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Amending Aggregation: The CFTC’s Proposes Amendments to its Aggregate Position Limit Rules

May 24, 2012

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.

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.

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