[Federal Register: July 17, 1998 (Volume 63, Number 137)]
[Proposed Rules]
[Page 38525-38537]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17jy98-26]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 17, 18, and 150
Revision of Federal Speculative Position Limits and Associated
Rules
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission ("Commission") has
long established and enforced speculative position limits for futures
contracts on various agricultural commodities. On April 7, 1993, the
Commission promulgated interim final
[[Page 38526]]
rules amending Federal speculative position limits. The interim
amendments generally maintained the existing speculative position limit
levels for the delivery months and increased limit levels for the
deferred months, at levels below those originally proposed. The
Commission is proposing to raise the levels of speculative position
limits for the deferred months to the levels originally proposed.
In addition, the Commission is proposing to codify various policies
relating to the requirement that exchanges set speculative position
limits as required by rule 1.61, 17 CFR 1.61. These relate to the
levels which the Commission has approved for such rules, and to various
exemptions from the general requirement that exchanges set speculative
position limits which the Commission has approved over the years.
Specifically, the Commission is proposing to codify an exemption
permitting exchanges to substitute position accountability rules for
position limits for high volume and liquid markets. The Commission is
proposing elsewhere in this issue of the Federal Register to amend its
guideline for application for contract market designation to conform it
to the changes to the speculative position limit rules proposed herein
that apply at initial contract designation. See, Guideline No. 1, 17
CFR Part 5, Appendix A.
The Commission is also proposing to amend the applicability of the
limited exemption from non-spot month speculative position limits under
Commission rule 150.3, 17 CFR 150.3, for entities that authorize
independent account controllers to trade on their behalf. Specifically,
the Commission is proposing to amend the definition of entities
eligible for this relief under Commission rule 150.1(d), 17 CFR
150.1(d), to expand the categories of eligible entities and to extend
it to the separately incorporated affiliates of an eligible entity.
Finally, the Commission is proposing to amend its rule on
aggregation. In particular, the Commission is proposing to clarify the
applicability of a limited partnership exemption to limited partners or
shareholders with less than a 25% ownership interest, or to pooled
trading accounts with ten or fewer account owners. The Commission is
also proposing to amend its rules to clarify that a commodity pool
operator's principals and its affiliates are treated the same as the
commodity pool operator itself for purposes of the Commission's
aggregation rule.
DATES: Comments must be received by September 15, 1998.
ADDRESSES: Comments should be mailed to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington,
D.C. 20581, attention: Office of the Secretariat; transmitted by
facsimile at (202) 418-5521; or transmitted electronically at
[[email protected]]. Reference should be made to "Speculative
Position Limits."
FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel,
Division of Economic Analysis, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581,
(202) 418-5260, or electronically, [[email protected]].
SUPPLEMENTARY INFORMATION:
I. Background
Speculative position limits have been a tool for regulation of
futures markets for over sixty years. Since the Commodity Exchange Act
of 1936, Congress consistently has expressed confidence in the use of
speculative position limits as an effective means of preventing
unreasonable or unwarranted price fluctuations.\1\ Section 4a(1) of the
Commodity Exchange Act (Act), 7 U.S.C. 6a(1), provides the Commission
with authority to:
\1\ See, H.R. Rep. No. 421, 74th Cong., lst Sess. 1 (1935); See
also, H.R. Rep. No. 624, 99th Cong., 2d Sess. 44 (1986). Section
4a(1) of the Commodity Exchange Act, 7 U.S.C. 6a(1), makes the
explicit finding 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 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.
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fix such limits on the amount of trading which may be done or
positions which may be held by any person under contracts of sale of
such commodity for future delivery on or subject to the rules of any
contract market as the Commission finds are necessary to diminish,
eliminate, or prevent such burden.
The Commission directly administers speculative position limits on
futures contracts for most of the domestic agricultural commodities
enumerated in section 2(a)(1) of the Act. See, 17 CFR Part 150. Prior
to the Act's amendment in 1974 which expanded its jurisdiction to all
"services, rights and interests" in which futures contracts are
traded, only these enumerated commodities were regulated. Both prior to
and after the 1974 amendments to the Act, futures markets which traded
commodities not so enumerated applied speculative position limits by
exchange rule, if at all. In 1981, the Commission promulgated rule
1.61, requiring exchanges to adopt rules setting speculative position
limits for all contract markets not subject to Commission-set
speculative position limits. Since then, all contract markets have been
subject to either Commission or exchange-set speculative position
limits.\2\ Responsibility for enforcement of speculative position
limits is shared by the Commission and the exchanges.\3\
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\2\ Commission rule 1.61, 17 CFR 1.61, requires that, absent an
exemption, exchanges adopt and enforce speculative position limits
for all contract markets which are not subject to the Commission-set
limits. In addition, Commission rule 1.61 permits exchanges to adopt
and enforce their own speculative position limits for those
contracts which have Commission speculative position limits, as long
as the exchange limits are not higher than the Commission's.
\3\ 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.
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The Commission periodically has reviewed its policies and rules
pertaining to each of the three elements of the regulatory framework
for speculative position limits--the levels of the limits, the
exemptions from them (in particular, for hedgers), and the policy on
aggregating accounts.\4\ The Commission, in this notice of proposed
rulemaking, is proposing to raise the levels of the Commission
speculative position limits and to codify a number of broad exemptions
from the requirement of rule 1.61 that exchanges establish speculative
position limits for all contracts not subject to Commission
[[Page 38527]]
limits. These exemptions to rule 1.61 were established through a series
of Commission interpretations. The Commission is also proposing to
broaden its speculative position limit exemption under rule 150.3 for
independent account controllers and to amend its aggregation policy.
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\4\ Initially, for example, the Commission redefined "hedging"
(42 FR 42748 (August 24, 1977)), raised speculative position limits
in wheat (41 FR 35060 (August 19, 1976)), and in 1979 issued its
statement of policy on aggregation of accounts and adoption of
related reporting rules (1979 Aggregation Policy), 44 FR 33839 (June
13, 1979).
Subsequently, the Commission modified and updated speculative
position limits by issuing a clarification of its hedging definition
with regard to the "temporary substitute" and "incidental" tests
(52 FR 27195 (July 20, 1987)) and guidelines regarding the exemption
of risk-management positions from exchange-set speculative position
limits in financial futures contracts. 52 FR 34633 (September 14,
1987). Moreover, in 1988, the Commission promulgated Commission rule
150.3(a)(4), an exemption from speculative position limits for the
positions of multi-advisor commodity pools and other similar
entities which use independent account controllers. The Commission
subsequently amended Commission rule 150.3(a)(4), broadening its
applicability to commodity trading advisors and simplifying and
streamlining the application process. 56 FR 14308 (April 12, 1991).
In 1991, the Commission solicited public comment on, and
subsequently approved, exchange requests for exemptions for futures
and option contracts on certain financial instruments from the
Commission rule 1.61 requirement that speculative position limits be
specified for all contracts. 56 FR 51687 (October 15, 1991).
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II. Commission Speculative Position Limit Levels
In 1987, the Commission completely revised Commission speculative
position limits. 52 FR 38914 (October 20, 1987). As part of these
revisions, the Commission added Commission speculative position limits
for soybean meal and soybean oil, which, because of an historical
anomaly, previously were not included. The Commission also amended the
structure and levels of the Commission speculative position limits. It
restructured speculative position limits by establishing them by
contract market, rather than generically by commodity. The Commission
proposed generally to increase limit levels from the spot-month limits,
which were not proposed to be increased, to progressively higher
individual-month and all-futures-combined limits. However, the rules as
promulgated generally did not provide for such stepped increases.
Instead, the amended rules generally maintained the then existing
structure of a uniform spot- and single-month level and only increased
the all-months-combined level.\5\
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\5\ However, the Commission did set stepped increases for the
cotton contract. Those commenting on the grain and soybean complex
limits opposed telescoping limits, in part, in an attempt to promote
greater liquidity in the back months. In contrast, those commenting
on the proposed speculative position limits in cotton did not object
to the higher single-month limit level. 52 FR 38916.
In light of the strong preferences expressed by the commenters
at that time, and the range of acceptable solutions which the data
supported, the Commission acceded to the views of the commenters.
Subsequently, as it expected, the Commission's experience monitoring
both Commission and exchange-set limits with stepped increases was
favorable. None of the adverse consequences hypothesized by the
opposing commenters occurred.
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In 1991, the Chicago Board of Trade (CBT), the New York Cotton
Exchange (NYCE), the Kansas City Board of Trade (KCBT) and the
Minneapolis Grain Exchange (MGE) petitioned the Commission to increase
further the levels of Commission speculative position limits.\6\ On
August 2, 1991, the Commission published in the Federal Register notice
of, and requested public comment on, these petitions for rulemaking. 56
FR 37049.
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\6\ These petitions requested that the Commission amend its
rules to increase Commission speculative position limits in the CBT
corn, wheat, oats, soybeans, soybean oil, and soybean meal futures
contracts, in the NYCE's cotton No. 2 futures contract, and in the
KCBT's and MGE's wheat futures contracts. The CBT also requested
that the Commission expand the current exemption for spread
positions between months within the same crop year to an exemption
for spread positions between any months, outside of the spot month,
regardless of the crop year and to increase the overall level of
this exemption. The CBT separately sought Commission approval for
increases to the exchange-set speculative position limits on these
commodities.
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On April 13, 1992, the Commission proposed a number of revisions to
the structure and levels of Commission speculative position limits. 57
FR 12766. The Commission proposed these revisions to the levels of the
speculative position limits based upon two criteria: (1) the
distribution of speculative traders in the markets; and (2) the size of
open interest. Previously, the Commission had given little weight to
the size of open interest in the contract in determining the
appropriate speculative position limit level. The Commission noted,
however, that the size of open interest and the distribution of
speculative traders had not increased at the same rate over time.
Accordingly, the Commission determined that, in proposing the new
levels, both criteria should be taken into account. The Commission
noted that:
[t]his approach will permit speculative position limits to reflect
better the changing needs and composition of the futures markets,
while adhering to the policies of the Act and Commission Rule 1.61.
Although the Commission in setting levels is proposing to place
greater reliance on the criterion of percentage of open interest
represented by a particular level than previously, it has always
recognized that there is a range of acceptable limit levels [.] * *
* even when relying on a single criterion * * *.
57 FR 12770.
In proposing these increases to the limit levels, the Commission
reasoned that, as the total open interest of a futures market
increased, speculative position limit levels could be raised. The
Commission therefore applied the open interest criterion by using a
formula that specified appropriate increases to the limit level as a
percentage of open interest. Specifically, the Commission proposed
combined futures and option speculative position limits for both a
single month and for all months combined at the level of 10% of open
interest up to an open interest of 25,000 contracts, with a marginal
increase of 2.5% thereafter. It reasoned that such levels were "not
excessively large under the criteria of Commission rule 1.61." \7\ Id.
The Commission also determined that this analysis did not apply to
spot-month levels, which are "based most appropriately on an analysis
of current deliverable supplies and the history of various spot-month
expirations." Id.
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\7\ Providing for a marginal increase to the speculative
position limit of 2.5% was "based upon the universal observation
that the size of the largest individual positions in a market do not
continue to grow in proportion with increases in the overall open
interest of the market." Id. The Commission also proposed a minimum
of 1,000 contracts.
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The Commission received 63 comments in response to the proposed
rules.\8\ Typically, commodity pool operators, commodity trading
advisors and futures commission merchants strongly favored the
amendments. Most agricultural producers and their representative
organizations strongly opposed any increase to the speculative position
limits. Others, however, recommended that the Commission proceed, but
in a more cautious manner. In particular, they recommended that the
Commission raise speculative position limits on a phased or test basis.
These commenters advocated taking additional time to study the need
for, and the possible effects of, further increasing speculative
position limits, and in their view, the trial implementation of
expanded speculative limits would provide such an additional
opportunity.
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\8\ Those commenters included three futures exchanges; a broad-
based futures industry association; four futures commission
merchants; 26 commodity pool operators, commodity trading advisors
or associations of such entities; 20 groups or firms representing
agricultural interests; eight individual agricultural producers; and
one exchange member. In addition, the proposed rules were a topic of
discussion at the October 19, 1992, meeting of the Commission's
Agricultural Advisory Committee.
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Based on its consideration of the comments received and its
favorable administrative experience with the rule's prior amendment,
the Commission in April 1993 adopted interim final rules to Commission
speculative position limits. These interim amendments increased the
position limit levels by half of the increase originally proposed, in
two steps. 58 FR 18057 (April 7, 1993). The first phase, which took
effect on June 7, 1993, increased speculative position limits by
combining the previously separate futures and option limits. The second
phase, which took effect on March 31, 1994, increased the back-month
speculative position limits halfway to the level originally proposed by
the Commission.
When the Commission adopted the interim final rules, it provided
notice that the comment period on the original proposed levels would be
reopened in March 1994, coinciding with implementation of the second
phase of the interim rules. The comment period
[[Page 38528]]
was kept open for a year, closing on April 30, 1995. Anticipating that
it would determine whether to adopt the levels originally proposed
based upon trading experience under the interim rules, the Commission
directed the Division of Economic Analysis (Division) to study the
effects of the phased increases.
In April 1995, the Division reported to the Commission on the
interim rule's effects. The report reviewed trading under both phases
of the interim rules over a period of eighteen months and was based
upon an analysis of extensive Commission and exchange data relating to
individual and aggregate positions of reportable traders, as well as
inter- and intra-day price series for the entire period of 1988 through
1994. The report concluded that overall the impact of the interim final
rules on actual, observed large trader position was modest and that any
changes in market performance were most likely attributable to factors
other than changes in the rules.
Specifically, the report concluded that the phase 1 and phase 2
modifications of futures and option limits had little impact on the
overall activities of large traders during the first 18 months of the
interim final rules with relatively few speculative traders increasing
the size of their positions above the previously permitted levels. The
report further concluded that the periods of higher volatility and
measurable changes in market liquidity observed in particular markets
during the first 18 months of the interim rules appear to have been a
result of rapidly-changing cash market conditions rather than the
amended limits. Finally, the report concluded that there was no
discernable negative impact on commercial use of the markets during the
time period studied.
Only 13 comment letters were received during the post-phase 2
comment period, none from agricultural interests. Generally, all of the
commenters supported increasing Commission speculative position limit
levels as originally proposed. However, at that time concerns began to
arise regarding the continued viability of the delivery provisions of
the CBT's corn, soybean, and wheat futures contracts. The Commission
directed its attention to resolving those surveillance-related concerns
before further raising speculative position limit levels. Accordingly,
the Commission took no further action on the proposed rules, and they
remain pending.
The Commission recently reviewed open interest and trader position
data to determine market changes since the Division's report to it
following implementation of the phase 2 limits. With the exception of
CBT oats, the markets' 1997 open interest substantially exceeded their
1994 open interest.\9\ Although the Division's report concluded that
the phase 1 increases to speculative position limits had little
discernable impact on trader behavior, since then the number of large
traders in these markets, the general size of their positions and the
number of large traders holding positions above the phase 1 speculative
position limits have increased. In addition, a number of traders now
frequently hold positions greater than 80% of the current phase 2 all-
months-combined level. These increases suggest that, under both of the
criteria the Commission has applied in the past--size of traders'
positions and open interest--expansion of the back month speculative
position limits to the levels originally proposed is appropriate.
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\9\ In its interim final rulemaking, the Commission determined
to maintain a parity of limit levels for wheat traded on the CBT,
KCBT, and MGE. 58 FR 17979-179080. Accordingly, only data from the
larger CBT wheat market were analyzed.
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Accordingly, the Commission is reproposing to raise the back month
speculative position limits to the levels it proposed initially.
Consistent with its previous determination, the Commission is not
proposing any change to spot-month limits.\10\ The Commission has
determined to seek public comment on the reproposed levels because
commenters may have modified their views or additional persons may have
formed an opinion during the extended period of time since the comment
period closed. The following table compares the phase 2 speculative
position limits now in effect for selected contracts to those that the
Commission is reproposing.
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\10\ The Commission originally proposed to increase the spot
month limit in oats based upon changes in the cash market. See 57 FR
at 12770, n. 17. The increases noted at the time have since
reversed. Accordingly, the Commission is not proposing any change to
the current spot month limit for oats.
Speculative Position Limits
[by contract] \11\
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Current levels (as of March 31, 1994) Reproposed levels
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Contract Single Single
Spot month month All months Spot month month All months
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CHICAGO BOARD OF TRADE
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Corn.............................. 600 3,400 6,000 600 5,500 9,000
Oats.............................. 400 900 1,200 400 1,000 1,500
Soybeans.......................... 600 2,400 4,300 600 3,500 5,500
Wheat............................. 600 2,100 3,200 600 3,000 4,000
Soybean Oil....................... 540 2,000 3,100 540 3,000 4,000
Soybean Meal...................... 720 2,200 3,400 720 3,000 4,000
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MIDAMERICA COMMODITY EXCHANGE
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Corn.............................. 600 1,200 1,200 600 1,200 1,200
Soybeans.......................... 600 1,200 1,200 600 1,200 1,200
Wheat............................. 600 1,200 1,200 600 1,200 1,200
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MINNEAPOLIS GRAIN EXCHANGE
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Hard Red Spring Wheat............. 600 2,100 3,200 600 3,000 4,000
White Wheat....................... 600 1,200 1,200 600 1,200 1,200
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[[Page 38529]]
NEW YORK COTTON EXCHANGE
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Cotton No. 2...................... 300 1,600 2,500 300 2,500 3,500
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KANSAS CITY BOARD OF TRADE
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Hard Winter Wheat................. 600 2,100 3,200 600 3,000 4,000
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\11\ The limits are shown here in terms of the contract size traded on each exchange. The size of the
speculative position limit being proposed is based upon the current contract size. Any subsequent change in
contract size would require a conforming adjustment to the limit. For comparative purposes, the MCE limits are
expressed here as though its contracts were for 5,000 bushels, the contract size traded on the CBT. MCE
contracts are actually for 1,000 bushels, and its limits therefore would be five times the size shown on the
table.
III. Exemptions From Required Exchange-set Speculative Position
Limits
Although Commission rule 1.61 generally requires that all contract
markets not subject to Commission speculative position limits impose
exchange-set speculative position limits, the Commission over the years
has approved a number of significant exemptions from this requirement.
These exemptions were approved by the Commission under Commission rule
1.61(e), a broad exemptive provision enabling the Commission to exempt
contract markets "consistent with the purposes of this section." In
each case, the Commission considered and granted such an exemption by
approving a proposed rule change of a contract market.
The first of these exchange rule changes was submitted for
Commission approval by the Chicago Mercantile Exchange (CME). In
requesting public comment on the proposed rule change, the Commission
explained that it was considering granting exemptive relief based upon
one of the factors included in rule 1.61 for setting speculative
positions limit levels--the "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." See, 56 FR 51687, 51688 (October 15, 1991),
citing Commission rule 1.61(a)(2). The Commission further explained
that, "(b)ased upon its over ten-years experience in administering
rule 1.61, the Commission believes that exemptions for three classes of
futures and option contacts with varying degrees of exchange
supervision for each class could be appropriately considered * * *."
These three classes were based upon the depth and liquidity of the
underlying cash market and the ease of arbitrage between the futures
and underlying cash market. The three classes were futures and option
contracts on foreign currencies and futures and option contracts on two
broad categories of financial instruments. The two categories for
futures and option contracts on financial instruments were based upon
the relative degree of liquidity in both the futures and option markets
and in the cash market for the underlying instrument. The Commission
subsequently added a fourth exemptive class, comprised of contracts for
certain physical commodities. See, 57 FR 29064.
The Commission explained that it would exempt contracts in major
foreign currencies from all of rule 1.61's requirements based upon
their nearly inexhaustible deliverable supply, the very highly liquid
underlying cash markets and the great ease of arbitrage between the
cash and futures markets thereon. Contract markets which have been so
exempted are the NYCE U.S. dollar index and NYFE foreign
currencies.\12\
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\12\ THe CME and the Philadelphia Board of Trade (PBOT), as a
matter of exchange choice, have not included their foreign currency
contracts in this category, instead applying to them a position
accountability rule.
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The second category of exempt contracts applies to futures and
option contracts on financial instruments which exhibit the highest
degree of liquidity in both the futures and cash markets, which are
readily arbitraged. The Commission noted that for this class of
contract the required speculative position limit could be replaced with
a position accountability rule. Position accountability rules impose a
level which triggers distinct reporting responsibilities by a trader at
the request of the applicable exchange. The CME Eurodollar contracts
and the CBT U.S. Treasury bond contracts were exempted under this
category.\13\
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\13\ As noted above, the CME and the PBOT voluntarily apply a
"category 2" position accountability rule to their foreign
currency contracts.
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The third class of exemptions was not contract markets on financial
instruments having a highly liquid futures or cash market, but not of
the same magnitude of liquidity as those in the highest class. For this
class of contract, the position accountability rule should include, in
addition to the specified reporting requirements, automatic consent of
the trader not to increase further those positions which exceed the
triggering level when so ordered by the exchange acting in its
discretion.\14\ See, 56 FR 51688-89. Examples of contract markets
falling within this category include CBT U.S. Treasury notes and
Eurodollars, NYCE 5-year U.S. Treasury notes, CME one-month LIBOR, and
MCE U.S. Treasury bonds.
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\14\ The Commission also noted that all such exemptions under
rule 1.61(e) must include appropriate plans for the continued
surveillance and exchange supervision of trading in these contract
markets and for monitoring and review of the operation of the
exemption.
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Finally, the Commission noted that certain contractors for tangible
commodities such as precious metals and energy contracts are
characterized by underlying cash markets with liquidity equivalent to
or greater than certain of the financial futures and options which the
Commission exempted. Because of the limitation on the delivery
mechanisms of physically-delivered contracts, however, the Commission
limited the exemption for such contracts on physical commodities to the
deferred trading months, requiring retention of a spot-month
speculative position limit. COMEX gold,
[[Page 38530]]
silver, and copper contracts are examples of such contracts.\15\
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\15\ Although the Commission cited certain energy contracts as
eligible for such treatment, the New York Mercantile Exchange
(NYMEX) has not sought such treatment for its contract markets.
COMEX was acquired by NYMEX and is now a division of NYMEX.
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These policies were first considered by the Commission in
connection with specific exemptive requests by exchanges for existing
contracts and, because they are based in part on the liquidity of the
futures markets, are applicable only to existing markets. Except for
several applications for designation of new foreign currency futures
adoption contracts,\16\ the Commission has approved few additional
exemptions since granting the initial exemptive requests.\17\ Moreover,
the Commission has never formally promulgated these exceptions, nor has
it incorporated these policies into Guideline No. 1, the Commission's
guideline for exchange compliance with the requirements for contract
market designation. As a consequence, the exemptions, which appear only
in a number of Federal Register notices, are not readily accessible to
those unfamiliar with Commission precedent.
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\16\ Although the Commission exempted foreign currency contracts
from the requirement for position accountability rules based upon
the recognized liquidity of the underlying cash markets in the major
foreign currencies, it has also approved, as a matter of exchange
preference, "category 2" position accountability rules (a purely
informational provision) for a number of such contracts. Futures and
option contracts based on a non-major foreign currency, which are
required to include position accountability rules, have been
approved for "category 4" position accountability rules with spot-
month speculative position limits.
\17\ However, the Commission did approve for position
accountability rules several newly designated contracts which are
spreads between existing contracts on financial instruments that are
the subject of contracts already having position accountability
rules. These spread contracts, the CBT Yield Curve Spreads, were
approved for the "category 4" position accountability exception.
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Similarly, the open-interest criterion and numeric formula used by
the Commission in its 1991 proposed amendment of Commission speculative
position limits, which have provided the most definitive guidance by
the Commission to date on acceptable levels for speculative position
limits for tangible commodities, have not been promulgated as
Commission rules.\18\ Rather, the staff routinely has applied that
formula (and its associated minimum levels) as a matter of
administrative practice when reviewing proposed exchange speculative
position limits under Commission rule 1.61. The staff examines exchange
speculative position limit rules in connection with its review of
applications for designation of futures and option contracts and of any
subsequent proposed increases to those limits. Despite the formula's
widespread use as a rule of thumb, it is not readily accessible in its
present form.
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\18\ In addition, in reviewing applications for contract
designation for tangible commodities, the staff has relied upon the
Commission's formulation providing for a minimum level of 1,000
contracts for non-spot-month speculative position limits. Moreover,
the Commission has routinely approved a level of 5,000 contracts for
non-spot months in applications for designation of financial futures
and energy contracts and that level has become a rule of thumb as a
matter of administrative practice.
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The Commission is proposing to promulgate these informal policies
as rules and, in a companion notice of proposed rulemaking located
elsewhere in this edition of the Federal Register, is proposing
conforming amendments to Guideline No. 1. Promulgating these policies
within a single section of the Commission's rules will increase
significantly their accessibility and clarify their terms.
As proposed by the Commission, the rules clarify several issues
that the policies do not address. First, the proposed rules make clear
that no speculative position limit or position accountability rule is
required for designated contract markets in major foreign currencies.
No such limitations are necessary because of the nearly inexhaustible
deliverable supply of the major foreign currencies. Such foreign
currencies are defined in the Commission's fast-track designation rule
as a foreign currency "for which there is no legal impediment to
delivery and for which there exists a liquid cash market." 17 CFR
5.1(a)(2)(i). The Commission is proposing that contract markets in
other, less liquid foreign currencies be treated as a futures or option
contract on any other financial instrument or product.\19\
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\19\ Although the Commission approved an exchange proposal to
apply "category 2" position accountability rules, which is a
purely informational provision, to its futures and option contracts
on major foreign currencies, the Commission does not require any
position accountability rule for such contracts. Futures and option
contracts on non-major foreign currencies are required to include a
position accountability rule. Accordingly, the Commission approved a
"category 4" position accountability exception (spot month limit
and a provision enabling the exchange to order a trader not to
increase further a position) for such a non-major foreign currency.
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The remaining position accountability categories are proposed to
apply only to existing futures and option contracts.\20\ Consistent
with the policies, under the proposed rule, the type of position
accountability rule that applies to a particular contract market is
determined by the liquidity of the futures market, the liquidity of the
cash market and the Commission's oversight experience. The Commission
is proposing, however, to restate the criteria with greater clarity and
precision, particularly in measuring the necessary levels of liquidity
of the futures and option markets.\21\
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\20\ As explained above, the only instances where position
accountability rules were permitted in the absence of prior trading
history was where the contracts were closely related to existing
contracts for which position accountability rules had already been
approved.
\21\ The policy provided that position accountability could be
based on either a liquid futures or cash market. The Commission is
proposing to require that both the cash and futures markets be
liquid. Accordingly, no futures contract can meet the proposed
rule's requirement at the time of its initial designation and must
first establish a trading history. The Commission will apply the
rule prospectively, and any designated contracts or pending
designation applications that have position accountability rules in
place in reliance on the liquidity of the cash market alone may
continue to rely on the policy. The Commission is seeking comment
specifically on this proposed change, its proposed application only
to designation applications filed after the effective date of the
rule and whether the proposed rule would entail any adverse
consequences.
---------------------------------------------------------------------------
The Commission is proposing to quantify the necessary levels of
futures market liquidity similar to its use of a formula to set (and to
increase) speculative position limits. The formula is based upon a
market's open interest, a measure of its overall relative size.\22\
When substituting position accountability rules for speculative
position limits, however, the liquidity of the futures and option
market--measured by volume of trading--is also particularly
important.\23\ Accordingly, the Commission is proposing to restate the
futures market liquidity criterion as a required minimum level of open
interest combined with specified, increasing levels of trading volume.
As the level of open interest increases, the extent of the exemptive
relief increases as well.
---------------------------------------------------------------------------
\22\ The rationale for this criterion is that, as a market's
overall size grows, the size of the individual speculative positions
that it can absorb and carry without adverse impact increases.
\23\ 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. A high degree
of liquidity in the futures and option market better enables traders
to arbitrage these markets with the underlying cash markets. 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. See, 56 FR at 51689.
---------------------------------------------------------------------------
Specifically, the Commission is proposing that contract markets be
eligible for position accountability rules in the non-spot months if
they have a minimum month-end open interest of 50,000 contracts and an
average daily volume of 5,000 contracts, both measured in terms of all
months combined for the most recent calendar year. Financial futures
contracts, as well
[[Page 38531]]
as contracts on tangible commodities having the requisite cash market
liquidity, are eligible for this proposed exemptive treatment.
Financial futures contracts having a minimum month-end open interest of
50,000 contracts and an average daily trading volume of 25,000
contracts need not impose a spot month limit, but must have a position
accountability rule that enables the exchange to order traders not to
increase further their positions. Financial futures contracts having a
minimum month-end open interest of 50,000 contracts and an average
daily trading volume of 100,000 contracts may have a position
accountability rule which only requires that traders provide specified
information to the exchange if so ordered.
In addition to a liquid futures market, the Commission has looked
to the liquidity in the underlying cash market and to its
administrative experience in approving position accountability rules
for particular contract markets. The Commission is not proposing to
quantify an acceptable measure of cash market liquidity. Cash markets
differ greatly, and many are decentralized, making it difficult to
propose a uniform means of measuring their liquidity. Generally,
however, in assessing the liquidity of cash markets, the Commission
looks to the depth of the market and the tightness of bids and offers.
The final criterion--administrative experience--is based upon a
contract market's surveillance history, whether it has been subject to
problem expirations or liquidations and whether its terms or conditions
are consistent with current cash market conditions.
IV. Issues Relating to Aggregation and Exemptions for Independently
Controlled Accounts
Section 4a of the Act provides that, in determining whether a
position exceeds the speculative position limits,
the positions held and trading done by any persons directly or
indirectly controlled by such person shall be included with the
positions held and trading done by such person; and further, such
limits upon positions and trading shall apply to positions held by,
and trading done by, two or more persons acting pursuant to an
expressed or implied agreement or understanding, the same as if the
positions were held by, or the trading were done by, a single
person.
The Commission and its predecessor agency have interpreted the
"held or controlled" standard as applying both to ownership of
positions or to control of trading decisions. Each aggregation
criterion is applied separately.\24\ However, beginning in 1979, the
Commission has recognized a number of exceptions from the general
principle. In its "Statement of Policy on Aggregation of Accounts,"
44 FR 83839 (June 13, 1979) (1979 Aggregation Policy), the Commission
determined that a futures commission merchant (FCM) need not aggregate
the discretionary trading accounts or customer trading programs through
which a trader affiliated with, but independent of, the FCM directs
trading of customer-owned positions or accounts. To demonstrate the
trader's independence, the FCM must maintain only supervisory control
over the trader, and trading decisions in the discretionary account or
program must be made independently of trading decisions in all other
accounts held by the FCM.\25\ Id. at 33843
---------------------------------------------------------------------------
\24\ See, e.g., Commission rule 18.01 ("holds, has a financial
interest in or controls"). Using two independent criteria may lead
to positions being aggregated in more than one manner. Although the
Commission's large trader reporting system routinely aggregates
positions reported by FCMs on the basis of the control criterion,
Commission staff may direct FCMs to report particular accounts on
the basis of ownership, as well. In addition, the Commission may
require by special call that individual traders file large-trader
reports for all positions which they own or control.
\25\ The 1979 Aggregation Policy offered guidance on the
criteria considered in determining whether the FCM exercises control
over the trading decisions of the customer discretionary accounts or
trading programs. These included the customer account agreement,
advertising, the agreements between the FCM and its employee or
other trader, the degree of supervision, the confidentiality of the
program's trading decisions, reliance on the FCM for market
information, and financial investment by the FCM in the program
greater than 10% and common trading patterns. Id. at 33844.
---------------------------------------------------------------------------
The 1979 Aggregation Policy was based in part on structural changes
made by the futures industry to respond to the increased acceptance of
professional management of trading accounts and the use of trading
programs. Id. at 83840. Further responding to this continuing trend,
the Commission in 1988 promulgated rule 150.3, 17 CFR 150.3, an
exemption from speculative position limits for commodity pools or
similar entities which use independent account controllers. 53 FR 41563
(October 24, 1988). Commodity pools, pension funds, and other similar
entities are required to aggregate their positions as the owner of the
trading accounts, even if those accounts are traded independently by
multiple independent account controllers. Commission rule 150.3
exempted such entities which use independent account controllers from
speculative position limits outside of the spot-month. The exemption
permits the total positions of the trading entity or vehicle to exceed
speculative limits during non-spot months, but requires that each
independent account controller trading on the entity's behalf comply
with the applicable limits. During the spot month, all positions of the
entity are required to be aggregated and are subject to the spot-month
speculative position limit level. Under the exemption as originally
promulgated, those seeking exemptive treatment were required to file an
application with the Commission and to document the independence of
their account controllers.
In 1991, the Commission extended eligibility for this exemption to
commodity trading advisors and greatly streamlined the application
procedure. Subsequently, in 1992 the Commission made the exemption
self-executing. 57 FR 44492 (September 28, 1992). Commenters on both
the 1991 and 1992 amendments suggested that, in addition to commodity
trading advisors, the exemption should be extended to others, including
investment banks, other financial intermediaries, parent/affiliate
firms, corporate divisions, commercial banks, merchant banks, and
insurance companies. The Commission declined to do so, saying that it:
is aware of no adverse market effects resulting from the exemptions
granted so far.
Nevertheless, * * * [t]he current exemption and the proposed
expansion are limited to those who trade professionally for others.
* * * The classes of trader suggested by commenters for inclusion in
the exemption differ from this pattern. The Commission will
undertake further expansion of the exemption after it has had an
opportunity to assess the impact of the current expansion and has
gained a better understanding of the characteristics of the market
user who might benefit from, and their need for, such an exemption.
56 FR 14308, 14312 (April 9, 1991).
Commission rule 150.3 generally has worked well. It has provided
flexibility to the markets, accommodating the continuing trend toward
professional management of speculative trading accounts, while at the
same time protecting the markets from the undue accumulation of large
speculative positions owned by a single person or entity in the spot
month. Since its amendment in 1991, most questions concerning rule
150.3 have related to its application to integrated financial services
companies. The number and complexity of these companies has grown in
the intervening years, a consequence of mergers and consolidation in
the financial services sector. Such companies generally may include
affiliated futures commission
[[Page 38532]]
merchants (FCMs), commodity pool operators, and non-Commission
registrants which may also trade futures and option contracts for their
own accounts. They may grant their affiliates or subsidiaries
independent trading authority with appropriate safeguards to maintain
the affiliates' independence and the confidentiality of the affiliates'
trading decisions. However, presently only affiliated commodity pool
operators and commodity trading advisors meet the rule's eligibility
requirement.\26\
---------------------------------------------------------------------------
\26\ FCMs have similar but not identical relief under the 1979
Aggregation Policy discussed above.
---------------------------------------------------------------------------
The Commission is proposing to amend rule 150.3 better to reflect
the continuing trend to greater complexity in the structure of
financial services companies. Such companies, as a matter of business
preference, may provide their affiliates with independent trading
authority and are structured in a manner which meets the policies of
rule 150.3. The Commission is proposing to include the separately
incorporated affiliates of commodity pool operator, commodity trading
advisor or futures commission merchant as eligible entities for the
exemptive relief of rule 150.3.\27\
---------------------------------------------------------------------------
\27\ Affiliated companies are generally understood to include
one company that owns, or is owned by, another or companies that
share a common owner.
---------------------------------------------------------------------------
The Commission is also proposing to expand the classes of entities
which are eligible for the exemption in response to the continuing
trend toward greater professional management of trading funds. Single-
investor commodity pools or commodity pools having a very limited
number of participants have been created as part of this trend. Often
these pools are organized as limited partnerships, and in many cases,
the limited partner or partners, who may also trade professionally,
provide almost all of the trading capital. The operators of such
commodity pools generally, by virtue of having fewer than fifteen
participants in the pools and less than $200,000 in capital
contributions, would be exempt from registration under Commission rule
4.13. As discussed in greater detail below, the Commission is of the
view that the trading of these limited partnerships should not be
disaggregated from trading by such a limited partner. However, because
these commodity pools may provide for the pool's trading by an
independent account controller, the Commission believes that they
appropriately can be included within the exemption from speculative
position limits for the non-spot month limits under Commission rule
150.3.
The Commission is also proposing to include with the exemption
banks, trust companies, savings and loan associations, insurance
companies and the separately incorporated affiliates of any of the
above entities. These additional classes of eligible entity were
suggested for inclusion by some commenters when the Commission last
proposed to revise the rule 150.3 exemption. In light of the successful
operation of the exemption during the intervening years, the Commission
believes that it should now consider extending the exemption to these
entities. Accordingly, the Commission is proposing that any of the
above entities that grants its affiliates or subsidiaries independent
trading authority, maintains only the supervisory authority over their
trading activity consistent with its fiduciary, statutory and
regulatory responsibilities \28\ and creates a system of controls to
ensure that it or its affiliates have no knowledge of the trading
decisions of other of its affiliates can exceed speculative position
limits outside of the spot month. During the spot month, all of the
affiliates' accounts, except for those of an affiliated FCM qualifying
under the 1979 Aggregation Policy, must be aggregated for speculative
position purposes as positions belonging to a single owner.
---------------------------------------------------------------------------
\28\ See e.g., sections 2(a)(1)(A)(iii) and 4f(c) of the Act and
Commission rule 166.3.
---------------------------------------------------------------------------
The Commission is proposing to codify in rule 150.4 the substance
of its policies on aggregation, particularly its 1979 Aggregation
Policy. The substance of its aggregation policies currently is
contained in rules 17.00 and 18.01, 17 CFR 17.00 and 18.01, which
specify the manner of identifying accounts for reporting purposes. The
Commission is of the view that its rules on aggregating positions for
speculative limit compliance should be codified as such, rather than be
drawn by inference from the Commission's large-trader reporting
requirements.
In codifying these policies, the Commission also is proposing to
amend the limited partner exception of Commission rule 18.01.\29\
Commission rule 18.01 governs the Commission's reporting requirements
and parallels the 1979 Aggregation standard. It defines an account
owner as a person or entity having a 10% or greater financial interest
in the account, except for limited partners. Limited partners had been
exempt from definitions of ownership beginning with the Commission's
predecessor agency, the Commodity Exchange Authority, based upon the
assumption that limited partners by definition were required to be
passive investors and were prohibited from exercising control over the
trading activities of the partnership. However, the degree to which
limited partners can be involved in the operation of a partnership
varies under state law. Although limited partners generally are
precluded from "controlling" the business of the partnership, they
may not be precluded from being involved to some degree in the
partnership's trading decisions.\30\
---------------------------------------------------------------------------
\29\ As discussed above, the Commission is proposing to include
within the exemption from speculative position limits under
Commission rule 150.3 the operators of commodity pools which are
exempt from registration under Commission rule 4.13.
\30\ Section 303(b) of the Revised Uniform Limited Partnership
Act provides in part that:
A limited partner does not participate in the control of the
business * * * solely by * * * (2) consulting with and advising a
general partner with respect to the business of the limited
partnership. * * *
---------------------------------------------------------------------------
The Commission has become aware of, and concerned of, trading by
single-investor commodity pools. In these commodity pools, a single
limited partner may contribute virtually all of the pool's trading
capital, relying upon the general partner to control trading in the
account. Previously, persons with this type of ownership interest may
not have aggregated the pool's positions with their own in reliance of
the exception under Commission rule 18.01 for limited partners in a
commodity pool.\31\
---------------------------------------------------------------------------
\31\ Commission rule 18.01 provides, in part, that:
If any trader holds, has a financial interest in or controls
more than one account, * * * all such accounts shall be considered
as a single account for * * * the purpose of reporting. For the
purpose of Sec. 18.01, except for the interest of a limited partner
or shareholder (other than the CPO) in a commodity pool, the term
"financial interest" shall mean an interest of 10 percent or more
in ownership or equity of an account.
---------------------------------------------------------------------------
In light of the possibility that limited partners may be less than
wholly passive investors, the likelihood that limited partners may be
involved to some degree in the trading decisions of the partnership's
trading activity rises as the overall number of limited partners in a
commodity pool decreases, such as in the single or limited-number
investor pool or when a small number of limited partners have a
relatively dominant ownership interest. Accordingly, the Commission is
proposing to require a limited partner, shareholder or other type of
pool participant (such as a member of a limited liability company), to
aggregate the pool's positions with the trader's other positions if the
trader has as an ownership interest of 25% or
[[Page 38533]]
greater in the pooled account or if the pool has ten or fewer
participants.\32\
---------------------------------------------------------------------------
\32\ It should be noted that, while such positions must be
aggregated, the Commission has also proposed to include such
entities within the exemption of rule 150.3. Accordingly, where the
limited partners in fact treat the partnership as an independent
trader, they qualify for an exemption from speculative position
limits for non-spot months. During the spot month, however, the
limited partners or shareholders would be required to aggregate the
partnership positions.
---------------------------------------------------------------------------
The Commission does not intend by this proposal to modify the
general treatment of limited partners or shareholders in commodity
pools, but rather intends to require aggregation by limited partners or
shareholders in unusual or atypical arrangements.\33\ The Commission
requests comments specifically to address the typical organization for
pools and whether levels proposed are appropriate for reaching only
unusual ownership forms.
---------------------------------------------------------------------------
\33\ The Commission is proposing to clarify that participants in
additional categories of limited-liability business organizations,
such as members of limited liability companies, for the purpose of
these rules, are treated the same as limited partners or
shareholders.
---------------------------------------------------------------------------
The Commission is proposing an additional revision to the existing
limited partnership exemption to clarify its application to commodity
pool operators. Currently, commodity pools are excluded from the
limited partnership exemption. Accordingly, commodity pool operators
which are also a limited partner have a financial interest which causes
them to aggregate their positions if their ownership interest is ten
percent or greater. This is apart from the requirement that they
aggregate positions based upon trading control. The question has arisen
whether the commodity pool operator's principals or affiliates, if
investing as limited partners, are covered by the ten percent interest
requirement. The Commission is of the view that principles and
affiliates of the commodity pool operator were intended to be treated
under the rule the same as the commodity pool operator itself. This
would be consistent with the explicit treatment of FCMs investing in
customer trading programs or pools under the 1979 Aggregation Policy.
The Commission is proposing to amend the limited partner exception to
make explicit its understanding of the rule's application to the
principals and affiliates of the pool operator.
III. Other Matters
A. Paperwork Reduction Act
When publishing proposed rules, the Paperwork Reduction Act of 1995
(Pub. L. 104-13 (May 13, 1996)) imposes certain requirements on federal
agencies (including the Commission) in connection with their conducting
or sponsoring any collection of information as defined by the Paperwork
Reduction Act. In compliance with the Act, the Commission, through this
rule proposal, solicits comment to:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including the validity of the methodology and assumptions used; (2)
evaluate the accuracy of the agency's estimate of the burden of the
proposed collection of information including the validity of the
methodology and assumptions used; (3) enhance the quality utility, and
clarity of the information to be collected; and (4) minimize the burden
of the collection of the information on those who are to respond
through the use of appropriate automated, electronic, mechanical, or
other technological collection techniques or other forms of information
technology, e.g., permitting electronic submission of responses.
The Commission has submitted the proposed rule and its associated
information collection requirements to the Office of Management and
Budget. The proposed rules are part of two approved information
collections. The burdens associated with these rules are as follows:
Collection Number
[3038-0013]
------------------------------------------------------------------------
------------------------------------------------------------------------
Average burden hours per response........ 6
Number of respondents.................... 12
Frequency of response.................... On occasion
------------------------------------------------------------------------
Collection Number
[3038-0009]
------------------------------------------------------------------------
------------------------------------------------------------------------
Average burden hours per response........ 4.74
Number of respondents.................... 3709
Frequency of response.................... On occasion
------------------------------------------------------------------------
Persons wishing to comment on the information which would be
required by this proposed/amended rule should contact the Desk Officer,
CFTC, Office of Management and Budget, Room 10202, NEOB, Washington, DC
20503, (202) 395-7340. Copies of the information collection submission
to OMB are available from the CFTC Clearance Officer, 1155 21st St
N.W., Washington, DC 20581, (202) 418-5160.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) 5 U.S.C. 601 et seq., requires
that agencies, in proposing rules, consider the impact of those rules
on small businesses. The Commission has previously determined that
large traders are not small entities for purposes of the RFA.\34\ The
Commission believes that the proposed rule amendments to raise
Commission speculative position limits would only impact large traders.
In addition, the Commission is of the opinion that the proposed
amendments to Commission rule 150.3, under which certain eligible
entities will be exempted from speculative limits (except in the spot-
month) would apply exclusively to large traders, as would the proposal
to codify in rule 150.4 its policies on aggregation. Similarly, the
Commission's proposal to aggregate the positions of participants in
pooled accounts with a greater than 25 percent ownership interest in
the accounts is not expected to impact a significant number of small
entities. The Chairperson, on behalf of the Commission, hereby
certifies, pursuant to 5 U.S.C. 605(b), that the action taken herein
will not have a significant economic impact on a substantial number of
small entities. The certification is based on the fact that the
proposed rules will lift speculative limits levels, extend exemptive
relief from speculative limits (except in the spot-month) to certain
eligible entities and codify the Commission policies on aggregation,
including its rules on aggregating positions for speculative limit
compliance. The proposed rules permitting such transactions subject to
the specified conditions, therefore, remove a burden for all entities,
regardless of size.
---------------------------------------------------------------------------
\34\ 47 FR 18618 (April 30, 1982).
---------------------------------------------------------------------------
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements, Segregation requirements.
17 CFR Part 17
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
17 CFR Part 18
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
[[Page 38534]]
17 CFR Part 150
Agricultural commodities, Bona fide hedge positions, Position
limits, Spread exemptions.
In consideration of the foregoing, and pursuant to the authority
contained in the Act, and in particular sections 2(a)(1), 2(a)(2), 4a,
4c, 4f, 4g, 4i, 4n, 5, 5a, 6b, 6c, 8a, and 15, 7 U.S.C. 2, 6a, 6c, 6f,
6g, 6i, 6n, 7, 7a, 12a, 13a, 13a-1, and 19, the Commission hereby
proposes to amend parts 1, 17, 18, and 150 of chapter I of title 17 of
the Code of Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,
12c, 13a, 13a-l, 16, 16a, 19, 21, 23, and 24.
2. Section 1.61 is proposed to be removed and reserved.
PART 17--REPORTS BY FUTURES COMMISSION MERCHANTS, MEMBERS OF
CONTRACT MARKETS AND FOREIGN BROKERS
3. The authority citation for part 17 continues to read as follows:
Authority: 7 U.S.C. 6a, 6d, 6f, 6g, 6i, 7, and 12a.
4. Section 17.00 is proposed to be amended by renumbering paragraph
(b)(1) as (b) and revising it, by removing paragraphs (b)(2) and (c),
by renumbering paragraphs (b)(1)(i) and (b)(1)(ii) as (b)(1) and
(b)(2), respectively, and by adding paragraph (b)(3), to read as
follows:
Sec. 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 Sec. 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. For
purposes of this section, the following shall apply:
(1) * * *
(3) Account ownership--Multiple accounts owned by a trader shall be
considered a single account as provided under Sec. Sec. 150.4(b), (c)
and (d) of this chapter.
PART 18--REPORTS BY TRADERS
5. The authority citation for part 18 continues to read as follows:
Authority: 7 U.S.C. 2, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a,
and 19; 5 U.S.C. 552 and 552(b) unless otherwise noted:
6. Section 18.01 is proposed to be revised to read as follows:
Sec. 18.01 Interest in or control of several accounts.
If any traders holds, has a financial interest in or controls
positions in more than one account, whether carried with the same or
with different futures commission merchants or foreign brokers, all
such positions and accounts shall be considered as a single account for
the purpose of determining whether such trader has a reportable
position and, unless instructed otherwise in the special call to report
under Sec. 18.00 of this part, for the purpose of reporting.
PART 150--LIMITS ON POSITIONS
6. The authority citation for part 150 continues to read as
follows:
Authority: 7 U.S.C. 6a, 6c and 12a(5).
7. In Sec. 150.1 the introductory text of paragraph (d), and
paragraphs (d)(2), (e)(2) and (e)(5) are proposed to be revised to read
as follows:
Sec. 150.1 Definitions.
* * * * *
(d) Eligible entity means--
A commodity pool operator, the operator of a trading vehicle which
is excluded or who itself has qualified for exclusion from the
definition of the term "pool" or commodity pool operator,"
respectively, under Sec. 4.5 of this chapter; the limited partner or
shareholder in a commodity pool the operator of which is exempt from
registration under Sec. 4.13 of this chapter; a commodity trading
advisor; a bank or trust company; a savings and loan association; an
insurance company; or the separately incorporated affiliates of a
futures commission merchant or of any of the above entities:
(1) * * *
(2) Which maintains: (i) only such minimum control over the
independent account controller as is consistent with its fiduciary
responsibilities and necessary to fulfill its duty to supervise
diligently the trading done on its behalf; or (ii) if a limited partner
or shareholder of a commodity pool exempt from registration under
Sec. 4.13 of this chapter, only such limited control as is consistent
with its status.
(e) Independent account controller means a person--
(1) * * *
(2) Over whose trading the eligible entity maintains only such
minimum control as is consistent with its fiduciary responsibilities 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) * * *
(5) Who is registered as a futures commission merchant, introducing
broker, commodity trading advisor or an associated person of any such
registrant or a commodity pool operator that is exempt from
registration under Sec. 4.13 of this chapter.
8. Section 150.2 is proposed to be revised to read as follows:
Sec. 150.2 Position limits.
No 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 the following:
Speculative Position Limits
[By contract]
------------------------------------------------------------------------
Limits by number of contracts
--------------------------------------
Contract Single
Spot month month All months
------------------------------------------------------------------------
CHICAGO BOARD OF TRADE
------------------------------------------------------------------------
Corn............................. 600 5,500 9,000
Oats............................. 600 1,000 1,500
[[Page 38535]]
Soybeans......................... 600 3,500 5,500
Wheat............................ 600 3,000 4,000
Soybean Oil...................... 540 3,000 4,000
Soybean Meal..................... 720 3,000 4,000
------------------------------------------------------------------------
MIDAMERICA COMMODITY EXCHANGE
------------------------------------------------------------------------
Corn............................. 3000 6000 6000
Oats............................. 2000 2000 2000
Soybeans......................... 3000 6000 6000
Wheat............................ 3000 6000 6000
Soybean Meal..................... 800 800 800
------------------------------------------------------------------------
MINNEAPOLIS GRAIN EXCHANGE
------------------------------------------------------------------------
Hard Red Spring Wheat............ 600 3,000 4,000
White Wheat...................... 600 1,200 1,200
------------------------------------------------------------------------
NEW YORK COTTON EXCHANGE
------------------------------------------------------------------------
Cotton No. 2..................... 300 2,500 3,500
------------------------------------------------------------------------
KANSAS CITY BOARD OF TRADE
------------------------------------------------------------------------
Hard Winter Wheat................ 600 3,000 4,000
------------------------------------------------------------------------
9. Section 150.4 is proposed to be revised to read as follows:
Sec. 150.4 Aggregation of positions.
(a) Positions to be aggregated. The position limits set forth in
Sec. 150.2 of this part shall apply to all positions in accounts for
which any person by power of attorney or otherwise directly or
indirectly holds positions or controls trading or to positions held by
two or more persons acting pursuant to an expressed or implied
agreement or understanding the same as if the positions were held by,
or the trading of the position were done by, a single individual.
(b) Ownership of accounts. For the purpose of applying the position
limits set forth in Sec. 150.2, except for the ownership interest of
limited partners or shareholders as set forth in paragraph (c) of this
section, any trader holding positions in more than one account, or
holding accounts or positions in which the trader by power of attorney
or otherwise directly or indirectly has a 10 percent or greater
ownership or equity interest, must aggregate all such accounts or
positions.
(c) Ownership by limited partners, shareholders or other pool
participants. For the purpose of applying the position limits set forth
in Sec. 150.2, any trader having a 25 percent or greater ownership or
equity interest in an account or positions as a limited partner,
shareholder or other category of pool participant must aggregate those
accounts or positions with all other accounts or positions owned or
controlled by the trader; Provided however, that:
(1) A limited partner, shareholder or other pool participant that
is also a principal or affiliate of the commodity pool operator must
aggregate the pooled account or positions with all other accounts or
positions owned or controlled by that trader if the trader's ownership
or equity interest in the pooled accounts or positions is 10 percent or
greater; or
(2) Each limited partner, shareholder or other pool participant
having an ownership interest in a pooled account or positions with ten
or fewer partners or shareholders must aggregate the pooled account or
positions with all other accounts or positions owned or controlled by
the trader if the trader's ownership or equity interest in the pooled
accounts or positions is 10 percent or greater.
(d) Trading Control by Futures Commission Merchants. The position
limits set forth in Sec. 150.2 of this part shall be construed to apply
to all positions held by a futures commission merchant in a
discretionary account, or in an account which is part of, or
participates in, or receives trading advice from a customer trading
program of a futures commission merchant, or any of the officers,
partners, or employees of such futures commission merchant, unless:
(1) A trader other than the futures commission merchant directs
trading in such an account;
(2) The futures commission merchant maintains only such minimum
control over the trading in such an account as is necessary to fulfill
its duty to supervise diligently trading in the account; and
(3) Each trading decision of the discretionary account or the
customer trading program is determined independently of all trading
decisions in other accounts which the futures commission merchant
holds, has a financial interest of 10 percent or more in, or controls.
10. New Sec. 150.5 is proposed to be added to read as follows:
Sec. 150.5 Exchange-set speculative position limits.
(a) Exchange limits. Each contract market, as a condition of
designation under part 5, appendix A of this chapter, shall by bylaw,
rule, regulation, or resolution 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 future delivery
or, on a futures equivalent basis, options thereon. This section shall
not apply to a contract market for
[[Page 38536]]
which position limits are set forth in Sec. 150.2 of this part or for a
futures or option contract market on a major foreign currency for which
there is no legal impediment to delivery and for which there exists a
highly liquid cash market. Nothing in this section shall be construed
to prohibit a contract market from fixing different and separate
position limits for different types of futures contracts based on the
same commodity, different position limits for different futures or for
different delivery months, or from exempting positions which are
normally known in the trade as "spreads, straddles, or arbitrage," or
from fixing limits which apply to such positions which are different
from limits fixed for other positions.
(b) Levels at designation. At the time of its initial designation,
a contract market must provide for speculative position limit levels as
follows:
(1) The spot month limit level for physical delivery contracts must
be no greater than one-quarter of the estimated spot month deliverable
supply calculated separately for each month to be listed and for cash-
settled contracts based on a small or not highly liquid underlying cash
market must be at a level that will tend to prevent or diminish price
manipulation;
(2) Individual non-spot month or all-months-combined levels must be
no greater than 1,000 contracts for tangible commodities other than
energy products;
(3) individual non-spot month or all-months-combined levels must be
no greater than 5,000 contracts for energy products and non-tangible
commodities, including contracts on financial products.
(c) Adjustments to levels. Twelve months after a contract market's
initial listing for trading, or an any time thereafter, contract
markets may adjust their speculative limit levels as follows:
(1) The spot month limit level for physical delivery contracts must
be no greater than one-quarter of the estimated spot month deliverable
supply calculated separately for each month to be listed and for cash-
settled contracts based on a small or not highly liquid underlying cash
market must be at a level that will tend to prevent or diminish price
manipulation; and
(2) Individual non-spot month or all-months-combined levels must be
no greater than 10 percent of the average combined futures and delta-
adjusted option month-end open interest for the most recent calendar
year up to 25,000 contracts with a marginal increase of 2.5 percent
thereafter, or be based on position sizes customarily held by
speculative traders on the contract market, which shall not be
extraordinarily large relative to total open positions in the contract,
the 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.
(d) Hedge exemption. (1) No exchange by law, rule regulation, or
resolution adopted pursuant to this section shall apply to bona fide
hedging positions as defined by a contract market in accordance with
Sec. 1.3(z)(1) of this chapter. Provided, that the contract market may
limit bona fide hedging positions or any other positions which have
been exempted pursuant to paragraph (e) of this section which it
determines are not in accord with sound commercial practices or exceed
an amount which may be established and liquidated in an orderly
fashion.
(2) Traders must apply to the contract market for exemption from
its speculative position limit rules. In considering whether to grant
such an application for exemption, contract markets must take into
account the factors contained in paragraph (d)(1) of this section.
(e) Trader accountability exemption. Tweleve months after a
contract market's initial listing for trading, or at any time
thereafter, contract markets may submit for Commission approval under
section 5a(a)(12) of the Act and Sec. 1.41(b) of this chapter, a bylaw,
rule, regulation, or resolution, substituting for the position limits
required under paragraphs (a), (b) and (c) of this section, an exchange
rule requiring traders to be accountable for large positions as
follows:
(1) For futures and option contracts on a financial instrument or
product having an average month-end open interest of 50,000 contracts
and an average daily trading volume of 100,000 contracts and a very
highly liquid cash market, an exchange bylaw, regulation or resolution
requiring traders to provide information about their position upon
request by the exchange;
(2) For futures and option contracts on a financial instrument or
product or on an intangible commodity having an average month-end open
interest of 50,000 and an average daily volume of 25,000 contracts and
a highly liquid cash market, an exchange bylaw, regulation or
resolution requiring traders to provide information about their
position upon request by the exchange and to consent to halt increasing
further the trader's positions if so ordered by the exchange;
(3) For futures and option contracts on a tangible commodity,
including but not limited to metals, energy products, or international
soft agricultural products, having an average month-end open interest
of 50,000 contracts and an average daily volume of 5,000 contracts and
a liquid cash market, an exchange bylaw, regulation or resolution
requiring traders to provide information about their position upon
request by the exchange and to consent to halt increasing further the
trader's positions if so ordered by the exchange, provided, however,
such contract markets are not exempt from the requirement of paragraphs
(b) or (c) that they adopt an exchange bylaw, regulation or resolution
setting a spot month speculative position limit with a level no greater
than one-quarter of the estimated spot month deliverable supply;
(4) For purposes of this paragraph, trading volume and month-end
open interest shall be calculated based upon the futures contract and
its related option contract, on a delta-adjusted basis, for all trading
months listed during the most recent twelve month period.
(f) Other exemptions. Exchange speculative position limits adopted
pursuant to this section shall not apply to any position acquired in
good faith prior to the effective date of any bylaw, rule, regulation,
or resolution which specifies such limit or to 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 on behalf of or for the account or benefit of such
person. In addition to the express exemptions specified in this
section, a contract market may propose such other exemptions from its
position limits consistent with the purposes of this section and shall
submit such rules for Commission review under section 5a(a)(12) of the
Act and Sec. 1.41(b) of this chapter.
(g) Aggregation. In determining 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 expressed or implied
agreement or understanding, the same as if the positions were held by a
single person.
[[Page 38537]]
Issued by the Commission this 13th day of July, 1998, in
Washington, D.C.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 98-19114 Filed 7-16-98; 8:45 am]
BILLING CODE 6351-01-M
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