1

6351-01-P

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 15, 17, 19, 40, 140, 150, and 151

RIN 3038-AD99

Position Limits for Derivatives

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

SUMMARY: The Commodity Futures Trading Commission (“Commission” or 

“CFTC”) is proposing amendments to regulations concerning speculative position limits 

to conform to the Wall Street Transparency and Accountability Act of 2010 (“DoddFrank Act”) amendments to the Commodity Exchange Act (“CEA” or “Act”). Among 

other amendments, the Commission proposes new and amended federal spot month limits 

for 25 physical commodity derivatives; amended single month and all-months-combined 

limits for most of the agricultural contracts currently subject to federal limits; new and 

amended definitions for use throughout the position limits regulations, including a 

revised definition of “bona fide hedging transactions or positions” and a new definition of 

“economically equivalent swaps”; amended rules governing exchange-set limit levels and 

grants of exemptions therefrom; a new streamlined process for bona fide hedging 

recognitions for purposes of federal limits; new enumerated hedges; and amendments to 

certain regulatory provisions that would eliminate Form 204, enabling the Commission to 

leverage cash-market reporting submitted directly to the exchanges.

DATES: Comments must be received on or before April 29, 2020.
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ADDRESSES: You may submit comments, identified by “Position Limits for 

Derivatives” and RIN 3038-AD99, by any of the following methods:

• CFTC Comments Portal: https://comments.cftc.gov. Select the “Submit 

Comments” link for this rulemaking and follow the instructions on the Public Comment 

Form. 

• Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, 

Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW, 

Washington, DC 20581.

• Hand Delivery/Courier: Follow the same instructions as for Mail, above.

Please submit your comments using only one of these methods. To avoid possible 

delays with mail or in-person deliveries, submissions through the CFTC Comments 

Portal are encouraged.

All comments must be submitted in English, or if not, be accompanied by an 

English translation. Comments will be posted as received to https://comments.cftc.gov. 

You should submit only information that you wish to make available publicly. If you 

wish the Commission to consider information that you believe is exempt from disclosure 

under the Freedom of Information Act (“FOIA”), a petition for confidential treatment of 

the exempt information may be submitted according to the procedures established in § 

145.9 of the Commission’s regulations.1

The Commission reserves the right, but shall have no obligation, to review, prescreen, filter, redact, refuse, or remove any or all submissions from 

https://www.comments.cftc.gov that it may deem to be inappropriate for publication, such 

 1 17 CFR 145.9.
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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 FOIA.

FOR FURTHER INFORMATION CONTACT: Aaron Brodsky, Senior Special 

Counsel, (202) 418-5349, abrodsky@cftc.gov; Steven Benton, Industry Economist, (202) 

418-5617, sbenton@cftc.gov; Jeanette Curtis, Special Counsel, (202) 418-5669, 

jcurtis@cftc.gov; Steven Haidar, Special Counsel, (202) 418-5611, shaidar@cftc.gov; 

Harold Hild, Policy Advisor, 202-418-5376, hhild@cftc.gov; or Lillian Cardona, Special 

Counsel, (202) 418-5012, lcardona@cftc.gov; Division of Market Oversight, in each case 

at the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 

Street, NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Introduction

B. Executive Summary

C. Summary of Proposed Amendments

D. The Commission Preliminarily Construes CEA Section 4a(a) to Require the 

Commission to Make a Necessity Finding Before Establishing Position Limits for 

Physical Commodities Other than Excluded Commodities

II. Proposed Rules

A. § 150.1—Definitions

B. § 150.2—Federal Limit Levels

C. § 150.3—Exemptions from Federal Position Limits

D. § 150.5—Exchange-Set Position Limits and Exemptions Therefrom

E. § 150.6—Scope

F. § 150.8—Severability

G. § 150.9—Process for Recognizing Non-enumerated Bona Fide Hedging 

Transactions or Positions with Respect to Federal Speculative Position Limits
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H. Part 19 and Related Provisions—Reporting of Cash-Market Positions

I. Removal of Part 151

III. Legal Matters

A. Introduction

B. Key Statutory Provisions

C. Ambiguity of Section 4a With Respect to Necessity Finding

D. Resolution of Ambiguity

E. Evaluation of Considerations Relied Upon by the Commission in Previous 

Interpretation of Paragraph 4a(a)(2)

F. Necessity Finding

G. Request for Comment

IV. Related Matters

A. Cost-Benefit Considerations

B. Paperwork Reduction Act

C. Regulatory Flexibility Act

D. Antitrust Considerations

I. Background

A. Introduction

The Commission has long established and enforced speculative position limits for 

futures and options on futures contracts on various agricultural commodities as 

authorized by the CEA.2

 The existing part 150 position limits regulations3 include three 

components: (1) the level of the limits, which currently apply to nine agricultural 

commodity derivatives contracts and set a maximum that restricts the number of 

speculative positions that a person may hold in the spot month, individual month, and all-

 2 7 U.S.C. 1 et seq. 3 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 nine agricultural 

contracts. Agricultural contracts refers to the list of commodities contained in the definition of 

“commodity” in CEA section 1a; 7 U.S.C. 1a. This list of agricultural contracts currently includes nine 

contracts: CBOT Corn (and Mini-Corn) (C), CBOT Oats (O), CBOT Soybeans (and Mini-Soybeans) (S), 

CBOT Wheat (and Mini-Wheat) (W), CBOT Soybean Oil (SO), CBOT Soybean Meal (SM), MGEX Hard

Red Spring Wheat (MWE), CBOT KC Hard Red Winter Wheat (KW), and ICE Cotton No. 2 (CT). See 17 

CFR 150.2. The position limits on these agricultural contracts are referred to as “legacy” limits because 

these contracts have been subject to federal position limits for decades. 
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months-combined;4 (2) exemptions for positions that constitute bona fide hedges and for 

certain other types of transactions;5 and (3) regulations to determine which accounts and 

positions a person must aggregate for the purpose of determining compliance with the 

position limit levels.6

 The existing federal speculative position limits function in parallel 

to exchange-set limits required by designated contract market (“DCM”) Core Principle 

5.7 Certain contracts are thus subject to both federal and DCM-set limits, whereas others 

are subject only to DCM-set limits and/or position accountability.

As part of the Dodd-Frank Act, Congress amended the CEA’s position limits 

provisions, which, since 1936, have authorized the Commission (and its predecessor) to 

impose limits on speculative positions to prevent the harms caused by excessive 

speculation. As discussed below, the Commission interprets these amendments as, 

among other things, tasking the Commission with establishing such position limits as it 

finds are “necessary” for the purpose of “diminishing, eliminating, or preventing” 

“[e]xcessive speculation...causing sudden or unreasonable fluctuations or unwarranted 

changes in...price...”8 The Commission also interprets these amendments as tasking the 

Commission with establishing position limits on any “economically equivalent” swaps.

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The Commission previously 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.10 A September 28, 2012 order of the U.S. District Court for the District of 

 4 See 17 CFR 150.2. 5 See 17 CFR 150.3. 6 See 17 CFR 150.4. 7 7 U.S.C. 7(d)(5); 17 CFR 38.300. 8 7 U.S.C. 6a(a)(1); see infra Section III.F. (discussion of the necessity finding). 9 7 U.S.C. 6a(a)(5). 

10 Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 2011); Position Limits for Futures and Swaps, 76 

FR 71626 (Nov. 18, 2011) (“2011 Final Rulemaking”).
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Columbia vacated the 2011 Final Rulemaking, with the exception of the rule’s 

amendments to 17 CFR 150.2.11

Subsequently, the Commission proposed position limits regulations in 2013

(“2013 Proposal”), June of 2016 (“2016 Supplemental Proposal”), and again in 

December of 2016 (“2016 Reproposal”).12 The 2016 Reproposal would have amended 

part 150 to, among other things: establish federal position limits for 25 physical 

commodity futures contracts and for “economically equivalent” futures, options on 

futures, and swaps; revise the existing exemptions from such limits, including for bona 

fide hedges; and establish a framework for exchanges13 to recognize certain positions as 

bona fide hedges, and thus exempt from position limits.

To date, the Commission has not issued any final rulemaking based on the 2013 

Proposal, 2016 Supplemental Proposal, or 2016 Reproposal. The 2016 Reproposal

generally addressed comments received in response to those prior rulemakings. In a 

companion proposed rulemaking, the CFTC also proposed, and later adopted in 2016, 

amendments to rules governing aggregation of positions for purposes of compliance with 

federal position limits.14 These aggregation rules currently apply only to the nine 

 11 Int’l Swaps & Derivatives Ass’n v. U.S. Commodity Futures Trading Comm’n, 887 F. Supp. 2d 259 

(D.D.C. 2012) (“ISDA”). 12 Position Limits for Derivatives, 78 FR 75680 (Dec. 12, 2013) (2013 Proposal); Position Limits for 

Derivatives: Certain Exemptions and Guidance, 81 FR 38458 (June 13, 2016) (2016 Supplemental 

Proposal); and Position Limits for Derivatives, 81 FR 96704 (Dec. 30, 2016) (2016 Reproposal). 13 Unless indicated otherwise, the use of the term “exchanges” throughout this proposal refers to DCMs and 

Swap Execution Facilities. 14 Aggregation of Positions, 81 FR 91454 (Dec. 16, 2016) (“Final Aggregation Rulemaking”); see 17 CFR 

150.4. Under the Final Aggregation Rulemaking, unless an exemption applies, a person’s positions must 

be aggregated with positions for which the person controls trading or for which the person holds a 10 

percent or greater ownership interest. The Division of Market Oversight has issued time-limited no-action 

relief from some of the aggregation requirements contained in that rulemaking. See CFTC Letter No. 19-

19 (July 31, 2019), available at https://www.cftc.gov/csl/19-19/download.
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agricultural contracts subject to existing federal limits, and going forward would apply to 

the commodities that would be subject to federal limits under this release. 

After reconsidering the prior proposals, including reviewing the comments 

responding thereto, the Commission is withdrawing from further consideration the 2013 

Proposal, the 2016 Supplemental Proposal, and the 2016 Reproposal.

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Instead, the Commission is now issuing a new proposal (“2020 Proposal”). The

2020 Proposal is intended to (1) recognize differences across commodities and contracts, 

including differences in commercial hedging and cash-market reporting practices; (2) 

focus on derivatives contracts that are critical to price discovery and distribution of the 

underlying commodity such that the burden of excessive speculation in the derivatives 

contract may have a particularly acute impact on interstate commerce for that 

commodity; and (3) reduce duplication and inefficiency by leveraging existing expertise 

and processes at DCMs. For these general reasons, discussed in turn below, the 

Commission proposes new regulations, rather than finalizing the 2016 Reproposal.

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First, the Commission preliminarily believes that any position limits regime must 

take into account differences across commodity and contract types. The existing federal 

position limits regulations apply only to nine contracts, all of which are physically-settled 

futures on agricultural commodities. Limits on these commodities have been in place for 

decades, as have the federal program for exemptions from these limits and the federal 

rules governing DCM-set limits on such commodities. The existing framework is largely 

 15 Because the earlier proposals are withdrawn, comments on them will not be part of the administrative 

record with respect to the current proposal, except where expressly referenced herein. Commenters should 

resubmit comments relevant to the subject proposal; commenters who wish to reference prior comment 

letters should cite those prior comment letters as specifically as possible. 16 The specific proposed new regulations are discussed in detail later in this release. 
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a historical remnant of an approach that predates cash-settled futures contracts, let alone 

swaps, institutional-investor interest in commodity indexes, and highly liquid energy 

markets. Congress has tasked the Commission with: establishing such limits as it finds 

are “necessary” for the purpose of preventing the burdens associated with excessive 

speculation causing sudden or unreasonable fluctuations or unwarranted changes in price; 

and establishing limits on swaps that are “economically equivalent” to certain futures 

contracts. The Commission has preliminarily determined that an approach that is flexible 

enough to accommodate potential future, unpredictable developments in commercial 

hedging practices would be well-suited for the current derivatives markets by 

accommodating differences in commodity types, contract specifications, hedging 

practices, cash-market trading practices, organizational structures of hedging participants, 

and liquidity profiles of individual markets. 

The Commission proposes to build this flexibility into several parts of the 

proposed regulations, including: exchange-set limits and/or accountability, rather than 

federal limits, outside of the spot month for referenced contracts based on commodities 

other than the nine legacy agricultural commodities; the ability for exchanges to use more 

than one formula when setting their own limit levels; an updated formula for federal nonspot month levels on the nine legacy agricultural contracts that is calibrated to recently

observed trading activity; a bona fide hedging definition that is broad enough to 

accommodate common commercial hedging practices, including anticipatory hedging

practices such as anticipatory merchandising; a broader range of exchange-granted

recognitions for purposes of federal and exchange-set limits that are in line with common 

commercial hedging practices; the elimination of a restriction for purposes of federal 
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limits on holding positions during the last trading days of the spot month; and broader 

discretion for market participants to measure risk in the manner most suitable for their 

business. 

Second, the proposal establishes limits on a limited set of commodities for which

the Commission preliminarily finds that speculative position limits are necessary.17 As 

described below, this necessity finding is based on a combination of factors including: 

the particular importance of these contracts in the price discovery process for their 

respective underlying commodities, the fact that they require physical delivery of the 

underlying commodity, and, in some cases, the commodities’ particular importance to the 

national economy and especially acute economic burdens on interstate commerce that 

would arise from excessive speculation causing sudden or unreasonable fluctuations or 

unwarranted changes in the price of the commodities underlying these contracts.18 

Third, the Commission preliminarily believes that there is an opportunity for 

greater collaboration between the Commission and the exchanges within the statutorily 

created parallel federal and exchange-set position limit regimes. Given the exchanges’ 

self-regulatory responsibilities, resources, deep knowledge of their markets and trading 

practices, close interactions with market participants, existing programs for addressing 

exemption requests, and ability to generally act more quickly than the Commission, the 

Commission preliminarily believes that cooperation between the Commission and the 

exchanges on position limits should not only be continued, but enhanced. For example, 

exchanges are particularly well-positioned to provide the Commission with estimates of 

deliverable supply, to recommend limit levels for the Commission’s consideration, and to 

 17 See infra Section III.F. 18 See infra Section III.F.1.
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help administer the program for recognizing bona fide hedges. Further, given that the 

Commission is proposing to require exchanges to collect, and provide to the Commission 

upon request, cash-market information from market participants requesting bona fide 

hedges, the Commission also proposes to eliminate Form 204, which market participants 

with bona fide hedging positions in excess of limits currently file each month with the 

Commission to demonstrate cash-market positions justifying such overages. The 

Commission preliminarily believes that enhanced collaboration will maintain the 

Commission’s access to information and result in a more efficient administrative process, 

in part by reducing duplication of efforts. The Commission invites comments on all 

aspects of this rulemaking.

B. Executive Summary

This executive summary provides an overview of the key components of this 

proposal. The summary only highlights certain aspects of the proposed regulations and 

generally uses shorthand to summarize complex topics. The executive summary is 

neither intended to be a comprehensive recitation of the proposal nor intended to 

supplement, modify, or replace any interpretive or other language contained herein. 

Section II of this release includes a more detailed and comprehensive discussion of all of 

the proposed regulations, and Section V includes the actual regulations. 

1. Contracts Subject to Federal Speculative Position Limits

Federal speculative position limits would apply to “referenced contracts,” which 

include: (a) 25 “core referenced futures contracts;” (b) futures and options directly or 

indirectly linked to a core referenced futures contract; and (c) “economically equivalent 

swaps.” 
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a. Core Referenced Futures Contracts

Federal speculative position limits would apply to the following 25 physicallysettled core referenced futures contracts: 

Legacy Agricultural

(federal limits during and 

outside the spot month)

Non-Legacy 

Agricultural

(federal limits only

during the spot month)

19

Metals

(federal limits only during 

the spot month)

CBOT Corn (C) CBOT Rough Rice (RR) COMEX Gold (GC)

CBOT Oats (O) ICE Cocoa (CC) COMEX Silver (SI)

CBOT Soybeans (S) ICE Coffee C (KC) COMEX Copper (HG)

CBOT Wheat (W) ICE FCOJ-A (OJ) NYMEX Platinum (PL)

CBOT Soybean Oil (SO) ICE U.S. Sugar No. 11 

(SB)

NYMEX Palladium (PA)

CBOT Soybean Meal (SM) ICE U.S. Sugar No. 16 

(SF)

Energy

(federal limits only during 

the spot month)

MGEX Hard Red Spring 

Wheat (MWE)

CME Live Cattle (LC) NYMEX Henry Hub Natural 

Gas (NG)

ICE Cotton No. 2 (CT) NYMEX Light Sweet Crude

Oil (CL)

CBOT KC Hard Red Winter 

Wheat (KW)

NYMEX New York Harbor 

ULSD Heating Oil (HO)

NYMEX New York Harbor 

RBOB Gasoline (RB)

b. Futures and Options on Futures Linked to a Core Referenced Futures Contract

Referenced contracts would also include futures and options on futures that are

directly or indirectly linked to the price of a core referenced futures contract or to the 

same commodity underlying the applicable core referenced futures contract for delivery 

at the same location as specified in that core referenced futures contract. Referenced 

contracts, however, would not include location basis contracts, commodity index 

contracts, swap guarantees, and trade options that meet certain requirements. 

 19 While the Commission is proposing federal non-spot month limits only for the nine legacy agricultural 

core referenced futures contracts, exchanges would be required to establish, consistent with Commission 

standards set forth in this proposal, exchange-set position limits and/or position accountability levels in the 

non-spot months for the non-legacy agricultural, metals, and energy core referenced futures contracts.
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c. Economically Equivalent Swaps

Referenced contracts would also include economically equivalent swaps, which 

would be defined as swaps with “identical material” contractual specifications, terms, and 

conditions to a referenced contract. Swaps in commodities other than natural gas that 

have identical material specifications, terms, and conditions to a referenced contract, but 

differences in lot size specifications, notional amounts, or delivery dates diverging by less 

than one calendar day, would still be deemed economically equivalent swaps. Natural 

gas swaps that have identical material specifications, terms, and conditions to a 

referenced contract, but differences in lot size specifications, notional amounts, or 

delivery dates diverging by less than two calendar days, would still be deemed

economically equivalent swaps. 

2. Federal Limit Levels During the Spot Month

Federal spot month limits would apply to referenced contracts on all 25 core 

referenced futures contracts. The following proposed spot month limit levels,

summarized in the table below, are set at or below 25 percent of deliverable supply, as 

estimated using recent data provided by the DCM listing the core referenced futures 

contract, and verified by the Commission. The proposed spot month limits would apply 

on a futures-equivalent basis based on the size of the unit of trading of the relevant core 

referenced futures contract, and would apply “separately” to physically-settled and cashsettled referenced contracts. Therefore, a market participant could net positions across 

physically-settled referenced contracts, and separately could net positions across cashsettled referenced contracts, but would not be permitted to net cash-settled referenced 

contracts with physically-settled referenced contracts.
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Core Referenced 

Futures Contract

2020 Proposed 

Spot Month Limit

Existing 

Federal Spot 

Month 

Limit

Existing Exchange-Set 

Spot Month Limit

Legacy Agricultural Contracts

CBOT Corn (C) 1,200 600 600

CBOT Oats (O) 600 600 600

CBOT Soybeans (S) 1,200 600 600

CBOT Soybean 

Meal (SM) 1,500 720 720

CBOT Soybean Oil 

(SO) 1,100 540 540

CBOT Wheat (W) 1,200 600 600/500/400/300/220

CBOT KC Hard Red 

Winter Wheat (KW) 1,200 600 600

MGEX Hard Red 

Spring Wheat 

(MWE)

1,200 600 600

ICE Cotton No. 2 

(CT) 1,800 300 300

Other Agricultural Contracts

CME Live Cattle 

(LC) 600/300/20020 n/a 450/300/200

CBOT Rough Rice 

(RR) 800 n/a 600/200/250

ICE Cocoa (CC) 4,900 n/a 1,000

ICE Coffee C (KC) 1,700 n/a 500

ICE FCOJ-A (OJ) 2,200 n/a 300

ICE U.S. Sugar No. 

11 (SB) 25,800 n/a 5,000

ICE U.S. Sugar No. 

16 (SF) 6,400 n/a n/a

Metals Contracts

COMEX Gold (GC) 6,000 n/a 3,000

 20 The proposed federal spot month limit for Live Cattle would feature a step-down limit similar to the 

CME’s existing Live Cattle step-down exchange set limit. The proposed federal spot month step-down 

limit is: (1) 600 at the close of trading on the first business day following the first Friday of the contract 

month; (2) 300 at the close of trading on the business day prior to the last five trading days of the contract 

month; and (3) 200 at the close of trading on the business day prior to the last two trading days of the 

contract month.
14

COMEX Silver (SI) 3,000 n/a 1,500

COMEX Copper 

(HG) 1,000 n/a 1,500

NYMEX Platinum 

(PL) 500 n/a 500

NYMEX Palladium 

(PA) 50 n/a 50

Energy Contracts

NYMEX Henry Hub 

Natural Gas (NG) 2,000 n/a 1,000

NYMEX Light 

Sweet Crude Oil 

(CL)

6,000/5,000/4,000

21 n/a 3,000

NYMEX New York 

Harbor ULSD 

Heating Oil (HO)

2,000 n/a 1,000

NYMEX New York 

Harbor RBOB 

Gasoline (RB)

2,000 n/a 1,000

3. Federal Limit Levels Outside of the Spot Month

Federal limits outside of the spot month would apply only to referenced contracts 

based on the nine legacy agricultural commodities subject to existing federal limits. All 

other referenced contracts subject to federal limits would be subject to federal limits only 

during the spot month, as specified above, and otherwise would only be subject to 

exchange-set limits and/or position accountability levels outside of the spot month. 

The following proposed non-spot month limit levels, summarized in the table 

below, are set at 10 percent of open interest for the first 50,000 contracts, with an 

incremental increase of 2.5 percent of open interest thereafter, and would apply on a 

 21 The proposed federal spot month limit for Light Sweet Crude Oil would feature the following step-down 

limit: (1) 6,000 contracts as of the close of trading three business days prior to the last trading day of the 

contract; (2) 5,000 contracts as of the close of trading two business days prior to the last trading day of the 

contract; and (3) 4,000 contracts as of the close of trading one business day prior to the last trading day of 

the contract.
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futures-equivalent basis based on the size of the unit of trading of the relevant core 

referenced futures contract:

Core Referenced 

Futures Contract

2020 Proposed 

Single Month 

and All-Months 

Combined 

Limit

Existing Federal 

Single Month and 

All-MonthsCombined Limit

Existing 

Exchange-Set 

Single Month 

and AllMonthsCombined 

Limit

CBOT Corn (C) 57,800 33,000 33,000

CBOT Oats (O) 2,000 2,000 2,000

CBOT Soybean (S) 27,300 15,000 15,000

CBOT Soybean Meal 

(SM) 16,900 6,500 6,500

CBOT Soybean Oil 

(SO) 17,400 8,000 8,000

CBOT Wheat (W) 19,300 12,000 12,000

CBOT KC HRW 

Wheat (KW) 12,000 12,000 12,000

MGEX HRS Wheat 

(MWE) 12,000 12,000 12,000

ICE Cotton No. 2 

(CT) 11,900 5,000 5,000

4. Exchange-Set Limits and Exemptions Therefrom

a. Contracts Subject to Federal Limits

An exchange that lists a contract subject to federal limits, as specified above, 

would be required to set its own limits for such contracts at a level that is no higher than 

the federal level. Exchanges would be allowed to grant exemptions from their own 

limits, provided the exemption does not subvert the federal limits framework.22 

b. Physical Commodity Contracts Not Subject to Federal Limits 

 22 In addition, as explained further below, exchanges may choose to participate in the Commission’s new 

proposed streamlined process for reviewing bona fide hedge exemption applications for purposes of federal

limits.
16

For physical commodity contracts not subject to federal limits, an exchange 

would generally be required to set spot month limits no greater than 25 percent of 

deliverable supply, but would have flexibility to submit other approaches for review by 

the Commission, provided the approach results in spot month levels that are “necessary 

and appropriate to reduce the potential threat of market manipulation or price distortion 

of the contract’s or the underlying commodity’s price or index” and complies with all 

other applicable regulations. 

Outside of the spot month, such an exchange would have additional flexibility to 

set either position limits or position accountability levels, provided the levels are 

“necessary and appropriate to reduce the potential threat of market manipulation or price 

distortion of the contract’s or the underlying commodity’s price or index.” Nonexclusive Acceptable Practices would provide several examples of formulas that the 

Commission has determined would meet this standard, but an exchange would have the 

flexibility to develop other approaches. 

Exchanges would be provided flexibility to grant a variety of exemption types, 

provided that the exchange must take into account whether the exemption would result in 

a position that would not be in accord with “sound commercial practices” in the market 

for which the exchange is considering the application, and/or would “exceed an amount 

that may be established and liquidated in an orderly fashion in that market.” 

5. Limits on “Pre-Existing Positions”

Certain “Pre-Existing Positions” that were entered into prior to the effective date 

of final position limits rules would not be subject to federal limits. Both “Pre-Enactment 

Swaps,” which are swaps entered into prior to the Dodd-Frank Act whose terms have not 
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expired, and “Transition Period Swaps,” which are swaps entered into between July 22, 

2010 and 60 days after the publication of final position limits rules, would not be subject 

to federal limits. All other “Pre-Existing Positions” that are acquired in good faith prior 

to the effective date of final position limits rules would be subject to federal limits during, 

but not outside, the spot month. 

6. Substantive Standards for Exemptions from Federal Limits

a. Bona Fide Hedge Recognition

Hedging transactions or positions may continue to exceed federal limits if they 

satisfy all three elements of the “general” bona fide hedging definition: (1) the hedge 

represents a substitute for transactions or positions made at a later time in a physical 

marketing channel (“temporary substitute test”); (2) the hedge is economically 

appropriate to the reduction of risks in the conduct and management of a commercial 

enterprise (“economically appropriate test”); and (3) the hedge arises from the potential 

change in value of actual or anticipated assets, liabilities, or services (“change in value 

requirement”). The Commission proposes several changes to the existing bona fide 

hedging definition, including those described immediately below, and also proposes a 

streamlined process for granting bona fide hedge recognitions, described further below. 

First, for referenced contracts based on the 25 core referenced futures contracts 

listed in § 150.2(d), the Commission would expand the current list of enumerated bona 

fide hedges to cover additional hedging practices included in the 2016 Reproposal, as 

well as hedges of anticipated merchandising.

23 Persons who hold a bona fide hedging 

 23 The existing definition of “bona fide hedging transactions and positions” enumerates the following 

hedging transactions: (1) hedges of inventory and cash commodity fixed-price purchase contracts under 

1.3(z)(2)(i)(A); (2) hedges of unsold anticipated production under 1.3(z)(2)(i)(B); (3) hedges of cash 
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transaction or position in accordance with § 150.1 in referenced contracts based on one of 

the 25 core referenced futures contracts and whose hedging practice is included in the list 

of enumerated hedges in Appendix A of part 150 would not be required to request prior 

approval from the Commission to hold such bona fide hedge position. That is, such 

exemptions would be self-effectuating for purposes of federal speculative position limits, 

so a person would only be required to request the bona fide hedge exemption from the 

relevant exchange for purposes of exchange-set limits. Transactions or positions that do 

not fit within one of the enumerated hedges could still be recognized as a bona fide 

hedge, provided the Commission, or an exchange subject to Commission oversight, 

recognizes the position as such using one of the processes described below. The 

Commission would be open to adopting additional enumerated hedges as it becomes 

more comfortable with evolving hedging practices, particularly in the energy space, and 

provided the practices comply with the general bona fide hedging definition. 

Second, the Commission is clarifying its position on whether and when market 

participants may measure risk on a gross basis rather than on a net basis in order to 

provide market participants with greater flexibility. Instead of only being permitted to 

hedge on a “net basis” except in a narrow set of circumstances, market participants would 

also now be able to hedge positions on a “gross basis” in certain circumstances, provided 

that the participant has done so over time in a consistent manner and is not doing so to 

evade the federal limits.

 

commodity fixed-price sales contracts under 1.3(z)(2)(ii)(A); (4) certain cross-commodity hedges under 

1.3(z)(2)(ii)(B); (5) hedges of unfilled anticipated requirements under 1.3(z)(2)(ii)(C) and (6) hedges of 

offsetting unfixed price cash commodity sales and purchases under 1.3(z)(2)(iii). The following additional 

hedging practices are not enumerated in the existing regulation, but are included as enumerated hedges in 

the 2020 Proposal: (1) hedges by agents; (2) hedges of anticipated royalties; (3) hedges of services; (4) 

offsets of commodity trade options; and (5) hedges of anticipated merchandising.
19

Third, market participants would have additional leeway to hold bona fide 

hedging positions in excess of limits during the last five days of the spot period (or during 

the time period for the spot month if less than five days). The proposal would not include 

such a restriction for purposes of federal limits, and would make clear that exchanges 

continue to have the discretion to adopt such restrictions for purposes of exchange-set 

limits. The proposal would also include flexible guidance on the circumstances under 

which exchanges may waive any such limitation for purposes of their own limits. 

Finally, the proposal would modify the “temporary substitute test” to require that 

a bona fide hedging transaction or position in a physical commodity must always, and not 

just normally, be connected to the production, sale, or use of a physical cash-market 

commodity. Therefore, a market participant would generally no longer be allowed to 

treat positions entered into for “risk management purposes”24

as a bona fide hedge, unless 

the position qualifies as either (i) an offset of a pass-through swap, where the offset 

reduces price risk attendant to a pass-through swap executed opposite a counterparty for 

whom the swap qualifies as a bona fide hedge; or (ii) a “swap offset,” where the offset is 

used by a counterparty to reduce price risk attendant to a swap that qualifies as a bona 

fide hedge and that was previously entered into by that counterparty.

b. Spread Exemption

Transactions or positions may also continue to exceed federal limits if they 

qualify as a “spread transaction,” which includes the following common types of spreads: 

calendar spreads, inter-commodity spreads, quality differential spreads, processing 

 24 The phrase “risk management” as used in this instance refers to derivatives positions, typically held by a 

swap dealer, used to offset a swap position, such as a commodity index swap, with another entity for which 

that swap is not a bona fide hedge.
20

spreads (such as energy “crack” or soybean “crush” spreads), product or by-product 

differential spreads, or futures-option spreads. Spread exemptions may be granted using 

the process described below. 

c. Financial Distress Exemption

This exemption would allow a market participant to exceed federal limits if 

necessary to take on the positions and associated risk of another market participant during 

a potential default or bankruptcy situation. This exemption would be available on a caseby-case basis, depending on the facts and circumstances involved. 

d. Conditional Spot Month Limit Exemption in Natural Gas

The rules would allow market participants with cash-settled positions in natural 

gas to exceed the proposed 2,000 contract spot month limit, provided that the participant 

exits its spot month positions in the New York Mercantile Exchange (“NYMEX”) Henry 

Hub (NG) physically-settled natural gas contracts, and provided further that the 

participant’s position in cash-settled natural gas contracts does not exceed 10,000 

NYMEX Henry Hub Natural Gas (NG) equivalent-size natural gas contracts per DCM 

that lists a natural gas referenced contract. Such market participants would be permitted 

to hold an additional 10,000 contracts in cash-settled natural gas economically equivalent 

swaps. 

7. Process for Requesting Bona Fide Hedge Recognitions and Spread 

Exemptions

a. Self-Effectuating Enumerated Bona Fide Hedges 

For referenced contracts based on any core referenced futures contract listed in § 

150.2(d), bona fide hedge recognitions for positions that fall within one of the proposed 

enumerated hedges, including the proposed anticipatory enumerated hedges, would be 
21

self-effectuating for purposes of federal limits, provided the market participant separately 

applies to the relevant exchange for an exemption from exchange-set limits. Such market 

participants would no longer be required to file Form 204/304 with the Commission on a 

monthly basis to demonstrate cash-market positions justifying position limit overages. 

Instead, the Commission would have access to cash-market information such market 

participants submit as part of their application to an exchange for an exemption from 

exchanges-set limits, typically filed on an annual basis.

b. Bona Fide Hedges That Are Not Self-Effectuating

The Commission will consider adding to the proposed list of enumerated hedges 

at a later time once the Commission becomes more familiar with common commercial 

hedging practices for referenced contracts subject to federal position limits. Until that 

time, all bona fide hedging recognitions that are not enumerated in Appendix A of part 

150 would be granted pursuant to one of the proposed processes for requesting a nonenumerated bona fide hedge recognition, as explained below. 

A market participant seeking to exceed federal limits for a non-enumerated bona 

fide hedging transaction or position would be able to choose whether to apply directly to 

the Commission or, alternatively, apply to the applicable exchange using a new proposed 

streamlined process. If applying directly to the Commission, the market participant 

would also have to separately apply to the relevant exchange for relief from exchange-set 

position limits. If applying to an exchange using the new proposed streamlined process, a 

market participant would be able to file an application with an exchange, generally at 

least annually, which would be valid both for purposes of federal and exchange-set limits. 

Under this streamlined process, if the exchange determines to grant a non-enumerated 
22

bona fide hedge recognition for purposes of its exchange-set limits, the exchange must 

notify the Commission and the applicant simultaneously. Then, 10 business days (or two 

business days in the case of sudden or unforeseen bona fide hedging needs) after the 

exchange issues such a determination, the market participant could rely on the 

exchange’s determination for purposes of federal limits unless the Commission (and not 

staff) notifies the market participant otherwise. After the 10 business days expire, the 

bona fide hedge exemption would be valid both for purposes of federal and exchange

position limits and the market participant would be able to take on a position that exceeds 

federal position limits. Under this streamlined process, during the 10 business day 

review period, any rejection of an exchange determination would require Commission 

action. Further, if, for purposes of federal position limits, the Commission determines to 

reject an application for exemption, the applicant would not be subject to any position 

limits violation during the period of the Commission’s review nor once the Commission 

has issued its rejection, provided the person reduces the position within a commercially 

reasonable amount of time, as applicable.

Under the proposal, positions that do not fall within one of the enumerated hedges 

could thus still be recognized as bona fide hedges, provided the exchange deems the 

position to comply with the general bona fide hedging definition, and provided that the 

Commission does not object to such a hedge within the ten-day (or two-day, as 

appropriate) window. 

Requests and approvals to exceed limits would generally have to be obtained in 

advance of taking on the position, but the proposed rule would allow market participants 

with sudden or unforeseen hedging needs to file a request for a bona fide hedge 
23

exemption within five business days of exceeding the limit. If the Commission rejects 

the application, the market participant would not be subject to a position limit violation, 

provided the participant reduces its position within a commercially reasonable amount of 

time. 

Among other changes, market participants would also no longer be required to 

file Form 204/304 with the Commission on a monthly basis to demonstrate cash-market 

positions justifying position limit overages. 

c. Spread Exemptions

For referenced contracts on any commodity, spread exemptions would be selfeffectuating for purposes of federal limits, provided that the position: falls within one of 

the categories set forth in the proposed “spread transaction” definition,

25 and provided 

further that the market participant separately applies to the applicable exchange for an 

exemption from exchange-set limits. 

Market participants with a spread position that does not fit within the “spread 

transaction” definition with respect to any of the commodities subject to the proposed 

federal limits may apply directly to the Commission, and must also separately apply to 

the applicable exchange. 

8. Comment Period and Compliance Date

The public may comment on these rules during a 90-day period that starts after 

this proposal has been approved by the Commission. Market participants and exchanges 

 25 The categories are: calendar spreads, inter-commodity spreads, quality differential spreads, processing 

spreads (such as energy “crack” or soybean “crush” spreads), product or by-product differential spreads, 

and futures-option spreads. 
24

would be required to comply with any position limit rules finalized from herein no later 

than 365 days after publication in the Federal Register.

C. Summary of Proposed Amendments

The Commission is proposing revisions to §§ 150.1, 150.2, 150.3, 150.5, and 

150.6 and to parts 1, 15, 17, 19, 40, and 140, as well as the addition of §§ 150.8, 150.9,

and Appendices A-F to part 150.26 Most noteworthy, the Commission proposes the 

following amendments to the foregoing rule sections, each of which, along with all other 

proposed changes, is discussed in greater detail in Section II of this release. The 

following summary is not intended to provide a substantive overview of this proposal, but 

rather is intended to provide a guide to the rule sections that address each topic. Please 

see the executive summary above for an overview of this proposal organized by topic, 

rather than by section number.

• The Commission preliminarily finds that federal speculative position limits 

are necessary for 25 core referenced futures contracts and proposes federal 

limits on physically-settled and linked cash-settled futures, options on 

futures, and “economically equivalent” swaps for such commodities. The 25 

core referenced futures contracts would include the nine “legacy” agricultural 

contracts currently subject to federal limits and 16 additional non-legacy 

contracts, which would include: seven additional agricultural contracts, four 

energy contracts, and five metals contracts.

27 Federal spot and non-spot 

 26 This 2020 Proposal does not propose to amend current § 150.4 dealing with aggregation of positions for 

purposes of compliance with federal position limits. Section 150.4 was amended in 2016 in a prior 

rulemaking. See Final Aggregation Rulemaking, 81 FR at 91454. 27 The seven additional agricultural contracts that would be subject to federal spot month limits are CME 

Live Cattle (LC), CBOT Rough Rice (RR), ICE Cocoa (CC), ICE Coffee C (KC), ICE FCOJ-A (OJ), ICE 
25

month limits would apply to the nine “legacy” agricultural contracts currently 

subject to federal limits,

28 and only federal spot month limits would apply to 

the additional 16 non-legacy contracts. Outside of the spot month, these 16 

non-legacy contracts would be subject to exchange-set limits and/or 

accountability levels if listed on an exchange.

• Amendments to § 150.1 would add or revise several definitions for use 

throughout part 150, including: new definitions of the terms “core referenced 

futures contract” (pertaining to the 25 physically-settled futures contracts 

explicitly listed in the regulations) and “referenced contract” (pertaining to 

contracts that have certain direct and/or indirect linkages to the core 

referenced futures contracts, and to “economically equivalent swaps”) to be 

used as shorthand to refer to contracts subject to federal limits; a “spread 

transaction” definition; and a definition of “bona fide hedging transactions or

positions” that is broad enough to accommodate hedging practices in a 

variety of contract types, including hedging practices that may develop over 

time.

 

U.S. Sugar No. 11 (SB), and ICE U.S. Sugar No. 16 (SF). The four energy contracts that would be subject 

to federal spot month limits are: NYMEX Light Sweet Crude Oil (CL), NYMEX New York Harbor ULSD 

Heating Oil (HO), NYMEX New York Harbor RBOB Gasoline (RB), and NYMEX Henry Hub Natural 

Gas (NG). The five metals contracts that would be subject to federal spot month limits are: COMEX Gold 

(GC), COMEX Silver (SI), COMEX Copper (HG), NYMEX Palladium (PA), and NYMEX Platinum (PL). 

As discussed below, any contracts for which the Commission is proposing federal limits only during the 

spot month would be subject to exchange-set limits and/or accountability outside of the spot month. 28 The Commission currently sets and enforces speculative position limits with respect to certain 

enumerated agricultural products. The “enumerated” agricultural products refer to the list of commodities 

contained in the definition of “commodity” in CEA section 1a; 7 U.S.C. 1a. These agricultural products 

consist of the following nine currently traded contracts: CBOT Corn (and Mini-Corn) (C), CBOT Oats 

(O), CBOT Soybeans (and Mini-Soybeans) (S), CBOT Wheat (and Mini-Wheat) (W), CBOT Soybean Oil 

(SO), CBOT Soybean Meal (SM), MGEX HRS Wheat (MWE), CBOT KC HRW Wheat (KW), and ICE 

Cotton No. 2 (CT). See 17 CFR 150.2. 
26

• Amendments to § 150.2 would list the 25 core referenced futures contracts

which, along with any associated referenced contracts, would be subject to 

federal limits; and specify the proposed federal spot and non-spot month 

limit levels. Federal spot month limit levels would be set at or below 25 

percent of deliverable supply, whereas federal non-spot month limit levels 

would be set at 10 percent of open interest for the first 50,000 contracts of 

open interest, with an incremental increase of 2.5 percent of open interest 

thereafter.

• Amendments to § 150.3 would specify the types of positions for which 

exemptions from federal position limit requirements may be granted, and 

would set forth and/or reference the processes for requesting such 

exemptions, including recognitions of bona fide hedges and exemptions for 

spread positions, financial distress positions, certain natural gas positions 

held during the spot month, and pre-enactment and transition period swaps. 

For all contracts subject to federal limits, bona fide hedge exemptions listed

in Appendix A to part 150 as an enumerated bona fide hedge would be selfeffectuating for purposes of federal limits. For non-enumerated hedges, 

market participants must request approval in advance of taking a position that 

exceeds the federal position limit, except in the case of sudden or unforeseen 

hedging needs. 

• Amendments to § 150.5 would refine the process, and establish nonexclusive methodologies, by which exchanges may set exchange-level limits 

and grant exemptions therefrom with respect to futures and options on 
27

futures, including separate methodologies for contracts subject to federal 

limits and physical commodity derivatives not subject to federal limits.29 

While the Commission will oversee compliance with federal position limits 

on swaps, amended § 150.5 would not apply to exchanges with respect to 

swaps until a later time once exchanges have access to sufficient data to 

monitor compliance with limits on swaps across exchanges. 

• New § 150.9 would establish a streamlined process for addressing requests 

for bona fide hedging recognitions for purposes of federal limits, leveraging 

off exchange expertise and resources while affording the Commission an 

opportunity to intervene as-needed. This process would be used by market 

participants with non-enumerated positions. Under the proposed rule, market 

participants could provide one application for a bona fide hedge to a 

designated contract market or swap execution facility, as applicable, and 

receive approval of such request for purposes of both exchange-set limits and 

federal limits.

• New Appendix A to part 150 would contain enumerated hedges, some of 

which appear in the definition of bona fide hedging transactions and 

positions in current § 1.3, which would be examples of positions that would 

comply with the proposed bona fide hedging definition. As the enumerated 

hedges would be examples of bona fide hedging positions, positions that do 

 29 Proposed § 150.5 addresses exchange-set position limits and exemptions therefrom, whereas proposed § 

150.3 addresses exemptions from federal limits, and proposed § 150.9 addresses federal limits and 

acceptance of exchange-granted bona fide hedging recognitions for purposes of federal limits. Exchange 

rules typically refer to “exemptions” in connection with bona fide hedging and spread positions, whereas 

the Commission uses the nomenclature “recognition” with respect to bona fide hedges, and “exemption” 

with respect to spreads. 
28

not fall within any of the enumerated hedges could still potentially be 

recognized as bona fide hedging positions, provided the position otherwise 

complies with the proposed bona fide hedging definition and all other 

applicable requirements. 

• Amendments to part 19 and related provisions would eliminate Form 204, 

enabling the Commission to leverage cash-market reporting submitted 

directly to the exchanges under §§ 150.5 and 150.9. 

D. The Commission Preliminarily Construes CEA Section 4a(a) to Require the 

Commission to Make a Necessity Finding Before Establishing Position Limits for 

Physical Commodities Other than Excluded Commodities

The Commission is required by ISDA to determine whether CEA section 

4a(a)(2)(A) requires the Commission to find, before establishing a position limit, that 

such limit is “necessary.”30 The provision states in relevant part that “the Commission 

shall” establish position limits “as appropriate” for contracts in physical commodities 

other than excluded commodities “[i]n accordance with the standards set forth in” the 

preexisting section 4a(a)(1).31 That preexisting provision requires the Commission to 

establish position limits as it “finds are necessary to diminish, eliminate, or prevent” 

certain enumerated burdens on interstate commerce.32 In the 2011 Final Rulemaking, the 

Commission interpreted this language as an unambiguous mandate to establish position 

limits without first finding that such limits are necessary, but with discretion to determine 

the “appropriate” levels for each.33 In ISDA, the U.S. District Court for the District of 

Columbia disagreed and held that section 4a(a)(2)(A) is ambiguous as to whether the 

 30 ISDA, 887 F.Supp.2d at 259, 281. 31 7 U.S.C. 6a(a)(2)(A). 32 7 U.S.C. 6a(a)(1). 33 2011 Final Rulemaking, 76 FR at 71626, 71627.
29

“standards set forth in paragraph (1)” include the requirement of an antecedent finding 

that a position limit is necessary.34 The court vacated the 2011 Final Rulemaking and 

directed the Commission to apply its experience and expertise to resolve that ambiguity.35 

The Commission has done so and preliminarily determines that section 4a(a)(2)(A) 

should be interpreted to require that before establishing position limits, the Commission 

must determine that limits are necessary.36 A full legal analysis is set forth infra at 

Section III.F. 

The Commission preliminarily finds that position limits are necessary for the 25 

core referenced futures contracts, and any associated referenced contracts. This 

preliminary finding is based on a combination of factors including: the particular 

importance of these contracts in the price discovery process for their respective 

underlying commodities, the fact that they require physical delivery of the underlying 

commodity, and, in some cases, the commodities’ particular importance to the national 

economy and especially acute economic burdens that would arise from excessive 

speculation causing sudden or unreasonable fluctuations or unwarranted changes in the 

price of the commodities underlying these contracts.

II. Proposed Rules

A. § 150.1—Definitions

Definitions relevant to the existing position limits regime currently appear in both 

§§ 1.3 and 150.1 of the Commission’s regulations.37 The Commission proposes to update 

and supplement the definitions in § 150.1, including by moving a revised definition of 

 34 ISDA, 887 F.Supp.2d at 279-280. 35 Id. at 281. 36 See infra Section III.F. 37 17 CFR 1.3 and 150.1, respectively. 
30

“bona fide hedging transactions and positions” from § 1.3 into § 150.1. The proposed 

changes are intended, among other things, to conform the definitions to the Dodd-Frank 

Act amendments to the CEA.38 Each proposed defined term is discussed in alphabetical 

order below. 

1. “Bona Fide Hedging Transactions or Positions”

a. Background

Under CEA section 4a(c)(1), position limits shall not apply to transactions or 

positions that are “shown to be bona fide hedging transactions or positions, as such terms 

shall be defined by the Commission . . . .”

39 The Dodd-Frank Act directed the 

Commission, for purposes of implementing CEA section 4a(a)(2), to adopt a definition 

consistent with CEA section 4a(c)(2).

40 The current definition of “bona fide hedging 

transactions and positions,” which first appeared in § 1.3 of the Commission’s regulations 

in the 1970s,41 is inconsistent, in certain ways described below, with the revised statutory 

definition in CEA section 4a(c)(2).

 38 In addition to the amendments described below, the Commission proposes to re-order the defined terms 

so that they appear in alphabetical order, rather than in a lettered list, so that terms can be more quickly 

located. Moving forward, any new defined terms would be inserted in alphabetical order, as recommended 

by the Office of the Federal Register. See Document Drafting Handbook, Office of the Federal Register, 

National Archives and Records Administration, 2–31 (Revision 5, Oct. 2, 2017) (stating, “[i]n sections or 

paragraphs containing only definitions, we recommend that you do not use paragraph designations if you 

list the terms in alphabetical order. Begin the definition paragraph with the term that you are defining.”).

39 7 U.S.C. 6a(c)(1). While portions of the CEA and proposed § 150.1 respectively refer, and would refer, 

to the phrase “bona fide hedging transactions or positions,” the Commission may use the phrases “bona fide 

hedging position,” “bona fide hedging definition,” and “bona fide hedge” throughout this section of the 

release as shorthand to refer to the same.

40 7 U.S.C. 6a(c)(2). 41 See, e.g., Definition of Bona Fide Hedging and Related Reporting Requirements, 42 FR 42748 (Aug. 24, 

1977). Previously, the Secretary of Agriculture, pursuant to section 404 of the Commodity Futures Trading 

Commission Act of 1974 (Pub. L. 93–463), promulgated a definition of bona fide hedging transactions and 

positions. Hedging Definition, Reports, and Conforming Amendments, 40 FR 11560 (Mar. 12, 1975). 

That definition, largely reflecting the statutory definition previously in effect, remained in effect until the 

newly-established Commission defined that term. Id. 
31

Accordingly, and for the reasons outlined below, the Commission proposes to 

remove the current bona fide hedging definition from § 1.3 and replace it with an updated 

bona fide hedging definition that would appear alongside all of the other position limits 

related definitions in proposed § 150.1.42 This definition would be applied in 

determining whether a position is a bona fide hedge that may exceed the proposed federal 

limits set forth in § 150.2. The Commission’s current bona fide hedging definition is 

described immediately below, followed by a discussion of the proposed new definition. 

This section of the release describes the substantive standards for bona fide hedges. The 

process for granting bona fide hedge recognitions is discussed later in this release in 

connection with proposed §§ 150.3 and 150.9.43

b. The Commission’s Existing Bona Fide Hedging Definition in § 1.3 

Paragraph (1) of the current bona fide hedging definition in § 1.3 contains what is 

currently labeled the “general” bona fide hedging definition, which has five key elements 

 42 In a 2018 rulemaking, the Commission amended § 1.3 to replace the sub-paragraphs that had for years

been identified with an alphabetic designation for each defined term with an alphabetized list. See

Definitions, 83 FR 7979 (Feb. 23, 2018). The bona fide hedging definition, therefore, is now a paragraph, 

located in alphabetical order, in § 1.3, rather than in § 1.3(z). Accordingly, for purposes of clarity and ease 

of discussion, when discussing the Commission’s current version of the bona fide hedging definition, this 

release will refer to the bona fide hedging definition in § 1.3.

Further, the version of § 1.3 that appears in the Code of Federal Regulations applies only to excluded 

commodities and is not the version of the bona fide hedging definition currently in effect. The version 

currently in effect, the substance of which remains as it was amended in 1987, applies to all commodities, 

not just to excluded commodities. See Revision of Federal Speculative Position Limits, 52 FR 38914 (Oct. 

20, 1987). While the 2011 Final Rulemaking amended the § 1.3 bona fide hedging definition to apply only 

to excluded commodities, that rulemaking was vacated, as noted previously, by a September 28, 2012 order 

of the U.S. District Court for the District of Columbia, with the exception of the rule’s amendments to 17 

CFR 150.2. Although the 2011 Final Rulemaking was vacated, the 2011 version of the bona fide hedging 

definition in § 1.3, which applied only to excluded commodities, has not yet been formally removed from 

the Code of Federal Regulations. The currently-in-effect version of the Commission’s bona fide hedging 

definition thus does not currently appear in the Code of Federal Regulations. The closest to a “current” 

version of the definition is the 2010 version of § 1.3, which, while substantively current, still includes the 

“(z)” denomination that was removed in 2018. The Commission proposes to address the need to formally 

remove the incorrect version of the bona fide hedging definition as part of this rulemaking.

43 See infra Section II.C.2. (discussion of proposed § 150.3) and Section II.G.3. (discussion of proposed §

150.9).
32

and requires that the position must: (1) “normally” represent a substitute for transactions 

or positions made at a later time in a physical marketing channel (“temporary substitute 

test”); (2) be economically appropriate to the reduction of risks in the conduct and 

management of a commercial enterprise (“economically appropriate test”); (3) arise from 

the potential change in value of actual or anticipated assets, liabilities, or services 

(“change in value requirement”); (4) have a purpose to offset price risks incidental to 

commercial cash or spot operations (“incidental test”); and (5) be established and 

liquidated in an orderly manner (“orderly trading requirement”).44 

Additionally, paragraph (2) currently sets forth a non-exclusive list of four 

categories of “enumerated” hedging transactions that are included in the general bona 

fide hedging definition in paragraph (1). Market participants thus need not seek 

recognition from the Commission of such positions as bona fide hedges prior to 

exceeding limits for such positions; rather, market participants must simply report any 

such positions on the monthly Form 204, as required by part 19 of the Commission’s 

regulations.45 The four existing categories of enumerated hedges are: (1) hedges of 

ownership or fixed-price cash commodity purchases and hedges of unsold anticipated 

production; (2) hedges of fixed-price cash commodity sales and hedges of unfilled 

anticipated requirements; (3) hedges of offsetting unfixed-price cash commodity sales 

and purchases; and (4) cross-commodity hedges.46 

Paragraph (3) of the current bona fide hedging definition states that the 

Commission may recognize non-enumerated bona fide hedging transactions and positions 

 44 17 CFR 1.3. 45 17 CFR part 19. 46 17 CFR 1.3.
33

pursuant to a specific request by a market participant using the process described in § 

1.47 of the Commission’s regulations.47

c. Proposed Replacement of the Bona Fide Hedging Definition in § 1.3 with a New 

Bona Fide Hedging Definition in § 150.1

i. Background

The list of enumerated hedges found in paragraph (2) of the current bona fide 

hedging definition in § 1.3 was developed at a time when only agricultural commodities 

were subject to federal limits, has not been updated since 1987,

48 and is likely too narrow 

to reflect common commercial hedging practices, including for metal and energy 

contracts. Numerous market and regulatory developments have taken place since then, 

including, among other things, increased futures trading in the metals and energy 

markets, the development of the swaps markets, and the shift in trading from pits to 

electronic platforms. In addition, the CFMA49 and Dodd-Frank Act introduced various 

regulatory reforms, including the enactment of position limits core principles.

50 The 

Commission is thus proposing to update its bona fide hedging definition to better 

conform to the current state of the law and to better reflect market developments over 

time. 

While one option for doing so could be to expand the list of enumerated hedges to 

encompass a larger array of hedging strategies, the Commission does not view this alone 

to be a practical solution. It would be difficult to maintain a list that captures all hedging 

activity across commodity types, and any list would inherently fail to take into account 

 47 Id. 48 See Revision of Federal Speculative Position Limits, 52 FR 38914 (Oct. 20, 1987).

49 Commodity Futures Modernization Act of 2000, Public Law 106–554, 114 Stat. 2763 (Dec. 21, 2000). 50 See 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b–3(f)(6).
34

future changes in industry practices and other developments. The Commission proposes 

to create a new bona fide hedging definition in proposed § 150.1 that would work in 

connection with limits on a variety of commodity types and accommodate changing 

hedging practices over time. The Commission proposes to couple this updated definition 

with an expanded list of enumerated hedges. While positions that fall within the 

proposed enumerated hedges, discussed below, would be examples of positions that 

comply with the bona fide hedging definition, they would certainly not be the only types 

of positions that could be bona fide hedges. The proposed enumerated hedges are 

intended to ensure that the framework proposed herein does not reduce any clarity 

inherent in the existing framework; the proposed enumerated hedges are in no way 

intended to limit the universe of hedging practices that could otherwise be recognized as 

bona fide.

The Commission anticipates these proposed modifications would provide a 

significant degree of flexibility to market participants in terms of how they hedge, and to 

exchanges in terms of how they evaluate transactions and positions for purposes of their 

position limit programs, without sacrificing any of the clarity provided by the existing 

bona fide hedging definition. Further, as described in detail in connection with the 

discussion of proposed § 150.9 later in this release, the Commission anticipates that 

allowing the exchanges to process applications for bona fide hedges for purposes of 

federal limits would be significantly more efficient than the existing processes for 

exchanges and the Commission.51 The Commission discusses each element of the 

 51 In this rulemaking, the Commission proposes to allow qualifying exchanges to process requests for nonenumerated bona fide hedge recognitions for purposes of federal limits. See infra Section II.G.3. 

(discussion of proposed § 150.9).
35

proposed bona fide hedging definition below, followed by a discussion of the proposed 

enumerated hedges. The Commission’s intent with this proposal is to acknowledge to the 

greatest extent possible, consistent with the statutory language, existing bona fide 

hedging exemptions provided by exchanges. 

ii. Proposed Bona Fide Hedging Definition for Physical Commodities

The Commission proposes to maintain the general elements currently found in the 

bona fide hedging definition in § 1.3 that conform to the revised statutory bona fide 

hedging definition in CEA section 4a(c)(2), and proposes to eliminate the elements that 

do not. In particular, the Commission proposes to include the updated versions of the 

temporary substitute test, economically appropriate test, and change in value 

requirements that are described below, and eliminate the incidental test and orderly 

trading requirement, which are not included in the revised statutory text. Each of these 

proposed changes is described below.52

(1) Temporary Substitute Test

The language of the temporary substitute test that appears in the Commission’s 

existing bona fide hedging definition is inconsistent in some ways with the language of 

the temporary substitute test that currently appears in the statute. In particular, the bona 

fide hedging definition in section 4a(c)(2)(A)(i) of the CEA currently provides, among 

other things, that a bona fide hedging position “represents a substitute for transactions 

made or to be made or positions taken or to be taken at a later time in a physical 

 52 Bona fide hedge recognition is determined based on the particular circumstances of a position or 

transaction and is not conferred on the basis of the involved market participant alone. Accordingly, while a 

particular position may qualify as a bona fide hedge for a given market participant, another position held by 

that same participant may not. Similarly, if a participant holds positions that are recognized as bona fide 

hedges, and holds other positions that are speculative, only the speculative positions would be subject to 

position limits.
36

marketing channel.”53 The Commission’s definition currently provides that a bona fide 

hedging position “normally represent[s] a substitute for transactions to be made or 

positions to be taken at a later time in a physical marketing channel” (emphasis added).

54 

The Dodd-Frank Act amended the temporary substitute language that previously 

appeared in the statute by removing the word “normally” from the phrase “normally 

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. . . .”

55 The Commission 

preliminarily interprets this change as reflecting Congressional direction that a bona fide 

hedging position in physical commodities must always (and not just “normally”) be in 

connection with the production, sale, or use of a physical cash-market commodity.56

Accordingly, the Commission preliminarily interprets this change to signal that 

the Commission should cease to recognize “risk management” positions as bona fide 

hedges for physical commodities, unless the position satisfies the pass-through 

swap/swap offset requirements in section 4a(c)(2)(B) of the CEA, discussed further 

below.

57 In order to implement that statutory change, the Commission proposes a 

 53 7 U.S.C. 6a(c)(2)(A)(i). 54 17 CFR 1.3. 55 7 U.S.C. 6a(c)(2)(A)(i). 56 Previously, the Commission stated that, among other things, the inclusion of the word “normally” in 

connection with the pre-Dodd-Frank Act version of the temporary substitute language indicated that the 

bona fide hedging definition should not be construed to apply only to firms using futures to reduce their 

exposures to risks in the cash market, and that to qualify as a bona fide hedge, a transaction in the futures 

market did not necessarily need to be a temporary substitute for a later transaction in the cash market. See

Clarification of Certain Aspects of the Hedging Definition, 52 FR 27195, 27196 (July 20, 1987). In other 

words, that 1987 interpretation took the view that a futures position could still qualify as a bona fide 

hedging position even if it was not in connection with the production, sale, or use of a physical commodity. 

57 7 U.S.C. 6a(c)(2)(B). In connection with physical commodities, the phrase “risk management 

exemption” has historically been used by Commission staff to refer to non-enumerated bona fide hedge 

recognitions granted under § 1.47 to allow swap dealers and others to hold agricultural futures positions 

outside of the spot month in excess of federal limits in order to offset commodity index swap or related 

exposure, typically opposite an institutional investor for which the swap was not a bona fide hedge. As 

described below, due to differences in statutory language, the phrase “risk management exemption” often 
37

narrower bona fide hedging definition for physical commodities in proposed § 150.1 that 

does not include the word “normally” currently found in the temporary substitute 

language in paragraph (1) of the existing § 1.3 bona fide hedging definition. 

The practical effect of conforming the temporary substitute test in the regulation 

to the amended statutory provision would be to prevent market participants from treating

positions entered into for risk management purposes as bona fide hedges for contracts 

subject to federal limits, unless the position qualifies under the pass-through swap 

provision in CEA section 4a(c)(2)(B).58 As noted above, the Commission previously 

viewed positions in physical commodities, entered into for risk management purposes to 

offset the risk of swaps and other financial instruments and not as substitutes for 

transactions or positions to be taken in a physical marketing channel, as bona fide hedges. 

However, given the statutory change, positions that reduce the risk of such swaps and 

financial instruments would no longer meet the requirements for a bona fide hedging 

position under CEA section 4a(c)(2) and under proposed § 150.1. As discussed below, 

any such previously-granted risk management exemptions would generally no longer 

apply after the effective date of the speculative position limits proposed herein.59 

Further, retaining such exemptions for swap intermediaries, without regard to the purpose 

of their counterparty’s swap, would be inconsistent with the statutory restrictions on passthrough swap offsets, which require that the swap position being offset qualify as a bona 

 

has a broader meaning in connection with excluded commodities than with physical commodities. See 

infra Section II.A.1.c.v. (discussion of proposed pass-through language). 58 7 U.S.C. 6a(c)(2)(B). See infra Section II.A.1.c.v. (discussion of proposed pass-through language). 

Excluded commodities, as described in further detail below, are not subject to the statutory bona fide 

hedging definition. Accordingly, the statutory restrictions on risk management exemptions that apply to 

physical commodities subject to federal limits do not apply to excluded commodities. 59 See infra Section II.C.2.g. (discussion of revoking existing risk management exemptions).
38

fide hedging position.60 Aside from this change, the Commission is not proposing any 

other modifications to its existing temporary substitute test. 

While the Commission preliminarily interprets the Dodd-Frank amendments to 

the CEA as constraining the Commission from recognizing as bona fide hedges risk

management positions involving physical commodities, the Commission has in part 

addressed the hedging needs of persons seeking to offset the risk from swap books by 

proposing the pass-through swap and pass-through swap offset provisions discussed 

below. 

The Commission observes that while “risk management” positions would not 

qualify as bona fide hedges, some other provisions in this proposal may provide 

flexibility for existing and prospective risk management exemption holders in a manner 

that comports with the statute. In particular, the Commission anticipates that the proposal 

to limit the applicability of federal non-spot month limits to the nine legacy agricultural 

contracts,

61 coupled with the proposed adjustment to non-spot limit levels based on 

updated open interest numbers for the nine legacy agricultural contracts currently subject 

to federal limits,

62 may accommodate risk management activity that remains below the 

proposed levels in a manner that comports with the CEA. Further, to the extent that such 

activity would be opposite a counterparty for whom the swap is a bona fide hedge, the 

Commission would encourage intermediaries to consider whether they would qualify 

under the bona fide hedging position definition for the proposed pass-through swap 

 60 See 7 U.S.C. 6a(c)(2)(B)(i). The pass-through swap offset language in the proposed bona fide hedging 

definition is discussed in greater detail below.

61 See infra Section II.B.2.d. (discussion of non-spot month limit levels). 62 The proposed non-spot month levels for the nine legacy agricultural contracts were calculated using a 

methodology that, with the exception of CBOT Oats (O), CBOT KC HRW Wheat (KW), and MGEX HRS 

Wheat (MWE), would result in higher levels than under existing rules and prior proposals. See infra

Section II.B.2.d (discussion of proposed non-spot month limit levels).
39

treatment, which is explicitly authorized by the CEA and discussed in greater detail 

below.63 Moreover, while positions entered into for risk management purposes may no 

longer qualify as bona fide hedges, some may satisfy the proposed requirements for 

spread exemptions. Finally, consistent with existing industry practice, exchanges may 

continue to recognize risk management positions for contracts that are not subject to 

federal limits, including for excluded commodities.

(2) Economically Appropriate Test

The bona fide hedging definitions in section 4a(c)(2)(A)(ii) of the CEA and in 

existing § 1.3 of the Commission’s regulations both provide that a bona fide hedging 

position must be “economically appropriate to the reduction of risks in the conduct and 

management of a commercial enterprise.”64 The Commission proposes to replicate this 

standard in the new definition in § 150.1, with one clarification: consistent with the 

Commission’s longstanding practice regarding what types of risk may be offset by bona 

fide hedging positions in excess of federal limits,65 the Commission proposes to make 

explicit that the word “risks” refers to, and is limited to, “price risk.” This proposed 

clarification does not reflect any change in policy, as the Commission has, when defining 

bona fide hedging, historically focused on transactions that offset price risk.

66 

 63 See infra Section II.A.1.c.v. (discussion of proposed pass-through language). 64 7 U.S.C. 6a(c)(2)(A)(ii) and 17 CFR 1.3. 65 See, e.g., 2013 Proposal, 78 FR at 75709, 75710. 66 For example, in promulgating existing § 1.3, the Commission explained that a bona fide hedging position 

must, among other things, “be economically appropriate to risk reduction, such risks must arise from 

operation of a commercial enterprise, and the price fluctuations of the futures contracts used in the 

transaction must be substantially related to fluctuations of the cash market value of the assets, liabilities or 

services being hedged.” Bona Fide Hedging Transactions or Positions, 42 FR 14832, 14833 (Mar. 16, 

1977). “Value” is generally understood to mean price times quantity. Dodd-Frank added CEA section 

4a(c)(2), which copied the economically appropriate test from the Commission’s definition in § 1.3. See 

also 2013 Proposal, 78 FR at 75702, 75703 (stating that the “core of the Commission’s approach to 

defining bona fide hedging over the years has focused on transactions that offset a recognized physical 

price risk”).
40

Commenters have previously requested flexibility for hedges of non-price risk.67 

However, re-interpreting “risk” to mean something other than “price risk” would make 

determining whether a particular position is economically appropriate to the reduction of 

risk too subjective to effectively evaluate. While the Commission or an exchange’s staff 

can objectively evaluate whether a particular derivatives position is an economically 

appropriate hedge of a price risk arising from an underlying cash-market transaction, 

including by assessing the correlations between the risk and the derivatives position, it 

would be more difficult, if not impossible, to objectively determine whether an offset of 

non-price risk is economically appropriate for the underlying risk. For example, for any 

given non-price risk, such as political risk, there could be multiple commodities, 

directions, and contract months which a particular market participant may view as an 

economically appropriate offset for that risk, and multiple market participants might take 

different views on which offset is the most effective. Re-interpreting “risk” to mean 

something other than “price risk” would introduce an element of subjectivity that would 

make a federal position limit framework difficult, if not impossible, to administer. 

The Commission remains open to receiving new product submissions, and should 

those submissions include contracts or strategies that are used to hedge something other 

than price risk, the Commission could at that point evaluate whether to propose

regulations that would recognize hedges of risks other than price risk as bona fide hedges. 

(3) Change in Value Requirement

The Commission proposes to retain the substance of the change in value 

requirement in existing § 1.3, with some non-substantive technical modifications, 

 67 See, e.g., 2016 Reproposal, 81 FR at 96847.
41

including modifications to correct a typographical error.68 Aside from the typographical 

error, the proposed § 150.1 change in value requirement mirrors the Dodd-Frank Act’s 

change in value requirement in CEA section 4a(c)(2)(A)(iii).69

(4) Incidental Test and Orderly Trading Requirement

While the Commission proposes to maintain the substance of the three core 

elements of the existing bona fide hedging definition described above, with some 

modifications, the Commission also proposes to eliminate two elements contained in the 

existing § 1.3 definition: the incidental test and orderly trading requirement that currently 

appear in paragraph (1)(iii) of the § 1.3 bona fide hedging definition.70 

Notably, Congress eliminated the incidental test from the statutory bona fide 

hedging definition in CEA section 4a(c)(2).71 Further, the Commission views the 

incidental test as redundant because the Commission is proposing to maintain the change 

in value requirement (value is generally understood to mean price per unit times quantity 

of units), and the economically appropriate test, which includes the concept of the offset 

of price risks in the conduct and management of (i.e., incidental to) a commercial 

enterprise. 

The Commission does not view the proposed elimination of the incidental test in 

the definition that appears in the regulations as a change in policy. The proposed 

 68 The Commission proposes to replace the phrase “liabilities which a person owns,” which appears in the 

statute erroneously, with “liabilities which a person owes,” which the Commission believes was the 

intended wording. The Commission interprets the word “owns” to be a typographical error. A person may 

owe on a liability, and may anticipate incurring a liability. If a person “owns” a liability, such as a debt 

instrument issued by another, then such person owns an asset. The fact that assets are included in CEA 

section 4a(c)(2)(A)(iii)(I) further reinforces the Commission’s interpretation that the reference to “owns” 

means “owes.” The Commission also proposes several other non-substantive modifications in sentence 

structure to improve clarity. 

69 7 U.S.C. 6a(c)(2)(A)(iii). 70 17 CFR 1.3. 71 7 U.S.C. 6a(c)(2).
42

elimination would not result in any changes to the Commission’s interpretation of the 

bona fide hedging definition for physical commodities. 

The Commission also preliminarily believes that the orderly trading requirement 

should be deleted from the definition in the Commission’s regulations because the 

statutory bona fide hedging definition does not include an orderly trading requirement,72

and because the meaning of “orderly trading” is unclear in the context of the over-the 

counter (“OTC”) swap market and in the context of permitted off-exchange transactions,

such as exchange for physicals. The proposed elimination of the orderly trading 

requirement would also have no bearing on an exchange’s ability to impose its own 

orderly trading requirement. Further, in proposing to eliminate the orderly trading 

requirement from the definition in the regulations, the Commission is not proposing any 

amendments or modified interpretations to any other related requirements, including to 

any of the anti-disruptive trading prohibitions in CEA section 4c(a)(5),73 or to any other 

statutory or regulatory provisions. 

Taken together, the proposed retention of the updated temporary substitute test, 

economically appropriate test, and change in value requirement, coupled with the 

proposed elimination of the incidental test and orderly trading requirement, should reduce 

uncertainty by eliminating provisions that do not appear in the statute, and by clarifying 

the language of the remaining provisions. By reducing uncertainty surrounding some 

parts of the bona fide hedging definition for physical commodities, the Commission 

 72 The orderly trading requirement has been a part of the regulatory definition of bona fide hedging since 

1975; see Hedging Definition, Reports, and Conforming Amendments, 40 FR 11560 (Mar. 12, 1975). Prior 

to 1974, the orderly trading requirement was found in the statutory definition of bona fide hedging position; 

changes to the CEA in 1974 removed the statutory definition from CEA section 4a(3).

73 7 U.S.C. 6c(a)(5).
43

anticipates that, as described in greater detail elsewhere in this release, it would be easier

going forward for the Commission, exchanges, and market participants to address 

whether novel trading practices or strategies may qualify as bona fide hedges.

iii. Proposed Enumerated Bona Fide Hedges for Physical Commodities

Federal position limits currently only apply to referenced contracts based on nine 

legacy agricultural commodities, and, as mentioned above, the bona fide hedging 

definition in existing § 1.3 includes a list of four categories of enumerated hedges that 

may be exempt from federal position limits.

74 So as not to reduce any of the clarity 

provided by the current list of enumerated hedges, the Commission proposes to maintain 

the existing enumerated hedges, some with modification, and, for the reasons described

below, to expand this list. Such enumerated bona fide hedges would be self-effectuating 

for purposes of federal limits.

75 The Commission also proposes to move the expanded 

list to proposed Appendix A to part 150 of the Commission’s regulations. The 

Commission preliminarily believes that the list of enumerated hedges should appear in an 

appendix, rather than be included in the definition, because each enumerated hedge 

represents just one way, but not the only way, to satisfy the proposed bona fide hedging 

definition and § 150.3(a)(1).76 In some places, as described below, the Commission 

proposes to modify and/or re-organize the language of the current enumerated hedges; 

such proposed changes are intended only to provide clarifications, and, unless indicated 

otherwise, are not intended to substantively modify the types of practices currently listed

 74 17 CFR 1.3. 75 See infra Section II.C.2. (discussion of proposed § 150.3) and Section II.G.3. (discussion of proposed § 

150.9).

76 As discussed below, proposed § 150.3(a)(1) would allow a person to exceed position limits for bona fide 

hedging transactions or positions, as defined in proposed § 150.1.
44

as enumerated hedges. In other places, however, the Commission proposes substantive 

changes to the existing enumerated hedges, including the elimination of the five-day rule 

for purposes of federal limits, while allowing exchanges to impose a five-day rule, or 

similar restrictions, for purposes of exchange-set limits. With the exception of risk 

management positions previously recognized as bona fide hedges, and assuming all 

regulatory requirements continue to be satisfied, bona fide hedging recognitions that are 

currently in effect under the Commission’s existing rules, either by virtue of § 1.47 or 

one of the enumerated hedges currently listed in § 1.3, would be grandfathered once the 

rules proposed herein are adopted.

When first proposed, the Commission viewed the enumerated bona fide hedges as 

conforming to the general definition of bona fide hedging “without further consideration 

as to the particulars of the case.”77 Similarly, the proposed enumerated hedges would 

reflect fact patterns for which the Commission has preliminarily determined, based on 

experience over time, that no case-by-case determination, or review of additional details, 

by the Commission is needed to determine that the position or transaction is a bona fide 

hedge. This proposal would in no way foreclose the recognition of other hedging 

practices as bona fide hedges. 

The Commission would be open, on a case-by-case basis, to recognizing as bona 

fide hedges positions or transactions that may fall outside the bounds of these enumerated 

hedges, but that nevertheless satisfy the proposed bona fide hedging definition and 

section 4a(c)(2) of the CEA.

78 

 77 Bona Fide Hedging Transactions or Positions, 42 FR 14832 (Mar. 16, 1977). 78 See infra Section II.G.3. (discussion of proposed § 150.9).
45

The Commission does not anticipate that moving the list of enumerated hedges 

from the bona fide hedging definition to an appendix per se would have a substantial 

impact on market participants who seek clarity regarding bona fide hedges. However, the 

Commission is open to feedback on this point. 

Positions in referenced contracts subject to position limits that meet any of the 

proposed enumerated hedges would, for purposes of federal limits, meet the bona fide 

hedging definition in CEA section 4a(c)(2)(A), as well as the Commission’s proposed 

bona fide hedging definition in § 150.1. Any such recognitions would be selfeffectuating for purposes of federal limits, provided the market participant separately 

requests an exemption from the applicable exchange-set limit established pursuant to 

proposed § 150.5(a). The proposed enumerated hedges are each described below, 

followed by a discussion of the proposal’s treatment of the five-day rule. 

(1) Hedges of Unsold Anticipated Production

This hedge is currently enumerated in paragraph (2)(i)(B) of the bona fide 

hedging definition in § 1.3, and is subject to the five-day rule. The Commission proposes 

to maintain it as an enumerated hedge, with the modification described below. This 

enumerated hedge would allow a market participant who anticipates production, but who 

has not yet produced anything, to enter into a short derivatives position in excess of limits 

to hedge the anticipated production. 

While existing paragraph (2)(i)(B) limits this enumerated hedge to twelvemonths’ unsold anticipated production, the Commission proposes to remove the twelvemonth limitation. The twelve-month limitation may be unsuitable in connection with 

additional contracts based on agricultural and energy commodities covered by this 
46

release, which may have longer growth and/or production cycles than the nine legacy 

agricultural commodities. Commenters have also previously recommended removing the 

twelve-month limitation on agricultural production, stating that it is unnecessarily short in 

comparison to the expected life of investment in production facilities.79 The Commission 

preliminarily agrees. 

(2) Hedges of Offsetting Unfixed Price Cash Commodity Sales and Purchases

This hedge is currently enumerated in paragraph (2)(iii) of the bona fide hedging 

definition in § 1.3 and is subject to the five-day rule. The Commission proposes to 

maintain it as an enumerated hedge, with one proposed modification described below. 

This enumerated hedge allows a market participant to use commodity derivatives in 

excess of limits to offset an unfixed price cash commodity purchase coupled with an 

unfixed price cash commodity sale. 

Currently, under paragraph (2)(iii), the cash commodity must be bought and sold 

at unfixed prices at a basis to different delivery months, meaning the offsetting 

derivatives transaction would be used to reduce the risk arising from a time differential in 

the unfixed-price purchase and sale contracts.80 The Commission proposes to expand this 

provision to also permit the cash commodity to be bought and sold at unfixed prices at a 

basis to different commodity derivative contracts in the same commodity, even if the 

commodity derivative contracts are in the same calendar month. The Commission is 

 79 See, e.g., 2016 Reproposal, 81 FR at 96752. 80 The Commission stated when it proposed this enumerated hedge, “[i]n particular, a cotton merchant may 

contract to purchase and sell cotton in the cash market in relation to the futures price in different delivery 

months for cotton, i.e., a basis purchase and a basis sale. Prior to the time when the price is fixed for each 

leg of such a cash position, the merchant is subject to a variation in the two futures contracts utilized for 

price basing. This variation can be offset by purchasing the future on which the sales were based [and] 

selling the future on which [the] purchases were based.” Revision of Federal Speculative Position Limits, 

51 FR 31648, 31650 (Sept. 4, 1986).
47

proposing this change to allow a commercial enterprise to enter into the described 

derivatives transactions to reduce the risk arising from either (or both) a location 

differential81 or a time differential in unfixed-price purchase and sale contracts in the 

same cash commodity.

Both an unfixed-price cash commodity purchase and an offsetting unfixed-price 

cash commodity sale must be in hand in order to be eligible for this enumerated hedge, 

because having both the unfixed-price sale and purchase in hand would allow for an 

objective evaluation of the hedge.82 Absent either the unfixed-price purchase or the 

unfixed-price sale (or absent both), it would be less clear how the transaction could be 

classified as a bona fide hedge, that is, a transaction that reduces price risk.83 

This is not to say that an unfixed-price cash commodity purchase alone, or an 

unfixed-price cash commodity sale alone, could never be recognized as a bona fide 

hedge. Rather, an additional facts and circumstances analysis would be warranted in 

such cases.

Further, upon fixing the price of, or taking delivery on, the purchase contract, the 

owner of the cash commodity may hold the short derivative leg of the spread as a hedge 

against a fixed-price purchase or inventory. However, the long derivative leg of the 

spread would no longer qualify as a bona fide hedging position, since the commercial 

 81 In the case of reducing the risk of a location differential, and where each of the underlying transactions in 

separate derivative contracts may be in the same contract month, a position in a basis contract would not be 

subject to position limits, as discussed in connection with paragraph (3) of the proposed definition of 

“referenced contract.” 

82 For example, in the case of a calendar spread, having both the unfixed-price sale and purchase in hand 

would set the timeframe for the calendar month spread being used as the hedge. 83 In 2013, the Commission provided an example regarding this enumerated hedge: “The contemplated 

derivative positions will offset the risk that the difference in the expected delivery prices of the two 

unfixed-price cash contracts in the same commodity will change between the time the hedging transaction 

is entered and the time of fixing of the prices on the purchase and sales cash contracts. Therefore, the 

contemplated derivative positions are economically appropriate to the reduction of risk.” 2013 Proposal, 

78 FR at 75715.
48

entity has fixed the price or taken delivery on the purchase contract. Similarly, if the 

commercial entity first fixed the price of the sales contract, the long derivative leg of the 

spread may be held as a hedge against a fixed-price sale, but the short derivative leg of 

the spread would no longer qualify as a bona fide hedging position. Commercial entities 

in these circumstances thus may have to consider reducing certain positions in order to 

comply with the regulations proposed herein. 

(3) Short Hedges of Anticipated Mineral Royalties

The Commission is proposing a new acceptable practice that is not currently 

enumerated in § 1.3 for short hedges of anticipated mineral royalties. The Commission

previously adopted a similar provision as an enumerated hedge in part 151 in response to 

a request from commenters.

84 The proposed provision would permit an owner of rights 

to a future royalty to lock in the price of anticipated mineral production by entering into a 

short position in excess of limits in a commodity derivative contract to offset the 

anticipated change in value of mineral royalty rights that are owned by that person and 

arise out of the production of a mineral commodity (e.g., oil and gas).85 The Commission 

preliminarily believes that this remains a common hedging practice, and that positions 

that satisfy the requirements of this acceptable practice would conform to the general 

definition of bona fide hedging without further consideration as to the particulars of the 

case.

 84 See 2011 Final Rulemaking, 76 FR at 71646. As noted above, part 151 was subsequently vacated. 85 A short position fixes the price of the anticipated receipts, removing exposure to change in value of the 

person’s share of the production revenue. A person who has issued a royalty, in contrast, has, by definition, 

agreed to make a payment in exchange for value received or to be received (e.g., the right to extract a 

mineral). Upon extraction of a mineral and sale at the prevailing cash market price, the issuer of a royalty 

remits part of the proceeds in satisfaction of the royalty agreement. The issuer of a royalty, therefore, does 

not have price risk arising from that royalty agreement.
49

The Commission proposes to limit this acceptable practice to mineral royalties;

the Commission preliminarily believes that while royalties have been paid for use of land 

in agricultural production, the Commission has not received any evidence of a need for a 

bona fide hedge recognition from owners of agricultural production royalties. The 

Commission requests comment on whether and why such an exemption might be needed 

for owners of agricultural production or other royalties. 

(4) Hedges of Anticipated Services

The Commission is proposing a new enumerated hedge that is not currently 

enumerated in the § 1.3 bona fide hedging definition for hedges of anticipated services. 

The Commission previously adopted a similar provision as an enumerated hedge in part 

151 in response to a request from commenters.86 This enumerated hedge would 

recognize as a bona fide hedge a long or short derivatives position used to hedge the 

anticipated change in value of receipts or payments due or expected to be due under an 

executed contract for services arising out of the production, manufacturing, processing, 

use, or transportation of the commodity underlying the commodity derivative contract.87 

The Commission preliminarily believes that this remains a common hedging practice, and 

that positions that satisfy the requirements of this acceptable practice would conform to 

the general definition of bona fide hedging without further consideration as to the 

particulars of the case.

(5) Cross-Commodity Hedges

 86 See 2011 Final Rulemaking, 76 FR at 71646. As noted above, part 151 was subsequently vacated. 87 As the Commission previously stated, regarding a proposed hedge for services, “crop insurance providers 

and other agents that provide services in the physical marketing channel could qualify for a bona fide hedge 

of their contracts for services arising out of the production of the commodity underlying a [commodity 

derivative contract].” 2013 Proposal, 78 FR at 75716. 
50

Paragraph (2)(iv) of the existing § 1.3 bona fide hedge definition enumerates the 

offset of cash purchases, sales, or purchases and sales with a commodity derivative other 

than the commodity that comprised the cash position(s).88 The Commission proposes to 

include this hedge in the enumerated hedges and expand its application such that crosscommodity hedges could be used to establish compliance with: each of the proposed 

enumerated hedges listed in Appendix A to part 150;

89 and hedges in the proposed passthrough provisions under paragraph (2) of the proposed bona fide hedging definition

discussed further below; provided, in each case, that the position satisfies each element of 

the relevant acceptable practice.

90 

This enumerated hedge is conditioned on the fluctuations in value of the position 

in the commodity derivative contract or of the underlying cash commodity being 

“substantially related”91 to the fluctuations in value of the actual or anticipated cash 

position or pass-through swap. To be “substantially related,” the derivative and cash 

market position, which may be in different commodities, should have a reasonable 

 88 For example, existing paragraph (2)(iv) of the bona fide hedging definition recognizes as an enumerated 

hedge the offset of a cash-market position in one commodity, such as soybeans, through a derivatives 

position in a different commodity, such as soybean oil or soybean meal.

89 Specifically, for: (i) hedges of unsold anticipated production, (ii) hedges of offsetting unfixed-price cash 

commodity sales and purchases, (iii) hedges of anticipated mineral royalties, (iv) hedges of anticipated 

services, (v) hedges of inventory and cash commodity fixed-price purchase contracts, (vi) hedges of cash 

commodity fixed-price sales contracts, (vii) hedges by agents, and (viii) offsets of commodity trade 

options, a cross-commodity hedge could be used to offset risks arising from a commodity other than the 

cash commodity underlying the commodity derivatives contract. 90 For example, an airline that wishes to hedge the price of jet fuel may enter into a swap with a swap 

dealer. In order to remain flat, the swap dealer may offset that swap with a futures position, for example, in 

ULSD. Subsequently, the airline may also offset the swap exposure using ULSD futures. In this example, 

under the pass-through swap language of proposed § 150.1, the airline would be acting as a bona fide 

hedging swap counterparty and the swap dealer would be acting as a pass-through swap counterparty. In 

this example, provided each element of the enumerated hedge in paragraph (a)(5) of Appendix A, the passthrough swap provision in § 150.1, and all other regulatory requirements are satisfied, the airline and swap 

dealer could each exceed limits in ULSD futures to offset their respective swap exposures to jet fuel. See 

infra Section II.A.1.c.v. (discussion of proposed pass-through language).

91 See proposed Appendix A to part 150. 
51

commercial relationship.92 For example, there is a reasonable commercial relationship 

between grain sorghum, used as a food grain for humans or as animal feedstock, with 

corn underlying a derivative. There currently is not a futures contract for grain sorghum 

grown in the United States listed on a U.S. DCM, so corn represents a substantially 

related commodity to grain sorghum in the United States.

93 In contrast, there does not 

appear to be a reasonable commercial relationship between a physical commodity, say 

copper, and a broad-based stock price index, such as the S&P 500 Index, because these 

commodities are not reasonable substitutes for each other in that they have very different 

pricing drivers. That is, the price of a physical commodity is based on supply and 

demand, whereas the stock price index is based on various individual stock prices for 

different companies. 

(6) Hedges of Inventory and Cash Commodity Fixed-Price Purchase Contracts

Hedges of inventory and cash-commodity fixed-price purchase contracts are 

included in paragraph (2)(i)(A) of the existing § 1.3 bona fide hedge definition, and the 

Commission proposes to include them as an enumerated hedge with minor modifications. 

This proposed enumerated hedge acknowledges that a commercial enterprise is exposed 

to price risk (e.g., that the market price of the inventory could decrease) if it has obtained 

inventory in the normal course of business or has entered into a fixed-price spot or 

forward purchase contract calling for delivery in the physical marketing channel of a 

cash-market commodity (or a combination of the two), and has not offset that price risk. 

 92 Id. 93 Grain sorghum was previously listed for trading on the Kansas City Board of Trade and Chicago 

Mercantile Exchange, but because of liquidity issues, grain buyers continued to use the more liquid corn 

futures contract, which suggests that the basis risk between corn futures and cash sorghum could be 

successfully managed with the corn futures contract.
52

Any such inventory, or a fixed-price purchase contract, must be on hand, as opposed to a 

non-fixed purchase contract or an anticipated purchase. To satisfy the requirements of

this particular enumerated hedge, a bona fide hedge would be to establish a short position 

in a commodity derivative contract to offset such price risk. An exchange may require 

such short position holders to demonstrate the ability to deliver against the short position

in order to demonstrate a legitimate purpose for holding a position deep into the spot 

month.94

(7) Hedges of Cash Commodity Fixed-Price Sales Contracts

This hedge is enumerated in paragraphs (2)(ii)(A) and (B) of the existing § 1.3

bona fide hedge definition, and the Commission proposes to maintain it as an enumerated 

hedge. This enumerated hedge acknowledges that a commercial enterprise is exposed to 

price risk (i.e., that the market price of a commodity might be higher than the price of a 

fixed-price sales contract for that commodity) if it has entered into a spot or forward 

fixed-price sales contract calling for delivery in the physical marketing channel of a cashmarket commodity, and has not offset that price risk. To satisfy the requirements of this 

particular enumerated hedge, a bona fide hedge would be to establish a long position in a 

commodity derivative contract to offset such price risk. 

(8) Hedges by Agents

This proposed enumerated hedge is included in paragraph (3) of the existing § 1.3

bona fide hedge definition as an example of a potential non-enumerated bona fide hedge. 

 94 For example, it would not appear to be economically appropriate to hold a short position in the spot 

month of a commodity derivative contract against fixed-price purchase contracts that provide for deferred 

delivery in comparison to the delivery period for the spot month commodity derivative contract. This is 

because the commodity under the cash contract would not be available for delivery on the commodity 

derivative contract.
53

The Commission proposes to include this example as an enumerated hedge, with nonsubstantive modifications,

95 because the Commission preliminarily believes that this is a 

common hedging practice, and that positions which satisfy the requirements of this 

enumerated hedge would conform to the general definition of bona fide hedging without

further consideration as to the particulars of the case. This proposed provision would 

allow an agent who has the responsibility to trade cash commodities on behalf of another 

entity for which such positions would qualify as bona fide hedging positions to hedge 

those cash positions on a long or short basis. For example, an agent may trade on behalf 

of a farmer or a producer, or a government may wish to contract with a commercial firm 

to manage the government’s cash wheat inventory; in such circumstances, the agent or 

the commercial firm would not take ownership of the commodity it trades on behalf of 

the farmer, producer, or government, but would be an agent eligible for an exemption to 

hedge the risks associated with such cash positions.

(9) Offsets of Commodity Trade Options

The Commission is proposing a new enumerated hedge to recognize certain 

offsets of commodity trade options as a bona fide hedge. Under this proposed 

enumerated hedge, a commodity trade option meeting the requirements of § 32.396 of the 

 95 For example, the Commission proposes to replace the phrase “offsetting cash commodity” with 

“contract’s underlying cash commodity” to use language that is consistent with the other proposed 

enumerated hedges. 96 17 CFR 32.3. In order to qualify for the trade option exemption, § 32.3 requires, among other things, 

that: (1) the offeror is either (i) an eligible contract participant, as defined in section 1a(18) of the Act, or 

(ii) offering or entering into the commodity trade option solely for purposes related to its business as a 

“producer, processor, or commercial user of, or a merchant handling the commodity that is the subject of 

the” trade option; and (2) the offeree is offered or entering into the commodity trade option solely for 

purposes related to its business as “a producer, processor, or commercial user of, or a merchant handling 

the commodity that is the subject” of the commodity trade option.
54

Commission’s regulations97 may be deemed a cash commodity fixed-price purchase or 

cash commodity fixed-price sales contract, as the case may be, provided that such option 

is adjusted on a futures-equivalent basis.98 Because the Commission proposes to include 

hedges of cash commodity fixed-price purchase contracts and hedges of cash commodity

fixed-price sales contracts as enumerated hedges, the Commission also proposes to 

include hedges of commodity trade options as an enumerated hedge. 

(10) Hedges of Unfilled Anticipated Requirements

This proposed enumerated hedge appears in paragraph (2)(ii)(C) of the existing § 

1.3 bona fide hedge definition. The Commission proposes to include it as an enumerated 

hedge, with modification. To satisfy the requirements of this particular enumerated 

hedge, a bona fide hedge would be to establish a long position in a commodity derivative 

contract to offset the expected price risks associated with the anticipated future purchase 

of the cash-market commodity underlying the commodity derivative contract. Such 

unfilled anticipated requirements could include requirements for processing, 

manufacturing, use by that person, or resale by a utility to its customers.99 Consistent 

with the existing provision, for purposes of exchange-set limits, exchanges may wish to 

consider adopting rules providing that during the lesser of the last five days of trading (or 

 97 17 CFR 32.3. 

98 It may not be possible to compute a futures-equivalent basis for a trade option that does not have a fixed 

strike price. Thus, under this enumerated hedge, a market participant may not use a trade option as a basis 

for a bona fide hedging position until a fixed strike price reasonably may be determined. For example, a 

commodity trade option with a fixed strike price may be converted to a futures-equivalent basis, and, on 

that futures-equivalent basis, deemed a cash commodity sale contract, in the case of a short call option or 

long put option, or a cash commodity purchase contract, in the case of a long call option or short put option. 99 The proposed inclusion of unfilled anticipated requirements for resale by a utility to its customers does 

not appear in the existing § 1.3 bona fide hedging definition. This provision is analogous to the unfilled 

anticipated requirements provision of existing paragraph (2)(ii)(C) of the existing bona fide hedging 

definition, except the commodity is not for use by the same person (that is, the utility), but rather for 

anticipated use by the utility’s customers. This would recognize a bona fide hedging position where a 

utility is required or encouraged by its public utility commission to hedge. 
55

such time period for the spot month), such positions must not exceed the person’s 

unfilled anticipated requirements of the underlying cash commodity for that month and 

for the next succeeding month.100 Any such quantity limitation may help prevent the use 

of long futures to source large quantities of the underlying cash commodity. The 

Commission preliminarily believes that the two-month limitation would allow for an

amount of activity that is in line with common commercial hedging practices, without 

jeopardizing any statutory objectives.

Although existing paragraph (2)(ii)(C) limits this enumerated hedge to twelvemonths’ unfilled anticipated requirements outside of the spot period, the Commission 

proposes to remove the twelve-month limitation because commenters have previously 

stated, and the Commission preliminarily believes, that there is a commercial need to 

hedge unfilled anticipated requirements for a time period longer than twelve months.

101

(11) Hedges of Anticipated Merchandising

The Commission is proposing a new enumerated hedge to recognize certain 

offsets of anticipated purchases or sales as a bona fide hedge. Under this proposed 

enumerated hedge, a merchant may establish a long or short position in a commodity 

derivative contract to offset the anticipated change in value of the underlying commodity 

that the merchant anticipates purchasing or selling in the future. To safeguard against 

misuse, the enumerated hedge would be subject to certain conditions. First, the 

commodity derivative position must not exceed in quantity twelve months’ of purchase or 

 100 This is essentially a less-restrictive version of the five-day rule, allowing a participant to hold a position

during the end of the spot period if economically appropriate, but only up to two months’ worth of 

anticipated requirements. The two-month quantity limitation has long-appeared in existing § 1.3 as a 

measure to prevent the sourcing of massive quantities of the underlying in a short time period. 17 CFR 1.3. 101 See, e.g., 2016 Reproposal, 81 FR at 96751.
56

sale requirements of the same commodity that is anticipated to be merchandised. This 

requirement is intended to ensure that merchants are hedging their anticipated 

merchandising exposure to the value change of the underlying commodity, while 

calibrating the anticipated need within a reasonable timeframe and the limitations in 

physical commodity markets, such as annual production or processing capacity. Unlike 

in the enumerated hedge for unsold anticipated production, where the Commission is 

proposing to eliminate the twelve-month limitation, the Commission has preliminarily 

determined that a twelve-month limitation for anticipatory merchandising is suitable in 

connection with contracts that are based on anticipated activity on yet-to-be established 

cash positions due to the uncertainty of forecasting such activity and, all else being equal,

the increased risk of excessive speculation on the price of a commodity the longer the 

time period before the actual need arises. 

Second, the Commission is proposing to limit this enumerated hedge to merchants 

who are in the business of purchasing and selling the underlying commodity that is 

anticipated to be merchandised, and who can demonstrate that it is their historical 

practice to do so. Such demonstrated history should include a history of making and 

taking delivery of the underlying commodity, and a demonstration of an ability to store 

and move the underlying commodity. The Commission has a longstanding practice of 

providing exemptive relief to commercial market participants to enable physical 

commodity markets to continue to be well-functioning markets. The proposed 

anticipatory merchandising hedge requires that the person be a merchant handling the 

underlying commodity that is subject to the anticipatory merchandising hedge and that 

such merchant is entering into the anticipatory merchandising hedge solely for purposes 
57

related to its merchandising business. A merchandiser that lacks the requisite history of 

anticipatory merchandising activity could still potentially receive bona fide hedge 

recognition under the proposed non-enumerated process, so long as the merchandiser can 

otherwise show activities in the physical marketing channel, including, for example,

arrangements to take or make delivery of the underlying commodity. 

The Commission preliminarily believes that anticipated merchandising is a 

hedging practice commonly used by some commodity market participants, and that 

merchandisers play an important role in the physical supply chain. Positions which 

satisfy the requirements of this acceptable practice would thus conform to the general 

definition of bona fide hedging. 

While each of the proposed enumerated hedges described above would be selfeffectuating for purposes of federal limits, the Commission and the exchanges would 

continue to exercise close oversight over such positions to confirm that market 

participants’ claimed exemptions are consistent with their cash-market activity. In 

particular, because all contracts subject to federal limits would also be subject to 

exchange-set limits, all traders seeking to exceed federal position limits would have to 

request an exemption from the relevant exchange for purposes of the exchange limit, 

regardless of whether the position falls within one of the enumerated hedges. In other 

words, enumerated bona fide hedge recognitions that are self-effectuating for purposes of 

federal limits would not be self-effectuating for purposes of exchange limits. 

Exchanges have well-established programs for granting exemptions, including, in 

some cases, experience granting exemptions for anticipatory merchandising for certain 

traders in markets not currently subject to federal limits. As discussed in greater detail 
58

below, proposed § 150.5102 would ensure that such programs require, among other things,

that: exemption applications filed with an exchange include sufficient information to 

enable the exchange to determine, and the Commission to verify, whether the exchange 

may grant the exemption, including an indication of whether the position qualifies as an 

enumerated hedge for purposes of federal limits and a description of the applicant’s 

activity in the underlying cash markets; and that the exchange provides the Commission 

with a monthly report showing the disposition of all exemption applications, including 

cash market information justifying the exemption. The Commission expects exchanges 

will be thoughtful and deliberate in granting exemptions, including anticipatory 

exemptions. 

The Commission and the exchanges also have a variety of other tools designed to 

help prevent misuse of self-effectuating exemptions. For example, market participants

who submit an application to an exchange as required under § 150.5 would be subject to 

the Commission’s false statements authority that carries with it substantial penalties 

under both the CEA and federal criminal statutes.103 Similarly, the Commission can use 

surveillance tools, special call authority, rule enforcement reviews, and other formal and 

informal avenues for obtaining additional information from exchanges and market 

participants in order to distinguish between true hedging needs and speculative trading 

masquerading as a bona fide hedge. 

In the 2013 Proposal, the Commission previously addressed a petition for 

exemptive relief for 10 transactions described as bona fide hedging transactions by the 

 102 See infra Section II.D.4. (discussion of proposed § 150.5). 103 CEA section 6(c)(2), 7 U.S.C. 9(2); CEA section 9(a)(3), 7 U.S.C. 13(a)(3); CEA section 9(a)(4), 7 

U.S.C. 13(a)(4); 18 U.S.C. 1001.
59

Working Group of Commercial Energy Firms (which has since reconstituted itself as the 

“Commercial Energy Working Group”) (“BFH Petition”).104 In the 2013 Proposal, the 

Commission included examples Nos. 1, 2, 6, 7 (scenario 1), and 8 as being permitted 

under the proposed definition of bona fide hedging. 

With respect to the rules proposed herein, the Commission has preliminarily 

determined that example # 4 (binding, irrevocable bids or offers) and # 5 (timing of 

hedging physical transactions) from the BFH Petition potentially fit within the proposed 

Appendix A paragraph (a)(11) enumerated hedge of anticipatory merchandising, so long 

as the transaction complies with each condition of that proposed enumerated hedge. 

In addition, as discussed further below, because the Commission is also proposing 

to eliminate the five-day rule from the enumerated hedges to which the five-day rule 

currently applies, the Commission has preliminarily determined that example # 9

(holding a cross-commodity hedge using a physical delivery contract into the spot month) 

and # 10 (holding a cross-commodity hedge using a physical delivery contract to meet 

unfilled anticipated requirements) from the BFH Petition potentially fit within the 

proposed Appendix A paragraph (a)(5) enumerated hedge, so long as the transaction 

otherwise complies with the additional conditions of all applicable enumerated hedges 

and other requirements. 

Regarding examples # 3 (unpriced physical purchase or sale commitments) and # 

7 (scenario 2) (use of physical delivery referenced contracts to hedge physical 

transactions using calendar month average pricing), while the Commission has 

preliminarily determined that the positions described within those examples do not fit 

 104 The Working Group BFH Petition is available at

http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgbfhpetition012012.pdf. 
60

within any of the proposed enumerated hedges, market participants seeking bona fide 

hedge recognition for such positions may apply for a non-enumerated recognition under 

proposed §§ 150.3 or 150.9, and a facts and circumstances decision would be made.

105 

As included in the request for comment on this section, the Commission requests

additional information on the scenarios listed above, particularly for the positions that the 

Commission preliminarily views as falling outside the proposed list of enumerated 

hedges. 

iv. Elimination of a federal five day rule

Under the existing bona fide hedging definition in § 1.3, to help protect orderly 

trading and the integrity of the physical-delivery process, certain enumerated hedging 

positions in physical-delivery contracts are not recognized as bona fide hedges that may 

exceed limits when the position is held during the last five days of trading during the spot 

month. The goal of the five-day rule is to help ensure that only those participants who 

actually intend to make or take delivery maintain positions toward the end of the spot 

period.106 When the Commission adopted the five-day rule, it believed that, as a general 

matter, there is little commercial need to maintain such positions in the last five days.107 

However, persons wishing to exceed position limits during the five last trading days 

 105 Similarly, other examples of anticipatory merchandising that have been described to the Commission in 

response to request for comment on proposed rulemakings on position limits (i.e., the storage hedge and 

hedges of assets owned or anticipated to be owned) would be the type of transactions that market 

participants may seek through one of the proposed processes for requesting a non-enumerated bona fide 

hedge recognition. 

106 Paragraphs (2)(i)(B), (ii)(C), (iii), and (iv) of the existing § 1.3 bona fide hedging definition are subject 

to some form of the five-day rule. 107 Definition of Bona Fide Hedging and Related Reporting Requirements, 42 FR 42748, 42750 (Aug. 24, 

1977).
61

could submit materials supporting a classification of the position as a bona fide hedge, 

based on the particular facts and circumstances.108 

The Commission has viewed the five-day rule as an important way to help ensure 

that futures and cash-market prices converge and to prevent excessive speculation as a 

physical-delivery contract nears expiration, thereby protecting the integrity of the 

delivery process and the price discovery function of the market, and deterring or 

preventing types of market manipulations such as corners and squeezes. The enumerated 

hedges currently subject to the five-day rule are either: (i) anticipatory in nature; or (ii) 

involve a situation where there is no need to make or take delivery. The Commission has 

historically questioned the need for such positions in excess of limits to be held into the 

spot period if the participant has no immediate plans and/or need to make or take delivery 

in the few remaining days of the spot period.109

While the Commission continues to believe that the justifications described above 

for the existing five-day rule remain valid, the Commission has preliminarily determined 

that for contracts subject to federal limits, the exchanges, subject to Commission 

oversight, are better positioned to decide whether to apply the five-day rule in connection 

with their own exchange-set limits, or whether to apply other tools that may be equally 

effective. Accordingly, consistent with this proposal’s focus on leveraging existing 

exchange practices and expertise when appropriate, the Commission proposes to 

eliminate the five-day rule from the enumerated hedges to which the five-day rule 

currently applies, and instead to afford exchanges with the discretion to apply, and when 

 108 Id. 109 See, e.g., 42 FR at 42749.
62

appropriate, waive the five-day rule (or similar restrictions) for purposes of their own 

limits.

Allowing for such discretion will afford exchanges flexibility to quickly impose, 

modify, or waive any such limitation as circumstances dictate. While a strict five day 

rule may be inappropriate in certain circumstances, including when applied to energy 

contracts that typically have a shorter spot period than agricultural contracts,

110 the

flexible approach allowed for herein may allow for the development and implementation 

of additional solutions other than a five-day rule that protect convergence while 

minimizing the impact on market participants. The proposed approach would allow 

exchanges to design and tailor a variety of limitations to protect convergence during the 

spot period. For example, in certain circumstances, a smaller quantity restriction, rather 

than a complete restriction on holding positions in excess of limits during the spot period, 

may be effective at protecting convergence. Similarly, exchanges currently utilize other 

tools to achieve similar policy goals, such as by requiring market participants to “step 

down” the levels of their exemptions as they approach the spot period, or by establishing 

exchange-set speculative position limits that include a similar step down feature. As 

proposed § 150.5(a) would require that any exchange-set limits for contracts subject to 

federal limits must be less than or equal to the federal limit, any exchange application of 

the five day rule, or a similar restriction, would have the same effect as if administered by 

the Commission for purposes of federal speculative position limits. 

 110 Energy contracts typically have a three-day spot period, whereas the spot period for agricultural 

contracts is typically two weeks. 
63

The Commission expects that exchanges would closely scrutinize any participant 

who requests a recognition during the last five days of the spot period or in the time 

period for the spot month. 

To assist exchanges that wish to establish a five-day rule, or a similar provision, 

the Commission proposes guidance in paragraph (b) of Appendix B that would set forth 

circumstances when a position held during the spot period may still qualify as a bona fide 

hedge. The guidance would provide that a position held during the spot period may still 

qualify as a bona fide hedging position, provided that, among other things: (1) the 

position complies with the bona fide hedging definition; and (2) there is an economically 

appropriate need to maintain such position in excess of federal speculative position limits 

during the spot period, and that need relates to the purchase or sale of a cash 

commodity.

111

In addition, the guidance would provide that the person wishing to exceed federal 

position limits during the spot period: (1) intends to make or take delivery during that 

period; (2) provides materials to the exchange supporting the waiver of the five-day rule; 

(3) demonstrates supporting cash-market exposure in-hand that is verified by the 

exchange; (4) demonstrates that, for short positions, the delivery is feasible, meaning that 

the person has the ability to deliver against the short position;112 and (5) demonstrates 

that, for long positions, the delivery is feasible, meaning that the person has the ability to 

 111 For example, an economically appropriate need for soybeans would mean obtaining soybeans from a 

reasonable source (considering the marketplace) that is the least expensive, at or near the location required 

for the purchaser, and that such sourcing does not cause market disruptions or prices to spike. 112 That is, the person has inventory on-hand in a deliverable location and in a condition in which the 

commodity can be used upon delivery.
64

take delivery at levels that are economically appropriate.113 This proposed guidance is 

intended to include a non-exclusive list of considerations for determining whether to 

waive a five-day rule established at the discretion of an exchange.

v. Guidance on Measuring Risk 

In prior proposals involving position limits, the Commission discussed the issue 

of whether the Commission may recognize as bona fide both “gross hedging” and “net 

hedging.”114 Such attempts reflected the Commission’s longstanding preference for net 

hedging, which, although not stated explicitly in prior releases, has been underpinned by 

a concern that unfettered recognition of gross hedging could potentially allow for the 

cherry picking of positions in a manner that subverts the position limits rules.115 

In an effort to clarify its current view on this issue, the Commission proposes 

guidance in paragraph (a) to Appendix B. The Commission is of the preliminary view 

that there are myriad ways in which organizations are structured and engage in 

commercial hedging practices, including the use of multi-line business strategies in 

certain industries that would be subject to federal limits for the first time under this 

proposal. Accordingly, the Commission does not propose a one-size-fits-all approach to 

the manner in which risk is measured across an organization. 

 113 That is, the delivery comports with the person’s demonstrated need for the commodity, and the contract 

is the cheapest source for that commodity. 114 Id. at 96747. 115 For example, using gross hedging, a market participant could potentially point to a large long cash 

position as justification for a bona fide hedge, even though the participant, or an entity with which the 

participant is required to aggregate, has an equally large short cash position that would result in the 

participant having no net price risk to hedge as the participant had no price risk exposure to the commodity 

prior to establishing such derivative position. Instead, the participant created price risk exposure to the 

commodity by establishing the derivative position.
65

The proposed guidance reflects the Commission’s historical practice of

recognizing positions hedged on a net basis as bona fide;

116 however, as the Commission 

has also previously allowed, the proposed guidance also may in certain circumstances

allow for the recognition of gross hedging as bona fide, provided that: (1) the manner in 

which the person measures risk is consistent over time and follows a person’s regular, 

historical practice117 (meaning the person is not switching between net hedging and gross 

hedging on a selective basis simply to justify an increase in the size of his/her derivatives 

positions); (2) the person is not measuring risk on a gross basis to evade the limits set 

forth in proposed § 150.2 and/or the aggregation rules currently set forth in § 150.4; (3) 

the person is able to demonstrate (1) and (2) to the Commission and/or an exchange upon 

request; and (4) an exchange that recognizes a particular gross hedging position as a bona 

fide hedge pursuant to proposed § 150.9 documents the justifications for doing so and 

maintains records of such justifications in accordance with proposed § 150.9(d).

The Commission continues to believe that a gross hedge may be a bona fide 

hedge in circumstances where net cash positions do not necessarily measure total risk 

 116 See 2016 Reproposal, 81 FR at 96747 (stating that gross hedging was economically appropriate in 

circumstances where “net cash positions do not necessarily measure total risk exposure due to differences 

in the timing of cash commitments, the location of stocks, and differences in grades or the types of cash 

commodity.”) See also Bona Fide Hedging Transactions or Positions, 42 FR at 14832, 14834 (Mar. 16, 

1977) and Definition of Bona Fide Hedging and Related Reporting Requirements, 42 FR 42748, 42750 

(Aug. 24, 1977). 117 This proposed guidance on measuring risk is consistent in many ways with the manner in which the 

exchanges require their participants to measure and report risk, which is consistent with the Commission’s 

requirements with respect to the reporting of risk. For example, under § 17.00(d), futures commission 

merchants (“FCMs”), clearing members, and foreign brokers are required to report certain reportable net 

positions, while under § 17.00(e), such entities may report gross positions in certain circumstances, 

including if the positions are reported to an exchange or the clearinghouse on a gross basis. 17 CFR 17.00. 

The Commission’s understanding is that certain exchanges generally prefer, but do not require, their 

participants to report positions on a net basis. For those participants that elect to report positions on a gross 

basis, such exchanges require such participants to continue reporting that way, particularly through the spot 

period. The Commission preliminarily believes that such consistency is a strong indicator that the 

participant is not measuring risk on a gross basis simply to evade regulatory requirements.
66

exposure due to differences in the timing of cash commitments, the location of stocks, 

and differences in grades or types of the cash commodity.118 However, the Commission 

clarifies that these may not be the only circumstances in which gross hedging may be 

recognized as bona fide. Like the analysis of whether a particular position satisfies the 

proposed bona fide hedge definition, the analysis of whether gross hedging may be 

utilized would involve a case-by-case determination made by the Commission and/or by 

an exchange using its expertise and knowledge of its participants as it considers 

applications under § 150.9, subject to Commission review and oversight. 

The Commission believes that permitting market participants with bona fide 

hedges to use either or both gross or net hedging will help ensure that market participants 

are able to hedge efficiently. Large, complex entities may have hedging needs that 

cannot be efficiently and effectively met with either gross or net hedging. For instance, 

some firms may hedge on a global basis while others may hedge by trading desk or 

business line. Some risks that appear offsetting may in fact need to be treated separately 

where a difference in delivery location or date makes net hedging of those positions 

inappropriate.

To prevent “cherry-picking” when determining whether to gross or net hedge 

certain risks, hedging entities should have policies and procedures setting out when gross 

and net hedging is appropriate. Consistent usage of appropriate gross and/or net hedging 

in line with such policies and procedures can demonstrate compliance with the 

Commission’s regulations. On the other hand, usage of gross or net hedging that is 

 118 See, e.g., Bona Fide Hedging Transactions or Positions, 42 FR at 14834.
67

inconsistent with an entity’s policies or a change from gross to net hedging (or vice 

versa) could be an indication that an entity is seeking to evade position limits regulations.

vi. Pass-Through Provisions

As the Commission has noted above, CEA section 4a(c)(2)(B)119 further 

contemplates bona fide hedges that by themselves do not meet the criteria of CEA section 

4a(c)(2)(A), but that are executed by a pass-through swap counterparty opposite a bona 

fide hedging swap counterparty, or used by a bona fide hedging swap counterparty to 

offset its swap exposure that does satisfy CEA section 4a(c)(2)(A).120 The Commission 

preliminarily believes that, in affording bona fide hedging recognition to positions used 

to offset exposure opposite a bona fide hedging swap counterparty, Congress in CEA 

section 4a(c)(2)(B) intended: (1) to encourage the provision of liquidity to commercial 

entities that are hedging physical commodity price risk in a manner consistent with the 

bona fide hedging definition; but also (2) to prohibit risk management positions that are 

not opposite a bona fide hedging swap counterparty from being recognized as bona fide 

hedges.121 

The Commission proposes to implement this pass-through swap language in 

paragraph (2) of the bona fide hedging definition for physical commodities in proposed § 

 119 7 U.S.C. 6a(c)(2)(B). 120 CEA section 4a(c)(2)(B)(i) recognizes as a bona fide hedging position a position that reduces risk 

attendant to a position resulting from a swap that was executed opposite a counterparty for which the 

transaction would qualify as a bona fide hedging transaction pursuant to 4a(c)(2)(A). 7 U.S.C. 

6a(c)(2)(B)(i). CEA section 4a(c)(2)(B)(ii) further recognizes as bona fide positions that reduce risks 

attendant to a position resulting from a swap that meets the requirements of 4a(c)(2)(A). 7 U.S.C. 

6a(c)(2)(B)(ii). 121 As described above, the Commission has preliminarily interpreted the revised statutory temporary 

substitute test as limiting its authority to recognize risk management positions as bona fide hedges unless 

the position is used to offset exposure opposite a bona fide hedging swap counterparty. 
68

150.1. Each component of the proposed pass-through swap provision is described in turn 

below. 

Proposed paragraph (2)(i) of the bona fide hedging definition would address a 

situation where a particular swap qualifies as a bona fide hedge by satisfying the 

temporary substitute test, economically appropriate test, and change in value requirement 

under proposed paragraph (1) for one of the counterparties (the “bona fide hedging swap 

counterparty”), but not for the other counterparty, and where those bona fides “pass 

through” from the bona fide hedging swap counterparty to the other counterparty (the 

“pass-through swap counterparty”). The pass-through swap counterparty could be an 

entity such as a swap dealer, for example, that provides liquidity to the bona fide hedging 

swap counterparty. 

Under the proposed rule, the pass-through of the bona fides from the bona fide 

hedging swap counterparty to the pass-through swap counterparty would be contingent 

on: (1) the pass-through swap counterparty’s ability to demonstrate that the pass-through 

swap is a bona fide hedge upon request from the Commission and/or from an 

exchange;122 and (2) the pass-through swap counterparty entering into a futures, option 

on a futures, or swap position in the same physical commodity as the pass-through swap 

to offset and reduce the price risk attendant to the pass-through swap.

 122 While proposed paragraph (2)(i) of the bona fide hedging definition in § 150.1 would require the passthrough swap counterparty to be able to demonstrate the bona fides of the pass-through swap upon request, 

the proposed rule would not prescribe the manner by which the pass-through swap counterparty obtains the 

information needed to support such a demonstration. The pass-through swap counterparty could base such 

a demonstration on a representation made by the bona fide hedging swap counterparty, and such 

determination may be made at the time when the parties enter into the swap, or at some later point. For the 

bona fides to pass-through as described above, the swap position need only qualify as a bona fide hedging 

position at the time the swap was entered into.
69

If the two conditions above are satisfied, then the bona fides of the bona fide 

hedging swap counterparty “pass through” to the pass-through swap counterparty for 

purposes of recognizing as a bona fide hedge any futures, options on futures, or swap

position entered into by the pass-through swap counterparty to offset the pass-through 

swap (i.e. to offset the swap opposite the bona fide hedging swap counterparty). The 

pass-through swap counterparty could thus exceed federal limits for the bona fide hedge 

swap opposite the bona fide hedging swap counterparty and for any offsetting futures, 

options on futures, or swap position in the same physical commodity, even though any 

such position on its own would not qualify as a bona fide hedge for the pass-through 

swap counterparty under proposed paragraph (1). 

Proposed paragraph (2)(ii) of the bona fide hedging definition would address a 

situation where a participant who qualifies as a bona fide hedging swap counterparty (i.e.,

a counterparty with a position in a previously-entered into swap that qualified, at the time 

the swap was entered into, as a bona fide hedge under paragraph (1)) seeks, at some later 

time, to offset that bona fide hedge swap position using futures, options on futures, or 

swaps in excess of limits. Such step might be taken, for example, to respond to a change 

in the bona fide hedging swap counterparty’s risk exposure in the underlying 

commodity.123 Proposed paragraph (2)(ii) would allow such a bona fide hedging swap 

counterparty to use futures, options on futures, or swaps in excess of federal limits to 

offset the price risk of the previously-entered into swap, even though the offsetting 

 123 Examples of a change in the bona fide hedging swap counterparty’s cash market price risk could include 

a change in the amount of the commodity that the hedger will be able to deliver due to drought, or 

conversely, higher than expected yield due to growing conditions. 
70

position itself does not qualify for that participant as a bona fide hedge under paragraph 

(1).

The proposed pass-through exemption under paragraph (2) would only apply to 

the pass-through swap counterparty’s offset of the bona fide hedging swap, and/or to the 

bona fide hedging swap counterparty’s offset of its bona fide hedging swap. Any further 

offsets would not be eligible for a pass-through exemption under (2) unless the offsets

themselves meet the bona fide hedging definition. For instance, if Producer A enters into 

an OTC swap with Swap Dealer B, and the OTC swap qualifies as a bona fide hedge for 

Producer A, then Swap Dealer B could be eligible for a pass-through exemption to offset 

that swap in the futures market. However, if Swap Dealer B offsets its swap opposite 

Producer A using an OTC swap with Swap Dealer C, Swap Dealer C would not be 

eligible for a pass-through exemption.

As discussed more fully above, the pass-through swap provision may help 

mitigate some of the potential impact resulting from the removal of the “risk 

management” exemptions that are currently in effect.

124

2. “Commodity Derivative Contract”

The Commission proposes to create the defined term “commodity derivative 

contract” for use throughout part 150 of the Commission’s regulations as shorthand for 

any futures contract, option on a futures contract, or swap in a commodity (other than a 

security futures product as defined in CEA section 1a(45)). 

3. “Core Referenced Futures Contract”

 124 See supra Section II.A.1.c.ii.(1) (discussion of the temporary substitute test).
71

The Commission proposes to provide a list of 25 futures contracts in proposed § 

150.2(d) to which proposed position limit rules would apply. The Commission proposes 

the term “core referenced futures contract” as a short-hand phrase to denote such 

contracts.125 As per the “referenced contract” definition described below, position limits 

would also apply to any contract that is directly/indirectly linked to, or that has certain 

pricing relationships with, a core referenced futures contract.

4. “Economically Equivalent Swap”

CEA section 4a(a)(5) requires that when the Commission imposes limits on 

futures and options on futures pursuant to CEA section 4a(a)(2), the Commission also 

establish limits simultaneously for “economically equivalent” swaps “as appropriate.”

126 

As the statute does not define the term “economically equivalent,” the Commission must 

apply its expertise in construing such term, and, as discussed further below, must do so 

consistent with the policy goals articulated by Congress, including in CEA sections 

4a(a)(2)(C) and 4a(a)(3). 

Under the Commission’s proposed definition of an “economically equivalent

swap,” a swap on any referenced contract (including core referenced futures contracts),

except for natural gas referenced contracts, would qualify as “economically equivalent” 

with respect to that referenced contract so long as the swap shares identical “material” 

 125 The selection of the proposed core referenced futures contracts is explained below in the discussion of 

proposed § 150.2. 

126 CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). In addition, CEA section 4a(a)(4) separately authorizes, but 

does not require, the Commission to impose federal limits on swaps that meet certain statutory criteria 

qualifying them as “significant price discovery function” swaps. 7 U.S.C. 6a(a)(4). The Commission 

reiterates, for the avoidance of doubt, that the definitions of “economically equivalent” in CEA section 

4a(a)(5) and “significant price discovery function” in CEA section 4a(a)(4) are separate concepts and that 

contracts can be economically equivalent without serving a significant price discovery function. See 2016 

Reproposal, 81 FR at 96736 (the Commission noting that certain commenters may have been confusing the 

two definitions).
72

contractual specifications, terms, and conditions with the referenced contract, 

disregarding any differences with respect to: (i) lot size or notional amount, (ii) delivery 

dates diverging by less than one calendar day (if the swap and referenced contract are 

physically-settled), or (iii) post-trade risk management arrangements.127 For reasons 

described further below, natural gas swaps would qualify as economically equivalent 

with respect to a particular referenced contract under the same circumstances, except that 

physically-settled swaps with delivery dates diverging by less than two calendar days, 

rather than one calendar day, could qualify as economically equivalent. 

In promulgating the position limits framework, Congress instructed the 

Commission to consider several factors: First, CEA section 4a(a)(3) requires the 

Commission when establishing federal limits, to the maximum extent practicable, in its 

discretion, to (i) diminish, eliminate, or prevent excessive speculation; (ii) deter and 

prevent market manipulation, squeezes, and corners; (iii) ensure sufficient market 

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

underlying market is not disrupted. Second, CEA section 4a(a)(2)(C) requires the 

Commission to strive to ensure that any limits imposed by the Commission will not cause 

price discovery in a commodity subject to federal limits to shift to trading on a foreign 

exchange. 

Accordingly, any definition of “economically equivalent swap” must consider 

these statutory objectives. The Commission also recognizes that physical commodity 

 127The proposed “economically equivalent” language is distinct from the terms “futures equivalent,” 

“economically appropriate,” and other similar terms used in the Commission’s regulations. For the 

avoidance of doubt, the Commission’s proposed definition of “economically equivalent swap” for the 

purposes of CEA section 4a(a)(5) does not impact the application of any such other terms as they appear in 

part 20 of the Commission’s regulations, in the Commission’s proposed bona fide hedge definition, or 

elsewhere.
73

swaps are largely bilaterally negotiated, traded off-exchange (i.e., OTC), and potentially 

include customized (i.e., “bespoke”) terms, while futures contracts are exchange traded

with standardized terms. As explained further below, due to these differences between 

swaps and exchange-traded futures and options, the Commission has preliminarily 

determined that Congress’s underlying policy goals in CEA section 4a(a)(2)(C) and (3) 

are best achieved by proposing a narrow definition of “economically equivalent swaps,” 

compared to the broader definition of “referenced contract” the Commission is proposing 

to apply to look-alike futures and related options.

128 

The Commission’s proposed “referenced contract” definition in § 150.1 would 

include “economically equivalent swaps,” meaning any economically equivalent swap 

would be subject to federal limits, and thus would be required to be added to, and could 

be netted against, as applicable, other referenced contracts in the same commodity for the 

purpose of determining one’s aggregate positions for federal position limit levels.

129 Any 

swap that is not deemed economically equivalent would not be a referenced contract, and 

thus could not be netted with referenced contracts nor would be required to be aggregated 

with any referenced contract for federal position limits purposes. The proposed 

definition is based on a number of considerations. 

 128 The proposed definition of “referenced contract” would incorporate cash-settled look-alike futures 

contracts and related options that are either (i) directly or indirectly linked, including being partially or fully 

settled on, or priced at a fixed differential to, the price of that particular core referenced futures contract; or

(ii) directly or indirectly linked, including being partially or fully settled on, or priced at a fixed differential 

to, the price of the same commodity underlying that particular core referenced futures contract for delivery 

at the same location or locations as specified in that particular core referenced futures contract. See infra

Section II.A.16. (definition of “referenced contract”). The proposed definition of “economically 

equivalent swap” would be included as a type of “referenced contract,” but, as discussed herein, would 

include a relatively narrower class of swaps compared to look-alike futures and options contracts, for the 

reasons discussed below. 

129 See infra Section II.B.2.k. (discussion of netting).
74

First, the proposed definition would support the statutory objectives in CEA 

section 4a(a)(3)(i) and (ii) by helping to prevent excessive speculation and market 

manipulation, including corners and squeezes, by: (1) focusing on swaps that are the 

most economically equivalent in every significant way to futures or options on futures for 

which the Commission deems position limits to be necessary; 130 and (2) simultaneously 

limiting the ability of speculators to obtain excessive positions through netting. Any 

swap that meets the proposed definition would offer identical risk sensitivity to its 

associated referenced futures or options on futures contract with respect to the underlying 

commodity, and thus could be used to effect a manipulation, benefit from a manipulation, 

or otherwise potentially distort prices in the same or similar manner as the associated 

futures or options on futures contract.

Because OTC swaps are bilaterally negotiated and customizable, the Commission 

has preliminarily determined not to propose a more inclusive “economically equivalent

swap” definition that would encompass additional swaps because such definition could 

make it easier for market participants to inappropriately net down against their core 

referenced futures contracts by allowing market participants to structure swaps that do

not necessarily offer identical risk or economic exposure or sensitivity. In contrast, the 

Commission preliminarily believes that this is less of a concern with exchange-traded 

futures and related options since these instruments have standardized terms and are 

subject to exchange rules and oversight. As a result, the proposal would generally allow 

market participants to net certain positions in referenced contracts in the same commodity 

across economically equivalent swaps, futures, and options on futures, but the proposed 

 130 See infra Section III.F. (necessity finding).
75

economically equivalent swap definition would focus on swaps with identical material 

terms and conditions in order to reduce the ability of market participants to accumulate 

large, speculative positions in excess of federal limits by using tangentially-related (i.e., 

non-identical) swaps to net down such positions.

Second, the proposed definition would address statutory objectives by focusing 

federal limits on those swaps that pose the greatest threat for facilitating corners and 

squeezes – that is, those swaps with similar delivery dates and identical material 

economic terms to futures and options on futures subject to federal limits – while also 

minimizing market impact and liquidity for bona fide hedgers by not unnecessarily 

subjecting other swaps to the new federal framework. For example, if the Commission 

were to adopt an alternative definition of economically equivalent swap that 

encompassed a broader range of swaps by including delivery dates that diverge by one or

more calendar days – perhaps by several days or weeks – a speculator with a large 

portfolio of swaps may be more likely to be constrained by the applicable position limits 

and therefore may have an incentive either to minimize its swaps activity, or move its 

swaps activity to foreign jurisdictions. If there were many similarly situated speculators, 

the market for such swaps could become less liquid, which in turn could harm liquidity 

for bona fide hedgers. As a result, the Commission has preliminarily determined that the

proposed definition’s relatively narrow scope of swaps reasonably balances the factors in 

CEA section 4a(a)(3)(B)(ii) and (iii) by decreasing the possibility of illiquid markets for 

bona fide hedgers on the one hand while, on the other hand, focusing on the prevention of

market manipulation during the most sensitive period of the spot month as discussed 

above.
76

Third, the proposed definition would help prevent regulatory arbitrage and would 

strengthen international comity. If the Commission proposed a definition that captured a 

broader range of swaps, U.S.-based swaps activity could potentially migrate to other 

jurisdictions with a narrower definition, such as the European Union (“EU”). In this 

regard, the proposed definition is similar in certain ways to the EU definition for OTC 

contracts that are “economically equivalent” to commodity derivatives traded on an EU 

trading venue.131 The proposed definition of economically equivalent swaps thus furthers 

statutory goals, including those set forth in CEA section 4a(a)(2)(C), which requires the 

Commission to strive to ensure that any federal position limits are “comparable” to 

foreign exchanges and will not cause “price discovery . . . to shift to trading” on foreign 

exchanges.132 Further, market participants trading in both U.S. and EU markets should 

 131 See EU Commission Delegated Regulation (EU) 2017/591, 2017 O.J. (L 87). The applicable European 

regulations define an OTC derivative to be “economically equivalent” when it has “identical contractual 

specifications, terms and conditions, excluding different lot size specifications, delivery dates diverging by 

less than one calendar day and different post trade risk management arrangements.” While the 

Commission’s proposed definition is similar, the Commission’s proposed definition requires “identical 

material” terms rather than “identical” terms. Further, the Commission’s proposed definition excludes 

different “lot size specifications or notional amounts” rather than referencing only “lot size” since swaps 

terminology usually refers to “notional amounts” rather than to “lot sizes.”

Both the Commission’s definition and the applicable EU regulation are intended to prevent harmful netting. 

See European Securities and Markets Authority, Draft Regulatory Technical Standards on Methodology for 

Calculation and the Application of Position Limits for Commodity Derivatives Traded on Trading Venues 

and Economically Equivalent OTC Contracts, ESMA/2016/668 at 10 (May 2, 2016), available at 

https://www.esma.europa.eu/sites/default/files/library/2016-668_opinion_on_draft_rts_21.pdf (“[D]rafting 

the [economically equivalent OTC swap] definition in too wide a fashion carries an even higher risk of 

enabling circumvention of position limits by creating an ability to net off positions taken in on-venue 

contracts against only roughly similar OTC positions.”). 

The applicable EU regulator, the European Securities and Markets Authority (“ESMA”), recently released 

a “consultation paper” discussing the status of the existing EU position limits regime and specific

comments received from market participants. According to ESMA, no commenter, with one exception,

supported changing the definition of an economically equivalent swap (referred to as an “economically 

equivalent OTC contract” or “EEOTC”). ESMA further noted that for some respondents, “the mere fact 

that very few EEOTC contracts have been identified is no evidence that the regime is overly restrictive.” 

See European Securities and Markets Authority, Consultation Paper MiFID Review Report on Position 

Limits and Position Management Draft Technical Advice on Weekly Position Reports, ESMA70-156-1484

at 46, Question 15 (Nov. 5, 2019), available at https://www.esma.europa.eu/document/consultation-paperposition-limits. 132 7 U.S.C. 6a(a)(2)(C).
77

find the proposed definition to be familiar, which may help reduce compliance costs for 

those market participants that already have systems and personnel in place to identify and 

monitor such swaps.

Each element of the proposed definition, as well as the proposed exclusions from 

the definition, is described below.

a. Scope of Identical Material Terms

Only “material” contractual specifications, terms, and conditions would be 

relevant to the analysis of whether a particular swap would qualify as an economically 

equivalent swap. The proposed definition would thus not require that a swap be identical 

in all respects to a referenced contract in order to be deemed “economically equivalent.” 

“Material” specifications, terms, and conditions would be limited to those provisions that 

drive the economic value of a swap, including with respect to pricing and risk. Examples 

of “material” provisions would include, for example: the underlying commodity, 

including commodity reference price and grade differentials; maturity or termination 

dates; settlement type (e.g., cash- versus physically-settled); and, as applicable for 

physically-delivered swaps, delivery specifications, including commodity quality 

standards or delivery locations.

133 Because settlement type would be considered to be a 

material “contractual specification, term, or condition,” a cash-settled swap could only be 

deemed economically equivalent to a cash-settled referenced contract, and a physically-

 133 When developing its definition of an “economically equivalent swap,” the Commission, based on its 

experience, preliminarily has determined that for a swap to be “economically equivalent” to a futures 

contract, the material contractual specifications, terms, and conditions would need to be identical. In 

making this determination, the Commission took into account, in regards to the economics of swaps, how a 

swap and a corresponding futures contract or option on a futures contract react to certain market factors and 

movements, the pricing variables used in calculating each instrument, the sensitivities of those variables, 

the ability of a market participant to gain the same type of exposures, and how the exposures move to 

changes in market conditions.
78

settled swap could only be deemed economically equivalent to a physically-settled 

referenced contract; however, a cash-settled swap that initially did not qualify as 

“economically equivalent” due to no corresponding cash-settled referenced contract (i.e., 

no cash-settled look-alike futures contract), could subsequently become an “economically 

equivalent swap” if a cash-settled futures contract market were to develop. In addition, a 

swap that either references another referenced contract, or incorporates its terms by 

reference, would be deemed to share identical terms with the referenced contract and 

therefore would qualify as an economically equivalent swap.

134 Any change in the 

material terms of such a swap, however, would render the swap no longer economically 

equivalent for position limits purposes.135 

In contrast, the Commission generally would consider those swap contractual 

terms, provisions, or terminology (e.g., ISDA terms and definitions) that are unique to 

swaps (whether standardized or bespoke) not to be material for purposes of determining 

whether a swap is economically equivalent to a particular referenced contract. For 

example, swap provisions or terms designating business day or holiday conventions, day 

count (e.g., 360 or actual), calculation agent, dispute resolution mechanisms, choice of 

law, or representations and warranties are generally unique to swaps and/or otherwise not 

 134 For example, a cash-settled swap that either settles to the pricing of a corresponding cash-settled 

referenced contract, or incorporates by reference the terms of such referenced contract, could be deemed to 

be economically equivalent to the referenced contract. 135 The Commission preliminarily recognizes that the material swap terms noted above are essential to 

determining the pricing and risk profile for swaps. However, there may be other contractual terms that also 

may be important for the counterparties but not necessarily “material” for purposes of position limits. For 

example, as discussed below, certain other terms, such as clearing arrangements or governing law, may not 

be material for the purpose of determining economic equivalence for federal position limits, but may 

nonetheless affect pricing and risk or otherwise be important to the counterparties.
79

material, and therefore would not be dispositive for determining whether a swap is

economically equivalent.

136 

The Commission is unable to publish a list of swaps it would deem to be 

economically equivalent swaps because any such determination would involve a facts 

and circumstances analysis, and because most commodity swaps are created bilaterally 

between counterparties and traded OTC. Absent a requirement that market participants 

identify their economically equivalent swaps to the Commission on a regular basis, the 

Commission preliminarily believes that market participants are best positioned to 

determine whether particular swaps share identical material terms with referenced 

contracts and would therefore qualify as “economically equivalent” for purposes of 

federal position limits. However, the Commission understands that for certain bespoke 

swaps it may be unclear whether the facts and circumstances would demonstrate whether 

the swap qualifies as “economically equivalent” with respect to a referenced contract. 

The Commission emphasizes that under this proposal, market participants would 

have the discretion to make such determination as long as they make a reasonable, good 

faith effort in reaching their determination, and that the Commission would not bring any 

enforcement action for violating the Commission’s speculative position limits against 

 136 Commodity swaps, which generally are traded OTC, are less standardized compared to exchange-traded 

futures and therefore must include these provisions in an ISDA master agreement between counterparties. 

While certain provisions, for example choice of law, dispute resolution mechanisms, or the general 

representations made in an ISDA master agreement, may be important considerations for the 

counterparties, the Commission would not deem such provisions material for purposes of determining 

economic equivalence under the federal position limits framework for the same reason the Commission 

would not deem a core referenced futures contract and a look-alike referenced contract to be economically 

different, even though the look-alike contract may be traded on a different exchange with different 

contractual representations, governing law, holidays, dispute resolution processes, or other provisions 

unique to the exchanges. Similarly, with respect to day counts, a swap could designate a day count that is 

different than the day count used in a referenced contract but adjust relevant swap economic terms (e.g., 

relevant rates or payments, fees, basis, etc.) to achieve the same economic exposure as the referenced 

contract. In such a case, the Commission may not find such differences to be material for purposes of 

determining the swap to be economically equivalent for federal position limits purposes. 
80

such market participants as long as the market participant performed the necessary due 

diligence and is able to provide sufficient evidence, if requested, to support its 

reasonable, good faith effort.137 Because market participants would be provided with 

discretion in making any “economically equivalent” swap determination, the Commission 

preliminarily anticipates that this flexibility should provide a greater level of certainty to

market participants in contrast to the alternative in which market participants would be 

required to first submit swaps to the Commission staff and wait for feedback.

138

b. Exclusions from the Definition of “Economically Equivalent Swap” 

As noted above, the Commission’s proposed definition would expressly provide 

that differences in lot size or notional amount, delivery dates diverging by less than one 

calendar day (or less than two calendar days for natural gas), or post-trade risk 

management arrangements would not disqualify a swap from being deemed to be 

“economically equivalent” to a particular referenced contract.

i. Delivery Dates Diverging by Less Than One Calendar Day

The proposed definition as it applies to commodities other than natural gas would 

encompass swaps with delivery dates that diverge by less than one calendar day from that 

 137 As noted below, the Commission reserves the authority under this proposal to determine that a particular 

swap or class of swaps either is or is not “economically equivalent” regardless of a market participant’s 

determination. See infra Section II.A.4.d. (discussion of commission determination of economic 

equivalence). As long as the market participant made its determination, prior to such Commission 

determination, using reasonable, good faith efforts, the Commission would not take any enforcement action

for violating the Commission’s position limits regulations if the Commission’s determination differs from 

the market participant’s.

138 As discussed under Section II.A.16. (definition of “referenced contract”), the Commission proposes to 

include a list of futures and related options that qualify as referenced contracts because such contracts are 

standardized and published by exchanges. In contrast, since swaps are largely bilaterally negotiated and 

OTC traded, a swap could have multiple permutations and any published list of economically equivalent 

swaps would be unhelpful or incomplete.
81

of a referenced contract.139 As a result, a swap with a delivery date that differs from that 

of a referenced contract by one calendar day or more would not be deemed to be 

economically equivalent under the Commission proposal, and such swaps would not be 

required to be added to, nor permitted to be netted against, any referenced contract when 

calculating one’s compliance with federal position limit levels.140 The Commission 

recognizes that while a penultimate contract may be significantly correlated to its 

corresponding spot-month contract, it does not necessarily offer identical economic or 

risk exposure to the spot-month contract, and depending on the underlying commodity 

and market conditions, a market participant may open itself up to material basis risk by 

moving from the spot-month contract to a penultimate contract. Accordingly, the 

Commission has preliminarily determined that it would not be appropriate to permit 

market participants to net such penultimate positions against their core referenced futures 

contract positions since such positions do not necessarily reflect equivalent economic or 

risk exposure.

ii. Post-Trade Risk Management

The Commission is specifically excluding differences in post-trade risk 

management arrangements, such as clearing or margin, in determining whether a swap is 

economically equivalent. As noted above, many commodity swaps are traded OTC and 

may be uncleared or cleared at a different clearing house than the corresponding 

referenced contract.

141 Moreover, since the core referenced futures contracts, along with 

 139 This aspect of the proposed definition would be irrelevant for cash-settled swaps since “delivery date” 

applies only to physically-settled swaps. 140 A swap as so described that is not “economically equivalent” would not be subject to a federal 

speculative position limit under this proposal.

141 Similar to the Commission’s understanding of “material” terms, the Commission construes “post-trade 

risk management arrangements” to include various provisions included in standard swap agreements, 
82

futures contracts and options on futures in general, are traded on DCMs with vertically 

integrated clearing houses, as a practical matter, it is impossible for OTC commodity

swaps, which historically have been uncleared, to share identical post-trade clearing

house or other post-trade risk management arrangements with their associated core 

referenced futures contracts.

Therefore, if differences in post-trade risk management arrangements were 

sufficient to exclude a swap from economic equivalence to a core referenced futures

contract, then such an exclusion could otherwise render ineffective the Commission’s

statutory directive under CEA section 4a(a)(5) to include economically equivalent swaps 

within the federal position limits framework. Accordingly, the Commission has 

preliminarily determined that differences in post-trade risk management arrangements 

should not prevent a swap from qualifying as economically equivalent with an otherwise 

materially identical referenced contract.

iii. Lot Size or Notional Amount

The last exclusion would clarify that differences in lot size or notional amount 

would not prevent a swap from being deemed to be economically equivalent to its 

corresponding referenced contract. The Commission’s use of “lot size” and “notional 

amount” refer to the same general concept – while futures terminology usually employs

“lot size,” swap terminology usually employs “notional amount.” Accordingly, the 

Commission proposes to use both terms to convey the same general meaning, and in this 

context does not mean to suggest a substantive difference between the two terms.

 

including, for example: margin or collateral requirements, including with respect to initial or variation 

margin; whether a swap is cleared, uncleared, or cleared at a different clearing house than the applicable 

referenced contract; close-out, netting, and related provisions; and different default or termination events 

and conditions.
83

c. Economically Equivalent Natural Gas Swaps

Market dynamics in natural gas are unique in several respects including, among 

other things, that ICE and NYMEX both list high volume contracts, whereas liquidity in 

other commodities tends to pool at a single DCM. As expiration approaches for natural 

gas contracts, volume tends to shift from the NYMEX core referenced futures contract

(“NG”), which is physically settled, to an ICE contract, which is cash settled. This trend 

reflects certain market participants’ desire for exposure to natural gas prices without 

having to make or take delivery.142 NYMEX and ICE also list several “penultimate”

cash-settled referenced contracts that use the price of the physically-settled NYMEX 

contract as a reference price for cash settlement on the day before trading in the 

physically-settled NYMEX contract terminates.

143 In order to recognize the existing 

natural gas markets, which include active and vibrant markets in penultimate natural gas 

contracts, the Commission thus proposes a slightly broader economically equivalent swap 

definition for natural gas so that swaps with delivery dates that diverge by less than two 

calendar days from an associated referenced contract could still be deemed economically 

equivalent and would be subject to federal limits. The Commission intends for this 

change to prevent and disincentivize manipulation and regulatory arbitrage and to prevent 

 142 In part to address historical concerns over the potential for manipulation of physically-settled natural gas 

contracts during the spot month in order to benefit positions in cash-settled natural gas contracts, the 

Commission proposes later in this release to allow for a higher “conditional” spot month limit in cashsettled natural gas referenced contracts under the condition that market participants seeking to utilize such 

conditional limit exit any positions in physically-settled natural gas referenced contracts. See infra Section 

II.C.2.e. (proposed conditional spot month limit exemption for natural gas). 143 Such penultimate contracts include: ICE’s Henry Financial Penultimate Fixed Price Futures (PHH) and

options on Henry Penultimate Fixed Price (PHE), and NYMEX’s Henry Hub Natural Gas Penultimate 

Financial Futures (NPG).
84

volume from shifting away from NG to penultimate natural gas contract futures and/or 

penultimate swap markets in order to avoid federal position limits.144 

d. Commission Determination of Economic Equivalence

While the Commission would primarily rely on market participants to determine 

whether their swaps meet the proposed “economically equivalent swap” definition, the 

Commission is proposing paragraph (3) to the definition to clarify that the Commission 

may determine on its own initiative that any swap or class of swaps satisfies, or does not 

satisfy, the economically equivalent definition with respect to any referenced contract or 

class of referenced contracts. The Commission believes that this provision may provide 

the ability to offer clarity to the marketplace in cases where uncertainty exists as to 

whether certain swaps would qualify (or would not qualify) as “economically

equivalent,” and therefore would be (or would not be) subject to the proposed federal 

position limits framework. Similarly, where market participants hold divergent views as 

to whether certain swaps qualify as “economically equivalent,” the Commission can

ensure that all market participants treat OTC swaps with identical material terms 

similarly, and also would be able to serve as a backstop in case market participants fail to 

properly treat economically equivalent swaps as such. As noted above, the Commission 

would not take any enforcement action with respect to violating the Commission’s 

 144 As noted above, the Commission is proposing a relatively narrow “economically equivalent swap” 

definition in order to prevent market participants from inappropriately netting positions in core referenced 

futures contracts against swap positions further out on the curve. The Commission preliminarily 

acknowledges that liquidity could shift to penultimate swaps as a result but believes that, with the exception 

of natural gas, this concern is mitigated since certain constraints exist that militate against this occurring. 

First, there may be basis risk between the penultimate swap and the core referenced futures contract. 

Second, compared to most other contracts, the Commission believes that natural gas has a relatively liquid 

penultimate futures market that enables a market participant to hedge or set-off its penultimate swap 

position. Since the constraints described above do not necessarily apply to the natural gas futures markets, 

the Commission preliminarily believes that liquidity may be incentivized to shift from NG to penultimate 

natural gas swaps in order to avoid federal position limits in the absence of the Commission’s proposed 

exception for natural gas in the “economically equivalent swap” definition.
85

position limits regulations if the Commission disagrees with a market participant’s 

determination as long as the market participant is able to provide sufficient support to 

show that it made a reasonable, good faith effort in applying its discretion.

145

5. “Eligible Affiliate”

The Commission proposes to create the new defined term “eligible affiliate,” 

which would be used in proposed § 150.2(k), discussed in connection with proposed § 

150.2 below. As discussed further in that section of the release, an entity that qualifies as 

an “eligible affiliate” would be permitted to voluntarily aggregate its positions, even 

though it is eligible for an exemption from aggregation under § 150.4(b). 

6. “Eligible Entity”

The Commission adopted a revised “eligible entity” definition in the 2016 Final 

Aggregation Rulemaking.146 The Commission is not proposing any further amendments 

to this definition, but is including that revised definition in this document so that all 

defined terms are included. As noted above, the Commission is also proposing a nonsubstantive change to remove the lettering from this and other definitions that appear 

lettered in existing § 150.1, and to list the definitions in alphabetical order. 

7. “Entity”

The Commission proposes defining “entity” to mean “a ‘person’ as defined in 

section 1a of the Act.”147 The term, not defined in existing § 150.1, is used throughout 

proposed part 150 of the Commission’s regulations. 

8. “Excluded Commodity”

 145 See supra II.A.4.a. (discussing market participants’ discretion in determining whether a swap is 

economically equivalent). 146 See 17 CFR 150.1(d). 147 7 U.S.C. 1a(38). 
86

The phrase “excluded commodity” is defined in CEA section 1a(19), but is not 

defined or used in existing part 150 of the Commission’s regulations. The Commission 

proposes including a definition of “excluded commodity” in part 150 that references that 

term as defined in CEA section 1a(19).148 

9. “Futures-Equivalent”

This phrase is currently defined in existing § 150.1(f) and is used throughout 

existing part 150 of the Commission’s regulations to describe the method for converting a 

position in an option on a futures contract to an economically equivalent amount in a 

futures contract. The Dodd-Frank Act amendments to CEA section 4a,

149 in part, direct 

the Commission to apply aggregate federal position limits to physical commodity futures 

contracts and to swap contracts that are economically equivalent to such physical 

commodity futures on which the Commission has established limits. In order to 

aggregate positions in futures, options on futures, and swaps, 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 thus 

proposes to adjust position sizes to an equivalent position based on the size of the unit of 

trading of the core referenced futures contract. The phrase “futures-equivalent” is used 

for that purpose throughout the proposed rules, including in connection with the 

“referenced contract” definition in proposed § 150.1. The Commission also proposes 

 148 7 U.S.C. 1a(19). 149 Under 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 options on futures contracts. 7 

U.S.C. 6a(a)(2) and (5). 
87

broadening this definition to include references to the proposed term “core referenced 

futures contracts.”

10. “Independent Account Controller”

The Commission adopted a revised “independent account controller” definition in 

the 2016 Final Aggregation Rule.150 The Commission is not proposing any further 

amendments to this definition, but is including that revised definition in this document so 

that all defined terms appear together. 

11. “Long Position”

The phrase “long position” is currently defined in § 150.1(g) to mean “a long call 

option, a short put option or a long underlying futures contract.” The Commission 

proposes to update this definition to apply to swaps and to clarify that such positions 

would be on a futures-equivalent basis. This provision would thus be applicable to 

options on futures and swaps such that a long position would also include a long futuresequivalent option on futures and a long futures-equivalent swap. 

12. “Physical Commodity”

The Commission proposes to define the term “physical commodity” for position 

limits purposes. Congress used the term “physical commodity” in CEA sections 

4a(a)(2)(A) and 4a(a)(2)(B) to mean commodities “other than excluded commodities as 

defined by the Commission.”151 The proposed definition of “physical commodity” thus 

would include both exempt and agricultural commodities, but not excluded commodities.

13. “Position Accountability”

 150 See 17 CFR 150.1(e). 151 7 U.S.C. 6a(a)(2)(A) and (B).
88

Existing § 150.5 permits position accountability in lieu of position limits in 

certain cases, but does not define the term “position accountability.” The proposed 

amendments to § 150.5 would allow exchanges, in some cases, to adopt position 

accountability levels in lieu of, or in addition to, position limits. The Commission 

proposes a definition of “position accountability” for use throughout proposed § 150.5 as 

discussed in greater detail in connection with proposed § 150.5 below.

14. “Pre-Enactment Swap”

The Commission proposes to create the defined term “pre-enactment swap” to 

mean any swap entered into prior to enactment of the Dodd-Frank Act of 2010 (July 21, 

2010), the terms of which have not expired as of the date of enactment of that Act. As 

discussed in connection with proposed § 150.3 later in this release, if acquired in good 

faith, such swaps would be exempt from federal speculative position limits, although 

such swaps could not be netted with post-effective date swaps for purposes of complying 

with spot month speculative position limits.

15. “Pre-Existing Position”

The Commission proposes to create the defined term “pre-existing position” to 

reference any position in a commodity derivative contract acquired in good faith prior to 

the effective date of a final federal position limit rulemaking. Proposed § 150.2(g) would 

set forth the circumstances under which position limits would apply to such positions. 

16. “Referenced Contract”

The nine contracts currently subject to federal limits, which are all physicallysettled futures, are all listed in existing § 150.2.152 As the Commission is proposing to 

 152 17 CFR 150.2. 
89

expand the position limits framework to cover certain cash-settled futures and options on 

futures contracts and certain economically equivalent swaps, the Commission proposes a 

new defined term, “referenced contract,” for use throughout proposed part 150 to refer to 

contracts that would be subject to federal limits. 

The referenced contract definition would thus include: (1) any core referenced

futures contract listed in proposed § 150.2(d); (2) any other contract (futures or option on 

futures), on a futures-equivalent basis with respect to a particular core referenced futures 

contract, that is directly or indirectly linked to the price of a core referenced futures 

contract, or that is directly or indirectly linked to the price of the same commodity 

underlying a core referenced futures contract (for delivery at the same location(s)); and 

(3) any economically equivalent swap, on a futures-equivalent basis. 

The proposed referenced contract definition would include look-alike futures and 

options on futures contracts (as well as options or economically equivalent swaps with 

respect to such look-alike contracts) and contracts of the same commodity but different 

sizes (e.g., mini contracts). Positions in referenced contracts may in certain 

circumstances be netted with positions in other referenced contracts. However, to avoid 

evasion and undermining of the position limits framework, non-referenced contracts on 

the same commodity could not be used to net down positions in referenced contracts.153

a. Cash-Settled Referenced Contracts

Under these proposed provisions, federal limits would apply to all cash-settled 

futures and options on futures contracts on physical commodities that are linked in some 

manner, whether directly or indirectly, to physically-settled contracts subject to federal 

 153 A more detailed discussion of when netting is permitted appears below. See infra Section II.B.2.k. 

(discussion of netting). 
90

limits, and to any cash settled swaps that are deemed “economically equivalent swaps” 

with respect to a particular cash-settled referenced contract.

154 While the Commission 

acknowledges previous comments to the effect that cash-settled contracts are less 

susceptible to manipulation and thus should not be subject to federal limits, the 

Commission is of the view that generally speaking, linked cash-settled and physicallysettled contracts form one market, and thus should be subject to federal limits. This view 

is informed by the Commission’s experience overseeing derivatives markets, where it has 

observed that it is common for the same market participant to arbitrage linked cash- and 

physically-settled contracts, and where it has also observed instances where linked cashsettled and physically-settled contracts have been used together as part of a 

manipulation.155 In the Commission’s view, cash-settled contracts are generally 

economically equivalent to physical-delivery contracts in the same commodity. In the 

absence of position limits, a trader with positions in both the physically-delivered and 

cash-settled contracts may have increased ability and incentive to manipulate one 

contract to benefit positions in the other. 

The proposal to include futures contracts and options on futures that are 

“indirectly linked” to the core referenced futures contract under the definition of 

“referenced contract” is intended to prevent the evasion of position limits through the 

creation of an economically equivalent futures contract or option on a future, as 

 154 For example, ICE’s Henry Penultimate Fixed Price Future, which cash-settles directly to NYMEX’s 

Henry Hub Natural Gas core referenced futures contract, would be considered a referenced contract under 

the rules proposed herein. 

155 The Commission has previously found that traders with positions in look-alike cash-settled contracts 

may have an incentive to manipulate and undermine price discovery in the physical-delivery contracts to 

which the cash-settled contract is linked. The practice known as “banging the close” or “marking the 

close” is one such manipulative practice that the Commission prosecutes and that this proposal seeks to 

prevent.
91

applicable, that does not directly reference the price of the core referenced futures 

contract. Such contracts that settle to the price of a referenced contract but not to the 

price of a core referenced futures contract, for example, would be indirectly linked to the 

core referenced futures contract.156

On the other hand, an outright derivative contract whose settlement price is based 

on an index published by a price reporting agency that surveys cash market transaction 

prices (even if the cash market practice is to price at a differential to a futures contract) 

would not be directly or indirectly linked to the core referenced futures contract. 

Similarly, a physical-delivery derivative contract whose settlement price was based on 

the same underlying commodity at a different delivery location (e.g., a hypothetical 

physical-delivery futures contract on ultra-low sulfur diesel delivered at L.A. Harbor 

instead of the NYMEX ultra-low sulfur diesel futures contract delivered in New York 

Harbor core referenced futures contract) would not be linked, directly or indirectly, to the 

core referenced futures contract because the price of the physically-delivered L.A. Harbor 

contract would reflect the L.A. Harbor market price for ultra-low sulfur diesel. 

b. Exclusions from the Referenced Contract Definition

While the proposed referenced contract definition would include linked contracts, 

it would also explicitly exclude certain other types of contracts. Paragraph (3) of the 

proposed referenced contract definition would explicitly exclude from that definition a 

location basis contract, a commodity index contract, a swap guarantee, or a trade option 

that meets the requirements of § 32.3 of this chapter. 

 156 As discussed above, the Commission is proposing a definition of “economically equivalent swap” that is 

narrower than the class of futures and options on futures that would be included as referenced contracts. 

See supra Section II.A.4. (discussion of economically equivalent swaps).
92

First, failing to exclude location basis contracts from the referenced contract 

definition could enable speculators to net portions of the location basis contract with 

outright positions in one of the locations comprising the basis contract, which would 

permit extraordinarily large speculative positions in the outright contract.

157 For 

example, under the proposed rules, a large outright position in Henry Hub Natural Gas 

futures could not be netted down against a location basis contract that cash-settles to the 

difference in price between Gulf Coast Natural Gas and Henry Hub Natural Gas. Absent 

the proposed exclusion, a market participant could otherwise increase its exposure in the 

outright contract by using the location basis contract to net down, and then increase 

further, an outright contract position that would otherwise be restricted by position 

limits.158 Further, excluding location basis contracts from the referenced contract 

definition may allow commercial end-users to more efficiently hedge the cost of 

commodities at their preferred location. 

Similarly, the proposed exclusion of commodity index contracts from the 

referenced contract definition would help ensure that market participants could not use a 

position in a commodity index contract to net down an outright position that was a 

component of the commodity index contract. If the Commission did not exclude 

commodity index contracts, then speculators would be allowed to take on massive 

outright positions in referenced contracts, which could lead to excessive speculation. 

 157 See infra Section II.B.2.k. (discussion of netting). 158 While excluding location basis contracts from the referenced contract definition would prevent the 

circumstance described above, it would also mean that location basis contracts would not be subject to 

federal limits. The Commission would be comfortable with this outcome because location basis contracts 

generally demonstrate minimal volatility and are typically significantly less liquid than the core referenced 

futures contracts, meaning they would be more costly to try to use in a manipulation.
93

As noted above, it is common for swap dealers to enter into commodity index 

contracts with participants for which the contract would not qualify as a bona fide 

hedging position (e.g., with a pension fund). Failing to exclude commodity index 

contracts from the referenced contract definition could enable a swap dealer to use 

positions in commodity index contracts to net down offsetting outright futures positions 

in the components of the index. This would have the effect of subverting the statutory 

pass-through swap language in CEA section 4a(c)(2)(B), which is intended to foreclose

the recognition of positions entered into for risk management purposes as bona fide 

hedges unless the swap dealer is entering into positions opposite a counterparty for which 

the swap position is a bona fide hedge.159

In order to clarify the types of contracts that would qualify as location basis 

contracts and commodity index contracts, and thus would be excluded from the 

referenced contract definition, the Commission proposes guidance in Appendix C to part 

150 of the Commission’s regulations. The proposed guidance would include information 

which would help define the parameters of the terms “location basis contract” and 

“commodity index contract.” To the extent a particular contract fits within the proposed 

guidance, such contract would not be a referenced contract, would not be subject to 

federal limits, and could not be used to net down positions in referenced contracts.160

Second, swap guarantees are explicitly excluded from the proposed referenced 

contract definition. In connection with further defining the term “swap” jointly with the 

 159 7 U.S.C. 6a(c)(2)(B). While excluding commodity index contracts from the referenced contract 

definition would prevent the potentially risky netting circumstance described above, it would also mean 

that commodity index contracts would not be subject to federal limits. The Commission would be 

comfortable with this outcome because the commodities comprising the index would themselves be subject 

to limits, and because commodity index contracts generally tend to exhibit low volatility since they are 

diversified across many different commodities. 160 See infra Section II.B.2.k. (discussion of netting).
94

Securities and Exchange Commission in connection with the “Product Definition 

Adopting Release,”

161 the Commission interpreted the term “swap” (that is not a 

“security-based swap” or “mixed swap”) to include a guarantee of such swap, to the 

extent that a counterparty to a swap position would have recourse to the guarantor in 

connection with the position.162 Excluding guarantees of swaps from the definition of 

referenced contract should help avoid any potential confusion regarding the application 

of position limits to guarantees of swaps. The Commission understands that swap 

guarantees generally serve as insurance, and in many cases swap guarantors guarantee the 

performance of an affiliate in order to entice a counterparty to enter into a swap with such 

guarantor’s affiliate. As a result, the Commission preliminarily believes that swap 

guarantees neither contribute to excessive speculation, market manipulation, squeezes, or 

corners nor were contemplated by Congress when Congress articulated its policy goals in 

CEA sections 4a(a)(1)-(3).163

Third, trade options that meet the requirements of § 32.3 would also be excluded 

from the proposed referenced contract definition. The Commission has traditionally 

exempted trade options from a number of Commission requirements because they are 

typically used by end-users to hedge physical risk and thus do not contribute to excessive 

speculation. Trade options are not subject to position limits under current regulations, 

 161 See generally Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap 

Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48207 (Aug. 13, 

2012) (“Product Definitions Adopting Release”). 162 See id. at 48226. 163 To the extent that swap guarantees may lower costs for uncleared OTC swaps in particular by 

incentivizing counterparties to agree to the swap, excluding swap guarantees arguably may improve market 

liquidity, which is consistent with the CEA’s statutory goals in CEA section 4a(a)(3)(B) to ensure sufficient 

liquidity for bona fide hedgers when establishing its position limit framework.
95

and the proposed exclusion of trade options from the referenced contract definition would 

simply codify existing practice.164 

c. List of Referenced Contracts

In an effort to provide clarity to market participants regarding which exchangetraded contracts are subject to federal limits, the Commission anticipates publishing, and 

regularly updating, a list of such contracts on its website.165 The Commission thus 

proposes to publish a CFTC Staff Workbook of Commodity Derivative Contracts under

the Regulations Regarding Position Limits for Derivatives along with this release, which 

would provide a non-exhaustive list of referenced contracts and may be helpful to market 

participants in determining categories of contracts that would fit within the referenced 

contract definition. As always, market participants may request clarification from the 

Commission. 

In order to ensure that the list remains up-to-date and accurate, the Commission is 

proposing changes to certain provisions of part 40 of its regulations which pertain to the 

collection of position limits information through the filing of product terms and 

conditions submissions. In particular, under existing rules, including §§ 40.2, 40.3, and 

40.4, DCMs and SEFs are required to comply with certain submission requirements 

related to the listing of certain products. Many of the required submissions must include 

the product’s “terms and conditions,” which is defined in § 40.1(j) and which includes, 

under § 40.1(j)(1)(vii), “Position limits, position accountability standards, and position 

 164 In the trade options final rule, the Commission stated its belief that federal limits should not apply to 

trade options, and expressed an intention to address trade options in the context of any final rulemaking on 

position limits. See Trade Options, 81 FR at 14966, 14971 (Mar. 21, 2016). 165 As discussed above, the Commission will provide market participants with reasonable, good-faith 

discretion to determine whether a swap would qualify as economically equivalent for federal position limit 

purposes. See supra Section II.A.4. (discussion of economically equivalent swaps).
96

reporting requirements.” The Commission proposes to expand § 40.1(j)(1)(vii), which 

addresses futures and options on futures, to also include an indication as to whether the 

contract meets the definition of a referenced contract as defined in § 150.1, and, if so, the 

name of the core referenced futures contract on which the referenced contract is based. 

The Commission proposes to also expand § 40.1(j)(2)(vii), which addresses swaps, to 

include an indication as to whether the contract meets the definition of economically 

equivalent swap as defined in § 150.1 of this chapter, and, if so, the name of the 

referenced contract to which the swap is economically equivalent. This information

would enable the Commission to maintain on its website, www.cftc.gov, an up-to-date list 

of DCM and SEF contracts subject to federal limits.

17. “Short Position”

The Commission proposes to expand the existing definition of “short position,” 

currently defined in § 150.1(h), to include swaps and to clarify that any such positions 

would be measured on a futures-equivalent basis. 

18. “Speculative Position Limit”

The Commission proposes to define the term “speculative position limit” for use 

throughout part 150 of the Commission’s regulations to refer to federal or exchange-set 

limits, net long or net short, including single month, spot month, and all-monthscombined limits. This proposed definition is not intended to limit the authority of 

exchanges to adopt other types of limits that do not meet the “speculative position limit 

definition,” such as a limit on gross long or gross short positions, or a limit on holding or 

controlling delivery instruments. 

19. “Spot Month,” “Single Month,” and “All-Months”
97

The Commission proposes to expand the existing definition of “spot month” to 

account for the fact that the proposed limits would apply to both physically-settled and 

certain cash-settled contracts, to clarify that the spot month for referenced contracts 

would be the same period as that of the relevant core referenced futures contract, and to 

account for variations in spot month conventions that differ by commodity. In particular, 

for the ICE U.S. Sugar No. 11 (SB) core referenced futures contract, the spot month 

would mean the period of time beginning at the opening of trading on the second 

business day following the expiration of the regular option contract traded on the expiring 

futures contract until the contract expires. For the ICE U.S. Sugar No. 16 (SF) core 

referenced futures contract, the spot month would mean the period of time beginning on 

the third-to-last trading day of the contract month until the contract expires. For the CME 

Live Cattle (LC) core referenced futures contract, the spot month would mean the period 

of time beginning at the close of trading on the fifth business day of the contract month 

until the contract expires. 

The Commission also proposes to eliminate the existing definitions of “single 

month” and “all-months” because the definitions for those terms would be built into the 

proposed definition of “speculative position limits” described above. 

20. “Spread Transaction” 

The Commission proposes to incorporate a definition for transactions normally 

known to the trade as “spreads,” which would list the types of transactions that could 

qualify for spread exemptions for purposes of federal position limits. The proposed list 

would cover common types of inter-commodity and intra-commodity spreads such as: 

calendar spreads; quality differential spreads; processing spreads (such as energy “crack” 
98

or soybean “crush” spreads); product or by-product differential spreads; and futuresoptions spreads.166 Separately, under proposed § 150.3(a)(2)(ii), the Commission could 

determine to exempt any other spread transaction that is not included in the spread 

transaction definition, but that the Commission has determined is consistent with CEA 

section 4a(a)(3)(B),167 and exempted, pursuant to proposed § 150.3(b).

21. “Swap” and “Swap Dealer”

The Commission proposes to incorporate the definitions of “swap” and “swap 

dealer” as they are defined in section 1a of the Act and § 1.3 of this chapter.168 

22. “Transition Period Swap”

The Commission proposes to create the defined term “transition period swap” to 

mean any swap entered into during the period commencing July 22, 2010 and ending 60 

days after the publication of a final federal position limits rulemaking in the Federal 

Register, the terms of which have not expired as of that date. As discussed in connection 

with proposed § 150.3 later in this release, if acquired in good faith, such swaps would be 

exempt from federal speculative position limits, although such swaps could not be netted 

 166 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 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 by-product 

differential spreads, may serve similar liquidity-enhancing functions when spreading a position in an 

actively traded commodity derivatives market such as CBOT Wheat (W) against a position in another 

actively traded market, such as MGEX Wheat. 167 As noted above, CEA section 4a(a)(3)(B) provides that the Commission shall set limits “to the 

maximum extent practicable, in its discretion—(i) to diminish, eliminate, or prevent excessive speculation 

as described under this section; (ii) to deter and prevent market manipulation, squeezes, and corners; (iii) to 

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

of the underlying market is not disrupted.” 168 7 U.S.C. 1a(47) and 1a(49); 17 CFR 1.3. 
99

with post-effective date swaps for purposes of complying with spot month speculative 

position limits.

Finally, the Commission proposes to eliminate existing § 150.1(i), which includes 

a chart specifying the “first delivery month of the crop year” for certain commodities.

The crop year definition had been pertinent for purposes of the spread exemption to the 

individual month limit in current § 150.3(a)(3), which limits spreads to those between 

individual months in the same crop year and to a level no more than that of the allmonths limit. This provision was pertinent at a time when the single month and all 

months combined limits were different. Now that the current and proposed single month 

and all months combined limits are the same, and now that the Commission is proposing 

a new process for granting spread exemptions in § 150.3, this provision is no longer 

needed. 

23. Request for Comment

The Commission requests comment on all aspects of the proposed amendments 

and additions to the definitions in § 150.1. The Commission also invites comments on 

the following:

(1) Should the Commission include the enumerated hedges in regulations, 

rather than in an appendix of acceptable practices? Why or why not? 

(2) Should the Commission list any additional common commercial hedging 

practices as enumerated hedges?

(3) The Commission proposes to eliminate the five day rule on federal 

position limits, instead allowing exchanges discretion on whether to apply 

or waive any five day rule or equivalent on their exchange position limits. 
100

The Commission believes that the five day rule can be an important way 

to help ensure that futures and cash market prices converge. As such, 

should the Commission require that exchanges apply the five day rule to 

some or all bona fide hedging positions and/or spread exemptions? If so, 

to which bona fide hedging positions? Should the exchanges retain the 

ability to waive such five day rule?

(4) The Commission requests comment on the nature of anticipated 

merchandising exemptions that have been granted by DCMs in 

connection with the 16 non-legacy commodities or in connection with 

exemptions from exchange limits in 9 legacy commodities.

(5) To what extent do the enumerated hedges proposed in this release 

encompass the types of positions discussed in the BFH Petition? Should

additional types of positions identified in the BFH Petition, including 

examples nos. 3 (unpriced physical purchase and sale commitments) and 7 

(scenario 2) (use of physical delivery referenced contracts to hedge 

physical transactions using calendar month averaging pricing), be 

enumerated as bona fide hedges, after notice and comment?

(6) The Commission requests comment as to whether price risk is attributable 

to a variety of factors, including political and weather risk, and could 

therefore allow hedging political, weather, or other risks, or whether 

price risk is something narrower in the application of bona fide hedging.

(7) While an “economically equivalent swap” qualifies as a referenced 

contract under paragraph (2) of the “referenced contract” definition, 
101

paragraph (1) of the “referenced contract” definition applies a broader test 

to determine whether futures contracts or options on a futures contract 

would qualify as a referenced contract. Instead of a separate definition for 

“economically equivalent swaps,” should the same test (e.g., paragraph (1)

of the “referenced contract” definition) that applies to futures and options 

on futures for determining status as “referenced contracts” also apply to 

determine whether a swap is an “economically equivalent swap,” and 

therefore a “referenced contract”? Why or why not?

(8) The Commission is proposing to define “economically equivalent swap” 

in a manner that is generally consistent with the EU’s definition, with the 

exception that a swap must have “identical material” terms, disregarding 

differences in lot size or notional amount, delivery dates diverging by less 

than one calendar day (or for natural gas, by less than two calendar days), 

or post-trade risk management arrangements. Is this approach either too 

narrow or too broad? Why or why not?

(9) The Commission requests comment how a market participant subject to 

both the CFTC’s and EU’s position limits regimes expects to comply 

with both regimes for contracts subject to both regimes.

(10) With respect to economically equivalent swaps, the Commission proposes 

an exception that would capture penultimate swaps only for natural gas 

contracts, including penultimate swaps on the NYMEX NG core 

referenced futures contract. Is this exception for such penultimate natural 

gas swaps appropriate, or should economically equivalent natural gas 
102

swaps be treated the same as other economically equivalent swaps? Why 

or why not? 

(11) Should the Commission broaden the definition of “economically 

equivalent swap” to include penultimate referenced contracts for all (or at 

least a subset of) commodities subject to federal position limits? Why or 

why not?

(12) The Commission is proposing that a physically-settled swap may qualify 

as economically equivalent even if its delivery date diverges by less than 

one calendar day from its corresponding physically-settled referenced 

contract. Should the Commission include a similar provision for cashsettled swaps where cash-settled swaps could qualify as economically 

equivalent if their cash settlement price determination diverged from their 

corresponding cash-settled referenced contract by less than one calendar 

day? 

(13) Under the proposed definition of “economically equivalent swaps,” a 

cash-settled swap that otherwise shares identical material terms with a 

physically-settled referenced contract (and vice-versa) would not be 

deemed to be economically equivalent due to the difference in settlement 

type. Should the Commission consider treating swaps that share identical 

material terms, other than settlement type (i.e., cash-settled versus 

physically-settled swaps), to be economically equivalent? Why or why 

not?
103

(14) Consistent with the 2016 Reproposal, the Commission is proposing to 

explicitly exclude swap guarantees from the referenced contract 

definition.169 Should the Commission again propose to exclude swap 

guarantees from the referenced contract definition? Why or why not? If 

the Commission does exclude swap guarantees, should such exclusion be 

limited to guarantees for affiliated entities only? Why or why not?

(15) Please indicate if any updates or other modifications are needed to: (1) the 

proposed list of referenced contracts that would appear in the CFTC Staff 

Workbook of Commodity Derivative Contracts Under the Regulations 

Regarding Position Limits for Derivatives posted on the Commission’s 

website;

170 or (2) the proposed Appendix D to part 150 list of commodities 

deemed “substantially the same” for purposes of the term “location basis 

contract” as used in the proposed “referenced contract” definition. 

(16) Should the Commission require exchanges to maintain a list of referenced 

contracts and location basis contracts listed on their platforms? 

(17) The Commission has previously requested, and commenters have

previously provided, a list of risks other than price risk for which 

commercial enterprises commonly need to hedge.

171 Please explain which 

hedges of non-price risks could be objectively and systematically verified 

as bona fide hedges by the Commission, and how the Commission would 

 169 See 2016 Reproposal, 81 FR at 96966. 170 Position Limits for Derivatives, U.S. Commodity Futures Trading Commission Web site, available at 

https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/PositionLimitsforDerivatives/index.htm. 171 See, e.g., National Gas Supply Association Comment Letter at 4 (Feb. 28, 2017) in response to 2016 

Reproposal (listing operational risk, liquidity risk, credit risk, locational risk, and seasonal risk).
104

verify that such positions are bona fide hedges, including how the 

Commission would consistently and definitively quantify and assess 

whether any such hedges of non-price risks are bona fide hedges that 

comply with the proposed bona fide hedging definition. 

(18) The Commission proposes to define spread transactions to include: either

a calendar spread, intercommodity spread, quality differential spread, 

processing spread (such as energy “crack” or soybean “crush” spreads), 

product or by-product differential spread, or futures-option spread. 

Are there other types of transactions commonly known to the trade as 

“spreads” that the Commission should include in its spread transaction 

definition? Please provide any examples or descriptions that will help 

the Commission determine whether such transactions would be consistent 

with CEA section 4a(a)(3)(B) and should be included in the definition of 

spread transaction.

(19) Should the Commission require market participants that trade 

economically equivalent swaps OTC, rather than on a SEF or DCM, to 

self-identify and report to the Commission that in their view, such swaps 

meet the Commission’s proposed economically equivalent swap 

definition? 

B. § 150.2—Federal Limit Levels

1. Existing § 150.2 

Federal spot month, single month, and all-months-combined position limits 

currently apply to nine physically-settled futures contracts on agricultural commodities 

listed in existing § 150.2, and, on a futures-equivalent basis, to options contracts thereon. 
105

Existing federal limit levels set forth in § 150.2172 apply net long or net short and are as 

follows:

Existing Legacy Agricultural Contract Federal Spot Month, Single Month, and AllMonths-Combined Limit Levels

Contract

Spot 

Month 

Limit

Single Month and 

All-MonthsCombined Limit

Chicago Board of Trade (“CBOT”) Corn (C) 600 33,000

CBOT Oats (O) 600 2,000

CBOT Soybeans (S) 600 15,000

CBOT Soybean Meal (SM) 720 6,500

CBOT Soybean Oil (SO) 540 8,000

CBOT Kansas City Hard Red Winter Wheat (KW) 600 12,000

CBOT Wheat (W) 600 12,000

ICE Futures U.S. (“ICE”) Cotton No. 2 (CT) 300 5,000

Minneapolis Grain Exchange (“MGEX”) Hard Red 

Spring Wheat (MWE) 600 12,000

While not explicit in § 150.2, the Commission’s practice has been to set spot 

month limit levels at or below 25 percent of deliverable supply based on DCM estimates 

of deliverable supply verified by the Commission, and to set limit levels outside of the 

spot month at 10 percent of open interest for the first 25,000 contracts of open interest, 

with a marginal increase of 2.5 percent of open interest thereafter. 

2. Proposed § 150.2173

a. Contracts Subject to Federal Limits

The Commission proposes to establish federal limits on the 25 core referenced 

futures contracts listed in proposed § 150.2(d),174 and on their associated referenced 

 172 17 CFR 150.2. 173 This portion of the release is organized by subject matter, rather than by lettered provision, and will 

proceed in the following order: (1) contracts subject to federal limits; (2) proposed spot month limit levels; 

(3) proposed methodology for setting spot month limit levels; (4) proposed non-spot month limit levels; (5) 

proposed methodology for setting non-spot month limit levels; (6) subsequent levels; (7) relevant contract 

month for purposes of referenced contracts; (8) limits on pre-existing positions; (9) limits for positions on 

foreign boards of trade; (10) anti-evasion provision; (11) netting of positions; (12) eligible affiliates and 

aggregation; and (13) request for comment. 
106

contracts, which would include swaps that qualify as “economically equivalent swaps.”

175 

The Commission proposes to establish position limits on futures and options on these 25 

commodities on the basis that position limits on such contracts are “necessary.” A 

discussion of the necessity finding and the characteristics of the 25 core referenced 

futures contracts is in Section III.F.

In order to comply with CEA section 4a(a)(5), the Commission also proposes to 

establish limits on swaps that are “economically equivalent” to the above.176 As 

discussed above, under the Commission’s proposed definition of “economically 

equivalent swap” set forth in § 150.1, a swap would generally qualify as economically 

equivalent with respect to a particular referenced contract so long as the swap shares 

identical material contract specifications, terms, and conditions with the referenced 

contract, disregarding any differences with respect to lot size or notional amount, delivery 

dates diverging by less than one calendar day, (or for natural gas, by less than two 

calendar days) or post-trade risk-management arrangements.177

As described in greater detail below, the proposed federal limits would apply 

during all contract months for the nine legacy agricultural commodity contracts and only 

during the spot month for the 16 other commodity contracts.

 174 Proposed § 150.2(d) provides that each core referenced futures contract includes any “successor” 

contracts. An example of a successor contract would be the RBOB Gasoline contract that was listed due to

a change in gasoline specifications and that ultimately replaced the Unleaded Gasoline contract. For some 

time, both contracts were listed for trading to allow open interest to migrate to the new RBOB contract;

once trading migrated, the Unleaded Gasoline contract was delisted. 175 As described above, the proposed term “referenced contract” includes: (1) futures and options on 

futures contracts that, with respect to a particular core referenced futures contract, are directly or indirectly 

linked to the price of that core referenced futures contract, or directly or indirectly linked to the price of the 

same commodity underlying the core referenced futures contract for delivery at the same location; and (2) 

“economically equivalent swaps.” See proposed “referenced contract” and “economically equivalent 

swap” definitions in 150.1. 

176 CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). 177 See infra Section II.A.4. (definition of “economically equivalent swap”).
107

Proposed § 150.2(e) would provide that the levels set forth below for the 25 

contracts are listed in Appendix E to part 150 of the Commission’s regulations and would 

set the compliance date for such levels at 365 days after publication of final position 

limits regulations in the Federal Register. 

b. Proposed Federal Spot Month Limit Levels

Under the rules proposed herein, federal spot month limit levels would apply to 

all 25 core referenced futures contracts, and any associated referenced contracts.178 

Federal spot month limits for referenced contracts on all 25 commodities are essential for 

deterring and preventing excessive speculation, manipulation, corners and squeezes.179 

Proposed § 150.2(e) provides that federal spot month levels are set forth in proposed 

Appendix E to part 150 and are as follows:

Core Referenced 

Futures Contract

2020 Proposed Spot 

Month Limit

Existing 

Federal 

Spot 

Month 

Limit

Existing Exchange-Set 

Spot Month Limit

Legacy Agricultural Contracts

CBOT Corn (C) 1,200 600 600

CBOT Oats (O) 600 600 600

CBOT Soybeans (S) 1,200 600 600

CBOT Soybean Meal

(SM)

1,500 720 720

CBOT Soybean Oil

(SO)

1,100 540 540

 178 As described below, federal non-spot month limit levels would only apply to the nine legacy agricultural 

commodities. The 16 non-legacy commodities would be subject to federal limits during the spot month, 

and exchange-set limits and/or accountability outside of the spot month. See infra Section II.B.2.d.

(discussion of proposed non-spot month limit levels).

179 See infra Section III. (Legal Matters).
108

CBOT Wheat (W) 1,200 600 600/500/400/300/220180

CBOT KC HRW 

Wheat (KW)

1,200 600 600

MGEX HRS Wheat

(MWE)

1,200 600 600

ICE Cotton No. 2 (CT) 1,800 300 300

Other Agricultural Contracts

CME Live Cattle (LC) 600/300/200181 n/a 450/300/200182

CBOT Rough Rice

(RR)

800 n/a 600/200/250183

ICE Cocoa (CC) 4,900 n/a 1,000

ICE Coffee C (KC) 1,700 n/a 500

ICE FCOJ-A (OJ) 2,200 n/a 300

ICE U.S. Sugar No. 11

(SB)

25,800 n/a 5,000

ICE U.S. Sugar No. 16

(SF)

6,400 n/a n/a

Metals Contracts

COMEX Gold (GC) 6,000 n/a 3,000

COMEX Silver (SI) 3,000 n/a 1,500

 180 CBOT’s existing exchange-set limit for Wheat (W) is 600 contracts. However, for its May contract 

month, CBOT has a variable spot limit that is dependent upon the deliverable supply that it publishes from 

the CBOT’s Stocks and Grain report on the Friday preceding the first notice day for the May contract 

month. In the last five trading days of the expiring futures month in May, the speculative position limit is: 

(1) 600 contracts if deliverable supplies are at or above 2,400 contracts; (2) 500 contracts if deliverable 

supplies are between 2,000 and 2,399 contracts; (3) 400 contracts if deliverable supplies are between 1,600 

and 1,999 contracts; (4) 300 contracts if deliverable supplies are between 1,200 and 1,599 contracts; and (5) 

220 contracts if deliverable supplies are below 1,200 contracts. 

181 The proposed federal spot month limit for CME Live Cattle (LC) would feature a step-down limit 

similar to the CME’s existing Live Cattle (LC) step-down exchange set limit. The proposed federal spot 

month step down limit is: (1) 600 at the close of trading on the first business day following the first Friday 

of the contract month; (2) 300 at the close of trading on the business day prior to the last five trading days 

of the contract month; and (3) 200 at the close of trading on the business day prior to the last two trading 

days of the contract month.

182 CME’s existing exchange-set limit for Live Cattle (LC) has a step-down spot month limit: (1) 450 at the 

close of trading on the first business day following the first Friday of the contract month; (2) 300 at the 

close of trading on the business day prior to the last five trading days of the contract month; and (3) 200 at 

the close of trading on the business day prior to the last two trading days of the contract month. 183 CBOT’s existing exchange-set spot month limit for Rough Rice (RR) is 600 contracts for all contract 

months. However, for July and September, there is a step-down limit from 600 contracts. In the last five 

trading days of the expiring futures month, the speculative position limit for the July futures month steps 

down to 200 contracts from 600 contracts and the speculative position limit for the September futures 

month steps down to 250 contracts from 600 contracts.
109

COMEX Copper (HG) 1,000 n/a 1,500

NYMEX Platinum (PL) 500 n/a 500

NYMEX Palladium

(PA)

50 n/a 50

Energy Contracts

NYMEX Light Sweet 

Crude Oil (CL)

6,000/5,000/4,000184 n/a 3,000

NYMEX NYH ULSD

Heating Oil (HO)

2,000 n/a 1,000

NYMEX NYH RBOB 

Gasoline (RB)

2,000 n/a 1,000

NYMEX Henry Hub 

Natural Gas (NG)

2,000 n/a 1,000

Limits for any contract with a proposed limit above 100 contracts would be 

rounded up to the nearest 100 contracts from the exchange-recommended level and/or 

from 25 percent of deliverable supply. 

c. Process for Calculating Federal Spot Month Limit Levels

The existing federal spot month limit levels on the nine legacy agricultural 

contracts have remained constant for decades, yet the markets have changed significantly 

during that time period, including the advent of electronic trading and the implementation 

of extended trading hours. Further, open interest and trading volume have since reached 

record levels, and some of the deliverable supply estimates on which the existing federal 

spot month limits were originally based are now decades out of date. In light of these and 

other factors, CME Group, ICE, and MGEX recommended federal spot month limit 

levels for each of their respective core referenced futures contracts, including contracts 

 184 NYMEX recommends implementing a step-down federal spot position limit for its Light Sweet Crude 

Oil (CL) futures contract: (1) 6,000 contracts as of the close of trading three business days prior to the last 

trading day of the contract; (2) 5,000 contracts as of the close of trading two business days prior to the last 

trading day of the contract; and (3) 4,000 contracts as of the close of trading one business day prior to the 

last trading day of the contract.
110

that would be subject to federal limits for the first time under this proposal.185 

Commission staff reviewed these recommendations and conducted its own analysis of 

them, including by requesting additional information and by independently assessing the 

recommended levels using its own experience, observations, and knowledge. The 

Commission proposes to adopt each of the exchange-recommended levels as federal spot 

month limit levels.

In setting federal limits, the Commission considers the four policy objectives in 

CEA section 4a(a)(3)(B). That is, to set limits, to the maximum extent practicable, in its 

discretion, to: (1) diminish, eliminate, or prevent excessive speculation; (2) deter and 

prevent market manipulation, squeezes, and corners; (3) ensure sufficient market liquidity 

for bona fide hedgers; and (4) ensure that the price discovery function of the underlying 

market is not disrupted.186 In setting federal position limit levels, the Commission 

endeavors to maximize these objectives by setting limits that are low enough to prevent 

excessive speculation, manipulation, squeezes, and corners that could disrupt price 

discovery, but high enough so as not to restrict liquidity for bona fide hedgers. 

Based on the Commission’s experience overseeing federal position limits for 

decades, and overseeing exchange-set position limits submitted to the Commission 

pursuant to part 40 of its regulations, the Commission has analyzed and evaluated the 

information provided by CME Group, ICE, and MGEX, and preliminarily finds that none 

of the recommended levels considered in preparing this release appear improperly 

calibrated such that they might hinder liquidity for bona fide hedgers, or invite excessive 

 185 See ICE Comment Letter at 8 (May 14, 2019); MGEX Comment Letter at 2, 4-8 (Aug. 31, 2018); and 

Summary DSE Proposed Limits, CME Group Comment Letter (Nov. 26, 2019), available at

https://comments.cftc.gov (comment file for RIN 3038-AD99). 186 7 U.S.C. 6a(a)(3)(B).
111

speculation, manipulation, corners, or squeezes, including activity that could impact price 

discovery. For these reasons, discussed in turn below, the Commission preliminarily 

believes that the DCMs’ recommended spot month limit levels all further the statutory 

objectives set forth in CEA section 4a(a)(3)(B).187 

i. The proposed spot month limit levels are low enough to prevent excessive 

speculation and protect price discovery.

All 25 of the exchange-recommended levels are at or below 25 percent of 

deliverable supply.188 The Commission has long used deliverable supply as the basis for 

spot month position limits due to concerns regarding corners, squeezes, and other 

settlement-period manipulative activity.189 It would be difficult, in the absence of other 

factors, for a participant to corner or squeeze a market if the participant holds less than or 

equal to 25 percent of deliverable supply because, among other things, any potential 

economic gains resulting from the manipulation may be insufficient to justify the 

potential costs, including the costs of acquiring, and ultimately offloading, the positions 

used to effectuate the manipulation. 

By restricting positions to a proportion of the deliverable supply of the 

commodity, the spot month position limits require that no one speculator can hold a 

position larger than 25 percent of deliverable supply, reducing the possibility that a 

market participant can use derivatives, including referenced contracts, to affect the price 

of the cash commodity (and vice versa). Limiting a speculative position based on a 

percentage of deliverable supply also restricts a speculative trader’s ability to establish a 

 187 7 U.S.C. 6a(a)(3)(B). 188 The recommended levels range from approximately 7 percent of deliverable supply to 25 percent of 

deliverable supply. 

189 See, e.g., Revision of Federal Speculative Position Limits and Associated Rules, 64 FR 24038 (May 5, 

1999). 
112

leveraged position in cash-settled derivative contracts, reducing that trader’s incentive to 

manipulate the cash settlement price.190 Further, by proposing levels that are sufficiently 

low to prevent market manipulation, including corners and squeezes, the proposed levels 

also help ensure that the price discovery function of the underlying market is not 

disrupted because markets that are free from corners, squeezes, and other manipulative 

activity reflect fundamentals of supply and demand rather than artificial pressures. 

Each of the exchange-recommended levels is based on a percentage of deliverable 

supply estimated by the relevant exchange and submitted to the Commission for 

review.191 The Commission has closely assessed the estimates, which CME Group, ICE, 

and MGEX updated with recent data using the methodologies they used during the 2016 

Reproposal.192 The Commission hereby verifies that the estimates submitted by the 

exchanges are reasonable. 

 190 Id. 191 See ICE Comment Letter at 8 (May 14, 2019); MGEX Comment Letter at 2, 4-8 (Aug. 31, 2018); and 

Summary DSE Proposed Limits, CME Group Comment Letter (Nov. 26, 2019), available at

https://comments.cftc.gov (comment file for RIN 3038-AD99). CME Group submitted updated estimates of 

deliverable supply and recommended federal spot month limit levels for CBOT Corn (C), CBOT Oats (O), 

CBOT Rough Rice (RR), CBOT Soybeans (S), CBOT Soybean Meal (SM), CBOT Soybean Oil (SO), 

CBOT Wheat (W), and CBOT KC HRW Wheat (KW); COMEX Gold (GC), COMEX Silver (SI), 

NYMEX Platinum (PL), NYMEX Palladium (PA), and COMEX Copper (HG); and NYMEX Henry Hub 

Natural Gas (NG), NYMEX Light Sweet Crude Oil (CL), NYMEX NY Harbor ULSD Heating Oil (HO), 

and NYMEX NY Harbor RBOB Gasoline (RB). ICE submitted updated estimates of deliverable supply 

and recommended federal spot month limit levels for ICE Cocoa (CC), ICE Coffee C (KC), ICE Cotton 

No. 2 (CT), ICE FCOJ-A (OJ), ICE U.S. Sugar No. 11 (SB), and ICE U.S. Sugar No. 16 (SF). MGEX 

submitted an updated deliverable supply estimate and indicated that if the Commission adopted a specific 

spot month position limit, MGEX believes the federal spot month limit level for MGEX Hard Red Spring 

Wheat (MWE) should be no less than 1,000 contracts. Commission staff reviewed the exchange 

submissions and conducted its own research. Commission staff reviewed the data submitted, confirmed 

that the data submitted accurately reflected the source data, and considered whether the data sources were 

authoritative. Commission staff considered whether the assumptions made by the exchanges in the 

submissions were acceptable, or whether alternative assumptions would lead to similar results. In some 

cases, Commission staff conducted trade source interviews. Commission staff replicated the calculations 

included in the submissions. 192 See CME Group Comment Letter (Apr. 15, 2016); CME Group Comment Letter (addressing natural 

gas) (Sept. 15, 2016); CME Group Comment Letter (addressing ULSD) (Sept. 15, 2016); ICE Comment 

Letter (Apr. 20, 2016); and MGEX Comment Letter (Jul. 13, 2016), available at

https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1772&ctl00_ctl00_cphContentMain_M
113

In verifying the DCMs’ estimates of deliverable supply, the Commission is not 

endorsing any particular methodology for estimating deliverable supply beyond what is 

already set forth in Appendix C to part 38 of the Commission’s regulations.193 As 

circumstances change over time, such DCMs may need to adjust the methodology, 

assumptions, and allowances that they use to estimate deliverable supply to reflect then 

current market conditions and other relevant factors. 

ii. The proposed spot month limit levels are high enough to ensure sufficient market 

liquidity for bona fide hedgers.

Section 4a(a)(1) of the CEA addresses “excessive speculation...causing sudden or 

unreasonable fluctuations or unwarranted [price] changes...”194 Speculative activity that 

is not “excessive” in this manner is not a focus of section 4a(a)(1). Rather, speculative 

activity may generate liquidity by enabling market participants with bona fide hedging 

positions to trade more efficiently. Setting position limits too low could result in reduced 

liquidity, including for bona fide hedgers. The Commission has not observed, or received 

any complaints about, a lack of liquidity for bona fide hedgers in the markets for the 25 

core referenced futures contracts. In fact, as described later in this release, the 25 core 

referenced futures contracts represent some of the most liquid markets overseen by the 

Commission.195 Market developments that have taken place since federal spot month 

limits were last amended decades ago, such as electronic trading and expanded trading 

 

ainContent_gvCommentListChangePage=8_50. At that time, the Commission reviewed the methodologies 

that the DCMs used to prepare the estimates, among other things, and verified the deliverable supply 

estimates as reasonable. See 2016 Reproposal, 81 FR at 96754.

193 17 CFR part 38, Appendix C.

194 CEA section 4a(a)(1); 7 U.S.C. 6a(a)(1).

195 See infra Section III.F.
114

hours, have likely only contributed to these already liquid markets.196 Market 

participants have more opportunities than ever to enter, trade, or exit a position. By 

proposing to generally increase the existing federal spot month limit levels, and by 

proposing federal spot month limit levels that are generally equal to or higher than 

existing exchange-set levels,197 yet in all cases still low enough to prevent excessive 

speculation, manipulation, corners and squeezes, the Commission does not expect the 

proposed limits to result in a reduction in liquidity for bona fide hedgers.

iii. The proposed spot month limit levels fall within a range of acceptable levels.

ICE and MGEX recommended federal spot month limit levels at 25 percent of 

deliverable supply, while CME Group generally recommended levels below 25 percent of 

deliverable supply.198 These distinctions reflect philosophical and other differences 

among the exchanges and differences between the core referenced futures contracts and 

their underlying commodities, including a preference on the part of CME Group not to 

 196 With the exception of CBOT Oats (O), open interest for the legacy agricultural commodities has 

increased dramatically over the past several decades, some by a factor of four. 

197 While the proposed spot month limit levels are generally higher than the existing federal or exchange-set 

levels, the proposed federal level for COMEX Copper (HG) is below the existing exchange-set level, the 

proposed federal level for CBOT Oats (O) is the same as the existing federal and exchange-set level, and 

the proposed federal levels for NYMEX Platinum (PL) and NYMEX Palladium (PA) are the same as the 

existing exchange-set levels. 198 For the following core referenced futures contracts, CME Group recommended spot month levels below 

25 percent of deliverable supply: CBOT Corn (C) (9.22% of deliverable supply), CBOT Oats (O)

(19.29%), CBOT Soybeans (S) (15.86%), CBOT Soybean Meal (SM) (16.77%), Soybean Oil (SO)

(8.31%), CBOT Wheat (W) (9.24%), CBOT KC HRW Wheat (KW) (9.24%), CME Live Cattle (LC) (stepdown limits 15.86% - 7.93% - 5.29%), CBOT Rough Rice (RR) (8.94%), COMEX Gold (GC) (12.72%), 

COMEX Silver (SI) (12.62%), COMEX Copper (HG) (9.66%), NYMEX Platinum (PL) (13.60%), 

NYMEX Palladium (PA) (17.18%), NYMEX Light Sweet Crude Oil (CL) (step-down limits 11.16% -

9.30% - 7.44%), NYMEX NYH ULSD Heating Oil (HO) (10.85%), and NYMEX NYH RBOB Gasoline 

(RB) (7.41%). CME Group recommended spot month levels at 25 percent of estimated deliverable supply 

for NYMEX Henry Hub Natural Gas (NG). ICE and MGEX recommended limit levels at 25 percent of 

estimated deliverable supply for each of their core referenced futures contracts: Cocoa (CC), Coffee C

(KC), FCOJ-A (OJ), Cotton No. 2 (CT), U.S. Sugar No. 11 (SB), and U.S. Sugar No. 16 (SF) on ICE, and 

Hard Red Spring Wheat (MWE) on MGEX. See ICE Comment Letter at 1-7 (May 14, 2019); MGEX 

Comment Letter at 2, 4-8 (Aug. 31, 2018); and Summary DSE Proposed Limits, CME Group Comment 

Letter (Nov. 26, 2019), available at https://comments.cftc.gov (comment file for RIN 3038-AD99).
115

increase existing limit levels applicable to its core referenced futures contracts too 

drastically.199 The Commission has previously stated that “there is a range of acceptable 

limit levels,”200 and continues to believe this is true, both for spot and non-spot month 

limits. There is no single “correct” spot month limit level for a given contract, and it is 

likely that a number of limit levels within a certain range could effectively address the 

4a(a)(3) factors. While the CME Group, ICE, and MGEX recommended levels all fall at 

different ends of the deliverable supply range, the levels all fall at or below 25 percent of 

deliverable supply, which is critical for protecting the spot month from excessive 

speculation, manipulation, corners and squeezes. 

iv. The proposed spot month limit levels account for differences between markets.

In addition to being high enough to ensure sufficient liquidity, and low enough to 

prevent excessive speculation and manipulation, the proposed spot month limit levels are 

also calibrated to further address CEA section 4a(a)(3) by accounting for differences 

between markets for the core referenced futures contracts and for their underlying 

commodities.201 

 199 CME Group has indicated that for its own exchange-set limits, it historically has not typically set the 

limit at the full 25 percent of deliverable supply when launching a new product, regardless of asset class or 

commodity. CME Group’s recommended spot month limit levels are based on observations regarding the 

orderliness of liquidations and monitoring for appropriate price convergence. CME Group indicated that 

the recommended levels reflect a measured approach calibrated to avoid the risk of disruption to its 

markets, and stated that upon analyzing a reasonable body of data relating to the expirations with the 

recommended spot month limit levels, CME Group would consider in the future making any 

recommendations for increases in limits if any additional increases were appropriate. Summary DSE 

Proposed Limits, CME Group Comment Letter (Nov. 26, 2019), available at https://comments.cftc.gov

(comment file for RIN 3038-AD99). 200 See, e.g., Revision of Federal Speculative Position Limits, 57 FR at 12766, 12770 (Apr. 13, 1992). 201 Commenters, including those responding to the 2016 Reproposal, have previously requested that limit 

levels should be set on a commodity-by-commodity basis to recognize differences among commodities, 

including differences in liquidity, seasonality, and other economic factors. See, e.g., AQR Capital 

Management Comment Letter at 12 (Feb. 28, 2017); Copperwood Asset Management Comment Letter at 3 

(Feb. 28, 2017); Managed Funds Association, Asset Management Group of the Securities Industry and 

Financial Markets Association, and the Alternative Investment Management Association Comment Letter 

at 9-12 (Feb. 28, 2017); and National Grain and Feed Association Comment Letter at 2 (Feb. 28, 2017). 
116

For the agricultural commodities, the Commission considered a variety of factors 

in evaluating the exchange-recommended spot month levels, including concentration and 

composition of market participants, the historical price volatility of the commodity, 

convergence between the futures and cash market prices at the expiration of the contract, 

and the Commission’s experience observing how the supplies of agricultural

commodities are affected by weather (drought, flooding, or optimal growing conditions), 

storage costs, and delivery mechanisms. In the Commission’s view, the exchanges’ 

recommended spot month levels for each of the agricultural contracts would allow for 

speculators to be present in the market while preventing speculative positions from being 

so large as to harm convergence and otherwise hinder statutory objectives. 

The Commission also considered the delivery mechanisms for the agricultural 

commodities in assessing the exchange-recommended spot month levels. For example, 

for the CME Live Cattle (LC) contract, the Commission considered the physical 

limitation that exists on how many cattle can be processed (inspected, graded, and 

weighed) at the delivery facilities. CME Group currently has an exchange-set step-down 

spot month limit, and recommended a federal step-down limit for CME Live Cattle (LC) 

of 600/300/200 contracts in order to avoid congestion and to foster convergence by 

gradually reducing the limit levels in a manner that meets the processing capacity of the 

delivery facilities. The Commission proposes to adopt this step-down limit due to the 

unique attributes of the CME Live Cattle (LC) contract.

For the metals contracts, which are all listed on NYMEX, the Commission took 

delivery mechanisms, among other factors, into account in assessing the recommended 

spot month limit levels. Upon expiration, the long for each metals contract receives the 
117

ownership certificate (warrant) for the metal already in the warehouse/depository and can 

continue to store the metal where it is, load-out the metal, or short a futures contract to 

sell the ownership certificate. This delivery mechanism, which allows for the resale of 

the warrant while the metal remains in the warehouse, provides for relatively inexpensive 

and simple delivery when compared to the delivery mechanisms for other commodity 

types. Further, metals tend not to spoil and are cheap to store on a per dollar basis 

compared to other commodities. As metals are generally easier to obtain, store, and sell 

than other commodity types, it is also potentially cheaper to accomplish a corner or 

squeeze in metals than in other commodity types. The Commission has previously 

observed manipulative activity in metals as evidenced by the Hunt Brother silver and 

Sumitomo copper events. The Commission kept this history in mind in accepting CME 

Group’s recommendation to take a fairly cautious approach with respect to the 

recommended levels for each metal contract, which are each well below 25 percent of 

deliverable supply.202 Commission staff has, however, reviewed each of the metals 

contracts previously and confirms that these contracts satisfy all regulatory requirements, 

including the DCM Core Principle 3 requirement that the contracts are not readily 

susceptible to manipulation. 

 202 As noted above, CME Group’s recommended federal level of 1,000 for COMEX Copper (HG) is below 

the existing exchange-set level of 1,500, and CME Group’s recommended federal levels for NYMEX 

Platinum (PL) and NYMEX Palladium (PA) are equal to the existing exchange-set levels of 500 and 50, 

respectively. CME Group recommended federal levels of 6,000 for COMEX Gold (GC) and 3,000 for 

COMEX Silver (SI), which would represent an increase over the existing exchange-set levels of 3,000 and 

1,500, respectively. While CME Group’s recommended federal COMEX Gold (GC) and COMEX Silver 

(SI) levels are higher than the existing exchange-set levels, the recommended levels still represent only 

approximately 13 percent of deliverable supply each. Summary DSE Proposed Limits, CME Group 

Comment Letter (Nov. 26, 2019), available at https://comments.cftc.gov (comment file for RIN 3038-

AD99). 
118

Additionally, the Commission considered the volatility in the estimated 

deliverable supply for metals. For the COMEX Copper (HG) contract, the estimated

deliverable supply for copper (measured by copper stocks in COMEX-approved 

warehouses) has experienced considerable volatility during the past decade, resulting in 

COMEX amending its exchange-set spot month position limit multiple times, decreasing 

or increasing the limit level to reflect the amount of copper in its approved warehouses.203 

Similarly, volatility in deliverable supplies has been observed for the NYMEX Palladium 

(PA) contract, where production of palladium from major producers has been declining 

while demand for palladium by the auto industry for catalytic converters has increased. 

This trend in palladium stocks in exchange-approved depositories has been observed 

since 2014. In a series of amendments, NYMEX reduced its exchange-set spot month 

limit from 650 contracts to below 200 contracts over time.204 

The Commission has not observed similar volatility in the deliverable supply 

estimates for agricultural or energy commodities. Given this history of volatility in 

deliverable supply estimates for metals, if the Commission were to set limit levels at, 

rather than below, 25 percent of deliverable supply, and if deliverable supply were to 

subsequently change drastically, the spot month limit level could end up being well above 

(or below) 25 percent of deliverable supply, and thus potentially too high (or too low) to 

further statutory objectives. 

 203 The volatility was based on factors such as the bust in the housing market in 2008, the severe recession 

in the United States in 2009, and high demand for copper exports to China, which has grown continually 

over the past 20 years. 204 See, e.g., NYMEX Submissions Nos. 14-463 (Oct. 31, 2014), 15-145 (Apr. 14, 2015), and 15-377 (Aug. 

27, 2015).
119

For the energy complex, the Commission considered factors such as the 

underlying infrastructure and connectivity. For example, as of 2017, generally, out of 

commodities underlying the core referenced futures contracts in energy, natural gas had 

the most robust infrastructure for moving the commodity, with over 1,600,000 miles of 

pipeline (including distribution mains, transmission pipelines, and gathering lines) in the 

United States, compared to only 215,000 miles of pipeline for oil (including crude and 

product lines).205 The robust infrastructure for moving natural gas supports CME 

Group’s recommended spot month limit level at 25 percent of estimated deliverable 

supply for the NYMEX Henry Hub Natural Gas (NG) contract, while comparatively 

smaller crude oil and crude product pipeline infrastructure support CME Group’s 

recommended spot month limit levels below 25 percent of estimated deliverable supply 

for the NYMEX Light Sweet Crude Oil (CL) and NYMEX NYH RBOB Gasoline (RB) 

contracts. 

The Commission also considered factors such as the large amounts of liquidity in 

the cash-settled natural gas referenced contracts relative to the physically settled 

NYMEX Henry Hub Natural Gas (NG) core referenced futures contract. For that 

contract, CME Group recommended setting the spot month limit at 25 percent of 

estimated deliverable supply (2,000 contract spot month limit) with a conditional limit 

exemption of 10,000 contracts net long or net short conditioned on the participant not 

holding or controlling any positions during the spot month in the physically-settled 

NYMEX Henry Hub Natural Gas (NG) core referenced futures contract. Speculators 

who desire price exposure to natural gas will likely trade in the cash-settled contracts 

 205 See U.S. Oil and Gas Pipeline Mileage, Bureau of Transportation Statistics Web site, available at

www.bts.gov/content/us-oil-and-gas-pipeline-mileage.
120

because, generally, they do not have the ability to make or take delivery; trading in the 

cash-settled contract removes the chance that they may be unable to exit the physicallysettled NYMEX Henry Hub Natural Gas (NG) contract and be selected to make or take 

delivery of natural gas. Thus, speculators are likely to remain out of the NYMEX Henry 

Hub Natural Gas (NG) contract during the spot month. Since corners and squeezes 

cannot be effected using cash settled contracts, the Commission proposes a spot month 

limit set at 25 percent of deliverable supply for the NYMEX Henry Hub Natural Gas 

(NG) core referenced futures contract.

Further, for certain energy commodities, CME Group recommended step-down 

limits, including for commodities where delivery constraints could hinder convergence or 

where market participants otherwise provided feedback that such limits would help 

maintain orderly markets. In the case of NYMEX Light Sweet Crude Oil (CL), CME 

Group currently has a single spot-month limit of 3,000 contracts, but is recommending a 

step down limit that would end at 4,000 contracts (step-down limits of 

6,000/5,000/4,000). Historically, as liquidity decreases in the contract, the exchange 

would have a step down mechanism in its exemptions that it had granted to force market 

participants to lower their positions to the current 3,000 contract spot month limit. Given 

the recommended increase to a final step-down limit of 4,000 contracts, the exchange,

through feedback from market participants, recommended a step-down spot month limit 

that would in effect provide the same diminishing effect on positions. 

d. Proposed Federal Single Month and All-Months Combined (“Non-Spot 

Month”) Limit Levels

Under the rules proposed herein, federal non-spot month limits would only apply 

to the nine agricultural commodities currently subject to federal limits. The 16 additional 
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contracts covered by this proposal would be subject to federal limits only during the spot 

month, and exchange-set limits and/or accountability requirements outside of the spot 

month.206

The Commission proposes to maintain federal non-spot month limits for the nine 

legacy agricultural contracts, with the modifications set forth below, because the 

Commission has observed no reason to eliminate them. These non-spot month limits 

have been in place for decades, and while the Commission is proposing to modify the 

limit levels,207 removing the levels entirely could potentially result in market disruption. 

In fact, commercial market participants trading the nine legacy agricultural contracts have 

requested that the Commission maintain federal limits outside the spot month in order to 

promote market integrity. For the following reasons, however, the Commission is not 

proposing limits outside the spot month for the other 16 contracts.

First, corners and squeezes cannot occur outside the spot month when there is no 

threat of delivery, and there are tools other than federal position limits for deterring and 

preventing manipulation outside of the spot month.

208 Surveillance at both the exchange 

and federal level, coupled with exchange-set limits and/or accountability, would continue 

 206 Market Resources, ICE Futures Web site, available at https://www.theice.com/futures-us/marketresources (ICE exchange-set position limits); Position Limits, CME Group Web site, available at

https://www.cmegroup.com/market-regulation/position-limits.html; Rules and Regulations of the 

Minneapolis Grain Exchange, Inc., MGEX, available at

http://www.mgex.com/documents/Rulebook_051.pdf (MGEX exchange-set position limits). 207 See infra Section II.B.2.e. 208 In the case of certain commodities where open interest in the deferred month contracts may be much 

larger, it may become difficult to exert market power via concentrated futures positions. For example, a 

participant with a large cash-market position and a large deferred futures position may attempt to move 

cash markets in order to benefit that deferred futures position. Any attempt to do so could become muted 

due to general futures market resistance from multiple vested interests present in that deferred futures 

month (i.e., the overall size of the deferred contracts may be too large for one individual to influence via 

cash market activity). However, if a large position accumulated over time in a particular deferred month is 

held into the spot month, it is possible that such positions could form the groundwork for an attempted 

corner or squeeze in the spot month. 
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to offer strong deterrence and protection against manipulation outside of the spot month. 

In particular, under this proposal, for the 16 contracts that would be subject to federal 

limits only during the spot month, exchanges would be required to establish either 

position limit levels or position accountability levels outside of the spot month.209 Any 

such accountability and limit levels would be subject to standards established by the 

Commission including, among other things, that any such levels be “necessary and 

appropriate to reduce the potential threat of market manipulation or price distortion of the 

contract’s or the underlying commodity’s price or index.”210 Exchanges would also be 

required to submit any rules adopting or modifying such position limit and/or 

accountability levels to the Commission pursuant to part 40 of the Commission’s 

regulations.211

Exchange position accountability establishes a level at which an exchange will 

ask traders additional questions, including regarding the trader’s purpose for the position, 

and will evaluate existing market conditions. If the position does not raise any concerns, 

the exchange will allow the trader to exceed the accountability level. If the position 

raises concerns, the exchange has the authority to instruct the trader not to increase the 

position further, or to reduce the position. Accountability is a particularly flexible and 

effective tool because it provides the exchanges with an opportunity to intervene once a 

position hits a relatively low level, while still affording market participants with the 

 209 See infra Section II.D.4. (discussion of proposed § 150.5). 210 Id. 211 Under the proposed “position accountability” definition in § 150.1, DCM accountability rules would 

have to require a trader whose position exceeds the accountability level to consent to: (1) provide 

information about its position to the DCM; and (2) halt increasing further its position or reduce its position 

in an orderly manner, in each case as requested by the DCM.
123

flexibility to establish a large position when warranted by the nature of the position and 

the condition of the market. 

The Commission has decades of experience overseeing accountability levels 

implemented by exchanges,212 including for all 16 contracts that would not be subject to 

federal limits outside of the spot month under this proposal. Such accountability levels 

apply to all participants on the exchange, whether commercial or non-commercial, and 

regardless of whether the participant would qualify for an exemption. In the 

Commission’s experience, these levels have functioned as-intended, and the Commission 

views exchange accountability outside of the spot month as an equally robust, yet more 

flexible, alternative to federal non-spot month speculative position limits.

Second, applying federal limits during the spot month to referenced contracts 

based on all 25 core referenced futures contracts, and outside of the spot month only to 

referenced contracts based on the nine legacy agricultural commodities, furthers statutory 

goals while minimizing the impact on existing industry practice and leveraging existing 

exchange-set limits and accountability levels that appear to have functioned well. The 

Commission thus endeavors to minimize market disruption that could result from 

eliminating existing federal non-spot month limits on certain agricultural commodities 

and from adding new non-spot limits on certain metals and energy commodities that have 

never been subject to federal limits. Layering federal non-spot month limits for the 16 

additional contracts on top of existing exchange-set limit/accountability levels may only 

 212 See, e.g., 56 FR 51687 (Oct. 15, 1991) (permitting CME to establish position accountability for certain 

financial contracts traded on CME), Speculative Position Limits—Exemptions from Commission Rule 

1.61, 57 FR 29064 (June 30, 1992) (permitting the use of accountability for trading in energy commodity 

contracts), and 17 CFR 150.5(e) (2009) (formally recognizing the practice of accountability for contracts 

that met specified standards). 
124

provide minimal benefits, if any, and would forego the benefits associated with flexible 

accountability levels, which provide many of the same protections as hard limits but with 

significantly more flexibility for market participants to exceed the accountability level in 

cases where the position would not harm the market. 

As set forth in proposed § 150.2(e), proposed federal non-spot month levels 

applicable to referenced contracts based on the nine legacy agricultural contracts are 

listed in proposed Appendix E and are as follows:

Core Referenced 

Futures Contract

2020 Proposed

Single Month and 

All-Months 

Combined Limit 

Based on New 

10/2.5 Formula for

First 50,000 OI

Existing Federal 

Single Month and 

All-MonthsCombined Limit

Existing 

Exchange-Set 

Single Month 

and AllMonthsCombined 

Limit

CBOT Corn (C) 57,800 33,000 33,000

CBOT Oats (O) 2,000 2,000 2,000

CBOT Soybeans

(S) 27,300 15,000 15,000

CBOT Soybean 

Meal (SM) 16,900 6,500 6,500

CBOT Soybean Oil 

(SO) 17,400 8,000 8,000

CBOT Wheat (W) 19,300 12,000 12,000

KC HRW Wheat 

(KW) 12,000 12,000 12,000

MGEX HRS Wheat 

(MWE) 12,000 12,000 12,000

ICE Cotton No. 2 

(CT) 11,900 5,000 5,000

e. Methodology for Setting Proposed Non-Spot Month Limit Levels

The Commission’s practice has been to set non-spot month limit levels for the 

nine legacy agricultural contracts at 10 percent of the open interest for the first 25,000 
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contracts and 2.5 percent of the open interest thereafter (the “10, 2.5 percent formula”).213 

The existing non-spot month limit levels have not been updated to reflect changes in open 

interest data in over a decade, and the 10, 2.5 percent formula has been used since the 

1990s, and was based on the Commission’s experience up until that time.

214 The 

Commission’s adoption of the 10, 2.5 percent formula was based on two primary factors: 

growth in open interest and the size of large traders’ positions.215 

The Commission proposes to maintain the 10, 2.5 percent formula for non-spot 

limits, with the limited change that the 2.5 percent calculation will be applied to open 

interest above 50,000 contracts rather than to the current level of 25,000 contracts. The 

Commission believes that this change is warranted due to the significant overall increase 

in open interest in these markets, which has roughly doubled since federal limits were set 

on these markets. The Commission would apply the modified formula to recent open 

interest data for the periods from July 2017–June 2018 and July 2018–June 2019 of the 

applicable futures and delta adjusted futures options. The resulting proposed limit levels, 

set forth in the second column in the table above, would generally be higher than existing 

 213 For example, assume a commodity contract has an aggregate open interest of 200,000 contracts over the 

past 12 month period. Applying the 10, 2.5 percent formula to an aggregate open interest of 200,000 

contracts would yield a non-spot month limit of 6,875 contracts. That is, 10 percent of the first 25,000 

contracts would equal 2,500 contracts (25,000 contracts x 0.10 = 2,500 contracts). Then add 2.5 percent of 

the remaining 175,000 of aggregate open interest or 4,375 contracts (175,000 contracts x 0.025 = 4,375 

contracts) for a total non-spot month limit of 6,875 contracts (2,500 contracts + 4,375 contracts = 6,875 

contracts). 

214 See, e.g., Revision of Federal Speculative Position Limits and Associated Rules, 64 FR at 24038 (May 

5, 1999) (increasing deferred-month limit levels based on 10 percent of open interest up to an open interest 

of 25,000 contracts, with a marginal increase of 2.5 percent thereafter). Prior to 1999, the Commission had 

given little weight to the size of open interest in the contract in determining the position limit level—

instead, the Commission’s traditional standard was to set limit levels based on the distribution of 

speculative traders in the market. See, e.g., 64 FR at 24039; Revision of Federal Speculative Position 

Limits and Associated Rules, 63 FR at 38525, 38527 (July 17, 1998). 215 See 64 FR at 24038. See also 63 FR at 38525, 38527 (The 1998 proposed revisions to non-spot month 

levels, which were eventually adopted in 1999, were based upon two criteria: “(1) the distribution of 

speculative traders in the markets; and (2) the size of open interest.”).
126

limit levels, with the exception of CBOT Oats (O), CBOT KC HRW Wheat (KW), and 

MGEX HRS Wheat (MWE), where proposed levels would remain at the existing levels. 

The Commission continues to believe that a formula based on a percentage of 

open interest is an appropriate tool for establishing limits outside the spot month. As the 

Commission stated when it initially proposed to use an open interest formula, taking open 

interest into account “will permit speculative position limits to reflect better the changing 

needs and composition of the futures markets...”216 Open interest is a measure of market 

activity that reflects the number of contracts that are “open” or live, where each contract 

of open interest represents both a long and a short position. Relative to contracts with 

smaller open interest, contracts with larger open interest may be better able to mitigate 

the disruptive impact of excessive speculation because there may be more activity to 

oppose, diffuse, or otherwise counter a potential pricing disruption. Limiting positions to 

a percentage of open interest: (1) helps ensure that positions are not so large relative to 

observed market activity that they risk disrupting the market; (2) allows speculators to 

hold sufficient contracts to provide a healthy level of liquidity for hedgers; and (3) allows

for increases in position limits and position sizes as markets expand and become more 

active. 

While the Commission continues to prefer a formula based on a percentage of 

open interest, market and potential regulatory changes counsel in favor of proposing a 

slight modification to the existing formula. In particular, as discussed in detail below, 

open interest has grown, and market composition has changed, significantly since the 

 216 Revision of Federal Speculative Position Limits, 57 FR 12766, 12770 (Apr. 13, 1992). The 

Commission also stated that providing for a marginal increase was “based upon the universal observation 

that the size of the largest individual positions in a market do not continue to grow in proportion with 

increases in the overall open interest of the market.” Id. 
127

1990s. The proposed increase in the open interest portion of the non-spot month limit 

formula from 25,000 to 50,000 contracts would provide a modest increase in the non-spot 

month limit of 1,875 contracts (over what the limit would be if the 10, 2.5 percent 

formula were applied at 25,000 contracts), assuming the underlying commodity futures 

market has open interest of at least 50,000 contracts. The Commission believes that the 

amended non-spot month formula would provide a conservative increase in the non-spot 

month limits for most contracts to better reflect the general increase observed in open 

interest across futures markets since the late 1990s, as discussed below.

i. Increases in Open Interest

The table below provides data that describes the market environment during the 

period prior to, and subsequent to, the adoption of the 10, 2.5 percent formula by the 

Commission in 1999. The data includes futures contracts and the delta-adjusted options 

on futures open interest.217 The first column of the table provides the maximum open 

interest in the nine legacy agricultural contracts over the five year period ending in 1999. 

The CBOT Corn (C) contract had maximum open interest of approximately 463,000 

contracts, and the CBOT Soybeans (S) contract had maximum open interest of 

approximately 227,000 contracts. The other seven contracts had maximum open interest 

figures that ranged from less than 20,000 contracts for CBOT Oats (O) to approximately 

172,000 for CBOT Soybean Oil (SO). Hence, when adopting the 10, 2.5 percent formula 

 217 Delta is a ratio comparing the change in the price of an asset (a futures contract) to the corresponding 

change in the price of its derivative (an option on that futures contract) and has a value that ranges between 

zero and one. In-the-money call options get closer to 1 as their expiration approaches. At-the-money call 

options typically have a delta of 0.5, and the delta of out-of-the-money call options approaches 0 as 

expiration nears. The deeper in-the-money the call option, the closer the delta will be to 1, and the more 

the option will behave like the underlying asset. Thus, delta-adjusted options on futures will represent the 

total position of those options as if they were converted to futures. 
128

in 1999, the Commission’s experience in these markets was of aggregate futures and 

options on futures open interest well below 500,000 contracts. 

Table: Maximum Futures and Options on Futures Open Interest, 1994–2018

1994-1999 2000-2004 2005-2009 2010-2014 2015-2018

CBOT Corn (C) 463,386 828,176 1,897,484 2,052,678 2,201,990

ICE Cotton No. 2 (CT) 122,989 140,240 388,336 296,596 344,302

CBOT Oats (O) 18,879 17,939 16,860 15,375 11,313

CBOT Soybeans (S) 227,379 327,276 672,061 991,258 997,881

CBOT Soybean Meal (SM) 155,658 183,255 241,917 392,265 544,363

CBOT Soybean Oil (SO) 172,424 191,337 328,050 395,743 547,784

CBOT Wheat (W) 163,193 187,181 507,401 576,333 621,750

CBOT Wheat: Kansas City 

Hard Red Winter (KW) 76,435 87,611 159,332 189,972 311,592

MGEX Wheat: Minneapolis 

Hard Red Spring (MWE) 24,999 36,155 57,765 68,409 80,635

The table also displays the maximum open interest figures for subsequent periods 

up to, and including, 2018. The maximum open interest for all of these contracts, except 

for oats, generally increased over the period.218 By the 2015–2018 period covered in the 

last column of the table, five of the contracts had maximum open interest greater than 

500,000 contracts. The contracts for CBOT Corn (C), CBOT Soybeans (S), and CBOT 

Hard Red Winter Wheat (KW) saw maximum open interest increase by a factor of four to 

five times the maximum open interest during the 1994-1999 period leading up to the 

Commission’s adoption of the 10, 2.5 percent formula in 1999. 

 218 See infra Section II.B.2.e.iii. (discussion of proposed non-spot month limit level for CBOT Oats (O)).
129

ii. Changes in Market Composition

As open interest has increased, the current non-spot limits have become 

significantly more restrictive over time. In particular, because the 2.5 percent 

incremental increase applies after the first 25,000 contracts of open interest, limits on 

commodities with open interest above 25,000 contracts (i.e., all commodities other than 

oats) continue to increase at a much slower rate of 2.5 percent rather than 10 percent, as 

for the first 25,000 contracts. This gradual increase was less of a problem in the latter 

part of the 1990s, for example, when open interest in each of the nine legacy agricultural 

contracts was below 500,000, and in many cases below 200,000. More recently, 

however, open interest has grown above 500,000 for a majority of the legacy contracts. 

The 10, 2.5 percent formula has thus become more restrictive for market participants, 

including those entities with positions that may not be eligible for a bona fide hedging 

exemption, but who might otherwise provide valuable liquidity to commercial firms. 

This problem has become worse over time because dealers play a much more 

significant role in the market today than at the time the Commission adopted the 10, 2.5 

percent formula. Prior to 1999, the Commission regulated physical commodity markets 

where the largest participants were often large commercial interests who held short 

positions. The offsetting positions were often held by small, individual traders, who 

tended to be long.219 Several years after the Commission adopted the 10, 2.5 percent 

formula, the composition of futures market participants changed, as dealers began to 

enter the physical commodity futures market in larger size. The table below presents data 

from the Commission’s publicly available “Bank Participation Report” (“BPR”), as of the 

 219 Stewart, Blair, An Analysis of Speculative Trading in Grain Futures, Technical Bulletin No. 1001, U.S. 

Department of Agriculture (Oct. 1949).
130

December report for 2002-2018.220 The table displays the number of banks holding 

reportable positions for the seven futures contracts for which federal limits apply and that 

were reported in the BPR.221 The report presents data for every market where five or 

more banks hold reportable positions. The BPR is based on the same large-trader 

reporting system database used to generate the Commission’s Commitments of Traders 

(“COT”) report.222

No data was reported for the seven futures contracts in December 2002, indicating 

that fewer than five banks held reportable positions at the time of the report. The 

December 2003 report shows that five or more banks held reportable positions in four of 

the commodity futures. The number of banks with reportable positions generally 

increased in the early to mid-2000s. As described in the Commission’s 2008 Staff Report 

on Commodity Swap Dealers & Index Traders, major changes in the composition of 

futures markets developed over the 20 years prior to 2008, including an influx of swap 

dealers (“SDs”), affiliated with banks or other large financial institutions, acting as 

aggregators or market makers and providing swaps to commercial hedgers and to other 

market participants.223 The dealers functioned in the swaps market and also used the 

futures markets to hedge their exposures. When the Commission adopted the 10, 2.5 

 220 Bank Participation Reports, U.S. Commodity Futures Trading Commission Web site, available at

https://www.cftc.gov/MarketReports/BankParticipationReports/index.htm. 221 The term “reportable position” is defined in § 15.00(p) of the Commission’s regulations. 17 CFR 

15.00(p). 

222 Commitments of Traders, U.S. Commodity Futures Trading Commission Web site, available at

www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm. There are generally still as many large 

commercial traders in the markets today as there were in the 1990s.

223 Staff Report on Commodity Swap Dealers & Index Traders with Commission Recommendations, U.S. 

Commodity Futures Trading Commission (Sept. 2008), available at 

https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/cftcstaffreportonswap

dealers09.pdf.
131

percent formula in 1999, it had limited experience with physical commodity derivatives 

markets in which such banks were significant participants.

Table: Number of Reporting Commercial Banks with Long Futures Positions

Year Corn Cotton Soybeans Soybean Meal Soybean Oil Wheat Wheat KCBT

2002 NR NR NR NR NR NR NR

2003 5 6 7 NR NR 5 NR

2004 5 10 7 NR NR 7 NR

2005 10 8 6 NR 5 9 9

2006 11 11 9 NR 7 14 7

2007 13 8 12 NR 6 14 6

2008 17 13 16 NR 6 14 9

2009 8 8 8 NR NR 13 NR

2010 7 7 7 NR NR 11 NR

2011 10 11 9 5 5 10 NR

2012 8 10 11 6 6 13 5

2013 11 11 13 10 6 11 5

2014 15 12 15 10 9 15 6

2015 12 13 13 12 9 16 9

2016 15 14 15 12 10 15 6

2017 16 13 12 11 9 16 8

2018 16 15 18 15 13 18 12

NR = “Not Reported”
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For 2003, the first year in the report with reported data on the futures for these 

physical commodities, the BPR showed, as displayed in the table below, that the 

reporting banks held modest positions, totaling 3.4 percent of futures long open interest 

for wheat and smaller positions in other futures. The positions displayed in the table 

below increased over the next several years, generally peaking around 2005/2006 as a 

fraction of the long open interest. 

Table: Percent of Futures Long Open Interest Held by Commercial Banks

Year 

(Dec.) Corn Cotton Soybeans

Soybean 

Meal

Soybean 

Oil Wheat

Wheat 

KCBT

2002 NR NR NR NR NR NR NR

2003 1.5% 1.4% 0.8% NR NR 3.4% NR

2004 7.0% 6.5% 3.6% NR NR 14.5% NR

2005 12.5% 13.8% 8.3% NR 6.8% 20.2% 5.2%

2006 9.4% 14.2% 7.7% NR 6.7% 17.0% 6.9%

2007 9.2% 9.7% 6.7% NR 6.5% 13.5% 5.5%

2008 8.9% 18.2% 10.0% NR 6.4% 18.7% 7.1%

2009 4.3% 6.5% 3.6% NR NR 9.3% NR

2010 3.7% 2.5% 4.7% NR NR 6.9% NR

2011 4.1% 3.3% 4.9% 1.9% 4.4% 7.7% NR

2012 4.7% 9.9% 3.7% 5.8% 5.5% 7.4% 3.5%

2013 5.3% 9.1% 4.4% 7.0% 4.1% 6.2% 6.4%

2014 9.7% 10.0% 6.3% 6.7% 6.5% 7.7% 10.1%

2015 8.1% 10.1% 5.0% 5.9% 6.4% 7.8% 4.3%

2016 8.1% 8.5% 7.1% 10.7% 6.6% 7.3% 5.2%

2017 5.5% 9.5% 4.3% 9.1% 7.3% 7.7% 4.8%
133

2018 5.8% 8.3% 5.9% 9.2% 7.6% 10.2% 7.0%

NR = “Not Reported”

iii. Proposed Non-Spot Month Limits for Hard Red Wheat and Oats

The Commission proposes partial wheat parity outside of the spot month: limits 

for CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) would be set at 

12,000 contracts, while limits for CBOT Wheat (W) would be set at 19,300 contracts. 

Based on the Commission’s experience since 2011 with non-spot month speculative

position limit levels at 12,000 for the CBOT KC HRW Wheat (KW) and MGEX HRS

Wheat (MWE) core referenced futures contracts, the Commission is proposing to 

maintain the current non-spot month limit levels for those two contracts, rather than 

reducing the existing levels to the lower levels that would result from applying the 

proposed modified 10, 2.5 percent formula.224 The current 12,000 contract level appears 

to have functioned well for these contracts, and the Commission sees no market-based 

reason to reduce the levels. 

CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) are both hard red 

wheats representing about 60 percent of the wheat grown in the United States225 and

about 80 percent of the wheat grown in Canada.

226 Although the CBOT Wheat (W) 

contract allows for delivery of hard red wheat, it typically sees deliveries of soft white 

wheat varieties, which comprises a smaller percentage of the wheat grown in North 

 224 Applying the proposed modified 10, 2.5 percent formula to recent open interest data for these two 

contracts would result in limit levels of 11,900 and 5,700, respectively. 

225 Wheat Sector at a Glance, USDA Economic Research Service, available at 

https://www.ers.usda.gov/topics/crops/wheat/wheat-sector-at-a-glance. 226 Estimated Areas, Yield, Production, Average Farm Price and Total Farm Value of Principal Field 

Crops, In Metric and Imperial Units, Statistics Canada Web site, available at 

https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3210035901.
134

America. Even though the CBOT Wheat (W) contract has the majority of liquidity 

among the three wheat contracts as measured by open interest and trading volume, it is 

the hard red wheats that make up the bulk of wheat crops in North America. Thus, the 

Commission proposes to maintain the non-spot month limit for the CBOT KC HRW 

Wheat (KW) contract and MGEX HRS Wheat (MWE) contract at the 12,000 contract 

level even though both contracts would have a lower non-spot month limit based solely 

on the open interest formula. The Commission preliminarily believes that maintaining 

partial parity and the existing non-spot month limits in this manner will benefit the MWE 

and KW markets since the two species of wheat are similar (i.e., hard red wheat) to one 

another relative to CBOT Wheat (W), which is soft white wheat; and as a result, the 

Commission has preliminarily determined that decreasing the non-spot month levels for 

MWE could impose liquidity costs on the MWE market and harm bona fide hedgers, 

which could further harm liquidity for bona fide hedgers in the related KW market.

However, the Commission has determined not to raise the proposed limit levels 

for CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) to the proposed 

19,300 contract limit level for CBOT Wheat (W) because 19,300 contracts appears to be 

extraordinarily large in comparison to open interest in the CBOT KC HRW Wheat (KW)

and MGEX HRS Wheat (MWE) markets, and the limit levels for both contracts are 

already larger than a limit level based on the 10, 2.5 percent formula. The Commission is 

concerned that substantially raising non-spot limits on the KW or MWE contracts could 

create a greater likelihood of excessive speculation given their smaller overall trading 

relative to the CBOT Wheat (W) contract. In response to prior proposals, which would 

have resulted in lower non-spot limits for MWE, MGEX had requested parity among all 
135

wheat contracts. In part, MGEX reasoned that intermarket spread trading among the 

three contracts is vital to their price discovery function.227 The Commission notes that 

intermarket spreading is permitted under this proposal.228 The intermarket spread 

exemption should address any concerns over the loss of liquidity in spread trades among 

the three wheat contracts. 

Likewise, based on the Commission’s experience since 2011 with the current nonspot month speculative position limit of 2,000 contracts for CBOT Oats (O), the 

Commission is proposing to maintain the current 2,000 contract level rather than 

reducing it to the lower levels that would result from applying the updated 10, 2.5 

formula.229 The existing 2,000 contract limit for CBOT Oats (O) appears to have 

functioned well, and the Commission sees no reason to reduce it. 

While retaining the existing non-spot month limits for the MWE and KW 

contracts and for CBOT Oats (O) does break with the proposed non-spot month formula, 

the Commission has confidence that the existing contract limits should continue to be 

appropriate for these contracts. Furthermore, even when relying on a single criterion, 

such as percentage of open interest, the Commission has historically recognized that there 

can “result . . . a range of acceptable position limit levels.”

230

For all of the core referenced contracts, based on decades of experience

overseeing exchange-set position limits and administering its own federal position limits 

 227 See Statement of Layne Carlson, CFTC Agricultural Advisory Committee meeting, Sept. 22, 2015, at 

38–44. 228 See supra Section II.A.20. (definition of spread transaction).

229 Applying the proposed modified 10, 2.5 percent formula to recent open interest data for oats would 

result in a 700 contract limit level. 

230 Revision of Speculative Position Limits, 57 FR 12770, 12766 (Apr. 13, 1992). See also Revision of 

Speculative Position Limits and Associated Rules, 63 FR at 38525, 38527 (July 17, 1998). Cf. 2013 

Proposal, 78 FR at 75729 (there may be range of spot month limits that maximize policy objectives).
136

regime, the Commission is of the view that the proposed non-spot month limit levels are 

also low enough to diminish, eliminate, or prevent excessive speculation, and to deter and 

prevent market manipulation, squeezes, and corners. The Commission has previously 

studied prior increases in federal non-spot month limits and concluded that the overall 

impact was modest, and that any changes in market performance were most likely 

attributable to factors other than changes in the federal position limit rules.231 The 

Commission has since gained further experience which supports that conclusion, 

including by monitoring amendments to position limit levels by exchanges. Further,

given the significant increases in open interest and changes in market composition that 

have occurred since the 1990s, the Commission is comfortable that the proposal to amend 

the 10, 2.5 percent formula will adequately address each of the policy objectives set forth 

in CEA section 4a(a)(3).232 

iv. Conclusion

With the exception of the CBOT KC HRW Wheat (KW), MGEX HRS Wheat 

(MWE), and CBOT Oats (O) contracts, as noted above, the proposed formula would 

result in higher non-spot month limit levels than those currently in place. Furthermore, as 

noted above, under the rules proposed herein, the nine legacy agricultural contracts would 

be the only contracts subject to limits outside of the spot month. Aside from the CBOT 

Oats (O) contract, these contracts all have high open interest, and thus their pricing may 

be less likely to be affected by the trading of large position holders in non-spot months. 

Further, consistent with the approach proposed herein to leverage existing exchange-level 

programs and expertise, the proposed federal non-spot month limit levels would serve 

 231 64 FR 24038, 24039 (May 5, 1999). 232 7 U.S.C. 6a(a)(3)(B).
137

simply as ceilings—exchanges would remain free to set exchange levels below the 

federal limit. The exchanges currently have systems and processes in place to monitor 

and surveil their markets in real time, and have the ability, and regulatory responsibility, 

to act quickly in the event of a disturbance.233 

Additionally, exchanges have tools other than position limits for protecting 

markets. For instance, exchanges can establish position accountability levels well below 

a position limit level, and can impose liquidity and concentration surcharges to initial 

margin if they are vertically integrated with a derivatives clearing organization. One 

reason that the Commission is proposing to update the formula for calculating non-spot 

month limit levels is that the exchanges may be able in certain circumstances to act much 

more quickly than the Commission, including quickly altering their own limits and 

accountability levels based on changing market conditions. Any decrease in an 

exchange-set limit would effectively lower the federal limit for that contract, as market 

participants would be required to comply with both federal and exchange-set limits, and 

as the Commission has the authority to enforce violations of both federal and exchangeset limits.234 

f. Subsequent Spot and Non-Spot Month Limit Levels

Prior to amending any of the proposed spot or non-spot month levels, if adopted, 

the Commission would provide for public notice and comment by publishing the 

proposed levels in the Federal Register. Under proposed § 150.2(f), should the 

 233 For example, under DCM Core Principle 4, DCMs are required to “have the capacity and responsibility 

to prevent manipulation, price distortion, and disruptions of the delivery or cash-settlement process through 

market surveillance, compliance, and enforcement practices and procedures,” including “methods for 

conducting real-time monitoring of trading” and “comprehensive and accurate trade reconstructions.” 7 

U.S.C. 7(d)(4).

234 See infra Section II.D.4.g. (discussion of Commission enforcement of exchange-set limits).
138

Commission wish to rely on exchange estimates of deliverable supply to update spot 

month speculative limit levels, DCMs would be required to supply to the Commission 

deliverable supply estimates upon request. Proposed § 150.2(j) would delegate the 

authority to make such requests to the Director of the Division of Market Oversight. 

Recognizing that estimating deliverable supply can be a time and resource 

consuming process for DCMs and for the Commission, the Commission is not proposing 

to require DCMs to submit such estimates on a regular basis; instead, DCMs would be 

required to submit estimates of deliverable supply if requested by the Commission.235 

DCMs would also have the option of submitting estimates of deliverable supply and/or 

recommended speculative position limit levels if they wanted the Commission to 

consider them when setting/adjusting federal limit levels. Any such information would 

be included in a Commission action proposing changes to the levels. The Commission 

encourages exchanges to submit such estimates and recommendations voluntarily, as the 

exchanges are uniquely situated to recommend updated levels due to their knowledge of 

individual contract markets. When submitting estimates, DCMs would be required under 

proposed § 150.2(f) to provide a description of the methodology used to derive the 

estimate, as well as any statistical data supporting the estimate, so that the Commission 

can verify that the estimate is reasonable. DCMs should consult the guidance regarding 

estimating deliverable supply set forth in Appendix C to part 38.236

g. Relevant Contract Month

 235 For example, if a contract has problems with pricing convergence between the futures and the cash 

market, it could be a symptom of a deliverable supply issue in the market. In such a situation, the 

Commission may request an updated deliverable supply estimate from the relevant DCM to help identify 

the possible cause of the pricing anomaly. 236 17 CFR part 38, Appendix C. 
139

Proposed § 150.2(c) clarifies that the spot month and single month for any given 

referenced contract is determined by the spot month and single month of the core 

referenced futures contract to which that referenced contract is linked. This requires that 

referenced contracts be linked to the core referenced futures contract in order to be netted 

for position limit purposes. For example, for the NYMEX NY Harbor ULSD Heating Oil

(HO) futures core referenced futures contract, the spot month period starts at the close of 

trading three business days prior to the last trading day of the contract. The spot month 

period for the NYMEX NY Harbor ULSD Financial (MPX) futures referenced contract 

would thus start at the same time—the close of trading three business days prior to the 

last trading day of the core referenced futures contract. 

h. Limits on “Pre-Existing Positions”

Under proposed § 150.2(g)(1), other than pre-enactment swaps and transition 

period swaps as defined in proposed § 150.1, “pre-existing positions,” defined in 

proposed § 150.1 as positions established in good faith prior to the effective date of a

final federal position limits rulemaking, would be subject to federal spot month limit 

levels. This clarification is intended to avoid rendering spot month limits ineffective—

failing to apply spot month limits to such pre-existing positions could result in a large, 

pre-existing position either intentionally or unintentionally causing a disruption to the 

price discovery function of the core referenced futures contract as positions are rolled 

into the spot month. The Commission is particularly concerned about protecting the spot 

month in physical-delivery futures from price distortions or manipulation that would 

disrupt the hedging and price discovery utility of the futures contract. 
140

Proposed § 150.2(g)(2) would provide that the proposed non-spot month limit 

levels would not apply to positions acquired in good faith prior to the effective date of 

such limit, recognizing that pre-existing large positions may have a relatively less 

disruptive effect outside of the spot month than during the spot month given that physical 

delivery occurs only during the spot month. However, other than pre-enactment swaps 

and transition period swaps, any pre-existing positions held outside the spot month would 

be attributed to such person if the person’s position is increased after the effective date of 

a final federal position limits rulemaking. 

i. Positions on Foreign Boards of Trade 

CEA section 4a(a)(6) directs the Commission to, among other things, establish 

limits on the aggregate number of positions in contracts based upon the same underlying 

commodity that may be held by any person across contracts listed by DCMs, certain 

contracts traded on a foreign board of trade (“FBOT”) with linkages to a contract traded 

on a registered entity, and swap contracts that perform or affect a significant price 

discovery function with respect to regulated entities.237 Pursuant to that directive, 

proposed § 150.2(h) would apply the proposed limits to a market participant’s aggregate 

positions in referenced contracts executed on a DCM and on, or pursuant to the rules of, 

an FBOT, provided that the referenced contracts settle against a price of a contract listed 

for trading on a DCM or SEF, and that the FBOT makes such contract available in the 

United States through “direct access.”238 In other words, a market participant’s positions 

in referenced contracts listed on a DCM and on an FBOT registered to provide direct 

 237 7 U.S.C. 6a(a)(6). 238 Commission regulation § 48.2(c) defines “direct access” to mean an explicit grant of authority by a 

foreign board of trade to an identified member or other participant located in the United States to enter 

trades directly into the trade matching system of the foreign board of trade. 17 CFR 48.2(c).
141

access would collectively have to stay below the federal limit level for the relevant core 

referenced futures contract. The Commission preliminarily believes that, as proposed, § 

150.2(h) would lessen regulatory arbitrage by eliminating a potential loophole whereby a 

market participant could accumulate positions on certain FBOTs in excess of limits in 

referenced contracts.239 

j. Anti-Evasion

Pursuant to the Commission’s rulemaking authority in section 8a(5) of the 

CEA,240 the Commission proposes § 150.2(i), which is intended to deter and prevent a 

number of potential methods of evading the position limits proposed herein. The 

proposed anti-evasion provision is not intended to capture a trading strategy merely 

because it may result in smaller position size for purposes of position limits, but rather is 

intended to deter and prevent cases of willful evasion of federal position limits, the 

specifics of which the Commission may be unable to anticipate. The proposed federal 

position limit requirements would apply during the spot month for all referenced 

contracts subject to federal limits and non-spot position limit requirements would only 

apply for the nine legacy agricultural contracts. Under this proposed framework, and 

 239 In addition, CEA section 4(b)(1)(B) prohibits the Commission from permitting an FBOT to provide 

direct access to its trading system to its participants located in the United States unless the Commission 

determines, in regards to any FBOT contract that settles against any price of one or more contracts listed 

for trading on a registered entity, that the FBOT (or its foreign futures authority) adopts position limits that 

are comparable to the position limits adopted by the registered entity. 7 U.S.C. 6(b)(1)(B). CEA section 

4(b)(1)(B) provides that the Commission may not permit a foreign board of trade to provide to the members 

of the foreign board of trade or other participants located in the United States direct access to the electronic 

trading and order-matching system of the foreign board of trade with respect to an agreement, contract, or 

transaction that settles against any price (including the daily or final settlement price) of 1 or more contracts 

listed for trading on a registered entity, unless the Commission determines that the foreign board of trade 

(or the foreign futures authority that oversees the foreign board of trade) adopts position limits (including 

related hedge exemption provisions) for the agreement, contract, or transaction that are comparable to the 

position limits (including related hedge exemption provisions) adopted by the registered entity for the 1 or 

more contracts against which the agreement, contract, or transaction traded on the foreign board of trade 

settles.

240 7 U.S.C. 12a(5).
142

because the threat of corners and squeezes is the greatest in the spot month, the 

Commission preliminarily anticipates that it may focus its attention on anti-evasion 

activity during the spot month. 

First, the proposed rule would consider a commodity index contract and/or 

location basis contract used to willfully circumvent position limits to be a referenced 

contract subject to federal limits. Because commodity index contracts and location basis 

contracts are excluded from the proposed “referenced contract” definition and thus not 

subject to federal limits,241 the Commission intends that proposed § 150.2(i) would close 

a potential loophole whereby a market participant who has reached its limits could 

purchase a commodity index contract in a manner that allowed the participant to exceed 

limits when taking into account the weighting in the component commodities of the index 

contract. The proposed rule would close a similar potential loophole with respect to 

location basis contracts.

Second, proposed § 150.2(i) would provide that a bona fide hedge recognition or 

spread exemption would no longer apply if used to willfully circumvent speculative 

position limits. This provision is intended to help ensure that bona fide hedge 

recognitions and spread exemptions are granted and utilized in a manner that comports 

with the CEA and Commission regulations, and that the ability to obtain a bona fide 

hedge recognition or spread exemption does not become an avenue for market 

participants to inappropriately exceed speculative position limits.

Third, a swap contract used to willfully circumvent speculative position limits 

would be deemed an economically equivalent swap, and thus a referenced contract, even 

 241 See supra Section II.A.16.b. (explanation of proposed exclusions from the “referenced contract” 

definition).
143

if the swap does not meet the economically equivalent swap definition set forth in 

proposed § 150.1. This provision is intended to deter and prevent the structuring of a 

swap in order to willfully evade speculative position limits. 

The determination of whether particular conduct is intended to circumvent or 

evade requires a facts and circumstances analysis. In preliminarily interpreting these 

anti-evasion rules, the Commission is guided by its interpretations of anti-evasion 

provisions appearing elsewhere in the Commission’s regulations, including the

interpretation of the anti-evasion rules that the Commission adopted in its rulemakings to 

further define the term “swap” and to establish a clearing requirement under section 

2(h)(1)(A) of the CEA.

242 

Generally, consistent with those interpretations, in evaluating whether conduct 

constitutes evasion, the Commission would consider, among other things, the extent to 

which the person lacked a legitimate business purpose for structuring the transaction in 

that particular manner. For example, an analysis of how a swap was structured could 

reveal that persons crafted derivatives transactions, structured entities, or conducted 

themselves in a manner without a legitimate business purpose and with the intent to 

willfully evade position limits by structuring a swap such that it would not meet the 

proposed “economically equivalent swap” definition. As stated in a prior rulemaking, a 

person’s specific consideration of, for example, costs or regulatory burdens, including the 

avoidance thereof, is not, in and of itself, dispositive that the person is acting without a 

 242 See Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; 

Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48207, 48297–48303 (Aug. 13, 

2012); Clearing Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284, 74317–74319 

(Dec. 13, 2012).
144

legitimate business purpose in a particular case.243 The Commission will view legitimate 

business purpose considerations on a case-by-case basis in conjunction with all other 

relevant facts and circumstances.

Further, as part of its facts and circumstances analysis, the Commission would 

look at factors such as the historical practices behind the market participant and 

transaction in question. For example, with respect to § 150.2(i)(3), the Commission

would consider whether a market participant has a history of structuring its swaps one 

way, but then starts structuring its swaps a different way around the time the participant 

risked exceeding a speculative position limit as a result of its swap position, such as by 

modifying the delivery date or other material terms and conditions such that the swap no 

longer meets the definition of an “economically equivalent swap.”

Consistent with interpretive language in prior rulemakings addressing evasion,

244

when determining whether a particular activity constitutes willful evasion, the 

Commission will consider the extent to which the activity involves deceit, deception, or 

other unlawful or illegitimate activity. Although it is likely that fraud, deceit, or unlawful 

activity will be present where willful evasion has occurred, the Commission does not 

believe that these factors are a prerequisite to an evasion finding because a position that 

does not involve fraud, deceit, or unlawful activity could still lack a legitimate business

purpose or involve other indicia of evasive activity. The presence or absence of fraud, 

deceit, or unlawful activity is one fact the Commission will consider when evaluating a 

person’s activity. That said, the proposed anti-evasion provision does require willfulness, 

 243 See Clearing Requirements Determination Under Section 2(h) of the CEA, 77 FR at 74319. 244 See Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; 

Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48207, 48297–48303 and Clearing 

Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284, 74317–74319.
145

i.e. “scienter.” The Commission will interpret “willful” consistent with how the 

Commission has in the past, that acting either intentionally or with reckless disregard 

constitutes acting “willfully.”

245

In determining whether a transaction has been entered into or structured willfully 

to evade position limits, the Commission will not consider the form, label, or written 

documentation as dispositive. The Commission also is not requiring a pattern of evasive 

transactions as a prerequisite to prove evasion, although such a pattern may be one factor 

in analyzing whether evasion has occurred. In instances where one party willfully 

structures a transaction to evade but the other counterparty does not, proposed § 150.2(i) 

would apply to the party who willfully structured the transaction to evade. 

Finally, entering into transactions that qualify for the forward exclusion from the 

swap definition shall not be considered evasive. However, in circumstances where a 

transaction does not, in fact, qualify for the forward exclusion, the transaction may or 

may not be evasive depending on an analysis of all relevant facts and circumstances. 

k. Netting

For the reasons discussed above, the referenced contract definition in proposed § 

150.1 includes, among other things, cash-settled contracts that are linked, either directly 

or indirectly, to a core referenced futures contract; and any “economically equivalent 

swaps.”

246 Under proposed § 150.2(a), federal spot month limits would apply to 

physical-delivery referenced contracts separately from federal spot month limits applied 

to cash-settled referenced contracts, meaning that during the spot month, positions in 

 245 See In re Squadrito, [1990–1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,262 (CFTC Mar. 27, 

1992) (adopting definition of ‘‘willful’’ in McLaughlin v. Richland Shoe Co., 486 U.S. 128 (1987)).

246 See supra Section II.A.16. (discussion of the proposed referenced contract definition).
146

physically-settled contracts may not be netted with positions in linked cash-settled 

contracts. Specifically, all of a trader’s positions (long or short) in a given physicallysettled referenced contract (across all exchanges and OTC as applicable)

247 are netted and 

subject to the spot month limit for the relevant commodity, and all of such trader’s 

positions in any cash-settled referenced contracts (across all exchanges and OTC as 

applicable) linked to such physically-settled core referenced futures contract are netted 

and independently (rather than collectively along with the physically-settled positions) 

subject to the federal spot month limit for that commodity.248 A position in a commodity 

contract that is not a referenced contract is therefore not subject to federal limits, and, as a 

consequence, cannot be netted with positions in referenced contracts for purposes of 

federal limits.249 For example, a swap that is not a referenced contract because it does not 

meet the economically equivalent swap definition could not be netted with positions in a 

referenced contract. 

Allowing the netting of linked physically-settled and cash-settled contracts during 

the spot month could lead to disruptions in the price discovery function of the core 

referenced futures contract or allow a market participant to manipulate the price of the 

core referenced futures contract. Absent separate spot month limits for physically-settled 

and cash-settled contracts, the spot month limit would be rendered ineffective, as a 

 247 In practice, the only physically-settled referenced contracts under this proposal would be the 25 core 

referenced futures contracts, none of which are listed on multiple DCMs, although there could potentially 

be physically-settled OTC swaps that would satisfy the “economically equivalent swap” definition and 

therefore would also qualify as referenced contracts. 248 Consistent with CEA section 4a(a)(6), this would include positions across exchanges. 

249 Proposed Appendix C to part 150 provides guidance regarding the referenced contract definition, 

including that the following types of contracts are not deemed referenced contracts, meaning such contracts 

are not subject to federal limits and cannot be netted with positions in referenced contracts for purposes of 

federal limits: location basis contracts; commodity index contracts; and trade options that meet the 

requirements of 17 CFR 32.3. 
147

participant could maintain large positions in excess of limits in both the physically-settled 

contract and the linked cash-settled contract, enabling the participant to disrupt the price 

discovery function as the contracts go to expiration by taking large opposite positions in 

the physically-settled core referenced futures and cash-settled referenced contracts, or 

potentially allowing a participant to effect a corner or squeeze.250 

Proposed § 150.2(b), which would establish limits outside the spot month, does 

not use the “separately” language. Accordingly, outside of the spot month, participants 

may net positions in linked physically-settled and cash-settled referenced contracts, 

because there is no immediate threat of delivery.

Finally, proposed § 150.2(a) and (b) also provide that spot and non-spot limits 

apply “net long or net short.” Consistent with existing § 150.2, this language requires 

that, both during and outside the spot month, and subject to the provisions governing 

netting described above, a given participant’s long positions in a particular contract be 

aggregated (including across exchanges and OTC as applicable), and a participant’s short 

positions be aggregated (including across exchanges and OTC as applicable), and those 

aggregate long and short positons be netted—in other words, it is the net value that is 

subject to federal limits. 

Consistent with current and historical practice, the speculative position limits 

proposed herein would apply to positions throughout each trading session, including as of 

the close of each trading session.251 

l. “Eligible Affiliates” and Aggregation

 250 For example, absent such a restriction in the spot month, a trader could stand for 100 percent of 

deliverable supply during the spot month by holding a large long position in the physical-delivery contract 

along with an offsetting short position in a cash-settled contract, which effectively would corner the market. 251 See, e.g., Elimination of Daily Speculative Trading Limits, 44 FR 7124, 7125 (Feb. 6, 1979).
148

Proposed § 150.2(k) addresses entities that qualify as an “eligible affiliate” as 

defined in proposed § 150.1. Under the proposed definition, an “eligible affiliate” 

includes certain entities that, among other things, are required to aggregate their positions 

under § 150.4 and that do not claim an exemption from aggregation. There may be 

certain entities that are eligible for an exemption from aggregation but that prefer to 

aggregate rather than disaggregate their positions; for example, when aggregation would 

result in advantageous netting of positions with affiliated entities. Proposed § 150.2(k) is 

intended to address such a circumstance by making clear that an “eligible affiliate” may 

opt to aggregate its positions even though it is eligible to disaggregate. 

m. Request for Comment

The Commission requests comment on all aspects of proposed § 150.2. The 

Commission also invites comments on the following:

(20) Are there legitimate strategies on which the Commission should offer 

guidance with respect to the anti-evasion provision?

(21) Should the Commission list by regulation specific factors/circumstances 

in which it may set spot month limits with other than the at or below 25 

percent of deliverable supply formula, and non-spot month limits with 

other than the modified 10, 2.5 percent formula proposed herein? If so, 

please provide examples of any such factors, including an explanation of 

whether and why different formulas make sense for different commodities. 

(22) Is the proposed compliance date of twelve months after publication of a 

final federal position limits rulemaking in the Federal Register an 

appropriate amount of time for compliance? If not, please provide 
149

reasons supporting a different timeline. Do market participants support 

delaying compliance until one year after a DCM has had its new § 150.9 

rules approved by the Commission under § 40.5?

(23) The Commission understands that it may be possible for a market 

participant trading options to start a trading day below the delta-adjusted 

federal speculative position limit for that option, but end up above such 

limit as the option becomes in-the-money during the spot month. Should 

the Commission allow for a one-day grace period with respect to federal 

position limits for market participants who have exercised options that 

were out-of-the money on the previous trading day but that become in-themoney during the trading day in the spot month?

(24) Given that the contracts in corn and soybean complex are more liquid 

than CBOT Oats (O) and the MGEX HRS (MWE) wheat contract, should 

the Commission employ a higher open interest formula for corn and the 

soybean complex?

(25) Should the Commission phase-in the proposed increased federal non-spot 

month limits incrementally over a period of time, rather than 

implementing the entire increase upon the effective date? Please explain 

why or why not. If so, please comment on an appropriate phase-in 

schedule, including whether different commodities should be subject to 

different schedules. 

(26) The Commission is aware that the non-spot month open interest is skewed 

to the first new crop (usually December or November) for the nine legacy 
150

agricultural contracts. The Commission understands that cotton may be 

unique because it has an extended harvest period starting in July in the 

south and working its way north until November. There may be some 

concern with positions being rolled from the prompt month into deferred 

contract months causing disruption to the price discovery function of the 

Cotton futures. Should the Commission consider lowering the single 

month limit to a percentage of the all months limits for Cotton? If so, 

what percentage of the all month limit should be used for the single month 

limit? Please provide a rationale for your percentage. 

(27) Should the Commission allow market participants who qualify for the 

conditional spot month limit in natural gas to net cash-settled natural gas 

referenced contracts across DCMs? Why or why not? 

C. § 150.3—Exemptions from Federal Position Limits

1. Existing §§ 150.3, 1.47, and 1.48 

Existing § 150.3(a), which pre-dates the Dodd-Frank Act, lists positions that may, 

under certain circumstances, exceed federal limits: (1) bona fide hedging transactions, as 

defined in the current bona fide hedging definition in § 1.3; and (2) certain spread or 

arbitrage positions.252 So that the Commission can effectively oversee the use of such 

exemptions, existing § 150.3(b) provides that the Commission or certain Commission 

staff may make special calls to demand certain information from exemption holders, 

 252 17 CFR 150.3(a). 
151

including information regarding positions owned or controlled by that person, trading 

done pursuant to that exemption, and positions that support the claimed exemption.253 

Existing § 150.3(a) allows for bona fide hedging transactions to exceed federal 

limits, and the current process for a person to request such recognitions for nonenumerated hedges appears in § 1.47.254 Under that provision, persons seeking 

recognition by the Commission of a non-enumerated bona fide hedging transaction or 

position must file statements with the Commission.255 Initial statements must be filed 

with the Commission at least 30 days in advance of exceeding the limit.256 Similarly, 

existing § 1.48 sets forth the process for market participants to file an application with the 

Commission to recognize certain enumerated anticipatory positions as bona fide hedging 

positions.257 Under that provision, such recognitions must be requested 10 days in 

advance of exceeding the limit.258

Further, the Commission provides self-effectuating spread exemptions for the 

nine legacy agricultural contracts currently subject to federal limits, but does not specify 

a formal process for granting such spread exemptions.259 The Commission’s authority 

and existing regulation for exempting certain spread positions can be found in section 

4a(a)(1) of the Act and existing § 150.3(a)(3) of the Commission’s regulations, 

 253 17 CFR 150.3(b). 254 17 CFR 1.47. 255 17 CFR 1.47(a). 256 17 CFR 1.47(b). 257 17 CFR 1.48. 258 Id. 259 Since 1938, the Commission (known as the Commodity Exchange Commission in 1938) has recognized 

the use of spread positions to facilitate liquidity and hedging. Notice of Proposed Order in the Matter of 

Limits on Position and Daily Trading in Grain for Future Delivery, 3 FR 1408 (June 14, 1938).
152

respectively.260 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.’” 

2. Proposed § 150.3

As described elsewhere in this release, the Commission is proposing a new bona 

fide hedging definition in § 150.1 (described above) and a new streamlined process in 

proposed § 150.9 for recognizing non-enumerated bona fide hedging positions (described 

further below). The Commission thus proposes to update § 150.3 to conform to those 

new proposed provisions. Proposed § 150.3 also includes new exemption types not 

explicitly listed in existing § 150.3, including: (i) exemptions for financial distress 

situations; (ii) conditional exemptions for certain spot month positions in cash-settled 

natural gas contracts; and (iii) exemptions for pre-enactment swaps and transition period 

swaps.

261 Proposed § 150.3(b)–(g) respectively address: requests for relief from position 

limits submitted directly to the Commission or Commission staff (rather than to an 

exchange under proposed § 150.9, as discussed further below); previously-granted risk 

management exemptions to position limits; exemption-related recordkeeping and specialcall requirements; the aggregation of accounts; and the delegation of certain authorities to 

the Director of the Division of Market Oversight. 

 260 See 7 U.S.C. 6a(a)(1) and 17 CFR 150.3(a)(3) (providing 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 futures-equivalent 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.). Although existing § 

150.3(a)(3) does not specify a formal process for granting spread exemptions, the Commission is able to 

monitor traders’ gross and net positions using part 17 data, the monthly Form 204, and information from 

the applicable DCMs to identify any such spread positions. 261 The Commission revised § 150.3(a) in 2016, relocating the independent account controller aggregation 

exemption from § 150.3(a)(4) in order to consolidate it with the Commission’s aggregation requirements in 

§ 150.4(b)(4). See Final Aggregation Rulemaking, 81 FR at 91489–90.
153

a. Bona Fide Hedging Positions and Spread Exemptions

The Commission has years of experience granting and monitoring spread 

exemptions, and enumerated and non-enumerated bona fide hedges, as well as overseeing 

exchange processes for administering exemptions from exchange-set limits on such 

contracts. As a result of this experience, the Commission has determined to continue to 

allow self-effectuating enumerated bona fide hedges and certain spread exemptions for 

all contracts that would be subject to federal position limits, as explained further below. 

i. Bona Fide Hedging Positions

First, under proposed § 150.3(a)(1)(i), bona fide hedge recognitions for positions 

in referenced contracts that fall within one of the proposed enumerated hedges set forth in 

proposed Appendix A to part 150, discussed above, would be self-effectuating for 

purposes of federal position limits. Market participants would thus not be required to 

request Commission approval prior to exceeding federal position limits in such cases, but 

would be required to request a bona fide hedge exemption from the relevant exchange for 

purposes of exchange-set limits established pursuant to proposed § 150.5(a), and submit 

required cash-market information to the exchange as part of such request.

262 The 

Commission has also determined to allow the proposed enumerated anticipatory bona 

fide hedges (some of which are not currently self-effectuating and thus are required to be 

approved by the Commission under existing § 1.48) to be self-effectuating for purposes 

of federal limits (and thus would not require prior Commission approval for such 

enumerated anticipatory hedges). The Commission may consider expanding the 

 262 See infra Section II.D.4.a. See also proposed § 150.5(a)(2)(ii)(A)(1).
154

proposed list of enumerated hedges at a later time, after notice and comment, as it gains 

experience with the new federal position limits framework proposed herein. 

Second, under proposed § 150.3(a)(1)(ii), for positions in referenced contracts 

that do not fit within one of the proposed enumerated hedges in Appendix A, (i.e., nonenumerated bona fide hedges), market participants must request approval from the 

Commission, or from an exchange, prior to exceeding federal limits. Such exemptions 

thus would not be self-effectuating and market participants in such cases would have two 

options for requesting such a non-enumerated bona fide hedge recognition: (1) apply 

directly to the Commission in accordance with proposed § 150.3(b) (described below), 

and separately also apply to an exchange pursuant to exchange rules established under

proposed § 150.5(a);263 or, alternatively (2) apply to an exchange pursuant to proposed § 

150.9 for a non-enumerated bona fide hedge recognition that could be valid both for 

purposes of federal and exchange-set position limit requirements, unless the Commission 

(and not staff) objects to the exchange’s determination within a limited period of time.

264 

As discussed elsewhere in this release, market participants relying on enumerated or nonenumerated bona fide hedge recognitions would no longer have to file the monthly Form 

204/304 with supporting cash market information.265

ii. Spread Exemptions 

Under proposed § 150.3(a)(2)(i), spread exemptions for positions in referenced 

contracts would be self-effectuating, provided that the position fits within one of the 

 263 See infra Section II.D.4. (discussion of proposed § 150.5). 264 See infra Section II.G.3. (discussion of proposed § 150.9). 265 See infra Section II.H.2. (discussion of the proposed elimination of Form 204).
155

types of spreads listed in the spread transaction definition in proposed § 150.1,

266 and 

provided further that the market participant separately requests a spread exemption from 

the relevant exchange’s limits established pursuant to proposed § 150.5(a).

The Commission anticipates that such spread exemptions 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 or near 

simultaneously. The list of spread transactions in proposed § 150.1 reflects the most 

common types of spread strategies for which the Commission and/or exchanges have 

previously granted spread exemptions. 

Under proposed § 150.3(a)(2)(ii), for all contracts subject to federal limits, if the 

spread position does not fit within one of the spreads listed in the spread transaction 

definition in proposed § 150.1, market participants must apply for the spread exemption 

relief directly from the Commission in accordance with proposed § 150.3(b). The market 

participant must receive notification of the approved spread exemption under proposed § 

150.3(b)(4) before exceeding the federal speculative position limits for that spread 

position. The Commission may consider expanding the proposed spread transactions 

definition at a later time, after notice and comment, as it gains experience with the new 

federal position limits framework proposed herein.

iii. Removal of Existing §§ 1.47, 1.48, and 140.97 

Given the proposal set forth in § 150.9, as described in detail below, to allow for a

streamlined process for recognizing bona fide hedges for purposes of federal limits,267 the 

 266 See supra Section II.A.20. (proposed definition of “spread transaction” in § 150.1, which would cover: 

calendar spreads; quality differential spreads; processing spreads (such as energy “crack” or soybean 

“crush” spreads); product or by-product differential spreads; and futures-options spreads.)
156

Commission also proposes to delete existing §§ 1.47 and 1.48. The Commission 

preliminarily believes that overall, the proposed approach would lead to a more efficient 

bona fide hedge recognition process. As the Commission proposes to delete §§ 1.47 and 

1.48, the Commission also proposes to delete existing § 140.97, which delegates to the 

Director of the Division of Enforcement or his designee authority regarding requests for 

classification of positions as bona fide hedges under existing §§ 1.47 and 1.48.268

The Commission does not intend the proposed replacement of §§ 1.47 and 1.48 to 

have any bearing on bona fide hedges previously recognized under those provisions. 

With the exception of certain recognitions for risk management positions discussed 

below, positions that were previously recognized as bona fide hedges under §§ 1.47 or 

1.48 would continue to be recognized, provided they continue to meet the statutory bona 

fide hedging definition and all other existing and proposed requirements.

b. Process for Requesting Commission-Provided Relief for Non-enumerated Bona 

Fide Hedges and Spread Exemptions

Under the proposed rules, non-enumerated bona fide hedging recognitions may 

only be granted by the Commission as proposed in § 150.3(b), or under the streamlined

process proposed in § 150.9. Further, spread exemptions that do not meet the proposed 

spread transaction definition may only be granted by the Commission as proposed in § 

150.3(b). Under the Commission process in § 150.3(b), a person seeking a bona fide 

hedge recognition or spread exemption may submit a request to the Commission. 

With respect to bona fide hedge recognitions, such request must include: (i) a 

description of the position in the commodity derivative contract for which the application 

 267 Id. 268 17 CFR 140.97.
157

is submitted, including the name of the underlying commodity and the position size; (ii) 

information to demonstrate why the position satisfies section 4a(c)(2) of the Act and the 

definition of bona fide hedging transaction or position in proposed § 150.1, including 

factual and legal analysis; (iii) a statement concerning the maximum size of all gross 

positions in derivative contracts for which the application is submitted (in order to 

provide a view of the true footprint of the position in the market); (iv) information 

regarding the applicant’s activity in the cash markets and the swaps markets for the 

commodity underlying the position for which the application is submitted;269 and (v) any 

other information that may help the Commission determine whether the position meets 

the requirements of section 4a(c)(2) of the Act and the definition of bona fide hedging 

transaction or position in § 150.1.

270

With respect to spread exemptions, such request must include: (i) a description of 

the spread transaction for which the exemption application is submitted;271 (ii) a 

statement concerning the maximum size of all gross positions in derivative contracts for 

which the application is submitted; and (iii) any other information that may help the 

Commission determine whether the position is consistent with section 4a(a)(3)(B) of the 

Act. 

Under proposed § 150.3(b)(2), the Commission, or Commission staff pursuant to 

delegated authority proposed in § 150.3(g), may request additional information from the 

requestor and must provide the requestor with ten business days to respond. Under 

 269 The Commission would expect that applicants would provide cash market data for at least the prior year. 270 For example, the Commission may, in its discretion, request a description of any positions in other 

commodity derivative contracts in the same commodity underlying the commodity derivative contract for 

which the application is submitted. Other commodity derivatives contracts could include other futures, 

options, and swaps (including over-the-counter swaps) positions held by the applicant. 271 The nature of such description would depend on the facts and circumstances, and different details may 

be required depending on the particular spread.
158

proposed § 150.3(b)(3) and (4), the requestor, however, may not exceed federal position 

limits unless it receives a notice of approval from the Commission or from Commission 

staff pursuant to delegated authority proposed in § 150.3(g); provided however, that, due 

to demonstrated sudden or unforeseen increases in its bona fide hedging needs, a person 

may request a recognition of a bona fide hedging transaction or position within five 

business days after the person established the position that exceeded the federal 

speculative position limit.

272

Under this proposed process, market participants would be encouraged to submit 

their requests for bona fide hedge recognitions and spread exemptions as early as possible 

since proposed § 150.3(b) would not set a specific timeframe within which the 

Commission must make a determination for such requests.

Further, all approved bona fide hedge recognitions and spread exemptions must 

be renewed if there are any changes to the information submitted as part of the request, or 

upon request by the Commission or Commission staff.273 Finally, the Commission (and 

 272 Where a person requests a bona fide hedge recognition within five business days after they exceed 

federal position limits, such person would be required to demonstrate that they encountered sudden or 

unforeseen circumstances that required them to exceed federal position limits before submitting and 

receiving approval of their bona fide hedge application. These applications submitted after a person has 

exceeded federal position limits should not be habitual and will be reviewed closely. If the Commission 

reviews such application and finds that the position does not qualify as a bona fide hedge, then the 

applicant would be required to bring their position into compliance within a commercially reasonable time, 

as determined by the Commission in consultation with the applicant and the applicable DCM or SEF. If the 

applicant brings the position into compliance within a commercially reasonable time, then the applicant

will not be considered to have violated the position limits rules. Further, any intentional misstatements to 

the Commission, including statements to demonstrate why the bona fide hedging needs were sudden and 

unforeseen, would be a violation of sections 6(c)(2) and 9(a)(2) of the Act. 273 See proposed § 150.3(b)(5). Currently, the Commission does not require automatic updates to bona fide 

hedge applications, and does not require applications or updates thereto for spread exemptions, which are 

self-effectuating. Consistent with current practices, under proposed § 150.3(b)(5), the Commission would 

not require automatic annual updates to bona fide hedge and spread exemption applications; rather, updated 

applications would only be required if there are changes to information the requestor initially submitted or 

upon Commission request. This approach is different than the proposed streamlined process in § 150.9, 

which would require automatic annual updates to such applications, which is more consistent with current 

exchange practices. See, e.g., CME Rule 559.
159

not staff) may revoke or modify any bona fide hedge recognition or spread exemption at 

any time if the Commission determines that the bona fide hedge recognition or spread 

exemption, or portions thereof, are no longer consistent with the applicable statutory and 

regulatory requirements.

274

The Commission anticipates that most market participants would utilize the 

streamlined process set forth in proposed § 150.9 and described below, rather than the 

process as proposed in § 150.3(b), because exchanges would generally be able to make 

such determinations more efficiently than Commission staff, and because market 

participants are likely already familiar with the proposed processes set forth in § 150.9, 

which is intended to leverage the processes currently in place at the exchanges for 

addressing requests for exemptions from exchange-set limits. Nevertheless, proposed § 

150.3(a)(1) and (2) clarify that market participants may seek relief from federal position 

limits for non-enumerated bona fide hedges and spread transactions that do not meet the 

proposed spread transactions definition directly from the Commission. After receiving 

any approval of a bona fide hedge or spread exemption from the Commission, the market 

participant would still be required to request a bona fide hedge recognition or spread 

exemption from the relevant exchange for purposes of exchange-set limits established 

pursuant to proposed § 150.5(a).

c. Request for Comment

The Commission requests comments on all aspects of proposed § 150.3(a)(1) and 

(2). The Commission also invites comment on the following:

 274 This proposed authority to revoke or modify a bona fide hedge recognition or spread exemption would 

not be delegated to Commission staff.
160

(28) Out of concern that large demand for delivery against long nearby futures 

positions may outpace demand on spot cash values, the Commission has 

previously discussed allowing cash and carry exemptions as spreads on the 

condition that the exchange ensures that exit points in cash and carry 

spread exemptions would facilitate an orderly liquidation.275 Should the 

Commission allow the granting of cash and carry exemptions under such 

conditions? If so, please explain why, including how such exemptions 

would be consistent with the Act and the Commission’s regulations. If 

not, please explain why not, and if other circumstances would be better, 

including better for preserving convergence, which is essential to properly 

functioning markets and price discovery. If cash and carry exemptions 

were allowed, how could an exchange ensure that exit points in cash and 

carry exemptions facilitate convergence of cash and futures?

d. Financial Distress Exemptions

Proposed § 150.3(a)(3) would allow for a financial distress exemption in certain 

situations, including the potential default or bankruptcy of a customer or a potential 

acquisition target. For example, in periods of financial distress, such as a customer 

default at an FCM or a potential bankruptcy of a market participant, it may be beneficial 

for a financially-sound market participant to take on the positions and corresponding risk 

of a less stable market participant, and in doing so, exceed federal speculative position 

limits. Pursuant to authority delegated under §§ 140.97 and 140.99, Commission staff 

previously granted exemptions in these types of situations to avoid sudden liquidations 

 275 See, e.g., 2016 Reproposal, 81 FR 96704 at 96833.
161

required to comply with a position limit.276 Such sudden liquidations could otherwise

potentially hinder statutory objectives, including by reducing liquidity, disrupting price 

discovery, and/or increasing systemic risk.277

The proposed exemption would be available to positions of “a person, or related 

persons,” meaning that a financial distress exemption request should be specific to the 

circumstances of a particular person, or to persons related to that person, and not a more 

general request by a large group of unrelated people whose financial distress 

circumstances may differ from one another. The proposed exemption would be granted 

on a case by case basis in response to a request submitted pursuant to § 140.99, and 

would be evaluated based on the specific facts and circumstances of a particular person or 

related persons. Any such financial distress position would not be a bona fide hedging 

transaction or position unless it otherwise met the substantive and procedural 

requirements set forth in proposed §§ 150.1, 150.3, and 150.9, as applicable.

e. Conditional Spot Month Exemption in Natural Gas

Certain natural gas contracts are currently subject to exchange-set limits, but not 

federal limits.278 This proposal would apply federal limits to certain natural gas contracts 

for the first time by including the physically-settled NYMEX Henry Hub Natural Gas 

(“NYMEX NG”) contract as a core referenced futures contract listed in proposed § 

 276 See, e.g., CFTC Press Release No. 5551–08, CFTC Update on Efforts Underway to Oversee Markets, 

(Sept. 19, 2008), available at http://www.cftc.gov/PressRoom/PressReleases/pr5551-08. 277 See 7 U.S.C. 6a(a)(3). 278 Some examples include natural gas contracts that use the NYMEX NG futures contract as a reference 

price, such as ICE’s Henry Financial Penultimate Fixed Price Futures (PHH), options on Henry 

Penultimate Fixed Price (PHE), Henry Basis Futures (HEN) and Henry Swing Futures (HHD); NYMEX’s 

E-mini Natural Gas Futures (QG), Henry Hub Natural Gas Last Day Financial Futures (HH), and Henry 

Hub Natural Gas Financial Calendar Spread (3 Month) Option (G3); and Nasdaq Futures, Inc.’s (“NFX”)

Henry Hub Natural Gas Financial Futures (HHQ), and Henry Hub Natural Gas Penultimate Financial 

Futures (NPQ).
162

150.2(d). As set forth in proposed Appendix E to part 150, that physically-settled 

contract, as well as any cash-settled natural gas contract that qualifies as a referenced 

contract,279 would be separately subject to a federal spot month limit, net long or net 

short, of 2,000 NYMEX NG equivalent-size contracts.

Under the referenced contract definition in proposed § 150.1, ICE’s cash-settled 

Henry Hub LD1 contract, ICE’s Henry Financial Penultimate Fixed Price Futures, 

NYMEX’s cash-settled Henry Hub Natural Gas Last Day Financial Futures contract, 

Nodal Exchange’s (“Nodal”) cash-settled Henry Hub Monthly Natural Gas contract, and 

NFX cash-settled Henry Hub Natural Gas Financial Futures contract, for example, would 

each qualify as a referenced contract subject to federal limits by virtue of being cashsettled to the physically-settled NYMEX NG core referenced futures contract.280 Any 

other cash-settled contract that meets the referenced contract definition would also be 

 279 Under the referenced contract definition proposed in § 150.1, cash-settled natural gas referenced 

contracts are those futures or options contracts, including spreads, that are:

(1) Directly or indirectly linked, including being partially or fully settled on, or priced at a fixed differential 

to, the price of the physically-settled NYMEX NG core referenced futures contract; or

(2) Directly or indirectly linked, including being partially or fully settled on, or priced at a fixed differential 

to, the price of the same commodity underlying the physically-settled NYMEX NG core referenced futures 

contract for delivery at the same location or locations as specified in the NYMEX NG core referenced 

futures contract. As proposed, the referenced contract definition does not include a location basis contract, 

a commodity index contract, or a trade option that meets the requirements of § 32.3 of this chapter. See

proposed § 150.1.

280 On November 12, 2019, Nodal announced that it had reached an agreement to acquire the core assets of 

NFX. See Nodal Exchange Acquires U.S. Commodities Business of Nasdaq Futures, Inc. (NFX), Nodal 

Exchange Web site (Nov. 12, 2019), available at https://www.nodalexchange.com/wpcontent/uploads/20191112-Nodal-NFX-release-Final.pdf (press release). The acquisition includes all of 

NFX’s energy complex of futures and options contracts, including NFX’s Henry Hub Natural Gas 

Financial Futures contract. Because that contract will become part of Nodal’s offerings, that contract, as 

well as Nodal’s existing Henry Hub Monthly Natural Gas contract, would continue to qualify as referenced 

contracts under the proposed definition herein, and thus would be subject to federal limits by virtue of 

being cash-settled to the physically-settled NYMEX NG core referenced futures contract. According to the 

November 12, 2019 press release, “Nodal Exchange and Nodal Clear plan to complete the integration of 

U.S. Power contracts by December 2019. U.S. Natural Gas, Crude Oil and Ferrous Metals contracts could 

transfer to Nodal as soon as spring 2020.” Id.
163

subject to federal limits, as would an “economically equivalent swap,” as defined in 

proposed § 150.1, with respect to any natural gas referenced contract.

Proposed § 150.3(a)(4) would permit a new federal conditional spot month limit 

exemption for certain cash-settled natural gas referenced contracts. Under proposed § 

150.3(a)(4), market participants seeking to exceed the proposed 2,000 NYMEX NG 

equivalent-size contract spot month limit for a cash-settled natural gas referenced 

contract listed on any DCM could receive an exemption that would be capped at 10,000 

NYMEX NG equivalent-size contracts net long or net short per DCM, plus an additional 

10,000 NYMEX NG futures equivalent size contracts in economically equivalent swaps. 

A grant of such an exemption would be conditioned on the participant not holding or 

controlling any positions during the spot month in the physically-settled NYMEX NG 

core referenced futures contract.281

This proposed conditional exemption level of 10,000 contracts per DCM in 

natural gas would codify into federal regulations the industry practice of an exchange-set 

conditional limit that is five times the size of the spot month limit that has developed over 

time, and which the Commission preliminarily believes has functioned well. The practice 

balances the needs of certain market participants, who may currently hold or control 

5,000 contracts in each DCM’s cash-settled natural gas futures contracts and prefer a 

sizeable position in a cash-settled contract in order to obtain the desired exposure without 

needing to make or take delivery of natural gas, with the policy objectives of the 

 281 While the NYMEX NG is the only natural gas contract included as a core referenced futures contract in 

this release, the conditional spot month exemption proposed herein would also apply to any other 

physically-settled natural gas contract that the Commission may in the future designate as a core referenced 

futures contract, as well as to any physically-delivered contract that is substantially identical to the 

NYMEX NG and that qualifies as a referenced contract, or that qualifies as an economically equivalent 

swap.
164

Commission, which has historically had concerns about the possibility of traders 

attempting to manipulate the physically-settled NYMEX NG contract (i.e., mark-the 

close) in order to benefit from a larger position in the cash-settled ICE LD1 Natural Gas 

Swap and/or NYMEX Henry Hub Natural Gas Last Day Financial Futures contract 

during the spot month as these contracts expired.282

NYMEX, ICE, NFX, and Nodal currently have rules in place establishing a 

conditional spot month limit exemption equivalent to up to 5,000 contracts (in NYMEXequivalent size) for their respective cash-settled natural gas contracts, provided that the 

trader does not maintain a position in the physically-settled NYMEX NG contract during 

the spot month.

283 Together, the ICE, NYMEX, NFX, and Nodal rules allow a trader to 

hold up to 20,000 (NYMEX- equivalent size) contracts during the spot month combined 

across ICE, NYMEX, NFX, and Nodal cash-settled natural gas contracts, provided the 

trader does not hold positions in excess of 5,000 contracts on any one DCM, and 

provided further that the trader does not hold any positions in the physically-settled 

NYMEX NG contract during the spot month.284

 282 As noted above, current exchange rules establish a spot month limit of 1,000 NYMEX equivalent sized 

contracts. The Commission proposes a federal spot month limit of 2,000 NYMEX equivalent sized 

contracts based on updated deliverable supply estimates. See supra Section II.B.2.b. (2020 proposed spot 

month limit chart). The proposed conditional spot month limit exemption of 10,000 contracts per exchange 

is thus five times the proposed federal spot month limit. 

283 See ICE Rule 6.20(c), NYMEX Rule 559.F, NFX Rule Chapter V, Section 13(a), and Nodal Rule 6.5.2. 

The spot month for such contracts is three days. See also Position Limits, CMG Group Web site, available 

at https://www.cmegroup.com/market-regulation/position-limits.html (NYMEX position limits 

spreadsheet); Market Resources, ICE Futures Web site, available at https://www.theice.com/futuresus/market-resources (ICE position limits spreadsheet). NYMEX rules establish an exchange-set spot 

month limit of 1,000 contracts for its physically-settled NYMEX NG Futures contract and a separate spot 

month limit of 1,000 contracts for its cash-settled Henry Hub Natural Gas Last Day Financial Futures 

contract. As the ICE natural gas contract is one quarter the size of the NYMEX contract, ICE’s exchangeset natural gas limits are shown in NYMEX equivalents throughout this section of the release. ICE thus has 

rules in place establishing an exchange-set spot month limit of 4,000 contracts (equivalent to 1,000 

NYMEX contracts) for its cash-settled Henry Hub LD1 Fixed Price Futures contract. 284 In practice, a majority of the trading in such contracts is on ICE and NYMEX. As noted above, Nodal is 

acquiring NFX, including its Henry Hub Natural Gas Financial Futures contract.
165

The DCMs originally adopted these rules, in consultation with Commission staff, 

in large part to address historical concerns over the potential for manipulation of 

physically-settled natural gas contracts during the spot month in order to benefit positions 

in cash-settled natural gas contracts, and to accommodate certain trading dynamics 

unique to the natural gas contracts. In particular, in natural gas, open interest tends to 

decline in the NYMEX NG contract approaching expiration and tends to increase rapidly 

in the ICE cash-settled Henry Hub LD1 contract. These dynamics suggest that cashsettled natural gas contracts serve an important function for hedgers and speculators who 

wish to recreate and/or hedge the physically-settled NYMEX NG contract price without 

being required to make or take delivery.

The condition in proposed § 150.3(a)(4), however, should remove the potential to 

manipulate the physically-settled natural gas contract in order to benefit a sizeable 

position in the cash-settled contract. To qualify for the exemption, market participants 

would not be permitted to hold any spot month positions in the physically-settled 

contract. This proposed conditional exemption would prevent manipulation by traders 

with leveraged positions in the cash-settled contracts (in comparison to the level of the 

limit in the physical-delivery contract) who might otherwise attempt to mark the close or 

distort physical-delivery prices in the physically-settled contract to benefit their leveraged 

cash-settled positions. Thus, the exemption would establish a higher conditional limit for 

the cash-settled contract than for the physical-delivery contract, so long as the cashsettled positions are decoupled from spot-month positions in physical-delivery contracts 

which set or affect the value of such cash-settled positions.
166

While the Commission is unaware of any natural gas swaps that would qualify as 

“economically equivalent swaps,” the Commission proposes to apply the conditional 

exemption to swaps as well, provided that a given market participant’s positions in such 

cash-settled swaps do not exceed 10,000 futures-equivalent contracts and provided that 

the participant does not hold spot-month positions in physically settled natural gas 

contracts. Because swaps may generally be fungible across markets, that is, a position 

may be established on one SEF and offset on another SEF or OTC, the Commission 

proposes that economically equivalent swap contracts have a conditional spot month limit 

of 10,000 economically equivalent contracts in total across all SEFs and OTC.

A market participant that sought to hold positions in both the NYMEX NG 

physically-settled contract and in any cash-settled natural gas contract would not be 

eligible for the proposed conditional exemption. Such a participant could only hold up to 

2,000 contracts net long or net short across exchanges/OTC in physically-settled natural 

gas referenced contract(s), and another 2,000 contracts net long or net short across 

exchanges/OTC in cash-settled natural gas contract referenced contract(s).285 

f. Exemption for Pre-Enactment Swaps and Transition Period Swaps

In order to promote a smooth transition to compliance for swaps not previously 

subject to federal speculative position limits, proposed § 150.3(a)(5) would provide that 

federal speculative position limits shall not apply to positions acquired in good faith in 

any pre-enactment swap or in any transition period swap, in either case as defined by § 

150.1.286 Any swap that meets the proposed economically equivalent swap definition, 

 285 See supra Section II.B.2.k. (discussion of netting). 286 “Pre-enactment swap” would mean any swap entered into prior to enactment of the Dodd-Frank Act of 

2010 (July 21, 2010), the terms of which have not expired as of the date of enactment of that Act. 
167

but that otherwise qualifies as a pre-enactment swap or transition period swap, would 

thus be exempt from federal speculative position limits. This exemption would be selfeffectuating and would not require a market participant to request relief. 

In order to further lessen the impact of the proposed federal limits on market 

participants, for purposes of complying with the proposed federal non-spot month limits, 

the proposed rule would also allow both pre-enactment swaps and transition period swaps 

to be netted with commodity derivative contracts acquired more than 60 days after 

publication of final rules in the Federal Register. Any such positions would not be 

permitted to be netted during the spot month so as to avoid rendering spot month limits 

ineffective—the Commission is particularly concerned about protecting the spot month in 

physical-delivery futures from price distortions or manipulation that would disrupt the 

hedging and price discovery utility of the futures contract. 

g. Previously-Granted Risk Management Exemptions

As discussed elsewhere in this release, the Commission previously recognized, as 

bona fide hedges under § 1.47, certain risk-management positions in physical commodity 

futures and/or options on futures contracts thereon held outside of the spot month that 

were used to offset the risk of commodity index swaps and other related exposure, but 

that did not represent substitutes for transactions or positions to be taken in a physical 

marketing channel. However, as noted earlier in this release, the Commission interprets 

Dodd-Frank Act amendments to the CEA as eliminating the Commission’s authority to 

grant such relief unless the position satisfies the pass-through provision in CEA section 

 

“Transition period swap” would mean a swap entered into during the period commencing after the 

enactment of the Dodd-Frank Act of 2010 (July 21, 2010), and ending 60 days after the publication in the 

Federal Register of final amendments to this part implementing section 737 of the Dodd-Frank Act of 2010.
168

4a(c)(2)(B).

287 Accordingly, to ensure consistency with the Dodd-Frank Act, the 

Commission will not recognize further risk management positions as bona fide hedges, 

unless the position otherwise satisfies the requirements of the pass-through provisions.

288 

In addition, the Commission proposes in § 150.3(c) that such previously-granted 

exemptions shall not apply after the effective date of a final federal position limits 

rulemaking implementing the Dodd-Frank Act. Proposed § 150.3(c) uses the phrase 

“positions in financial instruments” to refer to such commodity index swaps and related 

exposure and would have the effect of revoking the ability to use previously-granted risk

management exemptions once the limits proposed in § 150.2 go into effect. 

h. Recordkeeping 

Proposed § 150.3(d) establishes recordkeeping requirements for persons who 

claim any exemptions or relief under proposed § 150.3. Proposed § 150.3(d) should help 

to ensure that any person who claims any exemption permitted under proposed § 150.3 

can demonstrate compliance with the applicable requirements. Under proposed § 

150.3(d)(1), any persons claiming an exemption would be required to keep and maintain 

complete books and records concerning all details of their related cash, forward, futures, 

options on futures, and swap positions and transactions, including anticipated 

requirements, production and royalties, contracts for services, cash commodity products 

and by-products, cross-commodity hedges, and records of bona fide hedging swap 

counterparties. 

 287 See supra Section II.A.1.c.ii.(1). (discussion of the temporary substitute test and risk-management 

exemptions).

288 See supra Section II.A.1.c.vi. (discussion of proposed pass-through language).
169

Proposed § 150.3(d)(2) addresses recordkeeping requirements related to the passthrough swap provision in the proposed definition of bona fide hedging transaction or 

position in proposed § 150.1.289 Under proposed § 150.3(d)(2), a pass-through swap 

counterparty, as contemplated by proposed § 150.1, that relies on a representation 

received from a bona fide hedging swap counterparty that a swap qualifies in good faith 

as a bona fide hedging position or transaction under proposed § 150.1, would be required 

to: (i) maintain any written representation for at least two years following the expiration 

of the swap; and (ii) furnish the representation to the Commission upon request.

i. Call for Information

The Commission proposes to move existing § 150.3(b), which currently allows 

the Commission or certain Commission staff to make special calls to demand certain 

information regarding positions or trading, to proposed § 150.3(e), with some technical 

modifications. Together with the recordkeeping provision of proposed § 150.3(d),

proposed § 150.3(e) should enable the Commission to monitor the use of exemptions 

from speculative position limits and help to ensure that any person who claims any 

exemption permitted by proposed § 150.3 can demonstrate compliance with the 

applicable requirements.

j. Aggregation of Accounts

Proposed § 150.3(f) would clarify that entities required to aggregate under § 150.4 

would be considered the same person for purposes of determining whether they are 

eligible for a bona fide hedge recognition under § 150.3(a)(1).

k. Delegation of Authority

 289 See supra Section II.A.1.c.vi. (discussion of proposed pass-through language).
170

Proposed § 150.3(g) would delegate authority to the Director of the Division of 

Market Oversight to: grant financial distress exemptions pursuant to proposed § 

150.3(a)(3); request additional information with respect to an exemption request pursuant 

to proposed § 150.3(b)(2); determine, in consultation with the exchange and applicant, a 

commercially reasonable amount of time required for a person to bring its position within 

the federal position limits pursuant to proposed § 150.3(b)(3)(ii)(B); make a 

determination whether to recognize a position as a bona fide hedging transaction or to 

grant a spread exemption pursuant to proposed § 150.3(b)(4); and to request that a person 

submit updated materials or renew their request pursuant to proposed § 150.3(b)(2) or 

(5). This proposed delegation would enable the Division of Market Oversight to act 

quickly in the event of financial distress and in the other circumstances described above. 

l. Request for Comment

The Commission requests comment on all aspects of proposed § 150.3. In 

addition, the Commission understands that there may be certain not-for-profit electric and 

natural gas utilities that have certain public service missions and that are prohibited, by 

their governing body, risk management policies, or otherwise, from speculating, and that 

would request relief from federal position limits once federal limits on swaps are 

implemented. The Commission requests comment on all aspects of the concept of an 

exemption from part 150 of the Commission’s regulations for certain not-for-profit 

electric and natural gas utility entities that have unique public service missions to provide 

reliable, affordable energy services to residential, commercial, and industrial customers, 

and that are prohibited from speculating. In addition, the Commission requests comment 
171

on whether the definition of “economically equivalent swap” would cover the types of 

hedging activities such utilities engage in with respect to their OTC swap activity.

The Commission also invites comments on the following:

(29) What are the overarching issues or concerns the Commission should 

consider regarding a potential exemption from position limits for such notfor-profit electric and natural gas utilities?

(30) Are there certain provisions in part 150 of the Commission’s regulations 

that should apply to such not-for-profit electric and natural gas utilities 

even if the Commission were to grant such entities an exemption with 

respect to federal position limits?

(31) Are there other types of entities, similar to the not-for-profit electric and 

natural gas utilities described above, for which the Commission should 

also consider granting such exemptive relief by rule, and why?

(32) What types of conditions, restrictions, or criteria should the Commission 

consider applying with respect to such an exemption?

(33) Should higher position limits in cash-settled natural gas futures be 

conditioned on the closing of any positions in the physically delivered 

natural gas contract? Are there characteristics of the natural gas futures 

markets that weigh in favor of or against the higher conditional limits?

D. § 150.5—Exchange-Set Position Limits and Exemptions Therefrom

1. Background

For the avoidance of confusion, the discussion of § 150.5 that follows addresses 

exchange-set limits and exemptions therefrom, not federal limits. For a discussion of the
172

proposed processes by which an exemption may be recognized for purposes of federal 

limits, please see the discussion of proposed § 150.3 above and § 150.9 below.

Under DCM Core Principle 5, DCMs shall adopt for each contract, as is necessary 

and appropriate, position limitations or position accountability for speculators, and, for 

any contract subject to a federal position limit, DCMs must establish exchange-set limits 

for that contract no higher than the federal limit level.290 Similarly, under SEF Core 

Principle 6, SEFs that are trading facilities shall adopt for each contract, as is necessary 

and appropriate, position limitations or position accountability for speculators, and, for 

any contract subject to a federal position limit, SEFs that are trading facilities must 

establish exchange-set limits for that contract no higher than the federal limit, and must 

monitor positions established on or through the SEF for compliance with the limit set by 

the Commission and the limit, if any, set by the SEF.291 Beyond these and other statutory 

and Commission requirements, unless otherwise determined by the Commission, DCM 

and SEF Core Principle 1 afford DCMs and SEFs “reasonable discretion” in establishing 

the manner in which they comply with the core principles.292

The current regulatory provisions governing exchange-set position limits and 

exemptions therefrom appear in § 150.5.

293 To align § 150.5 with Dodd-Frank statutory 

changes294 and with other changes proposed herein,295 the Commission proposes a new 

version of § 150.5. This new proposed § 150.5 would generally afford exchanges the 

 290 See 7 U.S.C. 7(d)(5).

291 See 7 U.S.C. 7b-3(f)(6). 292 See 7 U.S.C. 7(d)(1) and 7 U.S.C. 7b-3(f)(1).

293 17 CFR 150.5. 

294 While existing § 150.5 on its face only applies to contracts that are not subject to federal limits, DCM 

Core Principle 5, as amended by Dodd-Frank, and SEF Core Principle 6, establish requirements both for 

contracts that are, and are not, subject to federal limits. 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b-3(f)(6). 295 Significant changes proposed herein include the process set forth in proposed § 150.9 and revisions to 

the bona fide hedging definition proposed in § 150.1.
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discretion to decide for themselves how best to set limit levels and grant exemptions from 

such limits in a manner that best reflects their specific markets.

2. Implementation of Exchange-Set Limits on Swaps

With respect to the DCM Core Principle 5 and SEF Core Principle 6 requirements 

addressing exchange-set limits on swaps, the Commission is preliminarily determining 

that it is reasonable to delay implementation because requiring compliance would be 

impracticable, and in some cases impossible, at this time.296

The Commission has previously explained why it has proposed to temporarily 

delay imposition of exchange-set position limits on swaps.297 The decision to delay

imposing exchange-set position limits on swaps is based largely on the lack of exchange 

access to sufficient data regarding individual market participants’ open swap positions, 

which means that, without action to provide further access to swap data to exchanges, the 

exchanges cannot effectively monitor swap position limits.

The Commission preliminarily believes that delayed implementation of exchangeset speculative position limits on swaps at this time is not inconsistent with the statutory 

objectives outlined in section 4a(a)(3) of the CEA: to diminish excessive speculation, to 

deter market manipulation, to ensure sufficient liquidity for bona fide hedgers, and to 

ensure that the price discovery function of the underlying market it not disrupted.298

Accordingly, while proposed § 150.5 will apply to DCMs and SEFs, the 

requirements associated with swaps would be enforced at a later time. In other words, 

 296 The Commission has observed in prior releases that courts have upheld relieving regulated entities of 

their statutory obligations where compliance is impossible or impracticable. 2016 Supplemental Proposal, 

81 FR at 38462.

297 2016 Supplemental Proposal, 81 FR at 38459-62; 2016 Reproposal, 81 FR at 96784-86.

298 7 U.S.C. 6a(a)(3).
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exchanges must comply with proposed § 150.5 only with respect to futures and options 

on futures traded on DCMs, and with respect to swaps at a later time as determined by the 

Commission.

3. Existing § 150.5

As noted above, existing § 150.5 pre-dates the Dodd-Frank Act and addresses the 

establishment of DCM-set position limits for all contracts not subject to federal limits 

under existing § 150.2 (aside from certain major foreign currencies).299 Existing § 

150.5(a) authorizes DCMs to set different limits for different contracts and contract 

months, and permits DCMs to grant exemptions from DCM-set limits for spreads, 

straddles, or arbitrage trades.

Existing § 150.5(b) provides a limited set of methodologies for DCMs to use in 

establishing initial limit levels, including separate maximum limit levels for spot month 

limits in physical-delivery contracts, spot month limits in cash-settled contracts, non-spot 

month limits for tangible commodities other than energy, and non-spot month limits for 

energy products and non-tangible commodities, including financials.300 Existing § 

150.5(c) provides that DCMs may adjust their speculative initial levels as follows: (i) no 

greater than 25 percent of deliverable supply for adjusted spot month levels in physicallydelivered contracts; (ii) “no greater than necessary to minimize the potential for

manipulation or distortion of the contract’s or the underlying commodity’s price” for 

 299 Existing § 150.5(a) states that the requirement to set position limits shall not apply to futures or option 

contract markets on major foreign currencies, for which there is no legal impediment to delivery and for 

which there exists a highly liquid cash market. 17 CFR 150.5(a). 300 See 17 CFR 150.5(b)(1)–(3) (no greater than one-quarter of the estimated spot month deliverable supply 

for physical delivery contracts during the spot month; no greater than necessary to minimize the potential 

for manipulation or distortion of the contract’s or the underlying commodity’s price for cash-settled 

contracts during the spot month; no greater than 1,000 contracts for tangible commodities other than energy 

outside the spot month; and no greater than 5,000 contracts for energy products and nontangible 

commodities, including financials outside the spot month).
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adjusted spot month levels in cash-settled contracts; and (iii) for adjusted non-spot month 

limit levels, either no greater than 10 percent of open interest, up to 25,000 contracts,

with a marginal increase of 2.5 percent thereafter, or based on position sizes customarily 

held by speculative traders on the DCM.

Existing § 150.5(d) addresses bona fide hedging exemptions from DCM-set 

limits, including an exemption application process, providing that exchange-set 

speculative position limits shall not apply to bona fide hedging positions as defined by a 

DCM in accordance with the definition of bona fide hedging transactions and positions 

for excluded commodities in § 1.3. Existing § 150.5(d) also addresses factors for 

consideration by DCMs in recognizing bona fide hedging exemptions (or position 

accountability), including whether such positions “are not in accord with sound 

commercial practices or exceed an amount which may be established and liquidated in an 

orderly fashion.”301 

Existing § 150.5(e) permits DCMs in certain circumstances to submit for 

Commission approval, as a substitute for the position limits required under § 150.5(a), 

(b), and (c), a DCM rule requiring traders “to be accountable for large positions,”

meaning that under certain circumstances, traders must provide information about their 

position upon request to the exchange, and/or consent to halt increasing further a position 

if so ordered by the exchange.302 Among other things, this provision includes open

interest and volume-based parameters for determining when DCMs may do so.

303

 301 See 17 CFR 150.5(d)(1). 302 17 CFR 150.5(e). 303 17 CFR 150.5(e)(1)–(4).
176

Existing § 150.5(f) provides that DCM speculative position limits adopted 

pursuant to § 150.5 shall not apply to certain positions acquired in good faith prior to the 

effective date of such limits or to a person that is registered as an FCM or as a floor 

broker under authority of the CEA except to the extent that transactions made by such 

person are made on behalf of or for the account or benefit of such person.

304 This 

provision also provides that in addition to the express exemptions specified in § 150.5, a 

DCM may propose such other exemptions from the requirements of § 150.5 as are 

consistent with the purposes of § 150.5, and provides procedures for doing so.

305 Finally, 

existing § 150.5(g) addresses aggregation of positions for which a person directly or 

indirectly controls trading.

4. Proposed § 150.5

Pursuant to CEA sections 5(d)(1) and 5h(f)(1), the Commission proposes a new 

version of § 150.5.306 Proposed § 150.5 is intended to provide the ability for DCMs and 

SEFs to set limit levels and grant exemptions in a manner that best accommodates 

activity particular to their markets, while promoting compliance with DCM Core 

Principle 5 and SEF Core Principle 6 and ensuring consistency with other changes 

proposed herein, including the process for exchanges to administer applications for nonenumerated bona fide hedge exemptions for purposes of federal limits proposed in § 

150.9.307

 304 17 CFR 150.5(f). 305 Id. 306 As mentioned above, while proposed § 150.5 will include references to swaps and SEFs, the proposed 

rule would initially only apply to DCMs, as requirements relating to exchange-set limits on swaps would be 

phased in at a later time. 

307 To avoid confusion created by the parallel federal and exchange-set position limit frameworks, the 

Commission clarifies that proposed § 150.5 deals solely with exchange-set position limits and exemptions 
177

Proposed § 150.5 contains two main sub-sections, with each sub-section 

addressing a different category of contract: (i) proposed § 150.5(a) would include rules 

governing exchange-set limits for contracts subject to federal limits; and (ii) proposed § 

150.5(b) would include rules governing exchange-set limits for physical commodity 

contracts that are not subject to federal limits. 

As described in further detail below, the proposed provisions addressing

exchange-set limits on contracts that are not subject to federal limits reflect a principlesbased approach and include acceptable practices that provide for non-exclusive methods 

of compliance with the principles-based regulations. The Commission would therefore 

provide exchanges with the ability to set limits and grant exemptions in the manner that 

most suits their unique markets. Each proposed provision of § 150.5 is described in 

detail below. 

a. Proposed § 150.5(a)—Requirements for Exchange-Set Limits on Commodity 

Derivative Contracts Subject to Federal Limits Set Forth in § 150.2

Proposed § 150.5(a) would apply to all contracts subject to the federal limits 

proposed in § 150.2 and, among other things, is intended to help ensure that exchange-set 

limits do not undermine the federal limits framework. Under proposed § 150.5(a)(1), for 

any contract subject to a federal limit, DCMs and, ultimately, SEFs, would be required to 

establish exchange-set limits for such contracts. Consistent with DCM Core Principle 5

and SEF Core Principle 6, the exchange-set limit levels on such contracts, whether cashsettled or physically-settled, and whether during or outside the spot month, would have to 

be no higher than the level specified for the applicable referenced contract in proposed § 

 

therefrom, whereas proposed § 150.9 deals solely with federal limits and recognition of exchange-granted 

exemptions and bona fide hedging determinations for purposes of federal limits. 
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150.2. Exchanges would be free to set position limits that are more stringent than the 

federal limit for a particular contract, and would also be permitted to adopt position 

accountability at a level lower than the federal limit, in addition to an exchange-set 

position limit that is equal to or less than the federal limit. 

Proposed § 150.5(a)(2) would permit exchanges to grant exemptions from

exchange-set limits established under proposed § 150.5(a)(1) as follows:

First, if such exemptions from exchange-set limits conform to the types of

exemptions that may be granted for purposes of federal limits under proposed §§

150.3(a)(1)(i), 150.3(a)(2)(i), and 150.3(a)(4)-(5) (enumerated bona fide hedge 

recognitions and spread exemptions that are listed in the spread transaction definition in 

proposed § 150.1, as well as exempt conditional spot month positions in natural gas and 

pre-enactment and transition period swaps), then the level of the exemption may exceed 

the applicable federal position limit under proposed § 150.2. Since the proposed 

exemptions listed above are self-effectuating for purposes of federal position limit levels, 

exchanges may grant such exemptions pursuant to proposed § 150.5(a)(2)(i).

Second, if such exemptions from exchange-set limits conform to the exemptions 

from federal limits that may be granted under proposed §§ 150.3(a)(1)(ii) and 

150.3(a)(2)(ii) (respectively, non-enumerated bona fide hedges and spread transactions 

that are not currently listed in the spread transaction definition in proposed § 150.1), then 

the level of the exemption may exceed the applicable federal position limit under 

proposed § 150.2, provided that the exemption for purposes of federal limits is first 

approved in accordance with proposed § 150.3(b) or § 150.9, as applicable.
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Third, if such exemptions conform to the exemptions from federal limits that may 

be granted under proposed § 150.3(a)(3) (financial distress positions), then the level of 

the exemption may exceed the applicable federal position limit under proposed § 150.2, 

provided that the Commission has first issued a letter approving such exemption pursuant 

to a request submitted under § 140.99.308

Finally, for purposes of exchange-set limits only, exchanges may grant exemption 

types that are not listed in § 150.3(a). However, in such cases, the exemption level would 

have to be capped at the level of the applicable federal position limit, so as not to 

undermine the federal limit framework, unless the Commission has first approved such 

exemption for purposes of federal limits pursuant to § 150.3(b).

Exchanges that wish to offer exemptions from their own limits other than the 

types listed in proposed § 150.3(a) could also submit rules to the Commission allowing 

for such exemptions pursuant to part 40. The Commission would carefully review any 

such exemption types for compliance with applicable standards, including any statutory 

requirements309 and Commission-set standards.310

Under proposed § 150.5(a)(2)(ii)(A), exchanges that wish to grant exemptions 

from their own limits would have to require traders to file an application. Aside from the 

requirements discussed below, including the requirement that the exchange collect cash-

 308 Under the proposal, requests for exemptions for financial distress positions would be submitted directly 

to the Commission (or delegated staff) for consideration, and any approval of such exemption would be 

issued in the form of an exemption letter from the Commission (or delegated staff) pursuant to § 140.99.

309 For example, an exchange would not be permitted to adopt rules allowing for risk management 

exemptions in physical commodities because the Commission interprets Dodd-Frank amendments to CEA 

section 4a(c)(2) as prohibiting risk management exemptions in such commodities. See supra Section 

II.A.1.c.ii.(1). (discussion of the temporary substitute test and risk-management exemptions). 310 For example, as discussed below, proposed § 150.5(a)(2)(ii)(C) would require that exchanges take into 

account whether the requested exemption would result in positions that are not in accord with sound 

commercial practices in the relevant commodity derivative market and/or would not exceed an amount that 

may be established and liquidated in an orderly fashion in that market.
180

market and swaps market information from the applicant, exchanges would have 

flexibility to establish the application process as they see fit, including adopting protocols

to reduce burdens by leveraging existing processes with which their participants are 

already familiar. For all exemption types, exchanges would have to generally require that 

such applications be filed in advance of the date such position would be in excess of the 

limits, but exchanges would be given the discretion to adopt rules allowing traders to file 

applications within five business days after a trader established such position. Exchanges

wishing to grant such retroactive exemptions would have to require market participants to 

demonstrate circumstances warranting a sudden and unforeseen hedging need. 

Proposed § 150.5(a)(2)(ii)(B) would provide that exchanges must require that a

trader reapply for the exemption granted under proposed § 150.5(a)(2) at least annually

so that the exchange and the Commission can closely monitor exemptions for contracts 

subject to federal speculative position limits, and to help ensure that the exchange and the 

Commission remain aware of the trader’s activities. Proposed § 150.5(a)(2)(ii)(C) would 

authorize exchanges to deny, limit, condition, or revoke any exemption request in 

accordance with exchange rules,

311 and would set forth a principles-based standard for 

the granting of exemptions that do not conform to the type that the Commission may 

grant under proposed § 150.3(a). Specifically, exchanges would be required to take into 

account: (i) whether the requested exemption from its limits would result in a position 

that is “not in accord with sound commercial practices” in the market in which the DCM 

 311 Currently, DCMs review and set exemption levels annually based on the facts and circumstances of a 

particular exemption and the market conditions at that time. As such, a DCM may decide to deny, limit, 

condition, or revoke a particular exemption, typically, if the DCM determines that certain conditions have 

changed and warrant such action. This may happen if, for example, there are droughts, floods, embargoes, 

trade disputes, or other events that cause shocks to the supply or demand of a particular commodity and 

thus impact the DCM’s disposition of a particular exemption.
181

is granting the exemption; and (ii) whether the requested exemption would result in a 

position that would “exceed an amount that may be established or liquidated in an orderly 

fashion in that market.” Exchanges’ evaluation of exemption requests against these

standards would be a facts and circumstances determination.

Activity may reflect “sound commercial practice” for a particular market or 

market participant but not for another. Similarly, activity may reflect “sound commercial 

practice” outside the spot month but not in the spot month. Further, activity with 

manipulative intent or effect, or that has the potential or effect of causing price distortion 

or disruption, would be inconsistent with “sound commercial practice,” even if common 

practice among market participants. While an exemption granted to an individual market 

participant may reflect “sound commercial practice” and may not “exceed an amount that 

may be established or liquidated in an orderly fashion in that market,” the Commission 

expects exchanges to also evaluate whether the granting of a particular exemption type to 

multiple participants could have a collective impact on the market in a manner 

inconsistent with “sound commercial practice” or in a manner that could result in a 

position that would “exceed an amount that may be established or liquidated in an orderly 

fashion in that market.”

The Commission understands that the above-described parameters for exemptions 

from exchange-set limits are generally consistent with current industry practice among 

DCMs. Bearing in mind that proposed § 150.5(a) would apply to contracts subject to 

federal limits, the Commission proposes codifying such parameters, as they would 

establish important, minimum standards needed for exchanges to administer, and the 

Commission to oversee, a robust program for granting exemptions from exchange-set 
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limits in a manner that does not undermine the federal limits framework. Proposed § 

150.5(a) also would afford exchanges the ability to generally oversee their programs for 

granting exemptions from exchange limits as they see fit, including to establish different 

application processes and requirements to accommodate the unique characteristics of

different contracts.

If adopted, changes proposed herein may result in certain “pre-existing positions” 

being subject to speculative position limits even though the position predated the 

adoption of such limits.312 So as not to undermine the federal position limits framework 

during the spot month, and to minimize disruption outside the spot month, the 

Commission proposes § 150.5(a)(3), which would require that during the spot month, for 

contracts subject to federal limits, exchanges must impose limits no larger than federal 

levels on “pre-existing positions,” other than for pre-enactment swaps and transition 

period swaps.

However, outside the spot month, exchanges would not be required to impose 

limits on such positions, provided the position is acquired in good faith consistent with 

the “pre-existing position” definition of proposed § 150.1, and provided further that if the 

person’s position is increased after the effective date of the limit, such pre-existing 

position, other than pre-enactment swaps and transition period swaps, along with the 

position increased after the effective date, would be attributed to the person. This 

provision is consistent with the proposed treatment of pre-existing positions for purposes 

of federal limits set forth in proposed § 150.2(g) and is intended to prevent spot month 

limits from being rendered ineffective.

 
183

Not subjecting pre-existing positions to spot month limits could result in a large, 

pre-existing position either intentionally or unintentionally causing a disruption as it is 

rolled into the spot month, and the Commission is particularly concerned about protecting 

the spot month in physical-delivery futures from corners and squeezes. Outside of the 

spot month, however, concerns over corners and squeezes may be less acute.

313

Finally, the Commission seeks a balance between having sufficient information to 

oversee the exchange-granted exemptions, and not burdening exchanges with excessive 

periodic reporting requirements. The Commission thus proposes under § 150.5(a)(4) to 

require one monthly report by each exchange. Certain exchanges already voluntarily file 

these types of monthly reports with the Commission, and proposed § 150.5(a)(4) would 

standardize such reports for all exchanges that process applications for bona fide hedges, 

spread exemptions, and other exemptions for contracts that are subject to federal limits. 

The proposed report would provide information regarding the disposition of any 

application to recognize a position as a bona fide hedge (both enumerated and nonenumerated) or to grant a spread or other exemption, including any renewal, revocation 

of, or modification to the terms and conditions of, a prior recognition or exemption.314

As specified under proposed § 150.5(a)(4), the report would provide certain 

details regarding the bona fide hedging position or spread exemption, including: the 

effective date and expiration date of any recognition or exemption; any unique identifier 

assigned to track the application or position; identifying information about the applicant; 

 

314 In the monthly report, exchanges may elect to list new recognitions or exemptions, and modifications to 

or revocations of prior recognitions and exemptions each month; alternatively, exchanges may submit 

cumulative monthly reports listing all active recognitions and exemptions (i.e., including exemptions that 

are not new or have not changed).
184

the derivative contract or positions to which the application pertains; the maximum size 

of the commodity derivative position that is recognized or exempted by the exchange 

(including any “walk-down” requirements);315 any size limitations the exchange sets for 

the position; and a brief narrative summarizing the applicant’s relevant cash market 

activity.

With respect to any unique identifiers to be included in the proposed monthly 

report, the exchange’s assignment of a unique identifier would assist the Commission’s 

tracking process. The unique identifier could apply to each of the bona fide hedge or 

spread exemption applications that the exchange receives, and, separately, each type of 

commodity derivative position that the exchange wishes to recognize as a bona fide 

hedge or spread exemption. Accordingly, the Commission suggests that, as a “best 

practice,” the exchange’s procedures for processing bona fide hedging position and 

spread exemption applications contemplate the assignment of such unique identifiers.

The proposed report would also be required to specify the maximum size and/or 

size limitations by contract month and/or type of limit (e.g., spot month, single month, or 

all-months-combined), as applicable.

The proposed monthly report would be a critical element of the Commission’s 

surveillance program by facilitating its ability to track bona fide hedging positions and 

spread exemptions approved by exchanges. The proposed monthly report would also 

keep the Commission informed as to the manner in which an exchange is administering 

 315 An exchange could determine to recognize as a bona fide hedge or spread exemption all, or a portion, of 

the commodity derivative position for which an application has been submitted, provided that such 

determination is made in accordance with the requirements of proposed § 150.5 and is consistent with the 

Act and the Commission’s regulations. In addition, an exchange could require that a bona fide hedging 

positon or spread position be subject to “walk-down” provisions that require the trader to scale down its 

positions in the spot month in order to reduce market congestion as needed based on the facts and 

circumstances. 
185

its application procedures, the exchange’s rationale for permitting large positions, and 

relevant cash market activity. The Commission expects that exchanges would be able to 

leverage their current exemption processes and recordkeeping procedures to generate 

such reports.

In certain instances, information included in the proposed monthly report may 

prompt the Commission to request records required to be maintained by an exchange. 

For example, the Commission proposes that, for each derivative position that an 

exchange wishes to recognize as a bona fide hedge, or any revocation or modification of 

such recognition or exemption, the report would include a concise summary of the 

applicant’s activity in the cash markets and swaps markets for the commodity underlying 

the position. The Commission expects that this summary would focus on the facts and 

circumstances upon which an exchange based its determination to recognize a bona fide 

hedge, to grant a spread exemption, or to revoke or modify such recognition or 

exemption. In light of the information provided in the summary, or any other information 

included in the proposed monthly report regarding the position, the Commission may 

request the exchange’s complete record of the application. The Commission expects that 

it would only need to request such complete records in the event that it noticed an issue 

that could cause market disruptions.

Proposed § 150.5(a)(4) would require an exchange, unless instructed otherwise by 

the Commission, to submit such monthly reports according to the form and manner 

requirements the Commission specifies. In order to facilitate the processing of such 

reports, and the analysis of the information contained therein, the Commission would 

establish reporting and transmission standards. The proposal would also require that such 
186

reports 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 its website.316

Request for Comment

The Commission requests comment on all aspects of proposed § 150.5(a). The 

Commission also invites comments on the following:

(34) The Commission has proposed that exchanges submit monthly reports 

under § 150.5(a)(4). Do exchanges prefer that the Commission specify a 

particular day each month as a deadline for submitting such monthly 

reports or do exchanges prefer to have discretion in determining which 

day to submit such reports?

b. Proposed § 150.5(b)—Requirements and Acceptable Practices for Exchange-Set 

Limits on Commodity Derivative Contracts in a Physical Commodity That Are 

Not Subject to the Limits Set Forth in § 150.2

As described elsewhere in this release, the Commission is proposing federal 

speculative limits on 25 core referenced futures contracts and their respective referenced 

contracts.317 DCMs, and, ultimately, SEFs, listing physical commodity contracts for 

which federal limits do not apply would have to comply with proposed § 150.5(b), which 

includes a combination of rules and references to acceptable practices.

Under proposed § 150.5(b), for physical commodity derivatives that are not 

subject to federal limits, whether cash-settled or physically-settled, exchanges would be 

subject to flexible standards during the product’s spot month and non-spot month. 

 316 The Commission would provide such form and manner instructions on the Forms and Submissions page 

at www.cftc.gov. Such instructions would likely be published in the form of a technical guidebook. 317 See infra Section III.F.
187

During the spot month, under proposed § 150.5(b)(1)(i), exchanges would be required to 

establish position limits, and such limits would have to be set at a level that is no greater 

than 25 percent of deliverable supply. As described in detail in connection with the 

proposed federal spot month limits described above, it would be difficult, in the absence 

of other factors, for a participant to corner or squeeze a market if the participant holds 

less than or equal to 25 percent of deliverable supply, and the Commission has long used 

deliverable supply as the basis for spot month position limits due to concerns regarding 

corners, squeezes, and other settlement-period manipulative activity.318

The Commission recognizes, however, that there may be circumstances where an 

exchange may not wish to use the 25 percent formula, including, for example, if the 

contract is cash-settled, does not have a measurable deliverable supply, or if the exchange

can demonstrate that a different parameter is better suited for a particular contract or 

market.319 Accordingly, the proposal would afford exchanges the ability to submit to the 

Commission alternative potential methodologies for calculating spot month limit levels 

required by proposed § 150.5(b)(1), provided that the limits are set at a level that is

“necessary and appropriate to reduce the potential threat of market manipulation or price 

distortion of the contract’s or the underlying commodity’s price or index.” This standard 

has appeared in existing § 150.5 since its adoption in connection with spot month limits 

on cash-settled contracts. As noted above, existing § 150.5 includes separate parameters 

for spot month limits in physical-delivery contracts and for cash-settled contracts, but 

does not include flexibility for exchanges to consider alternative parameters. In an effort 

 318 See supra Section II.B.2. (discussion of proposed § 150.2).

319 Guidance for calculating deliverable supply can be found in Appendix C to part 38. 17 CFR part 38, 

Appendix C.
188

to both simplify the regulation and provide the ability for exchanges to consider multiple 

parameters that may be better suited for certain products, the Commission proposes the 

above standard as a principles-based requirement for both cash-settled and physicallysettled contracts subject to proposed § 150.5(b). 

Outside of the spot month, where, historically, attempts at certain types of market 

manipulation are generally less of a concern, proposed § 150.5(b)(2)(i) would allow 

exchanges to choose between position limits or position accountability for physical 

commodity contracts that are not subject to federal limits. While exchanges would be 

provided the ability to decide whether to use limit levels or accountability levels for any 

such contract, under either approach, the exchange would have to set a level that is 

“necessary and appropriate to reduce the potential threat of market manipulation or price 

distortion of the contract’s or the underlying commodity’s price or index.” 

To help exchanges efficiently demonstrate compliance with this standard for 

physical commodity contracts outside of the spot month, the Commission proposes 

separate acceptable practices for exchanges that wish to adopt non-spot month position 

limits and exchanges that wish to adopt non-spot month accountability.320 For exchanges

that choose to adopt non-spot month position limits, rather than position accountability, 

proposed paragraph (a)(1) to Appendix F of part 150 would set forth non-exclusive 

acceptable practices. Under that provision, exchanges would be deemed in compliance 

with proposed § 150.5(b)(2)(i) if they set non-spot limit levels for each contract subject to 

 320 The acceptable practices proposed in Appendix F to part 150 herein reflect non-exclusive methods of 

compliance. Accordingly, the language of this proposed acceptable practice, along with the other 

acceptable practices proposed herein, uses the word “shall” not to indicate that the acceptable practice is a 

required method of compliance, but rather to indicate that in order to satisfy the acceptable practice, a 

market participant must (i.e., shall) establish compliance with that particular acceptable practice.
189

§ 150.5(b) at a level no greater than: (1) the average of historical position sizes held by 

speculative traders in the contract as a percentage of the contract’s open interest;321 (2) 

the spot month limit level for the contract; (3) 5,000 contracts (scaled up proportionally 

to the ratio of the notional quantity per contract to the typical cash market transaction if 

the notional quantity per contract is smaller than the typical cash market transaction, or 

scaled down proportionally if the notional quantity per contract is larger than the typical 

cash market transaction);322 or (4) 10 percent of open interest in that contract for the most 

recent calendar year up to 50,000 contracts, with a marginal increase of 2.5 percent of

open interest thereafter.323 When evaluating average position sizes held by speculative 

traders, the Commission expects exchanges: (i) to be cognizant of speculative positions 

that are extraordinarily large relative to other speculative positions, and (ii) to not 

consider any such outliers in their calculations. 

 321 For example, if speculative traders in a particular contract typically make up 12 percent of open interest 

in that contract, the exchange could set limit levels no greater than 12 percent of open interest. 

322 For exchanges that choose to adopt a non-spot month limit level of 5,000 contracts, this level assumes 

that the notional quantity per contract is set at a level that reflects the size of a typical cash market 

transaction in the underlying commodity. However, if the notional quantity of the contract is larger/smaller 

than the typical cash market transaction in the underlying commodity, then the DCM must reduce/increase 

the 5,000 contract non-spot month limit until it is proportional to the notional quantity of the contract 

relative to the typical cash market transaction. These required adjustments to the 5,000 contract metric are 

intended to avoid a circumstance where an exchange could allow excessive speculation by setting 

excessively large notional quantities relative to typical cash-market transaction sizes. For example, if the 

notional quantity per contract is set at 30,000 units, and the typical observed cash market transaction is 

2,500 units, the notional quantity per contract would be 12 times larger than the typical cash market 

transaction. In that case, the non-spot month limit would need to be 12 times smaller than 5,000 (i.e., at

417 contracts.). Similarly, if the notional quantity per contract is 1,000 contracts, and the typical observed 

cash market transaction is 2,500 units, the notional quantity per contract would be 2.5 times smaller than 

the typical cash market transaction. In that case, the non-spot month limit would need to be 2.5 times 

larger than 5,000, and would need to be set at 12,500 contracts. 323 In connection with the proposed Appendix F to part 150 acceptable practices, open interest should be 

calculated by averaging the month-end open positions in a futures contract and its related option contract, 

on a delta-adjusted basis, for all months listed during the most recent calendar year.
190

These proposed parameters have largely appeared in existing § 150.5 for many 

years in connection with non-spot month limits, either for initial or subsequent levels.324 

The Commission is of the view that these parameters would be useful, flexible standards 

to carry forward as acceptable practices. For example, the Commission expects that the 

5,000-contract acceptable practice would be a useful benchmark for exchanges because it 

would allow them to establish limits and demonstrate compliance with Commission 

regulations in a relatively efficient manner, particularly for new contracts that have yet to 

establish open interest. Similarly, for purposes of exchange-set limits on physical 

commodity contracts that are not subject to federal limits, the Commission proposes to 

maintain the baseline 10, 2.5 percent formula as an acceptable practice. Because these 

parameters are simply acceptable practices, exchanges may, after evaluation, propose 

higher non-spot month limits or accountability levels.

Along those lines, the Commission recognizes that other parameters may be 

preferable and/or just as effective, and would be open to considering alternative 

parameters submitted pursuant to part 40 of the Commission’s regulations, provided, at a 

minimum, that the parameter complies with § 150.5(b)(2)(i). The Commission 

encourages exchanges to submit potential new parameters to Commission staff in draft 

form prior to submitting them under part 40. 

For exchanges that choose to adopt position accountability, rather than limits, 

outside of the spot month, proposed paragraph (a)(2) of Appendix F to part 150 would set 

forth a non-exclusive acceptable practice that would permit exchanges to comply with 

proposed § 150.5(b)(2)(i) by adopting rules establishing “position accountability” as 

 324 17 CFR 150.5(b) and (c). Proposed § 150.5(b) would address physical commodity contracts that are not 

subject to federal limits. 
191

defined in proposed § 150.1. “Position accountability” would mean rules, submitted to 

the Commission pursuant to part 40, that require traders to, upon request by the 

exchange, consent to: (i) provide information to the exchange about their position, 

including, but not limited to, information about the nature of the their positions, trading 

strategies, and hedging information; and (ii) halt further increases to their position or to 

reduce their position in an orderly manner.325

Proposed § 150.5(b)(3) addresses a circumstance where multiple exchanges list 

contracts that are substantially the same, including physically-settled contracts that have 

the same underlying commodity and delivery location, or cash-settled contracts that are 

directly or indirectly linked to a physically-settled contract. Under proposed § 

150.5(b)(3), exchanges listing contracts that are substantially the same in this manner 

must either adopt “comparable” limits for such contracts, or demonstrate to the 

Commission how the non-comparable levels comply with the standards set forth in 

proposed § 150.5(b)(1) and (2). Such a determination also must address how the levels 

are necessary and appropriate to reduce the potential threat of market manipulation or 

price distortion of the contract’s or the underlying commodity’s price or index. Proposed 

§ 150.5(b)(3) would apply equally to cash-settled and physically-settled contracts, and to 

limits during and outside of the spot month, as applicable.

326 Proposed § 150.5(b)(3) is 

intended to help ensure that position limits established on one exchange would not 

 325 While existing § 150.5(e) includes open-interest and volume-based limitations on the use of 

accountability, the Commission opts not to include such limitations in this proposal. Under the rules 

proposed herein, if an exchange submitted a part 40 filing seeking to adopt position accountability, the 

Commission would determine on a case-by-case basis whether such rules are consistent with the Act and 

the Commission’s regulations. The Commission does not want to use one-size-fits-all volume-based 

limitations for making such determinations. 326 For reasons discussed elsewhere in this release, this provision would not apply to natural gas contracts. 

See supra Section II.C.2.e. (discussion of proposed conditional spot month exemption in natural gas).
192

jeopardize market integrity or otherwise harm other markets. Further, proposed § 

150.5(b)(3) would be consistent with the Commission’s proposal to generally apply 

equivalent federal limits to linked contracts, including linked contracts listed on multiple 

exchanges.327

Finally, under proposed § 150.5(b)(4), exchanges would be permitted to grant 

exemptions from any limits established under proposed § 150.5(b). As noted, proposed § 

150.5(b) would apply to physical commodity contracts not subject to federal limits; thus, 

exchanges would be given flexibility to grant exemptions in such contracts, including 

exemptions for both intramarket and intermarket spread positions,328 as well as other 

exemption types not explicitly listed in proposed § 150.3.329 However, such exchanges

must require that traders apply for the exemption. In considering any such application, 

the exchanges would be required to take into account whether the exemption would result 

in a position that would not be in accord with “sound commercial practices” in the market 

for which the exchange is considering the application, and/or would “exceed an amount 

that may be established and liquidated in an orderly fashion in that market.” 

 327 See supra Section II.A.16. (discussion of the proposed referenced contract definition and linked 

contracts). 328 The Commission understands an intramarket spread position to be a long position in one or more 

commodity derivative contracts in a particular commodity, or its products or its by-products, and a short 

position in one or more commodity derivative contracts in the same, or similar, commodity, or its products 

or by-products, on the same DCM. The Commission understands an intermarket spread position to be a 

long (or short) position in one or more commodity derivative contracts in a particular commodity, or its 

products or its by-products, at a particular DCM and a short (or 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 DCM. For instance, the Commission would consider a spread between CBOT Wheat (W) 

futures and MGEX HRS Wheat (MWE) futures to be an intermarket spread based on the similarity of the 

commodities.

329 As noted above, proposed § 150.3 would allow for several exemption types, including: bona fide 

hedging positions; certain spreads; financial distress positions; and conditional spot month limit exemption 

positions in natural gas.
193

While exchanges would be subject to the requirements of § 150.5(a) and (b) 

described above, such proposed requirements are not intended to limit the discretion of 

exchanges to utilize other tools to protect their markets. Among other things, an 

exchange would have the discretion to: impose additional restrictions on a person with a 

long position in the spot month of a physical-delivery contract who stands for delivery, 

takes that delivery, then re-establishes a long position; establish limits on the amount of 

delivery instruments that a person may hold in a physical-delivery contract; and impose 

such other restrictions as it deems necessary to reduce the potential threat of market 

manipulation or congestion, to maintain orderly execution of transactions, or for such 

other purposes consistent with its responsibilities. 

c. Proposed § 150.5(c)—Requirements for Security Futures Products

As the Commission has previously noted, security futures products and security 

options may serve economically equivalent or similar functions to one another.

330 

Therefore, when the Commission originally adopted position limits regulations for 

security futures products in part 41, it set levels that were generally comparable to, 

although not identical with, the limits that applied to options on individual securities.331 

The Commission has pointed out that security futures products may be at a competitive 

disadvantage if position limits for security futures products vary too much from those of 

security options.332 As a result, the Commission in 2019 adopted amendments to the 

position limitations and accountability requirements for security futures products, noting 

 330 See Position Limits and Position Accountability for Security Futures Products, 83 FR at 36799, 36802 

(July 31, 2018). 331 Id. See also Listing Standards and Conditions for Trading Security Futures Products, 66 FR at 55078, 

55082 (Nov. 1, 2001) (explaining the Commission’s adoption of position limits for security futures 

products).

332 See 83 FR at 36799, 36802 (July 31, 2018).
194

that one goal was to provide a level regulatory playing field with security options.

333 

Proposed § 150.5(c), therefore, would include a cross-reference clarifying that for 

security futures products, position limitations and accountability requirements for 

exchanges are specified in § 41.25.334 This would allow the Commission to take into 

account the position limits regime that applies to security options when considering 

position limits regulations for security futures products. 

d. Proposed § 150.5(d)—Rules on Aggregation

As noted earlier in this release, the Commission adopted in 2016 final aggregation 

rules under § 150.4 that apply to all contracts subject to federal limits. The Commission 

recognizes that with respect to contracts not subject to federal limits, market participants 

may find it burdensome if different exchanges adopt different aggregation standards. 

Accordingly, under proposed § 150.5(d), all DCMs, and, ultimately, SEFs, that list any 

physical commodity derivatives, regardless of whether the contract is subject to federal 

limits, would be required to adopt aggregation rules for such contracts that conform to § 

150.4.335 Exchanges that list excluded commodities would be encouraged to also adopt 

aggregation rules that conform to § 150.4. Aggregation policies that otherwise vary from 

exchange to exchange would increase the administrative burden on a trader active on 

multiple exchanges, as well as increase the administrative burden on the Commission in 

monitoring and enforcing exchange-set position limits.

 333 See Position Limits and Position Accountability for Security Futures Products, 84 FR at 51005, 51009 

(Sept. 27, 2019). 334 See 17 CFR 41.25. Rule § 41.25 establishes conditions for the trading of security futures products. 335 Under § 150.4, unless an exemption applies, a person’s positions must be aggregated with positions for 

which the person controls trading or for which the person holds a 10 percent or greater ownership interest.

Commission Regulation § 150.4(b) sets forth several permissible exemptions from aggregation. See Final 

Aggregation Rulemaking, 81 FR at 91454. The Division of Market Oversight has issued time-limited noaction relief from some of the aggregation requirements contained in that rulemaking. See CFTC Letter 

No. 19-19 (July 31, 2019), available at https://www.cftc.gov/csl/19-19/download.
195

e. Proposed § 150.5(e)—Requirements for Submissions to the Commission

Proposed § 150.5(e) reflects that, consistent with the definition of “rule” in 

existing § 40.1, any exchange action establishing or modifying exchange-set position 

limits or exemptions therefrom, or position accountability, in any case pursuant to 

proposed § 150.5(a), (b), (c), or Appendix F to part 150, would qualify as a “rule” and 

must be submitted to the Commission as such pursuant to part 40 of the Commission’s 

regulations. Such rules would also include, among other things, parameters used for 

determining position limit levels, and policies and related processes setting forth 

parameters addressing, among other things, which types of exemptions are permitted, the 

parameters for the granting of such exemptions, and any exemption application 

requirements.

Proposed § 150.5(e) further provides that exchanges would be required to review 

regularly336 any position limit levels established under proposed § 150.5 to ensure the 

level continues to comply with the requirements of those sections. For example, in the 

case of § 150.5(b), exchanges would be expected to ensure the limits comply with the 

requirement that limits be set “at a level that is necessary and appropriate to reduce the 

potential threat of market manipulation or price distortion of the contract’s or the 

underlying commodity’s price or index.” Exchanges would also be required to update 

such levels as needed, including if the levels no longer comply with the proposed rules.

f. Delegation of Authority to the Director of the Division of Market Oversight

 336 An acceptable, regular review regime would consist of both a periodic review and an event-specific 

review (e.g., in the event of supply and demand shocks such as unanticipated shocks to supply and demand 

of the underlying commodity, geo-political shocks, and other events that may result in congestion and/or 

other disruptions). The Commission also expects that exchanges would re-evaluate such levels in the event 

of unanticipated shocks to the supply or demand of the underlying commodity. 
196

The Commission proposes to delegate its authority, pursuant to proposed § 

150.5(a)(4)(ii), to the Director of the Commission’s Division of Market Oversight, or 

such other employee(s) that the Director may designate from time to time, to provide 

instructions regarding the submission of information required to be reported by 

exchanges to the Commission on a monthly basis, and to determine the manner, format, 

coding structure, and electronic data transmission procedures for submitting such 

information.

g. Commission Enforcement of Exchange-Set Limits

As discussed throughout this release, the framework for exchange-set limits 

operates in conjunction with the federal position limits framework. The Futures Trading 

Act of 1982 gave the Commission, under CEA section 4a(5) (since re-designated as 

section 4a(e)), the authority to directly enforce violations of exchange-set, Commissionapproved speculative position limits in addition to position limits established directly by 

the Commission.337 Since 2008, it has also been a violation of the Act for any person to 

violate an exchange position limit rule certified to the Commission by such exchange

pursuant to CEA section 5c(c)(1).

338 Thus, under CEA section 4a(e), it is a violation of 

the Act for any person to violate an exchange position limit rule certified to or approved 

by the Commission, including to violate any subsequent amendments thereto, and the 

Commission has the authority to enforce those violations.

 337 See Futures Trading Act of 1982, Public Law 97-444, 96 Stat. 2299-30 (1983). 338 See CFTC Reauthorization Act of 2008, Food, Conservation and Energy Act of 2008, Public Law No. 

110–246, 122 Stat. 1624 (June 18, 2008) (also known as the “Farm Bill”) (amending CEA section 4a(e), 

among other things, to assure that a violation of position limits, regardless of whether such position limits 

have been approved by or certified to the Commission, would constitute a violation of the Act that the 

Commission could independently enforce). See also Federal Speculative Position Limits for Referenced 

Energy Contracts and Associated Regulations, 75 FR at 4144, 4145 (Jan. 26, 2010) (summarizing the 

history of the Commission’s authority to directly enforce violations of exchange-set speculative position 

limits).
197

h. Request for Comment

The Commission requests comment on all aspects of proposed § 150.5.

E. § 150.6—Scope

Existing § 150.6 provides that nothing in this part shall be construed to affect any 

provisions of the Act relating to manipulation or corners nor to relieve any contract 

market or its governing board from responsibility under section 5(4) of the Act to prevent 

manipulation and corners.339 

Position limits are meant to diminish, eliminate, or prevent excessive speculation 

and deter and prevent market manipulation, squeezes, and corners. The Commission 

stresses that nothing in the proposed revisions to part 150 would impact the antidisruptive, anti-cornering, and anti-manipulation provisions of the Act and Commission 

regulations, including but not limited to CEA sections 6(c) or 9(a)(2) regarding 

manipulation, section 4c(a)(5) regarding disruptive practices including spoofing, or 

sections 180.1 and 180.2 of the Commission’s regulations regarding manipulative and 

deceptive practices. It may be possible for a trader to manipulate or attempt to 

manipulate the prices of futures contracts or the underlying commodity with a position 

that is within the federal position limits. It may also be possible for a trader holding a 

bona fide hedge recognition from the Commission or an exchange to manipulate or 

attempt to manipulate the markets. The Commission would not consider it a defense to a 

charge under the anti-manipulation provisions of the Act or the regulations that a trader’s 

position was within position limits.

 339 17 CFR 150.6.
198

Like existing § 150.6, proposed § 150.6 is intended to make clear that fulfillment 

of specific part 150 requirements alone does not necessarily satisfy other obligations of 

an exchange. Proposed § 150.6 would provide that part 150 of the Commission’s 

regulations shall only be construed as having an effect on position limits set by the 

Commission or an exchange including any associated recordkeeping and reporting 

requirements. Proposed § 150.6 would provide further that nothing in part 150 shall 

affect any other provisions of the Act or Commission regulations including those relating 

to actual or attempted manipulation, corners, squeezes, fraudulent or deceptive conduct, 

or to prohibited transactions. For example, proposed § 150.5 would require DCMs, and, 

ultimately, SEFs, to impose and enforce exchange-set speculative position limits. The 

fulfillment of the requirements of § 150.5 alone would not satisfy any other legal 

obligations under the Act or Commission regulations applicable to exchanges to prevent 

manipulation and corners. Likewise, a market participant’s compliance with position 

limits or an exemption thereto does not confer any type of safe harbor or good faith 

defense to a claim that the participant had engaged in an attempted or perfected 

manipulation.

Further, the proposed amendments are intended to help clarify that § 150.6 applies 

to: regulations related to position limits found outside of part 150 of the Commission’s 

regulations (e.g., relevant sections of part 1 and part 19); and recordkeeping and reporting 

regulations associated with speculative position limits.

F. § 150.8—Severability

The Commission proposes to add new § 150.8 to provide for the severability of 

individual provisions of part 150. Should any provision(s) of part 150 be declared 

invalid, including the application thereof to any person or circumstance, § 150.8 would 
199

provide that all remaining provisions of part 150 shall not be affected to the extent that 

such remaining provisions, or the application thereof, can be given effect without the 

invalid provisions. 

G. § 150.9—Process for Recognizing Non-enumerated Bona Fide Hedging 

Transactions or Positions with Respect to Federal Speculative Position Limits

1. Background and Overview

For the nine legacy agricultural contracts currently subject to federal position 

limits, the Commission’s current processes for recognizing non-enumerated bona fide 

hedge positions and certain enumerated anticipatory bona fide hedge positions exist in 

parallel with exchange processes for granting exemptions from exchange-set limits, as 

described below. The exchange processes for granting exemptions vary by exchange, 

and generally do not mirror the Commission’s processes. Thus, when requesting certain

bona fide hedging position recognitions that are not self-effectuating, market participants 

must currently comply with the exchanges’ processes for exchange-set limits and the 

Commission’s processes for federal limits. Although this disparity is currently only an 

issue for the nine agricultural futures contracts subject to both federal and exchange-set 

limits, the parallel approaches may become more inefficient and burdensome once the 

Commission adopts limits on additional commodities.

Accordingly, the Commission is proposing § 150.9 to establish a separate 

framework, applicable to proposed referenced contracts in all commodities, whereby a 

market participant who is seeking a bona fide hedge recognition that is not enumerated in 

proposed Appendix A can file one application with an exchange to receive a bona fide 
200

hedging recognition for purposes of both exchange-set limits and for federal limits.

340

Given the proposal to significantly expand the list of enumerated hedges, the 

Commission expects the use of the proposed § 150.9 non-enumerated process described 

below would be rare and exceptional. This separate framework would be independent of, 

and serve as an alternative to, the Commission’s process for reviewing exemption 

requests under proposed § 150.3. Among other things, proposed § 150.9 would help to 

streamline the process by which non-enumerated bona fide hedge recognition requests 

are addressed, minimize disruptions by leveraging existing exchange-level processes with 

which many market participants are already familiar,341 and reduce inefficiencies created 

when market participants are required to comply with different federal and exchangelevel processes.

For instance, currently, market participants seeking recognitions of nonenumerated bona fide hedges for the nine legacy agricultural commodities must request 

recognitions from both the Commission under existing § 1.47, and from the relevant 

exchange. If the recognition is for an “enumerated” hedge under existing § 1.3 (other 

than anticipatory enumerated hedges), the market participant would not need to file an 

application with the Commission (as the enumerated hedge has a self-effectuating 

recognition for purposes of federal limits). 

If the exemption is for a “non-enumerated” hedge or certain enumerated 

 340 Alternatively, under the proposed framework, a trader could submit a request directly to the 

Commission pursuant to proposed § 150.3(b). A trader that submitted such a request directly to the 

Commission for purposes of federal limits would have to separately request an exemption from the 

applicable exchange for purposes of exchange-set limits. As discussed earlier in this release, the 

Commission proposes to separately allow for enumerated hedges and spreads that meet the “spread 

transaction” definition to be self-effectuating. See supra Section II.C.2. (discussion of proposed § 150.3). 341 In particular, the Commission recognizes that, in the energy and metals spaces, market participants are 

familiar with exchange application processes and are not familiar with the Commission’s processes since, 

currently, there are no federal position limits for those commodities.
201

anticipatory hedges under existing § 1.3, the market participant would need to file an 

application with the Commission pursuant to §§ 1.47 or 1.48, respectively. In either case, 

the market participant would also still need to seek an exchange exemption and file a 

Form 204/304 on a monthly basis with the Commission. As discussed more fully in this 

section, with respect to bona fide hedges that are not self-effectuating for purposes of 

federal limits, proposed § 150.9 would permit such a market participant to file a single 

application with the exchange and relieve the market participant from having to 

separately file an application and/or monthly cash-market reporting information with the 

Commission.

The existing Commission and exchange level approaches are described in more 

detail below, followed by a more detailed discussion of proposed § 150.9.

2. Existing Approaches for Recognizing Bona Fide Hedges

The Commission’s authority and existing processes for recognizing bona fide 

hedges can be found in section 4a(c) of the Act, and §§ 1.3, 1.47, and 1.48 of the 

Commission’s regulations.342 In particular, CEA section 4a(c)(1) provides that no CFTC 

rule issued under CEA section 4a(a) applies to “transactions or positions which are 

shown to be bona fide hedging transactions or positions.”

343 Further, under the existing 

definition of “bona fide hedging transactions and positions” in § 1.3,344 paragraph (1) 

provides the Commission’s general definition of bona fide hedging transactions or 

positions; paragraph (2) provides a list of enumerated bona fide hedging positions that, 

generally, are self-effectuating, and must be reported (along with supporting cash-market 

 342 See 7 U.S.C. 6a(c) and 17 CFR 1.3, 1.47, and 1.48. 343 7 U.S.C. 6a(c)(1). 344 As described above, the Commission proposes to move an amended version of the bona fide hedging 

definition from § 1.3 to § 150.1. See supra Section II.A. (discussion of proposed § 150.1).
202

information) to the Commission monthly on Form 204 after the positions are taken;345

and paragraph (3) provides a procedure for market participants to seek recognition from 

the Commission for non-enumerated bona fide hedging positions. Under paragraph (3), 

any person that seeks Commission recognition of a position as a non-enumerated bona 

fide hedge must submit an application to the Commission in advance of taking on the 

position, and pursuant to the processes found in § 1.47 (30 days in advance for nonenumerated bona fide hedges) or § 1.48 (10 days in advance for enumerated anticipatory 

hedges), as applicable.

b. Exchanges’ Existing Approach for Granting Bona Fide Hedge Exemptions346 with 

Respect to Exchange-Set Limits 

Under DCM Core Principle 5,347 DCMs have, for some time, established 

exchange-set limits for futures contracts that are subject to federal limits, as well as for 

contracts that are not. In addition, under existing § 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 transactions or positions as defined in paragraph 

(1) of § 1.3.348 As such, with respect to exchange-set limits, exchanges have adopted 

processes for handling trader requests for bona fide hedging exemptions, and generally 

have granted such requests pursuant to exchange rules that incorporate the Commission’s 

existing general definition of bona fide hedging transactions or positions in paragraph (1) 

 345 As described below, the Commission proposes to eliminate Form 204 and to rely instead on the cashmarket information submitted to exchanges pursuant to proposed §§ 150.5 and 150.9. See infra Section 

II.H.3. (discussion of proposed amendments to part 19).

346 Exchange rules typically refer to “exemptions” in connection with bona fide hedging and spread 

positions, whereas the Commission uses the nomenclature “recognition” with respect to bona fide hedges, 

and “exemption” with respect to spreads.

347 7 U.S.C. 7(d)(5). 348 17 CFR 150.5(d).
203

of § 1.3.349 Accordingly, DCMs currently have rules and application forms in place to 

process applications to exempt bona fide hedging positions with respect to exchange-set 

position limits.350

Separately, under SEF Core Principle 6, currently SEFs are required to adopt, as 

is necessary and appropriate, position limits or position accountability levels for each 

swap contract to reduce the potential threat of market manipulation or congestion.351 For 

contracts that are subject to a federal position limit, the SEF must set its position limits at 

a level that is no higher than the federal limit, and must monitor positions established on 

or through the SEF for compliance with both the Commission’s federal limit and the 

exchange-set limit.352 Section 37.601 further implements SEF Core Principle 6 and 

specifies that until such time that SEFs are required to comply with the Commission’s 

position limits regulations, a SEF may refer to the associated guidance and/or acceptable 

practices set forth in Appendix B to part 37 of the Commission’s regulations.353

Currently, in practice, there are no federal position limits on swaps for which SEFs would 

be required to establish exchange-set limits.

As noted above, the application processes currently used by exchanges are 

different than the Commission’s processes. In particular, exchanges typically use one 

application process to grant all exemption types, whereas the Commission has different 

 349 See, e.g., CME Rule 559 and ICE Rule 6.29 (addressing position limits and exemptions). 350 Id. 351 7 U.S.C. 7b-3(f)(6). The Commission codified Core Principle 6 under § 37.600. 17 CFR 37.600. 352 Id. 353 17 CFR 37.601. Under Appendix B to part 37, for Required Transactions, as defined in § 37.9, SEFs 

may demonstrate compliance with SEF Core Principle 6 by setting and enforcing position limits or position 

accountability levels only with respect to trading on the SEF’s own market. For Permitted Transactions, as 

defined in § 37.9, SEFs may demonstrate compliance with SEF Core Principle 6 by setting and enforcing 

position accountability levels or by sending the Commission a list of Permitted Transactions traded on the 

SEF.
204

processes for different exemptions, as explained below. Also, exchanges generally do 

not require the submission of monthly cash-market information, whereas the Commission 

has various monthly reporting requirements under Form 204 and part 17 of the 

Commission’s regulations. Finally, exchanges generally require exemption applications 

to include cash-market information supporting positions that exceed the limits, to be filed 

annually prior to exceeding a position limit, and to be updated on an annual basis.354

The Commission, on the other hand, currently has different processes for 

permitting enumerated bona fide hedges and for recognizing positions as non-enumerated 

bona fide hedges. Generally, for bona fide hedges enumerated in paragraph (2) of the 

bona fide hedge definition in § 1.3, no formal process is required by the Commission. 

Instead, such enumerated bona fide hedge recognitions are self-effectuating and 

Commission staff reviews monthly reporting of cash-market positions on existing Form 

204 and part 17 position data to monitor such positions. Recognition requests for nonenumerated bona fide hedging positions and for certain enumerated anticipatory bona 

fide hedge positions, as explained above, must be submitted to the Commission pursuant 

to the processes in existing §§ 1.47 and 1.48 of the regulations, as applicable.

3. Proposed § 150.9

Under the proposed procedural framework, an exchange’s determination to 

recognize a non-enumerated bona fide hedge in accordance with proposed § 150.9 with 

respect to exchange-set limits would serve to inform the Commission’s own decision as 

to whether to recognize the exchange’s determination for purposes of federal speculative 

position limits set forth in proposed § 150.2. Among other conditions, the exchange 

 354 Id.
205

would be required to base its determination on standards that conform to the 

Commission’s own standards for recognizing bona fide hedges for purposes of federal 

position limits. Further, the exchange’s determination with respect to its own position 

limits and application process would be subject to Commission review and oversight. 

These requirements would facilitate Commission review and determinations by ensuring

that any bona fide hedge recognized by an exchange for purposes of exchange-set limits 

and in accordance with proposed § 150.9 conforms to the Commission’s standards.

For a given referenced contract, proposed § 150.9 would potentially allow a 

person to exceed federal position limits if the exchange listing the contract has 

recognized the position as a bona fide hedge with respect to exchange-set limits. Under 

this framework, the exchange would make such determination with respect to its own 

speculative position limits, set in accordance with proposed § 150.5(a), and, unless the 

Commission denies or stays the application within ten business days (or two business 

days for applications, including retroactive applications, filed due to sudden or 

unforeseen circumstances), the exemption would be deemed approved for purposes of 

federal positions limits.

The exchange’s exemption would be valid only if the exchange meets the 

following additional conditions, each described in greater detail below: (1) the exchange 

maintains rules, approved by the Commission pursuant to § 40.5, that establish 

application processes for recognizing bona fide hedges in accordance with § 150.9; (2) 

the exchange meets specified prerequisites for granting such recognitions; (3) the 

exchange satisfies specified recordkeeping requirements; and (4) the exchange notifies 

the Commission and the applicant upon determining to recognize a bona fide hedging 
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transaction or position. A person may exceed the applicable federal position limit ten

business days (for new and annually renewed exemptions) or two business days (for 

applications, including retroactive applications, submitted due to sudden and unforeseen 

circumstances) after the exchange makes its determination, unless the Commission 

notifies the exchange and the applicant otherwise.

The above-described elements of the proposed approach differ from the 

regulations proposed in the 2016 Reproposal, which did not require a 10-day 

Commission review period. The 2016 Reproposal allowed DCMs and SEFs to recognize 

non-enumerated bona fide hedges for purposes of federal position limits.355 However, the 

2016 Reproposal may not have conformed to the legal limits on what an agency may 

delegate to persons outside the agency.356 The 2016 Reproposal delegated to the DCMs 

and SEFs a significant component of the Commission’s authority to recognize bona fide 

hedges for purposes of federal position limits. Under that proposal, the Commission did 

not have a substantial role in reviewing the DCMs’ or SEFs’ recognitions of non-

 355 Proposed § 150.9(a)(5) of the 2016 Reproposal provided that an applicant’s derivatives position shall be 

deemed to be recognized as a non-enumerated bona fide hedging 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 recognize such position as a non-enumerated 

bona fide hedging position.

356 In U.S. Telecom Ass’n v. FCC, the D.C. Circuit held “that, while federal agency officials may 

subdelegate their decision-making authority to subordinates absent evidence of contrary congressional 

intent, they may not subdelegate to outside entities—private or sovereign—absent affirmative evidence of 

authority to do so.” U.S. Telecom Ass’n v. FCC, 359 F.3d 554, 565-68 (D.C. Cir. 2004) (citing Shook v. 

District of Columbia Fin. Responsibility & Mgmt. Assistance Auth., 132 F.3d 775, 783–84 & n. 6 

(D.C.Cir.1998); Nat'l Ass'n of Reg. Util. Comm'rs (“NARUC”) v. FCC, 737 F.2d 1095, 1143–44 & n. 41 

(D.C.Cir.1984); Nat'l Park and Conservation Ass'n v. Stanton, 54 F.Supp.2d 7, 18–20 (D.D.C.1999).

Nevertheless, the D.C. Circuit recognized three circumstances that the agency may “delegate” its authority 

to an outside party because they do not involve subdelegation of decision-making authority: (1) 

establishing a reasonable condition for granting federal approval; (2) fact gathering; and (3) advice giving. 

The first instance involves conditioning of obtaining a permit on the approval by an outside entity as an 

element of its decision process. The second provides the agency with nondiscretionary information 

gathering. The third allows a federal agency to turn to an outside entity for advice and policy 

recommendations, provided the agency makes the final decisions itself. Id. at 568. “An agency may not, 

however, merely ‘rubber-stamp’ decisions made by others under the guise of seeking their ‘advice,’ [ ], nor 

will vague or inadequate assertions of final reviewing authority save an unlawful subdelegation, [ ].” Id.
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enumerated bona fide hedges for purposes of federal position limits. Upon further 

reflection, the Commission believes that the 2016 Reproposal may not have retained

enough authority with the Commission under case law on sub-delegation of agency 

decision making authority. Under the new proposed model, the Commission would be 

informed by the exchanges’ determinations to make the Commission’s own 

determination for purposes of federal position limits within a 10-day review period. 

Accordingly, the Commission would retain its decision-making authority with respect to 

the federal position limits and provide legal certainty to market participants of their 

determinations.

Both DCMs and SEFs would be eligible to allow traders to utilize the processes 

set forth under proposed § 150.9. However, as a practical matter, the Commission 

expects that upon implementation of § 150.9, the process proposed therein will likely be 

used primarily by DCMs, rather than by SEFs, given that most economically equivalent 

swaps that would be subject to federal position limits are expected to be traded OTC and 

not executed on SEFs.

The Commission emphasizes that proposed § 150.9 is intended to serve as a 

separate, self-contained process that is related to, but independent of, the proposed 

regulations governing: (1) the process in proposed § 150.3 for traders to apply directly to 

the Commission for a bona fide hedge recognition; and (2) exchange processes for 

establishing exchange-set limits and granting exemptions therefrom in proposed § 150.5. 

Proposed § 150.9 is intended to serve as a voluntary process exchanges can implement to 

provide additional flexibility for their market participants seeking non-enumerated bona 

fide hedges to file one application with an exchange to receive a recognition or 
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exemption for purposes of both exchange-set limits and for federal limits. Proposed § 

150.9 is discussed in greater detail below.

Request for Comment

The Commission requests comment on all aspects of proposed § 150.9. The 

Commission also invites comments on the following:

(35) Considering that the Commission’s proposed position limits would apply 

to OTC economically equivalent swaps, should the Commission develop a

mechanism for exchanges to be involved in the review of non-enumerated 

bona fide hedge applications for OTC economically equivalent swaps? 

(36) If so, what, if any, role should exchanges play in the review of nonenumerated bona fide hedge applications for OTC economically 

equivalent swaps?

a. Proposed § 150.9(a)—Approval of Rules

Under proposed § 150.9(a), the exchange must have rules, adopted pursuant to the 

rule approval process in § 40.5 of the Commission’s regulations, establishing processes 

and standards in accordance with proposed § 150.9, described below. The Commission 

would review such rules to ensure that the exchange’s standards and processes for 

recognizing bona fide hedges from its own exchange-set limits conform to the 

Commission’s standards and processes for recognizing bona fide hedges from the federal 

limits.

b. Proposed § 150.9(b)—Prerequisites for an Exchange to Recognize Nonenumerated Bona Fide Hedges in Accordance with this Section

This section sets forth conditions that would require an exchange-recognized bona 

fide hedge to conform to the corresponding definitions or standards the Commission uses
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in proposed §§ 150.1 and 150.3 for purposes of the federal position limits regime.

An exchange would be required to meet the following prerequisites with respect 

to recognizing bona fide hedging positions under proposed § 150.9(b): (i) the exchange 

lists the applicable referenced contract for trading; (ii) the position is consistent with both 

the definition of bona fide hedging transaction or position in proposed § 150.1 and 

section 4a(c)(2) of the Act; and (iii) the exchange does not recognize as bona fide hedges 

any positions that include commodity index contracts and one or more referenced 

contracts, nor does the exchange grant risk management exemptions for such contracts.

357

Request for Comment

The Commission requests comment on all aspects of proposed § 150.9. The 

Commission also invites comments on the following:

(37) Does the proposed compliance date of twelve-months after publication of 

a final federal position limits rulemaking in the Federal Register provide a 

sufficient amount of time for exchanges to update their exemption 

application procedures, as needed, and begin reviewing exemption 

applications in accordance with proposed § 150.9? If not, please 

provide an alternative longer timeline and reasons supporting a longer 

timeline. 

c. Proposed § 150.9(c)—Application Process 

Proposed § 150.9(c) sets forth the information and representations that the 

 357 The Commission finds that financial products are not substitutes for positions taken or to be taken in a 

physical marketing channel. Thus, the offset of financial risks arising from financial products would be

inconsistent with the definition of bona fide hedging transactions or positions for physical commodities in 

proposed § 150.1. See supra Section II.A.1.c.ii.(1) (discussion of the temporary substitute test and riskmanagement exemptions).
210

exchange, at a minimum, would be required to obtain from applicants as part of the 

application process for granting bona fide hedges. In this connection, exchanges may 

rely upon their existing application forms and processes in making such determinations, 

provided they collect the information outlined below. The Commission believes the 

information set forth below is sufficient for the exchange to determine, and the 

Commission to verify, whether a particular transaction or position satisfies the federal 

definition of bona fide hedging transaction for purposes of federal position limits. 

i. Proposed § 150.9(c)(1)—Required Information for Bona Fide Hedging Positions

With respect to bona fide hedging positions in referenced contracts, proposed § 

150.9(c)(1) would require that any application include: (i) a description of the position in 

the commodity derivative contract for which the application is submitted (which would 

include the name of the underlying commodity and the position size); (ii) information to 

demonstrate why the position satisfies section 4a(c)(2) of the Act and the definition of 

bona fide hedging transaction or position in proposed § 150.1, including factual and legal 

analysis; (iii) a statement concerning the maximum size of all gross positions in 

derivative contracts for which the application is submitted (in order to provide a view of 

the true footprint of the position in the market); (iv) information regarding the applicant’s 

activity in the cash markets for the commodity underlying the position for which the 

application is submitted;358 and (v) any other information the exchange requires, in its 

discretion, to enable the exchange to determine, and the Commission to verify, whether 

 358 The Commission would expect that exchanges would require applicants to provide cash market data for 

at least the prior year.
211

such position should be recognized as a bona fide hedge.359 These proposed application 

requirements are similar to current requirements for recognizing a bona fide hedging 

position under existing §§ 1.47 and 1.48.

Market participants have raised concerns that such requirements, even if 

administered by the exchanges, would require hedging entities to change internal books 

and records to track which category of bona fide hedge a position would fall under. The 

Commission notes that, as part of this current proposal, exchanges would not need to 

require the identification of a hedging need against a particular identified category. So 

long as the requesting party satisfies all applicable requirements in proposed § 150.9, 

including demonstrating with a factual and legal analysis that a position would fit within 

the bona fide hedge definition, the Commission is not intending to require the hedging 

party’s books and records to identify the particular type of hedge being applied. 

ii. Proposed § 150.9(c)(2)—Timing of Application

The Commission does not propose to prescribe timelines (e.g., a specified number 

of days) for exchanges to review applications because the Commission believes that 

exchanges are in the best position to determine how to best accommodate the needs of 

their market participants. Rather, under proposed § 150.9(c)(2), the exchange must 

separately require that applicants submit their application in advance of exceeding the 

applicable federal position limit for any given referenced contract. However, an 

exchange may adopt rules that allow a person to submit a bona fide hedge application

 359 Under proposed § 150.9(c)(1)(iv) and (v), exchanges, in their discretion, could request additional 

information as necessary, including information for cash market data similar to what is required in the 

Commission’s existing Form 204. See infra Section II.H.3. (discussion of Form 204 and proposed 

amendments to part 19). Exchanges could also request a description of any positions in other commodity 

derivative contracts in the same commodity underlying the commodity derivative contract for which the 

application is submitted. Other commodity derivatives contracts could include other futures, options, and 

swaps (including OTC swaps) positions held by the applicant.
212

within five days after the person has exceeded federal speculative limits if such person 

exceeds the limits due to sudden or unforeseen increases in its bona fide hedging needs.

Where an applicant claims a sudden or unforeseen increase in its bona fide hedging 

needs, the proposed rules would require exchanges to require that the person provide 

materials demonstrating that the person exceeded the federal speculative limit due to 

sudden or unforeseen circumstances. Further, the Commission would caution exchanges 

that applications submitted after a person has exceeded federal position limits should not 

be habitual and should be reviewed closely. Finally, if the Commission finds that the 

position does not qualify as a bona fide hedge, then the applicant would be required to 

bring its position into compliance, and could face a position limits violation if it does not 

reduce the position within a commercially reasonable time.

iii. Proposed § 150.9(c)(3)—Renewal of Applications

Under proposed § 150.9(c)(3), the exchange must require that persons with bona 

fide hedging recognitions in referenced contracts granted pursuant to proposed § 150.9 

reapply at least on an annual basis by updating their original application, and receive a 

notice of approval from the exchange prior to exceeding the applicable position limit.

iv. Proposed § 150.9(c)(4)—Exchange Revocation Authority

Under proposed § 150.9(c)(4), the exchange retains its authority to limit, 

condition, or revoke, at any time, any recognition previously issued pursuant to proposed 

§ 150.9, for any reason, including if the exchange determines that the recognition is no 

longer consistent with the bona fide hedge definition in proposed § 150.1 or section 

4a(c)(2) of the Act. 

Request for Comment
213

The Commission requests comment on all aspects of proposed § 150.9. The 

Commission also invites comments on the following:

(38) As described above, the Commission does not propose to prescribe 

timelines for exchanges to review applications. Please comment on what, 

if any, timing requirements the Commission should prescribe for 

exchanges’ review of applications pursuant to proposed § 150.9.

(39) Currently, certain exchanges allow for the submission of exemption 

requests up to five business days after the trader established the position 

that exceeded the exchange-set limit. Under proposed § 150.9, should 

exchanges continue to be permitted to recognize bona fide hedges and 

grant spread exemptions retroactively – up to five days after a trader has 

established a position that exceeds federal position limits? 

d. Proposed § 150.9(d)—Recordkeeping 

Proposed § 150.9(d) would set forth recordkeeping requirements for purposes of § 

150.9. The required records would form a critical element of the Commission’s oversight 

of the exchanges’ application process and such records could be requested by the 

Commission as needed. Under proposed § 150.9(d), 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.360 Such records must include all information and documents 

submitted by an applicant in connection with its application; records of oral and written 

 360 Requirements 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 are already required to 

maintain records of their business activities in accordance with the requirements of § 1.31 of § 38.951, 17 

CFR 38.951.
214

communications between the exchange and the applicant in connection with the 

application; and information and documents in connection with the exchange’s analysis 

of and action on such application.361 Exchanges would also be required to maintain any 

documentation submitted by an applicant after the disposition of an application, 

including, for example, any reports or updates the applicant filed with the exchange. 

Exchanges would be required to store and produce records pursuant to existing § 

1.31,362 and would be subject to requests for information pursuant to other applicable 

Commission regulations, including, for example, existing § 38.5.363 

Request for Comment

The Commission requests comment on all aspects of proposed § 150.9. The 

Commission also invites comments on the following:

(40) Do the proposed recordkeeping requirements set forth in § 150.9 comport 

with existing practice? Are there any ways in which the Commission 

could streamline the proposed recordkeeping requirements while still 

maintaining access to sufficient information to carry out its statutory 

responsibilities? 

e. Proposed § 150.9(e)—Process for a Person to Exceed Federal Position Limits 

 361 The Commission does not intend, in proposed § 150.9(d), to create any new obligation for an exchange 

to record conversations with applicants or their representatives; however, the Commission does expect that 

an exchange would preserve any written or electronic notes of verbal interactions with such parties.

362 Consistent with existing § 1.31, the Commission expects that these records would be readily available 

during the first two years of the required five year recordkeeping period for paper records, and readily 

accessible for the entire five-year recordkeeping period for electronic records. 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. 363 See 17 CFR 38.5 (requiring, in general, that upon request by the Commission, a DCM must file 

responsive information with the Commission, such as information related to its business, or a written 

demonstration of the DCM’s compliance with one or more core principles).
215

Under proposed § 150.9(e), once an exchange recognizes a bona fide hedge with 

respect to its own speculative position limits established pursuant to § 150.5(a), a person 

could rely on such determination for purposes of exceeding federal position limits 

provided that specified conditions are met, including that the exchange provide the 

Commission with notice of any approved application as well as a copy of the application 

and any supporting materials, and the Commission does not object to the exchange’s 

determination. The exchange is only required to provide this notice to the Commission 

with respect to its initial (and not renewal) determinations for a particular application. 

Under proposed § 150.9(e), the exchange must provide such notice to the Commission 

concurrent with the notice provided to the applicant, and, except as provided below, a 

trader can exceed federal position limits ten business days after the exchange issues the 

required notification, provided the Commission does not notify the exchange or applicant 

otherwise. 

However, for a person with sudden or unforeseen bona fide hedging needs that 

has filed an application, pursuant to proposed § 150.9(c)(2)(ii), after they already 

exceeded federal speculative position limits, the exchange’s retroactive approval of such 

application would be deemed approved by the Commission two business days after the 

exchange issues the required notification, provided the Commission does not notify the 

exchange or applicant otherwise. That is, the bona fide hedge recognition would be 

deemed approved by the Commission two business days after the exchange issues the 

required notification, unless the Commission notifies the exchange and the applicant 

otherwise during this two business day timeframe. 

Once those ten (or two) business days have passed, the person could rely on the 
216

bona fide hedge recognition both for purposes of exchange-set and federal limits, with the 

certainty that the Commission (and not Commission staff) would only revoke that

determination in the limited circumstances set forth in proposed § 150.9(f)(1) and (2) 

described further below.

However, under proposed § 150.9(e)(5), if, during the ten (or two) business day 

timeframe, the Commission notifies the exchange and applicant that the Commission 

(and not staff) has determined to stay the application, the person would not be able to rely 

on the exchange’s approval of the application for purposes of exceeding federal position 

limits, unless the Commission approves the application after further review.

Separately, under proposed § 150.9(e)(5), the Commission (or Commission staff) 

may request additional information from the exchange or applicant in order to evaluate 

the application, and the exchange and applicant would have an opportunity to provide the 

Commission with any supplemental information requested to continue the application 

process. Any such request for additional information by the Commission (or staff), 

however, would not stay or toll the ten (or two) business day application review period. 

Further, under proposed § 150.9(e)(6), the applicant would not be subject to any 

finding of a position limits violation during the Commission’s review of the application. 

Or, if the Commission determines (in the case of retroactive applications) that the bona 

fide hedge is not approved for purposes of federal limits after a person has already 

exceeded federal position limits, the Commission would not find that the person has 

committed a position limits violation so long as the person brings the position into 

compliance within a commercially reasonable time. 

The Commission believes that the ten (or two) business day period to review 
217

exchange determinations under proposed § 150.9 would allow the Commission enough 

time to identify applications that may not comply with the proposed bona fide hedging 

position definition, while still providing a mechanism whereby market participants may 

exceed federal position limits pursuant to Commission determinations. 

Request for Comment

The Commission requests comment on all aspects of proposed § 150.9. The 

Commission also invites comments on the following:

(41) The Commission has proposed, in § 150.9(e)(3), a ten business day period 

for the Commission to review an exchange’s determination to recognize a 

bona fide hedge for purposes of the Commission approving such 

determination for federal position limits. Please comment on whether 

the review period is adequate, and if not, please comment on what would 

be an appropriate amount of time to allow the Commission to review 

exchange determinations while also providing a timely determination 

for the applicant.

(42) The Commission has proposed a two business day review period for 

retroactive applications submitted to exchanges after a person has already 

exceeded federal position limits. Please comment on whether this time 

period properly balances the need for the Commission to oversee the 

administration of federal position limits with the need of hedging parties 

to have certainty regarding their positions that are already in excess of the 

federal position limits.

(43) With respect to the Commission’s review authority in § 150.9(e)(5), if the
218

Commission stays an application during the ten (or two) business-day 

review period, the Commission’s review, as would be the case for an 

exchange, would not be bound by any time limitation. Please comment on 

what, if any, timing requirements the Commission should prescribe for its 

review of applications pursuant to proposed § 150.9(e)(5).

(44) Please comment on whether the Commission should permit a person to 

exceed federal position limits during the ten business day period for the 

Commission’s review of an exchange-granted exemption.

(45) Under proposed § 150.9(e), an exchange is only required to notify the 

Commission of its initial approval of an exemption application (and not 

any renewal approvals). Should the Commission require that exchanges 

submit approved renewals of applications to the Commission for review 

and approval if there are material changes to the facts and circumstances 

underlying the renewal application?

f. Proposed § 150.9(f)—Commission Revocation of an Approved Application

Proposed § 150.9(f) sets forth the limited circumstances under which the 

Commission would revoke a bona fide hedge recognition granted pursuant to proposed § 

150.9. The Commission expects such revocation to be rare, and this authority would not 

be delegated to Commission staff. First, under proposed § 150.9(f)(1), if an exchange 

revokes its recognition of a bona fide hedge, then such bona fide hedge would also be 

deemed revoked for purposes of federal limits.

Second, under proposed § 150.9(f)(2), if the Commission determines that an 

application that has been approved or deemed approved by the Commission is no longer 
219

consistent with the applicable sections of the Act and the Commission’s regulations, the 

Commission shall notify the person and exchange, and, after an opportunity to respond, 

the Commission can require the person to reduce the derivatives position within a 

commercially reasonable time, or otherwise come into compliance. In determining a 

commercially reasonable amount of time, the Commission must consult with the 

applicable exchange and applicant, and may consider factors including, among others,

current market conditions and the protection of price discovery in the market.

The Commission expects that it would only exercise its revocation authority 

under circumstances where the disposition of an application has resulted, or is likely to 

result, in price anomalies, threatened manipulation, actual manipulation, market 

disruptions, or disorderly markets. In addition, the Commission’s authority to require a 

market participant to reduce certain positions in proposed § 150.9(f)(2) would not be 

subject to the requirements of CEA section 8a(9), that is, the Commission would not be 

compelled to find that a CEA section 8a(9) emergency condition exists prior to requiring 

that a market participant reduce certain positions pursuant to proposed § 150.9(f)(2).

If the Commission determines that a person must reduce its position or otherwise 

bring it into compliance, the Commission would not find that the person has committed a 

position limit violation so long as the person comes into compliance within the 

commercially reasonable time identified by the Commission in consultation with the 

applicable exchange and applicant. The Commission intends for persons to be able to 

rely on recognitions and exemptions granted pursuant to § 150.9 with the certainty that 

the exchange decision would only be reversed in very limited circumstances. Any action 

compelling a market participant to reduce its position pursuant to § 150.9(f)(2) would be 
220

a Commission action, and would not be delegated to Commission staff. 364 

g. Proposed § 150.9(g)—Delegation of Authority to the Director of the Division of 

Market Oversight 

The Commission proposes to delegate certain of its authorities under proposed § 

150.9 to the Director of the Commission’s Division of Market Oversight, or such other 

employee(s) that the Director may designate from time to time. Proposed § 150.9(g)(1) 

would delegate the Commission’s authority, in § 150.9(e)(5), to request additional 

information from the exchange and applicant.

The Commission does not propose, however, to delegate its authority, in proposed 

§ 150.9(e)(5) and (6) to stay or reject such application, nor proposed § 150.9(f)(2), to 

revoke a bona fide hedge recognition granted pursuant to § 150.9 or to require an 

applicant to reduce its positions or otherwise come into compliance. The Commission 

believes that if an exchange’s disposition of an application raises concerns regarding 

consistency with the Act, presents novel or complex issues, or requires remediation, then 

the Commission, and not Commission staff, should make the final determination, after 

taking into consideration any supplemental information provided by the exchange or the 

applicant.

As with all authorities delegated by the Commission to staff, the Commission 

would maintain the authority to consider any matter which has been delegated, including 

the proposed delegations in §§ 150.3 and 150.9 described above. The Commission will 

closely monitor staff administration of the proposed processes for granting bona fide 

 364 None of the provisions in proposed § 150.9 would compromise the Commission’s emergency authorities 

under CEA section 8a(9), including the Commission’s authority to fix “limits that may apply to 

a market position acquired in good faith prior to the effective date of the Commission’s action.” CEA 

section 8a(9). 7 U.S.C. 12a(9).
221

hedge recognitions.

H. Part 19 and Related Provisions—Reporting of Cash-Market Positions

1. Background

Key reports currently used for purposes of monitoring compliance with federal 

position limits include Form 204365 and Form 304,366 known collectively as the “series 

‘04” reports. Under existing § 19.01, market participants that hold bona fide hedging 

positions in excess of limits for the nine commodities currently subject to federal limits 

must justify such overages by filing the applicable report each month: Form 304 for 

cotton, and Form 204 for the other commodities.367 These reports are generally filed after 

exceeding the limit, show a snapshot of such traders’ cash positions on one given day 

each month, and are used by the Commission to determine whether a trader has sufficient 

cash positions that justify futures and options on futures positions above the speculative 

limits. 

2. Proposed Elimination of Form 204 and Cash-Reporting Elements of Form 304

For the reasons set forth below, the Commission proposes to eliminate Form 204

and Parts I and II of existing Form 304, which requests information on cash-market 

positions for cotton akin to the information requested in Form 204.368 

 365 CFTC Form 204: Statement of Cash Positions in Grains, Soybeans, Soybean Oil, and Soybean Meal, 

U.S. Commodity Futures Trading Commission Web site, available at

https://www.cftc.gov/sites/default/files/idc/groups/public/@forms/documents/file/cftcform204.pdf (existing 

Form 204).

366 CFTC Form 304: Statement of Cash Positions in Cotton, U.S. Commodity Futures Trading Commission 

Web site, available at http://www.cftc.gov/ucm/groups/public/@forms/documents/file/cftcform304.pdf

(existing Form 204). Parts I and II of Form 304 address fixed-price cash positions used to justify cotton 

positions in excess of federal limits. As described below, Part III of Form 304 addresses unfixed-price 

cotton “on-call” information, which is not used to justify cotton positions in excess of limits, but rather to 

allow the Commission to prepare its weekly cotton on-call report. 367 17 CFR 19.01. 368 Proposed amendments to Part III of the Form 304, which addresses cotton on-call, are discussed below. 
222

First, the Commission would no longer need the cash-market information 

currently reported on Forms 204 and 304 because the exchanges would collect, and make 

available to the Commission, cash-market information needed to assess whether any such 

position is a bona fide hedge.

369 Further, the Commission would continue to have access 

to information, including cash-market information, by issuing special calls relating to 

positions exceeding limits. 

Second, Form 204 as currently constituted would be inadequate for the reporting 

of cash-market positions relating to certain energy contracts which would be subject to 

federal limits for the first time under this proposal. For example, when compared to 

agricultural contracts, energy contracts generally expire more frequently, have a shorter 

delivery cycle, and have significantly more product grades. The information required by 

Form 204, as well as the timing and procedures for its filing, reflects the way agricultural 

contracts trade, but is inadequate for purposes of reporting cash-market information 

involving energy contracts.

While the Commission considered proposing to modify Form 204 to cover energy 

and metal contracts, the Commission has opted instead to propose a more streamlined 

approach to cash-market reporting that reduces duplication between the Commission and 

the exchanges. In particular, to obtain information with respect to cash market positions, 

the Commission proposes to leverage the cash-market information reported to the 

exchanges, with some modifications. When granting exemptions from their own limits, 

exchanges do not use a monthly cash-market reporting framework akin to Form 204. 

 369 The cash-market reporting regime discussed in this section of the release only pertains to bona fide 

hedges, not to spread exemptions, because the Commission has not traditionally relied on cash-market 

information when reviewing requests for spread exemptions. 
223

Instead, exchanges generally require market participants who wish to exceed exchangeset limits, including for bona fide hedging positions, to submit an annual exemption 

application form in advance of exceeding the limit.370 Such applications are typically 

updated annually and generally include a month-by-month breakdown of cash-market 

positions for the previous year supporting any position-limits overages during that 

period.371

To ensure that the Commission continues to have access to the same information 

on cash-market positions that is already provided to exchanges, the Commission proposes 

several reporting and recordkeeping requirements in §§ 150.3, 150.5, and 150.9, as 

discussed above.

372 First, exchanges would be required to collect applications, updated at 

least on an annual basis, for purposes of granting bona fide hedge recognitions from 

exchange-set limits for contracts subject to federal limits,373 and for recognizing bona 

fide hedging positions for purposes of federal limits.

374 Among other things, such 

applications would be required to include: (1) information regarding the applicant’s 

activity in the cash markets for the underlying commodity; and (2) any other information 

to enable the exchange to determine, and the Commission to verify, whether the 

 370 See, e.g., ICE Rule 6.29 and CME Rule 559. 371 For certain physically-delivered agricultural contracts, some exchanges may require that spot month 

exemption applications be renewed several times a year for each spot month, rather than annually.

372 As discussed earlier in this release, proposed § 150.9 also includes reporting and recordkeeping 

requirements pertaining to spread exemptions. Those requirements will not be discussed again in this 

section of the release, which addresses cash-market reporting in connection with bona fide hedges. This 

section of the release focuses on the cash-market reporting requirements in § 150.9 that pertain to bona fide 

hedges.

373 See proposed § 150.5(a)(2)(ii)(A)(1). 374 As discussed above in connection with proposed § 150.9, market participants who wish to request a 

bona fide hedge recognition under § 150.9 would not be required to file such applications with both the 

exchange and the Commission. They would only file the applications with the exchange, which would then 

be subject to recordkeeping requirements in proposed § 150.9(d), as well as proposed §§ 150.5 and 150.9

requirements to provide certain information to the Commission on a monthly basis and upon demand.
224

exchange may recognize such position as a bona fide hedge.375 Second, consistent with 

existing industry practice for certain exchanges, exchanges would be required to file 

monthly reports to the Commission showing, among other things, for all bona fide hedges

(whether enumerated or non-enumerated), a concise summary of the applicant’s activity 

in the cash markets.376

Collectively, these proposed §§ 150.5 and 150.9 rules would provide the 

Commission with monthly information about all recognitions and exemptions granted for 

purposes of contracts subject to federal limits, including cash-market information 

supporting the applications, and annual information regarding all month-by-month cashmarket positions used to support a bona fide hedging recognition. These reports would 

help the Commission verify that any person who claims a bona fide hedging position can 

demonstrate satisfaction of the relevant requirements. This information would also help 

the Commission perform market surveillance in order to detect and deter manipulation 

and abusive trading practices in physical commodity markets. 

While the Commission would no longer receive the monthly snapshot data 

currently included on Form 204, the Commission would have broad access, at any time, 

to the cash-market information described above, as well as any other data or information 

exchanges collect as part of their application processes.377 This would include any

updated application forms and periodic reports that exchanges may require applicants to 

file regarding their positions. To the extent that the Commission observes market activity 

 375 See proposed § 150.9(c)(1)(iv)-(v). 376 See proposed § 150.5(a)(4). 377 See, e.g., proposed § 150.9(d) (requiring that all such records, including cash-market information 

submitted to the exchange, be kept in accordance with the requirements of § 1.31) and proposed § 19.00(b) 

(requiring, among other things, all persons exceeding speculative limits who have received a special call to 

file any pertinent information as specified in the call).
225

or positions that warrant further investigation, § 150.9 would also provide the 

Commission with access to any supporting or related records the exchanges would be 

required to maintain.378

Furthermore, the proposed changes would not impact the Commission’s existing 

provisions for gathering information through special calls relating to positions exceeding 

limits and/or to reportable positions. Accordingly, as discussed further below, the 

Commission proposes that all persons exceeding the proposed limits set forth in § 150.2, 

as well as all persons holding or controlling reportable positions pursuant to § 

15.00(p)(1), must file any pertinent information as instructed in a special call.379

Finally, the Commission understands that the exchanges maintain regular 

dialogue with their participants regarding cash-market positions, and that it is common 

for exchange surveillance staff to make informal inquiries of market participants, 

including if the exchange has questions about market events or a participant’s use of an 

exemption. The Commission encourages exchanges to continue this practice. Similarly, 

the Commission anticipates that its own staff would engage in dialogue with market 

participants, either through the use of informal conversations or, in limited circumstances, 

via special call authority. 

For market participants who are accustomed to filing Form 204s with information 

supporting classification as a federally enumerated hedging position, the proposed 

elimination of Form 204 would result in a slight change in practice. Under the proposed 

rules, such participants’ bona fide hedge recognitions could still be self-effectuating for 

purposes of federal limits, provided the market participant also separately applies for a

 378 See proposed § 150.9(d).

379 See proposed § 19.00(b).
226

bona fide hedge exemption from exchange-set limits established pursuant to proposed § 

150.5(a), and provided further that the participant submits the requisite cash-market 

information to the exchange as required by proposed § 150.5(a)(2)(ii)(A)(1).

3. Proposed Changes to Parts 15 and 19 to Implement the Proposed Elimination of 

Form 204 and Portions of Form 304

The market and large-trader reporting rules are contained in parts 15 through 21 

of the Commission’s regulations. Collectively, these reporting rules effectuate the 

Commission’s market and financial surveillance programs by enabling the Commission 

to gather information concerning the size and composition of the commodity derivative 

markets and to monitor and enforce any established speculative position limits, among 

other regulatory goals. 

To effectuate the proposed elimination of Form 204 and the cash-market reporting 

components of Form 304, the Commission proposes corresponding amendments to 

certain provisions in parts 15 and 19. These amendments would eliminate: (i) existing § 

19.00(a)(1), which requires persons holding reportable positions which constitute bona 

fide hedging positions to file a Form 204; and (ii) existing § 19.01, which, among other 

things, sets forth the cash-market information required on Forms 204 and 304.380 Based 

on the proposed elimination of existing § 19.00(a)(1) and Form 204, the Commission also 

proposes to remove related provisions from: (i) the “reportable position” definition in § 

15.00(p); (ii) the list of “persons required to report” in § 15.01; and (iii) the list of 

reporting forms in § 15.02.

4. Special Calls

 380 17 CFR 19.01. 
227

Notwithstanding the proposed elimination of Form 204, the Commission does not 

propose to make any significant substantive changes to information requirements relating 

to positions exceeding limits and/or to reportable positions. Accordingly, in proposed § 

19.00(b), the Commission proposes that all persons exceeding the proposed limits set 

forth in § 150.2, as well as all persons holding or controlling reportable positions 

pursuant to § 15.00(p)(1), must file any pertinent information as instructed in a special 

call. This proposed provision is similar to existing § 19.00(a)(3), but would require any 

such person to file the information as instructed in the special call, rather than to file a 

series ’04 report.381

The Commission also proposes to add language to existing § 15.01(d) to clarify 

that persons who have received a special call are deemed “persons required to report” as 

defined in § 15.01.382 The Commission proposes this change to clarify an existing 

requirement found in § 19.00(a)(3), which requires persons holding or controlling 

positions that are reportable pursuant to § 15.00(p)(1) who have received a special call to 

respond.

383 The proposed changes to part 19 operate in tandem with the proposed 

additional language for § 15.01(d) to reiterate the Commission’s existing special call 

authority without creating any new substantive reporting obligations. Finally, proposed § 

19.03 would delegate authority to issue such special calls to the Director of the Division 

of Enforcement, and proposed § 19.03(b) would delegate to the Director of the Division 

of Enforcement the authority in proposed § 19.00(b) to provide instructions or to 

 381 17 CFR 19.00(a)(3). 382 17 CFR 15.01. 383 17 CFR 19.00(a)(3).
228

determine the format, coding structure, and electronic data transmission procedures for 

submitting data records and any other information required under part 19.

5. Form 304 Cotton On-Call Reporting

With the proposed elimination of the cash-market reporting elements of Form 304 

as described above, Form 304 would be used exclusively to collect the information 

needed to publish the Commission’s weekly cotton on call report, which shows the 

quantity of unfixed-price cash cotton purchases and sales that are outstanding against 

each cotton futures month.384 The requirements pertaining to that report would remain in 

proposed §§ 19.00(a) and 19.02, with minor modifications to existing provisions. The 

Commission proposes to update cross references (including to renumber § 19.00(a)(2) as 

§ 19.00(a)) and to clarify and update the procedures and timing for the submission of 

Form 304. In particular, proposed § 19.02(b) would require that each Form 304 report be 

made weekly, dated as of the close of business on Friday, and filed not later than 9 a.m. 

Eastern Time on the third business day following that Friday using the format, coding 

structure, and electronic data transmission procedures approved in writing by the 

Commission. The Commission also proposes some modifications to the Form 304 itself, 

including conforming and technical changes to the organization, instructions, and 

required identifying information.385

Request for Comment

 384 Cotton On-Call, U.S. Commodity Futures Trading Commission Web site, available at 

https://www.cftc.gov/MarketReports/CottonOnCall/index.htm (weekly report). 385 Among other things, the proposed changes to the instructions would clarify that traders must identify 

themselves on Form 304 using their Public Trader Identification Number, in lieu of the CFTC Code 

Number required on previous versions of Form 304. This proposed change would help Commission staff 

to connect the various reports filed by the same market participants. This release includes a representation

of the proposed Form 304, which would be submitted in an electronic format published pursuant to the 

proposed rules, either via the Commission’s web portal or via XML-based, secure FTP transmission.
229

The Commission requests comment on all aspects of the proposed amendments to 

Part 19 and related provisions. The Commission also invites comments on the following:

(46) To what extent, and for what purpose, do market participants and others 

rely on the information contained in the Commission’s weekly cotton oncall report?

(47) Does publication of the cotton on-call report create any informational 

advantages or disadvantages, and/or otherwise impact competition in any 

way?

(48) Should the Commission stop publishing the cotton on-call report, but 

continue to collect, for internal use only, the information required in Part 

III of Form 304 (Unfixed-Price Cotton “On Call”)?

(49) Alternatively, should the Commission stop publishing the cotton on-call 

report and also eliminate the Form 304 altogether, including Part III?

6. Proposed Technical Changes to Part 17

Part 17 of the Commission’s regulations addresses reports by reporting markets, 

FCMs, clearing members, and foreign brokers.386 The Commission proposes to amend 

existing § 17.00(b), which addresses information to be furnished by FCMs, clearing 

members, and foreign brokers, to delete certain provisions related to aggregation, because 

those provisions have become duplicative of aggregation provisions that were adopted in 

§ 150.4 in the 2016 Final Aggregation Rulemaking.387 The Commission also proposes to 

 386 17 CFR part 17. 387 See Final Aggregation Rulemaking. Specifically, the Commission proposes to delete paragraphs (1), 

(2), and (3) from § 17.00(b). 17 CFR 17.00(b). 
230

add a new provision, § 17.03(i), which delegates certain authority under § 17.00(b) to the 

Director of the Office of Data and Technology.388 

I. Removal of Part 151

Finally, the Commission is proposing to remove and reserve part 151 in response 

to its vacatur by the U.S. District Court for the District of Columbia,389 as well as in light 

of the proposed revisions to part 150 that conform part 150 to the amendments made to 

the CEA section 4a by the Dodd-Frank Act.

III. Legal Matters

A. Introduction

Section 737 (a)(4) of the Dodd-Frank Act,390 codified as section 4a(a)(2)(A) of 

the Commodity Exchange Act,391 states in relevant part that “the Commission shall” 

establish position limits for contracts in physical commodities other than excluded 

commodities “[i]n accordance with the standards set forth in” section 4a(a)(1), which 

primarily contains the Commission’s preexisting authority to establish such position 

limits as it “finds are necessary.”392 In connection with the 2011 Final Rulemaking, the 

Commission determined that section 4a(a)(2)(A) is an unambiguous mandate to establish 

position limits for all physical commodities. In ISDA,

393 however, the U.S. District Court 

 388 Under § 150.4(e)(2), which was adopted in the 2016 Final Aggregation Rulemaking, the Director of the 

Division of Market Oversight is delegated authority to, among other things, provide instructions relating to 

the format, coding structure, and electronic data transmission procedures for submitting certain data 

records. 17 CFR 150.4(e)(2). A subsequent rulemaking changed this delegation of authority from the 

Director of the Division of Market Oversight to the Director of the Office of Data and Technology, with the 

concurrence of the Director of the Division of Enforcement. See 82 FR at 28763 (June 26, 2017). The 

proposed addition of § 17.03(i) would conform § 17.03 to that change in delegation.

389 See supra note 11 and accompanying discussion.

390 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, § 737(a)(4), Pub. L. 111-203, 

124 Stat. 1376, 1723 (July 21, 2010).

391 7 U.S.C. 6a(a)(2)(A).

392 7 U.S.C. 6a(a)(1).

393 887 F.Supp.2d 259.
231

for the District of Columbia held that the term “standards set forth in paragraph (1)” is 

ambiguous as to whether it includes the requirement under section 4a(a)(1) that before 

the Commission establishes a position limit, it must first find it “necessary” to do so. The 

court therefore vacated the 2011 Final Rulemaking and directed the Commission to 

determine, in light of the Commission’s “experience and expertise” ” and the “competing 

interests at stake,” whether section 4a(a)(2)(A) requires the Commission to make a 

necessity finding before establishing the relevant limits, or if section 4a(a)(2)(A) is a 

mandate from Congress to do so without that antecedent finding.

Following the court’s order, the Commission subsequently determined that the 

“standards set forth in paragraph (1)” do not include the requirement in that paragraph 

that the Commission find position limits “necessary.”394 Rather, the Commission 

determined, “the standards set forth in paragraph (1)” refer only to what the Commission 

called the “aggregation standard” and the “flexibility standard.”395 The “aggregation 

standard” referred to directions under section 4a(a)(1)(A) that in determining whether any 

person has exceeded an applicable position limit, the Commission must aggregate the 

positions a party controls directly or indirectly, or held by two persons acting in concert 

“the same as if the positions were held by, or the trading were done by, a single 

person.”396 The “flexibility standard” referred to the statement in section 4a(a)(1)(A) that 

“[n]othing in this section shall be construed to prohibit” the Commission from fixing 

 394 See, e.g., 2013 Proposal, 78 FR at 75680, 75684.

395 See, e.g., id. 396 7 U.S.C. 6a(a)(1).
232

different limits for different commodities, markets, futures, delivery months, numbers of 

days remaining on the contract, or for buying and selling operations.397 

The Commission here preliminarily reaches a different conclusion. In light of its 

experience with and expertise in position limits and the competing interests at stake, the 

Commission now determines that it should interpret “the standards set forth in paragraph 

(1)” to include the traditional necessity and aggregation standards. The Commission also 

preliminarily determines that the “flexibility standard” is not an accurate way of 

describing the statute’s lack of a prohibition on differential limits, and therefore is not 

included in “the standards set forth in paragraph (1)” with which position limits must 

accord. However, even if that were not so, the Commission would still preliminarily 

determine that “the standards set forth in paragraph (1)” should be interpreted to include 

necessity. 

B. Key Statutory Provisions

The Commission’s authority to establish position limits dates back to the 

Commodity Exchange Act of 1936.398 The relevant CEA language, now codified in its 

present form as section 4a(a)(1), states, among other things that the Commission “shall, 

from time to time ... proclaim and fix such limits on the amounts of trading which may 

be done or positions which may be held by any person under such contracts” as the 

Commission “finds are necessary to diminish, eliminate, or prevent such burden.” Thus, 

the Commission’s original authority to establish a position limit required it first to find 

that it was necessary to do so. Section 4a(a)(1) also includes what the Commission has 

referred to as the aggregation and flexibility standards.

 397 Id. 398 P.L. 74-675 § 5, 49 Stat. 1491, 1492 (June 15, 1936).
233

Section 4a(a)(2)(A) provides, in relevant part, that “[i]n accordance with the 

standards set forth in paragraph (1) of this subsection,” i.e., paragraph 4a(a)(1) discussed 

above, the Commission shall, by rule, regulation, or order establish limits on the amount 

of positions, as appropriate, other than bona fide hedge positions, that may be held by any 

person with respect to contracts of sale for future delivery or with respect to options on 

the contracts or commodities traded on or subject to the rules of a DCM. This direction 

applies only to physical commodities other than excluded commodities. Paragraph 

4a(a)(2)(B) states that the limits for exempt physical commodities “required” under 

subparagraph (A) “shall” be established within 180 days, and for agricultural 

commodities the limits “required” under subparagraph (A) “shall” be established within 

270 days. Paragraph 4a(a)(2)(C) establishes as a “goal” that the Commission “shall strive 

to ensure that trading on foreign boards of trade in the same commodity will be subject to 

comparable limits” and that any limits imposed by the Commission not cause price 

discovery to shift to foreign boards of trade. 

Next, paragraph 4a(a)(3) establishes certain requirements for position limits set

pursuant to paragraph 4a(a)(2). It directs that when the Commission establishes “the 

limits required in paragraph (2),” it shall, “as appropriate,” set limits on the number of 

positions that may be held in the spot month, each other month, and the aggregate 

number of positions that may be held by any person for all months; and “to the extent 

practicable, in its discretion” the Commission shall fashion the limits to (i) “diminish, 

eliminate, or prevent excessive speculation as described under this section;” (ii) “deter 

and prevent market manipulation, squeezes, and corners;” (iii) “ensure sufficient market 
234

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

underlying market is not disrupted.” 

Paragraph 4a(a)(5) adds a further requirement that when the Commission 

establishes limits under paragraph 4a(a)(2), the Commission must establish limits on the 

amount of positions, “as appropriate,” on swaps that are “economically equivalent” to 

futures and options contracts subject to paragraph 4a(a)(2). 

C. Ambiguity of Section 4a With Respect to Necessity Finding

The district court held that section 4a(a)(2) is ambiguous as to whether, before the 

Commission establishes a position limit, it must first find that a limit is “necessary.” The 

court found the phrase “[i]n accordance with the standards set forth in paragraph (1) of 

this subsection” unclear as to whether it includes the proviso in paragraph (1) that 

position limits be established only “as the Commission finds are necessary.” 399 The 

court noted that, by some definitions of “standard,” a requirement that position limits be 

“necessary” could qualify.400

The district court found the ambiguity compounded by the phrase “as 

appropriate” in sections 4a(a)(2)(A), 4a(a)(3), and 4a(a)(5).

401 It was unclear to the court 

whether this phrase gives the Commission discretion not to impose position limits at all if 

it finds them not appropriate, or if the discretion extends only to determining 

“appropriate” levels at which to set the limits.402 Neither the grammar of the relevant 

provisions nor the available legislative history resolved these issues to the court’s 

 399 ISDA, 887 F.Supp.2d at 274. 400 Id. 401 Id. at 276-278. 402 Id.
235

satisfaction.

403 In sum, “the Dodd-Frank amendments do not constitute a clear and 

unambiguous mandate to set position limits.”404 The court therefore directed the 

Commission to resolve the ambiguity, not by “rest[ing] simply on its parsing of the 

statutory language,” but by “bring[ing] its experience and expertise to bear in light of the 

competing interests at stake.”

405

D. Resolution of Ambiguity

The Commission has applied its experience and expertise in light of the 

competing interests at stake and preliminarily determined that paragraph 4a(a)(2) should 

be interpreted as incorporating the requirement of paragraph 4a(a)(1) that position limits 

be established only “as the Commission finds are necessary.” This is based on a number 

of considerations. 

First, while the Commission has previously taken the position that necessity does 

not fall within the definition of the word “standard,” that view relied on only one of the 

many dictionary definitions of “standard,”406 and the Commission now believes it was an 

overly narrow interpretation. The word “standard” is used in different ways in different 

contexts, and many reasonable definitions would encompass “necessity.”407 In legal 

 403 Id. 404 Id. at 280. 405 Id. at 281. 406 ISDA, Defendant Commodity Futures Trading Commission’s Cross-Motion for Summary Judgment at 

24-25, (quoting definition of “standard” as “something set up and established by authority as a rule for the 

measure of quantity, weight, extent, value, or quality” from Merriam-Webster’s Collegiate Dictionary 1216 

(11th ed. 2011)).

407 Black’s Law Dictionary 1624 (10th ed. 2014) (“A criterion for measuring acceptability, quality, or 

accuracy.”); The American Heritage Dictionary of the English Language (5th ed. 2011) (“A degree or level 

of requirement, excellence, or attainment.”); New Oxford American Dictionary 1699 (3rd ed. 2010) (“an 

idea or thing used as a measure, norm, or model in comparative evaluations”); The Random House 

Unabridged Dictionary 1857 (2d ed. 1993) (“rule or principle that is used as a basis for judgment”); XVI 

The Oxford English Dictionary 505 (2d ed. 1989) (“A rule, principle, or means of judgment or estimation; a 

criterion, measure.”).
236

contexts, “necessity” is routinely called a “standard.”408 The Commission preliminarily 

believes that the more natural reading of “standard” in section 4a(a)(2)(A) does include 

the requirement of a necessity finding.

Second, and relatedly, the Commission believes the term “standard” is a less 

natural fit for the language in subparagraph 4a(a)(1) that the Commission has previously 

called the “flexibility standard.” The sentence provides that “[n]othing in this section 

shall be construed to prohibit the Commission from fixing different trading or position 

limits for different” contracts or situations.409 Typically a legal standard constrains an 

agency’s discretion.410 But nothing in the so-called “flexibility” language constrains the 

Commission at all. In other words, the express lack of any prohibition of differential 

limits under section 4a(a)(1) is better understood as the absence of any standard.411 And 

if flexibility is not a standard, then necessity must be, because section 4a(a)(2)(A) refers 

to “standards,” plural.

 408 Home Buyers Warranty Corp. v. Hanna, 750 F.3d 427, 435 (4th Cir. 2014) (applying a “‘necessity’ 

standard” under Fed. R. Civ. P. 19(a)(1)(A)); United States v. Cartagena, 593 F.3d 104, 111 n.4 (1st Cir. 

2010) (discussing a “necessity standard” under the Omnibus Crime Control and Safe Streets Act of 1968); 

Fones4All Corp. v. F.C.C., 550 F.3d 811, 820 (9th Cir. 2008) (applying a “necessity standard” under the 

Telecommunications Act of 1996); Swonger v. Surface Transp. Bd., 265 F.3d 1135, 1141–42 (10th Cir. 

2001) (applying a “necessity standard” under transportation law); see also Minnesota v. Mille Lacs Band of 

Chippewa Indians, 526 U.S. 172, 205 (1999) (“conservation necessity standard”); Int'l Union, United 

Auto., Aerospace & Agr. Implement Workers of Am., UAW v. Johnson Controls, Inc., 499 U.S. 187, 198 

(1991) (“business necessity standard”). 409 7 U.S.C. 6a(a)(1)(A). 410 See, e.g., OSU Student Alliance v. Ray, 699 F.3d 1053, 1064 (9th Cir. 2012) (holding that the First 

Amendment was violated by enforcement of a rule that “created no standards to cabin discretion”); Lenis v.

U.S. Attorney General, 525 F.3d 1291, 1294 (11th Cir. 2008) (dismissing petition for review where agency 

procedural regulation “specifie[d] no standards for a court to use to cabin” the agency’s discretion); 

Tamenut v. Mukasey, 521 F.3d 1000, 1004 (8th Cir. 2008); Drake v. FAA, 291 F.3d 59, 71 (D.C. Cir. 2002)

(similar). 411 Tamenut v. Mukasey, 521 F.3d 1000, 1004 (8th Cir. 2008) (explaining that a statute placing “no 

constraints on the [agency’s] discretion ... specifie[d] no standards”); United States v. Gonzalez-Aparicio, 

663 F.3d 419, 435 (9th Cir. 2011) (Tashima, J., dissenting) (“If we can pick whatever standard suits us, free 

from the direction of binding principles, then there is no standard at all.”); Downs v. Am. Emp. Ins. Co., 423 

F.2d 1160, 1163 (5th Cir. 1970) (“best judgment is no standard at all”).
237

Third, the requirement that position limits be “appropriate” is an additional 

ground to interpret the statute as lacking an across-the board-mandate. In the past, the 

Commission has taken the view that the word “appropriate” as used in section 

4a(a)(2)(A)—and in sections 4a(a)(3) and 4a(a)(5) in connection with position limits 

established pursuant to section 4a(a)(2)(A)—refers to position limit levels but not to the 

determination of whether to establish a limit.412 However, the Supreme Court has opined 

in the context of the Clean Air Act that “[n]o regulation is ‘appropriate’ if it does 

significantly more harm than good.”413 That was not a CEA case, but the Commission 

finds the Court’s reasoning persuasive in this context.

It is reasonable to interpret the direction to set a position limit “as appropriate” to 

mean that in a given context, it may be that no position limit is justified. Under an 

across-the-board mandate, however, the Commission would be compelled to impose

some limit even if any level of position limit would do significantly more harm than 

good, including with respect to the public interests Congress set forth in section 4a(a)(1) 

itself and elsewhere in section 4a and the CEA generally.

414. The Commission does not 

believe that is the best reading of section 4a(a)(2)(A). Rather, Congress’s use of 

“appropriate” in that section and elsewhere in the Dodd-Frank amendments is more 

consistent with a directive that the Commission consider all relevant factors and, on that 

basis, set an appropriate limit level—or no limit at all, if to establish one would 

contravene the public interests Congress articulated in section 4a(a)(1) and the CEA 

 412 E.g., ISDA, Commission Appellate Brief at 37-38. 413 Michigan v. EPA, 135 S.Ct. 2699, 2707 (2015). Because Michigan was not a CEA case, the 

Commission does not mean to imply that Michigan would be controlling or compels any particular result in 

determining when a position limit is appropriate. To the contrary, the court in ISDA held that the CEA is 

ambiguous in that regard. The Commission merely finds the Supreme Court’s discussion in Michigan 

useful in reasonably resolving that ambiguity.

414 7 U.S.C. 5, 6a(a)(2)(C) and (a)(3)(B).
238

generally. That is also better policy. To be clear, this does not mean the Commission 

must conduct a formal cost-benefit analysis in which each advantage and disadvantage is 

assigned a monetary value. To the contrary, the Commission retains broad discretion to 

decide how to determine whether a position limit is appropriate.415

Fourth, mandatory federal position limits for all physical commodities would be a 

sea change in derivatives regulation, and the Commission does not believe it should infer

that Congress would have acted so dramatically without speaking clearly and 

unequivocally.416 It is important to understand the reach of the proposition that the 

Commission must impose position limits for every physical commodity. The

Commission estimates, based on information from the Commission’s surveillance 

system, that currently there are over 1,200 contracts on physical commodities listed on 

DCMs. Some of these contracts have little or no active trading.417 Absent clearer 

statutory language than is present in the statute, the Commission does not believe it 

should interpret the statute as though Congress had concerns about or even considered 

each and every one of the similar number of contracts listed at the time of Dodd-Frank. 

In a similar vein, the Commission previously has cited Senate Subcommittee’s staff 

studies of potential excessive speculation that preceded the enactment of section 

 415 135 S.Ct. at 2707, 2711. 416E.g., Whiteman v. American Trucking Assns., Inc., 531 U.S. 457, 468 (2000) (Congress...does not alter 

the fundamental details of a regulatory scheme in vague terms....”); EEOC v. Staten Island Sav. Bank, 207 

F.3d 144, (2d Cir. 2000) (“we are reluctant to infer...a mandate for radical change absent a clearer 

legislative command”); Canup v. Chipman-Union, Inc., 123 F.3d 1440, (11th Cir. 1997) (“We would 

expect Congress to speak more clearly if it intended such a radical change....”).

417 See, e.g., Daily Agricultural Volume and Open Interest, CME Group Web site, available at

https://www.cmegroup.com/market-data/volume-open-interest/agriculture-commodities-volume.html

(tables of daily trading volume and open interest for CME futures contracts).
239

4a(a)(2).418 But those studies covered only a few commodities—oil, natural gas, and 

wheat.419 While these studies demonstrate that Senate subcommittee’s concern with 

potential excessive speculation, the Commission does not believe it should interpret a 

statute by extrapolating from one Senate subcommittee’s interest in three specific 

commodities to a requirement to impose limits on all of the many hundreds of physical 

futures contracts listed on exchanges, where Congress as a whole has not said so 

unambiguously. 

DCMs also regularly create new contracts. If Congress intended federal position 

limits to apply to all physical commodity contracts, the Commission would expect there 

to be a provision directing it to establish position limits on a continuous basis. There is 

no such provision—and Congress directed the Commission to complete its position-limits 

rulemaking within 270 days.420 The only other relevant provision is the preexisting and 

broadly discretionary requirement that the Commission make an assessment “from time 

to time.” That structure is inconsistent, both as a statutory and policy matter, with an 

across-the-board mandate. 

Fifth, the Commission believes as a matter of policy judgment that requiring a 

necessity finding better carries out the purposes of section 4a. As Congress presumably 

was aware, position limits create costs as well as potential benefits. 

The Commission has recognized, and Congress also presumably understood, that 

there are costs even for well-crafted position limits. As discussed below in the 

Commission’s consideration of costs and benefits, market participants must monitor their 

 418 E.g., 2013 Proposal, 78 FR at 75787 nn.122-124; ISDA, Brief for Appellant Commodity Futures Trading 

Commission at 14-15.

419 Id. 420 7 U.S.C. 6a(a)(2)(B).
240

positions and have safeguards in place to ensure compliance with limits. In addition to 

compliance costs, position limits may constrain some economically beneficial uses of 

derivatives, because a limit calculated to prevent excessive speculation or to restrict 

opportunities for manipulation may, in some circumstances, affect speculation that is 

desirable. While the Commission has designed limits to avoid interference with normal 

trading, certain negative effects cannot be ruled out. 

For example, to interpret section 4a(a)(2) as a mandate even where unnecessary 

could pose risks to liquidity and hedging. Well-calibrated position limits can protect 

liquidity by checking excessive speculation, but unnecessary limits can have the opposite 

effect by drawing capital out of markets. Indeed, the liquidity of a futures contract, upon 

which hedging depends, is directly related to the amount of speculation that takes place. 

Speculators contribute valuable liquidity to commodity markets, and section 4a(a)(1) 

identified “excessive speculation”—not all speculation—as “an undue burden on 

interstate commerce.” To needlessly reduce liquidity, impair price discovery, and make

hedging more difficult for commodity end-users without sufficient beneficial effects on 

interstate commerce is unsound policy, as Congress has defined the policy. If Congress 

had drafted the statute unambiguously to reflect the judgment that these costs of position 

limits are justified in all instances, the Commission of course would follow it. Without 

such clarity, the Commission does not believe it should interpret the statute to impose 

those costs regardless of whether and to what extent doing so advances Congress’ stated 

goals.

Sixth, while Congress has deemed position limits an effective tool, it is sound 

regulatory policy for the Commission to apply its experience and expertise to determine 
241

whether economic conditions with respect to a given commodity at a given point in time 

render it likely that position limits will achieve positive outcomes. A mandate without 

the requirement of a necessity finding would eliminate the Commission’s expertise and 

experience from the process and could lead to position limits that do not have 

significantly positive effects, or even position limits that are counterproductive. 

Necessity findings may also enhance public confidence that position limits in place are 

necessary to their statutory purposes, potentially improving public confidence in the 

markets themselves. It is therefore sound policy to construe the statute in a way that 

requires the Commission to make a necessity finding before establishing position

limits.421 

Finally, also as a matter of policy, the Commission’s approach will prevent 

market participants from suffering the costs of statutory ambiguity. Mandating position 

limits across all products would automatically impose costs on market participants 

regardless of whether doing so fulfills the purpose of section 4a. The associated 

compliance costs remain as long as those limits are in place. Reading a mandate into 

section 4a would exchange regulatory convenience, with or without any public benefit,

for long-term burdens on market participants. The Commission does not believe that 

ambiguity should be resolved reflexively in a manner that shifts costs to market 

participants. Rather, the Commission believes that where an agency has discretion to 

choose from among reasonable alternative interpretations, it should not impose costs 

 421 The Commission also does not believe that establishing and enforcing position limits for all contracts on 

physical commodities, regardless of their importance to the price or delivery process of the underlying 

commodities or to the economy more broadly, would be a productive use of the public resources Congress 

has appropriated to the Commission.
242

without a strong justification, which in this context would be lacking without a necessity 

finding.

E. Evaluation of Considerations Relied Upon by the Commission in Previous 

Interpretation of Paragraph 4a(a)(2)

As noted above, the Commission previously has identified a number of 

considerations it believed supported interpreting paragraph 4a(a)(2) to mandate position 

limits for all physical commodities other than excluded commodities, without the need 

for a necessity finding. Although the Administrative Procedure Act does not require the 

Commission to rebut those previous points, the Commission believes it is useful to 

discuss them. While certain of these considerations could support such an interpretation, 

the Commission is no longer persuaded that, on balance, they support interpreting 

paragraph 4a(a)(2) as an across-the-board mandate. Considerations on which the 

Commission previously relied include the following:

1. When Congress enacted paragraph 4a(a)(2), the text of what previously 

was paragraph 4a(a),

422 already provided that the Commission “shall...proclaim and fix” 

position limits “as the Commission finds are necessary” to diminish, eliminate, or prevent 

the burdens on commerce associated with excessive speculation. This directive 

applied—and still applies—to all exchange-traded commodities, including the physical 

commodities that are the subject of paragraph 4a(a)(2). The Commission has previously 

reasoned that if paragraph 4a(a)(2) were not a mandate to establish position limits without 

such a necessity finding, it would be a nullity.423 That is, the Commission already had 

 422 7 U.S.C. 6a(a). 423 E.g., 2016 Reproposal, 81 FR at 96715, 96716 (discussing comments on past releases); 2013 Proposal, 

78 FR at 75684.
243

the authority to issue position limits, so 4a(a)(2) would add nothing were it not a 

mandate. The Commission is no longer convinced that is correct.

Whereas the Commission’s preexisting authority under the predecessor to 

paragraph 4a(a)(1) directed the Commission to establish position limits “from time to 

time,” new paragraph 4a(a)(2) directed the Commission to consider position limits

promptly within two specified time limits after Congress passed the Dodd-Frank Act. 

That is a new directive, and it is consistent with maintaining the requirement for, and 

preserving the benefits of, a necessity finding. This interpretation is also consistent with 

the Commission’s belief that Congress would not have intended a drastic mandate 

without a clear statement to that effect. This interpretation is likewise consistent with 

Congress’ addition of swaps to the Commission’s jurisdiction—it makes sense to direct 

the Commission to give prompt consideration to whether position limits are necessary at 

the same time Congress was expanding the Commission’s oversight responsibilities to 

new markets, and the Commission believes that is sound policy to ensure that the regime 

works well as a whole. Rather than leave it to the Commission’s preexisting discretion to 

set limits “from time to time,” it is reasonable to believe that Congress found it important 

for the Commission to focus on this issue at a time certain. 

In addition, paragraph 4a(a)(2) triggers other requirements added to section 4a(a) 

by Dodd-Frank and not included in paragraph 4a(a)(1). For example, as described above, 

paragraph 4a(a)(3)(B) identifies objectives the Commission is required to pursue in 

establishing position limits, including three, set forth in subparagraphs 4a(a)(3)(B)(ii)-

(iv), that are not explicitly mentioned in paragraph 4a(a)(1). The Commission previously 

opined that paragraph 4a(a)(5), which directs the Commission to establish, position limits 
244

on swaps “economically equivalent” to futures subject to new position limits, would add 

nothing to paragraph 4a(a)(1), because if there were no mandate. The Commission no 

longer finds that reasoning persuasive. Paragraph 4a(a)(5) goes beyond paragraph 

4a(a)(1), because it separately requires that when the Commission imposes limits on 

futures pursuant to paragraph 4a(a)(2), it also does so on economically equivalent swaps. 

Without that text, the Commission would have no such obligation to issue both types of 

limits at the same time. 

2. The Commission has also previously been influenced by the requirements 

of paragraph 4a(a)(3), which directs the Commission, “as appropriate” when setting 

limits, to establish them for the spot month, each other month, and all months; and sets 

forth four policy objectives the Commission must pursue “to the maximum extent 

practicable.”424 The Commission described these as “constraints” and found it “unlikely” 

that Congress intended to place new constraints on the Commission’s preexisting 

authority to establish position limits, given the background of the amendments and in 

particular the studies that preceded their enactment.

425 However, on further consideration 

of this statutory language, the Commission does not interpret that language as a set of 

constraints in the sense of directing the Commission to make less use of limits or to 

impose higher limits than in the past. Rather, it focuses the Commission’s decision 

process by identifying relevant objectives and directing the Commission to achieve them 

to the maximum extent practicable. Requiring the Commission to prioritize, to the extent 

practicable, preventing excessive speculation and manipulation, ensuring liquidity, and 

 424 7 U.S.C. 6a(a)(3). 425 E.g., 2016 Reproposal, 81 FR at 96716 (discussing comments on earlier releases).
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avoiding disruption of price discovery is reasonable regardless of whether there is an 

across-the-board mandate. 

In past releases the Commission has also suggested that it is unclear why 

Congress would have imposed the decisional “constraints” of paragraph 4a(a)(3) “with 

respect to physical commodities but not excluded commodities or others” unless this 

provision was enacted as part of a mandate to impose limits without a necessity 

finding.426 However, all of these relevant amendments pertain only to physical 

commodities other than excluded commodities. The Congressional studies that preceded 

the enactment of paragraph 4a(a)(2) demonstrated concern specifically with problems in 

markets for physical commodities such as oil and natural gas.427 It therefore is not 

surprising that Congress enacted provisions specifically addressing limits for physical 

commodities and not others, whether or not Congress intended a necessity finding. 

Those physical commodities were the focus of Congress’ concern. 

3. The Commission has previously stated that the time requirements for 

establishing limits set forth in subparagraph 4a(a)(2)(B) are inconsistent with a necessity 

finding because, based on past experience, necessity findings for individual commodity 

markets cannot be made within the specified time periods.428 However, the fact that 

many decades ago a number of months may have elapsed between proposals and final 

position limits does not mean that much time was necessary then or is necessary now. 

There are a number of possible reasons, such as limits on agency resources and why the 

agency took that amount of time. It is not a like-to-like comparison, because the agencies 

 426 Id. 427 See, e.g., 2013 Proposal, 78 FR at 75682 and nn.24-26 (describing Congressional studies). 428 E.g., 2016 Reproposal, 81 FR at 96708; 2013 Proposal, 78 FR at 75682, 75683. 
246

acting many decades ago were not acting pursuant to a mandate. The speed with which 

an agency could or would enact discretionary position limits is not necessarily a good 

proxy for how long would be required under a mandate. 429 There is accordingly no 

inconsistency, and thus the deadlines do not necessarily imply that Congress intended to 

eliminate a necessity finding for limits under paragraph 4a(a)(2).

4. The Commission previously has stated that Congress appears to have 

modeled the text of paragraph 4a(a)(2) on the text of the Commission’s 1981 rule 

requiring exchanges to set speculative position limits for all contracts.430 The 

Commission has further stated that the 1981 rule treated aggregation and flexibility as 

“standards,” and Congress therefore likely did the same in paragraph 4a(a)(2).431 The 

Commission no longer agrees with that description or that reasoning. 

Under the 1981 rule, former section 1.61(a) of the Commission’s regulations

required exchanges to adopt position limits for all contracts listed to trade.432 The rule 

also established requirements similar to the current statutory aggregation requirements: 

Section 1.61(a) required that limits apply to positions a person may either “hold” or 

“control,”

433 section 1.61(g) established more detailed aggregation requirements.434 

Section 1.61(a)(1) contained language the Commission has called the “flexibility 

standard,” i.e. that “nothing” in section 1.61 “shall be construed to prohibit a contract 

 429 The Commission’s reasoning in this respect has also assumed that a necessity finding means a granular 

market-by-market study of whether position limits will be useful for a given contract. As explained below, 

however, the Commission here preliminarily determines that such an analysis is not required. Under the 

Commission’s current preliminary interpretation of the necessity finding requirement, it would have been 

plausible to complete the required findings under the deadlines Congress established. 

430 E.g., 2013 Proposal, 78 FR at 75683, 75684. 431 Id. 432 Establishment of Speculative Position Limits, 46 FR at 50945 (Oct. 16, 1981). 433 Id. 434 Id. at 50946.
247

market from fixing different and separate position limits for different types of futures 

contracts based on the same commodity, different position limits for different futures, or 

for different delivery months, or from exempting positions which are normally known in 

the trade as ‘spreads, straddles or arbitrage’ or from fixing limits which apply to such 

positions which are different from limits fixed for other positions.”

435 Section 1.61(d)(1) 

of the rule required every exchange to submit information to the Commission 

demonstrating that it had “complied with the purpose and standards set forth in paragraph 

(a).”436 In the 2013 and 2016 proposals, the Commission concluded that the crossreference to the “standards set forth in paragraph (a)” meant both the aggregation and 

flexibility language, because both of those sets of language appear in paragraph (a). By 

contrast, paragraph (a) did not include a requirement for a necessity finding, since the 

1981 rule required position limits on all actively traded contracts.

437 

On further review, the Commission does not find this reasoning persuasive. The 

“flexibility” language gave the exchange unfettered discretion to set different limits for 

different kinds of positions—there was expressly “nothing” in that language to limit the 

exchange’s discretion.438 In other words, there is nothing in that flexibility text with 

which to “comply,” so it cannot be part of what section 1.61(d)(1) referenced as a 

“standard” for which compliance must be demonstrated. 

As discussed above, “standard” is an ill-fitting label for this lack of a prohibition. 

Indeed, the 1981 release and associated 1980 NPRM did use the word “standard” to refer 

to certain language directing and constraining the discretion of the exchanges, a much 

 435 Id. at 50945. 436 Id. 437 Id. 438 46 FR at 50945 (section 1.61(a)(1)).
248

more natural use of that word. For example, the preambles to both releases called

requirements to aggregate certain holdings “aggregation standards.”439 And, in both the 

1980 NPRM (in the preamble) and the 1981 Final Rule (in rule text), the Commission 

used the word “standard” to describe factors, such as position sizes customarily held by 

speculative traders, that exchanges were required to consider in setting the level of 

position limits.440

Although the wording of the 1981 rule and paragraph 4a(a)(2) have similarities, 

there are also differences. These differences weaken the inference that Congress 

intended the statute to hew closely to the rule. There is no legislative history articulating 

any relationship between the two. And even if Congress in Dodd-Frank did borrow 

concepts from the 1981 rule, there is little reason to infer that Congress was borrowing 

the precise meaning of any individual word—much less that the use of “standards” 

includes what “nothing in this section shall be construed to prohibit....” 

5. In past releases the Commission has also observed that, in 1983, as part of 

the Futures Trading Act of 1982, Pub. L. 96-444, 96 Stat. 2294 (1983), Congress added a 

provision to the CEA making it a violation of the Act to violate exchange-set position 

limits, thus, in effect, ratifying the Commission’s 1981 rule.441 The Commission 

reasoned that this history supports the possibility that Congress could reasonably have 

followed an across-the-board approach here.442 But while that may be so, the 

Commission today does not find that mere possibility helpful in interpreting the 

ambiguous term “standards,” because there is no evidence that Congress in 1982 

 439 Id. at 50943; Speculative Position Limits, 45 FR at 79834. 440 46 FR at 50945 (in section 1.61(a)(2)); 45 FR at 79833, 79834. 441 See, e.g., 2016 Reproposal, 81 FR at 96709, 96710. 442 Id. at 96710.
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considered the lack of a prohibition on different position limit levels in the rule to be a 

“standard.” By extension, the Futures Trading Act does not bear on the Commission’s 

preliminary interpretation of “standards” in section 4a(a)(2)(A) today.

6. In briefs in the ISDA case, the Commission pointed out that CEA 

paragraphs 4a(a)(2)(B) and 4a(a)(3) repeatedly use the word “required” in connection 

with position limits established pursuant to paragraph 4a(a)(2), implying that the 

Commission is required to establish those limits regardless of whether it finds them to be 

necessary.443 But that is not the only way to interpret the word “required.” Position 

limits are required under certain circumstances even if there is no across-the-board 

mandate—i.e., when the Commission finds that they are “necessary.” Under the 

Commission’s current preliminary interpretation, the Commission was required to assess 

within a specified timeframe if position limits were “necessary” and, if so, section 

4a(a)(2) states that the Commission “shall” establish them. Thus, the word “required” in 

paragraphs 4a(a)(2)(B) and 4a(a)(3) leaves open the question of whether paragraph 

4a(a)(2) itself requires position limits for all physical commodity contracts or, on the 

other hand, only requires them where the Commission finds them necessary under the 

standards of paragraph 4a(a)(1). The use of the word “required” in paragraphs 

4a(a)(2)(B) and 4a(a)(3) therefore does not resolve the ambiguity in the statute. For the 

same reason, the evolution of the statutory language during the legislative process, during 

which the word “may” was changed to “shall” in a number of places, also does not 

resolve the ambiguity.444

 443 E.g., ISDA, Brief for Appellant Commodity Futures Trading Commission at 26-27. 444 See, e.g., 2013 Proposal, 78 FR at 75684,75685 (discussing evolution of statutory language as 

supporting mandate). 
250

7. The Commission has pointed out that section 719 of the Dodd-Frank Act 

required the Commission to “conduct a study of the effects (if any) of the position limits 

imposed” pursuant to paragraph 4a(a)(2) and report the results to Congress within twelve 

months after the imposition of limits.445 The Commission has suggested that Congress 

would not have required such a study if paragraph 4a(a)(2) left the Commission with 

discretion to find that limits were unnecessary so that there would be nothing for the 

Commission to study and report on to Congress.446 However, while the study 

requirement implies that Congress perhaps anticipated that at least some limits would be 

imposed pursuant to paragraph 4a(a)(2), it leaves open the question of whether Congress 

mandated limits for every physical commodity without the need for a necessity finding. 

In addition, the phrase “the effects (if any)” language does not imply that Congress 

expected position limits on all physical commodities. This language simply recognizes 

that new position limits could be imposed, but have no demonstrable effects.

8. In past releases and court filings, the Commission has stated that the 

legislative history of section 4a, as amended by the Dodd-Frank Act, supports the 

conclusion that paragraph 4a(a)(2) requires the establishment of position limits for all 

physical commodities whether or not the Commission finds them necessary to achieve 

the objectives of the statute.447 However, the most relevant legislative history, taken as a 

whole, does not resolve the ambiguity in the statutory language or compel the conclusion 

that Congress intended to drop the necessity finding requirement when it enacted 

paragraph 4a(a)(2) as part of the Dodd-Frank Act.

 445 See, e.g., id. at 75684. 446 See, e.g., id. 447 See, e.g., 2016 Reproposal, 81 FR at 96709. 
251

The language of paragraph 4a(a)(2) derives from section 6(a) of a bill, the 

Derivatives Markets Transparency and Accountability Act of 2009, H.R. 977 (111th 

Cong.), which was approved by the House Committee on Agriculture in February of 

2009.448 The committee report on this bill included explanatory language stating that the 

relevant provision required the Commission to set position limits “for all physical 

commodities other than excluded commodities.”449 However, H.R. 977 was never 

approved by the full House of Representatives.450

The relevant language concerning position limits was incorporated into the House 

of Representatives version of what became the Dodd-Frank Act, H.R. 4173 (111th 

Cong.), as part of a floor amendment that was introduced by the chairman of the 

Committee on Agriculture.451 In explaining the amendment’s language regarding 

position limits, the chairman stated that it “strengthens confidence in position limits on 

physically deliverable commodities as a way to prevent excessive speculation trading” 

but did not specify that limits would be required for all physical commodities without the 

need for a necessity finding.452 The House of Representatives language regarding 

position limits was ultimately incorporated into the Dodd-Frank Act by a conference 

committee. However, the explanatory statement in the Conference report states, with 

respect to position limits, only that the act’s “regulatory framework outlines provisions 

 448 See H.R. Rep. 111-385 part 1 at 4 (Dec. 19, 2009). 

449 Id. at 19. 450 See Actions – H.R.977 – 111th Congress (2009-2010) Derivatives Markets Transparency and 

Accountability Act of 2009, Congress Web site, available at https://www.congress.gov/bill/111thcongress/house-bill/977/all-actions?overview=closed#tabs (bill history). 451 155 Cong. Rec. H14682, H14692 (daily ed. Dec. 10, 2009). 452 Id. at H14705. 
252

for:...[p]osition limits on swaps contracts that perform or affect a significant price 

discovery function and requirements to aggregate limits across markets.”453

In subsequent floor debate, the chairman of the House Agriculture Committee 

alluded to position limits provisions deriving from earlier bills reported by that 

committee, but did not describe them with specificity.454 In the Senate, the chairman of 

the Senate Committee on Agriculture, Nutrition, and Forestry stated that the conference 

bill would “grant broad authority to the Commodity Futures Trading Commission to once 

and for all set aggregate position limits across all markets on non-commercial market 

participants.”455 The statement that the bill would grant “authority” to set position limits 

implies an exercise of judgement by the Commission in determining whether to set 

particular limits.456 Thus, this legislative history is itself ambiguous on the question of 

whether federal position limits are now mandatory on all physical commodities in the 

absence of a finding of necessity. 

Looking at legislative history in more general terms, the Commission, in past 

releases, has pointed out that the enactment of paragraph 4a(a)(2) followed congressional 

investigations in the late 1990s and early 2000s that concluded that excessive speculation 

accounted for volatility and prices increases in the markets for a number of 

 453 Dodd-Frank Wall Street Reform and Consumer Protection Act, Conference Report to Accompany H.R. 

4173 at 969 (H.R. Rep. 111-517 June 29, 2010). 454 He stated, “This conference report includes the tools we authorized [in response to concerns about 

excessive speculation] and the direction to the CFTC to mitigate outrageous price spikes we saw 2 years 

ago.” 156 Cong. Rec. H5245 (daily ed. June 30, 2010).

455 156 Cong. Rec. S5919 (daily ed. July 15, 2010). 456 In addition, the remainder of the Senate chairman’s floor statement with regard to position limits 

focused on volatility and price discovery problems arising from the use of commodity swaps, implying that 

her reference to setting position limits “across all markets” refers to Dodd-Frank’s extension of position 

limits authority to swaps markets. 156 Cong. Rec. at S5919-20 (daily ed. July 15, 2010). 
253

commodities.457 However, while the history of congressional investigations supports the 

conclusion that Congress intended the Commission to take action with respect to position 

limits, it does not resolve the specific interpretive issue of whether the “[i]n accordance 

with the standards set forth in paragraph (1)” language that was ultimately enacted by 

Congress incorporates a necessity finding. As discussed above, the congressional 

investigations focused on only a few commodities, which weakens the inference that 

Congress considered the question of what speculative positions to limit a closed question.

Overall, in past releases the Commission has expressed the view that construing 

section 4a as an “integrated whole” leads to the conclusion that paragraph 4a(a)(2) does 

not require a necessity finding.458 However, for reasons explained above, the 

Commission preliminarily believes that the better interpretation is that prior to imposing 

position limits, it must make a finding that the position limits are necessary. 

F. Necessity Finding

The Commission preliminarily finds that federal speculative position limits are 

necessary for the 25 core referenced futures contracts, and any associated referenced 

contracts. This preliminary finding is based on a combination of factors including: the 

particular importance of these contracts in the price discovery process for their respective 

underlying commodities; the fact that they require physical delivery of the underlying 

commodity; and, in some cases, the especially acute economic burdens that would arise 

from excessive speculation causing sudden or unreasonable fluctuations or unwarranted 

changes in the price of the commodities underlying these contracts. The Commission has 

preliminarily determined that the benefit of advancing the statutory goal of preventing 

 457 See, e.g., 2016 Reproposal, 81 FR at 96711–96713. 458 See, e.g., 2016 Reproposal, 81 FR at 96713, 96714. 
254

those undue burdens with respect to these commodities in interstate commerce justifies

the potential burdens or negative consequences associated with establishing these 

targeted position limits.459

1. Meaning of “Necessary” Under Section 4a(a)(1)

Section 4a(a)(1) of the Act contains a congressional finding that “[e]xcessive 

speculation ... causing sudden or unreasonable fluctuations or unwarranted changes in ... 

price ... is an undue and unnecessary burden on interstate commerce in such 

commodity.”460 For the purpose of “diminishing, eliminating, or preventing” that burden, 

section 4a(a)(1) tasks the Commission with establishing such position limits as it finds 

are “necessary.”461 The Commission’s analysis, therefore, proceeds on the basis of these 

legislative findings that excessive speculation threatens negative consequences for 

interstate commerce and the accompanying proposition that position limits are an 

effective tool to diminish, eliminate, or prevent the undue and unnecessary burdens 

Congress has targeted in the statute.462 The Commission will therefore determine

whether position limits are necessary for a given contract, in light of those premises,

considering facts and circumstances and economic factors. 

 459 As discussed, the Commission is not proposing non-spot-month limits apart from the legacy agricultural 

contracts. Non-spot-month prices serve as references for cash-market transactions much less frequently 

than spot-month prices. Accordingly, the burdens of excessive speculation in non-spot-months on 

commodities in interstate commerce would be substantially less than the burdens of excessive speculation 

in spot-months. It is also not possible to execute a corner or squeeze in non-spot-months. And because 

there generally are fewer market participants in non-spot-months, holders of large speculative positions 

may play a more important role in providing liquidity to bona fide hedgers.

460 7 U.S.C. 6a(a)(1). 461 7 U.S.C. 6a(a)(1). 462 It is not the Commission’s role to determine if these findings are correct. See Public Citizen v. FTC, 869 

F.2d 1541, 1557 (D.C. Cir. 1989) (“[A]gencies surely do not have inherent authority to second-guess 

Congress’ calculations.”); see also 46 FR at 50938, 50940 (“Section 4a(1) [now 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.”). 
255

The statute does not define “necessary.” In legal contexts, the term can have “a 

spectrum of meanings.”463 “At one end, it may ‘import an absolute physical necessity, so 

strong, that one thing, to which another may be termed necessary, cannot exist without 

that other;’ at the opposite, it may simply mean ‘no more than that one thing is 

convenient, or useful, or essential to another.’”464 The Commission does not believe 

Congress intended either end of this spectrum in section 4a(a)(1). On one hand, 

“necessary” in this context cannot mean that position limits must be the only means 

capable of addressing the burdens associated with excessive speculation. The Act 

contains numerous provisions designed to prevent, diminish, or eliminate price 

disruptions or distortions or unreasonable volatility. For example, the Commission’s 

anti-manipulation authority is designed to stop, redress, and deter intentional acts that 

may give rise to uneconomic prices or unreasonable volatility.465 Other examples include 

prohibitions on disruptive trading practices,466 certain core principles for contract 

markets,467 and the Commission’s emergency powers.

468 

Yet the Commission is directed by section 4a(a)(1) not only to impose position 

limits to diminish or eliminate sudden and unwarranted fluctuations in price caused by 

excessive speculation once those other protections have failed, it is directed to establish 

position limits as necessary to “prevent” those burdens on interstate commerce from 

 463 Jewell v. Life Ins. Co. of N. Am., 508 F.3d 1303, 1310 (10th Cir. 2007). 464 Jewell v. Life Ins. Co. of N. Am., 508 F.3d 1303, 1310 (10th Cir. 2007); see also Black’s Law Dictionary 

1227 (3d ed. 1933) (“As used in jurisprudence, the word ‘necessary’ does not always import an actual 

physical necessity, so strong that one thing, to which another may be termed ‘necessary,’ cannot exist 

without the other. ... To employ the means necessary to an end is generally understood as employing any 

means calculated to produce the end, and not as being confined to those single means without which the 

end would be entirely unattainable.” (citing McCullouch v. Maryland, 4 Wheat. 216, 4 L. Ed. 579 (1819)). 465 7 U.S.C. 9(1), 9(3), 13(a)(2). 466 7 U.S.C. 6c(a). 467 7 U.S.C. 7(d). 468 7 U.S.C. 12a(9).
256

arising in the first place. It makes little sense to suppose that Congress meant for the 

Commission to “prevent” unreasonable fluctuations or unwarranted price changes caused 

by excessive speculation only after they have already begun to occur, or when the 

Commission can somehow predict with confidence that the Act’s other tools will be 

absolutely ineffective.

469 The Act uses the word “necessary” in a number of places to 

authorize measures it is highly unlikely Congress meant to apply only where the relevant 

policy goals will otherwise certainly fail.470 

On the other hand, the Commission also does not believe that Congress intended 

position limits where they are merely “useful” or “convenient.” As explained above, 

Congress has already determined that position limits are useful in preventing undue 

burdens on interstate commerce associated with excessive speculation, but requires the 

Commission to make the further finding that they are also necessary. A “convenience” 

standard would be similarly toothless.

Rather than accepting either extreme, the Commission preliminarily interprets that 

sections 4a(a)(1) and 4a(a)(2) direct the Commission to establish position limits where 

the Commission finds, based on the relevant facts and circumstances, that position limits 

would be an efficient mechanism to advance the congressional goal of preventing undue 

 469 See Nat. Res. Def. Council, Inc. v. Thomas, 838 F.2d 1224, 1236–37 (D.C. Cir. 1988) (“[A] measure 

may be ‘necessary’ even though acceptable alternatives have not been exhausted.”); F.T.C. v. Rockefeller, 

591 F.2d 182, 188 (2d Cir. 1979) (rejecting “the notion that ‘necessary’ means that the [Federal Trade 

Commission] must pursue all other ‘reasonably available alternatives’” before undertaking the measure at 

issue). Indeed, where the Commission considers setting such prophylactic limits, it is unlikely to be 

knowable whether position limits will be the only effective tool. The existence of other tools to prevent 

unwarranted volatility and price changes may be relevant, but cannot be dispositive in all cases. 470 See, e.g., 7 U.S.C. 2(h)(4)(A) (empowering the Commission to prescribe rules “as determined by the 

Commission to be necessary to prevent evasions of the mandatory clearing requirements”); 7 U.S.C. 

2(h)(4)(B)(iii) (requiring that the Commission “shall” take such actions “as the Commission determines to 

be necessary” when it finds that certain swaps subject to the clearing requirement are not listed by any 

derivatives clearing organization); 7 U.S.C. 21(e) (subjecting registered persons to such “rules and 

regulations as the Commission may find necessary to protect the public interest and promote just and 

equitable principles of trade.”). 
257

burdens on interstate commerce in the given underlying commodity caused by excessive 

speculation. For example, it may be that for a given commodity, volatility in derivatives 

markets would be unlikely to cause high levels of sudden or unreasonable fluctuations or 

unwarranted changes in the price of the underlying commodity and would have little 

overall impact on the national economy/interstate commerce. Under those circumstances, 

the Commission may find that position limits are unnecessary. There are, however, also

contract markets in which volatility would be highly likely to cause sudden or 

unreasonable fluctuations or unwarranted changes in the price of the underlying 

commodity or have significantly negative effects on the broader economy. Even if such 

disruptions would be unlikely due to the characteristics of an individual market, the 

Commission may nevertheless determine that position limits are necessary as a 

prophylactic measure given the potential magnitude or impact of the event.471 

Most commodities lie somewhere in between, with varying degrees of linkage 

between derivative contracts and cash-market prices, and differences in importance to the 

overall economy. There is no mathematical formula to make this determination, though 

the Commission will consider relevant data where it is available. The Commission must 

instead exercise its judgment in light of facts and circumstances, including its experience 

and expertise, to determine what limits are economically justified.472 In all instances, the 

Commission will consider the applicable costs and benefits as required under section 

 471 The Commission will also be mindful that the undue burdens Congress tasked the Commission with 

diminishing, eliminating, or preventing would not generally be borne exclusively by speculators or other 

participants in futures and swaps markets, but instead the public at large or a certain industry or sector of 

the economy. In a given context, the Commission may find that this factor supports a finding that position 

limits are necessary. 

472 The Commission is well positioned to select from among all commodities within the scope of 4a(a)(1) 

and (2)(A), from its ongoing regulatory activities, including but not limited to market surveillance and 

product review.
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15(a) of the Act.473 With this interpretation of “necessary” in mind, the Commission 

below explains its selection of the 25 core referenced futures contracts, and any 

associated referenced contracts. Going forward, the Commission will make this 

assessment “from time to time” as required under section 4a(a)(1).

The Commission recognizes that this approach differs from that taken in earlier 

necessity findings. For example, when the Commission’s predecessor agency, the 

Commodity Exchange Commission (“CEC”), established position limits, it would publish 

them in the Federal Register along with necessity findings that were generally conclusory 

recitations of the statutory language.474 The published basis would be a recitation that 

trading of a given commodity for future delivery by a person who holds or controls a net 

position in excess of a given amount tends to cause sudden or unreasonable fluctuations 

or changes in the price of that commodity, not warranted by changes in the conditions of 

supply and demand.475 Apart from that, the CEC typically would refer to a public 

hearing, but provide no specifics of the evidence presented or what the CEC found 

persuasive.476 The CEC variously imposed limits one commodity at a time, or for several 

commodities at once.477 

In 1981, the Commission issued a rule directing all exchanges to establish 

position limits for each contract not already subject to federal limits, and for which 

 473 7 U.S.C. 19(a) 474 See, e.g., Limits on Position and Daily Trading in Soybeans for Future Delivery, 16 FR at 8107 (Aug. 

16, 1951); Findings of Fact, Conclusions, and Order in the Matter of Limits on Position and Daily Trading 

in Cotton for Future Delivery, 5 FR at 3198 (Aug. 28, 1940); In re Limits on Position and Daily Trading in 

Wheat, Corn, Oats, Barley, Rye, and Flaxseed, for Future Delivery, 3 FR at 3146, 3147 (Dec. 24, 1938). 475See, e.g., Limits on Position and Daily Trading in Soybeans for Future Delivery, 16 FR at 8107 (Aug. 16,

1951); Findings of Fact, Conclusions, and Order in the Matter of Limits on Position and Daily Trading in 

Cotton for Future Delivery, 5 FR at 3198 (Aug. 28, 1940); In re Limits on Position and Daily Trading in 

Wheat, Corn, Oats, Barley, Rye, and Flaxseed, for Future Delivery, 3 FR at 3146, 3147 (Dec. 24, 1938). 476 The records available from the National Archives during this period are sparse. 477 Compare 5 FR at 3198 (cotton) with 3 FR at 3146, 3147 (six types of grain).
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delivery months were listed to trade.478 There, as here, the Commission explained that 

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.”479 The Commission observed that all futures markets share the 

salient characteristics that make position limits a useful tool to prevent the potential 

burdens of excessive speculation. Specifically, “it appears that the capacity of any 

contract market to absorb the establishment and liquidation of large speculative positions 

in an orderly manner is related to the relative size of such positions, i.e., the capacity of 

the market is not unlimited.”480 

In 2013, the Commission proposed a necessity finding applicable to all physical 

commodities, and then reproposed it in 2016. In that finding, the Commission discussed 

incidents in which the Hunt family in 1979 and 1980 accumulated unusually large silver 

positions, and in which Amaranth Advisors L.L.C. in 2006 accumulated unusually large 

natural gas positions.481 The Commission preliminarily determined that the size of those 

positions contributed to unwarranted volatility and price changes in those respective 

markets, which imposed undue burdens on interstate commerce, and that position limits 

could have prevented this.482 The Commission here preliminarily finds those parts of the 

2013 and 2016 proposed necessity finding to be beside the point, because Congress has 

already determined that excessive speculation can place undue burdens on interstate 

commerce in a commodity, and that position limits can diminish, eliminate, or prevent 

 478 46 FR at 50945. 479 Id. at 50938, 50940. Section 4a(a)(1) was at the time numbered 4a(1). 480 46 FR at 50940 (Oct. 16, 1981). The Commission based this finding in part upon then-recent events in 

the silver market, an apparent reference to the corner and squeeze perpetrated by members of the Hunt 

family in 1979 and 1980. 481 2013 Proposal, 78 FR at 75686, 75693. 482 Id. at 75691, 75193.
260

those burdens. In 2013 and 2016, the Commission also considered numerous studies 

concerning position limits.483 To the extent that those studies merely examined whether 

or not position limits are an effective tool, the Commission here does not find them 

directly relevant, again because Congress has already determined that position limits can 

be effective to diminish, eliminate, or prevent sudden or unreasonable fluctuations or 

unwarranted changes in commodity prices.

484

In the 2013 and 2016 necessity findings, the Commission stated again that “all 

markets in physical commodities” are susceptible to the burdens of excessive speculation 

because all such markets have a finite ability to absorb the establishment and liquidation 

of large speculative positions in an orderly manner.

485 The Commission here, however, 

preliminarily determines that this characteristic is not sufficient to support a finding that 

position limits are “necessary” for all physical commodities, within the meaning of 

section 4a(a)(1). Congress has already determined that excessive speculation can give 

rise to unwarranted burdens on interstate commerce and that position limits can be an 

effective tool to eliminate, diminish, or prevent those burdens. Yet the statute directs the 

Commission to establish position limits only when they are “necessary.” In that context, 

the Commission considers it unlikely that Congress intended the Commission to find that 

position limits are “necessary” even where facts and circumstances show the significant 

potential that they will cause disproportionate negative consequences for markets, market 

participants, or the commodity end users they are intended to protect. Similarly, because 

 483 See 2016 Reproposal, 81 FR at 96894, 96924. 484 In any event, the Commission found those studies inconclusive. 2016 Reproposal, 81 FR at 96723. 485 2016 Reproposal, 81 FR at 96722; see also Corn Products Refining Co. v. Benson, 232 F.2d 554, 560 

(1956) (finding it “obvious that transactions in such vast amounts as those involved here might cause 

‘sudden or unreasonable fluctuations in the price’ of corn and hence be an undue and unnecessary burden 

on interstate commerce” (alteration omitted)).
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the Commission has preliminarily determined that section 4a(a)(2) does not mandate 

federal speculative position limits for all physical commodities,

486 it cannot be that 

federal position limits are “necessary” for all physical commodities, within the meaning 

of section 4a(a)(1), on the basis of a property shared by all of them, i.e., a limited 

capacity to absorb the establishment and liquidation of large speculative positions in an 

orderly fashion. 

The Commission requests comments on all aspects of this interpretation of the 

requirement in section 4a(a)(1) of a necessity finding.

2. Necessity Findings as to the 25 Core Referenced Futures Contracts

As noted above, the proposed rule would impose federal position limits on: 25 

core referenced futures contracts, including 16 agricultural products, five metals 

products, and four energy products; any futures or options on futures directly or indirectly 

linked to the core referenced futures contracts; and any economically equivalent swaps. 

As discussed above, the Commission’s necessity analysis proceeds on the basis of certain 

propositions reflected in the text of section 4a(a)(1): first, that excessive speculation in 

derivatives markets can cause sudden or unreasonable fluctuations or unwarranted 

changes in the price of an underlying commodity, i.e., fluctuations not attributable to the 

forces of supply of and demand for that underlying commodity; second, that such price 

fluctuations and changes are an undue and unnecessary burden on interstate commerce in 

that commodity, and; third, that position limits can diminish, eliminate, or prevent that 

burden. With those propositions established by Congress, the Commission’s task is to 

make the further determination of whether it is necessary to use position limits, 

 486 See supra Section III.D.
262

Congress’s prescribed tool to address those burdens on interstate commerce, in light of 

the facts and circumstances. Unlike prior preliminary necessity findings which focused 

on evidence of excessive speculation in just wheat and natural gas, this necessity finding 

addresses all 25 core referenced futures contracts and focuses on two interrelated factors: 

(1) the importance of the derivatives markets to the underlying cash markets, including 

whether they call for physical delivery of the underlying commodity; and (2) the 

importance of the cash markets underlying the referenced futures contracts to the national 

economy. The Commission will apply the relevant facts and circumstances holistically 

rather than formulaically, in light of its experience and expertise. 

With respect to the first factor, the markets for the 25 core referenced futures 

contracts are large in terms of notional value and open interest, and are critically 

important to the underlying cash markets. These derivatives markets enable food 

processors, farmers, mining operations, utilities, textile merchants, confectioners, and 

others to hedge the risks associated with volatile changes in price that are the hallmark of 

cash commodity markets. 

Futures markets were established to allow industries that are vital to the U.S. 

economy and critical to the American public to accurately manage future receipts, 

expenses, and financial obligations with a high level of certainty. In general, futures 

markets perform valuable functions for society such as “price discovery” and by allowing 

counterparties to transfer price risk to their counterparty. The risk transfer function that 

the futures markets facilitate allows someone to hedge against price movements by 

establishing a price for a commodity for a time in the future. Prices in derivatives 

markets can inform the cash market prices of, for example, energy used in homes, cars, 
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factories, and hospitals. More than 90 percent of Fortune 500 companies use derivatives 

to manage risk, and over 50 percent of all companies use derivatives in physical 

commodity markets such as the 25 core referenced futures contracts.487 

The 25 core referenced futures contracts are vital for establishing reliable 

commodity prices and enabling the beneficial risk transfer between buyers and sellers of 

commodities, allowing participants to hedge risk and undertake planning with greater 

certainty. By providing a highly efficient marketplace for participants to offset risks, the 

25 core referenced futures contracts attract a broad range of participants, including 

farmers, ranchers, producers, utilities, retailers, investors, banking institutions, and 

others. These participants hedge production costs and delivery prices so that, among 

other things, consumers can always find plenty of food at reliable prices on the grocery 

store shelves. 

Futures prices are used for pricing of cash market transactions but also serve as 

economic signals that help various members of society plan. These signals help farmers 

decide which crops to plant as well as assist producers to decide how to implement their 

production processes given the anticipated costs of various inputs and the anticipated 

prices of any anticipated finished products, and they serve similar functions in other areas 

of the economy. For the commodities that are the subject of this necessity finding, the 

Commission preliminarily has determined that there is a significant amount of 

 487 ISDA Survey of the Derivatives Usage by the World’s Largest Companies 2009. It has also been 

estimated that the use of commercial derivatives added 1.1 percent to the size of the U.S. economy between 

2003 and 2012. See Apanard Prabha et al., Deriving the Economic Impact of Derivatives, (Mar. 2014), 

available at http://assets1b.milkeninstitute.org/assets/Publication/ResearchReport/PDF/DerivativesReport.pdf.
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participation in these commodity markets, both directly and indirectly, through price 

discovery signals.488

Two key features of the 25 core referenced futures contracts are the role they play 

in the price discovery process for their respective underlying commodities and the fact 

that they require physical delivery of the underlying commodity. Price discovery is the 

process by which markets, through the interaction of buyers and sellers, produce prices 

that are used to value underlying futures contracts that allow society to infer the value of 

underlying physical commodities. Adjustments in futures market requirements and 

valuations by a diverse array of futures market participants, each with different 

perspectives and access to supply and demand information, can result in adjustments to 

the pricing of the commodities underlying the futures contract. The futures markets are 

generally the first to react to such price-moving information, and price movements in the 

futures markets reflect a judgment of what is likely to happen in the future in the 

underlying cash markets. The 25 core referenced futures contracts were selected in part 

because they generally serve as reference prices for a large number of cash-market 

transactions, and the Commission knows from large trader reporting that there is a 

significant presence of commercial traders in these contracts, many of whom may be 

using the contracts for hedging and price discovery purposes. 

 488 The Commission observes that there has been much written in the academic literature about price 

discovery of the 25 core referenced futures contracts. This demonstrates the importance of the 

commodities underlying such contracts in our society. The Commission’s Office of the Chief Economist 

conducted a preliminary search on the JSTOR and Science Direct academic research databases for journal 

articles that contain the key words: Price Discovery <Commodity Name> Futures. While the articles made 

varying conclusions regarding aspects of the futures markets, and in some cases position limits, almost all 

articles agreed that the futures markets in general are important for facilitating price discovery within their 

respective markets.
265

For example, a grain elevator may use the futures markets as a benchmark for the 

price it offers local farmers at harvest. In return, farmers look to futures prices to 

determine for themselves whether they are getting fair value for their crops. The physical 

delivery mechanism further links the cash and futures markets, with cash and futures 

prices expected to converge at settlement of the futures contract.489 In addition to 

facilitating price convergence, the physical delivery mechanism allows the 25 core 

referenced futures contracts to be an alternative means of obtaining or selling the 

underlying commodity for market participants. While most physically-settled futures 

contracts are rolled-over or unwound and are not ultimately settled using the physical 

delivery mechanism, because the futures contracts have standardized terms and 

conditions that reflect the cash market commodity, participants can reasonably expect

that the commodity sold or purchased will meet their needs.490 This physical delivery 

and price discovery process contributes to the complexity of the markets for the 25 core 

referenced futures contracts. If these markets function properly, American producers and

consumers enjoy reliable commodity prices. Excessive speculation causing sudden or 

unreasonable fluctuations or unwarranted changes in the price of those commodities

could, in some cases, have far reaching consequences for the U.S. economy by interfering 

with proper market functioning. 

The cash markets underlying the 25 core referenced futures contracts are to 

varying degrees vitally important to the U.S. economy, driving job growth, stimulating 

 489 Futures contracts are traded for settlement at a date in the future. At a contract’s delivery month and 

date, a commodity cash market price and its futures price converge, allowing an efficient transfer of 

physical commodities between buyers and sellers of the futures contract. 

490 Standardized terms and conditions for physically-settled futures contracts typically include delivery 

quantities, qualities, sizes, grades and locations for delivery that are commonly used in the commodity cash 

market. 
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economic activity, and reducing trade deficits while impacting everyone from consumers 

to automobile manufacturers and farmers to financial institutions. These 25 cash markets 

include some of the largest cash markets in the world, contributing together, along with 

related industries, approximately 5 percent to the U.S. gross domestic product (“GDP”) 

directly and a further 10 percent indirectly.491 As described in detail below, the cash 

markets underlying the 25 core referenced futures contracts are critical to consumers, 

producers, and, in some cases, the overall economy. 

By “excessive speculation,” the Commission here refers to the accumulation of 

speculative positions of a size that threaten to cause the ills Congress addressed in 

Section 4a—sudden or unreasonable fluctuations or unwarranted changes in the price of 

the underlying commodity. These potentially violent price moves in the futures markets 

could impact producers such as utilities, farmers, ranchers, and other hedging market 

participants. Such unwarranted volatility could result in significant costs and price 

movements, compromising budgeting and planning, making it difficult for producers to 

manage the costs of farmlands and oil refineries, and impacting retailers’ ability to 

provide reliable prices to consumers for everything from cereal to gasoline. To be clear, 

volatility is sometimes warranted in the sense that it reflects legitimate forces of supply 

and demand, which can sometimes change very quickly. The purpose of this proposed 

rule is not to constrain those legitimate price movements. Instead, the Commission’s 

 491 See The Bureau of Economic Analysis, U.S. Department of Commerce, Interactive Access to Industry 

Economic Accounts Data: GDP by Industry (Historical) that includes GDP contributions by U.S. Farms, 

Oil & Gas extraction, pipeline transportation, petroleum and coal products, utilities, mining and support 

activities, primary and fabricated metal products and finance in securities, commodity contracts and 

investments.
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purpose is to prevent volatility caused by excessive speculation, which Congress has 

deemed a potential burden on interstate commerce.

Further, excessive speculation in the futures market could result in price 

uncertainty in the cash market, which in turn could cause periods of surplus or shortage 

that would not have occurred if prices were more reliable. Properly functioning futures 

markets free from excessive speculation are essential for hedging the volatility in cash 

markets for these commodities that are the result of real supply and demand. Specific 

attributes of the cash and derivatives markets for these 25 commodities are discussed 

below. 

3. Agricultural Commodities

Futures contracts on the 16 agricultural commodities are essential tools for 

hedging against price moves of these widely grown crops, and are key instruments in 

helping to smooth out volatility and to ensure that prices remain reliable and that food 

remains on the shelves. These agricultural futures contracts are used by grain elevators, 

farmers, merchants, and others and are particularly important because prices in the 

underlying cash markets swing regularly depending on factors such as crop conditions, 

weather, shipping issues, and political events. 

Settlement prices of futures contracts are made available to the public by 

exchanges in a process known as “price discovery.” To be an effective hedge for cash 

market prices, futures contracts should converge to the spot price at expiration of the 

futures contract. Otherwise, positions in a futures contract will be a less effective tool to 

hedge price risk in the cash market since the futures positions will less than perfectly 

offset cash market positions. Convergence is so important for the 16 agricultural 
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contracts that exchanges have deliveries occurring during the spot month, unlike for the 

energy commodities covered by this proposal.

492 This delivery mechanism helps to force 

convergence because shorts who can deliver cheaper than the futures prices may do so,

and longs can stand in for delivery if it’s cheaper to obtain the underlying through the 

futures market than the cash market. The Commission does not collect information on all 

cash market transactions. Nevertheless, the Commission understands that futures prices 

are often used by counterparties to settle many cash-market transactions due to 

approximate convergence of the futures contract price to the cash-market price at 

expiration. 

Agricultural futures markets are some of the most active, and open interest on 

agricultural futures have some of the highest notional value. The CBOT Corn (C) and 

CBOT Soybean (S) contracts, for example, trade over 350,000 and 200,000 contracts 

respectively per day.493 Outstanding futures and options notional values range anywhere 

from approximately $ 71 billion for CBOT Corn (C) to approximately $ 70 million for 

CBOT Oats (O), with the other core referenced futures contracts on agricultural 

commodities all falling somewhere in between.494

The American agricultural market, including markets for the commodities 

underlying the 16 agricultural core referenced contracts, is foundational to the U.S. 

economy. Agricultural, food, and related industries contributed $ 1.053 trillion to the 

 492 For energy contracts, physical delivery of the underlying commodity does not occur during the spot 

month. This allows time to schedule pipeline deliveries and so forth. Instead, a shipping certificate (a 

financial instrument claim to the physical product), not the underlying commodity, is the delivery 

instrument that is exchanged at expiration of the futures contract.

493 CME Group website, available at

https://www.cmegroup.com/trading/products/#pageNumber=1&sortAsc=false&sortField=oi. 494 Notional values here and throughout this section of the release are derived from CFTC internal data 

obtained from the Commitments of Traders Reports. Notional value means the U.S. dollar value of both 

long and short contracts without adjusting for delta in options. Data is as of June 30, 2019.
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U.S. economy in 2017, representing 5.4 percent of U.S. GDP.495 In 2017, agriculture 

provided 21.6 million full and part time jobs, or 11 percent of total U.S. employment.496 

Agriculture’s contribution to international trade is also sizeable. For fiscal year 2019, it 

was projected that agricultural exports would exceed $ 137 billion, with imports at $ 129 

billion for a net balance of trade of $ 8 billion.497 This balance of trade is good for the 

nation and for American farmers. The U.S. commodity futures markets have provided 

risk mitigation and pricing that reflects the economic value of the underlying commodity 

to farmers, ranchers, and producers. 

The 16 agricultural core referenced futures contracts498 are key drivers to the 

success of the American agricultural industry. The commodities underlying these 

markets are used in a variety of consumer products including: ingredients in animal feeds 

for production of meat and dairy (soybean meal and corn); margarine, shortening, paints, 

adhesives, and fertilizer (soybean oil); home furnishings and apparel (cotton); and food 

staples (corn, soybeans, wheat, oats, frozen orange juice, cattle, rough rice, cocoa, coffee, 

and sugar).

The cash markets underlying the 16 agricultural core referenced futures contracts 

help create jobs and stimulate economic activity. The soybean meal market alone has an 

 495 What is Agriculture’s Share of the Overall U.S. Economy, USDA Economic Research Services, 

available at https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=58270. 496 Ag and Food Sales and the Economy, USDA Economic Research Services, available at 

https://www.ers.usda.gov/data-products/ag-and-food-statistics-charting-the-essentials/ag-and-foodsectors-and-the-economy. 497 Outlook for U.S. Agricultural Trade, USDA Economic Research Services, available at

https://www.ers.usda.gov/topics/international-markets-us-trade/us-agricultural-trade/outlook-for-usagricultural-trade. 498 The 16 agricultural core referenced futures contracts are: CBOT Corn (C), CBOT Oats (O), CBOT 

Soybeans (S), CBOT Soybean Meal (SM), CBOT Soybean Oil (SO), CBOT Wheat (W), CBOT KC HRW 

Wheat (KW), ICE Cotton No. 2 (CT), MGEX HRS Wheat (MWE), CBOT Rough Rice (RR), CME Live 

Cattle (LC), ICE Cocoa (CC), ICE Coffee C (KC), ICE FCOJ-A (OJ), ICE U.S. Sugar No. 11 (SB), and 

ICE U.S. Sugar No. 16 (SF).
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implied value to the U.S. economy through animal agriculture which contributed more 

than 1.8 million American jobs,499 and wheat remains the largest produced food grain in 

the United States, with planted acreage, production, and farm receipts ranking third after 

corn and soybeans.500 The United States is the world’s largest producer of beef, and also 

produced 327,000 metric tons of frozen orange juice in 2018.501 Total economic activity 

stimulated by the cotton crop is estimated at over $ 75 billion.502 Many of these markets 

are also significant export commodities, helping to reduce the trade deficit. The United 

States exports between 10 and 20 percent of its corn crop and 47 percent of its soybean 

crop, generating tens of billions of dollars in annual economic output.503 

Many of these agricultural commodities are also crucial to rural areas. In 

Arkansas alone, which ranks first among rice-producing states, the annual rice crop 

contributes $ 1.3 billion to the state’s economy and accounts for tens of thousands of jobs 

to an industry that contributes more than $ 35 billion to the U.S. economy on an annual 

basis.504 Similarly, the U.S. meat and poultry industry, which includes cattle, accounts 

for $ 1.02 trillion in total economic output equaling 5.6 percent of GDP, and is 

responsible for 5.4 million jobs.505 Coffee-related economic activity comprises 1.6 

 499 Decision Innovation Solutions, 2018 Soybean Meal Demand Assessment, United Soybean Board, 

available at https://www.unitedsoybean.org/wp-content/uploads/LOW-RES-FY2018-Soybean-MealDemand-Analysis-1.pdf. 500 Wheat Sector at a Glance, USDA Economic Research Service, available at 

https://www.ers.usda.gov/topics/crops/wheat/wheat-sector-at-a-glance. 501 Cattle & Beef Sector at a Glance, USDA Economic Research Service, available at

https://www.ers.usda.gov/topics/animal-products/cattle-beef/sector-at-a-glance. 502 World of Cotton, National Cotton Council of America, available at

http://www.cotton.org/econ/world/index.cfm. 503 Feedgrains Sector at a Glance, USDA Economic Research Service, available at

https://www.ers.usda.gov/topics/crops/corn-and-other-feedgrains/feedgrains-sector-at-a-glance. 504 Where is Rice Grown, Think Rice Web site, available at http://www.thinkrice.com/on-the-farm/whereis-rice-grown. 505 The United States Meat Industry at a Glance, North American Meat Institute Web site, available at 

https://www.meatinstitute.org/index.php?ht=d/sp/i/47465/pid/47465.
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percent of total U.S. GDP,506 and U.S. sugar producers generate nearly $ 20 billion per 

year for the U.S. economy, supporting 142,000 jobs in 22 states.507 Even some of the 

smaller agricultural markets have a noteworthy economic impact.508 For example, oats 

are planted on over 2.6 million acres in the United States, with the total U.S. supply in the 

order of 182 million bushels,509 and in 2010 the United States exported chocolate and 

chocolate-type confectionary products worth $ 799 million to more than 50 countries 

around the world. 510 

4. Metal Commodities

The core referenced futures contracts on metal commodities play an important 

role in the price discovery process and are some of the most active and valuable in terms 

of notional value. The Gold (GC) contract, for example, trades the equivalent of nearly 

27 million ounces and 170,000 contracts daily. 511 Outstanding futures and options 

notional values range from approximately $ 234 billion in the case of Gold (GC), to 

approximately $ 2.34 billion in the case of Palladium (PA), with the other metals core 

 506 The Economic Impact of the Coffee Industry, National Coffee Association, available at

http://www.ncausa.org/Industry-Resources/Economic-Impact. 507 U.S. Sugar Industry, The Sugar Association, available at https://www.sugar.org/about/us-industry. 

While Sugar No. 11 (SB) is primarily an international benchmark, the contract is still used for price 

discovery and hedging within the United States and has significantly more open interest and daily volume 

than the domestic Sugar No. 16 (SF). As a pair, these two contracts are crucial tools for risk management 

and for ensuring reliable pricing, with much of the price discovery occurring in the higher-volume Sugar 

No. 11 (SB) contract. 

508 Although the macroeconomic impact of these markets is smaller, the Commission reiterates that it has 

selected the 25 core referenced futures contracts also based on the importance of derivatives in these 

commodities to cash-market pricing.

509 Feed Outlook: May 2019, USDA Economic Research Service, available at

https://www.ers.usda.gov/publications/pub-details/?pubid=93094. 510 Economic Profile of the U.S. Chocolate Industry, World Cocoa Foundation, available at 

https://www.worldcocoafoundation.org/wpcontent/uploads/Economic_Profile_of_the_US_Chocolate_Industry_2011.pdf. 511 Gold Futures Quotes, CME Group Web site, available at

https://www.cmegroup.com/trading/metals/precious/gold_quotes_globex.html.
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referenced futures contracts all falling somewhere in between.512 Metals futures are used 

by a diverse array of commercial end-users to hedge their operations, including mining 

companies, merchants and refiners. 

The underlying commodities are also important to the U.S. economy. In 2018, 

U.S. mines produced $ 82.2 billion of raw materials, including the commodities 

underlying the five metals core referenced futures contracts: COMEX Gold (GC), 

COMEX Silver (SI), COMEX Copper (HG), NYMEX Platinum (PL), and NYMEX 

Palladium (PA).513 U.S. mines produced 6.6 million ounces of gold in 2018 worth 

around $ 9.24 billion as of July 1, 2019, and the United States holds the largest official 

gold reserves of any country, worth around $ 366 billion and representing 75 percent of 

the value of total U.S. foreign reserves.514 U.S. silver refineries produced around 52.5 

million ounces of silver worth around $ 800 million in 2018 at current prices.515 

Major industries, including steel, aerospace, and electronics, process and 

transform these materials, creating about $ 3.02 trillion in value-added products.516 The 

five metals commodities are key components of these products, including for use in:

batteries, solar panels, water purification systems, electronics, and chemical refining 

(silver); jewelry, electronics, and as a store of value (gold); building construction, 

transportation equipment, and industrial machinery (copper); automobile catalysts for 

diesel engines and in chemical, electric, medical and biomedical applications, and 

 512 Calculations based on data submitted to the Commission pursuant to part 16 of the Commission’s 

regulations.

513 Mineral Commodity Summaries 2019, U.S. Geological Survey, available at http://prd-wret.s3-us-west2.amazonaws.com/assets/palladium/production/atoms/files/mcs2019_all.pdf. 514 CPM Gold Yearbook 2019, CPM Group, available at https://www.cpmgroup.com/store/cpm-goldyearbook-2019; Goldhub, World Gold Council, available at https://www.gold.org/goldhub. 515 World Silver Survey 2019, The Silver Institute, available at https://www.silverinstitute.org/wpcontent/uploads/2019/04/WSS2019V3.pdf.

516 Id.
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petroleum refining (platinum); and automobile catalysts for gasoline engines and in 

dental and medical applications (palladium). A disruption in any of these markets would 

impact highly important and sensitive industries, including those critical to national 

security, and would also impact the price of consumer products. 

The underlying metals markets also create jobs and contribute to GDP. Over 

20,000 people were employed in U.S. gold and copper mines and mills in 2017 and 2018, 

metal ore mining contributed $ 54.5 billion to U.S. GDP in 2015, and the global copper 

mining industry drives more than 45 percent of the world’s GDP, either on a direct basis 

or through the use of products that facilitate other industries.517 

The gold and silver markets are especially important because they serve as 

financial assets and a store of value for individual and institutional investors, including in 

times of economic or political uncertainty. Several exchange-traded funds (“ETFs”) that 

are important instruments for U.S. retail and institutional investors also hold significant 

quantities of these metals to back their shares. A disruption to any of these metals 

markets would thus not only impact producers and retailers, but also potentially retail and 

institutional investors. The iShares Silver Trust ETF, for example, holds around 323.3 

million ounces of silver worth $ 4.93 billion, and the largest U.S. listed gold-backed ETF 

 517 Creamer, Martin, Global Mining Derives 45%-Plus of World GDP, Mining Weekly (July. 4, 2012), 

available at https://www.miningweekly.com/print-version/global-mining-drives-45-plus-of-world-gdpcutifani-2012-07-04. Platinum and palladium mine production in 2018 was less substantial, worth $ 114 

million and $ 695 million, respectively (All such valuations throughout this release are at current prices as 

of July 2, 2019.). See Bloxham, Lucy, et al., Pgm Market Report May 2019, Johnson Matthey, available at 

http://www.platinum.matthey.com/documents/newitem/pgm%20market%20reports/pgm_market_report_may_19.pdf. However, derivatives contracts in 

those commodities do play a role in price discovery.
274

holds around 25.5 million ounces to back its shares worth around $ 35.7 billion.518 

Platinum and palladium ETFs are worth hundreds of millions of dollars as well.519 

5. Energy Commodities

The energy core referenced futures markets are crucial tools for hedging price risk 

for commodities which can be highly volatile due to changes in weather, economic 

health, demand-related price swings, and pipeline and supply availability or disruptions. 

These futures contracts are used by some of the largest refiners, exploration and 

production companies, distributors, and by other key players in the energy industry, and 

are some of the most widely traded and valuable contracts in the world in terms of 

notional value. The NYMEX Light Sweet Crude Oil (CL) contract, for example, is the 

world’s most liquid and actively traded crude oil contract, trading nearly 1.2 million 

contracts a day, and the NYMEX Henry Hub Natural Gas (NG) contract trades 400,000 

contracts daily.520 Futures and option notional values range from $ 53 billion in the case 

of NYMEX NY Harbor RBOB Gasoline (RB) and NYMEX NY Harbor ULSD Heating 

Oil (HO), to $ 498 billion for NYMEX Light Sweet Crude Oil (CL).521

Some of the energy core referenced futures contracts also serve as key 

benchmarks for use in pricing cash-market and other transactions. NYMEX NY Harbor 

RBOB Gasoline (RB) is the main benchmark used for pricing gasoline in the U.S. 

 518 Historical Data, SPDR Gold Shares, available at http://www.spdrgoldshares.com/usa/historical-data. 

Data as of July 1, 2019.

519 iShares Silver Trust Fund, iShares, available at https://www.ishares.com/us/products/239855/isharessilver-trust-fund/1521942788811.ajax?fileType=xls&fileName=iShares-Silver-Trust_fund&dataType=fund 

https://www.aberdeenstandardetfs.us/institutional/us/en-us/products/product/etfs-physical-platinumshares-pplt-arca#15. 520 Calculations based on data submitted to the Commission pursuant to part 16 of the Commission’s 

regulations.

521Calculations based on data submitted to the Commission pursuant to part 16 of the Commission’s 

regulations.
275

petroleum products market, a huge physical market with total U.S. refinery capacity of 

approximately 9.5 million barrels per day of gasoline.522 Similarly, the NYMEX NY 

Harbor ULSD Heating Oil (HO) contract is the main benchmark used for pricing the 

distillate products market, which includes diesel fuel, heating oil, and jet fuel. 523

The U.S. energy markets are some of the most important and complex in the 

world, contributing over $ 1.3 trillion to the U.S. economy.524 Crude oil, heating oil, 

gasoline, and natural gas, the commodities underlying the four energy core reference 

futures contracts,525 are key contributors to job growth and GDP. In 2015, the natural gas 

and oil industries supported 10.3 million jobs directly and indirectly, accounting for 5.6 

percent of total U.S. employment, and generating $ 714 billion in wages to account for 

6.7 percent of national income.526 Crude oil alone, which is a key component in making 

gasoline, contributes 7.6 percent of total U.S. GDP. RBOB gasoline, which is a 

byproduct of crude oil that is used as fuel for vehicles and appliances, contributes $ 35.5 

billion in income and $ 57 billion in economic activity.527 ULSD comprises all on-

 522 CME Comment letter dated April 24, 2015 at 79. 523 Id. at 136. 524 Natural Gas and Oil National Factsheet, API Energy, available at

https://www.api.org/~/media/Files/Policy/Jobs/National-Factsheet.pdf. 525 The four energy core referenced futures contracts are: NYMEX Light Sweet Crude Oil (CL), NYMEX 

NY Harbor ULSD Heating Oil (HO), NYMEX NY Harbor RBOB Gasoline (RB), and NYMEX Henry 

Hub Natural Gas (NG).

526 Natural Gas and Oil National Factsheet, API Energy, available at

https://www.api.org/~/media/Files/Policy/Jobs/National-Factsheet.pdf; PricewaterhouseCoopers, Impacts 

of the Natural Gas and Oil Industry on the US Economy in 2015, API Energy, available at

https://www.api.org/~/media/Files/Policy/Jobs/Oil-and-Gas-2015-Economic-Impacts-Final-Cover-07-17-

2017.pdf. 527 PricewaterhouseCoopers, Impacts of the Natural Gas and Oil Industry on the US Economy in 2015, API 

Energy, at 12, available at https://www.api.org/~/media/Files/Policy/Jobs/Oil-and-Gas-2015-EconomicImpacts-Final-Cover-07-17-2017.pdf.
276

highway diesel fuel consumed in the United States, and is also commonly used as heating 

oil.528

Natural gas is similarly important, serving nearly 69 million homes, 185,400 

factories, and 5.5 million businesses such as hotels, restaurants, hospitals, schools, and 

supermarkets. More than 2.5 million miles of pipeline transport natural gas to more than 

178 million Americans.529 Natural gas is also a key input for electricity generation and 

comprises more than one quarter of all primary energy used in the United States. 530 U.S. 

agricultural producers also rely on an affordable, dependable supply of natural gas, as 

fertilizer used to grow crops is composed almost entirely of natural gas components. 

6. Consistency with Commodity Indices

The criteria underlying the Commission’s necessity finding is consistent with the 

criteria used by several widely tracked third party commodity index providers in 

determining the composition of their indices. Bloomberg selects commodities for its 

Bloomberg Commodity Index that in its view are “sufficiently significant to the world 

economy to merit consideration,” that are “tradeable through a qualifying related futures 

contract” and that generally are the “subject of at least one futures contract that trades on 

a U.S. exchange.”531 Similarly, S&P’s GSCI index is, among other things, “designed to 

reflect the relative significance of each of the constituent commodities to the world 

 528 CME Comment Letter dated April 24, 2015 at 135.

529 Natural Gas: The Facts, American Gas Association, available at

https://www.aga.org/globalassets/2019-natural-gas-factsts-updated.pdf. 530 Id. 531 The Bloomberg Commodity Index Methodology, Bloomberg, at 17 (Dec. 2018) available at

https://data.bloomberglp.com/professional/sites/10/BCOM-Methodology-December-2019.pdf. The list of 

commodities that Bloomberg deems eligible for inclusion in its index overlaps significantly with the 

Commission’s proposed list of 25 core referenced futures contracts.
277

economy.”532 Applying these criteria, Bloomberg and S&P have deemed eligible for 

inclusion in their indices lists of commodities that overlap significantly with the 

Commission’s proposed list of 25 core referenced futures contracts. Independent index 

providers thus appear to have arrived at similar conclusions to the Commission’s 

preliminary necessity finding regarding the relative importance of certain commodity 

markets. 

7. Conclusion

This proposal only sets limits for referenced contracts for which a DCM currently 

lists a physically-settled core referenced futures contract. As discussed above, there are 

currently over 1,200 contracts on physical commodities listed on DCMs, and there are 

physical commodities other than those underlying the 25 core referenced futures 

contracts that are important to the national economy, including, for example, steel, butter, 

uranium, aluminum, lead, random length lumber, and ethanol. However, unlike the 25 

core referenced futures contracts, the derivatives markets for those commodities are not 

as large as the markets for the 25 core referenced futures contracts and/or play a less 

significant role in the price discovery process.

For example, the futures contracts on steel, butter, and uranium were not included

as core referenced futures contracts because they are cash-settled contracts that settle to a 

third party index. Among the agricultural commodity futures listed on CME that are 

cash-settled only to an index are: class III milk, feeder cattle, and lean hogs. All three of 

these were included in the 2011 Final Rulemaking. Because there are no physicallysettled futures contracts on these commodities, these cash-settled contracts would not 

 532 S&P GSCI Methodology, S&P Dow Jones Indices, at 8 (Oct. 2019) available at

https://us.spindices.com/documents/methodologies/methodology-sp-gsci.pdf?force_download=true.
278

qualify as referenced contracts are would not be subject to the proposed rule. While the 

futures contracts on aluminum, lead, random length lumber, and ethanol are physically 

settled contracts, their open interest and trading volume is lower than that of the CBOT 

Oats contract, which is the smallest market included among the 25 core referenced 

futures contracts as measured by open interest and volume. In that regard, based on FIA 

end of month open interest data and 12-month total trading volume data for December 

2019, CBOT Oats had end of month open interest of 4,720 contracts and 12-month total 

trading volume ending in December 2019 of 162,682 round turn contracts.533 In 

comparison, the end of month December 2019 open interest and 12-month total trading 

volume ending in December 2019 for the other commodity futures contracts that were not 

selected to be included as core referenced futures contracts were as follows: COMEX 

Aluminum (267 OI/ 2,721 Vol), COMEX Lead (0 OI/ 0 Vol), CME Random Length 

Lumber (3,275 OI/ 11,893 Vol), and CBOT Ethanol (708 OI/ 2,686 Vol.). It would be 

impracticable for the Commission to analyze in comprehensive fashion all contracts that 

have either feature, so the Commission has chosen commodities for which the underlying 

and derivatives markets both play important economic roles, including the potential for 

especially acute burdens on a given commodity in interstate commerce that would arise 

from excessive speculation in derivatives markets. Line drawing of this nature is 

inherently inexact, and the Commission will revisit these and other contracts “from time 

to time” as the statute requires.534 Depending on facts and circumstances, including the 

Commission’s experience administering the proposed limits with respect to the 25 core 

 533 FIA notes that volume for exchange-traded futures is measured by the number of contracts traded on a 

round-trip basis to avoid double-counting. Furthermore, FIA notes that open interest for exchange-traded 

futures is measured by the number of contracts outstanding at the end of the month. 534 CEA section 4a(a)(1).
279

referenced futures contracts, the Commission may determine that additional limits are 

necessary within the meaning of section 4a(a)(1).

As discussed in the cost benefit consideration below, the Commission’s proposed 

limits are not without costs, and there are potential burdens or negative consequences 

associated with establishing the proposed limits.535 In particular, if the levels are set too 

high, there is a greater risk of excessive speculation that could harm market participants 

and the public. If the levels are set too low, transaction costs may rise and liquidity could 

be reduced.536 Nevertheless, the Commission preliminarily believes that the specific 

proposed limits applicable to the 25 core referenced futures contracts would limit such 

potential costs, and that the significant benefits associated with advancing the statutory 

goal of preventing the undue burdens associated with excessive speculation in these 

commodities justify the potential costs associated with establishing the proposed limits. 

G. Request for Comment

The Commission requests comment on all aspects of the proposed necessity 

finding. The Commission also invites comments on the following:

(50) Does the proposed necessity finding take into account the relevant factors 

to ascertain whether position limits would be necessary on a core 

referenced futures contract?

(51) Does the proposed necessity finding base its analysis on the correct levels 

of trading volume and open interest? If not, what would be a more 

appropriate minimum level of trading volume and/or open interest upon 

 535 See infra Section IV.A. (discussion of cost-benefit considerations for the proposed changes). 536 See infra Section IV.A.2.a. (cost-benefit discussion of market liquidity and integrity).
280

which to evaluate whether federal position limits are necessary to prevent 

excessive speculation?

(52) Are there particular attributes of any of the 25 proposed core referenced 

futures contracts that the Commission should consider when determining 

whether federal position limits are or are not necessary for that particular 

product? 

IV. Related Matters

A. Cost-Benefit Considerations

1. Introduction

Section 15(a) of the Commodity Exchange Act (“CEA” or “Act”) requires the 

Commodity Futures Trading Commission (“Commission”) to consider the costs and 

benefits of its actions before promulgating a regulation under the CEA.537 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 (collectively, the “section 15(a) factors”).

538 

The Commission interprets section 15(a) to require the Commission to consider 

only those costs and benefits of its proposed changes that are attributable to the 

Commission’s discretionary determinations (i.e., changes that are not otherwise required 

by statute) compared to the existing status quo requirements. For this purpose, the status 

quo requirements include the CEA’s statutory requirements as well as any applicable

 537 7 U.S.C. 19(a). 538 Id.
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Commission regulations that are consistent with the CEA.539 As a result, any proposed 

changes to the Commission’s regulations that are required by the CEA or other applicable 

statutes would not be deemed to be a discretionary change for purposes of discussing 

related costs and benefits.

The Commission anticipates that the proposed position limits regulations will

affect market participants differently depending on their business model and scale of 

participation in the commodity contracts that are covered by the proposal.540 The 

Commission also anticipates that the proposal may result in “programmatic” costs to 

some market participants. Generally, affected market participants may incur increased 

costs associated with developing or revising, implementing, and maintaining compliance 

functions and procedures. Such costs might include those related to the monitoring of 

positions in the relevant referenced contracts; related filing, reporting, and recordkeeping 

requirements, and the costs of changes to information technology systems. 

The Commission has preliminarily determined that it is not feasible to quantify 

the costs or benefits with reasonable precision and instead has identified and considered 

 539 This cost-benefit consideration section is divided into seven parts, including this introductory section, 

each discussing their respective baseline benchmarks with respect to any applicable CEA or regulatory 

provisions. 

540 For example, the proposal could result in increased costs to market participants who may need to adjust 

their trading and hedging strategies to ensure that their aggregate positions do not exceed federal position 

limits, particularly those who will be subject to federal position limits for the first time (i.e., those who may 

trade contracts for which there are currently no federal limits). On the other hand, existing costs could 

decrease for those existing traders whose positions would fall below the new proposed limits and therefore 

would not be forced to adjust their trading strategies and/or apply for exemptions from the limits, 

particularly if the Commission’s proposal improves market liquidity or other metrics of market health. 

Similarly, for those market participants who would become subject to the federal position limits, general 

costs would be lower to the extent such market participants can leverage their existing compliance 

infrastructure in connection with existing exchange position limit regimes relative to those market 

participants that do not currently have such systems.
282

the costs and benefits qualitatively.541 The Commission believes that for many of the 

costs and benefits that quantification is not feasible with reasonable precision because 

doing so would require understanding all market participants’ business models, operating 

models, cost structures, and hedging strategies, including an evaluation of the potential 

alternative hedging or business strategies that could be adopted under the proposal. 

Further, while Congress has tasked the Commission with establishing such position limits 

as the Commission finds are “necessary,” some of the benefits, such as mitigating or 

eliminating manipulation or excessive speculation, may be very difficult or infeasible to 

quantify. These benefits, moreover, would likely manifest over time and be distributed 

over the entire market. 

In light of these limitations, to inform its consideration of costs and benefits of the 

proposed regulations, the Commission in its discretion relies on: (1) its experience and 

expertise in regulating the derivatives markets; (2) information gathered through public 

comment letters542 and meetings with a broad range of market participants; and (3) 

certain Commission data, such as the Commission’s Large Trader Reporting System and 

data reported to swap data repositories.

In addition to the specific questions included throughout the discussion below, the 

Commission generally requests comment on all aspects of its consideration of costs and 

benefits, including: identification and assessment of any costs and benefits not discussed 

herein; data and any other information to assist or otherwise inform the Commission’s 

 541 With respect to the Commission’s analysis under its discussion of its obligations under the Paperwork 

Reduction Act (“PRA”), the Commission has endeavored to quantify certain costs and other burdens 

imposed on market participants related to collections of information as defined by the PRA. See generally

Section IV.B. (discussing the Commission’s PRA determinations). 

542 While the general themes contained in comments submitted in response to prior proposals informed this 

rulemaking, the Commission is withdrawing the 2013 Proposal, the 2016 Supplemental Proposal, and the 

2016 Reproposal. See supra Section I.A. 
283

ability to quantify or qualify the costs and benefits of the proposed rules; and 

substantiating data, statistics, and any other information to support positions posited by 

commenters with respect to the Commission’s consideration of costs and benefits. 

The Commission preliminarily considers the benefits and costs discussed below in 

the context of international markets, because market participants and exchanges subject 

to the Commission’s jurisdiction for purposes of position limits may be organized outside 

of the United States; some industry leaders typically conduct operations both within and 

outside the United States; and market participants may follow substantially similar 

business practices wherever located. Where the Commission does not specifically refer 

to matters of location, the discussion of benefits and costs below refers to the effects of 

this proposal on all activity subject to the proposed regulations, whether by virtue of the 

activity’s physical location in the United States or by virtue of the activity’s connection 

with or effect on U.S. commerce under CEA section 2(i).543

The Commission will identify and discuss the costs and benefits organized 

conceptually by topic, and certain topics may generally correspond with a specific 

proposed regulatory section. The Commission’s discussion is organized as follows: (1) 

the scope of the commodity derivative contracts that would be subject to the proposed 

position limits framework, including with respect to the 25 proposed core referenced 

futures contracts and the proposed definitions of “referenced contract” and “economically 

equivalent swaps;” (2) the proposed federal position limit levels (proposed § 150.2); (3) 

the proposed federal bona fide hedging definition (proposed § 150.1) and other

Commission exemptions from federal position limits (proposed § 150.3); (4) proposed 

 543 7 U.S.C. 2(i).
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streamlined process for the Commission and exchanges to recognize bona fide hedges

and to grant exemptions for purposes of federal position limits (proposed §§ 150.3 and

150.9) and related reporting changes to part 19 of the Commission’s regulations; (5) the 

proposed exchange-set position limits framework and exchange-granted exemptions 

thereto (proposed §150.5); and (6) the section 15(a) factors.

2. “Necessity Finding” and Scope of Referenced Futures Contracts Subject to

Proposed Federal Position Limit Levels

Federal spot and non-spot month limits currently apply to futures and options on 

futures on the nine legacy agricultural commodities.544 The Commission’s proposal 

would expand the scope of commodity derivative contracts currently subject to the 

Commission’s existing federal position limits framework545 so that federal spot-month 

limits would apply to futures and options on futures on 16 additional physical 

commodities, for a total of 25 physical commodities.

546

The Commission has preliminarily interpreted CEA section 4a to require that the 

Commission must make an antecedent “necessity” finding that establishing federal 

 544 The nine legacy agricultural contracts currently subject to federal spot and non-spot month limits are: 

CBOT Corn (C), CBOT Oats (O), CBOT Soybeans (S), CBOT Wheat (W), CBOT Soybean Oil (SO), 

CBOT Soybean Meal (SM), MGEX Hard Red Spring Wheat (MWE), ICE Cotton No. 2 (CT), and CBOT 

KC Hard Red Winter Wheat (KW). 545 17 CFR 150.2. Because the Commission has not yet implemented the Dodd-Frank Act’s amendments to 

the CEA regarding position limits, except with respect to aggregation (see generally Final Aggregation 

Rulemaking, 81 FR at 91454) and the vacated 2011 Position Limits Rulemaking’s amendments to 17 CFR 

150.2 (see International Swaps and Derivatives Association v. United States Commodity Futures Trading 

Commission, 887 F. Supp. 2d 259 (D.D.C. 2012)), the baseline or status quo consists of the provisions of 

the CEA relating to position limits immediately prior to effectiveness of the Dodd-Frank Act amendments 

to the CEA and the relevant provisions of existing parts 1, 15, 17, 19, 37, 38, 140, and 150 of the 

Commission’s regulations, subject to the aforementioned exceptions.

546 The 16 proposed new products that would be subject to federal spot month limits would include seven

agricultural (CME Live Cattle (LC), CBOT Rough Rice (RR), ICE Cocoa (CC), ICE Coffee C (KC), ICE 

FCOJ-A (OJ), ICE U.S. Sugar No. 11 (SB), and ICE U.S. Sugar No. 16 (SF)), four energy (NYMEX Light 

Sweet Crude Oil (CL), NYMEX New York Harbor ULSD Heating Oil (HO), NYMEX New York Harbor

RBOB Gasoline (RB), NYMEX Henry Hub Natural Gas (NG)), and five metals (COMEX Gold (GC), 

COMEX Silver (SI), COMEX Copper (HG), NYMEX Palladium (PA), and NYMEX Platinum (PL)) 

contracts.
285

position limits is “necessary” to diminish, eliminate, or prevent certain burdens on 

interstate commerce with respect to the physical commodities in question.

547 As the 

statute does not define the term “necessary,” the Commission must apply its expertise in 

construing such term, and, as discussed further below, must do so consistent with the 

policy goals articulated by Congress, including in CEA sections 4a(a)(2)(C) and 4a(a)(3),

as noted throughout this discussion of the Commission’s cost-benefit considerations.

548 

As discussed in greater detail in the preamble, the Commission proposes to establish 

position limits on futures and options on futures for these 25 commodities on the basis 

that position limits on such contracts are “necessary.” In determining to include the 

proposed 25 core referenced futures contracts within the proposed federal position limit

framework, the Commission considered the effects that these contracts have on the 

underlying commodity, especially with respect to price discovery; the fact that they 

require physical delivery of the underlying commodity and therefore may be more 

affected by manipulation such as corners and squeezes compared to cash-settled 

contracts; and, in some cases, the especially acute economic burdens on interstate 

commerce that could arise from excessive speculation in these contracts causing sudden 

or unreasonable fluctuations or unwarranted changes in the price of the commodities 

underlying these contracts.

549

 547 See supra Section III.F. (discussion of the necessity finding). 548 In promulgating the position limits framework, Congress instructed the Commission to consider several 

factors: First, CEA section 4a(a)(3) requires the Commission when establishing position limits, to the 

maximum extent practicable, in its discretion, to (i) diminish, eliminate, or prevent excessive speculation; 

(ii) deter and prevent market manipulation, squeezes, and corners; (iii) ensure sufficient market liquidity for 

bona fide hedgers; and (iv) ensure that the price discovery function of the underlying market is not 

disrupted. Second, CEA section 4a(a)(2)(C) requires the Commission to strive to ensure that any limits 

imposed by the Commission will not cause price discovery in a commodity subject to position limits to 

shift to trading on a foreign exchange.

549 See supra Section III.F. (discussion of the necessity finding).
286

More specifically, the 25 core referenced futures contracts were selected because 

they: (i) physically settle, (ii) have high levels of open interest550 and significant notional 

value of open interest,551 (iii) serve as a reference price for a significant number of swaps 

and/or cash market transactions, and/or (iv) have, in most cases, relatively higher average 

trading volumes.552 These factors reflect the important and varying degrees of linkage 

between the derivatives markets and the underlying cash markets. The Commission 

preliminarily acknowledges that there is no mathematical formula that would be 

dispositive, though the Commission has considered relevant data where it is available. 

As a result, the Commission preliminarily has concluded that it must exercise its 

judgment in light of facts and circumstances, including its experience and expertise, to 

determine whether federal position limit levels are economically justified. For example, 

based on its general experience, the Commission preliminarily recognizes that contracts 

that physically settle can, in certain circumstances during the spot month, be at risk of 

corners and squeezes, which could distort pricing and resource allocation, make it more 

costly to implement hedge strategies, and harm the underlying cash market. Similarly, 

certain contracts with higher open interest and/or trading volume are more likely to serve 

as benchmarks and/or references for pricing cash market and other transactions, meaning 

 550 Open interest for this purpose includes the sum of open contracts, as defined in § 1.3 of the 

Commission’s regulations, in futures contracts and in futures option contracts converted to a futuresequivalent amount, as defined in current § 150.1(f) of the Commission’s regulations. See 17 CFR 1.3 and 

150.1(f).

551 Notional value of open interest for this purpose is open interest multiplied by the unit of trading for the 

relevant futures contract multiplied by the price of that futures contract. 552 A combination of higher average trading volumes and open interest is an indicator of a contract’s 

market liquidity. Higher trading volumes make it more likely that the cost of transactions is lower with 

narrower bid-ask spreads. 
287

a distortion of the price of any such contract could potentially impact underlying cash 

markets that are important to interstate commerce.

553 

As discussed in more detail in connection with proposed § 150.2 below, the 

Commission preliminarily believes that establishing federal position limits at the 

proposed levels for the proposed 25 core referenced futures contracts and related 

referenced contracts would result in several benefits, including a reduction in the 

probability of excessive speculation and market manipulation (e.g., squeezes and corners)

and the attendant harms to price discovery that may result. The Commission 

acknowledges, in connection with establishing federal position limit levels under 

proposed § 150.2 (discussed below), that position limits, especially if set too low, could 

adversely affect market liquidity and increase transaction costs, especially for bona fide 

hedgers, which ultimately might be passed on to the general public. However, the 

Commission is also cognizant that setting position limit levels too high may result in an 

increase in the possibility of excessive speculation and the harms that may result, such as 

sudden or unreasonable fluctuations or unwarranted changes in the price of the 

commodities underlying these contracts.

For purposes of this discussion, rather than discussing the general potential 

benefits and costs of the federal position limit framework, the Commission will instead 

focus on the benefits and costs resulting from the Commission’s proposed necessity 

finding with respect to the 25 core referenced futures contracts.

554 The Commission will 

address potential benefits and costs of its approach with respect to: (1) the liquidity and 

 553 See supra Section III.F. (discussion of the necessity finding). 554 See supra Section III.F. (discussion of the necessity finding).
288

integrity of the futures and related options markets and (2) market participants and 

exchanges.

a. Potential Impact of the Scope of the Commission’s Necessity Finding on Market 

Liquidity and Integrity

The Commission has preliminarily determined that the 25 contracts that the 

Commission proposes to include in its necessity finding are among the most liquid 

physical commodity contracts, as measured by open interest and/or trading volume, and 

therefore, imposing positions limits on these contracts may impose costs on market 

participants by constraining liquidity. However, the Commission believes that the 

potential harmful effect on liquidity will be muted, as a result of the generally high levels

of open interest and trading volumes of the respective 25 core referenced futures 

contracts.

555 

The Commission has preliminarily determined that, as a general matter, focusing 

on the 25 proposed core referenced futures contracts may benefit market integrity since

these contracts generally are amongst the largest physically-settled contracts with respect 

to relative levels of open interest and/or trading volumes. As a result, the Commission 

preliminarily believes that excessive speculation or potential market manipulation in such 

contracts would be more likely to affect more market participants and therefore 

potentially more likely to cause an undue and unnecessary burden (e.g., potential harm to 

market integrity or liquidity) on interstate commerce. Because each proposed core 

 555 The contracts that would be subject to the Commission’s proposal generally have higher trading 

volumes and open interest, which tend to have greater liquidity, including relatively narrower bid-ask 

spreads and relatively smaller price impacts from larger transaction sizes. Further, all other factors being 

equal, markets for contracts that are more illiquid tend to be more concentrated, so that a position limit on 

such contracts might reduce open interest on one side of the market, because a large trader would face the 

potential of being capped out by a position limit. For this reason, among others, the contracts to which the

federal position limits in existing § 150.2 apply include some of the most liquid physical-delivery futures 

contracts. 
289

referenced futures contract is physically-settled, as opposed to cash-settled, the proposal 

focuses on preventing corners and squeezes in those contracts where such market 

manipulation could cause significant harm in the price discovery process for their 

respective underlying commodities.

556 

While the Commission recognizes that market participants may engage in market 

manipulation through cash-settled futures and options on futures, the Commission 

preliminarily has determined that focusing on the physically-settled core referenced 

futures contracts will benefit market integrity by reducing the risk of corners and 

squeezes in particular. In addition, not imposing position limits on additional

commodities may foster non-excessive speculation, leading to better prices and more 

efficient resource allocation in these commodities. This may ultimately benefit 

commercial end users and possibly be passed on to the general public in the form of 

better pricing. As noted above, the scope of the Commission’s necessity finding with 

respect to the 25 proposed core referenced futures contracts will allow the Commission to 

focus on those contracts that, in general, the Commission preliminarily recognizes as 

having particular importance in the price discovery process for their respective 

underlying commodities as well as potentially acute economic burdens that would arise 

from excessive speculation causing sudden or unreasonable fluctuations or unwarranted 

changes in the commodity prices underlying these contracts.

To the extent the Commission does not include additional commodities in its 

necessity finding, the Commission’s approach may also introduce additional costs in the 

 556 The Commission must also make this determination in light of its limited available resources and 

responsibility to allocate taxpayer resources in an efficient manner to meet the goals of section 4a(a)(1), 

and the CEA generally. 
290

form of loss of certain benefits associated with the proposed federal position limits 

framework, such as stronger prevention of market manipulation, such as corners and 

squeezes. Accordingly, the greater the potential benefits of the proposed federal position 

limits framework in general, the greater the potential cost in the reduction in market 

integrity in general from not including other possible commodities within the federal 

position limits framework (only to the extent any such additional commodities would be 

found to be “necessary” for purposes of CEA section 4a). Nonetheless, some of the 

potential harms to market integrity associated with not including additional commodities 

within the federal position limits framework could be mitigated to an extent by 

exchanges, which can use tools other than position limits, such as margin requirements or 

position accountability at lower levels than potential federal limits, to defend against 

certain market behavior. Similarly, for those contracts that would not be subject to the 

proposal, exchange-set position limits alternatively may achieve the same benefits 

discussed in connection with the proposed federal position limits. 

b. Potential Impact of the Scope of the Commission’s Necessity Finding on Market 

Participants and Exchanges

The Commission acknowledges that the federal position limits proposed herein 

could impose certain administrative, logistical, technological, and financial burdens on 

exchanges and market participants, especially with respect to developing or expanding 

compliance systems and the adoption of monitoring policies. However, the Commission 

preliminarily believes that its approach to delaying the effective date by 365 days from 

publication of any final rule in the Federal Register should mitigate compliance costs by 

permitting the update and build out of technological and compliance systems more 

gradually. It may also reduce the burdens on market participants not previously subject 
291

to position limits, who will have a longer period of time to determine whether they may 

qualify for certain bona fide hedging recognitions or other exemptions, and to possibly 

alter their trading or hedging strategies.557 Further, the delayed effective date will reduce 

the burdens on exchanges, market participants, and the Commission by providing each 

with more time to resolve technological and other challenges for compliance with the 

new regulations. In turn, the Commission preliminarily anticipates that the extra time 

provided by the delayed effective date will result in more robust systems for market 

oversight, which should better facilitate the implementation of the Commission’s position 

limits framework and avoid unnecessary market disruptions while exchanges and market 

participants prepare for its implementation. However, the longer the proposed delay in 

the proposal’s effective date, the longer it will take to realize the benefits identified 

above.

3. Federal Position Limit Levels (Proposed § 150.2)

a. General Approach 

Existing § 150.2 establishes position limit levels that apply net long or net short to 

futures and futures-equivalent options contracts on nine legacy physically-settled 

agricultural contracts.558 The Commission has previously set separate federal position 

limits for: (i) the spot month, and (ii) the single month and all-months combined limit 

 557 Commenters on prior proposals have requested a sufficient phase-in period. See, e.g., 2016 Reproposal, 

81 FR at 96815 (implementation timeline). 558 The nine legacy agricultural contracts currently subject to federal spot and non-spot month limits are: 

CBOT Corn (C), CBOT Oats (O), CBOT Soybeans (S), CBOT Wheat (W), CBOT Soybean Oil (SO), 

CBOT Soybean Meal (SM), MGEX Hard Red Spring Wheat (MWE), ICE Cotton No. 2 (CT), and CBOT 

KC Hard Red Winter Wheat (KW). 
292

levels (i.e., “non-spot months”).559 For the existing spot month federal limit levels, the 

contract levels are based on 25 percent, or lower, of the estimated deliverable supply 

(“EDS”).

560 For the existing single month and all-months combined limit levels, the 

levels are set at 10 percent of open interest for the first 25,000 contracts of open interest, 

with a marginal increase of 2.5 percent of open interest thereafter (the “10, 2.5 percent 

formula”). 

Proposed § 150.2 would revise and expand the current federal position limits 

framework as follows: First, for spot month levels, proposed § 150.2 would (i) cover 16 

additional physically-settled futures and related options contracts, based on the 

Commission’s existing approach of establishing limit levels at 25 percent or lower of 

EDS, for a total of 25 core referenced futures contracts subject to federal spot month 

limits (i.e., the nine legacy agricultural contracts plus the proposed 16 additional 

contracts);561 and (ii) update the existing spot month levels for the nine legacy 

agricultural contracts based on revised EDS.562 

Second, for non-spot month levels, proposed § 150.2 would revise the 10, 2.5 

percent formula so that (i) the incremental 2.5 percent increase takes effect after 50,000

contracts of open interest, rather than after 25,000 contracts under the existing rule (the 

 559 For clarity, limits for single and all-months combined apply separately. However, the Commission 

previously has applied the same limit levels to the single month and all-months combined. Accordingly, 

the Commission will discuss the single and all-months limits, i.e. the non-spot month limits, together. 560 See supra Section II.B.1—Existing § 150.2 (discussing that establishing spot month levels at 25 percent

or less of EDS is consistent with past Commission practices).

561 The 16 proposed new products that would be subject to federal spot month limits would include seven

agricultural (CME Live Cattle (LC), CBOT Rough Rice (RR), ICE Cocoa (CC), ICE Coffee C (KC), ICE

FCOJ-A (OJ), ICE U.S. Sugar No. 11 (SB), and ICE U.S. Sugar No. 16 (SF)), four energy (NYMEX Light 

Sweet Crude Oil (CL), NYMEX NY Harbor ULSD Heating Oil (HO), NYMEX NY Harbor RBOB 

Gasoline (RB), and NYMEX Henry Hub Natural Gas (NG)), and five metals (COMEX Gold (GC), 

COMEX Silver (SI), COMEX Copper (HG), NYMEX Palladium (PA), and NYMEX Platinum (PL)) 

contracts. 

562 The proposal would maintain the current spot month limits on CBOT Oats (O).
293

“marginal threshold level”), and (ii) the limit levels will be calculated by applying the 

updated 10, 2.5 percent formula to open interest data for the periods from July 2017–June 

2018 and July 2018–June 2019 of the applicable futures and delta adjusted futures 

options.

563 

Third, the proposed position limits framework would expand to cover (i) any 

cash-settled futures and related options contracts directly or indirectly linked to any of the 

25 proposed physically-settled core referenced futures contracts as well as (ii) any 

economically equivalent swaps. 

For spot month positions, the proposed position limits would apply separately, net 

long or short, to cash-settled contracts and to physically-settled contracts in the same 

commodity. This would result in a separate net long/short position for each category so 

that cash-settled contracts in a particular commodity would be netted with other cashsettled contracts in that commodity, and physically-settled contracts in a given 

commodity would be netted with other physically-settled contracts in that commodity; a 

cash-settled contract and a physically-settled contract would not net with one another. 

Outside the spot month, cash and physically-settled contracts in the same commodity 

would be netted together to determine a single net long/short position. 

Fourth, proposed § 150.2 would subject certain pre-existing positions to federal 

position limits during the spot month but would grandfather certain pre-existing positions 

outside the spot month. 

 563 As discussed below, for most of the legacy agricultural commodities, this would result in a higher nonspot month limit. However, the Commission is not proposing to change the non-spot month limits for 

either CBOT Oats (O) or MGEX Hard Red Spring Wheat (MWE) based on the revised open interest since 

this would result in a reduction of non-spot month limits from 2,000 to 700 contracts for CBOT Oats (O) 

and 12,000 to 5,700 contracts for MGEX HRS Wheat (MWE). Similarly, the Commission also proposed to 

maintain the current non-spot month limit for CBOT KC Hard Red Winter Wheat (KW).
294

In setting the federal position limit levels, the Commission seeks to advance the

enumerated statutory objectives with respect to position limits in CEA section 

4a(a)(3)(B).

564 The Commission recognizes that relatively high limit levels may be more 

likely to support some of the statutory goals and less likely to advance others. For 

instance, a relatively higher limit level may be more likely to benefit market liquidity for 

hedgers or ensure that the price discovery of the underlying market is not disrupted, but

may be less likely to benefit market integrity by being less effective at diminishing, 

eliminating, or preventing excessive speculation or at deterring and preventing market 

manipulation, corners, and squeezes. In particular, setting relatively high federal position 

limit levels may result in excessively large speculative positions and/or increased 

volatility, especially during speculative showdowns, which may cause some market 

participants to retreat from the commodities markets due to perceived decreases in market

integrity. In turn, fewer market participants may result in lower liquidity levels for

hedgers and harm to the price discovery function in the underlying markets. 

Conversely, setting a relatively lower federal limit level may be more likely to 

diminish, eliminate, or prevent excessive speculation, but may also limit the availability 

of certain hedging strategies, adversely affect levels of liquidity, and increase transaction 

costs.565 Additionally, setting federal position limits too low may cause non-excessive 

 564 See supra Section II.B.2.c. (for further discussion regarding the CEA’s statutory objectives for the 

federal position limits framework).

565 For example, relatively lower federal limits may adversely affect potential hedgers by reducing liquidity. 

In the case of reduced liquidity, a potential hedger may face unfavorable spreads and prices, in which case 

the hedger must choose either to delay implementing its hedging strategy and hope for more favorable 

spreads in the near future or to choose immediate execution (to the extent possible) at a less favorable price.
295

speculation to exit a market, which could reduce liquidity, cause “choppy”566 prices and 

reduced market efficiency, and increase option premia to compensate for the more 

volatile prices. The Commission in its discretion has nevertheless endeavored to set 

federal limit levels, to the maximum extent practicable, to benefit the statutory goals 

identified by Congress. 

As discussed above, the contracts that would be subject to the proposed federal 

limits are currently subject to either federal- or exchange-set limits (or both). To the 

extent that the proposed federal position limit levels are higher than the existing federal 

position limit levels for either the spot or non-spot month, market participants currently 

trading these contracts could engage in additional trading under the proposed federal 

limits in proposed § 150.2 that otherwise would be prohibited under existing § 150.2.

567 

On the other hand, to the extent an exchange–set limit level would be lower than its

proposed corresponding federal limit, the proposed federal limit would not affect market 

participants since market participants would be required to comply with the lower 

exchange-set limit level (to the extent that the exchanges maintain their current levels).568 

b. Spot Month Levels

The Commission proposes to maintain 25 percent of EDS as a ceiling for federal 

limits. Based on the Commission’s experience overseeing federal position limits for 

 566 “Choppy” prices often refers to illiquidity in a market where transacted prices bounce between the bid 

and the ask prices. Market efficiency may be harmed in the sense that transacted prices might need to be 

adjusted for the bid-ask bounce to determine the fundamental value of the underlying contract. 567 For the spot month, all the legacy agricultural contracts other than CBOT Oats (O) would have higher 

federal levels. For the non-spot months, all the legacy agricultural contracts other than CBOT Oats (O), 

MGEX HRS Wheat (MWE), and CBOT KC HRW Wheat (KW), would have higher federal levels. 568 While the Commission proposes to generally either increase or maintain the federal position limits for

both the spot-months and non-spot months compared to existing federal limits, where applicable, and 

exchange limits, the proposed federal level for COMEX Copper (HG) would be below the existing 

exchange-set level. Accordingly, market participants may have to change their trading behavior with 

respect to COMEX Copper (HG), which could impose compliance and transaction costs on these traders, to 

the extent their existing trading would violate the proposed lower federal limit levels.
296

decades and overseeing exchange-set position limits submitted to the Commission 

pursuant to part 40 of the Commission’s regulations, none of the proposed levels listed in 

Appendix E of part 150 of the Commission’s regulations appears to be so low as to 

reduce liquidity for bona fide hedgers or disrupt price discovery function of the 

underlying market, or so high as to invite excessive speculation, manipulation, corners, or 

squeezes because, among other things, any potential economic gains resulting from the 

manipulation may be insufficient to justify the potential costs, including the costs of 

acquiring, and ultimately offloading, the positions used to effect the manipulation. 

c. Levels Outside of the Spot Month

i. The 10, 2.5 Percent Formula

The Commission preliminarily has determined that the existing 10, 2.5 percent

formula generally has functioned well for the existing nine legacy agricultural contracts 

and has successfully benefited the markets by taking into account the competing goals of 

facilitating both liquidity formation and price discovery while also protecting the markets 

from harmful market manipulation and excessive speculation. However, since the 

existing limit levels are based on open interest levels from 2009 (except for CBOT Oats

(O), CBOT Soybeans (S), and ICE Cotton No. 2 (CT), for which existing levels are based 

on the respective open interest from 1999), the Commission is proposing to revise the 

levels based on the periods from July 2017–June 2018 and July 2018–June 2019 to reflect 

the general increases in open interest and trading volume that have occurred over time in 

the nine legacy agricultural contracts (other than CBOT Oats (O), MGEX HRS Wheat
297

(MWE), and CBOT KC HRW Wheat (KW)).

569 Since the proposed increase for most of 

the federal non-spot position limits is predicated on the increase in open interest and 

trading volume, as reflected in the revised data reviewed by the Commission, the 

Commission preliminarily believes that its proposal may enhance, or at least should 

maintain, general liquidity, which the Commission preliminarily believes may benefit 

those with bona fide hedging positions, and commercial end users in general. On the 

other hand, the Commission understands that many market participants, especially 

commercial end users, generally believe that the existing non-spot month levels for the 

nine legacy agricultural commodities function well, including promoting liquidity and 

facilitating bona fide hedging in the respective markets. As a result, the Commission’s 

proposal may increase the risk of excessive speculation without achieving any 

concomitant benefits of increased liquidity for bona fide hedgers compared to the status 

quo.

The Commission also preliminarily recognizes that there could be potential costs 

to keeping the existing 10, 2.5 percent formula (even if revised to reflect current open 

interest levels) compared to alternative formulae that would result in even higher federal 

position limit levels. First, while the 10, 2.5 percent formula may have reflected 

“normal” observed market activity through 1999 when the Commission adopted it, it no 

longer reflects current open interest figures. When adopting the 10, 2.5 percent formula 

in 1999, the Commission’s experience in these markets reflected aggregate futures and 

 569 For most of the legacy agricultural commodities, this would result in a higher non-spot month limit. 

However, the Commission is not proposing to change the non-spot month limits for either CBOT Oats (O) 

or MGEX HRS Wheat (MWE) based on the revised open interest since this would result in a reduction of 

non-spot month limits from 2,000 to 700 contracts for CBOT Oats (O) and 12,000 to 5,700 contracts for 

MGEX HRS Wheat (MWE). Similarly, the Commission also proposed to maintain the current non-spot 

month limit for CBOT KC HRW Wheat (KW). See supra Section II.B.2.e. —Methodology for Setting 

Proposed Non-Spot Month Limit Levels for further discussion. 
298

options open interest well below 500,000 contracts, which no longer reflects market 

reality.570 As the nine legacy agricultural contracts (with the exception of CBOT Oats

(O)) all have open interest well above 25,000 contracts, and in some cases above 500,000 

contracts, the existing formula may act as a negative constraint on liquidity formation 

relative to the higher proposed formula. Further, if open interest continues to increase 

over time, the Commission anticipates that the existing 10, 2.5 percent formula could 

impose even greater marginal costs on bona fide hedgers by potentially constraining

liquidity formation (i.e., as the open interest of a commodity contract increase, a greater 

relative proportion of the commodity’s open interest is subject to the 2.5 percent limit 

level rather than the initial 10 percent limit). In turn, this may increase costs to 

commercial firms, which may be passed to the public in the form of higher prices.

Further, to the extent there may be certain liquidity constrains, the Commission 

has determined that this potential concern could be mitigated, at least in part, by the 

Commission’s proposed change to increase the marginal threshold level from 25,000 

contracts to 50,000 contracts, which the Commission preliminarily believes should

provide a conservative increase in the non-spot month limits for most contracts to better 

reflect the general increase observed in open interest across futures markets. The 

Commission acknowledges that the marginal threshold level could be increased above 

50,000 contracts, but notes that each increase of 25,000 contracts in the marginal 

 570 See 64 FR at 24038, 24039 (May 5, 1999). As discussed in the preamble, the data show that by the 

2015-2018 period, five of the nine legacy agricultural contracts had maximum open interest greater than 

500,000 contracts. The contracts for CBOT Corn (C), CBOT Soybeans (S), and CBOT KC HRW Wheat 

(KW) saw increased maximum open interest by a factor of four to five times the maximum open interest 

during the years leading up to the Commission’s adoption of the 10, 2.5 percent formula in 1999. 

Similarly, the contracts for CBOT Soybean Meal (SM), CBOT Soybean Oil (SO), CBOT Wheat (W), and 

MGEX HRS Wheat (MWE) saw increased maximum open interest by a factor of three to four times. See

supra Section II.B.2.e. —Methodology for Setting Proposed Non-Spot Month Limit Levels for further 

discussion. 
299

threshold level would only increase the permitted non-spot month level by 1,875 

contracts (i.e., (10% of 25,000 contracts) – (2.5% of 25,000 contracts) = 1,875 contracts). 

The Commission has observed based on current data that this proposed change could 

benefit several market participants per legacy agricultural commodity who otherwise

would bump up against the all-months and/or single month limits with based on the status 

quo threshold of 25,000 contracts. As a result, the Commission preliminarily has 

determined that changing the marginal threshold level could result in marginal benefits 

and costs for many of the legacy agricultural commodities, but the Commission 

acknowledges the proposed change is relatively minor compared to revising the existing 

10, 2.5 percent formula based on updated open interest data. 

Second, the Commission preliminarily recognizes that an alternative formula that 

allows for higher non-spot limits, compared to the existing 10, 2.5 percent formula, could

benefit liquidity and market efficiency by creating a framework that is more conducive to 

the larger liquidity providers that have entered the market over time.

571 Compared to 

when the Commission first adopted the 10, 2.5 percent formula, today there exist

relatively more large non-commercial traders, such as banks, managed money traders, 

and swap dealers, which generally hold long positions and act as aggregators or market 

makers that provide liquidity to short positions (e.g., commercial hedgers).

572 These 

dealers also function in the swaps market and use the futures market to hedge their 

exposures. Accordingly, to the extent that larger non-commercial market makers and 

liquidity providers have entered the market – particularly to the extent they are able to 

 571 See supra Section II.B.2.e.—Methodology for Setting Proposed Non-Spot Month Limit Levels for 

further discussion.

572 Id.
300

take offsetting positions to commercial short interests – a hypothetical alternative formula

that would permit higher non-spot month limits might provide greater market liquidity,

and possibly increased market efficiency, by allowing for greater market-making 

activities.

573 

However, the Commission believes that any purported benefits related to a 

hypothetical alternative formula that would allow for higher non-spot limits would be 

minimal at best. Specifically, bona fide hedgers and end users generally have not 

requested a revised formula to allow for significantly higher non-spot limits. Similarly, 

liquidity providers would still be able to maintain, and possibly increase, market making 

activities under the Commission’s proposal since the non-spot month limits will generally 

still increase under the existing 10, 2.5 percent formula to reflect the increase in open 

interest. Further, to the extent that the Commission’s proposal to eliminate the risk 

management exemption could theoretically force liquidity providers to reduce their 

trading activities, the Commission preliminarily believes that certain liquidity-providing 

activity of the existing risk management exemption holders may still be permitted under

the Commission’s proposal, either as a result of the proposed swap pass-through 

provision or because of the general increase in limits based on the revised open interest 

 573 For example, the Commission is aware of several market makers that either have left particular 

commodity markets, or reduced their market making activities. See, e.g., McFarlane, Sarah, Major Oil 

Traders Don’t See Banks Returning to the Commodity Markets They Left, The Wall Street Journal (Mar. 

28, 2017), available at https://www.wsj.com/articles/major-oil-traders-dont-see-banks-returning-to-thecommodity-markets-they-left-1490715761?mg=prod/com-wsj (describing how “Morgan Stanley sold its oil 

trading and storage business . . . and J.P. Morgan unloaded its physical commodities business . . . .”); 

Decambre, Mark, Goldman Said to Plan Cuts to Commodity Trading Desk: WSJ, MarketWatch Web site 

(Feb. 5, 2019), https://www.marketwatch.com/story/goldman-said-to-plan-cuts-to-commodity-trading-deskwsj-2019-02-05 (describing how Goldman Sachs “plans on making cuts within its commodity trading 

platform. . . .”).
301

levels.

574 The Commission also preliminarily recognizes an additional benefit to market 

integrity of the current proposal compared to a hypothetical alternative formula: While 

the Commission believes that the proposed pass-through swap provision is narrowlytailored to enable liquidity providers to continue providing liquidity to bona fide hedgers,

in contrast, an alternative formula that would allow higher limit levels for all market 

participants would also permit increased excessive speculation and increase the 

probability of market manipulation or harm the underlying price discovery function. 

Additionally, some have voiced general concern that permitting increased federal 

non-spot month limits in the nine legacy agricultural contracts (at any level), especially in 

connection with commodity indices, could disrupt price discovery and result in a lack of 

convergence between futures and cash prices, resulting in increased costs to end users, 

which ultimately could be borne by the public. The Commission has not seen data 

demonstrating this causal connection, but acknowledges arguments to that effect.575 

Third, if the Commission’s proposed non-spot position limits would be too high 

for a commodity, the proposal might be less effective in deterring excessive speculation 

 574 See supra Section II.A.1.c.v. (preamble discussion of pass-through swap provision); see infra Section 

IV.A.4.b.i.(2).

575 As discussed in preamble Section II.B.2.e.—Methodology for Setting Proposed Non-Spot Month Limit 

Levels, one of the concerns that prompted the 2008 moratorium on granting risk management exemptions 

was a lack of convergence between futures and cash prices in wheat. Some at the time hypothesized that 

perhaps commodity index trading was a contributing factor to the lack of convergence, and, some have 

argued that this could harm price discovery since traders holding these positions may not react to market 

fundamentals, thereby exacerbating any problems with convergence. However, the Commission has 

determined for various reasons that risk management exemptions did not lead to the lack of convergence 

since the Commission understands that many commodity index traders vacate contracts before the spot 

month and therefore would not influence converge between the spot and futures price at expiration of the 

contract. Further, the risk-management exemptions granted prior to 2008 remain in effect, yet the 

Commission is unaware of any significant convergence problems relating to commodity index traders at 

this time. Additionally, there did not appear to be any convergence problems between the period when 

Commission staff initially granted risk management exemptions and 2007. Instead, the Commission 

believes that the convergence issues that started to occur around 2007 were due to the contract specification 

underpricing the option to store wheat for the long futures holder making the expiring futures price more 

valuable than spot wheat.
302

and market manipulation for that commodity’s market. Conversely, if the Commission’s 

proposed position limit levels would be too low for a commodity, the proposal could 

unduly constrain liquidity for bona fide hedgers or result in a diminished price discovery

function for that commodity’s underlying market. In either case, the Commission would 

view these as costs imposed on market participants. However, to the extent the 

Commission’s proposed non-spot limit levels could be too high, the Commission 

preliminarily believes these costs could be mitigated because exchanges would be able to 

establish lower non-spot month levels.576 Moreover, these concerns may be mitigated

further to the extent that exchanges use other tools for protecting markets aside from 

position limits, such as establishing accountability levels below federal position limit

levels or imposing liquidity and concentration surcharges to initial margin if vertically 

integrated with a derivatives clearing organization. Further, as discussed below, the 

Commission is proposing to maintain current non-spot limit levels for CBOT Oats (O), 

MGEX HRS Wheat (MWE), and CBOT KC HRW Wheat (KW), which otherwise would 

be lower based on current open interest levels for these contracts.

ii. Exceptions to the Proposed 10, 2.5 Percent Formula for CBOT Oats (O), MGEX 

Hard Red Spring Wheat (MWE), and CBOT Kansas City Hard Red Winter Wheat 

(KW)

 576 On the other hand, relying on exchanges may have potential costs because exchanges may have 

conflicting interests and therefore may not establish position limit (or accountability) levels lower than the 

proposed federal limits. For example, exchanges may not be incentivized to lower their limits due to

competitive concerns with another exchange, or due to influence from a large customer. 

Conversely, exchange and Commission interests may be aligned to the extent that exchanges do have a 

countervailing interest to protect their markets from manipulation and price distortion: If market 

participants lose confidence in the contract as a tool for hedging, they will look for alternatives, possibly 

migrating to another product on a different exchange. The Commission is aware of at least one instance in 

which exchanges adopted spot-month position limits and/or adopted a lower exchange-set limit for 

particular futures contracts as a result of excessive manipulation and potential market manipulation. 

Similarly, exchanges remain subject to their core principle obligations to prevent manipulation, and the 

Commission conducts general market oversight through its own surveillance program. Accordingly, the 

Commission acknowledges such concerns about conflicting exchange incentives, but preliminarily believes 

that such concerns are mitigated for the foregoing reasons.
303

Based on the Commission’s experience since 2011 with non-spot month 

speculative position limit levels for MGEX HRS Wheat (“MWE”) and CBOT KC HRW 

Wheat (“KW") core referenced futures contracts, the Commission is proposing to 

maintain the proposed limit levels for MWE and KW at the existing level of 12,000 

contracts rather than reducing them to the lower level that would result from applying the 

proposed updated 10, 2.5 percent formula. Maintaining the status quo for the MWE and 

KW non-spot month limit levels would result in partial wheat parity between those two 

wheat contracts, but not with CBOT Wheat (“W”), which would increase to 19,300 

contracts. The Commission preliminarily believes that this will benefit the MWE and 

KW markets since the two species of wheat are similar to one another; accordingly, 

decreasing the non-spot month levels for MWE could impose liquidity costs on the MWE 

market and harm bona fide hedgers, which could further harm liquidity or bona fide 

hedgers in the KW market. On the other hand, the Commission has determined not to 

raise the proposed limit levels for either KW or MWE to the limit level for W since the 

non-spot month level appears to be extraordinarily large in comparison to open interest in 

KW and MWE markets, and the limit level for the MWE contract is already larger than

the limit level would be based on the 10, 2.5 percent formula. While W is a potential 

substitute for KW and MWE, it is not similar to the same extent that MWE and KW are 

to one another, and so the Commission has preliminarily determined that this is a 

reasonable compromise to maintain liquidity and price discovery while not unnecessarily 

inviting excessive speculation or potential market manipulation in the MWE and KW

markets.
304

Likewise, based on the Commission’s experience since 2011 with the non-spot 

month speculative position limit for CBOT Oats (O), the Commission is proposing the 

limit level at the current 2,000 contract level rather than reducing it to the lower level that 

would result from applying the updated 10, 2.5 formula based on current open interest. 

The Commission has preliminarily determined that there is no evidence of potential 

market manipulation or excessive speculation, and so there would be no perceived benefit 

to reducing the non-spot month limit for the CBOT Oats (O) contract, while reducing the 

level could impose liquidity costs.

d. Core Referenced Futures Contracts and Linked Referenced Contracts; Netting 

The definitions of the terms “core referenced futures contract” and “referenced 

contract” set the scope of contracts to which federal position limits apply. As discussed 

below, by applying the federal position limits to “referenced contracts,” the 

Commission’s proposal would expand the federal position limits beyond the proposed 25 

physically-settled “core referenced futures contracts” listed in proposed Appendix E to 

part 150 by also including any cash-settled “referenced contracts” linked thereto as well 

as swaps that meet the proposed “economically equivalent swap” definition and thus

qualify as “referenced contracts.”

577 

i. Referenced Contracts

The Commission preliminarily has determined that including futures contracts

and options thereon that are “directly” or “indirectly linked” to the core referenced 

contracts, including cash-settled contracts, under the proposed definition of “referenced 

 577 As discussed in the preamble, the proposed position limits framework would also apply to physicallysettled swaps that qualify as economically equivalent swaps. However, the Commission preliminarily 

believes that physically-settled economically equivalent swaps would be few in number.
305

contract” would help prevent the evasion of federal position limits – especially during the 

spot month – through the creation of a financially equivalent contract that references the 

price of a core referenced futures contract. The Commission preliminarily has 

determined that this will benefit market integrity and potentially reduce costs to market 

participants that otherwise could result from market manipulation.

The Commission also recognizes that including cash-settled contracts within the 

proposed federal position limits framework may impose additional compliance costs on 

market participants and exchanges. Further, the proposed federal position limits –

especially outside the spot month – may not provide the benefits discussed above with 

respect to market integrity and manipulation because there is no physical delivery outside 

the spot month and therefore there is reduced concern for corners and squeezes. 

However, to the extent that there is manipulation of such non-spot, cash-settled contracts, 

the Commission’s authority to regulate and oversee futures and related options markets

(other than through establishing federal position limits) may also be effective in 

uncovering or preventing manipulation, especially in the non-spot cash markets, and may 

result in relatively lower compliance costs incurred by market participants. Similarly, the 

Commission preliminarily acknowledges that exchange oversight could provide the same 

benefit to market oversight and prevention of market manipulation, but with lower costs

imposed on market participants – given the exchanges’ deep familiarity with their own 

markets and their ability to tailor a response to a particular market disruption – compared 

to federal position limits. 

The proposed “referenced contract” definition would also include “economically 

equivalent swaps,” and for the reasons discussed below would include a narrower set of 
306

swaps compared to the set of futures and options thereon that would be, under the 

proposed “referenced contract” definition, captured as either “directly” or “indirectly 

linked” to a core referenced futures contract.

578

ii. Netting

The Commission proposes to permit market participants to net positions outside 

the spot month in linked physically-settled and cash-settled referenced contracts, but

during the spot month market participants would not be able to net their positions in cashsettled referenced contracts against their positions in physically-settled referenced 

contracts. The Commission preliminarily believes that its proposal would benefit 

liquidity formation and bona fide hedgers outside the spot months since the proposed 

netting rules would facilitate the management of risk on a portfolio basis for liquidity 

providers and market makers. In turn, improved liquidity may benefit bona fide hedgers 

and other end users by facilitating their hedging strategies and reducing related 

transaction costs (e.g., improving execution timing and reducing bid-ask spreads). On the 

other hand, the Commission recognizes that allowing such netting could increase 

transaction costs and harm market integrity by allowing for a greater possibility of market 

manipulation since market participants and speculators would be able to maintain larger 

gross positions outside the spot month. However, the Commission preliminarily has 

determined that such potential costs may be mitigated since concerns about corners and 

squeezes generally are less acute outside the spot month given there is no physical 

delivery involved, and because there are tools other than federal position limits for 

preventing and deterring other types of manipulation, including banging the close, such 

 578 See infra Section IV.A.3.d.iv. (discussion of economically equivalent swaps). 
307

as exchange-set limits and accountability and surveillance both at the exchange and 

federal level. Moreover, prohibiting the netting of physical and cash positions during the 

spot month should benefit bona fide hedgers as well as price discovery of the underlying 

markets since market makers and speculators would not be able to maintain a relatively 

large position in the physical markets by netting it against its positions in the cash 

markets.

579 While this may increase compliance and transaction costs for speculators, it 

might benefit some bona fide hedgers and end users. It might also impose costs on 

exchanges, including increased surveillance and compliance costs and lost fees related to 

the trading that such market makers or speculators otherwise might engage in absent 

federal position limits or with the ability to their net physical and cash positions. 

iii. Exclusions from the “Referenced Contract” Definition

First, while the proposed “referenced contract” definition would include linked 

contracts, it would explicitly exclude location basis contracts, which are contracts that 

reflect the difference between two delivery locations or quality grades of the same 

commodity.580 The Commission preliminarily believes that excluding location basis 

contracts from the “referenced contract” definition would benefit market integrity by 

preventing a trader from obtaining an extraordinarily large speculative position in the 

 579 Otherwise, a participant could maintain large, offsetting positions in excess of limits in both the 

physically-settled and cash-settled contract, which might harm market integrity and price discovery and 

undermine the federal position limits framework. For example, absent such a restriction in the spot month, 

a trader could stand for over 100 percent of deliverable supply during the spot month by holding a large 

long position in the physical-delivery contract along with an offsetting short position in a cash-settled 

contract, which effectively would corner the market. 580 The term “location basis contract” generally means a derivative that is cash-settled based on the 

difference in price, directly or indirectly, of (1) a core referenced futures contract; and (2) the same 

commodity underlying a particular core referenced futures contract at a different delivery location than that 

of the core referenced futures contract. For clarity, a core referenced futures contract may have 

specifications that include multiple delivery points or different grades (i.e., the delivery price may be 

determined to be at par, a fixed discount to par, or a premium to par, depending on the grade or quality). 

The above discussion regarding location basis contracts is referring to delivery locations or quality grades 

other than those contemplated by the applicable core referenced futures contract.
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commodity underlying the referenced contract. Otherwise, absent the proposed 

exclusion, a market participant could increase its exposure in the commodity underlying 

the referenced contract by using the location basis contract to net down against its 

position in a referenced contract, and then further increase its position in the referenced 

contract that would otherwise by restricted by position limits. Similarly, the Commission 

preliminarily believes that this would reduce hedging costs for hedgers and commercial 

end-users, as they would be able to more efficiently hedge the cost of commodities at 

their preferred location without the risk of possibly hitting a position limits ceiling or 

incur compliance costs related to applying for a bona fide hedge related to such position. 

Excluding location basis contracts from the “referenced contract” definition also 

could impose costs for market participants that wish to trade location basis contracts 

since, as noted, such contracts would not be subject to federal limits and thus could be 

more easily subject to manipulation by a market participant that obtained an excessively 

large position. However, the Commission preliminarily believes such costs are mitigated 

because location basis contracts generally demonstrate less volatility and are less liquid 

than the core referenced futures contracts, meaning the Commission believes that it 

would be an inefficient method of manipulation (i.e., too costly to implement and 

therefore, the Commission believes that the probability of manipulation is low). Further, 

excluding location basis contracts from the “referenced contract” definition is consistent 

with existing market practice since the market treats a contract on one grade or delivery 

location of a commodity as different from another grade or delivery location. 

Accordingly, to the extent that the proposal is consistent with current market practice, 

any benefits or costs already may have been realized. 
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Second, the Commission preliminarily has concluded that excluding commodity 

indices from the “referenced contract” definition would benefit market integrity by 

preventing speculators from using a commodity index contract to net down an outright 

position in a referenced contract that is a component of the commodity index contract, 

which would allow the speculator to take on large outright positions in the referenced 

contracts and therefore result in increased speculation, undermining the federal position 

limits framework.581 However, the Commission preliminarily believes that its proposed 

exclusion could impose costs on market participants that trade commodity indices since, 

as noted, such contracts would not be subject to federal limits and thus could be more 

easily subject to manipulation by a market participant that obtained an excessively large 

position. The Commission preliminarily believes such costs would be mitigated because 

the commodities comprising the index would themselves be subject to limits, and because 

commodity index contracts generally tend to exhibit low volatility since they are 

diversified across many different commodities. Further, the Commission believes that it 

is possible that excluding commodity indices from the definition of “referenced 

contracts” could result in some trading shifting to commodity indices contracts, which 

 581 Further, the Commission believes that prohibiting the netting of a commodity index position with a 

referenced contract is required by its interpretation of the Dodd-Frank Act’s amendments to the CEA’s 

definition of “bona fide hedging transaction or position.” The Commission interprets the amended CEA 

definition to eliminate the Commission’s ability to recognize risk management positions as bona fide 

hedges or transactions. See infra Section IV.A.4.—Bona Fide Hedging and Spread and Other Exemptions 

from Federal Position Limits (proposed §§ 150.1 and 150.3) for further discussion. In this regard, the 

Commission has observed that it is common for swap dealers to enter into commodity index contracts with 

participants for which the contract would not qualify as a bona fide hedging position (e.g., with a pension 

fund). Failing to exclude commodity index contracts from the “referenced contract” definition could 

enable a swap dealer to use positions in commodity index contracts as a risk management hedge by netting 

down its offsetting outright futures positions in the components of the index. Permitting this type of risk 

management hedge would subvert the statutory pass-through swap language in CEA section 4a(c)(2)(B), 

which the Commission interprets as prohibiting the recognition of positions entered into for risk 

management purposes as bona fide hedges unless the swap dealer is entering into positions opposite a 

counterparty for which the swap position is a bona fide hedge.
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may reduce liquidity in exchange-listed core referenced futures contracts, harm pre-trade 

transparency and the price discovery process in the futures markets, and further depress 

open interest (as volumes shift to index positions, which would not count toward open 

interest calculations). However, the Commission believes that the probability of this 

occurring is low because the Commission preliminarily believes that using indices is an 

inefficient means of obtaining exposure to a certain commodity.

Under certain circumstances, a participant that has reached the applicable position 

limit could use a commodity index to purchase and weight a commodity index contract, 

which is otherwise excluded from the “referenced contract” definition and therefore from 

federal position limits, in a manner that would allow the participant to exceed limits of 

the applicable referenced contract (i.e., the participant could be long outright in a 

referenced contract, purchase a commodity index contract that includes the applicable 

referenced contract as a component, and short the remaining components of the index. 

The Commission observes that these short positions would be subject to the proposed 

federal limits, so there would be a ceiling on this strategy and, in addition, it would be 

costly to potential manipulators because margin would have to be posted and exchanged 

to retain the positions. In this circumstance, excluding commodity indices from the 

“referenced contract” definition could impose costs on market integrity. However, the 

Commission preliminarily believes any related costs should be mitigated because

proposed § 150.2 would include anti-evasion language that would deem such commodity 

index contract to be a referenced contract subject to federal limits. Also, analogous costs
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could apply to the discussion above regarding location basis contracts and such proposed 

anti-evasion provision would similarly cover location basis contracts.582

iv. Economically Equivalent Swaps 

The existing federal position limits framework does not include limit levels on 

swaps. The Dodd-Frank Act added CEA section 4a(a)(5), which requires that when the 

Commission imposes position limits on futures and options on futures pursuant to CEA 

section 4a(a)(2), the Commission also establish limits simultaneously for “economically 

equivalent” swaps “as appropriate.”583 As the statute does not define the term 

“economically equivalent,” the Commission will apply its expertise in construing such 

term consistent with the policy goals articulated by Congress, including in CEA sections 

4a(a)(2)(C) and 4a(a)(3) as discussed below. Specifically, under the Commission’s 

proposed definition of “economically equivalent swap” set forth in proposed § 150.1, a 

swap would generally qualify as economically equivalent with respect to a particular 

referenced contract so long as the swap shares “identical material” contract 

specifications, terms, and conditions with the referenced contract, disregarding any 

differences with respect to lot size or notional amount, delivery dates diverging by less 

than one calendar day (other than for natural gas referenced contracts),584 or post-trade 

 582 Similarly, the proposed anti-evasion provision would also provide that a spread exemption would no 

longer apply.

583 CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). In addition, CEA section 4a(a)(4) separately authorizes, but 

does not require, the Commission to impose federal limits on swaps that meet certain statutory criteria 

qualifying them as “significant price discovery function” swaps. 7 U.S.C. 6a(a)(4). The Commission 

reiterates, for the avoidance of doubt, that the definitions of “economically equivalent” in CEA section 

4a(a)(5) and “significant price discovery function” in CEA section 4a(a)(4) are separate concepts and that 

contracts can be economically equivalent without serving a significant price discovery function. 

584 As discussed below, the proposed definition of “economically equivalent swaps” with respect to natural 

gas referenced contracts would contain the same terms, except that it would include delivery dates 

diverging by less than two calendar days.
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risk-management arrangements.585 As discussed further below, the Commission explains 

that the definition of “economically equivalent swaps” is relatively narrow, especially 

compared to the definition of “referenced contract” as applied to cash-settled look-alike 

contracts.

The Commission preliminarily believes that the proposed definition of 

“economically equivalent swaps” would benefit (1) market integrity by protecting against 

excessive speculation and potential manipulation and (2) market liquidity by not favoring 

OTC or foreign markets over domestic markets. However, as discussed below, 

exchanges would be subject to delayed compliance with respect to the proposed § 150.5 

requirements regarding exchange-set speculative position limits on swaps until such time 

that exchanges have access to sufficient data to monitor for limits on swaps across 

exchanges; as a result, exchange-set limits would not need to include, nor would 

exchanges be required to oversee, compliance with exchange-set position limits on swaps 

until such time.

(1) Benefits and costs related to market integrity.

The Commission preliminarily believes that the proposed definition will benefit 

market integrity in two ways. First, the proposed definition would protect against 

excessive speculation and potential market manipulation by limiting the ability of 

speculators to obtain excessive positions through netting. For example, a more inclusive 

“economically equivalent” definition that would encompass additional swaps (e.g., swaps 

that may differ in their “material” terms or physical swaps with delivery dates that 

diverge by one day or more) could make it easier for market participants to 

 585 See supra Section II.A.4. (for further discussion regarding the Commission’s proposed definition of 

“economically equivalent swap”).
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inappropriately net down against their referenced contracts by allowing market 

participants to structure swaps that do not necessarily offer identical risk or economic 

exposure or sensitivity. In such a case, a market participant could enter into an OTC 

swap with a maturity that differs by days or even weeks in order to net down this position 

against its position in a referenced contract, enabling it to hold an even greater position in 

the referenced contract. 

Similarly, requiring “economically equivalent swaps” to share all material terms 

with their corresponding referenced contracts benefits market integrity by preventing 

market participants from escaping the position limits framework merely by altering nonmaterial terms, such as holiday conventions. On the other hand, the Commission 

recognizes that such a narrow definition could impose costs on the marketplace by 

possibly permitting excessive speculation since market participants would not be subject 

to federal position limits if they were to enter into swaps that may have different material 

terms (e.g., penultimate swaps)586 but may nonetheless be sufficiently correlated to their 

corresponding referenced contract. In this case, it is possible that there may be potential 

for excessive speculation, market manipulation such as squeezes and corners, insufficient 

market liquidity for bona fide hedgers, or disruption to the price discovery function. 

Nonetheless, to the extent that swaps currently are not subject to federal position limit 

levels, such potential costs would remain unchanged compared to the status quo.

Second, the relatively narrow proposed definition benefits market integrity, and 

reduces associated compliance and implementation costs, by permitting exchanges, 

 586 Or, in the case of natural gas referenced contracts, which would potentially include penultimate swaps as 

economically equivalent swaps, a swap with a maturity of less than one day away from the penultimate 

swap. See infra Section IV.A.3.d.iv.(3)(discussion of natural gas swaps).
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market participants, and the Commission to focus resources on those swaps that pose the 

greatest threat for facilitating corners and squeezes – that is, those swaps with 

substantially identical delivery dates and material economic terms to futures and options 

on futures subject to federal position limits. While swaps that have different material 

terms than their corresponding referenced contracts, including different delivery dates, 

may potentially be used for engaging in market manipulation, the proposed definition 

would benefit market integrity by allowing exchanges and the Commission to focus on 

the most sensitive period of the spot month, including with respect to the Commission’s 

and exchanges’ various surveillance and enforcement functions. To the extent market 

participants would be able to use swaps that would not be covered by the proposed 

definition to effect market manipulation, such potential costs would not differ from the 

status quo since no swaps are currently covered by federal position limits. The 

Commission however acknowledges that its narrow definition may increase this cost, as 

fewer swaps will be covered under the limits.

Further, the proposal to delay compliance with respect to exchange-set limits on 

swaps will benefit exchanges by facilitating exchanges’ ability to establish surveillance 

and compliance systems. As noted above, exchanges currently lack sufficient data 

regarding individual market participants’ open swap positions, which means that 

requiring exchanges to establish oversight over participants’ positions currently could 

impose substantial costs and also may be impractical to achieve. As a result, the 

Commission has preliminarily determined that allowing exchanges delayed compliance 

with respect to swaps would reduce unnecessary costs. Nonetheless, the Commission’s 

preliminary determination to permit exchanges to delay implementing federal position 
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limits on swaps could incentivize market participants to leave the futures markets and 

instead transact in economically-equivalent swaps, which could reduce liquidity in the 

futures and related options markets, although the Commission recognizes that this 

concern should be mitigated by the reality that the Commission would still oversee and 

enforce federal position limits on economically equivalent swaps. 

Additionally, while futures and related options are subject to clearing and 

exchange oversight, economically equivalent swaps may be transacted bilaterally offexchange (i.e., OTC swaps). As a result, it is relatively easy to create customized OTC 

swaps that may be highly correlated to a referenced contract, which would allow the 

market participant to create an exposure in the underlying commodity similar to the 

referenced contract’s exposure. Due to the relatively narrow proposed “economically 

equivalent swap” definition, the Commission preliminarily believes that it would not be 

difficult for market participants to avoid federal position limits by entering into such 

OTC swaps.587 While such swaps may not be perfectly correlated to their corresponding 

referenced contracts, market participants may find this risk acceptable in order to avoid 

federal position limits. An increase in OTC swaps at the expense of futures and options 

contracts may impose costs on market integrity due to lack of exchange oversight. If 

liquidity were to move from futures exchanges to the OTC swaps markets, non-dealer 

commercial entities may face increased transaction costs and widening spreads, as swap 

dealers gain market power in the OTC market relative to centralized exchange trading. 

The Commission is unable to quantify the costs of these potential harms. However, while 

 587 In contrast, since futures and options on futures contracts are created by exchanges and submitted to the 

Commission for either self-certification or approval under part 40 of the Commission’s regulations, a 

market participant would not be able to customize an exchange-traded futures or options on futures 

contract.
316

the Commission acknowledges these potential costs, such costs to those contracts that 

already have limits on them already may have been realized in the marketplace because 

swaps are not subject to federal position limits under the status quo. 

Lastly, under this proposal, market participants would be able to determine 

whether a particular swap satisfies the definition of “economically equivalent swap,” as 

long as market participants make a reasonable, good faith effort in reaching their 

determination and are able to provide sufficient evidence, if requested, to support a 

reasonable, good faith effort. The Commission preliminarily anticipates that this 

flexibility will benefit market integrity by providing a greater level of certainty to market 

participants in contrast to the alternative in which market participants would be required 

to first submit swaps to the Commission staff and wait for feedback or approval. On the 

other hand, the Commission also recognizes that not having the Commission explicitly 

opine on whether a swap would qualify as economically equivalent could cause market 

participants to avoid entering into such swaps. In turn, this could lead to less efficient 

hedging strategies if the market participant is forced to turn to the futures markets (e.g., a 

market participant may choose to transact in the OTC swaps markets for various reasons, 

including liquidity, margin requirements, or simply better familiarity with ISDA and 

swap processes over exchange-traded futures). However, as noted below, the 

Commission reserves the right to declare whether a swap or class of swaps is or is not 

economically equivalent, and a market participant could petition, or request informally, 

that the Commission make such a determination, although the Commission acknowledges 

that there could be costs associated with this, including delayed timing and monetary 

costs. 
317

Further, the Commission recognizes that requiring market participants to conduct 

reasonable due diligence and maintain related records also could impose new compliance 

costs. Additionally, the Commission recognizes that certain market participants could 

assert that an OTC swap is (or is not) “economically equivalent” depending upon whether 

such determination benefits the market participant. In such a case, market participants 

could theoretically subvert the intent of the federal position limits framework, although 

the Commission preliminarily believes that such potential costs would be mitigated due 

to its surveillance functions and the proposal to reserve the authority to declare that a 

particular swap or class of swaps either would or would not qualify as economically 

equivalent.

(2) The proposed definition could increase benefits or costs related to market 

 liquidity.

First, the proposed definition could benefit market liquidity by being, in general, 

less disruptive to the swaps markets, which in turn may reduce the potential for 

disruption for the price discovery function compared to an alternative in which the 

Commission would proposed a broader definition. For example, if the Commission were 

to adopt an alternative to its proposed “economically equivalent swap” definition that 

encompassed a broader range of swaps by including, for example, delivery dates that 

diverge by one or more calendar days – perhaps by several days or weeks – a speculator 

with a large portfolio of swaps could more easily bump up against the applicable position 

limits and therefore would have a strong incentive either to reduce its swaps activity or 

move its swaps activity to foreign jurisdictions. If there were many similarly situated 

speculators, the market for such swaps could become less liquid, which in turn could 
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harm liquidity for bona fide hedgers as large liquidity providers could move to other 

markets. 

Second, the proposed definition could benefit market liquidity by being 

sufficiently narrow to reduce incentives for liquidity providers to move to foreign 

jurisdictions, such as the European Union (“EU”).588 Additionally, the Commission 

preliminarily believes that proposing a definition similar to that used by the EU will 

benefit international comity.589 Further, since market participants trading in both U.S. 

and EU markets would find the proposed definition to be familiar, it may help reduce 

compliance costs for those market participants that already have systems and personnel in 

place to identify and monitor such swaps.

 588 In this regard, the proposed definition is similar in certain ways to the EU definition for OTC contracts 

that are “economically equivalent” to commodity derivatives traded on an EU trading venue. The 

applicable European regulations define an OTC derivative to be “economically equivalent” when it has 

“identical contractual specifications, terms and conditions, excluding different lot size specifications, 

delivery dates diverging by less than one calendar day and different post trade risk management 

arrangements.” While the Commission’s proposed definition is similar, the Commission’s proposed 

definition requires “identical material” terms rather than simply “identical” terms. Further, the 

Commission’s proposed definition excludes different “lot size specifications or notional amounts” rather 

than referencing only “lot size” since swaps terminology usually refers to “notional amounts” rather than to 

“lot sizes.” See EU Commission Delegated Regulation (EU) 2017/591, 2017 O.J. (L 87). 

589 Both the Commission’s definition and the applicable EU regulation are intended to prevent harmful 

netting. See European Securities and Markets Authority, Draft Regulatory Technical Standards on 

Methodology for Calculation and the Application of Position Limits for Commodity Derivatives Traded on 

Trading Venues and Economically Equivalent OTC Contracts, ESMA/2016/668 at 10 (May 2, 2016), 

available at https://www.esma.europa.eu/sites/default/files/library/2016-668_opinion_on_draft_rts_21.pdf

(“[D]rafting the [economically equivalent OTC swap] definition in too wide a fashion carries an even 

higher risk of enabling circumvention of position limits by creating an ability to net off positions taken in 

on-venue contracts against only roughly similar OTC positions.”) 

The applicable EU regulator, the European Securities and Markets Authority (“ESMA”), recently released 

a “consultation paper” discussing the status of the existing EU position limits regime and specific

comments received from market participants. According to ESMA, no commenter, with one exception,

supported changing the definition of an economically equivalent swap (referred to as an “economically 

equivalent OTC contract” or “EEOTC”). ESMA further noted that for some respondents, “the mere fact 

that very few EEOTC contracts have been identified is no evidence that the regime is overly restrictive.” 

See European Securities and Markets Authority, Consultation Paper MiFID Review Report on Position 

Limits and Position Management Draft Technical Advice on Weekly Position Reports, ESMA70-156-1484

at 46, Question 15 (Nov. 5, 2019), available at https://www.esma.europa.eu/document/consultation-paperposition-limits.
319

(3) The proposed definition could create benefits or costs related to market liquidity 

for the natural gas market.

As discussed in greater detail in the preamble, the Commission recognizes that the 

market dynamics in natural gas are unique in several respects, including the fact that 

unlike with respect to other core referenced futures contracts, for natural gas relatively 

liquid spot-month and penultimate cash-settled futures exist. As a result, the Commission 

believes that creating an exception to the proposed “economically equivalent swap” 

definition for natural gas would benefit market liquidity by not unnecessarily favoring 

existing penultimate contracts over spot contracts. The Commission is especially 

sensitive to potential market manipulation in the natural gas markets since market 

participants – to a significantly greater extent compared to the other core referenced 

futures contracts that are included in the proposal – regularly trade in both the physicallysettled core referenced futures contract and the cash-settled look-alike referenced 

contracts. Accordingly, the Commission preliminarily has concluded that a slightly 

broader definition of “economically equivalent swap” would uniquely benefit the natural 

gas markets by helping to deter and prevent manipulation of a physically-settled contract 

to benefit a related cash-settled contract. 

e. Pre-Existing Positions

Proposed § 150.2(g) would impose federal limits on “pre-existing positions” –

other than pre-enactment swaps and transition period swaps – during the spot month,

while non-spot month pre-existing positions would not be subject to position limits as 

long as (i) the position was acquired in good faith consistent with the “pre-existing 
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position” definition in proposed § 150.1;590 and (ii) such position would be attributed to 

the person if the position increases after the limit’s effective date. 

The Commission believes that this approach would benefit market integrity since 

pre-existing positions (other than pre-enactment and transition period swaps) that exceed 

spot-month limits could result in market or price disruptions as positions are rolled into 

the spot month.591 However, the Commission acknowledges that the proposed “goodfaith” standard also could impose certain costs on market integrity since an inherently 

subjective “good faith” standard could result in disparate treatment of traders by a 

particular exchange or across exchanges seeking a competitive advantage with one 

another and could impose trading costs on those traders given less advantageous 

treatment. For example, the Commission acknowledges that since it has given discretion 

to an exchange in interpreting this “good faith” standard, an exchange may be more 

liberal with concluding that a large trader or influential exchange member obtained a 

position in “good faith.” As a result, the proposal could potentially harm market integrity 

and/or increase transaction costs if an exchange were to benefit certain market 

participants compared to other market participants that receive relatively less 

advantageous treatment. However, the Commission believes the risk of any 

unscrupulous trader or exchange is mitigated since exchanges continue to be subject to 

Commission oversight and to DCM Core Principles 4 (“prevention of market disruption”) 

and 12 (“protection of markets and market participants”), among others, and since 

 590 Proposed § 150.1 would define “pre-existing position” to mean “any position in a commodity derivative 

contract acquired in good faith prior to the effective date” of any applicable position limit.

591 The Commission is particularly concerned about protecting the spot month in physical-delivery futures 

from corners and squeezes. 
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proposed § 150.2(g)(2) also would require that exchanges must attribute the position to 

the trader if its position increases after the position limit’s effective date.

4. Bona Fide Hedging and Spread and Other Exemptions from Federal Position 

Limits (Proposed §§ 150.1 and 150.3)

a. Background

The proposal provides for several exemptions that, subject to certain conditions, 

would permit a trader to exceed the applicable federal position limit set forth under 

proposed § 150.2. Specifically, proposed § 150.3 would generally maintain, with certain 

modifications discussed below, the two existing federal exemptions for bona fide hedging 

positions and spread positions, and would include new federal exemptions for certain 

conditional spot month positions in natural gas, certain financial distress positions, and 

pre-enactment and transition period swaps. Proposed § 150.1 would set forth the 

proposed definitions for “bona fide hedging transactions or positions” and for “spread 

transactions.”592

b. Bona Fide Hedging Definition; Enumerated Bona Fide Hedges; and Guidance on 

Measuring Risk

The Commission is proposing several amendments related to bona fide hedges. 

First, the Commission is proposing to include a revised definition of “bona fide hedging 

transactions or positions” in § 150.1 to conform to the statutory bona fide hedge 

definition in CEA section 4a(c) as Congress amended it in the Dodd-Frank Act. As 

discussed in greater detail in the preamble, the Commission proposes to (1) revise the 

temporary substitute test, consistent with the Commission’s understanding of the Dodd-

 592 This discussion sometimes refers to the “bona fide hedging transactions or positions” definition as “bona 

fide hedges,” “bona fide hedging,” or “bona fide hedge positions.” For the purpose of this discussion, the 

terms have the same meaning.
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Frank Act’s amendments to section 4a of the CEA, to no longer recognize as bona fide 

hedges certain risk management positions; (2) revise the economically appropriate test to 

make explicit that the position must be economically appropriate to the reduction of 

“price risk”; and (3) eliminate the incidental test and orderly trading requirement, which 

Dodd-Frank removed from section 4a of the CEA. The Commission preliminarily 

believes that these changes include non-discretionary changes that are required by 

Congress’s amendments to section 4a of the CEA. The Commission also proposes to 

revise the bona fide hedge definition to conform to the CEA’s statutory definition, which

permits certain pass-through offsets.593

Second, the Commission would maintain the distinction between enumerated and 

non-enumerated bona fide hedges but would (1) move the currently-enumerated hedges

in the existing definition of “bona fide hedging transactions and positions” currently 

found in Commission regulation § 1.3 to proposed Appendix A in part 150 that will serve 

as examples of positions that would comply with the proposed bona fide hedging 

definition; and (2) propose to make all existing enumerated bona fide hedges as well as 

additional enumerated hedges to be self-effectuating for federal position limit purposes,

without the need for prior Commission approval. In contrast, the existing enumerated 

anticipatory bona fide hedges are not currently self-effectuating and require market 

participants to apply to the Commission for recognition.

 593 As discussed in Section II.A.—§ 150.1—Definitions of the preamble, the existing definition of “bona 

fide hedging transactions and positions” currently appears in § 1.3 of the Commission’s regulations; the 

proposal would move the revised definition to proposed § 150.1.
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Third, the Commission is proposing guidance with respect to whether an entity 

may measure risk on a net or gross basis for purposes of determining its bona fide hedge 

positions. 

The Commission expects these proposed modifications will provide market 

participants with the ability to hedge, and exchanges with the ability to recognize hedges, 

in a manner that is consistent with common commercial hedging practices, reducing 

compliance costs and increase the benefits associated with sound risk management 

practices. 

i. Bona Fide Hedging Definition

(1) Elimination of Risk Management Exemptions; Addition of the Proposed PassThrough Swap Exemption

First, the Commission has preliminarily determined that eliminating the riskmanagement exemption in physical commodity derivatives subject to federal speculative 

position limits, unless the position satisfies the pass-through/swap offset requirements in 

section 4a(c)(2)(B) of the CEA discussed further below, is consistent with Congressional 

and statutory intent, as evidenced by the Dodd-Frank Act’s amendments to the bona fide 

hedging definition in CEA section 4a(c)(2).

594 Accordingly, once the proposed federal 

 594 See supra Section II.A.1.c.ii.(1). The existing bona fide hedging definition in § 1.3 requires that a 

position must “normally” represent a substitute for transactions or positions made at a later time in a 

physical marketing channel (i.e., the “temporary substitute test”). The Dodd-Frank Act amended the 

temporary substitute language that previously appeared in the statute by removing the word “normally” 

from the phrase normally 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.” 7 U.S.C. 6a(c)(2)(A). The Commission 

preliminarily interprets this change as reflecting Congressional direction that a bona fide hedging position 

in physical commodities must always (and not just “normally”) be in connection with the production, sale, 

or use of a physical cash-market commodity. 

Previously, the Commission stated that, among other things, the inclusion of the word “normally” in 

connection with the pre-Dodd-Frank version of the temporary substitute language indicated that the bona 

fide hedging definition should not be construed to apply only to firms using futures to reduce their 

exposures to risks in the cash market, and that to qualify as a bona fide hedge, a transaction in the futures 

market did not need to be a temporary substitute for a later transaction in the cash market. See Clarification 
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limit levels go into effect, market participants with positions that do not otherwise satisfy 

the proposed bona fide hedging definition or qualify for an exemption would no longer be 

able to rely on recognition of such risk-reducing techniques as bona fide hedges. Absent 

other factors, market participants who have, or have requested, a risk management 

exemption under the existing definition may resort to less effective hedging strategies 

resulting in, for example, increased costs for liquidity providers due to increased basis 

risk and/or decreased market efficiency due to higher transaction (i.e., hedging) costs. 

Moreover, absent other factors, by excluding risk management positions from the bona

fide hedge definition (other than those positions that would meet the pass-through/swap 

offset requirement in the proposed bona fide hedge definition, discussed further below), 

the proposed definition may affect the overall level of liquidity in the market since 

dealers who approach or exceed the federal position limit may decide to pull back on 

providing liquidity, including to bona fide hedgers. 

On the other hand, the Commission believes that these potential costs could be 

mitigated for several reasons. First, the proposed bona fide hedging definition, consistent 

with the Dodd-Frank Act’s changes to CEA section 4a(c)(2), would permit the 

recognition as bona fide hedges of futures and options on futures positions that offset 

pass-through swaps entered into by dealers and other liquidity providers (the “pass-

 

of Certain Aspects of the Hedging Definition, 52 FR at 27195, 27196 (Jul. 20, 1987). In other words, that 

1987 interpretation took the view that a futures position could still qualify as a bona fide hedging position 

even if it was not in connection with the production, sale, or use of a physical commodity. Accordingly, 

based on the Commission’s preliminary interpretation of the revised statutory definition of bona fide 

hedging in CEA section 4a(c)(2), risk-management hedges would not be recognized under the 

Commission’s proposed bona fide hedging definition.
325

through swap counterparty”)595 opposite bona fide hedging swap counterparties (the 

“bona fide hedge counterparty”), as long as: (1) the pass-through swap counterparty can 

demonstrate, upon request from the Commission and/or from an exchange, that the passthrough swap qualifies as a bona fide hedge for the bona fide hedge counterparty; and (2) 

the pass-through swap counterparty enters into a futures or option on a futures position or 

a swap position, in each case in the same physical commodity as the pass-through swap 

to offset and reduce the price risk attendant to the pass-through swap.596 Accordingly, a 

subset of risk management exemption holders could continue to benefit from an 

exemption, and potential counterparties could benefit from the liquidity they provide, as 

long as the position being offset qualifies as a bona fide hedge for the counterparty. 

The Commission preliminarily has determined that any resulting costs or benefits 

related to the proposed pass-through swap exemption are a result of Congress’s 

amendments to CEA section 4a(c) rather than the Commission’s discretionary action. 

On the other hand, the Commission’s discretionary action to require the pass-through 

swap counterparty to create and maintain records to demonstrate the bona fides of the 

pass-through swap would cause the swap counterparty to incur marginal recordkeeping 

costs.

597

 595 Such pass-through swap counterparties are typically swap dealers providing liquidity to bona fide 

hedgers.

596 See paragraph (2)(i) of the proposed bona fide hedging definition. Of course, if the pass-through swap 

qualifies as an “economically appropriate swap,” then the pass-through swap counterparty would not need 

to rely on the proposed pass-through swap provision since it may be able to offset its long (or short) 

position in the economically equivalent swap with the corresponding short (or long) position in the futures 

or option on futures position or on the opposite side of another economically equivalent swap. 

597 To the extent that the pass-through swap counterparty is a swap dealer or major swap participant, they 

already may be subject to similar recordkeeping requirements under § 1.31 and part 23 of the 

Commission’s regulations. As a result, such costs may already have been realized. 
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The proposed pass-through swap provision, consistent with the Dodd-Frank Act’s 

changes to CEA section 4a(c)(2), also would address a situation where a participant who 

qualifies as a bona fide hedging swap counterparty (i.e., a participant with a position in a 

previously-entered into swap that qualified, at the time the swap was entered into, as a 

bona fide hedging position under the proposed definition) seeks, at some later time, to 

offset that swap position.598 Such step might be taken, for example, to respond to a 

change in the participant’s risk exposure in the underlying commodity. As a result, a 

participant could use futures or options on futures in excess of federal position limits to 

offset the price risk of a previously-entered into swap, which would allow the participant 

to exceed federal limits using either new futures or options on futures or swap positions 

that reduce the risk of the original swap. 

The Commission expects the pass-through swap provision to facilitate dynamic 

hedging by market participants. The Commission recognizes that a significant number of 

market participants use dynamic hedging to more effectively manage their portfolio risks. 

Therefore, this provision may increase operational efficiency. In addition, by permitting 

dynamic hedging, a greater number of dealers should be better able to provide liquidity to 

the market, as these dealers will be able to more effectively manage their risks by

entering into pass-through swaps with bona fide hedgers as counterparties. Moreover, 

market participants are not precluded from using swaps that are not “economically 

equivalent swap” for such risk management purposes since swaps that are not deemed to 

be “economically equivalent” to a referenced contract would not be subject to the 

Commission’s proposed position limits framework. 

 598 See paragraph (2)(ii) of the proposed bona fide hedging transactions or positions definition.
327

The Commission preliminarily observes that market participants may not need to 

rely on the proposed pass-through swap provision to the extent such parties employ 

swaps that qualify as “economically equivalent swaps,” since such market participants 

may be able to net such swaps against the corresponding futures or options on futures. 

As a result, the Commission preliminarily anticipates that the proposed pass-through 

swap provision would benefit those bona fide hedgers and pass-through swap 

counterparties that use swaps that would not qualify as economically equivalent under the 

Commission’s proposal. To the extent market participants use swaps that would qualify 

as economically equivalent swaps, or could shift their trading strategies to use such swaps 

without incurring additional costs, the Commission preliminarily believes that the 

elimination of the risk management position would not necessarily result in market 

participants incurring costs or limiting their trading since they would be able to net the 

positions in economically equivalent swaps with their futures and options on futures 

positions, or with other economically equivalent swaps.

Second, for the nine legacy agricultural contracts, the proposal would generally 

set federal non-spot month limit levels higher than existing non-spot limits, which may

enable additional dealer activity described above.

599 The remaining 16 core referenced 

futures contracts would be subject to existing exchange-set limits or accountability 

outside of the spot month, which does not represent a change from the status quo under 

existing or proposed § 150.5. The proposed higher levels with respect to the nine legacy 

agricultural contracts and the exchanges’ flexible accountability regimes with respect to 

 599 Proposed § 150.2 generally would increase position limits for non-spot months for contracts that 

currently are subject to the federal position limits framework other than for CBOT Oats (O), CBOT KC 

HRW Wheat (KW), and MGEX HRS Wheat (MWE), for which the Commission would maintain existing 

levels.
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the proposes new 16 core referenced futures contract should mitigate at least some 

potential costs related to the prohibition on recognizing risk management positions as 

bona fide hedges. 

Third, the proposal may improve market competitiveness and reduce transaction 

costs. As noted above, existing holders of the risk management exemption, and the levels 

permitted thereunder, are currently confidential, and the Commission is no longer 

granting new risk management exemptions to potential new liquidity providers. 

Accordingly, by eliminating the risk management exemption, the Commission’s proposal 

would benefit the public and strengthen market integrity by improving market 

transparency since certain dealers would no longer be able to maintain the grandfathered 

risk management exemption while other dealer lack this ability under the status quo. 

While the Commission believes that the risk management exemption may allow dealers 

to more effectively provide market making activities, which benefits market liquidity and 

ultimately leads to lower prices for end-users, as noted above, the potential costs resulting 

from removing the risk management exemption may be mitigated by the revised position 

limit levels that reflect current EDS for spot month levels and current open interest and 

trading volume for non-spot month levels. Therefore, the Commission believes that 

existing risk management exemption holders should be able to continue providing 

liquidity to bona fide hedgers, but acknowledges that some may not to the same degree as 

under the exemption; however, the Commission believes that any potential harm to 

liquidity should be mitigated. 

Further, the proposed spot month and non-spot month levels, which generally will 

be higher than the status quo, together with the elimination of the risk management 
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exemptions that benefit only certain dealers, might enable new liquidity providers to 

enter the markets on a level playing field with the existing risk management exemption 

holders. With the possibility of additional liquidity providers, the proposed framework

may strengthen market integrity by decreasing concentration risk potentially posed by too 

few market makers. However, the benefits to market liquidity the Commission describes

above may be muted since this analysis is predicated, in part, on the understanding that 

dealers are the predominant large traders. Data in the Commission’s Supplementary 

COT and its underlying data indicate that risk-management exemption holders are not the 

only large participants in these markets—large commercial firms also hold large 

positions in such commodities. 

(2) Limiting “Risk” to “Price” Risk; Elimination of the Incidental Test and Orderly 

Trading Requirement

As discussed in the preamble, the proposed bona fide hedging definition’s 

“economically appropriate test” would clarify that only hedges that offset price risks 

could be recognized as bona fide hedging transactions or positions. The Commission 

does not believe that this clarification would impose any new costs or benefits, as it is 

consistent with both the existing bona fide hedging definition600 as well as the 

Commission’s longstanding policy.

601 Nonetheless, the Commission realizes that 

 600 The existing bona fide hedging definition in § 1.3 provides that no transactions or positions shall be 

classified as bona fide hedging unless their purpose is to offset price risks incidental to commercial cash or 

spot operations . (emphasis added). Accordingly, the proposed definition would merely move this 

requirement to the proposed definition’s revised “economically appropriate test” requirement. 601 For example, in promulgating existing § 1.3, the Commission explained that a bona fide hedging 

position must, among other things, “be economically appropriate to risk reduction, such risks must arise 

from operation of a commercial enterprise, and the price fluctuations of the futures contracts used in the 

transaction must be substantially related to fluctuations of the cash market value of the assets, liabilities or 

services being hedged.” Bona Fide Hedging Transactions or Positions, 42 FR at 14832, 14833 (Mar. 16, 

1977). Dodd-Frank added CEA section 4a(c)(2), which copied the “economically appropriate test” from 

the Commission’s definition in § 1.3. See also 2013 Proposal, 78 FR at 75702, 75703.
330

hedging occurs for more types of risks than price (e.g., volumetric hedging). Therefore, 

the Commission recognizes that by expressly limiting the bona fide hedge exemption to 

hedging only price risk, certain market participants may not be able to receive a bona fide 

hedging recognition, and for certain dealers, this may limit their ability to provide 

liquidity to the market because without being able to rely on bona fide hedging status, 

their trading activity would cause them to otherwise exceed federal limits. 

The Commission further would implement Congress’s Dodd-Frank Act 

amendments that eliminated the statutory bona fide hedge definition’s incidental test and 

orderly trading requirement by proposing to make the same changes to the Commission’s 

regulations. As discussed in the preamble, the Commission preliminarily believes that 

these proposed changes do not represent a change in policy or regulatory requirement. 

As a result, the Commission does not identify any costs or benefits related to these 

proposed changes.

ii. Proposed Enumerated Bona Fide Hedges

The Commission proposes enumerated bona fide hedges in Appendix A to part 

150 of the Commission’s regulations to provide a list bona fide hedges that would 

include: (i) the existing enumerated hedges; and (ii) additional enumerated bona fide 

hedges. The Commission reinforces that hedging practices not otherwise listed may still 

be deemed, on a case-by-case basis, to comply with the proposed bona fide hedging 

definition (i.e., non-enumerated bona fide hedges). As discussed further below, the 

proposed enumerated bona fide hedges in Appendix A would be “self-effectuating” for 

purposes of federal position limits levels, which are expected to reduce delays and 

compliance costs associated with requesting an exemption. 
331

Additionally, as part of the Commission’s proposal, the exchanges would have 

discretion to determine, for purposes of their own exchange-granted bona fide hedges,

whether any of the proposed enumerated bona fide hedges in proposed Appendix A to 

part 150 of the Commission’s regulations would be permitted to be maintained during the 

lesser of the last five days of trading or the time period for the spot month in such 

contract (the “five-day rule”), and the Commission’s proposal otherwise would not 

require any of the enumerated bona fide hedges to be subject to the five-day rule for 

purposes of federal position limits. Instead, the Commission expects exchanges to make 

their own determinations with respect to exchange-set limits as to whether it is 

appropriate to apply the five-day rule for a particular bona fide hedge type and 

commodity contract. The Commission has preliminarily determined that exchanges are 

well-informed with respect to their respective markets and well-positioned to make a 

determination with respect to imposing the five-day rule in connection with recognizing

bona fide hedges for their respective commodity contracts. In general, the Commission 

believes that, on the one hand, limiting a trader’s ability to establish a position in this 

manner by requiring the five-day rule could result in increased costs related to

operational inefficiencies, as a trader may believe that this is the most opportune time to 

hedge. On the other hand, the Commission believes that price convergence may be 

particularly sensitive to potential market manipulation or excessive speculation during 

this period. Accordingly, the Commission preliminarily believes that the proposal to not 

impose the five-day rule with respect to any of the enumerated bona fide hedges for 

federal purposes but instead rely on exchange’s determination with respect to exchangegranted exemptions would help to better optimize these considerations. The Commission 
332

notes a potential cost for market integrity if exchanges fail to implement a five-day rule 

in order to encourage additional trading in order to increase profit, which could harm 

price convergence. However, the Commission believes this concern is mitigated since 

exchanges also have an economic incentive to ensure that price convergence occurs with 

their respective contracts since commercial end-users would be less willing to use such 

contracts for hedging purposes if price convergence would fail to occur in such contracts

as they may generally desire to hedge cash market prices with futures contracts.

iii. Guidance for Measuring Risk on a Gross or Net Basis

The Commission proposes guidance in paragraph (a) of Appendix B to part 150 

on whether positions may be hedged on either a gross or net basis. Under the proposed 

guidance, among other things, a trader may measure risk on a gross basis if it would be 

consistent with the trader’s historical practice and is not intended to evade applicable 

limits. The key cost associated with allowing gross hedging is that it may provide 

opportunity for hidden speculative trading.

602 

Such risk is mitigated to a certain extent by the guidance’s provisos that the trader 

does not switch between net hedging and gross hedging in order to evade limits and that 

the DCM documents justifications for allowing gross hedging and maintains any relevant 

records in accordance with proposed § 150.9(d).603 However, the Commission also 

recognizes that there are myriad of ways in which organizations are structured and 

 602 For example, using gross hedging, a market participant could potentially point to a large long cash 

position as justification for a bona fide hedge, even though the participant, or an entity with which the 

participant is required to aggregate, has an equally large short cash position that would result in the 

participant having no net price risk to hedge as the participant had no price risk exposure to the commodity 

prior to establishing such derivative position. Instead, the participant created price risk exposure to the 

commodity by establishing the derivative position. 603 Under proposed § 150.3(b)(2) and (e) and proposed § 150.9(e)(5), and (g), the Commission would have 

access to any information related to the applicable exemption request.
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engage in commercial hedging practices, including the use of multi-line business 

strategies in certain industries that would be subject to federal position limits for the first 

time under this proposal and for which net hedging could impose significant costs or be 

operationally unfeasible. 

c. Spread Exemptions

Under existing § 150.3, certain spread exemptions are self-effectuating.

Specifically, existing § 150.3 allows for “spread or arbitrage positions” that are “between 

single months of a futures contract and/or, on a futures-equivalent 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.”604 Proposed §§ 150.1 and 150.3

would amend the existing spread position exemption for federal limits by (i) listing

specific spread transactions that may be granted; and (ii) other than for the listed spread 

positions, which would be self-effectuating, requiring a person to apply for spread 

exemptions directly with the Commission pursuant to proposed § 150.3.605 In addition, 

the proposed rule would permit spread exemptions outside the same crop year and/or 

during the spot month.

606 

 604 17 CFR 150.3. 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. 605 The proposed “spread transactions” definition would list the most common types of spread positions, 

including: calendar spreads, intercommodity spreads, quality differential spreads, processing spreads (such 

as energy “crack” or soybean “crush” spreads), product or by-product differential spreads, and futuresoptions spreads. Proposed § 150.3(b) also would permit market participants to apply to the Commission 

for other spread transactions. 606 As discussed under proposed § 150.3, spread exemptions identified in the proposed “spread transaction” 

definition in proposed § 150.1 would be self-effectuating similar to the status quo and would not represent 

a change to the status quo baseline. The related costs and benefits, particularly with respect to requesting 

exemptions with respect to spreads other than those identified in the proposed “spread transaction” 

definition, are discussed under the respective sections below.
334

In connection with the spread exemption provisions, the Commission is relaxing 

the prohibition for contracts during the same crop year and/or the spot month so that 

exchanges are able to exempt spreads outside the same crop year and/or during the spot 

month. There may be benefits that result from permitting these types of spread 

exemptions. For example, the Commission believes that permitting spread exemptions 

not in the same crop year or during the spot month may potentially improve price 

discovery as well as provide market participants with the ability to use strategies 

involving spread positions, which may reduce hedging costs. 

As in the intermarket wheat example discussed below, the proposed spread relief 

not limited to the same crop year 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, permitting spread exemptions outside the same crop year may enable pricing in two 

different but related markets for substitute goods to be more highly correlated, which, in 

this example, benefits market participants with a price exposure to the underlying protein 

content in wheat generally, rather than that of a particular commodity. 

However, the Commission also recognizes certain potential costs to permitting 

spread exemptions during the spot month, particularly to extend into the last five days of 

trading. This feature could raise the risk of allowing participants in the market at a time 

in the contract where only those interested in making or taking delivery should be 

present. When a contract goes into expiration, open interest and trading volume naturally 

decrease as traders not interested in making or taking delivery roll their positions into 

deferred calendar months. The presence of large spread positions so close to the 

 
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expiration of a futures contract, which positions are normally tied to large liquidity 

providers, may actually lead to disruptions in the price discovery function of the contract 

by disrupting the futures/cash price convergence. This could lead to increased 

transaction costs and harm the hedging utility for end-users of the futures contract, which 

could lead to higher costs passed on to consumers. However, the Commission 

preliminarily believes that these concerns would be mitigated as exchanges would 

continue to apply their expertise in overseeing and maintaining the integrity of their 

markets. For example, an exchange could refuse to grant a spread exemption if the 

exchange believed it would harm its markets, require a participant to reduce its positions,

or implement a five-day-rule for spread exemptions, as discussed above.607

Generally, the Commission preliminarily finds that, by allowing speculators to 

execute intermarket and intramarket spreads as proposed, 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 may also 

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.

For clarity, the Commission has identified the following two examples of spread 

positions that could benefit from the proposed spread exemption: 

• 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, 

 607 See supra Section IV.A.4.b.ii. (discussion of the five-day rule).
336

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 (the long position hedges the purchase of the anticipated inputs for 

processing and the short position hedges the sale of the anticipated soybean meal and oil

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. In this example, 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 on the one hand and those of soybean oil and soybean meal on the other hand, 

which means that prices for all three products may move up or down together in a more 

correlated 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 
337

available to trade at a desirable price for the farmer. There may be a speculator willing to 

offer liquidity to the hedger; however, 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 and/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.

d. Conditional Spot Month Exemption Positions in Natural Gas

Proposed § 150.3(a)(4) would provide a new federal conditional spot month limit 

exemption position for cash-settled natural gas contracts that would permit traders to 

acquire positions up to 10,000 NYMEX Henry Hub Natural Gas (NG) equivalent-size

contracts (the federal spot month limit in proposed § 150.2 for NYMEX Henry Hub 

Natural Gas (NG) referenced contracts is otherwise 2,000 contracts in the aggregate

across all one’s net positions) per exchange that lists the relevant natural gas cash-settled

referenced contracts, along with an additional futures-adjusted 10,000 contracts of cash-
338

settled economically equivalent swaps, as long as such person does not also hold 

positions in the physically-settled natural gas referenced contract.608 NYMEX, ICE,

Nasdaq Futures, and Nodal currently have rules in place establishing a conditional spot 

month limit exemption equivalent to up to 5,000 contracts in NYMEX-equivalent size. 

By proposing to include the conditional exemption for purposes of federal limits on 

natural gas contracts, the Commission reduces the incentive and ability for a market 

participant to manipulate a large physically-settled position to benefit a linked cashsettled position. 

Further, the Commission has heeded natural gas traders’ concerns about 

disrupting market practices and harming liquidity in the cash-settled contract, which 

could increase the cost of hedging and possibly prevent convergence between the 

physical delivery futures and cash markets.609 While a trader with a position in the 

physical-delivery natural gas contract may incur costs associated with liquidating that 

position in order to meet the conditions of the federal exemption, such costs are incurred

outside of the proposal, as the trader would have to do so as a condition of the exchangelevel exemption under current exchange rules.610 

e. Financial Distress Exemption 

Proposed § 150.3(a)(3) would provide an exemption for certain financial distress 

circumstances, including the default of a customer, affiliate, or acquisition target of the 

requesting entity that may require the requesting entity to take on, in short order, the 

 608 The NYMEX Henry Hub Natural Gas (NG) contract is the only natural gas contract included as a core 

referenced futures contract under this proposal.

609 See 2016 Reproposal, 81 FR at 96862, 96863. 610 See ICE Rule 6.20(c) and NYMEX Rule 559.F. See, e.g., NASDAQ Futures Rule ch. v, section 

13(a)(ii) and Nodal Exchange Rulebook Appendix C (equivalent rules of NASDAQ and Nodal exchanges). 
339

positions of another entity. In codifying the Commission’s historical practice, the 

proposed rule accommodates transfers of positions from financially distressed firms to 

financially secure firms. The disorderly liquidation of a position threatens price impacts 

that may harm the efficiency and price discovery function of markets, and the proposal 

would make it less likely that positions will be prematurely or needlessly liquidated. The 

Commission has determined that costs related to filing and recordkeeping are likely to be 

minimal. The Commission cannot accurately estimate how often this exemption may be 

invoked because emergency or distressed market situations are unpredictable and 

dependent on a variety of firm and market-specific factors as well as general 

macroeconomic indicators.611 The Commission, nevertheless, believes that emergency or 

distressed market situations that might trigger the need for this exemption will be 

infrequent, and that codifying this historical practice will add transparency to the 

Commission’s oversight responsibilities. 

f. Pre-Enactment and Transition Period Swaps Exemption

Proposed § 150.3(a)(5) would also provide an exemption from position limits for 

positions acquired in good faith in any “pre-enactment swap,” or in any “transition period 

swap,” in either case as defined in proposed § 150.1. A person relying on this exemption 

may net such positions with post-effective date commodity derivative contracts for the 

purpose of complying with any non-spot-month speculative positions limits, but may not 

net against spot month positions. This exemption would be self-effectuating, and the 

Commission preliminarily believes that proposed § 150.3(a)(5) would benefit both 

individual market participants by lessening the impact of the proposed federal limits, and 

 611 See 2016 Reproposal, 81 FR at 96862, 96863.
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market liquidity in general as liquidity providers initially would not be forced to reduce 

or exit their positions. 

The proposal would benefit price discovery and convergence by prohibiting large 

traders seeking to roll their positions into the spot month from netting down positions in 

the spot-month against their pre-enactment swap or transition period swap. The 

Commission acknowledges that, on its face, including a “good-faith” requirement in the 

proposed § 150.3(a)(5) could hypothetically diminish market integrity since determining 

whether a trader has acted in “good faith” is inherently subjective and could result in 

disparate treatment among traders, where certain traders may assert a more aggressive 

position in order to seek a competitive advantage over others. The Commission believes 

the risk of any such unscrupulous trader or exchange is mitigated since exchanges would 

still be subject to Commission oversight and to DCM Core Principles 4 (“prevention of 

market disruption”) and 12 (“protection of markets and market participants”), among 

others. The Commission has determined that market participants who voluntarily employ 

this exemption also will incur negligible recordkeeping costs. 

5. Process for the Commission or Exchanges to Grant Exemptions and Bona Fide 

Hedge Recognitions for Purposes of Federal Limits (Proposed §§ 150.3 and

150.9) and Related Changes to Part 19 of the Commission’s Regulations

Existing §§ 1.47 and 1.48 set forth the process for market participants to apply to 

the Commission for recognition of certain bona fide hedges for purposes of federal limits, 

and existing § 150.3 sets forth a list of spread exemptions a person can rely on for 

purposes of federal limits. However, under existing Commission practices, spread 

exemptions and certain enumerated bona fide hedges are generally self-effectuating and 

do not require market participants to apply to the Commission for purposes of federal 
341

position limits, although market participants are required to file Form 204 monthly

reports612 to justify certain position limit overages. Further, for those bona fide hedges 

for which market participants are required to apply to the Commission, existing 

regulations and market practice require market participants to apply both to the 

Commission for purposes of federal limits and also to the relevant exchanges for 

purposes of exchange-set limits. The Commission has preliminarily determined that this

dual application process creates inefficiencies for market participants.

Proposed §§ 150.3 and 150.9, taken together, would make several changes to the 

process of acquiring bona fide hedge recognitions and spread exemptions for federal 

position limits purposes. Proposed §§ 150.3 and 150.9 would maintain certain elements 

of the status quo while also adopting certain changes to facilitate the exemption 

process.613 

First, with respect to the proposed enumerated bona fide hedges, proposed § 150.3 

would maintain the status quo by providing that those enumerated bona fide hedges that

currently are self-effectuating for the nine legacy agricultural contracts would remain 

self-effectuating for the nine legacy agricultural contracts for purposes of federal position 

limits.

614 Similarly, the enumerated bona fide hedges for the proposed additional 16 

contracts that would be newly subject to federal position limits (i.e., those contracts other 

than the nine legacy agricultural contracts) also would be self-effectuating for purposes of 

federal position limits. 

 612 In the case of cotton, market participants currently file the relevant portions of Form 304. 613 In this section the Commission discusses the costs and benefits related to the application process for 

these exemptions and bona fide hedge recognitions. For a discussion of the costs and benefits related to the 

scope of the exemptions and bona fide hedge recognitions, see supra Section IV.A.5.a.iv. 614 Under the status quo, market participants must apply to the Commission for recognition of certain 

enumerated anticipatory bona fide hedges. The Commission’s proposal also would make these enumerated 

anticipatory bona fide hedges self-effectuating for the nine legacy agricultural contracts.
342

Second, for recognition of any non-enumerated bona fide hedge in connection 

with any referenced contract, market participants would be required to apply either 

directly to the Commission under proposed § 150.3 or through an exchange that adheres 

to certain requirements under proposed § 150.9. The Commission notes that existing 

regulations require market participants to apply to the Commission for recognition of 

non-enumerated bona fide hedges, and so the Commission’s proposal does not represent 

a change to the status quo in this respect for the nine legacy agricultural contracts.

Third, proposed § 150.3 would maintain the status quo by providing that the most 

common spread exemptions for the nine legacy agricultural contracts would remain selfeffectuating. Similarly, these common spread exemptions also would be self-effectuating 

for the proposed additional 16 contracts that would be newly subject to federal position 

limits. These common spread exemptions would be listed in the proposed “spread 

transaction” definition under proposed § 150.1.615 

Fourth, for any spread exemption not listed in the proposed “spread transaction”

definition, market participants would be required to apply directly to the Commission 

under proposed §150.3. There would be no exception for the nine legacy agricultural 

products nor would market participants be permitted to apply through an exchange under 

proposed § 150.9 for these types of spread exemptions.

616 

The Commission anticipates that most – if not all – market participants would 

utilize the exchange-centric process set forth in proposed § 150.9 with respect to applying 

 615 The proposed “spread transaction” definition would include a calendar spread, intercommodity spread, 

quality differential spread, processing spread (such as energy “crack” or soybean “crush” spreads), product 

or by-product differential spread, or futures-option spread. 616 As discussed below, the proposal would also eliminate the Form 204 and the equivalent portions of the 

Form 304. 
343

for recognition of non-enumerated bona fide hedges rather than apply directly to the 

Commission under proposed § 150.3 because market participants are likely already 

familiar with the proposed processes set forth in § 150.9, which is intended to leverage 

the processes currently in place at the exchanges for addressing requests bona fide hedge

recognitions from exchange-set limits. In the sections below, the Commission will 

discuss the costs and benefits related to both processes.

a. Process for Requesting Exemptions and Bona Fide Hedge Recognitions Directly 

from the Commission (Proposed § 150.3)

Under existing §§ 1.47 and 1.48, and existing § 150.3, the processes for obtaining 

a recognition of a bona fide hedge or for relying on a spread exemption, are similar in 

some respects and different in other respects than the proposed approach. Existing §§ 

1.47 and 1.48 require market participants seeking recognition of non-enumerated bona 

fide hedges and enumerated anticipatory bona fide hedges, respectively, for federal 

position limits to apply directly to the Commission for prior approval. 

In contrast, existing non-anticipatory enumerated bona fide hedges and spread 

exemptions are self-effectuating, which means that market participants are not required to 

submit any information to the Commission for prior approval, although such market 

participants must subsequently file Form 204 or Form 304 each month in order to 

describe their cash market positions and justify their bona fide hedge position. There 

currently is no codified federal process related to financial distress exemptions or natural 

gas conditional spot month exemptions. 

For those market participants that would choose to apply directly to the 

Commission for recognition of non-enumerated bona fide hedges or spread exemptions

not included in the proposed “spread transaction” definition, which in each case would 
344

not be self-effectuating under the proposal, proposed § 150.3 would provide a process for 

the Commission to review and approve requests. Under proposed § 150.3, any person 

seeking Commission recognition of these types of bona fide hedges or a spread 

exemptions (as opposed to applying to using the exchange-centric process under 

proposed § 150.9 described below) would be required to submit a request directly to the 

Commission and to provide information similar to what is currently required under 

existing §§ 1.47 and 1.48.617 

i. Existing Bona Fide Hedges that Currently Require Prior Submission to the 

Commission Under Existing §§ 1.47 and 1.48 for the Nine Legacy Agricultural 

Contracts

Under the proposal, the Commission would maintain the distinction between 

enumerated bona fide hedges and non-enumerated bona fide hedges under proposed § 

150.3: (1) enumerated bona fide hedges would continue to be self-effectuating; (2)

enumerated anticipatory bona fide hedges would become self-effectuating so market 

participants would no longer need to apply to the Commission; and (3) non-enumerated 

bona fide hedges would still require market participants to apply for recognition. Market 

participants that choose to apply directly to the Commission for a bona fide hedge 

recognition (i.e., for non-enumerated bona fide hedges) would be subject to an 

application process that generally is similar to what the Commission currently 

administers for the non-enumerated bona fide hedges and the enumerated anticipatory 

 617 For bona fide hedges and spread exemptions, this information would include: (i) a description of the 

position in the commodity derivative contract for which the application is submitted, including the name of 

the underlying commodity and the position size; (ii) information to demonstrate why the position meets the 

applicable requirements for a bona fide hedge or spread transaction; (iii) a statement concerning the 

maximum size of all gross positions in derivative contracts for which the application is submitted; (iv) for 

bona fide hedges, information regarding the applicant’s activity in the cash markets and swaps markets for 

the commodity underlying the position for which the application is submitted; and (v) any other 

information that may help the Commission determine whether the position meets the applicable 

requirements for a bona fide hedge position or spread transaction.
345

bona fide hedges.618 With respect to enumerated anticipatory bona fide hedges for the 

nine legacy contracts, for which market participants currently are required to apply to the 

Commission for recognition for federal position limit purposes, the Commission 

preliminarily anticipates that the proposal would benefit market participants by making

such hedges self-effectuating.619 As a result, market participants will no longer be 

required to spend time and resources applying to the Commission. Further, for these

enumerated anticipatory hedges, existing § 1.48 requires market participants to submit 

either an initial or supplemental application to the Commission 10 days prior to entering 

into the bona fide hedge that would cause the hedger to exceed federal position limits.

620 

Under existing § 1.48, market participants could proceed with their proposed bona fide 

hedges if the Commission does not notify a market participants otherwise within the 

specific 10-day period. Because bona fide hedgers could implement enumerated 

anticipatory bona fide hedges without waiting the requisite 10 days, they may be able to 

implement their hedging strategy more efficiently with reduced cost and risk. The 

Commission acknowledges that making such bona fide hedges easier to obtain could 

 618 As noted above, under the existing framework market participants are not required to apply for any type 

of bona fide hedge recognition or spread exemption from the Commission for any of the proposed 

additional 16 contracts that would be newly subject to federal position limits (i.e., those contracts other than 

the nine legacy agricultural contracts); rather, under the existing framework, such market participants must 

apply to the exchanges for bona fide hedge recognitions or exemptions for purposes of exchange-set 

position limits. Accordingly, to the extent that market participants would not need to apply to the 

Commission in connection with any of the proposed additional 16 contracts, the Commission’s proposal 

would not impose additional costs or benefits compared to the status quo.

619 As noted above, since market participants do not need to apply to the Commission for bona fide hedge 

recognition for any of the proposed additional 16 contracts that would be newly subject to federal position 

limits, the Commission’s proposal would not result in any additional costs or benefits to the extent such 

bona fide hedge recognitions would be self-effectuating. 620 Under the Commission’s existing regulations, non-anticipatory enumerated bona fide hedges are selfeffectuating, and market participants do not have to file any applications for recognition under existing 

Commission regulations. However, bona fide hedgers must file with the Commission monthly Form 204 

(or Form 304 in connection with ICE Cotton No. 2 (CT)) reports discussing their underlying cash positions 

in order to substantiate their bona fide hedge positions. 
346

increase the possibility of excess speculation since anticipatory exemptions are 

theoretically more difficult to substantiate compared to the other existing enumerated 

bona fide hedges. However, the Commission has gained significant experience over the 

years with bona fide hedging practices in general and with enumerated anticipatory bona 

fide hedging practices in particular, and the Commission preliminarily has determined 

that making such hedges self-effectuating should not increase the risk of excessive 

speculation or market manipulation compared to the status quo. 

For non-enumerated bona fide hedges, existing § 1.47 requires market participants 

to submit (i) initial applications to the Commission 30 days prior to the date the market 

participant would exceed the applicable position limits and (ii) supplemental applications 

(i.e., applications for a market participant that desire to exceed the bona fide hedge 

amount provided in the person’s previous Commission filing) 10 days prior for 

Commission approval, and market participants can proceed with their proposed bona fide 

hedges if the Commission does not intervene within the specific time (e.g., either 10 days 

or 30 days). 

Proposed § 150.3 would similarly require market participants seeking recognition 

of a non-enumerated bona fide hedge for any of the proposed 25 core referenced futures 

contracts to apply to the Commission prior to exceeding federal position limits, but 

proposed § 150.3 would not prescribe a certain time period by which a bona fide hedger 

must apply or by which the Commission must respond. The Commission preliminarily 

anticipates that the proposal would benefit bona fide hedgers by enabling them in many 

cases to generally implement their hedging strategies sooner than the existing 30-day or 

10-day waiting period, in which case the Commission believes hedging-related costs
347

would decrease. However, the Commission believes that there could also be 

circumstances in which the overall process could take longer than the existing timelines 

under § 1.47, which could increase hedging related costs if a bona fide hedger is 

compelled to wait longer, compared to existing Commission practices, before executing

its hedging strategy.

On the other hand, the Commission also recognizes that there could be potential 

costs to bona fide hedgers if under the proposal they are forced either to enter into less 

effective bona fide hedges or to wait to implement their hedging strategy, as a result of

the potential uncertainty that could result from proposed § 150.3 not requiring the 

Commission to respond within a certain amount of time. The Commission believes this 

concern is mitigated to the extent market participants utilize the proposed § 150.3 process

that would permit a market participant that demonstrates a “sudden or unforeseen” 

increase in its bona fide hedging needs to enter into a bona fide hedge without first 

obtaining the Commission’s prior approval, as long as the market participant submits a 

retroactive application to the Commission within five business days of exceeding the 

applicable position limit. The Commission preliminarily believes this “five-business day 

retroactive exemption” would benefit bona fide hedgers compared to existing §§ 1.47 and 

1.48, which requires Commission prior approval, since hedgers that would qualify to 

exercise the five-business day retroactive exemption are also likely facing more acute 

hedging needs – with potentially commensurate costs if required to wait. This provision 

would also leverage, for federal position limit purposes, existing exchange practices for 

granting retroactive exemptions from exchange-set limits. 
348

On the other hand, the proposed five-business day retroactive exemption could 

harm market liquidity and bona fide hedgers if the applicable exchange or the 

Commission were to not approve of the retroactive request, and the Commission 

subsequently required liquidation of the position in question. As a result, such possibility

could cause market participants to either enter into smaller bona fide hedge positions than 

they otherwise would or cause the bona fide hedger to delay entering into its hedge, in 

either case potentially causing bona fide hedgers to incur increased hedging costs. 

However, the Commission preliminarily believes this concern is partially 

mitigated since proposed § 150.3 would require the purported bona fide hedger to exit its 

position in a “commercially reasonable time,” which the Commission believes should 

partially mitigate any costs incurred by the market participant compared to either an 

alternative that would require the bona fide hedger to exit its position immediately, or the 

status quo where the market participant either is unable to enter into a hedge at all 

without Commission prior approval. 

ii. Spread Exemptions and Non-Enumerated Bona Fide Hedges 

Proposed § 150.3 would impose a new requirement for market participants to (1) 

apply either directly to the Commission pursuant to proposed § 150.3 or to an exchange 

pursuant to proposed § 150.9 for any non-enumerated bona fide hedge; and (2) to apply 

directly to the Commission pursuant to proposed § 150.3 for any spread exemptions not 

identified in the proposed “spread transaction” definition for any of the proposed 25 core 

referenced futures contracts.621 As noted above, common spread exemptions (i.e., those 

 621 As discussed below, for spread exemptions not identified in the proposed “spread transaction” definition 

in proposed § 150.3, market participants would be required to apply directly to the Commission under 

proposed § 150.3 and would not be able to apply under proposed § 150.9
349

identified in the proposed definition of “spread transaction” in proposed § 150.1) would 

remain self-effectuating for the nine legacy agricultural products and also would be selfeffectuating for the 16 proposed core referenced futures contracts.622 Unlike nonenumerated bona fide hedges, for which market participants could apply directly to the 

Commission under proposed § 150.3 or through an exchange under proposed §150.9, for 

spread exemptions not identified in the proposed “spread transaction” definition, market 

participants would be required to apply directly to the Commission under proposed § 

150.3.

As noted above, proposed § 150.3 also would maintain the status quo and 

continue to require any non-enumerated bona fide hedge in one of the nine legacy 

agricultural products to receive prior approval, and similarly would require prior approval 

for such non-enumerated bona fide hedges for the proposed additional 16 contracts that 

would be newly subject to federal position limits.

623 The Commission anticipates that 

there will be no change to the status quo baseline with respect to the most common 

spread exemptions since these exemptions would be self-effecting for purposes of federal 

position limits.

To the extent market participants would be required to obtain prior approval for a 

non-enumerated bona fide hedge or spread exemption for any of the additional 16 

contracts that would be newly subject to federal position limits, the Commission 

recognizes that proposed § 150.3 would impose costs on market participants who will 

 622 Existing § 150.3(a)(2) does not specify a formal process for granting either spread exemptions or nonanticipatory enumerated bona fide hedges that are consistent with CEA section 4a(a)(1), so in practice 

spread exemptions and non-anticipatory enumerated bona fide hedges have been self-effectuating. 623 The Commission discusses the costs and benefits related to the proposed process for non-enumerated 

bona fide hedge recognitions with respect to the nine legacy agricultural products in the above section.
350

now be required to spend time and resources submitting applications to the Commission

(for certain spread exemptions) or to either the Commission or an exchange (for nonenumerated bona fide hedges) for prior approval for federal position limit purposes.

624 

Further, compared to the status quo in which the proposed new 16 contracts are not 

subject to federal position limits, the proposed process could increase uncertainty since 

market participants would be required to seek prior approval and wait up to 10 days. As 

a result, such uncertainty could cause market participants to either enter into smaller 

spread or bona fide hedging positions or do so at a later time. In either case, this could 

cause market participants to incur additional costs and/or implement less efficient 

hedging strategies. However, the Commission preliminarily believes that proposed § 

150.3’s framework would be familiar to market participants that currently apply to the 

Commission for bona fide exemptions for the nine legacy agricultural products, which 

should serve to reduce costs for some market participants associated with obtaining 

recognition of a bona fide hedge or spread exemption from the Commission for federal 

limits for those market participants.

625 The Commission also preliminarily believes that 

this analysis also would apply to the nine legacy agricultural contracts for spread 

exemptions that are not listed in the proposed “spread transaction” definition and 

therefore also would require market participants to apply to the Commission for these 

 624 The Commission’s Paperwork Reduction Act analysis identifies some of these information collection 

burdens in greater specificity. See supra Section IV.A.4.c. (discussing in greater detail the cost and 

benefits related to spread exemptions).

625 The Commission preliminarily anticipates that the proposed application process in § 150.3(b) could 

slightly reduce compliance-related costs, compared to the status quo application process to the Commission

under existing §§ 1.47 and 1.48, because proposed § 150.3 would provide a single, standardized process for 

all bona fide hedge and spread exemption requests that is slightly less complex – and more clearly laid out 

in the proposed regulations – than the Commission’s existing application processes. Nonetheless, since the 

Commission anticipates that most market participants would apply directly to exchanges for bona fide 

hedges and spread exemptions when provided the option under proposed § 150.9, the Commission believes 

that most market participants would incur the costs and benefits discussed thereunder. 
351

types of spread exemptions for the first time for the nine legacy agricultural products. 

However, because the Commission preliminarily has determined that most spread 

transactions would be self-effectuating (especially for the nine legacy agricultural 

contracts based on the Commission’s experience), the Commission believes that the 

proposal would impose only small costs with respect to spread exemptions for both the 

nine legacy agricultural contracts as well as the proposed additional 16 contracts that 

would be newly subject to federal position limits.

While the Commission has years of experience granting and monitoring spread 

exemptions and enumerated and non-enumerated bona fide hedges for the nine legacy 

agricultural contracts, as well as overseeing exchange processes for administering 

exemptions from exchange-set limits on such commodities, the Commission does not 

have the same level of experience or comfort administering bona fide hedge recognitions 

and spread exemptions for the additional 16 contracts that would be subject to the 

proposed federal position limits and the new proposed exemption processes for the first 

time. Accordingly, the Commission preliminarily recognizes that permitting enumerated 

bona fide hedges and spread recognitions identified in the proposed “spread transaction” 

definition for these additional 16 contracts might not provide the purported benefits, or 

could result in increased costs, compared to the Commission’s experience with the nine 

legacy agricultural products.

The Commission also preliminarily believes that the proposal will benefit market 

participants by providing market participants the option to choose the process for 

applying for a non-enumerated bona fide hedge (i.e., either directly with the Commission 

or, alternatively, through the exchange-centric process discussed under proposed § 150.9 
352

below) for the additional 16 contracts that would be newly subject to federal position 

limits that would be more efficient given the market participants unique facts, 

circumstances, and experience.626 If a market participant chooses to apply through an 

exchange for federal position limits pursuant to proposed § 150.9, the market participant 

would also receive the added benefit of not being required to also submit another 

application directly to the Commission. The Commission anticipates that most market 

participants would apply directly to exchanges for non-enumerated bona fide hedges, 

pursuant to the proposed streamlined process § 150.9, as explained below, in which case 

the Commission believes that most market participants would incur the costs and benefits 

discussed thereunder. The Commission also preliminarily believes that this analysis also 

would apply with respect to non-enumerated bona fide hedges for the nine legacy 

agricultural contracts.

iii. Exemption-Related Recordkeeping

Proposed § 150.3(d) would require persons who avail themselves of any of the 

foregoing exemptions to maintain complete books and records relating to the subject 

position, and to make such records available to the Commission upon request under 

proposed § 150.3(e). These requirements would benefit market integrity by providing the 

Commission with the necessary information to monitor the use of exemptions from 

speculative position limits and help to ensure that any person who claims any exemption 

 626 As noted above, market participants seeking spread exemptions not listed in the proposed “spread 

transaction” definition in proposed § 150.1 would be required to apply directly with the Commission under 

proposed § 150.3 and would not be permitted to apply under proposed § 150.9. The Commission 

preliminarily recognizes that these types of spread exemptions are difficult to analyze compared to either 

the spread exemptions identified in proposed § 150.1 or bona fide hedges in general. Accordingly, the 

Commission preliminarily has determined to require market participants to apply directly to the 

Commission. Further, compared to the spread exemptions identified in proposed § 150.1, the Commission 

anticipates relatively few requests, and so does not believe the proposed application requirement will 

impose a large aggregate burden across market participants.
353

permitted by proposed § 150.3 can demonstrate compliance with the applicable 

requirements. The Commission does not expect these requirements to impose significant 

new costs on market participants, as these requirements are in line with existing 

Commission and exchange-level recordkeeping obligations.

iv. Exemption Renewals

Consistent with existing §§ 1.47 and 1.48, with respect to any Commissionrecognized bona fide hedge or Commission-granted spread exemption pursuant to 

proposed § 150.3, the Commission would not require a market participant to reapply 

annually for bona fide hedges.

627 The Commission preliminarily believes that this will 

reduce burdens on market participants but also recognizes that not requiring market 

participants to annually reapply ostensibly could harm market integrity since the 

Commission would not directly receive updated information with respect to particular 

bona fide hedgers or exemption holders prior to the trader excessing the applicable 

federal limits. 

However, the Commission preliminarily believes that any potential harm would 

be mitigated since the Commission, unlike exchanges, has access to aggregate market 

data, including positions held by individual market participants. Further, proposed § 

150.3 would require a market participant to submit a new application if any information 

changes, or upon the Commission’s request. On the other hand, market participants 

would benefit by not being required to annually submit new applications, which the 

Commission preliminarily believes will reduce compliance costs.

 627 As discussed below, with respect to exchange-set limits under proposed § 150.5 or the exchange process 

for federal limits under proposed § 150.9, market participants would be required to annually reapply to 

exchanges. 
354

v. Exemptions for Financial Distress and Conditional Natural Gas Positions

Proposed § 150.3 would codify the Commission’s existing informal practice with 

respect to exemptions for financial distress and conditional spot month limit exemption

positions in natural gas. The same costs and benefits described above with respect to 

applications for bona fide hedge recognitions and spread exemptions would also apply. 

However, to the extent the Commission currently allows exemptions related to financial 

distress, the Commission preliminarily has determined that the costs and benefits with 

respect to the related application process already may be recognized by market 

participants.

b. Process for Market Participants to Apply to an Exchange for Non-Enumerated

Bona Fide Hedge Recognitions for Purposes of Federal Limits (Proposed § 150.9) 

and Related Changes to Part 19 of the Commission’s Regulations

Proposed § 150.9 would provide a framework whereby a market participant could

avoid the existing dual application process described above and, instead, file one 

application with an exchange to receive a non-enumerated bona fide hedging recognition, 

which as discussed previously would not be self-effectuating for purposes of federal 

position limits. Under this process, a person would be allowed to exceed the federal limit 

levels following an exchange’s review and approval of an application for a bona fide 

hedge recognition or spread exemption, provided that the Commission during its review

does not notify the exchange otherwise within a certain period of time thereafter. Market 

participants who do not elect to use the process in proposed § 150.9 for purposes of 

federal position limits would be required to request relief both directly from the 
355

Commission under proposed § 150.3, as discussed above, and also apply to the relevant

exchange, consistent with existing practices.

628

i. Proposed § 150.9 — Establishment of General Exchange Process

Pursuant to proposed § 150.9, exchanges that elect to process these applications 

would be required to file new rules or rule amendments with the Commission under § 

40.5 of the Commission’s regulations and obtain from applicants all information to 

enable the exchange to determine, and the Commission to verify, that the facts and 

circumstances support a non-enumerated bona fide hedge recognition. The Commission 

initially believes that exchanges’ existing practices generally are consistent with the 

requirements of proposed § 150.9, and therefore exchanges would only incur marginal 

costs, if any, to modify their existing practices to comply. Similarly, the Commission 

preliminarily anticipates that establishing uniform, standardized exemption processes 

across exchanges would benefit market participants by reducing compliance costs. On 

the other hand, the Commission recognizes that exchanges that wish to participate in the 

processing of applications with the Commission under proposed § 150.9 would be 

required to expend resources to establish a process consistent with the Commission’s 

proposal. However, to the extent exchanges have similar procedures, such benefits and 

costs may already have been realized by market participants and exchanges.

The Commission preliminarily believes that there are significant benefits to the 

proposed § 150.9 process that would be largely realized by market participants. The 

Commission preliminarily has determined that the use of a single application to process 

both exchange and federal position limits will benefit market participants and exchanges 

 628 As noted above, the Commission preliminarily anticipates that most, if not all, market participants will 

use proposed § 150.9, rather than proposed § 150.3, where permitted.
356

by simplifying and streamlining the process. For applicants seeking recognition of a nonenumerated bona fide hedge, proposed § 150.9 should reduce duplicative efforts because 

applicants would be saved the expense of applying in parallel to both an exchange and 

the Commission for relief from exchange-set position limits and federal position limits, 

respectively. Because many exchanges already possess similar application processes 

with which market participants are likely accustomed, compliance costs should be 

decreased in the form of reduced application-production time by market participants and 

reduced response time by exchanges. 

As discussed above, in connection with the recognition of bona fide hedges for 

federal position limit purposes, current practices set forth in existing §§ 1.47 and 1.48 

require market participants to differentiate between (i) enumerated non-anticipatory bona 

fide hedges that are self-effectuating, and (ii) enumerated anticipatory bona fide hedges

and non-enumerated bona fide hedges for which market participants must apply to the 

Commission for prior approval. Under the proposal, the Commission would no longer 

distinguish among different types of enumerated bona fide hedges (e.g., anticipatory 

versus non-anticipatory enumerated bona fide hedges), and therefore, would not require 

exchanges to have separate processes for enumerated anticipatory positions under 

proposed § 150.9 for the nine legacy agricultural contracts. The Commission’s proposal 

would also eliminate the requirement for bona fide hedgers to file Form 204 or Form 304, 

as applicable, with respect to any bona fide hedge, whether enumerated or nonenumerated.

629 The Commission preliminarily expects this to benefit market participants 

 629 See infra Section II.H.3. (discussion of proposed changes to part 19 eliminating Form 204 and portions 

of Form 304).
357

by providing a more efficient and less complex process that is consistent with existing 

practices at the exchange-level. 

On the other hand, the Commission recognizes proposed § 150.9 would impose 

new costs related to non-enumerated bona fide hedges for the additional 16 contracts that 

would be newly subject to federal position limits. Under the proposal, market 

participants would now be required to submit applications to receive prior approval for 

federal position limits purposes. However, since the Commission preliminarily 

understands that exchanges already require market participants to submit applications and 

receive prior approval under exchange-set limits for all types of bona fide hedges, the 

Commission does not believe proposed § 150.9 would impose any additional incremental

costs on market participants beyond those already incurred under exchanges’ existing 

processes. Accordingly, the Commission preliminarily believes that any costs already 

may have been realized by market participants. 

Further, the Commission preliminarily believes that employing a concurrent 

process with exchanges to oversee the non-enumerated bona fide hedges that would not 

be self-effectuating for federal position limits purposes would benefit market integrity by 

ensuring that market participants are appropriately relying on such bona fide hedges and 

not entering into such positions in order to attempt to manipulate the market or evade 

position limits. However, to the extent that exchange oversight, consistent with 

Commission standards and DCM core principles, already exists, such benefits may 

already be realized.

ii. Proposed §150.9 – Exchange Expertise, Market Integrity, and Commission 

Oversight
358

For non-enumerated bona fide hedge recognitions that would require the 

Commission’s prior approval, the proposal would provide a framework that utilizes 

existing exchange resources and 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. Proposed § 150.9 would build on existing 

exchange processes, which the Commission preliminarily believes would strengthen the 

ability of the Commission and exchanges to monitor markets and trading strategies while 

reducing burdens on both the exchanges, which would administer the process, and market 

participants, who would utilize the process. For example, exchanges are familiar with 

their market participants’ commercial needs, practices, and trading strategies, and already 

evaluate hedging strategies in connection with setting and enforcing exchange-set 

position limits; accordingly, exchanges should be able to readily identify bona fide 

hedges.630

For these reasons, the Commission has preliminarily determined that allowing 

market participants to apply through an exchange under proposed § 150.9, rather than 

directly to the Commission as required under existing § 1.47, is likely to be more 

efficient than if the Commission itself initially had to review and approve all applications. 

The Commission preliminarily considers the increased efficiency in processing 

applications under proposed § 150.9 as a benefit to bona fide hedgers and liquidity 

providers. By having the availability of the exchange’s analysis and view of the markets, 

the Commission would be better informed in its review of the market participant and its 

application, which in turn may further benefit market participants in the form of 

 630 For a discussion on the history of exemptions, see 2013 Proposal, 78 FR at 75703 – 75706.
359

administrative efficiency and regulatory consistency. However, the Commission 

recognizes additional costs for exchanges required to create and submit these real-time 

notices. To the extent exchanges already provide similar notice to the Commission or to 

market participants, or otherwise are required to notify the Commission under certain 

circumstances, such benefits and costs already may have been realized.

On the other hand, to the extent exchanges would become more involved with 

respect to review and oversight of market participants’ bona fide hedges and spread 

exemptions, exchanges could incur additional costs. However, as noted, the Commission 

believes most of the costs have been realized by exchanges under current market practice.

At the same time, the Commission also preliminarily recognizes that this aspect of 

the proposal could potentially harm market integrity. Absent other provisions, since 

exchanges profit from increased activity, an exchange could hypothetically seek a 

competitive advantage by offering excessively permissive exemptions, which could allow 

certain market participants to utilize non-enumerated bona fide hedge recognitions to 

engage in excessive speculation or to manipulate market prices. If an exchange engaged 

in such activity, other market participants would likely face greater costs through 

increased transaction fees, including forgoing trading opportunities resulting from market 

prices moving against market participants and/or preventing the market participant from 

executing at its desired prices, which may also further lead to inefficient hedging. 

However, the Commission preliminarily believes that these hypothetical costs are 

unfounded since under proposed § 150.9 the Commission would review the applications 

submitted by market participants for bona fide hedge recognitions and spread 

exemptions; the Commission emphasizes that proposed §150.9 is not providing 
360

exchanges with an ability to recognize a bona fide hedge or grant an exemption for 

federal position limit purposes in lieu of a Commission review. Rather, proposed 

§ 150.9(e) and (f) would require an exchange to provide the Commission with notice of 

the disposition of any application for purposes of exchange limits concurrently with the

notice the exchange would provide to the applicant, and the Commission would have 10 

business days to make its determination for federal position limits purposes (although, in 

connection with “sudden or unforeseen increases” in bona fide hedging needs, as 

discussed in connection with proposed § 150.3, proposed § 150.9 would require the 

Commission to make its determination within two business days).

On the other hand, the Commission also recognizes that there could be potential 

costs to bona fide hedgers if under the proposal they are forced to wait up to 10 business 

days for the Commission to complete its review after the exchange’s initial review –

especially compared to the status quo for the 16 commodities that would be subject to 

federal limits for the first time under this release and currently are not required to receive 

the Commission’s prior approval. As a result, the Commission preliminarily recognizes 

that a market participant could incur costs by waiting during the 10 business day period 

or be required to enter into a less efficient hedge, which would harm liquidity. However, 

the Commission believes this concern is mitigated since proposed § 150.9, similar to 

proposed § 150.3, would permit a market participant that demonstrates a “sudden or 

unforeseen” increase in its bona fide hedging needs to enter into a bona fide hedge

without first obtaining the Commission’s prior approval, as long as the market participant 

submits a retroactive application to the Commission within five business days of 

exceeding the applicable position limit. In turn, the Commission would only have two 
361

business days (as opposed to the default 10 business days) to complete its review for 

federal purposes. The Commission preliminarily believes this “five-business day 

retroactive exemption” would benefit bona fide hedgers compared to existing § 1.47, 

which requires Commission prior approval, since hedgers that would qualify to exercise 

the five-business day retroactive exemption are also likely facing more acute hedging 

needs – with potentially commensurate costs if required to wait. This provision would 

also leverage, for federal position limit purposes, existing exchange practices for granting 

retroactive exemptions from exchange-set limits. 

On the other hand, the proposed five-business day retroactive exemption could 

harm market liquidity and bona fide hedgers since the Commission would be able to 

require a market participant to exit its position if the exchange or the Commission does 

not approve of the retroactive request, and such uncertainty could cause market 

participants to either enter into smaller bona fide hedge positions than it otherwise would 

or could cause the bona fide hedger to delay entering into its hedge, in either case 

potentially causing bona fide hedgers to incur increased hedging costs. However, the 

Commission preliminarily believes this concern is partially mitigated since proposed § 

150.9 would require the purported bona fide hedger to exit its position in a 

“commercially reasonable time,” which the Commission believes should partially 

mitigate any costs incurred by the market participant compared to either an alternative 

that would require the bona fide hedger to exit its position immediately, or the status quo 

where the market participant either is unable to enter into a hedge at all without 

Commission approval. 
362

While existing § 1.47 does not require market participants to annually reapply for 

certain bona fide hedges, proposed § 150.9 would require market participants to reapply 

at least annually with exchanges for purposes of federal position limits. The Commission 

recognizes that requiring market participants to reapply annually could impose additional 

costs on those that are not currently required to do so. However, the Commission 

believes that this is consistent with industry practice with respect to exchange-set limits 

and that market participants are familiar with exchanges’ exemption processes, which 

should reduce related costs.631 Further, the Commission preliminarily believes that 

market integrity would be strengthened by ensuring that exchanges receive updated trader 

information that may be relevant to the exchange’s oversight.632 However, to the extent 

any of these benefits and costs reflect current market practice, they already may have 

been realized by exchanges and market participants. 

In addition, the proposed exchange-to-Commission monthly report in proposed § 

150.5(a)(4) would further detail the exchange’s disposition of a market participant’s

application for recognition of a bona fide hedge position or spread exemption as well as 

the related position(s) in the underlying cash markets and swaps markets. The 

Commission believes that such reports would provide greater transparency by facilitating 

the tracking of these positions by the Commission and would further assist the 

Commission in ensuring that a market participant’s activities conform to the exchange’s 

rules and to the CEA. The combination of the “real-time” exchange notification and 

 631 See infra Section IV.A.6. (discussing proposed § 150.5). 632 In contrast, the Commission, unlike exchanges, has access to aggregate market data, including positions 

held by individual market participants, and so the Commission has preliminarily determined that requiring 

market participants to apply annually under proposed § 150.3, absent any changes to their application, 

would not benefit market integrity to the same extent. 
363

exchanges’ provision of monthly reports to the Commission under proposed §§

150.9(e)(1) and 150.5(a)(4), respectively, would provide the Commission with enhanced 

surveillance tools on both a “real-time” and a monthly basis to ensure compliance with 

the requirements of this proposal. The Commission anticipates additional costs for 

exchanges required to create and submit monthly reports because the proposed rules 

would require exchanges to compile the necessary information in the form and manner 

required by the Commission. However, to the extent exchanges already provide similar 

notice to the Commission, or otherwise are required to notify the Commission under 

certain circumstances, such benefits and costs already may have been realized 

iii. Proposed 150.9(d) – Recordkeeping 

Proposed § 150.9(d) would require exchanges to maintain complete books and 

records of all activities relating to the processing and disposition of any applications, 

including applicants’ submission materials, exchange notes, and determination 

documents.

633 The Commission preliminarily believes that this will benefit market 

integrity and Commission oversight by ensuring that pertinent records will be readily 

accessible, as needed by the Commission. However, the Commission acknowledges that 

such requirements would impose costs on exchanges. Nonetheless, to the extent that 

exchanges are already required to maintain similar records, such costs and benefits 

already may be realized.634

 633 Moreover, consistent with existing § 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 or exempt 

spread position and during the first two years of the subsequent, five-year retention period. 634 The Commission believes that exchanges that process applications for recognition of bona fide hedging 

transactions or positions and/or spread exemptions currently maintain records of such applications as 

required pursuant to other existing Commission regulations, including existing § 1.31. The Commission, 

however, also believes that proposed § 150.9(d) may impose additional recordkeeping obligations on such 

exchanges. The Commission estimates that each exchange electing to administer the proposed process 
364

iv. Proposed § 150.9 (g) – Commission Revocation of Previously-Approved 

Applications

The Commission preliminarily acknowledges that there may be costs to market 

participants if the Commission revokes the hedge recognition for federal purposes under 

proposed § 150.9(f). Specifically, market participants could incur costs to unwind trades 

or reduce positions if the Commission required the market participant to do so under 

proposed § 150.9(f)(2).

However, the potential cost to market participants would be mitigated under 

proposed § 150.9(f) since the Commission would provide a commercially reasonable 

time for a person to come back into compliance with the federal position limits, which the 

Commission believes should mitigate transaction costs to exit the position and allow a 

market participant the opportunity to potentially execute other hedging strategies. 

v. Proposed § 150.9 – Commodity Indexes and Risk Management Exemptions

Proposed § 150.9(b) would prohibit exchanges from recognizing as a bona fide 

hedge with respect to commodity index contracts. The Commission recognizes that this 

proposed prohibition could alter trading strategies that currently use commodity index 

contracts as part of an entity’s risk management program. Although there likely would 

be a cost to change risk management strategies for entities that currently rely on a bona 

fide hedge recognition for positions in commodity index contracts, as discussed above,

the Commission believes that such financial products are not substitutes for positions in a 

physical market and therefore do not satisfy the statutory requirement for a bona fide 

 

would likely incur a de minimis cost annually to retain records for each proposed process compared to the 

status quo. See generally Section IV.B. (discussing the Commission’s PRA determinations).
365

hedge under section 4a(c)(2) of the Act.

635 In addition, the Commission further posits

that this cost may be reduced or mitigated by the proposed increased in federal position 

limit levels set forth in proposed § 150.2 or by the implementation of the pass-through 

swap provision of the proposed bona fide hedge definition.

636 

c. Request for Comment

(48) The Commission requests comment on its considerations of the benefits

and costs of proposed § 150.3 and § 150.9. Are there additional benefits

or costs that the Commission should consider? Has the Commission 

misidentified any benefits or costs? Commenters are encouraged to 

include both quantitative and qualitative assessments of these benefits and 

costs, as well as data or other information to support such assessments.

(49) The Commission requests comment on whether a Commissionadministered process, such as the process in proposed § 150.3, would 

promote more consistent and efficient decision-making. Commenters are 

encouraged to include both quantitative and qualitative assessments, as

well as data or other information to support such assessments.

(50) 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 bona fide hedging transactions or 

positions or grant exempt spread positions for purposes of federal limits; 

or (2) maintaining the status quo. The Commission requests comment on 

 635 See supra Section III.F.6. (discussion of commodity indices); see supra Section IV.A.4.b.i.(1). 

(discussion of elimination of the risk management exemption).

636 See supra Section IV.A.4.b.i.(1). (discussion of the pass-through swap exemption).
366

whether an alternative to what is proposed would result in a superior costbenefit profile, with support for any such position.

d. Related Changes to Part 19 of the Commission’s Regulations Regarding the 

Provision of Information by Market Participants

Under existing regulations, the Commission relies on Form 204637 and Form 

304,638 known collectively as the “series ‘04” reports, to monitor for compliance with 

federal position limits. Under existing part 19, market participants that hold bona fide 

hedging positions in excess of federal limits for the nine legacy agricultural contracts

currently subject to federal limits under existing § 150.2 must justify such overages by 

filing the applicable report (Form 304 for cotton and Form 204 for the other eight legacy

commodities) each month.639 The Commission uses these reports to determine whether a 

trader has sufficient cash positions that justify futures and options on futures positions 

above the speculative limits. 

As discussed above, with respect to bona fide hedging positions, the Commission 

is proposing a streamlined approach under proposed § 150.9 to cash-market reporting that 

reduces duplication between the Commission and the exchanges. Generally, the 

Commission is proposing amendments to part 19 and related provisions in part 15 that 

would: (i) eliminate Form 204; and (ii) amend the Form 304, in each case to remove any 

 637 CFTC Form 204: Statement of Cash Positions in Grains, Soybeans, Soybean Oil, and Soybean Meal, 

U.S. Commodity Futures Trading Commission Web site, available at

https://www.cftc.gov/sites/default/files/idc/groups/public/@forms/documents/file/cftcform204.pdf (existing 

Form 204).

638 CFTC Form 304: Statement of Cash Positions in Cotton, U.S. Commodity Futures Trading 

Commission Web site, available at

http://www.cftc.gov/ucm/groups/public/@forms/documents/file/cftcform304.pdf (existing Form 204). Parts 

I and II of Form 304 address fixed-price cash positions used to justify cotton positions in excess of federal 

limits. As described below, Part III of Form 304 addresses unfixed price cotton “on-call” information, 

which is not used to justify cotton positions in excess of limits, but rather to allow the Commission to 

prepare its weekly cotton on-call report.

639 17 CFR 19.01. 
367

cash-market reporting requirements. Under this proposal, the Commission would instead 

rely on cash-market reporting submitted directly to the exchanges, pursuant to proposed 

§§ 150.5 and 150.9,640 or request cash-market information through a special call.

The proposed cash-market and swap-market reporting elements of §§ 150.5 and

150.9 discussed above are largely consistent with current market practices with respect to

exchange-set limits and thus should not result in any new costs. The proposed 

elimination of Form 204 and the cash-market reporting segments of the Form 304 would 

eliminate a reporting burden and the costs associated thereto for market participants. 

Instead, market participants would realize significant benefits by being able to submit

cash market reporting to one entity – the exchanges – instead of having to comply with 

duplicative reporting requirements between the Commission and applicable exchange, or 

implement new Commission processes for reporting cash market data for market 

participants who will be newly subject to position limits.

641 Further, market participants 

are generally already familiar with exchange processes for reporting and recognizing 

bona fide hedging exemptions, which is an added benefit, especially for market 

participants that would be newly subject to federal position limits. 

 640 See supra Section II.G.3. (discussion of proposed § 150.9). As discussed above, leveraging existing 

exchange application processes should avoid duplicative Commission and exchange procedures and 

increase the speed by which position limit exemption applications are addressed. While the Commission 

would recognize spread exemptions based on exchanges’ application processes that satisfy the 

requirements in proposed § 150.9, for purposes of federal limits, the cash-market reporting regime 

discussed in this section of the release only pertains to bona fide hedges, not to spread exemptions, because 

the Commission has not traditionally relied on cash-market information when reviewing requests for spread 

exemptions. 

641 The Commission has noted that certain commodity markets will be subject to federal position limits for 

the first time. In addition, the existing Form 204 would be inadequate for reporting of cash-market 

positions relating to certain energy contracts that would be subject to federal limits for the first time under 

this proposal.
368

Further, the proposed changes would not impact the Commission’s existing 

provisions for gathering information through special calls relating to positions exceeding 

limits and/or to reportable positions. Accordingly, as discussed above, the Commission 

proposes that all persons exceeding the proposed limits set forth in proposed § 150.2, as 

well as all persons holding or controlling reportable positions pursuant to existing

§ 15.00(p)(1), must file any pertinent information as instructed in a special call.642 This 

proposed provision is similar to existing § 19.00(a)(3), but would require any such person 

to file the information as instructed in the special call, rather than to file a series ’04 

report.643 The Commission preliminarily believes that relying on its special call authority 

is less burdensome for market participants than the existing Forms 204 and 304 reporting 

costs, as special calls are discretionary requests for information whereas the series ‘04 

reporting requirements are a monthly, recurring reporting burden for market participants. 

6. Exchange-Set Position Limits (Proposed § 150.5)

a. Introduction

Existing § 150.5 addresses exchange-set position limits on contracts not subject to 

federal limits under existing § 150.2, and sets forth different standards for DCMs to apply 

in setting limit levels depending on whether the DCM is establishing limit levels: (1) on 

an initial or subsequent basis; (2) for cash-settled or physically-settled contracts; and (3)

during or outside the spot month. 

In contrast, for physical commodity derivatives, proposed § 150.5(a) and (b) 

would (1) expand existing § 150.5’s framework to also cover contracts subject to federal 

limits under § 150.2; (2) simplify the existing standards that DCMs apply when 

 642 See proposed § 19.00(b). 643 17 CFR 19.00(a)(3).
369

establishing exchange-set position limits; and (3) provide non-exclusive acceptable 

practices for compliance with those standards.644 Additionally, proposed § 150.5(d) 

would require DCMs to adopt aggregation rules that conform to existing § 150.4.645 

b. Physical Commodity Derivative Contracts Subject to Federal Position Limits 

Under § 150.5 (Proposed § 150.5(a))

i. Exchange-Set Position Limits and Related Exemption Process

For contracts subject to federal limits under § 150.2, proposed § 150.5(a)(1) 

would require DCMs to establish exchange-set limits no higher than the level set by the 

Commission. This is not a new requirement, and merely restates the applicable 

requirement in DCM Core Principle 5.646 

Proposed § 150.5(a)(2) would authorize DCMs to grant exemptions from such 

limits and is generally consistent with current industry practice. The Commission has 

preliminarily determined that codifying such practice would establish important, 

minimum standards needed for DCMs to administer – and the Commission to oversee –

an effective and efficient program for granting exemptions to exchange-set limits in a 

manner that does not undermine the federal limits framework.647 In particular, proposed 

 644 See 17 CFR 150.2. Existing § 150.5 addresses only contracts not subject to federal limits under existing 

§ 150.2 (aside from certain major foreign currency contracts). To avoid confusion created by the parallel 

federal and exchange-set position limit frameworks, the Commission clarifies that proposed § 150.5 deals 

solely with exchange-set position limits and exemptions therefrom, whereas proposed § 150.9 deals solely 

with the process for purposes of federal limits. 

645 See 17 CFR 150.4. 646 See Commission regulation § 38.300 (restating DCMs’ statutory obligations under the CEA § 5(d)(5), 7 

U.S.C. 7(d)(5)). Accordingly, the Commission will not discuss any costs or benefits related to this 

proposed change since it merely reflects an existing regulatory and statutory obligation. 647 This proposed standard is substantively consistent with current market practice. See, e.g., CME Rule 

559 (providing that CME will consider, among other things, the “applicant’s business needs and financial 

status, as well as whether the positions can be established and liquidated in an orderly manner . . .”) and 

ICE Rule 6.29 (requiring a statement that the applicant’s “positions will be initiated and liquidated in an 

orderly manner . . .”). This proposed standard is also substantively similar to existing § 150.5’s standard 

and is not intended to be materially different. See existing § 150.5(d)(1) (an exemption may be limited if it 
370

§ 150.5(a)(2) would protect market integrity and prevent exchange-granted exemptions 

from undermining the federal limits framework by requiring DCMs to either conform 

their exemptions to the type the Commission would grant under proposed §§ 150.3 or 

150.9, or to cap the exemption at the applicable federal limit level and to assess whether 

an exemption request would result in a position that is “not in accord with sound 

commercial practices” or would “exceed an amount that may be established or liquidated 

in an orderly fashion in that market.” 

Absent other factors, this element of the proposal could potentially increase 

compliance costs for traders since each DCM could establish different exemption-related 

rules and practices. However, to the extent that rules and procedures currently differ 

across exchanges, any compliance-related costs and benefits for traders may already be 

realized. Similarly, absent other provisions, a DCM could hypothetically seek a 

competitive advantage by offering excessively permissive exemptions, which could allow 

certain market participants to utilize exemptions in establishing sufficiently large 

positions to engage in excessive speculation and to manipulate market prices. However, 

proposed § 150.5(a)(2) would mitigate these risks by requiring that exemptions that do 

not conform to the types the Commission may grant under proposed § 150.3 could not 

exceed proposed § 150.2’s applicable federal limit unless the Commission has first 

approved such exemption. Moreover, before a DCM could permit a new exemption 

category, proposed § 150.5(e) would require a DCM to submit rules to the Commission 

allowing for such exemptions, allowing the Commission to ensure that the proposed 

exemption type would be consistent with applicable requirements, including with the 

 

would not be “in accord with sound commercial practices or exceed an amount which may be established 

and liquidated in orderly fashion.”) 17 CFR 150.5(d)(1).
371

requirement that any resulting positions would be “in accord with sound commercial 

practices” and may be “established and liquidated in an orderly fashion.”

Proposed § 150.5(a)(2) additionally would require traders to re-apply to the 

exchange at least annually for the exchange-level exemption. The Commission 

recognizes that requiring traders to re-apply annually could impose additional costs on 

traders that are not currently required to do so. However, the Commission believes this is 

industry practice among existing market participants, who are likely already familiar with 

DCMs’ exemption processes.648 This familiarity should reduce related costs, and the 

proposal should strengthen market integrity by ensuring that DCMs receive updated 

information related to a particular exemption. 

Proposed §150.5(a)(2) also would require a DCM to provide the Commission 

with certain monthly reports regarding the disposition of any exemption application, 

including the recognition of any position as a bona fide hedge, the exemption of any

spread transaction or other position, the revocation or modification or previously granted 

recognitions or exemptions, or the rejection of any application, as well as certain related 

information similar to the information that applicants must provide the Commission 

under proposed § 150.3 or an exchange under proposed § 150.9, including underlying 

cash-market and swap-market information related to bona fide hedge positions. The 

Commission generally recognizes that this monthly reporting requirement could impose 

additional costs on exchanges, although the Commission also preliminarily has 

 648 As noted above, the Commission believes this requirement is consistent with current market practice. 

See, e.g., CME Rule 559 and ICE Rule 6.29. While ICE Rule 6.29 merely requires a trader to “submit to 

[ICE Exchange] a written request” without specifying how often a trader must reapply, the Commission 

understands from informal discussions between Commission staff and ICE that traders must generally 

submit annual updates.
372

determined that it would assist with its oversight functions and therefore benefit market 

integrity. The Commission discusses this proposed requirement in greater detail in its 

discussion of proposed § 150.9.649

Further, while existing § 150.5(d) does not explicitly address whether traders 

should request an exemption prior to taking on its position, proposed § 150.5(a)(2), in 

contrast, would explicitly authorize (but not require) DCMs to permit traders to file a 

retroactive exemption request due to “demonstrated sudden or unforeseen increases in its 

bona fide hedging needs,” but only within five business days after the trade and as long 

as the trader provides a supporting explanation.

650 As noted above, these provisions are 

largely consistent with existing market practice, and to this extent, the benefits and costs 

already may have been realized by DCMs and market participants. 

ii. Pre-Existing Positions

Proposed § 150.5(a)(3) would require DCMs to impose exchange-set position 

limits on “pre-existing positions,” other than pre-enactment swaps and transition period 

swaps, during the spot month, but not outside of the spot month, as long as any position 

outside of the spot month: (i) was acquired in good faith consistent with the “pre-existing 

position” definition in proposed § 150.1;651 and (ii) would be attributed to the person if 

the position increases after the limit’s effective date. The Commission believes that this 

approach would benefit market integrity since pre-existing positions that exceed spotmonth limits could result in market or price disruptions as positions are rolled into the 

 649 See supra Section IV.A.5.b.ii. (discussion of monthly exchange-to-Commission report in proposed § 

150.5(a)).

650 Certain exchanges currently allow for the submission of exemption requests up to five business days 

after the trader established the position that exceeded a limit in certain circumstances. See, e.g., CME Rule 

559 and ICE’s “Guidance on Position Limits” (Mar. 2018).

651 Proposed § 150.1 would define “pre-existing position” to mean “any position in a commodity derivative 

contract acquired in good faith prior to the effective date” of any applicable position limit.
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spot month.652 However, the Commission acknowledges that, on its face, including a 

“good-faith” requirement in the proposed “pre-existing position” definition could 

hypothetically diminish market integrity since determining whether a trader has acted in 

“good faith” is inherently subjective and could result in disparate treatment of traders by 

a particular exchange or across exchanges seeking a competitive advantage with one 

another. For example, with respect to a particular large or influential exchange member, 

an exchange could, in order to maintain the business relationship, be incentivized to be 

more liberal with its conclusion that the member obtained its position in “good faith,” or 

could be more liberal in general in order to gain a competitive advantage. The 

Commission believes the risk of any such unscrupulous trader or exchange is mitigated 

since exchanges would still be subject to Commission oversight and to DCM Core 

Principles 4 (“prevention of market disruption”) and 12 (“protection of markets and 

market participants”), among others, and since proposed § 150.5(a)(3) also would require 

that exchanges must attribute the position to the trader if its position increases after the 

position limit’s effective date.

c. Physical Commodity Derivative Contracts Not Yet Subject to Federal Position 

Limits Under § 150.2 (Proposed § 150.5(b))

i. Spot Month Limits and Related Acceptable Practices

For cash-settled contracts during the spot month, existing § 150.5 sets forth the 

following qualitative standard: exchange-set limits should be “no greater than necessary 

to minimize the potential for market manipulation or distortion of the contract’s or 

underling commodity’s price.” However, for physically-settled contracts, existing § 

 652 The Commission is particularly concerned about protecting the spot month in physical-delivery futures 

from corners and squeezes. 
374

150.5 provides a one-size-fits-all parameter that exchange limits must be no greater than 

25 percent of EDS. 

In contrast, the proposed standard for setting spot month limit levels for physical 

commodity derivative contracts not subject to federal position limits set forth in proposed 

§ 150.5(b)(1) would not distinguish between cash-settled and physically-settled contracts, 

and instead would require DCMs to apply the existing § 150.5 qualitative standard to 

both.653 The Commission also proposes a related, non-exclusive acceptable practice that 

would deem exchange-set position limits for both cash-settled and physically-settled 

contracts subject to proposed § 150.5(b) to be in compliance if the limits are no higher 

than 25 percent of the spot-month EDS. 

Applying the existing § 150.5 qualitative standard and non-exclusive acceptable 

practice in proposed 150.5(b)(1), rather than a one-size-fits-all regulation, to both cashsettled and physically-settled contracts during the spot month is expected to enhance

market integrity by permitting a DCM to establish a more tailored, product-specific 

approach by applying other parameters that may take into account the unique liquidity 

and other characteristics of the particular market and contract, which is not possible under 

the one-size-fits-all 25 percent EDS parameter set forth in existing § 150.5. While the 

Commission recognizes that the existing 25 percent EDS parameter has generally worked 

well, the Commission also recognizes that there may be circumstances where other 

 653 Proposed § 150.5(b)(1) would require DCMs to establish position limits for spot-month contracts at a 

level that is “necessary and appropriate to reduce the potential threat of market manipulation or price 

distortion of the contract’s or the underlying commodity’s price or index.” Existing § 150.5 also 

distinguishes between “levels at designation” and “adjustments to levels,” although each category similarly 

incorporates the qualitative standard for cash-settled contracts and the 25-percent metric for physicallysettled contracts. Proposed § 150.5(b) would eliminate this distinction. The Commission intends the 

proposed § 150.5(b)(1) standard to be substantively the same as the existing § 150.5 standard for cashsettled contracts, except that under proposed § 150.5(b)(1), the standard would apply to physically-settled

contracts. 
375

parameters may be preferable and just as effective, if not more, including, for example, if 

the contract is cash-settled or does not have a reasonably accurate measurable deliverable 

supply, or if the DCM can demonstrate that a different parameter would better promote 

market integrity or efficiency for a particular contract or market. 

On the other hand, the Commission recognizes that proposed § 150.5(b)(1) could 

adversely affect market integrity by theoretically allowing DCMs to establish excessively 

high position limits in order to gain a competitive advantage, which also could harm the 

integrity of other markets that offer similar products.

654 However, the Commission 

believes these potential risks would be mitigated since (i) proposed § 150.5(e) would 

require DCMs to submit proposed position limits to the Commission, which would 

review those rules for compliance with § 150.5(b), including to ensure that the proposed 

limits are “in accord with sound commercial practices” and that they may be “established 

and liquidated in an orderly fashion”; and (ii) proposed § 150.5(b)(3) would require 

DCMs to adopt position limits for any new contract at a “comparable” level to existing 

contracts that are substantially similar (i.e., “look-alike contracts”) on other exchanges 

unless the Commission approves otherwise. Moreover, this latter requirement also may 

reduce the amount of time and effort needed for the DCM and Commission staff to assess 

proposed limits for any new contract that competes with another DCM’s existing 

contract. 

ii. Non-Spot Month Limits/Accountability Levels and Related Acceptable Practices

 654 Since the existing § 150.5 framework already applies the proposed qualitative standard to cash-settled 

spot-month contracts, any new risks resulting from the proposed standard would occur only with respect to 

physically-settled contracts, which are currently subject to the one-size-fits-all 25-percent EDS parameter

under the existing framework.
376

Existing § 150.5 provides one-size-fits-all levels for non-spot month contracts and 

allows for position accountability after a contract’s initial listing only for those contracts 

that satisfy certain trading thresholds.655 In contrast, for contracts outside the spot-month, 

proposed § 150.5(b)(2) would require DCMs to establish either position limits or position 

accountability levels that satisfy the same proposed qualitative standard discussed above 

for spot-month contracts.656 For DCMs that establish position limits, the Commission 

proposes related acceptable practices that would provide non-exclusive parameters that 

are generally consistent with existing § 150.5’s parameters for non-spot month 

contracts.657 For DCMs that establish position accountability, § 150.1’s proposed

definition of “position accountability” would provide that a trader must reduce its 

position upon a DCM’s request, which is generally consistent with existing § 150.5’s 

 655 As noted above, in establishing the specific metric, existing § 150.5 distinguishes between “levels at 

designation” and “adjustments to [subsequent] levels.” Proposed § 150.5(b)(2) would eliminate this 

distinction and apply the qualitative standard for all non-spot month position limit and accountability 

levels.

656 DCM Core Principle 5 requires DCMs to establish either position limits or accountability for 

speculators. See Commission regulation § 38.300 (restating DCMs’ statutory obligations under the CEA § 

5(d)(5)). Accordingly, inasmuch as proposed § 150.5(b)(2) would require DCMs to establish position 

limits or accountability, the proposal does not represent a change to the status quo baseline requirements. 657 Specifically, the acceptable practices proposed in Appendix F to part 150 would provide that DCMs 

would be deemed to comply with the proposed § 150.5(b)(2)(i) qualitative standard if they establish nonspot limit levels no greater than any one of the following: (1) based on the average of historical positions 

sizes held by speculative traders in the contract as a percentage of open interest in that contract; (2) the spot 

month limit level for that contract; (3) 5,000 contracts (scaled up proportionally to the ratio of the notional 

quantity per contract to the typical cash market transaction if the notional quantity per contract is smaller 

than the typical cash market transaction, or scaled down proportionally if the notional quantity per contract 

is larger than the typical cash market transaction); or (4) 10 percent of open interest in that contract for the 

most recent calendar year up to 50,000 contracts, with a marginal increase of 2.5 percent of open interest 

thereafter.

These proposed parameters have largely appeared in existing § 150.5 for many years in connection with 

non-spot month limits, either for levels at designation, or for subsequent levels, with certain revisions. For 

example, while existing § 150.5(b)(3) has provided a limit of 5,000 contracts for energy products, existing 

§ 150.5(b)(2) provides a limit of 1,000 contracts for physical commodities other than energy products. The 

proposed acceptable practice parameters would create a uniform standard of 5,000 contracts for all physical 

commodities. The Commission expects that the 5,000 contract acceptable practice, for example, would be 

a useful rule of thumb for exchanges because it would allow them to establish limits and demonstrate 

compliance with Commission regulations in a relatively efficient manner, particularly for new contracts 

that have yet to establish open interest. The spot month limit level under item (2) above would be a new 

parameter for non-spot month contracts. 
377

framework, but would not distinguish between trading volume or contract type, like 

existing § 150.5. While DCMs would be provided the ability to decide whether to use 

limit levels or accountability levels for any such contract, under either approach, the 

DCM would have to set a level that is “necessary and appropriate to reduce the potential 

threat of market manipulation or price distortion of the contract’s or the underlying 

commodity’s price or index.”

Proposed § 150.5(b)(2) would benefit market efficiency by authorizing DCMs to 

determine whether position limits or accountability would be best-suited outside of the 

spot month based on the DCM’s knowledge of its markets. For example, position 

accountability could improve liquidity compared to position limits since liquidity 

providers may be more willing or able to participate in markets that do not have hard 

limits. As discussed above, DCMs are well-positioned to understand their respective 

markets, and best practices in one market may differ in another market, including due to 

different market participants or liquidity characteristics of the underlying commodities. 

For DCMs that choose to establish position limits, the Commission believes that applying 

the proposed § 150.5 qualitative standard to contracts outside the spot-month would 

benefit market integrity by permitting a DCM to establish a more tailored, productspecific approach by applying other tools that may take into account the unique liquidity 

and other characteristics of the particular market and contract, which is not possible under 

the existing § 150.5 specific parameters for non-spot month contracts. While the 

Commission recognizes that the existing parameters may have been well-suited to market 

dynamics when initially promulgated, the Commission also recognizes that open interest

may have changed for certain contracts subject to proposed § 150.5(b), and open interest
378

will likely continue to change in the future (e.g., as new contracts may be introduced and 

as supply and/or demand may change for underlying commodities). In cases where open 

interest has not increased, the exchange may not need to change existing limit levels. 

But, for contracts where open interest have increased, the exchange would be able to raise 

its limits to facilitate liquidity consistent with an orderly market. However, the 

Commission reiterates that the specific parameters in the proposed acceptable practices 

are merely non-exclusive examples, and an exchange would be able to establish higher 

(or lower) limits, provided the exchange submits its proposed limits to the Commission 

under proposed § 150.5(e) and explains how its proposed limits satisfy the proposed 

qualitative standard and are otherwise consistent with all applicable requirements. 

The Commission, however, recognizes that proposed § 150.5(b)(2) could 

adversely affect market integrity by potentially allowing DCMs to establish position 

accountability levels rather than position limits, regardless of whether the contract 

exceeds the volume-based thresholds provided in existing § 150.5. However, proposed 

§ 150.5(e) would require DCMs to submit any proposed position accountability rules to 

the Commission for review, and the Commission would determine on a case-by-case 

basis whether such rules satisfy regulatory requirements, including the proposed 

qualitative standard. Similarly, in order to gain a competitive advantage, DCMs could 

theoretically set excessively high accountability (or position limit) levels, which also 

could potentially adversely affect markets with similar products. However, the 

Commission believes these risks would be mitigated since (i) proposed § 150.5(e) would 

require DCMs to submit proposed position accountability (or limits) to the Commission, 

which would review those rules for compliance with § 150.5(b), including to ensure that 
379

the exchange’s proposed accountability levels (or limits) are “necessary and appropriate 

to reduce the potential threat of market manipulation or price distortion” of the contract 

or underlying commodity; and (ii) proposed § 150.5(b)(3) would require DCMs to adopt 

position limits for any new contract at a “comparable” level to existing contracts that are 

substantially similar on other exchanges unless the Commission approves otherwise. 

iii. Exchange-Set Limits on Economically Equivalent Swaps

As discussed above, swaps that would qualify as “economically equivalent 

swaps” would become subject to the federal position limits framework. However, the 

Commission is proposing to allow exchanges to delay compliance – including enforcing 

position limits – with respect to exchange-set limits on economically equivalent swaps.

The proposed delayed compliance would benefit the swaps markets by permitting SEFs 

and DCMs that list economically equivalent swaps more time to establish surveillance 

and compliance systems; as noted in the preamble, such exchanges currently lack 

sufficient data regarding individual market participants’ open swap positions, which 

means that requiring exchanges to establish oversight over participants’ positions 

currently would impose substantial costs and would be currently impracticable.

Nonetheless, the Commission’s preliminary determination to permit exchanges to

delay implementing federal position limits on swaps could incentivize market participants

to leave the futures markets and instead transact in economically equivalent swaps, which 

could reduce liquidity in the futures and related options markets, which could also 

increase transaction and hedging costs. Delaying position limits on swaps therefore

could harm market participants, especially end-users that do not transact in swaps, if 

many participants were to shift trading from the futures to the swaps markets. In turn, 
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end-users could pass on some of these increased costs to the public at large.658 However, 

the Commission believes that these concerns would be mitigated to the extent the 

Commission would still oversee and enforce federal position limits even if the exchanges 

would not be required to do so. 

d. Position Aggregation

Proposed § 150.5(d) would require all DCMs that list physical commodity 

derivative contracts to apply aggregation rules that conform to existing § 150.4, 

regardless of whether the contract is subject to federal position limits under § 150.2.659 

The Commission believes proposed § 150.5(d) would benefit market integrity in several 

ways. First, a harmonized approach to aggregation across exchanges that list physical 

commodity derivative contracts would prevent confusion that could result from divergent 

standards between federal limits under § 150.2 and exchange-set limits under § 150.5(b). 

As a result, proposed §150.5(d) would provide uniformity, consistency, and reduced 

administrative burdens for traders who are active on multiple trading venues and/or trade 

similar physical contracts, regardless of whether the contracts are subject to § 150.2’s 

federal position limits. Second, a harmonized aggregation policy eliminates the potential 

for DCMs to use excessively permissive aggregation policies as a competitive advantage,

which would impair the effectiveness of the Commission’s aggregation policy and limits 

 658 On the other hand, the Commission has not seen any shifting of liquidity to the swaps markets – or 

general attempts at market manipulation or evasion of federal position limits – with respect to the nine 

legacy core referenced futures contracts, even though swaps currently are not subject to federal or exchange 

position limits.

659 The Commission adopted final aggregation rules in 2016 under existing §150.4, which applies to 

contracts subject to federal limits under § 150.2. See Final Aggregation Rulemaking, 81 FR at 91454. 

Under the Final Aggregation Rulemaking, unless an exemption applies, a person’s positions must be 

aggregated with positions for which the person controls trading or for which the person holds a 10 percent 

or greater ownership interest. The Division of Market Oversight has issued time-limited no-action relief 

from some of the aggregation requirements contained in that rulemaking. See CFTC Letter No. 19-19 (July

31, 2019), available at https://www.cftc.gov/csl/19-19/download. Commission regulation § 150.4(b) sets 

forth several permissible exemptions from aggregation.
381

framework. Third, since, for contracts subject to federal limits, proposed § 150.5(a) 

would require DCMs to set position limits at a level not higher than that set by the 

Commission under proposed § 150.2, differing aggregation standards could effectively

lead to an exchange-set limit that is higher than that set by the Commission. 

Accordingly, harmonizing aggregation standards reinforces the efficacy and intended 

purpose of proposed §§ 150.2 and 150.5 and existing § 150.4 by eliminating DCMs’ 

ability to circumvent the applicable federal aggregation and position limits rules. 

To the extent a DCM currently is not applying the federal aggregation rules in 

existing § 150.4, or similar exchange-based rules, proposed § 150.5(d) could impose 

costs with respect to market participants trading referenced contracts for the proposed 

new 16 commodities that would become subject to federal position limits for the first 

time. Market participants would be required to update their trading and compliance 

systems to ensure they comply with the new aggregation rules.

e. Request for Comment

(51) The Commission requests comment on all aspects of the Commission’s 

cost-benefit discussion of the proposal. 

7. Section 15(a) Factors660

a. Protection of Market Participants and the Public 

A chief purpose of speculative position limits is to preserve the integrity of 

derivatives markets for the benefit of commercial interests, producers, and other end-

 660 The discussion here covers the proposed amendments that the Commission has identified as being 

relevant to the areas set out in section 15(a) of the CEA: (i) Protection of market participants and the 

public; (ii) efficiency, competitiveness, and financial integrity of futures markets; (iii) price discovery; (iv) 

sound risk management practices; and (v) other public interest considerations. For proposed amendments 

that are not specifically addressed, the Commission has not identified any effects.
382

users that use these markets to hedge risk and of consumers that consume the underlying 

commodities. The Commission preliminarily believes that the proposed position limits 

regime would operate to deter excessive speculation and manipulation, such as squeezes 

and corners, which might impair the contract’s price discovery function and liquidity for 

hedgers – and ultimately, would protect the integrity and utility of the commodity 

markets for the benefit of both producers and consumers. 

At this time, the Commission is proposing to include the proposed 25 core 

referenced futures contracts within the proposed federal position limit framework. In 

selecting the proposed 25 core referenced contracts, the Commission, in accordance with 

its necessity analysis, considered the effects that these contracts have on the underlying 

commodity, especially with respect to price discovery; the fact that they require physical 

delivery of the underlying commodity; and, in some cases, the potentially acute economic 

burdens on interstate commerce that could arise from excessive speculation in these 

contracts causing sudden or unreasonable fluctuations or unwarranted changes in the 

price of the commodities underlying these contracts.

661

Of particular importance are the proposed position limits during the spot month 

period because the Commission preliminarily believes that deterring and preventing 

manipulative behaviors, such as corners and squeezes, is more urgent during this period. 

The proposed spot month position limits are designed, among other things, to deter and 

prevent corners and squeezes as well as promote a more orderly liquidation process at 

expiration. By restricting derivatives positions to a proportion of the deliverable supply 

of the commodity, the spot month position limits reduce the possibility that a market 

 661 See supra Section III.F.2. (discussion of the necessity findings as to the 25 core referenced futures 

contacts).
383

participant can use derivatives, including referenced contracts, to affect the price of the 

cash commodity (and vice versa). Limiting a speculative position based on a percentage 

of deliverable supply also restricts a speculative trader’s ability to establish a leveraged 

position in cash-settled derivative contracts, diminishing that trader’s incentive to 

manipulate the cash settlement price. As the Commission has determined in the 

preamble, the Commission has concluded that excessive speculation or manipulation may 

cause sudden or unreasonable fluctuations or unwarranted changes in the price of the 

commodities underlying these contracts.662 In this way, the Commission preliminarily 

believes that the proposed limits would benefit market participants that seek to hedge the 

spot price of a commodity at expiration, and benefit consumers who would be able to 

purchase underlying commodities for which prices are determined by fundamentals of 

supply and demand, rather than influenced by excessive speculation, manipulation, or 

other undue and unnecessary burdens on interstate commerce. 

The Commission preliminarily believes that the proposed Commission and 

exchange-centric processes for granting exemptions from federal limits, including nonenumerated bona fide hedging recognitions, would help ensure the hedging utility of the 

futures market for commercial end-users. First, the proposal to allow exchanges to 

leverage existing processes and their knowledge of their own markets, including 

participant positions and activities, along with their knowledge of the underlying 

commodity cash market, should allow for more timely review of exemption applications 

than if the Commission were to conduct such initial application reviews. This benefits 

the public by allowing producers and end-users of a commodity to more efficiently and 

 662 See supra Section III.F. (discussion of the necessity finding).
384

predictably hedge their price risks, thus controlling costs that might be passed on to the 

public. Second, exchanges may be better-suited than the Commission to leverage their 

knowledge of their own markets, including participant positions and activities, along with 

their knowledge of the underlying commodity cash market, in order to recognize whether 

an applicant qualifies for an exemption and what the level for that exemption should be. 

This benefits market participants and the public by helping assure that exemption levels 

are set in a manner that meets the risk management needs of the applicant without 

negatively impacting the futures and cash market for that commodity. Third, allowing 

for exchange-granted spread exemptions could improve liquidity in all months for a listed 

contract or across commodities, benefitting hedgers by providing tighter bid-ask spreads 

for out-right trades. Furthermore, traders using spreads can arbitrage price discrepancies 

between calendar months within the same commodity contract or price discrepancies 

between commodities, helping ensure that futures prices more accurately reflect the 

underlying market fundamentals for a commodity. Lastly, the Commission would review 

each application for bona fide hedge recognitions or spread exemptions (other than those 

bona fide hedges and spread exemptions that would be self-effectuating under the 

Commission’s proposal), but the proposal would allow the Commission to also leverage 

the exchange’s knowledge and experience of its own markets and market participants 

discussed above.

The Commission also understands that there are costs to market participants and 

the public to setting the levels that are too high or too low. If the levels are set too high, 

there’s greater risk of excessive speculation, which may harm market participants and the 

public. Further, to the extent that the proposed limits are set at such a level that even 
385

without these proposed exemptions, the probability of nearing or breaching such levels 

may be negligible for most market participants, benefits associated with such exemptions 

may be reduced. 

Conversely, if the limits are set too low, transaction costs for market participants 

who are near or above the limit would rise as they transact in other instruments with 

higher transaction costs to obtain their desired level of speculative positions. 

Additionally, limits that are too low could incentivize speculators to leave the market and 

not be available to provide liquidity for hedgers, resulting in “choppy” prices. It is also 

possible for limits that are set too low to harm market efficiency because the views of 

some speculators might not be reflected fully in the price formation process.

In setting the proposed limit levels, the Commission considered these factors in 

order to implement to the maximum extent practicable, as it finds necessary in its 

discretion, to apply the position limits framework articulated in CEA section 4a(a) to set

federal position limits to protect market integrity and price discovery, thereby benefiting 

market participants and the public. 

b. Efficiency, Competitiveness, and Financial Integrity of Futures Markets

Position limits help to prevent market manipulation or excessive speculation that 

may unduly influence prices at the expense of the efficiency and integrity of markets. 

The proposed expansion of the federal position limits regime to 25 core referenced 

futures contracts (e.g., the existing nine legacy agricultural contracts and the 16 proposed 

new contracts) enhances the buffer against excessive speculation historically afforded to 

the nine legacy agricultural contracts exclusively, improving the financial integrity of 

those markets. Moreover, the proposed limits in proposed § 150.2 may promote market 
386

competitiveness by preventing a trader from gaining too much market power in the 

respective markets. 

Also, in the absence of position limits, market participants may be deterred from 

participating in a futures market if they perceive that there is a participant with an 

unusually large speculative position exerting what they believe is unreasonable market 

power. A lack of participation may harm liquidity, and consequently, may harm market 

efficiency. 

On the other hand, traders who find position limits overly constraining may seek 

to trade in substitute instruments—such as futures contracts or swaps that are similar to or 

correlated with (but not otherwise deemed to be a referenced contract), forward contracts, 

or trade options—in order to meet their demand for speculative instruments. These 

traders may also decide to not trade beyond the federal speculative position limit. 

Trading in substitute instruments may be less effective than trading in referenced 

contracts and, thus, may raise the transaction costs for such traders. In these 

circumstances, futures prices might not fully reflect all the speculative demand to hold 

the futures contract, because substitute instruments may not fully influence prices the 

same way that trading directly in the futures contract does. Thus, market efficiency 

might be harmed. 

The Commission preliminarily believes that focusing on the proposed 25 core 

referenced futures contracts, which generally have high levels of open interest and 

trading volume and/or have been subject to existing federal position limits for many 

years, should in general be less disruptive for the derivatives markets that it regulates, 

which in turn may reduce the potential for disruption for the price discovery function of 
387

the underlying commodity markets as compared to including less liquid contracts (of 

course, only to the extent that the Commission would be able to make the requisite 

necessity finding for such contracts).

Finally, the Commission preliminarily believes that the proposal to cease 

recognizing certain risk management positions as bona fide hedges, coupled with the 

proposed increased non-spot month limit levels for the nine legacy agricultural contracts, 

will foster competition among swap dealers by subjecting all market participants, 

including all swap dealers, to the same non-spot month limit rather than to an inconsistent 

patchwork of staff-granted exemptions. Accommodating risk management activity by 

additional entities with higher limit levels may also help lessen the concentration risk 

potentially posed by a few commodity index traders holding exemptions that are not 

available to competing market participants. 

c. Price Discovery

Market manipulation or excessive speculation may result in artificial prices. 

Position limits may help to prevent the price discovery function of the underlying 

commodity markets from being disrupted. Also, in the absence of position limits, market 

participants might elect to trade less as a result of a perception that the market pricing is 

unfair as a consequence of what they perceive is the exercise of too much market power 

by a larger speculator. Reduced liquidity may have a negative impact on price discovery. 

On the other hand, imposing position limits raises the concerns that liquidity and 

price discovery may be diminished, because certain market segments, i.e., speculative 

traders, are restricted. For certain commodities, the Commission proposes to set the 

levels of position limits at increased levels, to avoid harming liquidity that may be 
388

provided by speculators that would establish large positions, while restricting speculators 

from establishing extraordinarily large positions. The Commission further preliminarily 

believes that the bona fide hedging recognition and exemption processes will foster 

liquidity and potentially improve price discovery by making it easier for market 

participants to have their bona fide hedging recognitions and spread exemptions granted.

In addition, position limits serve as a prophylactic measure that reduces market 

volatility due to a participant otherwise engaging in large trades that induce price impacts 

that interrupt price discovery. In particular, spot month position limits make it more 

difficult to mark the close of a futures contract to possibly benefit other contracts that 

settle on the closing futures price. Marking the close harms markets by spoiling 

convergence between futures prices and spot prices at expiration and damaging price 

discovery.

d. Sound Risk Management Practices

Proposed exemptions for bona fide hedges help to ensure that market participants 

with positions that are hedging legitimate commercial needs are recognized as hedgers 

under the Commission’s speculative position limits regime. This promotes sound risk 

management practices. In addition, the Commission has crafted the proposed rules to 

ensure sufficient market liquidity for bona fide hedgers to the maximum extent 

practicable, e.g., through the proposals to: (1) create a bona fide hedging definition that 

is broad enough to accommodate common commercial hedging practices, including 

anticipatory hedging, for a variety of commodity types; (2) maintain the status quo with 

respect to existing bona fide hedge recognitions and spread exemptions that would 

remain self-effectuating and make additional bona fide hedges self-effectuating (i.e., 
389

certain anticipatory hedging); (3) provide additional ability for a streamlined process 

where market participants can make a single submission to an exchange in which the 

exchange and Commission would each review applications for non-enumerated bona fide 

hedge recognitions for purposes of federal and exchange-set limits that are in line with 

commercial hedging practices; and (4) to allow for a conditional spot month limit 

exemption in natural gas.

To the extent that monitoring for position limits requires market participants to 

create internal risk limits and evaluate position size in relation to the market, position 

limits may also provide an incentive for market participants to engage in sound risk 

management practices. Further, sound risk management practices would be promoted by 

the proposal to allow for market participants to measure risk in the manner most suitable 

for their business (i.e., net versus gross hedging practices), rather than having to conform 

their hedging programs to a one-size-fits-all standard that may not be suitable for their 

risk management needs. Finally, the proposal to increase non-spot month limit levels for 

the nine legacy agricultural contracts to levels that reflect observed levels of trading 

activity, based on recent data reviewed by the Commission, should allow swap dealers, 

liquidity providers, market makers, and others who have risk management needs, but who 

are not hedging a physical commercial, to soundly manage their risks. 

e. Other Public Interest

The Commission has not identified any additional public interest considerations 

related to the costs and benefits of this 2020 Proposal.

f. Request for Comment
390

(52) The Commission requests comment on all aspects of the Commission’s 

discussion of the 15(a) factors for this proposal. 

B. Paperwork Reduction Act

1. Overview

Certain provisions of the proposed rule on position limits for derivatives would 

amend or impose new “collection of information” requirements as that term is defined 

under the Paperwork Reduction Act (“PRA”).663 An agency may not conduct or sponsor, 

and a person is not required to respond to, a collection of information unless it displays a 

valid control number from the Office of Management and Budget (“OMB”). The 

proposed rule would modify the following existing collections of information previously 

approved by OMB and for which the Commodity Futures Trading Commission

(“Commission”) has received control numbers: (i) OMB control number 3038-0009 

(Large Trader Reports), which generally covers Commission regulations in parts 15 

through 21; (ii) OMB control number 3038-0013 (Aggregation of Positions), which 

covers Commission regulations in part 150;664 and (iii) OMB control number 3038-0093 

(Provisions Common to Registered Entities), which covers Commission regulations in 

part 40. 

Certain provisions of the proposed rule would impose new collection of 

information requirements under the PRA. As a result, the Commission is proposing to 

revise OMB control numbers 3038-0009, 3038-0013, and 3038-0093 and is submitting 

 663 44 U.S.C. 3501 et seq. 664 Currently, OMB control number 3038-0013 is titled “Aggregation of Positions.” The Commission 

proposes to rename the OMB control number “Position Limits” to better reflect the nature of the 

information collections covered by that OMB control number. 
391

this proposal to OMB for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 

1320.11.

2. Commission Reorganization of OMB Control Numbers 3038-0009 and 3038-0013

The Commission is proposing two non-substantive changes so that all collections 

of information related solely to the Commission’s position limit requirements are 

consolidated under one OMB control number.665 First, the Commission would transfer 

collections of information under part 19 (Reports by Persons Holding Bona Fide Hedge 

Positions and By Merchants and Dealers in Cotton) related to position limit requirements 

from OMB control number 3038-0009 to OMB control number 3038-0013. Second, the 

modified OMB control number 3038-0013 would be renamed as “Position Limits.” This 

renaming change is non-substantive and would allow for all collections of information 

related to the federal position limits requirements, including exemptions from speculative 

position limits and related large trader reporting, to be housed in one collection. 

One collection would make it easier for market participants to know where to find 

the relevant position limits PRA burdens. If the proposed rule is finalized, the remaining 

collections of information under OMB control number 3038–0009 would cover reports 

by various entities under parts 15, 17, and 21666 of the Commission’s regulations, while 

OMB control number 3038–0013 would hold collections of information arising from 

parts 19 and 150.

 665 The Commission notes that certain collections of information under OMB control number 3038-0093 

relate to several Commission regulations in addition to the Commission’s proposed position limits 

framework. As a result, the collections of information discussed herein under this OMB control number 

3038-0093 will not be consolidated under OMB control number 3038-0013. 666 As noted above, OMB control number 3038-0009 generally covers Commission regulations in parts 15 

through 21. However, it does not cover §§ 16.02, 17.01, 18.04, or 18.05, which are under OMB control 

number 3038-0103. Final Rule. 78 FR 69178 at 69200 (Nov. 18, 2013) (transferring §§ 16.02, 17.01, 

18.04, and 18.05 to OMB Control Number 3038-0103).
392

As discussed in section 3 below, this non-substantive reorganization would result 

in: (i) a decreased burden estimate under control number 3038-0009 due to the transfer 

of the collection of information arising from obligations in part 19, and (ii) a 

corresponding increase of the amended part 19 burdens under control number 3038-0013. 

However, as discussed further below, the collection of information and burden hours 

arising from proposed part 19 that would be transferred to OMB control number 3038-

0013 would be less than the existing burden estimate under OMB control number 3038-

0009 since the Commission’s proposal would amend existing part 19 by eliminating 

existing Form 204 and certain parts of Form 304 and the reporting burdens related 

thereto. As a result, market participants would see a net reduction of collections of 

information and burden hours under revised part 19.

3. Collections of Information

The proposed rule would amend existing regulations, and create new regulations, 

concerning speculative position limits. Among other amendments, the Commission’s 

proposed rule would include: (1) new and amended federal spot month limits for the 

proposed 25 physical commodity derivatives; (2) amended federal non-spot limits for the 

nine legacy agricultural commodities contracts currently subject to federal position limits; 

(3) amended rules governing exchange-set limit levels and grants of exemptions 

therefrom; (4) an amended process for requesting certain spread exemptions and nonenumerated bona fide hedge recognitions for purposes of federal position limits directly 

from the Commission; (5) a new exchange-administered process for recognizing nonenumerated bona fide hedge positions from federal limit requirements; and (6) 
393

amendments to part 19 and related provisions that would eliminate certain reporting 

obligations that require traders to submit a Form 204 and Parts I and II of Form 304.

Specifically, this proposal would amend parts 15, 17, 19, 40, and 150 of the 

Commission’s regulations to implement the proposed federal position limits framework. 

The proposal would also transfer an amended version of the “bona fide hedging 

transactions or positions” definition from existing § 1.3 to proposed § 150.1, and remove 

§§ 1.47, 1.48, and 140.97. The Commission’s proposal would revise existing collections 

of information covered by OMB control number 3038-0009 by amending part 19, along 

with conforming changes to part 15, in order to narrow the scope of who is required to 

report under part 19.667 

Furthermore, the proposed rule’s amendments to part 150 would revise existing 

collections of information covered by OMB control number 3038-0013, including new 

reporting and recordkeeping requirements related to the application and request for relief 

from federal position limit requirements submitted to designated contract markets 

(“DCMs”) and swap execution facilities (“SEFs”) (collectively, “exchanges”). Finally, 

the proposed rule would also amend part 40 to incorporate a new reporting obligation into 

the definition of “terms and conditions” in § 40.1(j) and result in a revised existing 

collection of information covered by OMB control number 3038-0093. 

a. OMB Control Number 3038-0009 – Large Trader Reports; Part 19 – Reports by 

Persons Holding Bona Fide Hedge Positions and by Merchants and Dealers in Cotton

 667 As noted above, the Commission would accomplish this by eliminating existing From 204 and Parts I 

and II of Form 304. Additionally, proposed changes to part 17, covered by OMB control number 3038-

0009, would make conforming amendments to remove certain duplicative provisions and associated 

information collections related to aggregation of positions, which are in current § 150.4. These conforming 

changes would not impact the burden estimates of OMB control number 3038-0009.
394

Under OMB control number 3038-0009, the Commission currently estimates that 

the collections of information related to existing part 19, including Form 204 and Form 

304, collectively known as the “Series ‘04” reports, have a combined annual burden 

hours of 1,553 hours. Under existing part 19, market participants that hold bona fide

hedging positions in excess of position limits for the nine legacy agricultural commodity 

contracts currently subject to federal limits must file a monthly report on Form 204 (or 

Parts I and II of Form 304 for cotton). These reports show a snapshot of traders’ cash 

positions on one given day each month, and are used by the Commission to determine 

whether a trader has sufficient cash positions to justify futures and options on futures 

positions above the applicable federal position limits in existing § 150.2. 

The Commission’s proposal would amend part 19 to remove these reporting 

obligations associated with Form 204 and Parts I and II of Form 304. As discussed under 

proposed § 150.9 below, the Commission preliminarily has determined that it may 

eliminate these forms and still receive adequate information to carry out its market and 

financial surveillance programs since its proposed amendments to §§ 150.5 and 150.9 

would also enable the Commission to obtain the necessary information from the 

exchanges. To effect these changes to traders’ reporting obligations, the Commission 

would eliminate (i) existing § 19.00(a)(1), which requires the applicable persons to file a 

Form 204; and (ii) existing § 19.01, which among other things, sets forth the cash-market 

information required to be submitted on the Forms 204 and 304.668 The Commission 

 668 As noted above, the proposed amendments to part 19 affect certain provisions of part 15 and § 17.00. 

Based on the proposed elimination of Form 204 and Parts I and II of Form 304, the Commission proposes

conforming technical changes to remove related reporting provisions from (i) the “reportable position” 

definition in § 15.00(p); (ii) the list of “persons required to report” in § 15.01; and (iii) the list of reporting 

forms in § 15.02. These proposed conforming amendments to part 15 would not impact the existing burden 

estimates.
395

would maintain Part III of Form 304, which requests information on unfixed-price “on 

call” purchases and sales of cotton and which the Commission utilizes to prepare its 

weekly cotton on-call report.669 The Commission would also maintain its existing special 

call authority under part 19.

The supporting statement for the current active information collection request for 

part 19 under OMB control number 3038-0009670 states that in 2014: (i) 135 reportable 

traders filed the Series ’04 reports (i.e., Form 204 and Form 304 in the aggregate), (ii) 

totaling 3,105 Series ‘04 reports, for a total of (iii) 1,553 burden hours.671 However, 

based on more current and recent 2019 submission data, the Commission is revising its 

existing estimates slightly higher for the Series ’04 reports under part 19: 

• Form 204: 50 monthly reports, for an annual total of 600 reports (50 

monthly reports x 12 months = 600 total annual reports) and 300 annual 

burden hours (600 annual Form 204s submitted x 0.5 hours per report = 

300 aggregate annual burden hours for all Form 204s).

• Form 304: 55 weekly reports, for an annual total of 2,860 reports (55 

weekly reports x 52 weeks = 2,860 total annual reports) and 1,430 annual 

burden hours (2,860 annual Form 304s submitted x 0.5 hours per report = 

1,430 aggregate annual burden hours for all Form 304s).

 669 The Commission is proposing a technical change to Part III of Form 304 to require traders to identify 

themselves on the Form 304 using their Public Trader Identification Number, in lieu of the CFTC Code 

Number required on previous versions of the Form 304. However, the Commission preliminarily has 

determined that this would not result in any change to its existing PRA estimates with respect to the 

collections of information related to Part III of Form 304.

670 See ICR Reference No: 201906-3038-008. 671 3,105 Series ’04 submissions x 0.5 hours per submission = 1,553 aggregate burden hours for all

submissions. The Commission notes that it has preliminarily estimated that it takes approximately 20 

minutes to complete a Form 204 or 304. However, in order to err conservatively, the Commission now 

uses a figure of 30 minutes.
396

Accordingly, based on the above revised estimates the Commission would revise 

its estimate of the current collections of information under existing part 19 to reflect that 

approximately 105 reportable traders672 file a total of 3,460 responses annually673

resulting in an aggregate annual burden of 1,730 hours.674,675 The Commission’s 

proposal would reduce the current OMB control number 3038-0009 by these revised 

burden estimates under part 19 as they would be transferred to OMB control number 

3038-0013.

With respect to the overall collections of information that would be transferred to 

OMB control number 3038-0013 based on the Commission’s revised part 19 estimate, 

the Commission estimates that the Commission’s proposal would reduce the collections 

of information in part 19 by 600 reports676 and by 300 annual aggregate burden hours 

since the Commission’s proposal would eliminate Form 204, as discussed above.677 The 

Commission does not expect a change in the number of reportable traders that would be 

required to file Part III of Form 304.678 Thus, the Commission continues to expect 

approximately 55 weekly Form 304 reports, for an annual total of 2,860 reports679 for an 

 672 55 Form 304 reports + 50 Form 205 reports = 105 reportable traders. 673 2,860 Form 304s + 600 Form 204s = 3,460 total annual Series ’04 reports. 674 3,460 Series ’04 reports x 0.5 hours per repot = 1,730 annual aggregate burden hours. 675 These revised estimates result in an increased estimate under existing part 19 of 355 Series ’04 reports 

submitted by traders (3,460 estimated Series ’04 reports – 3,105 submissions from the Commission’s 

previous estimate = an increase of 355 response difference); an increase of 177 aggregate burden hours 

across all respondents (1,730 aggregate burden hours – 1,553 aggregate burden hours from the 

Commission’s previous estimate = an increase of 177 aggregate burden hours); and a decrease of 30 

respondent traders (105 respondents – 135 respondents from the Commission’s previous estimate = a 

decrease of 30 respondents).

676 50 monthly Form 204 reports x 12 months = 600 total annual reports. 677 600 Form 204 reports x 0.5 burden hours per report = 300 aggregate annual burden hours. 678 Since the Commission’s proposal would eliminate Parts I and II of Form 304, proposed Form 304 would 

only refer to existing Part III of that form.

679 55 weekly Form 304 reports x 52 weeks = 2,860 total annual Form 304 reports.
397

aggregate total of 1,430 burden hours, which information collection burdens would be 

transferred to OMB control number 3038-0013.680

In addition, the Commission would maintain its authority to issue special calls for 

information to any person claiming an exemption from speculative federal position limits. 

While the position limits framework will expand to traders in the proposed twenty-five 

commodities (an increase from the existing nine legacy agricultural products), the 

position limit levels themselves will also be higher. The higher position limit levels 

would result in a smaller universe of traders who may exceed the position limits and thus 

be subject to a special call for information on their large position(s). Taking into account 

the higher limits and smaller universe of traders who would likely exceed the position 

limits, the Commission estimates that it is likely to issue a special call for information to 

4 reportable traders. The Commission preliminarily estimates that it would take

approximately 5 hours to respond to a special call. The Commission therefore estimates 

that industry would incur a total of 20 aggregate annual burden hours.681

b. OMB Control Number 3038-0013 – Aggregation of Positions (To be renamed 

“Position Limits”)

i. Introduction; Bona Fide Hedge Recognition and Exemption Process

The Commission is proposing to amend the existing process for market 

participants to apply to obtain an exemption or recognition of a bona fide hedge position. 

Currently, the “bona fide hedging transaction or position” definition appears in existing § 

1.3. Under existing §§ 1.47 and 1.48, a market participant must apply directly to the 

 680 2,860 Form 304 reports x 0.5 burden hours per report = 1,430 aggregate annual burden hours. 681 4 possible reportable traders x 5 hours each = 20 aggregate annual burden hours.
398

Commission to obtain a bona fide hedge recognition in accordance with § 1.3 for federal 

position limit purposes. 

Proposed §§ 150.3 and 150.9 would establish an amended process for obtaining a 

bona fide hedge exemption or recognition, which includes: (i) a new bona fide hedging 

definition in § 150.1, (ii) a new process administered by the exchanges in proposed §

150.9 for recognizing non-enumerated bona fide hedging positions for federal limit 

requirements, and (iii) an amended process to apply directly to the Commission for 

certain spread exemptions or for recognition of non-enumerated bona fide hedging 

positions. Proposed § 150.3 also would include new exemption types not explicitly listed 

in existing § 150.3. 

The Commission has previously estimated the combined annual burden hours for 

submitting applications under both §§ 1.47 and 1.48 to be 42 hours.682 The 

Commission’s proposal would maintain the existing process where market participants 

may apply directly to the Commission, although the Commission expects market 

participants to predominantly rely on the exchange-administered process to obtain 

recognition of their non-enumerated bona fide hedging positions for purposes of federal 

position limit requirements. Enumerated bona fide hedge positions would remain selfeffectuating, which means that market participants would not need to apply to the 

Commission for purposes of federal position limits, although market participants would 

still need to apply to an exchange for recognition of bona fide hedge positions for 

purposes of exchange-set position limits. The Commission forms this expectation on the 

 682 The supporting statement for a previous information collection request, ICR Reference No: 201808-

3038-003, for OMB control number 3038-0013, estimated that seven respondents would file the §§ 1.47 

and 1.48 submissions, and that each respondent would file two submissions for a total of 14 annual 

submissions, requiring 3 hours per response, for a total of 42 burden hours for all respondents.
399

fact that all the contracts that will now be subject to federal position limits are already 

subject to exchange-set limits. Thus, most market participants are likely to already be 

familiar with an exchange-administered process, as is being proposed under § 150.9.

Familiarity with an exchange-administered process will result in operational efficiencies, 

such as completing one application for non-enumerated bona fide hedge requests for both 

federal and exchange-set limits and thus a reduced burden on market participants. 

As previously discussed, the proposal would move the “bona fide hedge 

transaction or position” definition to proposed § 150.1, and amend the definition to, 

among other things, remove the distinction between different types of enumerated bona 

fide hedge positions so that anticipatory enumerated bona fide hedges would be selfeffectuating like other non-anticipatory enumerated bona fide hedges. The proposal 

would maintain the distinction between enumerated and non-enumerated bona fide 

hedges, and market participants would be required to apply for recognition of nonenumerated bona fide hedge positions either directly from the Commission pursuant to 

proposed § 150.3 or indirectly through an exchange-centric process under § 150.9.683 

The Commission does not preliminarily believe that this amendment will have any PRA 

impacts since it is maintaining the status quo in which most enumerated bona fide hedges 

 683 Currently, in order to determine whether a futures, an option on a futures, or a swap position qualifies as 

a bona fide hedge, either (1) the position in question must qualify as an enumerated bona fide hedge, as 

defined in existing § 1.3, or (2) the trader must file a statement with the Commission, pursuant to existing § 

1.47 (for non-enumerated bona fide hedges) and/or existing § 1.48 (for enumerated anticipatory bona fide 

hedges). The revised definition would be accompanied by an expanded list of enumerated bona fide hedges

that would appear in acceptable practices, rather than in the definition. The Commission additionally 

proposes to include an additional enumerated bona fide hedge for anticipatory merchandizing, which would 

be self-effectuating like the other enumerated hedges. Under the existing framework, anticipatory 

merchandizing is considered to be a non-enumerated bona fide hedge. The Commission preliminarily does 

not expect this change to have any PRA impacts.
400

are self-effectuating while requiring traders to apply to the Commission for recognition of 

non-enumerated bona fide hedge positions.

ii. § 150.2 Speculative Limits

Under proposed § 150.2(f), upon request from the Commission, DCMs listing a 

core referenced futures contract would be required to supply to the Commission 

deliverable supply estimates for each core referenced futures contract listed at that DCM. 

DCMs would only be required to submit estimates if requested to do so by the 

Commission on an as-needed basis. When submitting estimates, DCMs would be 

required to provide a description of the methodology used to derive the estimate, as well 

as any statistical data supporting the estimate. Appendix C to part 38 sets forth guidance 

regarding estimating deliverable supply. 

Submitting deliverable supply estimates upon demand from the Commission for 

contracts subject to federal limits would be a new reporting obligation for DCMs. The 

Commission estimates that six DCMs would be required to submit initial deliverable 

supply estimates. The Commission estimates that it would request each DCM that lists a 

core referenced futures contract to file one initial report for each core reference futures 

contract it lists on its market. Such requests from the Commission would result in one 

initial submission for each of the proposed twenty-five core referenced futures

contracts.684 The Commission further estimates that it will take 20 hours to complete and 

file each report for a total annual burden of 500 hours for all respondents.685 

 684 In 2018, the DCMs submitted deliverable supply estimates for all the commodities that would be subject 

to federal position limits. Thus, the Commission expects that the exchanges would be able to leverage these 

recent estimates to minimize the burden of the initial submission under the Commission’s proposal. 685 20 initial hours x 25 core referenced futures contracts = 500 one-time, aggregate burden hours. While 

there is an initial annual submission, the Commission does not expect to require the exchanges to resubmit 

the supply estimates on an annual basis. 
401

Accordingly, the proposed changes to § 150.2(f) would result in an initial, one-time 

increase to the current burden estimates of OMB control number 3038-0013 by an 

increase of 25 submissions across six respondent DCMs for the initial number of 

submissions for the twenty-five core referenced futures contracts and an initial, one-time 

burden of 500 hours.

iii. § 150.3 Exemptions from Federal Position Limit Requirements

Market participants may currently apply directly to the Commission for 

recognition of certain bona fide hedges under the process set forth in existing §§ 1.47 and 

1.48. There is no existing process that is codified under the Commission’s regulations for 

spread exemptions or other exemptions included under proposed § 150.3.

Proposed § 150.3 would specify the circumstances in which a trader could exceed 

federal position limits.686 With respect to non-enumerated bona fide hedge recognitions 

and spread exemptions not identified in the proposed “spread transaction” definition in 

proposed § 150.1, proposed § 150.3(b) would provide a process for market participants to 

request such bona fide hedge recognitions or spread exemptions directly from the 

Commission (as previously noted, both enumerated bona fide hedges and spread 

exemptions identified in the proposed “spread transaction” definition would be selfeffectuating and would not require a market participant to submit a request). Proposed § 

150.3(b), (d), and (e) set forth exemption-related reporting and recordkeeping 

requirements that impact the current burden estimates in OMB control number 3038-

 686 Proposed § 150.3(b) would include (1) recognitions of bona fide hedges under proposed § 150.3(b); (2) 

spread exemptions under proposed § 150.3(b); (3) financial distress positions a person could request from 

the Commission under § 140.99; and (4) exemptions for certain natural gas positions held during the spot 

month. Proposed § 150.3(b) would also exempt pre-enactment and transition period swaps. The 

enumerated bona fide hedge recognitions and spread exemptions identified in the proposed “spread 

transaction” definition in proposed § 150.1 would be self-effectuating.
402

0013.687 The proposed collection of information is necessary for the Commission to 

determine whether to recognize a trader’s position as a bona fide hedge exempted from 

position limit requirements. 

Proposed § 150.3(b) establishes application filing requirements and recordkeeping 

and reporting requirements that are similar to existing requirements for bona fide hedge 

recognitions under existing §§ 1.47 and 1.48. Although these requirements in proposed § 

150.3 would be new for market participants seeking spread exemptions (which are 

currently self-effectuating), the proposed filing, recordkeeping, and reporting 

requirements in § 150.3(b) are otherwise familiar to market participants that have 

requested certain bona fide hedging recognitions from the Commission under existing 

regulations. 

The Commission estimates that very few or no traders would request recognition 

of a non-enumerated bona fide hedge, and those traders that do would likely prefer the 

exchange-administered process in proposed § 150.9 (discussed further below) rather than 

apply directly to the Commission under proposed § 150.3(b). Similarly, the Commission 

estimates that very few or no traders would submit a request for a spread exemption since 

the Commission preliminarily has determined that the most common spread exemptions 

are included in the proposed “spread transaction” definition and therefore would be selfeffectuating and would not need approval for purposes of federal position limits. The 

Commission expects that traders are likely to rely on the § 150.3(b) process when dealing 

 687 Proposed § 150.3(f) clarifies the implications on entities required to aggregate accounts under § 150.4, 

and § 150.3(g) provides for delegation of certain authorities to the Director of the Division of Market 

Oversight. The proposed changes to §§ 150.3(f) and 150.3(g) do not impact the current estimates for these 

OMB control numbers. Also, the proposal reminds persons of the relief provisions in § 140.99, covered by 

OMB control number 3038-0049, which does not impact the burden estimates.
403

with a spread transaction or non-enumerated bona fide hedge position that poses a novel 

or complex question under the Commission’s rules. Particularly when the exchanges 

have not recognized that type of practice as a non-enumerated bona fide hedge 

previously, the Commission expects market participants to seek more regulatory clarity 

under proposed § 150.3(b). In the event a trader submits such request under proposed § 

150.3, the Commission estimates that traders would file one request per year for a total of 

one annual request for all respondents. The Commission further estimates that in such

situation, it would take 20 hours to complete and file each report, for a total of 20 

aggregate annual burden hours for all traders. 

Proposed § 150.3(d) establishes recordkeeping requirements for persons who 

claim any exemptions or relief under proposed § 150.3. Proposed § 150.3(d) should help 

to ensure that if any person claims any exemption permitted under proposed § 150.3 such 

exemption holder can demonstrate compliance with the applicable requirements as 

follows: 

First, under proposed § 150.3(d)(1), any person claiming an exemption would be 

required to keep and maintain complete books and records concerning certain details.688 

Proposed § 150.3(d)(1) would establish recordkeeping requirements for any person 

relying on an exemption granted directly from the Commission. The Commission 

estimates that very few or no traders would claim an exemption directly from the 

Commission. In the event a trader requests an exemption, the Commission estimates that 

the trader would create one record per exemption per year for a total of one annual record 

 688 The requirement would include all details of related cash, forward, futures, options, and swap positions 

and transactions, including anticipated requirements, production and royalties, contracts for services, cash 

commodity products and by-products, cross-commodity hedges, and a record of bona fide hedging swap 

counterparties.
404

for all respondents. The Commission further estimates that it will take one hour to 

comply with the recordkeeping requirement of § 150.3(d)(1) for a total of one aggregate 

annual burden hour for all traders. 

Second, under proposed § 150.3(d)(2), a pass-through swap counterparty, as 

defined by proposed § 150.1, that relies on a representation received from a bona fide 

hedging swap counterparty that the swap qualifies in good faith as a “bona fide hedging 

position or transaction,” as defined under proposed § 150.1, would be required to: (i) 

maintain any written representation for at least two years following the expiration of the 

swap; and (ii) furnish the representation to the Commission upon demand. Proposed § 

150.3(d)(2) would create a new recordkeeping obligation for certain persons relying on 

the proposed pass-through swap representations, and the Commission estimates that 425 

traders would be requested to maintain the required records. The Commission estimates 

that each trader would maintain one record per year for a total of 425 aggregate annual 

records for all respondents. The Commission further estimates that it will take one hour 

to comply with the recordkeeping requirement of § 150.3(d) for a total of one annual 

burden hour for each trader and 425 aggregate annual burden hours for all traders. 

The Commission proposes to move existing § 150.3(b), which currently allows 

the Commission or certain Commission staff to make special calls to demand certain 

information regarding persons claiming exemptions, to proposed § 150.3(e), with some 

modifications to include swaps.689 Together with the recordkeeping provision of 

proposed § 150.3(d), proposed § 150.3(e) should enable the Commission to monitor the 

use of exemptions from speculative position limits and help to ensure that any person 

 689 Proposed § 150.3(e) would refer to commodity derivative contracts, whereas current § 150.3(b) refers to 

futures and options. The proposed change would result in the inclusion of swaps.
405

who claims any exemption permitted by proposed § 150.3 can demonstrate compliance 

with the applicable requirements. The Commission’s existing collection under existing § 

150.3 estimated that the Commission issues two special calls per year for information 

related to exemptions, and that each response to a special call for information takes 3 

burden hours to complete. This includes two burden hours to fulfill reporting 

requirements and 1 burden hour related to recordkeeping for an aggregate total for all 

respondents of six annual burden hours, broken down into four aggregate annual burden 

hours for reporting and two aggregate annual burden hours for recordkeeping.690

The Commission estimates that proposed § 150.3(e) would impose information 

collection burdens related to special calls by the Commission on approximately 18 

additional respondents, for an estimated 20 special calls per year.691 The Commission 

estimates that these 20 market participants would provide one submission per year to 

respond to the special call for a total of 20 annual submissions for all respondents. The 

Commission estimates it would take a market participant approximately 10 hours to 

complete a response to a special call. Therefore, the Commission estimates responses to 

special calls for information will take an aggregate total of 200 burden hours for all 

traders.692 The Commission notes that it is also maintaining its special call authority for 

reporting requirements under proposed part 19 discussed above. 

 690 The special call authority under part 19 and the proposed special call authority discussed under § 150.3 

would be similar in nature; however, part 19 would apply to special calls regarding bona fide hedge 

recognitions and related underlying cash market positions while the special calls under proposed § 150.3 

would apply to the other exemptions under proposed §150.3.

691 2 respondents subject to special calls under existing § 150.3 + 18 additional respondents under proposed 

§ 150.3 = 20 total respondents. The Commission estimates, at least during the initial implementation 

period, that it is likely to issue more special calls for information to monitor compliance with position 

limits, particularly in the commodity markets that will now be subject to federal position limits for the first 

time.

692 20 special calls x 10 burden hours per call = 200 total burden hours. 
406

iv. § 150.5 Exchange Set Limits and Exemptions

Amendments to § 150.5 would refine the process, and establish non-exclusive 

methodologies, by which exchanges may set exchange-level limits and grant exemptions 

therefrom, including separate methodologies for setting limit levels for contracts subject 

to federal limits (§ 150.5(a)), physical commodity derivatives not subject to federal limits 

(§ 150.5(b)), and excluded commodity contracts (§ 150.5(c)).693 In compliance with part 

40 of the Commission’s regulations, exchanges currently have policies and procedures in 

place to address exemptions from exchange set limits through their rulebooks. If the 

proposal is adopted, the Commission expects that the exchanges would accordingly 

update their rulebooks, both to conform to proposed new requirements and to incorporate 

the additional contracts that will be subject to federal position limits into their process for 

setting exchange-level limits and exemptions therefrom. 

The collections of information related to amended rulebooks under part 40 are 

covered by OMB control number 3038-0093. Separately, the collections of information 

related to applications for exemptions from exchange-set limits are covered by OMB 

control number 3038-0013. 

Under proposed § 150.5(a)(1), for any contract subject to a federal limit, DCMs 

and, ultimately, SEFs, would be required to establish exchange-set limits for such 

contracts. Under proposed § 150.5(a)(2), exchanges that wish to grant exemptions from 

exchange-set limits on commodity derivative contracts subject to federal limits would 

have to require traders to file an application to show a request for a bona fide hedge 

 693 Proposed § 150.5 addresses exchange-set position limits and exemptions therefrom, whereas proposed § 

150.9 addresses federal limits and an exchange-administered process for purposes of federal limits where 

an applicant may apply through an exchange to the Commission for recognition of an non-enumerated bona 

fide hedge for purposes of federal position limits. 
407

recognition or exemption conforms to a type that may be granted under proposed § 

150.3(a)(1)-(4). Exchanges would have to require that such exchange-set limit 

exemption applications be filed in advance of the date such position would be in excess 

of the limits, but exchanges would be given the discretion to adopt rules allowing traders 

to file applications within five business days after a trader took on such position. 

Proposed § 150.5(a)(2) would also provide that exchanges must require that the trader 

reapply for the exemption at least annually. Proposed § 150.5(a)(4) would require each 

exchange to provide a monthly report showing the disposition of any exemption 

application, including the recognition of any position as a bona fide hedge, the exemption 

of any spread transaction, the renewal, revocation, or modification of a previously 

granted recognition or exemption, or the rejection of any application.694

These proposed collections of information related to exemptions from exchangeset limits are necessary to ensure that such exchange-set limits comply with Commission 

regulations, including that exchange limits are no higher than the applicable federal level; 

to establish minimum standards needed for exchanges to administer the exchange’s 

position limits framework; and to enable the Commission to oversee an exchange’s 

 694 Additionally, each report should include the following details: (A) The date of disposition; (B) The 

effective date of the disposition; (C) The expiration date of any recognition or exemption; (D) Any unique 

identifier(s) the designated contract market or swap execution facility may assign to track the application, 

or the specific type of recognition or exemption; (E) If the application is for an enumerated bona fide 

hedging transaction or position, the name of the enumerated bona fide hedging transaction or position listed 

in Appendix A to this part; (F) If the application is for a spread transaction listed in the spread transaction 

definition in § 150.1, the name of the spread transaction as it is listed in § 150.1; (G) The identity of the 

applicant; (H) The listed commodity derivative contract or position(s) to which the application pertains; (I) 

The underlying cash commodity; (J) The maximum size of the commodity derivative position that is 

recognized by the designated contract market or swap execution facility as a bona fide hedging transaction 

or position, specified by contract month and by the type of limit as spot month, single month, or allmonths-combined, as applicable; (K) Any size limitations or conditions established for a spread exemption 

or other exemption; and (L) For bona fide hedging transactions or positions, a concise summary of the 

applicant’s activity in the cash markets and swaps markets for the commodity underlying the commodity 

derivative position for which the application was submitted. 
408

exemptions process to ensure it does not undermine the federal position limits 

framework. In addition, the Commission would use the information to confirm that 

exemptions are granted and renewed in accordance with the types of exemptions that may 

be granted under proposed § 150.3(a)(1)-(4).

The Commission estimates under proposed § 150.5(a) that 425 traders would 

submit applications to claim spread exemptions and bona fide hedge recognitions from 

exchange-set position limits on commodity derivatives contracts subject to federal limits 

set forth in § 150.2. The Commission estimates that each trader on average would submit 

one application to an exchange each year for a total of 425 applications for all 

respondents. The Commission further estimates that it will take 2 hours to complete and 

file each application for a total of 2 annual burden hours for each trader and 850 

aggregate burden hours for all traders.695 

The Commission estimates under proposed § 150.5(a)(4) that six exchanges 

would provide monthly reports for a total of 72 monthly reports for all exchanges.696 The 

Commission further estimates that it will take 5 hours to complete and file each monthly 

report for a total of 60 annual burden hours for each exchange and 360 annual burden 

hours for all exchanges.697

Proposed § 150.5(b) would require exchanges, for physical commodity 

derivatives that are not subject to federal limits to set limits during the spot month and to 

 695 To increase efficiency and reduce duplicative efforts, the proposed rule would permit an exchange to

have a single process in place that would allow market participants to request non-enumerated bona fide 

hedge recognitions from both federal and exchange-set position limits at the same time. The Commission 

believes that under a single process, the estimated burdens under proposed § 150.5(a) discussed in this 

section for exemptions from exchange-set limits will include the burdens under the federal limit exemption 

process for non-enumerated bona fide hedges under proposed § 150.9 discussed below. 696 6 exchanges x 12 months = 72 total monthly reports per year. 697 5 hours per monthly report x 12 months = 60 hours per year for each exchange. 60 annual hours x 6 

exchanges = 360 aggregate annual hours for all exchanges. 
409

set either limits or accountability outside of the spot month. Under proposed § 

150.5(b)(3), where multiple exchanges list contracts that are substantially the same, 

including physically-settled contracts that have the same underlying commodity and 

delivery location, or cash-settled contracts that are directly or indirectly linked to a 

physically-settled contract, the exchange must either adopt “comparable” limits for such 

contracts, or demonstrate to the Commission how the non-comparable levels comply with 

the standards set forth in proposed § 150.5(b)(1) and (2). Such a determination also must 

address how the levels are necessary and appropriate to reduce the potential threat of 

market manipulation or price distortion of the contract’s or the underlying commodity’s 

price or index. Proposed § 150.5(b)(3) is intended to help ensure that position limits 

established on one exchange would not jeopardize market integrity or otherwise harm 

other markets. This provision may also improve the efficiency with which exchanges 

adopt limits on newly-listed contracts that compete with an existing contract listed on 

another exchange and help reduce the amount of time and effort needed for Commission 

staff to assess the new limit levels. Further, proposed § 150.5(b)(3) would be consistent 

with the Commission’s proposal to generally apply equivalent federal limits to linked 

contracts, including linked contracts listed on multiple exchanges.

The Commission estimates that under proposed § 150.5(b)(3), six exchanges 

would make submissions to demonstrate to the Commission how the non-comparable 

levels comply with the standards set forth in proposed § 150.5(b)(1) and (2). The 

Commission estimates that each exchange on average would make 3 submissions each 

year for a total of 18 submissions for all exchanges. The Commission further estimates 
410

that it will take 10 hours to complete and file each submission for a total of 18 annual 

burden hours for each exchange and 180 burden hours for all exchanges.698

Proposed § 150.5(b)(4) would permit exchanges to grant exemptions from any 

exchange limit established for physical commodity contracts not subject to federal limits. 

To grant such exemptions, exchanges must require traders to file an application to show 

whether the requested exemption from exchange-set limits would be in accord with sound 

commercial practices in the relevant commodity derivative market and/or that may be 

established and liquidated in an orderly fashion in that market. This proposed collection 

of information is necessary to confirm that any exemptions granted from exchange limits 

on physical commodity contracts not subject to federal limits do not pose a threat of 

market manipulation or congestion, and maintains orderly execution of transactions. The 

Commission estimates that 200 traders would submit one application each year and that 

each application would take approximately two hours to complete, for an aggregate total 

of 400 burden hours per year for all traders. 

Proposed § 150.5(e) reflects that, consistent with the definition of “rule” in 

existing § 40.1, any exchange action establishing or modifying position limits or 

exemptions therefrom, or position accountability, in any case pursuant to proposed § 

150.5(a), (b), (c), or Appendix F to part 150, would qualify as a “rule” and must be 

submitted to the Commission pursuant to part 40 of the Commission’s regulations. 

Proposed § 150.5(e) further provides that exchanges would be required to review 

regularly any position limit levels established under proposed § 150.5 to ensure the level 

continues to comply with the requirements of those sections. The Commission estimates 

 698 18 estimated annual submissions x 10 burden hours per submission = 180 aggregate annual burden 

hours.
411

under proposed § 150.5(e) that six exchanges would submit revised rulebooks to satisfy 

their compliance obligations under part 40. The Commission estimates that each 

exchange on average would make 1 initial revision of its rulebook to reflect the new 

position limit framework for a total of 6 applications for all exchanges. The Commission 

further estimates that it will take 30 hours to revise a rulebook for a total of 30 annual 

burden hours for each exchange and 180 burden hours for all exchanges.699

This proposed collection of information is necessary to ensure that the exchanges’ 

rulebooks reflect the most up to date rules and requirements in compliance with the 

proposed position limits framework. The information would be used to confirm that 

exchanges are complying with their requirements to regularly review any position limit 

levels established under proposed § 150.5.

v. § 150.9 Exchange Process for Bona Fide Hedge Recognitions from Federal Limits 

Proposed § 150.9 would establish a new streamlined process in which a trader 

could apply through an exchange to request a non-enumerated bona fide hedging 

recognition from federal position limits. As part of the process, proposed § 150.9 would 

create certain recordkeeping and reporting obligations on the market participant and the 

exchange, including: (i) an application to request non-enumerated bona fide hedge 

recognitions, which the trader would submit to the exchange and which the exchange 

would subsequently provide to the Commission if the exchange approves the application 

for purposes of exchange-set limits; (ii) a notification to the Commission and the 

applicant of the exchange’s determination for purposes of exchange limits regarding the 

trader’s request for recognition of a bona fide hedge or spread exemption; (iii) and a 

 699 6 initial applications x 30 burden hours = 180 initial aggregate burden hours.
412

requirement to maintain full, complete and systematic records for Commission review of 

the exchange’s decisions. The Commission believes that the exchanges that will elect to 

process applications for non-enumerated bona fide hedging exemptions under proposed § 

150.9(a) already have similar processes for the review and disposition of such exemption 

applications in place through their rulebooks for purposes of exchange-set position limits. 

Accordingly, the estimated burden on an exchange to comply with the proposed 

rule will be less burdensome because the exchanges may leverage their existing policies 

and procedures to comply with the proposed rule. The Commission estimates that six 

exchanges would elect to process applications for non-enumerated bona fide hedge 

recognitions that would satisfy the federal position limit requirements under proposed § 

150.9, and would be required to file amended rulebooks pursuant to part 40 of the 

Commission’s regulations. The Commission bases its estimate on the number of 

exchanges that have submitted similar rules to the Commission in the past.

Proposed § 150.9(c) would require a trader to submit an application with 

sufficient information to enable the exchange to determine whether it should recognize a 

position as a bona fide hedge for purposes of federal position limits. Each applicant 

would need to reapply for its non-enumerated bona fide hedge recognition at least on an 

annual basis by updating its original application. The Commission expects that traders 

would benefit from the exchange-administered framework established under proposed 

§150.9 because traders may submit one application to obtain a non-enumerated bona fide 

hedge recognition for purposes of both exchange-set and federal limits, as opposed to 
413

submitting separate applications to the Commission for federal position limit purposes 

and separate applications to an exchange for exchange limit purposes.700 

Accordingly, the estimated burden for traders requesting non-enumerated bona 

fide hedge recognitions from exchange-set limits under § 150.5(a) would subsume the 

burden estimates in connection with proposed § 150.9 for requesting non-enumerated 

bona fide hedge recognition’s from federal limits since the Commission preliminarily 

believes exchanges would combine the two processes (i.e., any trader who applies 

through an exchange under proposed § 150.9 for a non-enumerated bona fide hedge for 

federal position limits purposes also would be deemed to be applying at the same time 

under proposed § 150.5(a) for exchange position limits purposes and thus it would not be 

appropriate to distinguish between the two for PRA purposes). Accordingly, the 

Commission preliminarily anticipates that 6 exchanges each would receive only one 

application for a non-enumerated bona fide hedge recognition under proposed § 150.9 for 

a total of six aggregate annual applications for all exchanges; however, as noted above, 

this amount is included in the Commission’s estimate in connection with proposed § 

150.5(a).701 Specifically, as discussed above in connection with proposed § 150.5(a), the 

Commission estimates under proposed §§ 150.5(a) and 150.9(a) that 425 traders would 

 700 The Commission believes the collections of information set forth above are necessary for the exchange 

to process requests for recognition of non-enumerated bona fide hedges for purposes of both exchange-set 

position limits and federal position limits. The information would be used by the exchange to determine, 

and the Commission to review and verify, whether the facts and circumstances demonstrate it is appropriate 

to recognize a position as a non-enumerated bona fide hedging transaction or position. 701 As discussed above, the process and estimated burdens under proposed § 150.9 would not apply to § 

150.5(b) because proposed § 150.5(b) applies to those physical commodity contracts that are not subject to 

federal limits (as opposed to proposed § 150.5(a), which applies to those contracts subject to federal limits). 

As a result, a trader that would use the process established under § 150.5(b) for exchange-set limits would 

not need to apply under proposed § 150.9 since the traders would not need a bona fide hedge recognition or 

an exemption from federal position limits. 
414

submit applications to claim exemptions and/or bona fide hedge recognitions for 

contracts subject to federal position limits as set forth in § 150.2.

702 

Proposed § 150.9(d) would require exchanges to keep full, complete, and 

systematic records, including all pertinent data and memoranda, of all activities relating 

to the processing of such applications and the disposition thereof. In addition, as 

provided for in proposed § 150.9(g), the Commission may, in its discretion, at any time, 

review the designated contract market’s records retained pursuant to proposed § 150.9(d). 

The proposed recordkeeping requirement is necessary for the Commission to review the 

exchanges’ processes, retention of records, and compliance with requirements established 

and implemented under this section.

Proposed § 150.9(d) would create a new recordkeeping obligation consistent with 

the standards in existing § 1.31.703 The Commission estimates that six exchanges would 

each create one record in connection with proposed § 150.9 each year for a total of six 

 702 As discussed in connection with proposed § 150.5(a) above, the Commission estimates that each trader

on average would make one application each year for a total of 425 applications across all exchanges. The 

Commission further estimates that, for proposed §§ 150.5(a) and 150.9(a), taken together, it will take two 

hours to complete and file each application for a total of two annual burden hours for each trader and 850

aggregate annual burden hours for all traders. (425 annual applications x 2 burden hours per application = 

850 aggregate annual burden hours). The Commission preliminarily anticipates that compared to proposed 

§150.5(a), fewer traders will apply under proposed § 150.9 since proposed §150.9 applies only to nonenumerated bona fide hedge recognitions for federal purposes. In comparison, while proposed § 150.5 

would encompass these same applications for non-enumerated bona fide hedge recognitions (but for the 

purpose of exchange-set limits), proposed § 150.5(a) also would include enumerated bona fide hedge 

applications along with spread exemption requests. The Commission’s estimate of 850 aggregate annual 

burden hours encompasses all such requests from all traders. However, for the sake of clarity, the 

Commission preliminarily anticipates that 6 exchanges each would receive one application per year for a 

non-enumerated bona fide hedge under proposed § 150.9 (for a total of six applications across all 

exchanges); as noted, this burden is included in the Commission’s estimate of 425 annual applications in 

connection with its estimate under proposed §150.5(a). 

703 Consistent with existing § 1.31, the Commission expects that these records would be readily available 

during the first two years of the required five year recordkeeping period for paper records, and readily 

accessible for the entire five-year recordkeeping period for electronic records. 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.
415

annual records for all respondents. The Commission further estimates that it will take

five hours to comply with the proposed recordkeeping requirement of §150.9(d) for a 

total of five annual burden hours for each exchange and 30 aggregate annual burden 

hours across all exchanges. 

Proposed § 150.9(f) would allow the Commission to inspect such books and 

records.704 In the event the Commission exercises its authority to inspect such books and 

records, it estimates that the Commission would make an inspection to two exchanges per 

year and each exchange would incur four hours to make its books and records available 

to the Commission for review for a total of 8 aggregate annual burden hours for the two 

estimated respondent exchanges.705

Under proposed § 150.9(e), an exchange would need to provide an applicant and 

the Commission with notice of any approved application of an exchange’s determination 

to recognize bona fide hedges and grant spread exemptions with respect to its own 

position limits for purposes of exceeding the federal position limits. The proposed 

notification requirement is necessary to inform the Commission of the details of the type 

of bona fide hedge recognitions or spread exemptions being granted. The information 

would be used to keep the Commission informed as to the manner in which an exchange 

administers its application procedures, and the exchange’s rationale for permitting large 

positions.

 704 Proposed § 150.9(g)(1) provides the Commission’s authority to, at its discretion, and at any time, review 

the exchange’s processes, retention of records, and compliance with requirements established and 

implemented under this section. Under proposed § 150.9(g)(2), if the Commission determines additional 

information is required to conduct its review, pursuant to proposed § 150.9(g)(1), then it would notify the 

exchange and the relevant market participant of any issues identified and provide them with ten business 

days to provide supplemental information. 

705 2 exchanges per year subject to a Commission inspection x 4 hours per inspection request = 8 aggregate 

annual burden hours for all exchanges.
416

The Commission estimates that under proposed § 150.9(e), 6 exchanges would 

submit notifications of approved application of an exchange’s determination to recognize 

non-enumerated bona fide hedges for purposes of exceeding the federal position limits. 

The Commission estimates that each exchange on average would make 2 notifications:

one notification each to the applicant trader and to the Commission each year for a total 

of 12 notices for all exchanges. The Commission further estimates that it will take 0.5 

hours to complete and file each notification for a total of one annual burden hour for each 

exchange and six burden hours for all exchanges.706

c. OMB Control Number 3038-0093 – Provisions Common to Registered Entities

1. § 150.9(a)

Under proposed § 150.9(a), exchanges that would like for their market 

participants to be able to exceed federal position limits based on a non-enumerated bona 

fide hedge recognition granted by the exchange with respect to its own limits must have 

rules, adopted pursuant to the rule approval process in § 40.5 of the Commission’s 

regulations, establishing processes consistent with the provisions of proposed § 150.9. 

The proposed collection of information is necessary to capture the new non-enumerated 

bona fide hedge process in the exchanges’ rulebook, which is subject to Commission 

approval. The information would be used to assess the process put in place by each 

exchange submitting amended rulebooks. 

The Commission has previously estimated the combined annual burden hours for 

both §§ 40.5 and 40.6 to be 7,000 hours.707 If the proposed rule is adopted, the 

 706 12 notices for all exchanges x 0.5 hours per notice = six (6) total burden hours across all exchanges. 707 The supporting statement for the current active information collection request, ICR Reference No: 

201503-3038-002, for OMB control number 3038-0013, estimated that seven respondents would file the §§ 
417

Commission estimates that six exchanges would make one initial § 40.5 rule filings per 

year for a total of six one-time initial submissions for all exchanges. The Commission 

further estimates that the exchanges would employ a combination of in-house and outside 

legal and compliance counsel to update existing rulebooks and it will take 25 hours to 

complete and file each rule for a total 25 one-time burden hours for each exchange and 

150 one-time burden hours for all exchanges. 

2. Request for Comments on Collection

The Commission invites the public and other Federal agencies to comment on any 

aspect of the proposed information collection requirements discussed above. Pursuant to 

44 U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to (i) 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; (ii) evaluate the accuracy of the Commission’s estimate of the burden of the 

proposed collections of information; (iii) determine whether there are ways to enhance 

the quality, utility, and clarity of the information proposed to be collected; and (iv) 

minimize the burden of the proposed collections of information on those who are to 

respond, including through the use of appropriate automated collection techniques or 

other forms of information technology.

Those desiring to submit comments on the proposed information collection 

requirements should submit them directly to the Office of Information and Regulatory 

Affairs, OMB, by fax at (202) 395-6566, or by email at OIRAsubmissions@omb.eop.gov. 

Please provide the Commission with a copy of submitted comments so that all comments 

 

1.47 and 1.48 reports, and that each respondent would file two reports for a total of 14 annual responses, 

requiring three hour per response, for a total of 42 burden hours for all respondents. 
418

can be summarized and addressed in the final rule preamble. Refer to the ADDRESSES

section of this notice of proposed rulemaking 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 http://www.RegInfo.gov. OMB is required 

to make a decision concerning the collection of information between 30 and 60 days after 

publication of this document in the Federal Register. Therefore, a comment is best 

assured of having its full effect if OMB receives it within 30 days of publication.

C. 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.708

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-and-comment provisions of the Administrative Procedure Act, 5 U.S.C. 553(b).709

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.710

 708 44 U.S.C. 601 et seq.

709 5 U.S.C. 601(2), 603–05. 710 See Policy Statement and Establishment of Definitions of ‘‘Small Entities’’ for Purposes of the

Regulatory Flexibility Act, 47 FR 18618–19, Apr. 30, 1982 (DCMs, FCMs, and large traders) (‘‘RFA

Small Entities Definitions’’); Opting Out of Segregation, 66 FR 20740–43, Apr. 25, 2001 (eligible contract 

participants); Position Limits for Futures and Swaps; Final Rule and Interim Final Rule, 76 FR 71626, 

71680, Nov. 18, 2011 (clearing members); Core Principles and Other Requirements for Swap Execution 

Facilities, 78 FR 33476, 33548, Jun. 4, 2013 (SEFs); A New Regulatory Framework for Clearing 
419

Further, while the requirements under this rulemaking may impact nonfinancial

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 Proposal,

711 the 2016 

Supplemental Proposal,

712 and the 2016 Reproposal.713

D. Antitrust Considerations

Section 15(b) of the CEA requires the Commission to take into consideration the 

public interest to be protected by the antitrust laws and endeavor to take the least 

anticompetitive means of achieving the objectives of the Act, and the policies and 

purposes of the Act, in issuing any order or adopting any Commission rule or regulation 

(including any exemption under section 4(c) or 4c(b)), or in requiring or approving any 

bylaw, rule, or regulation of a contract market or registered futures association 

established pursuant to section 17 of the Act.714 

The Commission believes that the public interest to be protected by the antitrust 

laws is generally to protect competition. The Commission requests comment on whether 

the proposed rule implicates any other specific public interest to be protected by the 

antitrust laws.

 

Organizations, 66 FR 45604, 45609, Aug. 29, 2001 (DCOs); Registration of Swap Dealers and Major Swap 

Participants, 77 FR 2613, Jan. 19, 2012, (swap dealers and major swap participants);and Special Calls, 72 

FR 50209, Aug. 31, 2007 (foreign brokers).

711 See 2013 Proposal, 78 FR at 75784. 712 See 2016 Supplemental Proposal, 81 FR at 38499. 713 See 2016 Reproposal, 81 FR at 96894. 714 7 U.S.C. 19(b).
420

The Commission has considered the proposed rules to determine whether they are 

anticompetitive and has preliminarily determined that the proposed rules could, in some 

circumstances, be anticompetitive because position limits at low levels are, to some 

degree, inherently anticompetitive. A more established DCM that already lists, or is first 

to list, a core referenced futures contract (an “incumbent DCM”) has a competitive 

advantage over smaller DCMs seeking to expand or future entrant DCMs (collectively 

“entrant DCMs”), even in the absence of position limits, because “liquidity attracts 

liquidity.” That is, a market participant seeking to execute a single transaction or, for that 

matter, establish a large position would, other things being equal, gravitate toward a more 

established facility that successfully lists a contract with relatively consistent volume and 

transparent pricing—where there is likely to be someone willing to take the other side of 

a trade. This is especially true if the market participant is already clearing other products 

with the incumbent DCM. This would tend to protect the incumbent DCM’s contract and 

reinforce the advantage of an incumbent DCM, which has to do less to keep and attract 

customers and should be able to keep more of the profits from trading volume. That is, 

the status of incumbency by itself may to some extent create a barrier to entry for an 

entrant DCM where the presence of a counterparty at the desired price is less assured. 

Position limits at low levels, especially in the non-spot month, may exacerbate the 

situation. If a market participant establishes a futures position on an incumbent DCM 

and then reaches the federal limit level on the incumbent DCM, it becomes even less 

likely that the market participant will migrate to an entrant DCM, because the federal 

limit would still apply and prevents the market participant from increasing its aggregate 

futures position where ever located. Higher volume may permit an incumbent DCM to 
421

charge lower transaction fees than an entrant DCM; the price concession that a market 

participant might have to absorb to establish a large position may be lower on an 

incumbent DCM than an entrant DCM. Both of these factors would inform a DCM’s 

decision regarding where to set the levels for its own exchange-set limits. Moreover, the 

incumbent DCM can use other tools to defend its advantage such as the implementation 

of new technologies, the use of various fees/charges and the application of exemptions to 

federal limits. The Commission preliminarily believes that the relatively high limit levels 

that the Commission proposes today do not at this time establish a barrier to entry or 

competitive restraint likely to facilitate anticompetitive effects in any relevant antitrust 

market for contract trading. This is because the limit levels that the Commission 

proposes today are based on recent data regarding deliverable supply and open interest. 

However, if the size of the relevant markets continues on an upward trend and the 

Commission does not adjust federal limit levels commensurately, limit levels that become 

stale over time could facilitate anticompetitive effects. The Commission requests 

comment on whether and in what circumstances adopting the proposed rules could be 

anticompetitive.

The Commission has also preliminarily determined that the proposed rules serve 

the regulatory purpose of the Act “to deter and prevent price manipulation or any other 

disruptions to market integrity.”715 The Commission proposes to implement the rules 

pursuant to section 4a(a) of the CEA, which articulates additional policies and 

purposes.716

 715 Section 3(b) of the CEA, 7 U.S.C. 5(b). 716 7 U.S.C. 7a(a) (burdens on interstate commerce; trading or position limits). 
422

The Commission has identified the following less anticompetitive means: 

requiring derivatives clearing organizations (“DCOs”) to impose initial margin 

surcharges for position limits. This would be less anticompetitive because initial margin 

surcharges would still allow a large speculator to accumulate a futures position on 

another DCM if the speculator so desired while protecting against the price impact from a 

large price change against the speculator who would otherwise be forced to offload a 

position due to position limits. The Commission requests comment on whether there are 

other less anticompetitive means of achieving the relevant purposes of the Act. The 

Commission is not required to follow the least anticompetitive course of action. 

The Commission has examined whether requiring DCOs to impose initial margin 

surcharges for position limits in lieu of imposing position limits is feasible and has 

preliminarily determined that is not because it could be inconsistent with a relevant 

provision of the CEA and would require the Commission to revise its current regulations 

in part 39 to be more prescriptive and less principles-based. Thus, the Commission has 

preliminarily determined not to adopt this less anticompetitive means. Under section 

5b(c)(2)(A)(ii) of the CEA717 and the corresponding provision of the Commission’s 

current regulations, a registered DCO has “reasonable discretion in establishing the 

manner by which it complies with each core principle.”718 Moreover, the Commission’s 

regulations already require DCOs to “establish initial margin requirements that are 

commensurate with the risks of each product and portfolio, including any unusual 

characteristics of, or risks associated with, particular products or portfolios . . . ,”719

 717 7 U.S.C. 7a-1(c)(2)(A)(ii). 718 17 CFR 39.10(b).

719 17 CFR 39.13(g)(2)(i).
423

which would include large positions. DCOs are also already required to use models that 

take into account concentration, minimum liquidation time, and other risk factors 

inherent in large positions, and the Commission reviews these models.720 Finally, 

Congress has required that the Commission establish position limits “as the Commission 

finds are necessary.”

721 The Commission requests comment on its feasibility analysis.

List of Subjects

17 CFR Part 1

Agricultural commodity, Agriculture, Brokers, Committees, Commodity futures, 

Conflicts of interest, Consumer protection, Definitions, Designated contract markets, 

Directors, Major swap participants, Minimum financial requirements for intermediaries, 

Reporting and recordkeeping requirements, Swap dealers, Swaps.

17 CFR Part 15

Brokers, Commodity futures, Reporting and recordkeeping requirements, Swaps.

17 CFR Part 17

Brokers, Commodity futures, Reporting and recordkeeping requirements, Swaps.

17 CFR Part 19

Commodity futures, Cottons, Grains, Reporting and recordkeeping requirements, 

Swaps.

17 CFR Part 40

Commodity futures, Reporting and recordkeeping requirements, Procedural rules.

17 CFR Part 140

 720 See generally 17 CFR 39.13. 721 See supra Section III.F. (discussion of the necessity finding).
424

Authority delegations (Government agencies), Conflict of interests, Organizations 

and functions (Government agencies).

17 CFR Part 150

Bona fide hedging, Commodity futures, Cotton, Grains, Position limits, 

Referenced Contracts, Swaps.

17 CFR Part 151

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 1 – GENERAL REGULATIONS UNDER THE COMMODITY 

EXCHANGE ACT

1. The authority citation for part 1 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 

6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 

23, and 24 (2012).

§ 1.3 [Amended]

2. In § 1.3, remove the definition of the term “bona fide hedging transactions and 

positions for excluded commodities.”

§ 1.47 [Removed and Reserved]

3. Remove and reserve § 1.47.

§ 1.48 [Removed and Reserved]

4. Remove and reserve § 1.48.
425

PART 15 – REPORTS – GENERAL PROVISIONS

5. The authority citation for part 15 continues to read as follows:

Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a, 9, 12a, 19, and 21, 

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. In § 15.00, revise paragraph (p)(1) to read as follows:

§ 15.00 Definitions of terms used in parts 15 to 19, and 21 of this chapter.

* * * * *

(p) * * *

(1) For reports specified in parts 17 and 18 and in § 19.00(a) and (b) of this 

chapter, any open contract position that at the close of the market on any business day 

equals or exceeds the quantity specified in § 15.03 in either:

(i) Any one futures of any commodity on any one reporting market, excluding 

futures contracts against which notices of delivery have been stopped by a trader or 

issued by the clearing organization of the reporting market; or

(ii) Long or short put or call options that exercise into the same future of any 

commodity, or other long or short put or call commodity options that have identical 

expirations and exercise into the same commodity, on any one reporting market.

* * * * *

7. In § 15.01, revise paragraph (d) to read as follows:

§ 15.01 Persons required to report.

* * * * *

(d) Persons, as specified in part 19 of this chapter, who:
426

(1) Are merchants or dealers of cotton holding or controlling positions for future 

delivery in cotton that equal or exceed the amount set forth in § 15.03; or 

(2) Are persons who have received a special call from the Commission or its 

designee under § 19.00(b) of this chapter.

* * * * *

8. Revise § 15.02 to read as follows:

§ 15.02 Reporting forms.

Forms on which to report may be obtained from any office of the Commission or 

via https://www.cftc.gov. Listed below are the forms to be used for the filing of reports.

To determine who shall file these forms, refer to the Commission rule listed in the 

column opposite the form number.

Form 

No.

Title Rule

40 Statement of Reporting Trader 18.04

71 Identification of Omnibus Accounts and Sub-accounts 17.01

101 Positions of Special Accounts 17.00

102 Identification of Special Accounts, Volume Threshold Accounts, 

and Consolidated Accounts

17.01

304 Statement of Cash Positions for Unfixed-Price Cotton “On Call” 19.00

(Approved by the Office of Management and Budget under control numbers 3038-0007, 

3038-0009, 3038-0013, and 3038-0103.)

PART 17 – REPORTS BY REPORTING MARKETS, FUTURES COMMISSION 

MERCHANTS, CLEARING MEMBERS, AND FOREIGN BROKERS

9. The authority citation for part 17 continues to read as follows:

Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i, 6t, 7, 7a, and 12a.
427

10. In § 17.00, revise paragraph (b) introductory text to read as follows:

§ 17.00 Information to be furnished by futures commission merchants, clearing 

members and foreign brokers.

* * * * *

(b) Interest in or control of several accounts. Except as otherwise instructed by 

the Commission or its designee and as specifically provided in § 150.4 of this chapter, if 

any person holds or has a financial interest in or controls more than one account, all such 

accounts shall be considered by the futures commission merchant, clearing member, or 

foreign broker as a single account for the purpose of determining special account status 

and for reporting purposes.

* * * * *

11. In § 17.03, add paragraph (i) to read as follows:

§ 17.03 Delegation of authority to the Director of the Office of Data and Technology 

or the Director of the Division of Market Oversight.

* * * * *

(i) Pursuant to § 17.00(b), and as specifically provided in § 150.4 of this chapter, 

the authority shall be designated to the Director of the Office of Data and Technology to 

instruct a futures commission merchant, clearing member, or foreign broker to consider 

otherwise than as a single account for the purpose of determining special account status 

and for reporting purposes all accounts one person holds or controls, or in which the 

person has a financial interest.
428

12. Revise part 19 to read as follows:

PART 19 – REPORTS BY PERSONS HOLDING REPORTABLE POSITIONS IN 

EXCESS OF POSITION LIMITS, AND BY MERCHANTS AND DEALERS IN 

COTTON

Sec.

19.00 Who shall furnish information.

19.01 [Reserved]

19.02 Reports pertaining to cotton on call purchases and sales.

19.03 Delegation of authority to the Director of the Division of Market Oversight and 

the Director of the Division of Enforcement.

19.04 – 19.10 [Reserved]

Appendix A to Part 19 – Form 304

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

§ 19.00 Who shall furnish information.

(a) Persons filing cotton on call reports. Merchants and dealers of cotton holding 

or controlling positions for future delivery in cotton that are reportable pursuant to 

§ 15.00(p)(1)(i) of this chapter shall file CFTC Form 304.

(b) Persons responding to a special call. All persons: (i) exceeding speculative 

position limits under § 150.2 of this chapter; or (ii) holding or controlling positions for 

future delivery that are reportable pursuant to § 15.00(p)(1) of this chapter and who have 

received a special call from the Commission or its designee shall file any pertinent 

information as instructed in the special call. Filings in response to a special call shall be 

made within one business day of receipt of the special call unless otherwise specified in 

the call. Such filing shall be transmitted using the format, coding structure, and 

electronic data submission procedures approved in writing by the Commission. 

§ 19.01 [Reserved]
429

§ 19.02 Reports pertaining to cotton on call purchases and sales.

(a) Information required. Persons required to file CFTC Form 304 reports under 

§ 19.00(a) shall file CFTC Form 304 reports showing the quantity of call cotton bought 

or sold on which the price has not been fixed, together with the respective futures on 

which the purchase or sale is based. As used herein, call cotton refers to spot cotton 

bought or sold, or contracted for purchase or sale at a price to be fixed later based upon a 

specified future.

(b) Time and place of filing reports. Each CFTC Form 304 report shall be made 

weekly, dated as of the close of business on Friday, and filed not later than 9 a.m. Eastern 

Time on the third business day following that Friday using the format, coding structure, 

and electronic data transmission procedures approved in writing by the Commission.

§ 19.03 Delegation of authority to the Director of the Division of Enforcement.

(a) The Commission hereby delegates, until it orders otherwise, to the Director of 

the Division of Enforcement, or such other employee or employees as the Director may 

designate from time to time, the authority in § 19.00(b) to issue special calls.

(b) The Commission hereby delegates, until it orders otherwise, to the Director of 

the Division of Enforcement, or such other employee or employees as the Director may 

designate from time to time, the authority in § 19.00(b) to provide instructions or to 

determine the format, coding structure, and electronic data transmission procedures for 

submitting data records and any other information required under this part.

(c) The Director of the Division of Enforcement may submit to the Commission 

for its consideration any matter which has been delegated in this section.
430

(d) Nothing in this section prohibits the Commission, at its election, from 

exercising the authority delegated in this section.

§§ 19.04 – 19.10 [Reserved]

Appendix A to Part 19 – Form 304
431

CFTC FORM 304

Statement of Cash Positions for Unfixed-Price 

Cotton “On Call”

NOTICE: Failure to file a report required by the Commodity Exchange Act (“CEA” or the 

“Act”)1 and the regulations thereunder,2 or the filing of a report with the Commodity Futures 

Trading Commission (“CFTC” or “Commission”) that includes a false, misleading, or fraudulent 

statement or omits material facts that are required to be reported therein or are necessary to make 

the report not misleading, may (a) constitute a violation of section 6(c)(2) of the Act (7 U.S.C. 9), 

section 9(a)(3) of the Act (7 U.S.C. 13(a)(3)), and/or section 1001 of Title 18, Crimes and 

Criminal Procedure (18 U.S.C. 1001) and (b) result in punishment by fine or imprisonment, or 

both.

PRIVACY ACT NOTICE

The Commission’s authority for soliciting this information is granted in sections 4i and 8 of the 

CEA and related regulations (see, e.g., 17 CFR 19.02). The information solicited from entities 

and individuals engaged in activities covered by the CEA is required to be provided to the CFTC, 

and failure to comply may result in the imposition of criminal or administrative sanctions (see,

e.g., 7 U.S.C. 9 and 13a-1, and/or 18 U.S.C. 1001). The information requested is used by the 

Commission to prepare its cotton on-call report. The requested information may be used by the 

Commission in the conduct of investigations and litigation and, in limited circumstances, may be 

made public in accordance with provisions of the CEA and other applicable laws. It may also be 

disclosed to other government agencies and to contract markets to meet responsibilities assigned 

to them by law. The information will be maintained in, and any additional disclosures will be 

made in accordance with, the CFTC System of Records Notices, available on www.cftc.gov.

 1 7 U.S.C. 1, et seq. 2 Unless otherwise noted, the rules and regulations referenced in this notice are found in chapter I of title 17 

of the Code of Federal Regulations; 17 CFR chapter I.
432

BACKGROUND & INSTRUCTIONS

Applicable Regulations:

• 17 CFR 19.00(a) specifies who shall file Form 304. 

• 17 CFR 19.02(a) specifies the information required on Form 304. 

• 17 CFR 19.02(b) specifies the frequency (weekly), the report date (close of business on 

Friday), and the time (9 a.m. Eastern Time on the third business day following that 

Friday) and manner, for filing the Form 304. 

Please follow the instructions below to generate and submit the required filing. Relevant 

regulations are cited in parentheses () for reference. Unless the context requires otherwise, the 

terms used herein shall have the same meaning as ascribed in parts 15 to 21 of the Commission’s 

regulations. 

Complete Form 304 as follows:

The trader identification fields should be completed by all filers. This Form 304 requires 

traders to identify themselves using their Public Trader Identification Number, in lieu of the 

CFTC Code Number required on previous versions of the Form 304. This number is provided to 

traders who have previously filed Forms 40 or 102 with the Commission. Traders may contact the 

Commission to obtain this number if it is unknown. If a trader has a National Futures Association 

Identification Number (“NFA ID”) and/or a Legal Entity Identifier (“LEI”), the trader should also 

identify itself using those numbers. Form 304 requires traders to identify the name of the 

reporting trader or firm and the contact information (including full name, address, phone number, 

and email address) for a natural person the Commission may contact regarding the submitted 

Form 304.

Merchants and dealers of cotton shall report on Form 304. Report in hundreds of 500-lb. 

bales unfixed-price cotton “on-call” pursuant to § 19.02(a) of the Commission’s regulations. 

Include under “Call Purchases” stocks on hand for which price has not yet been fixed. For each 

listed stock, report the delivery month, delivery year, quantity of call purchases, and quantity of 

call sales. 

The signature/authorization page shall be completed by all filers. This page shall include the 

name and position of the natural person filing Form 304 as well as the name of the reporting 

trader represented by that person. The trader certifying this Form 304 on the 

signature/authorization page should note that filing a report that includes a false, misleading, or 

fraudulent statement or omits material facts that are required to be reported therein or are 

necessary to make the report not misleading, may (a) constitute a violation of section 6(c)(2) of 

the Act (7 U.S.C. 9), section 9(a)(3) of the Act (7 U.S.C. 13(a)(3)), and/or section 1001 of Title 

18, Crimes and Criminal Procedure (18 U.S.C. 1001) and (b) result in punishment by fine or 

imprisonment, or both.
433

Submitting Form 304: Once completed, please submit this form to the Commission pursuant to 

the instructions on www.cftc.gov or as otherwise directed by Commission staff. If submission 

attempts fail, the reporting trader shall contact the Commission at techsupport@cftc.gov for 

further technical support.

Please be advised that pursuant to 5 CFR 1320.5(b)(2)(i), you are not required to respond to this 

collection of information unless it displays a currently valid OMB control number.

.
434

Public Trader ID No. [provided by CFTC] OMB No. 3038-0013

COMMODITY FUTURES TRADING COMMISSION

FORM 304

STATEMENT OF CASH POSITIONS FOR UNFIXED-PRICE 

COTTON “ON-CALL”

Identifying Information

Identification Codes:

NFA ID Legal Entity Identifier (LEI)

Name of Reporting Trader or Firm:

Name of Person to Contact Regarding This Form:

First Name Middle 

Name Last Name Suffix

Contact Information:

Address Phone 

Number Email Address

NOTICE: Failure to file a report required by the Commodity Exchange Act (“CEA” or the “Act”) and the regulations thereunder, or the filing of a report with the Commodity Futures Trading Commission (“CFTC” or 

“Commission”) that includes a false, misleading or fraudulent statement or omits material facts that are required to be reported therein or are necessary to make the report not misleading, may (a) constitute a violation of 

section 6(c)(2) of the Act (7 U.S.C. 9), section 9(a)(3) of the Act (7 U.S.C. 13(a)(3)), and/or section 1001 of Title 18, Crimes and Criminal Procedure (18 U.S.C. 1001) and (b) result in punishment by fine or imprisonment, or 

both. Please be advised that pursuant to 5 CFR 1320.5(b)(2)(i), you are not required to respond to this collection of information unless it displays a currently valid OMB control number.

Unfixed-price Cotton “on-call” pursuant to § 19.02(a); include under “Call Purchases” stocks on hand for which price has not yet been fixed. Report 

in hundreds of bales (500-lb. bales).

Delivery Month Delivery Year Call Purchases

(’00 bales)

Call Sales

(’00 bales)

CFTC Form 304 (XX-XX)

Previous Editions Obsolete
435

Please sign/authenticate the Form 304 prior to submitting.

Signature/ Electronic Authentication:

 By checking this box and submitting this form (or by clicking “submit,” “send,” or any other analogous transmission command if 

transmitting electronically), I certify that I am duly authorized by the reporting trader identified below to provide the information 

and representations submitted on this Form 304, and that to the best of my knowledge the information and representations made

herein are true and correct. 

Reporting Trader Authorized Representative (Name and Position):

____________________ (Name)

____________________ (Position)

Submitted on behalf of:

____________________ (Reporting Trader Name)

Date of Submission: _____________________

CFTC Form 304 (XX-XX)

Previous Editions Obsolete
436

Form 304, Example – July 2017 Call purchases of 200 bales and sales of 1,800 bales; October Call purchases of 6,600 bales 

and sales of 8,000 bales.

Unfixed-price Cotton “on-call” pursuant to § 19.02(a); include under “Call Purchases” stocks on hand for which price has not yet been 

fixed. Report in hundreds of bales (500-lb. bales).

Delivery Month Delivery Year Call Purchases

(’00 bales)

Call Sales

(’00 bales)

July 2017 2 18

October 2017 66 80
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PART 40 – PROVISIONS COMMON TO REGISTERED ENTITIES

13. The authority citation for part 40 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 7a, 8 and 12, as amended by Titles VII and VIII 

of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Pub. L. 111-

203, 124 Stat. 1376 (2010). 

14. In § 40.1, revise paragraphs (j)(1)(vii) and (j)(2)(vii) to read as follows:

§ 40.1 Definitions.

* * * * *

(j) * * *

(1) * * *

(vii) Speculative position limits, position accountability standards, and position 

reporting requirements, including an indication as to whether the contract meets the 

definition of a referenced contract as defined in § 150.1 of this chapter, and, if so, the 

name of the core referenced futures contract on which the referenced contract is based.

* * * * *

(j) * * *

(2) * * *

(vii) Speculative position limits, position accountability standards, and position 

reporting requirements, including an indication as to whether the contract meets the 

definition of economically equivalent swap as defined in § 150.1 of this chapter, and, if 

so, the name of the referenced contract to which the swap is economically equivalent.

* * * * *
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PART 140 – ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE 

COMMISSION

15. The authority citation for part 140 continues to read as follows:

Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and 16(b).

§ 140.97 [Removed and Reserved]

16. Remove and reserve § 140.97.

PART 150 – LIMITS ON POSITIONS

17. 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, and 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).

18. Revise § 150.1 to read as follows:

§ 150.1 Definitions.

As used in this part—

Bona fide hedging transactions or positions means a position in commodity 

derivative contracts in a physical commodity, where:

(1) Such position:

(i) 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;

(ii) Is economically appropriate to the reduction of price risks in the conduct and 

management of a commercial enterprise; and

(iii) Arises from the potential change in the value of—
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(A) Assets which a person owns, produces, manufactures, processes, or 

merchandises or anticipates owning, producing, manufacturing, processing, or 

merchandising;

(B) Liabilities which a person owes or anticipates incurring; or

(C) Services that a person provides or purchases, or anticipates providing or 

purchasing; or

(2) Such position qualifies as:

(i) Pass-through swap and pass-through swap offset pair. Paired positions of a 

pass-through swap and a pass-through swap offset, where: 

(A) The pass-through swap is a swap position entered into by one person for 

which the swap would qualify as a bona fide hedging transaction or position pursuant to 

paragraph (1) of this definition (the bona fide hedging swap counterparty) that is opposite 

another person (the pass-through swap counterparty); and 

(B) The pass-through swap offset is a futures, option on a futures, or swap

position entered into by the pass-through swap counterparty in the same physical 

commodity as the pass-through swap, and which reduces the pass-through swap 

counterparty’s price risks attendant to that pass-through swap; and provided that the passthrough swap counterparty is able to demonstrate upon request that the pass-through 

swap qualifies as a bona fide hedging transaction or position pursuant to paragraph (1) of 

this definition; or

(ii) Offsets of a bona fide hedger’s qualifying swap position. A futures, option on 

a futures, or swap position entered into by a bona fide hedging swap counterparty that 

reduces price risks attendant to a previously-entered-into swap position that qualified as a 
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bona fide hedging transaction or position at the time it was entered into for that 

counterparty pursuant to paragraph (1) of this definition.

Commodity derivative contract means any futures, option on a futures, or swap

contract in a commodity (other than a security futures product as defined in section 

1a(45) of the Act).

Core referenced futures contract means a futures contract that is listed in 

§ 150.2(d).

Economically equivalent swap means, with respect to a particular referenced 

contract, any swap that has identical material contractual specifications, terms, and 

conditions to such referenced contract. 

(1) Other than as provided in paragraph (2) of this definition, for the purpose of 

determining whether a swap is an economically equivalent swap with respect to a 

particular referenced contract, the swap shall not be deemed to lack identical material 

contractual specifications, terms, and conditions due to different lot size specifications or 

notional amounts, delivery dates diverging by less than one calendar day, or different 

post-trade risk management arrangements.

(2) With respect to any natural gas referenced contract, for the purpose of 

determining whether a swap is an economically equivalent swap to such referenced 

contract, the swap shall not be deemed to lack identical material contractual 

specifications, terms, and conditions due to different lot size specifications or notional 

amounts, delivery dates diverging by less than two calendar days, or different post-trade 

risk management arrangements.
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(3) With respect to any referenced contract or class of referenced contracts, the 

Commission may make a determination that any swap or class of swaps satisfies, or does 

not satisfy, this economically equivalent swap definition. 

Eligible affiliate means an entity with respect to which another person:

(1) Directly or indirectly holds either:

(i) A majority of the equity securities of such entity, or

(ii) The right to receive upon dissolution of, or the contribution of, a majority of 

the capital of such entity;

(2) Reports its financial statements on a consolidated basis under Generally 

Accepted Accounting Principles or International Financial Reporting Standards, and such 

consolidated financial statements include the financial results of such entity; and

(3) Is required to aggregate the positions of such entity under § 150.4 and does not

claim an exemption from aggregation for such entity.

Eligible entity1

means a commodity pool operator; the operator of a trading 

vehicle which is excluded, or which itself has qualified for exclusion from the definition 

of the term “pool” or “commodity pool operator,” respectively, under § 4.5 of this 

chapter; the limited partner, limited member or shareholder in a commodity pool the 

operator of which is exempt from registration under § 4.13 of this chapter; a commodity 

trading advisor; a bank or trust company; a savings association; an insurance company; or 

the separately organized affiliates of any of the above entities:

 1 The definition of the term eligible entity was amended by the Commission in a final rule published on 

December 16, 2016 (81 FR at 91454, 91489). Aside from proposing to remove the lettering from each of 

the defined terms and to display them in alphabetical order, the definition of the term eligible entity would 

not be further amended by this proposal and is included solely to maintain the continuity of this definitions 

section.
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(1) Which authorizes an independent account controller independently to control 

all trading decisions with respect to the eligible entity’s client positions and accounts that 

the independent account controller holds directly or indirectly, or on the eligible entity’s 

behalf, but without the eligible entity’s day-to-day direction; and

(2) Which maintains:

(i) Only such minimum control over the independent account controller as is 

consistent with its fiduciary responsibilities to the managed positions and accounts, and 

necessary to fulfill its duty to supervise diligently the trading done on its behalf; or

(ii) If a limited partner, limited member or shareholder of a commodity pool the 

operator of which is exempt from registration under § 4.13 of this chapter, only such 

limited control as is consistent with its status.

Entity means a “person” as defined in section 1a of the Act.

Excluded commodity means an “excluded commodity” as defined in section 1a of 

the Act.

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, 

provided however, if a participant’s position exceeds speculative position limits as a 

result of an option assignment, that participant is allowed one business day to liquidate 

the excess position without being considered in violation of the limits;
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(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.

Independent account controller2means a person:

(1) Who specifically is authorized by an eligible entity, as defined in this section, 

independently to control trading decisions on behalf of, but without the day-to-day 

direction of, the eligible entity;

(2) Over whose trading the eligible entity maintains only such minimum control 

as is consistent with its fiduciary responsibilities for managed positions and accounts to 

fulfill its duty to supervise diligently the trading done on its behalf or as is consistent with 

such other legal rights or obligations which may be incumbent upon the eligible entity to 

fulfill;

(3) Who trades independently of the eligible entity and of any other independent 

account controller trading for the eligible entity;

(4) Who has no knowledge of trading decisions by any other independent account 

controller; and

(5) Who is:

(i) Registered as a futures commission merchant, an introducing broker, a 

commodity trading advisor, or an associated person of any such registrant, or

 2 The definition of the term independent account controller was amended by the Commission in a final rule 

published on December 16, 2016 (81 FR at 91454, 91489). This term would not be further amended by 

this proposal and is included solely to maintain the continuity of this definitions section.
444

(ii) A general partner, managing member or manager of a commodity pool the 

operator of which is excluded from registration under § 4.5(a)(4) of this chapter or § 4.13 

of this chapter, provided that such general partner, managing member or manager 

complies with the requirements of § 150.4(c).

Long position means, on a futures-equivalent basis, a long call option, a short put 

option, a long underlying futures contract, or a swap position that is equivalent to a long 

futures contract.

Physical commodity means any agricultural commodity as that term is defined in 

§ 1.3 of this chapter or any exempt commodity as that term is defined in section 1a of the 

Act.

Position accountability means any bylaw, rule, regulation, or resolution that is 

submitted to the Commission pursuant to part 40 of this chapter in lieu of, or along with, 

a speculative position limit, and that requires a trader whose position exceeds the 

accountability level to consent to: (1) provide information about its position to the 

designated contract market or swap execution facility; and (2) halt increasing further its 

position or reduce its position in an orderly manner, in each case as requested by the 

designated contract market or swap execution facility. 

Pre-enactment swap means any swap entered into prior to enactment of the DoddFrank Act of 2010 (July 21, 2010), the terms of which have not expired as of the date of 

enactment of that Act.

Pre-existing position means any position in a commodity derivative contract 

acquired in good faith prior to the effective date of any bylaw, rule, regulation, or 
445

resolution that specifies a speculative position limit level or a subsequent change to that 

level.

Referenced contract means:

(1) A core referenced futures contract listed in § 150.2(d) or, on a futuresequivalent basis with respect to a particular core referenced futures contract, a futures 

contract or options on a futures contract, including a spread, that is either:

(i) Directly or indirectly linked, including being partially or fully settled on, or 

priced at a fixed differential to, the price of that particular core referenced futures 

contract; or

(ii) Directly or indirectly linked, including being partially or fully settled on, or 

priced at a fixed differential to, the price of the same commodity underlying that 

particular core referenced futures contract for delivery at the same location or locations as 

specified in that particular core referenced futures contract; or

(2) On a futures-equivalent basis, an economically equivalent swap.

(3) The definition of referenced contract does not include a location basis 

contract, a commodity index contract, any guarantee of a swap, or a trade option that 

meets the requirements of § 32.3 of this chapter.

Short position means, on a futures-equivalent basis, a short call option, a long put 

option, a short underlying futures contract, or a swap position that is equivalent to a short 

futures contract.

Speculative position limit means the maximum position, either net long or net 

short, in a commodity derivative contract that may be held or controlled by one person, 

absent an exemption, whether such limits are adopted for combined positions in all 
446

commodity derivative contracts in a particular commodity, including the spot month 

future and all single month futures (the spot month and all single month futures, 

cumulatively, “all-months-combined”), positions in a single month of commodity 

derivative contracts in a particular commodity other than the spot month future (“single 

month”), or positions in the spot month of commodity derivative contacts in a particular 

commodity. Such a limit may be established under federal regulations or rules of a 

designated contract market or swap execution facility. For referenced contracts other 

than core referenced futures contracts, single month means the same period as that of the 

relevant core referenced futures contract.

Spot month means:

(1) For physical-delivery core referenced futures contracts, the period of time 

beginning at the earlier of the close of business on the trading day preceding the first day 

on which delivery notices can be issued by the clearing organization of a contract market, 

or the close of business on the trading day preceding the third-to-last trading day, until 

the contract expires, except as follows:

(i) For ICE Futures U.S. Sugar No. 11 (SB) core referenced futures contract, the 

spot month means the period of time beginning at the opening of trading on the second 

business day following the expiration of the regular option contract traded on the expiring 

futures contract until the contract expires;

(ii) For ICE Futures U.S. Sugar No. 16 (SF) core referenced futures contract, the 

spot month means the period of time beginning on the third-to-last trading day of the 

contract month until the contract expires;
447

(iii) For Chicago Mercantile Exchange Live Cattle (LC) core referenced futures 

contract, the spot month means the period of time beginning at the close of trading on the 

fifth business day of the contract month until the contract expires;

(2) For referenced contracts other than core referenced futures contracts, the spot 

month means the same period as that of the relevant core referenced futures contract. 

Spread transaction means either a calendar spread, intercommodity spread, 

quality differential spread, processing spread, product or by-product differential spread, 

or futures-option spread.

Swap means “swap” as that term is defined in section 1a of the Act and as further 

defined in § 1.3 of this chapter.

Swap dealer means “swap dealer” as that term is defined in section 1a of the Act 

and as further defined in § 1.3 of this chapter.

Transition period swap means a swap entered into during the period commencing 

after the enactment of the Dodd-Frank Act of 2010 (July 21, 2010), and ending 60 days 

after the publication in the Federal Register of final amendments to this part 

implementing section 737 of the Dodd-Frank Act of 2010.

19. Revise § 150.2 to read as follows:

§ 150.2 Federal speculative position limits.

(a) Spot month speculative position limits. For physical-delivery referenced 

contracts and, separately, for cash-settled referenced contracts, no person may hold or 

control positions in the spot month, net long or net short, in excess of the levels specified 

by the Commission.
448

(b) Single month and all-months-combined speculative position limits. For any 

referenced contract, no person may hold or control positions in a single month or in allmonths-combined (including the spot month), net long or net short, in excess of the levels 

specified by the Commission.

(c) Relevant contract month. For purposes of this part, for referenced contracts 

other than core referenced futures contracts, the spot month and any single month shall be 

the same as those of the relevant core referenced futures contract.

(d) Core referenced futures contracts. Federal speculative position limits apply to 

referenced contracts based on the following core referenced futures contracts:

Core Referenced Futures Contracts

Commodity Type Designated Contract Market Core Referenced Futures Contract1

Legacy 

Agricultural

Chicago Board of Trade

Corn (C)

Oats (O)

Soybeans (S)

Soybean Meal (SM)

Soybean Oil (SO)

Wheat (W)

Hard Winter Wheat (KW)

ICE Futures U.S.

Cotton No. 2 (CT)

Minneapolis Grain Exchange

Hard Red Spring Wheat (MWE)

Other Agricultural
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Commodity Type Designated Contract Market Core Referenced Futures Contract1

Chicago Board of Trade

Rough Rice (RR)

Chicago Mercantile 

Exchange

Live Cattle (LC)

ICE Futures U.S.

Cocoa (CC)

Coffee C (KC)

FCOJ-A (OJ)

U.S. Sugar No. 11 (SB)

U.S. Sugar No. 16 (SF)

Energy

New York Mercantile 

Exchange

Light Sweet Crude Oil (CL)

NY Harbor ULSD (HO)

RBOB Gasoline (RB)

Henry Hub Natural Gas (NG)

Metals 

Commodity Exchange, Inc.

Gold (GC)

Silver (SI)

Copper (HG)

New York Mercantile 

Exchange

Palladium (PA)

Platinum (PL)

1 The core referenced futures contract includes any successor contracts.
450

(e) Establishment of speculative position limit levels. The levels of federal 

speculative position limits are fixed by the Commission at the levels listed in appendix E

to this part; provided however, compliance with such speculative limits shall not be 

required until 365 days after publication in the Federal Register.

(f) Designated contract market estimates of deliverable supply. Each designated 

contract market listing a core referenced futures contract shall supply to the Commission 

an estimated spot month deliverable supply upon request by the Commission, and may 

supply such estimates to the Commission at any other time. Each estimate shall be 

accompanied by a description of the methodology used to derive the estimate and any 

statistical data supporting the estimate, and shall be submitted using the format and 

procedures approved in writing by the Commission. A designated contract market should 

use the guidance regarding deliverable supply in appendix C to part 38 of this chapter. 

(g) Pre-existing positions—(1) Pre-existing positions in a spot month. A spot 

month speculative position limit established under this section shall apply to pre-existing 

positions other than pre-enactment swaps and transition period swaps. 

(2) Pre-existing positions in a non-spot month. A single month or all-monthscombined speculative position limit established under this section shall not apply to preexisting positions, provided however, that if such position is not a pre-enactment swap or 

transition period swap then that position shall be attributed to the person if the person’s 

position is increased after the effective date of such limit.

(h) Positions on foreign boards of trade. The speculative position limits 

established under this section shall apply to a person’s combined positions in referenced 
451

contracts, including positions executed on, or pursuant to the rules of a foreign board of 

trade, pursuant to section 4a(a)(6) of the Act, provided that:

(1) Such referenced contracts settle against any price (including the daily or final 

settlement price) of one or more contracts listed for trading on a designated contract 

market or swap execution facility that is a trading facility; and

(2) The foreign board of trade makes available such referenced contracts to its 

members or other participants located in the United States through direct access to its 

electronic trading and order matching system.

(i) Anti-evasion provision. For the purposes of applying the speculative position 

limits in this section, if used to willfully circumvent or evade speculative position limits: 

(1) A commodity index contract and/or a location basis contract shall be 

considered to be a referenced contract; 

(2) A bona fide hedging transaction or position recognition or spread exemption 

shall no longer apply; and

(3) A swap shall be considered to be an economically equivalent swap.

(j) 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 in paragraph (f) of this section to request 

estimated deliverable supply from a designated contract market and to provide the format 

and procedures for submitting such estimates.

(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.
452

(3) Nothing in this section prohibits the Commission, at its election, from 

exercising the authority delegated in this section.

(k) Eligible affiliates and aggregation. For purposes of this part, if an eligible 

affiliate meets the conditions for any exemption from aggregation under § 150.4, the 

eligible affiliate may choose to utilize that exemption, or it may opt to be aggregated with

its affiliated entities.

20. Revise § 150.3 to read as follows:

§ 150.3 Exemptions.

(a) Positions which may exceed limits. The speculative position limits set forth in 

§ 150.2 may be exceeded to the extent that all applicable requirements in this part are 

met, provided that such positions are one of the following:

(1) Bona fide hedging transactions or positions. Positions that comply with the 

bona fide hedging transaction or position definition in § 150.1, and are:

(i) Enumerated in appendix A to this part; or 

(ii) Bona fide hedging transactions or positions, other than those enumerated in 

appendix A to this part, that are approved as non-enumerated bona fide hedging 

transactions or positions in accordance with paragraph (b)(4) of this section or § 150.9; 

(2) Spread transactions. Transactions that:

(i) Meet the spread transaction definition in § 150.1; or

(ii) Do not meet the spread transaction definition in § 150.1, but have been 

approved by the Commission pursuant to paragraph (b)(4) of this section.

(3) Financial distress positions. Positions of a person, or related persons, under 

financial distress circumstances, when exempted by the Commission from any of the 
453

requirements of this part in response to a specific request made to the Commission

pursuant to § 140.99 of this chapter, where financial distress circumstances include, but 

are not limited to, situations involving the potential default or bankruptcy of a customer 

of the requesting person or persons, an affiliate of the requesting person or persons, or a 

potential acquisition target of the requesting person or persons; 

(4) Conditional spot month limit exemption positions in natural gas. Spot month 

positions in natural gas cash-settled referenced contracts that exceed the spot month 

speculative position limit set forth in § 150.2, provided that such positions:

(i) Do not exceed the equivalent of 10,000 contracts of the NYMEX Henry Hub 

Natural Gas core referenced futures contract per designated contract market that lists a 

natural gas cash-settled referenced contract;

(ii) Do not exceed 10,000 futures equivalent contracts in economically equivalent 

swaps in natural gas; and 

(iii) That the person holding or controlling such positions does not hold or control 

positions in spot-month physical-delivery referenced contracts in natural gas; or

(5) Pre-enactment and transition period swaps exemption. The speculative 

position limits set forth in § 150.2 shall not apply to positions acquired in good faith in 

any pre-enactment swap, or in any transition period swap, in either case as defined by § 

150.1; provided however, that a person may net such positions with post-effective date 

commodity derivative contracts for the purpose of complying with any non-spot month 

speculative position limit. 

(b) Application for relief. Any person with a position in a referenced contract 

seeking recognition of such position as a bona fide hedging transaction or position, in 
454

accordance with paragraph (a)(1)(ii) of this section, or seeking an exemption for a spread 

position in accordance with paragraphs (a)(2)(ii) of this section, in each case for purposes 

of federal speculative position limits set forth in § 150.2, may submit an application to 

the Commission in accordance with this section.

(1) Required information. The application shall include the following 

information:

(i) With respect to an application for a recognition of a bona fide hedging 

transaction or position: 

(A) A description of the position in the commodity derivative contract for which 

the application is submitted, including, but not limited to, the name of the underlying 

commodity and the derivative position size;

(B) Information to demonstrate why the position satisfies the requirements of 

section 4a(c)(2) of the Act and the definition of bona fide hedging transaction or position 

in § 150.1, including factual and legal analysis;

(C) A statement concerning the maximum size of all gross positions in 

commodity derivative contracts for which the application is submitted; 

(D) A description of the applicant’s activity in the cash markets and swaps 

markets for the commodity underlying the position for which the application is 

submitted, including, but not limited to, information regarding the offsetting cash 

positions; and

(E) Any other information that may help the Commission determine whether the 

position satisfies the requirements of section 4a(c)(2) of the Act and the definition of 

bona fide hedging transaction or position in § 150.1.
455

(ii) With respect to an application for a spread exemption: 

(A) A description of the spread position for which the application is submitted;

(B) A statement concerning the maximum size of all gross positions in 

commodity derivative contracts for which the application is submitted; and

(C) Any other information that may help the Commission determine whether the 

position is consistent with section 4a(a)(3)(B) of the Act.

(2) Additional information. If the Commission determines that it requires 

additional information in order to determine whether to recognize a position as a bona 

fide hedging transaction or position, or grant a spread exemption, the Commission shall:

(i) Notify the applicant of any supplemental information required; and 

(ii) Provide the applicant with ten business days in which to provide the 

Commission with any supplemental information.

(3) Timing of application. (i) Except as provided in paragraph (b)(3)(ii) of this 

section, a person seeking relief in accordance with this section must submit an application 

to the Commission and receive a notice of approval of such application prior to the date 

that the position for which the application was submitted would be in excess of the 

applicable federal speculative position limit set forth in § 150.2; 

(ii) A person may, however, due to demonstrated sudden or unforeseen increases 

in their bona fide hedging needs, submit an application for a recognition of a bona fide 

hedging transaction or position within five business days after the person established the 

position that exceeded the applicable federal speculative position limit.
456

(A) Any application filed pursuant to paragraph (b)(3)(ii) of this section must 

include an explanation of the circumstances warranting the sudden or unforeseen 

increases in bona fide hedging needs.

(B) If an application filed pursuant to paragraph (b)(3)(ii) of this section is denied, 

the person must bring its position within the federal speculative position limits within a 

commercially reasonable time, as determined by the Commission in consultation with the 

applicant and the applicable designated contract market or swap execution facility.

(C) The Commission will not determine that the person holding the position has 

committed a position limits violation during the period of the Commission’s review nor 

once the Commission has issued its determination.

(4) Commission determination. After review of the application and any 

supplemental information provided by the requestor, the Commission will determine, 

with respect to the transaction or position for which the request is submitted, whether to 

recognize all or a specified portion of such transaction or position as a bona fide hedging 

transaction or position or whether to exempt all or a specified portion of such spread 

transaction, as applicable. The Commission shall notify the applicant of its 

determination, and an applicant may exceed federal speculative position limits set forth in 

§ 150.2 upon receiving a notice of approval.

(5) Renewal of application. With respect to any application approved by the 

Commission pursuant to this section, a person shall renew such application if the 

information provided pursuant to paragraph (b)(1) of this section changes or upon request 

by the Commission.
457

(6) Commission revocation or modification. If the Commission determines, at 

any time, that a recognized bona fide hedging transaction or position is no longer 

consistent with section 4a(c)(2) of the Act or the definition of bona fide hedging 

transaction or position in § 150.1, or that a spread exemption is no longer consistent with 

section 4a(a)(3)(B) of the Act, the Commission shall notify the person holding such 

position and, in its discretion, revoke or modify the bona fide hedge recognition or spread 

exemption for purposes of federal speculative position limits and require the person to 

reduce the derivatives position within a commercially reasonable time or otherwise come 

into compliance. This notification shall briefly specify the nature of the issues raised and 

the specific provisions of the Act or the Commission’s regulations with which the 

position or application is, or appears to be, inconsistent.

(c) Previously-granted risk management exemptions. Exemptions previously 

granted by the Commission under § 1.47 of this chapter, or by a designated contract 

market or swap execution facility, in either case to the extent that such exemptions are for 

the risk management of positions in financial instruments, including but not limited to 

index funds, shall not apply after the effective date of speculative position limit levels

adopted, pursuant to § 150.2(e). Nothing in this paragraph shall preclude the 

Commission, a designated contract market, or swap execution facility from recognizing a 

bona fide hedging transaction or position for the former holder of such a risk 

management exemption if the position complies with the definition of bona fide hedging 

transaction or position under this part, including appendices hereto.

(d) Recordkeeping. (1) Persons who avail themselves of exemptions or relief 

under this section shall keep and maintain complete books and records concerning all 
458

details of their related cash, forward, futures, options on futures, and swap positions and 

transactions, including anticipated requirements, production and royalties, contracts for 

services, cash commodity products and by-products, cross-commodity hedges, and 

records of bona fide hedging swap counterparties, and shall make such books and records 

available to the Commission upon request under paragraph (e) of this section. 

(2) Any person that relies on a representation received from another person that a 

swap qualifies as a pass-through swap under paragraph (2) of the definition of bona fide 

hedging transaction or position in § 150.1 shall keep and make available to the 

Commission upon request all relevant books and records supporting such a 

representation, including any record the person intends to use to demonstrate that the 

pass-through swap is a bona fide hedging transaction or position, for a period of at least 

two years following the expiration of the swap.

(3) 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. 

(e) Call for information. Upon call by the Commission, the Director of the 

Division of Enforcement or the Director’s delegate, any person claiming an exemption 

from speculative position limits under this section shall provide to the Commission such 

information as specified in the call relating to the positions owned or controlled by that 

person; trading done pursuant to the claimed exemption; the commodity derivative 

contracts or cash market positions which support the claimed exemption; and the relevant 

business relationships supporting a claimed exemption.

(f) Aggregation of accounts. Entities required to aggregate accounts or positions 

under § 150.4 shall be considered the same person for the purpose of determining 
459

whether they are eligible for an exemption under paragraphs (a)(1) through (4) of this 

section with respect to such aggregated account or position.

(g) 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:

(i) The authority in paragraph (a)(3) of this section to provide exemptions in 

circumstances of financial distress;

(ii) The authority in paragraph (b)(2) of this section to request additional 

information with respect to a request for a bona fide hedging transaction or position 

recognition or spread exemption;

(iii) The authority in paragraph (b)(3)(ii)(B) of this section to, if applicable, 

determine a commercially reasonable amount of time required for a person to bring its 

position within the federal speculative position limits:

(iv) The authority in paragraph (b)(4) of this section to make a determination 

whether to recognize a position as a bona fide hedging transaction or position or to grant 

a spread exemption; and 

(v) The authority in paragraph (b)(2) or (b)(5) of this section to request that a 

person submit updated materials or renew their request with the Commission. 

(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.
460

21. Revise § 150.5 to read as follows:

§ 150.5 Exchange-set speculative position limits and exemptions therefrom.

(a) Requirements for exchange-set limits on commodity derivative contracts 

subject to federal limits set forth in § 150.2—(1) Exchange-set limits. For any 

commodity derivative contract that is subject to a federal 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 no higher than the level specified in § 150.2.

(2) Exemptions to exchange-set limits. A 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 in accordance with the 

following: 

(i) Exemption levels. Exemptions of the type that conform to the exemptions the 

Commission identified in:

(A) Sections 150.3(a)(1)(i), (a)(2)(i), and (a)(4) through (5) may be granted at a 

level that exceeds the level of the applicable federal limit in § 150.2;

(B) Sections 150.3(a)(1)(ii) and (a)(2)(ii) may be granted at a level that exceeds 

the level of the applicable federal limit in § 150.2, provided that, the exemption is first 

approved in accordance with § 150.3(b) or 150.9, as applicable;

(C) Section 150.3(a)(3) may be granted at a level that exceeds the level of the 

applicable federal limit in § 150.2, provided that, the Commission has first approved such 

exemption pursuant to a request submitted under § 140.99 of this chapter; and

(D) Exemptions of the type that do not conform to the exemptions identified in § 

150.3(a) shall be granted at a level that is capped at the level of the applicable federal 
461

limit in § 150.2 and that complies with paragraph (a)(2)(ii)(C) of this section, unless the 

Commission has first approved such exemption pursuant to § 150.3(b) or pursuant to a 

request submitted under § 140.99.

(ii) Application for exemption from exchange-set limits. A designated contract 

market or swap execution facility that is a trading facility that elects to grant exemptions 

under paragraph (a)(2)(i) of this section:

(A) (1) Except as provided in paragraph (a)(2)(ii)(A)(2) of this section, shall

require traders to file an application requesting such exemption in advance of the date 

that such position would be in excess of the limits then in effect. Such application shall 

include any information needed to enable the designated contract market or swap 

execution facility to determine, and the Commission to verify, whether the facts and 

circumstances demonstrate that the designated contract market or swap execution facility 

may grant an exemption. Any application for a bona fide hedging transaction or position 

shall include a description of the applicant’s activity in the cash markets and swaps 

markets for the commodity underlying the position for which the application is 

submitted, including, but not limited to, information regarding the offsetting cash 

positions.

(2) The designated contract market or swap execution facility may, however,

adopt rules that allow a person, due to demonstrated sudden or unforeseen increases in its

bona fide hedging needs, to file an application to request a recognition of a bona fide 

hedging transaction or position within five business days after the person established the 

position that exceeded the applicable exchange-set speculative position limit.
462

(3) The designated contract market or swap execution facility must require that 

any application filed pursuant to paragraph (a)(2)(ii)(A)(2) of this section include an 

explanation of the circumstances warranting the sudden or unforeseen increases in bona 

fide hedging needs.

(4) If an application filed pursuant to paragraph (a)(2)(ii)(A)(2) of this section is 

denied, the applicant must bring its position within the designated contract market or 

swap execution facility’s speculative position limits within a commercially reasonable 

time as determined by the designated contract market or swap execution facility.

(5) The designated contract market, swap execution facility, or Commission will 

not determine that the person holding the position has committed a position limits 

violation during the period of the designated contract market or swap execution facility’s

review nor once the designated contract market or swap execution facility has issued its 

determination;

(B) Shall require, for any such exemption granted, that the trader re-apply for the 

exemption at least on an annual basis; 

(C) May, in accordance with the designated contract market or swap execution 

facility’s rules, deny any such application, or limit, condition, or revoke any such 

exemption, at any time after providing notice to the applicant, and shall take into account 

whether the requested exemption would result in positions that would not be in accord 

with sound commercial practices in the relevant commodity derivative market and/or that 

would exceed an amount that may be established and liquidated in an orderly fashion in 

that market; and
463

(D) Notwithstanding paragraph (a)(2)(ii)(C) of this section, may require persons 

with positions that comply either with the bona fide hedging transactions or positions 

definition or the spread transactions definition in § 150.1, as applicable, to exit any such 

positions in excess of limits during the lesser of the last five days of trading or the time 

period for the spot month in such physical-delivery contract, or to otherwise limit the size 

of such position. Designated contract markets and swap execution facilities may refer to 

paragraph (b) of appendix B to part 150 for guidance regarding the foregoing. 

(3) Exchange-set limits on pre-existing positions—(i) Pre-existing positions in a 

spot month. A designated contract market or swap execution facility that is a trading 

facility shall require compliance with spot month exchange-set speculative position limits 

for pre-existing positions in commodity derivative contracts other than pre-enactment 

swaps and transition period swaps.

(ii) Pre-existing positions in a non-spot month. A single month or all-monthscombined speculative position limit established under paragraph (a)(1) of this section 

shall not apply to any pre-existing positions in commodity derivative contracts, provided 

however, that if such position is not a pre-enactment swap or transition period swap, then

such position shall be attributed to the person if the person’s position is increased after 

the effective date of such limit.

(4) Monthly reports detailing the disposition of each application. (i) For 

commodity derivative contracts subject to federal speculative position limits, the 

designated contract market or swap execution facility shall submit to the Commission a 

report each month showing the disposition of any exemption application, including the 

recognition of any position as a bona fide hedging transaction or position, the exemption 
464

of any spread transaction or other position, the renewal, revocation, or modification of a 

previously granted recognition or 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 recognition or exemption;

(D) Any unique identifier(s) the designated contract market or swap execution 

facility may assign to track the application, or the specific type of recognition or 

exemption;

(E) If the application is for an enumerated bona fide hedging transaction or 

position, the name of the enumerated bona fide hedging transaction or position listed in 

appendix A to this part;

(F) If the application is for a spread transaction listed in the spread transaction 

definition in § 150.1, the name of the spread transaction as it is listed in § 150.1;

(G) The identity of the applicant;

(H) The listed commodity derivative contract or position(s) to which the 

application pertains;

(I) The underlying cash commodity;

(J) The maximum size of the commodity derivative position that is recognized by 

the designated contract market or swap execution facility as a bona fide hedging 

transaction or position, specified by contract month and by the type of limit as spot 

month, single month, or all-months-combined, as applicable;
465

(K) Any size limitations or conditions established for a spread exemption or other 

exemption; and

(L) For bona fide hedging transactions or positions, a concise summary of the 

applicant’s activity in the cash markets and swaps markets for the commodity underlying 

the commodity derivative position for which the application was submitted.

(ii) The designated contract market or swap execution facility shall submit to the 

Commission the information required by paragraph (a)(4)(i) of this section:

(A) As specified by the Commission on the Forms and Submissions page at

www.cftc.gov; and

(B) Using the format, coding structure, and electronic data transmission 

procedures approved in writing by the Commission.

(b) Requirements for exchange-set limits on commodity derivative contracts in a 

physical commodity that are not subject to the limits set forth in § 150.2—(1) Exchangeset spot month limits—(i) Spot month speculative position limit levels. For any 

commodity derivative contract subject to paragraph (b) of this section, a designated 

contract market or swap execution facility that is a trading facility shall establish 

speculative position limits for the spot month no greater than 25 percent of the estimated 

spot month deliverable supply, calculated separately for each month to be listed.

(ii) Additional sources for compliance. Alternatively, a designated contract 

market or swap execution facility that is a trading facility may submit rules to the 

Commission establishing spot month speculative position limits other than as provided in 

paragraph (b)(1)(i) of this section, provided that the limits are set at a level that is 
466

necessary and appropriate to reduce the potential threat of market manipulation or price 

distortion of the contract’s or the underlying commodity’s price or index.

(2) Exchange-set limits or accountability outside of the spot month—(i) Non-spot 

month speculative position limit or accountability levels. For any commodity derivative 

contract subject to paragraph (b) of this section, a designated contract market or swap 

execution facility that is a trading facility shall adopt either speculative position limits or 

position accountability outside of the spot month at a level that is necessary and

appropriate to reduce the potential threat of market manipulation or price distortion of the 

contract’s or the underlying commodity’s price or index.

(ii) Additional sources for compliance. A designated contract market or swap 

execution facility that is a trading facility may refer to the non-exclusive acceptable 

practices in paragraph (b) of appendix F of this part to demonstrate to the Commission 

compliance with the requirements of paragraph (b)(2)(i) of this section.

(3) Look-alike contracts. For any newly listed commodity derivative contract 

subject to paragraph (b) of this section that is substantially the same as an existing 

contract listed on a designated contract market or swap execution facility that is a trading 

facility, a designated contract market or swap execution facility that is a trading facility

listing such newly listed contract shall adopt spot month, individual month, and allmonths-combined speculative position limits comparable to those of the existing contract. 

Alternatively, if such designated contract market or swap execution facility seeks to 

adopt speculative position limits that are not comparable to those of the existing contract, 

such designated contract market or swap execution facility shall demonstrate to the 

Commission how the levels comply with paragraphs (b)(1) and/or (b)(2) of this section. 
467

(4) Exemptions to exchange-set limits. A designated contract market or swap 

execution facility that is a trading facility may grant exemptions from any speculative 

position limits it sets under paragraphs (b)(1) or (b)(2) of this section in accordance with 

the following: 

(i) Traders shall be required to apply to the designated contract market or swap 

execution facility for any such exemption from its speculative position limit rules; and 

(ii) A designated contract market or swap execution facility that is a trading 

facility may deny any such application, or limit, condition, or revoke any such 

exemption, at any time after providing notice to the applicant, and shall take into account 

whether the requested exemption would result in positions that would not be in accord 

with sound commercial practices in the relevant commodity derivative market and/or 

would exceed an amount that may be established and liquidated in an orderly fashion in 

that market.

(c) Requirements for security futures products. For security futures products, 

speculative position limits and position accountability requirements are specified in 

§ 41.25 of this chapter.

(d) Rules on aggregation. For commodity derivative contracts in a physical 

commodity, a designated contract market or swap execution facility that is a trading 

facility shall have aggregation rules that conform to § 150.4.

(e) Requirements for submissions to the Commission. A designated contract 

market or swap execution facility that is a trading facility that adopts speculative position 

limits and/or position accountability levels pursuant to paragraphs (a) or (b) of this 

section, and/or that elects to offer exemptions from any such levels pursuant to such 
468

paragraphs, shall submit to the Commission pursuant to part 40 of this chapter rules 

establishing such levels and/or exemptions. To the extent any such designated contract 

market or swap execution facility adopts speculative position limit levels, such part 40 

submission shall also include the methodology by which such levels are calculated, and 

the designated contract market or swap execution facility shall review such speculative 

position limit levels regularly for compliance with this section and update such 

speculative position limit levels as needed.

(f) Delegation of authority to the Director of the Division of Market Oversight—

(1) Commission delegations. 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 in paragraph 

(a)(4)(ii) of this section to provide instructions regarding the submission to the 

Commission of information required to be reported, pursuant to paragraph (a)(4)(i) of this 

section, 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.

(2) Commission consideration of delegated matter. 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) Commission authority. Nothing in this section prohibits the Commission, at 

its election, from exercising the authority delegated in this section.
469

22. Revise § 150.6 to read as follows:

§ 150.6 Scope.

This part shall only be construed as having an effect on speculative position limits 

set by the Commission or by a designated contract market or swap execution facility, 

including any associated recordkeeping and reporting regulations in this chapter. 

Nothing in this part shall be construed to relieve any contract market, swap execution 

facility, or its governing board from responsibility under section 5(d)(4) of the Act to 

prevent manipulation and corners. Further, nothing in this part shall be construed to 

affect any other provisions of the Act or Commission regulations, including, but not 

limited to, those relating to actual or attempted manipulation, corners, squeezes, 

fraudulent or deceptive conduct, or to prohibited transactions.

§ 150.7 [Reserved].

23. Add and reserve § 150.7.

24. Add § 150.8 to read as follows:

§ 150.8 Severability.

If any provision of this part, or the application thereof to any person or 

circumstances, is held invalid, such invalidity shall not affect the validity of other 

provisions or the application of such provision to other persons or circumstances that can 

be given effect without the invalid provision or application.

25. Add § 150.9 to read as follows:

§ 150.9 Process for recognizing non-enumerated bona fide hedging transactions or 

positions with respect to federal speculative position limits.
470

For purposes of federal speculative position limits, a person with a position in a 

referenced contract seeking recognition of such position as a non-enumerated bona fide 

hedging transaction or position, in accordance with § 150.3(a)(1)(ii), shall submit an

application to the Commission, pursuant to § 150.3(b), or submit an application to a 

designated contract market or swap execution facility in accordance with this section. If 

such person submits an application to a designated contract market or swap execution 

facility in accordance with this section, and the designated contract market or swap 

execution facility, with respect to its own speculative position limits established pursuant 

to § 150.5(a), recognizes the person’s position as a non-enumerated bona fide hedging 

transaction or position, then the person may also exceed the applicable federal 

speculative position limit for such position, in accordance with paragraph (e) of this 

section. The designated contract market or swap execution facility may approve such 

applications only if the designated contract market or swap execution facility complies 

with the conditions set forth in paragraphs (a) through (e) of this section. 

(a) Approval of rules. The designated contract market or swap execution facility 

maintains rules, consistent with the requirements of this section and approved by the 

Commission pursuant to § 40.5 of this chapter, that establish application processes and 

conditions for recognizing bona fide hedging transactions or positions. 

(b) Prerequisites for a designated contract market or swap execution facility to 

recognize bona fide hedging transactions or positions in accordance with this section. 

(1) The designated contract market or swap execution facility lists the applicable

referenced contract for trading;
471

(2) The position meets the definition of bona fide hedging transactions or 

positions in section 4a(c)(2) of the Act and the definition of bona fide hedging 

transactions or positions in § 150.1; and

(3) The designated contract market or swap execution facility does not recognize 

as a bona fide hedging transaction or position any position involving a commodity index 

contract and one or more referenced contracts, including exemptions known as risk 

management exemptions.

(c) Application process. The designated contract market or swap execution 

facility’s application process meets the following conditions:

(1) Required application information. The designated contract market or swap 

execution facility requires the applicant to provide, and can obtain from the applicant, all 

information to enable the designated contract market or swap execution facility to 

determine, and the Commission to verify, whether the facts and circumstances 

demonstrate that the designated contract market or swap execution facility may recognize 

a position as a bona fide hedging transaction or position, including the following: 

(i) A description of the position in the commodity derivative contract for which 

the application is submitted, including but not limited to, the name of the underlying 

commodity and the derivative position size;

(ii) Information to demonstrate why the position satisfies the requirements of 

section 4a(c)(2) of the Act and the definition of bona fide hedging transaction or position 

in § 150.1, including factual and legal analysis;

(iii) A statement concerning the maximum size of all gross positions in

commodity derivative contracts for which the application is submitted; 
472

(iv) A description of the applicant’s activity in the cash markets and the swaps 

markets for the commodity underlying the position for which the application is 

submitted, including, but not limited to, information regarding the offsetting cash 

positions; and

(v) Any other information the designated contract market or swap execution 

facility requires, in its discretion, to verify that the position complies with paragraph 

(b)(2) of this section, as applicable.

(2) Timing of application. (i) Except as provided in paragraph (c)(2)(ii) of this 

section, the designated contract market or swap execution facility requires the applicant 

to submit an application and receive a notice of approval of such application prior to the 

date that the position for which such application was submitted would be in excess of the 

applicable federal speculative position limits.

(ii) A designated contract market or swap execution facility may, however, adopt 

rules that allow a person to, due to demonstrated sudden or unforeseen increases in its

bona fide hedging needs, file an application with the designated contract market or swap 

execution facility to request a recognition of a bona fide hedging transaction or position 

within five business days after the person established the position that exceeded the 

applicable federal speculative position limit.

(A) The designated contract market or swap execution facility must require that 

any application filed pursuant to paragraph (c)(2)(ii) of this section include an 

explanation of the circumstances warranting the sudden or unforeseen increases in bona 

fide hedging needs.
473

(B) If an application filed pursuant to paragraph (c)(2)(ii) of this section is denied

by the designated contract market, swap execution facility, or Commission, the applicant 

must bring its position within the applicable federal speculative position limits within a 

commercially reasonable time as determined by the Commission in consultation with the 

applicant and the applicable designated contract market or swap execution facility.

(C) The designated contract market, swap execution facility, or Commission will 

not determine that the person holding the position has committed a position limits 

violation during the period of the designated contract market, swap execution facility, or 

Commission’s review nor once a determination has been issued.

(3) Renewal of applications. The designated contract market or swap execution 

facility requires each applicant to reapply for such recognition or exemption at least on an 

annual basis by updating the original application, and to receive a notice of approval of 

the renewal from the designated contract market or swap execution facility prior to the 

date that such position would be in excess of the applicable federal speculative position 

limits.

(4) Exchange revocation authority. The designated contract market or swap 

execution facility retains its authority to limit, condition, or revoke, at any time after 

providing notice to the applicant, any bona fide hedging transaction or position

recognition for purposes of the designated contract market or swap execution facility’s

speculative position limits established under § 150.5(a), for any reason as determined in 

the discretion of the designated contract market or swap execution facility, including if 

the designated contract market or swap execution facility determines that the position no 

longer meets the conditions set forth in paragraph (b) of this section, as applicable.
474

(d) Recordkeeping. (1) The designated contract market or swap execution facility 

keeps 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. Such records include:

(i) Records of the designated contract market or swap execution facility’s

recognition of any derivative position as a bona fide hedging transaction or position, 

revocation or modification of any such recognition, or the rejection of an application; 

(ii) All information and documents submitted by an applicant in connection with 

its application, including documentation and information that is submitted after the

disposition of the application, and any withdrawal, supplementation, or update of any 

application; 

(iii) Records of oral and written communications between the designated contract 

market or swap execution facility and the applicant in connection with such application; 

and

(iv) All information and documents in connection with the designated contract 

market or swap execution facility’s analysis of, and action(s) taken with respect to, 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.

(e) Process for a person to exceed federal speculative position limits on a 

referenced contract—(1) Notification to the Commission. The designated contract 

market or swap execution facility must submit to the Commission a notification of each 

initial determination to recognize a bona fide hedging transaction or position in 
475

accordance with this section, concurrently with the notice of such determination the 

designated contract market or swap execution facility provides to the applicant. 

(2) Notification requirements. The notification in paragraph (e)(1) of this section 

shall include, at a minimum, the following information:

(i) Name of the applicant;

(ii) Brief description of the bona fide hedging transaction or position being 

recognized;

(iii) Name of the contract(s) relevant to the recognition;

(iv) The maximum size of the position that may exceed federal speculative 

position limits; 

(v) The effective date and expiration date of the recognition; 

(vi) An indication regarding whether the position may be maintained during the 

last five days of trading during the spot month, or the time period for the spot month; and

(vii) A copy of the application and any supporting materials.

(3) Exceeding federal speculative position limits on referenced contracts. A

person may exceed federal speculative position limits on a referenced contract ten 

business days after the designated contract market or swap execution facility issues the

notification required pursuant to paragraph (e)(1) of this section, unless the Commission 

notifies the designated contract market or swap execution facility and the applicant 

otherwise, pursuant to paragraph (e)(5) of this section, before the ten business day period 

expires.

(4) Exceeding federal speculative position limits on referenced contracts due to 

sudden or unforeseen circumstances. If a person files an application for a recognition of 
476

a bona fide hedging transaction or position in accordance with paragraph (c)(2)(ii) of this 

section, then such person may rely on the designated contract market or swap execution 

facility’s determination to grant such recognition for purposes of federal speculative 

position limits two business days after the designated contract market or swap execution 

facility issues the notification required pursuant to paragraph (e)(1) of this section, unless 

the Commission notifies the designated contract market or swap execution facility and 

the applicant otherwise, pursuant to paragraph (e)(5) of this section, before the two 

business day period expires.

(5) Commission stay of pending applications and requests for additional 

information. If the Commission determines to stay an application that requires additional 

time to analyze, or request additional information to determine whether the position for 

which the application is submitted meets the conditions set forth in paragraph (b) of this 

section, the Commission shall notify the applicable designated contract market or swap 

execution facility and applicant of the Commission’s determination or request for any 

supplemental information required, and provide an opportunity for the applicant to 

respond with any supplemental information.

(6) Commission determination. If the Commission determines that a position for 

which the application is submitted does not meet the conditions set forth in paragraph (b) 

of this section, the Commission shall:

(i) Notify the designated contract market or swap execution facility and applicant, 

and, after providing an opportunity for the applicant to respond, the Commission may, in 

its discretion, reject the exchange’s determination for purposes of federal speculative 

position limits and, as applicable, require the person to reduce the derivatives position 
477

within a commercially reasonable time, as determined by the Commission in consultation 

with the applicant and the applicable designated contract market or swap execution 

facility, or otherwise come into compliance; and

(ii) The Commission will not determine that the person holding the position has 

committed a position limits violation during the period of the Commission’s review nor 

once the Commission has issued its determination.

(f) Commission revocation of approved applications. (1) If a designated contract 

market or swap execution facility limits, conditions, or revokes any recognition of a bona 

fide hedging transaction or position for purposes of the designated contract market or 

swap execution facility’s speculative position limits established under § 150.5(a), then 

such recognition will also be deemed limited, conditioned, or revoked for purposes of 

federal speculative position limits. 

(2) If the Commission determines, at any time, that a position that has been 

recognized as a bona fide hedging transaction or position has been granted for a position 

that, for purposes of federal speculative position limits, is no longer consistent with 

section 4a(c)(2) of the Act or the definition of bona fide hedging transaction or position 

in § 150.1, the following applies:

(i) The Commission shall notify the person holding the position and, after 

providing an opportunity to respond, the Commission may, in its discretion, revoke the 

exchange’s determination for purposes of federal speculative position limits and require 

the person to reduce the derivatives position within a commercially reasonable time as 

determined by the Commission in consultation with the applicant and the applicable 
478

designated contract market or swap execution facility, or otherwise come into 

compliance;

(ii) The Commission shall include in its notification a brief explanation of the 

nature of the issues raised and the specific provisions of the Act or the Commission’s 

regulations with which the position or application is, or appears to be, inconsistent; and

(iii) The Commission shall not determine that the person holding the position has 

committed a position limits violation during the period of the Commission’s review nor 

once the Commission has issued its determination, provided the person reduced the 

derivatives position within a commercially reasonable time, as determined by the 

Commission in consultation with the applicant and the applicable designated contract 

market or swap execution facility, or otherwise came into compliance. 

(g) Delegation of authority to the Director of the Division of Market Oversight—

(1) Commission delegations. 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 in paragraph 

(e)(5) of this section, to request additional information from the applicable designated 

contract market or swap execution facility and applicant; 

(2) Commission consideration of delegated matter. 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) Commission authority. Nothing in this section prohibits the Commission, at 

its election, from exercising the authority delegated in this section.
479

26. In part 150, add appendices A through F to read as follows:

APPENDIX A TO PART 150 – LIST OF ENUMERATED HEDGES.

Persons that follow specific practices outlined in the enumerated hedges in this 

appendix shall establish compliance with the bona fide hedging transactions or positions

definition in § 150.1 and with § 150.3(a)(1)(i) without being required to request approval

under § 150.3 or § 150.9 prior to exceeding the applicable federal speculative position 

limit. All other persons must request approval pursuant to § 150.3 or § 150.9 prior to 

exceeding the applicable federal speculative position limit.

Compliance with an enumerated bona fide hedge listed below does not, however, 

diminish or replace, in any event, the obligations and requirements of the person to 

comply with the regulations provided under this part 150. The enumerated bona fide 

hedges do not state the exclusive means for establishing compliance with the bona fide 

hedging transactions or positions definition in § 150.1 or with the requirements of § 

150.3(a)(1).

(a) Enumerated hedges. The following positions comply with the bona fide 

hedging transactions or positions definition in § 150.1:

(1) Hedges of unsold anticipated production. Short positions in commodity 

derivative contracts that do not exceed in quantity the person’s unsold anticipated 

production of the contract’s underlying cash commodity.

(2) Hedges of offsetting unfixed-price cash commodity sales and purchases. Both 

short and long positions in commodity derivative contracts that do not exceed in quantity 

the amount of the contract’s underlying cash commodity that has been both bought and 

sold by the same person at unfixed prices:
480

(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.

(3) Hedges of anticipated mineral royalties. Short positions in a person’s 

commodity derivative contracts offset by the anticipated change in value of mineral 

royalty rights that are owned by that person, provided that the royalty rights arise out of 

the production of the commodity underlying the commodity derivative contract.

(4) Hedges of anticipated services. Short or long positions in a person’s 

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 that

person, provided that the contract for services arises out of the production, 

manufacturing, processing, use, or transportation of the commodity underlying the 

commodity derivative contract.

(5) Cross-commodity hedges. Positions in commodity derivative contracts 

described in paragraph (2) of the bona fide hedging transactions or positions definition in 

§ 150.1 or in paragraphs (a)(1) through (a)(4) and paragraphs (a)(6) through (a)(9) of this 

appendix A may also be used to offset the risks arising from a commodity other than the 

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, shall be substantially related 

to the fluctuations in value of the actual or anticipated cash position or pass-through 

swap.
481

(6) Hedges of inventory and cash commodity fixed-price purchase contracts.

Short positions in commodity derivative contracts that do not exceed in quantity the sum 

of the person’s ownership of inventory and fixed-price purchase contracts in the 

contract’s underlying cash commodity.

(7) Hedges of cash commodity fixed-price sales contracts. Long positions in 

commodity derivative contracts that do not exceed in quantity the sum of the person’s 

fixed-price sales contracts in the contract’s underlying cash commodity and the quantity 

equivalent of fixed-price sales contracts of the cash products and by-products of such 

commodity.

(8) 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 commodity 

derivative contract’s underlying 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.

(9) Offsets of commodity trade options. Long or short positions in commodity 

derivative contracts that do not exceed in quantity, on a futures-equivalent basis, a 

position in a commodity trade option that meets the requirements of § 32.3 of this 

chapter. Such commodity trade option transaction, if it meets the requirements of § 32.3 

of this chapter, may be deemed, for purposes of complying with this paragraph (a)(9) of

this appendix A, a cash commodity purchase or sales contract as set forth in paragraphs 

(a)(6) or (a)(7) of this appendix A, as applicable. 
482

(10) Hedges of unfilled anticipated requirements. Long positions in commodity 

derivative contracts that do not exceed in quantity the person’s unfilled anticipated 

requirements for the contract’s underlying cash commodity, for processing, 

manufacturing, or use by that person, or for resale by a utility as it pertains to the utility’s 

obligations to meet the unfilled anticipated demand of its customers for the customer’s 

use.

(11) Hedges of anticipated merchandising. Long or short positions in commodity 

derivative contracts that offset the anticipated change in value of the underlying 

commodity that a person anticipates purchasing or selling, provided that:

(A) The position in the commodity derivative contract does not exceed in quantity 

twelve months’ of current or anticipated purchase or sale requirements of the same cash 

commodity that is anticipated to be purchased or sold; and 

(B) The person is a merchant handling the underlying commodity that is subject 

to the anticipatory merchandising hedge, and that such merchant is entering into the 

position solely for purposes related to its merchandising business and has a demonstrated 

history of buying and selling the underlying commodity for its merchandising business.

APPENDIX B TO PART 150 – GUIDANCE ON GROSS HEDGING POSITIONS 

AND POSITIONS HELD DURING THE SPOT PERIOD.

(a) Guidance on gross hedging positions. (1) A person’s gross hedging positions 

may be deemed in compliance with the bona fide hedging transactions or positions 

definition in § 150.1, provided that all applicable regulatory requirements are met, 

including that the position is economically appropriate to the reduction of risks in the 
483

conduct and management of a commercial enterprise and otherwise satisfies the bona fide 

hedging definition in § 150.1, and provided further that:

(A) The manner in which the person measures risk is consistent and follows 

historical practice for that person;

(B) The person is not measuring risk on a gross basis to evade the speculative 

position limits in § 150.2 or the aggregation rules in § 150.4;

(C) The person is able to demonstrate compliance with paragraphs (A) and (B) 

upon the request of the Commission and/or of a designated contract market, including by 

providing information regarding the entities with which the person aggregates positions; 

and

(D) A designated contract market or swap execution facility that recognizes a 

particular gross hedging position as bona fide pursuant to § 150.9 documents the 

justifications for doing so, and maintains records of such justifications in accordance with 

§ 150.9(d).

(b) Guidance regarding positions held during the spot period. Section 

150.5(a)(2)(ii)(D) confirms the existing authority of designated contract markets and 

swap execution facilities to maintain rules that subject positions that comply with the 

bona fide hedging position or transaction definition in § 150.1 to a restriction that 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 (the “spot period”). Any such designated contract market or 

swap execution facility may waive any such restriction, including if: 
484

(1) The position complies with the bona fide hedging transaction or position 

definition in § 150.1;

(2) There is an economically appropriate need to maintain such position in excess 

of federal speculative position limits during the spot period for such contract, and such 

need relates to the purchase or sale of a cash commodity; and

(3) The person wishing to exceed federal position limits during the spot period:

(A) Intends to make or take delivery during that time period;

(B) Provides materials to the designated contract market or swap execution 

facility supporting a classification of the position as a bona fide hedging transaction or 

position and demonstrating facts and circumstances that would warrant holding such 

position in excess of limits during the spot period;

(C) Demonstrates cash-market exposure in-hand that is verified by the designated 

contract market or swap execution facility and that supports holding the position during 

the spot period;

(D) Demonstrates that, for short positions, the delivery is feasible, meaning that 

the person has the ability to deliver against the short position (i.e., has inventory on hand 

in a deliverable location and in a condition in which the commodity can be used upon 

delivery); and

(E) Demonstrates that, for long positions, the delivery is feasible, meaning that 

the person has the ability to take delivery at levels that are economically appropriate (i.e., 

the delivery comports with the person’s demonstrated need for the commodity and the 

contract is the cheapest source for that commodity).
485

APPENDIX C TO PART 150 – GUIDANCE REGARDING THE REFERENCED 

CONTRACT DEFINITION IN § 150.1

This appendix C provides guidance regarding the “referenced contract” definition 

in § 150.1, which provides in paragraph (3) that the definition of referenced contract does 

not include a location basis contract, a commodity index contract, or a trade option that 

meets the requirements of § 32.3 of this chapter. The term referenced contract is used 

throughout part 150 of the Commission’s regulations to refer to contracts that are subject 

to federal limits. A position in a contract that is not a referenced contract is not subject to 

federal limits, and, as a consequence, cannot be netted with positions in referenced 

contracts for purposes of federal limits. This guidance is intended to clarify the types of 

contracts that would qualify as a location basis contract or commodity index contract. 

Compliance with this guidance does not diminish or replace, in any event, the 

obligations and requirements of any person to comply with the regulations provided 

under this part, or any other part of the Commission’s regulations. The guidance is for 

illustrative purposes only and does not state the exclusive means for a contract to qualify, 

or not qualify, as a referenced contract as defined in § 150.1, or to comply with any other 

provision in this part.

(a) Guidance. (1) As provided in paragraph (3) of the “referenced contract” 

definition in § 150.1, the following types of contracts are not deemed referenced 

contracts, meaning such contracts are not subject to federal limits and cannot be netted 

with positions in referenced contracts for purposes of federal limits: location basis 

contracts; commodity index contracts; swap guarantees; and trade options that meet the 

requirements of § 32.3 of this chapter. 
486

(2) Location basis contract. For purposes of the referenced contract definition in 

§ 150.1, a location basis contract means a commodity derivative contract that is cashsettled based on the difference in:

(i) The price, directly or indirectly, of:

(A) A particular core referenced futures contract; or

(B) A commodity deliverable on a particular core referenced futures contract, 

whether at par, a fixed discount to par, or a premium to par; and

(ii) The price, at a different delivery location or pricing point than that of the same 

particular core referenced futures contract, directly or indirectly, of:

(A) A commodity deliverable on the same particular core referenced futures 

contract, whether at par, a fixed discount to par, or a premium to par; or

(B) A commodity that is listed in appendix D to this part as substantially the same 

as a commodity underlying the same core referenced futures contract.

(3) Commodity index contract. For purposes of the referenced contract definition 

in § 150.1, a commodity index contract means an agreement, contract, or transaction 

based on an index comprised of prices of commodities that are not the same or 

substantially the same and that is not a location basis contract, a calendar spread contract, 

or an intercommodity spread contract as such terms are defined in this guidance, where: 

(i) A calendar spread contract means a cash-settled agreement, contract, or 

transaction that represents the difference between the settlement price in one or a series of 

contract months of an agreement, contract, or transaction and the settlement price of 

another contract month or another series of contract months’ settlement prices for the 

same agreement, contract, or transaction; and 
487

(ii) An intercommodity spread contract means a cash-settled agreement, contract,

or transaction that represents the difference between the settlement price of a referenced 

contract and the settlement price of another contract, agreement, or transaction that is 

based on a different commodity.

APPENDIX D TO PART 150 – COMMODITIES LISTED AS SUBSTANTIALLY 

THE SAME FOR PURPOSES OF THE TERM “LOCATION BASIS 

CONTRACT” AS USED IN THE REFERENCED CONTRACT DEFINITION

The following table lists core referenced futures contracts and commodities that 

are treated as substantially the same as a commodity underlying a core referenced futures 

contract for purposes of the term “location basis contract” as used in the referenced

contract definition under § 150.1, and as discussed in the associated appendix, Appendix 

C – Guidance Regarding the Referenced Contract Definition in § 150.1.

LOCATION BASIS CONTRACT LIST OF SUBSTANTIALLY THE SAME COMMODITIES

Core 

Referenced 

Futures 

Contract

Commodities Considered 

Substantially the Same 

(regardless of location)

Source(s) for Specification of 

Quality

NYMEX 

Light Sweet 

Crude Oil 

futures 

contract (CL)

1. Light Louisiana Sweet (LLS) 

Crude Oil

NYMEX Argus LLS vs. WTI 

(Argus) Trade Month futures 

contract (E5)

NYMEX LLS (Argus) vs. WTI 

Financial futures contract (WJ)

ICE Futures Europe Crude 

Diff—Argus LLS vs WTI 1st

Line Swap futures contract 

(ARK)

ICE Futures Europe Crude 

Diff—Argus LLS vs WTI Trade 
488

Core 

Referenced 

Futures 

Contract

Commodities Considered 

Substantially the Same 

(regardless of location)

Source(s) for Specification of 

Quality

Month Swap futures contract 

(ARL)

NYMEX New 

York Harbor 

ULSD 

Heating Oil 

futures 

contract (HO)

1. Chicago ULSD NYMEX Chicago ULSD (Platts) 

vs. NY Harbor ULSD Heating 

Oil futures contract (5C)

2. Gulf Coast ULSD NYMEX Group Three ULSD 

(Platts) vs. NY Harbor ULSD 

Heating Oil futures contract (A6)

NYMEX Gulf Coast ULSD 

(Argus) Up-Down futures 

contract (US)

NYMEX Gulf Coast ULSD 

(Argus) Up-Down BALMO 

futures contract (GUD)

NYMEX Gulf Coast ULSD 

(Platts) Up-Down BALMO 

futures contract (1L)

NYMEX Gulf Coast ULSD 

(Platts) Up-Down Spread futures 

contract (LT)

ICE Futures Europe Diesel DiffGulf Coast vs Heating Oil 1st

Line Swap futures contract 

(GOH)

CME Clearing Europe Gulf 

Coast ULSD( Platts) vs. New 

York Heating Oil (NYMEX) 

Spread Calendar swap (ELT)

CME Clearing Europe New York 

Heating Oil (NYMEX) vs. 

European Gasoil (IC) Spread 

Calendar swap (EHA)

3. California Air Resources Board 

Spec ULSD (CARB no. 2 oil)

NYMEX Los Angeles CARB 

Diesel (OPIS) vs. NY Harbor 

ULSD Heating Oil futures 

contract (KL)
489

Core 

Referenced 

Futures 

Contract

Commodities Considered 

Substantially the Same 

(regardless of location)

Source(s) for Specification of 

Quality

4. Gas Oil Deliverable in Antwerp, 

Rotterdam, or Amsterdam Area

ICE Futures Europe Gasoil 

futures contract (G)

ICE Futures Europe Heating Oil 

Arb—Heating Oil 1st Line vs 

Gasoil 1st Line Swap futures 

contract (HOT)

ICE Futures Europe Heating Oil 

Arb—Heating Oil 1st Line vs 

Low Sulphur Gasoil 1st Line 

Swap futures contract (ULL)

NYMEX NY Harbor ULSD 

Heating Oil vs. Gasoil futures 

contract (HA)

NYMEX 

RBOB 

Gasoline 

futures 

contract (RB)

1. Chicago Unleaded 87 gasoline

NYMEX Chicago Unleaded 

Gasoline (Platts) vs. RBOB 

Gasoline futures contract (3C)

NYMEX Group Three Unleaded 

Gasoline (Platts) vs. RBOB 

Gasoline futures contract (A8)

2. Gulf Coast Conventional 

Blendstock for Oxygenated 

Blending (CBOB) 87 

NYMEX Gulf Coast CBOB 

Gasoline A1 (Platts) vs. RBOB 

Gasoline futures contract (CBA)

NYMEX Gulf Coast Unl 87 

(Argus) Up-Down futures 

contract (UZ)

3. Gulf Coast CBOB 87 (Summer 

Assessment) 

NYMEX Gulf Coast CBOB 

Gasoline A2 (Platts) vs. RBOB 

Gasoline futures contract (CRB)

4. Gulf Coast Unleaded 87 (Summer 

Assessment) 
490

Core 

Referenced 

Futures 

Contract

Commodities Considered 

Substantially the Same 

(regardless of location)

Source(s) for Specification of 

Quality

NYMEX Gulf Coast 87 Gasoline 

M2 (Platts) vs. RBOB Gasoline 

futures contract (RVG)

NYMEX Gulf Coast 87 Gasoline 

M2 (Platts) vs. RBOB Gasoline 

BALMO futures contract (GBB)

NYMEX Gulf Coast 87 Gasoline 

M2 (Argus) vs. RBOB Gasoline 

BALMO futures contract (RBG)

5. Gulf Coast Unleaded 87

NYMEX Gulf Coast Unl 87 

(Platts) Up-Down BALMO 

futures contract (1K)

NYMEX Gulf Coast Unl 87 

Gasoline M1 (Platts) vs. RBOB 

Gasoline futures contract (RV)

CME Clearing Europe Gulf 

Coast Unleaded 87 Gasoline M1 

(Platts) vs. New York RBOB 

Gasoline (NYMEX) Spread 

Calendar swap (ERV)

6. Los Angeles California 

Reformulated Blendstock for 

Oxygenate Blending (CARBOB) 

Regular

NYMEX Los Angeles CARBOB 

Gasoline (OPIS) vs. RBOB 

Gasoline futures contract (JL)

7. Los Angeles California 

Reformulated Blendstock for 

Oxygenate Blending (CARBOB) 

Premium

NYMEX Los Angeles CARBOB 

Gasoline (OPIS) vs. RBOB 

Gasoline futures contract (JL)

8. Euro-BOB OXY NWE Barges 

NYMEX RBOB Gasoline vs. 

Euro-bob Oxy NWE Barges 

(Argus) (1000mt) futures 

contract (EXR)
491

Core 

Referenced 

Futures 

Contract

Commodities Considered 

Substantially the Same 

(regardless of location)

Source(s) for Specification of 

Quality

CME Clearing Europe New York 

RBOB Gasoline (NYMEX) vs. 

European Gasoline Euro-bob 

Oxy Barges NWE (Argus) 

(1000mt) Spread Calendar swap 

(EEXR)

9. Euro-BOB OXY FOB Rotterdam

ICE Futures Europe Gasoline 

Diff—RBOB Gasoline 1st Line 

vs. Argus Euro-BOB OXY FOB 

Rotterdam Barge Swap futures 

contract (ROE)

APPENDIX E TO PART 150 – SPECULATIVE POSITION LIMIT LEVELS

Contract Spot Month Single-Month and All 

Months

Legacy Agricultural

Chicago Board of Trade 

Corn (C)

1,200 57,800

Chicago Board of Trade 

Oats (O)

600 2,000

Chicago Board of Trade 

Soybeans (S)

1,200 27,300

Chicago Board of Trade 

Soybean Meal (SM)

1,500 16,900

Chicago Board of Trade 

Soybean Oil (SO) 1,100 17,400

Chicago Board of Trade 

Wheat (W)

1,200 19,300

Chicago Board of Trade KC 

HRW Wheat (KW)

1,200 12,000

Minneapolis Grain 

Exchange Hard Red Spring 

Wheat (MWE)

1,200 12,000

ICE Futures U.S. Cotton 

No. 2 (CT)

1,800 11,900

Other Agricultural
492

Contract Spot Month Single-Month and All 

Months

Chicago Board of Trade 

Rough Rice (RR)

800 Not Applicable

Chicago Mercantile 

Exchange Live Cattle (LC)

600/300/2001 Not Applicable

ICE Futures U.S. Cocoa 

(CC)

4,900 Not Applicable

ICE Futures U.S. Coffee C 

(KC)

1,700 Not Applicable

ICE Futures U.S. FCOJ-A 

(OJ)

2,200 Not Applicable

ICE Futures U.S. Sugar No. 

11 (SB)

25,800 Not Applicable

ICE Futures U.S. Sugar No. 

16 (SF)

6,400 Not Applicable

Energy

 1 Step-down spot month limits would be for positions net long or net short as follows: 600 contracts at the 

close of trading on the first business day following the first Friday of the contract month; 300 contracts at 

the close of trading on the business day prior to the last five trading days of the contract month; and 200 

contracts at the close of trading on the business day prior to the last two trading days of the contract month. 
493

New York Mercantile 

Exchange Henry Hub 

Natural Gas (NG)

2,0002 Not Applicable

New York Mercantile 

Exchange Light Sweet 

Crude Oil (CL) 6,000/5,000/4,0003 Not Applicable

New York Mercantile 

Exchange NY Harbor

ULSD (HO)

2,000 Not Applicable

New York Mercantile 

Exchange RBOB Gasoline 

(RB)

2,000 Not Applicable

Metal

Commodity Exchange, Inc. 

Copper (HG)

1,000 Not Applicable

Commodity Exchange, Inc. 

Gold (GC)

6,000 Not Applicable

Commodity Exchange, Inc. 

Silver (SI)

3,000 Not Applicable

New York Mercantile 

Exchange Palladium (PA)

50 Not Applicable

New York Mercantile 

Exchange Platinum (PL)

500 Not Applicable

APPENDIX F TO PART 150 – GUIDANCE ON, AND ACCEPTABLE 

PRACTICES IN, COMPLIANCE WITH § 150.5

The following are guidance and acceptable practices for compliance with § 150.5. 

Compliance with the acceptable practices and guidance does not diminish or replace, in 

any event, the obligations and requirements of the person to comply with the other 

regulations provided under this part. The acceptable practices and guidance are for 

 2 See § 150.3 regarding the conditional spot month limit exemption for cash-settled positions in natural gas. 3 Step-down spot month limits would be for positions net long or net short as follows: 6,000 contracts at the 

close of trading three business days prior to the last trading day of the contract; 5,000 contracts at the close 

of trading two business days prior to the last trading day of the contract; and 4,000 contracts at the close of 

trading one business day prior to the last trading day of the contract.
494

illustrative purposes only and do not state the exclusive means for establishing 

compliance with § 150.5.

(a) Acceptable practices for compliance with § 150.5(b)(2)(i) regarding 

exchange-set limits or accountability outside of the spot month. A designated contract 

market or swap execution facility that is a trading facility may satisfy § 150.5(b)(2)(i) by 

complying with either of the following acceptable practices: 

(1) Non-spot month speculative position limits. For any commodity derivative 

contract subject to § 150.5(b), a designated contract market or swap execution facility 

that is a trading facility sets individual single month or all-months-combined levels no 

greater than any one of the following:

(i) The average of historical position sizes held by speculative traders in the 

contract as a percentage of the average combined futures and delta-adjusted option 

month-end open interest for that contract for the most recent calendar year; 

(ii) The level of the spot month limit for the contract; 

(iii) 5,000 contracts (scaled-down proportionally to the notional quantity per 

contract relative to the typical cash-market transaction if the notional quantity per 

contract is larger than the typical cash market transaction, and scaled up proportionally to 

the notional quantity per contract relative to the typical cash-market transaction if the 

notional quantity per contract is smaller than the typical cash market transaction); or

(iv) 10 percent of the average combined futures and delta-adjusted option monthend open interest in the contract for the most recent calendar year up to 50,000 contracts, 

with a marginal increase of 2.5 percent of open interest thereafter.
495

(2) Non-spot month position accountability. For any commodity derivative 

contract subject to § 150.5(b), a designated contract market or swap execution facility 

that is a trading facility adopts position accountability, as defined in § 150.1.

(b) [Reserved]

PART 151 – [REMOVED AND RESERVED]

27. Under the authority of section 8a(5) of the Commodity Exchange Act, 7 

U.S.C. 12a(5), remove and reserve part 151.

Issued in Washington, DC, on January 31, 2020, by the Commission.

Christopher Kirkpatrick,

Secretary of the Commission.

NOTE: The following appendices will not appear in the Code of Federal Regulations.

Appendices to Position Limits for Derivatives – Commission Voting Summary,

Chairman’s Statement, and Commissioners’ Statements

Appendix 1 – Commission Voting Summary

On this matter, Chairman Tarbert and Commissioners Quintenz and Stump voted 

in the affirmative. Commissioners Behnam and Berkovitz voted in the negative.

Appendix 2 – Supporting Statement of Chairman Heath Tarbert

I am pleased to support the Commission’s proposed rule on limits for speculative 

positions in futures and derivatives markets. Today’s proposal is a pragmatic approach 

that will protect our agricultural, energy, and metals markets from excessive speculation. 

But just as importantly, it will ensure fair and easy access to these markets for businesses 

producing, consuming, and wholesaling commodities under our jurisdiction.
496

When I came to the Commission, I set out several strategic goals. Among them is 

to regulate our derivatives markets to promote the interests of all Americans. Another 

goal is to enhance the regulatory experience of market participants. The proposal we are 

issuing today will deliver on both. We also drew from each of our agency core values to 

craft it—commitment, forward-thinking, teamwork, and clarity. Clarity is of particular 

importance here because, ultimately, markets and their participants deserve regulatory 

certainty. We provide that today.

Making our Markets Work for the American Economy

If adopted, our proposal will help ensure that futures markets in agricultural, 

energy and metals commodities work for American households and businesses. Farmers, 

ranchers, energy producers, utilities, and manufacturers are the backbone of the American 

economy. Our derivatives markets generally, and in particular the markets addressed in 

this proposal, are designed specifically to allow these businesses to hedge their exposure 

to price changes.

This Commission’s proposal will protect Americans from some of the most 

nefarious machinations in our derivatives markets. First, capping speculative positions in 

the covered derivatives contracts will help prevent cornering and squeezing. Such 

manipulative schemes can cause artificial prices and can injure the users of commodities 

linked to the futures markets. Limiting speculative positions can also reduce the 

likelihood of chaotic price swings caused by speculative gamesmanship. In effect, 

position limits should help ensure that prices in our markets reflect real supply and 

demand.
497

Position limits are not a solution born inside the Washington Beltway and 

imposed on the market from afar. Instead, they are one of many tools that exchanges 

have used since the 19th century to mitigate the potentially damaging effects of excessive 

speculation. They are a pragmatic, Midwestern solution to a real-world problem. 

Recognizing the usefulness of exchange-set limits, the Commission has worked 

collaboratively with our exchanges since 1981 to put sensible position limits and 

accountability levels on speculative positions in all physical commodity futures markets.

Our proposal would also end the “risk management” exemption that has allowed 

banks, hedge funds, and trading firms to take large and purely speculative positions in 

agricultural markets. Nearly a decade ago, Congress directed the Commission to address 

this issue. Today we are acting.

Some observers have gone so far as to call position limits “at best, a cure for a 

disease that does not exist or a placebo for one that does.”1

 I respectfully disagree. To be 

sure, position limits are not a silver bullet against the damaging impact of excessive 

speculative activity. But I also believe, as did Congress when it amended the Commodity 

Exchange Act, that position limits can help to “diminish, eliminate, or prevent” potential 

damage to the commodities markets that are so critical to our real economy.

Still, setting limits requires balancing the competing need for liquidity in our 

markets against the potential for disruptive speculative positions. I believe that the spot 

month levels we are proposing are reasonably calibrated. They are based on the current 

rule of thumb that limits should be no more than 25 percent of the deliverable supply of 

 1 https://www.cftc.gov/PressRoom/SpeechesTestimony/dunnstatement101811.
498

the referenced commodity, in order to prevent corners and squeezes that everyone can 

agree are bad for the market.

For the nine grain futures contracts currently subject to position limits,2 revising 

non-spot limits required the Commission to consider an additional complication. 

Eliminating the risk management exemption could potentially take away a source of 

liquidity further out the curve. For a farmer who needs to hedge the price risk on crops 

that are still in the ground, a bank with a risk management exemption may be the only 

willing buyer. To mitigate the impact of eliminating the risk management exemption, we 

have raised the non-spot month limits for the grain contracts. This should allow a 

broader set of market participants to provide liquidity and help farmers hedge their crop 

risk as far in advance as they need.

Ensuring Access for Bona Fide Hedgers

Position limits is the rare rule where the exception is as important as the rule 

itself. It cannot be said too often that these limits are on speculative activity. Congress 

has always intended that positions that are a bona fide hedge of price risk should not be 

subject to limits.

It is critical, therefore, that we not disrupt the regulatory experience of American 

producers, middlemen, and end-users of commodities. The greatest risk of a position 

limits rule is that hedgers are caught in the limits aimed at speculators. This could reduce 

their ability to protect themselves from risk, which could in turn negatively impact the 

broader economy. If a farmer cannot offset a risk on next year’s crop —if a refiner 

 2 The proposal would not set non-spot month limits on the 16 contracts that are not currently subject to 

federal position limits.
499

cannot offset a risk on crude oil for a new plant—or if a wholesaler cannot offset risks on 

inventory it is buying, those businesses will not expand their operations.

Any position limits rule must therefore be written with those hedging needs in 

mind. Congress and the American people expect nothing less. The proposal addresses 

those needs through (i) a broad exemption for “bona fide” hedging, and (ii) a streamlined 

and non-intrusive process for recognizing those exemptions.

On the first point, the proposal will expand the types of hedging strategies that are 

presumed to meet the bona fide hedging definition—and therefore be eligible for an 

exemption from position limits. For the first time, we have included anticipated 

merchandising, meaning that wholesalers and middlemen connecting producers and 

consumers could more readily hedge their risks. We have also expanded the definition to 

conform to the hedging strategies that are common in energy markets. This will ensure 

that the new federal speculative limits on energy markets do not inadvertently undermine 

the producers, refiners, pipeline operators, and utilities that keep this country running.

On the second point, we have built on prior proposals to create a practical and 

efficient way for hedgers to avail themselves of the bona fide hedging exemption. 

Creating burdensome red tape or slowing down approvals to take on hedging positions 

could result in lost business opportunities for the participants we are called to protect.

For parties whose hedging needs fit within the enumerated list, they could exceed 

federal position limits without requesting approval from the Commission. They also 

would not need to submit information on their cash market positions—a duplicative and 

burdensome exercise that is better handled by the exchanges.
500

For parties whose hedging needs do not fit within the enumerated list, we are 

offering a process whereby an exchange could evaluate that hedging need. If the 

exchange finds that the need is a bona fide hedge not captured by our list, the exchange 

would notify the Commission. Unless the Commission votes to reject it within 10 

business days, the exchange’s recognition would be deemed effective for purposes of 

federal position limits. Given our expanded definition of bona fide hedging, I anticipate 

that it would be a rare case that a market participant finds its legitimate hedging needs are 

not already covered in the list of enumerated exemptions. Still, this process would 

provide flexibility and legal certainty, without excessive red tape.

Striking the Right Balance

The Commission has grappled with position limits for a decade. The 2011 

proposal was finalized, but struck down by a court because of concerns over its legal 

justification. Subsequent proposals in 2013 and 2016 were never finalized, following 

pushback from market participants about access to bona fide hedge exemptions. The 

Commission and staff have worked with diligence and good faith to solve this puzzle. 

There are difficult, often competing interests to address in this seemingly simple rule. If 

an easy solution exists, I have no doubt that the Commission would have found it.

Today’s proposal is the culmination of ten years of effort across four Chairmen’s 

tenures. I sincerely thank my predecessors, as well as the Commission staff, who have 

worked so hard for so long to strike the right balance. Each proposal and every piece of 

feedback has helped improve the proposal before the Commission today. I believe that 

the proposal offers the pragmatic, workable solution that would protect markets from 
501

corners and squeezes while preserving the ability of American businesses to manage their 

risks.

Putting the Burden in the Right Place

Finally, I want to draw attention to one fundamental shift in approach between 

prior position limits rules and the present proposal. Previously, the Commission had read 

the Commodity Exchange Act to require federal limits to be placed on every futures 

contract for a physical commodity. This would have required the Commission to 

evaluate approximately 1,200 individual contracts to determine the appropriate levels.

The 2011 position limits rule was challenged in court on this ground and was 

struck down. The court found that the statute was ambiguous about whether the 

Commission must impose limits on all futures, or whether it should impose limits only 

“as the Commission finds are necessary[.]” The court said that “it is incumbent upon the 

agency not to rest simply on its parsing of the statutory language. It must bring its 

experience and expertise to bear in light of competing interests at stake to resolve the 

ambiguities in the statute.”3

The Commission is now bringing its experience and expertise to bear on this 

matter. We have taken a big picture approach to determine when position limits are in 

fact necessary. In short, we are proposing that speculative limits are necessary for those 

futures contracts that are physically delivered and where the futures market is important 

in the price discovery process for the underlying commodity. The Commission also 

examined whether a disruption in the distribution of that commodity would have a 

significant impact on our economy. This has led us to propose limits on 25 physically 

 3 Int’l Swap Dealers Assoc. v. CFTC, 887 F.Supp.2d 259, 281 (D.D.C. 2012).
502

delivered futures contracts,4 which covers the vast majority of trading volume and open 

interest in physically delivered derivatives. In addition to the nine grain futures contracts 

currently subject to federal limits, this includes the largest energy, metals, and other 

agricultural futures contracts.

Position limits are like medicine; they can help cure a symptom but can have 

undesirable side effects. And like medicine, position limits should be prescribed only 

when necessary. I believe this change in the underlying rationale for the proposal will 

require thoughtful reflection before imposing additional position limits on additional 

contracts in the future. Position limits will always create a burden on someone in the 

market—whether a compliance burden on parties having to track their positions relative 

to limits, or potentially the loss of a business opportunity because the risks cannot be 

hedged.

The statutory provisions on position limits can reasonably be read in two ways. 

The first reading would put the burden on the Commission to find position limits to be 

necessary before imposing them on new contracts. The second reading would mandate 

federal limits on all futures contracts irrespective of any need, reflexively putting placing 

a burden on all markets and all market participants. Given the choice of burdening a 

government agency or private enterprise, I think it is more prudent to put the burden on 

the government. That is what today’s proposal does. As Thomas Jefferson said, 

“Government exists for the interests of the governed, not for the governors.”

 4 The proposal would also impose limits on approximately 400 other futures contracts that are linked, 

directly or indirectly, to the 25 core physically delivered contracts.
503

Appendix 3 – Supporting Statement of Commissioner Brian Quintenz

I am pleased to support the agency’s revitalized approach to position limits. 

Today’s iteration marks the CFTC’s fifth proposed position limits rule since the DoddFrank Act1 amended the Commodity Exchange Act’s (CEA) section on position limits. 

This proposal is, by far, the strongest of them all.

Today’s proposed rule promotes flexibility, certainty, and market integrity for 

end-users – farmers, ranchers, energy producers, transporters, processors, manufacturers, 

merchandisers, and all who use physically-settled derivatives to risk manage their 

exposure to physical goods. The proposal includes an expansive list of enumerated and 

self-effectuating bona fide hedge exemptions, and a streamlined, exchange-centered 

process to adjudicate non-enumerated bona fide hedge exemption requests.

Of the five proposed rules, this proposal is the most true to the CEA in many 

significant respects: by requiring, as has long been the Commission’s practice, a 

necessity finding before imposing limits, by including economically equivalent swaps, 

and, perhaps most importantly, by following Congress’ instruction that, “to the maximum 

extent practicable,” any limits set by the Commission balance the interests among 

promoting liquidity, deterring manipulation, squeezes, and corners, and ensuring the price 

discovery function of the underlying market is not disrupted.2 The confluence of these 

factors occurs most acutely in the spot month for physically-settled contracts where the 

delivery process and price convergence is most vulnerable to potential manipulation or 

 1 76 FR 4752 (Jan. 26, 2011); 78 FR 75680 (Dec. 12, 2013); 81 FR 38458 (June 13, 2016) (“supplemental 

proposal”); and 81 FR 96704 (Dec. 30, 2016). The CEA addresses position limits in section (sec.) 4a (7 

U.S.C. 6a).

2 Sec. 4a(a)(3).
504

disruption due to outsized positions. By focusing exclusively on spot month position 

limits in the new set of physically-settled (and closely related cash-settled) contracts, the 

proposal elegantly balances the countervailing policy interests enumerated in the statute.

Necessity Finding

Today’s proposal, unlike the recent prior proposals, premises new limits on a 

finding that they are necessary to diminish, eliminate, or prevent the burden on interstate 

commerce from extraordinary price movements caused by excessive speculation 

(“necessity finding”) in specific contracts, as Congress has long required in the CEA and 

its legislative precursors since 1936.3 I am pleased that the proposal complies with the 

District Court’s ruling in the ISDA-position limits litigation: that the Commission must 

decide whether section 4a of the CEA mandates the CFTC set new limits or only permits 

the CFTC to set such limits pursuant to a necessity finding.4 As the District Court noted, 

“the Dodd-Frank amendments do not constitute a clear and unambiguous mandate to set 

position limits.”5 I agree with the proposal’s determination that, when read together, 

paragraphs (1) and (2) of section 4a demand a necessity finding.

Section 4a(a)(2)(A) states that the Commission shall establish limits “in 

accordance with the standards set forth in paragraph (1) of this subsection.”6 Paragraph 

(1) establishes the Commission’s authority to, “proclaim and fix such limits on the 

 3 Sec. 4a(1).

4 ISDA et al. v CFTC, 887 F. Supp. 2d 259, 278 and 283-84 (D.D.C. Sept. 28, 2012).

5 Id. at 280.

6 Sec. 4a(a)(2)(A) (“In accordance with the standards set forth in paragraph (1) of this subsection and 

consistent with the good faith exception cited in subsection (b)(2), with respect to physical commodities 

other than excluded commodities as defined by the Commission, the Commission shall by rule, regulation, 

or order establish limits on the amount of positions, as appropriate, other than bona fide hedge positions, 

that may be held by any person with respect to contracts of sale for future delivery or with respect to 

options on the contracts or commodities traded on or subject to the rules of a designated contract market.”)
505

amounts of trading ... as the Commission finds are necessary to diminish, eliminate or 

prevent [the] burden” on interstate commerce caused by unreasonable or unwarranted 

price moves associated with excessive speculation. This language dates back almost 

verbatim to legislation passed in 1936, in which Congress directed the CFTC’s precursor 

to make a necessity finding before imposing position limits. The Congressional report 

accompanying the CEA from the 74th Congress includes the following directive, 

“[Section 4a of the CEA] gives the Commodity Exchange Commission the power, after 

due notice and opportunity for hearing and a finding of a burden on interstate commerce 

caused by such speculation, to fix and proclaim limits on futures trading ...”7 In its ISDA 

opinion, the District Court noted the following: “This text clearly indicated that Congress 

intended for the CFTC to make a ‘finding of a burden on interstate commerce caused by 

such speculation’ prior to enacting position limits.”8

I support the proposal’s view that the most natural reading of section 

4a(a)(2)(A)’s reference to paragraph (1)’s “standards” is that it logically includes the 

“necessity” standard. Paragraph (1)’s requirement to make a necessity finding, along 

with the aggregation requirement, provide substantive guidance to the Commission about 

when and how position limits should be implemented.

If Congress intended to mandate that the Commission impose position limits on 

all physical commodity derivatives, there is little reason it would have referred to 

paragraph (1) and the Commission’s long established practice of necessity findings. 

Instead, Congress intended to focus the Commission’s attention on whether position 

 7 H.R. Rep. 74-421, at 5 (1935).

8 887 F. Supp. 2d 259, 269 (fn 4).
506

limits should be considered for a broader set of contracts than the legacy agricultural 

contracts, but did not mandate those limits be imposed.

Setting New Limits “As Appropriate”

The proposal preliminarily determines that position limits are necessary to 

diminish, eliminate, or prevent the burden on interstate commerce posed by unreasonable 

or unwarranted prices moves that are attributable to excessive speculation in 25 

referenced commodity markets that each play a crucial role in the U.S. economy. I am 

aware that there is significant skepticism in the marketplace and among academics as to 

whether position limits are an appropriate tool to guard against extraordinary price 

movements caused by extraordinarily large position size. Some argue there is no 

evidence that excessive speculation currently exists in U.S. derivatives markets.9 Others 

believe that large and sudden price fluctuations are not caused by hyper-speculation, but 

rather by market participants’ interpretations of basic supply and demand fundamentals.10

In contrast, still others believe that outsized speculative positions, however defined, may 

 9 Testimony of Erik Haas (Director, Market Regulation, ICE Futures U.S.) before the CFTC at 70 (Feb. 26, 

2015) (“We point out the makeup of these markets, primarily to show that any regulations aimed at 

excessive speculation is a solution to a nonexistent problem in these contracts.”), available at: 

https://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/emactranscript022615.pdf.

10 BAHATTIN BUYUKSAHIN & JEFFREY HARRIS, CFTC, THE ROLE OF SPECULATORS IN THE 

CRUDE OIL FUTURES MARKET 1, 16-19 (2009) (“Our results suggest that price changes leads the net 

position and net position changes of speculators and commodity swap dealers, with little or no feedback in 

the reverse direction. This uni-directional causality suggests that traditional speculators as well as 

commodity swap dealers are generally trend followers.”), available at 

http://www.cftc.gov/idc/groups/public/@swaps/documents/file/plstudy_19_cftc.pdf; Testimony of Philip K. 

Verleger, Jr. before the CFTC, Aug. 5, 2009 (“The increase in crude prices between 2007 and 2008 was 

caused by the incompatibility of environmental regulations with the then-current global crude supply. 

Speculation had nothing to do with the price rise.”), available at

https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/hearing080509_verle

ger.pdf.
507

aggravate price volatility, leading to price run-ups or declines that are not fully supported 

by market fundamentals.11

In my opinion, position limits should not be viewed as a means to counteract 

long-term directional price moves. The CFTC is not a price setting agency and we 

should not impede the market from reflecting long term supply and demand 

fundamentals. It is worth noting that the physically-settled contract which has seen the 

largest sustained price increase recently is palladium,12 which has also seen its exchangeset position limit decline four times since 2014 to what is now the smallest limit of any 

contract in the referenced contract set.13 Nevertheless, between the start of 2018 and the 

end of 2019, palladium futures prices rose 76%.14 Taking these conflicting views and 

facts into account, it is clear the Commission correctly stated in its 2013 proposal, “there 

is a demonstrable lack of consensus in the [academic] studies” as to the effectiveness of 

position limits.15

With that healthy dose of skepticism, I think the proposal appropriately focuses 

on the time period and contract type where position limits can have the most positive, and 

 11 For a discussion of studies discussing supply and demand fundamentals and the role of speculation, see

81 FR 96704, 96727 (Dec. 30, 2016). See, e.g., Hamilton, Causes and Consequences of the Oil Shock of 

2007–2008, Brookings Paper on Economic Activity (2009); Chevallier, Price Relationships in Crude oil 

Futures: New Evidence from CFTC Disaggregated Data, Environmental Economics and Policy Studies 

(2012).

12 Platinum, gold slide as dollar soars; palladium eases off record, Reuters (Sept. 30, 2019), available at:

https://www.reuters.com/article/global-precious/precious-platinum-gold-slide-as-dollar-soars-palladiumeases-off-record-idUSL3N26L3UV.

13 Between 2014 and 2017, the CME Group lowered the spot month position limit in the contract four 

times, from 650, to 500, to 400, to 100, to the current limit of 50 (NYMEX regulation 40.6(a) certifications, 

filed with the CFTC, 14-463 (Oct. 31, 2014), 15-145 (Apr. 14, 2015), 15-377 (Aug. 27, 2015), and 17-227 

(June 6, 2017)), available at: https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ProductTermsandConditions.

14 Palladium futures were at $1,087.35 on Jan. 2, 2018 and at $1,909.30 on Dec. 31, 2019. Historical prices 

available at: https://futures.tradingcharts.com/historical/PA_/2009/0/continuous.html.

15 78 FR 75694 (Dec. 12, 2013).
508

the least negative, impact - the spot month of physically settled contracts - while also 

calibrating those limits to function as just one of many tools in the Commission’s 

regulatory toolbox that can be used to promote credible, well-functioning derivatives and 

cash commodity markets.

Because of the significance of these 25 core referenced futures contracts to the 

underlying cash markets, the level of liquidity in the contracts, as well as the importance 

of these cash markets to the national economy, I think it is appropriate for the 

Commission to protect the physical delivery process and promote convergence in these 

critical commodity markets. Further, the limits proposed today are higher than in the 

past, notably because the proposal utilizes current estimates of deliverable supply -

numbers which haven’t been updated since 1999.16 I am interested to hear feedback from 

commenters about whether the estimates of deliverable supply, and the calibrated limits 

based off of them, are sufficiently tailored for the individual contracts.

Taking End-Users Into Account

Perhaps more than any other area of the CFTC’s regulations, position limits 

directly affect the participants in America’s real economy: farmers, ranchers, energy 

producers, manufacturers, merchandisers, transporters, and other commercial end-users 

that use the derivatives market as a risk management tool to support their businesses. I 

am pleased that today’s proposal takes into account many of the serious concerns that 

end-users voiced in response to the CFTC’s previous five unsuccessful position limits 

proposals.

 16 64 FR 24038 (May 5, 1999).
509

Importantly, and in response to many comments, this proposal, for the first time, 

expands the possibility for enterprise-wide hedging,17 proposes an enumerated anticipated 

merchandising exemption,18 eliminates the “five-day rule” for enumerated hedges,19 and 

no longer requires the filing of certain cash market information with the Commission that 

the CFTC can obtain from exchanges.20 Regarding enterprise-wide hedging – otherwise 

known as “gross hedging” – the proposal would provide an energy company, for 

example, with increased flexibility to hedge different units of its business separately if 

those units face different economic realities.

With respect to cross-commodity hedging, today’s proposal completely rejects the 

arbitrary, unworkable, ill-informed, and frankly, ludicrous “quantitative test” from the 

2013 proposal.21 That test would have required a correlation of at least 0.80 or greater in 

the spot markets prices of the two commodities for a time period of at least 36 months in 

order to qualify as a cross-hedge.22 Under this test, longstanding hedging practices in the 

electric power generation and transmission markets would have been prohibited. Today’s 

proposal not only shuns this Government-Knows-Best approach, it also proposes new 

flexibility for the cross-commodity hedging exemption, allowing it to be used in 

conjunction with other enumerated hedges.23 For example, a commodity merchant could 

rely on the enumerated hedge for unsold anticipated production to exceed limits in a 

 17 Proposed Appendix B, paragraph (a).

18 Proposed Appendix A, paragraph (a)(11).

19 Preamble discussion of Proposed Enumerated Bona Fide Hedges for Physical Commodities.

20 Elimination of CFTC Form 204.

21 78 FR 75,717 (Dec. 12, 2013).

22 Id.

23 Proposed Appendix A, paragraph (a)(5).
510

futures contract subject to the CFTC’s limits in order to hedge exposure in a commodity 

for which there is no futures contract, provided that the two commodities share 

substantially related fluctuations in value.

Bona Fide Hedges and Coordination with Exchanges

For those market participants who employ non-enumerated bona fide hedging 

practices in the marketplace, this proposal creates a streamlined, exchange-focused 

process to approve those requests for purposes of both exchange-set and federal limits. 

As the marketplaces for the core referenced futures contracts addressed by the proposal, 

the DCMs have significant experience in, and responsibility towards, a workable position 

limits regime. CEA core principles require DCMs and swap execution facilities to set 

position limits, or position accountability levels, for the contracts that they list in order to 

reduce the threat of market manipulation.24 DCMs have long administered position limits 

in futures contracts for which the CFTC has not set limits, including in certain 

agricultural, energy, and metals markets. In addition, the exchanges have been strong 

enforcers of their own rules: during 2018 and 2019, CME Group and ICE Futures US 

concluded 32 enforcement matters regarding position limits.

As part of their stewardship of their own position limits regimes, DCMs have long 

granted bona fide hedging exemptions in those markets where there are no federal limits. 

Today’s proposal provides what I believe is a workable framework to utilize exchanges’ 

long standing expertise in granting exemptions that are not enumerated by CFTC rules.25

This proposed rule also recognizes that the CEA does not provide the Commission with 

 24 DCM Core Principle 5 (sec. 5 of the CEA, 7 U.S.C. 7) (implemented by CFTC regulation 38.300) and 

SEF Core Principle 6 (sec. 5h of the CEA, 7 U.S.C. 7b-3) (implemented by CFTC regulation 37.600).

25 Proposed regulation 150.9.
511

free rein to delegate all of the authorities granted to it under the statute.26 The 

Commission itself, through a majority vote of the five Commissioners, retains the ability 

to reject an exchange-granted non-enumerated hedge request within 10 days of the 

exchange’s approval. The Commission has successfully and responsibly used a similar 

process for both new contract listings as well as exchange rule filings, and I am pleased 

to see the proposal expand that approach to non-enumerated hedge exemption requests 

that will limit the uncertainty for bone fide commercial market participants.

I look forward to hearing from end-users about whether this proposal provides 

them the flexibility and certainty they need to manage their exposures in a way that 

reflects the complexities and realities of their physical businesses. In particular, I am 

interested to hear if the list of enumerated bona fide hedging exemptions should be

broadened to recognize other types of common, legitimate commercial hedging activity.

Proposed Limits on Swaps

The CEA requires the Commission to consider limits not only on exchange-traded 

futures and options, but also on “economically equivalent” swaps.27 Today’s proposal 

provides the market with far greater certainty on the universe of such swaps than the 

previous proposals. Prior proposals failed to sufficiently explain what constituted an 

“economically equivalent swap,” thereby ensuring that compliance with position limits 

was essentially unworkable, given real-time aggregation requirements and ambiguity 

over in-scope contracts. In stark contrast, today’s proposed rule narrows the scope of 

“economically equivalent” swaps to those with material contractual specifications, terms, 

 26 Preamble discussion of proposed regulation 150.9, including references to cases pointing out the extent 

to which an agency can delegate to persons outside of the agency.

27 Sec. 4a(5).
512

and conditions that are identical to exchange-traded contracts.28 For example, in order 

for a swap to be considered “economically equivalent” to a physically-settled core 

referenced futures contract, that swap would also have to be physically-settled, because 

settlement type is considered a material contractual term. I believe the proposed 

narrowly-tailored definition will provide market participants with clarity over those 

contracts subject to position limits. I also welcome suggestions from commenters 

regarding ways in which the definition can be further refined to complement limits on 

exchange-traded contracts.

Conclusion

Section 2a(10) of the CEA is not an often cited passage of text. It describes the 

Seal of the United States Commodity Futures Trading Commission, and in particular, 

lists a number of symbols on the seal which represent the mission and legacy of our 

agency: the plough showing the agricultural origin of futures markets; the wheel of 

commerce illuminating the importance of hedging markets to the broader economy; and, 

the scale of balanced interests, proposing a fair weighing of competing or contradicting 

forces.

As I think about the proposal in front of us today, I believe it speaks to all of those 

elements enshrined in our agency’s legacy, but the scale of balanced interests comes most 

to mind with this rule: new flexibility combined with new regulation, the removal of a 

few exemptions with the expansion or addition of others, the reliance on exchange 

expertise but with Commission review and oversight, and the balance of liquidity and 

price discovery against the threat of corners and squeezes. I am very pleased to support 

 28 Proposed regulation 150.1.
513

today’s revitalized, confined, and tempered approach to position limits and look forward 

to comment letters, particularly from the end-user community.

Appendix 4 – Dissenting Statement of Commissioner Rostin Behnam

Introduction

The ceremony for the 92nd Academy Awards will air in a little over a week. I 

haven’t seen too many movies this year given my two young girls and hectic work 

schedule, but I did see “Ford v Ferrari.”1

 “Ford v Ferrari” earned four award 

nominations, including best motion picture of the year. The film tells the true story of 

American car designer Carroll Shelby and British-born driver Ken Miles who built a race 

car for Ford Motor Company and competed with Enzo Ferrari’s dominating and iconic 

red racing cars at the 1966 24 Hours of Le Mans.2

 This high drama action film focuses 

foremost on the relationship between Shelby and Miles—the co-designers and driver of 

Ford’s own iconic GT40—and their triumph over the competition, the course, the 

rulebook, and the bureaucracy. Even if you aren’t a car enthusiast, the action, acting, and 

accuracy of the story are well worth your time. However, there is a lot more to this movie 

than racing.

There is a great scene where Miles is talking to his son about achieving the 

“perfect lap” –no mistakes, every gear change, and every corner perfect. In response to 

his son’s observation that you can’t just “push the car hard” the whole time, Miles agrees, 

pensively staring down the track towards the setting sun. He says, “If you are going to 

 1 Ford V Ferrari (Twentieth Century Fox 2019).

2 Ford v Ferrari, Fox Movies, https://www.foxmovies.com/movies/ford-v-ferrari (Last visited Jan. 28, 2020, 

1:55 PM).
514

push a piece of machinery to the limit, and expect it to hold together, you have to have 

some sense of where that limit is.”

It’s been nine years since the Commission first set out to establish the position 

limits regime required by amendments to section 4a of the Commodity Exchange Act 

(the “Act” or “CEA”)3, under the Dodd-Frank Wall Street Reform and Consumer 

Protection Act of 2010.

4

 While I would like to be in a position to say that today’s 

proposed rule addressing Position Limits for Derivatives (the “Proposal”) is leading us 

towards that “perfect lap,” I cannot. While the Proposal purports to respect 

Congressional intent and the purpose and language of CEA section 4a, in reality, it 

pushes the bounds of reasonable interpretation by deferring to the exchanges5 and setting 

the Commission on a course where it will remain perpetually in the draft, unable to 

acquire the necessary experience to retake the lead in administering a position limits 

regime.

In 2010 and the decades leading up to it, Congress understood that for the 

derivatives markets in physical commodities to perform optimally, there needed to be 

limits on the amount of control exerted by a single person (or persons acting in 

agreement). In tasking the Commission with establishing limits and the framework 

around their operation, Congress was aware of our relationship with the exchanges, but 

nevertheless opted for our experience and our expertise to meet the policy objectives of 

the Act.

 3 See Position Limits for Derivatives, 76 FR 4752 (proposed Jan. 26, 2011) (the “2011 Proposal”).

4 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203 section 737, 124 

Stat. 1376, 1722-25 (2010) (the “Dodd-Frank Act”).

5 As in the Proposal, unless otherwise indicated, the use of the term “exchanges” throughout this statement 

refers to designated contract markets (“DCMs”) and swap execution facilities (“SEFs”).
515

Right now, we are pushing to go faster and just get to the finish line, making realtime adjustments without regard for even trying for that “perfect lap.” It is unfortunate, 

but despite the Chairman’s leadership and the talented staff’s hard work, I do not believe 

that this Proposal will hold itself together. I must therefore, with all due respect, dissent.

Deference to our Detriment

While I have a number of concerns with the Proposal, my principal disagreement 

is with the Commission’s determination to in effect disregard the tenets supporting the 

statutorily created parallel federal and exchange-set position limit regime, and take a back 

seat when it comes to administration and oversight. In doing so, the Commission claims 

victory for recognizing that the exchanges are better positioned in terms of resources, 

information, knowledge, and agility, and therefore ought to take the wheel. While the 

Commission believes it can withdraw and continue to maintain access to information that 

is critical to oversight, I fear that giving way absent sufficient understanding of what we 

are giving up, and planning for ad hoc Commission (and staff) determinations on key 

issues that are certain to come up, will let loose a different set of responsibilities that we 

have yet to consider.

I believe the Proposal has many flaws that could be the subject of dissent. I am 

focusing my comments on those issues that I think are most critical for the public’s 

review. Based on consideration of the Commission’s mission, and Congressional intent 

as evinced in the Dodd-Frank Act amendments to CEA section 4a and elsewhere in the 

Act, I believe that (1) the Commission is required to establish position limits based on its 

reasoned and expert judgment within the parameters of the Act; (2) the Commission has 

not provided a rational basis for its determination not to propose federal limits outside of 
516

the spot month for referenced contracts based on commodities other than the nine legacy 

agricultural commodities; and (3) the Commission’s seemingly unlimited flexibility in 

proposing to (a) significantly broaden the bona fide hedging definition, (b) codify an 

expanded list of self-effectuating enumerated bona fide hedges, (c) provide for exchange 

recognition of non-enumerated bona fide hedge exemptions with respect to federal limits, 

and (d) simultaneously eliminate notice and reporting mechanisms, is both inexplicably 

complicated to parse and inconsistent with Congressional intent.

The Commission is Required to Establish Position Limits

The Proposal goes to great lengths to reconcile whether the CEA section 

4a(a)(2)(A) requires the Commission to make an antecedent necessity finding before 

establishing any position limit,6 with the implication that if a necessity finding is 

required, then the Commission could rationalize imposing no limits at all. I do not 

believe it was necessary to rehash the legislative and regulatory histories to determine the 

Commission’s authority with respect to CEA section 4a. Nor do I believe it was 

worthwhile here to reply in such great depth to the U.S. District Court for the District of 

Columbia’s opinion vacating the Commission’s 2011 final rulemaking on Position Limits 

for Futures and Swaps.

7 The Proposal uses a tremendous amount of text to try and flesh 

out what is meant by “necessary”, and yet I fear it does not demonstrate the 

Commission’s “bringing its expertise and experience to bear when interpreting the 

statute,” giving effect to the meaning of each word in the statute, and providing an 

explanation for how any interpretation comports with the policy objectives of the Act as 

 6 See Proposal at III.

7 Int’l Swaps & Derivatives Ass’n v. CFTC, 887 F. Supp. 2d 259 (D.D.C. 2012).
517

amended by the Dodd-Frank Act, as directed by the District Court.8 The Commission 

ought to avoid the temptation to retract when doing so requires the torture of strawmen. 

Not only do we look complacent, but we invite criticism for our unnecessary affront to 

the sensibilities of the public we serve.

Looking back at the record, what is necessary is that the Commission complies 

with the mandate.

9 In response to the District Court’s directive, the Commission could 

have gone back through its own records to the 2011 Proposal. If it had done so, it would 

have found that the Commission provided a review of CEA section 4a(a)—interpreting

the various provisions, giving effect to each paragraph, acknowledging the Commission’s 

own informational and experiential limitations regarding the swaps markets at that time, 

and focusing on the Commission’s primary mission of fostering fair, open and efficient 

functioning of the commodity derivatives markets.10 Of note, “Critical to fulfilling this 

statutory mandate,” the Commission pronounced, “is protecting market users and the 

public from undue burdens that may result from ‘excessive speculation.’”11 Federal 

position limits, as predetermined by Congress, are most certainly the only means towards 

addressing the burdens of excessive speculation when such limits must address a 

“proliferation of economically equivalent instruments trading in multiple trading 

 8 Id. at 284.

9 The Proposal’s analysis in support of its denial of a mandate misconstrues form over substance and

assumes the answer it is looking for by providing a misleading recitation of Michigan v. EPA, 135 S.Ct. 

2699 (2015). In doing so, the Proposal seems to suggest that the Commission is free to ignore a 

Congressional mandate if it determines that Congress is wrong about the underlying policy. See Proposal 

at III.D.

10 76 FR at 4752-54.

11 Id. at 4753.
518

venues.”

12 Exchange-set position limits or accountability levels simply cannot meet the 

mandate.

In exercising its authority, the Commission may evaluate whether exchange-set 

position limits, accountability provisions, or other tools for contracts listed on such 

exchanges are currently in place to protect against manipulation, congestion, and price 

distortions.13 Such an evaluation—while permissible—is just one factor for 

consideration. The existence of exchange-set limits or accountability levels, on their 

own, can neither predetermine deference nor be justified absent substantial consideration.

The authority and jurisdiction of individual exchanges are necessarily different than that 

of the Commission. They do not always have congruent interests to the Commission in 

monitoring instruments that do not trade on or subject to the rules of their particular 

platform or the market participants that trade them. They do not have the attendant 

authority to determine key issues such as whether a swap performs or affects a significant 

price discovery function, or what instruments fit into the universe of economically 

equivalent swaps. They are not permitted to define bona fide hedging transactions or 

grant exemptions for purposes of federal position limits. It is therefore clear that CEA 

section 4a, as amended by the Dodd-Frank Act “warrants extension of Commission-set 

position limits beyond agricultural products to metals and energy commodities.”14

Unsupportable Deference

In spite of all of this—the foregoing mandate; the clear Congressional intent in 

CEA section 4a(a)(3)(A); and the Commission’s real experience and expertise (including 

 12 Id. at 4754-55.

13 See 76 FR at 4755.

14 Id.
519

its unique data repository)—the Commission only proposes to maintain federal non-spot 

month limits for the nine legacy agricultural contracts (with questionably appropriate 

modifications), “because the Commission has observed no reason to eliminate them.”15 

Essentially, in the Commission’s reasoned judgment, “if it ain’t broke, don’t fix it.” And 

so, the Commission, in keeping with this relatively riskless course of action, similarly 

was able to conclude that federal non-spot month limits are not necessary for the 

remaining 16 proposed core referenced futures contracts identified in the Proposal.

The Commission provides two reasons in support of its determination, and neither 

sufficiently demonstrates that the Commission utilized its experience and expertise. 

Rather, the Commission backs into deferring to the exchanges’ authority to establish 

position limits or accountability levels. This course of action ignores the reality that 

Commission-set position limits serve a higher purpose than just addressing threats of 

market manipulation16 or creating parameters for exchanges in establishing their own 

limits.17 The Proposal advocates that there is no need to disturb the status quo, despite

the fact that we have nothing to compare it to. The Commission places a higher value on 

minimizing the impact on industry—which it appears to have not quantified for purposes 

of the Proposal—than actually evaluating the appropriateness of limits in light of the 

purposes of the Act and as described in CEA section 4a(a)(3).

The first reason the Commission submits in defense of not proposing federal 

limits outside of the spot month for the 16 aforementioned contracts is that “corners and 

squeezes cannot occur outside the spot month...and there are other tools other than 

 15 Proposal at II.B.2.d.

16 See 7 U.S.C. 7(d)(5) and 7b-3(f)(6).

17 See, e.g., 7 U.S.C. 6a(e).
520

federal position limits for deterring and preventing manipulation outside of the spot 

month.”18 The “other tools” include surveillance by the Commission and exchanges,

coupled with exchange-set limits and/or accountability levels. As laid out in several 

paragraphs of the Proposal, the Commission would maintain a window into the setting of 

any limits or accountability levels that in its view are “an equally robust” alternative to 

federal non-spot month speculative position limits. In describing how accountability 

levels implemented by exchanges work, the Commission touts the flexibility in 

application because they provide exchanges—and not the Commission—the ability to ask 

questions about positions, determine if a position raises any concerns, provide an 

opportunity to intervene—or not—etc.19

While all of this reads well, it ignores Congressional intent. The Proposal never 

considers that Congress directed the Commission to establish limits—not accountability 

levels. Given the Commission’s “decades of experience in overseeing accountability 

levels implemented by the exchanges,” Congress would have been well aware that this 

alternative path would be a viable option if it were truly as robust in choosing the 

legislative language. But the Commission has failed to make that case. Foremost, 

federal position limits are aimed at diminishing, eliminating, and preventing sudden and 

unwarranted price changes. These sudden price changes may occur regardless of

manipulative, intentional or reckless activity—both within and outside of the spot month. 

The Commission provides no explanation regarding how exchange-set limits or 

accountability levels would compare, in terms of effectiveness, to federal position limits,

 18 Proposal at II.B.2.d.

19 See id.
521

which among other things, must apply in the aggregate as mandated by CEA section 

4a(a)(6). It is difficult to measure the robustness of a regime when there is nothing to 

compare it to. As well, the Commission’s observation that exchange-set accountability 

levels have “functioned as-intended” until this point time, ignores the wider purpose and 

function of aggregate position limits established by the Commission, and is shortsighted 

given the ever expanding universe of economically equivalent instruments trading across 

multiple trading venues. Not to belabor the point, but it seems odd to conclude that 

Congress envisioned that its painstaking amendments to CEA section 4a were a directive 

for the Commission to check the box that the current system is working perfectly.

The Commission’s second reason is that layering federal non-spot limits for the 

16 contracts on top of existing exchange-set limit/accountability levels may only provide 

minimal benefits—if any—while sacrificing the benefits associated with flexible 

accountability levels.20 The Commission, again, ignores that Congress was clearly aware 

of the possible layering effect, and did not find it to be comparable let alone as robust.21 

Moreover, the Commission fails to support or otherwise quantify its argument with data. 

Presumably, the Commission could calculate anticipated non-spot month position 

limits—based on the formula in the proposed part 150.2(e) (and described in section 

II.B.2. e. of the Proposal)—for the 16 proposed core referenced futures contracts that 

have never been subject to such limits. The Commission could have based its

determination on aggregate position data it collects through surveillance, and it could 

have provided a rough estimate of the potential impact that limits may have, absent 

 20 See id.

21 See, e.g.7 U.S.C. 6a(e) (providing, among other things and consistent with core principles for DCMs and 

SEFs, that exchange-set position limits shall not be higher that the limits fixed by the Commission).
522

consideration of any of the proposed enumerated bona fide hedges or spread exemptions. 

While I am not sure such evidence if presented would have changed my mind, it certainly 

would have been helpful in determining the reasonableness of the Commission’s 

determination.

What if?

When muscles are overly flexible, they require appropriate strength to ensure that 

they can perform under stress. In addition to largely deferring to the exchanges in 

addressing excessive speculation outside of the spot-month for the majority of the 25 core 

referenced futures contracts, the Proposal also incorporates flexibility in a multitude of 

other ways. The Proposal would provide for significantly broader bona fide hedging 

opportunities that will be largely self-effectuating; it would defer to the exchanges in 

recognizing non-enumerated bona fide hedging; and it would eliminate longstanding 

notice and reporting mechanisms. In proposing these various provisions, the Proposal 

flexes and contorts to accommodate each piece. In doing so, it seems the Commission 

will be left insufficient strength to accomplish its mandated role of exercising appropriate 

surveillance, monitoring, and enforcement authorities—and this will be to the detriment 

of the derivatives markets and the public we serve.

The main point to get across here is that while I support enhancing the 

cooperation between the Commission and the exchanges, the Commission here is 

cooperating by dropping back and promising to remain in the draft—never able to fully 

compete, or take advantage of a “slingshot effect.” We will simply never gain the 

necessary direct experience with the new regime. The Commission lacks experience in 

administering spot month limits for 16 of the 25 core referenced futures contracts and 
523

lacks familiarity with both common commercial hedging practices for the 16 contracts 

and the proliferation of the use of the dozen or so self-effectuating enumerated hedges 

and spread exemptions (also largely self-effectuating) being proposed. While prior drafts 

of the Proposal admitted this as recently as two weeks ago, the Commission determined 

to change course and quickly let go of the line. The Commission’s decision to essentially 

give up primary authority to recognize non-enumerated bona fide hedges, and to rely on 

the exchanges to collect and hold relevant cash market data for the Commission’s use 

only after requesting it, seems both careless and inconsistent with Congressional intent.

For example, while the Proposal provides the Commission with the authority to 

reject an exchange’s granting of a non-enumerated bona fide hedge recognition, this 

determination must be in the form of a “Commission action,” and it must take place in 

the span of ten business days (or two in the case of sudden or unforeseen circumstances). 

Furthermore, the Proposal offers no guidance as to what factors the Commission may 

consider, or the criteria it may use to make the determination. This narrow window of 

time likely will not provide Commission staff with a reasonable timeframe to prepare the 

necessary documentation for the full Commission to deliberate and either request 

additional information, stay the application, or vote to accept the recognition.22 It seems 

more likely that the Commission will be unable to act within the ten or two-day window 

and the recognition will default to being approved. Regardless of what the Commission 

determines—even if it ultimately determines that a position for which an application for a 

bona fide hedge recognition does not meet the CEA definition of a bona fide hedge or the 

requirements in proposed part 150.9(b)—the Commission could not determine that the 

 22 See Proposed part 150.9(e).
524

person holding the position has committed a position limits violation during the 

Commission’s ongoing review or upon issuing its determination. I have so many “what 

ifs” in response to this set up that I feel trapped.

In the Proposal, the Commission requires exchanges to collect cash-market 

information from market participants requesting bona fide hedges, and to provide it to the 

Commission only upon request. The Proposal also eliminates Commission Form 204, 

which market participants currently file each month when they have bona fide hedging 

positions in excess of the federal limits. This form is a necessary mechanism by which 

market participants demonstrate cash-market positions justifying such overages. These 

changes may be well-intentioned, but they are ill-conceived in consideration of the 

various changes being proposed to the federal position limits regime.

Foremost, under the Proposal, the Commission would receive a monthly report 

showing the exchange’s disposition of any applications to recognize a position as a bona 

fide hedge (both enumerated and non-enumerated) or to grant a spread or other 

exemption (including any renewal, revocation of, or modification of a prior recognition 

or exemption).23 While the Proposal argues that the monthly report would be a critical 

element of the Commission’s surveillance program by facilitating its ability to track bona 

fide hedging positions and spread exemptions approved by the exchanges,24 it would not 

itself appear to be useful in discerning any market participants ongoing justification for, 

or compliance with, self-effectuating or approved bona fide hedge, spread, or other 

exemption requirements. While the contents of the report may prompt the Commission 

 23 See Proposed Commission regulation 150.5(a)(4).

24 See Proposal at II.D.4.
525

to request records from the exchange, it is unclear what may be involved in the making 

of, and response to, such requests—including time and resources on both sides. Not to 

mention that the Proposal opines that exchanges would only collect responsive 

information on an annual basis,25 and part 150.9(e) does not require exchanges to notify 

the Commission of any renewal applications. Of course, the Proposal posits that the 

Commission would likely only need to make such requests “in the event that it noticed an 

issue that could cause market disruptions.”26 My guess is that our surveillance staff and 

Division of Enforcement may have other ideas, but I will leave that with the “what ifs.”

Conclusion

The 24 Hours of Le Mans awards the victory to the car that covers the greatest 

distance in 24 hours. While the Proposal shoots for victory by similarly attempting to 

achieve a great amount over a short time period, I am concerned that all of it will not hold 

together. The Proposal attempts to justify deferring to the exchanges on just about 

everything, and in-so-doing it pushes to the back any earnest interpretation of the 

Commission’s mandate or the guiding Congressional intent. This is not cooperation, this 

is stepping-aside, backing down, giving way, and getting comfortable in the draft. I am 

not comfortable in this or any draft. It’s my understanding that the Commission has the 

tools and resources to develop a better sense of where federal position limits ought to be 

in order to achieve the purposes for which they were designed, while maintaining our 

natural, Congressionally-mandated lead. The Proposal fails to recognize that Congress 

 25 See Proposal at I.B.7.a. and b.

26 Id. As well, the Proposal opines that the Commission’s reliance on the “limited circumstances” set forth 

in proposed part 150.9(f)under which it would revoke a bona fide hedge recognition granted by an 

exchange would be rarely exercised, suggesting a preference to defer to the judgment of the exchange. See

Proposal at II.G.3.f.
526

already set the course in directing us that our derivatives markets will operate optimally 

with limits—we just need to provide a sense of where they are. Perhaps the Proposal was 

just never aiming for the “perfect lap.”

Appendix 5 – Statement of Commissioner Dawn D. Stump

Reasonably designed. Balanced in approach. And workable in practice – both for 

market participants and for the Commission. These are the 3 guideposts by which I have 

evaluated the proposal before us to update the Commission’s rules regarding position 

limits for derivatives. Is it reasonable in its design? Is it balanced in its approach? And 

is it workable in practice for both market participants and the Commission? Overall, I 

believe the answer to each of these questions is yes, and I therefore support the 

publication of this proposal for public comment.

There is one question that I have not asked: Is it perfect? It is not. There are two 

particular areas discussed below that I believe can be improved – the list of enumerated 

hedging transactions and positions, and the process for reviewing hedging practices

outside of that list.

But in reality, how could a position limits proposal ever achieve perfection? In 

section 4a(a) of the Commodity Exchange Act (“CEA”),1 Congress has given the 

Commission the herculean task of adopting position limits that:

• It finds necessary to diminish, eliminate, or prevent an undue and unnecessary 

burden on interstate commerce as a result of excessive speculation in derivatives;

• Deter and prevent market manipulation, squeezes, and corners;

• Ensure sufficient market liquidity for bona fide hedgers;2

 1 CEA section 4a(a), 7 U.S.C. 6a(a).
527

• Ensure that the price discovery function of the underlying market is not disrupted;

• Do not cause price discovery to shift to trading on foreign boards of trade; and

• Include economically equivalent swaps.

And it must do so, according to the CEA’s purposes set out in section 3(b), 

through a system of effective self-regulation of trading facilities.3

These statutory objectives are not only numerous, but in many instances they are 

in tension with one another. As a result, it is not surprising that each of us will have a 

different view of the perfect position limits framework. Perfection simply cannot be the 

standard by which this proposal is judged.

But after nearly a decade of false starts, I believe the proposal before us brings us 

close to the end of that long journey. It is reasonably designed. It is balanced in its 

approach. And it is workable in practice. I am pleased to support putting it before the 

public for comment.

The Commission has a Mandate to Impose Position Limits it Finds are Necessary

Background

Before digging into the substantive provisions of the proposal, let me offer my 

view on a legal issue that has been debated seemingly without end throughout the past 

decade in the Commission’s rulemaking proceedings and in federal court. As noted in 

testimony by the CFTC’s General Counsel in July 2009, a year before the Dodd-Frank 

 2 Section 4a(c) of the CEA further requires that the Commission’s position limit rules “permit producers, 

purchasers, sellers, middlemen, and users of a commodity or a product derived therefrom to hedge their 

legitimate anticipated business needs . . .” CEA section 4a(c), 7 U.S.C. 6a(c).

3 CEA section 3(b), 7 U.S.C. 5(b).
528

Act4 became law, the CEA has always given the Commission a mandate to impose 

federal position limits – that is, a mandate to impose federal position limits that it finds 

are necessary.5 The issue that has consumed the agency, the industry, and the bar is this: 

Did the amendments to the CEA’s position limits provisions that were enacted as part of 

the Dodd-Frank Act strip the Commission of its discretion not to impose limits if it does 

not find them to be necessary?

I consider it unfortunate that the Commission has spent so much time, energy, and 

resources on this debate. That time, energy, and resources would have been much better 

spent focusing on the development of a position limits framework that is reasonably 

designed, balanced in approach, and workable in practice for both market participants and 

the Commission – which simply cannot be said of the Commission’s prior efforts in this 

area. But, in the words of American writer Isaac Marion in his “zombie romance” novel 

Warm Bodies: “We are where we are, however we got here.”6

 And so, a few thoughts on 

necessity and mandates.

 4 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 

(2010) (“Dodd-Frank Act”).

5 “Position Limits and the Hedge Exemption, Brief Legislative History,” Testimony of General Counsel 

Dan M. Berkovitz, Commodity Futures Trading Commission, before Hearing on Speculative Position 

Limits in Energy Futures Markets at 1 (July 28, 2009) (“Today, I will provide a brief legislative history of 

the mandate in the CEA concerning position limits and the exemption from those limits for bona fide 

hedging transactions. . . . Since its enactment in 1936, the Commodity Exchange Act (CEA) . . . has 

directed the Commodity Futures Trading Commission (CFTC) to establish such limits on trading ‘as the 

Commission finds are necessary to diminish, eliminate, or prevent such burden [on interstate commerce].’ 

The basic statutory mandate in Section 4a of the CEA to establish position limits to prevent such burdens 

has remained unchanged over the past seven decades) (emphasis added), available at 

https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement072809; see also, id. at 5 (“By the 

mid-1930s . . . Congress finally provided a federal regulatory authority with the mandate and authority to 

establish and enforce limits on speculative trading. In Section 4a of the 1936 Act (CEA), the Congress . . . . 

directed the Commodity Exchange Commission [the CFTC’s predecessor agency] to establish such limits 

on trading ‘as the commission finds is [sic] necessary to diminish, eliminate, or prevent’ such burdens . . .”) 

(emphasis added).

6 Isaac Marion, Warm Bodies and The New Hunger: A Special 5th Anniversary Edition, 97, Simon and 

Schuster (2016).
529

In the ISDA v. CFTC case, a federal district court in 2012 vacated the 

Commission’s first post-Dodd-Frank Act attempt to adopt a position limits rulemaking. 

The court concluded that the Dodd-Frank Act amendments to the position limits 

provisions of the CEA “are ambiguous and lend themselves to more than one plausible 

interpretation.” Accordingly, it remanded the position limits rulemaking to the 

Commission to “bring its experience and expertise to bear in light of competing interests 

at stake” in order to “fill in the gaps and resolve the ambiguities.”7

The Commission attempted to follow the court’s directive in a proposed position 

limits rulemaking published in 2013. There, the Commission concluded that the DoddFrank Act required the agency to adopt position limits even in the absence of finding 

them necessary but, “in an abundance of caution,” also made a finding of necessity with 

respect to the position limits that it was proposing.8

 The Commission promulgated this 

same analysis when, three years later, it re-proposed its position limits rulemaking in 

2016.9

 The proposal before us today, by contrast, bases its proposed limits solely on 

finding them to be necessary – albeit a finding of necessity that is different from the one 

relied upon in the 2013 Proposal and the 2016 Re-Proposal.

Practical Considerations

I find the analysis put forward by our General Counsel’s Office in the proposed 

rulemaking before us today – which explains the Commission’s legal interpretation that 

its mandate to impose position limits under the CEA exists only when it finds the limits

 7 International Swaps and Derivatives Association v. U.S. Commodity Futures Trading Commission, 887 

F.Supp. 2d 259, 281-282 (D.D.C. 2012) (emphasis in the original) (“ISDA v. CFTC”), citing PDK Labs. 

Inc. v. U.S. DEA, 362 F.3d 786, 794, 797-98 (D.C. Cir. 2004).

8 Position Limits for Derivatives, 78 FR 75680, 75685 (proposed Dec. 12, 2013) (“2013 Proposal”).

9 Position Limits for Derivatives, 81 FR 96704, 96716 (proposed Dec. 30, 2016) (“2016 Re-Proposal”).
530

are necessary – to be well-reasoned and compelling. I add two practical considerations in 

support of that conclusion.

First, if Congress in the Dodd-Frank Act had wanted to eliminate a necessity 

finding as a prerequisite to the imposition of position limits, it could simply have 

removed the requirement to find necessity that already existed in the CEA. That it did 

not do so indicates that on this point, the CEA both before and after the Dodd-Frank Act 

provides that the Commission has a mandate to impose position limits that it finds are 

necessary.

Second, I do not believe that Congress would have directed the Commission to 

spend its limited resources developing and administering position limits that are not 

necessary. We must be careful stewards of the taxpayer dollars entrusted to us, and 

absent a clear statement of Congressional intent to do so, I do not believe those dollars 

should be spent on position limits that the Commission does not find to be necessary to 

achieve the objectives of the CEA.

Statutory Analysis

This section walks through some of the statutory text in CEA section 4a(a) that is 

relevant to the question of whether a finding of necessity is a prerequisite to the 

Commission’s mandate of imposing position limits. A diagram entitled “Commodity 

Exchange Act Section 4a(a): Finding Position Limits Necessary is a Prerequisite to the 

Mandate for Establishing Such” accompanies this statement on the Commission’s 

website, which may aid in reading the discussion.

Subsection (1) of section 4a(a) is legacy text that has been in the CEA for 

decades. As noted above, it has long mandated that the Commission impose position 
531

limits that it finds necessary to diminish, eliminate, or prevent the burden on interstate 

commerce resulting from excessive speculation in derivatives. Subsection (2) of section 

4a(a), on the other hand, was added to the CEA by the Dodd-Frank Act.

In my view, subsections (1) and (2) are linked, and cannot each be considered in 

isolation, because the Dodd-Frank Act specifically tied them together. First, 

subparagraph (A) of subsection (2) links the Commission’s obligation to set position 

limits to the “standards” set forth in subsection (1) – including the standard of finding 

necessity as a prerequisite to the mandate of imposing position limits. Then, 

subparagraph (B) of subsection (2) links the timing of issuing position limits to the limits 

required under subparagraph (A) – which, as noted, is connected to the standards set forth 

in subsection (1), including the standard of finding necessity.

In sum, the new timing provisions in subparagraph (2)(B) apply to the 

requirement in subparagraph (2)(A). Subparagraph (2)(A), in turn, informs how 

Congress intended the Commission to establish limits, i.e., in specific accordance with 

the standards in subsection (1) – which includes the necessity standard. They are all 

linked.

Yet, some have relied in isolation on the “shall . . . establish limits” wording in 

subparagraph (A) of subsection (2) to argue that the Dodd-Frank Act imposed a mandate

on the Commission to establish position limits even in the absence of a finding of 

necessity. Some also have pointed to the timing provisions in subparagraph (B) of 

subsection (2) to argue that the Dodd-Frank Act imposed a mandate on the Commission 

to establish position limits because subparagraph (B) twice says that position limits “shall 

be established.” I agree that, under subparagraph (B), position limits “shall be 
532

established” as required under subparagraph (A) – but as noted, subparagraph (A) states 

that the Commission shall establish limits “[i]n accordance with the standards set forth in 

[subsection (1)].” This latter point cannot be overlooked or ignored.

Some also have asked why Congress would add all this new language to CEA 

section 4a(a) if not to impose a new mandate. Yet, it makes perfect sense to me that 

while expanding the Commission’s authority to regulate swaps in the Dodd-Frank Act, 

Congress took the opportunity to review and enhance the Commission’s position limit 

authorities to ensure they were fit for purpose considering the addition of the new 

expanded authorities, including how swaps would be considered in the context of 

position limits. The timing of the review period was spelled out and the manner in which 

the Commission would go about establishing limits was refined to account for this 

massive change in oversight.

But never did anyone suggest that the legacy language in subsection (1) of section 

4a(a), including the required prerequisite of a necessity finding, had effectively been 

eliminated and replaced with a new mandate that would apply even in the absence of a 

necessity finding.

Subsequent History

Finally, as noted above, the court in ISDA v. CFTC instructed the Commission to 

use its “experience and expertise” to resolve the ambiguity it found in the statute. That 

experience and expertise cannot look only to the era in which these position limit 

provisions were enacted. We are where we are, and so the application of the 

Commission’s experience and expertise must include a consideration of the substantial 

changes in the markets since that time.
533

Given the intervention of a global financial crisis, it is hard to recall that the 

Dodd-Frank Act amendments to the CEA’s position limit provisions were borne at a time 

of skyrocketing energy prices during 2007-2008. The price of oil climbed to over $147 a 

barrel in July 2008, which represented a 50% increase in one year and a seven-fold 

increase since 2002.10 Gas prices at the pump peaked at over $4 a gallon in June and July 

of 2008.11

Some at the time charged that these price spikes were caused by excessive 

speculation in futures contracts on energy commodities traded on U.S. futures exchanges 

– another topic of debate on which I will save my views for another day. But not 

surprisingly, legislation soon followed. By the end of 2008, the House of Representatives 

had passed amendments to the CEA’s position limit provisions,12 and after the Senate 

failed to act, the issue was subsequently addressed in the Dodd-Frank Act.

How times have changed. The United States, due to a boom in oil and natural gas 

production relating to shale drilling and the development of liquefied natural gas, will 

soon become a net energy exporter.13 Although no new federal position limits have been 

imposed, prices of energy commodities have generally dropped and stabilized, and cries 

of excessive speculation in the derivatives markets are rare. Also, our derivatives 

markets have grown substantially. Global trading in listed futures and options increased 

 10 Rebeka Kebede, Oil Hits Record Above $147, Reuters Business News, July 10, 2008, available at

https://www.reuters.com/article/us-markets-oil/oil-hits-record-above-147-idUST14048520080711.

11 Leigh Ann Caldwell, Face the Facts: A Fact Check on Gas Prices, CBS News Face the Nation, March 

21, 2012, available at https://www.cbsnews.com/news/face-the-facts-a-fact-check-on-gas-prices/.

12 Commodity Markets Transparency and Accountability Act of 2008, H.R. 6604, 110th Cong. sec. 8 

(2008).

13 Tom DiChristopher, US to Become a Net Energy Exporter in 2020 for First Time in Nearly 70 Years, 

Energy Dept. Says, CNBC Business News, Energy, Jan. 24, 2019, available at

https://www.cnbc.com/2019/01/24/us-becomes-a-net-energy-exporter-in-2020-energy-dept-says.html.
534

from 22.4 billion contracts in 2010 to a record 34.47 billion contracts in 2019. Global 

open interest increased to a record 900 million contracts from 718.5 million in 2010.14

Applying our experience and expertise, what these developments teach us is that 

economic conditions change over time. Technology marches on. Markets evolve. And 

prices fluctuate in response to a myriad of influences. Having lived through the energy 

price increases of the mid-2000s, I do not minimize the pain they caused, or the 

importance of the Commission taking appropriate steps to prevent excessive speculation 

in derivatives markets that can contribute to a burden on interstate commerce. Given the 

history of the past decade, however, I do not believe Congress intended, based on the 

moment in time of 2007-2008, to forever lock our derivatives markets into a 

straightjacket, or to deny the Commission the flexibility to draw conclusions of necessity 

based on particular circumstances.

Returning to our zombie romance, I’m afraid I have not been fair to its author. 

That is because there is a second line to the quotation, which reads: “We are where we 

are, however we got here. What matters is where we go next.”15

It is my fervent hope that the majority of comment letters we receive on today’s 

proposal provide constructive input on where the proposal would take us next with 

respect to position limits – and not simply fan the flames of the necessity debate. And it 

is the topic of where we go next that I will now turn.

 14 Futures Industry Association, Global Futures and Options Trading Reaches Record Level in 2019, Jan. 

16, 2020, available at https://fia.org/articles/global-futures-and-options-trading-reaches-record-level2019.

15 See fn. 6, supra, at 97.
535

What Position Limits Are Necessary?

Having concluded that the CEA mandates the Commission to impose position 

limits that it finds are necessary, the question then becomes: What position limits are 

necessary?

In the 2013 Proposal, the Commission’s necessity finding determined that federal 

spot month position limits were necessary for 28 core referenced futures contracts on 

various agricultural, energy, and metals commodities. In the 2016 Re-Proposal, the 

Commission utilized the same necessity finding to determine that federal spot month 

limits were necessary for 25 of the 28 core referenced futures contracts for which they 

had been found necessary in 2013.16 And today’s proposal, although utilizing a different 

approach to the necessity finding, determines that federal spot month limits are necessary 

for the same 25 core referenced futures contracts for which they were found to be 

necessary in the 2016 Re-Proposal.

In other words, three different iterations of the Commission have found federal 

spot month position limits to be necessary for these 25 core referenced futures contracts. 

That degree of consistency alone demonstrates the reasonableness of this determination.

To be sure, both the 2013 Proposal and the 2016 Re-Proposal found federal 

position limits for non-spot months to be necessary for these 25 contracts, whereas 

today’s proposal does so for only the nine legacy agricultural contracts that are currently 

subject to federal non-spot month limits. Yet, the necessity findings in the 2013 Proposal 

and the 2016 Re-Proposal were based largely, if not entirely, on just two episodes: 

 16 The 2016 Re-Proposal did not propose that federal position limits be imposed on three cash-settled 

futures contracts (Class III Milk, Feeder Cattle, and Lean Hogs) that were included as core referenced 

futures contracts in the 2013 Proposal. See 2016 Re-Proposal, 81 FR at 96740 n.368.
536

(1) the activity of the Hunt Brothers in the silver market in 1979-1980; and (2) the 

activity of the Amaranth hedge fund in the natural gas market in the mid-2000s.

The Hunt Brothers silver episode and Amaranth natural gas episode occurred over 

30 and over 15 years ago, respectively. It also should be noted that the Commission 

settled enforcement actions against both the Hunt Brothers and Amaranth charging that 

they had engaged in manipulation and/or attempted manipulation.17 Since that time, 

Congress has provided the Commission with enhanced anti-manipulation enforcement 

authority as part of the Dodd-Frank Act, which the Commission has used aggressively 

and serves as an effective tool to deter and combat potential manipulation involving 

trading in non-spot months.

Again, I do not minimize the seriousness of the Hunt Brothers and Amaranth 

episodes, both of which had significant ramifications. But I am comfortable with the 

proposal’s determination that two dated episodes of manipulation during the past 30 years 

do not establish that it is necessary to take the drastic step of restricting trading (and 

liquidity) in non-spot months by imposing position limits for the core referenced futures 

contracts in these two commodities – let alone for the other 14 contracts at issue. I 

therefore support publishing the necessity finding in the proposal before us – including 

the limitation on proposed non-spot month limits to the nine legacy agricultural contracts 

– for public comment.

 17 The 2016 Re-Proposal acknowledged that “both episodes involved manipulative intent.” 2016 ReProposal, 81 FR at 96716.
537

Setting Limit Levels

With respect to setting position limit levels, the Commission’s historical practice 

has been to set federal spot month levels at or below 25 percent of deliverable supply 

based on estimates provided by the exchanges and verified by the Commission. Yet, 

some of the deliverable supply estimates underlying the existing federal spot month limits 

on the nine legacy agricultural futures contracts have remained the same for decades, 

notwithstanding the revolutionary changes in U.S. futures markets and the explosive 

growth in trading volume over the years. These outdated delivery supply estimates 

require updating.

The proposal adheres to the Commission’s historical approach, which is 

reasonable given the Commission’s years of experience administering federal spot month 

limits on the legacy agricultural contracts. And it provides a long-overdue update to 

deliverable supply estimates for those legacy contracts to reflect the realities of today’s 

markets. The proposed spot month limits for the 25 core referenced futures contracts are 

based on deliverable supply estimates of the exchanges that know their markets best, but 

that have been carefully analyzed by Commission staff to assure that they strike an 

appropriate balance between protecting market integrity and restricting liquidity for bona 

fide hedgers.

For limit levels outside the spot month, the Commission historically has used a 

formula based on 10% of open interest for the first 25,000 contracts, with a marginal 

increase of 2.5% of open interest thereafter. Again, the proposal reasonably adheres to 

this general formula with which the Commission is familiar in proposing non-spot month 
538

limits for the nine legacy agricultural contracts, but it would apply the 2.5% calculation to 

open interest above 50,000 contracts rather than the current level of 25,000 contracts.

Open interest has roughly doubled since federal limits were set for these markets, 

which has made the current non-spot month limits significantly more restrictive as the 

years have gone by. Nevertheless, I appreciate that such a change to established limits 

may raise concern. I am therefore pleased that the proposal includes a question asking 

whether the proposed increases in federal non-spot month limits should be implemented 

incrementally over a period of time, rather than immediately at the effective date. (There 

is additionally a question seeking input on the impact of increases in non-spot month 

limits for convergence that is of great interest to me.)

Finally, it is important to remember that the 16 core referenced futures contracts 

for which federal non-spot month limits are not being proposed remain subject to 

exchange-set position limit levels or position accountability levels.18 The Commission 

has decades of experience overseeing accountability levels implemented by exchanges, 

including for all 16 contracts that would not be subject to federal limits outside the spot 

month under this proposal. Position accountability enables the exchange to obtain 

information about a potentially problematic position while it is at a relatively low level, 

and to require a trader to halt increasing that position or to reduce the position if the 

exchange considers it warranted. Exchange position accountability rules, in combination 

with market surveillance by both the exchanges and the Commission and the 

Commission’s enhanced anti-manipulation authority granted by the Dodd-Frank Act, 

 18 The use of position accountability in lieu of hard limits is expressly permitted by the CEA for both 

designated contract markets, CEA section 5(d)(5), 7 U.S.C. 7(d)(5), and swap execution facilities, CEA 

section 5h(f)(6), 7 U.S.C. 7b-3(f)(6).
539

provide a robust means of detecting and deterring problems in the outer months of a 

contract. The proposal reasonably continues to rely on these tools in the non-legacy 

contracts.

Undoubtedly, there will be those who believe the proposed spot and non-spot 

month limits are too high, and others who consider them too low. I look forward to 

receiving public comments along these lines, but expect that any such comments will 

include market data and analysis for the Commission to consider in developing final 

rules.

Bona Fide Hedging Transactions and Positions

The CEA provides that the Commission’s position limit rules shall not apply to 

bona fide hedging transactions or positions. It gives the Commission the authority to 

define “bona fide hedging transactions and positions” with the purpose of “permit[ting] 

producers, purchasers, sellers, middlemen, and users of a commodity or a product derived 

therefrom to hedge their legitimate anticipated business needs . . .”19 This serves as a 

statutory reminder of the fundamental point that the Commission is imposing speculative

position limits, and since bona fide hedging is outside the scope of speculative activity, it 

is by definition outside the scope of the position limit rules.

The Commission’s current definition of the term “bona fide hedging transactions 

and positions” is set out in what is referred to as “Rule 1.3(z).” In addition to providing a 

definition, Rule 1.3(z) also identifies certain specific “enumerated” hedging practices that 

the Commission recognizes as falling within the scope of that definition and therefore not 

 19 CEA section 4a(c)(1), 7 U.S.C. 6a(c)(1).
540

subject to position limits. Other “non-enumerated” hedging practices can still be 

recognized as bona fide hedging, but only after a Commission review process.

I am delighted that the proposal before us recognizes an expanded list of 

enumerated bona fide hedging practices than are currently recognized in Rule 1.3(z). 

This is entirely appropriate. Hedging practices at companies that produce, process, trade, 

and use agricultural, energy, and metals commodities are far more sophisticated, 

complex, and global than when the Commission last considered Rule 1.3(z). This is yet 

one more instance where the Commission’s position limit rules simply have not kept pace 

with developments in, and the realities of, the marketplace. In addition, the proposal 

would expand federal limits to contracts in commodities not previously subject to federal 

limits, and thus common hedging practices in the markets for those commodities must be 

considered for inclusion in the list of enumerated bona fide hedges.

I am particularly pleased that, at my request, the proposal recognizes anticipatory 

merchandising as an enumerated bona fide hedge. After all, the CEA itself identifies 

anticipatory merchandising as bona fide hedging activity,20 and the Commission has 

previously granted non-enumerated hedge recognitions for anticipatory merchandising. 

There is no policy basis for distinguishing merchandising or anticipated merchandising 

from other activities in the physical supply chain. Although there must be appropriate 

safeguards against abuse, where merchandisers anticipate taking price risk, they should 

have the same opportunity as others in the physical supply chain to manage their risk 

through recognized risk-reducing transactions that qualify as bona fide hedging.

 20 CEA section 4a(c)(2)(A)(iii)(I), 7 U.S.C. 6a(c)(2)(A)(iii)(I) (bona fide hedging transaction or position is 

a transaction or position that, among other things, “arises from the potential change in the value of . . . 

assets that a person owns, produces, manufactures, processes, or merchandises or anticipates owning, 

producing, manufacturing, processing, or merchandising . . .” (emphasis added)).
541

Although the proposal refers to enumerated bona fide hedges as “selfeffectuating” for purposes of federal limits, this is a bit of a misnomer. Even if a hedge is 

enumerated, the trader still must receive approval from the relevant exchange to exceed 

the exchange-set limits.21 This, too, is entirely appropriate. The exchanges know their 

markets, and they are very familiar with current hedging practices in agricultural, energy, 

and metals commodities, and thus are well-suited to apply the enumerated bona fide 

hedges in real-time. And, as noted above, Congress has declared it a purpose of the CEA 

to serve the public interest with respect to derivatives trading “through a system of 

effective self-regulation of trading facilities . . .”22

I find perplexing what the proposal refers to as a “streamlined” process for 

recognizing non-enumerated bona fide hedging practices with respect to federal position 

limits. Pursuant to proposed 150.9, if an exchange recognizes a non-enumerated practice 

as a bona fide hedge for purposes of the exchange’s position limits, that recognition 

would apply to the federal limits as well, unless the Commission notifies the exchange 

and market participant otherwise. The Commission would have 10 business days for an 

initial application, or 2 business days in the case of a sudden or unforeseen increase in the 

applicant’s bona fide hedging needs, to approve or reject the exchange’s bona fide 

hedging recognition.

I do not believe this “10/2-Day Rule” is workable in practice for either market 

participants or the Commission because it is both too long and too short. It is too long to 

be workable for market participants that may need to take a hedging position quickly, and 

 21 Further, the absence of Commission approval of an enumerated bona fide hedge does not mean that the 

Commission has no access to data about the position or insight into the hedger’s trading activity.

22 See fn. 3, supra.
542

it is too short for the Commission to meaningfully review the relevant circumstances and 

make a reasoned determination related to the exchange’s recognition of the hedge as bona 

fide.

My preference would have been to propose that recognition of non-enumerated 

hedges be the responsibility of the exchanges that, again, are most familiar both with their 

own markets and with the hedging practices of participants in those markets. The 

Commission would monitor this process through our routine, ongoing review of the 

exchanges. I welcome public comment on the proposal’s legal discussion of the subdelegation of agency decision making authority as relevant to this question, and on how 

the proposed 10/2-Day Rule might be improved in a final rulemaking to make the process 

workable for market participants and the Commission alike.

A Word about Economically Equivalent Swaps

CEA section 4a(a)(5) provides that “[n]otwithstanding any other provision” in 

section 4a, the Commission’s position limit rules shall establish limits, “as appropriate,” 

with respect to economically equivalent swaps, and that such limits must be “develop[ed] 

concurrently” and “establish[ed] simultaneously” with the limits imposed on futures 

contracts and options on futures contracts.23 I share the view that section 4a(a)(5) thereby 

requires that this rulemaking encompass economically equivalent swaps, although I invite 

public comment from those who believe another interpretation may be permissible and 

appropriate.

The proposal sets forth a narrow definition of the term “economically equivalent 

swap,” which I believe is appropriate. A measured approach is reasonable given that: 

 23 CEA section 4a(a)(5), 7 U.S.C. 6a(a)(5).
543

(1) the Commission’s regulatory regime for swaps remains in its relative infancy; (2) 

swaps have never been subject to position limits, be it federal or exchange-set limits; and 

(3) the implications of imposing position limits on economically equivalent swaps cannot 

be predicted with any degree of confidence at this time. Further, a measured approach is 

more workable because it is the Commission, rather than an exchange, that will be 

responsible for administering the new position limits regime for swaps given that: (1) 

many swaps trade over-the-counter (“OTC”) so there is no exchange to fulfill this 

responsibility; and (2) for swaps traded on swap execution facilities (“SEFs”), those SEFs 

lack the information about a trader’s swap positions on other SEFs and OTC that would 

be necessary to fulfill this responsibility.

That said, the proposed definition of an “economically equivalent swap” is 

broader than that used in the European position limits regime. In Europe, economic 

equivalence requires identical terms; the proposal, by contrast, requires only that material 

terms be identical. I look forward to receiving comment on this distinction, and the 

experience that market participants have had with the European application of position 

limits to swaps.

Conclusion

The fact that the Commission has been trying to update these rules for nearly a 

decade demonstrates the challenge presented by position limits. I am extremely grateful 

to the many members of our staff in the Division of Market Oversight, the Office of 

General Counsel, and the Chief Economist’s Office who have dedicated a significant 

portion of their lives to helping us try to meet that challenge. I also appreciate the efforts 

of my fellow Commissioners as well.
544

Each of us has committed that we would work to finish a position limits 

rulemaking. The time has come. Overall, today’s proposal is reasonable in design, 

balanced in approach, and workable for both market participants and the Commission. I 

therefore support it.

I ask market participants to view the proposal in that spirit. Please provide us 

with your constructive input on how we can make a good proposal even better.

Appendix 6 – Dissenting Statement of Commissioner Dan M. Berkovitz

Introduction

I dissent from today’s position limits proposal (“Proposal”). The Proposal would 

create an uncertain and unwieldy process with the Commission demoted from head coach 

over the hedge exemption process to Monday-morning quarterback for exchange 

determinations.1

 The Proposal would abruptly increase position limits in many physical 

delivery agricultural, metals, and energy commodities, in some instances to multiples of 

their current levels. It would provide no opportunity for the Commission to monitor the 

effect of these increases, or to act if necessary to preserve market integrity. The Proposal 

provides inadequate explanation for other key approaches in the document, including the 

use of position accountability rather than numerical limits for energy and metals 

commodities in non-spot months. The Proposal also ignores Congress’s mandate in the 

Dodd-Frank Act, and reverses decades of legal interpretations of the Commodity 

Exchange Act (“CEA”) by the Commission and the courts regarding the Commission’s 

authority and responsibility to impose position limits. It would require, for the first time, 

 1 See Position Limits for Derivatives (“Proposal”) at rule text section 150.9(e).
545

the Commission to find that position limits are necessary for each commodity prior to 

imposing limits.

I Support an Effective Position Limits Framework with Transparency and 

Certainty

Position limits is one of the last remaining items in the Commission’s reform 

agenda arising from the Dodd-Frank Act. In the wake of the 2008 oil price spike to $147 

per barrel, the Amaranth hedge fund’s dominance of the natural gas futures and swaps 

market, the rise of commodity index funds, and the financial crisis, Congress mandated 

that the Commission promptly establish, as appropriate, position limits and hedge 

exemptions for exempt and agricultural commodities and economically equivalent swaps. 

We must not forget the lessons from the financial crisis or prior episodes of excessive 

speculation, nor be lulled back into the belief that unfettered markets yield optimal 

outcomes. A meaningful, effective position limits regime was important to the reform 

agenda in 2010, and it must remain our goal today.

I support an effective position limits regime that includes both effective limits on 

speculative positions and appropriate bona fide hedge exemptions to meet market 

participants’ legitimate commercial needs. Position limits are critical to preventing 

market manipulation or distortion due to excessively large speculative positions. 

Together, position limits and bona fide hedge exemptions promote the market integrity 

and the price discovery process, while enabling producers, end-users, merchants, and 

others to use the futures and swaps markets to manage their commercial risks. The 

Dodd-Frank Act, adopted by Congress in 2010 in the midst of the financial crisis, 

affirmed Congress’s commitment to federal speculative position limits and its 
546

determination that the Commission should act decisively to address excessive speculation 

in physical commodity markets.

Since joining the Commission, I have traveled the country to meet with market 

participants in many segments of the physical commodity markets. I have been to 

soybean farms and rice mills in Arkansas, feedlots in Colorado, dairy co-ops and 

cornfields in Minnesota, and grain mills and elevators in Kansas, Arkansas, Colorado, 

and Minnesota. I have met with coffee and cocoa graders in New York, energy 

companies in Texas, cotton merchandisers from Tennessee, and many others to 

understand how end-users participate in our markets. I have visited the CME in Chicago, 

ICE in New York, and the Minneapolis Grain Exchange in Minneapolis. The 

fundamental purpose of the commodity markets we oversee is to enable end-users to 

manage the price risks they face in their businesses. I am committed to ensuring that this 

rule is workable for end-users and provides them with sufficient clarity, predictability, 

and transparency.

In my view, a position limits rule must meet three basic criteria. First, the rule 

must provide effective limits on speculative positions. Second, the rule must recognize 

legitimate bona fide hedging activities. The Commission should provide market 

participants with certainty regarding which activities constitute bona fide hedging and 

establish a workable, transparent process for qualifying additional types of activities as 

bona fide hedging. Such a process should recognize both the traditional role of the 

Commission in determining, generally, which activities constitute bona fide hedging, and 

the role of the exchanges in determining whether the specific activities of particular 
547

commercial market participants fall within such bona fide hedging categories as

determined by the Commission.

Third, from a legal perspective, a final rule must recognize that Congress has 

authorized and directed the Commission to promulgate position limits—without a 

predicate finding that position limits are necessary to prevent excessive speculation—and 

that the Commission has the flexibility to determine the appropriate tools and limits to 

accomplish that Congressional directive.

Unfortunately, the Proposal fails to satisfy any of these criteria. The Proposal 

would greatly increase position limits in many physical delivery agricultural, metals, and 

energy commodities in spot and individual non-spot months, with no opportunity to 

monitor for or guard against adverse market impacts. Although I am pleased that the 

Proposal would no longer recognize risk management exemptions as bona fide hedges for 

physical commodities,2 the higher limits allowed under the Proposal could accommodate 

substantially more speculative positions,3 with potentially adverse impacts on markets. 

There is solid evidence that the financialization and growth of commodity index 

investments can raise commodity prices and negatively affect end-users in the real 

economy.

4

The Proposal departs from the well-established roles of the Commission and 

exchanges in the bona fide hedge framework. As affirmed by the Dodd-Frank Act, it is 

 2 See Proposal at preamble section II(A)(1)(c)(ii)(1). This change comports with amendments to the 

definition of bona fide hedging in CEA section 4a(c)(2) made by the Dodd-Frank Act.

3 Proposal at preamble section II(A)(1)(c)(ii)(1).

4 See, e.g., Ke Tang & Wei Xiong, Index Investment and Financialization of Commodities, 68 Financial 

Analysts Journal 54, 55 (2012); Luciana Juvenal & Ivan Petrella, Speculation in the Oil Market, Federal 

Reserve Bank of St. Louis, Working Paper 2011-027E (June 2012), available at 

http://research.stlouisfed.org/wp/2011/2011-027.pdf.
548

the Commission’s responsibility to define what constitutes a bona fide hedge.5 For 

practical reasons, including limited Commission resources, I support delegating to 

exchanges the authority to determine whether a particular position, under the particular 

facts and circumstances presented, constitutes a bona fide hedge as defined by the 

Commission. The exchanges are well suited for this role and have decades of experience 

in making such determinations. However, the initial legal and policy determination of 

what types of positions constitute bona fide hedges must remain the Commission’s 

responsibility.

The Proposal carries forward all of the bona fide hedges currently enumerated in 

the Commission’s rules, adds several additional categories to the list of enumerated 

hedges, and opens the door to an unlimited number of additional, undefined nonenumerated exemptions. The Proposal states, “the proposed enumerated hedges are in no 

way intended to limit the universe of hedging practices which could otherwise be 

recognized as bona fide.”6

 The “universe” is a very large place indeed.

On the other hand, the Proposal does not address practices that market 

participants have urged the Commission to recognize as bona fide hedges, including 

practices currently recognized by the exchanges. The Proposal thus deprives end-users 

and other market participants of legal certainty regarding what constitutes a bona fide 

hedge for various practices currently permitted by the exchanges as bona fide hedges.

Rather than determine whether to recognize these practices as bona fide hedges 

through notice and comment in today’s rulemaking, the Proposal contemplates that 

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

6 Proposal at preamble section II(A)(1)(c)(i) (emphasis added).
549

additional non-enumerated bona fide hedges should first be considered by the exchanges, 

and then reviewed by the Commission during a cramped 10-day retrospective review 

period.7 Determination of what constitutes a bona fide hedge for non-enumerated hedges 

would begin anew each time that an exchange must decide whether a purported bona fide 

hedge held by a market participant is consistent with the CEA, and then await the 

Commission’s retrospective review. Market participants should be able to discern 

whether particular types of practices qualify as bona fide hedging by reading the 

Commission’s rules and regulations rather than by engaging lawyers and lobbyists to 

guide them through an opaque, non-public process through the halls of the Commission’s 

headquarters in Washington, DC.

The Commission has almost 40 years of experience with exchange 

implementation of position limits for energy and metals commodities, and more for 

agricultural commodities. Based on this experience, I support many of the types of bona 

fide hedges that exchanges recognize in these markets today. However, the Commission 

should recognize these exemptions in its own rules through prospective, notice and 

comment rulemaking, not delegate these determinations to the exchanges.

The legal analysis in this Proposal is a convoluted and confusing legal 

interpretation of the Dodd-Frank Act that defies Congressional intent. It is implausible 

that in the aftermath of the financial crisis and the run-up to oil at $147 per barrel, 

 7 The Proposal would establish two distinct processes for recognition of non-enumerated hedges. One 

process would be Commission-based, but the Proposal anticipates that this process would rarely, if ever, be 

used by market participants. See Proposal at rule text section 150.3. The other, in proposed § 150.9(e), 

would require the Commission to retroactively review bona fide hedge exemptions approved by an 

exchange. See Proposal at rule text section 150.9(e). Such review would need to be conducted within 

business10 days, would involve the five-member Commission itself, and could be stayed for a longer 

period.
550

Congress made it more difficult for the Commission to impose position limits. Yet that is 

the result of the Commission’s revisionist interpretation that a predicate finding of 

necessity (i.e., that position limits are necessary) is required for the imposition of a 

position limit for each commodity. Moreover, the Proposal’s finding of necessity for the 

25 core reference futures contracts subject to the rule is unpersuasive both economically 

and legally, and is highly unlikely to survive legal challenge. The necessity finding 

largely consists of general economic statistics about the importance of the physical 

commodities underlying these futures contracts to commerce, together with statistics 

about open interest and trading volume in those futures contracts. These statistics bear 

little rational relationship to why position limits are necessary to prevent excessive 

speculation in derivative contracts for these commodities. For example, the imposition of 

limits on cocoa futures is justified on the basis that “in 2010 the United States exported 

chocolate and chocolate-type confectionary products worth $799 million to more than 50 

countries around the world.”8

 There is a simpler, more logical, and defensible path 

forward, as I will outline later in this statement.

I thank the Commission staff for working with my office on the Proposal. 

Although I am not able to support it as currently formulated, I look forward to working 

with my colleagues and staff to improve the Proposal so that it effectively protects our 

markets from excessive speculation and provides end-users and other market participants 

with the regulatory certainty they need. I encourage market participants to comment on 

the Proposal.

 8 Proposal at preamble section III(F)(3).
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Additional Flaws in the Proposal

1. No Phase-In for Large Increase in Speculative Position Limits

The Proposal would generally increase existing federal or exchange spot month 

position limits for 25 physical delivery agricultural, metals, and energy commodities by a 

factor of two or more.9

 It would substantially increase existing federal single month and 

all months combined limits for the nine legacy agricultural commodities. As examples, 

spot month limits on ICE’s frozen concentrated orange juice contract would increase 

from 300 to 2,200 contracts, and single month and all months combined limits on CBOT 

soybean meal would increase from 6,500 to 16,900 contracts.10 Single month and all 

months combined limits for CBOT corn would increase to 57,800 contracts.11 The 

proposed increases are largely due to increases in deliverable supply, and the new spot 

and non-spot month limits continue to reflect the Commission’s 25% and 10% / 2.5% of 

deliverable supply formulas.

The Proposal does not provide for phasing in the new, higher limits or for 

otherwise providing a transition period.12 It presents no analysis of the market’s ability to 

absorb these large increases without disruption, and no analysis of how large new 

speculative positions may affect the price discovery process.

 9 See Proposal at preamble section I(B).

10 Id. Other notable examples include increased spot limits for ICE U.S. Sugar No. 11 (SB) from 5,000 to 

25,800 contracts; increased spot month limits for ICE Cotton No. 2 (CT) from 300 to 1,800 contracts; 

increased single month and all months combined limits for CBOT Soybean Oil (SO) from 8,000 to 17,400 

contracts; and increased single month and all months combined limits for ICE Cotton No. 2 (CT) from 

5,000 to 11,900 contracts.

11 Id. Although the proposed new limit for CBOT Corn (C) is less than twice the current limit (57,800 

contracts proposed versus 33,000 contracts currently), it would still be a significantly larger position limit 

and the largest single month and all months combined limit in the Proposal.

12 See Proposal at rule text section 150.2 and Appendix E.
552

Large increases in the amounts of speculative activity in individual non-spot 

months have the potential to disrupt the convergence process and distort market signals 

regarding storage of commodities. The Proposal provides no analysis of whether these 

potential price distortions and their attendant detrimental consequences could be avoided 

by distributing the large increases in the numerical limits across several non-spot months, 

rather than permit such large positions in individual months. Instead, the Proposal would 

codify an abrupt increase 365 days after publication of any final rule in the Federal 

Register. A transition period or lower individual spot month limits would give the 

Commission the time and ability to mitigate any issues that may arise if markets are 

unable to absorb the higher limits in an orderly manner, and prevent disruption if 

necessary. It is a prudent measure that the Commission should adopt in any final rule.

2. Absence of Non-Spot Month Limits for Exempt and Certain Agricultural 

Commodities

I am concerned with the Proposal’s failure to adopt federal non-spot limits for 16 

energy, metals, and certain agricultural commodities included in the Proposal.13 CEA 

section 4a(a)(3) directs that the Commission “shall set limits” on positions held not only 

in the spot month, but also “each other month” and “for all months,” “as appropriate.”14 

Despite this directive, the Proposal does not adopt non-spot month limits for these 

commodities. It includes virtually no analysis of why the Commission believes that nonspot limits are not appropriate.

 13 See Proposal at rule text section 150.5(b)(2), providing for exchange-set position limits or position 

accountability in non-spot months contracts not subject to federal speculative position limits.

14 CEA section 4a(a)(3); 7 U.S.C. 6a(a)(3).
553

Exchanges have demonstrated an ability to manage speculation and maintain 

orderly markets with position accountability in non-spot months. However, experiences 

such as the collapse of the Amaranth hedge fund in 2006 demonstrate how large trades in 

the non-spot month can also distort markets, widen spreads, and increase volatility.15 I 

believe the exchanges have learned from the Amaranth experience and that position 

accountability can be an effective tool, where appropriate. The Proposal, however, also 

fails to demonstrate why accountability levels, rather than numerical limits, are 

appropriate in light of the statutory directives in the CEA. It provides no discussion of 

the effect of applying the 10/2.5% formula to the energy and metals contracts covered by 

the Proposal, and why the application of this traditional formula would not be 

appropriate. Similarly, there is no analysis regarding the numerical limits that could 

result from applying the four factors specified in 4a(a)(3), and why such numerical limits 

would not be appropriate.

3. Definition of Economically Equivalent Swap

The Proposal would define an economically equivalent swap as a swap that 

“shares identical material contractual specifications, terms, and conditions with the 

referenced contract . . . .”16 The Proposal offers several rationales for this narrow 

definition that could potentially lend itself to evasion through financial engineering. One 

such rationale is that it would reduce market participants’ ability to net down their 

speculative positions through swaps that are not materially identical. While this and 

other rationales proffered in the Proposal have merit, the Commission must also ensure 

 15 See Excessive Speculation In the Natural Gas Market, Staff Report with Additional Minority Staff 

Views, Permanent Subcommittee on Investigations, United States Senate (2007).

16 Proposal at preamble section (II)(A)(4) and proposed rule text section 150.1.
554

that economically equivalent swaps are not structured in a manner to evade federal or 

exchange regulation through minor modifications to material terms. I invite public 

comment on this issue.

4. The Proposal’s Necessity Finding Misconstrues the CEA as Amended by the 

Dodd-Frank Act

The Proposal states that, for any particular commodity, “prior to imposing 

position limits, [the Commission] must make a finding that they are necessary.”17 This is 

a reversal of prior Commission determinations.18 Neither the statutory language of CEA 

section 4a(a)(2), nor the district court’s decision in ISDA v. CFTC, compels this 

outcome.19 The Commission should not adopt it.

Title VII of the Dodd-Frank Act amended CEA section 4a and directed in 

4a(a)(2)(A) that “the Commission shall” establish position limits for agricultural and 

exempt physical commodities “as appropriate.”20 In ISDA v. CFTC, the district court 

directed the Commission to resolve a perceived ambiguity in section 4a(a)(2)(A) by 

bringing the Commission’s “experience and expertise to bear in light of the competing 

interests at stake . . . .”21 That experience includes over 80 years of position limits 

 17 Proposal at preamble section III(D). The Proposal also states that “[t]he Commission will therefore 

determine whether position limits are necessary for a given contract, in light of those premises, considering 

facts and circumstances and economic factors.” Proposal at preamble section III(F)(1).

18 The Proposal acknowledges “this approach differs from that taken in earlier necessity findings.” 

Proposal at preamble section III(F)(1). Specifically, the Proposal identifies different approaches taken in 

position limit rulemaking undertaken by the Commission’s predecessor agency, the Commodity Exchange 

Commission (“CEC”) from 1938 through 1951, the Commission’s 1981 rulemaking that required 

exchanges to impose position limits for each contract not already subject to a federal limit, and the 

proposed rulemakings in 2013 and 2016. Id.

19 Int’l Swaps and Derivatives Ass’n (“ISDA”) v. CFTC, 887 F. Supp. 2d 259 (D.D.C. 2012).

20 CEA section 4a(a)(2)(A); 7 U.S.C. 6a(a)(2)(A).

21 ISDA, 887 F. Supp. 2d at 281.
555

rulemakings, as described below. It provides ample practical and legal bases to 

determine that Congress intended the Commission to adopt federal position limits for 

certain commodities pursuant to CEA section 4a(a)(2).

Starting in 1936, and across multiple iterations of the CEA and its predecessors, 

the CEA has consistently and continuously reflected Congress’s finding that excessive 

speculation in a commodity can cause sudden, unreasonable, and unwarranted 

movements in commodity prices that are undue burden on interstate commerce.22 

Congress also has declared that “[f]or the purpose of diminishing, eliminating, or 

preventing such burden,” the Commission shall . . . proclaim and fix such [position] 

limits” that the Commission finds “are necessary to diminish, eliminate, or prevent such 

burden.” In plain English, Congress has found that excessive speculation is a burden on 

interstate commerce, and the CFTC is directed to impose position limits that are 

necessary to prevent that burden. Congress did not direct the Commission to study 

excessive speculation, to prepare any reports on excessive speculation, or to second-guess 

Congress’s finding that excessive speculation was a problem that needed to be prevented. 

Rather, Congress directed the Commission to impose position limits that the Commission 

believed were necessary to accomplish the statutory objectives.

Following the passage of the 1936 Act, the Commission set position limits for 

grains in 1938, cotton in 1940, and soybeans in 1951. As the Proposal recognizes, in 

these rulemakings the Commission did not publish any analyses or make any “necessity 

finding,” other than to include a “recitation” of the statutory findings regarding the undue 

burdens on commerce that can be caused by excessively large positions. These 

 22 Commodity Exchange Act of 1936, P.O. 76-675, 49 Stat. 1491 section 5.
556

rulemakings then set numerical limits on the amounts of commodity futures contracts that 

could be held.

Court decisions from the 1950s through the 1970s in cases involving the 

application of the position limits rules reflect a common-sense reading: the statute 

mandates that the Commission establish position limits, while providing the Commission 

with discretion as to how to craft those limits. In Corn Refining Products v. Benson,

23

defendants challenged the suspension by the Secretary of Agriculture of their trading 

privileges on the Chicago Board of Trade for violating position limits in corn futures on 

the grounds that the statutory prohibition only applied to speculative positions. The U.S. 

Court of Appeals for the Second Circuit denied the appeal, stating in part:

The discretionary powers of the Commission and the exemptions from the 

‘trading limits’ established under the Act are carefully delineated in [section] 4a. 

The Commission is given discretionary power to prescribe ‘* * * different trading 

limits for different commodities, markets futures, or delivery months, or different 

trading limits for the purposes of buying and selling operations, or different limits 

for the purposes of subparagraphs (A) (i.e., with respect to trading during one 

business day) and (B) (i.e., with respect to the net long or net short position held 

at any one time) of this section * * *’ . . . .

Although [section] 4a expresses an intention to curb ‘excessive speculation,’ we 

think that the unequivocal reference to ‘trading,’ coupled with a specific and welldefined exemption for bona-fide hedging, clearly indicates that all trading in 

commodity futures was intended to be subject to trading limits unless within the 

terms of the exemptions.

24

In United States v. Cohen,

25 the defendant challenged his criminal conviction for 

violating CEC trading limits in potato futures contracts. In upholding the conviction, the 

court of appeals stated that “[t]rading in potato futures, as for other commodities, is 

limited by statute and by regulations issued by the Commission. The statute here 

 23 232 F.2d 554 (2d Cir. 1956).

24 Id. at 560 (emphasis added).

25 448 F.2d 1224 (2d Cir. 1971).
557

requires the Commission to fix a trading limit . . . .”26 The court of appeals further 

observed: “Congress expressed in the statute a clear intention to eliminate excessive 

futures trading that can cause sudden or unreasonable fluctuations.”

27

In CFTC v. Hunt,

28 the Hunt brothers challenged the validity of the agency’s 

position limit on soybeans of three million bushels on the basis that the agency “made no 

analysis of the relationship between the size of soybean price changes and the size of the 

change in the net position of large traders. They argue[d] that there is no direct 

relationship between these phenomena, and, therefore, the regulation limiting the 

positions and the trading of the large soybean traders is unreasonable.”29 Fundamentally, 

the Hunts alleged that the agency failed to demonstrate that the limits were a reasonable 

means—or, alternatively put, “necessary”—to prevent unwarranted price fluctuations in 

soybeans. “The essence of the Hunts’ attack on the validity of the regulation is their 

substantive contention that there is no connection between large scale speculation by 

individual traders and fluctuations in the soybean trading market.”30

The U.S. Court of Appeals for the Seventh Circuit denied the Hunt brothers’ 

challenge. It held, “[t]he Commodity Exchange Authority, operating under an express 

congressional mandate to formulate limits on trading in order to forestall the evils of 

 26 Id. at 1225-6 (emphasis added).

27 Id. at 1227 (emphasis added).

28 591 F.2d 1211 (7th Cir. 1979).

29 Id. at 1216.

30 Id.
558

large scale speculation, was deciding on whether to raise its then existing limit on 

soybeans. . . . There is ample evidence in the record to support the regulation.”31

The Hunt case also illustrates the difference between the requirement for a 

predicate finding of necessity and the requirement that the Commission’s rulemakings be 

supported by sufficient evidence. Under the Administrative Procedure Act (“APA”), the 

Commission’s regulations must not be “arbitrary, capricious, an abuse of discretion, or 

otherwise not in accordance with law.”32 To make this finding, “the court must consider 

whether the decision was based on a consideration of the relevant factors and whether 

there has been a clear error of judgment.”33

In 1981, following the silver crisis of 1979-1980, the Commission adopted a 

seminal final rule requiring exchanges to establish position limits for all commodities that 

did not have federal limits.34 In the final rulemaking, the Commission determined that 

predicate findings are not necessary in position limits rulemakings. It affirmed its longstanding statutory mandate going back to 1936: “Section 4a(1) represents an express 

Congressional finding that excessive speculation is harmful to the market, and a finding 

 31 Id. at 1218 (emphasis added).

32 5 U.S.C. 706(2)(A).

33 Hunt, 591 F.2d at 1216. In the proposed regulation increasing the speculative position limits for 

soybeans from 2 million to 3 million bushels, the Commission’s predecessor, the Commodity Exchange 

Authority (“Authority”), did not make a soybean-specific finding that the limit of three million bushels was 

necessary to prevent undue burdens on commerce. Rather, the Authority relied on its 1938 and 1951 

position limit rulemakings for the general principle that “the larger the net trades by large speculators, the 

more certain it becomes that prices will respond directly to trading.” Corn and Soybeans, Limits on 

Position and Daily Trading for Future Delivery, 36 FR 1340 (Jan. 28, 1971). The Authority then stated that 

its analysis of speculative trading between 1966 and 1969 “ did not show that undue price fluctuations 

resulted from speculative trading as the trading by individual traders grew larger.” Id. Following a public 

hearing, the Authority adopted the proposed increase. See 36 FR 12163 (June 26, 1971). For the past 82 

years, the Commission has relied on this general principle to justify its position limits regime.

34 During the silver crisis, the Hunt brothers and others attempted to corner the silver market through large 

physical and futures positions. The price of silver rose more than five-fold from August 1979 to January 

1980.
559

that speculative limits are an effective prophylactic measure.”35 The 1981 final rule 

found that “speculative position limits are appropriate for all contract markets 

irrespective of the characteristics of the underlying market.”36 It required exchanges to 

adopt position limits for all listed contracts, and it did so based on statutory language that 

is nearly identical to CEA section 4a(a)(1).37

In the 1981 rulemaking, the Commission also responded to comments that the 

Commission had failed to “demonstrate[] that position limits provided necessary market 

protection,” or were appropriate for futures markets in “international soft” commodities, 

such as coffee, sugar, and cocoa. The Commission rejected comments that it was 

required to make predicate necessity findings for particular commodities. The 

Commission stated:

The Commission believes that the observations concerning the general 

desirability of limits are contrary to Congressional findings in sections 3 

and 4a of the Act and considerable years of Federal and contract market 

regulatory experience. . . .

* * *

As stated in the proposal, the prevention of large and/or abrupt price 

movements which are attributable to extraordinarily large speculative 

positions is a Congressionally endorsed regulatory objective of the 

Commission. Further, it is the Commission’s view that this objective is 

enhanced by speculative limits since it appears that the capacity of any 

contract market to absorb the establishment and liquidation of large 

speculative positions in an orderly manner is related to the relative size of 

such positions, i.e., the capacity of the market is not unlimited.38

 35 See Establishment of Speculative Positon Limits, 46 FR 50938, 50940 (Oct. 16, 1981) (“1981 Position 

Limits Rule”).

36 1981 Position Limits Rule at 50941.

37 In the proposed regulation, the Commission noted that as of April 1975, position limits were in effect for 

“almost all” actively traded commodities then under regulation. Speculative Position Limits, 45 FR 79831, 

79832 (Dec. 2, 1980).

38 1981 Position Limits Rule at 50940.
560

In the “Legal Matters” section of the preamble, the Proposal would jettison the 

interpretation that has prevailed over the past four decades as the basis for the 

Commission’s position limits regime. Relying on a non sequitur incorporating a double 

negative, the Preamble brushes off nearly forty years of Commission jurisprudence:

[B]ecause the Commission has preliminarily determined that section 

4a(a)(2) does not mandate federal speculative limits for all commodities, 

it cannot be that federal position limits are ‘necessary’ for all physical 

commodities, within the meaning of section 4a(a)(1), on the basis of a 

property shared by all of them, i.e., a limited capacity to absorb the 

establishment and liquidation of large speculative positions in an orderly 

fashion.39

In 2010, Congress enacted Title VII of the Dodd-Frank Act and amended CEA 

section 4a by directing the Commission to establish speculative position limits for 

agricultural and exempt commodities and economically equivalent swaps.40 Congress 

also set forth criteria for the Commission to consider in establishing limits, including 

diminishing, eliminating, or preventing excessive speculation; deterring and preventing 

market manipulation; ensuring sufficient liquidity for bona fide hedgers; and ensuring 

that price discovery in the underlying market is not disrupted.41 Congress directed the 

Commission to establish the required speculative limits within tight deadlines of 180 days 

for exempt commodities and 270 days for agricultural commodities.

It defies history and common sense to assert that the amendments to section 4a 

enacted by Congress in the Dodd-Frank Act made it more difficult for the Commission to 

impose position limits, such as by requiring predicate necessity findings on a commodityby-commodity basis. This is particularly true given Congress’s repeated use of 

 39 Proposal at preamble section III(F)(1).

40 See CEA section 4a(a)(2); 7 U.S.C. 6a(a)(2);CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5).

41 See CEA section 4a(a)(3); 7 U.S.C. 6a(a)(3).
561

mandatory words like “shall” and “required” and the tight timeframe to respond to the 

new Congressional directives. In light of the run up in the price of oil and the financial 

crisis that precipitated the legislation, it is unreasonable to interpret the Dodd-Frank 

amendments as creating new obstacles for the Commission to establish position limits for 

oil, natural gas, and other commodities whose significant price fluctuations had caused 

economic harm to consumers and businesses across the nation. The Commission’s 

interpretation is revisionist history.

The Commission’s necessity finding that follows its legal analysis is sure to 

persuade no one. Unless substantially modified in the final rulemaking, it will likely 

doom this regulation as “arbitrary, capricious, or an abuse of discretion” under the APA. 

The necessity finding for the 25 core referenced futures contracts selected for this 

rulemaking boils down to simplistic assertions that the futures contracts and 

economically equivalent swaps for these contracts “are large and critically important to 

the underlying cash markets.”42 As part of the necessity finding for these 25 

commodities, the Proposal presents general economic measures, such as production, 

trade, and manufacturing statistics, to illustrate the importance of these commodities to 

interstate commerce, and therefore for the need for position limits. On the other hand, the 

Proposal fails to present any rational reason as to why the economic trade, production, 

and value statistics for commodities other than the 25 core referenced futures contracts 

are insufficient to support a similar finding that position limits are necessary for futures 

contracts in those other commodities.

 42 Proposal at preamble section III(F)(2).
562

For example, the Proposal justifies the exclusion of aluminum, lead, random 

length lumber, and ethanol as examples of contracts for which a necessity finding was not 

made on the basis that the open interest in these contracts is less than the open interest in 

the oat futures contracts. This comparison has no basis in rationality. The need for 

position limits for commodity futures contracts in aluminum, lead, lumber, and ethanol is 

not in any way rationally related to the open interest in those commodity futures contracts 

relative to the open interest in oat futures. The Proposal is rife with other such illogical 

statements.

Fundamentally, general economic measures of commodity production, trade, and 

value are irrelevant with respect to the need for position limits to prevent excessive 

speculation. The Congress has found that position limits are an effective prophylactic 

tool to prevent excessive speculation for all commodities. The Congressional findings in 

CEA section 4a regarding the need for position limits are not limited to only the most 

important or the largest commodity markets. General economic data regarding a 

commodity in interstate commerce is irrelevant to the need for position limits for futures 

contracts for that commodity.

The collapse of the Amaranth hedge fund in 2006 is another strong example of 

why a position limits regime is necessary to prevent excessive speculation, in this case in 

non-spot months. Amaranth was a large speculative hedge fund that at one point held 

some 100,000 natural gas contracts, or approximately 5% of all natural gas used in the 

U.S. in a year. As the Commission has explained in other position limits proposals since 

2011, the collapse of Amaranth was a factor in the Dodd-Frank’s amendments to CEA 

section 4a.
563

The Commission has ample practical experience and legal precedent to resolve 

the perceived ambiguity in CEA section 4a(a)(2) as instructed by the district court in 

ISDA v. CFTC without making the antecedent necessity finding now incorporated in the 

Proposal. Our remaining task is to design the overall position limits framework, 

including determining the appropriate limit levels, defining bona fide hedges through 

prospective rulemaking, and appropriately considering other options such as position 

accountability and exchange-set limits.

Conclusion

In CEA section 4a, Congress directed the Commission to establish position limits 

and appropriate hedge exemptions to prevent the undue burdens on interstate commerce 

that result from excessive speculation. Congress has also entrusted to the Commission’s 

discretion the appropriate regulatory tools to meet this mandate. Congress’ overarching 

policy directive for position limits is straightforward and has been remarkably consistent 

for 84 years. The Commission has had ten years, three prior proposals, one supplemental 

proposal, and hundreds of pages of comment letters to define bona fide hedge 

exemptions. Now is the time to finish the job, and to do it the right way.