[Federal Register Volume 75, Number 16 (Tuesday, January 26, 2010)]
[Proposed Rules]
[Pages 4144-4172]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-1209]



[[Page 4143]]

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Part II





Commodity Futures Trading Commission





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17 CFR Parts 1, 20 and 151



Federal Speculative Position Limits for Referenced Energy Contracts and 
Associated Regulations; Proposed Rule

Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 / 
Proposed Rules

[[Page 4144]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 20 and 151

RIN 3038-AC85


Federal Speculative Position Limits for Referenced Energy 
Contracts and Associated Regulations

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is proposing to implement speculative position limits 
for futures and option contracts in certain energy commodities. The 
Commodity Exchange Act of 1936 (``CEA'' or ``Act'') gives the 
Commission the authority to establish limits on positions to diminish, 
eliminate or prevent excessive speculation causing sudden or 
unreasonable fluctuations in the price of a commodity, or unwarranted 
changes in the price of a commodity. In addition to identifying the 
affected energy contracts and the position limits that would apply to 
them, the notice of proposed rulemaking includes provisions relating to 
exemptions from the position limits for bona fide hedging transactions 
and for certain swap dealer risk management transactions. The notice of 
proposed rulemaking also sets out an application process that would 
apply to swap dealers seeking a risk management exemption from the 
position limits, as well as related definitions and reporting 
requirements. In addition, the notice of proposed rulemaking includes 
provisions regarding the aggregation of positions under common 
ownership for the purpose of applying the limits.

DATES: Comments must be received on or before April 26, 2010.

ADDRESSES: Comments should be submitted to David Stawick, Secretary, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581. Comments also may be sent by 
facsimile to (202) 418-5521, or by electronic mail to 
<a href="/cdn-cgi/l/email-protection#2053454352455441525960434654430e474f56"><span class="__cf_email__" data-cfemail="3c4f595f4e59485d4e457c5f5a485f125b534a">[email protected]</span></a>. Reference should be made to ``Proposed Federal 
Speculative Position Limits for Referenced Energy Contracts and 
Associated Regulations.'' Comments may also be submitted by connecting 
to the Federal eRulemaking Portal at http://www.regulations.gov and 
following comment submission instructions.

FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Acting Director of 
Surveillance, (202) 418-5452, <a href="/cdn-cgi/l/email-protection#2b5858434e5959444f6b484d5f48054c445d"><span class="__cf_email__" data-cfemail="5526263d3027273a3115363321367b323a23">[email protected]</span></a>, David P. Van Wagner, 
Chief Counsel, (202) 418-5481, <a href="/cdn-cgi/l/email-protection#92f6e4f3fce5f3f5fcf7e0d2f1f4e6f1bcf5fde4"><span class="__cf_email__" data-cfemail="284c5e49465f494f464d5a684b4e5c4b064f475e">[email protected]</span></a>, Donald Heitman, 
Senior Special Counsel, (202) 418-5041, <a href="/cdn-cgi/l/email-protection#07636f626e736a6669476461736429606871"><span class="__cf_email__" data-cfemail="04606c616d7069656a44676270672a636b72">[email protected]</span></a>, or Bruce 
Fekrat, Special Counsel, (202) 418-5578, <a href="/cdn-cgi/l/email-protection#ea888c8f81988b9eaa898c9e89c48d859c"><span class="__cf_email__" data-cfemail="8defebe8e6ffecf9cdeeebf9eea3eae2fb">[email protected]</span></a>, Division of 
Market Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581, facsimile number 
(202) 418-5527.

SUPPLEMENTARY INFORMATION:

I. Overview

    The majority of futures and options trading on energy commodities 
in the United States occurs on the New York Mercantile Exchange 
(``NYMEX''), a designated contract market (``DCM'') that operates as 
part of the CME Group.\1\ Energy commodity trading also takes place on 
the Intercontinental Exchange (``ICE''), an Atlanta-based exchange that 
operates as an exempt commercial market (``ECM'') and is, as of July 
2009, a registered entity with respect to its Henry Financial LD1 Fixed 
Price natural gas contract.\2\ NYMEX currently lists physically-
delivered and cash-settled futures contracts (and options on such 
futures contracts) in crude oil, natural gas, gasoline and heating oil. 
ICE lists a cash-settled look-alike contract on natural gas, and 
options thereon, that settles directly to the settlement price of 
NYMEX's physically-delivered natural gas futures contract.\3\
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    \1\ The CME Group is the parent company of four DCMs: NYMEX, the 
Chicago Board of Trade (``CBOT''), the Chicago Mercantile Exchange 
(``CME''), and the Commodity Exchange (``COMEX'').
    \2\ Under section 2(h)(7) of the Act, ECM contracts that have 
been determined by the Commission to be significant price discovery 
contracts (``SPDCs'') are subject to Commission regulation. 7 U.S.C. 
2(h)(7). ECMs listing SPDCs (``ECM-SPDCs'') are also deemed to be 
registered entities with self-regulatory responsibilities with 
respect to such contracts. To date, ICE's Henry Financial LD1 Fixed 
Price natural gas contract is the first and only ECM contract to 
have been determined by the Commission to be a SPDC under section 
2(h)(7) of the Act. 74 FR 37988 (July 30, 2009).
    \3\ US-based traders also enter into various energy contracts 
listed by the ICE Futures Europe Exchange (``ICE Futures Europe''), 
a London-based exchange. These energy contracts include futures on 
West Texas Intermediate (WTI) light sweet crude oil, a New York 
Harbor heating oil futures contract and a New York Harbor unleaded 
gasoline blendstock futures contract. All of the listed contracts 
directly cash-settle to the price of NYMEX futures contracts that 
are physically-settled. ICE Futures Europe is a foreign board of 
trade (``FBOT'') and, unlike NYMEX and ICE, is not registered in any 
capacity with the Commission. Instead, ICE Futures Europe and its 
predecessor, the International Petroleum Exchange, have operated in 
the US since 1999 pursuant to Commission staff no-action relief. 
CFTC Staff Letter No. 99-69 (November 12, 1999). Since 2008, ICE 
Futures Europe's no-action relief has been conditioned on, among 
other things, the requirement that the Exchange implement position 
limit requirements for its NYMEX-linked contracts that are 
comparable to the position limits that NYMEX applies to its 
contracts. CFTC Staff Letter No. 08-09 (June 17, 2008); CFTC Staff 
Letter No. 08-10 (July 3, 2008). Generally, comparable position 
limits for FBOT contracts that link to CFTC-regulated contracts 
serve to ensure the integrity of prices for CFTC-regulated 
contracts.
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    ICE's Henry Financial LD1 Fixed Price natural gas contract and 
virtually all NYMEX energy contracts are currently subject to exchange-
set spot-month speculative position limits that are in effect for the 
last three days of trading of the respective contracts. Under an 
exchange's speculative position limit rules, no trader, whether 
commercial or noncommercial, may exceed a specified limit unless the 
trader has requested and received an exemption from the exchange. 
Outside of a contract's spot month, these energy contracts are subject 
to exchange all-months-combined and single-month position 
accountability rules. Under an exchange's position accountability 
rules, once a trader exceeds an accountability level in terms of 
outstanding contracts held, the exchange has the right to request 
supporting justification from the trader for the size of its position, 
and may order a trader to reduce or not increase its positions further.
    As described in detail in section VI of this release, the 
Commission is proposing to impose all-months-combined, single-month, 
and spot-month speculative position limits for contracts based on a 
defined set of energy commodities. Broadly described, the Commission's 
proposal, for non-spot-month positions, would apply exchange-specific 
speculative position limits to a set of economically similar contracts 
that settle in the same manner. In addition, the Commission is 
proposing to implement and enforce aggregate non-spot-month speculative 
position limits that would apply across registered entities that list 
substantially similar energy contracts. As discussed in the Paperwork 
Reduction Act section of this notice of proposed rulemaking, should the 
proposed regulations be adopted, the Commission estimates that the 
total number of traders with significant positions that could be 
affected by the proposed regulations would be approximately ten.
    Particular data concerning the distribution of speculative traders 
in a market and an analysis of market conditions and variables, 
including open interest, can support a range of acceptable speculative 
position limit requirements. The Commission, in structuring the 
speculative position

[[Page 4145]]

limit framework as proposed, has considered its recent and historical 
actions in setting position limits, its continuous oversight of 
exchange-set speculative position limit and accountability rules, its 
experience in administering Commission-set speculative position limits 
\4\ and its observations of energy commodity market conditions and 
developments, particularly during the past four years. The Commission 
notes that the proposed Federal speculative position limits on energy 
contracts would be in addition to, and not a substitute for, a 
reporting market's existing speculative position limit and 
accountability requirements. Reporting markets, defined in Commission 
regulation 15.00 to include DCMs and ECM-SPDCs, are self-regulatory 
organizations with an independent responsibility for adopting and 
implementing appropriate position limit and accountability rules.
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    \4\ The Commission sets Federal speculative position limits for 
certain agricultural commodities enumerated in section 1a(4) of the 
Act. See 17 CFR 150.2.
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    This notice of proposed rulemaking does not propose regulations 
that would classify and treat differently passive long-only positions. 
The Commission does, however, in section VIII of this notice, solicit 
comment on specific issues related to large, passive long-only 
positions. In particular, the Commission solicits comments on how to 
identify and define such positions and whether such positions should, 
including collectively, be limited in any way.

II. Statutory Background

    Speculative position limits have been identified as an effective 
regulatory tool for mitigating the potential for market disruptions 
that could result from uncontrolled speculative trading. Section 4a(a) 
of the Act, 7 U.S.C. 6a(a), which in significant part retains language 
that was initially adopted in 1936, provides that:

    Excessive speculation in any commodity under contracts of sale 
of such commodity for future delivery made on or subject to the 
rules of contract markets or derivatives transaction execution 
facilities, or on electronic trading facilities with respect to a 
significant price discovery contract causing sudden or unreasonable 
fluctuations or unwarranted changes in the price of such commodity, 
is an undue and unnecessary burden on interstate commerce in such 
commodity.

    Accordingly, section 4a(a) of the Act provides the Commission with 
the following authority:

    For the purpose of diminishing, eliminating, or preventing such 
burden, 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 contracts of sale of 
such commodity for future delivery on or subject to the rules of any 
contract market or derivatives transaction execution facility, or on 
an electronic trading facility with respect to a significant price 
discovery contract, as the Commission finds are necessary to 
diminish, eliminate, or prevent such burden.

    Amendments introduced to the Act by the Futures Trading Act of 1982 
supplemented this longstanding statutory framework for Commission-set 
Federal speculative position limits by explicitly acknowledging the 
role of the exchanges in setting their own speculative position 
limits.\5\ The 1982 legislation also gave the Commission, under section 
4a(5) of the Act, the authority to directly enforce violations of 
exchange-set, Commission-approved speculative position limits in 
addition to position limits established directly by the Commission 
through orders or regulations.\6\ Thus, since 1982, the Act's framework 
explicitly anticipates the concurrent application of Commission and 
exchange-set speculative position limits. The concurrent application of 
limits is particularly consistent with an exchange's close knowledge of 
trading activity on that facility and the Commission's greater capacity 
for monitoring trading and implementing remedial measures across 
interconnected commodity futures and option markets.
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    \5\ Futures Trading Act of 1982, Pub. L. No. 97-444, 96 Stat. 
2299-30 (1983).
    \6\ Section 4a(5) has since been redesignated as section 4a(e) 
of the Act. 7 U.S.C. 4a(e).
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    The Commodity Futures Modernization Act of 2000 (``CFMA'') \7\ 
introduced substantial changes to the CEA. Broadly described, the CFMA 
established a principles-based approach to regulating the futures 
markets, allowed for the implementation of exchange rules through a 
certification process without requiring the exchanges to obtain prior 
Commission approval, and delineated specific designation criteria and 
core principles with which a DCM must comply to receive and maintain 
designation. Among these, Core Principle 5 in section 5(d) of the Act 
provides:
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    \7\ Commodity Futures Modernization Act of 2000, Appendix E of 
Public Law No. 106-554, 114 Stat. 2763 (2000).

    Position Limitations or Accountability--To reduce the potential 
threat of market manipulation or congestion, especially during 
trading in the delivery month, the board of trade shall adopt 
position limitations or position accountability for speculators, 
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where necessary and appropriate.

    Most recently the CEA was amended by the CFTC Reauthorization Act 
of 2008.\8\ The 2008 legislation amended the CEA by, among other 
things, adding core principles in new section 2(h)(7) governing SPDCs 
traded on electronic trading facilities operating in reliance on the 
exemption in section 2(h)(3) of the Act.\9\ The 2008 legislation 
amended the Act to impose certain self-regulatory responsibilities on 
ECM-SPDCs through core principles, as did the CFMA with respect to 
DCMs, including a core principle that requires such facilities to 
``adopt, where necessary and appropriate, position limitations or 
position accountability for speculators in significant price discovery 
contracts * * *'' \10\ The 2008 legislation also amended section 4a(e) 
of the Act to incorporate references to ECM-SPDCs, thereby assuring 
that violation of an ECM-SPDC's 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.
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    \8\ Food, Conservation and Energy Act of 2008, Public Law No. 
110-246, 122 Stat. 1624 (June 18, 2008).
    \9\ 7 U.S.C. 2(h)(3)-(7).
    \10\ 7 U.S.C. 2(h)(7)(C)(ii)(IV).
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    As mentioned above, the CFMA generally replaced the Act's exchange 
rule approval process with a certification process. On a practical 
level, this shift has tended to reduce the Commission's ability to more 
directly shape the specific requirements of exchange-set speculative 
position limit and accountability rules through approving such rules 
prior to implementation. In light of this, the Commission's broad 
authority to independently set position limits under CEA section 4a(a) 
could be viewed as an increasingly important enabling provision that 
allows the Commission to take the initiative in acting, when 
appropriate, to bolster market confidence and curb or prevent excessive 
speculation that may cause sudden, unwarranted, or unreasonable 
fluctuations in commodity prices.

III. Federal Speculative Position Limits

A. Historical Background

    From the earliest days of federal regulation of the futures 
markets, Congress made it clear that unchecked speculative positions, 
even without intent to manipulate the market, can cause price 
disturbances.\11\ To protect

[[Page 4146]]

markets from the adverse consequences associated with large speculative 
positions, Congress expressly authorized the Commodity Exchange 
Commission (``CEC'') \12\ to impose speculative position limits 
prophylactically.\13\ The Congressional endorsement of the Commission's 
prophylactic use of position limits rendered unnecessary a specific 
finding that an undue burden on interstate commerce had actually 
occurred. Additionally, Congress closely restricted exemptions from 
position limits to bona fide hedging transactions, initially defined as 
sales or purchases of futures contracts offset by sales or purchases of 
the same cash commodity.
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    \11\ The Congressional finding that excessive speculation can 
have detrimental consequences even without manipulative intent is 
consistent with the series of studies and reports made to Congress 
urging the adoption of measures to restrict speculative trading 
notwithstanding the absence of ``the deliberate purpose of 
manipulating the market.'' See e.g., Fluctuations in Wheat Futures, 
69th Cong., 1st Sess., Senate Document No. 135 (June 28, 1926).
    \12\ The CEC is the predecessor of the Commodity Exchange 
Authority, which is, in turn, the predecessor of the Commission.
    \13\ Requiring a specific demonstration of the need for position 
limits is contrary to section 4a(a) of the Act, which provides that 
the Commission shall set position limits from time to time, among 
other things, to prevent excessive speculation. 7 U.S.C. 4a(a).
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    In December of 1938, the CEC promulgated the first Federal 
speculative position limits for futures contracts in grains (then 
defined as wheat, corn, oats, barley, flaxseed, grain sorghums and rye) 
after finding that large speculative positions tended to cause sudden 
and unreasonable fluctuations and changes in the price of grain.\14\ At 
that time, the CEC did not impose limits in the other commodities 
enumerated in the 1936 Act.
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    \14\ 3 FR 3145 (December 24, 1938).
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    Over the following years, Federal position limits were extended to 
various other commodities enumerated in the Act. However, no uniform 
approach regarding speculative position limits was applied to those 
enumerated commodities. In some cases (e.g., soybeans), a commodity 
added to the Act's list of enumerated commodities was also added to the 
roster of commodities subject to Federal speculative position limits. 
In other cases (e.g., livestock products, butter, and wool), 
commodities added to the list of enumerated commodities in the Act 
never became subject to Federal position limits.
    In 1974, Congress overhauled the CEA to create the CFTC and 
simultaneously expanded the new agency's jurisdictional scope beyond 
the enumerated agricultural commodities to include futures contracts in 
any commodity. In expanding the CFTC's jurisdiction, Congress 
reiterated a fundamental precept underlying the Act, namely, to 
minimize or prevent the harmful effect of uncontrolled speculation.\15\ 
When the Commission came into existence in April 1975, ``various 
contract markets [had] voluntarily placed speculative position limits 
on 23 contracts involving 17 commodities.'' \16\ At that time, 
``position limits were in effect for almost all actively traded 
commodities then under regulation and the limits for positions in about 
one half of these actively traded commodities had been specified by the 
contract markets.'' \17\ Initially, the Commission retained the 
position limits enacted by the CEC, as then in effect, but did not 
establish position limits for any additional commodities.\18\ In the 
years immediately following, the Commission implemented a few 
relatively minor changes to position limit regulations, but undertook 
no significant expansion of Federal speculative position limits.
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    \15\ ``The fundamental purpose of the measure is to insure fair 
practice and honest dealing on the commodity exchanges and to 
provide a measure of control over those forms of speculative 
activity which too often demoralize the markets to the injury of 
producers and consumers and the exchanges themselves.'' S. Rep. No. 
93-1131, 93rd Cong., 2d. Sess. (1974).
    \16\ 45 FR 79831 (December 2, 1980).
    \17\ Id. at 79832. ``Commodity Exchange Authority regulations 
included limits for wheat, corn, oats, soybeans, cotton, eggs and 
potatoes. Exchange rules included limits for live cattle, feeder 
cattle, live hogs, frozen pork bellies, soybean oil, soybean meal, 
and grain sorghums.'' (Id. n.1)
    \18\ Pursuant to section 4l of the Commodity Futures Trading 
Commission Act of 1974, all regulations previously adopted by the 
Commodity Exchange Authority continued in full force and effect, to 
the extent they were not inconsistent with the Act, as amended, 
unless or until terminated, modified or suspended by the Commission. 
Sec. 205, 88 Stat. 1397 (effective July 18, 1975).
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    After the silver futures market crisis during late 1979 to early 
1980, commonly referred to as ``the Hunt Brothers silver 
manipulation,'' \19\ the Commission concluded that ``[t]he recent 
events in silver * * * suggest that the capacity of any futures market 
to absorb large positions in an orderly manner is not unlimited.'' \20\ 
Accordingly, in 1981 the Commission adopted regulation 1.61, which 
required all exchanges to adopt and submit for Commission approval 
speculative position limits in active futures markets for which no 
exchange or Commission limits were then in effect.\21\ Although 
regulation 1.61 directed the exchanges to implement position limit 
rules, the pre-CFMA exchange rule approval process, on a practical 
level, gave the Commission the ability to shape the requirements of 
exchange-set position limit rules as measures that guarded against 
excessive speculation in accordance with the purposes and findings of 
section 4a(a) of the Act.
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    \19\ See, In re Nelson Bunker Hunt et al., CFTC Docket No. 85-
12.
    \20\ 45 FR 79831, at 79833 (December 2, 1980).
    \21\ 46 FR 50938 (October 16, 1981).
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    The next significant development occurred in 1986, when the 
Commission undertook a comprehensive review of speculative position 
limit policies, including position limit levels. During the 
Commission's 1986 reauthorization, the CFTC's Congressional authorizing 
committees suggested that this subject should be addressed. The Report 
of the House Agriculture Committee stated:

    [T]he Committee believes that, given the changes in the nature 
of these markets and the influx of new market participants over the 
last decade, the Commission should reexamine the current levels of 
speculative position limits with a view toward elimination of 
unnecessary impediments to expanded market use.\22\
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    \22\ H.R. Rep. No. 624, 99th Cong., 2d Sess., at 4 (1986).

    Subsequently, the Commission reviewed its Federal speculative 
position limit framework and, in October 1987, adopted final amendments 
that raised some of the Federal speculative position limits and revised 
the general structure of the Federal speculative position limit 
regulations.\23\ The amendments introduced in 1987 retained the then 
current spot-month and individual month position limits but increased 
the all-months-combined position limits. The revised limits, which had 
historically been set on a generic commodity basis, established 
position limits for each contract ``according to the individual 
characteristics of that contract market,'' particularly ``the 
distribution of speculative position sizes in recent years and recent 
levels of open interest.'' \24\ In response to a petition by the CBOT, 
the Commission also established position limits for CBOT soybean oil 
and soybean meal contracts, which had been subject solely to exchange-
set position limits, to provide ``consistency with all other 
agricultural commodities traded at the CBOT.'' \25\
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    \23\ 52 FR 38914 (October 20, 1987).
    \24\ Id. at 38917, 38919.
    \25\ Petition for rulemaking of the CBOT, dated July 24, 1986, 
cited in 52 FR 6814 (March 5, 1987).
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    In 1992, the Commission issued proposed regulations adhering to the 
principle that speculative position limits should be formulaically 
adjusted based upon increases in the size of a contract's open interest 
(in addition to the traditional standard of distribution of speculative 
traders in a market).\26\

[[Page 4147]]

The formula was thereafter ``routinely applied [hellip] as a matter of 
administrative practice when reviewing proposed exchange speculative 
position limits under Commission [regulation] 1.61.'' \27\
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    \26\ 57 FR 12766 (April 13, 1992).
    \27\ 63 FR 38525 (July 17, 1998).
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    During this same time frame, the Commission began a process that 
led to the adoption of position accountability rules for contracts that 
were subject to exchange-set speculative position limits. Beginning in 
1991, the Commission approved several exchange rules establishing 
position accountability provisions in lieu of position limits for 
certain contracts exhibiting significant trading volume and open 
interest, a highly liquid underlying cash market and ready 
opportunities for arbitrage between the cash and futures markets.\28\ 
An exchange's position accountability rules, as opposed to position 
limits that bar traders from acquiring contracts that quantitatively 
exceed a specific number of outstanding contracts, require persons 
holding a certain number of open contracts to report the nature of 
their positions, trading strategy, and hedging needs to the exchange, 
upon the exchange's request.
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    \28\ See, e.g., 56 FR 51687 (October 15, 1991) and 57 FR 29064 
(June 30, 1992).
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    In 1999, the Commission simplified and reorganized its speculative 
position limit regulations to consolidate requirements for both 
Commission-set limits and exchange-set limits under regulation 1.61 in 
part 150 of the Commission's regulations. Regulation 150.5(e), 
currently, and as initially adopted in 1999, establishes a ``trader 
accountability exemption'' \29\ and generally codifies the position 
accountability conditions that initially were imposed as a matter of 
administrative practice beginning in 1991.\30\
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    \29\ 64 FR 24038, at 24048 (May 5, 1999).
    \30\ Regulation 150.5(e) provides that, for futures and option 
contracts that have been listed for trading for at least 12 months, 
an exchange may submit a position accountability rule, in lieu of a 
numerical limit, as follows:
     ``(1) For futures and option contracts on a financial 
instrument or product having an average open interest of 50,000 
contracts and an average daily trading volume of 100,000 contracts 
and a very highly liquid cash market, an exchange bylaw, regulation 
or resolution requiring traders to provide information about their 
position upon request by the exchange;
     (2) For futures and option contracts on a financial instrument 
or product or on an intangible commodity having an average month-end 
open interest of 50,000 and an average daily volume of 25,000 
contracts and a highly liquid cash market, an exchange bylaw, 
regulation or resolution requiring traders to provide information 
about their position upon request by the exchange and to consent to 
halt increasing further a trader's positions if so ordered by the 
exchange;
     (3) For futures and option contracts on a tangible commodity, 
including but not limited to metals, energy products, or 
international soft agricultural products having an average month-end 
open interest of 50,000 contracts and an average daily volume of 
5,000 contracts and a liquid cash market, an exchange bylaw, 
regulation or resolution requiring traders to provide information 
about their position upon request by the exchange and to consent to 
halt increasing further a trader's positions if so ordered by the 
exchange, provided, however, such contract markets are not exempt 
from the requirement of paragraphs (b) or (c) that they adopt an 
exchange bylaw, regulation or resolution setting a spot month 
speculative position limit with a level no greater than one quarter 
of the estimated spot-month deliverable supply * * *'' 17 CFR 
150.5(e).
    Notably, the Commission's concerns regarding spot-month limits 
were eventually mirrored by the CFMA, which provides in DCM Core 
Principle 5 (section 5(d)(5) of the Act), that ``[t]o reduce the 
potential threat of market manipulation or congestion, especially 
during trading in the delivery month, the board of trade shall adopt 
position limitations or position accountability for speculators, 
where necessary and appropriate.''
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    The reorganized rules also included new regulation 150.5(c), which 
codified the Commission's 1992 formula for calculating Federal 
speculative position limits based upon open interest, and applied it to 
exchanges for their use in calculating the levels of exchange-imposed 
numerical speculative position limits.\31\ The formula provided for 
``combined futures and option speculative position limits for both a 
single month and for all-months-combined at the level of 10 percent of 
open interest up to an open interest of 25,000 contracts, with a 
marginal increase of 2.5% thereafter.'' \32\ In initially proposing to 
use this formula, the Commission noted that:
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    \31\ The formulaic approach, initially developed by Blake Imel, 
former Acting Director of the Division of Economic Analysis (the 
Division has since been merged into the Division of Market 
Oversight), was premised on limiting the concentration of positions 
in the hands of one or a few traders by requiring a minimum number 
of distinct market participants.
    \32\ 64 FR 24038, at 24039 (May 5, 1999).

    [I]ts large trader data indicates that limits based on open 
interest as described above should accommodate the normal course of 
speculative positions in agricultural markets. The levels derived 
using this method of analysis generally are consistent with the 
largest exchange-set speculative limits approved by the Commission 
under Rule 1.61 for contract markets in agricultural commodities at 
corresponding levels of open interest. However, the Commission, 
based on its surveillance experience and monitoring of exchange and 
Federal speculative position limits, is satisfied that the levels 
indicated by this methodology, although near the outer bounds of the 
levels which have been approved previously, nevertheless will 
achieve the prophylactic intent of Section [4a] of the Act and 
Commission Rule 1.61, thereunder [emphasis supplied].\33\
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    \33\ 57 FR 12766, at 12771 (April 13, 1992).

    The Commission also emphasized that particular data can result in a 
range of acceptable speculative position limits, and that based on its 
experience overseeing exchange-set speculative limits and its direct 
administration of the Federal limits establishing ``a single-month and 
all-month limits on futures positions combined with option positions on 
a delta-equivalent basis of no more than ten percent of the combined 
markets' open interest for contracts with combined open interest below 
25,000'' was within the range of acceptable speculative position 
limits.\34\ For those markets with combined average open interest 
greater than 25,000 contracts, the Commission proposed a marginal 
increase of 2.5% after noting 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.''\35\
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    \34\ Id. at 12770.
    \35\ Id.
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    As noted above, Core Principle 5, introduced to the Act in 2000 by 
the CFMA, requires DCMs to implement position limits or position 
accountability rules for speculators ``where necessary and 
appropriate.'' In 2001, the Commission established Acceptable Practices 
for complying with Core Principle 5, set out in Appendix B to part 38 
of the Commission's regulations.\36\ The Acceptable Practices 
specifically reference part 150 of the Commission's regulations as 
providing guidance on how to comply with the requirements of the Core 
Principle.\37\ The CFMA, however, did not change the treatment of the 
enumerated agricultural commodities, which remained subject to Federal 
speculative position limits.
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    \36\ 17 CFR part 38, Appendix B, Core Principle 5(d)(5).
    \37\ 66 FR 42256 (August 10, 2001).
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    In 2005, the Commission increased the all-months-combined Federal 
speculative position limits and reset the single-month levels to 
roughly approximate the existing numerical relationship between all-
months-combined and single-month levels (i.e., arriving at the single-
month limits by setting them at about two-thirds of the relevant all-
months-combined limits), based generally on the 1992 open interest 
formula (as incorporated into regulation 150.5(e)).\38\
---------------------------------------------------------------------------

    \38\ 70 FR 24705 (May 11, 2005).
---------------------------------------------------------------------------

    In 2008, Congress, in response to high prices and volatility in the 
energy markets and concerns regarding excessive speculation on 
unregulated energy exchanges, including ECMs, adopted the CFTC 
Reauthorization Act of 2008 and amended two CEA provisions aimed at 
curbing possible manipulation and excessive speculation

[[Page 4148]]

in the energy markets. Specifically, the 2008 legislation amended CEA 
section 4a(e) to give the CFTC enforcement authority over position 
limits certified by the exchanges and adopted new section 2(h)(7) to 
apply a position limit and position accountability core principle to 
ECM-SPDCs.\39\ Notably, the legislation also extended the Commission's 
authority to set Federal speculative position limits, under CEA section 
4a(a), to ECM-SPDCs.
---------------------------------------------------------------------------

    \39\ See 7 U.S.C. 2(h)(7)(C)(IV).
---------------------------------------------------------------------------

B. Statutory Basis and Need for Energy Speculative Position Limits

    Energy futures and option contracts have never been subject to 
CFTC-set speculative position limits. These contracts began to attract 
significant trading volumes in the early 1980s beginning with NYMEX's 
New York Harbor No. 2 heating oil futures contract,\40\ followed by 
NYMEX's gasoline futures contract in 1981 and crude oil futures 
contract in 1983. NYMEX did not initially adopt position limits for 
heating oil futures contracts. However, with the adoption of Commission 
regulation 1.61, effective November 16, 1981, each exchange was 
required to submit for Commission approval speculative position limits 
for each actively traded futures contract. Thereafter, newly designated 
contracts (e.g., NYMEX's crude oil futures contract in 1983) were 
required to be accompanied by exchange speculative position limit rules 
as a condition of designation.
---------------------------------------------------------------------------

    \40\ The contract was designated in October 1974, but 
significant volume first developed in 1980.
---------------------------------------------------------------------------

    As noted above, in 1999 the Commission reorganized its speculative 
position limit regulations to codify its earlier administrative 
practice of allowing exchanges to adopt position accountability rules 
in lieu of numerical position limits for positions outside of the spot 
month. Currently, virtually all of NYMEX's energy futures and option 
contracts and ICE's single SPDC contract are subject to exchange-set 
position accountability rules during non-spot months and to hard 
speculative position limits during spot months.
    From 2007 to mid 2008, commodity prices generally, and energy 
prices in particular, increased significantly and experienced unusual 
volatility. As a result of this, Commission-regulated energy markets, 
as well as the over-the-counter (``OTC'') energy swap markets over 
which the Commission has no direct regulatory authority, were the 
subject of numerous Congressional hearings \41\ and formal and informal 
studies, including a preliminary review by an Interagency Task Force 
chaired by CFTC staff. \42\ In the summer of 2009, the Commission held 
three days of hearings ``to discuss energy position limits and hedge 
exemptions'' (``Energy Hearings'').\43\ The Commission heard from 26 
witnesses, including members of the U.S. House and Senate, swap 
dealers, money managers, futures market participants (including 
commercial hedgers), trade associations, exchanges, and consumer 
advocates.\44\ In addition, a total of 5,281 email comments were 
received (including some 1,200 identical emails from a single 
commenter).\45\
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    \41\ At the hearings, numerous witnesses expressed concern 
regarding the impact on energy prices of speculation on commodity 
futures markets, including particularly the price impact of trading 
by swap dealers and index funds. Alternatively, many other witnesses 
expressed the view that fundamental market conditions were the 
primary driver of prices.
    \42\ The Task Force included staff representatives from the 
Departments of Agriculture, Energy and the Treasury, the Board of 
Governors of the Federal Reserve, the Federal Trade Commission, and 
the Securities and Exchange Commission. The Task Force looked at the 
crude oil market between January 2003 and June 2008. The staff 
members of the various agencies did not find direct causal evidence 
for the general increase in oil prices between January 2003 and June 
2008. Interagency Task Force on Commodity Markets, Interim Report on 
Crude Oil (July 22, 2008).
    \43\ Commodity Futures Trading Commission, ``CFTC to Hold Three 
Open Hearings to Discuss Energy Position Limits and Hedge 
Exemptions,'' CFTC Release 5681-09 (July 21, 2009).
    \44\ See the following Commission Releases for a listing of 
agendas and witnesses and related links:
     5681-09 (July 21, 2009) http://www.cftc.gov/newsroom/generalpressreleases/2009/pr5681-09.html;
    5682-09 (July 27, 2009) http://www.cftc.gov/newsroom/generalpressreleases/2009/pr5682-09.html;
    and 5685-09 (July 31, 2009) http://www.cftc.gov/newsroom/generalpressreleases/2009/pr5685-09.html.
    \45\ Persons wishing to review these comments may contact the 
Commission's Secretariat at <a href="/cdn-cgi/l/email-protection#7300161001160712010a33101507105d141c05"><span class="__cf_email__" data-cfemail="aeddcbcddccbdacfdcd7eecdc8dacd80c9c1d8">[email protected]</span></a>.
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    As with the Congressional hearings and market studies, there were 
mixed opinions among the Energy Hearing participants as to the causes 
of the price rises and market volatility. With respect to position 
limits for energy commodities, a number of witnesses expressed concern 
over the impact on energy prices of excessive speculation and supported 
position limits.\46\ Others cautioned that such limits could be 
ineffective, hurt market liquidity or distort the price discovery 
process if not properly constructed.\47\
---------------------------------------------------------------------------

    \46\ ``This increase in volatility has been associated with a 
massive increase in speculative investment in oil futures.'' Ben 
Hirst, Senior Vice President and General Counsel for Delta Airlines; 
``* * *[S]peculative trading strategies may not always have a benign 
effect on the markets.'' Laura Campbell, Assistant Manager of Energy 
Resources, Memphis Light, Gas & Water, on behalf of The American 
Public Gas Association; ``That ability [to hedge heating fuel 
costs], however, is now being undermined by an erratic market, 
questionable investment tactics and purely speculative market 
forces.'' Sean Cota, President, Cota & Cota, Inc. Hearings on Energy 
Position Limits and Hedge Exemptions, July 28, July 29 and August 5, 
2009, at the Commodity Futures Trading Commission.
    \47\ ``If [limits] are set too tight, traders who possess 
important market information and provide crucial liquidity are kept 
away.'' Todd E. Petzel. Chief Investment Officer, Offit Capital 
Advisors; ``Simply eliminating or limiting swap dealer hedge 
exemptions will impair liquidity, have other unintended consequences 
and would very likely not achieve the stated objective.'' Donald 
Casturo, Managing Director, Goldman Sachs & Co.; ``Position limits 
no matter how well meaning create real market migration risk and 
pushing price discovery of agricultural, energy or metals markets to 
overseas or other trading venues would be contrary to the purposes 
of the Act.'' Mark D. Young, Kirkland & Ellis LLP. Hearings on 
Energy Position Limits and Hedge Exemptions, July 28, July 29 and 
August 5, 2009, at the Commodity Futures Trading Commission.
---------------------------------------------------------------------------

    As discussed above, section 4a(a) represents an explicit 
Congressional finding that extreme or abrupt price fluctuations 
attributable to unchecked speculative positions are harmful to the 
futures markets and that position limits can be an effective 
prophylactic regulatory tool to diminish, eliminate or prevent such 
activity. Accordingly, Congress charged the Commission with 
responsibility for setting contract position limits in any commodity to 
prevent or minimize extreme or abrupt price movements resulting from 
large or concentrated positions. Under the authority granted to it, the 
Commission may impose speculative position limits without finding an 
extant undue burden on interstate commerce resulting from excessive 
speculation.\48\ Section 8a(5) of the Act also provides that the 
Commission may make and promulgate such rules and regulations that in 
its judgment are reasonably necessary to accomplish any of the purposes 
of the Act.
---------------------------------------------------------------------------

    \48\ Moreover, the exchanges' independent responsibility to 
monitor trading and implement position limits and position 
accountability rules does not detract from or otherwise impair the 
Commission's broad authority to impose speculative limits.
---------------------------------------------------------------------------

    Large concentrated positions in the energy futures and option 
markets can potentially facilitate abrupt price movements and price 
distortions. The prevention of unreasonable and abrupt price movements 
that are attributable to large or concentrated speculative positions is 
a congressionally endorsed regulatory objective. This objective is 
furthered by position limits, particularly given that the capacity of 
any reporting market to absorb the establishment and liquidation of 
large speculative

[[Page 4149]]

positions in an orderly manner is related to the relative size of such 
positions and is not unlimited. Specifically, when large speculative 
positions are amassed in a contract, or contract month, the potential 
exists for unreasonable and abrupt price movements should the positions 
be traded out of or liquidated in a disorderly manner. Concentration of 
large positions in one or a few traders' accounts can also create the 
unwarranted appearance of appreciable liquidity and market depth. 
Trading under such conditions can result in greater volatility than 
would otherwise prevail if traders' positions were more evenly 
distributed among market participants.
    Furthermore, concurrent trading in economically similar and 
equivalent energy futures and option contracts on multiple exchanges 
effectively creates a single but fragmented market for such contracts. 
Because individual exchanges have knowledge of positions only on their 
own trading facilities, it is difficult for them to assess the full 
impact of a trader's positions on the greater market. As such, 
monitoring and limiting positions through exchange-specific position 
limits and through the enforcement of exchange position accountability 
rules, though necessary and beneficial, may not sufficiently guard 
against potential market disruptions.
    For these reasons, the Commission is proposing to establish 
reporting market-specific Federal speculative position limits for 
futures and option contracts in certain energy commodities and 
aggregate position limits that would apply across economically similar 
contracts, regardless of whether such contracts are listed on a single 
or on multiple reporting markets, to curb the impact of disruptive 
excessive speculation.

IV. Exemptions and Account Aggregation

    The Commission's current regulatory framework for Federal 
speculative position limits consists of three elements, (i) the levels 
of the Commission-set speculative position limits (discussed above), 
(ii) certain exemptions from the limits (e.g., for hedging, spreading 
or arbitraged positions), and (iii) the policy on aggregating related 
accounts for purposes of applying the limits.
    Commission regulation 150.3, headed ``Exemptions,'' lists certain 
types of positions that may be exempted from (and thus may exceed) the 
Federal speculative position limits delineated in regulation 150.2. In 
particular, under regulation 150.3(a)(1), bona fide hedging 
transactions, as defined in Commission regulation 1.3(z), may exceed 
Commission-set position limits.\49\ The first two parts of the bona 
fide hedging definition include a general definition of bona fide 
hedging (see paragraph (z)(1)) and a listing of certain enumerated 
hedging transactions in the agricultural commodities that are currently 
subject to Federal position limits (see paragraph (z)(2)). Paragraph 
(z)(3) of the definition provides flexibility to the Commission in 
granting exemptions by permitting additional transactions to be 
recognized as bona fide hedging upon a trader's request, made in 
accordance with the application provisions of Commission regulation 
1.47. Regulation 1.47 requires a person seeking a bona fide hedge 
exemption under regulation 1.3(z)(3) to provide the Commission with 
various information that will, among other things, ``demonstrate that 
the purchases and sales are economically appropriate to the reduction 
of risk exposure attendant to the conduct and management of a 
commercial enterprise.'' \50\
---------------------------------------------------------------------------

    \49\ Commission regulation 1.3(z) provides:
    ``Bona fide hedging transactions and positions--(1) General 
definition. Bona fide hedging transactions and positions shall mean 
transactions or positions in a contract for future delivery on any 
contract market, or in a commodity option, where such transactions 
or positions normally represent a substitute for transactions to be 
made or positions to be taken at a later time in a physical 
marketing channel, and where they are economically appropriate to 
the reduction of risks in the conduct and management of a commercial 
enterprise, and where they arise from:
    (i) The potential change in the value of assets which a person 
owns, produces, manufactures, processes, or merchandises or 
anticipates owning, producing, manufacturing, processing, or 
merchandising,
    (ii) The potential change in the value of liabilities which a 
person owns or anticipates incurring, or
    (iii) The potential change in the value of services which a 
person provides, purchases, or anticipates providing or purchasing.
    Notwithstanding the foregoing, 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 
and such positions are established and liquidated in an orderly 
manner in accordance with sound commercial practices and, for 
transactions or positions on contract markets subject to trading and 
position limits in effect pursuant to section 4a of the Act, unless 
the provisions of paragraphs (z)(2) and (3) of this section and 
Sec. Sec.  1.47 and 1.48 of the regulations have been satisfied.
    (2) Enumerated hedging transactions. The definitions of bona 
fide hedging transactions and positions in paragraph (z)(1) of this 
section includes, but is not limited to, the following specific 
transactions and positions:
    (i) Sales of any commodity for future delivery on a contract 
market which do not exceed in quantity:
    (A) Ownership or fixed-price purchase of the same cash commodity 
by the same person; and
    (B) Twelve months' unsold anticipated production of the same 
commodity by the same person provided that no such position is 
maintained in any future during the five last trading days of that 
future.
    (ii) Purchases of any commodity for future delivery on a 
contract market which do not exceed in quantity:
    (A) The fixed-price sale of the same cash commodity by the same 
person;
    (B) The quantity equivalent of fixed-price sales of the cash 
products and by-products of such commodity by the same person; and
    (C) Twelve months' unfilled anticipated requirements of the same 
cash commodity for processing, manufacturing, or feeding by the same 
person, provided that such transactions and positions in the five 
last trading days of any one future do not exceed the person's 
unfilled anticipated requirements of the same cash commodity for 
that month and for the next succeeding month.
    (iii) Offsetting sales and purchases for future delivery on a 
contract market which do not exceed in quantity that amount of the 
same cash commodity which has been bought and sold by the same 
person at unfixed prices basis different delivery months of the 
contract market, provided that no such position is maintained in any 
future during the five last trading days of that future.
    (iv) Sales and purchases for future delivery described in 
paragraphs (z)(2)(i), (ii), and (iii) of this section may also be 
offset other than by the same quantity of the same cash commodity, 
provided that the fluctuations in value of the position for future 
delivery are substantially related to the fluctuations in value of 
the actual or anticipated cash position, and provided that the 
positions in any one future shall not be maintained during the five 
last trading days of that future.
    (3) Non-enumerated cases. Upon specific request made in 
accordance with Sec.  1.47 of the regulations, the Commission may 
recognize transactions and positions other than those enumerated in 
paragraph (z)(2) of this section as bona fide hedging in such amount 
and under such terms and conditions as it may specify in accordance 
with the provisions of Sec.  1.47. Such transactions and positions 
may include, but are not limited to, purchases or sales for future 
delivery on any contract market by an agent who does not own or who 
has not contracted to sell or purchase the offsetting cash commodity 
at a fixed price, provided that the person is responsible for the 
merchandising of the cash position which is being offset.'' 17 CFR 
1.3(z).
    \50\ 17 CFR 1.47(b)(2).
---------------------------------------------------------------------------

    In addition to regulation 150.3(a)(1)'s bona fide hedging 
exemption, regulation 150.3(a) includes two other exemptions from the 
Federal speculative position limits. Regulation 150.3(a)(3) exempts 
``spread or arbitrage positions between single months of a futures 
contract * * * outside of the spot-month, in the same crop year * * * 
.'' Subject to various conditions, regulation 150.3(a)(4) exempts 
positions ``[c]arried for an eligible entity as defined in regulation 
150.1(d), in the separate account or accounts of an independent account 
controller, as defined in regulation 150.1(e) * * * .'' Eligible 
entities include mutual funds, commodity pool operators and commodity 
trading advisors. Entities claiming this exemption are required, upon 
call by the Commission, to provide information supporting their claim 
that the account controllers for

[[Page 4150]]

these positions are acting independently.
    Also, in order to achieve the intended effect of the Federal 
speculative position limits, Commission regulation 150.4, headed 
``Aggregation of positions,'' requires the Commission and the exchanges 
to treat multiple accounts subject to common ownership or control as if 
they are held by a single trader. Such accounts are typically 
considered to be under a common ownership if one or more traders have a 
10% or greater financial interest in the accounts and do not otherwise 
qualify for an exemption from aggregation, such as the independent 
account controller exemption discussed above. The aggregation standards 
are applied in a manner calculated to aggregate related positions. For 
example, each participant with a 10% or greater financial interest in 
an account must aggregate the entire position of that account--not just 
the participant's fractional share--together with other positions that 
the participant may independently hold. Likewise, a commodity futures 
or option contract pool comprised of many traders is allowed only to 
hold positions as if it were a single trader. The Commission also 
treats positions that are not commonly owned, but are traded pursuant 
to an express or implied agreement, as a single aggregated position for 
purposes of applying the Federal speculative position limits. 
Exceptions to the aggregation standards exist for certain pool 
participants, such as limited partners and shareholders that cannot 
exercise control over the positions of the pool.

V. Bona Fide Hedge Exemptions

    Prior to 1974, the CEA included a limited statutory hedging 
definition that applied only to agricultural commodities. When the 
Commission was created in 1974, the Act's definition of commodity was 
expanded. At that time, Congress was concerned that the limited hedging 
definition, even if applied to newly regulated commodity futures, would 
fail to accommodate the commercial risk management needs of market 
participants that could emerge over time. Accordingly, Congress, in 
section 404 of the Commodity Futures Trading Commission Act of 1974, 
repealed the statutory definition and gave the Commission the authority 
to define bona fide hedging.
    The Commission exercised this authority in 1977 by adopting 
regulations 1.3(z) and 1.47.\51\ Those regulations have remained 
unchanged since 1977. By the mid 1980s, new concerns had emerged. Under 
the Commission's definition, bona fide hedge transactions ``normally 
represent a substitute for transactions to be made or positions to be 
taken at a later time in a physical marketing channel,'' and are 
``economically appropriate to the reduction of risks in the conduct of 
a commercial enterprise.'' \52\ This aspect of the hedging definition 
proved to be ill fitted to the economic realities of financial futures. 
Portfolio managers utilize the financial futures markets to add 
incremental income to managed assets, to manage overall risk, or to 
rebalance a portfolio. Indeed, futures market positions are often 
acquired entirely as an alternative to cash market transactions (in 
view of the lower transaction costs, speed, and minimal price impact), 
rather than as a temporary substitute for positions that will later be 
taken in the underlying cash market.
---------------------------------------------------------------------------

    \51\ 42 FR 42748 (August 24, 1977).
    \52\ 17 CFR 1.3(z)(1).
---------------------------------------------------------------------------

    In 1986, in response to concerns raised in testimony regarding the 
constraints on investment decisions imposed by position limits, the 
House Committee on Agriculture, in its report accompanying the 
Commission's 1986 reauthorization legislation, instructed the 
Commission to reexamine its approach to speculative position limits and 
its definition of hedging.\53\ Specifically, the Committee Report 
``strongly urge[d] the Commission to undertake a review of its hedging 
definition * * * and to consider giving certain concepts, uses, and 
strategies `non-speculative' treatment * * * whether under the hedging 
definition or, if appropriate, as a separate category similar to the 
treatment given certain spread, straddle or arbitrage positions * * *'' 
\54\ The Committee Report singled out four categories of trading and 
positions that the Commission should recognize as non-speculative: (i) 
``Risk management'' trading by portfolio managers as an alternative to 
the concept of ``risk reduction;'' (ii) futures positions taken as 
alternatives to, rather than as temporary substitutes for, cash market 
positions; (iii) other positions acquired to implement strategies 
involving the use of financial futures including, but not limited to, 
asset allocation (altering portfolio exposure in certain areas such as 
equity and debt), portfolio immunization (curing mismatches between the 
duration and sensitivity assets and liabilities to ensure that 
portfolio assets will be sufficient to fund the payment of 
liabilities), and portfolio duration (altering the average maturity of 
a portfolio's assets); and (iv) certain options trading, in particular 
the writing of covered puts and calls.\55\
---------------------------------------------------------------------------

    \53\ House Committee on Agriculture, Futures Trading Act of 
1986, H.R. Rep. No. 624, 99th Cong., 2d Sess. 44-46 (1986).
    \54\ Id. at 46.
    \55\ Id.
---------------------------------------------------------------------------

    The Senate Committee on Agriculture, Nutrition and Forestry, in its 
report on the 1986 CFTC reauthorization legislation, also directed the 
Commission to reassess its interpretation of bona fide hedging.\56\ The 
Commission heeded Congress's recommendation, and its staff issued 
interpretive statements directing that risk management exemptions be 
included as speculative position limit exemptions in addition to the 
existing exemptions for hedging, arbitrage and spreading.\57\ The 
interpretive statements recognized new types of ``risk reducing'' and 
``risk shifting'' strategies in financial futures (including ``dynamic 
asset allocation strategies'') as falling within the bona fide hedging 
category.
---------------------------------------------------------------------------

    \56\ Senate Committee on Agriculture, Nutrition and Forestry, 
Futures Trading Act of 1986, S. Rep. No. 291, 99th Cong., 2d Sess. 
at 21-22 (1986). Specifically, the Senate Committee directed the 
Commission to consider ``whether the concept of prudent risk 
management [should] be incorporated in the general definition of 
hedging as an alternative to this risk reduction standard.'' Id., at 
22.
    \57\ See, Clarification of Certain Aspect of the Hedging 
Definition, 52 FR 27195 (July 20, 1987); Risk Management Exemptions 
from Speculative Position Limits Approved under Commission 
Regulation 1.61, 52 FR 34633 (September 14, 1987).
---------------------------------------------------------------------------

    The next significant change in trading patterns and practices in 
derivatives markets involved an influx of new traders into the market 
seeking exposure to commodities as an asset class through passive, 
long-term investment in commodity indexes as a way of diversifying 
portfolios that might otherwise be limited to equities and debt 
instruments.\58\ New market participants included commodity index 
traders (including pension and endowment funds, as well as individual 
investors participating in commodity index-based funds or trading 
programs) and swap dealers seeking to hedge price risk from OTC trading 
activity (frequently opposite those same commodity index traders).
---------------------------------------------------------------------------

    \58\ The argument has also been made that commodities act as a 
general hedge of liability obligations that are linked to inflation.
---------------------------------------------------------------------------

    The development of the OTC swaps industry, over which the 
Commission generally has no regulatory authority, is related to the 
exchange-traded futures and options industry in that a swap agreement 
\59\ can either compete with or

[[Page 4151]]

complement regulated commodity futures and options trading.\60\ Market 
participants often enter into OTC swap agreements because, unlike more 
standardized futures contracts, they can be customized to match 
particular hedging or price exposure needs. Swap dealers, often 
affiliated with a bank or other large financial institution, act as 
swap counterparties to both commercial firms seeking to hedge price 
risks and speculators seeking to gain price exposure. Swap dealers, in 
turn, utilize the more standardized futures markets to manage the 
residual risk of their swaps book.\61\ In addition, some swap dealers 
also deal directly in the merchandising of physical commodities.
---------------------------------------------------------------------------

    \59\ A swap agreement is typically a privately negotiated 
exchange of one asset or cash flow for another asset or cash flow. 
In a commodity swap, at least one of the assets or cash flows is 
related to the price of one or more commodities.
    \60\ The bilateral contracts that swap dealers create can vary 
widely, from terms tailored to meet the needs of a specific 
customer, to relatively standardized contracts.
    \61\ Because swap agreements can be highly customized, and the 
liquidity for a particular swap contract can be low, swap dealers 
may also use other swap agreements and physical market positions, in 
addition to futures, to offset the residual risks of their swap 
book.
---------------------------------------------------------------------------

    In accordance with the above-discussed Congressional 
recommendations, market developments, and the Commission's recognition 
of a risk management exemption for financial futures, beginning in 
1991, the Commission staff extended the concept of risk management 
exemptions from speculative position limits by granting bona fide hedge 
exemptions, in various agricultural futures markets subject to Federal 
speculative position limits, to a number of swap dealers who were 
seeking to manage price risks on their books arising from swap dealing 
activities. The first such hedge exemption involved J. Aron, a large 
commodity merchandising firm that engaged in commodity related swaps as 
a part of a commercial line of business. The firm, through an 
affiliate, wished to enter into an OTC swap transaction with a 
qualified counterparty (a large pension fund) involving an index based 
on the returns afforded by investments in exchange-traded futures 
contracts on certain non-financial commodities meeting specified 
criteria.\62\ The commodities making up the index included contracts in 
certain agricultural commodities subject to Federal speculative 
position limits. As a result of the swap, J. Aron would have, in 
effect, been going short the index. In order to protect itself against 
this risk, the firm planned to establish a portfolio of long futures 
positions in the commodities making up the index, in such amounts as 
would replicate its exposure under the swap transaction. By design, the 
index did not include contract months that had entered the delivery 
period and J. Aron, in replicating the index, stated that it would not 
maintain futures positions based on index-related swap activity into 
the spot month (when physical commodity markets are most vulnerable to 
manipulation and attendant price fluctuations). With this risk 
mitigation strategy, the firm's composite return on its futures 
portfolio would have offset the net payments that the dealer would have 
been required to make to the pension fund counterparty.
---------------------------------------------------------------------------

    \62\ The commodities comprising such indexes may include the 
agricultural commodities subject to Federal speculative position 
limits, as well as energy commodities, metals and world agricultural 
commodities (e.g., coffee, sugar, and cocoa).
---------------------------------------------------------------------------

    The futures positions J. Aron required to cover its exposure on the 
swap agreement's agricultural component would have been in excess of 
certain Federal speculative position limits. Accordingly, the firm 
requested, and the staff granted, a hedge exemption for those futures 
positions, that offset risks directly related to the OTC swap 
transaction.
    Subsequently, the Commission staff granted a number of similar 
hedge exemptions, pursuant to delegated authority, in other cases where 
the futures positions clearly offset risks related to swap agreements 
or similar OTC positions involving both individual commodities and 
commodity indexes. These non-traditional ``hedges'' were all subject to 
specific limitations to protect the marketplace from potential ill 
effects. The limitations required: (i) The futures positions to offset 
specific price risk; (ii) the dollar value of the futures positions to 
be no greater than the dollar value of the underlying risk; and (iii) 
the futures positions to not be carried into the spot-month.\63\
---------------------------------------------------------------------------

    \63\ 72 FR 66097, at 66099 (November 27, 2007).
---------------------------------------------------------------------------

    In 2006, Commission staff issued two no-action letters involving 
another type of index-based trading.\64\ Both cases involved trading 
that offered investors the opportunity to participate in a broadly-
diversified commodity index-based fund or program (``index fund''). The 
futures positions of these index funds differed from the futures 
positions taken by the swap dealers who had earlier received 
exemptions. The swap dealer positions were taken to offset OTC swaps 
exposure that was directly linked to the price of an index. For that 
reason, Commission staff granted hedge exemptions to those swap dealer 
positions. On the other hand, in the index fund positions described in 
the no-action letters, the price exposure resulted from a promise or 
obligation to track an index, rather than from holding an OTC swap 
position whose value was directly linked to the price of an index. 
Commission staff believed that this difference was significant enough 
that the index fund positions would not qualify for a hedge exemption. 
Nevertheless, because the index fund positions represented a legitimate 
and potentially useful investment strategy, Commission staff granted 
the index funds no-action relief, subject to certain conditions 
intended to protect the futures markets from potential ill effects. 
These conditions required: (i) The positions to be passively managed; 
(ii) the positions to be unleveraged (so that financial conditions 
should not trigger rapid liquidations); and (iii) the positions to not 
be carried into the delivery month.
---------------------------------------------------------------------------

    \64\ CFTC Letter 06-09 (April 19, 2006); CFTC Letter 06-19 
(September 6, 2006).
---------------------------------------------------------------------------

    Prompted by concerns regarding the growing market presence of swap 
dealers and commodity index traders who use futures markets to manage 
risks related to OTC trading activity, in June and July of 2008, CFTC 
staff issued a special call for information from swap dealers and index 
traders. Based upon information collected from its special call, the 
Commission published on September 11, 2008, a ``Staff Report on 
Commodity Swap Dealers and Index Traders with Commission 
Recommendations'' (the ``September 2008 Report''). Most relevant to the 
Commission's proposed rulemaking is the Report's recommendation that 
the Commission consider the elimination of bona fide hedge exemptions 
for swap dealers and the creation of a new, limited risk management 
exemption for the activities of swap dealers and commodity index 
traders.\65\
---------------------------------------------------------------------------

    \65\ The Report also made a number of other recommendations for 
Commission action, including: (1) Removing swap dealers from the 
commercial category in the Commitments of Traders Reports (``COT 
Reports'') and creating a new swap dealer classification for 
reporting purposes; (2) Developing and publishing a new periodic 
supplemental report based on OTC swap dealer activity; (3) Creating 
a new CFTC Office of Data Collection dedicated to the collection and 
publication of COT Report data; (4) Establishing more detailed 
reporting standards for large traders; and (5) Conducting a review 
of swap dealers' futures trading activity to ensure that it is 
sufficiently independent of any affiliated commodity research. The 
Commission has largely addressed the Report's recommendations 
regarding COT Reports. The Commission has been publishing a new 
Disaggregated COT Report (``DCOT Report'') for twenty-two different 
physical commodity markets since September 4, 2009 and expanded the 
DCOT Report to the remaining physical markets on December 4, 2009. 
The Commission also began publishing on September 4, 2009 a new 
quarterly report of Index Investment Data which shows for swap 
dealers and index funds their index investments in commodity markets 
in terms of notional values and equivalent futures positions. The 
Commission continues to study the viability of the September 2008 
Report's other recommendations regarding the creation of an Office 
of Data Collection, the establishment of more detailed reporting 
standards for large traders and a review of the relation of swap 
dealers' futures trading and commodity research activities. 
September 2008 Report, at 6.

---------------------------------------------------------------------------

[[Page 4152]]

    In March of 2009, the Commission published a ``Concept Release on 
Whether to Eliminate the Bona Fide Hedge Exemption for Certain Swap 
Dealers and Create a New Limited Risk Management Exemption from 
Speculative Position Limits.''\66\ The concept release reviewed the 
underlying statutory and regulatory background, as well as relevant 
regulatory history and marketplace developments, and posed a number of 
questions designed to help inform the Commission's decision as to: (i) 
Whether to proceed with the recommendation to eliminate the bona fide 
hedge exemption for swap dealers and replace it with a conditional 
limited risk management exemption; and (ii) if so, what form the new 
limited risk management exemptive regulations should take and how they 
might be implemented most effectively.
---------------------------------------------------------------------------

    \66\ 74 FR 12282 (March 24, 2009).
---------------------------------------------------------------------------

    In response, the Commission received letters from 30 commenters, 
including futures exchanges, agricultural trade associations, financial 
industry trade associations, money management firms (including swap 
dealers), other market participants and various other interested 
parties. The comments were about equally divided between those who 
favored eliminating the bona fide hedge exemption for swap dealers (or 
restricting the exemption to positions offsetting swap dealers' 
exposure to traditional commercial market users) and those who favored 
retaining the swap dealer hedge exemption in its current form, or some 
variation thereof.\67\ Similar views on hedge exemptions were also 
expressed at the Commission's Energy Hearings in July and August 
2009.\68\ As discussed below, the proposed regulations would not 
recognize futures and option transactions offsetting exposure acquired 
pursuant to swap dealing activity as bona fide hedges. Accordingly, 
swap dealers would not be allowed to seek bona fide hedge exemptions 
for such positions. Instead, however, upon compliance with several 
conditions including reporting and disclosure obligations, the proposed 
regulations would allow swap dealers to seek a limited exemption from 
the proposed speculative position limits for the major energy 
contracts.
---------------------------------------------------------------------------

    \67\ The comments are available for review on the Commission's 
Web site at http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-004.html.
    \68\ Also in August 2009, Commission staff withdrew CFTC Letters 
06-09 and 06-19, which had granted staff no-action relief to two 
index funds (with passively managed positions) from complying with 
the Federal speculative position limits otherwise applicable to 
futures and option contracts in wheat, corn and soybeans.
---------------------------------------------------------------------------

VI. The Proposed Regulations

A. Overview

    The proposed regulations seek to implement an integrated 
speculative position limit framework for exchange listed natural gas, 
crude oil, heating oil, and gasoline futures and option contracts. In 
addition to identifying the affected energy contracts with 
particularity, the proposed regulations would establish aggregate and 
exchange-specific speculative position limits, including provisions 
relating to exemptions from the proposed limits and related application 
and reporting requirements. The proposed regulations provide position 
limit exemptions for bona fide hedging transactions, certain swap 
dealer risk management transactions, and positions that remain, in 
their totality, in compliance with the applicable limits once option 
contracts that comprise a portion of a trader's overall position are 
delta-adjusted by a demonstrably appropriate risk factor. The proposed 
regulations key the setting of position limits to deliverable supplies 
and open interest. In addition, they seek to apply position limits to a 
set of readily identifiable contracts. By doing so, the proposed 
regulations intend to establish an objective and administerial process 
for fixing specific position limits and identifying the contracts to 
which they apply without relying on the Commission's exercise of 
discretion.
    As discussed in detail below, the proposed spot-month limits 
generally are a function of the estimated deliverable supply for 
physically-settled contracts. The logic behind limiting positions based 
on deliverable supply is readily apparent since, for example, traders 
with sufficiently large positions can squeeze shorts and thereby 
distort the price of the deliverable commodity. In contrast, the 
proposed (non-spot) single-month and all-months-combined position 
limits would limit positions to a specific percentage of overall 
trading activity as represented by open interest. As such, the link 
between open interest and the proposed non-spot-month position limits 
may not be as readily apparent as the link between spot-month limits 
and estimated deliverable supply.
    To illustrate how a formula based on open interest would restrict 
the ability of any single trader to disrupt market operations through 
the acquisition and liquidation of large speculative positions, it may 
be helpful to consider a framework in which there are no exemptions 
from position limits and there exists a single contract with an open 
interest level of 1,000 contracts. With these simplifications in place, 
a position limit that is set at 10% of open interest, given an assumed 
open interest level of 1,000 contracts, would be 100 contracts (i.e., 
10% of 1,000 contracts). Thus, the position limit, at the assumed open 
interest level of 1,000 contracts, would mean that there must, at a 
minimum, be 10 independent long and 10 independent short traders.\69\ 
If there were 9 traders on either side of the market, then at least one 
trader would necessarily hold more than 100 contracts. That trader 
would hold such positions in violation of the contract's position 
limit.
---------------------------------------------------------------------------

    \69\ The concept of independence is important because the 
positions of a group of traders acting pursuant to a common plan 
would be aggregated as if the positions were traded by a single 
person.
---------------------------------------------------------------------------

    Alternatively, if the position limit is set at a lower percentage 
of the contract's assumed open interest level of 1,000 contracts, then 
the minimum number of independent traders needed as market participants 
would be higher. For example, a position limit that is set at 2.5% of 
the assumed open interest level of 1,000 contracts would be 25 
contracts (i.e., 2.5% of 1,000 contracts). Accordingly, the minimum 
``size of the trading crowd'' under this scenario would be 40 long and 
40 short traders (40 traders each with 25 contract positions would 
equal the given open interest level of 1,000 contracts). Therefore, 
position limits that are formulaically set as a percentage of open 
interest can prevent any single trader from acquiring excessive market 
power if structured properly as one part of a comprehensive speculative 
position limit framework.

B. Identifying Referenced Energy Contracts

    As proposed, the speculative position limits would apply only to 
referenced energy contracts. Proposed regulation 151.1 defines 
referenced energy contracts to mean one of four enumerated contracts--
the NYMEX Henry Hub natural gas contract, the NYMEX Light Sweet crude 
oil contract, the NYMEX New York Harbor No. 2 heating oil contract, and 
the NYMEX New York Harbor gasoline blendstock (RBOB) contract--and in 
addition, any other contract that is exclusively or partially based on 
the referenced

[[Page 4153]]

contracts' commodities and deliverable at locations specified in the 
proposed regulations. Basis contracts and diversified commodity index 
futures that are based on such contracts' commodities, however, would 
not be considered to be referenced energy contracts and, therefore, 
would not be subject to the proposed speculative position limits.
    Basis contracts, as defined in proposed regulation 151.1, are 
futures or option contracts that are cash settled based on the 
difference in price of the same commodity (or substantially the same 
commodity)\70\ at different delivery points. These basis contracts have 
been excluded by the Commission from the speculative position limits 
because they price the difference between the same commodity in two 
different locations and not the underlying commodity itself.\71\ 
Similarly, contracts based on diversified commodity indexes, defined in 
proposed regulation 151.1 as commodity indexes that are comprised of 
contracts in energy as well as non-energy commodities, are excluded 
because they may not involve a separate and distinct exposure to the 
price of a referenced energy contract's commodity.\72\
---------------------------------------------------------------------------

    \70\ A commodity may be considered ``substantially the same,'' 
for instance, if it is of the same grade and quality. If a commodity 
meets an underlying referenced energy contract's deliverable grade 
and quality specifications, then such commodity presumptively is 
substantially similar.
    \71\ It should also be noted that, although a grade may be 
substantially similar to a referenced energy contract's commodity, 
this is not sufficient to render a futures or option contract a 
referenced energy contract. In order to be included as a referenced 
energy contract, a substantially similar commodity must also be 
deliverable at a referenced energy contract's delivery point(s).
    \72\ Examples of diversified commodity indexes include the S&P/
Goldman Sachs Commodity Index, the Thomson Reuters/Jefferies CRB 
Index and the Dow Jones-UBS Commodity Index.
---------------------------------------------------------------------------

C. Determining Aggregate All-Months-Combined and Single-Month Position 
Limits

    The current Federal speculative position limits of regulation 150.2 
apply only to specific futures contracts (and on a futures-equivalent 
basis) specific option contracts. Historically, all trading volume in a 
specific contract tended to migrate to a single contract on a single 
exchange. Consequently, speculative position limits that applied to a 
single contract and options thereon effectively applied to a single 
market. The current speculative position limits of regulation 150.2 for 
certain agricultural contracts follow this approach.
    In 2005, when the Commission last amended the agricultural 
speculative position limits of regulation 150.2, it codified the 
Commission's practice of grouping positions in a limited set of 
contracts on the same exchange with substantially identical terms for 
the purpose of applying the Federal agricultural speculative position 
limits.\73\ This limited grouping of positions extended only to regular 
and mini-sized contracts on the same exchange, such as the CBOT Corn 
and Mini-Corn futures contracts, and did not extend to contracts that 
were cash settled to physically delivered contracts. At that time and 
subsequently in 2007 (in a notice of proposed rulemaking that was 
subsequently withdrawn), the Commission considered but refrained from 
adopting additional position grouping requirements for the agricultural 
contracts enumerated in regulation 150.2.\74\
---------------------------------------------------------------------------

    \73\ 70 FR 24705 (May 11, 2005).
    \74\ See, 70 FR 12621 (March 15, 2005); 72 FR 65483 (November 
21, 2007).
---------------------------------------------------------------------------

    With the advent of look-alike energy contracts that are listed on 
different registered entities and contracts that are based on other 
contracts in an attempt to isolate different energy price risks, most 
prominently contracts traded at NYMEX and ICE, applying a speculative 
position to a specific energy contract, and its smaller sized 
counterpart, if any, without consideration of other directly or highly 
related contracts could result in applying a position limit only to a 
very limited segment of a broader regulated market. Accordingly, the 
proposed regulations would, for positions outside the spot month, apply 
the proposed Federal speculative position limits aggregately on and 
across reporting markets to capture a broader segment of the open 
interest that comprises the market for the referenced energy contracts.
    Proposed regulation 151.2(b)(1) would establish aggregate all-
months-combined and single-month speculative limits for positions held 
outside the spot month. The proposed framework premises its limits on 
open interest levels, and would establish speculative position limits 
aggregately, that is, across contracts of different classes on a single 
exchange and across all reporting markets listing the same referenced 
energy contracts. As defined in proposed regulation 151.1, contracts of 
the same class outside of the spot month include all referenced energy 
contracts (including option contracts on a futures-equivalent basis) on 
a single reporting market that are based on the same commodity and 
settled in the same manner. As proposed, NYMEX's crude oil financial 
calendar spread option, last day financial futures and options thereon, 
and light sweet crude oil e-mini contracts, as cash-settled NYMEX 
contracts, would all be grouped together as contracts of the same 
class. NYMEX's physically-settled light sweet crude oil contract, 
however, would be in a different class because the contract is 
physically-settled as opposed to being a financial futures contract 
like the contracts listed above. Similarly, ICE's natural gas SPDC, 
although financially-settled and related to NYMEX's natural gas 
contracts, would be in a different class because it is on a different 
exchange. As discussed more fully below, categorizing the referenced 
energy contracts in this manner allows for the application of aggregate 
and class-specific speculative position limits and permits for the 
netting of positions as appropriate.
    In fixing aggregate all-months-combined and single-month position 
limits across contract classes, that is, for related contracts of 
different classes on and across the exchanges, the Commission would 
initially identify the referenced energy contracts that are based on 
the same commodity but that constitute a distinct class of contracts 
because, for example, they are cash-settled as opposed to physically-
settled, or because they are listed on different reporting markets. The 
Commission next would calculate each class's average combined futures 
and delta-adjusted option month-end open interest for all months listed 
on a reporting market during the most recent calendar year as the first 
reference point (``class single-exchange gross open interest value'').
    The proposed regulations would subtract the open interest generated 
from spread contracts, as defined in regulation 151.1, from the class 
single-exchange gross open interest value to arrive at a ``class 
single-exchange final open interest value.'' Proposed regulation 151.1 
would define spread contracts as either a calendar spread contract or 
an inter-commodity spread contract.\75\ Open interest generated from

[[Page 4154]]

spread contracts, as defined in proposed regulation 151.1, is not 
included in the class single-exchange final open interest value because 
spread contracts may be indicative of nominal commodity price 
exposures. Traders on both sides of spread contracts, as defined by the 
proposed regulations, hold a single position composed of two highly 
correlated legs. Therefore, open interest from such contracts may be 
excluded from the base open interest value that is used to calculate 
speculative position limits. Although excluded from the class single-
exchange final open interest value that, as discussed below, is used to 
set the aggregate all-months-combined and single-month position limits, 
such contracts, unlike basis contracts and contracts based on 
diversified commodity indexes, are nonetheless referenced energy 
contracts and therefore are attributable to traders for the purposes of 
determining a trader's compliance with, for example, the proposed 
single-month speculative position limits.
---------------------------------------------------------------------------

    \75\ More specifically, proposed regulation 151.1 defines 
``calendar spread contracts'' as contracts that are settled based on 
the difference between the settlement prices in one expiring month 
of a referenced energy contract and another month's settlement price 
for the same referenced energy contract. The proposed regulations 
would define ``inter-commodity spread'' contracts as contracts that 
are based on the price difference between the settlement price of a 
referenced energy contract and another commodity contract. An 
example of a calendar spread contract is the NYMEX Crude Oil 
Calendar Spread Financially Settled Option Contract (WA). This 
contract represents an option to assume positions in two different 
NYMEX Light Sweet crude oil futures contracts distinguished by 
opposite positions in different delivery months. An example of an 
inter-commodity spread representing the price difference between two 
referenced commodities would be the NYMEX heating oil crack spread 
swap futures (HK) contract, which represents the price difference 
between two referenced energy contracts, the NYMEX New York Harbor 
No. 2 heating oil futures settlement price minus the NYMEX Light 
Sweet crude oil futures settlement price. A different example of an 
inter-commodity spread would be the NYMEX Mars (Argus) vs. WTI 
spread calendar swap (YX) which represents the Mars midpoint price 
from Argus Media minus the NYMEX Light Sweet crude oil futures first 
nearby contract month settlement price.
---------------------------------------------------------------------------

    The following table lists the contracts, grouped by class, which 
would be used to determine a class's single-exchange final open 
interest value as described above:

                                     Contract List Without Spread Contracts
----------------------------------------------------------------------------------------------------------------
                                                                                    Individual      All months
                                                                    Spot-month         month         combined
                                                                    conversion      conversion      conversion
                                                                      factor          factor          factor
       Class of contract          Contract name    Contract code    relative to     relative to     relative to
                                                                    referenced      referenced      referenced
                                                                      energy          energy          energy
                                                                     contract        contract        contract
----------------------------------------------------------------------------------------------------------------
Crude Oil/Physical Delivery/    Light Sweet Crude  CL...........               1               1               1
 NYMEX.                          Oil Futures.
                                Light Sweet Crude  LO...........               0               1               1
                                 Oil Option.
Crude Oil/Cash-Settled/NYMEX..  Crude Oil          WS...........               1               1               1
                                 Financial
                                 Futures.
                                Crude Oil Last     26...........               1               1               1
                                 Day Financial
                                 Futures.
                                Crude Oil Option   6F...........               0               1              12
                                 on Calendar
                                 Strip.
                                Crude Oil Option   6E...........               0               1               3
                                 on Quarterly
                                 Futures Strip.
                                Daily Crude Oil    CD...........               0               1               1
                                 Option.
                                E-mini Crude Oil   QM...........           \1/2\           \1/2\           \1/2\
                                 Futures.
                                NYMEX Crude Oil    XK...........               0           \1/5\           \1/5\
                                 Backwardation/
                                 Contango (B/C)
                                 Index.
                                NYMEX Crude Oil    XC...........               0           \1/5\           \1/5\
                                 MACI Index.
                                NYMEX Crude Oil    4T...........               1               1               1
                                 Minute-Marker
                                 Calendar Month
                                 Swap Futures.
                                NYMEX Crude Oil    6C...........               1               1               1
                                 Minute-Marker
                                 Futures.
                                WTI Average Price  AO...........               0               1               1
                                 Option.
                                WTI Calendar Swap  CS...........               1               1               1
                                 Futures.
                                WTI Look-Alike     LC...........               0               1               1
                                 Option.
Gasoline/Physical Delivery/     RBOB Gasoline      RB...........               1               1               1
 NYMEX.                          Futures.
                                RBOB Gasoline      OB...........               0               1               1
                                 Option.
Gasoline/Cash-Settled/NYMEX...  E-mini RBOB        QU...........           \1/2\           \1/2\           \1/2\
                                 Gasoline Futures.
                                NYMEX RBOB         5T...........               1               1               1
                                 Gasoline Minute-
                                 Marker Calendar
                                 Month Swap
                                 Futures.
                                NYMEX RBOB         6R...........               1               1               1
                                 Gasoline Minute-
                                 Marker Futures.
                                RBOB Gasoline      RA...........               1               1               1
                                 Average Price
                                 Option.
                                RBOB Gasoline      1D...........               1               1               1
                                 BALMO Swap
                                 Futures.
                                RBOB Gasoline      RL...........               1               1               1
                                 Calendar Swap
                                 Futures.
                                RBOB Gasoline      RT...........               1               1               1
                                 Financial
                                 Futures.
                                RBOB Gasoline      27...........               1               1               1
                                 Last Day
                                 Financial
                                 Futures.
                                RBOB Gasoline      RF...........               0               1               1
                                 Look-Alike
                                 European Option.
Heating Oil/Physical Delivery/  Heating Oil        OH...........               0               1               1
 NYMEX.                          Option.
                                New York Harbor    HO...........               1               1               1
                                 No. 2 Heating
                                 Oil Futures.
Heating Oil/Cash-Settled/NYMEX  E-mini Heating     QH...........           \1/2\           \1/2\           \1/2\
                                 Oil Futures.
                                Heating Oil        AT...........               1               1               1
                                 Average Price
                                 Option.
                                Heating Oil BALMO  1G...........               1               1               1
                                 Swap Futures.
                                Heating Oil        MP...........               1               1               1
                                 Calendar Swap
                                 Futures.
                                Heating Oil        BH...........               1               1               1
                                 Financial
                                 Futures.
                                Heating Oil Last   23...........               1               1               1
                                 Day Financial
                                 Futures.
                                Heating Oil Look-  LB...........               0               1               1
                                 Alike Option.
                                NYMEX Heating Oil  7T...........               1               1               1
                                 Minute-Marker
                                 Calendar Month
                                 Swap Futures.

[[Page 4155]]

 
                                NYMEX Heating Oil  6H...........               1               1               1
                                 Minute-Marker
                                 Futures.
Natural Gas/Physical Delivery/  Henry Hub Natural  NG...........               1               1               1
 NYMEX.                          Gas Futures.
                                Henry Hub Natural  ON...........               1               1               1
                                 Gas Option.
Natural Gas/Cash-Settled/NYMEX  Daily Natural Gas  KD...........               0               1               1
                                 Option.
                                E-mini Henry Hub   NP...........           \1/4\           \1/4\           \1/4\
                                 Natural Gas
                                 Penultimate
                                 Financial
                                 Futures.
                                E-mini Natural     QG...........           \1/4\           \1/4\           \1/4\
                                 Gas Futures.
                                Henry Hub Natural  HH...........               1               1               1
                                 Gas Last Day
                                 Financial
                                 Futures.
                                Henry Hub Natural  E7...........               1               1               1
                                 Gas Last Day
                                 Financial Option.
                                Henry Hub Natural  LN...........               1               1               1
                                 Gas Look-Alike
                                 Option.
                                Henry Hub Natural  HP...........               1               1               1
                                 Gas Penultimate
                                 Financial
                                 Futures.
                                Henry Hub Natural  NN...........           \1/4\           \1/4\           \1/4\
                                 Gas Swap Futures.
                                Natural Gas        6J...........               0           \1/4\               3
                                 Option on
                                 Calendar Futures
                                 Strip.
                                Natural Gas        4D...........               0           \1/4\         1 \3/4\
                                 Option on Summer
                                 Futures Strip.
                                Natural Gas        6I...........               0           \1/4\         1 \1/4\
                                 Option on Winter
                                 Futures Strip.
Natural Gas/Cash-Settled/ICE..  Henry Hub Natural  H............           \1/4\           \1/4\           \1/4\
                                 Gas Swap.
----------------------------------------------------------------------------------------------------------------

    Once a class single-exchange final open interest value is 
determined, under the proposed regulations, the Commission would sum 
this value for all related classes on and across all reporting markets 
to arrive at an ``aggregated market open interest value'' as a third 
reference point for each of the four referenced energy contracts. The 
proposed regulations would establish an all-months-combined aggregate 
position limit that is fixed by the Commission at 10% of the aggregated 
open interest value discussed above, up to 25,000 contracts, with a 
marginal increase of 2.5% thereafter.\76\ This proposed formula is 
similar to the formula provided in current regulation 150.5(c).
---------------------------------------------------------------------------

    \76\ Proposed regulation 151.2(e)(3) provides that the result of 
the formula is rounded up to the nearest one hundred to calculate 
the level of the limit.
---------------------------------------------------------------------------

    The proposed regulations would set the single-month aggregate 
position limit at two-thirds of the position limit fixed for the all-
months-combined aggregate position limit. This means that the aggregate 
all-months-combined position limit level would be 150% of the aggregate 
single-month position limit level. As previously discussed, in 2005 the 
Commission increased the all-months-combined Federal speculative 
position limits and reset the single-month levels to approximate the 
then existing ratio between all-months-combined and single-month levels 
(i.e., arriving at the single-month limits by setting them at about 
two-thirds of the relevant all-months-combined limits). The proposed 
regulation's reliance on this approach for determining single non-spot-
month limits is therefore consistent with prior Commission 
determinations.
    As proposed, the intent of the aggregate position limits is to 
permit for the netting of positions in a referenced energy contract's 
different classes on a single exchange and across the exchanges for the 
purpose of determining compliance with the aggregate all-months-
combined and aggregate single-month speculative position limits. 
Accordingly, no trader would be permitted to hold net long or net short 
referenced energy contract positions that, when combined with net long 
or net short positions in the same referenced energy contract on 
another exchange, would exceed the aggregate all-months-combined and 
aggregate single-month speculative position limits.

D. Single-Exchange Limits

    In order to prevent the excessive concentration of positions in a 
particular class of contracts, for each reporting market separately, 
the proposed regulations would also establish an all-months-combined 
position limit that would apply specifically to contracts of the same 
class at the lower of the aggregate position limit for a referenced 
energy contract or 30% of a class's single exchange final open interest 
value. Accordingly, for the purpose of applying these exchange and 
class-specific speculative position limits, netting would only be 
permitted between contracts of the same class.
    For each reporting market separately, the proposed regulations also 
would establish a single-month position limit for contracts of the same 
class that would be two-thirds of the all-months-combined position 
limit fixed for that class of contracts. Thus, the single-month limit 
on each reporting market for a class of contracts would be no greater 
than 20% of a class's single exchange final open interest value (i.e., 
two-thirds of 30% of a class's single exchange final open interest 
value).
    Proposed regulation 151.2 also establishes a minimum position limit 
for a reporting market of 5,000 contracts or 1% of the aggregated open 
interest value, whichever is greater. The Commission notes that the 
5,000 contract level is consistent with its guidance on acceptable 
practices for exchanges setting all-months-combined position limits for 
newly listed energy contracts in current regulation

[[Page 4156]]

150.5(b)(3). Levels set by reference to the 1% of aggregated open 
interest value and the 5,000 contract limit are intended to give newly 
listed contracts or contracts with low open interest the opportunity to 
attract liquidity. The concentration of positions held by a single 
trader on a particular reporting market, such as a market marker,\77\ 
given the minimal impact that such trading may have on commodity 
prices, is acceptable because such levels promote innovation and 
competition.
---------------------------------------------------------------------------

    \77\ A market maker is a trader that quotes both a buy and a 
sell price in an attempt to profit from the spread.
---------------------------------------------------------------------------

    In addition to the above mentioned position limits, as proposed, a 
trader's positions in contracts of the same class in a single month on 
a reporting market, measured on a gross basis, would be limited to no 
greater than two times the all-months-combined class position limit 
fixed for that reporting market. A limit on a trader's gross positions 
in a single month would serve to prevent sudden or unreasonable 
fluctuations or unwarranted changes in commodity prices that could 
arise from traders holding large positions that would otherwise net out 
(e.g., offsetting positions in last trading day and penultimate 
contracts of the same class for the same month) for the purpose of 
applying the class single-month position limits.
    The following table groups contracts by the classes in which they 
would be included under the proposed regulations:

                                       Contract List with Spread Contracts
----------------------------------------------------------------------------------------------------------------
                                                                                    Individual      All months
                                                                    Spot-month         month         combined
                                                                    conversion      conversion      conversion
                                                       Contract       factor          factor          factor
      Class of contract            Contract name         code       relative to     relative to     relative to
                                                                    referenced      referenced      referenced
                                                                      energy          energy          energy
                                                                     contract        contract        contract
----------------------------------------------------------------------------------------------------------------
Crude Oil/Physical Delivery/   Light Sweet Crude              CL               1               1               1
 NYMEX.                         Oil Futures.
                               Light Sweet Crude              LO               0               1               1
                                Oil Option.
                               Heating Oil Crack              HC              -1              -1              -1
                                Spread Option.
                               RBOB Gasoline Crack            RX              -1              -1              -1
                                Spread Option.
                               WTI Calendar Spread            WA               1               1               0
                                Option.
Crude Oil/Cash-Settled/NYMEX.  Crude Oil Financial            7A               1               1               1
                                Calendar Spread
                                Option.
                               Crude Oil Financial            WS               1               1               1
                                Futures.
                               Crude Oil Last Day             26               1               1               1
                                Financial Futures.
                               Crude Oil Option on            6F               0               1              12
                                Calendar Strip.
                               Crude Oil Option on            6E               0               1               3
                                Quarterly Futures
                                Strip.
                               Daily Crude Oil                CD               0               1               1
                                Option.
                               E-mini Crude Oil               QM           \1/2\           \1/2\           \1/2\
                                Futures.
                               Gulf Coast No. 2               RD              -1              -1              -1
                                (Platts) Crack
                                Spread Swap Futures.
                               Gulf Coast No. 6               MG              -1              -1              -1
                                Fuel Oil (Platts)
                                Crack Spread Swap
                                Futures.
                               Gulf Coast ULSD                CF              -1              -1              -1
                                (Argus) Crack
                                Spread Swap Futures.
                               Gulf Coast ULSD                GY              -1              -1              -1
                                (Platts) Crack
                                Spread Swap Futures.
                               Gulf Coast Unl 87              CK              -1              -1              -1
                                (Argus) Crack
                                Spread Swap Futures.
                               Gulf Coast Unl 87              1J              -1              -1              -1
                                (Platts) Crack
                                Spread BALMO Swap
                                Futures.
                               Gulf Coast Unl 87              RU              -1              -1              -1
                                (Platts) Crack
                                Spread Swap Futures.
                               Heating Oil Crack              3W              -1              -1              -1
                                Spread Average
                                Price Option.
                               Heating Oil Crack              1H              -1              -1              -1
                                Spread BALMO Swap
                                Futures.
                               Heating Oil Crack              HK              -1              -1              -1
                                Spread Swap Futures.
                               Mars (Argus) vs. WTI           YX              -1              -1              -1
                                Spread Calendar
                                Swap Futures.
                               Mars (Argus) vs. WTI           YV              -1              -1              -1
                                Spread Trade Month
                                Swap Futures.
                               New York Harbor                ML              -1              -1              -1
                                Residual Fuel
                                (Platts) Crack
                                Spread Swap Futures.
                               New York Ultra Low             YU              -1              -1              -1
                                Sulfur Diesel
                                (ULSD) Crack Spread
                                Swap.
                               NYMEX Crude Oil                XK               0           \1/5\           \1/5\
                                Backwardation/
                                Contango (B/C)
                                Index.
                               NYMEX Crude Oil MACI           XC               0           \1/5\           \1/5\
                                Index.
                               NYMEX Crude Oil                4T               1               1               1
                                Minute-Marker
                                Calendar Month Swap
                                Futures.
                               NYMEX Crude Oil                6C               1               1               1
                                Minute-Marker
                                Futures.
                               RBOB Gasoline Crack            3Y              -1              -1              -1
                                Spread Average
                                Price Option.

[[Page 4157]]

 
                               RBOB Gasoline Crack            1E              -1              -1              -1
                                Spread BALMO Swap
                                Futures.
                               RBOB Gasoline Crack            RM              -1              -1              -1
                                Spread Swap Futures.
                               WTI Average Price              AO               0               1               1
                                Option.
                               WTI Calendar Swap              CS               1               1               1
                                Futures.
                               WTI Look-Alike                 LC               0               1               1
                                Option.
                               WTS (Argus) vs. WTI            FF              -1              -1              -1
                                Spread Calendar
                                Swap Futures.
                                WTS (Argus) vs. WTI           FH              -1              -1              -1
                                Spread Trade Month
                                Swap Futures.
Gasoline/Physical Delivery/    RBOB Gasoline                  RB               1               1               1
 NYMEX.                         Futures.
                               RBOB Gasoline Option           OB               0               1               1
                               RBOB Gasoline                  ZA               1               1               0
                                Calendar Spread
                                Option.
                               RBOB Gasoline Crack            RX               0               1               1
                                Spread Option.
Gasoline/Cash-Settled/NYMEX..  Chicago Unleaded               3C              -1              -1              -1
                                Gasoline (Platts)
                                vs. RBOB Gasoline
                                Spread Swap Futures.
                                E-mini RBOB                   QU           \1/2\           \1/2\           \1/2\
                                Gasoline Futures.
                               Group Three Unleaded           A8              -1              -1              -1
                                Gasoline (Platts)
                                vs. RBOB Spread
                                Swap.
                               Gulf Coast Gasoline            4F              -1              -1              -1
                                (OPIS) vs. RBOB
                                Gasoline Spread
                                Swap Futures.
                               Gulf Coast Unl 87              UZ              -1              -1              -1
                                (Argus) Up-Down
                                Swap Futures.
                               Gulf Coast Unl 87              1K              -1              -1              -1
                                (Platts) Up-Down
                                BALMO Swap Futures.
                               Gulf Coast Unl 87              RV              -1              -1              -1
                                (Platts) vs. RBOB
                                Gasoline Spread
                                Swap Futures.
                               Los Angeles CARBOB             JL              -1              -1              -1
                                Gasoline (OPIS)
                                Spread Swap Futures.
                               New York Harbor                RZ              -1              -1              -1
                                Conv. Gasoline
                                (Platts) vs. RBOB
                                Gasoline Swap
                                Futures.
                               NY RBOB (Platts) vs.           RI              -1              -1              -1
                                NYMEX RBOB Gasoline
                                Spread Swap Futures.
                               NYMEX RBOB Gasoline            5T               1               1               1
                                Minute-Marker
                                Calendar Month Swap
                                Futures.
                               NYMEX RBOB Gasoline            6R               1               1               1
                                Minute-Marker
                                Futures.
                               RBOB Gasoline                  RA               1               1               1
                                Average Price
                                Option.
                               RBOB Gasoline BALMO            1D               1               1               1
                                Swap Futures.
                               RBOB Gasoline                  RL               1               1               1
                                Calendar Swap
                                Futures.
                               RBOB Gasoline Crack            3Y               1               1               1
                                Spread Average
                                Price Option.
                               RBOB Gasoline Crack            1E               1               1               1
                                Spread BALMO Swap.
                               RBOB Gasoline Crack            RM               1               1               1
                                Spread Swap Futures.
                               RBOB Gasoline                  RT               1               1               1
                                Financial Futures.
                               RBOB Gasoline Last             27               1               1               1
                                Day Financial
                                Futures.
                               RBOB Gasoline Look-            RF               0               1               1
                                Alike European
                                Option.
                               RBOB Gasoline vs.              RH               1               1               1
                                Heating Oil Swap
                                Futures.
Heating Oil/Physical Delivery/ New York Harbor No.            HO               1               1               1
 NYMEX.                         2 Heating Oil
                                Futures.
                               Heating Oil Option..           OH               0               1               1
                               Heating Oil Calendar           FA               1               1               0
                                Spread Options.
                               Heating Oil Crack              HC               0               1               1
                                Spread Option.
Heating Oil/Cash-Settled/      Chicago ULSD                   5C              -1              -1              -1
 NYMEX.                         (Platts) vs.
                                Heating Oil Spread
                                Swap.
                               E-mini Heating Oil             QH           \1/2\           \1/2\           \1/2\
                                Futures.
                               Group Three ULSD               A6              -1              -1              -1
                                (Platts) vs.
                                Heating Oil Spread
                                Swap Futures.
                                Gulf Coast Jet                JU              -1              -1              -1
                                (Argus) Up-Down
                                Swap Futures.
                               Gulf Coast Jet                 W7              -1              -1              -1
                                (OPIS) vs. Heating
                                Oil Spread Swap
                                Futures.
                               Gulf Coast Jet                 1M              -1              -1              -1
                                (Platts) Up-Down
                                BALMO Swap Futures.
                               Gulf Coast Jet                 ME              -1              -1              -1
                                (Platts) vs.
                                Heating Oil Spread
                                Swap Futures.
                               Gulf Coast Low                 YL              -1              -1              -1
                                Sulfur Diesel (LSD)
                                (Platts) Up-Down
                                Spread Swap Futures.
                               Gulf Coast ULSD                US              -1              -1              -1
                                (Argus) Up-Down
                                Swap Futures.

[[Page 4158]]

 
                               Gulf Coast ULSD                5Q              -1              -1              -1
                                (OPIS) vs. Heating
                                Oil Spread Swap
                                Futures.
                               Gulf Coast ULSD                LT              -1              -1              -1
                                (Platts) Up-Down
                                Spread Swap Futures.
                               Gulf Coast ULSD                1L              -1              -1              -1
                                (Platts) Up-Down
                                Swap Futures.
                               Heating Oil Arb :              HA               1               1               1
                                NYMEX Heating Oil
                                vs. ICE Gasoil.
                               Heating Oil Average            AT               1               1               1
                                Price Option.
                               Heating Oil BALMO              1G               1               1               1
                                Swap Futures.
                               Heating Oil Calendar           MP               1               1               1
                                Swap Futures.
                               Heating Oil Crack              3W               1               1               1
                                Spread Average
                                Price Option.
                               Heating Oil Crack              1H               1               1               1
                                Spread BALMO Swap
                                Futures.
                               Heating Oil Crack              HK               1               1               1
                                Spread Swap Futures.
                               Heating Oil                    BH               1               1               1
                                Financial Futures.
                                Heating Oil Last              23               1               1               1
                                Day Financial
                                Futures.
                               Heating Oil Look-              LB               0               1               1
                                Alike Option.
                               Los Angeles CARB               KL              -1              -1              -1
                                Diesel (OPIS)
                                Spread Swap Futures.
                               Los Angeles Jet                JS              -1              -1              -1
                                (OPIS) Spread Swap
                                Futures.
                               Los Angeles Jet Fuel           MQ              -1              -1              -1
                                (Platts) vs.
                                Heating Oil Spread
                                Swap Futures.
                               NY Jet Fuel (Argus)            5U              -1              -1              -1
                                vs. Heating Oil
                                Spread Swap Futures.
                               NY Jet Fuel (Platts)           1U              -1              -1              -1
                                vs. Heating Oil
                                Swap Futures.
                               NY ULSD (Platts) vs.           UY              -1              -1              -1
                                NYMEX Heating Oil
                                Spread Swap Futures.
                               NYMEX Heating Oil              7T               1               1               1
                                Minute-Marker
                                Calendar Month Swap
                                Futures.
                               NYMEX Heating Oil              6H               1               1               1
                                Minute-Marker
                                Futures.
                               RBOB Gasoline vs.              RH              -1              -1              -1
                                Heating Oil Swap
                                Futures.
                               ULSD (Argus) vs.               7Y              -1              -1              -1
                                Heating Oil Spread
                                Swap Futures.
Natural Gas/Physical Delivery/ Henry Hub Natural              NG               1               1               1
 NYMEX.                         Gas Futures.
                               Henry Hub Natural              ON               1               1               1
                                Gas Option.
                               Henry Hub Natural              IA               1               1               0
                                Gas Calendar Spread
                                Options.
Natural Gas/Cash-Settled/      Daily Natural Gas              KD               0               1               1
 NYMEX.                         Option.
                               E-mini Henry Hub               NP           \1/4\           \1/4\           \1/4\
                                Natural Gas
                                Penultimate
                                Financial Futures.
                               E-mini Natural Gas             QG           \1/4\           \1/4\           \1/4\
                                Futures.
                               Henry Hub Natural              HH               1               1               1
                                Gas Last Day
                                Financial Futures.
                               Henry Hub Natural              E7               1               1               1
                                Gas Last Day
                                Financial Option.
                               Henry Hub Natural              LN               1               1               1
                                Gas Look-Alike
                                Option.
                               Henry Hub Natural              HP               1               1               1
                                Gas Penultimate
                                Financial Futures.
                               Henry Hub Natural              NN           \1/4\           \1/4\           \1/4\
                                Gas Swap Futures.
                               Henry Natural Gas              G4               1               1               0
                                Financial Calendar
                                Spread Option.
                               Natural Gas Option             6J               0           \1/4\               3
                                on Calendar Futures
                                Strip.
                               Natural Gas Option             4D               0           \1/4\         1 \3/4\
                                on Summer Futures
                                Strip.
                               Natural Gas Option             6I               0           \1/4\         1 \1/4\
                                on Winter Futures
                                Strip.
Natural Gas/Cash-Settled/ICE.  Henry Hub Natural               H           \1/4\           \1/4\           \1/4\
                                Gas Swap.
----------------------------------------------------------------------------------------------------------------

E. Spot-Month Classes of Contracts

    An energy contract that is in its spot month, pursuant to industry 
practice and as defined in proposed regulation 151.1, is a futures 
contract that is ``next to expire during that period of time beginning 
at the close of trading on the trading day preceding the first day on 
which delivery notices can be issued to the clearing organization of a 
registered entity.'' \78\ In practice, the spot-month for the major 
energy contracts generally is

[[Page 4159]]

three days in duration. In view of the heightened potential for 
manipulation, corners, squeezes as well as excessive speculation during 
this concentrated period of time, only those contracts that expire on 
the same day would be deemed to be contracts of the same class under 
the proposed regulations. This would mean that, for example, during the 
spot month, a cash-settled last trading day contract would not be in 
the same class as a cash-settled penultimate contract. The most 
significant impact of defining a class of contracts in a narrower 
manner during the spot-month is to prohibit the netting of spot-month 
contracts that expire on different days for the purpose of applying the 
proposed speculative position limits. By way of example, a trader that 
is 4,000 contracts long in a cash-settled last trading day contract, 
and 4,000 contracts short in a cash-settled penultimate contract on the 
same exchange in a referenced energy contract, would be subject to 
spot-month position limits for each contract and would not be deemed to 
be holding a flat position. In contrast, outside the spot month, each 
leg of this spread would be considered to be in the same class and 
therefore subject to netting for the purpose of applying the proposed 
class all-months-combined and single-month position limits.
---------------------------------------------------------------------------

    \78\ For a contract that does not allow trading concurrently 
with the issuance of delivery notices, spot-month means ``the 
futures contract next to expire during that period of time beginning 
at the close of trading on the third trading day preceding the last 
trading day.'' For a contract that cash-settles based on the price 
of one or more physically-delivered contracts, spot-month means 
``the period of time that is the spot-month for such physically-
delivered contracts.'' The Commission intends the spot-month for 
options on futures contracts to be the same period of time as for 
the underlying futures contract.
---------------------------------------------------------------------------

F. Determining and Complying With the Proposed Spot-Month Limits

    For physically-delivered contracts, a spot-month position limit 
would be fixed by the Commission at one-quarter of the estimated 
deliverable supply for a spot-month class of contracts. This proposed 
formula is consistent with current regulation 150.5(b) and the 
Acceptable Practices for Core Principle 5, in Appendix B to part 38, 
and the Commission's Guideline No. 1, in Appendix A to part 40. 
Proposed regulation 151.2(d) would require a reporting market listing 
physically-delivered contracts to submit to the Commission an estimate 
of deliverable supply for its contracts by December 31st of each 
calendar year. The Commission, in setting the spot-month limits, would 
take into consideration the estimates of deliverable supply provided by 
the reporting markets and would base its own determination of 
deliverable supply on data submitted by the reporting markets unless 
the Commission has a basis for questioning the accuracy of the 
submitted data, in which case the Commission would derive its own 
estimates of deliverable supply.
    For cash-settled contracts based on the prices of physically-
delivered futures contracts, the proposed regulations would establish a 
default spot-month position limit equal to that of the cash-settled 
contract's physically-delivered counterpart. The proposed regulations 
would allow a trader to acquire or hold positions in a spot-month class 
of contracts, pursuant to reporting market rules specifically 
implemented to address such positions, that is five times greater than 
the default spot-month limit upon satisfying certain conditions. A 
trader would be permitted to hold positions under this conditional-
spot-month limit only if that trader does not hold a position in any 
physically-delivered referenced energy contract to which its cash-
settled positions are linked in the spot month and satisfies the 
reporting requirements of proposed regulation 20.00.
    Proposed regulation 20.00 sets forth reporting requirements for 
persons that would acquire positions in a referenced energy contract 
pursuant to the conditional-spot-month position limit of proposed 
regulation 151.2(a)(2). Specifically, this regulation would require 
such persons to file a completed CFTC Form 40 and Part A of new CFTC 
Form 404. CFTC Form 40, among other things, facilitates the 
Commission's identification of the persons controlling the trading of 
an account. Part A of new CFTC Form 404 would collect information on: A 
trader's spot and forward positions priced in relation to the relevant 
referenced energy contract or the contract's underlying commodity; the 
trader's spot and forward positions in contracts priced to a cash 
market index that includes quotations or prices for spot or forward 
contracts in the referenced energy contract's underlying commodity; the 
trader's positions in swaps priced in relation to the referenced energy 
contract or the contract's underlying commodity; and the trader's 
positions in other physically or financially settled contracts related 
to the trader's positions held pursuant to the conditional-spot-month 
position limit. The collection of this information would facilitate the 
Commission's surveillance program with respect to detecting and 
deterring trading activity that may tend to cause sudden or 
unreasonable fluctuations or unwarranted changes in the prices of the 
referenced energy contracts and their underlying commodities during the 
spot-month.

G. Exemptions and Related Requirements

1. Bona Fide Hedges
    Proposed regulation 151.3(a) would establish three exemptions for 
the following transactions and positions: (i) Bona fide hedging 
transactions generally consistent with paragraphs (1) and (2) of 
regulation 1.3(z); (ii) swap dealer risk management transactions 
outside of the spot-month that are held to offset risks associated with 
certain swap agreements; and (iii) positions that would be in 
compliance with the speculative position limits when adjusted by an 
appropriate contemporaneous risk factor.
    As proposed, a reporting market may establish an exemption process 
for traders holding positions in proprietary accounts that are shown to 
be bona fide hedging positions consistent with, but that may differ 
from (to the extent such differences are consistent with commercial 
activity in the physical energy markets), paragraphs (1) and (2) of 
regulation 1.3(z). As is currently the case for traders seeking 
exemptions from exchange-set spot-month position limits applicable to 
the referenced energy contracts, the Commission intends for traders 
seeking such bona fide hedging transactions to apply to a reporting 
market for exemptions from the applicable spot and non-spot-month 
limits. The Commission would audit this process to ensure that the 
reporting markets act appropriately in reviewing and acting on trader 
bona fide hedge exemption requests. In this manner, the Commission 
would also enable a reporting market to act expeditiously on exemption 
requests.
    Under the proposed regulations, traders holding positions pursuant 
to a bona fide hedge exemption would generally be prohibited from also 
trading speculatively. If bona fide hedging positions outside the spot 
month exceed twice an otherwise applicable all-months-combined or 
single-month position limit, then such traders would also be prohibited 
from holding positions as swap dealers. In contrast, however, traders 
holding positions in the spot-month pursuant to a bona fide hedge 
exemption would not be prohibited from holding positions speculatively 
outside the spot month. The intent of this proposed exception is to not 
affect liquidity generated by speculative trading outside the spot 
month that would otherwise be prohibited by virtue of a trader's need 
to invoke a hedge exemption to exceed the lower spot-month position 
limits.
    These ``crowding out'' provisions would restrict a trader 
controlling large positions used for hedging from also entering into 
large speculative positions or large swap dealer risk management 
positions. The proposed regulations would not impede a trader's ability 
to engage in bona fide hedging in any way,

[[Page 4160]]

but would limit a trader's ability to acquire swap dealer risk 
management positions or speculative positions when that trader holds 
very large positions pursuant to a bona fide hedge exemption.
    Proposed regulation 20.01 sets forth reporting requirements for 
persons that would acquire positions pursuant to the bona fide hedge 
exemption of proposed regulation 151.3(a)(1). Specifically, this 
section would require such persons to file a completed CFTC Form 40 and 
Part B of new CFTC Form 404. Part B of CFTC Form 404 would collect 
information on: The quantity of stocks owned of the commodity that 
underlies the relevant referenced energy contract and its products and 
by-products; the ownership of shares of an investment vehicle that 
holds or owns the referenced energy contract or the commodity that 
underlies the referenced energy contract and its products and by-
products; the quantity of fixed price purchase and sale commitments on 
the relevant referenced energy contract's commodity; and, for 
anticipatory hedging transactions, annual sales or requirements for the 
preceding three complete fiscal years and anticipated sales or 
requirements of such commodity for the period hedged. For cross-hedge 
positions, traders would be required to report the relevant commercial 
activity in terms of the actual or anticipated quantity of the cross-
hedged commodity, and on a converted basis, equivalent positions in the 
relevant referenced energy contract. The Commission notes that this 
proposed data collection is consistent with data currently collected in 
grain and cotton markets using CFTC Forms 204 and 304, respectively, 
pursuant to part 19 of the Commission's regulations.
2. Swap Dealers
    Swap dealers can perform an important economic function by taking 
on risks to accommodate the specific hedging and risk management needs 
of various customers. Swap dealers often are able to aggregate and 
standardize these otherwise particularized risks, and in turn, enter 
into commodity futures and option contracts to manage them. 
Accordingly, under the regulations as proposed, swap dealers may apply 
to the Commission for an exemption from the proposed speculative 
position limits for positions held outside of the spot month to manage 
the risks associated with swap agreements entered into to accommodate 
swap customers. Proposed regulation 151.1 would define ``swap 
agreement'' to have the same meaning as in current Commission 
regulation 35.1(b)(1).\79\ Proposed regulation 151.1 would also define 
``swap dealer'' to mean ``any person who, as a significant part of its 
business, holds itself out as a dealer in swaps, makes a market in 
swaps, regularly engages in the purchase of swaps and their resale to 
customers in the ordinary course of a business, or engages in any 
activity causing the person to be commonly known in the trade as a 
dealer or market maker in swaps.''
---------------------------------------------------------------------------

    \79\ 17 CFR 35.1(b)(1).
---------------------------------------------------------------------------

    The proposed swap dealer exemption would be limited to twice an 
applicable all-months-combined or single non-spot month speculative 
position limit. Further, traders would be required to aggregate 
positions held as swap dealer risk management transactions with net 
speculative positions for the purpose of determining compliance with 
the proposed Federal speculative position limits. As with bona fide 
hedgers that hold positions in excess of the proposed limits, swap 
dealers holding large positions pursuant to the proposed swap dealer 
exemption would be unable to also take on positions as speculators. In 
effect, this proposed ``crowding out'' provision would restrict a 
trader controlling a large position used for swap risk management from 
also entering into large speculative positions.
    Proposed regulation 1.45 sets forth the application procedure for 
swap dealers that would seek an exemption from the proposed Commission-
set speculative position limits. Specifically, this regulation would 
require a person to file a completed CFTC Form 40, an initial 
application and an annual update to certify that the person remains a 
swap dealer, as defined in proposed regulation 151.1. The exemption 
would require the applicant to consent to the publication of the fact 
that such person received a swap dealer exemption from the Commission. 
Such publication would be made only once a year and would not include 
the identity of a swap dealer that first received an exemption within 
the six calendar months preceding a publication. Furthermore, the 
publication would not include any information that would disclose the 
specific commodities for which the swap dealer has sought an exemption. 
In this regard, the Commission reiterates that it will protect all 
proprietary information in accordance with the Freedom of Information 
Act and part 145 of the Commission's regulations, headed ``Commission 
Records and Information.'' In addition, the Commission emphasizes that 
section 8(a)(1) of the Act strictly prohibits the Commission, unless 
specifically authorized otherwise by the Act, from making public ``data 
and information that would separately disclose the business 
transactions or market positions of any person and trade secrets or 
names of customers.'' \80\
---------------------------------------------------------------------------

    \80\ See 7 U.S.C. 12(a)(1).
---------------------------------------------------------------------------

    Proposed regulation 20.02 sets forth reporting requirements for 
persons who would receive a swap dealer limited risk management 
exemption pursuant to proposed regulation 151.3(a)(2). Specifically, 
the proposed regulation would require swap dealers to file monthly a 
completed Form 404 Part C with the Commission and with any registered 
entity on which the swap dealer's referenced energy contract positions 
are listed. The monthly report would include, for each day, swap 
positions based upon the commodity underlying the referenced energy 
contracts that are held in proprietary and customer accounts and a 
summary of dealing and trading activity in swaps based upon the 
commodity underlying the referenced energy contracts. Furthermore, 
proposed regulation 20.02 would require the swap dealer to file a 
supplemental report whenever it establishes a larger position in 
referenced energy contracts than previously reported. In addition to 
the above reporting requirements, traders that receive a swap dealer 
limited risk management exemption must also maintain complete books and 
records relating to their swap dealing activities (including 
transaction data) and make such books and records, along with a list of 
counterparties to customer swap agreements that support and 
substantiate the need to offset swap agreement risks on reporting 
markets, available to the Commission upon request.
3. Exemptions for Delta-Adjusted Positions
    The Commission understands that option risk factors continuously 
change with movements in the price of an underlying futures contract. 
As the price of the underlying futures contract changes, a trader 
offsetting the risk of an options position through a delta-neutral 
position in the underlying futures contract may need to adjust the 
futures position substantially on an intra-day basis to maintain a risk 
neutral position. As currently defined in regulation 150.1, delta-
neutrality is recognized by reference to the previous day's risk 
factor. Proposed regulations 151.3 and 20.03 would set forth the 
exemption and reporting requirements for persons whose positions would 
have exceeded the Federal speculative position limit

[[Page 4161]]

for a referenced energy contract when adjusted by the previous day's 
risk factors (deltas), but that would not exceed such a limit when 
positions are calculated using an appropriate contemporaneous risk 
factor. The reporting requirements, as proposed, would include the 
submission of complete position data to demonstrate that such positions 
remained within an otherwise applicable speculative position limit when 
adjusted by an appropriate and contemporaneous risk factor.

H. Account Aggregation

    Proposed regulation 151.4 would establish account aggregation 
standards specifically for positions in referenced energy contracts. 
Under the proposed standards, the Federal position limits in referenced 
energy contracts would apply to all positions in accounts in which any 
person, directly or indirectly, has an ownership or equity interest of 
10% or greater or, by power of attorney or otherwise, controls trading. 
Proposed regulation 151.4 includes a limited exemption for positions in 
pools in which a trader that is a limited partner, shareholder or 
similar person has an ownership or equity interest of less than 25% 
unless the trader in fact controls trading that is done by the pool. 
Proposed regulation 151.4 would also treat positions held by two or 
more persons acting pursuant to an express or implied agreement or 
understanding the same as if the positions were held by, or the trading 
of the positions were done by, a single person. Accordingly, the 
proposed regulations would aggregate positions in accounts at both the 
account owner and controller levels.
    In contrast to the disaggregation exemptions of current regulations 
150.3(a)(4) and 150.4, eligible entities (such as mutual funds, 
commodity pool operators and commodity trading advisors) and futures 
commission merchants will not be permitted to disaggregate positions 
pursuant to the independent account controller framework established in 
part 150 of the Commission's regulations. The current account 
disaggregation exceptions for the agricultural contracts enumerated in 
regulation 150.2, may be incompatible with the proposed Federal 
speculative position limit framework, however, and used to circumvent 
its requirements.
    The proposed framework sets high position levels that are at the 
outer bounds of the largest positions held by market participants, 
permits for the netting of positions across reporting markets and 
within contracts of the same class and in addition, includes a 
conditional-spot-month limit for cash-settled contracts and exemptions 
for bona fide hedgers, swap dealers and delta-adjusted positions. 
Accordingly, an exemption, such as the eligible entity exemption, that 
would allow traders to establish a series of positions each near a 
proposed outer bound position limit, without aggregation, may not be 
appropriate. Instead, proposed regulation 151.4 would establish a clear 
general account aggregation standard and a clear exception thereto for 
passive pool participants and similar investors.

VII. The CME Group's Proposal

    In a concept paper published in September of 2009, the CME Group 
suggested an alternative position limit framework that would require 
each reporting market to set position limits separately without inter-
exchange aggregation.\81\ The single-month and all-months-combined 
limits, under the CME's proposal, would apply collectively to 
physically-delivered contracts and cash-settled contracts on a 
referenced energy commodity, including spread positions within the same 
contract. The level of the limits would be based on the collective open 
interest of the lead month (i.e., the month with the highest level of 
open interest) in such contracts at that reporting market.
---------------------------------------------------------------------------

    \81\ See, ``Excessive Speculation and Position Limits in Energy 
Derivatives Markets,'' CME Group, at page 10, http://www.cmegroup.com/company/files/PositionLimitsWhitePaper.pdf.
---------------------------------------------------------------------------

    The CME Group also suggested that each reporting market set a 
single-month limit at 10% of the first 25,000 contracts of that 
reporting market's open interest with a 5% marginal increase for open 
interest in excess of 25,000 contracts at that reporting market. The 
CME Group suggested that the all-months-combined limit be set at 150% 
of the single-month limit and suggested establishing a flexible 
concentration limit in deferred-month contracts. Under the CME's 
proposed approach, a suggested concentration limit of 25% of open 
interest would be applicable in a single month that has developed 
liquidity.\82\
---------------------------------------------------------------------------

    \82\ The concept paper did not specify a method to determine 
when a contract month had developed liquidity.
---------------------------------------------------------------------------

    With respect to applying aggregate limits, the CME Group suggested 
that the CFTC establish and enforce an aggregate limit across all 
reporting markets, conditioned on the CFTC gaining authority to impose 
limits on OTC trading and on the CFTC developing a means to minimize 
the impact of potential transfers of trading to foreign jurisdictions 
or the physical markets. With respect to the aggregation of positions, 
the CME Group proposed that the aggregation standards of Commission 
regulation 150.4 apply to the aggregate limits.
    By way of comparison, the Commission's proposed limits would apply 
aggregately across all exchanges that list a referenced energy contract 
and separately to physically-delivered contracts and cash-settled 
contracts that are listed by a particular reporting market. The 
Commission's proposed class-based limits would prevent the 
establishment of excessively large positions in a single class and, 
thereby, would reduce the potential for price distortions.
    Also, by way of contrast to the CME Group's approach, the level of 
limits proposed by the Commission would be based on the sum of the open 
interest in all months, rather than only the lead month's open interest 
as proposed by the CME. By using the entire open interest, the 
Commission's proposal would avoid creating an incentive for traders to 
shift open interest into the lead month in an attempt to increase the 
level of the limits. Furthermore, rather than considering only a 
reporting market's open interest, the Commission's proposal would 
establish limit levels that reflect both aggregated open interest on 
all reporting markets and open interest on an individual reporting 
market. This tiered approach would provide an opportunity for small 
markets to grow, while establishing a prudential all-months limit for a 
class of contracts of no more than 30% of a reporting market's open 
interest in a class of contracts as defined in proposed regulation 
151.1. The class limit, as proposed by the Commission, would be capped 
at a formula-determined level based on the open interest in all 
reporting markets in a referenced energy contract. The 30% level was 
selected in light of the expected opportunity for arbitrage across 
classes and the cap was set using the traditional all-months position 
limit formula in regulation 150.5(c)(2).
    As discussed previously, the Commission's proposal first 
establishes an all-months-combined limit, then sets a single-month 
limit at two-thirds of the level of that all-months-combined limit. 
This is the same ratio between limits if first established in a single-
month limit, as proposed by the CME, and then multiplied by 150% to 
arrive at an all-months-combined position limit. This two-thirds ratio, 
as proposed by the Commission, is therefore the same ratio that is 
proposed by the CME Group and consistent with the ratio between the 
single-month limits and the all-month-combined limits in the existing 
Federal agricultural positions limits which

[[Page 4162]]

range from a low of 61% to a high of 77%. The table below provides a 
comparison of position limits as they would be set under the proposed 
Commission and CME Group approaches to establishing speculative 
position limits:

                  Proposed Federal Speculative Position Limits For Referenced Energy Contracts
----------------------------------------------------------------------------------------------------------------
                                                               All-months-
                                                             combined (AMC)
                                                              average open
     Referenced energy contract        Class of contract        interest          AMC limit       Single-month
                                                             (January 2008-                           limit
                                                             December 2008)
 
----------------------------------------------------------------------------------------------------------------
NYMEX Light Sweet Crude Oil........  NYMEX Physical                2,881,901            98,100            65,400
                                      Delivery.
                                     NYMEX Cash-Settled...           963,871            98,100            65,400
                                     Aggregate Limit......         3,845,772            98,100            65,400
NYMEX New York Harbor Gasoline       NYMEX Physical                  252,564             9,000             6,000
 Blendstock (RBOB).                   Delivery.
                                     NYMEX Cash-Settled...            29,306             8,800             5,900
                                     Aggregate Limit......           281,870             9,000             6,000
NYMEX New York Harbor No. 2 Heating  NYMEX Physical                  254,442            10,100             6,800
 Oil.                                 Delivery.
                                     NYMEX Cash-Settled...            73,996            10,100             6,800
                                     Aggregate Limit......           328,438            10,100             6,800
NYMEX Henry Hub Natural Gas........  NYMEX Physical                1,236,257           132,700            88,500
                                      Delivery.
                                     NYMEX Cash-Settled...         3,088,239           132,700            88,500
                                     ICE Cash-Settled.....           904,754           132,700            88,500
                                     Aggregate Limit......         5,229,250           132,700            88,500
----------------------------------------------------------------------------------------------------------------


                                 Proposed Energy Speculative Limits by CME Group
----------------------------------------------------------------------------------------------------------------
                                                              Average lead
                                                               month open
                                                                interest         All-months-      Single-month
     Reference energy contract              Exchange         (January 2008-    combined limit         limit
                                                             December 2008)
 
----------------------------------------------------------------------------------------------------------------
NYMEX Light Sweet Crude Oil........  NYMEX................           841,607            65,000            43,400
NYMEX New York Harbor Gasoline       NYMEX................           107,439            10,000             6,700
 Blendstock (RBOB).
NYMEX New York Harbor No. 2 Heating  NYMEX................            98,977             9,300             6,200
 Oil.
NYMEX Henry Hub Natural Gas........  NYMEX................           505,220            39,800            26,600
                                     ICE..................           124,860            11,300             7,500
----------------------------------------------------------------------------------------------------------------

VIII. Request for Comment

    The Commission requests comment on all aspects of this proposal, 
and particularly requests comments on the following issues and 
responses to the following questions:
    1. Are Federal speculative position limits for energy contracts 
traded on reporting markets necessary to ``diminish, eliminate, or 
prevent'' the burdens on interstate commerce that may result from 
position concentrations in such contracts?
    2. Are there methods other than Federal speculative position limits 
that should be utilized to diminish, eliminate, or prevent such 
burdens?
    3. How should the Commission evaluate the potential effect of 
Federal speculative position limits on the liquidity, market efficiency 
and price discovery capabilities of referenced energy contracts in 
determining whether to establish position limits for such contracts?
    4. Under the class approach to grouping contracts as discussed 
herein, how should contracts that do not cash settle to the price of a 
single contract, but settle to the average price of a sub-group of 
contracts within a class be treated during the spot month for the 
purposes of enforcing the proposed speculative position limits?
    5. Under proposed regulation 151.2(b)(1)(i), the Commission would 
establish an all-months-combined aggregate position limit equal to 10% 
of the average combined futures and option contract open interest 
aggregated across all reporting markets for the most recent calendar 
year up to 25,000 contracts, with a marginal increase of 2.5% of open 
interest thereafter. As an alternative to this approach to an all-
months-combined aggregate position limit, the Commission requests 
comment on whether an additional increment with a marginal increase 
larger than 2.5% would be adequate to prevent excessive speculation in 
the referenced energy contracts. An additional increment would permit 
traders to hold larger positions relative to total open positions in 
the referenced energy contracts, in comparison to the proposed formula. 
For example, the Commission could fix the all-months-combined aggregate 
position limit at 10% of the prior year's average open interest up to 
25,000 contracts, with a marginal increase of 5% up to 300,000 
contracts and a marginal increase of 2.5% thereafter. Assuming the 
prior year's average open interest equaled 300,000 contracts, an all-
months-combined aggregate position limit would be fixed at 9,400 
contracts under the proposed rule and 16,300 contracts under the 
alternative.
    6. Should customary position sizes held by speculative traders be a 
factor in moderating the limit levels proposed by the Commission? In 
this connection, the Commission notes that current regulation 150.5(c) 
states contract markets may adjust their speculative

[[Page 4163]]

limit levels ``based on position sizes customarily held by speculative 
traders on the contract market, which shall not be extraordinarily 
large relative to total open positions in the contract * * *''
    7. Reporting markets that list referenced energy contracts, as 
defined by the proposed regulations, would continue to be responsible 
for maintaining their own position limits (so long as they are not 
higher than the limits fixed by the Commission) or position 
accountability rules. The Commission seeks comment on whether it should 
issue acceptable practices that adopt formal guidelines and procedures 
for implementing position accountability rules.
    8. Proposed regulation 151.3(a)(2) would establish a swap dealer 
risk management exemption whereby swap dealers would be granted a 
position limit exemption for positions that are held to offset risks 
associated with customer initiated swap agreements that are linked to a 
referenced energy contract but that do not qualify as bona fide hedge 
positions. The swap dealer risk management exemption would be capped at 
twice the size of any otherwise applicable all-months-combined or 
single non-spot-month position limit. The Commission seeks comment on 
any alternatives to this proposed approach. The Commission seeks 
particular comment on the feasibility of a ``look-through'' exemption 
for swap dealers such that dealers would receive exemptions for 
positions offsetting risks resulting from swap agreements opposite 
counterparties who would have been entitled to a hedge exemption if 
they had hedged their exposure directly in the futures markets. How 
viable is such an approach given the Commission's lack of regulatory 
authority over the OTC swap markets?
    9. Proposed regulation 20.02 would require swap dealers to file 
with the Commission certain information in connection with their risk 
management exemptions to ensure that the Commission can adequately 
assess their need for an exemption. The Commission invites comment on 
whether these requirements are sufficient. In the alternative, should 
the Commission limit these filing requirements, and instead rely upon 
its regulation 18.05 special call authority to assess the merit of swap 
dealer risk management exemption requests?
    10. The Commission's proposed part 151 regulations for referenced 
energy contracts would set forth a comprehensive regime of position 
limit, exemption and aggregation requirements that would operate 
separately from the current position limit, exemption and aggregation 
requirements for agricultural contracts set forth in part 150 of the 
Commission's regulations. While proposed part 151 borrows many features 
of part 150, there are notable distinctions between the two, including 
their methods of position limit calculation and treatment of positions 
held by swap dealers. The Commission seeks comment on what, if any, of 
the distinctive features of the position limit framework proposed 
herein, such as aggregate position limits and the swap dealer limited 
risk management exemption, should be applied to the agricultural 
commodities listed in part 150 of the Commission's regulations.
    11. The Commission is considering establishing speculative position 
limits for contracts based on other physical commodities with finite 
supply such as precious metal and soft agricultural commodity 
contracts. The Commission invites comment on which aspects of the 
current speculative position limit framework for the agricultural 
commodity contracts and the framework proposed herein for the major 
energy commodity contracts (such as proposed position limits based on a 
percentage of open interest and the proposed exemptions from the 
speculative position limits) are most relevant to contracts based on 
other physical commodities with finite supply such as precious metal 
and soft agricultural commodity contracts.
    12. As discussed previously, the Commission has followed a policy 
since 2008 of conditioning FBOT no-action relief on the requirement 
that FBOTs with contracts that link to CFTC-regulated contracts have 
position limits that are comparable to the position limits applicable 
to CFTC-regulated contracts. If the Commission adopts the proposed 
rulemaking, should it continue, or modify in any way, this policy to 
address FBOT contracts that would be linked to any referenced energy 
contract as defined by the proposed regulations?
    13. The Commission notes that Congress is currently considering 
legislation that would revise the Commission's section 4a(a) position 
limit authority to extend beyond positions in reporting market 
contracts to reach positions in OTC derivative instruments and FBOT 
contracts. Under some of these revisions, the Commission would be 
authorized to set limits for positions held in OTC derivative 
instruments and FBOT contracts.\83\ The Commission seeks comment on how 
it should take this pending legislation into account in proposing 
Federal speculative position limits.
---------------------------------------------------------------------------

    \83\ See, e.g., the Over-the-Counter Derivatives Markets Act of 
2009 (OCDMA), H.R. 3795, 111th Congress, 1st Session (2009). OCDMA 
would also abolish the DTEF, ECM and ECM-SPDC market categories.
---------------------------------------------------------------------------

    14. Under proposed regulation 151.2, the Commission would set spot-
month and all-months-combined position limits annually.
    a. Should spot-month position limits be set on a more frequent 
basis given the potential for disruptions in deliverable supplies for 
referenced energy contracts?
    b. Should the Commission establish, by using a rolling-average of 
open interest instead of a simple average for example, all-months-
combined position limits on a more frequent basis? If so, what reasons 
would support such action?
    15. Concerns have been raised about the impact of large, passive, 
and unleveraged long-only positions on the futures markets. Instead of 
using the futures markets for risk transference, traders that own such 
positions treat commodity futures contracts as distinct assets that can 
be held for an appreciable duration. This notice of rulemaking does not 
propose regulations that would categorize such positions for the 
purpose of applying different regulatory standards. Rather, the owners 
of such positions are treated as other investors that would be subject 
to the proposed speculative position limits.
    a. Should the Commission propose regulations to limit the positions 
of passive long traders?
    b. If so, what criteria should the Commission employ to identify 
and define such traders and positions?
    c. Assuming that passive long traders can properly be identified 
and defined, how and to what extent should the Commission limit their 
participation in the futures markets?
    d. If passive long positions should be limited in the aggregate, 
would it be feasible for the Commission to apportion market space 
amongst various traders that wish to establish passive long positions?
    e. What unintended consequences are likely to result from the 
Commission's implementation of passive long position limits?
    16. The proposed definition of referenced energy contract, 
diversified commodity index, and contracts of the same class are 
intended to be simple definitions that readily identify the affected 
contracts through an objective and administerial process without

[[Page 4164]]

relying on the Commission's exercise of discretion.
    a. Is the proposed definition of contracts of the same class for 
spot and non-spot months sufficiently inclusive?
    b. Is it appropriate to define contracts of the same class during 
spot months to only include contracts that expire on the same day?
    c. Should diversified commodity indexes be defined with greater 
particularity?
    17. Under the proposed regulations, a swap dealer seeking a risk 
management exemption would apply directly to the Commission for the 
exemption. Should such exemptions be processed by the reporting markets 
as would be the case with bona fide hedge exemptions under the proposed 
regulations?
    18. In implementing initial spot-month speculative position limits, 
if the notice of proposed rulemaking is finalized, should the 
Commission:
    a. Issue special calls for information to the reporting markets to 
assess the size of a contract's deliverable supply;
    b. Use the levels that are currently used by the exchanges; or
    c. Undertake an independent calculation of deliverable supply 
without substantial reliance on exchange estimates?

IX. Related Matters

A. Cost Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its actions before issuing new regulations under 
the Act. Section 15(a) does not require the Commission to quantify the 
costs and benefits of new regulations or to determine whether the 
benefits of adopted regulations outweigh their costs. Rather, section 
15(a) requires the Commission to consider the cost and benefits of the 
subject regulations. Section 15(a) further specifies that the costs and 
benefits of new regulations 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 the market for listed derivatives; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission may, in its discretion, give 
greater weight to any one of the five enumerated areas of concern and 
may, in its discretion, determine that, notwithstanding its costs, a 
particular regulation is necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.
    The proposed regulatory framework for positions in the referenced 
energy contracts, as defined by the proposed regulations, would impose 
certain compliance costs on Commission-regulated exchanges and traders 
that hold large positions in the referenced energy contracts. In 
addition to the compliance costs that are directly related to the 
proposed regulations, the proposed position limits and their 
concomitant limitation on trading activity could impose certain general 
but significant costs. The proposed position limits could cause 
unintended consequences by decreasing liquidity in the markets for the 
referenced energy contracts, impairing the price discovery process in 
these markets, and pushing large positions to trading venues over which 
the Commission has no direct regulatory authority.
    Based on data received by the Commission's large trader reporting 
system, the Commission believes the proposed position limits would 
accommodate the normal course of speculative positions in markets for 
the referenced energy contracts. Commission data indicates that 
possibly ten traders, including traders that hold positions pursuant to 
exchange-approved bona fide hedge exemptions, could be affected by the 
proposed limits. For the reasons discussed below, the Commission 
anticipates that the compliance costs associated with the proposed 
limits and their impact on the efficiency of the markets for the 
referenced energy contracts would be minimal.
    The proposed spot-month position limits, although applicable to a 
class of contracts and across reporting markets, are consistent with 
current exchange-set spot-month position limits that have been 
implemented and enforced by NYMEX and ICE pursuant to DCM and ECM-SPDC 
core principles and Commission guidance. In addition, both NYMEX and 
ICE implement position accountability rules for positions outside the 
spot month and routinely monitor and solicit reports from large 
traders. The affected exchanges and large traders therefore are 
accustomed to an existing compliance system for large positions and the 
processing of hedge and spread exemptions from exchange-set spot-month 
position limits. In addition, a significant portion of the affected 
traders are currently subject to the Commission's large trader 
reporting system and should have compliance systems in place to 
accommodate any new potential regulatory requirements. For these 
reasons, the compliance costs associated with the proposed limits 
should be minimal.
    Section 4a(a) has identified excessive speculation that causes 
unwarranted fluctuations in the price of a commodity as an undue burden 
on commerce. Accordingly section 4a(a) of the Act gives the Commission 
the ability to establish a position limit framework as a prophylactic 
measure against sudden or unreasonable price fluctuations or 
unwarranted price changes in accordance with the purposes and findings 
of the Act. The Congressional endorsement of the Commission's 
prophylactic use of speculative position limits extends to any 
commodity and does not require a specific finding of an extant undue 
burden on interstate commerce.
    A primary intent of the proposed position limit framework is to 
prevent a single trader or several traders from acquiring large or 
concentrated positions that may cause unwarranted, sudden or 
unreasonable fluctuations in the price of energy commodities. The 
Commission is concerned that concentrated positions at or near the 
proposed limits may directly lead to market disruptions causing 
unwarranted, sudden or unreasonable fluctuations in the price of energy 
commodities.
    Another concern regarding the existence of large speculative 
positions is the possibility for disruption across markets or trading 
platforms listing similar or linked products. Because individual 
markets have knowledge of positions only on their own trading 
platforms, it is difficult for them to assess the full impact of a 
trader's activities. In recognition of this, the proposed framework 
also would apply to trading done in linked and economically similar 
contracts across markets. The Commission notes that it has the unique 
capacity for monitoring trading and implementing remedial measures 
across interconnected futures and option markets in the referenced 
energy contracts. The position limits, as proposed, are purposefully 
set at the outer bounds of the levels that speculators are likely to 
acquire in order to avoid disrupting or interfering with beneficial 
trading activity. Still, the proposed regulations are intended to fully 
achieve the prophylactic purpose of section 4a(a) of the Act.

B. The Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
requires that agencies consider the impact of their regulations on 
small businesses. The requirements related to the proposed amendments 
fall mainly on registered entities, exchanges, futures commission 
merchants, clearing members, foreign

[[Page 4165]]

brokers, and large traders. The Commission has previously determined 
that exchanges, futures commission merchants and large traders are not 
``small entities'' for the purposes of the RFA.\84\ Similarly, clearing 
members, foreign brokers and traders would be subject to the proposed 
regulations only if carrying or holding large positions. Accordingly, 
the Chairman, on behalf of the Commission, hereby certifies, 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.
---------------------------------------------------------------------------

    \84\ 47 FR 18618 (April 30, 1982).
---------------------------------------------------------------------------

C. Paperwork Reduction Act

    Certain provisions of the proposed regulations would result in new 
collection of information requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA''). The Commission therefore is 
submitting this proposal to the Office of Management and Budget 
(``OMB''), along with proposed new CFTC Form 404, for review in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    The title for this proposed collection of information is 
``Regulation 1.45 and Parts 20 and 151--Position Limit Framework For 
Referenced Energy Contracts'' (OMB control number 3038-NEW).
    If adopted, responses to this collection of information would be 
mandatory. The Commission will protect proprietary information 
according to the Freedom of Information Act and 17 CFR part 145, headed 
``Commission Records and Information.'' In addition, the Commission 
emphasizes that section 8(a)(1) of the Act strictly prohibits the 
Commission, unless specifically authorized by the Act, from making 
public ``data and information that would separately disclose the 
business transactions or market positions of any person and trade 
secrets or names of customers.'' \85\
---------------------------------------------------------------------------

    \85\ 7 U.S.C. 12(a)(1).
---------------------------------------------------------------------------

    Under the proposed regulations, reporting markets listing, and 
market participants trading, the referenced energy contracts would be 
subject to the position limit framework established by proposed part 
151 and the application and reporting requirements of proposed 
regulation 1.45 and part 20. Proposed regulation 1.45 sets forth the 
application procedure for swap dealers that would seek an exemption 
from the proposed Commission-set Federal speculative position limits 
for referenced energy contracts. Proposed part 20 would require similar 
reports from persons holding large positions under the proposed 
conditional-spot-month position limit, as bona fide hedgers, as swap 
dealers, and as traders with certain delta-adjusted positions. The 
Commission estimates that affected traders, as a result of their 
diversified business structure, would be subject to most or all of the 
requirements and exemptions of proposed regulation 1.45 and parts 20 
and 151.
    Should the proposed regulations be adopted, the total number of 
traders that would be subject to the regulations is estimated at 10, 
with each providing an estimated 20 reports to the Commission at an 
estimated compliance time of four hours per response. Accordingly, the 
Commission estimates the aggregate annual burden that would be imposed 
by the regulations, as proposed, to be 800 hours. The Commission 
specifically notes that the estimated annual burden provided on the 
affected exchanges and traders is in addition to, and does not include, 
costs incurred from compliance with other regulatory and operational 
requirements. The Commission invites the public and other Federal 
agencies to comment on any aspect of the reporting and recordkeeping 
burdens discussed above.
    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments in order to: (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 to be collected; and (iv) minimize the 
burden of the collections of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    You may submit your comments directly to the Office of Information 
and Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at <a href="/cdn-cgi/l/email-protection#7c33352e3d510f091e11150f0f1513120f3c13111e5219130c521b130a"><span class="__cf_email__" data-cfemail="753a3c273458060017181c06061c1a1b06351a18175b101a055b121a03">[email protected]</span></a>. Please provide the Commission with a copy of 
your comments so that we can summarize all written comments and address 
them in any subsequent notice of rulemaking. Refer to the Addresses 
section of this notice for comment submission instructions to the 
Commission. You may obtain a copy of the supporting statements for the 
collection of information discussed above by visiting RegInfo.gov. OMB 
is required to make a decision concerning the collection of information 
between 30 to 60 days after publication of this notice. Consequently, a 
comment to OMB is most assured of being fully considered if received by 
OMB (and the Commission) within 30 days after the publication of this 
notice of proposed rulemaking.

List of Subjects

17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

17 CFR Part 20

    Commodity futures, Reporting and recordkeeping requirements.

17 CFR Part 151

    Position limits, Bona fide hedge positions, Spread exemptions, 
Energy commodities.
    In consideration of the foregoing, pursuant to the authority 
contained in the Commodity Exchange Act, the Commission hereby proposes 
to amend chapter I of title 17 of the Code of Federal Regulations as 
follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for part 1 is revised to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 
6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 
13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as amended by Title XIII of 
the Food, Conservation and Energy Act of 2008, Pub. L. No. 110-246, 
122 Stat. 1624 (June 18, 2008).

    2. Add Sec.  1.45 in part 1 to read as follows:


Sec.  1.45.  Application for a swap dealer exemption.

    (a) Persons seeking an exemption from the speculative position 
limits established by the Commission for referenced energy contracts 
under Sec.  151.2 of this chapter, pursuant to an exemption for swap 
dealers under Sec.  151.3(a)(2) of this chapter, shall:
    (1) File an initial application for an exemption and, thereafter, 
update such application annually, as the Commission shall require;
    (2) Provide as part of the application, all information required by 
the Commission, including but not limited to:
    (i) A completed Form 40 along with the information required under 
Sec.  18.04 of this chapter;
    (ii) A certification that the person is a swap dealer as defined in 
Sec.  151.1 of this chapter; and

[[Page 4166]]

    (iii) Specific consent to having their name published on the 
Commission's Web site (http://www.cftc.gov) as having received a swap 
dealer exemption from the speculative position limits; provided 
however, that such list shall be published no more than once annually, 
that no publication of the name of a swap dealer shall be made earlier 
than six calendar months following the date on which the exemption was 
granted, and that such publication shall not disclose the related 
commodities in which the person is swap dealer or any other information 
provided by the swap dealer to the Commission that would be 
inconsistent with section 8(a)(1) of the Act; and
    (3) Comply with the reporting requirements of Sec.  20.02 of this 
chapter.
    (b) Form, manner and time of filing.
    (1) An application under paragraph (a) of this section shall be 
submitted in the format and in the manner and within the time specified 
by the Commission.
    (2) The Commission hereby delegates, until such time as the 
Commission orders otherwise, to the Director of the Division of Market 
Oversight and to such members of the Commission's staff acting under 
the Director's direction as the Director may designate, the authority 
to specify the format, manner and time period for applications to be 
submitted under paragraph (a) of this section. The Director may submit 
to the Commission for its consideration any matter that has been 
delegated in this paragraph. Nothing in this paragraph prohibits the 
Commission, at its election, from exercising the authority delegated in 
this paragraph.
    3. Add part 20 to read as follows:

PART 20--REPORTS IN CONNECTION WITH POSITIONS IN REFERENCED ENERGY 
CONTRACTS

Sec.
20.00 Conditional-spot-month position limit.
20.01 Bona fide hedging.
20.02 Reports from swap dealers.
20.03 Delta-adjusted positions.
20.04 Form, manner and time of filing.

    Authority:  7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 
6n, 7, 7a, 12a, 19 and 21, as amended by Title XIII of the Food, 
Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat. 
1624 (June 18, 2008).


Sec.  20.00  Conditional-spot-month position limit.

    (a) Information required. All persons that acquire positions in a 
referenced energy contract pursuant to the conditional-spot-month 
position limit of Sec.  151.2(a)(2) of this chapter shall submit to the 
Commission a Form 40 and provide the information required under Sec.  
18.04 of this chapter.
    (b) Additional cash and derivatives position data. All persons 
subject to paragraph (a) of this section shall also submit the 
following position data, net long or short, on Part A of Form 404:
    (1) The trader's cash positions in contracts priced at a fixed 
price differential (including a zero differential) to the referenced 
energy contract or the contract's underlying commodity;
    (2) The trader's cash positions in contracts priced to a cash 
market index that includes quotations or prices for spot or forward 
contracts in the referenced energy contract's underlying commodity;
    (3) The trader's positions in cleared or bilateral swap agreements 
with a fixed price differential (including zero) to the referenced 
energy contract or the contract's underlying commodity; and
    (4) Positions in any other physically or financially settled 
contracts that are economically related to the trader's positions that 
are acquired pursuant to the conditional-spot-month position limit.


Sec.  20.01  Bona fide hedging.

    (a) Information required. All persons that acquire positions in a 
referenced energy contract pursuant to the bona fide hedge exemption of 
Sec.  151.3(a)(1) of this chapter shall submit to the Commission a Form 
40 and provide the information required under Sec.  18.04 of this 
chapter.
    (b) Additional information on cash market activities. All persons 
subject to paragraph (a) of this section shall also submit the 
following information on Part B of Form 404:
    (1) The quantity of stocks owned of the commodity that underlies a 
referenced energy contract and its products and by-products;
    (2) The quantity of fixed price purchase commitments open in such 
commodity and its products and by-products;
    (3) The quantity of fixed price sale commitments open in such 
commodity and its products and by-products;
    (4) For unsold anticipated commercial services or output directly 
connected to producing, transporting, refining, merchandising, 
marketing, or processing a commodity underlying a referenced energy 
contract:
    (i) Annual sales of such services or output for the three complete 
fiscal years preceding the current fiscal year; and
    (ii) Anticipated sales of such services or output for the period 
hedged; and
    (5) For unfilled anticipated requirements:
    (i) Annual requirements of such commodity for the three complete 
fiscal years preceding the current fiscal year; and
    (ii) Anticipated requirements of such commodity for the period 
hedged.
    (6) The shares of an investment vehicle, including, but not limited 
to, exchange-traded funds, registered investment companies, commodity 
pools and private investment companies, that holds or owns a referenced 
energy contract or the commodity that underlies a referenced energy 
contract and its products and by-products.
    (c) Conversion methodology. Persons engaged in the hedging of 
commercial activity that does not involve the same quantity or 
commodity as the quantity or commodity associated with positions in 
referenced energy contracts shall furnish this information both in 
terms of the actual quantity and commodity used in the trader's normal 
course of business and in terms of the referenced energy contracts that 
are sold or purchased. In addition, such persons shall explain the 
methodology used for determining the ratio of conversion between the 
actual or anticipated cash positions and the trader's positions in 
referenced energy contracts.


Sec.  20.02  Reports from swap dealers.

    (a) Initial reports. Persons who have received a swap dealer 
exemption pursuant to Sec.  151.3(a)(2) of this chapter from the 
speculative position limits established by the Commission for 
referenced energy contracts under Sec.  151.2 of this chapter shall 
provide on Part C of Form 404 to the Commission, and to any registered 
entity on which the swap dealer's referenced energy contract positions 
are listed, a monthly report including:
    (1) Swap positions based upon the commodity underlying the 
referenced energy contracts separately for proprietary and customer 
accounts on a daily basis; and
    (2) A daily summary of dealing and trading activity in swaps based 
upon the commodity underlying the referenced energy contracts.
    (b) Supplemental reports. Whenever the risk management requirements 
of a swap dealer require it to increase its positions in referenced 
energy contracts from levels justified by information provided in its 
initial application under Sec.  1.45 of this chapter or the swap 
dealer's most recent report submitted under this section, the swap 
dealer shall file, on the business day following the date on which such 
positions were acquired, a supplemental report in compliance with the 
requirements of

[[Page 4167]]

paragraph (a) of this section that supports the increase in position 
levels.
    (c) Recordkeeping. Traders that receive a swap dealer exemption 
under Sec.  151.3(a)(2) of this chapter shall maintain complete books 
and records relating to their swap dealing activities (including 
transactional data) and make such books and records, along with a list 
of counterparties to customer swap agreements that support and 
substantiate the need to offset swap agreement risks on reporting 
markets, available to the Commission upon request.


Sec.  20.03  Delta-adjusted positions.

    (a) Information required. All persons with referenced energy 
contract positions in excess of the position limits of Sec.  151.2 of 
this chapter that acquire such positions in reliance on Sec.  
151.3(a)(3) of this chapter shall submit to the Commission a Form 40 
and provide the information required under Sec.  18.04 of this chapter.
    (b) Additional information. In addition, such persons shall provide 
the following on Part D of Form 404:
    (1) A certification that their positions, in whole or in part, are 
in excess of the applicable limits as a result of the application of a 
futures-equivalent calculation that adjusts option positions by the 
previous day's risk factor, or delta coefficient; and
    (2) Complete position data that demonstrates that the application 
of a contemporaneous risk factor, or delta coefficient, renders the 
trader compliant with the position limits of Sec.  151.2 of this 
chapter on an adjusted basis.


Sec.  20.04  Form, manner and time of filing.

    Unless otherwise instructed in this part or by the Commission or 
its designee, the Forms and information required to be filed under this 
part shall be submitted at such time and in a form and manner specified 
by the Commission. The Commission hereby delegates, until such time as 
the Commission orders otherwise, to the Director of the Division of 
Market Oversight and to such members of the Commission's staff acting 
under the Director's direction as the Director may designate, the 
authority to specify the format, manner and time period within which 
the Forms and information required to be filed under this part shall be 
submitted to the Commission. The Director may submit to the Commission 
for its consideration any matter that has been delegated in this 
paragraph. Nothing in this paragraph prohibits the Commission, at its 
election, from exercising the authority delegated in this paragraph.
    4. Add part 151 to read as follows:

PART 151--FEDERAL SPECULATIVE POSITION LIMITS FOR REFERENCED ENERGY 
CONTRACTS

Sec.
151.1 Definitions.
151.2 Position limits for referenced energy contracts.
151.3 Exemptions for referenced energy contracts.
151.4 Aggregation of positions.

    Authority:  7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 
6n, 7, 7a, 12a, 19 and 21, as amended by Title XIII of the Food, 
Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat. 
1624 (June 18, 2008).


Sec.  151.1  Definitions.

    As used in this part--
    Basis contract means a futures or option contract that is cash 
settled based on the difference in price of the same commodity (or 
substantially the same commodity) at different delivery points;
    Calendar spread contract means a futures or option contract that 
represents the difference between the settlement prices in one month of 
a referenced energy contract and another month's settlement price for 
the same referenced energy contract;
    Contracts of the same class mean referenced energy contracts 
(including option contracts on a futures-equivalent basis) on a single 
reporting market that are based on the same commodity and delivered in 
the same manner (cash-settled or physically-delivered), provided 
however, that during their spot month, contracts shall be considered 
contracts of the same class if, in addition, such contracts expire on 
the same trading day;
    Diversified commodity index means a commodity index with price 
components that include energy as well as non-energy commodities, 
provided however, that futures and option contracts based on a 
diversified commodity index that incorporates the price of a commodity 
underlying a referenced energy contract's commodity which are used to 
circumvent the speculative position limits, shall be considered to be 
referenced energy contracts for the purpose of applying the position 
limits of Sec.  151.2 of this chapter;
    Inter-commodity spread contract means a futures or option contract 
that is based on the price difference between a referenced energy 
contract and another commodity contract;
    Referenced energy contract means a physically-delivered or cash-
settled futures or option contract, other than a basis contract or 
contract on a diversified commodity index, that is a:
    (1) New York Mercantile Exchange Henry Hub natural gas contract 
(NG), or any other natural gas contract that is exclusively or 
partially based on a trading unit of 10,000 million British thermal 
units (mmBtu) of natural gas delivered at the Henry Hub pipeline 
interchange in Erath, Louisiana;
    (2) New York Mercantile Exchange Light Sweet crude oil contract 
(CL), or any other crude oil contract that is exclusively or partially 
based on a trading unit of 1,000 U.S. barrels of light sweet crude oil 
delivered at the Cushing crude oil storage complex in Cushing, 
Oklahoma;
    (3) New York Mercantile Exchange New York Harbor No. 2 heating oil 
contract (HO), or any other heating oil contract that is exclusively or 
partially based on a trading unit of 1,000 U.S. barrels of No. 2 fuel 
oil delivered at an ex-shore facility in New York Harbor;
    (4) New York Mercantile Exchange New York Harbor gasoline 
blendstock (RBOB) contract, or any other gasoline contract that is 
exclusively or partially based on a trading unit of 1,000 U.S. barrels 
of reformulated gasoline blendstock for oxygen blend delivered at an 
ex-shore facility in New York Harbor; or
    (5) Fraction or multiple of the contracts described in paragraphs 
(1) through (4) of this section, so that when viewed on a fractional 
basis or as a multiple, such contract is based on the same commodity in 
equivalent trading units;
    Reporting market means a reporting market as defined in Sec.  15.00 
of this chapter;
    Spot month means:
    (1) For a contract that allows trading concurrently with the 
issuance of delivery notices, the futures contract next to expire 
during that period of time beginning at the close of trading on the 
trading day preceding the first day on which delivery notices can be 
issued to the clearing organization of a registered entity;
    (2) For a contract that does not allow trading concurrently with 
the issuance of delivery notices, the futures contract next to expire 
during that period of time beginning at the close of trading on the 
third trading day preceding the last trading day; or
    (3) For a contract that cash-settles based on the price of one or 
more physically-delivered contracts, the period of time that is the 
spot-month for such physically-delivered contracts;
    Spread contract means either a calendar spread contract or an 
inter-commodity spread contract;
    Swap agreement means a swap agreement as defined in Sec.  
35.1(b)(1) of this chapter;

[[Page 4168]]

    Swap dealer means, solely for the purposes of this part and Sec.  
1.45 and part 20 of this chapter, any person who, as a significant part 
of its business, holds itself out as a dealer in swaps, makes a market 
in swaps, regularly engages in the purchase of swaps and their resale 
to customers in the ordinary course of a business, or engages in any 
activity causing the person to be commonly known in the trade as a 
dealer or market maker in swaps;
    Unless specifically defined otherwise, the terms defined in Sec.  
150.1 of this chapter shall have the same meaning as they do in that 
section.


Sec.  151.2  Position limits for referenced energy contracts.

    (a) Spot-month position limits. Except as otherwise authorized in 
Sec.  151.3, no person may hold or control positions in contracts of 
the same class when such positions, net long or net short, are in 
excess of:
    (1) For physically-delivered contracts, a spot-month position 
limit, fixed by the Commission at one-quarter of the estimated spot-
month deliverable supply; or
    (2) For contracts that cash settle based on prices of physically-
delivered contracts, a conditional-spot-month position limit, fixed by 
the Commission at one-quarter of the estimated spot-month deliverable 
supply, provided that, a trader may, if permitted by reporting market 
rules adopted to implement this paragraph, acquire or hold spot-month 
positions equal to the product of the above specified level and the 
spot-month multiplier of five if the trader does not hold positions in 
spot-month physically-delivered referenced energy contracts and the 
trader complies with the reporting requirements of part 20 of this 
chapter.
    (b) All-months-combined and single-month limits. Except as 
otherwise authorized in Sec.  151.3, no person may hold or control 
positions in a referenced energy contract when such positions, net long 
or net short, are in excess of:
    (1) Aggregate position limits:
    (i) An all-months-combined aggregate position limit, across 
reporting markets, fixed by the Commission at 10% of the open interest 
of that referenced energy contract aggregated across all reporting 
markets up to an open interest level of 25,000 contracts with a 
marginal increase of 2.5% of aggregated open interest thereafter; or
    (ii) A single-month aggregate position limit that is two-thirds of 
the position limit fixed pursuant to paragraph (b)(1)(i) of this 
section.
    (2) Reporting market position limits:
    (i) For a reporting market, an all-months-combined position limit 
for contracts of the same class that is the lower of the aggregate 
position limit for a referenced energy contract under paragraph 
(b)(1)(i) of this section or, for contracts of the same class, 30% of a 
class's average combined futures and delta-adjusted option month-end 
open interest for the most recent calendar year on that reporting 
market; or
    (ii) For a reporting market, a single-month position limit for 
contracts of the same class that is two-thirds of the position limit 
fixed pursuant to paragraph (b)(2)(i) of this section, provided 
however, that such positions shall not be greater than two times the 
level of the position limit fixed pursuant to paragraph (b)(2)(i) of 
this section on a gross basis.
    (c) Minimum position limit. The position limits of Sec.  
151.2(b)(2)(i) shall be replaced by an all-months-combined position 
limit, fixed by the Commission at the greater of 5,000 contracts or 1% 
of the open interest aggregated across all reporting markets, if the 
resulting position limit calculated under this paragraph is higher than 
an otherwise applicable position limit.
    (d) Deliverable supply.
    (1) Reporting markets listing physically-delivered referenced 
energy contracts are required to submit to the Commission an estimate 
of deliverable supply by the 31st of December of each calendar year.
    (2) The estimate submitted under paragraph (d)(1) of this section 
shall be accompanied by a description of the methodology used to derive 
the estimate along with any statistical data supporting the reporting 
market's estimate of deliverable supply.
    (3) The Commission shall base its fixing of spot-month position 
limits on the estimate provided under paragraph (d)(1) of this section 
unless the Commission determines to rely on its own estimate of 
deliverable supply.
    (4) The Commission may base its initial fixing of spot-month 
position limits solely on its own estimates of deliverable supply.
    (e) Calculation of limits for the purposes of this section.
    (1) For the purpose of calculating positions under this section, 
referenced energy option contracts that do not settle into futures 
contracts shall be included in any calculation on a futures-equivalent 
basis and treated as futures contracts under the provisions of this 
section.
    (2) Open interest shall be calculated by combining the month-end 
futures open interest and the open interest in its related option 
contract, on a delta-adjusted basis, for all months listed on a 
reporting market during the most recent calendar year.
    (3) In determining or calculating all levels and limits under this 
section, a resulting number shall be rounded up to the nearest hundred.
    (4) For the purpose of calculating position limits under this 
section, referenced energy contracts that are spread contracts, as 
defined by Sec.  151.1, shall be excluded from any calculation of open 
interest.
    (f) Administrative process for fixing and publishing position 
limits.
    (1) The Commission shall fix the spot-month position limits (and 
estimates of deliverable supply) and the all-months-combined position 
limits under Sec.  151.2, aggregately across all reporting markets and 
separately for each reporting market, by January 31st of each calendar 
year, provided that, the initial fixing of position limits may occur on 
a different date.
    (2) The Commission hereby delegates, until such time as the 
Commission orders otherwise, to the Director of the Division of Market 
Oversight and to such members of the Commission's staff acting under 
the Director's direction as the Director may designate, the authority 
to fix the position limits to be established pursuant to paragraph 
(f)(1) of this section. The Director may submit to the Commission for 
its consideration any matter that has been delegated in this paragraph. 
Nothing in this paragraph prohibits the Commission, at its election, 
from exercising the authority delegated in this paragraph.
    (3) The fixed position limits shall be published on the 
Commission's Web site (http://www.cftc.gov) and shall become effective 
on the 1st day of March immediately following the fixing date (or 30 
complete calendar days following an initial fixing of position limits 
under this part if such fixing is on a date other than the 31st of 
January) and shall remain effective until the last day of the 
immediately following February.


Sec.  151.3  Exemptions for referenced energy contracts.

    (a) Positions that may exceed limits. The position limits set forth 
in Sec.  151.2 may be exceeded to the extent that such positions are:
    (1) Upon application to a reporting market for an exemption, 
positions (other than positions that are held to offset risks 
associated with swap agreements under paragraph (a)(2) of this section) 
held in a proprietary account (as defined in Sec.  1.3(y) of this 
chapter) shown to be bona fide hedging transactions, as defined and 
approved

[[Page 4169]]

by a reporting market in a manner consistent with, but that may differ 
from (to the extent that such differences are consistent with 
commercial activity in the physical energy markets), Sec. Sec.  
1.3(z)(1) and (2) of this chapter, provided that:
    (i) Traders holding positions outside the spot month, and traders 
holding spot-month positions with respect to spot-month positions only, 
that are greater than or equal to a position limit set under Sec.  
151.2 pursuant to a bona fide hedge exemption shall not also hold or 
control positions speculatively; and
    (ii) Traders holding positions that are greater than or equal to 
twice a position limit set under to Sec.  151.2 pursuant to a bona fide 
hedge exemption shall not also hold or control positions pursuant to an 
exemption under paragraph (a)(2) of this section;
    (2) Upon application under Sec.  1.45 of this chapter, swap dealer 
risk management transactions outside of the spot month that are held to 
offset risks associated with swap agreements, which are entered into to 
accommodate swap customers and are either directly linked to the 
referenced energy contracts or the fluctuations in value of the swap 
agreements are substantially related to the fluctuations in the value 
of the referenced energy contracts, and which do not exceed twice the 
applicable speculative position limits in all-months-combined or in any 
single non-spot-month, provided that traders holding positions under 
this paragraph shall not also hold or control positions speculatively 
when such the trader's total positions are greater than or equal to a 
position limit set under to Sec.  151.2; or
    (3) Subsequently demonstrated, in a report to be filed on the 
calendar day following the acquisition of such positions pursuant to 
part 20 of this chapter, to be below an applicable position limit once 
option contracts that are a part of a trader's overall position are 
adjusted by a contemporaneous risk factor or delta coefficient for such 
options.
    (b) Other exemptions. The position limits set forth in Sec.  151.2 
of this chapter may be exceeded to the extent that such positions 
remain open and were entered into in good faith prior to the effective 
date of any rule, regulation, or order that specifies a limit.
    (c) Call for information. Upon call by the Commission, the Director 
of the Division of Market Oversight or the Director's designee, any 
reporting market issuing, or any person claiming, an exemption from 
speculative position limits under this section must 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 futures, options, over-the-counter, or cash 
market positions that support the claim of exemption, and the relevant 
business relationships supporting a claim of exemption.


Sec.  151.4  Aggregation of positions.

    (a) Positions to be aggregated. The position limits set forth in 
Sec.  151.2 of this chapter shall apply to:
    (1) All positions in accounts in which any person, directly or 
indirectly, has an ownership or equity interest of 10% or greater or, 
by power of attorney or otherwise, controls trading; or
    (2) Positions held by two or more persons acting pursuant to an 
expressed or implied agreement or understanding the same as if the 
positions were held by, or the trading of the positions were done by, a 
single person.
    (b) Positions in pools. Positions in pools in which a trader that 
is a limited partner, shareholder or similar person has an ownership or 
equity interest of less than 25% need not be aggregated with other 
positions of the trader unless such person, by power of attorney or 
otherwise, controls trading that is done by the pool.

    Issued by the Commission this 14th day of January 2010, in 
Washington, DC.
David Stawick,
Secretary of the Commission.

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

Appendix Statements

Statement of Gary Gensler Chairman, Commodity Futures Trading 
Commission Meeting of the Commodity Futures Trading Commission

    The CFTC is charged with a significant responsibility to ensure 
the fair, open and efficient functioning of futures markets. Our 
duty is to protect both market participants and the American public 
from fraud, manipulation and other abuses. Central to these 
responsibilities is our duty to protect the public from the undue 
burdens of excessive speculation that may arise, including those 
from concentration in the marketplace.
    The CFTC does not set or regulate prices. Rather, the Commission 
is directed to ensure that commodity markets are fair and orderly. 
It is for that reason that I support the staff's recommended 
rulemaking regarding position limits in the energy markets and 
exemptions for swap dealer risk management transactions.
    The CFTC is directed in its original 1936 statute to set 
position limits to protect against the burdens of excessive 
speculation, including those caused by large concentrated positions. 
In that law--the Commodity Exchange Act (CEA)--Congress said that 
the CFTC ``shall'' impose limits on trading and positions as 
necessary to eliminate, diminish or prevent the undue burdens that 
may come as a result of excessive speculation. We are directed by 
statute to act in this regard to protect the American public.
    A transparent and consistent playing field for all physical 
commodity futures should be the foundation of our regulations. Thus, 
position limits should be applied consistently to all markets and 
trading platforms and exemptions to them also should be consistent 
and well-defined.
    While we currently set and enforce position limits on certain 
agriculture products, we do not for energy markets. Though there are 
some differences between energy markets and agricultural markets, 
those distinctions do not suggest to me that the federal government 
should set position limits on one and not the other.
    When the CFTC set position limits in the past, the agency sought 
to ensure that the markets were made up of a broad group of market 
participants with a diversity of views. At the core of our 
obligations is promoting market integrity, which the agency has 
historically interpreted to include ensuring markets do not become 
too concentrated.
    Position limits help to protect the markets both in times of 
clear skies and when there is a storm on the horizon. In 1981, the 
Commission said 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.'' I believe this 
is still true today.
    The futures exchanges also have obligations with regard to the 
setting of position limits. As was explored in our summer hearings, 
though, the Commodity Futures Modernization Act (CFMA) changed the 
exchanges' obligations. They have to comply with a core principal 
that speaks to protecting against manipulation or congestion, 
``especially during trading in the delivery month.'' These core 
principles do not explicitly require the exchanges to set position 
limits to guard against the burdens of excessive speculation. The 
CEA, in section 4a, though, left the obligations of the CFTC 
unchanged with regard to setting position limits to protect against 
the possible burdens of excessive speculation. Our governing statute 
importantly distinguishes between these two distinct, but sometimes 
related, public policy goals--protecting against manipulation and 
protecting against possible burdens of excessive speculation. The 
CFMA clearly established that the exchanges had to address the first 
while the CFTC had a broader mandate to address both. Though the 
CFTC had in 1992 first allowed exchanges to establish accountability 
regimes, it was only in 2001 that they did so in lieu of position 
limits in the energy markets.
    The past eight years have provided further evidence as to the 
difference. Accountability levels are regularly and repeatedly 
exceeded. In fact, they are neither stop signs nor even yield signs 
for market participants. As reviewed at our summer hearings, in the 
12 months between July 2008 and June 2009,

[[Page 4170]]

accountability levels for individual months were exceeded in the 
four main energy contracts by 69 different traders, some exceeding 
the levels during every trading day in the period.
    The staff recommendation builds upon the Commission's experience 
and previous guidance in setting position limits, particularly for 
agricultural commodities.
    <bullet> Limits are set across the same contract month 
groupings: All-months-combined (AMC); single-month; and spot-month.
    <bullet> Limits apply to aggregate positions in futures and 
options combined.
    <bullet> There are exemptions for bona fide hedging transactions 
involving commodity inventory hedges and anticipatory purchases or 
sales of the commodity.
    In addition, the proposed energy limits incorporate CFTC 
guidance to exchanges in setting speculative position limits:
    <bullet> The basic formula for the level of the all-months-
combined limit is the same--10% of the first 25,000 contracts of 
open interest plus 2.5% of open interest over 25,000 contracts.
    <bullet> The approach to setting the level of the spot-month 
limit in the physical delivery contracts is the same--25% of the 
estimated deliverable supply.
    The proposed energy Federal limits builds upon the Commission's 
experience in several ways:
    <bullet> The proposed energy limits would be responsive to the 
size of the market and administratively reset on an annual basis, 
rather than remaining unchanged until a new rule is issued.
    <bullet> The proposal extends contract aggregation by applying 
all-months-combined and single-month energy speculative position 
limits both to classes of contracts (all physical delivery or cash 
settled contracts in a commodity at a reporting market) and to 
positions held across all reporting markets.
    <bullet> The proposed energy limits aggregate positions at the 
owner level rather than permitting disaggregation for independent 
account controllers.
    I believe that the staff recommendation is a measured and 
balanced approach to setting position limits in the energy markets.
    In addition to resetting position limits in the energy futures 
and options markets, the proposed rulemaking both addresses 
exemptions for bona fide hedgers and establishes a consistent 
framework for certain swap dealer risk management exemptions. The 
Commission and the exchanges currently grant relief from agriculture 
and energy position limits to swap dealers on a case-by-case basis 
via staff no-action letters or similar methods at the exchanges. The 
proposed rule would, for the first time, bring uniformity to swap 
dealer exemptions. Swap dealers would be required to file an 
exemption application and update the application annually. Exempted 
swap dealers also would be required to provide monthly reports of 
their actual risk management needs and maintain records that 
demonstrate their net risk management needs. The CFTC would publicly 
disclose the names of swap dealers that have filed for an exemption 
after a six-month delay.
    This rule proposal is one step in a very important process. Our 
vote on the proposed rulemaking begins a 90-day public comment 
period. Many important questions are listed in the proposal, and we 
are all very interested to hear from the public on these significant 
issues.
    I look forward to hearing from hedgers and speculators, dealers 
and exchanges and other market participants and economists regarding 
the proposal and how and if it would improve the functioning of the 
markets. I am also interested in hearing any changes that they may 
suggest.
    As we vote to on a proposed rulemaking to set position limits in 
the energy futures and options markets, we also are working with 
Congress to bring comprehensive regulatory reform to the over-the-
counter derivatives markets. I was pleased that the House included 
in the recently passed financial reform legislation enhanced 
authority for the CFTC to set aggregate position limits for over-
the-counter derivatives contracts when they perform or affect a 
significant price discovery function with respect to regulated 
entities. While Congress continues to work on regulatory reform, it 
is important that the Commission continue its work under current 
authority to consider setting energy position limits. The CFTC is 
working in parallel with the legislative process.
    I thank the staff and my fellow Commissioners for all of the 
preparation that went into the recommended rulemaking. I will now 
entertain a motion that the Commission issue a proposed rule to set 
position limits for futures and option contracts in the major energy 
markets and establish consistent, uniform exemptions for certain 
swap dealer risk management transactions.

Statement of Commissioner Michael V. Dunn Regarding the Notice of 
Proposed Rulemaking for Speculative Position Limits for Referenced 
Energy Contracts

    Today I am voting to release the proposed notice of rulemaking 
entitled Federal Speculative Position Limits for Referenced Energy 
Contracts and Associated Regulations. My vote to release this 
proposed rule should in no way be construed as an agreement with the 
opinions expressed in the proposal or to the approach advocated in 
setting these proposed position limits. Despite my serious 
reservations, I have agreed to the release of this proposal so that 
the public at-large has ample opportunity to voice their opinions 
and concerns on this topic.
    At the close of the Commission's position limits hearings on 
August 5, 2009, I stated that:

    [T]he CFTC does not have the authority to set speculative 
position limits in all of the venues that may be affected by 
excessive speculation, specifically over-the-counter markets (OTC) 
and on foreign boards of trade (FBOT). Unilateral Commission action 
in only the markets we currently regulate may not have the desired 
effect of reigning in excessive speculation in the futures market. 
Without similar steps in the OTC markets and on FBOTs, those seeking 
to evade the limits we set could simply move to venues outside our 
authority.

    I believe this is still true today, and that forging ahead on a 
position limits regime for political expediency is not the course of 
action that this agency needs or one that promotes the health and 
integrity of the futures industry in the United States. The simple 
announcement of our hearings several months ago caused business to 
migrate to OTC markets and FBOTs currently outside our purview. This 
is an unacceptable consequence of regulation and is, I fear, a sign 
of things to come if this agency does not take a coordinated 
approach to bringing sensible regulation to the futures markets.
    I think it needs to be made clear that the Proposed Position 
Limits do not set trading limitations on any particular class of 
investor, including passively managed long-only index funds. The 
Proposed Position Limits' sole objective is to prevent excessive 
speculation by a single entity. I would be very interested to hear 
from the public on whether this incremental approach best addresses 
the market wide concerns raised by those who participated in our 
hearings last summer.
    I would like to reiterate that my vote to release this document 
should in no way be construed as an agreement of any kind to final 
rules setting federal speculative position limits on energy 
contracts. My commitment remains to accept comments and information 
during the next few months with an open mind, and to work with my 
fellow Commissioners to ensure that we have a functioning futures 
industry.

Statement of Commissioner Jill Sommers Regarding the Notice of Proposed 
Rulemaking for Speculative Position Limits for Referenced Energy 
Contracts

Dissenting

    The Commission and its predecessors have grappled with the 
complex issues surrounding federal speculative position limits for 
many years in connection with transactions based on agricultural 
commodities. As prices rose across the board in virtually all 
commodities throughout 2007 and 2008, the Commission focused its 
attention on possible causes, including the influx of new traders 
into the markets, in particular swap dealers hedging the risk 
resulting from over-the-counter (OTC) business and traders seeking 
exposure to commodities as an asset class through passive, long-term 
investment in exchange traded funds (ETFs) and commodity index 
funds. Concerns were raised in numerous Congressional hearings that 
excessive speculation in both exchange-traded and OTC markets was to 
blame for rising prices, particularly in the energy sector. The 
Commission held three days of hearings in July and August of 2009 to 
discuss a number of different approaches and has received continuous 
feedback from the industry for the past several months. We now have 
before us a proposal from staff which would implement federal 
speculative position limits for futures and options contracts in 
certain energy commodities.
    I dissent from issuing the proposal for the following reasons. I 
am concerned that hard positions limits may be imposed on exchange 
trading without similar limits in place for

[[Page 4171]]

OTC markets. Legislation giving us the authority to impose OTC 
limits may be enacted this year, but the timing and final form of 
such legislation is unknown. While I wholeheartedly support efforts 
to enhance our authority in this area, I am concerned that forging 
ahead with federal limits in a piecemeal fashion is unwise. I am 
especially concerned that doing so will have the perverse effect of 
driving portions of the market away from centralized trading and 
clearing at the very time we are urging all standardized OTC 
activity to be traded on-exchange or cleared. Likewise, I am 
concerned that, without global standards, trading will move to other 
financial centers around the world. A report issued by the United 
Kingdom's Financial Services Authority and HM Treasury last month 
urges caution in introducing a position limits regime. See Financial 
Services Authority & HM Treasury, Reforming OTC Derivative Markets, 
A UK Perspective at 31-35 (Dec. 2009). Clearly, more work is needed 
to achieve a uniform approach.
    A delay in promulgating position limits will not leave the 
markets unprotected. The proposal before us ``sets high position 
levels that are at the outer bounds of the largest positions held by 
market participants.'' Proposal at 59. Exchange position limits and 
accountability rules remain in place and will continue to trigger 
the first line of defense against potential market manipulations or 
other disruptions. Even if the proposed federal limits were enacted, 
exchanges would be obligated to begin monitoring positions on their 
markets well before traders reach the federal limits. Aggressive use 
of the Commission's surveillance authority in partnership with the 
exchanges should be sufficient to closely monitor and protect the 
integrity of the markets.
    Finally, the proposal makes no distinction between passive ETF 
and index traders and speculators. While the proposal does seek 
comment on the feasibility of categorizing such traders differently, 
I am discouraged that we are no closer to an answer than we were 
prior to our 2009 hearings, the numerous Congressional hearings that 
focused on index trading, and the Commission's extensive collection 
of index investment data since June 2008, which it now publishes on 
a quarterly basis. There is no doubt that passive long-only 
investors do not behave as typical speculative traders. They have a 
unique footprint in the markets. If the data demonstrates that 
passive long traders are disrupting the markets, through the rolling 
of their positions or otherwise, the Commission should make an 
affirmative finding and tailor a solution that addresses the 
problem.
    It is also my hope that if the Commission adopts the limits 
included in the proposal, that it also promulgate federal limits for 
all other commodities with a finite supply, such as metals and the 
agricultural commodities not currently subject to federal limits. 
The rationale given for the current proposal applies equally to 
contracts in those commodities. Another inconsistency that would 
result if the Commission adopts the proposed rulemaking is that swap 
dealers would continue to receive bona fide hedge exemptions for 
positions related to agricultural commodities subject to federal 
limits, but the new proposed risk management exemption regime would 
apply to positions related to the four energy commodities included 
in the proposal. A uniform policy would benefit not only the 
Commission and market participants from an operational efficiency 
standpoint, but would also enhance transparency by eliminating 
needless complexities in the process.

Statement of Commissioner Bart Chilton Regarding the Notice of Proposed 
Rulemaking for Speculative Position Limits for Referenced Energy 
Contracts

``Moving Forward''

    During the last decade, while traditional hedgers and 
speculators increased their use of the futures markets, many new 
non-traditional participants entered the arena, bringing with them 
capital and a wealth of innovative approaches to trading. The trend 
helped fuel the economic engine of our democracy--a good and 
positive outcome. As markets and market participants evolve, the 
Commission has an inherent responsibility to examine the impact, as 
well as to proactively anticipate the potential impact, of changing 
dynamics on those markets we are entrusted to oversee.
    There is certainly no consensus about the potential and net 
impact of new non-traditional speculators on commodity markets. Did 
the massive passives--very large traders who have no interest in the 
underlying physical commodity and have, in general, a fairly 
inactive long trading strategy--contribute to $147 barrel oil in 
2008? Some say there is no impact on markets, others (like 
researchers at MIT, Rice and Princeton--and a new study out this 
week from Lincoln University of Missouri) absolutely disagree.
    Regardless, what is important to remember is that having an 
impact is not equivalent to manipulation (or other abuse) under 
current law, rule or regulation; it is not per se negative. However, 
any conduct that potentially can distress markets, that has the 
propensity to create artificiality in the markets, needs to be 
understood and curbed as necessary.
    The Commodity Exchange Act (CEA) has as its fundamental purpose 
the deterrence and prevention of fraud, market abuse and 
manipulation. To accomplish our mission requires vigilance and 
thoughtful consideration of the potential for market aberrations. It 
requires agile, balanced and prudent action in a timely manner--not 
usually the mark of government. Our role in striking the right 
balance with regard to the massive passives and other new dynamics 
in the futures industry requires that we not merely review and 
respond, but that we anticipate, deter and prevent.
    That is why I support moving forward on the energy proposal 
before the Commission. This proposal strikes a reasonable balance. 
Simply put, it seeks to impose mandatory hard cap position limits. 
Doing so is not the mark of wild-eyed overzealous regulators. In 
fact, the position limits called for in the proposal are similar to 
limits already in effect for agricultural commodities. This proposal 
simply seeks to expand such mandatory hard cap position limits to 
four heavily traded energy contracts.
    Specifically, the energy proposal would establish four different 
hard cap mandatory speculative position limits. They are: An 
exchange-specific spot-month limit; a single month limit; an all-
months-combined limit; and an all-encompassing, cumulative U.S. 
exchange position limit for substantially similar-traded contracts. 
These limits would be dynamic in that they would be responsive to 
the size of the market and subject to annual recalculation by the 
Commission.
    While I have been a staunch advocate for strong position limits, 
the levels set for the limits, in my opinion, actually err on the 
high side. The proposed limits will certainly be seen by some as 
higher than appropriate. However, should the limits prove 
inadequate, the agency can, and I hope will, recalibrate to ratchet 
them down or even increase them as deemed appropriate. The most 
important thing is to establish a thoughtful position limit system.
    Furthermore, while the proposed limits err on the high side, 
such levels would still ensure that the very largest traders' 
positions, those with the greatest potential for causing market-
contortions, would be limited. Moreover, if limits were set too low, 
there would be a possibility that trading migration could take 
place, transferring traders to over-the-counter markets or overseas 
exchanges. This is particularly noteworthy because Congress has yet 
to pass regulatory reform legislation that would grant the CFTC 
authority to properly regulate the over-the-counter markets--markets 
that are currently dark in that there is not government regulation 
or oversight. Hundreds of trillions of dollars are traded in these 
dark markets and they can influence the price that consumers pay for 
everything from gasoline, to a loaf of bread, to a home mortgage. 
Passage of such legislation to provide regulators with authority in 
this area is critically needed, and soon.
    In addition to position limits, the proposal contains a 
mechanism to consider certain exemptions to those limits. I have 
suggested that any exemptions should be approved by the CFTC, 
targeted for legitimate business purposes, verifiable and 
transparent. This proposal meets all four of those criteria.
    Traders hedging commercial risks, i.e. those who have inventory 
or have an interest in the underlying physical commodity, would 
qualify for a bona fide hedging exemption from the proposed 
speculative position limits upon application to the exchange. The 
CFTC would audit the use of this exemption to ensure its consistency 
with our rules and regulations. Importantly, no longer included in 
this class of traders would be swap dealers who establish positions 
to offset the financial risk of customer initiated swap positions. 
Instead, those traders could apply directly to the CFTC for a 
limited risk management exemption for positions held outside of the 
spot month. Swap dealers who receive this exemption from the CFTC 
would be subject to rigorous and regular reporting requirements to 
verify and qualify their need for the exemption. Currently, neither 
the names nor the numbers of such exemptions

[[Page 4172]]

are available to the public. Under the proposal, in order to 
increase transparency, the CFTC would make public the identities of 
those who receive exemptions.
    Finally, the proposal seeks comment from the public on the 
question of expanding position limits to the metals complex and to 
soft agricultural commodities. While I am pleased that this question 
is at least posited through the proposed rule, I am extremely 
disappointed that metals are not a part of this proposal as I have 
sought. In essence, failure to include a proposed rule relative to 
metals such as gold and silver prevents the inclusion of metals in 
the final rule covering position limits in energy. As a result of 
the omission, CFTC attorneys have opined that should the Commission 
wish to establish position limits in metals as a result of public 
comment, the agency would have to undertake an entirely separate 
rulemaking. I strongly support thoughtful position limits in the 
metals complex. I have advocated for their inclusion in this 
proposal with each of my colleagues and staff, and regret the lack 
of consensus that remains. It is my sincere hope and expectation 
that the upcoming hearing on position limits with regard to metals 
will enable us to move more expeditiously on a parallel regulatory 
process for metals.
    I thank everyone involved in conceiving and designing this 
thoughtful proposal with regard to energy. We seek comment, for an 
ample period of 90 days, on not only the overall proposal, but also 
specifically on the question of expanding the concept to the metals 
and soft agricultural commodities and on the question of imposing 
separate position limits for the massive passives as a class of 
investors. I look forward to the comments and ultimately to putting 
a sensible position limit system in place.

Concurring Statement of Commissioner Scott D. O'Malia

Regarding the Proposed Federal Speculative Position Limits for 
Referenced Energy Contracts and Associated Regulations

    I concur on the release of the Federal Register notice of 
proposed Federal speculative position limits for certain energy 
commodities because I think it is important that the Commission 
receive comments on the proposal. I encourage our market 
participants, the public, and anyone with an interest in the markets 
to inform the Commission about the impact of the proposed limits or 
other limits, meaning limits as currently proposed, or potentially 
lower limits as a result of this rulemaking or future rulemaking.
    Notwithstanding my concurrence on the release for comments, I 
have many concerns regarding the proposal's effectiveness and 
justification. Keeping in mind the importance of maintaining the 
market's fundamental purpose of allowing customers to hedge 
commercial risk, I question the utility of rules that either present 
any potential for circumventing CFTC authority or make energy 
markets less transparent or liquid.

The Proposed Limits Could Result in Less U.S. Regulatory Oversight

    I question the effectiveness of these regulatory changes, 
especially as Congress is considering a much broader and 
comprehensive financial reform package. I remain particularly 
concerned with the impact of enacting the proposed position limits 
on the regulated exchanges, while the Commission lacks the 
regulatory authority to impose limits equitably upon all similar 
energy transactions, including over-the-counter transactions. As we 
work to increase transparency in these markets, the proposed 
position limits may undermine our efforts by allowing participants 
to turn to the less regulated and less transparent over-the-counter 
markets, which would be detrimental to the markets and to the 
public.

Status Quo for Index and Speculative Investors

    Earlier this year, the Commission held hearings and heard 
testimony from witnesses who were frustrated with recent prices and 
volatility in commodity markets. Some advocated that the Commission 
immediately impose position limits as a solution. This created high 
expectations that any Commission proposal would impose limitations 
on passive index and speculative investors. The release states that 
no more than ten trading entities would be affected and most of 
those would likely be entitled to a bona fide hedge exemption. This 
means that few, if any, passive index and speculative investors will 
be significantly impacted by the proposed position limits. The 
proposed position limits will not change the investing behavior of 
passive index investors, so long as they remain under the limits or 
utilize the over-the-counter markets over which the Commission has 
limited authority. The Commission would benefit from receiving 
information on the impact, if any, the proposed position limits 
might have on the trading strategies of passive index investors 
going forward. In addition, the Commission should endeavor to 
improve its understanding of the impacts of passive index investors 
rolling over their position on a monthly basis to determine what, if 
any, action is required.

Concerns About Effectiveness and Necessity

    This proposal makes a case for the statutory justification for 
the CFTC to impose position limits under Section 4a(a) of the Act. 
However, the proposal fails to make a compelling argument that the 
proposed position limits, which only target large concentrated 
positions, would dampen price distortions or curb excessive 
speculation. In large part, the lack of a compelling justification 
may be due to the CFTC's own research and the Interagency Task Force 
on Commodity Market's conclusion that the rise in oil prices was 
largely attributable to fundamental supply and demand factors, which 
is also supported by independent analysis. In addition, the fact 
that the proposed position limits are modeled on the agricultural 
commodities position limits forces us to examine whether those 
agriculture limits were effective in preventing the price spikes in 
2007 and 2008. Despite federal position limits, contracts such as 
wheat, corn, soybeans, and cotton contracts were not spared record 
setting price increases.

Missed Opportunity for Transparency

    The proposed position limits provide swap dealers with twice the 
single and all-months combined levels. This is a divergence from the 
current practice of providing swap dealers with a hedge exemption 
for commercial risk taken on over-the-counter transactions. I 
question whether the Commission has missed an opportunity to 
consider an alternative approach to provide swap dealers with a 
``look through'' exemption, meaning swap dealers would receive a 
bona fide hedge exemption for business related to counterparties who 
would have been entitled to a hedge exemption if the counterparties 
had used the futures markets. In exchange for this ``look through'' 
exemption, swap dealers would provide the Commission with their 
customer's over-the-counter position data. That data would allow the 
Commission to determine whether customers are attempting to 
circumvent the position limits. I would be interested to receive 
comments on whether the Commission should impose this ``look 
through'' exemption, rather than the swap dealer exemption in the 
proposed rule. In addition, I am interested to know what types of 
data could be made available under a ``look through'' exemption. 
While I am aware that the proposed rule contains a provision for 
``look through'' recordkeeping, meaning data would be provided only 
upon Commission request, this would not provide the same 
transparency as the above.

Position Limits Must Not Hinder Commercial Risk Management

    If position limits are implemented, the Commission must ensure 
that such limits do not affect market liquidity and thus hinder the 
market's fundamental purpose of allowing commercial hedgers to 
manage risk. This is true for position limits on energy products or 
for any other commodity.
    In light of the many questions and concerns I have, I look 
forward to receiving comments from market participants, the public, 
and anyone with an interest in the markets that would be impacted by 
the proposed position limits.

[FR Doc. 2010-1209 Filed 1-25-10; 8:45 am]
BILLING CODE 6351-01-P


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