In response to a petition for exemptive relief and certain comments to its interim final rule for spot month limits for cash-settled contracts on those physical commodities subject to the new position limits regime under the Part 151 rules, the Commodity Futures Trading Commission (the "Commission" or "CFTC") is proposing certain modifications to its aggregation policy under Part 151.1 Comments must be received on or before June 29, 2012.

Summary

The Part 151 rules establish a new position limits regime for twenty-eight exempt (i.e., energy and metals) and agricultural commodity futures and options contracts and swaps that are economically equivalent to such contracts.2 In determining whether a person must treat positions in such contracts as its own for speculative position limit purposes, Rule 151.7 establishes account aggregation standards which are significantly more restrictive in some respects than the existing standards in the Commission's Part 150 rules. These provisions generally require that, absent a specific exemption, a person must aggregate positions in any account in which it has a ten percent or greater ownership or equity interest, whether directly or indirectly, even if the person does not control the trading in such an account. Also, a person must aggregate positions in any account on the basis of control over the trading decisions in the account, as well as on the basis of trading pursuant to an express or implied agreement or understanding with another person under Rule 151.7, which is consistent with longstanding CFTC policy. In addition, the Commission added a new aggregation provision in Rule 151.7(d), which is applicable to positions in accounts with so-called "identical trading strategies," even if a person does not control the trading in such accounts and has less than a ten percent interest in such accounts.

The CFTC's Proposed Rules

In response to a petition for relief from aggregation of positions across accounts on the basis of ownership and certain comments received on the interim final rule for spot month position limits on cash-settled contracts, the Commission is proposing: (i) to expand the exemption in Rule 151.7(i) for the sharing of position information which could cause a violation of federal law; (ii) add an exemption for positions held by "owned entities" in a new Rule 151.7(b)(1); and (iii) expand the underwriting exemption in Rule 151.7(g) to include ownership interests acquired through the market-making activities of an affiliated broker-dealer. If adopted, the proposed rules would modify the existing account aggregation standards in Part 151 in a number of important respects and broaden the circumstances under which market participants could be exempt from the Commission's aggregation requirements on the basis of ownership. Note that the CFTC proposal would not affect other aggregation exemptions under Part 151, including the exemptions applicable to the ownership interests of participants in commodity pools in Rule 151.7(c), the exemption for a futures commission merchant and its affiliates in Rule 151.7(e), and the independent account controller exemption in Rule 151.7(f).

Exemption for Violation of Laws

The Commission is proposing to amend the violation of law exemption in Rule 151.7(i) to make clear that this exemption would be available in those circumstances in which the sharing of position-level information to comply with speculative position limits presents a "reasonable risk" of violating the applicable law(s). The Commission is also proposing to expand this exemption to include state law and the laws of foreign jurisdictions. However, the Commission is proposing to retain the existing requirement to submit an opinion of counsel as a condition of the exemption.

Proposed Owned Entity Exemption

Proposed Rule 151.7(b)(1) would permit any person with an ownership or equity interest in an entity (whether or not a financial services entity) ranging from ten percent to fifty percent to disaggregate the owned entity's positions upon demonstrating compliance with certain specified indicia of independence such that the person and the owned entity: (i) do not have knowledge of the trading decisions of the other; (ii) trade pursuant to separately developed and independent trading systems; (iii) have in place policies and procedures to preclude sharing knowledge of, gaining access to, or receiving data about, trades of the other; (iv) do not share employees that control the trading decisions of the other; and (v) maintain a risk management system that does not allow the sharing of trade information or trading strategies between entities. These criteria of independence are modeled after criteria in the independent account controller exemption and in the "owned non-financial entity" exemption. The latter exemption was included in the Commission's proposal of the Part 151 rules, but deleted from the Part 151 rules in connection with their adoption. See 76 Fed. Reg. 71626 at 71653-71654.

The Commission, however, is not proposing to permit disaggregation of positions where a person has greater than a fifty percent interest in another entity, even if the specified criteria of independence are satisfied, including lack of knowledge of, and control over, the trading of the owned entity. The Commission believes that this limitation is warranted to give effect to the statutory requirement that positions "held" by a person be aggregated, and because of concerns about a person's ability to influence management, and concomitant concerns about coordinated trading. This aspect of the proposed owned entity exemption is likely to generate numerous comments.

Expansion of the Underwriter Exemption

The Commission is proposing to expand the exemption for the underwriting of securities in Rule 151.7(g) to include ownership interests acquired as part of market-making activities in the normal course of business of an affiliated broker-dealer who is registered with the Securities and Exchange Commission or under comparable registration in a foreign jurisdiction. The Commission explained that this proposal is intended to apply to ownership interests that are likely transitory, and not for investment purposes.

Notice Filing Relief

Under Rule 151.1, the exemptions from having to aggregate positions are no longer self-executing and generally require a notice filing with the Commission pursuant to Rule 151.7(h). A notice filing must provide a description of the relevant circumstances that warrant an exemption and a certification that the conditions of the applicable exemption have been met. The Commission is proposing that this certification must come from a senior officer of the market participant. The notice filings are effective upon submission, but the Commission may request additional information, as well as reject, modify, or otherwise condition an exemption. Also, a notice filing must be amended in the event of any material change.

The Commission is proposing to provide relief from the notice filing requirement for a "higher-tier" entity which, under proposed Rule 151.1(j), could rely on a filing submitted by an owned entity. Under this proposal, a "higher-tier" entity would not need to submit a separate notice pursuant to the notice filing requirement to rely upon the notice filed by an owned entity, as long as it complies with the conditions of the applicable aggregation exemption.

Technical Amendments

The Commission is also proposing certain other technical and clarifying amendments to the aggregation exemptions and related provisions. For example, the Commission is proposing to expand the definitions of the terms "eligible entity" and "independent account controller" in the independent account controller exemption to include specifically Rule 4.13 exempt commodity pools that are structured as limited liability companies and the managers of such pools. Currently, the independent account controller exemption technically includes only Rule 4.13 exempt commodity pools that are structured as limited partnerships and the general partners of such pools.

We will continue to monitor and report on developments in this area.

Footnotes

1 See 77 Fed. Reg. 31767 (May 30, 2012).

2 See 76 Fed. Reg. 71626 (Nov. 18, 2011).

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