Dodd-Frank Commodity Trading Account Aggregation Rules Re-proposed by CFTC | Practical Law

Dodd-Frank Commodity Trading Account Aggregation Rules Re-proposed by CFTC | Practical Law

The CFTC issued proposed rules that would modify rules on the aggregation of trading positions in physical commodities and related contracts for purposes of complying with final Dodd-Frank speculative commodity position limits rules.

Dodd-Frank Commodity Trading Account Aggregation Rules Re-proposed by CFTC

Practical Law Legal Update 9-519-5823 (Approx. 4 pages)

Dodd-Frank Commodity Trading Account Aggregation Rules Re-proposed by CFTC

by PLC Finance
Published on 22 May 2012 • USA (National/Federal)
The CFTC issued proposed rules that would modify rules on the aggregation of trading positions in physical commodities and related contracts for purposes of complying with final Dodd-Frank speculative commodity position limits rules.
On May 18, 2012, the CFTC issued proposed rules that would modify final rules on speculative position limits in certain physical commodity derivative contracts and their economically equivalent futures, options and swaps. The proposed rules would permit persons that hold between a 10% and 50% ownership or equity interest in another trading entity or account to disaggregate those trading positions from its own for purposes of determining compliance with the position limits rules provided the traders can demonstrate independence of trading decisions.
The final rules currently require aggregation of positions any time an entity's ownership interest in a trading account equals or exceeds 10%, or where trading decisions are not made independently. The re-proposed rules would set the mandatory aggregation ownership threshold at 50%.
The proposed rules:
  • Would require aggregation when one entity owns more than 50% of another entity.
  • State that for disaggregation to be permitted in the 10% to 50% ownership range:
    • trading must be conducted in separate locations;
    • risk management systems must not allow the sharing of trades or trading strategies among the entities;
    • the trading must be undertaken by different traders; and
    • information on individual trades or trading strategies cannot be shared between entities.
The proposed rules would also:
  • Preserve the existing Independent Account Controller (IAC) exemption for independently managed client accounts (see Practice Note, The Dodd-Frank Act: Commodity Position Limits: Aggregation of Proprietary Positions and the Independent Account Controller (IAC) Exemption), while expanding the exemption to include managing members of limited liability companies.
  • Clarify that the aggregation exemption for entities for which sharing the requisite information would violate federal law applies whenever the sharing of information presents a "reasonable risk" of a federal violation. The proposed rules also expand this exemption to include entities for which sharing the information would violate state law and the law of foreign jurisdictions.
  • Expand the aggregation exemption for the underwriting of securities to include ownership interests acquired through the market-making activities of an affiliated broker-dealer.
  • Extend filing relief to "higher-tier" entities. Higher-tier entities are entities that hold an indirect interest through subsidiaries or affiliates in another entity's trading accounts. For example, if Company A owns a 30% interest in Company B and Company B has filed an exemption notice for its holdings in the accounts and positions of Company C because it meets the disaggregation requirements of the proposed rules, then Company A may rely on Company B's exemption notice and would not need to file its own exemption notice for the trading accounts and positions of Company C.
  • Allow commodity pools structured as limited liability companies to rely on the IAC aggregation exemption.
Some market participants have suggested that the CFTC's re-proposal demonstrates that a lawsuit by industry groups challenging the CFTC's final Dodd-Frank position limits rules as flawed has merit. For more information on this case, see Practice Note, The Dodd-Frank Act: Commodity Position Limits: Industry Response to Position Limits Rules.
The revised rules were proposed in response to a petition for exemptive relief under section 4a(a)(7) of the Commodity Exchange Act (CEA) made by the Working Group of Commercial Energy Firms, as well as certain public comments made during the CFTC's request for comment on the interim final rule for spot-month position limits on cash-settled contracts.
The CFTC is accepting public comment on the rules until 30 days after they are published in the Federal Register.
For more on the rules, see the CFTC's press release.
For more information on the regulation of swaps and derivatives under the Dodd-Frank Act, see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives.