Aggregation of Positions

Federal RegisterDec 16, 2016

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 150

RIN 3038-AD82

Aggregation of Positions

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final rule.

SUMMARY:

The Commodity Futures Trading Commission (“Commission” or “CFTC”) is issuing a final rule to amend part 150 of the Commission's regulations with respect to the policy for aggregation under the Commission's position limits regime for futures and option contracts on nine agricultural commodities. The Commission notes that if its proposed position limits regime for other exempt and agricultural commodity futures and options contracts and the physical commodity swaps that are economically equivalent to such contracts are finalized, these amended regulations would also apply to the position limits regime for those contracts and swaps.

DATES:

The effective date for this final rule is February 14, 2017.

FOR FURTHER INFORMATION CONTACT:

Stephen Sherrod, Senior Economist, Division of Market Oversight, (202) 418-5452,

ssherrod@cftc.gov;

Riva Spear Adriance, Senior Special Counsel, Division of Market Oversight, (202) 418-5494,

radriance@cftc.gov;

or Mark Fajfar, Assistant General Counsel, Office of General Counsel, (202) 418-6636,

mfajfar@cftc.gov;

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

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

II. Final Rules

A. Aggregation on the Basis of Ownership or Control of Positions in Rule 150.4(a)(1) and Related Exemption From Aggregation in Rule 150.4(b)(2)

B. Criteria for Aggregation Relief in Rule 150.4(b)(2)(i)

C. Notice Filing Requirement in Rule 150.4(c)

D. Other Issues Related to Aggregation on the Basis of Ownership

E. Exemption for Certain Accounts Held by FCMs in Rule 150.4(b)(3)

F. Exemptions From Aggregation for Underwriting and Broker-Dealer Activities in Rules 150.4(b)(5) and (b)(6)

G. Exemption From Aggregation Where Information Sharing Would Violate Law in Rule 150.4(b)(7)

H. Aggregation Requirement for Substantially Identical Trading in Rule 150.4(a)(2)

I. Exemption for Ownership by Limited Partners, Shareholders or Other Pool Participants in Rule 150.4(b)(1)

J. Exemption for Accounts Carried by an Independent Account Controller in Rule 150.4(b)(4) and Conforming Change in Rule 150.1

K. Revisions To Clarify Regulations

III. Related Matters

A. Considerations of Costs and Benefits

B. Regulatory Flexibility Act

C. Paperwork Reduction Act

I. Background

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 on certain enumerated agricultural contracts; the listed commodities are referred to as enumerated agricultural commodities. The Commission has proposed to amend its position limits to also encompass other exempt and agricultural commodity futures and options contracts and the physical commodity swaps that are economically equivalent to such contracts.

See

Position Limits for Derivatives, 78 FR 75680 (Dec. 12, 2013).

See

17 CFR 150.2.

See

17 CFR 150.3.

See

17 CFR 150.4.

The Commission's existing aggregation policy under regulation 150.4 generally requires that unless a particular exemption applies, a person must aggregate all positions and accounts for which that person controls the trading decisions with all positions and accounts in which that person has a 10 percent or greater ownership interest, and with the positions of any other persons with which the person is acting pursuant to an express or implied agreement or understanding.

The scope of exemptions from aggregation include the ownership interests of limited partners in pooled accounts,

discretionary accounts and customer trading programs of futures commission merchants (“FCM”),

and eligible entities with independent account controllers (“IAC”) that manage customer positions.

Market participants claiming one of the exemptions from aggregation are subject to a call by the Commission for information demonstrating compliance with the conditions applicable to the claimed exemption.

See

17 CFR 150.4(a) and (b).

See

17 CFR 150.4(c).

See

17 CFR 150.4(d).

See

17 CFR 150.3(a)(4).

See

17 CFR 150.3(b) and 150.4(e).

The Commission adopted aggregation rules in 2011, as part of its adoption of part 151 of its regulations, that were largely similar to the existing aggregation policy under regulation 150.4.

In 2012, the Commission proposed to amend the aggregation rules in part 151.

Prior to finalization of the 2012 amendments, however, part 151 of the Commission's regulations was vacated by court order.

See

Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011). With regard to determining which accounts and positions a person must aggregate, regulation 151.7 (now vacated, see footnote 13, below) implemented the Commission's existing aggregation policy under regulation 150.4 and also provided additional exemptions for underwriters of securities, and for where the sharing of information between persons would cause either person to violate federal law or regulations adopted thereunder. With the exception of the exemption for underwriters, vacated regulation 151.7 required market participants to file a notice with the Commission demonstrating compliance with the conditions applicable to each exemption.

See

Aggregation, Position Limits for Futures and Swaps, 77 FR 31767 (May 30, 2012).

See International Swaps and Derivatives Association

United States Commodity Futures Trading Commission,

887 F. Supp. 2d 259 (D.D.C. 2012). The revised position limit levels in amended section 150.2 were not vacated.

In November 2013, the Commission proposed to amend the existing aggregation rules in regulation 150.4, and certain related regulations, to modify rules to determine which accounts and positions a person must aggregate.

This proposal and the related notice of proposed rulemaking are referred to herein as the “Proposed Rule.” The Proposed Rule was substantially similar to the aggregation rules that had been adopted in part 151 of the Commission's regulations in 2011, as they were proposed to be amended in May 2012.

After reviewing public comments on the Proposed Rule, the Commission supplemented it with a limited revision in September 2015 that would permit the disaggregation of positions of owned entities in expanded circumstances.

This supplement to the proposal and the

related supplemental notice of proposed rulemaking are referred to herein as the “Supplemental Notice.”

See

Aggregation of Positions; Proposed Rule, 78 FR 68946 (Nov. 15, 2013).

See

Proposed Rule, 78 FR at 68947-48.

See

Aggregation of Positions: Supplemental notice of proposed rulemaking, 80 FR 58365 (Sept. 29, 2015).

II. Final Rules

The Commission is adopting the amendments to its aggregation rules in regulation 150.4, and certain related regulations, as set forth in the Proposed Rule and modified in the Supplemental Notice, with certain further changes made in response to public comments. The amendments and the public comments relevant to each amendment are discussed below.

The public comments on the Proposed Rule and the Supplemental Notice are available at

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1620.

A. Aggregation on the Basis of Ownership or Control of Positions in Rule 150.4(a)(1) and Related Exemption From Aggregation in Rule 150.4(b)(2)

1. Proposed Approach

The Proposed Rule reflected the Commission's long-standing incremental approach to exemptions from the aggregation requirement for persons owning a financial interest in an entity. The Proposed Rule highlighted the relevant statutory language of section 4a(a)(1) of the CEA, which requires aggregation of an entity's positions on the basis of either ownership or control of the entity, and the related legislative history and regulatory developments which support the Commission's approach.

In addition, the Proposed Rule explained that the Commission's historical practice has been to craft narrowly-tailored exemptions, when and if appropriate, to the basic requirement of aggregation when there is either ownership or control of an entity. On this basis, proposed rule 150.4(a)(1) would maintain the requirement in existing regulation 150.4(b) that all positions in accounts for which any person, by power of attorney or otherwise, directly or indirectly, controls trading or holds a 10 percent or greater ownership or equity interest be aggregated with the positions held and trading done by such person.

See

Proposed Rule, 78 FR at 68956, citing 7 U.S.C. 6a(a)(1) (“In determining whether any person has exceeded such limits, the positions held and trading done by any persons directly or indirectly controlled by such person shall be included with the positions held and trading done by such person”).

To explain the basis for maintaining the existing 10 percent threshold level, the Commission noted that it has generally found that an ownership or equity interest of less than 10 percent in an account or position that is controlled by another person who makes discretionary trading decisions does not present a concern that such ownership interest results in control over trading or can be used indirectly to create a large speculative position through ownership interests in multiple accounts.

As such, the Commission has exempted an ownership interest below 10 percent from the aggregation requirement, while requiring aggregation when there is an ownership interest above 10 percent.

Prior comments, discussed in the Proposed Rule, had advocated that an ownership interest of 10 percent or more should also be exempt from the aggregation requirement, so long as such ownership represents a passive investment that does not involve control of the trading decisions of the owned entity.

The prior commenters had asserted that such passive investments would be unlikely to allow the owner to directly or indirectly control the trading of the owned entity, and therefore would be unlikely to present a risk that persons would be able to hold an unduly large overall position through positions in multiple accounts.

See

Proposed Rule, 78 FR at 68958.

The Commission codified this aggregation threshold in its 1979 statement of policy on aggregation, which was derived from the administrative experience of the Commission's predecessor.

See

Statement of Policy on Aggregation of Accounts and Adoption of Related Reporting Rules, 44 FR 33839, 33843 (June 13, 1979) (“1979 Aggregation Policy”). Note, however, that proposed rule 150.4(a)(2) would also separately require aggregation of investments in accounts with substantially identical trading strategies.

See

Proposed Rule, 78 FR at 68951.

See id.

Responding to these prior comments, the Commission explained in the Proposed Rule that it had previously considered, but not adopted, a broad passive investment exemption from the aggregation requirement, and had instead generally restricted exemptions based on ownership to those for FCMs, limited partner investors in commodity pools, and IACs managing customer funds for an eligible entity.

Further, the Proposed Rule reiterated the Commission's belief in incremental development of aggregation exemptions over time.

Consistent with that incremental approach, the Proposed Rule maintained the 10 percent threshold in the existing regulation but proposed to adopt specific, tailored relief from the ownership criteria of aggregation for certain situations.

See id,

citing Exemptions from Speculative Position Limits for Positions which have a Common Owner but which are Independently Controlled and for Certain Spread Positions; Proposed Rule, 53 FR 13290, 13292 (Apr. 22, 1988). The 1988 proposal for the independent account controller rule requested comment on the possibility of a broader passive investment exemption, and specifically noted:

[Q]uestions also have been raised regarding the continued appropriateness of the Commission's aggregation standard which provides that a beneficial interest in an account or positions of ten percent or more constitutes a financial interest tantamount to ownership. This threshold financial interest serves to establish ownership under both the ownership criterion of the aggregation standard and as one of the indicia of control under the 1979 Aggregation Policy.

In particular, certain instances have come to the Commission's attention where beneficial ownership in several otherwise unrelated accounts may be greater than ten percent, but the circumstances surrounding the financial interest clearly exclude the owner from control over the positions. The Commission is requesting comment on whether further revisions to the current Commission rules and policies regarding ownership are advisable in light of the exemption hereby being proposed. If such financial interests raise issues not addressed by the proposed exemption for independent account controllers, what approach best resolves those issues while maintaining a bright-line aggregation test?

See

Proposed Rule, 78 FR at 68951, citing Aggregation, Position Limits for Futures and Swaps, 77 FR 31767, 31773 (May 30, 2012). This incremental approach to account aggregation standards reflects the Commission's historical practice.

See, e.g.,

Exemptions from Speculative Position Limits for Positions Which Have a Common Owner But Which are Independently Controlled and for Certain Spread Positions; Final Rule, 53 FR 41563, 41567 (Oct. 24, 1988) (the definition of eligible entity for purposes of the IAC exemption originally only included commodity pool operators (“CPOs”), or exempt CPOs or pools, but the Commission indicated a willingness to expand the exemption after a “reasonable opportunity” to review the exemption.); Exemption From Speculative Position Limits for Positions Which Have a Common Owner, But Which Are Independently Controlled, 56 FR 14308, 14312 (Apr. 9, 1991) (the Commission expanded eligible entities to include commodity trading advisors, but did not include additional entities requested by commenters until the Commission had the opportunity to assess the current expansion and further evaluate the additional entities); and Revision of Federal Speculative Position Limits and Associated Rules, 64 FR 24038 (May 5, 1999) (“1999 Amendments”) (the Commission expanded the list of eligible entities to include many of the entities commenters requested in the 1991 rulemaking).

a. Initial Ownership Threshold for Disaggregation Relief in the Proposed Rule

The Proposed Rule included two tiers of relief from the ownership criteria of aggregation—relief on the basis of a notice filing, effective upon submission, by persons holding an interest of between 10 percent and 50 percent in an owned entity, and relief on the basis of an application by persons holding an interest of more than 50 percent in an owned entity.

Each of these procedures for relief in the Proposed Rule is described briefly below.

See

Proposed Rule, 78 FR at 68958-61.

The Proposed Rule set out a notice filing procedure, effective upon submission, to permit a person with either an ownership or an equity interest in an owned entity of 50 percent

or less to disaggregate the positions of an owned entity in specified circumstances, even if such person has a 10 percent or greater interest in the owned entity.

The notice filing would have to demonstrate compliance with certain conditions set forth in proposed rule 150.4(b)(2)(i). Similar to other exemptions from aggregation, the notice filing would be effective upon submission to the Commission, but under proposed rule 150.4(c) the Commission would be able to subsequently call for additional information, and to amend, terminate or otherwise modify the person's aggregation exemption for failure to comply with the provisions of proposed rule 150.4(b)(2). Further, the person would be obligated by proposed rule 150.4(c) to amend the notice filing in the event of a material change to the circumstances described in the filing.

Under the Proposed Rule, and in a manner similar to current regulation, if a person qualifies for disaggregation relief, the person would nonetheless have to aggregate those same accounts or positions covered by the relief if they are held in accounts with substantially identical trading strategies.

See

proposed rule 150.4(a)(2). The exemptions in proposed rule 150.4 were set forth as alternatives, so that, for example, the applicability of the exemption in paragraph (b)(2) would not affect the applicability of a separate exemption from aggregation (

e.g.,

the independent account controller exemption).

In the Proposed Rule, the Commission stated its preliminary belief that a 50 percent limit on the ownership interest in another entity is a reasonable, “bright line” standard for determining when aggregation of positions is required, even where the ownership interest is passive.

In the Proposed Rule, the Commission explained that majority ownership (

i.e.,

over 50 percent) is indicative of control, and this standard addresses the Commission's concerns about circumvention of position limits by coordinated trading or direct or indirect influence between entities. For these reasons, the Commission preliminarily believed that the 50 percent limit would be appropriate to address the heightened risk of direct or indirect influence over the owned entity and therefore a threshold at this level would be a reasonable approach to the aggregation of owned accounts pursuant to Section 4a(a)(1) of the CEA.

See

Proposed Rule, 78 FR at 68959.

See id.

With respect to a person who has a greater than 50 percent ownership or equity interest in the owned entity, proposed rule 150.4(b)(3) included disaggregation relief in limited situations where the owned entity is not required to be, and is not, consolidated on the financial statement of the person, if the person can demonstrate that the person does not control the trading of the owned entity, based on the criteria in proposed rule 150.4(b)(2)(i), and if both the person and the owned entity have procedures in place that are reasonably effective to prevent coordinated trading.

Under proposed rule 150.4(b)(3), a person with a greater than 50 percent ownership of an owned entity would have to apply on a case-by-case basis to the Commission for permission to disaggregate, and await the Commission's decision as to whether certain conditions specified in the proposed rule had been satisfied and therefore disaggregation would be permitted.

The person would be required to demonstrate to the Commission that:

See

Proposed Rule, 78 FR at 68959-61. This approach was consistent with the Commission's preliminary view that relief from the aggregation requirement should not be available merely upon a notice filing by a person who has a greater than 50 percent ownership or equity interest in the owned entity. The Commission explained that, in its view, a person with a greater than 50 percent ownership interest in multiple accounts would have the ability to hold and control a significant and potentially unduly large overall position in a particular commodity, which position limits are intended to prevent.

See id.

i. The owned entity is not required to be, and is not, consolidated on the financial statement of the person,

ii. the person does not control the trading of the owned entity (based on criteria in proposed rule 150.4(b)(2)(i)), with the person showing that it and the owned entity have procedures in place that are reasonably effective to prevent coordinated trading in spite of majority ownership,

iii. each representative of the person (if any) on the owned entity's board of directors attests that he or she does not control trading of the owned entity, and

iv. the person certifies that either (a) all of the owned entity's positions qualify as bona fide hedging transactions or (b) the owned entity's positions that do not so qualify do not exceed 20 percent of any position limit currently in effect, and the person agrees in either case that:

• If this certification becomes untrue for the owned entity, the person will aggregate the owned entity for three complete calendar months and if all of the owned entity's positions qualify as bona fide hedging transactions during that time the person would have the opportunity to make the certification again and stop aggregating,

• upon any call by the Commission, the owned entity(ies) will make a filing responsive to the call, reflecting the owned entity's positions and transactions only, at any time (such as when the Commission believes the owned entities in the aggregate may exceed a visibility level), and

• the person will provide additional information to the Commission if any owned entity engages in coordinated activity, short of common control (understanding that if there were common control, the positions of the owned entity(ies) would be aggregated).

The relief under proposed rule 150.4(b)(3) would not be automatic, but rather would be available only if the Commission finds, in its discretion, that the four conditions above are met. There would be no time limits on the Commission's process for making the determination of whether relief under proposed rule 150.4(b)(3) is appropriately granted, and relief would be available only if and when the Commission acts on a particular request for relief.

See

Proposed Rule, 78 FR at 68960.

b. Ownership Threshold for Disaggregation Relief in the Supplemental Notice

The Supplemental Notice discussed the public comments received on this aspect of the Proposed Rule. In brief, it noted that commenters generally praised the proposed relief for owners of between 10 percent and 50 percent of an owned entity, but commenters asserted that the proposed application procedures under proposed rule 150.4(b)(3) for owners of a more than 50 percent equity or ownership interest were unnecessary and inappropriate.

Several commenters said that the Commission should provide the same disaggregation relief for owners of more than 50 percent of an owned entity as was proposed to be provided for owners of 50 percent or less.

On the other hand, the Supplemental Notice noted that a few commenters opposed providing aggregation relief for owners of more than 10 percent of an owned entity.

See

Supplemental Notice, 80 FR at58369.

See id.

In view of the points raised by commenters on the Proposed Rule, the Commission proposed in the Supplemental Notice to delete proposed rules 150.4(b)(3) and 150.4(c)(2), and to change proposed rule 150.4(b)(2) so that it would apply to all persons with an ownership or equity interest in an owned entity of 10 percent or greater (

i.e.,

an interest of up to and including 100 percent) in the same manner as proposed rule 150.4(b)(2) would have applied, before this revision, to owners

of an interest of between 10 percent and 50 percent.

The Commission stated in the Supplemental Notice that, while the language in section 4a of the CEA, its legislative history, subsequent regulatory developments, and the Commission's historical practices in this regard all support aggregation on the basis of either ownership or control of an entity as a necessary part of the Commission's position limit regime,

the Commission is also mindful that, as discussed by commenters on the Proposed Rule, aggregation of positions held by owned entities may in some cases be impractical, burdensome, or not in keeping with modern corporate structures.

See

Supplemental Notice, 80 FR at 58371. The Supplemental Notice also laid out conforming changes in proposed rule 150.4(b)(7), to delete a cap of 50 percent on the ownership or equity interest for broker-dealers to disaggregate, in proposed rule 150.4(e)(1)(i), to delete a delegation of authority referencing proposed rule 150.4(b)(3), and in proposed rule 150.4(c)(1), to delete a cross-reference.

See id.

See

Supplemental Notice, 80 FR at 58372, citing 1999 Amendments, 64 FR at 24044 (“[T]he Commission . . . interprets the `held or controlled' criteria as applying separately to ownership of positions or to control of trading decisions.”).

See also

Proposed Rule, 78 FR at 68961, referring to regulation 150.3(a)(4) (proposed to be replaced by proposed rule 150.4(b)(5)). Such conditions have been useful in ensuring that trading is not coordinated through the development of similar trading systems, and that procedures are in place to prevent the sharing of trading decisions between entities. The disaggregation criteria require that the two entities not have knowledge of each other's trading and, moreover, have and enforce written procedures to preclude such knowledge.

A commenter on the Proposed Rule had said the Commission should eliminate the proposed aggregation exemptions for ownership interests up to 50 percent, because such notices would make it virtually impossible for the Commission to make timely, informed decisions about whether one person in fact controls the trading decisions of another and whether all proffered certifications are accurate.

This commenter said that, alternatively, the Commission should only provide aggregation exemptions where the ownership interest is no greater than 25 percent, in order to prevent abusive practices, which should not become effective prior to Commission review of the facts.

See

Honorable Carl Levin, United States Senate on February 10, 2014 (“CL-Sen. Levin Feb 10”),

See also

CL-Morgan Lewis Nov 13 (exemption from aggregation requirement should be a non-exclusive safe harbor, not excluding the possibility of relief for owners and owned entities that do not satisfy every criteria; delegate authority under 4a(a)(7) to staffs of the Commission, DCMs and SEFs to provide disaggregation relief to such firms on a case-by-case basis); CL-EPSA Nov 13 (10 percent ownership should invoke a rebuttable presumption that can be overcome by making the required notice filing in good faith).

See

Managed Funds Association on February 7, 2014 (“CL-MFA Feb 7”); CL-Energy Transfer Nov 13.

Although commenters generally supported the modifications made in the Supplemental Notice, and in particular the removal of the distinction between ownership interests of less than 50 percent and more than 50 percent, several commenters maintained that the Commission should not apply a threshold of 10 percent for the requirement of a notice filing in order to claim disaggregation relief.

Some commenters said that the Commission should apply a higher threshold below which a claim for disaggregation relief would not be required. Three commenters advocated for the threshold to be moved to 25 percent.

Other commenters said the threshold should be 50 percent, claiming that minority ownership generally does not permit control over operational aspects of the owned entity's activities, including trading strategy and decisions.

One commenter supporting a higher threshold remarked that maintaining the 10 percent threshold will trigger “false positives” requiring owners with no actual control over an owned-entity's trading activity to file a notice with the Commission, which will impose significant costs on market participants to prepare and file a notice, and on the Commission which will have to review and administer all of the filed notices.

In contrast, this commenter said, a higher threshold would allow the Commission to focus its surveillance resources on entities where there is a greater likelihood of commonly controlled trading activity.

See

CL-ISDA Nov 12; CL-MFA Feb 7; CL-AIMA Feb 10.

See

CSC Sugar, LLC on February 10, 2014; CL-IECA Nov 13; CL-PEGCC Nov 12; CL-OTPP Nov 13; CL-FIA Nov 13; CL-NGSA Nov 13.

See

CL-FIA Nov 13.

See id.

c. Comments Asserting That Aggregation Should Not Be Based on Ownership Alone

Other commenters said that there should be no ownership percentage threshold for disaggregation relief, but rather aggregation should be required solely on the basis of actual control of trading.

Certain of these commenters asserted that the CEA requires that a person control the owned entity's accounts in order to require aggregation.

Other commenters focused on the operational challenges of aggregation based on ownership, and asserted that limiting the aggregation requirement to cases where there is control would more closely match how affiliated companies operate.

One DCM argued that aggregation should be required only when there is both ownership and control of the owned entity, and said that it (

i.e.,

the DCM) does not automatically aggregate positions of companies with 100 percent common ownership, so long as the commonly-owned companies operate independently from one another in terms of decision-making and control of trading decisions.

See

Wilmar International Limited on November 13, 2015 (“CL-Wilmar Nov 13”); U.S. Chamber of Commerce's Center for Capital Markets Competitiveness on February 10, 2014 (“CL-Chamber Feb 10”); National Council of Farmers Cooperatives on August 4, 2014 (“CL-NCFC Aug 4”); Commodity Markets Council on January 22, 2015 (“CL-CMC Jan 22”); Natural Gas Supply Association on February 10, 2014 (“CL-NGSA Feb 10”); Archer Daniels Midland Company on January 20, 2015; The Andersons, Inc. on January 15, 2014.

See also

CL-ECOM Nov 13 (Commission should apply a facts and circumstances approach that permits disaggregation conditioned on independence of control of trading decisions).

See

CL-Wilmar Nov 13 and CL-Chamber Feb 10.

See

CL-NCFC Aug 4; CL-CMC Jan 22; CL-NGSA Feb 10.

See

ICE Futures US, Inc. on February 10, 2014 (“CL-ICE Feb 10”).

See also

CL-NGSA Feb 10 (arguing that aggregation should require findings of both ownership and control).

A commenter representing investment managers maintained that the Commission should not require passive investors in owned entities to aggregate the owned entities' positions when the passive investors do not have actual control over the owned entities' trading.

This commenter focused on the requirement to file a notice to claim relief from aggregation (which it said would be burdensome for entities that manage a large number of investment funds), and suggested instead that the criteria in proposed rule 105.4(b)(2)(i) be treated as a non-exclusive safe harbor, with other relief from aggregation being available in various circumstances.

The commenter asserted that the CEA requires aggregation only when there is actual control of the owned entity's derivatives trading, which the Commission has traditionally interpreted not to follow necessarily from mere corporate control of the owned entity.

See

CL-SIFMA AMG Nov 13.

See

SIFMA AMG on August 1, 2014 (discussing practical difficulties such as monitoring the equity ownership held by managed funds/accounts, and monitoring the commodity derivatives positions held by the operating companies in which managed funds/accounts hold equity ownership).

See also

CL-SIFMA AMG Nov 13; CL-Wilmar Nov 13.

See

SIFMA AMG on February 10, 2014 (“CL-SIFMA AMG Feb 10”) (referring to requirement to file reports on Form 40 and asserting that the Commission's pre-2011 rulemakings required aggregation on the basis of direct ownership in accounts, not on the basis of ownership interests in third parties who, in turn, owned positions in derivatives trading accounts).

A holding company for a number of DCMs commented that the Commission did not identify any basis or justification for the various features of the Proposed Rule.

This commenter contended that features of the Proposed Rule (regarding the owned entity aggregation rules, the IAC exemption, and the “substantially identical trading strategies” rule) are not in accordance with law, are arbitrary and capricious, are an unexplained departure from the Commission's administrative precedent, and are not more permissive than existing aggregation standards.

Two other commenters were also of the opinion that the Proposed Rule was not supported by the Commission's administrative precedent.

Commenters asserted that section 4a(a)(1) of the CEA provides no basis for requiring aggregation of positions held by another person in the absence of control of such other person.

One of these commenters also stated that existing regulation 150.4(b) generally exempts a commodity pool's participants with an ownership interest of 10 percent or greater from aggregating the positions held by the pool.

Finally, commenters contended that two of the Commission's enforcement cases indicate that the Commission has viewed aggregation as being required only where there is common trading control.

See

CME Group, Inc. on February 10, 2014 (“CL-CME Feb 10”).

CL-CME Feb 10 (opining that under Commission precedent, a 10 percent or more ownership or equity interest in an

account

is an indicia of trading control, but precedent does not support a requirement for aggregation based on a 10 percent or more ownership or equity interest in an

entity

). This commenter reasoned that the Commission's use of the term “account” has never referred to an owned entity that itself has accounts, that the 1979 Aggregation Policy suggests the Commission contemplated a definition of “account” that means no more than a personally owned futures trading account, and that the 1999 Amendments to the aggregation rules were focused on directly owned accounts.

Id.

One of these commenters contended that under the Commission's precedents “[l]egal affiliation [between companies] has been an indicium but not necessarily sufficient for position aggregation.”

See

Commodity Markets Council on Feb 10, 2014 (“CL-CMC Feb 10”).

The other commenter asserted that the Commission has never specifically required

aggregation solely on the basis of ownership of another legal person. CL-NGSA Feb 10. To support its view, this commenter said that the 1979 Aggregation Policy and the 1999 Amendments apply to only trading accounts that are directly or personally held or controlled by an individual or legal entity, the Commission's large trader rules require aggregation of multiple accounts held by a particular person, not the accounts of a person and its owned entities, and existing regulation 18.04(b) distinguishes between owners of the “reporting trader” and the owners of the “accounts of the reporting trader.”

Id.

See

CL-CME Feb 10; CL-NGSA Feb 10. One commenter asserted that the Commission's citation of prior rules requiring aggregation of owned entity positions at a 10 percent ownership level was not a sufficient consideration of the statutorily required factors. CL-CME Feb 10.

Another commenter contended that “CEA section 4a(a)(1) only allows the Commission to require the aggregation of positions on ownership alone when those positions are directly owned by a person. The positions of another person are only to be aggregated when the person has direct or indirect control over the trading of another person.” CL-NGSA Feb 10.

See

CL-CME Feb 10 (noting that the Commission's proposal to amend regulation 150.3 to include the separately incorporated affiliates of CPOs, CTAs or FCMs as eligible entities for the exemption relief of regulation 150.3 (63 FR 38525 at 38532 n. 27 (July 17, 1998)) states: “Affiliated companies are generally understood to include one company that owns, or is owned by, another or companies that share a common owner”). This commenter also asserted that the term “principals” under existing regulation 3.1(a)(2)(ii) include entities that have a direct ownership interest that is 10 percent or greater in a lower tier entity, such as the parent of a wholly-owned subsidiary.

Id.

From these two provisions, the commenter concluded that the corporate parent of a wholly-owned CPO would be affiliated with, and a principal of, its wholly-owned subsidiary.

See

CL-CME Feb 10, citing In the Matter of Vitol Inc. et al., Docket No. 10-17 (Sept. 14, 2010), available at

http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfvitolorder09142010.pdf

and In the Matter of Citigroup Inc. et al., Docket No. 12-34 (Sept. 21, 2012), available at

http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfcitigroupcgmlorder092112.pdf.

Another commenter contended that In the Matter of Vitol was based on facts that would be relevant only if common trading control was necessary for aggregating the positions of affiliated companies.

See

CL-NGSA Feb 10.

d. Other Comments Related to Aggregation

The Commission received conflicting comments about passive index-tracking commodity pools. One commenter asserted that the operators of such pools do not have discretion to react to market movements and, thus, do not “control” trading in the usual meaning of that word, so the positions of such pools should not be aggregated with other pools operated by the same operator.

Another commenter said the Commission should mandate aggregation of all positions of a group or class of traders such as operators of passive index-tracking commodity pools, because the Commission should focus on excessive concentration of positions and potential market manipulation.

This commenter noted that the CEA includes language extending the CFTC's aggregation powers to cover “any group or class of traders.”

See

DB Commodity Services LLC (a wholly-owned, indirect subsidiary of Deutsche Bank AG) on February 10, 2014 (“CL-DBCS Feb 10”).

See

CL-Better Markets Nov 13.

See id.

(citing CEA section 4a(a)(1)).

Two commenters suggested that the rule provide an explicit exemption from aggregation for pension plans, because the proposed rule creates a complicated and potentially unavailable route to relief to entities that are required to operate only in the best interests of plan beneficiaries and thus cannot be used to further the interests of the pension plan's sponsor.

See

Commercial Energy Working Group on February 10, 2014 (“CL-Working Group Feb 10”); CL-Working Group Nov 13; CL-CMC Nov 13; CL-CMC Feb 10. One of these commenters asserted that a common structure for U.S. pension plans is to have employees of the sponsor serve as members of the investment committee of the plan, which is a separate legal entity from and unaffiliated with the sponsor. The commenter claimed that these employees typically have an investment background and may serve in trading-related roles for the plan sponsor, and may have knowledge of both the plan and the sponsor's trading activity, which may prevent the plan and the sponsor from utilizing the proposed exemption from aggregation for pension plans. Aggregation would, the commenter said, put the fiduciaries of these plans in the position of having to account for the trading strategies of the sponsor, which may not be in the best interests of plan participants.

See

CL-Working Group Nov 13; CL-Working Group Feb 10.

3. Final Rule

The Commission is adopting rule 150.4(a)(1) as it was stated in the Proposed Rule and reiterated in the Supplemental Notice. This rule sets forth the requirements to aggregate positions on the basis of ownership or control, or when two or more persons act together under an express or implied agreement. The Commission is also adopting rule 150.4(b)(2) substantially as it was proposed in the Supplemental Notice (with certain modifications discussed below) but, as stated in the Supplemental Notice, it is not adopting proposed rule 150.4(b)(3).

The Commission is also adopting the conforming change in rule 150.4(b)(6) from the Supplemental Notice, to delete a cap of 50 percent on the ownership or equity interest for broker-dealers to disaggregate.

The Commission is persuaded by the commenters that rule 150.4(b)(2) should apply to all persons with an ownership or equity interest in an owned entity of 10 percent or greater (

i.e.,

an interest of up to and including 100 percent) in the same manner.

Because the Commission is not adopting proposed rule 150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed rule 150.4 are renumbered in the final rule as paragraphs (b)(3) to (b)(8), respectively. Also, as proposed in the Supplemental Notice, the Commission is not adopting proposed rule 150.4(e)(1)(i) which contained a delegation of authority referencing proposed rule 150.4(b)(3), and the final rule also reflects the deletion of a cross-reference to proposed rule 150.4(b)(3)(vii) in rule 150.4(c)(1).

See

Supplemental Notice, 80 FR at 58371.

See id.

Final rule 150.4(b)(6) (proposed as rule (b)(7)) is discussed more fully in section II.F, below.

a. Ownership Threshold for Aggregation

The Commission continues to believe that, as stated in the Supplemental Notice, the overall purpose of the position limits regime (to diminish the burden of excessive speculation which may cause unwarranted changes in commodity prices) would be better served by focusing the aggregation requirement on situations where the owner is, in view of the circumstances, actually able to control the trading of the owned entity.

The Commission reasons that the ability to cause unwarranted changes in the price of a commodity derivatives contract would result from the owner's control of the owned entity's trading activity.

The Commission notes in this regard that there may have been significant burdens in meeting the requirements of proposed rule 150.4(b)(3) even where there is no control of the trading of the owned entity, as was suggested by the Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce, SIFMA AMG and other commenters on the Proposed Rule.

See

Supplemental Notice, 80 FR at 58371.

Rule 150.4(b)(2) will continue the Commission's longstanding rule that persons with either an ownership or an equity interest in an account or position of less than 10 percent need not aggregate such positions solely on the basis of the ownership criteria, and persons with a 10 percent or greater ownership interest will generally be required to aggregate the account or position.

The Commission has found,

over the decades that the 10 percent threshold has been in effect, that this is an appropriate level at which aggregation should be required, and no change to this threshold was proposed.

For purposes of aggregation, the Commission continues to believe, as stated in the Proposed Rule,

that contingent ownership rights, such as an equity call option, would not constitute an ownership or equity interest.

See

Proposed Rule at 68958.

The Commission considered the comments that suggested different ownership thresholds (

e.g.,

25 percent or 50 percent) for the aggregation requirement. In contrast to the satisfactory experience with the 10 percent threshold, the Commission believes that none of the commenters presented a compelling analysis to justify a different threshold. That is, while it is undoubtedly true that application of different ownership thresholds would result in differences in which persons would be required to aggregate or seek exemptions from aggregation, the commenters did not provide a persuasive explanation of how application of a 25 percent or 50 percent ownership threshold would more appropriately further the purposes of the position limit regime than the 10 percent threshold which has been applied to date.

For example, one commenter posited that maintaining the 10 percent threshold would require owners to file unnecessary notices seeking exemptions from aggregation, imposing a burden on both market participants and the Commission.

However, the Commission believes that preparation of the required notices (and the Commission's review of them) will not impose undue burdens, and the notices will be helpful to the Commission in monitoring the use of exemptions from aggregation.

So while raising the threshold would presumably decrease the number of notices that are filed, it is not clear that the benefit would be significant since the filing burden is minimal; at the same time, however, the amount of information available to the Commission for use in monitoring and enforcement would be reduced, a potential harm. Because of this uncertainty, the Commission cannot conclude that a 25 percent, 50 percent or other threshold would be significantly better than the 10 percent threshold which has been satisfactorily applied to date, and the Commission has determined to leave the 10 percent threshold in place.

See

CL-FIA Nov 13.

As discussed below, the Commission has instructed its staff to conduct ongoing surveillance and monitoring of disaggregation filings and related information for red flags.

After considering the comments on the proposed procedure in rule 150.4(b)(2) for a notice filing to permit a person with an ownership or an equity interest in an owned entity of 10 percent or greater to disaggregate the positions of the owned entity in specified circumstances, the Commission has determined to adopt this proposal.

The notice filing must demonstrate compliance with the conditions set forth in rule 150.4(b)(2), which are discussed below. Similar to other exemptions from aggregation, the notice filing will be effective upon submission to the Commission, but the Commission is able to subsequently call for additional information, and to amend, terminate or otherwise modify the person's aggregation exemption for failure to comply with the provisions of rule 150.4(b)(2). Further, the person is obligated to amend the notice filing in the event of a material change to the circumstances described in the filing.

Under the rule adopted here, and in a manner similar to current regulation, if a person qualifies for disaggregation relief, the person would nonetheless have to aggregate those same accounts or positions covered by the relief if they are held in accounts with substantially identical trading strategies.

See

rule 150.4(a)(2). The exemptions in rule 150.4 are set forth as alternatives, so that, for example, the applicability of the exemption in paragraph (b)(2) would not affect the applicability of a separate exemption from aggregation (

e.g.,

the independent account controller exemption in paragraph (b)(4)).

See

rule 150.4(c), discussed in section II.C., below.

The Commission notes that commenters raised valid concerns about permitting disaggregation following a notice filing that is effective upon submission.

The Commission has instructed its staff to conduct ongoing surveillance and monitoring of disaggregation filings and related information for red flags which could include, but would not be limited to, the creation of multiple subsidiaries, filings that are only superficially complete, and patterns of trading that suggest coordination after a filing has been made. The Commission is sensitive to the potential for circumvention of position limits through the use of multiple subsidiaries, but it continues to believe, as stated in the Supplemental Notice, that the criteria in rule 150.4(b)(2)(i), which must be satisfied in order to disaggregate, will appropriately indicate whether an owner has control of or knowledge of the trading activity of the owned entity.

The disaggregation criteria require that the two entities not have knowledge of each other's trading and, moreover, have and enforce written procedures to preclude such knowledge.

And, in fact, as noted in the Proposed Rule, the Commission has applied, and expects to continue to apply, certain of the same conditions in connection with the IAC exemption to ensure independence of trading between an eligible entity and an affiliated independent account controller.

See

CL-Better Markets Nov 13; CL-Occupy the SEC Nov 13; CL-IATP Nov 13.

See

Supplemental Notice, 80 FR at 58371.

See

rule 150.4(b)(2)(i), discussed in section II.B., below.

See

Proposed Rule, 78 FR at 68961, referring to existing regulation 150.3(a)(4) (to be replaced by rule 150.4(b)(4)). Such conditions have been useful in ensuring that trading is not coordinated through the development of similar trading systems, and that procedures are in place to prevent the sharing of trading decisions between entities.

If the disaggregation criteria are satisfied, the Commission believes that disaggregation may be permitted without weakening the aggregation regime, even if the owner has a greater than 50 percent ownership or equity interest in the owned entity. Even in the case of majority ownership, if the disaggregation criteria are satisfied, the ability of an owner and the owned entity to act together to engage in excessive speculation or to cause unwarranted price changes should not differ significantly from that of two separate individuals. The Commission reaches this conclusion based in part on commenters' descriptions of relevant corporate structures. For example, one commenter described instances where an entity has a 100 percent ownership interest in another entity, yet does not control day-to-day business activities of the owned entity.

In this situation the owned entity would not have knowledge of the activities of other entities owned by the same owner, nor would it raise the heightened concerns, triggered when one entity both owns and controls trading of another entity, that the owner would necessarily act in a coordinated manner with other owned entities.

See

MidAmerican Energy Holdings Company on February 7, 2014 (“CL-MidAmerican Feb 7”).

As explained in the Supplemental Notice, the Commission believes it would be inappropriate to disallow the possibility of a notice filing to disaggregate the positions of majority-owned subsidiaries, because without this possibility of relief, corporate groups may be required to establish procedures to monitor and coordinate trading activities across disparate owned entities, which could have unpredictable consequences.

The Commission recognizes that these consequences could include not only the cost of establishing these procedures, but also the impairment of corporate structures which were established to ensure that the various

owned entities engage in business independently. This independence may serve important purposes which could be lost if the aggregation requirement were imposed too widely. The Commission does not intend that the aggregation requirement interfere with existing corporate structures and procedures adopted to ensure the independence of owned entities.

See

Supplemental Notice, 80 FR at 58369-70.

The Commission noted in the Supplemental Notice that the disaggregation criteria in rule 150.4(b)(2)(i) should be relatively familiar to corporate groups, because they are in line with prudent corporate practices that are maintained for longstanding, well-accepted reasons.

See id.

The Commission also notes that since the aggregation rules may be a precedent for aggregation rules enforced by DCMs and SEFs, it is even more important that the aggregation rules set out, to the extent feasible, “bright line” rules that are capable of easy application by a wide variety of market participants while not being susceptible to circumvention.

See

Proposed Rule, 78 FR at 68596, n. 103. The Commission believes that by implementing an approach to aggregation that is in keeping with longstanding corporate practices, rule 150.4(b)(2) promotes the goal of setting out “bright line” rules that are relatively easy to apply while not being susceptible to circumvention.

Adoption of rule 150.4(b)(2) is in accordance with the Commission's authority under CEA section 4a(a)(7) to provide relief from the position limits regime. The notice filing requirement in the rule will appropriately implement the CEA. The 10 percent threshold historically applied by the Commission continues to have importance, because it demarcates the level at which the notice filing and the procedures underlying the notice are required. Relief under rule 150.4(b)(2) will not be automatic, but rather will require a certification (provided in the notice under rule 150.4(c)) that procedures to ensure independence are in place.

Furthermore, as the Commission noted in the Supplemental Notice, satisfaction of the criteria in rule 150.4(b)(2) would not foreclose the possibility that positions of owners and owned entities would have to be aggregated.

For example, aggregation is and would continue to be required under rule 150.4(a)(1) if two or more persons act pursuant to an express or implied agreement; and this aggregation requirement would apply whether the two or more persons are an owner and owned entity(ies) that meet the conditions in proposed rule 150.4(b)(2), or are unaffiliated individuals.

See

Supplemental Notice, 80 FR at 58371.

b. Ownership Is a Valid Basis for Aggregation

Regarding those commenters who said that ownership of an entity should not be a basis for aggregation of that entity's positions, the Commission continues to interpret section 4a(a)(1) of the CEA, as stated in the Proposed Rule and reiterated in the Supplemental Notice, to provide for the general aggregation standard with regard to position limits, and specifically supports aggregation on the basis of ownership, because it provides that in determining whether any person has exceeded such limits, the positions held and trading done by any persons directly or indirectly controlled by such person shall be included with the positions held and trading done by such person; and further, such limits upon positions and trading shall apply to positions held by, and trading done by, two or more persons acting pursuant to an expressed or implied agreement or understanding, the same as if the positions were held by, or the trading were done by, a single person.

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

cited in

Proposed Rule, 78 FR at 68956, and Supplemental Notice, 80 FR 58366.

The Commission explained in the Proposed Rule that this interpretation is supported by Congressional direction and Commission precedent from as early as 1957 and continued through 1999.

See

Proposed Rule, 78 FR at 68956.

For example, in 1968, Congress amended the aggregation standard in CEA section 4a to include positions “held by” one trader for another,

supporting the view that an owner should aggregate the positions held by an owned entity (because the owned entity is holding the positions for the owner). During the Commission's 1986 reauthorization, witnesses at Congressional hearings suggested that “aggregation of positions based on ownership without actual control unnecessarily restricts a trader's use of the futures and options markets,” but the Congressional committee did not recommend any changes to the statute based on these suggestions.

See

S. Rep No. 947, 90th Cong., 2 Sess. 5 (1968) regarding the CEA Amendments of 1968, Public Law 90-258, 82 Stat. 26 (1968). This Senate Report provides:

Certain longstanding administrative interpretations would be incorporated in the act. As an example, the present act authorizes the Commodity Exchange Commission to fix limits on the amount of speculative “trading” that may be done. The Commission has construed this to mean that it has the authority to set limits on the amount of buying or selling that may be done and on the size of positions that may be held. All of the Commission's speculative limit orders, dating back to 1938, have been based upon this interpretation. The bill would clarify the act in this regard. . . .

Section 2 of the bill amends section 4a(1) of the act to show clearly the authority to impose limits on “positions which may be held.” It further provides that trading done and positions held by a person controlled by another shall be considered as done or held by such other; and that trading done or positions held by two or more persons acting pursuant to an express or implied understanding shall be treated as if done or held by a single person.

See

H.R. Rep. No. 624, 99th Cong., 2d Sess. (1986) at page 43. The Report noted that:

During the subcommittee hearings on reauthorization, several witnesses expressed dissatisfaction with the manner in which certain market positions are aggregated for purposes of determining compliance with speculative limits fixed under Section 4a of the Act. The witnesses suggested that, in some instances, aggregation of positions based on ownership without actual control unnecessarily restricts a trader's use of the futures and options markets. In this connection, concern was expressed about the application of speculative limits to the market positions of certain commodity pools and pension funds using multiple trading managers who trade independently of each other. The Committee does not take a position on the merits of the claims of the witnesses.

Id.

In 1988, the Commission reviewed petitions by the Managed Futures Trade Association and the Chicago Board of Trade which argued against aggregation based only on ownership.

In response to the petition, however, the Commission stated that:

The Managed Futures Trade Association petition requested that the Commission amend the aggregation standard for exchange-set speculative position limits in regulation 1.61(g) (now regulation 150.5(g)), by adding a proviso to exclude the separate accounts of a commodity pool where trading in those accounts is directed by unaffiliated CTAs acting independently.

See

Exemption From Speculative Position Limits for Positions Which Have a Common Owner but Which Are Independently Controlled; Proposed Rule, 53 FR 13290, 13291-92 (Apr. 22, 1988). The petition argued the ownership standard, as applied to “multiple-advisor commodity pools, is unfair and unrealistic” because while the commodity pool may own the positions in the separate accounts, the CPO does not control trading of those positions (the unaffiliated commodity trading advisor (“CTA”) does) and therefore the pool's ownership of the positions will not result in unwarranted price fluctuations.

See id.

at 13292.

The petition from the Chicago Board of Trade (which is now a part of CME Group, Inc.) sought to revise the aggregation standard so as not to require aggregation based solely on ownership without control.

See id.

Both ownership and control have long been included as the appropriate aggregation criteria in the Act and Commission regulations. Generally, inclusion of both criteria has resulted in a bright-line test for aggregating positions. And as noted above, although the factual circumstances surrounding the control of accounts and positions may vary, ownership generally is clear.

. . . In the absence of an ownership criterion in the aggregation standard, each potential speculative position limit violation would have to be analyzed with regard to the individual circumstances surrounding the degree of trading control of the positions in question. This would greatly increase uncertainty.

See id.

In response to the petitions, however, the Commission proposed the IAC exemption, which provides “an additional exemption from speculative position limits for positions of commodity pools which are traded in separate accounts by unaffiliated account controllers acting independently.”

Id.

Even earlier administrative determinations, as well as regulations of the Commodity Exchange Authority, announced standards that included control of trading and financial interests in positions. As early as 1957, the Commission's predecessor issued determinations requiring that accounts in which a person has a financial interest be included in aggregation.

In addition, the definition of “proprietary account” in regulation 1.3(y), which has been in effect for decades, includes any account in which there is 10 percent ownership.

100

See

Administrative Determination 163 (Aug. 7, 1957) (“[I]n the application of speculative limits, accounts in which the firm has a financial interest must be combined with any trading of the firm itself or any other accounts in which it in fact exercises control.”). In addition, the Commission's predecessor, and later the Commission, provided the aggregation standards for purposes of position limits in the large trader reporting rules.

See

Supersedure of Certain Regulations, 26 FR 2968 (Apr. 7, 1961). In 1961, then regulation 18.01(a) (“Multiple Accounts”) stated that if any trader holds or has a financial interest in or controls more than one account, whether carried with the same or with different futures commission merchants or foreign brokers, all such accounts shall be considered as a single account for the purpose of determining whether such trader has a reportable position and for the purpose of reporting. 17 CFR 18.01 (1961).

In the 1979 Aggregation Policy, the Commission discussed regulation 18.01, stating:

Financial Interest in Accounts.

Consistent with the underlying rationale of aggregation, existing reporting Rule 18.10(a) a (sic) basically provides that if a trader holds or has a financial interest in more than one account, all accounts are considered as a single account for reporting purposes. Several inquiries have been received regarding whether a nomial (sic) financial interest in an account requires the trader to aggregate. Traditionally, the Commission's predecessor and its staff have expressed the view that except for the financial interest of a limited partner or shareholder (other than the commodity pool operator) in a commodity pool, a financial interest of 10 percent or more requires aggregation. The Commission has determined to codify this interpretation at this time and has amended Rule 18.01 to provide in part that, “For purposes of this Part, except for the interest of a limited partner or shareholder (other than the commodity pool operator) in a commodity pool, the term `financial interest' shall mean an interest of 10 percent or more in ownership or equity of an account.”

Thus, a financial interest at or above this level will constitute the trader as an account owner for aggregation purposes.

1979 Aggregation Policy, 44 FR at 33843.

The provisions concerning aggregation for position limits generally remained part of the Commission's large trader reporting regime until 1999 when the Commission incorporated the aggregation provisions into existing regulation 150.4 with the existing position limit provisions in part 150.

See

1999 Amendments. The Commission's part 151 rulemaking also incorporated the aggregation provisions in vacated regulation 151.7 along with the remaining position limit provisions in part 151.

See

76 FR 71626, Nov. 18, 2011.

100

17 CFR 1.3(y). This provision has been in existing regulation 1.3(y)(1)(iv) since at least 1976, which the Commission adopted from regulations of its predecessor, with “for the most part, procedural, housekeeping-type modifications, conforming the regulations to the recently enacted CFTCA.”

See

41 FR 3192, 3195 (January 21, 1976).

In light of the language in section 4a, its legislative history, subsequent regulatory developments, and the Commission's historical practices in this regard, the Commission continues to interpret section 4a to require aggregation on the basis of either ownership or control of an entity. The Commission also believes that aggregation of positions across accounts based upon ownership is a necessary part of the Commission's position limit regime.

101

See

1999 Amendments, 64 FR at 24044 (“[T]he Commission . . . interprets the `held or controlled' criteria as applying separately to ownership of positions or to control of trading decisions.”).

See also

CL-CME Nov 13 (criteria should focus on ensuring that the entities do not share knowledge of or control over trading, which would not be implicated merely because they trade pursuant to commonly-developed trading systems).

134

This commenter also said that, at a minimum, the Commission should distinguish between front-end systems (used for trade capture and trade booking) and back-end systems (used for risk management and trade reporting).

See

CL-IECA Nov 13.

Another commenter described “trade capture systems” as distinct from trading strategies. This commenter said trade capture systems are used to track positions on an enterprise-wide basis across multiple affiliates for risk management, recordkeeping and other business purposes, but these systems do not direct trading and use of a shared trade capture system does not mean that the entities have adopted or employed identical, or even similar, trading strategies.

See

CL-EEI Nov 13.

A third commenter referred to trade capture, trade execution, and related report-generation systems for the confirmation, booking and accounting of orders and for any other mid- and back-office functions. This commenter asserted that since such systems merely record, process, and facilitate reports of trading, but do not establish

parameters (

e.g.,

algorithms) for trading, their use by multiple entities should be permitted under this criterion so long as they do not enable coordinated trading.

See

CL-Energy Transfer Nov 13.

Other commenters remarked that a change in the rule text from “trading systems” to “trading strategies” would allow corporate groups to take advantage of economies of scale by having one trading system developed for multiple companies in the group, and promote efficient trading and risk management practices through the development of trading technologies that are unrelated to trading strategy.

135

A commenter representing investment managers said that disaggregation relief should be available if the original investment decisions are made independently, even if trades are subsequently executed and risk managed on an aggregated basis using a single system.

136

135

See

CL-CME Nov 13; CL-FIA Nov 13; CL-FIA Feb 6.

136

This commenter said it would be appropriate for trading strategies of separate investment vehicles to be executed via a single execution desk, as long as the vehicles' portfolio managers were not coordinating placement of the trades, in order to achieve risk management goals such as to avoid cross and wash trading or the submission of an excessive numbers of orders, to avoid having vehicles bid against each other, to monitor other trading thresholds, and to achieve fair terms of execution and aggregation.

See

CL-AIMA Nov 12.

Commenters referred to the Commission's statement in the Proposed Rule that it generally would not expect that this criterion would prevent an owner and an owned entity from both using the same “off-the-shelf” system that is developed by a third party.

137

The commenters asked that this guidance be reiterated in the final rule and be extended beyond off-the-shelf systems or other technologies “developed by” third parties, to include any in-house software or custom modules added to third-party software, so long as these internal systems are not used to share trading information with day-day trading personnel or otherwise permit coordinated trading.

138

137

See

Proposed Rule, 78 FR at 68962.

138

See

CL-SIFMA AMG Nov 13; CL-AIMA Feb 10; CL-Energy Transfer Nov 13.

On the other hand, another commenter said that the application of this criterion, which implicitly assumes that market participants will self-report common trading strategies, fails to recognize that the participants may be reluctant to report collusive strategies, and therefore DCMs and SEFs should be required to analyze market data for trading strategy correlations.

139

See

Occupy the SEC on August 7, 2014 (“CL-Occupy the SEC Aug 7”).

c. Proposed Rule 150.4(b)(2)(i)(C)—Have Written Procedures To Maintain Independence, Including Separate Physical Locations

A commenter said that the requirement to meet this criteria (to have written procedures restricting access to trading information) should apply only to the owner claiming the exemption from aggregation, and not the owned entity, because depending on the extent of an owner's corporate control over an owned entity, the owner may not be in a position to compel the owned entity to establish the written procedures.

140

This commenter believes that so long as the owner has and enforces written procedures that preclude the owner from sharing trading information with, and receiving trading information from, the owned entity, then each entity will not have access to the information of the other.

141

140

See

FIA on July 31, 2014 (“CL-FIA July 31”) and CL-FIA Nov 13.

141

See id.

Another commenter suggested that the second sentence of this provision should be deleted because, this commenter believes, it is subsumed by the first sentence and such prescriptive criteria are unnecessary in the context of a physical commodity firm as opposed to an IAC.

142

The commenter also asked that the Commission clarify that the requirement of “separate physical locations” does not require physically separate buildings, but rather requires only restricted access prohibiting personnel from entering the affiliated company without permission or signing-in or, if on the derivatives trading floors, an escort.

143

142

See

CL-Energy Transfer Nov 13. The second sentence reads “Such procedures must include document routing and other procedures or security arrangements, including separate physical locations, which would maintain the independence of their activities.” The commenter said that if the second sentence is retained, the Commission should provide guidance that the routing of documents to senior management or risk management personnel, and the routing of documents that show aggregate, non-granular, or stale trading positions, may be acceptable so long as such routing does not allow coordinated trading.

143

See id.

On the other hand, another commenter said that this criterion should be strengthened to provide realistic guidelines for meaningful separations of location and information, because the statute requires an entity to cease trading commodity derivatives in multiple divisions separated by “mere `Chinese walls' ” and it is not within the discretion of the Commission to waive this requirement.

144

This commenter cited a research paper which asserted “that in important contexts Chinese walls fail to prevent the spread of non-public information within financial conglomerates.”

145

144

See

Better Markets, Inc. on February 10, 2014 (“CL-Better Markets Feb 10”).

145

See id.

d. Proposed Rule 150.4(b)(2)(i)(D)—No Shared Employees That Control Trading Decisions

A commenter said that the Commission should clarify that this criterion may be met if a shared employee participates on the board but does not control, direct or participate in the trading decisions.

146

Another commenter requested that the Commission clarify that guidance in the Proposed Rule about research personnel not influencing or directing the entities' trading decisions is properly interpreted to mean that research personnel are not precluded by this criterion from providing market research (including, for example, market fundamentals or technical indicators, support or resistance levels, and trade recommendations), so long as the research personnel do not direct or control trading decisions of the owned entities.

147

146

See

CL-COPE Feb 10.

147

See

CL-MFA Feb 7, referring to Proposed Rule, 78 FR at 68962.

e. Proposed Rule 150.4(b)(2)(i)(E)—No Risk Management Systems That Permit the Sharing of Trades or Trading Strategy

Several commenters focused on a statement in the Proposed Rule that the Commission would interpret this criterion not to prohibit sharing of information for risk management purposes, so long as the information is not used for trading purposes or shared with employees that participate in trading decisions.

148

These commenters asked that the Commission reiterate this guidance in the final rule.

149

Other commenters said that the guidance should be set forth as part of the text of the final rule, in order to provide a safe harbor, or greater certainty, for the

sharing of risk management information.

150

148

See

CL-AIMA Feb 10, citing Proposed Rule, 78 FR at 68962 (“this criterion generally would not prohibit sharing of information to be used only for risk management and surveillance purposes, when such information is not used for trading purposes and not shared with employees that, as noted above, control, direct or participate in the entities' trading decisions. Thus, sharing with employees who use the information solely for risk management or compliance purposes would generally be permitted, even though those employees' risk management or compliance activities could be considered to have an `influence' on the entity's trading.”).

See also

CL-ISDA Nov 12; CL-SIFMA AMG Nov 13; CL-PEGCC Nov 12; CL-CME Nov 13.

149

See

CL-ISDA Nov 12; CL-SIFMA AMG Nov 13; CL-PEGCC Nov 12; CL-CME Nov 13; CL-AIMA Feb 10.

150

See

CL-FIA Nov 13; CL-FIA July 31; CL-NGSA Nov 13; Commodity Markets Council on February 10, 2014. Another commenter suggested that the rule text should provide that owners and their affiliates may share such trading information as is necessary to manage risk and meet compliance obligations.

See

CL-Working Group Nov 13 (suggesting rule text allowing “obtaining such information as is necessary to fulfill [the entity's] fiduciary duties or fulfill its duty to supervise the trading activities of an affiliate, or . . . establishing and monitoring compliance or risk policies and procedures, including position limits, for an affiliate or on an enterprise wide basis, or . . . sharing employees so long as such employees do not control, direct or participate in the entities' trading decisions”).

A commenter asked the Commission to state that this criterion would not preclude disaggregation relief when there is sharing of information for only risk management and surveillance and other non-trading purposes, such as, for example, information used to assess collateral requirements or verify compliance with applicable credit limits or information maintained by a custodian or other service provider that does not control trading.

151

This commenter asserted that the condition that the owner entity and owned entity “do not have risk management systems that permit the sharing of trades or trading strategy” is ambiguous and potentially overly broad.

See

CL-ISDA Nov 12.

Other commenters suggested various formulations for Commission guidance or rule text to set out circumstances in which this criterion would be interpreted not to preclude disaggregation relief, so long as the employees who have access to the shared information do not control, direct or participate in the entities' trading decisions. The circumstances suggested by commenters include:

• Information sharing as is necessary to fulfill fiduciary duties or duties to supervise trading, or to monitor risk limits on an enterprise wide basis;

152

See

CL-CMC Nov 13.

• sharing of transaction and position information with and among employees who perform risk management, accounting, compliance or similar mid- and back-office functions;

153

See

CL-CME Nov 13.

• information sharing for risk management purposes;

154

See

CL-COPE Nov 13.

See also

CL-AIMA Feb 10 (criterion should not preclude shared risk management systems from allowing access to share trade and trading strategies by individuals who do not exercise control over trading decisions); CL-ECOM Nov 13 (criterion should not preclude information sharing for risk management and compliance purposes).

• continuous sharing of position information for risk management and surveillance purposes only, sharing of trading and position information for risk management purposes (even on a real-time basis and even if the entity's risk management systems or personnel have authority to require the reduction of positions to comply with applicable limits), and using shared risk management services, including real-time data sharing and position reduction mechanisms, so long as they do not permit coordinated or shared trading;

155

See

CL-SIFMA AMG Nov 13.

• sharing of derivative information with senior management or risk committee members that oversee the risks of more than one operating company, for risk management, accounting, compliance, or similar purposes (even if these personnel have authority to reduce exposure or comply with internal risk guidelines), and sharing of trading and position information for risk management purposes, even if such information is shared on a real-time or end-of-day basis and even if the risk management systems or personnel have authority to reduce positions to comply with applicable limits or other restrictions that senior management or the risk personnel may impose;

156

and

156

See

CL-Energy Transfer Nov 13.

• information sharing resulting from use of an affiliated service provider, such as an affiliated FCM, an affiliated custodian, an affiliate engaged in recordkeeping or reporting information, or an affiliate providing clearing, custodial, or other non-trading services for the owned entity.

157

See

CL-ISDA Nov 12.

Commenters also asserted that employees at the owner entity who are not directly or indirectly involved in trading or the supervision of traders, and are prohibited from sharing information with owner entity traders, should be permitted to receive trading activity and position exposure information of the owned entity,

158

and that the categories of employees referred to in the guidance in the Proposed Rule are not intended to be restrictive, so that, for example, entities could share sales staff without leading to shared knowledge of trading decisions.

159

Another commenter said that the Commission should interpret this criterion not to preclude disaggregation relief when information sharing is limited to employees involved in risk-management, compliance, execution or recordkeeping functions, so long as the functions are conducted pursuant to written procedures that protect the information from access by individuals involved in trading decisions, and there is no access by individuals who develop or execute trading strategies to the information shared for risk management.

160

158

See id.

159

See

CL-AIMA Feb 10, referring to Proposed Rule, 78 FR at 68962.

160

See

CL-ICE Nov 13.

3. Final Rule

The Commission is adopting rule 150.4(b)(2)(i) largely as proposed, with certain modifications described below in response to commenters and other considerations.

First, the lead in sentence of rule 150.4(b)(2)(i) includes the addition of the phrase “(to the extent that such person is aware or should be aware of the activities and practices of the aggregated entity or the owned entity).” The effect of adding this phrase is to apply the criteria in this rule to both the person who is required to aggregate positions and the aggregated or owned entity, but only to the extent that the person required to aggregate is aware or should be aware of the activities and practices of the aggregated or owned entity. This addition recognizes that, as commenters pointed out, an owner may not have knowledge of or an ability to find out about the trading practices of an owned entity. The Commission understands the phrase “should be aware” to mean that the owner is charged with awareness of the owned entity's activities if it is, in effect, able to control the owned entity or routinely has access to relevant information about the owned entity. If the owner is not aware, and should not be aware, of the owned entity's activities, it would not have to certify as to the owned entity.

The Commission believes that this modification addresses the comments on subparagraph (A) to the effect that passive investors in an owned entity should be required to certify only that they have no knowledge of the owned entity's trading. Therefore, the final rule adopts subparagraph (A) as it was proposed.

The final rule adopts subparagraph (B), relating to separately developed and independent trading systems, as it was proposed. The term “system” is appropriately broad to encompass the various methods, procedures and plans which market participants may use to initiate trading. “Trading system” includes, for example, a program (whether automated or not) that provides the impetus for the initiation of trades. The suggested alternative, “strategy,” is too narrowly limited to the particular trading decisions a person may make based on particular conditions. The entire “trading system,” not just the “trading strategy,” must be

separately developed and independent.

161

The Proposed Rule noted that “off-the-shelf” software could be considered to be separately developed and independent for this purpose, so long as the software could not be used by multiple parties to indirectly coordinate their trading.

See

Proposed Rule, 78 FR at 68962. The Commission reaffirms this position, and in response to commenters (

see

footnote 138, above), clarifies that customized software or in-house software could also be considered to be separately developed and independent for this purpose, so long as the same standard is met.

The Commission reiterates that, as stated in the Proposed Rule, the purpose of this requirement is to preclude use of a trading system to coordinate the trading of two or more entities.

162

Thus, it is the trading system that provides the impetus for the initiation of trades which must be separately developed and independent, not the mechanism or software that carries out those trades. For this reason, the Commission does not believe that use of a shared order execution platform, with appropriate firewalls, would necessarily mean that this condition is not met. For purposes of the final rule, an “order execution platform” is a computerized process that accepts inputs of terms of trades desired to be made and then uses pre-determined methods to specifically place those trades in the markets, while a “trading system” is a process or method for deciding on the timing and direction of trades.

163

Thus, for purposes of the final rule the Commission understands the term “trading system” not to include an order execution platform. Nor would the term “trading system” include systems used for back-office functions such as order capture or trade reporting. Also, a trading system does not include broad principles to guide trading (

e.g.,

principles one may learn from publicly-available literature).

162

See

Proposed Rule, 78 FR at 68962.

163

For example, Trader A may use a trading system to develop trading ideas, and then use a widely-used order execution platform to execute those ideas, while affiliated Trader B (with no knowledge of Trader A's trading system) may qualify for disaggregation when Trader B uses an independent trading system to develop trading ideas, and executes those ideas on the same order execution platform that Trader A uses, provided Trader B does not have access to Trader A's executions (and vice versa).

Subparagraph (C) of the final rule, relating to written procedures to maintain independence, including separate physical locations, reflects the deletion of the phrase “document routing and other procedures or” from the second sentence. The Commission believes that the concept of document routing is outmoded and possibly confusing (and the concept is adequately described by the general phrase “security arrangements” which is retained in the final rule).

164

For consistency, the phrase “document routing and other procedures or” is also deleted from rule 150.4(b)(4)(i)(A).

For the avoidance of doubt, the Commission reiterates its guidance from the Proposed Rule on the reference in subparagraph (C) to separate physical locations.

165

Subparagraph (C) would not necessarily require that the relevant personnel be located in separate buildings. The important factor is that there be a physical barrier between the personnel that prevents access between the personnel that would impinge on their independence. For example, locked doors with restricted access would generally be sufficient, while merely providing the purportedly “independent” personnel with desks of their own would not. Similar principles would apply to sharing documents or other resources.

165

See

Proposed Rule, 78 FR at 68962.

The final rule adopts subparagraph (D), relating to sharing of employees that control trading decisions, as it was proposed. For the avoidance of doubt, the Commission reiterates, as it stated in the Proposed Rule, that the sharing of attorneys, accountants, risk managers, compliance and other mid- and back-office personnel between entities would generally not compromise independence so long as the employees do not control, direct or participate in the entities' trading decisions.

166

Similarly, sharing of board or advisory committee members or research personnel, or sharing of employees for training, operational or compliance purposes, would not result in a violation of the criteria if the personnel do not influence (

e.g.,

“have a say in”) or direct the entities' trading decisions.

167

166

See id. See also

the discussion above regarding the condition under rule 150.4(b)(2)(i)(A) (conditioning aggregation relief on a demonstration that the person filing for disaggregation relief and the owned entity do not have knowledge of the trading decisions of the other, and discussing what constitutes “knowledge” for this purpose).

167

In this respect, rule 150.4(b)(2)(i)(D) is consistent with the Commission's Interpretive Letter No. 92-15 (CCH ¶ 25,381), where an employee both oversaw the execution of orders for a commodity pool, as well as maintained delta neutral option positions in non-agricultural commodities for the proprietary account of an affiliate of the sponsor of the commodity pool. In that interpretive letter, the Commission concluded that the use of clerical personnel who are dual employees of both affiliates would not require aggregation when the clerical personnel engage in ministerial activities and steps are taken to maintain independence, such as: (i) Limiting trading authority so that the personnel do not have responsibility for the two entities' activities in the same commodity; and (ii) separating the times at which the personnel conduct activities for the two entities.

One commenter asserted that personnel could provide research about “technical indicators, support or resistance levels, and trade recommendations” without being deemed to be participating in trading decisions.

168

The Commission believes this situation should be viewed in light of a previous interpretation, where the Commission stated that it “is concerned that specific trading recommendations . . . contained in such information not be substituted for independently derived trading decisions. When the person who directs trading in an account or program regularly follows the trading suggestions [from another person], such account or program will be evidence that the account is controlled by the [other person].”

169

168

See

CL-MFA Feb 7.

169

1979 Aggregation Policy, 44 FR at 33844.

The final rule adopts subparagraph (E), relating to risk management information sharing, substantially as it was proposed, but with a revision to clarify that the provision is focused on the sharing of trades or trading strategy with employees that control the trading decisions of the other entity.

170

The Commission notes that provisions virtually identical to this rule have been used for years in connection with the IAC exemption, and the Commission's interpretations of those provisions have not changed. The Commission considers this revision to the rule text to be a clarification of its existing interpretations.

170

For example, the rule would preclude Trader A and affiliated Trader B from having a risk management system that permits the sharing of Trader A's trades or trading strategy with employees that control the trading decisions of Trader B, or that permits the sharing of Trader B's trades or trading strategy with employees that control the trading decisions of Trader A.

But, in conjunction with that limitation, the rule would not preclude Trader A and affiliated Trader B from having a risk management system that permits the sharing of Trader A's trades or trading strategy with employees that handle risk management functions for Trader B but do not control its trading decisions.

Further, the Commission adopts and reiterates its guidance on this provision in the Proposed Rule.

171

That is, subparagraph (E) is intended to address concerns that risk management systems that permit entities to share trades or trading strategies with each other present a significant risk of coordinated trading through the sharing of information.

172

The Commission

intends that, generally speaking, subparagraph (E) would not prohibit sharing of information to be used only for risk management and surveillance purposes, when such information is not used for trading purposes and not shared with employees that, as noted above, control, direct or participate in the entities' trading decisions. Thus, sharing with employees who use the information solely for risk management or compliance purposes would generally be permitted, even though those employees' risk management or compliance activities could be considered to have an “influence” on the entity's trading.

171

See

Proposed Rule, 78 FR at 68962.

172

The Commission remains concerned that a trading system, as opposed to a risk management system, that is not separately developed from another system can subvert independence because such a system could apply the same or similar

trading strategies even without the sharing of trading information.

In response to questions from commenters, the Commission believes that transaction and position information may be shared among the risk assessment employees of a single entity or of affiliated entities as is necessary for certain explicitly specified risk and compliance purposes, such as complying with internal credit limits or fulfilling a fiduciary responsibility with respect to a third party's investment. However, transaction and position information could not be used for non-hedging purposes or shared with employees who participate in non-hedging decisions. (“Non-hedging” is defined in this context as activities to take, or liquidate, positions that are not bona fide hedging positions.)

So long as these restrictions are satisfied, the information may be shared on a real-time basis,

173

and may be used to effect reductions in non-hedging positions, but such reductions should be mandated by pre-established credit risk management procedures or compliance procedures regarding permissible investment activities. Within these restrictions, affiliated entities may use shared risk management services, and the information may be used for back-office recordkeeping and middle-office risk assessment, so long as such functions occur independently of any non-hedging decisions made by other employees who did not have access to shared information. Companies within an affiliated partnership or limited liability company structure (

i.e.,

where the relevant entities are under common ownership or control) may be considered to be affiliated for this purpose.

173

The Commission emphasizes that so long as the restrictions discussed here are satisfied, the information may be shared on a real-time basis, in addition to on an end-of-day basis. As noted above, the Commission does not consider knowledge of end-of-day position information to necessarily constitute knowledge of trading decisions, so long as the position information cannot be used to dictate or infer trading strategies, but has been concerned that the ability to monitor the development of positions on a real-time basis could constitute knowledge of trading decisions.

See

footnote 116, above. In response to questions from commenters, the Commission has considered the circumstances in which such information may be shared on a real-time basis, and the purpose of the discussion here is to explain when real-time sharing would be permissible.

Commenters proposed various alternative criteria which could be used to determine whether the positions of an owner and owned entity could be disaggregated.

174

However, after considering these suggestions, the Commission does not believe that the suggested criteria are significantly different from the criteria in rule 150.4(b)(2)(i). Also, some of the suggested criteria appear to be suitable for particular situations, but not necessarily all corporate groups.

175

Overall, the Commission believes that the criteria in rule 150.4(b)(2)(i) are appropriate and suitable for determining when disaggregation is permissible due to a lack of control and shared knowledge of trading activities.

176

174

See, e.g.,

CL-MidAmerican Feb 7 and Commodity Markets Council on July 25, 2014.

175

For example, one commenter recommended factors such as whether the owner and the owned entity have separate trading accounts, separate assets, separate lines of business, independent credit support and other specific indications of separation.

See

CL-MidAmerican Feb 7. In the Commission's view, criteria such as these are specific manifestations of the general principles stated in proposed rule 150.4(b)(2)(i) that the owner and the owned entity not have knowledge of the trading decisions of the other and trade pursuant to separately developed and independent trading systems. Similarly, whether the two entities do or do not have separate assets or separate lines of business would not necessarily indicate whether they are engaged in coordinated trading.

176

The criteria in rule 150.4(b)(2)(i) will be interpreted and applied in accordance with the Commission's past practices.

See

footnote 114, above.

C. Notice Filing Requirement in Rule 150.4(c)

1. Proposed Approach

The Commission proposed a notice filing requirement in proposed rule 150.4(c).

177

The proposed rule contemplated that the filing would be made before the exemption from aggregation is needed, since the filing would be a pre-requisite for obtaining the exemption. However, where a prior filing is impractical (such as where a person lacks information regarding a newly-acquired subsidiary's activities), the Commission proposed that the filing should be made as promptly as practicable.

178

177

The Commission also proposed an application procedure for ownership interests of more than 50 percent in proposed rule 150.4(c)(2). However, since the Commission is not adopting proposed rule 150.4(b)(3), that application procedure is not relevant and the Commission is not adopting proposed rule 150.4(c)(2). The text of rule 150.4(c)(2) in the final rule is a new provision discussed below.

178

See

Proposed Rule, 78 FR at 68962.

Even though a filing under proposed rule 150.4(c) could be made after an ownership or equity interest is acquired, the Commission proposed that the exemption from aggregation would not be effective retroactively because the filing is a pre-requisite to the exemption. The Commission reasoned that retroactive application of such filings could result in administrative difficulty in monitoring the scope of exemptions from aggregation and negatively affect the Commission staff's surveillance efforts.

179

See id.

Generally, the Commission proposed that entities could consolidate their filings in any efficient manner by, for example, discussing more than one owned entity in a single filing, so long as the scope of the filing is made clear.

180

The Commission also emphasized that if an entity determines to no longer apply an exemption (or if an exemption is no longer available), the entity would be required to inform the Commission by making a filing under proposed rule 150.4(c) because this would constitute a material change to the prior filing. Of course, once an exemption no longer applies to an owned entity, the person would be required to subsequently aggregate the positions of the entity in question.

181

180

In the Proposed Rule, the Commission clarified that section 8 of the CEA would apply to the information that the Commission may request under proposed rule 150.4(c), and sets out the extent to which such information will be treated confidentially.

See id.

181

See id.

2. Commenters' Views

Commenters addressed the time limit for making the proposed notice filing, the situations in which subsequent filings (after the initial notice) should be required, the consequences for failure to make a timely filing, the contents of the notice filing and how the notice filing should be signed.

Regarding the time limit for making the proposed notice filing, commenters said the rule should provide a reasonable period of time to file, in order to perform due diligence and gather information. Several commenters suggested that a three-month grace period would be reasonable before requiring aggregation, because this would be adequate to conduct the internal review to support and approve the notice filing.

182

See

CL-CME Nov 13; CL-PEGCC Nov 12; CL-FIA Nov 13; CL-FIA July 31; CL-ISDA Nov 12; CL-

Energy Transfer Nov 13. One of these commenters allowed that aggregation would be required if, during the grace period, an owner entity takes active steps to control and direct the trading strategy of a newly acquired owned entity.

See

CL-ISDA Nov 12. The three month time period was said to be adequate for a new owned entity to undertake post-closing diligence and operational measures to confirm whether seeking or claiming the aggregation exemption is necessary.

See

CL-Energy Transfer Nov 13. Another commenter suggested a grace period, but did not suggest a specific time period.

See

CL-SIFMA AMG Nov 13.

Regarding the situations in which subsequent filings (after the initial notice) should be required, several commenters stated that a subsequent filing should be required only in the event of a material change to the facts set forth in the relevant notice filing.

183

One commenter thought that a subsequent filing should be required only if there was a change in the ability to comply with the conditions of the exemption so that the criteria for disaggregation are no longer met, but not upon a mere internal reorganization of an affiliate which does not affect compliance with the criterion.

184

Another commenter said a subsequent filing should be required only when an owner entity is withdrawing the notice filing because it no longer maintains a requisite ownership interest in the owned entity, or in the event that the owner entity is no longer in compliance with the exemption criteria with respect to an owned entity or another material change in the contents of the notice filing has occurred.

185

183

See

CL-Working Group Nov 13; CL-EEI Nov 13; CL-FIA Nov 13; CL-NGSA Nov 13; CL-CME Nov 13.

184

See

CL-Energy Transfer Nov 13.

185

See

CL-ISDA Nov 12.

Regarding the consequences for failure to make a timely filing, one commenter proposed that the rule allow an entity five business days after exceeding a position limit to make the notice filing, if the entity is otherwise eligible to claim an exemption from aggregation and was deemed in excess of a position limit only because of aggregation from which it could have been exempt.

186

Another commenter said that if an entity is eligible to claim an exemption from aggregation, but fails to make a timely notice filing, that should constitute only a single violation for failure to make the filing, not a separate violation of position limits.

187

Other commenters addressed a slightly different situation, contending that if a market participant relies on an exemption from aggregation in good faith, but the Commission subsequently determines that an exemption was not available, the Commission should require aggregation only from the date of its determination.

188

186

See

CL-CME Nov 13.

187

This commenter asserted that this modification would not undermine the Commission's aggregation rule because it would apply only where an entity is entitled to an exemption from the aggregation requirement.

See

CL-FIA Nov 13.

188

See

CL-FIA Nov 13; CL-FIA July 31; CL-CME Nov 13; CL-IECA Nov 13.

Regarding the contents of the notice filing, two commenters requested that the Commission remove the requirement to provide a description of the relevant circumstances that warrant disaggregation in proposed rule 150.4(c)(1)(i), and instead require only a certification that the owner entity, as of the date of the filing, meets the conditions of the exemption with respect to each owned entity specified in the filing.

189

See

CL-ISDA Nov 12 and CL-PEGCC Nov 12.

Regarding signature of the notice filing, two commenters asked that the Commission clarify that the specific senior officer signing or submitting the notice filing may be any individual appropriately determined within the context of a particular owner entity's governance structure.

190

On the other hand, another commenter asserted that the rule should specifically require that the notice filing be signed by the CEO and the chief compliance officer or chief of risk management of the owner entity.

191

190

See

CL-ISDA Nov 12 and CL-PEGCC Nov 12.

191

This commenter felt that the signature requirement in the proposed rule appears casual and may lead the owner entity to assume that granting of exemptions from aggregation would be routine, while they should be exceptional.

See

CL-IATP Feb 10.

3. Final Rule

The Commission is adopting rule 150.4(c) largely as proposed, with certain modifications to reflect points made by commenters. Primarily, rule 150.4(c) includes a modification to provide for a 60-day period after acquisition of an ownership interest to conduct due diligence and prepare the notice filing.

192

In other words, a notice filing made within 60 days after an acquisition would have retroactive effect as of the date of acquisition. The Commission believes that a 60-day period would be adequate for the acquirer to perform due diligence and gather the information necessary to make the notice filing.

192

See

rule 150.4(c)(2). Rule 150.4(c)(2) is new text that was not included in the Proposed Rule, but rather is adopted in response to commenters' suggestions. As noted in footnote 177, above, the Commission is not adopting proposed rule 150.4(c)(2).

Rule 150.4(c) has also been modified to address a situation where a person is eligible to claim an exemption from aggregation, but does not make a filing at the proper time. In this case, rule 150.4(c)(6) provides that the failure to timely file the notice would be a violation of rule 150.4(c), but there would not be a violation of the aggregation requirement or of a position limit so long as the required filing is made within five business days after the person is aware, or should have been aware, that the notice has not been timely filed. That is, since the person was eligible to claim the exemption, aggregation was not required, but a violation of the filing requirement has occurred.

On the other hand, the Commission does not believe relief is appropriate if a person is not eligible to claim an exemption from aggregation, but erroneously believes that it is (even if the error occurs in good faith). In this case, the person could not “cure” the situation by taking steps to become eligible for the exemption, and then attempting to provide the notice filing with retroactive effect.

193

Where the person is not eligible for any exemption from aggregation and therefore aggregation is required, the ineligibility cannot be cured by making a later notice filing.

193

In this regard, the Commission disagrees with commenters who argued that if a market participant relies on an exemption from aggregation in good faith, but the Commission subsequently determines that an exemption was not available, the Commission should require aggregation only from the date of its determination.

See

CL-FIA Nov 13; CL-FIA July 31; CL-CME Nov 13; CL-IECA Nov 13.

As for a requirement to make filings subsequent to the initial filing, the Commission believes that a further filing is required only in the event of a material change to the facts set forth in the relevant notice filing, as is stated in rule 150.4(c)(4). The Commission understands that the Proposed Rule referred at one point to persons making one filing each year, but this was in the context of estimating how often filings might occur.

194

The Commission did not intend that notices be filed annually in the absence of a material change.

194

See

Proposed Rule, 78 FR at 68975.

As for the content of the notice filing, rule 150.4(c) includes the same requirements as were in the proposed rule. The Commission has not removed the requirement to provide a description of the relevant circumstances that warrant disaggregation, because it believes that a short description of circumstances helps the Commission and its staff to understand the context of the filing. In this regard, the Commission notes that under the earlier proposed amendment to part 151, the person claiming the exemption would

have been required to demonstrate compliance with each condition of relief, which would likely include an organizational chart showing the ownership and control structure of the involved entities, a description of risk management and information-sharing systems, and an explanation of trade data and position information distribution.

195

The Commission has not specifically adopted this guidance for rule 150.4(c). Instead, the Commission notes the distinction between rule 150.4(c)(1)(i), which requires a description of the relevant circumstances that warrant disaggregation to be included in each filing, and rule 150.4(c)(3), which allows the Commission to obtain information demonstrating that the person meets the requirements of the exemption in those cases where the Commission calls for such information.

196

195

See

Proposed Rule, 78 FR at 68952.

196

The Commission is adopting a delegation of authority to the Director of the Division of Market Oversight or the Director's designee to call under rule 150.4(c)(3) for additional information from a person claiming an aggregation exemption.

See

rule 150.4(e)(1)(ii). This parallels a provision in proposed rule 150.4(e)(1) delegating authority to call for additional information from a person claiming the exemption in proposed rule 150.4(b)(9) (renumbered (b)(8) in the final rule). The subparagraphs in rule 150.4(e)(1) have been renumbered from the proposed rule, because as noted in footnote 77, the Commission is not adopting proposed rule 150.4(e)(1)(i), which contained a delegation of authority referencing proposed rule 150.4(b)(3). Also, the cross-references in rule 150.4(e)(1)(i) have been corrected to refer to paragraph (b)(8)(iv) and paragraph (b)(8).

With regard to signature of the notice and the certification requirement in rule 150.4(c)(1)(ii), the Commission believes that rule 150.4(c) is satisfied when the notice containing the statement required by 150.4(c)(1)(ii) is signed by a senior officer of the entity claiming relief from the aggregation requirement or, if the entity does not have senior officers, a person of equivalent authority and responsibility with respect to the entity.

D. Other Issues Related to Aggregation on the Basis of Ownership

The Proposed Rule discussed or requested comment on several other issues related to aggregation due to ownership of another entity, or relief from that requirement. In addition, commenters raised certain miscellaneous issues related to the rule. These issues were the effective date for the final rule, how entities that hold an interest in the entity that submits a notice should be treated (

i.e.,

the treatment of “higher-tier entities”), whether aggregation should be required on a basis pro rata to the ownership interest in the owned entity, and how the aggregation rule would interact with other Commission rules.

1. Proposed Approach

Regarding the effective date for the final rule, the Commission discussed in the Proposed Rule a potential transition period for application of the requirement of aggregation based on ownership. However, the Commission concluded that this would not be necessary because the Proposed Rule would apply to existing position limits currently in effect and would provide further aggregation exemptions.

197

Therefore, the Proposed Rule did not suggest any compliance period or delayed effectiveness of the final rule.

197

See

Proposed Rule, 78 FR at 68959.

Regarding the treatment of higher-tier entities, proposed rule 150.4(b)(9)

198

provided that if an owned entity has filed a notice under proposed rule 150.4(c), any person with an ownership or equity interest of 10 percent or greater in the owned entity need not file a separate notice identifying the same positions and accounts previously identified in the notice filing of the owned entity, if such person complies with the conditions applicable to the exemption specified in the owned entity's notice filing, other than the filing requirements; and does not otherwise control trading of the accounts or positions identified in the owned entity's notice. Further, proposed rule 150.4(b)(9) provided that any person relying on the exemption for higher-tier entities must provide to the Commission information concerning the person's claim for exemption called for by the Commission.

198

As noted above, because the Commission is not adopting proposed rule 150.4(b)(3), paragraphs (b)(4) to (b)(9) of proposed rule 150.4 are renumbered in the final rule as paragraphs (b)(3) to (b)(8), respectively. Thus, final rule 150.4(b)(8) corresponds to proposed rule 150.4(b)(9).

In the Proposed Rule, the Commission noted that the proposed approach for higher-tier entities should significantly reduce the filing requiremen

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