Amending Aggregation: The CFTC’s Proposes Amendments to its Aggregate Position Limit Rules
On May 18th, the CFTC published for comment proposed amendments modifying its November 18, 2011 final rule and interim final rule establishing position limits for 28 commodity futures and options contracts and the physical commodity swaps that are economically equivalent to such contracts.
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Last November’s rule generally contains three components: (1) the threshold restricting the number of speculative positions that a person may hold in the spot-month, individual month, and all months combined, (2) a bona fide hedging exemption, and (3) rules to determine which accounts and positions a person must aggregate.
Last Friday’s proposed amendment only addresses the third component, the aggregation of position limits. The proposal maintains November’s ten percent threshold which considers an ownership interest of less than 10 percent as de minimis. So if a person’s ownership interest in another entity is less than 10 percent, the aggregation of position limits is not required.
Under the proposed amendment, if a person’s ownership is equal to or greater than 10 percent, but less than 50 percent, that person may file for disaggregation relief if they can establish that they 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.
For purposes of this provision, the CFTC will 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. Therefore, 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.
A bright line test remains for those who have an ownership interest that is equal to or greater than 50 percent. In these instances, aggregation would always be required. CFTC Commissioner Jill Sommers, however, questions this bright line test, asking whether it is necessary if lack of knowledge and control can be established. She specifically requests comments on this issue. See Sommers Remarks.
The CFTC also proposes to expand the exemption for the underwriting of securities 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, so long as there is no other ownership interests or indicia of control or concerted action. The CFTC 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.
Comments should be submitted within 30 days after publication in the Federal Register, which is expected any day now.
CFTC Chairman Previews Dodd-Frank Rulemaking
CFTC Chairman Gary Gensler testified today before the Senate Banking Committee. His prepared remarks provide the following insights regarding upcoming Dodd-Frank rulemaking.
Cross-Border Application. Citing AIG and JP Morgan, Gensler said that his agency’s rules for swaps will apply to the foreign subsidiaries and offices of U.S. banks. He noted that when AIG’s London-based credit default swaps (“CDS”) brought that company to its knees, it was the U.S. parent and the U.S. taxpayer who felt the pain. Similarly, although the “London Whale’s” CDS trades for JP Morgan occurred in London, it is the federally insured U.S. parent who will apparently absorb the billion dollar losses.
International Standards. Anticipating critics decrying a “go it alone” approach, Gensler noted the efforts of Japan and the European Union to adopt mandatory swap clearing and swap transparency rules. The CFTC’s timeframe for CDS clearing broadly aligns with both Japan and Europe. According to Gensler, the international community is closely coordinating on margin requirements for uncleared swaps, and is on track to seek public comment in June on a consistent approach.
Central Clearing. CFTC staff is preparing recommendations on clearing requirement determinations. The first determinations will be published for comment this summer and hopefully completed this fall. They will begin with key interest rate products, as well as a number of CDX and iTraxx credit default swap indices. The CFTC will then consider a final rule on the implementation of the clearing requirement and the end-user exception related to non-financial companies.
Position Limits. Last week, the CFTC published a proposed rule that would modify the CFTC’s aggregation provisions for limits on speculative positions. The proposal would permit any person with a 10 to 50 percent ownership or equity interest in an entity to disaggregate the owned entity’s positions, provided there are protections and firewalls in place to ensure trading decisions are made independently of one another.
New on Knowledge Mosaic: Batch-Download Documents
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A few weeks ago, we released a much-anticipated feature on the Knowledge Mosaic website. You now have the ability to download multiple documents (as individual PDFs) from your Document Cart. They’re neatly packaged into a zip folder that you can save to your desktop, flash drive, or wherever.
The Document Cart is available for items from our SEC Filings page ( not just whole filings, but also individual exhibits and 10-K or 8-K items) and our Laws, Rules, and Agency Materials page. Since your Document Cart is unique to you, logging in with your username and password is required to access. (If you’re part of an organization-wide license, click “Personal Access” at the upper right of your screen to get a login prompt).
As with all personal account features on the Knowledge Mosaic website, unlimited use is completely covered by your license.
The Document Cart is currently capped at 25 items. However, we anticipate tripling this maximum some time in the next few months. Keep reading this blog; we have lots of other enhancements coming down the pike.
What to Expect When You’re Expecting the SEC
Last November, the SEC published new rules under the Investment Advisers Act of 1940 implementing the Dodd-Frank Act’s requirement that investment advisers advising one or more private funds and having at least $150 million in private fund assets under management file Form PF with the SEC. We blogged about the SEC’s Form PF requirements last December.
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Last week, Carlo V. di Florio, the SEC’s Director of the Office of Compliance Inspections and Examinations (“OCIE”), provided summary information concerning newly registered private fund advisers and also gave some hints as to what private fund advisers can expect in the way of examinations and inspections. OCIE has previously indicated that private fund inspections will be an area of focus in 2012. (A general outline of what an inspection is like can be found on pages 24-30 of OCIE’s February 2012 overview.)
Di Florio highlighted the need for private fund advisers to have:
- written policies and procedures which are annually reviewed and overseen by a chief compliance officer;
- accurate books and records;
- current Form ADVs;
- an ethics code; and
- accurate advertising materials.
And he reminded advisers of their fiduciary duties regarding fees and expenses, and conflicts of interest.
OCIE is currently identifying the unique risks presented by private equity funds and hedge funds and is developing the information management systems to organize and evaluate the information it will collect via Form PF and Form ADV. Examples of the basic risk characteristics that it will track include any material changes in business activities such as lines of business or investment strategies, changes in key personnel, outside business activities of the firm or its personnel, any regulatory history of the firm or its personnel, anomalies in key metrics such as fees, performance, disclosures when compared to peers or to previous periods, and possible financial stress or weaknesses.
Risk areas that might be considered during an examination include (1) fund strategy; (2) whether the fund controls companies or holds minority positions; (3) product complexity; and (4) the fund’s lifecycle.
OCIE is particularly concerned by the possible conflicts of interest faced by private funds, especially for funds which co-invest with their clients or which play a role in a portfolio company. Other conflicts identified by OCIE include those involving fee and expense shifting or maximization.
In closing, di Florio emphasized the need for strong policies and procedures and risk controls. And when expecting the SEC, be prepared with documentation and the ability to access that documentation.
On Wednesday May 9 at 11 EDT, Join Us For an Open Webinar on “Tracking Health Care Reform”
It’s not too late to register for a web-based presentation we’ll be hosting tomorrow on our Affordable Care Act Tracker and related materials. I’ll be leading the 20-minute presentation beginning Wednesday morning at 11 Eastern / 8 Pacific. Click here to sign up.
The search tool we’ll be looking at is designed to keep you to on top of the deluge of federal rulemaking associated with this historic Act of Congress. Even with the possibility of an unfavorable Supreme Court decision casting doubt on the future of health care reform, agencies continue to work hard to implement the law (over 400 records have already been released).
Depending on your perspective, that either means that the dream of affordable health care for all Americans is incrementally becoming reality – or, alternatively, that Obamacare is creating the biggest tangle of bureaucratic red tape since the Dodd-Frank Act.
Whichever side of the fence you’re on, we’ve got the data you need. Please join us Wednesday to learn more and to ask questions.
To learn more about the Tracker:
- Watch a short video.
- Read more.
- Get a free trial of Knowledge Mosaic, and try out the tool for yourself.
Curious about our Affordable Care Act Tracker? Register Now for a Live Web-Based Presentation
Learn how Knowledge Mosaic can help you stay on top of federal agencies’ implementation of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Affordable Care Act,” or ACA). Our brand new ACA Rulemaking Tracker will be the main focus of this 20-minute presentation, scheduled for Wednesday, May 9, at 11 AM Eastern Time. 
You can register for the webinar here. We’ll also spend a few minutes looking at how other search pages on our website can contribute to your research or help you stay on top of public policy and compliance issues surrounding public health and health care.
NOTE: This presentation is being prepared by Knowledge Mosaic Inc. for informational purposes only. It does not purport to offer legal advice.
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As we announced yesterday, we at Knowledge Mosaic Inc. are launching our new Affordable Care Act Rulemaking Tracker today, Friday April 27. It should be accessible from the Knowledge Mosaic website some time in the next few hours.
To whet your appetite in the mean time, we’ve released a seven-minute video that gives an overview of the tool. It’s on YouTube now — check it out.
And there’s more. As a corollary but significant-in-its-own-right release, we’ve added to our Laws, Rules, and Agency Materials page over 25,000 documents from the U.S. Department of Health and Human Services, including its Centers for Medicare and Medicaid Services. Click here to search these materials for keyword “Affordable Care Act.”
