CFTC Proposes Modification to Dodd-Frank Commodity Position Limit Aggregation Rules | Practical Law

CFTC Proposes Modification to Dodd-Frank Commodity Position Limit Aggregation Rules | Practical Law

The CFTC announced a supplement to its November 2013 position limits proposal for physical commodity contracts that would modify when aggregation of positions would be required based on one entity’s ownership interest in another.

CFTC Proposes Modification to Dodd-Frank Commodity Position Limit Aggregation Rules

Practical Law Legal Update w-000-6146 (Approx. 4 pages)

CFTC Proposes Modification to Dodd-Frank Commodity Position Limit Aggregation Rules

by Practical Law Finance
Published on 28 Sep 2015 • USA (National/Federal)
The CFTC announced a supplement to its November 2013 position limits proposal for physical commodity contracts that would modify when aggregation of positions would be required based on one entity’s ownership interest in another.
On September 22, 2015, the CFTC announced a supplement to its November 15, 2013 proposal on position limits for physical commodity contracts (the November 2013 proposal) (see Practice Note, The Dodd-Frank Act: Commodity Position Limits). The new supplement revises the proposed rule on when aggregation of physical commodity positions would be required based on one entity’s ownership interest in another.
The supplement would permit all entities holding an ownership or equity interest in another entity that is greater than 10% to disaggregate its positions from those of that entity, provided certain criteria are met. With the exception of certain conforming changes, all other aspects of the November 2013 proposal, including the proposed disaggregation criteria, remain the same.
In November, 2013, the CFTC announced proposals to amend Part 150 of its regulations (17 CFR 150), including Regulation 150.4 (17 CFR 150.4) and certain related regulations, to include a determination of which accounts and positions a person would be required to aggregate for purposes of the November 2013 proposal.
Under the November 2013 proposal, a person (“X”) could disaggregate the positions held by another person (“Y”) upon notice to the CFTC if X held a 10% to 50% ownership or equity interest in Y. Persons with an ownership or equity interest of greater than 50% in another entity would have to apply to the CFTC for disaggregation on a case-by-case basis and wait for approval before disaggregation would be allowed.

New Disaggregation Proposal

Under the new supplemental proposal, disaggregation would be allowed, upon notice to the CFTC, if each of the following criteria is met:
  • The person (“X”) has a greater than 10% ownership or equity interest in the other (“Y”).
  • X files appropriate notice to the CFTC pursuant to proposed rule 150.4(c).
  • The parties meet the criteria set out in proposed rule 150.4(b)(2), which states that X and Y must:
    • not have knowledge of one another’s trading decisions;
    • engage in trades on separately developed and independent trading systems;
    • market their respective trading systems independently; and
    • solicit funds for trading by separate disclosure documents meeting CFTC standards.
In reaching the decision to expand the proposed disaggregation rules, the CFTC compared the relative costs and benefits of such a system and found it to be in the public interest.
The acknowledged benefits of the increased disaggregation rules include, among other things:
  • Furthering the general purpose of aggregation, which is to prevent the evasion of position limits through coordinated efforts.
  • Mitigating compliance burdens associated with aggregation and position limit requirements.
  • Creating a unified system where the same criteria apply to all persons applying for disaggregation (as long as they meet the 10% threshold).
The CFTC does, however, acknowledge the costs of the proposal, which include:
  • the cost of developing systems to determine whether a person qualifies for disaggregation; and
  • the costs associated with required filings.
Some have viewed this revision as a “walkback” of a controversial rule that was challenged successfully in court by market participants in 2012 (see Legal Update, CFTC Commodity Position Limits Rules Vacated by DC District Court) and subsequently re-proposed by the CFTC with few changes in the November 2013 proposal. The softening of this rule is regarded as indicative of a contrast in approach between current CFTC Chairman Timothy Massad (who took over in June 2014), viewed as more accommodating to the market, and his predecessor, Gary Gensler, who was perceived by some as more antagonistic.
Comments are due on or before November 13, 2015. Comments should be addressed to Christopher Kirkpatrick, Secretary of the Commission, Commodity and Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. Comments may also be submitted via the Federal eRulemaking Portal at www.regulations.gov. All comments should be identified by RIN 3038-AD82.