United States: U.S. CFTC Approves A Position Limits Reproposal And Finalizes Aggregation Rules

On December 5, 2016, the U.S. Commodity Futures Trading Commission unanimously approved a Reproposal on Position Limits for Derivatives and a Final Rule on Aggregation of Positions. The Position Limits Reproposal would establish federal speculative position limits for 25 core futures contracts, related futures and exchange-traded options contracts, and economically equivalent swaps. Exchanges would also be permitted to establish speculative position limits that are more (but not less) restrictive than the federal requirements, subject to exchange-granted exemptions that would also be consistent with federal exemptions. The Reproposal includes a revised definition of "bona fide hedging position" that addresses some of the concerns raised by commenters, allows the exchanges to grant non-enumerated exemptions (subject, however, to full CFTC review), and more closely conforms to the text of the Commodity Exchange Act, as amended. The 60-day comment period on the Reproposal will begin when it is published in the Federal Register.

The Final Rule on Aggregation of Positions, which will take effect 60 days after it is published in the Federal Register, will require persons to aggregate for position limits purposes all positions in accounts for which any person, directly or indirectly, (1) controls trading or holds a 10% or greater ownership or equity interest with the positions held and trading done by such person; or (2) holds or controls the trading of positions in more than one account or pool with substantially identical trading strategies. The Aggregation Rule will apply initially to the nine legacy agricultural commodity futures contracts for which federal position limits are currently in place under section 150.2 of the CFTC's regulations. Additionally, if and when the federal speculative position limits rules are finalized, the Aggregation Rule will apply to the additional 16 core referenced contracts. The Aggregation Rule includes four additional exemptions for: (1) persons with greater than 10% ownership in an entity; (2) where ownership results from broker-dealer activities; (3) underwriting; and (4) arrangements where the sharing of information would violate or create reasonable risk of violating U.S. or foreign law or regulation.

Introduction

On December 5, 2016, the U.S. Commodity Futures Trading Commission (the "CFTC") unanimously approved a Reproposal on Position Limits for Derivatives (the "2016 Reproposal") that would establish federal speculative position limits for 25 core futures contracts, related futures and exchange-traded options contracts, and economically equivalent swaps (collectively, "referenced contracts").1 The mammoth 910-page proposal revises and updates the previous Proposed Rule on Position Limits for Derivatives2 issued in December 2013 (the "2013 Proposal"), and the Supplemental Proposed Rule on Position Limits for Derivatives3 issued in June 2016 (the "Supplemental Proposal"). The 2016 Reproposal also provides the CFTC's summary and responses to comments submitted on the Supplemental Proposal. With the upcoming change in presidential administration, this last aspect of the 2016 Reproposal is useful to gather current thinking on this important topic in light of the significant number of comment letters, new studies, and discussions at CFTC advisory committee meetings over the past three years since the 2013 Proposal. The 2016 Reproposal has already sparked controversy among Democrats in the U.S. Senate, 3 of whom wrote a letter to Chairman Massad admonishing him for failing to finalize the rulemaking in 2016.4

As under the 2013 Proposal, the 2016 Reproposal would establish federal spot month and non-spot month limits for each referenced contract, and no person would be allowed to exceed such limits without an exemption.5 Exchanges would also be permitted to establish speculative position limits that are more (but not less) restrictive than the federal requirements, subject to exchange-granted exemptions that would also be consistent with federal exemptions. The 2016 Reproposal includes a revised definition of "bona fide hedging position" that addresses some of the concerns raised by commenters, allows the exchanges to grant non-enumerated exemptions (subject, however, to full CFTC review), and more closely conforms to the text of the Commodity Exchange Act, as amended ("CEA"). The 2016 Reproposal notes that the compliance date for the new position limits requirements, if finalized, would not be earlier than January 3, 2018.

The 60-day comment period on the 2016 Reproposal begins when it is published in the Federal Register. The ultimate fate of the CFTC's position limits rulemaking is uncertain with Republicans set to take control of the White House on January 20, 2017. Commissioner Giancarlo, who is likely to assume the role of Acting Chairman in January, has advocated for "a return to [the CFTC's] traditional approach of principles-based regulation."6 Although the 2016 Reproposal delegates a degree of flexibility to the exchanges to administer exemptions from the federal position limits regime, the CFTC would tie exchanges' hands in many respects with prescriptive regulatory requirements. Accordingly, it is possible that this position limits proposal will be followed by another.

Additionally, on December 5, 2016, the CFTC unanimously approved a final rule on the aggregation of positions for assessing compliance with federal speculative position limits rules (the "Aggregation Rule") that will become effective 60 days after it is published in the Federal Register.7 The Aggregation Rule will apply initially to the nine legacy agricultural commodity futures contracts for which federal position limits are currently in place under section 150.2 of the CFTC's regulations ("Legacy Agricultural Contracts"). Additionally, if and when the federal speculative position limits rules are finalized, the Aggregation Rule will apply to the additional referenced contracts. The Aggregation Rule largely adopts the regulations proposed in the Proposed Rule on the Aggregation of Positions,8 as amended by the 2015 Supplemental Proposal on Aggregation of Positions.9 The final Aggregation Rule will require persons to aggregate for position limits purposes all positions in accounts for which any person, directly or indirectly, (1) controls trading or holds a 10% or greater ownership or equity interest with the positions held and trading done by such person; or (2) holds or controls the trading of positions in more than one account or pool with substantially identical trading strategies. However, persons may request exemptions from the aggregation requirement by filing a notice with the CFTC in compliance with new section 150.4(c).

The Aggregation Rule includes four additional exemptions for: (1) persons with greater than 10% ownership in an entity (the "Owned Entity Exemption"); (2) where ownership results from broker-dealer activities (the "Broker-Dealer Exemption"); (3) underwriting (the "Underwriting Exemption"); and (4) arrangements where the sharing of information would violate or create reasonable risk of violating U.S. or foreign law or regulation (the "Information Sharing Restriction Exemption"). The Aggregation Rule would also revise the three currently available exemptions for certain FCM accounts (the "FCM Exemption"), accounts carried by an independent account controller10 (the "Independent Account Controller Exemption"), and pooled accounts (the "Pooled Accounts Exemptions"). Notably, some of the onerous conditions to the exemptions that were contained in the earlier proposals have been withdrawn.

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  1. The 2016 Reproposal is available at cftc.gov.
  2. Position Limits for Derivatives; Proposed Rule, 78 Fed. Reg. 75,680 (Dec. 12, 2013).
  3. Position Limits for Derivatives: Certain Exemptions and Guidance; Proposed Rule, 81 Fed. Reg. 38,458 (June 13, 2016).
  4. On December 14, 2016, Democratic Senators Maria Cantwell, Sherrod Brown, and Dianne Feinstein sent a letter to the CFTC Chairman Massad stating that they are "disturbed by the CFTC's action to delay [the position limits] rulemaking and [Chairman Massad's] inability to guide the rule to completion in the two and a half years of [his] tenure." The Senators urged Chairman Massad "to spend [his] remaining time putting the CFTC in a position to finalize strong Dodd-Frank rules for the derivatives market as contemplated by Congress." The letter is available at cantwell.senate.gov.
  5. The 2016 Reproposal would not prescribe federal position accountability levels for these products.
  6. Address of CFTC Commissioner J. Christopher Giancarlo to the American Enterprise Institute, Sep. 21, 2016, available at cftc.gov.
  7. The Aggregation Rule is available at cftc.gov.
  8. Aggregation of Positions; Proposed Rule, 78 Fed. Reg. 68,946 (Nov. 15, 2013).
  9. Aggregation of Positions; Supplemental Notice of Proposed Rulemaking, 80 Fed. Reg. 58,365 (Sep. 29, 2015).
  10. This exemption is currently within § 150.3, but the Aggregation Rule moves it into § 150.4.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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