2012-12526
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Federal Register, Volume 77 Issue 104 (Wednesday, May 30, 2012)[Federal Register Volume 77, Number 104 (Wednesday, May 30, 2012)]
[Proposed Rules]
[Pages 31767-31783]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12526]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 151
RIN 3038-AD82
Aggregation, Position Limits for Futures and Swaps
AGENCY: Commodity Futures Trading Commission.
[[Page 31768]]
ACTION: Notice of proposed rulemaking.
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SUMMARY: On November 18, 2011, the Commodity Futures Trading Commission
(``Commission'' or ``CFTC'') published in the Federal Register a final
rule and interim final rule, which establish a position limits regime
for 28 exempt and agricultural commodity futures and options contracts
and the physical commodity swaps that are economically equivalent to
such contracts. In response to a petition for exemptive relief under
the Commodity Exchange Act and certain comments to the Commission's
interim final rule for spot-month limits for cash-settled contracts,
this notice proposes certain modifications to the Commission's policy
for aggregation under the position limits regime in CFTC regulations.
DATES: Comments must be received on or before June 29, 2012.
ADDRESSES: You may submit comments, identified by RIN number3038-AD82,
by any of the following methods:
Agency Web Site: http://www.cftc.gov.
Mail: David A. Stawick, 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
www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the Commission to consider information
that is exempt from disclosure under the Freedom of Information Act, a
petition for confidential treatment of the exempt information may be
submitted according to the procedure established in CFTC regulation
145.9 (17 CFR 145.9).
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 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,
Division of Market Oversight, at (202) 418-5452, ssherrod@cftc.gov;
Neal Kumar, Counsel, Office of General Counsel, at (202) 418-5353,
nkumar@cftc.gov, Riva Spear Adriance, Senior Special Counsel, Division
of Market Oversight, at (202) 418-5494, radriance@cftc.gov, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street
NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. Introduction
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ Title VII
of the Dodd-Frank Act \2\ amended the Commodity Exchange Act (``CEA'')
\3\ to establish a comprehensive new regulatory framework for swaps and
security-based swaps. The legislation was enacted to reduce risk,
increase transparency, and promote market integrity within the
financial system by, among other things: (1) Providing for the
registration and comprehensive regulation of swap dealers and major
swap participants; (2) imposing clearing and trade execution
requirements on standardized derivative products; (3) creating robust
recordkeeping and real-time reporting regimes; and (4) enhancing the
Commission's rulemaking and enforcement authorities with respect to,
among others, all registered entities and intermediaries subject to the
Commission's oversight.
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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm.
\2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\3\ 7 U.S.C. 1 et seq.
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As amended by the Dodd-Frank Act, sections 4a(a)(2) and 4a(a)(5) of
the CEA mandate that the Commission establish limits for futures and
option contracts traded on a designated contract market (``DCM''), as
well as swaps that are economically equivalent to such futures or
options contracts traded on a DCM. This mandate directed the Commission
to establish position limits on the expedited timeframe of 180 days
from the date of enactment for exempt commodities and 270 days from the
date of enactment for agricultural commodities. In response to the
Congressional mandate, the Commission proposed and ultimately adopted
final rules in part 151 regarding position limits for 28 physical
commodity futures and option contracts (``Core Referenced Futures
Contracts'') and physical commodity swaps that are economically
equivalent to such contracts (collectively with Core Referenced Futures
Contracts referred to as ``Referenced Contracts'').\4\
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\4\ See Position Limits for Futures and Swaps, 76 FR 71626, Nov.
18, 2011.
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The regulations in the part 151 position limits regime, consistent
with the Commission's historical approach to position limits,\5\
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,\6\ (2) an exemption for positions that constitute bona fide
hedging transactions,\7\ and (3) rules to determine which accounts and
positions a person must aggregate for the purpose of determining
compliance with the position limit levels.\8\
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\5\ See 17 CFR 150 (1999). Prior to the Dodd-Frank Act
rulemaking, the Commission administered position limits under
Commission regulation 150, which established federal position limits
on certain enumerated agricultural contracts. The position limits on
these agricultural contracts are referred to as ``legacy'' limits,
and the listed commodities are referred to as ``enumerated''
agricultural commodities.
\6\ See 17 CFR 151.4.
\7\ See 17 CFR 151.5. See also CEA section 4a(c)(1) & (2).
\8\ See 17 CFR 151.7.
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The Commission published Part 151 in the Federal Register in
November of 2011, but determined to phase in compliance with the new
position limits regime.\9\ Specifically, 60 days after the Commission
publishes a joint final rulemaking with the Securities and Exchange
Commission (``SEC'') further defining the term ``swap'' in the Federal
Register,\10\ the rules require market participants to comply with
spot-month limits for the 28 physical commodities as well as non-spot
month limits for the enumerated agricultural contracts. The Commission
also established the spot-month position limit levels for cash-settled
contracts on an interim final basis and solicited comments on the
appropriateness of such levels.\11\ Finally, for the remaining non-spot
month limits (i.e., all commodities other than the enumerated
agricultural commodities), the rules require compliance on the first
calendar day of the third calendar month following a
[[Page 31769]]
Commission order providing the numerical level of the non-spot month
limits based upon a formula provided in part 151.\12\
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\9\ See 76 FR at 71632; and 151.4(d).
\10\ Id. See also Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 76 FR 29818, May 23,
2011 (notice of proposed rulemaking).
\11\ See 76 FR 71637.
\12\ See 151.4(d)(3).
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As noted above, one of the three major components to the
Commission's position limits regime is determining which accounts and
positions a person must aggregate.\13\ The final rule in regulation
151.7 largely adopted the Commission's existing aggregation policy
under regulation 150.4. The aggregation provisions generally require
that unless a particular exemption applies, a person must aggregate all
positions for which that person controls the trading decisions with all
the positions for which that person has a 10 percent or greater
ownership interest in an account or position, as well as the positions
of two or more persons acting pursuant to an express or implied
agreement or understanding.\14\
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\13\ The proposed rules in this release deal solely with the
aggregation of accounts.
\14\ See 17 CFR 151.7(a) & (b). In addition, the Commission
included a new aggregation provision for persons with positions in
accounts with identical trading strategies. This provision applies
even if a person does not control trading and has a less than 10
percent interest in an account. See 17 CFR 151.7(d).
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Regulation 151.7 retained the scope of exemptions from aggregation
that were contained in regulation 150.4, including the ownership
interests of limited partners in pooled accounts,\15\ discretionary
accounts and customer trading programs of futures commission merchants
(``FCM''),\16\ and eligible entities with independent account
controllers that manage customer positions (``IAC'' or ``IAC
exemption'').\17\ Further, the Commission provided two additional
exemptions for underwriters of securities,\18\ and where the sharing of
information between persons would cause either person to violate
federal law or regulations adopted thereunder.\19\ With the exception
of the exemption for underwriters, market participants were required to
file a notice with the Commission demonstrating compliance with the
conditions applicable to each exemption.\20\
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\15\ 17 CFR 151.7(c).
\16\ 17 CFR 151.7(e).
\17\ 17 CFR 151.7(f).
\18\ 17 CFR 151.7(g).
\19\ See 17 CFR 151.7(i).
\20\ See 17 CFR 151.7(h). The exemption for federal law
information sharing restrictions in regulation 151.7(i), also
requires that market participants submit an opinion of counsel that
the sharing of information would cause a violation of federal law.
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B. Aggregation Petition and Interim Final Rule Comments
On January 19th, 2012 the Commission received a petition for
interim relief from, among other things, part 151's provision for
aggregation of positions across accounts (hereinafter aggregation
petition'') \21\ under CEA section 4a(a)(7) for purposes of part
151.\22\ The Commission has also received letters that generally
support the aggregation petition.\23\ In addition, several commenters
opined on the aggregation rules in connection with the Commission's
request for comment on the interim final rule for spot-month position
limits on cash-settled contracts.\24\ As further discussed below, the
aggregation petition and certain interim final rule commenters argue
that the Commission should clarify the exemption provided in regulation
151.7(i) where the sharing of information would cause a violation of
federal law and expand the exemption to include circumstances in which
state or foreign law would prohibit the sharing of information
necessary to comply with the aggregation standard. In addition, the
aggregation petition and commenters request that the Commission create
an aggregation exemption for owned non-financial entities.\25\ In this
connection, some commenters argue that the Commission should only
aggregate on the basis of control and not ownership. Finally, one
commenter requests that the Commission expand the exemption provided in
151.7(g) for the ownership interests of broker-dealers connected with
specific market-making activity.
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\21\ The aggregation petition was originally filed by the
Working Group of Commercial Energy Firms; certain members of the
group later reconstituted as the Commercial Energy Working Group.
Both groups (hereinafter, collectively, the ``Working Groups'') wish
to present one voice with respect to the petition. A copy of the
aggregation petition can be found on the Commission's Web site at
www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/wgap011912.pdf.
\22\ CEA section 4a(a)(7) specifically provides: ``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 under this section with respect to position limits.''
7 U.S.C. 6a(a)(7).
\23\ See Commodity Markets Council (``CMC'') on March 9, 2012;
Edison Electric Institute and the American Gas Association on March
1, 2012; and the Futures Industry Association (``FIA'') on March 26,
2012.
\24\ See FIA on January 17, 2012 (``CL-FIA''); Atmos Energy
Holdings (``ATMOS'') on January 17, 2012 (``CL-Atmos''); Edison
Electric Institute (``EEI'') on January 17, 2012 (``CL-EEI''); and
American Gas Association (``AGA'') on January 17, 2012 (``CL-AGA'').
\25\ The Commission initially proposed but did not adopt an
exemption that would have permitted persons with an ownership or
equity interest in a non-financial entity not to aggregate the
positions or accounts of the non-financial entity provided the
person filed an application demonstrating compliance with certain
conditions. See Position Limits for Derivatives, 76 FR 4752, 4762-
63, Jan. 26, 2011. The Commission determined not to adopt this
proposed exemption, but instead generally retained the Commission's
existing aggregation policy. See 76 FR 71626.
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1. Exemption for Federal Law Restriction
As noted above, section 151.7(i) provides an exemption from
aggregation where the sharing of information between persons would
cause either person to violate federal law. The aggregation petition
seeks to clarify that the exemption would apply to potential violations
of federal law,\26\ and also seeks to expand the exemption to apply to
local, state, foreign and international law.\27\ According to the
aggregation petition, the standard in the rule could be read as limited
to per se violations of the law, but not cover ``indicia of improper
market activity.'' \28\ Further, market participants may not be able to
rely on the exemption where they take certain action to avoid the
``potential'' of a violation. Moreover, the Working Groups argue that
the filing of an opinion of counsel to claim the exemption may act as a
disincentive for market participants to avail themselves of the
exemption because an adverse opinion would harm the applicant.
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\26\ Aggregation petition at 18.
\27\ Id. at 24.
\28\ Id. at 17.
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Similar to the petition, certain commenters to the interim final
rule argue that the requirement that the sharing of information ``would
cause'' a violation of federal law sets the bar too high to claim the
exemption.\29\ In this connection, commenters opine that such a high
standard makes it too difficult to obtain an opinion of counsel to
reach the necessary conclusion.\30\ Therefore, several commenters argue
that the Commission should clarify that the standard to claim the
exemption is that the sharing of information presents either party with
a reasonable risk of violating federal law.\31\ Commenters also believe
that the Commission should expand this exemption to cover potential
violations of state and foreign law.\32\ Finally, one commenter
suggests
[[Page 31770]]
that the Commission should remove the requirement to file an opinion of
counsel to claim the exemption, which the commenter believes is
burdensome.\33\
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\29\ See CL-FIA at 16-17; CL-Atmos at 5-6; and CL-EEI at 17-18.
\30\ CL-EEI at 17-18; and CL-Atmos at 5-6.
\31\ CL-FIA at 16-17; CL-EEI at 17-18; and CL-Atmos at 5-6.
\32\ CL-AGA at 2; CL-FIA at 16-17; CL-EEI at 17-18; and CL-Atmos
5-6.
\33\ CL-AGA at 5.
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2. The Owned Non-Financial Entity Exemption and Aggregation Based on
Ownership Generally
As noted above, the proposed rules for part 151 proposed that a
person with a 10 percent or greater ownership or equity interest in a
non-financial entity need not aggregate the positions of the non-
financial entity with his own positions, if the person filed an
application with the Commission demonstrating compliance with certain
conditions. This exemption was not part of the Commission's previously
existing aggregation policy for position limits on the enumerated
agricultural contracts in part 150. Ultimately, the Commission
determined to largely retain its existing aggregation policy with
limited additional exemptions, and did not adopt the proposed owned
non-financial entity exemption.
According to the aggregation petition, the Commission's failure to
include an exemption for a person's ownership interest in a non-
financial entity will result in ``serious adverse consequences'' to the
Working Groups participants, and represents a ``drastic departure from
current market practices.'' \34\ In light of these consequences, the
aggregation petition includes a draft owned non-financial entity
exemption for the Commission to incorporate into its aggregation
policy. The draft exemption is similar, but not identical to, the owned
non-financial entity exemption that the Commission proposed but did not
adopt as part of its final rule.\35\
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\34\ See Aggregation petition, pg. 5-16.
\35\ Id. at Exhibit A.
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The aggregation petition suggests that without an owned non-
financial entity exemption, the rules would force information sharing
and the coordination of trading between entities, which would be
contrary to existing best practices for antitrust compliance.\36\ Given
the conflict with such practices, the Working Groups argue that
compliance with the position limits rules may create liability under
the antitrust laws. The Working Groups also argue that the aggregation
rules, as adopted by the Commission, are contrary to certain industry
best practices that ``go beyond the letter of the law or applicable
regulations in order to ensure that activities of unregulated entities
are kept separate from activities of regulated entities to the greatest
extent possible.'' \37\
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\36\ Id. at 7. The Working Groups cite to best practices issued
by the Federal Trade Commission and the U.S. Department of Justice
regarding antitrust guidelines (``Antitrust Guidelines for
Collaboration Among Competitors''). Available at www.ftc.gov/os/2000/04/ftcdojguidelines.pdf.
\37\ Id. at pg. 9.
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The aggregation petition also opines that the information sharing
between persons necessary to comply with the position limits would
impose significant costs that would impact the physical and derivatives
markets.\38\ According to the Working Groups, entities with complex
corporate structure arrangements that include established information
barriers to ensure compliance with other regulatory requirements will
face significant costs to monitor positions on an intra-day basis,
notwithstanding the current lack of control over such trading.\39\ In
this case, the Working Groups claim that aggregation will significantly
impact holding companies and firms that invest in commercial firms,
particularly in the context of ``passive investment.'' Such firms will
have to monitor the commercial firm for compliance with position limits
and ``insert itself into the management of the firm.'' \40\ In
addition, according to the Working Groups, the aggregation of futures,
cleared swaps and bilateral swaps across entities on a real time basis
requires technology that does not yet exist.\41\ The aggregation
petition also points to concerns surrounding allocation and reporting
of positions, sharing of information on physical inventories, and
information sharing for the unwinding of accounts.\42\
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\38\ Id. at 10-16.
\39\ Similarly, according to the aggregation petition, the
aggregation requirements impose significant compliance burdens where
ownership interests may involve international companies, or where a
corporate structure includes multiple levels of companies between a
parent company and a child company with an account or position.
\40\ Id. at 11.
\41\ Id.
\42\ Id. at 12-14.
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The Working Groups assert that the position limit rules represent a
``drastic departure from the status quo.'' \43\ According to the
aggregation petition, the Commission's position limits previously only
applied to agricultural commodity futures and options on futures, and
DCM position limits applied to futures on energy and metals
commodities.\44\ However, the Commission's new position limits rules
will apply to swaps for the first time. Further, the Working Groups
contend that DCMs previously provided ``aggregation exemptions that
provided the flexibility necessary for commercial enterprises to manage
their position limit obligations across entities without undue
burden.'' \45\ In addition, the aggregation of accounts across
commercial firms could lead to decreased liquidity and competition in
the energy derivatives market.
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\43\ Id. at 14.
\44\ The Commission notes that although the aggregation petition
describes the final position limit rules, including the aggregation
requirements, as a ``drastic departure from the status quo,'' and
seeks to differentiate between Commission and DCM rules regarding
treatment of owned positions for purposes of aggregation, many
current and past DCM rules require aggregation of the positions a
person either owns or controls. See Board of Trade of the City of
Chicago, Inc. (``CBOT'') Rule 559.D; Chicago Mercantile Exchange,
Inc. (``CME'') Rule 559.D; New York Mercantile Exchange, Inc.
(``NYMEX'') Rule 559.D; ICE Futures U.S., Inc. (``ICE US'') Rule
6.12; Board of Trade of Kansas City, Missouri, Inc. (``KCBT'') Rule
2008.00; and Minneapolis Grain Exchange, Inc. (``MGE'') Rule 7310.
See also NYMEX Rule 9.35, MGEX Rule 7310 and CBOT Rule 425.05 as
examples of older rules requiring aggregation of the positions a
person either owns or controls, which were in effect over the last
10 years. Furthermore, acceptable practices adopted by the
Commission in August, 2001, provided DCMs with a safe harbor for
position limit rules that aggregated positions a person owns or
controls. See 66 FR 42256, 42280, August 10, 2001, Appendix B to
Part 38, Core Principle 5. See also http://www.cftc.gov/files/foia/fedreg01/foi010810a.pdf.
\45\ Id. at 15.
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In light of these changes, the Working Groups believe that the
Commission should provide relief in the form of an owned non-financial
entity exemption. The aggregation petition includes a draft owned non-
financial entity exemption that follows the Commission's prior proposed
exemption with some modifications.\46\
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\46\ Id. at Exhibit A.
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Similar to the aggregation petition, commenters to the interim
final rule request that the Commission adopt an owned non-financial
entity exemption.\47\ FIA and EEI argue that without such an exemption,
market participants would have to aggregate all positions held by any
entity in which it has a ten percent ownership interest, even if such
interest is passive without control over trading. According to FIA,
such a consequence would ``have an unnecessary and profoundly negative
impact on users of Referenced Contracts, and their affiliates with no
corresponding benefit to the stability or integrity of the market.''
\48\ EEI also argues that the owned non-financial entity exemption
would provide commercial firms the same aggregation relief as eligible
entities that rely on the independent account controller exemption.\49\
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\47\ CL-FIA at 17-18; and CL-EEI at 16-17.
\48\ CL-FIA at 18. See also CL-EEI at 16-17.
\49\ CL-EEI at 16.
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Several commenters also address the requirement that persons
aggregate
[[Page 31771]]
based upon ownership of positions generally. These commenters recommend
that the Commission only aggregate based on control, and not aggregate
positions based upon an ownership interest in a position or
account.\50\ According to these commenters, aggregation through an
ownership interest, absent control of trading decisions, will impose
significant burdens for entities to aggregate on an intra-day basis,
may harm liquidity, and does not address the potential concerns about
coordinated trading. Similar to the comments regarding the owned non-
financial entity exemption, commenters submit that aggregating
positions based solely on ownership creates substantial compliance
burdens within the context of a complex corporate structure. In this
connection, EEI suggests that the Commission not require an entity to
aggregate owned positions if an entity could show the independence of
trading decisions of the owned entity.\51\
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\50\ See e.g., CL-FIA at 15; CL-EEI at 1-2, 14-15; CL-Atmos at
3-5; and CL-AGA at 1-3.
\51\ See e.g., CL-EEI at 14-15.
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3. Exemption for Underwriters
As noted above, Commission rule 151.7(g) includes an exemption from
the ownership criteria for aggregation if the ownership interest:
Is based on the ownership of securities constituting the whole
or a part of an unsold allotment to or subscription by such person
as a participant in the distribution of such securities by the
issuer or by or through an underwriter.
FIA submits that the Commission should clarify and expand this
exemption to include an ownership interest based on the acquisition or
disposition of securities acquired in connection with the trading or
market-making activities of a broker-dealer registered with the SEC, or
a comparable broker-dealer.\52\ FIA believes that aggregation based
upon a 10 percent ownership interest should not be required if the
broker-dealer acquires the interest--(1) In anticipation of demand, (2)
as part of its normal market-making activity, or (3) as a result of a
routine life cycle event, such as a stock distribution. Such ownership
interests, according to FIA, do not present the same concerns about
sharing transaction or position information that may facilitate
coordinated trading.\53\
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\52\ CL-FIA at 6, 16.
\53\ CL-FIA at 16.
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In response to the issues raised in the aggregation petition and
comments to the interim final rule, the Commission has determined to
propose modifications to certain position limits aggregation
provisions.
II. Proposed Rules
A. Proposed Rules for Information Sharing Restriction
The Commission is proposing to clarify that the scope of the
exemption in regulation 151.7(i) includes a reasonable risk of a
violation of federal law. The Commission intended to cover such risks
in the final rule and is therefore proposing to amend regulation
151.7(i) to make clear that the exemption includes circumstances in
which the sharing of information would create a reasonable risk of a
violation of federal law or regulations adopted thereunder.
The proposed rules retain the requirement that market participants
file an opinion of counsel to rely on the exemption in regulation
151.7(i). The opinion allows Commission staff to review the legal basis
for the asserted regulatory impediment to the sharing of information,
and is particularly helpful where the asserted impediment arises from
laws and/or regulations that the Commission does not directly
administer. Further, Commission staff will have the ability to consult
with other federal regulators as to the accuracy of the opinion, and to
coordinate the development of rules surrounding information sharing and
aggregation across accounts in the future. The Commission also notes
that the proposed clarification should address the concerns of
commenters that obtaining an opinion of counsel could be difficult if
the Commission read the existing standard to include only per se
violations.
With regard to comments that the exemption should permit persons to
rely upon ``best practices'' or other ``guidelines,'' the Commission
notes that the proposed exemption applies to situations where the
sharing of information creates a reasonable risk of violating federal
law or regulations adopted thereunder. Whether a reasonable risk exists
will depend on the interconnection of the applicable statute and
regulatory guidance, as well as the particular facts and circumstances
as applied to the statute and guidance. Notwithstanding the
Commission's facts and circumstances review of potentially conflicting
federal law or regulations, the exemption in regulation 151.7(i) is
effective upon filing of the notice in 151.7(h) and opinion of counsel.
These provisions authorize the Commission to request additional
information beyond that contained in the notice filing, and the
Commission may amend, suspend, terminate or otherwise modify a person's
aggregation exemption upon further review. As the Commission gains
further experience with the exemption for federal law information
sharing restriction in regulation 151.7(i), the Commission anticipates
providing further guidance to market participants.
1. Proposed Rules for Information Sharing Restriction--Foreign Law
For the same reasons the Commission adopted the exemption for
federal information sharing restrictions, the Commission proposes
extending the exemption to the law of a foreign jurisdiction. In
addition, similar to the clarification for the exemption for federal
law information sharing restriction, the Commission is also proposing
an exemption where the sharing of information creates a reasonable risk
of violating the law of a foreign jurisdiction. However, the Commission
remains concerned that certain market participants could potentially
use the existing and proposed expansion of the exemption in regulation
151.7(i) to evade the requirements for the aggregation of accounts. In
this regard, this proposed rule, consistent with the exemption for
federal law information sharing restriction, includes the requirement
to file an opinion of counsel specifically identifying the restriction
of law and facts particular to the market participant claiming the
exemption.\54\
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\54\ The Commission notes that the proposed expansion of this
exemption includes a proposed technical change to regulation
151.7(i). The proposed technical change specifies that the
``notice'' filing referenced in current regulation 151.7(i) is a
reference to the notice filing requirements set forth in regulation
151.7(h). In addition, the Commission has proposed a technical
change to the FCM exemption in current regulation 151.7(e). Proposed
regulation 151.7(e)(4) is designed for ease of reference for market
participants to follow the filing requirements in regulation
151.7(h), which requires persons claiming the FCM exemption in
regulation 151.7(e) to file pursuant to regulation 151.7(h).
Finally, the Commission is also proposing a technical change to the
form and manner of filing for an aggregation exemption in regulation
151.10(b)(4). Specifically, this proposed change makes clear that a
notice filing for an aggregation exemption is effective upon filing.
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The Commission notes that the aggregation petition references
information sharing restrictions that arise from ``international'' law.
The proposed rules include relief from aggregation for information
sharing that could create a reasonable risk of violating the law of a
foreign jurisdiction. The Commission seeks comment as to whether this
proposal adequately addresses the concerns of market participants
outlined in the interim final rule comments and the
[[Page 31772]]
aggregation petition, and as to whether those concerns are valid. The
Commission specifically requests comment on the types of
``international'' law, if any, which could create information sharing
restrictions other than the law of a foreign jurisdiction. Should the
regulation 151.7(i) exemption include ``international'' law or is it
sufficient to refer to the ``law of a foreign jurisdiction''?
Alternatively, the Commission is considering a case-by-case approach
through petitions submitted pursuant to CEA section 4a(a)(7). Should
the Commission adopt such a case-by-case approach?
2. Proposed Rules for Information Sharing Restriction--State Law
After consideration of the aggregation petition and the interim
final rule comments the Commission is also proposing to establish an
exemption for situations where information sharing restrictions could
trigger state law violations. In addition, similar to the clarification
for the exemption for federal law information sharing restriction, the
Commission is also proposing that the state law information sharing
restriction apply to situations where the sharing of information
creates a reasonable risk of violating the state law. However, as noted
above, the Commission remains concerned about the potential for evasion
within the context of this exemption. In this regard, this proposed
rule, consistent with the federal law information sharing restriction,
includes the requirement to file an opinion of counsel specifically
identifying the restriction of law and facts particular to the market
participant claiming the exemption.
The Commission solicits comments as to the appropriateness of
extending the information sharing exemption to state law. Should the
Commission provide for such an exemption? Alternatively, the Commission
is considering a case-by-case approach through petitions submitted
pursuant to CEA section 4a(a)(7). Should the Commission adopt such a
case-by-case approach and otherwise rely upon the preemption of state
law in administering its aggregation policy?
The Commission notes that the aggregation petition cites to Texas
Public Utility Code Substantive Rule 25.503, which provides that ``a
market participant shall not collude with other market participants to
manipulate the price or supply of power.'' \55\ That provision applies
to intra-state transactions and resembles regulations of the Federal
Energy Regulatory Commission.\56\ In this regard, should the Commission
limit application of the proposed exemption for state law information
sharing restrictions to laws that have a comparable provision at the
federal level? What criteria should the Commission use in identifying
state laws that a person may rely upon for an exemption from
aggregation?
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\55\ Aggregation petition at 24.
\56\ See e.g. 18 CFR 1c.1 & 1c.2.
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The Commission also solicits additional comment as to the types of
state laws, including specific laws, which could create an information
sharing restriction in conflict with the Commission's aggregation
policy.
The Commission further notes that the aggregation petition seeks to
extend the exemption to information sharing restrictions that arise
from ``local'' law.\57\ However, neither the aggregation petition nor
interim final rule commenters have provided examples, and the
Commission is concerned that an exemption for local law would be
difficult to implement due to the number of laws and/or regulations
that would need to be considered and the vast numbers of localities
that might issue such laws and/or regulations.
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\57\ Aggregation petition at 24.
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The Commission solicits comment as to the appropriateness of
extending the information sharing exemption to ``local'' law.
Commenters are asked to provide the scope of local law and identify any
specific laws that create information sharing restrictions that would
conflict with the Commission's aggregation policy. What criteria could
the Commission use in identifying local laws that a person may rely
upon for an exemption from aggregation? Should the Commission adopt a
case-by-case approach through petitions submitted pursuant to CEA
section 4a(a)(7) and otherwise rely upon the preemption of local law in
administering its aggregation policy?
B. Proposed Rules--Ownership of Positions Generally
The Commission continues to consider ownership an appropriate
measure for aggregation. Section 4a(a)(1) of the CEA provides for the
general aggregation standard with regard to position limits, and
specifically provides:
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.\58\
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\58\ 7 U.S.C. 6a.
Congress incorporated this provision into Section 4a as part of the CEA
Amendments of 1968 (``1968 Act'').\59\ The legislative history to the
1968 Act indicates that Congress added this language to expressly
incorporate prior administrative determinations of the Commodity
Exchange Authority (predecessor to the Commission).\60\ Prior to the
1968 Act, administrative determinations as well as regulations of the
Commodity Exchange Authority announced standards that included control
of trading and the ownership of positions.\61\
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\59\ Public Law 90-258, 82 Stat. 26 (1968).
\60\ See S. Rep No. 947, 90th Cong., 2 Sess. 5 (1968). This
senate report provides:
Certain longstanding administrative interpretations would be
incorporated in the act. As an example, the present act authorizes
the Commodity Exchange Commission to fix limits on the amount of
speculative ``trading'' that may be done. The Commission has
construed this to mean that it has the authority to set limits on
the amount of buying or selling that may be done and on the size of
positions that may be held. All of the Commission's speculative
limit orders, dating back to 1938, have been based upon this
interpretation. The bill would clarify the act in this regard * * *.
Section 2 of the bill amends section 4a(1) of the act to show
clearly the authority to impose limits on ``positions which may be
held.'' It further provides that trading done and positions held by
a person controlled by another shall be considered as done or held
by such other; and that trading done or positions held by two or
more persons acting pursuant to an express or implied understanding
shall be treated as if done or held by a single person.
\61\ See Administrative Determination (``A.D.'') 163 (Aug. 7,
1957) (``[I]n the application of speculative limits, accounts in
which the firm has a financial interest must be combined with any
trading of the firm itself or any other accounts in which it in fact
exercises control.''). In addition, the Commission's predecessor,
and later the Commission, provided the aggregation standards for
purposes of position limits in the large trader reporting rules. See
Supersedure of Certain Regulations, 26 FR 2968, Apr. 7, 1961. In
1961, then regulation 18.01 read:
``(a) Multiple Accounts. If any trader holds or has a financial
interest in or controls more than one account, whether carried with
the same or with different futures commission merchants or foreign
brokers, all such accounts shall be considered as a single account
for the purpose of determining whether such trader has a reportable
position and for the purpose of reporting.'' 17 CFR 18.01 (1961).
The provisions concerning aggregation for position limits
generally remained part of the Commission's large trader reporting
regime until 1999 when the Commission incorporated the aggregation
provisions into part 150.4 with the existing position limit
provisions in part 150. See 64 FR 24038, May 5, 1999. The
Commission's part 151 rulemaking also incorporates the aggregation
provisions in part 151.7 along with the remaining position limit
provisions in part 151. See 76 FR 71626, Nov. 18, 2011.
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In light of the language in section 4a, the legislative history and
regulatory developments, the Commission has
[[Page 31773]]
historically viewed, and continues to view, section 4a as requiring
aggregation on the basis of either ownership or control.\62\ The
Commission also believes that aggregation of positions across accounts
based upon ownership is a necessary part of the Commission's position
limit regime.\63\ An ownership standard establishes a bright-line test
that provides certainty to market participants and the Commission.\64\
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\62\ See e.g., Exemptions from Speculative Position Limits for
Positions which have a Common Owner but which are Independently
Controlled and for Certain Spread Positions, 53 FR 41563, 41564,
Oct. 24, 1988); and Exemption from Speculative Position Limits for
Positions which have a Common Owner but which are Independently
Controlled and for Certain Spread Positions, 55 FR 30926, July 30,
1990.
\63\ See also, Exemptions from Speculative Position Limits for
Positions which have a Common Owner but which are Independently
Controlled and for Certain Spread Positions, 53 FR 13290, 13292,
Apr. 22, 1988. In response to two separate petitions, the Commission
proposed the independent account controller exemption from
speculative position limits, but declined to remove the ownership
standard from its aggregation policy.
\64\ See also Revision of Federal Speculative Position Limits
and Associated Rules, 64 FR 24038, 24044, May 5, 1999 (``[T]he
Commission * * * interprets the `held or controlled' criteria as
applying separately to ownership of positions or to control of
trading decisions.''); and 53 FR 13290, 13293 (1988).
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Absent aggregation on the basis of ownership, the Commission would
have to apply a control test in all cases, which poses significant
administrative challenges to individually assess control across all
market participants. Further, if the statute only required aggregation
based on control, market participants may be able to use an ownership
interest to circumvent aggregation in circumstances where an ownership
interest is used to directly or indirectly influence control over the
account or position. The Commission also notes that the ownership prong
attributes a position to the beneficial owner of multiple accounts that
amount to an unduly large position, which position limits are intended
to prevent. Therefore, the proposed rules would continue to require
aggregation based upon either ownership or control.
Regarding a threshold level to aggregate on the basis of ownership,
the Commission has generally found that an ownership or equity interest
of less than 10 percent in an account or position that is controlled by
another person who makes discretionary trading decisions does not
present a concern that such ownership interest results in control over
trading or can be used indirectly to create a large speculative
position through ownership interests in multiple accounts. As such, the
Commission has traditionally viewed an ownership interest below 10
percent as not warranting aggregation.\65\ Commenters suggest that a
similar analysis should prevail for an ownership interest of 10 percent
or more where such ownership represents a passive investment that does
not involve control of the trading decisions of the owned entity.
Commenters argue that under these conditions, such passive investments
would present a reduced concern for trading pursuant to direct or
indirect control, as well as a reduced risk for persons with positions
in multiple accounts to hold an unduly large overall position.
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\65\ The Commission codified this aggregation threshold in its
1979 statement of policy on aggregation, which was derived from the
administrative experience of the Commission's predecessor. See
Statement of Policy on Aggregation of Accounts and Adoption of
Related Reporting Rules, 44 FR 33839, 33843, Jun. 13, 1979. Note,
however, rule 151.7(d) will separately require aggregation of
investments in accounts with identical trading strategies.
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While prior Commission rulemakings have generally restricted
exemptions to the ownership criteria to limited partners of commodity
pools and independent account controllers managing customer funds for
an eligible entity, the Commission has considered a broader passive
investment exemption.\66\ Further, the Commission indicated in the part
151 final rule that the development of aggregation exemptions could
occur over time.\67\ This incremental approach to account aggregation
standards reflects the Commission's historical practice.\68\ Consistent
with that practice, the Commission has considered the additional
information provided and the concerns raised by the aggregation
petition and interim final rule commenters, and believes it appropriate
to propose certain relief from the ownership criteria of
aggregation.\69\
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\66\ See e.g., 53 FR 13290, 13292 (1988) (proposal). The 1988
proposal for the independent account controller rule requested
comment on the possibility of a broader passive investment
exemption, and specifically noted:
``[Q]uestions also have been raised regarding the continued
appropriateness of the Commission's aggregation standard which
provides that a beneficial interest in an account or positions of
ten percent or more constitutes a financial interest tantamount to
ownership. This threshold financial interest serves to establish
ownership under both the ownership criterion of the aggregation
standard and as one of the indicia of control under the 1979
Aggregation Policy.
In particular, certain instances have come to the Commission's
attention where beneficial ownership in several otherwise unrelated
accounts may be greater than ten percent, but the circumstances
surrounding the financial interest clearly exclude the owner from
control over the positions. The Commission is requesting comment on
whether further revisions to the current Commission rules and
policies regarding ownership are advisable in light of the exemption
hereby being proposed. If such financial interests raise issues not
addressed by the proposed exemption for independent account
controllers, what approach best resolves those issues while
maintaining a bright-line aggregation test?''
\67\ See 76 FR 71626, 71654.
\68\ See e.g., 53 FR 41563, 41567, Oct. 24, 1988 (the definition
of eligible entity for purposes of the IAC exemption originally only
included CPOs, or exempt CPOs or pools, but the Commission indicated
a willingness to expand the exemption after a ``reasonable
opportunity'' to review the exemption.); 56 FR 14308, 14312, Apr. 9,
1991 (The Commission expanded eligible entities to include commodity
trading advisors, but did not include additional entities requested
by commenters until the Commission had the opportunity to assess the
current expansion and further evaluate the additional entities); and
64 FR 24038, May 5, 1999 (The Commission expanded the list of
eligible entities to include many of the entities commenters
requested in the 1991 rulemaking).
\69\ The Commission notes that ownership and control are
considered separately for the aggregation of accounts. As such, if
the Commission were to adopt the proposed exemption outlined below,
and a market participant qualified for the exemption, such person
would nonetheless have to aggregate those same accounts or positions
identified in the exemption if such person otherwise controlled
trading, acted pursuant to an express or implied agreement or held
positions in accounts with identical trading strategies.
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1. Disaggregation Relief for Owned Entities
Proposed rule 151.7(b) continues the Commission's longstanding rule
that persons with an ownership or equity interest in an account or
position of less than 10 percent need not aggregate such positions
solely on the basis of the ownership criteria. Persons with a 10
percent or greater ownership interest would still generally be required
to aggregate the account or positions. However, proposed rule
151.7(b)(1) establishes a notice filing procedure to permit a person in
specified circumstances to disaggregate the positions of a separately
organized entity (``owned entity''), even if such person has a 10
percent or greater interest in the owned entity. The notice filing
would need to demonstrate compliance with certain conditions set forth
in 151.7(b)(1)(i), and such relief would not be available to persons
with a greater than 50 percent ownership or equity interest in the
owned entity. Similar to other exemptions from aggregation, the notice
filing would be effective upon submission to the Commission, but the
Commission may subsequently call for additional information as well as
reject, modify or otherwise condition such relief. Further, such person
is obligated to amend the notice filing in the event of a material
change to the circumstances described in the filing.
The proposed criteria to claim relief under 151.7(b)(1) address the
Commission's concerns that an
[[Page 31774]]
ownership or equity interest of 10 percent and above may facilitate or
enable control over trading of the owned entity or allow a person to
accumulate a large position through multiple accounts that could
overall amount to an unduly large position. Essentially, the proposed
rules amending the ownership criteria for aggregation across accounts
establish a rebuttable presumption that persons with an ownership or
equity interest of 10 percent or greater must aggregate, but such
persons may file for disaggregation relief if their ownership interest
does not exceed 50 percent and they can demonstrate independence by
meeting the criteria described below.\70\
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\70\ The Commission notes that the conditions for independence
apply to the person filing the notice as well as the owned entity.
In addition, for purposes of complying with the proposed conditions,
such ``person'' shall include any entity that such person must
aggregate pursuant to regulation 151.7. For example, if company A
files a notice under proposed regulation 151.7(b)(1) for company A's
equity interest of 30 percent in company B, then company A must
comply with the conditions for the exemption, including any entity
with which company A aggregates positions under 151.7. In this
connection, if company A controls the trading of company C, then
there must be independence between company B and company C for
purposes of company A's 151.7(b)(1) notice filing.
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Proposed rule 151.7(b)(1)(i)(A) conditions aggregation relief for
the ownership interest in another entity on a demonstration that a
person filing for disaggregation relief and the owned entity do not
have knowledge of the trading decisions of the other. The Commission
believes that where an entity has an ownership interest in another
entity and neither entity share trading information, such entities
demonstrate independence. In contrast, persons with knowledge of
trading decisions of another in which they have an ownership interest
are likely to take such decisions into account in making their own
trading decisions, which implicates the Commission's concern about
independence and enhances the risk for coordinated trading. For
purposes of this provision, the Commission does not consider knowledge
of overall end-of-day position information to necessarily constitute
knowledge of trading decisions, so long as the position information
cannot be used to dictate or infer trading strategies. As such, the
knowledge of end-of-day positions for the purpose of monitoring credit
limits for corporate guarantees would not necessarily constitute
knowledge of trading information. However, the ability to monitor the
development of positions on a real time basis could constitute
knowledge of trading decisions because of the substantial likelihood
that such knowledge might affect trading strategies or influence
trading decisions of the other.
Proposed rule 151.7(b)(1)(i)(B) conditions aggregation relief on a
demonstration that such person seeking disaggregation relief and the
owned entity trade pursuant to separately developed and independent
trading systems. Further, proposed rule 151.7(b)(1)(i)(C) conditions
relief on a demonstration that such person and the owned entity have,
and enforce, written procedures to preclude the one entity from having
knowledge of, gaining access to, or receiving data about, trades of the
other. Such procedures must include document routing and other
procedures or security arrangements, including separate physical
locations, which would maintain the independence of their activities.
The Commission has applied these same conditions in connection with the
IAC exemption to ensure independence of trading between an eligible
entity and an affiliated independent account controller.\71\ Such
conditions have been useful in ensuring that trading is not coordinated
through the development of similar trading systems, and that procedures
are in place to prevent the sharing of trading decisions between
entities. Similar to the IAC exemption, the proposed owned entity
exemption in proposed rule 151.1(b)(1) would permit disaggregation if
there is independence of trading between two entities. Thus the
Commission proposes to include the above conditions, which are already
applicable in the IAC context, and which should also strengthen the
independence between the two entities for the owned entity exemption.
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\71\ See 17 CFR 151.7(f).
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Proposed rule 151.7(b)(1)(i)(D) conditions aggregation relief on a
demonstration that such person does not share employees that control
the owned entity's trading decisions, and the employees of the owned
entity do not share trading control with such persons. The Commission
is concerned that shared employees with knowledge of trading decisions
undermine the independence of trading between entities. Similar to the
restriction on information sharing, the sharing of employees with
knowledge of trading decisions presents a strong risk to the
independence of trading between entities. In the aggregation petition,
the Working Groups submit that entities should be permitted to share
``attorneys, accountants, risk managers, compliance and other mid- and
back-office personnel.'' \72\ At this time, the Commission questions,
and seeks comment regarding, whether the sharing of such persons
compromises independence because it would provide each entity with
knowledge of the other's trading decisions.\73\
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\72\ Aggregation petition at Exhibit A.
\73\ The Commission notes that the proposed condition barring
the sharing of employees that control the owned entity's trading
decisions would include a prohibition on sharing of employees
described in the aggregation petition (attorneys, accountants, risk
managers, compliance and other mid-and back-office personnel), to
the extent such employees are aware of the trading decisions of the
person or the owned entity.
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Proposed rule 151.7(b)(1)(i)(E) conditions aggregation relief on a
demonstration that the person and the owned entity do not have risk
management systems that permit the sharing of trades or trading
strategies with the other. This condition addresses concerns that risk
management systems that permit the sharing of trades or trading
strategies with each other present a significant risk of coordinated
trading through the sharing of information.\74\ The Commission has not
proposed a condition that the risk management system be separately
developed from the risk management system of the owned entity, and the
Commission seeks comment as to whether risk management systems that do
not communicate trade information can maintain independence of trading
between entities.\75\
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\74\ This condition is similar to a condition proposed in the
aggregation petition.
\75\ The Commission remains concerned that a trading system, as
opposed to a risk management system, that is not separately
developed from another system can subvert independence because such
a system could apply the same or similar trading strategies even
without the sharing of trading information.
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Proposed rule 151.7(b)(1)(ii) conditions aggregation relief on a
demonstration that such person does not have greater than a 50 percent
ownership or equity interest in the owned entity. An equity or
ownership interest above 50 percent constitutes a majority ownership or
equity interest of the owned entity and is so significant as to require
aggregation under the ownership prong of Section 4a(a)(1) of the CEA.
This proposal would provide administrative certainty and would address
concerns about circumvention of position limits by coordinated trading
or direct or indirect influence between entities. To the extent that
the majority owner may have the ability and incentive to direct,
control or influence the management of the owned entity, the proposed
bright-line test would be a reasonable approach to the aggregation of
owned accounts pursuant to Section
[[Page 31775]]
4a(a)(1). A person with a greater than 50 percent ownership interest in
multiple accounts would have the ability to hold and control a
significantly large and potentially unduly large overall position in a
particular commodity, which position limits are intended to
prevent.\76\
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\76\ The Commission notes that aggregation based on ownership
looks to a person's equity interest regardless of voting control. By
way of comparison, with a greater than 50 percent interest in voting
shares, such person generally is required to consolidate the owned
entity for purposes of the Generally Accepted Accounting Principles
(``GAAP''). See Financial Accounting Standards Board Accounting
Standards Codification Topic 810, at paragraphs 810-10-15-8 and 10,
available at https://asc.fasb.org/. See also Accounting Research
Bulletin 51 at paragraph 3 and Statement of Financial Accounting
Standard No. 94 at paragraph 2. The Commission believes that
aggregation based upon an ownership or equity interest of greater
than 50 percent, regardless of voting interest, is appropriate to
address the heightened risk of direct or indirect influence over the
owned entity. Further, unless a particular exemption applies, a
person with a 50 percent or greater voting interest in an owned
entity would likely be required to aggregate the positions of the
owned entity on the basis of control.
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The proposed owned entity exemption and the clarification and
expansion of the violation of law exemption address concerns raised in
the aggregation petition and interim final rule comments. First, the
clarification and extension of the violation of law exemption responds
to concerns that market participants could face increased liability
under state, federal and foreign law. While the aggregation petition
and other commenters argue that an owned non-financial entity exemption
would reduce the risk of liability under antitrust and other laws, the
proposed clarification and expansion would allow market participants to
avail themselves of the violation of law exemption in those
circumstances where the sharing of information creates a reasonable
risk of violating the above mentioned bodies of law.
The proposed owned entity exemption applies to both financial and
non-financial entities that have passive ownership interests. Market
participants that qualify for the exemption can file a notice with the
Commission demonstrating independence between entities and, thereafter,
forgo the development of monitoring and tracking systems for the
aggregation of accounts. The Commission seeks comment as to whether
such passive interests present a significantly reduced risk of
coordinated trading compared to owned entities that fail the criteria
for the proposed exemption. In addition, the Commission specifically
requests comment as to whether the proposed relief should be limited to
ownership interests in non-financial entities.
While the owned non-financial entity exemption mentioned in the
aggregation petition would permit disaggregation even if the owned
entity is a wholly owned company, the Commission is concerned that an
ownership interest greater than 50 percent presents heightened concerns
for coordinated trading or direct or indirect influence over an account
or position, and that permitting disaggregation at that level of
ownership would be inconsistent with the statutory requirement to
aggregate on the basis of ownership. Small ownership interests of less
than 10 percent do not warrant aggregation. A 10 percent or greater
ownership interest has served as a useful measure for aggregation, but
the Commission has determined relief may be warranted for passive
investments. However, for the reasons discussed above, an ownership
interest greater than 50 percent requires aggregation because ownership
at that level serves as a useful benchmark for the increased risk of
direct or indirect influence over the trading of an owned entity.
Because the circumstances facilitating control can be difficult to
monitor, a facts and circumstances review would be difficult to
administer by both market participants and the Commission. In addition,
a person with a greater than 50 percent ownership interest in multiple
accounts may have the ability to hold a significantly large and
potentially unduly large overall position in a particular commodity,
which position limits are intended to prevent. Therefore, the
Commission proposes limiting the availability of the exemption to those
having an ownership interest no greater than 50 percent because such a
bright-line rule would provide clarity to market participants and a
useful tool for the Commission to simplify aggregation where there is
an increased and substantial risk of coordinated trading.\77\
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\77\ The Commission reminds market participants that proposed
regulation 151.7(b)(1) does not affect the applicability of a
separate exemption from aggregation (e.g., the independent account
controller exemption).
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With regard to filing requirements for the exemption in regulation
151.7(b) (1), the Commission notes that market participants would be
required to file in accordance with regulation 151.7(h).\78\ As such,
market participants must file a notice with the Commission with a
description of how they adhere to the criteria in regulation
151.7(b)(1) and a certification that the conditions are met. This
certification, as well as any other certification made under regulation
151.7(h), must come from a senior officer of the market participant
with knowledge as to the contents of the notice.\79\ Therefore, the
Commission is proposing to clarify in regulation 151.7(h)(1)(ii) that
such certification come from a senior officer. Further, regulation
151.7(h)(3) requires market participants to promptly update a notice
filing in the event of a material change of the information contained
in the notice filing.\80\
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\78\ Where the provisions of regulation 151.7 require a person
to file a notice, entities cannot rely upon an exemption unless such
entity has properly filed a notice in accordance with regulation
151.7(h).
\79\ See 17 CFR 151.7(h)(1)(ii). Market participants should
update the certification if the individual certifying compliance no
longer works for the company.
\80\ In this regard, the Commission clarifies that a material
change would include, among other events, if the person making the
original certification is no longer employed by the company. See
also CEA Sec. Sec. 6(c)(2) and 9(a)(3).
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With regard to the type of material necessary to file a notice to
claim an exemption under 151.7(b)(1), the Commission notes that each
submission must be specific to the facts of the particular entity. The
person claiming the exemption must provide specific facts that
demonstrate compliance with each condition of relief. Such a
demonstration should likely include an organizational chart including
the ownership and control structure of the involved entities, a
description of the risk management system, a description of the
information-sharing systems (including bulletin boards, and common
email addresses of the entities identified), an explanation of how and
to whom the trade data and position information is distributed
(including the responsibilities of the individual receiving such
information), and the officers that receive reports of the trade data
and position information.\81\
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\81\ The Commission notes that this list is not meant to be
exhaustive of the factors that would indicate an exemption is
warranted and should not be interpreted as being solely sufficient
to claim the exemption because each filing is fact specific. As
noted earlier, the Commission may demand additional information
regarding the exemption within its discretion.
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The Commission specifically requests comments as to the
appropriateness of the owned entity exemption as well as the conditions
applicable to the exemption. Should the Commission add additional
criteria? If so, what criteria and why? Should the Commission require
market participants to submit additional information to claim the
exemption? If so, what information and why? With regard to the owned
entity exemption, should the Commission alter the scope of the
exemption? If so, how should it be altered and why? Further,
[[Page 31776]]
at what percent of ownership interest should a market participant no
longer be able to claim the exemption proposed in regulation
151.7(b)(1), if any? Are there specific circumstances in which a higher
percentage of ownership than 50 percent would be appropriate to claim
the exemption in regulation 151.7(b)(1) notwithstanding the concerns
described above regarding coordinated trading, direct or indirect
influence, and significantly large and potentially unduly large overall
positions in a particular commodity? In addition, the Commission
welcomes comment on the owned non-financial entity exemption set forth
in appendix A of the aggregation petition as an alternative to the
owned entity exemption proposed herein.
2. Higher Tier Entities
In connection with the Working Groups' request for the Commission
to include an owned non-financial entity exemption, the Working Groups
also request that the Commission provide relief from the filing
requirements for claiming the exemption. Specifically, the aggregation
petition argues that if an entity files a notice and claims the owned
non-financial entity exemption, then ``every higher-tier company (a
company that holds an interest in the company that submitted the
notice) need not aggregate the referenced contracts of the owned non-
financial entities identified in the notice.'' \82\ Thus, the
Commission is proposing rules that provide relief to such ``higher-tier
entities'' within the context of a corporate structure.\83\
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\82\ Aggregation petition at 23.
\83\ For purposes of the discussion below, ``higher-tier''
entities include entities with a 10 percent or greater ownership
interest in an owned entity.
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Proposed rule 151.7(j) provides that higher-tier entities may rely
upon a notice for exemption filed by the owned entity, and such
reliance would only go to the accounts or positions specifically
identified in the notice. For example, if company A has a 30 percent
interest in company B, and company B has filed an exemption notice for
the accounts and positions of company C, then company A may rely upon
company B's exemption notice for the accounts and positions of company
C. Should company A wish to disaggregate the accounts or positions of
company B, company A would have to file a separate notice for an
exemption.
The proposed rules also provide that a higher-tier entity that
wishes to rely upon an owned entity's exemption notice must comply with
conditions of the applicable aggregation exemption other than the
notice filing requirements. Although higher-tier entities need not
submit a separate notice to rely upon the notice filed by an owned
entity, the Commission notes that it may, upon call, request that a
higher-tier entity submit information to the Commission, including the
possibility of an on-site visit, demonstrating compliance with the
applicable conditions.
The Commission believes that these proposed rules, if adopted,
should significantly reduce the filing requirements for aggregation
exemptions. Further, the Commission does not anticipate that the
reduction in filing will impact the Commission's ability to effectively
survey the proper application of exemptions from aggregation. The
initial filing of an owned entity exemption notice should provide the
Commission with sufficient information regarding the appropriateness of
the exemption, while repetitive filings of higher-tier entities would
not be expected to provide additional substantive information. However,
the Commission again notes that higher-tier entities would still be
required to comply with the substantive conditions of the exemption
specified in the owned entity's notice filing.
C. Underwriting
As noted above, Commission regulation 151.7(g) includes an
exemption from aggregation where an ownership interest is in an unsold
allotment of securities. FIA requests that the Commission expand the
exemption to include situations where securities are owned in
anticipation of demand as part of normal market-making activity, or as
a result of a routine life cycle event, such as a stock distribution.
The Commission believes that the ownership interest of a broker-
dealer registered with the SEC, or similarly registered with a foreign
regulatory authority,\84\ in an entity based on the ownership of
securities acquired as part of reasonable activity in the normal course
of business as a dealer is largely consistent with the ownership of an
unsold allotment of securities covered by the underwriting exemption
currently found in regulation 151.7(g). In both circumstances, the
ownership interest is likely transitory and not to hold for investment
purposes. Accordingly, the Commission is proposing an aggregation
exemption in regulation 151.7(g) for such activity.\85\
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\84\ See 15 U.S.C. 78o.
\85\ The Commission specifically notes that this proposed
exemption would not apply to registered broker-dealers that acquire
an ownership interest in securities with the intent to hold for
investment purposes.
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However, the Commission notes that this exemption would not apply
where a broker-dealer acquires more than a 50 percent ownership
interest in another entity because this would not be consistent with
holding such a transitory interest for the purpose of market making and
runs a higher risk of coordinated trading.\86\ Therefore, a broker-
dealer that acquires more than 50 percent ownership interest in another
entity must aggregate that entity, in the absence of another
aggregation exemption.
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\86\ With regard to FIA's request that the exemption include a
broker-dealer's ownership of securities in anticipation of demand or
as part of routine life cycle events, the proposed rules would cover
such activity if the activity was in the normal course of the
person's business as a dealer.
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The Commission requests comment on whether ownership of stock, by a
broker-dealer registered with the SEC or similarly registered with a
foreign regulatory authority, that is acquired as part of reasonable
activity in the normal course of business as a dealer, without other
ownership interests or indicia of control or concerted action, warrants
aggregation.
D. Independent Account Controller for Eligible Entities
As noted above in section I.A of this release, section 151.7(f)
provides an eligible entity with an exemption for the eligible entity's
customer accounts that are managed and controlled by independent
account controllers. In the part 151 rulemaking, the Commission adopted
the same definitions of eligible entity and independent account
controller found in the Commission's prior position limit regulations
in regulation 150.1. The definition of eligible entity includes ``the
limited partner or shareholder in a commodity pool the operator of
which is exempt from registration under Sec. 4.13 of this chapter * *
*.'' However, with regard to a CPO that is exempt under regulation
4.13, the definition of an independent account controller only extends
to ``a general partner of a commodity pool the operator of which is
exempt from registration under Sec. 4.13 of this chapter.'' At the
time the Commission expanded the IAC exemption to include regulation
4.13 commodity pools, market participants generally structured such
pools as limited partnerships.\87\
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\87\ See 63 FR 38532.
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The Commission understands that today, not all regulation 4.13
commodity pools are formed as partnerships. For example, regulation
[[Page 31777]]
4.13 pools may be formed as limited liability companies and have
managing members, not general partners.
The Commission is proposing to expand the definition of independent
account controller to include the managing member of a limited
liability company. As such, regulation 4.13 commodity pools established
as limited liability companies would be accorded the same treatment as
such pools formed as limited partnerships. The limitation of the
exemption to general partners was based upon a market structure that,
historically, did not generally include regulation 4.13 commodity pools
established as limited liability companies. In light of market
developments since the Commission expanded IACs to include regulation
4.13 pools as eligible entities, it may not be appropriate for there to
be a distinction between limited partnerships and limited liability
companies in this regard. As such, the Commission is proposing to amend
the definitions of eligible entity and independent account controller
in part 151.1 to specifically provide for regulation 4.13 commodity
pools established as limited liability companies.
The Commission intends to coordinate the disposition of the
petition with the implementation of position limits under part 151. To
do so, among other things, the Commission has directed staff to
promptly review comment letters as soon as practicable following close
of the comment period. Further, in order to provide an orderly
transition to the compliance dates specified in part 151.4, the
Commission intends to finalize consideration of the petition prior to
the first compliance date of part 151.
III. Related Matters
A. Considerations of Costs and Benefits
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing an order.\88\ Section 15(a) further specifies
that the costs and benefits shall be evaluated in light of the
following five broad areas of market and public concern: (1) Protection
of market participants and the public; (2) efficiency, competitiveness,
and financial integrity of futures markets; (3) price discovery; (4)
sound risk management practices; and (5) other public interest
considerations.
---------------------------------------------------------------------------
\88\ 7 U.S.C. 19(a).
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The proposed rules provide the public with an opportunity to
comment on concerns raised in the aggregation petition and in comments
on the interim final rule. The petitioner and the commenters seek
clarification of certain provisions of the Commission's aggregation
policy, and seek to alter or expand exemptions from aggregation to
include circumstances where there may be a low risk of coordinated
trading. The Commission requests comment on all aspects of its
consideration of costs and benefits, including identification and
assessment of any costs and benefits not discussed herein. In addition,
the Commission requests that commenters provide data and any other
information or statistics that they believe supports their positions
with respect to the Commission's consideration of costs and benefits.
1. Aggregation Petition and Other Comments
As discussed in section I.B. of this release, the Commission
received a petition seeking relief from certain aggregation provisions
in the final rules, as well as several comments regarding aggregation
in response to the interim final rule on cash-settled contract limits.
Among other things, the aggregation petition requests that the
Commission provide an aggregation exemption for owned non-financial
entities similar to an exemption that the Commission proposed but did
not adopt in its final rules.\89\
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\89\ As part of the proposed rules for part 151, the Commission
proposed that persons with an ownership or equity interest in a non-
financial entity need not aggregate the positions or accounts of the
non-financial entity provided the person filed an application
demonstrating compliance with certain conditions. See Position
Limits for Derivatives, 76 FR 4752, 4762-63, Jan. 26, 2011.
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The aggregation petition states that compliance with the final
rules' aggregation requirements would require information sharing and
coordination of trading that is contrary to current best practices.\90\
The aggregation petition contends that the aggregation rules may impede
investment in commercial firms, impair liquidity and competition in
energy derivatives markets, or cause firms to exit the market
altogether.\91\ Further, the aggregation petition states that the
aggregation rules necessitate the development and implementation of
extensive and expensive information technology systems that can track
positions across numerous affiliates, even if those affiliates
currently trade independently of each other.\92\ The aggregation
petition also submits that companies with an ownership position in a
joint venture would have to divest their interest to avoid operational
difficulties associated with aggregating positions.\93\ The petitioner
contends that these asserted costs could be mitigated if the Commission
were to adopt a variant of the owned non-financial entity
exemption,\94\ clarify that the violation of law exemption applies to
situations in which there is a ``reasonable risk'' of violating the
applicable law, expand the violation of law exemption to include
possible violations of local, state, foreign, and international
law,\95\ and adopt provisions relieving ``higher-tier'' entities of the
filing requirement, as discussed above.\96\
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\90\ See Aggregation Petition at 19.
\91\ Id. at 10-16.
\92\ Id. at 11.
\93\ Id. at 15.
\94\ Id. at Exhibit A.
\95\ Id. at 16-18.
\96\ Id. at 23.
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Several commenters to the Commission's interim final rule also
suggest that the Commission adopt a version of the ``owned non-
financial entity'' exemption; these commenters argue that even above 10
percent ownership, where there is no common control, there is no risk
of coordinated trading and, therefore, no need for aggregation of
positions.\97\ These commenters recommend that the Commission aggregate
based on control, and not based on an ownership interest in a position
or account.\98\ Commenters contend that aggregation of accounts in
passive investments, where the owned entity is independently managed
and controlled, will be costly and have a negative impact on markets
and market participants.\99\ Commenters also claim that many businesses
establish information barriers between affiliates, and that the final
rules would require the destruction of those barriers in order to
ensure compliance.\100\
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\97\ See CL-FIA at 15; CL-Atmos at 4-5; and CL-EEI at 14-15.
\98\ See e.g. CL-FIA at 15; CL-EEI at 1-2, 14-15; CL-Atmos at 3-
5; and CL-AGA at 1-3.
\99\ See CL-FIA at 18 and CL-EEI at 16-17.
\100\ See CL-FIA at 15; CL-EEI at 14-15; and CL-Atmos at 3.
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As with the petitioners, commenters to the interim final rule also
assert that the aggregation provisions impose significant operational
challenges for entities and end-users in particular, requiring them to
develop and maintain costly internal infrastructure mechanisms to
ensure compliance.\101\ FIA estimates that for a large conglomerate,
costs to comply with the final rule's aggregation procedures could be
high. In particular, FIA estimates that each entity could spend as much
as $500,000 to $1,000,000 to identify all entities subject to
[[Page 31778]]
aggregation and to establish protocols for reporting all commonly owned
and controlled positions in Referenced Contracts; as much as $1,000,000
to $1,500,000 to establish new information technology systems for
consolidating and tracking aggregated position information; and
approximately $100,000 for each entity subject to aggregation to report
position information to its affiliates and/or controlling
entities.\102\
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\101\ See CL-EEI at 14-15; and CL-Atmos at 1-2.
\102\ See CL-FIA at 19-20.
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With regard to the exemption for federal law information sharing
restriction in regulation 151.7(i), several commenters also suggest
that the Commission extend the exemption to include state and foreign
jurisdictions.\103\ One commenter wrote that the provision in
regulation 151.7(i) that requires an opinion of counsel to obtain such
an exemption was too burdensome and should be revised.\104\
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\103\ See CL-EEI at 17-18; CL-AGA at 1-2; CL-FIA at 6; and CL-
Atmos at 5.
\104\ See CL-AGA at 5.
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One commenter also suggests that the Commission extend the
underwriting exemption in regulation 151.7(g) to include situations
where a broker-dealer acquires positions for legitimate dealing
reasons, such as in anticipation of increased demand, as part of its
normal market-making activity, or as a result of a routine life-cycle
event.\105\
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\105\ See CL-FIA at 16.
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2. Summary of the Commission's Proposal
Exemption for Violation of Laws. In the final part 151 rules, the
Commission included an exemption from aggregation for those entities
for whom sharing the requisite information would violate federal law.
The Commission seeks to clarify that it always intended the exemption
to apply in those circumstances in which the sharing of information
presents a ``reasonable risk'' of violating the applicable law(s).
As explained above, one commenter urged the Commission to drop the
requirement that, to obtain the violation-of-laws exemption an entity
must submit an opinion of counsel (as discussed in section II.C). Such
an opinion allows the Commission to review the facts and circumstances
supporting the claimed exemption, and thus the proposed rules would
retain the requirement to submit an opinion of counsel.
In light of the aggregation petition and comments on the interim
final rule, the Commission is including in this proposal an expansion
of the violation-of-law exemption to include state law and the law of
foreign jurisdictions. The existing rule allows entities who believe
that the aggregation provisions would require them to violate state or
foreign laws to seek an exemption on a case-by-case basis. The
Commission seeks comment as to the scope of the proposed exemption.
Proposed Owned Entity Exemption. Proposed rule 151.7(b)(1) provides
that any person with an ownership or equity interest in an entity
(financial or non-financial) of 10 percent or greater may disaggregate
the owned entity's positions upon demonstrating compliance with each of
several specified indicia of independence.\106\ The proposed indicia
are that such person and 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 in place policies
and procedures to preclude sharing knowledge of, gaining access to, or
receiving data about, trades of the other; (4) do not share employees
that control the trading decisions of the other; and (5) maintain a
risk management system that does not allow the sharing of trade
information or trading strategies between entities. In addition, such
person's ownership or equity interest in the owned entity cannot exceed
50 percent.
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\106\ As discussed in section II.D.1, at over 50 percent
ownership, the proposed ownership standard would mandate aggregation
in order to give effect to the statutory requirement that positions
``held'' by a person must be aggregated, and because of a person's
ability to influence management and the concomitant heightened
concerns about coordinated trading. The owned entity exemption does
not impact the availability of the IAC, FCM, and federal, state, or
foreign law information sharing restriction exemptions as found in
regulation 151.7(h). However, as proposed, this exemption from the
ownership criteria would not apply to investments in accounts with
identical trading strategies.
---------------------------------------------------------------------------
The aggregation petition and several of the other commenters urge
that the Commission should permit market participants to disaggregate
accounts in situations where ownership of an account is passive, as
they contend there is a less of a concern regarding coordinated
trading.\107\ The aggregation petition and other commenters suggest
that the Commission add an owned non-financial entity exemption, which
they contend would incorporate such situations as well as alleviate
potential negative impacts to liquidity and competition in both
physical and derivatives markets.
---------------------------------------------------------------------------
\107\ They further contend that a lack of an owned non-financial
entity exemption could increase liability for antitrust and other
federal law and regulations. This concern is addressed by the
proposed clarification discussed above, which provides that market
participants may avail themselves of the violation of law exemption
if the sharing of information creates a reasonable risk of a
violation.
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The Commission is proposing to permit disaggregation of entities
where a person has no greater than a 50 percent interest in the entity
and meets certain other conditions. The proposed owned-entity exemption
would apply to a person's passive investments in either financial or
non-financial entities. Those who qualify under this proposal would
have to demonstrate that they meet all of its conditions. The
Commission seeks comment as to whether the concerns suggested by the
aggregation petition and other commenters are valid, whether this
proposal meets those concerns, and whether the 50 percent limit and
other conditions are appropriate.
Expansion of the Underwriter Exemption. The Commission is also
proposing to expand the exemption for the underwriting of securities
that was adopted as regulation 151.7(g) to include ownership interests
acquired through the market-making activities of an affiliated broker
dealer. This proposal would exempt from aggregation ownership interests
acquired as part of a person's reasonable market-making activity in the
normal course of business as a broker-dealer registered with the SEC or
comparable registration in a foreign jurisdiction,\108\ so long as
there is no other ownership interests or indicia of control or
concerted action. The Commission intends for this proposal to apply to
ownership interests that are likely transitory and not for investment
purposes, and seeks comment as to whether such interests are at a low
risk for the coordination of trading or whether this exemption could
lead to evasion of applicable position limits.\109\
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\108\ See 15 U.S.C. 78o.
\109\ The Commission specifically notes that this proposed
exemption would not apply to registered broker-dealers that acquire
an ownership interest in securities with the intent to hold for
investment purposes.
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Proposed ``Higher-Tier'' Entity Filing Relief. The Commission also
is proposing to extend filing relief to ``higher-tier'' entities. As
such, proposed regulation 151.7(j) provides that higher-tier entities
may rely on exemption notices filed by owned entities. Commenters claim
that such an exemption would reduce the burden of filing exemption
notices by eliminating redundancies. The Commission seeks comment as to
whether this proposal will in fact reduce the filing burden for
claiming an exemption, and whether the proposal would affect the
Commission's
[[Page 31779]]
ability to oversee how exemptions are applied in the market.
Independent Account Controller Exemption. As discussed above, the
IAC exemption in regulation 151.7(f) previously included commodity
pools exempt from registration under Sec. 4.13 that are structured as
limited partnerships. The Commission is proposing to allow commodity
pools structured as limited liability companies to rely on the IAC
exemption. The Commission seeks comment as to whether there is any
relevant distinction between limited partnerships and limited liability
companies for purposes of this exemption.
3. Consideration of Costs and Benefits
It is the Commission's goal that this proposal uphold part 151's
regulatory aims without diminishing its effectiveness. In so doing, the
Commission adheres to its belief that aggregation represents a key
element to prevent evasion of prescribed position limits and that its
historical approach towards aggregation--one that appropriately blends
consideration of ownership and control indicia--remains sound.\110\
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\110\ The Commission's general policy on aggregation is derived
from CEA Section 4a(a)(1), which directs the Commission to aggregate
based on separate considerations of ownership, control, or persons
acting pursuant to an express or implied agreement.
---------------------------------------------------------------------------
The Commission seeks comment as to whether compliance with this
proposal will reduce the costs market participants will incur to comply
with the aggregation requirements of the final rules. In particular,
how would the cost of filing a notice for disaggregation relief compare
with the cost of developing systems necessary to aggregate the
positions of owned entities under the current version of part 151? Note
that, in the preamble to part 151, the Commission estimated that the
filing of a Notice of Disaggregation would create certain costs for
market participants.\111\ In particular, the Commission approximated
that the aggregation-related reporting requirements would affect
``ninety entities, resulting in a total burden, across all these
entities, of 225,000 annual labor hours and $5.9 million in annualized
capital, start-up, total operating, and maintenance costs.'' \112\ The
Commission has estimated the additional burden that may result from the
proposed rules as part of its Paperwork Reduction Act calculations, and
requests comment on those estimations.\113\ The Commission also seeks
comment as to how many entities would be able to take advantage of the
proposed exemption. Alternatively, how many entities would be able to
take advantage of the owned non-financial entity exemption described in
the aggregation petition?
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\111\ The costs of filing the Notice included costs of filing an
opinion of counsel as well as the other necessary information under
Sec. 151.7(h).
\112\ 76 FR 71626 at 71683.
\113\ See section III.C.2 of this release.
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Because costs associated with the aggregation of positions are
highly variable and entity-specific, the Commission requests that
commenters submit data from which the Commission can consider and
quantify the costs of the proposed rules.
In assessing benefits, it is important for the Commission to
determine whether the proposed rules will enhance the Commission's
ability to monitor compliance with position limits by focusing the
Commission's resources on those entities most at risk of coordinated
trading through multiple accounts. The Commission seeks comment as to
whether the proposed amendments to the Commission's aggregation policy
will result in lower costs for market participants without compromising
the core purposes of the position limits regime.
4. Section 15(a) Considerations
As the Commission has long held, position limits are an important
regulatory tool that is designed to prevent concentrated positions of
sufficient size to manipulate or disrupt markets. The aggregation of
accounts for purposes of applying position limits represents an
integral component that impacts the effectiveness of those limits. In
the final rule, the Commission implemented a policy for the aggregation
of accounts that largely tracked its longstanding standards of
aggregation, which were designed to prevent evasion of those position
limits. The proposed rules would amend this policy to introduce and
expand certain exemptions. The Commission intends for the proposed
rules to preserve the important protections of the existing aggregation
policy, but at a lower cost for market participants. The Commission
requests comment on its consideration of the costs and benefits of the
proposed rules in relation to each of the Section 15(a) factors
discussed herein.
a. Protection of Market Participants and the Public
The Commission wants to ensure that the exemptions proposed in
these rules will not lessen the protection of market participants and
the public that the aggregation policy in the Final Rule provides.
Given that the account aggregation standards are necessary to implement
an effective position limit regime, it is important that the clarified
and expanded exemptions of the proposed rules be sufficiently tailored
to exempt from aggregation only those accounts that do pose a low risk
of coordinated trading. The Commission believes that clarifying the
scope of the violation of law exemption to include the risk of
violating the applicable law more accurately informs market
participants as to the standard for claiming the exemption. The
proposed owned-entity exemption maintains the Commission's historical
presumption threshold of 10 percent ownership or equity interest and
makes that presumption rebuttable only where several conditions
indicative of independence are met. This exemption focuses on the
conditions that impact trading independence. The Commission intends
that any exemption it adopts would allow the Commission to direct its
resources to monitoring those entities with a higher risk of
coordinated trading and thus at a higher risk of circumventing position
limits, without reducing the protection of market participants and the
public that the Commission's aggregation policy affords.
Similarly, the Commission intends for the ``higher-tier'' entity
exemption, and the expansion of the underwriting and IAC exemptions, to
reduce costs for market participants without a compromise to the
integrity or effectiveness of the Commission's aggregation policy.
The Commission welcomes comment regarding whether the proposed
rules would impact protection of market participants and the public.
b. Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
The Commission wants to ensure that the exemptions proposed in
these rules would fully preserve account aggregation as a tool to
uphold the integrity of the part 151 position limit regime, which helps
maintain the overall competitiveness and integrity of derivatives
markets. The Commission seeks comment regarding whether the proposed
rules would impact the efficiency, competitiveness, and/or financial
integrity of futures markets.
c. Price Discovery
Similarly, the Commission wants to ensure that the exemptions
proposed in these rules do not adversely impact the price discovery
process, which the part 151 position limit regime (including the
account aggregation provisions in
[[Page 31780]]
Sec. 151.7) is designed to protect. The Commission welcomes comment as
to whether the proposed rules would impact price discovery.
d. Sound Risk Management
The Commission wants to ensure that the exemptions proposed in
these rules will not lessen the effectiveness of the sound risk
management practices that the Final Rule promotes. The Commission
welcomes comment as to whether the proposed rules would impact sound
risk management practices.
e. Other Public Interest Considerations
The Commission has not identified any other public interest
considerations related to the costs and benefits of the proposed rules.
The Commission welcomes comment as to whether there are additional
public interest considerations the Commissions should consider.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider the impact of their regulations on small businesses.\114\ The
requirements related to the proposed amendments fall mainly on DCMs,
swap execution facilities (``SEF'') that are trading facilities, FCMs,
foreign brokers, and large traders. The Commission has previously
determined that DCMs, FCMs, foreign brokers and large traders are not
``small entities'' for the purposes of the RFA.\115\ Further, in the
Commission's position limits rule,\116\ the Commission determined that
SEFs, which includes SEFs that are trading facilities, are not ``small
entities'' for purposes of the RFA.
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\114\ 44 U.S.C. 601 et seq.
\115\ See Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, Apr. 30 1982. See also Special Calls, 72 FR 34417, Jun.
22, 2007 (foreign broker determination).
\116\ 76 FR 71626, Nov. 18, 2011.
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies, on behalf of the Commission, pursuant to 5 U.S.C. 605(b),
that the actions proposed to be taken herein would not have a
significant economic impact on a substantial number of small entities.
C. Paperwork Reduction Act
1. Overview
The Paperwork Reduction Act (``PRA'') imposes certain requirements
on Federal agencies in connection with their conducting or sponsoring
any collection of information as defined by the PRA.\117\ An agency may
not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number. Certain provisions of the proposed regulations would result in
new collection of information requirements within the meaning of the
PRA. The Commission seeks to supplement the control number assigned by
the Office of Management and Budget (``OMB'') for part 151--Position
Limits for Futures and Swaps (OMB control number 3038-0077). Therefore
the Commission is submitting this proposal to OMB for review in
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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\117\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
In January of 2012, the Commission received a petition requesting
relief under section 4a(a)(7) of the CEA and clarification of certain
aggregation requirements in regulation 151.7. In response to that
petition, the Commission is proposing to clarify certain aspects of the
aggregation standards, and to expand the scope of certain exemptions
from aggregation. If adopted, responses to this collection of
information would be mandatory to the extent persons wish to rely upon
the exemptions contained within the proposed amendments to Commission
regulation 151.7. The Commission will protect proprietary information
according to the Freedom of Information Act and 17 CFR part 145, headed
``Commission Records and Information.'' In addition, the Commission
emphasizes that section 8(a)(1) of the CEA strictly prohibits the
Commission, unless specifically authorized by the CEA, from making
public ``data and information that would separately disclose the
business transactions or market positions of any person and trade
secrets or names of customers.\118\ The Commission also is required to
protect certain information contained in a government system of records
pursuant to the Privacy Act of 1974.\119\
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\118\ 7 U.S.C. 12(a)(1).
\119\ 5 U.S.C. 552a.
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Proposed rule 151.7(b)(1) establishes an exemption for a person to
disaggregate the positions of a separately organized entity (``owned
entity''). To claim the exemption, a person would need to meet certain
criteria and file a notice with the Commission in accordance with
regulation 151.7(h). The notice filing would need to demonstrate
compliance with certain conditions set forth in regulations
151.7(b)(1)(i)-(vii). Similar to other exemptions from aggregation, the
notice filing would be effective upon submission to the Commission, but
the Commission may call for additional information as well as reject,
modify or otherwise condition such relief. Further, such person is
obligated to amend the notice filing in the event of a material change
to the filing.
The proposed rules also amend regulation 151.7(i), which provides
an exemption from aggregation where the sharing of information between
persons would cause either person to violate federal law. The proposed
amendments clarify that the exemption would apply to a situation where
the sharing of information creates a reasonable risk of a violation of
federal law or regulations adopted thereunder, and not solely a per se
violation. For the same reasons the Commission adopted the exemption
for information sharing restrictions for federal law, the Commission
expanded the exemption in regulation 151.7(i) to generally extend to
the state law and the law of a foreign jurisdiction. The proposed rules
also retain the requirement that market participants file a notice
demonstrating compliance with the condition and an opinion of counsel
that the sharing of information could create a reasonable risk of a
violation of state or federal law or the law of a foreign jurisdiction.
The opinion allows Commission staff to review the legal basis for the
asserted regulatory impediment to the sharing of information, and is
particularly helpful where the asserted impediment arises from laws
and/or regulations that the Commission does not directly administer.
Further, Commission staff will have the ability to consult with other
federal regulators as to the accuracy of the opinion, and to coordinate
the development of rules surrounding information sharing and
aggregation across accounts in the future.
The Commission is also proposing to amend the definitions of
eligible entity and independent account controller in part 151.1 to
specifically provide for regulation 4.13 commodity pools established as
limited liability companies. These proposed amendments will likely
expand the number of entities that can file for the independent account
controller aggregation exemption.
Finally, the proposed rules include relief from notice filings for
``higher-tier'' entities, which, under proposed regulation 151.7(j),
may rely on the filings submitted by owned entities. A ``higher-tier''
entity need not submit a separate notice pursuant to the notice filing
requirements to rely upon the notice filed by an owned entity as long
as it complies with conditions of the applicable aggregation exemption.
[[Page 31781]]
2. Reporting Burdens
Proposed regulation 151.7(b)(1) specifies that qualified persons
may file a notice claiming exemptive relief from aggregation. Proposed
regulation 151.7(b)(1)(vii) states that the notice is to be filed in
accordance with regulation 151.7(h), which requires a description of
the relevant circumstances that warrant disaggregation and a statement
that certifies that the conditions set forth in the exemptive provision
have been met. Persons claiming the exemption would be required to
submit to the Commission, as requested, such information as relates to
the claim for exemption. An updated or amended notice must be filed
with the Commission upon any material change.
With regard to the existing filing procedure for claiming
exemptions from aggregation, in the part 151 final rule the Commission
estimated that ninety entities would incur a burden of 225,000 annual
labor hours as well as $5.9 million in annualized capital, start-up,
total operating, and maintenance costs. This estimate was based on each
entity submitting one notice of disaggregation per year at a burden of
2,500 labor hours. Given the expansion of the exemptions that market
participants may claim, the Commission anticipates an increase in the
number of notice filings; however, because of the relief for ``higher-
tier'' entities under proposed regulation 151.7(j), the Commission
expects that increase to be offset by a reduction in the number of
filings by ``higher-tier'' entities. Thus, the Commission anticipates a
small net increase in the number of filings under regulation 151.7 as a
result of the proposed rules. The Commission believes that this small
increase will create a small increase in the annual labor burden.
However, because entities will have already incurred the capital,
start-up, operating, and maintenance costs to file other exemptive
notices, the Commission does not anticipate an increase in those costs.
In light of the Commission providing for these additional
exemptions, the Commission estimates that 90 entities will each file
two notices annually under proposed regulation 151.7(b)(1), at an
average of 20 hours per filing. Thus, the Commission approximates a
total per-entity burden of 40 labor hours annually. Using the same
labor cost estimates as in the existing collection (OMB 3038-
0077),\120\ such a burden would cost approximately $3,100 per entity
for filings under proposed regulation 151.7(b)(1). Under proposed
regulation 151.7(f), the Commission anticipates that 10 entities will
annually file one notice each, at an average of 20 hours per filing,
for a per-entity burden of 20 labor hours annually. Such a burden would
cost approximately $1,600 per entity. Finally, the Commission
anticipates that 45 entities will annually file one notice each under
proposed regulation 151.7(i), at an average of 80 hours per filing, for
a per-entity burden of 80 hours each. Such a burden would cost
approximately $6,300 per entity. Monetary estimates have been rounded
to the nearest hundred.
---------------------------------------------------------------------------
\120\ The Commission staff's estimates concerning the wage rates
are based on salary information for the securities industry compiled
by the Securities Industry and Financial Markets Association
(``SIFMA''). The $78.61 per hour is derived from figures from a
weighted average of salaries and bonuses across different
professions from the SIFMA Report on Management & Professional
Earnings in the Securities Industry 2010, modified to account for an
1800-hour work-year and multiplied by 1.3 to account for overhead
and other benefits. The wage rate is a weighted national average of
salary and bonuses for professionals with the following titles (and
their relative weight); ``programmer (senior)'' (60% weight),
``compliance advisor (intermediate)'' (20%), ``systems analyst''
(10%), and ``assistant/associate general counsel'' (10%).
---------------------------------------------------------------------------
In sum, the Commission estimates that 145 entities would submit a
total of 235 responses per year and incur a total burden of 7,400 labor
hours at a cost of approximately $582,000 annually in addition to the
existing burden under Sec. 151.7.
3. Comments on Information Collection
The Commission invites the public and other federal agencies to
comment on any aspect of the reporting and recordkeeping burdens
discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission
solicits comments in order to: (1) Evaluate whether the proposed
collections of information are necessary for the proper performance of
the functions of the Commission, including whether the information will
have practical utility, (2) evaluate the accuracy of the Commission's
estimate of the burden of the proposed collections of information, (3)
determine whether there are ways to enhance the quality, utility, and
clarity of the information to be collected, and (4) minimize the burden
of the collections of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
Comments may be submitted directly to the Office of Information and
Regulatory Affairs, by fax at (202) 395-6566 or by email at OIRA-submissions@omb.eop.gov. Please provide the Commission with a copy of
comments submitted so that all comments can be summarized and addressed
in the final regulation preamble. Refer to the Addresses section of
this notice for comment submission instructions to the Commission. A
copy of the supporting statements for the collection of information
discussed above may be obtained by visiting RegInfo.gov. OMB is
required to make a decision concerning the collection of information
between 30 and 60 days after publication of this release. Consequently,
a comment to OMB is most assured of being fully considered if received
by OMB (and the Commission) within 30 days after the publication of
this notice of proposed rulemaking.
List of Subjects in 17 CFR Part 151
Position limits, Bona fide hedging, Referenced contracts.
In consideration of the foregoing, pursuant to the authority
contained in the Commodity Exchange Act, the Commission hereby proposes
to amend chapter I of title 17 of the Code of Federal Regulations as
follows:
PART 151--POSITION LIMITS FOR FUTURES AND SWAPS
1. The authority citation for part 151 is revised to read as
follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, 6g, 6t, 12a, 19, as
amended by Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
2. In Sec. 151.1, revise the definition for ``eligible entity''
and paragraph (5) of the definition of ``independent account
controller'' to read as follows:
Sec. 151.1 Definitions.
* * * * *
Eligible Entity means a commodity pool operator; the operator of a
trading vehicle which is excluded, or which itself has qualified for
exclusion from the definition of the term ``pool'' or ``commodity pool
operator,'' respectively, under Sec. 4.5 of this chapter; the limited
partner, limited member or shareholder in a commodity pool the operator
of which is exempt from registration under Sec. 4.13 of this chapter;
a commodity trading advisor; a bank or trust company; a savings
association; an insurance company; or the separately organized
affiliates of any of the above entities:
* * * * *
Independent Account Controller * * *
(5) Who is registered as a futures commission merchant, an
introducing broker, a commodity trading advisor, or
[[Page 31782]]
an associated person of any such registrant, or is a general partner or
manager of a commodity pool the operator of which is exempt from
registration under Sec. 4.13 of this chapter.
* * * * *
3. Revise Sec. 151.7 to read as follows:
3. In Sec. 151.7:
a. Revise paragraph (b);
b. Add paragraph (e)(4);
c. Revise paragraphs (g), (h), and (i); and
d. Add paragraph (j).
The revisions and additions read as follows:
Sec. 151.7 Aggregation of positions.
* * * * *
(b) Ownership of accounts generally. For the purpose of applying
the position limits set forth in Sec. 151.4, except for the ownership
interest of limited partners, shareholders, members of a limited
liability company, beneficiaries of a trust or similar type of pool
participant in a commodity pool subject to the provisos set forth in
paragraph (c) of this section or in accounts or positions in multiple
pools as set forth in paragraph (d) of this section, any person holding
positions in more than one account, or holding accounts or positions in
which the person by power of attorney or otherwise directly or
indirectly has a 10 percent or greater ownership or equity interest,
must aggregate all such accounts or positions. However--
(1) Any person with a 10 percent or greater ownership or equity
interest in an owned entity, need not aggregate the accounts or
positions of the owned entity with any other accounts or positions such
person is required to aggregate, provided that:
(i) Such person, including any entity that such person must
aggregate, and the owned entity:
(A) Do not have knowledge of the trading decisions of the other;
(B) Trade pursuant to separately developed and independent trading
systems;
(C) Have and enforce written procedures to preclude each from
having knowledge of, gaining access to, or receiving data about, trades
of the other. Such procedures must include document routing and other
procedures or security arrangements, including separate physical
locations, which would maintain the independence of their activities;
(D) Do not share employees that control the trading decisions of
either; and
(E) Do not have risk management systems that permit the sharing of
trades or trading strategy;
(ii) Such person does not have greater than a 50 percent ownership
or equity interest in the owned entity; and
(iii) Such person complies with the requirements of paragraph (h)
of this section.
(2) [Reserved]
* * * * *
(e) * * *
(4) The futures commission merchant or the affiliate has complied
with the requirements of paragraph (h) of this section.
* * * * *
(g) Exemption for underwriting. Notwithstanding any of the
provisions of this section, a person need not aggregate the positions
or accounts of an owned entity if the ownership interest is based on
the ownership of securities constituting the whole or a part of an
unsold allotment to or subscription by such person as a participant in
the distribution of such securities by the issuer or by or through an
underwriter.
(1) Further, a broker-dealer registered with the Securities and
Exchange Commission, or similarly registered with a foreign regulatory
authority, need not aggregate the positions or accounts of an owned
entity if the ownership interest is based on the ownership of
securities acquired as part of reasonable activity in the normal course
of business as a dealer, provided that, such person does not have
actual knowledge of the trading decisions of the owned entity.
(h) Notice filing for exemption. (1) Persons seeking an aggregation
exemption under paragraph (b)(1), (c), (e), (f), or (i) of this section
shall file a notice with the Commission, which shall be effective upon
submission of the notice, and shall include:
(i) a description of the relevant circumstances that warrant
disaggregation; and
(ii) a statement of a senior officer of the entity certifying that
the conditions set forth in the applicable aggregation exemption
provision have been met.
(2) Upon call by the Commission, any person claiming an aggregation
exemption under this section shall provide such information concerning
the person's claim for exemption as is requested by the Commission.
Upon notice and opportunity for the affected person to respond, the
Commission may amend, suspend, terminate, or otherwise modify a
person's aggregation exemption for failure to comply with the
provisions of this section.
(3) In the event of a material change to the information provided
in the notice filed under this paragraph, an updated or amended notice
shall promptly be filed detailing the material change.
(4) A notice shall be submitted in the form and manner provided for
in Sec. 151.10.
(i) Exemption for law information sharing restriction.
Notwithstanding any other provision of this section, a person is not
subject to the aggregation requirements of this section if the sharing
of information associated with such aggregation creates a reasonable
risk that either person could violate state or federal law or the law
of a foreign jurisdiction, or regulations adopted thereunder, and
provided that such a person does not have actual knowledge of
information associated with such aggregation. Provided further, that
such person file a prior notice pursuant to paragraph (h) of this
section and an opinion of counsel that the sharing of information
creates a reasonable risk that either person could violate state or
federal law or the law of a foreign jurisdiction, or regulations
adopted thereunder. Provided however, the exemption in this paragraph
shall not apply where the law or regulation serves as a means to evade
the aggregation of accounts or positions. All documents submitted
pursuant to this paragraph shall be in English, or if not, accompanied
by an official English translation.
(j) Higher-Tier Entities. If an owned entity has filed a notice
under paragraph (h) or (i) of this section, any person with an
ownership or equity interest of 10 percent or greater in the owned
entity need not file a separate notice identifying the same positions
and accounts previously identified in the notice filing of the owned
entity, provided that:
(1) Such person complies with the conditions applicable to the
exemption specified in the owned entity's notice filing, other than the
filing requirements; and
(2) Such person does not otherwise control trading of the accounts
or positions identified in the owned entity's notice.
(3) Upon call by the Commission, any person relying on the
exemption in paragraph (j)(1) of this section shall provide to the
Commission such information concerning the person's claim for
exemption. Upon notice and opportunity for the affected person to
respond, the Commission may amend, suspend, terminate, or otherwise
modify a person's aggregation exemption for failure to comply with the
provisions of this section.
4. In Sec. 151.10, revise paragraph (b)(4) to read as follows:
Sec. 151.10 Form and manner of reporting.
* * * * *
[[Page 31783]]
(b) * * *
(4) A notice of disaggregation is filed pursuant to Sec. 151.7(h),
in which case the notice shall be effective upon filing.
* * * * *
5. In Sec. 151.12, revise paragraph (a)(5) and add paragraph
(a)(6) to read as follows:
Sec. 151.12 Delegation of authority to the Director of the Division
of Market Oversight.
(a) * * *
(5) In Sec. 151.7(j)(1)(iii) to call for additional information
from a trader claiming the exemption in Sec. 151.7(j)(1).
(6) In Sec. 150.10 for providing instructions or determining the
format, coding structure, and electronic data transmission procedures
for submitting data records and any other information required under
this part.
* * * * *
Issued in Washington, DC, on May 17, 2012 by the Commission.
David A. Stawick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix 1--Statement of Commissioner Jill E. Sommers
I support the Commission's proposed rules that, among other
things, expand the exemptions relating to information sharing
restrictions, expand the circumstances under which market
participants will not be required to aggregate positions, and reduce
the reporting burdens on higher tier entities. I am pleased that we
recognize that the final position limits rules issued on November
18, 2011 set forth an unworkable and overly restrictive approach to
these issues.
Essentially, as they relate to ``owned entities,'' the proposed
rules contain three ``tiers'' for purposes of aggregation. First, if
the ownership interest is less than 10 percent, one need not
aggregate positions with those of the owned entity. Second, if the
ownership interest is between 10 percent and 50 percent, one must
aggregate positions with those of the owned entity unless it can be
shown that there is a lack of knowledge of, and control over, the
trading of the owned entity. Third, if the ownership interest
exceeds 50 percent, one must always aggregate positions with those
of the owned entity, even if there is a lack of knowledge of, and
control over, the trading of the owned entity.
I question whether a bright-line approach is the correct
approach, and if it is, whether the line should be drawn at 50
percent. In the absence of knowledge of, and control over, trading
of an owned entity, is there a real difference between owning 49
percent and owning 50 percent? I don't think there is. In justifying
50 percent as the correct place to draw the line, the preamble to
the proposed rules states, ``such a bright-line rule would provide
clarity to market participants and a useful tool for the Commission
to simplify aggregation.'' Providing clarity and certainty to market
participants is important. However, if providing clarity and
certainty results in a one-size-fits-all answer that fails to take
into account the varying needs of a very diverse group of market
participants, the clarity and certainty are of little use. Moreover,
while it is important to establish an aggregation approach that the
Commission can effectively administer, I hesitate to put too much
weight on ``simplifying'' the approach if the simplified approach is
needlessly restrictive.
In my dissent to the final position limits rules, I expressed
concern that with regard to the 19 new reference contracts, the
Commission was taking on ``front-line oversight of the granting and
monitoring of bona-fide hedging exemptions for the transactions of
massive, global corporate conglomerates that on a daily basis
produce, process, handle, store, transport, and use physical
commodities in their extremely complex logistical operations.'' My
concerns apply equally to the issue of aggregation. We have limited
experience as it relates to these new reference contracts, and no
experience aggregating swaps into the overall calculations. In the
face of such limited experience, our apparent certainty on where to
draw lines is troubling.
[FR Doc. 2012-12526 Filed 5-29-12; 8:45 am]
BILLING CODE P
Last Updated: May 30, 2012
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