2016-29582
[Federal Register Volume 81, Number 242 (Friday, December 16, 2016)]
[Rules and Regulations]
[Pages 91454-91492]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29582]
[[Page 91453]]
Vol. 81
Friday,
No. 242
December 16, 2016
Part V
Commodity Futures Trading Commission
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17 CFR Part 150
Aggregation of Positions; Final Rule
Federal Register / Vol. 81 , No. 242 / Friday, December 16, 2016 /
Rules and Regulations
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 150
RIN 3038-AD82
Aggregation of Positions
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is issuing a final rule to amend part 150 of the Commission's
regulations with respect to the policy for aggregation under the
Commission's position limits regime for futures and option contracts on
nine agricultural commodities. The Commission notes that if its
proposed position limits regime for other exempt and agricultural
commodity futures and options contracts and the physical commodity
swaps that are economically equivalent to such contracts are finalized,
these amended regulations would also apply to the position limits
regime for those contracts and swaps.
DATES: The effective date for this final rule is February 14, 2017.
FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Senior Economist,
Division of Market Oversight, (202) 418-5452, [email protected]; Riva
Spear Adriance, Senior Special Counsel, Division of Market Oversight,
(202) 418-5494, [email protected]; or Mark Fajfar, Assistant General
Counsel, Office of General Counsel, (202) 418-6636, [email protected];
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Final Rules
A. Aggregation on the Basis of Ownership or Control of Positions
in Rule 150.4(a)(1) and Related Exemption From Aggregation in Rule
150.4(b)(2)
B. Criteria for Aggregation Relief in Rule 150.4(b)(2)(i)
C. Notice Filing Requirement in Rule 150.4(c)
D. Other Issues Related to Aggregation on the Basis of Ownership
E. Exemption for Certain Accounts Held by FCMs in Rule
150.4(b)(3)
F. Exemptions From Aggregation for Underwriting and Broker-
Dealer Activities in Rules 150.4(b)(5) and (b)(6)
G. Exemption From Aggregation Where Information Sharing Would
Violate Law in Rule 150.4(b)(7)
H. Aggregation Requirement for Substantially Identical Trading
in Rule 150.4(a)(2)
I. Exemption for Ownership by Limited Partners, Shareholders or
Other Pool Participants in Rule 150.4(b)(1)
J. Exemption for Accounts Carried by an Independent Account
Controller in Rule 150.4(b)(4) and Conforming Change in Rule 150.1
K. Revisions To Clarify Regulations
III. Related Matters
A. Considerations of Costs and Benefits
B. Regulatory Flexibility Act
C. Paperwork Reduction Act
I. Background
The Commission has long established and enforced speculative
position limits for futures and options contracts on various
agricultural commodities as authorized by the Commodity Exchange Act
(``CEA'').\1\ The part 150 position limits regime \2\ generally
includes three components: (1) The level of the limits, which set a
threshold that restricts the number of speculative positions that a
person may hold in the spot-month, individual month, and all months
combined,\3\ (2) exemptions for positions that constitute bona fide
hedging transactions and certain other types of transactions,\4\ and
(3) rules to determine which accounts and positions a person must
aggregate for the purpose of determining compliance with the position
limit levels.\5\
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\1\ 7 U.S.C. 1 et seq.
\2\ See 17 CFR part 150. Part 150 of the Commission's
regulations establishes federal position limits on certain
enumerated agricultural contracts; the listed commodities are
referred to as enumerated agricultural commodities. The Commission
has proposed to amend its position limits to also encompass other
exempt and agricultural commodity futures and options contracts and
the physical commodity swaps that are economically equivalent to
such contracts. See Position Limits for Derivatives, 78 FR 75680
(Dec. 12, 2013).
\3\ See 17 CFR 150.2.
\4\ See 17 CFR 150.3.
\5\ See 17 CFR 150.4.
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The Commission's existing aggregation policy under regulation 150.4
generally requires that unless a particular exemption applies, a person
must aggregate all positions and accounts for which that person
controls the trading decisions with all positions and accounts in which
that person has a 10 percent or greater ownership interest, and with
the positions of any other persons with which the person is acting
pursuant to an express or implied agreement or understanding.\6\ The
scope of exemptions from aggregation include the ownership interests of
limited partners in pooled accounts,\7\ discretionary accounts and
customer trading programs of futures commission merchants (``FCM''),\8\
and eligible entities with independent account controllers (``IAC'')
that manage customer positions.\9\ Market participants claiming one of
the exemptions from aggregation are subject to a call by the Commission
for information demonstrating compliance with the conditions applicable
to the claimed exemption.\10\
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\6\ See 17 CFR 150.4(a) and (b).
\7\ See 17 CFR 150.4(c).
\8\ See 17 CFR 150.4(d).
\9\ See 17 CFR 150.3(a)(4).
\10\ See 17 CFR 150.3(b) and 150.4(e).
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The Commission adopted aggregation rules in 2011, as part of its
adoption of part 151 of its regulations, that were largely similar to
the existing aggregation policy under regulation 150.4.\11\ In 2012,
the Commission proposed to amend the aggregation rules in part 151.\12\
Prior to finalization of the 2012 amendments, however, part 151 of the
Commission's regulations was vacated by court order.\13\
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\11\ See Position Limits for Futures and Swaps, 76 FR 71626
(Nov. 18, 2011). With regard to determining which accounts and
positions a person must aggregate, regulation 151.7 (now vacated,
see footnote 13, below) implemented the Commission's existing
aggregation policy under regulation 150.4 and also provided
additional exemptions for underwriters of securities, and for where
the sharing of information between persons would cause either person
to violate federal law or regulations adopted thereunder. With the
exception of the exemption for underwriters, vacated regulation
151.7 required market participants to file a notice with the
Commission demonstrating compliance with the conditions applicable
to each exemption.
\12\ See Aggregation, Position Limits for Futures and Swaps, 77
FR 31767 (May 30, 2012).
\13\ See International Swaps and Derivatives Association v.
United States Commodity Futures Trading Commission, 887 F. Supp. 2d
259 (D.D.C. 2012). The revised position limit levels in amended
section 150.2 were not vacated.
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In November 2013, the Commission proposed to amend the existing
aggregation rules in regulation 150.4, and certain related regulations,
to modify rules to determine which accounts and positions a person must
aggregate.\14\ This proposal and the related notice of proposed
rulemaking are referred to herein as the ``Proposed Rule.'' The
Proposed Rule was substantially similar to the aggregation rules that
had been adopted in part 151 of the Commission's regulations in 2011,
as they were proposed to be amended in May 2012.\15\ After reviewing
public comments on the Proposed Rule, the Commission supplemented it
with a limited revision in September 2015 that would permit the
disaggregation of positions of owned entities in expanded
circumstances.\16\ This supplement to the proposal and the
[[Page 91455]]
related supplemental notice of proposed rulemaking are referred to
herein as the ``Supplemental Notice.''
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\14\ See Aggregation of Positions; Proposed Rule, 78 FR 68946
(Nov. 15, 2013).
\15\ See Proposed Rule, 78 FR at 68947-48.
\16\ See Aggregation of Positions: Supplemental notice of
proposed rulemaking, 80 FR 58365 (Sept. 29, 2015).
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II. Final Rules
The Commission is adopting the amendments to its aggregation rules
in regulation 150.4, and certain related regulations, as set forth in
the Proposed Rule and modified in the Supplemental Notice, with certain
further changes made in response to public comments. The amendments and
the public comments relevant to each amendment are discussed below.\17\
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\17\ The public comments on the Proposed Rule and the
Supplemental Notice are available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1620.
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A. Aggregation on the Basis of Ownership or Control of Positions in
Rule 150.4(a)(1) and Related Exemption From Aggregation in Rule
150.4(b)(2)
1. Proposed Approach
The Proposed Rule reflected the Commission's long-standing
incremental approach to exemptions from the aggregation requirement for
persons owning a financial interest in an entity. The Proposed Rule
highlighted the relevant statutory language of section 4a(a)(1) of the
CEA, which requires aggregation of an entity's positions on the basis
of either ownership or control of the entity, and the related
legislative history and regulatory developments which support the
Commission's approach.\18\ In addition, the Proposed Rule explained
that the Commission's historical practice has been to craft narrowly-
tailored exemptions, when and if appropriate, to the basic requirement
of aggregation when there is either ownership or control of an entity.
On this basis, proposed rule 150.4(a)(1) would maintain the requirement
in existing regulation 150.4(b) that all positions in accounts for
which any person, by power of attorney or otherwise, directly or
indirectly, controls trading or holds a 10 percent or greater ownership
or equity interest be aggregated with the positions held and trading
done by such person.
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\18\ See Proposed Rule, 78 FR at 68956, citing 7 U.S.C. 6a(a)(1)
(``In determining whether any person has exceeded such 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'').
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To explain the basis for maintaining the existing 10 percent
threshold level, the Commission noted that it has generally found that
an ownership or equity interest of less than 10 percent in an account
or position that is controlled by another person who makes
discretionary trading decisions does not present a concern that such
ownership interest results in control over trading or can be used
indirectly to create a large speculative position through ownership
interests in multiple accounts.\19\ As such, the Commission has
exempted an ownership interest below 10 percent from the aggregation
requirement, while requiring aggregation when there is an ownership
interest above 10 percent.\20\ Prior comments, discussed in the
Proposed Rule, had advocated that an ownership interest of 10 percent
or more should also be exempt from the aggregation requirement, so long
as such ownership represents a passive investment that does not involve
control of the trading decisions of the owned entity.\21\ The prior
commenters had asserted that such passive investments would be unlikely
to allow the owner to directly or indirectly control the trading of the
owned entity, and therefore would be unlikely to present a risk that
persons would be able to hold an unduly large overall position through
positions in multiple accounts.\22\
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\19\ See Proposed Rule, 78 FR at 68958.
\20\ The Commission codified this aggregation threshold in its
1979 statement of policy on aggregation, which was derived from the
administrative experience of the Commission's predecessor. See
Statement of Policy on Aggregation of Accounts and Adoption of
Related Reporting Rules, 44 FR 33839, 33843 (June 13, 1979) (``1979
Aggregation Policy''). Note, however, that proposed rule 150.4(a)(2)
would also separately require aggregation of investments in accounts
with substantially identical trading strategies.
\21\ See Proposed Rule, 78 FR at 68951.
\22\ See id.
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Responding to these prior comments, the Commission explained in the
Proposed Rule that it had previously considered, but not adopted, a
broad passive investment exemption from the aggregation requirement,
and had instead generally restricted exemptions based on ownership to
those for FCMs, limited partner investors in commodity pools, and IACs
managing customer funds for an eligible entity.\23\ Further, the
Proposed Rule reiterated the Commission's belief in incremental
development of aggregation exemptions over time.\24\ Consistent with
that incremental approach, the Proposed Rule maintained the 10 percent
threshold in the existing regulation but proposed to adopt specific,
tailored relief from the ownership criteria of aggregation for certain
situations.
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\23\ See id, citing Exemptions from Speculative Position Limits
for Positions which have a Common Owner but which are Independently
Controlled and for Certain Spread Positions; Proposed Rule, 53 FR
13290, 13292 (Apr. 22, 1988). The 1988 proposal for the independent
account controller rule requested comment on the possibility of a
broader passive investment exemption, and specifically noted:
[Q]uestions also have been raised regarding the continued
appropriateness of the Commission's aggregation standard which
provides that a beneficial interest in an account or positions of
ten percent or more constitutes a financial interest tantamount to
ownership. This threshold financial interest serves to establish
ownership under both the ownership criterion of the aggregation
standard and as one of the indicia of control under the 1979
Aggregation Policy.
In particular, certain instances have come to the Commission's
attention where beneficial ownership in several otherwise unrelated
accounts may be greater than ten percent, but the circumstances
surrounding the financial interest clearly exclude the owner from
control over the positions. The Commission is requesting comment on
whether further revisions to the current Commission rules and
policies regarding ownership are advisable in light of the exemption
hereby being proposed. If such financial interests raise issues not
addressed by the proposed exemption for independent account
controllers, what approach best resolves those issues while
maintaining a bright-line aggregation test?
\24\ See Proposed Rule, 78 FR at 68951, citing Aggregation,
Position Limits for Futures and Swaps, 77 FR 31767, 31773 (May 30,
2012). This incremental approach to account aggregation standards
reflects the Commission's historical practice. See, e.g., Exemptions
from Speculative Position Limits for Positions Which Have a Common
Owner But Which are Independently Controlled and for Certain Spread
Positions; Final Rule, 53 FR 41563, 41567 (Oct. 24, 1988) (the
definition of eligible entity for purposes of the IAC exemption
originally only included commodity pool operators (``CPOs''), or
exempt CPOs or pools, but the Commission indicated a willingness to
expand the exemption after a ``reasonable opportunity'' to review
the exemption.); Exemption From Speculative Position Limits for
Positions Which Have a Common Owner, But Which Are Independently
Controlled, 56 FR 14308, 14312 (Apr. 9, 1991) (the Commission
expanded eligible entities to include commodity trading advisors,
but did not include additional entities requested by commenters
until the Commission had the opportunity to assess the current
expansion and further evaluate the additional entities); and
Revision of Federal Speculative Position Limits and Associated
Rules, 64 FR 24038 (May 5, 1999) (``1999 Amendments'') (the
Commission expanded the list of eligible entities to include many of
the entities commenters requested in the 1991 rulemaking).
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a. Initial Ownership Threshold for Disaggregation Relief in the
Proposed Rule
The Proposed Rule included two tiers of relief from the ownership
criteria of aggregation--relief on the basis of a notice filing,
effective upon submission, by persons holding an interest of between 10
percent and 50 percent in an owned entity, and relief on the basis of
an application by persons holding an interest of more than 50 percent
in an owned entity.\25\ Each of these procedures for relief in the
Proposed Rule is described briefly below.
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\25\ See Proposed Rule, 78 FR at 68958-61.
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The Proposed Rule set out a notice filing procedure, effective upon
submission, to permit a person with either an ownership or an equity
interest in an owned entity of 50 percent
[[Page 91456]]
or less to disaggregate the positions of an owned entity in specified
circumstances, even if such person has a 10 percent or greater interest
in the owned entity.\26\ The notice filing would have to demonstrate
compliance with certain conditions set forth in proposed rule
150.4(b)(2)(i). Similar to other exemptions from aggregation, the
notice filing would be effective upon submission to the Commission, but
under proposed rule 150.4(c) the Commission would be able to
subsequently call for additional information, and to amend, terminate
or otherwise modify the person's aggregation exemption for failure to
comply with the provisions of proposed rule 150.4(b)(2). Further, the
person would be obligated by proposed rule 150.4(c) to amend the notice
filing in the event of a material change to the circumstances described
in the filing.
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\26\ Under the Proposed Rule, and in a manner similar to current
regulation, if a person qualifies for disaggregation relief, the
person would nonetheless have to aggregate those same accounts or
positions covered by the relief if they are held in accounts with
substantially identical trading strategies. See proposed rule
150.4(a)(2). The exemptions in proposed rule 150.4 were set forth as
alternatives, so that, for example, the applicability of the
exemption in paragraph (b)(2) would not affect the applicability of
a separate exemption from aggregation (e.g., the independent account
controller exemption).
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In the Proposed Rule, the Commission stated its preliminary belief
that a 50 percent limit on the ownership interest in another entity is
a reasonable, ``bright line'' standard for determining when aggregation
of positions is required, even where the ownership interest is
passive.\27\ In the Proposed Rule, the Commission explained that
majority ownership (i.e., over 50 percent) is indicative of control,
and this standard addresses the Commission's concerns about
circumvention of position limits by coordinated trading or direct or
indirect influence between entities. For these reasons, the Commission
preliminarily believed that the 50 percent limit would be appropriate
to address the heightened risk of direct or indirect influence over the
owned entity and therefore a threshold at this level would be a
reasonable approach to the aggregation of owned accounts pursuant to
Section 4a(a)(1) of the CEA.\28\
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\27\ See Proposed Rule, 78 FR at 68959.
\28\ See id.
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With respect to a person who has a greater than 50 percent
ownership or equity interest in the owned entity, proposed rule
150.4(b)(3) included disaggregation relief in limited situations where
the owned entity is not required to be, and is not, consolidated on the
financial statement of the person, if the person can demonstrate that
the person does not control the trading of the owned entity, based on
the criteria in proposed rule 150.4(b)(2)(i), and if both the person
and the owned entity have procedures in place that are reasonably
effective to prevent coordinated trading.
Under proposed rule 150.4(b)(3), a person with a greater than 50
percent ownership of an owned entity would have to apply on a case-by-
case basis to the Commission for permission to disaggregate, and await
the Commission's decision as to whether certain conditions specified in
the proposed rule had been satisfied and therefore disaggregation would
be permitted.\29\ The person would be required to demonstrate to the
Commission that:
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\29\ See Proposed Rule, 78 FR at 68959-61. This approach was
consistent with the Commission's preliminary view that relief from
the aggregation requirement should not be available merely upon a
notice filing by a person who has a greater than 50 percent
ownership or equity interest in the owned entity. The Commission
explained that, in its view, a person with a greater than 50 percent
ownership interest in multiple accounts would have the ability to
hold and control a significant and potentially unduly large overall
position in a particular commodity, which position limits are
intended to prevent. See id.
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i. The owned entity is not required to be, and is not, consolidated
on the financial statement of the person,
ii. the person does not control the trading of the owned entity
(based on criteria in proposed rule 150.4(b)(2)(i)), with the person
showing that it and the owned entity have procedures in place that are
reasonably effective to prevent coordinated trading in spite of
majority ownership,
iii. each representative of the person (if any) on the owned
entity's board of directors attests that he or she does not control
trading of the owned entity, and
iv. the person certifies that either (a) all of the owned entity's
positions qualify as bona fide hedging transactions or (b) the owned
entity's positions that do not so qualify do not exceed 20 percent of
any position limit currently in effect, and the person agrees in either
case that:
If this certification becomes untrue for the owned entity,
the person will aggregate the owned entity for three complete calendar
months and if all of the owned entity's positions qualify as bona fide
hedging transactions during that time the person would have the
opportunity to make the certification again and stop aggregating,
upon any call by the Commission, the owned entity(ies)
will make a filing responsive to the call, reflecting the owned
entity's positions and transactions only, at any time (such as when the
Commission believes the owned entities in the aggregate may exceed a
visibility level), and
the person will provide additional information to the
Commission if any owned entity engages in coordinated activity, short
of common control (understanding that if there were common control, the
positions of the owned entity(ies) would be aggregated).
The relief under proposed rule 150.4(b)(3) would not be automatic,
but rather would be available only if the Commission finds, in its
discretion, that the four conditions above are met. There would be no
time limits on the Commission's process for making the determination of
whether relief under proposed rule 150.4(b)(3) is appropriately
granted, and relief would be available only if and when the Commission
acts on a particular request for relief.\30\
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\30\ See Proposed Rule, 78 FR at 68960.
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b. Ownership Threshold for Disaggregation Relief in the Supplemental
Notice
The Supplemental Notice discussed the public comments received on
this aspect of the Proposed Rule. In brief, it noted that commenters
generally praised the proposed relief for owners of between 10 percent
and 50 percent of an owned entity, but commenters asserted that the
proposed application procedures under proposed rule 150.4(b)(3) for
owners of a more than 50 percent equity or ownership interest were
unnecessary and inappropriate.\31\ Several commenters said that the
Commission should provide the same disaggregation relief for owners of
more than 50 percent of an owned entity as was proposed to be provided
for owners of 50 percent or less.\32\ On the other hand, the
Supplemental Notice noted that a few commenters opposed providing
aggregation relief for owners of more than 10 percent of an owned
entity.\33\
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\31\ See Supplemental Notice, 80 FR at58369.
\32\ See id.
\33\ See id.
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In view of the points raised by commenters on the Proposed Rule,
the Commission proposed in the Supplemental Notice to delete proposed
rules 150.4(b)(3) and 150.4(c)(2), and to change proposed rule
150.4(b)(2) so that it would apply to all persons with an ownership or
equity interest in an owned entity of 10 percent or greater (i.e., an
interest of up to and including 100 percent) in the same manner as
proposed rule 150.4(b)(2) would have applied, before this revision, to
owners
[[Page 91457]]
of an interest of between 10 percent and 50 percent.\34\ The Commission
stated in the Supplemental Notice that, while the language in section
4a of the CEA, its legislative history, subsequent regulatory
developments, and the Commission's historical practices in this regard
all support aggregation on the basis of either ownership or control of
an entity as a necessary part of the Commission's position limit
regime,\35\ the Commission is also mindful that, as discussed by
commenters on the Proposed Rule, aggregation of positions held by owned
entities may in some cases be impractical, burdensome, or not in
keeping with modern corporate structures.
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\34\ See Supplemental Notice, 80 FR at 58371. The Supplemental
Notice also laid out conforming changes in proposed rule
150.4(b)(7), to delete a cap of 50 percent on the ownership or
equity interest for broker-dealers to disaggregate, in proposed rule
150.4(e)(1)(i), to delete a delegation of authority referencing
proposed rule 150.4(b)(3), and in proposed rule 150.4(c)(1), to
delete a cross-reference. See id.
\35\ See Supplemental Notice, 80 FR at 58372, citing 1999
Amendments, 64 FR at 24044 (``[T]he Commission . . . interprets the
`held or controlled' criteria as applying separately to ownership of
positions or to control of trading decisions.''). See also,
Exemptions from Speculative Position Limits for Positions which have
a Common Owner but which are Independently Controlled and for
Certain Spread Positions; Proposed Rule, 53 FR 13290, 13292, (Apr.
22, 1988) (responding to petitions, the Commission proposed the IAC
exemption from speculative position limits, but declined to remove
the ownership standard from its aggregation policy).
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The Commission explained that the modifications in the Supplemental
Notice would address comments that ownership of a greater than 50
percent interest in an entity (and the related consolidation of
financial statements) may not mean that the owner actually controls
day-to-day trading decisions of the owned entity.\36\ The Commission
stated in the Supplemental Notice that, on balance, the overall purpose
of the position limits regime (to diminish the burden of excessive
speculation which may cause unwarranted changes in commodity prices)
would be better served by focusing the aggregation requirement on
situations where the owner is, in view of the circumstances, actually
able to control the trading of the owned entity.\37\ The Commission
reasoned that the ability to cause unwarranted changes in the price of
a commodity derivatives contract would result from the owner's control
of the owned entity's trading activity, while due to variances in
corporate structures there may be instances where one entity has a 100
percent ownership interest in another entity yet does not control day-
to-day business activities of the owned entity. In this situation the
owned entity would not have knowledge of the activities of other
entities owned by the same owner, nor would it raise the heightened
concerns, triggered when one entity both owns and controls trading of
another entity, that the owner would necessarily act in a coordinated
manner with other owned entities.\38\
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\36\ See Supplemental Notice, 80 FR at 58371.
\37\ See id. The Commission notes in this regard that there may
be significant burdens in meeting the requirements of proposed rule
150.4(b)(3) even where there is no control of the trading of the
owned entity, as was suggested by the Center for Capital Markets
Competitiveness of the U.S. Chamber of Commerce, the Asset
Management Group of the Securities Industry and Financial Markets
Association and the other commenters. See Supplemental Notice, 80 FR
at 58372.
\38\ Supplemental Notice, 80 FR at 58371. In the Supplemental
Notice, the Commission also considered that aggregation of the
positions of majority-owned subsidiaries could require corporate
groups to establish procedures to monitor and coordinate trading
activities across disparate owned entities, which could have
unpredictable consequences including not only the cost of
establishing these procedures, but also the impairment of corporate
structures which were established to ensure that the various owned
entities engage in business independently. On the other hand, the
Commission believed that the disaggregation criteria in proposed
rule 150.4(b)(2)(i) are in line with prudent corporate practices
that are maintained for longstanding, well-accepted reasons with
which the Commission did not intend to interfere. See Supplemental
Notice, 80 FR at 58372.
In the Proposed Rule, the Commission noted that if the
aggregation rules adopted by the Commission would be a precedent for
aggregation rules enforced by designated contract markets (``DCMs'')
and swap execution facilities (``SEFs''), it would be even more
important that the aggregation rules set out, to the extent
feasible, ``bright line'' rules that are capable of easy application
by a wide variety of market participants while not being susceptible
to circumvention. See Proposed Rule, 78 FR at 68596, n. 103. In the
Supplemental Notice, the Commission stated that implementing an
approach to aggregation that is in keeping with longstanding
corporate practices would promote the goal of setting out ``bright
line'' rules that are relatively easy to apply while not being
susceptible to circumvention. See Supplemental Notice, 80 FR at
58372.
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Prior to issuing the Supplemental Notice, the Commission considered
the views of commenters who warned that inappropriate relief from the
aggregation requirements could allow circumvention of position limits
through the use of multiple subsidiaries. However, the Commission
believed that the criteria in proposed rule 150.4(b)(2)(i), which must
be satisfied in order to disaggregate, will appropriately indicate
whether an owner has control of or knowledge of the trading activity of
the owned entity, such that if the disaggregation criteria are
satisfied, the ability of an owner and the owned entity to act together
to engage in excessive speculation should not differ significantly from
that of two separate individuals.\39\
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\39\ See Supplemental Notice, 80 FR at 58371. See also Proposed
Rule, 78 FR at 68961, referring to regulation 150.3(a)(4) (proposed
to be replaced by proposed rule 150.4(b)(5)). Such conditions have
been useful in ensuring that trading is not coordinated through the
development of similar trading systems, and that procedures are in
place to prevent the sharing of trading decisions between entities.
The disaggregation criteria require that the two entities not have
knowledge of each other's trading and, moreover, have and enforce
written procedures to preclude such knowledge.
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A commenter on the Proposed Rule had said the Commission should
eliminate the proposed aggregation exemptions for ownership interests
up to 50 percent, because such notices would make it virtually
impossible for the Commission to make timely, informed decisions about
whether one person in fact controls the trading decisions of another
and whether all proffered certifications are accurate.\40\ This
commenter said that, alternatively, the Commission should only provide
aggregation exemptions where the ownership interest is no greater than
25 percent, in order to prevent abusive practices, which should not
become effective prior to Commission review of the facts.\41\
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\40\ See Honorable Carl Levin, United States Senate on February
10, 2014 (``CL-Sen. Levin Feb 10''), see also Americans for
Financial Reform on February 10, 2014 (Commission should trigger
automatic aggregation for an ownership interest well under 50
percent, because potential aggregation exemptions for ownership
interests over 10 percent may undermine the proposed limits).
\41\ See CL-Sen. Levin Feb 10.
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The Commission pointed out in the Supplemental Notice that
finalization of proposed rule 150.4(b)(2), which would allow persons
with ownership or equity interests in an owned entity of up to and
including 100 percent to disaggregate the positions of the owned entity
if certain conditions were satisfied, would not mean that there would
be no aggregation on the basis of ownership. Rather, aggregation would
still be the ``default requirement'' for the owner of a 10 percent or
greater interest in an owned entity, unless the conditions of proposed
rule 150.4(b)(2) are satisfied.\42\
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\42\ See Supplemental Notice, 80 FR at 58371. The Commission
noted in the Proposed Rule that if there were no aggregation on the
basis of ownership, it would have to apply a control test in all
cases, which would pose significant administrative challenges to
individually assess control across all market participants. See
Proposed Rule, 78 FR at 68956. Further, the Commission considered
that if the statute required aggregation only if the existence of
control were proven, market participants may be able to use an
ownership interest to directly or indirectly influence the account
or position and thereby circumvent the aggregation requirement. See
id. On further review and after considering the comments on the
Proposed Rule, the Commission stated in the Supplemental Notice that
the disaggregation criteria in proposed rule 150.4(b)(2)(i) provide
an effective, easily implemented means of applying a ``control
test'' to determine if disaggregation should be allowed, without
creating a loophole through which market participants could
circumvent the aggregation requirement. See Supplemental Notice, 80
FR at 58371.
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[[Page 91458]]
2. Commenters' Views
a. Comments on the Ownership Threshold
The large majority of comments received after the Supplemental
Notice was issued supported proposed rule 150.4(b)(2) as it was
modified in the Supplemental Notice, and said the Commission should not
adopt proposed rule 150.4(b)(3). The commenters said that the
modifications described in the Supplemental Notice would provide for a
more workable aggregation standard, enhance the Commission's regulatory
goals, and focus the Commission's limited resources on only those
disaggregation filings which might reasonably warrant additional
discretionary review.\43\
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\43\ See Electric Power Supply Association on November 13, 2015
(``CL-EPSA Nov 13''); International Swaps and Derivatives
Association on November 12, 2015 (``CL-ISDA Nov 12''); Alternative
Investment Management Association on November 12, 2015 (``CL-AIMA
Nov 12''); Asset Management Group of the Securities Industry and
Financial Markets Association (``SIFMA AMG'') on November 13, 2015
(``CL-SIFMA AMG Nov 13''); International Energy Credit Association
on November 13, 2015 (``CL-IECA Nov 13''); Energy Transfer Partners,
L.P., on behalf of itself and Energy Transfer Equity, L.P. on
November 13, 2015 (``CL-Energy Transfer Nov 13''); CME Group, Inc.
on November 13, 2015 (``CL-CME Nov 13''); Coalition of Physical
Energy Companies on November 13, 2015 (``CL-COPE Nov 13'');
Commercial Energy Working Group on November 13, 2015 (``C-Working
Group Nov 13''); Morgan, Lewis & Bockius LLP on November 13, 2015
(``CL-Morgan Lewis Nov 13''); Sempra Energy on November 13, 2015
(``CL-Sempra Nov 13''); Commodity Markets Council, November 13, 2015
(``CL-CMC Nov 13''); ECOM Agroindustrial Corp., Ltd. on November 13,
2015 (``CL-ECOM Nov 13''); Edison Electric Institute on November 13,
2015 (``CL-EEI Nov 13''); Futures Industry Association (``FIA'') on
November 13, 2015 (``CL-FIA Nov 13''); Ontario Teachers' Pension
Plan on November 13, 2015 (``CL-OTPP Nov 13''); ICE Futures US, Inc.
on November 13, 2015 (``CL-ICE Nov 13''); Natural Gas Supply
Association on November 13, 2015 (``CL-NGSA Nov 13''); Managed Funds
Association on November 12, 2015 (``CL-MFA Nov 12''); Private Equity
Growth Capital Council on November 12, 2015 (``CL-PEGCC Nov 12'') ;
Minneapolis Grain Exchange, Inc. on November 13, 2015.
---------------------------------------------------------------------------
Many of the commenters who supported the revisions in the
Supplemental Notice had also provided comments on the Proposed Rule to
the effect that the Commission should provide the same disaggregation
relief for owners of more than 50 percent of an owned entity as was
proposed to be provided for owners of 50 percent or less. For example,
one commented that the Commission should permit majority-owned
affiliates to be disaggregated regardless of whether the entities are
required to consolidate financial statements, another commented that
the requirement to submit an application to the Commission and await
its approval would be unworkable in practice and not provide any
apparent regulatory benefit, and a third commented that aggregation
relief for majority-owned affiliates was necessary to avoid ``serious
regulatory costs and consequences.'' \44\
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\44\ See Supplemental Notice, 80 FR at 58369-70 (describing
comments of FIA, the Center for Capital Markets Competitiveness of
the U.S. Chamber of Commerce, and MidAmerican Energy Holdings
Company).
---------------------------------------------------------------------------
Three commenters, each a public policy organization, opposed the
modifications described in the Supplemental Notice, saying the
modifications would impermissibly weaken the aggregation regime by
allowing entities with majority ownership not only to qualify for
disaggregation, but also to do so through a simple, immediately
effective filing. One commenter said that to allow this would be
fundamentally at odds with the statutory mandate of limiting
speculation and the requirement of aggregation based on indirect
control of an owned entity, because the proposal in the Supplemental
Notice would effectively remove the distinction between minority and
majority ownership by implementing a presumption that ownership does
not entail control over the owned entity's trading activity.\45\ This
commenter believes the Commission should reinstate a requirement of
aggregation of positions whenever an ownership interest in an owned
entity exceeds 10 percent.\46\ Another commenter asserted that the
procedure in the Supplemental Notice may be contrary to the CEA,
because it allows an entity other than the Commission (i.e., the entity
which files an automatically-effective compliance notice) to make the
determination of whether aggregation is required.\47\ The third
commenter in this group also maintained that relief from the
aggregation requirement should not be available to an owner of more
than 10 percent of a subsidiary, because ``allowing [position]
disaggregation of majority-owned subsidiaries would violate the clear
language'' of CEA section 4a(a)(1) and would allow the owner of such
subsidiaries to circumvent position limits through the creation of
multiple subsidiaries.\48\
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\45\ See Better Markets, Inc. (``Better Markets'') on November
13, 2015 (``CL-Better Markets Nov 13''). The commenter had also
commented on the Proposed Rule, saying that allowing disaggregation
of majority-owned subsidiaries would ignore the clear language of
CEA section 4a(a)(1). See Supplemental Notice, 80 FR at 58369
(describing comment of Better Markets).
\46\ See CL-Better Markets Nov 13.
\47\ See Occupy the SEC on November 13, 2015 (``CL-Occupy the
SEC Nov 13''). This commenter warned that challenges to the
Commission's handling of large amounts of data could likely allow
many companies that should have their positions aggregated to evade
that restriction. See id. The commenter had also commented on the
Proposed Rule, saying that no relief from aggregation should be
allowed for owners of more than 50 percent of an owned entity
because in this case the two firms are ``largely interconnected.''
See Supplemental Notice, 80 FR at 58369 (describing comment of
Occupy the SEC).
\48\ See Institute for Agriculture and Trade Policy (``IATP'')
on November 13, 2015 (``CL-IATP Nov 13'').
---------------------------------------------------------------------------
One commenter opposed to the approach in the Supplemental Notice
argued that it would lead to inconsistent results because it calls for
a case-by-case, discretionary assessment of compliance with standards
that test separation of trading activity, instead of an easy to
understand, bright-line test premised on ownership percentage. This
commenter feared that entities subject to this discretionary standard
would be able to attack the Commission's efforts to enforce the
aggregation requirement as arbitrary and capricious.\49\ Therefore, the
Commission would have to be vigilant in enforcing regulations requiring
aggregation by unaffiliated individuals acting pursuant to an implied
agreement.\50\ For example, this commenter asserted that unaffiliated
investment vehicles could serve as a conduit for the trading strategies
of a sponsor that holds no equity interest in the investment vehicle,
the trading decisions of which are nominally outsourced to an
unaffiliated investment advisor.\51\ The commenter believes that
aggregation must be applied in such a case, despite the apparent
absence of an ownership relationship between the sponsor and the
investment vehicle.\52\
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\49\ See CL-Occupy the SEC Nov 13.
\50\ See id. Along similar lines, another commenter said that
the increasing ease of electronic interoffice communication could
allow for circumvention of the aggregation requirements. See CL-IATP
Nov 13.
\51\ See CL-Occupy the SEC Nov 13.
\52\ See id.
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b. Comments Suggesting Additional Relief From the Aggregation
Requirement, or a Different Ownership Threshold
Several commenters believed that the proposal should be modified to
provide relief from the aggregation requirement in additional
situations. For instance, one commenter said that the Commission should
provide an exemption from aggregation for transitory ownership or
equity interests in an owned-entity, such as those acquired through
foreclosure or a similar credit event.\53\ Other commenters said the
Commission
[[Page 91459]]
should establish a process for entities that do not squarely meet the
criteria for disaggregation relief in proposed rule 150.4(b)(2),
allowing them to seek disaggregation relief based upon particular facts
and circumstances demonstrating that the owner does not control or have
shared knowledge of the owned entity's trading activities.\54\ Other
commenters asked for clarification of whether relief from aggregation
on the basis of ownership is available to general partners or other
persons holding interests in various forms of partnerships.\55\
---------------------------------------------------------------------------
\53\ See FIA on February 6, 2014 (``CL-FIA Feb 6'') and CL-FIA
Nov 13.
\54\ See CL-COPE Nov 13. See also CL-Morgan Lewis Nov 13
(exemption from aggregation requirement should be a non-exclusive
safe harbor, not excluding the possibility of relief for owners and
owned entities that do not satisfy every criteria; delegate
authority under 4a(a)(7) to staffs of the Commission, DCMs and SEFs
to provide disaggregation relief to such firms on a case-by-case
basis); CL-EPSA Nov 13 (10 percent ownership should invoke a
rebuttable presumption that can be overcome by making the required
notice filing in good faith).
\55\ See Managed Funds Association on February 7, 2014 (``CL-MFA
Feb 7''); CL-Energy Transfer Nov 13.
---------------------------------------------------------------------------
Although commenters generally supported the modifications made in
the Supplemental Notice, and in particular the removal of the
distinction between ownership interests of less than 50 percent and
more than 50 percent, several commenters maintained that the Commission
should not apply a threshold of 10 percent for the requirement of a
notice filing in order to claim disaggregation relief.
Some commenters said that the Commission should apply a higher
threshold below which a claim for disaggregation relief would not be
required. Three commenters advocated for the threshold to be moved to
25 percent.\56\ Other commenters said the threshold should be 50
percent, claiming that minority ownership generally does not permit
control over operational aspects of the owned entity's activities,
including trading strategy and decisions.\57\ One commenter supporting
a higher threshold remarked that maintaining the 10 percent threshold
will trigger ``false positives'' requiring owners with no actual
control over an owned-entity's trading activity to file a notice with
the Commission, which will impose significant costs on market
participants to prepare and file a notice, and on the Commission which
will have to review and administer all of the filed notices.\58\ In
contrast, this commenter said, a higher threshold would allow the
Commission to focus its surveillance resources on entities where there
is a greater likelihood of commonly controlled trading activity.\59\
---------------------------------------------------------------------------
\56\ See CL-ISDA Nov 12; CL-MFA Feb 7; CL-AIMA Feb 10.
\57\ See CSC Sugar, LLC on February 10, 2014; CL-IECA Nov 13;
CL-PEGCC Nov 12; CL-OTPP Nov 13; CL-FIA Nov 13; CL-NGSA Nov 13.
\58\ See CL-FIA Nov 13.
\59\ See id.
---------------------------------------------------------------------------
c. Comments Asserting That Aggregation Should Not Be Based on Ownership
Alone
Other commenters said that there should be no ownership percentage
threshold for disaggregation relief, but rather aggregation should be
required solely on the basis of actual control of trading.\60\ Certain
of these commenters asserted that the CEA requires that a person
control the owned entity's accounts in order to require
aggregation.\61\ Other commenters focused on the operational challenges
of aggregation based on ownership, and asserted that limiting the
aggregation requirement to cases where there is control would more
closely match how affiliated companies operate.\62\ One DCM argued that
aggregation should be required only when there is both ownership and
control of the owned entity, and said that it (i.e., the DCM) does not
automatically aggregate positions of companies with 100 percent common
ownership, so long as the commonly-owned companies operate
independently from one another in terms of decision-making and control
of trading decisions.\63\
---------------------------------------------------------------------------
\60\ See Wilmar International Limited on November 13, 2015
(``CL-Wilmar Nov 13''); U.S. Chamber of Commerce's Center for
Capital Markets Competitiveness on February 10, 2014 (``CL-Chamber
Feb 10''); National Council of Farmers Cooperatives on August 4,
2014 (``CL-NCFC Aug 4''); Commodity Markets Council on January 22,
2015 (``CL-CMC Jan 22''); Natural Gas Supply Association on February
10, 2014 (``CL-NGSA Feb 10''); Archer Daniels Midland Company on
January 20, 2015; The Andersons, Inc. on January 15, 2014. See also
CL-ECOM Nov 13 (Commission should apply a facts and circumstances
approach that permits disaggregation conditioned on independence of
control of trading decisions).
\61\ See CL-Wilmar Nov 13 and CL-Chamber Feb 10.
\62\ See CL-NCFC Aug 4; CL-CMC Jan 22; CL-NGSA Feb 10.
\63\ See ICE Futures US, Inc. on February 10, 2014 (``CL-ICE Feb
10''). See also CL-NGSA Feb 10 (arguing that aggregation should
require findings of both ownership and control).
---------------------------------------------------------------------------
A commenter representing investment managers maintained that the
Commission should not require passive investors in owned entities to
aggregate the owned entities' positions when the passive investors do
not have actual control over the owned entities' trading.\64\ This
commenter focused on the requirement to file a notice to claim relief
from aggregation (which it said would be burdensome for entities that
manage a large number of investment funds), and suggested instead that
the criteria in proposed rule 105.4(b)(2)(i) be treated as a non-
exclusive safe harbor, with other relief from aggregation being
available in various circumstances.\65\ The commenter asserted that the
CEA requires aggregation only when there is actual control of the owned
entity's derivatives trading, which the Commission has traditionally
interpreted not to follow necessarily from mere corporate control of
the owned entity.\66\
---------------------------------------------------------------------------
\64\ See CL-SIFMA AMG Nov 13.
\65\ See SIFMA AMG on August 1, 2014 (discussing practical
difficulties such as monitoring the equity ownership held by managed
funds/accounts, and monitoring the commodity derivatives positions
held by the operating companies in which managed funds/accounts hold
equity ownership). See also CL-SIFMA AMG Nov 13; CL-Wilmar Nov 13.
\66\ See SIFMA AMG on February 10, 2014 (``CL-SIFMA AMG Feb
10'') (referring to requirement to file reports on Form 40 and
asserting that the Commission's pre-2011 rulemakings required
aggregation on the basis of direct ownership in accounts, not on the
basis of ownership interests in third parties who, in turn, owned
positions in derivatives trading accounts).
---------------------------------------------------------------------------
A holding company for a number of DCMs commented that the
Commission did not identify any basis or justification for the various
features of the Proposed Rule.\67\ This commenter contended that
features of the Proposed Rule (regarding the owned entity aggregation
rules, the IAC exemption, and the ``substantially identical trading
strategies'' rule) are not in accordance with law, are arbitrary and
capricious, are an unexplained departure from the Commission's
administrative precedent, and are not more permissive than existing
aggregation standards.\68\ Two other commenters were also of the
opinion that the Proposed Rule was not supported by the Commission's
administrative precedent.\69\
[[Page 91460]]
Commenters asserted that section 4a(a)(1) of the CEA provides no basis
for requiring aggregation of positions held by another person in the
absence of control of such other person.\70\ One of these commenters
also stated that existing regulation 150.4(b) generally exempts a
commodity pool's participants with an ownership interest of 10 percent
or greater from aggregating the positions held by the pool.\71\
Finally, commenters contended that two of the Commission's enforcement
cases indicate that the Commission has viewed aggregation as being
required only where there is common trading control.\72\
---------------------------------------------------------------------------
\67\ See CME Group, Inc. on February 10, 2014 (``CL-CME Feb
10'').
\68\ CL-CME Feb 10 (opining that under Commission precedent, a
10 percent or more ownership or equity interest in an account is an
indicia of trading control, but precedent does not support a
requirement for aggregation based on a 10 percent or more ownership
or equity interest in an entity). This commenter reasoned that the
Commission's use of the term ``account'' has never referred to an
owned entity that itself has accounts, that the 1979 Aggregation
Policy suggests the Commission contemplated a definition of
``account'' that means no more than a personally owned futures
trading account, and that the 1999 Amendments to the aggregation
rules were focused on directly owned accounts. Id.
\69\ One of these commenters contended that under the
Commission's precedents ``[l]egal affiliation [between companies]
has been an indicium but not necessarily sufficient for position
aggregation.'' See Commodity Markets Council on Feb 10, 2014 (``CL-
CMC Feb 10'').
The other commenter asserted that the Commission has never
specifically required aggregation solely on the basis of ownership
of another legal person. CL-NGSA Feb 10. To support its view, this
commenter said that the 1979 Aggregation Policy and the 1999
Amendments apply to only trading accounts that are directly or
personally held or controlled by an individual or legal entity, the
Commission's large trader rules require aggregation of multiple
accounts held by a particular person, not the accounts of a person
and its owned entities, and existing regulation 18.04(b)
distinguishes between owners of the ``reporting trader'' and the
owners of the ``accounts of the reporting trader.'' Id.
\70\ See CL-CME Feb 10; CL-NGSA Feb 10. One commenter asserted
that the Commission's citation of prior rules requiring aggregation
of owned entity positions at a 10 percent ownership level was not a
sufficient consideration of the statutorily required factors. CL-CME
Feb 10.
Another commenter contended that ``CEA section 4a(a)(1) only
allows the Commission to require the aggregation of positions on
ownership alone when those positions are directly owned by a person.
The positions of another person are only to be aggregated when the
person has direct or indirect control over the trading of another
person.'' CL-NGSA Feb 10.
\71\ See CL-CME Feb 10 (noting that the Commission's proposal to
amend regulation 150.3 to include the separately incorporated
affiliates of CPOs, CTAs or FCMs as eligible entities for the
exemption relief of regulation 150.3 (63 FR 38525 at 38532 n. 27
(July 17, 1998)) states: ``Affiliated companies are generally
understood to include one company that owns, or is owned by, another
or companies that share a common owner''). This commenter also
asserted that the term ``principals'' under existing regulation
3.1(a)(2)(ii) include entities that have a direct ownership interest
that is 10 percent or greater in a lower tier entity, such as the
parent of a wholly-owned subsidiary. Id. From these two provisions,
the commenter concluded that the corporate parent of a wholly-owned
CPO would be affiliated with, and a principal of, its wholly-owned
subsidiary.
\72\ See CL-CME Feb 10, citing In the Matter of Vitol Inc. et
al., Docket No. 10-17 (Sept. 14, 2010), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfvitolorder09142010.pdf and In the Matter of
Citigroup Inc. et al., Docket No. 12-34 (Sept. 21, 2012), available
at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfcitigroupcgmlorder092112.pdf. Another
commenter contended that In the Matter of Vitol was based on facts
that would be relevant only if common trading control was necessary
for aggregating the positions of affiliated companies. See CL-NGSA
Feb 10.
---------------------------------------------------------------------------
d. Other Comments Related to Aggregation
The Commission received conflicting comments about passive index-
tracking commodity pools. One commenter asserted that the operators of
such pools do not have discretion to react to market movements and,
thus, do not ``control'' trading in the usual meaning of that word, so
the positions of such pools should not be aggregated with other pools
operated by the same operator.\73\ Another commenter said the
Commission should mandate aggregation of all positions of a group or
class of traders such as operators of passive index-tracking commodity
pools, because the Commission should focus on excessive concentration
of positions and potential market manipulation.\74\ This commenter
noted that the CEA includes language extending the CFTC's aggregation
powers to cover ``any group or class of traders.'' \75\
---------------------------------------------------------------------------
\73\ See DB Commodity Services LLC (a wholly-owned, indirect
subsidiary of Deutsche Bank AG) on February 10, 2014 (``CL-DBCS Feb
10'').
\74\ See CL-Better Markets Nov 13.
\75\ See id. (citing CEA section 4a(a)(1)).
---------------------------------------------------------------------------
Two commenters suggested that the rule provide an explicit
exemption from aggregation for pension plans, because the proposed rule
creates a complicated and potentially unavailable route to relief to
entities that are required to operate only in the best interests of
plan beneficiaries and thus cannot be used to further the interests of
the pension plan's sponsor.\76\
---------------------------------------------------------------------------
\76\ See Commercial Energy Working Group on February 10, 2014
(``CL-Working Group Feb 10''); CL-Working Group Nov 13; CL-CMC Nov
13; CL-CMC Feb 10. One of these commenters asserted that a common
structure for U.S. pension plans is to have employees of the sponsor
serve as members of the investment committee of the plan, which is a
separate legal entity from and unaffiliated with the sponsor. The
commenter claimed that these employees typically have an investment
background and may serve in trading-related roles for the plan
sponsor, and may have knowledge of both the plan and the sponsor's
trading activity, which may prevent the plan and the sponsor from
utilizing the proposed exemption from aggregation for pension plans.
Aggregation would, the commenter said, put the fiduciaries of these
plans in the position of having to account for the trading
strategies of the sponsor, which may not be in the best interests of
plan participants. See CL-Working Group Nov 13; CL-Working Group Feb
10.
---------------------------------------------------------------------------
3. Final Rule
The Commission is adopting rule 150.4(a)(1) as it was stated in the
Proposed Rule and reiterated in the Supplemental Notice. This rule sets
forth the requirements to aggregate positions on the basis of ownership
or control, or when two or more persons act together under an express
or implied agreement. The Commission is also adopting rule 150.4(b)(2)
substantially as it was proposed in the Supplemental Notice (with
certain modifications discussed below) but, as stated in the
Supplemental Notice, it is not adopting proposed rule 150.4(b)(3).\77\
The Commission is also adopting the conforming change in rule
150.4(b)(6) from the Supplemental Notice, to delete a cap of 50 percent
on the ownership or equity interest for broker-dealers to
disaggregate.\78\ The Commission is persuaded by the commenters that
rule 150.4(b)(2) should apply to all persons with an ownership or
equity interest in an owned entity of 10 percent or greater (i.e., an
interest of up to and including 100 percent) in the same manner.
---------------------------------------------------------------------------
\77\ Because the Commission is not adopting proposed rule
150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed rule 150.4 are
renumbered in the final rule as paragraphs (b)(3) to (b)(8),
respectively. Also, as proposed in the Supplemental Notice, the
Commission is not adopting proposed rule 150.4(e)(1)(i) which
contained a delegation of authority referencing proposed rule
150.4(b)(3), and the final rule also reflects the deletion of a
cross-reference to proposed rule 150.4(b)(3)(vii) in rule
150.4(c)(1). See Supplemental Notice, 80 FR at 58371.
\78\ See id. Final rule 150.4(b)(6) (proposed as rule (b)(7)) is
discussed more fully in section II.F, below.
---------------------------------------------------------------------------
a. Ownership Threshold for Aggregation
The Commission continues to believe that, as stated in the
Supplemental Notice, the overall purpose of the position limits regime
(to diminish the burden of excessive speculation which may cause
unwarranted changes in commodity prices) would be better served by
focusing the aggregation requirement on situations where the owner is,
in view of the circumstances, actually able to control the trading of
the owned entity.\79\ The Commission reasons that the ability to cause
unwarranted changes in the price of a commodity derivatives contract
would result from the owner's control of the owned entity's trading
activity.
---------------------------------------------------------------------------
\79\ The Commission notes in this regard that there may have
been significant burdens in meeting the requirements of proposed
rule 150.4(b)(3) even where there is no control of the trading of
the owned entity, as was suggested by the Center for Capital Markets
Competitiveness of the U.S. Chamber of Commerce, SIFMA AMG and other
commenters on the Proposed Rule. See Supplemental Notice, 80 FR at
58371.
---------------------------------------------------------------------------
Rule 150.4(b)(2) will continue the Commission's longstanding rule
that persons with either an ownership or an equity interest in an
account or position of less than 10 percent need not aggregate such
positions solely on the basis of the ownership criteria, and persons
with a 10 percent or greater ownership interest will generally be
required to aggregate the account or position.\80\ The Commission has
found,
[[Page 91461]]
over the decades that the 10 percent threshold has been in effect, that
this is an appropriate level at which aggregation should be required,
and no change to this threshold was proposed.
---------------------------------------------------------------------------
\80\ For purposes of aggregation, the Commission continues to
believe, as stated in the Proposed Rule, that contingent ownership
rights, such as an equity call option, would not constitute an
ownership or equity interest. See Proposed Rule at 68958.
---------------------------------------------------------------------------
The Commission considered the comments that suggested different
ownership thresholds (e.g., 25 percent or 50 percent) for the
aggregation requirement. In contrast to the satisfactory experience
with the 10 percent threshold, the Commission believes that none of the
commenters presented a compelling analysis to justify a different
threshold. That is, while it is undoubtedly true that application of
different ownership thresholds would result in differences in which
persons would be required to aggregate or seek exemptions from
aggregation, the commenters did not provide a persuasive explanation of
how application of a 25 percent or 50 percent ownership threshold would
more appropriately further the purposes of the position limit regime
than the 10 percent threshold which has been applied to date.
For example, one commenter posited that maintaining the 10 percent
threshold would require owners to file unnecessary notices seeking
exemptions from aggregation, imposing a burden on both market
participants and the Commission.\81\ However, the Commission believes
that preparation of the required notices (and the Commission's review
of them) will not impose undue burdens, and the notices will be helpful
to the Commission in monitoring the use of exemptions from
aggregation.\82\ So while raising the threshold would presumably
decrease the number of notices that are filed, it is not clear that the
benefit would be significant since the filing burden is minimal; at the
same time, however, the amount of information available to the
Commission for use in monitoring and enforcement would be reduced, a
potential harm. Because of this uncertainty, the Commission cannot
conclude that a 25 percent, 50 percent or other threshold would be
significantly better than the 10 percent threshold which has been
satisfactorily applied to date, and the Commission has determined to
leave the 10 percent threshold in place.
---------------------------------------------------------------------------
\81\ See CL-FIA Nov 13.
\82\ As discussed below, the Commission has instructed its staff
to conduct ongoing surveillance and monitoring of disaggregation
filings and related information for red flags.
---------------------------------------------------------------------------
After considering the comments on the proposed procedure in rule
150.4(b)(2) for a notice filing to permit a person with an ownership or
an equity interest in an owned entity of 10 percent or greater to
disaggregate the positions of the owned entity in specified
circumstances, the Commission has determined to adopt this
proposal.\83\ The notice filing must demonstrate compliance with the
conditions set forth in rule 150.4(b)(2), which are discussed below.
Similar to other exemptions from aggregation, the notice filing will be
effective upon submission to the Commission, but the Commission is able
to subsequently call for additional information, and to amend,
terminate or otherwise modify the person's aggregation exemption for
failure to comply with the provisions of rule 150.4(b)(2). Further, the
person is obligated to amend the notice filing in the event of a
material change to the circumstances described in the filing.\84\
---------------------------------------------------------------------------
\83\ Under the rule adopted here, and in a manner similar to
current regulation, if a person qualifies for disaggregation relief,
the person would nonetheless have to aggregate those same accounts
or positions covered by the relief if they are held in accounts with
substantially identical trading strategies. See rule 150.4(a)(2).
The exemptions in rule 150.4 are set forth as alternatives, so that,
for example, the applicability of the exemption in paragraph (b)(2)
would not affect the applicability of a separate exemption from
aggregation (e.g., the independent account controller exemption in
paragraph (b)(4)).
\84\ See rule 150.4(c), discussed in section II.C., below.
---------------------------------------------------------------------------
The Commission notes that commenters raised valid concerns about
permitting disaggregation following a notice filing that is effective
upon submission.\85\ The Commission has instructed its staff to conduct
ongoing surveillance and monitoring of disaggregation filings and
related information for red flags which could include, but would not be
limited to, the creation of multiple subsidiaries, filings that are
only superficially complete, and patterns of trading that suggest
coordination after a filing has been made. The Commission is sensitive
to the potential for circumvention of position limits through the use
of multiple subsidiaries, but it continues to believe, as stated in the
Supplemental Notice, that the criteria in rule 150.4(b)(2)(i), which
must be satisfied in order to disaggregate, will appropriately indicate
whether an owner has control of or knowledge of the trading activity of
the owned entity.\86\ The disaggregation criteria require that the two
entities not have knowledge of each other's trading and, moreover, have
and enforce written procedures to preclude such knowledge.\87\ And, in
fact, as noted in the Proposed Rule, the Commission has applied, and
expects to continue to apply, certain of the same conditions in
connection with the IAC exemption to ensure independence of trading
between an eligible entity and an affiliated independent account
controller.\88\
---------------------------------------------------------------------------
\85\ See CL-Better Markets Nov 13; CL-Occupy the SEC Nov 13; CL-
IATP Nov 13.
\86\ See Supplemental Notice, 80 FR at 58371.
\87\ See rule 150.4(b)(2)(i), discussed in section II.B., below.
\88\ See Proposed Rule, 78 FR at 68961, referring to existing
regulation 150.3(a)(4) (to be replaced by rule 150.4(b)(4)). Such
conditions have been useful in ensuring that trading is not
coordinated through the development of similar trading systems, and
that procedures are in place to prevent the sharing of trading
decisions between entities.
---------------------------------------------------------------------------
If the disaggregation criteria are satisfied, the Commission
believes that disaggregation may be permitted without weakening the
aggregation regime, even if the owner has a greater than 50 percent
ownership or equity interest in the owned entity. Even in the case of
majority ownership, if the disaggregation criteria are satisfied, the
ability of an owner and the owned entity to act together to engage in
excessive speculation or to cause unwarranted price changes should not
differ significantly from that of two separate individuals. The
Commission reaches this conclusion based in part on commenters'
descriptions of relevant corporate structures. For example, one
commenter described instances where an entity has a 100 percent
ownership interest in another entity, yet does not control day-to-day
business activities of the owned entity.\89\ In this situation the
owned entity would not have knowledge of the activities of other
entities owned by the same owner, nor would it raise the heightened
concerns, triggered when one entity both owns and controls trading of
another entity, that the owner would necessarily act in a coordinated
manner with other owned entities.
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\89\ See MidAmerican Energy Holdings Company on February 7, 2014
(``CL-MidAmerican Feb 7'').
---------------------------------------------------------------------------
As explained in the Supplemental Notice, the Commission believes it
would be inappropriate to disallow the possibility of a notice filing
to disaggregate the positions of majority-owned subsidiaries, because
without this possibility of relief, corporate groups may be required to
establish procedures to monitor and coordinate trading activities
across disparate owned entities, which could have unpredictable
consequences.\90\ The Commission recognizes that these consequences
could include not only the cost of establishing these procedures, but
also the impairment of corporate structures which were established to
ensure that the various
[[Page 91462]]
owned entities engage in business independently. This independence may
serve important purposes which could be lost if the aggregation
requirement were imposed too widely. The Commission does not intend
that the aggregation requirement interfere with existing corporate
structures and procedures adopted to ensure the independence of owned
entities.\91\
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\90\ See Supplemental Notice, 80 FR at 58369-70.
\91\ The Commission noted in the Supplemental Notice that the
disaggregation criteria in rule 150.4(b)(2)(i) should be relatively
familiar to corporate groups, because they are in line with prudent
corporate practices that are maintained for longstanding, well-
accepted reasons. See id. The Commission also notes that since the
aggregation rules may be a precedent for aggregation rules enforced
by DCMs and SEFs, it is even more important that the aggregation
rules set out, to the extent feasible, ``bright line'' rules that
are capable of easy application by a wide variety of market
participants while not being susceptible to circumvention. See
Proposed Rule, 78 FR at 68596, n. 103. The Commission believes that
by implementing an approach to aggregation that is in keeping with
longstanding corporate practices, rule 150.4(b)(2) promotes the goal
of setting out ``bright line'' rules that are relatively easy to
apply while not being susceptible to circumvention.
---------------------------------------------------------------------------
Adoption of rule 150.4(b)(2) is in accordance with the Commission's
authority under CEA section 4a(a)(7) to provide relief from the
position limits regime. The notice filing requirement in the rule will
appropriately implement the CEA. The 10 percent threshold historically
applied by the Commission continues to have importance, because it
demarcates the level at which the notice filing and the procedures
underlying the notice are required. Relief under rule 150.4(b)(2) will
not be automatic, but rather will require a certification (provided in
the notice under rule 150.4(c)) that procedures to ensure independence
are in place.
Furthermore, as the Commission noted in the Supplemental Notice,
satisfaction of the criteria in rule 150.4(b)(2) would not foreclose
the possibility that positions of owners and owned entities would have
to be aggregated.\92\ For example, aggregation is and would continue to
be required under rule 150.4(a)(1) if two or more persons act pursuant
to an express or implied agreement; and this aggregation requirement
would apply whether the two or more persons are an owner and owned
entity(ies) that meet the conditions in proposed rule 150.4(b)(2), or
are unaffiliated individuals.
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\92\ See Supplemental Notice, 80 FR at 58371.
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b. Ownership Is a Valid Basis for Aggregation
Regarding those commenters who said that ownership of an entity
should not be a basis for aggregation of that entity's positions, the
Commission continues to interpret section 4a(a)(1) of the CEA, as
stated in the Proposed Rule and reiterated in the Supplemental Notice,
to provide for the general aggregation standard with regard to position
limits, and specifically supports aggregation on the basis of
ownership, because it provides that in determining whether any person
has exceeded such 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.\93\
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\93\ 7 U.S.C. 6a(a)(1), cited in Proposed Rule, 78 FR at 68956,
and Supplemental Notice, 80 FR 58366.
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The Commission explained in the Proposed Rule that this
interpretation is supported by Congressional direction and Commission
precedent from as early as 1957 and continued through 1999.\94\
---------------------------------------------------------------------------
\94\ See Proposed Rule, 78 FR at 68956.
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For example, in 1968, Congress amended the aggregation standard in
CEA section 4a to include positions ``held by'' one trader for
another,\95\ supporting the view that an owner should aggregate the
positions held by an owned entity (because the owned entity is holding
the positions for the owner). During the Commission's 1986
reauthorization, witnesses at Congressional hearings suggested that
``aggregation of positions based on ownership without actual control
unnecessarily restricts a trader's use of the futures and options
markets,'' but the Congressional committee did not recommend any
changes to the statute based on these suggestions.\96\
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\95\ See S. Rep No. 947, 90th Cong., 2 Sess. 5 (1968) regarding
the CEA Amendments of 1968, Public Law 90-258, 82 Stat. 26 (1968).
This Senate Report provides:
Certain longstanding administrative interpretations would be
incorporated in the act. As an example, the present act authorizes
the Commodity Exchange Commission to fix limits on the amount of
speculative ``trading'' that may be done. The Commission has
construed this to mean that it has the authority to set limits on
the amount of buying or selling that may be done and on the size of
positions that may be held. All of the Commission's speculative
limit orders, dating back to 1938, have been based upon this
interpretation. The bill would clarify the act in this regard. . . .
Section 2 of the bill amends section 4a(1) of the act to show
clearly the authority to impose limits on ``positions which may be
held.'' It further provides that trading done and positions held by
a person controlled by another shall be considered as done or held
by such other; and that trading done or positions held by two or
more persons acting pursuant to an express or implied understanding
shall be treated as if done or held by a single person.
\96\ See H.R. Rep. No. 624, 99th Cong., 2d Sess. (1986) at page
43. The Report noted that:
During the subcommittee hearings on reauthorization, several
witnesses expressed dissatisfaction with the manner in which certain
market positions are aggregated for purposes of determining
compliance with speculative limits fixed under Section 4a of the
Act. The witnesses suggested that, in some instances, aggregation of
positions based on ownership without actual control unnecessarily
restricts a trader's use of the futures and options markets. In this
connection, concern was expressed about the application of
speculative limits to the market positions of certain commodity
pools and pension funds using multiple trading managers who trade
independently of each other. The Committee does not take a position
on the merits of the claims of the witnesses. Id.
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In 1988, the Commission reviewed petitions by the Managed Futures
Trade Association and the Chicago Board of Trade which argued against
aggregation based only on ownership.\97\ In response to the petition,
however, the Commission stated that:
---------------------------------------------------------------------------
\97\ The Managed Futures Trade Association petition requested
that the Commission amend the aggregation standard for exchange-set
speculative position limits in regulation 1.61(g) (now regulation
150.5(g)), by adding a proviso to exclude the separate accounts of a
commodity pool where trading in those accounts is directed by
unaffiliated CTAs acting independently. See Exemption From
Speculative Position Limits for Positions Which Have a Common Owner
but Which Are Independently Controlled; Proposed Rule, 53 FR 13290,
13291-92 (Apr. 22, 1988). The petition argued the ownership
standard, as applied to ``multiple-advisor commodity pools, is
unfair and unrealistic'' because while the commodity pool may own
the positions in the separate accounts, the CPO does not control
trading of those positions (the unaffiliated commodity trading
advisor (``CTA'') does) and therefore the pool's ownership of the
positions will not result in unwarranted price fluctuations. See id.
at 13292.
The petition from the Chicago Board of Trade (which is now a
part of CME Group, Inc.) sought to revise the aggregation standard
so as not to require aggregation based solely on ownership without
control. See id.
Both ownership and control have long been included as the
appropriate aggregation criteria in the Act and Commission
regulations. Generally, inclusion of both criteria has resulted in a
bright-line test for aggregating positions. And as noted above,
although the factual circumstances surrounding the control of
accounts and positions may vary, ownership generally is clear.
. . . In the absence of an ownership criterion in the
aggregation standard, each potential speculative position limit
violation would have to be analyzed with regard to the individual
circumstances surrounding the degree of trading control of the
positions in question. This would greatly increase uncertainty.\98\
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\98\ See id. In response to the petitions, however, the
Commission proposed the IAC exemption, which provides ``an
additional exemption from speculative position limits for positions
of commodity pools which are traded in separate accounts by
unaffiliated account controllers acting independently.'' Id.
[[Page 91463]]
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Even earlier administrative determinations, as well as regulations
of the Commodity Exchange Authority, announced standards that included
control of trading and financial interests in positions. As early as
1957, the Commission's predecessor issued determinations requiring that
accounts in which a person has a financial interest be included in
aggregation.\99\ In addition, the definition of ``proprietary account''
in regulation 1.3(y), which has been in effect for decades, includes
any account in which there is 10 percent ownership.\100\
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\99\ See Administrative Determination 163 (Aug. 7, 1957) (``[I]n
the application of speculative limits, accounts in which the firm
has a financial interest must be combined with any trading of the
firm itself or any other accounts in which it in fact exercises
control.''). In addition, the Commission's predecessor, and later
the Commission, provided the aggregation standards for purposes of
position limits in the large trader reporting rules. See Supersedure
of Certain Regulations, 26 FR 2968 (Apr. 7, 1961). In 1961, then
regulation 18.01(a) (``Multiple Accounts'') stated that if any
trader holds or has a financial interest in or controls more than
one account, whether carried with the same or with different futures
commission merchants or foreign brokers, all such accounts shall be
considered as a single account for the purpose of determining
whether such trader has a reportable position and for the purpose of
reporting. 17 CFR 18.01 (1961).
In the 1979 Aggregation Policy, the Commission discussed
regulation 18.01, stating:
Financial Interest in Accounts. Consistent with the underlying
rationale of aggregation, existing reporting Rule 18.10(a) a (sic)
basically provides that if a trader holds or has a financial
interest in more than one account, all accounts are considered as a
single account for reporting purposes. Several inquiries have been
received regarding whether a nomial (sic) financial interest in an
account requires the trader to aggregate. Traditionally, the
Commission's predecessor and its staff have expressed the view that
except for the financial interest of a limited partner or
shareholder (other than the commodity pool operator) in a commodity
pool, a financial interest of 10 percent or more requires
aggregation. The Commission has determined to codify this
interpretation at this time and has amended Rule 18.01 to provide in
part that, ``For purposes of this Part, except for the interest of a
limited partner or shareholder (other than the commodity pool
operator) in a commodity pool, the term `financial interest' shall
mean an interest of 10 percent or more in ownership or equity of an
account.''
Thus, a financial interest at or above this level will
constitute the trader as an account owner for aggregation purposes.
1979 Aggregation Policy, 44 FR at 33843.
The provisions concerning aggregation for position limits
generally remained part of the Commission's large trader reporting
regime until 1999 when the Commission incorporated the aggregation
provisions into existing regulation 150.4 with the existing position
limit provisions in part 150. See 1999 Amendments. The Commission's
part 151 rulemaking also incorporated the aggregation provisions in
vacated regulation 151.7 along with the remaining position limit
provisions in part 151. See 76 FR 71626, Nov. 18, 2011.
\100\ 17 CFR 1.3(y). This provision has been in existing
regulation 1.3(y)(1)(iv) since at least 1976, which the Commission
adopted from regulations of its predecessor, with ``for the most
part, procedural, housekeeping-type modifications, conforming the
regulations to the recently enacted CFTCA.'' See 41 FR 3192, 3195
(January 21, 1976).
---------------------------------------------------------------------------
In light of the language in section 4a, its legislative history,
subsequent regulatory developments, and the Commission's historical
practices in this regard, the Commission continues to interpret section
4a to require aggregation on the basis of either ownership or control
of an entity. The Commission also believes that aggregation of
positions across accounts based upon ownership is a necessary part of
the Commission's position limit regime.\101\
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\101\ See 1999 Amendments, 64 FR at 24044 (``[T]he Commission .
. . interprets the `held or controlled' criteria as applying
separately to ownership of positions or to control of trading
decisions.''). See also, Exemptions from Speculative Position Limits
for Positions which have a Common Owner but which are Independently
Controlled and for Certain Spread Positions, 53 FR 13290, 13292
(Apr. 22, 1988). In response to two separate petitions, the
Commission proposed the independent account controller exemption
from speculative position limits, but declined to remove the
ownership standard from its aggregation policy. The 1999 Amendments'
reference to the Commission's large-trader reporting system, 64 FR
at 24043, is not related to the aggregation rules for the position
limits regime. Rather, the 1999 Amendments included an explanation
of situations in which reporting could be required based on both
control and ownership. 1999 Amendments, 64 FR at 24043 and n. 26.
(the ``routine large trader reporting system is set up so that it
does not double count positions which may be controlled by one and
traded for the beneficial ownership of another. In such
circumstances, although the routine reporting system will aggregate
the positions reported by FCMs using only the control criterion, the
staff may determine that certain accounts or positions should also
be aggregated using the ownership criterion or may by special call
receive reports directly from a trader.'')
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Moreover, an ownership standard establishes a bright-line test that
provides certainty to market participants and the Commission.\102\
Without aggregation on the basis of ownership, the Commission would
have to apply a control test in all cases, which would pose significant
administrative challenges to individually assess control across all
market participants. Further, the Commission considers that if the
statute were read to require aggregation based only on control, market
participants may be able to use an ownership interest to directly or
indirectly influence the account or position and thereby circumvent the
aggregation requirement.
---------------------------------------------------------------------------
\102\ See footnote 91, above.
---------------------------------------------------------------------------
In the Supplemental Notice, the Commission responded to commenters'
assertions that the Proposed Rule was not in accordance with the
Commission's statutory authority or precedents.\103\ In brief, the
Commission explained that the aggregation requirement in CEA section 4a
is not phrased in terms of whether the owner holds an interest in a
trading account.\104\ The Commission also explained why its enforcement
history does not contradict the Commission's traditional view of
aggregation of owned entity positions as being required on the basis of
either control or ownership.\105\ The relevant commenters did not
discuss these points in the comments they submitted on the Supplemental
Notice,\106\ and the Commission considers that the discussion of these
matters in the Supplemental Notice explains how the final rule is in
accordance with law and the Commission's precedents.\107\
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\103\ See Supplemental Notice, 80 FR at 58373.
\104\ In fact, the word ``account'' does not even appear in the
statute. As noted above, section 4a(a)(1) of the CEA provides that
in determining whether any person has exceeded such 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. 7 U.S.C. 6a(a)(1).
\105\ See Supplemental Notice, 80 FR at 58373.
\106\ See CL-CME Nov 13 and CL-NGSA Nov 13.
\107\ See Supplemental Notice, 80 FR at 58373.
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c. Other Considerations Relevant to the Proposed Rule
The Commission does not believe, as suggested by some commenters,
that the aggregation requirement in rule 150.4(a)(1) would lead to
significantly more information sharing or significantly increased
levels of coordinated speculative trading by the entities subject to
aggregation. Among other things, the position limits would affect the
trading of only entities that hold positions in excess of the limits,
which the Commission expects to be relatively small in comparison to
all entities that are active in the relevant markets.\108\ Thus, the
Commission continues to believe that the final rule will not result in
a significantly increased level of information sharing that would
increase coordinated speculative trading. The Commission notes that
rule 150.4(b) sets out various aggregation exemptions, lessening the
need to share information regarding speculative trading to ensure
compliance with position limits.
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\108\ See, e.g., Position Limits for Futures and Swaps, 76 FR
71626, 71668 (Nov. 18, 2011) (describing the number of traders
estimated to be subject to position limits).
---------------------------------------------------------------------------
The Commission has also considered that relief from any rule
requiring the aggregation of positions held by separate entities is
only necessary where the entities would be below the relevant limits on
an individual basis, but above a limit when aggregated. Thus, as the
Commission suggested in the Proposed Rule, if a group of affiliated
entities can take steps to maintain an aggregate
[[Page 91464]]
position that does not exceed any limit, then the group will not have
to seek disaggregation relief.\109\
---------------------------------------------------------------------------
\109\ See Proposed Rule, 78 FR at 68958.
---------------------------------------------------------------------------
In other words, the Commission continues to believe that seeking
disaggregation relief is one option for those groups of affiliated
entities that may exceed a limit on an aggregate basis but will remain
below the relevant limits on an individual basis. Other avenues are
also available to corporate groups that seek to remain in compliance
with the position limit regime. For example, the affiliated entities
may put into place procedures to avoid exceeding the limits on an
aggregate basis.\110\ One potential approach that could be available to
a holding company with multiple subsidiaries would be to assign each
subsidiary an internal limit based on a percentage of the level of the
position limit. The holding company would allocate no more in aggregate
internal limits than the level of the position limit.\111\ Further, a
breach of an internal limit would provide the holding company with
notice that it should consider filing for bona fide hedging exemptions
or taking other compliance steps, as applicable.
---------------------------------------------------------------------------
\110\ The procedures adopted by the affiliates may obviate more
complex steps such as the implementation of real-time monitoring
software to consolidate all derivative activities of the affiliates,
especially if the group currently does not have an aggregate
position approaching the size of a position limit and has
historically not changed position sizes day-over-day by a
significant percentage of the position limit.
\111\ An even more cautious approach would be for the holding
company to limit the overall allocation to the subsidiaries to less
than 100 percent of the position limit. For example, a holding
company with three subsidiaries may assign each subsidiary an
internal limit equal to 30 percent of the level of the federal
limit. Thus, the holding company has allocated permission to
subsidiaries to hold, in the aggregate, positions equal to up to 90
percent of the level of the relevant position limit. Each subsidiary
would simply report at close of business its derivative position to
the holding company. The 10 percent cushion provides the holding
company with the ability to remain in compliance with the limit,
even if all subsidiaries slightly exceed the internal limits on the
same side of the market at the same time.
---------------------------------------------------------------------------
The Commission also considered whether aggregation of positions is
unnecessary because information about ownership and control is
available to the Commission through reports on Commission Form 40.\112\
However, the Commission is not persuaded that these reports are a
sufficient substitute for the position limits regime. While these
reports provide some information necessary for surveillance of
positions, some owned entities may not file these reports. On a more
fundamental level, the Commission believes that compliance with the
position limit rules, including aggregation of the positions of owned
entities, is primarily the responsibility of the owned entities and
their owners. Even if the information on Form 40 were sufficient, it
would be impractical and inefficient for the Commission to use that
information to monitor compliance with the position limit rules, as
compared to the ability of the entities themselves to maintain
compliance with the position limits.
---------------------------------------------------------------------------
\112\ See 17 CFR part 18, Appendix A.
---------------------------------------------------------------------------
d. Consideration of Alternatives Suggested by Commenters
Regarding the requests for specific exemptions or other special
treatment for various types of entities or situations, such as
investment companies, pension plans, passive index-tracking commodity
pools, and cases of transitory ownership, the Commission is not
persuaded that any further relief for such entities (i.e., beyond the
relief already provided in the final rule) would justify the complexity
of applying the new rules that would be necessary for such specific
treatment, which would likely include definitional rules to set out the
scope of entities that qualify for the special treatment. For example,
the Commission believes that distinguishing ``transitory'' ownership
from other forms of ownership would be more complicated than completing
the notice required to obtain relief, and in such situations it is
reasonable to expect that the notice filing would be made on a summary
basis appropriate to the transitory situation.
The Commission reached a similar conclusion regarding the
suggestions for different types of filings in various situations.
Again, the Commission believes that the filing required by rule
150.4(c) is relatively simple because it requires only a description of
the relevant circumstances that warrant disaggregation, and a statement
certifying that the conditions set forth in the applicable aggregation
exemption provision have been met. Therefore, the complexity of
determining which filing to provide in various situations would be
greater than that involved in completing the required filing.
As for the commenters that suggested certain categories of persons
(such as passive investors) should be exempt from the aggregation
requirement without making any filing at all, the Commission concluded
that this approach would put at risk the satisfactory experience under
the existing regulation, under which aggregation is required without
exemption. For this reason, the Commission did not propose to provide
categorical exemptions from the aggregation requirement. As explained
above, the Commission believes it is important that its staff be able
to conduct ongoing surveillance and monitoring of disaggregation
filings and related information for red flags. If greater than 10
percent owners were permitted to avoid the aggregation requirement
without making any filing, there could be a greater potential for
circumvention of position limits.
Last, the Commission emphasizes that the categories of relief from
the aggregation requirement set forth in the final rule do not limit
the Commission's existing authority under section 4a(a)(7) of the CEA
to grant exemptions from the aggregation requirement on a case-by-case
basis.
B. Criteria for Aggregation Relief in Rule 150.4(b)(2)(i)
1. Proposed Approach
The proposed criteria to claim relief addressed the Commission's
concerns that an ownership or equity interest of 10 percent and above
may facilitate or enable control over trading of the owned entity, or
allow a person to accumulate a large position through multiple accounts
that could overall amount to an unduly large position.\113\ The
Proposed Rule grouped these criteria into five paragraphs in proposed
rule 150.4(b)(2)(i). The Commission stated its intent that these
criteria would be interpreted and applied in accordance with the
Commission's past practices in this regard.\114\ In accordance with
these precedents, the Commission would not expect that the criteria
would impose requirements beyond a reasonable, plain-language
interpretation of the
[[Page 91465]]
criteria. For example, routine pre- or post-trade systems to effect
trading on an operational level (such as trade capture, trade risk or
order-entry systems) would not, broadly speaking, have to be
independently developed in order to comply with the criteria. Also,
employees that do not direct or participate in an entity's trading
decisions would generally not be subject to these requirements.
---------------------------------------------------------------------------
\113\ The Proposed Rule noted that the criteria would apply to
the person filing the notice as well as the owned entity. See
Proposed Rule, 78 FR at 68961. In addition, the Proposed Rule noted
that for purposes of meeting the criteria, such ``person'' would
include any entity that such person must aggregate pursuant to
proposed rule 150.4. For example, if company A files a notice under
proposed rule 150.4(c) for company A's equity interest of 30 percent
in company B, then company A must comply with the conditions for the
exemption, including any entity with which company A aggregates
positions under proposed rule 150.4. In this connection, if company
A controlled the trading of company C, then company A's 150.4(c)
notice filing must demonstrate that there is independence between
company B and company C. See id.
\114\ See id., citing 1979 Aggregation Policy, 44 FR 33839
(providing indicia of independence); CFTC Interpretive Letter No.
92-15 (CCH ] 25,381) (ministerial capacity overseeing execution of
trades not necessarily inconsistent with indicia of independence);
1999 Amendments, 64 FR at 24044 (intent in issuing final aggregation
rule ``merely to codify the 1979 Aggregation Policy, including the
continued efficacy of the [1992] interpretative letter'').
---------------------------------------------------------------------------
Proposed rule 150.4(b)(2)(i)(A) would condition aggregation relief
on a demonstration that the person filing for disaggregation relief and
the owned entity do not have knowledge of the trading decisions of the
other. The Commission noted its preliminary belief that where an entity
has an ownership interest in another entity and neither entity shares
trading information, such entities demonstrate independence.\115\ In
contrast, persons with knowledge of trading decisions of another in
which they have an ownership interest are likely to take such decisions
into account in making their own trading decisions, which implicates
the Commission's concern about independence and enhances the risk for
coordinated trading.\116\ This proposed criterion would address
concerns regarding knowledge of employees who control, direct or
participate in an entity's trading decisions, and would not prohibit
information sharing solely for risk management, accounting, compliance,
or similar purposes and information sharing among mid- and back-office
personnel that do not control, direct or participate in trading
decisions. In the Proposed Rule, the Commission clarified that this
criterion would generally not require aggregation solely based on
knowledge that a party gains during execution of a transaction
regarding the trading of the counterparty to that transaction, nor
would it encompass knowledge that an entity would gain when carrying
out due diligence under a fiduciary duty, so long as such knowledge is
not directly used to affect the entity's trading.\117\
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\115\ See Proposed Rule, 78 FR at 68961.
\116\ As noted in the Proposed Rule, the Commission does not
consider knowledge of overall end-of-day position information to
necessarily constitute knowledge of trading decisions, so long as
the position information cannot be used to dictate or infer trading
strategies. As such, the knowledge of end-of-day positions for the
purpose of monitoring credit limits for corporate guarantees does
not necessarily constitute knowledge of trading information.
However, the ability to monitor the development of positions on a
real time basis could constitute knowledge of trading decisions
because of the substantial likelihood that such knowledge might
affect trading strategies or influence trading decisions of the
other. See id.
\117\ As explained in the Proposed Rule, proposed paragraph (A)
was along the lines suggested by commenters on the proposed
amendments to part 151. These commenters had said that the limits on
sharing information between the person and the owned entity should
not apply to employees that do not direct or influence trading (such
as attorneys or risk management and compliance personnel), although
the employees may have knowledge of the trading of both the person
and the owned entity. Also, a commenter representing employee
benefit plan managers said that restrictions on information sharing
are, in general, a problem for plan managers, which have a fiduciary
duty to inquire as to an owned entities' activities, so the
Commission should recognize that acting as required by fiduciary
duties does not constitute a violation of the information sharing
restriction. And a commenter had said that information sharing
resulting when the person and the owned entity (or two owned
entities) are counterparties in an arm's length transaction should
not be a violation of the rule. See id.
---------------------------------------------------------------------------
Proposed rule 150.4(b)(2)(i)(B) would condition aggregation relief
on a demonstration that the person seeking disaggregation relief and
the owned entity trade pursuant to separately developed and independent
trading systems. Further, proposed rule 150.4(b)(2)(i)(C) would
condition relief on a demonstration that such person and the owned
entity have, and enforce, written procedures to preclude the one entity
from having knowledge of, gaining access to, or receiving data about,
trades of the other. Such procedures would have to include document
routing and other procedures or security arrangements, including
separate physical locations, which would maintain the independence of
their activities. As noted in the Proposed Rule, the Commission has
applied these same conditions in connection with the IAC exemption to
ensure independence of trading between an eligible entity and an
affiliated IAC.\118\ Similar to the IAC exemption, proposed rule
150.4(b)(2) would permit disaggregation in certain circumstances where
there is independence of trading between two entities. Thus, the
Commission proposed these conditions, which were already applicable and
working well in the IAC context, and which were expected to strengthen
the independence between the two entities for the owned entity
exemption.
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\118\ See id. See also existing regulation150.3(a)(4). Such
conditions have been useful in ensuring that trading is not
coordinated through the development of similar trading systems, and
that procedures are in place to prevent the sharing of trading
decisions between entities.
---------------------------------------------------------------------------
The Commission proposed that the phrase ``separately developed and
independent trading systems'' be interpreted in accordance with the
Commission's prior practices in this regard.\119\ The Commission stated
that it generally would not expect that this criterion would prevent an
owner and an owned entity from both using the same ``off-the-shelf''
system that is developed by a third party.\120\ Rather, the concern
driving the Commission's proposal was that trading systems (in
particular, the parameters for trading that are applied by the systems)
could be used by multiple parties who each know that the other parties
are using the same trading system as well as the specific parameters
used for trading and, therefore, are indirectly coordinating their
trading.\121\
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\119\ See, e.g., 1979 Aggregation Policy, 44 FR at 33840-1
(futures commission merchant (FCM) ``deemed to control'' trading of
customer accounts in trading program where FCM gives specific advice
or recommendations not made available to other customers, unless
such accounts and programs are traded independently and for
different purposes than proprietary accounts).
\120\ Commenters on the proposed amendments to part 151 had said
that this requirement should not prevent the use of third party
``off-the-shelf'' execution algorithms, should permit the sharing of
virtual documentation, so long as such document can be accessed only
by persons that do not manage or control trading, and should apply
only to systems that direct trading decisions, but not trade
capture, trade risk or trade facilitation systems. See Proposed
Rule, 78 FR at 68962.
\121\ Compare 1979 Aggregation Policy, 44 FR at 33841.
``However, the Commission also recognizes that purportedly different
programs which in fact are similar in design and purpose and are
under common control may be initiated in an attempt to circumvent
speculative limit and reporting requirements.''
---------------------------------------------------------------------------
The requirement of ``separate physical locations'' in proposed rule
150.4(b)(2)(i)(C) would not necessarily require that the relevant
personnel be located in separate buildings. In the Proposed Rule, the
Commission stated that the important factor is that there be a physical
barrier between the personnel that prevents access between the
personnel that would impinge on their independence.\122\ For example,
locked doors with restricted access would generally be sufficient,
while merely providing the purportedly ``independent'' personnel with
desks of their own would not. Similar principles would apply to sharing
documents or other resources.
---------------------------------------------------------------------------
\122\ See Proposed Rule, 78 FR at 68962.
---------------------------------------------------------------------------
Proposed rule 150.4(b)(2)(i)(D) would condition aggregation relief
on a demonstration that the person does not share employees that
control the owned entity's trading decisions, and the employees of the
owned entity do not share trading control with such persons. The
Proposed Rule noted the Commission's concern that shared employees with
control of trading decisions may undermine the independence of trading
between entities.\123\ Regarding the sharing of
[[Page 91466]]
attorneys, accountants, risk managers, compliance and other mid- and
back-office personnel, the Commission proposed that sharing of such
personnel between entities would generally not compromise independence
so long as the employees do not control, direct or participate in the
entities' trading decisions.\124\ Similarly, sharing of board or
advisory committee members, research personnel or sharing of employees
for training, operational or compliance purposes would not result in a
violation of the criteria if the personnel do not influence (e.g.,
``have a say in'') or direct the entities' trading decisions.\125\
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\123\ Commenters on the proposed amendments to part 151 said
this criteria should not prohibit sharing of board or advisory
committee members who do not influence trading decisions, sharing of
research personnel, or sharing for training, operational or
compliance purposes, so long as trading of the person and the owned
entity remains independent. See id.
\124\ As noted in the Proposed Rule, the condition barring the
sharing of employees that control the owned entity's trading
decisions would include a prohibition on sharing of attorneys,
accountants, risk managers, compliance and other mid-and back-office
personnel, to the extent such employees participate in control of
the trading decisions of the person or the owned entity. See id.
\125\ In this respect, proposed rule 150.4(b)(2)(i)(D) was
consistent with the Commission's Interpretive Letter No. 92-15 (CCH
] 25,381), where an employee both oversaw the execution of orders
for a commodity pool, as well as maintained delta neutral option
positions in non-agricultural commodities for the proprietary
account of an affiliate of the sponsor of the commodity pool. The
Commission concluded that the use of clerical personnel who are dual
employees of both affiliates would not require aggregation when the
clerical personnel engage in ministerial activities and steps are
taken to maintain independence, such as: (i) Limiting trading
authority so that the personnel do not have responsibility for the
two entities' activities in the same commodity; and (ii) separating
the times at which the personnel conduct activities for the two
entities.
---------------------------------------------------------------------------
Proposed rule 150.4(b)(2)(i)(E) would condition aggregation relief
on a demonstration that the person and the owned entity do not have
risk management systems that permit the sharing of trades or trading
strategies with the other. This condition was intended to address
concerns that risk management systems that permit the sharing of trades
or trading strategies with each other present a significant risk of
coordinated trading through the sharing of information.\126\ The
Commission proposed that this criterion generally would not prohibit
sharing of information to be used only for risk management and
surveillance purposes, when such information is not used for trading
purposes and not shared with employees that, as noted above, control,
direct or participate in the entities' trading decisions.\127\ Thus,
sharing with employees who use the information solely for risk
management or compliance purposes would generally be permitted, even
though those employees' risk management or compliance activities could
be considered to have an ``influence'' on the entity's trading.
---------------------------------------------------------------------------
\126\ The Commission remains concerned, as stated in the
Proposed Rule and as noted above, that a trading system, as opposed
to a risk management system, that is not separately developed from
another system can subvert independence because such a system could
apply the same or similar trading strategies even without the
sharing of trading information. See Proposed Rule, 78 FR at 68962.
\127\ See id.
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2. Commenters' Views
As a general matter, some commenters said that the disaggregation
criteria in the Proposed Rule were appropriately stated. One described
the disaggregation criteria as a balanced and effective approach that
gets to the heart of the Commission's aggregation policy, while another
said the criteria provide appropriate indications of whether an owner
has knowledge or control of the trading activity of an owned
entity.\128\ On the other hand, another commenter believed that the
criteria are vague and unclear, especially for global enterprises which
are active in more than one aspect of a market (e.g., both production
and trading activities).\129\
---------------------------------------------------------------------------
\128\ See CL-Sempra Nov 13 and CL-EEI Nov 13, respectively. A
third commenter thought the criteria are reasonable and practicable,
but cautioned that it is difficult to eliminate knowledge sharing
between related business entities, citing Paul Volcker describing as
na[iuml]ve the view that ``Chinese Walls can remain impermeable
against the pressures to seek maximum profit and personal
remuneration.'' See Chris Barnard on November 12, 2015.
\129\ See CL-Wilmar Nov 13.
---------------------------------------------------------------------------
Set forth below is a brief discussion of the comments on each
aspect of the proposed disaggregation criteria.
a. Proposed Rule 150.4(b)(2)(i)(A)--No Shared Knowledge of Trading
Decisions
Commenters said that passive investors in an owned entity should be
required to certify only that they have no knowledge of the owned
entity's trading, not whether the owned entity has knowledge of the
trading of the passive investors (i.e., the owners), since passive
investors would not have insight into the knowledge of the owned
entity.\130\ One commenter asked that the Commission clarify that the
gain of information as a counterparty to a transaction would not in
itself violate this criterion regardless of how the information is
transmitted.\131\
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\130\ See CL-SIFMA AMG Nov 13; CL-MFA Nov 12; CL-AIMA Feb 10.
One of these commenters said that, as a general matter, it can be
very difficult for owners to obtain information about owned
entities, e.g., when the owned entity is in a different country. CL-
MFA Nov 12.
\131\ See Coalition of Physical Energy Companies on February 10,
2014 (``CL-COPE Feb 10'').
---------------------------------------------------------------------------
Another commenter questioned how this criterion would be applied to
trading decisions triggered by an algorithm over which human
intervention is rarely exercised. For example, the commenter asserted
that the use of off-the-shelf third party algorithms by entities owned
by a single owner could enable a de facto coordination without
intentional indirect coordination.\132\
---------------------------------------------------------------------------
\132\ See Institute for Agriculture and Trade Policy on February
10, 2014 (``CL-IATP Feb 10'').
---------------------------------------------------------------------------
b. Proposed Rule 150.4(b)(2)(i)(B)--Have Separately Developed and
Independent Trading Systems
Several commenters suggested that the Commission modify this
paragraph so that it refers to ``trading strategies'' instead of
``trading systems.'' That is, they suggested that the paragraph require
that the owner and the owned entity ``Trade pursuant to separately
developed and independent trading strategies.'' One commenter was of
the view that because proposed rule 150.4(b)(2)(i)(A) would require
that the owner and the owned entity not have shared knowledge of
trading decisions, there is no need for this paragraph to require
separate ``trading systems'' when the purpose of this rule should be to
prohibit use of ``trading strategies'' that were developed in
coordination.\133\ The commenter believed that this change would allow
the owner and the owned entity to utilize a single shared system for
trading, which would be appropriate and could enhance risk management
so long as the owner and the owned entity can demonstrate that the
condition of no shared knowledge of trading decisions is met.\134\
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\133\ See CL-IECA Nov 13. See also CL-CME Nov 13 (criteria
should focus on ensuring that the entities do not share knowledge of
or control over trading, which would not be implicated merely
because they trade pursuant to commonly-developed trading systems).
\134\ This commenter also said that, at a minimum, the
Commission should distinguish between front-end systems (used for
trade capture and trade booking) and back-end systems (used for risk
management and trade reporting). See CL-IECA Nov 13.
Another commenter described ``trade capture systems'' as
distinct from trading strategies. This commenter said trade capture
systems are used to track positions on an enterprise-wide basis
across multiple affiliates for risk management, recordkeeping and
other business purposes, but these systems do not direct trading and
use of a shared trade capture system does not mean that the entities
have adopted or employed identical, or even similar, trading
strategies. See CL-EEI Nov 13.
A third commenter referred to trade capture, trade execution,
and related report-generation systems for the confirmation, booking
and accounting of orders and for any other mid- and back-office
functions. This commenter asserted that since such systems merely
record, process, and facilitate reports of trading, but do not
establish parameters (e.g., algorithms) for trading, their use by
multiple entities should be permitted under this criterion so long
as they do not enable coordinated trading. See CL-Energy Transfer
Nov 13.
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[[Page 91467]]
Other commenters remarked that a change in the rule text from
``trading systems'' to ``trading strategies'' would allow corporate
groups to take advantage of economies of scale by having one trading
system developed for multiple companies in the group, and promote
efficient trading and risk management practices through the development
of trading technologies that are unrelated to trading strategy.\135\ A
commenter representing investment managers said that disaggregation
relief should be available if the original investment decisions are
made independently, even if trades are subsequently executed and risk
managed on an aggregated basis using a single system.\136\
---------------------------------------------------------------------------
\135\ See CL-CME Nov 13; CL-FIA Nov 13; CL-FIA Feb 6.
\136\ This commenter said it would be appropriate for trading
strategies of separate investment vehicles to be executed via a
single execution desk, as long as the vehicles' portfolio managers
were not coordinating placement of the trades, in order to achieve
risk management goals such as to avoid cross and wash trading or the
submission of an excessive numbers of orders, to avoid having
vehicles bid against each other, to monitor other trading
thresholds, and to achieve fair terms of execution and aggregation.
See CL-AIMA Nov 12.
---------------------------------------------------------------------------
Commenters referred to the Commission's statement in the Proposed
Rule that it generally would not expect that this criterion would
prevent an owner and an owned entity from both using the same ``off-
the-shelf'' system that is developed by a third party.\137\ The
commenters asked that this guidance be reiterated in the final rule and
be extended beyond off-the-shelf systems or other technologies
``developed by'' third parties, to include any in-house software or
custom modules added to third-party software, so long as these internal
systems are not used to share trading information with day-day trading
personnel or otherwise permit coordinated trading.\138\
---------------------------------------------------------------------------
\137\ See Proposed Rule, 78 FR at 68962.
\138\ See CL-SIFMA AMG Nov 13; CL-AIMA Feb 10; CL-Energy
Transfer Nov 13.
---------------------------------------------------------------------------
On the other hand, another commenter said that the application of
this criterion, which implicitly assumes that market participants will
self-report common trading strategies, fails to recognize that the
participants may be reluctant to report collusive strategies, and
therefore DCMs and SEFs should be required to analyze market data for
trading strategy correlations.\139\
---------------------------------------------------------------------------
\139\ See Occupy the SEC on August 7, 2014 (``CL-Occupy the SEC
Aug 7'').
---------------------------------------------------------------------------
c. Proposed Rule 150.4(b)(2)(i)(C)--Have Written Procedures To Maintain
Independence, Including Separate Physical Locations
A commenter said that the requirement to meet this criteria (to
have written procedures restricting access to trading information)
should apply only to the owner claiming the exemption from aggregation,
and not the owned entity, because depending on the extent of an owner's
corporate control over an owned entity, the owner may not be in a
position to compel the owned entity to establish the written
procedures.\140\ This commenter believes that so long as the owner has
and enforces written procedures that preclude the owner from sharing
trading information with, and receiving trading information from, the
owned entity, then each entity will not have access to the information
of the other.\141\
---------------------------------------------------------------------------
\140\ See FIA on July 31, 2014 (``CL-FIA July 31'') and CL-FIA
Nov 13.
\141\ See id.
---------------------------------------------------------------------------
Another commenter suggested that the second sentence of this
provision should be deleted because, this commenter believes, it is
subsumed by the first sentence and such prescriptive criteria are
unnecessary in the context of a physical commodity firm as opposed to
an IAC.\142\ The commenter also asked that the Commission clarify that
the requirement of ``separate physical locations'' does not require
physically separate buildings, but rather requires only restricted
access prohibiting personnel from entering the affiliated company
without permission or signing-in or, if on the derivatives trading
floors, an escort.\143\
---------------------------------------------------------------------------
\142\ See CL-Energy Transfer Nov 13. The second sentence reads
``Such procedures must include document routing and other procedures
or security arrangements, including separate physical locations,
which would maintain the independence of their activities.'' The
commenter said that if the second sentence is retained, the
Commission should provide guidance that the routing of documents to
senior management or risk management personnel, and the routing of
documents that show aggregate, non-granular, or stale trading
positions, may be acceptable so long as such routing does not allow
coordinated trading.
\143\ See id.
---------------------------------------------------------------------------
On the other hand, another commenter said that this criterion
should be strengthened to provide realistic guidelines for meaningful
separations of location and information, because the statute requires
an entity to cease trading commodity derivatives in multiple divisions
separated by ``mere `Chinese walls' '' and it is not within the
discretion of the Commission to waive this requirement.\144\ This
commenter cited a research paper which asserted ``that in important
contexts Chinese walls fail to prevent the spread of non-public
information within financial conglomerates.'' \145\
---------------------------------------------------------------------------
\144\ See Better Markets, Inc. on February 10, 2014 (``CL-Better
Markets Feb 10'').
\145\ See id.
---------------------------------------------------------------------------
d. Proposed Rule 150.4(b)(2)(i)(D)--No Shared Employees That Control
Trading Decisions
A commenter said that the Commission should clarify that this
criterion may be met if a shared employee participates on the board but
does not control, direct or participate in the trading decisions.\146\
Another commenter requested that the Commission clarify that guidance
in the Proposed Rule about research personnel not influencing or
directing the entities' trading decisions is properly interpreted to
mean that research personnel are not precluded by this criterion from
providing market research (including, for example, market fundamentals
or technical indicators, support or resistance levels, and trade
recommendations), so long as the research personnel do not direct or
control trading decisions of the owned entities.\147\
---------------------------------------------------------------------------
\146\ See CL-COPE Feb 10.
\147\ See CL-MFA Feb 7, referring to Proposed Rule, 78 FR at
68962.
---------------------------------------------------------------------------
e. Proposed Rule 150.4(b)(2)(i)(E)--No Risk Management Systems That
Permit the Sharing of Trades or Trading Strategy
Several commenters focused on a statement in the Proposed Rule that
the Commission would interpret this criterion not to prohibit sharing
of information for risk management purposes, so long as the information
is not used for trading purposes or shared with employees that
participate in trading decisions.\148\ These commenters asked that the
Commission reiterate this guidance in the final rule.\149\ Other
commenters said that the guidance should be set forth as part of the
text of the final rule, in order to provide a safe harbor, or greater
certainty, for the
[[Page 91468]]
sharing of risk management information.\150\
---------------------------------------------------------------------------
\148\ See CL-AIMA Feb 10, citing Proposed Rule, 78 FR at 68962
(``this criterion generally would not prohibit sharing of
information to be used only for risk management and surveillance
purposes, when such information is not used for trading purposes and
not shared with employees that, as noted above, control, direct or
participate in the entities' trading decisions. Thus, sharing with
employees who use the information solely for risk management or
compliance purposes would generally be permitted, even though those
employees' risk management or compliance activities could be
considered to have an `influence' on the entity's trading.''). See
also CL-ISDA Nov 12; CL-SIFMA AMG Nov 13; CL-PEGCC Nov 12; CL-CME
Nov 13.
\149\ See CL-ISDA Nov 12; CL-SIFMA AMG Nov 13; CL-PEGCC Nov 12;
CL-CME Nov 13; CL-AIMA Feb 10.
\150\ See CL-FIA Nov 13; CL-FIA July 31; CL-NGSA Nov 13;
Commodity Markets Council on February 10, 2014. Another commenter
suggested that the rule text should provide that owners and their
affiliates may share such trading information as is necessary to
manage risk and meet compliance obligations. See CL-Working Group
Nov 13 (suggesting rule text allowing ``obtaining such information
as is necessary to fulfill [the entity's] fiduciary duties or
fulfill its duty to supervise the trading activities of an
affiliate, or . . . establishing and monitoring compliance or risk
policies and procedures, including position limits, for an affiliate
or on an enterprise wide basis, or . . . sharing employees so long
as such employees do not control, direct or participate in the
entities' trading decisions'').
---------------------------------------------------------------------------
A commenter asked the Commission to state that this criterion would
not preclude disaggregation relief when there is sharing of information
for only risk management and surveillance and other non-trading
purposes, such as, for example, information used to assess collateral
requirements or verify compliance with applicable credit limits or
information maintained by a custodian or other service provider that
does not control trading.\151\
---------------------------------------------------------------------------
\151\ This commenter asserted that the condition that the owner
entity and owned entity ``do not have risk management systems that
permit the sharing of trades or trading strategy'' is ambiguous and
potentially overly broad. See CL-ISDA Nov 12.
---------------------------------------------------------------------------
Other commenters suggested various formulations for Commission
guidance or rule text to set out circumstances in which this criterion
would be interpreted not to preclude disaggregation relief, so long as
the employees who have access to the shared information do not control,
direct or participate in the entities' trading decisions. The
circumstances suggested by commenters include:
Information sharing as is necessary to fulfill fiduciary
duties or duties to supervise trading, or to monitor risk limits on an
enterprise wide basis;\152\
---------------------------------------------------------------------------
\152\ See CL-CMC Nov 13.
---------------------------------------------------------------------------
sharing of transaction and position information with and
among employees who perform risk management, accounting, compliance or
similar mid- and back-office functions; \153\
---------------------------------------------------------------------------
\153\ See CL-CME Nov 13.
---------------------------------------------------------------------------
information sharing for risk management purposes; \154\
---------------------------------------------------------------------------
\154\ See CL-COPE Nov 13. See also CL-AIMA Feb 10 (criterion
should not preclude shared risk management systems from allowing
access to share trade and trading strategies by individuals who do
not exercise control over trading decisions); CL-ECOM Nov 13
(criterion should not preclude information sharing for risk
management and compliance purposes).
---------------------------------------------------------------------------
continuous sharing of position information for risk
management and surveillance purposes only, sharing of trading and
position information for risk management purposes (even on a real-time
basis and even if the entity's risk management systems or personnel
have authority to require the reduction of positions to comply with
applicable limits), and using shared risk management services,
including real-time data sharing and position reduction mechanisms, so
long as they do not permit coordinated or shared trading;\155\
---------------------------------------------------------------------------
\155\ See CL-SIFMA AMG Nov 13.
---------------------------------------------------------------------------
sharing of derivative information with senior management
or risk committee members that oversee the risks of more than one
operating company, for risk management, accounting, compliance, or
similar purposes (even if these personnel have authority to reduce
exposure or comply with internal risk guidelines), and sharing of
trading and position information for risk management purposes, even if
such information is shared on a real-time or end-of-day basis and even
if the risk management systems or personnel have authority to reduce
positions to comply with applicable limits or other restrictions that
senior management or the risk personnel may impose; \156\ and
---------------------------------------------------------------------------
\156\ See CL-Energy Transfer Nov 13.
---------------------------------------------------------------------------
information sharing resulting from use of an affiliated
service provider, such as an affiliated FCM, an affiliated custodian,
an affiliate engaged in recordkeeping or reporting information, or an
affiliate providing clearing, custodial, or other non-trading services
for the owned entity.\157\
---------------------------------------------------------------------------
\157\ See CL-ISDA Nov 12.
---------------------------------------------------------------------------
Commenters also asserted that employees at the owner entity who are
not directly or indirectly involved in trading or the supervision of
traders, and are prohibited from sharing information with owner entity
traders, should be permitted to receive trading activity and position
exposure information of the owned entity,\158\ and that the categories
of employees referred to in the guidance in the Proposed Rule are not
intended to be restrictive, so that, for example, entities could share
sales staff without leading to shared knowledge of trading
decisions.\159\ Another commenter said that the Commission should
interpret this criterion not to preclude disaggregation relief when
information sharing is limited to employees involved in risk-
management, compliance, execution or recordkeeping functions, so long
as the functions are conducted pursuant to written procedures that
protect the information from access by individuals involved in trading
decisions, and there is no access by individuals who develop or execute
trading strategies to the information shared for risk management.\160\
---------------------------------------------------------------------------
\158\ See id.
\159\ See CL-AIMA Feb 10, referring to Proposed Rule, 78 FR at
68962.
\160\ See CL-ICE Nov 13.
---------------------------------------------------------------------------
3. Final Rule
The Commission is adopting rule 150.4(b)(2)(i) largely as proposed,
with certain modifications described below in response to commenters
and other considerations.
First, the lead in sentence of rule 150.4(b)(2)(i) includes the
addition of the phrase ``(to the extent that such person is aware or
should be aware of the activities and practices of the aggregated
entity or the owned entity).'' The effect of adding this phrase is to
apply the criteria in this rule to both the person who is required to
aggregate positions and the aggregated or owned entity, but only to the
extent that the person required to aggregate is aware or should be
aware of the activities and practices of the aggregated or owned
entity. This addition recognizes that, as commenters pointed out, an
owner may not have knowledge of or an ability to find out about the
trading practices of an owned entity. The Commission understands the
phrase ``should be aware'' to mean that the owner is charged with
awareness of the owned entity's activities if it is, in effect, able to
control the owned entity or routinely has access to relevant
information about the owned entity. If the owner is not aware, and
should not be aware, of the owned entity's activities, it would not
have to certify as to the owned entity.
The Commission believes that this modification addresses the
comments on subparagraph (A) to the effect that passive investors in an
owned entity should be required to certify only that they have no
knowledge of the owned entity's trading. Therefore, the final rule
adopts subparagraph (A) as it was proposed.
The final rule adopts subparagraph (B), relating to separately
developed and independent trading systems, as it was proposed. The term
``system'' is appropriately broad to encompass the various methods,
procedures and plans which market participants may use to initiate
trading. ``Trading system'' includes, for example, a program (whether
automated or not) that provides the impetus for the initiation of
trades. The suggested alternative, ``strategy,'' is too narrowly
limited to the particular trading decisions a person may make based on
particular conditions. The entire ``trading system,'' not just the
``trading strategy,'' must be
[[Page 91469]]
separately developed and independent.\161\
---------------------------------------------------------------------------
\161\ The Proposed Rule noted that ``off-the-shelf'' software
could be considered to be separately developed and independent for
this purpose, so long as the software could not be used by multiple
parties to indirectly coordinate their trading. See Proposed Rule,
78 FR at 68962. The Commission reaffirms this position, and in
response to commenters (see footnote 138, above), clarifies that
customized software or in-house software could also be considered to
be separately developed and independent for this purpose, so long as
the same standard is met.
---------------------------------------------------------------------------
The Commission reiterates that, as stated in the Proposed Rule, the
purpose of this requirement is to preclude use of a trading system to
coordinate the trading of two or more entities.\162\ Thus, it is the
trading system that provides the impetus for the initiation of trades
which must be separately developed and independent, not the mechanism
or software that carries out those trades. For this reason, the
Commission does not believe that use of a shared order execution
platform, with appropriate firewalls, would necessarily mean that this
condition is not met. For purposes of the final rule, an ``order
execution platform'' is a computerized process that accepts inputs of
terms of trades desired to be made and then uses pre-determined methods
to specifically place those trades in the markets, while a ``trading
system'' is a process or method for deciding on the timing and
direction of trades.\163\ Thus, for purposes of the final rule the
Commission understands the term ``trading system'' not to include an
order execution platform. Nor would the term ``trading system'' include
systems used for back-office functions such as order capture or trade
reporting. Also, a trading system does not include broad principles to
guide trading (e.g., principles one may learn from publicly-available
literature).
---------------------------------------------------------------------------
\162\ See Proposed Rule, 78 FR at 68962.
\163\ For example, Trader A may use a trading system to develop
trading ideas, and then use a widely-used order execution platform
to execute those ideas, while affiliated Trader B (with no knowledge
of Trader A's trading system) may qualify for disaggregation when
Trader B uses an independent trading system to develop trading
ideas, and executes those ideas on the same order execution platform
that Trader A uses, provided Trader B does not have access to Trader
A's executions (and vice versa).
---------------------------------------------------------------------------
Subparagraph (C) of the final rule, relating to written procedures
to maintain independence, including separate physical locations,
reflects the deletion of the phrase ``document routing and other
procedures or'' from the second sentence. The Commission believes that
the concept of document routing is outmoded and possibly confusing (and
the concept is adequately described by the general phrase ``security
arrangements'' which is retained in the final rule).\164\
---------------------------------------------------------------------------
\164\ For consistency, the phrase ``document routing and other
procedures or'' is also deleted from rule 150.4(b)(4)(i)(A).
---------------------------------------------------------------------------
For the avoidance of doubt, the Commission reiterates its guidance
from the Proposed Rule on the reference in subparagraph (C) to separate
physical locations.\165\ Subparagraph (C) would not necessarily require
that the relevant personnel be located in separate buildings. The
important factor is that there be a physical barrier between the
personnel that prevents access between the personnel that would impinge
on their independence. For example, locked doors with restricted access
would generally be sufficient, while merely providing the purportedly
``independent'' personnel with desks of their own would not. Similar
principles would apply to sharing documents or other resources.
---------------------------------------------------------------------------
\165\ See Proposed Rule, 78 FR at 68962.
---------------------------------------------------------------------------
The final rule adopts subparagraph (D), relating to sharing of
employees that control trading decisions, as it was proposed. For the
avoidance of doubt, the Commission reiterates, as it stated in the
Proposed Rule, that the sharing of attorneys, accountants, risk
managers, compliance and other mid- and back-office personnel between
entities would generally not compromise independence so long as the
employees do not control, direct or participate in the entities'
trading decisions.\166\ Similarly, sharing of board or advisory
committee members or research personnel, or sharing of employees for
training, operational or compliance purposes, would not result in a
violation of the criteria if the personnel do not influence (e.g.,
``have a say in'') or direct the entities' trading decisions.\167\
---------------------------------------------------------------------------
\166\ See id. See also the discussion above regarding the
condition under rule 150.4(b)(2)(i)(A) (conditioning aggregation
relief on a demonstration that the person filing for disaggregation
relief and the owned entity do not have knowledge of the trading
decisions of the other, and discussing what constitutes
``knowledge'' for this purpose).
\167\ In this respect, rule 150.4(b)(2)(i)(D) is consistent with
the Commission's Interpretive Letter No. 92-15 (CCH ] 25,381), where
an employee both oversaw the execution of orders for a commodity
pool, as well as maintained delta neutral option positions in non-
agricultural commodities for the proprietary account of an affiliate
of the sponsor of the commodity pool. In that interpretive letter,
the Commission concluded that the use of clerical personnel who are
dual employees of both affiliates would not require aggregation when
the clerical personnel engage in ministerial activities and steps
are taken to maintain independence, such as: (i) Limiting trading
authority so that the personnel do not have responsibility for the
two entities' activities in the same commodity; and (ii) separating
the times at which the personnel conduct activities for the two
entities.
---------------------------------------------------------------------------
One commenter asserted that personnel could provide research about
``technical indicators, support or resistance levels, and trade
recommendations'' without being deemed to be participating in trading
decisions.\168\ The Commission believes this situation should be viewed
in light of a previous interpretation, where the Commission stated that
it ``is concerned that specific trading recommendations . . . contained
in such information not be substituted for independently derived
trading decisions. When the person who directs trading in an account or
program regularly follows the trading suggestions [from another
person], such account or program will be evidence that the account is
controlled by the [other person].'' \169\
---------------------------------------------------------------------------
\168\ See CL-MFA Feb 7.
\169\ 1979 Aggregation Policy, 44 FR at 33844.
---------------------------------------------------------------------------
The final rule adopts subparagraph (E), relating to risk management
information sharing, substantially as it was proposed, but with a
revision to clarify that the provision is focused on the sharing of
trades or trading strategy with employees that control the trading
decisions of the other entity.\170\ The Commission notes that
provisions virtually identical to this rule have been used for years in
connection with the IAC exemption, and the Commission's interpretations
of those provisions have not changed. The Commission considers this
revision to the rule text to be a clarification of its existing
interpretations.
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\170\ For example, the rule would preclude Trader A and
affiliated Trader B from having a risk management system that
permits the sharing of Trader A's trades or trading strategy with
employees that control the trading decisions of Trader B, or that
permits the sharing of Trader B's trades or trading strategy with
employees that control the trading decisions of Trader A.
But, in conjunction with that limitation, the rule would not
preclude Trader A and affiliated Trader B from having a risk
management system that permits the sharing of Trader A's trades or
trading strategy with employees that handle risk management
functions for Trader B but do not control its trading decisions.
---------------------------------------------------------------------------
Further, the Commission adopts and reiterates its guidance on this
provision in the Proposed Rule.\171\ That is, subparagraph (E) is
intended to address concerns that risk management systems that permit
entities to share trades or trading strategies with each other present
a significant risk of coordinated trading through the sharing of
information.\172\ The Commission
[[Page 91470]]
intends that, generally speaking, subparagraph (E) would not prohibit
sharing of information to be used only for risk management and
surveillance purposes, when such information is not used for trading
purposes and not shared with employees that, as noted above, control,
direct or participate in the entities' trading decisions. Thus, sharing
with employees who use the information solely for risk management or
compliance purposes would generally be permitted, even though those
employees' risk management or compliance activities could be considered
to have an ``influence'' on the entity's trading.
---------------------------------------------------------------------------
\171\ See Proposed Rule, 78 FR at 68962.
\172\ The Commission remains concerned that a trading system, as
opposed to a risk management system, that is not separately
developed from another system can subvert independence because such
a system could apply the same or similar trading strategies even
without the sharing of trading information.
---------------------------------------------------------------------------
In response to questions from commenters, the Commission believes
that transaction and position information may be shared among the risk
assessment employees of a single entity or of affiliated entities as is
necessary for certain explicitly specified risk and compliance
purposes, such as complying with internal credit limits or fulfilling a
fiduciary responsibility with respect to a third party's investment.
However, transaction and position information could not be used for
non-hedging purposes or shared with employees who participate in non-
hedging decisions. (``Non-hedging'' is defined in this context as
activities to take, or liquidate, positions that are not bona fide
hedging positions.)
So long as these restrictions are satisfied, the information may be
shared on a real-time basis,\173\ and may be used to effect reductions
in non-hedging positions, but such reductions should be mandated by
pre-established credit risk management procedures or compliance
procedures regarding permissible investment activities. Within these
restrictions, affiliated entities may use shared risk management
services, and the information may be used for back-office recordkeeping
and middle-office risk assessment, so long as such functions occur
independently of any non-hedging decisions made by other employees who
did not have access to shared information. Companies within an
affiliated partnership or limited liability company structure (i.e.,
where the relevant entities are under common ownership or control) may
be considered to be affiliated for this purpose.
---------------------------------------------------------------------------
\173\ The Commission emphasizes that so long as the restrictions
discussed here are satisfied, the information may be shared on a
real-time basis, in addition to on an end-of-day basis. As noted
above, the Commission does not consider knowledge of end-of-day
position information to necessarily constitute knowledge of trading
decisions, so long as the position information cannot be used to
dictate or infer trading strategies, but has been concerned that the
ability to monitor the development of positions on a real-time basis
could constitute knowledge of trading decisions. See footnote 116,
above. In response to questions from commenters, the Commission has
considered the circumstances in which such information may be shared
on a real-time basis, and the purpose of the discussion here is to
explain when real-time sharing would be permissible.
---------------------------------------------------------------------------
Commenters proposed various alternative criteria which could be
used to determine whether the positions of an owner and owned entity
could be disaggregated.\174\ However, after considering these
suggestions, the Commission does not believe that the suggested
criteria are significantly different from the criteria in rule
150.4(b)(2)(i). Also, some of the suggested criteria appear to be
suitable for particular situations, but not necessarily all corporate
groups.\175\ Overall, the Commission believes that the criteria in rule
150.4(b)(2)(i) are appropriate and suitable for determining when
disaggregation is permissible due to a lack of control and shared
knowledge of trading activities.\176\
---------------------------------------------------------------------------
\174\ See, e.g., CL-MidAmerican Feb 7 and Commodity Markets
Council on July 25, 2014.
\175\ For example, one commenter recommended factors such as
whether the owner and the owned entity have separate trading
accounts, separate assets, separate lines of business, independent
credit support and other specific indications of separation. See CL-
MidAmerican Feb 7. In the Commission's view, criteria such as these
are specific manifestations of the general principles stated in
proposed rule 150.4(b)(2)(i) that the owner and the owned entity not
have knowledge of the trading decisions of the other and trade
pursuant to separately developed and independent trading systems.
Similarly, whether the two entities do or do not have separate
assets or separate lines of business would not necessarily indicate
whether they are engaged in coordinated trading.
\176\ The criteria in rule 150.4(b)(2)(i) will be interpreted
and applied in accordance with the Commission's past practices. See
footnote 114, above.
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C. Notice Filing Requirement in Rule 150.4(c)
1. Proposed Approach
The Commission proposed a notice filing requirement in proposed
rule 150.4(c).\177\ The proposed rule contemplated that the filing
would be made before the exemption from aggregation is needed, since
the filing would be a pre-requisite for obtaining the exemption.
However, where a prior filing is impractical (such as where a person
lacks information regarding a newly-acquired subsidiary's activities),
the Commission proposed that the filing should be made as promptly as
practicable.\178\
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\177\ The Commission also proposed an application procedure for
ownership interests of more than 50 percent in proposed rule
150.4(c)(2). However, since the Commission is not adopting proposed
rule 150.4(b)(3), that application procedure is not relevant and the
Commission is not adopting proposed rule 150.4(c)(2). The text of
rule 150.4(c)(2) in the final rule is a new provision discussed
below.
\178\ See Proposed Rule, 78 FR at 68962.
---------------------------------------------------------------------------
Even though a filing under proposed rule 150.4(c) could be made
after an ownership or equity interest is acquired, the Commission
proposed that the exemption from aggregation would not be effective
retroactively because the filing is a pre-requisite to the exemption.
The Commission reasoned that retroactive application of such filings
could result in administrative difficulty in monitoring the scope of
exemptions from aggregation and negatively affect the Commission
staff's surveillance efforts.\179\
---------------------------------------------------------------------------
\179\ See id.
---------------------------------------------------------------------------
Generally, the Commission proposed that entities could consolidate
their filings in any efficient manner by, for example, discussing more
than one owned entity in a single filing, so long as the scope of the
filing is made clear.\180\ The Commission also emphasized that if an
entity determines to no longer apply an exemption (or if an exemption
is no longer available), the entity would be required to inform the
Commission by making a filing under proposed rule 150.4(c) because this
would constitute a material change to the prior filing. Of course, once
an exemption no longer applies to an owned entity, the person would be
required to subsequently aggregate the positions of the entity in
question.\181\
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\180\ In the Proposed Rule, the Commission clarified that
section 8 of the CEA would apply to the information that the
Commission may request under proposed rule 150.4(c), and sets out
the extent to which such information will be treated confidentially.
See id.
\181\ See id.
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2. Commenters' Views
Commenters addressed the time limit for making the proposed notice
filing, the situations in which subsequent filings (after the initial
notice) should be required, the consequences for failure to make a
timely filing, the contents of the notice filing and how the notice
filing should be signed.
Regarding the time limit for making the proposed notice filing,
commenters said the rule should provide a reasonable period of time to
file, in order to perform due diligence and gather information. Several
commenters suggested that a three-month grace period would be
reasonable before requiring aggregation, because this would be adequate
to conduct the internal review to support and approve the notice
filing.\182\
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\182\ See CL-CME Nov 13; CL-PEGCC Nov 12; CL-FIA Nov 13; CL-FIA
July 31; CL-ISDA Nov 12; CL-Energy Transfer Nov 13. One of these
commenters allowed that aggregation would be required if, during the
grace period, an owner entity takes active steps to control and
direct the trading strategy of a newly acquired owned entity. See
CL-ISDA Nov 12. The three month time period was said to be adequate
for a new owned entity to undertake post-closing diligence and
operational measures to confirm whether seeking or claiming the
aggregation exemption is necessary. See CL-Energy Transfer Nov 13.
Another commenter suggested a grace period, but did not suggest a
specific time period. See CL-SIFMA AMG Nov 13.
---------------------------------------------------------------------------
[[Page 91471]]
Regarding the situations in which subsequent filings (after the
initial notice) should be required, several commenters stated that a
subsequent filing should be required only in the event of a material
change to the facts set forth in the relevant notice filing.\183\ One
commenter thought that a subsequent filing should be required only if
there was a change in the ability to comply with the conditions of the
exemption so that the criteria for disaggregation are no longer met,
but not upon a mere internal reorganization of an affiliate which does
not affect compliance with the criterion.\184\ Another commenter said a
subsequent filing should be required only when an owner entity is
withdrawing the notice filing because it no longer maintains a
requisite ownership interest in the owned entity, or in the event that
the owner entity is no longer in compliance with the exemption criteria
with respect to an owned entity or another material change in the
contents of the notice filing has occurred.\185\
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\183\ See CL-Working Group Nov 13; CL-EEI Nov 13; CL-FIA Nov 13;
CL-NGSA Nov 13; CL-CME Nov 13.
\184\ See CL-Energy Transfer Nov 13.
\185\ See CL-ISDA Nov 12.
---------------------------------------------------------------------------
Regarding the consequences for failure to make a timely filing, one
commenter proposed that the rule allow an entity five business days
after exceeding a position limit to make the notice filing, if the
entity is otherwise eligible to claim an exemption from aggregation and
was deemed in excess of a position limit only because of aggregation
from which it could have been exempt.\186\ Another commenter said that
if an entity is eligible to claim an exemption from aggregation, but
fails to make a timely notice filing, that should constitute only a
single violation for failure to make the filing, not a separate
violation of position limits.\187\ Other commenters addressed a
slightly different situation, contending that if a market participant
relies on an exemption from aggregation in good faith, but the
Commission subsequently determines that an exemption was not available,
the Commission should require aggregation only from the date of its
determination.\188\
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\186\ See CL-CME Nov 13.
\187\ This commenter asserted that this modification would not
undermine the Commission's aggregation rule because it would apply
only where an entity is entitled to an exemption from the
aggregation requirement. See CL-FIA Nov 13.
\188\ See CL-FIA Nov 13; CL-FIA July 31; CL-CME Nov 13; CL-IECA
Nov 13.
---------------------------------------------------------------------------
Regarding the contents of the notice filing, two commenters
requested that the Commission remove the requirement to provide a
description of the relevant circumstances that warrant disaggregation
in proposed rule 150.4(c)(1)(i), and instead require only a
certification that the owner entity, as of the date of the filing,
meets the conditions of the exemption with respect to each owned entity
specified in the filing.\189\
---------------------------------------------------------------------------
\189\ See CL-ISDA Nov 12 and CL-PEGCC Nov 12.
---------------------------------------------------------------------------
Regarding signature of the notice filing, two commenters asked that
the Commission clarify that the specific senior officer signing or
submitting the notice filing may be any individual appropriately
determined within the context of a particular owner entity's governance
structure.\190\ On the other hand, another commenter asserted that the
rule should specifically require that the notice filing be signed by
the CEO and the chief compliance officer or chief of risk management of
the owner entity.\191\
---------------------------------------------------------------------------
\190\ See CL-ISDA Nov 12 and CL-PEGCC Nov 12.
\191\ This commenter felt that the signature requirement in the
proposed rule appears casual and may lead the owner entity to assume
that granting of exemptions from aggregation would be routine, while
they should be exceptional. See CL-IATP Feb 10.
---------------------------------------------------------------------------
3. Final Rule
The Commission is adopting rule 150.4(c) largely as proposed, with
certain modifications to reflect points made by commenters. Primarily,
rule 150.4(c) includes a modification to provide for a 60-day period
after acquisition of an ownership interest to conduct due diligence and
prepare the notice filing.\192\ In other words, a notice filing made
within 60 days after an acquisition would have retroactive effect as of
the date of acquisition. The Commission believes that a 60-day period
would be adequate for the acquirer to perform due diligence and gather
the information necessary to make the notice filing.
---------------------------------------------------------------------------
\192\ See rule 150.4(c)(2). Rule 150.4(c)(2) is new text that
was not included in the Proposed Rule, but rather is adopted in
response to commenters' suggestions. As noted in footnote 177,
above, the Commission is not adopting proposed rule 150.4(c)(2).
---------------------------------------------------------------------------
Rule 150.4(c) has also been modified to address a situation where a
person is eligible to claim an exemption from aggregation, but does not
make a filing at the proper time. In this case, rule 150.4(c)(6)
provides that the failure to timely file the notice would be a
violation of rule 150.4(c), but there would not be a violation of the
aggregation requirement or of a position limit so long as the required
filing is made within five business days after the person is aware, or
should have been aware, that the notice has not been timely filed. That
is, since the person was eligible to claim the exemption, aggregation
was not required, but a violation of the filing requirement has
occurred.
On the other hand, the Commission does not believe relief is
appropriate if a person is not eligible to claim an exemption from
aggregation, but erroneously believes that it is (even if the error
occurs in good faith). In this case, the person could not ``cure'' the
situation by taking steps to become eligible for the exemption, and
then attempting to provide the notice filing with retroactive
effect.\193\ Where the person is not eligible for any exemption from
aggregation and therefore aggregation is required, the ineligibility
cannot be cured by making a later notice filing.
---------------------------------------------------------------------------
\193\ In this regard, the Commission disagrees with commenters
who argued that if a market participant relies on an exemption from
aggregation in good faith, but the Commission subsequently
determines that an exemption was not available, the Commission
should require aggregation only from the date of its determination.
See CL-FIA Nov 13; CL-FIA July 31; CL-CME Nov 13; CL-IECA Nov 13.
---------------------------------------------------------------------------
As for a requirement to make filings subsequent to the initial
filing, the Commission believes that a further filing is required only
in the event of a material change to the facts set forth in the
relevant notice filing, as is stated in rule 150.4(c)(4). The
Commission understands that the Proposed Rule referred at one point to
persons making one filing each year, but this was in the context of
estimating how often filings might occur.\194\ The Commission did not
intend that notices be filed annually in the absence of a material
change.
---------------------------------------------------------------------------
\194\ See Proposed Rule, 78 FR at 68975.
---------------------------------------------------------------------------
As for the content of the notice filing, rule 150.4(c) includes the
same requirements as were in the proposed rule. The Commission has not
removed the requirement to provide a description of the relevant
circumstances that warrant disaggregation, because it believes that a
short description of circumstances helps the Commission and its staff
to understand the context of the filing. In this regard, the Commission
notes that under the earlier proposed amendment to part 151, the person
claiming the exemption would
[[Page 91472]]
have been required to demonstrate compliance with each condition of
relief, which would likely include an organizational chart showing the
ownership and control structure of the involved entities, a description
of risk management and information-sharing systems, and an explanation
of trade data and position information distribution.\195\ The
Commission has not specifically adopted this guidance for rule
150.4(c). Instead, the Commission notes the distinction between rule
150.4(c)(1)(i), which requires a description of the relevant
circumstances that warrant disaggregation to be included in each
filing, and rule 150.4(c)(3), which allows the Commission to obtain
information demonstrating that the person meets the requirements of the
exemption in those cases where the Commission calls for such
information.\196\
---------------------------------------------------------------------------
\195\ See Proposed Rule, 78 FR at 68952.
\196\ The Commission is adopting a delegation of authority to
the Director of the Division of Market Oversight or the Director's
designee to call under rule 150.4(c)(3) for additional information
from a person claiming an aggregation exemption. See rule
150.4(e)(1)(ii). This parallels a provision in proposed rule
150.4(e)(1) delegating authority to call for additional information
from a person claiming the exemption in proposed rule 150.4(b)(9)
(renumbered (b)(8) in the final rule). The subparagraphs in rule
150.4(e)(1) have been renumbered from the proposed rule, because as
noted in footnote 77, the Commission is not adopting proposed rule
150.4(e)(1)(i), which contained a delegation of authority
referencing proposed rule 150.4(b)(3). Also, the cross-references in
rule 150.4(e)(1)(i) have been corrected to refer to paragraph
(b)(8)(iv) and paragraph (b)(8).
---------------------------------------------------------------------------
With regard to signature of the notice and the certification
requirement in rule 150.4(c)(1)(ii), the Commission believes that rule
150.4(c) is satisfied when the notice containing the statement required
by 150.4(c)(1)(ii) is signed by a senior officer of the entity claiming
relief from the aggregation requirement or, if the entity does not have
senior officers, a person of equivalent authority and responsibility
with respect to the entity.
D. Other Issues Related to Aggregation on the Basis of Ownership
The Proposed Rule discussed or requested comment on several other
issues related to aggregation due to ownership of another entity, or
relief from that requirement. In addition, commenters raised certain
miscellaneous issues related to the rule. These issues were the
effective date for the final rule, how entities that hold an interest
in the entity that submits a notice should be treated (i.e., the
treatment of ``higher-tier entities''), whether aggregation should be
required on a basis pro rata to the ownership interest in the owned
entity, and how the aggregation rule would interact with other
Commission rules.
1. Proposed Approach
Regarding the effective date for the final rule, the Commission
discussed in the Proposed Rule a potential transition period for
application of the requirement of aggregation based on ownership.
However, the Commission concluded that this would not be necessary
because the Proposed Rule would apply to existing position limits
currently in effect and would provide further aggregation
exemptions.\197\ Therefore, the Proposed Rule did not suggest any
compliance period or delayed effectiveness of the final rule.
---------------------------------------------------------------------------
\197\ See Proposed Rule, 78 FR at 68959.
---------------------------------------------------------------------------
Regarding the treatment of higher-tier entities, proposed rule
150.4(b)(9) \198\ provided that if an owned entity has filed a notice
under proposed rule 150.4(c), any person with an ownership or equity
interest of 10 percent or greater in the owned entity need not file a
separate notice identifying the same positions and accounts previously
identified in the notice filing of the owned entity, if such person
complies with the conditions applicable to the exemption specified in
the owned entity's notice filing, other than the filing requirements;
and does not otherwise control trading of the accounts or positions
identified in the owned entity's notice. Further, proposed rule
150.4(b)(9) provided that any person relying on the exemption for
higher-tier entities must provide to the Commission information
concerning the person's claim for exemption called for by the
Commission.
---------------------------------------------------------------------------
\198\ As noted above, because the Commission is not adopting
proposed rule 150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed
rule 150.4 are renumbered in the final rule as paragraphs (b)(3) to
(b)(8), respectively. Thus, final rule 150.4(b)(8) corresponds to
proposed rule 150.4(b)(9).
---------------------------------------------------------------------------
In the Proposed Rule, the Commission noted that the proposed
approach for higher-tier entities should significantly reduce the
filing requirements for aggregation exemptions.\199\ The proposed
approach would allow higher-tier entities to rely upon a notice for
exemption filed by the owned entity, and such reliance would only go to
the accounts or positions specifically identified in the notice.\200\
The proposed approach would also mean that a higher-tier entity that
wishes to rely upon an owned entity's exemption notice would be
required to comply with conditions of the applicable aggregation
exemption other than the notice filing requirements.\201\ The
Commission did not anticipate that the reduction in filing would impact
the Commission's ability to effectively surveil the proper application
of exemptions from aggregation. The first filing of an owned entity
exemption notice should provide the Commission with sufficient
information regarding the appropriateness of the exemption, while
repetitive filings of higher-tier entities would not be expected to
provide additional substantive information.\202\
---------------------------------------------------------------------------
\199\ See Proposed Rule, 78 FR at 68975.
\200\ For example, if company A had a 30 percent interest in
company B, and company B filed an exemption notice for the accounts
and positions of company C, then company A could rely upon company
B's exemption notice for the accounts and positions of company C.
Should company A wish to disaggregate the accounts or positions of
company B, company A would have to file a separate notice for an
exemption. See Proposed Rule, 78 FR at 68953.
\201\ Although higher-tier entities would not have to submit a
separate notice to rely upon the notice filed by an owned entity,
the Commission noted that it would be able, upon call, to request
that a higher-tier entity submit information to the Commission, or
allow an on-site visit, demonstrating compliance with the applicable
conditions. See id.
\202\ See id.
---------------------------------------------------------------------------
Regarding aggregation on a basis that is pro rata to the relevant
ownership interest, the Commission preliminarily concluded in the
Proposed Rule that a pro rata approach would be administratively
burdensome for both owners and the Commission.\203\ For example, the
Commission suggested that the level of ownership interest in a
particular owned entity may change over time for a number of reasons,
including stock repurchases, stock rights offerings, or mergers and
acquisitions, any of which may dilute or concentrate an ownership
interest. Thus, it may be burdensome to determine and monitor the
appropriate pro rata allocation on a daily basis. Moreover, the
Commission stated that it has historically interpreted the statute to
require aggregation of all the relevant positions of owned entities,
absent an exemption, which is consistent with the view that a holder of
a significant ownership interest in another entity may have the ability
to influence all the trading decisions of the entity in which such
ownership interest is held. However, the Commission asked commenters to
address whether the Commission should permit a person to aggregate only
a pro rata allocation of the owned entity's positions based on that
person's less than 100 percent ownership, including a system for
aggregation based on ownership tiers.\204\
---------------------------------------------------------------------------
\203\ See Proposed Rule, 78 FR at 68958.
\204\ See Proposed Rule, 78 FR at 68959.
---------------------------------------------------------------------------
[[Page 91473]]
The Commission also invited comment on the interplay between the
Proposed Rule and other Commission rules. In the Proposed Rule, the
Commission asked commenters to address the issues or concerns arising
from the Proposed Rule that would have to be addressed if the
Commission were to adopt its proposal to establish speculative position
limits for other exempt and agricultural commodity futures and option
contracts, and physical commodity swaps that are ``economically
equivalent'' to such contracts.\205\ The Commission also asked about
implications with respect to the interplay between the proposed
disaggregation relief and the Commission's other rules relating to
swaps.
---------------------------------------------------------------------------
\205\ See Proposed Rule, 78 FR at 68963, referring to Position
Limits for Derivatives, 78 FR 75680 (Dec. 12, 2013).
---------------------------------------------------------------------------
2. Commenters' Views
Regarding the effective date for the final rule, several commenters
said that the rule should provide for an initial compliance or
transition period during which the rule would not be enforced and
market participants would be able to adjust their positions to the new
aggregation rules.\206\ The period of time suggested for this
transition ranged from two and one-half months to nine months.\207\
---------------------------------------------------------------------------
\206\ See CL-ISDA Nov 12; CL-PEGCC Nov 12; CL-FIA Feb 6; CL-
Working Group Feb 10; CL-AIMA Feb 10; CL-ICE Nov 13.
\207\ See id.
---------------------------------------------------------------------------
Commenters did not address the terms of proposed rule 150.4(b)(9),
relating to higher-tier entities. One commenter said that an entity
should be able to file for aggregation relief on behalf of any or all
of its affiliates (including joint ventures) as long as the criteria
for relief are satisfied for the entities receiving relief.\208\
---------------------------------------------------------------------------
\208\ See CL-Working Group Nov 13and CL-Working Group Feb 10.
That is, all affiliates, not just higher-tier entities, could rely
on a filing made by one entity in an affiliated group.
---------------------------------------------------------------------------
Regarding aggregation on a basis pro rata to the ownership interest
in the owned entity, one commenter thought that the rule should permit
entities to aggregate on a basis pro rata to the person's ownership or
equity interest, because pro rata aggregation would more accurately
reflect the positions owned by market participants and would not
unnecessarily restrict the positions of market participants, while
reducing the risk of an inadvertent position limits overage.\209\
Another commenter supporting pro rata aggregation suggested that the
Commission obtain the pro rata percentage that should be attributed to
the owner from the owner's filings on Form 40 and the Commission's
special call authority.\210\ To address potential administrative
burdens on the Commission, commenters proposed that entities that apply
pro rata aggregation would have to commit to informing the Commission
promptly upon a change in the relevant ownership or equity interest, or
upon request by the Commission.\211\
---------------------------------------------------------------------------
\209\ See CL-FIA Feb 6. See also CL-COPE Feb 10; CL-SIFMA AMG
Feb 10.
\210\ See CL-MFA Feb 7.
\211\ See CL-DBCS Feb 10 and CL-Working Group Feb 10,
respectively.
---------------------------------------------------------------------------
In response to the Commission's request for information on
implications with respect to the interplay of the aggregation
provisions and other Commission rules, one commenter thought that the
full implications of disaggregation relief ``will not be readily
apparent to physical commodity market participants'' until the
Commission finalizes the scope of contracts to be included in position
limits, especially with regards to trade options, the treatment of
which may have a ``dramatic impact on whether or not affiliated energy
business units . . . require disaggregation relief.'' \212\ Further,
this commenter said, the manner of organizing physical commodity
contracts is likely to be distinct from how financial transactions are
organized and executed, and a policy requiring aggregation of both
would ``create undue hardships'' for energy end-users unless there are
``accessible, practicable means'' of acquiring disaggregation
relief.\213\
---------------------------------------------------------------------------
\212\ See American Gas Association on February 10, 2014 (``CL-
AGA Feb 10'').
\213\ See id.
---------------------------------------------------------------------------
Another commenter, which is a DCM, sought clarification of how the
proposed aggregation requirement would affect the reporting of large
trader positions, asserting that reporting firms currently aggregate
accounts for reporting purposes by ownership and control so that
independently operated subsidiaries of a wholly-owned parent currently
report such positions separately in large trader reports and open
interest.\214\ This commenter believed that if both firms were to
aggregate those positions, each could carry large positions on opposite
sides of the market but would only report a small aggregate position,
which could be highly disruptive to the markets.\215\ The commenter
requested that the Commission make clear that ``the current reporting
regime would be maintained and not affected by whatever form the final
aggregation rule takes.'' \216\
---------------------------------------------------------------------------
\214\ See CL-ICE Feb 10.
\215\ See id. (asserting that lifting one side of a large two-
sided spread would result in a big open interest change).
\216\ See id.
---------------------------------------------------------------------------
This same commenter also requested the Commission to confirm that
``an exchange will continue to be permitted to grant separate
exemptions to commonly owned affiliates when the affiliates are
required to be aggregated,'' and that ``if firms that are aggregated
submit separate Form 204s to the Commission, . . . the quantities
reported roll up to the aggregate level for position limit purposes.''
\217\ The commenter noted that it currently permits ``commonly owned
entities that are under separate decision-making and trading control to
transact EFRPs and block trades with each other'' and asked the
Commission to indicate if these entities would be required to aggregate
for position limit purposes, and whether ``EFRPs and block trades
executed between such firms [are] prohibited trades under the CEA.''
\218\
---------------------------------------------------------------------------
\217\ See id.
\218\ See id.
---------------------------------------------------------------------------
3. Final Rule
The final rule will be effective 60 days after publication in the
Federal Register. The Commission considered comments requesting an
additional compliance or transition period during which the rule would
not be enforced and has determined additional time would not be
necessary or appropriate for this rule. One effect of the final rule is
to provide for certain exemptions from the aggregation requirement.
Considering both the relief available under the exemptions and the
requirements imposed by the final rule, the Commission concluded that a
period of 60 days would be appropriate to prepare for effectiveness of
the final rule.
As for higher-tier entities, the Commission is adopting rule
150.4(b)(8) largely as it was proposed,\219\ but with a modification to
provide that one entity may file a notice for aggregation relief on
behalf of any or all of its affiliates, as long as the criteria for
relief are satisfied. The Commission finds merit in a commenter's
suggestion that reliance by affiliates on a filing made by one entity
in an affiliated group should be permitted for the same reasons that
higher-tier entities would be permitted to rely on filings made by
subsidiaries.
[[Page 91474]]
The Commission clarifies that, in order to meet the requirements of
rule 150.4(c), a filing made on behalf of affiliates must be signed by
a senior officer (or equivalent) of each such affiliate. The Commission
intends that filing on behalf of affiliates will be optional;
affiliates may also file individual notices.
---------------------------------------------------------------------------
\219\ As noted above, because the Commission is not adopting
proposed rule 150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed
rule 150.4 are renumbered in the final rule as paragraphs (b)(3) to
(b)(8), respectively. Thus, final rule 150.4(b)(8) corresponds to
proposed rule 150.4(b)(9).
---------------------------------------------------------------------------
Regarding aggregation on a pro rata basis, the Commission concludes
that although the commenters point out the theoretical merits of a pro
rata procedure, none of them explained how pro rata aggregation would
be workable in practice. The Commission did not propose adopting pro
rata aggregation, because it was concerned about the administrative
burdens for both owners and the Commission.\220\ After considering the
comments received, the Commission has determined not to adopt a pro
rata procedure because it remains concerned about the difficulty of
specifying a broadly applicable procedure for calculating the level of
ownership interests and using those levels to allocate positions to the
owner entity. The Commission also finds merit in the procedure that has
been applied to date (under which owners aggregate all of the relevant
positions of the owned entities for which aggregation applies) and
concludes that the potential benefits of a pro rata procedure do not
support changes in the current practice.
---------------------------------------------------------------------------
\220\ See Proposed Rule, 78 FR at 68958.
---------------------------------------------------------------------------
In response to the comments about the interplay of the aggregation
provisions and other Commission rules, the Commission clarifies that,
generally speaking, the final aggregation rules are intended for
purposes of position limits and would not modify practices with respect
to other rules. Exchanges will continue to be permitted to require
separate reporting by aggregated entities, and to grant separate
exemptions to aggregated entities. Also, exchanges will continue to be
able to enforce separate limits on entities that are aggregated for
federal limits.
E. Exemption for Certain Accounts Held by FCMs in Rule 150.4(b)(3)
1. Proposed Approach
The Commission proposed to move the exemption for certain accounts
held by FCMs in existing regulation 150.4(d) to a new proposed rule
150.4(b)(4),\221\ so that all aggregation exemptions would be located
in paragraph (b) of proposed rule 150.4. The text of proposed rule
150.4(b)(4) was substantially the same as existing regulation 150.4(d),
except that it was rephrased in the form of a positive statement of the
availability of an exemption from the aggregation requirement, as
contrasted to the statement in the existing regulation that the
aggregation requirement applies unless certain conditions are met.\222\
---------------------------------------------------------------------------
\221\ As noted above, because the Commission is not adopting
proposed rule 150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed
rule 150.4 are renumbered in the final rule as paragraphs (b)(3) to
(b)(8), respectively. Thus, final rule 150.4(b)(3) corresponds to
proposed rule 150.4(b)(4).
\222\ See Proposed Rule, 78 FR at 68964.
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2. Commenters' Views and Final Rule
No commenter addressed proposed rule 150.4(b)(4). The Commission is
adopting it as proposed, but renumbered as rule 150.4(b)(3).
F. Exemptions From Aggregation for Underwriting and Broker-Dealer
Activities in Rules 150.4(b)(5) and (b)(6)
1. Proposed Approach
Proposed rule 150.4(b)(6) \223\ stated that a person need not
aggregate the positions or accounts of an owned entity if the ownership
or equity interest is based on the ownership of securities constituting
the whole or a part of an unsold allotment to or subscription by such
person as a participant in the distribution of such securities by the
issuer or by or through an underwriter. This proposal was similar to
regulation 151.7(g) (in the now-vacated part 151 regulations), which
provided for an exemption from aggregation where an ownership interest
is in an unsold allotment of securities.
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\223\ As noted above, because the Commission is not adopting
proposed rule 150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed
rule 150.4 are renumbered in the final rule as paragraphs (b)(3) to
(b)(8), respectively. Thus, final rule 150.4(b)(5) corresponds to
proposed rule 150.4(b)(6).
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Proposed rule 150.4(b)(7) stated that a broker-dealer registered
with the Securities and Exchange Commission,\224\ or similarly
registered with a foreign regulatory authority, need not aggregate the
positions or accounts of an owned entity if the ownership or equity
interest is based on the ownership of securities acquired in the normal
course of business as a dealer, so long as the broker-dealer does not
have actual knowledge of the trading decisions of the owned
entity.\225\
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\224\ See 15 U.S.C. 78o. Final rule 150.4(b)(6) corresponds to
proposed rule 150.4(b)(7).
\225\ As initially proposed, the rule also required that the
broker-dealer not have a greater than a 50 percent ownership or
equity interest in the owned entity. See Proposed Rule, 78 FR at
68977. In the Supplemental Notice, the Commission proposed to remove
this requirement for the reasons supporting removal of the separate
conditions for owners of a greater than a 50 percent ownership or
equity interest in general. See Supplemental Notice, 80 FR at 58371.
---------------------------------------------------------------------------
In the Proposed Rule, the Commission noted that the ownership
interest of a broker-dealer in an entity based on the ownership of
securities acquired as part of reasonable activity in the normal course
of business as a dealer is largely consistent with the ownership of an
unsold allotment of securities covered by the underwriting exemption in
regulation 151.7(g).\226\ In both circumstances, the ownership interest
is likely not held for investment purposes.\227\ Accordingly, the
Commission proposed to include an aggregation exemption in proposed
rule 150.4(b)(7) for such activity.\228\
---------------------------------------------------------------------------
\226\ See Proposed Rule, 78 FR at 68964.
\227\ The Commission specifically noted that this proposed
exemption would not apply to registered broker-dealers that acquire
an ownership interest in securities with the intent to hold for
investment purposes. See id.
\228\ As proposed, the exemption would encompass a broker-
dealer's ownership of securities in anticipation of demand or as
part of routine life cycle events, if the activity was in the normal
course of the person's business as a broker-dealer. See id.
---------------------------------------------------------------------------
2. Commenters' Views
Commenters did not address proposed rule 150.4(b)(6).
One commenter said the rationale for the broker-dealer exemption in
proposed rule 150.4(b)(7) should be expanded and clarified, asserting
that if a broker-dealer acquires a substantial but not controlling
interest in a trading entity, its due diligence would reveal historical
information while the availability of an exemption appears to be
conditioned upon acquiring no further knowledge.\229\ The commenter
asked that the Commission provide further explanation of what
constitutes ``actual knowledge,'' and in particular whether it is
limited to knowledge at the moment of acquisition, or also includes any
knowledge of trading decisions by the newly acquired entity and other
entities in which the broker-dealer has an equity based interest.\230\
---------------------------------------------------------------------------
\229\ See CL-IATP Feb 10.
\230\ See id.
---------------------------------------------------------------------------
3. Final Rule
The Commission is adopting rule 150.4(b)(6) as it was proposed, but
renumbered as rule 150.4(b)(5). For purposes of this rule, the
Commission expects to interpret the term ``unsold allotment'' along the
lines that it is interpreted under the Securities Exchange Act of 1934.
The Commission is adopting rule 150.4(b)(7) as it was proposed in
the Supplemental Notice, but renumbered as rule 150.4(b)(6). In
response to the commenter's question, the Commission clarifies that it
expects traditional
[[Page 91475]]
standards of a broker-dealer's due diligence to apply for this
provision. As stated in the Proposed Rule,\231\ the Commission would
interpret the phrase ``reasonable activity'' to be effectively
synonymous with the phrase ``normal course of business'' in this
context.
---------------------------------------------------------------------------
\231\ See Proposed Rule, 78 FR at 68964.
---------------------------------------------------------------------------
G. Exemption From Aggregation Where Information Sharing Would Violate
Law in Rule 150.4(b)(7)
1. Proposed Approach
a. In General
The Commission proposed rule 150.4(b)(8) \232\ to provide
exemptions from aggregation under certain conditions where the sharing
of information would cause a violation of state or federal law or the
law of a foreign jurisdiction, or regulations adopted thereunder. These
exemptions have not previously been available under the Commission's
existing rules. The Commission intended that the proposed rule make
clear that the exemption to the aggregation requirement would include
circumstances in which the sharing of information would create a
``reasonable risk'' of a violation--in addition to an actual
violation--of law or regulations.\233\ The Commission noted that
whether a reasonable risk exists would depend on the interconnection of
the applicable statute and regulatory guidance, as well as the
particular facts and circumstances as applied to the statute and
guidance.\234\ Also, it would not be necessary to show that a
comparable federal law exists in order for a state law to be the basis
for an exemption.\235\
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\232\ As noted above, because the Commission is not adopting
proposed rule 150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed
rule 150.4 are renumbered in the final rule as paragraphs (b)(3) to
(b)(8), respectively. Thus, final rule 150.4(b)(7) corresponds to
proposed rule 150.4(b)(8).
\233\ See Proposed Rule, 78 FR at 68950.
\234\ See Proposed Rule, 78 FR at 68948.
\235\ See Proposed Rule, 78 FR at 68950.
---------------------------------------------------------------------------
The Commission stated that the proposed rule was intended to
respond to concerns that market participants could face increased
liability under state, federal and foreign law. For example, the
proposed rule would reduce risk of liability under antitrust or other
laws by allowing market participants to avail themselves of the
violation of law exemption in those circumstances where the sharing of
information created a reasonable risk of violating the above mentioned
bodies of law.\236\
---------------------------------------------------------------------------
\236\ See Proposed Rule, 78 FR at 68949.
---------------------------------------------------------------------------
b. Laws of Non-U.S. Jurisdictions and International Law
The proposed rule would not allow local law or principles of
international law (as opposed to the specific laws of foreign
jurisdictions) to be a basis for the exemption. With regard to local
law, the Commission stated that an exemption for local law would be
difficult to implement due to the number of laws and regulations that
would need to be considered and the number of localities that might
issue them. While the number of such laws and regulations may be large,
the Commission was not persuaded that there would be a significant
number of instances where these laws and regulations would prohibit
information sharing that would otherwise be permitted under federal and
state law.\237\
---------------------------------------------------------------------------
\237\ See Proposed Rule, 78 FR at 68950. In addition, in those
instances where local law would impose an information sharing
restriction that is not present under state or federal law, the
Commission believed that it could be inappropriate to favor the
local law serving a local purpose to the detriment of the position
limits under federal law that serve a national purpose. See id.
---------------------------------------------------------------------------
Furthermore, the Commission was concerned that reviewing notices of
exemptions based on local laws would create a substantial
administrative burden for the Commission. That is, balancing the
possibility that including local law as a basis for the exemption would
be helpful to market participants against the possibility that doing so
would lead to confusion or inappropriate results, the Commission
concluded that the better course is not to provide for local law to be
a basis for the exemption.\238\
---------------------------------------------------------------------------
\238\ See id.
---------------------------------------------------------------------------
With regard to international law, the Commission believed that the
sources of international law, such as treaties and international court
decisions, would be unlikely to include information sharing
prohibitions that would not otherwise apply under foreign or federal
law, and that therefore including international law as a basis for the
exemption is unnecessary.\239\
---------------------------------------------------------------------------
\239\ See id.
---------------------------------------------------------------------------
c. Memorandum of Law
Under proposed rule 150.4(b)(8), market participants would be
required to provide a written memorandum of law (which may be prepared
by an employee of the person or its affiliates) which explains the
legal basis for determining that information sharing creates a
reasonable risk that either person could violate federal, state or
foreign law. The Commission explained that requiring a formal opinion
of counsel may be expensive and may not provide benefits, in terms of
the purposes of this requirement, as compared to a memorandum of law.
The memorandum of law would allow Commission staff to review the legal
basis for the asserted statutory or regulatory impediment to the
sharing of information, and would be particularly helpful where the
asserted impediment arises from laws or regulations that the Commission
does not directly administer. Further, Commission staff would have the
ability to consult with other federal regulators as to the accuracy of
the memorandum, and to coordinate the development of rules surrounding
information sharing and aggregation across accounts. The Commission
stated its expectation that a written memorandum of law would, at a
minimum, contain information sufficient to serve these purposes.\240\
---------------------------------------------------------------------------
\240\ See id.
---------------------------------------------------------------------------
The Commission also noted that if there is a reasonable risk that
persons in general could violate a provision of federal, state or
foreign law of general applicability by sharing information associated
with position aggregation, then the written memorandum of law may be
prepared in a general manner (i.e., not specifically for the person
providing the memorandum) and may be provided by more than one person
in satisfaction of the requirement. For example, the Commission noted
that trade associations commission law firms to provide memoranda on
various legal issues of concern to their members. Under the Proposed
Rule, such a memorandum (i.e., one that sets out in detail the basis
for concluding that a certain provision of federal, state or foreign
law of general applicability creates a reasonable risk of violation
arising from information sharing) could be provided by various persons
to satisfy the requirement, so long as it is clear from the memorandum
how the risk applies to the person providing the memorandum. \241\
---------------------------------------------------------------------------
\241\ See id.
---------------------------------------------------------------------------
On the other hand, the Commission did not believe that simply
providing a copy of the law or other legal authority would be
sufficient, because this would not set out the basis for a conclusion
that the law creates a reasonable risk of violation if the particular
person providing the document shared information associated with
position aggregation. If the effect of the law is clear, the written
memorandum of law need not be complex, so long as it explains in detail
the effect of the law on the person's information sharing. Also, the
question of what legal
[[Page 91476]]
authorities, in particular, constitute ``state law'' or ``foreign
law,'' where it is relevant, is a question to be addressed in the
written memorandum of law. In general, any state-level or foreign legal
authority that is binding on the person could be a basis for the
exemption.\242\
---------------------------------------------------------------------------
\242\ See id.
---------------------------------------------------------------------------
Proposed rule 150.4(b)(8) also included a parenthetical clause to
clarify that the types of information that may be relevant in this
regard may include, only by way of example, information reflecting the
transactions and positions of a such person and the owned entity. The
Commission believed it helpful to clarify in the rule text what types
of information may potentially be involved. The mention of transaction
and position information as examples of this information was not
intended to limit the types of information that may be relevant.\243\
---------------------------------------------------------------------------
\243\ See id.
---------------------------------------------------------------------------
2. Commenters' Views
One commenter supported the proposal and said the Commission should
include in the final regulatory text or preamble ``all elements'' of
the discussion in the Proposed Rule as to what constitutes a state law,
who can prepare the memorandum of law, and what must be included in
such memorandum, in order to provide clarity and ensure the process for
seeking relief has its intended effects.\244\ Another commenter called
for the Commission to expand on this provision by granting foreign law-
based exemptions on cross-border compliance, and developing memoranda
of understanding with foreign jurisdiction authorities concerning the
criteria for substituted compliance for aggregation exemptions.\245\
---------------------------------------------------------------------------
\244\ See CL-AGA Feb 10.
\245\ See CL-IATP Feb 10.
---------------------------------------------------------------------------
Other commenters said the Commission should clarify whether the
violation of law exemption would be available for other regulations
promulgated by the Commission, or for supranational laws, including
those promulgated by the European Union.\246\ A commenter asked the
Commission to clarify whether the memorandum may be prepared by an
employee of the firm, or of an affiliate of the firm, that is seeking
the exemption.\247\
---------------------------------------------------------------------------
\246\ See CL-Working Group Feb 10 and Alternative Investment
Management Association on February 10, 2014 (``CL-AIMA Feb 10''),
respectively.
\247\ See (CL-AIMA Feb 10).
---------------------------------------------------------------------------
Another commenter suggested that the rule permit filing of a
summary explanation of legal restrictions in lieu of a full legal
memorandum (provided the full memorandum is available for inspection by
the Commission upon request), to protect privileged attorney-client
communications and confidential work-product.\248\ On the other hand, a
commenter asserted that while a memorandum of law may entail lower
costs it would not provide sufficient accountability, in contrast to an
opinion of counsel that the commenter believes would be a reliable,
thorough, and formal document that provides a distinct level of
accountability to the firm making the attestation.\249\
---------------------------------------------------------------------------
\248\ See CL-FIA Feb 6.
\249\ See CL-Better Markets Feb 10 (also arguing that the CEA
requires an entity to obtain a legal opinion to avail itself of an
aggregation exemption, and it is not within the discretion of the
Commission to waive this requirement).
---------------------------------------------------------------------------
3. Final Rule
The Commission is adopting rule 150.4(b)(8) as proposed, but
renumbered as rule 150.4(b)(7). The Commission also adopts the
statements from the Proposed Rule noted above, including the statements
as to what constitutes a state law, who can prepare the memorandum of
law, and what must be included in such memorandum.\250\
---------------------------------------------------------------------------
\250\ See Proposed Rule, 78 FR at 68950.
---------------------------------------------------------------------------
In response to comments, the Commission clarifies that
supranational laws (such as EU laws) constitute laws of a foreign
jurisdiction which may be a basis for the exemption, if they meet the
standard of being the basis for a reasonable risk of violation arising
from information sharing. Similarly, the Commission's own regulations
may be a basis for the exemption if they meet that standard.
Also, the Commission clarifies that the memorandum of law
supporting an exemption may be prepared by an employee of the firm, or
of an affiliate of the firm, that is seeking the exemption. However,
the Commission does not agree with the commenters who suggested that a
more summary document may support an exemption, or that a formal
opinion of counsel should be required. Instead, the Commission
continues to believe that, as stated in the Proposed Rule,\251\
requiring a formal opinion of counsel would be expensive and may not
provide benefits, in terms of the purposes of this requirement, as
compared to a memorandum of law. The Commission expects that a
memorandum of law submitted in support of an exemption will contain
information sufficient to allow Commission staff to review the legal
basis for the asserted statutory or regulatory impediment to the
sharing of information (particularly where the asserted impediment
arises from laws or regulations that the Commission does not directly
administer), to consult with other federal regulators as to the
accuracy of the memorandum, and to coordinate the development of rules
surrounding information sharing and aggregation across accounts.
---------------------------------------------------------------------------
\251\ See id.
---------------------------------------------------------------------------
H. Aggregation Requirement for Substantially Identical Trading in Rule
150.4(a)(2)
1. Proposed Approach
The Commission first adopted an aggregation requirement for
substantially identical trading in the part 151 rules in order to
prevent circumvention of the aggregation requirements.\252\ In adopting
this proposal, the Commission explained that ``In [the] absence of such
aggregation requirement, a trader can, for example, acquire a large
long-only position in a given commodity through positions in multiple
pools, without exceeding the applicable position limits.'' \253\ The
Commission further explained that under this provision, no ownership
threshold would apply and positions of any size in accounts or pools
would require aggregation.\254\
---------------------------------------------------------------------------
\252\ See Position Limits for Futures and Swaps, 76 FR 71626,
71654 (Nov. 18, 2011). The provision was adopted as rule 151.7(d)
(since vacated).
\253\ Id.
\254\ See id.
---------------------------------------------------------------------------
The Proposed Rule, adopted after the part 151 rules were vacated,
included a similar provision in proposed rule 150.4(a)(2), noting that
the proposed rule was intended to be consistent with the approach taken
in vacated rule 151.7(d).\255\
---------------------------------------------------------------------------
\255\ See Proposed Rule, 78 FR at 68951 n 39.
---------------------------------------------------------------------------
2. Commenters' Views
A commenter representing managers of registered investment
companies said aggregation should not be required where a common
investment adviser controls the activities of various registered
investment companies, so long as the investment companies have
different investment strategies, because restructuring of the advisory
business to obtain an exemption from aggregation would impose costs on
the shareholders in the investment companies.\256\
---------------------------------------------------------------------------
\256\ See Investment Company Institute on February 10, 2014
(``CL-ICI Feb 10'') (asserting that investment strategies that do
not necessarily dictate the same specific trades should not be
considered ``substantially identical,'' noting that registered
investment companies may be managed by unaffiliated advisors that
follow similar strategies disclosed in their prospectuses).
---------------------------------------------------------------------------
Another commenter representing investment managers asked the
Commission to provide further guidance on the situations that will be
covered by
[[Page 91477]]
the ``substantially identical trading strategies'' provision, including
whether the Commission may apply the provision to situations other than
passively managed index funds.\257\ This commenter believed that the
aggregation requirement should not apply to accounts placed in
``separate performance composites,'' and suggested that the Commission
consider using in this rule the term ``trading program'' as defined in
rule 4.10(g), rather than the term ``trading strategies,'' which is not
defined.\258\ A third commenter representing investment managers
suggested that the Commission remove from the rule any requirement that
a person holding or controlling the trading of positions in accounts or
pools with substantially identical trading strategies aggregate those
positions.\259\
---------------------------------------------------------------------------
\257\ See CL-AIMA Feb 10. Passively managed index funds were
cited as an example of pools with identical trading strategies in
the adoption of rule 151.7(d). See Position Limits for Futures and
Swaps, 76 FR at 71654.
A commenter representing managers of pension plans asked for
guidance on how to determine if two investment vehicles in which an
investor holds an interest are pursuing ``substantially identical
trading strategies.'' See American Benefits Council, Inc. on
February 10, 2014 (``CL-ABC Feb 10'').
\258\ See CL-AIMA Feb 10.
\259\ See CL-SIFMA AMG Feb 10.
---------------------------------------------------------------------------
Two commenters asserted that the Commission did not provide a
statutory or policy rationale for, or consider the costs and benefits
of, this requirement, or provide guidance regarding the meaning of
``substantially identical trading strategies.'' \260\ Both of these
commenters asserted that the proposed rule would result in an absurd
consequence requiring a person to aggregate all of the positions of two
single-commodity index funds using the same index in which the person
invested, or in which a fund-of-funds manager invested for that
person.\261\
---------------------------------------------------------------------------
\260\ See CL-SIFMA AMG Feb 10 and CL-CME Feb 10. As an
alternative, one of these commenters suggested that the requirement
be limited to persons that directly control the trading of positions
in substantially identical accounts or pools. See CL-SIFMA AMG Feb
10.
\261\ See CL-SIFMA AMG Feb 10 and CL-CME Feb 10. One commenter
provided an example of its reading of the requirement, asserting
that ``a $10,000 investor in two $1 billion commodity index mutual
funds using the same index may have to aggregate the positions in
those two $1 billion mutual funds'' because the funds follow
substantially identical trading strategies. See CL-SIFMA AMG Feb 10.
This commenter posited that the investor would have to implement a
compliance program to prevent inadvertent violations of the position
limits rules, which (in addition to imposing significant legal and
operational obstacles) would impose costs many times the investor's
$10,000 investment. See id.
---------------------------------------------------------------------------
On the other hand, a commenter argued that the Commission's
position limit aggregation regime should limit financial speculation by
any group or class of traders in a given contract that becomes large
enough to threaten the contract's ability to serve the needs of
hedgers.\262\ This commenter asserted that commodity index traders,
which the commenter believes trade en masse with respect to an explicit
programmed common strategy, are clearly covered by the statutory
provision on ``two or more persons acting pursuant to an expressed or
implied agreement or understanding'' and these traders must be
aggregated for position limit purposes.\263\ Another commenter endorsed
the view that commodity index traders' positions should be aggregated
because they ``operate outside of the normal operation of the commodity
markets [and] sway market prices due to sheer volume and for exogenous,
non-market reasons,'' so that aggregating their positions would
significantly reduce market speculation and facilitate predictable
commodities market operations.\264\
---------------------------------------------------------------------------
\262\ See CL-Better Markets Feb 10 and Better Markets, Inc. on
March 30, 2015 (``CL-Better Markets Mar 30'').
\263\ See CL-Better Markets Mar 30 (arguing that Congress did
not permit the discretion of the Commission to apply position limits
to allow for an ``abdication of responsibility'' to act with respect
to commodity index traders).
\264\ See CL-Occupy the SEC Aug 7.
---------------------------------------------------------------------------
3. Final Rule
The Commission is adopting rule 150.4(a)(2) substantially as it was
proposed, but with clarifying changes discussed below. The Commission
continues to believe that this provision is necessary to prevent
circumvention of the aggregation requirements. In this regard, the
Commission notes, for example, that the exemption in rule 150.4(b)(1)
will generally permit limited partners, limited members, shareholders
and other similar types of pool participants not to aggregate the
accounts or positions of the pool with any other accounts or positions
such person is required to aggregate, unless certain circumstances
specified in rule 150.4(b)(1) are present.\265\ As a result of this
exemption, a person could hold significant positions in multiple pools
without any aggregation requirement, which the Commission believes to
be acceptable so long as the pools do not have substantially identical
trading strategies. However, in the absence of rule 150.4(a)(2) the
exemption would also permit a trader to separate a large position in a
given commodity derivative into positions held in pools that have
substantially identical trading strategies (i.e., the example cited in
the adoption of vacated regulation 151.7(d)). To ensure that this
situation is covered by the aggregation requirement, rule 150.4(a)(2)
requires that trader to aggregate its positions in all pools or
accounts that have substantially identical trading strategies.
---------------------------------------------------------------------------
\265\ See generally the discussion of rule 150.4(b)(1) in part
II.I, below.
---------------------------------------------------------------------------
Also, even apart from the exemption in rule 150.4(b)(1), a person
would (in the absence of rule 150.4(a)(2)) generally not be required to
aggregate positions in accounts or pools if those positions are below
the 10 percent threshold in rule 150.4(a)(1) and no control is present.
For this reason, and as was the case in vacated regulation 151.7(d),
there is no ownership threshold in rule 150.4(a)(2), so that if the
accounts or pools have substantially identical trading strategies, a
person must aggregate its positions in the accounts or pools regardless
of ownership level. Also, as was proposed, aggregation under rule
150.4(a)(2) is not subject to the exemptions in rule 150.4(b).\266\
And, as is stated in the rule, aggregation under rule 150.4(a)(2) is
required if a person either holds positions in more than one account or
pool with substantially identical trading strategies, or controls the
trading of such positions without directly holding them.
---------------------------------------------------------------------------
\266\ See Proposed Rule, 78 FR at 68959 n 109.
---------------------------------------------------------------------------
In response to the commenters, the Commission disagrees that this
provision could lead to absurd results. In the example described by one
commenter, where a person has holdings of $10,000 each in two commodity
index funds with substantially identical strategies,\267\ the terms of
the rule require the owner to aggregate the positions that it (i.e.,
the owner) holds in the two commodity index mutual funds, not the
positions of the funds themselves. That is, the two holdings would be
aggregated into one $20,000 holding.\268\ The owner is not required to
aggregate all the positions held by the two funds. Effectively, it is
the person's pro rata interest (held or controlled) in each account or
pool with substantially identical trading strategies that must be
included in the aggregation.
---------------------------------------------------------------------------
\267\ See footnote 256.
\268\ The commenter described the holdings in dollar amounts.
See CL-SIFMA AMG Feb 10. The Commission notes however that the
position limits generally are stated in terms of a number of
contracts, not a dollar amount. To apply rule 150.4(a)(2), a person
holding or controlling the trading of positions in more than one
account or pool with substantially identical trading strategies must
determine the person's pro rata interest in the number of contracts
such accounts or pools are holding.
---------------------------------------------------------------------------
The Commission also believes that proposed rule 150.4(a)(2) was
slightly unclear when it stated that the person ``must aggregate such
positions''
[[Page 91478]]
without stating precisely with what such positions must be aggregated.
To clarify how aggregation under rule 150.4(a)(2) is to be effected,
the Commission has modified the last clause of the rule so that it
reads ``. . . must aggregate each such position (determined pro rata)
with all other positions held and trading done by such person and the
positions in accounts which the person must aggregate pursuant to
paragraph (a)(1) of this section.'' That is, rules 150.4(a)(1) and
(a)(2) are to be applied cumulatively, so that a person must aggregate
all positions held and trading done by such person with all positions
that must be aggregated pursuant to rule 150.4(a)(1) and all positions
that must be aggregated pursuant to rule 150.4(a)(2).
I. Exemption for Ownership by Limited Partners, Shareholders or Other
Pool Participants in Rule 150.4(b)(1)
1. Proposed Approach
Proposed rule 150.4(b)(1) was substantially similar to existing
regulation 150.4(c). The Commission proposed rule 150.4(b)(1) as part
of an organizational revision intended to make rule 150.4 easy to
understand and apply. In the Proposed Rule, the Commission explained
that stating this provision as the first exemption will clarify that
this exemption may be applied by any person that is a limited partner,
limited member, shareholder or other similar type of pool participant
holding positions in which the person, by power of attorney or
otherwise, directly or indirectly, has a 10 percent or greater
ownership or equity interest in a pooled account or positions.\269\
That is, if the requirements of this exemption are satisfied with
respect to a person, then the person need not determine if the
requirements of the exemption in paragraph (b)(2) are satisfied. The
text of paragraph (b)(2), in turn, states that it applies to persons
with an ownership or equity interest in an owned entity, other than an
interest in a pooled account which is subject to paragraph (b)(1).
---------------------------------------------------------------------------
\269\ See Proposed Rule, 78 FR at 68963.
---------------------------------------------------------------------------
Proposed rule 150.4(b)(1) stated that for any person that is a
limited partner, limited member, shareholder or other similar type of
pool participant holding positions in which the person, by power of
attorney or otherwise, directly or indirectly, has a 10 percent or
greater ownership or equity interest in a pooled account or positions,
aggregation of the accounts or positions of the pool is not required,
except as provided in paragraphs (b)(1)(i), (b)(1)(ii) or (b)(1)(iii).
Although existing regulation 150.4(c) does not contain any explicit
statement of this rule, the lack of an aggregation requirement in these
circumstances is implicit in the existing regulation's statement that
aggregation is required only in certain specified circumstances. Thus,
proposed rule 150.4(b)(1)(i) stated explicitly a principle that is
implicit in the existing regulation.\270\ Paragraphs (b)(1)(i),
(b)(1)(ii) and (b)(1)(iii) of proposed rule 150.4 set out the
circumstances in which aggregation requirements apply; these
circumstances are substantially similar to those covered by paragraphs
(c)(1), (c)(2) and (c)(3) of existing regulation 150.4, but the text of
the rule was modified to simplify the wording of the provisions.
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\270\ The Commission stated that this modification was not
intended to effect a substantive change. Rather, it is intended to
state explicitly a rule that the Commission has applied since at
least 1979. See footnote 99, above.
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The Proposed Rule also briefly addressed the treatment of 4.13
pools in a manner that is equivalent to the treatment of operating
companies.\271\ The Commission noted that the proposed amendment to the
later-vacated part 151 regulations had proposed to expand the
definition of independent account controller to include the managing
member of a limited liability company, and to amend the definitions of
eligible entity and independent account controller to specifically
provide for 4.13 pools established as limited liability companies.\272\
In the Proposed Rule, the Commission stated that this is a matter that
could be the subject of relief granted under CEA section 4a(a)(7) and
that persons wishing to seek such relief should apply to the Commission
stating the particular facts and circumstances that justify the
relief.\273\
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\271\ A ``4.13 pool'' is a commodity pool for which the relevant
CPO has claimed an exemption from registration under regulation
4.13. A commenter on the proposed amendments to part 151 had
addressed 4.13 pools more broadly, and said that the Commission's
rules should treat ownership of 4.13 pools in the same way that the
rules treat ownership of operating companies. In particular, this
commenter said that the Commission should eliminate the requirement
that the positions of a 4.13 pool be aggregated with the positions
of any person that owns more than 25 percent of the 4.13 pool. See
Proposed Rule, 78 FR at 68965.
\272\ See id.
\273\ See id.
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2. Commenters' Views
Commenters did not address the proposed reorganization and
rephrasing of proposed rule 150.4(b)(1). However, some commenters
addressed the substance of the rule, which is the same as existing
regulation 150.4(c).
One commenter asked that the Commission make the following
technical changes to the proposed rule: Expand the exemption in the
rule to include the beneficiary of a trust, clarify that a ``limited
member'' of a limited liability company is any person who is not a
managing member, construe the term CPO to include a person discharging
the function of CPO (to account for situations where the function has
been delegated from one person to another), and confirm that a filing
generally is not required for relief under 150.4(b)(1), with the
exception of relief under rule 150.4(b)(1)(ii).\274\
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\274\ See CL-AIMA Feb 10.
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Several commenters said the Commission should provide an ownership
exemption for interests held by a limited partner in a commodity pool--
i.e., the rule should permit disaggregation on a showing that the
limited partner does not control trading by the commodity pool (for
which the CPO is exempt from registration).\275\ That is, these
commenters believed that the rule requiring aggregation when a limited
partner owns more than 25 percent of a pool (i.e., existing regulation
150.4(c)(3)) should be modified to allow for disaggregation following a
filing attesting to no control by the limited partner.\276\
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\275\ See CL-OTPP Nov 13; CL-PEGCC Nov 12; CL-DBCS Feb 10; CL-
SIFMA AMG Nov 13; CL-MFA Nov 12; CL-MFA Feb 7.
\276\ See id.
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One of these commenters asserted that investors holding greater
than 25 percent ownership interests in pools often do not have control
of the pools' trading (or ability to monitor the pools' positions) and
thus would qualify for disaggregation under the criteria in proposed
rule 150.4(b)(2)(i).\277\ This commenter cited a no-action letter
issued by the staff of the Commission, which the commenter interpreted
to acknowledge that, in the case of a manager of a fund of funds, there
may be a ``lack of visibility . . . regarding the positions of an
Investee Fund,'' that ``such opaqueness'' may not allow the manager to
have adequate data to determine a position, and when
[[Page 91479]]
investment managers of underlying investee funds provide full position
data, such data is rarely made available on a real-time basis.\278\
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\277\ The commenter believes that while the requirement to
aggregate for pools run by exempt CPOs was adopted in 1999 when very
few CPOs were exempt and there was a concern about small pools, this
requirement is no longer appropriate given the expanded number of
exempt CPOs. See CL-MFA Nov 12 and CL-MFA Feb 7.
Another commenter said that passive investors in 4.13 pools
should not be required to aggregate, and they should not have to
make a filing with the Commission as a condition of such
disaggregation, so that they would be treated the same as
unaffiliated passive investors in non-exempt pools under rule
150.4(b)(1). See CL-SIFMA AMG Nov 13 and CL-SIFMA AMG Feb 10.
\278\ See CL-MFA Feb 7, citing CFTC No-Action Letter No. 12-38
(Nov 29, 2012).
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A commenter representing managers of pension fund investments
believed that it is unclear whether proposed rule 150.4(b)(1)(iii) was
meant to require a passive investor that holds a 25 percent or greater
ownership interest in a 4.13 pool to aggregate the pool's
positions.\279\ The commenter felt that the Commission had not provided
any rationale for, or evaluated the costs of, such a requirement, with
which compliance would be impractical, if not impossible.\280\
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\279\ See CL-ABC Feb 10.
\280\ The commenter asserted that managers of 4.13 pools will be
reluctant to provide such information because (i) the selective
disclosure of fund position information to only certain investors
could raise legal liability issues under the federal securities
laws; (ii) certain employee benefit plans could utilize position
information provided by the fund to deduce proprietary and
confidential investment strategies of the advisor/manager to such
funds; and (iii) the operational burdens associated with the fund
providing such information to certain employee benefit plans, to the
extent not legally prohibited, may be deemed too costly. See id.
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3. Final Rule
The Commission is adopting rule 150.4(b)(1) as it was proposed. In
response to a commenter, the Commission notes that rule 150.4(c), as
was the case for the proposed rule, requires a filing to claim an
aggregation exemption under paragraph (b)(1)(ii), but not the other
subparagraphs of paragraph (b)(1).
The commenters' other discussion of this rule goes beyond the scope
of the proposal, because no substantive changes to the rule were
proposed. Rather, this rule was included in the proposal as part of the
reorganization of rule 150.4.
The question in the proposal about treating 4.13 pools the same as
operating companies was accompanied by a statement that ``this is a
matter that could be the subject of relief granted under CEA section
4a(a)(7).'' That is, this question requested comment on the
circumstances that could justify relief that may be granted in the
future under CEA section 4a(a)(7).
J. Exemption for Accounts Carried by an Independent Account Controller
in Rule 150.4(b)(4) and Conforming Change in Rule 150.1
1. Proposed Approach
The Commission proposed rule 150.4(b)(5) to take the place of the
existing IAC provision in existing regulation 150.3(a)(4) (which was
proposed to be deleted).\281\ The Commission also proposed conforming
changes to the definition of the term ``eligible entity'' in proposed
rule 150.1(d) and (e). Existing regulation 150.3(a)(4) provides an
eligible entity with an exemption from aggregation of the eligible
entity's customer accounts that are managed and controlled by
IACs.\282\ The Commission stated that the reason for this
organizational change was to place the IAC exemption in the regulatory
section providing for aggregation of positions.\283\ Proposed rule
150.4(b)(5) was substantially similar to existing regulation
150.3(a)(4) except that the Commission proposed to modify it (and the
related definition in proposed rule 150.1(d)) so that it could be
applied with respect to any person with a role equivalent to a general
partner in a limited liability partnership or a managing member of a
limited liability company.\284\
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\281\ See Proposed Rule, 78 FR at 68965. As noted above, because
the Commission is not adopting proposed rule 150.4(b)(3), paragraphs
(b)(4) to (b)(9) of proposed rule 150.4 are renumbered in the final
rule as paragraphs (b)(3) to (b)(8), respectively. Thus, final rule
150.4(b)(4) corresponds to proposed rule 150.4(b)(5).
\282\ The definition of eligible entity in existing regulation
150.1(d) includes the limited partner or shareholder in a commodity
pool the operator of which is exempt from registration under Sec.
4.13. However, with regard to a CPO that is exempt under regulation
4.13, the definition of an independent account controller in
existing regulation 150.1(e)(5) only extends to a general partner of
a commodity pool the operator of which is exempt from registration
under Sec. 4.13. At the time the Commission expanded the IAC
exemption to include regulation 4.13 commodity pools, market
participants generally structured such pools as limited
partnerships. See Proposed Rule, 78 FR at 68964.
\283\ See Proposed Rule, 78 FR at 68965.
\284\ A commenter on the proposed amendments to part 151 had
suggested that this rule be expanded to apply to any person with a
role equivalent to a general partner in a limited partnership or
managing member of a limited liability company, to accommodate
various structures that are used for commodity pools in
jurisdictions outside the U.S. See id.
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2. Commenters Views'
Commenters did not address the proposed reorganization and
rephrasing of proposed rule 150.4(b)(5). However, some commenters
addressed the substance of the rule, which is the same as existing
regulation 150.3(a)(4).
Several commenters asked that the Commission expand the definition
of the term ``eligible entity'' to include a variety of different
entities, such as:
The operators of certain similar investment vehicles, such
as governmental or pension-sponsored investment management vehicles;
\285\
---------------------------------------------------------------------------
\285\ See CL-OTPP Nov 13.
---------------------------------------------------------------------------
non-corporate entities that sponsor plans, such as
governmental plans or church plans; \286\
---------------------------------------------------------------------------
\286\ This commenter said that the phrase ``commodity pool the
operator of which is excluded from registration'' should be deleted
from proposed rule 150.1(e)(5)(ii) and replaced by the following
text from proposed rule 150.1(d): ``trading vehicle which is
excluded, or which itself has qualified for exclusion from the
definition of the term `pool' or `commodity pool operator,'
respectively.'' See CL-AIMA Feb 10.
---------------------------------------------------------------------------
foreign entities that perform a similar role or function
subject to foreign regulation; \287\
---------------------------------------------------------------------------
\287\ This commenter said that disaggregation relief should be
available to an affiliate which operates as a Registered Fund
Management Company in Singapore managing non-U.S. client accounts
holding U.S. futures, options and swaps and, thus, is not subject to
U.S. registration requirements. See Olam International Limited on
February 10, 2014.
---------------------------------------------------------------------------
exempt CTAs, and all registered, exempt or excluded CPOs;
\288\
---------------------------------------------------------------------------
\288\ See CL-AIMA Feb 10 and CL-ICI Feb 10.
---------------------------------------------------------------------------
a CPO exempt from registration; all operators excluded
from the definition of CPO; a limited partner, a limited member,
shareholder or other pool participant of a pool whose operator is
either registered or exempt from registration; a CTA that is exempt
from registration; a person excluded from the definition of CTA; and a
general partner, managing member or manager of a commodity pool whose
operator is either registered, exempt from registration, or excluded
from the definition of CPO.\289\
---------------------------------------------------------------------------
\289\ See CL-MFA Nov 12.
---------------------------------------------------------------------------
Two commenters suggested that the definition of the term ``eligible
affiliate'' should include sister companies, consistent with the
definition of the term ``eligible affiliate counterparty'' under
existing regulation 50.52, because the proposed definition does not
appear to cover sister affiliates in a corporate group where neither
affiliate holds an ownership interest in the other.\290\ Another two
commenters suggested the deletion of the proposed filing requirement
for the IAC exemption in proposed rule 150.4(c)(1), because, they
argued, no filing has been necessary to rely on the IAC exemption, and
the Proposed Rule provides no justification for deviating from this
established practice.\291\
---------------------------------------------------------------------------
\290\ See CL-FIA Feb 6 and Commercial Energy Working Group on
March 30, 2015.
\291\ See CL-ABC Feb 10 and CL-SIFMA AMG Nov 13.
---------------------------------------------------------------------------
Last, a commenter argued that the Commission provided no rationale
for the proposed amendments to the IAC exemption, and asserted that
since at least 1999 the IAC exemption is not limited to ``customer''
positions traded by IACs but rather is available to limited
[[Page 91480]]
partners who may be affiliates or principals of an owned-CPO.\292\
---------------------------------------------------------------------------
\292\ See CL-CME Feb 10.
---------------------------------------------------------------------------
3. Final Rule
The Commission is adopting rules 150.1(d) and (e) and rule
150.4(b)(5) as they were proposed, but proposed rule 150.4(b)(5) is
renumbered as 150.4(b)(4).\293\ Regarding the comments that the term
``eligible entity'' should include entities such as the operators of
governmental or church plans, the Commission notes that rule 150.1(d)
defines the term to include the operator of a trading vehicle which is
excluded, or which itself has qualified for exclusion from the
definition of the term ``pool'' or ``commodity pool operator,''
respectively, under Sec. 4.5, and existing regulation 4.5 has
exclusions from the definition of ``pool'' for governmental plans and
church plans.\294\ Thus, operators of such trading vehicles would be
eligible entities.
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\293\ Rule 150.1(e)(2), as adopted, reflects two grammatical
corrections: The phrase ``fiduciary responsibilities to the managed
positions and accounts'' is corrected to read ``fiduciary
responsibilities for managed positions and accounts'' and the word
``is'' is added before the second usage of the word ``consistent.''
Rule 150.4(b)(4)(i)(A), as adopted, reflects the deletion of the
phrase ``document routing and other procedures or'' for consistency
with rule 150.4(b)(2)(i)(C). See footnote 164, above.
\294\ See existing regulations 4.5(a)(4)(iii) and 4.5(a)(4)(v),
respectively.
---------------------------------------------------------------------------
The commenters' discussion of proposed rule 150.4(b)(5) (final rule
(150.4(b)(4)) goes beyond the scope of the proposal. As proposed, this
paragraph replaced the existing IAC rule in existing regulation
150.3(a)(4), except that it was expanded to include any person with a
role equivalent to a general partner in an limited partnership or
managing member of a limited liability company. The Commission did not
propose any other changes to the definitions of eligible entity or IAC.
Other changes to this regulation would be a matter for future
consideration.\295\
---------------------------------------------------------------------------
\295\ The Commission notes that commenters have suggested that
registered CPOs and exempt CTAs should be included in the definition
of the term ``eligible entity'' and the definition should clarify
the treatment of certain persons who are exempt from registration as
CPOs. The Commission is considering these comments and may take them
up in a later proceeding.
---------------------------------------------------------------------------
The Commission believes that the existing IAC exemption, the
substance of which is included in the final rule, is consistent with
the CEA and prior Commission precedents. In this regard, it is
important to distinguish between the exemption in existing regulation
150.4(c)(2) (e.g., for a limited partner of a CPO who is also a
principal or affiliate of the CPO) and the IAC exemption in existing
regulation 150.3(a)(4). These two distinct exemptions are incorporated
into the final rule as rules 150.4(b)(1)(ii) and (b)(4), respectively.
Thus, the comment implying that Commission precedent has not limited
the IAC exemption to ``customer'' positions traded by IACs is
misplaced. The discussion cited by the commenter related to the
definitions of the terms ``eligible entity'' and ``IAC'' and was
codified in existing regulation 150.4(c)(2); this precedent did not
relate to the exemption language in existing regulation
150.3(a)(4).\296\
---------------------------------------------------------------------------
\296\ See 1999 Amendments, 64 FR 24038 at 24045.
---------------------------------------------------------------------------
Regarding the potential for aggregation between ``sister
affiliates'' where neither affiliate holds an ownership interest in the
other, the Commission notes that an entity generally would not require
relief in this situation because aggregation is required only when one
entity owns an interest in, or controls, the other. Last, the
definition of the term ``eligible affiliate'' is not part of the
Proposed Rule and so comments on this definition are not germane to
this rulemaking.
K. Revisions To Clarify Regulations
1. Proposed Approach
In connection with the proposed modifications to rule 150.4, the
Commission reviewed whether the text of existing regulation 150.4 is
easy to understand and apply. In this regard, the Commission noted that
the existing regulation may be unclear, especially in terms of the
relationship between the provisions of paragraphs (a) through (d) of
the existing regulation and whether a particular paragraph is an
exception to another.\297\ Also, as more market participants active in
different parts of the market have studied existing regulation 150.4,
both in connection with the Dodd-Frank Act and otherwise, questions
have arisen about the application of the aggregation requirements to a
wide variety of circumstances. The Commission believed it is important
that the rules setting forth the aggregation requirements be clear in
their application to both the circumstances in which they currently
apply, and the various circumstances in which they may apply in the
future. The textual modifications in the proposed rule were not
intended to effect any substantive change to the meaning of rule
150.4.\298\
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\297\ See Proposed Rule, 78 FR at 68953.
\298\ See id. The textual modifications in the Proposed Rule
related to the Commission regulations currently in effect. The
Commission noted that its proposal regarding position limits
includes amendments to the text of certain Commission regulations
(See Position Limits for Derivatives, 78 FR 75680 (Dec. 12, 2013))
and that if the later proposal is adopted, conforming technical
changes to reflect the interplay between the two amendments may be
necessary.
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Therefore, the Commission proposed to modify the text to clarify
that paragraph (a) of rule 150.4 states the general requirement to
aggregate positions a person may hold in various accounts, and
paragraph (b) of the rule sets out the exemptions to the aggregation
requirement that may apply. The Commission believed that this format
clarifies that the exemptions in rule 150.4(b) are alternatives; that
is, aggregation is not required to the extent that any of the
exemptions in rule 150.4(b) may apply.\299\
---------------------------------------------------------------------------
\299\ See Proposed Rule, 78 FR at 68963.
---------------------------------------------------------------------------
Proposed rule 150.4(b)(1) stated that for any person that is a
limited partner, limited member, shareholder or other similar type of
pool participant holding positions in which the person by power of
attorney or otherwise directly or indirectly has a 10 percent or
greater ownership or equity interest in a pooled account or positions,
aggregation of the accounts or positions of the pool is not required,
except as provided in paragraphs (b)(1)(i), (b)(1)(ii) or (b)(1)(iii).
Proposed rule 150.4(b)(2) and proposed rule 150.4(b)(3) set out
exemptions permitting disaggregation of the positions of owned entities
in certain circumstances.
Paragraphs (b)(4) to (b)(8) of proposed rule 150.4 (renumbered as
paragraphs (b)(3) to (b)(7) of the final rule) set forth other
exemptions that may apply in various circumstances. The exemption for
certain accounts held by FCMs in paragraph (b)(4) of the proposed rule
(final rule (b)(3)) was substantially the same as existing regulation
150.4(d), except that it was rephrased in a form of a statement of when
an exemption is available, instead of the statement in the existing
regulation that the aggregation requirement applies unless certain
conditions are met. Paragraph (b)(5) of the proposed rule (final rule
(b)(4)) set forth the exemption for accounts carried by an IAC that was
substantially similar to existing regulation 150.3(a)(4). Paragraphs
(b)(6), (b)(7) and (b)(8) of the proposed rule (final rule paragraphs
(b)(5), (b)(6) and (b)(7), respectively) set forth the exemptions for
underwriting, broker-dealer activity and circumstances where laws
restrict information sharing. Paragraph (b)(9) of the proposed rule
(final rule (b)(8)) described how higher-tier entities may apply an
exemption pursuant to a notice filed by an owned entity.
[[Page 91481]]
2. Commenters' Views and Final Rule
No commenters raised any problems or issues arising from these
organizational changes, so they are reflected in the final rule adopted
by the Commission.
Finally, it should be noted that the amendments to part 150 adopted
here may require further conforming technical changes if the Commission
adopts any proposed amendments to its regulations regarding position
limits.\300\ Such changes would be explained at the time they are
adopted.
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\300\ See Position Limits for Derivatives, 78 FR 75680 (December
12, 2013).
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III. Related Matters
A. Considerations of Costs and Benefits
Section 15(a) of the CEA \301\ requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
the following five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission considers the costs and
benefits resulting from its discretionary determinations with respect
to the section 15(a) factors.
---------------------------------------------------------------------------
\301\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
As discussed in Section I (Background), above, the Commission
proposed amendments to its existing aggregation rules.\302\ In November
2013, the Commission proposed amendments to existing regulations 150.1
and 150.4.\303\ In response to commenters, the Commission issued a
supplemental notice in September 2015 to modify one of the proposed
exemptions to the Commission's proposed aggregation requirement.\304\
The modification changed the exemption category that was tied to
ownership and equity levels. In the main, the Commission is adopting
all of the changes identified in the Proposed Rule, as modified by the
Supplemental Notice. The Commission believes that the final rules are a
reasoned approach to complying with CEA section 4a(a)(1)'s aggregation
requirement. The Commission also believes that the final rules, via
exemptions, give market participants opportunities and processes to
reduce costs and burdens associated with aggregating positions that
might hinder trading or reduce liquidity.
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\302\ 17 CFR part 150.
\303\ 17 CFR 150.1 and 150.4. See Aggregation of Positions;
Proposed Rule, 78 FR 68946 (Nov. 15, 2013) (``Proposed Rule'').
\304\ See Aggregation of Positions: Supplemental notice of
proposed rulemaking, 80 FR 58365 (Sept. 29, 2015) (``Supplemental
Notice'').
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Current part 150 is the baseline against which the costs and
benefits associated with these final rules will be identified and
considered.\305\ The current regulations in part 150 require certain
market participants to aggregate positions subject to the position
limits.\306\ As discussed above in Section II., the Commission's
aggregation policy under existing regulation 150.4 generally requires
that unless a particular exemption applies, a person must aggregate all
positions and accounts for which that person controls the trading
decisions with all positions and accounts in which that person has a 10
percent or greater ownership interest, and with the positions of any
other persons with whom the person is acting pursuant to an express or
implied agreement or understanding.\307\ There are several exemptions
from aggregation listed, such as the ownership interests of limited
partners in pooled accounts,\308\ discretionary accounts and customer
trading programs of FCMs,\309\ and eligible entities with IAC that
manage customer positions.\310\
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\305\ 17 CFR part 150.
\306\ See Proposed Rule, 78 FR at 68946; Supplemental Notice, 80
FR at 58374 (for a discussion of the baseline).
\307\ See 17 CFR 150.4(a) and (b).
\308\ See 17 CFR 150.4(c).
\309\ See 17 CFR 150.4(d).
\310\ See 17 CFR 150.3(a)(4).
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In the Proposed Rule and the Supplemental Notice, the Commission
also requested comments on its costs-and-benefits assessments and
sought data as well as other information in the estimation of
quantifiable costs and benefits of the final changes to part 150.\311\
The commenters addressed the cost-and-benefit aspect of the Proposed
Rule and the Supplemental Notice in a general manner; commenters did
not provide data.\312\ Accordingly, since the data requisite to
quantification is by-and-large proprietary, specific to individual
market participants, and not otherwise reasonably accessible to the
Commission, the Commission's cost-and-benefit discussion that follows
is largely qualitative in nature. The Commission, nevertheless,
attempts to quantify costs and benefits where possible, especially, in
the area of market participants' filing exemption notices.
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\311\ See Proposed Rule, 78 FR at 68972, and Supplemental
Notice, 80 FR at 58375.
\312\ See CL-Working Group Feb 10; CL-CME Feb 10; CL-SIFMA AMG
Feb 10; CL-FIA Feb 6; CL-FIA Nov 13; CL-COPE Feb 10. Also, the
Proposed Rule included a discussion of comments on costs related to
the now-vacated Part 151 received prior to the 2013 proposal. See
Proposed Rule, 78 FR at 68971.
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1. Final Rules--Summary
The Commission is adopting final rules that, primarily, have two
objectives. First, the final rules state the Commission's aggregation
requirement. Second, the final rules identify exemptions that relieve
market participants from the requirement to aggregate all held
positions that are subject the Commission's position limits.
Final rules 150.4(a)(1) and (a)(2) set out two aggregation
requirements: (1) An aggregation requirement for a person exercising
trading control or possessing certain ownership or equity interests in
positions in accounts, which is the same as in existing regulation
150.4(b); and (2) an aggregation requirement for a person who holds or
controls positions in more than one account that employ substantially
identical trading strategies, which is new under the final rule. The
exemptions are in rules 150.4(b)(1) to (b)(8), and apply only to
persons who fall within the first category of persons who must
aggregate--i.e., persons subject to rule 150.4(a)(1). The exemption
notice filing process is in rules 150.4(c) and (d). In rule 150.4(e),
the Commission delegates authority over aggregation and exemption
related duties to the Director of the Division of Market Oversight.
There are eight exemptions. Three of them are largely the same as
in existing regulations: An exemption for limited partners,
shareholders, or other pool participants; an exemption for FCMs that
hold certain accounts; and an exemption for independent account
controllers that control trading by certain accounts or positions.\313\
Five of the exemptions are new in the final rule. There is an exemption
from aggregation of the positions and accounts of owned entities if the
owner meets certain conditions intended to ensure independence of
trading.\314\ There is exemptive relief for persons who hold positions
or accounts for the purpose of underwriting, and for certain broker-
dealers.\315\ There also is a violation-of-law exemption for persons
who must not share trading information to avoid violating state or
federal laws, or the law of a foreign jurisdiction.\316\ Finally,
[[Page 91482]]
there is an exemption that relieves persons who are affiliated with a
person who has already filed an exemption notice from filing a
duplicative exemption notice with the Commission.\317\
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\313\ See rules 150.4(b)(1), (b)(3) and (b)(4), respectively.
See also existing regulations 150.4(c), 150.4(d) and 150.3(a)(4),
respectively.
\314\ See rule 150.4(b)(2).
\315\ See rules 150.4(b)(5) and (b)(6), respectively.
\316\ See rule 150.4(b)(7).
\317\ See rule 150.4(b)(8).
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Persons seeking an exemption under most, but not all, of the
exemptive categories must file a notice with the Commission to obtain
relief from the aggregation requirement. Persons required to file a
notice include the following: Certain principals or affiliates of
commodity pool operators; persons with ownership or equity levels of 10
percent or greater; independent account controllers, and persons who do
not share trading information to avoid violating laws.\318\ The notice
must describe the relevant circumstances that warrant disaggregation,
and have a senior officer's certification.\319\ The relevant
circumstances that may warrant disaggregation are described in rule
150.4(b)(2)(i)(A)-(E) and include the following four factors for the
owner entity and the owned entity: \320\ Lack trading-decision
knowledge; trade through separately developed and independent trading
systems; possess and enforce written procedures to preclude each from
having knowledge of, gaining access to, or receiving data about, trades
of the other; do not share employees that control the trading decisions
of the owned entity or owner; and do not have a risk management system
that permits the sharing of trades or trading strategy.
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\318\ See rule 150.4(c)(1).
\319\ See rules 150.4(c)(1)(i), (ii) and 150.4(b)(2)(ii).
\320\ These factors apply to the owned entity to the extent that
the owner is or should be aware of the activities and practices of
the owned entity. The factors also apply to any other entity that
the owner must aggregate, again to the extent the owner is or should
be aware of its activities and practices. See rule 150.4(b)(2).
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The Commission also is finalizing definition changes to the term
``eligible entity'' in rule 150.1(d), and ``independent account
controller'' in rule 150.1(e). These changes reorganize where the
defined terms are located in the Commission's regulations, and clarify
that they apply not only to limited partnerships (as in the existing
regulation), but also to limited liability companies and other
equivalent corporate structures. The Commission believes that these
definition changes, in and of themselves, have no cost-benefit
concerns; their cost-benefit impact relates to implementing the
exemptions.
2. Benefits
The purpose of requiring positions to be aggregated among
affiliated and otherwise connected entities is to prevent evasion of
prescribed position limits through coordinated trading. Because the
same reasoning applies to a person who holds or controls positions in
more than one account or pool with substantially identical trading
strategies, the final rule includes a new provision to require
aggregation in these circumstances. The Commission believes that the
new requirement to aggregate positions under substantially identical
trading strategies will provide benefits by helping to prevent evasion
of the position limits.
The Commission also recognizes that an overly restrictive or
prescriptive aggregation policy may result in unnecessary burdens or
unintended consequences. Therefore, the final rule adopts five new
exemptions from the aggregation requirement, as described above. The
Commission believes that providing these exemptions will mitigate these
burdens and consequences in situations where the risks of coordinated
trading are low. Thus, the Commission believes the final rule provides
benefits to market participants who would have been subject to such
burdens and consequences, while at the same time maintaining an
aggregation requirement that is sufficient to maintain the benefit of
preventing evasion.
The unnecessary burdens and unintended consequences that could
arise from an overly restrictive or prescriptive aggregation policy
could take the form of reduced liquidity because the imposition of
aggregation requirements on entities that are not susceptible to
coordinated trading would restrict their ability to trade commodity
derivatives contracts if the aggregation requirements brought them
close to the applicable limits. The Commission also recognizes that
requiring passive investors to aggregate their positions may
potentially diminish capital investments, or interfere with existing
decentralized business structures.
The following example illustrates how the final rule is expected to
provide benefits by allowing new exemptions to the aggregation
requirement. In this example, Entity A seeks to pursue a business or
investment strategy that involves the use of futures transactions.
Before proceeding, Entity A must consider whether the futures
transactions would cause it to exceed any applicable position limit.
Under the aggregation requirement in current regulations, which has
only limited exceptions, Entity A's decision of whether to proceed
could depend on the futures transactions of its subsidiaries or other
entities whose positions it is required to aggregate. If one such
entity has significant positions in place, then Entity A may be
prevented from entering into the desired transactions, because the
aggregation of Entity A's positions with the positions of the other
entity would exceed a position limit.
The final rules permit Entity A to seek disaggregation relief for
the positions of certain of its subsidiaries and potentially other
entities. Thus, under the final rules Entity A will have more
flexibility to put in place a management structure that allows Entity A
to make business and investment decisions independently of its
subsidiaries and other potentially aggregated entities so long as
applicable criteria (which relate to independent decision making and
other indications of separateness) are met. This is beneficial to
Entity A because it can focus its business and investment decisions on
its own business needs. If disaggregation relief were not available to
Entity A, then the requirement to aggregate other entities' positions
might unnecessarily distort Entity A's business and investment
decisions by requiring Entity A to consider factors that do not relate
directly to those decisions. So by establishing exemptive relief that
is available to market participants that take steps to establish
independent decision making and separateness--for instance, the
demonstration of no shared control over trading--potential negative
effects, such as impediments to sound decision making, will be reduced.
The exemptions added by the final rules also will benefit market
participants by mitigating their compliance burdens associated with
meeting the aggregation requirement as well as position limits more
generally. Eligible market participants will not have to establish and
maintain the infrastructure necessary to aggregate positions across
affiliated entities where an exemption is available. Further, an
eligible entity with legitimate hedging needs and whose aggregated
positions are above the position limits thresholds in the absence of
any exemption will have the option of applying for an aggregation
exemption (if it meets the stated criteria) instead of applying for a
bona fide hedging exemption. In other words, an eligible entity will
have the benefit of being able to choose the exemption it deems
appropriate, and in many cases the exemption from aggregation, which
requires only a notice filing, may be less costly to
[[Page 91483]]
obtain than other exemptions from position limits.
The final rules also provide legal consistency for those persons
that own multiple entities with multiple ownership or equity interest
levels. Because the final rules treat all persons that possess at least
a 10 percent ownership or equity interest in another entity (other than
persons with an interest in a pooled account subject to rule
150.4(b)(1)) in the same way for purposes of receiving exemptive relief
from the Commission's aggregation requirement, there is a unified
exemptive framework. This will reduce confusion and further mitigates
the burdens facing market participants. Consider, for example, a
parent-holding company that has different levels of ownership or equity
interest in its various subsidiaries. Under the final unified
framework, it may establish and maintain one notice-filing system for
the purpose of obtaining aggregation exemptions for any or all of these
subsidiaries.
The Commission also has reduced, consistent with regulatory
objectives, the administrative and compliance burden of filing the
notice required to receive an exemption. For example, for the
violations-of-law exemption, the Commission will allow a memorandum of
law prepared by internal counsel instead of a formal opinion. This
reduces legal costs and is a benefit available to market participants.
Finally, the Commission recognizes the benefits of notice filing. This
will result in reduced administrative and compliance costs given that
updates will be necessary only when there are material changes.
3. Costs
The Commission recognizes that entities subject to the Commission's
aggregation policy in rule 150.4, including entities seeking to apply
one of the existing or newly-provided exemptions, will incur direct
costs. Such costs will include: (i) Initially determining which owned
entities, other persons, or transactions qualify for any of the
exemptions from aggregation in rule 150.4(b); (ii) developing and
maintaining a system of determining the scope of such exemptions over
time; (iii) potentially amending current operational structures to
achieve eligibility for such exemptions; (iv) preparing and filing
notices of exemption with the Commission; and (v) developing a system
for aggregating positions across entities, persons or transactions for
which no exemption is available.
The Commission has also considered whether its proposed amendments
expanding position limits \321\ would result in an increase in the
number of market participants that will have to consider the effects of
the Commission's aggregation policy, as compared to the number of
market participants that are currently subject to position limits and
potentially subject to aggregation.\322\ If the proposed position
limits are adopted, market participants would be required to aggregate
the accounts and positions of owned entities and other aggregated
entities that engage in the contracts and swap equivalents covered by
the new position limits. Thus, the Commission's adoption of the
proposed position limits would mean that the aggregation requirement in
the final rule (even though it largely continues the aggregation
requirement in the existing regulations) would apply to new market
participants who have not previously been subject to position limits or
the aggregation requirement.\323\ The Commission has considered the
costs that these market participants will face.
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\321\ See Position Limits for Derivatives, 78 FR 75680 (December
12, 2013).
\322\ See generally Proposed Rule, 78 FR at 68970, and
Supplemental Notice, 80 FR at 58375.
\323\ The Commission notes that market participants that are
currently subject to the aggregation requirement in the existing
regulations should have already a system in place for aggregating
positions across owned entities or as otherwise required. Further,
entities that have been transacting in futures markets have been
subject to these aggregation requirements for decades, and have
extant operational structures that are appropriate for their trading
and other activities. Given these considerations, the Commission
believes that for market participants that are currently subject to
position limits (and, potentially, the aggregation requirement)
prior to any adoption of new position limits, these final rules do
not increase significantly the costs of compliance as compared to
the status quo--that is, the aggregation requirements of existing
part 150 of the Commission's regulations.
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Many of these costs--such as building out new compliance systems--
would be attributable to complying with position limits that may be
adopted in the future and not with the final rule adopted here.\324\
However, the Commission has considered that as market participants
become subject to position limits or subject to position limits
applicable to a wider scope of their derivatives activities, the market
participants may face more complex situations involving owned entities
or other entities potentially subject to the aggregation requirement.
For example, if the scope of the position limits expands,
interpretation and application of the criteria for disaggregation
relief in rule 150.4(b)(2) may become more complex, even though these
criteria are largely the same as criteria previously applied with
respect to the exemption used by eligible entities using an IAC.\325\
The Commission has considered the potential for these costs but cannot
quantify them, because the costs that would be incurred by each market
participant will depend upon its management and corporate structure,
its trading practices, its information-sharing practices and other
factors specific to the market participant.
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\324\ The adoption of the proposed position limits for 28 exempt
and agricultural commodity futures and options contracts and the
physical commodity swaps that are economically equivalent to such
contracts would be pursuant to the requirements of CEA section
4a(a)(5). See Position Limits for Derivatives, 78 FR 75680 (December
12, 2013). Thus, costs resulting from this statutory requirement and
not the Commission's discretion are not subject to the consideration
of costs and benefits required by CEA section 15(a). The costs and
benefits attributable to the specific position limit levels that may
be adopted by the Commission would be considered in the rulemaking
establishing those limits.
\325\ See footnote 118 and accompanying text, above.
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The Commission has also considered that a large part of the final
rule (in particular, paragraphs (2), (5), (6) and (7) of rule 150.4(b))
adds potential exemptions from the aggregation requirement that were
not available under the existing regulations. While market participants
may incur some costs in determining whether to use these newly-
available exemptions and in filing the related notices, the market
participants are also free not to use the exemptions if the costs of
doing so are too high. In other words, if the costs attributable to
paperwork and compliance practices that are necessary to take advantage
of one of these exemptions do not make economic sense, market
participants will not avail themselves of the exemptions under this
rulemaking.
The Commission understands that there will be some costs to
investors in commodity pools in aggregating positions under rule
150.4(a)(2), which is a newly adopted requirement to aggregate the
positions of accounts or pools with substantially identical trading
strategies. First, investors may not be able to easily determine which
positions are held by a particular pool. Furthermore, the investors may
not be able to easily determine their percentage ownership or equity
interest in a pool that is open-ended and allows investors to
continuously buy and redeem shares. The Commission is unable to
quantify the effect of this rule because there are varying factors such
as complicated trading strategies and changing ownership levels within
a pool. Nonetheless, the Commission recognizes that there will be costs
[[Page 91484]]
associated with the aggregation requirement of this rule.
In addition, DCMs and SEFs will be required to conform their
aggregation policies, if their rules do not conform to the Commission's
aggregation policy already. As noted above, the requirement to
aggregate the positions of accounts or pools with substantially
identical trading strategies, as well as the potential application of
the aggregation requirement to a broader scope of positions and market
participants, may increase the complexity of applying the aggregation
requirement. The Commission recognizes that this complexity may
increase costs for DCMs and SEFs to enforce their aggregation policies,
but for the reasons noted above the Commission cannot quantify these
costs at this time. The actual costs will depend on, among other
things, the extent to which market participants may become subject to
position limits and the characteristics of their corporate structures
and trading practices. On the other hand, the Commission understands
that some DCMs have made conforming rule changes already. In these
cases, there are no incremental costs to consider.
The Commission believes that the final rules will decrease costs by
providing market participants new options to elect an exemption and
obtain relief from the aggregation requirements. Consequently, the main
direct costs associated with the changes to rule 150.4, relative to the
standard of existing regulation 150.4, will be those incurred by
entities as they determine whether they may be eligible for the final
exemptions, if they modify their management or corporate structures or
trading practices to comply with the exemptions, and if they make
subsequent exemption filings for material changes. These costs will
apply to market participants that pursue exemptions because they are a
principal or affiliate of an operator of a pooled account; person with
a 10 percent or greater owner or equity interest in another entity; a
certain type of FCM; a certain type of independent account controller;
or a person who must share information to avoid a violation of law.
The Commission believes there will be insignificant costs, if any,
for persons electing to take the underwriting and broker-dealer
exemptions. These groups are not required to file exemption notices
under rule 150.4(c). As a result, the cost these persons will incur
will be those dedicated to determining whether they are eligible for
the exemption.
There also will be a cost-savings to entities affiliated with an
entity who has already filed for an exemption under existing regulation
150.4. The Commission has offered affiliated entities greater relief by
affording them an opportunity under rule 150.4(b)(8) to reduce
administrative costs because they will not need to file a notice if
their affiliated entity has filed an exemption notice previously and
updates the previous filing to include the affiliated entities. While
there will be some associated costs to monitor records of notices filed
by affiliated entities and make the updates, the Commission expects
those costs will be small and will likely decline over time as tracking
systems are maintained and automated.
In short, the direct costs of the final rules are difficult to
quantify in the aggregate because such costs are heavily dependent on
each entity's characteristics. In other words, costs vary according to
an entity's current systems, its corporate structure, its use of
derivatives, the specific modifications it will implement in order to
qualify for an exemption, and other circumstances. The Commission,
nevertheless, believes that market participants will choose to incur
the costs of qualifying for and using the exemptions in the final rules
when doing so is less costly than complying with position limits. Thus,
by providing these market participants with a lower cost alternative
(i.e., qualifying for and using the exemptions) the final rules may
ease overall compliance burdens resulting from position limits.
There is an inherent trade-off between the benefits arising from
aggregation exemptions in certain circumstances and maintaining the
effectiveness of the Commission's position limits. The Commission
believes that it has tailored the exemptions sufficiently to
circumstances where the exemptions should not weaken the integrity of
the Commission's position limits significantly, because, for instance,
the exemptions apply only to accounts that pose a low risk of
coordinated trading.
In accordance with the Paperwork Reduction Act the Commission has
estimated the costs of the paperwork required to claim the final
exemptions. As stated in Section III.C., below, the Commission
estimates that 240 entities will submit a total of 340 responses per
year and incur a total burden of 6,850 labor hours at a cost of
approximately $1,096,000 annually to claim exemptive relief under
regulation 150.4.
The Commission also considers the cross-border implications of this
rulemaking. The Commission believes that the costs might be slightly
higher for entities that conduct business in both domestic and foreign
jurisdictions. Multi-jurisdictional entities will likely need to
consider the implications of memoranda of understanding between the
Commission and foreign regulators as well as non-U.S. privacy laws that
might apply to them. The Commission believes, however, that while there
may be costs for initial assessments, these costs will decline over
time for entities as they gain more experience with the aggregation
requirements discussed herein.
4. Comments
The Commission received several comments on cost-benefit issues in
response to the Proposed Rule and the Supplemental Notice. One
commenter argued that market participants faced the burden of building
compliance systems and programs to (i) capture the information
necessary to determine whether they may exceed position limits and (ii)
avoid violating such limits on an intraday basis. The commenter
believed that the number of potential market participants at risk of
violating limits ``is likely significantly larger'' than the number of
those who actually exceed limits, and the obligation to aggregate where
there is currently no information sharing increases costs associated
with aggregation.\326\
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\326\ See CL-Working Group Feb 10.
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As noted above, the Commission has considered that the requirement
to aggregate the positions of accounts or pools with substantially
identical trading strategies, along with the potential application of
the aggregation requirement to a broader scope of positions and market
participants, may increase the complexity of applying the aggregation
requirement. On the other hand, the Commission believes that it is
important to continue to apply the aggregation requirement in the
existing regulation (and to add the aggregation requirement related to
substantially identical trading) in order to forestall evasion of the
position limits through coordinated trading and to close potential
loopholes, as discussed above. To the extent a market participant
incurs costs in determining whether to seek an exemption or to comply
with an exemption provided in the final rule, the market participant
could avoid those costs if they are not sensible in relation to the
benefits of using the exemption.
Another commenter asserted that the Commission's cost-benefit
consideration of the proposed aggregation rules was inadequate,
including for investors applying the substantially identical trading
strategies aggregation requirement in rule 150.4(a)(2) to their
[[Page 91485]]
holdings in multiple funds or funds-of-funds. The commenter also
expressed that the Commission did not consider the costs for DCMs and
SEFs to implement aggregation standards for all derivatives that would
have to conform with proposed rule 150.4. These would include the costs
of validating and approving aggregation-related notice filings made
under proposed rule 150.4(c).\327\
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\327\ See CL-CME Feb 10.
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Regarding the costs faced by investors in multiple funds or funds-
of-funds, this rulemaking considers these costs qualitatively but not
quantitatively, because quantitative costs depend upon the specific
characteristics and activities of market participants--for example, the
extent to which investors have to aggregate pro rata interests in
multiple funds or funds-of-funds. The Commission recognizes that these
costs may be significant in some situations, such as where a single
investor transacts in derivatives subject to position limits through
multiple entities and funds. As noted in the discussion of costs in
Section III.A.3., above, investors may not be able to determine easily
which positions are held by an underlying fund or their precise
percentage interests in funds.
However, the Commission has determined that the requirements
resulting in these costs are appropriate in order to prevent evasion of
the position limits through coordinated trading. For example, as noted
above in section II.H.3., in the absence of rule 150.4(a)(2) the
exemption in rule 150.4(b)(1) would permit an investor to separate a
large position in a given commodity derivative into positions held in
various funds that have substantially identical trading strategies. As
a practical matter, if an investor's positions are near position
limits, the investor could consider the merits of holding its positions
in a single fund as compared to holding the positions in multiple
funds. The investor might elect to hold its positions in a single fund
instead of through multiple funds, in order to avoid the requirement
under rule 150.4(a)(2) to aggregate the multiple holdings. Of course,
the investor would have to comply with position limits whether it holds
its positions in a single fund or in multiple funds.
The discussion of costs in Section III.A.3., above, also covered
costs to DCMs and SEFs that will be required to conform their
aggregation policies to the Commission's aggregation policy. Moreover,
the Commission had discussed this issue in the Proposed Rule, when it
noted that because the Commission's aggregation rules would be
precedent for aggregation rules enforced by DCMs and SEFs, it is
important that the aggregation rules set out, to the extent feasible,
bright line rules that are capable of easy application in a wide
variety of circumstances, without being susceptible to
circumvention.\328\ The Commission notes that proposed rule
150.4(c)(2), which required a finding as to whether an applicant has
satisfied the conditions for an exemption, is not being adopted. This
should reduce the costs to DCMs and SEFs in reviewing filings made
under rule 150.4(c), which was a concern to the commenter.
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\328\ See Proposed Rule, 78 FR at 68956, n. 103.
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One commenter claimed that when considering the costs and benefits
of its proposed owned entity aggregation rules, the Commission assumes
a cost-benefit baseline that requires position aggregation based solely
on ownership, regardless of the existence of common control.\329\ The
commenter goes further to say that this is an inappropriate baseline,
because neither the Commission nor DCMs currently require the
aggregation of owned entity positions regardless of the existence of
common control, and also because speculative positions outside of the
spot month have not been subject to position limits in 19 out of the 28
``referenced contract'' markets.\330\ ``Aggregating non-spot-month
positions of entities in which passive investors make investments
presents considerable new challenges, which not been adequately
considered,'' the commenter stated.\331\
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\329\ See CL-SIFMA AMG Feb 10.
\330\ See id.
\331\ See id.
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In response to this commenter, the Commission reiterates that the
baseline is existing regulation 150.4, which does require aggregation
based solely on ownership, regardless of the existence of common
control.\332\
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\332\ See the discussion in Section II.A.3, above.
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Also, as noted previously, the Commission has considered that the
requirement to aggregate the positions of accounts or pools with
substantially identical trading strategies, as well as the potential
application of the aggregation requirement to a broader scope of
positions and market participants, may increase the complexity of
applying the aggregation requirement. The Commission understands that
passive investors may be among those market participants that are
affected by the new requirements. In response to this commenter's
concerns, the Commission notes that passive investors should be able to
qualify for the exemption from aggregation in rule 150.4(b)(2), because
if the investor were passive it would meet the conditions for that
exemption, which relate to an absence of coordinated trading. Thus,
rule 150.4(b)(2) will mitigate the burdens on passive investors.\333\
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\333\ The Commission believes that the newly added exemption in
rule 150.4(b)(2) will also mitigate the concerns that this commenter
expressed about undue costs on passive investors that have no
control over or knowledge of the commodity derivatives trading
activities of the owned entities in which they invest. See CL-SIFMA
AMG Feb 10. In the absence of such control or knowledge, the
investor would be eligible for an exemption from the aggregation
requirement. Thus, it is not the case, as the commenter argued (see
id.), that the owned entity aggregation threshold at 10 percent is
over-inclusive, or that it would require a purely passive investor
to aggregate the positions of all entities in which the investor has
beneficial equity ownership of 10 percent or more. Also, passive
investors would not necessarily have to determine how owned entities
transact in commodity derivatives, as the commenter argued. See id.
Instead, passive entities would only have to ensure that they meet
the requirements for the exemption in rule 150.4(b)(2), which the
Commission expects they would, and file the notice required to use
that exemption.
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The commenter also criticized the exemption for ownership interests
in rule 150.4(b)(2) because it would not extend to all ownership
interests, and would require a ``burdensome'' notice filing in all
investment circumstances, despite the absence of any common trading
control, ``for no apparent benefit.'' The commenter noted that passive
investors in a commodity pool that are not affiliated with the pool
operator would not, under the exemption in proposed rule 150.4(b)(1),
be required to submit a notice filing to disaggregate the positions of
pools in which they have invested, ``regardless of their ownership
interest in the pool,'' and the Proposed Rule provides no reason why
passive investors in owned entities should not have at least the same
degree of deference.\334\
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\334\ See CL-SIFMA AMG Feb 10.
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The Commission disagrees with the comment. The Commission does not
believe that a notice filing is a heavy burden on any investor, passive
or not, because the notice filing merely requires the investor to name
the entities involved, describe the relevant circumstances that warrant
disaggregation, and certify that the conditions in the applicable
aggregation exemption have been met. As discussed above, the Commission
believes that the notice filing requirement benefits the public and
market participants because it will allow the Commission to monitor
usage of the aggregation exemptions and receive notice of potential red
flags that warrant further investigation.
Furthermore, the Commission believes that the difference in
treatment
[[Page 91486]]
between limited partners and similar pool participants in rule
150.4(b)(1), and owners of entities in rule 150.4(b)(2), is sensible.
First, the Commission notes that rule 150.4(b)(1) continues the
treatment of pool participants under the existing regulation. As the
commenter said, rule 150.4(b)(1) does not include a notice filing
requirement where the participant is not affiliated with the commodity
pool operator. The Commission is comfortable that little additional
benefit would be achieved by requiring a notice filing in this
situation, because a separate entity is designated as the commodity
pool operator (and may be subject to registration with the Commission).
By contrast, rule 150.4(b)(2) applies to any type of owned entity. In
this situation, the Commission believes that the costs incurred by the
owner seeking an exemption to file a notice with the Commission are
reasonable in view of the very large variety of corporate structures
and management arrangements that may be in place. Given this variety,
there are important benefits from a notice filing because the notices
inform the Commission of the circumstances in which the exemption is
being used and thereby permit the Commission to monitor use of the
exemption.
The commenter also maintained that the Commission inadequately
considered the costs and benefits of the proposed substantially
identical trading strategies requirement at proposed rule 150.4(a)(2),
and that the requirement is unworkable in practice. The commenter
noted, for example, ``a $10,000 investor in two $1 billion commodity
index mutual funds using the same index may have to aggregate the
positions in those two $1 billion mutual funds because they follow
`substantially identical trading strategies.' '' The commenter believed
such an investor would have to implement a compliance program to
prevent inadvertent violations of the position limits rules, which (in
addition to imposing significant legal and operational obstacles) would
impose costs many times the investor's $10,000 investment.\335\
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\335\ See id.
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The Commission disagrees with the commenter's view that it
inadequately considered the costs and benefits of the substantially
identical trading strategies requirement. The Commission has explained
that the requirement under proposed rule 150.4 is effected on a pro
rata basis. That is, the terms of the rule require the owner to
aggregate the positions that it (i.e., the owner) holds in the two
commodity index mutual funds, not the positions of the funds
themselves, so that in the commenter's example the two holdings would
be aggregated into one $20,000 holding.\336\ The Commission
acknowledges that the determination of the owner's pro rata interest in
the number of contracts such accounts or pools are holding may create
practical difficulties for the owner--in particular when the owner is
unaware of the underlying positions of the account or pool. However, as
discussed above the Commission believes that the requirement in rule
150.4(a)(2) provides important benefits by preventing circumvention of
the aggregation requirements.
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\336\ The commenter described the holdings in dollar amounts.
See id. The Commission notes however that the position limits
generally are stated in terms of a number of contracts, not a dollar
amount. To apply rule 150.4(a)(2), a person holding or controlling
the trading of positions in more than one account or pool with
substantially identical trading strategies must determine the
person's pro rata interest in the number of contracts such accounts
or pools are holding.
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5. Alternatives
The Commission considered the cost-benefit implications of the
following significant alternatives:
Different ownership thresholds (e.g., 25 percent or 50
percent) for the aggregation requirement in rule 150.4(a)(1). As
discussed in Section II.A.3.a, the Commission recognizes that a higher
ownership threshold would presumably decrease the number of persons
required to aggregate or seek exemptions from aggregation. Yet, there
is uncertainty about how beneficial this reduction would be in reducing
burdens and how harmful it would be in reducing the amount of
information available to the Commission. Because of this uncertainty,
the Commission has determined not to change the 10 percent threshold in
effect under the current regulations.
Aggregation on a basis pro rata to the ownership interest
in the owned entity. Commenters suggested that Commission base the
aggregation requirement on a pro rata ownership or equity
interest.\337\ Arguably, pro rata aggregation would more accurately
reflect the positions owned by market participants and would not
unnecessarily restrict the positions of market participants, while
reducing the risk of an inadvertent position limits overage. The
Commission has decided not to offer such an aggregation method. As
explained above, while there are theoretical merits to a pro rata
aggregation method as it would measure a market participant's ownership
and equity levels more accurately, commenters did not offer suggestions
on how such an exemption would work practically, especially when
ownership and control may change on an inter-day basis. Nor did
commenters provide information regarding the extent to which a pro rata
approach would actually mitigate the aggregation requirement (e.g., how
often entities which are subject to an aggregation requirement, and not
eligible for an exemption, are owned at a level substantially below 100
percent). In such circumstances, implementing a pro rata aggregation
standard would be expensive in terms of costs related to developing and
maintaining systems that would connect multiple market participants
(e.g., CPOs, beneficial owners), DCMs, and SEFs, to share information
to perform pro rata calculations. The Commission believes a pro rata
aggregation standard would be more costly than the standard the
Commission is finalizing.
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\337\ See e.g., CL-FIA Feb 6; CL-COPE Feb 10; CL-SIFMA AMG Feb
10.
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No notice filing. A commenter suggested that the
Commission eliminate the exemption notice filing for passive
investors.\338\ The Commission disagrees and has not added any new
exemption from the notice filing. A one-time notice filing (with
updates upon any material change) is not a substantial burden. It is
noteworthy that, as discussed above, commenters made suggestions as to
the timing and mechanics of the notice filing, but generally did not
object to the requirement to make an exemption-notice filing. Moreover,
as discussed above, a notice filing increases the Commission's and
other market regulators' abilities to monitor usage of the aggregation
exemptions and oversee market participants benefitting from the
exemptions.
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\338\ See CL-SIFMA AMG Nov 13.
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Addition of exemptions for passive investors such as
pension plans and transitory ownership interests acquired through
credit events.\339\ As discussed above in Section II.A.3.d., the
Commission believes that applying rules for specific treatment of
particular situations or classes of entity would be complex and not
justified by the potential benefits to the entities receiving different
treatment. For example, the Commission believes that distinguishing
``transitory'' ownership from other forms of ownership would be more
complicated than completing the notice required to obtain relief, and
in such situations it is reasonable to expect that the notice filing
would be made on a summary basis appropriate to the
[[Page 91487]]
transitory situation. Similarly, application of definitional rules to
delineate when a class of entities such as pension plans would not have
to apply for an exemption from aggregation would be complex as compared
to the notice filing that a pension plan could file to receive an
exemption from aggregation.
---------------------------------------------------------------------------
\339\ See e.g., CL-SIFMA AMG Nov 13; CL-FIA Nov 13 CL-Working
Group Nov 13.
---------------------------------------------------------------------------
6. Section 15(a) Considerations
As the Commission has long held, position limits are regulatory
tools that are designed to prevent concentrated positions of sufficient
size to manipulate or disrupt markets. The aggregation of accounts for
purposes of applying position limits represents an integral component
that impacts the effectiveness of those limits. The Commission believes
the final rules will preserve the important protections of the existing
aggregation policy, but at a lower cost for market participants.
a. Protection of Market Participants and the Public
The Commission believes these final rules will not materially
affect the level of protection afforded market participants and the
public that is provided by the aggregation policy reflected currently
in regulation 150.4. Given that the aggregation standards are necessary
to implement effective position limits, it is important that the final
exemptions be sufficiently tailored to exempt from aggregation only
those positions or accounts that pose a low risk of coordinated
trading. The owned-entity exemption will maintain the Commission's
historical presumption threshold of 10 percent ownership or equity
interest and make that presumption rebuttable only where several
conditions indicative of independence are met. This final exemption
focuses on the conditions that impact trading independence. In
addition, by providing an avenue to apply for relief when ownership is
greater than 10 percent of the owned entity, the final rules will allow
market participants greater flexibility in meeting the requirements of
the position limits regulations, provided they are eligible to apply.
The Commission believes that all of the exemptions will allow the
Commission to direct its resources to monitoring those entities that
pose a higher risk of coordinated trading and thus a higher risk of
circumventing position limits. Furthermore, the exemptions will not
significantly reduce the protection of market participants and the
public that the Commission's aggregation policy affords.
b. Efficiency, Competition, and Financial Integrity of Markets
The Commission believes the final exemptions will reduce costs for
market participants without compromising the integrity or effectiveness
of the Commission's aggregation policy. An important rationale for
providing aggregation exemptions is to avoid overly restricting
commodity derivatives trading of affiliated entities not susceptible to
coordinated trading. Such trading restrictions may potentially result
in reduced liquidity in commodity derivatives markets, diminished
investment by largely passive investors, or distortions of existing
decentralized business structures. Thus, the final exemptions help
promote efficiency and competition, and protect market integrity by
helping to prevent these undesirable consequences.
c. Price Discovery
The Commission expects the final rules to further the Commission's
mission to deter and prevent manipulative behavior while maintaining
sufficient liquidity for hedging activity and protecting the price
discovery process. By relaxing aggregation requirements in
circumstances not conducive to coordinated trading, the final
exemptions may help improve liquidity by encouraging more market
participation. Specifically, the Commission believes that these
exemptions will help to encourage market participation on registered
exchanges so that price discovery will not move to other market
platforms where similar transactions could be effected, such as foreign
boards of trade.
d. Sound Risk Management Practices
The imposition of position limits helps to restrict market
participants from amassing positions that are of sufficient size to
disrupt the operation of commodity derivatives markets. The final
exemptions will allow affiliated entities to disaggregate their
positions in circumstances that the Commission believes present minimal
risk of coordinated trading with potential to disrupt market
operations. The Commission believes that the final exemptions will not
materially inhibit the use of commodity derivatives for hedging, as
bona fide hedging exemptions are available to any entity regardless of
aggregation of positions and exemptions from aggregation. Where there
is little possibility of coordinating trading, the final rules
facilitate sound risk management by permitting an entity to manage its
risks where risks are being generated.\340\
---------------------------------------------------------------------------
\340\ See earlier discussion of the example involving Entity A
in Section III.A.2., above.
---------------------------------------------------------------------------
e. Other Public Interest Considerations
The Commission did not identify any other public interest
considerations related to the costs and benefits in the proposed
exemptive relief to aggregation. No commenter on the Proposed Rule or
the Supplemental Notice identified any other public interest
consideration, either.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis respecting the impact.\341\ A
regulatory flexibility analysis or certification typically is required
for ``any rule for which the agency publishes a general notice of
proposed rulemaking pursuant to'' the notice-and-comment provisions of
the Administrative Procedure Act, 5 U.S.C. 553(b).\342\ The
requirements related to the proposed amendments fall mainly on
registered entities, exchanges, FCMs, swap dealers, clearing members,
foreign brokers, and large traders. The Commission has previously
determined that registered DCMs, FCMs, swap dealers, major swap
participants, eligible contract participants, SEFs, clearing members,
foreign brokers and large traders are not small entities for purposes
of the RFA.\343\ While the requirements under the proposed rulemaking
may impact non-financial end users, the Commission notes that position
limits levels apply only to large traders.
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\341\ 44 U.S.C. 601 et seq.
\342\ 5 U.S.C. 601(2), 603-05.
\343\ See Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18619 (Apr. 30, 1982) (DCMs, FCMs, and large traders);
Opting Out of Segregation, 66 FR 20740, 20743 (Apr. 25, 2001)
(eligible contract participants); Position Limits for Futures and
Swaps; Final Rule and Interim Final Rule, 76 FR 71626, 71680 (Nov.
18, 2011) (clearing members); Core Principles and Other Requirements
for Swap Execution Facilities, 78 FR 33476, 33548 (June 4, 2013)
(SEFs); A New Regulatory Framework for Clearing Organizations, 66 FR
45604, 45609 (Aug. 29, 2001) (DCOs); Registration of Swap Dealers
and Major Swap Participants, 77 FR 2613 (Jan. 19, 2012) (swap
dealers and major swap participants); and Special Calls, 72 FR 50209
(Aug. 31, 2007) (foreign brokers).
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies, pursuant to 5 U.S.C. 605(b), that the actions taken herein
will not have a significant economic impact on a substantial number of
small entities.
[[Page 91488]]
The Chairman made the same certification in the Proposed Rule and the
Supplemental Notice,\344\ and the Commission did not receive any
comments on the RFA.
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\344\ See Proposed Rule, 78 FR at 68973, and Supplemental
Notice, 80 FR at 58377.
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C. Paperwork Reduction Act
1. Overview
The Paperwork Reduction Act (``PRA''), 44 U.S.C. 3501 et seq.,
imposes certain requirements on Federal agencies in connection with
their conducting or sponsoring any collection of information as defined
by the PRA. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid control number issued by the Office of Management and
Budget (``OMB''). Certain provisions of the final rules will result in
amendments to previously-approved collection of information
requirements within the meaning of the PRA. Therefore, the Commission
submitted to OMB for review, in accordance with 44 U.S.C. 3507(d) and 5
CFR 1320.11, the information collection requirements in this
rulemaking, as an amendment to the previously-approved collection
associated with OMB control number 3038-0013.
Responses to this collection of information will be mandatory. The
Commission will protect proprietary information according to the
Freedom of Information Act and 17 CFR part 145, titled ``Commission
Records and Information.'' In addition, the Commission emphasizes that
section 8(a)(1) of the Act strictly prohibits the Commission, unless
specifically authorized by the Act, from making public ``data and
information that would separately disclose the business transactions or
market positions of any person and trade secrets or names of
customers.'' The Commission also is required to protect certain
information contained in a government system of records pursuant to the
Privacy Act of 1974.
On November 15, 2013, the Commission published in the Federal
Register a notice of proposed modifications to part 150 of the
Commission's regulations (i.e., the Proposed Rule). The modifications
addressed the policy for aggregation under the Commission's position
limits regime for futures and option contracts on nine agricultural
commodities set forth in part 150, and noted that the modifications
would also apply to the position limits regimes for other exempt and
agricultural commodity futures and options contracts and the physical
commodity swaps that are economically equivalent to such contracts, if
such regimes are finalized. On September 29, 2015, the Commission
published in the Federal Register a revision to the Proposed Rule
(i.e., the Supplemental Notice).
The Commission final rule provides that all persons holding a
greater than 10 percent ownership or equity interest in another entity
could avail themselves of an exemption in rule 150.4(b)(2) to
disaggregate the positions of the owned entity. To claim the exemption,
a person needs to meet certain criteria and file a notice with the
Commission in accordance with proposed rule 150.4(c). The notice filing
needs to demonstrate compliance with certain conditions set forth in
rule 150.4(b)(2)(i)(A)-(E). Similar to other exemptions from
aggregation, the notice filing is effective upon submission to the
Commission (or earlier, as provided in rule 150.4(c)(2)), but the
Commission may call for additional information as well as reject,
modify or otherwise condition such relief. Further, such person is
obligated to amend the notice filing in the event of a material change
to the filing.
2. Methodology and Assumptions
It is not possible at this time to precisely determine the number
of respondents affected by the final rule. The final rule relates to
exemptions that a market participant may elect to take advantage of,
meaning that without intimate knowledge of the day-to-day business
decisions of all its market participants, the Commission could not know
which participants, or how many, may elect to obtain such an exemption.
Further, the Commission is unsure of how many participants not
currently in the market may be required to or may elect to incur the
estimated burdens in the future.
These limitations notwithstanding, the Commission has made best-
effort estimations regarding the likely number of affected entities for
the purposes of calculating burdens under the PRA. The Commission used
its proprietary data, collected from market participants, to estimate
the number of respondents for each of the proposed obligations subject
to the PRA by estimating the number of respondents who may be close to
a position limit and thus may file for relief from aggregation
requirements.
The Commission's estimates concerning wage rates are based on 2013
salary information for the securities industry compiled by the
Securities Industry and Financial Markets Association (``SIFMA''). The
Commission is using a figure of $160 per hour, which is derived from a
weighted average of salaries across different professions from the
SIFMA Report on Management & Professional Earnings in the Securities
Industry 2013, modified to account for an 1800-hour work-year, adjusted
to account for the average rate of inflation in through April 2016.
This figure was then multiplied by 1.33 to account for benefits \345\
and further by 1.5 to account for overhead and administrative expenses,
and rounded to the nearest ten dollars.\346\ The Commission anticipates
that compliance with the provisions would require the work of an
information technology professional; a compliance manager; an
accounting professional; and an associate general counsel. Thus, the
wage rate is a weighted national average of salary for professionals
with the following titles (and their relative weight); ``programmer
(average of senior and non-senior)'' (15 percent weight), ``senior
accountant'' (15 percent), ``compliance manager'' (30 percent), and
``assistant/associate general counsel'' (40 percent).
---------------------------------------------------------------------------
\345\ The Bureau of Labor Statistics reports that an average of
32.8 percent of all compensation in the financial services industry
is related to benefits. This figure may be obtained on the Bureau of
Labor Statistics Web site, at http://www.bls.gov/news.release/ecec.t06.htm. The Commission rounded this number to 33 percent to
use in its calculations.
\346\ Other estimates of this figure have varied dramatically
depending on the categorization of the expense and the type of
industry classification used (see, e.g., BizStats at http://www.bizstats.com/corporation-industry-financials/finance-insurance-52/securities-commodity-contracts-other-financial-investments-523/commodity-contracts-dealing-and-brokerage-523135/show and Damodaran
Online at http://pages.stern.nyu.edu/~adamodar/pc/datasets/
uValuedata.xls. The Commission has chosen to use a figure of 50
percent for overhead and administrative expenses to attempt to
conservatively estimate the average for the industry.
---------------------------------------------------------------------------
The Commission requested comment on its assumptions and estimates
in the Proposed Rule and the Supplemental Notice,\347\ but did not
receive any comments.
---------------------------------------------------------------------------
\347\ See Proposed Rule, 78 FR at 68975 and Supplemental Notice,
80 FR at 58378.
---------------------------------------------------------------------------
3. Collections of Information
Rule 150.4(b)(2) requires qualified persons to file a notice in
order to claim exemptive relief from aggregation. Further, rule
150.4(b)(2)(ii) states that the notice is to be filed in accordance
with rule 150.4(c), which requires a description of the relevant
circumstances that warrant disaggregation and a statement that
certifies that the conditions set forth in the exemptive provision have
been met. Persons claiming these exemptions would be required to submit
to the
[[Page 91489]]
Commission, as requested, such information as relates to the claim for
exemption. An updated or amended notice must be filed with the
Commission upon any material change.
The final rule also extends relief available under rule 150.4(b)(4)
to additional entities; so the Commission expects that, as a result of
the expanded exemptive relief available to these entities, a greater
number of persons will file exemptive notices under 150.4(b)(4). The
Commission also expects entities to file for relief under rule
150.4(b)(7), which allows for entities to file a notice, including a
memorandum of law, in order to claim the exemption.
Given the expansion of the exemptions that market participants may
claim, the Commission anticipates an increase in the number of notice
filings. However, because of the relief for ``higher-tier'' entities
under rule 150.4(b)(8) the Commission expects that increase to be
offset partially by a reduction in the number of filings by ``higher-
tier'' entities. Thus, the Commission anticipates a net increase in the
number of filings under regulation 150.4 as a result of the adoption of
these final rules. The Commission believes that this increase will
create an increase in the annual labor burden. However, because
entities have already incurred the capital, start-up, operating, and
maintenance costs to file other exemptive notices--such as those
currently allowed for independent account controllers and futures
commission merchants under regulation 150.4--the Commission does not
anticipate an increase in those costs.
In the Supplemental Notice, the Commission estimated that 100
entities will each file two notices annually, and 25 entities will each
file one notice annually,\348\ under proposed rule 150.4(b)(2), at an
average of 20 hours per filing. Thus, the Commission approximated a
total per entity average burden of 36 labor hours annually.\349\ At an
estimated labor cost of $120 per hour, the Commission estimated a cost
of approximately $4,320 per entity on average for filings under rule
150.4(b)(2). For this final rule, while the Commission maintains its
estimates of the number of entities and number of filings, its update
of the estimated labor cost to $160 per hour, as noted above, increases
the estimated cost to approximately $5,760 per entity on average for
filings under rule 150.4(b)(2).
---------------------------------------------------------------------------
\348\ The Commission's estimate that 25 entities will each file
one notice annually reflected those entities which had been
estimated to each file one notice annually under proposed rule
150.4(b)(3), which the Commission is not adopting. Therefore, the
Commission estimated that each of these 25 entities would file one
notice annually under rule 150.4(b)(2), in place of the assumed
filing under proposed rule 150.4(b)(3). See Supplemental Notice, 80
FR at 58378.
\349\ That is, the Commission estimated that a total of 225
filings would be made each year. At 20 hours per filing, the total
burden would be 4,500 labor hours, which divided among the 125
entities results in an average burden of 36 labor hours per entity.
---------------------------------------------------------------------------
As in the Proposed Rule and the Supplemental Notice, the Commission
estimates that 75 entities will each file one notice annually under
rule 150.4(b)(4) (proposed paragraph (b)(5)), at an average of 10 hours
per filing. Thus, the Commission approximates a total per entity burden
of 10 labor hours annually. At an estimated labor cost of $160 per
hour, the Commission estimates a cost of approximately $1,600 per
entity for filings under rule 150.4(b)(4).
And, again as in the Proposed Rule and the Supplemental Notice, the
Commission estimates that 40 entities will each file one notice
annually under rule 150.4(b)(7) (proposed paragraph (b)(8)), including
the requisite memorandum of law, at an average of 40 hours per filing.
Thus, the Commission approximates a total per entity burden of 40 labor
hours annually. At an estimated labor cost of $160 per hour, the
Commission estimates a cost of approximately $6,400 per entity for
filings under rule 150.4(b)(7).
In sum, the Commission estimates that 240 entities will submit a
total of 340 responses per year and incur a total burden of 6,850 labor
hours. At the updated cost of $160 per hour, this results in a cost of
approximately $1,096,000 annually in order to claim exemptive relief
under rule 150.4.
List of Subjects in 17 CFR Part 150
Position limits, Bona fide hedging, Referenced contracts.
For the reasons discussed in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 150 as follows:
PART 150--LIMITS ON POSITIONS
0
1. The authority citation for part 150 is revised to read as follows:
Authority: 7 U.S.C. 6a, 6c, and 12a(5), as amended by Title VII
of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. 111-203, 124 Stat. 1376 (2010).
0
2. In Sec. 150.1, revise paragraphs (d), (e)(2), and (e)(5) 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 which 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, limited member 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 association; an insurance company; or the separately organized
affiliates of any of the above entities:
(1) Which authorizes an independent account controller
independently to control all trading decisions with respect to the
eligible entity's client positions and accounts that the independent
account controller holds directly or indirectly, or on the eligible
entity's behalf, but without the eligible entity's day-to-day
direction; and
(2) Which maintains:
(i) Only such minimum control over the independent account
controller as is consistent with its fiduciary responsibilities to the
managed positions and accounts, and necessary to fulfill its duty to
supervise diligently the trading done on its behalf; or
(ii) If a limited partner, limited member or shareholder of a
commodity pool the operator of which is exempt from registration under
Sec. 4.13 of this chapter, only such limited control as is consistent
with its status.
(e) * * *
(2) Over whose trading the eligible entity maintains only such
minimum control as is consistent with its fiduciary responsibilities
for managed positions and accounts to fulfill its duty to supervise
diligently the trading done on its behalf or as is consistent with such
other legal rights or obligations which may be incumbent upon the
eligible entity to fulfill;
* * * * *
(5) Who is:
(i) Registered as a futures commission merchant, an introducing
broker, a commodity trading advisor, or an associated person of any
such registrant, or
(ii) A general partner, managing member or manager of a commodity
pool the operator of which is excluded from registration under Sec.
4.5(a)(4) of this chapter or Sec. 4.13 of this chapter, provided that
such general partner, managing member or manager complies with the
requirements of Sec. 150.4(c).
* * * * *
Sec. 150.3 [Amended]
0
3. Amend Sec. 150.3 as follows:
[[Page 91490]]
0
a. Remove the semicolon and the word ``or'' at the end of paragraph
(a)(3) and add a period in their place; and
0
b. Remove paragraph (a)(4).
0
4. Revise Sec. 150.4 to read as follows:
Sec. 150.4 Aggregation of positions.
(a) Positions to be aggregated--(1) Trading control or 10 percent
or greater ownership or equity interest. For the purpose of applying
the position limits set forth in Sec. 150.2, unless an exemption set
forth in paragraph (b) of this section applies, all positions in
accounts for which any person, by power of attorney or otherwise,
directly or indirectly controls trading or holds a 10 percent or
greater ownership or equity interest must be aggregated with the
positions held and trading done by such person. For the purpose of
determining the positions in accounts for which any person controls
trading or holds a 10 percent or greater ownership or equity interest,
positions or ownership or equity interests held by, and trading done or
controlled by, two or more persons acting pursuant to an expressed or
implied agreement or understanding shall be treated the same as if the
positions or ownership or equity interests were held by, or the trading
were done or controlled by, a single person.
(2) Substantially identical trading. Notwithstanding the provisions
of paragraph (b) of this section, for the purpose of applying the
position limits set forth in Sec. 150.2, any person that, by power of
attorney or otherwise, holds or controls the trading of positions in
more than one account or pool with substantially identical trading
strategies, must aggregate all such positions (determined pro rata)
with all other positions held and trading done by such person and the
positions in accounts which the person must aggregate pursuant to
paragraph (a)(1) of this section.
(b) Exemptions from aggregation. For the purpose of applying the
position limits set forth in Sec. 150.2, and notwithstanding the
provisions of paragraph (a)(1) of this section, but subject to the
provisions of paragraph (a)(2) of this section, the aggregation
requirements of this section shall not apply in the circumstances set
forth in this paragraph (b).
(1) Exemption for ownership by limited partners, shareholders or
other pool participants. Any person that is a limited partner, limited
member, shareholder or other similar type of pool participant holding
positions in which the person by power of attorney or otherwise
directly or indirectly has a 10 percent or greater ownership or equity
interest in a pooled account or positions need not aggregate the
accounts or positions of the pool with any other accounts or positions
such person is required to aggregate, except that such person must
aggregate the pooled account or positions with all other accounts or
positions owned or controlled by such person if such person:
(i) Is the commodity pool operator of the pooled account;
(ii) Is a principal or affiliate of the operator of the pooled
account, unless:
(A) The pool operator has, and enforces, written procedures to
preclude the person from having knowledge of, gaining access to, or
receiving data about the trading or positions of the pool;
(B) The person does not have direct, day-to-day supervisory
authority or control over the pool's trading decisions;
(C) The person, if a principal of the operator of the pooled
account, maintains only such minimum control over the commodity pool
operator as is consistent with its responsibilities as a principal and
necessary to fulfill its duty to supervise the trading activities of
the commodity pool; and
(D) The pool operator has complied with the requirements of
paragraph (c) of this section on behalf of the person or class of
persons; or
(iii) Has, by power of attorney or otherwise directly or
indirectly, a 25 percent or greater ownership or equity interest in a
commodity pool, the operator of which is exempt from registration under
Sec. 4.13 of this chapter.
(2) Exemption for certain ownership of greater than 10 percent in
an owned entity. Any person with an ownership or equity interest in an
owned entity of 10 percent or greater (other than an interest in a
pooled account subject to paragraph (b)(1) of this section), need not
aggregate the accounts or positions of the owned entity with any other
accounts or positions such person is required to aggregate, provided
that:
(i) Such person, including any entity that such person must
aggregate, and the owned entity (to the extent that such person is
aware or should be aware of the activities and practices of the
aggregated entity or the owned entity):
(A) Do not have knowledge of the trading decisions of the other;
(B) Trade pursuant to separately developed and independent trading
systems;
(C) Have and enforce written procedures to preclude each from
having knowledge of, gaining access to, or receiving data about, trades
of the other. Such procedures must include security arrangements,
including separate physical locations, which would maintain the
independence of their activities;
(D) Do not share employees that control the trading decisions of
either; and
(E) Do not have risk management systems that permit the sharing of
its trades or its trading strategy with employees that control the
trading decisions of the other; and
(ii) Such person complies with the requirements of paragraph (c) of
this section.
(3) Exemption for accounts held by futures commission merchants. A
futures commission merchant or any affiliate of a futures commission
merchant need not aggregate positions it holds 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 or of its affiliates, if:
(i) A person other than the futures commission merchant or the
affiliate directs trading in such an account;
(ii) The futures commission merchant or the affiliate 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;
(iii) 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 or
the affiliate holds, has a financial interest of 10 percent or more in,
or controls; and
(iv) The futures commission merchant or the affiliate has complied
with the requirements of paragraph (c) of this section.
(4) Exemption for accounts carried by an independent account
controller. An eligible entity need not aggregate its positions with
the eligible entity's client positions or accounts carried by an
authorized independent account controller, as defined in Sec.
150.1(e), except for the spot month in physical-delivery commodity
contracts, provided that the eligible entity has complied with the
requirements of paragraph (c) of this section, and that the overall
positions held or controlled by such independent account controller may
not exceed the limits specified in Sec. 150.2.
(i) Additional requirements for exemption of affiliated entities.
If the independent account controller is affiliated with the eligible
entity or
[[Page 91491]]
another independent account controller, each of the affiliated entities
must:
(A) Have, and enforce, written procedures to preclude the
affiliated entities from having knowledge of, gaining access to, or
receiving data about, trades of the other. Such procedures must include
security arrangements, including separate physical locations, which
would maintain the independence of their activities; provided, however,
that such procedures may provide for the disclosure of information
which is reasonably necessary for an eligible entity to maintain the
level of control consistent with its fiduciary responsibilities to the
managed positions and accounts and necessary to fulfill its duty to
supervise diligently the trading done on its behalf;
(B) Trade such accounts pursuant to separately developed and
independent trading systems;
(C) Market such trading systems separately; and
(D) Solicit funds for such trading by separate disclosure documents
that meet the standards of Sec. 4.24 or Sec. 4.34 of this chapter, as
applicable, where such disclosure documents are required under part 4
of this chapter.
(ii) [Reserved].
(5) Exemption for underwriting. A person need not aggregate the
positions or accounts of an owned entity if the ownership or equity
interest is based on the ownership of securities constituting the whole
or a part of an unsold allotment to or subscription by such person as a
participant in the distribution of such securities by the issuer or by
or through an underwriter.
(6) Exemption for broker-dealer activity. A broker-dealer
registered with the Securities and Exchange Commission, or similarly
registered with a foreign regulatory authority, need not aggregate the
positions or accounts of an owned entity if the ownership or equity
interest is based on the ownership of securities acquired in the normal
course of business as a dealer, provided that such person does not have
actual knowledge of the trading decisions of the owned entity.
(7) Exemption for information sharing restriction. A person need
not aggregate the positions or accounts of an owned entity if the
sharing of information associated with such aggregation (such as, only
by way of example, information reflecting the transactions and
positions of a such person and the owned entity) creates a reasonable
risk that either person could violate state or federal law or the law
of a foreign jurisdiction, or regulations adopted thereunder, provided
that such person does not have actual knowledge of information
associated with such aggregation, and provided further that such person
has filed a prior notice pursuant to paragraph (c) of this section and
included with such notice a written memorandum of law explaining in
detail the basis for the conclusion that the sharing of information
creates a reasonable risk that either person could violate state or
federal law or the law of a foreign jurisdiction, or regulations
adopted thereunder. However, the exemption in this paragraph shall not
apply where the law or regulation serves as a means to evade the
aggregation of accounts or positions. All documents submitted pursuant
to this paragraph shall be in English, or if not, accompanied by an
official English translation.
(8) Exemption for affiliated entities. After a person has filed a
notice under paragraph (c) of this section, another person need not
file a separate notice identifying any position or account identified
in such notice filing, provided that:
(i) Such other person has an ownership or equity interest of 10
percent or greater in the person that filed the notice, or the person
that filed the notice has an ownership or equity interest of 10 percent
or greater in such other person, or an ownership or equity interest of
10 percent or greater is held in such other person by a third person
who holds an ownership or equity interest of 10 percent or greater in
the person that has filed the notice (in any such case, the ownership
or equity interest may be held directly or indirectly);
(ii) Such other person complies with the conditions applicable to
the exemption specified in such notice filing, other than the filing
requirements; and
(iii) Such other person does not otherwise control trading of any
account or position identified in such notice filing.
(iv) Upon call by the Commission, any person relying on the
exemption in this paragraph (b)(8) shall provide to the Commission such
information concerning the person's claim for exemption. Upon notice
and opportunity for the affected person to respond, the Commission may
amend, suspend, terminate, or otherwise modify a person's aggregation
exemption for failure to comply with the provisions of this section.
(c) Notice filing for exemption. (1) Persons seeking an aggregation
exemption under paragraph (b)(1)(ii), (b)(2), (b)(3), (b)(4), or (b)(7)
of this section shall file a notice with the Commission, which shall be
effective upon submission of the notice (or earlier, as provided in
paragraph (c)(2) of this section), and shall include:
(i) A description of the relevant circumstances that warrant
disaggregation; and
(ii) A statement of a senior officer of the entity certifying that
the conditions set forth in the applicable aggregation exemption
provision have been met.
(2) If a person newly acquires an ownership or equity interest in
an owned entity of 10 percent or greater and is eligible for the
aggregation exemption under paragraph (b)(2) of this section, the
person may elect that a notice filed under this paragraph (c) shall be
effective as of the date of such acquisition if such notice is filed no
later than 60 days after such acquisition.
(3) Upon call by the Commission, any person claiming an aggregation
exemption under this section shall provide such information
demonstrating that the person meets the requirements of the exemption,
as is requested by the Commission. Upon notice and opportunity for the
affected person to respond, the Commission may amend, suspend,
terminate, or otherwise modify a person's aggregation exemption for
failure to comply with the provisions of this section.
(4) In the event of a material change to the information provided
in any notice filed under this paragraph (c), an updated or amended
notice shall promptly be filed detailing the material change.
(5) Any notice filed under this paragraph (c) shall be submitted in
the form and manner provided for in paragraph (d) of this section.
(6) If a person is eligible for an aggregation exemption under
paragraph (b)(1)(ii), (b)(2), (b)(3), (b)(4), or (b)(7) of this
section, a failure to timely file a notice under this paragraph (c)
shall not constitute a violation of paragraph (a)(1) of this section or
any position limit set forth in Sec. 150.2 if such notice is filed no
later than five business days after the person is aware, or should be
aware, that such notice has not been timely filed.
(d) Form and manner of reporting and submitting information or
filings. Unless otherwise instructed by the Commission or its
designees, any person submitting reports under this section shall
submit the corresponding required filings and any other information
required under this part to the Commission using the format, coding
structure, and electronic data transmission procedures approved in
writing by the Commission. Unless otherwise provided in this section,
the notice shall be effective upon filing.
[[Page 91492]]
When the reporting entity discovers errors or omissions to past
reports, the entity shall so notify the Commission and file corrected
information in a form and manner and at a time as may be instructed by
the Commission or its designee.
(e) Delegation of authority to the Director of the Division of
Market Oversight. (1) The Commission hereby delegates, until it orders
otherwise, to the Director of the Division of Market Oversight or such
other employee or employees as the Director may designate from time to
time, the authority:
(i) In paragraph (b)(8)(iv) of this section to call for additional
information from a person claiming the exemption in paragraph (b)(8) of
this section.
(ii) In paragraph (c)(3) of this section to call for additional
information from a person claiming an aggregation exemption under this
section.
(iii) In paragraph (d) of this section for providing instructions
or determining the format, coding structure, and electronic data
transmission procedures for submitting data records and any other
information required under this part.
(2) The Director of the Division of Market Oversight may submit to
the Commission for its consideration any matter which has been
delegated in this section.
(3) Nothing in this section prohibits the Commission, at its
election, from exercising the authority delegated in this section.
Issued in Washington, DC, on December 6, 2016, by the
Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix to Aggregation of Positions--Commission Voting Summary
On this matter, Chairman Massad and Commissioners Bowen and
Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
[FR Doc. 2016-29582 Filed 12-15-16; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: December 16, 2016