United States: CFTC Grants Relief On Certain Position Aggregation Requirements

Last Updated: August 18 2017
Article by Robert Zwirb

Most Read Contributor in United States, December 2018

The CFTC Division of Market Oversight ("DMO") granted time-limited no-action relief to market participants from certain exemption and notice-filing requirements related to the aggregation of positions. Previous temporary relief from filing requirements was granted via Staff Letter 17-06, which was set to expire on August 14, 2017.

In response to requests for relief submitted by SIFMA and the FIA, the DMO agreed not to pursue enforcement action against market participants for failure to comply with CFTC Rule 150.4(c) notice-filing requirements (regarding compliance with CFTC Rule 150.2 ("Position Limits")) in certain scenarios. First, the DMO agreed to allow market participants to file notices seeking exemptions from filing requirements upon request from the DMO, rather than compelling market participants to file notices before the exemption actually is needed. The DMO determined that granting relief from the prospective filing requirement would ease compliance burdens on market participants.

The DMO also granted relief related to the "independent account controller" exemption ( CFTC Rule 150.4(b)(4)). Under this portion of the exemptive relief, the DMO agreed to allow commodity trading advisors ("CTAs") and persons using CTAs as independent account controllers to make use of the independent account controller exemption regardless of registration status; i.e., even if they do not fall under the definition of an "eligible entity" or "independent account controller," as prescribed by the current exemption. The no-action relief also allows for the exemption to be utilized in situations where a person has granted discretionary trading authority to an independent account controller that does not meet the definition of an "eligible entity."

The DMO also granted relief to allow a person seeking an owned entity exemption to (1) satisfy the firewall condition for the exemption only with respect to derivatives trading, rather than in connection with trading more broadly, (2) provide a notice filing that contains a certification with regard to controlling the owned entity, or having routine access to relevant information about the owned entity that addresses only derivatives trading, and (3) in circumstances where the owner is not and should not be aware of the derivatives trading activity of the owned entity, provide certifications only with respect to the owner, but not the owned entity.

Finally, in response to concerns from SIFMA and the FIA that an assessment of compliance with the "substantially identical trading strategies" requirement in CFTC Rule 150.4(a)(2) would be difficult without any quantifiable benchmarks for determining what constitutes "substantially identical," the DMO agreed not to recommend enforcement action unless a market participant is determined to have failed to aggregate positions in accounts or pools with substantially identical trading strategies held for the purpose of "willfully circumvent[ing] applicable position limits." The DMO stated that in the interim, it will evaluate the appropriateness of granting more permanent relief with respect to this requirement.

The relief, granted by Staff Letter 17-37, will remain in effect until August 12, 2019. Starting on August 14, 2017, market participants will be required to comply with the position limits and aggregation requirements in CFTC Rules 150.2 and 150.4, except as otherwise provided in the Staff Letter.

Commentary / Bob Zwirb

This request for relief illustrates how the issuance of a rule (here, the aggregation rule, which was issued last December), arguably before its time, and before its implications can be fully anticipated, may create problems down the road that defeat the purpose of the rule. Examples of this are reflected in the following excerpts:

  • "[C]ertain aspects of the Final Aggregation Rule are unworkable for and/or impose substantial and undue burdens on investment funds, asset managers, and the passive investors on whose behalf they act."
  • "The SIFMA AMG/MFA Request states that the Final Aggregation Rule did not provide any definition or guidance as to the meaning of 'substantially identical trading strategies,' and that absent any metrics to assess whether trading strategies are 'substantially identical,' asset managers and investment funds cannot operationalize the rule in order to determine whether they are aggregating positions in compliance with Commission requirements."
  • "According to FIA, requiring a market participant to address all accounts and positions that the participant is eligible to disaggregate 'would impose a substantial burden on industry and not provide Staff with important or necessary information. For example, within the context of the owned-entity exemption, FIA expects that a requirement to identify all owned entities in a notice filing would result in many participants filing notices with hundreds or thousands of owned entities, many of which will not trade futures or swaps. This would not provide Staff with helpful information to monitor compliance with position limits, but would impose a substantial burden for market participants to develop, file, and update notices with the list of disaggregated entities.'"
  • "[T]he SIFMA AMG/MFA Request states that the 'likely result of a prospective notice filing requirement . . . is that asset managers' clients who qualify as "eligible entities" will submit disaggregation notice filings as a prophylactic measure out of an abundance of caution . . . given the Commission's resource limitations and budgetary constraints, it is not clear the Commission will be able to review the flood of notice filings it may receive as it seeks to identify potential position limits issues.'"

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