Federal Register Notice

Vol. 78

Thursday,

No. 239

December 12, 2013

Part II

Commodity Futures Trading Commission

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17 CFR Parts 1, 15, 17, et al.
Position Limits for Derivatives; Proposed Rule

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules

COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 1, 15, 17, 19, 32, 37, 38,
140, and 150
RIN 3038–AD99

Position Limits for Derivatives
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:

The Commission proposes to
amend regulations concerning
speculative position limits to conform to
the Wall Street Transparency and
Accountability Act of 2010 (‘‘DoddFrank Act’’) amendments to the
Commodity Exchange Act (‘‘CEA’’ or
‘‘Act’’). The Commission proposes to
establish speculative position limits for
28 exempt and agricultural commodity
futures and option contracts, and
physical commodity swaps that are
‘‘economically equivalent’’ to such
contracts. In connection with
establishing these limits, the
Commission proposes to update some
relevant definitions; revise the
exemptions from speculative position
limits, including for bona fide hedging;
and extend and update reporting
requirements for persons claiming
exemption from these limits. The
Commission proposes appendices that
would provide guidance on risk
management exemptions for commodity
derivative contracts in excluded
commodities permitted under the
proposed definition of bona fide
hedging position; list core referenced
futures contracts and commodities that
would be substantially the same as a
commodity underlying a core referenced
futures contract for purposes of the
proposed definition of basis contract;
describe and analyze fourteen fact
patterns that would satisfy the proposed
definition of bona fide hedging position;
and present the proposed speculative
position limit levels in tabular form. In
addition, the Commission proposes to
update certain of its rules, guidance and
acceptable practices for compliance
with Designated Contract Market
(‘‘DCM’’) core principle 5 and Swap
Execution Facility (‘‘SEF’’) core
principle 6 in respect of exchange-set
speculative position limits and position
accountability levels.
DATES: Comments must be received on
or before February 10, 2014.
ADDRESSES: You may submit comments,
identified by RIN number 3038–AD99
by any of the following methods:
• Agency Web site: http://
comments.cftc.gov.

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SUMMARY:

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• Mail: Secretary of the Commission,
Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street NW., Washington, DC
20581.
• Hand Delivery/Courier: Same as
mail above.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow
instructions for submitting comments.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to www.cftc.gov. You
should submit only information that
you wish to make available publicly. If
you wish the Commission to consider
information that is exempt from
disclosure under the Freedom of
Information Act, a petition for
confidential treatment of the exempt
information may be submitted according
to the procedure established in § 145.9
of the Commission’s regulations (17 CFR
145.9).
The Commission reserves the right,
but shall have no obligation, to review,
pre-screen, filter, redact, refuse, or
remove any or all of your submission
from http://www.cftc.gov that it may
deem to be inappropriate for
publication, such as obscene language.
All submissions that have been redacted
or removed that contain comments on
the merits of the rulemaking will be
retained in the public comment file and
will be considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT:
Stephen Sherrod, Senior Economist,
Division of Market Oversight, at (202)
418–5452, ssherrod@cftc.gov; Riva
Spear Adriance, Senior Special Counsel,
Division of Market Oversight, at (202)
418–5494, radriance@cftc.gov; David N.
Pepper, Attorney-Advisor, Division of
Market Oversight, at (202) 418–5565,
dpepper@cftc.gov, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Position Limits for Physical Commodity
Futures and Swaps
A. Background
1. CEA Section 4a
2. The Commission Construes CEA Section
4a(a) To Mandate That the Commission
Impose Position Limits
3. Necessity Finding
B. Proposed Rules
1. Section 150.1—Definitions
i. Various Definitions Found in § 150.1
ii. Bona Fide Hedging Definition
2. Section 150.2—Position Limits
i. Current § 150.2

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ii. Proposed § 150.2
3. Section 150.3—Exemptions
i. Current § 150.3
ii. Proposed § 150.3
4. Part 19—Reports by Persons Holding
Bona Fide Hedge Positions Pursuant to
§ 150.1 of This Chapter and by
Merchants and Dealers in Cotton
i. Current Part 19
ii. Proposed Amendments to Part 19
5. § 150.7—Reporting Requirements for
Anticipatory Hedging Positions
i. Current § 1.48
ii. Proposed § 150.7
6. Miscellaneous Regulatory Amendments
i. Proposed § 150.6—Ongoing
Responsibility of DCMs and SEFs
ii. Proposed § 150.8—Severability
iii. Part 15—Reports—General Provisions
iv. Part 17—Reports by Reporting Markets,
Futures Commission Merchants, Clearing
Members, and Foreign Brokers
II. Revision of Rules, Guidance, and
Acceptable Practices Applicable to
Exchange-Set Speculative Position
Limits—§ 150.5
A. Background
B. The Current Regulatory Framework for
Exchange-Set Position Limits
1. Section 150.5
2. The Commodity Futures Modernization
Act of 2000 Caused Commission § 150.5
To Become Guidance on and Acceptable
Practices for Compliance with DCM Core
Principle 5
3. The CFTC Reauthorization Act of 2008
4. The Dodd-Frank Act Amendments to
CEA Section 5
i. The Dodd-Frank Act Added Provisions
That Permit the Commission To Override
the Discretion of DCMs in Determining
How To Comply With the Core
Principles
ii. The Dodd-Frank Act Established a
Comprehensive New Statutory
Framework for Swaps
iii. The Dodd-Frank Act Added the
Regulation of Swaps, Added Core
Principles for SEFs, Including SEF Core
Principle 6, and Amended DCM Core
Principle 5
5. Dodd-Frank Rulemaking
i. Amended Part 38
ii. Amended Part 37
iii. Vacated Part 151
C. Proposed Amendments to § 150.5
1. Proposed Amendments to § 150.5 To
Add References to Swaps and Swap
Execution Facilities
2. Proposed § 150.5(a)—Requirements and
Acceptable Practices for Commodity
Derivative Contracts That Are Subject to
Federal Position Limits
3. Proposed § 150.5(b)—Requirements and
Acceptable Practices for Commodity
Derivative Contracts That Are Not
Subject to Federal Position Limits
III. Related Matters
A. Considerations of Costs and Benefits
1. Background
i. Statutory Mandate To Consider Costs and
Benefits
2. Section 150.1—Definitions
i. Bona Fide Hedging
ii. Rule Summary
iii. Benefits and Costs

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
3. Section 150.2—Limits
i. Rule Summary
ii. Benefits
iii. Costs
iv. Consideration of Alternatives
4. Section 150.3—Exemptions
i. Rule Summary
ii. Benefits
iii. Costs
iv. Consideration of Alternatives
5. Section 150.5—Exchange-Set
Speculative Position Limits
i. Rule Summary
ii. Benefits
iii. Costs
iv. Consideration of Alternatives
6. Section 150.7—Reporting Requirements
for Anticipatory Hedging Positions
i. Benefits and Costs
7. Part 19—Reports
i. Rule Summary
ii. Benefits
iii. Costs
iv. Consideration of Alternatives
8. CEA Section 15(a)
i. Protection of Market Participants and the
Public
ii. Efficiency, Competitiveness, and
Financial Integrity of Markets
iii. Price Discovery
iv. Sound Risk Management
v. Other Public Interest Considerations
B. Paperwork Reduction Act
1. Overview
2. Methodology and Assumptions
3. Information Provided by Reporting
Entities/Persons and Recordkeeping
Duties
4. Comments on Information Collection
C. Regulatory Flexibility Act
IV. Appendices
A. Appendix A—Studies Relating to
Position Limits Reviewed and Evaluated
by the Commission

I. Position Limits for Physical
Commodity Futures and Swaps

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A. Background
1. CEA Section 4a
Speculative position limits have been
used as a tool to regulate futures
markets for over seventy years. Since
the Commodity Exchange Act of 1936,1
Congress has repeatedly expressed
confidence in the use of speculative
position limits as an effective means of
preventing unreasonable and
unwarranted price fluctuations.2
CEA section 4a, as amended by the
Dodd-Frank Act, provides the
Commission with broad authority to set
position limits. When Congress created
the Commission in 1974, it reiterated
that the purpose of the CEA was to
prevent fraud and manipulation and to
control speculation. Later, the
Commodity Futures Modernization Act
of 2000 (‘‘CFMA’’) provided a statutory
17

U.S.C. 1 et seq.
2 See, e.g., H.R. Rep. No. 421, 74th Cong., 1st Sess.
1 (1935); H.R. Rep. No. 624, 99th Cong., 2d Sess.
44 (1986).

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basis for exchanges to use pre-existing
position accountability levels as an
alternative means to limit the burdens of
excessive speculative positions.
Nevertheless, the CFMA did not weaken
the Commission’s authority in CEA
section 4a to establish position limits to
prevent such undue burdens on
interstate commerce.3 More recently, in
the CFTC Reauthorization Act of 2008,
Congress gave the Commission
expanded authority to set position
limits for significant price discovery
contracts on exempt commercial
markets.4
In 2010, the Dodd-Frank Act
expanded the Commission’s authority to
set position limits by amending CEA
section 4a(a)(1) to authorize the
Commission to establish position limits
not just for futures and option contracts,
but also for swaps that are economically
equivalent to covered futures and
options contracts,5 swaps traded on a
DCM or SEF, swaps that are traded on
or subject to the rules of a DCM or SEF,
and swaps not traded on a DCM or SEF
that perform or affect a significant price
discovery function with respect to
regulated entities (‘‘SPDF Swaps’’).6
CEA section 4a(a)(1) further declares the
Congressional determination that:
‘‘[e]xcessive 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
swaps that perform or affect a
significant price discovery function
with respect to registered entities
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.’’ 7
As described below, amended CEA
section 4a(a)(2), Congress directed, i.e.,
mandated, that the Commission ‘‘shall’’
establish limits on the amount of
positions, as appropriate, that may be
held by any person in agricultural and
exempt commodity futures and options
contracts traded on a DCM.8 Similarly,
as described below, in amended CEA
section 4a(a)(5),9 Congress mandated
that the Commission impose position
3 See Commodity Futures Modernization Act of
2000, Public Law 106–554, 114 Stat. 2763 (Dec. 21,
2000).
4 See Food, Conservation and Energy Act of 2008,
Public Law 110–246, 122 Stat. 1624 (June 18, 2008).
5 See infra discussion of economically equivalent.
6 CEA section 4a(a)(1) (as amended 2010) ; 7
U.S.C. 6a(a)(1).
7 Id.
8 CEA section 4a(a)(2); 7 U.S.C. 6a(a)(2).
9 CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5).

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limits on swaps that are economically
equivalent to the agricultural and
exempt commodity derivatives for
which it mandated position limits in
CEA section 4a(a)(2).
With respect to the position limits
that the Commission is required to set,
CEA section 4a(a)(3) guides the
Commission in setting the level of those
limits by providing several criteria for
the Commission to address, namely: (i)
To diminish, eliminate, or prevent
excessive speculation as described
under this section; (ii) to deter and
prevent market manipulation, squeezes,
and corners; (iii) to ensure sufficient
market liquidity for bona fide hedgers;
and (iv) to ensure that the price
discovery function of the underlying
market is not disrupted.10
CEA section 4a(a)(5) requires the
Commission to establish, at an
appropriate level, position limits for
swaps that are economically equivalent
to those futures and options that are
subject to mandatory position limits
pursuant to CEA section 4a(a)(2).11 CEA
section 4a(a)(5) also requires that the
position limits on economically
equivalent swaps be imposed at the
same time as mandatory limits are
imposed on futures and options.12
CEA section 4a(a)(6) requires the
Commission to apply position limits on
an aggregate basis to contracts based on
the same underlying commodity across:
(1) Contracts listed by DCMs; (2) with
respect to foreign boards of trade
(‘‘FBOTs’’), contracts that are pricelinked to a contract listed for trading on
a registered entity and made available
from within the United States via direct
access; and (3) SPDF Swaps.13
Furthermore, under new CEA section
4a(a)(7), Congress gave the Commission
authority to exempt persons or
transactions from any position limits it
establishes.14
2. The Commission Construes CEA
Section 4a(a) To Mandate That the
Commission Impose Position Limits
The Commission concludes that,
based on its experience and expertise,
when section 4a(a) of the Act is
considered as an integrated whole, it is
reasonable to construe that section to
mandate that the Commission impose
position limits. This mandate requires
the Commission to impose limits on
futures contracts, options, and certain
swaps for agricultural and exempt
commodities. The Commission also
10 CEA

section 4a(a)(3); 7 U.S.C. 6a(a)(3).
section 4a(a)(5); 7 U.S.C. 6a(a)(5).
12 See id.
13 CEA section 4a(a)(6); 7 U.S.C. 6a(a)(6).
14 CEA section 4a(a)(7); 7 U.S.C. 6a(a)(7).
11 CEA

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concludes that the mandate requires it
to impose such limits without first
finding that any such limit is necessary
to prevent excessive speculation in a
particular market.
In ISDA v. CFTC,15 the district court
concluded that section 4a(a)(1) of the
Act ‘‘unambiguously requires that, prior
to imposing position limits, the
Commission find that position limits are
necessary to ‘diminish, eliminate, or
prevent’ the burden described in
[section 4a(a)(1) of the Act].’’ 16 But the
court further concluded that, even if
CEA section 4a(a)(1) standing alone
required the Commission to make a
necessity determination as a
prerequisite to imposing position limits,
it was plausible to conclude that
sections 4a(a)(2), (3), and (5) of the Act,
which were added by Dodd-Frank,
constituted a mandate, requiring the
Commission to impose position limits
without making any findings of
necessity. The court ultimately
determined that the Dodd-Frank
amendments, and their relationship to
section 4a(a)(1) of the Act, are
‘‘ambiguous and lend themselves to
more than one plausible
interpretation.’’ 17 Thus, the court
rejected the Commission’s contention
that section 4a(a) of the Act
unambiguously mandated the
imposition of position limits without
any finding of necessity.
Having concluded that section 4a(a) of
the Act is ambiguous, the court could
not rely on the Commission’s
interpretation to resolve the section’s
ambiguity. As the court observed, the
D.C. Circuit has held that ‘‘ ‘deference to
an agency’s interpretation of a statute is
not appropriate when the agency
wrongly believes that interpretation is
compelled by Congress.’ ’’ 18 The court
further held that, pursuant to the law of
the D.C. Circuit, it was required to
remand the matter to the Commission so
that it could ‘‘fill in the gaps and resolve
the ambiguities.’’ 19 The court cautioned
the Commission that, in resolving the
ambiguity of section 4a(a) of the Act,
‘‘ ‘it is incumbent upon the agency not
to rest simply on its parsing of the
statutory language.’ ’’ 20
The Commission now undertakes the
task assigned by the court: using its
15 International Swaps and Derivatives
Association v. United States Commodity Futures
Trading Commission, 887 F. Supp. 2d 259 (D.D.C.
2012).
16 Id. at 270.
17 Id. at 281.
18 Id. at 280–82, quoting Peter Pan Bus Lines, Inc.
v. Fed. Motor Carrier Safety Admin., 471 F.3d 1350,
1354 (D.C. Cir. 2006).
19 887 F. Supp. 2d at 282.
20 Id. at n.7, quoting PDK Labs. Inc. v. DEA, 362
F.3d 786, 797 (D.C. Cir. 2004).

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experience and expertise to resolve the
ambiguity the district court perceived in
section 4a(a) of the Act. The most
important guidepost for the Commission
in resolving the ambiguity is section
4a(a)(2) of the Act. That section, which
is captioned ‘‘Establishment of
Limitations,’’ includes two sections that
are critical to understanding
congressional intent. Subsection
4a(a)(2)(A) provides that the
Commission, in accordance with the
standards set forth in section 4a(a)(1) of
the Act, shall establish limits on the
amount of positions, as appropriate,
other than bona fide hedge positions
that may be held by any person with
respect to physical commodities other
than excluded commodities.21
Subsection 4a(a)(2)(B) provides that for
exempt commodities, the limits
‘‘required’’ under subsection 4a(a)(2)(A)
be established within 180 days of the
enactment of section 4a(a)(2)(B) and that
for agricultural commodities, the limits
‘‘required’’ under subsection 4a(a)(2)(A)
be established within 270 days of the
enactment of section 4a(a)(2)(B).22
The court concluded that this section
was ambiguous as to whether the
Commission had a mandate to impose
position limits. The court focused on
the opening phrase of subsection (A)—
‘‘[i]n accordance with the standards set
forth in [section 4a(a)(1) of the Act].’’
The court held that the term
‘‘standards’’ in section 4a(a)(2) of the
Act was ambiguous and could refer to
the requirement in section 4a(a)(1) of
the Act that the Commission impose
position limits ‘‘as [it] finds are
necessary to diminish, eliminate, or
prevent’’ an unnecessary burden on
interstate commerce.23 Thus, the court
held that it was plausible that section
4a(a)(2) of the Act required the
Commission to make a finding of
necessity as a precondition to imposing
any position limit. But the court held
that it was also plausible that the
reference to ‘‘standards’’ did not
incorporate such a requirement.
The Commission believes that it is
reasonable to conclude from the DoddFrank amendments that Congress
mandated limits and did not intend for
the Commission to make a necessity
finding as a prerequisite to the
imposition of limits. The Commission’s
interpretation of its mandate is also
based on congressional concerns that
arose, and congressional actions taken,
before the passage of the Dodd-Frank
amendments. During the years leading
up to the enactment, Congress
21 CEA

section 4a(a)(2)(A); 7 U.S.C. 6a(a)(2)(A).
section 4a(a)(2)(B); 7 U.S.C. 6a(a)(2)(B).
23 887 F. Supp. 2d at 274–76.
22 CEA

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conducted several investigations that
concluded that excessive speculation
accounted for significant volatility and
price increases in physical commodity
markets. A congressional investigation
determined that prices of crude oil had
risen precipitously and that ‘‘[t]he
traditional forces of supply and demand
cannot fully account for these
increases.’’ 24 The investigation found
evidence suggesting that speculation
was responsible for an increase of as
much as $20–25 per barrel of crude oil,
which was then at $70.25 Subsequently,
Congress found similar price volatility
stemming from excessive speculation in
the natural gas market.26 Thus, these
investigations had already gathered
evidence regarding the impact of
excessive speculation, and had
concluded that such speculation
imposed an undue burden on the
economy. In light of these investigations
and conclusions, it is reasonable for the
Commission to conclude that Congress
did not intend for it to duplicate
investigations Congress had already
conducted, and did not intend to leave
it up to the Commission whether there
should be federal limits. Instead,
Congress set short deadlines for the
limits it ‘‘required,’’ and directed the
Commission to conduct a study of the
limits after their imposition and to
report to Congress promptly on their
effects. Accordingly, the Commission
believes that the better reading of the
Dodd-Frank amendments, in light of the
congressional investigations and
findings made, is the Dodd-Frank
amendments require the Commission to
impose position limits on physical
commodity derivatives as opposed to
merely reaffirming the preexisting,
discretionary authority the Commission
has long had to impose limits as it finds
necessary. Congress made the decision
to impose limits, and it is for the
Commission to carry that decision out,
subject to close congressional oversight.
Based on its experience, the
Commission concludes that Congress
could not have contemplated that, as a
prerequisite to imposing limits, the
Commission would first make the sort of
24 ‘‘The Role of Market Speculation in Rising Oil
and Gas Prices: A Need to Put the Cop Back on the
Beat,’’ Staff Report, Permanent Subcommittee on
Investigations of the Senate Committee on
Homeland Security and Governmental Affairs, U.S.
Senate, S. Prt. No. 109–65 at 1 (June 27, 2006).
25 Id. at 12; see also ‘‘Excessive Speculation in the
Natural Gas Market,’’ Staff Report, Permanent
Subcommittee on Investigations of the Senate
Committee on Homeland Security and
Governmental Affairs, U.S. Senate at 1 (June 25,
2007) available at http://www.levin.senate.gov/imo/
media/doc/supporting/2007/
PSI.Amaranth.062507.pdf (last visited Mar. 18,
2013) (‘‘Gas Report’’).
26 Gas Report at 1–2.

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
necessity determination that the
plaintiffs in ISDA v. CFTC argue section
4a(a)(2) of the Act requires—i.e., a
finding that, before imposing any limit
in any particular market, there is a
reasonable likelihood that excessive
speculation will pose a problem in that
market, and that position limits are
likely to curtail that excessive
speculation without imposing undue
costs.27 As the district court noted, for
45 years after passage of the CEA, the
Commission’s predecessor agency made
findings of necessity in its rulemakings
establishing position limits.28 During
that period, the Commission had
jurisdiction over only a limited number
of agricultural commodities. The court
cited several orders issued by the
Commodity Exchange Commission
(‘‘CEC’’) between 1940 and 1956
establishing position limits, and in each
of those orders, the CEC stated that the
limits it was imposing were necessary.
Each of those orders involved no more
than a small number of commodities.
But it took the CEC many months to
make those findings. For example, in
1938, the CEC imposed position limits
on six grain products.29 Proceedings
leading up to the establishment of the
limits commenced more than 13 months
earlier, when the CEC issued a notice of
hearings regarding the limits.30
Similarly, in September 1939, the CEC
issued a Notice of Hearing with respect
to position limits for cotton, but it was
not until August 1940 that the CEC
finally promulgated such limits.31 And
the CEC began the process of imposing
limits on soybeans and eggs in January
1951, but did not complete the process
until more than seven months later.32
In the Commission’s experience (i.e.,
in the experience of its predecessor
agency), it took at least four months to
make a necessity finding with respect to
one commodity. The process of making
the sort of necessity findings that
plaintiffs urged upon the court with
respect to all agricultural commodities
and all exempt commodities would be
far more lengthy than the time allowed
by section 4a(a)(3) of the Act, i.e., 180
or 270 days.
27 See

887 F. Supp. 2d at 273.
at 269.
29 See 3 FR 3145, Dec. 24, 1938.
30 See 2 FR 2460, Nov. 12, 1937.
31 See 4 FR 3903, Sep. 14, 1939; 5 FR 3198, Aug.
28, 1940.
32 See 16 FR 321, Jan. 12, 1951; 16 FR 8106, Aug.
16, 1951; see also 17 FR 6055, Jul. 4, 1952 (notice
of hearing regarding proposed position limits for
cottonseed oil, soybean oil, and lard); 18 FR 443,
Jan. 22, 1953 (orders setting limits for cottonseed
oil, soybean oil, and lard); 21 FR 1838, Mar. 24,
1956 (notice of hearing regarding proposed position
limits for onions), 21 FR 5575, Jul. 25, 1956 (order
setting position limits for onions).

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28 Id.

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Dodd-Frank requires the Commission
to impose position limits on all exempt
commodities within 180 days after
enactment, and on all agricultural
commodities within 270 days.33
Because of these stringent time limits,
the Commission concludes that
Congress did not intend for the
Commission to delay the imposition of
limits until it has first made antecedent,
contract-by-contract necessity
findings.34
Additional experience of the
Commission confirms this
interpretation. The Commission has
found, historically, that speculative
position limits are a beneficial tool to
prevent, among other things,
manipulation of prices. Limits do so by
restricting the size of positions held by
noncommercial entities that do not have
hedging needs in the underlying
physical markets. In other words,
markets that have underlying physical
commodities with finite supplies benefit
from the protections offered by position
limits. This will be discussed further,
below.
For example, in 1981, the
Commission, acting expressly pursuant
to, inter alia, what was then CEA
Section 4a(1) (predecessor to CEA
section 4a(a)(1)), adopted what was then
§ 1.61.35 This rule required speculative
position limits for ‘‘for each separate
type of contract for which delivery
33 Although the Commission did not meet these
deadlines in its first position limits rulemaking, it
completed the task (in which the Commission
received and addressed more than 15,000
comments) as expeditiously as possible under the
circumstances.
34 Even if there were no mandate, the Commission
would not need to make the sort of particularized
necessity findings advocated by the plaintiffs in
ISDA v. CFTC, and discussed by the district court.
When the Commission imposed limits pre-DoddFrank, it only had to determine that excessive
speculation is harmful to the market and that limits
on speculative positions are a reasonable means of
preventing price disruptions in the marketplace that
place an undue burden on interstate commerce.
That is the determination that the Commission
made in 1981 when it required the exchanges to
establish position limits on all futures contracts,
regardless of the characteristics of a particular
contract market. See 46 FR 50940 (‘‘[I]t is the
Commission’s view that this objective [‘‘the
prevention of large and/or abrupt price movements
which are attributable to extraordinarily large
speculative positions’’] is enhanced by speculative
position limits since it appears that the capacity of
any contract market to absorb the establishment and
liquidation of large speculative positions in an
orderly manner is related to the relative size of such
positions, i.e., the capacity of the market is not
unlimited.’’). In the immediate wake of that
decision, Congress enacted legislation to give the
Commission the specific authority to enforce those
omnibus limits. See CEA section 4a(e); 7 U.S.C.
6a(e).
35 46 FR 50938, 50944–45, Oct. 16, 1981. The rule
adopted in 1981 tracked, in significant part, the
language of Section 4a(1). Compare 17 CFR
1.61(a)(1) (1982) with 7 U.S.C. 6a(1) (1976).

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months are listed to trade’’ on any DCM,
including ‘‘contracts for future delivery
of any commodity subject to the rules of
such contract market.’’ 36 The
Commission explained that this action
was necessary in order to ‘‘close the
existing regulatory gap whereby some
but not all contract markets [we]re
subject to a specified speculative
position limit.’’ 37 Like the Dodd-Frank
Act, the 1981 final rule established (and
the rule release described) that such
limits ‘‘shall’’ be established according
to what the Commission termed
‘‘standards.’’ 38 As used in the 1981 final
rule and release, ‘‘standards’’ meant the
criteria for determining how the
required limits would be set.39
‘‘Standards’’ did not include the
antecedent judgment of whether to order
limits at all. The Commission had
already made the antecedent judgment
in the rule that ‘‘speculative limits are
appropriate for all contract markets
irrespective of the characteristics of the
underlying market.’’ 40 It further
concluded that, with respect to any
particular market, the ‘‘existence of
historical trading data’’ showing
excessive speculation or other burdens
on that market is not ‘‘an essential
prerequisite to the establishment of a
speculative limit.’’ 41 The Commission
thus directed the exchanges to set limits
for all futures contracts ‘‘pursuant to the
. . . standards of rule 1.61[.]’’ 42 And
§ 1.61 incorporated the standards from
then-CEA-section 4a(1)—an
‘‘Aggregation Standard’’ (46 FR at
50943) for applying the limits to
positions both held and controlled by a
trader and a flexibility standard,
allowing the exchanges to set ‘‘different
and separate position limits for different
types of futures contracts, or for
different delivery months, or from
exempting positions which are normally
known in the trade as ‘spreads,
straddles or arbitrage’ or from fixing
limits which apply to such positions
which are different from limits fixed for
other positions.’’ 43
The language that ultimately became
section 737 of the Dodd-Frank Act,
amending CEA section 4a(a), originated
in substantially final form in H.R. 977,
introduced by Representative Peterson,
36 46

FR 50945.
50939; see also id. 50938 (‘‘to ensure that
each futures and options contract traded on a
designated contract market will be subject to
speculative position limits’’).
38 Compare id. at 50941–42, 50945 with 7 U.S.C.
6a(a)(2)(A).
39 46 FR 50941–42, 50945.
40 Id. at 50941.
42 Id. at 50942.
43 Id. at 50945 (§ 1.61(a)). Compare 7 U.S.C. 6a(1)
(1976).
37 Id.

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who was then Chairman of the House
Agriculture Committee and who would
ultimately be a member of the DoddFrank conference committee.44 H.R. 977
appears influenced by the Commission’s
1981 rulemaking, establishing that there
‘‘shall’’ be position limits in accordance
with the ‘‘standards’’ identified in CEA
section 4a(a).45 Like the 1981 rule, H.R.
977 established (and the Dodd-Frank
Act ultimately adopted) a ‘‘good faith’’
exception for positions acquired prior to
the effective date of the mandated
limits.46 The committee report
accompanying H.R. 977 described it as
‘‘Mandat[ing] the CFTC to set
speculative position limits’’ and the
section-by-section analysis stated that
the legislation ‘‘requires the CFTC to set
appropriate position limits for all
physical commodities other than
excluded commodities.’’ 47 This closely
resembles the omnibus prophylactic
approach the Commission took in 1981,
when the Commission required the
establishment of position limits on all
futures contracts according to
‘‘standards’’ it borrowed from CEA
section 4a(1), and the Commission finds
the history and interplay of the 1981
rule and Dodd-Frank section 737 to be
further evidence that Congress intended
to follow much the same approach as
the Commission did in 1981, mandating
position limits as to all physical
commodities.48
Consistent with this interpretation,
which is based on the Commission’s
experience, CEA section 4a(a)(2)(A)’s
phrase ‘‘[i]n accordance with the
standards set forth in [CEA section
4a(a)(1)]’’ does not require a finding of
necessity as a prerequisite to the
imposition of position limits, but rather
has a different meaning. Section 4a(a)(1)
of the Act lists ‘‘standards’’ that the
Commission must consider, and has
historically considered, when it imposes
position limits. It contains an
aggregation standard, which provides
that, if one person controls the positions
of another, or if those persons
coordinate their trading, then those
positions must be aggregated. And it
contains a flexibility standard,
providing the Commission with the
flexibility to impose different position
limits for different commodities,
44 H.R.

977, 11th Cong. (2009).
U.S.C. 6.
46 Compare H.R. 977, 11th Cong. (2009) with 46
FR 50944.
47 H.Rept. 111–385, at 15, 19 (Dec. 19, 2009).
48 See Union Carbide Corp. & Subsidiaries v.
Comm’r of Internal Revenue, 697 F.3d 104, (2d Cir.
2012) (explaining that when an agency must resolve
a statutory ambiguity, to do so ‘‘ ‘with the aid of
reliable legislative history is rational and prudent’ ’’
(quoting Robert A. Katzman, Madison Lecture:
Statutes, 87 N.Y.U. L. Rev. 637, 659 (2012)).
45 7

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markets, delivery months, etc.49
Because the Commission concludes
that, when Congress amended section
4a(a) of the Act and directed the
Commission to establish the ‘‘required’’
limits, it did not want, much less
require the Commission to make an
antecedent finding of necessity for every
position limit it imposes, the
‘‘standards’’ the Commission must
apply in imposing the limits required by
section 4a(a)(2) of the Act consist of the
aggregation standard and the flexibility
standard of CEA section 4a(a)(1), the
same standards the Commission
required the exchanges to apply the last
time there was a mandatory,
prophylactic position limits regime.50
In addition, section 719 of the DoddFrank Act (codified at 15 U.S.C. 8307)
provides that the Commission ‘‘shall
conduct a study of the effects (if any) of
the position limits imposed’’ pursuant
to CEA section 4a(a)(2), that ‘‘[w]ithin
12 months after the imposition of
position limits,’’ the Commission
‘‘shall’’ submit a report of the results of
that study to Congress, and that, within
30 days of the receipt of that report,
Congress ‘‘shall’’ hold hearings
regarding the findings of that report. As
explained above, if, as a precondition to
imposing position limits, the
Commission were required to make the
sort of necessity determinations
apparently contemplated by the district
court, the Commission would have to
conduct time-consuming studies and
then determine as a matter of discretion
whether a limit was necessary. The
Commission believes that, to comply
with section 719 of the Dodd-Frank Act,
49 In its 1981 rulemaking in which the
Commission required exchanges to impose position
limits, the Commission interpreted the term
‘‘standards,’’ to not require exchanges to make any
finding of necessity with respect to imposing
position limits. See 46 FR. 50941–42 (preamble),
50945 (text of § 1.61(a)(2)).
50 The District Court expressed concern that,
unless CEA section 4a(a)(2) incorporated a necessity
finding, then the language referring to such a
finding in CEA section 4a(a)(1) might be rendered
surplusage. 887 F. Supp. 2d at 274–75. That is, the
court believed that, unless a necessity finding were
incorporated into any limits required by CEA
section 4a(a)(2), then the ‘‘finds as necessary’’
language would serve no purpose in the CEA. But
there is no surplusage because CEA section 4a(a)
only mandates position limits with respect to
physical commodity derivatives (i.e., agricultural
commodities and exempt commodities). The
mandate does not apply to excluded commodities
(i.e., intangible commodities such as interest rates,
exchange rates, or indexes, see CEA section 1a(19)
(defining the term ‘‘excluded commodity’’). As a
result, although a necessity finding does not apply
with respect to physical commodities as to which
the Dodd-Frank Congress mandated position limits,
it still applies to any limits the Commission may
choose to impose with respect to excluded
commodities. Thus, the mandate of CEA section
4a(a) does not render the necessity language
surplusage.

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the Commission would then, within one
year, have to conduct another round of
studies with respect to each contract as
to which it had imposed limits. The
Commission does not believe that
Congress would have imposed such
burdensome and duplicative
requirements on the Commission.
Moreover, Congress would not have
required the Commission to conduct a
study of the effects, ‘‘if any,’’ of position
limits, and would not have imposed a
hearing requirement on itself, if the
Commission had the discretion to not
impose any position limits at all.51
Further, Congress was careful to make
clear that its mandate only extends to
agricultural and exempt commodities. If
there were no mandate, then the same
standards that apply to position limits
for excluded commodities would also
apply to agricultural and exempt
commodities and, basically, the
Commission would have only
permissive authority to promulgate
position limits for any commodity—the
same permissive authority that existed
prior to the Dodd-Frank Act. Finding
that a mandate exists is the only way to
give effect to the distinction that
Congress drew.
The legislative history of the DoddFrank amendments to CEA section 4a(a)
confirms that Congress intended to
make position limits mandatory for
agricultural and exempt commodities.
As initially introduced, the House
version of the bill that became DoddFrank provided the Commission with
discretionary authority to issue position
limits by stating that the Commission
‘‘may’’ impose them.52 However, by the
time the bill passed the House, it
dispensed with the permissive approach
in favor of a mandate, stating that the
Commission ‘‘shall’’ impose limits, and
51 When Congress requires an agency to
promulgate a rule, it frequently requires the agency
to provide it with a report regarding the impact of
that rule. See, e.g., 15 U.S.C. 6502, 6506 (provisions
of the Children’s Online Privacy Protection Act,
requiring the FTC to promulgate implementing
rules, and to report as to the impact thereof); 47
U.S.C. 227(b), (h) (requiring the FCC to implement
rules restricting unsolicited fax advertising, and to
report on enforcement); 15 U.S.C. 78m(p) (requiring
the SEC to issue rules requiring disclosures
regarding the use of certain ‘‘conflict minerals’’
obtained from the Democratic Republic of Congo),
and section 1502(d) of the Dodd-Frank Act
(requiring the Comptroller General to report
regarding the effectiveness of the conflict minerals
rule).
52 Initially, the House used the word ‘‘may’’ to
permit the Commission to impose aggregate
positions on contracts based upon the same
underlying commodity. See H.R. 4173, 11th Cong.
section 3113(a)(2) (as introduced in the House, Dec.
2, 2009) (‘‘Introduced Bill’’); see also Brief of
Senator Levin et al as Amicus Curiae at 10–11,
ISDA v. CFTC, no. 12–5362 (D.C. Cir. Apr. 22,
2013), Document No. 1432046 (hereafter ‘‘Levin
Br.’’).

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in addition, the House added two new
subsections, mandating the imposition
of limits for agricultural and exempt
commodities with the tight deadlines
described above.53 Similarly, it was only
after the initial bill was amended to
make position limits mandatory that the
House bill referred to the limits for
agricultural and exempt commodities as
‘‘required’’ in one instance.54
Furthermore, Congress decided to
include the requirement that the
Commission conduct studies on the
‘‘effects (if any) of position limits
imposed’’ 55 to determine if the required
position limits were harming US
markets only after position limits went
from discretionary to mandatory.56 To
remove all doubt, the House Report
accompanying the House Bill also made
clear that the House amendments to the
position limits bill ‘‘required’’ the
Commission to impose limits.57 The
Conference Committee adopted the
provisions of the House bill with regard
to position limits and then strengthened
them by referring to the position limits
as ‘‘required’’ an additional three times
so that CEA section 4a(a), as enacted
referred, to position limits as ‘‘required’’
a total of four times.58
Considering the text, purpose and
legislative history of section 4a(a) as a
whole, along with its own experience
and expertise, the Commission believes
that it is reasonable to conclude that
Congress—notwithstanding the
ambiguity the district court found to
arise from some of the words in the
statute—decided that position limits
were necessary with respect to physical
commodities, mandated the
Commission to impose them on
physical commodities, and required that
the Commission do so expeditiously.59
53 Levin Br. at 11 (citing H.R. 4173, 111th Cong.
section 3113(a)(5)(2), (7) (as passed by the House
Dec. 11, 2009) (‘‘Engrossed Bill’’)).
54 Id. at 12. (citing Engrossed Bill at section
3113(a)(5)(3)).
55 15 U.S.C. 8307.
56 See Levin Br. at 13–17; see also DVD: October
21, 2009 Business Meeting (House Agriculture
Committee 2009), ISDA v. CFTC, Dkt. 37–2 Exh. B
(Apr. 13, 2012) at 59:55–1:02:18.
57 Levin Br. at 23 (citing H.R. Rep. No. 111–373
at 11 (2009)).
58 Levin Br. at 17–18.
59 The district court noted that CEA sections
4a(a)(2), (3), and (5)(A) contain the words ‘‘as
appropriate.’’ The court held that it was ambiguous
whether those words referred to the Commission’s
obligation to impose limits (i.e., the Commission
shall, ‘‘as appropriate,’’ impose limits), or to the
level of the limits the Commission is to impose.
Because, as explained above, the Commission
believes it is reasonable to interpret CEA section
4a(a) to mandate the imposition of limits, the words
‘‘as appropriate’’ must refer to the level of limits,
i.e., the Commission must set limits at an
appropriate level. Thus, while Congress made the
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3. Necessity Finding
As explained above, the Commission
concludes that the CEA mandates the
imposition of speculative position
limits. Because of this mandate, the
Commission need not make a
prerequisite finding that such limits are
necessary ‘‘to diminish, eliminate or
prevent excessive speculation causing
sudden or unreasonable fluctuations or
unwarranted changes in the prices of’’
commodities under pre-Dodd-Frank
CEA section 4a(a)(1). Nonetheless, out
of an abundance of caution in light of
the district court decision in ISDA v.
CFTC, and without prejudice to any
argument the Commission may advance
in any forum, the Commission proposes,
as a separate and independent basis for
the proposed Rule, a preliminary
finding herein that such limits are
necessary to achieve their statutory
purposes.60
Historically, speculative position
limits have been one of the tools used
by the Commission to prevent, among
other things, manipulation of prices.
Limits do so by restricting the size of
positions held by noncommercial
entities that do not have hedging needs
in the underlying physical markets. By
capping the size of speculative
positions, limits lessen the likelihood
that a trader can obtain a large enough
position to potentially manipulate
prices, engage in corners or squeezes or
other forms of price manipulation. The
position limits in this proposal are
necessary as a prophylactic measure to
lessen the likelihood that a trader will
accumulate excessively large
speculative positions that can result in
corners, squeezes, or other forms of
manipulation that cause unwarranted or
unreasonable price fluctuations. In the
Commission’s experience, position
limits are also necessary as a
prophylactic measure because
excessively large speculative positions
may cause sudden or unreasonable price
fluctuations even if not accompanied by
manipulative conduct. Two examples
that inform the Commission’s
determinations are the silver crisis of
1979–80 and events in the natural gas
markets in 2006.61
physical commodity futures and options and
economically equivalent swaps, Congress at the
same time delegated to the Commission the task of
setting the limits at levels that would maximize
Congress’ objectives. See CEA sections 4a(a)(3)(A)–
(B).
60 The CEA does not define ‘‘excessive
speculation.’’ But the Commission has historically
associated it with extraordinarily large speculative
positions. 76 FR at 71629 (referring to
‘‘extraordinarily large speculative positions’’).
61 Since the 1920’s, Congressional and other
official governmental investigations and reports
have identified other instances of sudden or

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Position limits would help to deter
and prevent manipulative corners and
squeezes, such as the silver price spike
caused by the Hunt brothers and their
cohorts in 1979–80.
A market is ‘‘cornered’’ when an
individual or group of individuals
acting in concert acquire a controlling or
ownership interest in a commodity that
is so dominant that the individual or
group of individuals can set or
manipulate the price of that
commodity.62 In a short squeeze, an
excess of demand for a commodity
together with a lack of supply for that
commodity forces the price of that
commodity upward. During a short
squeeze, individuals holding short
positions, i.e., sales for future delivery
of a commodity,63 are typically forced to
purchase that commodity in situations
where the price increases rapidly, in
order to exit their short position and/or
cover,64 i.e., be able to deliver the
commodity in accordance with the
terms of the sale.65
A rapid rise and subsequent sharp
decline in silver prices occurred from
the second half of 1979 to the first half
of 1980 when the Hunt brothers 66 and
colluding syndicates 67 attempted to
corner the silver market by hoarding
silver and executing a short squeeze.
Prices deflated only after the
Commodity Exchange, Inc. (‘‘COMEX’’)
unreasonable fluctuations or unwarranted changes
in the price of commodities. See discussion below.
62 See CFTC Glossary, A Guide to the Language
of the Futures Industry (‘‘CFTC Glossary’’),
available at http://www.cftc.gov/
ConsumerProtection/EducationCenter/
CFTCGlossary/glossary, which defines a corner as
‘‘(1) [s]ecuring such relative control of a commodity
that its price can be manipulated, that is, can be
controlled by the creator of the corner; or (2) in the
extreme situation, obtaining contracts requiring the
delivery of more commodities than are available for
delivery.’’
63 See CFTC Glossary, which defines a ‘‘short’’ as
‘‘(1) [t]he selling side of an open futures contract;
(2) a trader whose net position in the futures market
shows an excess of open sales over open
purchases.’’
64 See CFTC Glossary, which defines ‘‘cover’’ as
‘‘(1) [p]urchasing futures to offset a short position
(same as Short Covering); . . . (2) to have in hand
the physical commodity when a short futures sale
is made, or to acquire the commodity that might be
deliverable on a short sale’’ and offset as
‘‘[l]iquidating a purchase of futures contracts
through the sale of an equal number of contracts of
the same delivery month, or liquidating a short sale
of futures through the purchase of an equal number
of contracts of the same delivery month.’’
65 See CFTC Glossary, which defines a ‘‘squeeze’’
as ‘‘[a] market situation in which the lack of
supplies tends to force shorts to cover their
positions by offset at higher prices.’’
66 The primary silver traders in the Hunt family
were Nelson Bunker Hunt, William Herbert Hunt,
and Lamar Hunt.
67 A group of individuals and firms trading
through ContiCommodity Services, Inc. and ACLI
International Commodity Services, Inc., both of
which were FCMs.

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and the Chicago Board of Trade
(‘‘CBOT’’) imposed a series of
emergency rules imposing at various
times position limits, increased margin
requirements, and trading for
liquidation only on U.S. silver futures.
It was the consensus view of staffs of the
Commission, the Board of Governors of
the Federal Reserve System, the
Department of the Treasury and the
Securities and Exchange Commission
articulated in an interagency task force
study of events in the silver market
during that period that ‘‘[r]easonable
speculative position limits, if they had
been in place before the buildup of large
positions occurred, would have helped
prevent the accumulation of such large
positions and the resultant dislocations
created when the holders of those
positions stood for delivery.’’ 68 That is,
speculative position limits would have
helped to prevent the buildup of the
silver price spike of 1979–80. The
Commission believes that this
conclusion remains correct. ‘‘Moreover,
by limiting the ability of one person or
group to obtain extraordinarily large
positions, speculative limits diminish
the possibility of accentuating price
swings if large positions must be
liquidated abruptly in the face of
adverse price movements or for other
reasons.’’ 69
The Hunt brothers were speculators 70
who neither produced, distributed,
processed nor consumed silver. The
corner began in early 1979, when the
Hunt brothers accumulated large
physical holdings of silver by
purchasing silver futures and taking
physical delivery of silver.71 By the fall
of 1979, they had accumulated over 43
million ounces of physical silver.72 In
addition to their physical holdings, in
the fall of 1979 the Hunts and their
cohorts held over 12 thousand contracts
for March delivery, representing a
potential future delivery to the hoard of
another 60 million ounces of silver.73 In

general, the larger a position held by a
trader, the greater is the potential that
the position may affect the price of the
contract. Throughout late 1979, the
Hunts continued to stand for delivery
and took care to ensure that their own
holdings were not re-delivered back to
them when outstanding futures
contracts settled.74 Thus, through this
period, silver prices climbed as the
Hunts accumulated more financial and
physical positions and the available
supply of silver decreased. As the
interagency working group observed,
‘‘[t]he biggest single source of the
change in demand for silver bullion
during the last half of 1979 and the first
quarter of 1980 came from the silver
acquisitions of Hunt family members
and other large traders.’’ 75
The exchanges and regulators were
slow to react to events in the silver
market. However, to correct by then
evident market imbalances, in late 1979
the CBOT introduced position limits of
3 million ounces of silver (i.e., 600
contracts) per trader and raised margin
requirements. Contracts over 3 million
ounces were to be liquidated by
February of 1980. On January 7, 1980,
the larger COMEX instituted position
limits of 10 million ounces of silver (i.e.,
2,000 contracts) per trader, with
contracts over that amount to be
liquidated by February 18. Then, on
January 21, COMEX suspended trading
in silver and announced that it would
only accept liquidation orders. The
price of silver began to decline. When
the price of a commodity starts to move
against the cornerer, attempts by the
cornerer to sell would tend to fuel a
further price move against the cornerer
resulting in a vicious cycle of price
decline. The Hunts were eventually
unable to meet their margin calls and
took a huge loss on their positions. The
interagency working group concluded
that the data relating to the episode
‘‘support the hypothesis that the

deliveries and potential deliveries to
large long participants in the silver
futures markets contributed to the rise
and fall in silver prices in both the cash
and futures markets. The rise appears to
have been caused in part by the
conversion of silver futures contracts to
actual physical silver. The subsequent
fall in prices was then exacerbated by
the anticipated selling of some of the
Hunt’s physical silver by FCMs as well
as the liquidation of Hunt group and
possibly . . . [other large traders’]
futures positions.’’ 76
Figure 1 illustrates the rapid rise and
sharp decline in the price of silver
during the period in question.77 In
January of 1979, the settlement price of
silver was approximately $6.00 per troy
ounce. By August, the price had risen to
over $9.00, an increase of over 50
percent. Through most of October and
November 1979, silver traded within a
range of $15.00–$17.50 per troy ounce.
On November 28, the closing price rose
above $18.00. In December of 1979, the
price rose above $30.00 and continued
to climb until mid-January. On January
17, 1980, the closing price of silver
reached its apex at $48.70 per troy
ounce, more than five times the August
price. On January 21, the price declined
to $44.00; on January 22 the closing
price slid to $34.00 per troy ounce.
Through March 7, 1980, silver traded in
an approximate range of $30.00–$40.00
per troy ounce. On March 10, silver
closed below $30.00. On March 17 and
18, silver closed below $20.00. After a
brief rebound above $22.00, by March
26 the price dropped to $15.80. On
March 27, the price of silver hit a low
of $10.80 per troy ounce, less than a
quarter of the high of $48.70 two
months earlier. ‘‘After March 28, silver
prices stabilized for a while in the $12–
$15 range. . . . During April through
December 1980, silver prices moved
generally in a range between $12 and
$20 per ounce.’’ 78

68 Commodity Futures Trading Commission,
Report To The Congress In Response To Section 21
Of The Commodity Exchange Act, May 29, 1981,
Part Two, A Study of the Silver Market, at 173
(‘‘Interagency Silver Study’’).
69 Speculative Position Limits, 45 FR 79831,
79833, Dec. 2, 1980.
70 Speculators seek to profit by anticipating the
price movement of a commodity in which a futures
position has been established. See CFTC Glossary,
which defines a speculator as, ‘‘[i]n commodity
futures, a trader who does not hedge, but who
trades with the objective of achieving profits
through the successful anticipation of price
movements.’’ In contrast, a hedger is ‘‘[a] trader
who enters into positions in a futures market
opposite to positions held in the cash market to
minimize the risk of financial loss from an adverse

price change; or who purchases or sells futures as
a temporary substitute for a cash transaction that
will occur later. One can hedge either a long cash
market position (e.g., one owns the cash
commodity) or a short cash market position (e.g.,
one plans on buying the cash commodity in the
future).’’ The Hunts had no apparent industrial use
for silver, although some attribute their early
activities in the silver market to an attempt to hedge
against Carter-era inflation and a defense against
potential confiscation of precious metals in the
event of a national crisis.
71 Typically, delivery occurs in only a small
percentage of futures transactions. The vast majority
of contracts are liquidated by offsetting
transactions.
72 See, e.g., Matonis, Jon, Hunt Brothers
Demanded Physical Silver Delivery Too, available

at http://www.rapidtrends.com/hunt-brothersdemanded-physical-silver-delivery-too/. To provide
context, at this time COMEX and CBOT warehouses
held 120 million ounces of silver.
73 Interagency Silver Study at 18.
74 It has been reported that they moved vast
quantities of silver to warehouses in Switzerland to
prevent this possibility.
75 Interagency Silver Study at 77.
76 Interagency Silver Study at 133.
77 See CFTC Glossary, which defines ‘‘spot price’’
as ‘‘[t]he price at which a physical commodity for
immediate delivery is selling at a given time and
place.’’ The prompt month is the nearest month to
the expiration date of a futures contract.
78 Interagency Silver Study at 35–36.

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degree to which the value of the front
month contract exceeded the value of
other contracts was exaggerated. By
April of 1980, because the Hunts and
their cohorts were forced to sell,
physical supply had increased and
silver was comparatively cheaper to
deliver. The front month contract was
then worth substantially less than other
contracts. In contrast, assuming
equilibrium in production, use, and
storage of silver, one would expect the

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charted price spreads to look
comparatively much flatter. That is,
there should not be that much
difference between the price of the front
month contract and other contracts
because silver should not be subject to
seasonality such as would affect crops.
Moreover, because silver is relatively
cheap to store, the difference in the
price of the front month and other
contracts should also be less sensitive to
the cost of carry.

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Figure 2 shows the distortion in the
price of silver futures contracts due to
the short squeeze during the run-up to
the January 17 high and the effect of
‘‘burying the corpse’’ after the squeeze
ended. In January 1980, due to the
hoarding of the Hunts and their cohorts,
physical supplies of silver were tight
and the physical commodity was
expensive to deliver. Scarcity in the
physical market for silver distorted
prices in the silver futures markets. The

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In section 4a(a)(1) of the Act, Congress
identifies ‘‘sudden or unreasonable
fluctuations or unwarranted changes in
the price of such commodity’’ 79 as an
indication that excessive speculation
may be present in a market for a
commodity. The rapid rise and sharp
decline in the price of silver that
commenced in August 1979 and was
spent by the end of March 1980
certainly fits the description advanced
by Congress. Nevertheless, the
Commission, based on its experience
and expertise, does not believe that the
burdens on interstate commerce are
limited solely to the temporary and
unwarranted changes in price such as
those exhibited during the silver price
spike that resulted, at least in part, from
the deliberate behavior of the Hunt
brothers and their cohorts.80 Indirect
burdens on interstate commerce may
arise as a result of unwarranted changes
in price such as occurred in this case.
Such burdens arise due to manipulation
79 7

U.S.C. 6a(a)(1).
Interagency Silver Study identified three
main factors contributing to the price increases in
silver at the time.
First, the state of the economy during the period
in question affected all precious metals including
silver. . . .
Second, changes in the supply and demand of
physical silver affected the price of silver. . . .
Third, the accumulation of large amounts of both
physical silver and silver futures by individuals
such as the Hunt family of Dallas, Texas, had an
effect on the price of silver directly and on the
expectations of others who became aware of these
actions.
Interagency Silver Study at 2.

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or attempted manipulation, or they may
result from the excessive size and
disorderly trading of a speculative, i.e.,
non-hedging, position.
Sudden or unreasonable fluctuations
or unwarranted changes in the price of
a commodity derivative contract may be
caused by a trader establishing,
maintaining or liquidating an
extraordinarily large position whether
in a physical-delivery or cash-settled
contract. Prices for commodity
derivative contracts reflect expectations
about the price of the underlying
commodity at a future date and, thus,
reflect expectations about supply and
demand for that underlying commodity.
In contrast, the supply of a commodity
derivative contract itself is not limited
to the supply of the underlying
commodity. Rather, the supply of a
commodity derivative contract is a
function of the ability of a trader to
induce a counterparty to take the
opposite side of the transaction.81 Thus,
the capacity of the market (i.e., all
participants) to absorb purchase or sale
orders for commodity derivative
contracts is limited by the number of
participants that are willing to provide
liquidity, i.e., take the other side of the
order at a given price. For example, a
trader that demands immediacy in
establishing a long position larger than
81 In a commodity derivative contract, the two
parties to the contract have opposite positions. That
is, for every long position in a commodity
derivative contract held by one trader, there is a
short position that another trader must hold.

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the amount of pending offers to sell by
market participants may cause the
commodity derivative contract price to
increase, as market participants may
demand a higher price when entering
new offers to sell. It follows that an
extraordinarily large position, relative to
the size of other participants’ positions,
may cause an unwarranted price
fluctuation.
In the spot month for a physicaldelivery commodity derivative contract,
concerns regarding sudden or
unreasonable fluctuations or
unwarranted changes in the price of that
contract are heighted because open
positions in such a contract either: Must
be satisfied by delivery of the
underlying commodity (which is of
limited supply and, thus, susceptible to
corners or squeezes); or must be offset
before delivery obligations attach (that
requires trading with another
participant to offset the open
position).82 For example, a trader
82 Regarding cash-settled commodity derivative
contracts, there are a variety of methods for
determining the final cash settlement price, such as
by reference to (i) a survey price of cash market
transactions, or (ii) the final (or daily) settlement
price of a physical-delivery futures contract. For
example, in the case of a trader who holds an
extraordinarily large position in a cash-settled
contract based on a survey of prices of cash market
transactions, where the price of the spot month
cash-settled contract is used by cash market
participants in determining or setting their cash
market transaction prices, then an unwarranted
price fluctuation in that cash-settled commodity
derivative contract could result in distorted prices
in cash market transactions and, thus, an artificial

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
holding an extraordinarily large long
position, absent position limits, could
maintain a long position (requiring
delivery beyond the limited supply of
the physical commodity) deep into the
spot month. By maintaining such an
extraordinarily large position, such a
trader may cause an unwarranted
increase in the price of the commodity
derivative contract, as holders of short
positions attempt to induce a
counterparty to offset their position.
Prices that deviate from the natural
forces of supply and demand, i.e.,
artificial prices, may occur when there
is hoarding of a physical commodity in
an attempted or perfected manipulative
activity (such as a corner). If a price of
a commodity is artificial, resources will
be inefficiently allocated during the
time that the artificial price exists.
Similarly, prices that are unduly
influenced by the size of a very large
speculative position, or trading that
increases or reduces the size of such
very large speculative position, may
lead to an inefficient allocation of
resources to the extent that such prices
do not allocate resources to their highest
and best use. These burdens were
present during the Hunt brothers
episode. The Interagency Silver Study
concluded that ‘‘the volatile conditions
in silver markets and the much higher
price levels . . . affected the industrial
and commercial sectors of the economy
to a greater extent than would have been
the case if silver price changes had been
less turbulent.’’ 83 The Interagency
Silver Study described several negative
consequences of resource misallocations
that occurred during the silver price
spike.
Significant changes took place in the
use of silver as an industrial input
during silver’s price oscillation in 1979–
80. In the photography industry, the
consumption of silver from the first
quarter of 1979 to the first quarter of
1980 fell by nearly one third. Similarly,
the use of silver in the production of
silverware declined by over one half in
this period. In addition, numerous other
uses of silver exhibited sharp usage
declines equivalent to or in excess of
these examples. These sharp reductions
in silver use are indicative of the general
disruption caused by the sharp rise in
silver prices. Since the demand for
final cash settlement price from a survey of such
distorted cash market transaction prices.
Alternatively, for example, in the case of a trader
who holds an extraordinarily large position in a
cash-settled contract based on the final settlement
price of a physical-delivery futures contract, then a
trader has an incentive to mark the close of that
physical-delivery futures contract to benefit her
position in the cash-settled contract.
83 Id. at 150.

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silver in many of these uses is relatively
price inelastic, the substantial decline
registered in the use of silver for
industrial purposes underscores the
sizable magnitude of silver price
increases and the consequent disruption
experienced by the industry.
Individual commercial operations
using silver were also disrupted. To
illustrate, a major producer of X-ray film
discontinued production purportedly as
a result of the sharply increased and
erratic behavior of the price of silver. In
addition, there were reports that trading
firms failed financially in early 1980
due to losses incurred in silver markets.
Finally, the financial condition of small
firms dependent on silver products
(hearing aid batteries, printing supplies,
etc.) deteriorated as a result of high
silver prices and limited supplies.84
Moreover, after the settlement price of
silver peaked in mid-January 1980, the
ensuing ‘‘rapid decline of silver prices
subjected several FCMs and their parent
companies to considerable financial
stress.’’ 85 In the view of the
Commission and other regulators,
‘‘[w]hile all FCMs carrying silver
positions appear to have remained
solvent during the period in question,
the potential for insolvency was
significant.’’ 86 The Interagency Silver
Study described a cascade of
undesirable events;
Falling prices reduced the equity in the
accounts of some large, net long silver futures
positions, necessitating margin calls.
Responsibility for the financial obligations of
some of these positions had to be assumed
by FCMs when large margin calls went
unmet. A significant proportion of the loans
to major silver longs, collateralized by silver,
had been made by some FCMs acting for their
parent companies. A major portion of this
collateral was rehypothecated for bank loans
by these companies. The FCMs and their
parent companies were thus exposed to two
related problems that threatened them with
insolvency—the losses on customer accounts
and the possibility that silver prices would
fall to a point which would cause the banks
to demand payment on the hypothecated
loans. . . . The FCM was not only vulnerable
because of its customers’ losses on the
futures contracts, but also because of the
84 Id. (footnotes omitted). James M. Stone,
formerly Chairman of the Commission, maintained
that the negative effects of the price spike on
commercials were borne out in employment figures:
‘‘In the case of silver, the employment impacts fell
hardest upon the makers of consumer products.
According to the Department of Labor’s Bureau of
Labor Statistics some 6000 jobs in the jewelry,
silverware and plateware industries were lost
between November of 1979 and February of 1980.’’
Additional Comments on the Interagency Silver
Study at 9 (‘‘Stone Comments’’).
85 Id. at 135.
86 Id. at 140.

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75689

potential for a decline in the value of loan
collateral.87

The failure of an FCM with large
silver exposures could have adversely
affected clients without positions in
silver and potentially other participants
in the futures markets. The failure of a
large FCM could have negatively
affected the various exchanges and
potentially the clearinghouses.88 The
solvency of FCMs and other
Commission registrants crucial to
properly functioning futures markets is
clearly within the Commission’s
regulatory ambit. The failure of a
commission registrant in the context of
unwarranted price spikes would be a
burden on interstate commerce.
Fallout from the silver price spike in
late 1979-early 1980 extended beyond
the silver markets. ‘‘Banks, by extending
credit for futures market activity while
accepting silver as collateral, exposed
themselves to higher than normal
risks.’’ 89 Unusual activity was also
observed in other futures markets, such
as precious metals and commodities
other than silver in which the Hunts
were thought to have had positions.90
‘‘On March 27, 1980, the date on which
the price of silver dropped to its lowest
point, $10.80 an ounce, a combination
of factors, including news of the Hunts’
problems in meeting margin calls, the
efforts of the Hunts to sell positions in
various exchange-listed securities in
order to meet those calls, and the
actions of the SEC in suspending trading
in Bache Group stock, appeared to have
a direct impact on the securities
markets.’’ 91 Commenters noted the
marked changes in the rate of inflation
concomitant with the rapid rise and fall
of the price of silver.92 Potential bank
87 Id.

at 135–6 (footnote omitted).
id. at 140–41. ‘‘Although the
clearinghouses have contingency plans to deal with
insolvent members, to date these plans have
covered only the collapse of small FCMs.
Conceivably, a major default could result in
assessments of members that might, in turn, result
in the insolvency of some members and the collapse
of the exchange.’’
89 Interagency Silver Study at 145. ‘‘Bank loans to
major silver traders were made both directly and
indirectly through FCMs. . . . Default on a major
portion of these loans could have had a significant
effect on the overall banking industry, but
particularly on those banks where the loan
concentration was the greatest.’’ Testimony of
Philip McBride Johnson, Chairman, Commodity
Futures Trading Commission, Before the
Subcommittee on Conservation, Credit and Rural
Development, Committee on Agriculture, U.S.
House of Representatives, Oct. 1, 1981, at 19
(‘‘Johnson Testimony’’).
90 See Interagency Silver Study at 147–8. See also
Johnson Testimony at 18–21.
91 Interagency Silver Study at 148.
92 See Stone Comments at 9; Johnson Testimony
at 20. Contra Philip Cagan, ‘‘Financial Futures
88 See

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules

failures, disruptions in other futures
markets, disruptions in the securities
markets and volatile inflation rates
would be additional burdens on
interstate commerce. In highlighting the
ability of market participants to
accumulate extraordinarily large
speculative positions, thereby
demoralizing the silver markets to the
injury of producers and consumers, the
entirety of the Hunt brothers silver
episode called into question the
adequacy of futures regulation generally
and the integrity of the futures markets.
The Commission believes that if
Federal speculative position limits had
been in effect that correspond to the
limits that the Commission proposes
now, across markets now subject to
Commission jurisdiction, such limits
would have prevented the Hunt brothers
and their cohorts from accumulating
such large futures positions.93 Such
large positions were associated with the
sudden fluctuations in price shown in
Figures 1 and 2. These unwarranted
changes in price imposed an undue and
unnecessary burden on interstate
commerce, as described in greater detail
on the preceding pages. If the Hunt
brothers had been prevented from
accumulating such large futures
positions, they would not have been
able to demand delivery on such large
futures positions. The Hunts therefore
would have been unable to hoard as
much physical silver. The Commission’s

belief is based on the following
assessment:
In order to approximate a singlemonth and all-months-combined limit
calculated using a methodology similar
to that proposed in this release 94 for
silver during this time period, the
Commission used data regarding monthend open contracts from the Interagency
Silver Study.95 These month-end open
interest reports are for all silver futures
combined for the Chicago Board of
Trade and the Commodity Exchange in
New York.96 Table 1 shows the monthend open interest for all silver futures
combined from August 1979 to April
1980. Using these numbers, the average
month-end open interest for this period
is 190,545 contracts, and applying the
10, 2.5 percent formula to this average
would result in single-month and allmonths-combined limits of 6,700
contracts. The Hunts would have
exceeded this single-month limit in the
fall of 1979 when they and their cohorts
held over 12,000 contracts for March
delivery.97 In addition, the Hunts and
their cohorts held net positions in silver
futures on COMEX and CBOT that
exceeded the calculated all-monthscombined limits on multiple occasions
between September 1975 and February
1980 as is shown in Table 2. Hence, if
the proposed rule had been in place, it
could have limited the size of the
positions held by the Hunts and their
cohorts as early as the autumn of 1975.

There are two limitations to the data
used in this analysis. First, the monthend open interest data do not include
open interest from the MidAmerica
Commodity Exchange. Second, the
month-end open interest numbers are
for a short time-period starting at the
end of August 1979. If the proposed rule
had been in place at the time of the
Hunt brothers price spike, the limits
would have been calculated using data
from two years and would likely have
used data from an earlier period which
could have caused the limit levels to be
different. However, the Commission
believes that the calculated limits are a
fair approximation of the limits that
would have applied during this time
period. Moreover, for speculative
position limits not to have constrained
the Hunts at the end of 1975 when their
net position was reported as 15,876
contracts, the average total open interest
for the time period would have had to
be over 500,000 contracts (of 5,000 troy
ounces). Moreover, the average total
open interest would have had to be over
900,000 contracts (of 5,000 troy ounces)
before the all-months-combined limit
would have exceeded the maximum net
position reported by the Interagency
Silver Study (24,722 for September 30,
1979). According to the Interagency
Silver Study, it was at this point that the
Hunts began acquiring large quantities
of physical silver.98

TABLE 1—MONTH-END OPEN INTEREST FOR CHICAGO BOARD OF TRADE (CBOT) AND THE COMMODITY EXCHANGE
(COMEX), AUGUST 1979 THROUGH APRIL 1980, ALL SILVER FUTURES COMBINED 99
CBOT open
interest

Date

emcdonald on DSK67QTVN1PROD with PROPOSALS2

8/31/1979 .....................................................................................................................................
9/30/1979 .....................................................................................................................................
10/31/1979 ...................................................................................................................................
11/30/1979 ...................................................................................................................................
12/31/1979 ...................................................................................................................................
1/31/1980 .....................................................................................................................................
2/29/1980 .....................................................................................................................................
3/31/1980 .....................................................................................................................................
4/30/1980 .....................................................................................................................................

Markets: Is More Regulation Needed?,’’ I J. Futures
Markets 169, 181–82 (1981).
93 See also Speculative Position Limits, 45 FR
79831, 79833, Dec. 2, 1980 (‘‘Had limits on the
amount of total open commitments which any
trader or group can own been in effect, such
occurrences may have been prevented.’’).
94 The formula for the non-spot-month position
limits is based on total open interest for all

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Referenced Contracts in a commodity. The actual
position limit level will be set based on a formula:
10 percent of the open interest for the first 25,000
contracts and 2.5 percent of the open interest
thereafter. The 10, 2.5 percent formula is identified
in 17 CFR 150.5(c)(2).
95 Interagency Silver Study at 117.
96 During the time of the events discussed, silver
bullion futures contracts traded in the United States
on the COMEX in New York, the CBOT in Chicago,

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185,031
161,154
105,709
98,009
93,748
49,675
28,211
24,336
19,008

COMEX open
interest
157,952
167,723
145,611
134,207
127,225
77,778
63,672
48,688
27,166

Total open
interest
342,983
328,877
251,320
232,216
220,973
127,453
91,884
73,024
46,174

and the MidAmerica Commodity Exchange
(‘‘MCE’’) in Chicago. At this time, the COMEX and
CBOT contracts were each 5,000 troy ounces of
silver, and MCE’s contract was 1,000 troy ounces.
Month-end open interest numbers were not
available for MCE.
97 See discussion below.
98 Interagency Silver Study at 104.
99 Id. at 117.

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75691

TABLE 2—ESTIMATED OWNERSHIP OF SILVER BY HUNT RELATED ACCOUNTS
[Contracts of 5,000 troy ounces] 100
Net futures
COMEX

Date
9/30/1975 .....................................................................................................................................
12/31/1975 ...................................................................................................................................
3/31/1976 .....................................................................................................................................
6/30/1976 .....................................................................................................................................
9/30/1976 .....................................................................................................................................
12/31/1976 ...................................................................................................................................
3/31/1977 .....................................................................................................................................
6/30/1977 .....................................................................................................................................
9/30/1977 .....................................................................................................................................
12/31/1977 ...................................................................................................................................
3/31/1978 .....................................................................................................................................
6/30/1978 .....................................................................................................................................
9/30/1978 .....................................................................................................................................
12/31/1978 ...................................................................................................................................
3/31/1979 .....................................................................................................................................
5/31/1979 .....................................................................................................................................
6/30/1979 .....................................................................................................................................
7/31/1979 .....................................................................................................................................
8/31/1979 .....................................................................................................................................
9/30/1979 .....................................................................................................................................
10/31/1979 ...................................................................................................................................
11/30/1979 ...................................................................................................................................
12/31/1979 ...................................................................................................................................
1/31/1980 .....................................................................................................................................
2/29/1980 .....................................................................................................................................
4/2/1980 .......................................................................................................................................

The Commission finds that if the
position limits suggested by this data
were applied as early as 1975, the Hunts
would not have been able to accumulate
or hold their excessively large futures
positions and thereby the limits would
have restricted their ability to cause the
price fluctuations and other harms
described above.
Position limits would help to
diminish or prevent unreasonable
fluctuations or unwarranted changes in
the price of a commodity, such as the
extreme price volatility in the 2006
natural gas markets.101
100 Id.

at 103.
purposes of discussion, the following
section recounts certain findings about the 2006
natural gas markets by the staff of the Permanent
Subcommittee on Investigations of the United
States Senate (the ‘‘Permanent Subcommittee’’). See
generally Excessive Speculation in the Natural Gas
Market, Staff Report with Additional Minority Staff
Views, Permanent Subcommittee on Investigations,
United States Senate, Released in Conjunction with
the Permanent Subcommittee on Investigations,
June 25 & July 9, 2007 Hearings (‘‘Subcommittee
Report’’). Separately, the Commission, on July 25,
2007, charged Amaranth Advisors LLC, Amaranth
Advisors (Calgary) ULC and its former head energy
trader, Brian Hunter, with attempted manipulation
in violation of the Commodity Exchange Act. The
charges against the Amaranth entities were later
settled, with a fine of $7.5 million levied against
them in August of 2009. See U.S. Commodity
Futures Trading Commission Charges Hedge Fund
Amaranth and its Former Head Energy Trader,
Brian Hunter, with Attempted Manipulation of the
Price of Natural Gas Futures, July 25, 2007,
available at http://www.cftc.gov/PressRoom/

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Amaranth Advisors L.L.C.
(‘‘Amaranth’’) was a hedge fund that,
until its spectacular collapse in
September 2006, held ‘‘by far the largest
positions of any single trader in the
2006 U.S. natural gas financial
markets.’’ 102 Amaranth’s activities are a
classic example of the market power
that often typifies excessive speculation.
‘‘Market power’’ in this context means
the ability to move prices by exerting
outsize influence on expectations of
supply and/or demand for a commodity.
Amaranth accumulated such large
speculative natural gas futures positions
that it affected expectations of demand
for physical natural gas and prices rose
to levels not warranted by the otherwise
natural forces of supply and demand for
the commodity.103
‘‘Prior to its collapse, Amaranth
dominated trading in the U.S. natural
gas market. . . . All but a few of the
largest energy companies and hedge
PressReleases/pr5359-07; Amaranth Entities
Ordered to Pay a $7.5 Million Civil Fine in CFTC
Action Alleging Attempted Manipulation of Natural
Gas Futures Prices, August 12, 2009, available at
http://www.cftc.gov/PressRoom/PressReleases/
pr5692-09. The Commission enforcement action is
still pending against Brian Hunter. The discussion
herein of the natural gas events and Subcommittee
Report shall not be construed to alter any
statements by or positions of the Commission and
its staff in the pending enforcement matter.
102 Subcommittee Report at 67.
103 Amaranth was a pure speculator that, for
example, could neither make nor take delivery of
physical natural gas.

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Net futures
CBOT

6,917
6,865
6,092
4,061
3,890
3,910
3,288
4,540
5,277
5,826
6,459
4,200
2,481
4,076
6,655
8,712
9,442
10,407
14,941
15,392
11,395
12,379
13,806
7,432
6,993
1,056

4,560
9,011
5,324
(920)
578
571
259
816
1,518
2,016
2,224
2,451
3,047
1,317
1,699
4,765
3,846
4,336
8,700
9,330
7,444
5,693
5,921
1,344
789
388

Futures total
(from table)
11,077
15,876
11,416
3,141
4,468
4,481
3,547
5,356
6,795
7,344
8,683
6,651
5,528
5,393
8,354
13,477
13,288
14,743
23,641
24,722
18,839
18,072
19,727
8,776
7,782
1,444

funds consider trades of a few hundred
contracts to be large trades. Amaranth
held as many as 100,000 natural gas
futures contracts at once, representing
one trillion cubic feet of natural gas, or
5% of the natural gas used in the United
States in a year. At times, Amaranth
controlled up to 40% of all of the open
interest on NYMEX for the winter
months (October 2006 through March
2007). Amaranth accumulated such
large positions and traded such large
volumes of natural gas futures that it
distorted market prices, widened price
spreads, and increased price
volatility.’’ 104
Natural gas is one of the main sources
of energy for the United States. The
price of natural gas has a pervasive
effect throughout the U.S. economy. In
general, ‘‘[b]ecause one of the major
uses of natural gas is for home heating,
natural gas demand peaks in the winter
month and ebbs during the summer
months.’’ 105 During the summer
months, when demand for physical
natural gas falls, the spot price of
natural gas tends to fall, with the excess
physical supply being placed into
underground storage reservoirs for
future use. During the winter, when
demand for natural gas exceeds
production and the spot price tends to
increase, natural gas is removed from
104 Subcommittee
105 Subcommittee

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underground storage and is
consumed.106
Amaranth believed that winter natural
gas prices would be much higher than
summer natural gas prices,
notwithstanding an abundant supply of
natural gas in 2006. Seeking to profit
from this view, Amaranth engaged in
spread trading: it bought contracts for
future delivery of natural gas in months
where it thought prices would be
relatively higher and sold contracts for
future delivery of natural gas in months
were it thought prices would be
relatively lower.107 Amaranth primarily
traded the January/November spread
and the March/April spread, although it
took positions in other near months.
When Amaranth bet that the spread
between the two contracts would
increase, it would make money by
selling out of the position or the
equivalent underlying legs at a higher
price than it paid. Amaranth’s positions
were extremely large.108 The Permanent
Subcommittee found that ‘‘Amaranth’s
large positions and trades caused
significant price movements in key
natural gas futures prices and price
relationships.’’ 109 The Permanent
Subcommittee also found that
‘‘Amaranth’s trades were not the sole
cause of the increasing price spreads
106 See

id.

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107 Amaranth

sought to benefit from changes in
the price relationship between two linked contracts.
For instance, if a trader is long the front month at
10 and short the back month at 8, the spread is 2.
If the price of the front month contract rises to 11,
the spread is 3 and the position has a gain. If the
price of the back month contract declines to 7, the
spread is 3 and the position has a gain. If the price
of the front month contract rises to 11 and the price
of the back month contract declines to 7, the spread
is 4 and the position has a gain. But if the front
month contract falls to 8 and the back month
contract falls to 6, the spread does not change.
108 ‘‘Amaranth also held large positions in other
winter and summer months spanning the five-year
period from 2006–2010. In aggregate, Amaranth
amassed an extraordinarily large share of the total
open interest on NYMEX. During the spring and
summer of 2006, Amaranth controlled between 25
and 48% of the outstanding contracts (open
interest) in all NYMEX natural gas futures contracts
for 2006; about 30% of the outstanding contracts
(open interest) in all NYMEX natural gas futures
contracts for 2007; between 25 and 40% of the
outstanding contracts (open interest) in all NYMEX
natural gas futures contracts for 2008; between 20
and 40% of the outstanding contracts (open
interest) in all NYMEX natural gas futures contracts
for 2009; and about 60% of the outstanding
contracts (open interest) in all NYMEX natural gas
futures contracts for 2010.’’ Subcommittee Report at
52.
109 Subcommittee Report at 2.

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between the summer and winter
contracts; rather they were the
predominant cause.’’ 110
Events in the 2006 natural gas markets
demonstrate the burdens on interstate
commerce of extreme price volatility.
In section 4a(a)(1) of the CEA
Congress causally links excessive
speculative positions with ‘‘sudden or
unreasonable fluctuations or
unwarranted changes in the price of’’
such commodities. The precipitous
decline in natural gas prices from lateAugust 2006 until Amaranth’s collapse
in September 2006 demonstrates that
link. The Permanent Subcommittee
found that ‘‘[p]urchasers of natural gas
during the summer of 2006 for delivery
in the following winter months paid
inflated prices due to Amaranth’s
speculative trading’’ and that ‘‘[m]any of
these inflated costs were passed on to
consumers, including residential users
who paid higher home heating bills.’’ 111
Such inflated costs are clearly a burden
on interstate commerce. In the words of
the Permanent Subcommittee, ‘‘[t]he
Amaranth experience demonstrates how
excessive speculation can distort prices
of futures contracts that are many
months from expiration, with serious
consequences for other market
participants.’’ 112 The Permanent
Subcommittee findings support the
imposition of speculative position limits
outside the spot month. Commercial
participants in the 2006 natural gas
markets were reluctant or unable to
hedge.113 Speculators withdrew
liquidity from a market viewed as
artificially expensive.114 To relieve the
burdens on interstate commerce posed
by positions as large as Amaranth’s,
Congress directed the Commission to set
position limits to, among other things,
ensure sufficient market liquidity for
bona fide hedgers.115
‘‘Amaranth held as many as 100,000
natural gas contracts in a single month,
representing 1 trillion cubic feet of
natural gas, or 5% of the natural gas in
the entire United States in a year. At
times Amaranth controlled 40% of all of
the outstanding contracts on NYMEX for
natural gas in the winter season
110 Id.

at 68 (emphasis in original).
at 6.
112 Id. at 4.
113 See id. at 114.
114 See id. at 71–77.
115 7 U.S.C. 6a(a)(3)(B)(iv).
111 Id.

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(October 2006 through March 2007),
including as much as 75% of the
outstanding contracts to deliver natural
gas in November 2008.’’ 116 Position
limits that would prevent the
accumulation of such overly large
speculative positions in deferred
commodity contracts would help to
prevent unreasonable fluctuations or
unwarranted changes in the price of a
commodity that may occur when a
speculator must substantially reduce its
position within a short period of time to
the extent the price of such commodity
during the unwind period does not
reflect fundamental values.117
Moreover, position limits would help to
prevent disruptions to market integrity
caused by the corrosive perception that
a market is unfair or prices in a market
do not reflect the fundamental forces of
supply and demand as occurred during
2006 in the natural gas markets.
Commodity markets where artificial
volatility discourages participation are
less likely to produce ‘‘a market
consensus on correct pricing.’’ 118
Based on certain assumptions
described below, the Commission
believes that if Federal speculative
position limits had been in effect that
correspond to the limits that the
Commission proposes now, across
markets now subject to Commission
jurisdiction, such limits would have
prevented Amaranth from accumulating
such large futures positions and thereby
restrict its ability to cause unwarranted
price effects. Using non-public data
reported to the Commission under Part
16 of the Commission’s regulations for
open interest 119 for natural gas
contracts, the Commission calculated
the single-month and all-monthscombined limits using the same
methodology as proposed in this release
for the period January 1, 2004 to
December 31, 2005. The results of this
analysis are presented in Table 3 below,
which shows that the resulting singlemonth and all-months combined limits
would have each been 40,900 contracts.
116 Subcommittee

Report at 2.
is because, among other things, the
speculator’s influence on expectations of demand is
reduced as the speculator is no longer willing and
able to hold such a large net position in futures
contracts.
118 Subcommittee Report at 119.
119 See 17 CFR 16.01.
117 This

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75693

TABLE 3—OPEN INTEREST AND CALCULATED LIMITS FOR NYMEX NATURAL GAS JANUARY 1, 2004, TO DECEMBER 31,
2005
Core referenced futures contract
NYMEX Natural Gas ................................

2004
2005

Using non-public data reported to the
Commission under Part 17 of the
Commission’s regulation for large trader
positions,120 the Commission also
calculated Amaranth’s positions 121 as
they would be calculated under the
proposed rule for the period January 1,
2005 to September 30, 2006. During this
time, Amaranth’s net position would
have exceeded the limits for the single
month and for all-months-combined on
multiple days, starting as early as June
2006. It is important to note that ICE did
not report market open interest for its
swap contracts or for large traders to the
Commission during this time period, so
the Commission cannot exactly replicate
the calculations in the proposed rule.
However, even if ICE had the same
amount of open interest in futuresequivalent terms as all of the NYMEX
natural gas contracts listed in 2005,122
the calculated limit would be 79,900
contracts. According to the
Subcommittee Report, Amaranth would
have exceeded this limit at the end of
July 2006 with its holding of 80,000
long contracts in the January 2007
delivery month.123 Moreover, the
Subcommittee Report also shows that
Amaranth tended to trade in the same
direction for the same delivery month
on ICE and NYMEX. Hence, the
Commission believes that had the
proposed rule been in effect in 2006,
Amaranth would not have been able to
build such large positions in natural gas
futures and swaps and thereby limits
would have restricted Amaranth’s
ability to cause harmful price effects
that limits are intended to prevent.124
Position limits would prevent the
accumulation of extraordinarily large
120 See

17 CFR 17.00.
the Commission’s calculations are
based on non-public information, the results of this
analysis may be different from calculations based
on publicly available information, including
information contained in the Subcommittee Report.
122 Since the main natural gas swap contracts on
ICE are one quarter of the size of the NYMEX Henry
Hub Natural Gas Futures contract, this would mean
that the open interest for natural gas contracts on
ICE would have to be four times the open interest
for natural gas contracts on NYMEX.
123 See Subcommittee Report at 79.
124 According to the Subcommittee Report,
Amaranth reduced its positions on NYMEX as
directed by NYMEX in August 2006, and at the
same time, increased its corresponding positions on
ICE. See Subcommittee Report at 97–98.

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121 Because

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Open interest
(daily average)

Year

Open interest
(month end)

851,763
1,559,335

Limit
(daily average)

839,330
1,529,252

positions that could potentially cause
unreasonable price fluctuations even in
the absence of manipulative conduct.
As the above examples illustrate,
position limits are vital tools to prevent
the accumulation of speculative
positions that can enable market
manipulation. But these examples also
show that limits are necessary to
achieve a broader statutory purpose —
to prevent price distortions that can
potentially occur due to excessively
large speculative positions even in the
absence of manipulative conduct.
The text of section 4a(a)(1) of the Act
itself establishes its broader purpose: It
authorizes limits as the Commission
finds are necessary to prevent price
distortions that can potentially occur
due to excessive speculation (i.e.
excessively large speculative positions),
without regard to whether it is
manipulative.125 The Commission has
long interpreted the provision as
authorizing limits to achieve this
broader purpose and it has long found
that limits are necessary to do so.
For example, in the 1981 Rule
requiring exchanges to set limits for all
commodities, noted above, the
Commission found that ‘‘historical and
current reason for imposing position
limits on individual contracts is to
prevent unreasonable fluctuations or
unwarranted changes in the price of a
commodity which may occur by
allowing any one trader or group of
traders acting in concert to hold
extraordinarily large futures
positions.’’ 126 In a 2010 rulemaking, the
Commission stated that ‘‘[f]rom 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. To
protect markets from the adverse
consequences associated with large
speculative positions, Congress
expressly authorized the [Commission]
to impose speculative position limits
prophylactically.’’ 127
The Commission reiterated this view
before Congress in 1982 in opposing
industry amendments to the CEA that
125 See

7 U.S.C. 6a(a)(1).
126 46 FR 50938, 50939, Oct. 16, 1981.
127 75 FR 4144, 4145–46, Jan. 26, 2010.

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23,200
40,900

Limit
(month end)
22,900
40,200

Limit
40,900
........................

would have required that limits are
necessary to prevent manipulation,
corners or squeezes. Former
Commission Chair Philip McBride
Johnson told Congress that position
limits were ‘‘predicated on several
different sections of the Commodity
Exchange Act which pertain to orderly
markets and the terms ‘manipulation,
corners or squeezes’ refer to only one
class of market disruption which the
limits established under this rule are
intended to diminish or prevent. For
instance, CEA section 4a contains the
Congressional finding that excessive
speculation in the futures markets can
cause sudden or unreasonable
fluctuations or unwarranted changes in
the price of commodities. Accordingly,
a requirement that the Commission
make the suggested finding concerning
‘manipulation, corners, or squeezes’
prior to requiring a contract market to
establish speculative limits could
significantly restrict the application of
the current rule and undermine its more
comprehensive regulatory purpose of
preventing excessive speculation which
arises from extraordinarily large
positions.’’ 128
Congress effectively ratified the
Commission’s interpretation in 1982. As
it explained: ‘‘the Senate Committee
decided to retain [CEA section] 4a
language concerning the burden which
excess speculation places on interstate
commerce. This was due to the
Committee’s belief that speculative
limits, in addition to their role in
preventing manipulations, corners, or
squeezes, are also important regulatory
tools for preventing unreasonable
fluctuations or unwarranted changes in
commodity prices that may arise even in
the absence of manipulation.’’ 129
The Commission has long found and
again finds, based on its experience, that
unchecked speculative positions can
potentially disrupt markets. In general,
the larger a position held by a trader, the
greater is the potential that the position
may affect the price of the contract. The
Commission reaffirms that, ‘‘the
capacity of any contract to absorb the
128 Futures Trading Act of 1982: Hearings on S.
2109 before the S. Subcomm. on Agricultural
Research, 97th Cong. 44 (1982).
129 S. Rep. 97–384 at 45 (1982).

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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.’’ 130 When
positions exceed the capacity of markets
to absorb and liquidate them,
unreasonable price fluctuations and
volatility can potentially occur. ‘‘[B]y
limiting the ability of one person or
group to obtain extraordinarily large
positions, speculative limits diminish
the possibility of accentuating price
swings if large positions must be
liquidated abruptly in the face of
adverse price movements or for other
reasons.’’ 131 As former Commission
Chair McBride Johnson explained to
Congress regarding the silver crisis: ‘‘It
seems clear from the silver crisis that
the orderly imposition of speculative
limits before a crisis develops is one of
the more promising means of solving
such difficulties in the future . . . .’’ 132
This statement is equally true of the
natural gas events of 2006. Had the Hunt
brothers and Amaranth been prevented
from amassing extraordinarily large
speculative positions in the first place,
their ability to cause unwarranted price
fluctuations and volatility and other
harmful market effects attributable to
such positions would have been
restricted.
The Commission requests comment
on all aspects of this section.
Studies and Reports
In addition to those cited previously,
the Commission has reviewed and
evaluated additional studies and reports
(collectively, ‘‘studies’’) about various
issues relating to position limits. A list
of studies that the Commission has
reviewed is in appendix A to this
preamble.
Some studies discuss whether or not
excessive speculation exists, the
definition of excessive speculation, and/
or whether excessive speculation has a
negative impact on derivatives
markets.133 Those studies that do
generally discuss the impact of position
limits do not address or provide
analysis of how the Commission should
specifically implement position limits
under section 4a of the CEA.134 Some
studies may be read to support the
imposition of Federal speculative
position limits; others suggest that
speculative position limits will be
130 46 FR 50938, Oct. 16, 1981 (adopting then
§ 1.61 (now part of § 150.5)).
131 45 FR at 79833.
132 Futures Trading Act of 1982: Hearings on S.
2109 before the S. Subcomm. on Agricultural
Research, 97th Cong. 44 (1982).
133 76 FR at 71663.
134 Id. at 71664.

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ineffective; still others assert that
imposing speculative position limits
will be harmful. There is a demonstrable
lack of consensus in the studies.
Many of the studies were focused on
the impact of speculative activity in
futures markets, e.g., how the behavior
of non-commercial traders affected price
levels. Such studies did not provide a
view on position limits in general or on
the Commission’s implementation of
position limits in particular. Some
studies have found little or no evidence
of excessive speculation unduly moving
prices,135 while others conclude there is
significant evidence of the impact of
speculation in commodity markets.136
Even studies that questioned whether
speculation affects prices were often
equivocal.137 Still other studies have
135 See, e.g., Harris, Jeffrey and Buyuksahin,
Bahattin, ‘‘The Role of Speculators in the Crude Oil
Futures Market,’’ June 16, 2009, at 2, 19 (‘‘We find
that the changing net positions of no specific trader
groups lead to price changes . . . .’’ and ‘‘we fail
to find the causality from these [speculative]
traders’ positions to prices.’’); Byun, Sungje,
‘‘Speculation in Commodity Futures Market,
Inventories and the Price of Crude Oil,’’ January 17,
2013, at 3, 33 (noting that ‘‘ . . . evidence among
researchers is inconsistent’’ but that ‘‘we conclude
there does not exist sufficient evidence on the
potential contribution of financial investors in the
crude oil market.’’); Irwin, Scott H.; Sanders,
Dwight R.; and Merrin, Robert P., ‘‘Devil or Angel:
The Role of Speculation in the Recent Commodity
Price Boom,’’ August 1, 2009, at 17 (‘‘There is little
evidence that the recent boom and bust in
commodity prices was driven by a speculative
bubble . . . Economic fundamentals, as usual,
provide a better explanation for the movements in
commodity prices.’’).
136 See, e.g., Singleton, Kenneth J., ‘‘Investor
Flows and the 2008 Boom/Bust in Oil Prices,’’
March 23, 2011, at 2–3 (Singleton presents
‘‘ . . . new evidence that . . . there were
economically and statistically significant effects of
investor flows on futures prices.’’); Tang, Ke and
Xiong, Wei, ‘‘Index Investment and Financialization
of Commodities,’’ November 1, 2012, at 72 (‘‘As a
result of the financialization process, the price of
an individual commodity is no longer determined
solely by its supply and demand. Instead, prices are
also determined by the aggregate risk appetite for
financial assets and the investment behavior of
diversified commodity index investors.’’); Manera,
Matteo, Nicolini, Marcella, and Vignati, Ilaria,
‘‘Futures Price Volatility in Commodities Markets:
The Role of Short-Term vs Long-Term
Speculation,’’ April 1, 2013, at 15 (‘‘We find that
speculation significantly affects the volatility of
returns, although in contrasting ways. The scalping
index has a positive and significant coefficient in
the variance equation, suggesting that short term
speculation has a positive impact on volatility.’’).
137 Compare Technical Committee of the
International Organization of Securities
Commissions, Task for on Commodity Futures
Markets Final Report, March 1, 2009, at 3
(‘‘economic fundamentals, rather than speculative
activity, are a plausible explanation for recent price
changes in commodities’’) with id. at 8 (‘‘short term
expectations can be influenced by sentiment and
investor behavior, which can amplify short-term
price fluctuations, as in other asset markets’’).
Another study opining that speculative activity in
general may reduce volatility nevertheless
conceded that the authors could not rule out the
possibility that a single trader might implement

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determined that while speculation may
not cause a price movement, such
activity may increase price pressures,
thereby exacerbating the price
movement.138
Several studies did generally address
the concept of position limits as part of
their discussion of speculative activity.
The authors of some of these works
expressed views that speculative
position limits were an important
regulatory tool and that the CFTC
should implement limits to control
excessive speculation.139 For example,
strategies that move prices and increase volatility.
Brunetti, Celso and Buyuksahin, Bahattin, ‘‘Is
Speculation Destabilizing?,’’ April 22, 2009, at 4,
22–23; see also Irwin, et al., ‘‘The Performance of
CBOT Corn, Soybean, and Wheat Futures Contracts
after Recent Changes in Speculative Limits,’’ July
29, 2007, at 1, 6 (concluding that there was ‘‘no
large change in’’ price volatility after speculative
limits were increased, but cautioning that ‘‘[w]ith
limited observations available for the period
following the change in speculative limits . . . ,
conclusions about the impact on volatility are
tentative. Additional observations will be required
across varying scenarios of supply, demand, and
price level, to have full confidence in the
conclusions.’’) (emphasis added); Parsons, John E.,
‘‘Black Gold & Fool’s Gold: Speculation in the Oil
Futures Market,’’ September 1, 2009, at 108
(position limits will not prevent asset bubbles from
forming, but they are ‘‘necessary to insure the
integrity of the market’’).
138 See, e.g., Hamilton, James D., ‘‘Causes and
Consequences of the Oil Shock of 2007–08,’’ April
1, 2009, at 258 (Hamilton raises ‘‘the possibility that
miscalculation of the long-run price elasticity of oil
demand . . . was one factor in the oil shock of
2007–2008, and that speculative investing in oil
futures may have contributed to that
miscalculation.’’); Juvenal, Luciana and Petrella,
Ivan, ‘‘Speculation in the Oil Market,’’ June 1, 2012,
(‘‘While global demand shocks account for the
largest share of oil price fluctuations, speculative
shocks are the second most important driver.’’).
139 See, e.g., Greenberger, Michael, ‘‘The
Relationship of Unregulated Excessive Speculation
to Oil Market Price Volatility,’’ January 1, 2010, at
11 (On position limits: ‘‘The damage price volatility
causes the economy by needlessly inflating energy
and food prices worldwide far outweighs the
concerns about the precise application of what for
over 70 years has been the historic regulatory
technique for controlling excessive speculation in
risk-shifting derivative markets.’’.); Khan, Mohsin
S., ‘‘The 2008 Oil Price ‘‘Bubble’’,’’ August 2009, at
8 (‘‘The policies being considered by the CFTC to
put aggregate position limits on futures contracts
and to increase the transparency of futures markets
are moves in the right direction.’’); U.S. Senate
Permanent Subcommittee on Investigations,
‘‘Excessive Speculation in the Wheat Market,’’ June
2009, at 12 (‘‘The activities of these index traders
constitute the type of excessive speculation the
CFTC should diminish or prevent through the
imposition and enforcement of position limits as
intended by the Commodity Exchange Act.’’); U.S.
Senate Permanent Subcommittee on Investigations,
‘‘Excessive Speculation in the Natural Gas Market,’’
June 25, 2007, at 8 (The Subcommittee
recommended that Congress give the CFTC
authority over ECMs, noting that ‘‘[to] ensure fair
energy pricing, it is time to put the cop back on the
beat in all U.S. energy commodity markets.’’);
United Nations Conference on Trade and
Development, ‘‘The Global Economic Crisis:
Systemic Failures and Multilateral Remedies,’’
March 1, 2009, at 14, (The UNCTAD recommends
that ‘‘ . . . regulators should be enabled to

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one author opined that ‘‘ . . . strict
position limits should be placed on
individual holdings, such that they are
not manipulative.’’ 140 Another stated,
‘‘[s]peculative position limits worked
well for over 50 years and carry no
unintended consequences. If Congress
takes these actions, then the speculative
money that flowed into these markets
will be forced to flow out, and with that
the price of commodities futures will
come down substantially. Until
speculative position limits are restored,
investor money will continue to flow
unimpeded into the commodities
futures markets and the upward
pressure on prices will remain.’’ 141 The
authors of one study claimed that
‘‘[r]ules for speculative position limits
were historically much stricter than
they are today. Moreover, despite
rhetoric that imposing stricter limits
would harm market liquidity, there is
no evidence to support such claims,
especially in light of the fact that the
market was functioning very well prior
to 2000, when speculative limits were
tighter.’’ 142
Not all of the reviewed studies viewed
position limits in a positive light. One
study claimed that position limits will
not restrain manipulation,143 while
another argued that position limits in
the agricultural commodities have not
significantly affected volatility.144
intervene when swap dealer positions exceed
speculative position limits and may represent
‘excessive speculation’.); United Nations
Conference on Trade and Development, ‘‘The
Financialization of Commodity Markets,’’ July 1,
2009, at 26 (The report recommends tighter
restrictions, notably closing loopholes that allow
potentially harmful speculative activity to surpass
position limits.).
140 de Schutter, Olivier, ‘‘Food Commodities
Speculation and Food Price Crises,’’ September 1,
2010, United Nations Special Report on the Right
to Food, at 8.
141 Masters, Michael and White, Adam, ‘‘The
Accidental Hunt Brothers: How Institutional
Investors are Driving up Food and Energy Prices,’’
July 31, 2008, at 3.
142 Medlock, Kenneth and Myers Jaffe, Amy,
‘‘Who is In the Oil Futures Market and How Has
It Changed?,’’ August 26, 2009, Baker Institute for
Public Policy, at 8.
143 Ebrahim, Muhammed and Rhys ap Gwilym,
‘‘Can Position Limits Restrain Rogue Traders?,’’
March 1, 2013, Journal of Banking & Finance, at 27
(‘‘. . . binding constraints have an unintentional
effect. That is, they lead to a degradation of the
equilibria and augmenting market power of
Speculator in addition to other agents. We therefore
conclude that position limits are not helpful in
curbing market manipulation. Instead of curtailing
price swings, they could exacerbate them.’’).
144 Irwin, Scott H.; Garcia, Philip; and Good,
Darrel L., ‘‘The Performance of CBOT Corn,
Soybean, and Wheat Futures Contracts after Recent
Changes in Speculative Limits,’’ July 29, 2007, at 16
(‘‘The analysis of price volatility revealed no large
change in measures of volatility after the change in
speculative limits. A relatively small number of
observations are available since the change was
made, but there is little to suggest that the change

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Another study noted that while position
limits are effective as an antimanipulation measure, they will not
prevent asset bubbles from forming or
stop them from bursting.145 A study
cautioned that while limits may be
effective in preventing manipulation,
they should be set at an optimal level so
as to not harm the affected markets.146
Another study claimed that position
limits should be administered by DCMs,
as those entities are closest to and most
familiar with the intricacies of markets
and thus can implement the most
efficient position limits policy.147
Another study suggested eliminating
position limits, arguing that increasing
ex-post penalties for manipulation
would be more effective at deterring
manipulative behavior.148 One study
noted the similar efforts under
discussion in European markets.149
in speculative limits has had a meaningful overall
impact on price volatility to date.’’).
145 Parsons, John E., ‘‘Black Gold & Fool’s Gold:
Speculation in the Oil Futures Market,’’ September
1, 2009, at 30 (‘‘Restoring position limits on all
nonhedgers, including swap dealers, is a useful
reform that gives regulators the powers necessary to
ensure the integrity of the market. Although this
reform is useful, it will not prevent another
speculative bubble in oil. The general purpose of
speculative limits is to constrain manipulation . . .
Position limits, while useful, will not be useful
against an asset bubble. That is really more of a
macroeconomic problem, and it is not readily
managed with microeconomic levers at the
individual exchange level.’’).
146 Wray, Randall, ‘‘The Commodities Market
Bubble: Money Manager Capitalism and the
Financialization of Commodities,’’ October 1, 2008,
at 41, 43 (‘‘While the participation of traditional
speculators offers clear benefits, position limits
must be carefully administered to ensure that their
activities do not ‘‘demoralize’’ markets. . . . The
CFTC must re-establish and enforce position
limits.’’).
147 CME Group, Inc., ‘‘Excessive Speculation and
Position Limits in Energy Derivatives Markets,’’
CME Group White Paper, at 6 (‘‘Indeed, as the
Commission has previously noted, the exchanges
have the expertise and are in the best position to
fix position limits for their contracts. In fact, this
determination led the Commission to delegate to
the exchanges authority to set position limits in
non-enumerated commodities, in the first instances,
almost 30 years ago.’’) (available at http://
www.cmegroup.com/company/files/
PositionLimitsWhitePaper.pdf).
148 Pirrong, Craig, ‘‘Squeezes, Corpses, and the
Anti-Manipulation Provisions of the Commodity
Exchange Act,’’ October 1, 1994, at 2 (‘‘The
efficiency of futures markets would be improved,
and perhaps substantially so, by eliminating
position limits . . . and relying upon revitalized,
harm-based sanctions to deter market
manipulation.’’).
149 European Commission, ‘‘Review of the
Markets in Financial Instruments Directive,’’
December 1, 2010, at 82 note 282 (‘‘European
Parliament . . . calls on the Commission to develop
measures to ensure that regulators are able to set
position limits to counter disproportionate price
movements and speculative bubbles, as well as to
investigate the use of position limits as a dynamic
tool to combat market manipulation, most
particularly at the point when a contract is
approaching expiry. It also requests the

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Studies that militate against imposing
any speculative position limits appear
to conflict with the Congressional
mandate (discussed above) that the
Commission impose limits on futures
contracts, options, and certain swaps for
agricultural and exempt commodities.
Such studies also appear to conflict
with Congress’ determination, codified
in CEA section 4a(a)(1), that position
limits are an effective tool to address
excessive speculation as a cause of
sudden or unreasonable fluctuations or
unwarranted changes in the price of
such commodities.150
In any case, these studies overall
show a lack of consensus regarding the
impact of speculation on commodity
markets and the effectiveness of
position limits. While there is not a
consensus, the fact that there are studies
on both sides, in the Commission’s
view, warrants erring on the side of
caution. In light of the Commission’s
experience with position limits, and its
interpretation of congressional intent, it
is the Commission’s judgment that
position limits should be implemented
as a prophylactic measure, to protect
against the potential for undue price
fluctuations and other burdens on
commerce that in some cases have been
at least in part attributable to excessive
speculation.
In this regard, the Commission has
found two studies of actual market
events to be helpful and persuasive in
making its alternative necessity
finding.151 The first is the inter-agency
report on the silver crisis.152 This
report, by a joint task force of the staffs
of the Commission, the Board of
Governors of the Federal Reserve
System, the Department of the Treasury
and the Securities and Exchange
Commission, provides an in-depth
description and analysis of the silver
crisis, the Hunt brothers’ build-up of
massive positions, the manipulative
Commission to consider rules relating to the
banning of purely speculative trading in
commodities and agricultural products, and the
imposition of strict position limits especially with
regard to their possible impact on the price of
essential food commodities in developing countries
and greenhouse gas emission allowances.’’).
150 7 U.S.C. 6a(a)(1)–(2).
151 Another study of actual market events
analyzed position limits in the context of the ‘‘Flash
Crash’’ of May 6, 2010. While this study concluded
that position limits would not have prevented the
crash, and that price limits were more effective, it
measured the impacts of potential limits on certain
financial contracts not implicated in the instant
rulemaking. Lee, Bernard; Cheng, Shih-Fen; and
Koh, Annie, ‘‘Would Position Limits Have Made
any Difference to the ’Flash Crash’ on May 6, 2010,’’
November 1, 2010, at 37.
152 U.S Commodity Futures Trading Commission,
‘‘Part Two, A Study of the Silver Market,’’ May 29,
1981, Report to The Congress in Response to
Section 21 of The Commodity Exchange Act.

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conduct that those massive positions
enabled, the resulting extreme price
volatility, and consequent harms to the
economy. The second is the PSI Report
on Excessive Speculation in the Natural
Gas market.153 As a Congressional
report issued following hearings, it is
more helpful and persuasive than
academic and other studies in
indicating how Congress views limits as
necessary to prevent the adverse effects
of excessively large speculative
positions. The PSI Report is also more
helpful because it thoroughly studied
actual market events involving a vital
energy commodity, natural gas,
examined how Amaranth’s buildup of
massive speculative positions by itself
created a risk of market harms,
documented how Amaranth sought to
avoid existing limits, and analyzed how
its ability to do so was a cause of the
attendant extreme price volatility
documented in the report.
The Commission requests comment
on its discussion of studies and reports.
It also invites commenters to advise the
Commission of any additional studies
that the Commission should consider,
and why.
B. Proposed Rules
1. Section 150.1—Definitions

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i. Various Definitions Found in § 150.1
The Commission proposes to amend
the definitions of ‘‘futures-equivalent,’’
‘‘independent account controller,’’
‘‘long position,’’ ‘‘short position,’’ and
‘‘spot month’’ found in § 150.1 of its
regulations to conform them to the
concepts and terminology of the CEA, as
amended by the Dodd-Frank Act.154 The
Commission also is proposing to add to
§ 150.1, definitions for ‘‘basis contract,’’
‘‘calendar spread contract,’’
‘‘commodity derivative contract,’’
‘‘commodity index contract,’’ ‘‘core
referenced futures contract,’’ ‘‘eligible
affiliate,’’ ‘‘entity,’’ ‘‘excluded
commodity,’’ ‘‘intercommodity spread
contract,’’ ‘‘intermarket spread
positions,’’ ‘‘intramarket spread
positions,’’ ‘‘physical commodity,’’
‘‘pre-enactment swap,’’ ‘‘pre-existing
position,’’ ‘‘referenced contract,’’
‘‘spread contract,’’ ‘‘speculative position
limit,’’ ‘‘swap,’’ ‘‘swap dealer’’ and
‘‘transition period swap.’’ In addition,
the Commission is proposing to move
153 U.S. Senate Permanent Subcommittee on
Investigations, ‘‘Excessive Speculation in the
Natural Gas Market,’’ June 25, 2007.
154 In a separate proposal approved on the same
date as this proposal, the Commission is proposing
amendments to § 150.4—aggregation of positions
(‘‘Aggregation NPRM’’) (Nov. 5, 2013), including
amendments to the definitions of ‘‘eligible entity’’
and ‘‘independent account controller.’’

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the definition of bona fide hedging from
§ 1.3(z) into part 150, and to amend and
update it. Moreover, the Commission
proposes to delete the definition for
‘‘the first delivery month of the ‘crop
year.’ ’’ The Commission notes that
several terms that are not currently in
part 150 are not included in the current
rulemaking proposal even though
definitions for those terms were adopted
in vacated part 151. The Commission
does not view definition of these terms
as necessary for clarity in light of other
revisions proposed herein. The terms
not currently proposed include
‘‘swaption’’ and ‘‘trader.’’ 155 Separately,
the Commission is making a nonsubstantive change to list the definitions
in alphabetical order rather than by use
of assigned letters. This last change will
be helpful when looking for a particular
definition, both in the near future, in
light of the additional definitions
proposed to be adopted, and in the
expectation that future rulemakings may
adopt additional definitions.
a. Basis Contract
While the term ‘‘basis contract’’ is not
defined in current § 150.1, a definition
was adopted in vacated § 151.1. The
definition adopted in § 151.1 defined
basis contract as ‘‘an agreement,
contract or transaction that is cashsettled based on the difference in price
of the same commodity (or substantially
the same commodity) at different
delivery locations.’’ When it adopted
part 151, the Commission noted that a
swap based on the difference in price of
a commodity (or substantially the same
commodity) at different delivery
locations was a ‘‘basis contract and
therefore not subject to the limits
adopted therein.156
Under the proposal, the definition for
‘‘basis contract’’ adopted in § 150.1
would expand upon the definition of
basis contract adopted in vacated part
151, by defining basis contract to mean
‘‘a commodity derivative contract that is
cash-settled based on the difference in:
(1) The price, directly or indirectly, of:
(a) A particular core referenced futures
contract; or (b) a commodity deliverable
on a particular core referenced futures
155 ‘‘Swaption’’ was defined in vacated part 151
to mean ‘‘an option to enter into a swap or a
physical commodity option.’’ ‘‘Trader’’ was defined
in vacated part 151 to mean ‘‘a person that, for its
own account or for an account that it controls,
makes transactions in Referenced Contracts or has
such transactions made.’’ The Commission notes
that while vacated part 151 and several places in
current part 150 use the term ‘‘trader,’’ the term
‘‘person’’ is currently used in both § 1.3(z) and in
other places in part 150. The amendments in both
the Aggregation NPRM and this NPRM use the term
‘‘person’’ in a manner consistent with its current
use in part 150.
156 76 FR 71626, 71631 (n. 49), Nov. 18, 2011.

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contract, whether at par, a fixed
discount to par, or a premium to par;
and (2) the price, at a different delivery
location or pricing point than that of the
same particular core referenced futures
contract, directly or indirectly, of: (a) A
commodity deliverable on the same
particular core referenced futures
contract, whether at par, a fixed
discount to par, or a premium to par; or
(b) a commodity that is listed in
appendix B to this part as substantially
the same as a commodity underlying the
same core referenced futures contract.’’
The Commission notes that the
proposal excludes intercommodity
spread contracts, calendar spread
contracts, and basis contracts from the
definition of ‘‘commodity index
contract.’’
The Commission is proposing
appendix B to this part, Commodities
Listed as Substantially the Same for
Purposes of the Definition of Basis
Contract. The Commission proposes to
expand the definition of basis contract
to include contracts cash-settled on the
difference in prices of two different, but
economically closely related
commodities. The basis contract
definition in vacated part 151 targeted
the location differential. Now the
Commission is proposing a basis
contract definition that would expand to
include certain quality differentials
(e.g., RBOB vs. 87 unleaded).157 The
intent of the expanded definition is to
reduce the potential for excessive
speculation in referenced contracts
where, for example, a speculator
establishes a large outright directional
position in referenced contracts and
nets down that directional position with
a contract based on the difference in
price of the commodity underlying the
referenced contracts and a close
economic substitute that was not
deliverable on the core referenced
futures contract. In the absence of this
expanded definition, the speculator
could then increase further the large
position in the referenced contracts. By
way of comparison, the Commission
preliminarily believes there is greater
concern that (i) someone may
manipulate the markets by disguise of a
directional exposure through netting
down the directional exposure using
one of the legs of a quality differential
(if that quality differential contract were
not exempted) than (ii) that someone
may use certain quality differential
contracts that were exempted from
position limits to manipulate the
157 The expanded basis contract definition is not
intended to include significant time differentials in
prices of the two commodities (e.g., the expanded
basis contract definition would not include
calendar spreads for nearby vs. deferred contracts).

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outright price of a referenced contract.
Historically, manipulation has occurred
though use of outright positions (as in
the case of the Hunt brothers) or time
spreads (Amaranth, for example, used
calendar month spreads), rather than
quality or locational differentials.
The Commission seeks comment on
alternatives to the specification of
quality standards for substantially the
same commodity, such as a
methodology to identify and define
which differential contracts should be
excluded from position limits. (i)
Should the Commission expand the
definition of basis contract to include
any commodity priced at a differential
to any of its products and by-products?
For example, should a basis contract
include a soybean crush spread contract
or a crude oil crack spread contract,
regardless of the number of
components? (ii) Should the
Commission expand the definition of
basis contract to include a product or
by-product of a particular commodity,
priced at a differential to another
product or by-product of that same
commodity? For example, should the
basis contract definition include a
contract based on jet fuel priced at a
differential to heating oil? Jet fuel and
heating oil are both products of the
same commodity, namely crude oil. (iii)
Should the Commission expand the
definition of basis contract for a
particular commodity to include other
similar commodities? For example,
should the basis contract definition
include a contract based on the
difference in prices of light sweet crude
oil and a sour crude oil that is not
deliverable on the WTI contract?
b. Commodity Derivative Contract
The Commission proposes in
§ 150.1(l) to define the term
‘‘commodity derivative contract’’ for
position limits purposes as shorthand
for any futures, option, or swap contract
in a commodity (other than a security
futures product as defined in CEA
section 1a(45)). Part 150 refers only to
futures and options, while vacated part
151 was drafted without the use of any
similar concise phrase. It was
determined during the process of
updating part 150 that the use of such
a generic term would be a useful way to
streamline and simplify references in
part 150 to the various kinds of
contracts to which the position limits
regime applies. As such, this new
definition can be found frequently
throughout the Commission’s proposed
amendments to part 150.158
158 See, e.g., proposed amendments to § 150.1 (the
definitions of: ‘‘basis contract,’’ the definition of

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c. Commodity Index Contract
The term ‘‘commodity index contract’’
is not currently defined in § 150.1; a
definition for the term was adopted in
vacated part 151.159 Under the
definition adopted in § 151.1,
commodity index contract means ‘‘an
agreement, contract, or transaction that
is not a basis or any type of spread
contract, based on an index comprised
of prices of commodities that are not the
same or substantially the same;
provided that, a commodity index
contract used to circumvent speculative
position limits shall be considered to be
a Referenced Contract for the purpose of
applying the position limits of
§ 151.4.’’ 160
The Commission noted in the vacated
part 151 final rulemaking that the
definition of ‘‘Referenced Contract’’ in
§ 151.1 expressly excluded commodity
index contracts.161 The Commission
also noted that ‘‘if a swap is based on
prices of multiple different commodities
comprising an index, it is a ‘commodity
index contract.’ ’’ 162 As the preamble
pointed out, it would not, therefore, be
subject to position limits.163
The Commission proposes in the
current rulemaking to add into § 150.1
substantially the same definition for
‘‘commodity index contract’’ as was
adopted in vacated § 151.1, with one
change. The proviso included in § 151.1,
which required treatment of a position
in a commodity index contract as a
Referenced Contract if the contract was
used to circumvent speculative position
limits, acted in the § 151.1 definition as
an anti-evasion provision, a substantive
regulatory requirement. Consequently,
to provide greater clarity as to the effect
‘‘bona fide hedging position,’’ ‘‘inter-market spread
position,’’ ‘‘intra-market spread position,’’ ‘‘preexisting position,’’ ‘‘speculative position limits,’’
and ‘‘spot month’’), §§ 150.2(f)(2), 150.3(d),
150.3(h), 150.5(a), 150.5(b), 150.5(e), 150.7(d),
150.7(f), appendix A to part 150, and appendix C
to part 150.
159 76 FR at 71685.
160 See id.
161 Id. at 71656.
162 Id. at 71631 n.49.
163 Id. The Commission clarifies here, that, as was
noted in the vacated part 151 Rulemaking, if a swap
is based on the difference between two prices of
two different commodities, with one linked to a
core referenced futures contract price (and the other
either not linked to the price of a core referenced
futures contract or linked to the price of a different
core referenced futures contract), then the swap is
an ‘‘intercommodity spread contract,’’ is not a
commodity index contract, and is a Referenced
Contract subject to the position limits specified in
§ 150.2. The Commission further clarifies that, again
as was noted in the vacated part 151 Rulemaking,
a contract based on the prices of a referenced
contract and the same or substantially the same
commodity (and not based on the difference
between such prices) is not a commodity index
contract and is a referenced contract subject to
position limits specified in § 150.2. See id.

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of the provision, the definition of
‘‘commodity index contract’’ proposed
in 150.1 mirrors that of the definition in
151.1, but with no anti-evasion proviso.
Instead, an anti-evasion provision,
while similar to that contained in
§ 151.1, is included in proposed
§ 150.2(h).164
As in vacated part 151, and as noted
above, the definition of ‘‘referenced
contract’’ proposed in the current
rulemaking also expressly excludes
commodity index contracts. However,
as the Commission noted in the final
part 151 Rulemaking, part 20 of the
Commission’s regulations requires
reporting entities to report commodity
reference price data sufficient to
distinguish between commodity index
contract and non-commodity index
contract positions in covered
contracts.165 Therefore, for commodity
index contracts, the Commission
intends to rely on the data elements in
§ 20.4(b) to distinguish data records
subject to § 150.2 position limits from
those contracts that are excluded from
§ 150.2. This will enable the
Commission to set position limits using
the narrower data set (i.e., referenced
contracts subject to § 150.2 position
limits) as well as conduct surveillance
using the broader data set.
d. Core Referenced Futures Contract
While current part 150 does not
contain a definition of the term ‘‘core
referenced futures contracts,’’ a
definition for the term was adopted in
vacated § 151.1 as a simple short-hand
phrase to denote certain futures
contracts, regarding which several
position limit rules were then applied.
The definition adopted in § 151.1
provided that a core referenced futures
contract was ‘‘a futures contract defined
in § 151.2’’; section 151.2 provided a list
of 28 physical commodity futures and
option contracts.166
The Commission proposes to include
in § 150.1 the same definition as was
adopted in vacated § 151.1—such that
the definition would cite to futures
contracts listed in § 151.2.167
e. Eligible Affiliate
The term ‘‘eligible affiliate,’’ used in
proposed § 150.2(c)(2), is not defined in
current § 150.1. The Commission
proposes to amend § 150.1 to define an
164 See

discussion below.
FR at 71632.
166 The Commission clarified in adopting § 151.2,
that core referenced futures contracts included
options that expire into outright positions in such
contracts. See 76 FR at 71631.
167 The selection of the core referenced futures
contracts is explained in the discussion of proposed
§ 150.2. See discussion below.
165 76

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‘‘eligible affiliate’’ as ‘‘an entity with
respect to which another person: (1)
Directly or indirectly holds either: (i) A
majority of the equity securities of such
entity, or (ii) the right to receive upon
dissolution of, or the contribution of, a
majority of the capital of such entity; (2)
reports its financial statements on a
consolidated basis under Generally
Accepted Accounting Principles or
International Financial Reporting
Standards, and such consolidated
financial statements include the
financial results of such entity; and (3)
is required to aggregate the positions of
such entity under § 150.4 and does not
claim an exemption from aggregation for
such entity.’’ 168
The definition of ‘‘eligible affiliate’’
proposed in the current NPRM qualifies
persons as eligible affiliates based on
requirements similar to those recently
adopted by the Commission in a
separate rulemaking. On April 1, 2013,
the Commission provided relief from
the mandatory clearing requirement of
section 2(h)(1)(A) of the Act for certain
affiliated persons if the affiliated
persons (‘‘eligible affiliate
counterparties’’) meet requirements
contained in § 50.52.169 Under both
§ 50.52 and the current proposed
definition, a person is an eligible
affiliate if the person, directly or
indirectly, holds a majority ownership
interest in the other counterparty (a
majority of the equity securities of such
entity, or the right to receive upon
dissolution of, or the contribution of, a
majority of the capital of such entity),
reports its financial statements on a
consolidated basis under Generally
Accepted Accounting Principles or
International Financial Reporting
Standards, and such consolidated
financial statements include the
168 See

proposed § 150.1.
Clearing Exemption for Swaps Between
Certain Affiliated Entities, 78 FR 21749, 21783, Apr.
11, 2013. Section 50.52(a) addresses eligible affiliate
counterparty status, allowing a person not to clear
a swap subject to the clearing requirement of
section 2(h)(1)(A) of the Act and part 50 if the
person meets the requirements of the conditions
contained in paragraphs (a) and (b) of § 50.52. The
conditions in paragraph (a) of § 50.52 specify either
one counterparty holds a majority ownership
interest in, and reports its financial statements on
a consolidated basis with, the other counterparty,
or both counterparties are majority owned by a
third party who reports its financial statements on
a consolidated basis with the counterparties.
The conditions in paragraph (b) of § 50.52 address
factors such as the decision of the parties not to
clear, the associated documentation, audit, and
recordkeeping requirements, the policies and
procedures that must be established, maintained,
and followed by a dealer and major swap
participant, and the requirement to have an
appropriate centralized risk management program,
rather than the nature of the affiliation. As such,
those conditions are less pertinent to the definition
of eligible affiliate.

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financial results of such entity. In
addition, for purposes of the position
limits regime, an eligible affiliate, as
proposed in § 150.1, must be required to
aggregate the positions of such entity
under § 150.4 and does not claim an
exemption from aggregation for such
entity.170
The Commission requests comment
on the proposed definition. Is the
definition an appropriate one for
purposes of the position limits regime?
Should the Commission consider
adopting a definition that more closely
tracks the ‘‘eligible affiliate
counterparties’’ definition adopted in
§ 50.52 or is the difference appropriate
in light of the differing regulatory
purposes of the two regulations?
f. Entity
The current proposal defines ‘‘entity’’
to mean ‘‘a ‘person’ as defined in
section 1a of the Act.’’ 171 The term is
not defined in either current § 150.1, but
was defined in vacated § 151.1; the
language proposed here tracks that
adopted in § 151.1. The term ‘‘entity,’’
like that of ‘‘person,’’ is used in a
number of contexts, and in various
definitions. Defining the term, therefore,
provides a clear and unambiguous
meaning, and prevents confusion.
g. Excluded Commodity
The phrase ‘‘excluded commodity’’
was added into the CEA in the CFMA,
but was not defined or used in part 150.
CEA section 4a(a)(2)(A), as amended by
the Dodd-Frank Act, utilizes the phrase
‘‘excluded commodity’’ when it
provides a timeline under which the
Commission is charged with setting
limits for futures and option contracts
other than on excluded commodities.172
Part 151 included in the definition
section of vacated § 151.1, a definition
which simply incorporated into part 151
the statutory meaning, as a useful term
for purposes of a number of the changes
made by part 151 to the position limits
regime. For example, the phrase was
used in vacated § 151.11, in the
provision of acceptable practices for
DCMs and SEFs in their adoption of
rules and procedures for monitoring and
enforcing position accountability
provisions; it was also used in the
amendments to the definition of bona
fide hedging.173 Similarly, the
Commission believes that the adoption
into part 150 of the excluded
commodity definition will be a useful
170 See proposed amendments to the definition of
‘‘eligible affiliate’’ in proposed § 150.1.
171 CEA section 1a(38); 7 U.S.C. 1a(38).
172 CEA section 4a(2)(A); 7 U.S.C. 6a(2)(A).
173 See 17 CFR 1.3(z) as amended by the vacated
part 151 Rulemaking.

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tool in addressing the same provisions,
and so proposes to adopt into § 150.1
the definition used in § 151.1.174
h. First Delivery Month of the Crop Year
The term ‘‘first delivery month of the
crop year’’ is currently defined in
§ 150.1(c), with a table of the first
delivery month of the crop year for the
commodities for which position limits
are currently provided in § 150.2. The
crop year definition has been pertinent
for purposes of the spread exemption to
the single month limit in current
§ 150.3(a)(3), which limits spread
positions in a single month to a level no
more than that of the all-months limit.
The Commission did not adopt this
definition in vacated part 151.175 In the
current proposal, the Commission
proposes to amend § 150.1 to delete the
definition of ‘‘crop year.’’ The
elimination of the definition reflects the
fact that the definition is no longer
needed, since the current proposal, like
the approach adopted in part 151,
would raise the level of individual
month limits to the level of the allmonth limits.
i. Futures Equivalent
The term ‘‘futures-equivalent’’ is
currently defined in § 150.1(f) to mean
‘‘an option contract which has been
adjusted by the previous day’s risk
factor, or delta coefficient, for that
option which has been calculated at the
close of trading and published by the
applicable exchange under § 16.01 of
this chapter.’’ 176 The Commission
proposes to retain the definition
currently found in § 150.1(f), while
broadening it in light of the Dodd-Frank
Act amendments to CEA section 4a.177
The proposed amendments would also
delete, as unnecessary, the reference to
§ 16.01 found in the current definition.
As proposed, ‘‘futures equivalent’’
would be defined in § 150.1 as ‘‘(1) An
option contract, whether an option on a
future or an option that is a swap, which
has been adjusted by an economically
reasonable and analytically supported
risk factor, or delta coefficient, for that
174 See e.g., proposed § 150.1 definitions for bona
fide hedging and proposed amendments to
§ 150.5(b).
175 See 76 FR at 71685.
176 17 CFR 150.1(f).
177 Amendments to CEA section 4a(1) authorize
the Commission to extend position limits beyond
futures and option contracts to swaps traded on a
DCM or SEF and swaps not traded on a DCM or SEF
that perform or affect a significant price discovery
function with respect to regulated entities (‘‘SPDF
swaps’’). 7 U.S.C. 6a(a)(1). In addition, under new
CEA sections 4a(a)(2) and 4a(a)(5), speculative
position limits apply to agricultural and exempt
commodity swaps that are ‘‘economically
equivalent’’ to DCM futures and option contracts. 7
U.S.C. 6a(a)(2) and (5).

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option computed as of the previous
day’s close or the current day’s close or
contemporaneously during the trading
day, and; (2) A swap which has been
converted to an economically equivalent
amount of an open position in a core
referenced futures contract.’’
Vacated § 151.1 did not retain a
definition for ‘‘futures-equivalent;’’
instead final part 151 referred to
guidance on futures equivalency
provided in appendix A to part 20.178
The Commission notes that while the
part 20 ‘‘futures equivalent’’ definition
is consistent with the ‘‘futuresequivalent’’ definition proposed herein,
it addresses only swaps, and cites to,
and relies on, the guidance provided in
appendix A to part 20.179 The definition
proposed herein addresses both options
on futures and options that are swaps;
it also includes and expands upon
clarifications that are incorporated into
the current definition regarding the
computation time and the adjustment by
an economically reasonable and
analytically supported risk factor, or
delta coefficient.
As noted above, the current § 150.1(f)
definition of ‘‘futures-equivalent’’ is
narrowly defined to mean ‘‘an option
contract,’’ and nothing else. Although
certain contracts, from a practical
standpoint, may be economically
equivalent to futures contracts, as that
terms is defined in § 150.1, such
products are not ‘‘futures-equivalent’’
under the narrow definition of current
§ 150.1(f) unless they are options on
those actual futures. Therefore, current
§ 150.1(f) is narrowly tailored to target
only specifically enumerated futures
contracts on ‘‘legacy’’ agricultural
commodities and their equivalent
options.
The current rulemaking, like vacated
part 151, establishes federal position
limits and limit formulas for 28 physical
commodity futures and option
contracts, or ‘‘core referenced futures
contracts,’’ and applies these limits to
all derivatives that are directly or
indirectly linked to the price of a core
referenced futures contracts, or based on
the price of the same commodity
underlying that particular core
178 76 FR at 71633 (n. 67) (stating that ‘‘For
purposes of applying the limits, a trader shall
convert and aggregate positions in swaps on a
futures equivalent basis consistent with the
guidance in the Commission’s appendix A to Part
20, Large Trader Reporting for Physical Commodity
Swaps.’’). See also 76 FR 43851, 43865, Jul. 22,
2011.
179 See 17 CFR 20.1 (‘‘Futures equivalent means
an economically equivalent amount of one or more
futures contracts that represents a position or
transaction in one or more paired swaps or
swaptions consistent with the conversion
guidelines in appendix A of this part.’’).

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referenced futures contract for delivery
at the same location or locations as
specified in that particular core
referenced futures contract, and defines
such derivative products, collectively,
as ‘‘referenced contracts.’’ Therefore, the
position limits amendments proposed in
this current rulemaking, similar to the
position limits regime established in
vacated part 151, apply across different
trading venues to economically
equivalent contracts, as that term is
defined in § 150.1, that are based on the
same underlying commodity. As
discussed supra, however, current part
150 defines ‘‘futures-equivalent’’
narrowly to mean ‘‘an option contract,’’
and makes no mention of broadly
defined ‘‘referenced contracts.’’
Consequently, as noted above, and
consistent with these changes to the
position limits regime, including the
applicability of aggregate position limits
to economically equivalent ‘‘referenced
contracts’’ across different trading
venues, the Commission proposes to
expand the strict ‘‘futures-equivalent’’
standard set forth in current part 150.
j. Intercommodity Spread Contract
Current part 150 does not include a
definition of the term ‘‘intercommodity
spread contract,’’ which was introduced
and adopted in vacated part 151. The
Commission proposes to add into
§ 150.1 the definition adopted in
§ 151.1,180 such that an
‘‘intercommodity spread contract’’
means ‘‘a cash-settled agreement,
contract or transaction that represents
the difference between the settlement
price of a referenced contract and the
settlement price of another contract,
agreement, or transaction that is based
on a different commodity.’’ The
Commission determined, however, to
adopt the term ‘‘intercommodity spread
contract’’ as part of the definition of
reference contract rather than as a
separate term, since the phrase
‘‘intercommodity spread contract’’ is
used solely for purposes of defining the
term ‘‘referenced contract.’’ The
inclusion of the term as part of the
definition of referenced contract is
intended to simplify the definition
section and make it easier to
understand.
180 In vacated part 151, ‘‘intercommodity spread
contract’’ was defined to mean ‘‘a cash-settled
agreement, contract or transaction that represents
the difference between the settlement price of a
Referenced Contract and the settlement price of
another contract, agreement, or transaction that is
based on a different commodity.’’ See vacated
§ 151.1.

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k. Intermarket Spread Position
The term ‘‘intermarket spread
position’’ is not defined in current part
150, and was not adopted in part 151.
But in conjunction with the
amendments to part 150 to address the
changes to CEA section 4a made by the
Dodd-Frank Act,181 the Commission
proposes to add into § 150.1 a definition
for ‘‘intermarket spread position’’ to
mean ‘‘a long position in a commodity
derivative contract in a particular
commodity at a particular designated
contract market or swap execution
facility and a short position in another
commodity derivative contract in that
same commodity away from that
particular designated contract market or
swap execution facility.’’ Among the
changes to CEA section 4a, new section
4a(a)(6) of the Act requires the
Commission to apply position limits on
an aggregate basis to contracts based on
the same underlying commodity across
certain markets.182 The Commission
believes that the term ‘‘intermarket
spread position’’ simplifies the
proposed changes to § 150.5, which
provide acceptable exemptions DCMs
and SEFs may choose to grant from
speculative position limits.183
l. Intramarket Spread Position
Neither current part 150, nor vacated
part 151, includes a definition of the
term ‘‘intramarket spread contract.’’ The
Commission now proposes to add into
§ 150.1 the definition, such that
‘‘intramarket spread position’’ means ‘‘a
long position in a commodity derivative
contract in a particular commodity and
a short position in another commodity
derivative contract in the same
commodity on the same designated
contract market or swap execution
facility.’’
Current part 150 includes exemptions
for certain spread positions. For
example, current § 150.3(a)(3) provides
an exemption for spread (or arbitrage)
positions, but this exemption is limited
to those between single months for
futures contracts and/or, options
thereon, if outside of the spot month,
and only if in the same crop year. While
current § 150.3(a)(3) limits the spread
181 See e.g., discussions of Dodd-Frank changes to
CEA section 4a above and below.
182 CEA section 4a(a)(6) requires the Commission
to apply position limits on an aggregate basis to (1)
contracts based on the same underlying commodity
across DCMs; (2) with respect to foreign boards of
trade (‘‘FBOTs’’), contracts that are price-linked to
a DCM or SEF contract and made available from
within the United States via direct access; and (3)
SPDF swaps. 7 U.S.C. 6a(a)(6). See also,
consideration of proposed changes to § 150.2 for
further discussion.
183 See e.g., § 150.5(a)(2)(B)(ii); see also
150.5(b)(5)(b)(iv).

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exemption provided thereunder, the
exemption under current § 150.5(a) is
not so limited. Instead, under current
§ 150.5(a), exchanges may exempt from
position limits ‘‘positions which are
normally known in the trade as
‘‘spreads, straddles, or arbitrage.
. . .’’ 184 The Commission notes that the
definition it now proposes for
‘‘intramarket spread position’’ is a
generic term, and not limited only to
futures and/or options thereon.185 In a
similar manner to adoption of the term
‘‘intermarket spread position,’’ the term
‘‘intramarket spread position,’’
therefore, simplifies the Commissions
amendments to exemptions for spread
positions, including proposed changes
to § 150.5, which, as noted above,
provide acceptable exemptions DCMs
and SEFs may choose to grant from
speculative position limits.
m. Long Position
The term ‘‘long position’’ is currently
defined in § 150.1(g) to mean ‘‘a long
call option, a short put option or a long
underlying futures contract,’’ but the
phrase was not retained in vacated
§ 151.1. The Commission proposes to
retain the definition, but to update it to
make it also applicable to swaps such
that a long position would include a
long futures-equivalent swap.
n. Physical Commodity
The Commission proposes to amend
§ 150.1 by adding in a definition of the
term ‘‘physical commodity’’ for position
limits purposes. Congress used the term
‘‘physical commodity’’ in CEA sections
4a(a)(2)(A) and 4a(a)(2)(B) to mean
commodities ‘‘other than excluded
commodities as defined by the
Commission.’’ Therefore, the
Commission interprets ‘‘physical
commodities’’ to include both exempt
and agricultural commodities, but not
excluded commodities, and proposes to
define the term as such.186

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o. Referenced Contracts
Part 150 currently does not include a
definition of the phrase ‘‘Referenced
Contract,’’ which was introduced and
184 The Commission notes that the exemption
provided in § 150.5(a) for ‘‘positions which are
normally known in the trade as ‘spreads, straddles,
or arbitrage,’ ’’ tracks CEA section 4a(a)(1). 7 U.S.C.
6a(a)(1). Also, various DCMs currently have rules in
place that provide exemptions for such as ‘‘spreads,
straddles, or arbitrage’’ positions. See, e.g., ICE
Futures U.S. rule 6.27 and CME rule 559.C.
185 For further discussion regarding the
exemptions for intramarket spread positions, see
infra, discussion regarding § 150.5(a)(2) and (b)(5).
186 For position limits purposes, proposed § 150.1
would define ‘‘physical commodity’’ to mean ‘‘any
agricultural commodity as that term is defined in
§ 1.3 of this chapter or any exempt commodity as
that term is defined in section 1a(20) of the Act.’’

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adopted in vacated part 151.187 As was
noted when part 151 was adopted, the
Commission identified 28 core
referenced futures contracts and
proposed to apply aggregate limits on a
futures equivalent basis across all
derivatives that [met the definition of
Referenced Contracts’].’’ 188
The vacated § 151.1 definition of
Referenced Contracts included: (1) The
Core Referenced Futures Contract; (2)
‘‘look-alike’’ contracts (i.e., those that
settle off of the Core Referenced Futures
Contract and contracts that are based on
the same commodity for the same
delivery location as the Core Referenced
Futures Contract); (3) contracts with a
reference price based only on the
combination of at least one Referenced
Contract price and one or more prices in
the same or substantially the same
commodity as that underlying the
relevant Core Referenced Futures
Contract; and (4) intercommodity
spreads with two components, one or
both of which are Referenced Contracts.
According to the Commission, these
criteria captured contracts with prices
that are or should be closely correlated
to the prices of the Core Referenced
Futures Contract, as defined in vacated
§ 151.1.189 In addition, the definition
included categories of Referenced
Contract based on objective criteria and
readily available data (i.e., derivatives
that are directly or indirectly linked to
or based on the same commodity for
delivery at the same delivery location as
a Core Referenced Futures Contract).190
At that time, the Commission clarified
that a swap contract using as its sole
floating reference price the prices
generated directly or indirectly from the
price of a single Core Referenced
Futures Contract or a swap priced based
on a fixed differential to a Core
Referenced Futures Contract, were lookalike Referenced Contracts, and subject
to the limits adopted in vacated part
151.191 In addition, the definition
187 Vacated § 151.1 defined ‘‘Referenced
Contract’’ to mean ‘‘on a futures-equivalent basis
with respect to a particular Core Referenced Futures
Contract, a Core Referenced Futures Contract listed
in § 151.2, or a futures contract, options contract,
swap or swaption, other than a basis contract or
contract on a commodity index that is: (1) Directly
or indirectly linked, including being partially or
fully settled on, or priced at a fixed differential to,
the price of that particular Core Referenced Futures
Contract; or (2) Directly or indirectly linked,
including being partially or fully settled on, or
priced at a fixed differential to, the price of the
same commodity underlying that particular Core
Referenced Futures Contract for delivery at the
same location or locations as specified in that
particular Core Referenced Futures Contract.’’
188 76 FR at 71629.
189 Id. at 71630.
190 Id. at 71630–31.
191 Id. at 71631 n.50 (‘‘The Commission has
clarified in its definition of ‘Referenced Contract’

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included options that expire into
outright positions in such contracts.192
In response to comments that the
Commission should broaden the scope
of Referenced Contracts, the
Commission noted that expanding the
scope of position limits based, for
example, on cross-hedging relationships
or other historical price analysis would
be problematic as historical
relationships may change over time and,
additionally, would require
individualized determinations. In light
of these circumstances, the Commission
determined that it was not necessary to
expand the scope of position limits
beyond what was adopted. The
Commission also noted that the
commenters did not provide specific
criteria or thresholds for making
determinations as to which pricecorrelated commodity contracts should
be subject to limits, further noting that
it would consider amending the scope
of economically equivalent contracts
(and the relevant identifying criteria) as
it gained experience in this area.193
The definition for ‘‘referenced
contract’’ proposed in § 150.1 mirrors
the definition proposed in § 151.1, with
the delineation of several related terms
incorporated into the definition.194 The
that position limits extend to contracts traded at a
fixed differential to a Core Referenced Futures
Contract (e.g., a swap with the commodity reference
price NYMEX Light, Sweet Crude Oil + $3 per
barrel is a Referenced Contract) or based on the
same commodity at the same delivery location as
that covered by the Core Referenced Futures
Contract, and not to unfixed differential contracts
(e.g., a swap with the commodity reference price
Argus Sour Crude Index is not a Referenced
Contract because that index is computed using a
variable differential to a Referenced Contract).’’).
192 Id. at 71631.
193 Id.
194 In the current rulemaking, the term
‘‘referenced contract’’ is defined in § 150.1 to mean,
on a futures-equivalent basis with respect to a
particular core referenced futures contract, ‘‘a core
referenced futures contract listed in § 151.2(d) of
this part, or a futures contract, options contract, or
swap, other than a guarantee of a swap, a basis
contract, or a commodity index contract: (1) That
is: (a) Directly or indirectly linked, including being
partially or fully settled on, or priced at a fixed
differential to, the price of that particular core
referenced futures contract; or (b) Directly or
indirectly linked, including being partially or fully
settled on, or priced at a fixed differential to, the
price of the same commodity underlying that
particular core referenced futures contract for
delivery at the same location or locations as
specified in that particular core referenced futures
contract; and (2) Where: (a) Calendar spread
contract means a cash-settled agreement, contract,
or transaction that represents the difference
between the settlement price in one or a series of
contract months of an agreement, contract or
transaction and the settlement price of another
contract month or another series of contract
months’ settlement prices for the same agreement,
contract or transaction; (b) Commodity index
contract means an agreement, contract, or
transaction that is not a basis or any type of spread
contract, based on an index comprised of prices of

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beginning of the current definition
parallels the definition in vacated
§ 151.1, differing only with the addition
of a clarification that the definition of
‘‘referenced contract’’ does not include
guarantees of a swap. This clarification
is added into the list of products that are
not included in the definition.195 In the
proposed definition, ‘‘referenced
contract’’ would not include ‘‘a
guarantee of a swap, a basis contract, or
a commodity index contract.’’ 196 In
addition, for the sake of clarify, the
proposal incorporates into the definition
of ‘‘referenced contract’’ several related
terms. Consequently, the definition for
‘‘referenced contract’’ delineates the
meaning of ‘‘calendar spread contract,’’
‘‘commodity index contract,’’ ‘‘spread
contract,’’ and ‘‘intercommodity spread
contract.’’ 197 The incorporation of these
terms into the definition of ‘‘referenced
contract’’ is intended to retain in one
place the various parts and meanings of
the definition, thereby facilitating
comprehension of the definition.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

p. Short Position
The term ‘‘short position’’ is currently
defined in § 150.1(c) to mean ‘‘a short
call option, a long put option, or a short
underlying futures contract.’’ Vacated
part 151 did not retain this definition.
The current proposal would amend the
definition to state that a short position
commodities that are not the same or substantially
the same; (c) Spread contract means either a
calendar spread contract or an intercommodity
spread contract; and (d) Intercommodity spread
contract means a cash-settled agreement, contract or
transaction that represents the difference between
the settlement price of a referenced contract and the
settlement price of another contract, agreement, or
transaction that is based on a different commodity.’’
195 As defined in vacated § 151.1, ‘‘Referenced
Contract’’ excludes ‘‘a basis contract or contract on
a commodity index.’’ See vacated § 151.1.
196 The Commission proposes to exclude a
guarantee of a swap from the definition of a
referenced contract due to regulatory developments
that occurred after the vacated part 151
Rulemaking. In connection with further defining
the term ‘‘swap’’ jointly with the Securities and
Exchange Commission, (see generally Further
Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and
‘‘Security-Based Swap Agreement’’; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 77
FR 48208, Aug. 13, 2012 (‘‘Product Definitions
Adopting Release’’)), the Commission interpreted
the term ‘‘swap’’ (that is not a ‘‘security-based
swap’’ or ‘‘mixed swap’’) to include a guarantee of
such swap, to the extent that a counterparty to a
swap position would have recourse to the guarantor
in connection with the position. See id. at 48226.
Excluding guarantees of swaps from the definition
of referenced contract should help avoid any
potential confusion regarding the application of
position limits to guarantees of swaps, which could
impede the Commission’s efforts to monitor
compliance with the requirements of the CEA. In
addition, if the rules proposed in the Aggregation
NPRM are adopted, it would obviate the need to
include guarantees of swaps in the definition of
referenced contracts.
197 Compare vacated § 151.1 with proposed
§ 150.1.

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means ‘‘a short call option, a long put
option or a short underlying futures
contract, or a short futures-equivalent
swap.’’ This revised definition reflects
the fact that under the Dodd-Frank Act,
the Commission is charged with
applying the position limits regime to
swaps.
q. Speculative Position Limit
The term ‘‘speculative position limit’’
is currently not defined in § 150.1 and
was not defined in vacated part 151.
The Commission now proposes to
define the term ‘‘speculative position
limit’’ to mean ‘‘the maximum position,
either net long or net short, in a
commodity derivatives contract that
may be held or controlled by one
person, absent an exemption, such as an
exemption for a bona fide hedging
position. This limit may apply to a
person’s combined position in all
commodity derivative contracts in a
particular commodity (all-monthscombined), a person’s position in a
single month of commodity derivative
contracts in a particular commodity, or
a person’s position in the spot month of
commodity derivative contacts in a
particular commodity. Such a limit may
be established under federal regulations
or rules of a designated contract market
or swap execution facility. An exchange
may also apply other limits, such as a
limit on gross long or gross short
positions, or a limit on holding or
controlling delivery instruments.’’
This proposed definition is similar to
definitions for position limits used by
the Commission for many years; the
various regulations and defined terms
included use of maximum amounts ‘‘net
long or net short,’’ which limited what
any one person could ‘‘hold or control,’’
‘‘one grain on any one contract market’’
(or in ‘‘in one commodity’’ or ‘‘a
particular commodity’’), and ‘‘in any
one future or in all futures combined.’’
For example, in 1936, Congress enacted
the CEA, which authorized the CFTC’s
predecessor, the CEC, to establish limits
on speculative trading. Congress
empowered the CEC to ‘‘fix such limits
on the amount of trading . . . as the
[CEC] finds is necessary to diminish,
eliminate, or prevent such burden.’’ 198
The first speculative position limits
were issued by the CEC in December
1938.199 Those first speculative position
limits rules provided in § 150.1 for
limits on position and daily trading in
grain for future delivery, adopting a
maximum amount ‘‘net long or net short
position which any one person may
hold or control in any one grain on any
198 CEA
199 3

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section 6a(1) (Supp. II 1936).
FR 3145, Dec. 24, 1938.

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75701

one contract market’’ as 2,000,000
bushels ‘‘in any one future or in all
futures combined.’’ 200
Another example is found in the
glossaries published by the Commission
for many years. Various Commission
documents over the years have included
a glossary. For example, the
Commission’s annual report for 1983
includes in its glossary ‘‘Position Limit
The maximum position, either net long
or net short, in one commodity future
combined which may be held or
controlled by one person as prescribed
by any exchange or by the CFTC.’’ The
version of the staff glossary currently
posted on the CFTC Web site defines
speculative position limit as ‘‘[t]he
maximum position, either net long or
net short, in one commodity future (or
option) or in all futures (or options) of
one commodity combined that may be
held or controlled by one person (other
than a person eligible for a hedge
exemption) as prescribed by an
exchange and/or by the CFTC.’’
r. Spot Month
Vacated part 151 adopted an amended
definition for ‘‘spot month’’ that
replaced the definition for spot month
currently found in § 150.1 by citing to
the definition provided in § 151.3.
Vacated § 151.3 provided detailed lists
of spot months separately for
agricultural, metals and energy
commodities.
The Commission proposes to adopt a
simplified update to the definition of
‘‘spot month’’ by expanding upon the
current § 150.1 definition. The
definition, as expanded, would
specifically address both physicaldelivery contracts and cash-settled
contracts, and clarify the duration of
‘‘spot month.’’ Under the proposed
changes, the term ‘‘spot month’’ does
not refer to a month of time. Rather, the
definition clarifies that the ‘‘spot
200 17 CFR 150.1 (1938) (Part 150—Orders of The
Commodity Exchange Commission)(‘‘Limits on
position and daily trading in grain for future
delivery. The following limits on the amount of
trading under contracts of sale of grain for future
delivery on or subject to the rules of contract
markets which may be done by any person are
hereby proclaimed and fixed, to be in full force and
effect on and after December 31, 1938: (a) Position
limits. (1) The limit on the maximum net long or
net short position which any one person may hold
or control in any one grain on any one contract
market, except as specifically authorized by
paragraph (a) (2), is: 2,000,000 bushels in any one
future or in all futures combined. (2) To the extent
that the net position held or controlled by any one
person in all futures combined in any one grain on
any one contract market is shown to represent
spreading in the same grain between markets, the
limit on net position in all futures combined set
forth in paragraph (a)(1) may be exceeded on such
contract market, but in no case shall the excess
result in a net position of more than 3,000,000.’’).

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month’’ is the trading period
immediately preceding the delivery
period for a physical-delivery futures
contract as well as for any cash-settled
swaps and futures contracts that are
linked to the physical-delivery contract.
The definition continues to define the
spot month as the period of time
beginning at of 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 contract
market, while adding in a clarification
that this definition applies only to
physical-delivery commodity
derivatives contracts. For physicaldelivery contracts with delivery
beginning after the last trading day, the
proposal defines the spot month as the
close of trading on the trading day
preceding the third-to-last trading day,
until the contract is no longer listed for
trading (or available for transfer, such as
through exchange for physical
transactions). This definition is
consistent with the current spot month
for each of the 28 core referenced
futures contracts. The definition
proposes similar, but slightly different
language for cash-settled contracts,
providing that the spot month begins at
the earlier of the start of the period in
which the underlying cash-settlement
price is calculated or the close of trading
on the trading day preceding the thirdto-last trading day and continues until
the contract cash-settlement price is
determined.201 In addition, the
definition includes a proviso that, if the
cash-settlement price is determined
based on prices of a core referenced
futures contract during the spot month
period for that core referenced futures
contract, then the spot month for that
cash-settled contract is the same as the
spot month for that core referenced
futures contract.202

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201 For

example, a ‘‘look-alike’’ contract that
references a calendar-month average of settlement
prices would have the same spot-month limit as the
core referenced futures contract (CRFC) but the
limit would be in effect beginning with the first
calendar day of the cash-settlement period; a ‘‘lookalike’’ contract that references a single day’s
settlement price in the spot-month of the CRFC
would have a spot-month limit at the same level as
the CRFC but the limit would be in effect only
during the spot month of the CRFC.
202 For example, the physical-delivery NYMEX
Henry Hub Natural Gas futures contract would
have, as is currently the case for the exchange spot
month limit, a spot period beginning on close of
trading three business days prior to the last trading
day of that core referenced futures contract. The
NYMEX Henry Hub Natural Gas Penultimate
Financial futures contract (which is cash-settled
based on the NYMEX Henry Hub Natural Gas
Futures contract settlement price on the business
day preceding the last trading day for that physicaldelivery contract, and is currently subject to
position accountability effective on the last three
trading days of the futures contract), would have a

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s. Spot-Month, Single-Month, and AllMonths-Combined Position Limits
In addition to a definition for ‘‘spot
month,’’ current part 150 includes
definitions for ‘‘single month,’’ and for
‘‘all-months’’ where ‘‘single month’’ is
defined as ‘‘each separate futures
trading month, other than the spot
month future,’’ and ‘‘all-months’’ is
defined as ‘‘the sum of all futures
trading months including the spot
month future.’’
Vacated part 151 retained only the
definition for spot month, and, instead,
adopted a definition for ‘‘spot-month,
single-month, and all-months-combined
position limits.’’ The definition
provided that, for Referenced Contracts
based on a commodity identified in
§ 151.2, the maximum number of
contracts a trader may hold was as
provided in § 151.4.
In the current rulemaking proposal, as
noted above, the Commission proposes
to amend § 150.1 by deleting the
definitions for ‘‘single month,’’ and for
‘‘all-months.’’ Unlike the vacated part
151 Rulemaking, the current proposal
does not include a definition for ‘‘spotmonth, single-month, and all-monthscombined position limits.’’ Instead, the
current rulemaking proposes to adopt a
definition for ‘‘speculative position
limits’’ that should obviate the need for
these definitions.203
t. Spread Contract
Spread contract was defined in
vacated part 151 as ‘‘either a calendar
spread contract or an intercommodity
spread contract.’’ 204 The Commission
proposes to add the same definition into
§ 150.1 in conjunction with the proposal
to define ‘‘referenced contract.’’ 205
The Commission also notes that while
the proposed definition of ‘‘referenced
contract’’ specifically excludes
guarantees of a swap, basis contracts
and commodity index contracts, spread
contracts are not excluded from the
proposed definition of ‘‘referenced
contract.’’ 206
spot month period that is the same as that of the
physical-delivery NYMEX Henry Hub Natural Gas
futures contract.
203 See supra discussion of the proposed
definition of ‘‘speculative position limit.’’
204 Vacated § 151.1.
205 See supra discussion of proposed § 150.1
‘‘referenced contract’’ definition.
206 The Commission notes that this is consistent
with vacated part 151. See, e.g., the final part 151
Rulemaking, which noted that commodity index
contracts, which by the definition in vacated
§ 151.1 were expressly excluded from the definition
of ‘‘Referenced Contract,’’ were not spread
contracts. 76 FR at 71656. See also, the definition
of ‘‘commodity index contract,’’ which is defined as
‘‘a contract, agreement, or transaction ‘‘that is not
a basis or any type of spread contract, [and] based

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u. Swap
The definitions of several terms
adopted in vacated part 151 relied on
the statutory definition in some cases in
conjunction with a further definition
adopted by the Commission in other
rulemakings.207 Other defined terms
that rely on the statutory definition in
included: ‘‘entity,’’ ‘‘excluded
commodity,’’ and ‘‘swap dealer.’’ Since
the adoption of part 151, the
Commission, in a joint rulemaking with
the Securities and Exchange
Commission, adopted a further
definition for ‘‘swap’’ in § 1.3(xxx).208
Consequently, the definition of ‘‘swap’’
proposed in the current rulemaking,
while paralleling that of the definition
included in vacated § 151.1, and while
substantially the same, additionally
cites to the definition of ‘‘swap’’ found
in § 1.3(xxx).
v. Swap Dealer
The term ‘‘swap dealer’’ is not
currently defined in § 150.1, but was
defined in vacated 151.1 to mean
‘‘ ‘swap dealer’ as that term is defined in
section 1a of the Act and as further
defined by the Commission.’’ 209 Similar
to the definition of ‘‘swap,’’ the
Commission adopted a definition for
‘‘swap dealer’’ since part 151 was
finalized.210 Under the current proposal,
§ 150.1 would be amend to define
‘‘swap dealer’’ to mean ‘‘ ‘swap dealer’
as that term is defined in section 1a of
the Act and as further defined in section
1.3 of this chapter.’’ This revised
definition reflects the fact that the
definition of ‘‘swap dealer,’’ while
paralleling that of the definition
included in § 151.1, and while
substantially the same, additionally
cites to the definition of ‘‘swap dealer’’
found in § 1.3(ggg).
ii. Bona Fide Hedging Definition
The core of the Commission’s
approach to defining bona fide hedging
over the years has focused on
transactions that offset a recognized
physical price risk.211 Once a bona fide
on an index comprised of prices of commodities
that are not the same nor substantially the same.’’
Vacated § 151.1.
207 Under vacated § 151.1, the term ‘‘[s]wap
means ‘swap’ as defined in section 1a of the Act and
as further defined by the Commission.’’
208 See 77 FR 48208, 48349, Aug. 13, 2012.
209 See vacated § 151.1.
210 77 FR 30596, May 23, 2012.
211 For an historical perspective on the bona fide
hedging provision prior to the Dodd-Frank
amendments, see Testimony of General Counsel
Dan M. Berkovitz, Commodity Futures Trading
Commission, ‘‘Position Limits and the Hedge
Exemption, Brief Legislative History,’’ July 28,
2009, available at http://www.cftc.gov/PressRoom/
SpeechesTestimony/berkovitzstatement072809.

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hedge is implemented, the hedged
entity should be price insensitive
because any change in the value of the
underlying physical commodity is offset
by the change in value of the entity’s
physical commodity derivative position.
Because a firm that has hedged its
price exposure is price neutral in its
overall physical commodity position,
the hedged entity should have little
incentive to manipulate or engage in
other abusive market practices to affect
prices. By contrast, a party that
maintains a derivative position that
leaves them with exposure to price
changes is not neutral as to price and,
therefore, may have an incentive to
affect prices. Further, the intention of a
hedge exemption is to enable a
commercial entity to offset its price risk;
it was never intended to facilitate taking
on additional price risk.
The Commission recognizes there are
complexities to analyzing the various
commercial price risks applicable to
particular commercial circumstances in
order to determine whether a hedge
exemption is warranted. These
complexities have led the Commission,
from time to time, to issue rule changes,
interpretations, and exemptions.
Congress, too, has periodically revised
the Federal statutes applicable to bona
fide hedging, most recently in the DoddFrank Act. These complexities will be
further explored below.
a. Bona Fide Hedging History
Prior to 1974, the term bona fide
hedging transactions or positions was
defined in section 4a(3) of the Act. That
definition only applied 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.212 In response
to the 1974 legislation, the
Commission’s predecessor adopted in
1975 a bona fide hedging definition in
§ 1.3(z) of its regulations stating, among
other requirements, that transactions or
positions would not be classified as
212 Section 404 of Public Law 93–463, October 23,
1974, (CFTC Act), amended section 4a(3) of the Act,
deleting the statutory definition of bona fide
hedging position or transaction and directing the
newly-established Commission to issue a rule
defining that term.

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hedging unless their bona fide purpose
was to offset price risks incidental to
commercial cash or spot operations, and
such positions were established and
liquidated in an orderly manner and in
accordance with sound commercial
practices.213 Shortly thereafter, the
newly formed Commission sought
comment on amending that
definition.214 Given the large number of
issues raised in comment letters, the
Commission adopted the predecessor’s
definition with minor changes as an
interim definition of bona fide hedging
transactions or positions, effective
October 18, 1975.215
In 1977, the Commission proposed a
revised definition of bona fide hedging
that largely forms the basis of the
current definition of bona fide
hedging.216 The 1977 proposed
definition set forth: (i) A general
definition of bona fide hedging
positions under economically
appropriate circumstances and subject
to other conditions (noted below); (ii) an
enumerated list of specific positions
that conform to the general definition;
and (iii) a procedure to consider nonenumerated cases.217 The 1977
proposal, as adopted, established the
concept of portfolio hedging and
recognized cross-commodity hedges and
hedges of anticipated production or
unfilled anticipated requirements,
provided such hedges were not
recognized in the five last days of
trading in any particular futures
contract (the ‘‘five-day rule’’ in current
§ 1.3(z)(2)).218
The general definition of bona fide
hedging in current § 1.3(z), as was the
case when adopted in 1977, advises that
a position should ‘‘normally represent a
213 Pending promulgation of a definition by the
Commission, the Secretary of Agriculture
promulgated § 1.3(z) pursuant to section 404 of the
CFTC Act. 40 FR 11560, Mar. 12, 1975. This
definition of bona fide hedging in new § 1.3(z)
deviated in only minor ways from the hedging
definition contained in section 4a(3) of the Act. The
Commodity Exchange Commission subsequently
issued conforming amendments to various rules. 40
FR 15086, Apr. 4, 1975.
214 40 FR 34627, Aug. 18, 1975. The Commission
sought comment on many issues, including whether
to include in the definition of bona fide hedging
transactions and positions ‘‘the practice of many
traders which results in hedging of gross cash
positions rather than a net cash position—so-called
‘double hedging.’ ’’ Id. at 34628. The Commission
later noted ‘‘that net cash positions do not
necessarily measure total risk exposure and in such
cases the hedging of gross cash positions does not
constitute ‘double hedging.’ ’’ 42 FR 42748, 42750,
Aug. 24, 1977.
215 40 FR 48688, Oct. 17, 1975. The Commission
re-issued all regulations, with rule 1.3(z) essentially
unchanged, in 1976. 41 FR 3192, 3195, Jan. 21,
1976.
216 42 FR 14832, Mar. 16, 1977.
217 Id.
218 42 FR 42748, Aug. 24, 1977.

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substitute for . . . positions to be taken
at a later time in a physical marketing
channel,’’ and requires such position to
be ‘‘economically appropriate to the
reduction of risks in the conduct of a
commercial enterprise,’’ and where the
risks arise from the potential change in
value of assets, liabilities or services.219
Such bona fide hedges also must have
a purpose ‘‘to offset price risks
incidental to commercial cash or spot
operations’’ and must be ‘‘established
and liquidated in an orderly manner in
accordance with sound commercial
practices.’’ Thus a bona fide hedge
exemption was appropriate where there
was a demonstrated physical price risk
that had been recognized. This also
applies, for example, to bona fide hedge
exemptions for unfilled anticipated
requirements, where processors or
manufacturers are exposed to price risk
on such unfilled anticipated
requirements necessary for their
manufacturing or processing.220
The 1977 proposed definition did not
include the modifying adverb
‘‘normally’’ to the verb ‘‘represent.’’ 221
The Commission explained in the 1977
preamble it intended to recognize bona
fide hedging positions ‘‘on the basis of
net risk related to changes in the values
reflected on balance sheets.’’ 222 The
Commission introduced the adverb
normally in the 1977 final rulemaking
in order to make clear it would
recognize as bona fide such balance
sheet hedging and ‘‘other [at the time]
relatively infrequent but potentially
important examples of risk reducing
futures transactions’’ that would
otherwise not have met the general
definition of bona fide hedging.223 The
Commission noted: ‘‘One form of
balance sheet hedging would involve
offsetting net exposure to changes in
currency exchange rates for the purpose
of stabilizing the domestic dollar
accounting value of assets which are
held abroad. In the case of depreciable
capital assets, such hedging transactions
219 17 CFR 1.3(z)(1) (2010). The Commission
cautions that the e-CFR version of § 1.3(z) reflects
changes made by the vacated 2011 final rule.
220 The Commission notes that the definition of
bona fide hedging transactions or positions
historically included an exemption for unfilled
anticipated requirements. As the Commission stated
in 1974, in its proposal to adopt § 1.3(z), the
regulation on the hedging definition proposed by
the Secretary of Agriculture was intended to
comply with the intent of section 404 of Public Law
93–463, enacted October 23, 1974, as stated in the
Conference Report accompanying HR. 13113, pp.
40–1. The Commission noted in its proposal that
the new statutory language was intended to allow
processors and manufacturers to hedge unfilled
annual requirements. 39 FR 39731, Nov. 11, 1974.
221 See 42 FR 42748, Aug. 24, 1977.
222 Id.
223 42 FR at 42749.

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might not represent a substitute for
subsequent transactions in a physical
marketing channel.’’ 224
With respect to the five-day rule in
current § 1.3(z)(2) for anticipatory
hedges of unfilled anticipated
requirements, the Commission observed
that historically there was a low
utilization of this provision in terms of
actual positions acquired in the futures
market.225 For cross commodity and
short anticipatory hedge positions, the
Commission did ‘‘not believe that
persons who do not possess or do not
have a commercial need for the
commodity for future delivery will
normally wish to participate in the
delivery process.’’ 226
In 1979, the Commission eliminated
daily speculative trading volume limits
and concluded such daily trading limits
were ‘‘not necessary to diminish,
eliminate or prevent excessive
speculation.’’ 227 The Commission noted
eliminating daily trading limits had no
effect on the limits on the size of
speculative positions which any one
person may hold or control on a single
contract market. The Commission also
noted the speculative position limits
apply to positions throughout the day as
well as to positions at the close of the
trading session.228 The Commission
continues to apply position limits
throughout the day and will continue
under this proposal.
In the aftermath of the silver futures
market crisis during late 1979 to early
1980,229 in 1981 the Commission
adopted § 1.61, subsequently
incorporated into § 150.5, requiring
DCMs to adopt speculative position
limits and providing an exemption for
‘‘bona fide hedging positions as defined
by a contract market in accordance with
§ 1.3(z)(1) of the Commission’s
regulations.’’ 230 That rule permits
DCMs to limit bona fide hedging
positions which it determines are not in
accord with sound commercial practices
224 Id.

at 42749 (n. 1).
at 42749. The five-day rule in current
§ 1.3(z)(2) for anticipatory hedges permits an
exception for a person with a long anticipatory
hedging need, for up to two months unfilled
anticipated requirements.
226 Id.
227 44 FR 7124, Feb. 6, 1979.
228 Id. at 7125.
229 See, In re Nelson Bunker Hunt et al., CFTC
Docket No. 85–12.
230 46 FR 50938, 50945, Oct. 16, 1981. With the
passage of the Commodity Futures Modernization
Act in 2000 and the Commission’s subsequent
adoption of the part 38 regulations covering DCMs
in 2001 (66 FR 42256, Aug. 10, 2001), part 150’s
approach to exchange-set speculative position
limits was incorporated as an acceptable practice
under DCM Core Principle 5—Position Limitations
and Accountability. 72 FR 66097, 66098 n.1, Nov.
27, 2007.

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or exceed an amount which the
exchange determines may be established
or liquidated in an orderly fashion.
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.231
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
. . . ’’ 232 The Committee Report singled
out four categories of trading and
positions that the Commission should
consider recognizing 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 of 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.233
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.234
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
231 House Committee on Agriculture, Futures
Trading Act of 1986, H.R. Rep. No. 624, 99th Cong.,
2d Sess. 44–46 (1986).
232 Id. at 46.
233 Id.
234 Senate Committee on Agriculture, Nutrition
and Forestry, Futures Trading Act of 1986, S. Rep.
No. 291, 99th Cong., 2d Sess. at 21–22 (1986).

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alternative to this risk reduction
standard.’’ 235
The Commission heeded Congress’s
recommendation, and the Commission
issued two 1987 interpretive statements
regarding the definition of bona fide
hedging. The first 1987 interpretative
statement clarified the meaning of
current § 1.3(z)(1).236 The Commission
interpreted the regulatory ‘‘temporary
substitute’’ criterion 237 not to be a
necessary condition for classification of
positions as hedging. The Commission
interpreted the ‘‘incidental test’’ 238 to
be a ‘‘requirement that the risks that are
offset by a futures or option hedge must
arise from commercial cash market
activities.’’ The Commission also noted
bona fide hedges could include balance
sheet and other trading strategies that
are risk reducing, such as ‘‘strategies
that provide protection equivalent to a
put option for an existing portfolio of
securities.’’ 239
The second 1987 interpretative
statement provides assistance to an
exchange who may wish to recognize
risk management exemptions from
exchange speculative position limit
rules.240 ‘‘The Commission note[d] that
providing risk management exemptions
to commercial entities who are typically
engaged in buying, selling or holding
cash market instruments is similar to a
provision in the Commission’s hedging
definition, [namely], the risks to be
hedged arise in the management and
conduct of a commercial enterprise.’’ 241
The Commission believed that it would
be consistent with the objectives of
section 4a of the Act and § 1.61 [now
incorporated as § 150.5] for exchange
rules to exempt from speculative limits
a number of risk management positions
in debt-based, equity-based and foreign
currency futures and options.242 Those
positions included: Unleveraged long
positions (covered by cash set aside);
short calls on securities or currencies
owned (i.e., covered calls); and long
positions in asset allocation strategies
235 Id.

at 22.
Clarification of Certain Aspect of the
Hedging Definition, 52 FR 27195, Jul. 20, 1987 (July
1987 Interpretative Statement).
237 In current § 1.3(z)(1), the phrase ‘‘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’’ has been termed the ‘‘temporary
substitute criterion.’’ (Emphasis added.)
238 In current § 1.3(z)(1), the phrase ‘‘price risks
incidental to commercial cash or spot operations’’
has been termed the ‘‘incidental test.’’
239 52 FR at 27197.
240 See, Risk Management Exemptions from
Speculative Position Limits Approved under
Commission Regulation 1.61, 52 FR 34633, Sep. 14,
1987.
241 Id. at 34637.
242 Id. at 34636.
236 See,

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
covered by hedged debt securities or
currencies owned.243
In 1987, the Commission also added
an enumerated hedging position for
spread positions which offset unfixedprice cash sales and unfixed-price cash
purchases that are priced basis different
delivery months in a futures contract
(that is, floating-price cash purchases
coupled with floating-price cash
sales).244 In this regard, the Commission
extended the cross-commodity hedging
provisions to offsets of such coupled
floating-price cash contracts that were
not cash market transactions in the same
commodity underlying the futures
contract.245
The Commission adopted federal
limits on soybean meal and soybean oil
futures contracts in 1987, in response to
a petition by the Chicago Board of
Trade.246 In the final rule, the
Commission noted: ‘‘Crush positions
allow the processor to determine or fix
his processing margin in advance and
are included within the exemptions
permitted for anticipatory hedging
under Commission Rule 1.3(z)(2).’’ 247
Specifically, the Commission noted for
a crush position established by a
soybean processor, the short positions
in soybean oil and soybean meal futures
would be permitted to the extent of
twelve months unsold anticipated
production; and the long positions in
soybean futures would be permitted to
the extent of twelve months unfilled
anticipated requirements. The
Commission declined to adopt an
exemption for a reverse crush position.
The Commission stated its belief, based
upon comments received and its own
analysis, ‘‘that there are important
differences between the crush and
reverse crush positions from the
standpoint of bona fide hedging by
soybean processors.’’ The results of a
crush position, plus or minus basis
variation, are known once the position
is established. In contrast, the
Commission noted with a reverse crush
spread position, ‘‘the intended results
transpire only if, and when, the futures
markets reflect the expected or
anticipated more favorable crushing
margin and the position can be lifted.’’
Accordingly, the Commission noted it
did not appear appropriate to recognize
the reverse crush spread position as an
enumerated category of bona fide
hedging.248
243 Id.

FR 38914, 38919, Oct. 20, 1987.
at 38922.
246 Petition for rulemaking of the CBOT, dated
July 24, 1986, cited in 52 FR 6814, Mar. 5, 1987.
247 52 FR 38914, 38920, Oct. 20, 1987.
248 Id. The Commission noted at that time that the
determination of whether a reverse crush position

In 2007, the Commission proposed a
risk management exemption to federal
position limits, in addition to the bona
fide hedging exemption.249 A risk
management position would have been
defined as a futures or futures
equivalent position held as part of a
broadly diversified portfolio of longonly or short-only futures or futures
equivalent positions, that is based on
either tracking a broadly diversified
index for clients or a portfolio
diversification plan that included an
exposure to a broadly diversified index.
In either case, the exemption would
have been conditioned on the futures
positions being passively managed,
unleveraged, and outside of the spot
month. The Commission withdrew that
proposal in 2008, citing a lack of
consensus.250
In March of 2009, the Commission
issued 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.251 The Commission explained
that, beginning in 1991, the Commission
had granted bona fide hedge exemptions
under § 1.47 to a number of swap
intermediaries who were seeking to
manage price risk on their books as a
result of their serving as counterparties
to their swap clients in commodity
index swap contracts or commodity
swap contracts.252 The swap clients
included pension funds and other
passive investors who were not using
swaps to offset risks in the physical
marketing channel. In order to protect
itself from the risks of such swaps, the
swap intermediary would establish a
portfolio of long futures positions in the
commodities making up the index or the
commodity underlying the swap, in
such amounts as would offset its
exposure under the swap transaction.
By design, the commodity index did not
include contract months in the spot
month. The exemptions did not cover
positions carried into the spot month.
The comments on the March 2009
concept release 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

244 52

245 Id.

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is bona fide hedging should be made on a case-bycase basis under § 1.47.
249 72 FR 66097, Nov. 27, 2007.
250 73 FR 32261, Jun. 6, 2008.
251 74 FR 12282, Mar. 24, 2009.
252 Id. at 12284.

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current form, or some variation
thereof.253
In January of 2010, the Commission
proposed an integrated speculative
position framework for the major energy
contracts listed on DCMs.254 The
proposed rules would not have
recognized futures and option
transactions offsetting exposure
acquired pursuant to swap dealing
activity as bona fide hedges. Instead,
upon compliance with several
conditions including reporting and
disclosure obligations, the proposed
regulations would have allowed swap
dealers to seek a limited exemption
from the proposed speculative position
limits for the major energy contracts.255
The proposed framework was
withdrawn after enactment of the DoddFrank Act, which the Commission
interprets as expanding the range of
derivative contracts, beyond contracts
listed on DCMs, on which the
Commission must impose position
limits.
Since 1974, the Commission has had
authority under the Act to define the
term bona fide hedging position. With
the enactment on July 21, 2010 of the
Dodd-Frank Act, section 4a(c)(1) of the
Act,256 continues to provide that
position limits do not apply to positions
shown to be bona fide hedging positions
as defined by the Commission.257
However, Dodd-Frank added section
4a(c)(2) of the Act, which the
Commission interprets as directing the
Commission to narrow the bona fide
hedging position definition for physical
commodities from the definition found
in current § 1.3(z)(1), as discussed
further below.258 Separately, DoddFrank added section 4a(a)(7) of the Act
to give the Commission plenary
authority to grant general exemptive
relief from the position limit rules.259
On November 18, 2011, the
Commission adopted part 151 to
establish a position limits regime for
253 The comments are available for review on the
Commission’s Web site at http://www.cftc.gov/
LawRegulation/PublicComments/09-004.
254 75 FR 4144, Jan. 26, 2010 (withdrawn 75 FR
50950, Aug. 18, 2010).
255 75 FR at 4152.
256 7 U.S.C. 6a(c)(1).
257 Id. The Dodd-Frank Act did not change the
language found in prior 7 U.S.C. 6a(c) (2010).
258 See infra discussion of ‘‘temporary substitute
test.’’
259 Section 4a(a)(7) of the Act provides: ‘‘The
Commission, by rule, regulation, or order, may
exempt, conditionally or unconditionally, any
person or class of persons, any swap or class of
swaps, any contract of sale of a commodity for
future delivery or class of such contracts, any
option or class of options, or any transaction or
class of transactions from any requirement it may
establish under this section with respect to position
limits.’’ 7 U.S.C. 6a(a)(7).

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twenty-eight exempt and agricultural
commodity futures and options
contracts and the physical commodity
swaps that are economically equivalent
to such contracts.260 In connection with
issuing the part 151 limits, the
Commission defined bona fide hedging
transactions or positions in § 151.5(a)
and enumerated eight transactions or
positions that would constitute bona
fide hedging transactions or positions
and, thus, would be exempt from the
part 151 limits.261
In addition to the exemptions
enumerated in § 151.5(a)(2) and (5)
provided that, ‘‘Any person engaging in
other risk reducing practices commonly
used in the market which they believe
may not be specifically enumerated in
§ 151.5(a)(2) may request relief from
Commission staff under § 140.99 of this
chapter 262 or the Commission under
section 4a(a)(7) of the Act concerning
the applicability of the bona fide
hedging transaction exemption.’’ 263
On January 20, 2012, the Working
Group of Commercial Energy Firms (the
‘‘Working Group’’) filed a petition
pursuant to both section 4a(a)(7) of the
Act and § 151.5(a)(5) (the ‘‘Working
Group Petition’’) 264 requesting that the
Commission ‘‘grant exemptive relief for
[ten] classes of risk-reducing
transactions described [in the petition]
to the extent that such transactions are
not covered by [§§ ] 151.5(a)(1) or (2) of
the Position Limit Rules or, in the
alternative, clarify that such classes of
transactions qualify as ‘bona fide
hedging transactions or positions’
within the meaning of [§§ ] 151.5(a)(1)
and (2); [(‘‘Requests One–Ten’’)] and
provide exemptive relief regarding the
definition of (a) ‘‘spot month’’ set forth
in [§ ] 151.3(c) of the Position Limit
Rules, and (b) ‘‘swaption’’ set forth in
260 See

generally 76 FR 71626, Nov. 18, 2011.
17 CFR 151.5(a)(2)(i)–(viii). The
Commission also recognized pass-through swaps
and pass-through swap offsets as bona fide hedging
transactions. 17 CFR 151.5(a)(3)–(4).
262 Section 140.99 sets out general procedures and
requirements for requests to Commission staff for
exemptive, no-action and interpretative letters.
263 17 CFR § 151.5(a)(5).
264 The Working Group Petition is available at
http://www.cftc.gov/stellent/groups/public/@
rulesandproducts/documents/ifdocs/
wgbfhpetition012012.pdf. The Working Group
supplemented the petition in a letter dated April
17, 2012, available at http://www.cftc.gov/stellent/
groups/public/@rulesandproducts/documents/
ifdocs/workinggroupltr041712.pdf. As noted in
their submission, the Working Group is a diverse
group of commercial firms in the energy industry
whose primary business activity is the physical
delivery of one or more energy commodities to,
among others, industrial, commercial and
residential consumers. Members of the Working
Group and their affiliates actively trade futures and
swaps and they assert that they would be materially
impacted by position limit rules under part 151.

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261 See

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[§ ] 151.1 of the Position Limit Rules
[(‘Other Requests)].’’ 265 In connection
with any relief ultimately granted as a
result of the Petition, the Working
Group also requested that the
Commission ‘‘confirm that any relief
granted is generally applicable to the
entire market.’’ 266
In addition to the Working Group
Petition, on March 13, 2012, the
American Petroleum Institute (‘‘API’’)
also filed a petition pursuant to both
section 4a(a)(7) of the Act and
§ 151.5(a)(5) (the ‘‘API Petition’’).267 The
API Petition generally endorsed the
Working Group petition and requested
that the Commission recognize as bona
fide hedging transactions certain routine
energy market transactions that are
priced at monthly average index
prices.268 The request in the API
Petition is essentially a restatement of
Requests One through Three of the
Working Group Petition. The API
Petition also requested relief for passthrough swaps.
Further, the CME Group, on April 26,
2012, filed a petition pursuant to section
4a(a)(7) of the Act and § 151.5(a)(5) (the
‘‘CME Petition’’).269 The CME Petition
generally requested that the
Commission recognize as bona fide
hedging transactions certain purchases
by persons engaged in processing,
manufacturing or feeding that were
permitted under § 1.3(z)(2)(ii)(C) during
the last five trading days in physicaldelivery contracts, not to exceed
anticipated requirements for that month
and the next succeeding month. The
request in the CME Petition is
265 See

Working Group Petition at 1.
Working Group Petition at 3. In letters
dated March 1,2012, and March 26, 2012,
respectively, a group of three energy trade
associations (Edison Electric Institute, American
Gas Association, and Electric Power Supply
Association), and the Futures Industry Association
submitted comments in support of the Working
Group Petition, available at http://www.cftc.gov/
stellent/groups/public/@rulesandproducts/
documents/ifdocs/eei-aga-epsa_comments.pdf and
http://www.cftc.gov/stellent/groups/public/@
rulesandproducts/documents/ifdocs/
fialtr032612.pdf.
267 The API Petition is available at http://
www.cftc.gov/stellent/groups/public/@
rulesandproducts/documents/ifdocs/
apiltr031312.pdf. As noted in their submission, API
is a national trade association representing more
than 450 oil and natural gas companies. Its
members transact in physical and financial,
exchange-traded, and over-the-counter markets
primarily to hedge or mitigate commercial risks
associated with their core business of delivering
energy to wholesale and retail customers.
268 See API Petition at 1.
269 The CME Petition is available at http://
www.cftc.gov/stellent/groups/public/@
rulesandproducts/documents/ifdocs/
cmeltr042612.pdf.
266 See

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substantively similar to Request Eight of
the Working Group Petition.
With the court’s September 28, 2012,
order vacating part 151, the Commission
now re-proposes a definition of bona
fide hedging position.
b. Proposed Definition of Bona Fide
Hedging Position
The Commission proposes to delete
§ 1.3(z), the current definition of ‘‘bona
fide hedging transactions or positions,’’
and replace it with a new definition of
‘‘bona fide hedging position’’ in
§ 150.1.270 Section 4a(c)(1) of the Act, as
added by the Dodd-Frank Act,
authorizes the Commission to define
bona fide hedging positions ‘‘consistent
with the purposes of this Act.’’ 271 The
proposed definition of bona fide
hedging position builds on the
Commission’s history, both in
administering a regulatory exemption to
federal limits and in providing guidance
to exchanges in establishing exchange
limits, and is grounded for physical
commodities on the new requirements
in section 4a(c)(2) of the Act, as
amended by section 737 of the DoddFrank Act in July 2010.272
Organization. The proposed
definition of bona fide hedging position
is organized into six sections: an
opening paragraph with two general
requirements for all hedges; and five
numbered paragraphs (paragraphs (1)–
(5)). Paragraph (1) of the proposed
definition sets forth requirements for
hedges of an excluded commodity, and
incorporates guidance on risk
management exemptions that may be
adopted by an exchange.273 Paragraph
(2) lists requirements for hedges of a
physical commodity. Paragraphs (3) and
(4) list enumerated exemptions.
Paragraph (5) specifies the requirements
for cross-commodity hedges.
c. General Requirements for All Bona
Fide Hedges—Opening Paragraph
The opening paragraph of the
proposed definition sets forth two
general requirements for any legitimate
hedging position: (i) The purpose of the
position must be to offset price risks
incidental to commercial cash
operations (the ‘‘incidental test’’); and
270 The proposed definition does not reference
‘‘transactions’’ because the Commission has not had
trading volume limits on transactions since 1979.
See generally Elimination of Daily Speculative
trading Limits, 44 FR 7124, Feb. 6, 1979.
271 7 U.S.C. 6a(c)(1).
272 7 U.S.C. 6a(c)(2).
273 Regarding the definition of bona fide hedging
positions in excluded commodities, the
Commission notes this proposed definition also
would provide flexibility to exchanges adopting
exemptions for securities futures contracts
consistent with § 41.25(a)(3)(iii).

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(ii) the position must be established and
liquidated in an orderly manner in
accordance with sound commercial
practices (the ‘‘orderly trading
requirement’’). These general
requirements are found in current
§ 1.3(z)(1).274
Incidental test. Consistent with its
prior interpretation of the incidental test
under § 1.3(z)(1), discussed above, the
Commission intends the proposed
incidental test to be a requirement that
the risks offset by a commodity
derivative contract hedging position
must arise from commercial cash market
activities.275 The Commission believes
this requirement is consistent with the
statutory guidance to define bona fide
hedging positions to permit hedging
‘‘legitimate anticipated business
needs.’’ 276 In the absence of a
requirement for a legitimate business
need, the Commission believes it would
be difficult to distinguish between
hedging and speculative activities. The
Commission believes the concept of
commercial cash market activities is
also embodied in the economically
appropriate test for physical
commodities in section 4a(c)(2) of the
Act, discussed below. The proposed
incidental test amends the incidental
test in current § 1.3(z)(1) by clarifying
that forward commercial operations may
also serve as the basis for a bona fide
hedging position.277 This is consistent
with the Commission’s long-standing
recognition of fixed-price purchase and
fixed-price sales contracts (which may
specify forward delivery dates) as the
basis of certain enumerated hedges in
current § 1.3(z)(2).
Orderly trading requirement. The
proposed orderly trading requirement is
intended to impose on bona fide
hedgers a duty of ordinary care when
entering, maintaining and exiting the
market in the ordinary course of
business and in order to avoid as
practicable the potential for significant
274 In relevant part, current § 1.3(z)(1) provides:
‘‘Notwithstanding the foregoing, no transaction or
position shall be classified as bona fide hedging for
purposes of section 4a of the Act unless their
purpose is to offset price risks incidental to
commercial cash or spot operations and such
position are established and liquidated in an
orderly manner in accordance with sound
commercial practices and [unless other] provisions
[of this definition] have been satisfied.’’ 17 CFR
1.3(z)(1). The second characteristic was contained
in vacated § 151.5(a)(1)(v).
275 See, Clarification of Certain Aspect of the
Hedging Definition, 52 FR 27195, Jul. 20, 1987 (July
1987 interpretative statement).
276 7 U.S.C. 6a(c)(1).
277 The incidental test was not contained in
vacated § 151.5(a)(1). This omission was not
discussed in the preambles to the proposed or final
rule. However, the incidental test was retained in
amended § 1.3(z)(1) for excluded commodities. 76
FR at 71683.

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market impact in establishing,
maintaining or liquidating a position in
excess of position limitations.278 The
Commission believes the proposed
orderly trading requirement is
consistent with the policy objectives of
position limits to diminish, eliminate or
prevent excessive speculation and to
ensure that the price discovery function
of the underlying market is not
disrupted.279 The Commission believes
the orderly trading requirement is
particularly important since the
Commission intends to set the initial
levels of position limits at the outer
bound of the range of levels of position
limits that may serve to maximize the
statutory policy objectives. Thus, bona
fide hedgers likely would only need an
exemption for extraordinarily large
positions.
The Commission believes that
negligent trading, practices, or conduct
should be a sufficient basis for the
Commission to disallow a bona fide
hedging exemption. The Commission
believes that an evaluation of ‘‘orderly
trading’’ should be based on the totality
of the facts and circumstances as of the
time the person engaged in the relevant
trading, practices, or conduct—i.e., the
Commission intends to consider
whether the person knew or should
have known, based on the information
available at the time, he or she was
engaging in the conduct at issue.
The Commission proposes to apply its
policy regarding orderly markets for
purposes of the disruptive trading
practice prohibitions, to its orderly
trading requirement for purposes of
position limits. ‘‘The Commission’s
policy is that an orderly market may be
characterized by, among other things,
parameters such as a rational
relationship between consecutive
prices, a strong correlation between
price changes and the volume of trades,
levels of volatility that do not
dramatically reduce liquidity, accurate
relationships between the price of a
derivative and the underlying such as a
physical commodity or financial
instrument, and reasonable spreads
between contracts for near months and
278 Compare, section 4c(a)(5)(B) of the Act, which
makes it unlawful for any person to engage in any
trading, practice, or conduct on or subject to the
rules of a registered entity that, for example,
demonstrates intentional or reckless disregard for
the orderly execution of transactions during the
closing period. 7 U.S.C. 6c(a)(5)(B). Section 4c(a)(6)
of the Act authorizes the Commission to promulgate
such ‘‘rules and regulations as, in the judgment of
the Commission, are reasonable necessary to
prohibit . . . any other trading practice that is
disruptive of fair and equitable trading.’’ 7 U.S.C.
6c(a)(6).
279 See sections 4a(3)(B)(i) and (iv) of the Act. 7
U.S.C. 6a(3)(B)(i) and (iv).

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for remote months.’’ 280 Further, in
fulfilling their duty of ordinary care
when entering, maintaining and exiting
a position, market participants should
assess market conditions and consider
how their trading practices and conduct
affect the orderly execution of
transactions when establishing,
maintaining or liquidating a position in
excess of a speculative position limit.
d. Requirements and Guidance for
Hedges in an Excluded Commodity—
Paragraph (1)
The proposed definition of bona fide
hedging position for contracts in an
excluded commodity 281 includes the
general requirements in the opening
paragraph and would require that the
position is economically appropriate to
the reduction of risks in the conduct
and management of a commercial
enterprise (the ‘‘economically
appropriate’’ test) and is either (i)
specifically enumerated in paragraphs
(3)–(5) of the definition of bona fide
hedging position; or (ii) recognized as a
bona fide hedging position by a DCM or
SEF consistent with the guidance on
risk management exemptions in
proposed appendix A to part 150.282
The economically appropriate test in
section 4a(c)(2) of the Act, applicable to
physical commodities, also should
apply to excluded commodities because
it has long been a fundamental
requirement of a bona fide hedging
position.283 Current § 1.3(z)(1) contains
the economically appropriate test.284
280 See Interpretive Guidance and Policy
Statement on Antidisruptive Practices Authority, 78
FR 31890, 31895–96 (May 28, 2013) (available at
http://www.cftc.gov/ucm/groups/public/@
lrfederalregister/documents/file/2013-12365a.pdf).
281 ‘‘Excluded commodity’’ is defined in section
1a(19) of the Act. 7 U.S.C. 1a(19).
282 See the discussion below of proposed
§ 150.5(b)(5), requiring exchange hedge exemptions
to exchange limits on contracts in an excluded
commodity to conform to the definition of bona fide
hedging position in § 150.1. The Dodd-Frank Act
expanded the authority of the Commission with
respect to core principles applicable to exchange
traded contracts in an excluded commodity, but did
not address directly the definition of bona fide
hedging positions for excluded commodities. The
Dodd-Frank Act amended the core principles for
DCMs and established core principles for SEFs,
authorizing the Commission, by rule or regulation,
to restrict the reasonable discretion of the exchange
in complying with core principles. 7 U.S.C.
7(d)(1)(B) and 7b–3(f)(1)(B).
283 See, e.g., the definition of bona fide hedging
promulgated by the Commission’s predecessor in
§ 1.3(z) of its regulations in 1975. 40 FR 11560,
11561, Mar. 12, 1975 (‘‘Bona fide hedging
transactions or positions . . . shall mean sales of or
short positions in any commodity for future
delivery . . . ,’’ (emphasis added)).
284 The Commission adopted this requirement in
§ 1.3(z)(1) in 1977. 42 FR 42748, 42751, Aug. 24,
1977. Prior to that time, the concept of
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The Commission notes that the concept
of the reduction of risk was long
embodied in the statutory concept of
‘‘offset’’ prior to 1974.285 The
economically appropriate test is
discussed further, below.
Under the proposed definition, an
exchange would be permitted to grant
an exemption based on its rules that
were consistent with the enumerated
exemptions in paragraphs (3)–(5) of the
proposed definition of bona fide
hedging position. Current § 1.3(z)(1) also
requires a bona fide hedging position to
be either (i) an enumerated exemption
in current § 1.3(z)(2) or (ii) a nonenumerated exemption under current
§ 1.3(z)(3) (a non-enumerated exemption
may be granted under current § 1.47 as
a risk management exemption). The
enumerated exemptions in paragraphs
(3)–(5) of the proposed definition of
bona fide hedging position contain all of
the enumerated exemptions in current
§ 1.3(z)(2). The specifically enumerated
exemptions also are discussed
separately, below.
The Commission is proposing to
incorporate as guidance in appendix A
to part 150 the concepts in the 1987 risk
management exemptions interpretative
statement.286 The Commission believes
that it would be consistent with the
objectives of section 4a of the Act for
exchange rules to exempt from
speculative limits a number of risk
management positions in commodity
derivative contracts in an excluded
commodity. Such risk management
exemption positions would include, but
not be limited to, three types of
the operation of a commercial enterprise was not
separately articulated, but was reflected in the
incidental test (‘‘unless their bona fide purpose is
to offset price risks incidental to commercial cash
or spot operations’’) in § 1.3(z)(1) as amended in
1975. 40 FR 11560, 11561, Mar. 12, 1975. Current
§ 150.5(d) provides guidance to DCMs that
exchange regulations for bona fide hedging position
exemptions (including exemptions for excluded
commodity contracts) should be granted in
accordance with current § 1.3(z)(1). 17 CFR 150.5(d)
See, for example, Chicago Mercantile Exchange
Rule 559.A., Bona Fide Hedging Positions, available
at http://www.cmegroup.com/rulebook/CME/I/5/
5.pdf, that provides: ‘‘The Market Regulation
Department may grant exemptions from position
limits for bona fide hedge positions as defined by
CFTC Regulation § 1.3(z)(1). Approved bona fide
hedgers may be exempted from emergency orders
that reduce position limits or restrict trading.’’
285 Prior to 1974, section 4a of the Act defined
bona fide hedging transactions as: ‘‘For the
purposes of this paragraph, bona fide hedging
transactions shall mean sales of any commodity for
future delivery on or subject to the rules of any
board of trade to the extent that such sales are offset
in quantity by the ownership or purchase of the
same cash commodity or, conversely, purchases of
any commodity for future delivery on or subject to
the rules of any board of trade to the extent that
such purchases are offset by sales of the same cash
commodity.’’ 7 U.S.C. 6a (1940).
286 52 FR 34633, Sep. 14, 1987.

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exemptions for: (i) Unleveraged long
positions (covered by cash set aside); (ii)
short calls on securities or currencies
owned (i.e., covered calls); and (iii) long
positions in asset allocation strategies
covered by hedged debt securities or
currencies owned (i.e., unleveraged
synthetic positions).287 The Commission
is proposing to withdraw the 1987 risk
management exemption interpretative
statement in light of incorporating its
concepts in proposed appendix A to
part 150, thus rendering that
interpretative statement redundant. The
Commission requests comment on all
aspects of proposed appendix A to part
150.
In addition, under the proposed
guidance for excluded commodities and
as is currently the case, there need not
be any temporary substitute test for a
bona fide hedging position in an
excluded commodity. This is consistent
with the Commission’s July 1987
interpretative statement that the
temporary substitute component need
not apply to a bona fide hedging
position in an excluded commodity.288
e. Requirements for Hedges in a
Physical Commodity—Paragraph (2)
The Commission is proposing to
implement the statutory directive of
section 4a(c)(2) of the Act in paragraph
(2) of the proposed definition of bona
fide hedging position under § 150.1. The
proposed definition for physical
commodities would also include the
general requirements of the opening
paragraph, as is the case under current
§ 1.3(z)(1) and as discussed above.
Section 4a(c)(2) of the Act directs the
Commission to define what constitutes
a bona fide hedging position for futures
and option contracts on physical
commodities listed by DCMs.289 The
Commission proposes to apply the same
definition to (i) swaps that are
economically equivalent to futures
contracts and (ii) direct-access linked
FBOT futures contracts that are
economically equivalent to futures
contracts listed by DCMs.290 Applying
287 Id.

at 34626.
FR 27195, Jul. 20, 1987 (July 1987
Interpretative Statement). See also House of
Representatives Committee Report quoted at 52 FR
34633, 34634, September 14, 1987, regarding
‘‘futures positions taken as alternatives rather than
temporary substitutes for cash market positions.’’
H.R. Rep No. 624, 99th Cong., 2d Sess. 1, 45–46
(1986). However, the Commission is proposing to
withdraw the July 1987 Interpretative Statement,
since the temporary substitute test was added by
the Dodd-Frank Act as a statutory requirement for
a bona fide hedging position in a physical
commodity. 7 U.S.C. 4a(c)(2)(A)(i).
289 7 U.S.C. 6a(c)(2).
290 This is consistent with the approach the
Commission took in vacated § 151.5. 76 FR 71643
n.168.
288 52

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the same definition to economically
equivalent contracts would promote
administrative efficiency. Applying the
same definition to economically
equivalent contracts also is consistent
with congressional intent as embodied
in the expansion of the Commission’s
authority to apply position limits to
swaps (i.e., those that are economically
equivalent to futures and swaps that
serve a significant price discovery
function) and to direct-access linked
FBOT contracts.291
Paragraph (2)(i) of the proposed
definition would recognize as bona fide
a position in a commodity derivative
contract that (i) represents a substitute
for positions taken or to be taken at a
later time in the physical marketing
channel (i.e., the ‘‘temporary substitute’’
test); (ii) is economically appropriate to
the reduction of risks (i.e., the
‘‘economically appropriate’’ test); and
(iii) arises from the potential change in
value of assets, liabilities or services
(i.e., the ‘‘change in value’’
requirement), provided the position is
enumerated in paragraphs (3) through
(5) of the definition, as discussed below.
This subparagraph would incorporate
the provisions of section 4a(c)(2)(A) of
the Act for futures and option contracts
and also would include the provisions
of section 4a(c)(2)(B)(ii) of the Act,
regarding swaps, by using the term
commodity derivative contracts, which
includes swaps, futures and futures
option contracts.
Temporary substitute test. The
temporary substitute test requires that a
bona fide hedging position must
represent ‘‘a substitute for . . . positions
taken or to be taken at a later time in
a physical marketing channel.’’ 292
Paragraph (2)(i) of the proposed
definition incorporates the temporary
substitute test of section 4a(c)(2)(A)(i) of
the Act. The express language of section
4a(c)(2)(A)(i) of the Act requires the
temporary substitute test to be a
necessary condition for classification of
positions in physical commodities as
bona fide hedging positions. Section
4a(c)(2)(A) of the Act incorporates many
aspects of the general definition of bona
fide hedging in current § 1.3(z)(1).
However, there are significant
differences. Section 4a(c)(2)(A)(i) of the
Act does not include the adverb
‘‘normally’’ to modify the verb
‘‘represents’’ in the phrase ‘‘represents a
substitute for transactions made or to be
made or positions taken or to be taken
at a later time in a physical marketing
291 7
292 7

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U.S.C. 6a(c)(2)(A)(i).

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channel.’’ 293 In addition, Congress
provided explicit requirements for
recognizing swaps as bona fide hedging
positions in section 4a(c)(2)(B),
recognizing positions that reduce either
the risk of swaps that meet the
requirements of section 4a(c)(2)(A) of
the Act or swaps that are executed
opposite a counterparty whose
transaction would qualify as bona fide
under section 4a(c)(2)(A) of the Act. The
statutory requirements are more
stringent than the conditions for swap
risk management exemptions the
Commission previously granted under
§ 1.3(z)(3) and § 1.47. As discussed
above, the Commission granted risk
management exemptions for persons to
offset the risk of swaps that did not
represent substitutes for transactions or
positions in a physical marketing
channel, neither by the intermediary nor
the counterparty. Thus, positions that
reduce the risk of such speculative
swaps would no longer meet the
requirements for a bona fide hedging
transaction or position under the new
statutory criteria.
Economically appropriate test.
Paragraph (2)(A)(ii) of the proposed
definition incorporates the
economically appropriate test of section
4a(c)(2)(A)(ii) of the Act. This statutory
provision mirrors the provisions in
current § 1.3(z)(1). The Commission has
provided interpretations and guidance
over the years as to the meaning of
‘‘economically appropriate’’ in current
§ 1.3(z)(1). For example, the
Commission has indicated that hedges
of processing margins by a processor,
such as a soybean processor that
establishes long positions in the
soybean contract and short positions in
the soybean meal contact and the
soybean oil contract, may be
economically appropriate.294
By way of example, a manufacturer
may anticipate using a commodity that
it does not own as an input to its
manufacturing process; however, the
manufacturer expects to change output
prices to offset substantially a change in
price of the input commodity. For
example, processing by a soybean crush
operation or a fuel blending operation
may add relatively little value to the
price of the input commodity. In such
circumstances, it would be
economically appropriate for the
processor to offset the price risks of both
293 In contrast and as noted above, in current
§ 1.3(z)(1), the phrase ‘‘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’’ has
been termed the ‘‘temporary substitute’’ criterion.
(Emphasis added.)
294 52 FR 38914, 38920, Oct. 20, 1987.

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the unfilled anticipated requirement for
the input commodity and the unsold
anticipated production; such a hedge
would, for example, fully lock in the
value of soybean crush processing.
Alternatively, a processor may wish to
establish a calendar month hedge solely
in terms of the input commodity, to
offset the price risk of the anticipated
input commodity and to crosscommodity hedge the unsold
anticipated production. In such an
alternative, a processor has hedged the
commercial enterprise’s exposure to the
value of the input commodity at the
expected time of acquisition and to the
input commodity’s value component of
the processed commodity at the
expected later time of production and
sale. Unfilled anticipated requirements,
unsold anticipated production and
cross-commodity hedging are also
discussed as enumerated hedges, below.
The Commission affirms that gross
hedging may be appropriate under
certain circumstances, when net cash
positions do not measure total risk
exposure due to differences in the
timing of cash commitments, the
location of stocks, and differences in
grades or types of the cash commodity
being hedged.295 By way of example, a
merchant may have sold a certain
quantity of a commodity for deferred
delivery in the current year (i.e., a fixedprice cash sales contract) and purchased
that same quantity of that same
commodity for deferred receipt in the
next year (i.e., a fixed-price cash
purchase contract). Such a merchant
would be exposed to value risks in the
two cash contracts arising from different
delivery periods (that is, from a timing
difference). Thus, although the
merchant has bought and sold the same
quantity of the same commodity, the
merchant may elect to offset the price
risk arising from the cash purchase
contract separately from the price risk
arising from the cash sales contract,
with each offsetting commodity
derivative contract regarded as a bona
fide hedging position. However, if such
a merchant were to offset only the cash
purchase contract, but not the cash sales
contract (or vice versa), then it
reasonably would appear the offsetting
commodity derivative contract would
result in an increased value exposure of
the enterprise (that is, the risk of
changes in the value of the cash
commodity contract that was not offset
is likely to be higher than the risk of
changes in the value of the calendar
spread difference between the nearby
and deferred delivery period) and, so,
the commodity derivative contract
295 42

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75709

would not qualify as a bona fide
hedging position.
In order for a position to be
economically appropriate to the
reduction of risks in the conduct and
management of a commercial enterprise,
the enterprise generally should take into
account all inventory or products that
the enterprise owns or controls, or has
contracted for purchase or sale at a fixed
price. For purposes of reporting cash
market positions under current part 19,
the Commission historically has
allowed a reporting trader to ‘‘exclude
certain products or byproducts in
determining his cash positions for bona
fide hedging’’ if it is ‘‘the regular
business practice of the reporting
trader’’ to do so.296 The Commission has
determined to clarify the meaning of
‘‘economically appropriate’’ in light of
this reporting exclusion of certain cash
positions.
Originally, the Commission intended
for the optional part 19 reporting
exclusion to cover only cash positions
that were not capable of being delivered
under the terms of any derivative
contract.297 The Commission
differentiated between ‘‘products and
byproducts’’ of a commodity and the
underlying commodity itself, the former
capable of exclusion from part 19
reporting under normal business
practices due to the absence of any
derivative contract in such product or
byproduct.298 This intention ultimately
evolved to allow cross-commodity
hedging of products and byproducts of
a commodity that were not necessarily
deliverable under the terms of any
derivative contract.299
296 See current § 19.00(b)(1) (providing that ‘‘[i]f
the regular business practice of the reporting trader
is to exclude certain products or byproducts in
determining his cash position for bona fide hedging
. . . , the same shall be excluded in the report’’).
17 CFR 19.00(b)(1).
297 43 FR 45825, 45827, Oct. 4, 1978 (explaining
that the allowance for eggs not kept in cold storage
to be excluded from reporting a cash position in
eggs under part 19 ‘‘was appropriate when the only
futures contract being traded in fresh shell eggs
required delivery from cold storage warehouses.’’).
298 See id. Prior to the Commission’s revision of
the part 19 reporting exclusion for eggs, the
exclusion allowed ‘‘eggs not in cold storage or
certain egg products’’ not to be reported as a cash
position. 26 FR 2971, Apr. 7, 1961 (emphasis
added). Additionally, the title to the revised
exclusion read, ‘‘Excluding products or byproducts
of the cash commodity hedged.’’ See 43 FR 45825,
45828 (Oct. 4, 1978). So, in addition to a
commodity itself that was not deliverable under any
derivative contract, the Commission also recognized
a separate class of ‘‘products and byproducts’’ that
resulted from the processing of a commodity that
it did not believe at the time were capable of being
hedged by any derivative contract for purposes of
a bona fide hedge.
299 See 42 FR 42748, Aug. 24, 1977. Crosscommodity hedging is discussed as an enumerated
hedge, below.

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emcdonald on DSK67QTVN1PROD with PROPOSALS2

The instructions to current Form 204
go a step further than current
§ 19.00(b)(1) by allowing for a reporting
trader to exclude ‘‘certain source
commodities, products, or byproducts in
determining [ ] cash positions for bona
fide hedging.’’ (Emphasis added.) In line
with its historical approach to the
reporting exclusion, the Commission
does not believe that it would be
economically appropriate to exclude
large quantities of a source commodity
held in inventory when an enterprise is
calculating its value at risk to a source
commodity and it intends to establish a
long derivatives position as a hedge of
unfilled anticipated requirements. As
explained in the revisions to part 19,
discussed below, a source commodity
itself can only be excluded from a
calculation of a cash position if the
amount is de minimis, impractical to
account for, and/or on the opposite side
of the market from the market
participant’s hedging position.
Change in value requirement.
Paragraph (2)(A)(iii) of the proposed
definition incorporates the potential
change in value requirement of section
4a(c)(2)(A)(iii) of the Act. This statutory
provision largely mirrors the provisions
in current § 1.3(z)(1).300 The
Commission notes that it uses the term
‘‘price risk’’ to mean a ‘‘potential change
in value.’’ To satisfy the change in value
requirement, the purpose of a bona fide
hedge must be to offset price risks
incidental to a commercial enterprise’s
cash operations. The change in value
requirement is embedded in the concept
of offset of price risks.
Pass-through Swaps and Offsets.
Subparagraph (2)(B) of the proposed
definition would recognize as bona fide
a commodity derivative contract that
reduces the risk of a position resulting
from a swap executed opposite a
counterparty for which the position at
the time of the transaction would
qualify as a bona fide hedging position
under subparagraph (2)(A). This
provision generally mirrors the
provisions of section 4a(c)(2)(B)(i) of the
Act,301 and clarifies that the swap itself
is also a bona fide hedging position to
the extent it is offset. However, the
300 Compare 7 U.S.C. 6a(c)(2)(A)(iii) and 17 CFR
1.3(z)(1). Note that § 1.3(z)(1)(ii) uses the phrase
‘‘liabilities which a person owes or anticipate
incurring,’’ while section 4a(c)(2)(A)(iii)(II) uses the
phrase ‘‘liabilities that a person owns or anticipates
incurring.’’ (Emphasis added.) The Commission
interprets the word ‘‘owns’’ to be an error and the
word ‘‘owes’’ to be correct.
301 The Commission interprets the statutory
provision that requires that ‘‘the transaction would
qualify as a bona fide hedging transaction’’ to mean
the swap position at the time of the transaction
would qualify as a bona fide hedging position. 7
U.S.C. 6a(c)(2)(B)(i).

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Commission is proposing that it will not
recognize as bona fide hedges the offset
of such swaps with physical-delivery
contracts during the lesser of the last
five days of trading or the time period
for the spot month in such physicaldelivery commodity derivative contract
(the ‘‘five-day’’ rule).
The Commission is proposing to use
its exemptive authority under section
4a(a)(7) of the Act to net positions in
futures, futures options, economically
equivalent swaps and direct-access
linked FBOT contracts in the same
referenced contract for purposes of
single month and all-months-combined
limits under proposed § 150.2,
discussed below.302 Thus, a passthrough swap exemption would not be
necessary for a swap portfolio in
referenced contracts that would
automatically be netted with futures and
futures options in the same referenced
contract outside of the spot month
under the proposed rules. The
Commission historically has permitted
non-enumerated risk management
positions under § 1.3(z)(3) and § 1.47.
Almost all exemptions historically
requested and granted under these
provisions were for risk management of
swap positions related to the
agricultural commodities subject to
federal position limits under part 150.
As noted above, the proposed rule
would impose a five-day rule during the
spot-month. In the risk management
exemptions for swaps issued to date by
the Commission under current
§ 1.3(z)(3) and § 1.47, the exemptions for
swap offsets did not run to the spot
month. As discussed above, the
Commission has long imposed a fiveday rule in current § 1.3(z)(2) for other
exemptions. For example, for hedges of
unfilled anticipated requirements, the
Commission observed that historically
there was a low utilization of this
provision in terms of actual positions
acquired in the futures market.303 For
cross-commodity and short anticipatory
hedge positions, the Commission did
not believe that persons who do not
possess or do not have a commercial
need for the commodity for future
delivery will normally wish to
participate in the delivery process.304 In
302 This is consistent with netting permitted in
vacated § 151.4(b) of swaps with futures for
purposes of single-month and all-months-combined
limits. The Commission noted in that final
rulemaking that it did ‘‘not believe that including
a risk management provision is necessary or
appropriate given that the elimination of the class
limits outside of the spot-month will allow entities,
including swap dealers, to net Referenced Contracts
whether futures or economically equivalent swaps.’’
76 FR at 71644.
303 42 FR 42748, Aug. 24, 1977.
304 Id. 42749.

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the instant cases of swaps, the
Commission has observed generally low
usage among all traders of the physicaldelivery futures contract during the spot
month, relative to the existing exchange
spot-month position limits.305 The
Commission invites comments as to the
extent to which traders actually have
offset the risk of swaps during the spot
month in a physical-delivery futures
contract with a position in excess of an
exchange’s spot-month position limit.
The Commission has reviewed its
historical policy position regarding the
five-day rule for speculative limits in
the spot month in light of position
information, including positions in
physical-delivery energy futures
contracts.306 For example, the
Commission reviewed three years of
confidential large trader data in cashsettled and physical-delivery energy
contracts. The review covered actual
positions held in the physical-delivery
energy futures markets during the threeday spot period, among all traders
(including those who had received
hedge exemptions from their DCM). It
showed that, historically, there have
been relatively few positions held in
excess (and those few not greatly in
excess) of the spot month limits.
Accordingly, the Commission generally
is not inclined to change its long-held
policy views regarding physical305 Compare 76 FR at 71690. Vacated
§ 151.5(a)(2)(3) recognized a pass-through swap
offset during the spot period as an exception to the
five-day rule if the ‘‘pass-through swap position
continues to offset the cash market commodity
price risk of the bona fide hedging counterparty.’’
Based on a review of open positions in physicaldelivery futures contracts, the Commission no
longer believes it necessary to recognize offsets of
swaps in the last few days of the expiring physicaldelivery contract and has not provided this
additional provision in the current proposal.
Rather, the Commission has decided to forego this
exception to the five-day rule in the interest of
ensuring that the price discovery function of the
underlying market is not disrupted during the last
few days of the spot period. Further, the
Commission believes it would have been
administratively burdensome for a trader to
demonstrate that its counterparty continued to have
a bona fide hedging need through the spot period.
306 The Commission also relies upon the
congressional shift evidenced in the Dodd-Frank
Act amendments to the CEA, that directed the
Commission, to the maximum extent practicable, in
its discretion, (i) to diminish, eliminate, or prevent
excessive speculation, (ii) to deter and prevent
market manipulation, squeezes, and corners, (iii) to
ensure sufficient market liquidity for bona fide
hedgers, and (iv) to ensure that the price discovery
function of the underlying market is not disrupted.
7 U.S.C. 6a(a)(3)(B). The five-day rule would serve
to prevent excessive speculation as a physicaldelivery contract nears expiration, thereby deterring
or preventing types of market manipulations such
as squeezes and corners and protecting the price
discovery function of the market. The restriction of
the five-day rule does not appear to deprive the
market of sufficient liquidity for bona fide hedgers.

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
delivery futures contracts at this
time.307
The Commission typically does not
publish ‘‘general statistical
information’’ 308 regarding large trader
positions in the expiring physicaldelivery energy futures contracts
because of concerns that such data may
reveal information about the amount of
market power a person may need to
‘‘mark the close’’ 309 or otherwise
manipulate the price of an expiring
contract.310

emcdonald on DSK67QTVN1PROD with PROPOSALS2

f. Trade Option Exemption
The Commission previously amended
part 32 of its regulations to allow
commodity options to trade subject to
the same rules applicable to any other
swap, unless the commodity option
qualifies under the new § 32.3 trade
option exemption.311 In order to qualify
for the trade option exemption, (i) both
offeror and offeree must be a producer,
processor, or commercial user of, or
merchant handling the commodity that
is the subject of the commodity option
transaction, or the products or
byproducts thereof, and both offeror and
offeree must be offering or entering into
the commodity option transaction solely
for purposes related to their business as
such,312 and (ii) the option is intended
to be physically settled such that, if
exercised, the commodity option would
307 Nevertheless, the Commission requests
comment on whether the five-day rule should be
waived for pass-through swaps and offsets in the
event a position of the bona fide counterparty in the
physical-delivery futures contract would have been
recognized as a bona fide hedging position. If so,
should a person be required to document the
continuing bona fides of the counterparty to such
swaps through the spot period, that is, in addition
to the time of the transaction? Further, should a
person also be required to have an unfixed-price
forward contract with the bona fide counterparty,
so that a person would have a bona fide need and
ability to make or take delivery on the physicaldelivery futures contract, analogous to the agent
provisions in proposed paragraph (3)(iv) of the
definition of bona fide hedging position?
308 As authorized by CEA section 8(a)(1). 7 U.S.C.
12(a)(1).
309 Marking the close refers to, among other
things, the practice of acquiring a substantial
position leading up to the closing period of trading
in a futures contract, followed by offsetting the
position before the end of the close of trading, in
an attempt to manipulate prices in the closing
period.
310 The Commission gathers large trader position
reports on reportable traders in futures under part
17 of the Commission’s rules. That data has
historically remained confidential pursuant to CEA
section 8. The Commission does, however, publish
summary statistics for all-months-combined in its
Commitments of Traders Report, available on
http://www.cftc.gov/MarketReports/
CommitmentsofTraders/index.htm.
311 See 17 CFR 32.2; Commodity Options, 77 FR
25320 (Apr. 27, 2012).
312 Additionally, the offeror can be an eligible
contract participant (‘‘ECP’’) as defined in CEA
section 1a(18).

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result in the sale of an exempt or
agricultural commodity for immediate
or deferred shipment or delivery.313
Qualifying trade options are exempt
from all requirements of the CEA and
Commission’s regulations, except for
certain enumerated provisions,
including position limits.314
The Commission is making
conforming changes to the trade option
exemption requirement that position
limits still apply. Under § 32.3(c)(2),
‘‘Part 151 (Position Limits)’’ of the
Commission’s regulations applies to
every counterparty to a trade option ‘‘to
the same extent that [part 151] would
apply to such person in connection with
any other swap.’’ The Commission is
replacing the reference to ‘‘Part 151,’’
now vacated, with ‘‘Part 150’’ to clarify
that the position limit requirements
proposed herein still would be
applicable to trade options qualifying
under the exemption.
The Commission also is requesting
comment as to whether the Commission
should use its exemptive authority
under CEA section 4a(a)(7) 315 to
provide that the offeree of a commodity
option qualifying for the trade option
exemption would be presumed to be a
‘‘pass-through swap counterparty’’ for
purposes of the offeror of the trade
option qualifying for the pass-through
swap offset.316 Although the
Commission is proposing generally to
net futures and swaps in reference
contracts in the same commodity under
proposed § 150.2, as discussed below,
the Commission notes that crosscommodity offsets of pass-through
swaps would not be recognized unless
the counterparty to the swap is a bona
fide hedger. Would this presumption
help offerors determine the
appropriateness of carrying out crosscommodity hedge transactions?
In addition, the Commission requests
comments on whether adopting such a
presumption might allow use of the
exemption to evade Commission rules
pertaining to swap transactions. Should
313 The Commission noted in the preamble to the
trade option exemption that in determining delivery
intent, market participants could refer to the
guidance provided for the forward contract
exclusion in the Product Definition rulemaking. See
77 FR at 25326. This guidance conveyed that the
Commission’s ‘‘Brent Interpretation’’ is equally
applicable to the forward exclusion from the swap
definition as it was to the forward exclusion from
the ‘‘future delivery’’ definition, which allows for
subsequently, separately negotiated book-out
transactions to qualify for the forward contract
exclusion. See 77 FR 48208, 48228, Aug. 13, 2012
(citing Statutory Interpretation Concerning Forward
Transactions, 55 FR 39188, Sep. 25, 1990).
314 See 17 CFR 32.3(b)–(d).
315 7 U.S.C. 6a(a)(7).
316 See the proposed § 150.1 definition of ‘‘bona
fide hedge exemption’’ at paragraph (2)(ii).

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the Commission adopt an anti-evasion
provision to address this concern?
Furthermore, might some additional
safeguards be included to allow the
Commission to provide administrative
simplicity through use of the
presumption, while also limiting use of
the presumption to evade other
regulations?
Further, the Commission requests
comment on whether it would be
appropriate to exclude trade options
from the definition of referenced
contracts and, thus, to exempt trade
options from the proposed position
limits. If trade options were excluded
from the definition of reference
contracts, then commodity derivative
contracts that offset the risk of trade
options would not automatically be
netted with such trade options for
purposes of non-spot month position
limits. The Commission notes that
forward contracts are not subject to the
proposed position limits; however,
certain forward contracts may serve as
the basis of a bona fide hedging position
exemption, e.g., an enumerated bona
fide hedging position exemption is
available for the offset of the risk of a
fixed price forward contract with a short
futures position. Should the
Commission include trade options as
one of the enumerated exemptions (e.g.,
proposed paragraphs (3)(ii) and (iii) of
the definition of bona fide hedging
position under proposed § 150.1)? As an
alternative to excluding trade options
from the definition of referenced
contract, should the Commission
provide an exemption under CEA
section 4a(a)(7) that permits the offeree
or offeror to submit a notice filing to
exclude their trade options from
position limits? If so, why and under
what circumstances? Are there any
other characteristics of trade options or
the parties to trade options that the
Commission should consider? Would
any of these alternatives permit
commodity options that should be
regulated as swaps to circumvent the
protections established in the DoddFrank Act for the forward contract
exclusion for non-financial
commodities?
g. Enumerated Hedges—Paragraphs
(3)–(5).
Proposed paragraph (1)(i) would
require a bona fide hedging position in
an excluded commodity to be
enumerated under paragraphs (3), (4), or
(5) of the definition or to be granted an
exemption under exchange rules
consistent with the risk management
guidance of appendix A to part 150.
Proposed paragraph (2)(i)(D) would
require a bona fide hedging position in

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a physical commodity to be enumerated
under paragraphs (3), (4), or (5) of the
definition. The Commission has
historically enumerated acceptable bona

fide hedging positions in § 1.3(z)(2) for
physical commodities. Each of the
enumerated provisions is discussed
below. For convenience, the

Commission is providing a summary
comparison of the various provisions of
the proposed rule, vacated part 151, and
current rules, in Table 4 below.

TABLE 4—PROPOSED, CURRENT, AND VACATED ENUMERATED BONA FIDE HEDGES
Cash position underlying bona fide
hedging position
Inventory and fixed-price cash commodity purchase contracts.
Fixed-price cash commodity sales
contracts.
Unfilled anticipated requirements
for same cash commodity.
Unfilled anticipated requirements
for resale by a utility.
Hedges by agents ...........................
Unsold anticipated production .........
Offsetting unfixed-price cash commodity sales and purchases.

Paragraph in proposed definition
of bona fide hedging position
under § 150.1 and related
provisions

Current § 1.3(z) and related
provisions

(3)(i) ..............................................

1.3(z)(2)(i)(A) ................................

151.5(a)(2)(i)(A).

(3)(ii) .............................................

1.3(z)(2)(ii)(A) and (B) ..................

151.5(a)(2)(ii)(A) and (B).

(3)(C)(i) .........................................

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

151.5(a)(2)(ii)(C).

(3)(C)(ii) ........................................

N/A ...............................................

N/A.

(3)(iv) ............................................

1.3(z)(3) ........................................
Discussed as example of nonenumerated hedge.
1.3(z)(2)(i)(B) ................................
1.3(z)(2)(iii) ...................................

151.5(a)(2)(iv).
151.5(a)(2)(i)(B).
151.5(a)(2)(iii).

N/A ...............................................

151.5(a)(2)(vi).

N/A ...............................................
1.3(z)(2)(iv) ...................................

151.5(a)(2)(vii).
151.5(a)(2)(viii).

1.3(z)(3) and 1.47 ........................
Non-enumerated exemption for
futures used in risk management of swaps.
N/A, as not subject to current federal limits.
1.3(z)(3) and 1.47 ........................
1.3(z) and 1.48 .............................

151.5(a)(3).

Pass-through swap offset ...............

(4)(i) ..............................................
(4)(ii) .............................................
Scope expanded in comparison
to part 151.
(4)(iii) ............................................
Scope reduced in comparison to
part 151 to ownership of royalties.
(4)(iv) ............................................
(5) .................................................
Scope expanded to permit crosshedge of pass-through swap in
comparison to part 151.
(2)(ii)(A) ........................................

Pass-through swap .........................

(2)(ii)(B) ........................................

Non-enumerated hedges ................
Filing for anticipatory hedges ..........

150.3(e) ........................................
150.7 ............................................

Anticipated royalties ........................

Services ...........................................
Cross-commodity hedges ...............

Vacated part 151 definition

151.5(a)(4).
151.5(a)(5).
151.5(d).

emcdonald on DSK67QTVN1PROD with PROPOSALS2

N/A denotes not applicable.

For clarity, the proposed definition
uses the terms long positions and short
positions in commodity derivative
contracts as those terms are proposed to
be defined, rather than the terms
purchases or sales of any commodity for
future delivery, used in current
§ 1.3(z)(2). These clarifications are for
two reasons. First, the proposed
definition only addresses bona fide
hedging positions, and does not address
bona fide hedging transactions.
Although the language of current
§ 1.3(z)(2) was written to address
purchase or sales transactions, the
Commission eliminated daily
speculative trading volume limits in
1979, as noted above.317 The
Commission and its predecessor has
long interpreted the terms sales or
purchases of futures contracts in
§ 1.3(z)(2) to mean short or long
positions in futures contracts in the
317 44

FR 7124, Feb. 6, 1979.

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context of position limits.318 Second,
318 The statutory definition of bona fide hedging
in section 4a(3) of the Act (prior to the CFTC Act
of 1974) used the terms ‘‘sales of any commodity
for future delivery . . . to the extent that such sales
are offset in quantity by the ownership or purchase
of the same cash commodity’’ and ‘‘purchases of
any commodity for future delivery . . . to the
extent that such purchases are offset by sales of the
same cash commodity.’’ 7 U.S.C. 6a(3) (1940).
Following enactment of the CFTC Act, the Secretary
of Agriculture’s initial proposed definition of bona
fide hedging transactions or positions makes clear
this understanding, as that definition provided, in
relevant part, for ‘‘sales of, or short positions in any
commodity for future delivery . . . to the extent
that such sales or short positions are offset in
quantity by the ownership or fixed-price purchase
of the same cash commodity’’ and for ‘‘purchases
of, or long positions in, any commodity for future
delivery . . . to the extent that such purchases or
long positions are offset by fixed-price sales of the
same cash commodity. . . .’’ 39 FR 39731, Nov. 11,
1974. The Commission adopted that same language
in its initial definition of bona fide hedging
transactions or positions. 40 FR 48688, 48689, Oct.
17, 1975. In both the proposed and final rules in
1977, the Commission was silent as to why it
omitted the clarifying phrases ‘‘long positions’’ and
‘‘short positions.’’ Proposed Rule, 42 FR 14832,

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the proposed definition would be
applicable to positions in commodity
derivative contracts (i.e., futures,
options thereon, swaps and directaccess linked FBOT contracts) rather
than only to futures and options
contracts. As noted above, the
Commission preliminarily believes it
appropriate to apply the same definition
of bona fide hedging positions to all
physical commodity derivative
contracts subject to federal limits.
The Commission notes that DCMs and
SEFs may impose additional conditions
on holders of positions in commodity
derivative contracts, particularly in the
spot month. The Commission has long
relied on the DCMs to protect the
integrity of the exchange’s delivery
process in physical-delivery contracts.
Congress recognizes this obligation,
including in core principle 5, which
Mar. 16, 1977; Final Rule, 42 FR 42748, Aug. 24,
1977.

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requires DCMs to consider position
limitations or position accountability for
speculators to reduce the potential
threat of market manipulation or
congestion, especially during trading in
the delivery month.319 Exchanges will
typically impose on large short position
holders in a physical-delivery contract a
continuing obligation to compare cash
market and futures market prices in the
spot month and to liquidate the
derivative position (i.e., buy back the
short position) if the commodity may be
sold at a more favorable (higher) price
in the cash market. Further, exchanges
will typically impose on large long
position holders in a physical-delivery
contract a continuing obligation to
compare cash market and futures market
prices in the spot month and to
liquidate the derivative position (i.e.,
sell the long position) if the commodity
may be purchased at a more favorable
(lower) price in the cash market.
Exchanges can continue these practices
under the proposed rule.
(1) Exemption-by-Exemption Discussion
Inventory and cash commodity
purchase contracts—paragraph (3)(A).
Inventory and fixed-price cash
commodity purchase contracts have
long served as the basis of a bona fide
hedging position.320 This provision is in
current § 1.3(z)(2)(i)(A). A commercial
enterprise is exposed to price risk if it
has (i) obtained inventory in the normal
course of business or (ii) entered into a
fixed-price purchase contract, whether
spot or forward, calling for delivery in
the physical marketing channel of a
commodity; and has not offset that price
risk. For example, an enterprise may
offset such price risk in the cash market
by entry into fixed-price sales contracts.
An appropriate hedge of inventory or a
fixed-price purchase contract would be
to establish a short position in a
commodity derivative contract to offset
the risk of such position. Such short
position may be held into the spot
month in a physical-delivery contract if
economically appropriate.321
319 7

U.S.C. 7(d)(5).
e.g., 7 U.S.C 6a(3) (1970). That statutory
definition of bona fide hedging included ‘‘sales of,
or short positions in, any commodity for future
delivery on or subject to the rules of any contract
market made or held by such person to the extent
that such sales or short positions are offset in
quantity by the ownership or purchase of the same
cash commodity by the same person.’’
321 For example, it would not appear to be
economically appropriate to hold a short position
in the spot month of a commodity derivative
contract against fixed-price purchase contracts that
provide for deferred delivery in comparison to the
delivery period for the spot month commodity
derivative contract. This is because the commodity
under the cash contract would not be available for
delivery on the commodity derivative contract.

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A person can use a commodity
derivative contract to hedge inventories
of a cash commodity that is deliverable
on that physical-delivery contract. Such
a deliverable cash commodity inventory
need not be in a delivery location.
However, the Commission notes that a
DCM or SEF may prudentially require
such short positions holders to
demonstrate the ability to move the
commodity into a deliverable location,
particularly during the spot month.322
Once inventory has been sold, a
person is permitted a commercially
reasonable time period, as necessary to
exit the market in an orderly manner, to
liquidate a position in commodity
derivative contracts in excess of a
position limit. Generally, the
Commission believes such time period
would be less than one business day.
Cash commodity sales contracts—
paragraph (3)(B). Fixed-price cash
commodity sales have long served as the
basis of a bona fide hedging position.323
This provision is in current
§ 1.3(z)(2)(ii)(A) and (B). A commercial
enterprise is exposed to price risk if it
has entered into a fixed-price sales
contract, whether spot or forward,
calling for delivery in the physical
marketing channel of a commodity and
has not offset that price risk, for
example, by entering into a fixed-price
purchase contract. An appropriate
hedge of a fixed-price sales contract
would be to establish a long position in
a commodity derivative contract to
offset the risk of such cash market
contact. Such long position may be held
into the spot month in a physicaldelivery contract if economically
appropriate.
Unfilled anticipated requirements—
paragraph (3)(C)(i). Unfilled anticipated
requirements for the same cash
commodity have long served as the
basis of a bona fide hedging position.324
322 Further, the Commission notes an exchange,
pursuant to its position accountability rules, may at
any time direct a trader that is in excess of
accountability levels to reduce a position in a
contract traded on that exchange.
323 See, e.g., 7 U.S.C. 6a(3)(1970). That statutory
definition of bona fide hedging included
‘‘purchases of, or long positions in, any commodity
for future delivery on or subject to the rules of any
contract market made or held by such person to the
extent that such purchases or long positions are
offset by sales of the same cash commodity by the
same person.’’
324 See, e.g., 7 U.S.C. 6a(3)(C) (1970). That
statutory definition of bona fide hedging included
‘‘an amount of such commodity the purchase of
which for future delivery shall not exceed such
person’s unfilled anticipated requirements for
processing or manufacturing during a specified
operating period not in excess of one year:
Provided, That such purchase is made and
liquidated in an orderly manner and in accordance
with sound commercial practice in conformity with
such regulations as the Secretary of Agriculture may
prescribe.’’

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This provision mirrors the requirement
of current § 1.3(z)(2)(ii)(C). An
appropriate hedge of unfilled
anticipated requirements would be to
establish a long position in a commodity
derivative contract to offset the risk of
such unfilled anticipated requirements.
Under the proposal, such long
positions may not be held into the lesser
of the last five days of trading or the
time period for the spot month in a
physical-delivery commodity derivative
contract (the five-day rule), with the
exception that a person may hold long
positions that do not exceed the
person’s unfilled anticipate
requirements of the same cash
commodity for the next two months. As
noted above, the CME Group and the
Working Group pointed out that
previously, persons engaged in
purchases of futures contracts have been
permitted to hold up to 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 futures do not exceed
the person’s unfilled anticipated
requirements of the same cash
commodity for that month and for the
next succeeding month.
Utility hedging unfilled anticipated
requirements of customers—paragraph
(3)(iii)(B). The Commission is proposing
a new exemption for unfilled
anticipated requirements for resale by a
utility. This provision is analogous to
the unfilled anticipated requirements
provision of paragraph (3)(iii)(A), except
the commodity is not for use by the
same person—that is, the utility—but
rather for anticipated use by the utility’s
customers. The proposed new
exemption would recognize a bona fide
hedging position where a utility is
required or encouraged to hedge by its
public utility commission (‘‘PUC’’).
Request Six of the Working Group
petition asked the Commission to grant
relief with respect to a long position in
a commodity derivative contract that
arises from natural gas utilities’ desire to
hedge the price of gas that they expect
to purchase and supply to their retail
customers. In support of its petition, the
Working Group provided evidence that
hedging natural gas price risk, which
includes some combination of fixedprice supply contracts, storage and
derivatives, is a prudent risk
management practice that limits
volatility in the prices ultimately paid
by consumers.325
325 See, e.g., ‘‘Use of Hedging by Local Gas
Distribution Companies: Basic Considerations and

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Materials submitted in support of the
Working Group petition 326 make it clear
that the risk management transactions—
fixed-price contracts, storage, and
derivatives—engaged in by a typical
natural gas utility to reduce risk
associated with anticipated
requirements of natural gas are used to
fulfill its obligation to serve retail
customers and are typically considered
by the state PUC as prudent. The PUC
may indeed obligate the natural gas
utility to hedge some portion of the
supply of natural gas needed to meet the
needs of its customers and may take
regulatory action if the utility fails to do
so. As a result, in order to mitigate the
impact of natural gas price volatility on
the cost of natural gas acquired to serve
its regulated retail natural gas
customers, a utility may enter into long
positions in commodity derivative
contracts to hedge a specified
percentage of such customers’
anticipated natural gas requirements
over a multi-year horizon. The utility’s
PUC considers such hedging practices to
be prudent and has allowed gains and
losses related to such hedging activities
to be retained by its regulated retail
natural gas customers.
The Commission recognizes the
highly regulated nature of the natural
gas market, where state-regulated public
utilities may have rules or guidance
concerning locking in the costs of
anticipated requirements for retail
customers through a number of means,
including fixed-price purchase
contracts, storage, and commodity
derivative contracts. Moreover, since the
public utility typically does not directly
profit from the results of its hedging
activity (because most or all of the gains
derived from hedging are passed on to
customers, e.g., through the price
charged for natural gas), the utility has
no incentive to speculate.
The Commission invites comments on
all aspects of this new enumerated bona
fide hedging exemption.
Hedges by agents—paragraph (3)(iv).
The Commission is proposing an
enumerated exemption for hedges by an
agent who does not own or has not
contracted to sell or purchase the
offsetting cash commodity at a fixed
price, provided that the agent is
responsible for merchandising the cash
positions that are being offset in
commodity derivative contracts and the
Regulatory Issues,’’ K. Costello and J. Cita, The
National Regulatory Research Institute at the Ohio
State University (May 2001). All supporting
materials provided by the Working Group are
available at http://sirt.cftc.gov/sirt/sirt.aspx?
Topic=CommissionOrdersandOtherActionsAD&
Key=23082.
326 Id.

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agent has a contractual arrangement
with the person who owns the
commodity or holds the cash market
commitment being offset. The
Commission historically has recognized
a merchandising transaction as a bona
fide hedge in the narrow circumstances
of an agent responsible for
merchandising a cash market position
which is being offset.327
Other enumerated hedging
positions—paragraph (4). Each of the
other enumerated hedging positions
would be subject to the five-day rule for
physical-delivery contracts. The
Commission reiterates the intent of the
five-day rule is to protect the integrity
of the delivery process in physicaldelivery contracts. The reorganization
into new paragraph (4) of existing
provisions in 1.3(z) subject to the fiveday rule is intended for administrative
ease.
Unsold anticipated production—
paragraph (4)(i). Unsold anticipated
production has long served as the basis
of a bona fide hedging position.328 This
provision is in current § 1.3(z)(2)(i)(B).
The Commission historically has
recognized twelve months of unsold
anticipated production in an
agricultural commodity as the basis of a
bona fide hedging position. Under the
proposal, this twelve-month restriction
would not apply to physical-delivery
contracts that were not in an
agricultural commodity.
The Commission is considering
relaxing the five-day rule to permit a
person to hold a position in a physicaldelivery commodity derivative contract,
other than in an agricultural
commodity, through the close of the
spot month that does not exceed in
quantity the reasonably anticipated
unsold forward production that would
be available for delivery under the terms
of a physical-delivery commodity
derivative contract. For example, a
person with a significant number of
producing natural gas wells may be
highly certain that she can be a position
to deliver natural gas on the physicaldelivery natural gas futures contract.329
327 This provision is included in current
§ 1.3(z)(3) as an example of a potential nonenumerated case. 17 CFR 1.3(z)(3). Compare
vacated § 151.5(a)(2)(iv).
328 See 7 U.S.C 6a(3)(A) (1940). That statutory
definition of bona fide hedging, enacted in 1936,
included ‘‘the amount of such commodity such
person is raising, or in good faith intends or expects
to raise, within the next twelve months, on land (in
the United States or its Territories) which such
person owns or leases.’’
329 In contrast, prior to harvest, a farmer must
plant and manage a crop until it is ripe. Anticipated
agricultural production may not be available timely
at a delivery location for a futures contract. Thus,
historically, only inventories of agricultural
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The Commission is considering
permitting the exchange listing the
physical-delivery commodity derivative
contract to administer exemptions to the
five-day rule upon application to such
exchange specifying the unsold forward
production that could be moved into
delivery position. The Commission
requests comment on this alternative.
Offsetting unfixed-price cash
commodity sales and purchases—
paragraph (4)(ii). Offsetting unfixedprice cash commodity sales and
purchases basis different delivery
months in the same commodity
derivative contract have long served as
the basis of a bona fide hedging
position. 330 This provision is in current
§ 1.3(z)(2)(iii). The Commission
explained a major rationale for this
exemption for spread positions was to
facilitate commercial risk shifting
positions which may not have otherwise
conformed to the definition of bona fide
hedging.331
The proposed enumerated provision
would be expanded from current
§ 1.3(z)(2)(iii) to include unfixed-price
cash contracts basis different
commodity derivative contracts in the
same commodity, regardless of whether
the commodity derivative contracts are
in the same calendar month.332 The
Commission notes a commercial
enterprise may enter into the described
transactions to reduce the risk arising
from either (or both) a location
differential or a time differential in
unfixed price purchase and sale
contracts in the same cash
commodity.333 The contemplated
derivative transactions represent a
substitute for two transactions to be
made at a later time in a physical
marketing channel: a fixed-price
purchase and a fixed-price sale of the
have been recognized as a basis for a bona fide
hedging position under the five-day rule.
330 The Commission added this enumerated
exemption to the definition of bona fide hedging in
1987. 52 FR 38914, Oct. 20, 1987.
331 51 FR 31648, 31650, September 4, 1986. ‘‘In
particular, a cotton merchant may contract to
purchase and sell cotton in the cash market in
relation to the futures price in different delivery
months for cotton, i.e., a basis purchase and a basis
sale. Prior to the time when the price is fixed for
each leg of such a cash position, the merchant is
subject to a variation in the two futures contracts
utilized for price basing. This variation can be offset
by purchasing the future on which the sales were
based [and] selling the future on which [the]
purchases were based.’’ Id. (n. 3).
332 The Working Group requested this expansion
in Requests One and Two.
333 A location differential is the difference in
price between two derivative contracts in the same
commodity (or substantially the same commodity)
at two different delivery locations on the same (or
similar) delivery dates. A location differential also
may underlie a single derivative contract that is
called a basis contract.

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
same cash commodity. The commercial
enterprise intends to later take delivery
on one unfixed-price cash contract and
to re-deliver the same cash commodity
on another unfixed-price cash contract.
There may be no substantive difference
in time between taking and making
delivery in the physical marketing
channel, but the derivative contracts do
not offset each other because they are in
two different contracts (e.g., the NYMEX
Light Sweet Crude Oil futures contract
versus the ICE Europe Brent crude
futures) or two different instruments
(e.g., swaps versus futures). The
contemplated derivative positions will
offset the risk that the difference in the
expected delivery prices of the two
unfixed-price cash contracts in the same
commodity will change between the
time the hedging transaction is entered
and the time of fixing of the prices on
the purchase and sales cash contracts.
Therefore, the contemplated derivative
positions are economically appropriate
to the reduction of risk.
In the case of reducing the risk of a
location differential, and where each of
the underlying transactions in separate
derivative contracts may be in the same
contract month, the Commission notes
that a position in a basis contract would
not be subject to position limits, as
discussed in the proposed definition of
referenced contract.
The Commission notes that upon
fixing the price of, or taking delivery on,
the purchase contract, the owner of the
cash commodity may hold the short
derivative leg of the spread as a hedge
against a fixed-price purchase or
inventory.334 However, the long
derivative leg of the spread would no
longer qualify as a bona fide hedging
position since the commercial entity has
fixed the price or taken delivery on the
purchase contract. Similarly, if the
commercial entity first fixed the price of
the sales contract, the long derivative
leg of the spread may be held as a hedge
against a fixed-price sale,335 but the
short derivative leg of the spread would
no longer qualify as a bona fide hedging
position.
Anticipated royalties—paragraph
(4)(iii). The new enumerated exemption
would permit an owner of a royalty to
lock in the price of anticipated mineral
production. The Commission initially
recognized the hedging of anticipated
royalties in vacated § 151.5(a)(2)(vi).336
That provision would have recognized
‘‘sales or purchases’’ in commodity

derivative contracts that would be
‘‘offset by the anticipated change in
value of royalty rights that are owned by
the same person . . . [and] arise out of
the production, manufacturing,
processing, use, or transportation of the
commodity underlying the [commodity
derivative contract], which may not
exceed one year for agricultural’’
commodity derivative contracts; such
positions would be subject to the fiveday rule.
The Commission has reconsidered
that exemption in vacated
§ 151.5(a)(2)(vi) and now re-proposes it
as an enumerated exemption for short
positions in commodity derivative
contracts offset by the anticipated
change in value of mineral royalty rights
that are owned by the same person and
arise out of the production of a mineral
commodity (e.g., oil and gas); such
positions would be subject to the fiveday rule. This proposed exemption
differs from the exemption in vacated
§ 151.5(a)(2)(vi) because it applies only
to: (i) Short positions; (ii) arising from
production; and (iii) in the context of
mineral extraction.
A royalty arises as ‘‘compensation for
the use of property . . . [such as]
natural resources, expressed as a
percentage of receipts from using the
property or as an account per unit
produced.’’ 337 A short position is the
proper offset of a yet-to-be received
payment based on a percentage of
receipts per unit produced for a royalty
that is owned. This is because a short
position fixes the price of the
anticipated receipts, removing exposure
to change in value of the person’s share
of the production revenue.338 In
contrast, a person who has issued a
royalty has, by definition, agreed to
make a payment in exchange for value
received or to be received (e.g., the right
to extract a mineral). Upon extraction of
a mineral and sale at the prevailing cash
market price, the issuer of a royalty
remits part of the proceeds in
satisfaction of the royalty agreement.
Thus, the issuer of a royalty does not
have price risk arising from that royalty
agreement.
The Commission preliminarily
believes that ‘‘manufacturing,
processing, use, or transportation’’ of a
commodity does not conform to the
meaning of the term royalty. Further,
while the Commission recognizes that,
337 Black’s

Law Dictionary, 6th Ed.
short position fixes the price at the entry
price to the commodity derivative contract. For any
decrease (increase) in price of the commodity
produced, the expected royalty would decline
(increase) in value, but the commodity derivative
contract would increase (decrease) in value,
offsetting the price risk in the royalty.
338 A

334 See proposed paragraph (3)(i) of the definition
of bona fide hedging position under § 150.1.
335 See proposed paragraph (3)(ii) of the
definition of bona fide hedging position under
§ 150.1.
336 76 FR at 71689.

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historically, royalties have been paid for
use of land in agricultural
production,339 the Commission has not
received any evidence of a need for a
bona fide hedging exemption from
owners of agricultural production
royalties. The Commission nonetheless
invites comment on all aspects of this
new royalty exemption.
Services—paragraph (4)(iv). The
Commission is proposing the hedging of
services as a new enumerated hedge in
subparagraph (4)(iv) of the proposed
definition. This new exemption is not
without Commission precedent. For
example, in 1977, the Commission
noted that the existence of futures
markets for both source and product
commodities, such as soybeans and
soybean oil and meal, afford business
firms increased opportunities to hedge
the value of services.340 The
Commission’s current proposal is
similar to vacated § 151.5(a)(2)(vii).341
That provision would have recognized
‘‘sales or purchases’’ in commodity
derivative contracts that would be
‘‘offset by the anticipated change in
value of receipts or payments due or
expected to be due under an executed
contract for services held by the same
person . . . [and] the contract for
services arises out of the production,
manufacturing, processing, use, or
transportation of the commodity
underlying the [commodity derivative
contract], which may not exceed one
year for agricultural’’ commodity
derivative contracts; such positions
would be subject to the five-day rule.
That provision also made such positions
subject to a provision for crosscommodity hedging, namely that, ‘‘The
fluctuations in the value of the position
in [commodity derivative contracts] are
substantially related to the fluctuations
in value of receipts or payments due or
expected to be due under a contract for
services.’’ 342
The Commission has reconsidered its
proposed exemption in vacated
§ 151.5(a)(2)(vii) and now re-proposes
an enumerated exemption that is largely
the same, save for deleting the crosscommodity hedging provision in this
enumerated exemption, as that
provision is included under the cross339 For example, corn ‘‘rents’’ were cited in An
Inquiry into the Nature and Causes of the Wealth
of Nations, Smith, Adam, 1776, at cp. 5, available
at: http://www.gutenberg.org/files/3300/3300-h/
3300-h.htm. This eBook is for the use of anyone
anywhere at no cost and with almost no restrictions
whatsoever. You may copy it, give it away, or reuse it under the terms of the Project Gutenberg
License included with this eBook or online at
www.gutenberg.org.
340 42 FR 14832, 14833, Mar. 16, 1977.
341 76 FR at 71689.
342 Vacated § 151.5(a)(2)(vii)(B).

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commodity hedging exemption,
discussed below. Thus, the proposed
exemption would recognize ‘‘sales or
purchases’’ in commodity derivative
contracts that are ‘‘offset by the
anticipated change in value of receipts
or payments due or expected to be due
under an executed contract for services
by the same person . . . [and] the
contract for services arises out of the
production, manufacturing, processing,
use, or transportation of the commodity
which may not exceed one year for
agricultural’’ commodity derivative
contracts; such positions would be
subject to the five-day rule.
As the Commission previously noted
and under this proposed exemption,
‘‘crop insurance providers and other
agents that provide services in the
physical marketing channel could
qualify for a bona fide hedge of their
contracts for services arising out of the
production of the commodity
underlying a [commodity derivative
contract].’’ 343 The Commission invites
comment on all aspects of this new
services exemption.
(2) Cross-Commodity Hedges—
Paragraph (5)
The proposed cross-commodity
hedging provision would apply to all
enumerated hedges in paragraphs (3)
and (4) of the definition of bona fide
hedging position, as well as to passthrough swaps under paragraph (2).344
The Commission has long recognized
cross-commodity hedging, noting in
1977 that sales for future delivery of any
product or byproduct which is offset by
the ownership of fixed-price purchase of
the source commodity would be covered
by the general provisions for crosscommodity hedging in § 1.3(z)(2).345
FR at 71654.
344 Compare with vacated § 151.5(a)(2)(viii),
which provided for cross-commodity hedges in
enumerated positions but not for pass-through
swaps.
345 42 FR 14832, 14834, Mar. 16, 1977. The
Commission noted its belief that there is little

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Under the proposed enumerated
exemption, cross-commodity hedging
would be conditioned on: (i) The
fluctuations in value of the position in
the commodity derivative contract (or
the commodity underlying the
commodity derivative contract) are
substantially related to the fluctuations
in value of the actual or anticipated cash
position or pass-through swap (the
‘‘substantially related’’ test); and (ii) the
five-day rule being applied to positions
in any physical-delivery commodity
derivative contract.346 As discussed
above, the five-day rule would not
restrict positions in cash-settled
contracts, but would restrict only
positions in physical-delivery
commodity derivative contracts. Thus,
the Commission is protecting the
integrity of the delivery process in the
physical-delivery contract. Further, as
noted above, few traders typically hold
a position in excess of the position
limits during the last few days of the
spot month. Hence, a cross-commodity
hedger who held a position deep into
the spot month in excess of the spot
position limit likely would be large
commercial need to maintain cross-hedge positions
during the last five trading days of any expiring
contract. It believed the five-day restriction was
necessary to guarantee the integrity of the markets.
The Commission considered there was little
commercial utility of such positions during the last
five days of trading to offset anticipated production,
which at that time was limited to agricultural
commodities. The Commission considered its
responsibility for orderly markets and concluded
not to propose an enumerated exemption in the last
five days of trading for anticipatory production. See
also 7 U.S.C. 6a(3)(B) (1970). That statutory
definition of bona fide hedging included ‘‘an
amount of such commodity the sale of which for
future delivery would be a reasonable hedge against
the products or byproducts of such commodity
owned or purchased by such person, or the
purchase of which for future delivery would be a
reasonable hedge against the sale of any product or
byproduct of such commodity by such person.’’ Id.
346 Compare with current § 1.3(z)(2)(iv), which
requires compliance with the substantially related
test and with the five-day rule, and does not
provide an exception to the five-day rule for cashsettled contracts.

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relative to all traders. Such large
positions may interfere with
convergence of the commodity
derivative contract with the cash market
price, since the supply and demand
expectations for cross-commodity
hedgers may differ from those of
persons hedging price risks of the
commodity underlying the physicaldelivery derivative.
Substantially related test. The
Commission is proposing guidance on
the meaning of the substantially related
test. The Commission is proposing a
non-exclusive safe harbor for crosscommodity hedges.347 The safe harbor
would have two factors: (i) Qualitative;
and (ii) quantitative.
Qualitative factor: As a first factor in
assessing whether a cross-commodity
hedge is bona fide, the target commodity
should have a reasonable commercial
relationship to the commodity
underlying the commodity derivative
contract. For example, there is a
reasonable commercial relationship
between grain sorghum (commonly
called milo), used as a food grain for
humans or as animal feedstock, with
corn underlying a commodity derivative
contract.348
In contrast, there does not appear to
be a reasonable commercial relationship
between a physical commodity and a
stock price index; while long-term price
series of such commodities may be
statistically related by either inflation or
measures of economic activity, such
disparate commodities do not appear to
have the requisite commercial
relationship. Such correlation appears
for this purpose to be spurious.
347 The Commission understands that crosscommodity hedges in physical commodities are not
generally recognized by accountants as eligible for
hedge accounting treatment.
348 See, e.g., ‘‘The Alternative Field Crops
Manual,’’ University of Minnesota, November 1989,
available at http://www.hort.purdue.edu/newcrop/
afcm/sorghum.html.

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Quantitative factor: The target
commodity should also be offset by a
position in a commodity derivative
contract that provides a reasonable
quantitative correlation and in light of
available liquid commodity derivative
contracts. The Commission will
presume an appropriate quantitative
relationship exists when the correlation
(R), between first differences or returns
in daily spot price series for the target
commodity and the price series for the
commodity underlying the derivative
contract (or the price series for the
derivative contract used to offset risk),
is at least 0.80 for a time period of at
least 36 months.349 When less granular
price series than daily are used, R
typically will be higher. Thus, price

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349 By way of comparison, accounting practice
may look to goodness of fit (R2) to be at least 0.80.
The proposed correlation (R) of 0.80 corresponds to
an R2 of 0.64, substantially less than accounting
practice. Further, accounting practice may look to
the coefficient (hedge ratio) from a regression
analysis to be in the range of negative 0.80 to 1.25.
The Commission notes that the size of this
coefficient is dependent upon the unit of trading for
the hedging instrument and the unit of trading for
the target of the hedge. To the extent both may be
expressed in similar terms, the coefficient may fall
within the range suggested by accounting practice.
However, given standardized hedging instruments
such as futures are fixed in terms of a particular
price quote for a commodity (such as in dollars per
bushel) and the target of a cross-commodity hedge
may not have units fixed in the same terms (such
as in dollars per hundred weight), the hedge ratio
will depend on a fairly arbitrary choice of units to
express the price series of the target of the hedge.
Thus, the Commission is not proposing any
particular safe harbor or requirement for a hedge
ratio.

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series data of at least daily frequency
should be used, if available.
The Commission will presume that
positions in a commodity derivative
contract that does not meet the safe
harbor are not bona fide crosscommodity hedging positions. However,
a person may rebut this presumption
upon presentation of facts and
circumstances demonstrating a
reasonable relationship between the
spot price series for the commodity to
be hedged and either the spot price
series for the commodity underlying the
commodity derivative contract or the
price series for the commodity
derivative contract to be used for
hedging. A person should consider
whether there is an actively traded
commodity derivative contract that
would meet the safe harbor, in light of
liquidity considerations. A person may
seek interpretative relief under § 140.99
for recognition of such a position as a
bona fide hedging position.
Generally, a regression or time series
analysis of prices should be performed
to determine an appropriate hedge
ratio.350 Many price series are nonstationary because the prices increase
with time and, thus, do not revert to a
mean (i.e., stationary) price level. A
regression on non-stationary data can
350 The

Commission notes this safe harbor is
intentionally written in general terms. Appropriate
hedge ratios may be determined using an
appropriate model, including but not limited to
ordinary lease squares (OLS), autoregressive
conditional heteroscedasticity (ARCH), generalized
autoregressive conditional heteroscedasticity
(GARCH), or an error-correction model (ECM).

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give rise to spurious values for the
‘‘goodness of fit’’ and other statistics.351
Thus, a quantitative analysis should be
performed using first differences or
returns (percentage price changes) so as
to render the time series stationary.352
However, the Commission is not
proposing to condition the substantially
related test on any particular hedge ratio
methodology.
By way of example, the Commission
believes that fluctuations in the value of
electricity contracts typically will not be
substantially related to fluctuations in
value of natural gas. There may not be
a substantial relation, for example,
because the marginal pricing in a spot
market may be driven by the price of
something other than natural gas, such
as nuclear, coal, transmission, outages,
or water/hydroelectric power
generation. Table 5 below shows
illustrative simple correlations, both in
terms of levels and returns, between
spot electricity prices and natural gas
(both spot Henry Hub prices and the
nearby NYMEX Henry Hub Natural Gas
futures prices, assuming a roll to the
next deferred futures contract on the
eleventh calendar day of each month).
These correlations are much lower than
the proposed safe harbor level of 0.80.
351 ‘‘Goodness of fit’’ is defined as: ‘‘A general
term describing the extent to which an
econometrically estimated equation fits the data.
There are various ways of summarizing this
concept, including the coefficient of determination
and adjusted R2.’’ ‘‘The MIT Dictionary of Modern
Economics,’’ 4th Ed. (1996).
352 See, e.g., ‘‘A Guide to Econometrics,’’ 5th Ed.,
The MIT Press (2003), at p.319.

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TABLE 5—CORRELATIONS—SPOT ELECTRICITY PRICES AND NATURAL GAS (SPOT AND FUTURES) PRICES JANUARY 2,
2009 TO MAY 14, 2013
Price series:

Correlations using:

Houston electricity ........................................

Levels ...........................................................
Returns .........................................................
Levels ...........................................................
Returns .........................................................
Levels ...........................................................
Returns .........................................................

PJM electricity ..............................................
New England electricity ................................

Henry Hub spot
0.1333
0.1264
0.4415
0.0987
0.3450
0.1808

Henry Hub futures
0.0630
0.0488
0.2724
0.0153
0.2422
0.0121

Data sources: Henry Hub Gulf Coast Natural Gas Spot Price ($ per mmBTUs) and Natural Gas Futures Contracts ($ per mmBTU), source: US
Energy Information Administration, available at http://www.eia.gov/dnav/ng/ng_pri_fut_s1_d.htm; Wholesale Day Ahead Prices at Selected Hubs,
Peak (5/16/2013), source: US Energy Information Administration, republished from the Intercontinental Exchange (ICE), available at http://
www.eia.gov/electricity/wholesale/.

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Alternatively, a generator of
electricity that owns or leases a natural
gas generator may qualify for an unfilled
anticipated requirements bona fide
hedge to meet a fixed price power
commitment (sale of electricity). The
position that is hedged is the quantity
equivalent of natural gas through the
generator to meet the contracted fixed
price power commitment.353 A natural
gas hedge exemption can also be
applied to operating characteristics of
the plant and sources of revenue such
as ancillary services.
(3) Examples of Bona Fide Hedging
Positions in Appendix B
The Commission is providing
examples to illustrate enumerated bona
fide hedging positions. The Commission
invites comment on all aspects of the
examples.
h. Non-Enumerated Hedging
Exemptions
The Commission proposes to replace
the existing procedures for persons
seeking non-enumerated hedging
exemptions under current § 1.3(z)(3)
and § 1.47 with proposed § 150.3(e),
discussed further below, that would
provide guidance for persons seeking
non-enumerated hedging exemptions
through filing of a petition under
section 4a(a)(7) of the Act. As noted
above, practically all non-enumerated
hedging exemption requests were from
persons seeking to offset the risk arising
from swap books, which the
Commission has addressed in the
proposed pass-through swaps and passthrough swap offsets, and in the
proposal to net positions in futures and
swap reference contracts for purposes of
single-month and all-months-combined
position limits.
The Commission requests comment
on industry practices involving the
hedging of risks of cash market activities
in a physical commodity that are not
353 A generator must also be able to satisfy any
operating constraints, including minimum
production runs.

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specifically enumerated in paragraphs
(3), (4), and (5) of the proposed
definition of bona fide hedging position,
the extent to which such hedging
practices reflect industry standards or
best practices and the particular sources
of changes in value that such hedging
positions offset.
Under the proposal for hedges of
physical commodities, additional
enumerated hedges could only be added
to the proposed definition of bona fide
hedging position by way of notice and
comment rulemaking. Should the
Commission adopt, as an alternative, an
administrative procedure that would
allow the Commission to add additional
enumerated bona fide hedges without
requiring notice and comment
rulemaking? If so, what procedures
should be used? Is current § 1.47 an
appropriate process? And what
standards, in addition to the statutory
standards of CEA section 4a(c)(2),
should be applicable to any such
administrative procedure? The
Commission is particularly concerned
about the absence of standards in
current § 1.47. If the Commission were
to adopt such an administrative
procedure, how should the Commission
address the factors in CEA section
4a(a)(3)(B) in such an administrative
procedure?
No Proposal of Unfilled Storage
Capacity as an Anticipated
Merchandizing Hedge. The Commission
is not re-proposing a hedge for unfilled
storage capacity that was in vacated
§ 151.5(a)(2)(v). That exemption would
have permitted a person to establish as
a bona fide hedge offsetting sales and
purchases of commodity derivative
contracts that did not exceed in quantity
the amount of the same cash commodity
that was anticipated to be
merchandized. That exemption was
limited to the current or anticipated
amount of unfilled storage capacity that
the person owned or leased.
The Commission previously noted it
had not recognized anticipated

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merchandising transactions as bona fide
hedges due to its historic view that
merchandizing transactions generally
fail to meet the economically
appropriate test.354 The Commission
explained, ‘‘A merchant may anticipate
that it will purchase and sell a certain
amount of a commodity, but has not
acquired any inventory or entered into
fixed-price purchase or sales contracts.
Although the merchant may anticipate
such activity, the price risk from
merchandising activity is yet to be
assumed and therefore a transaction in
[commodity derivative contracts] could
not reduce this yet-to-be-assumed risk.’’
In response to comments, the
Commission opined that, ‘‘in some
circumstances, such as when a market
participant owns or leases an asset in
the form of storage capacity, the market
participant could establish market
positions to reduce the risk associated
with returns anticipated from owning or
leasing that capacity. In these narrow
circumstances, the transaction in
question may meet the statutory
definition of a bona fide hedging
transaction.’’
With the benefit of further review, the
Commission now sees a strong basis to
doubt that such a position generally will
meet the economically appropriate test.
This is because the value fluctuations in
a calendar month spread in a
commodity derivative contract will
likely have at best a low correlation
with value fluctuations in expected
returns (e.g., rents) on unfilled storage
capacity. There are at least two factors
that contribute to the size of a calendar
month spread.355 One factor is the cost
of carry, comprised of the anticipated
storage cost plus the interest paid to
finance purchase of the physical
354 76

FR at 71646.
calendar month spread generally means the
purchase of one delivery month of a given futures
contract and simultaneous sale of a different
delivery month of the same futures contract. See
CFTC Glossary, available at http://www.cftc.gov/
ConsumerProtection/EducationCenter/
CFTCGlossary/index.htm.
355 A

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
commodity over the time period of the
calendar month spread.356 A second
factor, and likely the factor that most
contributes to value fluctuations in the
calendar month spread, is the difference
in the anticipated supply and demand
of a commodity on the different dates of
the calendar month spread. In this
context, a calendar month spread
position would likely increase, rather
than decrease, risk in the operation of a
commercial enterprise. Accordingly, for
these reasons, the Commission is not reproposing to recognize a bona fide
hedging position based on an unfilled
storage bin and any of a number of
commodities that a merchant might
store in such bin.
For example, the Commission
recognizes there is commercial risk in
operating off-farm storage, including the
risk that total grain production may not
be sufficient to ensure capacity
utilization of such storage. Business
costs of providing off-farm storage
include the fixed cost of the storage
facility and the variable costs for labor
and fuel, in addition to other costs such
as insurance. However, as the
Commission noted above, based on its
experience, the value fluctuations in a
calendar month spread in a commodity
derivative contract will likely have at
best a low correlation with value
fluctuations in expected returns (e.g.,
rents) on unfilled storage capacity.
Therefore, the Commission requests
comment on what positions in
commodity derivative contracts, if any,
would offset the value changes in the
commercial risks (e.g., changes in
anticipated rental income or changes in
other revenue streams) arising from a
commodity storage business. And for
those positions that would offset value
changes in the commercial risks, what
data should the Commission obtain to
verify such claims? By way of
comparison, the Commission has
recognized unsold anticipated
production and unfilled anticipated
requirements for processing,
manufacturing or feeding, as the basis of
a bona fide hedging position.357 The
Commission has required persons
seeking to claim such production or
requirements exemptions to file
statements showing historical
production or usage and anticipated
production or usage.358
The Commission invites commenters
to provide specific, empirical analysis
and data that would demonstrate how
356 For a brief discussion of cost of carry, see, e.g.,
‘‘Options, Futures, and Other Derivatives,’’ 3rd Ed.,
Hull, (1997) at p. 67.
357 See current § 1.3(z)(2)(i)(B) and (C).
358 See current § 1.48.

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particular types of transactions could
reduce the value at risk of unfilled
storage space that could support such an
exemption.
i. Summary of Disposition of Working
Group Petition Requests
As noted above, the Working Group
made ten requests for exemptions under
vacated part 151.359 The Commission
summarizes and addresses in a brief
statement each request, below.
Request One. Unfixed Price
Transactions Involving a NonReferenced Contract: In a hedge of an
unfixed price purchase and unfixed
price sale of a physical commodity in
which one leg of the hedge is a
referenced contract and the other leg is
a non-referenced contract, the Working
Group requests that the referenced
contract leg of the hedge be treated as
a bona fide hedging position.
The proposed definition of bona fide
hedging position would permit Request
One under proposed paragraphs
(4)(ii)(B) and (5), discussed above.
Request Two. Offsetting Unfixed Price
Transactions Hedged with Derivatives
in the Same Calendar Month: The
Working Group requests that hedges of
an unfixed price purchase and an
unfixed price sale of a physical
commodity in which the separate legs of
the hedge are in the same calendar
month, but which do not offset each
other, because they are in different
contracts or for any other reason, be
treated as bona fide hedging positions.
The proposed definition of bona fide
hedging position would permit Request
Two under proposed paragraphs
(4)(ii)(B) and (5), discussed above.
Request Three. Unpriced Physical
Purchase or Sale Commitments: The
Working Group requests that referenced
contracts used to lock in a price
differential where one leg of the
underlying transaction is an unpriced
commitment to buy or sell a physical
energy commodity, and the offsetting
sale or purchase has not been
completed, be treated as bona fide
hedging transactions or positions.
This request would not be permitted
under the proposed definition of bona
fide hedging position. The transaction
described in Request Three concerns a
commercial entity that has entered into
either an unfixed-price sale or an
unfixed-price purchase, but has not
entered into an offsetting purchase or
sale contract. This differs from the
proposed enumerated bona fide hedge
359 The Working Group Petition is available at
http://www.cftc.gov/stellent/groups/public/@
rulesandproducts/documents/ifdocs/
wgbfhpetition012012.pdf.

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exemption provided in paragraph (4)(ii)
because both sides of the cash
transactions have not been contracted.
Locking in the spread for the same
commodity between two markets is
prudent risk management when a
commercial trader has a contractual
commitment both to buy and sell the
physical commodity at unfixed prices in
the same two markets. A commercial
merchant may expect to match an
unfixed-price purchase with an unfixedprice sale, regardless of which came
first, and at that point, will qualify for
a hedge exemption for the basis risk,
under paragraphs (4)(ii) and (5), as
discussed in Requests One and Two,
above.
However, a trader has not established
a definite exposure to a value change
when that trader has established only an
unfixed price purchase or sales contract.
This cash position fails the change in
value requirement. Considering the
anticipated merchandizing transaction,
a merchant may assert her intention, but
merchandizing intentions alone are not
sufficient to recognize a price risk (that
is, the yet-to-be established pair of
unfixed-price cash purchase and sales
contracts). The Commission is
concerned that exempting such a yet-tobe established cash position would
make it difficult or impossible for the
Commission to distinguish hedging
from speculation. For example, a trader
could maintain a derivatives position,
exempt from position limits, until that
trader enters into a subsequent cash
market transaction that results in a
book-out of the first unfixed-price cash
market transaction. The trader could
assert that changed conditions resulted
in a change in intentions. Since market
prices are continually changing to
reflect new information and, thus,
changing conditions, the Commission
believes an exemption standard based
on merchandizing intentions alone
would be no standard at all.
The Commission recognizes there can
be a gradation of probabilities that an
anticipated transaction will occur.
However, the example above offers no
context in which to evaluate the nature
or probability of an anticipated
merchandising transaction, and such
context is essential to determining the
nature of any price risk that has been
realized and could support the existence
of a bona fide hedge. The Commission
notes that in such cases, the only way
to evaluate the nature of any price risk
would be for the Commission to be
provided with particulars of the
transaction. This can be done, under the
current proposal, either by requesting a
staff interpretive letter under § 140.99 or
seeking CEA section 4a(a)(7) exemptive

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relief. Furthermore, in instances where
an entity can establish that the nature of
their commercial operation is such that
they have committed physical or
financial resources towards the
anticipated transaction, they should
consider whether they can avail
themselves of the exemption for unsold
anticipated production or unfilled
anticipated requirements exemptions.
Request Four. Binding, Irrevocable
Bids or Offers: The Working Group
requests that referenced contracts used
to hedge exposure to market price
volatility associated with binding and
irrevocable fixed-price bids or offers be
treated as bona fide hedging positions.
The contemplated transactions are not
consistent with the enumerated hedges
in proposed paragraphs (3)(i), as a hedge
of a purchase contract, or (3)(ii), as a
hedge of a sales contract, because the
cash transaction is tentative and,
therefore, neither a sale nor a purchase
agreement.
In the Commission’s view, a binding
bid or offer by itself is too tenuous to
serve as the basis for an exemption from
speculative position limits, since it is an
uncompleted merchandising transaction
that, historically, has not been
recognized as the basis for a bona fide
hedging transaction under § 1.3(z)(2).
Any related derivative would cover a
conditional price risk for a bid or offer
that would depend on that bid or offer
being accepted and, therefore, would
not be economically appropriate to the
reduction of risk. The commercial entity
submitting a binding, fixed-price bid or
offer is essentially subject to a
contingent price risk.360 The
Commission also understands that some
commercial entities submit bids or
offers merely to obtain information
about the request for proposal, without
an intention of submitting a quote that
is likely to be accepted.
Moreover, the Working Group’s
suggestion that the Commission
condition its relief on a good-faith
showing and immediate reclassification
of the portion of the position not
awarded against the bid or offer does
not protect the market against the
prospect that multiple participants may
hold such a good-faith belief and may
also hold a position in the same
360 For example, if the entity submits a fixed-price
bid, it runs the risk that either (a) it did not enter
into a derivative hedge position that would cover
an accepted bid, and before its bid was accepted,
the cash market price decreased (so that it ends up
paying an above-market price); or (b) it did enter
into a derivatives position (a short position) that
would cover an accepted bid, and before its bid was
rejected, the derivative price increased so that the
entity loses money when it lifts the short position.
Either outcome would create a loss for the
commercial entity.

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direction as the cover transaction. If the
Commission were to grant relief with
respect to such positions, then all
persons who made good-faith bids or
offers on a particular cash market
solicitation would be eligible to enter
into derivatives to cover their potential
exposure, in addition to holding
speculative positions on the same side
of the market at the limit. Under such
relief, such persons, in the aggregate,
could hold derivatives as cover in an
amount several times larger than the
total amount to be awarded under the
solicitation. Undue volatility could
result when the winning bid is accepted
and all the losing bidders
simultaneously reduce their total
positions to get below the speculative
position limit level.
In contrast, under the Commission’s
proposed rules a commercial entity may
cover the risk of a yet to be accepted bid
or offer, provided its total position does
not exceed the Commission’s
speculative position limits. Thus, when
such person’s bid or offer is not
accepted and that person’s speculative
position is appropriately limited, that
person need not liquidate any of its
position to come into compliance with
limits. As discussed further below, the
Commission proposes to set speculative
limits at relatively high levels. Thus, a
commercial entity is not likely to be
constrained in covering bids or offers
unless it also has a relatively large
speculative position on the same side of
the market.
Request Five. Timing of Hedging
Physical Transactions: The Working
Group requests that referenced contracts
used to hedge a physical transaction
that is subject to ongoing, good-faith
negotiations, and that the hedging party
reasonably expects to conclude, be
treated as bona fide hedging
transactions or positions.
As with Request Four, the
contemplated transactions are not
consistent with the enumerated hedges
in proposed paragraphs (3)(i), as a hedge
of a purchase contract, or (3)(ii), as a
hedge of a sales contract, because the
cash transaction is tentative (here,
subject to negotiation) and, therefore,
neither a sale nor a purchase agreement.
The Commission is concerned that a
trader has not established a definite
exposure to a value change when that
trader has only entered into negotiations
for a fixed-price purchase or sales
contract. This tentative cash position
thus fails the change in value
requirement.
Further, a trader could assert that
changed conditions resulted in a change
in intentions and a failure to complete
negotiations. Since market prices are

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continually changing to reflect new
information and, thus, changing
conditions, the Commission believes an
exemption standard based on
merchandizing intentions alone (even if
the merchant were engaged in good faith
negotiations) would be no standard at
all.
In the case where the anticipated
merchandizing transaction is ‘‘naked,’’
or not backed by any existing physical
exposure, the Commission is not aware
of a methodology for distinguishing
naked merchandizing from speculation.
In the case of a firm bid or offer not
offset by existing physical exposure, an
entity can, at the time the bid or offer
is accepted, enter into a corresponding
hedge transaction or, in the alternative,
an entity can enter into a corresponding
hedge transaction at the time the bid or
offer is made provided the entity
remains within the speculative position
limits. The Commission invites
comment on why hedging in this
manner is insufficient to offset physical
risks. The Commission asks that parties
submitting comments detail the nature
of their merchandizing operations and
how they realize and account for
physical risks related to anticipatory
merchandizing transactions not offset by
anticipated production or processing
requirements. In particular, the
Commission requests comment on
appropriate measures to address the
risks for contingent bids or offers. Under
what circumstances should the
Commission recognize contingent bids
or offers as the basis of a bona fide
hedging position? If the Commission
were to do so, should only the expected
value of the risk of such position be
recognized? And what would be an
appropriate methodology for
distinguishing naked merchandizing
from speculation? How should the
Commission address the varying ex ante
subjective probability of completion of
such bids or offers? For example, is an
ex post measure of completion, e.g., the
ratio of completed transactions to bids
or offers, an acceptable proxy to impute
the probability of acceptance for
purposes of determining an ex ante
hedge ratio, regardless of the expected
probability of completion on a
particular bid or offer? Should the
Commission require a person, seeking to
claim an exemption based on contingent
bids or offers, keep complete records of
all such cash market bids or offers? If so,
what record format and specific data
elements should be kept?
Request Six. Local Natural Gas Utility
Hedging of Customer Requirements: The
Working Group requests that long
positions in referenced contracts
purchased by a state-regulated public

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utility to hedge the anticipated natural
gas requirements of its retail customers
be treated as bona fide hedging
transactions or positions.
The proposed definition of bona fide
hedging position would permit Request
Six under proposed paragraph
(3)(iii)(B), discussed above.
Request Seven. Use of PhysicalDelivery Referenced Contracts to Hedge
Physical Transactions Using Calendar
Month Average Pricing: The Working
Group argues that referenced contracts
used to hedge in connection with
calendar month average (‘‘CMA’’)
pricing are not speculative in nature and
should be exempt from speculative
position limits. The Working Group
requests that firms engaged in CMApriced transactions involving physicaldelivery referenced contracts be
permitted to hold those positions
through the spot month as bona fide
hedging positions.
The discussion below summarizes
and addresses the petitioner’s scenarios
under Request Seven and notes the
proposed exemptions that would be
applicable or the reasons for denial.
Summary of Scenario 1: Refinery
hedging unfilled anticipatory
requirements for crude oil on a calendar
month average basis and cross-hedging
the sale of anticipated processed
distillate products 361
The Working Group noted that a
refinery may buy crude oil on a CMA
basis. The petitioner describes a threestep program whereby a refinery might
buy crude oil on a CMA basis and
subsequently sell distillate products on
a CMA basis. First, on each trading day
over approximately a one month period
prior to expiration of the nearby
NYMEX light sweet crude oil (WTI)
futures contract, the refinery purchases
futures contracts in the nearby contract
month and sells an equivalent amount
of futures in the next two deferred
contract months in that same futures
contract. The resulting positions are
calendar month spreads in WTI futures
contracts that are acquired at an average
price over the one-month period.
361 The petitioner separately requested relief for a
seller of crude oil on a CMA basis that had
contracted to deliver crude oil ratably to a refiner
during a month at the daily average spot price. That
is, the seller entered into an unfixed price forward
sales contract to the refiner. Such a transaction
would be covered by the existing bona fide hedging
rules. Such an unfixed price sales contract would
become partially fixed as each day in the month
locked in the daily spot price that would be used
to fix the price of deliveries in the forward delivery
period. Thus, to the extent the price of the forward
contract was partially fixed, a seller could use long
positions in commodity derivative contracts to
offset the risk of the partially-fixed-price sales
contract under the provisions of proposed
paragraph (3)(i).

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Second, following the establishment of
the spread positions in WTI futures
contracts, the refinery engages in
exchange of futures for physical
commodity (EFP) transactions,
obtaining a short nearby WTI futures
position in exchange for entering into
cash market contracts for purchase of
crude oil at a fixed price over the
following calendar month.362 These
nearby short WTI futures positions
offset the nearby long WTI futures
positions of the calendar month spread.
Alternatively, the refinery stands for
delivery on the nearby long WTI futures
positions. As a result, the refinery holds
only short deferred month WTI futures
positions. Third, as the refinery takes
deliveries of crude oil over the
following calendar month on the cash
market contracts (or alternatively under
the physical delivery provisions of the
futures contracts), the refinery processes
the crude oil then sells the distillate
products on the spot market. As the
sales of distillate products occur, the
refinery buys back the short WTI futures
positions in the next two contract
months.
The contemplated long positions are
consistent with proposed paragraph
(3)(iii) to the extent a refinery does not
establish a long position in excess of
that refinery’s unfilled anticipated
requirements for crude oil for the next
two months. Further, in the case of a
refinery, the Commission notes that,
unless the refinery has fixed price
sales 363 or offsetting short positions of
the expected processed cash products,
such contemplated long positions in
WTI futures alone may not be
economically appropriate to the
reduction of risk in the conduct and
management of a commercial enterprise;
hence, the Commission also views the
short positions in WTI futures to be an
integral component of the contemplated
calendar spreads.
Regarding the short positions, the
Commission considers the economic
consequences of the positions over two
time periods: (1) the period of time the
refinery holds a calendar spread
position (long nearby and short deferred
WTI contract months); and (2) the
362 Under NYMEX rules regarding EFP
transactions in WTI futures, the buyer and seller of
futures must be the seller and buyer of an
approximately equivalent quantity of the physical
product underlying the futures. See NYMEX rule
200.20 (available at http://www.cmegroup.com/
rulebook/NYMEX/2/200.pdf), and NYMEX rule 538
(available at http://www.cmegroup.com/rulebook/
NYMEX/1/5.pdf).
363 A refinery with fixed price sales contracts
may, as appropriate, enter into a long position in
commodity derivative contracts as a bona fide
hedging position or cross-commodity hedging
position under proposed paragraphs (3)(ii) and (5).

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subsequent period of time when the
refinery holds only a short position in
WTI futures 364 and has a fixed price
purchase contract on which it receives
crude oil that it processes into distillate
products.
Regarding the first time period, when
considered as a whole with the long
positions covering the unfilled
anticipated requirements, the refinery’s
short positions would be risk reducing
transactions, and therefore would
qualify under proposed paragraphs (4)(i)
and (5), so long as the long futures
positions (meeting the unfilled
anticipated requirements of paragraph
(3)(iii)) fix the input price and the short
futures positions fix a significant
portion of the price of the expected
output of petroleum distillate products
that are not yet sold at a fixed price. The
refinery’s short position in referenced
contracts would be an economically
appropriate cross-commodity hedge, as
contemplated by paragraph (5), to the
extent the fluctuations in value of the
anticipated processed cash commodities
(that is, the petroleum distillates) are
substantially related to fluctuations in
value of the referenced contracts in
crude oil.365
During the second time period, the
refinery, for example, contracts for the
purchase of crude oil at a fixed price (as
a result of the EFP transaction) or
subsequently holds crude oil in
inventory (e.g., through taking delivery
on the WTI futures contracts). Thus, the
refinery in the second time period
initially holds a bona fide hedging
position under paragraph (3)(A). Once
the crude oil is processed, the refinery
also may continue to hold short crude
oil futures contracts as a cross-hedge of
distillate products under paragraph (5).
Proposed paragraph (5) permits a crosscommodity hedge when the fluctuations
in value of the position in the
commodity derivative contract are
substantially related to the fluctuations
in value of the actual or anticipated cash
364 The refinery’s long position in WTI futures
would be liquidated as a result of the EFP
transaction that established the fixed price purchase
contract.
365 Regarding the first time period, there is
another enumerated bona fide hedging exemption
involving offsetting commodity derivative
contracts. Offsetting sales and purchases of
commodity derivative contracts would be
recognized as bona fide hedging positions to reduce
the risk of unfixed price purchase and sales
contracts of the cash commodity (paragraph (4)(ii)).
This provision does not recognize positions as bona
fide hedges under the five-day rule (i.e., during the
lesser of the last five days of trading or the spot
month for physical-delivery commodity derivative
contracts). The refinery short positions are not
similar to positions established to offset the risk of
unfixed price sales and purchases, in that the
refinery has not entered into open price purchase
and sales contracts.

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position. In this example, the aggregate
price fluctuations of all of the distillate
products of crude oil are substantially
related to the price fluctuations of crude
oil, with such prices expected to differ
by refining costs and an expected
processing margin. Thus, the refinery in
the second time period holds a short
futures position that is a bona fide
inventory hedge or a bona fide crosscommodity hedge permitted under
existing and proposed rules.
Summary of Scenario 2: Merchant
short hedge of CMA price purchase of
crude oil from producer, and long
position to cover anticipated re-sale of
crude oil at CMA.
In its January 20, 2012, petition, the
Working Group gives the example of a
producer that sells oil at the price at
which it was valued (basis WTI futures)
on each day it was extracted from the
earth. The buyer is an aggregator that
pays each producer for crude oil on a
CMA basis for the production of the
prior month. The aggregator seeks to
ensure the CMA selling price for the oil
purchased from the producers.
The aggregator sells the nearby WTI
futures each trading day over a one
month period and buys an equivalent
quantity of WTI futures contracts in the
subsequent two deferred WTI contract
months.
Subsequently, the aggregator intends,
in an EFP transaction, to exchange long
futures in the nearby contract month, for
a sales contract to be delivered ratably
over the delivery period of that nearby
contract month. (The long futures from
the EFP transaction would offset the
short WTI futures in the nearby contract
month.) The aggregator would sell the
long futures contracts each day as oil is
delivered ratably during the month. By
ratably selling the long futures as the
physical barrels are delivered, the
aggregator effectively realizes the price
of the prompt barrel on that trading day.
Alternatively, in its April 17, 2012
supplement, the Working Group argues
that it should be sufficient that an
aggregator wants to lock in CMA pricing
for a sales commitment by entering into
the spread position described above,
regardless of the facts relating to the
purchase side of the transaction.
Because the aggregator is selling
futures daily as the price on the
aggregator’s contractual purchase
commitment is being fixed for each
day’s production, the aggregator builds
a short futures position to offset the
crude oil it will eventually purchase
from the producer under the CMA cash
contract at a price that is partially fixed
each day the short position is acquired.
Once the aggregator is committed at a
fixed price to take delivery of the oil,

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the aggregator holds a bona fide hedging
position under paragraph (3)(A), which
continues to be a bona fide hedging
position under that rule after the
aggregator takes delivery of the oil.
The Commission has not recognized
as bona fide hedging a long futures
position (as a synthetic sales price for
the same commodity), when a person
holds either inventory or a fixed-price
purchase contract, the price risk of
which has been offset using a short
futures position. From the scenario and
alternative presented, it is not clear that
there is a price risk that is being
reduced. Rather, the aggregator appears
to seek to establish a sales price,
without a corresponding uncovered
price risk in either inventory or fixedprice sales or fixed-price purchase
contracts. Thus, the transactions do not
satisfy the requirements of the proposed
definition of bona fide hedging position.
In considering the petition, the
Commission reviewed its historical
policy position with respect to bona fide
hedges in light of position information
regarding physical-delivery energy
futures contracts. The Commission
reviewed three years of confidential
large trader data in cash-settled and
physical-delivery energy contracts.366
The review covered actual positions
held in the physical-delivery energy
futures markets during the three-day
spot period, among all traders
(including those who had received
hedge exemptions from their D.C.M). It
showed that, historically, there have
been relatively few positions held in
excess (and those few not greatly in
excess) of the spot month limits.
Accordingly, the Commission does not
propose to grant the Working Group’s
requests regarding Scenario 2.
Nonetheless, the Commission notes
that a person desiring to establish a
synthetic sales price may hold a
position subject to the spot month limit,

but cautions that such person should
trade so as not to disrupt the settlement
price of the physical-delivery contract.

366 The Commission typically does not publish
‘‘general statistical information’’ as authorized by
CEA section 8(a)(1) regarding large trader positions
in the expiring physical-delivery energy futures
contracts because of concerns that such data may
reveal information about the amount of market
power a person may need to ‘‘mark the close’’ or
otherwise manipulate the price of an expiring
contract. Marking the close refers to, among other
things, the practice of acquiring a substantial
position leading up to the closing period of trading
in a futures contract, followed by offsetting the
position before the end of the close of trading, in
an attempt to manipulate prices in the closing
period. The Commission gathers large trader
position reports on reportable traders in futures
under part 17 of the Commission’s rules. That data
generally is confidential pursuant to section 8 of the
Act. The Commission does, however, publish
summary statistics for all-months-combined in its
Commitments of Traders Report, available at http://
www.cftc.gov/MarketReports/
CommitmentsofTraders/index.htm.

367 Request Ten is similar to Request Eight, which
also deals with unfilled anticipated requirements.
However, Request Eight deals with requirements for
the same commodity, whereas Request Ten involves
cross-hedging in a different commodity.
368 Prior to the court’s order vacating part 151,
§ 1.3(z) was amended to in November 2011 to apply
only to excluded (i.e., financial, not physical)
commodities. Therefore, by requesting that this
particular section of § 1.3(z) be ‘‘reinstated,’’
petitioner is asking that it be applied once again to
physical delivery (exempt and agricultural)
commodities. However, § 1.3(z)(2)(iv) has never
permitted a cross-commodity hedge under
§ 1.3(z)(2)(ii)(C) to be held into the five last trading
days.
369 The CME Petition also requested that the
Commission recognize as bona fide hedges
positions held into the five last trading days in
physical-delivery referenced contracts that reduce
the risk of two months unfilled anticipated
requirements in the same cash commodity, as
provided in § 1.3(z)(2)(ii)(C).

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Working Group Petition Requests Eight,
Nine, and Ten
Request Eight. Holding a Hedge Using
a Physical-Delivery Contract into the
Spot Month; Generally: The Working
Group requests that firms that use
physical-delivery referenced contracts
(in commodities other than metals or
agriculture) as bona fide hedging
transactions or positions be permitted to
hold these hedges into the spot month.
Request Nine. Holding a CrossCommodity Hedge Using a Physical
Delivery Contract into the Spot Month:
The Working Group requests that firms
that use physical-delivery referenced
contracts as a cross-commodity hedge be
permitted to hold these hedges into the
spot month.
Request Ten. Holding a CrossCommodity Hedge Using a PhysicalDelivery Contract to Meet Unfilled
Anticipated Requirements: 367 The
Working Group argued that the
Commission should ‘‘reinstate’’
§ 1.3(z)(2)(ii)(C) 368 to permit firms to
hold cross-commodity hedges involving
physical-delivery referenced contracts
into the spot month in order to meet
their unfilled anticipated requirements.
The proposed definition of bona fide
hedging position would permit Request
Eight under proposed paragraphs (3)(C),
discussed above, for hedges of unfilled
anticipated requirements.369
However, the proposed definition
does not recognize the other requests as
bona fide hedging positions. As
discussed above, the Commission
continues to believe that, as a physicaldelivery commodity derivative contract
approaches expiration, it is necessary to
protect orderly trading and the integrity
of the markets. A person holding a large
physical-delivery futures position who

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has no intention to make or take
delivery may cause an unwarranted
price fluctuation by demanding to
liquidate such position deep into the
delivery period in a physical-delivery
agricultural contract or a metal futures
contract or during the three-day spot
period in a physical-delivery energy
futures contract. Further, as noted
above, a review of large trader positions
in physical-delivery energy futures
contracts does not show a current
practice of traders holding large
positions in the spot period of the
physical-delivery energy referenced
contracts relative to the exchange spot
month limits.
The Commission invites comments on
all aspects of the Working Group’s
petition and the Commission review.
2. Section 150.2—Position limits

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i. Current § 150.2
The Commission currently sets and
enforces speculative position limits
with respect to certain enumerated
agricultural products.370 Current § 150.2
provides in its entirety that ‘‘[n]o person
may hold or control positions,
separately or in combination, net long or
net short, for the purchase or sale of a
commodity for future delivery or, on a
futures-equivalent basis, options
thereon, in excess of [enumerated
levels].’’ 371 As such, the speculative
position limits set forth in current
§ 150.2 apply only to specific futures
contracts traded on specific exchanges
and, on a futures-equivalent basis, to
specific option contracts thereon.372
‘‘Futures-equivalent’’ is defined in
current § 150.1(f) as ‘‘an option
contract,’’ and nothing else.373
Accordingly, current § 150.2 establishes
federal position limits only for
specifically enumerated futures
contracts on ‘‘legacy’’ agricultural
commodities and options on those
futures contracts.
In 2010, the Commission proposed to
implement additional speculative
position limits for futures and option
370 The ‘‘enumerated’’ agricultural products refer
to the list of commodities contained in the
definition of ‘‘commodity’’ in CEA section 1a; 7
U.S.C. 1a. This list of agricultural contracts includes
nine currently traded contracts: Corn (and MiniCorn), Oats, Soybeans (and Mini-Soybeans), Wheat
(and Mini-wheat), Soybean Oil, Soybean Meal, Hard
Red Spring Wheat, Hard Winter Wheat, and Cotton
No. 2. See 17 CFR 150.2. The position limits on
these agricultural contracts are referred to as
‘‘legacy’’ limits because these contracts on
agricultural commodities have been subject to
federal positions limits for decades.
371 17 CFR 150.2. Footnote 1 to § 150.2 adds, ‘‘for
purposes of compliance with these limits, positions
in the regular sized and mini-sized contracts shall
be aggregated.’’ Id.
372 See id.
373 See 17 CFR 150.1(f).

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contracts in certain energy commodities
(‘‘2010 Energy Proposal’’).374 In the
2010 Energy Proposal, the Commission
included a discussion of past and
present position limits for certain
agricultural contracts under part 150
stating that current § 150.2 applies only
to specific agricultural futures and
options contracts:
[t]he current Federal speculative position
limits of regulation 150.2 apply only to
specific futures contracts [and] (on a futuresequivalent basis) specific option contracts.
Historically, all trading volume in a specific
contract tended to migrate to a single
[futures] contract on a single exchange.
Consequently, speculative position limits
that applied to a single [futures] 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.375

The Commission withdrew the 2010
Energy Proposal when the Dodd-Frank
Act became law.376
The limited scope and applicability of
the speculative position limits in
current § 150.2, as well as in the 2010
Energy Proposal, are inconsistent with
the congressional shift evidenced in the
Dodd-Frank Act amendments to section
4a of the Act, upon which the
Commission relies in this release.
Amended CEA section 4a(a)(1)
authorizes the Commission to extend
position limits beyond futures and
option contracts to swaps traded on a
DCM or SEF and swaps not traded on
a DCM or SEF that perform or affect a
significant price discovery function
with respect to regulated entities
(‘‘SPDF swaps’’).377 Further, new CEA
section 4a(a)(5) requires that speculative
position limits apply to swaps that are
‘‘economically equivalent’’ 378 to DCM
374 75

FR 4142, Jan. 26, 2010.
at 4152–54.
376 75 FR 50950, Aug. 18, 2010.
377 7 U.S.C. 6a(a)(1).
378 Section 4a(a)(5) of the Act requires the
Commission to impose the same limits on ‘‘swaps’’
that are ‘‘economically equivalent’’ to futures and
options contracts. The statute does not define the
term. But the Commission construes it, consistent
with the policy objectives of the Dodd-Frank
amendments, to require the Commission to
expeditiously impose limits on physical commodity
swaps that are price-linked to futures contracts, or
to satisfy other defined equivalence criteria. The
Commission accordingly construes the term
‘‘economically equivalent’’ to require swaps to
satisfy the definition of ‘‘referenced’’ contract in
proposed § 150.1. It requires that a swap be, among
other things, ‘‘directly or indirectly linked,
including being partially or fully settled on, or
priced at a fixed differential to, the price of that
particular core referenced futures contract; or . . .
directly or indirectly linked, including being
partially or fully settled on, or priced at a fixed
differential to, the price of the same commodity
underlying that particular core referenced futures
contract for delivery at the same location or

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futures and option contracts for
agricultural and exempt commodities
under new CEA section 4a(a)(2).379
Similarly, new CEA section 4a(a)(6)
requires the Commission to apply
position limits on an aggregate basis to
contracts based on the same underlying
commodity across: (1) DCMs; (2) with
respect to foreign boards of trade
(‘‘FBOTs’’), contracts that are pricelinked to a DCM or SEF contract and
made available from within the United
States via direct access; and (3) SPDF
swaps.380
In 2011, the Commission proposed
and, after comment, adopted rules to
establish an expanded position limits
regime pursuant to the mandate
contained in the Dodd-Frank Act
amendments to CEA section 4a.381
However, in an Order dated September
28, 2012, the U.S. District Court for the
District of Columbia vacated the 2011
Position Limits Rulemaking, with the
exception of the revised position limit
levels in amended § 150.2.382 Therefore,
part 150 continues to apply, as
amended, as if part 151 had not been
finally adopted by the Commission.383
Vacated part 151 would have
established federal position limits and
limit formulas for 28 physical
commodity futures and option
contracts, or ‘‘Core Referenced Futures
Contracts,’’ and would have applied
these limits to all derivatives that are
directly or indirectly linked to the price
of a Core Referenced Futures Contract
(collectively, ‘‘Referenced
Contracts’’).384 Therefore, the position
limits in vacated part 151 would have
applied across different trading venues
to economically equivalent Referenced
Contracts (as specifically defined in part
151) that are based on the same
underlying commodity, a concept
known as aggregate limits. Vacated

375 Id.

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locations as specified in that particular core
referenced futures contract . . .’’ Other similarities
or differences that exist between futures and swaps
are not material to the Commission’s interpretation
of economic equivalence under 7 U.S.C. 6a(a)(5).
379 7 U.S.C. 6a(a)(2), (5).
380 7 U.S.C. 6a(a)(6). The Commission refers to
this requirement in section 4a(a)(6) of the Act as a
requirement for position aggregation.
381 The Commission instructed market
participants to continue to comply with the existing
position limit regime contained in part 150 and any
applicable DCM position limits or accountability
levels until the compliance date for the position
limits rules in new part 151. After such date, part
150 would have been revoked and compliance with
part 151 would have been required. 76 FR 71632.
382 See 887 F. Supp. 2d 259 (D.D.C. 2012).
383 The District Court’s order vacated the final
rule and the interim final rule promulgated in the
2011 Position Limits Rulemaking, with the
exception of the rule’s amendments to 17 CFR
150.2.
384 76 FR at 71629.

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§ 151.1 defined ‘‘Referenced Contract’’
to mean:
on a futures equivalent basis with respect to
a particular Core Referenced Futures
Contract, a Core Referenced Futures Contract
listed in § 151.2, or a futures contract,
options contract, swap or swaption, other
than a basis contract or commodity index
contract, that is: (1) Directly or indirectly
linked, including being partially or fully
settled on, or priced at a fixed differential to,
the price of that particular Core Referenced
Futures Contract; or (2) Directly or indirectly
linked, including being partially or fully
settled on, or priced at a fixed differential to,
the price of the same commodity underlying
that particular Core Referenced Futures
Contract for delivery at the same location or
locations as specified in that particular Core
Referenced Futures Contract.385

In addition to establishing federal
position limits for all Referenced
Contracts, vacated part 151 would have,
among other things, implemented a new
statutory definition of bona fide hedging
transactions, revised the standards for
position aggregation, and established
position visibility reporting
requirements.386
ii. Proposed § 150.2
Proposed § 150.2 would list spot
month, single month, and all-monthscombined position limits for 28 core
referenced futures contracts. Consistent
with section 4a(a)(5) of the Act,
proposed § 150.2 would apply such
position limits to all referenced
contracts (as that term is defined in the
proposed amendments to § 150.1) 387
including economically equivalent
swaps.388 Consistent with section
4a(a)(6) of the Act, proposed § 150.2
would apply position limits across all
385 Id.

at 71685.
generally 76 FR 71626, Nov. 18, 2011.
387 See discussion of proposed § 150.1 above.
388 Section 4a(a)(5) of the Act requires the
Commission to impose the same limits on ‘‘swaps’’
that are ‘‘economically equivalent’’ to futures and
options contracts. The statute does not define the
term. But the Commission construes it, consistent
with the policy objectives of the Dodd-Frank
amendments, to require the Commission to
expeditiously impose limits on physical commodity
swaps that are price-linked to futures contracts, or
to satisfy other defined equivalence criteria. The
Commission accordingly construes the term
‘‘economically equivalent’’ to require swaps to
satisfy the definition of ‘‘referenced’’ contract in
proposed § 150.1. It requires that a swap be, among
other things, ‘‘directly or indirectly linked,
including being partially or fully settled on, or
priced at a fixed differential to, the price of that
particular core referenced futures contract; or . . .
directly or indirectly linked, including being
partially or fully settled on, or priced at a fixed
differential to, the price of the same commodity
underlying that particular core referenced futures
contract for delivery at the same location or
locations as specified in that particular core
referenced futures contract. . . .’’ Other similarities
or differences that exist between futures and swaps
are not material to the Commission’s interpretation
of economic equivalence under 7 U.S.C. 6a(a)(5).

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386 See

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trading venues subject to the
Commission’s jurisdiction. Proposed
§ 150.2 would also specify Commission
procedures for computing position
limits levels.
a. Spot Month Limits
Proposed § 150.2(a) provides that no
person may hold or control positions in
referenced contracts in the spot month,
net long or net short, in excess of the
level specified by the Commission for
physical-delivery referenced contracts
and, specified separately, for cashsettled referenced contracts.389
Proposed § 150.2(a) requires that a
trader’s positions in the physicaldelivery referenced contract and cashsettled referenced contract are to be
calculated separately under the separate
spot month position limits fixed by the
Commission. Therefore, a trader may
hold positions up to the spot month
limit in the physical-delivery contracts,
as well as positions up to the applicable
spot month limit in cash-settled
contracts (i.e., cash-settled futures and
swaps), but a trader in the spot month
may not net across physical-delivery
and cash-settled contracts. Absent such
a restriction in the spot month, a trader
could stand for 100 percent of
deliverable supply during the spot
month by holding a large long position
in the physical-delivery contract along
with an offsetting short position in a
cash-settled contract, which effectively
would corner the market. The
Commission will closely monitor the
effects of its spot-month position limits.
b. Single-Month and All-MonthsCombined Limits
Proposed § 150.2(b) provides that no
person may hold or control positions,
net long or net short, in referenced
contracts in a single-month or in allmonths-combined in excess of the levels
specified by the Commission. Proposed
§ 150.2(b) permits traders to net all
positions in referenced contracts
(regardless of whether such referenced
contracts are physical-delivery or cashsettled) when calculating the trader’s
positions for purposes of the proposed
single-month or all-months-combined
position limits.390
389 The Commission proposes to adopt an
amended definition of spot month in proposed
§ 150.1 (as discussed above), simplified from the
spot-month definitions listed in vacated § 151.3.
The term ‘‘spot month’’ does not refer to a month
of time.
390 The Commission would allow traders to net
positions in physical-delivery and cash-settled
contracts outside the spot month because the
Commission is less concerned about corners and
squeezes outside the spot month. Permitting such
netting will significantly reduce the number of
traders with positions over the levels of non-spot

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The Commission also proposes to
amend § 150.2 by deleting the
potentially ambiguous phrase
‘‘separately or in combination.’’ The
Commission first proposed adding the
phrase ‘‘separately or in combination’’
to § 150.2 in 1992.391 While the text of
current § 150.2 could be read in context
to apply limits to futures or option
positions, separately or in combination,
the preamble to that rulemaking
proposal stated otherwise, indicating
the Commission was proposing a
‘‘unified approach’’ to limits on futures
and options positions combined.392
When considering at that time whether
to extend the existing federal position
limits on futures contracts also to option
contracts (on a futures equivalent basis),
the Commission explained that a
unified futures and options level limit
was ‘‘more appropriate for several
reasons’’ than position limits on futures
that are separate from position limits on
options.393 Further, the Commission
noted in the 1992 preamble that
‘‘proposed Rule 150.2 provides that
‘[n]o person may hold or control net
long or net short positions in excess of
the stated limits.’’ 394 Although the 1992
preamble stated the limit rule was to
apply on a net basis to futures and
options combined, the regulatory text
could be read to suggest a different
approach, i.e., applying to futures or
options on both a separate basis and a
combined basis. The phrase ‘‘separately
or in combination’’ was not discussed in
any subsequent Federal Register
notice.395
month limits. The Commission discusses how many
traders historically held positions over the levels of
non-spot month limits below.
391 See Revision of Federal Speculative Position
Limits, Proposed Rules, 57 FR 12766, Apr. 13, 1992.
392 Id. at 12768.
393 Id. at 12769.
394 Id. at 12770.
395 Indeed, the Commission noted in 1993 when
it adopted an interim final rule that ‘‘as proposed,
speculative position limits for both futures and
options thereon are being combined into a single
limit.’’ See interim final rule at 58 FR 17973, Apr.
7, 1993. The Commission noted it ‘‘proposed to
unify speculative position limits for both futures
and options thereon, reasoning that, because price
movements in the two markets are highly related,
the unified system more readily reflects the
economic reality of a position in its totality.
Moreover, unified speculative limits provide the
trader with greater flexibility. Further, traders
should find such a unified speculative position
limit easier to use and to understand. Finally, as a
consequence of the simpler structure, unified
speculative position limits would be easier to
administer, resulting in more accurate and timely
market surveillance.’’ Id. at 17974.
In discussing comments on the 1992 proposed
rule, the Commission noted an objection by a DCM
to the proposed unified futures and options limits,
preferring the DCM’s proposed separate futures and
options limits. Id. at 17976. The Commission
discussed views of other commenters regarding the
proposed ‘‘unified limits.’’ Id. at 17977. The

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c. Selection of Initial Commodity
Derivative Contracts in Physical
Commodities
As discussed above, the Commission
interprets the CEA to mandate position
limits for futures contracts in physical
commodities other than excluded
commodities (i.e., position limits are
required for futures contracts in
agricultural and exempt commodities).
The Commission is proposing a
phased approach to implement the
statutory mandate. The Commission is
proposing in this release to establish
speculative position limits on 28 core
referenced futures contracts in physical
commodities.396 The Commission
anticipates that it will, in subsequent
releases, propose to expand the list of
core referenced futures contracts in
physical commodities. The Commission
believes that a phased approach will (i)
reduce the potential administrative
burden by not immediately imposing
position limits on all commodity
derivative contracts in physical
commodities at once, and (ii) facilitate
adoption of monitoring policies,
procedures and systems by persons not
currently subject to positions limits
(such as traders in swaps that are not
significant price discovery contracts).
The Commission proposes, initially,
to establish position limits on these 28

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Commission concluded that it would adopt the
unified limits, noting it ‘‘will combine futures and
option limits.’’ The preamble also made clear the
limits would not apply separately, noting further
that ‘‘because such positions would be netted
automatically under a unified speculative position
limit, the Commission is removing and reserving
§ 150.3(a)(2) which exempts from Federal
speculative position limits positions in option
contracts which offset the futures positions.’’ Id. at
17978–79.
396 The 28 core referenced futures contracts are:
Chicago Board of Trade Corn, Oats, Rough Rice,
Soybeans, Soybean Meal, Soybean Oil and Wheat;
Chicago Mercantile Exchange Feeder Cattle, Lean
Hog, Live Cattle and Class III Milk; Commodity
Exchange, Inc., Gold, Silver and Copper; ICE
Futures U.S. Cocoa, Coffee C, FCOJ–A, Cotton No.
2, Sugar No. 11 and Sugar No. 16; Kansas City
Board of Trade Hard Winter Wheat (on September
6, 2013, CBOT and the Kansas City Board of Trade
(‘‘KCBT’’) requested that the Commission permit
the transfer to CBOT, effective December 9, of all
contracts listed on the KCBT, and all associated
open interest); Minneapolis Grain Exchange Hard
Red Spring Wheat; and New York Mercantile
Exchange Palladium, Platinum, Light Sweet Crude
Oil, NY Harbor ULSD, RBOB Gasoline and Henry
Hub Natural Gas.

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core referenced futures contracts, and
related swap and futures contracts, on
the basis that such contracts (i) have
high levels of open interest 397 and
significant notional value of open
interest 398 or (ii) serve as a reference
price for a significant number of cash
market transactions.399 Thus, in the first
phase, the Commission generally is
proposing limits on those contracts that
it believes are likely to play a larger role
in interstate commerce than that played
by other physical commodity derivative
contracts.
In selecting the list of 28 core
referenced futures contracts in proposed
§ 150.2(d), the Commission calculated
the open interest and notional value of
open interest for all futures, futures
options, and significant price discovery
contracts as of December 31, 2012 in all
agricultural and exempt commodities.
The Commission identified those
commodities with the largest notional
value of open interest and open interest
for agricultural commodities, energy
commodities, and metals commodities.
The Commission then selected 16
agricultural commodities, 4 energy
commodities, and 5 metals
commodities. Once these commodities
were selected, the Commission
determined the most important futures
contract, or contracts, within each
commodity, generally by selecting the
physical-delivery contracts with the
highest levels of open interest, and
deemed these as the core referenced
futures contracts for which position
397 Open interest for this purpose is the sum of
open contracts, as defined in § 1.3(t), in futures
contracts and in futures option contracts converted
to a futures-equivalent amount, as defined in
§ 150.1(f), and open swaps, as defined in § 20.1, on
a future equivalent basis, as defined in § 20.1,
where such swaps are significant price discovery
contracts as determined by the Commission under
§ 36.3(d).
398 Notional value of open interest for this
purpose is open interest times the unit of trading
for the relevant futures contract times the price of
that futures contract.
399 The Commission, in the vacated part 151
Rulemaking, selected for what was also intended as
a first phase, the same 28 core referenced futures
contracts on the same basis. 76 FR at 71629. As was
noted when part 151 was adopted, the 28 core
referenced futures contracts were selected on the
basis that such contracts: (1) had high levels of open
interest and significant notional value; or (2) served
as a reference price for a significant number of cash
market transactions. Id.

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limits would be established in this
release. As such, the Commission
proposes in this release to set position
limits in 19 core referenced futures
contracts for agricultural commodities, 4
core referenced futures contracts for
energy commodities, and 5 core
referenced futures contracts for metals
commodities. The Commission
currently sets limits for 9 legacy
agricultural contracts under part 150.400
In selecting the 16 agricultural
commodities, the Commission used oats
as its baseline since oats has the lowest
notional value of open interest and the
lowest open interest among the 9 legacy
agricultural contracts. Hence, the
Commission selected all agricultural
commodities that have notional value of
open interest and open interest that
exceed that of oats.401 The Commission
has determined to defer consideration of
speculative position limits on contracts
in other agricultural commodities
because the Commission must marshal
its resources. The Commission
anticipates that it will consider
speculative position limits on contracts
in other agricultural commodities in a
subsequent rulemaking.
Table 6 below provides the notional
value of open interest and open interest
for agricultural contracts by type of
commodity contract reported under the
Commission’s reporting rules.402 With
respect to the type of commodity, it
should be noted, for example, that
‘‘wheat’’ refers to the general type of
physical commodity, and includes
contracts listed on three different DCMs.
400 17

CFR 150.2.
cheese has a notional value of open
interest that is higher than oats, it has an open
interest that is lower than that of oats (the open
interest of the cheese contract was less than 10,000
contracts as of year-end 2012). Furthermore, all
futures and options contracts in cheese are on the
same DCM (which currently has a single month
position limit set at 1,000 contracts) and had no
Large Trader Reporting for physical commodity
swaps as reported under part 20 during January
2013. The Commission intends to address cheese
when it proposes, in subsequent releases,
expansions to the list of referenced contracts in
physical commodities.
402 17 CFR Part 16. Commission staff computed
notional values of open interest from data reported
under § 16.01. Data reported under § 16.01 includes
significant price discovery contracts in compliance
with core principle VI for exempt commercial
markets, app. B to part 36.
401 While

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules

TABLE 6—LARGEST AGRICULTURAL COMMODITIES RANKED BY NOTIONAL VALUE OF OPEN INTEREST IN FUTURES,
FUTURES OPTIONS, AND SIGNIFICANT PRICE DISCOVERY CONTRACTS, AS OF DECEMBER 31, 2012
Type and rank within type by
notion value of open interest

Commodity

Agricultural:
1 ...............................................
2 ...............................................
3 ...............................................
4 ...............................................
5 ...............................................
6 ...............................................
7 ...............................................
8 ...............................................
9 ...............................................
10 .............................................
11 .............................................
12 .............................................
13 .............................................
14 .............................................
15 .............................................
16 .............................................
17 .............................................

Soybeans .......................................
Corn ...............................................
Wheat .............................................
Sugar ..............................................
Live Cattle ......................................
Coffee .............................................
Soybean Oil ...................................
Soybean Meal ................................
Cotton .............................................
Lean Hogs ......................................
Cocoa .............................................
Feeder Cattle .................................
Milk .................................................
Frozen Orange Juice .....................
Rice ................................................
Cheese ...........................................
Oats ................................................

For exempt commodity contracts, the
Commission proposes to initially select
the commodities in the energy and
metals markets that have the largest
open interest and notional value of
interest. For metals, the Commission
proposes to initially target the 5 largest
commodities in terms of notional value
of open interest, as listed in Table 7
below, and selected 1 core referenced
futures contract for each of the 5 metals.
In selecting these 5 core referenced

Number of
contracts

Notional value of open interest

6
6
10
5
2
3
4
2
3
1
1
1
3
1
1
2
1

$54.07 billion ..................................
$51.54 billion ..................................
$41.06 billion ..................................
$39.06 billion ..................................
$19.91 billion ..................................
$13.89 billion ..................................
$11.01 billion ..................................
$10.46 billion ..................................
$9.75 billion ....................................
$9.68 billion ....................................
$5.13 billion ....................................
$2.64 billion ....................................
$1.45 billion ....................................
$609 million ....................................
$445 million ....................................
$282 million ....................................
$187 million ....................................

futures contracts, the Commission
would establish federal position limits
on ninety-eight percent of the open
interest in U.S. metals markets.
The next largest commodity in metals
after palladium in terms of notional
value is iron ore, which has open
interest that is about one-quarter that of
palladium.403 Furthermore, there are
less than 50 reportable traders 404 in iron
ore, while in the 5 selected metals, each
has more than 200 reportable traders.

Open interest

765,030
1,545,135
767,006
896,082
394,385
211,147
344,412
253,361
234,367
280,451
218,224
34,816
40,690
29,652
14,783
8,601
10,755

The Commission has determined to
defer consideration of speculative
position limits on contracts in iron ore
and other metal commodities because
the Commission must marshal its
resources. The Commission anticipates
that it will consider speculative position
limits on contracts in iron ore and other
metal commodities in a subsequent
rulemaking.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

TABLE 7—LARGEST METALS COMMODITIES BY NOTIONAL VALUE OF OPEN INTEREST IN FUTURES, FUTURES OPTIONS, AND
SIGNIFICANT PRICE DISCOVERY CONTRACTS, AS OF DECEMBER 31, 2012
Type and rank within type by
notion value of open interest

Commodity

Metals:
1 ...............................................
2 ...............................................
3 ...............................................
4 ...............................................
5 ...............................................

Gold ................................................
Silver ..............................................
Copper ...........................................
Platinum .........................................
Palladium .......................................

For energy commodities, the
Commission similarly proposes to select
the 4 largest commodities for this first
phase of the expansion of speculative
position limits and selected 1 core
referenced futures contract in each of
these 4 commodities. Each of these
commodities has a notional value of
open interest in excess of $40 billion.

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Number of
contracts

Notional value of open interest

6
5
3
1
1

$100.41 billion ................................
$27.77 billion ..................................
$13.28 billion ..................................
$4.78 billion ....................................
$2.08 billion ....................................

The fifth largest commodity in energy
is electricity, and the Commission has
determined to defer consideration of
speculative position limits on contracts
403 The open interest in iron ore futures, futures
options, and significant price discovery contracts as
of December 31, 2012, was 8,195 contracts and the
notional value of open interest was $236.63 million.
404 A reportable trader is a trader with a
reportable position as defined in § 15.00(p).

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Open interest

604,853
180,576
146,865
61,467
32,293

in electricity and other energy
commodities because the Commission
must marshal its resources. The
Commission anticipates that it will
consider speculative position limits on
contracts in electricity and other energy
commodities in a subsequent
rulemaking.

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules

75727

TABLE 8—LARGEST ENERGY COMMODITIES BY NOTIONAL VALUE OF OPEN INTEREST IN FUTURES, FUTURES OPTIONS,
AND SIGNIFICANT PRICE DISCOVERY CONTRACTS, AS OF DECEMBER 31, 2012
Type and rank within type by
notion value of open interest

Commodity

Energy:
1 ...............................................
2 ...............................................
3 ...............................................
4 ...............................................

Crude Oil ........................................
Heating Oil/Diesel ..........................
Natural Gas ....................................
Gasoline .........................................

d. Setting Levels of Spot-Month Limits
Proposed § 150.2(e)(1) establishes the
initial levels of speculative position
limits for each referenced contract at the
levels listed in appendix D to this part.
These levels would become effective 60
days after publication in the Federal
Register of a final rule adopted by the
Commission. The Commission proposes
to set the initial spot month position
limit levels for referenced contracts at
the existing DCM-set levels for the core
referenced futures contracts because the
Commission believes this approach is
consistent with the regulatory objectives
of the Dodd-Frank Act amendments to
the CEA and many market participants
are already used to these levels.405

Number of
contracts
76
89
216
54

Notional value of open interest

$516.42 billion ................................
$470.69 billion ................................
$225.74 billion ................................
$46.13 billion ..................................

As an alternative to the initial spot
month limits in proposed appendix D to
part 150, the Commission is considering
setting the initial spot month limits
based on estimated deliverable supplies
submitted by the CME Group in
correspondence dated July 1, 2013.406
Under this alternative, the Commission
would use the exchange’s estimated
deliverable supplies and apply the 25
percent formula to set the level of the
spot month limits in a final rule if the
Commission verifies the exchange’s
estimated deliverable supplies are
reasonable. For purposes of setting
initial spot month limits in a final rule,
in the event the Commission is not able
to verify an exchange’s estimated

Open interest

6,188,201
1,192,036
21,335,777
402,369

deliverable supply for any commodity
as reasonable, then the Commission may
determine to adopt the initial spot
month limits in proposed appendix D
for such commodity, or such higher
level based on the Commission’s
estimated deliverable supply for such
commodity, but not greater than would
result from the exchange’s estimated
deliverable supply. The Commission
requests comment on whether the initial
spot month limits should be based on
the exchange’s July 1, 2013, estimations
of deliverable supplies, once verified.
The spot month limits that would result
from the CME’s estimated deliverable
supplies are show in Table 9 below.

TABLE 9—ALTERNATIVE PROPOSED INITIAL SPOT MONTH LIMIT LEVELS FOR CERTAIN CORE REFERENCED FUTURES CONTRACTS (BASED ON CME GROUP ESTIMATES OF DELIVERABLE SUPPLY SUBMITTED TO THE COMMISSION ON JULY 1,
2013)
Alternative
proposed spotmonth limit
(25% of deliverable supply
rounded up to
the next 100
contracts)

Current spotmonth limit

Contract

CME Group deliverable supply estimate

CME Group
deliverable
supply
estimate in
contracts

Legacy Agricultural
Chicago Board of Trade
Chicago Board of Trade
Chicago Board of Trade
Chicago Board of Trade
Chicago Board of Trade
Chicago Board of Trade
Kansas City Board of
Wheat (KW).

Corn (C) ..................
Oats (O) ..................
Soybeans (S) ..........
Soybean Meal (SM)
Soybean Oil (SO) ....
Wheat (W) ...............
Trade Hard Winter

600
600
600
720
540
600
600

1,000
1,500
1,200
4,400
5,300
3,700
4,100

19,590,000 bushels ........................................
29,470,000 bushels ........................................
23,900,000 bushels ........................................
1,753,047 tons ...............................................
1,253,000 lbs ..................................................
73,790,000 bushels ........................................
81,710,000 bushels ........................................

3,918
5,894
4,780
17,531
20,883
14,757
16,342

14,100,000 cwt ...............................................
4,170,000,000 lbs ...........................................

7,050
20,850

154,200,000 mmBtu .......................................

15,420

Other Agricultural

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Chicago Board of Trade Rough Rice (RR) ....
Chicago Mercantile Exchange Class III Milk
(DA).

600
1500

1,800
5,300
Energy

New York Mercantile Exchange Henry Hub
Natural Gas (NG).
405 DCMs currently set spot-month position limits
based on their own estimates of deliverable supply.
Federal spot-month limits can, therefore, be
implemented by the Commission relatively
expeditiously.

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1,000

3,900

406 Letter from Terrance A. Duffy, Executive
Chairman and President, CME Group, to CFTC
Chairman Gensler, Commissioner Chilton,
Commissioner Sommers, Commissioner O’Malia,
Commissioner Wetjen, and Division of Market

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Oversight Director Richard Shilts, dated July 1,
2013 (available at www.cftc.gov). The Commission
notes the CME Group did not propose to set the
level of spot month limits using the 25 percent
formula in this letter.

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules

TABLE 9—ALTERNATIVE PROPOSED INITIAL SPOT MONTH LIMIT LEVELS FOR CERTAIN CORE REFERENCED FUTURES CONTRACTS (BASED ON CME GROUP ESTIMATES OF DELIVERABLE SUPPLY SUBMITTED TO THE COMMISSION ON JULY 1,
2013)—Continued

Current spotmonth limit

Contract

New York Mercantile Exchange Light Sweet
Crude Oil (CL).
New York Mercantile Exchange NY Harbor
ULSD (HO).
New York Mercantile Exchange RBOB Gasoline (RB).

Alternative
proposed spotmonth limit
(25% of deliverable supply
rounded up to
the next 100
contracts)

CME Group deliverable supply estimate

CME Group
deliverable
supply
estimate in
contracts

3,000

12,100

48,100,000 barrels .........................................

48,100

1,000

5,500

20,000,000 barrels .........................................

22,000

1,000

7,300

29,000,000 barrels .........................................

29,000

Metal

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Commodity Exchange, Inc. Copper (HG) .......
Commodity Exchange, Inc. Gold (GC) ...........
Commodity Exchange, Inc. Silver (SI) ............
New York Mercantile Exchange Palladium
(PA).
New York Mercantile Exchange Platinum (PL)

The Commission is considering a
further alternative to setting the spot
month limit at a level based on 25
percent of estimated deliverable supply.
This alternative would permit the
Commission, in its discretion, both for
setting an initial spot month limit and
subsequent resets, to use the
recommended level, if any, of the spot
month limit as submitted by each DCM
listing a CRFC (if lower than 25 percent
of estimated deliverable supply). Under
this alternative, the Commission would
have discretion to set the level of any
spot month limit to the DCM’s
recommended level, a level
corresponding to 25 percent of
estimated deliverable supply, or a level
in proposed appendix D. The
Commission requests comment on all
aspects of this alternative. Specifically,
is the Commission’s discretion in
administering levels of spot month
limits appropriately constrained by the
choice, in its discretion, of the DCM’s
recommended level or the level
corresponding to 25 percent of
deliverable supply or a level in
proposed appendix D?
Proposed § 150.2(e)(3) explains how
the Commission will calculate spot
month position limit levels. The
Commission proposes to fix the levels of
the spot-month limits for referenced
contracts based on one-quarter of the
estimated spot-month deliverable
supply in the relevant core referenced
futures contract, no less frequently than

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1,200
3,000
1,500
650

1,700
27,300
5,700
1,500

161,850,000 lbs ..............................................
10,911,100 troy ounces .................................
113,375,000 troy ounces ...............................
578,900 troy ounces ......................................

6,474
109,111
22,675
5,789

500

800

152,150 troy ounces ......................................

3,043

every two calendar years.407 Under the
proposal, each DCM listing a core
referenced futures contract would be
required to report to the Commission an
estimate of spot-month deliverable
supply, accompanied by a description of
the methodology used to derive the
estimate and any statistical data
supporting the estimate.408 Proposed
§ 150.2(e)(3) provides a cross-reference
to appendix C to part 38 for guidance on
how to estimate deliverable supply.409
The Commission proposes to utilize the
estimated spot-month deliverable
supply provided by a DCM unless the
Commission decides to rely on its own
estimate of deliverable supply.
The Commission proposes to update
spot-month limits every two years for
each of the 28 referenced contracts, and
to stagger the dates on which DCMs
must submit estimates of deliverable
supply. The Commission has reevaluated data on the frequency with
which DCMs historically have changed
the levels of spot month limits in the 28
physical-delivery core referenced
futures contracts. Given the low
frequency of changes to DCM spot
407 Federal spot month limits have historically
been set at one-quarter of estimated deliverable
supply. See, e.g., 64 FR 24038, 24041, May 5, 1999.
Further, current guidance on complying with DCM
core principle 5 calls for spot month levels to be
set at ‘‘no greater than one-quarter of the estimated
spot month deliverable supply. . . .’’ 17 CFR
150.5(c)(1).
408 The timing for submission of such reports
varies by commodity type—see proposed
§ 150.2(e)(ii)(A)–(D).
409 See 17 CFR part 38, appendix C, at section
(b)(1)(i).

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month limits, the Commission has
reconsidered requiring annual updates
for referenced contracts in agricultural
commodities.410 When compared with
annual updates to the spot month
position limits, biennial updates would
reduce the burden on market
participants in updating speculative
position limit monitoring systems.411
The term ‘‘estimated deliverable
supply’’ means the amount of a
commodity that can reasonably be
expected to be readily available to short
traders to make delivery at the
410 In any event, core principle 5 in section
5(d)(5) of the Act imposes a continuing obligation
on a DCM, where the DCM has set a position limit
as necessary and appropriate, to ensure levels of
position limits are set to reduce the potential threat
of market manipulation or congestion (especially
during the spot month). 7 U.S.C. 7(d)(5). Thus, a
DCM appropriately would reduce the level of its
exchange-set spot month limit if the level of
deliverable supply declined significantly. Core
principle 6 in section 5h(f)(6) of the Act imposes
a similar obligation on a SEF that is a trading
facility. 7 U.S.C. 7b–3(f)(6).
411 Proposed § 150.2(e)(3) also provides the
Commission with flexibility to reset spot month
position limits more frequently than every two
years, but the proposed rule would require DCMs
to submit estimated deliverable supplies only every
two years. This means, for example, that a DCM
may with discretion provide the Commission with
updated estimated deliverable supplies and petition
the Commission to reset spot month limits more
frequently than every two years. Similarly,
proposed § 150.2(e)(4) provides the Commission
with flexibility to change non-spot month position
limits more frequently than every two years. This
means, for example, that a DCM may petition the
Commission to reset non-spot month position limits
based on the most recent calendar-year’s open
interest.

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emcdonald on DSK67QTVN1PROD with PROPOSALS2

expiration of a futures contract.412 The
use of estimated deliverable supply to
set spot-month limits is wholly
consistent with DCM core principles 3
and 5.413 Currently, in determining
whether a physical-delivery contract
complies with core principle 3, the
Commission considers whether the
specified contract terms and conditions
may result in an estimated deliverable
supply that is sufficient to ensure that
the contract is not readily susceptible to
price manipulation or distortion. The
Commission has previously indicated
that it would be an acceptable practice
for a DCM to set spot-month limits
pursuant to core principle 5 based on an
analysis of estimated deliverable
supplies.414 Accordingly, the
Commission is adopting estimated
deliverable supply as the basis of setting
spot-month limits.
The Commission proposes to adopt
the 25 percent level of estimated
deliverable supply for setting spotmonth limits because, based on the
Commission’s surveillance and
enforcement experience, this formula
narrowly targets the trading that may be
most susceptible to, or likely to
facilitate, price disruptions. The
Commission believes this spot month
limit formula best maximizes the
statutory objectives expressed in CEA
section 4a(a)(3)(B) of preventing
excessive speculation and market
manipulation, ensuring market liquidity
for bona fide hedgers, and promoting
efficient price discovery. This formula is
consistent with the longstanding
acceptable practices for DCM core
principle 5 which provide that, for
412 As part of its recently published guidance for
complying with DCM core principle 3, the
Commission provided guidance on how to calculate
deliverable supplies in appendix C to part 38 (at
paragraph (b)(1)(i)). 77 FR 36612, 36722, Jun. 19,
2012. Typically, deliverable supply reflects the
quantity of the commodity that potentially could be
made available for sale on a spot basis at current
prices at the contract’s delivery points. For a
physical-delivery commodity contract, this estimate
might represent product which is in storage at the
delivery point(s) specified in the futures contract or
can be moved economically into or through such
points consistent with the delivery procedures set
forth in the contract and which is available for sale
on a spot basis within the marketing channels that
normally are tributary to the delivery point(s).
413 DCM core principle 3 specifies that a board of
trade shall list only contracts that are not readily
susceptible to manipulation. See CEA section
5(d)(3); 7 U.S.C. 7(d)(3). DCM core principle 5
(discussed in detail below) requires a DCM to
establish position limits or position accountability
provisions where necessary and appropriate ‘‘to
reduce the threat of market manipulation or
congestion, especially during the delivery month.’’
CEA section 5(d)(5); 7 USC 7(d)(5). See also
guidance and discussion of estimated deliverable
supply in Core Principles and Other Requirements
for Designated Contract Markets, Final Rule, 77 FR
36612, 36722, Jun. 19, 2012.
414 See 17 CFR 150.5(b).

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physical-delivery contracts, the spotmonth limit should not exceed 25
percent of the estimated deliverable
supply.415 The Commission believes,
based on its experience and expertise,
that the formula would be an effective
prophylactic tool to reduce the threat of
corners and squeezes, and promote
convergence without compromising
market liquidity.416
Furthermore, the Commission has
observed generally low usage among all
traders of the physical-delivery futures
contract during the spot month, relative
to the existing exchange spot-month
position limits. Thus, the Commission
infers that few, if any, traders offset the
risk of swaps in physical-delivery
futures contracts during the spot month
with positions in excess of the
exchange’s current spot month limits.417
The Commission invites comments as to
the extent to which traders actually
have offset the risk of swaps during the
spot month in a physical-delivery
futures contract with a position in
excess of an exchange’s spot-month
position limit.
Additionally, the Commission
imposes spot-month limits using the
same formula to restrict the size of
positions in cash-settled contracts that
would potentially benefit from a trader’s
distortion of the price of the underlying
referenced contract (or other cash price
series) that serves as the basis of cash
settlement.418 The Commission has
found that traders with positions in
look-alike cash-settled contracts have an
incentive to manipulate and undermine
price discovery in the physical-delivery
contract to which the cash-settled
contract is linked by price. This practice
is known as ‘‘banging’’ or ‘‘marking the
close,’’ 419 a manipulative practice that
415 Id.
416 The Commission also has established
requirements for a DCM to monitor a physicaldelivery contract’s terms and conditions as they
relate to the convergence between the futures
contract price and the cash price of the underlying
commodity. 17 CFR 38.252. See the preamble
discussion of § 38.252 in the final part 38
rulemaking. 77 FR 36612, 36635, June 19, 2012. The
spot month limits will be set at levels that target
only extraordinarily large traders. For example, the
spot month limit for CBOT Wheat will be set at 600
contracts. The contract size for CBOT Wheat is
5,000 bushels (∼136 metric tons). The current price
of a bushel of wheat is approximately $7 per bushel.
Therefore, a speculative trader would be permitted
to carry a ∼$21 million position in wheat into the
spot month under the proposed position limits
regime.
417 See 76 FR at 71635 (n. 100–01) (discussing
data in CME natural gas contract).
418 The Commission also has established
requirements for DCMs to monitor the pricing of
cash-settled contracts. 17 CFR 38.253.
419 Section 4c(a)(5) of the Act lists certain
unlawful disruptive trading practices, including
‘‘any trading, practice, or conduct on or subject to
the rules of a registered entity that . . .

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75729

the Commission prosecutes and that this
proposal seeks to prevent.420
In the final part 38 rulemaking, the
Commission instructed DCMs, when
estimating deliverable supplies, to take
into consideration the individual
characteristics of the underlying
commodity’s supply and the specific
delivery features of the futures
contract.421 In this regard, the
Commission notes that DCMs
historically have set or maintained
exchange spot month limits at levels
below 25 percent of deliverable supply.
Setting such a lower level of a spot
month limit may also serve the
objectives of preventing excessive
speculation, manipulation, squeezes
and corners, while ensuring sufficient
market liquidity for bona fide hedgers in
the view of the listing DCM and
ensuring the price discovery function of
the market is not disrupted. Hence, the
Commission observes that there may be
a range of spot month limits, including
limits set at levels below 25 percent of
deliverable supply, which may serve as
practicable to maximize these policy
objectives.
e. Setting Levels of Single-Month and
All-Months-Combined Limits
Proposed § 150.2(e)(4) explains how
the Commission would calculate nonspot-month position limit levels, which
the Commission proposes to fix no less
frequently than every two calendar
years. In contrast to spot month position
limits which are set as a function of
estimated deliverable supply, the
formula for the non-spot-month position
limits is based on total open interest for
all referenced contracts in a commodity.
The actual position limit level will be
set based on a formula: 10 percent of the
open interest for the first 25,000
contracts and 2.5 percent of the open
interest thereafter.422 The Commission
has used the 10, 2.5 percent formula in
administering the level of the legacy alldemonstrates intentional or reckless disregard for
the orderly execution of transactions during the
closing period.’’ 7 U.S.C. 6c(a)(5)(B). ‘‘Banging’’ or
‘‘marking the close’’ is discussed in the
Commission’s Antidisruptive Practices Authority,
Interpretive guidance and policy statement, 78 FR
31890, 31894–96, May 28, 2013.
420 See, e.g., DiPlacido v. CFTC, 364 Fed. Appx.
657 (2d Cir. 2009) (upholding Commission finding
that DiPlacido manipulated the market where
DiPlacido’s closing trades accounted for 14% of the
market).
421 See 77 FR 36611, 36723, Jun. 12, 2012. DCM
estimates of deliverable supplies (and the
supporting data and analysis) will continue to be
subject to Commission review.
422 The Commission proposes to use the futures
position limits formula (the 10, 2.5 percent formula)
to determine non-spot-month position limits for
referenced contracts. The 10, 2.5 percent formula is
identified in 17 CFR 150.5(c)(2).

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months position limits since 1999.423
The Commission believes the non-spot
month position limits would restrict the
market power of a speculator that could
otherwise be used to cause unwarranted
price movements. The Commission
solicits comment on its single-month
and all-months-combined limits,
including whether the proposed formula
has effectively addressed and will

continue to address the § 4a(a)(3)
regulatory objectives.
The Commission also proposes to
estimate average open interest in
referenced contracts based on the largest
annual average open interest computed
for each of the past two calendar years,
using either month-end open contracts
or open contracts for each business day
in the time period, as the Commission
finds in its discretion to be reliable.

(1) Initial Levels
For setting the levels of initial nonspot month limits, the Commission
proposes to use open interest for
calendar years 2011 and 2012 in futures
contracts, options thereon, and in swaps
that are significant price discovery
contracts that are traded on exempt
commercial markets.

TABLE 10—OPEN INTEREST AND CALCULATED LIMITS BY CORE FUTURES REFERENCED CONTRACT, JANUARY 1, 2011, TO
DECEMBER 31, 2012
Legacy Agricultural ...........

Other Agricultural ..............

CBOT Corn (C) .................
...........................................
CBOT Oats (O) ................
...........................................
CBOT Soybeans (S) .........
...........................................
CBOT Soybean Meal (SM)
...........................................
CBOT Soybean Oil (SO) ..
...........................................
CBOT Wheat (W) .............
...........................................
ICE Cotton No. 2 (CT) ......
...........................................
KCBT Hard Winter Wheat
(KW).
...........................................
MGEX Hard Red Spring
Wheat (MWE).
...........................................
CBOT Rough Rice (RR) ...
...........................................
CME Milk Class III (DA) ...
...........................................
CME Feeder Cattle (FC) ..
...........................................
CME Lean Hog (LH) .........
...........................................
CME Live Cattle (LC) .......
...........................................
ICUS Cocoa (CC) .............
...........................................
ICE Coffee C (KC) ............
...........................................

2011
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011

2,063,231
1,773,525
15,375
12,291
822,046
997,736
237,753
283,304
392,658
397,549
565,459
572,068
275,799
259,608
183,400

1,987,152
1,726,096
15,149
11,982
798,417
973,672
235,945
281,480
382,100
388,417
550,251
565,490
272,613
261,789
177,998

53,500
46,300
1,600
1,300
22,500
26,900
7,900
9,000
11,700
11,900
16,100
16,200
8,800
8,400
6,500

51,600
45,100
1,600
1,200
21,900
26,300
7,800
9,000
11,500
11,600
15,700
16,100
8,700
8,500
6,400

53,500

2012
2011

155,540
55,938

155,074
54,546

5,800
3,300

5,800
3,300

2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
2012

40,577
21,788
15,262
55,567
47,378
44,611
44,984
284,211
296,822
433,581
409,501
191,801
202,886
174,845
204,268

40,314
21,606
14,964
57,490
47,064
43,730
43,651
288,281
297,882
440,229
417,037
198,290
206,808
176,079
207,403

2,900
2,200
1,600
3,300
3,100
3,000
3,000
9,000
9,300
12,800
12,200
6,700
7,000
6,300
7,000

2,900
2,200
1,500
3,400
3,100
3,000
3,000
9,100
9,400
12,900
12,400
6,900
7,100
6,300
7,100

ICE FCOJ–A (OJ) .............
...........................................
ICE Sugar No. 11 (SB) .....
...........................................
ICE Sugar No. 16 (SF) .....
...........................................
NYMEX Henry Hub Natural Gas (NG).
...........................................
NYMEX Light Sweet
Crude Oil (CL).
...........................................
NYMEX NY Harbor ULSD
(HO).
...........................................

2011
2012
2011
2012
2011
2012
2011

37,347
30,788
814,234
855,375
11,532
10,485
4,831,973

36,813
29,867
806,887
862,446
11,662
10,530
4,821,859

2,900
2,700
22,300
23,300
1,200
1,100
122,700

2,800
2,700
22,100
23,500
1,200
1,100
122,500

149,600

2012
2011

5,905,137
4,214,770

5,866,365
4,291,662

149,600
107,300

148,600
109,200

109,200

2012
2011

3,720,590
559,280

3,804,287
566,600

94,900
15,900

97,000
16,100

16,100

2012

473,004

485,468

13,800

14,100

1,600
26,900
9,000
11,900
16,200
8,800
6,500
3,300
2,200
3,400
3,000
9,400
12,900
7,100
7,100

.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Energy ...............................

423 See 64 FR 24038, 24039, May 5, 1999. The
Commission applies the open interest criterion by
using a formula that specifies appropriate increases
to the limit level as a percentage of open interest.
As the total open interest of a futures market
increases, speculative position limit levels can be
raised. The Commission proposed using the 10, 2.5
percent formula in 1992. See Revision of Federal
Speculative Position Limits, Proposed Rules, 57 FR

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12766, 12770, Apr. 13, 1992. The Commission
implemented the 10, 2.5 percent formula in two
steps, the first step in 1993 and the second step in
1999. See Revision of Federal Speculative Limits,
Interim Final Rules, 58 FR 17973, 17978, Apr. 7,
1993. See also Establishment of Speculative
Position Limits, 46 FR 50938, Oct. 16, 1981 (‘‘[T]he
prevention of large or abrupt price movements
which are attributable to the extraordinarily large

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2,900
23,500
1,200

speculative positions is a congressionally endorsed
regulatory objective of the Commission. Further, it
is the Commission’s view that this objective is
enhanced by the speculative position limits since
it appears that the capacity of any contract 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.’’).

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TABLE 10—OPEN INTEREST AND CALCULATED LIMITS BY CORE FUTURES REFERENCED CONTRACT, JANUARY 1, 2011, TO
DECEMBER 31, 2012—Continued

Metals ...............................

NYMEX RBOB Gasoline
(RB).
...........................................
COMEX Copper (HG) .......
...........................................
COMEX Gold (GC) ...........
...........................................
COMEX Silver (SI) ...........
...........................................
NYMEX Palladium (PA) ....
...........................................
NYMEX Platinum (PL) ......
...........................................

Given the levels of open interest for
the calendar years of 2011 and 2012 for
futures contracts and for swaps that are
significant price discovery contracts
traded on exempt commercial markets,
this formula would result in levels for
non-spot month position limits that are
high in comparison to the size of

2011

362,349

370,207

11,000

11,200

2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
2012

388,479
134,097
148,767
782,793
685,618
179,393
165,670
22,327
23,869
40,988
54,838

393,219
131,688
147,187
746,904
668,751
172,567
164,064
22,244
24,265
40,750
54,849

11,600
5,300
5,600
21,500
19,100
6,400
6,100
2,300
2,400
2,900
3,300

11,800
5,200
5,600
20,600
18,600
6,200
6,000
2,300
2,500
2,900
3,300

positions typically held in futures
contracts.424 Few persons held positions
over the levels of the proposed position
limits in the past two calendar years, as
illustrated in Table 11 below. To
provide the public with additional
information regarding the number of
large position holders in the past two

11,800
5,600
21,500
6,400
5,000
5,000

calendar years, the table also provides
counts of persons over 60, 80, 100, and
500 percent of the levels of the proposed
position limits. Note that the 500
percent line is omitted from Table 11
where no person held a position over
that level.

TABLE 11—UNIQUE PERSONS OVER PERCENTAGES OF PROPOSED POSITION LIMIT LEVELS, JANUARY 1, 2011, TO
DECEMBER 31, 2012
Unique persons over level
Percent of
level

Commodity type/core referenced futures contract

Spot month
(physicaldelivery)

Spot month
(cash-settled)

Single month

All months

4
*
*
........................
........................
........................
........................
........................
........................
........................
........................
*
*
*
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................

9
6
*
........................
15
8
6
14
9
6
........................
20
9
6
31
15
10
........................
22
14
9
........................
16
11
9
........................
36
13
9
........................
17
11
9

16
8
5
........................
15
9
8
17
12
8
........................
35
16
9
37
20
12
........................
32
16
12
........................
19
14
11
........................
40
21
13
........................
24
15
9

Legacy Agricultural
CBOT Corn (C) ....................................................................

60
80
100
500
60
80
100
60
80
100
500
60
80
100
60
80
100
500
60
80
100
500
60
80
100
500
60
80
100
500
60
80
100

CBOT Oats (O) ....................................................................
CBOT Soybeans (S) ............................................................

CBOT Soybean Meal (SM) ..................................................
CBOT Soybean Oil (SO) .....................................................

CBOT Wheat (W) .................................................................

emcdonald on DSK67QTVN1PROD with PROPOSALS2

ICE Cotton No. 2 (CT) .........................................................

KCBT Hard Winter Wheat (KW) ..........................................

MGEX Hard Red Spring Wheat (MWE) ..............................

424 A review of preliminary swap open interest
reported under part 20 indicates that open interest

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243
167
53
7
5
4
*
119
88
27
9
52
32
12
114
70
20
*
46
31
14
*
12
7
6
*
33
18
14
*
11
10
6

in swap referenced contracts is low, in comparison
to futures open interest. Any open interest in swap

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referenced contracts would serve to increase the
levels of the positions limits.

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TABLE 11—UNIQUE PERSONS OVER PERCENTAGES OF PROPOSED POSITION LIMIT LEVELS, JANUARY 1, 2011, TO
DECEMBER 31, 2012—Continued
Unique persons over level
Percent of
level

Commodity type/core referenced futures contract

Spot month
(physicaldelivery)

Spot month
(cash-settled)

Single month

All months

9
6
........................
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
37
*
*
*
*
*
14
13
8
2
8
7
6
33
23
15
*
6
5
5

........................
........................
........................
6
4
*
76
55
16
52
41
28
*
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................

7
5
*
*
........................
........................
4
*
*
20
11
7
........................
13
7
4
24
14
10
19
8
5
........................
13
9
6
28
20
12
........................
10
7
7

9
5
*
19
14
7
13
7
*
30
18
13
........................
27
17
12
29
18
12
24
14
6
........................
16
9
7
31
24
18
........................
16
14
13

177
131
61
........................
98
72
39
........................
76
53
33
........................
71
48
30
........................

221
183
148
35
89
62
33
........................
45
35
24
*
45
32
22
*

*
........................
........................
........................
........................
........................
........................
........................
9
6
5
........................
21
12
7
........................

5
........................
........................
........................
4
*
*
........................
18
15
8
........................
30
16
11
........................

14
13
*
13
9
5
5
*
*
6
*

........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................

29
21
16
24
19
12
25
15
10
5
*

28
22
16
21
19
12
21
13
9
5
*

Other Agricultural
CBOT Rough Rice (RR) ......................................................

60
80
100
60
80
100
60
80
100
60
80
100
500
60
80
100
60
80
100
60
80
100
500
60
80
100
60
80
100
500
60
80
100

CME Milk Class III (DA) .......................................................
CME Feeder Cattle (FC) ......................................................
CME Lean Hog (LH) ............................................................

CME Live Cattle (LC) ...........................................................
ICUS Cocoa (CC) ................................................................
ICE Coffee C (KC) ...............................................................

ICE FCOJ–A (OJ) ................................................................
ICE Sugar No. 11 (SB) ........................................................

ICE Sugar No. 16 (SF) ........................................................

Energy
NYMEX Henry Hub Natural Gas (NG) ................................

60
80
100
500
60
80
100
500
60
80
100
500
60
80
100
500

NYMEX Light Sweet Crude Oil (CL) ...................................

NYMEX NY Harbor ULSD (HO) ..........................................

NYMEX RBOB Gasoline (RB) .............................................

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Metals
COMEX Copper (HG) ..........................................................

60
80
100
60
80
100
60
80
100
60
80

COMEX Gold (GC) ..............................................................
COMEX Silver (SI) ...............................................................
NYMEX Palladium (PA) .......................................................

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75733

TABLE 11—UNIQUE PERSONS OVER PERCENTAGES OF PROPOSED POSITION LIMIT LEVELS, JANUARY 1, 2011, TO
DECEMBER 31, 2012—Continued
Unique persons over level
Percent of
level

Commodity type/core referenced futures contract

Spot month
(physicaldelivery)

100
60
80
100

NYMEX Platinum (PL) .........................................................

*
11
5
*

Spot month
(cash-settled)
........................
........................
........................
........................

Single month

All months

*
15
11
9

*
18
12
10

Legend:
* means fewer than 4 unique owners exceeded the level.
— means no unique owners exceeded the level.
NA means not applicable.425

The Commission has also reviewed
preliminary data submitted to it under
part 20. The Commission preliminarily
has decided not to use the data
currently reported under part 20 for
purposes of setting the initial levels of
the proposed single month and allmonths-combined positions limits.
Instead, the Commission is proposing to

set initial levels based on open interest
in futures, options on futures, and SPDC
swaps. Thus, the proposed initial levels
represent lower bounds for the initial
levels the Commission may establish in
final rules. The Commission is
providing the public with average open
positions reported under part 20 for the
month of January 2013, in the table

below. As discussed below, the data
reported during the month of January
2013, reflected improved data reporting
quality. However, the Commission is
concerned that the longer time series of
this data has been less reliable and thus
has not used it for purposes of setting
proposed initial position limit levels.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

TABLE 12—SWAPS REPORTED UNDER PART 20—AVERAGE DAILY OPEN POSITIONS, FUTURES EQUIVALENT, JANUARY
2013
Covered swap contract

Uncleared
swaps

Cleared swaps

Chicago Board of Trade (‘‘CBOT’’) Corn ................................................................................................................
CBOT Ethanol ..........................................................................................................................................................
CBOT Oats ..............................................................................................................................................................
CBOT Rough Rice ...................................................................................................................................................
CBOT Soybean Meal ...............................................................................................................................................
CBOT Soybean Oil ..................................................................................................................................................
CBOT Soybeans ......................................................................................................................................................
CBOT Wheat ...........................................................................................................................................................
Chicago Mercantile Exchange (‘‘CME’’) Butter .......................................................................................................
CME Cheese ...........................................................................................................................................................
CME Dry Whey ........................................................................................................................................................
CME Feeder Cattle ..................................................................................................................................................
CME Hardwood Pulp ...............................................................................................................................................
CME Lean Hog ........................................................................................................................................................
CME Live Cattle .......................................................................................................................................................
CME Milk Class III ...................................................................................................................................................
CME Non Fat Dry Milk ............................................................................................................................................
CME Random Length Lumbar .................................................................................................................................
CME Softwood Pulp ................................................................................................................................................
Commodity Exchange, Inc. (‘‘COMEX’’) Copper Grade No. 1 ...............................................................................
COMEX Gold ...........................................................................................................................................................
COMEX Silver ..........................................................................................................................................................
ICE Futures U.S. (‘‘ICE’’) Cocoa .............................................................................................................................
ICE Coffee C ...........................................................................................................................................................
ICE Cotton No. 2 .....................................................................................................................................................
ICE Frozen Concentrated Orange Juice .................................................................................................................
ICE Sugar No. 11 ....................................................................................................................................................
ICE Sugar No. 16 ....................................................................................................................................................
Kansas City Board of Trade (‘‘KCBT’’) Wheat ........................................................................................................
Minneapolis Grain Exchange (‘‘MGEX’’) Wheat ......................................................................................................
NYSE LIFFE (‘‘NYL’’) Gold, 100 Troy Oz. ..............................................................................................................
NYL Silver, 5000 Troy Oz. ......................................................................................................................................
New York Mercantile Exchange (‘‘NYMEX’’) Cocoa ...............................................................................................
NYMEX Brent Financial ...........................................................................................................................................
NYMEX Central Appalachian Coal ..........................................................................................................................
NYMEX Coffee ........................................................................................................................................................
NYMEX Cotton ........................................................................................................................................................

110,533
*
........................
........................
20,594
35,760
39,883
64,805
........................
........................
........................
*
........................
12,809
17,617
........................
........................
........................
........................
9,259
38,295
5,753
8,933
3,465
14,627
*
287,434
........................
2,565
2,419
........................
........................
........................
93,825
........................
2,320
8,315

3,060
15,905
........................
........................
........................
........................
1,306
2,856
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................

425 Table notes: (1) Aggregation exemptions were
not used in computing the counts of unique

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persons; (2) the position data was for futures,

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futures options and swaps that are significant price
discovery contracts (SPDCs).

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TABLE 12—SWAPS REPORTED UNDER PART 20—AVERAGE DAILY OPEN POSITIONS, FUTURES EQUIVALENT, JANUARY
2013—Continued
Uncleared
swaps

Covered swap contract
NYMEX
NYMEX
NYMEX
NYMEX
NYMEX
NYMEX
NYMEX

Crude Oil, Light Sweet ..............................................................................................................................
Gasoline Blendstock (RBOB). ...................................................................................................................
Hot Rolled Coil Steel .................................................................................................................................
Natural Gas ................................................................................................................................................
No. 2 Heating Oil, New York Harbor .........................................................................................................
Palladium ...................................................................................................................................................
Platinum .....................................................................................................................................................

507,710
10,110
*
1,060,468
35,126
*
*

Cleared swaps
........................
........................
........................
96,057
........................
........................
........................

Legend:
* means fewer than 1,000 futures equivalent contracts reported in the category.
Leaders mean no contracts reported.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

The part 20 data are comprised of
positions resulting from cleared and
uncleared swaps, which are reported by
different reporting entities. Clearing
members of derivative clearing
organizations (‘‘DCOs’’) have reported
paired swap positions in cleared swaps
since November 11, 2011, and paired
swap positions in uncleared swaps
since January 20, 2012. DCOs have also
reported aggregate positions of each
clearing member’s house and customer
accounts for each paired swap since
November 11, 2011. Data reports
submitted by clearing members have
had various errors (e.g., duplicate
records, inconsistent reporting of data
fields)—Commission staff continues to
work with these reporting entities to
improve data reporting.
Beginning March 1, 2013, swap
dealers that were not clearing members
were required to submit data reports
under § 20.4(c). Additionally, some
swap dealers began reporting such data
voluntarily prior to March 1, 2013.426
As these new reporters submitted
position data reports, the Commission
observed a substantial increase in open
interest for uncleared swaps that
appeared unreasonable; it became
apparent that part of this increase was
caused by data reporting errors.427 The
Commission believes it would be
difficult to distinguish the true level of
open interest because some reporting
errors may cause open interest to be
underestimated while others may cause
open interest to be overestimated.
Alternatively, the Commission is
considering using part 20 data, should
it determine such data to be reliable, in
426 Further, other firms have begun to report
under part 20 after March 1, 2013, following
registration as swap dealers.
427 For example, reported total open interest in
swaps, both cleared and uncleared, linked to or
based on NYMEX Natural Gas futures contracts
averaged approximately 1.2 million contracts
between January 1, 2013 and March 1, 2013 and
approximately 97 million contracts between March
1 and May 31, 2013 (with a peak value close to 300
million contracts).

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order to establish higher initial levels in
a final rule.428 Further, the Commission
is considering using data from swaps
data repositories, as practicable. In
either case, the Commission is
considering excluding inter-affiliate
swaps, since such swaps would tend to
inflate open interest.
Based on the forgoing, the
Commission believes the initial levels
proposed herein should ensure adequate
liquidity for hedges yet nevertheless
prevent a speculative trader from
acquiring excessively large positions
above the limits, and thereby help to
prevent excessive speculation and to
deter and prevent market manipulation.
(2) Subsequent Levels
For setting subsequent levels of nonspot month limits, the Commission
proposes to estimate average open
interest in referenced contracts using
data reported by DCMs and SEFs
pursuant to parts 16, 20, and/or 45.429
While the Commission does not
currently possess all data needed to
fully enforce the position limits
proposed herein, the Commission
believes that it should have adequate
data to reset the overall concentrationbased percentages for the position limits
two years after initial levels are set.430
The Commission intends to use
comprehensive positional data on
physical commodity swaps once such
428 Several reporting entities have submitted data
that contained stark errors. For example, certain
reporting entities submitted position sizes that the
Commission determined to be 1000 times, or even
10,000 times, too large.
429 Options listed on DCMs would be adjusted
using an option delta reported to the Commission
pursuant to 17 CFR part 16; swaps would be
counted on a futures equivalent basis, equal to the
economically equivalent amount of core referenced
futures contracts reported pursuant to 17 CFR part
20 or as calculated by the Commission using swap
data collected pursuant to17 CFR part 45.
430 While the Commission has access to some data
on physical-commodity swaps from swaps data
repositories, the Commission continues to work
with SDRs and other market participants to fully
implement the swaps data reporting regime.

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data is collected by swap data
repositories under part 45, and would
convert such data to futures-equivalent
open positions in order to fix numerical
position limits through the application
of the proposed open-interest-based
position limit formula. The resultant
limits are purposely designed to be high
enough to ensure sufficient liquidity for
bona fide hedgers and to avoid
disrupting the price discovery process
given the limited information the
Commission has with respect to the size
of the physical commodity swap
markets, including preliminary data
collected under part 20 as of January
2013. The Commission further proposes
to publish on the Commission’s Web
page such estimates of average open
interest in referenced contracts on a
monthly basis to make it easier for
market participants to estimate changes
in levels of position limits.
f. Grandfather of Pre-Existing Positions
The Commission proposes in new
§ 150.2(f)(2) to conditionally exempt
from federal non-spot-month
speculative position limits any
referenced contract position acquired by
a person in good faith prior to the
effective date of such limit, provided
that such pre-existing referenced
contract position is attributed to the
person if such person’s position is
increased after the effective date of such
limit.431 This conditional exemption for
pre-existing positions is consistent with
the provisions of CEA section 4a(b)(2) in
431 Such pre-existing positions that are in excess
of the proposed position limits would not cause the
trader to be in violation based solely on those
positions. To the extent a trader’s pre-existing
positions would cause the trader to exceed the nonspot-month limit, the trader could not increase the
directional position that caused the positions to
exceed the limit until the trader reduces the
positions to below the position limit. As such,
persons who established a net position below the
speculative limit prior to the enactment of a
regulation would be permitted to acquire new
positions, but the Commission would calculate the
combined position of a person based on pre-existing
positions with any new position.

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that it is designed to phase in position
limits without significant market
disruption, while attributing such preexisting positions to the person if such
person’s position is increased after the
effective date of a position limit is
consistent with the provisions of CEA
section 22(a)(5)(B). Notwithstanding this
exemption for pre-existing positions in
non-spot months, proposed § 150.2(f)(1)
would require a person holding a preexisting referenced contract position (in
a commodity derivative contract other
than a pre-enactment and transition
period swaps as defined in proposed
§ 150.1) to comply with spot month
speculative position limits.432 The
Commission remains particularly
concerned about protecting the spot
month in physical-delivery futures
contracts from squeezes and corners.
Proposed § 150.2(g) would apply
position limits to foreign board of trade
(‘‘FBOT’’) contracts that are both: (1)
Linked contracts, that is, a contract that
settles against the price (including the
daily or final settlement price) of one or
more contracts listed for trading on a
DCM or SEF; and (2) direct-access
contracts, that is, the FBOT makes the
contract available in the United States
through direct access to its electronic
trading and order matching system
through registration as an FBOT or via
a staff no action letter.433 Proposed
§ 150.2(g) is consistent with CEA section
4a(a)(6)(B), which directs the
Commission to apply aggregate position
limits to FBOT linked, direct-access
contracts.434
3. Section 150.3—Exemptions
i. Current § 150.3

emcdonald on DSK67QTVN1PROD with PROPOSALS2

CEA section 4a(c)(1) exempts bona
fide hedging transactions or positions,
which terms are to be defined by the
Commission, from any rule promulgated
by the Commission under CEA section
4a concerning speculative position
limits.435 Current § 150.3, adopted by
the Commission before the Dodd-Frank
Act was enacted, contains an exemption
from federal position limits for bona
fide hedging transactions.436
432 Nothing in proposed § 150.2(f) would override
the exemption set forth in proposed § 150.3(d) for
pre-enactment and transition period swaps from
speculative position limits. See discussion of
proposed § 150.3(d) below.
433 Proposed § 150.2(g) is identical in substance to
vacated § 151.8. Compare 76 FR 71693.
434 See supra discussion of CEA section 4a(a)(6)
concerning aggregate position limits and the
treatment of FBOT contracts.
435 7 U.S.C. 6a(c)(1).
436 Bona fide hedging transactions and positions
for excluded commodities are currently defined at
17 CFR § 1.3(z). As discussed above, the
Commission has proposed a new comprehensive

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Additionally, Dodd-Frank added section
4a(a)(7) to the CEA, which gives the
Commission authority to provide
exemptions from any requirement the
Commission establishes under section
4a with respect to speculative position
limits.437
The existing exemptions promulgated
under pre-Dodd-Frank CEA section 4a
and set forth in current § 150.3 are
fundamental to the Commission’s
regulatory framework for speculative
position limits. Current § 150.3 specifies
the types of positions that may be
exempted from, and thus may exceed,
the federal speculative position limits.
First, the exemption for bona fide
hedging transactions and positions as
defined in current § 1.3(z) permits a
commercial enterprise to exceed
positions limits to the extent the
positions are reducing price risks
incidental to commercial operations.438
Second, the exemption for spread or
arbitrage positions between single
months of a futures contract (and/or, on
a futures-equivalent basis, options)
outside of the spot month, permits any
trader’s spread position to exceed the
single month limit.439 Third, positions
carried for an eligible entity 440 in the
separate account of an independent
account controller (‘‘IAC’’) 441 that
manages customer positions need not be
aggregated with the other positions
owned or controlled by that eligible
entity (the ‘‘IAC exemption’’).442
definition of bona fide hedging positions in
proposed § 150.1.
437 7 U.S.C. 6a(a)(7). Section 4a(a)(7) of the CEA
provides the Commission plenary authority to grant
exemptive relief from position limits. Specifically,
under Section 4a(a)(7), the Commission ‘‘by rule,
regulation, or order, may exempt, conditionally or
unconditionally, any person, or class of persons,
any swap or class of swaps, any contract of sale of
a commodity for future delivery or class of such
contracts, any option or class of options, or any
transaction or class of transactions from any
requirement it may establish . . . with respect to
position limits.’’
438 17 CFR 150.3(a)(1). The current definition of
bona fide hedging transactions and positions in
1.3(z) is discussed above.
439 The Commission clarifies that a spread or
arbitrage position in this context means a short
position in a single month of a futures contract and
a long position in another contract month of that
same futures contract, outside of the spot month, in
the same crop year. The short and/or long positions
may also be in options on that same futures
contract, on a futures equivalent basis. Such spread
or arbitrage positions, when combined with any
other net positions in the single month, must not
exceed the all-months limit set forth in current
§ 150.2, and must be in the same crop year. 17 CFR
150.3(a)(3).
440 ‘‘Eligible entity’’ is defined in current 17 CFR
150.1(d).
441 ‘‘Independent account controller’’ is defined
in 17 CFR 150.1(e).
442 See 17 CFR 150.3(a)(4). See also discussion of
the IAC exemption in the Aggregation NPRM.

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75735

ii. Proposed § 150.3
In this release, the Commission
proposes organizational and substantive
amendments to § 150.3, generally
resulting in an increase in the number
of exemptions to speculative position
limits. First, the Commission proposes
to amend the three exemptions from
federal speculative limits currently
contained in § 150.3. These
amendments would update cross
references, relocate the IAC exemption
and consolidate it with the
Commission’s separate proposal to
amend the aggregation requirements of
§ 150.4,443 and delete the calendar
month spread provision which is
unnecessary under proposed changes to
§ 150.2 that would increase the level of
the single month position limits.
Second, the Commission proposes to
add exemptions from the federal
speculative position limits for financial
distress situations, certain spot-month
positions in cash-settled referenced
contracts, and grandfathered pre-DoddFrank and transition period swaps.
Third, the Commission proposes to
revise recordkeeping and reporting
requirements for traders claiming any
exemption from the federal speculative
position limits.
a. Proposed Amendments to Existing
Exemptions
(1) New Cross-References
Because the Commission proposes to
replace the definition of bona fide
hedging in 1.3(z) with the definition in
proposed § 150.1, proposed
§ 150.3(a)(1)(i) updates the crossreferences to reflect this change.444
Proposed § 150.3(a)(3) would add a new
cross-reference to the reporting
requirements proposed to be amended
in part 19.445 As is currently the case for
bona fide hedgers, persons who wish to
claim any exemption from federal
position limits, including hedgers,
would need to satisfy the reporting
requirements in part 19.446 As discussed
elsewhere in this release, the
Commission is proposing amendments
to update part 19 reporting.447 For
purposes of simplicity, the Commission
is retaining the current placement of
many reporting requirements, including
those related to claimed exemptions
from the federal position limits, within
443 See

Aggregation NPRM.
supra discussion of the Commission’s
revised definition of bona fide hedging position in
proposed § 150.1.
445 See infra discussion of proposed revisions of
17 CFR part 19.
446 See 17 CFR part 19.
447 See infra discussion of proposed revisions of
17 CFR part 19.
444 See

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parts 15–21 of the Commission’s
regulations.448 Lastly, proposed
§ 150.3(i) would add a cross-reference to
the updated aggregation rules in
proposed § 150.4.449 The Commission
proposes to retain the current practice of
considering entities required to
aggregate accounts or positions under
proposed § 150.4 to be the same person
when determining whether they are
eligible for a bona fide hedging position
exemption.450

emcdonald on DSK67QTVN1PROD with PROPOSALS2

(2) Deleting Exemption for Calendar
Spread or Arbitrage Positions
The Commission proposes to delete
the exemption in current § 150.3(a)(3)
for spread or arbitrage positions
between single months of a futures
contract or options thereon, outside the
spot month.451 The Commission has
proposed to maintain the current
practice in § 150.2, which the district
court did not vacate, of setting singlemonth limits at the same levels as allmonths limits, rendering the ‘‘spread’’
exemption unnecessary. The spread
exemption set forth in current
§ 150.3(a)(3) permits a spread trader to
exceed single month limits only to the
extent of the all months limit.452 Since
proposed § 150.2 sets single month
limits at the same level as all months
limits, the spread exemption no longer
provides useful relief. Furthermore, as
discussed below in this release, the
Commission would codify guidance in
proposed § 150.5(a)(2)(B) that would
allow a DCM or SEF to grant exemptions
for intramarket and intermarket spread
positions (as those terms are defined in
proposed § 150.1) involving commodity
derivative contracts subject to the
federal limits.453
448 The Commission notes this is a change from
the organization of vacated § 151.5, that included
both exemptions and related reporting requirements
in a single section.
449 See Aggregation NPRM.
450 See Aggregation NPRM. The Commission
clarifies that whether it is economically appropriate
for one entity to offset the cash market risk of an
affiliate depends, in part, upon that entity’s
ownership interest in the affiliate. It would not be
economically appropriate for an entity to offset all
the risk of an affiliate’s cash market exposure unless
that entity held a 100 percent ownership interest in
the affiliate. For less than a 100 percent ownership
interest, it would be economically appropriate for
an entity to offset no more than a pro rata amount
of any cash market risk of an affiliate, consistent
with the entity’s ownership interest in the affiliate.
451 In its entirety, 17 CFR 150.3(a)(3) sets forth an
exemption from federal position limits for [s]pread
or arbitrage positions between single months of a
futures contract and/or, on a futures-equivalent
basis, options thereon, outside of the spot month,
in the same crop year; provided however, that such
spread or arbitrage positions, when combined with
any other net positions in the single month, do not
exceed the all-months limit set forth in § 150.2.
452 See id.
453 As discussed above.

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(3) Relocating Independent Account
Controller (‘‘IAC’’) Exemption to
proposed § 150.4
In a separate rulemaking, the
Commission has proposed § 150.4(b)(5)
to replace the existing IAC exemption in
current § 150.3(a)(4).454 Proposed
§ 150.4(b)(5) sets forth an exemption for
accounts carried by an IAC that is
substantially similar to current
§ 150.3(a)(4). Thus, the Commission is
proposing to delete the IAC exemption
in current § 150.3(a)(4) because it is
duplicative.
b. Proposed Additional Exemptions
From Position Limits
As discussed above, CEA section
4a(a)(7) provides that the Commission
may ‘‘by rule, regulation, or order . . .
exempt . . . any person or class of
persons’’ from any requirement that the
Commission may establish under
section 4a of the Act. Pursuant to this
authority, the Commission proposes to
add new exemptions in § 150.3 for
financial distress situations and
qualifying positions in cash-settled
referenced contracts. The Commission
also proposes to add guidance to
persons seeking exemptive relief for
certain qualifying non-enumerated riskreducing transactions. Additionally, the
Commission proposes to grandfather
pre-Dodd-Frank enactment swaps and
transition swaps entered into before
from position limits.
(1) Financial Distress Exemption
The Commission proposes to add an
exemption from position limits for
certain market participants in certain
financial distress scenarios to § 150.3(b).
During periods of financial distress, it
may be beneficial for a financially
sound entity to take on the positions
(and corresponding risk) of a less stable
market participant. The Commission
historically has provided for an
exemption from position limits in these
types of situations, to avoid sudden
liquidations that could potentially
reduce liquidity, disrupt price
discovery, and/or increase systemic
risk.455 Therefore, the Commission now
proposes to codify in regulation its prior
exemptive practices to accommodate
situations involving, for example, a
customer default at a FCM, or in the
context of potential bankruptcy. The
Commission historically has not granted
454 For purposes of simplicity, the IAC exemption
would be placed within the regulatory section
providing for aggregation of positions. See
Aggregation NPRM.
455 See Release 5551–08, ‘‘CFTC Update on Efforts
Underway to Oversee Markets,’’ September 19, 2008
(available at http://www.cftc.gov/PressRoom/
PressReleases/pr5551-08).

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such an exemption by Commission
Order due to concerns regarding
timeliness and flexibility. Furthermore,
the Commission clarifies that this
exemption for financial distress
situations is not a hedging exemption.
(2) Conditional Spot-Month Limit
Exemption
Proposed § 150.3(c) would provide a
conditional spot-month limit exemption
that permits traders to acquire positions
up to five times the spot-month limit if
such positions are exclusively in cashsettled contracts. This conditional
exemption would only be available to
traders who do not hold or control
positions in the spot-month physicaldelivery referenced contract.
Historically, the Commission and
Congress have been particularly
concerned about protecting the spot
month in physical-delivery futures
contracts.456 For example, new CEA
section 4c(a)(5)(B) makes it unlawful for
any person to engage in any trading,
practice, or conduct on or subject to the
rules of a registered entity that
demonstrates intentional or reckless
disregard for the orderly execution of
transactions during the closing period.
The Commission interprets the closing
period to be defined generally as the
period in the contract or trade when the
settlement price is determined under
the rules of a trading facility such as a
DCM or SEF, and may include the time
period in which a daily settlement price
is determined and the expiration day for
a futures contract.457
This proposed conditional exemption
for cash-settled contracts generally
tracks exchange-set position limits
currently implemented for certain cashsettled energy futures and swaps.458 The
456 See, for example, the guidance for DCMs to
establish a spot month limit in physical-delivery
futures contracts that is no greater than 25 percent
of estimated deliverable supply in 17 CFR 150.5(b).
457 See Antidisruptive Practices Authority,
Interpretive guidance and policy statement, 78 FR
31890, 31894, May 28, 2013. See also the
discussion above of ‘‘banging the close’’ and the
DiPlacido case.
458 For example, this is the same methodology for
spot-month speculative position limits that applies
to cash-settled Henry Hub natural gas contracts on
NYMEX and ICE, beginning with the February 2010
contract months (with the exception of the
exchange-set requirement that a trader not hold
large cash commodity positions). In response to
concerns regarding increasing trading volumes in
standardized swaps, in 2008 Congress amended
section 2(h) of the Act to establish core principles
for exempt commercial markets (‘‘ECMs’’) trading
swap contracts that the Commission determined to
be significant price discovery contracts (‘‘SPDCs’’).
7 U.S.C. 2(h)(7) (2009). See also section 13201 of
the Food, Conservation and Energy Act of 2008,
H.R. 2419 (May 22, 2008). Core principle (IV)
directed ECMs to ‘‘adopt, where necessary and
appropriate, position limitations or position
accountability for speculators . . . to reduce the

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emcdonald on DSK67QTVN1PROD with PROPOSALS2

Commission has examined market data
on the effectiveness of conditional spotmonth limits for cash-settled energy
futures swaps, including the data
submitted as part of the prior position
limits rulemaking,459 and preliminarily
believes that the conditional approach
effectively addresses the § 4a(a)(3)
regulatory objectives. Since spot-month
limit levels for cash-settled referenced
contracts will be set at no more than
25% of the estimated spot-month
deliverable supply in the relevant core
referenced futures contract, the
proposed conditional exemption would
therefore permit a speculator to own
positions in cash-settled referenced
contracts equivalent to no more than
125% of the estimated deliverable
supply.
As proposed, this broad conditional
spot month limit exemption for cashsettled contracts would be similar to the
conditional spot month limit for cashsettled contracts in proposed § 151.4.460
However, unlike proposed § 151.4,
proposed § 150.3(c) would not require a
trader to hold physical commodity
inventory of less than or equal to 25
percent of the estimated deliverable
supply in order to qualify for the
conditional spot month limit
exemption. Rather, the Commission
proposes to require enhanced reporting
of cash market holdings of traders
availing themselves of the conditional
spot month limit exemption, as
discussed in the proposed changes to
part 19, below.461 The Commission
preliminarily believes that an enhanced
potential threat of market manipulation or
congestion, especially during trading in the delivery
month.’’ 7 U.S.C. 2(h)(7)(C)(ii)(IV)(2009). Under the
Commission’s rules for ECMs trading SPDCs, the
Commission provided an acceptable practice that
an ECM trading a SPDC that is economicallyequivalent to a contract traded on a DCM should
set the spot-month limit at the same level as that
specified for the economically-equivalent DCM
contract. 17 CFR part 36 (2010). In practice, for
example, ICE complied with this requirement by
establishing a spot month limit for its natural gas
SPDC at the same level as the spot month limit in
the economically-equivalent NYMEX Henry Hub
Natural Gas futures contract. Both ICE and NYMEX
established conditional spot month limits in their
cash-settled natural gas contracts at a level five
times the level of the spot month limit in the
physical-delivery futures contract.
459 See 76 FR 71635 (n. 100–01)(discussing data
for the CME natural gas contract).
460 With respect to cash-settled contracts,
proposed § 151.4 incorporated a conditional spotmonth limit permitting traders without a hedge
exemption to acquire position levels that are five
times the spot-month limit if such positions are
exclusively in cash-settled contracts (i.e., the trader
does not hold positions in the physical-delivery
referenced contract) and the trader holds physical
commodity positions that are less than or equal to
25 percent of the estimated deliverable supply. See
Proposed Rule, 76 FR 4752, 4758, Jan. 26, 2011.
461 See infra discussion of proposed revisions to
part 19.

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reporting regime may serve to provide
sufficient information to conduct an
adequate surveillance program to detect
and potentially deter excessively large
positions or manipulative schemes
involving the cash market.
The Commission notes that the
proposed conditional spot month limit
is a change of course from the expanded
spot month limit that was only for
natural gas referenced contracts in
vacated § 151.4.462 In proposing to
expand the scope of derivatives
contracts for which the conditional spot
month limit is available, the
Commission has reconsidered the risks
to the market of permitting a speculative
trader to hold an expanded position in
a cash-settled contract when that
speculative trader also is active in the
underlying physical-delivery contract.
The Commission preliminarily believes
the conditional natural gas spot month
limits of the exchanges generally have
served to further the purposes Congress
articulated for positions limits in
sections 4a(a)(3)(B) and 4c(a)(5)(B) of
the Act, such as deterring market
manipulation, ensuring the price
discovery function of the underlying
market is not disrupted, and deterring
disruptive trading during the closing
period. The Commission notes those
exchange-set conditional limits, as is the
case for the proposed rule, prohibit a
speculative trader who is holding an
expanded position in a cash-settled
contract from also holding any position
in the physical-delivery contract.
The proposed conditional exemption
would satisfy the goals set forth in CEA
section 4a(a)(3)(B) by: Eliminating all
speculation in a physical-delivery
contract during the spot period by a
trader availing herself of the conditional
spot month limit exemption; ensuring
sufficient market liquidity in the cashsettled contract for bona fide hedgers, in
light of the typically rapidly decreasing
levels of open interest in the physicaldelivery contract during the spot month
as hedgers exit the physical-delivery
contract; and protecting the price
discovery process in the physicaldelivery contract from the risk that
traders with leveraged positions in cashsettled contracts (in comparison to the
level of the limit in the physicaldelivery contract) would otherwise
attempt to mark the close or distort
462 Under vacated § 151.4, the Commission would
have applied spot-month position limits for cashsettled contracts using the same methodology as
applied to the physical-delivery core referenced
futures contracts, with the exception of natural gas
contracts, which would have a class limit and
aggregate limit of five times the level of the limit
for the physical-delivery Core Referenced Futures
Contract. 76 FR 71635.

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physical-delivery prices to benefit their
leveraged cash-settled positions. Thus,
the exemption would establish a higher
conditional limit for cash-settled
contracts than for physical delivery
contracts, so long as such positions are
decoupled from positions in physical
delivery contracts which set or affect the
value of such cash-settled positions.
The Commission preliminarily
believes this proposed exemption would
not encourage price discovery to migrate
to the cash-settled contracts in a way
that would make the physical-delivery
contract more susceptible to sudden
price movements near expiration. The
Commission has observed, repeatedly,
that open interest in physical-delivery
contracts typically declines markedly in
the period immediately preceding the
spot month. Open interest typically
declines to minimal levels prior to the
close of trading in physical-delivery
contracts. The Commission notes a
hedger with a long position need not
stand for delivery when the price of a
physical-delivery contract has
adequately converged to the underlying
cash market price; rather, such long
position holder may offset and purchase
needed commodities in the cash market
at a comparable price that meets the
hedger’s specific location and quality
needs. Similarly, the Commission notes
a hedger with a short position need not
give notice of intention to deliver and
deliver when the price of a physicaldelivery contract has adequately
converged to the underlying cash
market price; rather, such short position
holder may offset and sell commodities
held in inventory or current production
in the cash market at a comparable price
that is consistent with the hedger’s
specific storage location and quality of
inventory or production.463 Concerns
regarding corners and squeezes are most
acute in the markets for physical
contracts in the spot month, which is
why speculative limits in physical
delivery markets are generally set at
levels that are stricter during the spot
month. The Commission seeks comment
on whether a conditional spot-month
463 Once the price of a physical-delivery contract
has converged adequately to cash market prices,
long and short position holders typically offset
physical-delivery contracts. Prior to such adequate
convergence, the Commission has observed when a
physical-delivery contract is trading at a price
above prevailing cash market prices, commercials
with inventory tend to sell contracts with the intent
of making delivery, causing physical-delivery prices
to converge to cash market prices. Similarly, the
Commission has observed when a physical-delivery
contract is trading at a price below prevailing cash
market prices, commercials with a need for the
commodity or merchants active in the cash market
tend to buy the contract with the intent of taking
delivery, causing physical-delivery prices to
converge to cash market prices.

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limit exemption adequately protects the
price discovery function of the
underlying physical-delivery market.
Further, the Commission solicits
comment on its conditional spot month
limit, including whether it is advisable
to expand this conditional limit to all
contracts. Additionally, the Commission
solicits comment on whether the
conditional spot-month limit has
effectively addressed and will continue
to address the CEA section 4a(a)(3)
regulatory objectives. Are there other
concerns or issues regarding the
proposed conditional spot month limit
exemption that the Commission has not
addressed?
While traders who avail themselves of
a conditional spot month limit
exemption could not directly influence
particular settlement prices by trading
in the physical-delivery referenced
contract, the Commission remains
concerned about such traders’ activities
in the underlying cash commodity.
Accordingly, the Commission proposes
new reporting requirements in part 19,
as discussed below.464 The Commission
invites comment and empirical analysis
as to whether these reporting
requirements adequately address
concerns regarding: (1) Protecting the
price discovery function of the physicaldelivery market, including deterring
attempts to mark the close in the
physical-delivery contract; and (2)
providing adequate liquidity for bona
fide hedgers in the physical-delivery
contracts. In light of these two concerns,
the Commission is also proposing
alternatives to the conditional spotmonth limit exemption, as discussed
below, including the possibility that it
would not adopt the proposed
conditional spot-month limit
exemption.
As one alternative to the proposed
conditional spot month limit, the
Commission is considering whether to
restrict a trader claiming the conditional
spot-month limit exemption to positions
in cash-settled contracts that settle to an
index based on cash-market transactions
prices. This would prohibit traders from
claiming a conditional exemption if the
trader held positions in the spot-month
of cash-settled contracts that settle to
prices based on the underlying physicaldelivery futures contract. If the
Commission adopted this alternative
instead of the proposal, would the
physical-delivery futures contract
market be better protected? Why or why
not?
The Commission is also considering a
second alternative to the proposed
464 See infra discussion of proposed revisions of
part 19.

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conditional spot month limit: Setting an
expanded spot-month limit for cashsettled contracts at five times the level
of the limit for the physical-delivery
core referenced futures contract,
regardless of positions in the underlying
physical-delivery contract. This
alternative would not prohibit a trader
from carrying a position in the spotmonth of the physical-delivery contract.
Consequently, this alternative would
give more weight to protecting liquidity
for bona fide hedgers in the physicaldelivery contract in the spot month, and
less weight to protecting the price
discovery function of the underlying
physical-delivery contract in the spot
month.465 Given Congressional concerns
regarding disruptive trading practices in
the closing period, as discussed above,
would this second alternative
adequately address the policy factors in
CEA section 4a(a)(3)(B)?
The Commission is also considering a
third alternative: Limiting application of
an expanded spot-month limit to a
trader holding positions in cash-settled
contracts that settle to an index based
on cash-market transactions prices.
Under this third alternative, cash-settled
contracts that settle to the underlying
physical-delivery contract would be
restricted by a spot-month limit set at
the same level as that of the underlying
physical-delivery contract. The
Commission is considering an aggregate
spot-month limit on all types of cashsettled contracts set at five times the
level of the limit of the underlying
physical-delivery contract for this
alternative to the proposed conditional
spot month limit. Would this third
alternative adequately address the
policy factors in CEA section
4a(a)(3)(B)? Would this third alternative
better address such policy factors than
the second alternative?
The Commission requests comment
on all aspects of the proposed
conditional spot limit and the three
alternatives discussed above, including
whether conditional spot month limit
exemptions should vary based on the
underlying commodity. Should the
Commission consider any other
alternatives? If yes, please describe any
alternative in detail. Would any of the
proposed conditional spot month limit
or the alternatives be more or less likely
to increase or decrease liquidity in
465 This second alternative would effectively
adopt for all commodity derivative contract limits
certain provisions of vacated § 151.4 (that would
have been applicable only to contracts in natural
gas). As noted above, under vacated § 151.4, the
Commission would have applied a spot-month
position limit for cash-settled contracts in natural
gas at a level of five times the level of the limit for
the physical-delivery Core Referenced Futures
Contract in natural gas. Id.

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particular products? Would anticompetitive behavior be more or less
likely to result from any of the proposed
conditional spot month limit or the
alternatives? Does any of the proposed
conditional spot month limit or the
alternatives increase the potential for
manipulation? If yes, please provide
detailed arguments and analyses.
(3) Exemption for Pre-Dodd-Frank
Enactment Swaps and Transition Period
Swaps
Proposed § 150.3(d) would provide an
exemption from federal position limits
for (1) swaps entered into prior to July
21, 2010 (the date of the enactment of
the Dodd-Frank Act of 2010), the terms
of which have not expired as of that
date, and (2) swaps entered into during
the period commencing July 22, 2010,
the terms of which have not expired as
of that date, and ending 60 days after
the publication of final § 150.3 in the
Federal Register.466 However, the
Commission would allow both preenactment and transition swaps to be
netted with commodity derivative
contracts acquired more than 60 after
publication of final § 150.3 in the
Federal Register for the purpose of
complying with any non-spot-month
position limit.
(4) Other Exemptions for NonEnumerated Risk-Reducing Practices
The Commission notes that the
enumerated list of bona fide hedging
positions as set forth in proposed
§ 150.1 represents an expanded list of
exemptions that has evolved over many
years of the Commission’s experience in
administering speculative position
limits. The Commission has carefully
expanded the list of exemptions in light
of the statutory directive to define a
bona fide hedging position in section
4a(c)(2) of the Act.
The Commission previously
permitted a person to file an application
seeking approval for a non-enumerated
position to be recognized as a bona fide
hedging position under § 1.47. The
Commission proposes to delete § 1.47
for several reasons. First, § 1.47 did not
provide guidance as to the standards the
Commission would use to determine
whether a position was a bona fide
466 This exemption is consistent with CEA section
4a(b)(2). The time period for transition swaps for
purposes of position limits differs from the time
period for transition swaps for purposes of swap
data recordkeeping and reporting requirements. In
both cases, the time periods for transition swaps
begins on the date of enactment of the Dodd-Frank
Act. However, the time periods for transition swaps
end prior to the compliance date for each relevant
rule. Swap data recordkeeping and reporting
requirements for pre-enactment and transition
period swaps are listed in 17 CFR part 46.

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
hedging position. Second, in the
Commission’s experience, the
overwhelming number of applications
filed under § 1.47 were from swap
intermediaries seeking to offset the risk
of swaps. Section 4a(c)(2) of the Act
addresses the application of the bona
fide hedging definition to certain
positions that reduce risks attendant to
a position resulting from certain swaps.
As discussed in the definitions section
above, those statutory provisions have
been incorporated into the proposed
definition of a bona fide hedging
position under § 150.1; further, as
discussed in the position limits section
above, the provisions of proposed
§ 150.2 include relief outside of the spot
month to permit automatic netting of
swaps that are referenced contracts with
futures contracts that are referenced
contracts and, where appropriate, to
recognize as a bona fide hedging
position the offset of certain nonreferenced contract swaps with futures
that are referenced contracts.467 Third,
§ 1.47 provided specific, limited
timeframes (of 30 days or 10 days) for
the Commission to determine whether
the position may be classified as bona
fide hedging. The Commission
preliminarily believes it should not
constrain itself to such limited
timeframes for review of potentially
complex and novel risk-reducing
transactions.
Nevertheless, the Commission
proposes in § 150.3(e) to provide
guidance to persons seeking exemptive
relief. A person that engages in riskreducing practices commonly used in
the market that the person believes may
not be included in the list of
enumerated bona fide hedging
transactions may apply to the
Commission for an exemption from
position limits. As proposed, market
participants would be guided in
§ 150.3(e) first to consult proposed
appendix C to part 150 to see whether
their practices fall within a nonexhaustive list of examples of bona fide
hedging positions as defined under
proposed § 150.1.
A person engaged in risk-reducing
practices that are not enumerated in the
revised definition of bona fide hedging
in proposed § 150.1 may use two
different avenues to apply to the
Commission for relief from federal
position limits: The person may request
an interpretative letter from
Commission staff pursuant to
467 All the exemptions granted by the
Commission pursuant to § 1.47 involving swaps
were restricted to recognition of the futures offset
as a bona fide hedging position only outside of the
spot month.

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§ 140.99 468 concerning the applicability
of the bona fide hedging position
exemption, or the person may seek
exemptive relief from the Commission
under section 4a(a)(7) of the Act.469
(5) Previously Granted Risk
Management Exemptions
Until about mid-2008, the
Commission accepted and approved
filings pursuant to § 1.3(z) and § 1.47 for
recognition of transactions and
positions described in such filings as
bona fide hedging for purposes of
compliance with Federal position
limits. Since then, the Division of
Market Oversight (the ‘‘Division’’), on
behalf of the Commission, has only
considered revisions to previously
recognized filings.470 Prior to the DoddFrank Act and pursuant to authority
delegated to it under § 140.97,471 the
Division recognized a broad range of
transactions and positions as bona fide
hedges based on facts and
representations contained in such
filings.472 In seeking these
468 17 CFR 140.99 defines three types of staff
letters—exemptive letters, no-action letters, and
interpretative letters—that differ in scope and
effect. An interpretative letter is written advice or
guidance by the staff of a division of the
Commission or its Office of the General Counsel. It
binds only the staff of the division that issued it (or
the Office of the General Counsel, as the case may
be), and third-parties may rely upon it as the
interpretation of that staff. See description of CFTC
Staff Letters, available at http://www.cftc.gov/
lawregulation/cftcstaffletters/index.htm.
469 See supra discussion of CEA section 4a(a)(7).
470 On May 29, 2008, the Commission announced
a number of initiatives to increase transparency of
the energy futures markets. In particular, the
Commission would review the trading practices of
index traders in the futures markets. CFTC Press
Release 5503–08, May 29, 2008, available at
http://www.cftc.gov/PressRoom/PressReleases/
pr5503-08. On June 3, 2008, the Commission
announced policy initiatives aimed at addressing
concerns raised at an April 22, 2008 roundtable
regarding events affecting the agricultural futures
markets. Among other things, the Commission
withdrew proposed rulemakings that would have
increased the Federal speculative position limits on
certain agricultural futures contracts and created a
risk-management hedge exemption from the Federal
speculative position limits for agricultural futures
and options contracts. At the time, Acting Chairman
Lukken and Commissioners Dunn, Sommers and
Chilton said, ‘‘. . . the Commission will be cautious
and guarded before granting additional exemptions
in this area.’’ CFTC Press Release 5504–08, June 3,
2008, available at http://www.cftc.gov/PressRoom/
PressReleases/pr5504-08.
471 17 CFR 140.97.
472 Almost all requests pursuant to § 1.47 have
been for ‘‘risk-management’’ exemptions. See
generally Risk Management Exemptions from
Speculative Position Limits Approved under
Commission Regulation 1.61, 52 FR 34633, Sep. 14,
1987; Clarification of Certain Aspects of the
Hedging Definition, 52 FR 27195, Jul. 20, 1987. The
Commission first approved a request for a riskmanagement exemption in 1991. The Commission
has also approved a request by a foreign
government to recognize certain positions
associated with a governmental agricultural support

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determinations and exemptions from
Federal position limits, filers would
furnish information to demonstrate,
among other things, that the described
transactions and positions were
economically appropriate to the
reduction of risk exposure attendant to
the conduct and management of a
commercial enterprise.473 On this basis,
the Division provided relief to dealers,
market makers and ‘‘risk
intermediaries’’ facing not only
producers and consumers of
commodities but hedge funds, pension
funds and other financial institutions
who lacked the capacity to make or take
delivery of, or otherwise handle, a
physical commodity.474 The exemptions
granted by the Division were not limited
to futures to offset price risks associated
with commodity index swaps that could
be hedged in the component futures
contracts. Filers obtained exemptions
for futures transactions used to hedge
price risks from transactions involving
options, warrants, certificates of deposit,
structured notes and various other
structured products and hybrid
instruments referencing commodities or
embedding transactions linked to the
payout or performance of a commodity
or basket of commodities (collectively,
‘‘financial products’’). In sum, the
Division provided relief to ‘‘persons
using the futures markets to manage
risks associated with financial
investment portfolios’’ and granted
exemptions from speculative position
limits to a broad range of ‘‘trading
strategies to reduce financial risks,
regardless of whether a matching
transaction ever took place in a cash
market for a physical commodity.’’ 475 In
program that would be consistent with the
examples of bona fide hedging positions in
proposed appendix B to part 150.
473 Section 1.3(z)(1) includes the language,
‘‘economically appropriate to the reduction of risks
in the conduct and management of a commercial
enterprise.’’ 17 CFR 1.3(z)(1). Section 1.47(b)(2)
includes the language, ‘‘economically appropriate
to the reduction of risk exposure attendant to the
conduct and management of a commercial
enterprise.’’ 17 CFR 1.47(b)(2).
474 The Commission notes that both the filings
received by the Commission requesting such
exemptions and the responding exemption letters
issued by the Division are confidential in light of
section 8 of the Act since, as noted above, the
filings included information that described
transactions and positions in order to demonstrate,
among other things, that the transactions and
positions were economically appropriate to the
reduction of risk exposure attendant to the conduct
and management of a commercial enterprise, while
the Division’s responding letters included
information regarding the nature of the price risks
that the transactions would entail.
475 Staff Report, S. Permanent Subcomm. on
Investigations, ‘‘Excessive Speculation in the Wheat
Market,’’ S. Hrg. 111–155 (Jul. 21, 2009) at 13
(‘‘Wheat Report’’). The Wheat Report was issued
before the Dodd-Frank Act became law.

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recognizing such trading strategies as
bona fide hedges, the Commission was
responding to Congressional
direction476 to update its approach at a
time when many sought to encourage
what was then thought to be benign or
beneficial financial innovation. In
hindsight, the sum of these
determinations may have exceeded
what would be appropriate ‘‘to permit
producers, purchasers, sellers,
middlemen, and users of a commodity
or product derived therefrom to hedge
their legitimate anticipated business
needs’’ and adequate ‘‘to prevent
unwarranted price pressures by large
hedgers.’’ 477
The Commission now proposes a
definition of bona fide hedging position
that would apply to all referenced
contracts, and proposes to remove
§ 1.47.478 The Commission is also
proposing in § 150.3(f) that riskmanagement exemptions granted by the
Commission under § 1.47 shall not
apply to swap positions entered into
after the effective date of a final position
limits rulemaking, i.e., revoking the
exemptions for new swap positions.479
This means that certain transactions and
positions (and, by extension, persons
party to such transactions or holding
such positions) heretofore exempt from
Federal position limits may be subject to
476 See generally CFTC Staff Report on
Commodity Swap Dealers & Index Traders with
Commission Recommendations (Sep. 2008) at 13–
15 (‘‘Index Trading Report’’).
477 7 U.S.C. 6a(c)(1).
478 Section 1.3(z), the definition of bona fide
hedging transactions and positions for excluded
commodities, was revised (but retained as
amended) by the vacated part 151 Rulemaking.
Section 1.47 of the Commission’s regulations was
removed and reserved by the vacated part 151
Rulemaking. On September 28, 2012, the District
Court for the District of Columbia vacated the part
151 Rulemaking with the exception of the
amendments to § 150.2. 887 F. Supp. 2d 259 (D.D.C.
2012). Vacating the part 151 Rulemaking, with the
exception of the amendments to § 150.2, means that
as things stand now, it is as if the Commission had
never adopted any part of the part 151 Rulemaking
other than the amendments to § 150.2. That is, the
definition of bona fide hedging transactions and
positions in § 1.3(z) remains unchanged, and § 1.47
is still in effect. As discussed above, the new
definition of bona fide hedging positions in
proposed § 150.1 is different from the changes to
§ 1.3(z) adopted by the Commission in the vacated
part 151 Rulemaking. See 76 FR 71683–84. The
Commission proposes to delete § 1.47 for several
reasons, as discussed above. Proposed § 150.3(e)
would provide guidance for persons seeking nonenumerated hedging exemptions through filing of a
petition under section 4a(a)(7) of the Act, 7 U.S.C.
6a(a)(7), replacing the current process, as discussed
above, under § 1.3(z)(3) and § 1.47 of the
Commission’s regulations.
479 This approach is consistent with the limited
exemption to provide for transition into position
limits for persons with existing § 1.47 exemptions
under vacated § 151.9(d) adopted in the vacated
part 151 Rulemaking. See 76 FR 71655–56. This
limited grandfather is similarly designed to limit
market disruption.

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Federal position limits. This is because
some transactions and positions
previously characterized as ‘‘riskmanagement’’ and recognized as bona
fide hedges are inconsistent with the
revised definition of bona fide hedging
positions proposed in this release and
the purposes of the Dodd-Frank Act
amendments to the CEA.480 As noted
above, some pre-Dodd-Frank Act
exemptions recognized offsets of risks
from financial products. But the
Commission now proposes to
incorporate the ‘‘temporary substitute’’
test of section 4a(c)(2)(A)(i) of the Act in
paragraph (2)(i) of the proposed
definition of bona fide hedging
position.481 Financial products are not
substitutes for positions taken or to be
taken in a physical marketing channel.
Thus, the offset of financial risks arising
from financial products is inconsistent
with the proposed definition of bona
fide hedging for physical commodities.
Moreover, the Commission interprets
CEA section 4a(c)(2)(B) as a direction
from Congress to narrow the scope of
what constitutes a bona fide hedge.482
Other things being equal, a narrower
definition of bona fide hedging would
logically subject more speculative
positions to Federal limits.
Many of the Commission’s bona fide
hedging exemptions prior to the DoddFrank Act provided relief from Federal
speculative position limits for persons
acting as intermediaries in connection
with index trading activities.483 For
480 Section 4a(c)(1) of the CEA authorizes the
Commission to define bona fide hedging
transactions or positions ‘‘consistent with the
purposes of this Act.’’ 7 U.S.C. 6a(c)(1).
481 Section 4a(c)(2)(A)(i) of the Act provides that
the Commission shall define what constitutes a
bona fide hedging position as a position that
represents a substitute for transactions made or to
be made or positions taken or to be taken at a later
time in a physical marketing channel. 7 U.S.C.
6a(c)(2)(A)(i). The proposed definition of bona fide
hedging position requires that, for a position in a
commodity derivative contracts in a physical
contract to be a bona fide hedging position, such
position must represent a substitute for transactions
made or to be made or positions taken or to be
taken, at a later time in a physical marketing
channel. See supra discussion of the temporary
substitute test.
482 See discussion above.
483 Index trading activities have emerged as an
area of special concern to both Congress and the
Commission. See generally the Wheat Report and
the Index Trading Report. The Commission
continues to consider the concerns of commenters
who argue that some transactions and positions
recognized before the Dodd-Frank Act as bona fide
hedging may, in fact, facilitate excessive
speculation. See, e.g., Testimony of Michael W.
Masters before the Commodity Futures Trading
Commission, Aug. 5, 2009, available at http://
www.cftc.gov/ucm/groups/public/@newsroom/
documents/file/hearing080509_masters.pdf;
Comment Letter from Better Markets, Inc., Mar. 28,
2013, available at http://comments.cftc.gov/Public
Comments/ViewComment.aspx?id=34010&Search

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example, a pension fund enters into a
swap to receive the rate of return on a
particular commodity index (such as the
Standard & Poor’s–Goldman Sachs
Commodity Index or the Dow Jones–
UBS Commodity Index) with a swap
dealer. The pension fund thus has a
synthetic long position in the index.
The swap dealer, in turn, must pay the
rate of return on the index to the
pension fund, and purchases
commodity futures contracts to hedge
its short exposure to the index. Prior to
the Dodd-Frank Act, the swap dealer
might have obtained a bona fide hedge
exemption for its position. This would
no longer be the case.
The effect of revoking these
exemptions for intermediaries may be
mitigated in part by the absence of class
limits in the proposed rules.484 The
Text=Better%20Markets. The speculative position
limits that the Commission now proposes do not
directly address these concerns as they relate to
commodity index funds, commodity index
speculation and passive investment in the
commodity derivatives markets. The speculative
position limits that the Commission proposes apply
only to transactions involving one commodity or
the spread between two commodities (e.g., the
purchase of one delivery month of one commodity
against the sale of that same delivery month of a
different commodity). They do not apply to
diversified commodity index contracts involving
more than two commodities. This means that index
speculators remain unconstrained on the size of
positions in diversified commodity index contracts
that they can accumulate so long as they can find
someone with the capacity to take the other side of
their trades. These commenters assert that such
contracts, which this proposal does not address,
consume liquidity and damage the price discovery
function of the market. Contra Bessembinder et al.,
‘‘Predatory or Sunshine Trading? Evidence from
Crude Oil Rolls’’ (working paper, 2012) available at
http://business.nd.edu/uploadedFiles/
Faculty_and_Research/Finance/Finance_Seminar_
Series/2012%20Fall%20Finance%20Seminar%20
Series%20-%20Hank%20Bessembinder
%20Paper.pdf.
484 In the vacated part 151 Rulemaking Proposal,
the Commission proposed to create two classes of
contracts for non-spot month limits: (1) Futures and
options on futures contracts and (2) swaps. The
proposed part 151 rule would have applied singlemonth and all-months-combined position limits to
each class separately. The aggregate position limits
across contract classes would have been in addition
to the position limits within each contract class.
The class limits were designed to diminish the
possibility that a trader could have market power
as a result of a concentration in any one submarket
and to prevent a trader that had a flat net aggregate
position in futures and swap from establishing
extraordinarily large offsetting positions. 76 FR at
71642. In response to comments received on the
proposed part 151 rule, the Commission determined
to eliminate class limits from the final rule. This is
because the Commission believed that comments
regarding the ability of market participants to net
swaps and futures positions that are economically
equivalent had merit. The Commission believed
that concerns regarding the potential for market
abuses through the use of futures and swaps
positions could be addressed adequately, for the
time being, by the Commission’s large trader
surveillance program. The Commission stated in the
vacated part 151 Rulemaking that it would closely
monitor speculative positions in Referenced

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absence of class limits means that
market participants will be able to net
economically equivalent derivatives
contracts that are referenced contracts,
i.e., futures against swaps, outside of the
spot month, which would have the
effect of reducing the size of a net
position, perhaps below applicable
speculative limits, in the case of an
intermediary who enters into multiple
swap positions in individual
commodities to replicate a desired
commodity index exposure in lieu of
executing a swap on the commodity
index.485 Netting would also permit
larger speculative positions in futures
alone outside of the spot month for
traders who did not previously have a
bona fide hedge exemption, but who
have positions in swaps in the same
commodity that would be netted against
futures in the same commodity.486
Declining to impose class limits might
seem to be at cross-purposes with
narrowing the scope of the bona fide
hedging definition. However, the
Commission is concerned that class
limits could impair liquidity in futures
or swaps, as the case may be. For
example, a speculator with a large
portfolio of swaps near a particular class
limit would be assumed to have a strong
preference for executing futures
transactions in order to maintain a
swaps position below the class limit. If
there were many similarly situated
speculators, the market for such swaps
could become less liquid. The absence
of class limits should decrease the
possibility of illiquid markets for
contracts subject to Federal speculative
position limits. Economically equivalent
swaps and futures contracts outside of
the spot month are close substitutes for
each other. The absence of class limits
should allow greater integration
between the swaps and futures markets
for contracts subject to Federal
Contracts and may revisit this issue as appropriate.
76 FR 71643. The Commission has determined to
omit class limits from the rules proposed in this
release for the same reasons that it eliminated class
limits in the vacated part 151 Rulemaking.
485 Netting of commodity index contracts with
referenced contracts would not be permitted
because a commodity index contract is not a
substitute for a position taken or to be taken in a
physical marketing channel.
486 For example, a swap intermediary seeking to
manage price risk on its books from serving as a
counterparty to swap clients in commodity index
swap contracts or commodity swap contracts could
establish a portfolio of long futures positions in the
commodities in the index or the commodity
underlying the swap above applicable speculative
limits if it had obtained a risk-management
exemption. If the Commission adopts this proposal,
the intermediary would not be able to hedge above
the limits pursuant to the exemption, but could net
economically equivalent contracts, which would
have the effect of reducing the size of the position
below applicable speculative limits.

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speculative position limits, and should
also provide market participants with
more flexibility when both hedging and
speculating.
c. Proposed Recordkeeping
Requirements
Proposed § 150.3(g) specifies
recordkeeping requirements for persons
who claim any exemption set forth in
proposed § 150.3. Persons claiming
exemptions under proposed § 150.3
must maintain complete books and
records concerning all details of their
related cash, forward, futures, options
and swap positions and transactions.487
Furthermore, such persons must make
such books and records available to the
Commission upon request under
proposed § 150.3(h), which would
preserve the ‘‘special call’’ rule set forth
in current § 150.3(e). This ‘‘special call’’
rule sets forth that any person claiming
an exemption under § 150.3 must, upon
request, provide to the Commission
such information as specified in the call
relating to the positions owned or
controlled by that person; trading done
pursuant to the claimed exemption; the
commodity derivative contracts or cash
market positions which support the
claim of exemption; and the relevant
business relationships supporting a
claim of exemption.488
The proposed rules concerning
detailed recordkeeping and special calls
would help to ensure that any person
who claims any exemption set forth in
§ 150.3 can demonstrate a legitimate
purpose for doing so.
4. Part 19—Reports by Persons Holding
Bona Fide Hedge Positions Pursuant to
§ 150.1 of This Chapter and by
Merchants and Dealers in Cotton
i. Current Part 19
The market and large trader reporting
rules are contained in parts 15 through
21 of the Commission’s regulations.489
Collectively, these reporting rules
effectuate the Commission’s market and
financial surveillance programs by
providing information concerning the
size and composition of the commodity
futures, options, and swaps markets,
thereby permitting the Commission to
monitor and enforce the speculative
position limits that have been
established, among other regulatory
487 Such positions and transactions include
anticipated requirements, production and royalties,
contracts for services, cash commodity products
and by-products, and cross-commodity hedges.
488 In order to capture information relating to
swaps positions, the term ‘‘futures, options’’ in 17
CFR 150.3(e) would be replaced in proposed
§ 150.3(g) with the broader term ‘‘commodity
derivative contracts’’ (defined in proposed § 150.1).
489 17 CFR parts 15–21.

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goals. The Commission’s reporting rules
are implemented pursuant to the
authority of CEA sections 4g and 4i,
among other CEA sections. Section 4g of
the Act imposes reporting and
recordkeeping obligations on registered
entities, and obligates FCMs,
introducing brokers, floor brokers, and
floor traders to file such reports as the
Commission may require on proprietary
and customer positions executed on any
board of trade.490 Section 4i of the Act
requires the filing of such reports as the
Commission may require when
positions equal or exceed Commissionset levels.491
Current part 19 of the Commission’s
regulations sets forth reporting
requirements for persons holding or
controlling reportable futures and
option positions which constitute bona
fide hedge positions as defined in
§ 1.3(z) and for merchants and dealers in
cotton holding or controlling reportable
positions for future delivery in
cotton.492 In the several markets with
federal speculative position limits—
namely those for grains, the soy
complex, and cotton—hedgers that hold
positions in excess of those limits must
file a monthly report pursuant to part 19
on CFTC Form 204: Statement of Cash
Positions in Grains,493 which includes
the soy complex, and CFTC Form 304
Report: Statement of Cash Positions in
Cotton.494 These monthly reports,
collectively referred to as the
Commission’s ‘‘series ’04 reports,’’ must
show the trader’s positions in the cash
market and are used by the Commission
to determine whether a trader has
sufficient cash positions that justify
futures and option positions above the
speculative limits.495
ii. Proposed Amendments to Part 19
The Commission proposes to amend
part 19 so that it conforms with the
Commission’s proposed changes to part
490 See

CEA section 4g(a); 7 U.S.C. 6g(a).
CEA section 4i; 7 U.S.C. 6i.
492 See 17 CFR part 19. Current part 19 crossreferences a provision of the definition of reportable
position in 17 CFR 15.00(p)(2). As discussed below,
that provision would be incorporated into proposed
§ 19.00(a).
493 Current CFTC Form 204: Statement of Cash
Positions in Grains is available at http://
www.cftc.gov/ucm/groups/public/@forms/
documents/file/cftcform204.pdf.
494 Current CFTC Form 304 Report: Statement of
Cash Positions in Cotton is available at http://
www.cftc.gov/ucm/groups/public/@forms/
documents/file/cftcform304.pdf.
495 In addition, in the cotton market, merchants
and dealers file a weekly CFTC Form 304 Report of
their unfixed-price cash positions, which is used to
publish a weekly Cotton On-call report, a service to
the cotton industry. The Cotton On-Call Report
shows how many unfixed-price cash cotton
purchases and sales are outstanding against each
cotton futures month.
491 See

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150. First, the Commission proposes to
amend part 19 by adding new and
modified cross-references to proposed
part 150, including the new definition
of bona fide hedging position in
proposed § 150.1. Second, the
Commission proposes to amend
§ 19.00(a) by extending reporting
requirements to any person claiming
any exemption from federal position
limits pursuant to proposed § 150.3. The
Commission proposes to add three new
series ’04 reporting forms to effectuate
these additional reporting requirements.
Third, the Commission proposes to
update the manner of part 19 reporting.
Lastly, the Commission proposes to
update both the type of data that would
be required in series ’04 reports, as well
as the time allotted for filing such
reports.
For purposes of clarity and simplicity,
the Commission seeks to retain the
current organization of grouping many
reporting requirements, including those
related to claimed exemptions from the
federal position limits, within parts 15–
21 of the Commission’s regulations. The
Commission notes this is a change from
the organization of vacated § 151.5,
which included both exemptions and
related reporting requirements within a
single section.
a. Amended Cross-References
As discussed above, the Commission
has proposed to replace the definition of
bona fide hedging transaction found in
§ 1.3(z) with a new proposed definition
of bona fide hedging position in
proposed § 150.1. Therefore, proposed
part 19 would replace cross-references
to § 1.3(z) with cross-references to the
new definition of bona fide hedging
positions in proposed § 150.1.
Proposed part 19 will be expanded to
include reporting requirements for
positions in swaps, in addition to
futures and options positions, for any
part of which a person relies on an
exemption. Therefore, positions in
‘‘commodity derivative contracts,’’ as
defined in proposed § 150.1, would
replace ‘‘futures and option positions’’
throughout amended part 19 as
shorthand for any futures, option, or
swap contract in a commodity (other
than a security futures product as
defined in CEA section 1a(45)).496 This
amendment would harmonize the
reporting requirements of part 19 with
proposed amendments to part 150 that
encompass swap transactions.
Proposed § 19.00(a) would eliminate
the cross-reference to the definition of
reportable position in § 15.00(p)(2). In
this regard, the current reportable
496 See

discussion above.

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position definition essentially identifies
futures and option positions in excess of
speculative position limits. Proposed
§ 19.00(a) simply makes clear that the
reporting requirement applies to
commodity derivative contract positions
(including swaps) that exceed
speculative position limits, as discussed
below.
b. List of Persons Who Must File Series
’04 Reports Extended To Include Any
Person Claiming an Exemption Under
Proposed § 150.3
The reporting requirements of current
part 19 apply only to persons holding
bona fide hedge positions and
merchants and dealers in cotton holding
or controlling reportable positions for
future delivery in cotton.497 The
Commission proposes to extend the
reach of part 19 by requiring all persons
who wish to avail themselves of any
exemption from federal position limits
under proposed § 150.3 to file
applicable series ’04 reports.498
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 contracts
and their underlying commodities. By
broadening the scope of persons who
must file series ’04 reports, the
Commission seeks to ensure that any
person who claims any exemption from
federal speculative position limits can
demonstrate a legitimate purpose for
doing so. The list of positions set forth
in proposed § 150.3 that are eligible for
exemption from the federal position
includes, but is not limited to, bona fide
hedging positions (including passthrough swaps and anticipatory bona
fide hedge positions), qualifying spot
month positions in cash-settled
referenced contracts, and qualifying
non-enumerated risk-reducing
transactions.
Series ’04 reports currently refers to
Form 204 and Form 304, which are
listed in current § 15.02.499 The
Commission proposes to add three new
series ’04 reporting forms to effectuate
the expanded reporting requirements of
part 19. The Commission will avoid
using any form numbers with ‘‘404’’ to
avoid confusion with the part 151
497 See 17 CFR part 19. Current part 19 crossreferences the definition of reportable position in 17
CFR 15.00(p).
498 Furthermore, anyone exceeding the federal
limits who has received a special call must file a
series ’04 form.
499 17 CFR 15.02.

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Rulemaking.500 Proposed Form 504
would be added for use by persons
claiming the conditional spot month
limit exemption pursuant to proposed
§ 150.3(c).501 Proposed Form 604 would
be added for use by persons claiming a
bona fide hedge exemption for either of
two specific pass-through swap position
types, as discussed further below.502
Proposed Form 704 would be added for
use by persons claiming a bona fide
hedge exemption for certain
anticipatory bona fide hedging
positions.503
c. Manner of Reporting
(1) Excluding Certain Source
Commodities, Products or Byproducts of
the Cash Commodity Hedged
For purposes of reporting cash market
positions under current part 19, the
Commission historically has allowed a
reporting trader to ‘‘exclude certain
products or byproducts in determining
his cash positions for bona fide
hedging’’ if it is ‘‘the regular business
practice of the reporting trader’’ to do
so.504 The Commission has determined
to clarify the meaning of ‘‘economically
appropriate’’ in light of this reporting
exclusion of certain cash positions.505 In
order for a position to be economically
appropriate to the reduction of risks in
the conduct and management of a
commercial enterprise, the enterprise
generally should take into account all
inventory or products that the enterprise
owns or controls, or has contracted for
purchase or sale at a fixed price. For
example, in line with its historical
approach to the reporting exclusion, the
Commission does not believe that it
would be economically appropriate to
exclude large quantities of a source
commodity held in inventory when an
enterprise is calculating its value at risk
to a source commodity and it intends to
establish a long derivatives position as
500 Forms 404, 404A and 404S were required
under provisions of vacated part 151.
501 See supra discussion of proposed § 150.3(c).
502 Proposed Form 604 would replace Form 404S
(as contemplated in vacated part 151).
503 The updated definition of bona fide hedging
in proposed § 150.1 incorporates several specific
types of anticipatory transactions: unfilled
anticipated requirements, unsold anticipated
production, anticipated royalties, anticipated
services contract payments or receipts, and
anticipatory cross-commodity hedges. See,
paragraphs (3)(iii), (4)(i), (iii), and (iv), and (5),
respectively, of the Commission’s amended
definition of bona fide hedging transactions in
proposed § 150.1 as discussed above.
504 See 17 CFR 19.00(b)(1) (providing that ‘‘[i]f the
regular business practice of the reporting trader is
to exclude certain products or byproducts in
determining his cash position for bona fide hedging
. . ., the same shall be excluded in the report’’).
505 See supra discussion of the ‘‘economically
appropriate test’’ as it relates to the definition of
bona fide hedging position.

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a hedge of unfilled anticipated
requirements. Therefore, under
proposed § 19.00(b)(1), a source
commodity itself can only be excluded
from a calculation of a cash position if
the amount is de minimis, impractical
to account for, and/or on the opposite
side of the market from the market
participant’s hedging position.506
Originally, the Commission intended
for the optional part 19 reporting
exclusion to cover only cash positions
that were not capable of being delivered
under the terms of any derivative
contract.507 The Commission
differentiated between ‘‘products and
byproducts’’ of a commodity and the
underlying commodity itself, the former
capable of exclusion from part 19
reporting under normal business
practices due to the absence of any
derivative contract in such product or
byproduct.508 This intention ultimately
evolved to allow cross-commodity
hedging of products and byproducts of
a commodity that were not necessarily
deliverable under the terms of any
derivative contract.509 The instructions
to current Form 204 go a step further
than current § 19.00(b)(1) by allowing
for a reporting trader to exclude ‘‘certain
source commodities, products, or
byproducts in determining [ ] cash
positions for bona fide hedging.’’
(Emphasis added.)
The Commission’s proposed
clarification of the § 19.00(b)(1)
reporting exclusion would prevent the
definition of bona fide hedging
positions in proposed § 150.1 from
being swallowed by this reporting rule.
506 Proposed § 19.00(b)(1) adds a caveat to the
alternative manner of reporting: when reporting for
the cash commodity of soybeans, soybean oil, or
soybean meal, the reporting person shall show the
cash positions of soybeans, soybean oil and soybean
meal. This proposed provision for the soybean
complex is included in the current instructions for
preparing Form 204.
507 43 FR 45825, 45827, Oct. 4, 1978 (explaining
that the allowance for eggs not kept in cold storage
to be excluded from reporting a cash position in
eggs under part 19 ‘‘was appropriate when the only
futures contract being traded in fresh shell eggs
required delivery from cold storage warehouses.’’).
508 Prior to the Commission revising the part 19
reporting exclusion for eggs, see id., the exclusion
allowed ‘‘eggs not in cold storage or certain egg
products’’ not to be reported as a cash position. 26
FR 2971, Apr. 7, 1961 (emphasis added).
Additionally, the title to the revised exclusion
reads: ‘‘Excluding products or byproducts of the
cash commodity hedged.’’ See 43 FR 45825, 45828,
Oct. 4, 1978. So, in addition to a commodity itself
that was not deliverable under any derivative
contract, the Commission also recognized a separate
class of ‘‘products and byproducts’’ that resulted
from the processing of a commodity that it did not
believe at the time was capable of being hedged by
any derivative contract for purposes of a bona fide
hedge.
509 See 42 FR 42748, Aug. 24, 1977. Crosscommodity hedging is discussed as an enumerated
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For it would not be economically
appropriate behavior for a person who
is, for example, long derivative contracts
to exclude inventory when calculating
unfilled anticipated requirements. Such
behavior would call into question
whether an offset to unfilled anticipated
requirements is, in fact, a bona fide
hedging position, since such inventory
would fill the requirement. As such, a
trader can only underreport cash market
activities on the opposite side of the
market from her hedging position as a
regular business practice, unless the
unreported inventory position is de
minimis or impractical to account for.
By way of example, the alternative
manner of reporting in proposed
§ 19.00(b)(1) would permit a person who
has a cash inventory of 5 million
bushels of wheat, and is short 5 million
bushels worth of commodity derivative
contracts, to underreport additional
cash inventories held in small silos in
disparate locations that are
administratively difficult to count. This
person could instead opt to calculate
and report these hard-to-count
inventories and establish additional
short positions in commodity derivative
contracts as a bona fide hedge against
such additional inventories.
(2) Cross-Commodity Hedges
Proposed § 19.00(b)(2) sets forth
instructions, which are consistent with
the provisions in the current section, for
reporting a cash position in a
commodity that is different from the
commodity underlying the futures
contract used for hedging.510 A person
who is unsure of whether a commodity
may serve as the basis of a crosscommodity hedge should refer to the
deliverable commodities listed by the
relevant DCM under the terms of a
particular core referenced futures
contract. Persons who wish to avail
themselves of cross-commodity hedges
are required to file an appropriate series
’04 form.511
Under vacated § 151.5(g), traders
engaged in hedging commercial activity
(or hedging swaps that in turn hedge
commercial activity) that did not
involve the same quantity or commodity
as the quantity or commodity associated
with positions in referenced contracts
that are used to hedge would have been
obligated to submit a description of the
conversion methodology each time they
510 Proposed § 19.00(b)(2) would add the term
commodity derivative contracts (as defined in
proposed § 150.1). The proposed definition of crosscommodity hedge in proposed § 150.1 is discussed
above.
511 Vacated § 151.5(g) would have required the
filing of a Form 404, 404A, or 404S by persons
availing themselves of cross-commodity hedges.

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75743

cross-hedged.512 In lieu of that, the
Commission proposes to instead
maintain the special call status
concerning such information as set forth
in current § 19.00(b)(3).513 Furthermore,
since proposed § 19.00(b)(3) would
maintain the requirement that crosshedged positions be shown both in
terms of the equivalent amount of the
commodity underlying the commodity
derivative contract used for hedging and
in terms of the actual cash commodity
(as provided for on the appropriate
series ’04 form), the Commission will be
able to determine the hedge ratio used
merely by comparing the reported
positions. Thus, the Commission will be
positioned to review whether a hedge
ratio appears reasonable in comparison
to, for example, other similarly situated
traders, without requiring reporting of
the conversion methodology.
(3) Standards and Conversion Factors
Proposed § 19.00(b)(3) maintains the
requirement that standards and
conversion factors used in computing
cash positions for reporting purposes
must be made available to the
Commission upon request. Proposed
§ 19.00(b)(3) would clarify that such
information would include hedge ratios
used to convert the actual cash
commodity to the equivalent amount of
the commodity underlying the
commodity derivative contract used for
hedging, and an explanation of the
methodology used for determining the
hedge ratio.
(4) Examples of Completed ’04 Forms
To assist filers in completing Forms
204, 304, 504, 604 and 704, illustrative
examples are provided in appendix A to
part 19, adjacent to the blank forms and
instructions. Once finalized, filers
would be able to contact Commission
staff in the Office of Data and
Technology (ODT) and/or surveillance
staff in the Division of Market Oversight
for additional guidance.
d. Information Required and Timing
Proposed § 19.01(b)(3) would require
series ‘04 reports to be transmitted using
the format, coding structure, and
electronic data transmission procedures
approved in writing by the Commission
or its designee.514
512 See

76 FR at 71692.
discussion below.
514 For example, the Commission is considering
requiring that series ’04 reports should be sent to
the Commission via FTP, unless otherwise
specifically authorized by the Commission or its
designee. Prior to submitting series ’04 reports,
persons would contact the CFTC at (312) 596–0700
to obtain the CFTC trader identification code
required by such reports. Further instructions on
513 See

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(1) Bona Fide Hedgers and Cotton
Merchants and Dealers
Current § 19.01(a) sets forth the data
that must be provided by bona fide
hedgers (on Form 204) and by
merchants and dealers in cotton (on
Form 304).515 The Commission
proposes to continue using Forms 204
and 304, which will feature only minor
changes to the types of data to be
reported.516 To accommodate open
price pairs, proposed § 19.01(a)(3)
would remove the modifier ‘‘fixed
price’’ from ‘‘fixed price cash position’’
and would add a specific request for
data concerning open price contracts.
The Commission would maintain
additional reporting requirements for
cotton but will incorporate the monthly
reporting, including the granularity of
equity, certificated and non-certificated
cotton stocks, on Form 204. Weekly
reporting for cotton will be retained as
a separate report made on Form 304 for
the collection of data required by the
Commission to publish its weekly
public cotton ‘‘on call’’ report on
www.cftc.gov.
Proposed § 19.01(b) would maintain
the requirement that reports on Form
204 be submitted to the Commission on
a monthly basis, as of the close of
business on the last Friday of the
month.517 Accordingly, commercial
submitting ’04 reports may be found at http://
www.cftc.gov/Forms/index.htm. If submission
through FTP is impractical, the reporting trader
would contact the Commission at (312) 596–0700
for further instruction.
CFTC Form 204 reports with respect to
transactions in wheat, corn, oats, soybeans, soybean
meal and soybean oil would no longer be sent to
the Commission’s office in Chicago, IL.
Similarly, CFTC Form 304 reports with respect to
transactions in cotton would no longer be sent to
the Commission’s office in New York, NY.
515 Vacated § 151.5 would have set forth the
application procedure for bona fide hedgers and
counterparties to bona fide hedging swap
transactions that seek an exemption from the
Commission-set Federal position limits for
Referenced Contracts. Under vacated § 151.5, had a
bona fide hedger sought to claim an exemption from
position limits because of cash market activities,
then the hedger would have submitted a Form 404
filing pursuant to vacated § 151.5(b). The Form 404
filing would have been submitted when the bona
fide hedger exceeded the applicable position limit
and claimed an exemption or when its hedging
needs increased. Similarly, parties to bona fide
hedging swap transactions would have been
required to submit a Form 404S filing to qualify for
a hedging exemption, which would also have been
submitted when the bona fide hedger exceeded the
applicable position limit and claimed an exemption
or when its hedging needs increased.
516 The list of data required for persons filing on
Forms 204 and 304 would be relocated from current
§ 19.01(a) to proposed § 19.01(a)(3).
517 Compare proposed § 19.01(b) with 17 CFR
19.01(b). Additionally, compare proposed § 19.01(b)
with vacated § 151.5(c) which would have required
that any person holding a derivatives position in
excess of a position limit record and ultimately
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firms would measure their respective
cash positions on one day a month, as
they currently do for Form 204, and
submit a monthly report, as currently
provided in § 19.01. Proposed § 19.02
provides that Form 304, but not Form
204, must be filed weekly to provide
data for the Commission’s weekly cotton
‘‘on call’’ report. The Commission
would continue to utilize its special call
authority in addition to the regular
reporting on ’04 forms to ensure that it
has sufficient information.
(2) Conditional Spot-Month Limit
Exemption
Proposed § 19.01(a)(1) would require
persons availing themselves of the
conditional spot month limit exemption
(pursuant to proposed § 150.3(c)) to
report certain detailed information
concerning their cash market activities
for any commodity specially designated
by the Commission for reporting under
§ 19.03 of this part. While traders who
avail themselves of this exemption
could not directly influence particular
settlement prices by trading in the
physical-delivery referenced contract,
the Commission remains concerned
about such traders’ activities in the
underlying cash commodity.
Accordingly, proposed § 19.01(b) would
require that persons claiming a
conditional spot month limit exemption
must report on new Form 504 daily, by
9 a.m. Eastern Time on the next
business day, for each day that a person
is over the spot month limit in certain
special commodity contracts specified
by the Commission.518 The scope of
reporting—purchase and sales contracts
through the delivery area for the core
referenced futures contract and
inventory in the delivery area—differs
from the scope of reporting for bona fide
hedgers, since the person relying on the
conditional spot month limit exemption
may not be hedging any position.
Initially, the Commission would
require reporting on new Form 504 for
conditional spot month limit
exemptions in the natural gas
commodity derivative contracts only.
Based on its experience in surveillance
of natural gas commodity derivative
contracts, the Commission believes that
enhanced reporting is warranted.519 The
positions in the relevant commodity for each day
that its derivatives position exceeds the applicable
position limit.
518 Additionally, data under this provision may
be required by way of special call, in addition to
special commodity reporting.
519 The Commission has observed dramatic
instances of disruptive trading practices in the
natural gas markets. See United States CFTC v.
Amaranth Advisors, LLC, 2009 U.S. Dist. LEXIS
101406 (S.D.N.Y. Aug. 12, 2009). The Commission
endeavors to balance the cost of similar enhanced

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Commission would wait to impose
similar reporting requirements for
persons claiming conditional spot
month limit exemptions in other
commodity derivative contracts until
the Commission gains additional
experience with the limits in proposed
§ 150.2. In this regard, the Commission
will closely monitor the reporting
associated with conditional spot month
limit exemptions in natural gas and may
require reporting on Form 504 for other
commodity derivative contracts in the
future in response to market
developments and to facilitate
surveillance.520
(3) Pass-Through Swap Exemption
Under the definition of bona fide
hedging position in proposed § 150.1, a
person who uses a swap to reduce risks
attendant to a position that qualifies as
a bona fide hedging position may passthrough those bona fides to the
counterparty, even if the person’s swap
position is not in excess of a position
limit.521 As such, positions in
commodity derivative contracts that
reduce the risk of pass-through swaps
would qualify as bona fide hedging
positions.
Proposed § 19.01(a)(2) would require
a person relying on the pass-through
swap exemption who holds either of
two position types to file a report with
the Commission on new Form 604. The
first type of position is a swap executed
opposite a bona fide hedger that is not
a referenced contract and for which the
risk is offset with referenced contracts.
The second type of position is a cashsettled swap executed opposite a bona
fide hedger that is offset with physicaldelivery referenced contracts held into a
spot month, or, vice versa, a physicaldelivery swap executed opposite a bona
fide hedger that is offset with cashsettled referenced contracts held into a
spot month.
These reports on Form 604 would
explain hedgers’ needs for large
referenced contract positions and would
give the Commission the ability to verify
the positions were a bona fide hedge,
with heightened daily surveillance of
spot month offsets. Persons holding any
type of pass-through swap position
other than the two described above
would report on Form 204.522
reporting for the other 27 commodities against its
experience with observing disruptive trading
practices.
520 See proposed § 19.03.
521 See supra discussion of the proposed
definition of bona fide hedging position.
522 Persons holding pass-through swap positions
that are offset with referenced contracts outside the
spot month (whether such contracts are for physical
delivery or are cash-settled) need not report on

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(A) Non-Referenced Contract Swap
Offset
Proposed § 19.01(a)(2)(i) lists the
types of data that a person who executes
a pass-through swap that is not a
referenced contract and for which the
risk is offset with referenced contracts
must report on new Form 604. Such
data requirements include details
concerning the non-referenced contract
in terms of commodity reference
price,523 notional quantity, gross long or
short position in terms of futuresequivalents in the core referenced
futures contract, and gross long or short
position in the referenced contract used
to offset risk.524 Under proposed
§ 19.01(b), persons holding a nonreferenced contract swap offset would
submit reports to the Commission on a
monthly basis, as of the close of
business of the last Friday of the month.
This data collection would permit staff
to identify offsets of non-referencedcontract pass-through swaps on an
ongoing basis for further analysis. The
Commission believes collection of this
data will be less burdensome on
reporting entities than complying with
special calls.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

(B) Spot Month Swap Offset
Under proposed § 150.2(a), a trader in
the spot month may not net across
physical-delivery and cash-settled
contracts for the purpose of complying
with federal position limits.525 If a
person executes a cash-settled passthrough swap that is offset with
physical-delivery contracts held into a
spot month (or vice versa), then,
pursuant to proposed § 19.01(a)(2)(ii),
that person must report additional
information concerning the swap and
offsetting referenced contract position
on new Form 604. A person need not
file a Form 604 if he or she executes a
cash-settled pass-through swap that is
offset with cash-settled referenced
contracts, or, vice versa, a physical
delivery pass-through swap offset with
physical delivery referenced
contracts.526 Pursuant to proposed
Form 604 because swap positions will be netted
with referenced contract positions outside the spot
month pursuant to proposed § 150.2(b).
523 As defined in 17 CFR 20.1, a commodity
reference price is the price series used by the
parties to a swap or swaption to determine
payments made, exchanged, or accrued under the
terms of that swap or swaption.’’
524 In contrast to vacated § 151.5(f) and (g),
proposed § 19.01(a)(2)(i) would not require the
person to submit a description of the conversion
methodology each time he or she cross-hedged.
525 See supra discussion of proposed § 150.2(a).
526 To provide clarity in filings, a person may
report cash-settled referenced contracts used for
bona fide hedging in a separate filing from physicaldelivery referenced contracts used for bona fide
hedging.

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§ 19.01(b), a person holding a spot
month swap offset would need to file on
Form 604 as of the close of business on
each day during a spot month, and not
later than 9 a.m. Eastern Time on the
next business day following the date of
the report. The Commission notes that
pass-through swap offsets would not be
permitted during the lesser of the last
five days of trading or the time period
for the spot month. However, the
Commission remains concerned that a
trader could hold an extraordinarily
large position early in the spot month in
the physical-delivery contract along
with an offsetting short position in a
cash-settled contract, which may
disrupt the price discovery function of
the underlying physical delivery core
referenced futures contract. Hence, the
Commission proposes to introduce this
new daily reporting requirement within
the spot month to identify and monitor
such offsetting positions.
5. Section 150.7—Reporting
Requirements for Anticipatory Hedging
Positions
For reasons discussed above, the
revised definition of bona fide hedging
in proposed § 150.1 incorporates hedges
of five specific types of anticipated
transactions: unfilled anticipated
requirements, unsold anticipated
production, anticipated royalties,
anticipated services contract payments
or receipts, and anticipatory crosshedges.527 The Commission proposes
reporting requirements in new § 150.7
for traders seeking an exemption from
position limits for any of these five
enumerated anticipated hedging
transactions. Proposed § 150.7 would
build on, and replace, the special
reporting requirements for hedging of
unsold anticipated production and
unfilled anticipated requirements in
current § 1.48.528
i. Current § 1.48
Current § 1.48 provides a procedure
for persons to file for bona fide hedging
exemptions for anticipated production
or unfilled requirements when that
person has not covered the anticipatory
need with fixed-price commitments to
sell a commodity, or inventory or fixedprice commitments to purchase a
commodity. The Commission has long
been concerned that distinguishing
between what is the reduction of risk
arising from anticipatory needs, and
527 See paragraphs (3)(iii), (4)(i), (iii), and (iv), and
(5), respectively, of the Commission’s amended
definition of bona fide hedging transactions in
proposed § 150.1 as discussed above.
528 See 17 CFR 1.48. See also definition of bona
fide hedging transactions in current 17 CFR
1.3(z)(2)(i)(B) and (ii)(C), respectively.

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what is speculation, may be exceedingly
difficult if anticipatory transactions are
not well defined. Therefore, for more
than fifty years, the position limit rules
have set discrete reporting requirements
in § 1.48 for persons wishing to avail
themselves of certain anticipatory bona
fide hedging position exemptions.529
When first promulgated in 1956, § 1.48
set forth reporting requirements for
persons hedging anticipated
requirements for processing or
manufacturing.530 In 1977, § 1.48 was
amended to include similar reporting
requirements for a second type of
anticipatory hedge transaction: unsold
anticipated production.531 Thereafter,
the Commission did not substantively
amend § 1.48 until it adopted a new
position limits regime in 2011.532
In January 2011, the Commission
published a notice of proposed
rulemaking to replace existing part 150,
in its entirety, with a new federal
position limits rules regime in the form
of new part 151.533 Proposed § 151.5
would have established exemptions
from position limits for bona fide
hedging transactions or positions in
exempt and agricultural
commodities.534 The referenced
contracts subject to the proposed
position limit framework would have
been subject to the bona fide hedge
provisions of proposed § 151.5 and
would have no longer been subject to
the definition of bona fide hedging
transactions in § 1.3(z), which would
have been retained only for excluded
commodities.535 Proposed § 151.5(c)
specified reporting and approval
requirements for traders seeking an
anticipatory hedge exemption,
incorporating the current requirements
of § 1.48 (and thereby rendering § 1.48
529 See Hedging Anticipated Requirements for
Processing or Manufacturing under Section 4a(3) of
the Commodity Exchange Act, 21 FR 6913, Sep. 12,
1956.
530 Id. The statutory definition also provided an
anticipatory production hedge for twelve months
agricultural production. 7 U.S.C. 6a(3)(A) (1940)
(1970). The statutory definition was deleted in
1974, as discussed above in the definition of bona
fide hedging position.
531 See Definition of Bona Fide Hedging
Requirements and Related Reporting Requirements,
42 FR 42748, Aug. 24, 1977. The Commission stated
at that time that this amended reporting
requirement was intended to conform § 1.48 to the
updated definition of bona fide hedging in § 1.3(z),
and to limit the potential for market disruption. Id.
at 42750.
532 See generally 76 FR 71626, November 18,
2011. Prior to compliance dates, the rule was
vacated, as discussed below.
533 Proposed Rule, 76 FR 4752, Jan. 26, 2011. The
final rulemaking for new Part 151 required DCMs
to comply with Part 150 until such time that the
Commission replaces Part 150 with the new Part
151. See 76 FR 71632.
534 76 FR 71643.
535 76 FR 71644.

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duplicative).536 However, in an Order
dated September 28, 2012, the United
States District Court for the District of
Columbia vacated part 151.537 The
District Court decision had the effect of
reinstating §§ 1.3(z) and 1.48.538
Therefore, §§ 1.3(z) and 1.48 continue to
apply as if part 151 had not been finally
adopted by the Commission.

within the Commission’s position limits
regime in part 150, and alongside the
Commission’s updated definition of
bona fide hedging positions in proposed
§ 150.1. Thus, the Commission is
proposing to delete the reporting
requirements for anticipatory hedges in
current § 1.48 because that section is
duplicative.

ii. Proposed § 150.7

b. New Form 704
The Commission proposes to add a
new series ’04 reporting form, Form 704,
to effectuate these additional and
updated reporting requirements for
anticipatory hedges. Persons wishing to
avail themselves of an exemption for
any of the anticipatory hedging
transactions enumerated in the updated
definition of bona fide hedging in
proposed § 150.1 would be required to
file an initial statement on Form 704
with the Commission at least ten days
in advance of the date that such
positions would be in excess of limits
established in proposed § 150.2.
Advance notice of a trader’s intended
maximum position in commodity
derivative contracts to offset
anticipatory risks would allow the
Commission to review a proposed
position before a trader exceeds the
position limits and, thereby, would
allow the Commission to prevent
excessive speculation in the event that
a trader were to misconstrue the
purpose of these limited exemptions.541
The trader’s initial statement on Form
704 would provide a detailed
description of the person’s anticipated
activity (i.e., unfilled anticipated
requirements, unsold anticipated
production, etc.).542 Under proposed
§ 150.7(b), the Commission may reject
all or a portion of the position as not
meeting the requirements for bona fide
hedging positions under proposed
§ 150.1. To support this determination,
proposed § 150.7(c) would allow the
Commission to request additional
specific information concerning the
anticipated transaction to be hedged.
Otherwise, Form 704 filings that
conform to the requirements set forth in
proposed § 150.7 would become
effective ten days after submission.
Proposed § 150.7(e) would require an
anticipatory hedger to file a
supplemental report on Form 704

a. Reporting Requirements for
Anticipatory Hedging Positions

emcdonald on DSK67QTVN1PROD with PROPOSALS2

The Commission’s revised definition
of bona fide hedging in proposed § 150.1
would enumerate two new types of
anticipatory bona hedging positions.
Two existing types of anticipatory
hedges would be carried forward from
the existing definition of bona fide
hedging in current § 1.3(z): hedges of
unfilled anticipated requirements and
hedges of unsold anticipated
production, as well as anticipatory
cross-commodity hedges of such
requirements or production.539
Proposed § 150.1 would expand the list
of enumerated anticipatory bona fide
hedging positions to include hedges of
anticipated royalties and hedges of
anticipated services contract payments
or receipts, as well as anticipatory crosscommodity hedges of such contracts.540
As discussed above, § 1.48 has long
required special reporting for hedges of
unfilled anticipated requirements and
hedges of unsold anticipated production
because the Commission remains
concerned about distinguishing between
anticipatory reduction of risk and
speculation. Such concerns apply
equally to any position undertaken to
reduce the risk of anticipated
transactions. Hence, the Commission
proposes to extend the special reporting
requirements in proposed § 150.7 for all
types of enumerated anticipatory hedges
that appear in the definition of bona fide
hedging positions in proposed § 150.1.
For purposes of simplicity, the
proposed special reporting requirements
for anticipatory hedges would be placed
536 Id. This rulemaking would have removed and
reserved § 1.48.
537 See 887 F. Supp. 2d 259 (D.D.C. 2012).
538 See Georgetown Univ. Hosp. v. Bowen, 821
F.2d 750, 757 (D.C. Cir. 1987) (‘‘This circuit has
previously held that the effect of invalidating an
agency rule is to ‘reinstate the rules previously in
force.’ ’’).
539 See current definition of bona fide hedging
transactions at 17 CFR 1.3(z)(2)(i)(B) and (ii)(C),
respectively. Cross-commodity hedges are
permitted under 17 CFR 1.3(z)(2)(iv). Compare with
paragraphs (3)(iii) and (4)(i), respectively, of the
definition of bona fide hedging positions in
proposed § 150.1, discussed above.
540 See sections (4)(iii) and (iv) and (5),
respectively, of the definition of bona fide hedging
positions in proposed § 150.1, discussed above.

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541 Further, advance filing may serve to reduce
the burden on a person who exceeds position limits
and who may then otherwise be issued a special
call to determine whether the underlying
requirements for the exemption have been met. If
the Commission were to reject such an exemption,
such a person would have already violated position
limits.
542 Proposed 150.7(d)(2) would require additional
information for cross hedges, for reasons discussed
above.

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whenever the anticipatory hedging
needs increase beyond that in its most
recent filing.
c. Annual and Monthly Reporting
Requirements
Proposed § 150.7(f) would add a
requirement for any person who files an
initial statement on Form 704 to provide
annual updates that detail the person’s
actual cash market activities related to
the anticipated exemption. With an eye
towards distinguishing bona fide
hedging of anticipatory risks from
speculation, annual reporting of actual
cash market activities and estimates of
remaining unused anticipated
exemptions beyond the past year would
enable the Commission to verify
whether the person’s anticipated cash
market transactions closely track that
person’s real cash market activities.
Proposed § 150.7(g) would similarly
enable the Commission to review and
compare the actual cash activities and
the remaining unused anticipated hedge
transactions by requiring monthly
reporting on Form 204. Absent monthly
filing, the Commission would need to
issue a special call to determine why a
person’s commodity derivative contract
position is, for example, larger than the
pro rata balance of her annually
reported anticipated production.
As is the case under current § 1.48,
proposed § 150.7(h) requires that a
trader’s maximum sales and purchases
must not exceed the lesser of the
approved exemption amount or the
trader’s current actual anticipated
transaction.
d. Delegation
The Commission is proposing to
delete current § 140.97, which delegates
to the Director of the Division of Market
Oversight or his designee authority
regarding requests for classification of
positions as bona fide hedging under
current §§ 1.47 and 1.48. For purposes
of simplicity, this delegation of
authority would be placed in proposed
§ 150.7(j), within the Commission’s
position limits regime in part 150.
6. Miscellaneous Regulatory
Amendments
i. Proposed § 150.6—Ongoing
Application of the Act and Commission
Regulations
The Commission is proposing to
amend existing § 150.6 to conform the
provision with the general applicability
of part 150 to SEFs that are trading
facilities, and concurrently making nonsubstantive changes to clarify the
provision. The provision, as amended
and clarified, provides this part shall
only be construed as having an effect on

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
position limits and that nothing in part
150 shall affect any provision
promulgated under the Act or
Commission regulations including but
not limited to those relating to
manipulation, attempted manipulation,
corners, squeezes, fraudulent or
deceptive conduct, or prohibited
transactions.543 For example, by
requiring DCMs and SEFs that are
trading facilities to impose and enforce
exchange-set speculative position limits,
the Commission does not intend for the
fulfillment of such requirements alone
to satisfy any other legal obligations
under the Act and Commission
regulations of DCMs and SEFs that are
trading facilities to detect and deter
market manipulation and corners. In
another example, a market participant’s
compliance with position limits or an
exemption does not confer any type of
safe harbor or good faith defense to a
claim that he had engaged in an
attempted manipulation, a perfected
manipulation or deceptive conduct.
ii. Proposed § 150.8—Severability
The Commission is proposing to add
§ 150.8 to address the severability of
individual provisions of part 150.
Should any provision(s) of part 150 be
declared invalid, including the
application thereof to any person or
circumstance, § 150.8 provides that all
remaining provisions of part 150 shall
not be affected to the extent that such
remaining provisions, or the application
thereof, can be given effect without the
invalid provisions.544 The Commission
believes it is prudent to include a
severability clause to avoid any further
delay, as practicable, in carrying out
Congress’ mandate to impose position
limits in a timely manner.

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iii. Part 15—Reports—General
Provisions
The Commission is proposing to
amend the definition of the term
‘‘reportable position’’ in current
§ 15.00(p)(2) by clarifying that: (1) Such
positions include swaps; (2) issued and
stopped positions are not included in
open interest against a position limit;
and (3) special calls may be made for
any day a person exceeds a limit.
Additionally, the Commission is
proposing to amend § 15.01(d) by
adding language to reference swaps
positions. Lastly, the Commission is
proposing to amend the list of reporting
forms in current § 15.02 to account for
543 The Commission notes that amended § 150.6
matches vacated § 151.11(h).
544 The Commission notes that proposed § 150.8
matches vacated § 151.13.

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new and updated series ’04 reporting
forms, as discussed above.545
iv. Part 17—Reports by Reporting
Markets, Futures Commission
Merchants, Clearing Members, and
Foreign Brokers
The Commission is proposing to
amend current § 17.00(b) to delete
aggregation provisions, since those
provisions are duplicative of aggregation
provisions in § 150.4.546 Proposed
§ 17.00(b) would provide that ‘‘[e]xcept
as otherwise instructed by the
Commission or its designee and as
specifically provided in § 150.4 of this
chapter, if any person holds or has a
financial interest in or controls more
than one account, all such accounts
shall be considered by the futures
commission merchant, clearing member
or foreign broker as a single account for
the purpose of determining special
account status and for reporting
purposes.’’ In addition, proposed
§ 17.03(h) would delegate to the Director
of the Division of Market Oversight or
his designee the authority to instruct
persons pursuant to proposed
§ 17.03.547
II. Revision of Rules, Guidance, and
Acceptable Practices Applicable to
Exchange-Set Speculative Position
Limits—§ 150.5
A. Background
Pursuant to 17 CFR part 150, the
Commission administers speculative
position limits on futures contracts for
certain agricultural commodities.548
Prior to the CEA’s amendment in 1974,
which expanded its jurisdiction to all
‘‘services, rights and interests’’ in which
futures contracts are traded, only certain
designated agricultural commodities
could be regulated. Both prior to and
after the 1974 amendments to the Act,
futures markets that traded commodities
not so enumerated applied speculative
position limits by exchange rule, if at
all. In 1981, the Commission
promulgated § 1.61, which required
that, absent an exemption, exchanges
must adopt and enforce speculative
position limits for all contracts that are
not subject to the Commission-set
limits.549 The Commission has
545 See discussion of new and amended series ’04
reports above.
546 In a separate proposal approved on the same
date as this proposal, the Commission is proposing
amendments to § 150.4—aggregation of positions.
See Aggregation NPRM (Nov. 5, 2013).
547 In a separate final rulemaking (Oct. 30, 2013),
the Commission adopted amendments to § 17.03;
the current proposal would amend § 17.03 further
by adding proposed § 17.03(h).
548 See 17 CFR Part 150.
549 See Establishment of Speculative Position
Limits, 46 FR 50938, Oct. 16, 1981, and 17 CFR 1.61

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periodically reviewed and updated its
policies and rules pertaining to each of
the three basic elements of the
regulatory framework for speculative
position limits, namely, the levels of the
limits, the exemptions from them (in
particular, for hedgers), and the policy
on aggregating accounts.550
In 1999, the Commission relocated
several of the rules and policies
concerning exchange-set-position limits
from § 1.61 to current § 150.5, thereby
incorporating within part 150 most
Commission rules relating to
speculative position limits. The
Commission codified as rules within
§ 150.5 various staff policies and
administrative practices that had
developed over time. These policies and
practices related to the speculative
position limit levels that the staff had
routinely recommended for approval by
the Commission for newly designated
futures and option contracts, as well as
the magnitude of increases to the limit
levels that it would approve for alreadytraded contracts. The Commission also
codified within § 150.5 various
exemptions from the general
requirement that exchanges must set
speculative position limits for all
contracts. The exemptions included
permitting exchanges to substitute
position accountability rules for
position limits for physical commodity
derivatives outside the spot month in
high volume and liquid markets.551
Less than two years after the
Commission promulgated § 150.5, the
Commodity Futures Modernization Act
(removed and reserved May 5, 1999). Section 1.61
permitted exchanges to adopt and enforce their own
speculative position limits for those contracts that
were covered by Commission-set speculative
position limits, as long as the exchange limits were
not higher than those set by the Commission.
Furthermore, CEA section 4a(e) provides that a
violation of a speculative position limit established
by a Commission-approved exchange rule is also a
violation of the Act. Thus, the Commission can
enforce directly violations of exchange-set
speculative position limits as well as those
provided under Commission rules.
550 Initially, for example, the Commission
redefined ‘‘hedging’’ (see 42 FR 42748, Aug. 24,
1977), and raised speculative position limits in
wheat (see 41 FR 35060, Aug. 19, 1976).
Subsequently, for example, the Commission
solicited public comment on, and subsequently
approved, exchange requests for exemptions for
futures and option contracts on certain financial
instruments from the requirement specified by
former § 1.61 that speculative position limits be
specified for all contracts. See 56 FR 51687, Oct. 15,
1991.
551 See 17 CFR 150.5. See also Revision of Federal
Speculative Position Limits and Associated Rules,
Final Rules, 64 FR 24038, 24040–42, May 5, 1999.
As noted in the notice of proposed rulemaking for
§ 150.5, promulgating these policies within a single
section of the Commission’s rules would increase
significantly their accessibility and clarify their
terms. See 63 FR 38537, Jul. 17, 1998.

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of 2000 (‘‘CFMA’’) 552 amended the CEA
to include a set of core principles that
DCMs must comply with at the time of
application, and on an ongoing basis
after designation,553 including DCM
core principle 5, which requires
exchanges to adopt position limits or
position accountability levels where
necessary and appropriate to reduce the
threat of market manipulation or
congestion.554 The CFMA further
amended the CEA to provide DCMs
with ‘‘reasonable discretion’’ in
determining how to comply with each
core principle, including core principle
5 regarding exchange-set position
limits.555 Since 2000, the Commission
has continued to maintain § 150.5, but
only as guidance on, and acceptable
practices for, compliance with DCM
core principle 5. The Commission did
not amend § 150.5 following passage of
the CFMA.
In 2010, the Dodd-Frank Act amended
the CEA to explicitly provide that the
Commission may mandate the manner
in which DCMs must comply with the
core principles.556 Specifically, the
Dodd-Frank Act amended DCM core
principle 1 to include the condition that
‘‘[u]nless otherwise determined by the
Commission by rule or regulation,’’
boards of trade shall have reasonable
discretion in establishing the manner in
which they comply with the core
principles.557
Additionally, the Dodd-Frank Act
amended DCM core principle 5 to
require that, for any contract that is
subject to a position limitation
established by the Commission pursuant
to CEA section 4a(a), the DCM ‘‘shall set
552 Commodity Futures Modernization Act of
2000, Public Law 106–554, 114 Stat. 2763 (Dec. 21,
2000). By enacting the CFMA, Congress intended
‘‘[t]o reauthorize and amend the Commodity
Exchange Act to promote legal certainty, enhance
competition, and reduce systemic risk in markets
for futures and over-the-counter derivatives . . . .’’
Id.
553 See CEA section 5(d); 7 U.S.C. 7(d). The CEA,
as amended by the CFMA, required a DCM
applicant to demonstrate its ability to comply with
18 core principles.
554 CEA section 5(d)(5); 7 U.S.C. 7(d)(5).
555 DCM core principle 1 states, among other
things, that boards of trade ‘‘shall have reasonable
discretion in establishing the manner in which they
comply with the core principles.’’ This ‘‘reasonable
discretion’’ provision underpinned the
Commission’s use of core principle guidance and
acceptable practices. See former CEA section
5(d)(1)(amended in 2010); U.S.C. 7(d)(1). As
discussed above, the Dodd-Frank Act subsequently
amended DCM core principle 1 to specifically
provide the Commission with discretion to
determine, by rule or regulation, the manner in
which boards of trade comply with the core
principles.
556 See CEA section 5(d)(1)(B); 7 U.S.C. 7(d)(1)(B).
557 See id. Congress limited the exercise of
reasonable discretion by DCMs only where the
Commission has acted by regulation.

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the position limitation of the board of
trade at a level not higher than the
position limitation established by the
Commission.’’ 558 Furthermore, the
Dodd-Frank Act added CEA section 5h
to provide a regulatory framework for
Commission oversight of SEFs.559 Under
SEF core principle 6, which parallels
DCM core principle 5, Congress
required that SEFs adopt for each swap,
as is necessary and appropriate, position
limits or position accountability.560 In
addition, Congress required that, for any
contract that is subject to a Federal
position limit under CEA Section 4a(a),
the SEF shall set its position limits at a
level no higher than the position
limitation established by the
Commission.561
In view of these Dodd-Frank Act
amendments, the Commission proposes
several amendments to update and
streamline the part 150 regulations.
First, the Commission proposes new
and amended clarifying definitions in
§ 150.1 that relate particularly to
position limits. Second, the Commission
proposes to amend § 150.5 to include
SEFs and swaps. Third, the Commission
proposes to codify rules and acceptable
practices for compliance with DCM core
principle 5 and SEF core principle 6
within amended § 150.5(a) for
commodity derivative contracts that are
subject to the federal position limits set
forth in § 150.2. Lastly, the Commission
proposes to codify rules and revise
guidance and acceptable practices for
compliance with DCM core principle 5
and SEF core principle 6 within
amended § 150.5(b) for commodity
derivative contracts that are not subject
to the Federal position limits set forth
in § 150.2.
B. The Current Regulatory Framework
for Exchange-Set Position Limits
1. Section 150.5
The Commission currently sets and
enforces position limits pursuant to its
broad authority under CEA section
4a 562 and does so only with respect to
certain enumerated agricultural
products.563 In 1981, the Commission
558 See CEA section 5(d)(5)(B) (amended 2010); 7
U.S.C. 7(d)(5)(B).
559 See CEA section 5h; 7 U.S.C. 7b–3.
560 CEA section 5h(f)(6); 7 U.S.C. 7b–3(f)(6).
561 Id.
562 CEA section 4a, as amended by the DoddFrank Act, provides the Commission with broad
authority to set position limits. 7 U.S.C. 6a. See
supra discussion of CEA section 4a.
563 The position limits on these agricultural
contracts are referred to as ‘‘legacy’’ limits, and the
listed commodities are referred to as the
‘‘enumerated’’ agricultural commodities. This list of
agricultural contracts includes Corn (and MiniCorn), Oats, Soybeans (and Mini-Soybeans), Wheat
(and Mini-wheat), Soybean Oil, Soybean Meal, Hard

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promulgated what was then 17 CFR 1.61
(re-codified in 1999 as 17 CFR 150.5),
which required that, absent an
exemption, exchanges must adopt and
enforce speculative position limits for
all futures contracts that were not
subject to Commission-set limits.564
The Commission’s 1981 rule requiring
that exchanges set position limits was a
watershed in its approach to position
limits. The Commission first concluded
that multiple provisions of the CEA
vested it with authority to direct that
exchanges impose position limits.565
The Commission explained that section
4a ‘‘represents an express Congressional
finding that excessive speculation is
harmful to the market, and a finding
that speculative limits are an effective
prophylactic measure.’’ 566 Relying on
those Congressional findings, the
Commission directed exchanges to
impose speculative position limits on
all futures contracts subject to their
jurisdiction.567
In adopting this prophylactic
approach, the Commission explained
that comments it had received during
the rulemaking that questioned ‘‘the
general desirability of [position] limits
[were] contrary to Congressional
findings in sections 3 and 4a of the Act
and considerable years of Federal and
contract market regulatory
experience.’’ 568 The Commission also
explained that:
the prevention of large and/or abrupt price
movements which are attributable to
extraordinarily large speculative positions is
a Congressionally endorsed regulatory
objective of the Commission. Further . . .
this objective is enhanced by speculative
position limits since it appears that the
capacity of any contract market to absorb the
establishment and liquidation of large
speculative positions in an orderly manner is
related to the relative size of the positions,
Red Spring Wheat, Hard Winter Wheat, and Cotton
No. 2. See 17 CFR 150.2.
564 46 FR 50938, Oct. 16, 1981. The Commission
stated the purpose of such limits was to prevent
‘‘excessive speculation . . . arising from those
extraordinarily large positions which may cause
sudden or unreasonable fluctuations or
unwarranted changes in the price’’ of commodity
futures. Id. at 50945. Former § 1.61(a)(2) specified
that limits shall be based on ‘‘such factors that will
accomplish the purposes of this section. As
appropriate, these factors shall include position
sizes customarily held by speculative traders in the
market . . . , which shall not be extraordinarily
large relative to total open positions in the contract
market . . . [or] breadth and liquidity of the cash
market underlying each delivery month and the
opportunity for arbitrage between the futures
market and cash market in the commodity
underlying the futures contract.’’ 17 CFR 1.61
(removed and reserved on May 5, 1999).
565 46 FR 50938, 50939–40, Oct. 16, 1981.
566 Id. at 50940.
567 Id. at 50945.
568 Id. at 50940.

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
i.e., the capacity of the market is not
unlimited.569

Citing the recent disruption in the
silver market, the Commission insisted
that position limits be imposed
prophylactically for all futures and
options contracts, irrespective of the
unique features of the cash market
underlying a particular derivative.570
Thus, the Commission concluded that
‘‘speculative limits are appropriate for
all contract markets,’’ 571 and directed
exchanges to impose them on an
‘‘omnibus basis,’’ 572 that is, on all
futures contracts.573
Congress ratified the Commission’s
construction of section 4a and its
promulgation of § 1.61 in the Futures
Trading Act of 1982 574 when it enacted
section 4a(e) of the Act, which provides
that limits set by exchanges and
approved by the Commission are subject
to Commission enforcement.575
During the 1990s, the Commission
allowed exchanges to replace position
limits with position accountability
levels with respect to certain derivatives
outside the spot month.576 Position
accountability levels are not fixed
limits, but rather position sizes that
trigger an exchange review of a trader’s
position and at which an exchange may
remediate perceived problems, such as
preventing a trader from increasing his
position or forcing a reduction in a
position. In January 1992, the
Commission approved the CME’s
request for an exemption from the
position limits requirements and
permitted the CME to establish position
accountability for a variety of financial
contracts. Initially, the Commission
limited its approval of position
accountability to financial instruments
(i.e., excluded commodities) that had a
high degree of liquidity. Six months
later, the Commission determined it
would also allow position

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569 Id.
570 Id. at 50940–41. The Commission stated it
would consider the particular characteristics of the
cash markets in setting limit levels, but required
that all futures contracts have position limits. Id. at
50941.
571 Id. at 50941.
572 Id. at 50939.
573 See 17 CFR 1.61(a)(1) (1982). In addition,
§ 1.61 permitted exchanges to adopt and enforce
their own speculative position limits for those
contracts that have federal speculative position
limits, as long as the exchange limits were not
higher than those set by the Commission.
574 The Futures Trading Act of 1982, Public Law
97–444, 96 Stat. 2294 (1983).
575 See id; see also 7 U.S.C. 6a(e).
576 See Speculative Position Limits—Exemptions
from Commission Rule 1.61, 56 FR 51687, Oct. 15,
1991; and Speculative Position Limits—Exemptions
from Commission Rule 1.61, 57 FR 29064, Jun. 30,
1992.

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accountability to be used for highly
liquid energy and metals contracts.577
In 1999, the Commission simplified
and reorganized its rules relating to
speculative position limits by removing
and reserving § 1.61 and relocating
several of its rules and policies
concerning exchange-set-position limits
to new § 150.5, thereby incorporating
within part 150 most Commission rules
relating to speculative position
limits.578 The Commission codified
within § 150.5 various staff policies and
administrative practices that had
developed over time relating to: (1) The
speculative position limit levels that the
staff routinely had recommended for
approval by the Commission for newly
designated futures and option contracts;
(2) the magnitude of increases to the
limit levels that it would approve for
traded contracts; and (3) various
exemptions from the general
requirement that exchanges set
speculative position limits for all
contracts, such as permitting exchanges
to substitute position accountability
rules for position limits for high volume
and liquid markets.579 The Commission
explained that codifying the prior
administrative practices as part of new
§ 150.5 would make the applicable
standard for exchange-set position
limits more transparent and thereby
make compliance easier for exchanges
to achieve.580
Under § 150.5(a), the Commission
required each exchange to ‘‘limit the
maximum number of contracts a person
may hold or control, separately or in
combination, net long or net short, for
the purchase or sale of a commodity for
577 See

57 FR 29064, Jun. 30, 1992.
FR 24038, 24040, May 5, 1999. As noted
in the notice of proposed rulemaking for § 150.5,
promulgating these policies within a single section
of the Commission’s rules would increase
significantly their accessibility and clarify their
terms. See Revision of Federal Speculative Position
Limits and Associated Rules, Proposed Rules, 63 FR
38537, Jul. 17, 1998.
579 64 FR at 24040–42. As the Commission
explained, the open-interest criterion and numeric
formula used by the Commission in its 1991
proposed amendment of Commission-set
speculative position limits provided the most
definitive guidance by the Commission on
acceptable levels for speculative position limits for
tangible commodities and, along with several other
commonly accepted measures, had been widely
followed as a matter of administrative practice
when reviewing proposed exchange speculative
position limits under Commission rule 1.61. Id. at
24040. Additionally, in reviewing new contracts for
tangible commodities, the staff had relied upon the
Commission’s formulation providing for a
minimum level of 1,000 contracts for non-spot
month speculative position limits. Id. Moreover, the
Commission had routinely approved a level of
5,000 contracts in non-spot months for designation
of financial futures and energy contracts, and that
level had become a rule of thumb as a matter of
administrative practice. Id.
580 Id.
578 64

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75749

future delivery or, on a futuresequivalent basis, options thereon.’’ 581
The Commission noted that this
provision does not apply to contracts for
which position limits are set forth in
§ 150.2 or to a futures or option contract
on a major foreign currency.582
Furthermore, nothing in § 150.5(a) was
to be construed to prohibit an exchange
from setting different limits for different
futures contracts or delivery months, or
from exempting positions normally
known in the trade as spreads,
straddles, or arbitrage.583
In § 150.5(b), the Commission
presented explicit numeric formulas
and descriptive standards for the
speculative position limit levels that it
found to be appropriate for new
contracts.584 For physical delivery
contracts, the spot month limit level
must be no greater than one-quarter of
the estimated spot month deliverable
supply, calculated separately for each
month to be listed.585 For cash-settled
contracts, the Commission presented a
descriptive standard: ‘‘the spot month
limit level must be no greater than
necessary to minimize the potential for
manipulation or distortion of the
contract’s or the underlying
commodity’s price.’’ 586 Individual nonspot-month or all-months-combined
levels for such newly-designated
contracts must be no greater than 1,000
contracts for tangible commodities other
than energy products,587 and no greater
than 5,000 contracts for energy products
and non-tangible commodities,
including contracts on financial
products.588 In § 150.5(c), the
Commission codified mandatory
numeric formulas and descriptive
standards for subsequent adjustments to
spot, individual and all-monthscombined position limit levels.589
The Commission explained that these
explicit numeric formulas grew from
administrative practices that had long
required a deliverable supply of at least
four times the spot month speculative
position limit.590 The Commission
581 17

CFR 150.5(a).

582 Id.
583 Id.
584 See 17 CFR 150.5(b). The Commission
explained that the proposed limit levels for new
contracts, which were based upon the formula and
associated minimum levels used by the
Commission in its 1992 proposed rulemaking, had
long been used as a matter of informal
administrative practice. 64 FR 24040.
585 17 CFR 150.5(b)(1).
586 Id.
587 17 CFR 150.5(b)(2).
588 17 CFR 150.5(b)(3).
589 17 CFR 150.5(c).
590 64 FR at 24041 (citing 62 FR 60831, 60838,
Nov. 13, 1997). A spot month speculative position

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further explained that the descriptive
standards for exchange-set limits in
§ 150.5 grew from staff experience that
had demonstrated that many
commodities, particularly intangible
commodities, have sufficiently large
deliverable supplies to meet this
standard without requiring a spot month
level that is lower than the individual
month level.591
In § 150.5(d), the Commission
explicitly precluded exchanges from
applying exchange-set speculative
position limits rules to bona fide
hedging positions as defined by an
exchange in accordance with
§ 1.3(z)(1).592 However, that section also
provided an exchange with the
discretion to limit bona fide hedging
positions that it determines are ‘‘not in
accord with sound commercial practices
or [that] exceed an amount which may
be established and liquidated in an
orderly fashion.’’ 593 Under
§ 150.5(d)(2), the Commission explicitly
required traders to apply to the
exchange for any exemption from its
speculative position limit rules.594
Furthermore, under § 150.5(f), an
exchange is compelled to grant
additional exemptions to positions
acquired in good faith prior to the
effective date of any exchange position
limits rule.595 In addition to the express
exemptions specified in § 150.5,
§ 150.5(f) permitted an exchange to
propose other exemptions consistent
with the purposes of § 150.5.596
limit that exceeds this amount enhances the
susceptibility of the contract to market
manipulation, price distortion or congestion. Except
for cash-settled contracts, Commission staff had
used this standard to review every new contract, or
proposals to increase existing exchange speculative
position limits, since 1981, when § 1.61 was issued.
Id.
591 64 FR at 24041. For other commodities,
however, especially commodities having strong
seasonal characteristics, spot month speculative
position limits are required to be set at a level lower
than the individual month limit for all or some
trading months. Id. Accordingly, codification of the
standard only made explicit the standard which,
since 1981, had been applied to, and met by, every
physical delivery futures contract at the time of
initial review and upon subsequent increases to the
spot month speculative position limit. Id.
592 17 CFR 150.5(d)(1); 17 CFR 1.3(z).
593 17 CFR 150.5(d)(1).
594 17 CFR 150.5(d)(2). In considering whether to
grant such an application for exemption, exchanges
must take into account whether the hedging
position is not in accord with sound commercial
practices or exceeds an amount which may be
established and liquidated in an orderly fashion.
See id.
595 17 CFR 150.5(f). This exemption also applies
to positions acquired in good faith prior to the
effective date of any exchange position limits rule
by a person that is registered as a futures
commission merchant or as a floor broker under
authority of the Act except to the extent that
transactions made by such person are made for or
on behalf of the account or benefit of such person.
596 Id.

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In § 150.5(e), the Commission codified
its existing policies concerning the
classes of contracts for which an
exchange could replace the required
speculative position limit with a
position accountability rule.597 Under
§ 150.5(e), at least twelve months after a
contract’s initial listing for trading, an
exchange could apply to the
Commission to substitute for the
position limits required under part 150
an exchange rule requiring traders to be
accountable for large positions.598 The
Commission explained that the type of
position accountability rule that applies
to a particular contract under § 150.5(e)
is determined by the liquidity of the
futures market, the liquidity of the cash
market and the Commission’s oversight
experience.599 The Commission further
explained that it used § 150.5(e) to
restate these criteria with greater clarity
and precision, particularly in measuring
the necessary levels of liquidity of the
futures and option markets.600
Furthermore, for purposes of § 150.5(e),
trading volume and open interest must
be calculated by combining the monthend futures and its related option
contract, on a delta-adjusted basis, for
all months listed during the most recent
calendar year.601
Lastly, the Commission codified its
aggregation policy relating to exchangeset position limits in § 150.5(g).602
597 17 CFR 150.5(e). Position accountability rules
impose a level that triggers distinct reporting
responsibilities by a trader at the request of the
applicable exchange.
598 Id. The Commission explained that a trading
history of at least 12 months must first be
established before a futures contract can meet the
proposed rule’s liquidity requirements. See
Proposed Rule, 63 FR 38525, 38529, Jul. 17, 1998.
599 Revision of Federal Position Limits and
Associated Rules, Proposed Rule, 63 FR 38525,
38530, Jul. 17, 1998. The Commission explained
that a liquid market is one which has sufficient
trading activity to enable individual trades coming
to a market to be transacted without significantly
affecting the price. Id. A high degree of liquidity in
the futures and option markets better enables
traders to arbitrage these markets with the
underlying cash markets. Id. Where the underlying
cash markets in turn are very liquid and have
extremely large deliverable supplies, the threat of
market manipulation or distortions caused by large
speculative positions is lessened. Id.
600 See 17 CFR 150.5(e)(1)–(3); see also Proposed
Rule, 63 FR 38525, 38530, Jul. 17, 1998.
601 17 CFR 150.5(e)(4).
602 To determine whether any person has
exceeded the limits established under this section,
all positions in accounts for which such person by
power of attorney or otherwise directly or indirectly
controls trading shall be included with the
positions held by such person; such limits upon
positions shall apply to positions held by two or
more person acting pursuant to an express or
implied agreement or understanding, the same as if
the positions were held by a single person. 17 CFR
150.5(g).

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2. The Commodity Futures
Modernization Act of 2000 Caused
Commission § 150.5 To Become
Guidance on and Acceptable Practices
for Compliance With DCM Core
Principle 5
Just over a year after the Commission
promulgated § 150.5, the Commodity
Futures Modernization Act of 2000 603
amended the CEA to establish DCMs as
a registration category and create a set
of 18 core principles with which DCMs
must comply.604 DCM core principle 5
requires exchanges to adopt position
limits or position accountability levels
‘‘where necessary and appropriate to
reduce the threat of market
manipulation or congestion.’’ 605 Under
the CFMA, DCM core principle 1 gave
DCMs ‘‘reasonable discretion’’ in
determining how to comply with the
core principles.606 The CFMA, however,
did not change the treatment of the
enumerated agricultural commodities,
which remain subject to Federal
speculative position limits. Moreover,
the CFMA did not alter the
Commission’s authority in CEA section
4a to establish position limits. The core
principles regime set forth in the CFMA
had the effect of undercutting the
prescriptive rules of § 150.5 because
DCMs were afforded ‘‘reasonable
discretion’’ in determining how to
comply with the position limits or
accountability requirements of core
principle 5. Nevertheless, the
Commission has retained current
§ 150.5 as guidance on, and acceptable
practices for, compliance with DCM
603 CFMA, Public Law 106–554, 114 Stat. 2763.
By enacting the CFMA, Congress intended ‘‘[t]o
reauthorize and amend the Commodity Exchange
Act to promote legal certainty, enhance
competition, and reduce systemic risk in markets
for futures and over-the-counter derivatives, and for
other purposes.’’ Id.
604 See CEA section 5(d); 7 U.S.C. 7(d). DCMs
were first established under the CFMA as one of
two forms of Commission-regulated markets for the
trading of contracts for sale of a commodity for
future delivery or commodity options (the other
being registered DTEFs). In addition, the CFMA
provided for two markets exempt from regulation:
Exempt boards of trade (‘‘EBOTs’’) and exempt
commercial markets (‘‘ECMs’’). See A New
Regulatory Framework for Trading Facilities,
Intermediaries and Clearing Organizations, Notice
of Proposed Rulemaking, 66 FR 14262, Mar. 9,
2001; Final Rulemaking, 66 FR 42256, Aug. 10,
2001.
605 CEA sections 5(d)(1), (5); 7 U.S.C. 7(d)(1), (5).
606 CEA section 5(d)(1)(B); 7 U.S.C. 7(d)(1)(B). The
Commission also undertakes due diligence reviews
of each exchange’s compliance with the core
principles during rule and product certification
reviews and periodic examinations of DCMs’
compliance with the core principles under Rule
Enforcement Reviews. As discussed above, DCM
core principle 1 was amended by the Dodd-Frank
Act to give the Commission authority to determine,
by rule or regulation, the manner in which boards
of trade must comply with the core principles.

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
core principle 5.607 The Commission
did not amend § 150.5 following passage
of CFMA.
In August 2001, the Commission
adopted part 38 to govern trading on
DCMs post-CFMA. Under § 38.2, DCMs
operating under part 38 were ‘‘exempt
from all Commission rules not
specifically reserved’’ 608 and § 38.2 did
not reserve § 150.5.609 Accordingly,
DCMs operating under part 38 in the
post-CFMA environment have not been
required to comply with § 150.5. In this
same rulemaking, the Commission
adopted appendix B to part 38 as
guidance on and acceptable practices for
compliance with the DCM core
principles, including core principle
5.610 Within appendix B to part 38, the
Commission advised DCMs to, among
other things, adopt spot-month limits
for markets based on commodities
having more limited deliverable
supplies, or where otherwise necessary
to minimize the susceptibility of the
market to manipulation or price
distortions.611 The Commission also
advised DCMs on how they should set
spot-moth limit levels and instructed
DCMs that they could elect not to adopt
all-months-combined and non-spot
month limits.612 Appendix B to part 38
was subsequently amended in June 2012
to delete the guidance and acceptable
practices section relevant to compliance
with DCM core principle 5 in deference
to parts 150 and 151.613

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607 Guidance

provides DCMs and DCM applicants
with contextual information regarding the core
principles, including important concerns which the
Commission believes should be taken into account
in complying with specific core principles. In
contrast, the acceptable practices are more specific
than guidance and provide examples of how DCMs
may satisfy particular requirements of the core
principles; they do not, however, establish
mandatory means of compliance. Acceptable
practices are intended to assist DCMs by
establishing non-exclusive safe harbors. The safe
harbors apply only to compliance with specific
aspects of the core principle, and do not protect the
exchange with respect to charges of violations of
other sections of the CEA or other aspects of the
core principle. In applying § 150.5 as guidance and
acceptable practices, most exchanges, in exercising
their ‘‘reasonable discretion,’’ have continued to
impose strict position limits in the spot month and
to apply position accountability standards in nonspot months.
608 17 CFR 38.2 (amended June 19, 2012); see also
A New Regulatory Framework for Trading
Facilities, Intermediaries and Clearing
Organizations, Final Rules, 66 FR 42256, 42257,
Aug. 10, 2001.
609 See id.
610 17 CFR part 38 app. B (2002); see also 66 FR
42256, Aug. 10, 2001.
611 Id.
612 Id.
613 See Core Principles and Other Requirements
for Designated Contract Markets, Final Rule, 77 FR
36611, 36639, Jun. 19, 2012. The Commission
published the final rules for Position Limits for
Futures and Swaps on November 18, 2011, which

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3. The CFTC Reauthorization Act of
2008
In the CFTC Reauthorization Act of
2008, Congress, among other things,
expanded the Commission’s authority to
set position limits to include significant
price discovery contracts (‘‘SPDCs’’) on
exempt commercial markets
(‘‘ECMs’’).614 The Reauthorization Act’s
provisions regarding ECMs were based
largely on the Commission’s
recommendations for improving
oversight of ECMs whose contracts
perform or affect a significant price
discovery function. The legislation
significantly expanded the
Commission’s regulatory authority over
ECMs by adding section 2(h)(7) 615 to
the CEA, establishing criteria for the
Commission to consider in determining
whether a particular ECM contract
performs a significant price discovery
function, and providing for greater
regulation of SPDCs traded on ECMs.
The Reauthorization Act also required
ECMs to adopt position limit and
accountability level provisions for
SPDCs, authorized the Commission to
require the reporting of large trader
positions in SPDCs, and established
core principles governing ECMs with
SPDCs. The core principles applicable
to ECMs with SPDCs were largely
derived from selected DCM core
principles and designation criteria set
forth in CEA section 5, and Congress
intended that they be construed in a like
manner.616
Much like DCM core principle 5, ECM
core principle IV of CEA section
2(h)(7)(C) required electronic trading
facilities to adopt where necessary and
appropriate, position limits or position
accountability provisions, especially
during trading in the delivery month,
and taking into account fungible
positions at a derivative clearing
organization.617
In a Notice of Final Rulemaking in
March 2009, the Commission adopted
Appendix B to Part 36 as guidance on
and acceptable practices for compliance
required DCMs to comply with part 150 (Limits on
Positions) until such time that the Commission
replaces part 150 with the new part 151 (Limits on
Positions). Id.
614 CFTC Reauthorization Act of 2008,
incorporated as Title XIII of the Food, Conservation
and Energy Act of 2008, Public Law 110–246, 122
Stat. 1651 (June 18, 2008).
615 CEA sections 2(h)(3)–(7) were deleted by the
Dodd-Frank Act on July 15, 2011, thus eliminating
the ECM category.
616 See Joint Explanatory Statement of the
Committee of Conference, H.R. Rep. No. 110–627,
110 Cong., 2d Sess. at 985 (2008). Section 723 of
the Dodd-Frank Act subsequently repealed the ECM
SPDC provisions. See Section 723 of the DoddFrank Act, Pub. L. 111–203, 124 Stat. 1376 (2010).
617 CEA section 2(h)(7)(C) (amended 2010).

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with ECM core principles.618 The
guidance on and acceptable practices for
compliance with ECM core principle IV
generally tracked those for DCM core
principle 5 as listed in § 150.5.619
Furthermore, the Commission indicated
within this Notice of Final Rulemaking
that § 150.5 was not binding on DCMs
once part 38 was finalized.620 The
Commission rejected a commenter’s
suggestion that a proposed ECM–SPDCs
core principle for position limits and
accountability should adopt the existing
standards in CEA section 4a(b)(2)
(barring trading or positions in excess of
federal limits) and, especially,
incorporate a broader good faith
exemption in § 150.5(f).621 The
Commission responded that section
4a(b)(2) applies to federal limits, not
exchange-set limits.622 The Commission
further explained that § 150.5(f) ‘‘no
longer has direct application to DCM-set
limits’’ because ‘‘the statutory authority
governing [those] limits is found in CEA
section 5(d)(5)—DCM core principle
5.’’ 623 That core principle does not, the
Commission explained, contain any of
the exemptive language found in CEA
section 4a or § 150.5(f).624 The
Commission observed that the part 38
rules specifically exempt DCMs and
DCM-traded contracts from all rules
other than those specifically reserved in
§ 38.2, and § 38.2 did not retain
618 Significant Price Discovery Contracts on
Exempt Commercial Markets, Final Rulemaking, 74
FR 12178, Mar. 23, 2009; See also 17 CFR part 36
app. B (2009).
619 For example, ECMs were advised to adopt
spot-month limits for SPDCs. If there was an
economically-equivalent SPDC, or a contract on a
DCM, then the spot-month limit should be set at the
same level as that specified for such other contract.
If there was not an economically-equivalent SPDC
or contract traded on a DCM, then in the case of
a physical delivery contact, the spot-month limit
should be set based upon an analysis of deliverable
supplies and the history of spot-month liquidations
and at no more than 25 percent of the estimated
deliverable supply or, in the case of a cash
settlement provision, the spot month limit should
be set at a level that minimizes the potential for
price manipulation or distortion in the significant
price discovery contract itself; in related futures
and options contracts traded on a DCM or DTEF;
in other significant price discovery contracts; in
other fungible agreements, contracts and
transactions; and in the underlying commodity.
ECMs were also advised to adopt position
accountability provisions for non-spot month and
all-months combined or, in lieu of position
accountability, an ECM could establish non-spot
individual month position limits and all-monthscombined position limits for its SPDC. See 17 CFR
part 36 app. B (2009).
620 See 74 FR 12178, 12183, Mar. 23, 2009.
621 See id.
622 See id.
623 See id.
624 See id; see also CEA Section 4a and 17 CFR
150.5(f).

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§ 150.5(f).625 Accordingly, the
Commission explained, ‘‘the part 150
rules essentially constitute guidance for
DCMs administering position limit
regimes, [and] Commission staff in
overseeing such regimes has not
required that position limits include an
exemption for positions acquired in
good faith.’’ 626
4. The Dodd-Frank Act Amendments to
CEA Section 5

emcdonald on DSK67QTVN1PROD with PROPOSALS2

On July 21, 2010, President Obama
signed The Dodd-Frank Wall Street
Reform and Consumer Protection
Act.627 The legislation was enacted to
reduce risk, increase transparency, and
promote market integrity within the
financial system by, among other things,
enhancing the Commission’s
rulemaking and enforcement authorities
with respect to all registered entities
and intermediaries subject to the
Commission’s oversight.628 The DoddFrank Act repealed certain sections of
the CEA, amended others, and added
many new provisions and vastly
expanded the Commission’s
jurisdiction. The Commission has
finalized 65 rules, orders, and guidance
to implement sweeping changes to the
regulatory framework established by the
Dodd-Frank Act.629 This proposed
rulemaking would make several
conforming amendments to part 150 of
the Commission’s regulations, most
prominently to § 150.5, in order to
integrate that section more fully within
the statutory framework created by the
Dodd-Frank Act.

625 See 74 FR 12178, 12183, Mar. 23, 2009; see
also 17 CFR Part 38. The Commission
acknowledged that the acceptable practices in
former appendix B to part 38 incorporate many
provisions of § 150.5, but not § 150.5(f).
626 74 FR 12183. In a 2010 notice of proposed
rulemaking, the Commission similarly noted that
former appendix B to part 38 ‘‘specifically
reference[d] part 150’’ in order to provide
‘‘guidance’’ to DCMs on how to comply with the
core principle on position limits/accountability. 75
FR 4144, 4147, Jan. 26, 2010.
627 See generally the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Public Law
111–203, 124 Stat. 1376 (2010).
628 Furthermore, the Dodd-Frank Act amended
the DCM core principles by: (1) Eliminating the
eight criteria for designation as a contract market;
(2) amending most of the core principles, including
incorporating the substantive requirements of the
designation criteria; and (3) adding five new core
principles. Accordingly, all DCMs and DCM
applicants must comply with a total of 23 core
principles as a condition of obtaining and
maintaining designation as a contract market.
629 77 FR 66288, Nov. 2, 2012. See also
amendments to CEA section 4a, discussed above.

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i. The Dodd-Frank Act Added
Provisions That Permit the Commission
To Override the Discretion of DCMs in
Determining How To Comply With the
Core Principles
As discussed above, DCM core
principle 1, set out in CEA section
5(d)(1), states that boards of trade ‘‘shall
have reasonable discretion in
establishing the manner in which they
comply with the core principles.’’ 630
However, section 735 of the Dodd-Frank
Act amended section 5(d)(1) of the CEA
to include the proviso that ‘‘[u]nless
otherwise determined by the
Commission by rule or
regulation . . . ,’’ boards of trade shall
have reasonable discretion in
establishing the manner in which they
comply with the core principles.631 In
view of amended CEA section 5(d)(1),
which gives the Commission authority
to determine, by rule or regulation, the
manner in which boards of trade must
comply with the core principles, the
Commission has proposed a number of
new and revised rules, guidance, and
acceptable practices to implement the
new and revised Dodd-Frank Act core
principles.
ii. The Dodd-Frank Act Established a
Comprehensive New Statutory
Framework for Swaps
The Dodd-Frank Act tasked the
Commission with overseeing the U.S.
market for swaps (except for securitybased swaps). Title VII of the DoddFrank Act amended the CEA to establish
a comprehensive new regulatory
framework for swaps, including
requirements for SEFs.632 This new
regulatory framework includes: (1)
Registration, operation, and compliance
requirements for SEFs; and (2) fifteen
core principles with which SEFs must
comply. As a condition of obtaining and
maintaining their registration as a SEF,
applicants and registered SEFs are
required to comply with the SEF core
principles and with any requirement
that the Commission may impose by
rule or regulation.633 The Dodd-Frank
Act also amended the CEA to provide
that, under new section 5h, the
Commission may determine, by rule or
regulation, the manner in which SEFs
comply with the core principles.634
630 CEA

section 5(d)(1); 7 U.S.C. 7(d)(1).
631 See CEA section 5(d)(1)(B); 7 U.S.C. 7(d)(1)(B).
632 The SEF definition is added in section 721 of
the Dodd-Frank Act, amending CEA section 1a. 7
U.S.C. 1a(50).
633 See CEA section 5h, as enacted by section 733
of the Dodd-Frank Act; 7 U.S.C. 7b–3.
634 See id.; see also SEF core principle 1 at CEA
section 5h(f)(1)(B); 7 U.S.C. 7b–3(f)(1)(B).

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iii. The Dodd-Frank Act Added the
Regulation of Swaps, Added Core
Principles for SEFs, Including SEF Core
Principle 6, and Amended DCM Core
Principle 5
The Dodd-Frank Act added a core
principle concerning position
limitations or accountability for SEFs,
SEF core principle 6, which parallels
DCM core principle 5.635 SEF core
principle 6 requires SEFs that are
trading facilities to set, ‘‘as is necessary
and appropriate, position limitations or
position accountability for
speculators’’ 636 for each contract
executed pursuant to their rules.
Furthermore, for contracts subject to
Federal position limits imposed by the
Commission under CEA section 4a(a),
CEA section 5h(f)(6)(B) 637 requires SEFs
that are trading facilities to set and
enforce speculative position limits at a
level no higher than those established
by the Commission.
The Dodd-Frank Act similarly
amended DCM core principle 5 by
adding that for any contract that is
subject to a position limit established by
the Commission pursuant to CEA
section 4a(a), the DCM shall set the
position limit of the board of trade at a
level not higher than the position
limitation established by the
Commission.638
5. Dodd-Frank Rulemaking
To implement section 735 of the
Dodd-Frank Act, the Commission has
proposed a number of new and revised
rules, guidance, and acceptable
practices to implement the new and
revised DCM core principles. In doing
so, the Commission has evaluated the
preexisting regulatory framework for
overseeing DCMs, which consisted
largely of guidance and acceptable
practices, in order to update those
provisions and to determine which core
principles would benefit from having
new or revised derivative regulations.
Based on that review, and in view of the
Dodd-Frank Act’s amendment to section
5(d)(1) of the CEA, which grants the
Commission authority to determine, by
rule or regulation, the manner in which
boards of trade comply with the core
principles, the Commission has
proposed revised guidance and
acceptable practices for some core
635 Compare CEA section 5h(f)(6); 7 U.S.C. 7b–
3(f)(6) with CEA section 5(d)(5); 7 U.S.C. 7(d)(5).
636 CEA section 5h(f)(6)(A); 7 U.S.C. 7b–3(f)(6).
637 7 U.S.C. 7b–3(f)(6) as added by the DoddFrank Act.
638 See CEA section 5(d)(1)(B); 7 U.S.C. 7(d)(1)(B).
DCM core principle 5 under CEA section 5(d)(5)
requires that DCMs adopt for each contract, as is
necessary and appropriate, position limitations or
position accountability.

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principles and, for other core principles,
has proposed to codify rules in lieu of
guidance and acceptable practices.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

i. Amended Part 38
In January 2011, the Commission
published a notice of proposed
rulemaking to replace existing part 150,
in its entirety, with a new federal
position limits rules regime in the form
of new part 151.639 Just one month prior
to this publication, the Commission
published a notice of proposed
rulemaking to amend part 38 to
establish regulatory obligations that
each DCM must meet in order to comply
with section 5 of the CEA, as amended
by the Dodd-Frank Act. Accordingly,
the Commission proposed § 38.301 to
require that each DCM must comply
with the requirements of part 151 as a
condition of its compliance with DCM
core principle 5.640 The Commission
later adopted a revised version of
§ 38.301 with an additional clause that
requires DCMs to continue to meet the
requirements of part 150 of the
Commission’s regulations—the current
position limit regulations—until such
time that compliance would be required
under part 151.641 The Commission
explained that this clarification would
ensure that DCMs are in compliance
with the Commission’s regulations
under part 150 during the interim
period until the compliance date for the
new position limits regulations of part
151 would take effect.642 The
Commission further explained that new
§ 38.301 was based on the Dodd-Frank
amendments to the DCM core principles
regime, which collectively provide that
DCM discretion in setting position
limits or position accountability levels
is limited by Commission regulations
setting limits.643
However, in an Order dated
September 28, 2012, the United States
District Court for the District of
Columbia vacated part 151.644 The
District Court’s decision did not affect
the applicability of part 150.645
639 Position Limits for Derivatives, Proposed Rule,
76 FR 4752, Jan. 26, 2011. The final rulemaking for
vacated part 151 required DCMs to comply with
part 150 until such time that the Commission
replaces part 150 with the new part 151. See 76 FR
at 71632.
640 75 FR 80571, 80585, Dec. 22, 2010.
641 77 FR 36611, 36639, Jun. 19, 2012. The
Commission mandated in final § 38.301 that, in
order to comply with DCM core principle 5, a DCM
must ‘‘meet the requirements of parts 150 and 151
of this chapter, as applicable.’’ See also 17 CFR
38.301.
642 77 FR at 36639.
643 Id. See also CEA sections 5(d)(1) and 5(d)(5)
(amended 2010), and discussion supra of DoddFrank amendments to the DCM core principles.
644 See 887 F. Supp. 2d 259 (D.D.C. 2012).
645 See id generally.

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Therefore, part 150 continues to apply
as if part 151 had not been finally
adopted by the Commission, and § 150.5
continues to apply as non-exclusive
guidance and acceptable practices for
compliance with DCM core principle 5.
In light of the foregoing, the
Commission could not, without notice,
interpret § 150.5 as a pre-requisite for
compliance with core principle 5.
Additionally, the Commission is
proposing to amend § 38.301 by deleting
the reference to vacated part 151.
Proposed § 38.301 would maintain the
requirement that DCMs meet the
requirements of part 150, as applicable.
ii. Amended Part 37
Similarly, in the Commission’s
proposal to adopt a regulatory scheme
applicable to SEFs, under proposed
§ 37.601,646 the Commission proposed
to require that SEFs establish position
limits in accordance with the
requirements set forth in part 151 of the
Commission’s regulations.647 In the SEF
final rulemaking, the Commission
revised § 37.601 to state that until such
time that compliance is required under
part 151, a SEF may refer to the
guidance and/or acceptable practices in
appendix B of part 37 to demonstrate to
the Commission compliance with the
requirements of core principle 6.
In light of the District Court vacatur
of part 151, the Commission proposes to
amend § 37.601 to delete the reference
to vacated part 151. Instead, this
rulemaking proposes to require that
SEFs that are trading facilities meet the
requirements of part 150, which are
comparable to the DCM’s requirement,
since, as proposed, § 150.5 would apply
to commodity derivative contracts,
whether listed on a DCM or on a SEF
that is a trading facility. In addition, the
Commission proposes to amend
appendix B to part 37, which provides
guidance on complying with core
principles, both initially and on an
ongoing basis, to maintain SEF
registration.648 Since this rulemaking
proposes to require that SEFs that are
trading facilities meet the requirements
of part 150, the proposed amendments
to the guidance regarding SEF core
principle 6 would reiterate that
requirement. For SEFs that are not
trading facilities, to whom core
principle 6 is not applicable under the
646 Current § 37.601 provides requirements for
SEFs that are trading facilities to comply with SEF
core principle 6 (Position Limits or Accountability).
647 Core Principles and Other Requirements for
Swap Execution Facilities, 76 FR 1214 (proposed
Jan. 7, 2011).
648 Appendix B to Part 37—Guidance on, and
Acceptable Practices in, Compliance with Core
Principles.

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75753

statutory language, the proposal would
provide that part 150 should be
considered as guidance.
iii. Vacated Part 151
As discussed above, the United States
District Court for the District of
Columbia vacated part 151 of the
Commission’s regulations.649 Because
the District Court’s decision did not
affect the applicability of part 150,
current § 150.5 remains as guidance and
acceptable practices for compliance
with DCM core principle 5 and SEF core
principle 6. The Commission continues
to rigorously enforce compliance with
these core principles.
Vacated § 151.11 would have required
DCMs and SEFs to adopt position limits
for Referenced Contracts, and would
have established acceptable practices for
establishing position limits and position
accountability for certain nonreferenced contracts and excluded
commodities.650 Specifically, vacated
§ 151.11(a) would have required DCMs
and SEFs to set spot month limits, with
exceptions for securities futures and
some excluded commodities.651 Under
vacated § 151.11(a)(1), the Commission
would have required DCMs and SEFs to
establish spot-month limits for
Referenced Contracts at levels no greater
than the federal position limits
(established pursuant to vacated
§ 151.4).652 For contracts other than
Referenced Contracts (including other
physical commodity contracts), it would
be acceptable practice under vacated
§ 151.11(a)(2) for DCMs and SEFs to set
position limits at levels no greater than
25 percent of estimated deliverable
supply.653 Additionally, under vacated
§ 151.11(c), DCMs and SEFs would have
had discretion to establish position
accountability levels in lieu of position
649 See

887 F. Supp. 2d 259 (D.D.C. 2012).
76 FR at 71659–61.
651 76 FR at 71659.
652 76 FR at 71659–60. For Referenced Contracts,
DCMs and SEFs would have been similarly required
under vacated § 151.11(b) to set single non-spotmonth and all-months limits for Referenced
Contracts at levels no higher than the federal
position limits (established pursuant to vacated
§ 151.4). Id. For non-referenced contracts, it would
be acceptable practice under vacated § 151.11(b)(2)
for DCMs and SEFs to impose limits based on ten
percent of the average combined futures, swaps and
delta-adjusted option month-end open interest for
the most recent two calendar years up to 25,000
contracts, with a marginal increase of 2.5 percent
thereafter based on open interest in the contract and
economically equivalent contracts traded on the
same DCM or SEF. 76 FR 71661.
653 76 FR at 71660. Furthermore, for nonreferenced contracts, vacated § 151.11(b)(3) would
have allowed as an acceptable practice the
provision of speculative limits for an individual
single-month or in all-months-combined at no
greater than 1,000 contracts for non-energy physical
commodities and at no greater than 5,000 contracts
for other commodities. Id.
650 See

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limits for excluded commodities under
certain circumstances.654
Vacated §§ 151.11(e) and 151.11(f)
would have required DCMs and SEFs to
follow the same account aggregation and
bona fide exemption standards set forth
by vacated §§ 151.5 and 151.7 with
respect to exempt and agricultural
commodities.655 With respect to a
DCM’s or SEF’s duty to administer
hedge exemptions, the Commission
intended that DCMs and SEFs
administer their own position limits
under § 151.11.656 Accordingly, the
Commission had required under this
vacated rulemaking that DCMs and SEFs
create rules and procedures to allow
traders to claim a bona fide hedge
exemption, consistent with vacated
§ 151.5 for physical commodity
derivatives and § 1.3(z), as was amended
in the vacated rulemaking, for excluded
commodities.657

emcdonald on DSK67QTVN1PROD with PROPOSALS2

C. Proposed Amendments to § 150.5
To implement section 735 of the
Dodd-Frank Act regarding DCMs, the
Commission continues to adopt new
and revised rules, guidance, and
acceptable practices to implement the
DCM core principles added and revised
by the Dodd-Frank Act. The
654 Id. Position accountability levels could be
used in lieu of position limits only if the contract
involves either a major currency or certain excluded
commodities (such as measures of inflation, or
other macroeconomic measures) or an excluded
commodity that: (1) Has an average daily open
interest of 50,000 or more contracts, (2) has an
average daily trading volume of 100,000 or more
contracts, and (3) has a highly liquid cash market.
Id. Compare this vacated provision with current 17
CFR 150.5(e). As for physical commodities, under
vacated § 151.11(c), the Commission would have
allowed a DCM or SEF to establish position
accountability rules as an acceptable alternative to
position limits outside of the spot month for
physical commodity contracts when a contract has
an average month-end open interest of 50,000
contracts and an average daily volume of 5,000
contracts and a liquid cash market. Id.
655 Id. Furthermore, under vacated § 151, the
Commission would have removed the procedure to
apply to the Commission for bona fide hedge
exemptions for non-enumerated transactions or
positions under § 1.3(z)(3). Id. DCMs and SEFs
would have been able to recognize non-enumerated
hedge transactions subject to Commission review.
Id. Additionally, DCMs and SEFs could continue to
provide exemptions for ‘‘risk-reducing’’ and ‘‘riskmanagement’’ transactions or positions consistent
with existing Commission guidelines. Id. (citing
Clarification of Certain Aspects of Hedging
Definition, 52 FR 27195, Jul. 20, 1987; and Risk
Management Exemptions from Speculative Position
Limits Approved under Commission Regulation
1.61, 52 FR 34633, Sep. 14, 1987). Vacated
§ 151.11(f)(2) would have required traders seeking
a hedge exemption to comply with the procedures
of the DCM or SEF for granting exemptions from its
speculative position limit rules. 76 FR 71660–61.
656 76 FR at 71661.
657 Id. Vacated § 151.11 contemplated that DCMs
and SEFs would administer their own bona fide
hedge exemption regime in parallel to the
Commission’s regime.

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Commission continues to evaluate its
pre-Dodd-Frank Act regulations and
approach to oversight of DCMs, which
had consisted largely of published
guidance and acceptable practices, with
the aim of updating them to conform to
the new Dodd-Frank Act regulatory
framework. Based on that review, and
pursuant to the authority given to the
Commission in amended sections
5(d)(1) and 5h(f)(1) of the CEA, which
permit the Commission to determine, by
rule or regulation, the manner in which
boards of trade and SEFs, respectively,
must comply with the core
principles,658 the Commission is
proposing several updates to § 150.5 to
promote compliance with DCM core
principle 5 and SEF core principle 6.
First, the Commission proposes
amendments to the provisions of § 150.5
to include SEFs and swaps. Second, the
Commission proposes to codify rules
and revise acceptable practices for
compliance with DCM core principle 5
and SEF core principle 6 within
amended § 150.5(a) for contracts subject
to the federal position limits set forth in
§ 150.2. Lastly, the Commission
proposes to codify rules and revise
guidance and acceptable practices for
compliance with DCM core principle 5
and SEF core principle 6 within
amended § 150.5(b) for contracts not
subject to the federal position limits set
forth in § 150.2.
As noted above, the CFMA core
principles regime concerning position
limitations or accountability for
exchanges had the effect of undercutting
the mandatory rules promulgated by the
Commission in § 150.5. Since the CFMA
amended the CEA in 2000, the
Commission has retained § 150.5, but
only as guidance on, and acceptable
practice for, compliance with DCM core
principle 5.659 However, the
Commission did not amend the text of
§ 150.5 following passage of CFMA,
leaving language in place that could
suggest that the rules originally codified
within § 150.5 remain mandatory for
exchanges. To correct this potential
misimpression, the Commission now
proposes several amendments to § 150.5
to clarify that certain provisions of
§ 150.5 are non-exclusive guidance on,
and acceptable practice for, compliance
with DCM core principle 5.
Additionally, the Commission is
proposing several conforming
amendments to § 150.5 in order to
integrate that section more fully with
the statutory framework created by the
Dodd-Frank Act. The Commission,
658 See CEA sections 5(d)(1)(B) and 5h(f)(1)(B); 7
U.S.C. 7(d)(1)(B) and 7b–3(f)(1)(B).
659 See id.

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pursuant to the factors enumerated in
section 4a(a)(3) of the Act, has
endeavored to maximize the objectives
of preventing excessive speculation,
deterring and preventing market
manipulation, ensuring that markets
remain sufficiently liquid so as to afford
end users and producers of commodities
the ability to hedge commercial risks,
and promoting efficient price discovery.
These proposed clarifying revisions to
§ 150.5 should also provide exchanges
with sufficient flexibility to address the
divergent and changing conditions in
their respective markets.
Within amended § 150.5(a), the
Commission proposes to codify a set of
rules and revise acceptable practices for
compliance with DCM core principle 5
and SEF core principle 6 for contracts
that are subject to the federal position
limits set forth in § 150.2. Within
amended § 150.5(b), the Commission
proposes to codify rules and revise
guidance and acceptable practices for
compliance with DCM core principle 5
and SEF core principle 6 for contracts
that are not subject to the federal
position limits set forth in § 150.2.
Unlike current § 150.5, which
contains only non-exclusive guidance
on and acceptable practices for
compliance with DCM core principle 5
(despite the presence of language that
connotes mandatory rules), proposed
§ 150.5 contains a mix of rules that
would be mandatory for compliance
with DCM core principle 5 and SEF core
principle 6, coupled with guidance and
acceptable practices for compliance
with those core principles. Accordingly,
the Commission urges the reader to pay
special attention to the language in
proposed § 150.5 that distinguishes
mandatory rules (indicated by terms
such as ‘‘must’’ and ‘‘shall’’) from
guidance and acceptable practices
(indicated by terms such as ‘‘should’’ or
‘‘may’’).
Additionally, the Commission
proposes to amend § 150.5 to implement
uniform requirements for DCMs and
SEFs relating to hedging exemptions
across all types of contracts, including
those that are subject to federal limits.
The Commission also proposes to
require DCMs and SEFs to have
aggregation policies that mirror the
federal aggregation provisions.660
Hedging exemptions and position
aggregation exemptions, if not uniform
with the Commission’s requirements,
660 Aggregation exemptions are, in effect, a way
for a trader to acquire a larger speculative position.
The Commission believes that it is important that
the aggregation rules set out, to the extent feasible,
‘‘bright line’’ standards that are capable of easy
application by a wide variety of market participants
while not being susceptible to circumvention.

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may serve to permit a person to obtain
a larger position on a particular DCM or
SEF than would be permitted under the
federal limits. For example, if an
exchange were to grant an aggregation
position to a corporate person with
aggregate positions above federal limits,
that exchange may permit such person
to be treated as two or more persons.
The person would avoid violating
exchange limits, but may be in violation
of the federal limits. The Commission
believes that a DCM or SEF, consistent
with its responsibilities under
applicable core principles, may serve an
important role in ensuring compliance
with federal positions limits and
thereby protect the price discovery
function of its market and guard against
excessive speculation or manipulation.
In the absence of uniform hedging and
position aggregation exemptions, DCMs
or SEFs may not serve that role. The
Commission notes that hedging
exemptions and aggregation policies
that vary from exchange to exchange
would increase the administrative
burden on a trader active on multiple
exchanges, as well as increase the
administrative burden on the
Commission in enforcing exchange-set
position limits.
The essential features of the proposed
amendments to § 150.5 are summarized
below.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

1. Proposed Amendments to § 150.5 To
Add References to Swaps and Swap
Execution Facilities
As discussed above, the Dodd-Frank
Act created a new type of regulated
marketplace, SEFs, for which it
established a comprehensive regulatory
framework. A SEF must comply with
fifteen enumerated core principles and
any requirement that the Commission
may impose by rule or regulation.661
The Dodd-Frank Act provides that the
Commission may, in its discretion,
determine by rule or regulation the
manner in which SEFs comply with the
core principles.662
For contracts that are subject to
federal position limits imposed under
CEA section 4a(a), new CEA section
5h(f)(6)(A) 663 requires that SEFs set ‘‘as
is necessary and appropriate, position
limitations or position accountability for
speculators’’ for each contract executed
pursuant to their rules.664 New CEA
661 See

supra discussion of SEF core principles.
CEA section 5h(f)(1)(B); 7 U.S.C. 7b–
3(f)(1)(B).
663 As added by section 723 of the Dodd-Frank
Act.
664 A similar duty is imposed on DCMs under
CEA section 5(d)(5)(A); 7 U.S.C. 7(d)(5)(A).
662 See

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section 5h(f)(6)(B),665 requires SEFs that
are trading facilities to set and enforce
speculative position limits at a level no
higher than those established by the
Commission.666 The Commission
recognizes that SEFs may need to
contract with derivative clearing
organizations in order to comply with
SEF core principle 6. The Commission
invites comments on the practicability
and effectiveness of such arrangements.
In addition, the Commission invites
comment as to whether the Commission
should use its exemptive authority
under CEA section 4a(a)(7) to exempt
SEFs from the requirements of CEA
section 5h(f)(6)(B). If so, why and to
what extent?
The Commission carefully considered
both the novel nature of SEFs and its
experience in overseeing DCMs’
compliance with core principles when
determining which SEF core principles
to address with rules that would
provide more certainty to the
marketplace, and which core principles
to address with guidance or acceptable
practices that might provide more
flexibility. The Commission has
determined that the policy purposes
effectuated by establishing uniform
requirements for aggregation and bona
fide hedging exemptions for DCM
contracts are equally present in SEF
markets.667 Accordingly, the
Commission has determined to amend
§ 150.5 to present essentially identical
standards for establishing rules and
acceptable practices relating to position
limits (and accountability levels) for
DCMs and SEFs.
2. Proposed § 150.5(a)—Requirements
and Acceptable Practices for
Commodity Derivative Contracts That
Are Subject to Federal Position Limits
Proposed § 150.5(a) adds several
requirements that a DCM or SEF must
adhere to when setting position limits
for contracts that are subject to the
federal position limits listed in
§ 150.2.668 Proposed § 150.5(a)(1)
specifies that a DCM or SEF that lists a
contract on a commodity that is subject
to federal position limits must adopt
665 As

added by section 723 of the Dodd-Frank

Act.
666 This requirement for SEFs parallels that for
DCMs as listed in the CEA section 5(d)(5)(B); 7
U.S.C. 7(d)(5)(B).
667 See core principle 6 for SEFs, CEA section
5h(f)(6)(A); 7 U.S.C. 7b–3(f)(6)(A). The Commission
notes that section 4a(a)(2) of the CEA requires the
Commission to establish speculative position limits
on physical commodity DCM contracts as
appropriate, but did not extend this requirement to
SEF contracts. See discussion above.
668 As discussed above, 17 CFR 150.2 provides
limits for specified agricultural contracts in the spot
month, individual non-spot months, and allmonths-combined.

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position limits for that contract at a
level that is no higher than the federal
position limit.669 Exchanges with cashsettled contracts price-linked to
contracts subject to federal limits must
also adopt those limit levels.
Proposed § 150.5(a)(2) prescribes the
manner in which a DCM or SEF that
lists a contract on a commodity that is
subject to federal position limits must
adopt hedge exemption rules. Proposed
§ 150.5(a)(2)(i) cross-references the
definition of bona fide hedging, as
proposed in amended § 150.1, as the
regulation governing bona fide hedging
positions.670 Proposed § 150.5(a)(2)(ii)
clarifies the types of spread positions for
which a DCM or SEF may grant
exemptions from the federal limits by
cross-referencing the definitions of
intermarket and intramarket spread
positions in proposed § 150.1.671 To be
eligible for exemption under proposed
§ 150.5(a)(2)(ii), intermarket and
intramarket spread positions must be
outside of the spot month for physical
delivery contracts, and intramarket
spread positions must not exceed the
federal all-months limit when combined
with any other net positions in the
single month. Proposed § 150.5(a)(2)(iii)
would require traders to apply to the
DCM or SEF for any exemption from its
speculative position limit rules.672
Proposed § 150.5(a)(2)(iii) also preserves
the exchange’s ability to limit bona fide
hedging positions which it determines
are not in accord with sound
commercial practices, or which exceed
669 Proposed § 150.5(a)(1) is in keeping with the
mandate in core principle 5 as amended by the
Dodd-Frank Act. See CEA section 5(d)(1)(B); 7
U.S.C. 7(d)(1)(B). SEF core principle 6 parallels
DCM core principle 5. Compare CEA section
5h(f)(5); 7 U.S.C. 7b–3(f)(5) with CEA section
5(d)(5); 7 U.S.C. 7(d)(5).
670 Compare 17 CFR 150.5(d) which explicitly
precludes exchanges from applying exchange-set
speculative position limits rules to bona fide
hedging positions as defined by the exchange in
accordance with § 1.3(z)(1).
671 The Commission has proposed to maintain the
current practice in 17 CFR 150.2 of setting singlemonth limits at the same levels as all-months limits,
rendering the ‘‘spread’’ exemption in 17 CFR 150.3
unnecessary. However, since DCM core principle 5
allows exchanges to set more restrictive limits than
the federal limits, a DCM or SEF may set the single
month limit at a level lower than that of the allmonth limit, an exemption for intramarket spread
position may be useful. See CEA section 5(d)(5); 7
U.S.C. 7(d)(5). An exemption for intramarket spread
positions would be unnecessary if the DCM or SEF
sets the single month limit at the same level as the
all-months limit.
Additionally, the duplicative term ‘‘arbitrage’’
would be removed because CEA section 4a(a)(1)
explains that ‘‘the word ‘arbitrage’ in domestic
markets shall be defined to mean the same as
‘spread’ or ‘straddle.’ ’’ 7 U.S.C. 6a(a)(1).
672 Hence, proposed § 150.5(a)(2)(C) would codify
as a requirement for DCMs and SEFs the acceptable
practice concerning application for exemption
listed in 17 CFR 150.5(d)(2).

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an amount that may be established and
liquidated in an orderly fashion.673
Proposed § 150.5(a)(3)(i) requires a
DCM or SEF to exempt from speculative
position limits established under § 150.2
a swap position acquired in good faith
prior to the effective date of such
limits.674 However, proposed
§ 150.5(a)(3)(i) would allow a person to
net such a pre-existing swap with posteffective date commodity derivative
contracts for the purpose of complying
with any non-spot-month speculative
position limit. Furthermore, proposed
§ 150.5(a)(3)(ii) requires a DCM or SEF
to exempt from non-spot-month
speculative position limits established
under § 150.2 any commodity derivative
contract acquired in good faith prior to
the effective date of such limit.
However, such a pre-existing
commodity derivative contract position
must be attributed to the person if the
person’s position is increased after the
effective date of such limit.675
The Commission proposes to require
DCMs and SEFs to have aggregation
polices that mirror the federal
aggregation provisions.676 Therefore,
proposed § 150.5(a)(4) requires DCMs
and SEFs to have aggregation rules that
conform to the uniform standards listed
in § 150.4.677
A DCM or SEF would continue to be
free to enforce position limits that are
more stringent that the federal limits.
The Commission clarifies that federal
spot month position limits do not to
apply to physical-delivery contracts
after delivery obligations are
established.678 Exchanges generally
673 Proposed § 150.5(a)(2)(C) presents guidance
that largely mirrors the guidance provided in the
second half of 17 CFR 150.5(d), with edits to specify
DCMs and SEFs.
674 The Commission is exercising its authority
under CEA section 4a(a)(7) to exempt pre-DoddFrank and transition period swaps from speculative
position limits (unless the trader elects to include
such a position to net with post-effective date
commodity derivative contracts). Such a preexisting swap position will be exempt from initial
spot month speculative position limits.
675 Notwithstanding any pre-existing exemption
adopted by a DCM or SEF that applies to
speculative position limits in non-spot months, a
person holding pre-existing commodity derivative
contracts (except for pre-existing swaps as
described above) must comply with spot month
speculative position limits. However, nothing in
proposed § 150.5(a)(3)(B) would override the
exclusion of pre-Dodd-Frank and transition period
swaps from speculative position limits.
676 See supra discussion concerning aggregation.
677 Proposed § 150.5(a)(4) references 17 CFR 150.4
as the regulation governing aggregation for contracts
subject to federal position limits and would replace
17 CFR 150.5(g). See supra the Commission’s
explanation for implementing uniform aggregation
standards across DCMs and SEFs.
678 Therefore, federal spot month position limits
do not apply to positions in physical-delivery
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prohibit transfer or offset of positions
once long and short position holders
have been assigned delivery obligations.
Proposed § 150.5(a)(6) would clarify
acceptable practices for a DCM or SEF
to enforce spot month limits against the
combination of, for example, long
positions that have not been stopped,
stopped positions, and deliveries taken
in the current spot month.679
3. Proposed § 150.5(b)—Requirements
and Acceptable Practices for
Commodity Derivative Contracts That
Are Not Subject to Federal Position
Limits
The Commission sets forth in
proposed § 150.5(b) requirements and
acceptable practices applicable to DCMand SEF-set speculative position limits
for any contract that is not subject to
federal position limits, including
physical and excluded commodities.680
As discussed above, the Commission
proposes to revise § 150.5 to implement
uniform requirements for DCMs and
SEFs relating to hedging exemptions
across all types of commodity derivative
contracts, including those that are not
subject to federal position limits. The
Commission further proposes to require
DCMs and SEFs to have uniform
aggregation polices that mirror the
federal aggregation provisions for all
types of commodity derivative
contracts, including for contracts that
are not subject to federal position limits.
As explained above, hedging
exemptions and aggregation policies
that vary from exchange to exchange
would increase the administrative
burden on a trader active on multiple
exchanges, as well as increase the
administrative burden on the
Commission in monitoring and
enforcing exchange-set position limits.
Therefore, proposed § 150.5(b)(5)(i)
would require any hedge exemption
rules adopted by a designated contract
market or a swap execution facility that
is a trading facility to conform to the
definition of bona fide hedging position
in proposed § 150.1. In addition to this
affirmative rule, proposed § 150.5(b)(5)
have been issued, stopped long positions, delivery
obligations established by the clearing organization,
or deliveries taken.
679 For example, an exchange may restrict a
speculative long position holder that otherwise
would obtain a large long position, take delivery,
and seek to re-establish a large long position in an
attempt to corner a significant portion of the
deliverable supply or to squeeze shorts. Proposed
§ 150.5(b)(9) would set forth the same acceptable
practices for contracts not subject to federal limits.
680 For position limits purposes, proposed
§ 150.1(k) would define ‘‘physical commodity’’ to
mean any agricultural commodity, as defined in 17
CFR 1.3, or any exempt commodity, as defined in
section 1a(20) of the Act. Excluded commodity is
defined in section 1a(19) of the Act.

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would set forth acceptable practices for
DCMs and SEFs to grant exemptions
from position limits for positions, other
than bona fide hedging positions, in
contracts not subject to federal limits.
Such exemptions generally track the
exemptions set forth in proposed
§ 150.3, and are suggested as acceptable
practices based on the same logic that
underpins the proposed § 150.3
exemptions.681 It would be acceptable
practice for a DCM or SEF to grant
exemptions under certain circumstances
for financial distress, intramarket and
intermarket spreads, and qualifying
cash-settled contract positions in the
spot month.682 Additionally, proposed
§ 150.5(b)(5)(ii) would set forth an
acceptable practice for a DCF or SEF to
grant a limited risk management
exemption for contracts on excluded
commodities pursuant to rules
submitted to the Commission, and
consistent with the guidance in new
appendix A to part 150.683
Proposed § 150.5(b)(6) and (7) set
forth acceptable practices relating to
pre-enactment and transition period
swap positions (as those terms are
defined in proposed § 150.1),684 and to
commodity derivative contract positions
acquired in good faith prior to the
effective date of mandatory federal
speculative position limits.
Additionally, for any contract that is
not subject to federal position limits,
proposed § 150.5(b)(8) requires the DCM
or SEF to conform to the uniform federal
aggregation provisions.685 This
proposed requirement generally mirrors
the requirement in proposed
§ 150.5(a)(4) for contracts that are
subject to federal position limits by
requiring the DCM or SEF to have
681 See supra discussion of the § 150.3
exemptions.
682 See id.
683 New appendix A to part 150 is intended to
capture the essence of the Commission’s 1987
interpretation of its definition of bona fide hedge
transactions to permit exchanges to grant hedge
exemptions for various risk management
transactions. See Risk Management Exemptions
From Speculative Position Limits Approved Under
Commission Regulation 1.61, 52 FR 34633, Sep. 14,
1987. The Commission specified that such
exemptions be granted on a case-by-case basis,
subject to a demonstrated need for the exemption.
It also required that applicants for these exemptions
be typically engaged in the buying, selling, or
holding of cash market instruments. See id.
Additionally, the Commission required the
exchanges to monitor the exemptions they granted
to ensure that any positions held under the
exemption did not result in any large positions that
could disrupt the market. See id. The term
‘‘excluded commodity’’ is defined in CEA section
1(a)(19).
684 See supra discussion of pre-enactment and
transition period swap positions.
685 Proposed § 150.5(b)(7) would replace 17 CFR
150.5(g) as it relates to contracts that are not subject
to federal position limits.

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aggregation rules that conform to
§ 150.4.
The Commission proposes in
§ 150.5(b) to generally update and
reorganize the set of acceptable
practices listed in current § 150.5 as it
relates to contracts that are not subject
to the federal position limits. For
existing and newly established DCMs
and newly established SEFs, these
acceptable practices generally concern
how to: (1) Set spot-month position
limits; (2) set individual non-spot
month and all-months-combined
position limits; (3) set position limits for
cash-settled contracts that use a
reference contract as a price source; (4)
adjust position limit levels after a
contract has been listed for trading; and
(5) adopt position accountability in lieu
of speculative position limits.
For a derivative contract that is based
on a commodity with a measurable
deliverable supply, proposed
§ 150.5(b)(1)(i)(A) updates the
acceptable practice in current
§ 150.5(b)(1) whereby spot month
position limits should be set at a level
no greater than one-quarter of the
estimated deliverable supply of the
underlying commodity.686 Proposed
§ 150.5(b)(1)(i)(A) clarifies that this
acceptable practice for setting spot
month position limits would apply to
any commodity derivative contract,
whether physical-delivery or cashsettled, that has a measurable
deliverable supply.687
For a derivative contract that is based
on a commodity without a measurable
deliverable supply, proposed
§ 150.5(b)(1)(i)(B) would codify as
guidance that the spot month limit level
should be no greater than necessary and
686 Proposed § 150.5(b)(1)(i)(A) is consistent with
the Commission’s longstanding policy regarding the
appropriate level of spot-month limits for physical
delivery contracts. These position limits would be
set at a level no greater than 25 percent of estimated
deliverable supply. The spot-month limits would be
reviewed at least every 24 months thereafter. The
proposed deliverable supply formula narrowly
targets the trading that may be most susceptible to,
or likely to facilitate, price disruptions. The formula
seeks to minimize the potential for corners and
squeezes by facilitating the orderly liquidation of
positions as the market approaches the end of
trading and by restricting swap positions that may
be used to influence the price of referenced
contracts that are executed centrally.
687 In general, the term ‘‘deliverable supply’’
means the quantity of the commodity meeting a
derivative contract’s delivery specifications that can
reasonably be expected to be readily available to
short traders and saleable to long traders at its
market value in normal cash marketing channels at
the derivative contract’s delivery points during the
specified delivery period, barring abnormal
movement in interstate commerce. Proposed § 150.1
would define commodity derivative contract to
mean any futures, option, or swap contract in a
commodity (other than a security futures product as
defined in CEA section 1a(45)).

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appropriate to reduce the potential
threat of market manipulation or price
distortion of the contract’s or the
underlying commodity’s price.688
Proposed § 150.5(b)(1)(ii)(A) preserves
the existing acceptable practice in
current § 150.5(b)(2) whereby individual
non-spot or all-months-combined levels
for agricultural commodity derivative
contracts that are not subject to the
federal limits should be no greater than
1,000 contracts at initial listing. The
proposed rule would also codify as
guidance that the 1,000 contract limit
should be taken into account when the
notional quantity per contract is no
larger than a typical cash market
transaction in the underlying
commodity, or reduced if the notional
quantity per contract is larger than a
typical cash market transaction.689
Additionally, proposed
§ 150.5(b)(1)(ii)(A) would codify that if
the commodity derivative contract is
substantially the same as a pre-existing
DCM or SEF commodity derivative
contract, then it would be an acceptable
practice for the DCM or SEF to adopt the
same limit as applies to that pre-existing
commodity derivative contract.690
Proposed § 150.5(b)(1)(ii)(B) preserves
the existing acceptable practice, set
forth in current § 150.5(b)(3), for DCMs
to set individual non-spot or all-monthscombined limits at levels no greater
than 5,000 contracts at initial listing, but
would apply this acceptable practice on
a wider scale to both exempt and
excluded commodity derivative
688 This descriptive standard is largely based on
the language of DCM core principle 5 and SEF core
principle 6. The Commission does not suggest that
an excluded commodity derivative contract that is
based on a commodity without a measurable supply
should adhere to a numeric formula in setting spot
month position limits.
689 The Commission explained what it considers
to be a ‘‘typical cash market transaction’’ in the
preamble for final part 151 (subsequently vacated):
‘‘[f]or example, if a DCM or SEF offers a new
physical commodity contract and sets the notional
quantity per contract at 100,000 units while most
transactions in the cash market for that commodity
are for a quantity of between 1,000 and 10,000 units
and exactly zero percent of cash market transactions
are for 100,000 units or greater, then the notional
quantity of the derivatives contract offered by the
DCM or SEF would be atypical. This clarification
is intended to deter DCMs and SEFs from setting
non-spot-month position limits for new contracts at
levels where they would constitute non-binding
constraints on speculation through the use of an
excessively large notional quantity per contract.
This clarification is not expected to result in
additional marginal cost because, among other
things, it reflects current Commission custom in
reviewing new contracts and is an acceptable
practice for core principle compliance and not a
requirement per se for DCMs or SEFs.’’ See 76 FR
71660.
690 In this context, ‘‘substantially the same’’
means a close economic substitute. For example, a
position in Eurodollar futures can be a close
economic substitute for a fixed-for-floating interest
rate swap.

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contracts.691 Proposed
§ 150.5(b)(1)(ii)(B) would codify as
guidance for exempt and excluded
commodity derivative contracts that the
5,000 contract limit should be
applicable when the notional quantity
per contract is no larger than a typical
cash market transaction in the
underlying commodity, or should be
reduced if the notional quantity per
contract is larger than a typical cash
market transaction. Additionally,
proposed § 150.5(b)(1)(B)(ii) would
codify a new acceptable practice for a
DCM or SEF to adopt the same limit as
applies to the pre-existing contract if the
new commodity contract is substantially
the same as an existing contract.
Proposed § 150.5(b)(1)(iii) sets forth
that if a commodity derivative contract
is cash-settled by referencing a daily
settlement price of an existing contract
listed on a DCM or SEF, then it would
be an acceptable practice for a DCM or
SEF to adopt the same position limits as
the original referenced contract,
assuming the contract sizes are the
same. Based on its enforcement
experience, the Commission believes
that limiting a trader’s position in cashsettled contracts in this way diminishes
the incentive to exert market power to
manipulate the cash-settlement price or
index to advantage a trader’s position in
the cash-settled contract.692
Proposed § 150.5(b)(2)(i) updates the
acceptable practices in current
§ 150.5(c) for adjusting limit levels for
the spot month. For a derivative
contract that is based on a commodity
with a measurable deliverable supply,
proposed § 150.5(b)(2)(i) maintains the
acceptable practice in current § 150.5(c)
to adjust spot month position limits to
a level no greater than one-quarter of the
estimated deliverable supply of the
underlying commodity, but would
apply this acceptable practice to any
commodity derivative contract, whether
physical-delivery or cash-settled, that
has a measurable deliverable supply.
For a derivative contract that is based on
a commodity without a measurable
deliverable supply, proposed
§ 150.5(b)(1)(i)(B) would codify as
691 In contrast, 17 CFR 150.5(b)(3) lists this as an
acceptable practice for contracts for energy products
and non-tangible commodities. Excluded
commodity is defined in CEA section 1a(19), and
exempt commodity is defined CEA section 1a(20).
692 With respect to cash-settled contracts where
the underlying product is a physical commodity
with limited supplies, enabling a trader to exert
market power (including agricultural and exempt
commodities), the Commission has viewed the
specification of speculative position limits to be an
essential term and condition of such contracts in
order to ensure that they are not readily susceptible
to manipulation, which is the DCM core principle
3 requirement.

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guidance that the spot month limit level
should not be adjusted to levels greater
than necessary and appropriate to
reduce the potential threat of market
manipulation or price distortion of the
contract’s or the underlying
commodity’s price. Proposed
§ 150.5(b)(2)(i) would codify as a new
acceptable practice that spot month
limit levels be reviewed no less than
once every two years.
Proposed § 150.5(b)(2)(ii) maintains as
an acceptable practice the basic formula
set forth in current § 150.5(c)(2) for
adjusting non-spot-month limits at
levels of no more than 10% of the
average combined futures and deltaadjusted option month-end open
interest for the most recent calendar
year up to 25,000 contracts, with a
marginal increase of 2.5% of the
remaining open interest thereafter.
Proposed § 150.5(b)(2)(ii) would also
maintain as an alternative acceptable
practice the adjustment of non-spotmonth limits to levels based on position
sizes customarily held by speculative
traders in the contract. Proposed
§ 150.5(b)(3) generally updates and
reorganizes the existing acceptable
practices in current § 150.5(e) for a DCM
or SEF to adopt position accountability
rules in lieu of position limits, under
certain circumstances, for contracts that
are not subject to federal position limits.
This proposed section reiterates the
DCM’s authority, with conforming
changes for SEFs, to require traders to
provide information regarding their
position when requested by the
exchange.693 Proposed § 150.5(b)(3)
would codify a new acceptable practice
for a DCM or SEF to require traders to
consent to halt from increasing their
position in a contract if so ordered.
Proposed § 150.5(b)(3) would also
codify a new acceptable practice for a
DCM or SEF to require traders to reduce
their position in an orderly manner.
Proposed § 150.5(b)(3)(i) would
maintain the acceptable practice for a
DCM or SEF to adopt position
accountability rules outside the spot
month, in lieu of position limits, for an
agricultural or exempt commodity
derivative contract that: (1) has an
average month-end open interest of
50,000 contracts and an average daily
volume of 5,000 or more contracts
during the most recent calendar year; (2)
has a liquid cash market; and (3) is not
subject to federal limits in § 150.2—
provided, however, that such DCM or
SEF should adopt a spot month
speculative position limit with a level
no greater than one-quarter of the
693 Compare

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estimated spot month deliverable
supply.694
For an excluded commodity
derivative contract that has a highly
liquid cash market and no legal
impediment to delivery, proposed
§ 150.5(b)(3)(ii)(A) would maintain the
acceptable practice for a DCM or SEF to
adopt position accountability rules in
the spot month in lieu of position limits.
For an excluded commodity derivative
contract without a measurable
deliverable supply, proposed
§ 150.5(b)(3)(ii)(A) would codify an
acceptable practice for a DCM or SEF to
adopt position accountability rules in
the spot month in lieu of position limits
because there is not a deliverable supply
that is subject to manipulation.
However, for an excluded commodity
derivative contract that has a
measurable deliverable supply, but that
may not be highly liquid and/or is
subject to some legal impediment to
delivery, proposed § 150.5(b)(3)(ii)(A)
sets forth an acceptable practice for a
DCM or SEF to adopt a spot-month
position limit equal to no more than
one-quarter of the estimated deliverable
supply for that commodity, because the
estimated deliverable supply may be
susceptible to manipulation.
Furthermore, proposed § 150.5(b)(3)(ii)
would remove the ‘‘minimum open
interest and volume’’ test for excluded
commodity derivative contracts
generally.695 Proposed
§ 150.5(b)(3)(ii)(B) would codify an
acceptable practice for a DCM or SEF to
adopt position accountability levels for
an excluded commodity derivative
contract in lieu of position limits in the
individual non-spot month or allmonths-combined.
Proposed § 150.5(b)(3)(iii) adds a new
acceptable practice for an exchange to
list a new contract with position
accountability levels in lieu of position
limits if that new contract is
substantially the same as an existing
contract that is currently listed for
trading on an exchange that has already
adopted position accountability levels
in lieu of position limits.696
694 17 CFR 150.5(e)(3) applies this acceptable
practice to a ‘‘tangible commodity, including, but
not limited to metals, energy products, or
international soft agricultural products.’’ Also,
compare the ‘‘minimum open interest and volume
test’’ in proposed § 150.5(b)(3)(i) with that in
current § 150.5(e)(3).
695 The ‘‘minimum open interest and volume’’
test, as presented in 17 CFR 150.5(e)(1)–(2), need
not be used to determine whether an excluded
commodity derivative contract should be eligible
for position accountability rules in lieu of position
limits in the spot month.
696 See supra discussion of what is meant by
‘‘substantially the same’’ in this context.

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Proposed § 150.5(b)(4) maintains the
acceptable practice that for contracts not
subject to federal position limits, DCMs
and SEFs should calculate trading
volume and open interest as established
in current § 150.5(e)(4).697 Proposed
§ 150.5(b)(4) would build upon these
standards by accounting for swaps in
reference contracts on a futuresequivalent basis.698
III. Related Matters
A. Considerations of Costs and Benefits
1. Background
Generally, speculative position limits
cap the size of positions that a person
may hold or control in commodity
derivative contracts for speculative
purposes.699 First authorized in 1936,700
position limits are not a new regulatory
tool for containing speculative market
activity. The Commission and its
predecessors have directly set limits for
futures and options contracts on certain
agricultural commodities since 1938.
Additionally, for approximately 20
years from 1981 until the Commodity
Futures Modernization Act
(‘‘CFMA’’) 701 amended the CEA to
substitute a core-principles-based, selfregulatory model for futures exchanges,
Commission rules required exchanges to
set position limits (or, in certain
697 For SEFs, trading volume and open interest for
swaptions should be calculated on a delta-adjusted
basis.
698 ‘‘Futures-equivalent’’ is a defined term in
proposed § 150.1 that accounts for swaps in
referenced contracts.
699 Derivative contracts—i.e., futures, options and
swaps—may not transfer any ownership interest in
the underlying commodity, but their prices are
substantially derived from the value of the
underlying commodity. Those who purchase or sell
derivatives do so either to hedge or speculate.
Generally, hedging is the use of derivatives markets
by commodity producers, merchants or end-users to
manage their exposure to fluctuation in the price of
a commodity that a producer or user intends to use
or produce; speculation, in contrast, is the use of
derivative markets to profit from price appreciation
or depreciation in the underlying commodity.
Because the limits only restrict positions obtained
for speculative purposes, this discussion refers
interchangeably to ‘‘position limits,’’ ‘‘speculative
position limits,’’ or ‘‘speculative limits.’’
700 Congress first granted the CEC, a Commodity
Futures Trading Commission predecessor, authority
to set speculative position limits as part of the New
Deal reforms enacted in the Commodity Exchange
Act of 1936. Public Law 74–765, 49 Stat. 1491, 1492
(codified at 7 U.S.C. 6a(1) (1940)). Specifically,
Congress authorized the CEC to ‘‘fix such limits on
the amount of trading . . . which may be done by
any person as the [CEC] finds is necessary to
diminish, eliminate, or prevent such burden.’’
Congress exempted positions attributable to bona
fide hedging. Unless otherwise indicated, references
in this discussion to the ‘‘Commission’’ mean the
Commodity Futures Trading Commission as well as
its predecessor agencies, including the CEC.
701 Commodity Futures Modernization Act of
2000, Public Law 106–554, 114 Stat. 2763 (Dec. 21,
2000).

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specified cases, position accountability
levels) for futures and options contracts
not subject to Commission-imposed
limits.702 Through amendments to the
CEA over more than 75 years and a
number of legislative reauthorizations,
the Commission’s basic authority to
establish speculative position limits,
now codified in CEA section 4a(a), has
remained constant.703
The backdrop for this basic authority
is a public record replete with
Congressional and other official
governmental investigations and
reports—issued over more than 80
years—critical of the harm attributed to
‘‘excess speculation’’ in derivative
markets. From the 1920s through 2009,
a litany of official government
investigations, hearings and reports
document disruptive speculative
behavior; 704 several of the earliest link
702 See, e.g., 46 FR 50938, 50940, Oct. 16, 1981.
As discussed above, following enactment of the
CFMA, which among other things afforded DCMs
discretion to set appropriate position limits under
DCM core principle 5, these rules, then contained
in § 150.5, became ineffective as requirements; they
were retained, however, as guidance and acceptable
practices for DCMs to use in meeting their core
principle 5 compliance obligations. 74 FR 12178,
12183, Mar. 23, 2009.
703 One of these amendments, the Commodity
Futures Trading Act of 1974, created the CFTC and
granted it expanded jurisdiction beyond the certain
enumerated agricultural products of its predecessor
to all ‘‘services, rights, and interests’’ in which
futures contracts are traded. Public Law 93–463, 88
Stat. 1389 (1974).
704 See, e.g., Federal Trade Commission, ‘‘Report
of the Federal Trade Commission on the Grain
Trade,’’ vol. VI, at 60–62 (1924)(documenting a
number of ‘‘violent fluctuations of price’’ over the
preceding 30 years evidencing ‘‘the close
connection between extreme fluctuations in annual
average prices of cash grain and unusual
speculative activity in the futures market’’); id. vol.
VII, at 293–294 (1926)(recommending limitation on
individual open interest because the ‘‘very large
trader . . . [w]hether he is more often right than
wrong . . . and whether influenced by a desire to
manipulate or not . . . can cause disturbances in
the market which impair its proper functioning and
are harmful to producers and consumers’’); Grain
Futures Administration, ‘‘Fluctuations in Wheat
Futures,’’ S. Doc. No. 69–135, at 1,6 (1926)
(investigation of ‘‘wide and erratic [1925 wheat
futures] price fluctuations . . . were largely
artificial[,] were caused primarily . . . by heavy
trading on the part of a limited number of
professional speculators [that] completely disrupted
the market and resulted in abnormal fluctuations
. . . felt in every other large grain market in the
world;’’ concludes that limitations on the extent of
daily trading by speculators are ‘‘inevitable . . . if
there is to be eliminated from the market those
hazards which are so unmistakably reflected as
existing whenever excessively large lines are held
by individuals’’); 1932 Annual Report of the Chief
of the Grain Futures Admin., at 4, 8 (describing the
16 percent drop in May wheat prices during a 21day period as illustrative of the price impact of
‘‘short selling by a few large traders;’’ again stresses
the need for legislation authorizing limitations to
eliminate ‘‘the economic evils incident to market
domination by a few powerful operators trading for
speculative account’’); 1950 Annual Report of the
Administrator of the Commodity Exchange
Authority, at 14–15 (speculative operations by a

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the behavior to artificial price effects
and impaired commodity distribution
efficiency, and recommend mandatory
position limits as a tool to curb
speculative abuses and their ill-effects.
The statute reflects and responds to the
centerpiece concern of these hearings
and reports. Indeed, CEA section
4a(a)(1) states Congress’s express
determination that excessive commodity
speculation causing sudden or
unreasonable price fluctuations or
unwarranted changes in commodity
prices is an undue and unnecessary
burden on interstate commerce, and
mandates that the Commission set
position limits, including prophylactic
limits, to diminish, eliminate, or
prevent this burden.705
The longstanding statutory approach
to position limit regulation reflects two
important concepts with direct bearing
on the benefits and costs involved in
this rulemaking. First is the distinction
between speculative trading, for which
limits are statutorily authorized, and, as
to derivatives for physical commodities,
mandated, and bona fide hedging, for
small number of traders holding a large proportion
of long contracts ‘‘distorted egg future prices in
October 1949 and disrupted orderly marketing of
the commodity causing financial losses;’’ notes that
enforcement of speculative limits is a ‘‘strong
deterrent to excessive speculation by large
traders’’); Commodity Futures Trading Commission,
Report To The Congress In Response To Section 21
Of The Commodity Exchange Act, May 29, 1981,
Part Two, A Study of the Silver Market (addressing
silver market corner discussed above); ‘‘The Role of
Market Speculation in Rising Oil and Gas Prices: A
Need to Put the Cop Back on the Beat,’’ Staff Report,
Permanent Subcommittee on Investigations of the
Senate Committee on Homeland Security and
Governmental Affairs, U.S. Senate, S. Rpt. No. 109–
65 at 1 (June 27, 2006) (addressing speculation and
price increases in oil and gas markets) [hereinafter
‘‘Oil & Gas Report’’]; ‘‘Excessive Speculation in the
Natural Gas Market, Staff Report,’’ Permanent
Subcommittee on Investigations of the Senate
Committee on Homeland Security and
Governmental Affairs, U.S. Senate, at 1 (June 25,
2007) (addressing speculation, price increases and
market distortion in natural gas markets discussed
above) [hereinafter ‘‘Gas Report’’]; ‘‘Excessive
Speculation in the Wheat Market;’’ Staff Report,
Permanent Subcommittee on Investigations of the
Senate Committee on Homeland Security and
Governmental Affairs, U.S. Senate, at 2 (June 24,
2009) (addressing excessive speculation in wheat
futures contracts by commodity index traders)
[hereinafter ‘‘Wheat Report’’]; see also Jerry W.
Markham, ‘‘The History of Commodity Futures
Trading and its Regulation,’’ at 3–47 (1987)
(summarizes numerous incidents of large
speculative trader abuse in an array of commodities
from the emergence of futures exchanges in the
mid-1800s through the 1970s).
705 The roots of this statutory determination date
back to 1922, when Congress found ‘‘sudden or
unreasonable fluctuations in the prices’’ of certain
commodity futures transactions ‘‘frequently occur
as a result of [ ] speculation, manipulation or
control’’ and that ‘‘such fluctuations in prices are
an obstruction to and a burden upon’’ interstate
commerce. Grain Futures Act of 1922, ch. 369 at
section 3, 342 Stat. 998, 999 (1922), codified at 7
U.S.C. 5 (1925–26).

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which they are not.706 This distinction
is important because a chief purpose of
position limits is to preserve the
integrity of derivative markets for the
benefit of producers that use them to
hedge risk and consumers that consume
the underlying commodities.
Second is the distinction between
speculation generally and excessive
speculation as addressed in CEA section
4a(a)(1). While, as noted above,
numerous government inquires have
linked speculation at excessive levels to
abuses and burdens on commerce,
below excessive levels, speculation
provides needed liquidity to derivative
markets.707
In 2010 the Dodd-Frank Act 708
amended CEA section 4a(a). These
amendments responded to the 2008
financial crisis and came in the wake of
three Congressional reports within a
three-year span finding increased and/or
‘‘excessive’’ derivative market
speculation linked to increased and
distorted prices. These reports
recommended increased statutory
authority to, in the parlance of two of
the reports, put the Commission ‘‘back
on the beat.’’ 709 Among other things,
the Dodd-Frank Act 710 expanded the
Commission’s speculative position limit
authority under CEA section 4a to
706 See

CEA section 4a(c)(1); 7 U.S.C. 6a(c)(1).
do not always trade simultaneously in
the same quantities in opposing directions. That is,
long and short hedgers may trade at different times
and with different quantities, often making
transactions between only hedgers unfeasible.
Speculative traders thus provide a trading partner
for hedgers for whom there is no feasible hedger
counterparty. In so doing, speculators provide
valuable liquidity to the market.
708 Public Law 111–203, 124 Stat. 1376 (2010).
709 See, e.g., Wheat Report, at 15–16 (excessive
speculation in wheat futures contracts by
commodity index traders contributed to
‘‘unreasonable fluctuations or unwarranted
changes’’ in wheat futures prices, resulting in an
abnormally large and persistent gap between wheat
futures and cash prices (the basis);’’ commerce was
unduly burdened; stiffened position limit
regulation for index traders recommended); Gas
Report, at 3–7 (‘‘[t]he current regulatory system was
unable to prevent [the hedge fund] Amaranth’s
excessive speculation in the 2006 natural gas
market;’’ the experience demonstrated ‘‘how
excessive speculation can distort prices’’ and have
‘‘serious consequences for other market
participants;’’ and the Commission should be put
‘‘back on the beat’’); Oil & Gas Report, at 6–7 (heavy
speculation in commodity energy markets
contributed to rising U.S. energy prices, distorting
the historical relationship between price and
inventory; recommends putting the CFTC ‘‘back on
the beat’’ to police these markets by eliminating the
‘‘Enron’’ loophole that limited it from doing so). In
the interval between the two reports addressed to
energy market speculation and the Dodd-Frank Act
amendments, Congress also expanded the
Commission’s authority to set position limits for
significant price discovery contracts on exempt
commercial markets. See Food, Conservation and
Energy Act of 2008, Public Law 110–246, 122 Stat.
1624 (2008).
710 Dodd-Frank Act section 737(a).
707 Hedgers

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mandate that the Commission: (i)
establish limits on the amount of
positions, as appropriate, that may be
held by any person in agricultural and
exempt commodity 711 futures and
options contracts traded on a DCM (CEA
section 4a(a)(2));* * * 712 (ii) establish
at an appropriate level position limits
for swaps that are economically
equivalent to those futures and options
that are subject to mandatory position
limits pursuant to CEA section 4a(a)(2),
and do so at the same time as the CEA
section 4a(a)(2) limits are established
(CEA section 4a(a)(5)); and (iii) apply
position limits on an aggregate basis to
contracts based on the same underlying
commodity across enumerated trading
venues 713 (CEA section 4a(a)(6)).
Additionally, the Dodd-Frank Act
requires DCMs and SEFs to set position
limits for any contract subject to a
Commission-imposed limit at a level not
higher than the Commission’s limit.714
Finally, the Dodd-Frank Act, through
new CEA section 4a(c)(2), requires that
the Commission define bona fide
hedging positions pursuant to an
express framework for purposes of
exclusion from position limits. The
Commission’s approach, historically, to
exercising its statutory position limits
authority has been to set or order limits
prophylactically to deter all forms of
manipulation and to diminish,
eliminate, or prevent excessive
speculation.715 It has done so through
711 As defined in CEA section 1a(20), ‘‘exempt
commodity’’ means a commodity that is neither an
agricultural commodity nor an ‘‘excluded
commodity.’’ Excluded commodities, in turn, are
defined in CEA section 1a(19) to encompass
specified groups of financial and occurrence-based
commodities. Accordingly, exempt commodities
include energy products and metals. The DoddFrank mandate in CEA section 4a(a)(2) to impose
limits applies to all agricultural and exempt
commodities (collectively, physical commodities).
This mandate does not apply to excluded
commodities, which are primarily intangible
commodities, like financial products.
712 The Commission’s statutory interpretation of
its mandate under CEA section 4a(a)(2) is discussed
in detail above. A separate provision added by the
Dodd-Frank Act directs the Commission with
respect to factors to consider in establishing the
levels of speculative position limits that are
mandated by CEA section 4a(a)(2). See CEA section
4a(a)(3); 7 U.S.C. 6a(a)(3).
713 Specifically, as enumerated these are: (1)
contracts listed by DCMs; (2) with respect to
FBOTs, contracts that are price-linked to a contract
listed for trading on a registered entity and made
available from within the United States via direct
access; and (3) SPDF Swaps.
714 See Dodd-Frank Act sections 735(b)
(amending CEA section 5(d)(5)) and 733 (adding
CEA section 5h, subsection (f)(6) of which specifies
SEF’s core principle obligation with respect to
position limitations or accountability).
715 See, e.g., 46 FR 50938, 50940, Oct. 16, 1981.
In this release adopting § 1.61, the Commission
articulated its interpretation that the CEA
authorized prophylactic speculative position limits.
One year later, Congress enacted the Futures

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regulations comprised of three primary
components: (1) The level of the limits,
which set a threshold that restricts the
number of speculative positions that a
person may hold in the spot-month, in
any individual month, and in all
months combined; (2) the standards for
what constitute bona fide hedging
versus speculative transactions, as well
as other exemptions; and (3) the
accounts and positions a person must
aggregate for the purpose of determining
compliance with the position limit
levels. These rules now reside in part
150 of the Commission’s regulations.716
The rules proposed herein would
amend part 150 and make certain
conforming amendments to related
reporting requirements in parts 15, 17
and 19. They would do so in a manner
that represents an extension of the
Commission’s historical approach
towards the first two components: limit
levels and exemptions. The third
component, aggregation, is addressed in
a separate Commission rulemaking.717
i. Statutory Mandate To Consider Costs
and Benefits
CEA section 15(a) 718 requires the
Commission to consider the costs and
benefits of its actions before
promulgating a regulation under the
CEA or issuing certain orders. CEA
section 15(a) further specifies that the
costs and benefits shall be evaluated in
light of five broad areas of market and
public concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations.719
Trading Act of 1982, Public Law 97–444, 96 Stat.
2294, 2299–2300(1982), which, inter alia, amended
the CEA to ‘‘clarify and strengthen the
Commission’s’’ position limits authority. S. Rep.
97–384, at 44 (1982). Congress enacted this
strengthening amendment with awareness of the
Commission’s prophylactic interpretation and
approach, and after rejecting amendments that
would have circumscribed the Commission’s
authority. See, e.g., Futures Trading Act of 1982:
Hearings on S. 2109 before the S. Subcomm. on
Agricultural Research, 97th Cong. 28, 29, 44–45,
337, 340–45 (1982) (oral and written statements of
Commission Chair Phillip McBride Johnson and
Commodity Exchange Executive Vice Chair Lee
Berendt concerning, inter alia, the Commission’s
omnibus approach to position limits); S. Rep. 97–
384, at 44–45, 79 (discussing rejected amendments).
716 As discussed above, the District Court for the
District of Columbia vacated part 151 of the
Commission’s regulations, which would have
replaced part 150. As a result, part 150 remains in
effect.
717 See Aggregation NPRM.
718 7 U.S.C. 19(a).
719 In ICI v. CFTC, 2013 WL 3185090, at *8 (D.C.
Cir. 2013), the United States Court of Appeals for
the D.C. Circuit held that CEA section 15(a) imposes
no duty on the Commission to conduct a

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The Commission considers the costs
and benefits resulting from its
discretionary determinations with
respect to the CEA section 15(a) factors.
Accordingly, the discussion that
follows identifies, and considers against
the five CEA section 15(a) factors,
benefits and costs to market participants
and the public that the Commission
expects to flow from these proposed
rules relative to the statutory
requirements of the CEA and the
Commission’s regulations now in effect.
The Commission has attempted to
quantify the costs and benefits of these
regulations where feasible. Where
quantification is not feasible the
Commission identifies and considers
costs and benefits qualitatively.
Beyond specific questions
interspersed throughout its discussion,
the Commission generally requests
comment on all aspects of its
consideration of costs and benefits,
including: identification and assessment
of any costs and benefits not discussed
therein; data and any other information
to assist or otherwise inform the
Commission’s ability to quantify or
qualify the benefits and costs of the
proposed rules; and, substantiating data,
statistics, and any other information to
support positions posited by
commenters with respect to the
Commission’s consideration of costs
and benefits.
The following consideration of
benefits and costs is generally organized
according to the following rules
proposed in this release: definitions
(§ 150.1),720 federal position limits
(§ 150.2), exemptions to limits (§ 150.3),
position limits set by DCMs and SEFs
(§ 150.5), anticipatory hedging
requirements (§ 150.7), and reporting
requirements (§ 19.00). For each rule,
the Commission summarizes the
proposed rule and considers the benefits
and costs expected to result from it.721
The Commission then considers the
benefits and costs of the proposed rules
collectively in light of the five public
quantitative economic analysis: ‘‘Where Congress
has required ‘‘‘rigorous, quantitative economic
analysis,’’’ it has made that requirement clear in the
agency’s statute, but it imposed no such
requirement here [in the CEA].’’ Id. (citation
omitted).
720 Many of the revised or new definitions do not
substantively affect the Commission’s
considerations of costs and benefits on their own
merit, but are considered in conjunction with the
sections of the rule that implement them.
721 The proposed rules also include amendments
to 17 CFR parts 15 and 17, as discussed supra. The
Commission preliminarily believes these
amendments are not substantive in nature and do
not have cost or benefit implications. The
Commission welcomes comment on any potential
costs or benefits of the changes to parts 15 and 17.

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interest considerations of CEA section
15(a).
2. Section 150.1—Definitions
Currently, § 150.1 defines terms for
operation within the various rules that
comprise part 150. As described above,
the Commission proposes formatting,
organizational, and other nonsubstantive amendments to these
definitional provisions that, subject to
consideration of any relevant comments,
it does not view as having benefit or
cost implications.722 But, with respect
to a number of definitions, the
Commission proposes substantive
amendments and additions. With the
exception of the term ‘‘bona fide
hedging position,’’ for which the
benefits and costs of the proposed
§ 150.1 definition are considered in the
subsection directly below, any benefits
and costs attributable to substantive
definitional changes and additions
proposed in § 150.1 are considered in
the discussion of the rule in which such
new or amended terms would be
operational.

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i. Bona Fide Hedging
Proposed § 150.1 would include a
definition of the term ‘‘bona fide
hedging positions’’—which operates to
distinguish hedging positions from
those that are speculative and thus
subject to position limits, both federal
and exchange-set, unless otherwise
exempted by the Commission. Hedgers
present a lesser risk of burdening
interstate commerce as described in
CEA section 4a because their positions
are offset in the physical market. CEA
section 4a(c) has long directed that no
Commission rule, regulation or order
establishing position limits under CEA
section 4a(a) apply to bona fide hedging
as defined by the Commission.723 The
proposed definition would replace the
definition now contained in § 1.3(z) to
implement that statutory directive.724
Generally, the current definition of
bona fide hedging in § 1.3(z) advises
that a position should ‘‘normally
represent a substitute for . . . positions
to be taken at a later time in a physical
marketing channel’’ and requires such
722 See supra discussion of proposed amendments
to § 150.1.
723 CEA section 4a(c)(1); 7 U.S.C. 6a(c)(1).
724 Currently, 17 CFR 1.3(z), defines the term
‘‘bona fide hedging transactions and positions.’’
Originally adopted by the newly formed
Commission in 1975, a revised version of § 1.3(z)
took effect two years later. This 1977 revision
largely forms the basis of the current definition of
bona fide hedging. A history of the definition of
bona fide hedging is presented above. With the
adoption of the proposed definition of ‘‘bona fide
hedging positions’’ in § 150.1, § 1.3(z) would be
deleted.

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position to be ‘‘economically
appropriate to the reduction of risks in
the conduct of a commercial enterprise’’
where the risks arise from the potential
change in value of assets, liabilities, or
services.725 Such bona fide hedges must
have a purpose ‘‘to offset price risks
incidental to commercial cash or spot
operations’’ and must be ‘‘established
and liquidated in an orderly manner in
accordance with sound commercial
practices.’’
This general definition thus provides
general components of the type of
position that constitute a bona fide
hedge position. The criterion that such
a position should ‘‘normally represent a
substitute for . . . positions to be taken
at a later time in a physical marketing
channel’’ has been deemed the
‘‘temporary substitute’’ criterion. The
requirement that such position be
‘‘economically appropriate to the
reduction of risks in the conduct of a
commercial enterprise’’ is referred to as
the ‘‘economically appropriate’’ test.
The criterion that hedged risks arise
from the potential change in value of
assets, liabilities, or services is
commonly known as the ‘‘change in
value’’ requirement or test. The phrase
‘‘price risks incidental to commercial
cash or spot operations’’ has been
termed the ‘‘incidental test.’’ The
criterion that hedges must be
‘‘established and liquidated in an
orderly manner’’ is known as the
‘‘orderly trading requirement.’’ 726
The current definition also describes
a non-exclusive list of transactions that
satisfy the definitional criteria and
therefore qualify as bona fide hedges;
these ‘‘enumerated hedging
transactions’’ are located in § 1.3(z)(2).
For those transactions that may fit the
definition but are not listed in
§ 1.3(z)(2), current § 1.3(z)(3) provides a
means of requesting relief from the
Commission.
The Dodd-Frank Act amended the
CEA in ways that require the
Commission to adjust its current bona
fide hedging definition. Specifically, the
Dodd-Frank Act added section 4a(c)(2)
of the Act, which the Commission
interprets as directing the Commission
to narrow the bona fide hedging
position definition for physical
commodities from the definition found
in current § 1.3(z)(1).727
Dodd-Frank also provided direction
regarding the bona fide hedging criteria
for swaps contracts newly under the
725 17 CFR 1.3(z)(1). The Commission cautions
that the e-CFR 2012 version of this provision
reflects changes made by the now-vacated Part 151
rule.
726 See supra for additional explanation of these
terms.

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Commission’s jurisdiction. Specifically,
new CEA sections 4a(a)(5) and (6)
require the Commission to impose
limits on an aggregate basis across all
economically equivalent contracts,
excepting in both cases bona fide
hedging positions. CEA section
4a(c)(2)(B) describes which swap offset
positions may qualify as bona fide
hedges. Finally, new CEA section
4a(a)(7) provides the Commission with
authority to grant exemptive relief from
position limits. The Commission
proposes to amend its definition of bona
fide hedging under the authority and
direction of amended CEA section 4a(c)
and the other provisions added by the
Dodd-Frank Act. To the extent a change
in the definition represents a statutory
requirement, it is not discretionary and
thus not subject to CEA section 15(a).
ii. Rule Summary
Like current § 1.3(z), the proposed
§ 150.1 bona fide hedging definition
employs a basic organizational model of
stating general, broadly applicable
requirements for a hedge to qualify as
bona fide,728 and then specifying certain
particular (‘‘enumerated’’) hedges that
are deemed to meet the general
requirements.729 Generally, the
proposed definition is built around the
same criteria as are currently found in
§ 1.3(z), including the temporary
substitute and economically appropriate
criteria. Thus, the proposed definition is
substantially similar to the current
definition, with limited changes to
accommodate altered statutory
requirements regarding bona fide
hedging as well as accomplish
discretionary improvements. The
proposed definition also reflects
organizational changes to better
accommodate the extension of
speculative position limits to all
economically equivalent contracts
across all trading venues. To the extent
the proposed definition carries over
requirements currently resident in the
§ 1.3(z) definition, it does not represent
a change from current practice and
therefore should not pose incremental
benefits or costs.
The proposed definition has been
relocated from § 1.3(z) to § 150.1 in
order to facilitate reference between
sections of part 150. The proposed
728 Compare 17 CFR 1.3(z)(1) (‘‘General
Definition’’) with the proposed § 150.1 definition of
bona fide hedging opening sentence and paragraphs
(1) and (2) (respectively, ‘‘Hedges of an excluded
commodity’’ and ‘‘Hedges of a physical
commodity’’).
729 Compare 17 CFR 1.3(z)(2)(‘‘Enumerated
Hedging Transactions’’) with the proposed § 150.1
definition of bona fide hedging paragraphs (3) and
(4) (respectively, ‘‘Enumerated hedging positions’’
and ‘‘Other enumerated hedging positions’’).

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definition of bona fide hedging position
is also re-organized into six sections,
starting with an opening paragraph
describing the general requirements for
all hedges followed by five numbered
paragraphs. Paragraph (1) of the
proposed definition describes
requirements for hedges of an excluded
commodity,730 including guidance on
risk management exemptions that may
be adopted by an exchange. Paragraph
(2) describes requirements for hedges of
a physical commodity. Paragraphs (3)
and (4) describe enumerated
exemptions. Paragraph (5) describes
cross-commodity hedges.
The following discussion is meant to
highlight the essential components of
each section of the proposed definition.
A full discussion of the history and
policy rationale of each section may be
found supra.731
a. Opening Paragraph
The opening paragraph of the
proposed definition incorporates the
incidental test and the orderly trading
requirement, both found in the current
§ 1.3(z)(1). The Commission intends the
proposed incidental test to be a
requirement that the risks offset by a
commodity derivative contract hedging
position must arise from commercial
cash market activities. The Commission
believes this requirement is consistent
with the statutory guidance to define
bona fide hedging positions to permit
the hedging of ‘‘legitimate anticipated
business needs.’’ 732 The incidental test
allows the Commission to distinguish
between hedging and speculate
activities by defining the former as
requiring a legitimate business need.
The proposed orderly trading
requirement is intended to impose on
bona fide hedgers the duty to enter and
exit the market carefully in the ordinary
course of business. The requirement is
also intended to avoid to the extent
possible the potential for significant
market impact in establishing or
liquidating a position in excess of
position limits. This requirement is
particularly important because, as
discussed below, the Commission
proposes to set the initial levels of
position limits at the outer bound of the
range of levels of limits that may serve
to balance the statutory policy
objectives in CEA section 4a(a)(3) for
limit levels. As such, bona fide hedgers
730 An

‘‘excluded commodity’’ is defined in CEA
section 1a(19). The definition includes financial
products such as interest rates, exchange rates,
currencies, securities, credit risks, and debt
instruments as well as financial events or
occurrences.
731 See discussion above.
732 7 U.S.C. 6a(c)(1).

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likely would only need an exemption
for very large positions. The orderly
trading requirement is intended to
prevent disorderly trading, practices, or
conduct from bona fide hedgers by
encouraging market participants to
assess market conditions and consider
how the trading practices and conduct
affect the orderly execution of
transactions when establishing or
liquidating a position greater than the
applicable position limit.733
b. Paragraph (1) Hedges of an Excluded
Commodity
The first paragraph in the proposed
definition addresses hedging of an
excluded commodity; it emanates from
the Commission’s discretionary
authority to impose limits on intangible
commodities. In general, in addition to
the requirements in the opening
paragraph, proposed paragraph (1)
requires the position meet the
economically appropriate test and is
either enumerated in paragraphs (3), (4),
or (5) of the proposed definition or is
recognized by a DCM or SEF as a bona
fide hedge pursuant to exchange rules.
The temporary substitute and change in
value criteria are not included in the
proposed paragraph (1), as these
requirements are inappropriate in the
context of certain excluded
commodities that lack a physical
marketing channel.734
Exclusively addressed to excluded
commodity hedging, paragraph (1) is
relevant only for the purposes of
exchange-set limits under § 150.5 as
proposed for amendment. As the
Commission has determined to focus
the application of federal speculative
position limits on 28 physical
commodities and their related physicaldelivery and cash-settled referenced
contracts, this paragraph does not affect
the imposition of federal speculative
position limits and exemptions thereto.
c. Paragraph (2) Hedges of a Physical
Commodity
Proposed paragraph (2) of the
definition enumerates what constitutes
a hedge for physical commodities,
including physical agricultural and
exempt commodities both subject and
not subject to federal speculative
position limits. In addition to the
requirements in the opening paragraph,
733 As discussed supra, the Commission believes
that negligent trading, practices, or conduct should
be a sufficient basis for the Commission to deny or
revoke a bona fide hedging exemption.
734 The Commission notes that DCMs currently
incorporate the temporary substitute and change in
value criteria when the contract’s underlying
market has physical delivery obligations. The
proposal would not limit their ability to continue
to do so when appropriate.

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proposed paragraph (2) requires that the
position satisfy the temporary substitute
test, the economically appropriate test,
and the change-in-value test. These tests
have been incorporated into the revised
statutory definition in CEA section
4a(c)(2) and essentially mirror the
current definition in § 1.3(z).735 The
proposed paragraph (2) also requires the
position either be enumerated in
proposed paragraphs (3), (4), or (5) or be
a pass-through swap offset or passthrough swap position as defined in
paragraph (2)(ii).
Proposed paragraph (2) of the
definition applies generally to
derivative positions that hedge a
physical commodity and as such
includes swaps. Thus, the paragraph
responds to the statutory requirement in
CEA section 4a(a)(5) that the
Commission establish limits on
economically equivalent contracts,
including swaps, excluding bona fide
hedging positions. The definition of a
pass-through swap offset position
incorporates the definition in new CEA
section 4a(c)(2)(B)(i), with the inclusion
of the requirement that such position
not be maintained during the lesser of
the last five days of trading or the time
period for the spot month for the
physical-delivery contract.
d. Paragraphs (3) and (4) Enumerated
Hedging Positions
Proposed paragraph (3) lists specific
positions that would fit under the
definition of a bona fide hedging
position, including hedges of inventory,
cash commodity purchase and sales
contracts, unfilled anticipated
requirements, and hedges by agents.736
Each of these positions was described in
§ 1.3(z), with the exception of paragraph
(iii)(B), which was added in response to
the petition submitted to the
Commission by the Working Group of
Commercial Energy Firms.737
Proposed paragraph (4) provides other
enumerated hedging exemptions,
including hedges of unanticipated
production, offsetting unfixed price
cash commodity sales and purchases,
anticipated royalties, and services, all of
which are subject to the ‘‘five-day rule.’’
The ‘‘five-day rule’’ is a provision in
many of the enumerated hedging
positions that prohibits a trader from
maintaining the positions in any
physical-delivery commodity derivative
735 With respect to the temporary substitute test,
the word ‘‘normally’’ has been removed in the
proposed definition in order to conform with the
stricter statutory standard in new CEA section
4a(c)(2). See discussion above.
736 A detailed description of each enumerated
position can be found supra.
737 See discussion above.

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contract during the lesser of the last five
days of trading or the time period for the
spot month in such physical-delivery
contract.738 Because each exemption
shares this provision, the Commission is
proposing to reorganize such
exemptions into proposed paragraph (4)
for administrative efficiency.
Of the enumerated hedges in
proposed paragraphs (4)(i) and (ii) are
currently in § 1.3(z) and paragraph
(4)(iv) codifies a hedge that has
historically been recognized by the
Commission. Paragraph (4)(iii) proposes
a royalties exemption not now specified
in § 1.3(z).
e. Paragraph (5) cross-commodity
hedges
Proposed paragraph (5) describes
positions that would qualify as crosscommodity bona fide hedges. The
Commission has long recognized crosscommodity hedging, stating in 1977 that
such positions would be covered under
the general provisions of § 1.3(z)(2).
The definition in proposed paragraph
(5) would condition cross-commodity
hedging on: (i) whether the fluctuations
in value of the position in the
commodity derivative contract are
‘‘substantially related’’ to the
fluctuations in value of the actual or
anticipated cash position or passthrough swap; and (ii) the five-day rule
being applied to positions in any
physical-delivery commodity derivative
contract. The second condition, i.e. the
application of the five-day rule, would
help to protect the integrity of the
delivery process in the physicaldelivery contract but would not apply to
cash-settled contract positions.739

emcdonald on DSK67QTVN1PROD with PROPOSALS2

iii. Benefits and Costs
Elements of the proposed definition
that represent discretionary, substantive
modifications to the required manner in
which bona fide hedging have been
defined under § 1.3(z) include the
following: 740 (i) Proposing requirements
for hedges in an excluded commodity in
738 As discussed above, the purpose of the fiveday rule is to protect the integrity of the delivery
and settlement processes in physical-delivery
contracts. Without this rule, high concentrations of
exempted positions can distort the markets,
impairing price discovery while potentially having
an adverse impact on efforts to deter all forms of
market manipulation and diminish excessive
speculation.
739 See discussion above.
740 The Commission notes that the relocation of
the definition from § 1.3(z) to part 150 is also
discretionary. As noted above, the placement is
intended to facilitate compliance with the other
sections of part 150; the Commission does not
believe, however, that this action has substantive
cost or benefit implications. Also, the proposed
definition incorporates and references elements of
non-binding guidance not encompassed by CEA
section 15(a).

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proposed paragraph (1); (ii) adding the
five-day rule into the statutory
definition of pass-through swap as
described in paragraph (2)(ii)(A); (iii)
applying the definition in proposed
paragraph (2) to positions in
economically equivalent contracts in a
physical commodity; 741 (iv) expanding
paragraph (3)(III)(b) to incorporate
hedges encouraged by a public utility
commission; (v) expanding paragraph
(4)(ii) to include offsetting unfixed-price
cash commodity sales and purchases
that are basis different contracts in the
same commodity, regardless of whether
the contracts are in the same calendar
month; (vi) adding paragraph (iii) to
proposed paragraph (4) to enumerate
anticipated royalty hedges; and (vii)
enumerating cross-commodity hedges as
a standalone provision in paragraph (5).
a. Benefits
The Commission proposes the
definition for excluded commodities in
paragraph (1) in order to provide a
consistent definition of bona fide
hedging—i.e., a definition that
incorporates the economically
appropriate test—for all commodities
under the Commission’s jurisdiction.
The addition of paragraph (1) would
provide exchanges with a definition for
bona fide hedging designed to provide
a level of assurance that the
Commission’s policy objectives
regarding bona fide hedging are met at
the exchange level as well as at the
federal level, and for excluded
commodities as well as agricultural and
exempt commodities.
The Commission believes that the
additions to the definition of bona fide
hedging proposed in this release
provide additional necessary relief to
bona fide hedgers. This relief, in turn,
will help to ensure that market
participants with positions hedging
legitimate business needs are properly
recognized as hedgers under the
Commission’s speculative position
limits regime. Thus, the Commission
anticipates that the addition of the
enumerated position for anticipated
royalties and the expansion of the
enumerated unfilled anticipated
requirements position provide
additional means for obtaining a hedge
exemption by recognizing the legitimate
741 As discussed supra, CEA section 4a(a)(5)
requires that the Commission set speculative limits
on the amount of positions, ‘‘other than bona fide
hedging positions . . . held by any person with
respects to swaps that are economically equivalent’’
to futures and options. 7 U.S.C. 6a(a)(5). Subject to
CEA section 4a(a)(2), the Commission is exercising
its discretion in defining bona fide hedging in
economically equivalent contracts in the same
manner as for futures and options in physical
commodities. 7 U.S.C. 6a(a)(2).

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75763

business need in each position. The safe
harbor proposed in paragraph (5) is
expected to provide clarity and promote
regulatory certainty for entities that use
cross-commodity hedging strategies.
Further, the addition of the five-day rule
to the hedging definition for passthrough swaps helps the Commission to
ensure the integrity of the delivery
process in the physical-delivery contract
and as a result to accomplish to the
maximum extent practicable the factors
in CEA section 4a(a)(3). Finally, the
Commission believes using the same
bona fide hedging exemptions in
economically equivalent contracts may
facilitate administrative efficiency by
avoiding the need for market
participants to manage and apply
different definitional criteria across
multiple products and trading
venues.742 The Commission requests
comment on its consideration of the
benefits of the proposed definition of
bona fide hedging. Has the Commission
misidentified any of the benefits of the
proposed rule? Are there additional
benefits the Commission ought to
consider regarding the proposed
definition of bona fide hedging? Why or
why not?
b. Costs
The Commission anticipates that
there will be some small additional
costs associated with the proposed
definition.
Entities may incur costs to the extent
the proposed definition of a bona fide
hedging position in an excluded
commodity requires an exchange to
adjust its policies for bona fide hedging
exemptions or a market participant to
adjust its trading strategies for what is
and is not a bona fide hedge in an
excluded commodity. The Commission
expects such costs to be negligible, as
the definition is substantially the same
as the current definition under § 1.3(z).
Costs for exchanges are also considered
in the section of this release that
discusses the proposed amendments to
§ 150.5.
In general, under other aspects of the
Commission’s proposed definition,
market participants may incur costs to
determine whether their positions fall
under one of the new or expanded
enumerated positions. In the event a
position does not fit under any of the
enumerated positions, market
742 Further, using the same exemptions in
economically equivalent contracts is consistent
with the approach of the Dodd-Frank Act section
737(a) amendment requiring that the Commission
establish limits for economically equivalent swap
positions and across trading venues, including
direct-access linked FBOT contracts. See 7 U.S.C.
6a(a)(5)–(6).

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participants may incur costs associated
with filing for exemptive relief as
described in the section discussing the
costs of proposed § 150.3 or in altering
speculative trading strategies as
discussed above. As trading strategies
are proprietary, and the determinations
made by individual entities present a
burden that is highly idiosyncratic, it is
not reasonably feasible for the
Commission to estimate the value of the
burden imposed.
c. Request for Comment
The Commission requests comment
on its consideration of the costs of the
proposed definition of bona fide
hedging position. Are there additional
costs related to the Commission’s
discretionary actions that the
Commission should consider? Has the
Commission misidentified any costs?
Commenters are encouraged to submit
any data that the Commission should
consider in evaluating the costs of the
proposed definition.
d. Consideration of Alternatives
The Commission recognizes that
alternatives exist to discretionary
elements of the definition of bona fide
hedging positions proposed herein. The
Commission requests comments on
whether an alternative to what is
proposed would result in a superior
benefit-cost profile, with support for any
such position provided.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

3. Section 150.2—Limits
i. Rule Summary
As previously discussed, the
Commission interprets CEA section
4a(a)(2) to mandate that it establish
speculative position limits for all
agricultural and exempt physical
commodity derivative contracts.743 The
Commission currently sets and enforces
speculative position limits for futures
and futures-equivalent options contracts
on nine agricultural products.
Specifically, current § 150.2 provides
‘‘[n]o person may hold or control
positions, separately or in combination,
net long or net short, for the purchase
or sale of a commodity for future
delivery or, on a futures-equivalent
basis, options thereon, in excess of’’
enumerated spot, single-month, and allmonth levels for nine specified
contracts.744 These proposed
amendments to § 150.2 would expand
743 See supra discussion of the Commission’s
interpretation of this mandate.
744 These contracts are Chicago Board of Trade
corn and mini-corn, oats, soybeans and minisoybeans, wheat and mini-wheat, soybean oil, and
soybean meal; Minneapolis Grain Exchange hard
red spring wheat; ICE Futures U.S. cotton No. 2;
and Kansas City Board of Trade hard winter wheat.

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the scope of federal position limits
regulation in three chief ways: (1)
specify limits on 19 contracts in
addition to the nine existing legacy
contracts (i.e., a total of 28); (2) extend
the application of these limits beyond
futures and futures-equivalent options
to all commodity derivative interests,
including swaps; and (3) extend the
application of these limits across trading
venues to all economically equivalent
contracts that are based on the same
underlying commodity. In addition, the
proposed rule would provide a
methodology and procedures for
implementing and applying the
expanded limits.
The Commission proposes to amend
§ 150.2 to impose speculative position
limits as mandated by Congress in
accordance with the statutory bounds
that define its discretion in doing so.
First, pursuant to CEA section 4a(a)(5)
the Commission must concurrently
impose position limits on swaps that are
economically equivalent to the
agricultural and exempt commodity
derivatives for which position limits are
mandated in section 4a(a)(2). Second,
CEA section 4a(a)(3) requires that the
Commission appropriately set limit
levels mandated under section 4a(a)(2)
that ‘‘to the maximum extent
practicable, in its discretion,’’
accomplish four specific objectives.745
Third, CEA section 4a(a)(2)(C) requires
that in setting limits mandated under
section 4a(a)(2)(A), the ‘‘Commission
shall strive to ensure that trading on
foreign boards of trade in the same
commodity will be subject to
comparable limits and that any limits
. . . imposed . . . will not cause price
discovery in the commodity to shift to
trading on the foreign boards of trade.’’
Key elements of the proposed rule are
summarized below.746
Generally, proposed § 150.2 would
limit the size of speculative
positions,747 i.e., prohibit any person
from holding or controlling net long/
short positions above certain specified
spot month, single month, and allmonths-combined position limits. These
position limits would reach: (1) 28 ‘‘core
referenced futures contracts,’’ 748
745 These objectives are to: (1) ‘‘diminish,
eliminate, or prevent excessive speculation;’’ (2)
‘‘deter and prevent market manipulation, squeezes,
and corners;’’ (3) ‘‘ensure sufficient market liquidity
for bona fide hedgers;’’ and (4) ‘‘ensure that the
price discovery function of the underlying market
is not disrupted.’’ 7 U.S.C. 6a(a)(3).
746 For a more detailed description, see
discussion above.
747 Proposed § 150.1 would include a consistent
definition of the term ‘‘speculative position limits.’’
748 Proposed § 150.1 also would define the term
‘‘core referenced futures contract’’ by reference to
‘‘a futures contract that is listed in § 150.2(d).’’

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representing an expansion of 19
contracts beyond the 9 legacy
agricultural contracts identified
currently in § 150.2; 749 (2) a newly
defined category of ‘‘referenced
contracts’’ (as defined in proposed
§ 150.1); 750 and (3) across all trading
venues to all economically equivalent
contracts that are based on the same
underlying commodity.
a. § 150.2(a) Spot-Month Speculative
Position Limits
In order to implement the statutory
directive in CEA section 4a(a)(3)(A),
proposed § 150.2(a) would prohibit any
person from holding or controlling
positions in referenced contracts in the
spot month in excess of the level
specified by the Commission for
referenced contracts.751 Proposed
§ 150.2(a) would require, in the
Commission’s discretion, that a trader’s
positions, net long or net short, in the
physical-delivery referenced contract
and cash-settled referenced contract be
749 Specifically, in addition to the existing 9
legacy agricultural contracts now within § 150.2—
i.e., Chicago Board of Trade corn, oats, soybeans,
soybean oil, soybean meal, and wheat; Minneapolis
Grain Exchange hard red spring wheat; ICE Futures
U.S. cotton No. 2; and Kansas City Board of Trade
hard winterwheat—proposed § 150.2 would expand
the list of core referenced futures contracts to
capture the following additional agricultural,
energy, and metal contracts: Chicago Board of Trade
Rough Rice; ICE Futures U.S. Cocoa, Coffee C,
FCOJ–A, Sugar No. 11 and Sugar No. 16; Chicago
Mercantile Exchange Feeder Cattle, Lean Hog, Live
Cattle and Class III Milk; Commodity Exchange,
Inc., Gold, Silver and Copper; and New York
Mercantile Exchange Palladium, Platinum, Light
Sweet Crude Oil, NY Harbor ULSD, RBOB Gasoline
and Henry Hub Natural Gas.
750 This would result in the application of
prescribed position limits to a number of contract
types with prices that are or should be closely
correlated to the prices of the 28 core referenced
futures contracts—i.e., economically equivalent
contracts—including: (1) ‘‘look-alike’’ contracts
(i.e., those that settle off of the core referenced
futures contract and contracts that are based on the
same commodity for the same delivery location as
the core referenced futures contract); (2) contracts
based on an index comprised of one or more prices
for the same delivery location and in the same or
substantially the same commodity underlying a
core referenced futures contract; and (3) intercommodity spreads with two components, one or
both of which are referenced contracts. The
proposed ‘‘reference contract’’ definition would
exclude, however, a guarantee of a swap.
751 As discussed supra, the Commission proposes
to adopt a streamlined, amended definition of ‘‘spot
month’’ in proposed § 150.1. The term would be
defined as the trading period immediately
preceding the delivery period for a physicaldelivery futures contract and cash-settled swaps
and futures contracts that are linked to the physicaldelivery contract. The definition proposes similar
but slightly different language for cash-settled
contracts, providing for the spot month to be the
earlier of the period in which the underlying cashsettlement price is calculated or the close of trading
on the trading day preceding the third-to-last
trading day, until the contract cash-settlement price
is determined. For more details, see discussion
above.

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calculated separately under the spot
month position limits fixed by the
Commission for each. As a result, a
trader could hold positions up to the
applicable spot month limit in the
physical-delivery contracts, as well as
positions up to the applicable spot
month limit in cash-settled contracts
(i.e., cash-settled futures and swaps),
but would not be able to net across
physical-delivery and cash-settled
contracts in the spot month.
b. § 150.2(b) Single-Month and AllMonths-Combined Speculative Position
Limits
Proposed § 150.2(b) would provide
that no person may hold or control
positions, net long or net short, in
referenced contracts in a single-month
or in all-months-combined in excess of
the levels specified by the Commission.
Proposed § 150.2(b) would require
netting all positions in referenced
contracts (regardless of whether such
referenced contracts are physicaldelivery or cash-settled) when
calculating a trader’s positions for
purposes of the proposed single-month
or all-months-combined position limits
(collectively ‘‘non-spot-month’’
limits).752

emcdonald on DSK67QTVN1PROD with PROPOSALS2

c. § 150.2(d) Core Referenced Futures
Contracts
To be clear, the statutory mandate in
Dodd-Frank section 4a(a)(2) applies on
its face to all physical commodity
contracts. The Commission is
nevertheless proposing, initially, to
apply speculative position limits to
referenced contracts that are based on
28 core referenced futures contract
listed in proposed § 150.2(d). As defined
in proposed § 150.1, referenced
contracts are futures, options, or swaps
contracts that are directly or indirectly
linked to a core referenced futures
contract or the commodity underlying a
core referenced futures contract.753
Proposed § 150.2(d) lists the 28 core
referenced futures contracts on which
the Commission is initially proposing to
establish federal speculative position
limits. The list represents a significant
expansion of federal speculative
position limits from the current list of
nine agricultural contracts under
current part 150.754 The Commission
752 The Commission proposes to use the same
level for single-month and all-months-combined
limits, and refers to those limits as the ‘‘non-spotmonth limits.’’ The spot month and any single
month refer to those periods of the core referenced
futures contract.
753 As discussed above, the definition of
referenced contract excludes any guarantee of a
swap, basis contracts, and commodity index
contracts.
754 17 CFR 150.2.

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has selected these important food,
energy, and metals contracts on the
basis that such contracts (i) have high
levels of open interest and significant
notional value and/or (ii) serve as a
reference price for a significant number
of cash market transactions. Thus, the
Commission is proposing limits to
commence the expansion of its federal
position limit regime with those
commodity derivative contracts that it
believes are likely to have the greatest
impact on interstate commerce. Because
the mandate applies to all physical
commodity contracts, the Commission
intends through supplemental
rulemaking to establish limits for all
other physical commodity contracts.
Given limited Commission resources, it
cannot do so in this initial rulemaking.
As discussed above,755 the
Commission calculated the notional
value of open interest (delta-adjusted)
and open interest (delta-adjusted) for all
futures, futures options, and significant
price discovery contracts as of
December 31, 2012 in all agricultural
and exempt commodities in order to
select the list of 28 core referenced
futures contracts in proposed § 150.2(d).
The Commission selected commodities
in which the derivative contracts had
largest notional value of open interest
and open interest for three categories:
agricultural, energy, and metals. The
Commission then designated the
benchmark futures contracts for each
commodity as the core referenced
futures contracts for which position
limits would be established. Proposed
§ 150.2(d) lists 19 core referenced
futures contracts for agricultural
commodities, four core referenced
futures contracts for energy
commodities, and five core referenced
futures contracts for metals
commodities.
d. § 150.2(e) Levels of Speculative
Position Limits
The Commission proposes setting
initial spot month position limit levels
for referenced contracts at the existing
DCM-set levels for the core referenced
futures contracts. Thereafter, proposed
§ 150.2(e)(3) would task the Commission
with recalibrating spot month position
limit levels no less frequently than
every two calendar years. The
Commission’s proposed recalibration
would result in limits no greater than
one-quarter (25 percent) of the estimated
spot-month deliverable supply 756 in the
755 See

discussion above.
guidance for meeting DCM core principle
3 (as listed in 17 CFR part 38 app. C) specifies that,
‘‘[t]he specified terms and conditions [of a futures
contract], considered as a whole, should result in
a ‘deliverable supply’ that is sufficient to ensure
756 The

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relevant core referenced futures
contract. This formula is consistent with
the acceptable practices in current
§ 150.5, as well as the Commission’s
longstanding practice of using this
measure of deliverable supply to
evaluate whether DCM-set spot-month
limits are in compliance with DCM core
principles 3 and 5. The proposed rules
separately restrict the size of positions
in cash-settled referenced contracts that
would potentially benefit from a trader’s
potential distortion of the price of the
underlying core referenced futures
contract.
As proposed, each DCM would be
required to supply the Commission with
an estimated spot-month deliverable
supply figure that the Commission
would use to recalibrate spot-month
position limits unless it decides to rely
on its own estimate of deliverable
supply instead.757
In contrast to spot-month limits,
which would be set as a function of
deliverable supply, the proposed
formula for the non-spot-month position
limits is based on total open interest for
all referenced contracts that are
aggregated with a particular core
referenced contract. Proposed
§ 150.2(e)(4) explains that the
Commission would calculate non-spotmonth position limit levels based on the
following formula: 10 percent of the
largest annual average open interest for
the first 25,000 contracts and 2.5
percent of the open interest
thereafter.758 As is the case with spot
month limits, the Commission proposes
to adjust single month and all-monthscombined limits no less frequently than
every two calendar years.
The Commission’s proposed average
open interest calculation would be
computed for each of the past two
calendar years, using either month-end
open contracts or open contracts for
each business day in the time period, as
practical and in the Commission’s
discretion. Initially, the Commission
proposes to set the levels of initial nonspot-month limits using open interest
that the contract is not susceptible to price
manipulation or distortion. In general, the term
‘deliverable supply’ means the quantity of the
commodity meeting the contract’s delivery
specifications that reasonably can be expected to be
readily available to short traders and salable by long
traders at its market value in normal cash marketing
channels . . .’’ See 77 FR 36612, 36722, Jun. 19,
2012.
757 Proposed § 150.2(e)(3)(ii) would require DCMs
to submit estimates of deliverable supply. DCM
estimates of deliverable supplies (and the
supporting data and analysis) would continue to be
subject to Commission review.
758 Since 1999, the same 10 percent/2.5 percent
methodology, now incorporated in current
§ 150.5(c)(2), has been used to determine futures allmonths position limits for referenced contracts.

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for calendar years 2011 and 2012 in
futures contracts, options thereon, and
in swaps that are significant price
discovery contracts and are traded on
exempt commercial markets. Using the
2011/2012 combined levels of open
interest for futures contracts and for
swaps that are significant price
discovery contracts and are traded on
exempt commercial markets will result
in non-spot month position limit levels
that are not overly restrictive at the
outset; this is intended to facilitate the
transition to the new position limits
regime without disrupting liquidity. For
example, the Commission is proposing
a non-spot-month limit for CBOT Wheat
that represents the harvest from around
2 million acres (3,125 square miles) of
wheat, or 81 million bushels. The
proposed non-spot-month limit for
NYMEX WTI Light Sweet Crude Oil
represents 109.2 million barrels of oil.
The Commission believes these levels to
be sufficiently high as to restrict
excessive speculation without
restricting the benefits of speculative
activity, including liquidity provision
for bona fide hedgers.
After the initial non-spot-month
limits are set, the Commission proposes
subsequently to use the data reported by
DCMs and SEFs pursuant to parts 16,
20, and/or 45 to estimate average open
interest in referenced contracts.759

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e. § 150.2(f)–(g) Pre-Existing Positions
and Positions on Foreign Boards of
Trade
The Commission proposes in new
§ 150.2(f)(2) to exempt from federal nonspot-month speculative position limits
any referenced contract position
acquired by a person in good faith prior
to the effective date of such limit,
provided that the pre-existing position
is attributed to the person if such
person’s position is increased after the
effective date of such limit.760
759 Options listed on DCMs would be adjusted
using an option delta reported to the Commission
pursuant to 17 CFR part 16; swaps would be
counted on a futures equivalent basis, equal to the
economically equivalent amount of core referenced
futures contracts reported pursuant to 17 CFR part
20 or as calculated by the Commission using swap
data collected pursuant to 17 CFR part 45.
760 See also the definition of the term ‘‘Preexisting position’’ incorporated in proposed § 150.1
herein. Such pre-existing positions that are in
excess of the proposed position limits would not
cause the trader to be in violation based solely on
those positions. To the extent a trader’s pre-existing
positions would cause the trader to exceed the nonspot-month limit, the trader could not increase the
directional position that caused the positions to
exceed the limit until the trader reduces the
positions to below the position limit. As such,
persons who established a net position below the
speculative limit prior to the enactment of a
regulation would be permitted to acquire new
positions, but the total size of the pre-existing and
new positions may not exceed the applicable limit.

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Finally, proposed § 150.2(g) would
apply position limits to positions on
foreign boards of trade (‘‘FBOT’’s)
provided that positions are held in
referenced contracts that settle to a
referenced contract and that the FBOT
allows direct access to its trading system
for participants located in the United
States.
ii. Benefits
The criteria set out in CEA section
4a(a)(3)(B)—namely, that position limit
levels (1) ‘‘diminish, eliminate, or
prevent excessive speculation;’’ (2)
‘‘deter and prevent market
manipulation, squeezes, and corners;’’
(3) ‘‘ensure sufficient market liquidity
for bona fide hedgers;’’ and (4) ‘‘ensure
that the price discovery function of the
underlying market is not disrupted’’—
clearly articulate objectives that
Congress intended the Commission to
accomplish, to the maximum extent
practicable, in setting limit levels in
accordance with the mandate to impose
limits. The Commission is proposing to
expand its speculative position limits
regime to include all commodity
derivative interests, including swaps; to
impose federal limits on 19 additional
contract markets; and to apply limits
across trading venues to all
economically equivalent contracts that
are based on the same underlying
commodity.
In so doing, the proposed rules
generally would expand the
prophylactic protections of federal
position limits to additional contract
markets. Proposed § 150.2(f) and (g)
implement statutory directives in CEA
section 4a(b)(2) and CEA section
4a(a)(6)(B), respectively, and are not acts
of the Commission’s discretion. Thus,
the Commission is not required to
consider costs and benefits of these
provisions under CEA section 15(a).
Specific discussion of the benefits of the
other components of proposed § 150.2 is
below.
a. § 150.2(a) Spot-Month Speculative
Position Limits
As discussed above, CEA section
4a(a)(3)(A) now directs the Commission
to set limits on speculative positions
during the spot-month.761 It is during
the spot-month period that concerns
regarding certain manipulative
behaviors, such as corners and squeezes,
become most urgent.762 Spot-month
position limits cap speculative traders’
positions, and therefore restrict their
ability to amass market power. In so
doing, spot-month limits restrict the
761 7

U.S.C. 6a(a)(3)(A).
discussion above.

762 See

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ability of speculators to engage in
corners and squeezes and other forms of
manipulation. They also prevent the
potential adverse impacts of unduly
large positions even in the absence of
manipulation, thereby promoting a more
orderly liquidation process for each
contract.
The Commission has used its
discretion in the manner in which it
implements the statutorily-required
spot-month position limits so as to
achieve Congress’s objectives in CEA
section 4a(a)(3)(B)(ii) to prevent or deter
market manipulation, including corners
and squeezes. For example, the
Commission has used its discretion
under CEA section 4a(a)(1) to set
separate but equal limits in the spotmonth for physical-delivery and cashsettled referenced contracts. By setting
separate limits for physical-delivery and
cash-settled referenced contracts, the
proposed rule restricts the size of the
position a trader may hold or control in
cash-settled reference contracts, thus
reducing the incentive of a trader to
manipulate the settlement of the
physical-delivery contract in order to
benefit positions in the cash-settled
reference contract. Thus, the separate
limits further enhance the prevention of
market manipulation provided by spotmonth position limits by reducing the
potential for adverse incentives to
manifest in manipulative action.
b. § 150.2(b) Single-Month and AllMonths-Combined Speculative Position
Limits
CEA section 4a(a)(3)(A) further directs
the Commission to set limits on
speculative positions for months other
than the spot-month.763 While market
disruptions arising from the
concentration of positions remain a
possibility outside the spot month, the
above-mentioned concerns about
corners and squeezes and other forms of
manipulation are reduced because the
potential for the same is reduced
outside the spot-month. Accordingly,
the Commission has proposed to use its
discretion to require netting of physicaldelivery and cash-settled referenced
contracts for purposes of determining
compliance with non-spot-month limits.
The Commission deems it is appropriate
to provide traders with additional
flexibility in complying with the nonspot-months limits given their
decreased risk of corners and squeezes.
Because this additional flexibility
means market participants are able to
retain offsetting positions outside of the
spot-month, liquidity should not be
763 7

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impaired and price discovery should
not be disrupted.

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c. § 150.2(e) Levels of Speculative
Position Limits
The proposed methodology for
determining the levels at which the
limits are set is consistent with the
Commission’s longstanding acceptable
practices for DCM-set speculative
position limits. Further, the
Commission’s proposal to set initial
spot-month limits at the current federal
or DCM-set levels for each core
referenced futures contract means that
any trading activity that is compliant
with the current position limits regime
generally will continue to be compliant
under the first two years of the proposed
rule.764
The proposed rule is designed to
result in speculative position limit
levels that prevent excessive
speculation and deter market
manipulation without diminishing
market liquidity. Specifically, levels
that are too low may be binding and
overly restrictive, but levels that are too
high may not adequately protect against
manipulation and excessive
speculation. The Commission believes
that both standards—i.e., spot month
limits of not greater than 25 percent of
deliverable supply and the 10 and 2.5
percent formula for non-spot-month
limits—produce levels for speculative
position limits that help to ensure that
both policy objectives—to deter market
manipulation and excessively large
speculative positions and to maintain
adequate market liquidity—are achieved
to the maximum extent practicable.
The Commission’s review of the
number of potentially affected traders
indicates that the proposed rule will not
significantly affect market liquidity.
Over the last two full years (2011–2012),
an average of fewer than 40 traders in
any one of the 28 proposed markets
exceeded just 60 percent of the level of
the proposed spot-month position limit.
An average of fewer than 10 of those
traders exceeded 100 percent of the
proposed level of the spot-month
limit.765 In several months over the
period, no trader exceeded the proposed
764 The Commission notes that the CME Group
submitted an estimate of deliverable supply that, if
used by the Commission as a base for setting initial
levels of spot month limits, would result in higher
spot month limits than those currently proposed in
appendix D. See discussion above for more
information.
765 To put this figure in context, over the same
period the number of unique owners over at least
one of the proposed limit levels in the 28 proposed
markets was 384, while 932 unique owners were
over 60 percent of at least one of the proposed limit
levels. In contrast, under the large trader reporting
provisions of part 17, there are thousands of traders
with reportable positions as defined in § 15.00(p).

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level of the spot-month limits and some
months saw a much larger number of
traders with positions in excess of the
proposed level of the spot-month limits.
Smaller numbers were revealed when
observing traders’ positions in relation
to proposed levels for non-spot-month
position limits—an average of fewer
than 10 traders exceeded 60 percent of
the proposed all-months-combined
limit. The analysis reviewed by the
Commission does not account for
hedging and other exemptions, which
leads the Commission to believe that the
number of speculative traders in excess
of the proposed limit is even smaller.
The relatively low number of traders
that may exceed proposed limits in nonspot-months is indicative of the
flexibility of the limit formula to
account for changes in market
participation.
d. Request for Comment
The Commission welcomes comment
on its considerations of the benefits of
proposed § 150.2. What other benefits of
the provisions in § 150.2 should the
Commission consider? Has the
Commission accurately identified the
potential benefits of the proposed rules?
iii. Costs
The expansion of § 150.2 will
necessarily create some additional
compliance costs for market
participants. The Commission has
attempted, where feasible, to reduce
such burdens without compromising its
policy objectives.
a. § 150.2(a)–(b) Spot-Month, SingleMonths, and All-Months-Combined
Speculative Position Limits; Other
Considerations
Notwithstanding the above analysis of
potentially affected traders, the
Commission anticipates that some
market participants still may find it
necessary to reassess and modify
existing trading strategies in order to
comply with spot- and non-spot-month
position limits for the 28 commodities
with applicable federal limits, though
the Commission believes much of these
costs to be the direct result of the
statutory mandate to impose limits. The
Commission anticipates any such costs
would be largely incurred by swapsonly entities, as futures and options
market participants have experience
with position limits, particularly in the
spot-month, such that the costs of any
strategic or trading changes that needed
to be made may have already been
incurred. These costs are not reasonably
quantifiable by the Commission, due to
their highly variable and entity-specific
nature, and because trading strategies

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75767

are proprietary, but to the extent an
expanded position limits regime alters
the ways a trader conducts speculative
trading activity, such costs may be
incurred.
Broadly speaking, imposing position
limits raises the concerns that liquidity
and price discovery may be diminished,
because certain market segments, i.e.,
speculative traders, are restricted. The
Commission has endeavored to mitigate
concerns about liquidity and price
discovery, as well as costs to market
participants, by expanding limits to
additional markets incrementally in
order to facilitate the transition to the
expanded position limits regime. For
example, the Commission has proposed
to adopt current spot-month limit levels
as the initial levels in order to ensure
traders know well in advance of the
effective date of the rule what limits
will be on that date. The Commission
also expects a large number of swaps
traders to avail themselves of the preexisting position exemption as defined
in proposed § 150.3. As preexisting
positions are replaced with new
positions, traders will be able to
incorporate an understanding of the
new regime into existing and new
trading strategies, which allows the
burden of altering strategies to happen
incrementally over time. The
preexisting position exemption applies
to non-spot-month positions entered
into in good faith prior to (i) the
enactment of the Dodd-Frank Act or (ii)
the effective date of this proposed rule.
Implementing the statutory
requirement of CEA section 4a(a)(6), the
aggregate limits proposed in § 150.2
would impact, as described above,
market participants who are active
across trading venues in economically
equivalent contracts. Under current
practice, speculative traders may hold
positions up to the limit in each
derivative product for which a limit
exists. In contrast, aggregate limits cap
all of a speculative market participant’s
positions in derivatives contracts for a
particular commodity. In some
circumstances, the aggregate limit will
prevent traders from entering into
positions that would have otherwise
been permitted without aggregate
limits.766 The proposed rule
incorporates features that provide
766 For example, a market participant has a
position close to the spot-month limit in the
NYMEX cash-settled crude oil contract is currently
able to take the same size position in the ICE cashsettled crude oil contract. The proposed rule would,
in accordance with the statutory requirement of
CEA section 4a(a)(6), require that the positions on
NYMEX and ICE be aggregated for the purposes of
complying with the limit—effectively halving the
limit.

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counterbalancing opportunities for
speculative trading.
First, the limits apply separately to
physical-delivery and cash-settled
contracts in the spot-month. Physicaldelivery core referenced futures
contracts have one limit; cash-settled
reference contracts traded on the same
exchange, a different exchange, or overthe-counter have a separate, but equal,
limit. Therefore, a speculative trader
may hold positions up to the spot
month limit in both the physicaldelivery core referenced futures
contract, and a cash-settled contract
(i.e., cash-settled future and/or swap).
The second feature is the proposed
conditional spot-month limit
exemption. As discussed in a
subsequent section of this release, the
conditional spot-month limit exemption
allows a speculative trader to hold a
position in a cash-settled contract that is
up to five times the spot-month limit of
the core referenced futures contract,
provided that trader does not hold any
position in the physical-delivery core
referenced futures contract.
Finally, federal non-spot-month limits
are calculated as a fixed ratio of total
open interest in a particular commodity
across all markets for referenced
contracts. Because of this feature of the
Commission’s formula for calculating
non-spot-month limit levels and of the
proposed rule’s application of non-spotmonth limits on an aggregate basis
across all markets, the imposition of the
required aggregate limits should not
unduly impact positions outside of the
spot-month, as evidenced by the
relatively few number of traders that
would have been impacted historically,
noted in table 11, supra.
b. § 150.2(e) Levels of Speculative
Position Limits
Market participants would incur costs
to monitor positions to prevent a
violation of the limit level. The
Commission expects that large traders in
the futures and options markets for the
28 core referenced futures contracts
have already developed some system to
control the size of their positions on an
intraday basis, in compliance with the
longstanding position limits regimes
utilized by both the Commission on a
federal level and DCMs on an exchange
level and in light of industry practices
to measure, monitor, and control the
risk of positions. For these traders, the
Commission anticipates a small
incremental burden to accommodate
any physical commodity swap positions
that such traders may hold that would
become subject to the position limits
regime. The Commission, subject to
evidence establishing the contrary,

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believes the burden will be minimal
because futures and options market
participants are currently monitoring
trading to track, among other things,
their positions vis-a`-vis current limit
levels. For those participating in the
futures and options markets, the
Commission estimates two to three labor
weeks to adjust monitoring systems to
track position limits for referenced
contracts, including swaps and other
economically equivalent contracts
traded on other trading venues.
Assuming an hourly wage of $120,767
multiplied by 120 hours, this
implementation cost would amount to
approximately $14,000 per entity.
The incremental costs of compliance
with the proposed rule would be higher
for speculative traders who have until
now traded only or primarily in swap
contracts.768 Specifically, swaps-only
traders may potentially incur larger
start-up costs to develop a compliance
system to monitor their positions in
referenced contracts and to comply with
an applicable position limit. Though
swaps-only market participants have not
historically been subject to position
limits, swap dealers and major swap
participants (as defined by the
Commission pursuant to the DoddFrank Act) are required in § 23.601 to
implement systems to monitor position
limits.769 In addition, many of these
entities have already developed systems
or business processes to monitor or
control the size of swap positions for a
variety of business reasons, including (i)
managing counterparty credit risk
767 The Commission’s estimates concerning the
wage rates are based on 2011 salary information for
the securities industry compiled by the Securities
Industry and Financial Markets Association
(‘‘SIFMA’’). The Commission is using $120 per
hour, which is derived from a weighted average of
salaries across different professions from the SIFMA
Report on Management & Professional Earnings in
the Securities Industry 2011, modified to account
for an 1800-hour work-year, adjusted to account for
the average rate of inflation in 2012, and multiplied
by 1.33 to account for benefits and 1.5 to account
for overhead and administrative expenses. The
Commission anticipates that compliance with the
provisions would require the work of an
information technology professional; a compliance
manager; an accounting professional; and an
associate general counsel. Thus, the wage rate is a
weighted national average of salary for
professionals with the following titles (and their
relative weight); ‘‘programmer (senior)’’ and
‘‘programmer (non-senior)’’ (15% weight), ‘‘senior
accountant’’ (15%) ‘‘compliance manager’’ (30%),
and ‘‘assistant/associate general counsel’’ (40%).
All monetary estimates have been rounded to the
nearest hundred dollars.
768 The Commission notes that costs associated
with the inclusion of swaps contracts in the federal
position limits regime are the direct result of
changes made by the Dodd-Frank Act to section 4a
of the Act. The Commission presents a discussion
of these costs in order to be transparent regarding
the effects of the proposed rules.
769 See 17 CFR 23.601.

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exposure; and (ii) limiting and
monitoring the risk exposure to such
swap positions. Such existing systems
would likely make compliance with
position limits significantly less
burdensome, as they may be able to
leverage current monitoring procedures
to comply with this rule. The
Commission anticipates that a firm
could select from a wide range of
compliance systems to implement a
monitoring regime. This flexibility
allows the firm to tailor the system to
suit its specific needs in a cost-effective
manner.
In the release adopting now-vacated
part 151, the Commission recognized
the potentially firm-specific and highly
variable nature of implementing
monitoring systems. In particular, the
Commission presented estimates of, on
average, labor costs per entity ranging
from 40 to 1,000 hours, $5,000 to
$100,000 in five-year annualized
capital/start-up costs, and $1,000 to
$20,000 in annual operating and
maintenance costs.770 The Commission
explained that costs would likely be
lower for firms with positions far below
the speculative limits, but higher for
firms with large or complex positions as
those firms may need comprehensive,
real-time analysis.771 The Commission
further explained that due to the
variation in both number of positions
held and degree of sophistication in
existing risk management systems, it
was not feasible for the Commission to
provide a greater degree of specificity as
to the particularized costs for swaps
firms.772
At this time, the Commission remains
in the early stages of implementing the
suite of Dodd-Frank Act regulations
addressing swap markets now under its
jurisdiction. The Commission is
registering swap dealers and major
swaps participants for the first time.
Much of the infrastructure, including
execution facilities, of the new markets
has only recently become operational,
and the collection of comprehensive
regulatory data on physical commodity
swaps is in its infancy. Because of this,
the Commission is unable to estimate
with precision the likely number of
impacted swaps-only traders who
would be subject to position limits for
the first time. However, the Commission
770 See 76 FR at 71667. The presentation of costs
on a five-year annualized basis is consistent with
requirements under the Paperwork Reduction Act
(‘‘PRA’’). See OMB Form 83–I requiring the
Commission’s Paperwork Reduction Act analysis be
submitted with ‘‘annualized’’ costs in all categories.
Instructions for the form do not provide
instructions for annualizing costs; the Commission
chose to annualize over a five year period.
771 Id. (n. 401).
772 Id.

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
preliminarily believes that a relatively
small number of swaps-only traders will
be affected. The Commission anticipates
that most of the traders in swaps
markets that accumulate physical
commodity swap positions of a
sufficiently high volume to engender
concern for crossing position limit
thresholds either: Are required to
register as swap dealers or major swaps
participants and as such already have
systems in place to monitor limits in
accordance with § 23.601; or, are also
active in futures markets and as such
have the ability to leverage existing
strategies for monitoring limits.
Accordingly, for purposes of
proposing these amendments to § 150.2,
the Commission again estimates that
swaps entities will incur, on average,
labor costs per entity ranging from 40 to
1,000 hours; between $25,000 and
$500,000 in total (non-annualized)
capital/start-up costs and $1,000 to
$20,000 in annual operating and
maintenance costs. These estimates
provide a preliminary range of costs for
monitoring positions that reflects, on
average, costs that market participants
may incur based on their specific,
individualized needs.
Finally, proposed § 150.2(e)(3)(ii)
requires DCMs that list a core referenced
futures contract to supply to the
Commission estimates of deliverable
supply. The Commission proposes to
require staggered submission of the
deliverable supply estimates in order to
spread out the administrative burden of
the proposed rules. Further, for
contracts with DCM-set limits, an
exchange would have already estimated
deliverable supply in order to set spotmonth position limit or demonstrate
continued compliance with core
principles 3 and 5. Thus, the
Commission does not anticipate a large
burden to result from the proposed
§ 150.2(e)(3)(ii). The Commission
preliminarily believes that, as estimated
in accordance with the Paperwork
Reduction Act (‘‘PRA’’), the submission
would require a labor burden of
approximately 20 hours per estimate.
Thus, a DCM that submits one estimate
may incur a burden of 20 hours for a
cost, using the estimated hourly wage of
$120,773 of approximately $2,400. DCMs
that submit more than one estimate may
multiply this per-estimate burden by the
number of estimates submitted to obtain
an approximate total burden for all
submissions, subject to any efficiencies
and economies of scale that may result
from submitting multiple estimates.
c. Request for Comment
Do the estimates presented accurately
reflect the expected costs of monitoring

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position limits under the proposed rule?
Would the proposed rule engender
material costs for monitoring positions
addition to those the Commission has
identified? Are the assumptions
reflected in the Commission’s
consideration of the proposed rule’s
costs to monitor limits valid? If not, why
and to what degree?
Is the Commission’s view that
aggregate limits as proposed will not
create overly restrictive limit levels
valid? Would the aggregated, crossexchange nature of the limits as
proposed in § 150.2 engender material
costs that the Commission has not
identified?
Are there other cost factors related to
operational changes that the
Commission should consider? What
other factors should the Commission
consider?
The Commission requests that
commenters submit data or other
information to assist it in quantifying
anticipated costs of proposed § 150.2
and to support their own assertions
concerning costs associated with
proposed § 150.2.
iv. Consideration of Alternatives
The Commission recognizes there
exist alternatives to its discretionary
proposals herein. These include the
alternative of setting initial levels for
spot month speculative position limit
based on estimates of deliverable
supply, as provided by the CME Group,
rather than at the levels proposed in
appendix D. The Commission requests
comment on whether an alternative to
what is proposed, including setting
initial limits based on a current estimate
of deliverable supply, would result in a
superior benefit-cost profile, with
support for any such position provided.
4. Section 150.3—Exemptions
CEA section 4a(a)(7), added by the
Dodd-Frank Act, authorizes the
Commission to exempt, conditionally or
unconditionally, any person, swap,
futures contract, or option—as well as
any class of the same—from the position
limit requirements that the Commission
establishes. Current § 150.3 specifies
three types of positions for exemption
from calculation against the federal
limits prescribed by the Commission
under § 150.2: (1) Bona fide hedges, (2)
spreads or arbitrage between single
months of a futures contract (and/or, on
a futures-equivalent basis, options), and
(3) those of an ‘‘eligible entity’’ as that
term is defined in § 150.1(d) 774 carried
774 For example, an operator of a commodity pool
or certain other trading vehicle, a commodity
trading advisor, or another specified financial entity

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in a separate account by an independent
account controller (‘‘IAC’’) 775 when
specific conditions are met. The
Commission proposes to make
organizational and conforming changes
to § 150.3 as well as several substantive
changes. By exempting positions that
pose less risk of unduly burdening
interstate commerce from position limit
regulation, these substantive revisions
would further the Commission’s
mission specified in CEA section
4a(a)(3).
The proposed organizational/
conforming changes consist of updating
cross references; 776 relocating the IAC
exemption to consolidate it with the
Commission’s separate proposal to
amend the aggregation requirements of
§ 150.4; 777 and deleting the calendar
month spread provision that, due to
changes proposed under § 150.2, would
be rendered unnecessary.778 These
amendments will facilitate reader easeof-use and clarity. However, the
Commission foresees little additional
impact from these non-substantive
proposed amendments.
The proposed substantive changes to
§ 150.3 would revise an existing
exemption, add three additional
exemptions, and revise recordkeeping
requirements. As summarized in the
section below, proposed § 150.3 would:
(i) Codify in Commission regulation the
statutory requirement of CEA section
4a(c)(1) that federal position limits not
apply to bona fide hedging as defined by
the Commission; (ii) add exemptions for
financial distress situations, certain
spot-month positions in cash-settled
reference contracts, and pre-Dodd-Frank
and transition period swaps; (iii)
provide guidance for non-enumerated
exemptions, including the deletion of
§ 1.47; and (iv) revise recordkeeping
such as a bank, trust company, savings association,
or insurance company.
775 IACs are defined currently in 17 CFR 150.1(e).
Amendments to that definition are being proposed
in a separate release. See Aggregation NPRM.
776 Specifically, as described above: a) proposed
§ 150.3(a)(1)(i) would update the cross-references to
the bona fide hedging definition to reflect its
proposed replacement in amended § 150.1 from its
current location in § 1.3(z); b) proposed § 150.3(a)(3)
would add a new cross-reference to the reporting
requirements proposed to be amended in part 19;
and c) proposed § 150.3(i) would add a crossreference to the updated aggregation rules in
proposed § 150.4.
777 See Aggregation NPRM. The exemption for
accounts carried by an IAC is set out in proposed
§ 150.4(b)(5); adoption of that proposal would
render current § 150.3(a)(4) duplicative.
778 More specifically, as discussed supra, the
Commission proposes to amend § 150.2 to increase
the level of single month position limits to the same
level as all months limits. As a result, the spread
exemption set forth in current § 150.3(a)(3) that
permits a spread trader to exceed single month
limits only to the extent of the all months limit
would no longer provide useful relief.

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requirements for traders claiming any
exemption from the federal speculative
position limits.
i. Rule Summary
a. Section 150.3(a) Bona Fide Hedging
Exemption
As does current § 150.3(a)(1),
proposed § 150.3(a)(1)(i) will codify the
statutory requirement that bona fide
hedging positions be exempt from
federal position limits. To the extent
that benefits and costs would derive
from the Commission’s proposed
amendment in § 150.1 to the definition
of ‘‘bona fide hedging position’’ that is
discussed above. This proposed
amendment would also require that the
anticipatory hedging requirements
proposed in § 150.7, the recordkeeping
requirements proposed in § 150.3(g),
and the reporting requirements in
proposed part 19 are met in order to
claim the exemption. Any benefits and
costs attributable to these features of the
rule are considered below in the
respective discussions of proposed
§ 150.7, § 150.3(g) and Part 19.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

b. Section 150.3(b) Financial Distress
Exemption
Proposed § 150.3(b) provides the
means for market participants to request
relief from applicable speculative
position limits during times of market
stress. The proposed rule allows for
exemption under certain financial
distress circumstances, including the
default of a customer, affiliate, or
acquisition target of the requesting
entity, that may require an entity to
assume in short order the positions of
another entity.
c. Section 150.3(c) Conditional SpotMonth Limit Exemption
Proposed § 150.3(c) would provide a
conditional spot-month limit exemption
that permits traders to acquire positions
up to five times the spot month limit if
such positions are exclusively in cashsettled contracts. The conditional
exemption would not be available to
traders who hold or control positions in
the spot-month physical-delivery
referenced contract in order to reduce
the risk that traders with large positions
in cash-settled contracts would attempt
to distort the physical-delivery price to
benefit such positions.
The proposed conditional exemption
is consistent with current exchange-set
position limits on certain cash-settled
natural gas futures and swaps.779 Both
NYMEX and ICE have established
conditional spot month limits in their
cash-settled natural gas contracts at a
779 See

discussion above.

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level five times the level of the spot
month limit in the physical-delivery
futures contract. Since spot-month limit
levels for referenced contracts will be
set at no greater than 25 percent of the
estimated deliverable supply in the
relevant core referenced futures
contract, the proposed exemption would
allow a speculative trader to hold or
control positions in cash-settled
referenced contracts equal to no greater
than 125 percent of the spot month
limit.
Historically, the Commission has been
particularly concerned about protecting
the spot month in physical-delivery
futures contracts because they are most
at risk for corners and squeezes. This
acute risk is the reason that speculative
limits in physical-delivery markets are
generally set more restrictively during
the spot month. The conditional
exemption, as proposed, would
constrain the potential for manipulative
or disruptive activity in the physicaldelivery contracts during the spot
month by capping speculative trading in
such contracts; however, in parallel
cash-settled contracts, where the
potential for manipulative or disruptive
activity is much lower, the conditional
exemption would broaden speculative
trading opportunity, potentially
providing additional liquidity for bona
fide hedgers in cash-settled contracts.
In proposing the conditional limit, the
Commission has examined market data
on the effectiveness of conditional spotmonth limits in natural gas markets,
including the data submitted as part of
the rulemaking for now-vacated part
151.780 The Commission has also
examined market data in other
contracts, and has observed that open
interest levels naturally decline in the
physical-delivery contract leading up to
and during the spot month, as the
contract approaches expiration.781 Both
hedgers and speculators exit the
physical-delivery contract in order to,
for example, roll their positions to the
next contract month or avoid delivery
obligations. Market participants in cashsettled contracts, however, tend to hold
their positions through to expiration.
This market behavior suggests that the
conditional spot-month limit exemption
should not affect liquidity in the spot
month of the physical-delivery contract,
as open interest is rapidly declining.782
780 See

76 FR at 71635 (n. 100–01).
discussion above.
782 Traders participating in the physical-delivery
contract in the spot month are understood to have
a commercial reason or need to stay in the spot
month; the Commission preliminarily believes at
this time that it is unlikely that the factors keeping
traders in the spot month physical-delivery contract

The exemption, would, however,
provide the opportunity for speculative
trading to increase in the cash-settled
contract. The Commission preliminarily
believes that while this proposed
exemption would remove certain
constraints from speculative trading in
cash-settled contracts, it would not
damage liquidity in the aggregate, i.e.,
across physical-delivery and cashsettled contracts in the same
commodity. On this basis, the
Commission preliminarily believes a
conditional limit in additional
commodities is consistent with the
statutory direction to deter
manipulation while ensuring sufficient
liquidity for bona fide hedgers without
disrupting the price discovery process.
The Commission’s current proposal
would not restrict a trader’s cash
commodity position. Instead, the
Commission proposes to require
enhanced reporting of cash market
positions of traders availing themselves
of the conditional spot-month limit. As
discussed in the proposed changes to
part 19, the Commission proposes to
initially require this enhanced reporting
only for the natural gas contract until it
gains more experience administering the
conditional spot month limit in the
other referenced contracts. The
Commission preliminarily believes that
the proposed reporting regime in natural
gas will provide useful information that
can be deployed by surveillance staff to
detect and potentially deter
manipulative schemes involving the
cash market.
d. Section 150.3(d) Pre-Enactment and
Transition Period Swaps Exemption
To implement the statutory
requirement of CEA section 4a(b)(2),783
proposed § 150.3(d) would provide an
exemption from federal position limits
for swaps entered into prior to July 21,
2010 (the date of the enactment of the
Dodd-Frank Act), the terms of which
have not expired as of that date, and for
swaps entered into during the period
commencing July 22, 2010, the terms of
which have not expired as of that date,
and ending 60 days after the publication
of final rule § 150.3 in the Federal
Register, i.e., its effective date. The
Commission would allow both preenactment and transition swaps to be
netted with commodity derivative
contracts acquired more than 60 days
after publication of final rule § 150.3 in
the Federal Register for the purpose of

781 See

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will change due solely to the introduction of a
higher cash-settled contract limit.
783 CEA section 4a(b)(2) states in part that ‘‘any
position limit fixed by the Commission . . . good
faith prior to the effective date of such rule,
regulation or order.’’ 7 U.S.C. 6a(b)(2).

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complying with any non-spot-month
position limit.784 This exemption
facilitates the transition to full position
limits compliance for previously
unregulated swaps markets. Allowing
netting with pre-enactment and
transition swaps provides flexibility
where possible in order to lessen the
impact of the regime on entities that
trade swaps.
e. Section 150.3(e) and (f) Other
Exemptions and Previously Granted
Exemptions
Proposed § 150.3(e) and (f) provide
information on other exemptive relief
not specified by other sections of
§ 150.3. The Commission previously
permitted a person to file an application
seeking approval for a non-enumerated
position to be recognized as a bona fide
hedging position under § 1.47. Though
the Commission is proposing to delete
§ 1.47, the Commission believes it is
appropriate to provide persons the
opportunity to seek exemptive relief.
Proposed § 150.3(e) provides guidance
to persons seeking exemptive relief. A
person engaged in risk-reducing
practices that are not enumerated in the
revised definition of bona fide hedging
in proposed § 150.1 may use two
different avenues to apply to the
Commission for relief from federal
position limits. The person may request
an interpretative letter from
Commission staff pursuant to
§ 140.99 785 concerning the applicability
of the bona fide hedging position
exemption, or may seek exemptive relief
from the Commission under section
4a(a)(7) of the Act.786

emcdonald on DSK67QTVN1PROD with PROPOSALS2

f. Section 150.3(g) and (h)
Recordkeeping
Proposed § 150.3(g)(1) specifies
recordkeeping requirements for persons
who claim any exemption set forth in
proposed § 150.3. Persons claiming
exemptions under § 150.3 would need
to maintain complete books and records
concerning all details of their related
cash, forward, futures, options and swap
positions and transactions. Proposed
784 Because of concerns regarding manipulation
during the delivery period of a referenced contract,
the proposed rule would not allow pre- and postenactment and transition swaps to be netted for the
purpose of complying with any spot-month position
limit.
785 17 CFR 140.99 defines three types of staff
letters—exemptive letters, no-action letters, and
interpretative letters—that differ in terms of scope
and effect. An interpretative letter is written advice
or guidance by the staff of a division of the
Commission or its Office of the General Counsel. It
binds only the staff of the division that issued it (or
the Office of the General Counsel, as the case may
be), and third-parties may rely upon it as the
interpretation of that staff.
786 See supra discussion of CEA section 4a(a)(7).

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§ 150.3(g)(1) is largely duplicative of
other recordkeeping obligations
imposed on market participants,
including provisions in § 1.35 and
§ 18.05 as amended by the Commission
to conform with the Dodd-Frank Act.787
Proposed § 150.3(g)(2) require persons
seeking to rely upon the pass-through
swap offset exemption to obtain a
representation from its counterparty that
the swap qualifies as a bona fide
hedging position and to retain this
representation on file. Similarly,
proposed § 150.3(g)(3) requires a person
who makes such a representation to
maintain records supporting the
representation. Under proposed
§ 150.3(h), all persons would need to
make such books and records available
to the Commission upon request, which
would preserve the ‘‘call for
information’’ rule set forth in current
§ 150.3(b).
ii. Benefits
In articulating exemptions from
position limit requirements, § 150.3
works in concert with § 150.2 as it
pertains to Commission-specified
federal limits and with certain
requirements of § 150.5 pertaining to
exchange-set position limits.
Functioning as an integrated component
within the broader position-limits
regulatory regime, the Commission
believes the proposed changes to § 150.3
accomplish, to the maximum extent
practicable, the four objectives outlined
in CEA section 4a(a)(3). As such, the
Commission perceives these proposed
amendments to offer significant
benefits. These are explained more
specifically below.
a. Section 150.3(b) Financial Distress
Exemption
In codifying the Commission’s
historical practice of temporarily lifting
position limit restrictions, the proposed
rule further strengthens the benefits of
accommodating transfers of positions
from financially distressed firms to
financially secure firms or facilitating
other necessary remediation measures
during times of market stress. More
specifically, due to the improved facility
and transparency with respect to the
availability of this exemption, it
becomes less likely that positions will
be prematurely or unnecessarily
liquidated. The disorderly liquidation of
a position poses the threat of price
impacts that may harm the efficiency as
well as the price discovery function of
markets. In addition, the availability of
a financial distress exemption provides
market participants with a degree of
787 77

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confidence that the Commission has the
appropriate tools to facilitate the
transfer of positions expeditiously in
times of market uncertainty.
b. Section 150.3(c) Conditional Spotmonth Limit Exemption
The conditional spot-month limit
exemption provides speculators with an
opportunity to maintain relatively large
positions in cash-settled contracts up to
but no greater than 125 percent of the
spot-month limit. By prohibiting
speculators using the exemption in the
cash-settled contract from trading in the
spot-month of the physical-delivery
contract, the proposed rules should
further protect the delivery and
settlement process. In addition, the
condition of the exemption—i.e., a
trader availing himself of the exemption
may not have any position in the
physical-delivery contract—reduces the
ability for a trader with a large cashsettled contract position to attempt to
manipulate the physical-delivery
contract price in order to benefit his
position. As such, the conditional spotmonth limit exemption would further
three of the goals under CEA section
4a(a)(3)—deterring market
manipulation, and ensuring sufficient
market liquidity for bona fide hedgers,
without disrupting the price discovery
process.
The proposed rules are specifically
intended to provide an alternate
structure to the one that is currently in
place that also meets the objectives to
deter and prevent manipulation and to
ensure sufficient market liquidity. In
this way, the conditional limit
exemption provides flexibility for
market participants and the Commission
to meet the objectives outlined in CEA
section 4a(a)(3). The Commission
expects that market participants will
respond to the flexibility afforded by the
proposed exemption in order to fulfill
their needs in a manner that is
consistent with their business interests,
although it cannot reasonably predict
how markets, DCMs and market
participants will adapt. Accordingly, the
Commission requests comment on this
exemption, its potential impacts on
trading strategies, competition, and any
other direct or indirect costs to markets
or market participants and exchanges
that could arise as a result of the
conditional spot-month limit
exemption.
c. Section 150.3(d) Pre-Enactment and
Transition Period Swaps Exemption
The pre-existing swaps exemption in
proposed § 150.3(d) is consistent with
CEA section 4a(b)(2). This exemption
facilitates the transition to full position

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limits compliance for previously
unregulated swaps markets. Allowing
netting with post-enactment swaps
outside of the spot-month provides
flexibility where possible in order to
lessen the impact of the regime on
entities that trade swaps.

addition to those that the Commission
has identified? If so, what, and why and
how will they result? Has the
Commission misidentified or
overestimated any benefits likely to
result from the proposed exemptions? If
so, which and/or to what extent?

d. Section 150.3(e)–(f) Other
Exemptions and Previously Granted
Exemptions
The proposed amendments to
§ 150.3(e) and the replacement of
existing § 1.47 with new proposed
§ 150.3(f) are essentially clarifying and
organizational in nature. As such they
will confer limited substantive benefits
beyond providing market participants
with clarity regarding the process for
obtaining non-enumerated exemptive
relief and promoting regulatory
certainty for those granted exemptions
pursuant to § 1.47.

iii. Costs
In general, the exemptions proposed
in § 150.3 do not increase the costs of
complying with position limits, and in
fact may decrease these costs by
providing for relief from speculative
limits in certain situations. The
exemptions are elective, so no entity is
required to assert an exemption if it
determines the costs of doing so do not
justify the potential benefit resulting
from the exemption. Thus, the
Commission does not anticipate the
costs of obtaining any of the exemptions
to be overly burdensome. Nor does the
Commission anticipate the costs would
be so great as to discourage entities from
utilizing available exemptions, as
applicable.
Potential costs attendant to the
proposed amendments to § 150.3 are
discussed specifically below.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

e. Section 150.3(g) Recordkeeping
By requiring that market participants
who avail themselves of the exemptions
offered under § 150.3 maintain certain
records to document their exemption
eligibility and make such records
available to the Commission on request,
the rule reinforces proposed § 150.2 and
§ 150.3 and helps to accomplish, to the
maximum extent practicable, the goals
set out in CEA section 4a(a)(3)(B).
Supporting books and records are
critical to the Commission’s ability to
effectively monitor compliance with
exemption eligibility standards each
and every time an exemption is
employed. Absent this ability,
exemptions are more susceptible to
abuse. This susceptibility increases the
potential that position limits function in
a diminished capacity than intended to
prevent excessive speculation and/or
market manipulation.
f. Request for Comment
The Commission requests comments
on its considerations of the benefits
associated with the proposed
amendments to § 150.3, including data
or other information to assist the
Commission in identifying the number
and type of market participants that will
realize, respectively, the benefits
identified and/or to monetize such
benefits. Has the Commission correctly
identified market behavior and
incentives that affect or would likely be
affected by the conditional spot-month
limit exemption? What other potential
benefits could the conditional spotmonth limit exemption have for markets
and/or market participants? Will the
exemptions proposed likely result in
any benefits, direct or indirect, for
markets and/or market participants in

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a. Section 150.3(b) Financial Distress
Exemption
The Commission anticipates the costs
associated with the codification of the
financial distress exemption to be
minimal. Market participants who
voluntarily employ these exemptions
will incur costs stemming from the
requisite filing and recordkeeping
obligations that attend the
exemptions.788 Along with performing
its due diligence to acquire a distressed
firm, or positions held or controlled by
a distressed firm, an entity would have
to update and submit to the Commission
a request for the financial distress
exemption. The Commission is unable
at this time to accurately estimate how
often this exemption may be invoked, as
emergency or distressed market
situations by nature are unpredictable
and dependent on a variety of firm- and
market-specific idiosyncratic factors as
well as general macroeconomic
indicators. Given the unusual and
unpredictable nature of emergency or
distressed market situations, the
Commission anticipates that this
exemption would be invoked
infrequently, but is unable to provide a
more precise estimate. The Commission
also assumes that codifying the
proposed rule and thus lending a level
of transparency to the process will
788 See supra considerations of costs and benefits
of the proposed amendments to part 19 and the
Paperwork Reduction Act.

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result in an administrative burden that
is less onerous than the current regime.
In addition, the Commission believes
that in the case that one firm is
assuming the positions of a financially
distressed firm, the costs of claiming the
exemption would be incidental to the
costs of assuming the position.
b. Section 150.3(c) Conditional Spotmonth Limit Exemption
A market participant that elects to
exercise this exemption, one that is not
available under current rules, will incur
certain direct costs to do so. A person
seeking to utilize this exemption for the
natural gas market must file Form 504
in accordance with requirements listed
in proposed § 19.01.789 If that person
currently has any position in the
physical-delivery contract, such person
may incur costs associated with
liquidating that position in order to
meet the conditions of the conditional
spot-month limit exemption. As
previously discussed, the conditional
spot month limit is designed to deter
market manipulation without disrupting
the price discovery process. The
Commission does not have reason to
believe that liquidity, in the aggregate
(across the core referenced and
referenced contracts), will be adversely
impacted. However, the proposed rules
are specifically intended to provide an
alternative to the position limit regime
that is currently in place for the purpose
of deterring and preventing
manipulation and ensuring sufficient
market liquidity; the Commission
expects that market participants will
respond to the flexibility afforded by the
proposed exemption in order to fulfill
their needs in a manner that is
consistent with their business interests,
although it cannot reasonably predict
how markets, DCMs and market
participants will adapt. Accordingly, the
Commission requests comment on this
exemption, its potential impacts on
trading strategies, competition, and any
other direct or indirect costs to markets
or market participants and exchanges
that could arise as a result of the
conditional spot-month limit
exemption.
c. Section 150.3(d) Pre-Enactment and
Transition Period Swaps Exemption
The exemption offered in proposed
§ 150.3(d) is self-executing and would
not require a market participant to file
for relief. However, a firm may incur
costs to identify positions eligible for
789 Specific costs associated with filing Form 504
are considered above in the sections that implement
that form, namely the discussion of the costs and
benefits of proposed amendments to part 19 and the
Paperwork Reduction Act .

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the exemption and to determine if that
position is to be netted with postenactment swaps for purposes of
complying with a non-spot-month
position limit. Such costs would be
assumed voluntarily by a market
participant in order to avail itself of the
exemption, and the Commission does
not anticipate these costs to be overly
burdensome.
d. Section 150.3(e)–(f) Other
Exemptions and Previously Granted
Exemptions
Under the proposed § 150.3(e), market
participants electing to seek an
exemption other than those specifically
enumerated, will incur certain direct
costs to do so. First, they will incur
costs related to petitioning the
Commission under § 140.99 of the
Commission’s regulations or under CEA
section 4a(a)(7). To the extent these
costs may be marginally greater than a
market participant would experience to
seek an exemption under the process
afforded under current § 1.47—
something the Commission cannot rule
out at this time—the cost difference
between the two is attributable to this
rulemaking.790 Further, market
participants who had previously relied
upon the exemptions granted under
§ 1.47 would be able to continue to rely
on such exemptions for existing
positions. Going forward, market
participants would need to enter into a
new position that fits within applicable
limits or are eligible for an alternate
exemption, in which case the
participants may incur costs associated
with applying for such exemptions. The
Commission is unable to ascertain at
this time the number of participants
affected by these proposed regulations.
The Commission notes, however, that a
decision to incur the costs inherent in
seeking relief is voluntary.
e. Section 150.3(g) Recordkeeping
Finally, any person that elects to
exercise an exemption provided in
proposed § 150.3 would incur costs
attributable to additional recordkeeping
obligations under proposed § 150.3(e)–
(g). The Commission preliminarily
believes that these costs will be
minimal, as participants already
maintain books and records under a
variety of other Commission regulations
and as the information required in these
790 Alternatively, to the extent petitioning the
Commission under § 140.99 or under CEA section
4a(a)(7) results in lower costs relative to those
necessary to utilize the current § 1.47 process, the
cost difference is a benefit attributable to this
rulemaking. The Commission requests comment
concerning whether, and to what degree, requiring
petitions for exemption under § 140.99 or under
CEA section 4a(a)(7) in place of current § 1.47 is
likely to result in any material cost difference.

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sections is likely already being
maintained as part of prudent
accounting and risk management
policies and procedures. The
Commission preliminarily believes that,
as estimated in accordance with the
PRA, a total of 400 entities will incur an
annual labor burden of approximately
50 hours each, or 20,000 total hours for
all affected entities, to comply with the
additional recordkeeping obligations.
Using an estimated hourly wage of $120
per hour,791 the Commission anticipates
an annual burden of approximately
$6,000 per entity and a total of
$2,400,000 for all affected entities.
f. Request for Comment
The Commission requests comment
on its considerations of the costs
associated with the proposed changes to
§ 150.3. Are there other costs associated
with new exemptions that the
Commission should consider? With
respect to the proposed conditional
spot-month limit exemption,
specifically, the Commission welcomes
comments regarding the potential cost
impact on trading strategies, any other
direct or indirect costs to markets or
market participants that could arise as a
result of it, and the estimated number of
impacted entities.
iv. Consideration of Alternatives
The Commission recognizes that
alternatives may exist to discretionary
elements of § 150.3 proposed herein.
The Commission requests comment on
whether an alternative to what is
proposed would result in a superior
benefit-cost profile, with support for any
such position provided.
791 The Commission’s estimates concerning the
wage rates are based on 2011 salary information for
the securities industry compiled by the Securities
Industry and Financial Markets Association
(‘‘SIFMA’’). The Commission is using $120 per
hour, which is derived from a weighted average of
salaries across different professions from the SIFMA
Report on Management & Professional Earnings in
the Securities Industry 2011, modified to account
for an 1800-hour work-year, adjusted to account for
the average rate of inflation in 2012, and multiplied
by 1.33 to account for benefits and 1.5 to account
for overhead and administrative expenses. The
Commission anticipates that compliance with the
provisions would require the work of an
information technology professional; a compliance
manager; an accounting professional; and an
associate general counsel. Thus, the wage rate is a
weighted national average of salary for
professionals with the following titles (and their
relative weight); ‘‘programmer (senior)’’ and
‘‘programmer (non-senior)’’ (15% weight), ‘‘senior
accountant’’ (15%) ‘‘compliance manager’’ (30%),
and ‘‘assistant/associate general counsel’’ (40%).
All monetary estimates have been rounded to the
nearest hundred dollars.

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75773

5. Section 150.5—Exchange-Set
Speculative Position Limits
Current § 150.5 addresses the
requirements and acceptable practices
for exchanges in setting speculative
position limits or position
accountability levels for futures and
options contracts traded on each
exchange. As further described
above,792 the CFMA’s amendments to
the CEA in 2000 gave DCMs discretion
to set those limits or levels within the
statutory requirements of core principle
5.793 With this grant of statutory
discretion, § 150.5 became non-binding
guidance and accepted practice to assist
the exchanges in meeting their statutory
responsibilities under the core
principles.794 Subsequently, the DoddFrank Act scaled back the discretion
afforded DCMs for establishing position
limits under the earlier CFMA
amendments. Specifically, among other
things, the 2010 law: (1) amended core
principle 1 to expressly subordinate
DCMs’ discretion in complying with
statutory core principles to Commission
rules and regulations; and (2) amended
core principle 5 to additionally require
that, with respect to contracts subject to
a position limit set by the Commission
under CEA section 4a, a DCM must set
limits no higher than those prescribed
by the Commission.795 The Dodd-Frank
Act also added parallel core principle
obligations on newly-authorized SEFs,
including SEF core principle 6
regarding the establishment of position
limits.796
792 See

discussion above.
section 5(d)(5) (specifying DCM core
principle 5 titled ‘‘Position Limits or
Accountability’’).
794 Specifically, in 2001, the Commission adopted
in part 38 app. B (Guidance on, and acceptable
Practices in, Compliance with Core Principles), 66
FR 42256, 42280, Aug. 10, 2001, an acceptable
practice for compliance with DCM core principle 5
that stated ‘‘[p]rovisions concerning speculative
position limits are set forth in part 150.’’ Current
§ 150.5 states that each DCM shall ‘‘limit the
maximum number of contracts a person may hold
or control, separately or in combination, net long
or net sort, for the purchase or sale of a commodity
for future delivery or, on a futures-equivalent basis,
options thereon,’’ with certain exemptions.
Exemptions from federal limits include major
foreign currencies and ‘‘spread, straddles or
arbitrage’’ exemptions. Current § 150.5 expressly
excludes bona fide hedging positions from limits,
but acknowledges that exchanges may limit
positions ‘‘not in accord with sound commercial
practices or exceed an amount which may be
established and liquidated in an orderly fashion.’’
795 Dodd-Frank Act section 735(b). CEA section
4a(e), effective prior to, and not amended by, the
Dodd-Frank Act, likewise provides that position
limits fixed by a board of trade not exceed federal
limits. 7 U.S.C. 6a(e).
796 Dodd-Frank Act section 733 (adding CEA
section 5h; 7 U.S.C. 7b–3).
793 CEA

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i. Rule Summary

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In light of these Dodd-Frank Act
statutory amendments, the Commission
proposes to amend § 150.5 to specify
certain binding requirements with
which DCMs and SEFs must comply in
establishing exchange-set limits. 797
Specifically, proposed § 150.5(a)(1)
would require that DCMs and SEFs set
limits for contracts listed in § 150.2(d) at
a level not higher than the levels
specified in § 150.2. Proposed
§ 150.5(a)(5) and (b)(8) would require
that exchanges adopt aggregation rules
that conform to proposed § 150.4 for all
contracts, including those contracts
subject to federal speculative limits.
Proposed § 150.5(a)(2)(i) and (b)(5)(i)
would require that exchanges conform
their bona fide hedging exemption rules
to the proposed § 150.1 definition of
bona fide hedging for all contracts,
including those contracts subject to
federal speculative limits. Proposed
§ 150.5(a)(2)(iii) and (b)(5)(iii) would
require that exchanges condition any
exemptive relief from federal or
exchange-set position limits on an
application from the trader.798 To the
extent an exchange offers exemptive
relief for intra- and inter-market spread
positions for contracts subject to federal
limits under proposed § 150.2, proposed
§ 150.5(a)(2)(i) and (ii) would require
that the exchange provide such relief
only outside of the spot month for
physical-delivery contracts and, with
respect to intra-market spread positions,
on the condition that such positions do
not exceed the all-months limit. Finally,
proposed § 150.5(a)(4) would further
implement the statutory provision in
CEA section 4a(b)(2) that exempts preexisting positions, while § 150.5(a)(3)
would require exchanges to mirror the
Commission’s exemption in proposed
§ 150.3 for pre-enactment and transition
period swaps from exchange-set limits
on contracts subject to limits under
proposed § 150.2. Proposed § 150.5(a)(3)
would also require exchanges to allow
the netting of pre-enactment and
transition swaps with post-effective date
797 As discussed above, proposed § 150.5 also
would continue to incorporate non-exclusive
guidance and acceptable practices for DCMs and
SEFs with respect to setting limits with and without
a measurable deliverable supply, adopting position
accountability in lieu of a position limits scheme,
and adjusting limit levels, among other things. As
non-binding guidance and acceptable practices,
these components of the rulemaking are not binding
Commission regulations or orders subject to the
requirement of CEA section 15(a).
798 The Commission notes that for contracts
subject to federal limits, exchange-granted
exemptions would need to conform with the
standards in proposed § 150.5(a)(2)(i) for hedge
exemptions and proposed § 150.5(a)(2)(ii) for other
exemptions.

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commodity derivative contracts for the
purpose of complying with any nonspot-month position limit.
Two of these proposed
requirements—i.e., that for contracts
subject to limits specified in § 150.2,
DCMs and SEFs set limits no higher
than those specified in § 150.2, and that
pre-existing positions must be exempted
from exchange-set limits on contracts
subject to § 150.2—exclusively codify
statutory requirements, and therefore
reflect no exercise of Commission
discretion subject to CEA section 15(a).
The other-listed requirements, however,
do involve Commission discretion, the
costs and benefits of which are
considered below.
ii. Benefits
Functioning as an integrated
component within the broader positionlimits regulatory regime, the
Commission expects the proposed
changes to § 150.5 would further the
four objectives outlined in CEA section
4a(a)(3).799 As explained more fully
below, the Commission believes these
proposed amendments offer significant
benefits.
a. Section 150.5(a)(5) and (b)(8)
Aggregation
CEA section 4a(a)(1) states that the
Commission, ‘‘[in] determining whether
any person has exceeded such limits,’’
must include ‘‘the positions held and
trading done by any persons directly or
indirectly controlled’’ by such person.
Pursuant to this statutory direction, the
Commission has proposed in a separate
release amendments to its aggregation
policy, located in § 150.4.800 The
regulations proposed in this release
require that exchange-set limits employ
aggregation policies that conform to the
Commission’s aggregation policy both
for contracts that are subject to federal
limits under § 150.2 and those that are
not, thus harmonizing aggregation rules
for all federal and exchange-set
speculative position limits.
For contracts subject to federal
speculative position limits under
proposed § 150.2, the Commission
anticipates that a harmonized approach
to aggregation will prevent confusion
that otherwise might result from
allowing divergent standards between
federal and exchange-set limits on the
same contracts. Further, the proposed
approach would prevent the kind of
799 CEA section 4a(a)(3)(B) applies for purposes of
setting federal limit levels. 7 U.S.C. 6a(a)(3)(B). The
Commission considers the four factors set out in the
section relevant for purposes of considering the
benefits and costs of these proposed amendments
addressed to exchange-set position limits as well.
800 See Aggregation NPRM.

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regulatory arbitrage that may impede the
benefits of the federal speculative
position limits regime. The harmonized
approach to aggregation policies for
limits on all levels eliminates the
potential for exchanges to use
permissiveness in aggregation policies
as a competitive advantage and
therefore prevents a ‘‘race to the
bottom,’’ which would impair the
effectiveness of the Commission’s
aggregation policy. In addition, DCMs
and SEFs are required to set position
limits at a level not higher than that set
by the Commission. Differing
aggregation standards may have the
practical effect of lowering a DCM- or
SEF-set limit to a level that is lower
than that set by the Commission.
Accordingly, harmonizing aggregation
standards reinforces the efficacy and
intended purpose of §§ 150.5(a)(2)(iii)
and (b)(5)(iii) by foreclosing an avenue
to circumvent applicable limits.
Moreover, by extending this
harmonized approach to contracts not
included in proposed § 150.2, the
Commission is proposing a common
standard for all federal and exchange-set
limits. The proposed rule provides
uniformity, consistency, and certainty
for traders who are active on multiple
trading venues, and thus should reduce
the administrative burden on traders as
well as the burden on the Commission
in monitoring the markets under its
jurisdiction.
b. Section 150.5(a)(2)(i) and (b)(5)(i)
Hedge Exemptions
The proposed rules also promote a
common standard for bona fide hedging
exemptions by requiring such
exemptions granted by an exchange to
conform with the proposed definition of
bona fide hedging in § 150.1. For
contracts subject to federal limits under
proposed § 150.2, the proposed rules
under § 150.5(a)(2)(i) prescribe a
harmonized approach intended to
prevent the confusion that may arise
should the same contract have differing
standards of bona fide hedging between
the Commission’s federal standard and
the standard on any given exchange. As
discussed above, the definition of bona
fide hedging proposed by the
Commission in this release allows only
positions that represent legitimate
commercial risk to be exempt from
position limits. Deviation from this
definition could impede the
effectiveness of the Commission’s
position limit regime by potentially
allowing positions to be improperly
exempted from speculative limits.
Proposed § 150.5(b)(5)(i) would
extend this common standard of bona
fide hedging to contracts not subject to

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federal speculative limits, thereby
creating a single standard across all
trading venues that would reduce the
administrative burden on market
participants trading on multiple trading
venues and the burden on the
Commission of monitoring the markets
under its jurisdiction.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

c. Section 150.5(a)(2)(iii) and (b)(5)(iii)
Application for Exemption
Proposed § 150.5 requires traders to
apply to the exchange for any
exemption from position limits.
Requiring traders to apply to the
exchange affirms the position of the
DCM or SEF as the front-line regulator
for position limits while providing the
exchanges with information that can be
used to ensure the legitimacy of a
trader’s position with regards to its
eligibility for exemptive relief. By
gathering information from traders’
applications for exemption, exchanges
will have a complete record of all
exemptions requested, granted, and
denied, as well as information about the
commercial operations of traders who
apply for exemptions. Because the
Commission has not specified a format
for such exemption applications,
exchanges have flexibility to determine
which information will best inform the
exchange’s self-regulatory operations
and obligations.
The Commission understands that
many DCMs are already requiring
applications for exemptive relief from
speculative position limits,801 and that
SEFs are likely to adopt this practice as
a ‘‘best practice’’ for complying with
core principles. As such, the proposed
rules codify an industry ‘‘best practice’’
regarding position limits and promote
the continuation of the benefits of that
best practice across all trading venues
and all commodity derivative contracts.
d. Section 150.5(a)(2)(ii) Other
Exemptions
As discussed above, the Commission
is proposing to set single-month limits
at the same levels as all-months limits,
rendering the ‘‘spread’’ exemption in
current § 150.3 unnecessary. However,
since DCM core principle 5 allows
exchanges to set more restrictive levels
than those set by the Commission, a
DCM or SEF may set the single month
limit at a lower level than that of the allmonth limit. Further, because federal
limits apply across trading venues,
exchanges may grant spread exemptions
for inter-market spreads across
exchanges. As such, the Commission is
801 See, e.g., CME Rule 559; NYMEX Rule 559;
CBOT Rule 559; KCBT Rule 559; ICE Futures Rules
6.26, 6.27, and 6.29; and MGEX Rule 1504.00.

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proposing § 150.5(a)(2)(ii) to clarify the
types of spread positions for which a
DCM or SEF may grant exemptions by
cross-referencing the definitions
proposed in § 150.1 802 and to require
that any such exemption be outside of
the spot month for physical-delivery
contracts.
This exemption would provide
exchanges with certainty regarding the
application of spread exemptions for
contracts subject to federal limits under
proposed § 150.2. Should an exchange
decide to provide exemptive relief for
spread positions, the exemption
described in § 150.5(a)(2)(ii) promotes
the intended goals of federal speculative
limits, including protection of the spot
period in the physical-delivery contract
and exemption of positions as
appropriate.
e. Section 150.5(a)(3) Pre-Enactment and
Transition Period Swaps Positions
Proposed § 150.5(a)(3) requires DCMs
and SEFs to exempt pre-enactment and
transition period swaps as defined in
proposed § 150.1 from exchange-set
limits on contracts subject to federal
limits under proposed § 150.2. This
provision mirrors the exemption
proposed in § 150.3 and requires that
exchanges provide the same relief as the
Commission for pre-existing swaps
positions.
Further, requiring that DCMs and
SEFs allow netting of pre-and-post
enactment swaps outside of the spot
month provides additional flexibility on
an exchange level for market
participants in transitioning to a
position limits regime that includes
swaps.
f. Request for Comment
The Commission requests comment
on its consideration of the benefits of
proposed § 150.5. Are there additional
benefits that the Commission should
consider? Has the Commission
misidentified any benefits?
iii. Costs
DCMs presently have considerable
experience in setting and administering
speculative position limits and hedge
exemption programs in line with
existing Commission guidance and
acceptable practices that run parallel in
most respects to the requirements that
are incorporated in the proposed rule.
Accordingly, as a general matter, the
Commission anticipates minimal cost
impact on DCMs from these proposed
requirements; relative to DCMs, the cost
802 The terms ‘‘inter-market spread’’ and ‘‘intramarket spread’’ are defined in proposed § 150.1.

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75775

impact for SEFs as newly-instituted
entities may be somewhat greater.
The Commission notes that recently
adopted § 37.204 of the Commission’s
regulations allows SEFs the flexibility to
contract with a third-party regulatory
service provider 803 to fulfill certain
regulatory obligations.804 The
administration of position limits is
within the range of obligations eligible
for outsourcing to a third-party
regulatory service provider. Presumably,
a SEF will avail itself of this flexibility
if doing so results in lower costs for the
entity. In order to better inform itself
with respect to the cost implications of
this proposed rule for SEFs, the
Commission requests comment on the
likelihood of SEFs utilizing a third-party
regulatory service provider to comply
with its position limits obligations and
the expected dollar costs of doing so.
The Commission also requests comment
on the expected dollar costs of meeting
the proposed rule’s requirement if a SEF
undertakes to perform the proposed
rule’s obligations in-house rather than
outsourcing them.
The following discusses potential
costs with respect to the specific
discretionary aspects of the rule to
which they are attributable.
a. Section 150.5(a)(5) and (b)(8)
Aggregation and § 150.5(a)(2)(i) and
(b)(5)(i) Hedge Exemptions
DCMs may incur costs to amend their
current aggregation and bona fide
hedging policies to conform with
proposed § 150.4 and proposed § 150.1
respectively. Such costs may include
burdens associated with reviewing and
evaluating current standards to assess
differences that must be addressed,
employing legal counsel to aid in
ensuring conformity, and transitioning
from an old standard to the new one.
Because the burden associated with this
rule is proportional to the divergence of
a DCM’s current standard from the
Commission’s proposed standard, costs
are specific and proprietary to each
affected entity; as such, the Commission
is unable to estimate costs at this time
within a range of reasonable accuracy. It
requests comment to assist it in doing
so.
SEFs, as newly-instituted entities,
will be required to incur costs to
develop aggregation and bona fide
hedging policies that conform to the
appropriate provisions as required
803 Under § 37.204, possible third-party regulatory
service providers include registered futures
associations (such as the National Futures
Association (NFA)), registered entities (such as
DCMs or SEFs), and the Financial Industry
Regulatory Authority (FINRA).
804 See 78 FR 33476, 33516, Jun. 4, 2013.

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under proposed § 150.5. Such costs are
likely to include legal counsel, as well
as drafting and implementation of the
new policy. Because these entities are
new and have not previously been
subject to the Commission’s oversight in
this capacity, the Commission requests
comment regarding the costs associated
with implementing the appropriate
policies.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

b. Section 150.5(a)(2)(iii) and (b)(5)(iii)
Application for Exemption
The Commission anticipates that
DCMs will incur minimal costs to
administer the application process for
exemption relief in accordance with
standards set forth in the proposed rule.
As described above, the Commission
understands that requiring traders to
apply for exemptive relief comports
with existing DCM practice.
Accordingly, by incorporating an
application requirement that the
Commission has reason to understand
most if not all active DCMs already
follow, the rule should have little cost
impact for DCMs.
For SEFs, the rules necessitate a
compliant application regime, which
will require an initial investment
similar to that which DCMs have likely
already made and need not duplicate.
As noted above, the Commission
considers it highly likely that, in
accordance with industry best practices
to comply with core principles and due
to the utility of application information
in demonstrating compliance with core
principles, SEFs may incur such costs
with or without the proposed rules.
Again, due to the new existence of these
entities, the Commission is unable to
estimate what costs may be associated
with the requirement to impose an
application regime for exemptive relief
on the exchange level. The Commission
requests comment regarding the burden
on a SEF to impose a compliant
application regime.
c. Section 150.5(a)(2)(ii) Other
Exemptions
Proposed § 150.5(a)(2)(ii) provides
clarity on the imposition of exemptions
for spread positions on contracts subject
to federal limits under proposed § 150.2
in accordance with new definitions
proposed in § 150.1. The Commission
notes again that the rules would apply
if the single-month limit is at a lower
level than the all-month limit, which
would occur if a DCM or SEF
determines to set more restrictive levels
for a single-month limit that what has
been set by the Commission, or if the
exchange grants inter-market spread
exemptions. Thus, the Commission
anticipates that a DCM or SEF that has

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determined to set a more restrictive
limit will have done so having taken
into account any burden imposed by the
proposed rule. Further, some trading
venues already grant inter-market
spread exemptions on certain
commodities; such entities may be able
to leverage current practices to extend
such spread exemptions to other
commodities as appropriate.
The Commission expects small costs
to be associated with communicating
and monitoring the appropriate
conditions for exemption as described
in proposed § 150.5(a)(2)(ii), namely
that such position must be solely
outside of the spot-month of the
physical-delivery contract.
d. Request for Comment
The Commission requests comment
on its considerations of the costs of
proposed § 150.5. Are there additional
costs that the Commission should
consider? Has the Commission
misidentified any costs? What other
relevant cost information or data,
including alternative cost estimates,
should the Commission consider and
why?
iv. Consideration of Alternatives
The Commission recognizes that
alternatives may exist to discretionary
elements of § 150.5 proposed herein.
The Commission requests comment on
whether an alternative to what is
proposed would result in a superior
benefit-cost profile, with support for any
such position provided.
6. Section 150.7—Reporting
Requirements for Anticipatory Hedging
Positions
The revised definition of bona fide
hedging in proposed § 150.1
incorporates hedges of five specific
types of anticipated transactions:
unfilled anticipated requirements,
unsold anticipated production,
anticipated royalties, anticipated
services contract payments or receipts,
and anticipatory cross-hedges.805 The
Commission proposes reporting
requirements in new § 150.7 for traders
seeking an exemption from position
limits for any of these five enumerated
anticipated hedging transactions.
Proposed § 150.7 would build on, and
replace, the special reporting
requirements for hedging of unsold
anticipated production and unfilled
805 See, paragraphs (3)(iii), (4)(i), (iii), and (iv),
and (5), respectively, of the Commission’s amended
definition of bona fide hedging transactions in
proposed § 150.1.

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anticipated requirements in current
§ 1.48.806
Current § 1.48 provides a procedure
for persons to file for bona fide hedging
exemptions for anticipated production
or unfilled requirements when that
person has not covered the anticipatory
need with fixed-price commitments to
sell a commodity, or inventory or fixedprice commitments to purchase a
commodity. It reflects a long-standing
Commission concern for the difficulty of
distinguishing between reduction of risk
arising from anticipatory needs and that
arising from speculation if anticipatory
transactions are not well defined.807
These same concerns apply to any
position undertaken to reduce the risk
of anticipated transactions. To address
them, the Commission proposes to
extend the special reporting
requirements in proposed § 150.7 for all
types of enumerated anticipatory hedges
that appear in the definition of bona fide
hedging positions in proposed
§ 150.1.808
The Commission proposes to add a
new series ’04 reporting form, Form 704,
to effectuate these additional and
updated reporting requirements for
anticipatory hedges. Persons wishing to
avail themselves of an exemption for
any of the anticipatory hedging
transactions enumerated in the updated
definition of bona fide hedging in
proposed § 150.1 would be required to
file an initial statement on Form 704
with the Commission at least ten days
in advance of the date that such
positions would be in excess of limits
established in proposed § 150.2.
Proposed § 150.7(f) would add a
requirement for any person who files an
initial statement on Form 704 to provide
annual updates that detail the person’s
actual cash market activities related to
the anticipated exemption. Proposed
§ 150.7(g) would similarly enable the
Commission to review and compare the
806 See 17 CFR 1.48. See also definition of bona
fide hedging transactions in current 17 CFR
1.3(z)(2)(i)(B) and (ii)(C), respectively.
807 See Hedging Anticipated Requirements for
Processing or Manufacturing under Section 4a(3) of
the Commodity Exchange Act, 21 FR 6913, Sep. 12,
1956.
808 For purposes of simplicity, the proposed
special reporting requirements for anticipatory
hedges would be placed within the Commission’s
position limits regime in part 150, and alongside
the Commission’s updated definition of bona fide
hedging positions in proposed § 150.1; rendered
duplicative by these changes, current § 1.48 would
be deleted. In another non-substantive change,
proposed § 150.7(i) would replace current § 140.97
which delegates to the Director of the Division of
Market Oversight or his designee authority
regarding requests for classification of positions as
bona fide hedging under current §§ 1.47 and 1.48.
For purposes of simplicity, this delegation of
authority would be placed within the Commission’s
position limits regime in part 150.

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emcdonald on DSK67QTVN1PROD with PROPOSALS2

actual cash activities and the remaining
unused anticipated hedge transactions
by requiring monthly reporting on Form
204.
As is the case under current § 1.48,
proposed § 150.7(h) requires that a
trader’s maximum sales and purchases
must not exceed the lesser of the
approved exemption amount or the
trader’s current actual anticipated
transaction.
i. Benefits and Costs
As noted above, the Commission
remains concerned that distinguishing
whether an over-the-limit position is
entered into in order to reduce risk
arising from anticipatory needs, or
whether it is speculative, may be
exceedingly difficult if anticipatory
transactions are not well defined. The
Commission proposes to add, in its
discretion, proposed § 150.7 to collect
vital information to aid in this
distinction. Advance notice of a trader’s
intended maximum position in
commodity derivative contracts to offset
anticipatory risks would identify—in
advance—a position as a bona fide
hedging position, avoiding unnecessary
contact during the trading day with
surveillance staff to verify whether a
hedge exemption application is in
process, the appropriate level for the
exemption and whether the exemption
is being used in a manner that is
consistent with the requirements.
Market participants can anticipate
hedging needs well in advance of
assuming positions in derivatives
markets and in many cases need to
supply the same information after the
fact; in such cases, providing the
information in advance allows the
Commission to better direct its efforts
towards deterring and detecting
manipulation. The annual updates in
proposed § 150.7(f) similarly allow the
Commission to verify on an ongoing
basis that the person’s anticipated cash
market transactions closely track that
person’s real cash market activities.
Absent monthly filing pursuant to
proposed § 150.7(g), the Commission
would need to issue a special call to
determine why a person’s commodity
derivative contract position is, for
example, larger than the pro rata
balance of her annually reported
anticipated production.
The Commission understands that
there will be costs associated with
proposed § 150.7(f) in the filing of Form
704. Costs of filing that form are
discussed in the context of the proposed
part 19 requirements.
The Commission requests comments
on its consideration of the costs and
benefits of proposed § 150.7. Are there

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additional costs or benefits the
Commission should consider? What
costs may be incurred beyond those
incurred to gather information and file
Form 704? Should the Commission
consider alternatives to its annual
updating requirement? The Commission
also recognizes that alternatives may
exist to discretionary elements of
§ 150.7 proposed herein. The
Commission requests comments on
whether an alternative to what is
proposed would result in a superior
benefit-cost profile, with support for any
such position provided.
CEA Section 4i authorizes the
Commission to require the filing of
reports, as described in CEA section 4g,
when positions equal or exceed position
limits. Current part 19 of the
Commission’s regulations sets forth
these reporting requirements for persons
holding or controlling reportable futures
and option positions that constitute
bona fide hedge positions as defined in
§ 1.3(z) and in markets with federal
speculative position limits—namely
those for grains, the soy complex, and
cotton. Since having a bona fide hedge
exemption affords a commercial market
participant the opportunity to hold
positions that exceed a position limit
level, it is important for the Commission
to be able to verify that when an
exemption is invoked that it is done so
for legitimate purposes. As such,
commercial entities that hold positions
in excess of those limits must file
information on a monthly basis
pertaining to owned stocks and
purchase and sales commitments for
entities that claim a bona fide hedging
exemption.
In order to help ensure that the
additional exemptions described in
proposed § 150.3 are used in accordance
with the requirements of the exemption
employed, as well as obtain information
necessary to verify that any futures,
options and swaps positions established
in referenced contracts are justified, the
Commission proposes to make
conforming and substantive
amendments to part 19. First, the
Commission proposes to amend part 19
by adding new and modified crossreferences to proposed part 150,
including the new definition of bona
fide hedging position in proposed
§ 150.1.809 Second, the Commission
proposes to amend § 19.00(a) by
extending reporting requirements to any
809 These amendments are non-substantive
conforming amendments and should not have
implications for the Commission’s consideration of
costs and benefits.

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person claiming any exemption from
federal position limits pursuant to
proposed § 150.3. The Commission
proposes to add three new series ’04
reporting forms to effectuate these
additional reporting requirements.
Third, the Commission proposes to
update the manner of part 19 reporting.
Lastly, the Commission proposes to
update both the type of data that would
be required in series ’04 reports, as well
as the time allotted for filing such
reports.
i. Rule Summary
a. Extension of Reporting Requirements

7. Part 19—Reports

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Proposed part 19 will be expanded to
include reporting requirements for
positions in swaps, in addition to
futures and options positions, for any
instance in which a person relies on an
exemption. Therefore, positions in
‘‘commodity derivative contracts,’’ as
defined in proposed § 150.1, would
replace ‘‘futures and option positions’’
throughout amended part 19 as
shorthand for any futures, option, or
swap contract in a commodity (other
than a security futures product as
defined in CEA section 1a(45)).810
The Commission also proposes to
extend the reach of part 19 by requiring
all persons who avail themselves of any
exemption from federal position limits
under proposed § 150.3 to file
applicable series ’04 reports.811 The list
of positions set forth in proposed
§ 150.3 that are eligible for exemption
from the federal position includes, but
is not limited to, bona fide hedging
positions (including pass-through swaps
and anticipatory bona fide hedge
positions), qualifying spot month
positions in cash-settled referenced
contracts, and qualifying nonenumerated risk-reducing transactions.
The Commission currently requires
two monthly reports, CFTC Forms 204
and 304, which are listed in current
§ 15.02.812 The reports, collectively
referred to as the Commission’s ‘‘series
’04 reports,’’ show a trader’s positions in
the cash market and are used by the
Commission to determine whether a
trader has sufficient cash positions that
justify futures and option positions
above the speculative limits. CFTC
Form 204 is the Statement of Cash
Positions in Grains, which includes the
soy complex, and CFTC Form 304
Report is the Statement of Cash
810 See supra discussion of proposed amendments
to part 19.
811 Furthermore, anyone exceeding the federal
limits who has received a special call must file a
series ’04 form.
812 17 CFR 15.02.

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Positions in Cotton.813 The Commission
proposes to add three new series ’04
reporting forms to effectuate the
expanded reporting requirements of part
19. Proposed CFTC Form 504, Statement
of Cash Positions for Conditional Spot
Month Exemptions, would be added for
use by persons claiming the conditional
spot month limit exemption pursuant to
proposed § 150.3(c). Proposed CFTC
Form 604, Statement of Counterparty
Data for Pass-Through Swap
Exemptions, would be added for use by
persons claiming a bona fide hedge
exemption for either of two specific
pass-through swap position types, as
discussed further below. Proposed
CFTC Form 704, Statement of
Anticipatory Bona Fide Hedge
Exemptions, would be added for use by
persons claiming a bona fide hedge
exemption for certain anticipatory bona
fide hedging positions.
b. Manner of Reporting
For purposes of reporting cash market
positions under current part 19, the
Commission historically has allowed a
reporting trader to ‘‘exclude certain
products or byproducts in determining
his cash positions for bona fide
hedging’’ if it is ‘‘the regular business
practice of the reporting trader’’ to do
so.814 Nevertheless, the Commission
believes that an entity, when calculating
the value that is subject to risks from a
source commodity in order to establish
a long derivatives position as a hedge
for unfilled anticipated requirements,
need take into account large quantities
of a source commodity that it may hold
in inventory. Under proposed
§ 19.00(b)(1), a source commodity itself
can only be excluded from a calculation
of a cash position if the amount is de
minimis, impractical to account for,
and/or on the opposite side of the
market from the market participant’s
hedging position.815
Persons who wish to avail themselves
of cross-commodity hedges are required
to file an appropriate series ’04 form.
Proposed § 19.00(b)(2) sets forth
instructions, which are consistent with
the provisions in the current section, for
reporting a cash position in a
813 See

supra discussion of series ’04 forms.
17 CFR 19.00(b)(1) (providing that ‘‘[i]f the
regular business practice of the reporting trader is
to exclude certain products or byproducts in
determining his cash position for bona fide hedging
. . . , the same shall be excluded in the report’’).
815 Proposed § 19.00(b)(1) adds a caveat to the
alternative manner of reporting: when reporting for
the cash commodity of soybeans, soybean oil, or
soybean meal, the reporting person shall show the
cash positions of soybeans, soybean oil and soybean
meal. This proposed provision for the soybean
complex is included in the current instructions for
preparing Form 204.

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814 See

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commodity that is different from the
commodity underlying the futures
contract used for hedging.816 Since
proposed § 19.00(b)(3) would maintain
the requirement that cross-hedged
positions be shown both in terms of the
equivalent amount of the commodity
underlying the commodity derivative
contract used for hedging and in terms
of the actual cash commodity (as
provided for on the appropriate series
’04 form), the Commission will be able
to determine the hedge ratio used
merely by comparing the reported
positions. Thus, the Commission will be
positioned to review whether a hedge
ratio appears reasonable in comparison
to, for example, other similarly situated
traders.
Proposed § 19.00(b)(3) maintains the
requirement that standards and
conversion factors used in computing
cash positions for reporting purposes
must be made available to the
Commission upon request. Proposed
§ 19.00(b)(3) would clarify that such
information would include hedge ratios
used to convert the actual cash
commodity to the equivalent amount of
the commodity underlying the
commodity derivative contract used for
hedging, and an explanation of the
methodology used for determining the
hedge ratio.
c. Bona Fide Hedgers and Cotton
Merchants and Dealers
Current § 19.01(a) sets forth the data
that must be provided by bona fide
hedgers (on Form 204) and by
merchants and dealers in cotton (on
Form 304). The Commission proposes to
continue using Forms 204 and 304, with
minor changes to the types of data to be
reported.817 Form 204 will be expanded
to incorporate, in addition to all other
positions reportable under proposed
§ 19.00(a)(1)(iii), monthly reporting for
cotton, including the granularity of
equity, certificated and non-certificated
cotton stocks of cotton. Weekly
reporting for cotton will be retained as
a separate report made on Form 304 for
the collection of data required by the
Commission to publish its weekly
public cotton ‘‘on call’’ report on
www.cftc.gov.
Proposed § 19.01(b) would maintain
the requirement that reports on Form
204 be submitted to the Commission on
a monthly basis, as of the close of
816 Proposed § 19.00(b)(2) would add the term
commodity derivative contracts (as defined in
proposed § 150.1). The proposed definition of crosscommodity hedge in proposed § 150.1 is discussed
above.
817 The list of data required for persons filing on
Forms 204 and 304 would be relocated from current
§ 19.01(a) to proposed § 19.01(a)(3).

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business on the last Friday of the
month.
d. Conditional Spot-Month Limit
Exemption
Proposed § 19.01(a)(1) would require
persons availing themselves of the
conditional spot month limit exemption
for natural gas (pursuant to proposed
§ 150.3(c)) to report certain detailed
information concerning their cash
market activities. While traders could
not directly influence the settlement
price in the physical-delivery referenced
contract due to the prohibition of
holding physical-delivery contract
positions when invoking the conditional
spot month exemption, there is no
similar restriction on holding the
underlying cash commodity. While the
Commission is concerned about traders’
activities in the underlying cash market
of any derivative contract, it is
particularly concerned with respect to
natural gas where there is an existing
conditional spot-month limit
exemption. Accordingly, proposed
§ 19.01(b) would require that persons
claiming a conditional spot month limit
exemption must report on new Form
504 daily, by 9 a.m. Eastern Time on the
next business day, for each day that a
person is over the spot month limit in
certain commodity contracts specified
by the Commission. The scope of
reporting—purchase and sales contracts
through the delivery area for the core
referenced futures contract and
inventory in the delivery area—differs
from the scope of reporting for bona fide
hedgers, since the person relying on the
conditional spot month limit exemption
need not be hedging a position.
Initially, the Commission would
require reporting on new Form 504 for
exemptions in the natural gas
commodity derivative contracts only.818
The Commission requests comment as
to whether the costs and benefits of the
enhanced reporting regime support
imposing this requirement on additional
commodity markets before gaining
818 The Commission believes that enhanced
reporting for natural gas contracts is warranted
based on its experience in surveillance of natural
gas commodity derivative contracts. Absent
experiential evidence of current need beyond the
natural gas realm, the Commission proposes to
initially not impose reporting requirements for
persons claiming conditional spot month limit
exemptions in other commodity derivative
contracts until the Commission gains additional
experience with the limits in proposed § 150.2.
However, the Commission retains its authority to
issue ‘‘special calls’’ under § 18.05. The
Commission will closely monitor the reporting
associated with conditional spot-month limit
exemptions in natural gas, as well as other
information available to the Commission for other
commodities, and may require reporting on Form
504 for other commodity derivative contracts in the
future.

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
additional experience with this
exemption in other commodities.
e. Pass-Through Swap Exemption
Under the definition of bona fide
hedging position in proposed § 150.1, a
person who uses a swap to reduce risks
attendant to a position that qualifies for
a bona fide hedging transaction may
pass-through those bona fides to the
counterparty, even if the person’s swap
position is not in excess of a position
limit.819 As such, positions in
commodity derivative contracts that
reduce the risk of pass-through swaps
would qualify as bona fide hedging
transactions.
Proposed § 19.01(a)(2) would require
a person relying on the pass-through
swap exemption who holds either of
two position types to file a report with
the Commission on new form 604. The
first type of position is a swap executed
opposite a bona fide hedger that is not
a referenced contract and for which the
risk is offset with referenced contracts.
The second type of position is a cashsettled swap executed opposite a bona
fide hedger that is offset with physicaldelivery referenced contracts held into a
spot month, or, vice versa, a physicaldelivery swap executed opposite a bona
fide hedger that is offset with cashsettled referenced contracts held into a
spot month.
The information reported on Form
604 would explain hedgers’ needs for
large referenced contract positions and
would give the Commission the ability
to verify that the positions were a bona
fide hedge, with heightened daily
surveillance of spot month offsets.
Persons holding any type of passthrough swap position other than the
two described above would report on
form 204.820

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f. Swap Off-Sets
Proposed § 19.01(a)(2)(i) lists the
types of data that a person who executes
a pass-through swap that is not a
referenced contract and for which the
risk is offset with referenced contracts
must report on new Form 604. Under
proposed § 19.01(b), persons holding
non-referenced contract swap offset
would submit reports to the
Commission on a monthly basis, as of
the close of business of the last Friday
of the month. This data collection
819 See supra discussion of definition of bona fide
hedging position in proposed § 150.1.
820 Persons holding pass-through swap positions
that are offset with referenced contracts outside the
spot month (whether such contracts are for physical
delivery or are cash-settled) need not report on
Form 604 because swap positions will be netted
with referenced contract positions outside the spot
month pursuant to proposed § 150.2(b).

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would permit staff to identify offsets of
non-referenced-contract pass-through
swaps on an ongoing basis for further
analysis.
Under proposed § 150.2(a), a trader in
the spot month may not net across
physical-delivery and cash-settled
contracts for the purpose of complying
with federal position limits.821 If a
person executes a cash-settled passthrough swap that is offset with
physical-delivery contracts held into a
spot month (or vice versa), then,
pursuant to proposed § 19.01(a)(2)(ii),
that person must report additional
information concerning the swap and
offsetting referenced contract position
on new Form 604. Pursuant to proposed
§ 19.01(b), a person holding a spot
month swap offset would need to file on
form 604 as of the close of business on
each day during a spot month, and not
later than 9 a.m. Eastern Time on the
next business day following the date of
the report. The Commission notes that
pass-through swap offsets would not be
permitted during the lesser of the last
five days of trading or the time period
for the spot month. However, the
Commission remains concerned that a
trader could hold an extraordinarily
large position early in the spot month in
the physical-delivery contract along
with an offsetting short position in a
cash-settled contract. Hence, the
Commission proposes to introduce this
new daily reporting requirement within
the spot month to identify and monitor
such offsetting positions.
ii. Benefits
The reporting requirements allow the
Commission to obtain the information
necessary to verify whether the relevant
exemption requirements are fulfilled in
a timely manner. This is needed for the
Commission to help ensure that any
person who claims any exemption from
federal speculative position limits can
demonstrate a legitimate purpose for
doing so. In the absence of the reporting
requirements detailed in proposed part
19, the Commission would lack critical
tools to identify abuses related to the
exemptions afforded in proposed
§ 150.3 in a timely manner and refer
them to enforcement. As such, the
reporting requirements are necessary for
the Commission to be able to perform its
essential surveillance functions. These
reporting requirements therefore
promote the Commission’s ability to
achieve, to the maximum extent
practicable, the statutory factors
outlined by Congress in CEA section
4a(a)(3).
821 See

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The Commission requests comment
on its considerations of the benefits of
reporting under part 19. Has the
Commission accurately identified the
benefits of collecting the reported
information? Are there additional
benefits the Commission should
consider?
iii. Costs
The Commission recognizes there will
be costs associated with the proposed
changes and additions to the report
filing requirements under part 19.
Though the Commission anticipates that
market participants should have ready
access to much of the required
information, the Commission expects
that, at least initially, market
participants will require additional time
and effort to become familiar with new
and amended series ’04 forms, to gather
the necessary information in the
required format, and to file reports in
the proposed timeframes. The
Commission has attempted to mitigate
the cost impacts of these reports.
Actual costs incurred by market
participants will vary depending on the
diversity of their cash market positions,
the experience that the participants
currently have regarding filing Form 204
and Form 304 as well as a variety of
other organizational factors. However,
the Commission has estimated average
incremental burdens associated with the
proposed rules in order to fulfill its
obligations under the PRA.822
For Form 204, the Commission
estimates that approximately 400 market
participants will file an average of 12
reports annually at an estimated labor
burden of 2 hours per response for a
total per-entity hour burden of
approximately 24 hours, which
computes to a total annual burden of
9,600 hours for all affected entities.
Using an estimated hourly wage of $120
per hour,823 the Commission estimates
822 See PRA section below for full details on the
Commission’s estimates.
823 The Commission’s estimates concerning the
wage rates are based on 2011 salary information for
the securities industry compiled by the Securities
Industry and Financial Markets Association
(‘‘SIFMA’’). The Commission is using $120 per
hour, which is derived from a weighted average of
salaries across different professions from the SIFMA
Report on Management & Professional Earnings in
the Securities Industry 2011, modified to account
for an 1800-hour work-year, adjusted to account for
the average rate of inflation in 2012, and multiplied
by 1.33 to account for benefits and 1.5 to account
for overhead and administrative expenses. The
Commission anticipates that compliance with the
provisions would require the work of an
information technology professional; a compliance
manager; an accounting professional; and an
associate general counsel. Thus, the wage rate is a
weighted national average of salary for
professionals with the following titles (and their

supra discussion of proposed § 150.2.

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an annual per-entity cost of
approximately $2,900 and a total annual
cost of $1,152,000 for all affected
entities.
For Form 304, the Commission
estimates that approximately 400 market
participants will file an average of 52
reports annually at an estimated labor
burden of 1 hours per response for a
total per-entity hour burden of
approximately 52 hours, which
computes to a total annual burden of
20,800 hours for all affected entities.
Using an estimated hourly wage of $120
per hour,824 the Commission estimates
an annual per-entity cost of
approximately $6,300 and a total annual
cost of $2,500,000 for all affected
entities.
For the new Form 504, the
Commission anticipates that
approximately 40 market participants
will file an average of 12 reports
annually at an estimated labor burden of
15 hours per response for a total perentity hour burden of approximately
180 hours, which computes to a total
annual burden of 7,200 hours for all
affected entities. Using an estimated
hourly wage of $120 per hour,825 the
Commission estimates an annual perentity cost of approximately $10,800
and a total annual cost of $864,000 for
all affected entities.
For the new Form 604, the
Commission anticipates that
approximately 200 market participants
will file an average of 10 reports
annually at an estimated labor burden of
30 hours per response for a total perentity hour burden of approximately
300 hours, which computes to a total
annual burden of 60,000 hours for all
affected entities. Using an estimated
hourly wage of $120 per hour,826 the
Commission estimates an annual perentity cost of approximately $36,000
and a total annual cost of $7,200,000 for
all affected entities.
Finally, for the new Form 704, the
Commission anticipates that
approximately 200 market participants
will file an average of 10 reports
annually at an estimated labor burden of
20 hours per response for a total perentity hour burden of approximately
200 hours, which computes to a total
annual burden of 40,000 hours for all
affected entities. Using an estimated
relative weight); ‘‘programmer (senior)’’ and
‘‘programmer (non-senior)’’ (15% weight), ‘‘senior
accountant’’ (15%) ‘‘compliance manager’’ (30%),
and ‘‘assistant/associate general counsel’’ (40%).
All monetary estimates have been rounded to the
nearest hundred dollars.
824 Id.
825 Id.
826 Id.

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hourly wage of $120 per hour,827 the
Commission estimates an annual perentity cost of approximately $24,000
and a total annual cost of $4,800,000 for
all affected entities.
The Commission requests comment
regarding its consideration of costs
pertaining to the amendments to part
19. Has the Commission accurately
described the ways that market
participants may incur costs? Are there
other costs, direct or indirect, that the
Commission should consider regarding
the proposed part 19? How does the
introduction of the new series ’04
reports affect the likelihood that a trader
may seek an exemption? What other
burdens may arise from the filing of
these reports? Are the Commission’s
burden estimates under the PRA
reasonable? Why or why not?
Commenters are encouraged to submit
their own estimates of costs, including
labor burdens and wage estimates, for
the Commission’s consideration.
iv. Consideration of Alternatives
The Commission also recognizes that
alternatives may exist to discretionary
elements of the part 19 reporting
amendments proposed herein. The
Commission requests comments on
whether an alternative to what is
proposed would result in a superior
benefit-cost profile, with support for any
such position provided.
8. CEA Section 15(a)
As described above, the Commission
interprets the revised CEA section 4a as
requiring the imposition of speculative
position limits during the spot-month,
any single month, and all-monthscombined on all commodity derivative
contracts, including swaps, that
reference the same underlying physical
commodity on an aggregated basis
across trading venues. Section 15(a) of
the Act requires the Commission to
evaluate the costs and benefits of its
discretionary actions in light of five
enumerated factors that represent broad
areas of market and public concern. The
Commission welcomes comment on its
evaluation under CEA section 15(a).
i. Protection of Market Participants and
the Public
Broadly speaking, the Commission’s
expansion of the federal speculative
position limits regime to include an
additional 19 core-referenced futures
contracts (and the associated referenced
contracts) will extend protections
afforded to the existing legacy contracts.
Namely, the limits are intended as a
measure to prophylactically deter
827 Id.

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manipulation and to diminish,
eliminate, or prevent excessive
speculation in significant price
discovery contracts. The proposed
limits in § 150.2, the methodology used
for determining limits at the spot, single
and all-months combined levels and the
determination of distinct levels in
physically-delivered and cash-settled
contracts all support the Commission’s
mission to prevent undue or
unnecessary burdens on interstate
commerce resulting from excess
speculation such as the sudden or
unreasonable fluctuations or
unwarranted changes in commodity
prices. Further, by requiring that market
participants who avail themselves of the
exemptions offered under § 150.3
document their exemption eligibility
and make such records available on
request and through regular reporting to
the Commission, the Commission is
protecting market participants—hedgers
and speculators alike—from another
party abusing the exemptions reserved
for eligible entities.
The Commission anticipates that
market participants engaged in
speculative trading will incur costs to
monitor their positions vis-a-vis limit
levels. The Commission expects that
market participants will need to invest
additional time and effort to become
familiar with new and amended series
’04 forms, to gather the necessary
information in the required format, and
to file reports in the proposed
timeframes.
ii. Efficiency, Competitiveness, and
Financial Integrity of Markets
Position limits help to prevent market
manipulation or excessive speculation
that may unduly influence prices at the
expense of the efficiency and integrity
of markets. The expansion of the federal
position limits regime to 28 core
referenced futures contracts enhances
the buffer against excessive speculation
historically afforded to the nine legacy
contracts exclusively, improving the
financial integrity of those markets.
Moreover, the proposed limits in § 150.2
promote market competitiveness by
preventing a trader from gaining too
much market power.
The stringently defined exemptions in
§ 150.3 and the reporting requirements
assigned to those availing themselves of
the exemptions provided are the
Commission’s first line of defense in
ensuring that participants transacting in
the Commission’s jurisdictional markets
are doing so in a competitive and
efficient environment.
In codifying the Commission’s
historical practice of temporarily lifting
position limit restrictions, the proposed

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
§ 150.3(b) financial distress exemption
strengthens the benefits of
accommodating transfers of positions
from financially distressed firms to
financially secure firms or facilitating
other necessary remediation measures
during times of market stress. In
addition, it provides market participants
with a degree of confidence which
contributes to the overall efficiency and
financial integrity of markets.
iii. Price Discovery
Market manipulation or excessive
speculation may result in artificial
prices. So, in this sense, position limits
might also help to prevent the price
discovery function of the underlying
commodity markets from being
disrupted. On the other hand, imposing
position limits raises the concerns that
liquidity and price discovery may be
diminished, because certain market
segments, i.e., speculative traders, are
restricted. However, the Commission
has mitigated some of these concerns by
proposing various exemptions to
positions limits. In addition, applying
current DCM-set limits as federal limits
means that even though additional
contract markets will be brought into
the federal position limits regime, the
activity of speculative traders, at least
initially, will be no less restricted than
under the current regime.

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iv. Sound Risk Management
Proposed exemptions for bona fide
hedgers help to ensure that market
participants with positions that are
hedging legitimate commercial needs
are properly recognized as hedgers
under the Commission’s speculative
position limits regime. This promotes
sound risk management practices. In
addition, the Commission has crafted
the proposed rules to ensure sufficient
market liquidity for bona fide hedgers to
the maximum extent practicable, e.g.,
through the conditional spot month
limit exemption.
To the extent that monitoring for
position limits requires market
participants to create internal risk limits
and evaluate position size in relation to
the market, position limits may also
provide an incentive for market
participants to engage in sound risk
management practices.
v. Other Public Interest Considerations
The regulations proposed under
§ 150.5 require that exchange-set limits
employ policies that conform to the
Commission’s general policy both for
contracts that are subject to federal
limits under § 150.2 and those that are
not, thus harmonizing rules for all

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federal and exchange-set speculative
position limits.
B. Paperwork Reduction Act
1. Overview
The PRA 828 imposes certain
requirements on Federal agencies in
connection with their conducting or
sponsoring any collection of
information as defined by the PRA.
Certain provisions of the regulations
proposed herein will result in
amendments to approved collection of
information requirements within the
meaning of the PRA. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a
currently valid control number issued
by the Office of Management and
Budget (‘‘OMB’’). Therefore, the
Commission is submitting this proposal
to OMB for review in accordance with
44 U.S.C. 3507(d) and 5 CFR 1320.11.
The information collection requirements
proposed in this proposal would amend
previously-approved collections
associated with OMB control numbers
3038–0009 and 3038–0013.
If adopted, responses to these
collections of information would be
mandatory. Several of the reporting
requirements are mandatory in order to
obtain exemptive relief, and are thus
mandatory under the PRA to the extent
a market participant elects to seek such
relief. 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.’’ 829 The Commission also is
required to protect certain information
contained in a government system of
records pursuant to the Privacy Act of
1974.830
Under the proposed regulations,
market participants with positions in a
‘‘referenced contract,’’ as defined in
proposed § 150.1, would be subject to
the position limit framework established
under the proposed revisions to parts 19
and 150. Proposed part 19 prescribes
new forms and reporting requirements
for persons claiming a conditional spot
month limit exemption (proposed Form
828 44

U.S.C. 3501 et seq.
U.S.C. 12(a)(1).
830 5 U.S.C. 552a.
829 7

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75781

504),831 a pass-through swap exemption
(proposed Form 604),832 or an
anticipatory exemption (proposed Form
704).833 The proposed amendments to
part 19 also update and change
reporting obligations and required
information for Form 204 and Form
304.834 Proposed part 150 prescribes
reporting requirements for DCMs listing
a core referenced futures contract 835
and traders who wish to apply for an
exemption from DCM- or SEFestablished positions limits in nonreferenced contracts,836 as well as
recordkeeping requirements for persons
who claim exemptions from position
limits or are counterparties to a person
claiming a pass-through swap offset.837
2. Methodology and Assumptions
It is not possible at this time to
precisely determine the number of
respondents affected by the proposed
rules. Many of the regulations that
impose PRA burdens are exemptions
that a market participant may elect to
take advantage of, meaning that without
intimate knowledge of the day-to-day
business decisions of all its market
participants, the Commission could not
know which participants, or how many,
may elect to obtain such an exemption.
Further, the Commission is unsure of
how many participants not currently in
the market may be required to or may
elect to incur the estimated burdens in
the future. Finally, many of the
regulations proposed herein are
applying to participants in swaps
markets for the first time, and, as
explained supra, the Commission’s lack
of experience with such markets and
with many of the participants therein
hinders its ability to determine with
precision the number of affected
entities.
These limitations notwithstanding,
the Commission has made best-effort
estimations regarding the likely number
of affected entities for the purposes of
calculating burdens under the PRA. The
Commission used its proprietary data,
collected from market participants, to
estimate the number of respondents for
each of the proposed obligations subject
to the PRA. As discussed supra,838 the
831 See

proposed §§ 19.00(a)(1)(i) and 19.01(a)(1).
proposed §§ 19.00(a)(1)(ii) and 19.01(a)(2).
833 The requirement of filing a Form 704 in order
to claim an anticipatory exemption is stipulated in
proposed § 150.7(a) in addition to its inclusion in
proposed amendments to part 19. See proposed
§§ 19.00(a)(1)(iv), 19.01(a)(4) and 150.7(a).
834 See proposed § 19.01(a)(3).
835 See proposed § 150.2(e)(3)(ii).
836 See proposed § 150.5(b)(5)(C).
837 See proposed § 150.3(g).
838 See supra discussion of number of traders over
the limits.
832 See

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Commission analyzed data covering the
two year period 2011–2012 to determine
how many participants would be over
60, 80, or 100 percent of the proposed
limit levels in each of the 28 core
referenced futures contracts, were such
limit levels to be adopted as proposed.
For purposes of the PRA, Commission
staff determined the number of unique
traders over the proposed spot-month
position limit level for all of the 28 core
referenced futures contracts combined.
The Commission also determined the
number of traders over the non-spotmonth position limit level for all of the
28 core referenced futures contracts
combined. Staff then added those two
figures and rounded it up to the nearest
hundred to arrive at an approximation
of 400 persons.839 This base figure was
then scaled to estimate, based on the
Commission’s expertise and experience
in the administration of position limits,
how many participants may be affected
by each specific provision. The analysis
reviewed by the Commission does not
account for hedging and other
exemptions from position limits, which
leads the Commission to believe that the
approximate number of traders in excess
of the limits is a very conservative
estimate. The Commission welcomes
comment on its estimates, the
methodology described above, and its
conclusion regarding the
conservativeness of its estimates.
The Commission’s estimates
concerning wage rates are based on 2011
salary information for the securities
industry compiled by the Securities
Industry and Financial Markets
Association (‘‘SIFMA’’). The
Commission is using a figure of $120
per hour, which is derived from a
weighted average of salaries across
different professions from the SIFMA
Report on Management & Professional
Earnings in the Securities Industry
2011, modified to account for an 1800hour work-year, adjusted to account for
the average rate of inflation in 2012.
This figure was then multiplied by 1.33
to account for benefits 840 and further by
1.5 to account for overhead and
administrative expenses.841 The
839 Staff believes that such rounding preserves the
reasonability of the estimate without creating a false
impression of precision.
840 The Bureau of Labor Statistics reports that an
average of 32.8% of all compensation in the
financial services industry is related to benefits.
This figure may be obtained on the Bureau of Labor
Statistics Web site, at http://www.bls.gov/
news.release/ecec.t06.htm. The Commission
rounded this number to 33% to use in its
calculations.
841 Other estimates of this figure have varied
dramatically depending on the categorization of the
expense and the type of industry classification used
(see, e.g., BizStats at http://www.bizstats.com/

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Commission anticipates that compliance
with the provisions would require the
work of an information technology
professional; a compliance manager; an
accounting professional; and an
associate general counsel. Thus, the
wage rate is a weighted national average
of salary for professionals with the
following titles (and their relative
weight); ‘‘programmer (average of senior
and non-senior)’’ (15% weight), ‘‘senior
accountant’’ (15%) ‘‘compliance
manager’’ (30%), and ‘‘assistant/
associate general counsel’’ (40%). All
monetary estimates have been rounded
to the nearest hundred dollars. The
Commission welcomes public comment
on its assumptions regarding its
estimated hourly wage.
3. Information Provided by Reporting
Entities/Persons and Recordkeeping
Duties
For purposes of assisting the
Commission in setting spot-month
limits no less frequently than every two
years, proposed § 150.2(e)(3)(ii) adds an
additional burden cost to information
collection 3038–0013 by requiring
DCMs to supply the Commission with
an estimated spot-month deliverable
supply for each core referenced futures
contract listed. The estimate must
include documentation as to the
methodology used in deriving the
estimate, including a description and
any statistical data employed. The
Commission estimates that the
submission would require a labor
burden of approximately 20 hours per
estimate. Thus, a DCM that submits one
estimate may incur a burden of 20 hours
for a cost, using the estimated hourly
wage of $120, of approximately $2,400.
DCMs that submit more than one
estimate may multiply this per-estimate
burden by the number of estimates
submitted to obtain an approximate
total burden for all submissions, subject
to any efficiencies and economies of
scale that may result from submitting
multiple estimates. The Commission
welcomes comment regarding the
estimated burden on DCMs that will
result from proposed § 150.2(e).
Proposed § 150.3(g)(1) adds an
additional burden cost to information
collection 3038–0013 by requiring any
person claiming an exemption from
federal position limits under part 150 to
corporation-industry-financials/finance-insurance52/securities-commodity-contracts-other-financialinvestments-523/commodity-contracts-dealing-andbrokerage-523135/show and Damodaran Online at
http://pages.stern.nyu.edu/∼adamodar/pc/datasets/
uValuedata.xls) The Commission has chosen to use
a figure of 50% for overhead and administrative
expenses to attempt to conservatively estimate the
average for the industry.

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keep and maintain books and records
concerning all details of their related
cash, forward, futures, options and swap
positions and transactions to serve as a
reasonable basis to demonstrate
reduction of risk on each day that the
exemption was claimed. These records
must be comprehensive, in that they
must cover anticipated requirements,
production and royalties, contracts for
services, cash commodity products and
by-products, and cross-commodity
hedges. Proposed § 150.3(g)(2) requires
any person claiming a pass-through
swap offset hedging exemption to obtain
a representation that the swap qualifies
as a pass-through swap for purposes of
a bona fide hedging position.
Additionally, proposed § 150.3(g)(3)
requires any person representing to
another person that a swap qualifies as
a pass-through swap for purposes of a
bona fide hedging position, to keep and
make available to the Commission upon
request all relevant books and records
supporting such a representation for at
least two years following the expiration
of the swap.
The Commission estimates that
approximately 400 traders will claim an
average of 50 exemptions each per year
that fall within the scope of the
recordkeeping requirements of proposed
§ 150.3(g). At approximately one hour
per exemption claimed to keep and
maintain the required books and
records, the Commission estimates that
industry will incur a total of 20,000
annual labor hours amounting to
$2,400,000 in additional labor costs.
The Commission requests public
comment regarding the burden
associated with the recordkeeping
requirements of proposed § 150.3(g) and
its estimates thereto.
Proposed § 150.5(b)(5)(iii) adds an
additional burden cost to information
collection 3038–0013 by requiring
traders who wish to avail themselves of
any exemption from a DCM or SEF’s
speculative position limit rules that is
allowed for under § 150.5(b)(5)(A)–(B) to
submit an application to the DCM or
SEF explaining how the exemption
would be in accord with sound
commercial practices and would allow
for a position that could be liquidated
in an orderly fashion. As noted supra,
the Commission understands that
requiring traders to apply for exemptive
relief comports with existing DCM
practice; thus, the Commission
anticipates that the codification of this
requirement will have the practical
effect of incrementally increasing, rather
than creating, the burden of applying for
such exemptive relief. The Commission
estimates that approximately 400 traders
will claim exemptions from DCM or

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SEF-established speculative position
limits each year, with each trader on
average making 100 related submissions
to the DCM or SEF each year. Each
submission is estimated to take 2 hours
to complete and file, meaning that these
traders would incur a total burden of
80,000 labor hours per year for an
industry-wide additional labor cost of
$9,600,000. The Commission welcomes
all comment regarding the estimated
burden on market participants wishing
to avail themselves of a DCM or SEF
exemption.
Proposed § 19.01(a)(1) adds an
additional burden cost to information
collection 3038–0009 for persons
claiming a conditional spot month limit
exemption pursuant to § 150.3(c), by
requiring the filing of Form 504 for
special commodities so designated by
the Commission under § 19.03. A Form
504 filing shows the composition of the
cash position of each commodity
underlying a referenced contract that is
held or controlled for which the
exemption is claimed,842 including the
‘‘as of’’ date, the quantity of stocks
owned of such commodity, the quantity
of fixed-price purchase commitments
open providing for receipt of such cash
commodity, the quantity of fixed-price
sale commitments open providing for
delivery of such cash commodity, the
quantity of unfixed-price purchase
commitments open providing for receipt
of such cash commodity, and the
quantity of unfixed-price sale
commitments open providing for
delivery of such cash commodity. The
Commission estimates that
approximately 40 traders will claim a
conditional spot month limit 12 times
per year, and each corresponding
submission will take 15 labor hours to
complete and file. Therefore, the
Commission estimates that the Form
504 reporting requirement will result in
approximately 7,200 total annual labor
hours for an additional industry-wide
labor cost of $864,000. The Commission
requests comment on its estimates
regarding new Form 504. In particular,
the Commission welcomes comment
regarding the number of entities who
may partake of the conditional limit in
842 The Commission proposes that initially only
the natural gas commodity derivative contracts
would be designated under § 19.03 for Form 504
reporting. As such, the Commission’s estimates
reflect only the burden for traders in that
commodity. The Commission is not able to estimate
the expanded cost of any future Commission
determination to designate another commodity
under § 19.03 as a special commodity for which
Form 504 filings would be required. See supra
discussion regarding the proposed conditional spot
month limit.

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natural gas and would thus be required
to file Form 504.
Proposed § 19.01(a)(2) adds an
additional burden cost to information
collection 3038–0009 by requiring
persons claiming a pass-through swap
exemption pursuant to § 150.3(a)(1)(i) to
file Form 604 showing various data
depending on whether the offset is for
non-referenced contract swaps or spotmonth swaps including, at a minimum,
the underlying commodity or
commodity reference price, the
applicable clearing identifiers, the
notional quantity, the gross long or short
position in terms of futures-equivalents
in the core referenced futures contracts,
and the gross long or short positions in
the referenced contract for the offsetting
risk position. The Commission estimates
that approximately 200 traders will
claim a pass-through swap exemption
an average of ten times per year each.
At approximately 30 labor hours to
complete each corresponding
submission for a total burden to traders
of 60,000 annual labor hours,
compliance with the Form 604 filing
requirements industry-wide will impose
an additional $7,200,000 in labor costs.
The Commission requests comment on
its estimates regarding new Form 604. In
particular, the Commission welcomes
comment regarding the number of
entities who may utilize the passthrough swap exemption and the
burden incurred to file Form 604.
Proposed § 19.01(a)(3) increases
existing burden costs previously
approved under information collection
3038–0009 by expanding the number of
cash commodities that existing Form
204 covers. Additionally, proposed
§ 19.01(a)(3) requires additional data to
be reported on Form 204 and proposed
§ 19.02 requires additional data to be
reported on existing Form 304 (call
cotton). Both forms are required to be
filed when a trader accumulates a net
long or short commodity derivative
position in a core referenced futures
contract that exceeds a federal limit, and
inform the Commission of the trader’s
cash positions underlying those
commodity derivative contracts for
purposes of claiming bona fide hedging
exemptions.
The Commission estimates that
approximately 400 traders will be
required to file Form 204 12 times per
year each. At an estimated two labor
hours to complete and file each Form
204 report for a total annual burden to
industry of 9,600 labor hours, the Form
204 reporting requirement will cost
industry $1,200,000 in labor costs. The
Commission also estimates that
approximately 400 traders will be
required to make a Form 304

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75783

submission for call cotton 52 times per
year each. At one hour to complete each
submission (representing a net increase
of a half hour from the previous
estimate) for a total annual burden to
industry of 20,800 labor hours, the Form
304 reporting requirement will impose
upon industry $2,500,000 in labor costs.
Previously, the Commission estimated
the combined annual labor hours for
both forms to be 1,350 hours, which
amounted to a total labor cost to
industry of $68,850 per annum.843
Therefore, the Commission is increasing
its net estimate of labor hours and costs
associated with existing Form 204 and
Form 304 for collection 3038–0009 by
30,400 hours and $3,700,000.844 The
Commission requests comment with
respect to its estimates regarding the
increased number of entities and
additional information required to file
Forms 204 and 304.
Proposed § 19.01(a)(4) adds an
additional burden cost to information
collection 3038–0009 by requiring
traders claiming anticipatory
exemptions to file Form 704 for the
initial statement pursuant to § 150.7(d),
the supplemental statement pursuant to
§ 150.7(e), and the annual update
pursuant to § 150.7(f), as well as Form
204 monthly reporting the remaining
unsold, unfilled and other anticipated
activity for the Specified Period in Form
704, Section A. The Commission
estimates that approximately 200 traders
will claim anticipatory exemptions
every year an average of 10 times each.
At an estimated 20 labor hours to
complete and file Form 704 for a total
annual burden to traders of 40,000 labor
hours, the anticipatory exemption filing
requirement will cost industry an
additional $4,800,000 in labor costs.
The Commission requests comment on
its estimates regarding new Form 704. In
particular, the Commission welcomes
comment regarding the number of
entities who may utilize the anticipatory
hedge exemption and the burden
incurred to file Form 704.
4. Comments on Information Collection
The Commission invites the public
and other federal agencies to submit
comments on any aspect of the reporting
and recordkeeping burdens discussed
above. Pursuant to 44 U.S.C.
3506(c)(2)(B), the Commission solicits
comments in order to: (1) Evaluate
843 This estimate was based upon an average wage
rate of $51 per hour. Adjusted to the hourly wage
rate used for purposes of this PRA estimate, the
previous total labor cost would have been $202,500.
844 The Commission notes that the burdens
associated with Forms 204 and 304 in collection
3038–0009 represent a fraction of the total burden
under that collection.

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whether the proposed collections of
information are necessary for the proper
performance of the functions of the
Commission, including whether the
information will have practical utility;
(2) evaluate the accuracy of the
Commission’s estimate of the burden of
the proposed collections of information;
(3) determine whether there are ways to
enhance the quality, utility, and clarity
of the information to be collected; and
(4) minimize the burden of the
collections of information on those who
are to respond, including through the
use of automated collection techniques
or other forms of information
technology. Comments may be
submitted directly to the Office of
Information and Regulatory Affairs, by
fax at (202) 395–6566 or by email at
OIRAsubmissions@omb.eop.gov. Please
provide the Commission with a copy of
comments submitted so that all
comments can be summarized and
addressed in the final rule preamble.
Refer to the Addresses section of this
notice for comment submission
instructions to the Commission. A copy
of the supporting statements for the
collection of information discussed
above may be obtained by visiting
RegInfo.gov. OMB is required to make a
decision concerning the collection of
information between 30 and 60 days
after publication of this release.
Consequently, a comment to OMB is
most assured of being fully considered
if received by OMB (and the
Commission) within 30 days after the
publication of this notice of proposed
rulemaking.
C. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) requires that Federal agencies
consider whether the rules they propose
will have a significant economic impact
on a substantial number of small entities
and, if so, provide a regulatory
flexibility analysis respecting the
impact.’’ 845 A regulatory flexibility
analysis or certification typically is
required for ‘‘any rule for which the
agency publishes a general notice of
proposed rulemaking pursuant to’’ the
notice-and-comment provisions of the
Administrative Procedure Act, 5 U.S.C.
553(b).846 The requirements related to
the proposed amendments fall mainly
on registered entities, exchanges, futures
commission merchants, swap dealers,
clearing members, foreign brokers, and
large traders.
The Commission has previously
determined that registered DCMs, FCMs,
SDs, MSPs, ECPs, SEFs, clearing
845 5
846 5

U.S.C. 601 et seq.
U.S.C. 601(2), 603–05.

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members, foreign brokers and large
traders are not small entities for
purposes of the RFA.847 While the
requirements under the proposed
rulemaking may impact non-financial
end users, the Commission notes that
position limits levels and filing
requirements associated with bona fide
hedging apply only to large traders,
while requirements to keep records
supporting a transaction’s qualification
for pass-through swap treatment incurs
a marginal burden that is mitigated
through overlapping recordkeeping
requirements for reportable futures
traders (current § 18.05) and reportable
swap traders (current § 20.6(b));
furthermore, these records are ones that
such entities maintain, as they would
other documents evidencing material
financial relationships, in the ordinary
course of their businesses.
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.’’
IV. Appendices
Appendix A—Studies relating to
position limits reviewed and evaluated
by the Commission
1. Acharya, Viral V.; Ramadorai, Tarun;
and Lochstoer, Lars, ‘‘Limits to Arbitrage and
Hedging: Evidence from Commodity
Markets,’’ January 8, 2013, Journal of
Financial Economics.
2. Allen, Franklin; Litov, Lubomir; and
Mei, Jianping, ‘‘Large Investors, Price
Manipulation, and Limits to Arbitrage: An
Anatomy of Market Corners,’’ June 30, 2006,
Review of Finance.
3. Anderson, David; Outlaw, Joe L.; Bryant,
Henry L.; Richardson, James W.; Ernstes,
David P.; Raulston, J. Marc; Welch, J. Mark;
Knapek, George M.; Herbst, Brian K.; and
Allison, Marc S., ‘‘The Effects of Ethanol on
Texas Food and Feed,’’ January 1, 2008, The
Agricultural and Food Policy Center
Research Report 08–1, Texas A&M
University.
4. Antoshin, Sergei; Canetti, Elie; and
Miyajima, Ken, Global Financial Stability
Report, ‘‘Financial Stress and Deleveraging,
847 See Policy Statement and Establishment of
Definitions of ‘‘Small Entities’’ for Purposes of the
Regulatory Flexibility Act, 47 FR 18618, 18619,
Apr. 30, 1982 (DCMs, FCMs, and large traders)
(‘‘RFA Small Entities Definitions’’); Opting Out of
Segregation, 66 FR 20740, 20743, Apr. 25, 2001
(ECPs); Position Limits for Futures and Swaps;
Final Rule and Interim Final Rule, 76 FR 71626,
71680, Nov. 18, 2011 (clearing members); Core
Principles and Other Requirements for Swap
Execution Facilities, 78 FR 33476, 33548, June 4,
2013 (SEFs); A New Regulatory Framework for
Clearing Organizations, 66 FR 45604, 45609, Aug.
29, 2001 (DCOs); Registration of Swap Dealers and
Major Swap Participants, 77 FR 2613, Jan. 19, 2012,
(SDs and MSPs); and Special Calls, 72 FR 50209,
Aug. 31, 2007 (foreign brokers).

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Macrofinancial Implications and Policy,’’
October 1, 2008, Annex 1.2, Financial
Investment in Commodities Markets,
International Monetary Fund.
5. Aurelich, Nicole M.; Irwin, Scott H.; and
Garcia, Philip, Bubbles, ‘‘Food Prices, and
Speculation: Evidence from the CFTC’s Daily
Large Trader Data Files,’’ August 15, 2012,
NBER Conference on Economics of Food
Price Volatility.
6. Avriel, Mordecai and Reisman, Haim,
‘‘Optimal Option Portfolios in Markets with
Position Limits and Margin Requirements,’’
June 6, 2000, Journal of Risk.
7. Babula, Ronald A. and Rothenberg, John
Paul, ‘‘A Dynamic Monthly Model of U.S.
Pork Product Markets: Testing for and
Discerning the Role of Hedging on PorkRelated Food Costs,’’ January 1, 2013, Journal
of International Agricultural Trade and
Development.
8. Baffes, John and Haniotos, Tasos,
‘‘Placing the 2006/08 Commodity Boom into
Perspective,’’ July 1, 2010, The World Bank
Policy Research Working Paper 5371.
9. Basu, Devraj and Miffre, Joelle,
‘‘Capturing the Risk Premium of Commodity
Futures: The Role of Hedging Pressure,’’ July
1, 2013, Journal of Banking and Risk.
10. Bos, Jaap and van der Molen, Maarten,
‘‘A Bitter Brew? How Index Fund
Speculation Can Drive Up Commodity
Prices,’’ June 6, 2010, Journal of Agricultural
and Applied Economics.
11. Boyd, Naomi; Buyuksahin, Bahattin;
Haigh, Michael; and Harris, Jeffrey, ‘‘The
Prevalence, Sources, and Effects of Herding,’’
February 1, 2013, SSRN Abstract #1359251.
12. Breitenfellner, Andreas; Crespo
Cuaresma, Jesus; and Keppel, Catherine,
‘‘Determinants of Crude Oil Prices: Supply,
Demand, Cartel, or Speculation?,’’ October 1,
2009, Monetary Policy and the Economy.
13. Brennan, Michael J. and Schwartz,
Eduardo S., ‘‘Arbitrage in Stock Index
Futures,’’ January 1, 1990, The Journal of
Business.
14. Brunetti, Celso and Buyuksahin,
Bahattin, ‘‘Is Speculation Destabilizing?,’’
April 22, 2009, SSRN Abstract # 1393524.
15. Buyuksahin, Bahattin and Robe,
Michel, ‘‘Does it Matter Who Trades Energy
Derivatives?,’’ March 1, 2012, Review of
Environment, Energy, and Economics.
16. Buyuksahin, Bahattin and Robe,
Michel, ‘‘Speculators, Commodities, and
Cross-Market Linkages,’’ November 8, 2012,
Working Paper, U.S. Commodity Futures
Trading Commission.
17. Buyuksahin, Bahattin and Robe,
Michel, ‘‘Does ‘Paper Oil’ Matter?,’’ July 28,
2011, SSRN Abstract # 1855264.
18. Buyuksahin, Bahattin; Harris, Jeffrey;
Haigh, Michael; Overdahl, James; and Robe,
Michel, ‘‘Fundamentals, Trader Activity, and
Derivatives Pricing,’’ December 4, 2008,
Working Paper, U.S. Commodity Futures
Trading Commission.
19. Byun, Sungje, ‘‘Speculation in
Commodity Futures Market, Inventories and
the Price of Crude Oil,’’ January 17, 2013,
Working Paper, University of California at
San Diego.
20. Cagan, Phillip, ‘‘Financial Futures
Markets: Is More Regulation Needed?,’’
August 7, 2006, Journal of Futures Markets.

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
21. Chan, Kalok and Fong, Wai Ming,
‘‘Trade Size, Order Imbalance, and VolatilityVolume Relation,’’ August 1, 2000, Journal of
Financial Economics.
22. Chincarini, Ludwig, ‘‘The Amaranth
Debacle: Failure of Risk Measures or Failure
of Risk Management?,’’ April 1, 2007, SSRN
Abstract #952607.
23. Chincarini, Ludwig, ‘‘Natural Gas
Futures and Spread Position Risk: Lessons
from the Collapse of Amaranth Advisors
L.L.C.,’’ January 19, 2008, Journal of Applied
Finance.
24. Chordia, Tarun; Subrahmanyam,
Avanidhar; and Roll, Richard, ‘‘Order
Imbalance, Liquidity, and Market Returns,’’
July 1, 2002, Journal of Financial Economics.
25. Cifarelli, Giulio and Paladino,
Giovanna, ‘‘Oil Price Dynamics and
Speculation: a Multivariate Financial
Approach,’’ March 1, 2010, Energy
Economics.
26. Cifarelli, Giulio and Paladino,
Giovanna, ‘‘Commodity Futures Returns: A
non-linear Markov Regime Switching Model
of Hedging and Speculative Pressures,’’
November 19, 2010, Working Paper.
27. CME Group, Inc., ‘‘Excessive
Speculation and Position Limits in Energy
Derivatives Markets,’’ CME Group White
Paper.
28. Dahl, R.P., ‘‘Futures Markets: The
Interaction of Economic Analyses and
Regulation: Discussion,’’ December 1, 1980,
American Journal of Agricultural Economics.
29. Dai, Min; Jin, Hanqing; and Liu, Hong,
‘‘Illiquidity, Position Limits, and Optimal
Investment,’’ March 15, 2009, SSRN Abstract
#1360423.
30. de Schutter, Olivier, ‘‘Food
Commodities Speculation and Food Price
Crises,’’ September 1, 2010, United Nations
Special Report on the Right to Food.
31. Dutt, Hans R. and Harris, Lawrence E.,
‘‘Position Limits For Cash-Settled Derivative
Contracts,’’ August 18, 2005, Journal of
Futures Markets.
32. Easterbrook, Frank, ‘‘Monopoly,
Manipulation, and the Regulation of Futures
Markets,’’ April 1, 1986, The Journal of
Business.
33. Ebrahim, Muhammed and Rhys ap
Gwilym, ‘‘Can Position Limits Restrain Rogue
Traders?,’’ March 1, 2013, Journal of Banking
& Finance.
34. Eckaus, R.S., ‘‘The Oil Price Really is
a Speculative Bubble,’’ June 1, 2008, MIT
Center for Energy and Environmental Policy
Research.
35. Ederington, Louis and Lee, Jae Ha,
‘‘Who Trades Futures and How: Evidence
from the Heating Oil Market,’’ April 1, 2002,
Journal of Business.
36. Ederington, Louis; Dewally, Michael;
and Fernando, Chitru, ‘‘Determinants of
Trader Profits in Futures Markets,’’ January
24, 2013, SSRN Abstract #1781975.
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The World Bank Research Observer.

List of Subjects
17 CFR Part 1
Agricultural commodity, Agriculture,
Brokers, Committees, Commodity
futures, Conflicts of interest, Consumer
protection, Definitions, Designated
contract markets, Directors, Major swap
participants, Minimum financial
requirements for intermediaries,
Reporting and recordkeeping
requirements, Swap dealers, Swaps.

17 CFR Part 38
Block transaction, Commodity
futures, Designated contract markets,
Reporting and recordkeeping
requirements, Transactions off the
centralized market.
17 CFR Part 140
Authority delegations (Government
agencies), Conflict of interests,
Organizations and functions
(Government agencies).
17 CFR Part 150
Bona fide hedging, Commodity
futures, Cotton, Grains, Position limits,
Referenced Contracts, Swaps.
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission proposes to amend
17 CFR chapter I as follows:
PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for part 1
continues to read as follows:

■

Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b,
6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o,
6p, 6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a,
12, 12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23,
and 24, as amended by Title VII of the DoddFrank Wall Street Reform and Consumer
Protection Act, Pub. L. 111–203, 124 Stat.
1376 (2010).
§ 1.3

[Amended]

2. Amend § 1.3 by removing and
reserving paragraph (z).

■

§§ 1.47 and 1.48

17 CFR Parts 15 and 17

[Removed and Reserved]

3. Remove and reserve §§ 1.47 and
1.48.

■

Brokers, Commodity futures,
Reporting and recordkeeping
requirements, Swaps.

PART 15—REPORTS—GENERAL
PROVISIONS

17 CFR Part 19

4. The authority citation for part 15
continues to read as follows:

■

Commodity futures, Cottons, Grains,
Reporting and recordkeeping
requirements, Swaps.
17 CFR Part 32
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17 CFR Part 37
Registered entities, Registration
application, Reporting and
recordkeeping requirements, Swaps,
Swap execution facilities.

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

Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i,
6k, 6m, 6n, 7, 7a, 9, 12a, 19, and 21, as
amended by Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act,
Pub. L. 111–203, 124 Stat. 1376 (2010).

5. Amend § 15.00 by revising
paragraph (p) to read as follows:

■

§ 15.00 Definitions of terms used in parts
15 to 19, and 21 of this chapter.

*

*
*
*
*
(p) Reportable position means:
(1) For reports specified in parts 17
and 18, and § 19.00(a)(2) and (3), of this
chapter any open contract position that
at the close of the market on any
business day equals or exceeds the
quantity specified in § 15.03 in either:
(i) Any one futures of any commodity
on any one reporting market, excluding
futures contracts against which notices
of delivery have been stopped by a
trader or issued by the clearing
organization of a reporting market; or
(ii) Long or short put or call options
that exercise into the same future of any
commodity, or long or short put or call
options for options on physicals that
have identical expirations and exercise
into the same physical, on any one
reporting market.
(2) For the purposes of reports
specified in § 19.00(a)(1) of this chapter,
any position in commodity derivative
contracts, as defined in § 150.1 of this
chapter, that exceeds a position limit in
§ 150.2 of this chapter for the particular
commodity.
*
*
*
*
*
■ 6. Amend § 15 .01 by revising
paragraph (d) to read as follows:
§ 15.01

Persons required to report.

*

*
*
*
*
(d) Persons, as specified in part 19 of
this chapter, either:
(1) Who hold or control commodity
derivative contracts (as defined in
§ 150.1 of this chapter) that exceed a
position limit in § 150.2 of this chapter
for the commodities enumerated in that
section; or
(2) Who are merchants or dealers of
cotton holding or controlling positions
for future delivery in cotton that equal
or exceed the amount set forth in
§ 15.03.
■ 7. Revise § 15.02 to read as follows:
§ 15.02

Reporting forms.

Forms on which to report may be
obtained from any office of the
Commission or via the Internet (http://
www.cftc.gov). Forms to be used for the
filing of reports follow, and persons
required to file these forms may be
determined by referring to the rule
listed in the column opposite the form
number.

Form No.

Title

40 ......................................................
71 ......................................................
101 ....................................................
102 ....................................................
204 ....................................................

Statement of Reporting Trader .................................................................................................
Identification of Omnibus Accounts and Sub-accounts ...........................................................
Positions of Special Accounts ..................................................................................................
Identification of Special Accounts, Volume Threshold Accounts, and Consolidated Accounts
Cash Positions of Hedgers (excluding Cotton) ........................................................................

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17.01
17.00
17.01
19.00

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Form No.

304
504
604
704

Title

....................................................
....................................................
....................................................
....................................................

Cash Positions of Cotton Traders ............................................................................................
Cash Positions for Conditional Spot Month Exemptions .........................................................
Counterparty Data for Pass-Through Swap Exemptions .........................................................
Statement of Anticipatory Bona Fide Hedge Exemptions ........................................................

(Approved by the Office of Management
and Budget under control numbers
3038–0007, 3038–0009, and 3038–0103)
PART 17—REPORTS BY REPORTING
MARKETS, FUTURES COMMISSION
MERCHANTS, CLEARING MEMBERS,
AND FOREIGN BROKERS
8. The authority citation for part 17,
as amended November 18, 2013, at 78
FR 69230, effective February 18, 2014,
continues to read as follows:

■

Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i,
6t, 7, 7a, and 12a, as amended by Title VII
of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111–203,
124 Stat. 1376 (2010).

9. Amend § 17.00 by revising
paragraph (b) to read as follows:

■

§ 17.00 Information to be furnished by
futures commission merchants, clearing
members and foreign brokers.

*

*
*
*
*
(b) Interest in or control of several
accounts. Except as otherwise
instructed by the Commission or its
designee and as specifically provided in
§ 150.4 of this chapter, if any person
holds or has a financial interest in or
controls more than one account, all such
accounts shall be considered by the
futures commission merchant, clearing
member or foreign broker as a single
account for the purpose of determining
special account status and for reporting
purposes.
*
*
*
*
*
■ 10. Amend § 17.03, as amended
November 18, 2013, at 78 FR 69232,
effective February 18, 2014, by adding
paragraph (h) to read as follows:
§ 17.03 Delegation of authority to the
Director of the Office of Data and
Technology or the Director of the Division
of Market Oversight.

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*

*
*
*
*
(h) Pursuant to § 17.00(b), and as
specifically provided in § 150.4 of this
chapter, the authority shall be
designated to the Director of the
Division of Market Oversight to instruct
an futures commission merchant,
clearing member or foreign broker to
consider as a single account for the
purpose of determining special account
status and for reporting purposes all
accounts one person holds or controls,
or in which the person has a financial
interest.

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■

11. Revise part 19 to read as follows:

PART 19—REPORTS BY PERSONS
HOLDING POSITIONS EXEMPT FROM
POSITION LIMITS AND BY
MERCHANTS AND DEALERS IN
COTTON
Sec.
19.00 General provisions.
19.01 Reports on stocks and fixed price
purchases and sales.
19.02 Reports pertaining to cotton on call
purchases and sales.
19.03 Reports pertaining to special
commodities.
19.04 Delegation of authority to the Director
of the Division of Market Oversight.
19.05–19.10 [Reserved]
Appendix Appendix A to Part 19—Forms
204, 304, 504, 604, and 704
Authority: 7 U.S.C. 6g(a), 6a, 6c(b), 6i, and
12a(5), as amended by Title VII of the DoddFrank Wall Street Reform and Consumer
Protection Act, Pub. L. 111–203, 124 Stat.
1376 (2010).
§ 19.00

General provisions.

(a) Who must file series ’04 reports.
The following persons are required to
file series ’04 reports:
(1) Persons filing for exemption to
speculative position limits. All persons
holding or controlling positions in
commodity derivative contracts, as
defined in § 150.1 of this chapter, in
excess of any speculative position limit
provided under § 150.2 of this chapter
and for any part of which a person relies
on an exemption to speculative position
limits under § 150.3 of this chapter as
follows:
(i) Conditional spot month limit
exemption. A conditional spot month
limit exemption under § 150.3(c) of this
chapter for any commodity specially
designated by the Commission under
§ 19.03 for reporting;
(ii) Pass-through swap exemption. A
pass-through swap exemption under
§ 150.3(a)(1)(i) of this chapter and as
defined in paragraph (2)(ii) of the
definition of ‘‘bona fide hedging
position’’ in § 150.1 of this chapter,
reporting separately for:
(A) Non-referenced-contract swap
offset. A swap that is not a referenced
contract, as that term is defined in
§ 150.1 of this chapter, and which is
executed opposite a counterparty for
which the swap would qualify as a bona
fide hedging position and for which the

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19.00
19.00
19.00
19.00

risk is offset with a referenced contract;
and
(B) Spot-month swap offset. A cashsettled swap, regardless of whether it is
a referenced contract, executed opposite
a counterparty for which the swap
would qualify as a bona fide hedging
position and for which the risk is offset
with a physical-delivery referenced
contract in its spot month;
(iii) Other exemption. Any other
exemption from speculative position
limits under § 150.3 of this chapter,
including for a bona fide hedging
position as defined in § 150.1 of this
chapter or any exemption granted under
§ 150.3(b) or (d) of this chapter; or
(iv) Anticipatory exemption. An
anticipatory exemption under § 150.7 of
this chapter.
(2) Persons filing cotton on call
reports. Merchants and dealers of cotton
holding or controlling positions for
futures delivery in cotton that are
reportable pursuant to § 15.00(p)(1)(i) of
this chapter; or
(3) Persons responding to a special
call. All persons exceeding speculative
position limits under § 150.2 of this
chapter or all persons holding or
controlling positions for future delivery
that are reportable pursuant to
§ 15.00(p)(1) of this chapter who have
received a special call for series ’04
reports from the Commission or its
designee. Persons subject to a special
call shall file CFTC Form 204, 304, 504,
604 or 704 as instructed in the special
call. Filings in response to a special call
shall be made within one business day
of receipt of the special call unless
otherwise specified in the call. For the
purposes of this paragraph, the
Commission hereby delegates to the
Director of the Division of Market
Oversight, or to such other person
designated by the Director, authority to
issue calls for series ’04 reports.
(b) Manner of reporting. The manner
of reporting the information required in
§ 19.01 is subject to the following:
(1) Excluding certain source
commodities, products or byproducts of
the cash commodity hedged. If the
regular business practice of the
reporting person is to exclude certain
source commodities, products or
byproducts in determining his cash
positions for bona fide hedging
positions (as defined in § 150.1 of this
chapter), the same shall be excluded in

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the report, provided that the amount of
the source commodity being excluded is
de minimis, impractical to account for,
and/or on the opposite side of the
market from the market participant’s
hedging position. Such persons shall
furnish to the Commission or its
designee upon request detailed
information concerning the kind and
quantity of source commodity, product
or byproduct so excluded. Provided
however, when reporting for the cash
commodity of soybeans, soybean oil, or
soybean meal, the reporting person shall
show the cash positions of soybeans,
soybean oil and soybean meal.
(2) Cross hedges. Cash positions that
represent a commodity, or products or
byproducts of a commodity, that is
different from the commodity
underlying a commodity derivative
contract that is used for hedging, shall
be shown both in terms of the
equivalent amount of the commodity
underlying the commodity derivative
contract used for hedging and in terms
of the actual cash commodity as
provided for on the appropriate series
’04 form.
(3) Standards and conversion factors.
In computing their cash position, every
person shall use such standards and
conversion factors that are usual in the
particular trade or that otherwise reflect
the value-fluctuation-equivalents of the
cash position in terms of the commodity
underlying the commodity derivative
contract used for hedging. Such person
shall furnish to the Commission upon
request detailed information concerning
the basis for and derivation of such
conversion factors, including:
(i) The hedge ratio used to convert the
actual cash commodity to the equivalent
amount of the commodity underlying
the commodity derivative contract used
for hedging; and
(ii) An explanation of the
methodology used for determining the
hedge ratio.

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§ 19.01 Reports on stocks and fixed price
purchases and sales.

(a) Information required.—(1)
Conditional spot month limit
exemption. Persons required to file ’04
reports under § 19.00(a)(1)(i) shall file
CFTC Form 504 showing the
composition of the cash position of each
commodity underlying a referenced
contract that is held or controlled
including:
(i) The as of date;
(ii) The quantity of stocks owned of
such commodity that either:
(A) Is in a position to be delivered on
the physical-delivery core referenced
futures contract; or

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(B) Underlies the cash-settled core
referenced futures contract;
(iii) The quantity of fixed-price
purchase commitments open providing
for receipt of such cash commodity in:
(A) The delivery period for the
physical-delivery core referenced
futures contract; or
(B) The time period for cashsettlement price determination for the
cash-settled core referenced futures
contract;
(iv) The quantity of unfixed-price sale
commitments open providing for
delivery of such cash commodity in:
(A) The delivery period for the
physical-delivery core referenced
futures contract; or
(B) The time period for cashsettlement price determination for the
cash-settled core referenced futures
contract;
(v) The quantity of unfixed-price
purchase commitments open providing
for receipt of such cash commodity in:
(A) The delivery period for the
physical-delivery core referenced
futures contract; or
(B) The time period for cashsettlement price determination for the
cash-settled core referenced futures
contract; and
(vi) The quantity of fixed-price sale
commitments open providing for
delivery of such cash commodity in:
(A) The delivery period for the
physical-delivery core referenced
futures contract; or
(B) The time period for cashsettlement price determination for the
cash-settled core referenced futures
contract.
(2) Pass-through swap exemption.
Persons required to file ’04 reports
under § 19.00(a)(1)(ii) shall file CFTC
Form 604:
(i) Non-referenced-contract swap
offset. For each swap that is not a
referenced contract and which is
executed opposite a counterparty for
which the transaction would qualify as
a bona fide hedging position and for
which the risk is offset with a
referenced contract, showing:
(A) The underlying commodity or
commodity reference price;
(B) The applicable clearing identifiers;
(C) The notional quantity;
(D) The gross long or short position in
terms of futures-equivalents in the core
referenced futures contract; and
(E) The gross long or short positions
in the referenced contract for the
offsetting risk position; and
(ii) Spot-month swap offset. For each
cash-settled swap executed opposite a
counterparty for which the transaction
would qualify as a bona fide hedging
position and for which the risk is offset

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with a physical-delivery referenced
contract held into a spot month,
showing for such cash-settled swap that
is not a referenced contract the
information required under paragraph
(a)(2)(i) of this section and for such
cash-settled swap that is a referenced
contract:
(A) The gross long or short position
for such cash-settled swap in terms of
futures-equivalents in the core
referenced futures contract; and
(B) The gross long or short positions
in the physical-delivery referenced
contract for the offsetting risk position.
(3) Other exemptions. Persons
required to file ’04 reports under
§ 19.00(a)(1)(iii) shall file CFTC Form
204 reports showing the composition of
the cash position of each commodity
hedged or underlying a reportable
position including:
(i) The as of date, an indication of any
enumerated bona fide hedging position
exemption(s) claimed, the commodity
derivative contract held or controlled,
and the equivalent core reference
futures contract;
(ii) The quantity of stocks owned of
such commodities and their products
and byproducts;
(iii) The quantity of fixed-price
purchase commitments open in such
cash commodities and their products
and byproducts;
(iv) The quantity of fixed-price sale
commitments open in such cash
commodities and their products and
byproducts;
(v) The quantity of unfixed-price
purchase and sale commitments open in
such cash commodities and their
products and byproducts, in the case of
offsetting unfixed-price cash commodity
sales and purchases; and
(vi) For cotton, additional information
that includes:
(A) The quantity of equity in cotton
held by the Commodity Credit
Corporation under the provisions of the
Upland Cotton Program of the
Agricultural Stabilization and
Conservation Service of the U.S.
Department of Agriculture;
(B) The quantity of certificated cotton
owned; and
(C) The quantity of non-certificated
stocks owned.
(4) Anticipatory exemptions. Persons
required to file ’04 reports under
§ 19.00(a)(1)(iv) shall file:
(i) CFTC Form 704 for the initial
statement pursuant to § 150.7(d) of this
chapter, the supplemental statement
pursuant to § 150.7(e) of this chapter,
and the annual update pursuant to
§ 150.7(f) of this chapter; and
(ii) CFTC Form 204 monthly on the
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anticipated activity for the Specified
Period that was reported on such
person’s most recently filed Form 704,
Section A pursuant to § 150.7(g) of this
chapter.
(b) Time and place of filing reports.—
(1) General. Except for reports filed in
response to special calls made under
§ 19.00(a)(3) or reports required under
§ 19.00(a)(1)(i), (a)(1)(ii)(B), or
§ 19.01(a)(4)(i), each report shall be
made monthly:
(i) As of the close of business on the
last Friday of the month, and
(ii) As specified in paragraph (b)(3) of
this section, and not later than 9 a.m.
Eastern Time on the third business day
following the date of the report.
(2) Conditional spot month limit.
Persons required to file ’04 reports
under § 19.00(a)(1)(i) shall file each
report for special commodities as
specified by the Commission under
§ 19.03:
(i) As of the close of business for each
day the person exceeds the limit during
a spot period up to and through the day
the person’s position first falls below
the position limit; and
(ii) As specified in paragraph (b)(3) of
this section, and not later than 9 a.m.
Eastern Time on the next business day
following the date of the report.
(3) Electronic filing. CFTC ’04 reports
must be transmitted using the format,
coding structure, and electronic data
transmission procedures approved in
writing by the Commission.

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§ 19.02 Reports pertaining to cotton on
call purchases and sales.

(a) Information required. Persons
required to file ’04 reports under
§ 19.00(a)(2) shall file CFTC Form 304
reports showing the quantity of call
cotton bought or sold on which the
price has not been fixed, together with
the respective futures on which the
purchase or sale is based. As used
herein, call cotton refers to spot cotton
bought or sold, or contracted for
purchase or sale at a price to be fixed
later based upon a specified future.
(b) Time and place of filing reports.
Each report shall be made weekly as of
the close of business on Friday and filed
using the procedure under § 19.01(b)(3),
not later than 9 a.m. Eastern Time on
the third business day following the
date of the report.
§ 19.03 Reports pertaining to special
commodities.

From time to time to facilitate
surveillance in certain commodity
derivative contracts, the Commission
may designate a commodity derivative
contract for reporting under
§ 19.00(a)(1)(i) and will publish such
determination in the Federal Register
and on its Web site. Persons holding or
controlling positions in such special
commodity derivative contracts must,
beginning 30 days after notice is
published in the Federal Register,
comply with the reporting requirements
under § 19.00(a)(1)(i) and file Form 504

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for conditional spot month limit
exemptions.
§ 19.04 Delegation of authority to the
Director of the Division of Market Oversight.

(a) The Commission hereby delegates,
until it orders otherwise, to the Director
of the Division of Market Oversight or
such other employee or employees as
the Director may designate from time to
time, the authority in § 19.01 to provide
instructions or to determine the format,
coding structure, and electronic data
transmission procedures for submitting
data records and any other information
required under this part.
(b) The Director of the Division of
Market Oversight may submit to the
Commission for its consideration any
matter which has been delegated in this
section.
(c) Nothing in this section prohibits
the Commission, at its election, from
exercising the authority delegated in
this section.
§§ 19.05–19.10

[Reserved]

Appendix A to Part 19—Forms 204,
304, 504, 604, and 704
Note: This Appendix includes
representations of the proposed reporting
forms, which would be submitted in an
electronic format published pursuant to the
proposed rules, either via the Commission’s
web portal or via XML-based, secure FTP
transmission.
BILLING CODE 6351–01–P

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
PART 32—REGULATION OF
COMMODITY OPTION TRANSACTIONS
12. The authority citation for part 32
continues to read as follows:

■

Authority: 7 U.S.C. 1a, 2, 6c, and 12a,
unless otherwise noted.

■

18. Revise § 38.301 to read as follows:

13. Amend § 32.3 by revising
paragraph (c)(2) to read as follows:

§ 38.301 Position limitations and
accountability.

§ 32.3

A designated contract market must
meet the requirements of part 150 of this
chapter, as applicable.

■

Trade options.

*

*
*
*
*
(c) * * *
(2) Part 150 (Position Limits) of this
chapter;
*
*
*
*
*

PART 140—ORGANIZATION,
FUNCTIONS, AND PROCEDURES OF
THE COMMISSION
19. The authority citation for part 140
continues to read as follows:

■

PART 37—SWAP EXECUTION
FACILITIES

Authority: 7 U.S.C. 2(a)(12), 13(c), 13(d),
13(e), and 16(b).

14. The authority citation for part 37
continues to read as follows:

■

§ 140.97

Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a–
2, 7b–3, and 12a, as amended by Titles VII
and VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Pub. L.
111–203, 124 Stat. 1376
■

15. Revise § 37.601 to read as follows:

§ 37.601 Additional sources for
compliance.

A swap execution facility that is a
trading facility must meet the
requirements of part 150 of this chapter,
as applicable.
■ 16. In Appendix B to part 37, under
the heading Core Principle 6 of Section
5H of the Act, revise the introductory
text of paragraph (B) and paragraph
(B)(2)(a) to read as follows:
Appendix B to Part 37—Guidance on,
and Acceptable Practices in,
Compliance with Core Principles
*

*

*

*

*

CORE PRINCIPLE 6 OF SECTION 5H OF
THE ACT—POSITION LIMITS OR
ACCOUNTABILITY

*

*

*

*

*

(B) Position limits. For any contract that is
subject to a position limitation established by
the Commission pursuant to section 4a(a) of
the Act, the swap execution facility that is a
trading facility shall:

*

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Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e,
6f, 6g, 6i, 6j, 6k, 6l, 6m, 6n, 7, 7a–2, 7b, 7b–
1, 7b–3, 8, 9, 15, and 21, as amended by the
Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111–203,
124 Stat. 1376.

*

*

*

*

(2) * * *
(a) Guidance. A swap execution facility
that is a trading facility must meet the
requirements of part 150 of this chapter, as
applicable. A swap execution facility that is
not a trading facility should consider part
150 of this chapter as guidance.

*

*

*

*

*

PART 38—DESIGNATED CONTRACT
MARKETS
17. The authority citation for part 38
continues to read as follows:

■

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■

[Removed and Reserved]

20. Remove and reserve § 140.97.

PART 150—LIMITS ON POSITIONS
21. The authority citation for part 150
is revised to read as follows:

■

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f,
6g, 6t, 12a, 19, as amended by Title VII of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111–203,
124 Stat. 1376 (2010).
■

22. Revise § 150.1 to read as follows:

§ 150.1

Definitions.

As used in this part—
Basis contract means a commodity
derivative contract that is cash-settled
based on the difference in:
(1) The price, directly or indirectly,
of:
(i) A particular core referenced futures
contract; or
(ii) A commodity deliverable on a
particular core referenced futures
contract, whether at par, a fixed
discount to par, or a premium to par;
and
(2) The price, at a different delivery
location or pricing point than that of the
same particular core referenced futures
contract, directly or indirectly, of:
(i) A commodity deliverable on the
same particular core referenced futures
contract, whether at par, a fixed
discount to par, or a premium to par; or
(ii) A commodity that is listed in
Appendix B of this part as substantially
the same as a commodity underlying the
same core referenced futures contract.
Bona fide hedging position means any
position whose purpose is to offset price
risks incidental to commercial cash,
spot, or forward operations, and such
position is established and liquidated in
an orderly manner in accordance with
sound commercial practices, provided
that:

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(1) Hedges of an excluded commodity.
For a position in commodity derivative
contracts in an excluded commodity, as
that term is defined in section 1a(19) of
the Act:
(i) Such position is economically
appropriate to the reduction of risks in
the conduct and management of a
commercial enterprise; and
(ii)(A) Is enumerated in paragraph (3),
(4) or (5) of this definition; or
(B) Such position is recognized as a
bona fide hedging position by the
designated contract market or swap
execution facility that is a trading
facility, pursuant to such market’s rules
submitted to the Commission, which
rules may include risk management
exemptions consistent with Appendix A
of this part; and
(2) Hedges of a physical commodity.
For a position in commodity derivative
contracts in a physical commodity:
(i) Such position:
(A) Represents a substitute for
transactions made or to be made, or
positions taken or to be taken, at a later
time in a physical marketing channel;
(B) Is economically appropriate to the
reduction of risks in the conduct and
management of a commercial enterprise;
(C) Arises from the potential change
in the value of—
(1) Assets which a person owns,
produces, manufactures, processes, or
merchandises or anticipates owning,
producing, manufacturing, processing,
or merchandising;
(2) Liabilities which a person owes or
anticipates incurring; or
(3) Services that a person provides,
purchases, or anticipates providing or
purchasing; and
(D) Is enumerated in paragraph (3), (4)
or (5) of this definition; or
(ii)(A) Pass-through swap offsets.
Such position reduces risks attendant to
a position resulting from a swap in the
same physical commodity that was
executed opposite a counterparty for
which the position at the time of the
transaction would qualify as a bona fide
hedging position pursuant to paragraph
(2)(i) of this definition (a pass-through
swap counterparty), provided that no
such risk-reducing position is
maintained in any physical-delivery
commodity derivative contract during
the lesser of the last five days of trading
or the time period for the spot month in
such physical-delivery commodity
derivative contract; and
(B) Pass-through swaps. Such swap
position was executed opposite a passthrough swap counterparty and to the
extent such swap position has been
offset pursuant to paragraph (2)(ii)(A) of
this definition.

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(3) Enumerated hedging positions. A
bona fide hedging position includes any
of the following specific positions:
(i) Hedges of inventory and cash
commodity purchase contracts. Short
positions in commodity derivative
contracts that do not exceed in quantity
ownership or fixed-price purchase
contracts in the contract’s underlying
cash commodity by the same person.
(ii) Hedges of cash commodity sales
contracts. Long positions in commodity
derivative contracts that do not exceed
in quantity the fixed-price sales
contracts in the contract’s underlying
cash commodity by the same person and
the quantity equivalent of fixed-price
sales contracts of the cash products and
by-products of such commodity by the
same person.
(iii) Hedges of unfilled anticipated
requirements. Provided that such
positions in a physical-delivery
commodity derivative contract, during
the lesser of the last five days of trading
or the time period for the spot month in
such physical-delivery contract, do not
exceed the person’s unfilled anticipated
requirements of the same cash
commodity for that month and for the
next succeeding month:
(A) Long positions in commodity
derivative contracts that do not exceed
in quantity unfilled anticipated
requirements of the same cash
commodity, and that do not exceed
twelve months for an agricultural
commodity, for processing,
manufacturing, or use by the same
person; and
(B) Long positions in commodity
derivative contracts that do not exceed
in quantity unfilled anticipated
requirements of the same cash
commodity for resale by a utility that is
required or encouraged to hedge by its
public utility commission on behalf of
its customers’ anticipated use.
(iv) Hedges by agents. Long or short
positions in commodity derivative
contracts by an agent who does not own
or has not contracted to sell or purchase
the offsetting cash commodity at a fixed
price, provided that the agent is
responsible for merchandising the cash
positions that are being offset in
commodity derivative contracts and the
agent has a contractual arrangement
with the person who owns the
commodity or holds the cash market
commitment being offset.
(4) Other enumerated hedging
positions. A bona fide hedging position
also includes the following specific
positions, provided that no such
position is maintained in any physicaldelivery commodity derivative contract
during the lesser of the last five days of
trading or the time period for the spot

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month in such physical-delivery
contract:
(i) Hedges of unsold anticipated
production. Short positions in
commodity derivative contracts that do
not exceed in quantity unsold
anticipated production of the same
commodity, and that do not exceed
twelve months of production for an
agricultural commodity, by the same
person.
(ii) Hedges of offsetting unfixed-price
cash commodity sales and purchases.
Short and long positions in commodity
derivative contracts that do not exceed
in quantity that amount of the same
cash commodity that has been bought
and sold by the same person at unfixed
prices:
(A) Basis different delivery months in
the same commodity derivative
contract; or
(B) Basis different commodity
derivative contracts in the same
commodity, regardless of whether the
commodity derivative contracts are in
the same calendar month.
(iii) Hedges of anticipated royalties.
Short positions in commodity derivative
contracts offset by the anticipated
change in value of mineral royalty rights
that are owned by the same person,
provided that the royalty rights arise out
of the production of the commodity
underlying the commodity derivative
contract.
(iv) Hedges of services. Short or long
positions in commodity derivative
contracts offset by the anticipated
change in value of receipts or payments
due or expected to be due under an
executed contract for services held by
the same person, provided that the
contract for services arises out of the
production, manufacturing, processing,
use, or transportation of the commodity
underlying the commodity derivative
contract, and which may not exceed one
year for agricultural commodities.
(5) Cross-commodity hedges.
Positions in commodity derivative
contracts described in paragraph (2)(ii),
paragraphs (3)(i) through (iv) and
paragraphs (4)(i) through (iv) of this
definition may also be used to offset the
risks arising from a commodity other
than the same cash commodity
underlying a commodity derivative
contract, provided that the fluctuations
in value of the position in the
commodity derivative contract, or the
commodity underlying the commodity
derivative contract, are substantially
related to the fluctuations in value of
the actual or anticipated cash position
or pass-through swap and no such
position is maintained in any physicaldelivery commodity derivative contract
during the lesser of the last five days of

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trading or the time period for the spot
month in such physical-delivery
contract.
Commodity derivative contract
means, for this part, any futures, option,
or swap contract in a commodity (other
than a security futures product as
defined in section 1a(45) of the Act).
Core referenced futures contract
means a futures contract that is listed in
§ 150.2(d).
Eligible affiliate. An eligible affiliate
means an entity with respect to which
another person:
(1) Directly or indirectly holds either:
(i) A majority of the equity securities
of such entity, or
(ii) The right to receive upon
dissolution of, or the contribution of, a
majority of the capital of such entity;
(2) Reports its financial statements on
a consolidated basis under Generally
Accepted Accounting Principles or
International Financial Reporting
Standards, and such consolidated
financial statements include the
financial results of such entity; and
(3) Is required to aggregate the
positions of such entity under § 150.4
and does not claim an exemption from
aggregation for such entity.
Eligible entity means a commodity
pool operator; the operator of a trading
vehicle which is excluded or which
itself has qualified for exclusion from
the definition of the term ‘‘pool’’ or
‘‘commodity pool operator,’’
respectively, under § 4.5 of this chapter;
the limited partner, limited member or
shareholder in a commodity pool the
operator of which is exempt from
registration under § 4.13 of this chapter;
a commodity trading advisor; a bank or
trust company; a savings association; an
insurance company; or the separately
organized affiliates of any of the above
entities:
(1) Which authorizes an independent
account controller independently to
control all trading decisions with
respect to the eligible entity’s client
positions and accounts that the
independent account controller holds
directly or indirectly, or on the eligible
entity’s behalf, but without the eligible
entity’s day-to-day direction; and
(2) Which maintains:
(i) Only such minimum control over
the independent account controller as is
consistent with its fiduciary
responsibilities to the managed
positions and accounts, and necessary
to fulfill its duty to supervise diligently
the trading done on its behalf; or
(ii) If a limited partner, limited
member or shareholder of a commodity
pool the operator of which is exempt
from registration under § 4.13 of this

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chapter, only such limited control as is
consistent with its status.
Entity means a ‘‘person’’ as defined in
section 1a of the Act.
Excluded commodity means an
‘‘excluded commodity’’ as defined in
section 1a of the Act.
Futures-equivalent means
(1) An option contract, whether an
option on a future or an option that is
a swap, which has been adjusted by an
economically reasonable and
analytically supported risk factor, or
delta coefficient, for that option
computed as of the previous day’s close
or the current day’s close or
contemporaneously during the trading
day, and;
(2) A swap which has been converted
to an economically equivalent amount
of an open position in a core referenced
futures contract.
Independent account controller
means a person—
(1) Who specifically is authorized by
an eligible entity, as defined in this
section, independently to control
trading decisions on behalf of, but
without the day-to-day direction of, the
eligible entity;
(2) Over whose trading the eligible
entity maintains only such minimum
control as is consistent with its
fiduciary responsibilities for managed
positions and accounts to fulfill its duty
to supervise diligently the trading done
on its behalf or as is consistent with
such other legal rights or obligations
which may be incumbent upon the
eligible entity to fulfill;
(3) Who trades independently of the
eligible entity and of any other
independent account controller trading
for the eligible entity;
(4) Who has no knowledge of trading
decisions by any other independent
account controller; and
(5) Who is
(i) Registered as a futures commission
merchant, an introducing broker, a
commodity trading advisor, or an
associated person of any such registrant,
or
(ii) A general partner, managing
member or manager of a commodity
pool the operator of which is excluded
from registration under § 4.5(a)(4) of this
chapter or § 4.13 of this chapter,
provided that such general partner,
managing member or manager complies
with the requirements of § 150.4(c).
Intermarket spread position means a
long position in a commodity derivative
contract in a particular commodity at a
particular designated contract market or
swap execution facility and a short
position in another commodity
derivative contract in that same
commodity away from that particular

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designated contract market or swap
execution facility.
Intramarket spread position means a
long position in a commodity derivative
contract in a particular commodity and
a short position in another commodity
derivative contract in the same
commodity on the same designated
contract market or swap execution
facility.
Long position means a long call
option, a short put option or a long
underlying futures contract, or a long
futures-equivalent swap.
Physical commodity means any
agricultural commodity as that term is
defined in § 1.3 of this chapter or any
exempt commodity as that term is
defined in section 1a(20) of the Act.
Pre-enactment swap means any swap
entered into prior to enactment of the
Dodd-Frank Act of 2010 (July 21, 2010),
the terms of which have not expired as
of the date of enactment of that Act.
Pre-existing position means any
position in a commodity derivative
contract acquired in good faith prior to
the effective date of any bylaw, rule,
regulation or resolution that specifies an
initial speculative position limit level or
a subsequent change to that level.
Referenced contract means, on a
futures equivalent basis with respect to
a particular core referenced futures
contract, a core referenced futures
contract listed in § 150.2(d), or a futures
contract, options contract, or swap, and
excluding any guarantee of a swap, a
basis contract, or a commodity index
contract:
(1) That is:
(i) Directly or indirectly linked,
including being partially or fully settled
on, or priced at a fixed differential to,
the price of that particular core
referenced futures contract; or
(ii) Directly or indirectly linked,
including being partially or fully settled
on, or priced at a fixed differential to,
the price of the same commodity
underlying that particular core
referenced futures contract for delivery
at the same location or locations as
specified in that particular core
referenced futures contract; and
(2) Where:
(i) Calendar spread contract means a
cash-settled agreement, contract, or
transaction that represents the
difference between the settlement price
in one or a series of contract months of
an agreement, contract or transaction
and the settlement price of another
contract month or another series of
contract months’ settlement prices for
the same agreement, contract or
transaction;
(ii) Commodity index contract means
an agreement, contract, or transaction

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that is not a basis or any type of spread
contract, based on an index comprised
of prices of commodities that are not the
same or substantially the same;
(iii) Spread contract means either a
calendar spread contract or an
intercommodity spread contract; and
(iv) Intercommodity spread contract
means a cash-settled agreement,
contract or transaction that represents
the difference between the settlement
price of a referenced contract and the
settlement price of another contract,
agreement, or transaction that is based
on a different commodity.
Short position means a short call
option, a long put option or a short
underlying futures contract, or a short
futures-equivalent swap.
Speculative position limit means the
maximum position, either net long or
net short, in a commodity derivatives
contract that may be held or controlled
by one person, absent an exemption,
such as an exemption for a bona fide
hedging position. This limit may apply
to a person’s combined position in all
commodity derivative contracts in a
particular commodity (all-monthscombined), a person’s position in a
single month of commodity derivative
contracts in a particular commodity, or
a person’s position in the spot month of
commodity derivative contacts in a
particular commodity. Such a limit may
be established under federal regulations
or rules of a designated contract market
or swap execution facility. An exchange
may also apply other limits, such as a
limit on gross long or gross short
positions, or a limit on holding or
controlling delivery instruments.
Spot month means—
(1) For physical-delivery commodity
derivative contracts, the period of time
beginning at the earlier of 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 contract market, or the close of trading
on the trading day preceding the thirdto-last trading day, until the contract is
no longer listed for trading (or available
for transfer, such as through exchange
for physical transactions).
(2) For cash-settled contracts, spot
month means the period of time
beginning at the earlier of the close of
trading on the trading day preceding the
period in which the underlying cashsettlement price is calculated, or the
close of trading on the trading day
preceding the third-to-last trading day,
until the contract cash-settlement price
is determined and published; provided
however, if the cash-settlement price is
determined based on prices of a core
referenced futures contract during the
spot month period for that core

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referenced futures contract, then the
spot month for that cash-settled contract
is the same as the spot month for that
core referenced futures contract.
Swap means ‘‘swap’’ as that term is
defined in section 1a of the Act and as
further defined in § 1.3 of this chapter.
Swap dealer means ‘‘swap dealer’’ as
that term is defined in section 1a of the
Act and as further defined in § 1.3 of
this chapter.
Transition period swap means a swap
entered into during the period
commencing after the enactment of the
Dodd-Frank Act of 2010 (July 21, 2010),
and ending 60 days after the publication
in the Federal Register of final

amendments to part 150 of this chapter
implementing section 737 of the DoddFrank Act of 2010.
■ 23. Revise § 150.2 to read as follows:
§ 150.2

Speculative position limits.

(a) Spot-month speculative position
limits. No person may hold or control
positions in referenced contracts in the
spot month, net long or net short, in
excess of the level specified by the
Commission for:
(1) Physical-delivery referenced
contracts; and, separately,
(2) Cash-settled referenced contracts;
(b) Single-month and all-monthscombined speculative position limits.
No person may hold or control

positions, net long or net short, in
referenced contracts in a single month
or in all months combined (including
the spot month) in excess of the levels
specified by the Commission.
(c) For purposes of this part:
(1) The spot month and any single
month shall be those of the core
referenced futures contract; and
(2) An eligible affiliate is not required
to comply separately with speculative
position limits.
(d) Core referenced futures contracts.
Speculative position limits apply to
referenced contracts based on the core
referenced futures contracts listed in the
following table:

CORE REFERENCED FUTURES CONTRACTS
Commodity type

Core referenced futures
contract 1

Designated contract market

(1) Legacy Agricultural.
Chicago Board of Trade.
Corn (C).
Oats (O).
Soybeans (S).
Soybean Meal (SM).
Soybean Oil (SO).
Wheat (W).
Kansas City Board of Trade.
Hard Winter Wheat (KW).
ICE Futures U.S.
Cotton No. 2 (CT).
Minneapolis Grain Exchange.
Hard Red Spring Wheat (MWE).
(2) Other Agricultural.
Chicago Board of Trade.
Rough Rice (RR).
Chicago Mercantile Exchange.
Class III Milk (DA).
Feeder Cattle (FC).
Lean Hog (LH).
Live Cattle (LC).
ICE Futures U.S.
Cocoa (CC).
Coffee C (KC).
FCOJ–A (OJ).
U.S. Sugar No. 11 (SB).
U.S. Sugar No. 16 (SF).
(3) Energy.
New York Mercantile Exchange.
Light Sweet Crude Oil (CL).
NY Harbor ULSD (HO).
RBOB Gasoline (RB).
Henry Hub Natural Gas (NG).
(4) Metals.
Commodity Exchange, Inc.
Gold (GC).
Silver (SI).
Copper (HG).
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New York Mercantile Exchange.
Palladium (PA).
Platinum (PL).
1 The

core referenced futures contract includes any successor contracts.

(e) Levels of speculative position
limits. (1) Initial levels. The initial levels
of speculative position limits are fixed
by the Commission at the levels listed

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in Appendix D of this part and shall be
effective 60 days after publication in the
Federal Register.

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(2) Subsequent levels. (i) The
Commission shall fix subsequent levels
of speculative position limits in
accordance with the procedures in this

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section and publish such levels on the
Commission’s Web site at http://
www.cftc.gov.
(ii) Such subsequent speculative
position limit levels shall each apply
beginning on the close of business of the
last business day of the second complete
calendar month after publication of
such levels; provided however, if such
close of business is in a spot month of
a core referenced futures contract, the
subsequent spot-month level shall apply
beginning with the next spot month for
that contract.
(iii) All subsequent levels of
speculative position limits shall be
rounded up to the nearest hundred
contracts.
(3) Procedure for computing levels of
spot-month limits. (i) No less frequently
than every two calendar years, the
Commission shall fix the level of the
spot-month limit no greater than onequarter of the estimated spot-month
deliverable supply in the relevant core
referenced futures contract. Unless the
Commission determines to rely on its
own estimate of deliverable supply, the
Commission shall utilize the estimated
spot-month deliverable supply provided
by a designated contract market.
(ii) Each designated contract market
in a core referenced futures contract
shall supply to the Commission an
estimated spot-month deliverable
supply. A designated contract market
may use the guidance regarding
deliverable supply in Appendix C of
part 38 of this chapter. Each estimate
must be accompanied by a description
of the methodology used to derive the
estimate and any statistical data
supporting the estimate, and must be
submitted no later than the following:
(A) For energy commodities, January
31 of the second calendar year following
the most recent Commission action
establishing such limit levels;
(B) For metals commodities, March 31
of the second calendar year following
the most recent Commission action
establishing such limit levels;
(C) For legacy agricultural
commodities, May 31 of the second
calendar year following the most recent
Commission action establishing such
limit levels; and
(D) For other agricultural
commodities, August 31 of the second
calendar year following the most recent
Commission action establishing such
limit levels.
(4) Procedure for computing levels of
single-month and all-months-combined
limits. No less frequently than every two
calendar years, the Commission shall fix
the level, for each referenced contract,
of the single-month limit and the allmonths-combined limit. Each such limit

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shall be based on 10 percent of the
estimated average open interest in
referenced contracts, up to 25,000
contracts, with a marginal increase of
2.5 percent thereafter.
(i) Time periods for average open
interest. The Commission shall estimate
average open interest in referenced
contracts based on the largest annual
average open interest computed for each
of the past two calendar years. The
Commission may estimate average open
interest in referenced contracts using
either month-end open contracts or
open contracts for each business day in
the time period, as practical.
(ii) Data sources for average open
interest. The Commission shall estimate
average open interest in referenced
contracts using data reported to the
Commission pursuant to part 16 of this
chapter, and open swaps reported to the
Commission pursuant to part 20 of this
chapter or data obtained by the
Commission from swap data
repositories collecting data pursuant to
part 45 of this chapter. Options listed on
designated contract markets shall be
adjusted using an option delta reported
to the Commission pursuant to part 16
of this chapter. Swaps shall be counted
on a futures equivalent basis, equal to
the economically equivalent amount of
core referenced futures contracts
reported pursuant to part 20 of this
chapter or as calculated by the
Commission using swap data collected
pursuant to part 45 of this chapter.
(iii) Publication of average open
interest. The Commission shall publish
estimates of average open interest in
referenced contracts on a monthly basis,
as practical, after such data is submitted
to the Commission.
(iv) Minimum levels. Provided
however, notwithstanding the above, the
minimum levels shall be the greater of
the level of the spot month limit
determined under paragraph (e)(3) of
this section and 1,000 for referenced
contracts in an agricultural commodity
or 5,000 for referenced contracts in an
exempt commodity.
(f) Pre-existing Positions—(1) Preexisting positions in a spot-month.
Other than pre-enactment and transition
period swaps exempted under
§ 150.3(d), a person shall comply with
spot month speculative position limits.
(2) Pre-existing positions in a nonspot-month. A single-month or allmonths-combined speculative position
limit established under this section
shall not apply to any commodity
derivative contract acquired in good
faith prior to the effective date of such
limit, provided, however, that if such
position is not a pre-enactment or
transition period swap then that

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75827

position shall be attributed to the person
if the person’s position is increased after
the effective date of such limit.
(g) Positions on Foreign Boards of
Trade. The aggregate speculative
position limits established under this
section shall apply to a person with
positions in referenced contracts
executed on, or pursuant to the rules of
a foreign board of trade, provided that:
(1) Such referenced contracts settle
against any price (including the daily or
final settlement price) of one or more
contracts listed for trading on a
designated contract market or swap
execution facility that is a trading
facility; and
(2) The foreign board of trade makes
available such referenced contracts to its
members or other participants located in
the United States through direct access
to its electronic trading and order
matching system.
(h) Anti-evasion provision. For the
purposes of applying the speculative
position limits in this section, a
commodity index contract used to
circumvent speculative position limits
shall be considered to be a referenced
contract.
(1) Delegation of authority to the
Director of the Division of Market
Oversight. (i) The Commission hereby
delegates, until it orders otherwise, to
the Director of the Division of Market
Oversight or such other employee or
employees as the Director may designate
from time to time, the authority in
paragraph (e) of this section to fix and
publish subsequent levels of speculative
position limits.
(ii) The Director of the Division of
Market Oversight may submit to the
Commission for its consideration any
matter which has been delegated in this
section.
(iii) Nothing in this section prohibits
the Commission, at its election, from
exercising the authority delegated in
this section.
(iv) The Commission will periodically
update these initial levels for
speculative position limits and publish
such subsequent levels on its Web site
at: http://www.cftc.gov.
(2) Reserved.
■ 24. Revise § 150.3 to read as follows:
§ 150.3

Exemptions.

(a) Positions which may exceed limits.
The position limits set forth in § 150.2
may be exceeded to the extent that:
(1) Such positions are:
(i) Bona fide hedging positions as
defined in § 150.1, provided that for
anticipatory bona fide hedge positions
under paragraphs (3)(iii), (4)(i), (4)(iii),
and (4)(iv) of the bona fide hedging
position definition in § 150.1 the person

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complies with the filing procedure
found in § 150.7;
(ii) Financial distress positions
exempted under paragraph (b) of this
section;
(iii) Conditional spot-month limit
positions exempted under paragraph (c)
of this section; or
(iv) Other positions exempted under
paragraph (e) of this section; and that
(2) The recordkeeping requirements of
paragraph (g) of this section are met;
and further that
(3) The reporting requirements of part
19 of this chapter are met.
(b) Financial distress exemptions.
Upon specific request made to the
Commission, the Commission may
exempt a person or related persons
under financial distress circumstances
for a time certain from any of the
requirements of this part. Financial
distress circumstances include
situations involving the potential
default or bankruptcy of a customer of
the requesting person or persons, an
affiliate of the requesting person or
persons, or a potential acquisition target
of the requesting person or persons.
(c) Conditional spot-month limit
exemption. The position limits set forth
in § 150.2 may be exceeded for cashsettled referenced contracts provided
that such positions do not exceed five
times the level of the spot-month limit
specified by the Commission and the
person holding or controlling such
positions does not hold or control
positions in spot-month physicaldelivery referenced contracts.
(d) Pre-enactment and transition
period swaps exemption. The
speculative position limits set forth in
§ 150.2 shall not apply to positions
acquired in good faith in any preenactment swap, or in any transition
period swap, in either case as defined
by § 150.1, provided, however, that a
person may net such positions with
post-effective date commodity
derivative contracts for the purpose of
complying with any non-spot-month
speculative position limit.
(e) Other exemptions. Any person
engaging in risk-reducing practices
commonly used in the market, which
they believe may not be specifically
enumerated in the definition of bona
fide hedging position in § 150.1, may
request:
(1) An interpretative letter from
Commission staff, under § 140.99 of this
chapter, concerning the applicability of
the bona fide hedging position
exemption; or
(2) Exemptive relief from the
Commission under section 4a(a)(7) of
the Act.

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(3) Appendix C of this part provides
a non-exhaustive list of examples of
bona fide hedging positions as defined
under § 150.1.
(f) Previously granted exemptions.
Exemptions granted by the Commission
under § 1.47 of this chapter for swap
risk management shall not apply to
swap positions entered into after the
effective date of initial position limits
implementing section 737 of the DoddFrank Act of 2010.
(g) Recordkeeping. (1) Persons who
avail themselves of exemptions under
this section, including exemptions
granted under section 4a(a)(7) of the
Act, shall keep and maintain complete
books and records concerning all details
of their related cash, forward, futures,
futures options and swap positions and
transactions, including anticipated
requirements, production and royalties,
contracts for services, cash commodity
products and by-products, and crosscommodity hedges, and shall make such
books and records, including a list of
pass-through swap counterparties,
available to the Commission upon
request under paragraph (h) of this
section.
(2) Further, a party seeking to rely
upon the pass-through swap offset in
paragraph (2)(ii) of the definition of
‘‘bona fide hedging position’’ in § 150.1,
in order to exceed the position limits of
§ 150.2 with respect to such a swap,
may only do so if its counterparty
provides a written representation (e.g.,
in the form of a field or other
representation contained in a mutually
executed trade confirmation) that, as to
such counterparty, the swap qualifies in
good faith as a ‘‘bona fide hedging
position,’’ as defined in § 150.1, at the
time the swap was executed. That
written representation shall be retained
by the parties to the swap for a period
of at least two years following the
expiration of the swap and furnished to
the Commission upon request.
(3) Any person that represents to
another person that a swap qualifies as
a pass-through swap under paragraph
(2)(ii) of the definition of ‘‘bona fide
hedging position’’ in § 150.1 shall keep
and make available to the Commission
upon request all relevant books and
records supporting such a
representation for a period of at least
two years following the expiration of the
swap.
(h) Call for information. Upon call by
the Commission, the Director of the
Division of Market Oversight or the
Director’s delegate, 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

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positions owned or controlled by that
person; trading done pursuant to the
claimed exemption; the commodity
derivative contracts or cash market
positions which support the claim of
exemption; and the relevant business
relationships supporting a claim of
exemption.
(i) Aggregation of accounts. Entities
required to aggregate accounts or
positions under § 150.4 shall be
considered the same person for the
purpose of determining whether they
are eligible for a bona fide hedging
position exemption under paragraph
(a)(1)(i) of this section with respect to
such aggregated account or position.
(j) Delegation of authority to the
Director of the Division of Market
Oversight. (1) The Commission hereby
delegates, until it orders otherwise, to
the Director of the Division of Market
Oversight or such other employee or
employees as the Director may designate
from time to time, the authority in
paragraph (b) of this section to provide
exemptions in circumstances of
financial distress.
(2) The Director of the Division of
Market Oversight may submit to the
Commission for its consideration any
matter which has been delegated in this
section.
(3) Nothing in this section prohibits
the Commission, at its election, from
exercising the authority delegated in
this section.
■ 25. Revise § 150.5 to read as follows:
§ 150.5
limits.

Exchange-set speculative position

(a) Requirements and acceptable
practices for commodity derivative
contracts subject to federal position
limits. (1) For any commodity derivative
contract that is subject to a speculative
position limit under § 150.2, the
designated contract market or swap
execution facility that is a trading
facility shall set a speculative position
limit no higher than the level specified
in § 150.2.
(2) Exemptions. (i) Hedge exemption.
Any hedge exemption rules adopted by
a designated contract markets or a swap
execution facility that is a trading
facility must conform to the definition
of bona fide hedging position in § 150.1.
(ii) Other exemptions. In addition to
the express exemptions specified in
§ 150.3, a designated contract market or
swap execution facility that is a trading
facility may grant other exemptions for:
(A) Intramarket spread positions as
defined in § 150.1, provided that such
positions must be outside of the spot
month for physical-delivery contracts
and must not exceed the all-months
limit set forth in § 150.2 when combined

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with any other net positions in the
single month;
(B) Intermarket spread positions as
defined in § 150.1, provided that such
positions must be outside of the spot
month for physical-delivery contracts.
(iii) Application for exemption.
Traders must apply to the designated
contract market or swap execution
facility that is a trading facility for any
exemption from its speculative position
limit rules. The designated contract
market or swap execution facility that is
a trading facility may limit bona fide
hedging positions, or any other
positions that have been exempted
pursuant to § 150.3, which it determines
are not in accord with sound
commercial practices, or which exceed
an amount that may be established and
liquidated in an orderly fashion.
(3) Pre-enactment and transition
period swap positions. Speculative
position limits set forth in § 150.2 shall
not apply to positions acquired in good
faith in any pre-enactment swap, or in
any transition period swap, in either
case as defined by § 150.1. Provided,
however, that a designated contract
market or swap execution facility that is
a trading facility shall allow a person to
net such position with post-effective
date commodity derivative contracts for
the purpose of complying with any nonspot-month speculative position limit.
(4) Pre-existing positions. (i) Preexisting positions in a spot-month. A
designated contract market or swap
execution facility that is a trading
facility must require compliance with
spot month speculative position limits
for pre-existing positions in commodity
derivative contracts other than preenactment and transition period swaps.
(ii) Pre-existing positions in a nonspot-month. A single-month or allmonths-combined speculative position
limit established under § 150.2 shall not
apply to any commodity derivative
contract acquired in good faith prior to
the effective date of such limit,
provided, however, that such position
shall be attributed to the person if the
person’s position is increased after the
effective date of such limit.
(5) Aggregation. Designated contract
markets and swap execution facilities
that are trading facilities must have
aggregation rules that conform to
§ 150.4.
(6) Additional acceptable practices. A
designated contract market or swap
execution facility that is a trading
facility may:
(i) Impose additional restrictions on a
person with a long position in the spot
month of a physical-delivery contract
who stands for delivery, takes that

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delivery, then re-establishes a long
position;
(ii) Establish limits on the amount of
delivery instruments that a person may
hold in a physical-delivery contract; and
(iii) Impose such other restrictions as
it deems necessary to reduce the
potential threat of market manipulation
or congestion, to maintain orderly
execution of transactions, or for such
other purposes consistent with its
responsibilities.
(b) Requirements and acceptable
practices for commodity derivative
contracts that are not subject to the
limits set forth in § 150.2, including
derivative contracts in a physical
commodity as defined in § 150.1 and in
an excluded commodity as defined in
section 1a(19) of the Act—(1) Levels at
initial listing. At the time of each
commodity derivative contract’s initial
listing, a designated contract market or
swap execution facility that is a trading
facility should base speculative position
limits on the following:
(i) Spot month position limits. (A)
Commodities with a measurable
deliverable supply. For all commodity
derivative contracts not subject to the
limits set forth in § 150.2 that are based
on a commodity with a measurable
deliverable supply, the spot month limit
level should be established at a level
that is no greater than one-quarter of the
estimated spot month deliverable
supply, calculated separately for each
month to be listed (Designated Contract
Markets and Swap Execution Facilities
may refer to the guidance in paragraph
(b)(1)(i) of Appendix C of part 38 for
guidance on estimating spot-month
deliverable supply);
(B) Commodities without a
measurable deliverable supply. For
commodity derivative contracts that are
based on a commodity with no
measurable deliverable supply, the spot
month limit level should be set at a
level that is necessary and appropriate
to reduce the potential threat of market
manipulation or price distortion of the
contract’s or the underlying
commodity’s price or index.
(ii) Individual non-spot or all-monthscombined position limits. (A)
Agricultural commodity derivative
contracts. For agricultural commodity
derivative contracts not subject to the
limits set forth in § 150.2, the individual
non-spot or all-months-combined levels
should be no greater than 1,000
contracts, when the notional quantity
per contract is no larger than a typical
cash market transaction in the
underlying commodity. If the notional
quantity per contract is larger than the
typical cash market transaction, then the
individual non-spot month limit or all-

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75829

months combined limit level should be
scaled down accordingly. If the
commodity derivative contract is
substantially the same as a pre-existing
designated contract market or swap
execution facility commodity derivative
contract, then the designated contract or
swap execution facility may adopt the
same limit as applies to that pre-existing
commodity derivative contract;
(B) Exempt or excluded commodity
derivative contracts. For exempt
commodity derivative contracts not
subject to the limits set forth in § 150.2
or excluded commodity derivative
contracts, the individual non-spot or allmonths-combined levels should be no
greater than 5,000 contracts, when the
notional quantity per contract is no
larger than a typical cash market
transaction in the underlying
commodity. If the notional quantity per
contract is larger than the typical cash
market transaction, then the individual
non-spot month limit or all-months
combined limit level should be scaled
down accordingly. If the commodity
derivative contract is substantially the
same as a pre-existing commodity
derivative contract, then the designated
contract market or swap execution
facility may adopt the same limit as
applies to that pre-existing commodity
derivative contract.
(iii) Commodity derivative contracts
that are cash-settled by referencing a
daily settlement price of an existing
contract. For commodity derivative
contracts that are cash-settled by
referencing a daily settlement price of
an existing contract listed on a
designated contract market or swap
execution facility that is a trading
facility, the cash-settled contract should
adopt the same spot-month, individual
non-spot-month, and all-monthscombined position limits as the original
price referenced contract.
(2) Adjustments to levels. Designated
contract markets and swap execution
facilities that are trading facilities
should adjust their speculative limit
levels as follows:
(i) Spot month position limits. The
spot month position limit level should
be reviewed no less than once every
twenty-four months from the date of
initial listing and should be maintained
at a level that is:
(A) No greater than one-quarter of the
estimated spot month deliverable
supply, calculated separately for each
month to be listed; or
(B) In the case of a commodity
derivative contract based on a
commodity without a measurable
deliverable supply, necessary and
appropriate to reduce the potential
threat of market manipulation or price

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distortion of the contract’s or the
underlying commodity’s price or index.
(ii) Individual non-spot or all-monthscombined position limits. Individual
non-spot or all-months-combined levels
should be no greater than 10% of the
average combined futures and deltaadjusted option month-end open
interest for the most recent calendar
year up to 25,000 contracts, with a
marginal increase of 2.5% thereafter, or
be based on position sizes customarily
held by speculative traders on the
contract market. In any case, such levels
should be reviewed no less than once
every twenty-four months from the date
of initial listing.
(3) Position accountability in lieu of
speculative position limits. A designated
contract market or swap execution
facility that is a trading facility may
adopt a bylaw, rule, regulation, or
resolution, substituting for the exchange
set speculative position limits specified
under this paragraph (b), an exchange
rule requiring traders to consent to
provide information about their position
upon request by the exchange and to
consent to halt increasing further a
trader’s position or to reduce their
positions in an orderly manner, in each
case upon request by the exchange as
follows:
(i) Physical commodity derivative
contracts. On a physical commodity
derivative contract that is not subject to
the limits set forth in § 150.2, having an
average month-end open interest of
50,000 contracts and an average daily
volume of 5,000 or more contracts
during the most recent calendar year
and a liquid cash market, a designated
contract market or swap execution
facility that is a trading facility may
adopt individual non-spot month or allmonths-combined position
accountability levels, provided,
however, that such designated contract
market or swap execution facility that is
a trading facility should adopt a spot
month speculative position limit with a
level no greater than one-quarter of the
estimated spot month deliverable
supply;
(ii) Excluded commodity derivative
contracts—(A) Spot month. On an
excluded commodity derivative contract
for which there is a highly liquid cash
market and no legal impediment to
delivery, a designated contract market
or swap execution facility that is a
trading facility may adopt position
accountability in lieu of position limits
in the spot month. For an excluded
commodity derivative contract based on
a commodity without a measurable
deliverable supply, a designated
contract market or swap execution
facility that is a trading facility may

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adopt position accountability in lieu of
position limits in the spot month. For
all other excluded commodity
derivative contracts, a designated
contract market or swap execution
facility that is a trading facility should
adopt a spot-month position limit with
a level no greater than one-quarter of the
estimated deliverable supply;
(B) Individual non-spot or all-monthscombined position limits. On an
excluded commodity derivative
contract, a designated contract market or
swap execution facility that is a trading
facility may adopt position
accountability levels in lieu of position
limits in the individual non-spot month
or all-months-combined.
(iii) New commodity derivative
contracts that are substantially the same
as an existing contract. On a new
commodity derivative contract that is
substantially the same as an existing
commodity derivative contract listed for
trading on a designated contract market
or swap execution facility that is a
trading facility, which has adopted
position accountability in lieu of
position limits, the designated contract
market or swap execution facility may
adopt for the new contract when it is
initially listed for trading the position
accountability levels of the existing
contract.
(4) Calculation of trading volume and
open interest. For purposes of this
paragraph, trading volume and open
interest should be calculated by:
(i) Open interest. (A) Averaging the
month-end open positions in a futures
contract and its related option contract,
on a delta-adjusted basis, for all months
listed during the most recent calendar
year; and
(B) Averaging the month-end futuresequivalent amount of open positions in
swaps in a particular commodity (such
as, for swaps that are not referenced
contracts, by combining the notional
month-end open positions in swaps in
a particular commodity, including
options in that same commodity that are
swaps on a delta-adjusted basis, and
dividing by a notional quantity per
contract that is no larger than a typical
cash market transaction in the
underlying commodity).
(ii) Trading volume. (A) Counting the
number of contracts in a futures contract
and its related option contract, on a
delta-adjusted basis, transacted during
the most recent calendar year; and
(B) Counting the futures-equivalent
number of swaps in a particular
commodity transacted during the most
recent calendar year.
(5) Exemptions—(i) Hedge exemption.
Any hedge exemption rules adopted by
a designated contract market or a swap

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execution facility that is a trading
facility must conform to the definition
of bona fide hedging position in § 150.1.
(ii) Other exemptions. In addition to
the exemptions for bona fide hedging
positions that conform to paragraph
(b)(5)(i) of this section, a designated
contract market or swap execution
facility that is a trading facility may
grant other exemptions for:
(A) Financial distress. Upon specific
request made to the designated contract
market or swap execution facility that is
a trading facility, the designated
contract market or swap execution
facility that is a trading facility may
exempt a person or related persons
under financial distress circumstances
for a time certain from any of the
requirements of this part. Financial
distress circumstances include
situations involving the potential
default or bankruptcy of a customer of
the requesting person or persons, an
affiliate of the requesting person or
persons, or a potential acquisition target
of the requesting person or persons;
(B) Conditional spot-month limit
exemption. Exchange-set speculative
position limits may be exceeded for
cash-settled contracts provided that
such positions should not exceed five
times the level of the spot-month limit
specified by the designated contract
market or swap execution facility that is
a trading facility and the person holding
or controlling such positions should not
hold or control positions in referenced
spot-month physical-delivery contracts;
(C) Intramarket spread positions as
defined in § 150.1, provided that such
positions should be outside of the spot
month for physical-delivery contracts
and should not exceed the all-months
limit when combined with any other net
positions in the single month;
(D) Intermarket spread positions as
defined in § 150.1, provided that such
positions should be outside of the spot
month for physical-delivery contracts;
and/or
(E) For excluded commodities, a
designated contract market or swap
execution facility that is a trading
facility may grant a limited risk
management exemption pursuant to
rules submitted to the Commission,
consistent with the guidance in
Appendix A of this part.
(iii) Application for exemption.
Traders must apply to the designated
contract market or swap execution
facility that is a trading facility for any
exemption from its speculative position
limit rules. In considering whether to
grant such an application for exemption,
a designated contract market or swap
execution facility that is a trading
facility should take into account

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whether the requested exemption is in
accord with sound commercial practices
and results in a position that does not
exceed an amount that may be
established and liquidated in an orderly
fashion.
(6) Pre-enactment and transition
period swap positions. Speculative
position limits should not apply to
positions acquired in good faith in any
pre-enactment swap, or in any transition
period swap, in either case as defined
by § 150.1. Provided, however, that a
designated contract market or swap
execution facility that is a trading
facility may allow a person to net such
position with post-effective date
commodity derivative contracts for the
purpose of complying with any nonspot-month speculative position limit.
(7) Pre-existing positions—(i) Preexisting positions in a spot-month. A
designated contract market or swap
execution facility that is a trading
facility should require compliance with
spot month speculative position limits
for pre-existing positions in commodity
derivative contracts other than preenactment and transition period swaps.
(ii) Pre-existing positions in a nonspot-month. A single-month or allmonths-combined speculative position
limit should not apply to any
commodity derivative contract acquired
in good faith prior to the effective date
of such limit, provided, however, that
such position should be attributed to the
person if the person’s position is
increased after the effective date of such
limit.
(8) Aggregation. Designated contract
markets and swap execution facilities
that are trading facilities must have
aggregation rules that conform to
§ 150.4.
(9) Additional acceptable practices.
Particularly in the spot month, a
designated contract market or swap
execution facility that is a trading
facility may:
(i) Impose additional restrictions on a
person with a long position in the spot
month of a physical-delivery contract
who stands for delivery, takes that
delivery, then re-establishes a long
position;
(ii) Establish limits on the amount of
delivery instruments that a person may
hold in a physical-delivery contract; and
(iii) Impose such other restrictions as
it deems necessary to reduce the
potential threat of market manipulation
or congestion, to maintain orderly
execution of transactions, or for such
other purposes consist with its
responsibilities.
(c) Securities futures products. For
security futures products, position
limitations and position accountability

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provisions are specified in § 41.25(a)(3)
of this chapter.
■ 26. Revise § 150.6 to read as follows:
§ 150.6 Ongoing application of the Act and
Commission regulations.

This part shall only be construed as
having an effect on position limits set by
the Commission or a designated contract
market or swap execution facility.
Nothing in this part shall be construed
to affect any other provisions of the Act
or Commission regulations including
but not limited to those relating to
manipulation, attempted manipulation,
corners, squeezes, fraudulent or
deceptive conduct or prohibited
transactions.
■ 27. Add § 150.7 to read as follows:
§ 150.7 Requirements for anticipatory
bona fide hedging position exemptions.

(a) Statement. Any person who
wishes to avail himself of exemptions
for unfilled anticipated requirements,
unsold anticipated production,
anticipated royalties, anticipated
services contract payments or receipts,
or anticipatory cross-commodity hedges
under the provisions of paragraphs
(3)(iii), (4)(i), (4)(iii), (4)(iv), or (5),
respectively, of the definition of bona
fide hedging position in § 150.1 shall
file Form 704 with the Commission in
advance of the date the person expects
to exceed the position limits established
under this part. Filings in conformity
with the requirements of this section
shall be effective ten days after
submission, unless otherwise notified
by the Commission.
(b) Commission notification. At any
time, the Commission may, by notice to
any person filing a Form 704, specify its
determination as to what portion, if any,
of the amounts described in such filing
does not meet the requirements for bona
fide hedging positions. In no case shall
such person’s anticipatory bona fide
hedging positions exceed the levels
specified in paragraph (f) of this section.
(c) Call for additional information. At
any time, the Commission may request
a person who has on file a Form 704
under paragraph (a) of this section to
file specific additional or updated
information with the Commission to
support a determination that the Form
704 on file accurately reflects unsold
anticipated production, unfilled
anticipated requirements, anticipated
royalties, or anticipated services
contract payments or receipts.
(d) Initial statement. Initial Form 704
concerning the classification of
positions as bona fide hedging pursuant
to paragraphs (3)(iii), or (4)(i), (4)(iii),
(4)(iv) or anticipatory cross-commodity
hedges under paragraph (5) of the

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75831

definition of bona fide hedging position
in § 150.1 shall be filed with the
Commission at least ten days in advance
of the date that such positions would be
in excess of limits then in effect
pursuant to section 4a of the Act. Such
statements shall set forth in detail for a
specified operating period, not in excess
of one year for an agricultural
commodity, the person’s anticipated
activity, i.e., unfilled anticipated
requirements, unsold anticipated
production, anticipated royalties, or
anticipated services contract payments
or receipts, and explain the method of
determination thereof, including, but
not limited to, the following
information:
(1) Anticipated activity. For each
anticipated activity:
(i) The type of cash commodity
underlying the anticipated activity;
(ii) The name of the actual cash
commodity underlying the anticipated
activity and the units in which the cash
commodity is measured;
(iii) An indication of whether the cash
commodity is the same commodity
(grade and quality) that underlies a core
referenced futures contract or whether a
cross-hedge will be used and, if so,
additional information for cross hedges
specified in paragraph (d)(2) of this
section;
(iv) Annual production, requirements,
royalty receipts or service contract
payments or receipts, in terms of futures
equivalents, of such commodity for the
three complete fiscal years preceding
the current fiscal year;
(v) The specified time period for
which the anticipatory hedge exemption
is claimed;
(vi) Anticipated production,
requirements, royalty receipts or service
contract payments or receipts, in terms
of futures equivalents, of such
commodity for such specified time
period, not in excess of one year for an
agricultural commodity;
(vii) Fixed-price forward sales,
inventory, and fixed-price forward
purchases of such commodity,
including any quantity in process of
manufacture and finished goods and
byproducts of manufacture or
processing (in terms of such
commodity);
(viii) Unsold anticipated production,
unfilled anticipated requirements,
unsold anticipated royalty receipts,, and
anticipated service contract payments or
receipts the risks of which have not
been offset with cash positions, of such
commodity for the specified time
period, not in excess of one year for an
agricultural commodity; and
(ix) The maximum number of long
positions and short positions in

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referenced contracts expected to be used
to offset the risks of such anticipated
activity.
(2) Additional information for cross
hedges. Cash positions that represent a
commodity, or products or byproducts
of a commodity, that is different from
the commodity underlying a commodity
derivative contract that is expected to be
used for hedging, shall be shown both
in terms of the equivalent amount of the
commodity underlying the commodity
derivative contract used for hedging and
in terms of the actual cash commodity
as provided for on Form 704. In
computing their cash position, every
person shall use such standards and
conversion factors that are usual in the
particular trade or that otherwise reflect
the value-fluctuation-equivalents of the
cash position in terms of the commodity
underlying the commodity derivative
contract used for hedging. Such person
shall furnish to the Commission upon
request detailed information concerning
the basis for and derivation of such
conversion factors, including:
(i) The hedge ratio used to convert the
actual cash commodity to the equivalent
amount of the commodity underlying
the commodity derivative contract used
for hedging; and
(ii) An explanation of the
methodology used for determining the
hedge ratio.
(e) Supplemental reports. Whenever
the amount which a person wishes to
consider as a bona fide hedging position
shall exceed the amount in the most
recent filing pursuant to this section or
such lesser amount as determined by
the Commission pursuant to paragraph
(b) of this section, such person shall file
with the Commission a Form 704 which
updates the information provided in the
person’s most recent filing and supplies
the reason for this change at least ten
days in advance of the date that person
wishes to exceed such amount.
(f) Annual update. Each person that
has filed an initial statement on Form
704 for an anticipatory bona fide hedge
exemption shall provide annual updates
on the utilization of the anticipatory
exemption. Each person shall report
actual cash activity utilizing the
anticipatory exemption for the
preceding year, as well as the
cumulative utilization since the filing of
the initial or most recent supplemental
statement. Each person shall also
provide a good faith estimate of the
remaining anticipatory exemption. Such
reports shall set forth in detail the
person’s activity related to the
anticipated exemption and shall
include, but not be limited to the
following information:

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(1) Information to be included:. For
each anticipated activity:
(i) The type of cash commodity
underlying the anticipated activity;
(ii) The name of the actual cash
commodity underlying the anticipated
activity and the units in which the cash
commodity is measured;
(iii) An indication of whether the cash
commodity is the same commodity
(grade and quality) that underlies a core
referenced futures contract or whether a
cross-hedge will be used and, if so,
additional information for cross hedges
specified in paragraph (d)(2) of this
section;
(iv) Actual production, requirements,
royalty receipts or service contract
payments or receipts, in terms of futures
equivalents, of such commodity for the
reporting month;
(v) Cumulative actual production,
requirements, royalty receipts or service
contract payments or receipts, in terms
of futures equivalents, of such
commodity since the initial or
supplemental statement;
(vi) Estimated anticipated production,
requirements, royalty receipts or service
contract payments or receipts, in terms
of futures equivalents, of such
commodity for the remainder of such
specified time period, not in excess of
one year for an agricultural commodity;
(vii) Fixed-price forward sales,
inventory, and fixed-price forward
purchases of such commodity,
including any quantity in process of
manufacture and finished goods and
byproducts of manufacture or
processing (in terms of such
commodity) for the reporting month;
(viii) Remaining unsold anticipated
production, unfilled anticipated
requirements, unsold anticipated
royalty receipts, and anticipated service
contract payments or receipts the risks
of which have not been offset with cash
positions, of such commodity for the
specified time period, not in excess of
one year for an agricultural commodity;
and
(ix) The maximum number of long
positions and short positions in
referenced contracts expected to be used
to offset the risks of such anticipated
activity for the remainder of the
specified time period.
(2) Reserved.
(g) Monthly reporting. Monthly
reporting of remaining anticipated
hedge exemption shall be reported on
Form 204, along with reporting other
exemptions pursuant to
§ 19.01(a)(3)(vii).
(h) Maximum sales and purchases.
Sales or purchases of commodity
derivative contracts considered to be
bona fide hedging positions under

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paragraphs (3)(iii)(A) or (4)(i) of the
bona fide hedging position definition in
§ 150.1 shall at no time exceed the lesser
of:
(1) A person’s anticipated activity
(including production, requirements,
royalties and services) as described by
the information most recently filed
pursuant to this section that has not
been offset with cash positions; or
(2) Such lesser amount as determined
by the Commission pursuant to
paragraph (b) of this section.
(i) Delegation of authority to the
Director of the Division of Market
Oversight. (1) The Commission hereby
delegates, until it orders otherwise, to
the Director of the Division of Market
Oversight or such other employee or
employees as the Director may designate
from time to time, the authority:
(i) In paragraph (b) of this section to
provide notice to a person that some or
all of the amounts described in a Form
704 filing does not meet the
requirements for bona fide hedging
positions;
(ii) In paragraph (c) of this section to
request a person who has filed a Form
704 under paragraph (a) of this section
to file specific additional or updated
information with the Commission to
support a determination that the Form
704 filed accurately reflects unsold
anticipated production, unfilled
anticipated requirements, anticipated
royalties, or anticipated services
contract payments or receipts; and
(iii) In paragraph (d)(2) of this section
to request detailed information
concerning the basis for and derivation
of conversion factors used in computing
the cash position provided in Form 704.
(2) The Director of the Division of
Market Oversight may submit to the
Commission for its consideration any
matter which has been delegated in this
section.
(3) Nothing in this section prohibits
the Commission, at its election, from
exercising the authority delegated in
this section.
■ 28. Add § 150.8 to read as follows:
§ 150.8

Severability.

If any provision of this part, or the
application thereof to any person or
circumstances, is held invalid, such
invalidity shall not affect other
provisions or application of such
provision to other persons or
circumstances which can be given effect
without the invalid provision or
application.
■ 29. Add appendix A to part 150 to
read as follows:

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emcdonald on DSK67QTVN1PROD with PROPOSALS2

Appendix A to Part 150—Guidance on
Risk Management Exemptions for
Commodity Derivative Contracts in
Excluded Commodities
(1) This appendix provides non-exclusive
interpretative guidance on risk management
exemptions for commodity derivative
contracts in excluded commodities permitted
under the definition of bona fide hedging
position in § 150.1. The rules of a designated
contract market or swap execution facility
that is a trading facility may recognize
positions consistent with this guidance as
bona fide hedging positions. The
Commission recognizes that risk reducing
positions in commodity derivative contracts
in excluded commodities may not conform to
the general definition of bona fide hedging
positions applicable to commodity derivative
contracts in physical commodities, as
provided under section 4a(c)(2) of the Act,
and may not conform to enumerated bona
fide hedging positions applicable to
commodity derivative contracts in physical
commodities under the definition of bona
fide hedging position in § 150.1.
This interpretative guidance for core
principle 5 for designated contract markets,
section 5(d)(5) of the Act, and core principle
6 for swap execution facilities that are
trading facilities, section 5h(f)(6) of the Act,
is illustrative only of the types of positions
for which a trading facility may elect to
provide a risk management exemption and is
not intended to be used as a mandatory
checklist. Other positions might also be
included appropriately within a risk
management exemption.
(2)(a) No temporary substitute criterion.
Risk management positions in commodity
derivative contracts in excluded commodities
need not be expected to represent a substitute
for a subsequent transaction or position in a
physical marketing channel. There need not
be any requirement to replace a commodity
derivative contract with a cash market
position in order to qualify for a risk
management exemption.
(b) Cross-commodity hedging is permitted.
Risks that are offset in commodity derivative
contracts in excluded commodities need not
arise from the same commodities underlying
the commodity derivative contracts. For
example, a trading facility may recognize a
risk management exemption based on the net
interest rate risk arising from a bank’s
balance sheet of loans and deposits that is
offset using Treasury security futures
contracts or short-term interest rate futures
contracts.
(3) Examples of risk management
positions. This section contains examples of
risk management positions that may be
economically appropriate to the reduction of
risk in the operation of a commercial
enterprise.
(a) Balance sheet hedging. A commercial
enterprise may have risks arising from its net
position in assets and liabilities.
(i) Foreign currency translation. Once form
of balance sheet hedging involves offsetting
net exposure to changes in currency
exchange rates for the purpose of stabilizing
the domestic dollar accounting value of net
assets and/or liabilities which are

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denominated in a foreign currency. For
example, a bank may make loans in a foreign
currency and take deposits in that same
foreign currency. Such a bank is exposed to
net foreign currency translation risk when
the amount of loans is not equal to the
amount of deposits. A bank with a net long
exposure to a foreign currency may hedge by
establishing an offsetting short position in a
foreign currency commodity derivative
contract.
(ii) Interest rate risk. Another form of
balance sheet hedging involves offsetting net
exposure to changes in values of assets and
liabilities of differing durations. Examples
include:
(A) A pension fund may invest in short
term securities and have longer term
liabilities. Such a pension fund has a
duration mismatch. Such a pension fund may
hedge by establishing a long position in
Treasury security futures contracts to
lengthen the duration of its assets to match
the duration of its liabilities. This is
economically equivalent to using a long
position in Treasury security futures
contracts to shorten the duration of its
liabilities to match the duration of its assets.
(B) A bank may make a certain amount of
fixed-rate loans of one maturity and fund
such assets through taking fixed-rate deposits
of a shorter maturity. Such a bank is exposed
to interest rate risk, in that an increase in
interest rates may result in a greater decline
in value of the assets than the decline in
value of the deposit liabilities. A bank may
hedge by establishing a short position in
short-term interest rate futures contracts to
lengthen the duration of its liabilities to
match the duration of its assets. This is
economically equivalent to using a short
position in short-term interest rate futures
contracts, for example, to shorten the
duration of its assets to match the duration
of its liabilities.
(b) Unleveraged synthetic positions. An
investment fund may have risks arising from
a delayed investment in an asset allocation
promised to investors. Such a fund may
synthetically gain exposure to an asset class
using a risk management strategy of
establishing a long position in commodity
derivative contracts that does not exceed
cash set aside in an identifiable manner,
including short-term investments, any funds
deposited as margin and accrued profits on
such commodity derivative contract
positions. For example:
(i) A collective investment fund that
invests funds in stocks pursuant to an asset
allocation strategy may obtain immediate
stock market exposure upon receipt of new
monies by establishing a long position in
stock index futures contracts (‘‘equitizing
cash’’). Such a long position may qualify as
a risk management exemption under trading
facility rules provided such long position
does not exceed the cash set aside. The long
position in stock index futures contracts need
not be converted to a position in stock.
(ii) Upon receipt of new funds from
investors, an insurance company that invests
in bond holdings for a separate account
wishes to lengthen synthetically the duration
of the portfolio by establishing a long
position in Treasury futures contracts. Such

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a long position may qualify as a risk
management exemption under trading
facility rules provided such long position
does not exceed the cash set aside. The long
position in Treasury futures contracts need
not be converted to a position in bonds.
(c) Temporary asset allocations. A
commercial enterprise may have risks arising
from potential transactional costs in
temporary asset allocations (altering portfolio
exposure to certain asset classes such as
equity securities and debt securities). Such
an enterprise may hedge existing assets
owned by establishing a short position in an
appropriate commodity derivative contract
and synthetically gain exposure to an
alternative asset class using a risk
management strategy of establishing a long
position in another commodity derivative
contract that does not exceed: the value of
the existing asset at the time the temporary
asset allocation is established or, in the
alternative, the hedged value of the existing
asset plus any accrued profits on such risk
management positions. For example:
(i) A collective investment fund that
invests funds in bonds and stocks pursuant
to an asset allocation strategy may believe
that market considerations favor a temporary
increase in the fund’s equity exposure
relative to its bond holdings. The fund
manager may choose to accomplish the
reallocation using commodity derivative
contracts, such as a short position in
Treasury security futures contracts and a long
position in stock index futures contracts. The
short position in Treasury security futures
contracts may qualify as a hedge of interest
rate risk arising from the bond holdings. A
trading facility may adopt rules to recognize
as a risk management exemption such a long
position in stock index futures.
(ii) Reserved.
(4) Clarification of bona fides of short
positions.
(a) Calls sold. A seller of a call option
establishes a short call option. A short call
option is a short position in a commodity
derivative contract with respect to the
underlying commodity. A bona fide hedging
position includes such a written call option
that does not exceed in quantity the
ownership or fixed-price purchase contracts
in the contract’s underlying cash commodity
by the same person.
(b) Puts purchased and portfolio insurance.
A buyer of a put option establishes a long put
option. However, a long put option is a short
position in a commodity derivative contract
with respect to the underlying commodity. A
bona fide hedging position includes such an
owned put that does not exceed in quantity
the ownership or fixed-price purchase
contracts in the contract’s underlying cash
commodity by the same person.
The Commission also recognizes as bona
fide hedging positions strategies that provide
protection against a price decline equivalent
to an owned position in a put option for an
existing portfolio of securities owned. A
dynamically managed short position in a
futures contract may replicate the
characteristics of a long position in a put
option. Hedgers are reminded of their
obligation to enter and exit the market in an
orderly manner.

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(c) Synthetic short futures contracts. A
person may establish a synthetic short
futures position by purchasing a put option
and selling a call option, when each option
has the same notional amount, strike price,
expiration date and underlying commodity.
Such a synthetic short futures position is a
short position in a commodity derivative
contract with respect to the underlying
commodity. A bona fide hedging position
includes such a synthetic short futures

position that does not exceed in quantity the
ownership or fixed-price purchase contracts
in the contract’s underlying cash commodity
by the same person.

Appendix B to Part 150—Commodities
Listed as Substantially the Same for
Purposes of the Definition of Basis
Contract

30. Add appendix B to part 150 to
read as follows:

The following table lists core referenced
futures contracts and commodities that are
treated as substantially the same as a
commodity underlying a core referenced
futures contract for purposes of the definition
of basis contract in § 150.1.

■

BASIS CONTRACT LIST OF SUBSTANTIALLY THE SAME COMMODITIES
Core referenced futures contract

Commodities considered substantially the same
(regardless of location)

Source(s) for specification of quality

1. Light Louisiana Sweet (LLS) Crude Oil ......................

NYMEX Argus LLS vs. WTI (Argus) Trade Month futures contract (E5).
NYMEX LLS (Argus) vs. WTI Financial futures contract
(WJ).
ICE Futures Europe Crude Diff—Argus LLS vs WTI 1st
Line Swap futures contract (ARK).
ICE Futures Europe Crude Diff—Argus LLS vs WTI
Trade Month Swap futures contract (ARL).

1. Chicago ULSD ............................................................

NYMEX Chicago ULSD (Platts) vs. NY Harbor ULSD
Heating Oil futures contract (5C).
NYMEX Group Three ULSD (Platts) vs. NY Harbor
ULSD Heating Oil futures contract (A6).
NYMEX Gulf Coast ULSD (Argus) Up-Down futures
contract (US).
NYMEX Gulf Coast ULSD (Argus) Up-Down BALMO
futures contract (GUD).
NYMEX Gulf Coast ULSD (Platts) Up-Down BALMO futures contract (1L).
NYMEX Gulf Coast ULSD (Platts) Up-Down Spread futures contract (LT).
ICE Futures Europe Diesel Diff- Gulf Coast vs Heating
Oil 1st Line Swap futures contract (GOH).
CME Clearing Europe Gulf Coast ULSD( Platts) vs.
New York Heating Oil (NYMEX) Spread Calendar
swap (ELT).
CME Clearing Europe New York Heating Oil (NYMEX)
vs. European Gasoil (IC) Spread Calendar swap
(EHA).
NYMEX Los Angeles CARB Diesel (OPIS) vs. NY Harbor ULSD Heating Oil futures contract (KL).
ICE Futures Europe Gasoil futures contract (G).

NYMEX Light Sweet Crude
Oil futures contract (CL).

NYMEX New York Harbor
ULSD Heating Oil futures
contract (HO).

2. Gulf Coast ULSD ........................................................

3. California Air Resources Board Spec ULSD (CARB
no. 2 oil).
4. Gas Oil Deliverable in Antwerp, Rotterdam, or Amsterdam Area.

ICE Futures Europe Heating Oil Arb—Heating Oil 1st
Line vs. Gasoil 1st Line Swap futures contract (HOT).
ICE Futures Europe Heating Oil Arb—Heating Oil 1st
Line vs. Low Sulphur Gasoil 1st Line Swap futures
contract (ULL).
NYMEX NY Harbor ULSD Heating Oil vs. Gasoil futures contract (HA).
NYMEX RBOB Gasoline futures contract (RB).
emcdonald on DSK67QTVN1PROD with PROPOSALS2

1. Chicago Unleaded 87 gasoline ...................................
NYMEX Chicago Unleaded Gasoline (Platts) vs. RBOB
Gasoline futures contract (3C).
NYMEX Group Three Unleaded Gasoline (Platts) vs.
RBOB Gasoline futures contract (A8).
2. Gulf Coast Conventional Blendstock for Oxygenated
Blending (CBOB) 87.
NYMEX Gulf Coast CBOB Gasoline A1 (Platts) vs.
RBOB Gasoline futures contract (CBA).
NYMEX Gulf Coast Unl 87 (Argus) Up-Down futures
contract (UZ).
3. Gulf Coast CBOB 87 (Summer Assessment) ............

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75835

BASIS CONTRACT LIST OF SUBSTANTIALLY THE SAME COMMODITIES—Continued
Core referenced futures contract

Commodities considered substantially the same
(regardless of location)

Source(s) for specification of quality
NYMEX Gulf Coast CBOB Gasoline A2 (Platts) vs.
RBOB Gasoline futures contract (CRB).

4. Gulf Coast Unleaded 87 (Summer Assessment) .......
NYMEX Gulf Coast 87 Gasoline M2 (Platts) vs. RBOB
Gasoline futures contract (RVG).
NYMEX Gulf Coast 87 Gasoline M2 (Platts) vs. RBOB
Gasoline BALMO futures contract (GBB).
NYMEX Gulf Coast 87 Gasoline M2 (Argus) vs. RBOB
Gasoline BALMO futures contract (RBG).
5. Gulf Coast Unleaded 87 .............................................
NYMEX Gulf Coast Unl 87 (Platts) Up-Down BALMO
futures contract (1K).
NYMEX Gulf Coast Unl 87 Gasoline M1 (Platts) vs.
RBOB Gasoline futures contract (RV).
CME Clearing Europe Gulf Coast Unleaded 87 Gasoline M1 (Platts) vs. New York RBOB Gasoline
(NYMEX) Spread Calendar swap (ERV).
6. Los Angeles California Reformulated Blendstock for
Oxygenate Blending (CARBOB) Regular.
NYMEX Los Angeles CARBOB Gasoline (OPIS) vs.
RBOB Gasoline futures contract (JL).
7. Los Angeles California Reformulated Blendstock for
Oxygenate Blending (CARBOB) Premium.
NYMEX Los Angeles CARBOB Gasoline (OPIS) vs.
RBOB Gasoline futures contract (JL).
8. Euro-BOB OXY NWE Barges .....................................
NYMEX RBOB Gasoline vs. Euro-bob Oxy NWE
Barges (Argus) (1000mt) futures contract (EXR).
CME Clearing Europe New York RBOB Gasoline
(NYMEX) vs. European Gasoline Euro-bob Oxy
Barges NWE (Argus) (1000mt) Spread Calendar
swap (EEXR).
9. Euro-BOB OXY FOB Rotterdam ................................
ICE Futures Europe Gasoline Diff—RBOB Gasoline 1st
Line vs. Argus Euro-BOB OXY FOB Rotterdam
Barge Swap futures contract (ROE).

31. Add appendix C to part 150 to
read as follows:

■

Appendix C to Part 150—Examples of
Bona Fide Hedging Positions for
Physical Commodities

emcdonald on DSK67QTVN1PROD with PROPOSALS2

A non-exhaustive list of examples meeting
the definition of bona fide hedging position
under § 150.1 is presented below. With
respect to a position that does not fall within
an example in this appendix, a person
seeking to rely on a bona fide hedging
position exemption under § 150.3 may seek
guidance from the Division of Market
Oversight. References to paragraphs in the
examples below are to the definition of bona
fide hedging position in § 150.1.
1. Portfolio Hedge Under Paragraph (3)(i) of
the Bona Fide Hedging Position Definition
Fact Pattern: It is currently January and
Participant A owns seven million bushels of
corn located in its warehouses. Participant A
has entered into fixed-price forward sale
contracts with several processors for a total
of five million bushels of corn that will be
delivered by May of this year. Participant A
has no fixed-price corn purchase contracts.
Participant A’s gross long cash position is
equal to seven million bushels of corn.
Because Participant A has sold forward five
million bushels of corn, its net cash position

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is equal to long two million bushels of corn.
To reduce price risk associated with
potentially lower corn prices, Participant A
chooses to establish a short position of 400
contracts in the CBOT Corn futures contract,
equivalent to two million bushels of corn, in
the same crop year as the inventory.
Analysis: The short position in a contract
month in the current crop year for the CBOT
Corn futures contract, equivalent to the
amount of inventory held, satisfies the
general requirements for a bona fide hedging
position under paragraphs (2)(i)(A)–(C) and
the provisions associated with owning a
commodity under paragraph (3)(i).1 Because
the firm’s net cash position is two million
bushels of unsold corn, the firm is exposed
to price risk. Participant A’s hedge of the two
million bushels represents a substitute for a
fixed-price forward sale at a later time in the
physical marketing channel. The position is
economically appropriate to the reduction of
1 Participant A could also choose to hedge on a
gross basis. In that event, Participant A could
establish a short position in the March Chicago
Board of Trade Corn futures contract equivalent to
seven million bushels of corn to offset the price risk
of its inventory and establish a long position in the
May Chicago Board of Trade Corn futures contract
equivalent to five million bushels of corn to offset
the price risk of its fixed-price forward sale
contracts.

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price risk because the short position in a
referenced contract does not exceed the
quantity equivalent risk exposure (on a net
basis) in the cash commodity in the current
crop year. Last, the hedge arises from a
potential change in the value of corn owned
by Participant A.
2. Lending a Commodity and Hedge of Price
Risk Under Paragraph (3)(i) of the Bona Fide
Hedging Position Definition
Fact Pattern: Bank B owns 1,000 ounces of
gold that it lends to Jewelry Fabricator J at
LIBOR plus a differential. Under the terms of
the loan, Jewelry Fabricator J may later
purchase the gold from Bank B at a
differential to the prevailing price of the
Commodity Exchange, Inc. (COMEX) Gold
futures contract (i.e., an open-price purchase
agreement is embedded in the terms of the
loan). Jewelry Fabricator J intends to use the
gold to make jewelry and reimburse Bank B
for the loan using the proceeds from jewelry
sales and either purchase gold from Bank B
by paying the market price for gold or return
the equivalent amount of gold to Bank B by
purchasing gold at the market price. Because
Bank B has retained the price risk on gold,
the bank is concerned about its potential loss
if the price of gold drops. The bank reduces
the risk of a potential loss in the value of the
gold by establishing a ten contract short

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position in the COMEX Gold futures contract,
which has a unit of trading of 100 ounces of
gold. The ten contract short position is
equivalent to 1,000 ounces of gold.
Analysis: This position meets the general
requirements for bona fide hedging positions
under paragraphs (2)(i)(A)–(C) and the
requirements associated with owning a cash
commodity under paragraph (3)(i). The
physical commodity that is being hedged is
the underlying cash commodity for the
COMEX Gold futures contract. Bank B’s short
hedge of the gold represents a substitute for
a transaction to be made in the physical
marketing channel (e.g., completion of the
open-price sale to Jewelry Fabricator J).
Because the notional quantity of the short
position in the gold futures contract is equal
to the amount of gold that Bank B owns, the
hedge is economically appropriate to the
reduction of risk. Finally, the short position
in the commodity derivative contract offsets
the potential change in the value of the gold
owned by Bank B.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

3. Repurchase Agreements and Hedge of
Inventory Under Paragraph (3)(i) of the Bona
Fide Hedging Position Definition
Fact Pattern: Elevator A purchased 500,000
bushels of wheat in April and reduced its
price risk by establishing a short position of
100 contracts in the CBOT Wheat futures
contract, equivalent to 500,000 bushels of
wheat. Because the price of wheat rose
steadily since April, Elevator A had to make
substantial maintenance margin payments.
To alleviate its cash flow concern about
meeting further margin calls, Elevator A
decides to enter into a repurchase agreement
with Bank B and offset its short position in
the wheat futures contract. The repurchase
agreement involves two separate contracts: A
fixed-price sale from Elevator A to Bank B at
today’s spot price; and an open-price
purchase agreement that will allow Elevator
A to repurchase the wheat from Bank B at the
prevailing spot price three months from now.
Because Bank B obtains title to the wheat
under the fixed-price purchase agreement, it
is exposed to price risk should the price of
wheat drop. Bank B establishes a short
position of 100 contracts in the CBOT Wheat
futures contract, equivalent to 500,000
bushels of wheat.
Analysis: Bank B’s position meets the
general requirements for a bona fide hedging
position under paragraphs (2)(i)(A)–(C) and
the provisions for owning the cash
commodity under paragraph (3)(i). The short
position in referenced contracts by Bank B is
a substitute for a fixed-price sales transaction
to be taken at a later time in the physical
marketing channel either to Elevator A or to
another commercial party. The position is
economically appropriate to the reduction of
risk in the conduct and management of the
commercial enterprise (Bank B) because the
notional quantity of the short position in
referenced contracts held by Bank B is not
larger than the quantity of cash wheat
purchased by Bank B. Finally, the short
position in the CBOT Wheat futures contract
reduces the price risk associated with owning
cash wheat.

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4. Utility Hedge of Anticipated Customer
Requirements Under Paragraph (3)(iii)(B) of
the Bona Fide Hedging Position Definition
Fact Pattern: Natural Gas Utility A is
encouraged to hedge its purchases of natural
gas by the State Public Utility Commission in
order to reduce natural gas price risk to
residential customers. State Public Utility
Commission considers the hedging practice
to be prudent and allows gains and losses
from hedging to be passed on to Natural Gas
Utility A’s regulated natural gas customers.
Natural Gas Utility A has about one million
residential customers who have average
historical usage of about 71.5 mmBTUs of
natural gas per year per residence. The utility
decides to hedge about 70 percent of its
residential customers’ anticipated
requirements for the following year,
equivalent to a 5,000 contract long position
in the NYMEX Henry Hub Natural Gas
futures contract. To reduce the risk of higher
prices to residential customers, Natural Gas
Utility A establishes a 5,000 contract long
position in the NYMEX Henry Hub Natural
Gas futures contract. Since the utility is only
hedging 70 percent of historical usage,
Natural Gas Utility A is highly certain that
realized demand will exceed its hedged
anticipated residential customer
requirements.
Analysis: Natural Gas Utility A’s position
meets the general requirements for a bona
fide hedging position under paragraphs
(2)(i)(A)–(C) and the provisions for hedges of
unfilled anticipated requirements by a utility
under paragraph (3)(iii)(B). The physical
commodity that is being hedged involves a
commodity underlying the NYMEX Henry
Hub Natural Gas futures contract. The long
position in the commodity derivative
contract represents a substitute for
transactions to be taken at a later time in the
physical marketing channel. The position is
economically appropriate to the reduction of
price risk because the price of natural gas
may increase. The commodity derivative
contract position offsets the price risk of
natural gas that the utility anticipates
purchasing on behalf of its residential
customers. As provided under paragraph
(3)(iii), the risk-reducing position qualifies as
a bona fide hedging position in the natural
gas physical-delivery referenced contract
during the spot month provided that the
position does not exceed the unfilled
anticipated requirements for that month and
for the next succeeding month.
5. Processor Margins Hedge Using Unfilled
Anticipated Requirements Under Paragraph
(3)(iii)(A) of the Bona Fide Hedging Position
Definition and Anticipated Production
Under Paragraph (4)(i) of the Definition
Fact Pattern: Soybean Processor A has a
total throughput capacity of 200 million
bushels of soybeans per year (equivalent to
40,000 CBOT soybean futures contracts).
Soybean Processor A crushes soybeans into
products (soybean oil and soybean meal). It
currently has 40 million bushels of soybeans
in storage and has offset that risk through
fixed-price forward sales of the amount of
products expected to be produced from
crushing 40 million bushels of soybeans, thus
locking in its processor margin on one

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million metric tons of soybeans. Because it
has consistently operated its plants at full
capacity over the last three years, it
anticipates purchasing another 160 million
bushels of soybeans to be delivered to its
storage facility over the next year. It has not
sold the 160 million bushels of anticipated
production of crushed products forward.
Processor A faces the risk that the difference
in price relationships between soybeans and
the crushed products (i.e., the crush spread)
could change adversely, resulting in reduced
anticipated processing margins. To hedge its
processing margins and lock in the crush
spread, Processor A establishes a long
position of 32,000 contracts in the CBOT
Soybean futures contract (equivalent to 160
million bushels of soybeans) and
corresponding short positions in CBOT
Soybean Meal and Soybean Oil futures
contracts, such that the total notional
quantity of soybean meal and soybean meal
futures contracts are equivalent to the
expected production from crushing 160
million bushels of soybeans into soybean
meal and soybean oil.
Analysis: These positions meet the general
requirements for bona fide hedging positions
under paragraphs (2)(i)(A)–(C) and the
provisions for hedges of unfilled anticipated
requirements under paragraph (3)(iii)(A) and
unsold anticipated production under
paragraph (4)(i). The physical commodities
being hedged are commodities underlying
the CBOT Soybean, Soybean Meal, and
Soybean Oil futures contracts. Long positions
in the soybean futures contract and
corresponding short positions in soybean
meal and soybean oil futures contracts
qualify as bona fide hedging positions
provided they do not exceed the unfilled
anticipated requirements of the cash
commodity for twelve months (in this case 4
million tons) as required in paragraph
(3)(iii)(A) and the quantity equivalent of
twelve months unsold anticipated
production of cash products and by-products
as required in paragraph (4)(i). Such
positions are a substitute for purchases and
sales to be made at a later time in the
physical marketing channel and are
economically appropriate to the reduction of
risk. The positions in referenced contracts
offset the potential change in the value of
soybeans that the processor anticipates
purchasing and the potential change in the
value of products and by-products the
processor anticipates producing and selling.
The size of the permissible long hedge
position in the soybean futures contract must
be reduced by any inventories and fixedprice purchases because they would reduce
the processor’s unfilled requirements.
Similarly, the size of the permissible short
hedge positions in soybean meal and soybean
oil futures contracts must be reduced by any
fixed-price sales because they would reduce
the processor’s unsold anticipated
production. As provided under paragraph
(3)(iii)(A), the risk reducing long position in
the soybean futures contract that is not in
excess of the anticipated requirements for
soybeans for that month and the next
succeeding month qualifies as a bona fide
hedging position during the last five days of
trading in the physical-delivery referenced

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contract. As provided under paragraph (4)(i),
the risk reducing short position in the
soybean meal and oil futures contract do not
qualify as a bona fide hedging position in a
physical-delivery referenced contract during
the last five days of trading in the event the
Soybean Processor A does not have unsold
products in inventory.
The combination of the long and short
positions in soybean, soybean meal, and
soybean oil futures contracts are
economically appropriate to the reduction of
risk. However, unlike in this example, an
unpaired position (e.g., only a long position
in a commodity derivative contract) that is
not offset by either a cash market position
(e.g., a fixed-price sales contract) or
derivative position (e.g., a short position in
a commodity derivative contract) would not
represent an economically appropriate
reduction of risk. This is because the
commercial enterprise’s crush spread risk is
relatively low in comparison to the price risk
from taking an outright long position in the
futures contract in the underlying commodity
or an outright short position in the futures
contracts in the products and by-products of
processing. The price fluctuations of the
crush spread, that is, the risk faced by the
commercial enterprise, would not be
expected to be substantially related to the
price fluctuations of either an outright long
or outright short futures position.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

6. Agent Hedge Under Paragraph (3)(iv) of
the Bona Fide Hedging Position Definition
Fact Pattern: Agent A is in the business of
merchandising (selling) the cash grain owned
by multiple warehouse operators and
forwarding the merchandising revenues back
to the warehouse operators less the agent’s
fees. Agent A does not own any cash
commodity, but is responsible for
merchandising of the cash grain positions of
the warehouse operators pursuant to
contractual arrangements. The contractual
arrangements also authorize Agent A to
hedge the price risks of the grain owned by
the warehouse operators. For the volumes of
grain it is authorized to hedge, the agent
enters into short positions in grain
commodity derivative contracts that offset
the price risks of the cash commodities.
Analysis: The positions meet the
requirements of paragraphs (2)(1)(A)–(C) for
hedges of a physical commodity and
paragraph (3)(iv) for hedges by an agent. The
positions represent a substitute for
transactions to be made in the physical
marketing channel, are economically
appropriate to the reduction of risks arising
from grain owned by the agent’s contractual
counterparties, and arise from the potential
change in the value of such grain. The agent
does not own and has not contacted to
purchase such grain at a fixed price, but is
responsible for merchandising the cash
positions that are being offset in commodity
derivative contracts. The agent has a
contractual arrangement with the persons
who own the grain being offset.

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7. Sovereign Hedge of Unsold Anticipated
Production Under Paragraph (4)(i) of the
Bona Fide Hedging Position Definition and
Position Aggregation Under § 150.4
Fact Pattern: A Sovereign induces a farmer
to sell his anticipated production of 100,000
bushels of corn forward to User A at a fixed
price for delivery during the expected
harvest. In return for the farmer entering into
the fixed-price forward sale, the Sovereign
agrees to pay the farmer the difference
between the market price at the time of
harvest and the price of the fixed-price
forward, in the event that the market price at
the time of harvest is above the price of the
forward. The fixed-price forward sale of
100,000 bushels of corn reduces the farmer’s
downside price risk associated with his
anticipated agricultural production. The
Sovereign faces commodity price risk as it
stands ready to pay the farmer the difference
between the market price and the price of the
fixed-price contract. To reduce that risk, the
Sovereign establishes a long position of 20
call options on the Chicago Board of Trade
(CBOT) Corn futures contract, equivalent to
100,000 bushels of corn.
Analysis: Because the Sovereign and the
farmer are acting together pursuant to an
express agreement, the aggregation
provisions of § 150.4 apply and they are
treated as a single person for purposes of
position limits. Taking the positions of the
Sovereign and farmer jointly, the risk profile
of the combination of the forward sale and
the long call is approximately equivalent to
the risk profile of a synthetic long put.2 A
synthetic long put offsets the downside price
risk of anticipated production. Thus, the
position of that person satisfies the general
requirements for a bona fide hedging position
under paragraphs (2)(i)(A)–(C) and meets the
requirements for anticipated agricultural
production under paragraph (4)(i). The
agreement between the Sovereign and the
farmer involves the production of a
commodity underlying the CBOT Corn
futures contract. The synthetic long put is a
substitute for transactions that the farmer has
made in the physical marketing channel. The
synthetic long put reduces the price risk
associated with anticipated agricultural
production. The size of the Sovereign’s
position is equivalent to the size of the
farmer’s anticipated production. As provided
under paragraph (4), the Sovereign’s riskreducing position would not qualify as a
bona fide hedging position in a physicaldelivery futures contract during the last five
days of trading; however, since the CBOT
Corn option will exercise into a physicaldelivery CBOT Corn futures contract prior to
the last five days of trading in that physicaldelivery futures contract, the Sovereign may
continue to hold its option position as a bona
fide hedging position through option expiry.
8. Hedge of Offsetting Unfixed Price Sales
and Purchases Under Paragraph (4)(ii) of the
Bona Fide Hedging Position Definition
Fact Pattern: Currently it is October and
Oil Merchandiser A has entered into cash
2 Put-call parity describes the mathematical
relationship between price of a put and call with
identical strike prices and expiry.

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75837

forward contracts to purchase 600,000 of
crude oil at a floating price that references
the January contract month (in the next
calendar year) for the ICE Futures Brent
Crude futures contract and to sell 600,000
barrels of crude oil at a price that references
the February contract month (in the next
calendar year) for the NYMEX Light Sweet
Crude Oil futures contract. Oil Merchandiser
A is concerned about an adverse change in
the price spread between the January ICE
Futures Brent Crude futures contract and the
February NYMEX Light Sweet Crude Oil
futures contract. To reduce that risk, Oil
Merchandiser A establishes a long position of
600 contracts in the January ICE Futures
Brent Crude futures contract, price risk
equivalent to buying 600,000 barrels of oil,
and a short position of 600 contracts in the
February NYMEX Light Sweet Crude Oil
futures contract, price risk equivalent to
selling 600,000 barrels of oil.
Analysis: Oil Merchandiser A’s positions
meet the general requirements for bona fide
hedging positions under paragraphs (2)(i)(A)–
(C) and the provisions for offsetting sales and
purchases in referenced contracts under
paragraph (4)(ii). The physical commodity
that is being hedged involves a commodity
underlying the NYMEX Light Sweet Crude
Oil futures contract. The long and short
positions in commodity derivative contracts
represent substitutes for transactions to be
taken at a later time in the physical
marketing channel. The positions are
economically appropriate to the reduction of
risk because the price spread between the ICE
Futures Brent Crude futures contract and the
NYMEX Light Sweet Crude Oil futures
contract could move adversely to Oil
Merchandiser A’s interests in the two cash
forward contracts, that is, the price of the ICE
Futures Brent Crude futures contract could
increase relative to the price of the NYMEX
Light Sweet Crude Oil futures contract. The
positions in commodity derivative contracts
offset the price risk in the cash forward
contracts. As provided under paragraph (4),
the risk-reducing position does not qualify as
a bona fide hedging position in the crude oil
physical-delivery referenced contract during
the spot month.
9. Anticipated Royalties Hedge Under
Paragraph (4)(iii) of the Bona Fide Hedging
Position Definition and Pass-Through Swaps
Hedge Under Paragraph (2)(ii) of the
Definition
a. Fact Pattern: In order to develop an oil
field, Company A approaches Bank B for
financing. To facilitate the loan, Bank B first
establishes an independent legal entity
commonly known as a special purpose
vehicle (SPV). Bank B then provides a loan
to the SPV. The SPV is obligated to repay
principal and interest to the Bank based on
a fixed price for crude oil. The SPV in turn
makes a production loan to Company A. The
terms of the production loan require
Company A to provide the SPV with
volumetric production payments (VPPs)
based on a specified share of the production
to be sold at the prevailing price of crude oil
(i.e., the index price) as oil is produced.
Because the price of crude oil may fall, the
SPV reduces that risk by entering into a

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crude oil swap with Swap Dealer C. The
swap requires the SPV to pay Swap Dealer
C the floating price of crude oil (i.e., the
index price) and for Swap Dealer C to pay a
fixed price to the SPV. The notional quantity
for the swap is equal to the expected
production underlying the VPPs to the SPV.
The SPV will receive a floating price at index
on the VPP and will pay a floating price at
index on the swap, which will offset. The
SPV will receive a fixed price payment on
the swap and repay the loan’s principal and
interest to Bank B. The SPV is highly certain
that the VPP production volume will occur,
since the SPV’s engineer has reviewed the
forecasted production from Company A and
required the VPP volume to be set with a
cushion (i.e., a hair-cut) below the forecasted
production.
Analysis: For the SPV, the swap between
Swap Dealer C and the SPV meets the general
requirements for a bona fide hedging position
under paragraphs (2)(i)(A)–(C) and the
requirements for anticipated royalties under
paragraph (4)(iii). The SPV will receive
payments under the VPP royalty contract
based on the unfixed price sale of anticipated
production of the physical commodity
underlying the royalty contract, i.e., crude
oil. The swap represents a substitute for the
price of sales transactions to be made in the
physical marketing channel. The SPV’s swap
position qualifies as a hedge because it is
economically appropriate to the reduction of
price risk. The swap reduces the price risk
associated with a change in value of a royalty
asset. The fluctuations in value of the SPV’s
anticipated royalties are substantially related
to the fluctuations in value of the crude oil
swap with Swap Dealer C.
b. Continuation of Fact Pattern: Swap
Dealer C offsets the price risk associated with
the swap to the SPV by establishing a short
position in cash-settled crude oil futures
contracts. The notional quantity of the short
position in futures contracts held by Swap
Dealer C exactly matches the notional
quantity of the swap with the SPV.
Analysis: For the swap dealer, because the
SPV enters the cash-settled swap as a bona
fide hedger under paragraph (4)(iii) (i.e., a
pass-through swap counterparty), the offset
of the risk of the swap in a futures contract
by Swap Dealer C qualifies as a bona fide
hedging position (i.e., a pass-through swap
offset) under paragraph (2)(ii)(A). Since the
swap was executed opposite a pass-through
swap counterparty and was offset, the swap
itself also qualifies as a bona fide hedging
position (i.e., a pass-through swap) under
paragraph (2)(ii)(B). If the cash-settled swap
is not a referenced contract, then the passthrough swap offset may qualify as a crosscommodity hedge under paragraph (5),
provided the fluctuations in value of the
pass-through swap offset are substantially
related to the fluctuations in value of the
pass-through swap.
10. Anticipated Royalties Hedge Under
Paragraph (4)(iii) of the Bona Fide Hedging
Position Definition and Cross-Commodity
Hedge Under Paragraph (5) of the Definition
Fact Pattern: An eligible contract
participant (ECP) owns royalty interests in a
portfolio of oil wells. Royalties are paid at the

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prevailing (floating) market price for the
commodities produced and sold at major
trading hubs, less transportation and
gathering charges. The large portfolio and
well-established production history for most
of the oil wells provide a highly certain
production stream for the next 24 months.
The ECP also determined that changes in the
cash market prices of 50 percent of the oil
production underlying the portfolio of
royalty interests historically have been
closely correlated with changes in the
calendar month average of daily settlement
prices of the nearby NYMEX Light Sweet
Crude Oil futures contract. The ECP decided
to hedge some of the royalty price risk by
entering into a cash-settled swap with a term
of 24 months. Under terms of the swap, the
ECP will receive a fixed payment and make
monthly payments based on the calendar
month average of daily settlement prices of
the nearby NYMEX Light Sweet Crude Oil
futures contract and notional amounts equal
to 50 percent of the expected production
volume of oil underlying the royalties.
Analysis: This position meets the
requirements of paragraphs (2)(i)(A)–(C) for
hedges of a physical commodity, paragraph
(4)(iii) for hedges of anticipated royalties, and
paragraph (5) for cross-commodity hedges.
The long position in the commodity
derivative contract represents a substitute for
transactions to be taken at a later time in the
physical marketing channel. The position is
economically appropriate to the reduction of
price risk because the price of oil may
decrease. The commodity derivative contract
position offsets the price risk of royalty
payments, based on oil production, that the
ECP anticipates receiving. The ECP is
exposed to price risk arising from the
anticipated production volume of oil
attributable to her royalty interests. The
physical commodity underlying the royalty
portfolio that is being hedged involves a
commodity with fluctuations in value that
are substantially related to the fluctuations in
value of the swap.
11. Hedges of Services Under Paragraph
(4)(iv) of the Bona Fide Hedging Position
Definition
a. Fact Pattern: Company A enters into a
risk service agreement to drill an oil well
with Company B. The risk service agreement
provides that a portion of the revenue
receipts to Company A depends on the value
of the light sweet crude oil produced.
Company A is exposed to the risk that the
price of oil may fall, resulting in lower
anticipated revenues from the risk service
agreement. To reduce that risk, Company A
establishes a short position in the New York
Mercantile Exchange (NYMEX) Light Sweet
Crude Oil futures contract, in a notional
amount equivalent to the firm’s anticipated
share of the expected quantity of oil to be
produced. Company A is highly certain of its
anticipated share of the expected quantity of
oil to be produced.
Analysis: Company A’s hedge of a portion
of its revenue stream from the risk service
agreement meets the general requirements for
bona fide hedging positions under
paragraphs (2)(i)(A)–(C) and the provisions
for services under paragraph (4)(iv). The

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contract for services involves the production
of a commodity underlying the NYMEX Light
Sweet Crude Oil futures contract. A short
position in the NYMEX Light Sweet Crude
Oil futures contract is a substitute for
transactions to be taken at a later time in the
physical marketing channel, with the value
of the revenue receipts to Company A
dependent on the price of the oil sales in the
physical marketing channel. The short
position in the futures contract held by
Company A is economically appropriate to
the reduction of risk, because the total
notional quantity underlying the short
position in the futures contract held by
Company A is equivalent to its share of the
expected quantity of future production under
the risk service agreement. Because the price
of oil may fall, the short position in the
futures contract reduces price risk from a
potential reduction in the payments to
Company A under the service contract with
Company B. Under paragraph (4)(iv), the
risk-reducing position will not qualify as a
bona fide hedging position during the spot
month of the physical-delivery oil futures
contract.
b. Fact Pattern: A City contracts with Firm
A to provide waste management services.
The contract requires that the trucks used to
transport the solid waste use natural gas as
a power source. According to the contract,
the City will pay for the cost of the natural
gas used to transport the solid waste by Firm
A. In the event that natural gas prices rise,
the City’s waste transport expenses will
increase. To mitigate this risk, the City
establishes a long position in the NYMEX
Henry Hub Natural Gas futures contract in an
amount equivalent to the expected volume of
natural gas to be used over the life of the
service contract.
Analysis: This position meets the general
requirements for bona fide hedging positions
under paragraphs (2)(i)(A)–(C) and the
provisions for services under paragraph
(4)(iv). The contract for services involves the
use of a commodity underlying the NYMEX
Henry Hub Natural Gas futures contract.
Because the City is responsible for paying the
cash price for the natural gas used under the
services contract, the long hedge is a
substitute for transactions to be taken at a
later time in the physical marketing channel.
The position is economically appropriate to
the reduction of price risk because the total
notional quantity of the long position in a
commodity derivative contract equals the
expected volume of natural gas to be used
over the life of the contract. The position in
the commodity derivative contract reduces
the price risk associated with an increase in
anticipated costs that the City may incur
under the services contract in the event that
the price of natural gas increases. As
provided under paragraph (4), the risk
reducing position will not qualify as a bona
fide hedge during the spot month of the
physical-delivery futures contract.
12. Cross-Commodity Hedge Under
Paragraph (5) of the Bona Fide Hedging
Position Definition and Inventory Hedge
Under Paragraph (3)(i) of the Definition
Fact Pattern: Copper Wire Fabricator A is
concerned about possible reductions in the

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price of copper. Currently it is November and
it owns inventory of 100 million pounds of
copper and five million pounds of finished
copper wire. Currently, deferred futures
prices are lower than the nearby futures
price. Copper Wire Fabricator A expects to
sell 150 million pounds of finished copper
wire in February of the following year. To
reduce its price risk, Copper Wire Fabricator
A establishes a short position of 6000
contracts in the February COMEX Copper
futures contract, equivalent to selling 150
million pounds of copper. The fluctuations
in value of copper wire are expected to be
substantially related to fluctuations in value
of copper.
Analysis: The Copper Wire Fabricator A’s
position meets the general requirements for
a bona fide hedging position under
paragraphs (2)(i)(A)–(C) and the provisions
for owning a commodity under paragraph
(3)(i) and for a cross-hedge of the finished
copper wire under paragraph (5). The short
position in a referenced contract represents a
substitute for transactions to be taken at a
later time in the physical marketing channel.
The short position is economically
appropriate to the reduction of price risk in
the conduct and management of the
commercial enterprise because the price of
copper could drop. The short position in the
referenced contract offsets the risk of a
possible reduction in the value of the
inventory that it owns. Since the finished
copper wire is a product of copper that is not
deliverable on the commodity derivative
contract, 200 contracts of the short position
are a cross-commodity hedge of the finished
copper wire and 400 contracts of the short
position are a hedge of the copper inventory.
13. Cross-Commodity Hedge Under
Paragraph (5) of the Bona Fide Hedging
Position Definition and Anticipated
Requirements Hedge Under Paragraph
(3)(iii)(A) of the Definition
Fact Pattern: Airline A anticipates using a
predictable volume of jet fuel every month
based on scheduled flights and decides to
hedge 80 percent of that volume for each of
the next 12 months. After a review of various
commodity derivative contract hedging
strategies, Airline A decides to cross hedge

its anticipated jet fuel requirements in ultralow sulfur diesel (ULSD) commodity
derivative contracts. Airline A determined
that price fluctuations in its average cost for
jet fuel were substantially related to the price
fluctuations of the calendar month average of
the first nearby physical-delivery NYMEX
New York Harbor ULSD Heating Oil (HO)
futures contract and determined an
appropriate hedge ratio, based on a
regression analysis, of the HO futures
contract to the quantity equivalent amount of
its anticipated requirements. Airline A
decided that it would use the HO futures
contract to cross hedge part of its jet fuel
price risk. In addition, Airline A decided to
protect against jet fuel price increases by
cross hedging another part of its anticipated
jet fuel requirements with a long position in
cash-settled calls in the NYMEX Heating Oil
Average Price Option (AT) contract. The AT
call option is settled based on the price of the
HO futures contract. The sum of the notional
amounts of the long position in AT call
options and the long position in the HO
futures contract will not exceed the quantity
equivalent of 80 percent of Airline A’s
anticipated requirements for jet fuel.
Analysis: The positions meet the
requirements of paragraphs (2)(i)(A)–(C) for
hedges of a physical commodity, paragraph
(3)(iii)(A) for unfilled anticipated
requirements and paragraph (5) for crosscommodity hedges. The positions represent a
substitute for transactions to be made in the
physical marketing channel, are
economically appropriate to the reduction of
risks arising from anticipated requirements
for jet fuel, and arise from the potential
change in the value of such jet fuel. The
aggregation notional amount of the airline’s
positions in the call option and the futures
contract does not exceed the quantity
equivalent of anticipated requirements for jet
fuel. The value fluctuations in jet fuel are
substantially related to the value fluctuations
in the HO futures contract.
Airline A may hold its long position in the
cash-settled AT call option contract as a cross
hedge against jet fuel price risk without
having to exit the contract during the spot
month.

14. Position Aggregation Under § 150.4 and
Inventory Hedge Under Paragraph (3)(i) of
the Bona Fide Hedging Position Definition
Fact Pattern: Company A owns 100 percent
of Company B. Company B buys and sells a
variety of agricultural products, including
wheat. Company B currently owns five
million bushels of wheat. To reduce some of
its price risk, Company B establishes a short
position of 600 contracts in the CBOT Wheat
futures contract, equivalent to three million
bushels of wheat. After communicating with
Company B, Company A establishes an
additional short position of 400 CBOT Wheat
futures contracts, equivalent to two million
bushels of wheat.
Analysis: The aggregate short position in
the wheat referenced contract held by
Company A and Company B meets the
general requirements for a bona fide hedging
position under paragraphs (2)(i)(A)–(C) and
the provisions for owning a cash commodity
under paragraph (3)(i). Because Company A
owns more than 10 percent of Company B,
Company A and B are aggregated together as
one person under § 150.4. Entities required to
aggregate accounts or positions under § 150.4
are the same person for the purpose of
determining whether a person is eligible for
a bona fide hedging position exemption
under § 150.3. The aggregate short position in
the futures contract held by Company A and
Company B represents a substitute for
transactions to be taken at a later time in the
physical marketing channel. The aggregate
short position in the futures contract held by
Company A and Company B is economically
appropriate to the reduction of price risk
because the aggregate short position in the
CBOT Wheat futures contract held by
Company A and Company B, equivalent to
five million bushels of wheat, does not
exceed the five million bushels of wheat that
is owned by Company B. The price risk
exposure for Company A and Company B
results from a potential change in the value
of that wheat.

32. Add appendix D to part 150 to
read as follows:

■

Appendix D to Part 150—Initial
Position Limit Levels

Contract

Spot-month

Single
month and
all months

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Legacy Agricultural
Chicago Board of Trade Corn (C) ...................................................................................................................................
Chicago Board of Trade Oats (O) ...................................................................................................................................
Chicago Board of Trade Soybeans (S) ...........................................................................................................................
Chicago Board of Trade Soybean Meal (SM) .................................................................................................................
Chicago Board of Trade Soybean Oil (SO) ....................................................................................................................
Chicago Board of Trade Wheat (W) ................................................................................................................................
ICE Futures U.S. Cotton No. 2 (CT) ...............................................................................................................................
Kansas City Board of Trade Hard Winter Wheat (KW) ..................................................................................................
Minneapolis Grain Exchange Hard Red Spring Wheat (MWE) ......................................................................................

600
600
600
720
540
600
300
600
600

53,500
1,600
26,900
9,000
11,900
16,200
8,800
6,500
3,300

600
1500
300
950

2,200
3,400
3,000
9,400

Other Agricultural
Chicago
Chicago
Chicago
Chicago

Board of Trade Rough Rice (RR) .....................................................................................................................
Mercantile Exchange Class III Milk (DA) ..........................................................................................................
Mercantile Exchange Feeder Cattle (FC) .........................................................................................................
Mercantile Exchange Lean Hog (LH) ................................................................................................................

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules

Contract

Spot-month

Chicago Mercantile Exchange Live Cattle (LC) ..............................................................................................................
ICE Futures U.S. Cocoa (CC) .........................................................................................................................................
ICE Futures U.S. Coffee C (KC) .....................................................................................................................................
ICE Futures U.S. FCOJ–A (OJ) ......................................................................................................................................
ICE Futures U.S. Sugar No. 11 (SB) ..............................................................................................................................
ICE Futures U.S. Sugar No. 16 (SF) ..............................................................................................................................

Single
month and
all months

450
1,000
500
300
5,000
1,000

12,900
7,100
7,100
2,900
23,500
1,200

1,000
3,000
1,000
1,000

149,600
109,200
16,100
11,800

1,200
3,000
1,500
650
500

5,600
21,500
6,400
5,000
5,000

Energy
New
New
New
New

York
York
York
York

Mercantile
Mercantile
Mercantile
Mercantile

Exchange
Exchange
Exchange
Exchange

Henry Hub Natural Gas (NG) ......................................................................................
Light Sweet Crude Oil (CL) .........................................................................................
NY Harbor ULSD (HO) ................................................................................................
RBOB Gasoline (RB) ...................................................................................................
Metal

Commodity Exchange, Inc. Copper (HG) ........................................................................................................................
Commodity Exchange, Inc. Gold (GC) ............................................................................................................................
Commodity Exchange, Inc. Silver (SI) ............................................................................................................................
New York Mercantile Exchange Palladium (PA) .............................................................................................................
New York Mercantile Exchange Platinum (PL) ...............................................................................................................

Issued in Washington, DC, on November 7,
2013, by the Commission.
Melissa D. Jurgens,
Secretary of the Commission.
Note: The following appendices will not
appear in the Code of Federal Regulations.

Appendices to Position Limits for
Derivatives—Commission Voting
Summary and Statements of
Commissioners
Appendix 1—Commission Voting
Summary
On this matter, Chairman Gensler and
Commissioners Chilton and Wetjen voted in
the affirmative. Commissioner O’Malia voted
in the negative.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Appendix 2—Statement of Chairman
Gary Gensler
I support the proposed rule to establish
position limits for physical commodity
derivatives.
The CFTC does not set or regulate prices.
The Commission is charged with promoting
the integrity of the futures and swaps
markets. The Commission is charged with
protecting the public from fraud,
manipulation and other abuses.
Since the Commodity Exchange Act passed
in 1936, position limits have been a tool to
curb or prevent excessive speculation that
may burden interstate commerce.
For a fuller understanding of this long
history, refer to the excellent testimony of
our former General Counsel Dan Berkovitz
from July of 2009 titled: ‘‘Position Limits and
the Hedge Exemption, Brief Legislative
History.’’
In the Dodd-Frank Act, Congress directed
the Commission to impose limits on
speculative positions in physical commodity
futures and options contracts and
economically equivalent swaps.
The CFTC finalized a rule in October 2011
that addressed Congress’ direction to prevent

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any single trader from obtaining too large a
share of the market to ensure that derivatives
markets remain fair and competitive. Last
fall, a federal court vacated the rule.
It is critically important, however, that
these position limits be established as
Congress required.
The agency has historically interpreted our
obligations to promote market integrity to
include ensuring that markets do not become
too concentrated. When the CFTC set
position limits in the past, it sought to ensure
that the markets were made up of a broad
group of participants with no one speculator
having an outsized position. This promotes
the integrity of the price discovery function
in the market by limiting the size of any one
speculator’s footprint in the market.
Position limits further protect the markets
and clearinghouses, as such limits diminish
the possible burdens when any individual
participant may need to sell or liquidate a
position in times of individual stress.
Thus, position limits help to protect the
markets both in times of clear skies and when
there is a storm on the horizon.
With a strong proposal ready for the
Commission’s consideration today, we
determined that the best path forward to
expedite position limits implementation was
to pursue the new rule and dismiss the
appeal of the court’s ruling, subject to the
Commission’s approval of this proposal.
Today’s proposed rule is consistent with
congressional intent. The rule would
establish position limits in 28 referenced
commodities in agricultural, energy and
metals markets as part of a phased approach.
It would establish one position limits
regime for the spot month and another for
single-month and all-months-combined
limits.
Spot-month limits would be set for futures
contracts that can be physically settled, as
well as those swaps and futures that can only
be cash settled. We are seeking additional
comment on alternatives to a conditional
spot-month limit exemption with regard to
cash-settled contracts.

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Single-month and all-months-combined
limits, which the Commission currently sets
only for certain agricultural contracts, would
be reestablished in the energy and metals
markets and be extended to swaps. These
limits would be set using a formula that is
consistent with that which the CFTC has
used to set position limits for decades. The
limits will be set based upon data on the total
size of the swaps and futures market
collected through the position reporting rules
for futures, options on futures, and swaps.
Consistent with congressional direction,
the rule also would allow for a bona fide
hedging exemption for agricultural and
exempt commodities. Also following
congressional direction, there is a narrower
exemption for swap dealers with regard to
their use of futures and swaps to facilitate the
bona fide hedging of their customers.
Today’s proposed position limits rule
builds on over four years of significant public
input. In fact, this is the ninth public meeting
during my tenure as Chairman to consider
position limits.
We held three public meetings on this
issue in the summer of 2009 and got a great
deal of input from market participants and
the broader public.
We also benefited from the more than
8,200 comments we received in response to
the January 2010 proposed rulemaking to
reestablish position limits in the energy
markets.
We further benefited from input received
from the public after a March 2010 meeting
on the metals markets. In response to the
January 2011 proposal, we received more
than 15,100 comments.

Appendix 3—Statement of
Commissioner Bart Chilton
For two reasons, this is a significant day for
me. I am reminded of that great Etta James
song, At Last.
The first reason is that, at last, we are
considering what I believe to be the signal
rule of my tenure here at the Commission;
I’ve been working on speculative position

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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules
limits since 2008. The second reason today
is noteworthy is that this will be my last
Dodd-Frank meeting. Early this morning, I
sent a letter to the President expressing my
intent to leave the Agency in the near future.
I’ve waited until now—today—to get this
proposed rule out the door, and now—at
last—with the process coming nearly full
circle, I can leave. It’s with incredible
excitement and enthusiasm that I look
forward to being able to move on to other
endeavors.
With that, here is a bit of history on the
position limits journey that has led us, and
me, to this day. The early spring of 2008 was
a peculiar time at the Commission. None of
my current colleagues were here. I and my
colleagues at that time watched Bear Stearns
fail. We had watched commodity prices rise
as investors sought diversified financial
havens. When I asked Commission staff
about the influence of speculation on prices,
some said speculative positions couldn’t
impact prices. It didn’t ring true, and as
numerous independent studies have
confirmed since, it was not true.
I began urging the Commission to
implement speculative position limits under
our then-existing authority. And I was, at that
time, the only Commissioner to support
position limits. Given the concerns, I urged
Congress to mandate limits in legislation. A
Senate bill was blocked on a cloture vote that
summer, but late in the session, the House
actually passed legislation. Finally, in 2010,
as part of the Dodd-Frank law, Congress
mandated the Commission to implement
position limits by early in 2011.
Within the Commission, I supported
passing a rule that would have complied
with the time-frame established by
Congress—by any other name—federal law.
A position limits rule was proposed in
January of 2011 and finally approved in
November.
In September 2012, literally days before
limits were to be effective, a federal district
court ruling tossed the rule out, claiming the
CFTC had not sufficiently provided rationale
for imposing the rule. We appealed and I
urged us to address the concerns of the court
by proposing and quickly passing another
new and improved rule. I thought and hoped
that we could move rapidly. After months of
delay and deferral, it became clear: We could
not.
But today—at last—more than three years
since Dodd-Frank’s passage, we are here to
take it to the limits one more time.
Thankfully, we have it right in the text
before us. The Commission staff has
ultimately done an admirable job of devising
a proposed regulation that should be
unassailable in court, good for markets and
good for consumers.
I thank everyone who has worked upon the
rule: Steve Sherrod, Riva Adriance, Ajay
Sutaria, Scott Mixon, Mary Connelly, and
many others for their good work. In addition,
I especially thank Elizabeth Ritter, my Chief
of Staff, Nancy Doyle, and also Salman
Banaei who has left the Agency for greener
pastures. I thank them for their tireless efforts
on the single most important, and perhaps to
me the most frustrating, policy issue of my
tenure with the Commission. I have had the

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true honor of working with Elizabeth since
prior to my confirmation. I would be remiss
if I did not reiterate here what I have often
said; nowhere do I believe there is a brighter,
smarter, more knowledgeable and hardworking derivatives counsel. She has served
the public and me phenomenally well. Thank
you, Elizabeth.
And finally to my colleagues, past and
present, my respect to those whom we have
been unable to persuade to vote with us on
this issue, and my thanks to those who will
vote in support of this needed and mandated
rule. At last!
Thank you.

Appendix 4—Dissenting Statement of
Commissioner Scott D. O’Malia
I respectfully dissent from the
Commission’s decision to approve the Notice
of Proposed Rulemaking for Position Limits
for Derivatives. I have a number of serious
concerns with the position limits proposed
rule and its interpretation of section 4a(a) of
the Commodity Exchange Act (‘‘CEA’’ or
‘‘Act’’).1 Regrettably, this proposal continues
to chip away at the commercial and business
operations of end-users and the vital hedging
function of the futures and swaps markets.
I cannot support the position limits
proposed rule that is before the Commission
today because the proposal: (1) Fails to
utilize current, forward-looking data and
other empirical evidence as a justification for
position limits; (2) fails to provide enough
flexibility for commercial end-users to engage
in necessary hedging activities; and (3) fails
to establish a useful process for end-users to
seek hedging exemptions.
We are the experts, but where’s the
evidence?
Recently, in connection with the
Commission’s vote to dismiss its appeal 2 of
the vacated 2011 position limits rule,3 I
reiterated that the federal district court 4 had
instructed the Commission to go back to the
drawing board and do its homework.5 As I
have consistently stated, the Commission
must perform a rigorous and objective factbased analysis in order to determine whether
position limits will effectively prevent or
deter excessive speculation.6 Not only that,
but the Commission must also, in
establishing any limits, ensure that there is
sufficient market liquidity for hedgers and
prevent disruption of the price discovery
function of the underlying market.
Unfortunately, the position limits rule that is
being proposed today is not based upon a
careful, disciplined review of market
dynamics or the new data collected under
our expanded oversight responsibilities
provided for by the Dodd-Frank Act.7
17

U.S.C. 6a(a).
& SIFMA v. CFTC, No. 12–5362 (D.C. Cir.).
3 76 Fed. Reg. 71626 (Nov. 18, 2011).
4 Int’l Swaps & Derivations Ass’n v. CFTC, 887 F.
Supp. 2d 259, 280–82 (D.D.C. 2012).
5 http://www.cftc.gov/PressRoom/Speeches
Testimony/omaliastatement102913.
6 http://www.cftc.gov/PressRoom/Speeches
Testimony/omaliadissentstatement111512.
7 Dodd-Frank Wall Street Reform and Consumer
Protection Act, Pub. L. 111–203, 124 Stat. 1376
(2010).
2 ISDA

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75841

In its second attempt at establishing a
broad position limit regime that is in
accordance with the statutory language
amended by Dodd-Frank, the Commission
relies on a new legal strategy—but not new
data—in order to circumvent the spirit of the
district court’s decision. Surprisingly, the
Commission now accepts that the statutory
language in CEA section 4a(a)(1) 8 is
ambiguous and that there is not a clear
mandate from Congress to set position limits,
contrary to the arguments made by the
Commission both in court and in the vacated
rule. Notwithstanding that concession, the
proposed rule now hides behind Chevron
deference and invokes the Commission’s
‘‘experience and expertise’’ in order to justify
setting position limits without performing an
ex ante analysis using current market data.9
I am troubled that the proposal uses only
two examples from the past—one of them as
far back as the 1970s—to cobble together a
weak, after-the-fact justification that position
limits would have prevented market
disruption. This is glaringly insufficient.
Instead, the Commission should have taken
the time to analyze the new data, especially
from the swaps market, that has been
collected under the Dodd-Frank Act. It is
especially troubling that the large trader data
being reported under Part 20 of Commission
regulations10 is still unreliable and
unsuitable for setting position limit levels,
almost two full years after entities began
reporting data, and that we are forced to
resort to using data from 2011 and 2012 as
a poor and inexact substitute.
Today, the Commission proposes to set
position limits for the futures and swaps
markets in the future, not the past. I fail to
see how we can be ‘‘experts’’ if we do not
have the data to back us up. I fear that this
reliance on a new legal strategy, instead of
evidence-based standards, does little to
affirm the Commission’s self-proclaimed
‘‘expertise’’ and could result in another long
and costly court challenge that will strain our
limited resources.
Preserving Flexibility for Commercial EndUsers
I am also concerned that the position limits
proposed rule may not preserve enough
flexibility for commercial end-users to hedge
risks inherent in their business operations.
Hedging is the foundation of our markets,
and the intent of the Dodd-Frank Act was not
to place excessive and unnecessary new
regulatory burdens on end-users and make it
more complicated and more costly to
undertake risk management. That was
strongly underlined in the letter sent to the
Commission by Senators Dodd and Lincoln
in June 2010.11
87

U.S.C. 6a(a)(1).
pp. 12–14, 24, 32, 171.
10 17 C.F.R. part 20.
11 Letter from Chairman Christopher Dodd,
Committee on Banking, Housing, and Urban Affairs,
United States Senate, and Chairman Blanche
Lincoln, Committee on Agriculture, Nutrition, and
Forestry, United States Senate, to Chairman Barney
Frank, Financial Services Committee, United States
House of Representatives, and Chairman Colin
Peterson, Committee on Agriculture, United States
House of Representatives (June 30, 2010).
9 NPRM

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Regrettably, the Commission’s rules
implementing Dodd-Frank have not adhered
to that directive. This position limits
proposal is just the latest in this disturbing
trend of narrowly interpreting the statute to
foreclose viable risk management functions
that did not contribute to the financial crisis.
This trend is nowhere more apparent than in
how narrowly the proposal defines the
concept of bona fide hedging.
The position limits proposed rule does
away with Commission regulation 1.3(z),12
which has been in effect since the 1970s, and
sets forth new regulations that narrow the
bona fide hedging definition, in particular
the treatment of anticipatory hedging. This is
despite the fact that the vacated position
limits rule explicitly recognized certain
anticipatory hedging transactions as falling
within the statutory definition of bona fide
hedging and consistent with the purposes of
section 4a of the Act, and provided
exemptions for such transactions given the
condition that the trader was ‘‘reasonably
certain’’ of engaging in the anticipated
activity. In this proposal, based on an
unsatisfactory ‘‘further review,’’ the
Commission has changed its mind and has
scaled back exemptions for anticipatory
hedging. In all, the Commission has rejected
half of the common hedging scenarios
described by a working group of end-users in
their petition for exemption.
I question whether the Commission has
fulfilled Congress’ intent to protect end-users
by proposing a new position limits rule that
articulates a far too narrow conception of
bona fide hedging and does not reflect the
realities of end-users’ commercial and
business operations.

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12 17

CFR 1.3(z).

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A Workable, Practical Process for NonEnumerated Hedging Exemptions
I am especially troubled by the proposed
rule’s elimination of Commission regulations
1.3(z)(3) and 1.47,13 which is the framework
for market participants to seek a nonenumerated hedging exemption. I question
whether eliminating a workable, practical
process that has been outlined in
Commission regulations for decades will
make it more difficult for end-users to seek
exemptions for legitimate hedging
transactions and will cause unnecessary
delay and interference with business
operations.
Aggregation Proposed Rule
While I believe that today’s aggregation
proposed rule is more responsive than the
vacated rule to the realities that market
participants face in their utilization of the
futures and swaps markets, some important
concerns still remain.
First, the aggregation standards in the
proposal present significant technology
challenges for compliance, especially across
affiliates. I would support a phase-in period
to meet those challenges.
Second, I am concerned that there is
insufficient consideration and flexibility in
the ownership tiers that are used as a proxy
for control. I would be interested in
reviewing comments on pro rata aggregation,
banding/tiering of ownership interest instead
of full aggregation, and other issues with
beneficial ownership. Further, I question
whether the possible exemption for
ownership in excess of 50% is of use to any
market participants, given the additional
conditions that are imposed.
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Cost-Benefit Considerations
It is imperative that market participants
carefully review the new position limits and
aggregation proposed rules and provide
comments. I especially encourage market
participants to include any comments on the
cost impact of the proposed position limits.
I would also like to receive input from
market participants about the cost of changes
to their operations that were undertaken in
order to prepare for compliance with the
previous position limit rules, before those
rules were vacated by the court. While the
Commission failed to give enough weight to
these consequences, I intend to carefully
consider the comments and the critical
information they provide in evaluating any
draft final rule put before the Commission.
Conclusion
It is rare to get a second chance to do
things right. I am disappointed by the
Commission’s approach today because the
Commission has not taken advantage of the
opportunity for a second chance presented by
the district court decision to vacate the 2011
position limits rule. The Commission has
failed in its duty as a responsible market
regulator by not taking the time to gather the
evidence and establish sound justifications
for position limits ex ante that are based on
data. Because of this failure, as well as the
narrowing of the bona fide hedging definition
and the elimination of the existing process
for end-users to seek non-enumerated
hedging exemptions, I cannot support this
proposal.
[FR Doc. 2013–27200 Filed 12–11–13; 8:45 am]
BILLING CODE 6351–01–P

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