CFTC Updates Position Limits Rule

Summary: On September 22, 2015, the Commodity Futures Trading Commission (CFTC or Commission) unanimously approved the publication of a “supplemental” proposed rule on position limits. The supplemental proposal would modify the requirements in the proposed rules regarding the aggregation of positions subject to the Commission’s speculative position limits. Specifically, the proposal would modify the eligibility criteria and simplify the process for claiming an exemption from the aggregation requirements for owners of more than 50 percent of another entity. On the same date, the CFTC’s Agriculture Advisory Committee (AAC) held a public meeting to discuss the CFTC’s 2013 position limits proposal.¹ Among the topics discussed was the possibility of the Commission delegating to the exchanges the responsibility for granting hedge exemptions to position limits. Section I of this alert discusses the Commission’s latest supplemental proposal on aggregation and Section II discusses the concept proposal on delegation.

I. Aggregation Supplemental Proposal

The supplemental proposal modifies the Commission’s November 2013 proposal for aggregation of positions under the CFTC’s position limits regime for futures and swaps. The supplement revises the process by which a person who owns more than 50 percent of a separately organized entity (Owned Entity) would be permitted to disaggregate positions held by the owned entity. The November 2013 proposal required more than 50 percent owners to file an application with the Commission certifying compliance with certain conditions.² These owners would then need to wait for the Commission’s approval before being permitted to disaggregate.3 Under the supplemental proposal, any person with more than a 10 percent interest in an Owned Entity would be able to disaggregate upon filing a notice with the Commission attesting that it meets certain requirements.⁴ The supplemental proposal would provide the same process for disaggregation of Owned Entity positions for owners with more than 50 percent that was previously proposed for owners of between 10 and 50 percent.

The CFTC’s position limits regime currently requires that persons determine which accounts and positions be aggregated for the purpose of determining compliance with position limits. Current CFTC Rule 150.4 requires a person to aggregate (1) all positions for which that person controls the trading decisions, (2) all positions and accounts in which that person has a 10 percent or greater ownership interest, and (3) the positions of any persons with which that person acts pursuant to an express or implied agreement or understanding.⁵ Rule 150.4 includes certain exemptions from aggregation, including for limited partners or shareholders in commodity pools who do not control trading decisions; positions held by a futures commission merchant (FCM) in an account that is controlled by a trader other than the FCM, where the trading decisions are made independently of the trading decisions in the FCM’s other accounts; and positions held by an independent account controller. Persons claiming an exemption from aggregation are subject to a call for information from the Commission, but are otherwise not required to make any affirmative filing with the CFTC or National Futures Association.⁶

In November 2013, the CFTC proposed to amend the current aggregation rules.⁷ Under that proposal, a person would still be required to aggregate all positions or accounts in which it has a 10 percent or greater interest, as well as all positions held by an entity of which that person owns at least 10 percent.⁸ The 2013 proposal includes several new exceptions to the aggregation requirements, including two exemptions based on the level of ownership in an owned entity.⁹ With respect to positions held by an owned entity, the proposal would establish a notice filing procedure to permit a person with a 10 to 50 percent interest in that entity to disaggregate the positions of the owned entity in specific circumstances.¹⁰ The filing would be self-executing, although the Commission would reserve the right to call for additional information, as well as to amend, terminate or otherwise modify the exemption if the person fails to comply with the conditions of the rule.¹¹

The proposal also would have permitted persons with a more than 50 percent interest in an owned entity to apply on a case-by-case basis to the Commission for permission to disaggregate.¹² The proposal would not have imposed any time limits on the Commission’s process for making the determination and the applicant would only have been permitted to disaggregate if the Commission granted the request for relief.¹³

Many commenters criticized this exemption process on both substantive and procedural grounds. The process was criticized substantively with respect to the criteria required to qualify for disaggregation, and procedurally for being an open-ended process with no definite timeframe for the Commission to act. Regarding the criteria, one industry association asserted that the proposed exemption’s condition prohibiting consolidation of financial results lacked any rationale and that consolidating financial results was simply a way to track investor returns, and not meant to control trading.¹⁴ Regarding procedure, another industry association argued that if...