United States: Navigating The Regulatory Trap Of Futures Position Limits — CFTC Staff Permits Position Limit Disaggregation For Two Affiliates

The US Commodity Futures Trading Commission ("CFTC") requires and enforces speculative position limits for exchange-traded futures and options contracts on certain agricultural commodities. Specifically, CFTC Rule 150.2 sets out speculative limits for several contract types that trade on one of the following designated contract markets: the Chicago Board of Trade, the Minneapolis Grain Exchange, ICE Futures U.S. and the Kansas City Board of Trade.1 In cases where one person directly or indirectly owns 10 percent or more of the equity or other ownership interests in another entity or entities (each an "owned entity" of such common owner), CFTC Rule 150.4 generally requires that the common owner aggregate all Rule 150.2 positions in accounts of such owned entities with such positions held or controlled by the common owner.2 Other factors that may trigger aggregation include direct or indirect trading control, accounts or pools with substantially identical trading strategies, and acting pursuant to an expressed or implied agreement or understanding with others. Although limited exemptions from aggregation are available through a notice filing process set out in Rule 150.4, the position limits and aggregation framework has become a confusing regulatory trap for many agricultural commodity market participants.

On behalf of a client, we recently sought and obtained no-action relief from the CFTC staff that permits two specific affiliated entities with a shared employee to disaggregate their Rule 150.2 positions, subject to certain firewall conditions. In response to our request, the CFTC's Division of Market Oversight ("DMO") issued Staff Letter 18-33,3 in which the staff took a no-action position to permit the two affiliated entities to rely on the "owned entity exemption" under CFTC Rule 150.4(b)(2), notwithstanding that one of the conditions of the exemption prohibits the sharing of employees that control the trading decisions of either entity. Only the two entities described anonymously in Staff Letter 18-33 may rely on the relief.

Specific Relief

Staff Letter 18-33 grants specific no-action relief to permit disaggregation of positions between an unnamed grain marketing company and an owned entity of that company. The owned entity buys, handles, sells and transports such commodities. The grain marketing company entered into an agreement to lend one of its employees with specialized physical grain market expertise to the owned entity for purposes of buying and selling physical grain for export on the marketing company's behalf. Under the terms of the agreement, the services provided by the shared employee are limited to physical grain transactions and related activities, but do not include derivatives trading.

One of the conditions of the owned entity exemption under Rule 150.4(b)(2) is that the two entities do not share employees that control the "trading decisions" of either entity. The relief granted in effect limits the scope of this condition to "derivatives trading decisions," where "derivatives trading" refers to the "trading of derivatives subject to the [CFTC]'s jurisdiction."  All other regulatory requirements, including the remaining conditions set forth in CFTC Rule 150.4(b)(2), must be met. Among other things, this means that the entities must have policies and procedures that preclude each from having knowledge of, gaining access to or receiving data about trades of the other. These procedures must include security arrangements, including separate physical locations, which would maintain the independence of their activities.

The letter is significant because it is the first the CFTC staff has granted for a shared trader employee who is engaged in the physical trading activities of one of the two related entities.  The relief provided by Staff Letter 18-33 remains in effect until 12:01 am eastern standard time on August 12, 2019. During the period of the relief, DMO will continue to evaluate whether the relief granted hinders staff's ability to conduct surveillance and may alter it accordingly.

Owned Entity Exemption

Under the owned entity exemption provided by CFTC Rule 150.4(b)(2),4 a person need not aggregate the accounts or positions of an owned entity, provided that:

(i) Such person, including any entity that such person must aggregate, and the owned entity (to the extent that such person is aware or should be aware of the activities and practices of the aggregated entity or the owned entity):

  1. Do not have knowledge of the trading decisions of the other;
  2. Trade pursuant to separately developed and independent trading systems;
  3. Have and enforce written procedures to preclude each from having knowledge of, gaining access to, or receiving data about, trades of the other. Such procedures must include security arrangements, including separate physical locations, which would maintain the independence of their activities;
  4. Do not share employees that control the trading decisions of either; and
  5. Do not have risk management systems that permit the sharing of its trades or its trading strategy with employees that control the trading decisions of the other; and

(ii) Such person files a notice with the CFTC, including a senior officer's certification that the conditions of the aggregation exemption have been met.

In Staff Letter 17-37,5 DMO staff took a no-action position that limited the scope of the reference to "trading" under condition (i)(A) above to include only derivatives trading and not cash-market trading. In the same letter, DMO staff also permitted a similar limitation to derivatives trading for certain purposes related to the certifications required to be made in the notice filing to claim the exemption.  However, Staff Letter 18-33, discussed above, was the first occasion on which DMO staff extended the application of the distinction between cash-market trading and derivatives trading to condition (i)(D) above, the prohibition against sharing employees who control trading decisions.

Footnotes

1 17 CFR 150.2. Speculative position limits apply to the following contracts on the Chicago Board of Trade: Corn and Mini-Corn, Oats, Soybeans and Mini-Soybeans, White and Mini-Wheat, Soybean Oil and Soybean Meal.  On the Minneapolis Grain Exchange, speculative position limits apply to Hard Red Spring Wheat; on ICE Futures U.S., to Cotton No. 2; and on the Kansas City Board of Trade, to Hard Winter Wheat. 

2 17 CFR 150.4(b)(2).

3 CFTC No-Action Ltr. No. 18-33 (Dec. 21, 2018).

4 The exemption does not apply with respect to pools or accounts with substantially identical trading strategies. See 17 CFR 150.4(a)(2), 150.4(b). However, CFTC Staff Letter 17-37, discussed in other respects below, provides partial, time-limited no-action relief from aggregation on account of substantially identical trading strategies. 

5 CFTC No-Action Ltr. No. 17-37, at p. 15 (Aug. 10, 2017). The relief granted under Staff Letter 17-37 remains in effect until August 12, 2019 at 12:01 a.m. eastern standard time.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2019. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions