[Federal Register Volume 81, Number 251 (Friday, December 30, 2016)]
[Proposed Rules]
[Pages 96704-96990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29483]



[[Page 96703]]

Vol. 81

Friday,

No. 251

December 30, 2016

Part III

Book 2 of 2 Books

Pages 96703-97110





 Commodity Futures Trading Commission





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17 CFR Parts 1, 15, 17, et al.



Position Limits for Derivatives; Proposed Rule

Federal Register / Vol. 81 , No. 251 / Friday, December 30, 2016 / 
Proposed Rules

[[Page 96704]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 15, 17, 19, 37, 38, 140, 150 and 151

RIN 3038-AD99


Position Limits for Derivatives

AGENCY: Commodity Futures Trading Commission.

ACTION: Reproposal.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is reproposing rules to amend part 150 of the Commission's 
regulations concerning speculative position limits to conform to the 
Wall Street Transparency and Accountability Act of 2010 (``Dodd-Frank 
Act'') amendments to the Commodity Exchange Act (``CEA'' or ``Act''). 
The reproposal would establish speculative position limits for 25 
exempt and agricultural commodity futures and option contracts, and 
physical commodity swaps that are ``economically equivalent'' to such 
contracts (as such term is used in section 4a(a)(5) of the CEA). In 
connection with establishing these limits, the Commission is 
reproposing to update some relevant definitions; revise the exemptions 
from speculative position limits, including for bona fide hedging; and 
extend and update reporting requirements for persons claiming exemption 
from these limits. The Commission is also reproposing appendices to 
part 150 that would provide guidance on risk management exemptions for 
commodity derivative contracts in excluded commodities permitted under 
the revised definition of bona fide hedging position; list core 
referenced futures contracts and commodities that would be 
substantially the same as a commodity underlying a core referenced 
futures contract for purposes of the definition of location basis 
contract; describe and analyze fourteen fact patterns that would 
satisfy the reproposed definition of bona fide hedging position; and 
present the reproposed speculative position limit levels in tabular 
form. In addition, the Commission proposes to update certain of its 
rules, guidance and acceptable practices for compliance with Designated 
Contract Market (``DCM'') core principle 5 and Swap Execution Facility 
(``SEF'') core principle 6 in respect of exchange-set speculative 
position limits and position accountability levels. Furthermore, the 
Commission is reproposing processes for DCMs and SEFs to recognize 
certain positions in commodity derivative contracts as non-enumerated 
bona fide hedges or enumerated anticipatory bona fide hedges, as well 
as to exempt from position limits certain spread positions, in each 
case subject to Commission review. Separately, the Commission is 
reproposing to delay for DCMs and SEFs that lack access to sufficient 
swap position information the requirement to establish and monitor 
position limits on swaps.

DATES: Comments must be received on or before February 28, 2017.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD99, 
by any of the following methods:
     CFTC Web site: http://comments.cftc.gov;
     Mail: Secretary of the Commission, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street NW., 
Washington, DC 20581;
     Hand delivery/courier: Same as Mail, above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow instructions for submitting comments.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that may be exempt from disclosure under the Freedom of 
Information Act, a petition for confidential treatment of the exempt 
information may be submitted according to the procedures established in 
CFTC regulations at 17 CFR part 145.
    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Stephen Sherrod, Senior Economist, 
(202) 418-5452, [email protected], Riva Spear Adriance, Senior Special 
Counsel, (202) 418-5494, [email protected], Hannah Ropp, Surveillance 
Analyst, 202-418-5228, [email protected], or Steven Benton, Industry 
Economist, (202) 418-5617, [email protected], Division of Market 
Oversight; or Lee Ann Duffy, Assistant General Counsel, 202-418-6763, 
[email protected], Office of General Counsel, in each case at the 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. Introduction
    B. The Commission Construes CEA Section 4a(a) To Mandate That 
the Commission Impose Position Limits
    C. Necessity Finding
II. Proposed Compliance Date
III. Reproposed Rules
    A. Sec.  150.1--Definitions
    B. Sec.  150.2--Position limits
    C. Sec.  150.3--Exemptions
    D. Sec.  150.5--Exchange-set speculative position limits and 
Parts 37 and 38
    E. Part 19--Reports by persons holding bona fide hedging 
positions pursuant to Sec.  150.1 of this chapter and by merchants 
and dealers in cotton
    F. Sec.  150.7--Reporting requirements for anticipatory hedging 
positions
    G. Sec.  150.9--Process for recognition of positions as non-
enumerated bona fide hedging positions
    H. Sec.  150.10--Process for designated contract market or swap 
execution facility exemption from position limits for certain spread 
positions
    I. Sec.  150.11--Process for recognition of positions as bona 
fide hedging positions for unfilled anticipated requirements, unsold 
anticipated production, anticipated royalties, anticipated services 
contract payments or receipts, or anticipatory cross-commodity hedge 
positions
    J. Miscellaneous regulatory amendments
    1. Proposed Sec.  150.6--Ongoing responsibility of DCMs and SEFs
    2. Proposed Sec.  150.8--Severability
    3. Part 15--Reports--General provisions
    4. Part 17--Reports by reporting markets, futures commission 
merchants, clearing members, and foreign brokers
    5. Part 151--Position limits for futures and swaps, Commission 
Regulation 1.47 and Commission Regulation 1.48--Removal
IV. Related Matters
    A. Cost-Benefit Considerations
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act
V. Appendices
    A. Appendix A--Review of Economic Studies
    B. Appendix B--List of Comment Letters Cited in this Rulemaking

I. Background

A. Introduction

    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

[[Page 96705]]

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 (that is, position 
limits established by the Commission, as opposed to exchange-set 
limits) on certain enumerated agricultural contracts; the listed 
commodities are referred to as enumerated agricultural commodities. 
The position limits on these agricultural contracts are referred to 
as ``legacy'' limits because these contracts on agricultural 
commodities have been subject to federal position limits for 
decades. See also Position Limits for Derivatives, 78 FR 75680 at 
75723, n. 370 and accompanying text (Dec. 12, 2013) (``December 2013 
Position Limits Proposal'').
    \3\ See 17 CFR 150.2.
    \4\ See 17 CFR 150.3.
    \5\ See 17 CFR 150.4.
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    In late 2013, the CFTC proposed to amend its part 150 regulations 
governing speculative position limits.\6\ These proposed amendments 
were intended to conform the requirements of part 150 to particular 
changes to the CEA introduced by the Wall Street Transparency and 
Accountability Act of 2010 (''Dodd-Frank Act'').\7\ The proposed 
amendments included the adoption of federal position limits for 28 
exempt and agricultural commodity futures and option contracts and 
swaps that are ``economically equivalent'' to such contracts.\8\ In 
addition, the Commission proposed to require that DCMs and SEFs that 
are trading facilities (collectively, ``exchanges'') establish 
exchange-set limits on such futures, options and swaps contracts.\9\ 
Further, the Commission proposed to (i) revise the definition of bona 
fide hedging position (which includes a general definition with 
requirements applicable to all hedges, as well as an enumerated list of 
bona fide hedges),\10\ (ii) revise the process for market participants 
to request recognition of certain types of positions as bona fide 
hedges, including anticipatory hedges and hedges not specifically 
enumerated in the proposed bona fide hedging definition; \11\ and (iii) 
revise the exemptions from position limits for transactions normally 
known to the trade as spreads.\12\
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    \6\ See generally December 2013 Positions Limits Proposal. In 
the December 2013 Position Limits Proposal, the Commission proposed 
to amend its position limits to also encompass 28 exempt and 
agricultural commodity futures and options contracts and the 
physical commodity swaps that are economically equivalent to such 
contracts.
    \7\ The Commission previously had issued proposed and final 
rules in 2011 to implement the provisions of the Dodd-Frank Act 
regarding position limits and the bona fide hedge definition. 
Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 2011); 
Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011). 
A September 28, 2012 order of the U.S. District Court for the 
District of Columbia vacated the November 18, 2011 rule, with the 
exception of the rule's amendments to 17 CFR 150.2. International 
Swaps and Derivatives Association v. United States Commodity Futures 
Trading Commission, 887 F. Supp. 2d 259 (D.D.C. 2012). See generally 
the materials and links on the Commission's Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_26_PosLimits/index.htm. The Commission issued the December 2013 Position Limits 
Proposal, among other reasons, to respond to the District Court's 
decision in ISDA v. CFTC. See generally the materials and links on 
the Commission's Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/PositionLimitsforDerivatives/index.htm.
    \8\ See CEA section 4a(a)(5), 7 U.S.C. 6a(a)(5) (providing that 
the Commission establish limits on economically equivalent 
contracts); CEA section 4a(a)(6), 7 U.S.C. 6a(a)(6) (directing the 
Commission to establish aggregate position limits on futures, 
options, economically equivalent swaps, and certain foreign board of 
trade contracts in agricultural and exempt commodities 
(collectively, ``referenced contracts'')). See December 2013 
Position Limits Proposal, 78 FR at 75825. Under the December 2013 
Position Limits Proposal, ``referenced contracts'' would have been 
defined as futures, options, economically equivalent swaps, and 
certain foreign board of trade contracts, in physical commodities, 
and been subject to the proposed federal position limits. The 
Commission proposed that federal position limits would apply to 
referenced contracts, whether futures or swaps, regardless of where 
the futures or swaps positions were established. See December 2013 
Positions Limits Proposal, at 78 FR 75826 (proposed Sec.  150.2).
    \9\ See December 2013 Position Limits Proposal, 78 FR at 75754-
8. Consistent with DCM Core Principle 5 and SEF Core Principle 6, 
the Commission proposed at Sec.  150.5(a)(1) that for any commodity 
derivative contract that is subject to a speculative position limit 
under Sec.  150.2, a DCM or SEF that is a trading facility shall set 
a speculative position limit no higher than the level specified in 
Sec.  150.2.
    \10\ See December 2013 Position Limits Proposal, 78 FR at 75706-
11, 75713-18.
    \11\ See December 2013 Position Limits Proposal, 78 FR at 75718.
    \12\ See December 2013 Position Limits Proposal, 78 FR at 75735-
6. CEA section 4a(a)(1), 7 U.S.C. 6a(a)(1), permits the Commission 
to exempt transactions normally known to the trade as ``spreads'' 
from federal position limits.
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    On June 13, 2016, the Commission published a supplemental proposal 
to its December 2013 Position Limits rulemaking.\13\ The supplemental 
proposal included revisions and additions to regulations and guidance 
proposed in 2013 concerning speculative position limits in response to 
comments received on that proposal, and alternative processes for DCMs 
and SEFs to recognize certain positions in commodity derivative 
contracts as non-enumerated bona fide hedges or enumerated anticipatory 
bona fide hedges, as well as to exempt from federal position limits 
certain spread positions, in each case subject to Commission review. In 
this regard, under the 2016 Supplemental Position Limits Proposal, 
certain of the regulations proposed in 2013 regarding exemptions from 
federal position limits and exchange-set position limits would be 
amended to take into account the alternative processes. In connection 
with those proposed changes, the Commission proposed to further amend 
certain relevant definitions, including to clearly define the general 
definition of bona fide hedging for physical commodities under the 
standards in CEA section 4a(c). Separately, the Commission proposed to 
delay for DCMs and SEFs that lack access to sufficient swap position 
information the requirement to establish and monitor position limits on 
swaps at this time.
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    \13\ Position Limits for Derivatives: Certain Exemptions and 
Guidance, 81 FR 38458 (June 13, 2016) (``2016 Supplemental Position 
Limits Proposal'').
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    After review of the comments responding to both the December 2013 
Position Limits Proposal and the 2016 Supplemental Position Limits 
Proposal, the Commission, in consideration of those comments, is now 
issuing a reproposal (``Reproposal''). The Commission invites comments 
on all aspects of this Reproposal.

B. The Commission Preliminarily Construes CEA Section 4a(a) To Mandate 
That the Commission Impose Position Limits

1. Introduction
a. The History of Position Limits and the 2011 Position Limits Rule
    As part of the Dodd-Frank Act, Congress amended the CEA's position 
limits provision, which since 1936 has authorized the Commission (and 
its predecessor) to impose limits on speculative positions to prevent 
the harms caused by excessive speculation. Prior to the Dodd-Frank Act, 
CEA section 4a(a) stated that for the purpose of diminishing, 
eliminating or preventing specified burdens on interstate commerce, the 
Commission shall, from time to time, after due notice and an 
opportunity for hearing, by rule, regulation, or order, proclaim and 
fix such limits on the amounts of trading which may be done or 
positions which may be held by any person under contracts of sale of 
such commodity for future delivery on or subject to the rules of any 
contract market as the Commission finds are necessary to

[[Page 96706]]

diminish, eliminate, or prevent such burden.\14\
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    \14\ 7 U.S.C. 6a(a) (2006).
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    In the Dodd-Frank Act, Congress renumbered a modified version of 
CEA section 4a(a) as section 4a(a)(1) and added, among other 
provisions, CEA section 4a(a)(2), captioned ``Establishment of 
Limitations,'' which provides that in accordance with the standards set 
forth in CEA section 4a(a)(1), the Commission shall establish limits on 
the amount of positions, as appropriate, other than bona fide hedge 
positions, that may be held by any person. CEA section 4a(a)(2) further 
provides that for exempt commodities (energy and metals), the limits 
required under CEA section 4a(a)(2) shall be established within 180 
days after the date of the enactment of CEA section 4a(a)(2); for 
agricultural commodities, the limits required under CEA section 
4a(a)(2) shall be established within 270 days after the date of the 
enactment of CEA section 4a(a)(2).\15\
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    \15\ CEA section 4a(a)(2); 7 U.S.C. 6a(a)(2). The Commission 
notes that it uses the defined term ``bona fide hedging position'' 
throughout part 150, rather than ``bona fide hedge positions'' found 
in CEA section 4a(a)(2). CEA section 4a(c)(1) uses the term ``bona 
fide hedging transactions or positions'' and CEA section 4a(c)(2) 
uses the term ``bona fide hedging transaction or position.'' The 
Commission interprets all of these terms to mean the same. It should 
be noted that the Commission previously imposed transaction volume 
limits on ``the amounts of trading which may be done'' as authorized 
by CEA section 4a(a)(1), but removed those transaction volume 
limits. Elimination of Daily Speculative Trading Limits, 44 FR 7124, 
7127 (Feb. 6, 1979).
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    These and other changes to CEA section 4a(a) are described in more 
detail below.
    Pursuant to these amendments, the Commission adopted a position 
limits rule in 2011 (``2011 Position Limits Rule'') in a new part 
151.\16\ In the 2011 Position Limits Rule, the Commission imposed, in 
new part 151, speculative limits in the spot-month and non-spot-months 
on 28 physical commodity derivatives ``of particular significance to 
interstate commerce.'' \17\ Under the 2011 Position Limits Rule, part 
151 used formulas for calculating limit levels that are similar to the 
formulas used to calculate previous Commission- and exchange-set 
position limits.\18\ The 2011 Position Limits Rule contained provisions 
in part 151 that implemented the statutory exemption for bona fide 
hedging.\19\ It also provided account aggregation standards to 
determine which positions to attribute to a particular market 
participant.\20\ Because it interpreted the Dodd-Frank Act as mandating 
position limits, the Commission did not make an independent threshold 
determination that position limits are necessary to accomplish the 
purposes set forth in the statute. The Commission explained:
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    \16\ Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 
18, 2011). As finalized, part 151 replaced part 150.
    \17\ Id. at 71665; see also id at 716629-30.
    \18\ Id. at 71632-33 (transition), 71668-70 (spot-month limit), 
71671 (non-spot month limit).
    \19\ Id. at 71643-51.
    \20\ Id. at 71651-55. A central feature of any position limits 
regime is determining which positions to attribute to a particular 
trader. The CEA requires the Commission to attribute to a person all 
positions that the person holds or trades, as well as positions held 
or traded by anyone else that such person directly or indirectly 
controls. 7 U.S.C. 6a(a)(1). This is referred to as account 
aggregation. In addition to account aggregation, Congress required 
the Commission to set limits on all derivative positions in the same 
underlying commodity that a trader may hold or control across all 
derivative exchanges. 7 U.S.C. 6a(a)(6). The Commission refers to 
this as position aggregation.

Congress directed the Commission to impose position limits and to do 
so expeditiously. Section 4a(a)(2)(B) states that the limits for 
physical commodity futures and options contracts ``shall'' be 
established within the specified timeframes, and section 4a(a)(2)(5) 
states that the limits for economically equivalent swaps ``shall'' 
be established concurrently with the limits required by section 
4a(a)(2). The congressional directive that the Commission set 
position limits is further reflected in the repeated references to 
the limits ``required'' under section 4a(a)(2)(A).\21\
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    \21\ Position Limits for Futures and Swaps, 76 FR at 71626-628.

    ISDA and SIFMA sued the Commission to vacate part 151 on the basis 
(among others) that, in their view, CEA section 4a(a) clearly required 
the Commission to make an antecedent necessity finding.
b. The District Court Opinion
    As set forth in the Commission's December 2013 Position Limits 
Proposal,\22\ the district court in ISDA v. CFTC found that, on one 
hand, CEA section 4a(a)(1) ``unambiguously requires that, prior to 
imposing position limits, the Commission find that position limits are 
necessary to `diminish, eliminate, or prevent' the burden described in 
[CEA section 4a(a)(1)].'' \23\ On the other hand, the court found that 
the Dodd-Frank Act amendments to CEA section 4a(a) rendered section 
4a(a)(1) ambiguous with respect to whether such findings are required 
for the position limits described in CEA section 4a(a)(2)--futures 
contracts, options, and certain swaps on agricultural and exempt 
commodities.\24\
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    \22\ International Swaps and Derivatives Ass'n v. United States 
Commodity Futures Trading Comm'n, 887 F. Supp. 2d 259 (D.D.C. 2012).
    \23\ Id. at 270.
    \24\ Id. at 281.
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    The court's determination in ISDA v. CFTC that CEA sections 
4a(a)(1) and (2), read together, are ambiguous focused on the opening 
phrase of subsection (A)--``[i]n accordance with the standards set 
forth in [CEA section 4a(a)(1)].'' The court held that the term 
``standards'' in CEA section 4a(a)(2) was ambiguous as to whether it 
referred to the requirement in CEA section 4a(a)(1) that the Commission 
impose position limits only ``as [it] finds are necessary to diminish, 
eliminate, or prevent'' an unnecessary burden on interstate 
commerce.\25\ If not, ``standards'' would refer to the aggregation and 
flexibility standards stated in CEA section 4a(a)(1) by which position 
limits are to be implemented. Accordingly, the court rejected both (1) 
the Commission's contention that CEA section 4a(a) as a whole 
unambiguously mandated the imposition of position limits without the 
Commission finding independently that they are necessary; and (2) the 
plaintiffs' contention that CEA section 4a(a) unambiguously required 
the Commission to make such findings before the imposition of position 
limits.\26\ The court stated that because the Commission had 
incorrectly found CEA section 4a(a) unambiguous, it could not defer to 
any interpretation by the Commission to resolve the section's 
ambiguity. As the court observed, the D.C. Circuit has held that `` 
`deference to an agency's interpretation of a statute is not 
appropriate when the agency wrongly believes that interpretation is 
compelled by Congress.' '' \27\ The court further held that, pursuant 
to the law of the D.C. Circuit, it was required to remand the matter to 
the Commission so that it could ``fill in the gaps and resolve the 
ambiguities.'' \28\ The court instructed that the Commission must apply 
its experience and expertise and cautioned that, in resolving the 
ambiguity in CEA section 4a(a), `` `it is incumbent upon the agency not 
to rest simply on its parsing of the statutory language.' '' \29\ The 
Commission does not rest simply on parsing the statutory language, but 
any interpretation necessarily begins with the text, which is described 
in the next section.
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    \25\ 887 F. Supp. 2d at 274-76.
    \26\ 887 F. Supp. 2d at 279-80.
    \27\ Id. at 280-82, quoting Peter Pan Bus Lines, Inc. v. Fed. 
Motor Carrier Safety Admin., 471 F.3d 1350, 1354 (D.C. Cir. 2006).
    \28\ 887 F. Supp. 2d at 282.
    \29\ Id. at n.7, quoting PDK Labs. Inc. v. DEA, 362 F.3d 786, 
797 (D.C. Cir. 2004).
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2. The Statutory Framework for Position Limits
    Before the Dodd-Frank Act, what was then CEA section 4a(a) 
authorized the

[[Page 96707]]

Commission to set limits on futures for any exchange-traded contract 
for future delivery of any commodity ``as the Commission finds are 
necessary to diminish, eliminate, or prevent [the] burden'' of 
``[e]xcessive speculation'' ``causing sudden or unreasonable 
fluctuations or unwarranted changes in the price of such commodity.'' 7 
U.S.C. 6a(a) (2009 Supp.).\30\ CEA section 4a(a) also required the 
Commission to follow certain criteria for aggregating limits once it 
made that determination. And the Commission was authorized to impose 
limits flexibly, depending on the commodity, delivery month, and other 
factors.\31\
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    \30\ Under the heading of ``Burden on interstate commerce; 
trading or position limits,'' 7 U.S.C. 6a(a) (2006) provided that 
excessive speculation in any commodity under contracts of sale of 
such commodity for future delivery made on or subject to the rules 
of contract markets or derivatives transaction execution facilities, 
or on electronic trading facilities with respect to a significant 
price discovery contract causing sudden or unreasonable fluctuations 
or unwarranted changes in the price of such commodity, is an undue 
and unnecessary burden on interstate commerce in such commodity. 
Title 7 U.S.C. 6a(a) (2006) further provided that for the purpose of 
diminishing, eliminating, or preventing such burden, the Commission 
shall, from time to time, after due notice and opportunity for 
hearing, by rule, regulation, or order, proclaim and fix such limits 
on the amounts of trading which may be done or positions which may 
be held by any person under contracts of sale of such commodity for 
future delivery on or subject to the rules of any contract market or 
derivatives transaction execution facility, or on an electronic 
trading facility with respect to a significant price discovery 
contract, as the Commission finds are necessary to diminish, 
eliminate, or prevent such burden. Additionally, 7 U.S.C. 6a(a) 
(2006) stated 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. Title 7 U.S.C. 6a(a) (2006) further stated that 
nothing in that section shall be construed to prohibit the 
Commission from fixing different trading or position limits for 
different commodities, markets, futures, or delivery months, or for 
different number of days remaining until the last day of trading in 
a contract, or different trading limits for buying and selling 
operations, or different limits for the purposes of paragraphs (1) 
and (2) of subsection (b) of this section, or from exempting 
transactions normally known to the trade as ``spreads'' or 
``straddles'' or ``arbitrage'' or from fixing limits applying to 
such transactions or positions different from limits fixed for other 
transactions or positions. Moreover, 7 U.S.C. 6a(a) (2006) defined 
the word ``arbitrage'' in domestic markets to mean the same as a 
``spread'' or ``straddle.'' It also authorized the Commission to 
define the term ``international arbitrage.'' 7 U.S.C. 6a(a) (2006).
    \31\ There were four other subsections of CEA section 4a: CEA 
section 4a(b), which made it unlawful for a person to hold positions 
in excess of Commission-set limits; CEA section 4a(c), which 
exempted positions held under an exemption for bona fide hedges, CEA 
section 4a(d), which exempted positions held by or on behalf of the 
United States, and CEA section 4a(e), which authorized exchanges to 
set limits so long as they were not higher than Commission-set 
limits and made it unlawful for any person to hold limits in excess 
of exchange-set limits. (Exchange-set limits are also addressed 
elsewhere in the CEA. E.g., 7 U.S.C. 7(d)(5)).
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    The 2010 Dodd-Frank Act amendments to CEA section 4a(a) 
significantly expanded and altered it. The entirety of pre-Dodd-Frank 
CEA section 4a(a) became CEA section 4a(a)(1). Congress added six new 
subsections to CEA section 4a(a)--sections 4a(a)(2) through (7). And, 
outside of section 4a(a), Congress imposed a requirement that the 
Commission study the new limits it imposed and provide Congress with a 
report on their effects within one year of their imposition.\32\
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    \32\ 15 U.S.C. 8307(a). Some parts of pre Dodd-Frank CEA 
sections 4a(a) and 4a(b)-(e) were also amended by the Dodd-Frank 
Act. CEA section 4a(a) is now CEA section 4a(a)(1) and was modified 
primarily to add swaps, CEA section 4a(b) updates the names of 
applicable exchanges, and CEA section 4a(c) requires the Commission 
to promulgate a rule in accordance with a narrowed definition of 
bona fide hedging position as an exemption from position limits. 7 
U.S.C. 6a(a)(1), 6a(b)-(e).
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    The primary change at issue here was the addition of new CEA 
section 4a(a)(2), which addresses position limits on a specific class 
of commodity contracts, ``physical commodities other than excluded 
commodities'':
    CEA section 4a(a)(2)(A) provides that in accordance with the 
standards set forth in CEA section 4a(a)(1), with respect to physical 
commodities other than excluded commodities, the Commission shall 
establish limits on the amount of positions, as appropriate, other than 
bona fide hedge positions, that may be held by any person with respect 
to contracts of sale for future delivery or with respect to options on 
the contracts.
    CEA section 4a(a)(2)(B), in turn, provides that the limits 
``required'' under CEA section 4a(a)(2)(A) ``shall be established 
within 180 days after the date of enactment of this paragraph'' for 
``agricultural commodities'' (such as wheat or corn) and ``within 270 
days after the date of the enactment of this paragraph'' for ``exempt 
commodities'' (which include energy-related commodities like oil, as 
well as metals).\33\
---------------------------------------------------------------------------

    \33\ 7 U.S.C. 6a(a)(2)(B)(i) and (ii).
---------------------------------------------------------------------------

    The other new subsections of CEA section 4a(a) delineate the types 
of physical commodity derivatives to which the new limits apply, set 
forth criteria for the Commission to consider in determining the levels 
of the required limits, require the Commission to aggregate the limits 
across exchanges for equivalent derivatives, require the Commission to 
impose limits on swaps that are economically equivalent to the physical 
commodity futures and options subject to CEA section 4a(a)(2), and 
permit the Commission to grant exemptions from the position limits it 
must impose under the provision:
     Section 4a(a)(3) guides the Commission in setting 
appropriate limit levels by providing that the Commission shall 
consider whether the limit levels: (i) Diminish, eliminate, or prevent 
excessive speculation; (ii) deter and prevent market manipulation, 
squeezes, and corners; (iii) ensure sufficient market liquidity for 
bona fide hedgers; and (iv) ensure that the price discovery function of 
the underlying market is not disrupted;
     Section 4a(a)(4) sets forth criteria for determining which 
swaps perform a significant price discovery function for purposes of 
the position limits provisions;
     Section 4a(a)(5) requires the Commission to concurrently 
impose appropriate limit levels on physical commodity swaps that are 
economically equivalent to the futures and options for which limits are 
required;
     Section 4a(a)(6) requires the Commission to apply the 
required position limits on an aggregate basis to contracts based on 
the same underlying commodity across all exchanges; and
     Section a(a)(7) authorizes the Commission to grant 
exemptions from the position limits it imposes.\34\
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    \34\ 7 U.S.C. 6a(a)(3)-(7).

In a separate Dodd-Frank Act provision, Congress required that the 
Commission, in consultation with exchanges, ``shall conduct a study of 
the effects (if any) of the position limits imposed'' under CEA section 
4a(a)(2), that ``[w]ithin twelve months after the imposition of 
position limits'' the Commission ``shall'' submit a report of the 
results of the study to Congress, and that Congress ``shall'' hold 
hearings within 30 days of receipt of the report regarding its 
findings.\35\
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 8307(a).
---------------------------------------------------------------------------

3. The Commission's Experience With Position Limits
    As explained in the December 2013 Position Limits Proposal, 
position limits have a long history as a tool to prevent unwarranted 
price movement and volatility, including but not limited to price 
swings caused by market manipulation.\36\ Physical commodities 
underlying futures contracts are, by definition, in finite supply, and 
so it is

[[Page 96708]]

possible to amass or dissipate an extremely large position in such a 
way as to interfere with the normal forces of supply and demand. 
Speculators (who have no commercial use for the underlying commodity) 
are considered differently from hedgers (who use commodity derivatives 
to hedge commercial risk). Speculators have been considered a greater 
source of risk because their trading is unconnected with underlying 
commercial activity, whereas a hedger's trading is calibrated to other 
business needs. In various statutory enactments, Congress has 
recognized both the utility of position limits and the need to treat 
speculators differently from hedgers.
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    \36\ December 2013 Position Limits Proposal, 78 FR at 75685.
---------------------------------------------------------------------------

    Congress began regulating commodity derivatives in 1917, when 
Congress enacted emergency legislation to stabilize the U.S. grain 
markets during the First World War by suspending wheat futures and 
securing ``a voluntary limitation'' of 500,000 bushels on trading in 
corn futures.\37\ In 1922 Congress enacted the Grain Futures Act, in 
which it noted that ``sudden or unreasonable fluctuations in the prices 
of commodity futures . . . frequently occur as a result of speculation, 
manipulation, or control . . . .'' \38\ In 1936, Congress strengthened 
the government's authority by providing for limits on speculative 
trading in commodity derivatives when it enacted the CEA. The CEA 
authorized the CFTC's predecessor, the Commodity Exchange Commission 
(CEC), to establish limits on speculative trading. Since that time, the 
Commission has been establishing or authorizing position limits for the 
past 80 years. As discussed in the December 2013 Position Limits 
Proposal and prior rulemakings, this history includes setting position 
limits beginning in 1938; overseeing exchange-set limits beginning in 
the 1960s; promulgating a rule in 1981, later directly ratified by 
Congress, mandating that exchanges set limits for all commodity futures 
for which there were no limits; allowing exchanges, in the 1990s, to 
set position accountability levels for certain financial contracts, 
such as futures and options on foreign currencies and other financial 
instruments with high degrees of stability; \39\ and later expanding 
exchange limits or accountability requirements to significant price 
discovery contracts traded on exempt commercial markets.\40\
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    \37\ Frank M. Surface, The Grain Trade During the World War, at 
224 (Macmilliam 1928).
    \38\ Grain Futures Act of 1922, ch. 369 at section 3, 342 Stat. 
998, 999 (1922), codified at 7 U.S.C. 5 (1925-26).
    \39\ See Speculative Position Limits--Exemptions From Commission 
Rule 1.61; Chicago Mercantile Exchange Proposed Amendments to Rules 
3902.D, 5001.E, 3010.F, 3012.F, 3013.F, 3015.F, 4604, and Deletion 
of Rules 3902.F, 5001.G, 3010.H., 3012.M, 3013.H, and 3015.H, 56 FR 
51687 (Oct. 15, 1991) (providing notice of proposed exchange rule 
changes; request for comments). The Government, either through 
Congress, CEC or the Commission, has maintained position limits on 
various agricultural commodities since 1917.
    \40\ December 2013 Position Limits Proposal, 78 FR at 75681-85; 
Significant Price Discovery Contracts on Exempt Commercial Markets, 
74 FR 12178 (March 23, 2009).
---------------------------------------------------------------------------

    As addressed in the December 2013 Position Limits Proposal, two 
aspects of the Commission's experience are particularly important to 
the Commission's interpretation of the Dodd-Frank Act amendments to CEA 
section 4a. The first is the Commission's experience with the time 
required to make necessity findings before setting limits, which 
relates to the time limits contained in CEA section 4a(a)(2)(B). The 
second is the Commission's experience in rulemaking requiring exchanges 
to set limits in accordance with certain ``standards,'' the term the 
district court found ambiguous.
a. Time to Establish Position Limits
    Based on its experience administering position limits, the 
Commission preliminarily concludes (as stated preliminarily in the 
December 2013 Position Limits Proposal) that Congress could not have 
contemplated that, as a prerequisite to imposing limits, the Commission 
would first make antecedent commodity-by-commodity necessity 
determinations in the 180-270 day time frame within which CEA section 
4a(a)(2)(B) states that limits ``required under subparagraph 
[4a(a)(2(A)] shall be established.'' \41\ As described in the December 
2013 Position Limits Proposal, for 45 years after passage of the CEA, 
the Commission's predecessor agency made findings of necessity in its 
rulemakings establishing position limits.\42\ During that period, the 
Commission had jurisdiction over only a limited number of agricultural 
commodities. In orders issued by the Commodity Exchange Commission 
between 1940 and 1956 establishing position limits, the CEC stated that 
the limits it was imposing in each were necessary. Each of those orders 
involved no more than a small number of commodities. But it took the 
CEC many months to make those findings. For example, in 1938, the CEC 
imposed position limits on six grain products.\43\ Proceedings leading 
up to the establishment of the limits commenced more than 13 months 
earlier, when the CEC issued a notice of hearing regarding the 
limits.\44\ Similarly, in September 1939, the CEC issued a Notice of 
Hearing with respect to position limits for cotton, but it was not 
until August 1940 that the CEC finally promulgated such limits.\45\ And 
the CEC began the process of imposing limits on soybeans and eggs in 
January 1951, but did not complete the process until more than seven 
months later.\46\
---------------------------------------------------------------------------

    \41\ December 2013 Position Limits Proposal, 78 FR at 75682-83 
(citing 887 F. Supp. 2d at 273).
    \42\ 887 F. Supp. 2d at 269.
    \43\ See In the Matter of Limits on Position and Daily Trading 
in Wheat, Corn, Oats, Barley, Rye, and Flaxseed, for Future Delivery 
Findings of Fact, Conclusions, and Order, 3 FR 3145, Dec. 24, 1938.
    \44\ See 2 FR 2460, Nov. 12, 1937.
    \45\ See Limitation on Buying or Selling of Cotton Notice of 
Hearing, 4 FR 3903, Sep. 14, 1939; Part 150--Orders of the Commodity 
Exchange Commission Findings of Fact, Conclusions, and Order In the 
Matter of Limits on Position and Daily Trading in Cotton for Future 
Delivery, 5 FR 3198, Aug. 28, 1940.
    \46\ See Handling of Anti-Hog-Cholera Serum and Hog-Cholera 
Virus; Notice of Proposed Rule Making 16 FR 321, Jan. 12, 1951; 
Limits on Position and Daily Trading in Eggs for Future Delivery, 16 
FR 8106, Aug. 16, 1951; see also Limits on Positions and Daily 
Trading in Cottonseed Oil, Soybean Oil, and Lard for Future 
Delivery, 17 FR 6055, Jul. 4, 1952 (providing notice of a hearing 
regarding proposed position limits for cottonseed oil, soybean oil, 
and lard); Limits on Position and Daily Trading in Cottonseed Oil 
for Future Delivery, 18 FR 443, Jan. 22, 1953 (giving orders setting 
limits for cottonseed oil, soybean oil, and lard); Limits on 
Position and Daily Trading in Onions for Future Delivery; Notice of 
Hearing, 21 FR 1838, Mar. 24, 1956 (conveying notice of a hearing 
regarding proposed position limits for onions), Limits on Position 
and Daily Trading in Onions for Future Delivery, 21 FR 5575, Jul. 
25, 1956 (providing order setting position limits for onions).
---------------------------------------------------------------------------

    In the Commission's experience (including the experience of its 
predecessor agency), it generally took many months to make a necessity 
finding with respect to one commodity. The process of making the sort 
of necessity findings that plaintiffs in ISDA v. SIFMA urged with 
respect to all agricultural commodities and all exempt commodities (and 
that some commenters urge) would be far more lengthy than the time 
allowed by CEA section 4a(a)(3), i.e., 180 or 270 days from enactment 
of the Dodd-Frank Act.\47\ Because of the stringent time limits in CEA 
section 4a(a)(2)(B), the Commission concludes that Congress did not 
intend for the Commission to delay the imposition of limits until it 
first made antecedent, contract-by-contract necessity findings.
---------------------------------------------------------------------------

    \47\ Although the Commission did not meet these deadlines in its 
first position limits rulemaking, it completed the task (in which 
the Commission received and addressed more than 15,000 comments) as 
expeditiously as possible under the circumstances.

---------------------------------------------------------------------------

[[Page 96709]]

b. Prior Rulemaking Requiring Exchanges to Set Limits
    The CFTC's preliminary interpretation of the statute is also based 
in part on its promulgation of a rule in 1981 requiring exchanges to 
impose limits on all contracts that did not already have limits. In 
that rulemaking, the Commission, acting expressly pursuant to, inter 
alia, what was then CEA section 4a(1) (predecessor to CEA section 
4a(a)(1)), adopted what was then 17 CFR 1.61.\48\ This rule required 
exchanges to set speculative position limits ``for each separate type 
of contract for which delivery months are listed to trade'' on any DCM, 
including ``contracts for future delivery of any commodity subject to 
the rules of such contract market.'' \49\ The Commission explained that 
this action would ``close the existing regulatory gap whereby some but 
not all contract markets [we]re subject to a specified speculative 
position limit.'' \50\
---------------------------------------------------------------------------

    \48\ Establishment of Speculative Position Limits, 46 FR 50938, 
50944-45, Oct. 16, 1981. The rule adopted in 1981 tracked, in 
significant part, the language of CEA section 4a(1). Compare 17 CFR 
1.61(a)(1) (1982) with 7 U.S.C. 6a(1) (1976).
    \49\ Establishment of Speculative Position Limits, 46 FR at 
50945.
    \50\ Id. at 50939; see also id. at 50938 (``to ensure that each 
futures and options contract traded on a designated contract market 
will be subject to speculative position limits'').
---------------------------------------------------------------------------

    Like the Dodd-Frank Act, the 1981 final rule established (and the 
rule release described) that such limits ``shall'' be established 
according to what the Commission termed ``standards.'' \51\ As used in 
the 1981 final rule and release, ``standards'' meant the criteria for 
determining how the required limits would be set.\52\ ``Standards'' did 
not include the antecedent ``necessity'' determination of whether to 
order limits at all. The Commission had already made the antecedent 
judgment in the rule that ``speculative limits are appropriate for all 
contract markets irrespective of the characteristics of the underlying 
market.'' \53\ The Commission further concluded that, with respect to 
any particular market, the ``existence of historical trading data'' 
showing excessive speculation or other burdens on that market is not 
``an essential prerequisite to the establishment of a speculative 
limit.'' \54\
---------------------------------------------------------------------------

    \51\ Compare id. at 50941-42, 50945 with 7 U.S.C. 6a(a)(2)(A).
    \52\ Establishment of Speculative Position Limits, 46 FR 50941-
42, 50945.
    \53\ Id. at 50941-42 (preamble), 50945 (text of Sec.  
1.61(a)(2)).
    \54\ The Commission believes it likely that, given the 
prophylactic purposes articulated in current CEA section 
4a(a)(1)(A), a similar view of position limits underpins CEA section 
4a(a)(2)(A).
---------------------------------------------------------------------------

    The Commission thus directed the exchanges to set limits for all 
futures contracts ``pursuant to the . . . standards of rule 1.61,'' 
without requiring that the exchanges first make a finding of 
necessity.\55\ And rule 1.61 incorporated the ``standards'' from then-
CEA-section 4a(1)--an ``Aggregation Standard'' (46 FR at 50943) for 
applying the limits to positions both held and controlled by a trader, 
and a flexibility standard allowing the exchanges to set ``different 
and separate position limits for different types of futures contracts, 
or for different delivery months, or from exempting positions which are 
normally known in the trade as `spreads, straddles or arbitrage' or 
from fixing limits which apply to such positions which are different 
from limits fixed for other positions.'' \56\ Because the Commission 
had already made the antecedent necessity findings, it imposed tight 
deadlines for the exchanges to establish the limits. It is, 
accordingly, reasonable to believe that Congress would have structured 
CEA section 4a(a) similarly, by first making the antecedent necessity 
determination on its own,\57\ then directing the Commission to impose 
the limits without making an independent determination of necessity, 
and then using the term ``standards'' just as the Commission did in 
1981 to refer to aggregation and flexibility rather than necessity for 
the required limits.
---------------------------------------------------------------------------

    \55\ Establishment of Speculative Position Limits. 46 FR at 
50942.
    \56\ Id. at 50945 (Sec.  1.61(a)). Compare 7 U.S.C. 6a(1) 
(1976).
    \57\ As discussed in further detail regarding congressional 
investigations, below, it is especially reasonable to infer that 
Congress had in fact made such a determination based on the 
congressional investigations that preceded these Dodd-Frank Act 
amendments. The fact that the Commission already had the clear 
authority to impose limits when it deemed them necessary bolsters 
this inference, because there was no need for these Dodd-Frank Act 
amendments to the position limits statute unless Congress, based on 
its own determination of necessity, sought to direct the Commission 
to impose limits.
---------------------------------------------------------------------------

    Indeed, legislative history shows reason to believe that Congress' 
choice of the word ``standards'' to refer to aggregation and 
flexibility alone was purposeful and intended it to mean the same thing 
it did in the Commission's 1981 rule.\58\ The language that ultimately 
became section 737 of the Dodd-Frank Act, amending CEA section 4a(a), 
originated in substantially final form in H.R. 977, introduced by 
Representative Peterson, who was then Chairman of the House Agriculture 
Committee and who would ultimately be a member of the Dodd-Frank Act 
conference committee.\59\ In important respects, the language of H.R. 
977 resembles the language the Commission used in 1981, suggesting that 
the regulation's text may have influenced the statutory text. Like the 
Commission's 1981 rule, H.R. 977 states that there ``shall'' be 
position limits in accordance with the ``standards'' identified in CEA 
section 4a(a).\60\ This language was included in CEA section 4a(a)(2) 
as adopted. Also like the 1981 rule, H.R. 977 established (and the 
Dodd-Frank Act ultimately adopted) a ``good faith'' exception for 
positions acquired prior to the effective date of the mandated 
limits.\61\ The committee report accompanying H.R. 977 described it as 
``Mandat[ing] the CFTC to set speculative position limits'' and the 
section-by-section analysis stated that the legislation ``requires the 
CFTC to set appropriate position limits for all physical commodities 
other than excluded commodities.'' \62\ This closely resembles the 
omnibus prophylactic approach the Commission took in 1981, when the 
Commission required the establishment of position limits on all futures 
contracts according to ``standards'' it borrowed from CEA section 
4a(1). The Commission views the history and interplay of the 1981 rule 
and Dodd-Frank Act section 737 as further evidence that Congress 
intended to follow much the same approach as the Commission did in 
1981, mandating position limits as to all physical commodities.\63\
---------------------------------------------------------------------------

    \58\ The relevant broader legislative history is discussed in 
depth, below.
    \59\ H.R. 977, 11th Cong. (2009).
    \60\ 7 U.S.C. 6.
    \61\ Compare H.R. 977, 11th Cong. (2009) with Establishment of 
Speculative Position Limits, 46 FR at 50944.
    \62\ H.Rept. 111-385, at 15, 19 (Dec. 19, 2009).
    \63\ See Union Carbide Corp. & Subsidiaries v. Comm'r of 
Internal Revenue, 697 F.3d 104, 109 (2d Cir. 2012) (explaining that 
when an agency must resolve a statutory ambiguity, to do so ``with 
the aid of reliable legislative history is rational and prudent'' 
(quoting Robert A. Katzman, Madison Lecture: Statutes, 87 N.Y.U. L. 
Rev. 637, 659 (2012)).
---------------------------------------------------------------------------

    There is further evidence based on the 1981 rulemaking that 
Congress would have found the across-the-board prophylactic approach 
attractive. In 1983, when enacting the Futures Trading Act of 19982, 
Public Law 97-444, 96 Stat. 2294 (1983), Congress was aware that the 
Commission had ``promulgated a final rule requiring exchanges to submit 
speculative position limit proposals for Commission approval for all 
futures contracts traded as of that date.'' \64\ Presented with 
competing industry and Commission proposals to amend the position 
limits statute, Congress elected to amend the

[[Page 96710]]

CEA ``to clarify and strengthen the Commission's authority in this 
area,'' including authorizing the Commission to prosecute violations of 
exchange-set limits as if they were violations of the CEA.\65\ Thus, by 
granting the Commission explicit authority to enforce the Commission-
mandated exchange-set limits, Congress in effect ratified the 1981 
rule, finding it reasonable to impose position limits on an across-the 
board basis, rather than following a commodity-by-commodity 
determination. This contributes to the Commission's judgment that 
Congress reasonably could have followed a similar approach here and, 
for the reasons given elsewhere, likely did.
---------------------------------------------------------------------------

    \64\ S. Rep. No. 97-384, at 44 (1982).
    \65\ Id.
---------------------------------------------------------------------------

c. Comments \66\
---------------------------------------------------------------------------

    \66\ A list is provided below in Section V, Appendix B, of the 
full names, abbreviations, dates and comment letter numbers for all 
comment letters cited in this rulemaking. The Commission notes that 
many commenters submitted more than one comment letter. 
Additionally, all comment letters that pertain to the December 2013 
Position Limits Proposal and the 2016 Supplemental Position Limits 
Proposal, including non-substantive comment letters, are contained 
in the rulemaking comment file and are available through the 
Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1708. A search can be done online for a 
particular comment letters by inserting the specific comment letter 
number in the address in place of the hash tags in the following web 
address: http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=#####&SearchText.
---------------------------------------------------------------------------

    i. Commission's Experience: No commenter disputed the depth or 
breadth of the Commission's experience and expertise with position 
limits.\67\ Most, if not all, commenters, many of them exchanges, 
traders, and other market participants who have been subject to a long-
standing federal and exchange-set limit regime, implicitly or 
explicitly agreed that at least spot-month position limits continue to 
be essential to prevent manipulation and excessive volatility and thus 
serve the public interest.\68\ One commenter acknowledged that only the 
Commission can impose and monitor limits across exchanges.\69\ Another 
opined that only the Commission could impose limits without any 
conflicts of interest due to the exchanges' imperative to maximize 
trading volume in order to maximize profit.\70\
---------------------------------------------------------------------------

    \67\ One commenter questioned whether the Commission's 
experience was even relevant. This commenter asserted that the 
statute clearly and unambiguously does not mandate imposition of 
position limits, and therefore no consideration or deference to the 
Commission's experience is appropriate. CL-ISDA/SIFMA-59611 at 7. 
But the district court disagreed and directed the Commission to 
employ its experience in resolving the ambiguities in the statute. 
887 F. Supp. 2d at 270, 280-82. In any event, for the reasons 
discussed, the Commission's reading is, at a minimum, reasonable.
    \68\ E.g., CL-CME-59718 at 2; see also CL-ISDA/SIFMA-59611 at 3, 
27-32, App. A at 11, App. B at 6 (arguing for alternatives to limits 
outside the spot month).
    \69\ CL-CME-59718 at 18.
    \70\ CL-CMOC-60400 at 3; and CL-Public Citizen-60390 at 2-3.
---------------------------------------------------------------------------

    ii. Time to Establish Limits: No commenters disputed the fact that 
it took many months for the Commission to make a necessity 
determination before establishing limits. Some commenters agreed with 
the determinations the Commission preliminarily drew from its 
experience.\71\
---------------------------------------------------------------------------

    \71\ E.g., CL-A4A-59714 at 3.
---------------------------------------------------------------------------

    Several commenters asserted that the Commission's reliance on the 
timelines to support its view ignores other qualifying language in the 
statute, such as the terms ``necessary'' and ``appropriate.'' \72\ The 
Commission disagrees, because its interpretation of the statute 
considers the relevant provisions as an integrated whole, which is 
required in interpreting any statute. Under this approach, it is 
appropriate to give consideration to the import of the tight statutory 
deadlines in light of the Commission's experience that it could not 
possibly comply with if it had to make necessity findings as it has in 
the past. These comments fail to take these considerations into 
account. The Commission addresses the language relied upon by these 
commenters, infra, in its discussion of the text of the statute.
---------------------------------------------------------------------------

    \72\ CL-CME-59718 at 7; and CL-ISDA/SIFMA-59611 at 9, n. 32 
(asserting that deadlines are no excuse for the Commission to be 
``arbitrary'' or ``sloppy.'').
---------------------------------------------------------------------------

    CME also contended that the 180- and 270-day time limits were a 
difficulty manufactured by the December 2013 Position Limits Proposal 
itself. According to CME, the Commission could instead expedite the 
process for setting limits by utilizing its exchanges and others to 
determine whether position limits are necessary and appropriate for a 
particular commodity and, if so, the appropriate types and levels of 
limits and related exemptions.\73\ While this is a plausible approach 
to generating necessity findings, the Commission views it unlikely that 
Congress had this approach in mind. The provisions at issue make no 
mention of exchange-set limits or necessity findings. CME also gave no 
reason to believe that commodity-by-commodity necessity findings could 
be made by the exchanges within the prescribed 180/270 day limits.
---------------------------------------------------------------------------

    \73\ CL-CME-59718 at 7.
---------------------------------------------------------------------------

    iii. 1981 Rulemaking: Some commenters disagreed with the 
Commission's consideration of the 1981 Rule. CME commented that the 
1981 Rule is inapposite because there the Commission was requiring DCMs 
to impose position limits based on an ``antecedent judgment'' that 
limits were necessary and appropriate; a necessity finding was not 
required there.\74\ The Commission believes that CME's observation is 
consistent with its interpretation. In the 1981 rule, the Commission 
made an antecedent judgment on an across-the-board basis that position 
limits were necessary, and the exchanges then set them according to 
specific standards. Here, Congress has made the antecedent judgment on 
an across-the-board basis that position limits are necessary for 
physical commodities (i.e., commodities other than excluded 
commodities), and ordered the Commission to set them according to the 
same types of standards referenced in the 1981 rule. This supports, 
rather than undermines, the Commission's interpretation that the 
``standards'' in CEA section 4a(a)(1), referred to in CEA section 
4a(a)(2) as added by the Dodd-Frank Act, are the flexibility and 
aggregation standards, much as they were in the 1981 rulemaking 
interpreting CEA section 4a(a)(1).
---------------------------------------------------------------------------

    \74\ Id. at 9-10.
---------------------------------------------------------------------------

    Several commenters contended that the Commission's reliance on the 
1981 rulemaking ignores that the CFTC then imposed limits only after a 
fact-intensive inquiry into the characteristics of individual contracts 
markets to determine the limits most appropriate for individual 
contract markets.\75\ However, the Commission has taken those inquiries 
into account. The Commission believes these inquiries are significant 
because while the Commission performed such investigation for some 
markets, it did not do so for all markets ultimately within the scope 
of the rule. The 1981 Rule directed exchanges to impose limits on all 
futures contracts for which exchanges had not already imposed limits. 
For example, citing a then-recent disruption in the silver market, the 
Commission directed that position limits be imposed prophylactically 
for all futures and options contracts.\76\ It further directed the 
exchanges to consider the characteristics of particular contracts and 
markets in determining how to set limits (the standards, limit

[[Page 96711]]

levels and so on) but not whether to do so.\77\ It specifically 
rejected commenters' concerns that position limits would not be 
beneficial for all contracts, finding, after ``considerable years of 
Federal and contract market regulatory experience,'' that ``the 
capacity of any contract market . . . is not unlimited,'' and there was 
no need to evaluate the particulars of whether any contract would 
benefit from position limits.\78\ The Dodd-Frank Act amendments 
unfolded in an analogous fashion. Prior to the Dodd-Frank Act, Congress 
conducted studies of some, but not all, markets in physical 
commodities. This history suggests that Congress extrapolated from the 
conclusions reached in those studies to determine that position limits 
were necessary for all physical commodities other than excluded 
commodities.
---------------------------------------------------------------------------

    \75\ CL-AMG-59709 at 4, n. 8; and CL-CME-59718 at 15-16.
    \76\ Establishment of Speculative Position Limits, 46 FR at 
50940-41 (Oct. 16, 1981).
    \77\ Id.
    \78\ Id.
---------------------------------------------------------------------------

    ISDA and SIFMA asserted that the Commission's reliance on the 1981 
rulemaking is unavailing because (1) it cannot alter the Commission's 
statutory burdens with respect to imposing position limits; and (2) it 
was never adopted by Congress.\79\ The first of these comments begs the 
question, i.e., what is ``the statutory burden'' intended in the text 
of CEA sections 4a(a)(1) and (2), read as a whole and considered in 
context to resolve the ambiguity found by the district court. As to the 
second comment, the Commission does not contend that Congress adopted 
the 1981 rule. Rather, it is relevant because the language the district 
court found ambiguous in the Dodd-Frank Act amendments to CEA section 
4a(a) resembles the language of the 1981 rule, and some of the context 
is parallel. The relevance of this rulemaking is supported by the fact 
that Congress did ratify it the following year, when it amended the CEA 
by granting the Commission the authority to enforce the position limits 
set by the exchanges, reinforcing that as a historical matter Congress 
had approved an omnibus prophylactic approach as reasonable. That 
Congress had approved of such an approach before and then used language 
in the Dodd-Frank Act that closely resembles the very language the 
Commission used when it mandated that omnibus approach is another 
factor that weighs on the side of interpreting the statutory ambiguity 
to find a mandate to impose physical commodity positon limits.\80\
---------------------------------------------------------------------------

    \79\ CL-ISDA/SIFMA-59611 at 9.
    \80\ CFTC v. Schor, 478 U.S. 833, 846 (1986).
---------------------------------------------------------------------------

    Finally, several commenters asserted that the Commission cannot 
consider the 1981 rulemaking because the Commission later allowed 
exchanges to set position accountability levels in lieu of limits for 
some commodities and contracts.\81\ Those later exemptions do not, 
however, alter the language or import of the 1981 rule, which directed 
the exchanges to impose limits in accordance with ``standards'' that 
did not include a necessity finding. The 1981 rulemaking is the last 
time the Commission definitively addressed and identified the 
``standards'' in CEA section 4a(a)(1) for imposing across-the-board, 
prophylactic position limits in a manner akin to the Dodd-Frank Act 
amendments. That other approaches intervened is not inconsistent with 
the inference that Congress was influenced by the 1981 rulemaking in 
the Dodd-Frank Act amendments.
---------------------------------------------------------------------------

    \81\ E.g., CL-ISDA/SIFMA-59611 at 9; and CL-AMG-59709 at 4, n.8.
---------------------------------------------------------------------------

4. Legislative History of the Dodd-Frank Act Amendments to Position 
Limits Statute
    As discussed in the 2016 Supplemental Position Limits Proposal, the 
Commission has also considered the legislative history of the Dodd-
Frank Act amendments.\82\ That history contains further indication that 
Congress intended to mandate the imposition of limits for physical 
commodity derivatives without requiring the Commission to make 
antecedent necessity findings, and did not intend the term 
``standards'' to include such a finding.\83\
---------------------------------------------------------------------------

    \82\ Union Carbide Corp. & Subsidiaries v. Comm'r of Internal 
Revenue, 697 F.3d 104, 109 (2d Cir. 2012) (explaining that when an 
agency must resolve a statutory ambiguity, to do so ``with the aid 
of reliable legislative history is rational and prudent'' (quoting 
Robert A. Katzman, Madison Lecture: Statutes, 87 N.Y.U. L. Rev. 637, 
659 (2012)).
    \83\ December 2013 Position Limits Proposal, 78 FR at 75682, 
75684-85.
---------------------------------------------------------------------------

    The Commission's preliminary interpretation of CEA section 4a(a)(2) 
is based in part on congressional concerns that arose, and 
congressional actions taken, before the passage of the Dodd-Frank Act 
amendments.\84\ During the 1990s, the Commission began permitting 
exchanges to experiment with an alternative to position limits--
position accountability, which allowed a trader to hold large positions 
subject to reporting requirements and gave the exchange the right to 
order the trader to hold or reduce its position.\85\ Then, in the 
Commodity Futures Modernization Act of 2000 (``CFMA''),\86\ Congress 
expressly authorized the use of position accountability as an 
alternative means to limit speculative positions.\87\
---------------------------------------------------------------------------

    \84\ Id. at 75682.
    \85\ Federal Speculative Position Limits for Referenced Energy 
Contracts and Associated Regulations, 75 FR 4144, 4147 (Jan. 26, 
2010); Revision of Federal Speculative Position Limits and 
Associated Rules, 64 FR 24038, 24048-49 (May 5, 1999).
    \86\ Commodity Futures Modernization Act of 2000, Public Law 
106-554, 114 Stat. 2763 (Dec. 21, 2000).
    \87\ 7 U.S.C. 7(d)(3) (2009).
---------------------------------------------------------------------------

    Following this experiment with position accountability, Congress 
became concerned about fluctuations in commodity prices. In the late 
1990s and 2000s, Congress conducted several investigations that 
concluded that excessive speculation accounted for significant 
volatility and price increases in physical commodity markets. For 
example, a congressional investigation determined that prices of crude 
oil had risen precipitously and that ``[t]he traditional forces of 
supply and demand cannot fully account for these increases.'' \88\ The 
investigation found evidence suggesting that speculation was 
responsible for an increase of as much as $20-25 per barrel of crude 
oil, which was then at $70.\89\ Subsequently, Congress found similar 
price volatility stemming from excessive speculation in the natural gas 
market.\90\
---------------------------------------------------------------------------

    \88\ The Role of Market Speculation in Rising Oil and Gas 
Prices: A Need to Put the Cop Back on the Beat, Staff Report, 
Permanent Subcommittee on Investigations of the Senate Committee on 
Homeland Security and Governmental Affairs, U.S. Senate, S. Prt. No. 
109-65 at 1 (June 27, 2006).
    \89\ Id. at 12; see also Excessive Speculation in the Natural 
Gas Market, Staff Report, Permanent Subcommittee on Investigations 
of the Senate Committee on Homeland Security and Governmental 
Affairs, U.S. Senate at 1 (June 25, 2007), available at http://www.levin.senate.gov/imo/media/doc/supporting/2007/PSI.Amaranth.062507.pdf (last visited Mar. 18, 2013) (``Gas 
Report'').
    \90\ Gas Report at 1-2.
---------------------------------------------------------------------------

    These investigations appear to have informed the drafting of the 
Dodd-Frank Act. During hearings prior to the passage of the Dodd-Frank 
Act, Senator Carl Levin, then-Chair of the Senate Permanent 
Subcommittee on Investigations that had conducted them, urged passage 
to ensure ``a cop on the beat in all commodity markets where U.S. 
commodities are traded . . . that can enforce the law to prevent 
excessive speculation and market manipulation.'' \91\ In addition, 
Congress viewed the nearly $600 trillion little-regulated swaps market 
as a ``major contributor to the financial crisis'' because excessive 
risk taking, hidden leverage, and under collateralization in that 
market created a systemic risk of harm to the entire financial 
system.\92\ As Senator Cantwell and others explained, it was imperative 
that the CFTC have the ability to regulate swaps through

[[Page 96712]]

``position limits,'' ``exchange trading,'' and ``public transparency'' 
to avoid a recurrence of the instability that rippled through the 
entire financial system in 2008.\93\ And in the House of 
Representatives, Representative Collin Peterson, then-Chairman of the 
House Committee on Agriculture and author of an amendment strengthening 
the position limits provision as discussed below, reminded his 
colleagues that his committee's own ``in-depth review of derivative 
markets began when we experienced significant price volatility in 
energy futures markets due to excessive speculation--first with natural 
gas and then with crude oil. We all remember when we had $147 oil. . . 
. This conference report [now] includes the tools we authorized and the 
direction to the CFTC to mitigate outrageous price spikes we saw 2 
years ago.'' \94\ Congress's focus in its investigations on excessive 
speculation involving physical commodities is reflected in the scope of 
the Dodd-Frank Act's position limits amendment: It applies only to 
physical commodities.
---------------------------------------------------------------------------

    \91\ 156 Cong. Record S. 4064 (daily ed. May 20, 2010).
    \92\ S. Rep. 111-176, at 29 (2010).
    \93\ See, e.g., 156 Cong. Rec. S 2676-78, S 2698-99, S 3606-07, 
S 3966, S 5919 (daily ed. April 27, May 12, 19, July 15, 2010 
(providing statements of Senators Cantwell, Feinstein, Lincoln)).
    \94\ 156 Cong. Rec. H5245 (daily ed. June 30, 2010) (emphasis 
added).
---------------------------------------------------------------------------

    The evolution of the position limits provision in the bills before 
Congress from permissive to mandatory supports a preliminary 
determination that Congress intended to do something more than continue 
the long-standing statutory regime giving the Commission discretionary 
authority to impose limits.\95\ As initially introduced, the House bill 
that became the Dodd-Frank Act provided the Commission with 
discretionary authority to issue position limits, stating that the 
Commission ``may'' impose them.\96\ However, the House replaced the 
word ``may'' with the word ``shall,'' suggesting a specific judgment 
that the limits should be mandatory, not discretionary. The House also 
added other language militating in favor of interpreting CEA section 
4a(a)(2) as a mandate. In two new subsections, it set the tight 
deadlines described above.\97\ After changing ``may'' to ``shall,'' the 
House further amended the bill to refer in one instance to the limits 
for agricultural and exempt commodities as ``required.'' \98\ And only 
after the language had changed from permissive to mandatory, the House 
added the requirement that the Commission conduct studies on the 
``effects (if any) of position limits imposed'' \99\ to determine if 
the required position limits were harming U.S. markets.\100\ 
Underscoring its intent to amend the bill to include a mandate, the 
House Report accompanying the House Bill stated that it ``required'' 
the Commission to impose limits.\101\ The Conference Committee adopted 
the House bill's amended provisions on position limits and then 
strengthened them even further by referring to the position limits as 
``required'' an additional three times, bringing the total to four 
times in the final legislation the number of references in statutory 
text to position limits as ``required.'' \102\
---------------------------------------------------------------------------

    \95\ December 2013 Position Limits Proposal, 78 FR at 75684-85.
    \96\ Initially, the House used the word ``may'' to permit the 
Commission to impose aggregate positions on contracts based upon the 
same underlying commodity. See H.R. 4173, 11th Cong. 3113(a)(2) 
(providing the version introduced in the House, Dec. 2, 2009) 
(``Introduced Bill''); see also Brief of Senator Levin et al as 
Amicus Curiae at 10-11, ISDA v. CFTC, no. 12-5362 (D.C. Cir. Apr. 
22, 2013), Document No. 1432046 (hereafter ``Levine Br.'').
    \97\ Levin Br. at 11 (citing H.R. 4173, 111th Cong. 
3113(a)(5)(2), (7) (as passed by the House Dec. 11, 2009) 
(``Engrossed Bill'')).
    \98\ Id. at 12. (citing Engrossed Bill at 3113(a)(5)(3)).
    \99\ 15 U.S.C. 8307; Engrossed Bill at 3005(a).
    \100\ See Levin Br. at 13-17; see also DVD: October 21, 2009 
Business Meeting (House Agriculture Committee 2009), ISDA v. CFTC, 
Dkt. 37-2 Exh. B (Apr. 13, 2012) at 59:55-1:02:18.
    \101\ Levin Br. at 23 (citing H.R. Rep. No. 111-373 at 11 
(2009)).
    \102\ Levin Br. at 17-18.
---------------------------------------------------------------------------

a. Comments
    A number of commenters generally supported or opposed the 
Commission's consideration of Congressional investigations and the 
textual strengthening of the Dodd-Frank bill. The Commission addresses 
specific comments below.
    i. Congressional Investigations: Several commenters agreed that the 
Congressional investigations, hearings and reports support the view 
that Congress decided to mandate position limits.\103\ They pointed out 
that Congress's investigations followed amendments in 2000 to the CEA 
as part of the CFMA that exempted swaps and energy derivatives from 
position limits and expressly authorized exchanges to impose position 
accountability levels in lieu of limits.\104\ According to the 
Commodity Markets Oversight Coalition (``CMOC''), ``witnesses confirmed 
[at those hearings] that the erosion of the position limits regime was 
a leading cause in market instability and wild price swings.'' \105\ 
Senator Levin, who presided over the investigations, commented that 
those investigations, conducted from 2002 onwards, ``into how our 
commodity markets function, focusing in particular on the role of 
excessive speculation on commodity prices'' ``have demonstrated that 
the failure to impose and enforce effective position limits have led to 
greater speculation and increased price volatility in U.S. commodity 
markets.'' \106\ According to Senator Levin, the investigations 
``provide[d] strong support for the Dodd-Frank decision to require the 
Commission to impose position limits on all types of commodity futures, 
swaps, and options.'' \107\ Senator Levin also stated that the harms of 
excessive speculation continue to be felt in the absence of the 
mandated limits. He cited recent actions by federal regulators to stop 
manipulation in energy markets, and opined that the continuing problems 
in the absence of the mandated limits only reinforce the reasonableness 
of the Commission's view that Congress intended to mandate position 
limits as a prophylactic measure.\108\ Senator Levin's point was echoed 
by Public Citizen, a consumer advocacy organization, and Airlines for 
America, a trade association for the U.S. scheduled airline 
industry.\109\
---------------------------------------------------------------------------

    \103\ CL-CMOC-59720 at 2; CL-Sen. Levin-59637 at 2-5; and CL-
A4A-59686 at 2-3.
    \104\ CL-IECA-59964 at 2; CL-A4A-59686 at 2; and CL-Public 
Citizen-59648 at 2-3.
    \105\ CL-CMOC-59720 at 2.
    \106\ CL-Sen. Levin-59637 at 3-4.
    \107\ Id.
    \108\ Id. at 2.
    \109\ CL-Public Citizen-59648 at 2-3, and CL-A4A-59686 at 1-2.
---------------------------------------------------------------------------

    Other commenters disagreed with the Commission's preliminary 
determination that the Congressional investigations indicate that 
Congress intended to mandate limits. CME asserted that the 
investigations do not in themselves demonstrate that Congress required 
the CFTC to impose position limits as recommended even if those 
investigations suggest that excessive speculation poses a burden on 
interstate commerce in certain physical commodity markets.\110\ Citadel 
questioned whether the cited reports could be ``broadly indicative of 
Congressional intent,'' or could ``redefine statutory language that has 
existed for nearly eight decades.'' \111\
---------------------------------------------------------------------------

    \110\ CL-CME-59718 at 8. CME also asserted that the 
Congressional investigation into excessive speculation in natural 
gas futures focused more on the fact that position accountability 
rules for exchange-traded natural gas futures were not in place for 
``look-alike'' natural gas swaps traded ``over the counter,'' 
permitting regulatory arbitrage.
    \111\ CL-Citadel-59717 at 3.
---------------------------------------------------------------------------

    But the Commission is not relying solely on these reports. The 
question, rather, is whether these Congressional

[[Page 96713]]

investigations and findings of excessive speculation and price 
volatility in energy markets, conducted and issued when the Commission 
was authorized but not required by law to impose limits, may be one 
indication, among others, that Congress sought to do something more 
with the Dodd-Frank Act amendments than to maintain the statutory 
status quo for futures on physical commodities. In the Commission's 
preliminary view, it is more plausible, based on these investigations, 
that Congress sought to do something more--to require that the 
Commission impose limits for the covered commodities without having to 
first find that they are necessary to prevent excessive speculation. 
Contrary to Citadel's comment, the Commission is not relying on the 
investigations and reports to redefine statutory language that has 
existed for nearly eight decades. Rather, the Commission believes that 
the investigations favor the conclusion that Congress added CEA section 
4a(a)(2) to the pre-existing language in order to strengthen the long-
standing position limits regime for a category of commodity 
derivatives--physical commodities--that Congress's investigations 
revealed to be vulnerable to substantial price fluctuations.
    ii. Evolution of the Dodd-Frank Bill: Several commenters agreed 
with the Commission's preliminary determination that the strengthening 
of the position limits language in the Dodd-Frank bill evinces 
Congress' intent to mandate limits.\112\
---------------------------------------------------------------------------

    \112\ CL-Public Citizen-59648 at 2.
---------------------------------------------------------------------------

    CME and MFA disagreed; while they do not directly address this 
point, they believed that the strengthening of the language in the 
Dodd-Frank bills does not indicate that Congress intended to de-couple 
the enacted directive to impose position limits from the necessity 
finding of CEA section 4a(a)(1).\113\ The Commission, however, 
preliminarily considers this the most plausible interpretation. The 
evolution of the bill from one stating the Commission ``may'' impose 
position limits to include statements that the Commission ``shall'' 
impose them, that they are ``required,'' and that the Commission shall 
study their effects indicates intentional progressive refinement from a 
bill that would continue the status quo for futures to one that added 
special nondiscretionary requirements for a category of commodities. 
This legislative evolution also supports the conclusion ``standards'' 
does not include an antecedent necessity finding.
---------------------------------------------------------------------------

    \113\ CL-CME-59718 at 2, 5-12 (maintaining statutory language 
requires necessity finding); and CL-MFA-59606 at 9 (citing S. Rept. 
111-176 (Apr. 30, 2010, which states ``[t]his section authorizes the 
CFTC to establish aggregate position limits. . . .'').
---------------------------------------------------------------------------

5. The Commission Preliminarily Interprets the Text of CEA Section 
4a(a) as an Integrated Whole, In Light of Its Experience and Expertise.
    In the December 2013 Position Limits Proposal, the Commission 
discussed how its interpretation of the text of CEA section 4a(a), 
considered as an integrated whole, is consistent with and supports its 
conclusions based on experience and expertise. As discussed, the 
ambiguity is the meaning of CEA section 4a(a)(2)'s statement that the 
Commission ``shall'' establish limits on physical commodities other 
than excluded commodities ``[i]n accordance with the standards'' set 
forth in CEA section 4a(a)(1). If ``standards'' includes a necessity 
finding, then a necessity finding is required before limits can be 
imposed on agricultural and exempt commodities. If not, the Commission 
must impose limits for that subset of commodity derivatives. In the 
December 2013 Position Limits Proposal, the Commission resolved the 
ambiguity by preliminarily determining that the reference in CEA 
section 4a(a)(2) to the ``standards'' in pre-Dodd-Frank section 
4a(a)(1) refers to the criteria in CEA section 4a(a)(1) for how the 
required limits are to be set and not the antecedent finding whether 
limits are even necessary. The Commission explained that, in its 
preliminary view, ``standards'' refers to, in CEA section 4a(a)(1), 
only the following two provisions. First, the limits must account for 
situations in which one person controls another or two persons act in 
concert, by aggregating those positions as if the trading were done by 
one person acting alone (aggregation). The second ``standard'' in CEA 
section 4a(a)(1) states that the limits may be different for different 
commodities, markets, delivery months, etc. (flexibility).
    The Commission reasoned that this construction of ``standards'' 
seemed most consistent with the Commission's experience and history 
administering position limits. It also seemed most consistent with the 
text of CEA section 4a(a)(2), the rest of CEA section 4a(a), and the 
Act as a whole. The Dodd-Frank Act amendments to CEA section 4a(a) 
largely re-shape CEA section 4a(a) by adding a new, detailed, and 
comprehensive section 4a(a)(2) that applies only to a subset of the 
derivatives regulated by the Commission--physical commodities like 
wheat, oil, and gold--and not intangible commodities like interest 
rates. Amended CEA section 4a(a) repeatedly uses the word ``shall'' and 
refers to the new limits as ``required,'' differentiating it from the 
text that existed before the Dodd-Frank Act.\114\ Never before in the 
Commission's experience had Congress set deadlines on action for 
position limits by a date certain, much less the short time provided in 
CEA section 4a(a)(2)(B).\115\ Nor, in the Commission's experience, had 
Congress required a report by a given date or committed itself to hold 
hearings on the report within 30 days thereafter.\116\ The Commission 
preliminarily concluded that, considered as a whole in light of this 
experience, these provisions evince a Congressional mandate that the 
Commission impose limits on physical commodities, that it do so 
quickly, that it impose limit levels in accordance with certain 
requirements, and that it study the effectiveness of the limits after 
imposing them and then report to Congress.
---------------------------------------------------------------------------

    \114\ E.g., CEA sections 4a(a)(2)(A) (providing that the 
Commission ``shall'' set the limits); 4a(a)(2)(B) (referring twice 
to the ``limits required'' and directing that they ``shall'' be 
established by a time certain); 4a(a)(3)(referring to the limits 
``required'' under subparagraph (A)); 4a(a)(5)(stating that the 
Commission ``shall'' concurrently establish limits on economically 
equivalent contracts).
    \115\ 7 U.S.C. 6a(a)(2(B).
    \116\ 15 U.S.C. 8307.
---------------------------------------------------------------------------

    By the same token, the Commission preliminarily determined that 
interpreting CEA section 4a(a)(2) as it proposed to do would not render 
superfluous the necessity finding requirement in CEA section 4a(a) 
because that section still applies to the non-physical (excluded) 
commodity derivatives that are not subject to CEA section 4a(a)(2). Nor 
would it nullify other parts of CEA section 4a(a), as those are 
unaffected by this reading.
    The Commission received a number of comments on its discussion of 
the interplay between the statute's text and the Commission's 
experience and expertise. The Commission has considered them carefully, 
but is not thus far persuaded. The Commission preliminarily believes 
that it is a reasonable interpretation of the text of the statute 
considered as an integrated whole and viewed through the lens of the 
Commission's experience and expertise, that Congress mandated that the 
Commission establish position limits for physical commodities. It is 
also reasonable to construe the reference to ``standards'' as an 
instruction to the Commission to apply the flexibility and aggregation 
standards set forth in CEA section 4a(a)(1), just as the Commission 
instructed the exchanges to impose

[[Page 96714]]

omnibus limits in 1981. And it is at least reasonable to conclude that 
Congress, in directing the Commission to impose the ``required'' limits 
on extremely tight deadlines, did not intend the Commission to 
independently make an antecedent finding that any given position limit 
for physical commodities is ``necessary''--a finding that would take 
many months for each individual physical commodity contract.
a. Comments
    Several commenters disputed the Commission's interpretation, based 
on its experience and expertise, that CEA section 4a(a)(2) is a mandate 
for prophylactic limits based on their view that the statute 
unambiguously requires the Commission to promulgate position limits 
only after making a necessity finding, and only ``as appropriate.'' 
\117\ But in ISDA v. SIFMA, the district court held that the statute 
was ambiguous in this respect, and the Commission here is following the 
court's direction to apply its experience and expertise to resolve the 
ambiguity. This is consistent with a commenter's statement that ``the 
meshing of the Dodd-Frank Act into the CEA may have created some 
ambiguity from a technical drafting/wording standpoint.'' \118\ 
Nevertheless, the Commission addresses these textual arguments to show 
that its preliminary interpretation is, at a minimum, a permissible 
one.
---------------------------------------------------------------------------

    \117\ CL-CME-59718 at 11; CL-MFA-59606. at 9; etc. But see, 
e.g., CL-A4A-59714 at 2-3 (noting that notwithstanding the 
``meshing'' problems, ``it is clear that the Commission's 
interpretation is reasonable and fully supported by the context in 
which the Dodd-Frank Act was passed, its legislative history, and 
the many other factors identified in the NPRM''); CL-AFR-59685 at 1; 
CL-Public Citizen-60390 at 2; CL-Public Citizen-59648 at 2; CL-Sen. 
Levin-59637 at 4; and CL-CMOC-59720 at 2-3.
    \118\ CL-A4A-59714 at 2-3.
---------------------------------------------------------------------------

    The commenters that disagreed with the Commission's preliminary 
conclusion argued that the Commission: (i) Erred in determining that 
the reference to ``standards'' in CEA section 4a(a)(2) does not include 
the necessity finding in CEA section 4a(a)(1); (ii) failed to consider 
other provisions that show Congress intended to require the Commission 
to make antecedent findings; and (iii) incorrectly determined that its 
interpretation is the only way to give effect to CEA section 4a(a)(2).
    i. Meaning of Standards: Several commenters asserted that the 
language: ``[in] accordance with the standards set forth in paragraph 
(1)'' in section 4a(a)(2) must include the phrase ``as the Commission 
finds are necessary to diminish, eliminate, or prevent [the burden on 
interstate commerce]'' in CEA section 4a(a)(1).\119\ They believed that 
the Commission's contrary interpretation constitutes an implied repeal 
of the necessity finding language.\120\
---------------------------------------------------------------------------

    \119\ See, e.g., CL-CME-59718 at 12-13; CL-Citadel-59717 at 3-4; 
CL-AMG-59709 at 3; CL-MFA-59606 at 9-10; CL-ISDA/SIFMA-59611 at 5-7; 
CL-IECAssn-59679 at 3-4; and CL-FIA-59595 at 6-7.
    \120\ CL-CME-59718 at 2, 12 (citing Hunter v. FERC, 711 F.3d 155 
(D.C. Cir. 2013)).
---------------------------------------------------------------------------

    The Commission disagrees that this constitutes an implied repeal. 
First, CEA section 4a(a)(2) applies only to physical commodities, not 
other commodities. Accordingly, the requirement of a necessity finding 
in section 4a(a)(1) still applies to a broad swath of commodity 
derivatives. Second, there is no implied repeal even in part, because 
the Commission is interpreting express language--the term 
``standards.'' The Commission must bring its experience to bear when 
interpreting the ambiguity in the new provision, and the Commission 
preliminarily believes that the statute, read in light of the 
Commission's experience administering position limits and making 
necessity findings, is more reasonably read as an express limited 
exception, for physical commodities futures and economically equivalent 
swaps, to the preexisting authorization in CEA section 4a(a)(1) for the 
Commission to impose limits when it finds them necessary.
    ii. Other Limiting Language: Some commenters pointed to a number of 
terms and provisions that they say support the notion that the 
Commission must make antecedent findings before imposing any limits 
under new CEA section 4a(a)(2).
    First, some commenters asserted that the term ``as appropriate'' in 
CEA sections 4a(a)(3) (factors that the ``Commission, ``as 
appropriate'' must consider when it ``shall set limits'') and 
4a(a)(5)(A) (providing that Commission ``shall'' ``as appropriate'' 
establish limits on swaps that are economically equivalent to physical 
commodity futures and options) require the Commission to make 
antecedent findings that the limits required under CEA section 4a(a)(2) 
are appropriate before it may impose them.\121\ The district court 
found these words to be ambiguous. In the court's view, they could 
refer to the Commission's obligation to impose limits (i.e., the 
Commission shall, ``as appropriate,'' impose limits), or to the level 
of the limits the Commission is to impose.\122\
---------------------------------------------------------------------------

    \121\ See, e.g., CL-ISDA/SIFMA-59611 at 5, 7-8 (citing CEA 
section 4a(a)(5) as authorizing aggregate position limits ``as 
appropriate'' for swaps that are economically equivalent to DCM 
futures and options and CEA section 4a(a)(3), which directs the 
Commission to set position limits as appropriate and to the maximum 
extent practicable, in its discretion: (i) To diminish, eliminate, 
or prevent excessive speculation; (ii) to deter and prevent market 
manipulation, squeezes, and corners; (iii) to ensure sufficient 
market liquidity for bona fide hedgers; and (iv) to ensure that the 
price discovery function of the underlying market is not 
disrupted.).
    \122\ 887 F.Supp. 2d at 278; December 2013 Position Limits 
Proposal, 78 FR at 75685, n. 59.
---------------------------------------------------------------------------

    The Commission preliminarily believes that when these words are 
considered in the context of CEA section 4a(a)(2)-(7) as a whole, 
including the multiple uses of the new terms ``shall'' and ``required'' 
and the historically unique stringent time limits for imposing the 
covered limits and post-imposition study requirement, it is more 
reasonable to interpret these words as referring to the level of 
limits, i.e., the Commission must set physical commodity limits at an 
appropriate level, and not to require the Commission to first determine 
whether the required limits are appropriate before it may even impose 
them.\123\ In other words, while Congress made the threshold decision 
to impose position limits on physical commodity futures and options and 
economically equivalent swaps, Congress at the same time delegated to 
the Commission the task of setting the limits at levels that would 
maximize Congress' objectives.
---------------------------------------------------------------------------

    \123\ CEA section 4a(a)(2)(A) provides that the Commission 
``shall'' establish limits; CEA section 4a(a)(2)(B) refers multiple 
times to the ``required'' limits in (A) that ``shall'' be 
established within 180 or 270 days of enactment of Dodd-Frank; and 
CEA section 4a(a)(2)(C) provides that ``[i]n establishing the limits 
required'' the Commission shall ``strive to ensure'' that trading on 
foreign boards of trade for commodities that have limits will be 
subject to ``comparable limits,'' thereby assuming that limits must 
be established and requiring that they be set at levels in 
accordance with particular considerations. CEA section 4a(a)(3) 
contains ``specific limitations'' on the ``required'' limits which 
are most reasonably understood to be considerations for the 
Commission for the levels of limits.
---------------------------------------------------------------------------

    Some commenters claimed that other parts of CEA section 4a(a)(2) 
undermine the Commission's determination. First, CEA section 4a(2)(C) 
states that the ``[g]oal . . . [i]n establishing the limits required'' 
is to ``strive to ensure'' that trading on foreign boards of trade 
(``FBOTs'') for commodities that have limits will be subject to 
``comparable limits.'' It goes on to state that for ``any limits to be 
imposed'' the Commission will strive to ensure that they not shift 
trading overseas. Commenters argue that ``any limits to be imposed'' 
under CEA section 4a(a)(2)(A) implies that limits might not be imposed 
under that section. However, in the context discussed and in view of 
the reference in that section to position limits

[[Page 96715]]

``required,'' the reference to ``any limits to be imposed'' refers 
again to the levels or other standards applied. That is, whatever the 
contours the Commission chooses for the required limits, they must meet 
the goal set forth in that section.
    Second, CEA section 4a(a)(3)(B) states certain factors that the 
Commission must consider in setting limits under CEA section 
4a(a)(2).\124\ The Commission sees no inconsistency with mandatory 
position limits--the Commission must consider these factors in setting 
the appropriate levels and other contours. Indeed, CEA section 
4a(a)(3)(B) applies by its own terms to ``establishing the limits 
required in paragraph (2).'' Moreover, consideration of these factors 
under CEA section 4a(a)(3) is not mandatory, as some commenters 
suggest,\125\ but rather to be made ``in [the Commission's] 
discretion.'' \126\ In the Commission's preliminary view, there is thus 
nothing in these provisions at odds with the Commission's 
interpretation that it is required by CEA section 4a(a)(2)(A) to impose 
limits on a subset of commodities without making antecedent findings 
whether they should be imposed, particularly when the language at issue 
is construed, as it should be, with other terms in CEA section 
4a(a)(2)-(7), discussed above, that use mandatory language and impose 
time limits.
---------------------------------------------------------------------------

    \124\ See, e.g., CL-CME-59718 at 11, 13-17, and CL-FIA-59595 at 
5-6.
    \125\ See, e.g., CL-AMG-59709 at 3; and CL-CME-59718 at 13-17.
    \126\ CEA section 4a(a)(3), 7 U.S.C. 6a(a)(3).
---------------------------------------------------------------------------

    Some commenters stated that two pre-Dodd Frank Act provisions in 
CEA section 4a undermine the Commission's interpretation. The first is 
CEA section 4a(e),which states, ``if the Commission shall have fixed 
limits . . . for any contract . . . , then the limits'' imposed by 
DCMs, SEFs or other trading facilities ``shall not be higher than the 
limits fixed by Commission.'' \127\ According to a commenter, the ``if/
then'' formulation suggests position limits should not be presupposed 
for any contract.\128\ The Commission sees the provision differently. 
CEA section 4a(a)(2) applies only to a subset of futures contracts--
contracts in physical commodities. For other commodities, position 
limits remain subject to the Commission's determination of necessity, 
and the ``if/then'' formulation applies and remains logical. There is, 
accordingly, no inconsistency.
---------------------------------------------------------------------------

    \127\ CEA section 4a(e), 7 U.S.C. 6a(e).
    \128\ CL-CME-59718 at 10 (citing CEA section 4a(e)).
---------------------------------------------------------------------------

    The second pre-Dodd Frank Act provision the commenters mentioned is 
CEA section 5(d)(5); \129\ it gives the exchanges discretionary 
authority to impose position limits on all commodity derivatives ``as 
is necessary and appropriate.'' \130\ There is, however, no 
inconsistency. Exchanges retain the discretionary authority to set 
position limits for the many commodities not covered by CEA section 
4a(a)(2), and they retain the discretion to impose position limits for 
physical commodities, so long as the limits are no higher than federal 
position limits.
---------------------------------------------------------------------------

    \129\ 7 U.S.C. 7(d)(5).
    \130\ CL-CME-59718 at 11 (citing 7 U.S.C. 7(d)(5)).
---------------------------------------------------------------------------

    Some commenters cited other language in CEA section 5(d)(5) to 
support their assertion that, notwithstanding the Dodd-Frank Act 
amendments discussed above requiring the Commission to impose limits, 
the Commission retains and should exercise its discretion to impose 
position accountability levels in lieu of limits or delegate that 
authority exchanges to do so. CEA section 5(d)(5) authorizes exchanges 
to adopt ``position limitations or position accountability'' levels in 
order to reduce the threat of manipulation and congestion. These 
commenters also pointed out that the Commission has previously endorsed 
accountability levels for exchanges in lieu of limits.\131\ Other 
commenters disagree. They asserted that, given what they interpret as a 
mandate in CEA section 4a(a)(2) for the Commission to impose position 
limits for physical commodities, it would be inappropriate for the 
Commission to consider imposing position accountability levels instead 
for those commodities, or to allow exchanges to do so.\132\
---------------------------------------------------------------------------

    \131\ CL-CME-59718 at 10; CL-AMG-59709 5-6; CL-FIA-59595 at 12-
13; CL-FIA-60392 at 4-6, 8 (asserting that under the Commission's 
general rulemaking authority in CEA section 8a(5), 7 U.S.C. 12a(5), 
``the Commission has the power to adopt, as part of an 
accountability regime, a rule pursuant to which it or a DCM could 
direct a market participant to reduce speculative positions above an 
accountability limit because that authority is `reasonably necessary 
to effectuate' a position accountability rule,'' and observing that 
the Commission previously determined in rulemakings that exchange-
set accountability levels represent an alternative means to limit 
excessive speculation); CL-FIA-60303 at 3-4; CL-DBCS-59569 at 4; CL-
MFA-60385 at 7-8, 10-14; and CL-Olam-59658 at 1-2 (declaring that 
the Commission can and should permit exchanges to administer 
position accountability levels in lieu of Commission-set limits 
under CEA section 4a(a)(2)).
    \132\ CL-Public Citizen-60390 at 3-4 (noting other concerns with 
exchange set limits or accountability levels); CL-IECA 60389 at 3-4 
(asserting that the Commission should not cede its authority to 
exchanges); CL-AFR-60953 at 4; CL-A4A-59686 at 2-3; CL-IECA-59671 at 
2; and CL-CMOC-59720 at 2.
---------------------------------------------------------------------------

    The Commission agrees with the latter group of commenters and finds 
the former reading strained. CEA section 4a(a)(2) makes no mention of 
position accountability levels. Regardless whether pre-Dodd Frank 
section 5(d)(5) allows exchanges to set accountability levels in lieu 
of limits where the Commission has not set limits, and regardless 
whether the Commission has in the past endorsed exchange-set position 
accountability levels in lieu of limits, CEA section 4a(a)(2) does not 
mention that tool. If anything, reference to accountability levels 
elsewhere in the CEA shows that Congress understands that exchanges 
have used position accountability, but made no reference to it in 
amended CEA section 4a(a).
    iii. Avoiding Surplusage or Nullity: Several commenters took issue 
with the Commission's preliminary determination that its interpretation 
is necessary in order to avoid rendering CEA section 4a(a)(2)(A) 
surplusage. These commenters suggested that reading the term 
``standards'' in CEA section 4a(a)(2)(A) to include the antecedent 
necessity finding in CEA section 4a(a)(1) will not render CEA section 
4a(a)(2) surplusage because if the Commission finds a position limit is 
``necessary'' and ``appropriate,'' it now must impose one (as opposed 
to pre-Dodd-Frank, when the Commission had authority but not a mandate 
under CEA section 4a(a) to impose limits).\133\ The Commission finds 
this reading highly unlikely. There is no history of the Commission 
determining that limits are necessary and appropriate, but then 
declining to impose them. Nor is it reasonable to expect that the 
Commission might do so. Indeed, historically necessity findings were 
made only in connection with establishing limits.
---------------------------------------------------------------------------

    \133\ CL-ISDA/SIFMA-59611 at 5; and CL-MFA-59606 at 9-10. The 
District Court expressed the same concern. 887 F. Supp. 2d at 274-
75.
---------------------------------------------------------------------------

    Furthermore, if Congress had still wanted to leave it to the 
Commission to ultimately decide whether a limit was necessary, there is 
no reason for it to have also set tight deadlines, repeat multiple 
times that the limits are ``required,'' and direct the agency to 
conduct a study after the limits were imposed. In other words, 
requiring the Commission to make an antecedent necessity finding would 
render many of the Dodd-Frank Act amendments superfluous. For example, 
if the Commission determined limits were not necessary then, contrary 
to CEA section 4a(a)(2), no limits were in fact ``required,'' no limits 
needed to be imposed by the deadlines, and no study

[[Page 96716]]

needed to be conducted. But none of these provisions were phrased in 
conditional terms (e.g., if the Commission finds a limit necessary, 
then it shall . . . ). Had Congress wanted the Commission to continue 
to be the decisionmaker regarding the need for limits, it could have 
expressed that view in countless ways that would not strain the 
statutory language in this way.
    CME contended that the Commission's position--that requiring a 
necessity finding would essentially give the Commission the same 
permissive authority it had before the Dodd-Frank Act amendments--is 
``short-sighted'' because other provisions of CEA section 4a(a) ``would 
still have practical significance.'' In support of this view, CME 
stated that new CEA sections 4a(a)(2)(C) and 4(a)(3)(B) have 
significance even if the Commission is required to make a necessity 
finding because they ``set forth safeguards that the CFTC must balance 
when it establishes limits'' after ``the CFTC finds that such limits 
are necessary.'' The Commission preliminarily believes it unlikely that 
Congress would have intended that. On CME's reading, the statute would 
place additional requirements to constrain the Commission's preexisting 
authority. Given the background for the amendments, particularly the 
studies that preceded the Dodd-Frank Act, the Commission sees no reason 
why Congress would have placed additional constraints, nor any reason 
it would have placed them with respect to physical commodities but not 
excluded commodities or others. This comment also does not address the 
thrust of the Commission's interpretation, which is that finding a 
mandate is the only way to read the entirety of the statute 
harmoniously, including the timing requirements of CEA section 
4a(a)(2)(B) and the reporting requirements of Section 719 of the Dodd-
Frank Act, account for the historical context, and, at the same time, 
avoid reading CEA section 4a(a)(2)(A) as the functional equivalent of 
CEA section 4a(a)(1).\134\ CME also cited CEA section 4a(a)(5), which 
requires position limits for economically equivalent swaps, to make the 
same point that there are still meaningful provisions in CEA section 
4a(a), even with a necessity finding. But CEA section 4a(a)(1) already 
authorizes the Commission to establish limits on swaps as necessary, 
and so the authority, which would be discretionary under CME's reading, 
to impose limits on economically equivalent swaps would add nothing to 
the statute and the amendment would be wholly superfluous.
---------------------------------------------------------------------------

    \134\ In this vein, then-Commissioner Mark Wetjen, who was an 
aide to Senate Majority Leader Harry Reid during the Dodd-Frank 
legislative process, stated at the Commission's public meeting to 
adopt the December 2013 proposal that to read Section 4a(a)(2)(A) to 
require the same antecedent necessity finding as Section 4a(a)(1) 
``does not comport with my understanding of the statute's intent as 
informed by my experience working as a Senate aide during 
consideration of these provisions.'' Statement of Commissioner Mark 
Wetjen, Public Meeting of the Commodity Futures Trading Commission 
(Nov. 5, 2013), http://www.cftc.gov/PressRoom/SpeechesTestimony/wetjenstatement110513.
---------------------------------------------------------------------------

6. Conclusion
    Having carefully considered the text, purpose and legislative 
history of CEA section 4a(a) as a whole, along with its own experience 
and expertise and the comments on its proposed interpretation, the 
Commission preliminarily believes for the reasons above that Congress--
while not expressing itself with ideal clarity--decided that position 
limits were necessary for a subset of commodities, physical 
commodities, mandated the Commission to impose them on those 
commodities in accordance with certain criteria, and required that the 
Commission do so expeditiously, without first making antecedent 
findings that they are necessary to prevent excessive speculation. 
Consistent with this interpretation, Congress also directed the agency 
to report back to Congress on their effectiveness within one year. In 
the Commission's preliminary view, this interpretation, even if not the 
only possible interpretation, best gives effect to the text and purpose 
of the Dodd-Frank Act amendments in the context of the pre-existing 
position limits provision, while ensuring that neither the amendments 
nor the pre-existing language is rendered superfluous.

C. Necessity Finding

1. Necessity
    The Commission reiterates its preliminary alternative necessity 
finding as articulated in the December 2013 Position Limits Proposal: 
\135\ Out of an abundance of caution in light of the district court 
decision in ISDA v. CFTC,\136\ and without prejudice to any argument 
the Commission may advance in any forum, the Commission reproposes, as 
a separate and independent basis for the Rule, a preliminary finding 
herein that the speculative position limits in this reproposed Rule are 
necessary to achieve their statutory purposes.
---------------------------------------------------------------------------

    \135\ December 2013 Position Limits Proposal, 78 FR at 75685.
    \136\ International Swaps and Derivatives Association v. United 
States Commodity Futures Trading Commission, 887 F. Supp. 2d 259 
(D.D.C. 2012).
---------------------------------------------------------------------------

    As described in the Proposal, the policy basis and reasoning for 
the Commission's necessity finding is illustrated by two major 
incidents in which market participants amassed massive futures 
positions in silver and natural gas, respectively, which enabled them 
to cause sudden and unreasonable fluctuations and unwarranted changes 
in the prices of those commodities. CEA section 4a(a)(1) calls for 
position limits for the purpose of diminishing, eliminating, or 
preventing the burden of excessive speculation.\137\ Although both 
episodes involved manipulative intent, the Commission believes that 
such intent is not necessary for an excessively large position to give 
rise to sudden and unreasonable fluctuations or unwarranted changes in 
the price of an underlying commodity. This is illustrated, for example, 
by the fact that when the perpetrators of the silver manipulation lost 
the ability to control their scheme, i.e., to manipulate the market at 
will, they were forced to liquidate quickly, which, given the amount of 
contracts sold in a very short time, caused silver prices to plummet. 
Any trader who was forced by conditions in the market or their own 
financial condition to liquidate a very large position could 
predictably have similar effects on prices, regardless of their 
motivation for amassing the position in the first place. Moreover, 
although these two episodes unfolded in contract markets for silver and 
natural gas, and unfolded at two different times in the past, there is 
nothing unique about either market at either relevant time that causes 
the Commission to restrict its preliminary finding of necessity to 
those markets or to reach a different conclusion based on market 
conditions today. Put another way, any contract market has a limited 
ability, closely linked to the market's size, to absorb the 
establishment and liquidation of large speculative positions in an 
orderly manner.\138\ The silver and natural gas examples illustrate 
these issues, but the reasoning applies beyond their specific facts. 
Accordingly, the Commission preliminarily finds it necessary to 
implement position limits as a prophylactic measure for the 25 core 
referenced futures contracts.\139\
---------------------------------------------------------------------------

    \137\ 7 U.S.C. 6a(a)(1).
    \138\ Establishment of Speculative Position Limits, 46 FR 50938, 
50940 (Oct. 16, 1981).
    \139\ The Commission's necessity finding is also supported by 
the consideration of costs and benefits below.

---------------------------------------------------------------------------

[[Page 96717]]

    The Commission received many comments on its preliminary 
alternative necessity finding; the Commission summarizes and responds 
to significant comments below.
    a. Studies' Lack of Consensus.\140\ The Commission stated in the 
December 2013 Position Limits Proposal that the lack of consensus in 
the studies reviewed at that time warrants acting on the side of 
caution and implementing position limits as a prophylactic measure, 
``to protect against undue price fluctuations and other burdens on 
commerce that in some cases have been at least in part attributable to 
excessive speculation.'' \141\ Some commenters suggested that a lack of 
consensus means instead that the Commission should not implement 
position limits,\142\ that the issue merits further study,\143\ that it 
would be arbitrary and capricious to implement position limits,\144\ 
and that the desire to err on the side of caution should be irrelevant 
to an assessment of whether position limits are necessary.\145\ In 
short, these comments contend that the lack of consensus means position 
limits cannot be necessary.\146\ The Commission disagrees. The lack of 
consensus does not provide ``objective evidence that position limits 
are not necessary;'' \147\ rather, it suggests that they remain 
controversial.\148\ In response to these comments, the Commission 
believes that Congress could not have intended by using the word 
``necessary'' to restrict the Commission from determining to implement 
position limits unless experts unanimously agree or form a consensus 
they would be beneficial. Otherwise a necessity finding would be 
virtually impossible and, in fact, the Commission could plausibly be 
stymied by interested persons publishing self-interested studies. The 
Commission's view in this respect is supported by the text of CEA 
section 4a(a)(1), which states that there shall be such limits as ``the 
Commission finds'' are necessary.\149\ Thus, while the Commission finds 
the studies useful, it does not cede the necessity finding to the 
authors.
---------------------------------------------------------------------------

    \140\ The Commission observed in the December 2013 Position 
Limits Proposal that the studies discussed therein ``overall show a 
lack of consensus regarding the impact of speculation on commodity 
markets and the effectiveness of position limits.'' 78 FR at 75695.
    \141\ December 2013 Position Limits Proposal, 78 FR at 75695.
    \142\ E.g., CL-CCMR-59623 at 4-5; CL-EEI-EPSA-59602 at 3; CL-
FIA-59595 at 7; and CL-IECAssn-59679 at 3.
    \143\ E.g., CL-BG Group-59656 at 3; CL-EEI-EPSA-59602 at 3; and 
CL-WGC-59558 at 2.
    \144\ CL-Chamber-59684 at 4.
    \145\ CL-CCMR-59623 at 4-5.
    \146\ Contra CL-AFR-59711 at 1; CL-AFR-59685 at 1; CL-Public 
Citizen-59648 at 3; CL-WEED-59628.
    \147\ CL-EEI-EPSA-59602 at 3.
    \148\ A discussion of the cumulative studies reviewed by the 
Commission follows below. See below, Section I.C.2. (discussing 
studies and reports received or reviwed in connection with the 
December 2013 Position Limits Proposal), and accompanying text.
    \149\ This assumes that, contrary to the Commission's 
interpretation of the statute, Congress did not make that 
determination itself as to physical commodity markets.
---------------------------------------------------------------------------

    b. Reliance on Silver and Natural Gas Studies.\150\ The Commission 
stated in the December 2013 Position Limits Proposal that it ``found 
two studies of actual market events to be helpful and persuasive in 
making its preliminary alternative necessity finding,'' \151\ namely, 
the Interagency Silver Study \152\ and the PSI Report on Excessive 
Speculation in the Natural Gas Market.\153\ Some commenters criticized 
the Commission's reliance on these two studies.\154\ These commenters 
dismissed the two studies, variously, as limited, outdated,\155\ 
dubious,\156\ unpersuasive, anecdotal, and irrelevant.\157\ Other 
commenters characterized the episodes as extreme or unique.\158\ Some 
commenters observed that neither study recommended position 
limits.\159\ One noted that, ``Each study focuses on activities in a 
single market during a limited timeframe that occurred years ago.'' 
\160\ Others noted that the Commission has undertaken no independent 
analysis of each market, commodity, or contract affected by this 
rulemaking.\161\ They then claim that because particular markets or 
commodities have unique characteristics, one cannot extrapolate from 
these two specific episodes to other commodities or other markets.\162\ 
Several commenters describe the Hunt brothers silver crisis and the 
collapse of the natural gas speculator Amaranth as instances of market 
manipulation rather than excessive speculation.\163\
---------------------------------------------------------------------------

    \150\ The Commission stated in the December 2013 Position Limits 
Proposal that it found two studies of actual market events to be 
helpful and persuasive in making its preliminary alternative 
necessity finding, namely, the interagency report on the silver 
crisis, U.S. Commodity Futures Trading Commission, ``Part Two, A 
Study of the Silver Market, May 29, 1981, Report to The Congress in 
Response to Section 21 of the Commodity Exchange Act, and the PSI 
Report on, U.S. Senate, ``Excessive Speculation in the Natural Gas 
Market,'' June 25, 2007.
    \151\ December 2013 Position Limits Proposal, 78 FR at 75695.
    \152\ Commodity Futures Trading Commission, Report to The 
Congress in Response to Section 21 of the Commodity Exchange Act, 
May 29, 1981, Part Two, A Study of the Silver Market.
    \153\ Excessive Speculation in the Natural Gas Market, Staff 
Report with Additional Minority Staff Views, Permanent Subcommittee 
on Investigations, United States Senate, Released in Conjunction 
with the Permanent Subcommittee on Investigations June 25 & July 9, 
2007 Hearings.
    \154\ One commenter called the Commission's choice `cherry-
picking.' CL-Citadel-59717 at 4.
    \155\ The Commission disagrees; that an exemplary event occurred 
in the past does not make it irrelevant.
    \156\ Contra CL-Sen. Levin-59637 at 6 (pointing to ``concrete 
examples'').
    \157\ E.g., CL-Chamber-59684 at 3; CL-CME-59718 at 3, 18; CL-
IECAssn-59679 at 2; CL-ISDA/SIFMA-59611 at 12; and CL-USCF-59644 at 
3.
    \158\ E.g., CL-IECAssn-59679 at 2; and CL-BG Group-59656 at 3. 
Certainly the Commission seeks to prevent extreme events such as 
Amaranth and the Hunt brothers, however infrequently they may occur.
    \159\ E.g., CL-CME-59718 at 18; and CL-CCMR-59623 at 3.
    \160\ CL-CME-59718 at 18.
    \161\ E.g., CL-EEI-EPSA-59602 at 2; CL-WGC-59558 at 2.
    \162\ E.g., CL-Citadel-59717 at 4; CL-ISDA/SIFMA-59611 at 12-14; 
CL-MFA-59606 at 10; and CL-WGC-59558 at 2.
    \163\ E.g., CL-Better Markets-59716 at 12; CL-BG Group-59656 at 
3; CL-COPE-59622 at 4-5; CL-CCMR-59623 at 4; CL-ISDA/SIFMA-59611 at 
13; and CL-AMG-59709 at 5.
---------------------------------------------------------------------------

    As discussed above, the presence of manipulative intent or activity 
does not preclude the existence of excessive speculation, and traders 
do not need manipulative intent for the accumulation of very large 
positions to cause the negative consequences observed in the Hunt and 
Amaranth incidents. These are some reasons position limits are valuable 
as a prophylactic measure for, in the language of CEA section 4a(a)(1), 
``preventing'' burdens on interstate commerce. The Hunt brothers, who 
distorted the price of silver, and Amaranth, who distorted the price of 
natural gas, are examples that illustrate the burdens on interstate 
commerce of excessive speculation that occurred in the absence of 
position limits, and position limits would have restricted those 
traders' ability to cause unwarranted price movement and market 
volatility, and this would be so even had their motivations been 
innocent. Both episodes involved extraordinarily large speculative 
positions, which the Commission has historically associated with 
excessive speculation.\164\ We are also given no persuasive reason to 
change our conclusion that extraordinarily large speculative positions 
could result in sudden or unreasonable fluctuations or unwarranted 
price changes in other physical commodity markets, just as they did in 
silver and natural case in the Hunt Brothers and Amaranth episodes. 
Although commenters describe changes in these markets over time, the 
characteristics that we find salient have

[[Page 96718]]

not changed materially.\165\ Thus, these two examples remain relevant 
and compelling.
---------------------------------------------------------------------------

    \164\ December 2013 Position Limits Proposal, 78 FR at 75685, n. 
60.
    \165\ See infra Section I.C.1.f., and accompanying text.
---------------------------------------------------------------------------

    CME makes a textual argument in support of the position that CEA 
section 4a(a)(2) requires a commodity-by-commodity determination that 
position limits are necessary. It cites several places in CEA section 
4a(a)(1) that refer to limits as necessary to eliminate ``such burden'' 
on ``such commodity'' or ``any commodity.'' \166\ However, the 
prophylactic measures described herein address vulnerabilities 
characteristic of each market.\167\ Accordingly, the Commission 
believes the statute's use of the singular is immaterial.\168\
---------------------------------------------------------------------------

    \166\ CL-CME-59718 at 13-14.
    \167\ See, e.g., Establishment of Speculative Position Limits, 
46 FR at 50940 (Oct. 16, 1981) (``[I]t appears that the capacity of 
any contract market to absorb the establishment and liquidation of 
large speculative positions in an orderly manner is related to the 
relative size of such positions, i.e., the capacity of the market is 
not unlimited.'').
    \168\ See also 1 U.S.C. 1 (``In determining the meaning of any 
Act of Congress, unless the context indicates otherwise--words 
importing the singular include and apply to several persons, 
parties, or things[.]'')
---------------------------------------------------------------------------

    The Commission's analysis applies to all physical commodities, and 
it would account for differences among markets by setting the limits at 
levels based on updated data regarding estimated deliverable supply in 
each of the given underlying commodities in the case of spot-month 
limits or based on exchange recommendation, if an exchange recommended 
a spot-month limit level of less than 25 percent of estimated 
deliverable supply, and open interest in the case of single-month and 
all-months-combined limits, for each separate commodity. The 
Commission's Reproposal regarding whether to adopt conditional spot-
month limits is also based on updated data.\169\ The Commission also 
does not find it relevant that the Interagency Silver Study and the PSI 
Report, each of which was published before the Dodd-Frank Act became 
law, do not recommend the imposition of position limits. Based on the 
facts described in those reports, along with the Commission's 
understanding of the policies underlying CEA section 4a(a)(1) in light 
of the Commission's own experience with legacy limits, the Commission 
preliminarily finds that position limits are necessary within the 
meaning of that section.
---------------------------------------------------------------------------

    \169\ See the Commission's discussion of its verification of 
estimates of deliverable supply and work with open interest data, 
below.
---------------------------------------------------------------------------

    c. Commission research. One commenter asserted that the Commission 
failed ``to conduct proper economic analysis to determine, if in fact, 
the position limits as proposed were likely to have any positive impact 
in promoting fair and orderly commodity markets.'' \170\ While 
acknowledging the Commission's resource constraints, this commenter 
remarked on ``the paucity of the published record by the CFTC's s own 
staff'' \171\ and suggests that outside authors be given ``controlled 
access to all of the CFTC's data regarding investor and hedger trading 
records.'' \172\ This commenter then proceeds to accuse the Commission 
of failing to ``conduct such research because they felt the data would 
not in fact support the proposed position limit regulations.'' \173\
---------------------------------------------------------------------------

    \170\ CL-USCF-59644 at 2.
    \171\ CL-USCF-59644 at 2. This commenter exaggerates. The last 
arguably relevant report of Commission staff is ``Commodity Swap 
Dealers & Index Traders with Commission Recommendations'' (Sept. 
2008), available at http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/cftcstaffreportonswapdealers09.pdf. However, several 
authors or co-authors of academic papers reviewed by the Commission 
are or have been affiliated with the Commission in various 
capacities and have added to the current literature relating to 
position limits. Each of Harris, see note240, Kirilenko, see note 
2400, and Overdahl, see notes 240 and 241, are former Chief 
Economists of the Commission. Other authors, e.g., Aulerich, Boyd, 
Brunetti, B[uuml]y[uuml]k[scedil]ahin, Einloth, Haigh, Hranaiova, 
Kyle, Robe, and Rothenberg, are now or have been staff and/or 
consultants to the Commission, have spent sabbaticals at the 
Commission, or have been detailed to the Commission from other 
federal agencies. Graduate students studying with some study 
authors, including some working on dissertations, have also cycled 
through the Commission as interns. Cf. note 180 (disclaimer on paper 
by Harris and B[uuml]y[uuml]k[scedil]ahin).
    \172\ CL-USCF-59644 at 3. Data regarding investor and hedger 
trading records may be protected by section 8 of the CEA, 7 U.S.C. 
12. In general, ``the Commission may not publish data and 
information that would separately disclose the business transactions 
or market positions of any person and trade secrets or names of 
customers . . . .'' 7 U.S.C. 12(a)(1). The Commission must therefore 
be very careful about granting outside economists access to such 
data. Commission registrants have in the past ``questioned why the 
CFTC was permitting outside economists to access CFTC data, why the 
CFTC was permitting the publication of academic articles using that 
data, and . . . the administrative process by which the CFTC was 
employing these outside economists.'' Review of the Commodity 
Futures Trading Commission's Response to Allegations Pertaining to 
the Office of the Chief Economist, Prepared by the Office of the 
Inspector General, Commodity Futures Trading Commission, Feb. 21. 
2014, at ii, available at http://www.cftc.gov/idc/groups/public/@freedomofinformationact/documents/file/oigreportredacted.pdf. The 
Commission is sensitive to these concerns, and strives to ensure 
that reports and publications that rely on Commission data do not 
reveal sensitive information. To do so requires an expenditure of 
effort by Commission staff.
    \173\ CL-USCF-59644 at 3. The Commission rejects the commenter's 
aspersion. The Commission's Office of the Inspector General 
addressed the perception of institutional censorship in its ``Follow 
Up Report: Review of the Commodity Futures Trading Commission's 
Response to Allegations Pertaining to the Office of the Chief 
Economist, Jan. 13, 2016 (``Follow Up Report''), available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/oig_oce011316.pdf. The Follow Up Report emphasizes ``that there has 
been no allegation that the Chairman or Commissioners have attempted 
to prevent certain topics from being researched or to alter 
conclusions,'' Follow Up Report at 11, but nevertheless recommended 
``that OCE not prohibit research topics relevant to the CFTC 
mission.'' Follow Up Report at 10. The Follow Up Report observed 
that recently ``OCE has focused almost exclusively on short-term 
research and economic analysis in support of other Divisions and the 
Commission.'' Follow Up Report at 10.
---------------------------------------------------------------------------

    The Commission disagrees that it has failed to conduct proper 
economic analysis to determine the likely benefits of position limits. 
CEA section 15(a) requires that before promulgating a regulation under 
the Act, the Commission consider the costs and benefits of the action 
according to five statutory factors. The Commission does so below in 
robust fashion with respect to the Reproposal in its entirety, 
including the alternative necessity finding. Neither section 15(a) of 
the CEA nor the Administrative Procedure Act requires the Commission to 
conduct a study in any particular form so long as it considers the 
costs and benefits and the entire administrative record. Section 719(a) 
of the Dodd-Frank Act, on the other hand, provides that the Commission 
``shall conduct a study of the effects (if any) of the position limits 
imposed pursuant to the . . . [CEA] on excessive speculation'' and 
report to Congress on such matters after the imposition of position 
limits.\174\ The Commission will do so as required by Section 719(a), 
thereby fully discharging its duty. At all stages, the Commission has 
relied on and will continue to rely on the input of staff economists in 
the Division of Market Oversight (``DMO'') and the Office of the Chief 
Economist (``OCE'').
---------------------------------------------------------------------------

    \174\ 15 U.S.C. 8307(a). See December 2013 Position Limits 
Proposal, 78 FR at 75684 (discussing section 719(a) of the Dodd-
Frank Act in the context of the Commission's construal of CEA 
section 4a(a) to mandate that the Commission impose position 
limits).
---------------------------------------------------------------------------

d. Excessive Speculation
    One commenter opined that, ``in discussing only the Hunt Brothers 
and Amaranth case studies the Commission has not given adequate weight 
to the benefits that speculators provide to the market.'' \175\ To the 
contrary, the Commission recognizes that speculation is part of a well-
functioning market, particularly insofar as speculators contribute 
valuable liquidity. The focus of this reproposed rulemaking is not 
speculation per se; Congress identified excessive speculation as an 
undue

[[Page 96719]]

burden on interstate commerce in CEA section 4a(a)(1).\176\
---------------------------------------------------------------------------

    \175\ CL-MFA-59606 at 11-12.
    \176\ 7 U.S.C. 6a(a)(1). One commenter suggests that the 
Commission base speculative position limits on ``a determination of 
an acceptable total level of speculation that approximates the 
historic ratio of hedging to investor/speculative trading.'' CL-A4A-
59714 at 4. The Commission declines at this time to adopt such a 
ratio as basis for speculative position limits. Among other things, 
the Commission does not now collect reliable data distinguishing 
hedgers from speculators. Also, there may be levels above a historic 
hedging ratio that still provide liquidity rather than denoting 
excessive speculation. While the Commission has authority under 
section 4a(a)(1) of the Act to impose position limits on a group or 
class of traders, the only way that the Commission knows how to 
implement limit levels based on such a historic ratio would be to 
impose rationing, which the Commission declines to do at this time.
---------------------------------------------------------------------------

    One commenter asserted that the Commission must provide a 
definition of excessive speculation before making any necessity 
finding.\177\ The Commission disagrees that the rule must include such 
a definition. The statute contains no such requirement, and did not 
contain such a requirement prior to the Dodd-Frank Act. The Commission 
has never based necessity findings on a rigid definition. The 
Commission's position on this issue has been clear over time: ``The CEA 
does not define excessive speculation. But the Commission historically 
has associated it with extraordinarily large speculative positions . . 
. .'' \178\ CEA section 4a(a)(1) states that position limits should 
diminish, eliminate, or prevent burdens on interstate commerce 
associated with sudden or unreasonable fluctuations or unwarranted 
changes in the price of commodities.\179\ It stands to reason that 
excessive speculation involves positions large enough to risk such 
unreasonable fluctuations or unwarranted changes. This commenter also 
urges the Commission to ``demonstrate and determine that . . . harmful 
excessive speculation exists or is reasonably likely to occur with 
respect to particular commodities'' \180\ before implementing any 
position limits.\181\ As stated in the December 2013 Position Limits 
Proposal, the Commission referenced its prior determination in 1981 
``that, with respect to any particular market, the `existence of 
historical trading data' showing excessive speculation or other burdens 
on that market is not `an essential prerequisite to the establishment 
of a speculative limit.' '' \182\ The Commission reiterates this 
statement and underscores that these risks are characteristic of 
contract markets generally. Differences among markets can be addressed, 
as the Commission reproposes to do here, by setting the limit levels to 
account for individual market characteristics. Attempting to 
demonstrate and determine that excessive speculation is reasonably 
likely to occur with respect to particular commodities before 
implementing position limits is impractical because historical trading 
data in a particular commodity is not necessarily indicative of future 
events in that commodity. Further, it would require the Commission to 
determine what may happen in a forecasted future state of the market in 
a particular commodity. As the Commission has often repeated, position 
limits are a prophylactic measure. Inherently, then, position limits 
are designed to address the burdens of excessive speculation well 
before they occur, not when the Commission somehow determines that such 
speculation is imminent, which the Commission (or any market actor for 
that matter) cannot reliably do.
---------------------------------------------------------------------------

    \177\ CL-ISDA/SIFMA-59611 at 3, 14-15; see also CL-FIA-59595 at 
6-7.
    \178\ December 2013 Position Limits Proposal, 78 FR at 75685, n. 
60 (citation omitted).
    \179\ 7 U.S.C. 6a(a)(1).
    \180\ CL-ISDA/SIFMA-59611 at 3; see also CL-CCMR-59623 at 4; CL-
Chamber-59684 at 4. Contra CL-Sen. Levin-59637 at 6 (stating 
``[c]ontrary to the complaints of some critics, it would be a waste 
of time and resources for the Commission to expand the proposed 
rules beyond the existing justification to repeat the same analysis, 
reach the same conclusions, and issue the same findings for each of 
the 28 commodities.'').
    \181\ See also CL-CCMR-59623 at 4-5. Another commenter 
``contends that the best available evidence discounts the theory 
that there is excessive speculation distorting the prices in the 
commodity markets.'' CL-MFA-59606 at 13 (citing Pirrong). Such a 
contention is inconsistent with ``Congress' determination, codified 
in CEA section 4a(a)(1), that position limits are an effective tool 
to address excessive speculation as a cause of sudden or 
unreasonable fluctuations or unwarranted changes in the price of . . 
. [agricultural and exempt] commodities. December 2013 Position 
Limits Proposal, 78 FR at 75695 (footnote omitted). Another 
commenter mischaracterizes the finding of the Congressional Budget 
Report, ``Evaluating Limits on Participation and Transactions in 
Markets for Emissions Allowances'' (2010), available at http://www.cbo.gov/publication/21967 (``CBO Report''); the CBO Report does 
not conclude ``that position limits are harmful to markets.'' CL-
IECAssn-59679 at 3. Rather, in the context of creating markets for 
emissions allowance trading, the CBO Report discusses both the uses 
and benefits and the challenges and drawbacks of not only position 
limits but also circuit breakers, in addition to banning certain 
types of traders and banning allowance derivatives. Among other 
things, the CBO Report states, ``Position Limits would probably 
lessen the possibility of systemic risk and manipulation in 
allowance markets . . . .'' CBO Report at viii. Another commenter 
states that a ``CFTC study'' found that the 2008 crude oil crisis 
was primarily due to fundamental factors in the supply and demand of 
oil. CL-CCMR-59623 at 4. The referenced study is Harris and 
B[uuml]y[uuml]k[scedil]ahin, The Role of Speculators in the Crude 
Oil Futures Market (working paper 2009). See generally note 240 
(listing studies that employ the Granger method of statistical 
analysis). While Harris is a former Chief Economist, and 
B[uuml]y[uuml]k[scedil]ahin is a former staff economist in OCE, as 
noted above, the cover page of the referenced paper contains the 
standard disclaimer, ``This paper reflects the opinions of its 
authors only, and not those of the U.S. Commodity Futures Trading 
Commission, the Commissioners, or other staff of the Commission.'' 
That is, it is not a ``CFTC study.'' In addition, other studies of 
that market at that time reached different conclusions. Cf. note 252 
(citing study that concludes price changes precede the position 
change). The Commission reviewed several studies of the crude oil 
market around 2008 and discusses them herein. See discussion of 
persuasive academic studies, below. The Commission cautions that, 
given the continuing controversy surrounding position limits, it is 
unlikely that one study will ever be completely dispositive of these 
complicated and difficult issues.
    \182\ December 2013 Position Limits Proposal, 78 FR at 75683.
---------------------------------------------------------------------------

e. Volatility
    Commenters assert, variously, that ``the volatility of commodity 
markets has decreased steadily over the past decade,'' \183\ that 
``research found that there was a negative correlation between 
speculative positions and market volatility,'' \184\ research shows 
that factors other than excessive speculation were primarily 
responsible for specific instances of price volatility,\185\ that 
futures markets are associated with lower price volatility,\186\ that 
particular types of speculators provide liquidity rather than causing 
price volatility,\187\ that position limits will increase 
volatility,\188\ etc. It would follow, then, according to these 
commenters, that because they believe there is little or no volatility 
(no sudden or unreasonable fluctuations or unwarranted price changes), 
or no volatility caused by excessive speculation, position limits 
cannot be necessary.
---------------------------------------------------------------------------

    \183\ CL-CCMR-59623 at 4 (claim supported only by a reference to 
a comment letter that pre-dates the December 2013 Position Limits 
Proposal).
    \184\ CL-MFA-59606 at 12 (citing one academic paper, Irwin and 
Sanders, The Impact of Index and Swap Funds on Commodity Futures 
Markets: Preliminary Results (working paper 2010)). See generally 
note 240 (studies that employ the Granger method of statistical 
analysis).
    \185\ E.g., CL-MFA-59606 at 11-12, n. 26. Contra CL-AFR-59685 at 
1 (stating ``We understand that other factors contribute to highly 
volatile commodity prices, but excessive speculation plays a 
significant part, according to studies by Princeton, MIT, the 
Petersen Institute, the University of London, and the U.S. Senate, 
among other highly credible sources.'').
    \186\ CL-MFA-59606 at 13, n. 30.
    \187\ E.g., CL-MFA-59606 at 12-13 (hedge funds). Cf. CL-SIFMA 
AMG-59709 at 15 (asserting ``neither Amaranth nor the Hunt brothers 
were in any way involved in commodity index swaps''), 16 (registered 
investment companies and ERISA accounts).
    \188\ CL-MFA- 59606 at 13. Contra CL-CMOC-59702 at 2 
(maintaining that witness testimony before policymakers ``confirmed 
that the erosion of the position limits regime was a leading cause 
in market instability and wild price swings seen in recent years and 
that it had led to diminished confidence in the commodity derivative 
markets as a hedging and price discovery tool'').
---------------------------------------------------------------------------

    As stated above, the Commission recognizes that speculation is part 
of a

[[Page 96720]]

well-functioning market particularly, as noted in comments, as a source 
of liquidity. Position limits address excessive speculation, not 
speculation per se. Position limits neither exclude particular types of 
speculators nor prohibit speculative transactions; they constrain only 
speculators with excessively large positions in order to diminish, 
eliminate, or prevent an undue and unnecessary burden on interstate 
commerce in a commodity.\189\ The Commission agrees that futures 
markets are associated with, and may indeed contribute to, lower 
volatility in underlying commodity prices. However, as Congress 
observed, in CEA section 4a(a)(1), excessive speculation in a commodity 
contract that causes sudden or unreasonable fluctuations or unwarranted 
changes in the price of such commodity, is an undue and unnecessary 
burden on interstate commerce in such commodity.\190\ In promulgating 
CEA section 4a(a)(1), Congress adopted position limits as a useful tool 
to diminish, eliminate, or prevent those problems. The Commission 
believes that position limits are a necessary prophylactic measure to 
guard against disruptions arising from excessive speculation, and the 
Commission has endeavored to repropose limit levels that are not so low 
as to hamper healthy speculation as a source of liquidity.\191\
---------------------------------------------------------------------------

    \189\ That a particular type of speculator trades a different 
type of instrument, employs a different trading strategy, or is 
unlevered, diversified, subject to other regulatory regimes, etc., 
so as to distinguish it in some way from Amaranth or the Hunt 
brothers does not overcome the size of the position held by the 
speculator, and the risks inherent in amassing extraordinarily large 
speculative positions.
    \190\ CEA section 4a(a)(1); 7 U.S.C. 6a(a)(1).
    \191\ See the discussion of the impact analysis, below under 
Sec.  150.2.
---------------------------------------------------------------------------

f. Basis for Determination
    One commenter states, ``The necessity finding . . . proffered by 
the Commission--which consists of a discussion of two historical events 
and a cursory review of existing studies and reports on position limits 
related issues--falls short of a comprehensive analysis and 
justification for the proposed position limits.\192\ We disagree with 
the commenter's opinion that the Commission's analysis is not 
comprehensive or falls short of justifying the reproposed rule.\193\
---------------------------------------------------------------------------

    \192\ CL-Citadel-59717 at 3-4 (footnote omitted). Contra CL-Sen. 
Levin-59637 at 6 (declaring that ``[t]he Commission's analysis and 
findings, paired with concrete examples, provide a comprehensive 
explanation of the principles and reasoning behind establishing 
position limits.'').
    \193\ Although the events described in the proposal are 
sufficient to support the necessity finding for the reasons given, 
the Commission also notes reports that more recent market events 
have been perceived as involving excessively large positions that 
have caused or threatened to cause market disruptions. See, e.g., Ed 
Ballard, Speculators sit on Sugar Pile, Raising Fears of Selloff, 
The Wall Street Journal (Nov. 21, 2016) (``Speculative investors 
have built a record position in sugar this year, sparking fears of a 
swift pullback in its price.''); Of mice and markets, A surge in 
speculation is making commodity markets more volatile, The Economist 
(Sept. 10, 2016) (discussing ``scramble by funds to unwind their 
short positions in'' West Texas Intermediate that appears to have 
``fanned a rally in spot oil prices''). As discussed elsewhere, 
willingness to participate in the futures and swaps markets may be 
reduced by perceptions that a participant with an unusually large 
speculative position could exert unreasonable market power.
---------------------------------------------------------------------------

    Another commenter states that the December 2013 Position Limits 
Proposal ``does not provide any quantitative analysis of how the 
outcome of these [two historical] events might have differed if the 
proposed position limits had been in place.'' \194\ The Commission 
disagrees. The Commission stated in the December 2013 Position Limits 
Proposal that, ``The Commission believes that if Federal speculative 
position limits had been in effect that correspond to the . . . . 
[proposed] limits . . . , across markets now subject to Commission 
jurisdiction, such limits would have prevented the Hunt brothers and 
their cohorts from accumulating such large futures positions.'' \195\ 
This statement was based on calculations using a methodology similar to 
\196\ that proposed in the December 2013 Position Limits Proposal 
applied to quantitative data included and as described therein.\197\ 
The Commission's stated belief is unchanged at the higher single-month 
and all-months-combined limit levels of 7,600 contracts that the 
Commission adopts today for silver.\198\ Nevertheless, historical data 
regarding absolute position size from the period of the late-1970's to 
1980 may not be readily comparable to the numerical limits adopted in 
the current market environment. Accordingly, the Commission is 
reproposing establishing levels using the methodology based on the size 
of the current market as described elsewhere in this release.
---------------------------------------------------------------------------

    \194\ CL-WGC-59558 at 2; see also CL-BG Group-59656 at 3.
    \195\ December 2013 Position Limits Proposal, 78 FR at 75690.
    \196\ The Commission's methodology is a fair approximation of 
how the limits would have been applied during the time of the silver 
crisis. See December 2013 Position Limits Proposal, 78 FR at 75690.
    \197\ December 2013 Position Limits Proposal, 78 FR at 75690-1.
    \198\ For example, using historical month-end open interest 
data, the Commission calculated a single- and all-months-combined 
limit level of 6,700 contracts, which would have been exceeded by a 
total Hunt position of over 12,000 contracts for March delivery. 
December 2013 Position Limits Proposal, 78 FR at 75690. Baldly, a 
position of 12,000 contracts would still exceed a 7,600 contract 
limit.
---------------------------------------------------------------------------

    With respect to Amaranth, the Commission stated, ``Based on certain 
assumptions . . . , the Commission believes that if Federal speculative 
position limits had been in effect that correspond to the limits that 
the Commission . . . [proposed in the December 2013 Position Limits 
Proposal], across markets now subject to Commission jurisdiction, such 
limits would have prevented Amaranth from accumulating such large 
futures positions and thereby restrict its ability to cause unwarranted 
price effects.'' \199\ This statement of belief about Amaranth was also 
based on calculations using the methodology applied to quantitative 
data as described and included in the December 2013 Position Limits 
Proposal preamble.\200\ The historical size of Amaranth positions would 
no longer breach the higher single-month and all-months-combined limit 
levels of 200,900 contracts that the Commission adopts today for 
natural gas.\201\ However, the Commission is reproposing setting a 
level using a methodology that adapts to changes in the market for 
natural gas, i.e., the fact that it has grown larger and more liquid 
since the collapse of Amaranth. Thus, it stands to reason that a 
speculator might now have to accumulate a larger position than 
Amaranth's historical position to present a similar risk of disruption 
to the natural gas market. In fact, the Commission has long recognized 
``that the capacity of any contract market to absorb the establishment 
and liquidation of large speculative positions in an orderly manner is 
related to the relative size of such positions, i.e., the capacity of 
the market is not unlimited.'' \202\ A larger market should have larger 
capacity, other things being equal; \203\ hence, the Commission is 
adopting higher levels of limits. Moreover, costly disruptions like 
those associated with Amaranth remain entirely possible. Because the 
costs of these disruptions can be great, and borne by members of the 
public

[[Page 96721]]

unconnected with trading markets, the Commission preliminarily finds it 
necessary to impose speculative position limits as a preventative 
measure. As markets differ in size, the limit levels differ 
accordingly, each designed to prevent the accumulation of positions 
that are extraordinary in size in the context of each market.
---------------------------------------------------------------------------

    \199\ December 2013 Position Limits Proposal, 78 FR at 75692.
    \200\ December 2013 Position Limits Proposal, 78 FR at 75692-3.
    \201\ See level of initial limits under App. D to part 150.
    \202\ Establishment of Speculative Position Limits, 46 FR 50938, 
50940.
    \203\ A gross comparison such as this may not meaningful. For 
example, the Commission could have increased the size of Amaranth's 
historical position proportionately to the increased size of the 
market and compared it to the limit level for natural gas that the 
Commission adopts today. But such an approach would be less rigorous 
than the analysis on which the Commission bases its determination 
today.
---------------------------------------------------------------------------

    Several commenters opined that the Commission, in reaching its 
preliminary alternative necessity finding, ignores current market 
developments and does not employ the ``new tools'' other than position 
limits available to it to prevent excessive speculation or manipulative 
or potentially manipulative behavior.\204\ Specifically, some 
commenters suggested that position limits are not necessary because 
position accountability rules and exchange-set limits are 
adequate.\205\ The Commission agrees that the Dodd-Frank Act gave the 
Commission new tools with which to protect and oversee the commodity 
markets, and agrees that these along with older tools may be useful in 
addressing market volatility. However, the Commission disagrees that 
the availability of other tools means that position limits are not 
necessary.\206\ Rather the statute, at a minimum, reflects Congress' 
judgment that position limits may be found by the Commission to be 
necessary. The Commission notes that although CEA section 4a(a) 
position limits provisions have existed for many years, the Dodd-Frank 
Act not only retained CEA section 4a(a), but added, rather than 
deleted, several sections. This leads to the conclusion that Congress 
appears to share the Commission's view that the other tools provided by 
Congress were not sufficient.
---------------------------------------------------------------------------

    \204\ E.g., CL-CCMR-59623 at 3 (supporting additional 
transparency and reporting); CL-Citadel-59717 at 4 (pointing to 
available tools, including ``enhanced market surveillance, broadened 
reporting requirements, broadened special call authorities, and 
exchange limits''); CL-ISDA/SIFMA-59611 at 13 (noting that tools 
that the Commission has incorporated include ``enhanced market 
surveillance, broadened reporting requirements, broadened special 
call authorities, and exchange limits''); CL-MFA-59606 at 10; and 
CL-SIFMA AMG-59709 at 5-6 (providing examples of new tools).
    \205\ E.g., CL-CME-59718 at 18; CL-ICE-59645 at 2-4; CL-FIA-
59595 at 6, n. 13, 12-13; and CL-AMG-59709 at 8.
    \206\ The Commission observes that logically there is no reason 
why the availability of some regulatory tools under the CEA should 
preclude the use of another tool explicitly authorized by Congress.
---------------------------------------------------------------------------

    Position accountability, for example, is an older tool, from the 
era of the CFMA. As the Commission explained in the December 2013 
Position Limits Proposal, the CFMA ``provided a statutory basis for 
exchanges to use pre-existing position accountability levels as an 
alternative means to limit the burdens of excessive speculative 
positions. Nevertheless, the CFMA did not weaken the Commission's 
authority in CEA section 4a to establish position limits as an 
alternative means to prevent such undue burdens on interstate commerce. 
More recently, in the CFTC Reauthorization Act of 2008, Congress gave 
the Commission expanded authority to set position limits for 
significant price discovery contracts on exempt commercial markets,'' 
\207\ and it expanded the Commission's authority again in the Dodd-
Frank Act.\208\ While position accountability is useful in providing 
exchanges with information about specific trading activity so that 
exchanges can act if prudent to require a trader to reduce a position 
after the position has already been amassed, position limits operate 
prophylactically without requiring case-by-case, ex post determinations 
about large positions. As to exchange-set accountability levels or 
position limits set at levels below those of federal position limits, 
those remain useful as well and should be used, at the exchanges' 
discretion, in conjunction with federal position limits. They may be 
most useful, for example, with respect to contracts that are not core-
referenced futures contracts or if an exchange determines that federal 
limits are too high to address adequately the conditions in the markets 
it administers. In the regulations that the Commission reproposes 
today, the Commission would update (rather than eliminate) the 
acceptable practices for exchange-set speculative position limits and 
position accountability rules to conform to the Dodd-Frank Act changes 
[as described in the December 2013 Position Limits Proposal].\209\ 
Generally, for contracts subject to speculative limits, exchanges may 
set limits no higher than the federal limits,\210\ and may impose 
``restrictions . . . to reduce the threat of market manipulation or 
congestion, to maintain orderly execution of transactions, or for such 
other purposes consistent with its responsibilities.'' \211\ And Sec.  
150.5(b)(3) sets forth the requirements for position accountability in 
lieu of exchange-set limits in the case of contracts not subject to 
federal limits. The exchanges are also still authorized to react to 
instances of greater price volatility by exercising emergency authority 
as they did during the silver crisis.\212\ In addition, the Commission 
has striven to take current market developments into account by 
considering the market data to which the Commission has access as 
described herein and by considering the description of current market 
developments to the extent included in the comments the Commission has 
received in connection with the December 2013 Position Limits Proposal. 
Some commenters suggest that the Commission, in reaching its 
preliminary alternative necessity finding, has not undertaken any 
empirical analysis of available data.\213\ As discussed above, the 
Commission carefully reviewed the Interagency Silver Study and the PSI 
Report on Excessive Speculation in the Natural Gas Market.\214\ The 
Commission also carefully considered the studies submitted during the 
various comment periods regarding the December 2013 Position Limits 
Proposal and the 2016 Supplemental Position Limits Proposal. Other 
commenters suggest that the Commission relies on incomplete, 
unreliable, or out of date data, and that the Commission should collect 
more and/or better data before determining that position limits are 
necessary or implementing position limits.\215\ The Commission 
disagrees. The Commission has considered the recent data presented by 
the exchanges in support of their estimates of deliverable supply. The 
Commission is expending significant, agency-wide efforts to improve 
data collection and to analyze the data it receives. The quality of the 
data on which the Commission relies has improved since the December 
2013 Position Limits Proposal. The Commission is satisfied with the 
quality of the data on which it bases its Reproposal.
---------------------------------------------------------------------------

    \207\ 78 FR at 75681 (footnotes omitted).
    \208\ See generally December 2013 Position Limits Proposal, 78 
FR at 75681.
    \209\ See generally December 2013 Position Limits Proposal, 78 
FR at 75747-8.
    \210\ See discussion of requirements for exchange-set position 
limits under Sec.  150.5, below, and exchange core principles 
regarding position limits, below.
    \211\ See reproposed Sec.  150.5(a)(6)(iii).
    \212\ See generally 7 U.S.C. 7(d)(6) (DCM Core Principles: 
Emergency Authority); 7 U.S.C. 7b-3(f)(8) (Core Principles for Swap 
Execution Facilities--Emergency Authority); 17 CFR 37.800 (Swap 
Execution Facility Core Principle 8--Emergency authority), 17 CFR 
38.350 (Designated Contract Markets -Emergency Authority--Core 
Principle 6).
    \213\ E.g., CL-FIA-59595 at 3; CL-EEI-EPSA-59602 at 2, 8-9.
    \214\ See supra Section I.C.2 (discussing the Interagency Silver 
Study and the PSI Report on Excessive Speculation in the Natural Gas 
Market).
    \215\ E.g., CL-Citadel-59717 at 4-5; CL-EEI-EPSA-59602 at 8-9.
---------------------------------------------------------------------------

    One commenter opines that, ``The Proposal's `necessary' finding 
offers no reasoned basis for adopting its framework and the shift in 
regulatory policy it embodies.'' \216\ To the contrary,

[[Page 96722]]

the necessity finding, including the Commission's responses to 
comments, is the Commission's explanation of why position limits are 
necessary.\217\
---------------------------------------------------------------------------

    \216\ CL-CME-59718 at 3.
    \217\ See CL-Sen. Levin-59637 at 6 (stating that the 
Commission's necessity finding ``appropriately reflects 
Congressional action in enacting the Dodd-Frank Act which requires 
the Commission to impose appropriate position limits on speculators 
trading physical commodities.'').
---------------------------------------------------------------------------

g. Non-Spot-Month Limits
    Some commenters opine that ``the Commission's proposed non-spot-
month position limits do not increase the likelihood of preventing the 
excessive speculation or manipulative trading exemplified by Amaranth 
or the Hunt brothers relative to the status quo.'' \218\ The Commission 
disagrees; as repeated above, ``the capacity of the market is not 
unlimited.'' \219\ This includes markets in non-spot month contracts. 
Thus, as with spot-month contracts, extraordinarily large positions in 
non-spot month contracts may still be capable of distorting 
prices.\220\ If prices are distorted, the utility of hedging may 
decline.\221\ One commenter argues for non-spot month position 
accountability rules; \222\ the Commission discusses position 
accountability above.\223\ Another argues that Amaranth was really just 
``another case of spot-month misconduct.'' \224\ The Commission 
disagrees that this limits the relevance of Amaranth; a speculator like 
Amaranth may attempt to distort the perception of supply and demand in 
order to benefit, for instance, calendar spread positions by, for 
instance, creating the perception of a nearby shortage of the commodity 
which a speculator could do by accumulating extraordinarily large long 
positions in the nearby month.\225\ One commenter states that 
``improperly calibrated non-spot month limits would also deter 
speculative activity that triggers no risk of manipulation or `causing 
sudden or unreasonable fluctuations or unwarranted changes in the price 
of such commodity,' the hallmarks of `excessive speculation.' '' \226\ 
The Commission sees little merit in this objection because the 
Reproposal would calibrate the levels of the non-spot month limits to 
accommodate speculative activity that provides liquidity for hedgers.
---------------------------------------------------------------------------

    \218\ CL-AMG-59709 at 9. See the Commission's response to the 
comment regarding the purported lack of ``quantitative analysis of 
how the outcome of these [two historical] events might of differed 
if the proposed position limits had been in place'' at the text 
accompanying notes 192-200 above. See also CL-CME-59718 at 41-3; CL-
ISDA/SIFMA-59611 at 28.
    \219\ See note 202 supra and accompanying text.
    \220\ See December 2013 Position Limits Proposal, 78 FR at 75691 
(citing the PSI Report, ``Amaranth accumulated such large positions 
and traded such large volumes of natural gas futures that it 
distorted market prices, widened price spread, and increased price 
volatility.'').
    \221\ See December 2013 Position Limits Proposal, 78 FR at 75692 
(citing the PSI Report, ``Commercial participants in the 2006 
natural gas markets were reluctant or unable to hedge.'').
    \222\ CL-CME-59718 at 41-42.
    \223\ See notes 207-212 supra and accompanying text.
    \224\ CL-ISDA/SIFMA-59611 at 28.
    \225\ The Commission discussed the trading activity of Amaranth 
at length in the December 2013 Position Limits Proposal, 78 FR at 
75691-3; in particular, Amaranth's calendar spread trading is 
discussed at 78 FR 75692. The Commission repeats that the findings 
of the Permanent Subcommittee in the PSI Report support the 
imposition of speculative position limits outside the spot month. A 
trader, who does not liquidate an extraordinarily large long futures 
position in the nearby physical-delivery futures contract, contrary 
to typical declining open interest patterns in a physical-delivery 
contract approaching expiration, may cause the nearby futures price 
to increase as short position holders, who do not wish to make 
physical delivery, bid up the futures price in an attempt to offset 
their short positions. Potential liquidity providers who do not 
currently hold a deliverable commodity may be hesitant to establish 
short positions as a physical-delivery futures contract approaches 
expiration, because exchange rules and contract terms require such 
short position holder to prepare to make delivery by obtaining the 
cash commodity.
    \226\ CL-CME-59718 at 43; cf. CL-APGA-59722 at 3 (asserting that 
``the non-spot month limits being proposed by the Commission are too 
high to be effective'').
---------------------------------------------------------------------------

h. Meaning of Necessity
    One commenter suggests that position limits could only be necessary 
if they were the only means of preventing the Hunt brothers and 
Amaranth crises.\227\ First, while the Commission relies on these 
incidents to explain its reasoning, the risks they illustrate apply to 
all markets in physical commodities, and so the efficacy of the limits 
the Commission adopts today, and the extent to which other tools are 
sufficient, cannot be judged solely by whether they might have 
prevented those specific incidents. Second, in any event, the 
Commission rejects such an overly restrictive reading, which lacks a 
basis in both common usage and statutory construction. The Commission 
preliminarily finds that limits are necessary as a prophylactic tool to 
strengthen the regulatory framework to prevent excessive speculation ex 
ante to diminish the risk of the economic harm it may cause further 
than it would reliably be from the other tools alone. Other commenters 
question why the Commission proposed limits at levels they contend are 
too high to be effective, undercutting the Commission's alternative 
necessity finding.\228\ One commenter points out that the limit levels 
as proposed would not have prevented the misconduct alleged by the 
Commission in a particular enforcement action filed in 2011.\229\ As 
repeated elsewhere in this Notice \230\ and in the December 2013 
Position Limits Proposal,\231\ in establishing limits, the Commission 
must, ``to the maximum extent practicable, in its discretion . . . 
ensure sufficient market liquidity for bona fide hedgers.\232\ The 
Commission realizes that the reproposed initial limit levels may 
prevent or deter some, but fail to eliminate all, excessive speculation 
in the markets for the 25 commodities covered by this first phase of 
implementation. But the Commission is concerned that initial limit 
levels set lower than those reproposed today, and in particular low 
enough to prevent market manipulation or excessive speculation in 
specific, less egregious cases than the Hunt brothers or Amaranth, 
could impair liquidity for hedges.\233\
---------------------------------------------------------------------------

    \227\ CL-CCMR-59623 at 4.
    \228\ CL-ISDA/SIFMA-59611 at 28; CL-Better Markets-59716 at 24; 
CL-APGA-59722 at 6-7.
    \229\ CL-Better Markets-59716 at 22, n. 38 (Parnon Energy).
    \230\ See the discussion in levels of limits, under Sec.  150.2, 
below.
    \231\ E.g., December 2013 Position Limits Proposal, 78 FR at 
75681.
    \232\ CEA section 4a(a)(3)(B)(iii), 7 U.S.C. 6a(a)(3)(B)(iii). 
Some commenters expressed concern that position limits could 
disproportionately affect commercial entities. E.g., CL-CME-59718 at 
43; CL-APGA-59722 at 3. Some commenters expressed concern about the 
application of position limits to trade options. E.g., CL-APGA-59722 
at 3; CL-EEI-EPSA-59602 at 3. The Commission reminds commenters that 
speculative position limits do not apply to bona fide hedging 
transactions or positions. CEA section 4a(c), 7 U.S.C. 6a(c).
    \233\ The Commission will revisit the specific limitations set 
forth in CEA section 4a(a)(3) when, under reproposed Sec.  150.2(e), 
it considers resetting limit levels.
---------------------------------------------------------------------------

    The Commission requests comment on all aspects of this section.
2. Studies and Reports
    The Commission has reviewed and evaluated studies and reports 
received as comments on the December 2013 Position Limits Proposal, in 
addition to the studies and reports reviewed in connection with the 
December 2013 Position Limits Proposal \234\ (such

[[Page 96723]]

studies and reports, collectively, ``studies''). Appendix A to this 
preamble is a summary of the various studies reviewed and evaluated by 
the Commission.
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    \234\ A list of studies and reports that the Commission reviewed 
in connection with the December 2013 Position Limits Proposal was 
included in its Appendix A to the preamble. December 2013 Position 
Limits Proposal, 78 FR at 75784-7. One commenter observed that the 
studies reviewed in connection with the December 2013 Position 
Limits Proposal are not all ``necessarily germane to specific 
position limits proposed.'' CL-Citadel-59717 at 4. See also CL-CCMR-
59623 at 5 (stating that it had reviewed the studies, and found that 
``only 27 address position limits''). The Commission acknowledges 
that some studies are more relevant than others. The Commission in 
the December 2013 Position Limits Proposal was disclosing the 
studies that it had reviewed and evaluated. The Commission requested 
comment on its discussion of the studies, and invited commenters to 
advise the Commission of other studies to consider, in the hope that 
commenters would indicate which studies they believe are more 
germane or persuasive and suggest other studies for Commission 
review.
---------------------------------------------------------------------------

    The Commission observed in the December 2013 Position Limits 
Proposal, ``There is a demonstrable lack of consensus in the studies.'' 
\235\ Neither the passage of time nor the additional studies have 
changed the Commission's view: As a group, these studies do not show a 
consensus in favor of or against position limits.\236\ In addition to 
arriving at disparate conclusions, the quality of the studies varies. 
Nevertheless, the Commission believes that some well-executed studies 
suggest that excessive speculation cannot be excluded as a possible 
cause of undue price fluctuations and other burdens on commerce in 
certain circumstances. All of these factors persuade the Commission to 
act on the side of caution in preliminarily finding limits necessary, 
consistent with their prophylactic purpose. For these reasons, 
explained in more detail below, the Commission preliminarily concludes 
that the studies, individually or taken as a whole, do not persuade the 
Commission to reverse course \237\ or to change its necessity 
finding.\238\
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    \235\ December 2013 Position Limits Proposal, 78 FR at 75694.
    \236\ See 162 Cong. Rec. E1005-03, E1006 (June 28, 2016) 
(Statement of Rep. Conaway, Chairman of the House Committee on 
Agriculture) (``Comment letters on either side declaring that the 
matter is settled in their favor among respectable economists are 
simply incorrect.''). Contra CL-CCMR-59623 at 5, which says, ``The 
Committee staff also reviewed these studies and found that of them, 
only 27 address position limits, with the majority opposing such 
limits.'' The commenter describes how it arrives at this conclusion 
as follows: ``The Committee staff reviewed the abstract and body of 
each study to determine if the author assessed: (1) Whether position 
limits are effective at reducing speculation; or (2) whether 
excessive speculation is distorting prices in commodities markets. 
If the author presented a critical analysis of the issue, rather 
than just mentioning position limits or excessive speculation in 
passing, then the Committee staff included the study in its tally.'' 
Such a method is relatively unsophisticated, and the Commission 
cannot evaluate it without knowing to which studies the commenter 
refers. The commenter continues, ``Of the total, 105 studies address 
whether excessive speculation is distorting prices in today's 
commodity markets, with 66 of these studies finding that excessive 
speculation is not a problem.'' This statement did not identify the 
66 studies or 105 studies on which it based its belief. Accordingly, 
the Commission is unable to evaluate the basis of its belief.
    \237\ See discussion of mandate, above. We emphasize that this 
discussion relates only to the Commission's alternative necessity 
finding. To the extent there is a Congressional mandate that the 
Commission establish position limits, these studies could be no 
basis to disregard it. As noted in the December 2013 Position Limits 
Proposal, ``Studies that militate against imposing any speculative 
position limits appear to conflict with the Congressional mandate . 
. . that the Commission impose limits on futures contracts, options, 
and certain swaps for agricultural and exempt commodities.'' 78 FR 
at 75695 (footnote omitted). Separately, ``such studies also appear 
to conflict with Congress' determination, codified in CEA section 
4a(a)(1), that position limits are an effective tool to address 
excessive speculation as a cause of sudden or unreasonable 
fluctuations or unwarranted changes in the price of such 
commodities,'' irrespective of whether they are mandated. Id. The 
Commission acknowledges that some of the studies, when considered as 
comments on the December 2013 Position Limits Proposal, can be 
understood to suggest that, contrary to the Congressional 
determination, there is no empirical evidence that excessive 
speculation exists, that excessive speculation causes sudden or 
unreasonable fluctuations or unwarranted changes in the price of a 
commodity, or is an undue and unnecessary burden on interstate 
commerce in a commodity.
    \238\ See discussion of necessity finding, above.
---------------------------------------------------------------------------

    The Commission's deliberations are informed by its consideration of 
the studies. The Commission recognizes that speculation and volatility 
are not per se unusual or exceptional occurrences in commodity markets. 
Some economic studies attempt to distinguish normal, helpful 
speculative activity in commodity markets from excessive speculation, 
and normal volatility from unreasonable price fluctuations. It has 
proven difficult in some studies to discriminate between the proper 
workings of a well-functioning market and unwanted phenomena. That some 
studies have as yet failed to do so with precision or certainty does 
not, in light of the full record, persuade the Commission to reverse 
course or to change its necessity finding.
    In general, many studies focused on subsidiary questions and did 
not directly address the desirability or utility of position limits. 
Their proffered interpretations may not be the only plausible 
explanation for statistical results. There is no broad academic 
consensus on the formal, testable economic definition of ``excessive 
speculation'' in commodity futures markets or other relevant terms such 
as ``price bubble.'' There is also no broad academic consensus on the 
best statistical model to test for the existence of excessive 
speculation. There are not many papers that quantify the impact and 
effectiveness of position limits in commodity futures markets. The 
Commission has identified some reasons why there are not many 
compelling, peer-reviewed economic studies engaging in quantitative, 
empirical analysis of the impact of position limits on prices or price 
volatility: Limitations on publicly available data, including detailed 
information on specific trades and traders; pre-existing position 
limits in some commodity markets, making it difficult to determine how 
those markets would operate in the absence of position limits; and the 
difficulties inherent in modelling complex economic phenomena.
    The studies that the Commission considered can be grouped into 
seven categories.\239\
     
---------------------------------------------------------------------------

    \239\ These categories are not exclusive; some studies employ or 
examine more than one type of methodology. That researchers in the 
different categories employed different methodologies complicates 
the task of comparing the studies across the seven categories. In 
addition, some studies were not susceptible to meaningful economic 
analysis for various reasons, such as being written in a foreign 
language, being founded on suspect methodologies, being press 
releases, etc. These studies include: Basak and Pavlova, A Model 
Financialization of Commodities (working paper 2013); Bass, 
Finanazm[auml]rkte als Hungerverursacher? (working paper 2011); 
Bass, Finanzspekulation und Nahrungsmittelpreise. Anmerkungenzum 
Stand der Forschung (working paper 2013); Bukold, 
[Ouml]lpreisspekulation und Benzinpreise in Deutschland, (2011); 
Chevalier, (Minist[egrave]re de l'Economie, de l'Industrie e t de 
l'emploi): Rappor t du groupe de travai l sur la volatilit[egrave] 
des prix du p[egrave]trole, (2010); Dicker, Oil's Endless Bid, 
(2011); Ederington and Lee, Who Trades Futures and How: Evidence 
from the Heating Oil Market?, Journal of Business 2002; Evans, The 
Official Demise of the Oil Bubble, Wall Street Journal 2008; Gheit 
and Katzenberg, Surviving Lower Oil Prices, Oppenheimer & Co. 
(2008); Ghosh, Commodity Speculation and the Food Crisis, (working 
paper 2010); Halova, The Intraday Volatility-Volume Relationship in 
Oil and Gas Futures, (working paper 2012); Jouyet, Rappor t d' 
[eacute]tape-Pr[eacute]venir e t g[eacute]rer l'instabilit[eacute] 
des march[eacute]s agricoles, (2010); Korzenik, Fundamental 
Misconceptions in the Speculation Debate, (2009); Lake Hill Capital 
Management, Investable Indices are Distorting Commodity Markets?, 
(2013); Lee, Cheng, and Koh, Would Position Limits Have Made any 
Difference to the `Flash Crash' on May 6, 2010?, Review of Futures 
Markets (2010); Markham, Manipulation of Commodity Futures Prices: 
The Unprosecutable Crime, Yale Journal of Regulation (1991); Mayer, 
The Growing Financializsation of Commodity Markets: Divergences 
between Index Investors and Money Managers, Journal of Development 
Studies (2012); Morse, Oil dotcom, Research Notes, (2008); Naylor, 
Food Security in an Era of Economic Volatility (working paper 2010); 
Newell, Commodity Speculation's ``Smoking Gun'' (2008); Peri, 
Vandone, and Baldi, Internet, Noise Trading and Commodity Prices 
(working paper 2012); Soros, Interview with Stern Stern Magazine 
(2008); Tanaka, IEA Says Speculation Amplifying Oil Price Moves, 
(2006); Von Braun and Tadesse, Global Food Price Volatility and 
Spikes: An Overview of Costs, Cause and Solutions (2012).
---------------------------------------------------------------------------

Granger Causality Analyses \240\
     
---------------------------------------------------------------------------

    \240\ Studies that employ the Granger method of statistical 
analysis include: Algieri, Price Volatility, Speculation and 
Excessive Speculation in Commodity Markets: Sheep or Shepherd 
Behaviour? (working paper 2012); Antoshin, Canetti, and Miyajima, 
IMF Global Financial Stability Report: Financial Stress and 
Deleveraging: Macrofinancial Implications and Policy, Annex 1.2, 
Financial Investment in Commodities Markets (October 2008); 
Aulerich, Irwin, and Garcia, Bubbles, Food Prices, and Speculation: 
Evidence from the CFTC's Daily Large Trader Data Files (NBER 
Conference 2012); Borin and Di Nino, The Role of Financial 
Investments in Agricultural Commodity Derivatives Markets (working 
paper 2012); Brunetti and B[uuml]y[uuml]k[scedil]ahin, Is 
Speculation Destabilizing? (working paper 2009); Cooke and Robles, 
Recent Food Prices Movements: A Time Series Analysis (working paper 
2009); Frenk, Review of Irwin and Sanders 2010 OECD Report (Better 
Markets June 10, 2010); Gilbert, Commodity Speculation and Commodity 
Investment (2010); Gilbert, How to Understand High Food Prices, 
Journal of Agricultural Economics (2008); Gilbert, Speculative 
Influences on Commodity Futures Prices, 2006-2008, UN Conference on 
Trade and Development (2010); Goyal and Tripathi, Regulation and 
Price Discovery: Oil Spot and Futures Markets (working paper 2012); 
Grosche, Limitations of Granger Causality Analysis to Assess the 
Price Effects From the Financialization of Agricultural Commodity 
Markets Under Bounded Rationality, Agricultural and Resource 
Economics (2012); Harris and B[uuml]y[uuml]k[scedil]ahin, The Role 
of Speculators in the Crude Oil Futures Market (working paper 2009); 
Irwin and Sanders, Energy Futures Prices and Commodity Index 
Investment: New Evidence from Firm-Level Position Data (working 
paper 2014); Irwin and Sanders, The Impact of Index and Swap Funds 
on Commodity Futures Markets: A Systems Approach, Journal of 
Alternative Investments (working paper 2010); Irwin and Sanders, The 
Impact of Index and Swap Funds on Commodity Futures Markets: 
Preliminary Results (working paper 2010); Irwin and Sanders, The 
``Necessity'' of New Position Limits in Agricultural Futures 
Markets: The Verdict from Daily Firm-Level Position Data (working 
paper 2014); Irwin and Sanders, The Performance of CBOT Corn, 
Soybean, and Wheat Futures Contracts after Recent Changes in 
Speculative Limits (working paper 2007); Irwin, Sanders, and Merrin, 
Devil or Angel: The Role of Speculation in the Recent Commodity 
Price Boom, Journal of Agricultural and Applied Economics (2009); 
Kaufman, The role of market fundamentals and speculation in recent 
price changes for crude oil, Energy Policy, Vol. 39, Issue 1 
(January 2011); Kaufmann and Ullman, Oil Prices, Speculation, and 
Fundamentals: Interpreting Causal Relations Among Spot and Futures 
Prices, Energy Economics, Vol. 31, Issue 4 (July 2009); Mayer, The 
Growing Interdependence Between Financial and Commodity Markets, UN 
Conference on Trade and Development (discussion paper 2009); Mobert, 
Do Speculators Drive Crude Oil Prices? (2009 working paper); Robles, 
Torero, and von Braun, When Speculation Matters (working paper 
2009); Sanders, Boris, and Manfredo, Hedgers, Funds, and Small 
Speculators in the Energy Futures Markets: An Analysis of the CFTC's 
Commitment of Traders Reports, Energy Economics (2004); Sanders, 
Irwin, and Merrin, The Adequacy of Speculation in Agricultural 
Futures Markets: Too Much of a Good Thing?, Applied Economic 
Perspectives and Policy (2010); Sanders, Irwin, and Merrin, Smart 
Money? The Forecasting Ability of CFTC Large Traders, Journal of 
Agricultural and Resource Economics (2009); Sanders, Irwin, and 
Merrin, A Speculative Bubble in Commodity Futures? Cross-Sectional 
Evidence, Agricultural Economics (2010); Singleton, The 2008 Boom/
Bust in Oil Prices (working paper 2010); Singleton, Investor Flows 
and the 2008 Boom/Bust in Oil Prices (working paper 2011); Stoll and 
Whaley, Commodity Index Investing and Commodity Futures Prices 
(working paper 2010); Timmer, Did Speculation Affect World Rice 
Prices?, UN Food and Agricultural Organization (working paper 2009); 
Tse and Williams, Does Index Speculation Impact Commodity Prices?, 
Financial Review, Vol. 48, Issue 3 (2013); Tse, The Relationship 
Among Agricultural Futures, ETFs, and the US Stock Market, Review of 
Futures Markets (2012); Varadi, An Evidence of Speculation in Indian 
Commodity Markets (working paper 2012); Williams, Dodging Dodd-
Frank: Excessive Speculation, Commodities Markets, and the Burden of 
Proof, Law & Policy Journal of the University of Denver (2015).

---------------------------------------------------------------------------

[[Page 96724]]

    Some economic studies considered by the Commission employ the 
Granger method of statistical analysis. The Granger method seeks to 
assess whether there is a strong linear correlation between two sets of 
data that are arranged chronologically forming a ``time series.'' While 
the Granger test is referred to as the ``Granger causality test,'' it 
is important to understand that, notwithstanding this shorthand, 
``Granger causality'' does not necessarily establish an actual cause 
and effect relationship. The result of the Granger method is evidence, 
or the lack of evidence, of the existence of a linear correlation 
between the two time series. The absence of Granger causality does not 
necessarily imply the absence of actual causation.
Comovement or Cointegration Analyses \241\
     
---------------------------------------------------------------------------

    \241\ Studies that employ the comovement or cointegration 
methods include: Ad[auml]mmer, Bohl and Stephan, Speculative Bubbles 
in Agricultural Prices (working paper 2011); Algieri, A Roller 
Coaster Ride: an Empirical Investigation of the Main Drivers of 
Wheat Price (working paper 2013); Babula and Rothenberg, A Dynamic 
Monthly Model of U.S. Pork Product Markets: Testing for and 
Discerning the Role of Hedging on Pork-Related Food Costs, Journal 
of Int'l Agricultural Trade and Development (2013); Baffes and 
Haniotos, Placing the 2006/08 Commodity Boom into Perspective, World 
Bank Policy Research Working Paper 5371 (2010); Basu and Miffre, 
Capturing the Risk Premium of Commodity Futures: The Role of Hedging 
Pressure, Journal of Banking and Risk (2013); Belke, Bordon, and 
Volz, Effects of Global Liquidity on Commodity and Food Prices, 
German Institute for Economic Research (2013); Bicchetti and 
Maystre, The Synchronized and Long-lasting Structural Change on 
Commodity Markets: Evidence from High Frequency Data (working paper 
2012); Boyd, B[uuml]y[uuml]k[scedil]ahin, and Haigh, The Prevalence, 
Sources, and Effects of Herding (working paper 2013); Bunn, 
Chevalier, and Le Pen, Fundamental and Financial Influences on the 
Co-movement of Oil and Gas Prices (working paper 2012); 
B[uuml]y[uuml]k[scedil]ahin, Harris, and Haigh, Fundamentals, Trader 
Activity, and Derivatives Pricing (working paper 2008); 
B[uuml]y[uuml]k[scedil]ahin and Robe, Does it Matter Who Trades 
Energy Derivatives?, Review of Env't, Energy, and Economics (2013); 
B[uuml]y[uuml]k[scedil]ahin and Robe, Does ``Paper Oil'' Matter? 
(working paper 2011); B[uuml]y[uuml]k[scedil]ahin and Robe, 
Speculators, Commodities, and Cross-Market Linkages (working paper 
2012); Cheng, Kirilenko, and Xiong, Convective Risk Flows in 
Commodity Futures Markets (working paper 2012); Coleman and Dark, 
Economic Significance of Non-Hedger Investment in Commodity Markets 
(working paper 2012); Creti, Joets, and Mignon, On the Links Between 
Stock and Commodity Markets' Volatility, Energy Economics (2010); 
Dorfman and Karali, Have Commodity Index Funds Increased Price 
Linkages between Commodities? (working paper 2012); Filimonov, 
Bicchetti, Maystre, and Sornette, Quantification of the High Level 
of Endogeneity and of Structural Regime Shifts in Commodity Markets, 
(working paper 2013); Haigh, Harris, and Overdahl, Market Growth, 
Trader Participation and Pricing in Energy Futures Markets (working 
paper 2007); Hoff, Herding Behavior in Asset Markets, Journal of 
Financial Stability (2009); Kawamoto, Kimura, et al., What Has 
Caused the Surge in Global Commodity Prices and Strengthened Cross-
market Linkage?, Bank of Japan Working Papers Series No.11-E-3 (May 
2011); Korniotis, Does Speculation Affect Spot Price Levels? The 
Case of Metals With and Without Futures Markets (working paper, FRB 
Finance and Economic Discussion Series 2009); Le Pen and 
S[eacute]vi, Futures Trading and the Excess Comovement of Commodity 
Prices (working paper 2012); Pollin and Heintz, How Wall Street 
Speculation is Driving Up Gasoline Prices Today (AFR working paper 
2011); Tang and Xiong, Index Investment and Financialization of 
Commodities, Financial Analysts Journal (2012); and Windawi, 
Speculation, Embedding, and Food Prices: A Cointegration Analysis 
(working paper 2012).
---------------------------------------------------------------------------

    The comovement method looks for whether there is correlation that 
is contemporaneous and not lagged. A subset of these comovement studies 
use a technique called cointegration for testing correlation between 
two sets of data.
Models of Fundamental Supply and Demand \242\
     
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    \242\ Studies that employ models of fundamental supply and 
demand include: Acharya, Ramadorai, and Lochstoer, Limits to 
Arbitrage and Hedging: Evidence from Commodity Markets, Journal of 
Financial Economics (2013); Allen, Litov, and Mei, Large Investors, 
Price Manipulation, and Limits to Arbitrage: An Anatomy of Market 
Corners, Review of Finance (2006); Bos and van der Molen, A Bitter 
Brew? How Index Fund Speculation Can Drive Up Commodity Prices, 
Journal of Agricultural and Applied Economics (2010); 
Breitenfellner, Crespo, and Keppel, Determinants of Crude Oil 
Prices: Supply, Demand, Cartel, or Speculation?, Monetary Policy and 
the Economy (2009); Brennan and Schwartz, Arbitrage in Stock Index 
Futures, Journal of Business (1990); Byun and Sungje, Speculation in 
Commodity Futures Market, Inventories and the Price of Crude Oil 
(working paper 2013); Chan, Trade Size, Order Imbalance, and 
Volatility-Volume Relation, Journal of Financial Economics (2000); 
Chordia, Subrahmanyam and Roll, Order imbalance, Liquidity, and 
Market Returns, Journal of Financial Economics (2002); Cifarelli and 
Paladino, Oil Price Dynamics and Speculation: a Multivariate 
Financial Approach, Energy Economics (2010); Doroudian and 
Vercammen, First and Second Order Impacts of Speculation and 
Commodity Price Volatility (working paper 2012); Ederington, 
Dewally, and Fernando, Determinants of Trader Profits in Futures 
Markets (working paper 2013); Einloth, Speculation and Recent 
Volatility in the Price of Oil (working paper 2009); Frankel and 
Rose, Determinants of Agricultural and Mineral Commodity Prices 
(working paper 2010); Girardi, Do Financial Investors Affect 
Commodity Prices? (working paper 2011); Gorton, Hayashi, 
Rouwenhorst, The Fundamentals of Commodity Futures Returns, Review 
of Finance (2013); Guilleminot and Ohana, The Interaction of Hedge 
Funds and Index Investors in Agricultural Derivatives Markets 
(working paper 2013); Gupta and Kamzemi, Factor Exposures and Hedge 
Fund Operational Risk: The Case of Amaranth (working paper 2009); 
Haigh, Hranaiova, and Overdahl, Hedge Funds, Volatility, and 
Liquidity Provisions in the Energy Futures Markets, Journal of 
Alternative Investments (2007); Haigh, Hranaiova, and Overdahl, 
Price Dynamics, Price Discovery, and Large Futures Trader 
Interactions in the Energy Complex, (working paper 2005); Hamilton, 
Causes and Consequences of the Oil Shock of 2007-2008, Brookings 
Paper on Economic Activity (2009); Hamilton and Wu, Effects of 
Index-Fund Investing on Commodity Futures Prices, International 
Economic Review, Vol. 56, No. 1 (2015); Hamilton and Wu, Risk Premia 
in Crude Oil Futures Prices, Journal of International Money and 
Finance (2013); Harrison and Kreps, Speculative Investor Behavior in 
a Stock Market with Heterogeneous Expectations, Quarterly Journal of 
Economics (1978); Henderson, Pearson and Wang, New Evidence on the 
Financialization of Commodity Markets (working paper 2012); 
Hirshleifer, Residual Risk, Trading Costs, and Commodity Futures 
Risk Premia, Review of Financial Studies, Vol. 1, No. 2, Oxford 
University Press (1988); Hong and Yogo, Digging into Commodities 
(working paper 2009); Interagency Task Force on Commodity Markets, 
Interim Report on Crude Oil, multiple federal agencies including the 
CFTC (2008); Juvenal and Petrella, Speculation in the Oil Market 
(working paper 2012); Juvenal and Petrella, Speculation in 
Commodities, and Cross-Market Linkages (working paper 2011); Kilian, 
Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply 
Shocks in the Crude Oil Market, American Economic Review (2007); 
Kilian and Lee, Quantifying the Speculative Component in the Real 
Price of Oil: The Role of Global Oil Inventories (working paper 
2013); Kilian and Murphy, The Role of Inventories and Speculative 
Trading in the Global Market for Crude Oil, Journal of Applied 
Econometrics (2010); Knittel and Pindyck, The Simple Economics of 
Commodity Price Speculation, (working paper 2013); Kyle and Wang, 
Speculation Duopoly with Agreement to Disagree: Can Overconfidence 
Survive the Market Test?, Journal of Finance (1997); Manera, 
Nicolini and Vignati, Futures Price Volatility in Commodities 
Markets: The Role of Short-Term vs Long-Term Speculation (working 
paper 2013); Mei, Acheinkman, and Xiong, Speculative Trading and 
Stock Prices: An Analysis of Chinese A-B Share Premia, Annals of 
Economics and Finance (2009); Morana, Oil Price Dynamics, Macro-
finance Interactions and the Role of Financial Speculation, Journal 
of Banking & Finance, Vol. 37, Issue 1 (Jan. 2012); Mou, Limits to 
Arbitrage and Commodity Index Investment: Front-Running the Goldman 
roll (working paper 2011); Plato and Hoffman, Measuring the 
Influence of Commodity Fund Trading on Soybean Price Discovery 
(working paper 2007); Sornette, Woodard and Zhou, The 2006-2008 Oil 
Bubble and Beyond: Evidence of Speculation, and Prediction, Physica 
A. (2009); Stevans and Sessions, Speculation, Futures Prices, and 
the U.S. Real Price of Crude Oil, American Journal of Social and 
Management Science (2010); Trostle, Global Agricultural Supply and 
Demand: Factors Contributing to the Recent Increase in Food 
Commodity Prices, USDA Economic Research Service (2008);Van der 
Molen, Speculators Invading the Commodity Markets (working paper 
2009); Weiner, Do Birds of A Feather Flock Together? Speculation in 
the Oil Markets, (Working Paper 2006); Weiner, Speculation in 
International Crises: Report from the Gulf, Journal of Int'l 
Business Studies (2005); Westcott and Hoffman, Price Determination 
for Corn and Wheat: The Role of Market Factors and Government 
Programs (working paper 1999); Wright, International Grain Reserves 
and Other Instruments to Address Volatility in Grain Markets, World 
Bank Research Observer (2012).

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[[Page 96725]]

    Some economists have developed economic models for the supply and 
demand of a commodity. These models often include theories of how 
storage capacity and use affect supply and demand, which may influence 
the price of a physical commodity over time. An economist looks at 
where the model is in equilibrium with respect to quantities of a 
commodity supplied and demanded to arrive at a ``fundamental'' price or 
price return. The economist then looks for deviations between the 
fundamental price (based on the model) and the actual price of a 
commodity. When there is a statistically significant deviation between 
the fundamental price and the actual price, the economist generally 
infers that the price is not driven by market fundamentals of supply 
and demand.
Switching Regressions or Similar Analyses \243\
     
---------------------------------------------------------------------------

    \243\ Studies that include switching regressions or similar 
analyses include: Brooks, Prokopczuk, and Wu, Boom and Bust in 
Commodity Markets: Bubbles or Fundamentals? (working paper 2014); 
Baldi and Peri, Price Discovery in Agricultural Commodities: the 
Shifting Relationship Between Spot and Futures Prices (working paper 
2011); Chevallier, Price Relationships in Crude oil Futures: New 
Evidence from CFTC Disaggregated Data, Environmental Economics and 
Policy Studies (2012); Cifarelli and Paladino, Commodity Futures 
Returns: A non-linear Markov Regime Switching Model of Hedging and 
Speculative Pressures (working paper 2010); Fan and Xu, What Has 
Driven Oil Prices Since 2000? A Structural Change Perspective, 
Energy Economics (2011); Hache and Lantz, Speculative Trading & Oil 
Price Dynamic: A Study of the WTI Market, Energy Economics, Vol. 36, 
p.340 (March 2013); Lammerding, Stephan, Trede, and Wifling, 
Speculative Bubbles in Recent Oil Price Dynamics: Evidence from a 
Bayesian Markov Switching State-Space Approach, Energy Economics 
Vol. 36 (2013); Sigl-Gr[uuml]b and Schiereck, Speculation and 
Nonlinear Price Dynamics in Commodity Futures Markets, Investment 
Management and Financial Innovations, Vol. 77 (2010); Silvernnoinen 
and Thorp, Financialization, Crisis and Commodity Correlation 
Dynamics, Journal of Int'l Financial Markets, Institutions, and 
Money (2013).
---------------------------------------------------------------------------

    In the context of studies relating to position limits, economists 
employing switching regression analysis generally posit a model with 
two states: A normal state, where prices reflect market fundamentals, 
and a second state, often interpreted as a ``bubble.'' \244\ Using 
price data, authors of these studies calculate the probability of a 
transition between the two states. The point of transition is called a 
structural ``breakpoint.'' Examination of these breakpoints permits the 
researcher to identify the duration of a particular ``bubble.''
---------------------------------------------------------------------------

    \244\ While there is no broad academic consensus on the formal, 
testable economic definition of the term ``price bubble,'' price 
bubbles are colloquially thought to be unsustainable surges in asset 
prices fueled by speculation and followed by ``crashes'' or 
precipitous price drops.
---------------------------------------------------------------------------

Eigenvalue Stability Analysis \245\
     
---------------------------------------------------------------------------

    \245\ Studies that employ eigenvalue stability analysis include: 
Czudaj and Beckman, Spot and Futures Commodity Markets and the 
Unbiasedness Hypothesis--Evidence from a Novel Panel Unit Root Test, 
Economic Bulletin (2013); Du, Yu, and Hayes, Speculation and 
Volatility Spillover in the Crude Oil and Agricultural Commodity 
Markets: A Bayesian Analysis, (working paper 2012); Gilbert, 
Speculative Influences on Commodity Futures Prices, 2006-2008, UN 
Conference on Trade and Development (working paper 2010); Gutierrez, 
Speculative Bubbles in Agricultural Commodity Markets, European 
Review of Agricultural Economics (2012); Phillips and Yu, Dating the 
Timeline of Financial Bubbles During the Subprime Crisis, 
Quantitative Economics (2011).
---------------------------------------------------------------------------

    Some economists have run regression analyses \246\ on price and 
time-lagged values of price. They estimate an equation that relates 
current to past time values over short time intervals and solve for the 
roots of that equation, called the eigenvalues (latent values), in 
order to detect unusual price changes. If they find an eigenvalue \247\ 
with an absolute value of greater than one, they infer that the price 
of the commodity is in a ``bubble.''
---------------------------------------------------------------------------

    \246\ In statistical modeling, regression analysis is a process 
for estimating the relationships among certain types of variables 
(values that change over time or in different circumstances).
    \247\ In this context, an eigenvalue is a mathematical 
calculation that summarizes the dynamic properties of the data 
generated by the model. Generally, an eigenvalue is a concept from 
linear algebra.
---------------------------------------------------------------------------

Theoretical Models \248\
     
---------------------------------------------------------------------------

    \248\ Studies that present theoretical models include: Avriel 
and Reisman, Optimal Option Portfolios in Markets with Position 
Limits and Margin Requirements, Journal of Risk (2000); Dai, Jin and 
Liu, Illiquidity, Position Limits, and Optimal Investment (working 
paper 2009); Dicembrino and Scandizzo, The Fundamental and 
Speculative Components of the Oil Spot Price: A Real Options Value 
Approach (working paper 2012); Dutt and Harris, Position Limits for 
Cash-Settled Derivative Contracts, Journal of Futures Markets 
(2005); Ebrahim and ap Gwilym, Can Position Limits Restrain Rogue 
Traders?, at p.832 Journal of Banking & Finance (2013); Edirsinghe, 
Naik, and Uppal, Optimal Replication of Options with Transaction 
Costs and Trading Restrictions, Journal of Financial and 
Quantitative Analysis (1993); Froot, Scharfstein, and Stein, Herd on 
the Street: Informational Inefficiencies in a Market with Short Term 
Speculation, (Working Paper 1990); Kumar and Seppi, Futures 
Manipulation with ``Cash Settlement'', Journal of Finance (1992); 
Kyle and Viswanathan, How to Define Illegal Price Manipulation, 
American Economic Review (2008); Kyle and Wang, Speculation Duopoly 
with Agreement to Disagree: Can Overconfidence Survive the Market 
Test?, Journal of Finance (1997); Lee, Cheng and Koh, An Analysis of 
Extreme Price Shocks and Illiquidity Among Systematic Trend 
Followers (working paper 2010); Leitner, Inducing Agents to Report 
Hidden Trades: A Theory of an Intermediary, Review of Finance 
(2012); Liu, Financial-Demand Based Commodity Pricing: A Theoretical 
Model for Financialization of Commodities (working paper 2011); 
Lombardi and van Robays, Do Financial Investors Destabilize the Oil 
Price? (working paper, European Central Bank, 2011); Morris, 
Speculative Investor Behavior and Learning, Quarterly Journal of 
Economics (1996); Parsons, Black Gold & Fool's Gold: Speculation in 
the Oil Futures Market, Economia (2009); Pierru and Babusiaux, 
Speculation without Oil Stockpiling as a Signature: A Dynamic 
Perspective (working paper 2010); Pirrong, Manipulation of the 
Commodity Futures Market Delivery Process, Journal of Business 
(1993); Pirrong, The Self-Regulation of Commodity Exchanges: The 
Case of Market Manipulation, Journal of Law and Economics (1995); 
Pliska and Shalen, The Effects of Regulation on Trading Activity and 
Return Volatility in Futures Markets, Journal of Futures Markets 
(2006); Routledge, Seppi, and Spatt, Equilibrium Forward Curves for 
Commodities, Journal of Finance (2000); Schulmeister, Technical 
Trading and Commodity Price Fluctuations (working paper 2012); 
Schulmeister, Torero, and von Braun, Trading Practices and Price 
Dynamics in Commodity Markets (working paper 2009); Shleifer and 
Vishney, The Limits of Arbitrage, Journal of Finance (1997); Sockin 
and Xiong, Feedback Effects of Commodity Futures Prices (working 
paper 2012); Vansteenkiste, What is Driving Oil Price Futures? 
Fundamentals Versus Speculation (working paper, European Central 
Bank, 2011); Westerhoff, Speculative Markets and the Effectiveness 
of Price Limits, Journal of Economic Dynamics and Control (2003).

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[[Page 96726]]

    Some studies perform little or no empirical analysis and instead 
present a general theoretical model that may bear, directly or 
indirectly, on the effect of excessive speculation in the commodities 
markets. Because these papers do not include empirical analysis, they 
contain many untested assumptions and conclusory statements, limiting 
their usefulness to the Commission.
Surveys of Economic Literature and Opinion Pieces \249\
     
---------------------------------------------------------------------------

    \249\ Studies that are survey or opinion pieces include: 
Anderson, Outlaw, and Bryant, The Effects of Ethanol on Texas Food 
and Feed, Agricultural and Food Policy Center Research Report 
(2008); Baffes, The Long-term Implications of the 2007-2008 
Commodity-Price Boom, Development in Practice (2011); Basu and 
Gavin, What Explains the Growth in Commodity Derivatives? (working 
paper 2011); Berg, The Rise of Commodity Speculation: from 
Villainous to Venerable, (2011); Bessenbinder, Lilan, and Mahadeva, 
The Role of Speculation in Oil Markets: What Have We Learned So Far? 
(working paper 2012); Cagan, Financial Futures Markets: Is More 
Regulation Needed?, Journal of Futures Markets (1981); Chincarini, 
The Amaranth Debacle: Failure of Risk Measures or Failure of Risk 
Management (working paper 2007); Chincarini, Natural Gas Futures and 
Spread Position Risk: Lessons from the Collapse of Amaranth Advisors 
L.L.C., Journal of Applied Finance (2008); CME Group, Inc., 
Excessive Speculation and Position Limits in Energy Derivatives 
Markets (working paper); Cooper, Excessive Speculation and Oil Price 
Shock Recessions: A Case of Wall Street ``D[eacute]j[agrave] vu All 
Over Again,'' Consumer Federation of America (2011); Dahl, Future 
Markets: The Interaction of Economic Analyses and Regulation: 
Discussion, American Journal of Agricultural Economics (1980); De 
Schutter, Food Commodities Speculation and Food Price Crises, United 
Nations Special Report on the Right to Food (2010); Easterbrook, 
Monopoly, Manipulation, and the Regulation of Futures Markets, 
Journal of Business (1986); Eckaus, The Oil Price Really is a 
Speculative Bubble (working paper 2008); Ellis, Michaely, and 
O'Hara, The Making of a Dealer Market: From Entry to Equilibrium in 
the Trading of Nasdaq Stocks, Journal of Finance (2002); European 
Commission, Review of the Markets in Financial Instruments Directive 
(working paper 2010); European Commission, Tackling the Challenges 
in Commodity Markets, Communication from the European Commission to 
the European Parliament (2011); Frenk and Turbeville, Commodity 
Index Traders and the Boom/Bust Cycle in Commodities Prices, Better 
Markets Copyright (2011); Goldman Sachs, Global Energy Weekly March 
2011 (2011); Government Accountability Office, Issues Involving the 
Use of the Futures Markets to Invest in Commodity Indexes, (Report 
2009); Greenberger, The Relationship of Unregulated Excessive 
Speculation to Oil Market Price Volatility (working paper 2010); 
Harris, Circuit Breaker and Program Trading Limits: What Have We 
Learned, Brooking Institutions Press (1997); Henn, CL-WEED-59628; 
Her Majesty's Treasury, Global Commodities: A Long Term Vision for 
Stable, Secure, and Sustainable Global Markets, (2008); House of 
Commons Select Committee on Science & Technology of the United 
Kingdom, Strategically Important Metals, (2011); Hunt, Thought for 
the Day: Unreported Copper Stocks, Simon Hunt Strategic Services 
(2011); Inamura Kimata, and Takeshi, Recent Surge in Global 
commodity Prices--Impact of Financialization of Commodities and 
Globally Accommodative Monetary Conditions, Bank of Japan Review 
March 2011; International Monetary Fund, Is Inflation Back? 
Commodity Prices and Inflation, Chapter 3 of IMF's World Economic 
Outlook ``Financial Stress, Downturns, and Recoveries'' (2008); 
Irwin and Sanders, Index Funds, Financialization, and Commodity 
Futures Markets, Applied Economic Perspective and Policy (2010); 
Jack, Populists vs Theorists: Futures Markets and the Volatility of 
Prices, Exploration in Economic History (2006); Jickling and Austin, 
Hedge Fund Speculation and Oil Prices (working paper 2011); Kemp, 
Crisis Remarks the Commodity Business, Reuters Columnist (2008); 
Khan, The 2008 Oil Price ``Bubble (working paper 2009); Koski and 
Pontiff, How Are Derivatives Used? Evidence from the Mutual Fund 
Industry, Journal of Finance (1996); Lagi, Bar-Yam, and Bertrand, 
The Food Crisis: A Quantitative Model Of Food Prices Including 
Speculators and Ethanol Conversion (working paper 2012); Lagi, Bar-
Yam, and Bertrand, The Food Crisis: A Quantitative Model Of Food 
Prices Including Speculators and Ethanol Conversion (working paper 
2011); Lines, Speculation in Food Commodity Markets, World 
Development Movement (2010); Luciani, From Price Taker to Price 
Maker? Saudi Arabia and the World Oil Market (working paper 2009); 
Masters and White, The Accidental Hunt Brother: How Institutional 
Investors are Driving UP Food and Energy Prices (working paper 
2008); Medlock and Myers, Who is in the Oil Futures Market and How 
Has It Changed?, (working paper 2009); Newman, Financialiation and 
Changes in the Social Relations along commodity Chains: The Case of 
Coffee, Review of Radical Political Economics (2009); Nissanke, 
Commodity Markets and Excess Volatility: An Evolution of Price 
Dynamics Under Financialization (working paper 2011); Nissanke, 
Commodity Market Linkage in the Global Financial Crisis: Excess 
Volatility and Development Impact, Journal of Development Studies 
(2012); Parsons, Black Gold & Fool's Gold: Speculation in the Oil 
Futures Market, (Economia 2009); Jones, Price Limits: A Return to 
Patience and Rationality in U.S. Markets, Speech to the CME Global 
Financial Leadership (2010); Petzel, Testimony before the CFTC, 
(July 28, 2009); Pfuderer and Gilbert, Index Funds Do Impact 
Agricultural Prices? (working paper 2012); Pirrong, Squeezes, 
Corners, and the Anti-Manipulation Provisions of the Commodity 
Exchange Act, Regulation (1994); Pirrong, Annex B to CL-ISDA/SIFMA-
59611; Plante and Yucel, Did Speculation Drive Oil Prices? Market 
Fundamentals Suggest Otherwise, Federal Reserve Bank of Dallas 
(2011); Plante and Yucel, Did Speculation Drive Oil Prices? Futures 
Market Points to Fundamentals, Federal Reserve Bank of Dallas 
(2011); Ray and Schaffer, Index Funds and the 2006-2008 Run-up in 
Agricultural Commodity Prices (working paper 2010); Rossi, Analysis 
of CFTC Proposed Position Limits on Commodity Index Fund Trading 
(working paper 2011); Smith, World Oil: Market or Mayhem?, Journal 
of Economic Perspectives (2009); Technical Committee of the 
International Organization of Securities Commissions, Task Force on 
Commodity Futures Market Final Report, (2009); Tokic, Rational 
Destabilizing Speculation, Positive Feedback Trading, and the Oil 
Bubble of 2008, Energy Economics (2011); U.S. Commodity Futures 
Trading Commission, Part Two, A Study of the Silver Market, May 29, 
1981, Report to the Congress in Response to Section 21 Of The 
Commodity Exchange Act., (1981); U.S. Commodity Futures Trading 
Commission, Staff Report on Commodity Swap Dealers and Index Traders 
with Commission Recommendations, (2008); U.S. Senate Permanent 
Subcommittee, Excessive Speculation in the Natural Gas Market, 
(2007); U.S. Senate Permanent Subcommittee, Excessive Speculation in 
the Wheat Market, (2009); U.S. Senate Permanent Subcommittee, The 
Role of Market Speculation in Rising Oil and Gas Prices: A Need to 
Put the cop Back on the Beat, (2006); United Nations Commission of 
Experts on Reforms of the International and Monetary System, Report 
of the Commission of Experts, (2009); United Nations Conference on 
Trade and Development, The Global Economic Crisis: Systemic Failures 
and Multilateral Remedies, (2009); United Nations Conference on 
Trade and Development, The Financialization of Commodity Markets, 
(2009); United Nations Conference on Trade and Development, Trade 
and Development Report: Price Formation in Financialized Commodity 
Markets: The Role of Information, (2011); United Nations Food and 
Agricultural Organization, Final Report of the Committee on 
Commodity Problems: Extraordinary Joint Intersessional Meeting of 
the Intergovernmental Group (IGG), (2010); United Nations Food and 
Agricultural Organization, Price Volatility in Agricultural Markets, 
Economic and Social Perspectives Policy Brief (2010); United Nations 
Food and Agricultural Organization, Price Volatility in Food and 
Agricultural Markets: Policy Response, (2011); Urbanchuk, 
Speculation and the Commodity Markets (2011); Verleger, Annex A to 
CL-ISDA/SIFMA-59611; Woolley, Why are Financial Markets so 
Inefficient and Exploitative--and a Suggested Remedy, (2010); Wray, 
The Commodities Market Bubble: Money Manager Capitalism and the 
Financialization of Commodities (working paper 2008).
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    The Commission considered more than seventy studies that are survey 
or opinion pieces. Some of these studies provide useful background 
material but, on the whole, they offer mere opinion unsupported by 
rigorous empirical analysis. While they may be useful for developing 
hypotheses or informing policymakers, these secondary sources often 
exhibit policy bias and are not neutral, reliable bases for scientific 
inquiry the way that primary economic studies are.\250\
---------------------------------------------------------------------------

    \250\ For example, these surveys may posit ``facts'' that are 
unsupported by testing, may not test their hypotheses, or may claim 
results that are subject to multiple interpretations.
---------------------------------------------------------------------------

More Persuasive Academic Studies
    While the economic literature is inconclusive, the Commission can

[[Page 96727]]

identify a few of the well-executed studies that do not militate 
against and, to some degree, support the Commission's reproposal to 
follow, out of due caution, a prophylactic approach.\251\ Hamilton and 
Wu, in Risk Premia in Crude Oil Futures Prices, Journal of 
International Money and Finance (2013), using models of fundamental 
supply and demand, find evidence that changes in non-commercial 
positions can affect the risk premium in crude oil futures prices; that 
is, Hamilton and Wu found that, for a limited period around the time of 
the 2008 financial crisis that gave rise to the Dodd-Frank Act, 
increases in speculative positions reduced the risk premiums \252\ in 
crude oil futures prices.\253\ This is important because, all else 
being equal, one would expect the risk premium to be the component of 
price that would be affected by traders accumulating large 
positions.\254\ Hamilton, in Causes of the Oil Shock of 2007-2008, 
Brookings Paper on Economic Activity (2009), also concludes that the 
oil price run-up was caused by strong demand confronting stagnating 
world production, but that something other than fundamental factors of 
supply and demand (as modeled) may have aggravated the speed and 
magnitude of the ensuing oil price collapse. Singleton, in Investor 
Flows and the 2008 Boom/Bust in Oil Prices (working paper 2011), 
employs a technique that is similar to Granger causality and finds a 
negative correlation between speculative positions and risk 
premiums.\255\ Chevallier, in Price Relationships in Crude Oil Futures: 
New Evidence from CFTC Disaggregated Data, Environmental Economics and 
Policy Studies (2012), applies switching regression analysis to 
position data and concludes that one cannot eliminate the possibility 
of speculation as one of the main factors contributing to oil price 
volatility in 2008. This study also suggests that when supply and 
demand are highly inelastic, i.e., relatively unresponsive to price 
changes, financial investors may have contributed to oil price 
volatility by taking large positions in energy sector commodity index 
funds.\256\ As one may infer from this small sample, some of the more 
compelling studies that support the proposition that large positions 
may move prices involve empirical studies of the oil market. The 
Commission acknowledges that not all commodity markets exhibit the same 
price behavior at the same times. Even so, that the findings of a 
particular study of the market experience of a particular commodity 
over a particular time period may not be extensible to other commodity 
markets or over other time periods does not mean that the Commission 
should disregard that study. This is because, as explained elsewhere, 
these markets are over time all susceptible to similar risks from 
excessive speculation. Again, this supports a prophylactic approach to 
limits and a determination that limits are necessary to effectuate 
their statutory purposes.
---------------------------------------------------------------------------

    \251\ Generally, studies that the Commission considers to be 
well-executed, for example, employ well-accepted, defensible, 
scientific methodology, document and present facts and results that 
can be replicated, are on point regarding issues relevant to 
position limits, and may eventually appear in respected, peer-
reviewed academic journals.
    \252\ A risk premium is the amount of return on a particular 
asset or investment that is in excess of the expected rate of return 
on a theoretically risk free asset or investment, i.e., one with a 
virtually certain or guaranteed return.
    \253\ The economic rationale behind this is that speculative 
traders would be taking long positions to earn the risk premium, 
among other things. If more speculative traders are going long, 
i.e., bidding to earn the risk premium, the risk premium would be 
reduced. In this way, speculators make it cheaper for short hedgers 
to lock in their price risk. Contra Harris and 
B[uuml]y[uuml]k[scedil]ahin, The Role of Speculators in the Crude 
Oil Futures Market (working paper 2009) (concluding that price 
changes precede the position change). In this way, speculators make 
it cheaper for short hedgers to lock in their price risk.
    \254\ Long speculators would tend to be compensated for assuming 
the price risk that is inherent with going long in the crude oil 
futures contract. If more speculators are bidding to earn the risk 
premium by taking long position in crude oil futures contracts, it 
should lower the risk premium, all else being equal.
    \255\ That is, when long speculative positions are larger, the 
risk premiums are smaller.
    \256\ See also Hamilton and Wu, Risk Premia in Crude Oil Futures 
Prices, Journal of International Money and Finance (2013); Hamilton, 
Causes of the Oil Shock of 2007-2008, Brookings Paper on Economic 
Activity (2009).
---------------------------------------------------------------------------

    The Commission in the December 2013 Position Limits Proposal 
identified two studies of actual market events to be helpful and 
persuasive in making its alternative necessity finding: \257\ The 
inter-agency report on the silver crisis \258\ and the PSI Report on 
Excessive Speculation in the Natural Gas Market.\259\ These two studies 
and some of the other reports included in the survey category \260\ do 
not use statistical or theoretical models to reach economically 
rigorous conclusions. Some of the evidence cited in these studies is 
anecdotal. Still, these two studies are in-depth examinations of actual 
market events and the Commission continues to find them to be helpful 
and persuasive in making its preliminary alternative necessity finding. 
The Commission reiterates that the PSI Report (because it closely 
preceded Congress' amendments to CEA section 4a(a) in the Dodd-Frank 
Act) indicates how Congress views limits as necessary as a prophylactic 
measure to prevent the adverse effects of excessively large speculative 
positions. The studies, individually or taken as a whole, do not 
dissuade the Commission from its consistent view that large speculative 
positions and outsized market power pose risks to well-functioning 
commodities markets, nor from its preliminary finding that speculative 
position limits are necessary to achieve their statutory purposes.
---------------------------------------------------------------------------

    \257\ December 2013 Position Limits Proposal, 78 FR at 75695-6.
    \258\ U.S. Commodity Futures Trading Commission, ``Part Two, A 
Study of the Silver Market,'' May 29, 1981, Report to Congress in 
Response to Section 21 of The Commodity Exchange Act.
    \259\ U.S. Senate Permanent Subcommittee on Investigations, 
``Excessive Speculation in the Natural Gas Market,'' June 25, 2007.
    \260\ E.g., U.S. Commodity Futures Trading Commission, Staff 
Report on Commodity Swap Dealers and Index Traders with Commission 
Recommendations (2008); U.S. Senate Permanent Subcommittee, 
Excessive Speculation in the Wheat Market (2009); U.S. Senate 
Permanent Subcommittee, The Role of Market Speculation in Rising Oil 
and Gas Prices: A Need to Put the Cop Back on the Beat (2006).
---------------------------------------------------------------------------

    The Commission requests comment on its discussion of studies and 
reports. It also invites commenters to advise the Commission of any 
additional studies that the Commission should consider, and why.

II. Compliance Date for the Reproposed Rules

    Commenters requested that the Commission delay the compliance date, 
generally for at least nine months, to provide adequate time for market 
participants to come into compliance with a final rule.\261\ In 
addition, a commenter requested the Commission delay the compliance 
date until no earlier than January 3, 2018, to coordinate with the 
expected implementation date for position limits in Europe.\262\
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    \261\ See, e.g., CL-FIA-60937 at 5.
    \262\ CL-FIA-61036 at 2.
---------------------------------------------------------------------------

    In response to commenters, in this reproposal, the Commission 
proposes to delay the compliance date of any final rule until, at 
earliest, January 3, 2018, as provided under reproposed Sec.  150.2(e). 
The Commission is of the opinion that a delay would provide market 
participants with sufficient time to come into compliance with a final 
rule, particularly in light of grandfathering provisions, discussed 
below.
    The Commission believes that a delay until January 3, 2018, would 
provide time for market participants to gain

[[Page 96728]]

access to adequate systems to compute futures-equivalent positions. The 
Commission bases this opinion on its experience, including with swap 
dealers and clearing members of derivative clearing organizations, who, 
as reporting entities under part 20 (swaps large trader reporting), 
have been required to prepare reports of swaps on a futures-equivalent 
basis for years. As discussed above, futures-equivalent reporting of 
swaps under part 20 generally has improved. This means many reporting 
entities already have implemented acceptable systems to compute 
futures-equivalent positions. The systems developed for that purpose 
also should be acceptable for monitoring compliance with position 
limits. The Commission believes it is reasonable to expect some 
reporting entities to offer futures-equivalent computation services to 
market participants. In this regard, such reporting entities already 
compute and report, under part 20, futures-equivalent positions for 
swap counterparties with reportable positions, including spot-month 
positions and non-spot-month positions.
    The Commission notes that market participants who expect to be over 
the limits would need to assess whether exemptions are available 
(including requesting non-enumerated bona fide hedging positon 
exemptions or spread exemptions from exchanges, as discussed below 
under reproposed Sec. Sec.  150.9 and 150.10). In the absence of 
exemptions, such market participants would need to develop plans for 
coming into compliance.
    The Commission notes the request for a further delay in a 
compliance date may be mitigated by the grandfathering provisions in 
the Reproposal. First, the reproposed rules would exclude from position 
limits ``pre-enactment swaps'' and ``transition period swaps,'' as 
discussed below. Second, the rules would exempt certain pre-existing 
positions from position limits under reproposed Sec.  150.2(f). 
Essentially, this means only futures contracts initially would be 
subject to non-spot-month position limits, as well as swaps entered 
after the compliance date. The Commission notes that a pre-existing 
position in a futures contract also would not be a violation of a non-
spot-month limit, but, rather, would be grandfathered, as discussed 
under reproposed Sec.  150.2(f)(2), below. Nevertheless, the Commission 
intends to provide a substantial implementation period to ease the 
compliance burden.
    The Commission requests comment on its discussion of the proposed 
compliance date.

III. Reproposed Rules

    The Commission is not addressing comments that are beyond the scope 
of this reproposed rulemaking.

A. Sec.  150.1--Definitions

1. Various Definitions Found in Sec.  150.1
    Among other elements, the December 2013 Position Limits Proposal 
included amendments to the definitions of ``futures-equivalent,'' 
``long position,'' ``short position,'' and ``spot-month'' found in 
Sec.  150.1 of the Commission's regulations, to conform them to the 
concepts and terminology of the CEA, as amended by the Dodd-Frank Act. 
The Commission also proposed to add to Sec.  150.1, definitions for 
``basis contract,'' ``calendar spread contract,'' ``commodity 
derivative contract,'' ``commodity index contract,'' ``core referenced 
futures contract,'' ``eligible affiliate,'' ``entity,'' ``excluded 
commodity,'' ``intercommodity spread contract,'' ``intermarket spread 
positions,'' ``intramarket spread positions,'' ``physical commodity,'' 
``pre-enactment swap,'' ``pre-existing position,'' ``referenced 
contract,'' ``spread contract,'' ``speculative position limit,'' 
``swap,'' ``swap dealer'' and ``transition period swap.'' In addition, 
the Commission proposed to move the definition of bona fide hedging 
from Sec.  1.3(z) into part 150, and to amend and update it. Moreover, 
the Commission proposed to delete the definition for ``the first 
delivery month of the `crop year.' '' \263\ Separately, the Commission 
proposed making a non-substantive change to list the definitions in 
alphabetical order rather than by use of assigned letters.\264\ 
According to the December 2013 Position Limits Proposal, this last 
change would be helpful when looking for a particular definition, both 
in the near future, in light of the additional definitions proposed to 
be adopted, and in the expectation that future rulemakings may adopt 
additional definitions.
---------------------------------------------------------------------------

    \263\ At that time, the Commission noted that several terms that 
are not currently in part 150 were not included in the December 2013 
Position Limits Proposal even though definitions for those terms 
were adopted in vacated part 151. The Commission stated its view 
that the definition of those terms was not necessary for clarity in 
light of other revisions proposed in that rulemaking. The terms not 
proposed at that time include ``swaption'' and ``trader.''
    \264\ The December 2013 Position Limits Proposal also made 
several non-substantive edits to the definitions to make them easier 
to read.
---------------------------------------------------------------------------

    Finally, in connection with the 2016 Supplemental Position Limits 
Proposal, which provided new alternative processes for DCMs and SEFs to 
recognize certain positions in commodity derivative contracts as non-
enumerated bona fide hedges or enumerated anticipatory bona fide 
hedges, and to exempt from federal position limits certain spread 
positions, the Commission proposed to further amend certain relevant 
definitions, including changes to the definitions of ``futures-
equivalent,'' ``intermarket spread position,'' and ``intramarket spread 
position.''
    Separately, as noted in the December 2013 Position Limits Proposal, 
amendments to two definitions were proposed in the November 2013 
Aggregation Proposal,\265\ which was approved by the Commission on the 
same date as the December 2013 Position Limits Proposal. The November 
2013 Aggregation Proposal, a companion to the December 2013 Position 
Limits Proposal, included amendments to the definitions of ``eligible 
entity'' and ``independent account controller.'' \266\ The Commission 
notes that since the amendments were part of the separate Aggregation 
proposal, the proposed amendments to those definitions, and comments 
thereon, are addressed in the final Aggregation rulemaking (the ``2016 
Final Aggregation Rule''); \267\ therefore, the Commission is not 
addressing the definitions of ``eligible entity'' and ``independent 
account controller'' herein.
---------------------------------------------------------------------------

    \265\ See Aggregation of Positions, 78 FR 68946 (Nov. 15, 2013) 
at 68965, 68974 (proposing changes to the definitions of ``eligible 
entity'' and ``independent account controller'') (``November 2013 
Aggregation Proposal''). The Commission issued a supplement to this 
proposal in September 2015, but the supplement did not propose any 
changes to the definitions. See 80 FR 58365 (Sept. 29, 2015).
    \266\ The December 2013 Position Limits Proposal mirrored the 
amendments to the definitions of ``eligible entity'' and 
``independent account controller,'' proposed in the November 2013 
Aggregation Proposal, and also included some non-substantive change 
to the definition of ``independent account controller.''
    \267\ See 2016 Final Aggregation Rule, adopted by the Commission 
separately from this Reproposal.
---------------------------------------------------------------------------

    The Commission is reproposing the amendments to the definitions in 
Sec.  150.1, as set forth in the December 2013 Position Limits Proposal 
and as amended in the 2016 Supplemental Position Limits Proposal, with 
modifications made in response to public comments. The Reproposal also 
includes non-substantive changes to certain definitions to enhance 
readability and clarity for market participants and the public, 
including the extraction of definitions that were contained in the 
definition of ``referenced contract'' to stand on their own. The 
amendments and the public

[[Page 96729]]

comments relevant to each amendment are discussed below.
a. Basis Contract
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to exclude ``basis contracts'' from the definition 
of ``referenced contracts.'' \268\ While the term ``basis contract'' is 
not defined in current Sec.  150.1, the Commission proposed a 
definition for basis contract in the December 2013 Position Limits 
Proposal. Proposed Sec.  150.1 defined basis contract to mean ``a 
commodity derivative contract that is cash-settled based on the 
difference in: (1) The price, directly or indirectly, of: (a) A 
particular core referenced futures contract; or (b) a commodity 
deliverable on a particular core referenced futures contract, whether 
at par, a fixed discount to par, or a premium to par; and (2) the 
price, at a different delivery location or pricing point than that of 
the same particular core referenced futures contract, directly or 
indirectly, of: (a) A commodity deliverable on the same particular core 
referenced futures contract, whether at par, a fixed discount to par, 
or a premium to par; or (b) a commodity that is listed in appendix B to 
this part as substantially the same as a commodity underlying the same 
core referenced futures contract.''
---------------------------------------------------------------------------

    \268\ The Commission also notes that the proposed definition of 
``commodity index contract'' excluded intercommodity spread 
contracts, calendar spread contracts, and basis contracts.
---------------------------------------------------------------------------

    The Commission also proposed Appendix B to part 150, Commodities 
Listed as Substantially the Same for Purposes of the Definition of 
Basis Contract. As proposed, the definition of basis contract would 
include contracts cash-settled on the difference in prices of two 
different, but economically closely related commodities, for example, 
certain quality differentials (e.g., RBOB gasoline vs. 87 
unleaded).\269\ As explained when it was proposed, the intent of the 
proposed definition was to reduce the potential for excessive 
speculation in referenced contracts where, for example, a speculator 
establishes a large outright directional position in referenced 
contracts and nets down that directional position with a contract based 
on the difference in price of the commodity underlying the referenced 
contracts and a close economic substitute that was not deliverable on 
the core referenced futures contract.\270\ In the absence of this 
provision, the speculator could then increase further the large 
position in the referenced contracts. By way of comparison, the 
Commission noted in the December 2013 Position Limits Proposal that 
there is greater concern (i) that someone may manipulate the markets by 
disguise of a directional exposure through netting down the directional 
exposure using one of the legs of a quality differential (if that 
quality differential contract were not exempted), than (ii) that 
someone may use certain quality differential contracts that were 
exempted from position limits to manipulate the outright price of a 
referenced contract.\271\
---------------------------------------------------------------------------

    \269\ The proposed basis contract definition was not intended to 
include significant time differentials in prices of the two 
commodities (e.g., the proposed basis contract definition did not 
include calendar spreads for nearby vs. deferred contracts).
    \270\ December 2013 Position Limits Proposal at 75696.
    \271\ Id.
---------------------------------------------------------------------------

    Comments Received: The Commission received a number of comment 
letters regarding the proposed definition of basis contract. One 
commenter supported the proposed definition of basis contract and 
stated that it appreciates the Commission's inclusion of Appendix B 
listing the commodities it believes are substantially the same as a 
core referenced futures contract for purposes of identifying contracts 
that meet the basis contract definition.\272\ Other comment letters 
requested that the Commission broaden the definition to include 
contracts that settle to other types of differentials, such as 
processing differentials (e.g., crack or crush spreads) or quality 
differentials (e.g., sweet vs. sour crude oil). One commenter 
recommended a definition of basis contract that includes crack spreads, 
by-products priced at a differential to other by-products (e.g., jet 
fuel vs. heating oil, both of which are crude oil by-products), and a 
commodity that includes similar commodities such as a contract based on 
the difference in prices between light sweet crude and a sour crude 
that is not deliverable against the NYMEX Light Sweet Crude Oil core 
referenced futures contract. This commenter suggested that if these 
types of contracts are included as basis contracts, market participants 
should be able to net certain contracts where a commodity is priced at 
a differential to a product or by-product, subject to prior approval 
according to a process created by the Commission.\273\
---------------------------------------------------------------------------

    \272\ CL-Working Group-59693 at 68.
    \273\ CLWorking Group-59959 at 16.
---------------------------------------------------------------------------

    Two commenters specifically requested that the list in Appendix B 
include Jet fuel (54 grade) as substantially the same as heating oil 
(67 grade). They also requested that WTI Midland (Argus) vs. WTI 
Financial Futures should be listed as basis contracts for Light 
Louisiana Sweet (LLS) Crude Oil.\274\
---------------------------------------------------------------------------

    \274\ CL-FIA-59595 at 19; CL-ISDA/SIFMA-59611 at 35.
---------------------------------------------------------------------------

    Noting that basis contracts are excluded from the definition of 
referenced contract and thus not subject to speculative position 
limits, two commenters requested CFTC expand the list in Appendix B to 
part 150 of commodities considered substantially the same as a core 
referenced futures contract, and the corresponding list of basis 
contracts, to reflect the commercial practices of market 
participants.\275\ One of these commenters recommended that the 
Commission adopt a flexible process for identifying any additional 
commodities that are substantially the same as a commodity underlying a 
core referenced futures contract for inclusion in Appendix B, and allow 
market participants to request a timely interpretation regarding 
whether a particular commodity is substantially the same as a core 
referenced futures contract or that a particular contract qualifies as 
a basis contract.\276\
---------------------------------------------------------------------------

    \275\ CL-FIA-59595 at 4 and 18-19; CL-ISDA/SIFMA-59611 at 34-35.
    \276\ CL-FIA-59595 at 19.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined to repropose 
the definition of basis contract as originally proposed, but to change 
the defined term from ``basis contract'' to ``location basis 
contract.'' The Commission intended the ``basis contract'' definition 
to encompass contracts that settle to the difference between prices in 
separate delivery locations of the same (or substantially the same) 
commodity, while the industry seems to use the term ``basis'' more 
broadly to include other price differentials, including, among other 
things, processing differentials and quality differentials. Thus, under 
the Reproposal, the term is changing from ``basis contract'' to 
``location basis contract'' in order to reduce any confusion stemming 
from the more encompassing use of the word ``basis'' in industry 
parlance.\277\
---------------------------------------------------------------------------

    \277\ Consequently, the Commission realizes that its 
determination to retain its traditional definition while clarifying 
its meaning by adopting the amended term of ``locational basis 
contract'' does not provide for the expanded definition of basis 
contract requested by some of the commenters. A broader definition 
of basis contract would result in the exclusion of more derivative 
contracts from the definition of referenced contract than previously 
proposed. A contract excluded from the definition of referenced 
contract is not subject to position limit under this Reproposal. The 
Commission declines to exclude more than the locational basis 
contracts that it previously proposed from the definition of 
referenced contract.

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[[Page 96730]]

    The Commission is reproposing Appendix B as originally proposed. 
The Commission is not persuaded by commenters' suggestions for 
expanding the current list of commodities considered ``substantially 
the same'' in Appendix B. While a commenter requested the Commission 
expand the list to address all ``commercial practices'' used by market 
participants, the Commission believes this request is too vague and too 
broad to be workable. In addition, although a commenter recommended 
that the Commission adopt a flexible process for identifying any 
additional commodities that are substantially the same as a commodity 
underlying a core referenced futures contract for inclusion in Appendix 
B,\278\ the Commission observes that market participants are already 
provided the flexibility of two processes: (i) To request an exemptive, 
no-action or interpretative letter under Sec.  140.99; and/or (ii) to 
petition for changes to Appendix B under Sec.  13.2. Under either 
process, the Commission would need to carefully consider whether it 
would be beneficial and consistent with the policies underlying CEA 
section 4a to list additional commodities as substantially the same as 
a commodity underlying a core referenced futures contract, especially 
since various market participants might have conflicting views on such 
a determination in certain cases.
---------------------------------------------------------------------------

    \278\ As noted above, according to the commenter, a flexible 
process would allow market participants to request a timely 
interpretation regarding whether a particular commodity is 
substantially the same as a core referenced futures contract or that 
a particular contract qualifies as a ``basis contract. See CL-FIA-
59595 at 19
---------------------------------------------------------------------------

    Finally, the Commission notes that comments regarding other types 
of differentials were addressed in the Commission's 2016 Supplemental 
Position Limits Proposal, which would allow exchanges to grant spread 
exemptions, including calendar spreads, quality differential spreads, 
processing spreads, and product or by-product differential 
spreads.\279\ Comments responding to that 2016 Supplemental Position 
Limits Proposal and the Commission's Reproposal are discussed below.
---------------------------------------------------------------------------

    \279\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38476-80.
---------------------------------------------------------------------------

b. Commodity Derivative Contract
    Proposed Rule: The December 2013 Position Limits Proposal would 
define in Sec.  150.1 the term ``commodity derivative contract'' for 
position limits purposes as shorthand for any futures, option, or swap 
contract in a commodity (other than a security futures product as 
defined in CEA section 1a(45)). The proposed use of such a generic term 
would be a convenient way to streamline and simplify references in part 
150 to the various kinds of contracts to which the position limits 
regime applies. As such, this new definition can be found frequently 
throughout the Commission's proposed amendments to part 150.\280\
---------------------------------------------------------------------------

    \280\ See, e.g., amendments to Sec.  150.1 (the definitions of: 
``location basis contract,'' the definition of ``bona fide hedging 
position,'' ``inter-market spread position,'' ``intra-market spread 
position,'' ``pre-existing position,'' ``speculative position 
limits,'' and ``spot month''), Sec. Sec.  150.2(f)(2), 150.3(d), 
150.3(h), 150.5(a), 150.5(b), 150.5(e), 150.7(d), 150.7(f), Appendix 
A to part 150, and Appendix C to part 150.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on the 
proposed definition.
    Commission Reproposal: The Commission has determined to repropose 
the definition as proposed for the reasons given above.
c. Commodity Index Contract, Spread Contract, Calendar Spread Contract, 
and Intercommodity Spread Contract
    Proposed Rule: The December 2013 Position Limits Proposal excluded 
commodity index contracts from the definition of referenced contracts; 
thus, commodity index contracts would not be subject to position 
limits. The Commission also proposed to define the term commodity index 
contract, which is not in current Sec.  150.1, to mean ``an agreement, 
contract, or transaction that is not a basis contract or any type of 
spread contract, based on an index comprised of prices of commodities 
that are not the same or substantially the same.''
    Further, the Commission proposed to add a definition of basis 
contract, as discussed above, and spread contract to clarify which 
types of contracts would not be considered a commodity index contract 
and thus would be subject to position limits. Under the proposal, a 
spread contract was defined as ``a calendar spread contract or an 
intercommodity spread contract.'' \281\ Finally, the Commission 
proposed the addition of definitions for a calendar spread contract, 
and an intercommodity spread contract to clarify the meanings of those 
terms. In particular, under the proposal, a calendar spread contract 
would mean ``a cash-settled agreement, contract, or transaction that 
represents the difference between the settlement price in one or a 
series of contract months of an agreement, contract or transaction and 
the settlement price of another contract month or another series of 
contract months' settlement prices for the same agreement, contract or 
transaction.'' An intercommodity spread contract would mean ``a cash-
settled agreement, contract or transaction that represents the 
difference between the settlement price of a referenced contract and 
the settlement price of another contract, agreement, or transaction 
that is based on a different commodity.'' \282\
---------------------------------------------------------------------------

    \281\ In the December 2013 Position Limits Proposal, the 
Commission noted that while the proposed definition of ``referenced 
contract'' specifically excluded guarantees of a swap, basis 
contracts and commodity index contracts, spread contracts were not 
excluded from the proposed definition of ``referenced contract.'' 
The December 2013 Position Limits Proposal at 75702.
    \282\ In the December 2013 Position Limits Proposal, the 
Commission also clarified that if a swap was based on the difference 
between two prices of two different commodities, with one linked to 
a core referenced futures contract price (and the other either not 
linked to the price of a core referenced futures contract or linked 
to the price of a different core referenced futures contract), then 
the swap was an ``intercommodity spread contract,'' was not a 
commodity index contract, and was a referenced contract subject to 
the position limits specified in Sec.  150.2. The Commission further 
clarified that a contract based on the prices of a referenced 
contract and the same or substantially the same commodity (and not 
based on the difference between such prices) was not a commodity 
index contract and was a referenced contract subject to position 
limits specified in Sec.  150.2. See December 2013 Position Limits 
Proposal, 78 FR at 75697, n. 163.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal further noted that part 
20 of the Commission's regulations requires reporting entities to 
report commodity reference price data sufficient to distinguish between 
commodity index contract and non-commodity index contract positions in 
covered contracts.\283\ Therefore, for commodity index contracts, the 
Commission stated its intention to rely on the data elements in Sec.  
20.4(b) to distinguish data records subject to Sec.  150.2 position 
limits from those contracts that are excluded from Sec.  150.2. The 
Commission explained that this would enable the Commission to set 
position limits using the narrower data set (i.e., referenced contracts 
subject to Sec.  150.2 position limits) as well as conduct surveillance 
using the broader data set.\284\
---------------------------------------------------------------------------

    \283\ Id. at 75697, n. 163.
    \284\ Id. at 75697.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on the 
proposed definitions for commodity index contract, spread contract, 
calendar spread contract, and intercommodity spread contract.\285\
---------------------------------------------------------------------------

    \285\ The Commission notes that although it did not receive 
comments on the proposed definitions for commodity index contract, 
spread contract, calendar spread contract, and intercommodity spread 
contract, it did receive a number of comments regarding the 
interplay of those defined terms and the definition of ``referenced 
contract.'' Discussion of those comments are included in the 
discussion of the proposed definition of ``referenced contract'' 
below.

---------------------------------------------------------------------------

[[Page 96731]]

    Commission Reproposal: The Commission has determined to repropose 
the definitions as originally proposed for the reasons provided above, 
with the exception that, under the Reproposal, the term ``basis 
contract'' will be replaced with the term ``location basis contract,'' 
in the reproposed definition of commodity index contract, to conform to 
the name change discussed above. In addition, the Commission notes that 
while it had proposed to subsume the definitions of commodity index 
contract, spread contract, calendar spread contract, and intercommodity 
spread contract under the definition of referenced contract, in the 
Reproposal it is enumerating each as a separate definition for ease of 
reference.
d. Core referenced Futures Contract
    Proposed Rule: The December 2013 Position Limits Proposal provided 
a list of futures contracts in Sec.  150.2(d) to which proposed 
position limit rules would apply. The Commission proposed the term 
``core referenced futures contract'' as a short-hand phrase to denote 
such contracts.\286\ Accordingly, the Commission proposed to include in 
Sec.  150.1 a definition of core referenced futures contract to mean 
``a futures contract that is listed in Sec.  150.2(d).'' In its 
proposal, the Commission also clarified that core referenced futures 
contracts include options that expire into outright positions in such 
contracts.\287\
---------------------------------------------------------------------------

    \286\ The selection of the core referenced futures contracts is 
explained in the discussion of Sec.  150.2. See discussion below.
    \287\ See 78 FR at 75697 n. 166.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on the 
proposed definition.
    Commission Reproposal: The Commission has determined to repropose 
the definition as originally proposed.
e. Eligible Affiliate
    Proposed Rule: The term ``eligible affiliate,'' used in proposed 
Sec.  150.2(c)(2), is not defined in current Sec.  150.1. The 
Commission proposed to amend Sec.  150.1 to define an ``eligible 
affiliate'' as an entity with respect to which another person: (1) 
Directly or indirectly holds either: (i) A majority of the equity 
securities of such entity, or (ii) the right to receive upon 
dissolution of, or the contribution of, a majority of the capital of 
such entity; (2) reports its financial statements on a consolidated 
basis under Generally Accepted Accounting Principles or International 
Financial Reporting Standards, and such consolidated financial 
statements include the financial results of such entity; and (3) is 
required to aggregate the positions of such entity under Sec.  150.4 
and does not claim an exemption from aggregation for such entity.\288\
---------------------------------------------------------------------------

    \288\ See proposed Sec.  150.1.
---------------------------------------------------------------------------

    The definition of ``eligible affiliate'' proposed in the December 
2013 Position Limits Proposal qualified persons as eligible affiliates 
based on requirements similar to those adopted by the Commission in a 
separate rulemaking.\289\ On April 1, 2013, the Commission provided 
relief from the mandatory clearing requirement of CEA section 
2(h)(1)(A) of the Act for certain affiliated persons if the affiliated 
persons (``eligible affiliate counterparties'') meet requirements 
contained in Sec.  50.52.\290\ Under both Sec.  50.52 and the 
definition proposed in the December 2013 Position Limits Proposal, a 
person is an eligible affiliate if another person (e.g. a parent 
company), directly or indirectly, holds a majority ownership interest 
in such affiliates, reports its financial statements on a consolidated 
basis under Generally Accepted Accounting Principles or International 
Financial Reporting Standards, and such consolidated financial 
statements include the financial results of such affiliates. In 
addition, for purposes of the position limits regime, that other person 
(e.g., a parent company) must be required to aggregate the positions of 
such affiliates under Sec.  150.4 and not claim an exemption from 
aggregation for such affiliates.\291\
---------------------------------------------------------------------------

    \289\ See December 2013 Position Limits Proposal, 78 FR at 
75698.
    \290\ See Clearing Exemption for Swaps Between Certain 
Affiliated Entities, 78 FR 21749, 21783, Apr. 11, 2013. Section 
50.52(a) addresses eligible affiliate counterparty status, allowing 
a person not to clear a swap subject to the clearing requirement of 
section 2(h)(1)(A) of the Act and part 50 if the person meets the 
requirements of the conditions contained in paragraphs (a) and (b) 
of Sec.  50.52. The conditions in paragraph (a) of Sec.  50.52 
specify either one counterparty holds a majority ownership interest 
in, and reports its financial statements on a consolidated basis 
with, the other counterparty, or both counterparties are majority 
owned by a third party who reports its financial statements on a 
consolidated basis with the counterparties.
    The conditions in paragraph (b) of Sec.  50.52 address factors 
such as the decision of the parties not to clear, the associated 
documentation, audit, and recordkeeping requirements, the policies 
and procedures that must be established, maintained, and followed by 
a dealer and major swap participant, and the requirement to have an 
appropriate centralized risk management program, rather than the 
nature of the affiliation. As such, those conditions are less 
pertinent to the definition of eligible affiliate.
    \291\ See December 2013 Position Limits Proposal, 78 FR at 
75698; see also definition of ``eligible affiliate'' in Sec.  150.1, 
as proposed therein.
---------------------------------------------------------------------------

    Comments Received: The Commission received few comments on the 
proposed definition of ``eligible affiliate.'' Commenters requested 
that the Commission harmonize the definition of ``eligible affiliate'' 
with the definition of ``eligible affiliate counterparty'' under Sec.  
50.52 in order to include ``sister affiliates'' within the 
definition.\292\
---------------------------------------------------------------------------

    \292\ See, e.g., CL-ISDA/SIFMA-59611 at 3 and 33, CL-Working 
Group-59693 at 66-7.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission notes that under Sec.  150.4, 
aggregation is required by a person that holds an ownership or equity 
interest of 10 percent or greater in another person, unless an 
exemption applies. Under reproposed Sec.  150.2(c)(2), sister 
affiliates would not be required to comply separately with position 
limits, provided such entities are eligible affiliates.\293\
---------------------------------------------------------------------------

    \293\ Of course, sister affiliates would be required to 
aggregate, as would any other market participants, if they were 
trading together pursuant to an express or implied agreement.
---------------------------------------------------------------------------

    As such, the Commission does not believe a there is a need to 
conform the ``eligible affiliate'' definition in reproposed Sec.  150.1 
to the definition of ``eligible affiliate counterparty'' in Sec.  50.52 
in order to accommodate sister affiliates. The Commission notes that a 
third person that holds an ownership or equity interest in each of the 
sister affiliates--e.g., the parent company--would be required to 
aggregate positions of such eligible affiliates. Thus, the Commission 
is reproposing the definition without changes.
f. Entity
    Proposed Rule: The December 2013 Position Limits Proposal defined 
``entity'' to mean ``a `person' as defined in section 1a of the Act.'' 
\294\ The term, not defined in current Sec.  150.1, is used in a number 
of contexts, and in various definitions in the proposed amendments to 
part 150. Thus, the definition originally proposed would provide a 
clear and unambiguous meaning for the term, and prevent confusion.
---------------------------------------------------------------------------

    \294\ CEA section 1a(38); 7 U.S.C. 1a(38). See also December 
2013 Position Limits Proposal, 78 FR at 75698.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on the 
proposed definition.
    Commission Reproposal: The Commission has determined to repropose 
the definition as originally proposed, for the reasons provided above.
g. Excluded Commodity
    Proposed Rule: The phrase ``excluded commodity'' was added into the 
CEA in the CFMA, and is defined in CEA

[[Page 96732]]

section 1a(19), but is not defined or used in current part 150.\295\ 
CEA section 4a(a)(2)(A), as amended by the Dodd-Frank Act, utilizes the 
phrase ``excluded commodity'' when it provides a timeline under which 
the Commission is charged with setting limits for futures and option 
contracts other than on excluded commodities.\296\
---------------------------------------------------------------------------

    \295\ CEA section 1a(19); 7 U.S.C. 1a(19).
    \296\ CEA section 4a(2)(A); 7 U.S.C. 6a(2)(A).
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal included in Sec.  150.1, 
a definition of excluded commodity that simply incorporates the 
statutory meaning, as a useful term for purposes of a number of the 
proposed changes to part 150. For example, the phrase was used in the 
proposed amendments to Sec.  150.5, in its provision of requirements 
and acceptable practices for DCMs and SEFs in their adoption of rules 
and procedures for monitoring and enforcing position limits and 
accountability provisions; the phrase was also used in the definition 
of bona fide hedging position.
    Comments Received: The Commission received no comments on the 
proposed definition.
    Commission Reproposal: The Commission has determined to repropose 
the definition as previously proposed, for the reasons provided above.
h. First Delivery Month of the Crop Year
    Proposed Rule: The term ``first delivery month of the crop year'' 
is currently defined in Sec.  150.1(c), with a table of the first 
delivery month of the crop year for the commodities for which position 
limits are currently provided in Sec.  150.2. The crop year definition 
had been pertinent for purposes of the spread exemption to the 
individual month limit in current Sec.  150.3(a)(3), which limits 
spreads to those between individual months in the same crop year and to 
a level no more than that of the all-months limit.\297\ Under the 
December 2013 Position Limits Proposal, the definition of ``crop year'' 
would be deleted from Sec.  150.1. The proposed elimination of the 
definition conformed with level of individual month limits set at the 
level of the all-months limits, thus negating the purpose of the 
existing spread exemption in current Sec.  150.3(a)(3), which the 
December 2013 Position Limits Proposal also eliminated.
---------------------------------------------------------------------------

    \297\ Prior to the adoption of Part 151, a single-month limit 
was set at a level that was lower than the all-months-combined 
limit. Operating in conjunction with the lower single-month limit 
level, as noted below, Sec.  150.3(a)(3) provides a limited 
exemption for calendar spread positions to exceed that single-month 
limit, as long as the single month position (including calendar 
spread positions) is no greater than the level of the all-months-
combined limit. In part 151, the Commission determined to set the 
single-month position limit levels in Sec.  150.2 at the same level 
as the all-months-combined limits; in vacating part 151, the court 
retained the amendments to Sec.  150.2, leaving the single-month 
limit at the same level as those of the all-months-combined limit 
levels. The December 2013 Position Limits Proposal retained parity 
of the single-month limit and all-months-combined limits levels.
---------------------------------------------------------------------------

    The Commission notes that in its 2016 Supplemental Position Limits 
Proposal, the Commission proposed to retain a spread exemption in Sec.  
150.3 and not, as proposed in the December 2013 Position Limits 
Proposal, to eliminate it altogether.\298\
---------------------------------------------------------------------------

    \298\ Moreover, the 2016 Supplemental Position Limits Proposal 
did not limit the exemption to spread positions held between 
individual months of a futures contract in the same crop year, nor 
limit the size of an individual month position to the all-months 
limit.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on the 
proposed deletion of the crop year definition.
    Commission Reproposal: The Commission has determined to repropose 
the deletion of the definition of the term ``first delivery month of 
the crop year'' as originally proposed. The Commission notes that, 
although in its 2016 Supplemental Position Limits Proposal, the 
Commission proposed to retain a spread exemption in Sec.  150.3 and, in 
fact, provides for the approval by exchanges of exemptions to spread 
positions beyond the limited exemption for spread positions in current 
Sec.  150.3(a)(3), the crop year definition remains unnecessary since 
the level of individual month limits has been set at the level of the 
all-months limits.
i. Futures Equivalent
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to broaden the definition of the term ``futures-
equivalent'' found in current Sec.  150.1(f) of the Commission's 
regulations,\299\ and to expand upon clarifications included in the 
current definition relating to adjustments and computation times.\300\ 
The Dodd-Frank Act amendments to CEA section 4a,\301\ in part, direct 
the Commission to apply aggregate federal position limits to physical 
commodity futures contracts and to swaps contracts that are 
economically equivalent to such physical commodity futures contracts on 
which the Commission has established limits. In order to aggregate 
positions in futures, options and swaps contracts, it is necessary to 
adjust the position sizes, since such contracts may have varying units 
of trading (e.g., the amount of a commodity underlying a particular 
swap contract could be larger than the amount of a commodity underlying 
a core referenced futures contract). The Commission proposed to adjust 
position sizes to an equivalent position based on the size of the unit 
of trading of the core referenced futures contract. Under the December 
2013 Position Limits Proposal, the definition of ``futures equivalent'' 
in current Sec.  150.1(f), which is applicable only to an option 
contract, would be extended to both options and swaps.
---------------------------------------------------------------------------

    \299\ 17 CFR 150.1(f) currently defines ``futures-equivalent'' 
only for an option contract, adjusting the open position in options 
by the previous day's risk factor, as calculated at the close of 
trading by the exchange.
    \300\ The December 2013 Position Limits Proposal defined 
``futures-equivalent'' for: (1) An option contact, adjusting the 
position size by an economically reasonable and analytically 
supported risk factor, computed as of the previous day's close or 
the current day's close or contemporaneously during the trading day; 
and (2) a swap, converting the position size to an economically 
equivalent amount of an open position in a core referenced futures 
contract. See December 2013 Position Limits Proposal, 78 FR at 
75698-9.
    \301\ Amendments to CEA section 4a(1) authorize the Commission 
to extend position limits beyond futures and option contracts to 
swaps traded on an exchange and swaps not traded on an exchange that 
perform or affect a significant price discovery function with 
respect to regulated entities. 7 U.S.C. 6a(a)(1). In addition, under 
new CEA sections 4a(a)(2) and 4a(a)(5), speculative position limits 
apply to agricultural and exempt commodity swaps that are 
``economically equivalent'' to DCM futures and option contracts. 7 
U.S.C. 6a(a)(2) and (5).
---------------------------------------------------------------------------

    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed two further clarifications to the definition of the term 
``futures-equivalent.'' First, the Commission proposed to address 
circumstances in which a referenced contract for which futures 
equivalents must be calculated is itself a futures contract. The 
Commission noted that this may occur, for example, when the referenced 
contract is a futures contract that is a mini-sized version of the core 
referenced futures contract (e.g., the mini-corn and the corn futures 
contracts).\302\ The Commission proposed to clarify in proposed Sec.  
150.1 that the term ``futures-equivalent'' includes a futures contract 
which has been converted to an economically equivalent amount of an 
open position in a core

[[Page 96733]]

referenced futures contract. This clarification would mirror the 
expanded definition of ``futures-equivalent'' in the December 2013 
Position Limits Proposal, as it would pertain to swaps.
---------------------------------------------------------------------------

    \302\ Under current Sec.  150.2, for purposes of compliance with 
federal position limits, positions in regular sized and mini-sized 
contracts are aggregated. The Commission's practice of aggregating 
futures contracts when a DCM lists for trading two or more futures 
contracts with substantially identical terms, is to scale down a 
position in the mini-sized contract, by multiplying the position in 
the mini-sized contract by the ratio of the unit of trading in the 
mini-sized contract to that of the regular sized contract. See 
paragraph (b)(2)(D) of app. C to part 38 of the Commission's 
regulations for guidance regarding the contract size or trading unit 
for a futures or futures option contract.
---------------------------------------------------------------------------

    Second, the Commission proposed in the 2016 Supplemental Position 
Limits Proposal to clarify the definition of the term ``futures-
equivalent'' to provide that, for purposes of calculating futures 
equivalents, an option contract must also be converted to an 
economically equivalent amount of an open position in a core referenced 
futures contract. This clarification would address situations, for 
example, where the unit of trading underlying an option contract (that 
is, the notional quantity underlying an option contract) may differ 
from the unit of trading underlying a core referenced futures 
contract.\303\
---------------------------------------------------------------------------

    \303\ For an example of a futures-equivalent conversion of a 
swaption, see example 6, WTI swaptions, Appendix A to part 20 of the 
Commission's regulations.
---------------------------------------------------------------------------

    The Commission expressed the view in the 2016 Supplemental Position 
Limits Proposal that these clarifications would be consistent with the 
methodology the Commission used to provide its analysis of unique 
persons over percentages of the proposed position limit levels in the 
December 2013 Position Limits Proposal.\304\
---------------------------------------------------------------------------

    \304\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38483. See also Table 11 in the December 2013 Position Limits 
Proposal, 78 FR at 75731-3.
---------------------------------------------------------------------------

    Comments Received: The Commission received two comments on the 
proposed definition of ``futures-equivalent'' in the December 2013 
Position Limits Proposal.\305\ Each comment was generally supportive of 
the proposed definition. Although one commenter commended the 
flexibility granted to market participants to use different option 
valuation models, it recommended that the Commission provide guidance 
on when it would consider an option valuation model unsatisfactory and 
what the factors the Commission would consider in arriving at such an 
opinion.\306\ According to the commenter, the Commission should utilize 
a ``reasonableness approach'' by explicitly providing a ``safe harbor'' 
for models that produce results within 10 percent of an exchange or 
Commission model, and should permit market participants to demonstrate 
the reasonableness under prevailing market conditions of any model that 
falls outside this safe harbor.\307\ It was also recommended that the 
Commission consider the exchanges' approach to option valuation where 
appropriate because these approaches are already in use and familiar to 
market participants.\308\
---------------------------------------------------------------------------

    \305\ CL-MFA-59606; CL-FIA-59595 at 15.
    \306\ CL-MFA-59606 at 16-17.
    \307\ MFA also stated that the Commission should not second 
guess the results of reasonable models and impose findings of 
violations after-the-fact as that would introduce tremendous 
uncertainty into compliance with the position limits regime. Id at 
17.
    \308\ Id at 17.
---------------------------------------------------------------------------

    Both MFA and FIA supported the optional use of the prior day's 
delta to calculate a futures-equivalent position for purposes of 
speculative position limit compliance.\309\ In addition, each requested 
that the Commission confirm or adopt a provision similar to CME Rule 
562. That exchange rule provides, among other things, that if a 
participant's position exceeds position limits as a result of an option 
assignment, that participant is allowed one business day to liquidate 
the excess position without being considered in violation of the 
limits. FIA urged the Commission to provide market participants with a 
reasonable period of time to reduce its position below the speculative 
position limit.\310\
---------------------------------------------------------------------------

    \309\ CL-MFA-59606 at 17; CL-FIA-59595 at 15.
    \310\ CL-FIA-59595 at 15.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined to repropose 
the definition of ``futures-equivalent'' as proposed in the 2016 
Supplemental Position Limits proposal, with the exception that it now 
proposes adopting the current exchange practice with regard to option 
assignments, as discussed below.
    Regarding risk (delta) models, the Reproposal does not provide a 
``safe harbor'' as requested since risk models, generally, should 
produce similar results. The Commission believes a difference of 10 
percent above or below the delta resulting from an exchange's model 
generally would be too great to be economically reasonable. However, 
the Commission notes that, under the Reproposal, should a market 
participant believe its model produces an economically reasonable and 
analytically supported risk factor for a particular trading session 
that differs significantly from a result published by an exchange for 
that same time,\311\ it may describe the circumstances that result in a 
significant difference and request that staff review that model for 
reasonableness.\312\
---------------------------------------------------------------------------

    \311\ Under Sec.  16.01(a)(2), a reporting market is required to 
record for each trading session the option delta, when a delta 
system is used, while Sec.  16.01(e) requires a reporting market to 
make that option delta readily available to the public. A reporting 
market for this purpose is defined in Sec.  15.00(q) as a DCM or a 
registered entity under CEA section 1a(40) (under CEA section 
1a(40), registered entities include, among others, DCMs, DCOs, SEFs, 
SDRs).
    \312\ Deltas are computed using an option pricing model. 
Different option pricing models incorporate different assumptions. 
For a discussion of circumstances where assumptions in an option 
pricing model may not hold, see, for example, Paul Wilmott, 
Derivatives: The Theory and Practice of Financial Engineering 
chapter 29 (1998) (describing circumstances where delta hedging an 
option position (i.e., replication trading) can move the price of 
the underlying asset, violating an assumption of certain option 
pricing models that replication trading has no influence on the 
price of the underlying asset).
---------------------------------------------------------------------------

    Regarding the time period for a participant to come into compliance 
because of option assignment, the Commission agrees that a participant 
in compliance only because of a previous day's delta, and no longer, 
after option assignment, in compliance on a subsequent day, should have 
one business day to liquidate the excess position resulting from option 
assignment without being considered in violation of the limits.\313\ 
Exchanges currently provide the same amount of time to come into 
compliance.
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    \313\ The Commission believes that, in the circumstance of 
option assignment, one business day is a reasonable amount of time 
to come into compliance because the markets for commodities subject 
to federal limits under Sec.  150.2 are generally liquid.
---------------------------------------------------------------------------

j. Intermarket Spread Position and Intramarket Spread Position
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to add to current Sec.  150.1 new definitions of 
the terms ``intermarket spread position'' and ``intramarket spread 
position.'' \314\ These terms were defined in the December 2013 
Position Limits Proposal within the definition of ``referenced 
contract.'' In connection with its 2016 Supplemental Position Limits 
Proposal to permit exchanges to process applications for exemptions 
from federal position limits for certain spread positions, the 
Commission proposed to expand the definitions of these terms as 
proposed in the December 2013 Position Limits Proposal.
---------------------------------------------------------------------------

    \314\ In the December 2013 Position Limits Proposal, the 
Commission proposed to define an ``intermarket spread position'' as 
``a long position in a commodity derivative contract in a particular 
commodity at a particular designated contract market or swap 
execution facility and a short position in another commodity 
derivative contract in that same commodity away from that particular 
designated contract market or swap execution facility.'' The 
Commission also proposed to define an ``intramarket spread 
position'' as ``a long position in a commodity derivative contract 
in a particular commodity and a short position in another commodity 
contract in the same commodity on the same designated contract 
market or swap execution facility.'' See December 2013 Position 
Limits Proposal, 78 FR at 75699-700.
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    In particular, in the 2016 Supplemental Position Limits Proposal,

[[Page 96734]]

the Commission proposed to define an ``intermarket spread position'' to 
mean ``a long (short) position in one or more commodity derivative 
contracts in a particular commodity, or its products or its by-
products, at a particular designated contract market, and a short 
(long) position in one or more commodity derivative contracts in that 
same, or similar, commodity, or its products or its by-products, away 
from that particular designated contract market.'' Similarly, the 
Commission proposed in the 2016 Supplemental Position Limits Proposal 
to define an ``intramarket spread position'' to mean ``a long position 
in one or more commodity derivative contracts in a particular 
commodity, or its products or its by-products, and a short position in 
one or more commodity derivative contracts in the same, or similar, 
commodity, or its products or its by-products, on the same designated 
contract market.''
    The Commission expressed the view that the expanded definitions 
proposed in the 2016 Supplemental Position Limits Proposal would take 
into account that a market participant may take positions in multiple 
commodity derivative contracts to establish an intermarket spread 
position or an intramarket spread position. The expanded definitions 
would also take into account that such spread positions may be 
established by taking positions in derivative contracts in the same 
commodity, in similar commodities, or in the products or by-products of 
the same or similar commodities. By way of example, the Commission 
noted that the expanded definitions would include a short position in a 
crude oil derivative contract and long positions in a gasoline 
derivative contract and a diesel fuel derivative contract 
(collectively, a reverse crack spread).
    Comments Received: The Commission did not receive any comments in 
response to the definitions of ``intermarket spread position'' and 
``intramarket spread position'' proposed in the December 2013 Position 
Limits Proposal \315\ or in response to the 2016 Supplemental Position 
Limits Proposal.
---------------------------------------------------------------------------

    \315\ As noted above, the definitions of ``intermarket spread 
position'' and ``intramarket spread position'' were included.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined to repropose 
the definitions of the terms ``intermarket spread position'' and 
``intramarket spread position'' as proposed in the 2016 Supplemental 
Position Limits Proposal.
k. Long Position
    Proposed Rule: The term ``long position'' is currently defined in 
Sec.  150.1(g) to mean ``a long call option, a short put option or a 
long underlying futures contract.'' The Commission proposed to update 
the definition to make it also applicable to swaps such that a long 
position would include a long futures-equivalent swap.
    Commission Reproposal: Though no commenters suggested changes to 
the definition of ``long position,'' the Commission is concerned that 
the proposed definition does not clearly articulate that futures and 
options contracts are subject to position limits on a futures-
equivalent basis in terms of the core referenced futures contract. 
Longstanding market practice has applied position limits on futures and 
options on a futures-equivalent basis, and the Commission believes that 
practice ought to be made explicit in the definition in order to 
prevent confusion. Thus, the Commission is reproposing an amended 
definition to clarify that a long position is ``on a futures-equivalent 
basis, a long call option, a short put option, a long underlying 
futures contract, or a swap position that is equivalent to a long 
futures contract.'' This clarification is consistent with the 
clarification to the definition of futures-equivalent basis proposed in 
the 2016 Supplemental Position Limits Proposal. Though the substance of 
the definition is fundamentally unchanged, the revised language should 
prevent unnecessary confusion over the application of futures-
equivalency to different kinds of commodity derivative contracts.
l. Physical Commodity
    Proposed Rule: The December 2013 Position Limits Proposal would 
amend Sec.  150.1 by adding in a definition of the term ``physical 
commodity'' for position limit purposes. Congress used the term 
``physical commodity'' in CEA sections 4a(a)(2)(A) and 4a(a)(2)(B) to 
mean commodities ``other than excluded commodities as defined by the 
Commission.'' Therefore, the Commission interprets ``physical 
commodities'' to include both exempt and agricultural commodities, but 
not excluded commodities, and proposes to define the term as such.\316\
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    \316\ For position limits purposes, proposed Sec.  150.1 would 
define ``physical commodity'' to mean any agricultural commodity as 
that term is defined in Sec.  1.3 of this chapter or any exempt 
commodity as that term is defined in section 1a(20) of the Act.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on the 
proposed definition.
    Commission Reproposal: The Commission has determined to repropose 
the definition as originally proposed.
m. Pre-enactment Swap and Pre-Existing Position
    Proposed Rule: The December 2013 Position Limits Proposal would 
amend Sec.  150.1 by adding in new definitions of the terms ``pre-
enactment swap'' and ``pre-existing position'' for position limit 
purposes. Under the definitions proposed in the December 2013 Position 
Limits Proposal, ``pre-enactment swap'' means any swap entered into 
prior to enactment of the Dodd-Frank Act of 2010 (July 21, 2010), the 
terms of which have not expired as of the date of enactment of that 
Act, while ``pre-existing position'' means any position in a commodity 
derivative contract acquired in good faith prior to the effective date 
of any bylaw, rule, regulation or resolution that specifies an initial 
speculative position limit level or a subsequent change to that level.
    Comments Received: The Commission received no comments on the 
proposed definitions either of the terms ``pre-enactment swap'' or 
``pre-existing position.''
    Commission Reproposal: The Commission has determined to repropose 
both definitions as previously proposed.
n. Referenced Contract
    Proposed Rule: Part 150 currently does not include a definition of 
the phrase ``referenced contract,'' which was introduced and adopted in 
vacated part 151.\317\ As was noted when part 151 was adopted, the 
Commission identified 28 core referenced futures contracts and proposed 
to apply aggregate limits on a futures equivalent basis across all 
derivatives that met the definition of referenced contracts.\318\ The 
definition of referenced contract proposed in the December 2013 
Position Limits Proposal was similar to that of vacated part 151,

[[Page 96735]]

but there were certain differences, including an exclusion of 
guarantees of swaps and the incorporation of other terms into the 
definition of referenced contract.
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    \317\ Vacated Sec.  151.1 defined ``Referenced Contract'' to 
mean ``on a futures-equivalent basis with respect to a particular 
Core Referenced Futures Contract, a Core Referenced Futures Contract 
listed in Sec.  151.2, or a futures contract, options contract, swap 
or swaption, other than a basis contract or contract on a commodity 
index that is: (1) Directly or indirectly linked, including being 
partially or fully settled on, or priced at a fixed differential to, 
the price of that particular Core Referenced Futures Contract; or 
(2) directly or indirectly linked, including being partially or 
fully settled on, or priced at a fixed differential to, the price of 
the same commodity underlying that particular Core Referenced 
Futures Contract for delivery at the same location or locations as 
specified in that particular Core Referenced Futures Contract.''
    \318\ Position Limits for Futures and Swaps, 76 FR at 71629.
---------------------------------------------------------------------------

    In the December 2013 Position Limits Proposal, the term 
``referenced contract'' was proposed to be defined in Sec.  150.1 to 
mean, on a futures-equivalent basis with respect to a particular core 
referenced futures contract, a core referenced futures contract listed 
in Sec.  150.2(d) of this part, or a futures contract, options 
contract, or swap, other than a guarantee of a swap, a basis contract, 
or a commodity index contract: (1) That is: (a) Directly or indirectly 
linked, including being partially or fully settled on, or priced at a 
fixed differential to, the price of that particular core referenced 
futures contract; or (b) directly or indirectly linked, including being 
partially or fully settled on, or priced at a fixed differential to, 
the price of the same commodity underlying that particular core 
referenced futures contract for delivery at the same location or 
locations as specified in that particular core referenced futures 
contract; and (2) where: (a) Calendar spread contract means a cash-
settled agreement, contract, or transaction that represents the 
difference between the settlement price in one or a series of contract 
months of an agreement, contract or transaction and the settlement 
price of another contract month or another series of contract months' 
settlement prices for the same agreement, contract or transaction; (b) 
commodity index contract means an agreement, contract, or transaction 
that is not a basis or any type of spread contract, based on an index 
comprised of prices of commodities that are not the same or 
substantially the same; (c) spread contract means either a calendar 
spread contract or an intercommodity spread contract; and (d) 
intercommodity spread contract means a cash-settled agreement, contract 
or transaction that represents the difference between the settlement 
price of a referenced contract and the settlement price of another 
contract, agreement, or transaction that is based on a different 
commodity.
    Comments Received: The Commission received numerous comments \319\ 
regarding various aspects of the definition of ``referenced contract.'' 
Some were generally supportive of the proposed definition while others 
suggested changes. One commenter expressly stated its support for 
speculative limits on futures, options, and swaps because each 
financial instrument ``can be used to develop market power and increase 
volatility.'' \320\ Another commenter expressed its support for the 
exclusion of guarantees of swaps from the definition of referenced 
contract.\321\ These comments and the Commission's response are 
detailed below.
---------------------------------------------------------------------------

    \319\ The commenters included AGA, APGA, Atmos, API, Better 
Markets, BG Group, Calpine, Citadel, CME, CMOC, COPE, DEU, EEI, 
EPSA, FIA, ICE, IECA, ISDA/SIFMA, GFMA, IATP, MFA, NEM, NFP, NGSA, 
OLAM, PAAP, SCS, and Vectra.
    \320\ CL-IECA-59713 at 4.
    \321\ CL-IECAssn-59679 at 31.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing the definition 
of referenced contract with two substantive modifications from the 
original proposal, both of which are discussed further below. First, 
the Commission is now proposing to amend the definition of ``referenced 
contract'' to expressly exclude trade options. Second, the Reproposal 
would clarify the meaning of ``indirectly linked.'' The Reproposal also 
moves four definitions that were embedded in the proposed definition of 
referenced contract, specifically ``calendar spread contract,'' 
``commodity index contract,'' ``spread contract,'' and ``intercommodity 
spread contract,'' to their own definitions in Sec.  150.1, while 
otherwise retaining those definitions as proposed. In addition, the 
Reproposal makes non-substantive modifications to the definition of 
referenced contract to make it easier to read.
    Comments Received: In response to a specific request for comment in 
the December 2013 Position Limits Proposal, many commenters recommended 
excluding trade options from the definition of referenced 
contract.\322\
---------------------------------------------------------------------------

    \322\ See, e.g., CL-FIA-59595 at 4 and 19, CL-EEI-EPSA-59602 at 
3, CL-ISDA/SIFMA-59611 at 3 and 34, CL-NEM-59620 at 2, CL-DEU-59627 
at 7, CL-AGA-59632 at 4-5, CL-AGA-60382 at 10, CL-Olam-59658 at 3, 
CL-BG Group-59656 at 4, CL-BG Group-60383 at 4, CL-COPE-59662 at 5 
and 8, CL-Calpine-59663 at 5, CL-PAAP-59664 at 4, CL-NGSA-59673 at 
27-33, CL-ICE-59669 at 13, CL-EPSA-60381 at 4-5, CL-A4A-59714 at 5, 
CL-NFP-59690 at 7-8, CL-Working Group-59693 at 55-58, CL-API-59694 
at 7, CL-IECAssn-59679 at 22, CL-IECAssn-59957 at 6-9, CL-Atmos-
59705 at 4, CL-APGA-59722 at 9, CL-EEI-59945 at 5-6, CL-EPSA-55953 
at 6-7, and CL-SCS-60399 at 3.
---------------------------------------------------------------------------

    Commission Reproposal: In response to numerous comments, the 
reproposed definition of ``referenced contract'' expressly excludes 
trade options that meet the requirements of Sec.  32.3. The Commission 
notes that in its trade options final rule,\323\ the cross-reference to 
vacated part 151 position limits was deleted from Sec.  32.3(c). At 
that time, the Commission stated its belief that federal speculative 
position limits should not apply to trade options, as well as its 
intention to address trade options in the context of the any final 
rulemaking on position limits.\324\ Therefore, the Commission is 
reproposing the definition of ``referenced contract'' to expressly 
exclude trade options that meet the requirements of Sec.  32.3 of this 
chapter.
---------------------------------------------------------------------------

    \323\ Trade Options, 81 FR 14966 (Mar. 21, 2016).
    \324\ Id. at 14971.
---------------------------------------------------------------------------

    Comments Received: Commenters asserted that certain aspects of the 
definition of referenced contract are unclear and/or unworkable. For 
example, commenters suggested that the concept of ``indirectly linked'' 
is unclear and so market participants may not know whether a particular 
contract is subject to limits.\325\ Some commenters believe that the 
definition is overbroad and captures products that they state do not 
affect price discovery or impair hedging and are not truly 
economically-equivalent.\326\ Commenters request that the Commission 
support its determination regarding which contracts are economically 
equivalent by providing a description of the methodology used to 
determine the contracts considered to be economically-equivalent, 
including examples of over-the-counter (``OTC'') and FBOT 
contracts.\327\ One commenter stated that support is necessary because 
``mechanically assign[ing]'' the label of economically-equivalent to 
any contract that references a core referenced futures contract does 
not make it equivalent.\328\
---------------------------------------------------------------------------

    \325\ See, e.g., CL-CMC-59634 at 14, and CL-COPE-59662 at 7, n. 
20 (stating ``[i]t is one thing if the Commission means a reference 
to a contract that itself directly references a core referenced 
futures contract. It is more troubling and likely unworkable if the 
Commission means a more subjective economic link to a delivery 
location that is used in a core referenced futures contract. At a 
minimum, the Commission should provide examples of indirect linkage 
that triggers referenced contract status'').
    \326\ See, e.g., CL-COPE-59662 at 7, and CL-BG Group-59656 at 4.
    \327\ See, e.g., CL-MFA-59606 at 4 and 15-16.
    \328\ CL-COPE-59950 at 7.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission agrees with commenters that 
there is a need to clarify the meaning of ``indirectly linked.'' The 
Commission notes that including contracts that are ``indirectly 
linked'' to the core referenced futures contract under the definition 
of referenced contract is intended to prevent the evasion of position 
limits through the creation of an economically equivalent contract that 
does not directly reference the core referenced futures contract price. 
Under the reproposed definition, ``indirectly linked'' means a contract 
that settles to a price based on another derivative contract that, 
either directly or through linkage to another derivative contract, has 
a settlement price based on

[[Page 96736]]

the price of a core referenced futures contract or based on the price 
of the same commodity underlying that particular core referenced 
futures contract for delivery at the same location specified in that 
particular core referenced futures contract. Therefore, contracts that 
settle to the price of a referenced contract, for example, would be 
indirectly linked to the core referenced futures contract (e.g., a swap 
that prices to the ICE Futures US Henry LD1 Fixed Price Futures (H) 
contract, which is a referenced contract that settles directly to the 
price of the NYMEX Henry Hub Natural Gas (NG) core referenced futures 
contract).
    On the other hand, an outright derivative contract whose settlement 
price is based on an index published by a price reporting agency 
(``PRA'') that surveys cash market transaction prices (even if the cash 
market practice is to price at a differential to a futures contract) 
would not be directly or indirectly linked to the core referenced 
futures contract.\329\ Similarly, a derivative contract whose 
settlement price was based on the same underlying commodity at a 
different delivery location (e.g., ultra-low sulfur diesel delivered at 
L.A. Harbor) would not be linked, directly or indirectly, to the core 
referenced futures contract. The Commission is publishing an updated 
CFTC Staff Workbook of Commodity Derivative Contracts Under the 
Regulations Regarding Position Limits for Derivatives along with this 
release, which provides a non-exhaustive list of referenced contracts 
and may be helpful to market participants in determining categories of 
contracts that fit within the definition. Under the Reproposal, as 
always, market participants may request clarification from the 
Commission when necessary.
---------------------------------------------------------------------------

    \329\ The Commission notes that while the outright derivative 
contract would not be indirectly linked to the core referenced 
contract, a derivative contract that settles to the difference 
between the core referenced futures contract and the PRA index would 
be directly linked because it settles in part to the core referenced 
futures contract price.
---------------------------------------------------------------------------

    Regarding comments that the definition is overbroad and captures 
products that commenters state do not affect price discovery or are not 
truly economically-equivalent, the Commission notes that commenters 
seem to be confusing the statutory definitions of ``significant price 
discovery function'' (in CEA section 4a(a)(4)) and ``economically 
equivalent'' (in CEA section 4a(a)(5)). As a matter of course, 
contracts can be economically equivalent without serving a significant 
price discovery function. The Commission notes that there is no 
unpublished methodology used to determine which contracts are 
referenced contracts. Instead, the Commission proposed, and, following 
notice and comment, is now reproposing a definition for referenced 
contracts, and contracts that fit under that definition will be subject 
to federal speculative position limits.
    Comments Received: Several commenters suggested that cash-settled 
contracts should not be subject to position limits.\330\ One commenter 
asserted that non-deliverable cash-settled contracts are 
``fundamentally different'' from deliverable commodity contracts and 
should not be subject to position limits.\331\ The commenter also 
asserted that subjecting penultimate-day contracts such as options to a 
limit structure would make managing an option portfolio ``virtually 
impossible'' and would result in confusion and uncertainty.\332\
---------------------------------------------------------------------------

    \330\ See, e.g., CL-Vectra-60369 at 3, and CL-Citadel-59717 at 
9.
    \331\ CL-Vectra-60369 at 3.
    \332\ Id.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined not to make 
any changes in the Reproposal that would broadly exempt cash-settled 
contracts from position limits. Cash-settled contracts are economically 
equivalent to deliverable contracts, and Congress has required that the 
Commission impose limits on economically equivalent swaps. The 
Commission notes that Congress took action twice to address this issue. 
In CEA section 4a(a)(5)(A), Congress required the Commission to adopt 
position limits for swaps that are economically equivalent to futures 
or options on futures or commodities traded on a futures exchange, for 
which the Commission has adopted position limits. Previously, in the 
CFTC Reauthorization Act of 2008,\333\ Congress imposed a core 
principle for position limitations on swaps that are significant price 
discovery contracts.\334\ In addition, because cash-settled referenced 
contracts are economically equivalent to the physical delivery contract 
in the same commodity, a trader has an incentive to manipulate one 
contract in order to benefit the other.\335\ The Commission notes that 
a trader with positions in both the physically delivered and cash-
settled referenced contracts would have, in the absence of position 
limits, increased ability to manipulate one contract to benefit 
positions in the other.
---------------------------------------------------------------------------

    \333\ Incorporated as Title XIII of the Food, Conservation and 
Energy Act of 2008, Pub. L. 110-246, 122 Stat. 1624 (June 18, 2008),
    \334\ CEA section 2(h)(7) (2009).
    \335\ Under the reproposed definition, a cash-settled contract 
must be linked, directly or indirectly, to the core referenced 
futures contract or the same underlying commodity in the same 
delivery location in order to be considered a ``referenced 
contract.''
---------------------------------------------------------------------------

    Moreover, if speculators were incentivized to abandon physical 
delivery contracts for cash-settled contracts so as to avoid position 
limits, it could result in degradation of the physical delivery 
contract markets that position limits are intended and designed to 
protect.
    Comments Received: One commenter asked the Commission to confirm 
that a non-transferable repurchase right granted in connection with a 
hedged commodity transaction does not count towards position limits, 
citing CME Group and ICE Futures rules to that effect. The commenter is 
concerned that such a transaction could be deemed a commodity option 
and therefore legally a swap, but that it believed the transaction 
satisfies the criteria for exemption from definition as a swap.\336\
---------------------------------------------------------------------------

    \336\ CL-Olam-59658 at 8-9.
---------------------------------------------------------------------------

    Commission Reproposal: As the commenter notes, whether the contract 
is subject to position limits depends on whether it is a swap. The 
Commission points out that the release adopting the definition of swap 
noted the Commission's belief that its forward contract interpretation 
``provides sufficient clarity with respect to the forward contract 
exclusion from the swap and future delivery definitions.'' \337\ Also 
in that release, the Commission noted that commodity options are 
swaps.\338\ Separately, the Commission adopted Commission Sec.  32.3, 
providing an exemption from the commodity option definition for trade 
options; the exemption was recently further amended.\339\ The commenter 
should apply these rules to determine whether a given contract is a 
swap. In addition, the Commission notes that under Commission Sec.  
140.99, the commenter may request clarification or exemptive relief 
regarding whether a non-transferable repurchase right falls under the 
definition of a ``swap.'' To the extent the commenter seeks a 
clarification or change to the definition of a swap, the current 
rulemaking has not been expanded to revisit that definition.
---------------------------------------------------------------------------

    \337\ See, Further Definition of ``Swap,'' ``Security-Based 
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping; Final Rule (``Swap 
Definition Rulemaking''), 77 FR 48208, 48231 (Aug. 13, 2012).
    \338\ Id. at 48237.
    \339\ See Commodity Options, 77 FR 25320, 75326 (Apr. 27, 2012); 
see also Trade Options, 81 FR 14966 (Mar. 21, 2016).

---------------------------------------------------------------------------

[[Page 96737]]

    Comments Received: One commenter \340\ requested clarification that 
a bid, offer, or indication of interest for an OTC swap that does not 
constitute a binding transaction will not count towards position 
limits, noting that current CME Rule 562 provides that such bids or 
offers would be in violation of the limit.
---------------------------------------------------------------------------

    \340\ See, e.g., CL-MFA-59606 at 5 and 23.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal does not change the 
definition originally proposed in response to the comment requesting 
clarification that a bid, offer, or indication of interest for an OTC 
swap that does not constitute a binding transaction will not count 
towards position limits. Nevertheless, the Commission clarifies that 
under the Reproposal, such bids, offers, or indications of interest do 
not count toward position limits.\341\
---------------------------------------------------------------------------

    \341\ The Commission notes that it is discussing bids, offers, 
and indications of interest in the context of whether these would 
violate position limits, and is not addressing other issues such as 
whether or not their use may indicate spoofing in violation of CEA 
section 4(c)(a)(5).
---------------------------------------------------------------------------

    Comments Received: One commenter requested that the Commission 
exclude from the definition of referenced contract any agreement, 
contract, and transaction exempted from swap regulations by virtue of 
an exemption order, interpretation, no-action letter, or other 
guidance; the commenter stated that it believes the Commission can use 
its surveillance capacity and anti-manipulation authority, along with 
its MOU with FERC, to monitor these nonfinancial commodity transactions 
as well as the market participants relying on the exemptive 
relief.\342\
---------------------------------------------------------------------------

    \342\ CL-NFP-59690 at 14-15.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal does not change the proposed 
definition in response to the comment requesting that the Commission 
exclude from the definition of referenced contract any agreement, 
contract, and transaction exempted from swap regulations by virtue of 
an exemption order, interpretation, no-action letter, or other 
guidance. The Commission notes that any contract that is not a 
commodity derivative contract, including one that has been excluded 
from the definition of swap, is not subject to position limits. The 
commenter is requesting a broad exclusion from the definition of 
referenced contract, based on other regulatory relief which may have 
been adopted for a variety of policy reasons unrelated to position 
limits. Consequently, in light of the many and varied policy reasons 
for issuing an exemption order, interpretation, no-action letter or 
other guidance from swap regulation, each such action would need to be 
considered in the context of the goals of the Commission's position 
limits regime. Rather than issuing a blanket exemption from the 
definition of referenced contract for any agreement, contract, and 
transaction exempted from swap regulations, therefore, the Commission 
believes it would be better to consider each such action on its own 
merits prior to issuing an exemption from position limits. Under the 
Reproposal, if a market participant desires to extend a previously 
taken exemptive action by exempting certain agreements, contracts, and 
transactions from the definition of referenced contract, the market 
participant can request that the particular exemption order, 
interpretation, no-action letter, or other guidance be so extended. 
This would allow the Commission to consider the particular action taken 
and the merits of that particular exemption in the context of the 
position limits regime.
    The Commission notes that in the particular exemptive order cited 
by the commenter,\343\ certain delineated non-financial energy 
transactions between certain specifically defined entities were 
exempted, pursuant to CEA sections 4(c)(1) and 4(c)(6), from all 
requirements of the CEA and Commission regulations issued thereunder, 
subject to certain anti-fraud, anti-manipulation, and record inspection 
conditions. All entities that meet the requirements for the exemption 
provided by the Federal Power Act 201(f) Order are, therefore, already 
exempt from position limits compliance for all transactions that meet 
the Order's conditions.
---------------------------------------------------------------------------

    \343\ See the Between NFP Electrics Exemptive Order (Order 
Exempting, Pursuant to Authority of the Commodity Exchange Act, 
Certain Transactions Between Entities Described in the Federal Power 
Act, and Other Electric Cooperatives, 78 FR 19670 (Apr. 2, 2013) 
(``Federal Power Act 201(f) Order''). See also CL-NFP-59690 at 14-
15. The Federal Power Act 201(f) Order exempted all ``Exempt Non-
Financial Energy Transactions'' (as defined in the Federal Power Act 
201(f) Order) that are entered into solely between ``Exempt 
Entities'' (also as defined in the Federal Power Act 201(f) Order, 
namely any electric facility or utility that is wholly owned by a 
government entity as described in the Federal Power Act (`FPA') 
section 201(f); (ii) any electric facility or utility that is wholly 
owned by an Indian tribe recognized by the U.S. government pursuant 
to section 104 of the Act of November 2, 1994; (iii) any electric 
facility or utility that is wholly owned by a cooperative, 
regardless of such cooperative's status pursuant to FPA section 
201(f), so long as the cooperative is treated as such under Internal 
Revenue Code section 501(c)(12) or 1381(a)(2)(C), and exists for the 
primary purpose of providing electric energy service to its member/
owner customers at cost; or (iv) any other entity that is wholly 
owned, directly or indirectly, by any one or more of the 
foregoing.). See Federal Power Act 201(f) Order at 19688.
---------------------------------------------------------------------------

    Comments Received: Commenters were divided with respect to the 
exclusion of ``commodity index contracts'' from the definition of 
referenced contract. As a result of the exclusion, the position of a 
market participant who enters into a commodity index contract with a 
dealer will not be subject to position limits. One commenter supported 
the exclusion of commodity index contracts from the definition of 
referenced contracts.\344\ The commenter was concerned, however, that a 
dealer who offsets his or her exposure in such contracts by purchasing 
futures contracts on the constituent components of the commodity index 
will be subject to position limits in the referenced contracts. The 
commenter urged the Commission to recognize as a bona fide hedge ``the 
offsetting nature of the dealer's position by exempting the futures 
contracts that a dealer acquires to hedge its commitments under 
commodity index contracts.'' \345\ Alternatively, the Commission should 
``modify the definition of `referenced contract' and the definition of 
`commodity derivative contract' by excluding core referenced futures 
contracts and related futures contracts, options contracts or swaps 
that are offset on an economically equivalent basis by the constituent 
portions of commodity index contracts.'' \346\ Another commenter 
supported the Commission's proposal to exclude swaps that reference 
indices such as the Goldman Sachs Commodity Index (GSCI) from the 
definition of a referenced contract.\347\
---------------------------------------------------------------------------

    \344\ CL-GFMA-60314 at 4.
    \345\ Id.
    \346\ Id.
    \347\ CL-CMOC-59720 at 4.
---------------------------------------------------------------------------

    One commenter asked that the Commission reconsider excluding 
commodity index contracts from the definition of referenced 
contract.\348\ Another commenter urged that commodity index contracts 
should be included in the definition of referenced contract in 
conjunction with (1) a class limit (as was proposed for vacated part 
151, but not included in final part 151); and (2) a lower position 
limit set at a level ``aimed to maintain no more than'' 30 percent 
speculation in each commodity (based on COT report classifications) 
that is reset every 6 months.\349\ The same commenter noted that 
trading by passive, long only

[[Page 96738]]

commodity index fund speculators does not provide liquidity, but rather 
takes net liquidity, dilutes the pool of market information to be less 
reflective of fundamental forces, causes volatility, and causes an 
increased frequency of contango attributed to frequent rolls from 
selling a nearby contract and buying a deferred (second month) 
contract. The commenter noted that, broadly, speculators in commodity 
futures historically constituted between 15 and 30 percent of open 
interest without meaningfully disrupting the market and providing 
beneficial intermediation between hedging producers and hedging 
consumers.\350\
---------------------------------------------------------------------------

    \348\ CL-IATP-59701 at 2.
    \349\ CL-Better Markets-59716 at 1-35, and particularly at 32.
    \350\ CL-Better Markets-59716 at 5, and CL-Better Markets-60401 
at 4, 16-17.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing the provision 
excluding commodity index contracts from the definition of referenced 
contract as previously proposed.
    Regarding commenters who requested that the Commission alter the 
proposed definition to include commodity index derivative contracts, 
the Commission notes that if it were to include such contracts, the 
Commission's rules would allow netting of such positions in commodity 
index contracts with other offsetting referenced contracts. The ability 
to net such commodity index derivative contracts positions with other 
offsetting referenced contracts would eliminate the need for a bona 
fide hedging exemption for such contracts. Thus, the Commission 
believes such netting would contravene Congressional intent, as 
expressed in CEA section 4a(c)(B)(i) in its requirement to permit a 
pass-thru swap offset only if the counterparty's position would qualify 
as a bona fide hedge.
    Another commenter suggested including commodity index contracts 
under the definition of referenced contract in conjunction with a class 
limit (e.g., a separate limit for commodity index contracts compared to 
all other categories of derivative contracts). The commenter suggested 
that the limit be set at a level aimed at maintaining a particular 
ratio of speculative trading in the market. In response to this 
commenter, the Commission declines in this Reproposal to propose class 
limits because it believes any adoption of a class limit would require 
a rationing scheme wherein unrelated legal entities would be limited by 
the positions of other unrelated legal entities. Further, the 
Commission is concerned that class limits (including the one proposed 
by the commenter) could impair liquidity in the relevant markets.\351\ 
The Commission also notes that it currently does not collect 
information to effectively enforce any ratio of speculative trading, 
and has not done so since the Commission eliminated Series '03 
reporting in 1981.\352\ The Reproposal does not make any changes to the 
definition of referenced contract pursuant to this comment.
---------------------------------------------------------------------------

    \351\ See also, December 2013 Position Limits Proposal, 78 FR at 
75741.
    \352\ The Commission's Series '03 reports required large traders 
to classify how much of their position was speculative and how much 
was hedging and formed the basis of the earliest versions of the 
CFTC Commitments of Traders Reports. See ``Reporting Requirements 
for Contract Markets, Futures Commission Merchants, Members of 
Exchanges and Large Traders,'' 46 FR 59960 (Dec. 8, 1981) 
(eliminating the routine of Series '03 reports by large traders).
---------------------------------------------------------------------------

    Finally, in response to the commenter who suggested that, in 
addition to excluding commodity index contracts as proposed, the 
Commission should recognize as bona fide hedge positions those 
positions that offset a position in a commodity index derivative 
contract by using the component futures contracts, the Commission 
observes that it still believes, as discussed in the December 2013 
Position Limits Proposal, that financial products do not meet the 
temporary substitute test. As such, the offset of financial risks 
arising from financial products is inconsistent with the statutory 
definition of a bona fide hedging position. The Commission also 
declines in this Reproposal to accept the commenter's request to exempt 
these offsetting positions using its authority under CEA section 
4a(a)(7) because it does not believe that permitting the offset of 
financial risks furthers the purposes of the Commission's position 
limits regime as described in CEA section 4a(a)(3)(B). Finally, the 
commenter suggested as an alternative that the Commission modify the 
definition of referenced contract to broadly exclude any derivative 
contracts that are used to offset commodity index exposure. However, 
the Commission believes such a broad exclusion would, at best, be too 
difficult to administer and, at worst, provide an easy vehicle for 
entities to evade position limits regulations.
    Comments Received: One commenter suggested that the Commission 
unnecessarily limited the scope of permissible netting by not 
recognizing cross-commodity netting, recommending either a threshold 
correlation factor of 60 percent or an approach that would permit pro 
rata netting to the extent of demonstrated correlation.\353\
---------------------------------------------------------------------------

    \353\ CL-ISDA/SIFMA-59611 at 3 and 32-33.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission believes that recognizing 
cross-commodity netting as requested by the commenter would 
substantially expand the definition of referenced contract and, thus, 
may weaken: (1) The protection of the price discovery function in the 
core referenced futures contract; (2) the prevention of excessive 
speculation; and (3) the prevention of market manipulation. Therefore, 
this Reproposal does not change the definition of referenced contract 
to accommodate cross-commodity netting.
    Comments Received: One commenter requested that all ``nonfinancial 
commodity derivatives'' used by commercial end-users for hedging 
purposes be expressly excluded from the definition of referenced 
contract (and so excluded from position limits). The commenter also 
suggested that the Commission allow an end-user to identify a swap as 
being used to ``hedge or mitigate commercial risks'' at the time the 
swap is executed and noted that such trades are highly-customized 
bilateral agreements that are difficult to convert into futures 
equivalents.\354\ The commenter also requested that ``customary 
commercial agreements'' be excluded from referenced contract 
definition. The commenter stated that these contracts may reference a 
core referenced futures contract or may be misinterpreted as directly 
or indirectly linking to a core referenced futures contract, but that 
the Commission has already determined that Congress did not intend to 
regulate such agreements as swaps.\355\
---------------------------------------------------------------------------

    \354\ CL-NFP-59690 at 9-12.
    \355\ CL-NFP-59690 at 13 (citing to Further Definition of 
``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap 
Agreement''; Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping, 77 FR 48208 (Aug. 13, 2012).
---------------------------------------------------------------------------

    Commission Reproposal: This Reproposal does not amend the 
definition of referenced contract in response to the request that 
``nonfinancial commodity derivatives'' used by commercial end-users for 
hedging purposes be expressly excluded from the definition of 
referenced contract. The Commission understands the comment to mean 
that when a particular transaction qualifies for the end-user 
exemption, it should also be exempt from position limits by excluding 
such transactions from the definition of ``referenced contract.'' The 
commenter quotes language from the end-user exemption definition, which 
was issued to provide relief from the clearing and trade execution 
mandates. The Commission notes that under the CEA's statutory language, 
the commercial end user exemption

[[Page 96739]]

definition is broader than the bona fide hedging definition. Under the 
canons of statutory construction, when Congress writes one section 
differently than another, the differences should be assumed to have 
different meaning. Thus, the Commission believes that the more 
restrictive language in the bona fide hedging definition should be 
applied here. The definition of bona fide hedging position, as proposed 
in the December 2013 Position Limits Proposal, as amended by the 2016 
Supplemental Position Limits Proposal, and as reproposed here, would be 
consistent with the differences in the two definitions, as adopted by 
Congress. The Commission notes that under this Reproposal, commercial 
end-users may rely on any applicable bona fide hedge exemption.
    In response to the commenter's concern regarding ``customary 
commercial agreements,'' the Commission reiterates its belief that 
contracts that are exempted or excluded from the definition of ``swap'' 
are not considered referenced contracts and so are not subject to 
position limits.
o. Short Position
    Proposed Rule: The term ``short position'' is currently defined in 
Sec.  150.1(c) to mean a short call option, a long put option, or a 
short underlying futures contract. In the December 2013 Position Limits 
Proposal, the Commission proposed to amend the definition to state that 
a short position means a short call option, a long put option or a 
short underlying futures contract, or a short futures-equivalent swap. 
This proposed revision reflects the fact that under the Dodd-Frank Act, 
the Commission is charged with applying the position limits regime to 
swaps.
    Comments Received: The Commission received no comments regarding 
the proposed amendment to the definition of ``short position.''
    Commission Reproposal: Though no commenters suggested changes to 
the definition of ``short position,'' the Commission is concerned that 
the proposed definition, like the proposed definition of ``long 
position'' described supra, does not clearly articulate that futures 
and options contracts are subject to position limits on a futures-
equivalent basis in terms of the core referenced futures contract. 
Longstanding market practice has applied position limits to futures and 
options on a futures-equivalent basis, and the Commission believes that 
practice ought to be made explicit in the definition in order to 
prevent confusion. Thus, in this Reproposal, the Commission is 
proposing to amend the definition to clarify that a short position is 
on a futures-equivalent basis, a short call option, a long put option, 
a short underlying futures contract, or a swap position that is 
equivalent to a short futures contract. Though the substance of the 
definition is fundamentally unchanged, the revised language should 
prevent unnecessary confusion over the application of futures-
equivalency to different kinds of commodity derivative contracts.
p. Speculative Position Limit
    The term ``speculative position limit'' is currently not defined in 
Sec.  150.1. In the December 2013 Position Limits Proposal, the 
Commission proposed to define the term ``speculative position limit'' 
to mean ``the maximum position, either net long or net short, in a 
commodity derivatives contract that may be held or controlled by one 
person, absent an exemption, such as an exemption for a bona fide 
hedging position. This limit may apply to a person's combined position 
in all commodity derivative contracts in a particular commodity (all-
months-combined), a person's position in a single month of commodity 
derivative contracts in a particular commodity, or a person's position 
in the spot-month of commodity derivative contacts in a particular 
commodity. Such a limit may be established under federal regulations or 
rules of a designated contract market or swap execution facility. An 
exchange may also apply other limits, such as a limit on gross long or 
gross short positions, or a limit on holding or controlling delivery 
instruments.'' \356\
---------------------------------------------------------------------------

    \356\ December 2013 Position Limits Proposal, 78 FR at 75825.
---------------------------------------------------------------------------

    As explained in the December 2013 Position Limits Proposal, the 
proposed definition is similar to definitions for position limits used 
by the Commission for many years,\357\ as well as glossaries published 
by the Commission for many years.\358\ For example, the December 2013 
Position Limits Proposal noted that the version of the staff glossary 
currently posted on the CFTC Web site defines speculative position 
limit as ``[t]he maximum position, either net long or net short, in one 
commodity future (or option) or in all futures (or options) of one 
commodity combined that may be held or controlled by one person (other 
than a person eligible for a hedge exemption) as prescribed by an 
exchange and/or by the CFTC.''
---------------------------------------------------------------------------

    \357\ Id. at 75701. As noted in the December 2013 Position 
Limits Proposal, ``the various regulations and defined terms 
included use of maximum amounts `net long or net short,' which 
limited what any one person could `hold or control,' `one grain on 
any one contract market' (or in `in one commodity' or `a particular 
commodity'), and `in any one future or in all futures combined.' For 
example, in 1936, Congress enacted the CEA, which authorized the 
CFTC's predecessor, the CEC, to establish limits on speculative 
trading. Congress empowered the CEC to `fix such limits on the 
amount of trading . . . as the [CEC] finds is necessary to diminish, 
eliminate, or prevent such burden.' [CEA section 6a(1) (Supp. II 
1936)] It also noted that the first speculative position limits were 
issued by the CEC in December 1938, 3 FR 3145, Dec. 24, 1938, and 
that those first speculative position limits rules provided, also in 
Sec.  150.1, for limits on position and daily trading in grain for 
future delivery, and adopted a maximum amount ``net long or net 
short position which any one person may hold or control in any one 
grain on any one contract market'' as 2,000,000 bushels ``in any one 
future or in all futures combined.'' Id.
    \358\ For example, the December 2013 Position Limits Proposal 
noted that the Commission's annual report for 1983 includes in its 
glossary ``Position Limit: the maximum position, either net long or 
net short, in one commodity future combined which may be held or 
controlled by one person as prescribed by any exchange or by the 
CFTC.'' Id.
---------------------------------------------------------------------------

    The Commission received no comments on the proposed definition, and 
is reproposing the definition without amendment.
q. Spot-Month
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to adopt a definition of ``spot-month'' that 
expands upon the current Sec.  150.1 definition.\359\ The definition, 
as proposed, specifically addressed both physical-delivery contracts 
and cash-settled contracts, and clarified the duration of ``spot-
month.'' Under the proposed definition, the ``spot-month'' for 
physical-delivery commodity derivatives contracts would be the period 
of time beginning at of the close of trading on the trading day 
preceding the first day on which delivery notices could be issued or 
the close of trading on the trading day preceding the third-to-last 
trading day, until the contract was no longer listed for trading (or 
available for transfer, such as through exchange for physical 
transactions). The proposed definition included similar, but slightly 
different language for cash-settled contracts, providing that the spot 
month would begin at the earlier of the start of the period in which 
the underlying cash-settlement price was calculated or the close of 
trading on the trading day preceding the third-to-last trading day and 
would continue until the contract

[[Page 96740]]

cash-settlement price was determined. In addition, the proposed 
definition included a proviso that, if the cash-settlement price was 
determined based on prices of a core referenced futures contract during 
the spot month period for that core referenced futures contract, then 
the spot month for that cash-settled contract would be the same as the 
spot month for that core referenced futures contract.\360\
---------------------------------------------------------------------------

    \359\ December 2013 Position Limits Proposal, 78 FR at 75701-02; 
As noted in in the December 2013 Position Limits Proposal, the 
definition proposed would be an expansion upon the definition 
currently found in Sec.  150.1, but greatly simplified from the 
definition adopted in vacated Sec.  151.3 (in the Part 151 
regulations, the ``spot month'' definition in Sec.  151.1 simply 
cited to the ``spot month'' definition provided in Sec.  151.3).
    \360\ See id. at 75825-6.
---------------------------------------------------------------------------

    Comments Received: The Commission received several comments 
regarding the definition of spot month.\361\ One commenter noted that 
the definition of the spot month for federal limits does not always 
coincide with the definition of spot month for purposes of any exchange 
limits and assumes that the Commission did not intend for this to 
happen. For example, the commenter noted the proposed definition of 
spot month would commence at the close of trading on the trading day 
preceding the first notice day, while the ICE Futures US definition 
commences as of the opening of trading on the second business day 
following the expiration of regular option trading on the expiring 
futures contract. Regarding the COMEX contracts, the commenter stated 
that the exchange spot month commences at the close of business, rather 
than at the close of trading, which would allow market participants to 
incorporate exchange of futures for related position transactions 
(EFRPs) that occur after the close of trading, but before the close of 
business.\362\ Finally, the commenter requested the Commission ensure 
the definition of spot month for federal limits is the same as the 
definition of spot month for exchange limits for all referenced 
contracts.\363\
---------------------------------------------------------------------------

    \361\ See, e.g., CL-FIA-59595 at 10, CL-NFP-59690 at 19, CL-
NGSA-59673 at 44, and CL-ICE-59669 at 5-6.
    \362\ CL-FIA-59595 at 10.
    \363\ Id.
---------------------------------------------------------------------------

    Two commenters urged the Commission to reconsider its proposed 
definition of spot month for cash-settled contracts that encompasses 
the entire period for calculation of the settlement price, preferring 
the current exchange practice which is to apply the spot month limit 
during the last three days before final settlement.\364\ One commenter 
noted its concern that the proposed definition would discourage use of 
calendar month average price contracts.\365\
---------------------------------------------------------------------------

    \364\ See, e.g., CL-NGSA-59673 at 44, CL-ICE-59669 at 5-6.
    \365\ See, CL-ICE-59669 at 5-6.
---------------------------------------------------------------------------

    Another commenter recommended that the Commission define ``spot 
month'' in relation to each core referenced futures contract and all 
related physically-settled and cash-settled referenced contracts, to 
assure that the definition works appropriately in terms of how each 
underlying nonfinancial commodity market operates, and to ensure that 
commercial end-users of such nonfinancial commodities can effectively 
use such referenced contracts to hedge or mitigate commercial 
risks.\366\
---------------------------------------------------------------------------

    \366\ CL-NFP-59690 at 19.
---------------------------------------------------------------------------

    The Commission also received the recommendation from one commenter 
that the Commission should publish a calendar listing the spot month 
for each Core Referenced Futures Contract to provide clarity to market 
participants and reduce the cost of identifying and tracking the spot 
month.\367\
---------------------------------------------------------------------------

    \367\ CL-FIA-59595 at 10-11.
---------------------------------------------------------------------------

    Commission Reproposal: For core referenced futures contracts, the 
Commission agrees with the commenter that the definition of spot month 
for federal limits should be the same as the definition of spot month 
for exchange limits. The Commission is therefore the definition of spot 
month in this Reproposal generally follows exchange practices. In the 
reproposed version, spot month means the period of time beginning at 
the earlier of the close of business on the trading day preceding the 
first day on which delivery notices can be issued by the clearing 
organization of a contract market, or the close of business on the 
trading day preceding the third-to-last trading day, until the contract 
expires for physical delivery core referenced futures contracts,\368\ 
except for the following: (a) ICE Futures U.S. Sugar No. 11 (SB) 
referenced contract for which the spot month means the period of time 
beginning at the opening of trading on the second business day 
following the expiration of the regular option contract traded on the 
expiring futures contract; (b) ICE Futures U.S. Sugar No. 16 (SF) 
referenced contract,\369\ for which the spot month means the period of 
time beginning on the third-to-last trading day of the contract month 
until the contract expires \370\ and (c) Chicago Mercantile Exchange 
Live Cattle (LC) referenced contract, for which the spot month means 
the period of time beginning at the close trading on the fifth business 
day of the contract month.\371\
---------------------------------------------------------------------------

    \368\ As noted above, this Reproposal does not address the three 
cash-settled contracts (Class III Milk, Feeder Cattle, and Lean 
Hogs) which, under the December 2013 Position Limits Proposal, were 
included in the list of core referenced futures contracts. 
Therefore, the reproposed spot month definition does not address 
those three contracts.
    \369\ While the Commission realized that Sugar 16 does not 
currently have a spot month, its delivery period takes place after 
the last trading day (similar to crude oil). Therefore, the 
Reproposal amends the spot month definition for Sugar No. 16 to 
mirror the three day period for other contracts that deliver after 
the end of trading.
    \370\ In regard to the modifier ``until the contract expires,'' 
the Commission views ``expires'' as meaning the end of delivery 
period or until cash-settled.
    \371\ In response to FIA's comment, CL-FIA-59595 at 10, the 
Commission notes that the spot periods for exchange-set limits on 
COMEX products begin at the close of trading and not the close of 
business. See http://www.cmegroup.com/market-regulation/position-limits.html. However, the Commission understands that CME Group 
staff determines compliance with spot month limits in conjunction 
with the receipt of futures large trader reports. In consideration 
of the practicality of this approach, and in light of the definition 
of reportable position, the Commission believes that it would be 
more practical, clear, and consistent with existing exchange 
practices, for the spot month to begin ``at the close of the 
market.'' See CFTC Regulation 15.00(p).
---------------------------------------------------------------------------

    As noted above, in the December 2013 Position Limits Proposal, spot 
month was proposed to be defined to begin at the earlier of: (1) ``the 
close of trading on the trading day preceding the first day on which 
delivery notices can be issued to the clearing organization''; or (2) 
``the close of trading on the trading day preceding the third-to-last 
trading day''--based on the comment letters received, the proposed 
definition resulted in some confusion.\372\ The Commission observes 
that the current definition also seems to be a source of some confusion 
when it defines ``spot month,'' in current CFTC Regulation 150.1(a), to 
begin ``at the close of trading on the trading day preceding the first 
day on which delivery notices can be issued to the clearing 
organization.''
---------------------------------------------------------------------------

    \372\ As a note of clarification, in light of the confusion of 
some commenters, position limits apply to open positions; once the 
position isn't open the limits don't apply.
---------------------------------------------------------------------------

    The Commission understands current DCM practice for physical-
delivery contracts permitting delivery before the close of trading 
generally is that the spot month begins at the start of the first 
business day on which the clearing house can issue ``stop'' notices to 
a clearing member carrying a long position, or, at the close of 
business on the day preceding the first business day on which the 
clearing house can issue ``stop'' notices to a clearing member carrying 
a long position, but current DCM rules vary somewhat. For some ICE 
contracts,\373\ the spot month includes ``any month for which delivery 
notices have been or may be issued,'' \374\ and begins at the open of 
trading; \375\ the

[[Page 96741]]

CME spot month, as noted above, begins at the close of trading. 
However, the Commission understands that the amended ``spot month'' 
definition, as reproposed herein, would be consistent with the existing 
spot month practices of exchanges when enforcing the start of the spot 
month limits in any of the 25 core referenced futures contracts, based 
on the timing of futures large trader reports, discussed below.
---------------------------------------------------------------------------

    \373\ See, e.g., Cotton No. 2.
    \374\ See ICE Rule 6.19.
    \375\ See, e.g., Cotton No. 2 Position Limits and Position 
Accountability information: ``ICE (1) Delivery Month: Cocoa, Coffee 
``C'', Cotton, World Cotton, FCOJ, Precious Metals--on and after 
First Notice Day Sugar#11 on and after the Second Business Day 
following the expiration of the regular option contract traded on 
the expiring futures contract.'' https://www.theice.com/products/254/Cotton-No-2-Futures.
---------------------------------------------------------------------------

    Furthermore, based on Commission staff discussions with staff from 
several DCMs regarding exchange current practices, the Commission 
believes that the spot month should begin at the same time as futures 
large trader reports are submitted--that is, under the definition of 
reportable position, the spot month should begin ``at the close of the 
market.'' \376\ The Commission views the ``close of the market'' as 
consistent with ``the close of business.''
---------------------------------------------------------------------------

    \376\ See current Sec.  15.00(p).
---------------------------------------------------------------------------

    In consideration of the practicality of this approach, and in light 
of the definition of ``reportable position,'' the Commission believes 
that it would be more practical, clear, and consistent with existing 
exchange practices, for the spot month to begin ``at the close of 
business.'' In addition, as noted by one commenter,\377\ when the 
exchange spot month commences at the close of business, rather than at 
the close of trading, it would allow market participants to incorporate 
exchange of futures for related position transactions (``EFRPs'') \378\ 
that occur after the close of trading, but before the close of 
business.
---------------------------------------------------------------------------

    \377\ CL-FIA-59595 at 10.
    \378\ The Commission notes that DCM determinations of allowable 
blocks, EFRPs, and transfer trades, in regards to position limits, 
must also consider compliance with DCM Core Principle 9; discussion 
of the interplay is beyond the scope of this Reproposal.
---------------------------------------------------------------------------

    The Commission points out an additional correction made to the 
reproposed definition, changing it from ``preceding the first day on 
which delivery notices can be issued to the clearing organization of a 
contract market'' to ``preceding the first day on which delivery 
notices can be issued by the clearing organization of a contract 
market'' [emphasis added]. The Commission understands that the spot 
periods on the exchanges commence the day preceding the first day on 
which delivery notices can be issued by the clearing organization of a 
contract market, not the first day on which notices can be issued to 
the clearing organization. The ``spot month'' definition in this 
Reproposal, therefore, has been changed to correct this error.
    The revisions included in the reproposed definition addresses the 
concerns of the commenter who suggested the Commission define the spot 
month according to each core referenced futures contract and for cash-
settled and physical delivery referenced contracts that are not core 
referenced futures contracts, although for clarity and brevity the 
Commission has chosen to highlight contracts that are the exception to 
the general definition rather than list each of the 25 core referenced 
futures contracts and multitude of referenced contracts separately.
    In response to the commenters' concern regarding cash-settled 
referenced contracts, the Reproposal changes the definition of spot 
month to agree with the limits proposed in Sec.  150.2. In the December 
2013 Position Limits Proposal, the Commission defined the spot month 
for certain cash-settled referenced contracts, including calendar month 
averaging contracts, to be a longer period than the spot month period 
for the related core referenced futures contract. However, the 
Commission did not propose a limit for such contracts in proposed Sec.  
150.2, rendering superfluous that aspect of the proposed definition of 
spot month, at this time. The Commission is reproposing the definition 
of spot month without this provision, thereby addressing the concerns 
of the commenters regarding the impact of the definition on calendar 
month averaging contracts outside of the spot month for the relevant 
core referenced futures contract. In order to make clearer the relevant 
spot month periods for referenced contracts other than core referenced 
futures contracts, the Commission has included subsection (3) of the 
definition that states that the spot month for such referenced 
contracts is the same period as that of the relevant core referenced 
futures contract.
    The Commission believes that the revised definition reproposed here 
sufficiently clarifies the applicable spot month periods, which can 
also be determined via exchange rulebooks and defined contract 
specifications, such that a defined calendar of spot months is not 
necessary. Further, a published calendar would need to be revised every 
year to update spot month periods for each contract and each 
expiration. The Commission believes this constant revision may lead to 
more confusion than it is meant to correct.
r. Spot-Month, Single-Month, and All-Months-Combined Position Limits
    Proposed Rule: In addition to a definition for ``spot month,'' 
current part 150 includes definitions for ``single month,'' and for 
``all-months'' where ``single month'' is defined as ``each separate 
futures trading month, other than the spot month future,'' and ``all-
months'' is defined as ``the sum of all futures trading months 
including the spot month future.''
    As noted in the December 2013 Position Limits proposal, vacated 
part 151 retained only the definition for spot month, and, instead, 
adopted a definition for ``spot-month, single-month, and all-months-
combined position limits.'' The definition specified that, for 
Referenced Contracts based on a commodity identified in Sec.  151.2, 
the maximum number of contracts a trader could hold was as provided in 
Sec.  151.4.
    In the December 2013 Position Limits Proposal, as noted above, the 
Commission proposed to amend Sec.  150.1 by deleting the definitions 
for ``single month,'' and for ``all-months,'' but, unlike the vacated 
part 151, the proposal did not include a definition for ``spot-month, 
single-month, and all-months-combined position limits.'' Instead, it 
proposed to adopt a definition for ``speculative position limits'' that 
should obviate the need for these definitions.\379\
---------------------------------------------------------------------------

    \379\ See Section III.A.1.r (Spot-month, single-month, and all-
months-combined position limits) above for a discussion of the 
proposed definition of ``speculative position limit.''
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments regarding 
the deletion of these definitions.
    Commission Reproposal: This Reproposal, consistent with the 
December 2013 Position Limits Proposal, eliminates the definitions for 
``single month,'' and for ``all-months,'' for the reasons provided 
above.
s. Swap and Swap Dealer
    Proposed Rule: While the terms ``swap'' and ``swap dealer'' are not 
currently defined in Sec.  150.1, the December 2013 Position Limits 
Proposal amended Sec.  150.1 to define these terms as they are defined 
in section 1a of the Act and as further defined in section 1.3 of this 
chapter.'' \380\
---------------------------------------------------------------------------

    \380\ 7 U.S.C. 1a(47) and 1a(49); Sec.  1.3(xxx) (``swap'') and 
Sec.  1.3(ggg) (``swap dealer''). See Further Definition of ``Swap 
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap 
Participant,'' ``Major Security-Based Swap Participant'' and 
``Eligible Contract Participant,'' 77 FR 30596 (May 23, 2012); see 
also, Swap Definition Rulemaking.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on these 
definitions.

[[Page 96742]]

    Commission Reproposal: The Commission has determined to repropose 
these definitions as originally proposed, for the reasons provided 
above.
2. Bona Fide Hedging Definition
a. Bona Fide Hedging Position (BFH) Definition--Background
    Prior to the 1974 amendments to the CEA, the definition of a bona 
fide hedging position was found in the statute. The 1974 amendments 
authorized the newly formed Commission to define a bona fide hedging 
position.\381\ The Commission published a final rule in 1977, providing 
a general definition of a bona fide hedging position in Sec.  
1.3(z)(1).\382\ The Commission listed certain positions, meeting the 
requirements of the general definition of a bona fide hedging position, 
in Sec.  1.3(z)(2) (i.e., enumerated bona fide hedging positions). The 
Commission provided an application process for market participants to 
seek recognition of non-enumerated bona fide hedging positions in 
Sec. Sec.  1.3(z)(3) and 1.48.
---------------------------------------------------------------------------

    \381\ Those amendments to CEA section 4a(3), subsequently re-
designated Sec.  4a(c)(1), 7 U.S.C. 6a(c)(1), provide that no rule 
of the Commission shall apply to positions which are shown to be 
bona fide hedging positions, as such term is defined by the 
Commission. See, sec. 404 of the Commodity Futures Trading 
Commission Act of 1974, Pub. L. 93-463, 88 Stat. 1389 (Oct. 23, 
1974). See 2013 Position Limits Proposal, 78 FR at 75703 for 
additional discussion of the history of the definition of a bona 
fide hedging position.
    \382\ 42 FR 42748 (Aug. 24, 1977). Previously, the Secretary of 
Agriculture, pursuant to section 404 of the Commodity Futures 
Trading Commission Act of 1974 (Pub. L. 93-463), promulgated a 
definition of bona fide hedging transactions and positions. 40 FR 
111560 (March 12, 1975). That definition, largely reflecting the 
statutory definition previously in effect, remained in effect until 
the newly-established Commission defined that term. Id.
---------------------------------------------------------------------------

    During the 1980's, exchanges were required to incorporate the 
Commission's general definition of bona fide hedging position into 
their exchange-set position limit regulations.\383\ While the 
Commission had established position limits on only a few commodity 
futures contracts in Sec.  150.2, Commission rule Sec.  1.61 
(subsequently incorporated into Sec.  150.5) required DCMs to establish 
limits on commodities futures not subject to federal limits. The 
Commission directed in Sec.  1.61(a)(3) (subsequently incorporated into 
Sec.  150.5(d)(1)) that no DCM regulation regarding position limits 
would apply to bona fide hedging positions as defined by a DCM in 
accordance with Sec.  1.3(z)(1).
---------------------------------------------------------------------------

    \383\ 46 FR 50938 at 50945 (Oct. 16, 1981).
---------------------------------------------------------------------------

    In 1987, the Commission provided interpretive guidance regarding 
the bona fide hedging definition and risk management exemptions for 
futures in financial instruments (now termed excluded 
commodities).\384\ This guidance permitted exchanges, for purposes of 
exchange-set limits on excluded commodities, to recognize risk 
management exemptions.\385\
---------------------------------------------------------------------------

    \384\ 52 FR 34633 (Sept. 14, 1987) and 52 FR 27195 (July 20, 
1987).
    \385\ See December 2013 Position Limits Proposal, 78 FR at 
75704.
---------------------------------------------------------------------------

    In the 1990's, the Commission allowed exchanges to experiment with 
substituting position accountability levels for position limits.\386\ 
The CFMA, in 2000, codified, in DCM Core Principle 5, position 
accountability as an acceptable practice.\387\ The CFMA, however, did 
not address the definition of a bona fide hedging position.
---------------------------------------------------------------------------

    \386\ Exchange rules for position accountability levels require 
a market participant whose position exceeds an accountability level 
to consent automatically to requests of the exchange: (1) To provide 
information about a position; and (2) to not increase or to reduce a 
position, if so ordered by the exchange. In contrast, a speculative 
position limit rule does not authorize an exchange to order a market 
participant to reduce a position. Rather, a position limit sets a 
maximum permissible size for a speculative position. The Commission 
notes that it may require a market participant to provide 
information about a position, for example, by issuing a special call 
under Sec.  18.05 to a trader with a reportable position in futures 
contracts.
    \387\ DCM Core Principle 5 is codified in CEA section 5(d)(5), 7 
U.S.C. 7(d)(5). See Section 111 of the Commodity Futures 
Modernization Act of 2000, Pub. L. No. 106-554, 114 Stat. 2763 (Dec. 
21, 2000) (CFMA).
---------------------------------------------------------------------------

    With the passing of the CFMA in 2000, the Commission's requirements 
for exchanges to adopt position limits and associated bona fide hedging 
exemptions, in Sec.  150.5, were rendered mere guidance. That is, 
exchanges were no longer required to establish limits and no longer 
required to use the Commission's general definition of a bona fide 
hedging position. Nonetheless, the Commission continued to guide 
exchanges to adopt position limits, particularly for the spot month in 
physical-delivery physical commodity derivatives, and to provide for 
exemptions.
    The Farm Bill of 2008 authorized the Commission to regulate swaps 
traded on exempt commercial markets (ECM) that the Commission 
determined to be a significant price discovery contract (SPDC).\388\ 
The Commission implemented these provisions in part 36 of its 
rules.\389\ The Commission provided guidance to ECMs in complying with 
Core Principle IV regarding position limitations or 
accountability.\390\ That guidance provided, as an acceptable practice 
for cleared trades, that the ECM's position limit rules may exempt bona 
fide hedging positions.
---------------------------------------------------------------------------

    \388\ See Sec.  13201 of the Food, Conservation and Energy Act 
of 2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008) (Farm 
Bill of 2008). These provisions were subsequently superseded by the 
Dodd-Frank Act.
    \389\ 66 FR 42270 (Aug. 10, 2001). Part 36 was removed and 
reserved to conform to the amendments to the CEA by the Dodd-Frank 
Act.
    \390\ 17 CFR part 36, App. B (2010).
---------------------------------------------------------------------------

    In 2010, the Dodd-Frank Act added a directive, for purposes of 
implementation of CEA section 4a(a)(2), for the Commission to define a 
bona fide hedging position for physical commodity derivatives 
consistent with, in the Commission's opinion, the reasonably certain 
statutory standards in CEA section 4a(c)(2). Those statutory standards 
build on, but differ slightly from, the Commission's general definition 
in rule 1.3(z)(1).\391\ The Commission interprets those statutory 
standards as directing the Commission to narrow the bona fide hedging 
position definition for physical commodities.\392\ The Commission 
discusses those differences, below.
---------------------------------------------------------------------------

    \391\ It should be noted that a 2011 final rule of the 
Commission would have amended the definition of a bona fide hedging 
position in Sec.  1.3(z), to be applicable only to excluded 
commodities, and would have added a new definition of a bona fide 
hedging position to Part 151, to be applicable to physical 
commodities. Position Limits for Futures and Swaps, 76 FR 71626 
(Nov.18, 2011). However, prior to the compliance date for that 2011 
rulemaking, a federal court vacated most provisions of that 
rulemaking, including the amendments to the definition of a bona 
fide hedging position. International Swaps and Derivatives Ass'n v. 
United State Commodity Futures Trading Comm'n, 887 F. Supp. 2d 259 
(D.D.C. 2012). Because the Commission has not instructed Federal 
Register to roll back the 2011 changes to the CFR, the current 
definition of a bona fide hedging position is found in the 2010 
version of the Code of Federal Regulations. 17 CFR 1.3(z) (2010).
    \392\ See December 2013 Position Limits Proposal, 78 FR at 
75705.
---------------------------------------------------------------------------

b. BFH Definition Summary
    Under the December 2013 Position Limits Proposal, the Commission 
proposed a new definition of bona fide hedging position, to replace the 
current definition in Sec.  1.3(z), that would be applicable to 
positions in excluded commodities and in physical commodities.\393\ The 
proposed definition was organized into an opening paragraph and five 
numbered paragraphs. In the opening paragraph, for positions in either 
excluded commodities or physical commodities, the proposed definition 
would have applied two general requirements: The incidental test; and 
the orderly trading requirement. For excluded commodities, the 
Commission proposed in paragraph (1) a definition that conformed to the 
Commission's 1987

[[Page 96743]]

interpretations permitting risk management exemptions in excluded 
commodity contracts. For physical commodities, the Commission proposed 
in paragraph (2) to amend the current general definition to conform to 
CEA section 4a(c) and to remove the application process in Sec. Sec.  
1.3(z)(3) and 1.48, that permits market participants to seek 
recognition of non-enumerated bona fide hedging positions. Rather, the 
Commission proposed that a market participant may request either a 
staff interpretative letter under Sec.  140.99 \394\ or seek CEA 
section 4a(a)(7) exemptive relief.\395\ Paragraphs (3) and (4) listed 
enumerated exemptions. Paragraph (5) listed the requirements for cross-
commodity hedges of enumerated exemptions.
---------------------------------------------------------------------------

    \393\ See December 2013 Position Limits Proposal, 78 FR at 
75702-23. In doing so, the Commission proposed to remove and reserve 
Sec.  1.3(z).
    \394\ Section 140.99 sets out general procedures and 
requirements for requests to Commission staff for exemptive, no-
action and interpretative letters.
    \395\ See December 2013 Position Limits Proposal, 78 FR 75719.
---------------------------------------------------------------------------

    In response to comments on the December 2013 Position Limits 
Proposal, in the 2016 Supplemental Proposal, the Commission amended the 
proposed definition of bona fide hedging position.\396\ The amended 
definition proposed in the 2016 Supplemental Proposal would no longer 
apply the two general requirements (the incidental test and the orderly 
trading requirement). For excluded commodities, the Commission again 
proposed paragraph (1) of the definition, substantially as in 2013. For 
physical commodities, the Commission again proposed to conform 
paragraph (2) more closely to CEA section 4a(c), but also proposed an 
application process for market participants to seek recognition of non-
enumerated bona fide hedging positions, without the need to petition 
the Commission. The Commission again proposed paragraphs (3) through 
(5).
---------------------------------------------------------------------------

    \396\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38462-64.
---------------------------------------------------------------------------

    In response to comments on both the December 2013 Position Limits 
Proposal and the 2016 Supplemental Proposal, the Commission is now 
reproposing the definition of bona fide hedging position, generally as 
proposed in the 2016 Supplemental Proposal, but with a few further 
amendments. First, for excluded commodities, the Commission clarifies 
further the discretion of exchanges in recognizing risk management 
exemptions. Second, for physical commodities, the Commission: (a) 
Clarifies the scope of the general definition of a bona fide hedging 
position; (b) conforms that general definition more closely to CEA 
section 4a(c) by including recognition of positions that reduce risks 
attendant to a swap that was used as a hedge; and, (c) re-organizes 
additional requirements for enumerated hedges and requirements for 
other recognition as a non-enumerated bona fide hedging position, apart 
from the general definition.
c. BFH Definition Discussion--Remove Incidental Test and Orderly 
Trading Requirement
    Proposed Rule: As noted above, the Commission proposed to retain, 
in its December 2013 Position Limits Proposal,\397\ then proposed to 
remove, in its 2016 Supplemental Position Limits Proposal,\398\ two 
general requirements contained in the Sec.  1.3(z)(1) definition of 
bona fide hedging position: the incidental test; and the orderly 
trading requirement. The incidental test requires, for a position to be 
recognized as a bona fide hedging position, that the ``purpose is to 
offset price risks incidental to commercial cash, spot, or forward 
operations.'' The orderly trading requirement mandates that ``such 
position is established and liquidated in an orderly manner in 
accordance with sound commercial practices.''
---------------------------------------------------------------------------

    \397\ 78 FR at 75706.
    \398\ 81 FR at 38462.
---------------------------------------------------------------------------

    Comments Received: Commenters generally objected to retaining the 
incidental test and the orderly trading requirement in the definition 
of bona fide hedging position, as proposed in 2013.\399\ A number of 
commenters supported the Commission's 2016 Supplemental Proposal to 
remove the incidental test and the orderly trading requirement.\400\
---------------------------------------------------------------------------

    \399\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38462.
    \400\ See, e.g., CL-NCFC-60930 at 2, CL-FIA-60937 at 5 and 23, 
and CL-IECAssn-60949 at 5-7.
---------------------------------------------------------------------------

    Incidental Test: Commenters objected to the incidental test, 
because that test is not included in the standards in CEA section 4a(c) 
for the Commission to define a bona fide hedging position for physical 
commodities.\401\
---------------------------------------------------------------------------

    \401\ See, e.g., CL-CME-58718 at 47, and CL-NGFA-60941 at 2.
---------------------------------------------------------------------------

    However, other commenters noted their belief that eliminating the 
incidental test would permit swap dealers or purely financial entities 
to avail themselves of bona fide hedging exemptions, to the detriment 
of commercial hedgers.\402\
---------------------------------------------------------------------------

    \402\ See, e.g., CL-IATP-60951 at 4, CL-AFR-60953 at 2, CL-
Better Markets-60928 at 5, and CL-Rutkowski-60962 at 1.
---------------------------------------------------------------------------

    Orderly trading requirement: One commenter urged the Commission to 
eliminate the orderly trading requirement, because this requirement 
does not apply to over-the-counter markets, the Commission does not 
define orderly trading in a bi-lateral market, and this requirement 
imposes a duty on end users to monitor market activities to ensure they 
do not cause a significant market impact; additionally, the commenter 
noted the anti-disruptive trading prohibitions and polices apply 
regardless of whether the orderly trading requirement is imposed.\403\ 
Similarly, another commenter urged the Commission to exempt commercial 
end-users from the orderly trading requirement, arguing that an orderly 
trading requirement unreasonably requires commercial end-users to 
monitor markets to measure the impact of their activities without clear 
guidance from the Commission on what would constitute significant 
market impact.\404\
---------------------------------------------------------------------------

    \403\ See CL-COPE-59662 at 13.
    \404\ See CL-DEU-59627 at 5-7.
---------------------------------------------------------------------------

    Other commenters to the 2013 Proposal requested the Commission 
interpret the orderly trading requirement consistently with the 
Commission's disruptive trading practices interpretation (i.e., a 
standard of intentional or reckless conduct) and not to apply a 
negligence standard.\405\ Yet another commenter requested clarification 
on the process the Commission would use to determine whether a position 
has been established and liquidated in an orderly manner, whether any 
defenses may be available, and what would be the consequences of 
failing the requirement.\406\
---------------------------------------------------------------------------

    \405\ See, e.g., CL-FIA-59595 at 5, 33-34, CL-EEI-EPSA-59602 at 
14-15, CL-ISDA/SIFMA-59611 at 4, 39, CL-CME-59718 at 67, and CL-ICE-
59669 at 11.
    \406\ See CL-Working Group-59693 at 14.
---------------------------------------------------------------------------

    However, one commenter is concerned that eliminating the orderly 
trading requirement for bona fide hedging for swaps positions would 
discriminate against market participants in the futures and options 
markets. The commenter noted that, if the Commission eliminates this 
requirement, the Commission could not use its authority effectively to 
review exchange-granted exemptions for swaps from position limits to 
prevent or diminish excessive speculation.\407\
---------------------------------------------------------------------------

    \407\ See CL-IATP-60951 at 4.
---------------------------------------------------------------------------

    Commission Reproposal: In the reproposed definition of bona fide 
hedging position, the Commission is eliminating the incidental test and 
the orderly trading requirement.
    Incidental Test: Under the Reproposal, the incidental test has been 
eliminated, because the Commission views the economically appropriate 
test (discussed below) as including the concept of the offset of price 
risks

[[Page 96744]]

incidental to commercial cash, spot, or forward operations. It was 
noted in the 2013 Position Limits Proposal that, ``The Commission 
believes the concept of commercial cash market activities is also 
embodied in the economically appropriate test for physical commodities 
in [CEA section 4a(c)(2)].'' \408\ It should be noted the incidental 
test has been part of the regulatory definition of bona fide hedging 
since 1975,\409\ but that the requirement was not explained in the 1974 
proposing notice (``proposed definition otherwise deviates in only 
minor ways from the hedging definition presently contained in [CEA 
section 4a(3)]'').\410\
---------------------------------------------------------------------------

    \408\ See December 2013 Position Limits Proposal, 78 FR at 
75707.
    \409\ 40 FR 11560 (March 12, 1975).
    \410\ 39 FR 39731 (Nov. 11, 1974).
---------------------------------------------------------------------------

    The Commission is not persuaded by the commenters who believe 
eliminating the incidental test would permit financial entities to 
avail themselves of a bona fide hedging exemption, because the 
incidental test is essentially embedded in the economically appropriate 
test. In addition, for a physical-commodity derivative, the reproposed 
definition, in mirroring the statutory standards of CEA section 4a(c), 
requires a bona fide hedging position to be a substitute for a 
transaction taken or to be taken in the cash market (either for the 
market participant itself or for the market participant's pass-through 
swap counterparty), which generally would preclude financial entities 
from availing themselves of a bona fide hedging exemption (in the 
absence of qualifying for a pass-through swap offset exemption, 
discussed below).
    Orderly Trading Requirement: The Reproposal also eliminates the 
orderly trading requirement. That provision has been a part of the 
regulatory definition of bona fide hedging since March 12, 1975 \411\ 
and previously was found in the statutory definition of bona fide 
hedging position prior to the 1974 amendment removing the statutory 
definition from CEA section 4a(3). However, the Commission is not aware 
of a denial of recognition of a position as a bona fide hedging 
position, as a result of a lack of orderly trading. Further, the 
Commission notes that the meaning of the orderly trading requirement is 
unclear in the context of the over-the-counter (OTC) swap market or in 
the context of permitted off-exchange transactions (e.g., exchange of 
futures for physicals).
---------------------------------------------------------------------------

    \411\ 40 FR 11560 (Mar. 12, 1975).
---------------------------------------------------------------------------

    In regard to the anti-disruptive trading prohibitions of CEA 
section 4c(a)(5), those prohibitions apply to trading on registered 
entities, but not to OTC transactions. It should be noted that the 
anti-disruptive trading prohibitions in CEA section 4c(a)(5) make it 
unlawful to engage in trading on a registered entity that 
``demonstrates intentional or reckless disregard for orderly execution 
of trading during the closing period'' (emphasis added); however, the 
Commission has not, under the authority of CEA section 4c(a)(6), 
prohibited the intentional or reckless disregard for the orderly 
execution of transactions on a registered entity outside of the closing 
period.
    The Commission notes that an exchange may impose a general orderly 
trading on all market participants. Market participants may request 
clarification from exchanges on their trading rules. The Commission 
does not believe that the absence of an orderly trading requirement in 
the definition of bona fide hedging position would discriminate against 
any particular trading venue for commodity derivative contracts.
d. BFH Definition Discussion-- Excluded Commodities
    Proposed Rule: In both the 2013 Position Limits Proposal and the 
2016 Supplement Proposal, the proposed definition of bona fide hedging 
position for contracts in an excluded commodity included a standard 
that the position is economically appropriate to the reduction of risks 
in the conduct and management of a commercial enterprise (the 
economically appropriate test) and also specified that such position 
should be either (i) specifically enumerated in paragraphs (3) through 
(5) of the definition of bona fide hedging position; or (ii) recognized 
as a bona fide hedging position by a DCM or SEF consistent with the 
guidance on risk management exemptions in proposed Appendix A to part 
150.\412\ As noted above, the 2016 Supplemental Proposal would 
eliminate the two additional general requirements (the incidental test 
and the orderly trading requirement).
---------------------------------------------------------------------------

    \412\ December 2013 Position Limits Proposal, 78 FR at 75707; 
2016 Supplemental Position Limits Proposal, 81 FR at 38505.
---------------------------------------------------------------------------

    Comments Received: One commenter believed that, to avoid an overly 
restrictive definition due to the limited set of examples provided by 
the Commission, only the general definition of a bona fide hedging 
position should be applicable to hedges of an excluded commodity.\413\
---------------------------------------------------------------------------

    \413\ CL-BG Group-59656 at 9.
---------------------------------------------------------------------------

    Commission Reproposal: After consideration of comments and review 
of the record, the Commission has determined in the Reproposal to apply 
the economically appropriate test to enumerated exemptions, as 
proposed.\414\ However, the Reproposal amends the proposed definition 
of a bona fide hedging position for an excluded commodity, to clarify 
that an exchange may otherwise recognize risk management exemptions in 
an excluded commodity, without regard to the economically appropriate 
test. Regarding risk management exemptions, the Commission notes that 
Appendix A (which codifies the Commission's two 1987 interpretations of 
the bona fide hedging definition in the context of excluded 
commodities) includes examples of risk altering transactions, such as a 
temporary increase in equity exposure relative to cash bond holdings. 
Such risk altering transactions appear inconsistent with the 
Commission's interpretation of the economically appropriate test. 
Accordingly, the Reproposal removes the economically appropriate test 
from the guidance for exchange-recognized risk management exemptions in 
excluded commodities.
---------------------------------------------------------------------------

    \414\ The Commission did not propose to apply to excluded 
commodities any of the additional standards in the general 
definition applicable to hedges of a physical commodity.
---------------------------------------------------------------------------

    Regarding an exchange's obligation to comply with core principles 
pertaining to position limits on excluded commodities, as discussed 
further in Sec.  150.5, the Commission clarifies that under the 
Reproposal, exchanges have reasonable discretion as to whether to adopt 
the Commission's definition of a bona fide hedging position, including 
whether to grant risk management exemptions, such as those that would 
be consistent with, but not limited to, the examples in Appendix A to 
part 150. That is, the set of examples in Appendix A to part 150 is 
non-restrictive, as it is guidance. The Reproposal also makes minor 
wording changes in Appendix A to part 150, including to clarify an 
exchange's reasonable discretion in granting risk management exemptions 
and to eliminate a reference to the orderly trading requirement which 
has been deleted, as discussed above, but otherwise is adopting 
Appendix A as proposed.
e. BFH Definition Discussion--Physical Commodities General Definition
    As noted in its proposal, the core of the Commission's approach to 
defining bona fide hedging over the years has focused on transactions 
that offset a

[[Page 96745]]

recognized price risk.\415\ Once a bona fide hedge is implemented, the 
hedged entity should be price insensitive because any change in the 
value of the underlying physical commodity is offset by the change in 
value of the entity's physical commodity derivative position.
---------------------------------------------------------------------------

    \415\ December 2013 Position Limits Proposal, 78 FR at 75702-3.
---------------------------------------------------------------------------

    Because a firm that has hedged its price exposure is price neutral 
in its overall physical commodity position, the hedged entity should 
have little incentive to manipulate or engage in other abusive market 
practices to affect prices. By contrast, a party that maintains a 
derivative position that leaves it with exposure to price changes is 
not neutral as to price and, therefore, may have an incentive to affect 
prices. Further, the intention of a hedge exemption is to enable a 
commercial entity to offset its price risk; it was never intended to 
facilitate taking on additional price risk.
    The Commission recognizes there are complexities to analyzing the 
various commercial price risks applicable to particular commercial 
circumstances in order to determine whether a hedge exemption is 
warranted. These complexities have led the Commission, from time to 
time, to issue rule changes, interpretations, and exemptions. Congress, 
too, has periodically revised the Federal statutes applicable to bona 
fide hedging, most recently in the Dodd-Frank Act.
    CEA section 4a(c)(1),\416\ as re-designated by the Dodd-Frank Act, 
authorizes the Commission to define bona fide hedging positions 
``consistent with the purposes of this Act.'' CEA section 4a(c)(2), as 
added by the Dodd-Frank Act, provides new requirements for the 
Commission to define bona fide hedging positions in physical commodity 
derivatives ``[f]or the purposes of implementation of [CEA section 
4a(a)(2)] for contracts of sale for future delivery or options on the 
contracts of commodities [traded on DCMs].'' \417\
---------------------------------------------------------------------------

    \416\ 7 U.S.C. 6a(c)(1).
    \417\ The Reproposal provides for a phased approach to 
implementation of CEA section 4a(a)(2), to reduce the potential 
administrative burden on exchanges and market participants, and to 
facilitate adoption of monitoring policies, procedures and systems. 
See, e.g., December 2013 Position Limits Proposal, 78 FR at 75725. 
The first phase of implementation of CEA section 4a(a)(2), in this 
Reproposal, initially sets federal limits on 25 core referenced 
futures contracts and their associated referenced contracts. The 
Commission is establishing a definition of bona fide hedging 
position for physical commodities in connection with its 
implementation of CEA section 4a(a)(2), applicable to federal 
limits. However, the Reproposal does not mandate adoption of that 
definition of a bona fide hedging position for purposes of exchange-
set limits in contracts that are not yet subject to a federal limit. 
See below regarding guidance and requirements under reproposed Sec.  
150.5 for exchange-set limits in physical commodities.
---------------------------------------------------------------------------

    General Definition: The Commission's proposed general definition 
for physical commodity derivative contracts, mirroring CEA section 
4a(c)(2)(a), specifies a bona fide hedging position is one that:
    (a) Temporary substitute test: represents a substitute for 
transactions made or to be made or positions taken or to be taken at a 
later time in the physical marketing channel;
    (b) Economically appropriate test: is economically appropriate to 
the reduction of risks in the conduct and management of a commercial 
enterprise; and
    (c) Change in value requirement: arises from the potential change 
in the value of assets, liabilities, or services, whether current or 
anticipated.
    In addition to the above, the Commission's proposed general 
definition, mirroring CEA section 4a(c)(2)(B)(i), also recognizes a 
bona fide hedging position that:
    (d) Pass-through swap offset: reduces risks attendant to a position 
resulting from a swap that was executed opposite a counterparty for 
which the transaction would qualify as a bona fide hedging transaction 
under the general definition above.
    The Commission proposed another provision, based on the statutory 
standards, to recognize as a bona fide a position that:
    (e) Pass-through swap: is itself the swap executed opposite a pass-
through swap counterparty, provided that the risk of that swap has been 
offset.
    The Commission received a number of comments on the December 2013 
Position Limits Proposal and the 2016 Supplemental Proposal. Those 
concerning the incidental test and the orderly trading requirement are 
discussed above. Others are discussed below.
i. Temporary Substitute Test and Risk Management Exemptions
    Proposed Rule: The temporary substitute test is discussed in the 
2013 Position Limits Proposal at 75708-9. As the Commission noted in 
the proposal, it believes that the temporary substitute test is a 
necessary condition for classification of positions in physical 
commodities as bona fide hedging positions. The proposed test mirrors 
the statutory test in CEA section 4a(c)(2)(a)(i). The statutory test 
does not include the adverb ``normally'' to modify the verb 
``represents'' in the phrase ``represents a substitute for transactions 
taken or to be taken at a later time in a physical marketing channel.'' 
Because the definition in Sec.  1.3(z)(1) includes the adverb 
``normally,'' the Commission interpreted that provision to be merely a 
temporary substitute criterion, rather than a test. Accordingly, the 
Commission previously granted risk management exemptions for persons to 
offset the risk of swaps and other financial instruments that did not 
represent substitutes for transactions or positions to be taken in a 
physical marketing channel. However, given the statutory change in 
direction, positions that reduce the risk of such speculative swaps and 
financial instruments would no longer meet the requirements for a bona 
fide hedging position under the proposed definition in Sec.  150.1.
    Comments Received: A number of commenters urged the Commission not 
to deny risk-management exemptions for financial intermediaries who 
utilize referenced contracts to offset the risks arising from the 
provision of diversified, commodity-based returns to the 
intermediaries' clients.\418\
---------------------------------------------------------------------------

    \418\ See, e.g., CL-FIA-59595 at 5, 34-35; CL-AMG-59709 at 2, 
12-15; and CL-CME-59718 at 67-69.
---------------------------------------------------------------------------

    However, other commenters noted the ``proposed rules properly 
refrain from providing a general exemption to financial firms seeking 
to hedge their financial risks from the sale of commodity-related 
instruments such as index swaps, Exchange Traded Funds (ETFs), and 
Exchange Traded Notes (ETNs),'' because such instruments are inherently 
speculative and may overwhelm the price discovery function of the 
derivative market.\419\
---------------------------------------------------------------------------

    \419\ See, e.g., CL-Sen. Levin-59637 at 8, and CL-Better 
Markets-60325 at 2.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal would retain the temporary 
substitute test, as proposed. The Commission interprets the statutory 
temporary substitute test as more stringent than the temporary 
substitute criterion in Sec.  1.3(z)(1); \420\ that is, the Commission 
views the statutory test as narrowing the standards for a bona fide 
hedging position. Further, the Commission believes that retaining a 
risk management exemption for swap intermediaries, without regard to 
the purpose of the counterparty's swap, would fly in the face of the 
statutory restrictions on pass-through swap offsets (requiring the 
position of the pass-through swap counterparty to

[[Page 96746]]

qualify as a bona fide hedging transaction).\421\
---------------------------------------------------------------------------

    \420\ See December 2013 Position Limits Proposal, 78 FR at 
75709.
    \421\ See CEA section 4a(c)(2)(B)(i).
---------------------------------------------------------------------------

    Proposed Rule on risk management exemption grandfather provisions: 
The Commission proposed in Sec.  150.2(f) and Sec.  150.3(f) to 
grandfather previously granted risk-management exemptions, as applied 
to pre-existing positions.\422\
---------------------------------------------------------------------------

    \422\ See December 2013 Position Limits Proposal, 78 FR at 
75734-5 and 75739-41.
---------------------------------------------------------------------------

    Comments Received: Commenters requested that the Commission extend 
the grandfather relief to permit pre-existing risk management positions 
to be increased after the effective date of a limit.\423\ Commenters 
also requested that the Commission permit the risk associated with a 
pre-existing position to be offset by a futures position in a deferred 
contract month, after the liquidation of an offsetting position in a 
nearby futures contract month.\424\
---------------------------------------------------------------------------

    \423\ See, e.g., CL-AMG-59709 at 2, 18.
    \424\ See, e.g., id. at 18-19.
---------------------------------------------------------------------------

    Some commenters urged the Commission not to deny risk-management 
exemptions for financial intermediaries who utilize referenced 
contracts to offset the risks arising from the provision of diversified 
commodity-based returns to the intermediaries' clients.\425\
---------------------------------------------------------------------------

    \425\ CL-FIA-59595 at 5,34-35; CL-AMG-59709 at 2, 12-15; and CL-
CME-59718 at 67-69.
---------------------------------------------------------------------------

    In contrast, other commenters noted that the proposed rules 
``properly refrain'' from providing a general exemption to financial 
firms seeking to hedge their financial risks from the sale of 
commodity-related instruments such as index swaps, ETFs, and ETNs 
because such instruments are ``inherently speculative'' and may 
overwhelm the price discovery function of the derivative market.\426\ 
Another commenter noted, because commodity index contracts are 
speculative, the Commission should not provide a regulatory exemption 
for such contracts.\427\
---------------------------------------------------------------------------

    \426\ CL-Sen. Levin-59637 at 8; and CL-Better Markets-60325 at 
2.
    \427\ CL-CMOC-59720 at 4-5.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal clarifies and expands the 
relief in Sec.  150.3(f) (previously granted exemptions) by: (1) 
Clarifying that such previously granted exemptions may apply to pre-
existing financial instruments that are within the scope of existing 
Sec.  1.47 exemptions, rather than only to pre-existing swaps; and (2) 
recognizing exchange-granted non-enumerated exemptions in non-legacy 
commodity derivatives outside of the spot month (consistent with the 
Commission's recognition of risk management exemptions outside of the 
spot month), and provided such exemptions are granted prior to the 
compliance date of the final rule, once adopted, and apply only to pre-
existing financial instruments as of the effective date of that final 
rule. These two changes are intended to reduce the potential for market 
disruption by forced liquidations, since a market intermediary would 
continue to be able to offset risks of pre-effective-date financial 
instruments, pursuant to previously-granted federal or exchange risk 
management exemptions.
    The Reproposal clarifies that the Commission will continue to 
recognize the offset of the risk of a pre-existing financial instrument 
as bona fide using a derivative position, including a deferred 
derivative contract month entered after the effective date of a final 
rule, provided a nearby derivative contract month is liquidated. 
However, under the Reproposal, such relief will not be extended to an 
increase in positions after the effective date of a limit, because that 
appears contrary to Congressional intent to narrow the definition of a 
bona fide hedging position, as discussed above.
ii. Economically Appropriate Test
    Commission proposal: The economically appropriate test is discussed 
in the 2013 Position Limits Proposal at 75709-10. The proposed 
economically appropriate test mirrors the statutory test, which, in 
turn, mirrors the test in current Sec.  1.3(z)(1).
    Comments received: Several commenters requested that the Commission 
broadly interpret the phrase ``economically appropriate'' to include 
more than just price risk, stating that there are other types of risk 
that are economically appropriate to address in the management of a 
commercial enterprise including operational risk, liquidity risk, 
credit risk, locational risk, and seasonal risk.\428\
---------------------------------------------------------------------------

    \428\ See, e.g., CL-NCGA-NGSA-60919 at 4, CL-EEI-EPSA-60925 at 
14, CL-API-60939 at 2, CL-CMC-60950 at 4-5, CL-NCFC-60930 at 2, CL-
ADM-60934 at 2-6, CL-FIA-60937 at 5 and 20, CL-NGFA-60941 at 4, and 
CL-Associations-60972 at 2.
---------------------------------------------------------------------------

    Commenters suggested that if the Commission objected to expanding 
its interpretation of ``economically appropriate'' risks, then the 
Commission should allow the exchanges to utilize discretion in their 
interpretations of the economically appropriate test.\429\ Another 
commenter believed that the Commission should provide ``greater 
flexibility'' in the various bona fide hedging tests, because hedging 
that reduces all the various types of risk should be deemed 
``economically appropriate.'' \430\ Commenters suggested that a broader 
view of the types of risks considered to be ``economically 
appropriate'' should not be perceived as being at odds with the 
Commission's view of ``price risk'' because all of these risks can 
inform and determine price, noting that firms evaluate different risks 
and determine a price impact based on a combination of their likelihood 
of occurrence and the price impact in the event of occurrence.\431\
---------------------------------------------------------------------------

    \429\ See, e.g., CL-CMC-60950 at 4-5, and CL-Olam-59946 at 2-4.
    \430\ CL-ICE-60929 at 10.
    \431\ See, e.g., CL-ADM-60934 at 2-6, and CL-API-60939 at 2.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal does not broaden the 
interpretation of the phrase ``economically appropriate.'' The 
Commission notes that it has provided interpretations and guidance over 
the years as to the meaning of ``economically appropriate.'' \432\ The 
Commission reiterates its view that, to satisfy the economically 
appropriate test and the change in value requirement of CEA section 
4a(c)(2)(A)(iii), the purpose of a bona fide hedging position must be 
to offset price risks incidental to a commercial enterprise's cash 
operations.\433\
---------------------------------------------------------------------------

    \432\ See December 2013 Position Limits Proposal, 78 FR at 
75709-10.
    \433\ Id. at 75710.
---------------------------------------------------------------------------

    The Commission notes that an exchange is permitted to recognize 
non-enumerated bona fide hedging positions under the process of Sec.  
150.9, discussed below, subject to assessment of the particular facts 
and circumstances, where price risk arises from other types of risk. 
The Reproposal does not, however, allow the exchanges to utilize 
unbounded discretion in interpreting ``economically appropriate'' in 
such recognitions. The Commission believes that such a broad delegation 
is not authorized by the CEA and, in the Commission's view, would be 
contrary to the reasonably certain statutory standard of the 
economically appropriate test. Further, as explained in the discussion 
of Sec.  150.9, exchange determinations will be subject to the 
Commission's de novo review.
    Comments on gross vs. net hedging: A number of commenters requested 
that the Commission recognize as bona fide both ``gross hedging'' and 
``net hedging,'' without regard to overall risk.\434\ Commenters 
generally requested, as ``gross hedging,'' that an enterprise should be 
permitted the flexibility to use either a long or short derivative to 
offset the risk of any cash position, identified at the discretion of

[[Page 96747]]

the commercial enterprise, irrespective of the commercial enterprise's 
net cash market position.\435\ For example, a commenter contended that 
a commercial enterprise should be able to hedge fixed-price purchase 
contracts (e.g., with a short futures position), without regard to the 
enterprise's fixed-price sales contracts, even if such a short 
derivative position may increase the enterprise's risk.\436\ One 
commenter stated that the ``new proposed interpretation'' of the 
``economically appropriate'' test requires a commercial enterprise to 
include, and consider for purposes of bona fide hedging, portions of 
its portfolio it would not otherwise consider in managing risk.\437\ 
Another commenter did not agree that market participants should be 
required to calculate risk on a consolidated basis, because this 
approach would require commercial entities to build out new systems. As 
an alternative, that commenter requests the Commission recognize 
current risk management tools.\438\
---------------------------------------------------------------------------

    \434\ See, e.g., CL-MGEX-60936 at 11, CL-CMC-60950 at 6, CL-
Associations-60972 at 2.
    \435\ See, e.g., CL-Olam-59658 at 4-6.
    \436\ CL-FIA-59595 at 20-21.
    \437\ CL-Working Group-60947 at 15.
    \438\ CL-CMC-60950 at 5.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal retains the Commission's 
interpretation, as proposed, of economically appropriate gross hedging: 
that in circumstances where net hedging does not measure all risk 
exposures, an enterprise may appropriately enter into, for example, a 
calendar month spread position as a gross hedge. A number of comments 
misconstrued the Commission's historical interpretation of gross and 
net hedging. The Commission has not recognized selective identification 
of cash positions to justify a position as bona fide; rather, the 
Commission has permitted a regular practice of excluding certain 
commodities, products, or by-products, in determining an enterprise's 
risk position.\439\ As proposed, the Reproposal requires such excluded 
commodities to be de minimis or difficult to measure, because a market 
participant should not be permitted to ignore material cash market 
positions and enter into derivative positions that increase risk while 
avoiding a position limit restriction; rather, such a market 
participant's speculative activity must remain below the level of the 
speculative position limit.
---------------------------------------------------------------------------

    \439\ See, e.g., instructions to Form 204.
---------------------------------------------------------------------------

    Note, however, under a partial reading of a preamble to a 1977 
proposal, the Commission has appeared to recognize gross hedging, 
without regard to net risk, as bona fide; the Commission noted in 1977 
that: ``The previous statutory definition of bona fide hedging 
transactions or positions contained in section 4a of the Act before 
amendment by the CFTC Act and the present definition permit persons to 
classify as hedging any purchase or sale for future delivery which is 
offset by their gross cash position irrespective of their net cash 
position.'' \440\ However, under a full reading of that 1977 proposal, 
the Commission made clear that gross hedging was appropriate in 
circumstances where ``net cash positions do not necessarily measure 
total risk exposure due to differences in the timing of cash 
commitments, the location of stocks, and differences in grades or types 
of the cash commodity.'' \441\ Thus, the 1977 proposal noted the 
Commission ``does not intend at this time to alter the provisions of 
the present definition with respect to the hedging of gross cash 
position.'' \442\ At the time of the 1977 proposal, the ``present 
definition'' had been promulgated in 1975 by the Administrator of the 
Commodity Exchange Authority based on the statutory definition; and the 
Administrator had interpreted the statutory definition to recognize 
gross hedging as bona fide in the context of a merchant who ``may hedge 
his fixed-price purchase commitments by selling futures and at the same 
time hedge his fixed-price sale commitments by buying futures,'' rather 
than hedging only his net position.\443\
---------------------------------------------------------------------------

    \440\ 42FR 14832 at 14834 (Mar. 16, 1977).
    \441\ Id.
    \442\ Id.
    \443\ See, Letter from Roger R. Kauffman, Adm'r, Commodity 
Exchange Authority, to Reid Bondurant, Cotton Exchange (Feb. 13, 
1959) (emphasis added), cited in CL-Olam-59658 at 5.
---------------------------------------------------------------------------

    Comments on specific, identifiable risk: Commenters requested the 
Commission consider as economically appropriate any derivative position 
that a business can reasonably demonstrate reduces or mitigates one or 
more specific, identifiable risks related to individual or aggregated 
positions or transactions, based on its own business judgment and risk 
management policies, whether risk is managed enterprise-wide or by 
legal entity, line of business, or profit center.\444\ One commenter 
disagreed with what it called a ``one-size-fits-all'' risk management 
paradigm that requires market participants to calculate risk on a 
consolidated basis because this approach would require commercial 
entities to build out new systems in order to manage risk this way. The 
commenter requests that the Commission instead recognize that current 
risk management tools are used effectively for positions that are below 
current limits and those tools remain effective above position limit 
levels as well.\445\
---------------------------------------------------------------------------

    \444\ See, e.g., CL-API-59694 at 4, CL-IECAssn-59679 at 10-11, 
CL-APGA-59722 at 9-10, CL-NCFC-59942 at 5, CL-EEI-EPSA-59602 at 15, 
and CL-EEI-Sup-60386 at 7.
    \445\ CL-CMC-60950 at 5.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal declines to assess the bona 
fides of a position based solely on whether a commercial enterprise can 
identify any particular cash position within an aggregated person, the 
risks of which such derivative position offsets. The Commission 
believes that such an approach would run counter to the aggregation 
rules in Sec.  150.4 and would permit an enterprise to cherry pick cash 
market exposures to justify exceeding position limits, with either a 
long or short derivative position, even though such derivative position 
increases the enterprise's risk.
    The Commission views a derivative position that increases an 
enterprise's risk as contrary to the plain language of CEA section 
4a(c) and the Commission's bona fide hedging definition, which requires 
that a bona fide hedging position ``is economically appropriate to the 
reduction of risks in the conduct and management of a commercial 
enterprise.'' \446\
---------------------------------------------------------------------------

    \446\ CEA section 4a(c)(2)(A)(ii).
---------------------------------------------------------------------------

    If a transaction that increases a commercial enterprise's overall 
risk should be considered a bona fide hedging position, this would 
result in position limits not applying to certain positions that should 
be considered speculative. For example, assume an enterprise has 
entered into only two cash forward transactions and has no inventory. 
The first cash forward transaction is a purchase contract (for a 
particular commodity for delivery at a particular later date). The 
second cash forward transaction is a sales contract (for the same 
commodity for delivery on the same date as the purchase contract). 
Under the terms of the cash forward contracts, the enterprise may take 
delivery on the purchase contract and re-deliver the commodity on the 
sales contract. Such an enterprise does not have a net cash market 
position that exposes it to price risk, because it has both purchased 
and sold the same commodity for delivery on the same date (such as cash 
forward contracts for the same cargo of Brent crude oil). The 
enterprise could establish a short derivative position that would 
offset the risk of the purchase contract; however, that would increase 
the enterprise's price risk. Alternatively, the enterprise

[[Page 96748]]

could establish a long derivative position that would offset the risk 
of the sales contract; however, that would increase the enterprise's 
price risk. If price risk reduction at the level of the aggregate 
person is not a requirement of a bona fide hedging position, such an 
enterprise could establish either a long or short derivative position, 
at its election, and claim an exemption from position limits for either 
derivative position, ostensibly as a bona fide hedging position. If 
either such position could be recognized as bona fide, position limits 
would simply not apply to such an enterprise's derivative position, 
even though the enterprise had no price risk exposure to the commodity 
prior to establishing such derivative position and created price risk 
exposure to the commodity by establishing the derivative position. 
Based on the Commission's experience and expertise, it believes that 
such a result (entering either a long or short derivative position, 
whichever the market participant elects) simply cannot be recognized as 
a legitimate risk reduction that should be exempt from position limits; 
rather, such a position should be considered speculative for purposes 
of position limits.
    The Commission notes that a commercial enterprise that wishes to 
separately manage its operations, in separate legal entities, may, 
under the aggregation requirements of Sec.  150.4, establish 
appropriate firewalls and file a notice for an aggregation exemption, 
because separate legal entities with appropriate firewalls are treated 
as separate persons for purposes of position limits. The Commission 
explained that an aggregation exemption was appropriate in 
circumstances where the risk of coordinated activity is mitigated by 
firewalls.\447\
---------------------------------------------------------------------------

    \447\ See discussion under section II.B.3 (Criteria for 
Aggregation Relief in Rule 150.4(b)(2)(i)) of the 2016 Final 
Aggregation Rule.
---------------------------------------------------------------------------

    Comments on processing hedge: A commenter requested the Commission 
recognize, as bona fide, a long or short derivative position that 
offsets either inputs or outputs in a processing operation, based on 
the business judgment of the commercial enterprise that it might not be 
an appropriate time to hedge both inputs and outputs, and requested the 
Commission withdraw the processing hedge example on pages 75836-7 of 
the 2013 Position Limits Proposal (proposed example 5 in Appendix C to 
part 150).\448\
---------------------------------------------------------------------------

    \448\ CL-Cargill-59638 at 2-4.
---------------------------------------------------------------------------

    Commission Reproposal: For the reasons discussed above regarding 
gross hedging and specific, identifiable risks, the Reproposal does not 
recognize as a bona fide hedging position a derivative position that 
offsets either inputs or outputs in a processing operation, absent 
additional facts and circumstances. The Commission reiterates its view 
that, as explained in the Commission's 2013 Position Limits Proposal, 
by way of example, processing by a soybean crush operation or a fuel 
blending operation may add relatively little value to the price of the 
input commodity. In such circumstances, it would be economically 
appropriate for the processor or blender to offset the price risks of 
both the unfilled anticipated requirement for the input commodity and 
the unsold anticipated production; such a hedge would, for example, 
fully lock in the value of soybean crush processing.\449\ However, 
under such circumstances, merely entering an outright derivative 
position (i.e., either a long position or a short position, at the 
processor's election) appears to be risk increasing, since the price 
risk of such outright position appears greater than, and not offsetting 
of, the price risk of anticipated processing and, thus, such outright 
position would not be economically appropriate to the reduction of 
risks.
---------------------------------------------------------------------------

    \449\ December 2013 Position Limits Proposal, 78 FR at 75709.
---------------------------------------------------------------------------

    Comments on economically appropriate anticipatory hedges: 
Commenters requested the Commission recognize derivative positions as 
economically appropriate to the reduction of certain anticipatory 
risks, such as irrevocable bids or offers.\450\
---------------------------------------------------------------------------

    \450\ See, e.g., CL-Cargill-59638 at 2-4.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has a long history of 
providing for the recognition, in Sec.  1.3(z)(2), as enumerated bona 
fide hedging positions, of anticipatory hedges for unfilled anticipated 
requirements and unsold anticipated production, under the process of 
Sec.  1.48.\451\ The Reproposal continues to enumerate those two 
anticipatory hedges, along with two new anticipatory hedges for 
anticipated royalties and contracts for services, as discussed below.
---------------------------------------------------------------------------

    \451\ 17 CFR 1.3(z)(2) and 1.48 (2010).
---------------------------------------------------------------------------

    The Commission did not propose an enumerated exemption for binding, 
irrevocable bids or offers as the Commission believes that an analysis 
of the facts and circumstances would be necessary prior to recognizing 
such an exemption. Consequently, the Reproposal does not provide for 
such an enumerated exemption. However, the Commission withdraws the 
view that a binding, irrevocable bid or offer fails to meet the 
economically appropriate test.\452\ Rather, the Commission will permit 
exchanges, under Sec.  150.9, to make a facts-and-circumstances 
determination as to whether to recognize such and other anticipatory 
hedges as non-enumerated bona fide hedges, consistent with the 
Commission's recognition ``that there can be a gradation of 
probabilities that an anticipated transaction will occur.'' \453\
---------------------------------------------------------------------------

    \452\ December 2013 Position Limits Proposal, 78 FR at 75720.
    \453\ Id. at 75719.
---------------------------------------------------------------------------

iii. Change in Value Requirement
    Commission proposal: To satisfy the change in value requirement, 
the hedging position must arise from the potential change in the value 
of: (I) Assets that a person owns, produces, manufactures, processes, 
or merchandises or anticipates owning, producing, manufacturing, 
processing, or merchandising; (II) liabilities that a person owes or 
anticipates incurring; or (III) services that a person provides, 
purchases, or anticipates providing or purchasing.\454\ The proposed 
definition incorporated the potential change in value requirement in 
current Sec.  1.3(z)(1).\455\ This provision largely mirrors the 
provision of CEA section 4a(c)(2)(A)(iii).\456\
---------------------------------------------------------------------------

    \454\ Id. at 75710.
    \455\ 17 CFR 1.3(z) (2010).
    \456\ As noted in the December 2013 Position Limits Proposal, 78 
FR at 75710, CEA section 4a(c)(2)(A)(iii)(II) uses the phrase 
``liabilities that a person owns or anticipates incurring.'' The 
Commission interprets the word ``owns'' to be a typographical error, 
and interprets the word ``owns'' to be ``owes.'' A person may owe on 
a liability, and may anticipate incurring a liability. If a person 
``owns'' a liability, such as a debt instrument issued by another, 
then such person owns an asset. Because assets are included in CEA 
section 4a(c)(2)(A)(iii)(I), the Commission interprets ``owns'' to 
be ``owes.''
---------------------------------------------------------------------------

    Comments on change in value: One commenter urged a more narrow 
definition of bona fide hedging that restricts exemptions to 
``commercial entities that deal exclusively in the production, 
processing, refining, storage, transportation, wholesale or retail 
distribution, or consumption of physical commodities.'' \457\ However, 
numerous commenters urged the Commission to enumerate new exemptions 
consistent with the change in value requirement, such as for 
merchandising, as discussed below.
---------------------------------------------------------------------------

    \457\ CL-PMAA-NEFI-60952 at 2.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal retains the change in value 
requirement as proposed, which mirrors CEA section 4a(c)(2)(A)(iii). 
Rather than further restrict the types of commercial entities who may 
avail themselves of a

[[Page 96749]]

bona fide hedging exemption under the change in value requirement, the 
Commission notes that the reproposed definition also reflects the 
statutory requirement under the temporary substitute test, that the 
hedging position be a substitute for a position taken or to be taken in 
a physical marketing channel, either by the market participant or the 
market participant's pass-through swap counterparty.
    Comments on anticipatory merchandising or storage: Numerous 
commenters asserted the Commission should recognize anticipatory 
merchandising as a bona fide hedge, as included in CEA section 
4a(c)(A)(iii), such as (1) a merchant desiring to lock in the price 
differential between an unfixed price forward commitment and an 
anticipated offsetting unfixed price forward commitment, where there is 
a reasonable basis to infer that an offsetting transaction was likely 
to occur (such as in anticipation of shipping), (2) a bid or offer, 
where there is a reasonably anticipated risk that such bid or offer 
will be accepted, or (3) an anticipated purchase and/or anticipated 
storage of a commodity, prior to anticipated merchandising (or 
usage).\458\
---------------------------------------------------------------------------

    \458\ See, e.g., CL-FIA-59595 at 30-31, CL-FIA-60303 at 6, CL-
EEI-EPSA-59602 at 17-18, CL-EEI-59945 at 6, CL-CMC-60950 at 6, CL-
CMC-60391 at 4-5, CL-CMC-60318 at 5, CL-CMC-59634 at 3, 20-22, CL-
Cargill-59638 at 2-4, CL-ADM-59640 at 2-3, CL-Olam-59946 at 4, CL-BG 
Group-59656 at 10-11, CL-ASCA-59667 at 2, CL-NGSA-60379 at 5, CL-
NGSA-59674 at 2, 18-24, CL-Working Group-60383 at 15, CL-Working 
Group-59937 at 5-6, 10-12, CL-Working Group-59656 at 16-18, 21-23, 
26, CL-API-59694 at 5-6, CL-MSCGI-59708 at 2-3, 18-20, CL-CME-59718 
at 56-57, 59, CL-Armajaro-59729 at 1, CL-AFBF-59730 at 2, CL-NCFC-
59942 at 2-4, CL-ICE-60310 at 4, CL-ICE-60387 at 9, CL-ISDA/SIFMA-
59611 at 37-38, CL-COPE-59662 at 15-16, and CL-GSC-59703 at 3-4.
---------------------------------------------------------------------------

    Commenters recommended the Commission recognize unfilled storage 
capacity as the basis of a bona fide hedge of, either (1) anticipated 
rents (e.g., a type of anticipated asset or liability), (2) anticipated 
merchandising, or (3) anticipated purchase and storage prior to 
usage.\459\ By way of example, one commenter contended anticipated rent 
on a storage asset is like an option and the appropriate hedge position 
should be dynamically adjusted.\460\ Also by way of example, another 
commenter suggested enumerated hedges should include (1) offsetting 
long and short positions in commodity derivative contracts as hedges of 
storage or transportation of the commodity underlying such contracts; 
and (2) positions that hedge the value of assets owned, or anticipated 
to be owned, used to produce, process, store or transport the commodity 
underlying the derivative.\461\
---------------------------------------------------------------------------

    \459\ See, e.g., CL-Cargill-59638 at 2-4, CL-CME-59718 at 57-58, 
CL-NEM-59586 at 4, CL-FIA-59595 32-33, CL-ISDA/SIFMA-59611 at 4, CL-
CMC-59634 at 5, CL-LDC-59643 at 2, CL-BG Group-59656 at 10, CL-COPE-
59950 at 5, CL-COPE-59662 at 14-15, CL--Working Group-59693 at 23-
26, CL-GSC-59703 at 2-3, CL-AFBF-59730 at 2, CL-SEMP-59926 at 6-7, 
CL-EDF-60398 at 8-9, CL-EDF-59961 at 2-3, CL-Andersons-60256 at 1-3, 
and CL-SEMP-60384 at 4-5.
    \460\ CL-ISDA/SIFMA-59611, Annex B at 7.
    \461\ CL-EEI-EPSA-60925 at 13.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission notes that an exchange, under 
reproposed Sec.  150.9, as discussed below, is permitted to recognize 
anticipated merchandising or anticipated purchase and storage, as 
potential non-enumerated bona fide hedging positions, subject to 
assessment of the particular facts and circumstances, including such 
information as the market participant's activities (taken or to be 
taken) in the physical marketing channel and arrangements for storage 
facilities. While the Commission previously discussed its doubt that 
storage hedges generally will meet the economically appropriate test, 
because the value fluctuations in a calendar month spread in a 
commodity derivative contract will likely have at best a low 
correlation with value fluctuations in expected returns (e.g., rents) 
on unfilled storage capacity,\462\ the Commission now withdraws that 
discussion of doubt and, as reproposed, would review exchange-granted 
non-enumerated bona fide hedging exemptions for storage with an open 
mind.
---------------------------------------------------------------------------

    \462\ December 2013 Position Limits Proposal, 78 FR at 75718.
---------------------------------------------------------------------------

    The Commission does not express a view as this time on one 
commenter's assertion that the anticipated rent on a storage asset is 
like an option; the commenter did not provide data regarding the 
relationship between calendar spreads and the ``profitability of 
filling storage.'' The Commission notes that, under the Reproposal, an 
exchange could evaluate the particulars of such a situation in an 
application for a non-enumerated hedging position.
    Similarly, as reproposed, an exchange could evaluate the 
particulars of other situations, such as a commenter's example of 
storage or transportation hedges. The Commission notes that it is not 
clear from the comments how the value fluctuations of calendar month or 
location differentials are related to the fluctuations in value of 
storage or transportation. Regarding a commenter's examples of assets 
owned or anticipated to be owned, it is not clear how the value 
fluctuations of whatever would be the relevant hedging position (e.g., 
long, short, or calendar month spread) are related to the fluctuations 
in value of whatever would be the particular assets (e.g., tractors, 
combines, silos, semi-trucks, rail cars, pipelines) to be used to 
produce, process, store or transport the commodity underlying the 
derivative.
    Comments on unfixed price commitments: Commenters recommended the 
Commission recognize, as a bona fide hedge, the fixing of the price of 
an unfixed price commitment, for example, to reduce the merchant's 
operational risk and potentially to acquire a commodity through the 
delivery process on a physical-delivery futures contract.\463\ Another 
commenter provided an example of a preference to shift unfixed-price 
exposure on cash commitments from daily index prices to the first-of-
month price under the NYMEX Henry Hub Natural Gas core referenced 
futures contract.\464\ A commenter suggested that the interpretation of 
a fixed price contract should include ``basis priced contracts which 
are purchases or sales with the basis value fixed between the buyer and 
the seller against a prevailing futures'' contract; the commenter noted 
such basis risk could be hedged with a calendar month spread to lock in 
their purchase and sale margins.\465\ Another commenter requested the 
Commission explicitly recognize index price transactions as appropriate 
for a bona fide hedging exemption, citing concerns that the price of an 
unfixed price forward sales contract may fall below the cost of 
production.\466\
---------------------------------------------------------------------------

    \463\ See, e.g., CL-Olam-59946 at 4, and CL-NCFC -59942 at 2-4.
    \464\ CL-NCGA-NGSA-60919 at 4-5.
    \465\ CL-NGFA-60941 at 4.
    \466\ CL-NCGA-NGSA-60919 at 5.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission affirms its belief that a 
reduction in a price risk is required under the economically 
appropriate test of CEA section 4a(c)(2)(A)(ii); consistent with the 
economically appropriate test, a potential change in value (i.e., a 
price risk) is required under CEA section 4a(c)(2)(A)(iii). In both the 
reproposed and proposed definitions of bona fide hedging position, the 
incidental test would require a reduction in price risk. Although the 
Reproposal deletes the incidental test from the first paragraph of the 
bona fide hedging position definition (as discussed above), the 
Commission notes that it interprets risk in the economically 
appropriate test as price risk, and does not interpret risk to include 
operational risk. Interpreting risk to include operational risk would 
broaden the scope of a bona fide hedging position beyond the 
Commission's historical interpretation

[[Page 96750]]

and may have adverse impacts that are inconsistent with the policy 
objectives of limits in CEA section 4a(a)(3)(B).
    The Commission has consistently required a bona fide hedging 
position to be a position that is shown to reduce price risk in the 
conduct and management of a commercial enterprise.\467\ By way of 
background, the Commission notes, in promulgating the definition of 
bona fide hedging position in Sec.  1.3(z), it explained that a bona 
fide hedging position ``must be economically appropriate to risk 
reduction, such risks must arise from operation of a commercial 
enterprise, and the price fluctuations of the futures contracts used in 
the transaction must be substantially related to fluctuations of the 
cash market value of the assets, liabilities or services being 
hedged.'' \468\ As noted above, the Dodd-Frank Act added CEA section 
4a(c)(2), which copied the economically appropriate test from the 
Commission's definition in Sec.  1.3(z)(1). Thus, the Commission 
believes it is reasonable to interpret that statutory standard in the 
context of the Commission's historical interpretation of Sec.  1.3(z).
---------------------------------------------------------------------------

    \467\ The Commission distinguishes operational risk, which may 
arise from a potential failure of a counterparty to a cash market 
forward transaction, from price risks in the conduct and management 
of a commercial enterprise.
    \468\ 42 FR 14832 at 14833 (March 16, 1977) (proposed 
definition). The Commission also adopted the incidental test 
(requiring that the ``purpose is to offset price risks incidental to 
commercial cash or spot operations''). 42 FR 42748 at 42751 (Aug. 
24, 1977) (final definition). Previously, the Secretary of 
Agriculture promulgated a definition of bona fide hedging position 
that required a purpose ``to offset price risks incidental to 
commercial cash or spot operations.'' 40 FR 11560 at 11561 (Mar. 12, 
1975).
---------------------------------------------------------------------------

    While the Commission has enumerated a calendar month spread as a 
bona fide hedge of offsetting unfixed-price cash commodity sales and 
purchases, the Reproposal will permit an exchange, under reproposed 
Sec.  150.9, to conduct a facts-and-circumstances, case-by-case review 
to determine whether a calendar month spread is appropriately 
recognized as a bona fide hedging position for only a cash commodity 
purchase or sales contract. For example, assume a merchant enters into 
an unfixed-price sales contract (e.g., priced at a fixed differential 
to a deferred month futures contract), and immediately enters into a 
calendar month spread to reduce the risk of the fixed basis moving 
adversely. It may not be economically appropriate to recognize as bona 
fide a long futures position in the spot (or nearby) month and a short 
futures position in a deferred calendar month matching the merchant's 
cash delivery obligation, in the event the spot (or nearby) month price 
is higher than the deferred contract month price (referred to as 
backwardation, and characteristic of a spot cash market with supply 
shortages), because such a calendar month futures spread would lock in 
a loss and may be indicative of an attempt to manipulate the spot (or 
nearby) futures price.
    Regarding the risk of an unfixed price forward sales contract 
falling below the cost of production, the Reproposal enumerates a bona 
fide hedging exemption for unsold anticipated production; the 
Commission clarifies, as discussed below, that such an enumerated hedge 
is available regardless of whether production has been sold forward at 
an unfixed (that is, index) price.
    Comments on cash and carry: Commenters requested the Commission 
enumerate, as a bona fide hedging position, a ``cash and carry'' trade, 
where a market participant enters a nearby long futures position and a 
deferred short futures position, with the intention to take delivery 
and carry the commodity for re-delivery.\469\
---------------------------------------------------------------------------

    \469\ See, e.g., CL-Armajaro-59729 at 2.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal does not propose to enumerate 
a cash and carry trade as a bona fide hedging position. A cash and 
carry trade appears to fail the temporary substitute test, since such 
market participant is not using the derivative contract as a substitute 
for a position taken or to be taken in the physical marketing channel. 
The long futures position in the cash and carry trade is in lieu of a 
purchase in the cash market. In the 2016 Supplemental Proposal, the 
Commission asked whether, and subject to what conditions (e.g., 
potential facilitation of liquidity for a bona fide hedger of 
inventory), a cash and carry position might be recognized by an 
exchange as a spread exemption under Sec.  150.10, subject to the 
Commission's de novo review.\470\ This issue is discussed under Sec.  
150.10, regarding exchange recognition of spread exemptions.
---------------------------------------------------------------------------

    \470\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38479.
---------------------------------------------------------------------------

iv. Pass-Through Swap Offsets and Offsets of Hedging Swaps
    Commission proposal: The Commission proposed to recognize as bona 
fide a commodity derivative contract that reduces the risk of a 
position resulting from a swap executed opposite a counterparty for 
which the position at the time of the transaction would qualify as a 
bona fide hedging position.\471\ This proposal mirrors the requirements 
in CEA section 4a(c)(B)(i). The proposal also clarified that the swap 
itself is a bona fide hedging position to the extent it is offset. 
However, the Commission proposed that it would not recognize as bona 
fide hedges an offset in physical-delivery contracts during the shorter 
of the last five days of trading or the time period for the spot month 
in such physical-delivery commodity derivative contract (the ``five-
day'' rule, discussed further below).
---------------------------------------------------------------------------

    \471\ December 2013 Position Limits Proposal, 78 FR at 75710.
---------------------------------------------------------------------------

    Comments received: As noted above, commenters recommended that the 
Commission's bona fide hedging definition should reflect the standards 
in CEA section 4a(c). One commenter suggested that the Commission 
broaden the pass-through swap offset provisions to accommodate 
secondary pass-through transactions among affiliates within a corporate 
organization to make ``the most efficient and effective use of their 
existing corporate structures.'' \472\
---------------------------------------------------------------------------

    \472\ CL-NCGA-NGSA-60919 at 8-9.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission agrees that the bona fide 
hedging definition, in general, and the pass-through swap provision, in 
particular, should more closely reflect the statutory standards in CEA 
section 4a(c). Under the proposed definition, a market participant who 
reduced the risk of a swap, where such swap was a bona fide hedging 
position for that market participant, would not have received 
recognition for the swap offset as a bona fide hedging position, as 
this provision in CEA section 4a(c)(2)(B)(ii) was not mirrored in the 
proposed definition.\473\ To adhere more closely to the statutory 
standards, the Reproposal recognizes such offset as a bona fide hedging 
position. Consistent with the proposal for offset of a pass-through 
swap, the Reproposal imposes a five-day rule restriction on the offset 
in a physical-delivery contract of a swap used as a bona fide hedge; 
however, as reproposed, an exchange listing a physical-delivery 
contract may recognize, on a case-by-case basis, such offset as a non-
enumerated bona fide hedging position pursuant to the process in 
reproposed Sec.  150.9.
---------------------------------------------------------------------------

    \473\ For example, assume a market participant entered a swap as 
a bona fide hedging position and, subsequently, offset (that is, 
lifted) that hedge using a futures contract. The Commission's 
original proposal would not have recognized the lifting of the hedge 
as a bona fide hedging transaction, although the statute does.
---------------------------------------------------------------------------

    The Reproposal retains and clarifies in subparagraph (ii)(A) that 
the bona fides of a pass-through swap may be

[[Page 96751]]

determined at the time of the transaction by the intermediary. The 
clarification is intended to reduce the burden on such intermediary of 
otherwise needing to confirm the continued bona fides of its 
counterparty over the life of the pass-through swap.
    In addition, the Reproposal retains, as proposed, application of 
the five-day rule to pass-through swap offsets in a physical-delivery 
contract. However, the Commission notes that under the Reproposal, an 
exchange listing a physical-delivery contract may recognize, on a case-
by-case basis, a pass-through swap offset (in addition to the offset of 
a swap used as a bona fide hedge), during the last five days of trading 
in a spot month, as a non-enumerated bona fide hedge pursuant to the 
process in reproposed Sec.  150.9.
    Further, the Reproposal retains the recognition of a pass-through 
swap itself that is offset, not just the offsetting position (and, 
thus, permitting the intermediary to exclude such pass-through swap 
from position limits, in addition to excluding the offsetting 
position).
    Regarding the request to broaden the pass-through swap offset 
provisions to accommodate secondary pass-through transactions among 
affiliates, the Commission declines in this Reproposal to broaden the 
pass-through swap offset exemption beyond the provisions in CEA section 
4a(c)(2)(B)(i). However, the Commission notes that a group of 
affiliates under common ownership is required to aggregate positions 
under the Commission's requirements in Sec.  150.4, absent an 
applicable aggregation exemption. In the circumstance of aggregation of 
positions, recognition of a secondary pass-through swap transaction 
would not be necessary among such an aggregated group, because the 
group is treated as one person for purposes of position limits.
v. Additional Requirements for Enumeration or Other Recognition
    Commission proposal: In 2013, the Commission proposed in 
subparagraph (2)(i)(D) of the definition of a bona fide hedging 
position, that, in addition to satisfying the general definition of a 
bona fide hedging position, a position would not be recognized as bona 
fide unless it was enumerated in paragraph (3), (4), or (5)(discussed 
below), or recognized as a pass-through swap offset or pass-through 
swap.\474\ In 2016, in response to comments on the 2013 proposed 
definition, the Commission proposed, in subparagraph (2)(i)(D)(2) of 
the definition, to also recognize as bona fide any position that has 
been otherwise recognized as a non-enumerated bona fide hedging 
position by either a designated contract market or a swap execution 
facility, each in accordance with Sec.  150.9(a), or by the 
Commission.\475\
---------------------------------------------------------------------------

    \474\ December 2013 Position Limits Proposal, 78 FR at 75711.
    \475\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38505.
---------------------------------------------------------------------------

    Comments received: Commenters objected to the requirement for a 
position to be specifically enumerated in order to be recognized as 
bona fide, noting that the enumerated requirement is not supported by 
the legislative history of the Dodd-Frank Act, conflicts with 
longstanding Commission practice and precedent, and may be overly 
restrictive due to the limited set of specific enumerated hedges.\476\ 
Other commenters recommended that the Commission expand the list of 
enumerated bona fide hedge positions, to encompass all transactions 
that reduce risks in the conduct and management of a commercial 
enterprise, such as anticipatory merchandising hedges and other general 
examples.\477\
---------------------------------------------------------------------------

    \476\ See, e.g., CL-CME-59718 at 47-53, and CL-BG Group-59656 at 
9.
    \477\ See, e.g., CL-FIA-59595 at 32, CL-FIA-60303 at 6, CL-API-
60939 at 3, CL-AGA-60943 at 4, CL-CMC-60950 at 6-9, CL-EEI-EPSA-
60925 at 13, and CL-FIA-60937 at 5 and 21.
---------------------------------------------------------------------------

    Commission Reproposal: In response to comments, the Reproposal 
retains, as proposed in 2016, a proposed definition that recognizes as 
bona fide, in addition to enumerated positions, any position that has 
been otherwise recognized as a non-enumerated bona fide hedging 
position by either a designated contract market or a swap execution 
facility, each in accordance with reproposed Sec.  150.9(a), or by the 
Commission. These provisions for recognition of non-enumerated 
positions are included in re-designated subparagraph (2)(iii)(C) of the 
reproposed definition of a bona fide hedging position.
    The Commission notes that it is not possible to list all positions 
that would meet the general definition of a bona fide hedging position. 
However, the Commission observes that the commenters' many general 
examples, which they recommended be included in the list of enumerated 
bona fide hedging positions, generally did not provide sufficient 
context or facts and circumstances to permit the Commission to evaluate 
whether recognition as a non-enumerated bona fide hedging position 
would be warranted. Context would be supplied, for instance, by the 
provision of the particular market participant's historical activities 
in the physical marketing channel and such participant's estimate, in 
good faith, of its reasonably expected activities to be taken in the 
physical marketing channel.
    In a clarifying change, the Commission notes that the Reproposal 
has re-designated the provisions proposed in subparagraph (2)(i)(D), in 
new subparagraph 2(iii), regarding the additional requirements for 
recognition of a position in a physical commodity contract as a bona 
fide hedging position. Concurrent with this re-designation, the 
Commission notes the Reproposal re-organizes, also for clarity, the 
application of the five-day rule to pass-through swaps and hedging 
swaps in subparagraph (2)(iii)(B), as discussed above.\478\
---------------------------------------------------------------------------

    \478\ However, as noted above, as reproposed, an exchange 
listing a physical-delivery contract may recognize, on a case-by-
case basis, a pass-through swap offset, or the offset of a swap used 
as a bona fide hedge, during the last five days of trading in a spot 
month, as a non-enumerated bona fide hedge pursuant to the process 
in reproposed Sec.  150.9.
---------------------------------------------------------------------------

3. Enumerated Hedging Positions
a. Proposed Enumerated Hedges
    In paragraph (3) of the proposed definition of a bona fide hedging 
position, the Commission proposed four enumerated hedging positions: 
(i) Hedges of inventory and cash commodity purchase contracts; (ii) 
hedges of cash commodity sales contracts; (iii) hedges of unfilled 
anticipated requirements; and (iv) hedges by agents.\479\
---------------------------------------------------------------------------

    \479\ December 2013 Position Limits Proposal, 78 FR at 75713.
---------------------------------------------------------------------------

    Comments received: Numerous commenters objected to the provision in 
proposed subparagraph (3)(iii)(A) that would have limited recognition 
of a hedge for unfilled anticipated requirements to one year for 
agricultural commodities. For example, commenters noted a need to hedge 
unfilled anticipated requirements for sugar for a time period longer 
than twelve months.\480\ Similarly, other commenters noted there may be 
a need to offset risks arising from investments in processing capacity 
in agricultural commodities for a period in excess of twelve 
months.\481\
---------------------------------------------------------------------------

    \480\ See, e.g., Ex Parte No-869, notes of Feb. 25, 2015 ex 
parte meeting with The Hershey Company, The J.M. Smucker Co., Louis 
Dreyfus Commodities, Noble Americans Corp., et al.
    \481\ See, e.g., CL-NGFA-60941 at 8.
---------------------------------------------------------------------------

    Other commenters recommended the Commission (1) remove the 
restriction that unfilled anticipated requirement hedges by a utility 
be ``required or encouraged to hedge by its public utility commission'' 
because most public utility commissions do not require or encourage 
such hedging, (2) expand the reach beyond utilities, by including

[[Page 96752]]

entities designated as providers of last resort who serve the same role 
as utilities, and (3) clarify the meaning of unfilled anticipated 
requirements, consistent with CFTC Staff Letter No. 12-07.\482\
---------------------------------------------------------------------------

    \482\ See, e.g., CL-Working Group-59693 at 27-28, CL-EEI-EPSA-
55953 at 19. CFTC Staff Letter No. 12-07 notes that unfilled 
anticipated requirements may be recognized as the basis of a bona 
fide hedging position or transaction under Commission Regulation 
151.5(a)(2)(ii)(C) when a commercial enterprise has entered into 
long-term, unfixed-price supply or requirements contracts as the 
price risk of such ``unfilled'' anticipated requirements is not 
offset by an unfixed price forward contract as the price risk 
remains with the commercial, even though the commercial enterprise 
has contractually assured a supply of the commodity. Instead, the 
price risk continues until the forward contract's price is fixed; 
once the price is fixed on the supply contract, the commercial 
enterprise no longer has price risk and the derivative position, to 
the extent the position is above an applicable speculative position 
limit, must be liquidated in an orderly manner in accordance with 
sound commercial practices.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal retains the enumerated 
exemptions as proposed, with two amendments. First, the Commission 
agrees with the commenters' request to remove the twelve month 
constraint on hedging unfilled anticipated requirements for 
agricultural commodities, as that provision appears no longer to be a 
necessary prudential constraint. Second, the Commission agrees with the 
commenters' request to remove the condition that a utility be 
``required or encouraged to hedge by its public utility commission.'' 
Accordingly, the condition that a utility be ``required or encouraged 
to hedge by its public utility commission'' is omitted from the 
reproposed definition. The Commission notes that under the Reproposal, 
a market participant, who is not a utility, may request that an 
exchange consider recognizing a non-enumerated exemption, as it is not 
clear who would be appropriately identified as a ``provider of last 
resort'' and under what circumstance such person would reasonably 
estimate its unfilled requirements.
    Consistent with CFTC Staff Letter No. 12-07, the Commission affirms 
its belief that unfilled anticipated requirements are those anticipated 
inputs that are estimated in good faith and that have not been filled. 
Under the Reproposal, an anticipated requirement may be filled, for 
example, by fixed-price purchase commitments, holdings of commodity 
inventory by the market participant, or unsold anticipated production 
of the market participant. However, an unfixed-price purchase 
commitment does not fill an anticipated requirement, in that the market 
participant's price risk to the input has not been fixed.
b. Proposed Other Enumerated Hedges Subject to the Five-Day Rule
    In paragraph (4) of the proposed definition of a bona fide hedging 
position, the Commission proposed four other enumerated hedging 
positions: (i) Hedges of unsold anticipated production; (ii) hedges of 
offsetting unfixed-price cash commodity sales and purchases; (iii) 
hedges of anticipated royalties; and (iv) hedges of services.\483\ The 
Commission proposed to apply the five-day rule to all such positions.
---------------------------------------------------------------------------

    \483\ December 2013 Position Limits Proposal, 78 FR at 75714.
---------------------------------------------------------------------------

    Comments received on the five-day rule: Numerous commenters 
requested that the five-day rule be removed from the Commission's other 
enumerated bona fide hedging positions, as that condition is not 
included in CEA section 4a(c).
    Commission Reproposal on the five-day rule: The Commission is 
retaining the prudential condition of the five-day rule in the other 
enumerated hedging positions. The Commission has a long history of 
applying the five-day rule, in its legacy agricultural federal position 
limits, to hedges of unsold anticipated production and hedges of 
offsetting unfixed-price cash commodity sales and purchases. However, 
as discussed in relation to reproposed Sec.  150.9, the Commission will 
permit an exchange, in effect, to remove the five-day rule on a case-
by-case basis in physical-delivery contracts, as a non-enumerated bona 
fide hedging position, by applying the exchange's experience and 
expertise in protecting its own physical-delivery market.
    Comments on other enumerated exemptions: As noted above, commenters 
recommended removing the twelve-month limitation on agricultural 
production, as unnecessarily short in comparison to the expected life 
of investment in production facilities.\484\
---------------------------------------------------------------------------

    \484\ See, e.g., CL-NGFA-60941 at 8.
---------------------------------------------------------------------------

    Commission Reproposal on other enumerated exemptions: The 
Reproposal removes the twelve-month limitations on unsold anticipated 
agricultural production and hedges of services for agricultural 
commodities. As noted above, that provision appears no longer to be a 
necessary prudential constraint. Otherwise, the Reproposal retains the 
other enumerated exemptions, as proposed.
c. Proposed Cross-Commodity Hedges
    In paragraph (5) of the proposed definition of a bona fide hedging 
position, the Commission proposed to recognize as bona fide cross-
commodity hedges.\485\ Cross-commodity hedging would be conditioned on: 
(i) The fluctuations in value of the position in the commodity derivate 
contract (or the commodity underlying the commodity derivative 
contract) being substantially related to the fluctuations in value of 
the actual or anticipated cash position or pass-through swap (the 
substantially related test); and (ii) the five-day rule being applied 
to positions in any physical-delivery commodity derivative contract. 
The Commission proposed a non-exclusive safe harbor for cross-commodity 
hedges that would have two factors: A qualitative factor; and a 
quantitative factor.
---------------------------------------------------------------------------

    \485\ December 2013 Position Limits Proposal, 78 FR at 75716.
---------------------------------------------------------------------------

    Comments on cross-commodity hedges: Numerous commenters requested 
the Commission withdraw the safe harbor quantitative ``test,'' and 
noted such test is impracticable where there is no relevant cash market 
price series for the commodity being hedged.\486\ Some commenters 
requested the Commission retain a qualitative approach to assessing 
whether the fluctuations in value of the position in the commodity 
derivate contract are substantially related to the fluctuations in 
value of the actual or anticipated cash position.
---------------------------------------------------------------------------

    \486\ See, e.g., CL-ICE-60929 at 16, CL-NCGA-NGSA-60919 at 6-7, 
CL-NCFC-60930 at 2-3, CL-API-60939 at 2, CL-NGFA-60941 at 8, CL-EEI-
EPSA-60925 at 10, and CL-IECAssn-60949 at 5-7.
---------------------------------------------------------------------------

    One commenter urged the Commission to clarify that market 
participants need not treat as enumerated cross-commodity hedges 
strategies where the cash position being hedged is the same cash 
commodity as the commodity underlying the futures contract even if the 
cash commodity is not deliverable against the contract. The commenter 
believes that this clarification would verify that non-deliverable 
grades of certain commodities could be deemed as the same cash 
commodity and thus not be deemed a cross-commodity hedge subject to the 
five-day rule.\487\
---------------------------------------------------------------------------

    \487\ CL-CME-60926 at 6.
---------------------------------------------------------------------------

    Commenters requested the Commission not apply a five-day rule to 
cross-commodity hedges or, alternatively, permit exchanges to determine 
the appropriate facts and circumstances where a market participant may 
be permitted to hold such positions into the spot month,

[[Page 96753]]

noting that a cross-commodity hedge in a physical-delivery contract may 
be the best hedge of its commercial exposure.\488\
---------------------------------------------------------------------------

    \488\ See, e.g., CL-FIA-60937 at 22, CL-CCI-60935 at 8-9.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal retains the cross-commodity 
hedge provision in paragraph (5) of the definition of a bona fide 
hedging position as proposed. However, for the reasons requested by 
commenters and because of confusion regarding application of a safe 
harbor, the Reproposal does not include the safe harbor quantitative 
test. If questions arise regarding the bona fides of a particular 
cross-commodity hedge, it would, as reproposed, be reviewed based on 
facts and circumstances, including a market participant's qualitative 
review of a particular cross-commodity hedge.
    The Reproposal retains the five-day rule, because a market 
participant who is hedging the price risk of a non-deliverable cash 
commodity has no need to make or take delivery on a physical-delivery 
contract. However, the Commission notes that an exchange may consider, 
on a case-by-case basis in physical-delivery contracts, whether to 
recognize such cross-commodity positions as non-enumerated bona fide 
hedges during the shorter of the last five days of trading or the time 
period for the spot month, by applying the exchange's experience and 
expertise in protecting its own physical-delivery market, under the 
process of Sec.  150.9.
4. Commodity Trade Options Deemed Cash Equivalents
    Commission proposal: The Commission requested comment as to whether 
the Commission should use its exemptive authority under CEA section 
4a(a)(7) to provide that the offeree of a commodity option would be 
presumed to be a pass-through swap counterparty for purposes of the 
offeror of the trade option qualifying for the pass-through swap offset 
exemption.\489\ Alternatively, the Commission, noting that forward 
contracts may serve as the basis of a bona fide hedging position 
exemption, proposed that it may similarly include trade options as one 
of the enumerated bona fide hedging exemptions. The Commission noted, 
for example, such an exemption could be similar to the enumerated 
exemption for the offset of the risk of a fixed-price forward contract 
with a short futures position.
---------------------------------------------------------------------------

    \489\ December 2013 Position Limits Proposal, 78 FR at 75711. 
The Commission also requested comment on whether it would be 
appropriate to exclude commodity trade options from the definition 
of referenced contract. As discussed above, the Commission has 
determined to exclude trade options from the definition of 
referenced contract. Previous to this reproposed rule, the 
Commission observed that federal position limits should not apply to 
trade options. 81 FR 14966 at 14971 (Mar. 21, 2016).
---------------------------------------------------------------------------

    Comments on trade option exemptions: Commenters requested that the 
Commission clarify that hedges of commodity trade options be recognized 
as bona fide hedges, as would be available for other cash 
positions.\490\
---------------------------------------------------------------------------

    \490\ See, e.g., CL-EEI-EPSA-60925 at 15.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission agrees with the commenters 
and has determined to address the request that commodity trade options 
should be recognized as the basis for a bona fide hedging position, as 
would be available for other cash positions. The reproposed definition 
of a bona fide hedging position adds new paragraph (6), specifying that 
a commodity trade option meeting the requirements of Sec.  32.3 may be 
deemed a cash commodity purchase or sales contract, as the case may be, 
provided that such option is adjusted on a futures-equivalent basis. 
The reproposed definition also provides non-exclusive guidance on 
making futures-equivalent adjustments to a commodity trade option. For 
example, the guidance provides that the holder of a trade option, who 
has the right, but not the obligation, to call the commodity at a fixed 
price, may deem that trade option, converted on a futures-equivalent 
basis, to be a position in a cash commodity purchase contract, for 
purposes of showing that the offset of such cash commodity purchase 
contract is a bona fide hedging position.
    Because the price risk of an option, including a trade option with 
a fixed strike price, should be measured on a futures-equivalent 
basis,\491\ the Commission has determined that under the reproposed 
definition, a trade option should be deemed equivalent to a cash 
commodity purchase or sales contract only if adjusted on a futures-
equivalent basis. The Commission notes that it may not be possible to 
compute a futures-equivalent basis for a trade option that does not 
have a fixed strike price. Thus, under the reproposed definition, a 
market participant may not use a trade option as a basis for a bona 
fide hedging position until a fixed strike price reasonably may be 
determined.
---------------------------------------------------------------------------

    \491\ See the discussion of the definition of futures-equivalent 
in reproposed Sec.  150.1, above.
---------------------------------------------------------------------------

5. App. C to Part 150--Examples of Bona Fide Hedging Positions for 
Physical Commodities
    Commission proposal: The Commission proposed a non-exhaustive list 
of examples meeting the requirements of the proposed definition of a 
bona fide hedging position, noting that market participants could see 
whether their practices fall within the list.\492\
---------------------------------------------------------------------------

    \492\ December 2013 Position Limits Proposal, 78 FR at 75739, 
75828.
---------------------------------------------------------------------------

    Comments on examples: Comments regarding the processing hedge 
example number 5 of proposed Appendix C to part 150 are discussed 
above. Another commenter requested the Commission affirm that 
aggregation is required pursuant to an express or implied agreement 
when that agreement is to trade referenced contracts, and that 
aggregation is not triggered by the condition in example number 7 of 
proposed Appendix C to part 150, where a Sovereign grants an option to 
a farmer at no cost, conditioned on the farmer entering into a fixed-
price forward sale.\493\
---------------------------------------------------------------------------

    \493\ CL-FIA-59595 at 35, CL-FIA-59566 at 3-7, citing December 
2013 Position Limits Proposal, 78 FR at 75837.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission agrees with the commenter 
that aggregation is required pursuant to an express or implied 
agreement when that agreement is to trade referenced contracts. 
Proposed example number 7 was focused on recognizing the legitimate 
public policy objectives of a sovereign furthering the development of a 
cash spot and forward market in agricultural commodities. To avoid 
confusion regarding the aggregation policy under rule 150.4, in the 
Reproposal, the Commission has revised example number 7, and has 
provided an interpretation that a farmer's synthetic position of a long 
put option may be deemed a pass-through swap, for purposes of a 
sovereign who has granted a cash-settled call option at no cost to such 
farmer in furtherance of a public policy objective to induce such 
farmer to sell production in the cash market. The Commission notes the 
combination of a farmer's forward sale agreement and a granted call 
option is approximately equivalent to a purchased put option. A farmer 
anticipating production or holding inventory may use such a long 
position in a put option as a bona fide hedging position.
    The Reproposal also includes a number of conforming amendments and 
corrections of typographical errors. Specifically, it conforms example 
number 4 regarding a utility to the

[[Page 96754]]

changes to paragraph (3)(iii)(B) of the bona fide hedging position 
definition, as discussed above. The references in the examples to a 12-
month restriction on hedges of agricultural commodities have also been 
removed because the Reproposal eliminates those proposed restrictions 
from the reproposed enumerated bona fide hedging positions, as 
discussed above. In addition, based on discussions with cotton 
merchants, example number 6, regarding agent hedging, has been amended 
from a generic example to a specific illustration of the hedge of 
cotton equities purchased by a cotton merchant from a producer, under 
the USDA loan program. Finally, the Reproposal corrects typographical 
errors in example number 12, regarding the hedge of copper inventory 
and the cross-hedge of copper wire inventory, to correctly reflect the 
25,000 pound unit of trading in the Copper core referenced futures 
contract, and deletes the unnecessary reference to the price 
relationship between the nearby and deferred Copper futures contracts.

B. Sec.  150.2--Position Limits

1. Setting Levels of Spot Month Limits
    In the December 2013 Position Limits Proposal, the Commission 
proposed to establish speculative position limits on 28 core referenced 
futures contracts in physical commodities.\494\
---------------------------------------------------------------------------

    \494\ See generally December 2013 Position Limits Proposal, 78 
FR at 75725. The 28 core referenced futures contracts for which 
initial limit levels were proposed are: Chicago Board of Trade 
(``CBOT'') Corn, Oats, Rough Rice, Soybeans, Soybean Meal, Soybean 
Oil and Wheat; Chicago Mercantile Exchange Feeder Cattle, Lean Hog, 
Live Cattle and Class III Milk; Commodity Exchange, Inc., Gold, 
Silver and Copper; ICE Futures U.S. Cocoa, Coffee C, FCOJ-A, Cotton 
No. 2, Sugar No. 11 and Sugar No. 16; Kansas City Board of Trade 
Hard Winter Wheat (on September 6, 2013, CBOT and the Kansas City 
Board of Trade (``KCBT'') requested that the Commission permit the 
transfer to CBOT, effective December 9, of all contracts listed on 
the KCBT, and all associated open interest); Minneapolis Grain 
Exchange Hard Red Spring Wheat; and New York Mercantile Exchange 
(``NYMEX'') Palladium, Platinum, Light Sweet Crude Oil, NY Harbor 
ULSD, RBOB Gasoline and Henry Hub Natural Gas.
---------------------------------------------------------------------------

    As stated in the December 2013 Position Limits Proposal, the 
Commission proposed to set the initial spot month position limit levels 
for referenced contracts at the existing DCM-set levels for the core 
referenced futures contracts because the Commission believed this 
approach to be consistent with the regulatory objectives of the Dodd-
Frank Act amendments to the CEA and many market participants are 
already used to those levels.\495\ The Commission also stated that it 
was considering setting initial spot month limits based on estimated 
deliverable supplies submitted by CME Group Inc. (``CME'') in 
2013.\496\ The Commission suggested that it might use the exchange's 
estimated deliverable supplies if it could verify that they are 
reasonable.\497\ The Commission further stated that it was considering 
another alternative of using, in the Commission's discretion, the 
recommended level, if any, of the spot month limit as submitted by each 
DCM listing a core referenced futures contract (if lower than 25 
percent of estimated deliverable supply).\498\
---------------------------------------------------------------------------

    \495\ December 2013 Position Limits Proposal, 78 FR at 75727. 
Several commenters supported establishing the initial levels of spot 
month speculative position limit levels at the levels then 
established by DCMs and listed in Appendix D to part 150, December 
2013 Position Limits Proposal, 78 FR at 75739-40 (generally stating 
that the then current levels are high enough and raising them could 
cause problems with contract performance. E.g., CL-WGC-59558 at 1-2; 
CL-Sen. Levin-59637 at 7; CL-AFBF-59730 at 3; CL-NGFA-59956 at 2; 
CL-NGFA-60312 at 3; CL-NCBA-59624 at 3; CL-Bakers-59691 at 1. 
Several commenters expressed the view that DCMs are best able to 
determine appropriate spot month limits and the Commission should 
defer to their expertise. E.g., CL-NCBA-59624 at 3; CL-Cactus-59660 
at 3; CL-TCFA-59680 at 3; CL-NGFA-59610 at 2; CL-MGEX-59635 at 2; 
CL-MGEX-59932 at 2; CL-MGEX-60380 at 1; CL-ICE-60311 at 1; CL-
Thornton-59729 at 1.
    \496\ December 2013 Position Limits Proposal, 78 FR at 75727. 
The CME July 1, 2013 deliverable supply estimates are available on 
the Commission's Web site at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/cmegroupdeliverable070113.pdf; see also 
December 2013 Position Limits Proposal, 78 FR at 75727, n. 406. 
Several commenters supported using the alternative level of spot-
month position limits based on CME's deliverable supply estimates as 
listed in Table 9 of the December 2013 Position Limits Proposal, 
generally stating that the alternative estimates are more up to date 
than the deliverable supply estimates underlying the spot month 
speculative position limits currently established by the DCMs, and 
therefore more appropriate for use in setting federal limits. E.g., 
CL-FIA-59595 at 3, 8; CL-EEI-EPSA-59602 at 9; CL-CMC-59634 at 14; 
CL-Olam-59658 at 1, 3; CL-BG Group-59656 at 6; CL-COPE-59662 at 21; 
CL-Calpine-59663 at 3; CL-NGSA-59673 at 37; CL-NGSA-59900 at 11; CL-
Working Group-59693 at 58-59; CL-CME-60406 at 2-3 and App. A; CL-
CME-60307 at 4; CL-CME-59718 at 3, 20-23; CL-Sempra-59926 at 3-4; 
CL-BG Group-59937 at 2-3; CL-EPSA-59953 at 2-3; CL-ICE-59966 at 5-6; 
CL-ICE-59962 at 5; CL-US Dairy-59597 at 4; CL-Rice Dairy-59601 at 1; 
CL-NMPF-59652 at 4; CL-FCS-59675 at 5.
    \497\ December 2013 Position Limits Proposal, 78 FR at 75727. 
The U.S. Chamber of Commerce's Center for Capital Markets 
Competitiveness commented that the CFTC must update estimates of 
deliverable supply, rather than relying on existing exchange-set 
spot month limit levels. CL-Chamber-59684 at 6-7.
    \498\ December 2013 Position Limits Proposal, 78 FR at 75728.
---------------------------------------------------------------------------

2. Verification of Estimated Deliverable Supply
    The Commission received comment letters from CME, Intercontinental 
Exchange (``ICE'') and Minneapolis Grain Exchange, Inc. (``MGEX'') 
containing estimates of deliverable supply. CME submitted updated 
estimates of deliverable supply for CBOT Corn (C), Oats (O), Rough Rice 
(RR), Soybeans (S), Soybean Meal (SM), Soybean Oil (SO), Wheat (W), and 
KC HRW Wheat (KW); COMEX Gold (GC), Silver (SI), Platinum (PL), 
Palladium (PA), and Copper (HG); NYMEX Natural Gas (NG), Light Sweet 
Crude Oil (CL), NY Harbor ULSD (HO), and RBOB Gasoline (RB).\499\ ICE 
submitted estimates of deliverable supply for Cocoa (CC), Coffee C 
(KC), Cotton No. 2 (CT), FCOJ-A (OJ), Sugar No. 11 (SB), and Sugar No. 
16 (SF).\500\ MGEX submitted an estimate of deliverable supply for Hard 
Red Spring Wheat (MWE).\501\
---------------------------------------------------------------------------

    \499\ CL-CME-61007 at 5. See also CL-CME-61011; CL-CME-61012; 
CL-CME-60785 (earlier submission of deliverable supply estimates); 
CL-CME-60435 (earlier submission of deliverable supply estimates); 
CL-CME-60406 (earlier submission of deliverable supply estimates). 
The Commission did not receive an estimate for Live Cattle (LC).
    \500\ CL-ICE-60786. ICE also submitted an estimate for Henry Hub 
natural gas. CL-ICE-60684.
    \501\ CL-MGEX-61038 at Exhibit A; see also CL-MGEX-60938 at 2 
(earlier submission of deliverable supply estimate).
---------------------------------------------------------------------------

    The Commission is verifying that the estimates for C, O, RR, S, SM, 
SO, W, and KW submitted by CME are reasonable. The Commission is 
verifying that the estimate for MWE submitted by MGEX is reasonable. 
The Commission is verifying that the estimates for CC, KC, CT, OJ, SB, 
and SF submitted by ICE are reasonable. The Commission is verifying 
that the estimates for GC, SI, PL, PA, and HG submitted by CME are 
reasonable. Finally, the Commission is verifying that the estimates for 
NG, CL, HO, and RB submitted by CME are reasonable. In verifying that 
all of these estimates of deliverable supply are reasonable, Commission 
staff reviewed the exchange submissions and conducted its own research. 
Commission staff reviewed the data submitted, confirmed that the data 
submitted accurately reflected the source data, and considered whether 
the data sources were authoritative. Commission staff considered 
whether the assumptions made by the exchanges in the submissions were 
acceptable, or whether alternative assumptions would lead to similar 
results. In response to Commission staff questions about the exchange 
submissions, the Commission received revised estimates from exchanges. 
In some cases, Commission staff conducted trade source interviews. 
Commission staff replicated the calculations included in the 
submissions.

[[Page 96755]]

    In verifying the exchange estimates of deliverable supply, the 
Commission is not endorsing any particular methodology for estimating 
deliverable supply beyond what is already set forth in Appendix C to 
part 38 of the Commission's regulations.\502\ As circumstances change 
over time, exchanges may need to adjust the methodology, assumptions 
and allowances that they use to estimate deliverable supply to reflect 
then current market conditions and other relevant factors. The 
Commission anticipates that it will base initial spot-month position 
limits on the current verified exchange estimates as and to the extent 
described below, unless an exchange provides additional updates during 
the Reproposal comment period that the Commission can verify as 
reasonable.
---------------------------------------------------------------------------

    \502\ 17 CFR part 38, Appendix C.
---------------------------------------------------------------------------

3. Single-Month and All-Months-Combined Limits
    Commission Proposal: In the December 2013 Position Limits Proposal, 
the Commission proposed to set the level of single-month and all-
months-combined limits (collectively, non-spot month limits) based on 
total open interest for all referenced contracts in a commodity.\503\ 
The Commission also proposed to estimate average open interest based on 
the largest annual average open interest computed for each of the past 
two calendar years, using either month-end open contracts or open 
contracts for each business day in the time period, as the Commission 
finds in its discretion to be reliable.\504\ For setting the levels of 
initial non-spot month limits, the Commission proposed to use open 
interest for calendar years 2011 and 2012 in futures contracts, options 
thereon, and in swaps that are significant price discovery contracts 
that are traded on exempt commercial markets.\505\ The Commission 
explained that it had reviewed preliminary data submitted to it under 
part 20, but preliminarily decided not to use it for purposes of 
setting the initial levels of single-month and all-months-combined 
position limits because the data prior to January 2013 was less 
reliable than data submitted later.\506\ The Commission noted that it 
was considering using part 20 data, should it determine such data to be 
reliable, in order to establish higher initial levels in a final 
rule.\507\
---------------------------------------------------------------------------

    \503\ December 2013 Position Limits Proposal, 78 FR at 75729. 
The Commission currently sets the single-month and all-months-
combined limits based on total open interest for a particular 
commodity futures contract and options on that futures contract, on 
a futures-equivalent basis.
    \504\ December 2013 Position Limits Proposal, 78 FR at 75730.
    \505\ Id.
    \506\ December 2013 Position Limits Proposal, 78 FR at 75733. 
Thus, the initial levels as proposed in the December 2013 Position 
Limits Proposal represented the lower bounds for the initial levels 
that the Commission would establish in final rules.
    \507\ December 2013 Position Limits Proposal, 78 FR at 75734. 
The Commission also stated that it was considering using data from 
swap data repositories, as practicable. Id. The Commission has 
determined that it is not yet practicable to use data from swap data 
repositories.
---------------------------------------------------------------------------

    In the June 2016 Supplemental Proposal, the Commission noted that, 
since the December 2013 Position Limits Proposal, the Commission worked 
with industry to improve the quality of swap position data reported to 
the Commission under part 20.\508\ The Commission also noted that, in 
light of the improved quality of such swap position data reporting, the 
Commission intended to rely on part 20 swap position data, given 
adjustments for obvious errors (e.g., data reported based on a unit of 
measure, such as an ounce, rather than a futures-equivalent number of 
contracts), to establish initial levels of federal non-spot month 
limits on futures and swaps in a final rule.
---------------------------------------------------------------------------

    \508\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38459.
---------------------------------------------------------------------------

    Comments Received: Commenters requested that the Commission delay 
the imposition of hard non-spot month limits until it has collected and 
evaluated complete open interest data.\509\
---------------------------------------------------------------------------

    \509\ E.g., CL-FIA-59595 at 3, 14; CL-EEI-EPSA-59602 at 10-11; 
CL-MFA-60385 at 4-7; CL-MFA-59606 at 22-23; CL-ISDA/SIFMA-59611 at 
28-29; CL-CMC-59634 at 13; CL-Olam-59658 at 3; CL-COPE-59662 at 22; 
CL-Calpine-59663 at 4; CL-CCMC-59684 at 4-5; CL-NFP-59690 at 20; CL-
Just Energy-59692 at 4; CL-Working Group-59693 at 62.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined that certain 
part 20 large trader position data, after processing and editing by 
Commission staff as described below,\510\ is reliable. The Commission 
has determined to repropose the initial non-spot month position limit 
levels based on the combination of such adjusted part 20 swaps data and 
data on open interest in physical commodity futures and options from 
the relevant exchanges, as described below. The Commission is using two 
12-month periods of data, covering a total of 24 months, rather than 
two calendar years of data, as is practicable, in reproposing the 
initial non-spot month position limit levels.
---------------------------------------------------------------------------

    \510\ Where relevant and practicable, Commission staff consulted 
and followed the Office of Management and Budget Standards and 
Guidelines for Statistical Surveys, September 2006, available at 
https://www.whitehouse.gov/sites/default/files/omb/inforeg/statpolicy/standards_stat_surveys.pdf.
---------------------------------------------------------------------------

Data Editing
    Commission staff analyzed and evaluated the quality of part 20 data 
for the period from July 1, 2014 through June 30, 2015 (``Year 1''), 
and the period from July 1, 2015 through June 30, 2016 (``Year 
2'').\511\ The Commission used open contracts as reported for each 
business day in the time periods, rather than month-end open contracts, 
primarily because it lessens the impact of missing data. Averaging 
generally also smooths over errors in reporting when there is both 
under- and over-reporting, both of which the Commission observed in the 
part 20 data. By calculating a daily average for each month for each 
reporting entity,\512\ one calculates a reporting entity's open 
contracts on a ``representative day'' for each month. The Commission 
then summed the open contracts for each reporting entity on this 
representative day, to determine the average open interest for a 
particular month.\513\
---------------------------------------------------------------------------

    \511\ There is no part 20 swaps data for Sugar No. 16 (SF).
    \512\ A reporting entity is a clearing member or a swap dealer 
required to report large trader position data for physical commodity 
swaps, as defined in 17 CFR 20.1.
    \513\ Because there may be missing data, using open contracts 
for each business day in the time period that a reporting entity 
submits a report may overestimate open interest, compared to taking 
a straight average of the open contracts over all business days in 
the time period. However, the Commission believes it is reasonable 
to assume that the open position in swaps for a reporting entity 
failing to report for a particular business day is more accurately 
reflected by that reporting entity's average reported open swaps for 
the month, rather than zero. Hence, in choosing this approach, the 
Commission chooses to repropose higher non-spot month limit levels.
---------------------------------------------------------------------------

    First, for each of Year 1 and Year 2, Commission staff identified 
all reported positions in swaps that do not satisfy the definition of 
referenced contract as proposed in the December 2013 Position Limits 
Proposal \514\ and removed those positions from the data set. For 
example, swaps settled using the price of the LME Gold PM Fix contract 
do not meet the definition of referenced contract for the gold core 
referenced futures contract (GC) but positions reported based on these 
types of swaps represented 14% of records submitted

[[Page 96756]]

under part 20 by reporting entities for gold swaps. The percentage of 
average daily open interest excluded from the adjusted part 20 swaps 
data resulting from this deletion are set forth in Table 1 below. Other 
adjustments to the data are described below. Because not all 
commodities required exclusion of non-referenced contracts, the 
Commission reports only the 11 commodities that required this type of 
exclusion.
---------------------------------------------------------------------------

    \514\ This adjustment may have removed fewer than all of the 
reported positions in swaps that do not satisfy the definition of 
referenced contract as adopted, and therefore may have resulted in a 
higher level of open interest (which would result in a higher limit 
level). For instance, swaps reported under part 20 include trade 
options, and the Commission is reproposing an amended definition of 
``referenced contract'' to expressly exclude trade options. See the 
discussion of the defined term ``referenced contract'' under Sec.  
150.1, above. Because part 20 does not require trade options to be 
identified, the Commission could not exclude records of trade 
options from open interest or position size.

 Table III-B-1--Percent of Adjusted Average Daily Open Interest Excluded
          as Not Meeting the Definition of Referenced Contract
------------------------------------------------------------------------
                                          Year 1 percent  Year 2 percent
                                            of excluded     of excluded
    Core referenced futures contract       adjusted open   adjusted open
                                           interest (%)    interest (%)
------------------------------------------------------------------------
Cotton No. 2 (CT).......................            0.22            0.00
Sugar No. 11 (SB).......................            0.05            0.00
Gold (GC)...............................           42.59            0.00
Silver (SI).............................           48.10            0.00
Platinum (PL)...........................            9.12            5.36
Palladium (PA)..........................           56.87            6.87
Copper (HG).............................           37.58            0.25
Natural Gas (NG)........................           12.49           12.52
Light Sweet Crude (CL)..................            3.60            0.83
New York Harbor ULSD (HO)...............            0.96            1.74
RBOB Gasoline (RB)......................            1.34            1.30
------------------------------------------------------------------------

    Second, Commission staff checked and edited the remaining data to 
mitigate certain types of errors. Commission staff identified three 
general types of reporting errors and made edits to adjust the data 
for:
    (i) Positions that were clearly reported in units of a commodity 
when they should have been reported in the number of gross futures-
equivalent contracts. For example, a position in gold (GC) with a 
futures contract unit of trading of 100 ounces might be reported as 
480,000 contracts, when other available information, reasonable 
assumptions, consultation with reporting entities and/or Commission 
expertise indicate that the position should have been reported as 4,800 
contracts (that is, 480,000 ounces divided by 100 ounces per contract). 
Commission staff corrected such reported swaps position data and 
included the corrected data in the data set.
    (ii) Positions that are not obviously reported in units of a 
commodity but appear to be off by one or more decimal places (e.g., a 
position is overstated, but not by a multiple of the contract's unit of 
trading). For example, a position in COMEX gold is reported as 100,000 
and the notional value might be reported as $13,000,000, when the price 
of gold is $1300 and the COMEX gold contract is for 100 ounces, 
indicating that the position should have been reported as 100 futures-
equivalent contracts. Staff corrected such reported swaps position data 
and included the corrected data in the data set.
    (iii) Positions reported multiple times per day or otherwise 
extremely different from surrounding days' reported open interest. In 
some cases, reporting entities submitted the same report using 
different reporting identifiers, for the same day. In other cases, a 
position would inexplicably spike for one day, to a multiple of other 
days' reported open interest. When Commission staff checked with the 
reporting entity, the reporting entity confirmed that the reports were, 
indeed, erroneous. Commission staff did not include such incorrectly 
reported duplicative swaps position data in its analysis. In other 
cases, positions that were clearly reported incorrectly, but for which 
Commission staff could discern neither a reason nor a reasonable 
adjustment, were not included. For example, Commission staff deleted 
all swap position data reports submitted by one swap dealer from its 
analysis because the reports were inexplicably anomalous in light of 
other available information, reasonable assumptions and Commission 
expertise. As another example, one reporting entity reported extremely 
large values for only certain types of positions. After speaking with 
the reporting entity, Commission staff determined that there was no 
systematic adjustment to be made, but that the actual positions were, 
in fact, small. Hence, Commission staff did not include such reported 
swaps position data in its analysis.
    The number of principal records edited, resulting from the edits 
relating to the three types of edits to erroneous position reports 
noted above, is set forth in Table 2 below. A principal record is a 
report of a swaps open position where the reporting entity is a 
principal to the swap, as opposed to a counterparty record.

    Table III-B-2--Percentage of Principal Records Adjusted by Edit Type and Underlying Commodity, Referenced
                                                 Contracts Only
----------------------------------------------------------------------------------------------------------------
                                                                                     Number of       Number of
                                                                                      records         records
                                                           Edit type               adjusted year   adjusted year
                                                                                       1 (%)           2 (%)
----------------------------------------------------------------------------------------------------------------
Corn (C)....................................  (i)...............................            0.00          0.0001
                                              (iii).............................            0.00            0.66
Oats (O)....................................  (iii).............................            0.00            0.20
Rough Rice (RR).............................  (iii).............................            0.38            0.00

[[Page 96757]]

 
Soybeans (S)................................  (i)...............................            0.00            0.03
                                              (iii).............................            2.38            1.46
Soybean Meal (SM)...........................  (iii).............................            0.00            0.41
Soybean Oil (SO)............................  (iii).............................            9.15            4.93
Wheat (W)...................................  (i)...............................            0.00            0.01
                                              (iii).............................            1.77            0.71
Wheat (MWE).................................  (iii).............................           0.043           0.002
Wheat (KW)..................................  (iii).............................            1.34            0.68
Cocoa (CC)..................................  (i)...............................           0.001          0.0005
                                              (iii).............................            1.79            0.25
Coffee C (KC)...............................  (i)...............................            0.00            0.01
                                              (iii).............................            5.33            0.60
Cotton No. 2 (CT)...........................  (iii).............................           16.76            5.59
FCOJ-A (OJ).................................  (iii).............................           13.30           17.43
Sugar No. 11 (SB)...........................  (i)...............................            0.00          0.0009
                                              (iii).............................            1.21            0.54
Live Cattle (LC)............................  (i)...............................           0.002            0.00
                                              (iii).............................           45.65           15.50
Gold (GC)...................................  (i)...............................            1.99            0.02
                                              (ii)..............................            0.32            0.00
                                              (iii).............................           91.45           89.04
Silver (SI).................................  (i)...............................            3.01            0.19
                                              (iii).............................           93.08           89.52
Platinum (PL)...............................  (i)...............................            2.75            0.01
                                              (ii)..............................            0.33            0.01
                                              (iii).............................           23.51           21.11
Palladium (PA)..............................  (i)...............................            0.62            0.00
                                              (ii)..............................            0.30            0.00
                                              (iii).............................           32.97           22.29
Copper (HG).................................  (i)...............................            4.94            0.48
                                              (iii).............................           20.80           16.82
Natural Gas (NG)............................  (i)...............................            0.01            1.03
                                              (iii).............................            7.68            3.80
Light Sweet Crude (CL)......................  (i)...............................           0.001           0.003
                                              (iii).............................            9.53            8.43
New York Harbor ULSD (HO)...................  (i)...............................            0.01          0.0006
                                              (iii).............................           29.58            4.33
RBOB Gasoline (RB)..........................  (i)...............................            0.22            0.60
                                              (iii).............................           30.46           24.62
----------------------------------------------------------------------------------------------------------------

    Some records also appeared to contain errors attributable to other 
factors that Commission staff could detect and for which Commission 
staff can correct. For example, there were instances where the 
reporting entity misreported the ownership of the position, i.e., 
principal vs. counterparty. Commission staff corrected the misreported 
ownership data and included the corrected data in the data set. Such 
corrections are important to ensure that data is not double counted. In 
Year 1, eight reporting entities required an adjustment to the reported 
position ownership information. In Year 2, five reporting entities 
required an adjustment to the reported position ownership information.
    Third, in the part 20 large trader swap data, staff checked and 
adjusted the average daily open interest for positions resulting from 
inter-affiliate transactions and duplicative reporting of positions due 
to transactions between reporting entities. For an example of 
duplicative reporting by reporting entities (which is reporting in 
terms of futures-equivalent contracts), assume Swap Dealer A and Swap 
Dealer B have an open swap equivalent to 50 futures contracts, Swap 
Dealer A also has a swap equivalent to 25 futures contracts with End 
User X, and Swap Dealer B has a swap equivalent to 200 futures 
contracts with End User Y. The total open swaps in this scenario is 
equivalent to 275 futures contracts. However, Swap Dealer A will report 
a gross position of 75 contracts and Swap Dealer B will report a gross 
position of 250 contracts. Simply summing these two gross positions 
would overestimate the open swaps as 325 contracts--50 contracts more 
than there actually should be. For this reason, Commission staff used 
the counterparty accounts of each reporting entity to flag counterparty 
accounts of other reporting entities. Commission staff then used the 
daily average of the gross positions for these accounts to reduce the 
amount of average daily open swaps. Similarly, Commission staff flagged 
the counterparty accounts for entities that are affiliates of each 
reporting entity in order to adjust the amount of average daily open 
swaps. These adjustments to the Year 1 data are reflected in Table 3 
below, and the corresponding adjustments to the Year 2 data are 
reflected in Table 4 below.

[[Page 96758]]



     Table III-B-3--Average Daily Open Interest in Year 1 Adjusted for Duplicate and Affiliate Reporting by
                                              Underlying Commodity
----------------------------------------------------------------------------------------------------------------
                                                                                               Average adjusted
                                                                           Average adjusted       daily open
                                                       Average  adjusted      daily open      interest reporting
                  Paired swaps for                        daily  open     interest reporting         entity
                                                           interest              entity         duplication  &
                                                                              duplication         affiliates
                                                                                removed             removed
----------------------------------------------------------------------------------------------------------------
Corn (C)............................................             655,492             522,566             359,715
Oats (O)............................................                 684                 667                 646
Rough Rice (RR).....................................                 916                 640                 362
Soybeans (S)........................................             157,017             139,608             109,858
Soybean Meal (SM)...................................             125,444              99,795              71,887
Soybean Oil (SO)....................................              74,831              64,854              55,265
Wheat (W)...........................................             272,839             229,453             162,999
Wheat (MGE).........................................               3,430               3,021               1,944
Wheat (KW)..........................................              14,918              14,213               9,436
Cocoa (CC)..........................................              15,207              13,792              11,257
Coffee C (KC).......................................              31,540              28,539              24,164
Cotton No. 2 (CT)...................................              51,442              42,806              35,102
FCOG-A (OJ).........................................                 160                 142                 121
Sugar No. 11 (SB)...................................             279,355             256,887             211,994
Live Cattle (LC)....................................              46,361              36,999              23,626
Gold (GC)...........................................              79,778              64,363              47,727
Silver (SI).........................................              19,373              14,678               9,867
Platinum (PL).......................................              25,145              24,530              21,566
Palladium (PA)......................................               2,044               1,939               1,929
Copper (HG).........................................              31,143              28,718              22,859
Natural Gas (NG)....................................           4,100,419           3,603,368           2,866,128
Light Sweet Crude (CL)..............................           2,039,963           1,875,660           1,587,450
NY Harbor ULSD (HO).................................             178,978             161,617             138,360
RBOB Gasoline (RB)..................................             103,586             100,021              81,822
----------------------------------------------------------------------------------------------------------------


     Table III-B-4--Average Daily Open Interest in Year 2 Adjusted for Duplicate and Affiliate Reporting by
                                              Underlying Commodity
----------------------------------------------------------------------------------------------------------------
                                                                                               Average adjusted
                                                                           Average adjusted       daily open
                                                       Average  adjusted      daily open      interest reporting
                  Paired swaps for                        daily  open     interest reporting         entity
                                                           interest              entity         duplication  &
                                                                              duplication         affiliates
                                                                                removed             removed
----------------------------------------------------------------------------------------------------------------
Corn (C)............................................           1,265,639             960,088             641,014
Oats (O)............................................               1,029                 858                 480
Rough Rice (RR).....................................                 396                 250                   4
Soybeans (S)........................................             453,419             351,279             235,679
Soybean Meal (SM)...................................             282,123             209,023             134,399
Soybean Oil (SO)....................................             282,207             198,744             125,106
Wheat (W)...........................................             437,711             334,136             222,420
Wheat (MWE).........................................              15,167               9,511               3,079
Wheat (KW)..........................................              65,533              47,722              29,563
Cocoa (CC)..........................................             141,526             100,564              56,853
Coffee C (KC).......................................              97,128              74,739              51,846
Cotton No. 2 (CT)...................................             137,295              99,496              60,477
FCOJ-A (OJ).........................................               1,137                 640                   5
Sugar No. 11 (SB)...................................             717,967             558,423             382,816
Live Cattle (LC)....................................             102,131              77,783              52,330
Gold (GC)...........................................              62,804              50,054              36,029
Silver (SI).........................................               9,306               6,207               3,510
Platinum (PL).......................................               2,575               2,507               2,285
Palladium (PA)......................................                 889                 857                 823
Copper (HG).........................................              82,479              65,187              47,365
Natural Gas (NG)....................................           4,239,581           3,828,739           3,331,141
Light Sweet Crude (CL)..............................           2,318,074           2,050,270           1,744,137
NY Harbor ULSD (HO).................................             170,316             117,004              65,721
RBOB Gasoline (RB)..................................             102,094              66,560              30,477
----------------------------------------------------------------------------------------------------------------

    Staff made numerous significant adjustments to the part 20 data for 
natural gas, due to numerous reports in units rather than the number of 
gross futures-equivalent contracts and the large number of reports of 
swaps that did not meet the definition of referenced contract.

[[Page 96759]]

    The Commission continues to be concerned about the quality of data 
submitted in large trader reports pursuant to part 20 of the 
Commission's regulations. Commissioners and staff have expressed 
concerns about data reporting publicly on a variety of occasions.\515\ 
Nevertheless, the Commission anticipates that over time part 20 
submissions will become more reliable and intensive efforts by 
Commission staff to process and edit raw data will become less 
necessary. As stated in the December 2013 Position Limits Proposal, for 
setting subsequent levels of non-spot month limits, the Commission 
proposes to estimate average open interest in referenced contracts 
using data reported pursuant to parts 16, 20, and/or 45.\516\ It is 
crucial, therefore, that market participants make sure they submit 
accurate data to the Commission, and resubmit data discovered to be 
erroneous, because subsequent limit levels will be based on that data. 
Reporting is at the heart of the Commission's market and financial 
surveillance programs, which are critical to the Commission's mission 
to protect market participants and promote market integrity. Failure to 
meet reporting obligations to the Commission by submitting reports and 
data that contain errors and omissions in violation of the part 20 
regulations may subject reporting entities to enforcement actions and 
remedial sanctions.\517\
---------------------------------------------------------------------------

    \515\ See, e.g., CFTC Staff Advisory No. 15-66, available at 
http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/15-66.pdf (reminding swap dealers and major swap participants 
of their swap data reporting obligations); Remarks of Chairman 
Timothy Massad before the ABA Derivatives and Futures Law Committee, 
2016 Winter Meeting, Jan. 22, 2016, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-37 (improving 
data reporting).
    \516\ December 2013 Position Limits Proposal, 78 FR at 75734.
    \517\ The CFTC announced its first case enforcing the Reporting 
Rules in September 2015. See Order: Australia and New Zealand 
Banking Group Ltd. (``ANZ''), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfaustraliaorder091715.pdf (the Order finds that during the period 
from at least March 1, 2013 through November 30, 2014, ANZ filed 
large trader reports that routinely contained errors).
---------------------------------------------------------------------------

4. Setting Levels of Spot-Month Limits
    In the December 2013 Position Limits Proposal, the Commission 
proposed to set the initial spot month speculative position limit 
levels for referenced contracts at the existing DCM-set levels for the 
core referenced futures contracts.\518\ As an alternative, the 
Commission stated that it was considering using 25 percent of an 
exchange's estimate of deliverable supply if the Commission verified 
the estimate as reasonable.\519\ As a further alternative, the 
Commission stated that it was considering setting initial spot month 
position limit levels at a recommended level, if any, submitted by a 
DCM (if lower than 25 percent of estimated deliverable supply).\520\
---------------------------------------------------------------------------

    \518\ December 2013 Position Limits Proposal, 78 FR at 75727. 
One commenter urged the Commission to retain the legacy speculative 
limits for enumerated agricultural products. The ``enumerated'' 
agricultural products refer to the list of commodities contained in 
the definition of ``commodity'' in CEA section 1a; 7 U.S.C. 1a. This 
list of agricultural contracts includes nine currently traded 
contracts: Corn (and Mini-Corn), Oats, Soybeans (and Mini-Soybeans), 
Wheat (and Mini-wheat), Soybean Oil, Soybean Meal, Hard Red Spring 
Wheat, Hard Winter Wheat, and Cotton No. 2. See 17 CFR 150.2. The 
position limits on these agricultural contracts are referred to as 
``legacy'' limits because these contracts on agricultural 
commodities have been subject to federal positions limits for 
decades. This commenter stated, ``There is no appreciable support 
within our industry or, as far as we know, from the relevant 
exchanges to move beyond current levels . . . . Changing current 
limits, as proposed in the rule, will have a negative impact on 
futures-cash market convergence and will compromise contract 
performance.'' CL-AFBF-59730 at 3. Contra CL-ISDA/SIFMA-59611 at 32 
(setting initial spot-month limits at the existing exchange-set 
levels would be arbitrary because the exchange-set levels have not 
been calibrated to apply as ``a ceiling on the spot-month positions 
that a trader can hold across all exchanges for futures, options and 
swaps''); CL-ICE-59966 at 6 (``the Proposed Rule . . . effectively 
halves the present position limit in the spot month by aggregating 
across trading venues and uncleared OTC swaps''). See also CL-ISDA/
SIFMA-59611 at 3 (the spot month limit methodology is ``both 
arbitrary and unjustified'').
    \519\ December 2013 Position Limits Proposal, 78 FR at 75727. 
The Commission also stated that if the Commission could not verify 
an exchange's estimate of deliverable supply for any commodity as 
reasonable, the Commission might adopt the existing DCM-set level or 
a higher level based on the Commission's own estimate, but not 
greater than would result from the exchange's estimated deliverable 
supply for a commodity.
    One commenter was unconvinced that estimated deliverable supply 
is ``the appropriate metric for determining spot month position 
limits'' and opined that the ``real test'' should be whether limits 
``allow convergence of cash and futures so that futures markets can 
still perform their price discovery and risk management functions.'' 
CL-NGFA-60941 at 2. Another commenter stated, ``While 25% may be a 
reasonable threshold, it is based on historical practice rather than 
contemporary analysis, and it should only be used as a guideline, 
rather than formally adopted as a hard rule. Deliverable supply is 
subject to numerous environmental and economic factors, and is 
inherently not susceptible to formulaic calculation on a yearly 
basis.'' CL-MGEX-60301 at 1. Another commenter expressed the view 
that the 25 percent formula is not ``appropriately calibrated to 
achieve the statutory objective'' set forth in section 
4a(a)(3)(B)(i) of the CEA, 7 U.S.C. 6a(a)(3)(B)(i). CL-CME-60926 at 
3. Another commenter opined that because the Commission ``has not 
established a relationship between `estimated deliverable supply' 
and spot-month potential for manipulation or excessive 
speculation,'' the 25 percent formula is arbitrary. CL-ISDA/SIFMA-
59611 at 31.
    Several commenters opined that 25 percent of deliverable supply 
is too high. E.g., CL-AFR-59685 at 2; CL-Tri-State Coalition for 
Responsible Investment-59682 at 1; CL-CMOC-59720 at 3; CL-WEED-59628 
(``Only a lower limit would ensure market stability and prevent 
market manipulation.''); CL-Public Citizen-60313 at 1 (``There is no 
good reason for a single firm to take 25% of a market.''); CL-IECA-
59964 at 3 (25 percent of deliverable supply ``is a lot of market 
power in the hands of speculators''). One commenter stated that 
``position limits should be set low enough to restore a commercial 
hedger majority in open interest in each core referenced contract,'' 
CL-IATP-60323 at 5 (suggesting in a later submission that position 
limits at 5-10 percent of estimated deliverable supply in each 
covered contract applied on an aggregated basis might ``enable 
commercial hedgers to regain for all covered contracts their pre-
2000 average share of 70 percent of agricultural contracts''). CL-
IATP-60394 at 2. One commenter supported expanding position limits 
``to ensure rough or approximate convergence of futures and 
underlying cash at expiration.'' CL-Thornton-59702 at 1.
    Several commenters supported setting limits based on updated 
estimates of deliverable supply which reflect current market 
conditions. E.g., CL-ICE-59966 at 5; CL-FIA-59595 at 8; CL-EEI-EPSA-
59602 at 9; CL-MFA-59606 at 5; CL-CMC-59634 at 14; CL-Olam-59658 at 
3; CL-CCMC-59684 at 6-7.
    \520\ December 2013 Position Limits Proposal, 78 FR at 75728.
---------------------------------------------------------------------------

    In determining the levels at which to repropose the initial 
speculative position limits, the Commission considered, without 
limitation, the recommendations of the exchanges as well as data to 
which the exchanges do not have access. In considering these and other 
factors, the Commission became very concerned about the effect of 
alternative limit levels on traders in the cash-settled referenced 
contracts. A DCM has reasonable discretion in establishing the manner 
in which it complies with core principle 5 regarding position 
limits.\521\ As the Commission observed in the December 2013 Position 
Limits Proposal, ``there may be a range of spot month limits, including 
limits set below 25 percent of deliverable supply, which may serve as 
practicable to maximize . . . [the] policy objectives [set forth in 
section 4a(a)(3)(B) of the CEA].'' \522\ The Commission must also 
consider the competitiveness of futures markets.\523\ Thus, the 
Commission accepts the recommendations of the exchanges and has 
determined to repropose federal limits below 25 percent of deliverable 
supply, where setting a limit level at less than 25 percent of 
deliverable supply does not appear to restrict unduly positions in the 
cash-settled referenced contracts. The exchanges retain the ability to 
adopt lower exchange-set limit levels than the initial

[[Page 96760]]

speculative position limit levels that the Commission reproposes today.
---------------------------------------------------------------------------

    \521\ CEA section 5(d)(1)(B), 7 U.S.C. 7(d)(1)(B).
    \522\ December 2013 Position Limits Proposal, 78 FR at 75729.
    \523\ CEA section 15(a)(2)(B), 7 U.S.C. 19(a)(2)(B).
---------------------------------------------------------------------------

a. CME and MGEX Agricultural Contracts
    As explained above, the Commission has verified that the estimates 
of deliverable supply for each of the CBOT Corn (C), Oats (O), Rough 
Rice (RR), Soybeans (S), Soybean Meal (SM), Soybean Oil (SO), Wheat (W) 
core referenced futures contract, the Hard Red Winter Wheat (KW) core 
referenced futures contract submitted by CME, and the Hard Red Spring 
Wheat (MWE) core referenced futures contract submitted by MGEX are 
reasonable.
    Nevertheless, the Commission has determined to repropose the 
initial speculative spot month position limit levels for C, O, RR, S, 
SM, SO, W and KW at the recommended levels submitted by CME,\524\ all 
of which are lower than 25 percent of estimated deliverable 
supply.\525\ As is evident from the table set forth below, this also 
means that the Commission is reproposing the initial speculative 
position limit levels for these eight contracts as proposed in the 
December 2013 Position Limits Proposal. These initial levels track the 
existing DCM-set levels for the core referenced futures contracts; 
\526\ therefore, as noted in the December 2013 Position Limits 
Proposal, many market participants are already used to these 
levels.\527\ The Commission continues to believe this approach is 
consistent with the regulatory objectives of the Dodd-Frank Act 
amendments to the CEA.
---------------------------------------------------------------------------

    \524\ CL-CME-61007 at 5.
    \525\ The Commission noted in the December 2013 Position Limits 
Proposal ``that DCMs historically have set or maintained exchange 
spot month limits at levels below 25 percent of deliverable 
supply.'' December 2013 Position Limits Proposal, 78 FR at 75729.
    \526\ See CL-CME-61007 (specifying lower exchange-set limit 
levels for W and RR in certain circumstances).
    \527\ December 2013 Position Limits Proposal, 78 FR at 75727.

                       Table III-B-5--CME Agricultural Contracts--Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
                                                          Previously       25% of estimated       Reproposed
                      Contract                          proposed  limit       deliverable     speculative  limit
                                                          level \528\        supply \529\            level
----------------------------------------------------------------------------------------------------------------
C...................................................                 600                 900                 600
O...................................................                 600                 900                 600
RR..................................................                 600               2,300                 600
S...................................................                 600               1,200                 600
SM..................................................                 720               2,000                 720
SO..................................................                 540               3,400                 540
W \530\.............................................                 600               1,000                 600
KW..................................................                 600               3,000                 600
----------------------------------------------------------------------------------------------------------------

    The Commission has also determined to repropose the initial 
speculative spot month position limit level for MWE at 1,000 contracts, 
which is the level requested by MGEX \531\ and just slightly lower than 
25 percent of estimated deliverable supply.\532\ This is an increase 
from the previously proposed level of 600 contracts and is greater than 
the reproposed speculative spot month position limit levels for W and 
KW.\533\ Upon deliberation, the Commission accepts the recommendation 
of MGEX.\534\
---------------------------------------------------------------------------

    \528\ December 2013 Position Limits Proposal, 78 FR at 75839 
(Appendix D to Part 150--Initial Position Limit Levels).
    \529\ Rounded up to the next 100 contracts.
    \530\ The W core referenced futures contract refers to soft red 
winter wheat, the KW core reference futures contract refers to hard 
red winter wheat, and the MWE core reference futures contract refers 
to hard red spring wheat; i.e., the contracts are for different 
products.
    \531\ CL-MGEX-61038 at 2; see also CL-MGEX-60938 at 2 (earlier 
submission of deliverable supply estimate).
    \532\ The difference is due to rounding. The MGEX estimate of 
4,005 contract equivalents for MWE deliverable would have supported 
a spot-month limit level of 1,100 contracts (rounded up to the next 
100 contracts). The Commission noted in the December 2013 Position 
Limits Proposal ``that DCMs historically have set or maintained 
exchange spot month limits at levels below 25 percent of deliverable 
supply.'' December 2013 Position Limits Proposal, 78 FR at 75729.
    \533\ Most commenters who supported establishing the same level 
of speculative limits for each of the three wheat core referenced 
futures contracts focused on parity in the non-spot months. However, 
some commenters did support wheat party in the spot month. See, 
e.g., CL-CMC-59634 at 15; CL-NCFC-59942 at 6.
    \534\ The difference between an estimate of 4,000 contracts, 
which would result in a limit level of 1,000, and 4,005 contracts, 
which results in a limit level of 1,100 contracts, is small enough 
that the Commission's prior statements regarding the 25% formula are 
instructive. As stated in the December 2013 Position Limits 
Proposal, the 25 percent formula ``is consistent with the 
longstanding acceptable practices for DCM core principle 5 which 
provides that, for physical-delivery contracts, the spot-month limit 
should not exceed 25 percent of the estimated deliverable supply.'' 
December 2013 Position Limits Proposal, 78 FR at 75729. The 
Commission continues to believe, based on its experience and 
expertise, that the 25 percent formula is an ``effective 
prophylactic tool to reduce the threat of corners and squeezes, and 
promote convergence without compromising market liquidity.'' 
December 2013 Position Limits Proposal, 78 FR at 75729.

                         Table III-B-6--CME and MGEX Agricultural Contracts--Spot Month
----------------------------------------------------------------------------------------------------------------
                                                                  Unique persons over spot month
                                                                               limit
    Core referenced futures      Basis of spot-                  --------------------------------   Reportable
           contract                month level      Limit level                      Physical      persons spot
                                                                   Cash settled      delivery       month only
                                                                     contracts       contracts
----------------------------------------------------------------------------------------------------------------
Corn (C)......................  CME                 [dagger] 600               0              36           1,050
                                 recommendation.
                                25% DS..........             900               0              20
Oats (O)......................  CME                 [dagger] 600               0               0              33
                                 recommendation.
                                25% DS..........             900               0               0
Soybeans (S)..................  CME                 [dagger] 600               0              22             929
                                 recommendation.
                                25% DS..........           1,200               0              14
Soybean Meal (SM).............  CME                 [dagger] 720               0              14             381
                                 recommendation.
                                25% DS..........           2,000               0               *

[[Page 96761]]

 
Soybean Oil (SO)..............  CME                 [dagger] 540               0              21             397
                                 recommendation.
                                25% DS..........           3,400               0               0
Wheat (W).....................  CME                 [dagger] 600               0              11             444
                                 recommendation.
                                25% DS..........           1,000               0               6
Wheat (MWE)...................  Parity w/CME        [dagger] 600               0               *             102
                                 recommendation.
                                25% DS..........  [dagger][dagge               0               *
                                                        r] 1,000
Wheat (KW)....................  CME                 [dagger] 600               0               4             250
                                 recommendation.
                                25% DS (MW).....           1,000               0               *
                                25% DS (KW).....           3,000               0               *
Rough Rice (RR)...............  CME                 [dagger] 600               0               0              91
                                 recommendation.
                                25% DS..........           2,300               0               0
----------------------------------------------------------------------------------------------------------------
Reproposed speculative position limit levels are shown in bold.
``25% DS'' means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract.
[dagger] Denotes existing limit level.
[dagger][dagger] Limit level requested by MGEX.
* Denotes fewer than 4 persons.

    The Commission's impact analysis reveals no traders in cash settled 
contracts in any of C, O, S, SM, SO, W, MWE, KW, or RR, and no traders 
in physical delivery contracts for O and RR, above the initial 
speculative limit levels for those contracts. The Commission found 
varying numbers of traders in the C, S, SM, SO, W, MWE, KW physical 
delivery contracts over the initial levels, but the numbers were very 
small for MWE and KW.\535\ Because the levels that the Commission 
reproposes today for C, O, S, SM, SO, W, KW, and RR maintain the status 
quo for those contracts, the Commission assumes that some or possibly 
all of such traders over the initial levels are hedgers. Hedgers may 
have to file for an applicable exemption, but hedgers with bona fide 
hedging positions should not have to reduce their positions as a result 
of speculative position limits per se. Thus, the number of traders in 
the C, S, SM, SO, W and KW physical delivery contracts who would need 
to reduce speculative positions below the initial limit levels should 
be lower than the numbers indicated by the impact analysis. The 
Commission believes that setting initial speculative levels at 25 
percent of deliverable supply would, based upon logic and the 
Commission's impact analysis, affect fewer traders in the C, S, SM, SO, 
W and KW physical delivery contracts. Consistent with its statement in 
the December 2013 Position Limits Proposal, the Commission believes 
that accepting the recommendation of the DCM to set these lower levels 
of initial spot month limits will serve the objectives of preventing 
excessive speculation, manipulation, squeezes and corners,\536\ while 
ensuring sufficient market liquidity for bona fide hedgers in the view 
of the listing DCM and ensuring that the price discovery function of 
the market is not disrupted.\537\
---------------------------------------------------------------------------

    \535\ Four or fewer traders.
    \536\ Contra CL-ISDA/SIFMA-59611 at 55 (proposed spot month 
limits ``are almost certainly far smaller than necessary to prevent 
corners or squeezes'').
    \537\ December 2013 Position Limits Proposal, 78 FR at 75729.
---------------------------------------------------------------------------

b. Softs
    As explained above, the Commission has verified that the estimates 
of deliverable supply for each of the IFUS Cocoa (CC), Coffee ``C'' 
(KC), Cotton No. 2 (CT), FCOJ-A (OJ), Sugar No. 11 (SB), and Sugar No. 
16 (SF) core referenced futures contracts submitted by ICE are 
reasonable.
    The Commission has determined to repropose the initial speculative 
spot month position limit levels for the CC, KC, CT, OJ, SB, and SF 
\538\ core referenced futures contracts at 25 percent of estimated 
deliverable supply, based on the estimates of deliverable supply 
submitted by ICE.\539\ As is evident from the table set forth below, 
this also means that the Commission is reproposing initial speculative 
position limit levels that are significantly higher than the levels for 
these six contracts as previously proposed. As stated in the December 
2013 Position Limits Proposal, the 25 percent formula ``is consistent 
with the longstanding acceptable practices for DCM core principle 5 
which provides that, for physical-delivery contracts, the spot-month 
limit should not exceed 25 percent of the estimated deliverable 
supply.'' \540\ The Commission continues to believe, based on its 
experience and expertise, that the 25 percent formula is an ``effective 
prophylactic tool to reduce the threat of corners and squeezes, and 
promote convergence without compromising market liquidity.'' \541\
---------------------------------------------------------------------------

    \538\ One commenter supported considering ``tropicals (sugar/
coffee/cocoa) . . . separately from those agricultural crops 
produced in the US domestic market.'' CL-Thornton-59702 at 1; see 
also CL-Armajaro-59729 at 1.
    \539\ CL-IFUS-60807.
    \540\ December 2013 Position Limits Proposal, 78 FR at 75729. 
The Commission also noted ``that DCMs historically have set or 
maintained exchange spot month limits at levels below 25 percent of 
deliverable supply.'' December 2013 Position Limits Proposal, 78 FR 
at 75729.
    \541\ December 2013 Position Limits Proposal, 78 FR at 75729.

                    Table III-B-7--IFUS Soft Agricultural Contracts--Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
                                                          Previously       25% of estimated       Reproposed
                      Contract                          proposed  limit       deliverable     speculative  limit
                                                          level \542\        supply \543\            level
----------------------------------------------------------------------------------------------------------------
CC..................................................               1,000               5,500               5,500

[[Page 96762]]

 
KC..................................................                 500               2,400               2,400
CT..................................................                 300               1,600               1,600
OJ..................................................                 300               2,800               2,800
SB..................................................               5,000              23,300              23,300
SF..................................................               1,000               7,000               7,000
----------------------------------------------------------------------------------------------------------------

     
---------------------------------------------------------------------------

    \542\ December 2013 Position Limits Proposal, 78 FR at 75839-40 
(Appendix D to Part 150--Initial Position Limit Levels).
    \543\ Rounded up to the next 100 contracts.
---------------------------------------------------------------------------

    The Commission did not receive any estimate of deliverable supply 
for the CME Live Cattle (LC) core referenced futures contract from CME, 
nor did CME recommend any change in the limit level for LC. In the 
absence of any such update, the Commission is reproposing the initial 
speculative position limit level of 450 contracts. Of 616 reportable 
persons, the Commission's impact analysis did not reveal any unique 
person trading cash settled or physical delivery spot month contracts 
who would have held positions above this level for LC.
    With respect to the IFUS CC, KC, CT, OJ, SB, and SF core referenced 
futures contracts, the Commission's impact analysis did not reveal any 
unique person trading cash settled spot month contracts who would have 
held positions above the initial levels that the Commission adopts 
today; as illustrated below, lower levels would mostly have affected 
small numbers of traders in physical delivery contracts.

                           Table III-B-8--IFUS Soft Agricultural Contracts--Spot Month
----------------------------------------------------------------------------------------------------------------
                                                                  Unique persons over spot month
                                                                               limit
    Core referenced futures      Basis of spot-                  --------------------------------   Reportable
           contract                month level      Limit level                      Physical      persons spot
                                                                   Cash settled      delivery       month only
                                                                     contracts       contracts
----------------------------------------------------------------------------------------------------------------
Cocoa (CC)....................  15% DS..........           3,300               0               0             164
                                25% DS..........  [dagger][dagge               0               0
                                                        r] 5,500
Coffee ``C'' (KC).............  15% DS..........           1,440               0               *             336
                                25% DS..........  [dagger][dagge               0               *
                                                        r] 2,400
Cotton No. 2 (CT).............  15% DS..........             960               0               *             122
                                25% DS..........  [dagger][dagge               0               0
                                                        r] 1,600
FCOJ-A (OJ)...................  15% DS..........           1,680               0               0              38
                                25% DS..........  [dagger][dagge               0               0
                                                        r] 2,800
Sugar No. 11 (SB).............  15% DS..........          13,980               *              10             443
                                25% DS..........  [dagger][dagge               0               *
                                                       r] 23,300
Sugar No. 16 (SF).............  15% DS..........           4,200               0               0              12
                                [dagger][dagger]  [dagger][dagge               0               0
                                 25% DS.                r] 7,000
----------------------------------------------------------------------------------------------------------------
Reproposed speculative position limit levels are shown in bold.
``15% DS'' means 15 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract and is included to provide information regarding the distribution of reportable traders.
``25% DS'' means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract.
[dagger][dagger] Limit level requested by ICE.
* Denotes fewer than 4 persons.

c. Metals
    As explained above, the Commission has verified that the estimates 
of deliverable supply for each of the COMEX Gold (GC), COMEX Silver 
(SI), NYMEX Platinum (PL), NYMEX Palladium (PA), and COMEX Copper (HG) 
core referenced futures contracts submitted by CME are reasonable.
    Nevertheless, the Commission has determined to repropose the 
initial speculative spot month position limit levels for GC, SI, and HG 
at the recommended levels submitted by CME,\544\ all of which are lower 
than 25 percent of estimated deliverable supply.\545\ In the case of GC 
and SI, this is a doubling of the current exchange-set limit 
levels.\546\ In the case of HG, the initial level is the same as the 
existing DCM-set level for the core referenced futures contract and 
lower than the level previously proposed.
---------------------------------------------------------------------------

    \544\ CL-CME-61007 at 5.
    \545\ The Commission noted in the December 2013 Position Limits 
Proposal ``that DCMs historically have set or maintained exchange 
spot month limits at levels below 25 percent of deliverable 
supply.'' December 2013 Position Limits Proposal, 78 FR at 75729.
    \546\ One commenter cautioned against raising limit levels for 
GC to 25 percent of deliverable supply, and expressed concern that 
higher federal limits would incentivize exchanges to raise their own 
limits. CL-WGC-59558 at 2-4.

                          Table III-B-9--CME Metals Contracts--Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
                                                          Previously       25% of estimated       Reproposed
                      Contract                          proposed  limit       deliverable     speculative  limit
                                                          level \547\        supply \548\            level
----------------------------------------------------------------------------------------------------------------
GC..................................................               3,000              11,200               6,000

[[Page 96763]]

 
SI..................................................               1,500               5,600               3,000
PL..................................................                 500                 900                 100
PA..................................................                 650                 900                -500
HG..................................................               1,200               1,100               1,000
----------------------------------------------------------------------------------------------------------------

    The Commission has also determined to repropose the initial 
speculative spot month position limit level for PL at 100 contracts and 
PA at 500 contracts, which are the levels recommended by CME. In the 
case of PL and PA, the reproposed level is the same as the existing 
DCM-set level for the core referenced futures contract, and a decrease 
from the previously proposed levels of 500 and 650 contracts, 
respectively.
---------------------------------------------------------------------------

    \547\ December 2013 Position Limits Proposal, 78 FR at 75840 
(Appendix D to Part 150--Initial Position Limit Levels).
    \548\ Rounded up to the next 100 contracts.
---------------------------------------------------------------------------

    The Commission found varying numbers of traders in the GC, SI, PL, 
PA, and HG physical delivery contracts over the initial levels, but the 
numbers were very small except for PA.\549\ Because the levels that the 
Commission reproposes today for PL, PA, and HG maintain the status quo 
for those contracts, the Commission assumes that some or possibly all 
of such traders over the reproposed levels are hedgers. The Commission 
reiterates the discussion above regarding agricultural contracts: 
hedgers may have to file for an applicable exemption, but hedgers with 
bona fide hedging positions should not have to reduce their positions 
as a result of speculative position limits per se. Thus, the number of 
traders in the metals physical delivery contracts who would need to 
reduce speculative positions below the reproposed limit levels should 
be lower than the numbers indicated by the impact analysis. And, while 
setting initial speculative levels at 25 percent of deliverable supply 
would, based upon logic and the Commission's impact analysis, affect 
fewer traders in the metals physical delivery contracts, consistent 
with its statement in the December 2013 Position Limits Proposal, the 
Commission believes that setting these lower levels of initial spot 
month limits will serve the objectives of preventing excessive 
speculation, manipulation, squeezes and corners,\550\ while ensuring 
sufficient market liquidity for bona fide hedgers in the view of the 
listing DCM and ensuring that the price discovery function of the 
market is not disrupted.
---------------------------------------------------------------------------

    \549\ Fewer than four unique persons.
    \550\ Contra CL-ISDA/SIFMA-59611 at 55 (proposed spot month 
limits ``are almost certainly far smaller than necessary to prevent 
corners or squeezes'').

                                 Table III-B-10--CME Metal Contracts--Spot Month
----------------------------------------------------------------------------------------------------------------
                                                                  Unique persons over spot month
                                                                               limit
    Core referenced futures      Basis of spot-                  --------------------------------   Reportable
           contract                month level      Limit level                      Physical      persons spot
                                                                   Cash settled      delivery       month only
                                                                     contracts       contracts
----------------------------------------------------------------------------------------------------------------
Gold (GC).....................  CME                        6,000               *               *             518
                                 recommendation.
                                25% DS..........          11,200               0               0
Silver (SI)...................  CME                        3,000               0               0             311
                                 recommendation.
                                25% DS..........           5,600               0               0
Platinum (PL).................  CME                 [dagger] 500              13               *             235
                                 recommendation.
                                25% DS..........             900              10               *
                                50% DS..........           1,800               *               0
Palladium (PA)................  CME                 [dagger] 100               6              14             164
                                 recommendation.
                                25% DS..........             900               0               0
Copper (HG)...................  CME               [dagger] 1,000               0               *             493
                                 recommendation.
                                25% DS..........           1,100               0               *
----------------------------------------------------------------------------------------------------------------
Reproposed speculative position limit levels are shown in bold.
``25% DS'' means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract.
``50% DS'' means 50 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract and is included to provide information regarding the distribution of reportable traders.
[dagger] Denotes existing exchange-set limit level.
* Denotes fewer than 4 persons.

    The Commission's impact analysis reveals no unique persons in the 
SI and HG cash settled referenced contracts, and very few unique 
persons in the cash settled GC referenced contract, whose positions 
would have exceeded the initial limit levels for those contracts. Based 
on the Commission's impact analysis, setting the initial federal spot 
month limit levels for PL and PA at the lower levels recommended by CME 
would impact a few traders in PL and PA cash settled contracts.
    The Commission has carefully considered the numbers of unique 
persons that would be impacted by each of the cash-settled and 
physical-delivery spot month limits in the PL and PA referenced 
contracts. The Commission notes those limits would appear to impact 
more traders in the physical-delivery PA contract than in the cash-
settled PA contract, while fewer traders would be impacted in the 
physical-delivery PL contract than in the cash-settled PL contract (in 
any event, few traders would appear to be affected).\551\
---------------------------------------------------------------------------

    \551\ In this regard, the Commission notes that CME did not have 
access to the Commission's impact analysis when CME recommended 
levels for its physical-delivery core referenced futures contracts.

---------------------------------------------------------------------------

[[Page 96764]]

The Commission also observed the distribution of those cash-settled 
traders over time; as reflected in the open interest table discussed 
below regarding setting non-spot month limits, it can be readily 
observed that open interest in each of the cash-settled PL and PA 
referenced contracts was markedly lower in the second 12-month period 
(year 2) than in the prior 12-month period (year 1). Accordingly, the 
Commission accepts the CME recommended levels in PL and PA referenced 
contracts.
d. Energy
    As explained above, the Commission has verified that the estimates 
of deliverable supply for each of the NYMEX Natural Gas (NG), Light 
Sweet Crude (CL), NY Harbor ULSD (HO), and RBOB Gasoline (RB) core 
referenced futures contracts submitted by CME are reasonable.
    The Commission has determined to repropose the initial speculative 
spot month position limit levels for the NG, CL, HO, and RB core 
referenced futures contracts at 25 percent of estimated deliverable 
supply which, in the case of CL, HO, and RB is higher than the levels 
recommended by CME.\552\ As is evident from the table set forth below, 
this also means that the Commission is reproposing speculative position 
limit levels that are significantly higher than the levels for these 
four contracts as previously proposed. As stated in the December 2013 
Position Limits Proposal, the 25 percent formula ``is consistent with 
the longstanding acceptable practices for DCM core principle 5 which 
provides that, for physical-delivery contracts, the spot-month limit 
should not exceed 25 percent of the estimated deliverable supply.'' 
\553\ The Commission continues to believe, based on its experience and 
expertise, that the 25 percent formula is an ``effective prophylactic 
tool to reduce the threat of corners and squeezes, and promote 
convergence without compromising market liquidity.'' \554\
---------------------------------------------------------------------------

    \552\ CL-CME-61007 at 5. One commenter opined that 25 percent of 
deliverable supply would result in a limit level that is too high 
for natural gas, and suggest 5 percent as an alternative that 
``would provide ample liquidity and significantly reduce the 
potential for excessive speculation.'' CL-Industrial Energy 
Consumers of America-59964 at 3. Another commenter supported 
increasing ``the spot-month position limit levels for Henry Hub 
Natural Gas referenced contracts to be consistent with CME Group's 
or ICE's estimates of deliverable supply and more generally the 
significant new sources of natural gas.'' CL-NGSA-59674 at 3.
    \553\ December 2013 Position Limits Proposal, 78 FR at 75729.
    \554\ December 2013 Position Limits Proposal, 78 FR at 75729.
    \555\ December 2013 Position Limits Proposal, 78 FR at 75840 
(App. D to part 150--Initial Position Limit Levels).
    \556\ Rounded up to the next 100 contracts.

                          Table III-B-11--CME Energy Contracts--Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
                                                          Previously       25% of estimated       Reproposed
                      Contract                          proposed  limit       deliverable     speculative  limit
                                                          level \555\        supply \556\            level
----------------------------------------------------------------------------------------------------------------
NG..................................................               1,000               2,000               2,000
CL..................................................               3,000              10,400              10,400
HO..................................................               1,000               2,900               2,900
RB..................................................               1,000               6,800               6,800
----------------------------------------------------------------------------------------------------------------

    The levels that CME recommended for NG, CL, HO, and RB are twice 
the existing exchange-set spot month limit levels. Nevertheless, the 
Commission is reproposing speculative spot month limit levels at 25 
percent of deliverable supply for CL, HO, and RB because the Commission 
believes that higher levels will lessen the impact on a number of 
traders in both cash settled and physical delivery contracts. For NG, 
the Commission is reproposing the physical delivery limit at 25% of 
deliverable supply, as recommended by CME; \557\ the Commission is also 
reproposing a conditional spot month limit exemption of 10,000 for 
cash-settled contracts in natural gas only.\558\ This exemption would 
to some degree maintain the status quo in natural gas because each of 
the NYMEX and ICE cash-settled natural gas contracts, which settle to 
the final settlement price of the physical delivery contract, include a 
conditional spot month limit exemption of 5,000 contracts (for a total 
of 10,000 contracts).\559\ However, neither the

[[Page 96765]]

NYMEX and ICE penultimate contracts, which settle to the daily 
settlement price on the next to last trading day of the physical 
delivery contract, nor OTC swaps, are currently subject to any spot 
month position limit. In addition, the Commission's impact analysis 
suggests that a conditional spot month limit exemption greater than 25% 
of deliverable supply for cash settled contracts in natural gas would 
potentially benefit many traders.
---------------------------------------------------------------------------

    \557\ One commenter expressed concern about setting the spot 
month limit for natural gas swaps at the same level as for the 
physically settled futures contract, because some referenced 
contracts cease to be economically equivalent ``during the limited 
window at expiry.'' CL-BG Group-59937 at 3.
    \558\ This exemption for up to 10,000 contracts would be five 
times the spot month limit of 2,000 contracts, consistent with the 
December 2013 Position Limits Proposal. See December 2013 Position 
Limits Proposal, 78 FR at 75736-8. Under vacated Sec.  151.4, the 
Commission would have applied a spot-month position limit for cash-
settled contracts in natural gas at a level of five times the level 
of the limit for the physical delivery core referenced futures 
contract. See Position Limits for Futures and Swaps, 76 FR 71626, 
71687 (Nov. 18, 2011).
    \559\ Some commenters supported retaining a conditional spot 
month limit in natural gas. E.g., CL-ICE-60929 at 12 (``Any changes 
to the current terms of the Conditional Limit would disrupt present 
market practice for no apparent reason. Furthermore, changing the 
limits for cash-settled contracts would be a significant departure 
from current rules, which have wide support from the broader market 
as evidenced by multiple public comments supporting no or higher 
cash-settled limits.''). Contra CL-Sen. Levin-59637 at 7 (``The 
proposed higher limit for cash settled contracts is ill-advised. It 
would not only raise the affected position limits to levels where 
they would be effectively meaningless, it would also introduce 
market distortions favoring certain contracts and certain exchanges 
over others, and potentially disrupt important markets, including 
the U.S. natural gas market that is key to U.S. manufacturing.''); 
CL-Public Citizen-59648 at 5 (``Congress, in allowing an exemption 
for bona fide hedgers but not pure speculators, could not possibly 
have intended for the Commission to implement position limits that 
allow market speculators to hold 125 percent of the estimated 
deliverable supply. Once again, while this exception for cash-
settled contracts would avoid market manipulations such as corners 
and squeezes (since cash-settled contracts give no direct control 
over a commodity), it does not address the problem of undue 
speculative influence on futures prices.''); CL-Better Markets-60401 
at 17 (``There is no justification for treating cash and physically-
settled contracts differently in any month, and settlement 
characteristics should not be a determinant of the ability to exceed 
the limits in any month.''). One commenter urged the Commission ``to 
eliminate the requirement that traders hold no physical-delivery 
position in order to qualify for the conditional spot-month limit 
exemption'' in order to maintain liquidity in the NYMEX natural gas 
futures contract. CL-BG Group-59656 at 6-7. See also CL-NGSA-59674 
at 38-39 (supporting the higher conditional spot month limit in 
natural gas without restricting positions in the underlying physical 
delivery contract); CL-EEI-EPSA-59602 at 10 (the Commission should 
permit ``market participants to rely on higher speculative limits 
for cash-settled contracts while still holding a position in the 
physical-delivery contract''); CL-APGA-59722 at 8 (the Commission 
should condition the spot month limit exemption for cash settled 
natural gas contracts by precluding a trader from holding more than 
one quarter of the deliverable supply in physical inventory). Cf. 
CL-CME-59971 at 3 (eliminate the five times natural gas limit 
because it ``encourages participants to depart from, or refrain from 
establishing positions in, the primary physical delivery contract 
market and instead opt for the cash-settled derivative contract 
market, especially during the last three trading days when the five 
times limit applies. By encouraging departure from the primary 
contract market, the five times limit encourages a process of de-
liquefying the benchmark physically delivered futures market and 
directly affects the determination of the final settlement price for 
the NYMEX NG contract- the very same price that a position 
representing five times the physical limit will settle against.'').

                                  Table III-B-12--Energy Contracts--Spot Month
----------------------------------------------------------------------------------------------------------------
                                                                  Unique persons over spot month
                                                                               limit
    Core referenced futures      Basis of spot-                  --------------------------------   Reportable
           contract                month level      Limit level                      Physical      persons spot
                                                                   Cash settled      delivery       month only
                                                                     contracts       contracts
----------------------------------------------------------------------------------------------------------------
Natural Gas (NG)..............  CME                        2,000             131              16           1,400
                                 recommendation.
                                50% DS..........           4,000              77               *
                                Conditional               10,000              20               0
                                 Exemption.
Light Sweet Crude (CL)........  CME               [dagger][dagge              19               8           1,733
                                 recommendation.        r] 6,000
                                25% DS..........          10,400              16               *
                                50% DS..........          20,800               *               0
NY Harbor ULSD (HO)...........  CME                        2,000              24              11             470
                                 recommendation.
                                25% DS..........           2,900              15               5
                                50% DS..........           5,800               5               0
RBOB Gasoline (RB)............  CME                        2,000              23              14             463
                                 recommendation.
                                25% DS..........           6,800               *               0
                                50% DS..........          13,600               0               0
----------------------------------------------------------------------------------------------------------------
Reproposed speculative position limit levels are shown in bold.
``25% DS'' means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract.
``50% DS'' means 50 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract and is included to provide information regarding the distribution of reportable traders.
[dagger][dagger] CME recommended a step-down spot month limit of 6,000/5,000/4,000 contracts in the last three
  days of trading.
* Denotes fewer than 4 persons.

5. Setting Levels of Single-Month and All-Months-Combined Limits
    The Commission has determined to use the futures position limits 
formula, 10 percent of the open interest for the first 25,000 contracts 
and 2.5 percent of the open interest thereafter, to repropose the non-
spot month speculative position limits for referenced contracts, 
subject to the details and qualifications set forth in this 
Notice.\560\ The Commission continues to believe that ``the non-spot 
month position limits would restrict the market power of a speculator 
that could otherwise be used to cause unwarranted price movements.'' 
\561\
---------------------------------------------------------------------------

    \560\ As noted in the December 2013 Position Limits Proposal, 
the Commission has used the 10, 2.5 percent formula in administering 
the level of the legacy all-months position limits since 1999. 
December 2013 Position Limits Proposal, 78 FR at 75729-30.
    Several commenters did not support establishing non-spot month 
limits. See, e.g., CL-ISDA/SIFMA-59611 at 27 (``There is no 
justification whatsoever for non-spot-month limits.''); CL-EEI-EPSA-
59602 at 10 (``limits outside the spot month are not necessary''); 
CL-AMG-59709 at 10 (the Commission should ``decline to adopt non-
spot-month position limits''); CL-CME-59718 at 39 (the Proposal's 
non-spot-month position limit formula should be withdrawn''); CL-
CAM-60097 at 2 (``Non-spot month limits are neither necessary nor 
appropriate.''); CL-BG Group-60383 at 2 (``Any final rule should be 
limited to a federally mandated spot-month limit (not any/all month 
limits).''). Some of these same commenters supported position 
accountability in the non-spot months rather than limits. See, e.g., 
CL-EEI-EPSA-59602 at 10, CL-FIA-59595 at 3, CL-MFA-60385 at 5, CL-
ISDA/SIFMA-59611 at 29, CL-Calpine-59663 at 3-4, CL-Working Group-
60396 at 10, CL-EDF-60398 at 4, CL-ICE-59966 at 8, CL-BG Group-60383 
at 2, CL-CMC-59634 at 11. Some commenters also urged the Commission 
to wait until it has reliable data before establishing non-spot 
month limits. See, e.g., CL-EEI-EPSA-59602 at 11; CL-FIA-59595 at 3, 
14; CL-MFA-60385 at 5; CL-ISDA/SIFMA-59611 at 29; CL-Olam-59658 at 
1, 3. See also discussion of part 20 data adjustments under Sec.  
150.2, below. Contra CL-O SEC-59972 (``corners and other supply 
fluctuations can occur during non-spot months'').
    A commenter who did not support adopting non-spot month limits 
suggested a fall-back position of adopting ``any months limits'' but 
not ``all months limits,'' and suggested an alternative 10, 5 
percent formula in specified circumstances. CL-Working Group-59693 
at 62. See also CL-CME-59718 at 44 (supporting a 10, 5 percent 
formula). One commenter supported abolishing single month limits 
``in favor of an ``all months'' or gross position that would 
effectively allow the player to adapt their position to the 
realities of an agricultural crop that doesn't flow in equal monthly 
chunks.'' CL-Thornton-59702 at 1. Another commenter stated that 
``[p]osition limits should be a function of the liquidity of the 
market,'' CL-MFA-59606 at 21, and asserted that applying the 10, 2.5 
percent formula will result in ``a self-reinforcing cycle of lower 
open interest and lower position limits in successive years.'' CL-
MFA-59696 at 22. Another commenter supported ``tying the overall 
non-spot month position limits to an acceptable aggregate (market-
wide) level of speculation, and tying individual trader limits to 
that aggregate level.'' CL-Public Citizen-59648 at 4. Another 
commenter expressed the belief that the 10, 2.5 percent formula 
would result in non-spot month limits that ``are much too high to 
adequately regulate excessive speculation that might lead to price 
fluctuations.'' CL-Tri-State-59682 at 1. To ``address the 
cumulative, disruptive effect of traders who hold large, but not 
dominant positions,'' one commenter suggested basing non-spot month 
position limits on ``an acceptable total level of speculation that 
approximates the historic ratio of hedging to investor/speculative 
trading.'' CL-A4A-59714 at 4. See CL-Better Markets-60401 at 4 
(``Historically, speculators in commodity futures have constituted 
between 15%-30% of market activity, and within this range 
speculators productively facilitated effective hedging without 
meaningfully disrupting or independently shaping the market's 
behavior.'').
    \561\ December 2013 Position Limits Proposal, 78 FR at 75730.
---------------------------------------------------------------------------

a. CME and MGEX Agricultural Contracts
    The Commission is reproposing the non-spot month speculative 
position limit levels for the Corn (C), Oats (O), Rough Rice (RR), 
Soybeans (S), Soybean Meal (SM), Soybean Oil (SO), and Wheat (W) core 
referenced futures contracts based on the 10, 2.5 percent open interest 
formula.\562\ Based on the Commission's experience since 2011 with non-
spot month speculative position limit levels for the Hard Red Winter 
Wheat (KW) and Hard Red Spring Wheat (MWE) core referenced futures 
contracts, the Commission is reproposing the limit levels for those two 
commodities at the current level of 12,000 contracts rather than 
reducing them to the lower levels that would result from applying the 
10, 2.5 percent formula.\563\
---------------------------------------------------------------------------

    \562\ One commenter expressed concern ``that proposed all-
months-combined speculative position limits based on open interest 
levels is not necessarily the appropriate methodology and could lead 
to contract performance problems.'' This commenter urged ``that all-
months-combined limits be structured to `telescope' smoothly down to 
legacy spot-month limits in order to ensure continued convergence.'' 
CL-NGFA-60312 at 4.
    \563\ One commenter supported a higher limit for KW than 
proposed to promote growth and to enable liquidity for Kansas City 
hedgers who often use the Chicago market. CL-Citadel-59717 at 8. 
Another commenter supported setting ``a non-spot month and combined 
position limit of no less than 12,000 for all three wheat 
contracts.'' CL-MGEX-60301 at 1. Contra CL-O SEC-59972 at 7-8 
(commending ``the somewhat more restrictive limitations . . . on 
wheat trading'').
    \564\ The W core referenced futures contract refers to soft red 
winter wheat, the KW core reference futures contract refers to hard 
red winter wheat, and the MWE core reference futures contract refers 
to hard red spring wheat; i.e., the contracts are for different 
products.

[[Page 96766]]



                Table III-B-13--CME and MGEX Agricultural Contracts--Non-Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
                                                                                    Previously      Reproposed
                            Contract                              Current  limit     proposed       speculative
                                                                       level        limit level     limit level
----------------------------------------------------------------------------------------------------------------
C...............................................................          33,000          53,500          62,400
O...............................................................           2,000           1,600           5,000
RR..............................................................           1,800           2,200           5,000
S...............................................................          15,000          26,900          31,900
SM..............................................................           6,500           9,000          16,900
SO..............................................................           8,000          11,900          16,700
W \564\.........................................................          12,000          16,200          32,800
KW..............................................................          12,000           6,500          12,000
MWE.............................................................          12,000           3,300          12,000
----------------------------------------------------------------------------------------------------------------

    Maintaining the status quo for the non-spot month limit levels for 
the KW and MWE core referenced futures contracts means there will be 
partial wheat parity.\565\ The Commission has determined not to raise 
the reproposed limit levels for KW and MWE to the limit level for W, as 
32,800 contracts appears to be extraordinarily large in comparison to 
open interest in the KW and MWE markets, and the limit levels for KW 
and MWE are already larger than a limit level based on the 10, 2.5 
percent formula. Even when relying on a single criterion, such as 
percentage of open interest, the Commission has historically recognized 
that there can ``result . . . a range of acceptable position limit 
levels.'' \566\
---------------------------------------------------------------------------

    \565\ Several commenters supported adopting equivalent non-spot 
month position limits for the three existing wheat referenced 
contracts traders. See, e.g., CL-FIA-59595 at 4, 15; CL-CMC-60391 at 
8; CL-CMC-60950 at 11; CL-CME-59718 at 44; CL-AFBF-59730 at 4; CL-
MGEX-59932 at 2; CL-MGEX-60301 at 1; CL-MGEX-59610 at 2-3; CL-MGEX-
60936 at 2-3; CL-NCFC-59942 at 6; CL-NGFA-59956 at 3.
    \566\ Revision of Speculative Position Limits, 57 FR 12770, 
12766 (Apr. 13, 1992). See also Revision of Speculative Position 
Limits and Associated Rules, 63 FR 38525, 38527 (July 17, 1998). Cf. 
December 2013 Position Limits Proposal, 78 FR at 75729 (there may be 
range of spot month limits that maximize policy objectives).

                                                              Table III-B-14--CME and MGEX Agricultural Contracts--Non-Spot Months
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Open interest                                            Unique persons above  limit     Reportable
                                                                 ---------------------------------------------------------------- Initial  limit               level                persons in
                Core-referenced futures contract                                                                                       level     --------------------------------  market-- all
                                                                       Year           Futures          Swaps           Total                        All months     Single month       months
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Corn (C)........................................................               1       1,829,359         359,715       2,189,074          62,400               *               *           2,606
                                                                               2       1,779,977         641,014       2,420,991
Oats (O)........................................................               1          10,097             646          10,743           5,000               0               0             173
                                                                               2          11,223             480          11,703
Rough Rice (RR).................................................               1          10,585             362          10,948           5,000               0               0             281
                                                                               2          12,769               4          12,773
Soybeans (S)....................................................               1         973,037         109,858       1,082,895          31,900               6               4           2,503
                                                                               2         962,636         235,679       1,198,315
Soybean Meal (SM)...............................................               1         422,611          71,887         494,498          16,900               5               4             978
                                                                               2         463,549         134,399         597,948
Soybean Oil (SO)................................................               1         421,114          55,265         476,379          16,700               5               4           1,034
                                                                               2         464,373         125,106         589,478
Wheat (W).......................................................               1       1,072,107         162,999       1,235,105          32,800               *               *           1,867
                                                                               2       1,010,342         222,420       1,232,762
Wheat (MWE).....................................................               1          67,653           1,944          69,596  [dagger] 5,000              10               7             342
                                                                               2          66,608           3,079          69,687          12,000               0               0
Wheat (KW)......................................................               1         169,059           9,436         178,495  [dagger] 8,100               9               8             718
                                                                               2         216,236          29,563         245,799          12,000               *               *
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 = July 1, 2014 to June 30, 2015
Year 2 = July 1, 2015 to June 30, 2016
Reproposed speculative position limit levels are shown in bold.
[dagger] Application of the 10, 2.5 percent formula would result in a level lower than the level adopted by the Commission in 2011.
* Denotes fewer than 4 persons.

b. Softs
    The Commission is reproposing non-spot month speculative position 
limit levels for the CC, KC, CT, OJ, SB, SF and LC \567\ core 
referenced futures contracts based on the 10, 2.5 percent open interest 
formula.
---------------------------------------------------------------------------

    \567\ One commenter expressed concern that too high non-spot 
month limit levels could lead to a repeat of convergence problems 
experienced by certain contracts and that ``the imposition of all 
months combined limits in continuously produced non-storable 
commodities such as livestock . . . will reduce the liquidity needed 
by hedgers in deferred months who often manage their risk using 
strips comprised of multiple contract months.'' CL-AFBF-59730 at 3-
4. One commenter requested that the Commission withdraw its proposal 
regarding non-spot month limits, citing, among other things, the 
Commission's previous approval of exchange rules lifting all-months-
combined limits for live cattle contracts ``to ensure necessary 
deferred month liquidity.'' CL-CME-59718 at 4. Another commenter 
expressed concern that non-spot month limits would have a negative 
impact on live cattle market liquidity. CL-CMC-59634 at 12-13. See 
also CL-CME-59718 at 41.

[[Page 96767]]



 Table III-B-15--Softs and Other Agricultural Contracts--Non-Spot Month
                              Limit Levels
------------------------------------------------------------------------
                                            Previously
                                             proposed       Reproposed
                Contract                    limit level     speculative
                                               \568\        limit level
------------------------------------------------------------------------
CC......................................           7,100          10,200
KC......................................           7,100           8,800
CT......................................           8,800           9,400
OJ......................................           2,900           5,000
SB......................................          23,500          38,400
SF......................................           1,200           7,000
LC......................................          12,900          12,200
------------------------------------------------------------------------

    Set forth below is a summary of the impact analysis for softs and 
live cattle.
---------------------------------------------------------------------------

    \568\ December 2013 Position Limits Proposal, 78 FR at 75839-40 
(App. D to part 150--Initial Position Limit Levels).

                                                             Table III-B-16--Softs and Other Agricultural Contracts--Non-Spot Months
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Open interest                                            Unique persons above  limit     Reportable
                                                                 ---------------------------------------------------------------- Initial  limit               level                persons in
                Core-referenced futures contract                                                                                       level     --------------------------------  market-- all
                                                                       Year           Futures          Swaps           Total                        All months     Single month       months
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cocoa (CC)......................................................               1         240,984          11,257         252,240          10,200              12               7             682
                                                                               2         273,134          56,853         329,987
Coffee C (KC)...................................................               1         211,051          24,164         235,215           8,800               6               *           1,175
                                                                               2         223,885          51,846         275,731
Cotton No. 2 (CT)...............................................               1         238,580          35,102         273,682           9,400              13               8           1,000
                                                                               2         239,321          60,477         299,798
FCOJ-A (OJ).....................................................               1          16,883             121          17,004           5,000
                                                                               *               *             242
                                                                               2          16,336               5          16,341
Sugar No. 11 (SB)...............................................               1       1,016,271         211,994       1,228,265          38,400              14               9             874
                                                                               2       1,077,452         382,816       1,460,268
Sugar No. 16 (SF)...............................................               1           8,385               0           8,385           7,000               *               0              22
                                                                               2           9,608               0           9,608
Live Cattle (LC)................................................               1         387,896          23,626         411,522          12,200               9               *           1,436
                                                                               2         350,147          52,330         402,478
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 = July 1, 2014 to June 30, 2015. Year 2 = July 1, 2015 to June 30, 2016. Reproposed speculative position limit levels are shown in bold.
* Denotes fewer than 4 persons.

c. Metals
    The Commission is reproposing non-spot month speculative position 
limit levels for the GC, SI, PL, PA, and HG core referenced futures 
contracts based on the 10, 2.5 percent open interest formula.\569\
---------------------------------------------------------------------------

    \569\ One commenter was concerned that applying the 10, 2.5 
percent formula to open interest for gold would result in a lower 
non-spot month limit level than the spot month limit level, and 
urged the Commission to ``apply a consistent methodology to both 
spot and non-spot months.'' CL-WGC-59558 at 5.

[[Page 96768]]



    Table III-B-17--CME Metals Contracts--Non-Spot Month Limit Levels
------------------------------------------------------------------------
                                            Previously      Reproposed
                Contract                     proposed       speculative
                                            limit level     limit level
------------------------------------------------------------------------
GC......................................          21,500          19,500
SI......................................           6,400           7,600
PL......................................            5000           5,000
PA......................................            5000           5,000
HG......................................           5,600           7,800
------------------------------------------------------------------------

    Set forth below is a summary of the impact analysis for 
metals.\570\
---------------------------------------------------------------------------

    \570\ One commenter expressed concern that imposing non-spot 
position limits on copper would negatively affect liquidity as 
evidenced by the number of unique persons affected. CL-CMC-59634 at 
13, n. 26. Another commenter cited the number of unique traders with 
all-months overages as shown in the open interest data for the GC, 
SI and PL contracts in the December 2013 Position Limits Proposal as 
an indication that ``the impact of the Commission's non-spot-month 
position limits is random and arbitrarily inflexible with no 
relationship to preventing excessive speculation or manipulation.'' 
CL-CME-59718 at 41.

                                                  Table III-B-18--CME Metals Contracts--Non-Spot Months
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      Open interest                                         Unique persons above limit      Reportable
    Core-referenced futures     ---------------------------------------------------------  Initial limit               level                persons in
            contract                                                                           level     --------------------------------   market--all
                                   Year       Futures          Swaps           Total                        All months     Single month       months
--------------------------------------------------------------------------------------------------------------------------------------------------------
Gold (GC)......................        1         618,738          47,727         666,465          19,500              19              17           1,557
                                       2         667,495          36,029         703,525
Silver (SI)....................        1         218,028           9,867         227,895           7,600              15              18           1,023
                                       2         203,645           3,510         207,155
Platinum (PL)..................        1          70,151          21,566          91,717           5,000              26              26             842
                                       2          70,713           2,285          72,997
Palladium (PA).................        1          37,488           1,929          39,417           5,000               *               *             580
                                       2          28,276             823          29,099
Copper (HG)....................        1         170,784          22,859         193,643           7,800              19              12           1,457
                                       2         186,525          47,365         233,890
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 = July 1, 2014 to June 30, 2015
Year 2 = July 1, 2015 to June 30, 2016
Reproposed speculative position limit levels are shown in bold.
* Denotes fewer than 4 persons.

d. Energy
    The Commission is reproposing non-spot month speculative position 
limit levels for the NG, CL, HO, and RB core referenced futures 
contracts based on the 10, 2.5 percent open interest formula.\571\
---------------------------------------------------------------------------

    \571\ One commenter suggested deriving non-spot month limit 
levels for the CL, HO, and RB referenced contracts from the usage 
ratios for U.S. crude oil and oil products rather than open interest 
and expressed concern that ``unnecessarily low limits will hamper 
legitimate hedging activity.'' CL-Citadel-59717 at 7-8. Another 
commenter suggested setting limit levels based on customary position 
size. CL-APGA-59722 at 6. This commenter also supported setting the 
single month limit at two-thirds of the all months combined limit in 
order to relieve market congestion as traders exit or roll out of 
the next to expire month into the spot month. CL-APGA-59722 at 7.

[[Page 96769]]



    Table III-B-19--CME Energy Contracts--Non-Spot Month Limit Levels
------------------------------------------------------------------------
                                            Previously      Reproposed
                Contract                  proposed limit    speculative
                                               level        limit level
------------------------------------------------------------------------
NG......................................         149,600         200,900
CL......................................         109,200         148,800
HO......................................          16,100          21,300
RB......................................          11,800          15,300
------------------------------------------------------------------------

    Set forth below is a summary of the impact analysis for energy 
contracts.

                                                  Table III-B-20--CME Energy Contracts--Non-Spot Months
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      Open interest                                         Unique persons above limit      Reportable
    Core-referenced futures     ---------------------------------------------------------  Initial limit               level                persons in
            contract                                                                           level     --------------------------------   market--all
                                   Year       Futures          Swaps           Total                        All months     Single month       months
--------------------------------------------------------------------------------------------------------------------------------------------------------
Natural Gas (NG)...............        1       4,919,841       2,866,128       7,785,969         200,900               *               0           1,846
                                       2       4,628,471       3,331,141       7,959,612
Light Sweet Crude (CL).........        1       4,071,681       1,587,450       5,659,130         148,800               0               0           2,673
                                       2       4,130,131       1,744,137       5,874,268
NY Harbor ULSD (HO)............        1         638,040         138,360         776,400          21,300               6               *             760
                                       2         587,796          65,721         653,518
RBOB Gasoline (RB).............        1         448,598          81,822         530,420          15,300               8               7             837
                                       2         505,849          30,477         536,327
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 = July 1, 2014 to June 30, 2015.
Year 2 = July 1, 2015 to June 30, 2016.
Reproposed speculative position limit levels are shown in bold.
* Denotes fewer than 4 persons.

6. Subsequent Levels of Limits
    The Commission notes that many of the comments referenced above, 
regarding setting initial position limits, are also discussed below, 
regarding re-setting levels of limits.
a. General Procedure for Re-Setting Levels of Limits
    Commission Proposal: The Commission proposed in Sec.  150.2(e)(2) 
that it would fix subsequent levels of speculative position limits no 
less frequently than every two calendar years, in accordance with the 
procedures in Sec.  150.2(e)(3) for spot-month limits and Sec.  
150.2(e)(3) for non-spot-month limits, discussed below.\572\ The 
Commission proposed it would publish such subsequent levels on its Web 
site.
---------------------------------------------------------------------------

    \572\ December 2013 Position Limits Proposal, 78 FR at 75728.
---------------------------------------------------------------------------

    Comments Received: Regarding Sec.  150.2(e)(2), commenters 
requested the Commission review the level of limits more frequently 
than every two years to address changes that may occur within the 
commodities markets.\573\
---------------------------------------------------------------------------

    \573\ CL-Public Citizen-59648 at 5; CL-AFR-59711 at 2; CL-IECA-
59713 at 3; CL-Better Markets-60325 at 2-3; CL-Better Markets-60401 
at 19-20; CL-CMOC-59720 at 3; CL-Cota-59706 at 2; CL-RF-60372 at 3.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined to repropose 
this provision as previously proposed in the December 2013 Position 
Limits Proposal, and reiterates that it will fix subsequent levels no 
less frequently than every two calendar years. The Commission is not 
proposing to establish a procedural requirement to reset limit levels 
more frequently than every two years, because as the frequency of reset 
increases, the burdens on market participants to update compliance 
systems and strategies, and on exchanges to submit deliverable supply 
estimates and reset exchange limit levels, also increase. The 
Commission believes that a two year timetable should reduce burdens on 
market participants while still maintaining limits based on recent 
market data. Should higher limit levels be desired, exchanges or market 
participants may petition the Commission to change limit levels within 
the two year period.
b. Re-setting Levels of Spot-Month Limits
    Commission Proposal: The Commission proposed in Sec.  150.2(e)(3) 
to reset each spot month limit at a level no greater than one-quarter 
of the estimated spot-month deliverable supply, based on the estimate 
of deliverable supply provided by the exchange listing the core 
referenced futures contract. The Commission proposed that it could, in 
its discretion, rely on its own estimate of deliverable supply. The 
Commission further proposed that, alternatively, it could set spot-
month limits based on the recommended level of the exchange listing the 
core referenced futures contract, if lower than 25 percent of estimated 
deliverable supply.\574\
---------------------------------------------------------------------------

    \574\ December 2013 Position Limits Proposal, 78 FR at 75728.
---------------------------------------------------------------------------

    Comments Received: Commenters generally recommended the Commission 
enhance predictability and reduce uncertainty for market participants, 
by either restricting how much adjustment would be made to the position 
limit level, or having the discretion to not alter position limit

[[Page 96770]]

levels, for example, if there have not been problems with 
convergence.\575\
---------------------------------------------------------------------------

    \575\ CL-FIA-60303 at 8, Agricultural Advisory Committee Meeting 
Transcript at 126-134 (Dec. 9, 2014).
---------------------------------------------------------------------------

    Commenters were divided regarding the proposed methodology for 
computing spot month position limit levels (which is calculated by 
determining a figure that is no more than 25 percent of estimated 
deliverable supply).\576\ Several commenters stated that the proposed 
formula for setting spot month limits based on 25 percent of 
deliverable supply results in spot month position limits that would be 
too high and may result in contract performance issues.\577\ Other 
commenters thought the formula results in spot-month position limits 
that would be too low and hinder market liquidity.\578\ Yet another 
requested that the Commission do further research to determine whether 
deliverable supply or open interest was a better means of setting spot 
month position limits, and apply the same metric (deliverable supply or 
open interest) to spot month limits and to non-spot month limits.\579\ 
Several commenters recommended that the Commission consider an 
alternative means of limiting excessive speculation, that is, by 
setting position limits at a level low enough to restore a hedger 
majority in open interest in each core referenced futures 
contract.\580\
---------------------------------------------------------------------------

    \576\ E.g., CL-WGC-59558 at 5; CL-MFA-60385 at 4-6; CL-ISDA/
SIFMA-59611 at 3, 31, 55-56, and 63-64; CL-MGEX-59610 at 2; CL-NGFA-
59681 at 4-5.
    \577\ See, e.g., CL-WGC-59558 at 5; CL-Public Citizen-60313 at 
1; CL-Tri-State-59682 at 1-2; CL-AFR-59711 at 2; CL-WEED-59628 at 1; 
CL-Industrial Energy Consumers of America-59671 at 3; CL-CMOC-59720 
at 3; CL-IATP-60394 at 2; CL-NGFA-59681 at 4-5.
    \578\ CL-ISDA/SIFMA-59611 at 55; CL-Armajaro-59729 at 1; CL-CAM-
60097 at 3-4.
    \579\ CL-WGC-59558 at 5.
    \580\ E.g., CL-IATP-60323 at 5; CL-IATP-60394 at 2; CL-RF-60372 
at 3.
---------------------------------------------------------------------------

    In estimating deliverable supply, some commenters recommended that 
the Commission include supply that is subject to long-term supply 
contracts, arguing that such supply can be readily made available for 
futures delivery.\581\ One commenter recommended that the Commission 
permit the inclusion in the deliverable supply calculation of supplies 
that can be readily transported to the futures delivery location.\582\ 
Another commenter recommended that the deliverable supply estimate 
should include related commodities that a DCM allows to be used to 
liquidate a futures position through an EFP transaction.\583\ One 
commenter recommended that the deliverable supply estimate for natural 
gas should include supplies that are available at other major locations 
in addition to the specific futures delivery location of Erath, 
Louisiana, because commercials at these locations use the futures 
contract for hedging and price basing and basing spot month limits on a 
more limited delivery area would be too restrictive.\584\ In estimating 
deliverable supply, one commenter recommended that the Commission not 
include supplies that do not meet delivery specifications.\585\ The 
same commenter said that DCMs should provide documentation if including 
long term supply agreements in deliverable supply estimates to enable 
the Commission to verify the information. The commenter expressed 
concern about financial holding companies' ability to own, warehouse 
and trade physical commodities and urged the Commission to assess how 
such firms might affect deliverable supply.\586\
---------------------------------------------------------------------------

    \581\ CL-FIA-59595 at 3, 9-10; CL-NGSA-59941 at 15.
    \582\ CL-MFA-59606 at 18; CL-MFA-60385 at 6.
    \583\ CL-MSCGI-59708 at 2, 11.
    \584\ CL-CAM-60097 at 3-4.
    \585\ CL-IATP-60323 at 6.
    \586\ CL-IATP-60323 at 7.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing to reset each 
spot-month limit, in its discretion, either: Based on 25 percent of 
deliverable supply as estimated by an exchange listing the core 
referenced futures contract; to the existing spot-month position limit 
level (that is, not changing such level); or to the recommended level 
of the exchange listing the core referenced futures contract, but not 
greater than 25 percent of estimated deliverable supply. In the 
alternative, if the Commission elects to rely on its own estimate of 
deliverable supply, it will first publish that estimate for comment in 
the Federal Register.
    Thus, the Commission accepts the commenter's recommendation that 
the Commission have discretion to retain current spot-month position 
limit levels. In this regard, the Commission provides, in reproposed 
Sec.  150.2(e)(3)(ii)(B), that an exchange need not submit an estimate 
of deliverable supply, if the exchange provides notice to the 
Commission, not less than two calendar months before the due date for 
its submission of an estimate, that it is recommending the Commission 
not change the spot-month limit, and the Commission accepts such 
recommendation.
    The Commission notes that it has long used deliverable supply as 
the basis for spot month position limits due to concerns regarding 
corners, squeezes, and other settlement-period manipulative activity. 
By restricting derivative positions to a proportion of the deliverable 
supply of the commodity, spot month position limits reduce the 
possibility that a market participant can use derivatives, including 
referenced contracts, to affect the price of the cash commodity (and 
vice versa). Limiting a speculative position based on a percentage of 
deliverable supply also restricts a speculative trader's ability to 
establish a leveraged position in cash-settled derivative contracts, 
diminishing that trader's incentive to manipulate the cash settlement 
price. Commenters did not provide evidence that would suggest that the 
open interest formula would respond more effectively to these concerns, 
and the Commission does not believe that using open interest would be 
preferable for calculating spot-month position limit levels.
    In addition, setting the limit levels at no greater than 25 percent 
of deliverable supply has historically been effective on both the 
federal and exchange level to combat corners and squeezes. In the 
preamble to the final rules for vacated Part 151, the Commission noted 
that the 25 percent of deliverable supply formula appears to ``work 
effectively as a prophylactic tool to reduce the threat of corners and 
squeezes and promote convergence without compromising market 
liquidity.'' Commenters did not provide evidence to support claims that 
this historical formula is no longer effective.
    In response to concerns that 25 percent of deliverable supply may 
result in a limit level that is too high, the Commission notes that 
exchanges can and often do--and are permitted under reproposed Sec.  
150.5(a) to--set limits at a level lower than 25 percent of estimated 
deliverable supply, which allows the exchanges to alter exchange-set 
limits easily based on changing market conditions.
    In response to commenters' suggestion to restore a hedger majority, 
the Commission notes such an alternative may fail the requirements of 
CEA section 4a(a)(3)(B)(iv) to ensure sufficient liquidity for bona 
fide hedgers. Hedgers may not be transacting on opposite sides of the 
market simultaneously and, thus, need speculators to provide liquidity. 
Simply changing the proportion of hedgers in the market does not mean 
that the markets would operate more efficiently for bona fide hedgers. 
In addition, in order to adopt the commenter's suggestion, the 
Commission would need to reintroduce the withdrawn '03 series forms 
which required traders to identify which positions were speculative and 
which were hedging, since any entity,

[[Page 96771]]

even a commercial end-user, can establish speculative positions.
    In response to commenters' suggestions regarding methods for 
estimating deliverable supply, the Commission notes that deliverable 
supply estimates are calculated and submitted by DCMs. Guidance for 
calculating deliverable supply can be found in Appendix C to part 38. 
Amendments to part 38 are beyond the scope of this rulemaking. However, 
such guidance already provides that deliverable supply calculations are 
estimates based on what ``reasonably can be expected to be readily 
available'' (including estimates of long-term supply that can be shown 
to be regularly made available for futures delivery).
c. Re-Setting Levels of Non-Spot-Month Limits
    Commission Proposal--General Procedure: For setting subsequent 
levels of non-spot month limits no less frequently than every two 
calendar years, the Commission proposed in Sec.  150.3(e)(4) to use the 
open interest formula: 10 percent of the first 25,000 contracts and 2.5 
percent of the open interest thereafter (10, 2.5 percent formula).\587\
---------------------------------------------------------------------------

    \587\ December 2013 Position Limits Proposal, 78 FR at 75729.
---------------------------------------------------------------------------

    Comments Received and Commission Response: ``In order to enhance 
the predictability and reduce uncertainty in business planning,'' one 
commenter recommended that the Commission ``adjust limits gradually and 
by no more than a minimum percentage in one biennial cycle.'' \588\ The 
Commission declines this suggestion because, as explained below, the 
Commission is reproposing a minimum non-spot month limit level of 5,000 
contracts; market participants would be certain that in no circumstance 
would the limit level fall below that figure. Also, because exchanges 
can set limits at levels below the federal limit level, a change in the 
federal limit may not have an effect on exchange limit levels.
---------------------------------------------------------------------------

    \588\ CL-FIA-60303 at 8. This commenter did not recommend any 
specific percentage limitation.
---------------------------------------------------------------------------

    Several commenters recommended that the Commission review the 
levels of position limits more frequently than once every two years to 
address changes that may occur within the commodities markets.\589\ In 
response these concerns, the Commission notes that exchanges may set 
limits at a level lower than the federal limits in order to more 
readily adapt to changing market conditions. Should higher limit levels 
be desired, exchanges may petition the Commission or the Commission may 
determine to change limit levels within the two year period. Thus, the 
flexibility to change limit levels more frequently than every two years 
is already permitted by the reproposed rules and the Commission is not 
changing the timeline.
---------------------------------------------------------------------------

    \589\ E.g., CL-Public Citizen-59648 at 5 (annually); CL-AFR-II 
at 2 (greater frequency); CL-Better Markets-60325 at 2-3 
(``[b]iennial updates . . . are completely inadequate''); CL-Better 
Markets-59716 at 34 (biennial updates values ``the input of swap 
dealers and their trade groups over that of commercial hedgers''); 
CL-CMOC-59720 at 3 (annual consultation with hedgers and end users); 
CL-RF-60372 at 3 (``review position limits every six months'').
---------------------------------------------------------------------------

    One commenter recommended that the Commission ``adopt final rules 
that give the Commission the flexibility to increase position limits 
immediately or with little delay so that the market can accurately 
respond to external forces without violating position limits'' or, in 
the alternative, ``include peak open interest levels beyond the most 
recent two years when it determines the level of open interest on which 
to base position limits.\590\ In response, the Commission notes that 
using peak open interest figures, as opposed to an average, as 
reproposed, may not necessarily represent an accurate portrait of 
current market conditions. Using the most recent two years of data is 
designed to ensure that the non-spot-month limit levels are set 
relative to the current size of the market.
---------------------------------------------------------------------------

    \590\ CL-MFA-59606 at 21.
---------------------------------------------------------------------------

    Several commenters expressed the view that the proposed limits 
based on the open interest formula would result in limit levels that 
are too high and would not accomplish the goal of reducing excessive 
speculation.\591\ In response, the Commission believes the open 
interest formula provides a level that is low enough to reduce the 
potential for excessive speculation and market manipulation without 
unduly impairing liquidity for bona fide hedgers. Under the rules 
reproposed today, both the Commission and the exchanges would have 
flexibility to impose non-spot month limit levels at the greater of the 
open interest formula, the spot month limit level, or 5,000 contracts.
---------------------------------------------------------------------------

    \591\ E.g., CL-Tri-State-59682 at 1-2; CL-A4A-59714 at 3; CL-
Better Markets-59716 at 24; CL-APGA-59722 at 3, 6; CL-AFBF-59730 at 
3; CL-NGFA-59681 at 5.
---------------------------------------------------------------------------

    Several commenters expressed the view that the proposed limits 
based on the open interest formula would result in limit levels for 
dairy contracts that are too low and would restrict hedging use by 
limiting liquidity.\592\ The Commission responds that it is deferring 
the imposition of position limits on the Class III Milk contract, as 
discussed below.\593\ The Commission also observes that reproposed 
Sec.  150.9 permits market participants to apply directly to the 
exchanges to obtain an exemption to exceed speculative position limits.
---------------------------------------------------------------------------

    \592\ E.g., CL-U.S. Dairy-59597 at 4, 6; CL-Hood-59582; CL-
McCully-59592 at 1; CL-Rice Dairy-59601 at 1; CL-Agri-Mark-59609 at 
1-2; CL-Jacoby-59622 at 1; CL-Pedestal-59630 at 2; CL-Darigold-59651 
at 1-2; CL-Traditum-59655 at 1; CL-Leprino-59707 at 2; CL-IDFA-59771 
at 1-2; CL-Fonterra-59608 at 1-2; CL-NCFC-59613 at 6; CL-NMPF-59936 
at 2; CL-DFA-59621 at 7-8; CL-Glanbia Foods-60316 at 1; CL-Leprino 
Foods-59707 at 2; CL-NMPF-59936 at 2.
    \593\ Some commenters urged the Commission to establish an 
individual month position limit in Class III Milk equal to the spot 
month limit but no less than 3,000 contracts net, and an all-months-
limit as a multiple of four times the spot month limit, to foster 
needed liquidity in the non-spot months. See, e.g., CL-NCFC-59942 at 
6. Another commenter urged an all-months-limit in Class III Milk of 
ten times the spot month limit for a similar reason. CL-U.S. Dairy-
59597 at 4. These comments are now moot.
---------------------------------------------------------------------------

    Several commenters recommended that the Commission consider an 
alternative means of limiting speculative traders, by setting position 
limits at a level low enough to restore a hedger majority in open 
interest in each core referenced futures contract.\594\ As discussed 
above, the Commission is concerned that ``restoring'' a hedger majority 
may not ensure sufficient liquidity for bona fide hedgers. Hedgers may 
not be transacting on opposite sides of the market simultaneously and, 
thus, need speculators to provide liquidity. Simply changing the 
proportion of hedgers in the market does not mean that the markets 
would operate more efficiently for bona fide hedgers. In addition, in 
order to implement this suggestion, the Commission would need to 
reintroduce the long defunct '03 series forms which required traders to 
identify which positions were speculative and which were hedging, 
because any entity, even a commercial end-user, can establish 
speculative positions.
---------------------------------------------------------------------------

    \594\ E.g., CL-IATP-60323 at 5; CL-IATP-60394 at 2; CL-RF-60372 
at 3; CL-A4A-59686 at 4; CL-Better Markets-59716 at 5; CL-Better 
Markets-60325 at 2.
---------------------------------------------------------------------------

    One commenter noted that the open interest formula permits a 
speculator to hold a larger percentage of open interest in a smaller 
commodity market and thus the formula's entire rationale seems 
``arbitrary . . . and . . . capricious.'' \595\ The Commission 
acknowledges that, because of the way the 10, 2.5 percent formula 
works, a speculator in a market with open interest of fewer than 25,000 
contracts may have a larger share of the open interest than a 
speculator in a market with an open interest of greater

[[Page 96772]]

than 25,000 contracts. The Commission responds that it is by design 
that the 10, 2.5 percent open interest formula provides that a 
speculator may hold a larger percentage of total open interest in a 
smaller market, potentially providing liquidity for bona fide hedgers 
in such a smaller market. As open interest increases, the 2.5% marginal 
increase results in limit levels that become a progressively smaller 
percentage of total open interest, essentially placing a greater 
emphasis on deterring market manipulation and protecting the price 
discovery process in a larger market.
---------------------------------------------------------------------------

    \595\ CL-USCF-59644 at 3-4.
---------------------------------------------------------------------------

    Another commenter suggested that the Commission use a 10, 5 percent 
open interest formula rather than a 10, 2.5 percent formula as 
proposed, arguing that the 10, 5 percent formula has worked well for 
certain agricultural futures markets and should be applied more 
broadly. Alternatively, this commenter said that Commission should use 
the 10, 5 percent formula for at least spread positions.\596\ The 
Commission notes the 10, 2.5 percent formula has produced limit levels 
that should sufficiently maximize the CEA section 4a(a)(3)(B) criteria, 
and the Commission does not believe increasing the marginal percentage 
is necessary. A larger limit such as would be produced from a 10, 5 
percent formula may not adequately prevent excessive speculation. In 
the preamble to the proposed rules, the Commission noted that the 10, 
2.5 percent formula was first proposed in 1992, and the commenter has 
not provided sufficient justification for moving away from this 
established standard.
---------------------------------------------------------------------------

    \596\ CL-Working Group-59693 at 62.
---------------------------------------------------------------------------

    One commenter recommended that the Commission consider commodity-
related ratios in establishing limits, such as the ratio between crude 
oil and its products, diesel (30 percent) and gasoline (50 percent), 
rather than on separate open interest formulas applied to each.\597\ In 
response, the Commission notes setting limit levels based on the open 
interest of a related commodity may result in limit levels that are too 
large to be effective in the smaller commodity markets. For example, 
based on the levels proposed in this release in Appendix D, 
implementing a limit for NYMEX RBOB Gasoline equal to 50 percent of the 
crude oil limit, as suggested by the commenter, would result in a limit 
almost 10 times the size otherwise indicated by the open interest 
formula, and would equal almost 28 percent of total average open 
interest in the RBOB referenced contract. Further, hedgers with 
positions in multiple contracts could establish positions in various 
ratios without violating a position limit, provided they comply with 
the bona fide hedging position definition and any applicable 
requirements. The Commission also notes that the process in reproposed 
Sec.  150.10 exempting certain spread positions may allow speculators 
some flexibility in inter- and intra-commodity spreads for the purpose 
of providing liquidity to bona fide hedgers.
---------------------------------------------------------------------------

    \597\ CL-Citadel-59717 at 7-8.
---------------------------------------------------------------------------

    One commenter suggested the Commission consider setting position 
limits on ``customary position size'' which had been used for setting 
non-spot month limits by the Commission in the past and which the 
commenter argues is a more effective means of curtailing large 
speculative positions.\598\ In response, the Commission believes the 
10, 2.5 percent formula has been effective in preventing excessive 
speculation without unduly limiting liquidity for bona fide hedgers. 
The Commission notes when the ``customary position size'' methodology 
was used to set non-spot-month limit levels, such levels were below the 
levels established using 10, 2.5 percent formula.
---------------------------------------------------------------------------

    \598\ CL-APGA-59722 at 6.
---------------------------------------------------------------------------

    Commission Reproposal Regarding General Procedure for Re-Setting 
Levels of Non-Spot Month Limits: The Commission has determined to 
repropose the 10, 2.5 percent formula, generally as proposed in the 
December 2013 Position Limits Proposal, for the reasons discussed 
above. However, the Commission has determined, in response to requests 
by commenters requesting wheat parity, as discussed above, to provide 
that it may determine not to change the level of a non-spot month 
limit. This would permit, for example, the Commission to continue to 
retain a level of 12,000 contracts for the non-spot month limits in the 
KW and MWE contracts, even if average open interest did not exceed 
405,000 contracts (which is the level that, when applying the 10, 2.5 
percent formula, would result in a limit of 12,000 contracts).
    Commission Proposal for Time Periods, Data Sources, Publication and 
Minimum Levels for Re-Setting Levels of Non-Spot Month Limits: Under 
proposed in Sec.  150.2(e)(4)(i) and (ii), the Commission would 
estimate average open interest in referenced contracts using data 
reported for each of the last two calendar years pursuant to parts 16, 
20, and/or 45.\599\ The Commission also proposed under Sec.  
150.2(e)(4)(iii) to publish on the Commission's Web page estimates of 
average open interest in referenced contracts on a monthly basis to 
make it easier for market participants to estimate changes in levels of 
position limits.\600\ Finally, the Commission proposed under Sec.  
150.2(e)(4)(iv) to establish minimum non-spot month levels of 1,000 
contracts for agricultural commodity contracts and 5,000 contracts for 
exempt commodity contracts.
---------------------------------------------------------------------------

    \599\ December 2013 Position Limits Proposal, 78 FR at 75734.
    \600\ Id.
---------------------------------------------------------------------------

    Comments Received and Commission Response: Regarding the time 
period for average open interest, as noted above, one commenter 
recommended that the Commission, as an alternative, ``include peak open 
interest levels beyond the most recent two years when it determines the 
level of open interest on which to base position limits.'' \601\ In 
response, the Commission notes that using peak open interest figures, 
as opposed to an average, as reproposed, may not necessarily represent 
an accurate portrait of current market conditions.
---------------------------------------------------------------------------

    \601\ CL-MFA-59606 at 21.
---------------------------------------------------------------------------

    Regarding data sources for average open interest, several 
commenters noted that the open interest data used by the Commission in 
determining the non-spot month limits was not complete since it did not 
include all OTC swaps data and that the Commission should correct this 
deficiency before it sets the limits using the open interest 
formula.\602\ In response, the Commission notes it used futures-
equivalent open interest for swaps reported under part 20, in 
determining the initial non-spot month limits, as discussed above, and 
believes this data also is acceptable for re-setting limit levels, as 
reproposed.
---------------------------------------------------------------------------

    \602\ E.g., CL-DBCS-59569 at 6; CL-FIA-59595 at 14; CL-EEI-60386 
at 11; CL-MFA-59606 at 5, 20, 22-23; CL-ISDA/SIFMA-59611 at 29, 
including footnote 108; CL-CMC-59634 at 13; CL-Olam-59658 at 3; CL-
COPE-59662 at 22; CL-Calpine-59663 at 4; CL-Chamber-59684 at 5; CL-
NFP-59690 at 20; CL-Just Energy-59692 at 4; CL-Working Group-59693 
at 62; CL-Working Group-60396 at 8-10; CL-Citadel-59717 at 4-5.
---------------------------------------------------------------------------

    The Commission received no comments regarding publication of 
average open interest.
    Regarding minimum levels for non-spot month limits, some commenters 
urged the Commission to afford itself the flexibility to set non-spot 
month limits at least as high as the spot-month position limit, rather 
than base the non-spot month limit strictly on the open interest 
formula in cases where the latter would result in a relatively small 
limit that would hinder liquidity.\603\ The Commission accepts these

[[Page 96773]]

commenters' recommendation. Upon consideration of proposing minimum 
initial non-spot month limits, as discussed above, the Commission is 
removing the distinction between agricultural and exempt commodities. 
This change would establish a minimum non-spot month limit level of 
5,000 contracts in either agricultural or exempt commodities.
---------------------------------------------------------------------------

    \603\ CL-ICE-59966 at 6; CL-U.S. Dairy-59597 at 4.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined to repropose 
these provisions generally as proposed in the December 2013 Position 
Limits Proposal, but with the changes described above to provide 
flexibility for a higher minimum level of non-spot month limits.
7. Deferral of Limits on Cash-Settled Core Referenced Futures Contracts
    Commission Proposal:
    The Commission proposed, but is not reproposing, positon limits on 
three cash-settled core referenced futures contracts: CME Class III 
Milk; CME Feeder Cattle; and CME Lean Hogs.\604\
---------------------------------------------------------------------------

    \604\ Each of these contracts is cash settled to a U.S. 
Department of Agriculture price series; Feeder Cattle and Lean Hogs 
settle to a CME-calculated index of daily USDA livestock prices, 
while Class III Milk settles to the monthly USDA Class III Milk 
price.
---------------------------------------------------------------------------

    Comments Received: Commenters raised concerns with these cash-
settled contracts and how they fit within the federal position limits 
regime. While many of these concerns were raised in the context of the 
dairy industry, they apply to all three cash-settled core referenced 
futures contracts. Concerns raised include: (1) How to apply spot month 
limits in a contract that is cash-settled; \605\ (2) the ``five-day 
rule'' for bona fide hedging; \606\ and (3) the length of the spot 
month period.\607\ Commenters contended that the Commission's rationale 
in the December 2013 Position Limits Proposal focused on concerns with 
physical-delivery contracts, which the commenters believe do not apply 
to cash-settled core referenced futures contracts because there is no 
physical delivery process and because the contracts settle to 
government-regulated price series (through the USDA).\608\ Commenters 
were concerned that the Commission's ``one-size-fits-all'' approach 
discriminates against participants in dairy and livestock because the 
spot-month limit is effectively smaller compared to the separate spot-
month limits for physical-delivery and cash-settled contracts in other 
commodities.\609\ Several commenters suggested limit levels that do not 
follow the proposed formulae for determining limit levels for both spot 
and non-spot-month limits due to the unique aspects of cash-settled 
core referenced futures contracts, including the relatively large cash 
market and trading strategies not found in other core referenced 
futures markets.\610\
---------------------------------------------------------------------------

    \605\ CL-Rice Dairy-59960 at 1; CL-US Dairy-59597 at 3-4; CL-
NMPF-59652 at 4; CL-DFA-59948 at 4-5.
    \606\ CL-NMPF-59652 at 5; CL-DFA-59948 at 8.
    \607\ CL-NGSA-59674 at 44; CL-ICE-59669 at 5-6.
    \608\ See, e.g., CL-US Dairy-59597 at 3-4.
    \609\ CL-DFA-59948 at 6.
    \610\ CL-Rice Dairy-59601 at 1; CL-US Dairy-59597 at 3; CL-NMPF-
59652 at 4; CL-DFA-59948 at 4-5.
---------------------------------------------------------------------------

    Commission Determination: The Commission, as part of the phased 
approach to implementing position limits on all physical commodity 
derivative contracts, is deferring action so that it may, at a later 
date: (1) Clarify the application of limits to cash-settled core 
referenced futures contracts; and (2) consider further which method to 
use to determine a level for a spot-month limit for a cash-settled core 
referenced futures contract. The Commission notes that the December 
2013 Position Limits Proposal discussed spot-month limits primarily in 
the context of protecting the price discovery process by preventing 
corners and squeezes.\611\ There was limited discussion of cash-settled 
core referenced futures contracts.\612\ The Commission did not propose 
alternate means of calculating limit levels for cash-settled core 
referenced futures contracts in the December 2013 Position Limits 
Proposal.
---------------------------------------------------------------------------

    \611\ For example, the Commission stated that concerns regarding 
corners and squeezes are most acute in the markets for physical-
delivery contracts in the spot month. December 2013 Position Limits 
Proposal, 78 FR at 75737.
    \612\ See, e.g., December 2013 Position Limits Proposal 78 FR at 
75688, including n. 82.
---------------------------------------------------------------------------

C. Sec.  150.3--Exemptions

1. Current Sec.  150.3
    Statutory authority: CEA section 4a(c)(1) exempts positions that 
are shown to be bona fide hedging positions, as defined by the 
Commission, from any Commission rule establishing speculative position 
limits under CEA section 4a(a).\613\ In addition, CEA section 4a(a)(1) 
authorizes the Commission to exempt transactions normally know to the 
trade as ``spreads.'' \614\ Further, CEA section 4a(a)(7) authorizes 
the Commission to exempt any person, contract, or transaction from any 
position limit requirement the Commission establishes.\615\
---------------------------------------------------------------------------

    \613\ 7 U.S.C. 6a(c)(1). Section 737 of the Dodd-Frank Act did 
not substantively change CEA section 4a(c)(1) (renumbering existing 
provision by inserting ``(1)'' after ``(c)'').
    \614\ 7 U.S.C. 6a(a)(1). Section 737 of the Dodd-Frank Act did 
not change the Commission's authority to exempt spreads under CEA 
section 4a(a)(1).
    \615\ 7 U.S.C. 6a(a)(7). Section 737 of the Dodd-Frank Act added 
CEA section 4a(a)(7). The Commission interprets CEA section 4a(a)(7) 
to provide the Commission with plenary authority to grant exemptive 
relief from position limits, consistent with the purposes of the 
CEA. Specifically, under Section 4a(a)(7), the Commission ``by rule, 
regulation, or order, may exempt, conditionally or unconditionally, 
any person, or class of persons, any swap or class of swaps, any 
contract of sale of a commodity for future delivery or class of such 
contracts, any option or class of options, or any transaction or 
class of transactions from any requirement it may establish . . . 
with respect to position limits.''
---------------------------------------------------------------------------

    Current exemptions: The three existing exemptions in current Sec.  
150.3(a), promulgated prior to the enactment of the Dodd-Frank Act, are 
part of the Commission's regulatory framework for speculative position 
limits.\616\ First, current Sec.  150.3(a)(1) exempts positions shown 
to be bona fide hedging positions from federal position limits.\617\ 
Second, current Sec.  150.3(a)(3) exempts spread positions between 
single months of a futures contract (and/or, on a futures-equivalent 
basis, options) outside of the spot month, provided a trader's spread 
position in any single month does not exceed the all-months limit.\618\ 
Third, under current Sec.  150.3(a)(4), positions carried for an 
eligible entity \619\ in the separate account of an independent account 
controller (``IAC'') \620\ that manages customer positions need not be 
aggregated with the other positions owned or controlled by that 
eligible entity (the ``IAC exemption'').\621\
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    \616\ For completeness, the Commission notes it previously 
provided an exemption in Sec.  150.3(a)(2) for spreads of futures 
positions which offset option positions. However, the Commission 
removed and reserved that provision once it was rendered obsolete by 
the Commission determination to impose speculative limits on a 
trader's net position in futures and options combined, rather than 
separately. 58 FR 17973 at 17979 (April 7, 1993).
    \617\ 17 CFR 150.3(a)(1). The term bona fide hedging position is 
currently defined at 17 CFR 1.3(z) (2010). As discussed above, the 
Commission is reproposing a new definition of bona fide hedging 
position in Sec.  150.1.
    \618\ The Commission clarifies that a spread position in this 
context means a short position in a single month of a futures 
contract and a long position in another contract month of that same 
futures contract, outside of the spot month, in the same crop year. 
The short and/or long positions may also be in options on that same 
futures contract, on a futures equivalent basis. Such spread 
positions, when combined with any other net positions in the single 
month, must not exceed the all-months limit set forth in current 
Sec.  150.2, and must be in the same crop year. 17 CFR 150.3(a)(3).
    \619\ ``Eligible entity'' is defined in current 17 CFR 150.1(d).
    \620\ ``Independent account controller'' is defined in current 
17 CFR 150.1(e).
    \621\ 17 CFR 150.3(a)(4). See also discussion of the IAC 
exemption in the 2016 Final Aggregation Rule.

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[[Page 96774]]

2. Proposed Sec.  150.3
    In the December 2013 Position Limits Proposal, the Commission 
proposed a number of organizational and substantive amendments to Sec.  
150.3, generally resulting in an increase in the number of exemptions 
to speculative position limits. First, the Commission proposed to amend 
the three exemptions from federal speculative limits contained in 
current Sec.  150.3. These previously proposed amendments would update 
cross references, relocate the IAC exemption and consolidate it with 
the Commission's separate proposal to amend the aggregation 
requirements of Sec.  150.4,\622\ and delete the calendar month spread 
provision which is unnecessary under changes to Sec.  150.2 that would 
set the level of each single month position limit to that of the all-
months position limit. Second, the Commission proposed to add 
exemptions from the federal speculative position limits for financial 
distress situations, certain spot-month positions in cash-settled 
referenced contracts, and grandfathered pre-Dodd-Frank and transition 
period swaps. Third, the Commission proposed to revise recordkeeping 
and reporting requirements for traders claiming any exemption from the 
federal speculative position limits.
---------------------------------------------------------------------------

    \622\ See November 2013 Aggregation Proposal. See also 2016 
Final Aggregation Rule.
---------------------------------------------------------------------------

a. Proposed Amendments to Existing Exemptions
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to update cross-references within Sec.  150.3 to 
reflect other changes in part 150. Specifically, the Commission 
proposed: To update references to the bona fide hedging definition to 
Sec.  150.1 from Sec.  1.3(z); to require that those filing for 
exemptive relief must meet the reporting requirements in part 19; and 
to add a cross-reference to aggregation provisions in proposed Sec.  
150.4.
    The Commission also proposed to move the existing IAC exemption to 
Sec.  150.4, thereby deleting the current exemption in Sec.  
150.3(a)(4). The Commission also proposed to delete the spread 
exemption in current Sec.  150.3, because it noted that the proposed 
non-spot month limits rendered such an exemption unnecessary.\623\
---------------------------------------------------------------------------

    \623\ Under the 2016 Supplemental Position Limits Proposal, DCMs 
and SEFs that are trading facilities would have authority to grant 
spread exemptions to both exchange and federal position limits. See 
infra discussion of Sec. Sec.  150.5 and 150.10.
---------------------------------------------------------------------------

    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed to conform Sec.  150.3(a) to accommodate processes proposed in 
other sections of part 150. Specifically, the Commission proposed under 
Sec.  150.3(a)(1)(i) exemptions for those bona fide hedging positions 
that have been recognized by a DCM or SEF in accordance with proposed 
Sec. Sec.  150.9 and 150.11. The Commission also proposed under Sec.  
150.3(a)(1)(iv) exemptions for those spread positions that have been 
recognized by a DCM or SEF in accordance with proposed Sec.  150.10. 
Recognition of other positions exempted under proposed Sec.  150.3(e) 
was re-numbered as subsection (v) from subsection (iv) of Sec.  
150.3(a)(1) of the 2013 Position Limits Proposal.
    Comments Received: The Commission received no comments on the 
proposed conforming changes to Sec.  150.3.\624\ The Commission 
addresses comments on the IAC exemption in its final rule amending the 
aggregation policy under Sec.  150.4, published separately.
---------------------------------------------------------------------------

    \624\ The Commission received many comments on the changes to 
the bona fide hedging definition in Sec.  150.1 and the processes 
for exchange recognition of exemptions in Sec. Sec.  150.9-11. See 
discussion of the bona fide hedging definition, above, and of the 
processes in Sec. Sec.  150.9-11, below.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing these 
amendments as previously proposed in the December 2013 Position Limits 
Proposal.
b. Positions Which May Exceed Limits--Sec.  150.3(a)
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission listed positions which may exceed limits in proposed Sec.  
150.3(a). Such positions included: (i) Bona fide hedging positions as 
defined in Sec.  150.1; (ii) financial distress positions exempted 
under Sec.  150.3(b); (iii) conditional spot month limit positions 
exempted under Sec.  150.3(c); and (iv) other positions exempted under 
Sec.  150.3(e). Proposed Sec.  150.3(a) also provided that all such 
positions may exceed limits only if recordkeeping requirements in Sec.  
150.3(g) are met and any applicable reporting requirements in part 19 
are met.
    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed to revise Sec.  150.3(a) to include, in addition to bona fide 
hedging positions as defined in Sec.  150.1, positions that are 
recognized by a DCM or SEF in accordance with Sec.  150.9 or Sec.  
150.11 as well as spread positions recognized by a DCM or SEF in 
accordance with Sec.  150.10.
    Comments Received: The Commission received many comments on the 
definition of bona fide hedging in Sec.  150.1, as well as on the 
processes proposed in Sec. Sec.  150.9-11.\625\ The Commission 
addresses those comments in the discussion of the definition of bona 
fide hedging position in Sec.  150.1, above, and in the discussion of 
the processes proposed in Sec. Sec.  150.9-11, below. The Commission 
did not receive comments specific to the conforming revisions to Sec.  
150.3(a).
---------------------------------------------------------------------------

    \625\ Id.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing Sec.  150.3(a) 
as previously proposed in the December 2013 Position Limits Proposal, 
with conforming changes consistent with the reproposed definition of a 
bona fide hedging position in Sec.  150.1, which includes positions 
that are recognized by a DCM or SEF in accordance with reproposed Sec.  
150.9 or Sec.  150.11, or by the Commission, and conforming changes 
consistent with the process for spread positions recognized by a DCM or 
SEF in accordance with reproposed Sec.  150.10, or by the Commission.
c. Proposed Additional Exemptions From Position Limits
i. Financial Distress Exemption--Sec.  150.3(b)
    Proposed Rule: The Commission proposed to add in Sec.  150.3(b) an 
exemption from position limits for market participants in financial 
distress circumstances, upon the Commission's approval of a specific 
request.\626\ For example, the Commission recognized that, in periods 
of financial distress, it may be beneficial for a financially sound 
market participant to take on the positions (and corresponding risk) of 
a less stable market participant. The Commission explained that it has 
historically provided an exemption from position limits in these types 
of situations in order to avoid sudden liquidations that could 
potentially reduce liquidity, disrupt price discovery, and/or increase 
systemic risk. The Commission therefore proposed to codify this 
historical practice.
---------------------------------------------------------------------------

    \626\ December 2013 Position Limits Proposal, 78 FR at 75736.
---------------------------------------------------------------------------

    Comments Received: One commenter requested the non-exclusive 
circumstances for the financial distress exemption be clarified by 
adding ``bud not limited to'' after the word ``include'' to permit 
other situations not listed.\627\
---------------------------------------------------------------------------

    \627\ CL-CME-59718 at 71.
---------------------------------------------------------------------------

    Commission Reproposal: In response to the commenter, the Commission 
clarifies that the circumstances under which a financial distress 
exemption may be claimed include, but are not limited to, the specific 
scenarios in the definition. However, the Commission believes that the 
proposed definition

[[Page 96775]]

sufficiently articulates that the list of potential circumstances for 
claiming the financial distress exemption is non-exclusive, and, 
therefore, is reproposing the definition as previously proposed.
ii. Pre-Enactment and Transition Period Swaps Exemption--Sec.  150.3(d)
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to provide an exemption from federal position 
limits for (1) pre-enactment swaps, defined as swaps entered into prior 
to July 21, 2010 (the date of the enactment of the Dodd-Frank Act of 
2010), so long as the terms of which have not expired as of that date, 
and (2) transition period swaps, defined as swaps entered into during 
the period commencing July 22, 2010 and ending 60 days after the 
publication of the final position limit rules in the Federal Register, 
the terms of which have not expired as of that date. The Commission 
also proposed to allow both pre-enactment and transition period swaps 
to be netted with commodity derivative contracts acquired more than 60 
days after publication of the final rules in the Federal Register for 
purposes of complying with non-spot-month position limits.\628\
---------------------------------------------------------------------------

    \628\ December 2013 Position Limits Proposal, 78 FR at 75738.
---------------------------------------------------------------------------

    Comments Received: One commenter suggested that ``grandfathering'' 
relief should be extended to pre-existing positions, and should also 
permit the pre-existing positions to be increased after the effective 
date of the limit. The commenter also suggested that the Commission 
should permit the risk associated with a pre-existing position to be 
offset through roll of a position from a prompt month into a deferred 
contract month.\629\
---------------------------------------------------------------------------

    \629\ CL-AMG-59709 at 2, 18-19.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission declines to accept the 
commenter's recommendation regarding increasing positions, because 
allowing pre-existing positions to be increased after the effective 
date of the limits effectively would create a loophole for exceeding 
position limits. Further, the Commission declines the commenter's 
recommendation to permit a roll of a pre-existing position, because 
that would permit a market participant to extend indefinitely the 
holding of a speculative economic exposure in commodity derivative 
contracts exempt from position limits, frustrating the intent of 
speculative position limits. The Commission notes, however, that 
reproposed Sec.  150.3(d), like the previous proposal, allows for 
netting of pre- and post-effective date positions, allowing a market 
participant to offset the risk of the position provided the offsetting 
position is not held into a spot month. The Commission is reproposing 
Sec.  150.3(d) as proposed in the December 2013 Position Limits 
Proposal.
iii. Previously Granted Exemptions--Sec.  150.3(f)
    Proposed Rule: The Commission proposed in the December 2013 
Position Limits Proposal that exemptions previously granted by the 
Commission under Sec.  1.47 for swap risk management would not apply to 
new swap positions entered into after the effective date of the final 
rule. The Commission noted that the proposed rules revoke the 
previously granted exemptions for risk management positions for such 
new swaps. Therefore, risk management positions that offset such new 
swaps would be subject to federal position limits, unless another 
exemption applied. The Commission explained that these risk management 
positions are inconsistent with the revised definition of bona fide 
hedging contained in the December 2013 Position Limits Proposal and the 
purposes of the Dodd-Frank Act amendments to the CEA.\630\
---------------------------------------------------------------------------

    \630\ December 2013 Position Limits Proposal, 78 FR at 75740.
---------------------------------------------------------------------------

    Comments Received: A number of commenters urged the Commission not 
to deny risk-management exemptions for financial intermediaries who 
utilize referenced contracts to offset the risks arising from the 
provision of diversified commodity-based returns to the intermediaries' 
clients.\631\
---------------------------------------------------------------------------

    \631\ CL-FIA-59595 at 5, 34-35; CL-AMG-59709 at 2, 12-15; CL-
CME-59718 at 67-69.
---------------------------------------------------------------------------

    In contrast, other commenters noted that the proposed rules 
``properly refrain'' from providing a general exemption to financial 
firms seeking to hedge their financial risks from the sale of 
commodity-related instruments such as index swaps, ETFs, and ETNs 
because such instruments are ``inherently speculative'' and may 
overwhelm the price discovery function of the derivative market.\632\
---------------------------------------------------------------------------

    \632\ CL-Sen. Levin-59637 at 8; CL-Better Markets-60325 at 2.
---------------------------------------------------------------------------

    Commission Reproposal: As discussed above in the clarifications to 
the bona fide hedging position definition, the Commission now proposes 
to expand the relief in Sec.  150.3(f) by: (1) Clarifying that such 
previously granted exemptions may apply to pre-existing financial 
instruments that are within the scope of existing Sec.  1.47 
exemptions, rather than only to pre-existing swaps; and (2) recognizing 
exchange-granted non-enumerated exemptions in non-legacy commodity 
derivatives outside of the spot month (consistent with the Commission's 
recognition of risk management exemptions outside of the spot month), 
and provided such exemptions are granted prior to the compliance date 
of the final rule, and apply only to pre-existing financial instruments 
as of the effective date of the final rule. These two changes are 
intended to reduce the potential for market disruption by forced 
liquidations, since a market intermediary would continue to be able to 
offset risks of pre-effective-date financial instruments, pursuant to 
previously-granted federal or exchange risk management exemptions.
iv. Non-Enumerated Hedging Positions--Sec.  150.3(e)
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission noted that it previously permitted a person to file an 
application seeking approval for a non-enumerated position to be 
recognized as a bona fide hedging position under Sec.  1.47. The 
Commission proposed to delete Sec.  1.47 for several reasons described 
in the December 2013 Position Limits Proposal.\633\
---------------------------------------------------------------------------

    \633\ December 2013 Position Limits Proposal, 78 FR at 75738-9.
---------------------------------------------------------------------------

    Proposed Sec.  150.3 provided that a person that engages in risk-
reducing practices commonly used in the market, that the person 
believes may not be included in the list of enumerated bona fide 
hedging positions, may apply to the Commission for an exemption from 
position limits. As previously proposed, market participants would be 
guided in Sec.  150.3(e) first to consult proposed Appendix C to part 
150 to see whether their practices fell within a non-exhaustive list of 
examples of bona fide hedging positions as defined under proposed Sec.  
150.1.
    A person engaged in risk-reducing practices that are not enumerated 
in the revised definition of bona fide hedging position in previously 
proposed Sec.  150.1 may use two different avenues to apply to the 
Commission for relief from federal position limits: The person may 
request an interpretative letter from Commission staff pursuant to 
Sec.  140.99 \634\ concerning the applicability

[[Page 96776]]

of the bona fide hedging position exemption, or the person may seek 
exemptive relief from the Commission under CEA section 4a(a)(7).\635\
---------------------------------------------------------------------------

    \634\ 17 CFR 140.99 defines three types of staff letters--
exemptive letters, no-action letters, and interpretative letters--
that differ in scope and effect. An interpretative letter is written 
advice or guidance by the staff of a division of the Commission or 
its Office of the General Counsel. It binds only the staff of the 
division that issued it (or the Office of the General Counsel, as 
the case may be), and third-parties may rely upon it as the 
interpretation of that staff. See description of CFTC Staff Letters, 
available at http://www.cftc.gov/lawregulation/cftcstaffletters/index.htm.
    \635\ See supra discussion of CEA section 4a(a)(7).
---------------------------------------------------------------------------

    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed Sec. Sec.  150.9, 150.10, and 150.11 which provided 
alternative processes that would permit eligible DCMs and SEFs to 
provide relief for non-enumerated bona fide hedging positions, certain 
spread positions, and anticipatory bona fide hedging positions, 
respectively.\636\ However, the Commission did not propose to alter or 
delete Sec.  150.3 because the Commission determined to provide 
multiple avenues for persons seeking exemptive relief.
---------------------------------------------------------------------------

    \636\ See infra discussion of these alternative processes in 
Sec.  150.9, Sec.  150.10, and Sec.  150.11.
---------------------------------------------------------------------------

    Comments Received: One commenter requested that the Commission 
provide a spread exemption from federal position limits for certain 
soft commodities, reasoning that there was a ``lack of fungibility of 
certain soft commodities . . . [because] inventories of various 
categories vary widely in terms of marketability over time.'' The 
commenter also stated that such a spread exemption would allow for 
effective competition for the ownership of certified inventories that 
in turn helps to maintain a close relationship between the cash and 
futures markets.\637\ Another commenter recommended the Commission 
recognize calendar spread netting, and not place any limits on the 
same, because speculators provide liquidity in deferred months to 
hedgers and offset, in part, that exposure with shorter dated 
contracts.\638\
---------------------------------------------------------------------------

    \637\ CL-CMC-59718 at 15.
    \638\ CL-Citadel-59717 at 8-9.
---------------------------------------------------------------------------

    Commission Reproposal: Both of these comments were submitted in 
response to the December 2013 Position Limits Proposal, well in advance 
of the 2016 Supplemental Position Limits Proposal. Spread exemptions 
such as those described by the commenters are addressed in Sec.  
150.10, discussed below. The Commission is reproposing Sec.  150.3(e) 
as previously proposed in the December 2013 Position Limits Proposal.
d. Proposed Conditional Spot Month Limit Exemption--Sec.  150.3(c)
    Conditional spot month limit exemptions to exchange-set spot-month 
position limits for natural gas contracts were adopted in 2009, after 
the ICE submitted such an exemption as part of its certification of 
compliance with core principles required of exempt commercial markets 
(``ECMs'') on which significant price discovery contracts (``SPDCs'') 
were traded.\639\
---------------------------------------------------------------------------

    \639\ CFTC Reauthorization Act of 2008 (``Farm Bill'', 
incorporated as Title XIII of the Food, Conservation and Energy Act 
of 2008, Public Law 110-246, 112 Stat. 1624 (June 18, 2008)) 
expanded the Commission's authority with respect to ECMs by creating 
a new regulatory category: ECMs on which significant price discovery 
contracts (``SPDCs'') were traded. The Farm Bill authorized the 
Commission to designate an ECM contract as a SPDC if the Commission 
determined, under criteria established in the Act, that the contract 
performed a significant price discovery function. When the 
Commission made such a determination, the ECM on which the SPDC was 
traded would be required to assume, with respect to that contract, 
all the responsibilities and obligations of a registered entity 
under the Commission's regulations and the Act. This process was 
invalidated and deleted by changes to the Act made under the Dodd-
Frank Act of 2010.
---------------------------------------------------------------------------

    As ICE developed its rules in order to comply with the ECM SPDC 
requirements,\640\ ICE expressed concerns regarding the impact of 
position limits on the open interest in its LD1 contract. ICE 
demonstrated that as the open interest declines in the physical-
delivery New York Mercantile Exchange Inc. (``NYMEX'') Henry Hub 
Natural Gas Futures (``NYMEX NG'') contract approaching expiration, 
open interest increases rapidly in the cash-settled ICE NG LD1 
contract, and suggested that the ICE NG LD1 contract served an 
important function for hedgers and speculators who wished to recreate 
or hedge the NYMEX NG contract price without being required to make or 
take delivery. ICE stated that it believed there are ``significant and 
material distinctions between the design and use of'' the NYMEX NG 
contract and the ICE NG LD1 contract, and those distinctions were most 
pronounced at expiration. Further, ICE stated that, due to the size of 
some positions in the cash-settled ICE NG LD1 contract, the impact to 
the market of an equivalent limit could impair the ability for market 
participants to adjust their positions in an orderly fashion to come 
into compliance. For these reasons, ICE requested that the Commission 
consider an alternative to the Commission's acceptable practice that 
spot month position limits for the NG LD1 contract should be equivalent 
to the spot month position limits in the NYMEX NG contract.\641\
---------------------------------------------------------------------------

    \640\ On March 16, 2009, the Commission adopted final rules 
implementing the provisions of the Farm Bill. 74 FR 12179 (March 23, 
2009). These regulations became effective on April 22, 2009. Among 
other things, the rules established procedures by which the 
Commission would make and announce its determination as to whether a 
particular contract served a significant price discovery function. 
On July 24, 2009, the Commission issued an order finding that ICE's 
Henry Financial LD1 Fixed Price contract (``NG LD1 contract'') 
performed a significant price discovery function and, thus, that ICE 
was a registered entity with respect to the NG LD1 contract, subject 
to all provisions of the Act applicable to registered entities, 
including compliance with certain core principles. 74 FR 37988 (July 
30, 2009).
    As required after the designation of the NG LD1 contract as a 
SPDC, ICE submitted a demonstration of their compliance with the 
required core principles. One of the core principles with which ICE 
was required to comply under the Farm Bill ECM SPDC rules concerned 
position limits and position accountability rules for the 
contract(s) designated as SPDC(s). See Section 13201(C)(ii)(IV) of 
the Farm Bill (implemented in Section 2(h)(7) of the Act).
    \641\ See 17 CFR part 36, App. B, Core Principle IV(c)(3) 
(2010). 74 FR 12177 (April 22, 2009).
---------------------------------------------------------------------------

    After discussion with both the Commission's Division of Market 
Oversight and NYMEX, ICE submitted and certified rule amendments 
implementing position limits and position accountability rules for the 
ICE NG LD1 contract. Specifically, ICE imposed a spot-month position 
limit and non-spot-month position accountability levels equal to those 
of the economically equivalent NYMEX NG contract. ICE also adopted a 
rule for a larger conditional position limit for traders who: (1) 
Agreed not to maintain a position in the NYMEX NG futures contract 
during the last three trading days, and (2) agreed to show ICE their 
complete book of Henry Hub related positions.\642\
---------------------------------------------------------------------------

    \642\ ICE also imposed related aggregation, bona fide hedging, 
and other exemption rules for the ICE NG LD1 contract.
---------------------------------------------------------------------------

    In June 2009, the Commission also received self-certified rule 
amendments from CME Group, Inc. (``CME'') regarding position limits and 
position accountability levels for the cash-settled NYMEX Henry Hub 
Financial Last Day Futures (HH) contract and related cash-settled 
contracts.\643\ The rules, as amended, established spot month position 
limits for the NYMEX HH contract as well as certain related cash-
settled contracts so as to be consistent with the requirements for the 
SPDC contract on ICE. In the rule certification documents, CME stated 
that it was amending its position limits rules for the HH contract in 
anticipation of ICE's new rules. In February 2010, the conditional spot 
month limit exemptions on NYMEX and ICE went into effect.
---------------------------------------------------------------------------

    \643\ New York Mercantile Exchange, Inc. Submission #09.103 
(June 2, 2009): Notification of Amendments to NYMEX Rules 9A.27 and 
9A.27A to Establish Hard Expiration Position Limits for Certain 
Natural Gas Financially Settled Contracts. Previously, NYMEX did not 
have spot-month limits on its HH contract and related cash-settled 
contracts.
---------------------------------------------------------------------------

    Proposed Rules: In the December 2013 Position Limits Proposal, the

[[Page 96777]]

Commission proposed a conditional spot month limit exemption for all 
commodities subject to federal limits under proposed Sec.  150.2. That 
proposed rule was identical to the rule proposed in the Part 151 
Proposal, with the exception that the December 2013 Position Limits 
Proposal did not include any restriction on trading in the cash 
market.\644\ In proposing the conditional spot month limit exemption in 
proposed Sec.  150.3(c), the Commission stated its preliminary belief 
that the current exemption in natural gas markets has served ``to 
further the purposes Congress articulated for position limits'' and 
that the exemption ``would not encourage price discovery to migrate to 
the cash-settled contracts in a way that would make the physical-
delivery contract more susceptible to sudden price movements near 
expiration.'' \645\ In addition, the Commission noted that it has 
observed repeatedly that open interest levels in physical-delivery 
contracts ``naturally decline leading up to and during the spot month, 
as the contract approaches expiration'' because ``both hedgers and 
speculators exit the physical-delivery contract in order to, for 
example, roll their positions to the next contract month or avoid 
delivery obligations.'' \646\ The Commission also stated its 
preliminary belief that ``it is unlikely that the factors keeping 
traders in the spot month physical-delivery contract will change due 
solely to the introduction of a higher cash-settled limit,'' as traders 
participating in the physical-delivery contract in the spot month are 
``understood to have a commercial reason or need to stay in the spot 
month.'' \647\
---------------------------------------------------------------------------

    \644\ See December 2013 Position Limits Proposal, 78 FR at 
75736-38.
    \645\ Id. at 75737.
    \646\ Id. at 75770.
    \647\ Id. at 75770, n. 782.
---------------------------------------------------------------------------

    Comments Received: The Commission received many comments regarding 
the conditional spot month limit exemption. These comments revealed 
little to no consensus among market participants, exchanges, and 
industry groups regarding spot-month position limits in cash-settled 
contracts.
    Several commenters supported the higher spot-month limit (or no 
limit at all) for cash-settled contracts, but opposed the restriction 
on holding a position in the physical-delivery referenced contract to 
obtain the higher limit for various reasons, including: The view that 
there is no discernible reason for the restriction in the first place; 
the belief that it provides a negative impact on liquidity in the 
physical delivery contract; and the view that it prevents commercials 
from taking advantage of the higher limit given their need to have some 
exposure in a physical delivery referenced contract during the spot 
month.\648\
---------------------------------------------------------------------------

    \648\ E.g., CL-FIA-59595 at 3 and 11; CL-EEI-EPSA-59602 at 9-10; 
CL-MFA-59606 at 5 and 19-20; CL-AIMA-59618 at 2; CL-ISDA/SIFMA-59611 
at 31; CL-BG Group-59656 at 7; CL-BG Group-59937 at 5-6; CL-COPE-
59662 at 23; CL-NGSA-59673 at 38-39; CL-NGSA-59941 at 3-4; CL-
IECAssn-59957 at 9.
---------------------------------------------------------------------------

    One commenter said that the conditional spot month position limit 
exemption for gold is not supported by sufficient research, could 
decouple the cash-settled contract from the physical-delivery contract, 
and could lead to lower liquidity in the physical-delivery contract and 
higher price volatility.\649\ Several commenters opposed a spot-month 
position limit for cash-settled contracts that is higher than the limit 
for physical-delivery contracts for various reasons including: The 
higher limit does not address the problem of excessive speculation; the 
higher limit would reduce liquidity in the physical-delivery contract; 
and the conditional limit is not restrictive enough and should include 
a restriction on holdings of the physical commodity as had been 
proposed in vacated part 151.\650\
---------------------------------------------------------------------------

    \649\ CL-WGC-59558 at 4.
    \650\ E.g., CL-Sen. Levin-59637 at 7; CL-AFR-59711 at 2; CL-A4A-
59714 at 3; CL-Working Group-59693 at 59-60; CL-IECA-59713 at 3-4; 
CL-Better Markets-60401 at 17-18; CL-CME-59971 at 3; CL-CME-60307 at 
4-5; CL-CME-60406 at 2; CL-CMOC-59720 at 3-6; CL-APGA-59722 at 8; 
CL-OSEC-59972 at 7; CL-RF-60372 at 3; CL-IATP-59701 at 5; CL-IATP-
59704 at 6; CL-IATP-60394 at 2; CL-NGFA-59681 at 6.
---------------------------------------------------------------------------

    Several commenters expressed the view that a market participant 
holding a trade option position, which presumably would be considered a 
physical delivery referenced contract, should not be precluded from 
using the conditional spot-month limit exemption because trade options 
are functionally equivalent to a forward contract and the conditional 
exemption does not restrict holding forwards.\651\
---------------------------------------------------------------------------

    \651\ E.g., CL-FIA-59595 at 20; CL-COPE-59662 at 23; CL-EEI-
EPSA-60926 at 7, CL-EEI-Sup-60386 at 3-4; CL-Working Group-59693 at 
59-60.
---------------------------------------------------------------------------

    One commenter supported the conditional spot month limit exemption 
provided that the Commission modifies its proposal to allow 
independently-operated subsidiaries to hold positions in physical-
delivery contracts if the subsidiary engages in separate and 
independent trading activities, shares no employees, and is not jointly 
directed in its trading activity with other subsidiaries by the parent 
company.\652\
---------------------------------------------------------------------------

    \652\ CL-SEMP-59926 at 4-6; CL-SEMP-60384 at 5-6.
---------------------------------------------------------------------------

    Some commenters supported the continuation of the practice of DCMs 
separately establishing and maintaining their own conditional spot 
month limits and not aggregating cash-settled limits across exchanges 
and the OTC market, arguing that the resultant aggregated limit will be 
unnecessarily restrictive and result in lower liquidity and increased 
volatility.\653\
---------------------------------------------------------------------------

    \653\ E.g., CL-IECAssn-59713 at 30-31; CL-ICE-59966 at 4-5; CL-
ICE-59962 at 4-7.
---------------------------------------------------------------------------

    Some commenters expressed the view that the filing of daily Form 
504 reports to satisfy the conditional spot month limit exemption was 
burdensome, and recommended less frequent reporting such as monthly 
reports \654\ or no reporting at all.\655\
---------------------------------------------------------------------------

    \654\ CL-EEI-EPSA-59602 at 10; CL-ICE-59669 at 7.
    \655\ CL-COPE-59662 at 24.
---------------------------------------------------------------------------

    Two exchanges which currently permit a conditional spot month limit 
exemption, CME and ICE, have each submitted several comments regarding 
the exemption, some in direct response to the other exchange's 
comments. This back-and-forth nature of the disagreement surrounding 
the conditional spot month limit exemption has been significant and, on 
many aspects of the previously proposed exemption, the comments have 
been in direct opposition to each other. CME submitted a comment letter 
in response to the 2016 Supplemental Position Limits Proposal that 
reiterated its belief that the conditional limit would drain liquidity 
from the physical-delivery contract; \656\ ICE responded that nothing 
in the natural gas market has suggested that the physical-delivery 
contract has been harmed.\657\ ICE noted that CME's current conditional 
limit benefits CME's own cash-settled natural gas contracts; \658\ CME 
responded that it opposes any conditional limit framework even though 
such opposition could work ``to the detriment of CME Group's commercial 
interests in certain of its cash-settled markets.'' \659\ CME stated 
its belief that the CEA necessitates ``one-to-one limit treatment and 
similar exemptions'' for both physical-delivery and cash-settled 
contracts within a particular commodity; \660\ ICE suggested that 
removing or reducing the conditional limit would ``disrupt present 
market practice.'' \661\
---------------------------------------------------------------------------

    \656\ CL-CME-60926 at 4.
    \657\ CL-ICE-61009 at 1.
    \658\ Id.
    \659\ CL-CME-61008 at 2.
    \660\ Id. at 3.
    \661\ CL-ICE-61009 at 2.
---------------------------------------------------------------------------

    ICE also submitted a series of charts, using CFTC Commitment of 
Traders

[[Page 96778]]

Report data, illustrating the opposite: That spot-month open interest 
and volume in the physical-delivery contract (the NYMEX NG) have 
actually increased since the introduction of the conditional spot month 
limit.\662\
---------------------------------------------------------------------------

    \662\ Id. at 3-6.
---------------------------------------------------------------------------

    CME stated its opposition to the conditional limits ``as a matter 
of statutory law,'' opining that CEA section 4(b) does not allow the 
imposition of the conditional limit.\663\ CME believes that the 
conditional limit contained in the December 2013 Position Limits 
Proposal ``contravenes Congress's intent behind the statutory 
`comparability' requirement'' in multiple ways, and that neither ICE 
nor the Commission has ``addressed these aspects of [CEA section 
4(b)].'' \664\
---------------------------------------------------------------------------

    \663\ CL-CME-61008 at 2-3. CEA section 4(b)(1)(B)(ii)(1) imposes 
requirements on a foreign board of trade (``FBOT'') as a condition 
of providing U.S. persons direct access to the electronic trading 
and order-matching systems of the FBOT with respect to a contract 
that settles against any price of one or more contracts listed for 
trading on a registered entity. Such FBOT must adopt position limits 
for contract(s) that are ``comparable'' to the position limits 
adopted by the registered entity for the contract(s) against which 
the FBOT contract settles. 7 U.S.C. 6(b)(1)(B)(ii)(1), codified in 
17 CFR 48.8(c)(1)(ii)(A).
    \664\ CL-CME-61008 at 3.
---------------------------------------------------------------------------

    ICE replied that the Commission ``has no basis to modify the 
current conditional limit level'' because the markets ``have functioned 
efficiently and effectively'' and the Commission should not ``change 
the status quo.'' \665\ ICE continued that the conditional limit of 
five times the physical-delivery contract's spot-month limit ``appears 
to be arbitrary and likely insufficient'' and opined that the 
Commission has not indicated how it arrived at that figure or how such 
a level ``strikes the right balance between supporting liquidity and 
diminishing undue burdens.'' \666\ ICE concluded that the conditional 
exemption ``must be maintained at no less than the current levels.'' 
\667\
---------------------------------------------------------------------------

    \665\ CL-ICE-61022 at 2.
    \666\ Id.
    \667\ Id.
---------------------------------------------------------------------------

    Commission Reproposal: After taking into consideration all the 
comments it received regarding the conditional spot-month limit 
exemption, the Commission is reproposing the conditional spot-month 
limit exemption in natural gas markets only. The Commission believes 
the volume of comments regarding the conditional spot-month limit 
exemption indicates the importance of careful and thoughtful analysis 
prior to finalizing policy with respect to conditional spot-month limit 
exemptions in other cash-settled referenced contracts. In particular, 
the considerations may vary, and should be considered in relation to 
the particular commodity at issue. As such, the Commission believes it 
is prudent to proceed cautiously in expanding the conditional spot-
month limit exemption beyond the natural gas markets where it is 
currently employed. The Commission encourages exchanges and/or market 
participants who believe that the Commission should extend the 
conditional spot-month limit exemption to additional commodities to 
petition the Commission to issue a rule pursuant to Sec.  13.2 of the 
Commission's regulations.\668\
---------------------------------------------------------------------------

    \668\ 17 CFR 13.2.
---------------------------------------------------------------------------

    With respect to natural gas cash-settled referenced contracts, the 
reproposed rules allow market participants to exceed the position limit 
provided that such positions do not exceed 10,000 contracts and the 
person holding or controlling such positions does not hold or control 
positions in the spot-month natural gas physical-delivery referenced 
contract (NYMEX NG). Persons relying upon this exemption must file Form 
504 during the spot month.\669\
---------------------------------------------------------------------------

    \669\ See infra discussion of part 19 and Form 504, below.
---------------------------------------------------------------------------

    The Commission observes that the conditional exemption level of 
10,000 contracts is equal to five times the federal natural gas spot-
month position limit level of 2,000 contracts. The conditional 
exemption level is also equal to the sum of the current conditional 
exemption levels for each of the NYMEX HH contract and the ICE NG LD1 
contract. The Commission believes the level of 10,000 contracts 
provides relief for market participants who currently may hold or 
control 5,000 contracts in each of these two cash-settled natural gas 
futures contracts and an unlimited number of cash-settled swaps, while 
still furthering the purposes of the Dodd-Frank Act's amendments to CEA 
section 4a.
    The Commission is proposing the fixed figure of 10,000 contracts, 
rather than the variable figure of five times the spot-month position 
limit level, in order to avoid confusion in the event NYMEX were to set 
its spot-month limit in the physical-delivery NYMEX NG contract at a 
level below 2,000 contracts.
    The Commission provides, for informational purposes, summary 
statistical information that it considered in declining to extend the 
conditional spot-month limit exemption beyond the natural gas 
referenced contract. The four tables below present the number of unique 
persons that held positions in commodity derivative contracts greater 
than or equal to the specified levels, as reported to the Commission 
under the large trader reporting systems for futures and swaps, for the 
period July 1, 2014 to June 30, 2016. The table also presents counts of 
unique reportable persons, whether reportable under part 17 (futures 
and future option contracts) or under part 20 (swap contracts). The 
method the Commission used to analyze this large trader data is 
discussed above, under Sec.  150.2.
    The four tables group commodities only for convenience of 
presentation. In each table, the term ``25% DS'' means 25 percent of 
the deliverable supply as estimated by the exchange listing the core 
referenced futures contract and verified as reasonable by the 
Commission. Similarly, ``15% DS'' means 15 percent of estimated 
deliverable supply. An asterisk (``*'') means that fewer than four 
unique persons were reported. ``CME proposal'' means the level 
recommended by the CME Group for the spot-month limit. MGEX submitted a 
recommended spot-month limit level that is slightly less than 25 
percent of estimated deliverable supply but did not affect the reported 
number of unique persons; no other exchange recommended a spot-month 
level of less than 25 percent of estimated deliverable supply.
    For the first group of commodities, there was no unique person in 
the cash-settled referenced contracts whose position would have 
exceeded 25 percent of the exchange's estimated deliverable supply. 
Moreover, no unique person held a position in the cash-settled 
referenced contracts that would have exceeded the reproposed spot-month 
limits discussed under Sec.  150.2, above, that are lower than 25 
percent of the exchange's estimated deliverable supply.

[[Page 96779]]



                                                Table III-B-21--CME Group and MGEX Agricultural Contracts
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Number of unique persons >=    Number of reportable persons
                                                                                                       level                         in market
                                                                          Position limit ---------------------------------------------------------------
     Core-referenced futures contract         Basis of spot-month level        level                        Spot month
                                                                                            Spot month       physical       Spot month      All months
                                                                                           cash settled      delivery          only
--------------------------------------------------------------------------------------------------------------------------------------------------------
Corn......................................  CME proposal................             600               0              36           1,050           2,606
(CBOT current limit 600)..................  25% DS......................             900               0              20  ..............  ..............
Oats......................................  CME proposal................             600               0               0              33             173
(CBOT current limit 600)..................  25% DS......................             900               0               0  ..............  ..............
Soybeans..................................  CME proposal................             600               0              22             929           2,503
(CBOT current limit 600)..................  25% DS......................           1,200               0              14  ..............  ..............
Soybean Meal..............................  CME proposal................             720               0              14             381             978
(CBOT current limit 720)..................  25% DS......................           2,000               0             (*)  ..............  ..............
Soybean Oil...............................  CME proposal................             540               0              21             397           1,034
(CBOT current limit 540)..................  25% DS......................           3,400               0               0  ..............  ..............
Wheat (CBOT)..............................  CME proposal................             600               0              11             444           1,867
(CBOT current limit 600)..................  25% DS......................           1,000               0               6  ..............  ..............
Wheat (MGEX)..............................  Parity w/CME proposal.......             600               0             (*)             102             342
(MGEX current limit 600)..................  Approx. 25% DS..............           1,000               0             (*)  ..............  ..............
Wheat (KCBT)..............................  CME proposal................             600               0               4             250             718
(KCBT current limit 600)..................  25% CBOT DS.................           1,000               0             (*)  ..............  ..............
                                            25% DS......................           3,000               0             (*)  ..............  ..............
Rough Rice................................  CME proposal................             600               0               0              91             281
(CBOT current limit 600)..................  25% DS......................           2,300               0               0  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For the second group of commodities, there was no unique person in 
the cash-settled referenced contracts whose position would have 
exceeded 25 percent of the exchange's estimated deliverable supply or, 
in the case of Live Cattle, the current exchange limit level of 450 
contracts. Moreover, other than in the Sugar No. 11 contract, no unique 
person held a position in the cash-settled referenced contracts that 
would have exceeded 15 percent of the exchange's estimated deliverable 
supply. For informational purposes, the table also shows for Live 
Cattle that no unique person held a position in the cash-settled 
referenced contracts that would have exceeded 60 percent of the 
exchange's current spot-month limit of 450 contracts.\670\
---------------------------------------------------------------------------

    \670\ The Commission notes that 60 percent of the 450 contract 
spot-month limit is analogous to the counts presented for 15 percent 
of estimated deliverable supply. That is, 60 percent of 25 percent 
equals 15 percent.

                                         Table III-B-22--Other Agricultural Contracts and ICE Futures U.S. Softs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Number of unique persons >=     Number of unique persons in
                                                                                                       level                          market
                                                                          Position limit ---------------------------------------------------------------
     Core-referenced futures contract         Basis of spot-month level        level                        Spot month
                                                                                            Spot month       physical       Spot month      All months
                                                                                           cash settled      delivery          only
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cotton No. 2..............................  15% DS......................             960               0             (*)             122           1,000
(ICE current limit 300)...................  25% DS......................           1,600               0               0  ..............  ..............
Cocoa.....................................  15% DS......................           3,300               0               0             164             682
(ICE current limit 1,000).................  25% DS......................           5,500               0               0  ..............  ..............
Coffee....................................  15% DS......................           1,440               0             (*)             336           1,175
(ICE current limit 500)...................  25% DS......................           2,400               0             (*)  ..............  ..............
Orange Juice..............................  15% DS......................           1,680               0               0              38             242
(ICE current limit 300)...................  25% DS......................           2,800               0               0  ..............  ..............
Live Cattle...............................  60% Current Limit...........             225               0              33             616           1,436
(CME current limit 450)...................  Current limit *.............             450               0               0  ..............  ..............
Sugar No. 11..............................  15% DS......................          13,980             (*)              10             443             874
(ICE current limit 5,000).................  25% DS......................          23,300               0             (*)  ..............  ..............
Sugar No. 16..............................  15% DS......................           4,200               0               0              12              22
(ICE current limit 1,000).................  25% DS......................           7,000               0               0  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For the third group of energy commodities, there were a number of 
unique persons in the cash-settled referenced contracts whose position 
would have exceeded 25 percent of the exchange's estimated deliverable 
supply. For energy commodities other than natural gas, there were fewer 
than 20 unique persons that had cash-settled positions in excess of the 
reproposed spot-month limit levels, each based on 25 percent of 
deliverable supply, as discussed above under Sec.  150.2. However, for 
natural gas referenced contracts, 131 unique persons had cash-settled 
positions in excess of the reproposed spot-month limit level of 2,000 
contracts. As can be observed in the table below, only 20 unique 
persons had cash-settled referenced contract positions that would have 
exceeded the

[[Page 96780]]

reproposed natural gas conditional spot-month limit level of 10,000 
contracts. Thus, a conditional spot-month limit exemption in natural 
gas referenced contracts potentially would provide relief to a 
substantial number of market participants, each of whom did not have a 
position that was extraordinarily large in relation to other traders' 
positions in cash-settled referenced contracts.

                                                            Table III-B-23--Energy Contracts
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Nunber of unique persons >=     Number of unique persons in
                                                                                                       level                          market
                                                                          Position limit ---------------------------------------------------------------
     Core-referenced futures contract         Basis of spot-month level        level                        Spot month
                                                                                            Spot month       physical       Spot month      All months
                                                                                           cash settled      delivery          only
--------------------------------------------------------------------------------------------------------------------------------------------------------
Crude Oil, Light Sweet (WTI)..............  CME proposal *..............           6,000              19               8           1,773           2,673
(NYMEX current limit......................  25% DS......................          10,400              16             (*)  ..............  ..............
3,000 contracts)..........................  50% DS......................          20,800             (*)               0  ..............  ..............
Gasoline Blendstock (RBOB)................  CME proposal................           2,000              23              14             463             837
(NYMEX current limit......................  25% DS......................           6,800             (*)               0  ..............  ..............
1,000 contracts)..........................  50% DS......................          13,600               0               0  ..............  ..............
Natural Gas...............................  25% DS......................           2,000             131              16           1,400           1,846
(NYMEX current limit......................  50% DS......................           4,000              77             (*)  ..............  ..............
1,000 contracts)..........................  Current single exchange                5,000              65             (*)  ..............  ..............
                                             conditional spot-month
                                             limit exemption.
                                            Conditional spot-month limit          10,000              20               0  ..............  ..............
                                             exemption.
ULSD (HO).................................  CME proposal................           2,000              24              11             470             760
(NYMEX current limit......................  25% DS......................           2,900              15               5  ..............  ..............
1,000 contracts)..........................  50% DS......................           5,800               5               0  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For WTI, CME Group recommended a step-down spot-month limit of 6,000/5,000/4,000 contracts in the last three days of trading.

    For the fourth group of metal commodities, there were a few unique 
persons in the cash-settled referenced contracts whose position would 
have exceeded the reproposed levels of the spot-month limits, based on 
the CME Group's recommended levels, as discussed above under Sec.  
150.2. However, there were fewer than 20 unique persons that had cash-
settled positions in excess of the reproposed spot-month limit levels 
for metal commodities; this is in marked contrast to the 131 unique 
persons who had cash-settled positions in excess of the reproposed 
spot-month limit for natural gas contracts. The Commission, in 
consideration of the distribution of unique persons holding positions 
in cash-settled metal commodity contracts across the 24 calendar months 
of its analysis, particularly in platinum,\671\ is of the view that the 
spot-month limit level, as discussed above under Sec.  150.2, and 
without a conditional spot-month limit exemption, is within the range 
of acceptable limit levels that, to the maximum extent practicable, may 
achieve the statutory policy objectives in CEA section 4a(a)(3)(B).
---------------------------------------------------------------------------

    \671\ As can be observed in the open interest table discussed 
under Sec.  150.2, above, the Commission notes that open interest in 
cash-settled platinum contracts was markedly lower in the second 12-
month review period (year 2), than in the first 12-month review 
period (year 1).

                                                Table III-B-24--Metal Contracts (COMEX Division of NYMEX)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Number of unique persons >=     Number of unique persons in
                                                                                                       level                          market
                                                                          Position limit ---------------------------------------------------------------
     Core-referenced futures contract         Basis of spot-month level        level                        Spot month
                                                                                            Spot month       physical       Spot month      All months
                                                                                           cash settled      delivery          only
--------------------------------------------------------------------------------------------------------------------------------------------------------
Copper....................................  CME proposal................           1,000               0             (*)             493           1,457
(current limit 1,000).....................  25% DS......................           1,100               0             (*)  ..............  ..............
Gold......................................  CME proposal................           6,000             (*)             (*)             518           1,557
(current limit 3,000).....................  25% DS......................          11,200               0               0  ..............  ..............
Palladium.................................  CME proposal................             100               6              14             164             580
(current limit 100).......................  25% DS......................             900               0               0  ..............  ..............
Platinum..................................  CME proposal................             500              13             (*)             235             842
(current limit 500).......................  25% DS......................             900              10             (*)  ..............  ..............
                                            50% DS......................           1,800             (*)               0  ..............  ..............
Silver....................................  CME proposal................           3,000               0               0             311           1,023
(current limit 1,500).....................  25% DS......................           5,600               0               0  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 96781]]

e. Proposed Recordkeeping and Special Call Requirements--Sec.  150.3(g) 
and Sec.  150.3(h)
    Proposed Rules: As proposed in the December 2013 Position Limits 
Proposal, Sec.  150.3(g) specifies recordkeeping requirements for 
persons who claim any exemption set forth in Sec.  150.3. Persons 
claiming exemptions under previously proposed Sec.  150.3 must maintain 
complete books and records concerning all details of their related 
cash, forward, futures, options and swap positions and transactions. 
Furthermore, such persons must make such books and records available to 
the Commission upon request under previously proposed Sec.  150.3(h), 
which would preserve the ``special call'' rule set forth in current 
Sec.  150.3(b). This ``special call'' rule would have required that any 
person claiming an exemption under Sec.  150.3 must, upon request, 
provide to the Commission such information as specified in the call 
relating to the positions owned or controlled by that person; trading 
done pursuant to the claimed exemption; the commodity derivative 
contracts or cash market positions which support the claim of 
exemption; and the relevant business relationships supporting a claim 
of exemption.
    The Commission noted that the previously proposed rules concerning 
detailed recordkeeping and special calls are designed to help ensure 
that any person who claims any exemption set forth in Sec.  150.3 can 
demonstrate a legitimate purpose for doing so.\672\
---------------------------------------------------------------------------

    \672\ December 2013 Position Limits Proposal, 78 FR at 75741.
---------------------------------------------------------------------------

    Comments Received: The Commission did not receive any comments on 
the recordkeeping provisions in Sec.  150.3(g) as proposed in the 
December 2013 Position Limits Proposal. With respect to previously 
proposed Sec.  150.3(h), one commenter opposed the ``special call'' 
provision because, in the commenter's opinion, it is ``too passive.'' 
The commenter advocated, instead, a revision requiring persons claiming 
an exemption to maintain books and records on an ongoing basis and 
provide information to the Commission on a periodic and automatic 
basis, because even if the Commission lacked staff and resources to 
review the submitted material in real-time, Commission staff would have 
detailed historical data for use in compliance audits. This commenter 
stated that since required records are likely to be kept in an 
electronic format, the more frequent reporting requirement would not be 
considered burdensome.\673\
---------------------------------------------------------------------------

    \673\ CL-O SEC-59972 at 5.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission believes the previously 
proposed recordkeeping and ``special call'' provisions in Sec.  
150.3(g) and Sec.  150.3(h), respectively, are sufficient to limit 
abuse of exemptions without causing undue burdens on market 
participants. The Commission is reproposing these sections generally as 
proposed in the December 2013 Position Limits Proposal. The Commission 
is clarifying, in reproposed Sec.  150.3(g)(2), that the bona fides of 
the pass-through swap counterparty may be determined at the time of the 
transaction or, alternatively, at such later time that the counterparty 
can show the swap position to be a bona fide hedging position. As 
previously proposed, such bona fides could only be determined at the 
time of the transaction, as opposed to at a later time.

D. Sec.  150.5--Exchange-Set Speculative Position Limits and Parts 37 
and 38

1. Background
    As discussed above, the Commission currently sets and enforces 
position limits pursuant to its broad authority under CEA section 
4a,\674\ and does so only with respect to certain enumerated 
agricultural products.\675\ As the Commission explained above and in 
the December 2013 Position Limits Proposal,\676\ section 735 of the 
Dodd-Frank Act amended section 5(d)(1) of the CEA to explicitly provide 
that the Commission may mandate the manner in which DCMs must comply 
with the core principles.\677\ However, Congress limited the exercise 
of reasonable discretion by DCMs only where the Commission has acted by 
regulation.\678\
---------------------------------------------------------------------------

    \674\ CEA section 4a, as amended by the Dodd-Frank Act, provides 
the Commission with broad authority to set position limits, 
including an extension of its position limits authority to swaps 
positions. 7 U.S.C. 6a. See supra discussion of CEA section 4a.
    \675\ The position limits on these agricultural contracts are 
referred to as ``legacy'' limits, and the listed commodities are 
referred to as the ``enumerated'' agricultural commodities. This 
list of enumerated agricultural contracts includes Corn (and Mini-
Corn), Oats, Soybeans (and Mini-Soybeans), Wheat (and Mini-wheat), 
Soybean Oil, Soybean Meal, Hard Red Spring Wheat, Hard Winter Wheat, 
and Cotton No. 2. See 17 CFR 150.2.
    \676\ See December 2013 Position Limits Proposal, 78 FR at 
75748.
    \677\ Specifically, the Dodd-Frank Act amended DCM core 
principle 1 to include the condition that ``[u]nless otherwise 
determined by the Commission by rule or regulation,'' boards of 
trade shall have reasonable discretion in establishing the manner in 
which they comply with the core principles. See CEA section 
5(d)(1)(B); 7 U.S.C. 7(d)(1)(B).
    \678\ See December 2013 Position Limits Proposal, 78 FR at 
75748.
---------------------------------------------------------------------------

    The Dodd-Frank Act also amended DCM core principle 5. As amended, 
DCM core principle 5 requires that, for any contract that is subject to 
a position limitation established by the Commission pursuant to CEA 
section 4a(a), the DCM ``shall set the position limitation of the board 
of trade at a level not higher than the position limitation established 
by the Commission.'' \679\ Moreover, the Dodd-Frank Act added CEA 
section 5h to provide a regulatory framework for Commission oversight 
of SEFs.\680\ Under SEF core principle 6, which parallels DCM core 
principle 5, Congress required that SEFs that are trading facilities 
adopt for each swap, as is necessary and appropriate, position limits 
or position accountability.\681\ Furthermore, Congress required that, 
for any contract that is subject to a Federal position limit under CEA 
section 4a(a), the SEF shall set its position limits at a level no 
higher than the position limitation established by the Commission.\682\
---------------------------------------------------------------------------

    \679\ See CEA section 5(d)(5)(B) (amended 2010), 7 U.S.C. 
7(d)(5)(B).
    \680\ See CEA section 5h, 7 U.S.C. 7b-3.
    \681\ CEA section 5h(f)(6), 7 U.S.C. 7b-3(f)(6); see also 
December 2013 Position Limits Proposal, 78 FR at 75748.
    \682\ Id.
---------------------------------------------------------------------------

2. Summary
    As explained in the December 2013 Position Limits Proposal,\683\ to 
implement the authority provided by section 735 of the Dodd-Frank Act 
amendments to CEA sections 5(d)(1) and 5h(f)(1), the Commission 
evaluated its pre-Dodd-Frank Act regulations and approach to oversight 
of DCMs, which had consisted largely of published guidance and 
acceptable practices, with the aim of updating them to conform to the 
new Dodd-Frank Act regulatory framework. Based on that review, and 
pursuant to the authority given to the Commission in amended sections 
5(d)(1) and 5h(f)(1) of the CEA, which permit the Commission to 
determine, by rule or regulation, the manner in which boards of trade 
and SEFs, respectively, must comply with the core principles,\684\ the 
Commission in its December 2013 Position Limit Proposal, proposed 
several updates to Sec.  150.5 to promote compliance with DCM core 
principle 5 and SEF core principle 6 governing position limitations or 
accountability.\685\
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    \683\ December 2013 Position Limits Proposal, 78 FR at 75754.
    \684\ See CEA sections 5(d)(1)(B) and 5h(f)(1)(B); 7 U.S.C. 
7(d)(1)(B) and 7b-3(f)(1)(B).
    \685\ December 2013 Position Limits Proposal, 78 FR at 75754.
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    First, the Commission proposed amendments to the provisions of 
Sec.  150.5 to include SEFs and swaps. Second, the Commission proposed 
to codify rules and revise acceptable practices for

[[Page 96782]]

compliance with DCM core principle 5 and SEF core principle 6 within 
amended Sec.  150.5(a) for contracts subject to the federal position 
limits set forth in Sec.  150.2. Third, the Commission proposed to 
codify rules and revise guidance and acceptable practices for 
compliance with DCM core principle 5 and SEF core principle 6 within 
amended Sec.  150.5(b) for contracts not subject to the federal 
position limits set forth in Sec.  150.2. Fourth, the Commission 
proposed to amend Sec.  150.5 to implement uniform requirements for 
DCMs and SEFs that are trading facilities relating to hedging 
exemptions across all types of contracts, including those that are 
subject to federal limits. Fifth, the Commission proposed to require 
DCMs and SEFs that are trading facilities to have aggregation policies 
that mirror the federal aggregation provisions.\686\
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    \686\ Id. Aggregation exemptions can be used, in effect, as a 
way for a trader to acquire a larger speculative position. As noted 
in the December 2013 Position Limits Proposal, the Commission 
believes that it is important that the aggregation rules set out, to 
the extent feasible, ``bright line'' standards that are capable of 
easy application by a wide variety of market participants while not 
being susceptible to circumvention. December 2013 Position Limits 
Proposal, 78 FR at 75754, n. 660.
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    In addition to the changes to the provisions of Sec.  150.5 
proposed in the December 2013 Position Limits Proposal, the Commission 
also noted that it had, in response to the Dodd-Frank Act, previously 
published several earlier rulemakings that pertained to position 
limits, including in a notice of proposed rulemaking to amend part 38 
to establish regulatory obligations that each DCM must meet in order to 
comply with section 5 of the CEA, as amended by the Dodd-Frank 
Act.\687\ In addition, as noted above, the Commission had published a 
proposal to replace part 150 with a proposed part 151, which was later 
finalized before being vacated.\688\ In the December 2013 Position 
Limits Proposal, the Commission pointed out that as it was originally 
proposed, Sec.  38.301 would require each DCM to comply with the 
requirements of part 151 as a condition of its compliance with DCM core 
principle 5.\689\ When the Commission finalized Dodd-Frank updates to 
part 38 in 2012, it adopted a revised version of Sec.  38.301 with an 
additional clause that requires DCMs to continue to meet the 
requirements of part 150 of the Commission's regulations--the current 
position limit regulations--until such time that compliance would be 
required under part 151.\690\ At that time, the Commission explained 
that this clarification would ensure that DCMs were in compliance with 
the Commission's regulations under part 150 during the interim period 
until the compliance date for the new position limits regulations of 
part 151 would take effect.\691\ The Commission further explained that 
its new regulation, Sec.  38.301, was based on the Dodd-Frank 
amendments to the DCM core principles regime, which collectively would 
provide that DCM discretion in setting position limits or position 
accountability levels was limited by Commission regulations setting 
position limits.\692\
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    \687\ See December 2013 Position Limits Proposal, 78 FR at 
75753; see also Core Principles and Other Requirements for 
Designated Contract Markets, 75 FR 80572 (Dec. 22, 2010) (``2010 
Part 38 Proposed Rule'').
    \688\ See supra discussion under Part I.B (discussing the 
Commission's adoption of part 151,subsequently vacated).
    \689\ 2010 Part 38 Proposed Rule at 80585.
    \690\ Core Principles and Other Requirements for Designated 
Contract Markets, 77 FR 36611, 36639 (Jun. 19, 2012) (``Final Part 
38 Rule''). The Commission mandated in final Sec.  38.301 that, in 
order to comply with DCM core principle 5, a DCM must ``meet the 
requirements of parts 150 and 151 of this chapter, as applicable.'' 
See also 17 CFR 38.301.
    \691\ Final Part 38 Rule at 36639.
    \692\ Id. (discussing the Dodd-Frank amendments to the DCM core 
principles); see also CEA sections 5(d)(1) and 5(d)(5), as amended 
by the Dodd-Frank Act.
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    Similarly, as the Commission noted in the December 2013 Position 
Limits Proposal,\693\ when in 2010 the Commission proposed to adopt a 
regulatory scheme applicable to SEFs, it proposed to require that SEFs 
establish position limits in accordance with the requirements set forth 
in part 151 of the Commission's regulations under proposed Sec.  
37.601.\694\ The Commission pointed out that it had revised Sec.  
37.601 in the SEF final rulemaking, to state that until such time that 
compliance was required under part 151, a SEF may refer to the guidance 
and/or acceptable practices in Appendix B of part 37 to demonstrate to 
the Commission compliance with the requirements of SEF core principle 
6.\695\
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    \693\ December 2013 Position Limits Proposal, 78 FR at 75753.
    \694\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR 1214 (Jan. 7, 2011) (``SEF final rulemaking''). 
Current Sec.  37.601 provides requirements for SEFs that are trading 
facilities to comply with SEF core principle 6 (Position Limits or 
Accountability), while the guidance to SEF core principle 6 
(Position Limits or Accountability) in Appendix B to part 37, cites 
to part 151.
    \695\ Core Principles and Other Requirements for Swap Execution 
Facilities, 78 FR 33476 (June 4, 2013). Current Sec.  37.601 
provides requirements for SEFs that are trading facilities to comply 
with SEF core principle 6 (Position Limits or Accountability).
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    In the December 2013 Position Limits Proposal, the Commission noted 
that in light of the District Court vacatur of part 151, the Commission 
proposed to amend Sec.  37.601 to delete the reference to vacated part 
151. The amendment would have instead required that SEFs that are 
trading facilities meet the requirements of part 150, which would be 
comparable to the DCM requirement, since, as proposed in the December 
2013 Position Limits Proposal, Sec.  150.5 would apply to commodity 
derivative contracts, whether listed on a DCM or on a SEF that is a 
trading facility. At the same time, the Commission would have amended 
Appendix B to part 37, which provides guidance on complying with core 
principles, both initially and on an ongoing basis, to maintain SEF 
registration.\696\ Since the December 2013 Position Limits Proposal 
required that SEFs that are trading facilities meet the requirements of 
part 150, the proposed amendments to the guidance regarding SEF core 
principle 6 reiterated that requirement. The Commission noted that for 
SEFs that are not trading facilities, to whom core principle 6 would 
not be applicable under the statutory language, part 150 should have 
been considered as guidance.\697\
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    \696\ Appendix B to Part 37--Guidance on, and Acceptable 
Practices in, Compliance with Core Principles.
    \697\ December 2013 Position Limits Proposal, 78 FR at 75753.
---------------------------------------------------------------------------

    More recently, the Commission issued the 2016 Supplemental Position 
Limits Proposal to revise and amend certain parts of the December 2013 
Position Limits Proposal based on comments received on the December 
2013 Position Limits Proposal,\698\ viewpoints expressed during a 
Roundtable on Position Limits,\699\ several Commission advisory 
committee meetings that each provided a focused forum for participants 
to discuss some aspects of the December 2013 Position Limits 
Proposal,\700\ and information obtained in the course of ongoing 
Commission

[[Page 96783]]

review of SEF registration applications.\701\
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    \698\ Comments on the December 2013 Position Limits Proposal are 
accessible on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1436.
    \699\ A transcript of the June 19, 2014 Roundtable on Position 
Limits is available on the Commission's Web site at http://www.cftc.gov/idc/groups/public/@swaps/documents/dfsubmission/dfsubmission_061914-trans.pdf.
    \700\ Information regarding the December 9, 2014 and September 
22, 2015 meetings of the Agricultural Advisory Committee, sponsored 
by Chairman Massad, is accessible on the Commission's Web site at 
http://www.cftc.gov/About/CFTCCommittees/AgriculturalAdvisory/aac_meetings. Information regarding February 26, 2015 and the July 
29, 2015 meetings of the Energy & Environmental Markets Advisory 
Committee (``EEMAC''), sponsored by Commission Giancarlo, is 
accessible on the Commission's Web site at http://www.cftc.gov/About/CFTCCommittees/EnergyEnvironmentalMarketsAdvisory/emac_meetings.
    \701\ Added by the Dodd-Frank Act, section 5h(a) of the CEA, 7 
U.S.C. 7b-3, requires SEFs to register with the Commission. See 
generally ``Core Principles and Other Requirements for Swap 
Execution Facilities,'' 78 FR 33476 (Aug. 5, 2013). Information 
regarding the SEF application process is available on the 
Commission's Web site at http://www.cftc.gov/IndustryOversight/TradingOrganizations/SEF2/sefhowto.
---------------------------------------------------------------------------

    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed to delay for exchanges that lack access to sufficient swap 
position information the requirement to establish and monitor position 
limits on swaps at this time by: (i) Adding Appendix E to part 150 to 
provide guidance regarding Sec.  150.5; and (ii) revising guidance on 
DCM Core Principle 5 and SEF Core Principle 6 that corresponds to that 
proposed guidance regarding Sec.  150.5.\702\ In addition, the 
Commission in the 2016 Supplemental Position Limits Proposal proposed 
new alternative processes for DCMs and SEFs to recognize certain 
positions in commodity derivative contracts as non-enumerated bona fide 
hedges or enumerated anticipatory bona fide hedges, as well as to 
exempt from federal position limits certain spread positions, in each 
case subject to Commission review.\703\ Moreover, the Commission 
proposed that DCMs and SEFs could recognize and exempt from exchange 
position limits certain non-enumerated bona fide hedging positions, 
enumerated anticipatory bona fide hedges, and certain spread 
positions.\704\ To effectuate the latter proposals, the Commission 
proposed amendments to Sec.  150.3 and new Sec.  150.9, 150.10, and 
150.11, as well as corresponding amendments to Sec.  150.5(a)(2) and 
150.5(b)(5).\705\
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    \702\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38459-62. See also DCM Core Principle 5, Position Limitations or 
Accountability (contained in CEA section 5(d)(5), 7 U.S.C. 7(d)(5)) 
and SEF Core Principle 6, Position Limits or Accountability 
(contained in CEA section 5h(f)(6), 7 U.S.C. 7b-3(f)(6)).
    \703\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38467-76 (providing for recognition of certain positions in 
commodity derivative contracts as non-enumerated bona fide hedges), 
at 38480-81 (providing for recognition of certain positions in 
commodity derivatives contracts as enumerated anticipatory bona fide 
hedges); and at 38476-80 (providing for exemptions from federal 
position limits for certain spread positions).
    \704\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38482.
    \705\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38504-13. The 2016 Supplemental Position Limits Proposal did not 
address the changes to Sec. Sec.  37.601 or 38.301 proposed in the 
December 2013 Position Limits Proposal.
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3. Discussion
    As discussed in greater detail below, the Commission has determined 
to repropose Sec.  150.5 largely as proposed in the December 2013 
Position Limit Proposal and as revised in the 2016 Supplemental 
Position Limits Proposal. In addition, the Commission has determined to 
repropose the previously proposed amendments to Sec.  37.601 and Sec.  
38.301.\706\
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    \706\ The Commission did not receive any comments regarding the 
proposed changes to Sec.  37.601 and Sec.  38.301.
---------------------------------------------------------------------------

    Some changes were made to Sec.  150.5 in response to concerns 
raised by commenters; other changes to the reproposed regulation are to 
conform to changes made in other sections. For example, in reproposing 
Sec.  150.5(b)(1) and (2), the Commission has determined to make 
certain changes to the acceptable practices for establishing the levels 
of individual non-spot or all-months combined position limits for 
futures and future option contracts that are not subject to federal 
limits. The changes to reproposed Sec.  150.5(b)(1) and (2) correspond 
to changes to reproposed Sec.  150.2(e)(4)(iv) discussed above, for 
establishing the levels of individual non-spot or all-months combined 
positions limits for futures and future option contracts that are 
subject to federal limits. Moreover, several non-substantive changes 
were made in response to commenter requests to provide greater 
clarity.\707\
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    \707\ See the removal of the provisions regarding excluded 
commodities from Sec.  150.5(b) and their placement in a new section 
(c), which addresses only excluded commodities. In addition to the 
reorganization of the excluded commodity provisions, changes were 
made to those provisions to track changes made in other sections or 
paragraphs and to address concerns raised by commenters and 
confusion that became apparent in the comment letters.
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    The essential features of the changes to reproposed Sec.  150.5 are 
discussed below.
a. Treatment of Swaps on SEFs and DCMs
    i. December 2013 Position Limits Proposal. As explained above, CEA 
section 4a(a)(5), as amended by the Dodd-Frank Act, requires federal 
position limits for swaps that are ``economically equivalent'' to 
futures and options that are subject to mandatory position limits under 
CEA section 4a(a)(2).\708\ The CEA also requires in SEF Core Principle 
6 that a SEF that is a trading facility: (i) Set its exchange-set limit 
on swaps at a level no higher than that of the federal position limit; 
and (ii) monitor positions established on or through the SEF for 
compliance with the federal position limit and any exchange-set 
limit.\709\ Similarly, for all contracts subject to a federal position 
limit, including swaps, DCMs, under DCM Core Principle 5, must set a 
position limit no higher than the federal limit.\710\
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    \708\ See December 2013 Position Limits Proposal, 78 FR at 
75681-5 (the Commission interpret the statute to mandate that the 
Commission impose limits on futures, options, and swaps, in 
agricultural and exempt commodities).
    \709\ CEA section 5h(f)(6)(B), 7 U.S.C. 7b-3(f)(6) (SEF Core 
Principle 6B). The Commission codified SEF Core Principle 6, added 
by the Dodd-Frank Act, in Sec.  37.600 of its regulations, 17 CFR 
37.600. See generally Core Principles and Other Requirements for 
Swap Execution Facilities, 78 FR 33476, 33533-34 (June 4, 2013).
    \710\ CEA section 5(d)(5), 7 U.S.C. 7(d)(5) (DCM Core Principle 
5). The Commission codified DCM Core Principle 5, as amended by the 
Dodd-Frank Act, in Sec.  38.300 of its regulations, 17 CFR 38.300. 
See Core Principles and Other Requirements for Designated Contract 
Markets, 77 FR 36612, 36639 (June 19, 2012).
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    The December 2013 Position Limits Proposal specified that federal 
position limits would apply to referenced contracts,\711\ whether 
futures or swaps, regardless of where the futures or swaps positions 
are established.\712\ Consistent with DCM Core Principle 5 and SEF Core 
Principle 6, the Commission at Sec.  150.5(a)(1) previously proposed 
that for any commodity derivative contract that is subject to a 
speculative position limit under Sec.  150.2, a DCM or SEF that is a 
trading facility shall set a speculative position limit no higher than 
the level specified in Sec.  150.2.'' \713\
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    \711\ Under the December 2013 Position Limits Proposal, 
``referenced contracts'' are defined as futures, options, 
economically equivalent swaps, and certain foreign board of trade 
contracts, in physical commodities, and are subject to the proposed 
federal position limits. See December 2013 Position Limits Proposal, 
78 FR at 75825.
    \712\ See December 2013 Position Limits Proposal, 78 FR at 75826 
(previously proposed Sec.  150.2).
    \713\ See December 2013 Position Limits Proposal, 78 FR at 
75754-8.
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ii. Comments Received to December 2013 Position Limits Proposal
    Several comment letters on previously proposed Sec.  150.5 
recommended that the Commission not require SEFs to establish position 
limits.\714\ Two noted that because SEF participants may use more than 
one derivatives clearing organization (``DCO''), a SEF may not know 
when a position has been offset.\715\ Further, during the ongoing SEF 
registration process,\716\ a number of

[[Page 96784]]

persons applying to become registered as SEFs told the Commission that 
they lack access to information that would enable them to knowledgeably 
establish position limits or monitor positions.\717\ As the Commission 
observed in the 2016 Supplemental Position Limits Proposal, this 
information gap would also be a concern for DCMs in respect of 
swaps.\718\
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    \714\ CL-CMC-59634 at 14-15, CL-FIA-60392 at 10. One comment 
letter stated that SEFs should be exempt from the requirement to set 
positions limits because SEFs are in the early stages of development 
and could be harmed by limits that restrict liquidity. CL-ISDA/
SIFMA-59611 at 35.
    \715\ CL-CMC-59634 at 14-15, CL-FIA-60392 at 10.
    \716\ Under CEA section 5h(a)(1), no person may operate a 
facility for trading swaps unless the facility is registered as a 
SEF or DCM. 7 U.S.C. 7b-3(a)(1). A SEF must comply with core 
principles, including Core Principle 6 regarding position limits, as 
a condition of registration. CEA section 5h(f)(1), 7 U.S.C. 7b-
3(f)(1).
    \717\ For example, in a submission to the Commission under part 
40 of the Commission's regulations, BGC Derivative Markets, L.P. 
states that ``[t]he information to administer limits or 
accountability levels cannot be readily ascertained. Position limits 
or accountability levels apply market-wide to a trader's overall 
position in a given swap. To monitor this position, a SEF must have 
access to information about a trader's overall position. However, a 
SEF only has information about swap transactions that take place on 
its own Facility and has no way of knowing whether a particular 
trade on its facility adds to or reduces a trader's position. And 
because swaps may trade on a number of facilities or, in many cases, 
over-the-counter, a SEF does not know the size of the trader's 
overall swap position and thus cannot ascertain whether the trader's 
position relative to any position limit. Such information would be 
required to be supplied to a SEF from a variety of independent 
sources, including SDRs, DCOs, and market participants themselves. 
Unless coordinated by the Commission operating a centralized 
reporting system, such a data collection requirement would be 
duplicative as each separate SEF required reporting by each 
information source.'' BGC Derivative Markets, L.P., Rule Submission 
2015-09 (Oct. 6, 2015).
    \718\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38460.
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iii. 2016 Supplemental Position Limits Proposal
    As explained above, in the 2016 Supplemental Position Limits 
Proposal, the Commission proposed to temporarily delay for DCMs and 
SEFs that are trading facilities, which lack access to sufficient swap 
position information, the requirement to establish and monitor position 
limits on swaps by: (i) Adding Appendix E to part 150 to provide 
guidance regarding Sec.  150.5; and (ii) revising guidance on DCM Core 
Principle 5 and SEF Core Principle 6 that corresponds to that guidance 
regarding Sec.  150.5.\719\ At that time, the Commission acknowledged 
that, if an exchange does not have access to sufficient data regarding 
individual market participants' open swap positions, then it cannot 
effectively monitor swap position limits, and expressed its belief that 
most exchanges do not have access to sufficient swap position 
information to effectively monitor swap position limits.\720\
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    \719\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38459-62.
    \720\ Id. at 38460. The Commission acknowledged that one SEF 
that may have access to sufficient swap position information by 
virtue of systems integration with affiliates that are CFTC 
registrants and shared personnel. This SEF requires that all of its 
listed swaps be cleared on an affiliated DCO, which reports to an 
affiliated SDR. 2016 Supplemental Position Limits Proposal, 81 FR at 
38459; see also 38460, n. 32.
---------------------------------------------------------------------------

    In this regard, the Commission expressed its belief that an 
exchange would have or could have access to sufficient swap position 
information to effectively monitor swap position limits if, for 
example: (1) It had access to daily information about its market 
participants' open swap positions; or (2) it knows that its market 
participants regularly engage in large volumes of speculative trading 
activity, including through knowledge gained in surveillance of heavy 
trading activity, that would cause reasonable surveillance personnel at 
an exchange to inquire further about a market participant's intentions 
\721\ or total open swap positions.\722\
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    \721\ Id. at 38460-61. For instance, heavy trading activity 
might cause an exchange to ask whether a market participant is 
building a large speculative position or whether the heavy trading 
activity is merely the result of a market participant making a 
market across several exchanges.
    \722\ Id. at 38461. See 17 CFR 45.3, 45.4, and 45.10. See 
generally CEA sections 4r (reporting and recordkeeping for uncleared 
swaps) and 21 (swap data repositories), 7 U.S.C. 6r and 24a, 
respectively. The Commission also observed that, unlike futures 
contracts, which are proprietary to a particular DCM and typically 
clear at a single DCO affiliated with the DCM, swaps in a particular 
commodity are not proprietary to any particular trading facility or 
platform. Market participants may execute swaps involving a 
particular commodity on or subject to the rules of multiple 
exchanges or, in some circumstances, OTC. Further, under the 
Commission regulations, data with respect to a particular swap 
transaction may be reported to any swap data repository (``SDR'').
---------------------------------------------------------------------------

    The Commission noted that it is possible that an exchange could 
obtain an indication of whether a swap position established on or 
through a particular exchange is increasing a market participant's swap 
position beyond a federal or exchange-set limit, if that exchange has 
data about some or all of a market participant's open swap position 
from the prior day and combines it with the transaction data from the 
current day, to obtain an indication of the market participant's 
current open swap position.\723\ The indication would alert the 
exchange to contact the market participant to inquire about that 
participant's total open swap position.
---------------------------------------------------------------------------

    \723\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38461. The Commission observed, moreover, by way of example, that 
part 20 swaps data is a source that identifies a market 
participant's reported open swap positions from the prior trading 
day. So an exchange with access to part 20 swaps date could use it 
to add to any swap positions established on or through that exchange 
during the current trading day to get an indication of a potential 
position limit violation. Nonetheless, that market participant may 
have conducted other swap transactions in the same commodity, away 
from a particular exchange, that reduced its swap position. Id.
---------------------------------------------------------------------------

    The Commission expressed its belief that although this indication 
would not include the market participant's activity transacted away 
from that particular exchange, such monitoring would comply with CEA 
section 5h(f)(6)(B)(ii). However, the Commission observed that 
exchanges generally do not currently have access to a data source that 
identifies a market participant's reported open swap positions from the 
prior trading day. With only the transaction data from a particular 
exchange, it would be impracticable, if not impossible, for that 
exchange to monitor and enforce position limits for swaps.\724\
---------------------------------------------------------------------------

    \724\ Id. The Commission also noted that an exchange could 
theoretically obtain swap position data directly from market 
participants, for example, by requiring a market participant to 
report its swap positions, as a condition of trading on the 
exchange. The Commission observed, however, that it is unlikely that 
a single exchange would unilaterally impose a swaps reporting regime 
on market participants. Id. at 38461, n. 36. The Commission 
abandoned the approach of requiring market participants to report 
futures positions directly to the Commission many years ago. Id.; 
see also Reporting Requirements for Contract Markets, Futures 
Commission Merchants, Members of Exchanges and Large Traders, 46 FR 
59960 (Dec. 8, 1981). Instead, the Commission and DCMs rely on a 
large trader reporting system where futures positions are reported 
by futures commission merchants, clearing members and foreign 
brokers. See generally part 19 of the Commission's regulations, 17 
CFR part 19. See also, for example, the discussion of an exchange's 
large trader reporting system in the Division of Market Oversight 
Rule Enforcement Review of the Chicago Mercantile Exchange and the 
Chicago Board of Trade, July 26, 2013, at 24-7, available at http://www.cftc.gov/idc/groups/public/@iodcms/documents/file/rercmecbot072613.pdf.
    Further, as noted above, exchanges do not have authority to 
demand swap position data from derivative clearing organizations or 
swap data repositories; nor do exchanges have general authority to 
demand market participants' swap position data from clearing members 
of DCOs or swap dealers (as the Commission does under part 20). 2016 
Supplemental Position Limits Proposal, 81 FR at 38461, n. 36.
---------------------------------------------------------------------------

    The Commission also acknowledged in the 2016 Supplemental Position 
Limits Proposal that it has neither

[[Page 96785]]

required any DCO \725\ or SDR \726\ to provide such swap data to 
exchanges,\727\ nor provided any exchange with access to swaps data 
collected under part 20 of the Commission's regulations.\728\
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    \725\ Core principle M for DCOs addresses information sharing 
for risk management purposes, but does not address information 
sharing with exchanges for other purposes. CEA section 5b(c)(2)(M), 
7 U.S.C. 7a-1(c)(2)(M), and Sec.  39.22, 17 CFR 39.22. The 
Commission has access to DCO information relating to trade and 
clearing details under Sec.  39.19, 17 CFR 39.19, as is necessary to 
conduct its oversight of a DCO. However, the Commission has not used 
its general rulemaking authority under CEA section 8a(5), 7 U.S.C. 
12a(5), to require DCOs to provide registered entities access to 
swap information, although the Commission could impose such a 
requirement by rule. CEA section 5b(c)(2)(A)(i), 7 U.S.C. 7a-
1(c)(2)(A)(i).
    \726\ An SDR has a duty to provide direct electronic access to 
the Commission, or a designee of the Commission who may be a 
registered entity (such as an exchange). CEA section 21(c)(4), 7 
U.S.C. 24a(c)(4). See 76 FR 54538 at 54551, n. 141 (Sept. 1, 2011). 
However, the Commission has not designated any exchange as a 
designee of the Commission for that purpose. Further, the Commission 
has not used its general rulemaking authority under CEA section 
8a(5), 7 U.S.C. 12a(5), to require SDRs to provide registered 
entities (such as exchanges) access to swap information, although 
the Commission could impose such a requirement by rule. CEA section 
21(a)(3)(A)(ii), 7 U.S.C. 24a(a)(3)(A)(ii). For purposes of 
comparison, the Securities and Exchange Commission (``SEC'') noted 
with regard to security-based swaps when it finalized its rules 
implementing its similar provision (which it described as a 
``statutory requirement that security-based SDRs conditionally 
provide data to certain regulators and other authorities''), ``that 
one or more self-regulatory organizations potentially may seek such 
access under this provision.'' Access to Data Obtained by Security-
Based Swap Data Repositories, 81 FR 60585, 50588 (Sept. 2, 2016). 
The SEC estimated that ``up to 30 domestic entities potentially 
might enter into such MOUs or other arrangements, reflecting the 
nine entities specifically identified by statute or the final rules, 
and up to 21 additional domestic governmental entities or self-
regulatory organizations that may seek access to such data.'' Id. at 
60593.
    \727\ As the Commission noted in the 2016 Supplemental Position 
Limits Proposal, even if such information were to be made available 
to exchanges, the swaps positions would need to be converted to 
futures-equivalent positions for purposes of monitoring position 
limits on a futures-equivalent basis. 2016 Supplemental Position 
Limits Proposal, 81 FR at 38461. See also December 2013 Positions 
Limits Proposal, 78 FR at 78 FR75825 (describing the proposed 
definition of futures-equivalent); 2016 Supplemental Position Limits 
Proposal at 38461 (describing amendments to that proposed 
definition).
    \728\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38461. The part 20 swaps data is reported in futures equivalents, 
but does not include data specifying where reportable positions in 
swaps were established.
    The Commission stated in the December 2013 Position Limits 
Proposal that it preliminarily had decided not to use the swaps data 
then reported under part 20 for purposes of setting the initial 
levels of the proposed single and all-months-combined positions 
limits due to concerns about the reliability of such data. December 
2013 Position Limits Proposal, 78 FR at 75533. The Commission also 
stated that it might use part 20 swaps data should it determine such 
data to be reliable, in order to establish higher initial levels in 
a final rule. Id. at 75734.
    However, as the Commission noted in the 2016 Supplemental 
Position Limits Proposal, the quality of part 20 swaps data does 
appear to have improved somewhat since the December 2013 Position 
Limits Proposal, although some reports continue to have significant 
errors. The Commission stated that it is possible that it will be 
able to rely on swap open positions data, given adjustments for 
obvious errors (e.g., data reported based on a unit of measure, such 
as an ounce, rather than a futures equivalent number of contracts), 
to establish higher initial levels of non-spot month limits in a 
final rule. 2016 Supplemental Position Limits Proposal, 81 FR at 
38461.
    Moreover, the quality of the data regarding reportable positions 
in swaps may have improved enough for the Commission to be able to 
rely on it when monitoring market participants' compliance with the 
proposed federal position limits.
---------------------------------------------------------------------------

    The Commission stated that in light of the foregoing, it was 
proposing a delay in implementation of exchange-set limits for swaps 
only, and only for exchanges without sufficient swap position 
information.\729\ After consideration of the circumstances described 
above, and in an effort to accomplish the policy objectives of the 
Dodd-Frank Act regulatory regime, including to facilitate trade 
processing of any swap and to promote the trading of swaps on 
SEFs,\730\ the 2016 Supplemental Position Limits Proposal amended the 
guidance in the appendices to parts 37 and 38 of the Commission's 
regulations regarding SEF core principle 6 and DCM core principle 5, 
respectively. According to the 2016 Supplemental Position Limits 
Proposal, the revised guidance clarified that an exchange need not 
demonstrate compliance with SEF core principle 6 or DCM core principle 
5 as applicable to swaps until it has access to sufficient swap 
position information, after which the guidance would no longer be 
applicable.\731\ For clarity, the 2016 Supplemental Position Limits 
Proposal included the same guidance in a new Appendix E to proposed 
part 150 in the context of the Commission's proposed regulations 
regarding exchange-set position limits.
---------------------------------------------------------------------------

    \729\ Id.
    \730\ See, e.g., CEA sections 5h(b)(1)(B) and 5h(e), 7 U.S.C. 
7b-3(b)(1)(B) and 7b-3(e), respectively.
    \731\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38461. The Commission stated that once the guidance was no longer 
applicable, a DCM or a SEF would be required to file rules with the 
Commission to implement the relevant position limits and demonstrate 
compliance with Core Principle 5 or 6, as appropriate. The 
Commission also noted that, for the same reasons regarding swap 
position data discussed above in respect of CEA section 5h(f)(6)(B), 
the guidance proposed in the 2016 Supplemental Position Limits 
Proposal would temporarily relieve SEFs of their statutory 
obligation under CEA section 5h(f)(6)(A). Id.
---------------------------------------------------------------------------

    Although the Commission proposed to temporarily relieve exchanges 
that do not now have access to sufficient swap position information 
from having to set position limits on swaps, it also noted that nothing 
in the 2016 Supplemental Position Limits Proposal would prevent an 
exchange from nevertheless establishing position limits on swaps, while 
stating that it does seem unlikely that an exchange would implement 
position limits before acquiring sufficient swap position information 
because of the ensuing difficulty of enforcing such a limit. The 
Commission expressed its belief that providing delay for those 
exchanges that need it both preserved flexibility for subsequent 
Commission rulemaking and allowed for phased implementation of 
limitations on swaps by exchanges, as practicable.\732\
---------------------------------------------------------------------------

    \732\ As the Commission noted above, although the 2016 
Supplemental Position Limits Proposal proposed position limits 
relief to SEFs and to DCMs in regards to swaps, it did not propose 
any alteration to the definition of referenced contract (including 
economically equivalent swaps) that was proposed in December 2013. 
See also December 2013 Position Limits Proposal, 78 FR at 75825.
---------------------------------------------------------------------------

    Additionally, the Commission observed that courts have authorized 
relieving regulated entities of their statutory obligations where 
compliance is impossible or impracticable,\733\ and noted its view that 
it would be impracticable, if not impossible, for an exchange to 
monitor and enforce position limits for swaps with only the transaction 
data from that particular exchange.\734\ The Commission expressed its 
belief that, accordingly, it was reasonable to delay implementation of 
this discrete aspect of position limits, only with respect to swaps 
position limits, and only for exchanges that lacked access to 
sufficient swap position information. This approach, the Commission 
believed, would further the policy objectives of the Dodd-Frank Act 
regulatory regime, including the facilitation of trade processing of 
swaps

[[Page 96786]]

and the promotion of trading swaps on SEFs. Finally, the Commission 
noted that while this approach would delay the requirement for certain 
exchanges to establish and monitor exchange-set limits on swaps, under 
the December 2013 Position Limits Proposal, federal position limits 
would apply to swaps that are economically equivalent to futures 
contracts subject to federal position limits.\735\
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    \733\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38462. See also id. at n. 44 (See, e.g., Ass'n of Irritated 
Residents v. EPA, 494 F.3d 1027, 1031 (D.C. Cir. 2007) (allowing 
regulated entities to enter into consent agreements with EPA--
without notice and comment--that deferred prosecution of statutory 
violation until such time as compliance would be practicable); 
Catron v. County Bd. Of Commissioners v. New Mexico Fish & Wildlife 
Serv., 75 F.3d 1429, 1435 (10th Cir.1966) (stating that `Compliance 
with [the National Environmental Protection Act] is excused when 
there is a statutory conflict with the agency's authorizing 
legislation that prohibits or renders compliance impossible.' '')). 
The Commission noted, moreover, that ``it is axiomatic that courts 
will avoid reading statutes to reach absurd or unreasonable 
consequences'' (citing, as an example, Griffin v. Oceanic 
Contractors, Inc., 458 U.S. 564 (1982)), and pointed out that to 
require an exchange to monitor position limits on swaps, when it 
currently has extremely limited visibility into a market 
participant's swap position, was, arguably, absurd and certainly 
appeared unreasonable. 2016 Supplemental Position Limits Proposal, 
81 FR at 38462, n. 44.
    \734\ Id. at 38462.
    \735\ Id.
---------------------------------------------------------------------------

iv. Comments Received to 2016 Supplemental Position Limits Proposal
    Several commenters addressed the Commission's proposed guidance on 
exchange-set limits on swaps.\736\
---------------------------------------------------------------------------

    \736\ E.g., CL-FIA-60937 at 1,6; CL-WMBA-60945 at 1-2; CL-AFR-
60953 at 2; CL-RER2-60962 at 1; CL-Better Markets-60928 at 6.
---------------------------------------------------------------------------

    Regarding insufficient swap data, four commenters agreed that SEFs 
and DCMs lack access to sufficient swap position data to set exchange 
limits on swaps, and as such, the commenters support the Commission's 
decision to delay the position limit monitoring requirements for SEFs 
that are trading facilities and DCMs.\737\ In addition, one commenter 
recommended that the Commission provide notice for public comments 
prior to implementing any determination that a DCM or SEF has access to 
sufficient swap position data to set exchange limits on swaps.\738\ 
Further, two commenters recommended that the Commission identify a 
plan, to address the insufficient data issues, that goes beyond 
``simply exempting affected exchanges.'' \739\
---------------------------------------------------------------------------

    \737\ CL-FIA-60937 at 2, 5-6; CL-WMBA-60945 at 1-2; CL-AFR-60953 
at 2; CL-RER2-60962 at 1.
    \738\ CL-FIA-60937 at 2, 5-6.
    \739\ CL-AFR-60953 at 2; CL-RER2-60962 at 1.
---------------------------------------------------------------------------

    On the other hand, one commenter asserted that there should be no 
delay in implementing position limits for swaps because, according to 
the commenter, the Commission has access to sufficient swap data it 
needs to implement position limits.\740\
---------------------------------------------------------------------------

    \740\ CL-Better Markets-60928 at 6.
---------------------------------------------------------------------------

v. Commission Determination
    The Commission has determined to repropose the treatment of swaps 
and SEFs as previously proposed in the 2016 Supplemental Position 
Limits Proposal for the reasons given above.\741\
---------------------------------------------------------------------------

    \741\ For purposes of clarity, the Commission is reproposing the 
guidance to provide for a temporarily delay for DCMs and SEFs that 
are trading facilities that lack access to sufficient swap position 
information the requirement to establish and monitor position limits 
on swaps by reproposing as proposed in the 2016 Supplemental 
Position Limits Proposal: (i) Appendix E to Part 150 to provide 
guidance regarding reproposed Sec.  150.5; and (ii) guidance on DCM 
Core Principle 5 and SEF Core Principle 6 that corresponds to that 
reproposed guidance regarding Sec.  150.5.
---------------------------------------------------------------------------

    Regarding the comments recommending that the Commission identify a 
plan to address the insufficient data issues that goes beyond ``simply 
exempting affected exchanges,'' the Commission may consider granting 
DCMs and SEFs, as self-regulatory organizations, access to part 20 data 
or SDR data at a later time.
    In addition, regarding the comment that the Commission already has 
access to sufficient swap data in order to implement position limits, 
the Commission points out that it proposes to adopt a phased approach 
to updating its position limits regime.\742\ In conjunction with this 
phased approach, the Commission believes that at this time it should 
limit its implementation of position limits for swaps to those that are 
referenced contracts.
---------------------------------------------------------------------------

    \742\ As the Commission noted in the December 2013 Position 
Limits Proposal, ``a phased approach will (i) reduce the potential 
administrative burden by not immediately imposing position limits on 
all commodity derivative contracts in physical commodities at once, 
and (ii) facilitate adoption of monitoring policies, procedures and 
systems by persons not currently subject to positions limits (such 
as traders in swaps that are not significant price discovery 
contracts).'' 78 FR 75680.
---------------------------------------------------------------------------

b. Sec.  150.5(a)--Requirements and Acceptable Practices for Commodity 
Derivative Contracts That Are Subject to Federal Position Limits
i. December 2013 Position Limits Proposal
    Several requirements were added to Sec.  150.5(a) in the December 
2013 Position Limits Proposal to which a DCM or SEF that is a trading 
facility must adhere when setting position limits for contracts that 
are subject to the federal position limits listed in Sec.  150.2.\743\ 
Previously proposed Sec.  150.5(a)(1) specified that a DCM or SEF that 
lists a contract on a commodity that is subject to federal position 
limits must adopt position limits for that contract at a level that is 
no higher than the federal position limit.\744\ Exchanges with cash-
settled contracts price-linked to contracts subject to federal limits 
would also be required to adopt those limit levels.
---------------------------------------------------------------------------

    \743\ As discussed above, 17 CFR 150.2 provides limits for 
specified agricultural contracts in the spot month, individual non-
spot months, and all-months-combined.
    \744\ As previously proposed, Sec.  150.5(a)(1) is in keeping 
with the mandate in core principle 5 as amended by the Dodd-Frank 
Act. See CEA section 5(d)(1)(B), 7 U.S.C. 7(d)(1)(B). SEF core 
principle 6 parallels DCM core principle 5. Compare CEA section 
5h(f)(5), 7 U.S.C. 7b-3(f)(5) with CEA section 5(d)(5), 7 U.S.C. 
7(d)(5).
---------------------------------------------------------------------------

    Previously proposed Sec.  150.5(a)(3) would have required a DCM or 
SEF that is a trading facility to exempt from speculative position 
limits established under Sec.  150.2 a swap position acquired in good 
faith in any pre-enactment and transition period swaps, in either case 
as defined in Sec.  150.1.\745\ However, previously proposed Sec.  
150.5(a)(3) would allow a person to net such a pre-existing swap with 
post-effective date commodity derivative contracts for the purpose of 
complying with any non-spot-month speculative position limit. Under 
previously proposed Sec.  150.5(a)(4)(i), a DCM or SEF that is a 
trading facility must require compliance with spot month speculative 
position limits for pre-existing positions in commodity derivatives 
contracts other than pre-enactment or transition period swaps, while 
previously proposed Sec.  150.5(a)(4)(ii) provides that a non-spot-
month speculative position limit established under Sec.  150.2 would 
not apply to any commodity derivative contract acquired in good faith 
prior to the effective date of such limit.\746\ As proposed in the 
December 2013 Position Limits Proposal, however, such a pre-existing 
commodity derivative contract position must be attributed to the person 
if the person's position is increased after the effective date of such 
limit.\747\
---------------------------------------------------------------------------

    \745\ The Commission previously proposed to exercise its 
authority under CEA section 4a(a)(7) to exempt pre-Dodd-Frank and 
transition period swaps from speculative position limits (unless the 
trader elected to include such a position to net with post-effective 
date commodity derivative contracts). Such a pre-existing swap 
position would be exempt from initial spot month speculative 
position limits. December 2013 Position Limits Proposal, 78 FR at 
75756, n. 674.
    \746\ See previously proposed 150.5(a)(4)(ii). See also CEA 
section 22(a)(5)(B), added by section 739 of the Dodd-Frank Act.
    \747\ See previously proposed 150.5(a)(4)(ii). Notwithstanding 
any pre-existing exemption adopted by a DCM or SEF that applied to 
speculative position limits in non-spot months, under the December 
2013 Position Limits Proposal, a person holding pre-existing 
commodity derivative contracts (except for pre-existing swaps as 
described above) would be required to comply with spot month 
speculative position limits. However, nothing in previously proposed 
Sec.  150.5(a)(4) would override the exclusion of pre-Dodd-Frank and 
transition period swaps from speculative position limits. December 
2013 Position Limits Proposal, 78 FR at 75756, n. 675.
---------------------------------------------------------------------------

    Under the December 2013 Position Limits Proposal, the Commission 
had proposed to require DCMs and SEFs that are trading facilities to 
have aggregation polices that mirror the federal aggregation 
provisions.\748\ Therefore,

[[Page 96787]]

previously proposed Sec.  150.5(a)(5) required DCMs and SEFs that are 
trading facilities to have aggregation rules that conformed to the 
uniform standards listed in Sec.  150.4.\749\ As noted in the December 
2013 Position Limits Proposal, aggregation policies that vary from 
exchange to exchange would increase the administrative burden on a 
trader active on multiple exchanges, as well as increase the 
administrative burden on the Commission in monitoring and enforcing 
exchange-set position limits.\750\
---------------------------------------------------------------------------

    \748\ December 2013 Position Limits Proposal, 78 FR at 75754, 
75756. As noted above, aggregation exemptions can be used, in 
effect, as a way for a trader to acquire a larger speculative 
position, and the Commission believes that it is important that the 
aggregation rules set out, to the extent feasible, ``bright line'' 
standards that are capable of easy application by a wide variety of 
market participants while not being susceptible to circumvention. 
The December 2013 Position Limits Proposal also noted that ``. . . 
position aggregation exemptions, if not uniform with the 
Commission's requirements, may serve to permit a person to obtain a 
larger position on a particular DCM or SEF than would be permitted 
under the federal limits. For example, if an exchange were to grant 
an aggregation position to a corporate person with aggregate 
positions above federal limits, that exchange may permit such person 
to be treated as two or more persons. The person would avoid 
violating exchange limits, but may be in violation of the federal 
limits. The Commission believes that a DCM or SEF, consistent with 
its responsibilities under applicable core principles, may serve an 
important role in ensuring compliance with federal positions limits 
and thereby protect the price discovery function of its market and 
guard against excessive speculation or manipulation. In the absence 
of uniform . . . position aggregation exemptions, DCMs or SEFs may 
not serve that role. December 2013 Position Limits Proposal, 78 FR 
at 75754. See also 2016 Final Aggregation Rule (regarding amendments 
to 150.4, which were approved by the Commission in a separate 
release concurrently with this reproposed rulemaking).
    \749\ Under the December 2013 Position Limits Proposal, 17 CFR 
150.5(g) would be replaced with previously proposed Sec.  
150.5(a)(5) which referenced 17 CFR 150.4 as the regulation 
governing aggregation for contracts subject to federal position 
limits.
    \750\ December 2013 Position Limits Proposal, 78 FR at 75755.
---------------------------------------------------------------------------

    A DCM or SEF that is a trading facility would have continued to be 
free to enforce position limits that are more stringent that the 
federal limits. The Commission clarified in the December 2013 Position 
Limits Proposal that federal spot month position limits do not to apply 
to physical-delivery contracts after delivery obligations are 
established.\751\ Exchanges generally prohibit transfer or offset of 
positions once long and short position holders have been assigned 
delivery obligations. Previously proposed Sec.  150.5(a)(6) clarified 
acceptable practices for a DCM or SEF that is a trading facility to 
enforce spot month limits against the combination of, for example, long 
positions that have not been stopped, stopped positions, and deliveries 
taken in the current spot month.\752\
---------------------------------------------------------------------------

    \751\ December 2013 Position Limits Proposal, 78 FR at 75756. 
The Commission stated that, therefore, federal spot month position 
limits do not apply to positions in physical-delivery contracts on 
which notices of intention to deliver have been issued, stopped long 
positions, delivery obligations established by the clearing 
organization, or deliveries taken. Id. at 75756, n. 678.
    \752\ Id. at 75756. The December 2013 Position Limits Proposal 
noted, for example, that an exchange might restrict a speculative 
long position holder that otherwise would obtain a large long 
position, take delivery, and seek to re-establish a large long 
position in an attempt to corner a significant portion of the 
deliverable supply or to squeeze shorts. Previously proposed Sec.  
150.5(b)(9) set forth the same acceptable practices for contracts 
not subject to federal limits. Id. at 75756, n. 679.
---------------------------------------------------------------------------

ii. Comments Received to December 2013 Position Limits Proposal 
Regarding Proposed Sec.  150.5(a)
    One commenter recommended that exchanges be required to withdraw 
their position accountability and position limit regimes in deference 
to any federal limits and to conform their position limits to the 
federal limits so that a single regime will apply across 
exchanges.\753\
---------------------------------------------------------------------------

    \753\ CL-DBCS-59569 at 4.
---------------------------------------------------------------------------

    Two commenters recommended that the Commission clarify that basis 
contracts would be excluded from exchange-set limits in order to 
provide consistency since such contracts are excluded from the 
Commission's definition of referenced contract and thus are not subject 
to Federal limits.\754\
---------------------------------------------------------------------------

    \754\ CL-FIA-59595 at 41; CL-Nodal-59695 at 3.
---------------------------------------------------------------------------

    One commenter recommended that DCMs and SEFs that are trading 
facilities be given more discretion, particularly with respect to non-
referenced contracts, over aggregation requirements.\755\
---------------------------------------------------------------------------

    \755\ CL-AMG-59709 at 2, 10-11.
---------------------------------------------------------------------------

iii. 2016 Supplemental Position Limits Proposal
    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed to amend Sec.  150.5(a)(2) as it was proposed in the December 
2013 Position Limits Proposal.\756\ The amendments would permit 
exchanges to recognize non-enumerated bona fide hedging positions under 
Sec.  150.9, to grant spread exemptions from federal limits under Sec.  
150.10, and to recognize certain enumerated anticipatory bona fide 
hedging positions under Sec.  150.11, each as contained in the 2016 
Supplemental Position Limits Proposal. In conjunction with those 
amendments, the Commission proposed corresponding changes to Sec.  
150.3 and Sec.  150.5(a)(2).
---------------------------------------------------------------------------

    \756\ As noted above, the changes to Sec.  150.3 as proposed in 
the December 2013 Position Limits Proposal would have provided for 
recognition of enumerated bona fide hedge positions, but would not 
have exempted any spread positions from federal limits. For any 
commodity derivative contracts subject to federal position limits, 
Sec.  150.5(a)(2) as proposed in the December 2013 Position Limits 
Proposal would have established requirements under which exchanges 
could recognize exemptions from exchange-set position limits, 
including hedge exemptions and spread exemptions. See also 2016 
Supplemental Position Limits Proposal, 81 FR at 38482.
---------------------------------------------------------------------------

    For example, Sec.  150.5(a)(2)(i), as proposed in the December 2013 
Position Limits Proposal, required that any exchange rules providing 
for hedge exemptions for commodity derivatives contracts subject to 
federal position limits conform to the definition of bona fide hedging 
position as defined in the amendments to Sec.  150.1 contained in the 
December 2013 Position Limits Proposal. But because the 2016 
Supplemental Position Limits Proposal incorporated the bona fide 
hedging position definition and provided for spread exemptions in 
150.3(a)(1)(i), the 2016 Supplemental Position Limits Proposal proposed 
instead to cite to Sec.  150.3 in Sec.  150.5(a)(2).\757\ Similarly, 
the application process provided for in Sec.  150.5(a)(2) was amended 
to conform to the requirement in proposed Sec.  150.10 and Sec.  150.11 
that exchange rules providing for exemptions for commodity derivatives 
contracts subject to federal position limits require that traders 
reapply on at least an annual basis. In addition, the changes to Sec.  
150.5(a)(2) clarified that exchanges may deny an application, or limit, 
condition, or revoke any exemption granted at any time.
---------------------------------------------------------------------------

    \757\ As proposed in the 2016 Supplemental Position Limits 
Proposal, Sec.  150.5(a)(2)(i) provides that a DCM or SEF that is a 
trading facility ``may grant exemptions from any speculative 
position limits it sets under paragraph (a)(1) of this section, 
provided that such exemptions conform to the requirements specified 
in Sec.  150.3.''
---------------------------------------------------------------------------

    Similarly, the 2016 Supplemental Position Limits Proposal amended 
previously proposed Sec.  150.5(b) to require that exchange rules 
provide for recognition of a non-enumerated bona fide hedge ``in a 
manner consistent with the process described in Sec.  150.9(a).'' 
Addressing the granting of spread exemptions for contracts not subject 
to federal position limits, the 2016 Supplemental Position Limits 
Proposal integrates in the standards of CEA section 4a(a)(3), providing 
that exchanges should take into account those standards when 
considering whether to grant spread exemptions. Finally, the 2016 
Supplemental Position Limits Proposal clarified that for excluded 
commodities, the exchange can grant certain exemptions provided under 
paragraphs Sec.  150.5(b)(5)(i) and (b)(5)(ii) in addition to the risk 
management exemption previously proposed in the December 2013 Position 
Limits Proposal.\758\
---------------------------------------------------------------------------

    \758\ See Sec.  150.5(b)(5)(D) (stating that for excluded 
commodities, a DCM or SEF may grant, pursuant to rules submitted to 
the Commission, ``the exemptions under paragraphs (b)(5)(i) and 
(b)(5)(ii)(A) through (C)''). While the December 2013 Position 
Limits Proposal numbered the provisions applicable to excluded 
commodities as Sec.  150.5(b)(5)(ii)(E), the 2016 Supplemental 
Position Limits Proposal renumbered the provision as Sec.  
150.5(b)(5)(ii)(D).

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[[Page 96788]]

iv. Comments Received on the 2016 Supplemental Position Limits Proposal 
Regarding Sec.  150.5(a)
    While comments were submitted on the 2016 Supplemental Position 
Limits Proposal that addressed the proposed changes to the definitions 
under Sec.  150.1, as well as to the proposed exchange processes for 
recognition of non-enumerated bona fide hedges and anticipatory hedges, 
and for granting spreads exemptions under proposed Sec. Sec.  150.9, 
150.11, and 150.10, respectively, all of which indirectly affect Sec.  
150.5(a), very few comments specifically addressed Sec.  150.5(a). 
Comments received on the 2016 Supplemental Position Limits Proposal 
regarding the other sections are addressed in the discussions of those 
sections.\759\
---------------------------------------------------------------------------

    \759\ One example of an issue raised by several commenters 
concerns the application procedures in Sec. Sec.  150.9(a)(4), 
150.10(a)(4), and 150.11(a)(3), which requires market participants 
to apply for recognition or an exemption in advance of exceeding the 
limit. See, e.g., CL-FIA-60937 at 4, 13; CL-CME-60926 at 12; CL-ICE-
60929 at 11, 20-21; CL-NCGA-NGSA-60919 at 10-11; CL-EEI-EPSA-60925 
at 4; CL-ISDA-60931 at 13; and CL-CMC-60950 at 3. For example, ICE 
requested the insertion of a provision for exchanges to recognize 
exemptions retroactively due to ``unforeseen hedging needs,'' and 
also stated that certain exchanges currently utilize a similar rule 
and it is ``critical in reflecting commercial hedging needs that 
cannot always be predicted in advance.'' CL-ICE-60929 at 11.
---------------------------------------------------------------------------

    One commenter urged the Commission to allow exchanges to maintain 
their current authority to set speculative limits for both spot month 
and all-months combined limits below federal limits to ensure that 
convergence continues to occur.\760\
---------------------------------------------------------------------------

    \760\ CL-NGFA-60941 at 2.
---------------------------------------------------------------------------

    While the Commission's retention of what is often referred to as 
the five-day rule \761\ was included only in the revised definition of 
bona fide hedging position under Sec.  150.1,\762\ several commenters 
addressed the five-day rule in the context of Sec.  150.5 as proposed 
in the 2016 Supplemental Position Limits Proposal.\763\ According to 
the commenters, the decision of whether to apply the five-day rule to a 
particular contract should be delegated to the exchanges because the 
exchanges are in the best position to evaluate facts and circumstances, 
and different markets have different dynamics and needs.\764\ In 
addition, one commenter requested that the Commission specifically 
authorize exchanges to grant bona fide hedging position and spread 
exemptions during the last five days of trading or less.\765\ Two 
commenters suggested, as an alternative approach if the five-day rule 
remains, that the Commission instead rely on tools available to 
exchanges to address concerns, such as exchanges requiring gradual 
reduction of the position (``step down'' requirements) or revoking 
exemptions to protect the price discovery process in core referenced 
futures contracts approaching expiration.\766\ Another commenter argued 
that in spite of any five-day rule that is adopted, exchanges should be 
allowed to recognize non-enumerated bona fide hedging exemptions during 
the last five trading days for enumerated strategies that are otherwise 
subject to the five-day rule and the discretion to grant exemptions for 
hedging strategies that would otherwise be subject to the five-day 
rule.\767\
---------------------------------------------------------------------------

    \761\ The Commission's current definition of ``bona fide hedging 
transactions and positions,'' under Sec.  1.3(z), applies the 
``five-day rule'' in Sec.  1.3(z)(2) subsections (i)(B), (ii)(C), 
(iii), and (iv). Under those sections of the ``five-day rule,'' no 
such positions and transactions were maintained in the five last 
days of trading. See Sec.  1.3(z).
    \762\ As noted in the December 2013 Position Limits Proposal 
(which did not change in the 2016 Supplemental Position Limits 
Proposal), the Commission previously proposed to delete Sec.  1.3(z) 
and replace it with a new definition in Sec.  150.1 of ``bona fide 
hedging position.'' And, as noted above, the December 2013 Position 
Limits Proposal retained the five-day rule. The previously proposed 
definition was built on the Commission's history and was grounded 
for physical commodities in the new requirements of CEA section 
4a(c)(2) as amended by the Dodd-Frank Act. December 2013 Position 
Limits Proposal, 78 FR at 75706.
    \763\ E.g., CL-NCGA-ASA-60917 at 1-2; CL-CME-60926 at 14-15; CL-
ICE-60929 at 7-8; CL-ISDA-60931 at 11; CL-CCI-60935 at 3; CL-MGEX-
60936 at 4; CL-Working Group-60947 at 5, 7-9; CL-IECAssn-60949 at 7-
9; CL-CMC-60950 at 9-14; CL-NCC-ACSA-60972 at 2. No comments on the 
December 2013 Position Limits Proposal specifically addressed the 
``five-day rule'' in the context of Sec.  150.5.
    \764\ See, e.g, CL-ISDA-60931 at 10; CL-CCI-60935 at 3; CL-MGEX-
60936 at 11; CL-Working Group-60947 at 7-9.
    \765\ CL-CMC-60950 at 11-12.
    \766\ CL-Working Group-60947 at 8; CL-IECAssn-60949 at 7-9.
    \767\ CL-CME-60926 at 6, 8.
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    One issue raised by several commenters \768\ that did not directly 
address Sec.  150.5 concerns the application procedures in Sec. Sec.  
150.9(a)(4), 150.10(a)(4), and 150.11(a)(3), which require market 
participants to apply for recognition or an exemption in advance of 
exceeding the limit.\769\ For example, one commenter requested the 
insertion of a provision permitting exchanges to recognize exemptions 
retroactively due to ``unforeseen hedging needs''; this commenter also 
stated that certain exchanges currently utilize a similar rule and it 
is ``critical in reflecting commercial hedging needs that cannot always 
be predicted in advance.'' \770\ Another commenter requested that the 
Commission allow exchanges to recognize a bona fide hedge exemption for 
up to a five-day retroactive period in circumstances where market 
participants need to exceed limits to address a sudden and unforeseen 
hedging need.\771\ That commenter stated that CME and ICE currently 
provide mechanisms for such recognition, which are used infrequently 
but are nonetheless important. According to that commenter, ``[t]o 
ensure that such allowances will not diminish the overall integrity of 
the process, two effective safeguards under the current exchange-
administered processes could continue to be required. First, the 
exchange rules could continue to require market participants making use 
of the retroactive application to demonstrate that the applied-for 
hedge was required to address a sudden and unforeseen hedging need. . . 
. Second, if the emergency hedge recognition is not granted, the 
exchange rules could continue to require the applicant to immediately 
unwind its position and also deem the applicant to have been in 
violation for any period in which its position exceeded the applicable 
limits.\772\ While these comments address other sections, the 
Commission will respond to these comments in explaining its reproposal 
of Sec.  150.5.
---------------------------------------------------------------------------

    \768\ CL-FIA-60937 at 4, 13; CL-CME-60926 at 12; CL-ICE-60929 at 
11, 20-21; CL-NCGA-NGSA-60919 at 10-11; CL-EEI-EPSA-60925 at 4; CL-
ISDA-60931 at 13; and CL-CMC-60950 at 3.
    \769\ See 150.9(a)(4) (requiring each person intending to exceed 
position limits to, among other things, ``receive notice of 
recognition from the designated contract market or swap execution 
facility of a position as a non-enumerated bona fide hedge in 
advance of the date that such position would be in excess of the 
limits then in effect pursuant to section 4a of the Act.'')
    \770\ CL-ICE-60929 at 11.
    \771\ CL-NCGA-NGSA-60919 at 10-11.
    \772\ Id. at 11 (footnote omitted).
---------------------------------------------------------------------------

v. Commission Determination Regarding Sec.  150.5(a)
    The Commission has determined to repropose Sec.  150.5(a) as 
proposed in the 2016 Supplemental Position Limits Proposal for the 
reasons provided above with some changes, as detailed below.\773\
---------------------------------------------------------------------------

    \773\ For example, the Commission is reproposing the following 
sections as previously proposed without change for the reasons 
provided above: Sec.  150.5(a)(1); Sec.  150.5(a)(3) (Pre-enactment 
and transition period swap positions), Sec.  150.5(a)(4) (Pre-
existing positions), and Sec.  150.5(a)(6) (Additional acceptable 
practices); no substantive comments were received regarding those 
sections.

---------------------------------------------------------------------------

[[Page 96789]]

    Although the Commission is reproposing Sec.  150.5(a)(1), in 
response to the comment that the exchanges should conform their 
position limits to the federal limits so that a single position limit 
and accountability regime apply across exchanges,\774\ the Commission 
believes that exchanges may find it prudent in the course of monitoring 
position limits to impose lower (that is, more restrictive) limit 
levels. The flexibility for exchanges to set more restrictive limits is 
granted in CEA section 4a(e), which provides that if an exchange 
establishes limits on a contract, those limits shall be set at a level 
no higher than the level of any limits set by the Commission. This 
expressly permits an exchange to set lower limit levels than federal 
limit levels. The reproposed rules track this statutory provision.
---------------------------------------------------------------------------

    \774\ But see CL-NGFA-60941 at 2 (urging the Commission to allow 
exchanges to maintain their current authority to set speculative 
limits for both spot month and all-months combined limits below 
federal limits).
---------------------------------------------------------------------------

    For purposes of clarification in response to comments on the 
treatment of basis contracts, the reproposed rules provide a singular 
definition of ``referenced contract'' which, as stated by the 
commenters, excludes ``basis contracts.'' For commodities subject to 
federal limits under reproposed Sec.  150.2, the definition of 
referenced contract remains the same for federal and exchange-set 
limits and may not be amended by exchanges. An exchange could, but is 
not required to, impose limits on any basis contract independently of 
the federal limit for the commodity in question, but a position in a 
basis contract with an independent, exchange-set limit would not count 
for the purposes of the federal limit.\775\
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    \775\ The Commission notes that its singular definition of 
``referenced contract'' that excludes ``basis contracts'' applies 
not only to Sec.  150.5(a), but also to Sec.  150.5(b). Separately, 
the Commission notes that in the future, it may determine to subject 
basis contracts to a separate class limit in order to discourage 
potential manipulation of the outright price legs of the basis 
contract.
---------------------------------------------------------------------------

    After consideration of comments regarding Sec.  150.5(a)(2)(i) 
(Grant of exemption),\776\ as proposed in the 2016 Supplemental 
Position Limits Proposal, the Commission is reproposing it with 
modifications. Reproposed Sec.  150.5(a)(2)(i) provides that any 
exchange may grant exemptions from any speculative position limits it 
sets under paragraph Sec.  150.5(a)(1), provided that such exemptions 
conform to the requirements specified in Sec.  150.3, and provided 
further that any exemptions to exchange-set limits not conforming to 
Sec.  150.3 are capped at the level of the applicable federal limit in 
Sec.  150.2.
---------------------------------------------------------------------------

    \776\ See, e.g., CL-ICE-60929 at 2-4, 7-8; CL-Working Group-
60947 at 14.
---------------------------------------------------------------------------

    The Commission notes that under the 2013 Position Limits Proposal, 
exchanges could adopt position accountability at a level lower than the 
federal limit (along with a position limit at the same level as the 
federal limit); in such cases, the exchange would not need to grant 
exemptions for positions no greater than the level of the federal 
limit. Under the Reproposal, exchanges could choose, instead, to adopt 
a limit lower than the federal limit; in such a case, the Commission 
would permit the exchange to grant an exemption to the exchange's lower 
limit, where such exemption does not conform to Sec.  150.3, provided 
that such exemption to an exchange-set limit is capped at the level of 
the federal limit. Such a capped exemption would basically have the 
same effect as if the exchange set its speculative position limit at 
the level of the federal limit, as required under DCM core principle 
5(B) and SEF core principle 6(B)(1).\777\
---------------------------------------------------------------------------

    \777\ 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b-3(f)(6).
---------------------------------------------------------------------------

    In regards to the five-day rule, the Commission notes that the 
reproposed rule does not apply the prudential condition of the five-day 
rule to non-enumerated hedging positions. The Commission considered the 
recommendations that the Commission: Allow exchanges to recognize a 
bona fide hedge exemption for up to a five-day retroactive period in 
circumstances where market participants need to exceed limits to 
address a sudden and unforeseen hedging need; specifically authorize 
exchanges to grant bona fide hedge and spread exemptions during the 
last five days of trading or less, and/or delegate to the exchanges for 
their consideration the decision of whether to apply the five-day rule 
to a particular contract after their evaluation of the particular facts 
and circumstances. As reproposed, and as discussed in connection with 
the definition of bona fide hedging position,\778\ the five-day rule 
would only apply to certain positions (pass-through swap offsets, 
anticipatory and cross-commodity hedges).\779\ However, in regards to 
exchange processes under Sec.  150.9, Sec.  150.10, and Sec.  150.11, 
the Commission would allow exchanges to waive the five-day rule on a 
case-by-case basis.
---------------------------------------------------------------------------

    \778\ See the discussion regarding the five-day rule in 
connection with the definition of bona fide hedging position in the 
discussion of Sec.  150.9 (Process for recognition of positions as 
non-enumerated bona fide hedges).
    \779\ See Sec.  150.1, definition of bona fide hedging position 
sections (2)(ii)(A), (3)(iii), (4), and (5) (Other enumerated 
hedging position). To provide greater clarity as to which bona fide 
hedge positions the five-day rule applies, the reproposed rules 
reorganize the definition.
---------------------------------------------------------------------------

    In addition, the Commission proposes to amend Sec.  150.5(a)(2)(ii) 
(Application for exemption). The reproposed rule would permit exchanges 
to adopt rules that allow a trader to file an application for an 
enumerated bona fide hedging exemption within five business days after 
the trader assumed the position that exceeded a position limit.\780\ 
The Commission expects that exchanges will carefully consider whether 
allowing such retroactive recognition of an enumerated bona fide 
hedging exemption would, as noted by one commenter, diminish the 
overall integrity of the process.\781\ In addition, the Commission 
cautions exchanges to carefully consider whether to adopt in those 
rules the two safeguards recommended by that commenter: (i) Requiring 
market participants making use of the retroactive application to 
demonstrate that the applied-for hedge was required to address a sudden 
and unforeseen hedging need; and (ii) providing that if the emergency 
hedge recognition was not granted, exchange rules would continue to 
require the applicant to unwind its position in an orderly manner and 
also would deem the applicant to have been in violation for any period 
in which its position exceeded the applicable limits.\782\
---------------------------------------------------------------------------

    \780\ The Reproposal includes a similar modification to Sec.  
150.5(b)(5)(i).
    \781\ CL-NCGA-NGSA-60919 at 10-11.
    \782\ Id.
---------------------------------------------------------------------------

    Concerning the comment recommending greater discretion be given 
DCMs and SEFs that are trading facilities with respect to aggregation 
requirements, the Commission reiterates its belief in the benefits of 
requiring exchanges to conform to the federal standards on aggregation, 
including lower burden and less confusion for traders active on 
multiple exchanges,\783\ efficiencies in administration for both 
exchanges and the Commission, and the prevention of a ``race-to-the-
bottom'' wherein exchanges compete over lower standards. The Commission 
notes that the provision regarding aggregation in reproposed Sec.  
150.5(a)(5) incorporates by reference Sec.  150.4 and thus would, on a 
continuing basis, reflect any changes made to the aggregation standard 
provided in the section.
---------------------------------------------------------------------------

    \783\ The Commission's belief is supported by requests from 
multiple traders for industry-wide, standard aggregation 
requirements.

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[[Page 96790]]

c. Sec.  150.5(b)--Requirements and Acceptable Practices for Commodity 
Derivative Contracts That Are Not Subject to Federal Position Limits
i. December 2013 Position Limits Proposal
    The Commission set forth in Sec.  150.5(b), as proposed in the 
December 2013 Position Limits Proposal, requirements and acceptable 
practices that would generally update and reorganize the set of 
acceptable practices listed in current Sec.  150.5 as they relate to 
contracts that are not subject to the federal position limits, 
including physical and excluded commodities.\784\ As discussed above, 
the Commission also proposed to revise Sec.  150.5 to implement uniform 
requirements for DCMs and SEFs that are trading facilities relating to 
hedging exemptions across all types of commodity derivative contracts, 
including those that are not subject to federal position limits. The 
Commission further proposed to require DCMs and SEFs that are trading 
facilities to have uniform aggregation polices that mirrored the 
federal aggregation provisions for all types of commodity derivative 
contracts, including for contracts that were not subject to federal 
position limits.\785\
---------------------------------------------------------------------------

    \784\ For position limits purposes, Sec.  150.1(k), as proposed 
in the December 2013 Position Limits Proposal, would define 
``physical commodity'' to mean any agricultural commodity, as 
defined in 17 CFR 1.3, or any exempt commodity, as defined in 
section 1a(20) of the Act. Excluded commodity is defined in section 
1a(19) of the Act.
    \785\ As Commission noted at that time, hedging exemptions and 
aggregation policies that vary from exchange to exchange would 
increase the administrative burden on a trader active on multiple 
exchanges, as well as increase the administrative burden on the 
Commission in monitoring and enforcing exchange-set position limits. 
December 2013 Position Limits Proposal, 78 FR at 75756.
---------------------------------------------------------------------------

    The previously proposed revisions to DCM and SEF acceptable 
practices generally concerned how to: (1) Set spot-month position 
limits; (2) set individual non-spot month and all-months-combined 
position limits; (3) set position limits for cash-settled contracts 
that use a referenced contract as a price source; (4) adjust position 
limit levels after a contract has been listed for trading; and (5) 
adopt position accountability in lieu of speculative position 
limits.\786\
---------------------------------------------------------------------------

    \786\ See December 2013 Position Limits Proposal, 78 FR at 
75757.
---------------------------------------------------------------------------

    For spot months under the December 2013 Position Limits Proposal, 
for a derivative contract that was based on a commodity with a 
measurable deliverable supply, previously proposed Sec.  
150.5(b)(1)(i)(A) updated the acceptable practice in current Sec.  
150.5(b)(1) whereby spot month position limits should be set at a level 
no greater than one-quarter of the estimated deliverable supply of the 
underlying commodity.\787\ Previously proposed Sec.  150.5(b)(1)(i)(A) 
clarified that this acceptable practice for setting spot month position 
limits would apply to any commodity derivative contract, whether 
physical-delivery or cash-settled, that has a measurable deliverable 
supply.\788\
---------------------------------------------------------------------------

    \787\ As proposed in the December 2013 Position Limits Proposal, 
Sec.  150.5(b)(1)(i)(A) was consistent with the Commission's 
longstanding policy regarding the appropriate level of spot-month 
limits for physical delivery contracts. These position limits would 
be set at a level no greater than 25 percent of estimated 
deliverable supply. The spot-month limits would be reviewed at least 
every 24 months thereafter. The 25 percent formula narrowly targeted 
the trading that may be most susceptible to, or likely to 
facilitate, price disruptions. The goal for the formula, as noted in 
the December 2013 Position Limits Proposal release, was to minimize 
the potential for corners and squeezes by facilitating the orderly 
liquidation of positions as the market approaches the end of trading 
and by restricting swap positions that may be used to influence the 
price of referenced contracts that are executed centrally. December 
2013 Position Limits Proposal, 78 FR at 75756, n. 686.
    \788\ The Commission noted in the December 2013 Position Limits 
Proposal that, in general, the term ``deliverable supply'' means the 
quantity of the commodity meeting a derivative contract's delivery 
specifications that can reasonably be expected to be readily 
available to short traders and saleable to long traders at its 
market value in normal cash marketing channels at the derivative 
contract's delivery points during the specified delivery period, 
barring abnormal movement in interstate commerce. Previously 
proposed Sec.  150.1 would define commodity derivative contract to 
mean any futures, option, or swap contract in a commodity (other 
than a security futures product as defined in CEA section 1a(45)). 
December 2013 Position Limits Proposal, 78 FR at 75756, n. 687.
---------------------------------------------------------------------------

    For a derivative contract that was based on a commodity without a 
measurable deliverable supply, the December 2013 Position Limits 
Proposal proposed for spot months, in Sec.  150.5(b)(1)(i)(B), to 
codify as guidance that the spot month limit level should be no greater 
than necessary and appropriate to reduce the potential threat of market 
manipulation or price distortion of the contract's or the underlying 
commodity's price.\789\
---------------------------------------------------------------------------

    \789\ December 2013 Position Limits Proposal, 78 FR at 75757. 
The Commission noted that this descriptive standard is largely based 
on the language of DCM core principle 5 and SEF core principle 6. 
The Commission does not suggest that an excluded commodity 
derivative contract that is based on a commodity without a 
measurable supply should adhere to a numeric formula in setting spot 
month position limits. Id. at 75757, n. 688.
---------------------------------------------------------------------------

    Under previously proposed Sec.  150.5(b)(1)(ii)(A), the December 
2013 Position Limits Proposal preserved the existing acceptable 
practice in current Sec.  150.5(b)(2) whereby individual non-spot or 
all-months-combined levels for agricultural commodity derivative 
contracts that are not subject to the federal limits should be no 
greater than 1,000 contracts at initial listing. As then proposed, the 
rule would also codify as guidance that the 1,000 contract limit should 
be taken into account when the notional quantity per contract is no 
larger than a typical cash market transaction in the underlying 
commodity, or reduced if the notional quantity per contract is larger 
than a typical cash market transaction. Additionally, the December 2013 
Position Limits Proposal proposed in Sec.  150.5(b)(1)(ii)(A), to 
codify for individual non-spot or all-months-combined, that if the 
commodity derivative contract was substantially the same as a pre-
existing DCM or SEF commodity derivative contract, then it would be an 
acceptable practice for the DCM or SEF that is a trading facility to 
adopt the same limit as applies to that pre-existing commodity 
derivative contract.\790\
---------------------------------------------------------------------------

    \790\ The Commission noted that ``in this context, 
`substantially the same' means a close economic substitute. For 
example, a position in Eurodollar futures can be a close economic 
substitute for a fixed-for-floating interest rate swap.'' December 
2013 Position Limits Proposal, 78 FR at 75757.
---------------------------------------------------------------------------

    In Sec.  150.5(b)(1)(ii)(B), the December 2013 Position Limits 
Proposal preserved the existing acceptable practice for individual non-
spot or all-months-combined in exempt and excluded commodity derivative 
contracts, set forth in current Sec.  150.5(b)(3), for DCMs to set 
individual non-spot or all-months-combined limits at levels no greater 
than 5,000 contracts at initial listing.\791\ Previously proposed Sec.  
150.5(b)(1)(ii)(B) would codify as guidance for exempt and excluded 
commodity derivative contracts that the 5,000 contract limit should be 
applicable when the notional quantity per contract was no larger than a 
typical cash market transaction in the underlying commodity, or should 
be reduced if the notional quantity per contract was larger than a 
typical cash market transaction. Additionally, previously proposed 
Sec.  150.5(b)(1)(ii)(B) would codify a new acceptable practice for a 
DCM or SEF that is a trading facility to adopt the same limit as 
applied to the pre-existing contract if the new commodity contract was 
substantially the same as an existing contract.\792\
---------------------------------------------------------------------------

    \791\ In contrast, 17 CFR 150.5(b)(3) lists this as an 
acceptable practice for contracts for ``energy products and non-
tangible commodities.'' Excluded commodity is defined in CEA section 
1a(19), and exempt commodity is defined CEA section 1a(20).
    \792\ December 2013 Position Limits Proposal, 78 FR at 75757.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal provided in Sec.  
150.5(b)(1)(iii)

[[Page 96791]]

that if a commodity derivative contract was cash-settled by referencing 
a daily settlement price of an existing contract listed on a DCM or 
SEF, then it would be an acceptable practice for a DCM or SEF to adopt 
the same position limits as the original referenced contract, assuming 
the contract sizes are the same. Based on its enforcement experience, 
the Commission expressed the belief that limiting a trader's position 
in cash-settled contracts in this way would diminish the incentive to 
exert market power to manipulate the cash-settlement price or index to 
advantage a trader's position in the cash-settled contract.\793\
---------------------------------------------------------------------------

    \793\ December 2013 Position Limits Proposal, 78 FR at 75757. As 
the Commission noted with respect to cash-settled contracts where 
the underlying product is a physical commodity with limited 
supplies, thus enabling a trader to exert market power (including 
agricultural and exempt commodities), the Commission has viewed the 
specification of speculative position limits to be an essential term 
and condition of such contracts in order to ensure that they are not 
readily susceptible to manipulation, which is the DCM core principle 
3 requirement. Id. at 75757, n. 692.
---------------------------------------------------------------------------

    In previously proposed Sec.  150.5(b)(2)(i)(A), the Commission was 
updating the acceptable practices in current Sec.  150.5(c) for 
adjusting limit levels for the spot month.\794\ For a derivative 
contract that was based on a commodity with a measurable deliverable 
supply, previously proposed Sec.  150.5(b)(2)(i)(A) maintained the 
acceptable practice in current Sec.  150.5(c) to adjust spot month 
position limits to a level no greater than one-quarter of the estimated 
deliverable supply of the underlying commodity, but would apply this 
acceptable practice to any commodity derivative contract, whether 
physical-delivery or cash-settled, that has a measurable deliverable 
supply. For a derivative contract that was based on a commodity without 
a measurable deliverable supply, previously proposed Sec.  
150.5(b)(2)(i)(B) would codify as guidance that the spot month limit 
level should not be adjusted to levels greater than necessary and 
appropriate to reduce the potential threat of market manipulation or 
price distortion of the contract's or the underlying commodity's price. 
In addition, the December 2013 Position Limit Proposal would have 
codified in Sec.  150.5(b)(2)(i)(A) a new acceptable practice that spot 
month limit levels be reviewed no less than once every two years.\795\
---------------------------------------------------------------------------

    \794\ Id. at 75757.
    \795\ Id. at 75757-58.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal explained that then 
proposed Sec.  150.5(b)(2)(ii) maintained as an acceptable practice the 
basic formula set forth in current Sec.  150.5(c)(2) for adjusting non-
spot-month limits at levels of no more than 10% of the average combined 
futures and delta-adjusted option month-end open interest for the most 
recent calendar year up to 25,000 contracts, with a marginal increase 
of 2.5% of the remaining open interest thereafter.\796\ Previously 
proposed Sec.  150.5(b)(2)(ii) would also maintain as an alternative 
acceptable practice the adjustment of non-spot-month limits to levels 
based on position sizes customarily held by speculative traders in the 
contract.\797\ Previously proposed Sec.  150.5(b)(3) generally updated 
and reorganized the existing acceptable practices in current Sec.  
150.5(e) for a DCM or SEF that is a trading facility to adopt position 
accountability rules in lieu of position limits, under certain 
circumstances, for contracts that are not subject to federal position 
limits. As noted in the December 2013 Position Limits Proposal, this 
section would reiterate the DCM's authority, with conforming changes 
for SEFs, to require traders to provide information regarding their 
position when requested by the exchange.\798\ In addition, previously 
proposed Sec.  150.5(b)(3) would codify a new acceptable practice for a 
DCM or SEF to require traders to consent to not increase their position 
in a contract if so ordered, as well as a new acceptable practice for a 
DCM or SEF to require traders to reduce their position in an orderly 
manner.\799\
---------------------------------------------------------------------------

    \796\ Id. at 75758.
    \797\ Id.
    \798\ Id. Cf. 17 CFR 150.5(e)(2)-(3).
    \799\ December 2013 Position Limits Proposal, 78 FR at 75758.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal would maintain under 
Sec.  150.5(b)(3)(i) the acceptable practice for a DCM or SEF to adopt 
position accountability rules outside the spot month, in lieu of 
position limits, for an agricultural or exempt commodity derivative 
contract that: (1) Had an average month-end open interest of 50,000 or 
more contracts and an average daily volume of 5,000 or more contracts 
during the most recent calendar year; (2) had a liquid cash market; and 
(3) was not subject to federal limits in Sec.  150.2--provided, 
however, that such DCM or SEF that is a trading facility should adopt a 
spot month speculative position limit with a level no greater than one-
quarter of the estimated spot month deliverable supply.\800\
---------------------------------------------------------------------------

    \800\ The December 2013 Position Limits Proposal noted that 17 
CFR 150.5(e)(3) applies this acceptable practice to a ``tangible 
commodity, including, but not limited to metals, energy products, or 
international soft agricultural products.'' Id. at 75758. It also 
cited to the comparison of the ``minimum open interest and volume 
test'' in proposed Sec.  150.5(b)(3)(A) to that in current Sec.  
150.5(e)(3). Id.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal would maintain in Sec.  
150.5(b)(3)(ii)(A) the acceptable practice for a DCM or SEF to adopt 
position accountability rules in the spot month in lieu of position 
limits for an excluded commodity derivative contract that had a highly 
liquid cash market and no legal impediment to delivery.\801\ For an 
excluded commodity derivative contract without a measurable deliverable 
supply, previously proposed Sec.  150.5(b)(3)(ii)(A) would codify an 
acceptable practice for a DCM or SEF to adopt position accountability 
rules in the spot month in lieu of position limits because there was 
not a deliverable supply that was subject to manipulation. However, for 
an excluded commodity derivative contract that had a measurable 
deliverable supply, but that may not be highly liquid and/or was 
subject to some legal impediment to delivery, previously proposed Sec.  
150.5(b)(3)(ii)(A) set forth an acceptable practice for a DCM or SEF to 
adopt a spot-month position limit equal to no more than one-quarter of 
the estimated deliverable supply for that commodity, because the 
estimated deliverable supply may be susceptible to manipulation.\802\ 
Furthermore, the December 2013 Position Limits Proposal in Sec.  
150.5(b)(3)(ii) would remove the ``minimum open interest and volume'' 
test for excluded commodity derivative contracts generally.\803\ 
Finally, the December 2013 Position Limits Proposal would codify in 
Sec.  150.5(b)(3)(ii)(B) an acceptable practice for a DCM or SEF to 
adopt position accountability levels for an excluded commodity 
derivative contract in lieu of position limits in the individual non-
spot month or all-months-combined.
---------------------------------------------------------------------------

    \801\ Id.
    \802\ Id.
    \803\ Id. The December 2013 Position Limits Proposal pointed out 
that the ``minimum open interest and volume'' test, as presented in 
17 CFR 150.5(e)(1)-(2), need not be used to determine whether an 
excluded commodity derivative contract should be eligible for 
position accountability rules in lieu of position limits in the spot 
month. Id.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal added in Sec.  
150.5(b)(3)(iii) a new acceptable practice for an exchange to list a 
new contract with position accountability levels in lieu of position 
limits if that new contract was substantially the same as an existing 
contract that was currently listed for trading on an exchange that had 
already

[[Page 96792]]

adopted position accountability levels in lieu of position limits.\804\
---------------------------------------------------------------------------

    \804\ See supra discussion of what is meant by ``substantially 
the same'' in this context. See also December 2013 Position Limits 
Proposal, 78 FR at 75757, n. 690.
---------------------------------------------------------------------------

    As previously proposed, Sec.  150.5(b)(4) would maintain the 
acceptable practice that for contracts not subject to federal position 
limits, DCMs and SEFs should calculate trading volume and open interest 
in the manner established in current Sec.  150.5(e)(4).\805\ The 
Commission stated in the December 2013 Position Limits Proposal that 
then proposed Sec.  150.5(b)(4) would build upon these standards by 
accounting for swaps in referenced contracts on a futures-equivalent 
basis.\806\
---------------------------------------------------------------------------

    \805\ As noted in the December 2013 Position Limits Proposal, 
for SEFs, trading volume and open interest for swaptions should be 
calculated on a delta-adjusted basis. See id. at 75758, n. 697.
    \806\ See id. at 75698-99 (defining ``Futures-equivalent'' in 
Sec.  150.1 to account for swaps in referenced contracts).
---------------------------------------------------------------------------

    As noted above, under the December 2013 Position Limits proposal, 
the Commission proposed to require DCMs and SEFs to have uniform 
hedging exemptions and aggregation polices that mirror the federal 
aggregation provisions for all types of commodity derivative contracts, 
including for contracts that are not subject to federal position 
limits. The Commission explained that hedging exemptions and 
aggregation policies that vary from exchange to exchange would increase 
the administrative burden on a trader active on multiple exchanges, as 
well as increase the administrative burden on the Commission in 
monitoring and enforcing exchange-set position limits.\807\ Therefore, 
the December 2013 Position Limits Proposal in Sec.  150.5(b)(5)(i) 
would require any hedge exemption rules adopted by a designated 
contract market or a swap execution facility that is a trading facility 
to conform to the definition of bona fide hedging position in 
previously proposed Sec.  150.1.\808\
---------------------------------------------------------------------------

    \807\ See December 2013 Position Limits Proposal, 78 FR at 
75756. See also supra regarding Sec.  150.5(a)(5).
    \808\ The requirement proposed in Sec.  150.5(b)(8) that DCMs 
and SEFs have uniform aggregation polices that mirror the federal 
aggregation provisions is addressed below.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal also set forth in Sec.  
150.5(b)(5)(ii) acceptable practices for DCMs and SEFs to grant 
exemptions from position limits for positions, other than bona fide 
hedging positions, in contracts not subject to federal limits. The 
exemptions in Sec.  150.5(b)(5)(ii) under the December 2013 Position 
Limits Proposal generally tracked the exemptions then proposed in Sec.  
150.3; acceptable practices were suggested based on the same logic that 
underpinned those exemptions.\809\ The acceptable practices 
contemplated that a DCM or SEF might grant exemptions under certain 
circumstances for financial distress, intramarket and intermarket 
spread positions (discussed above), and qualifying cash-settled 
contract positions in the spot month.\810\ Previously proposed Sec.  
150.5(b)(5)(ii)(E) also set forth an acceptable practice for a DCM or 
SEF to grant for contracts on excluded commodities, a limited risk 
management exemption pursuant to rules submitted to the Commission, and 
consistent with the guidance in new Appendix A to part 150.\811\
---------------------------------------------------------------------------

    \809\ See December 2013 Position Limits Proposal, 78 FR at 
75735-41, 75827-28. See also supra discussion of the Sec.  150.3 
exemptions.
    \810\ See id.
    \811\ As the Commission noted, previously proposed Appendix A to 
part 150 ``is intended to capture the essence of the Commission's 
1987 interpretation of its definition of bona fide hedge 
transactions to permit exchanges to grant hedge exemptions for 
various risk management transactions. See Risk Management Exemptions 
From Speculative Position Limits Approved Under Commission 
Regulation 1.61, 52 FR 34633, Sep. 14, 1987.'' The Commission also 
specified that such exemptions be granted on a case-by-case basis, 
subject to a demonstrated need for the exemption, required that 
applicants for these exemptions be typically engaged in the buying, 
selling, or holding of cash market instruments, and required the 
exchanges to monitor the exemptions they granted to ensure that any 
positions held under the exemption did not result in any large 
positions that could disrupt the market. Id. See also December 2013 
Position Limits Proposal, 78 FR at 75756, n. 683.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal provided in Sec.  
150.5(b)(6)-(7) acceptable practices relating to pre-enactment and 
transition period swap positions (as those terms were defined in 
previously proposed Sec.  150.1),\812\ as well as to commodity 
derivative contract positions acquired in good faith prior to the 
effective date of mandatory federal speculative position limits.\813\
---------------------------------------------------------------------------

    \812\ See supra discussion of pre-enactment and transition 
period swap positions.
    \813\ December 2013 Position Limits Proposal, 78 FR at 75756, 
75831.
---------------------------------------------------------------------------

    Additionally, for any contract that is not subject to federal 
position limits, previously proposed Sec.  150.5(b)(8) required the DCM 
or SEF that is a trading facility to conform to the uniform federal 
aggregation provisions.\814\ As noted above, aggregation policies that 
vary from exchange to exchange would increase the administrative burden 
on a trader active on multiple exchanges, as well as increase the 
administrative burden on the Commission in monitoring and enforcing 
exchange-set position limits. The requirement generally mirrored the 
requirement in Sec.  150.5(a)(5) for contracts that are subject to 
federal position limits by requiring the DCM or SEF that is a trading 
facility to have aggregation rules that conform to previously proposed 
Sec.  150.4.\815\
---------------------------------------------------------------------------

    \814\ Proposed Sec.  150.5(b)(7) would replace 17 CFR 150.5(g) 
as it relates to contracts that are not subject to federal position 
limits.
    \815\ Id. at 75756.
---------------------------------------------------------------------------

ii. Comments Received to December 2013 Position Limits Proposal 
Regarding Sec.  150.5(b)
    Three commenters on previously proposed regulation Sec.  150.5 
recommended that the Commission not require SEFs to establish position 
limits.\816\ Two noted that because SEF participants may use more than 
one derivatives clearing organization (``DCO''), a SEF may not know 
when a position has been offset.\817\ Further, during the ongoing SEF 
registration process,\818\ a number of entities applying to become 
registered as SEFs told the Commission that they lacked access to 
information that would enable them to knowledgeably establish position 
limits or monitor positions.\819\ The Commission observes that this

[[Page 96793]]

information gap would also be a concern for DCMs in respect of swaps.
---------------------------------------------------------------------------

    \816\ CL-CMC-59634 at 14-15; CL-FIA-60392 at 10; and CL-ISDA/
SIFMA-59611 at 35. One commenter stated that SEFs should be exempt 
from the requirement to set positions limits because SEFs are in the 
early stages of development and could be harmed by limits that 
restrict liquidity. CL-ISDA/SIFMA-59611 at 35.
    \817\ CL-CMC-59634 at 14-15; and CL-FIA-60392 at 10.
    \818\ Under CEA section 5h(a)(1), no person may operate a 
facility for trading swaps unless the facility is registered as a 
SEF or DCM. 7 U.S.C. 7b-3(a)(1). A SEF must comply with core 
principles, including Core Principle 6 regarding position limits, as 
a condition of registration. CEA section 5h(f)(1), 7 U.S.C. 7b-
3(f)(1).
    \819\ For example, in a submission to the Commission under part 
40 of the Commission's regulations, BGC Derivative Markets, L.P. 
states that ``[t]he information to administer limits or 
accountability levels cannot be readily ascertained. Position limits 
or accountability levels apply market-wide to a trader's overall 
position in a given swap. To monitor this position, a SEF must have 
access to information about a trader's overall position. However, a 
SEF only has information about swap transactions that take place on 
its own Facility and has no way of knowing whether a particular 
trade on its facility adds to or reduces a trader's position. And 
because swaps may trade on a number of facilities or, in many cases, 
over-the-counter, a SEF does not know the size of the trader's 
overall swap position and thus cannot ascertain whether the trader's 
position relative to any position limit. Such information would be 
required to be supplied to a SEF from a variety of independent 
sources, including SDRs, DCOs, and market participants themselves. 
Unless coordinated by the Commission operating a centralized 
reporting system, such a data collection requirement would be 
duplicative as each separate SEF required reporting by each 
information sources.'' BGC Derivative Markets, L.P., Rule Submission 
2015-09 (Oct. 6, 2015).
---------------------------------------------------------------------------

    One commenter expressed the view that deliverable supply 
calculations used to establish spot month limits should be based on 
commodity specific actual physical transport/transmission, generation 
and production.\820\
---------------------------------------------------------------------------

    \820\ CL-EDF-60398 at 6-7.
---------------------------------------------------------------------------

    One commenter urged the Commission to allow the listing exchange to 
set non-spot month limits at least as high as the spot-month position 
limit, rather than base the non-spot month limit strictly on the open 
interest formula.\821\ Another commenter recommended that the 
Commission remove from Sec.  150.5(b)(1)(ii)(B) the provision setting a 
5,000 contract limit for non-spot-month or all-months-combined 
accountability levels for exempt commodities, because that level may 
not be appropriate for all markets; instead, the Commission should rely 
on the exchanges to set accountability levels for exempt commodity 
markets.\822\
---------------------------------------------------------------------------

    \821\ CL-ICE-59962 at 7.
    \822\ CL-Nodal-59695 at 3.
---------------------------------------------------------------------------

    One commenter recommended that DCMs be permitted to establish 
position accountability levels in lieu of position limits outside of 
the spot month.\823\ The commenter recommended that the administration 
of position accountability should be coordinated with the Commission 
and other DCMs to the extent that a market participant holds positions 
on more than one DCM.\824\
---------------------------------------------------------------------------

    \823\ CL-FIA-59595 at 5, 39 and 41; see also CL-FIA-60303 at 3-
4.
    \824\ CL-FIA-60392 at 9.
---------------------------------------------------------------------------

iii. 2016 Supplemental Position Limits Proposal
    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed to revise Sec.  150.5(b)(5) from what was proposed in the 
December 2013 Position Limits Proposal; proposed Sec.  150.5(b) 
establishes requirements and acceptable practices that pertain to 
commodity derivative contracts not subject to federal position 
limits.\825\ The proposed revisions to Sec.  150.5(b)(5) would, under 
the 2016 Supplemental Position Limits Proposal, permit exchanges, in 
regards to commodity derivative contracts not subject to federal 
position limits, to recognize non-enumerated bona fide hedging 
positions, as well as spreads. Moreover, the exchanges would no longer 
be prohibited from recognizing spreads during the spot month.\826\ 
Instead, as the Commission noted in the 2016 Supplemental Position 
Limits Proposal, what it was proposing would, in part, maintain the 
status quo: Exchanges that currently recognize spreads in the spot 
month under current Sec.  150.5(a) would be able to continue to do so. 
Rather than a prohibition, the exchanges would be responsible for 
determining whether recognizing spreads, including spreads in the spot 
month, would further the policy objectives in section 4a(a)(3) of the 
Act.\827\
---------------------------------------------------------------------------

    \825\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38482.
    \826\ Id. at 38482, 38506-7. Compare December 2013 Position 
Limits Proposal, 78 FR at 75830.
    \827\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38482, 38506-07.
---------------------------------------------------------------------------

iv. Comments Received to 2016 Supplemental Position Limits Proposal 
Regarding Sec.  150.5(b)
Exchange-Administered Exemptions Under Sec.  150.5(b)
    Several commenters requested clarification as to the application of 
exchange-administered exemption requests to non-referenced contracts 
generally under Sec.  150.5(b).\828\ In addition, several commenters 
raised concerns with the requirement in Sec.  150.5(b)(5)(i) that the 
exchanges provide exemptions ``in a manner consistent with the process 
described in Sec.  150.9(a).'' \829\ Similarly, according to one 
commenter, the exchanges should not be bound to the same exemption 
process provided under proposed CFTC Regulation 150.9 when 
administering exemptions from exchange-set limits. Rather, the 
commenter recommended that the Commission: ``(i) not adopt proposed 
CFTC Regulation 150.5(b)(5)(i) in any final rule issued in this 
proceeding or (ii) clarify that the phrase `in a manner consistent with 
the process described in [proposed CFTC Regulation] 150.5(b)(5)(i)' 
does not mean that the Exchanges must apply the virtually identical 
process for recognizing non-enumerated bona fide hedging positions 
under proposed CFTC Regulation 150.9(a) to their exemption process for 
exchange-set speculative position limits.'' \830\
---------------------------------------------------------------------------

    \828\ CMC, for example, requested that the Commission clarify 
that exchange-granted hedge exemption procedures would be 
``applicable if, and to the extent that, the exchange granted 
exemption exceeds federally established speculative position limits 
and not otherwise.'' CL-CMC-60950 at 14. According to CME, on the 
other hand, proposed section 150.5(b) was unclear and ambiguous and 
so should be reproposed. For example, CME stated that the proposal 
was ``riddled with ambiguities and potential oversights,'' and, in 
connection with non-referenced contracts under section 150.5(b), CME 
also stated ``the scope of exchange discretion under proposed 
section 150.9(a) is unclear. Thus, exchanges could be bound by the 
five-day rule in recognizing as NEBFH positions certain enumerated 
hedge strategies for non-referenced contracts, despite the same 
five-day rule limitation not applying in similar scenarios today.'' 
CL-CME-60926 at 14-15.
    \829\ CL-CME-60926 at 14-15; CL-Working Group-60947 at 14; and 
CL-ICE-60929 at 8. For example, CME stated that requiring exchanges 
to recognize non-enumerated bona fide hedge positions for non-
referenced contracts ``in a manner consistent with the process 
described in Sec.  150.9(a)'' appears to ``break with historical 
practice in administering NEBFHs for non-referenced contracts,'' and 
``would appear to impose new burdensome and unnecessary compliance 
obligations on market participants that do not exist today.'' CL-
CME-60926 at 14-15.
    \830\ CL-Working Group-60947 at 14.
---------------------------------------------------------------------------

    Another commenter stated that the Commission should remove the 
requirements of Sec.  150.5(b) that apply the exemption procedures of 
Sec.  150.9 to exemptions granted for contracts in excluded commodities 
and physical commodities that are not subject to federal position 
limits. In support of this request, the commenter maintained that 
exchange exemption programs have been operating successfully without 
the need for such rules, and exchanges do not require additional 
guidance from the Commission on how to assess recognitions under the 
2016 Supplemental Position Limits Proposal and that rule enforcement 
reviews are adequate.\831\
---------------------------------------------------------------------------

    \831\ CL-ICE-60929 at 8.
---------------------------------------------------------------------------

Treatment of Spread and Anticipatory Hedge Exemptions Under Sec.  
150.5(b)
    Several commenters requested that the Commission clarify that 
spread and anticipatory hedge exemptions are unnecessary for excluded 
commodities and other products not subject to federal limits. For 
example, one commenter seeks clarity regarding the application of Sec.  
150.5(b) to spread exemption and anticipatory hedge exemption requests, 
stating that ``[p]roposed section 150.5(b) is silent with respect to 
anticipatory hedges contemplated under the process in proposed section 
150.11, and makes no reference in proposed section 150.5(b)(5)(ii)(C) 
to the process in proposed section 150.10 when describing spread 
exemptions an exchange may recognize. The Commission must clarify 
whether it intends that market participants and exchanges may avail 
themselves of such processes in applying for and recognizing exemptions 
from exchange limits for non-referenced contracts.'' \832\ On the other 
hand, in the associated footnote, the same commenter observes 
``[h]owever, in its cost-benefit analysis, the Commission notes that 
proposed section 150.11 `works in concert with' `proposed Sec.  
150.5(b)(5), with the effect that recognized anticipatory enumerated

[[Page 96794]]

bona fide hedging positions may exceed exchange-set position limits for 
contracts not subject to federal position limits.' '' \833\
---------------------------------------------------------------------------

    \832\ CL-CME-60926 at 15.
    \833\ Id.
---------------------------------------------------------------------------

    Another commenter urges the Commission to clarify that spread and 
anticipatory hedge exemptions are unnecessary for excluded commodities 
and other products not subject to federal limits. In this regard, the 
commenter seeks the removal of requirements found in Sec.  
150.5(b).\834\ A third commenter states that extending the requirements 
for exchange hedge exemption rules to contracts on excluded commodities 
is ``clearly an error'' that needs to be rectified, stating that there 
was no discussion of this expansion in the preamble to the 
Supplemental. According to the commenter, ``there is no basis in the 
Dodd-Frank amendments to the CEA for this extension of the Commission's 
authority over exchange position limits on excluded commodities. To the 
contrary, that authority is clearly limited to position limits on 
contracts on physical commodities.'' \835\
---------------------------------------------------------------------------

    \834\ CL-CMC-60950 at 14.
    \835\ CL-ISDA-60931 at 11.
---------------------------------------------------------------------------

Reporting Requirements Under Sec.  150.5(b)
    According to one commenter, the 2016 Supplemental Position Limits 
Proposal does not provide any explanation regarding the Commission's 
need to receive from the exchanges the same exemption reports for non-
referenced contracts that it would receive for referenced contracts. 
The commenter states that the 2016 Supplemental Position Limits 
Proposal characterizes exchange submissions of exemption recipient 
reports to the CFTC as ``support[ing] the Commission's surveillance 
program, by facilitating the tracking of non-enumerated bona fide 
hedging positions recognized by the exchange, and helping the 
Commission to ensure that an applicant's activities conform to the 
terms of recognition that the exchange has established.'' \836\ While 
acknowledging that the Commission has a surveillance obligation with 
respect to federal limits, the commenter maintains that, ``the same 
obligation has never before existed with respect to exchange-set limits 
for non-referenced contracts, and does not exist today.'' \837\ The 
commenter also states that the Commission has misinterpreted its 
mandate and therefore should drop this unnecessary reporting 
requirement and related procedures with respect to non-referenced 
contracts.''
---------------------------------------------------------------------------

    \836\ CL-CME-60926 at 15, quoting the 2016 Supplemental Position 
Limits Proposal, 81 FR at 38475.
    \837\ Id.
---------------------------------------------------------------------------

Five-Day Rule Under Sec.  150.5(b)
    As noted above, several commenters \838\ addressed the five-day 
rule, suggesting that the decision whether to apply the five-day rule 
to a particular contract should be delegated to the exchanges as the 
exchanges are in the best position to evaluate facts and circumstances, 
and different markets have different dynamics and needs.\839\ And, 
specifically in connection with non-referenced contracts under Sec.  
150.5(b), one commenter states that, as it believes that the scope of 
exchange discretion under proposed section 150.9(a) is unclear, 
``exchanges could be bound by the five-day rule in recognizing as non-
enumerated bona fide hedging positions certain enumerated hedge 
strategies for non-referenced contracts, despite the same five-day rule 
limitation not applying in similar scenarios today.'' \840\
---------------------------------------------------------------------------

    \838\ E.g., CL-NCGA-ASA-60917 at 1-2; CL-CME-60926 at 14-15; CL-
ICE-60929 at 7-8; CL-ISDA-60931 at 11; CL-CCI-60935 at 3; CL-MGEX-
60936 at 4; CL-Working Group-60947 at 5, 7-9; CL-IECAssn-60949 at 7-
9; CL-CMC-60950 at 9-14; CL-NCC-ACSA-60972 at 2.
    \839\ See, e.g, CL-ISDA-60931 at 10; CL-CCI-60935 at 3; CL-MGEX-
60936 at 11; CL-Working Group-60947 at 7-9.
    \840\ CL-CME-60926 at 14-15.
---------------------------------------------------------------------------

Comment Letter Received After the Close of the Comment Period for the 
2016 Supplemental Position Limits Proposal Regarding Limit Levels Under 
Sec.  150.5(b)
    One commenter noted that when the CEA addresses ``linked 
contracts'' in CEA section 4(b)(1)(B)(ii)(I), in relation to FBOTS, it 
provides that the Commission may not permit an FBOT to provide direct 
access to participants located in the United States unless the 
Commission determines that the FBOT (or the foreign authority 
overseeing the FBOT) adopts position limits that are comparable to the 
position limits adopted by the registered entity for the contract(s) 
against which the FBOT contract settles.\841\ According to the 
commenter, CEA section 4(b), which was added by the Dodd-Frank Act, 
``contains an explicit Congressional endorsement of `comparable' '' 
limits for cash-settled contracts in relation to the physically-
delivered contracts to which they are linked.\842\ The statutory 
definition of ``linked contract,'' the commenter stated, ``mirrors the 
definition of `referenced contract' in the Commission's 2013 position 
limits proposal: Both definitions capture cash-settled contracts that 
are `linked' to the price of a physically-delivered contract traded on 
a DCM (referred to as a `core referenced futures contract' in the 
proposal).'' \843\ That commenter stated that the only place in the CEA 
which addresses how to treat a cash-settled contract and its 
physically-delivered benchmark contract for position limit purposes is 
in CEA section 4(b), claiming that ``Congress unmistakably wanted the 
two trading instruments to be treated `comparably.' '' \844\
---------------------------------------------------------------------------

    \841\ See CL-CME-61007 at 2-4; CL-CME-61008 at 2-3.
    \842\ See CL-CME-61007 at 2.
    \843\ Id. at 3. CME claims that the underlying Congressional 
intent is clear, stating that whether a cash-settled contract is 
called a ``linked contract'' or a ``referenced contract,'' ``the 
limit levels and hedge exemptions for that contract and the related 
physically-delivered contract must be `comparable.'' Id.
    \844\ Id.
---------------------------------------------------------------------------

    In addition, according to the commenter, when the Commission, in 
response to the Dodd-Frank Act provisions regarding FBOTs in amended 
CEA section 4(b), adopted final Sec.  48.8(c)(1)(ii)(A), ``it 
acknowledged that a linked contract and its physically-delivered 
benchmark contract `create a single market' capable of being affected 
through trading in either of the linked or physically-delivered 
markets,'' and further noted that the Commission ``observed that the 
price discovery process would be protected by `ensuring that [ ] linked 
contracts have position limits and accountability provisions that are 
comparable to the corresponding [DCM] contracts [to which they are 
linked].' '' \845\
---------------------------------------------------------------------------

    \845\ Id. [footnotes omitted]. The Commission notes that CME 
incorrectly attributed preamble language as pertaining to Sec.  
48.8(c)(1)(ii)(A), which addresses statutory requirements, when it 
stated that the Commission ``acknowledged that a linked contract and 
its physically-delivered benchmark contract `create a single market' 
capable of being affected through trading in either of the linked or 
physically-delivered markets'' as this discussion actually addressed 
the Commission's adoption of its second set of conditions for linked 
contracts, found in Sec.  48.8(c)(2) (Other Conditions on Linked 
Contracts).
---------------------------------------------------------------------------

iv. Commission Determination Regarding Sec.  150.5(b)
    The Commission has determined to repropose Sec.  150.5(b) generally 
as proposed in the the 2016 Supplemental Position Limits Proposal, for 
the reasons stated above, with specific exceptions discussed 
below.\846\ An overall non-substantive change has been made in 
reproposing Sec.  150.5 pertaining to excluded commodities. To provide

[[Page 96795]]

greater clarity regarding which provisions concern excluded 
commodities, the Commission proposes to move all provisions applying to 
excluded commodities from Sec.  150.5(b) into Sec.  150.5(c). As the 
Commission observed in the December 2013 Position Limits Proposal, 
``CEA section 4a(a) only mandates position limits with respect to 
physical commodity derivatives (i.e., agricultural commodities and 
exempt commodities).
---------------------------------------------------------------------------

    \846\ The Commission is reproposing the following sections 
without further discussion, for the reasons provided above, since no 
substantive comments were received: Sec.  150.5(b)(6)(Pre-enactment 
and transition period swap positions), Sec.  150.5(b)(7) (Pre-
existing positions), and Sec.  150.5(b)(9) (Additional acceptable 
practices).
---------------------------------------------------------------------------

    Additionally, the Commission proposes to make some substantive 
revisions specific to excluded commodities in what was previously Sec.  
150.5 (b), addressed in the discussion of Sec.  150.5(c).
Limit Levels for Commodity Derivative Contracts in a Physical Commodity 
Not Subject to Federal Limits
    In response to the comment regarding the method for calculating 
deliverable supply, the Commission notes that guidance for calculating 
deliverable supply can be found in Appendix C to part 38. Amendments to 
part 38 are beyond the scope of this rulemaking. However, that guidance 
already provides that deliverable supply calculations are estimates 
based on what ``reasonably can be expected to be readily available'' on 
a monthly basis based on a number of types of data from the physical 
marketing channels, as suggested by the commenter, and these 
calculations are done for each month and each commodity separately. 
Furthermore, much of Sec.  150.5(b) reiterates longstanding guidance 
and acceptable practices for DCMs, rather than proposing new concepts 
for administering limits on contracts that are not subject to federal 
limits under Sec.  150.2.
    The Commission agrees with the commenter urging the Commission to 
allow exchanges to set non-spot month limits at least as high as the 
spot-month position limit, in the event the open interest formula would 
result in a limit level lower than the spot month. Accordingly, 
consistent with the recommended revisions to the initial limit level 
listings for contracts subject to federal limits found in Sec.  
150.2(e)(4)(iv), the Commission proposes to revise Sec.  
150.5(b)(2)(ii) to allow exchanges to set non-spot month limit levels 
at the maximum of the spot month limit level, the level derived from 
the 10/2.5% formula, or 5,000 contracts. To conform with those 
revisions, the Commission also proposes to revise Sec.  
150.5(b)(1)(ii)(A)-(B) to remove the distinction between agricultural 
and exempt commodities.
    Regarding the commenter who expressed concern regarding 
requirements for accountability levels for exempt commodities, the 
Commission notes that the provisions set forth guidance and acceptable 
practices for exchanges in setting position limit levels and 
accountability levels and, as guidance and acceptable practices, are 
not binding regulations. Under the Commission's guidance, an initial 
non-spot month limit level of no more than 5,000 is viewed as suitable.
    Similarly, in response to the commenter who recommended that DCMs 
be permitted to establish position accountability levels in lieu of 
position limits outside the spot month and coordinate the 
administration of such levels with the Commission and other DCMs, the 
Commission agrees that position accountability may be permitted for 
certain physical commodity derivative contracts. Reproposed Sec.  
150.5(b)(3), therefore, provides guidance and acceptable practices 
concerning exchange adoption of position accountability outside the 
spot month for contracts having an average month-end open interest of 
50,000 contracts and an average daily volume of 5,000 or more contracts 
during the most recent calendar year and a liquid cash market. The 
Commission again notes that guidance and acceptable practices do not 
establish mandatory means of compliance. As such, in regards to meeting 
the specified volume and open interest thresholds in Sec.  150.5(b)(3), 
the Commission notes that the guidance in Sec.  150.5(b)(3)(i) may not 
be the only circumstances under which sufficiently high liquidity may 
be shown to exist for the establishment of position accountability 
levels in lieu of position limits.
    The December 2013 Position Limits Proposal provided in Sec.  
150.5(b)(1)(iii) that if a commodity derivative contract was cash-
settled by referencing a daily settlement price of an existing contract 
listed on a DCM or SEF, then it would be an acceptable practice for a 
DCM or SEF to adopt the same position limits as the original referenced 
contract, assuming the contract sizes are the same.\847\ However, the 
Commission is reproposing Sec.  150.5(b)(1)(iii) with a modification: 
While the previously proposed guidance in Sec.  150.5(b)(1)(iii) 
provided that the exchange should adopt the ``same'' spot-month, 
individual non-spot month, and all-months combined limit levels as the 
original price referenced contract, the Commission is reproposing Sec.  
150.5(c)(1)(iii) to provide that the limit levels should, instead, be 
``comparable.''
---------------------------------------------------------------------------

    \847\ The Commission expressed the belief that, based on its 
enforcement experience, limiting a trader's position in cash-settled 
contracts in this way would diminish the incentive to exert market 
power to manipulate the cash-settlement price or index to advantage 
a trader's position in the cash-settled contract. See December 2013 
Position Limits Proposal, 78 FR at 75757. As the Commission noted 
with respect to cash-settled contracts where the underlying product 
is a physical commodity with limited supplies, thus enabling a 
trader to exert market power (including agricultural and exempt 
commodities), the Commission has viewed the specification of 
speculative position limits to be an essential term and condition of 
such contracts in order to ensure that they are not readily 
susceptible to manipulation, which is the DCM core principle 3 
requirement. Id. at 75757, n. 692.
---------------------------------------------------------------------------

    As pointed out by one commenter,\848\ the CEA establishes a 
comparability standard for linked FBOT contracts in CEA section 
4(b)(1)(B)(ii)(I), when it provides that the Commission may not permit 
an FBOT to provide direct access to participants located in the United 
States unless the Commission determines that the FBOT (or the foreign 
authority overseeing the FBOT) adopts position limits that are 
``comparable to'' the position limits adopted by the registered entity 
for the contract(s) against which the FBOT contract settles.\849\ In 
addition, as noted by the commenter, the Commission, in adopting Sec.  
48.8(c)(2), recognized that the comparability standard and its 
associated requirements would protect the price discovery process by 
ensuring that the linked contracts and the U.S. contracts to which they 
are linked ``have position limits and accountability provisions that 
are comparable to the corresponding [DCM] contracts [to which they are 
linked].' '' \850\ The Commission notes that this change will better 
align Sec.  150.5(b)(1)(iii) with the statute and with the standard 
provided in Sec.  48.8(c).\851\ Moreover, use of

[[Page 96796]]

``comparable'' rather than ``same'' limit levels provides exchanges 
with a more flexible standard based on statutory language.\852\ This 
change also provides a standard that is consistent with existing 
practice for domestic contracts that are linked to the price of a 
physical-delivery contract.\853\
---------------------------------------------------------------------------

    \848\ See, e.g., CL-CME-61007 at 2-4; CL-CME-61008 at 2-3.
    \849\ CL-CME-61007 at 2. ``Registered entities'' are defined in 
CEA section 1a(40) as DCMs, DCOs, SEFs, SDRs, notice-registered DCMs 
under CEA section 5f, and any electronic trading facility upon which 
a contract is executed or traded which the Commission has determined 
is a significant price discovery contract. According to CME, CEA 
Section 4(b) ``contains an explicit Congressional endorsement of 
`comparable' '' limits for cash-settled contracts in relation to the 
physically-delivered contracts to which they are linked. See CL-CME-
61007 at 2.
    \850\ CL-CME-61007 at 3. See 76 FR 80674, 80685, 80697 (Dec. 23, 
2011). See also Sec.  48.8(c)(1)(ii)(A).
    \851\ The comparability standard is also used in determinations 
as to which foreign DCOs are subject to comparable, comprehensive 
supervision and regulation by the appropriate government authority 
in the DCO's home country. See CEA section 5b)(h). See also the 
Commission's Notice of Comparability Determination for Certain 
Requirements Under the European Market Infrastructure Regulation, 81 
FR 15260 (Mar. 22, 2016).
    \852\ As the Commission explained in preamble to final part 48 
in connection with comparability determinations, ``[t]he 
Commission's determination of the comparability of the foreign 
regulatory regime to which the FBOT applying for registration is 
subject will not be a ``line by line'' examination of the foreign 
regulator's approach to supervision of the FBOTs it regulates. 
Rather, it will be a principles-based review conducted in a manner 
consistent with the part 48 regulations pursuant to which the 
Commission will look to determine if that regime supports and 
enforces regulatory objectives in the oversight of the FBOT and the 
clearing organization that are substantially equivalent to the 
regulatory objectives supported and enforced by the Commission in 
its oversight of DCMs and DCOs.'' 76 FR 80674, 80680 (Dec. 23, 
2011). See also Sec.  48.5(d)(5).
    \853\ For example, both CME and ICE currently have conditional 
spot-month limit exemptions for cash-settled natural gas contracts 
at a level up to five times the level of the spot-month limit level 
on CME's economically-equivalent NYMEX Henry Hub Natural Gas 
(physical-delivery) futures contract to which they settle.
---------------------------------------------------------------------------

    The Commission proposes to revise Sec.  150.5(b)(4)(B) regarding 
the calculation of open interest for use in setting exchange-set 
speculative position limits to provide that a DCM or SEF that is a 
trading facility would include swaps in their open interest calculation 
only if such entities are required to administer position limits on 
swap contracts of their facilities. This revision clarifies and 
harmonizes Sec.  150.5(b)(4)(B) with the relief in Appendix E to part 
150, as well as in appendices to parts 37 and 38, which delays for DCMs 
and SEFs that are trading facilities and lack access to sufficient swap 
position information the requirement to establish and monitor position 
limits on swaps at this time. This approach conforms Sec.  150.5(b) 
with other proposed changes regarding the treatment of swaps.\854\
---------------------------------------------------------------------------

    \854\ As noted above, the relief was proposed in the 2016 
Supplemental Position Limits Proposal, 81 FR at 38459-62. See also 
DCM Core Principle 5, Position Limitations or Accountability 
(contained in CEA section 5(d)(5), 7 U.S.C. 7(d)(5)) and SEF Core 
Principle 6, Position Limits or Accountability (contained in CEA 
section 5h(f)(6), 7 U.S.C. 7b-3(f)(6)).
---------------------------------------------------------------------------

Exchange--Administered Exemptions for Commodity Derivative Contracts in 
a Physical Commodity Not Subject to Federal Limits
    The Commission is reproposing Sec.  150.5(b)(5)(i) with 
modifications to clarify that it is guidance rather than a regulatory 
requirement. In addition, as modified, it provides that under exchange 
rules allowing a trader to file an application for an enumerated bona 
fide hedging exemption, the application should be filed no later than 
five business days after the trader assumed the position that exceeded 
a position limit.\855\ As noted above, the Commission expects that 
exchanges will carefully consider whether allowing retroactive 
recognition of an enumerated bona fide hedging exemption would, as 
noted by one commenter, diminish the overall integrity of the process, 
and should carefully consider whether to adopt in those rules the two 
safeguards noted: (i) To continue to require market participants making 
use of the retroactive application to demonstrate that the applied-for 
hedge was required to address a sudden and unforeseen hedging need; and 
(ii) providing that if the emergency hedge recognition was not granted, 
exchange rules would continue to require the applicant to promptly 
unwind its position and also would deem the applicant to have been in 
violation for any period in which its position exceeded the applicable 
limits.
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    \855\ The modification made to Sec.  150.5(b)(5)(i) is similar 
manner to its the Commission's modification of Sec.  
150.5(a)(2)(ii), but, as mentioned, Sec.  150.5(b)(5)(i) is guidance 
rather than a regulatory requirement.
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    Additionally, the Commission is reproposing Sec.  150.5(b)(5)(i) 
with modifications to clarify, as requested by commenters,\856\ that 
the exchanges have reasonable discretion as to whether they apply to 
their exemption process from exchange-set speculative position limits, 
a virtually identical process as provided for recognizing non-
enumerated bona fide hedging positions under CFTC Regulation 150.9(a). 
As explained in the discussion regarding the changes to the bona fide 
hedging definition under Sec.  150.1, the Commission is proposes a 
phased approach with respect to the definition of a bona fide hedging 
position applicable to physical commodities.\857\ The Commission 
recognizes that exchanges, under Sec.  150.9, may need to adapt their 
current process to recognize non-enumerated bona fide hedging positions 
for commodity derivative contracts that are subject to a federal 
position limit under Sec.  150.2, or adopt a new one. In turn, market 
participants will need to seek recognition of a non-enumerated bona 
fide hedge from an exchange under that new process. In light of this 
implementation issue, the Commission proposes to limit the mandatory 
scope of the new definition of bona fide hedging position to contracts 
that are subject to a federal position limit.\858\ This means that the 
Commission would permit exchanges to maintain both their current bona 
fide hedging position definition and their existing processes for 
recognizing non-enumerated bona fide hedging positions for physical 
commodity contracts not subject to federal limits under Sec.  150.2. 
The Commission notes an exchange may, but need not, adopt for physical 
commodities not subject to federal limits the new bona fide hedging 
position definition and the new process to recognize non-enumerated 
bona fide hedging positions.
---------------------------------------------------------------------------

    \856\ See CL-Working Group-60947 at 14; see also CL-ICE-60929 at 
8, 32. As previously proposed, Sec.  150.5(b)(5)(i) provides, ``(i) 
Hedge exemption. Any hedge exemption rules adopted by a designated 
contract market or swap execution facility that is a trading 
facility must conform to the definition of bona fide hedging 
position in Sec.  150.1 or provide for recognition as a non-
enumerated bona fide hedge in a manner consistent with the process 
described in Sec.  150.9(a).''
    \857\ See also December 2013 Position Limits Proposal, 78 FR at 
75725 (stating ``[t]he Commission is proposing a phased approach to 
implement the statutory mandate. The Commission is proposing in this 
release to establish speculative position limits on 28 core 
referenced futures contracts in physical commodities. The Commission 
anticipates that it will, in subsequent releases, propose to expand 
the list of core referenced futures contracts in physical 
commodities. The Commission believes that a phased approach will (i) 
reduce the potential administrative burden by not immediately 
imposing position limits on all commodity derivative contracts in 
physical commodities at once, and (ii) facilitate adoption of 
monitoring policies, procedures and systems by persons not currently 
subject to positions limits (such as traders in swaps that are not 
significant price discovery contracts.). . . . Thus, in the first 
phase, the Commission generally is proposing limits on those 
contracts that it believes are likely to play a larger role in 
interstate commerce than that played by other physical commodity 
derivative contracts.'').
    \858\ See also supra discussion under regarding the bona fide 
hedging position definition.
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    In addition, the Commission is proposing that, for enumerated bona 
fide hedging positions, exchange rules may allow traders to file an 
application for an enumerated bona fide hedging exemption within five 
business days after the trader assumed the position that exceeded a 
position limit.
    Finally, as to Sec.  150.5(b)(5)(ii) (Other exemptions), the 
Commission did not receive any comments regarding Sec.  
150.5(b)(5)(ii)(A) (Financial distress), and is reproposing this 
exemption without change.
Conditional Spot Month Limit Exemption for Commodity Derivative 
Contracts in a Physical Commodity Not Subject to Federal Limits
    While the conditional spot month limit exemption is addressed in 
more detail under Sec.  150.3, after consideration of comments, the 
Commission is reproposing Sec.  150.5(b)(5)(ii)(B) with a 
modification.\859\ The December 2013

[[Page 96797]]

Position Limits Proposal proposed guidance that an exchange may adopt a 
conditional spot month position limit exemption for cash-settled 
contracts, with one of two provisos being that such positions should 
not exceed five times the level of the spot-month limit specified by 
the exchange that lists the physical-delivery contract to which the 
cash-settled contracts were directly or indirectly linked.\860\ As 
reproposed, the guidance recommends that such conditional exemptions 
should not exceed two times the level of the spot-month limit specified 
by the exchange that lists the applicable physical-delivery contract.
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    \859\ Most comments concerning the conditional spot month limit 
were submitted by CME and ICE; recent letters include: CL-CME-61007; 
CL-ICE-61009; CL-CME-61008; CL-ICE-60929; CL-CME-60926.
    \860\ The second proviso included in Sec.  150.5(b)(5)(ii)(B) 
was that the person holding or controlling the positions should not 
hold or control positions in such spot-month physical-delivery 
contract.
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    After review of comments and an impact analysis regarding the 
federal limits, the Commission believes that a five-times conditional 
exemption is too large, other than in natural gas because, in the 
markets that the Commission proposes to subject to federal limits, the 
Commission observed few or no market participants with positions in 
cash-settled contracts in the aggregate that exceed 25 percent of 
deliverable supply in the spot month. This is so even though cash-
settled contracts that are swaps are not currently subject to position 
limits. A five-times conditional exemption would not ensure liquidity 
for bona fide hedgers in the spot month for cash-settled contracts 
because there appear to be few or no positions that large (other than 
in natural gas). Consequently, and in light of the other three policy 
objectives of CEA section 4a(a)(3)(B), the Commission reproposes a more 
cautious approach.\861\
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    \861\ As noted above, it is the Commission's responsibility 
under CEA section 4a(a)(3)(B) to set limits, to the maximum extent 
practicable, in its discretion, that, in addition to ensuring 
sufficient market liquidity for bona fide hedgers, diminish, 
eliminate or prevent excessive speculation; deter and prevent market 
manipulation, squeezes, and corners; and ensure that the price 
discovery function of the underlying market is not disrupted.
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    Since transactions of large speculative traders may tend to cause 
unwarranted price changes, exchanges should exercise caution in 
determining whether such conditional exemptions are warranted; for 
example, an exchange may determine that a conditional exemption is 
warranted because such a speculative trader is demonstrably providing 
liquidity for bona fide hedgers. Where an exchange may not have access 
to data regarding a market participant's cash-settled positions away 
from a particular exchange, such exchange should require, for any 
conditional spot-month limit exemption it grants, that a trader report 
promptly to such exchange the trader's aggregate positions in cash-
settled contracts, physical-delivery contracts, and cash market 
positions.
    As noted above, under reproposed Sec.  150.5(b)(5)(ii)(B), an 
exchange has the choice of whether or not to adopt a conditional spot 
month position limit exemption for cash-settled contracts that are not 
subject to federal limits. As also discussed above regarding reproposed 
Sec.  150.3(c), the Commission is not proposing a conditional spot-
month limit for agricultural contracts subject to federal limits under 
reproposed Sec.  150.2. Further, the Commission notes that the current 
cash-settled natural gas spot month limit rules of two commenters, CME 
Group (which operates NYMEX) and ICE, both include the same spot-month 
limit level and the same conditional spot-month limit exemption. In 
each case the current cash-settled conditional exemption is five times 
the limit for the physical-delivery contract. Such natural gas 
contracts would be subject to federal limits under reproposed Sec.  
150.2, so the guidance in reproposed Sec.  150.5(b) would not be 
applicable to those contracts.\862\
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    \862\ The Commission notes that reproposed Sec.  
150.5(b)(5)(ii)(B) retains both of the recommended provisos, 
although, as noted above, the guidance recommends that such 
positions should not exceed two times the level of the spot-month 
limit specified by the exchange that lists the applicable physical-
delivery contract, rather than five times.
---------------------------------------------------------------------------

Treatment of Spread and Anticipatory Hedge Exemptions for Commodity 
Derivative Contracts in a Physical Commodity Not Subject to Federal 
Limits
    In regards to the exemption for intramarket and intermarket spread 
positions under Sec.  150.5(b)(5)(ii)(C), the comments received 
concerned the exchange process for providing spread exemptions under 
Sec.  150.10. The Commission addresses those comments below in its 
discussion of Sec.  150.10, and is reproposing Sec.  150.5(b)(5)(ii)(C) 
as proposed in the 2016 Supplemental Position Limits Proposal.
    The Commission points out, however, that reproposed Sec.  
150.5(b)(5)(ii)(C) would apply only to physical commodity derivative 
contracts, and would not apply to any derivative contract in an 
excluded commodity. Furthermore, as noted above, reproposed Sec.  
150.5(b)(5)(ii)(C) provides guidance rather than rigid requirements. 
Instead, under Sec.  150.5(b)(5)(ii)(C), exchanges should take into 
account whether granting a spread exemption in a physical commodity 
derivative would, to the maximum extent practicable, ensure sufficient 
market liquidity for bona fide hedgers, and not unduly reduce the 
effectiveness of position limits to diminish, eliminate, or prevent 
excessive speculation; deter and prevent market manipulation, squeezes, 
and corners; and ensure that the price discovery function of the 
underlying market is not disrupted.\863\
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    \863\ As noted in the December 2013 Position Limits Proposal, 
the guidance is consistent with the statutory policy objectives for 
position limits on physical commodity derivatives in CEA section 
4a(a)(3)(B). See December 2013 Position Limits Proposal, 78 FR at 
38464. The Commission interprets the CEA as providing it with the 
statutory authority to exempt spreads that are consistent with the 
other policy objectives for position limits, such as those in CEA 
section 4a(a)(3)(B). Id. CEA section 4a(a)(3)(B) provides that the 
Commission shall set limits to the maximum extent practicable, in 
its discretion--to diminish, eliminate, or prevent excessive 
speculation as described under this section; to deter and prevent 
market manipulation, squeezes, and corners; to ensure sufficient 
market liquidity for bona fide hedgers; and to ensure that the price 
discovery function of the underlying market is not disrupted.
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Five-Day Rule for Commodity Derivative Contracts in a Physical 
Commodity Not Subject to Federal Limits
    While the Commission's determination regarding the five-day rule is 
addressed elsewhere,\864\ the Commission points out that, as discussed 
in connection with the definition of bona fide hedging position and in 
relation to exchange processes under Sec.  150.9, Sec.  150.10, and 
Sec.  150.11, and as noted above in connection with Sec.  150.5(a), the 
five-day rule would only apply to certain enumerated positions (pass-
through swap offsets, anticipatory, and cross-commodity hedges),\865\ 
rather than when determining whether to recognize as non-enumerated 
bona fide hedging positions certain non-enumerated hedge strategies for 
non-referenced contracts. As reproposed, therefore, Sec.  150.5(b) 
would apply the five-day rule only to pass-through swap offsets, 
anticipatory, and cross-commodity hedges. However, in regards to 
exchange processes under Sec.  150.9, Sec.  150.10, and Sec.  150.11, 
the Commission

[[Page 96798]]

proposes to allow exchanges to waive the five-day rule on a case-by-
case basis.
---------------------------------------------------------------------------

    \864\ See the discussion regarding the five-day rule in 
connection with the definition of bona fide hedging position and the 
discussion of Sec.  150.9 (Process for recognition of positions as 
non-enumerated bona fide hedges).
    \865\ See Sec.  150.1 definition of bona fide hedging position, 
sections (2)(ii)(A), (3)(iii), (4), and (5) (Other enumerated 
hedging position). To provide greater clarity as to which bona fide 
hedging positions the five-day rule applies, the reproposed rules 
reorganize the definition.
---------------------------------------------------------------------------

    As the Commission cautioned above, exchanges should carefully 
consider whether to recognize a position as a bona fide hedge or to 
exempt a spread position held during the last few days of trading in 
physical-delivery contracts. The Commission points to the tools that 
exchanges currently use to address concerns during the spot month; as 
two commenters observed, current tools include requiring gradual 
reduction of the position (``step down'' requirements) or revoking 
exemptions to protect the price discovery process in core referenced 
futures contracts approaching expiration. Consequently, under the 
reproposed rule, exchanges may recognize positions, on a case-by-case 
basis in physical-delivery contracts that would otherwise be subject to 
the five-day rule, as non-enumerated bona fide hedging positions, by 
applying the exchanges experience and expertise in protecting its own 
physical-delivery market.
Reporting Requirements for Commodity Derivative Contracts in a Physical 
Commodity Not Subject to Federal Limits
    In response to the comment questioning the proposed reporting 
requirements by a claim that, ``while the Commission has a surveillance 
obligation with respect to federal limits, the same obligation has 
never before existed with respect to exchange-set limits for non-
referenced contracts, and does not exist today,'' \866\ the Commission 
points out, as it did in the 2016 Supplemental Position Limits 
Proposal, that the Futures Trading Act of 1982 ``gave the Commission, 
under section 4a(5) [since redesignated as section 4a(e)] of the Act, 
the authority to directly enforce violations of exchange-set, 
Commission-approved speculative position limits in addition to position 
limits established directly by the Commission through orders or 
regulations.'' \867\ And, since 2008, it has also been a violation of 
the Act for any person to violate an exchange position limit rule 
certified by the exchange.\868\ To address any confusion that might 
have led to such a comment, the Commission reiterates, under CEA 
section 4a(e), its authority to enforce violations of exchange-set 
speculative position limits, whether certified or Commission-approved. 
As the Commission explained in the 2016 Supplemental Position Limits 
Proposal, exchanges, as SROs, do not act only as independent, private 
actors.\869\ In fact, to repeat the explanation provided by the 
Commission in 1981, when the Act is read as a whole, ``it is apparent 
that Congress envisioned cooperative efforts between the self-
regulatory organizations and the Commission. Thus, the exchanges, as 
well as the Commission, have a continuing responsibility in this matter 
under the Act.'' \870\ The 2016 Supplemental Position Limits Proposal 
pointed out that the ``Commission's approach to its oversight of its 
SROs was subsequently ratified by Congress in 1982, when it gave the 
CFTC authority to enforce exchange set limits.'' \871\ In addition, as 
the Commission observed in 2010, and reiterated in the 2016 
Supplemental Position Limits Proposal, ``since 1982, the Act's 
framework explicitly anticipates the concurrent application of 
Commission and exchange-set speculative position limits.'' \872\ The 
Commission further noted that the ``concurrent application of limits is 
particularly consistent with an exchange's close knowledge of trading 
activity on that facility and the Commission's greater capacity for 
monitoring trading and implementing remedial measures across 
interconnected commodity futures and option markets.'' \873\
---------------------------------------------------------------------------

    \866\ CL-CME-60926 at 15.
    \867\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38466, n. 85 (quoting the Federal Speculative Position Limits for 
Referenced Energy Contracts and Associated Regulations, 75 FR 4144, 
4145 (Jan. 36, 2010)).
    \868\ See Futures Trading Act of 1982, Public Law 97-444, 96 
Stat. 2299-30 (1983) (amending CEA section 4a by including, in what 
was then a new CEA section 4a(5), since been re-designated as CEA 
section 4a(e) ``. . . It shall be a violation of this chapter for 
any person to violate any bylaw, rule, regulation, or resolution of 
any contract market, derivatives transaction execution facility, or 
other board of trade licensed, designated, or registered by the 
Commission or electronic trading facility with respect to a 
significant price discovery contract fixing limits on the amount of 
trading which may be done or positions which may be held by any 
person under contracts of sale of any commodity for future delivery 
or under options on such contracts or commodities, if such bylaw, 
rule, regulation, or resolution has been approved by the Commission 
or certified by a registered entity pursuant to section 7a-2(c)(1) 
of this title: Provided, That the provisions of section 13(a)(5) of 
this title shall apply only to those who knowingly violate such 
limits.'').
    \869\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38465-66.
    \870\ Establishment of Speculative Position Limits, 46 FR 50938, 
50939 (Oct. 16, 1981). As the Commission noted at that time that 
``[s]ince many exchanges have already implemented their own 
speculative position limits on certain contracts, the new rule 
merely effectuates completion of a regulatory philosophy the 
industry and the Commission appear to share.'' Id. at 50940.
    \871\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38466. See also Futures Trading Act of 1982, Public Law 97-444, 96 
Stat. 2299-30 (1983). In 2010, the Commission noted that the 1982 
legislation ``also gave the Commission, under section 4a(5) of the 
Act, the authority to directly enforce violations of exchange-set, 
Commission-approved speculative position limits in addition to 
position limits established directly by the Commission through 
orders or regulations.'' Federal Speculative Position Limits for 
Referenced Energy Contracts and Associated Regulations, 75 FR 4144, 
4145 (Jan. 36, 2010) (``2010 Position Limits Proposal for Referenced 
Energy Contracts''). Section 4a(5) has since been re-designated as 
section 4a(e) of the Act.
    \872\ 2010 Position Limits for Referenced Energy Contracts at 
4145; see also 2016 Supplemental Position Limits Proposal, 81 FR at 
38466.
    \873\ See 2010 Position Limits for Referenced Energy Contracts, 
75 FR at 4145; see also 2016 Supplemental Position Limits Proposal, 
81 FR at 38466.
---------------------------------------------------------------------------

    The Commission retains the power to approve or disapprove the rules 
of exchanges, under standards set out pursuant to the CEA, and to 
review an exchange's compliance with the exchange's rules, by way of 
additional examples of the Commission's continuing responsibility in 
this matter under the Act.
v. Commission Determination Regarding Sec.  150.5(c)
    As noted above, in an overall non-substantive change made in 
reproposing Sec.  150.5, the Commission moved all provisions applying 
to excluded commodities from Sec.  150.5(b) into reproposed Sec.  
150.5(c) to provide greater clarity regarding which provisions concern 
excluded commodities. The Commission has determined to repropose the 
rule largely as proposed for excluded commodities (previously under 
Sec.  150.5(b)), for the reasons noted above, with certain changes 
discussed below.\874\
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    \874\ The Commission is reproposing the following sections 
without further discussion, for the reasons provided above, because 
it received no substantive comments: Sec.  150.5(c)(6) (Pre-
enactment and transition period swap positions), Sec.  150.5(c)(7) 
(Pre-existing positions), and Sec.  150.5(b)(9) (Additional 
acceptable practices).
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Limit Levels for Excluded Commodities
    The Commission is reproposing the provisions under Sec.  
150.5(c)(1) regarding levels of limits for excluded commodities as 
modified and reproposed under Sec.  150.5(b)(1),\875\ to reference 
excluded commodities and to remove provisions that were solely 
addressed to agricultural commodities.\876\ These provisions generally 
provide guidance rather than rigid requirements; the guidance for 
levels of limits remains the same for

[[Page 96799]]

excluded commodities as for all other commodity derivative contracts 
that are not subject to the limits set forth in reproposed Sec.  150.2, 
including derivative contracts in a physical commodity as defined in 
reproposed Sec.  150.1.
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    \875\ As reproposed, Sec.  150.5(c)(1)(iii), like Sec.  
150.5(b)(1)(iii), provides that the spot-month, individual non-spot 
month, and all-months combined limit levels should be ``comparable'' 
rather than the ``same.''
    \876\ See supra for discussion of the modifications made to the 
reproposed provisions of Sec.  150.5(b)(1) as compared to the 
December 2103 Position Limits Proposal; the explanation provided 
above also pertains to the inclusion of those modifications in 
reproposed Sec.  150.5(c)(1).
---------------------------------------------------------------------------

    Similarly, as to adjustment of limit levels for excluded commodity 
derivative contracts under Sec.  150.5(c)(2), the reproposed provisions 
are modified to reference only excluded commodities and to remove 
provisions that were solely addressed to agricultural commodities. As 
reproposed, Sec.  150.5(c)(2)(i) provides guidance that the spot month 
position limits for excluded commodity derivative contracts ``should be 
maintained at a level that is necessary and appropriate to reduce the 
potential threat of market manipulation or price distortion of the 
contract's or the underlying commodity's price or index.''
    The Commission did not receive comments regarding Sec.  
150.5(c)(3). The guidance in Sec.  150.5(c)(3), on exchange adoption of 
position accountability levels in lieu of speculative position limits, 
has been reproposed as was previously proposed in Sec.  150.5(b)(3), 
modified to remove provisions under Sec.  150.5(b)(3)(i), which were 
solely addressed to physical commodity derivative contracts, and to 
reference excluded commodities.
    As to the calculation of open interest for use in setting exchange-
set speculative position limits for excluded commodities, the 
Commission is reproposing, in Sec.  150.5(c)(4), the same guidance for 
excluded commodities that is being reproposed under Sec.  150.5(b)(4) 
as for all other commodity derivative contracts that are not subject to 
the limits set forth in Sec.  150.2, including the modification to 
provide that a DCM or SEF that is a trading facility would include 
swaps in its open interest calculation only if such entity is required 
to administer position limits on swap contracts of its facility.
Exchange--Administered Exemptions for Excluded Commodities
    In regards to hedge exemptions, the Commission is reproposing in 
new Sec.  150.5(c)(5)(i) for contracts in excluded commodities a 
modification of what was previously proposed in Sec.  150.5(b)(5)(i) 
that eliminates the guidance that exchanges ``may provide for 
recognition of a non-enumerated bona fide hedge in a manner consistent 
with the process described in Sec.  150.9(a).'' That provision was 
intended to apply only to physical commodity contracts and not to 
exemptions granted by exchanges for contracts in excluded 
commodities.\877\
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    \877\ In addition, as noted above, the Commission is reproposing 
Sec.  150.5(b)(5)(i) with a modification that clarifies that this 
provision is guidance in the case of commodity derivatives contracts 
in a physical commodity not subject to federal limits.
---------------------------------------------------------------------------

    As noted above, in reproposing the definition of bona fide hedging 
position, the Commission is clarifying that an exchange may otherwise 
recognize as bona fide any position in a commodity derivative contract 
in an excluded commodity, so long as such recognition is pursuant to 
such exchange's rules. Although the Commission's standards in the 
December 2013 Position Limits Proposal applied the incidental test and 
the orderly trading requirements to all commodities, the Commission, as 
previously described, proposed in the 2016 Supplemental Position Limits 
Proposal to remove both those standards from the definition of bona 
fide hedging position.\878\ Moreover, the reproposed definition of bona 
fide hedging position would provide only that the position is either: 
(i) Enumerated in the definition (in paragraphs (3), (4), or (5)) and 
meets the economically appropriate test; or (ii) recognized by an 
exchange under rules previously submitted to the Commission.\879\ The 
Commission's standards for recognizing a position as a bona fide hedge 
in an excluded commodity, therefore, would not include the additional 
requirements applicable to physical commodities subject to federal 
limits. Consequently, as reproposed, the exchanges would have 
reasonable discretion to comply with core principles regarding position 
limits on excluded commodities so long as the exchange does so pursuant 
to exchange rules previously submitted to the Commission under Part 40.
---------------------------------------------------------------------------

    \878\ See 2016 Supplemental Position Limits Proposal, definition 
of bona fide hedging position (amending the definition previously 
proposed in the December 2013 Position Limits Proposal), 78 FR at 
38463-64, 38505-06.
    \879\ The economically appropriate test has historically been 
interpreted primarily in the context of physical commodities, rather 
than applied to excluded commodities.
---------------------------------------------------------------------------

    In addition, in conjunction with the amendments to the definition 
of bona fide hedging positions in regards to excluded commodities,\880\ 
the Commission is reproposing Sec.  150.5(c)(5)(ii), proposed as Sec.  
150.5(b)(5)(ii)(D) in the 2016 Supplemental Position Limits Proposal, 
with no further modification, to afford greater flexibility for 
exchanges when granting exemptions for excluded commodities. The 2016 
Supplemental Position Limits Proposal provided, in addition to granting 
exemptions under paragraphs (b)(5)(ii)(A), (b)(5)(ii)(B), and 
(b)(5)(ii)(C) of Sec.  150.5, that exchanges may grant a ``limited'' 
risk management exemptions pursuant to rules consistent with the 
guidance in Appendix A of part 150. As reproposed, Sec.  
150.5(c)(5)(ii) eliminates the modifier ``limited'' from the risk 
management exemptions, and provides merely that exchanges may grant, in 
addition to the exemptions under paragraphs (b)(5)(ii)(A), 
(b)(5)(ii)(B), and (b)(5)(ii)(C), risk management exemptions pursuant 
to rules submitted to the Commission, ``including'' for a position that 
is consistent with the guidance in Appendix A of part 150.
---------------------------------------------------------------------------

    \880\ In each case pursuant to rules submitted to the 
Commission, consistent with the guidance in Appendix A of this part.
---------------------------------------------------------------------------

    In regards to the provisions addressing applications for exemptions 
for positions in excluded commodities, the Commission is modifying what 
was copied from Sec.  150.5(b)(5)(iii) to provide, under Sec.  
150.5(c)(5)(iii), simply that an exchange may allow a person to file an 
exemption application for excluded commodities after the person assumes 
the position that exceeded a position limit.
    Finally, in reproposing the aggregation provision for excluded 
commodities under Sec.  150.5(c)(8), the Commission is not merely 
mirroring the aggregation provision as previously proposed in Sec.  
150.5(b)(8). As noted above, the reproposed aggregation provisions for 
physical commodity derivatives contracts, whether under Sec.  
150.5(a)(8) or Sec.  150.5(b)(8), provide that exchanges must have 
aggregation provisions that conform to Sec.  150.4. Reproposed Sec.  
150.5(c)(8), consistent with the rest of reproposed Sec.  150.5(c), 
would instead provide guidance, that exchanges ``should'' have 
aggregation rules for excluded commodity derivative contracts that 
conform to Sec.  150.4.

E. Part 19--Reports by Persons Holding Bona Fide Hedge Positions 
Pursuant to Sec.  150.1 of This Chapter and by Merchants and Dealers in 
Cotton

1. Current Part 19
    The market and large trader reporting rules are contained in parts 
15 through 21 of the Commission's regulations.\881\ Collectively, these 
reporting rules effectuate the Commission's market and financial 
surveillance programs by enabling the Commission to gather information 
concerning the size and composition of the commodity futures, options, 
and swaps markets, thereby permitting the Commission to monitor and 
enforce the speculative position

[[Page 96800]]

limits that have been established, among other regulatory goals. The 
Commission's reporting rules are implemented pursuant to the authority 
of CEA sections 4g and 4i, among other CEA sections. Section 4g of the 
Act imposes reporting and recordkeeping obligations on registered 
entities, and obligates FCMs, introducing brokers, floor brokers, and 
floor traders to file such reports as the Commission may require on 
proprietary and customer positions executed on any board of trade.\882\ 
Section 4i of the Act requires the filing of such reports as the 
Commission may require when positions equal or exceed Commission-set 
levels.\883\
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    \881\ 17 CFR parts 15-21.
    \882\ See CEA section 4g(a); 7 U.S.C. 6g(a).
    \883\ See CEA section 4i; 7 U.S.C. 6i.
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    Current part 19 of the Commission's regulations sets forth 
reporting requirements for persons holding or controlling reportable 
futures and option positions ``which constitute bona fide hedging 
positions as defined in [Sec.  ] 1.3(z)'' and for merchants and dealers 
in cotton holding or controlling reportable positions for future 
delivery in cotton.\884\ In the several markets with federal 
speculative position limits--namely those for grains, the soy complex, 
and cotton--hedgers that hold positions in excess of those limits must 
file a monthly report pursuant to part 19 on CFTC Form 204: Statement 
of Cash Positions in Grains,\885\ which includes the soy complex, and 
CFTC Form 304 Report: Statement of Cash Positions in Cotton.\886\ These 
monthly reports, collectively referred to as the Commission's ``series 
'04 reports,'' must show the trader's positions in the cash market and 
are used by the Commission to determine whether a trader has sufficient 
cash positions that justify futures and option positions above the 
speculative limits.\887\
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    \884\ See 17 CFR part 19. Current part 19 cross-references a 
provision of the definition of reportable position in 17 CFR 
15.00(p)(2). As discussed below, that provision would be 
incorporated into proposed Sec.  19.00(a).
    \885\ Current CFTC Form 204: Statement of Cash Positions in 
Grains is available at http://www.cftc.gov/ucm/groups/public/@forms/documents/file/cftcform204.pdf.
    \886\ Current CFTC Form 304 Report: Statement of Cash Positions 
in Cotton is available at http://www.cftc.gov/ucm/groups/public/@forms/documents/file/cftcform304.pdf.
    \887\ In addition, in the cotton market, merchants and dealers 
file a weekly CFTC Form 304 Report of their unfixed-price cash 
positions, which is used to publish a weekly Cotton On-call report, 
a service to the cotton industry. The Cotton On-Call Report shows 
how many unfixed-price cash cotton purchases and sales are 
outstanding against each cotton futures month.
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2. Amendments to Part 19
    In the December 2013 Position Limits Proposal, the Commission 
proposed to amend part 19 so that it would conform to the Commission's 
proposed changes to part 150.\888\ First, the Commission proposed to 
amend part 19 by adding new and modified cross-references to proposed 
part 150, including the new definition of bona fide hedging position in 
proposed Sec.  150.1. Second, the Commission proposed to amend Sec.  
19.00(a) by extending reporting requirements to any person claiming any 
exemption from federal position limits pursuant to proposed Sec.  
150.3. The Commission proposed to add new series '04 reporting forms to 
effectuate these additional reporting requirements. Third, the 
Commission proposed to update the manner of part 19 reporting. Lastly, 
the Commission proposed to update both the type of data that would be 
required in series '04 reports as well as the timeframe for filing such 
reports.
---------------------------------------------------------------------------

    \888\ See December 2013 Position Limits Proposal, 78 FR at 
75741-75746.
---------------------------------------------------------------------------

    Comments Received: One commenter acknowledges concerns presented by 
Commission staff at the Staff Roundtable that exemptions from position 
limits be limited to prevent abuse, but does not believe that the 
adoption of additional recordkeeping or reporting rules or the 
development of costly infrastructure is required because statutory and 
regulatory safeguards already exist or are already proposed in the 
December 2013 Position Limits Proposal, noting that: (i) The series '04 
forms as well as DCM exemption documents will be required of market 
participants, who face significant penalties for false reporting, and 
the Commission may request additional information if the information 
provided is unsatisfactory; and (ii) market participants claiming a 
bona fide hedging exemption are still subject to anti-disruptive 
trading prohibitions in CEA section 4c(a)(5), anti-manipulation 
prohibitions in CEA sections 6(c) and 9(c), the orderly trading 
requirement in proposed Sec.  150.1, and DCM oversight. The commenter 
stated that these requirements comprise a ``thorough and robust 
regulatory structure'' that does not need to be augmented with new 
recordkeeping, reporting, or other obligations to prevent misuse of 
hedging exemptions.\889\ A second commenter echoed that additional 
recordkeeping or reporting obligations are unnecessary and would create 
unnecessary regulatory burdens.\890\
---------------------------------------------------------------------------

    \889\ CL-Working Group-59959 at 3-4.
    \890\ CL-NFP-60393 at 15-16.
---------------------------------------------------------------------------

    Another commenter stated that the various forms required by the 
regime, while not lengthy, represent significant data collection and 
categorization that will require a non-trivial amount of work to 
accurately prepare and file. The commenter claimed that a comprehensive 
position limits regime could be implemented with a ``far less 
burdensome'' set of filings and requested that the Commission review 
the proposed forms and ensure they are ``as clear, limited, and 
workable'' as possible to reduce burden. The commenter stated that it 
is not aware of any software vendors that currently provide solutions 
that can support a commercial firm's ability to file the proposed 
forms.\891\
---------------------------------------------------------------------------

    \891\ CL-COPE-59662 at 24; CL-COPE-60932 at 10; CL-EEI-EPSA-
60925 at 9.
---------------------------------------------------------------------------

    One commenter recommended that the Commission eliminate the series 
'04 reports in light of the application and reporting requirements laid 
out in the 2016 Supplemental Position Limits Proposal. The commenter 
asserted that the application requirements are in addition to the 
series '04 forms, which the commenter claims ``only provide the 
Commission with a limited surveillance benefit.'' \892\ Another 
commenter raised concerns regarding forms filed under part 19 and the 
data required to be filed with exchanges under Sec. Sec.  150.9-11. The 
commenter stated that the 2016 Supplemental Position Limits Proposal 
requires that ``those exceeding the federal limits file the proposed 
forms including Form 204'' but lacks ``meaningful guidance'' regarding 
the data that must be maintained ``effectively in real-time'' to 
populate the forms.\893\
---------------------------------------------------------------------------

    \892\ CL-FIA-60937 at 17.
    \893\ CL-EEI-EPSA-60925 at 9.
---------------------------------------------------------------------------

    Several commenters requested that the Commission create user-
friendly guidebooks for the forms so that all entities can clearly 
understand any required forms and build the systems to file such forms, 
including providing workshops and/or hot lines to improve the 
forms.\894\
---------------------------------------------------------------------------

    \894\ CL-COPE-59662 at 24; CL-COPE-60932 at 10; CL-ASR-60933 at 
4; CL-Working Group-60947 at 17-18; CL-EEI-EPSA-60925 at 3.
---------------------------------------------------------------------------

    One commenter expressed concern for reporting requirements in 
conflict with other regulatory requirements (such as FASB ASC 
815).\895\
---------------------------------------------------------------------------

    \895\ CL-U.S. Dairy-59597 at 6.
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    Finally, two commenters recommended modifying or removing the 
requirement to certify series '04 reports as ``true and correct''. One 
commenter suggested that the requirement be removed due to the 
difficulty of making such a certification

[[Page 96801]]

and the fact that CEA section 6(c)(2) already prohibits the submission 
of false or misleading information.\896\ Another noted that the 
requirement to report very specific information relating to hedges and 
cash market activity involves data that may change over time. The 
commenter suggested the Commission adopt a good-faith standard 
regarding ``best effort'' estimates of the data when verifying the 
accuracy of Form 204 submissions and, assuming the estimate of physical 
activity does not otherwise impact the bona fide hedge exemption (e.g. 
cause the firm to lose the exemption), not penalize entities for 
providing the closest approximation of the position possible.\897\
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    \896\ See CL-CMC-59634 at 17.
    \897\ CL-Working Group-59693 at 65.
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    Commission Reproposal: The Commission responds to specific comments 
regarding the content and timing of the series '04 forms and other 
concerns below. The Commission agrees with the commenters that the 
forms should be clear and workable, and offers several clarifications 
and amendments below in response to comments about particular aspects 
of the series '04 reports.
    The Commission notes that the information required on the series 
'04 reports represents a trader's most basic position data, including 
the number of units of the cash commodity that the firm has purchased 
or sold, or the size of a swap position that is being offset in the 
futures market. The Commission believes this information is readily 
available to traders, who routinely make trading decisions based on the 
same data that is required on the series '04 reports. The Commission is 
proposing to move to an entirely electronic filing system, allowing for 
efficiencies in populating and submitting forms that require the same 
information every month. Most traders who are required to file the 
series '04 reports must do so for only one day out of the month, 
further lowering the burden for filers. In short, the Commission 
believes potential burdens under the Reproposal have been reduced 
wherever possible while still providing adequate information for the 
Commission's Surveillance program. For market participants who may 
require assistance in monitoring for speculative position limits and 
gathering the information required for the series '04 reports, the 
Commission is aware of several software companies who, prior to the 
vacation of the Part 151 Rulemaking, produced tools that could be 
useful to market participants in fulfilling their compliance 
obligations under the new position limits regime.
    The Commission notes that the reporting obligations proposed in the 
2016 Supplemental Position Limits Proposal are intended to be 
complimentary to, not duplicative of, the series '04 reporting forms. 
In particular, the Commission notes the distinction between Form 204 
enumerated hedging reporting and exchange-based non-enumerated hedging 
reporting. The 2016 Supplemental Position Limits Proposal provides 
exchanges with the authority to require reporting from market 
participants. That is, regarding an exchange's process for non-
enumerated bona fide hedging position recognition, the exchange has 
discretion to implement any additional reporting that it may require. 
The Commission declines to eliminate series '04 reporting in response 
to the commenters because, as noted throughout this section, the data 
provided on the forms is critical to the mission of the Commission's 
Surveillance program to detect and deter manipulation and abusive 
trading practices in physical commodity markets.
    In response to the commenters that requested guidebooks for the 
series '04 reporting forms, the Commission believes that it is less 
confusing to ensure that form instructions are clear and detailed than 
it is to provide generalized guidebooks that may not respond to 
specific issues. The Commission has clarified the sample series `04 
forms found in Appendix A to part 19, including instructions to such 
forms, and invites comments in order to avoid future confusion. 
Specifically, the Commission has added instructions regarding how to 
fill out the trader identification section of each form; reorganized 
instructions relating to individual fields on each form; edited the 
examples of each form to reduce confusion and match changes to 
information required as described in this section; and clarified the 
authority for the certifications made on the signature/authorization 
page of each form.
    The Commission's longstanding experience with collecting and 
reviewing Form 204 and Form 304 has shown that many questions about the 
series '04 reports are specific to the circumstances and trading 
strategies of an individual market participant, and do not lend 
themselves to generalization that would be helpful to many market 
participants.
    The Commission also notes, in response to the commenter expressing 
concerns about other regulatory requirements, the policy objectives and 
standards for hedging under financial accounting standards differ from 
the statutory policy objectives and standards for hedging under the 
Act. Because of this, reporting requirements, and the associated 
burdens, would also differ between the series '04 reports and 
accounting statements.
    Finally, the Commission is proposing to amend the certification 
language found at the end of each form to clarify that the 
certification requires nothing more than is already required of market 
participants in section 6(c)(2) of the Act. In response to the 
commenters' request for a ``best effort'' standard, the Commission 
added the phrase ``to the best of my knowledge'' preceding the 
certification from the authorized representative of the reporting 
trader that the information on the form is true and correct. The 
Commission has also added instructions to each form clarifying what is 
required on the signature/authorization page of each form. The 
Commission notes that, in the recent past, the Division of Market 
Oversight has issued advisories and guidance on proper filing of series 
'04 reports, and the Division of Enforcement has settled several cases 
regarding lack of accuracy and/or timeliness in filing series '04 
forms.\898\ The Commission believes the certification language is an 
important reminder to reporting traders of their responsibilities to 
file accurate information under several sections of the Act, including 
but not limited to CEA section 6(c)(2).
---------------------------------------------------------------------------

    \898\ See, e.g., ``Obligation of Reportable Market Participants 
to File CFTC Form 204 Reports,'' CFTC Staff Advisory 13-42, July 8, 
2013; and CFTC Dockets Nos. 16-21, 15-41, 16-07, 16-20.
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a. Amended cross references
    Proposed Rule: As discussed above, in the December 2013 Position 
Limits Proposal, the Commission proposed to replace the definition of 
bona fide hedging transaction found in Sec.  1.3(z) with a new proposed 
definition of bona fide hedging position in proposed Sec.  150.1. As a 
result, proposed part 19 would replace cross-references to Sec.  1.3(z) 
with cross-references to the new definition of bona fide hedging 
positions in proposed Sec.  150.1.
    The Commission also proposed expanding Part 19 to include reporting 
requirements for positions in swaps, in addition to futures and options 
positions, for any part of which a person relies on an exemption. To 
accomplish this, ``positions in commodity derivative contracts,'' as 
defined in proposed Sec.  150.1, would replace ``futures and option 
positions'' throughout amended

[[Page 96802]]

part 19 as shorthand for any futures, option, or swap contract in a 
commodity (other than a security futures product as defined in CEA 
section 1a(45)).\899\ This amendment was intended to harmonize the 
reporting requirements of part 19 with proposed amendments to part 150 
that encompass swap transactions.
---------------------------------------------------------------------------

    \899\ See discussion above.
---------------------------------------------------------------------------

    Proposed Sec.  19.00(a) would eliminate the cross-reference to the 
definition of reportable position in Sec.  15.00(p)(2). The Commission 
noted that the current reportable position definition essentially 
identifies futures and option positions in excess of speculative 
position limits. Proposed Sec.  19.00(a) would simply make clear that 
the reporting requirement applies to commodity derivative contract 
positions (including swaps) that exceed speculative position limits, as 
discussed below.
    Comments Received: The Commission received no comments on the 
proposed cross-referencing amendments.
    Commission Reproposal: The Commission is repurposing the amended 
cross-references in part 19, as originally proposed.
b. Persons required to report--Sec.  19.00(a)
    Proposed Rule: Because the reporting requirements of current part 
19 apply only to persons holding bona fide hedge positions and 
merchants and dealers in cotton holding or controlling reportable 
positions for future delivery in cotton, the Commission proposed to 
extend the reach of part 19 by requiring all persons who wish to avail 
themselves of any exemption from federal position limits under proposed 
Sec.  150.3 to file applicable series '04 reports.\900\ The Commission 
also proposed to require that anyone exceeding a federal limit who has 
received a special call related to part 150 must file a series '04 
form. Collection of this information would facilitate the Commission's 
surveillance program with respect to detecting and deterring trading 
activity that may tend to cause sudden or unreasonable fluctuations or 
unwarranted changes in the prices of the referenced contracts and their 
underlying commodities. By broadening the scope of persons who must 
file series '04 reports, the Commission seeks to ensure that any person 
who claims any exemption from federal speculative position limits can 
demonstrate a legitimate purpose for doing so.
---------------------------------------------------------------------------

    \900\ See 17 CFR part 19. Current part 19 cross-references the 
definition of reportable position in 17 CFR 15.00(p).
---------------------------------------------------------------------------

    Series '04 reports currently refers to Form 204 and Form 304, which 
are listed in current Sec.  15.02.\901\ The Commission proposed to add 
three new series '04 reporting forms to effectuate the expanded 
reporting requirements of part 19.\902\ Proposed Form 504 would be 
added for use by persons claiming the conditional spot-month limit 
exemption pursuant to proposed Sec.  150.3(c).\903\ Proposed Form 604 
would be added for use by persons claiming a bona fide hedge exemption 
for either of two specific pass-through swap position types, as 
discussed further below.\904\ Proposed Form 704 would be added for use 
by persons claiming a bona fide hedge exemption for certain 
anticipatory bona fide hedging positions.\905\
---------------------------------------------------------------------------

    \901\ 17 CFR 15.02.
    \902\ As noted in the December 2013 Position Limits Proposal, 
the Commission is avoiding the use of any form numbers with ``404'' 
to avoid confusion with the part 151 Rulemaking, which required 
Forms 404, 404A, and 404S. See December 2013 Position Limits 
Proposal, 78 FR at 75742.
    \903\ See supra discussion of proposed Sec.  150.3(c).
    \904\ Proposed Form 604 would replace Form 404S (as contemplated 
in vacated part 151).
    \905\ The updated definition of bona fide hedging in proposed 
Sec.  150.1 incorporates several specific types of anticipatory 
transactions: Unfilled anticipated requirements, unsold anticipated 
production, anticipated royalties, anticipated services contract 
payments or receipts, and anticipatory cross-commodity hedges. See 
paragraphs (3)(iii), (4)(i), (4)(iii), (4)(iv) and (5), 
respectively, of the Commission's amended definition of bona fide 
hedging transactions in proposed Sec.  150.1 as discussed above.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on proposed 
Sec.  19.00(a) regarding who must file series '04 reports.
    Commission Reproposal: The Commission is reproposing the expansion 
of Sec.  19.00(a), as originally proposed.
c. Manner of reporting--Sec.  19.00(b)
i. Excluding certain source commodities, products or byproducts of the 
cash commodity hedged--Sec.  19.00(b)(1)
    Proposed Rule: For purposes of reporting cash market positions 
under current part 19, the Commission historically has allowed a 
reporting trader to ``exclude certain products or byproducts in 
determining his cash positions for bona fide hedging'' if it is ``the 
regular business practice of the reporting trader'' to do so.\906\ The 
Commission has proposed to clarify the meaning of ``economically 
appropriate'' in light of this reporting exclusion of certain cash 
positions.\907\ Therefore, in the December 2013 Position Limits 
Proposal, the Commission proposed in Sec.  19.00(b)(1) that a source 
commodity itself can only be excluded from a calculation of a cash 
position if the amount is de minimis, impractical to account for, and/
or on the opposite side of the market from the market participant's 
hedging position.\908\
---------------------------------------------------------------------------

    \906\ See 17 CFR 19.00(b)(1) (providing that ``[i]f the regular 
business practice of the reporting trader is to exclude certain 
products or byproducts in determining his cash position for bona 
fide hedging . . . ., the same shall be excluded in the report'').
    \907\ See supra discussion of the ``economically appropriate 
test'' as it relates to the definition of bona fide hedging 
position. In order for a position to be economically appropriate to 
the reduction of risks in the conduct and management of a commercial 
enterprise, the enterprise generally should take into account all 
inventory or products that the enterprise owns or controls, or has 
contracted for purchase or sale at a fixed price. For example, in 
line with its historical approach to the reporting exclusion, the 
Commission does not believe that it would be economically 
appropriate to exclude large quantities of a source commodity held 
in inventory when an enterprise is calculating its value at risk to 
a source commodity and it intends to establish a long derivatives 
position as a hedge of unfilled anticipated requirements.
    \908\ Proposed Sec.  19.00(b)(1) adds a caveat to the 
alternative manner of reporting: When reporting for the cash 
commodity of soybeans, soybean oil, or soybean meal, the reporting 
person shall show the cash positions of soybeans, soybean oil and 
soybean meal. This proposed provision for the soybean complex is 
included in the current instructions for preparing Form 204.
---------------------------------------------------------------------------

    The Commission explained in the December 2013 Position Limits 
Proposal that the original part 19 reporting exclusion was intended to 
cover only cash positions that were not capable of being delivered 
under the terms of any derivative contract, an intention that 
ultimately evolved to allow cross-commodity hedging of products and 
byproducts of a commodity that were not necessarily deliverable under 
the terms of any derivative contract. The Commission also noted that 
the instructions on current Form 204 go further than current Sec.  
19.00(b)(1) by allowing the exclusion of certain source commodities in 
addition to products and byproducts, when it is the firm's normal 
business practice to do so.
    Comments Received: One commenter suggested the Commission expand 
the provision in proposed Sec.  19.00(b)(1) that allows a reporting 
person to exclude source commodities, products or byproducts in 
determining its cash position for bona fide hedging to allow a person 
to also exclude inventory and contracts of the actual commodity in the 
course of his or her regular business practice. The commenter also 
noted that proposed Sec.  19.00(b)(1) only permits this exclusion if 
the amount is de minimis, despite there being ``many circumstances'' 
that make the inclusion of such source commodities irrelevant for 
reporting purposes. The commenter requested that the Commission only 
require a reporting person to calculate its cash positions in 
accordance with its regular business practice and report the

[[Page 96803]]

cash positions that it considered in making its bona fide hedging 
determinations.\909\
---------------------------------------------------------------------------

    \909\ See CL-Working Group-60396 at 16-17; CL-Working Group-
60947 at 15-17.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing Sec.  
19.00(b)(1), as originally proposed, because the Commission is 
concerned that adopting the commenter's request could lead to ``cherry-
picking'' a cash market position in an attempt to justify a speculative 
position as a hedge. As noted in the December 2013 Position Limits 
Proposal, the Commission's clarification of the Sec.  19.00(b)(1) 
reporting exclusion was proposed to prevent the definition of bona fide 
hedging positions in proposed Sec.  150.1 from being swallowed by this 
reporting rule. The Commission stated ``. . . it would not be 
economically appropriate behavior for a person who is, for example, 
long derivative contracts to exclude inventory when calculating 
unfilled anticipated requirements. Such behavior would call into 
question whether an offset to unfilled anticipated requirements is, in 
fact, a bona fide hedging position, since such inventory would fill the 
requirement. As such, a trader can only underreport cash market 
activities on the opposite side of the market from her hedging position 
as a regular business practice, unless the unreported inventory 
position is de minimis or impractical to account for.'' \910\ If a 
person were only required to report cash positions that are offset by 
particular derivative positions, then the form would not provide an 
indication as to whether the derivative position is economically 
appropriate to the reduction of risk, making the inclusion of source 
commodities very relevant for reporting purposes, contrary to the 
commenter's suggestion.
---------------------------------------------------------------------------

    \910\ See December 2013 Position Limits Proposal, 78 FR at 
75743. The Commission provided an example: ``By way of example, the 
alternative manner of reporting in proposed Sec.  19.00(b)(1) would 
permit a person who has a cash inventory of 5 million bushels of 
wheat, and is short 5 million bushels worth of commodity derivative 
contracts, to underreport additional cash inventories held in small 
silos in disparate locations that are administratively difficult to 
count.'' This person could instead opt to calculate and report these 
hard-to-count inventories and establish additional short positions 
in commodity derivative contracts as a bona fide hedge against such 
additional inventories.
---------------------------------------------------------------------------

    Because of these and other concerns, market participants have 
historically been required to report cash market information in 
aggregate form for the commodity as a whole, not the ``line item'' 
style of hedge reporting requested by the commenter (where firms report 
cash trades by category, tranche, or corresponding futures position). 
Further, since it is important for Surveillance purposes to receive a 
snapshot of a market participant's cash market position, the series '04 
forms currently require a market participant to provide relevant 
inventories and fixed price contracts in the hedged (or cross-hedged) 
commodity. The Commission believes it is necessary to maintain this 
aggregate reporting in order for the Commission's Surveillance program 
to properly monitor for position limit violations and to prevent market 
manipulation.
    Further, the Commission believes that firms may find reporting an 
aggregate cash market position less burdensome than attempting to 
identify portions of that position that most closely align with 
individual hedge positions as, according to some commenters, many firms 
hedge on a portfolio basis, making identifying the particular hedge 
being used difficult.\911\
---------------------------------------------------------------------------

    \911\ See CL-Working Group-59693 at 65.
---------------------------------------------------------------------------

ii. Cross-commodity Hedges, Standards and Conversion Factors--Sec.  
19.00(b)(2)-(3)
    Proposed Rules: In the December 2013 Position Limits Proposal, the 
Commission proposed under Sec.  19.00(b)(2) instructions for reporting 
a cash position in a commodity that is different from the commodity 
underlying the futures contract used for hedging.\912\ The Commission 
also proposed to maintain the requirement in Sec.  19.00(b)(3) that 
standards and conversion factors used in computing cash positions for 
reporting purposes must be made available to the Commission upon 
request.\913\ The Commission clarified that such information would 
include hedge ratios used to convert the actual cash commodity to the 
equivalent amount of the commodity underlying the commodity derivative 
contract used for hedging, and an explanation of the methodology used 
for determining the hedge ratio. Finally, the Commission provided 
examples of completed series '04 forms in proposed Appendix A to part 
19 along with blank forms and instructions.\914\
---------------------------------------------------------------------------

    \912\ See December 2013 Position Limits Proposal, 78 FR at 
75743. The proposed Sec.  19.00(b)(2) is consistent with provisions 
in the current section, but would add the term commodity derivative 
contracts (as defined in proposed Sec.  150.1). The proposed 
definition of cross-commodity hedge in proposed Sec.  150.1 is 
discussed above.
    \913\ See December 2013 Position Limits Proposal, 78 FR at 
75743.
    \914\ Id.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on proposed 
Sec. Sec.  19.00(b)(2)-(3).
    Commission Reproposal: The Commission is reproposing Sec. Sec.  
19.00(b)(2)-(3), as originally proposed.
d. Information Required--Sec.  19.01(a)
i. Bona Fide Hedgers Reporting on Form 204--Sec.  19.01(a)(3)
    Proposed Rule: Current Sec.  19.01(a) sets forth the data that must 
be provided by bona fide hedgers (on Form 204) and by merchants and 
dealers in cotton (on Form 304). The Commission proposed to continue 
using Forms 204 and 304, which will feature only minor changes to the 
types of data to be reported under Sec.  19.01(a)(3).\915\ These 
changes include removing the modifier ``fixed price'' from ``fixed 
price cash position;'' requiring cash market position information to be 
submitted in both the cash market unit of measurement (e.g. barrels or 
bushels) and futures equivalents; and adding a specific request for 
data concerning open price contracts to accommodate open price pairs. 
In addition, the monthly reporting requirements for cotton, including 
the granularity of equity, certificated and non-certificated cotton 
stocks, would be moved to Form 204, while weekly reporting for cotton 
would be retained as a separate report made on Form 304 in order to 
maintain the collection of data required by the Commission to publish 
its weekly public cotton ``on call'' report.
---------------------------------------------------------------------------

    \915\ The list of data required for persons filing on Forms 204 
and 304 has been relocated from current Sec.  19.01(a) to proposed 
Sec.  19.01(a)(3).
---------------------------------------------------------------------------

    Comments Received: The Commission received several comments 
regarding the proposed revisions to Form 204. These comments can be 
grouped loosely into three categories: general comments on bona fide 
hedge reporting; comments regarding the general information required on 
Form 204; and comments regarding the more specific nature of the cash 
market information required to be reported. The Commission responds to 
each category separately below.
    Comments: One commenter stated that CFTC should reduce the 
complexity and compliance burden of bona fide hedging record keeping 
and reporting by using a model similar to the current exchange-based 
exemption process.\916\ The commenter also stated that the requirement 
to keep records and file reports, in futures equivalents, regarding the 
commercial entity's cash market contracts and derivative market 
positions on a real-time basis globally, will be complex and impose a 
significant compliance burden. The

[[Page 96804]]

commenter noted such records are not needed for commercial 
purposes.\917\
---------------------------------------------------------------------------

    \916\ CL-ASR-59668 at 3.
    \917\ CL-ASR-59668 at 7; CL-ASR-60933 at 5.
---------------------------------------------------------------------------

    One commenter requested that the Commission provide for a single 
hedge exemption application and reporting process, and should not 
require applicants to file duplicative forms at the exchange and at the 
Commission. The commenter noted its support for rules that would 
delegate, to the exchanges, (1) the hedge exemption application and 
approval process, and (2) hedge exemption reporting (if any is 
required). The commenter argued that the exchanges, rather than the 
Commission, have a long history with enforcing position limits on all 
of their contracts and are in a much better position than the 
Commission to judge the applicant's hedging needs and set an 
appropriate hedge level for the hedge being sought. Thus, the commenter 
suggested, the exchanges should be the point of contact for market 
participants seeking hedge exemptions.\918\
---------------------------------------------------------------------------

    \918\ CL-AGA-59935 at 13.
---------------------------------------------------------------------------

    One commenter requested that the Commission address all pending 
requests for CEA 4a(a)(7) exemptions and respond to all requests for 
bona fide hedging exemptions from the energy industry.\919\
---------------------------------------------------------------------------

    \919\ CL-NFP-60393 at 15-16.
---------------------------------------------------------------------------

    Commission Reproposal: In response to the first commenter, the 
Commission notes that, while the exchange referred to by the commenter 
does not have a reporting process analogous to Form 204, it does 
require an application prior to the establishment of a position that 
exceeds a position limit. In contrast, advance notice is not required 
for most federal enumerated bona fide hedging positions.\920\ In the 
Commission's experience, the series '04 reports have been useful and 
beneficial to the Commission's Surveillance program and the Commission 
finds no compelling reason to change the forms to conform to the 
exchange's process. Further, the Commission notes that Form 204 is 
filed once a month as of the close of business of the last Friday of 
the month; it is not and has never been required to be filed on a real-
time basis globally. A market participant only has to file Form 204 if 
it is over the limit at any point during the month, and the form 
requires only cash market activity (not derivatives market positions).
---------------------------------------------------------------------------

    \920\ The Commission notes that advance notice is required for 
recognition of anticipatory hedging positions by the Commission. See 
below for more discussion of anticipatory hedging reporting 
requirements.
---------------------------------------------------------------------------

    The second commenter was responding to questions raised at the 
Energy and Environmental Markets Advisory Council Meeting in June 2014; 
the Commission notes in response to that commenter that there is no 
federal exemption application process for most enumerated hedges. For 
non-enumerated hedges and certain enumerated anticipatory hedges, in 
response to the EEMAC meeting and other comments from market 
participants, the Commission proposed a single exchange based process 
for recognizing bona fide hedges for both federal and exchange limits. 
Under this process, proposed in the 2016 Supplemental Position Limits 
Proposal, market participants would not be required to file with both 
the exchange and the Commission.\921\
---------------------------------------------------------------------------

    \921\ See supra the discussion of proposed Sec. Sec.  150.9 and 
150.11.
---------------------------------------------------------------------------

    Finally, in response to the commenter's request that the Commission 
respond to pending requests for exemptions under CEA section 4a(a)(7), 
the Commission notes that it responded to the outstanding section 
4a(a)(7) requests in the December 2013 Position Limits Proposal. In 
particular, the Commission proposed to include some of the energy 
industry's requests in the definition of bona fide hedging position and 
declined to include other requests.\922\
---------------------------------------------------------------------------

    \922\ The reasoning behind the Commission's determinations with 
respect to previous requests for exemption under CEA section 
4a(a)(7) is documented in the December 2013 Position Limits 
Proposal, 78 FR at 75719-75722. See also the definition of bona fide 
hedging position discussed supra.
---------------------------------------------------------------------------

    Comments: One commenter recommended that the Commission clarify 
that column three of Form 204 should permit a market participant to 
identify the number of futures-equivalent referenced contracts that 
hedge an identified amount of cash-market positions, but without 
separately identifying the positions in each referenced contract. The 
commenter stated that separate identification would add to the 
financial burden, but that it does not believe that it adds any benefit 
to the Commission.\923\ Two commenters also recommended the Commission 
remove from Form 204 the requirement for reporting non-referenced 
contracts, noting that the Commission did not explain why a market 
participant should report commodity derivative contracts that are not 
referenced contracts.\924\
---------------------------------------------------------------------------

    \923\ CL-FIA-59595 at 38.
    \924\ The Commission notes that the commenters are referring to 
titular language on column 3 of the example Form 204 found in 
proposed Appendix A to part 19, which states ``Commodity Derivative 
Contract or Referenced Contract'' as the information required in 
that column. CL-FIA-59595 at 38; CL-Working Group-59693 at 65.
---------------------------------------------------------------------------

    One commenter also recommended that the Commission either delete or 
make optional the identification of a particular enumerated position in 
column two of Section A or provide a good-faith standard. The commenter 
claimed that many energy firms hedge on a portfolio basis, and would 
not be able to identify a particular enumerated position that applies 
to the referenced contract position needing bona fide hedging 
treatment.\925\
---------------------------------------------------------------------------

    \925\ CL-Working Group-59693 at 65.
---------------------------------------------------------------------------

    One commenter asked for clarification regarding whether Section C 
of Form 204, which requires information regarding cotton stocks, is 
required of market participants in all commodities or just those in 
cotton markets.\926\
---------------------------------------------------------------------------

    \926\ CL-ASR-60933 at 4.
---------------------------------------------------------------------------

    One commenter recommended that the Commission remove the 
requirement in Form 204 to submit futures-equivalent derivative 
positions, stating that the Commission did not explain why it needs to 
obtain data on a market participant's futures-equivalent position as 
part of proposed Form 204 in light of the presumption that the 
Commission already has a market participant's future-equivalent 
position from large-trader reporting rules and access to SDR data.\927\ 
Another commenter noted that Form 204 mixes units of measurement 
between futures and cash positions and requested the Commission require 
market participants to use either cash units or futures units. The 
commenter noted that it's an easy conversion to make but that the 
``mix'' of both units is confusing.\928\
---------------------------------------------------------------------------

    \927\ CL-FIA-59595 at 37.
    \928\ CL-ASR-60933 at 4.
---------------------------------------------------------------------------

    Commission Reproposal: With respect to the comments regarding 
column three of Form 204, the Commission clarifies that Form 204 allows 
filers to identify multiple referenced contracts used for hedging a 
particular commodity cash position in the same line of Form 204. 
Because position limits under Sec.  150.2 are to be imposed on 
referenced contracts, cash positions hedged by such referenced 
contracts should be reported on an aggregate basis, not separated out 
by individual contract. However, the Commission declines to adopt the 
commenters' recommendation to delete the phrase ``Commodity Derivative 
Contract'' from the title of column three, because Sec.  19.00(a)(3) 
allows the Commission to require filing of a series '04 form of anyone 
holding a reportable position under Sec.  15.00(p)(1), which may 
involve a commodity derivative contract that does not fit the 
definition of referenced

[[Page 96805]]

contract.\929\ Further, the Commission can require a special call 
respondent to file their response using the relevant series '04 form, 
and the Form 204 may be filed in order to claim exemptions from 
Sec. Sec.  150.3(b) or 150.3(d), exemptions which may not involve a 
referenced contract. In sum, because the Commission may require the 
filing of Form 204 for purposes other than bona fide hedging, the form 
should include both ``Commodity Derivative Contract'' and, separately, 
``Referenced Contract'' in the title of column three. To avoid further 
confusion, the Commission has rephrased the wording of the column title 
and amended the instructions to the form.
---------------------------------------------------------------------------

    \929\ The Commission notes that Form 704 has been removed from 
the list of series '04 forms that could be required under a special 
call. This is a non-substantive change resulting from changes made 
to Sec.  150.7, discussed infra.
---------------------------------------------------------------------------

    With respect to column two of Form 204, the Commission is proposing 
to adopt the commenter's recommendation to delete the requirement to 
identify which paragraphs of the bona fide hedging definition are 
represented by the hedged position. The requirement seemed to be 
confusing to commenters who found it unclear whether the column 
required the identification of all bona fide hedge definition 
paragraphs used for the total cash market position or the 
identification of separate cash positions for each paragraph used. 
While the requirement was intended to provide insight into which 
enumerated provision of the bona fide hedging definition was being 
relied upon in order to provide context to the cash position, the 
column was never intended to prevent multiple paragraphs being cited at 
once. Given the confusion, the Commission is concerned that the 
information in column two may not provide the intended information 
while being burdensome to implement for both market participants and 
Commission staff. For these reasons, the Commission is proposing to 
delete column two of Form 204, and has updated the sample forms in 
Appendix A to part 19 accordingly.
    In response to the commenter requesting clarification regarding 
Section C of Form 204, the Commission confirms that Section C is only 
required of entities which hold positions in cotton markets that must 
be reported on Form 204. Further, the Commission proposes that, in 
order for the Commission to effectively evaluate the legitimacy of a 
claimed bona fide hedging position, filers of Section C of Form 204 
will be required to differentiate between equity stock held in their 
capacities as merchants, producers, and/or agents in cotton. The 
Commission has updated Section C of Form 204 and Sec.  
19.01(a)(3)(vi)(A) to reflect this change. The Commission does not 
believe this distinction will create any significant extra burden on 
cotton merchants, as the Commission understands that many entities in 
cotton markets will hold equity stocks in just one of the three 
capacities required on the form.
    The Commission notes in response to the last commenter that Form 
204 does not require the futures equivalent value of derivative 
positions but rather the futures equivalent of the cash position 
underlying a hedged position (e.g., 20,000,000 barrels of crude oil is 
equivalent to 20,000 futures equivalents, given a 1,000 barrel unit of 
trading for the futures contract). The futures equivalent of the cash 
position quantity is not available from any Commission data source 
because cash positions are not reported to the Commission under, for 
example, large trader reporting or swap data repository regulations. 
The Commission is proposing to require firms to report both the cash 
market unit of measurement and the futures equivalent measurement for a 
position in order to easily identify the size of the position 
underlying a hedge position, and has updated Sec.  19.01(a)(3), 
instructions to the sample Form 204 in Appendix A to part 19, and the 
field names on the Form 204 itself to clarify this requirement. The 
Commission agrees with the commenter that it is an easy conversion to 
make, and does not anticipate that this requirement will create any 
significant extra burden on market participants. Obtaining the futures 
equivalent information directly from the market participant--as opposed 
to calculating it upon receipt of the form--is necessary particularly 
with respect to cross-commodity hedging where calculating the hedging 
ratio may not be as clear-cut. In its experience administering and 
collecting Form 204, the Commission has noted much confusion regarding 
whether cash market information should be reported in futures 
equivalents or in cash market units. Currently, the form requires cash 
market units, but the Commission has seen both units of measurement 
used (sometimes on the same form), which requires Commission staff to 
contact traders in order to validate the numbers on the form. The 
Commission is proposing to require both in order to avoid such 
confusion.
    Comment: One commenter proposed modifications to the information 
required to be reported on Form 204. Specifically, the commenter 
suggested that the filer should be required to report the aggregate 
quantity of cash positions that underlie bona fide hedging positions in 
equivalent core referenced futures contract units, excluding all or 
part of the commodity that it excludes in its regular business 
practice. The commenter also suggested that if the filer is cross 
hedging, the filer must also report the aggregated quantity of bona 
fide hedge positions it is cross hedging in terms of the actual 
commodity as well as specify the futures market in which it is 
hedging.\930\
---------------------------------------------------------------------------

    \930\ CL-Working Group-60947 at 17-18.
---------------------------------------------------------------------------

    Another commenter suggested that the information required on Form 
204 is ``ambiguous'' and asked the Commission to clarify what scope of, 
for example, stocks or fixed price purchase and sales agreements must 
be reported as well as what level of data precision is required.\931\
---------------------------------------------------------------------------

    \931\ CL-COPE-60932 at 10. The commenter made the same requests 
for clarification regarding the cash market information required on 
Form 504; since the information is similar, the Commission is 
responding here to the comment for both forms.
---------------------------------------------------------------------------

    A commenter requested that the Commission allow hedges to be 
reported on a ``macro'' basis (e.g. futures positions vs. cash 
positions) as opposed to requiring the matching of individual physical 
market transactions to enumerated bona fide hedges. The commenter 
stated that performing specific linkage of individual physical 
transactions to individual hedge transactions is burdensome and does 
not provide any ``managerial or economic benefit.'' \932\
---------------------------------------------------------------------------

    \932\ CL-ASR-60933 at 5.
---------------------------------------------------------------------------

    In contrast, another commenter suggested that the Commission tailor 
the series '04 reports to require ``only the information that is 
required to justify the claimed hedge exemption.'' The commenter stated 
that Form 204 appears to require a market participant to list all cash 
market exposures, even if the exposures are not relevant to the bona 
fide hedge exemption being claimed, which it believes would provide no 
value to the Commission in determining whether a hedge was bona 
fide.\933\
---------------------------------------------------------------------------

    \933\ See CL-Working Group-60396 at 17.
---------------------------------------------------------------------------

    Another commenter stated that because the prompt (spot) month for 
certain referenced contracts will no longer trade as of the last Friday 
of the month, a market participant that exceeds a spot-month position 
limit who no longer has that spot-month position should not be required 
to report futures-equivalent positions for referenced contract on Form 
204.\934\ The commenter recommended that the Commission should require 
a market

[[Page 96806]]

participant with a position in excess of a spot-month position limit to 
report on Form 204 only the cash-market activity related to that 
particular spot-month derivative position, and not to require it to 
report cash-market activity related to non-spot-month positions where 
it did not exceed a non-spot-month position limit; the commenter stated 
that the burden associated with such a reporting obligation would 
increase significantly.\935\ Separately, another commenter claimed that 
Form 204 appears to address only non-spot-month position limits and 
asked the Commission to clarify how it will distinguish reporting on 
Form 204 that is related to a spot-month position limit versus a non-
spot-month position limit.\936\
---------------------------------------------------------------------------

    \934\ CL-FIA-59595 at 37-38.
    \935\ CL-FIA-59595 at 38.
    \936\ CL-ASR-60933 at 4.
---------------------------------------------------------------------------

    One commenter recommended that reporting rules require traders to 
identify the specific risk being hedged at the time a trade is 
initiated, to maintain records of termination or unwinding of a hedge 
when the underlying risk has been sold or otherwise resolved, and to 
create a practical audit trail for individual trades, to discourage 
traders from attempting to mask speculative trades under the guise of 
hedges.\937\
---------------------------------------------------------------------------

    \937\ CL-Sen. Levin-59637 at 8.
---------------------------------------------------------------------------

    Commission Reproposal: In response to the modifications to Form 204 
proposed by the commenter, the Commission notes that no modifications 
are necessary because the form, as proposed, requires the reporting of 
aggregated quantity of cash positions that underlie bona fide hedging 
positions in equivalent core referenced futures contract units, 
excluding a de minimis portion of the commodity, products, and 
byproducts that it excludes in its regular business practice.\938\ 
Reproposed Form 204 also requires cross-hedgers to report the 
aggregated quantity of bona fide hedging positions it is cross hedging 
in terms of the actual commodity as well as specify the futures market 
in which it is hedging.
---------------------------------------------------------------------------

    \938\ See supra discussion of the exclusion of certain source 
commodities, products, and byproducts of the cash commodity hedged 
when reporting on Form 204.
---------------------------------------------------------------------------

    The Commission reproposes that the Form 204 requires a market 
participant to report all cash market positions in any commodity in 
which the participant has exceeded a spot-month or non-spot-month 
position limit. Form 204 is not intended to match a firm's hedged 
positions to underlying cash positions on a one-to-one basis; rather, 
it is intended to provide a ``snapshot'' into the firm's cash market 
position in a particular commodity as of one day during a month. The 
information on this form is used for several purposes in addition to 
reviewing hedged positions, including helping Surveillance analysts 
understand changes in the market fundamentals in underlying commodity 
markets.\939\ The Commission believes that adopting the commenters' 
recommendations to require cash market information underlying a single 
derivative hedge position would result in a more burdensome reporting 
process for firms, particularly those who hedge on a portfolio basis. 
Instead, the Commission is confirming that, as requested by the 
commenter, cash market positions should be reported on an aggregated or 
``macro'' basis.
---------------------------------------------------------------------------

    \939\ In the December 2013 Position Limits Proposal, the 
Commission highlighted the importance of the data collected on Form 
204 to its Surveillance program, stating that ``[c]ollection of this 
information would facilitate the Commission's surveillance program 
with respect to detecting and deterring trading activity that may 
tend to cause sudden or unreasonable fluctuations or unwarranted 
changes in the prices of the referenced contracts and their 
underlying commodities.'' See December 2013 Position Limits 
Proposal, 78 FR at 75742.
---------------------------------------------------------------------------

    The Commission notes that this ``snapshot'' requirement has 
historically been--and is currently--required on Form 204 for the nine 
legacy agricultural contracts. Further, the Commission understands that 
exchange hedge application forms require similar cash position 
information; firms that have applied to an exchange for hedge 
exemptions in non-legacy contracts should already be familiar with 
providing cash market information when they exceed a position limit or 
a position accountability level.
    The commenters that focus on the Form 204 as it relates to 
exceeding either spot-month position limits or non-spot-month position 
limits contrast each other: one believed Form 204 was to be filed in 
response to exceeding only spot-month position limits and the other 
that Form 204 was to be filed in response to exceeding only non-spot-
month position limits. However, the Commission has never distinguished 
between spot-month limits and non-spot-month limits with respect to the 
filing of Form 204. The Commission notes that, as discussed in the 
December 2013 Position Limits Proposal, Form 204 is used to review 
positions that exceed speculative limits in general, not just in the 
spot-month.\940\ Because of this, the Commission is not adopting the 
commenter's recommendation to only require Form 204 when a market 
participant exceeds a spot-month limit.
---------------------------------------------------------------------------

    \940\ The Commission stated that the Form 204 ``must show the 
trader's positions in the cash market and are used by the Commission 
to determine whether a trader has sufficient cash positions that 
justify futures and option positions above the speculative limits'' 
because the Commission is seeking to ``ensure that any person who 
claims any exemption from federal speculative position limits can 
demonstrate a legitimate purpose for doing so.'' See December 2013 
Position Limits Proposal, 78 FR at 75741-2.
---------------------------------------------------------------------------

    In response to the commenter who suggested the Commission require a 
``practical audit trail'' for bona fide hedgers, the Commission notes 
that other sections of the Commission's regulations provide rules 
regarding detailed individual transaction recordkeeping as suggested by 
the commenter.
ii. Cotton Merchants and Dealers Reporting on Form 304--Sec.  19.02
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to continue to require the filing of Form 304, 
which requires information on the quantity of call cotton bought or 
sold, on a weekly basis. The Commission noted that Form 304 is required 
in order for the Commission to produce its weekly cotton ``on call'' 
report.\941\ The Commission also proposed to relocate the list of 
required information for Form 304 from current Sec.  19.01(a) to 
proposed Sec.  19.01(a)(3).
---------------------------------------------------------------------------

    \941\ The Commission's Weekly Cotton On-Call Report can be found 
here: http://www.cftc.gov/MarketReports/CottonOnCall/index.htm.
---------------------------------------------------------------------------

    Comments Received: The Commission did not receive any comments on 
the proposed changes to Form 304.
    Commission Reproposal: The Commission is reproposing Form 304, as 
originally proposed.
iii. Conditional Spot-Month Limit Exemption Reporting on Form 504--
Sec.  19.01(a)(1)
    Proposed Rule: As proposed, Sec.  19.01(a)(1) would require persons 
availing themselves of the conditional spot-month limit exemption 
(pursuant to proposed Sec.  150.3(c)) to report certain detailed 
information concerning their cash market activities for any commodity 
specially designated by the Commission for reporting under Sec.  19.03 
of this part. In the December 2013 Position Limits Proposal, the 
Commission noted its concern about the cash market trading of those 
availing themselves of the conditional spot-month limit exemption and 
so proposed to require that persons claiming a conditional spot-month 
limit exemption must report on new Form 504 daily, by 9 a.m. Eastern 
Time on the next business day, for each day that a person is over the 
spot-month limit in certain

[[Page 96807]]

special commodity contracts specified by the Commission.
    The Commission proposed to require reporting on new Form 504 for 
conditional spot-month limit exemptions in the natural gas commodity 
derivative contracts only.
    Comments Received: One commenter stated its belief that the 
information required on Form 504 is redundant of information required 
on Form 204 and would overly burden hedgers.\942\ The commenter 
suggested that, if the Commission decides to retain the conditional 
spot-month limit exemption, and thereby Form 504, the Commission should 
require only an affirmative representation from market participants 
that they do not hold any physical delivery Referenced Contracts.\943\
---------------------------------------------------------------------------

    \942\ CL-Working Group-59693 at 65-66.
    \943\ CL-Working Group-59693 at 65-66.
---------------------------------------------------------------------------

    Another commenter stated that Form 504 creates a burden for hedgers 
to track their cash business and affected contracts and to create 
systems to file multiple forms. The commenter noted its belief that 
end-users/hedgers should never be subjected to the daily filing of 
reports.\944\ Further, the commenter suggested the Commission delete 
Form 504 entirely, asserting that it will be unnecessary if the 
Commission adopts the commenter's separate cash settled limit idea (the 
commenter proposed a higher cash settled limit with no condition on the 
physical delivery market).\945\ Another commenter suggested deleting 
the Form 504 because it believes that no matter how extensive the 
Commission makes reporting requirements, the Commission will still need 
to request additional information on a case-by-case basis to ensure 
hedge transactions are legitimate.\946\
---------------------------------------------------------------------------

    \944\ CL-COPE-59662 at 24.
    \945\ CL-COPE-59662 at 24.
    \946\ CL-NGFA-60941 at 7-8.
---------------------------------------------------------------------------

    A third commenter suggested that the Commission should modify the 
data requirements for Form 504 in a manner similar to the approach used 
by ICE Futures U.S. for natural gas contracts, that is, requiring a 
description of a market participant's cash-market positions as of a 
specified date filed in advance of the spot-month.\947\
---------------------------------------------------------------------------

    \947\ CL-FIA-59595 at 37.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has tentatively determined 
under Sec.  19.03 to designate the Henry Hub Natural Gas referenced 
contracts for reporting of a conditional spot-month limit exemption 
under Sec.  19.00(a)(1)(i).
    In response to the first three commenters, the Commission 
reiterates a key distinction between the Form 504 and the Form 204. 
Form 504 is required of speculators that are relying upon the 
conditional spot-month limit exemption. Form 204 is required for 
hedgers that exceed position limits. To the extent a firm is hedging, 
there is no requirement to file the Form 504.
    In the unlikely event that a firm is both hedging and relying upon 
the conditional spot-month limit exemption, the firm would be required 
to file both forms at most one day a month, given the timing of the 
spot-month in natural gas markets (the only market for which Form 504 
will be required at first). In that event, however, the Commission 
believes that requiring similar information on both forms should 
encourage filing efficiencies rather than duplicating the burden. For 
example, both forms require the filer to identify fixed price purchase 
commitments; the Commission believes it is not overly burdensome for 
the same firm to report such similar information on the Form 204 and 
the Form 504, should a market participant ever be required to file both 
forms.
    The Commission is not adopting the commenters' recommendations to 
delete the Form 504 or to require only an affirmative representation 
that the condition of the conditional spot-month limit exemption has 
been met (i.e. that the trader holds no position in physical delivery 
referenced contracts). The Commission explained in the December 2013 
Position Limits Proposal that its primary motive in requiring the cash 
market information required on Form 504 is the need to detect and deter 
manipulative activities in the underlying cash commodity that might be 
used to benefit a derivatives position (or vice-versa).\948\
---------------------------------------------------------------------------

    \948\ Specifically, the Commission stated that ``[w]hile traders 
who avail themselves of this exemption could not directly influence 
particular settlement prices by trading in the physical-delivery 
referenced contract, the Commission remains concerned about such 
traders' activities in the underlying cash commodity.'' See December 
2013 Position Limits Proposal, 78 FR at 75744.
---------------------------------------------------------------------------

    In response to the third commenter, the Commission does not believe 
that a description of a cash market position is sufficient to allow 
Commission staff to administer its Surveillance program. Descriptions 
are not as exact as reported information, and the Commission believes 
the information gathered in daily Form 504 reports would be more 
complete--and thus more beneficial--in determining compliance and 
detecting and deterring manipulation.
    The Commission notes that since the Commission is proposing to 
limit the conditional spot month limit exemption to natural gas 
markets, the Form 504 will only be required from participants in 
natural gas markets who seek to avail themselves of the conditional 
spot-month limit exemption and any corresponding burden will apply to 
only those participants.
iv. Pass-Through Swap Exemption Reporting on Form 604--Sec.  
19.01(a)(2)
    Proposed Rule: As proposed, Sec.  19.01(a)(2) would require a 
person relying on the pass-through swap exemption who holds either of 
two position types to file a report with the Commission on new Form 
604.\949\ The first type of position, filed on Section A of Form 604, 
is a swap executed opposite a bona fide hedger that is not a referenced 
contract and for which the risk is offset with referenced contracts 
(e.g., cross commodity hedging positions). The second type of position, 
filed on Section B of Form 604, is a cash-settled swap (whether or not 
the swap is, itself, a referenced contract) executed opposite a bona 
fide hedger that is offset with physical-delivery referenced contracts 
held into a spot-month.
---------------------------------------------------------------------------

    \949\ Under the definition of bona fide hedging position in 
Section 4a(c)(2) of the Act, a person who uses a swap to reduce 
risks attendant to a position that qualifies as a bona fide hedging 
position may pass-through those bona fides to the counterparty, even 
if the person's swap position is not in excess of a position limit. 
As such, positions in commodity derivative contracts that reduce the 
risk of pass-through swaps would qualify as bona fide hedging 
positions. See supra discussion of the proposed definition of bona 
fide hedging position.
---------------------------------------------------------------------------

    These reports on Form 604 would explain hedgers' needs for large 
referenced contract positions and would give the Commission the ability 
to verify the positions were a bona fide hedge, with heightened daily 
surveillance of spot-month offsets. Persons holding any type of pass-
through swap position other than the two described above would report 
on Form 204.\950\
---------------------------------------------------------------------------

    \950\ Persons holding pass-through swap positions that are 
offset with referenced contracts outside the spot month (whether 
such contracts are for physical delivery or are cash-settled) need 
not report on Form 604 because swap positions that are referenced 
contracts will be netted with offsetting referenced contract 
positions outside the spot month pursuant to proposed Sec.  
150.2(b).
---------------------------------------------------------------------------

    Comments Received: The Commission received three comments regarding 
Form 604, all from the same commenter. These comments and the 
Commission's responses are detailed below.
    Comment: One commenter recommended that the Commission remove the 
requirement in Form 604 to submit futures-equivalent derivative

[[Page 96808]]

positions, claiming that the Commission did not explain why it needs to 
obtain data on a market participant's futures-equivalent position as 
part of proposed Form 604 in light of the commenter's presumption that 
the Commission already has a market participant's future-equivalent 
position from large-trader reporting rules and access to SDR data.\951\
---------------------------------------------------------------------------

    \951\ CL-FIA-59595 at 37.
---------------------------------------------------------------------------

    Commission Reproposal: In response to the commenter, the Commission 
notes that futures-equivalent position information is necessary to 
allow staff to match the offset futures position with the non-
referenced-contract swap position underlying the hedge because such 
positions are not subject to part 20 reporting. The Commission notes 
that Form 604 is filed outside of the spot month only if the swap 
position being offset is not a referenced contract. Since only 
referenced contracts are automatically netted for purposes of 
determining compliance with position limits, the Commission would not 
have knowledge or reason to net a pass-through swap position with the 
participant's futures positions without the filing of Form 604. During 
the spot month, the Commission notes that, while it has access to 
referenced contract swap positions in part 20 data, the Commission 
would not know that a particular swap forms the basis for a pass-
through swap offset exemption, and so again would not have knowledge or 
reason to net a pass-through swap position with the participant's 
futures position. Without Section B of Form 604 filed during the spot 
month, the Commission may believe a firm is in violation of physical-
delivery spot month limits despite the firm being eligible for a pass-
through swap offset exemption. The Commission is proposing to require 
the identification of a particular swap position and the offsetting 
referenced contract position to alleviate concerns about the disruption 
of the price discovery function of the underlying physical-delivery 
contract during the spot month period.
    Comment: The same commenter also noted that the spot-month for 
certain referenced contracts will no longer trade as of the last Friday 
of the month and so recommended that a market participant exceeding a 
spot-month position limit who no longer has that spot-month position 
should not be required to report futures-equivalent derivatives 
positions for referenced contract on Form 604.\952\
---------------------------------------------------------------------------

    \952\ CL-FIA-59595 at 37-38.
---------------------------------------------------------------------------

    Commission Reproposal: As proposed, pass-through swap offsets that 
last into the spot-month would be filed daily during the spot period, 
not as of the last Friday of the month.\953\ Pass-through swap offset 
positions outside of the spot-month are required to be filed as of the 
last Friday of the month. The Commission expects that, in most cases, 
the Form 604 would be filed outside of the spot-month which means only 
Section A would need to be filed. That filing is required as of the 
last Friday of the month, the same timeline that is required for the 
Form 204, for convenience and ease of filing.
---------------------------------------------------------------------------

    \953\ See supra discussion regarding the time and place of 
filing series '04 reports.
---------------------------------------------------------------------------

    Comment: Finally, the commenter recommended that CFTC require a 
market participant with a position in excess of a spot-month position 
limit to report on Form 604 only the cash-market activity related to 
that particular spot-month derivative position, and not to require it 
to report cash-market activity related to non-spot-month positions 
where it did not exceed a non-spot-month position limit, since the 
burden associated with such a reporting obligation would increase 
significantly.\954\
---------------------------------------------------------------------------

    \954\ CL-FIA-59595 at 38.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission notes in response to the 
commenter that neither Sections A nor B of Form 604 would require the 
filer to report cash market activity.
    This commenter makes the same remarks regarding Form 204, but the 
Form 204 requires cash-market activity in a particular commodity 
whereas the Form 604 requires information on a particular swap market 
position.
    The Commission is reproposing Form 604, as originally proposed.
e. Time and Place of Filing Reports--Sec.  19.01(b)
    Proposed Rule: As proposed, Sec.  19.01(b)(1) would require all 
reports except those submitted in response to special calls or on Form 
504, Form 604 during the spot-month, or Form 704 to be filed monthly as 
of the close of business on the last Friday of the month and not later 
than 9 a.m. Eastern Time on the third business day following the last 
Friday of the month.\955\ For reports submitted on Form 504 and Form 
604 during the spot-month, proposed Sec.  19.01(b)(2) would require 
filings to be submitted as of the close of business for each day the 
person exceeds the limit during the spot period and not later than 9 
a.m. Easter Time on the next business day following the date of the 
report.\956\ Finally, proposed Sec.  19.01(b)(3) would require series 
`04 reports to be transmitted using the format, coding structure, and 
electronic data transmission procedures approved in writing by the 
Commission or its designee.
---------------------------------------------------------------------------

    \955\ The timeframe for filing Form 704 is included as part of 
proposed Sec.  150.7. See supra for discussion regarding the filing 
of Form 704.
    \956\ In proposed Sec.  19.01(b)(2), the Commission 
inadvertently failed to include reports filed under Sec.  
19.00(a)(1)(ii)(B) (i.e. Form 604 during the spot month) in the same 
filing timeframe as reports filed under Sec.  19.00(a)(1)(i) (i.e. 
Form 504). The correct filing timeframe was described in multiple 
places on the forms published in the Federal Register as part of the 
December 2013 Position Limits Proposal.
---------------------------------------------------------------------------

    Comments Received: One commenter stated its support for the 
proposed monthly, rather than daily, filing of Form 204.\957\ Another 
commenter recommended an annual Form 204 filing requirement, rather 
than a monthly filing requirement. The commenter noted that because the 
general size and nature of its business is relatively constant, the 
differences between each monthly report would be insignificant. The 
commenter recommended the CFTC ``not impose additional costs of monthly 
reporting without a demonstration of significant additional regulatory 
benefits.'' The commenter noted its futures position typically exceeds 
the proposed position limits, but such positions are bona fide hedging 
positions. In addition to futures, the commenter noted it executes a 
small notional volume of swaps as hedges of forward contracts.\958\
---------------------------------------------------------------------------

    \957\ CL-Working Group-59693 at 65.
    \958\ CL-DFA-59621 at 2.
---------------------------------------------------------------------------

    Similarly, another commenter suggested that if the Commission does 
not eliminate the forms in favor of the requirements in the 2016 
Supplemental Position Limits Proposal the Commission should require 
only an annual notice that details its maximum cash market exposure 
that justifies an exemption, to be filed with the exchange.\959\
---------------------------------------------------------------------------

    \959\ CL-FIA-60937 at 17.
---------------------------------------------------------------------------

    One commenter suggested that the reporting date for Form 204 should 
be the close of business on the day prior to the beginning of the spot 
period and that it should be required to filed no later than the 15th 
day of the month following a month in which a filer exceeded a federal 
limit to allow the market participant sufficient time to collect and 
report its information.\960\
---------------------------------------------------------------------------

    \960\ CL-Working Group-60947 at 17-18.
---------------------------------------------------------------------------

    With regards to proposed Sec.  19.01(b)(2), one commenter 
recommended CFTC change the proposed next-day reporting of Form 504 for 
the conditional spot-month limit exemption and Form 604 for the pass-
through swap offsets during the spot-month, to a monthly basis, noting

[[Page 96809]]

market participants need time to generate and collect data and verify 
the accuracy of the reported data. The commenter further stated that 
CFTC did not explain why it needs the data on Form 504 or Form 604 on a 
next-day basis.\961\
---------------------------------------------------------------------------

    \961\ CL-FIA-59595 at 35.
---------------------------------------------------------------------------

    Another asserted that the daily filing requirement (Form 504) for 
participants who rely on the conditional spot-month limit exemption 
``imposes significant burdens and substantial costs on market 
participants.'' The commenter urged a monthly rather than a daily 
filing of all cash market positions, which the commenter claimed is 
consistent with current exchange practices.\962\
---------------------------------------------------------------------------

    \962\ CL-ICE-59669 at 7.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing Sec.  
19.01(b)(1), as originally proposed, with some minor clarifications to 
the language to make the text easier to follow. As discussed above, the 
Commission believes that Form 204 provides a monthly ``snapshot'' of 
the cash market positions of traders whose positions are in excess of 
spot-month or non-spot-month speculative position limits and for that 
reason it is necessary to provide its Surveillance program the ability 
to detect and deter market manipulation and protect the price discovery 
process. The Commission is retaining the last Friday of the month as 
the required reporting date in order to avoid confusion and 
uncertainty, particularly for those participants who already file Form 
204 and thus are accustomed to that reporting date.
    In response to the commenters' suggestions that Form 204 be filed 
annually, the Commission notes that throughout the course of a year, 
most commodities subject to federal position limits under proposed 
Sec.  150.2 are subject to seasonality of prices as well as less 
predictable imbalances in supply and demand such that an annual filing 
would not provide Surveillance insight into cash market trends 
underlying changes in the derivative markets. This insight is necessary 
for Surveillance to determine whether price changes in derivative 
markets are caused by fundamental factors or manipulative behavior. 
Further, the Commission believes that an annual filing could actually 
be more burdensome for firms, as an annual filing could lead to special 
calls or requests between filings for additional information in order 
for the Commission's Surveillance program to fulfill its responsibility 
to detect and deter market manipulation. In addition, the Commission 
notes that while one participant's positions may remain constant 
throughout a year, the same is not true for many other market 
participants. The Commission believes that varying the filing 
arrangement depending on a particular market or market participant is 
impractical and would lead to increased burdens for market participants 
due to uncertainty regarding when each firm, or each firm by each 
commodity, is supposed to file.
    The Commission is reproposing, as originally proposed, the 
provision in proposed Sec.  19.01(b)(2) to require next-day, daily 
filing of Forms 504 and 604 in the spot-month. In response to the 
commenter, the Commission notes that it described its rationale for 
requiring Forms 504 and 604 daily during the spot-month in the December 
2013 Position Limits Proposal.\963\ In order to detect and deter 
manipulation during the spot-month, concurrent information regarding 
the cash positions of a speculator holding a conditional spot-month 
limit exemption (Form 504) or the swap contract underlying a large 
offsetting position in the physical delivery contract (Form 604) is 
necessary during the spot-month. Receiving Forms 504 or 604 before or 
after the spot-month period would not help the Surveillance program to 
protect the price discovery process of physical-delivery contracts and 
to ensure that market participants have a qualifying pass-through swap 
contract position underlying offsetting futures positions held during 
the spot-month.
---------------------------------------------------------------------------

    \963\ December 2013 Position Limits Proposal, 78 FR at 75744-5. 
The Commission noted that its experience overseeing the ``dramatic 
instances of disruptive trading practices in the natural gas 
markets'' warranted enhanced reporting for that commodity during the 
spot month on Form 504. The Commission noted its intent to wait 
until it gained additional experience with limits in other 
commodities before imposing enhanced reporting requirements for 
those commodities. The Commission further noted that it was 
concerned that a trader could hold an extraordinarily large position 
early in the spot month in the physical-delivery contract along with 
an offsetting short position in a cash-settled contract (such as a 
swap), and that such a large position could disrupt the price 
discovery function of the core referenced futures contract.
---------------------------------------------------------------------------

    The Commission notes that, as reproposed, the Form 504 is required 
only for the Natural Gas commodity, which has a 3-day spot period.\964\ 
Daily reporting of the Form 504 during the spot-month allows 
Surveillance to monitor a market participant's cash market activity 
that could impact or benefit their derivatives position. Given the 
short filing period for natural gas and the importance of accurate 
information during the spot-month, the Commission believes that 
requiring the Form 504 to be filed daily provides an important benefit 
that outweighs the potential burdens for filers
---------------------------------------------------------------------------

    \964\ Reproposed Sec.  150.3(c) provides a conditional spot-
month limit exemption only for the natural gas cash-settled 
referenced contracts.
---------------------------------------------------------------------------

    As a practical matter, the Commission notes that the Form 604 is 
collected during the spot-month only under particular circumstances, 
i.e. for an offsetting position in physical delivery referenced 
contracts during the spot-month. Because the ``five-day rule'' applies 
to such positions, the spot-month filing of the Form 604 would only 
occur in contracts whose spot-month period is longer than 5 days 
(excluding, for example, energy contracts but including many 
agricultural commodities).\965\
---------------------------------------------------------------------------

    \965\ It should be noted, however that an exchange, using its 
discretion, could require the filing of Form 604, for example, in an 
energy contract, as part of the exchange's recognition of a non-
enumerated bona fide hedging position under Sec.  150.9, discussed 
below.
---------------------------------------------------------------------------

    The Commission is reproposing Sec. Sec.  19.01(b)(1)-(2), as 
originally proposed, with some minor clarifications to the language to 
make the text easier to follow. The Commission inadvertently left out 
of proposed Sec.  19.01(b)(2) a reference to the requirement to file 
Section B of Form 604 (pass-through swap offsets held into the spot-
month). No commenter appeared to be confused about this requirement, as 
the correct timeframe was described in multiple places on the forms 
published in the Federal Register as part of the December 2013 Position 
Limits Proposal, but to avoid future confusion the Commission has 
modified the language--but not the substance--of Sec.  19.01(b)(1)-(2) 
to clarify the time and place for filing series '04 reports.
    Finally, the Commission is reproposing the electronic filing 
requirement, as originally proposed.\966\ Further instructions on 
submitting '04 reports will be available at http://www.cftc.gov/Forms/index.htm.
---------------------------------------------------------------------------

    \966\ The Commission notes that the electronic filing 
requirement was proposed in Sec.  19.01(b)(3) but due to other 
changes within that section it is now located in Sec.  19.01(b)(4). 
The substance of the requirement has not changed.
---------------------------------------------------------------------------

F. Sec.  150.7--Reporting Requirements for Anticipatory Hedging 
Positions

1. Reporting Requirements for Anticipatory Hedging Positions and New 
Form 704
    Proposed Rule: The Commission's revised definition of bona fide 
hedging in Sec.  150.1 enumerates two new types of anticipatory bona 
hedging positions. Two existing types of anticipatory hedges are being 
continued from the existing definition of bona fide hedging in current 
Sec.  1.3(z): Hedges of unfilled anticipated requirements and hedges of

[[Page 96810]]

unsold anticipated production, as well as anticipatory cross-commodity 
hedges of such requirements or production.\967\ The revised Sec.  150.1 
definition expands the list of enumerated anticipatory bona fide 
hedging positions to include hedges of anticipated royalties and hedges 
of anticipated services contract payments or receipts, as well as 
anticipatory cross-commodity hedges of such contracts.\968\ As 
discussed above, Sec.  1.48 has long required special reporting for 
hedges of unfilled anticipated requirements and hedges of unsold 
anticipated production because the Commission remains concerned about 
distinguishing between anticipatory reduction of risk and speculation. 
Such concerns apply equally to any position undertaken to reduce the 
risk of anticipated transactions. Hence, the Commission proposed to 
extend the special reporting requirements in proposed Sec.  150.7 for 
all types of enumerated anticipatory hedges that appear in the 
definition of bona fide hedging positions in proposed Sec.  150.1.
---------------------------------------------------------------------------

    \967\ See current definition of bona fide hedging transactions 
at 17 CFR 1.3(z)(2)(i)(B) and (ii)(C), respectively. Cross-commodity 
hedges are permitted under 17 CFR 1.3(z)(2)(iv). Compare with 
paragraphs (3)(iii) and (4)(i), respectively, of the definition of 
bona fide hedging positions in proposed Sec.  150.1, discussed 
above.
    \968\ See sections (4)(iii), (4)(iv), and (5), respectively, of 
the definition of bona fide hedging positions in Sec.  150.1, 
discussed above.
---------------------------------------------------------------------------

    The Commission proposed to add a new series '04 reporting form, 
Form 704, to effectuate these additional and updated reporting 
requirements for anticipatory hedges. Persons wishing to avail 
themselves of an exemption for any of the anticipatory hedging 
transactions enumerated in the updated definition of bona fide hedging 
in Sec.  150.1 are required to file an initial statement on Form 704 
with the Commission at least ten days in advance of the date that such 
positions would be in excess of limits established in proposed Sec.  
150.2. Advance notice of a trader's intended maximum position in 
commodity derivative contracts to offset anticipatory risks allows the 
Commission to review a proposed position before a trader exceeds the 
position limits and, thereby, allows the Commission to prevent 
excessive speculation in the event that a trader were to misconstrue 
the purpose of these limited exemptions.\969\ The trader's initial 
statement on Form 704 provides a detailed description of the person's 
anticipated activity (i.e., unfilled anticipated requirements, unsold 
anticipated production, etc.).\970\ Under proposed Sec.  150.7(b), the 
Commission may reject all or a portion of the position as not meeting 
the requirements for bona fide hedging positions under proposed Sec.  
150.1. To support this determination, proposed Sec.  150.7(c) would 
allow the Commission to request additional specific information 
concerning the anticipated transaction to be hedged. Otherwise, Form 
704 filings that conform to the requirements set forth in Sec.  150.7 
would become effective ten days after submission. As proposed, Sec.  
150.7(e) would require an anticipatory hedger to file a supplemental 
report on Form 704 whenever the anticipatory hedging needs increase 
beyond that in its most recent filing.
---------------------------------------------------------------------------

    \969\ Further, advance filing may serve to reduce the burden on 
a person who exceeds position limits and who may then otherwise be 
issued a special call to determine whether the underlying 
requirements for the exemption have been met. If the Commission were 
to reject such an exemption, such a person would have already 
violated position limits.
    \970\ Proposed 150.7(d)(2) would require additional information 
for cross hedges, for reasons discussed above.
---------------------------------------------------------------------------

    As proposed, Sec.  150.7(f) would add a requirement for any person 
who files an initial statement on Form 704 to provide annual updates 
that detail the person's actual cash market activities related to the 
anticipated exemption. With an eye towards distinguishing bona fide 
hedging of anticipatory risks from speculation, annual reporting of 
actual cash market activities and estimates of remaining unused 
anticipated exemptions beyond the past year would enable the Commission 
to verify whether the person's anticipated cash market transactions 
closely track that person's real cash market activities. In addition, 
Sec.  150.7(g) would enable the Commission to review and compare the 
actual cash activities and the remaining unused anticipated hedge 
transactions by requiring monthly reporting on Form 204. Absent monthly 
filing, the Commission would need to issue a special call to determine 
why a person's commodity derivative contract position is, for example, 
larger than the pro rata balance of her annually reported anticipated 
production.
    As is the case under current Sec.  1.48, Sec.  150.7(h) requires 
that a trader's maximum sales and purchases must not exceed the lesser 
of the approved exemption amount or the trader's current actual 
anticipated transaction.
    For purposes of simplicity, the special reporting requirements for 
anticipatory hedges are located within the Commission's position limits 
regime in part 150, and alongside the Commission's updated definition 
of bona fide hedging positions in Sec.  150.1. Thus, the Commission is 
proposing to delete the reporting requirements for anticipatory hedges 
in current Sec.  1.48 because that section would be duplicative.
    Comments Received: One commenter asserted that the reporting 
requirements for anticipatory hedges of an operational or commercial 
risk comprising an initial, supplementary and annual report are unduly 
burdensome. The commenter recommended that the Commission require 
either an initial and annual report or an initial and supplementary 
report.\971\
---------------------------------------------------------------------------

    \971\ CL-IECAssn-59679 at 11.
---------------------------------------------------------------------------

    Another commenter suggested deleting the Form 704 because it 
believes that no matter how extensive the Commission makes reporting 
requirements, the Commission will still need to request additional 
information on a case-by-case basis to ensure hedge transactions are 
legitimate.\972\ The commenter suggested that the Commission should be 
able to achieve its goal of obtaining enough information to determine 
whether to request additional information using the Form 204 along with 
currently collected data sources and so the additional burden of the 
new series '04 reports outweighs the benefit to the Commission.\973\
---------------------------------------------------------------------------

    \972\ CL-NGFA-60941 at 7-8.
    \973\ Id.
---------------------------------------------------------------------------

    Several commenters remarked on the cost associated with the 
proposed Form 704. One commenter stated that the additional reporting 
requirements, including new Form 704 to replace the reporting 
requirements under current rule 1.48, and annual and monthly reporting 
requirements under proposed rules 150.7(f) and 150.7(g) ``will impose 
significant additional regulatory and compliance burdens on commercials 
and believes that the Commission should consider alternatives, 
including targeted special calls when appropriate.'' \974\ Another 
commenter stated the reporting requirements for the series 04 forms is 
overly burdensome and would impose a substantial cost to market 
participants because while the proposal would require the Commission to 
respond fairly quickly, it does not provide an indication of whether 
the Commission will deem the requirement accepted if the Commission 
doesn't respond within a time frame. The commenter is concerned that a 
market participant may have to refuse business if it does not receive 
an approved exemption in advance of a transaction.\975\ A third 
commenter stated that Form 704 is ``commercially impracticable and 
unduly burdensome'' because it would require filers to

[[Page 96811]]

``analyze each transaction to see if it fits into an enumerated hedge 
category.'' The commenter is concerned that such ``piecemeal review'' 
would require a legal memorandum and the development of new software to 
track positions and, since the Commission proposed that Form 704 to be 
used in proposed Sec.  150.11, the burden associated with the form has 
increased.\976\
---------------------------------------------------------------------------

    \974\ CL-APGA-59722 at 10.
    \975\ CL-EDF-59961 at 6.
    \976\ CL-EEI-EPSA-60925 at 9.
---------------------------------------------------------------------------

    One commenter highlighted discrepancies between the instructions 
for Form 704 and the data on the sample Form 704. The commenter noted 
that instructions for column five request the ``Cash commodity same as 
(S) or cross-hedged (C-H) with Core Reference Futures Contract (CFRC)'' 
while the sample Form 704 lists ``CL-NYMEX'' as the information 
reported in that column. The commenter also noted that Form 704 has 
eleven columns, while the sample Form 704 contains only ten columns, 
omitting a column for ``Core Referenced Futures contract (CRFC).'' 
\977\
---------------------------------------------------------------------------

    \977\ CL-FIA-59595 at 39.
---------------------------------------------------------------------------

    The commenter also requested that the Commission clarify 
instructions for column six of proposed Form 704 to permit a reasonable 
estimate of anticipated production (or other anticipatory hedge) based 
on commercial experience, in the event the market participant does not 
have three years of data related to the anticipated hedge, for example, 
of anticipated production of a newly developed well.\978\
---------------------------------------------------------------------------

    \978\ CL-FIA-59595 at 39.
---------------------------------------------------------------------------

    Commission Reproposal: As discussed in the December 2013 Position 
Limits Proposal, the Commission remains concerned about distinguishing 
between anticipatory reduction of risk and speculation.\979\ Therefore, 
the Commission is again proposing the requirement to file Form 704 for 
anticipatory hedges. The Commission notes that most of the information 
required on Form 704 is currently required under Sec.  1.48, and that 
such information is not found in any other Commission data source, 
including Form 204.
---------------------------------------------------------------------------

    \979\ See December 2013 Position Limits Proposal, 78 FR at 
75746.
---------------------------------------------------------------------------

    The Commission is proposing several changes to Sec.  150.7 in order 
to make the requirements for Form 704 clearer and more concise. For 
example, the Commission is adopting the commenter's suggestion to 
require the initial statement and annual update but eliminate the 
supplemental filing as proposed in Sec.  150.7(e). Current Sec.  1.48 
contains a requirement for supplemental filings similar to proposed 
Sec.  150.7(e), but unlike current Sec.  1.48, the proposed rules also 
require monthly reporting on Form 204 and annual updates to the initial 
statement. After considering the commenter's concerns, the Commission 
believe the monthly reporting on Form 204 and annual updates on Form 
704 will provide sufficient updates to the initial statement and is 
deleting the supplemental filing provision in proposed Sec.  150.7(e) 
to reduce the burden on filers as suggested by the commenter.
    In addition, the Commission is combining the list of required 
information on Form 704 into one section, since such information is 
almost identical for the initial statement and the required annual 
updates. In this Reproposal, two nearly identical lists of information 
have been combined into one list in Sec.  150.7(d). This reorganization 
is intended to make compliance with Sec.  150.7, including the filing 
of Form 704, simpler and easier to understand for market participants. 
Changes have been made throughout part 19 and part 150 to conform to 
the deletion of the required supplemental filing and the reorganization 
of Sec.  150.7. In particular, the Commission altered Sec.  19.01(a)(4) 
to reflect the deletion of the supplemental update and to clarify that 
persons required to file series '04 reports under Sec.  19.00(a)(1)(iv) 
must file only Form 204 as required in Sec.  150.7(e).
    Finally, the sample Form 704 found in Appendix A to part 19 has 
also been updated to reflect the combination of the initial statement 
and annual update into one section. Specifically, on proposed Form 704 
had two sections: Section A required information regarding the initial 
statement and supplemental updates and Section B was required for 
annual updates. Due to the above-mentioned changes, Section B has been 
deleted and Section A has been re-labeled as requiring information 
regarding both the initial statement and the annual update. In order to 
differentiate between a firm's initial statement and its annual updates 
regarding the same, the Commission has added a check-box field that 
requires traders to identify whether they are filing Form 704 to submit 
an initial statement or to file the required annual update. The 
Commission believes the addition of this field poses no significant 
additional burden; rather, the Commission believes the changes to the 
form, as discussed above, reduce burden to a far greater extent than a 
minor addition of a check box adds burden.
    In response to the commenter who suggested the Commission consider 
target special calls and other alternatives to the annual and monthly 
filings, the Commission believes these filings are critical to the 
Commission's Surveillance program. Anticipatory hedges, because they 
are by definition forward-looking, require additional detail regarding 
the firm's commercial practices in order to ensure that a firm is not 
using the provisions in proposed Sec.  150.7 to evade position limits. 
In contrast, special calls are backward-looking and would not provide 
the Commission's Surveillance program with the information needed to 
prevent markets from being susceptible to excessive speculation. 
However, the Commission expects the new filing requirements to be an 
improvement over current practice under Sec.  1.48 because as facts and 
circumstances change, Surveillance will have a more timely 
understanding of the market participant's hedging needs.
    The Commission notes in response to the commenter that Form 704 is 
filed in anticipation of risk to be assumed at a future date; market 
participants will need to provide a detailed description of anticipated 
activity but there is no requirement to analyze individual transactions 
or submit a memorandum.
    The Commission also notes that concerns regarding a firm having to 
decline business, because an exemption has not been approved, are 
unwarranted. Series '04 reports (other than the initial statement of 
Form 704) are self-effectuating and do not require Commission 
notification to become effective. With respect to Form 704, the 
Commission explained in the December 2013 Position Limits Proposal that 
if the Commission does not notify a market participant within the 
timeframe indicated in Sec.  150.7(b), the filing becomes effective 
automatically.\980\
---------------------------------------------------------------------------

    \980\ See the December 2013 Position Limits Proposal, 78 FR at 
75746: ``Under proposed Sec.  150.7(b), the Commission may reject 
all or a portion of the position as not meeting the requirements for 
bona fide hedging positions under Sec.  150.1. . . . Otherwise, Form 
704 filings that conform to the requirements set forth in proposed 
Sec.  150.7 would become effective ten days after submission.''
---------------------------------------------------------------------------

    The commenter is correct in noting that there is an error on the 
Sample Form 704 such that column five (``Core Referenced Futures 
Contract (CRFC)'') was inadvertently omitted from the Sample Form 
provided in the proposed rules. The Commission is amending the Sample 
Form 704 in the reproposed rules to ensure it accurately reflects the 
requirements of the Form 704 as described in Sec.  150.7(d). Further, 
the Commission is deleting the condition that requires the specified 
operating

[[Page 96812]]

period may not exceed one year for agricultural commodities, as end-
users in certain agricultural commodities may hedge their positions 
several years out along the curve.
    The Commission notes, in response to the commenter's concern 
regarding column 6 of Form 704, that the requirement to file the past 
three years of annual production is also in current Sec.  1.48. 
Understanding the recent history of a firm's production is necessary to 
ensure the requested anticipated hedging amount is reasonable. However, 
the Commission notes that it may permit a reasonable, supported 
estimate of anticipated production for less than three years of annual 
production data, in the Commission's discretion, if a market 
participant does not have three years of data. The Commission is 
amending the form instructions to clarify that Commission staff could 
determine that such an estimate is reasonable and so would be accepted.
    Finally, the Commission notes that several references to other 
provisions within part 150 contained in Sec. Sec.  150.7(b), 150.7(d), 
and 150.7(h) were incorrectly cited in the December 2013 Position 
Limits Proposal; the Commission is revising these paragraphs to ensure 
all references are up-to-date and correct.
2. Delegation
    Proposed Rule: In Sec.  150.7(i), the Commission proposed to 
delegate to the Division of Market Oversight director or staff the 
authority: To provide notice to a firm who has filed Form 704 that they 
do not meet the requirements for bona fide hedging; to request 
additional or updated information under Sec.  150.7(c); and to request 
under Sec.  150.7(d)(2) information concerning the basis for and 
derivation of conversion factors used in computing the position 
information provided in Form 704.
    Comments Received: The Commission received no comments on the 
proposed delegation of authority under Sec.  150.7.
    Commission Reproposal: The Commission is reproposing Sec.  
150.7(i), as originally proposed.

G. Sec.  150.9--Process for Recognition of Positions as Non-Enumerated 
Bona Fide Hedging Positions

1. Overview of Proposed Rules Related to Recognition of Bona Fide 
Hedging Positions and Granting of Spread Exemptions
    In the 2016 Supplemental Position Limits Proposal, the Commission 
noted that it was proposing three sets of Commission rules under which 
an exchange could take action to recognize certain bona fide hedging 
positions and to grant certain spread exemptions, with regard to both 
exchange-set and federal position limits.\981\ The Commission pointed 
out that in each case, the proposed rules would establish a formal CFTC 
review process that would permit the Commission to revoke all such 
exchange actions.
---------------------------------------------------------------------------

    \981\ See generally 2016 Supplemental Position Limits Proposal, 
81 FR at 38464-82; the Commission incorporates herein its 
explanation of its proposed adoption of Sec. Sec.  150.9, 150.10 and 
150.11. Under the proposal, exchanges would be able to: (i) 
Recognize certain non-enumerated bona fide hedging positions, i.e., 
positions that are not enumerated by the Commission's rules 
(pursuant to proposed Sec.  150.9); (ii) grant exemptions to 
position limits for certain spread positions (pursuant to proposed 
Sec.  150.10); and (iii) recognize certain enumerated anticipatory 
bona fide hedging positions (pursuant to proposed Sec.  150.11).
---------------------------------------------------------------------------

    As the Commission observed at that time, its authority to permit 
certain exchanges to recognize positions as bona fide hedging positions 
is found, in part, in CEA section 4a(c)(1), and under CEA section 
8a(5), which provides that the Commission may make such rules as, in 
the judgment of the Commission, are reasonably necessary to effectuate 
any of the provisions or to accomplish any of the purposes of the CEA. 
CEA section 4a(c)(1) provides that no CFTC rule applies to 
``transaction or positions which are shown to be bona fide hedging 
transactions or positions,'' as those terms are defined by Commission 
rule consistent with the purposes of the CEA.\982\ The Commission noted 
that ``shown to be'' is passive voice, which could encompass either a 
position holder or an exchange being able to ``show'' that a position 
is entitled to treatment as a bona fide hedging position, and does not 
specify that the Commission must determine in advance whether the 
position or transaction was shown to be bona fide. The Commission 
interpreted CEA section 4a(c)(1) to authorize the Commission to permit 
certain SROs (i.e., DCMs and SEFs, meeting certain criteria) to 
recognize positions as bona fide hedging positions for purposes of 
federal limits, subject to Commission review.
---------------------------------------------------------------------------

    \982\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38464.
---------------------------------------------------------------------------

    The Commission observed that for decades, exchanges have operated 
as self-regulatory organizations, and pointed out further that these 
self-regulatory organizations have been charged with carrying out 
regulatory functions, including, since 2001, complying with core 
principles, and operate subject to the regulatory oversight of the 
Commission pursuant to the CEA as a whole, and more specifically, CEA 
sections 5 and 5h.\983\ In addition, the Commission pointed out that as 
self-regulatory organizations, exchanges do not act only as 
independent, private actors; \984\ when the Act is read as a whole, as 
the Commission noted in 1981, ``it is apparent that Congress envisioned 
cooperative efforts between the self-regulatory organizations and the 
Commission. Thus, the exchanges, as well as the Commission, have a 
continuing responsibility in this matter under the Act.'' \985\ The 
Commission

[[Page 96813]]

noted that its approach to its oversight of its SROs was subsequently 
ratified by Congress in 1982, when it gave the CFTC authority to 
enforce exchange set limits. Further, the Commission observed that as 
it stated in 2010, ``since 1982, the Act's framework explicitly 
anticipates the concurrent application of Commission and exchange-set 
speculative position limits. The Commission further noted that the 
`concurrent application of limits is particularly consistent with an 
exchange's close knowledge of trading activity on that facility and the 
Commission's greater capacity for monitoring trading and implementing 
remedial measures across interconnected commodity futures and option 
markets.' '' \986\
---------------------------------------------------------------------------

    \983\ Id. at 38465. The Commission noted that CFTC Sec.  1.3(ee) 
defines SRO to mean a DCM, SEF, or registered futures association 
(such as the National Futures Association), and also pointed out 
that under the Commission's regulations, self-regulatory 
organizations have certain delineated regulatory responsibilities, 
which are carried out under Commission oversight and which are 
subject to Commission review. Id.
    \984\ Id. The Commission stated that it ``views as instructive'' 
three examples of case law addressing grants of authority by an 
agency (the Securities and Exchange Commission, the `SEC') to a 
self-regulatory organization (`SRO') (in the SEC cases the SRO was 
NASD, now FINRA), providing insight into the factors addressed by 
the court regarding oversight of an SRO;
    (i) In 1952, the Second Circuit reviewed an SEC order that 
failed to set aside a penalty fixed by NASD suspending the defendant 
broker-dealer from membership. Citing Sunshine Anthracite Coal Co. 
v. Adkins, 310 U.S. 381 (1940), the Second Circuit found that, in 
light of the statutory provisions vesting the SEC with power to 
approve or disapprove NASD's rules according to reasonably fixed 
statutory standards, and the fact that NASD disciplinary actions are 
subject to SEC review, there was `no merit in the contention that 
the Maloney Act unconstitutionally delegates power to the NASD.' 
R.H. Johnson v. Securities and Exchange Commission, 198 F. 2d 690, 
695 (2d Cir. 1952).
    (ii) In 1977, the Third Circuit, in Todd & Co. v. Securities and 
Exchange Commission (`Todd'), 557 F.2d 1008 (3rd Cir. 1977), 
likewise concluded that the Act did not unconstitutionally delegate 
legislative power to a private institution. The Todd court 
articulated critical factors that kept the Maloney Act within 
constitutional bounds. First, the SEC had the power, according to 
reasonably fixed statutory standards, to approve or disapprove 
NASD's rules before they could go into effect. Second, all NASD 
judgments of rule violations or penalty assessments were subject to 
SEC review. Third, all NASD adjudications were subject to a de novo 
(non-deferential) standard of review by the SEC, which could be 
aided by additional evidence, if necessary. Id. at 1012. Based on 
these factors, the court found that `[NASD's] rules and its 
disciplinary actions were subject to full review by the SEC, a 
wholly public body, which must base its decision on its own 
findings' and thus that the statutory scheme was constitutional. Id. 
at 1012-13. See also First Jersey Securities v. Bergen, 605 F.2d 690 
(1979), applying the same three-part test delineated in Todd, and 
then upholding a statutory narrowing of the Todd test.
    (iii) In 1982, the Ninth Circuit considered the 
constitutionality of Congress' delegation to NASD in Sorrel v. 
Securities and Exchange Commission, 679 F. 2d 1323 (9th Cir. 1982). 
Sorrel followed R.H. Johnson, Todd and First Jersey in holding that 
because the SEC reviews NASD rules according to reasonably fixed 
standards, and the SEC can review any NASD disciplinary action, the 
Maloney Act does not impermissibly delegate power to NASD.''
    \985\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38465.
    \986\ Id. at 38466.
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    The Commission also noted that under its proposal, it would retain 
the power to approve or disapprove the rules of exchanges, under 
standards set out pursuant to the CEA, and to review an exchange's 
compliance with those rules.\987\ Moreover, the Commission observed 
that it was not diluting its ability to recognize or not recognize bona 
fide hedging positions or to grant or not grant spread exemptions, as 
it reserved to itself the ability to review any exchange action, and to 
review any application by a market participant to an exchange, whether 
prior to or after disposition of such application by an exchange.
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    \987\ The Commission stated that ``In connection with 
recognition of bona fide hedging positions, the Commission notes 
that the statute is silent or ambiguous with respect to the specific 
issue--whether the CFTC may authorize SROs to recognize positions as 
bona fide hedging positions. CEA section 4a(c) provides that no 
Commission rule establishing federal position limits applies to 
positions which are shown to be bona fide hedging positions, as such 
term shall be defined by the CFTC. As noted above, the `shown to be' 
phrase is passive voice, which could encompass either a position 
holder or an exchange being able to ``show'' that a position is 
entitled to treatment as a bona fide hedge, and does not specify 
that the Commission must be the party determining in advance whether 
the position or transaction was shown to be bona fide; the 
Commission interprets that provision to permit certain SROs (i.e., 
DCMs and SEFs, meeting certain criteria) to recognize positions as 
bona fide hedges for purposes of federal limits when done so within 
a regime where the Commission can review and modify or overturn such 
determinations. Under the 2016 Position Limits Supplemental 
Proposal, an SRO's recognition is tentative, because the Commission 
would reserve the power to review the recognition, subject to the 
reasonably fixed statutory standards in CEA section 4a(c)(2) 
(directing the CFTC to define the term bona fide hedging position). 
An SRO's recognition would also be constrained by the SRO's rules, 
which would be subject to CFTC review under the proposal. The SROs 
are parties that are subject to Commission authority, their rules 
are subject to Commission review and their actions are subject to 
Commission de novo review under the proposal--SRO rules and actions 
may be changed by the Commission at any time.'' Id.
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2. Proposed Sec.  150.9--General
    Proposed Rule: In light of DCM experience in granting non-
enumerated bona fide hedging position exemptions to exchange-set 
position limits for futures contracts, and after consideration of 
comments recommending exchange review of non-enumerated bona fide 
hedging position requests, the Commission proposed to permit exchanges 
to recognize non-enumerated bona fide hedging positions with respect to 
the proposed federal speculative position limits. Under proposed Sec.  
150.9, an exchange, as an SRO \988\ that is under Commission oversight 
and whose rules are subject to Commission review,\989\ could establish 
rules under which the exchange could recognize as non-enumerated bona 
fide hedging positions, positions that meet the general definition of 
bona fide hedging position in proposed Sec.  150.1, which implements 
the statutory directive in CEA section 4a(c) for the general definition 
of bona fide hedging positions in physical commodities.\990\ The 
exchange's recognition would be subject to review by the Commission. 
Exchange recognition of a position as a non-enumerated bona fide 
hedging position would allow the market participant to exceed the 
federal position limit to the extent that it relied upon the exchange's 
recognition unless and until such time that the Commission notified the 
market participant to the contrary.\991\ The Commission could issue 
such a notification in accordance with the proposed review procedures. 
That is, if a party were to hold positions pursuant to a non-enumerated 
bona fide hedging position recognition granted by the exchange, such 
positions would not be subject to federal position limits, unless or 
until the Commission were to determine that such non-enumerated bona 
fide hedging position recognition was inconsistent with the CEA or CFTC 
regulations thereunder. Under this framework, the Commission would 
continue to exercise its authority in this regard by reviewing an 
exchange's determination and verifying whether the facts and 
circumstances in respect of a derivative position satisfy the 
requirements of the general definition of bona fide hedging position 
proposed in Sec.  150.1.\992\ If the Commission determined that the 
exchange-granted recognition was inconsistent with section 4a(c) of the 
Act and the Commission's general definition of bona fide hedging 
position in Sec.  150.1 and so notified a market participant relying on 
such recognition, the market participant would be required to reduce 
the derivative position or otherwise come into compliance with position 
limits within a commercially reasonable amount of time.
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    \988\ As noted above, under the Commission's regulations, SROs 
have certain delineated regulatory responsibilities, which are 
carried out under Commission oversight and which are subject to 
Commission review. See also 2016 Position Limits Supplemental 
Proposal, n. 126 (describing reviews of DCMs carried out by the 
Commission).
    \989\ See CEA section 5c(c), 7 U.S.C. 7a-2(a) (providing 
Commission with authority to review rules and rule amendments of 
registered entities, including DCMs).
    \990\ As previously noted, Congress has required in CEA section 
4a(c) that the Commission, within specific parameters, define what 
constitutes a bona fide hedging position for the purpose of 
implementing federal position limits on physical commodity 
derivatives, including, as previously stated, the inclusion in new 
section 4a(c)(2) of a directive to narrow the bona fide hedging 
definition for physical commodity positions from that currently in 
Commission regulation Sec.  1.3(z). See 2016 Supplemental Position 
Limits Proposal, nn. 32 and 105 and accompanying text; see also 
December 2013 Positions Limits Proposal at 75705. In response to 
that mandate, the Commission proposed in its December 2013 Position 
Limits Proposal to add a definition of bona fide hedging position in 
Sec.  150.1, to replace the definition in current Sec.  1.3(z). See 
78 FR at 75706, 75823.
    For the avoidance of doubt, the Commission is still reviewing 
comments received on these provisions. The Commission is proposing 
to finalize the general definition of bona fide hedging position 
based on the standards of CEA section 4a(c), and may further define 
the bona fide hedging position definition consistent with those 
standards.
    \991\ See generally the discussion of proposed Sec.  150.9(d) 
and the requirements regarding the review of applications by the 
Commission in the 2016 Position Limits Supplemental Proposal. The 
Commission noted that exchange participation is voluntary, not 
mandatory and that exchanges could elect not to administer the 
process. Market participants could still request a staff 
interpretive letter under Sec.  140.99 or seek exemptive relief 
under CEA section 4a(a)(7), per the December 2013 Position Limits 
Proposal. The process does not protect exchanges or applicants from 
charges of violations of applicable sections of the CEA or other 
Commission regulations. For instance, a market participant's 
compliance with position limits or an exemption thereto would not 
confer any type of safe harbor or good faith defense to a claim that 
he had engaged in an attempted manipulation, a perfected 
manipulation or deceptive conduct; see the discussion of Sec.  150.6 
(Ongoing application of the Act and Commission regulations) as 
proposed in the December 2013 Position Limits Proposal, 78 FR at 
75746-7.
    \992\ See the general discussion of the Commission's review 
process proposed in Sec.  150.9(d); see also the requirement for a 
weekly report, proposed in Sec.  150.9(c), which would support the 
Commission's surveillance program by facilitating the tracking of 
non-enumerated bona fide hedging positions recognized by exchanges, 
keeping the Commission informed of the manner in which an exchange 
is administering its procedures for recognizing such non-enumerated 
bona fide hedging positions.
---------------------------------------------------------------------------

    The Commission noted its belief that permitting exchanges to so 
recognize non-enumerated bona fide hedging positions is consistent with 
its statutory

[[Page 96814]]

obligation to set and enforce position limits on physical commodity 
contracts, because the Commission would be retaining its authority to 
determine ultimately whether any non-enumerated bona fide hedging 
positions so recognized is in fact a bona fide hedging position. The 
Commission's authority to set position limits does not extend to any 
position that is shown to be a bona fide hedging position.\993\ 
Further, most, if not all, DCMs already have a framework and 
application process to recognize non-enumerated positions, for purposes 
of exchange-set limits, as within the meaning of the general bona fide 
hedging definition in Sec.  1.3(z)(1).\994\ The Commission has a long 
history of overseeing the performance of the DCMs in granting 
exemptions under current exchange rules regarding exchange-set position 
limits \995\ and believed that it would be efficient and in the best 
interest of the markets, in light of current resource constraints,\996\ 
to rely on the exchanges to initially process applications for 
recognition of positions as non-enumerated bona fide hedging positions. 
In addition, because many market participants are familiar with current 
DCM practices regarding bona fide hedging positions, permitting DCMs to 
build on current practice may reduce the burden on market participants. 
Moreover, the Commission believed that the process outlined in the 2016 
Position Limits Supplemental Proposal should reduce duplicative efforts 
because market participants seeking recognition of a non-enumerated 
bona fide hedging position would be able to file one application for 
relief, only to an exchange, rather than to both an exchange with 
respect to exchange-set limits and to the Commission with respect to 
federal limits.\997\
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    \993\ CEA section 4a(c)(1), 7 U.S.C. 6a(c)(1). See also 2016 
Position Limits Supplemental Proposal, n. 65.
    \994\ Rulebooks for some DCMs can be found in the links to their 
associated documents on the Commission's Web site at http://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=TradingOrganizations.
    \995\ The Commission based this view on its long experience 
overseeing DCMs and their compliance with the requirements of CEA 
section 5 and part 38 of the Commission's regulations, 17 CFR part 
38. As the Commission noted in the 2016 Supplemental Position Limits 
Proposal, under part 38, a DCM must comply, on an initial and 
ongoing basis, with twenty-three Core Principles established in 
section 5(d) of the CEA, 7 U.S.C. 7(d), and part 38 of the CFTC's 
regulations and with the implementing regulations under part 38. The 
Division of Market Oversight's Market Compliance Section conducts 
regular reviews of each DCM's ongoing compliance with core 
principles through the self-regulatory programs operated by the 
exchange in order to enforce its rules, prevent market manipulation 
and customer and market abuses, and ensure the recording and safe 
storage of trade information. These reviews are known as rule 
enforcement reviews (``RERs''). Some periodic RERs examine a DCM's 
market surveillance program for compliance with Core Principle 4, 
Monitoring of Trading, and Core Principle 5, Position Limitations or 
Accountability. On some occasions, these two types of RERs may be 
combined in a single RER. Market Compliance can also conduct 
horizontal RERs of the compliance of multiple exchanges in regard to 
particular core principles. In conducting an RER, the Division of 
Market Oversight (DMO) staff examines trading and compliance 
activities at the exchange in question over an extended time period 
selected by DMO, typically the twelve months immediately preceding 
the start of the review. Staff conducts extensive review of 
documents and systems used by the exchange in carrying out its self-
regulatory responsibilities; interviews compliance officials and 
staff of the exchange; and prepares a detailed written report of 
findings. In nearly all cases, the RER report is made available to 
the public and posted on CFTC.gov. See materials regarding RERs of 
DCMs at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/dcmruleenf on the Commission's Web site. Recent RERs conducted 
by DMO covering DCM Core Principle 5 and exemptions from position 
limits have included the Minneapolis Grain Exchange, Inc. (``MGEX'') 
(June 5, 2015), ICE Futures U.S. (July 22, 2014), the Chicago 
Mercantile Exchange (``CME'') and the Chicago Board of Trade 
(``CBOT'') (July 26, 2013), and the New York Mercantile Exchange 
(May 19, 2008). While DMO may sometimes identify deficiencies or 
make recommendations for improvements, it is the Commission's view 
that it should be permissible for DCMs to process applications for 
exchange recognition of positions as non-enumerated bona fide 
hedging positions. Consistent with the fifteen SEF core principles 
established in section 5h(f) of the CEA, 7 U.S.C. 7b-3(f), and with 
the implementing regulations under part 37, 17 CFR part 37, the 
Commission will perform similar RERs for SEFs. The Commission's 
preliminary view is that it should be permissible for SEFs to 
process applications as well, after obtaining the requisite 
experience administering exchange-set position limits discussed 
below. See 2016 Supplemental Position Limits Proposal, 81 FR at 
38469, n. 126 and accompanying text.
    \996\ Since the enactment of the Dodd-Frank Act, Commissioners, 
CFTC staff, and public officials have expressed repeatedly and 
publicly that Commission resources have not kept pace with the 
CFTC's expanded jurisdiction and increased responsibilities. The 
Commission anticipates there may be hundreds of applications for 
non-enumerated bona fide hedging positions. This is based on the 
number of exemptions currently processed by DCMs. For example, under 
the existing process, during the period from June 15, 2011 to June 
15, 2012, the Market Surveillance Department of ICE Futures U.S. 
received 142 exemption applications, 121 of which related to bona 
fide hedging position requests, while 21 related to arbitrage or 
cash-and-carry requests; 92 new exemptions were granted. Rule 
Enforcement review of ICE Futures U.S., July 22, 2014, p. 40. Also 
under the existing process, during the period from November 1, 2010 
to October 31, 2011, the Market Surveillance Group from the CME 
Market Regulation Department took action on and approved 420 
exemption applications for products traded on CME and CBOT, 
including 114 new exemptive applications, 295 applications for 
renewal, 10 applications for increased levels, and one temporary 
exemption on an inter-commodity spread. Rule Enforcement Review of 
the Chicago Mercantile Exchange and the Chicago Board of Trade, July 
26, 2013, p. 54. These statistics are now a few years old, and it is 
possible that the number of applications under the processes 
outlined in this proposal will increase relative to the number of 
applications described in the RERs. The CFTC would need to shift 
substantial resources, to the detriment of other oversight 
activities, to process so many requests and applications and has 
determined, as described below, to permit exchanges to process 
applications initially. The Commission anticipates it will 
regularly, as practicable, check a sample of the exemptions granted, 
including in cases where the facts warrant special attention, 
retrospectively as described below, including through RERs.
    \997\ One commenter specifically requested that the Commission 
streamline duplicative processes. CL-AGA-60382 at 12 (stating that 
``AGA . . . urges the Commission to ensure that hedge exemption 
requests and any hedge reporting do not require duplicative filings 
at both the exchanges and the Commission, and therefore recommends 
revising the rules to streamline the process by providing that an 
applicant need only apply to and report to the exchanges, while the 
Commission could receive any necessary data and applications by 
coordinating data flow between the exchanges and the Commission.''). 
See also CL-Working Group-60396 (explaining that ``To avoid 
employing duplicative efforts, the Commission should simply rely on 
DCMs to administer bona fide hedge exemptions from federal 
speculative position limits as they carry out their core duties to 
ensure orderly markets.'').
---------------------------------------------------------------------------

Comments Received
Exchange Authority Under the Proposal
    The Commission received some comments on its 2016 Supplemental 
Position Limits Proposal that addressed concerns only marginally 
responsive to that proposal; the Commission will address those comments 
in connection with the relevant provisions.\998\
---------------------------------------------------------------------------

    \998\ One commenter expressed the view that Class III milk 
should not be subject to the prohibition on holding cross commodity 
hedge positions in the spot month or during the last five days, 
because it is a cash settled contract. CL-DFA-60927 at 5. The 
Commission is addressing Class III milk separately.
---------------------------------------------------------------------------

    Several commenters supported the Commission's proposal to allow 
exchanges to recognize non-enumerated bona fide hedge positions with 
respect to federal speculative position limits; \999\ on the other 
hand, some commenters expressed views against any Commission 
involvement in the exchange-administered exemption process. That is, 
according to those commenters, exchanges should be given full 
discretion or greater leeway to manage an exemption process without 
Commission interference.\1000\ In addition, a commenter requested that 
the Commission provide additional regulatory certainty for end-users, 
including that the Commission should simply expand the DCM's current 
authority to grant bona fide hedge exemptions and maintain the 
Commission's current oversight role in respect of DCM processes and 
rules under the DCM Core Principles.\1001\
---------------------------------------------------------------------------

    \999\ CL-NMPF-60956 at 2; CL-ISDA-60931 at 6-7; CL-API-60939 at 
4; CL-NFP-60942 at 6-8; and CL-IECAssn-60949 at 3-4.
    \1000\ CL-CME-60926 at 7; CL-NGFA-60941 at 3.
    \1001\ CL-NFP-60942 at 6-8.
---------------------------------------------------------------------------

    Similarly, some commenters expressed the view that there could be 
circumstances where multiple

[[Page 96815]]

commercial firms face similar risks and require recognition of 
positions as non-enumerated bona fide hedges for the same purpose, and 
there should be a method for a generic recognition of non-enumerated 
bona fide hedge positions for commercial firms meeting satisfy 
specified facts and circumstances, allowing an exchange to announce 
generic recognition of non-enumerated bona fide hedges for hedgers that 
satisfy certain facts and circumstances; to allow exchange to announce 
generic recognition for hedgers that certain specified facts.\1002\
---------------------------------------------------------------------------

    \1002\ CL-EEI-EPSA-60925 at 9 (noting also that ``unlike a hedge 
exemption, the exchanges are not granting a firm specific quantity 
of bona fide hedging contracts but, rather, are validating the bona 
fide nature of a hedge transaction''); CL-COPE-60932 at 8-9 
(recommending that ``[t]he Supplemental NOPR should be revised to 
permit the DCM to generically recognize a non-enumerated bona fide 
hedge in cases where multiple commercial firms have sought a non-
enumerated bona fide hedge for a similar risk, based upon similar 
circumstances.'').
---------------------------------------------------------------------------

    Others did not support providing exchanges with such authority. 
Instead, those commenters asserted that only the Commission can 
appropriately and comprehensively administer exemptions to federal 
limits,\1003\ or cited concerns with respect to conflicts of interest 
that could arise between for-profit exchanges and their exemption-
seeking customers.\1004\ In the alternative, several of these 
commenters recommended that the Commission make any final non-
enumerated bona fide hedging position determinations, or that exchanges 
have a limited advisory role with respect to granting exemptions. One 
commenter expressed the view that it is concerned that the Commission's 
constrained resources will prevent the Commission from effectively 
overseeing self-regulatory organizations' recognition of bona fide 
hedging position exemptions. The commenter suggested that the 
Commission at least provide guidance regarding what is the Commission's 
authority in the event that an exchange-managed position accountability 
level fails in numerous contracts to prevent speculation, or raises 
other concerns.\1005\ Further to this point, the commenter expressed 
the view that it was concerned that granting exemptions from position 
limits for swaps that are traded by high frequency trading strategies 
will exacerbate price volatility to the detriment of commercial hedgers 
by increasing momentum or rumor trading and the costs of hedging in 
such a price volatile environment. The commenter believes that this 
will impact the Commission's ability to review and oversee exchange 
exemptions, especially if the Commission does not have access to open 
interest swap data and the intra-day high frequency trading data to 
determine whether such exchange-granted exemption is economically 
appropriate.\1006\
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    \1003\ CL-Better Markets-60928 at 3-5; CL-Public Citizen-60940 
at 3; CL-PMAA-NEFI-60952 at 2; CL-AFR-60953 at 2-3; CL-RER1-60961 at 
1.
    \1004\ CL-Public Citizen-60940 at 3; CL-PMAA-NEFI-60952 at 2; 
CL-RER2-60962 at 1; CL-AFR-60953 at 2-3; CL-RER1-60961 at 1; CL-
PMAA-NEFI-60952 at 2; CL-RER2-60962 at 1; CL-Better Markets-60928 at 
3-5; CL-Public Citizen-60940 at 1-2; CL-AFR-60953 at 3-4.
    \1005\ CL-IATP-60951 at 2.
    \1006\ CL-IATP-60951 at 6.
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Implementation Timeline
    Regarding implementation of final regulations, one commenter 
requested that the CFTC provide a sufficient phase-in period for 
exchanges to review non-enumerated hedges ahead of implementation 
because it is hard to discern the number of current positions that will 
not be considered bona fide hedging positions in the proposed rule 
unless granted a non-enumerated bona fide hedging position e exemption 
from an exchange.\1007\
---------------------------------------------------------------------------

    \1007\ CL-NCFC-60930 at 5.
---------------------------------------------------------------------------

Commission Reproposal Regarding Sec.  150.9
    As explained further below, in this Reproposal, the Commission is 
adopting certain amendments to the proposed Sec.  150.9 and providing 
certain clarifications. In response to various general comments and 
recommendations for the non-enumerated bona fide hedging position 
process, the Commission provides the following responses.
Exchange Authority Under Reproposed Sec.  150.9
    In response to comments that the Commission should give exchanges 
greater leeway or discretion for purposes of federal position limits in 
the exemption process and expand DCM's current authority to grant bona 
fide hedge exemptions, the Commission believes, as noted above, that it 
would be an illegal delegation to give full discretion to exchanges to 
recognize positions or transactions as bona fide hedging positions, for 
purposes of federal position limits, without reasonably fixed statutory 
standards (such as the requirement that exchanges use the Commission's 
bona fide hedging position definition, which incorporates the standards 
of CEA section 4a(c)), and with no ability for the Commission to make a 
de novo review.\1008\ Instead, as observed above, the Commission 
believes it has the authority to provide exchanges with the ability to 
do so pursuant to reasonably fixed statutory standards and subject to 
CFTC de novo review.\1009\
---------------------------------------------------------------------------

    \1008\ See supra section G.1. (discussing the Commission's 
authority to adopt Sec.  150.9); see also discussion regarding 
adoption of Sec.  150.9(d).
    \1009\ As observed above, the Second Circuit found in Sunshine 
Anthracite Coal Co. v. Adkins, that in light of statutory provisions 
vesting the SEC with power to approve or disapprove NASD's rules 
according to reasonably fixed statutory standards, and the fact that 
NASD disciplinary actions are subject to SEC review, there was ``no 
merit in the contention that the Maloney Act unconstitutionally 
delegates power to the NASD.'' R.H. Johnson v. Securities and 
Exchange Commission, 198 F. 2d 690, 695 (2d Cir. 1952). See supra 
discussion under preamble section G.1; see also preamble discussion 
regarding the adoption of Sec.  150.9(d).
---------------------------------------------------------------------------

    Similarly, regarding requests to provide exchanges with a method 
for a generic recognition of a non-enumerated bona fide hedging 
position that allows an exchange to announce generic recognition of 
non-enumerated bona fide hedging positions for hedgers that satisfy 
certain facts and circumstances, the Commission notes that, as 
discussed above, it would be an illegal delegation of Commission 
authority to give full discretion to exchanges to recognize positions 
or transactions as enumerated bona fide hedging positions without 
reasonably fixed statutory standards, and without review by the 
Commission, for purposes of federal position limits. Instead, the 
Commission points out that any exchange can petition the Commission 
under Sec.  13.2 for recognition of a typical position as an enumerated 
bona fide hedging position if the exchange believes there is a fact 
pattern that is so certain as to not require a facts and circumstances 
review.
    In this light, the Commission is reproposing a consistent approach, 
subject to amendments described below, for processing recognitions of 
bona fide hedging positions for purposes of federal position limits 
(i.e., a standard process that the Commission, exchanges and market 
participants know and understand). As was noted in the 2016 Position 
Limits Proposal, the Commission believes that the consistent approach 
under reproposed Sec.  150.9 should increase administrative certainty 
for applicants seeking recognition of non-enumerated bona fide hedging 
positions in the form of reduced application-production time by market 
participants and reduced response time by exchanges and reduce 
duplicative efforts because applicants would be saved the expense of 
applying to both an exchange for relief from exchange-set

[[Page 96816]]

position limits and to the Commission for relief from federal 
limits.\1010\
---------------------------------------------------------------------------

    \1010\ See, e.g., 2016 Position Limits Proposal at 38470, 38488.
---------------------------------------------------------------------------

    The Commission, however, clarifies that exchanges can recognize 
strategies as non-enumerated bona fide hedging positions for purposes 
of federal position limits (including those that the Commission has not 
enumerated) so long as a facts-and-circumstances review leads the 
exchange to believe that such strategies meet the definition of bona 
fide hedging position. Further, regarding comments that exchanges 
should not have authority to grant exemptions, the Commission disagrees 
and believes the exchange's experience administering position limits to 
its actively traded contract, and the Commission's de novo review of 
exchange determinations that positions are bona fide hedging positions 
(afterwards) are adequate to guard against or remedy any conflicts of 
interest. The Commission points out that it has had a long history of 
cooperative enforcement of position limits with DCMs and, in addition 
notes that when recognizing non-enumerated bona fide hedging positions 
for purposes of federal limits, exchanges are required to use the 
Commission's bona fide hedging position definition.\1011\
---------------------------------------------------------------------------

    \1011\ See Sec.  150.9(a)(1).
---------------------------------------------------------------------------

    As to the concerns that allowing bona fide hedging position 
determinations for swap positions that are traded by high frequency 
trading strategies will exacerbate price volatility to the detriment of 
commercial hedgers and impact the Commission's ability to review and 
oversee exchange determinations (especially if the Commission does not 
have access to open interest swap data and the intra-day high frequency 
trading data to determine whether such exchange-granted determination 
is economically appropriate), the Commission notes that it does have 
access to open interest swap data, trade data and order data. The 
Commission views its access to open interest swap data, trade data and 
order data as well as its ability under Sec.  150.9 to review all 
exchange recognitions as sufficient to allow it to carry out its 
responsibilities under the Act.
General Reproposal Under Sec.  150.9
    Regarding implementation timing, the Commission is proposing to 
implement a delayed compliance date after publication of a final rule, 
as discussed above.\1012\
---------------------------------------------------------------------------

    \1012\ See discussion under Proposed Compliance Date, above; see 
also Sec.  150.2(e)(1).
---------------------------------------------------------------------------

3. Proposed Sec.  150.9(a)--Requirements for a Designated Contract 
Market or Swap Execution Facility To Recognize Non-Enumerated Bona Fide 
Hedging Positions
a. Proposed Sec.  150.9(a)(1)
Proposed Rule
    The Commission contemplated in proposed Sec.  150.9(a)(1) that 
exchanges may voluntarily elect to process non-enumerated bona fide 
hedging position applications by filing new rules or rule amendments 
with the Commission pursuant to part 40 of the Commission's 
regulations. The Commission anticipated that, consistent with current 
practice, most exchanges will self-certify such new rules or rule 
amendments pursuant to Sec.  40.6. The Commission expected that the 
self-certification process should be a low burden for exchanges, 
especially for those that already recognize non-enumerated positions 
meeting the general definition of bona fide hedging position in Sec.  
1.3(z)(1).\1013\ The Commission explained its view that allowing DCMs 
to continue to follow current practice, and extend that practice to 
exchange recognition of non-enumerated bona fide hedging positions for 
purposes of the federal position limits, would permit the Commission to 
more effectively allocate its limited resources to oversight of the 
exchanges' actions.\1014\
---------------------------------------------------------------------------

    \1013\ DCMs currently process applications for exemptions from 
exchange-set position limits for non-enumerated bona fide hedging 
positions and enumerated anticipatory bona fide hedges, as well as 
for exemptions from exchange-set position limits for spread 
positions, pursuant to CFMA-era regulatory guidance. See 2016 
Supplemental Position Limits Proposal, n. 102, and accompanying 
text. This practice continues because, among other things, the 
Commission has not finalized the rules proposed in the December 2013 
Position Limits Proposal.
    As noted above and as explained in the December 2013 Position 
Limits Proposal, while current Sec.  150.5 regarding exchange-set 
position limits pre-dates the CFMA ``the CFMA core principles regime 
concerning position limitations or accountability for exchanges had 
the effect of undercutting the mandatory rules promulgated by the 
Commission in Sec.  150.5. Since the CFMA amended the CEA in 2000, 
the Commission has retained Sec.  150.5, but only as guidance on, 
and acceptable practice for, compliance with DCM core principle 5.'' 
December 2013 Position Limits Proposal, 78 FR at 75754.
    The DCM application processes for bona fide hedging position 
exemptions from exchange-set position limits generally reference or 
incorporate the general definition of bona fide hedging position 
contained in current Sec.  1.3(z)(1), and the Commission believes 
the exchange processes for approving non-enumerated bona fide 
hedging position applications are at least to some degree informed 
by the Commission process outlined in current Sec.  1.47.
    \1014\ If the Commission becomes concerned about an exchange's 
general processing of non-enumerated bona fide hedging position 
applications, the Commission may review such processes pursuant to a 
periodic rule enforcement review or a request for information 
pursuant to Sec.  37.5. Separately, under proposed Sec.  150.9(d), 
the proposal provides that the Commission may review a DCM's 
determinations in the case of any specific non-enumerated bona fide 
hedging position application.
---------------------------------------------------------------------------

    Proposed Sec.  150.9(a)(1) provided that exchange rules must 
incorporate the general definition of bona fide hedging position in 
Sec.  150.1. It also provided that, with respect to a commodity 
derivative position for which an exchange elects to process non-
enumerated bona fide hedging position applications, (i) the position 
must be in a commodity derivative contract that is a referenced 
contract; (ii) the exchange must list such commodity derivative 
contract for trading; (iii) such commodity derivative contract must be 
actively traded on such exchange; (iv) such exchange must have 
established position limits for such commodity derivative contract; and 
(v) such exchange must have at least one year of experience 
administering exchange-set position limits for such commodity 
derivative contract. The requirement for one year of experience was 
intended as a proxy for a minimum level of expertise gained in 
monitoring futures or swaps trading in a particular physical commodity.
    The Commission believed that the exchange non-enumerated bona fide 
hedging position process should be limited only to those exchanges that 
have at least one year of experience overseeing exchange-set position 
limits in an actively traded referenced contract in a particular 
commodity because an individual exchange may not be familiar enough 
with the specific needs and differing practices of the commercial 
participants in those markets for which the exchange does not list any 
actively traded referenced contract in a particular commodity. Thus, if 
a referenced contract is not actively traded on an exchange that elects 
to process non-enumerated bona fide hedging position applications for 
positions in such referenced contract, that exchange might not be 
incentivized to protect or manage the relevant commodity market, and 
its interests might not be aligned with the policy objectives of the 
Commission as expressed in CEA section 4a. The Commission expected that 
an individual exchange will describe how it will determine whether a 
particular listed referenced contract is actively traded in its rule 
submission, based on its familiarity with the specific needs and

[[Page 96817]]

differing practices of the commercial participants in the relevant 
market.\1015\
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    \1015\ For example, a DCM (``DCM A'') may list a commodity 
derivative contract (``KX,'' where ``K'' refers to contract and 
``X'' refers to the commodity) that is a referenced contract, 
actively traded, and DCM A has the requisite experience and 
expertise in administering position limits in that one contract KX. 
DCM A can therefore recognize non-enumerated bona fide hedging 
positions in contract KX. But DCM A is not limited to recognition of 
just that one contract KX-DCM A can also recognize any other 
contract that falls within the meaning of referenced contract for 
commodity X. So a market participant could, for example, apply to 
DCM A for recognition of a position in any contract that falls 
within the meaning of referenced contract for commodity X. However, 
that market participant would still need to seek separate 
recognition from each exchange where it seeks an exemption from that 
other exchange's limit for a commodity derivative contract in the 
same commodity X.
---------------------------------------------------------------------------

    The Commission was also mindful that some market participants, such 
as commercial end users in some circumstances, may not be required to 
trade on an exchange, but may nevertheless desire to have a particular 
derivative position recognized as a non-enumerated bona fide hedging 
position. The Commission noted its belief that commercial end users 
should be able to avail themselves of an exchange's non-enumerated bona 
fide hedging position application process in lieu of requesting a staff 
interpretive letter under Sec.  140.99 or seeking CEA section 4a(a)(7) 
exemptive relief. This is because the Commission believed that 
exchanges that list particular referenced contracts would have enough 
information about the markets in which such contracts trade and would 
be sufficiently familiar with the specific needs and differing 
practices of the commercial participants in such markets in order to 
knowledgeably recognize non-enumerated bona fide hedging positions for 
derivatives positions in commodity derivative contracts included within 
a particular referenced contract. The Commission also viewed this to be 
consistent with the efficient allocation of Commission resources.
    Consistent with the restrictions regarding the offset of risks 
arising from a swap position in CEA section 4a(c)(2)(B), proposed Sec.  
150.9(a)(1) would not permit an exchange to recognize a non-enumerated 
bona fide hedging position involving a commodity index contract and one 
or more referenced contracts. That is, an exchange may not recognize a 
non-enumerated bona fide hedging position where a bona fide hedging 
position could not be recognized for a pass through swap offset of a 
commodity index contract.\1016\
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    \1016\ This is consistent with the Commission's interpretation 
in the December 2013 Position Limits Proposal that CEA section 
4a(c)(2)(b) is a direction from Congress to narrow the scope of what 
constitutes a bona fide hedge in the context of index trading 
activities. ``Financial products are not substitutes for positions 
taken or to be taken in a physical marketing channel. Thus, the 
offset of financial risks from financial products is inconsistent 
with the proposed definition of bona fide hedging for physical 
commodities.'' December 2013 Position Limits Proposal, 78 FR at 
75740. See also the discussion of the temporary substitute test in 
the December 2013 Position Limits Proposal, 78 FR at 75708-9.
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Comments on Proposed Sec.  150.9(a)(1)
Requirement That Exchanges Recognize Non-Enumerated Bona Fide Hedging 
Positions Consistent With the General Bona Fide Hedging Definition
    In connection with the requirement under Sec.  150.9 to apply the 
bona fide hedging definition to recognitions, two commenters requested 
that the Commission specifically allow exchanges to recognize 
anticipatory merchandising as a non-enumerated bona fide hedging 
positions should the facts and circumstances warrant including those 
rejected strategies [transactions or positions that fail to meet the 
`change in value' requirement or the `economically appropriate 
test'].\1017\
---------------------------------------------------------------------------

    \1017\ CL-ICE-60929 at 12; CL-Working Group-60947 at 6.
---------------------------------------------------------------------------

    Another commenter expressed the view that the Commission should 
extend the process proposed in the 2016 Supplemental Position Limits 
Proposal to include risk management exemptions.\1018\ The commenter 
acknowledged but disagrees with the Commission's view that such risk 
management exemptions would not be allowed under the statutory 
standards for a bona fide hedging position, and suggests that the 
Commission could use CEA section 4a(a)(7) authority to provide 
exemptions for risk management positions.
---------------------------------------------------------------------------

    \1018\ CL-AMG-60946 at 6-7.
---------------------------------------------------------------------------

    A commenter recommended that the rules clarify that the Exchanges 
may recognize and grant exemptions on the basis of a strategy, or 
hedging need, or a combination of strategies or hedging requirements 
associated with managing an ongoing business.\1019\
---------------------------------------------------------------------------

    \1019\ CL-CCI-60935 at 5.
---------------------------------------------------------------------------

    Separately, one commenter recommended that ``the Commission should 
confirm that exchanges may continue to adopt their own rules for 
exemptions from speculative position limits for futures contracts that 
are subject to DCM limits, but not to federal limits,'' \1020\ while 
two others stated that the Commission should confirm that the 2016 
Supplemental Position Limits Proposal's ``prescriptive procedures'' 
will not apply to exemptions involving exchange-set limits lower than 
federally-set levels, or where the exchanges set the limits 
themselves.\1021\
---------------------------------------------------------------------------

    \1020\ CL-FIA-60937 at 4.
    \1021\ CL-ICE-60929 at 7; CL-Working Group-60947 at 14.
---------------------------------------------------------------------------

Requests for Recognition of Non-Enumerated Bona Fide Hedging Positions 
in the Spot Month
    A commenter expressed the view that the Commission should not 
``categorically prohibit exchanges from granting non-enumerated and 
anticipatory hedge exemptions, as appropriate, during the spot month'' 
and reminded the Commission that orderly trading requirements remain 
applicable to all positions, as provided under the bona fide hedging 
position definition. The commenter further expressed the view that the 
statutory definition of bona fide hedging position allows for such 
recognition during the spot month and that a ``one-size-fits-all'' 
prohibition will ``unnecessarily restrict commercially reasonable 
hedging activity during the spot month.'' \1022\
---------------------------------------------------------------------------

    \1022\ CL-ICE-60929 at 9.
---------------------------------------------------------------------------

    Several commenters were generally against the application of the 
five-day rule to non-enumerated bona fide hedging position exemptions, 
and recommended that the Commission authorize the exchanges to grant 
non-enumerated hedge and spread exemptions during the last five days of 
trading or the spot period, and other alternatives and proposed 
regulation text.\1023\
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    \1023\ CL-ICE-60929 at 22; CL-NCGA-NGSA-60919 at 13; CL-CME-
60926 at 6 and 8; CL-API-60939 at 3; CL-FIA-60937 at 3 and 12; CL-
Working Group-60947 at 7-9; CL-NCC-ACSA-60972 at 2; CL-CMC-60950 at 
9-11; CL-ISDA-60931 at 3 and 10; CL-CCI-60935 at 8-9; CL-MGEX-60936 
at 11; CL-FIA-60937 at 10, 11; CL-MGEX-60936 at 11.
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Standards Exchanges Must Meet To Provide Recognitions
    Several commenters recommended that the Commission not adopt the 
proposed ``active trading'' and ``one year experience'' requirements 
regarding a DCM's qualification to administer exemptions from federal 
position limits.\1024\ One commenter requested removal of the 
``actively traded'' requirement, expressing concerns that, based on its 
understanding, the requirement would impose an ``absolute prohibition'' 
on exchange-administered exemptions for new contracts of at least one 
year.\1025\ Similarly, a commenter stated that the standard ``would 
arbitrarily limit competition and operate

[[Page 96818]]

as a bar to the establishment of new exchanges and new contracts.'' 
\1026\
---------------------------------------------------------------------------

    \1024\ CL-CCI-60935 at 3-4; CL-CME-60926 at 13; CL-FIA-60937 at 
9; CL-CMC-60950 at 3; CL-Working Group-60947 at 10; CL-IECAssn-60949 
at 12-13.
    \1025\ CL-CMC-60950 at 3.
    \1026\ CL-IECAssn-60949 at 12-13.
---------------------------------------------------------------------------

    In the alternative, one commenter argues that one year of 
experience in administering position limits in similar contracts within 
a particular ``asset class'' would be a more reasonable 
requirement.\1027\ In addition, a commenter expressed the view that the 
Commission should not define ``actively traded'' in terms of minimum 
monthly volume.\1028\
---------------------------------------------------------------------------

    \1027\ CL-CME-60926 at 14.
    \1028\ CL-IECAssn-60949 at 13.
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Previously Granted Hedge Exemptions
    One commenter expressed the view that since the exchanges have been 
working with commercial end user for several decades and currently have 
a process under Sec.  1.3(z) that may contain specific scenarios that 
work well and are not listed in the 2016 Position Limits Proposal, the 
Commission should deem every currently recognized hedge strategy by any 
exchange as a non-enumerated bona fide hedging position which would 
eliminate disruption and encourage the autonomy of the exchanges.\1029\
---------------------------------------------------------------------------

    \1029\ CL-IECAssn-60949 at 11-12.
---------------------------------------------------------------------------

    The commenter also expressed the view that, with respect to the 
status of previously exchange-recognized non-enumerated bona fide 
hedging positions for which such exchange no longer provides an annual 
review, the non-enumerated bona fide hedging positions should remain a 
non-enumerated bona fide hedging position and the participants 
utilizing that strategy should have ample notice that the exchange will 
no longer provide the annual review in order to allow time for the 
individual entity to apply to the CFTC directly for a non-enumerated 
bona fide hedging position exemption.\1030\
---------------------------------------------------------------------------

    \1030\ Id. at 12.
---------------------------------------------------------------------------

Recognition of OTC Positions as Bona Fide Hedges
    Another commenter requested Commission clarification regarding an 
exchange's obligation with respect to recognizing and monitoring non-
enumerated bona fide hedging position determinations for OTC positions. 
The commenter cited to preamble language to support the possibility of 
an obligation, but argued that the text of proposed Sec.  150.9 does 
not mention or contemplate such requests for OTC positions. The 
commenter also questioned whether such recognition is feasible given 
the exchanges' lack of visibility into OTC markets.\1031\
---------------------------------------------------------------------------

    \1031\ CL-CME-60926 at 11-12.
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Commission Reproposal Regarding Sec.  150.9(a)(1) \1032\
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    \1032\ See the 2016 Supplemental Position Limits Proposal, 81 FR 
at 38469-71 (providing further explanation of proposed Sec.  
150.9(a)(1)).
---------------------------------------------------------------------------

    The Commission is reproposing the rule, as originally proposed, 
subject to the amendments described below.
Requirement That Exchanges Recognize Non-Enumerated Bona Fide Hedging 
Positions Consistent With the General Bona Fide Hedging Position 
Definition
    Regarding comments that the Commission should permit the 
recognition of anticipatory merchandising as non-enumerated bona fide 
hedging strategies, as noted above, while exchanges' recognition of 
non-enumerated bona fide hedging positions must be consistent with the 
Commission's bona fide hedging position definition, the Commission 
agrees that exchanges should, in each case, make a facts-and-
circumstances determination as to whether to recognize an anticipatory 
hedge as a non-enumerated bona fide hedging position, consistent with 
the Commission's recognition ``that there can be a gradation of 
probabilities that an anticipated transaction will occur.'' \1033\
---------------------------------------------------------------------------

    \1033\ December 2013 Position Limits Proposal, 78 FR at 75719.
---------------------------------------------------------------------------

    In response to the request that the Commission expand the proposed 
bona fide hedging position recognition process to include risk 
management exemptions, the Commission notes that this suggestion is 
contrary to the intent of Congress (to narrow the bona fide hedging 
position definition to preclude commodity index hedging, a.k.a. risk 
management exemptions).
    Regarding comments requesting clarification on exchange authority 
to recognize as bona fide hedging positions multiple hedging 
strategies, the Commission clarifies that a single application to an 
exchange can specify and apply to multiple hedging strategies or needs.
    As to comments requesting clarification regarding whether the 
proposed application process applies to exchange-set limits, the 
Commission notes that the requirements of reproposed Sec.  150.9(a) 
addresses processes for recognition of bona fide hedge positions for 
purposes of federal limits and not exemption processes such as those 
exchanges currently implement and oversee for any exchange-set limits. 
In addition, such processes for exchange-set limits that are lower than 
the federal limit could differ as long as the exemption provided by the 
exchange is capped at the level of the applicable federal limit in 
Sec.  150.2.\1034\
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    \1034\ Similarly, as noted above, reproposed Sec.  
150.5(a)(2)(i) provides that any exchange may grant exemptions from 
any speculative position limits it sets under paragraph Sec.  
150.5(a)(1), provided that such exemptions conform to the 
requirements specified in Sec.  150.3, and provided further that any 
exemptions to exchange-set limits not conforming to Sec.  150.3 are 
capped at the level of the applicable federal limit in Sec.  150.2.
---------------------------------------------------------------------------

Requests for Recognition of Non-Enumerated Bona Fide Hedging Positions 
in the Spot Month
    The Commission considered the recommendations that the Commission: 
Allow exchanges to recognize a position as a bona fide hedging position 
for up to a five-day retroactive period in circumstances where market 
participants need to exceed limits to address a sudden and unforeseen 
hedging need; specifically authorize exchanges to recognize positions 
as bona fide hedging positions and grant spread exemptions during the 
last five days of trading or less, and/or delegate to the exchanges for 
their consideration the decision whether to apply the five-day rule to 
a particular contract after their evaluation of the particular facts 
and circumstances. As the Commission clarified above, the reproposed 
rules do not apply the prudential condition of the five-day rule to 
non-enumerated hedging positions other than to pass through swap 
offsets.\1035\ Therefore, as reproposed, the five-day rule would only 
apply to certain positions (pass-through swap offsets, anticipatory and 
cross-commodity hedges).\1036\ However, to provide exchanges with 
flexibility, in regards to exchange process under Sec.  150.9, the 
Commission will allow exchanges to waive the five-day rule on a case-
by-case basis.\1037\ As the Commission noted above, it expects that 
exchanges will carefully consider whether allowing retroactive 
recognition of a positions as a non-enumerated bona fide hedge would, 
as raised by one commenter, diminish the overall integrity of the 
process. In

[[Page 96819]]

addition, the Commission also points out that exchanges should 
carefully consider whether to adopt in those rules the two safeguards 
noted by commenters: (i) Requiring market participants making use of 
the retroactive application to demonstrate that the applied-for hedge 
was required to address a sudden and unforeseen hedging need; and (ii) 
providing that if the emergency hedge recognition was not granted, 
exchange rules would continue to require the applicant to unwind its 
position in an orderly manner and also would deem the applicant to have 
been in violation for any period in which its position exceeded the 
applicable limits.
---------------------------------------------------------------------------

    \1035\ See the discussion regarding the five-day rule in 
connection with the definition of bona fide hedging position and in 
the discussion of 150.9 (Process for recognition of positions as 
non-enumerated bona fide hedging positions).
    \1036\ See Sec.  150.1 definition of bona fide hedging position 
sections (2)(ii)(A), (3)(iii), (4), and (5) (Other enumerated 
hedging position). To provide greater clarity as to which bona fide 
hedging positions the five-day rule applies, the reproposed rules 
reorganize the definition.
    \1037\ In addition, reproposed Sec.  150.5(a)(2)(ii) 
(Application for exemption) permits exchanges to adopt rules that 
allow a trader to file an application for an enumerated bona fide 
hedging exemption within five business days after the trader assumed 
the position that exceeded a position limit, and adopted a similar 
modification to 150.5(b)(5)(i).
---------------------------------------------------------------------------

Standards Exchanges Must Meet To Provide Recognitions
    Regarding comments on the ``active trading'' and ``one year of 
experience'' requirements under proposed Sec.  150.9(a)(1)(v), as noted 
in the 2016 Supplemental Position Limits Proposal preamble \1038\ and 
above, the Commission is not persuaded that an exchange with no active 
trading and no experience would have their interests aligned with the 
Commission's policy objectives in CEA section 4a. However, it is clear 
from the comments that some interpreted the requirement as a narrower 
standard than intended.
---------------------------------------------------------------------------

    \1038\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38471.
---------------------------------------------------------------------------

    The Commission is, therefore, amending Sec.  150.9(a)(1)(v) to 
clarify that the active one-year of experience requirement can be met 
by any contract listed in the particular referenced contract.\1039\ As 
such, the Commission is reproposing Sec.  150.9(a)(1)(v) to provide 
that the exchange has at least one year of experience and expertise 
administering position limits for ``a particular commodity'' rather 
than for ``such commodity derivative contract.'' Further, in response 
to concerns that the standard would limit competition and operate as a 
bar to the establishment of new exchanges and new contracts, the 
Commission notes that experience manifests in the people carrying out 
surveillance in a commodity rather than in an institutional structure. 
An exchange's experience could be demonstrated through the relevant 
experience of the surveillance staff regarding the particular 
commodity. In fact, the Commission has historically reviewed the 
experience and qualifications of exchange regulatory divisions when 
considering whether to designate a new exchange as a contract market or 
to recognize a facility as a SEF; as such exchanges are new, staff 
experience has clearly been gained at other exchanges.\1040\
---------------------------------------------------------------------------

    \1039\ Regarding the comment that the Commission should not 
define ``actively traded,'' the Commission concurs, and notes that, 
as proposed in the 2016 Supplemental Position Limits Proposal, this 
interpretation will be left to the exchanges' reasonable discretion.
    \1040\ For example, the Commission reviews the experience of 
chief compliance officers when reviewing SEF applications. See Sec.  
37.1501(b)(2) (``Qualifications of chief compliance officer. The 
individual designated to serve as chief compliance officer shall 
have the background and skills appropriate for fulfilling the 
responsibilities of the position.'').
---------------------------------------------------------------------------

    In addition, regarding the Commission's authority to adopt this 
standard, the Commission notes that CEA section 4a(c) provides that the 
Commission ``shall'' define what constitutes a bona fide hedging 
transaction or position. In light of this responsibility, the 
Commission believes it is important that exchanges authorized to 
recognize non-enumerated bona fide hedging positions have experience 
(as indicated by their one year of experience regulating a particular 
contract) and interests (as indicated by their actively traded 
contract) that are aligned with the Commission's interests. The 
commenter provides no alternatives to the one-year experience in the 
actively traded contract as proxies for an exchange's interests being 
aligned with that of the Commission.
    The Commission clarifies, however, that an exchange can petition 
the Commission, pursuant to Sec.  140.99, for a waiver of the one-year 
experience requirement if such exchange believes that their experience 
and interests are aligned with the Commission's interests with respect 
to recognizing non-enumerated bona fide hedging positions.
Previously Granted Hedge Exemptions
    With respect to comments regarding currently recognized exchange-
granted non-enumerated bona fide hedging position exemptions, as noted 
above, the Commission believes the statutory directive to define bona 
fide hedging position narrows the current Sec.  1.3(z)(1) definition. 
As a result, currently recognized bona fide hedging strategies may not 
meet the new narrower bona fide hedging position standards. While 
certain strategies may not meet the definition of bona fide hedging 
position reproposed in this rulemaking, to reduce the potential for 
market disruption by forced liquidations, the Commission proposes, as 
discussed above, to clarify and expand the relief in Sec.  150.3(f) 
(previously granted exemptions) to grandfather previously granted risk-
management strategies applicable to previously established derivative 
positions in commodity index contract.\1041\
---------------------------------------------------------------------------

    \1041\ As stated above, Sec.  150.3(f) provides (1) recognition 
of the offset of the risk of a pre-existing financial instrument as 
bona fide using a derivative position, including a deferred 
derivative contract month entered after the effective date of a 
final rule, provided a nearby derivative contract month is 
liquidated (such recognition will not extend such relief to an 
increase in positions after the effective date of a limit); (2) 
possible application of previously granted exemptions to pre-
existing financial instruments that are within the scope of existing 
Sec.  1.47 exemptions, rather than only to pre-existing swaps; and 
(3) recognition of exchange-granted non-enumerated exemptions in 
non-legacy commodity derivatives outside of the spot month 
(consistent with the Commission's recognition of risk management 
exemptions outside of the spot month), provided such exemptions are 
granted prior to the compliance date of a final rule, and apply only 
to pre-existing financial instruments as of the effective date of a 
final rule. These last two were proposed to reduce the potential for 
market disruption, since a market intermediary would continue to be 
able to offset risks of pre-effective-date financial instruments, 
pursuant to previously-granted federal or exchange risk management 
exemptions. See supra discussion of the Commission's reproposed 
definition for bona fide hedging position; see also the discussion 
regarding the reproposed Sec.  150.3(f). In response to the comment 
requesting that the Commission use its authority under CEA section 
4a(a)(7) to provide exemptions for risk management positions, as 
noted above, that appears contrary to Congressional intent to narrow 
the definition of a bona fide hedging position.
---------------------------------------------------------------------------

    Regarding comments that exchanges should be required to provide 
additional notice or phase-out time for any bona fide hedging position 
recognitions that may expire, the Commission notes that, under 
reproposed Sec.  150.5, exchanges may issue recognition determinations 
for one year only. As such a market participant is provided a one-year 
notice for the potential expiration of the recognition of their 
position as a non-enumerated bona fide hedging position, and may seek 
recognition of the position from another (or the same) DCM, or from the 
CFTC directly prior to the expiration of the one-year period. The 
Commission is not proposing to authorize exchanges to provide an 
unlimited recognition of positions as non-enumerated bona fide hedging 
positions, and is not proposing to require exchanges to provide further 
notice to market participants prior to the expiration of previous 
determinations.
Recognition of OTC Positions as Bona Fide Hedging Positions
    Regarding comments requesting a clarification with respect to OTC 
positions, the Commission clarifies that exchanges do not have an 
obligation to monitor for compliance with OTC-only positions.

[[Page 96820]]

b. Proposed Sec.  150.9(a)(2); Sec.  150.9(a)(3); and Sec.  
150.9(a)(4)--Application Process
    Proposed Rules. As proposed, Sec.  150.9(a)(2) would permit an 
exchange to establish a less expansive application process for non-
enumerated bona fide hedging positions previously recognized and 
published on such exchange's Web site than for non-enumerated bona fide 
hedging positions based on novel facts and circumstances. This is 
because the Commission believed that some lesser degree of scrutiny may 
be adequate for applications involving recurring fact patterns, so long 
as the applicants are similarly situated. However, the Commission 
understood that DCMs currently use a single-track application process 
to recognize non-enumerated positions, for purposes of exchange limits, 
as within the meaning of the general bona fide hedging position 
definition in Sec.  1.3(z)(1).\1042\ The Commission did not know 
whether any exchange would elect to establish a separate application 
process for non-enumerated bona fide hedging positions based on novel 
versus non-novel facts and circumstances, or what the salient 
differences between the two processes might be, or whether a dual-track 
application process might be more likely to produce inaccurate results, 
e.g., inappropriate recognition of positions that are not bona fide 
hedging positions within the parameters set forth by Congress in CEA 
section 4a(c).\1043\ In proposing to permit separate application 
processes for novel and non-novel non-enumerated bona fide hedging 
positions, the Commission sought to provide flexibility for exchanges, 
but will insist on fair and open access for market participants to seek 
recognition of compliant positions as non-enumerated bona fide hedging 
positions.
---------------------------------------------------------------------------

    \1042\ 17 CFR 1.3(z)(1).
    \1043\ 7 U.S.C. 6a(c). The Commission noted that it could, under 
the proposal, review determinations made by a particular exchange, 
for example, that recognizes an unusually large number of bona fide 
hedging positions, relative to those of other exchanges.
---------------------------------------------------------------------------

    The Commission believed that there is a core set of information and 
materials necessary to enable an exchange to determine, and the 
Commission to verify, whether the facts and circumstances attendant to 
a position satisfy the requirements of CEA section 4a(c). Accordingly, 
the Commission proposed to require in Sec.  150.9(a)(3)(i), (iii) and 
(iv) that all applicants submit certain factual statements and 
representations. Proposed Sec.  150.9(a)(3)(i) required a description 
of the position in the commodity derivative contract for which the 
application is submitted and the offsetting cash positions.\1044\ 
Proposed Sec.  150.9(a)(3)(iii) required a statement concerning the 
maximum size of all gross positions in derivative contracts to be 
acquired during the year after the application is submitted.\1045\ 
Proposed Sec.  150.9(a)(3)(iv) required detailed information regarding 
the applicant's activity in the cash markets for the commodity 
underlying the position for which the application is submitted during 
the past three years.\1046\ These proposed application requirements are 
similar to existing requirements for recognition under current Sec.  
1.48 of a non-enumerated bona fide hedge.
---------------------------------------------------------------------------

    \1044\ See Sec.  1.47(b)(1), 17 CFR 1.47(b)(1), requiring a 
description of the futures positions and the offsetting cash 
positions.
    \1045\ See Sec.  1.47(b)(4), 17 CFR 1.47(b)(4), requiring the 
maximum size of gross futures positions which will be acquired 
during the following year.
    \1046\ See Sec. Sec.  1.47(b)(6), 1.48(b)(1)(i) and (2)(i), 17 
CFR 1.47(b)(6), 1.48(b)(1)(i) and 2(i), requiring three years of 
history of production or usage.
---------------------------------------------------------------------------

    The Commission also proposed to require in Sec.  150.9(a)(3)(ii) 
and (v) that all applicants submit detailed information to demonstrate 
why the position satisfies the requirements of CEA section 4a(c) \1047\ 
and any other information necessary to enable the exchange to 
determine, and the Commission to verify, whether it is appropriate to 
recognize such a position as a non-enumerated bona fide hedge.\1048\ 
The Commission anticipated that such detailed information may include 
both a factual and legal analysis indicating why recognition is 
justified for such applicant's position. The Commission expected that 
if the materials submitted in response to proposed Sec.  
150.9(a)(3)(ii) are relatively comprehensive, requests for additional 
information pursuant to proposed Sec.  150.9(a)(3)(v) would be 
relatively infrequent. Nevertheless, the Commission believed that it is 
important to include the requirement in proposed Sec.  150.9(a)(3)(v) 
that applicants submit any other information necessary to enable the 
exchange to determine, and the Commission to verify, that it is 
appropriate to recognize a position as a non-enumerated bona fide 
hedging position so that DCMs can protect and manage their markets.
---------------------------------------------------------------------------

    \1047\ Although many commenters have requested that the 
Commission retain the pre-Dodd Frank Act standard contained in 
current Sec.  1.3(z), 17 CFR 1.3(z), there is explicit and implicit 
support in the comments on the December 2013 Position Limits 
Proposal for pegging what applicants must demonstrate to the current 
statutory provision as amended by the Dodd-Frank Act. One commenter 
requested that the Commission ``publicly clarify that hedge 
positions are bona fide when they satisfy the hedge definition 
codified by Congress in section 4a(c)(2) of the Act, as added by the 
Dodd-Frank Act.'' CL-CME-59718 at 46. Another commenter supported a 
``process for Commission approval of a `non-enumerated' hedge that . 
. . complies with the statutory definition of the term `bona fide 
hedge.' '' CL-NGSA-59673 at 2. CEA section 4a(c)(2) contains 
standards for positions that constitute bona fide hedging positions. 
The Commission expects that exchanges would consider the 
Commission's relevant regulations and interpretations, when 
determining whether a position satisfies the requirements of CEA 
section 4a(c)(2). However, exchanges may confront novel facts and 
circumstances with respect to a particular applicant's position, 
dissimilar to facts and circumstances previously considered by the 
Commission. In these cases, an exchange may request assistance from 
the Commission; see the discussion of proposed Sec.  150.9(a)(8) in 
the 2016 Position Limits Supplemental Proposal.
    \1048\ See Sec.  1.47(b)(2), 17 CFR 1.47(b)(2), requiring 
detailed information to demonstrate that the futures positions are 
economically appropriate to the reduction of risk in the conduct and 
management of a commercial enterprise. See also Sec.  1.47(b)(3), 17 
CFR 1.47(b)(3), requiring, upon request, such other information 
necessary to enable the Commission to determine whether a particular 
futures position meets the requirements of the general definition of 
bona fide hedging. Under current application processes, market 
participants provide similar information to DCMs, make various 
representations required by DCMs and agree to certain terms imposed 
by DCMs with respect to exemptions granted. The Commission has 
recognized that DCMs already consider any information they deem 
relevant to requests for exemptions from position limits. See, e.g., 
Rule Enforcement Review of ICE Futures U.S., July 22, 2014, p. 41.
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    Under the proposal, the Commission would permit an exchange to 
recognize a smaller than requested position for purposes of exchange-
set limits. For instance, an exchange might recognize a smaller than 
requested position that otherwise satisfies the requirements of CEA 
section 4a(c) if the exchange determines that recognizing a larger 
position would be disruptive to the exchange's markets. This is 
consistent with current exchange practice. This is also consistent with 
DCM and SEF core principles. DCM core principle 5(A) provides that, 
``[t]o reduce the potential threat of market manipulation or congestion 
(especially during trading during the delivery month), the board of 
trade shall adopt for each contract of the board of trade, as is 
necessary and appropriate, position limitations or position 
accountability for speculators.'' \1049\ SEF core principle 6(A) 
contains a similar provision.\1050\
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    \1049\ CEA section 5(d)(5)(A), 7 U.S.C. 7(d)(5)(A); Sec.  
38.300, 17 CFR 38.300. The Commission proposed, consistent with 
previous Commission determinations, a preliminary finding that 
speculative position limits are necessary in the December 2013 
Position Limits Proposal. December 2013 Position Limits Proposal, 78 
FR at 75685.
    \1050\ CEA Section 5h(f)(6)(A), 7 U.S.C. 7b-3(f)(6)(A); Sec.  
38.300, 17 CFR 38.300.
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    By requiring in proposed Sec.  150.9(a)(3) that all applicants 
submit a core set of information and materials, the Commission 
anticipated that all exchanges would develop similar non-

[[Page 96821]]

enumerated bona fide hedging position application processes. However, 
the Commission intended that exchanges have sufficient discretion to 
accommodate the needs of their market participants. The Commission also 
intended to promote fair and open access for market participants to 
obtain recognition of compliant derivative positions as non-enumerated 
bona fide hedges.
    Proposed Sec.  150.9(a)(4) set forth certain timing requirements 
that an exchange must include in its rules for the non-enumerated bona 
fide hedge application process. A person intending to rely on an 
exchange's recognition of a position as a non-enumerated bona fide 
hedging position would be required to submit an application in advance 
and to reapply at least on an annual basis. This is consistent with 
commenters' views and DCMs' current annual exemption review 
process.\1051\ Proposed Sec.  150.9(a)(4) would require an exchange to 
notify an applicant in a timely manner whether the position was 
recognized as a non-enumerated bona fide hedging position or rejected, 
including the reasons for any rejection.\1052\ On the other hand, and 
consistent with the status quo, proposed Sec.  150.9(a)(4) would allow 
the exchange to revoke, at any time, any recognition previously issued 
pursuant to proposed Sec.  150.9 if the exchange determined the 
recognition is no longer in accord with section 4a(c) of the Act.\1053\
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    \1051\ See, e.g., statement of Ron Oppenheimer on behalf of the 
Working Group (supporting an annual non-enumerated bona fide hedge 
application), statement of Erik Haas, Director, Market Regulation, 
ICE Futures U.S. (describing the DCM's annual exemption review 
process), and statement of Tom LaSala, Chief Regulatory Officer, CME 
Group (