Position Limits for Derivatives

Federal RegisterDec 30, 2016

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 15, 17, 19, 37, 38, 140, 150 and 151

RIN 3038-AD99

Position Limits for Derivatives

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Reproposal.

SUMMARY:

The Commodity Futures Trading Commission (“Commission” or “CFTC”) is reproposing rules to amend part 150 of the Commission's regulations concerning speculative position limits to conform to the Wall Street Transparency and Accountability Act of 2010 (“Dodd-Frank Act”) amendments to the Commodity Exchange Act (“CEA” or “Act”). The reproposal would establish speculative position limits for 25 exempt and agricultural commodity futures and option contracts, and physical commodity swaps that are “economically equivalent” to such contracts (as such term is used in section 4a(a)(5) of the CEA). In connection with establishing these limits, the Commission is reproposing to update some relevant definitions; revise the exemptions from speculative position limits, including for bona fide hedging; and extend and update reporting requirements for persons claiming exemption from these limits. The Commission is also reproposing appendices to part 150 that would provide guidance on risk management exemptions for commodity derivative contracts in excluded commodities permitted under the revised definition of bona fide hedging position; list core referenced futures contracts and commodities that would be substantially the same as a commodity underlying a core referenced futures contract for purposes of the definition of location basis contract; describe and analyze fourteen fact patterns that would satisfy the reproposed definition of bona fide hedging position; and present the reproposed speculative position limit levels in tabular form. In addition, the Commission proposes to update certain of its rules, guidance and acceptable practices for compliance with Designated Contract Market (“DCM”) core principle 5 and Swap Execution Facility (“SEF”) core principle 6 in respect of exchange-set speculative position limits and position accountability levels. Furthermore, the Commission is reproposing processes for DCMs and SEFs to recognize certain positions in commodity derivative contracts as non-enumerated bona fide hedges or enumerated anticipatory bona fide hedges, as well as to exempt from position limits certain spread positions, in each case subject to Commission review. Separately, the Commission is reproposing to delay for DCMs and SEFs that lack access to sufficient swap position information the requirement to establish and monitor position limits on swaps.

DATES:

Comments must be received on or before February 28, 2017.

ADDRESSES:

You may submit comments, identified by RIN number 3038-AD99, by any of the following methods:

•

CFTC Web site: http://comments.cftc.gov

;

•

Mail:

Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581;

•

Hand delivery/courier:

Same as Mail, above.

•

Federal eRulemaking Portal: http://www.regulations.gov

. Follow instructions for submitting comments.

All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to

http://www.cftc.gov

. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that may be exempt from disclosure under the Freedom of Information Act, a petition for confidential treatment of the exempt information may be submitted according to the procedures established in CFTC regulations at 17 CFR part 145.

The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from

http://www.cftc.gov

that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT:

Stephen Sherrod, Senior Economist, (202) 418-5452,

ssherrod@cftc.gov

, Riva Spear Adriance, Senior Special Counsel, (202) 418-5494,

radriance@cftc.gov

, Hannah Ropp, Surveillance Analyst, 202-418-5228,

hropp@cftc.gov

, or Steven Benton, Industry Economist, (202) 418-5617,

sbenton@cftc.gov

, Division of Market Oversight; or Lee Ann Duffy, Assistant General Counsel, 202-418-6763,

lduffy@cftc.gov

, Office of General Counsel, in each case at the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Introduction

B. The Commission Construes CEA Section 4a(a) To Mandate That the Commission Impose Position Limits

C. Necessity Finding

II. Proposed Compliance Date

III. Reproposed Rules

A. § 150.1—Definitions

B. § 150.2—Position limits

C. § 150.3—Exemptions

D. § 150.5—Exchange-set speculative position limits and Parts 37 and 38

E. Part 19—Reports by persons holding bona fide hedging positions pursuant to § 150.1 of this chapter and by merchants and dealers in cotton

F. § 150.7—Reporting requirements for anticipatory hedging positions

G. § 150.9—Process for recognition of positions as non-enumerated bona fide hedging positions

H. § 150.10—Process for designated contract market or swap execution facility exemption from position limits for certain spread positions

I. § 150.11—Process for recognition of positions as bona fide hedging positions for unfilled anticipated requirements, unsold anticipated production, anticipated royalties, anticipated services contract payments or receipts, or anticipatory cross-commodity hedge positions

J. Miscellaneous regulatory amendments

1. Proposed § 150.6—Ongoing responsibility of DCMs and SEFs

2. Proposed § 150.8—Severability

3. Part 15—Reports—General provisions

4. Part 17—Reports by reporting markets, futures commission merchants, clearing members, and foreign brokers

5. Part 151—Position limits for futures and swaps, Commission Regulation 1.47 and Commission Regulation 1.48—Removal

IV. Related Matters

A. Cost-Benefit Considerations

B. Paperwork Reduction Act

C. Regulatory Flexibility Act

V. Appendices

A. Appendix A—Review of Economic Studies

B. Appendix B—List of Comment Letters Cited in this Rulemaking

I. Background

A. Introduction

The Commission has long established and enforced speculative position limits for futures and options contracts on various agricultural commodities as authorized by the Commodity Exchange

Act (“CEA”).

The part 150 position limits regime

generally includes three components: (1) The level of the limits, which set a threshold that restricts the number of speculative positions that a person may hold in the spot-month, individual month, and all months combined,

(2) exemptions for positions that constitute bona fide hedging transactions and certain other types of transactions,

and (3) rules to determine which accounts and positions a person must aggregate for the purpose of determining compliance with the position limit levels.

7 U.S.C. 1

et seq.

See

17 CFR part 150. Part 150 of the Commission's regulations establishes federal position limits (that is, position limits established by the Commission, as opposed to exchange-set limits) on certain enumerated agricultural contracts; the listed commodities are referred to as enumerated agricultural commodities. The position limits on these agricultural contracts are referred to as “legacy” limits because these contracts on agricultural commodities have been subject to federal position limits for decades.

See also

Position Limits for Derivatives, 78 FR 75680 at 75723, n. 370 and accompanying text (Dec. 12, 2013) (“December 2013 Position Limits Proposal”).

See

17 CFR 150.2.

See

17 CFR 150.3.

See

17 CFR 150.4.

In late 2013, the CFTC proposed to amend its part 150 regulations governing speculative position limits.

These proposed amendments were intended to conform the requirements of part 150 to particular changes to the CEA introduced by the Wall Street Transparency and Accountability Act of 2010 (”Dodd-Frank Act”).

The proposed amendments included the adoption of federal position limits for 28 exempt and agricultural commodity futures and option contracts and swaps that are “economically equivalent” to such contracts.

In addition, the Commission proposed to require that DCMs and SEFs that are trading facilities (collectively, “exchanges”) establish exchange-set limits on such futures, options and swaps contracts.

Further, the Commission proposed to (i) revise the definition of bona fide hedging position (which includes a general definition with requirements applicable to all hedges, as well as an enumerated list of bona fide hedges),

(ii) revise the process for market participants to request recognition of certain types of positions as bona fide hedges, including anticipatory hedges and hedges not specifically enumerated in the proposed bona fide hedging definition;

and (iii) revise the exemptions from position limits for transactions normally known to the trade as spreads.

See generally

December 2013 Positions Limits Proposal. In the December 2013 Position Limits Proposal, the Commission proposed to amend its position limits to also encompass 28 exempt and agricultural commodity futures and options contracts and the physical commodity swaps that are economically equivalent to such contracts.

The Commission previously had issued proposed and final rules in 2011 to implement the provisions of the Dodd-Frank Act regarding position limits and the bona fide hedge definition. Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 2011); Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011). A September 28, 2012 order of the U.S. District Court for the District of Columbia vacated the November 18, 2011 rule, with the exception of the rule's amendments to 17 CFR 150.2.

International Swaps and Derivatives Association

United States Commodity Futures Trading Commission,

887 F. Supp. 2d 259 (D.D.C. 2012).

See generally

the materials and links on the Commission's Web site at

http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_26_PosLimits/index.htm

. The Commission issued the December 2013 Position Limits Proposal, among other reasons, to respond to the District Court's decision in

ISDA

CFTC. See generally

the materials and links on the Commission's Web site at

http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/PositionLimitsforDerivatives/index.htm

See

CEA section 4a(a)(5), 7 U.S.C. 6a(a)(5) (providing that the Commission establish limits on economically equivalent contracts); CEA section 4a(a)(6), 7 U.S.C. 6a(a)(6) (directing the Commission to establish aggregate position limits on futures, options, economically equivalent swaps, and certain foreign board of trade contracts in agricultural and exempt commodities (collectively, “referenced contracts”)).

See

December 2013 Position Limits Proposal, 78 FR at 75825. Under the December 2013 Position Limits Proposal, “referenced contracts” would have been defined as futures, options, economically equivalent swaps, and certain foreign board of trade contracts, in physical commodities, and been subject to the proposed federal position limits. The Commission proposed that federal position limits would apply to referenced contracts, whether futures or swaps, regardless of where the futures or swaps positions were established.

See

December 2013 Positions Limits Proposal, at 78 FR 75826 (proposed § 150.2).

See

December 2013 Position Limits Proposal, 78 FR at 75754-8. Consistent with DCM Core Principle 5 and SEF Core Principle 6, the Commission proposed at § 150.5(a)(1) that for any commodity derivative contract that is subject to a speculative position limit under § 150.2, a DCM or SEF that is a trading facility shall set a speculative position limit no higher than the level specified in § 150.2.

See

December 2013 Position Limits Proposal, 78 FR at 75706-11, 75713-18.

See

December 2013 Position Limits Proposal, 78 FR at 75718.

See

December 2013 Position Limits Proposal, 78 FR at 75735-6. CEA section 4a(a)(1), 7 U.S.C. 6a(a)(1), permits the Commission to exempt transactions normally known to the trade as “spreads” from federal position limits.

On June 13, 2016, the Commission published a supplemental proposal to its December 2013 Position Limits rulemaking.

The supplemental proposal included revisions and additions to regulations and guidance proposed in 2013 concerning speculative position limits in response to comments received on that proposal, and alternative processes for DCMs and SEFs to recognize certain positions in commodity derivative contracts as non-enumerated bona fide hedges or enumerated anticipatory bona fide hedges, as well as to exempt from federal position limits certain spread positions, in each case subject to Commission review. In this regard, under the 2016 Supplemental Position Limits Proposal, certain of the regulations proposed in 2013 regarding exemptions from federal position limits and exchange-set position limits would be amended to take into account the alternative processes. In connection with those proposed changes, the Commission proposed to further amend certain relevant definitions, including to clearly define the general definition of bona fide hedging for physical commodities under the standards in CEA section 4a(c). Separately, the Commission proposed to delay for DCMs and SEFs that lack access to sufficient swap position information the requirement to establish and monitor position limits on swaps at this time.

Position Limits for Derivatives: Certain Exemptions and Guidance, 81 FR 38458 (June 13, 2016) (“2016 Supplemental Position Limits Proposal”).

After review of the comments responding to both the December 2013 Position Limits Proposal and the 2016 Supplemental Position Limits Proposal, the Commission, in consideration of those comments, is now issuing a reproposal (“Reproposal”). The Commission invites comments on all aspects of this Reproposal.

B. The Commission Preliminarily Construes CEA Section 4a(a) To Mandate That the Commission Impose Position Limits

1. Introduction

a. The History of Position Limits and the 2011 Position Limits Rule

As part of the Dodd-Frank Act, Congress amended the CEA's position limits provision, which since 1936 has authorized the Commission (and its predecessor) to impose limits on speculative positions to prevent the harms caused by excessive speculation. Prior to the Dodd-Frank Act, CEA section 4a(a) stated that for the purpose of diminishing, eliminating or preventing specified burdens on interstate commerce, the Commission shall, from time to time, after due notice and an opportunity for hearing, by rule, regulation, or order, proclaim and fix such limits on the amounts of trading which may be done or positions which may be held by any person under contracts of sale of such commodity for future delivery on or subject to the rules of any contract market as the Commission finds are necessary to

diminish, eliminate, or prevent such burden.

7 U.S.C. 6a(a) (2006).

In the Dodd-Frank Act, Congress renumbered a modified version of CEA section 4a(a) as section 4a(a)(1) and added, among other provisions, CEA section 4a(a)(2), captioned “Establishment of Limitations,” which provides that in accordance with the standards set forth in CEA section 4a(a)(1), the Commission shall establish limits on the amount of positions, as appropriate, other than bona fide hedge positions, that may be held by any person. CEA section 4a(a)(2) further provides that for exempt commodities (energy and metals), the limits required under CEA section 4a(a)(2) shall be established within 180 days after the date of the enactment of CEA section 4a(a)(2); for agricultural commodities, the limits required under CEA section 4a(a)(2) shall be established within 270 days after the date of the enactment of CEA section 4a(a)(2).

CEA section 4a(a)(2); 7 U.S.C. 6a(a)(2). The Commission notes that it uses the defined term “bona fide hedging position” throughout part 150, rather than “bona fide hedge positions” found in CEA section 4a(a)(2). CEA section 4a(c)(1) uses the term “bona fide hedging transactions or positions” and CEA section 4a(c)(2) uses the term “bona fide hedging transaction or position.” The Commission interprets all of these terms to mean the same. It should be noted that the Commission previously imposed transaction volume limits on “the amounts of trading which may be done” as authorized by CEA section 4a(a)(1), but removed those transaction volume limits. Elimination of Daily Speculative Trading Limits, 44 FR 7124, 7127 (Feb. 6, 1979).

These and other changes to CEA section 4a(a) are described in more detail below.

Pursuant to these amendments, the Commission adopted a position limits rule in 2011 (“2011 Position Limits Rule”) in a new part 151.

In the 2011 Position Limits Rule, the Commission imposed, in new part 151, speculative limits in the spot-month and non-spot-months on 28 physical commodity derivatives “of particular significance to interstate commerce.”

Under the 2011 Position Limits Rule, part 151 used formulas for calculating limit levels that are similar to the formulas used to calculate previous Commission- and exchange-set position limits.

The 2011 Position Limits Rule contained provisions in part 151 that implemented the statutory exemption for bona fide hedging.

It also provided account aggregation standards to determine which positions to attribute to a particular market participant.

Because it interpreted the Dodd-Frank Act as mandating position limits, the Commission did not make an independent threshold determination that position limits are necessary to accomplish the purposes set forth in the statute. The Commission explained:

Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011). As finalized, part 151 replaced part 150.

Id.

at 71665;

see also

Limits on Positions and Daily Trading in Cottonseed Oil, Soybean Oil, and Lard for Future Delivery, 17 FR 6055, Jul. 4, 1952 (providing notice of a hearing regarding proposed position limits for cottonseed oil, soybean oil, and lard); Limits on Position and Daily Trading in Cottonseed Oil for Future Delivery, 18 FR 443, Jan. 22, 1953 (giving orders setting limits for cottonseed oil, soybean oil, and lard); Limits on Position and Daily Trading in Onions for Future Delivery; Notice of Hearing, 21 FR 1838, Mar. 24, 1956 (conveying notice of a hearing regarding proposed position limits for onions), Limits on Position and Daily Trading in Onions for Future Delivery, 21 FR 5575, Jul. 25, 1956 (providing order setting position limits for onions).

In the Commission's experience (including the experience of its predecessor agency), it generally took many months to make a necessity finding with respect to one commodity. The process of making the sort of necessity findings that plaintiffs in

ISDA

SIFMA

urged with respect to all agricultural commodities and all exempt commodities (and that some commenters urge) would be far more lengthy than the time allowed by CEA section 4a(a)(3),

i.e.,

180 or 270 days from enactment of the Dodd-Frank Act.

Because of the stringent time limits in CEA section 4a(a)(2)(B), the Commission concludes that Congress did not intend for the Commission to delay the imposition of limits until it first made antecedent, contract-by-contract necessity findings.

Although the Commission did not meet these deadlines in its first position limits rulemaking, it completed the task (in which the Commission received and addressed more than 15,000 comments) as expeditiously as possible under the circumstances.

b. Prior Rulemaking Requiring Exchanges to Set Limits

The CFTC's preliminary interpretation of the statute is also based in part on its promulgation of a rule in 1981 requiring exchanges to impose limits on all contracts that did not already have limits. In that rulemaking, the Commission, acting expressly pursuant to,

inter alia,

what was then CEA section 4a(1) (predecessor to CEA section 4a(a)(1)), adopted what was then 17 CFR 1.61.

This rule required exchanges to set speculative position limits “for each separate type of contract for which delivery months are listed to trade” on any DCM, including “contracts for future delivery of any commodity subject to the rules of such contract market.”

The Commission explained that this action would “close the existing regulatory gap whereby some but not all contract markets [we]re subject to a specified speculative position limit.”

Establishment of Speculative Position Limits, 46 FR 50938, 50944-45, Oct. 16, 1981. The rule adopted in 1981 tracked, in significant part, the language of CEA section 4a(1).

Compare

17 CFR 1.61(a)(1) (1982)

with

7 U.S.C. 6a(1) (1976).

Establishment of Speculative Position Limits, 46 FR at 50945.

Id.

at 50939;

see also

CL-ISDA/SIFMA-59611 at 3, 27-32, App. A at 11, App. B at 6 (arguing for alternatives to limits

outside

the spot month).

CL-CME-59718 at 18.

CL-CMOC-60400 at 3; and CL-Public Citizen-60390 at 2-3.

ii.

Time to Establish Limits:

No commenters disputed the fact that it took many months for the Commission to make a necessity determination before establishing limits. Some commenters agreed with the determinations the Commission preliminarily drew from its experience.

E.g.,

CL-A4A-59714 at 3.

Several commenters asserted that the Commission's reliance on the timelines to support its view ignores other qualifying language in the statute, such as the terms “necessary” and “appropriate.”

The Commission disagrees, because its interpretation of the statute considers the relevant provisions as an integrated whole, which is required in interpreting any statute. Under this approach, it is appropriate to give consideration to the import of the tight statutory deadlines in light of the Commission's experience that it could not possibly comply with if it had to make necessity findings as it has in the past. These comments fail to take these considerations into account. The Commission addresses the language relied upon by these commenters, infra, in its discussion of the text of the statute.

CL-CME-59718 at 7; and CL-ISDA/SIFMA-59611 at 9, n. 32 (asserting that deadlines are no excuse for the Commission to be “arbitrary” or “sloppy.”).

CME also contended that the 180- and 270-day time limits were a difficulty manufactured by the December 2013 Position Limits Proposal itself. According to CME, the Commission could instead expedite the process for setting limits by utilizing its exchanges and others to determine whether position limits are necessary and appropriate for a particular commodity and, if so, the appropriate types and levels of limits and related exemptions.

While this is a plausible approach to generating necessity findings, the Commission views it unlikely that Congress had this approach in mind. The provisions at issue make no mention of exchange-set limits or necessity findings. CME also gave no reason to believe that commodity-by-commodity necessity findings could be made by the exchanges within the prescribed 180/270 day limits.

CL-CME-59718 at 7.

iii.

1981 Rulemaking:

Some commenters disagreed with the Commission's consideration of the 1981 Rule. CME commented that the 1981 Rule is inapposite because there the Commission was requiring DCMs to impose position limits based on an “antecedent judgment” that limits were necessary and appropriate; a necessity finding was not required there.

The Commission believes that CME's observation is consistent with its interpretation. In the 1981 rule, the Commission made an antecedent judgment on an across-the-board basis that position limits were necessary, and the exchanges then set them according to specific standards. Here, Congress has made the antecedent judgment on an across-the-board basis that position limits are necessary for physical commodities (

i.e.,

commodities other than excluded commodities), and ordered the Commission to set them according to the same types of standards referenced in the 1981 rule. This supports, rather than undermines, the Commission's interpretation that the “standards” in CEA section 4a(a)(1), referred to in CEA section 4a(a)(2) as added by the Dodd-Frank Act, are the flexibility and aggregation standards, much as they were in the 1981 rulemaking interpreting CEA section 4a(a)(1).

Id.

at 9-10.

Several commenters contended that the Commission's reliance on the 1981 rulemaking ignores that the CFTC then imposed limits only after a fact-intensive inquiry into the characteristics of individual contracts markets to determine the limits most appropriate for individual contract markets.

However, the Commission has taken those inquiries into account. The Commission believes these inquiries are significant because while the Commission performed such investigation for some markets, it did not do so for all markets ultimately within the scope of the rule. The 1981 Rule directed exchanges to impose limits on

all

futures contracts for which exchanges had not already imposed limits. For example, citing a then-recent disruption in the silver market, the Commission directed that position limits be imposed prophylactically for all futures and options contracts.

It further directed the exchanges to consider the characteristics of particular contracts and markets in determining

how

to set limits (the standards, limit

levels and so on) but not whether to do so.

It specifically rejected commenters' concerns that position limits would not be beneficial for all contracts, finding, after “considerable years of Federal and contract market regulatory experience,” that “the capacity of any contract market . . . is not unlimited,” and there was no need to evaluate the particulars of whether any contract would benefit from position limits.

The Dodd-Frank Act amendments unfolded in an analogous fashion. Prior to the Dodd-Frank Act, Congress conducted studies of some, but not all, markets in physical commodities. This history suggests that Congress extrapolated from the conclusions reached in those studies to determine that position limits were necessary for all physical commodities other than excluded commodities.

CL-AMG-59709 at 4, n. 8; and CL-CME-59718 at 15-16.

Establishment of Speculative Position Limits, 46 FR at 50940-41 (Oct. 16, 1981).

Id.

ISDA and SIFMA asserted that the Commission's reliance on the 1981 rulemaking is unavailing because (1) it cannot alter the Commission's statutory burdens with respect to imposing position limits; and (2) it was never adopted by Congress.

The first of these comments begs the question,

i.e.,

what is “the statutory burden” intended in the text of CEA sections 4a(a)(1) and (2), read as a whole and considered in context to resolve the ambiguity found by the district court. As to the second comment, the Commission does not contend that Congress adopted the 1981 rule. Rather, it is relevant because the language the district court found ambiguous in the Dodd-Frank Act amendments to CEA section 4a(a) resembles the language of the 1981 rule, and some of the context is parallel. The relevance of this rulemaking is supported by the fact that Congress did ratify it the following year, when it amended the CEA by granting the Commission the authority to enforce the position limits set by the exchanges, reinforcing that as a historical matter Congress had approved an omnibus prophylactic approach as reasonable. That Congress had approved of such an approach before and then used language in the Dodd-Frank Act that closely resembles the very language the Commission used when it mandated that omnibus approach is another factor that weighs on the side of interpreting the statutory ambiguity to find a mandate to impose physical commodity positon limits.

CL-ISDA/SIFMA-59611 at 9.

CFTC

Schor,

478 U.S. 833, 846 (1986).

Finally, several commenters asserted that the Commission cannot consider the 1981 rulemaking because the Commission later allowed exchanges to set position accountability levels in lieu of limits for some commodities and contracts.

Those later exemptions do not, however, alter the language or import of the 1981 rule, which directed the exchanges to impose limits in accordance with “standards” that did not include a necessity finding. The 1981 rulemaking is the last time the Commission definitively addressed and identified the “standards” in CEA section 4a(a)(1) for imposing across-the-board, prophylactic position limits in a manner akin to the Dodd-Frank Act amendments. That other approaches intervened is not inconsistent with the inference that Congress was influenced by the 1981 rulemaking in the Dodd-Frank Act amendments.

E.g.,

CL-ISDA/SIFMA-59611 at 9; and CL-AMG-59709 at 4, n.8.

4. Legislative History of the Dodd-Frank Act Amendments to Position Limits Statute

As discussed in the 2016 Supplemental Position Limits Proposal, the Commission has also considered the legislative history of the Dodd-Frank Act amendments.

That history contains further indication that Congress intended to mandate the imposition of limits for physical commodity derivatives without requiring the Commission to make antecedent necessity findings, and did not intend the term “standards” to include such a finding.

Union Carbide Corp. & Subsidiaries

Comm'r of Internal Revenue,

December 2013 Position Limits Proposal, 78 FR at 75682, 75684-85.

The Commission's preliminary interpretation of CEA section 4a(a)(2) is based in part on congressional concerns that arose, and congressional actions taken, before the passage of the Dodd-Frank Act amendments.

During the 1990s, the Commission began permitting exchanges to experiment with an alternative to position limits—position accountability, which allowed a trader to hold large positions subject to reporting requirements and gave the exchange the right to order the trader to hold or reduce its position.

Then, in the Commodity Futures Modernization Act of 2000 (“CFMA”),

Congress expressly authorized the use of position accountability as an alternative means to limit speculative positions.

Id.

at 75682.

Federal Speculative Position Limits for Referenced Energy Contracts and Associated Regulations, 75 FR 4144, 4147 (Jan. 26, 2010); Revision of Federal Speculative Position Limits and Associated Rules, 64 FR 24038, 24048-49 (May 5, 1999).

Commodity Futures Modernization Act of 2000, Public Law 106-554, 114 Stat. 2763 (Dec. 21, 2000).

7 U.S.C. 7(d)(3) (2009).

Following this experiment with position accountability, Congress became concerned about fluctuations in commodity prices. In the late 1990s and 2000s, Congress conducted several investigations that concluded that excessive speculation accounted for significant volatility and price increases in physical commodity markets. For example, a congressional investigation determined that prices of crude oil had risen precipitously and that “[t]he traditional forces of supply and demand cannot fully account for these increases.”

The investigation found evidence suggesting that speculation was responsible for an increase of as much as $20-25 per barrel of crude oil, which was then at $70.

Subsequently, Congress found similar price volatility stemming from excessive speculation in the natural gas market.

The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat,

Staff Report, Permanent Subcommittee on Investigations of the Senate Committee on Homeland Security and Governmental Affairs, U.S. Senate, S. Prt. No. 109-65 at 1 (June 27, 2006).

Id.

at 12;

see also Excessive Speculation in the Natural Gas Market,

Staff Report, Permanent Subcommittee on Investigations of the Senate Committee on Homeland Security and Governmental Affairs, U.S. Senate at 1 (June 25, 2007),

available at

http://www.levin.senate.gov/imo/media/doc/supporting/2007/PSI.Amaranth.062507.pdf

(last visited Mar. 18, 2013) (“Gas Report”).

Gas Report at 1-2.

These investigations appear to have informed the drafting of the Dodd-Frank Act. During hearings prior to the passage of the Dodd-Frank Act, Senator Carl Levin, then-Chair of the Senate Permanent Subcommittee on Investigations that had conducted them, urged passage to ensure “a cop on the beat in all commodity markets where U.S. commodities are traded . . . that can enforce the law to prevent excessive speculation and market manipulation.”

In addition, Congress viewed the nearly $600 trillion little-regulated swaps market as a “major contributor to the financial crisis” because excessive risk taking, hidden leverage, and under collateralization in that market created a systemic risk of harm to the entire financial system.

As Senator Cantwell and others explained, it was imperative that the CFTC have the ability to regulate swaps through

“position limits,” “exchange trading,” and “public transparency” to avoid a recurrence of the instability that rippled through the entire financial system in 2008.

And in the House of Representatives, Representative Collin Peterson, then-Chairman of the House Committee on Agriculture and author of an amendment strengthening the position limits provision as discussed below, reminded his colleagues that his committee's own “in-depth review of derivative markets began when we experienced significant price volatility in energy futures markets due to excessive speculation—first with natural gas and then with crude oil. We all remember when we had $147 oil. . . . This conference report [now] includes the tools we authorized and the

direction

to the CFTC to mitigate outrageous price spikes we saw 2 years ago.”

Congress's focus in its investigations on excessive speculation involving physical commodities is reflected in the scope of the Dodd-Frank Act's position limits amendment: It applies only to physical commodities.

156 Cong. Record S. 4064 (daily ed. May 20, 2010).

S. Rep. 111-176, at 29 (2010).

See, e.g.,

156 Cong. Rec. S 2676-78, S 2698-99, S 3606-07, S 3966, S 5919 (daily ed. April 27, May 12, 19, July 15, 2010 (providing statements of Senators Cantwell, Feinstein, Lincoln)).

156 Cong. Rec. H5245 (daily ed. June 30, 2010) (emphasis added).

The evolution of the position limits provision in the bills before Congress from permissive to mandatory supports a preliminary determination that Congress intended to do something more than continue the long-standing statutory regime giving the Commission discretionary authority to impose limits.

As initially introduced, the House bill that became the Dodd-Frank Act provided the Commission with discretionary authority to issue position limits, stating that the Commission “may” impose them.

However, the House replaced the word “may” with the word “shall,” suggesting a specific judgment that the limits should be mandatory, not discretionary. The House also added other language militating in favor of interpreting CEA section 4a(a)(2) as a mandate. In two new subsections, it set the tight deadlines described above.

After changing “may” to “shall,” the House further amended the bill to refer in one instance to the limits for agricultural and exempt commodities as “required.”

And only after the language had changed from permissive to mandatory, the House added the requirement that the Commission conduct studies on the “effects (if any) of position limits imposed”

to determine if the required position limits were harming U.S. markets.

100

Underscoring its intent to amend the bill to include a mandate, the House Report accompanying the House Bill stated that it “required” the Commission to impose limits.

101

The Conference Committee adopted the House bill's amended provisions on position limits and then strengthened them even further by referring to the position limits as “required” an additional three times, bringing the total to four times in the final legislation the number of references in statutory text to position limits as “required.”

102

December 2013 Position Limits Proposal, 78 FR at 75684-85.

Initially, the House used the word “may” to permit the Commission to impose aggregate positions on contracts based upon the same underlying commodity.

See

H.R. 4173, 11th Cong. 3113(a)(2) (providing the version introduced in the House, Dec. 2, 2009) (“Introduced Bill”);

see also

Brief of Senator Levin et al as

Amicus Curiae

at 10-11,

ISDA

CFTC,

no. 12-5362 (D.C. Cir. Apr. 22, 2013), Document No. 1432046 (hereafter “Levine Br.”).

Levin Br. at 11 (citing H.R. 4173, 111th Cong. 3113(a)(5)(2), (7) (as passed by the House Dec. 11, 2009) (“Engrossed Bill”)).

Id.

at 12. (citing Engrossed Bill at 3113(a)(5)(3)).

15 U.S.C. 8307; Engrossed Bill at 3005(a).

100

See

Levin Br. at 13-17;

see also

DVD: October 21, 2009 Business Meeting (House Agriculture Committee 2009),

ISDA

CFTC,

Dkt. 37-2 Exh. B (Apr. 13, 2012) at 59:55-1:02:18.

101

Levin Br. at 23 (citing H.R. Rep. No. 111-373 at 11 (2009)).

102

Levin Br. at 17-18.

a. Comments

A number of commenters generally supported or opposed the Commission's consideration of Congressional investigations and the textual strengthening of the Dodd-Frank bill. The Commission addresses specific comments below.

Congressional Investigations:

Several commenters agreed that the Congressional investigations, hearings and reports support the view that Congress decided to mandate position limits.

103

They pointed out that Congress's investigations followed amendments in 2000 to the CEA as part of the CFMA that exempted swaps and energy derivatives from position limits and expressly authorized exchanges to impose position accountability levels in lieu of limits.

104

According to the Commodity Markets Oversight Coalition (“CMOC”), “witnesses confirmed [at those hearings] that the erosion of the position limits regime was a leading cause in market instability and wild price swings.”

105

Senator Levin, who presided over the investigations, commented that those investigations, conducted from 2002 onwards, “into how our commodity markets function, focusing in particular on the role of excessive speculation on commodity prices” “have demonstrated that the failure to impose and enforce effective position limits have led to greater speculation and increased price volatility in U.S. commodity markets.”

106

According to Senator Levin, the investigations “provide[d] strong support for the Dodd-Frank decision to require the Commission to impose position limits on all types of commodity futures, swaps, and options.”

107

Senator Levin also stated that the harms of excessive speculation continue to be felt in the absence of the mandated limits. He cited recent actions by federal regulators to stop manipulation in energy markets, and opined that the continuing problems in the absence of the mandated limits only reinforce the reasonableness of the Commission's view that Congress intended to mandate position limits as a prophylactic measure.

108

Senator Levin's point was echoed by Public Citizen, a consumer advocacy organization, and Airlines for America, a trade association for the U.S. scheduled airline industry.

109

103

CL-CMOC-59720 at 2; CL-Sen. Levin-59637 at 2-5; and CL-A4A-59686 at 2-3.

104

CL-IECA-59964 at 2; CL-A4A-59686 at 2; and CL-Public Citizen-59648 at 2-3.

105

CL-CMOC-59720 at 2.

106

CL-Sen. Levin-59637 at 3-4.

107

Id.

108

Id.

at 2.

109

CL-Public Citizen-59648 at 2-3, and CL-A4A-59686 at 1-2.

Other commenters disagreed with the Commission's preliminary determination that the Congressional investigations indicate that Congress intended to mandate limits. CME asserted that the investigations do not in themselves demonstrate that Congress required the CFTC to impose position limits as recommended even if those investigations suggest that excessive speculation poses a burden on interstate commerce in certain physical commodity markets.

110

Citadel questioned whether the cited reports could be “broadly indicative of Congressional intent,” or could “redefine statutory language that has existed for nearly eight decades.”

111

110

CL-CME-59718 at 8. CME also asserted that the Congressional investigation into excessive speculation in natural gas futures focused more on the fact that position accountability rules for exchange-traded natural gas futures were not in place for “look-alike” natural gas swaps traded “over the counter,” permitting regulatory arbitrage.

111

CL-Citadel-59717 at 3.

But the Commission is not relying solely on these reports. The question, rather, is whether these Congressional

investigations and findings of excessive speculation and price volatility in energy markets, conducted and issued when the Commission was authorized but not required by law to impose limits, may be one indication, among others, that Congress sought to do something more with the Dodd-Frank Act amendments than to maintain the statutory status quo for futures on physical commodities. In the Commission's preliminary view, it is more plausible, based on these investigations, that Congress sought to do something more—to require that the Commission impose limits for the covered commodities without having to first find that they are necessary to prevent excessive speculation. Contrary to Citadel's comment, the Commission is not relying on the investigations and reports to redefine statutory language that has existed for nearly eight decades. Rather, the Commission believes that the investigations favor the conclusion that Congress added CEA section 4a(a)(2) to the pre-existing language in order to strengthen the long-standing position limits regime for a category of commodity derivatives—physical commodities—that Congress's investigations revealed to be vulnerable to substantial price fluctuations.

ii.

Evolution of the Dodd-Frank Bill:

Several commenters agreed with the Commission's preliminary determination that the strengthening of the position limits language in the Dodd-Frank bill evinces Congress' intent to mandate limits.

112

CL-Public Citizen-59648 at 2.

CME and MFA disagreed; while they do not directly address this point, they believed that the strengthening of the language in the Dodd-Frank bills does not indicate that Congress intended to de-couple the enacted directive to impose position limits from the necessity finding of CEA section 4a(a)(1).

113

The Commission, however, preliminarily considers this the most plausible interpretation. The evolution of the bill from one stating the Commission “may” impose position limits to include statements that the Commission “shall” impose them, that they are “required,” and that the Commission shall study their effects indicates intentional progressive refinement from a bill that would continue the status quo for futures to one that added special nondiscretionary requirements for a category of commodities. This legislative evolution also supports the conclusion “standards” does not include an antecedent necessity finding.

113

CL-CME-59718 at 2, 5-12 (maintaining statutory language requires necessity finding); and CL-MFA-59606 at 9 (citing S. Rept. 111-176 (Apr. 30, 2010, which states “[t]his section authorizes the CFTC to establish aggregate position limits. . . .”).

5. The Commission Preliminarily Interprets the Text of CEA Section 4a(a) as an Integrated Whole, In Light of Its Experience and Expertise.

In the December 2013 Position Limits Proposal, the Commission discussed how its interpretation of the text of CEA section 4a(a), considered as an integrated whole, is consistent with and supports its conclusions based on experience and expertise. As discussed, the ambiguity is the meaning of CEA section 4a(a)(2)'s statement that the Commission “shall” establish limits on physical commodities other than excluded commodities “[i]n accordance with the standards” set forth in CEA section 4a(a)(1). If “standards” includes a necessity finding, then a necessity finding is required before limits can be imposed on agricultural and exempt commodities. If not, the Commission must impose limits for that subset of commodity derivatives. In the December 2013 Position Limits Proposal, the Commission resolved the ambiguity by preliminarily determining that the reference in CEA section 4a(a)(2) to the “standards” in pre-Dodd-Frank section 4a(a)(1) refers to the criteria in CEA section 4a(a)(1) for

how

the required limits are to be set and not the antecedent finding

whether

limits are even necessary. The Commission explained that, in its preliminary view, “standards” refers to, in CEA section 4a(a)(1), only the following two provisions. First, the limits must account for situations in which one person controls another or two persons act in concert, by aggregating those positions as if the trading were done by one person acting alone (aggregation). The second “standard” in CEA section 4a(a)(1) states that the limits may be different for different commodities, markets, delivery months, etc. (flexibility).

The Commission reasoned that this construction of “standards” seemed most consistent with the Commission's experience and history administering position limits. It also seemed most consistent with the text of CEA section 4a(a)(2), the rest of CEA section 4a(a), and the Act as a whole. The Dodd-Frank Act amendments to CEA section 4a(a) largely re-shape CEA section 4a(a) by adding a new, detailed, and comprehensive section 4a(a)(2) that applies only to a subset of the derivatives regulated by the Commission—physical commodities like wheat, oil, and gold—and not intangible commodities like interest rates. Amended CEA section 4a(a) repeatedly uses the word “shall” and refers to the new limits as “required,” differentiating it from the text that existed before the Dodd-Frank Act.

114

Never before in the Commission's experience had Congress set deadlines on action for position limits by a date certain, much less the short time provided in CEA section 4a(a)(2)(B).

115

Nor, in the Commission's experience, had Congress required a report by a given date or committed itself to hold hearings on the report within 30 days thereafter.

116

The Commission preliminarily concluded that, considered as a whole in light of this experience, these provisions evince a Congressional mandate that the Commission impose limits on physical commodities, that it do so quickly, that it impose limit levels in accordance with certain requirements, and that it study the effectiveness of the limits

after

imposing them and then report to Congress.

114

E.g.,

CEA sections 4a(a)(2)(A) (providing that the Commission “shall” set the limits); 4a(a)(2)(B) (referring twice to the “limits required” and directing that they “shall” be established by a time certain); 4a(a)(3)(referring to the limits “required” under subparagraph (A)); 4a(a)(5)(stating that the Commission “shall” concurrently establish limits on economically equivalent contracts).

115

7 U.S.C. 6a(a)(2(B).

116

15 U.S.C. 8307.

By the same token, the Commission preliminarily determined that interpreting CEA section 4a(a)(2) as it proposed to do would not render superfluous the necessity finding requirement in CEA section 4a(a) because that section still applies to the non-physical (excluded) commodity derivatives that are not subject to CEA section 4a(a)(2). Nor would it nullify other parts of CEA section 4a(a), as those are unaffected by this reading.

The Commission received a number of comments on its discussion of the interplay between the statute's text and the Commission's experience and expertise. The Commission has considered them carefully, but is not thus far persuaded. The Commission preliminarily believes that it is a reasonable interpretation of the text of the statute considered as an integrated whole and viewed through the lens of the Commission's experience and expertise, that Congress mandated that the Commission establish position limits for physical commodities. It is also reasonable to construe the reference to “standards” as an instruction to the Commission to apply the flexibility and aggregation standards set forth in CEA section 4a(a)(1), just as the Commission instructed the exchanges to impose

omnibus limits in 1981. And it is at least reasonable to conclude that Congress, in directing the Commission to impose the “required” limits on extremely tight deadlines, did not intend the Commission to independently make an antecedent finding that any given position limit for physical commodities is “necessary”—a finding that would take many months for each individual physical commodity contract.

a. Comments

Several commenters disputed the Commission's interpretation, based on its experience and expertise, that CEA section 4a(a)(2) is a mandate for prophylactic limits based on their view that the statute unambiguously requires the Commission to promulgate position limits only after making a necessity finding, and only “as appropriate.”

117

But in

ISDA

SIFMA,

the district court held that the statute was ambiguous in this respect, and the Commission here is following the court's direction to apply its experience and expertise to resolve the ambiguity. This is consistent with a commenter's statement that “the meshing of the Dodd-Frank Act into the CEA may have created some ambiguity from a technical drafting/wording standpoint.”

118

Nevertheless, the Commission addresses these textual arguments to show that its preliminary interpretation is, at a minimum, a permissible one.

117

CL-CME-59718 at 11; CL-MFA-59606. at 9; etc.

But see, e.g.

, CL-A4A-59714 at 2-3 (noting that notwithstanding the “meshing” problems, “it is clear that the Commission's interpretation is reasonable and fully supported by the context in which the Dodd-Frank Act was passed, its legislative history, and the many other factors identified in the NPRM”); CL-AFR-59685 at 1; CL-Public Citizen-60390 at 2; CL-Public Citizen-59648 at 2; CL-Sen. Levin-59637 at 4; and CL-CMOC-59720 at 2-3.

118

CL-A4A-59714 at 2-3.

The commenters that disagreed with the Commission's preliminary conclusion argued that the Commission: (i) Erred in determining that the reference to “standards” in CEA section 4a(a)(2) does not include the necessity finding in CEA section 4a(a)(1); (ii) failed to consider other provisions that show Congress intended to require the Commission to make antecedent findings; and (iii) incorrectly determined that its interpretation is the only way to give effect to CEA section 4a(a)(2).

Meaning of Standards:

Several commenters asserted that the language: “[in] accordance with the standards set forth in paragraph (1)” in section 4a(a)(2) must include the phrase “as the Commission finds are necessary to diminish, eliminate, or prevent [the burden on interstate commerce]” in CEA section 4a(a)(1).

119

They believed that the Commission's contrary interpretation constitutes an implied repeal of the necessity finding language.

120

119

See, e.g.,

CL-CME-59718 at 12-13; CL-Citadel-59717 at 3-4; CL-AMG-59709 at 3; CL-MFA-59606 at 9-10; CL-ISDA/SIFMA-59611 at 5-7; CL-IECAssn-59679 at 3-4; and CL-FIA-59595 at 6-7.

120

CL-CME-59718 at 2, 12 (citing

Hunter

FERC,

711 F.3d 155 (D.C. Cir. 2013)).

The Commission disagrees that this constitutes an implied repeal. First, CEA section 4a(a)(2) applies only to physical commodities, not other commodities. Accordingly, the requirement of a necessity finding in section 4a(a)(1) still applies to a broad swath of commodity derivatives. Second, there is no implied repeal even in part, because the Commission is interpreting express language—the term “standards.” The Commission must bring its experience to bear when interpreting the ambiguity in the new provision, and the Commission preliminarily believes that the statute, read in light of the Commission's experience administering position limits and making necessity findings, is more reasonably read as an express limited exception, for physical commodities futures and economically equivalent swaps, to the preexisting authorization in CEA section 4a(a)(1) for the Commission to impose limits when it finds them necessary.

ii.

Other Limiting Language:

Some commenters pointed to a number of terms and provisions that they say support the notion that the Commission must make antecedent findings before imposing any limits under new CEA section 4a(a)(2).

First, some commenters asserted that the term “as appropriate” in CEA sections 4a(a)(3) (factors that the “Commission, “as appropriate” must consider when it “shall set limits”) and 4a(a)(5)(A) (providing that Commission “shall” “as appropriate” establish limits on swaps that are economically equivalent to physical commodity futures and options) require the Commission to make antecedent findings that the limits required under CEA section 4a(a)(2) are appropriate before it may impose them.

121

The district court found these words to be ambiguous. In the court's view, they could refer to the Commission's obligation to impose limits (

i.e.,

the Commission shall, “as appropriate,” impose limits), or to the level of the limits the Commission is to impose.

122

121

See, e.g.

CL-ISDA/SIFMA-59611 at 5, 7-8 (citing CEA section 4a(a)(5) as authorizing aggregate position limits “as appropriate” for swaps that are economically equivalent to DCM futures and options and CEA section 4a(a)(3), which directs the Commission to set position limits as appropriate and to the maximum extent practicable, in its discretion: (i) To diminish, eliminate, or prevent excessive speculation; (ii) to deter and prevent market manipulation, squeezes, and corners; (iii) to ensure sufficient market liquidity for bona fide hedgers; and (iv) to ensure that the price discovery function of the underlying market is not disrupted.).

122

887 F.Supp. 2d at 278; December 2013 Position Limits Proposal, 78 FR at 75685, n. 59.

The Commission preliminarily believes that when these words are considered in the context of CEA section 4a(a)(2)-(7) as a whole, including the multiple uses of the new terms “shall” and “required” and the historically unique stringent time limits for imposing the covered limits and post-imposition study requirement, it is more reasonable to interpret these words as referring to the level of limits,

i.e.,

the Commission must set physical commodity limits at an appropriate level, and not to require the Commission to first determine whether the required limits are appropriate before it may even impose them.

123

In other words, while Congress made the threshold decision to impose position limits on physical commodity futures and options and economically equivalent swaps, Congress at the same time delegated to the Commission the task of setting the limits at levels that would maximize Congress' objectives.

123

CEA section 4a(a)(2)(A) provides that the Commission “shall” establish limits; CEA section 4a(a)(2)(B) refers multiple times to the “required” limits in (A) that “shall” be established within 180 or 270 days of enactment of Dodd-Frank; and CEA section 4a(a)(2)(C) provides that “[i]n establishing the limits required” the Commission shall “strive to ensure” that trading on foreign boards of trade for commodities that have limits will be subject to “comparable limits,” thereby assuming that limits must be established and requiring that they be set at levels in accordance with particular considerations. CEA section 4a(a)(3) contains “specific limitations” on the “required” limits which are most reasonably understood to be considerations for the Commission for the levels of limits.

Some commenters claimed that other parts of CEA section 4a(a)(2) undermine the Commission's determination. First, CEA section 4a(2)(C) states that the “[g]oal . . . [i]n establishing the limits required” is to “strive to ensure” that trading on foreign boards of trade (“FBOTs”) for commodities that have limits will be subject to “comparable limits.” It goes on to state that for “any limits to be imposed” the Commission will strive to ensure that they not shift trading overseas. Commenters argue that “any limits to be imposed” under CEA section 4a(a)(2)(A) implies that limits might not be imposed under that section. However, in the context discussed and in view of the reference in that section to position limits

“required,” the reference to “any limits to be imposed” refers again to the levels or other standards applied. That is, whatever the contours the Commission chooses for the required limits, they must meet the goal set forth in that section.

Second, CEA section 4a(a)(3)(B) states certain factors that the Commission must consider in setting limits under CEA section 4a(a)(2).

124

The Commission sees no inconsistency with mandatory position limits—the Commission must consider these factors in setting the appropriate levels and other contours. Indeed, CEA section 4a(a)(3)(B) applies by its own terms to “establishing the limits required in paragraph (2).” Moreover, consideration of these factors under CEA section 4a(a)(3) is not mandatory, as some commenters suggest,

125

but rather to be made “in [the Commission's] discretion.”

126

In the Commission's preliminary view, there is thus nothing in these provisions at odds with the Commission's interpretation that it is required by CEA section 4a(a)(2)(A) to impose limits on a subset of commodities without making antecedent findings whether they should be imposed, particularly when the language at issue is construed, as it should be, with other terms in CEA section 4a(a)(2)-(7), discussed above, that use mandatory language and impose time limits.

124

See, e.g.

CL-CME-59718 at 11, 13-17, and CL-FIA-59595 at 5-6.

125

See, e.g.

CL-AMG-59709 at 3; and CL-CME-59718 at 13-17.

126

CEA section 4a(a)(3), 7 U.S.C. 6a(a)(3).

Some commenters stated that two pre-Dodd Frank Act provisions in CEA section 4a undermine the Commission's interpretation. The first is CEA section 4a(e),which states, “if the Commission shall have fixed limits . . . for any contract . . . , then the limits” imposed by DCMs, SEFs or other trading facilities “shall not be higher than the limits fixed by Commission.”

127

According to a commenter, the “if/then” formulation suggests position limits should not be presupposed for any contract.

128

The Commission sees the provision differently. CEA section 4a(a)(2) applies only to a subset of futures contracts—contracts in physical commodities. For other commodities, position limits remain subject to the Commission's determination of necessity, and the “if/then” formulation applies and remains logical. There is, accordingly, no inconsistency.

127

CEA section 4a(e), 7 U.S.C. 6a(e).

128

CL-CME-59718 at 10 (citing CEA section 4a(e)).

The second pre-Dodd Frank Act provision the commenters mentioned is CEA section 5(d)(5);

129

it gives the exchanges discretionary authority to impose position limits on all commodity derivatives “as is necessary and appropriate.”

130

There is, however, no inconsistency. Exchanges retain the discretionary authority to set position limits for the many commodities not covered by CEA section 4a(a)(2), and they retain the discretion to impose position limits for physical commodities, so long as the limits are no higher than federal position limits.

129

7 U.S.C. 7(d)(5).

130

CL-CME-59718 at 11 (citing 7 U.S.C. 7(d)(5)).

Some commenters cited other language in CEA section 5(d)(5) to support their assertion that, notwithstanding the Dodd-Frank Act amendments discussed above requiring the Commission to impose limits, the Commission retains and should exercise its discretion to impose position accountability levels in lieu of limits or delegate that authority exchanges to do so. CEA section 5(d)(5) authorizes exchanges to adopt “position limitations or position accountability” levels in order to reduce the threat of manipulation and congestion. These commenters also pointed out that the Commission has previously endorsed accountability levels for exchanges in lieu of limits.

131

Other commenters disagree. They asserted that, given what they interpret as a mandate in CEA section 4a(a)(2) for the Commission to impose position limits for physical commodities, it would be inappropriate for the Commission to consider imposing position accountability levels instead for those commodities, or to allow exchanges to do so.

132

131

CL-CME-59718 at 10; CL-AMG-59709 5-6; CL-FIA-59595 at 12-13; CL-FIA-60392 at 4-6, 8 (asserting that under the Commission's general rulemaking authority in CEA section 8a(5), 7 U.S.C. 12a(5), “the Commission has the power to adopt, as part of an accountability regime, a rule pursuant to which it or a DCM could direct a market participant to reduce speculative positions above an accountability limit because that authority is `reasonably necessary to effectuate' a position accountability rule,” and observing that the Commission previously determined in rulemakings that exchange-set accountability levels represent an alternative means to limit excessive speculation); CL-FIA-60303 at 3-4; CL-DBCS-59569 at 4; CL-MFA-60385 at 7-8, 10-14; and CL-Olam-59658 at 1-2 (declaring that the Commission can and should permit exchanges to administer position accountability levels in lieu of Commission-set limits under CEA section 4a(a)(2)).

132

CL-Public Citizen-60390 at 3-4 (noting other concerns with exchange set limits or accountability levels); CL-IECA 60389 at 3-4 (asserting that the Commission should not cede its authority to exchanges); CL-AFR-60953 at 4; CL-A4A-59686 at 2-3; CL-IECA-59671 at 2; and CL-CMOC-59720 at 2.

The Commission agrees with the latter group of commenters and finds the former reading strained. CEA section 4a(a)(2) makes no mention of position accountability levels. Regardless whether pre-Dodd Frank section 5(d)(5) allows exchanges to set accountability levels in lieu of limits where the Commission has not set limits, and regardless whether the Commission has in the past endorsed exchange-set position accountability levels in lieu of limits, CEA section 4a(a)(2) does not mention that tool. If anything, reference to accountability levels elsewhere in the CEA shows that Congress understands that exchanges have used position accountability, but made no reference to it in amended CEA section 4a(a).

iii.

Avoiding Surplusage or Nullity:

Several commenters took issue with the Commission's preliminary determination that its interpretation is necessary in order to avoid rendering CEA section 4a(a)(2)(A) surplusage. These commenters suggested that reading the term “standards” in CEA section 4a(a)(2)(A) to include the antecedent necessity finding in CEA section 4a(a)(1) will not render CEA section 4a(a)(2) surplusage because if the Commission finds a position limit is “necessary” and “appropriate,” it now must impose one (as opposed to pre-Dodd-Frank, when the Commission had authority but not a mandate under CEA section 4a(a) to impose limits).

133

The Commission finds this reading highly unlikely. There is no history of the Commission determining that limits are necessary and appropriate, but then declining to impose them. Nor is it reasonable to expect that the Commission might do so. Indeed, historically necessity findings were made only in connection with establishing limits.

133

CL-ISDA/SIFMA-59611 at 5; and CL-MFA-59606 at 9-10. The District Court expressed the same concern. 887 F. Supp. 2d at 274-75.

Furthermore, if Congress had still wanted to leave it to the Commission to ultimately decide whether a limit was necessary, there is no reason for it to have also set tight deadlines, repeat multiple times that the limits are “required,” and direct the agency to conduct a study after the limits were imposed. In other words, requiring the Commission to make an antecedent necessity finding would render many of the Dodd-Frank Act amendments superfluous. For example, if the Commission determined limits were not necessary then, contrary to CEA section 4a(a)(2), no limits were in fact “required,” no limits needed to be imposed by the deadlines, and no study

needed to be conducted. But none of these provisions were phrased in conditional terms (

e.g., if

the Commission finds a limit necessary,

then

it shall . . . ). Had Congress wanted the Commission to continue to be the decisionmaker regarding the need for limits, it could have expressed that view in countless ways that would not strain the statutory language in this way.

CME contended that the Commission's position—that requiring a necessity finding would essentially give the Commission the same permissive authority it had before the Dodd-Frank Act amendments—is “short-sighted” because other provisions of CEA section 4a(a) “would still have practical significance.” In support of this view, CME stated that new CEA sections 4a(a)(2)(C) and 4(a)(3)(B) have significance even if the Commission is required to make a necessity finding because they “set forth safeguards that the CFTC must balance when it establishes limits” after “the CFTC finds that such limits are necessary.” The Commission preliminarily believes it unlikely that Congress would have intended that. On CME's reading, the statute would place additional requirements to constrain the Commission's

preexisting

authority. Given the background for the amendments, particularly the studies that preceded the Dodd-Frank Act, the Commission sees no reason why Congress would have placed

additional

constraints, nor any reason it would have placed them with respect to physical commodities but not excluded commodities or others. This comment also does not address the thrust of the Commission's interpretation, which is that finding a mandate is the only way to read the entirety of the statute harmoniously, including the timing requirements of CEA section 4a(a)(2)(B) and the reporting requirements of Section 719 of the Dodd-Frank Act, account for the historical context, and, at the same time, avoid reading CEA section 4a(a)(2)(A) as the functional equivalent of CEA section 4a(a)(1).

134

CME also cited CEA section 4a(a)(5), which requires position limits for economically equivalent swaps, to make the same point that there are still meaningful provisions in CEA section 4a(a), even with a necessity finding. But CEA section 4a(a)(1) already authorizes the Commission to establish limits on swaps as necessary, and so the authority, which would be discretionary under CME's reading, to impose limits on economically equivalent swaps would add nothing to the statute and the amendment would be wholly superfluous.

134

In this vein, then-Commissioner Mark Wetjen, who was an aide to Senate Majority Leader Harry Reid during the Dodd-Frank legislative process, stated at the Commission's public meeting to adopt the December 2013 proposal that to read Section 4a(a)(2)(A) to require the same antecedent necessity finding as Section 4a(a)(1) “does not comport with my understanding of the statute's intent as informed by my experience working as a Senate aide during consideration of these provisions.” Statement of Commissioner Mark Wetjen, Public Meeting of the Commodity Futures Trading Commission (Nov. 5, 2013),

http://www.cftc.gov/PressRoom/SpeechesTestimony/wetjenstatement110513

6. Conclusion

Having carefully considered the text, purpose and legislative history of CEA section 4a(a) as a whole, along with its own experience and expertise and the comments on its proposed interpretation, the Commission preliminarily believes for the reasons above that Congress—while not expressing itself with ideal clarity—decided that position limits were necessary for a subset of commodities, physical commodities, mandated the Commission to impose them on those commodities in accordance with certain criteria, and required that the Commission do so expeditiously, without first making antecedent findings that they are necessary to prevent excessive speculation. Consistent with this interpretation, Congress also directed the agency to report back to Congress on their effectiveness within one year. In the Commission's preliminary view, this interpretation, even if not the only possible interpretation, best gives effect to the text and purpose of the Dodd-Frank Act amendments in the context of the pre-existing position limits provision, while ensuring that neither the amendments nor the pre-existing language is rendered superfluous.

C. Necessity Finding

1. Necessity

The Commission reiterates its preliminary alternative necessity finding as articulated in the December 2013 Position Limits Proposal:

135

Out of an abundance of caution in light of the district court decision in

ISDA

CFTC,

136

and without prejudice to any argument the Commission may advance in any forum, the Commission reproposes, as a separate and independent basis for the Rule, a preliminary finding herein that the speculative position limits in this reproposed Rule are necessary to achieve their statutory purposes.

135

December 2013 Position Limits Proposal, 78 FR at 75685.

136

International Swaps and Derivatives Association

United States Commodity Futures Trading Commission,

887 F. Supp. 2d 259 (D.D.C. 2012).

As described in the Proposal, the policy basis and reasoning for the Commission's necessity finding is illustrated by two major incidents in which market participants amassed massive futures positions in silver and natural gas, respectively, which enabled them to cause sudden and unreasonable fluctuations and unwarranted changes in the prices of those commodities. CEA section 4a(a)(1) calls for position limits for the purpose of diminishing, eliminating, or preventing the burden of excessive speculation.

137

Although both episodes involved manipulative intent, the Commission believes that such intent is not necessary for an excessively large position to give rise to sudden and unreasonable fluctuations or unwarranted changes in the price of an underlying commodity. This is illustrated, for example, by the fact that when the perpetrators of the silver manipulation lost the ability to control their scheme,

i.e.,

to manipulate the market at will, they were forced to liquidate quickly, which, given the amount of contracts sold in a very short time, caused silver prices to plummet. Any trader who was forced by conditions in the market or their own financial condition to liquidate a very large position could predictably have similar effects on prices, regardless of their motivation for amassing the position in the first place. Moreover, although these two episodes unfolded in contract markets for silver and natural gas, and unfolded at two different times in the past, there is nothing unique about either market at either relevant time that causes the Commission to restrict its preliminary finding of necessity to those markets or to reach a different conclusion based on market conditions today. Put another way, any contract market has a limited ability, closely linked to the market's size, to absorb the establishment and liquidation of large speculative positions in an orderly manner.

138

The silver and natural gas examples illustrate these issues, but the reasoning applies beyond their specific facts. Accordingly, the Commission preliminarily finds it necessary to implement position limits as a prophylactic measure for the 25 core referenced futures contracts.

139

137

7 U.S.C. 6a(a)(1).

138

Establishment of Speculative Position Limits, 46 FR 50938, 50940 (Oct. 16, 1981).

139

The Commission's necessity finding is also supported by the consideration of costs and benefits below.

The Commission received many comments on its preliminary alternative necessity finding; the Commission summarizes and responds to significant comments below.

a. Studies' Lack of Consensus.

140

The Commission stated in the December 2013 Position Limits Proposal that the lack of consensus in the studies reviewed at that time warrants acting on the side of caution and implementing position limits as a prophylactic measure, “to protect against undue price fluctuations and other burdens on commerce that in some cases have been at least in part attributable to excessive speculation.”

141

Some commenters suggested that a lack of consensus means instead that the Commission should not implement position limits,

142

that the issue merits further study,

143

that it would be arbitrary and capricious to implement position limits,

144

and that the desire to err on the side of caution should be irrelevant to an assessment of whether position limits are necessary.

145

In short, these comments contend that the lack of consensus means position limits cannot be necessary.

146

The Commission disagrees. The lack of consensus does not provide “objective evidence that position limits are not necessary;”

147

rather, it suggests that they remain controversial.

148

In response to these comments, the Commission believes that Congress could not have intended by using the word “necessary” to restrict the Commission from determining to implement position limits unless experts unanimously agree or form a consensus they would be beneficial. Otherwise a necessity finding would be virtually impossible and, in fact, the Commission could plausibly be stymied by interested persons publishing self-interested studies. The Commission's view in this respect is supported by the text of CEA section 4a(a)(1), which states that there shall be such limits as “the Commission finds” are necessary.

149

Thus, while the Commission finds the studies useful, it does not cede the necessity finding to the authors.

140

The Commission observed in the December 2013 Position Limits Proposal that the studies discussed therein “overall show a lack of consensus regarding the impact of speculation on commodity markets and the effectiveness of position limits.” 78 FR at 75695.

141

December 2013 Position Limits Proposal, 78 FR at 75695.

142

E.g.,

CL-CCMR-59623 at 4-5; CL-EEI-EPSA-59602 at 3; CL-FIA-59595 at 7; and CL-IECAssn-59679 at 3.

143

E.g.,

CL-BG Group-59656 at 3; CL-EEI-EPSA-59602 at 3; and CL-WGC-59558 at 2.

144

CL-Chamber-59684 at 4.

145

CL-CCMR-59623 at 4-5.

146

Contra

CL-AFR-59711 at 1; CL-AFR-59685 at 1; CL-Public Citizen-59648 at 3; CL-WEED-59628.

147

CL-EEI-EPSA-59602 at 3.

148

A discussion of the cumulative studies reviewed by the Commission follows below.

See

below, Section I.C.2. (discussing studies and reports received or reviwed in connection with the December 2013 Position Limits Proposal), and accompanying text.

149

This assumes that, contrary to the Commission's interpretation of the statute, Congress did not make that determination itself as to physical commodity markets.

b. Reliance on Silver and Natural Gas Studies.

150

The Commission stated in the December 2013 Position Limits Proposal that it “found two studies of actual market events to be helpful and persuasive in making its preliminary alternative necessity finding,”

151

namely, the Interagency Silver Study

152

and the PSI Report on Excessive Speculation in the Natural Gas Market.

153

Some commenters criticized the Commission's reliance on these two studies.

154

These commenters dismissed the two studies, variously, as limited, outdated,

155

dubious,

156

unpersuasive, anecdotal, and irrelevant.

157

Other commenters characterized the episodes as extreme or unique.

158

Some commenters observed that neither study recommended position limits.

159

One noted that, “Each study focuses on activities in a

single

market during a

limited timeframe

that occurred

years ago.”

160

Others noted that the Commission has undertaken no independent analysis of each market, commodity, or contract affected by this rulemaking.

161

They then claim that because particular markets or commodities have unique characteristics, one cannot extrapolate from these two specific episodes to other commodities or other markets.

162

Several commenters describe the Hunt brothers silver crisis and the collapse of the natural gas speculator Amaranth as instances of market manipulation rather than excessive speculation.

163

150

The Commission stated in the December 2013 Position Limits Proposal that it found two studies of actual market events to be helpful and persuasive in making its preliminary alternative necessity finding, namely, the interagency report on the silver crisis, U.S. Commodity Futures Trading Commission, “Part Two, A Study of the Silver Market, May 29, 1981, Report to The Congress in Response to Section 21 of the Commodity Exchange Act, and the PSI Report on, U.S. Senate, “Excessive Speculation in the Natural Gas Market,” June 25, 2007.

151

December 2013 Position Limits Proposal, 78 FR at 75695.

152

Commodity Futures Trading Commission, Report to The Congress in Response to Section 21 of the Commodity Exchange Act, May 29, 1981, Part Two, A Study of the Silver Market.

153

Excessive Speculation in the Natural Gas Market, Staff Report with Additional Minority Staff Views, Permanent Subcommittee on Investigations, United States Senate, Released in Conjunction with the Permanent Subcommittee on Investigations June 25 & July 9, 2007 Hearings.

154

One commenter called the Commission's choice `cherry-picking.' CL-Citadel-59717 at 4.

155

The Commission disagrees; that an exemplary event occurred in the past does not make it irrelevant.

156

Contra

CL-Sen. Levin-59637 at 6 (pointing to “concrete examples”).

157

E.g.,

CL-Chamber-59684 at 3; CL-CME-59718 at 3, 18; CL-IECAssn-59679 at 2; CL-ISDA/SIFMA-59611 at 12; and CL-USCF-59644 at 3.

158

E.g.,

CL-IECAssn-59679 at 2; and CL-BG Group-59656 at 3. Certainly the Commission seeks to prevent extreme events such as Amaranth and the Hunt brothers, however infrequently they may occur.

159

E.g.,

CL-CME-59718 at 18; and CL-CCMR-59623 at 3.

160

CL-CME-59718 at 18.

161

E.g.,

CL-EEI-EPSA-59602 at 2; CL-WGC-59558 at 2.

162

E.g.,

CL-Citadel-59717 at 4; CL-ISDA/SIFMA-59611 at 12-14; CL-MFA-59606 at 10; and CL-WGC-59558 at 2.

163

E.g.,

CL-Better Markets-59716 at 12; CL-BG Group-59656 at 3; CL-COPE-59622 at 4-5; CL-CCMR-59623 at 4; CL-ISDA/SIFMA-59611 at 13; and CL-AMG-59709 at 5.

As discussed above, the presence of manipulative intent or activity does not preclude the existence of excessive speculation, and traders do not need manipulative intent for the accumulation of very large positions to cause the negative consequences observed in the Hunt and Amaranth incidents. These are some reasons position limits are valuable as a prophylactic measure for, in the language of CEA section 4a(a)(1), “preventing” burdens on interstate commerce. The Hunt brothers, who distorted the price of silver, and Amaranth, who distorted the price of natural gas, are examples that illustrate the burdens on interstate commerce of excessive speculation that occurred in the absence of position limits, and position limits would have restricted those traders' ability to cause unwarranted price movement and market volatility, and this would be so even had their motivations been innocent. Both episodes involved extraordinarily large speculative positions, which the Commission has historically associated with excessive speculation.

164

We are also given no persuasive reason to change our conclusion that extraordinarily large speculative positions could result in sudden or unreasonable fluctuations or unwarranted price changes in other physical commodity markets, just as they did in silver and natural case in the Hunt Brothers and Amaranth episodes. Although commenters describe changes in these markets over time, the characteristics that we find salient have

not changed materially.

165

Thus, these two examples remain relevant and compelling.

164

December 2013 Position Limits Proposal, 78 FR at 75685, n. 60.

165

See infra

Section I.C.1.f., and accompanying text.

CME makes a textual argument in support of the position that CEA section 4a(a)(2) requires a commodity-by-commodity determination that position limits are necessary. It cites several places in CEA section 4a(a)(1) that refer to limits as necessary to eliminate “such burden” on “such commodity” or “any commodity.”

166

However, the prophylactic measures described herein address vulnerabilities characteristic of each market.

167

Accordingly, the Commission believes the statute's use of the singular is immaterial.

168

166

CL-CME-59718 at 13-14.

167

See, e.g.,

Establishment of Speculative Position Limits, 46 FR at 50940 (Oct. 16, 1981) (“[I]t appears that the capacity of any contract market to absorb the establishment and liquidation of large speculative positions in an orderly manner is related to the relative size of such positions,

i.e.,

the capacity of the market is not unlimited.”).

168

See also

1 U.S.C. 1 (“In determining the meaning of any Act of Congress, unless the context indicates otherwise—words importing the singular include and apply to several persons, parties, or things[.]”)

The Commission's analysis applies to all physical commodities, and it would account for differences among markets by setting the limits at levels based on updated data regarding estimated deliverable supply in each of the given underlying commodities in the case of spot-month limits or based on exchange recommendation, if an exchange recommended a spot-month limit level of less than 25 percent of estimated deliverable supply, and open interest in the case of single-month and all-months-combined limits, for each separate commodity. The Commission's Reproposal regarding whether to adopt conditional spot-month limits is also based on updated data.

169

The Commission also does not find it relevant that the Interagency Silver Study and the PSI Report, each of which was published before the Dodd-Frank Act became law, do not recommend the imposition of position limits. Based on the facts described in those reports, along with the Commission's understanding of the policies underlying CEA section 4a(a)(1) in light of the Commission's own experience with legacy limits, the Commission preliminarily finds that position limits are necessary within the meaning of that section.

169

See

the Commission's discussion of its verification of estimates of deliverable supply and work with open interest data, below.

c. Commission research.

One commenter asserted that the Commission failed “to conduct proper economic analysis to determine, if in fact, the position limits as proposed were likely to have any positive impact in promoting fair and orderly commodity markets.”

170

While acknowledging the Commission's resource constraints, this commenter remarked on “the paucity of the published record by the CFTC's s own staff”

171

and suggests that outside authors be given “controlled access to all of the CFTC's data regarding investor and hedger trading records.”

172

This commenter then proceeds to accuse the Commission of failing to “conduct such research because they felt the data would not in fact support the proposed position limit regulations.”

173

170

CL-USCF-59644 at 2.

171

CL-USCF-59644 at 2. This commenter exaggerates. The last arguably relevant report of Commission staff is “Commodity Swap Dealers & Index Traders with Commission Recommendations” (Sept. 2008), available at

http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/cftcstaffreportonswapdealers09.pdf

. However, several authors or co-authors of academic papers reviewed by the Commission are or have been affiliated with the Commission in various capacities and have added to the current literature relating to position limits. Each of Harris,

see

note240, Kirilenko,

see

note 2400, and Overdahl,

see

notes 240 and 241, are former Chief Economists of the Commission. Other authors,

e.g.,

Aulerich, Boyd, Brunetti, Büyükşahin, Einloth, Haigh, Hranaiova, Kyle, Robe, and Rothenberg, are now or have been staff and/or consultants to the Commission, have spent sabbaticals at the Commission, or have been detailed to the Commission from other federal agencies. Graduate students studying with some study authors, including some working on dissertations, have also cycled through the Commission as interns.

Cf.

note 180 (disclaimer on paper by Harris and Büyükşahin).

172

CL-USCF-59644 at 3. Data regarding investor and hedger trading records may be protected by section 8 of the CEA, 7 U.S.C. 12. In general, “the Commission may not publish data and information that would separately disclose the business transactions or market positions of any person and trade secrets or names of customers . . . .” 7 U.S.C. 12(a)(1). The Commission must therefore be very careful about granting outside economists access to such data. Commission registrants have in the past “questioned why the CFTC was permitting outside economists to access CFTC data, why the CFTC was permitting the publication of academic articles using that data, and . . . the administrative process by which the CFTC was employing these outside economists.” Review of the Commodity Futures Trading Commission's Response to Allegations Pertaining to the Office of the Chief Economist, Prepared by the Office of the Inspector General, Commodity Futures Trading Commission, Feb. 21. 2014, at ii, available at

http://www.cftc.gov/idc/groups/public/@freedomofinformationact/documents/file/oigreportredacted.pdf

. The Commission is sensitive to these concerns, and strives to ensure that reports and publications that rely on Commission data do not reveal sensitive information. To do so requires an expenditure of effort by Commission staff.

173

CL-USCF-59644 at 3. The Commission rejects the commenter's aspersion. The Commission's Office of the Inspector General addressed the perception of institutional censorship in its “Follow Up Report: Review of the Commodity Futures Trading Commission's Response to Allegations Pertaining to the Office of the Chief Economist, Jan. 13, 2016 (“Follow Up Report”), available at

http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/oig_oce011316.pdf

. The Follow Up Report emphasizes “that there has been no allegation that the Chairman or Commissioners have attempted to prevent certain topics from being researched or to alter conclusions,” Follow Up Report at 11, but nevertheless recommended “that OCE not prohibit research topics relevant to the CFTC mission.” Follow Up Report at 10. The Follow Up Report observed that recently “OCE has focused almost exclusively on short-term research and economic analysis in support of other Divisions and the Commission.” Follow Up Report at 10.

The Commission disagrees that it has failed to conduct proper economic analysis to determine the likely benefits of position limits. CEA section 15(a) requires that before promulgating a regulation under the Act, the Commission consider the costs and benefits of the action according to five statutory factors. The Commission does so below in robust fashion with respect to the Reproposal in its entirety, including the alternative necessity finding. Neither section 15(a) of the CEA nor the Administrative Procedure Act requires the Commission to conduct a study in any particular form so long as it considers the costs and benefits and the entire administrative record. Section 719(a) of the Dodd-Frank Act, on the other hand, provides that the Commission “shall conduct a study of the effects (if any) of the position limits imposed pursuant to the . . . [CEA] on excessive speculation” and report to Congress on such matters after the imposition of position limits.

174

The Commission will do so as required by Section 719(a), thereby fully discharging its duty. At all stages, the Commission has relied on and will continue to rely on the input of staff economists in the Division of Market Oversight (“DMO”) and the Office of the Chief Economist (“OCE”).

174

15 U.S.C. 8307(a).

See

December 2013 Position Limits Proposal, 78 FR at 75684 (discussing section 719(a) of the Dodd-Frank Act in the context of the Commission's construal of CEA section 4a(a) to mandate that the Commission impose position limits).

d. Excessive Speculation

One commenter opined that, “in discussing only the Hunt Brothers and Amaranth case studies the Commission has not given adequate weight to the benefits that speculators provide to the market.”

175

To the contrary, the Commission recognizes that speculation is part of a well-functioning market, particularly insofar as speculators contribute valuable liquidity. The focus of this reproposed rulemaking is not speculation

per se;

Congress identified

excessive

speculation as an undue

burden on interstate commerce in CEA section 4a(a)(1).

176

175

CL-MFA-59606 at 11-12.

176

7 U.S.C. 6a(a)(1). One commenter suggests that the Commission base speculative position limits on “a determination of an acceptable total level of speculation that approximates the historic ratio of hedging to investor/speculative trading.” CL-A4A-59714 at 4. The Commission declines at this time to adopt such a ratio as basis for speculative position limits. Among other things, the Commission does not now collect reliable data distinguishing hedgers from speculators. Also, there may be levels above a historic hedging ratio that still provide liquidity rather than denoting excessive speculation. While the Commission has authority under section 4a(a)(1) of the Act to impose position limits on a group or class of traders, the only way that the Commission knows how to implement limit levels based on such a historic ratio would be to impose rationing, which the Commission declines to do at this time.

One commenter asserted that the Commission must provide a definition of excessive speculation before making any necessity finding.

177

The Commission disagrees that the rule must include such a definition. The statute contains no such requirement, and did not contain such a requirement prior to the Dodd-Frank Act. The Commission has never based necessity findings on a rigid definition. The Commission's position on this issue has been clear over time: “The CEA does not define excessive speculation. But the Commission historically has associated it with extraordinarily large speculative positions . . . .”

178

CEA section 4a(a)(1) states that position limits should diminish, eliminate, or prevent burdens on interstate commerce associated with sudden or unreasonable fluctuations or unwarranted changes in the price of commodities.

179

It stands to reason that excessive speculation involves positions large enough to risk such unreasonable fluctuations or unwarranted changes. This commenter also urges the Commission to “demonstrate and determine that . . . harmful excessive speculation exists or is reasonably likely to occur with respect to particular commodities”

180

before implementing any position limits.

181

As stated in the December 2013 Position Limits Proposal, the Commission referenced its prior determination in 1981 “that, with respect to any particular market, the `existence of historical trading data' showing excessive speculation or other burdens on that market is not `an essential prerequisite to the establishment of a speculative limit.' ”

182

The Commission reiterates this statement and underscores that these risks are characteristic of contract markets generally. Differences among markets can be addressed, as the Commission reproposes to do here, by setting the limit levels to account for individual market characteristics. Attempting to demonstrate and determine that excessive speculation is reasonably likely to occur with respect to particular commodities before implementing position limits is impractical because historical trading data in a particular commodity is not necessarily indicative of future events in that commodity. Further, it would require the Commission to determine what may happen in a forecasted future state of the market in a particular commodity. As the Commission has often repeated, position limits are a prophylactic measure. Inherently, then, position limits are designed to address the burdens of excessive speculation well before they occur, not when the Commission somehow determines that such speculation is imminent, which the Commission (or any market actor for that matter) cannot reliably do.

177

CL-ISDA/SIFMA-59611 at 3, 14-15;

see also

CL-FIA-59595 at 6-7.

178

December 2013 Position Limits Proposal, 78 FR at 75685, n. 60 (citation omitted).

179

7 U.S.C. 6a(a)(1).

180

CL-ISDA/SIFMA-59611 at 3;

see also

CL-CCMR-59623 at 4; CL-Chamber-59684 at 4.

Contra

CL-Sen. Levin-59637 at 6 (stating “[c]ontrary to the complaints of some critics, it would be a waste of time and resources for the Commission to expand the proposed rules beyond the existing justification to repeat the same analysis, reach the same conclusions, and issue the same findings for each of the 28 commodities.”).

181

See also

CL-CCMR-59623 at 4-5. Another commenter “contends that the best available evidence discounts the theory that there is excessive speculation distorting the prices in the commodity markets.” CL-MFA-59606 at 13 (citing Pirrong). Such a contention is inconsistent with “Congress' determination, codified in CEA section 4a(a)(1), that position limits are an effective tool to address excessive speculation as a cause of sudden or unreasonable fluctuations or unwarranted changes in the price of . . . [agricultural and exempt] commodities. December 2013 Position Limits Proposal, 78 FR at 75695 (footnote omitted). Another commenter mischaracterizes the finding of the Congressional Budget Report, “Evaluating Limits on Participation and Transactions in Markets for Emissions Allowances” (2010), available at

http://www.cbo.gov/publication/21967

(“CBO Report”); the CBO Report does not conclude “that position limits are harmful to markets.” CL-IECAssn-59679 at 3. Rather, in the context of creating markets for emissions allowance trading, the CBO Report discusses both the uses and benefits and the challenges and drawbacks of not only position limits but also circuit breakers, in addition to banning certain types of traders and banning allowance derivatives. Among other things, the CBO Report states, “Position Limits would probably lessen the possibility of systemic risk and manipulation in allowance markets . . . .” CBO Report at viii. Another commenter states that a “CFTC study” found that the 2008 crude oil crisis was primarily due to fundamental factors in the supply and demand of oil. CL-CCMR-59623 at 4. The referenced study is Harris and Büyükşahin, The Role of Speculators in the Crude Oil Futures Market (working paper 2009).

See generally

note 240 (listing studies that employ the Granger method of statistical analysis). While Harris is a former Chief Economist, and Büyükşahin is a former staff economist in OCE, as noted above, the cover page of the referenced paper contains the standard disclaimer, “This paper reflects the opinions of its authors only, and not those of the U.S. Commodity Futures Trading Commission, the Commissioners, or other staff of the Commission.” That is, it is not a “CFTC study.” In addition, other studies of that market at that time reached different conclusions.

Cf.

note 252 (citing study that concludes price changes precede the position change). The Commission reviewed several studies of the crude oil market around 2008 and discusses them herein.

See

discussion of persuasive academic studies, below. The Commission cautions that, given the continuing controversy surrounding position limits, it is unlikely that one study will ever be completely dispositive of these complicated and difficult issues.

182

December 2013 Position Limits Proposal, 78 FR at 75683.

e. Volatility

Commenters assert, variously, that “the volatility of commodity markets has decreased steadily over the past decade,”

183

that “research found that there was a negative correlation between speculative positions and market volatility,”

184

research shows that factors other than excessive speculation were primarily responsible for specific instances of price volatility,

185

that futures markets are associated with lower price volatility,

186

that particular types of speculators provide liquidity rather than causing price volatility,

187

that position limits will increase volatility,

188

etc. It would follow, then, according to these commenters, that because they believe there is little or no volatility (no sudden or unreasonable fluctuations or unwarranted price changes), or no volatility caused by excessive speculation, position limits cannot be necessary.

183

CL-CCMR-59623 at 4 (claim supported only by a reference to a comment letter that pre-dates the December 2013 Position Limits Proposal).

184

CL-MFA-59606 at 12 (citing one academic paper, Irwin and Sanders, The Impact of Index and Swap Funds on Commodity Futures Markets: Preliminary Results (working paper 2010)).

See generally note 240 (

studies that employ the Granger method of statistical analysis).

185

E.g.,

CL-MFA-59606 at 11-12, n. 26.

Contra

CL-AFR-59685 at 1 (stating “We understand that other factors contribute to highly volatile commodity prices, but excessive speculation plays a significant part, according to studies by Princeton, MIT, the Petersen Institute, the University of London, and the U.S. Senate, among other highly credible sources.”).

186

CL-MFA-59606 at 13, n. 30.

187

E.g., CL-MFA-59606 at 12-13 (hedge funds).

Cf.

CL-SIFMA AMG-59709 at 15 (asserting “neither Amaranth nor the Hunt brothers were in any way involved in commodity index swaps”), 16 (registered investment companies and ERISA accounts).

188

CL-MFA- 59606 at 13.

Contra

CL-CMOC-59702 at 2 (maintaining that witness testimony before policymakers “confirmed that the erosion of the position limits regime was a leading cause in market instability and wild price swings seen in recent years and that it had led to diminished confidence in the commodity derivative markets as a hedging and price discovery tool”).

As stated above, the Commission recognizes that speculation is part of a

well-functioning market particularly, as noted in comments, as a source of liquidity. Position limits address excessive speculation, not speculation

per se.

Position limits neither exclude particular types of speculators nor prohibit speculative transactions; they constrain only speculators with excessively large positions in order to diminish, eliminate, or prevent an undue and unnecessary burden on interstate commerce in a commodity.

189

The Commission agrees that futures markets are associated with, and may indeed contribute to, lower volatility in underlying commodity prices. However, as Congress observed, in CEA section 4a(a)(1), excessive speculation in a commodity contract that causes sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.

190

In promulgating CEA section 4a(a)(1), Congress adopted position limits as a useful tool to diminish, eliminate, or prevent those problems. The Commission believes that position limits are a necessary prophylactic measure to guard against disruptions arising from excessive speculation, and the Commission has endeavored to repropose limit levels that are not so low as to hamper healthy speculation as a source of liquidity.

191

189

That a particular type of speculator trades a different type of instrument, employs a different trading strategy, or is unlevered, diversified, subject to other regulatory regimes, etc., so as to distinguish it in some way from Amaranth or the Hunt brothers does not overcome the size of the position held by the speculator, and the risks inherent in amassing extraordinarily large speculative positions.

190

CEA section 4a(a)(1); 7 U.S.C. 6a(a)(1).

191

See

the discussion of the impact analysis, below under § 150.2.

f. Basis for Determination

One commenter states, “The necessity finding . . . proffered by the Commission—which consists of a discussion of two historical events and a cursory review of existing studies and reports on position limits related issues—falls short of a comprehensive analysis and justification for the proposed position limits.

192

We disagree with the commenter's opinion that the Commission's analysis is not comprehensive or falls short of justifying the reproposed rule.

193

192

CL-Citadel-59717 at 3-4 (footnote omitted).

Contra

CL-Sen. Levin-59637 at 6 (declaring that “[t]he Commission's analysis and findings, paired with concrete examples, provide a comprehensive explanation of the principles and reasoning behind establishing position limits.”).

193

Although the events described in the proposal are sufficient to support the necessity finding for the reasons given, the Commission also notes reports that more recent market events have been perceived as involving excessively large positions that have caused or threatened to cause market disruptions.

See, e.g.,

Ed Ballard, Speculators sit on Sugar Pile, Raising Fears of Selloff, The Wall Street Journal (Nov. 21, 2016) (“Speculative investors have built a record position in sugar this year, sparking fears of a swift pullback in its price.”); Of mice and markets, A surge in speculation is making commodity markets more volatile, The Economist (Sept. 10, 2016) (discussing “scramble by funds to unwind their short positions in” West Texas Intermediate that appears to have “fanned a rally in spot oil prices”). As discussed elsewhere, willingness to participate in the futures and swaps markets may be reduced by perceptions that a participant with an unusually large speculative position could exert unreasonable market power.

Another commenter states that the December 2013 Position Limits Proposal “does not provide any quantitative analysis of how the outcome of these [two historical] events might have differed if the proposed position limits had been in place.”

194

The Commission disagrees. The Commission stated in the December 2013 Position Limits Proposal that, “The Commission believes that if Federal speculative position limits had been in effect that correspond to the . . . . [proposed] limits . . . , across markets now subject to Commission jurisdiction, such limits would have prevented the Hunt brothers and their cohorts from accumulating such large futures positions.”

195

This statement was based on calculations using a methodology similar to

196

that proposed in the December 2013 Position Limits Proposal applied to quantitative data included and as described therein.

197

The Commission's stated belief is unchanged at the higher single-month and all-months-combined limit levels of 7,600 contracts that the Commission adopts today for silver.

198

Nevertheless, historical data regarding absolute position size from the period of the late-1970's to 1980 may not be readily comparable to the numerical limits adopted in the current market environment. Accordingly, the Commission is reproposing establishing levels using the methodology based on the size of the current market as described elsewhere in this release.

194

CL-WGC-59558 at 2;

see also

CL-BG Group-59656 at 3.

195

December 2013 Position Limits Proposal, 78 FR at 75690.

196

The Commission's methodology is a fair approximation of how the limits would have been applied during the time of the silver crisis.

See

December 2013 Position Limits Proposal, 78 FR at 75690.

197

December 2013 Position Limits Proposal, 78 FR at 75690-1.

198

For example, using historical month-end open interest data, the Commission calculated a single- and all-months-combined limit level of 6,700 contracts, which would have been exceeded by a total Hunt position of over 12,000 contracts for March delivery. December 2013 Position Limits Proposal, 78 FR at 75690. Baldly, a position of 12,000 contracts would still exceed a 7,600 contract limit.

With respect to Amaranth, the Commission stated, “Based on certain assumptions . . . , the Commission believes that if Federal speculative position limits had been in effect that correspond to the limits that the Commission . . . [proposed in the December 2013 Position Limits Proposal], across markets now subject to Commission jurisdiction, such limits would have prevented Amaranth from accumulating such large futures positions and thereby restrict its ability to cause unwarranted price effects.”

199

This statement of belief about Amaranth was also based on calculations using the methodology applied to quantitative data as described and included in the December 2013 Position Limits Proposal preamble.

200

The historical size of Amaranth positions would no longer breach the higher single-month and all-months-combined limit levels of 200,900 contracts that the Commission adopts today for natural gas.

201

However, the Commission is reproposing setting a level using a methodology that adapts to changes in the market for natural gas,

i.e.,

the fact that it has grown larger and more liquid since the collapse of Amaranth. Thus, it stands to reason that a speculator might now have to accumulate a larger position than Amaranth's historical position to present a similar risk of disruption to the natural gas market. In fact, the Commission has long recognized “that the capacity of any contract market to absorb the establishment and liquidation of large speculative positions in an orderly manner is related to the relative size of such positions,

i.e.,

the capacity of the market is not unlimited.”

202

A larger market should have larger capacity, other things being equal;

203

hence, the Commission is adopting higher levels of limits. Moreover, costly disruptions like those associated with Amaranth remain entirely possible. Because the costs of these disruptions can be great, and borne by members of the public

unconnected with trading markets, the Commission preliminarily finds it necessary to impose speculative position limits as a preventative measure. As markets differ in size, the limit levels differ accordingly, each designed to prevent the accumulation of positions that are extraordinary in size in the context of each market.

199

December 2013 Position Limits Proposal, 78 FR at 75692.

200

December 2013 Position Limits Proposal, 78 FR at 75692-3.

201

See

level of initial limits under App. D to part 150.

202

Establishment of Speculative Position Limits, 46 FR 50938, 50940.

203

A gross comparison such as this may not meaningful. For example, the Commission could have increased the size of Amaranth's historical position proportionately to the increased size of the market and compared it to the limit level for natural gas that the Commission adopts today. But such an approach would be less rigorous than the analysis on which the Commission bases its determination today.

Several commenters opined that the Commission, in reaching its preliminary alternative necessity finding, ignores current market developments and does not employ the “new tools” other than position limits available to it to prevent excessive speculation or manipulative or potentially manipulative behavior.

204

Specifically, some commenters suggested that position limits are not necessary because position accountability rules and exchange-set limits are adequate.

205

The Commission agrees that the Dodd-Frank Act gave the Commission new tools with which to protect and oversee the commodity markets, and agrees that these along with older tools may be useful in addressing market volatility. However, the Commission disagrees that the availability of other tools means that position limits are not necessary.

206

Rather the statute, at a minimum, reflects Congress' judgment that position limits may be found by the Commission to be necessary. The Commission notes that although CEA section 4a(a) position limits provisions have existed for many years, the Dodd-Frank Act not only retained CEA section 4a(a), but added, rather than deleted, several sections. This leads to the conclusion that Congress appears to share the Commission's view that the other tools provided by Congress were not sufficient.

204

E.g.,

CL-CCMR-59623 at 3 (supporting additional transparency and reporting); CL-Citadel-59717 at 4 (pointing to available tools, including “enhanced market surveillance, broadened reporting requirements, broadened special call authorities, and exchange limits”); CL-ISDA/SIFMA-59611 at 13 (noting that tools that the Commission has incorporated include “enhanced market surveillance, broadened reporting requirements, broadened special call authorities, and exchange limits”); CL-MFA-59606 at 10; and CL-SIFMA AMG-59709 at 5-6 (providing examples of new tools).

205

E.g.,

CL-CME-59718 at 18; CL-ICE-59645 at 2-4; CL-FIA-59595 at 6, n. 13, 12-13; and CL-AMG-59709 at 8.

206

The Commission observes that logically there is no reason why the availability of some regulatory tools under the CEA should preclude the use of another tool explicitly authorized by Congress.

Position accountability, for example, is an older tool, from the era of the CFMA. As the Commission explained in the December 2013 Position Limits Proposal, the CFMA “provided a statutory basis for exchanges to use pre-existing position accountability levels as an alternative means to limit the burdens of excessive speculative positions. Nevertheless, the CFMA did not weaken the Commission's authority in CEA section 4a to establish position limits as an alternative means to prevent such undue burdens on interstate commerce. More recently, in the CFTC Reauthorization Act of 2008, Congress gave the Commission expanded authority to set position limits for significant price discovery contracts on exempt commercial markets,”

207

and it expanded the Commission's authority again in the Dodd-Frank Act.

208

While position accountability is useful in providing exchanges with information about specific trading activity so that exchanges can act if prudent to require a trader to reduce a position after the position has already been amassed, position limits operate prophylactically without requiring case-by-case, ex post determinations about large positions. As to exchange-set accountability levels or position limits set at levels below those of federal position limits, those remain useful as well and should be used, at the exchanges' discretion, in conjunction with federal position limits. They may be most useful, for example, with respect to contracts that are not core-referenced futures contracts or if an exchange determines that federal limits are too high to address adequately the conditions in the markets it administers. In the regulations that the Commission reproposes today, the Commission would update (rather than eliminate) the acceptable practices for exchange-set speculative position limits and position accountability rules to conform to the Dodd-Frank Act changes [as described in the December 2013 Position Limits Proposal].

209

Generally, for contracts subject to speculative limits, exchanges may set limits no higher than the federal limits,

210

and may impose “restrictions . . . to reduce the threat of market manipulation or congestion, to maintain orderly execution of transactions, or for such other purposes consistent with its responsibilities.”

211

And § 150.5(b)(3) sets forth the requirements for position accountability in lieu of exchange-set limits in the case of contracts not subject to federal limits. The exchanges are also still authorized to react to instances of greater price volatility by exercising emergency authority as they did during the silver crisis.

212

In addition, the Commission has striven to take current market developments into account by considering the market data to which the Commission has access as described herein and by considering the description of current market developments to the extent included in the comments the Commission has received in connection with the December 2013 Position Limits Proposal. Some commenters suggest that the Commission, in reaching its preliminary alternative necessity finding, has not undertaken any empirical analysis of available data.

213

As discussed above, the Commission carefully reviewed the Interagency Silver Study and the PSI Report on Excessive Speculation in the Natural Gas Market.

214

The Commission also carefully considered the studies submitted during the various comment periods regarding the December 2013 Position Limits Proposal and the 2016 Supplemental Position Limits Proposal. Other commenters suggest that the Commission relies on incomplete, unreliable, or out of date data, and that the Commission should collect more and/or better data before determining that position limits are necessary or implementing position limits.

215

The Commission disagrees. The Commission has considered the recent data presented by the exchanges in support of their estimates of deliverable supply. The Commission is expending significant, agency-wide efforts to improve data collection and to analyze the data it receives. The quality of the data on which the Commission relies has improved since the December 2013 Position Limits Proposal. The Commission is satisfied with the quality of the data on which it bases its Reproposal.

207

78 FR at 75681 (footnotes omitted).

208

See generally

December 2013 Position Limits Proposal, 78 FR at 75681.

209

See generally

December 2013 Position Limits Proposal, 78 FR at 75747-8.

210

See

discussion of requirements for exchange-set position limits under § 150.5, below, and exchange core principles regarding position limits, below.

211

See

reproposed § 150.5(a)(6)(iii).

212

See generally

7 U.S.C. 7(d)(6) (DCM Core Principles: Emergency Authority); 7 U.S.C. 7b-3(f)(8) (Core Principles for Swap Execution Facilities—Emergency Authority); 17 CFR 37.800 (Swap Execution Facility Core Principle 8—Emergency authority), 17 CFR 38.350 (Designated Contract Markets -Emergency Authority—Core Principle 6).

213

E.g.,

CL-FIA-59595 at 3; CL-EEI-EPSA-59602 at 2, 8-9.

214

See supra

Section I.C.2 (discussing the Interagency Silver Study and the PSI Report on Excessive Speculation in the Natural Gas Market).

215

E.g.,

CL-Citadel-59717 at 4-5; CL-EEI-EPSA-59602 at 8-9.

One commenter opines that, “The Proposal's `necessary' finding offers no reasoned basis for adopting its framework and the shift in regulatory policy it embodies.”

216

To the contrary,

the necessity finding, including the Commission's responses to comments, is the Commission's explanation of why position limits are necessary.

217

216

CL-CME-59718 at 3.

217

See

CL-Sen. Levin-59637 at 6 (stating that the Commission's necessity finding “appropriately reflects Congressional action in enacting the Dodd-Frank Act which requires the Commission to impose appropriate position limits on speculators trading physical commodities.”).

g. Non-Spot-Month Limits

Some commenters opine that “the Commission's proposed non-spot-month position limits do not increase the likelihood of preventing the excessive speculation or manipulative trading exemplified by Amaranth or the Hunt brothers relative to the status quo.”

218

The Commission disagrees; as repeated above, “the capacity of the market is not unlimited.”

219

This includes markets in non-spot month contracts. Thus, as with spot-month contracts, extraordinarily large positions in non-spot month contracts may still be capable of distorting prices.

220

If prices are distorted, the utility of hedging may decline.

221

One commenter argues for non-spot month position accountability rules;

222

the Commission discusses position accountability above.

223

Another argues that Amaranth was really just “another case of spot-month misconduct.”

224

The Commission disagrees that this limits the relevance of Amaranth; a speculator like Amaranth may attempt to distort the perception of supply and demand in order to benefit, for instance, calendar spread positions by, for instance, creating the perception of a nearby shortage of the commodity which a speculator could do by accumulating extraordinarily large long positions in the nearby month.

225

One commenter states that “improperly calibrated non-spot month limits would also deter speculative activity that triggers no risk of manipulation or `causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity,' the hallmarks of `excessive speculation.' ”

226

The Commission sees little merit in this objection because the Reproposal would calibrate the levels of the non-spot month limits to accommodate speculative activity that provides liquidity for hedgers.

218

CL-AMG-59709 at 9.

See

the Commission's response to the comment regarding the purported lack of “quantitative analysis of how the outcome of these [two historical] events might of differed if the proposed position limits had been in place” at the text accompanying notes 192-200 above.

See also

CL-CME-59718 at 41-3; CL-ISDA/SIFMA-59611 at 28.

219

See

note 202

supra

and accompanying text.

220

See

December 2013 Position Limits Proposal, 78 FR at 75691 (citing the PSI Report, “Amaranth accumulated such large positions and traded such large volumes of natural gas futures that it distorted market prices, widened price spread, and increased price volatility.”).

221

See

December 2013 Position Limits Proposal, 78 FR at 75692 (citing the PSI Report, “Commercial participants in the 2006 natural gas markets were reluctant or unable to hedge.”).

222

CL-CME-59718 at 41-42.

223

See

notes 207-212

supra

and accompanying text.

224

CL-ISDA/SIFMA-59611 at 28.

225

The Commission discussed the trading activity of Amaranth at length in the December 2013 Position Limits Proposal, 78 FR at 75691-3; in particular, Amaranth's calendar spread trading is discussed at 78 FR 75692. The Commission repeats that the findings of the Permanent Subcommittee in the PSI Report support the imposition of speculative position limits outside the spot month. A trader, who does not liquidate an extraordinarily large long futures position in the nearby physical-delivery futures contract, contrary to typical declining open interest patterns in a physical-delivery contract approaching expiration, may cause the nearby futures price to increase as short position holders, who do not wish to make physical delivery, bid up the futures price in an attempt to offset their short positions. Potential liquidity providers who do not currently hold a deliverable commodity may be hesitant to establish short positions as a physical-delivery futures contract approaches expiration, because exchange rules and contract terms require such short position holder to prepare to make delivery by obtaining the cash commodity.

226

CL-CME-59718 at 43;

cf.

CL-APGA-59722 at 3 (asserting that “the non-spot month limits being proposed by the Commission are too high to be effective”).

h. Meaning of Necessity

One commenter suggests that position limits could only be necessary if they were the only means of preventing the Hunt brothers and Amaranth crises.

227

First, while the Commission relies on these incidents to explain its reasoning, the risks they illustrate apply to all markets in physical commodities, and so the efficacy of the limits the Commission adopts today, and the extent to which other tools are sufficient, cannot be judged solely by whether they might have prevented those specific incidents. Second, in any event, the Commission rejects such an overly restrictive reading, which lacks a basis in both common usage and statutory construction. The Commission preliminarily finds that limits are necessary as a prophylactic tool to strengthen the regulatory framework to prevent excessive speculation

ex ante

to diminish the risk of the economic harm it may cause further than it would reliably be from the other tools alone. Other commenters question why the Commission proposed limits at levels they contend are too high to be effective, undercutting the Commission's alternative necessity finding.

228

One commenter points out that the limit levels as proposed would not have prevented the misconduct alleged by the Commission in a particular enforcement action filed in 2011.

229

As repeated elsewhere in this Notice

230

and in the December 2013 Position Limits Proposal,

231

in establishing limits, the Commission must, “to the maximum extent practicable, in its discretion . . . ensure sufficient market liquidity for bona fide hedgers.

232

The Commission realizes that the reproposed initial limit levels may prevent or deter some, but fail to eliminate all, excessive speculation in the markets for the 25 commodities covered by this first phase of implementation. But the Commission is concerned that initial limit levels set lower than those reproposed today, and in particular low enough to prevent market manipulation or excessive speculation in specific, less egregious cases than the Hunt brothers or Amaranth, could impair liquidity for hedges.

233

227

CL-CCMR-59623 at 4.

228

CL-ISDA/SIFMA-59611 at 28; CL-Better Markets-59716 at 24; CL-APGA-59722 at 6-7.

229

CL-Better Markets-59716 at 22, n. 38 (Parnon Energy).

230

See

the discussion in levels of limits, under § 150.2, below.

231

E.g.,

December 2013 Position Limits Proposal, 78 FR at 75681.

232

CEA section 4a(a)(3)(B)(iii), 7 U.S.C. 6a(a)(3)(B)(iii). Some commenters expressed concern that position limits could disproportionately affect commercial entities.

E.g.,

CL-CME-59718 at 43; CL-APGA-59722 at 3. Some commenters expressed concern about the application of position limits to trade options.

E.g.,

CL-APGA-59722 at 3; CL-EEI-EPSA-59602 at 3. The Commission reminds commenters that speculative position limits do not apply to bona fide hedging transactions or positions. CEA section 4a(c), 7 U.S.C. 6a(c).

233

The Commission will revisit the specific limitations set forth in CEA section 4a(a)(3) when, under reproposed § 150.2(e), it considers resetting limit levels.

The Commission requests comment on all aspects of this section.

2. Studies and Reports

The Commission has reviewed and evaluated studies and reports received as comments on the December 2013 Position Limits Proposal, in addition to the studies and reports reviewed in connection with the December 2013 Position Limits Proposal

234

(such

studies and reports, collectively, “studies”). Appendix A to this preamble is a summary of the various studies reviewed and evaluated by the Commission.

234

A list of studies and reports that the Commission reviewed in connection with the December 2013 Position Limits Proposal was included in its Appendix A to the preamble. December 2013 Position Limits Proposal, 78 FR at 75784-7. One commenter observed that the studies reviewed in connection with the December 2013 Position Limits Proposal are not all “necessarily germane to specific position limits proposed.” CL-Citadel-59717 at 4.

See also

CL-CCMR-59623 at 5 (stating that it had reviewed the studies, and found that “only 27 address position limits”). The Commission acknowledges that some studies are more relevant than others. The Commission in the December 2013 Position Limits Proposal was disclosing the studies that it had reviewed and

evaluated. The Commission requested comment on its discussion of the studies, and invited commenters to advise the Commission of other studies to consider, in the hope that commenters would indicate which studies they believe are more germane or persuasive and suggest other studies for Commission review.

The Commission observed in the December 2013 Position Limits Proposal, “There is a demonstrable lack of consensus in the studies.”

235

Neither the passage of time nor the additional studies have changed the Commission's view: As a group, these studies do not show a consensus in favor of or against position limits.

236

In addition to arriving at disparate conclusions, the quality of the studies varies. Nevertheless, the Commission believes that some well-executed studies suggest that excessive speculation cannot be excluded as a possible cause of undue price fluctuations and other burdens on commerce in certain circumstances. All of these factors persuade the Commission to act on the side of caution in preliminarily finding limits necessary, consistent with their prophylactic purpose. For these reasons, explained in more detail below, th

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