Revision of Federal Speculative Position Limits and Associated Rules

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 17, 18, and 150

Revision of Federal Speculative Position Limits and Associated

Rules

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') has

long established and enforced speculative position limits for futures

contracts on various agricultural commodities. On April 7, 1993, the

Commission promulgated interim final

[[Page 38526]]

rules amending Federal speculative position limits. The interim

amendments generally maintained the existing speculative position limit

levels for the delivery months and increased limit levels for the

deferred months, at levels below those originally proposed. The

Commission is proposing to raise the levels of speculative position

limits for the deferred months to the levels originally proposed.

In addition, the Commission is proposing to codify various policies

relating to the requirement that exchanges set speculative position

limits as required by rule 1.61, 17 CFR 1.61. These relate to the

levels which the Commission has approved for such rules, and to various

exemptions from the general requirement that exchanges set speculative

position limits which the Commission has approved over the years.

Specifically, the Commission is proposing to codify an exemption

permitting exchanges to substitute position accountability rules for

position limits for high volume and liquid markets. The Commission is

proposing elsewhere in this issue of the Federal Register to amend its

guideline for application for contract market designation to conform it

to the changes to the speculative position limit rules proposed herein

that apply at initial contract designation. See, Guideline No. 1, 17

CFR Part 5, Appendix A.

The Commission is also proposing to amend the applicability of the

limited exemption from non-spot month speculative position limits under

Commission rule 150.3, 17 CFR 150.3, for entities that authorize

independent account controllers to trade on their behalf. Specifically,

the Commission is proposing to amend the definition of entities

eligible for this relief under Commission rule 150.1(d), 17 CFR

150.1(d), to expand the categories of eligible entities and to extend

it to the separately incorporated affiliates of an eligible entity.

Finally, the Commission is proposing to amend its rule on

aggregation. In particular, the Commission is proposing to clarify the

applicability of a limited partnership exemption to limited partners or

shareholders with less than a 25% ownership interest, or to pooled

trading accounts with ten or fewer account owners. The Commission is

also proposing to amend its rules to clarify that a commodity pool

operator's principals and its affiliates are treated the same as the

commodity pool operator itself for purposes of the Commission's

aggregation rule.

DATES: Comments must be received by September 15, 1998.

ADDRESSES: Comments should be mailed to the Commodity Futures Trading

Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington,

D.C. 20581, attention: Office of the Secretariat; transmitted by

facsimile at (202) 418-5521; or transmitted electronically at

[[email protected]]. Reference should be made to ``Speculative

Position Limits.''

FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel,

Division of Economic Analysis, Commodity Futures Trading Commission,

Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581,

(202) 418-5260, or electronically, [PA[email protected]].

SUPPLEMENTARY INFORMATION:

I. Background

Speculative position limits have been a tool for regulation of

futures markets for over sixty years. Since the Commodity Exchange Act

of 1936, Congress consistently has expressed confidence in the use of

speculative position limits as an effective means of preventing

unreasonable or unwarranted price fluctuations.\1\ Section 4a(1) of the

Commodity Exchange Act (Act), 7 U.S.C. 6a(1), provides the Commission

with authority to:

\1\ See, H.R. Rep. No. 421, 74th Cong., lst Sess. 1 (1935); See

also, H.R. Rep. No. 624, 99th Cong., 2d Sess. 44 (1986). Section

4a(1) of the Commodity Exchange Act, 7 U.S.C. 6a(1), makes the

explicit finding that:

[e]xcessive speculation in any commodity under contracts of sale

of such commodity for future delivery made on or subject to the

rules of contract markets causing sudden or unreasonable

fluctuations or unwarranted changes in the price of such commodity,

is an undue and unnecessary burden on interstate commerce in such

commodity.

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fix such limits on the amount of trading which may be done or

positions which may be held by any person under contracts of sale of

such commodity for future delivery on or subject to the rules of any

contract market as the Commission finds are necessary to diminish,

eliminate, or prevent such burden.

The Commission directly administers speculative position limits on

futures contracts for most of the domestic agricultural commodities

enumerated in section 2(a)(1) of the Act. See, 17 CFR Part 150. Prior

to the Act's amendment in 1974 which expanded its jurisdiction to all

``services, rights and interests'' in which futures contracts are

traded, only these enumerated commodities were regulated. Both prior to

and after the 1974 amendments to the Act, futures markets which traded

commodities not so enumerated applied speculative position limits by

exchange rule, if at all. In 1981, the Commission promulgated rule

1.61, requiring exchanges to adopt rules setting speculative position

limits for all contract markets not subject to Commission-set

speculative position limits. Since then, all contract markets have been

subject to either Commission or exchange-set speculative position

limits.\2\ Responsibility for enforcement of speculative position

limits is shared by the Commission and the exchanges.\3\

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\2\ Commission rule 1.61, 17 CFR 1.61, requires that, absent an

exemption, exchanges adopt and enforce speculative position limits

for all contract markets which are not subject to the Commission-set

limits. In addition, Commission rule 1.61 permits exchanges to adopt

and enforce their own speculative position limits for those

contracts which have Commission speculative position limits, as long

as the exchange limits are not higher than the Commission's.

\3\ Section 4a(e) provides that a violation of a speculative

position limit established by a Commission-approved exchange rule is

also a violation of the Act. Thus, the Commission can enforce

directly violations of exchange-set speculative position limits as

well as those provided under Commission rules.

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The Commission periodically has reviewed its policies and rules

pertaining to each of the three elements of the regulatory framework

for speculative position limits--the levels of the limits, the

exemptions from them (in particular, for hedgers), and the policy on

aggregating accounts.\4\ The Commission, in this notice of proposed

rulemaking, is proposing to raise the levels of the Commission

speculative position limits and to codify a number of broad exemptions

from the requirement of rule 1.61 that exchanges establish speculative

position limits for all contracts not subject to Commission

[[Page 38527]]

limits. These exemptions to rule 1.61 were established through a series

of Commission interpretations. The Commission is also proposing to

broaden its speculative position limit exemption under rule 150.3 for

independent account controllers and to amend its aggregation policy.

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\4\ Initially, for example, the Commission redefined ``hedging''

(42 FR 42748 (August 24, 1977)), raised speculative position limits

in wheat (41 FR 35060 (August 19, 1976)), and in 1979 issued its

statement of policy on aggregation of accounts and adoption of

related reporting rules (1979 Aggregation Policy), 44 FR 33839 (June

13, 1979).

Subsequently, the Commission modified and updated speculative

position limits by issuing a clarification of its hedging definition

with regard to the ``temporary substitute'' and ``incidental'' tests

(52 FR 27195 (July 20, 1987)) and guidelines regarding the exemption

of risk-management positions from exchange-set speculative position

limits in financial futures contracts. 52 FR 34633 (September 14,

1987). Moreover, in 1988, the Commission promulgated Commission rule

150.3(a)(4), an exemption from speculative position limits for the

positions of multi-advisor commodity pools and other similar

entities which use independent account controllers. The Commission

subsequently amended Commission rule 150.3(a)(4), broadening its

applicability to commodity trading advisors and simplifying and

streamlining the application process. 56 FR 14308 (April 12, 1991).

In 1991, the Commission solicited public comment on, and

subsequently approved, exchange requests for exemptions for futures

and option contracts on certain financial instruments from the

Commission rule 1.61 requirement that speculative position limits be

specified for all contracts. 56 FR 51687 (October 15, 1991).

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II. Commission Speculative Position Limit Levels

In 1987, the Commission completely revised Commission speculative

position limits. 52 FR 38914 (October 20, 1987). As part of these

revisions, the Commission added Commission speculative position limits

for soybean meal and soybean oil, which, because of an historical

anomaly, previously were not included. The Commission also amended the

structure and levels of the Commission speculative position limits. It

restructured speculative position limits by establishing them by

contract market, rather than generically by commodity. The Commission

proposed generally to increase limit levels from the spot-month limits,

which were not proposed to be increased, to progressively higher

individual-month and all-futures-combined limits. However, the rules as

promulgated generally did not provide for such stepped increases.

Instead, the amended rules generally maintained the then existing

structure of a uniform spot- and single-month level and only increased

the all-months-combined level.\5\

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\5\ However, the Commission did set stepped increases for the

cotton contract. Those commenting on the grain and soybean complex

limits opposed telescoping limits, in part, in an attempt to promote

greater liquidity in the back months. In contrast, those commenting

on the proposed speculative position limits in cotton did not object

to the higher single-month limit level. 52 FR 38916.

In light of the strong preferences expressed by the commenters

at that time, and the range of acceptable solutions which the data

supported, the Commission acceded to the views of the commenters.

Subsequently, as it expected, the Commission's experience monitoring

both Commission and exchange-set limits with stepped increases was

favorable. None of the adverse consequences hypothesized by the

opposing commenters occurred.

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In 1991, the Chicago Board of Trade (CBT), the New York Cotton

Exchange (NYCE), the Kansas City Board of Trade (KCBT) and the

Minneapolis Grain Exchange (MGE) petitioned the Commission to increase

further the levels of Commission speculative position limits.\6\ On

August 2, 1991, the Commission published in the Federal Register notice

of, and requested public comment on, these petitions for rulemaking. 56

FR 37049.

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\6\ These petitions requested that the Commission amend its

rules to increase Commission speculative position limits in the CBT

corn, wheat, oats, soybeans, soybean oil, and soybean meal futures

contracts, in the NYCE's cotton No. 2 futures contract, and in the

KCBT's and MGE's wheat futures contracts. The CBT also requested

that the Commission expand the current exemption for spread

positions between months within the same crop year to an exemption

for spread positions between any months, outside of the spot month,

regardless of the crop year and to increase the overall level of

this exemption. The CBT separately sought Commission approval for

increases to the exchange-set speculative position limits on these

commodities.

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On April 13, 1992, the Commission proposed a number of revisions to

the structure and levels of Commission speculative position limits. 57

FR 12766. The Commission proposed these revisions to the levels of the

speculative position limits based upon two criteria: (1) the

distribution of speculative traders in the markets; and (2) the size of

open interest. Previously, the Commission had given little weight to

the size of open interest in the contract in determining the

appropriate speculative position limit level. The Commission noted,

however, that the size of open interest and the distribution of

speculative traders had not increased at the same rate over time.

Accordingly, the Commission determined that, in proposing the new

levels, both criteria should be taken into account. The Commission

noted that:

[t]his approach will permit speculative position limits to reflect

better the changing needs and composition of the futures markets,

while adhering to the policies of the Act and Commission Rule 1.61.

Although the Commission in setting levels is proposing to place

greater reliance on the criterion of percentage of open interest

represented by a particular level than previously, it has always

recognized that there is a range of acceptable limit levels [.] * *

* even when relying on a single criterion * * *.

57 FR 12770.

In proposing these increases to the limit levels, the Commission

reasoned that, as the total open interest of a futures market

increased, speculative position limit levels could be raised. The

Commission therefore applied the open interest criterion by using a

formula that specified appropriate increases to the limit level as a

percentage of open interest. Specifically, the Commission proposed

combined futures and option speculative position limits for both a

single month and for all months combined at the level of 10% of open

interest up to an open interest of 25,000 contracts, with a marginal

increase of 2.5% thereafter. It reasoned that such levels were ``not

excessively large under the criteria of Commission rule 1.61.'' \7\ Id.

The Commission also determined that this analysis did not apply to

spot-month levels, which are ``based most appropriately on an analysis

of current deliverable supplies and the history of various spot-month

expirations.'' Id.

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\7\ Providing for a marginal increase to the speculative

position limit of 2.5% was ``based upon the universal observation

that the size of the largest individual positions in a market do not

continue to grow in proportion with increases in the overall open

interest of the market.'' Id. The Commission also proposed a minimum

of 1,000 contracts.

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The Commission received 63 comments in response to the proposed

rules.\8\ Typically, commodity pool operators, commodity trading

advisors and futures commission merchants strongly favored the

amendments. Most agricultural producers and their representative

organizations strongly opposed any increase to the speculative position

limits. Others, however, recommended that the Commission proceed, but

in a more cautious manner. In particular, they recommended that the

Commission raise speculative position limits on a phased or test basis.

These commenters advocated taking additional time to study the need

for, and the possible effects of, further increasing speculative

position limits, and in their view, the trial implementation of

expanded speculative limits would provide such an additional

opportunity.

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\8\ Those commenters included three futures exchanges; a broad-

based futures industry association; four futures commission

merchants; 26 commodity pool operators, commodity trading advisors

or associations of such entities; 20 groups or firms representing

agricultural interests; eight individual agricultural producers; and

one exchange member. In addition, the proposed rules were a topic of

discussion at the October 19, 1992, meeting of the Commission's

Agricultural Advisory Committee.

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Based on its consideration of the comments received and its

favorable administrative experience with the rule's prior amendment,

the Commission in April 1993 adopted interim final rules to Commission

speculative position limits. These interim amendments increased the

position limit levels by half of the increase originally proposed, in

two steps. 58 FR 18057 (April 7, 1993). The first phase, which took

effect on June 7, 1993, increased speculative position limits by

combining the previously separate futures and option limits. The second

phase, which took effect on March 31, 1994, increased the back-month

speculative position limits halfway to the level originally proposed by

the Commission.

When the Commission adopted the interim final rules, it provided

notice that the comment period on the original proposed levels would be

reopened in March 1994, coinciding with implementation of the second

phase of the interim rules. The comment period

[[Page 38528]]

was kept open for a year, closing on April 30, 1995. Anticipating that

it would determine whether to adopt the levels originally proposed

based upon trading experience under the interim rules, the Commission

directed the Division of Economic Analysis (Division) to study the

effects of the phased increases.

In April 1995, the Division reported to the Commission on the

interim rule's effects. The report reviewed trading under both phases

of the interim rules over a period of eighteen months and was based

upon an analysis of extensive Commission and exchange data relating to

individual and aggregate positions of reportable traders, as well as

inter- and intra-day price series for the entire period of 1988 through

1994. The report concluded that overall the impact of the interim final

rules on actual, observed large trader position was modest and that any

changes in market performance were most likely attributable to factors

other than changes in the rules.

Specifically, the report concluded that the phase 1 and phase 2

modifications of futures and option limits had little impact on the

overall activities of large traders during the first 18 months of the

interim final rules with relatively few speculative traders increasing

the size of their positions above the previously permitted levels. The

report further concluded that the periods of higher volatility and

measurable changes in market liquidity observed in particular markets

during the first 18 months of the interim rules appear to have been a

result of rapidly-changing cash market conditions rather than the

amended limits. Finally, the report concluded that there was no

discernable negative impact on commercial use of the markets during the

time period studied.

Only 13 comment letters were received during the post-phase 2

comment period, none from agricultural interests. Generally, all of the

commenters supported increasing Commission speculative position limit

levels as originally proposed. However, at that time concerns began to

arise regarding the continued viability of the delivery provisions of

the CBT's corn, soybean, and wheat futures contracts. The Commission

directed its attention to resolving those surveillance-related concerns

before further raising speculative position limit levels. Accordingly,

the Commission took no further action on the proposed rules, and they

remain pending.

The Commission recently reviewed open interest and trader position

data to determine market changes since the Division's report to it

following implementation of the phase 2 limits. With the exception of

CBT oats, the markets' 1997 open interest substantially exceeded their

1994 open interest.\9\ Although the Division's report concluded that

the phase 1 increases to speculative position limits had little

discernable impact on trader behavior, since then the number of large

traders in these markets, the general size of their positions and the

number of large traders holding positions above the phase 1 speculative

position limits have increased. In addition, a number of traders now

frequently hold positions greater than 80% of the current phase 2 all-

months-combined level. These increases suggest that, under both of the

criteria the Commission has applied in the past--size of traders'

positions and open interest--expansion of the back month speculative

position limits to the levels originally proposed is appropriate.

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\9\ In its interim final rulemaking, the Commission determined

to maintain a parity of limit levels for wheat traded on the CBT,

KCBT, and MGE. 58 FR 17979-179080. Accordingly, only data from the

larger CBT wheat market were analyzed.

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Accordingly, the Commission is reproposing to raise the back month

speculative position limits to the levels it proposed initially.

Consistent with its previous determination, the Commission is not

proposing any change to spot-month limits.\10\ The Commission has

determined to seek public comment on the reproposed levels because

commenters may have modified their views or additional persons may have

formed an opinion during the extended period of time since the comment

period closed. The following table compares the phase 2 speculative

position limits now in effect for selected contracts to those that the

Commission is reproposing.

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\10\ The Commission originally proposed to increase the spot

month limit in oats based upon changes in the cash market. See 57 FR

at 12770, n. 17. The increases noted at the time have since

reversed. Accordingly, the Commission is not proposing any change to

the current spot month limit for oats.

Speculative Position Limits

[by contract] \11\

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Current levels (as of March 31, 1994) Reproposed levels

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Contract Single Single

Spot month month All months Spot month month All months

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CHICAGO BOARD OF TRADE

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Corn.............................. 600 3,400 6,000 600 5,500 9,000

Oats.............................. 400 900 1,200 400 1,000 1,500

Soybeans.......................... 600 2,400 4,300 600 3,500 5,500

Wheat............................. 600 2,100 3,200 600 3,000 4,000

Soybean Oil....................... 540 2,000 3,100 540 3,000 4,000

Soybean Meal...................... 720 2,200 3,400 720 3,000 4,000

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MIDAMERICA COMMODITY EXCHANGE

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Corn.............................. 600 1,200 1,200 600 1,200 1,200

Soybeans.......................... 600 1,200 1,200 600 1,200 1,200

Wheat............................. 600 1,200 1,200 600 1,200 1,200

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MINNEAPOLIS GRAIN EXCHANGE

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Hard Red Spring Wheat............. 600 2,100 3,200 600 3,000 4,000

White Wheat....................... 600 1,200 1,200 600 1,200 1,200

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[[Page 38529]]

NEW YORK COTTON EXCHANGE

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Cotton No. 2...................... 300 1,600 2,500 300 2,500 3,500

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KANSAS CITY BOARD OF TRADE

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Hard Winter Wheat................. 600 2,100 3,200 600 3,000 4,000

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\11\ The limits are shown here in terms of the contract size traded on each exchange. The size of the

speculative position limit being proposed is based upon the current contract size. Any subsequent change in

contract size would require a conforming adjustment to the limit. For comparative purposes, the MCE limits are

expressed here as though its contracts were for 5,000 bushels, the contract size traded on the CBT. MCE

contracts are actually for 1,000 bushels, and its limits therefore would be five times the size shown on the

table.

III. Exemptions From Required Exchange-set Speculative Position

Limits

Although Commission rule 1.61 generally requires that all contract

markets not subject to Commission speculative position limits impose

exchange-set speculative position limits, the Commission over the years

has approved a number of significant exemptions from this requirement.

These exemptions were approved by the Commission under Commission rule

1.61(e), a broad exemptive provision enabling the Commission to exempt

contract markets ``consistent with the purposes of this section.'' In

each case, the Commission considered and granted such an exemption by

approving a proposed rule change of a contract market.

The first of these exchange rule changes was submitted for

Commission approval by the Chicago Mercantile Exchange (CME). In

requesting public comment on the proposed rule change, the Commission

explained that it was considering granting exemptive relief based upon

one of the factors included in rule 1.61 for setting speculative

positions limit levels--the ``breadth and liquidity of the cash market

underlying each delivery month and the opportunity for arbitrage

between the futures market and cash market in the commodity underlying

the futures contract.'' See, 56 FR 51687, 51688 (October 15, 1991),

citing Commission rule 1.61(a)(2). The Commission further explained

that, ``(b)ased upon its over ten-years experience in administering

rule 1.61, the Commission believes that exemptions for three classes of

futures and option contacts with varying degrees of exchange

supervision for each class could be appropriately considered * * *.''

These three classes were based upon the depth and liquidity of the

underlying cash market and the ease of arbitrage between the futures

and underlying cash market. The three classes were futures and option

contracts on foreign currencies and futures and option contracts on two

broad categories of financial instruments. The two categories for

futures and option contracts on financial instruments were based upon

the relative degree of liquidity in both the futures and option markets

and in the cash market for the underlying instrument. The Commission

subsequently added a fourth exemptive class, comprised of contracts for

certain physical commodities. See, 57 FR 29064.

The Commission explained that it would exempt contracts in major

foreign currencies from all of rule 1.61's requirements based upon

their nearly inexhaustible deliverable supply, the very highly liquid

underlying cash markets and the great ease of arbitrage between the

cash and futures markets thereon. Contract markets which have been so

exempted are the NYCE U.S. dollar index and NYFE foreign

currencies.\12\

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\12\ THe CME and the Philadelphia Board of Trade (PBOT), as a

matter of exchange choice, have not included their foreign currency

contracts in this category, instead applying to them a position

accountability rule.

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The second category of exempt contracts applies to futures and

option contracts on financial instruments which exhibit the highest

degree of liquidity in both the futures and cash markets, which are

readily arbitraged. The Commission noted that for this class of

contract the required speculative position limit could be replaced with

a position accountability rule. Position accountability rules impose a

level which triggers distinct reporting responsibilities by a trader at

the request of the applicable exchange. The CME Eurodollar contracts

and the CBT U.S. Treasury bond contracts were exempted under this

category.\13\

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\13\ As noted above, the CME and the PBOT voluntarily apply a

``category 2'' position accountability rule to their foreign

currency contracts.

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The third class of exemptions was not contract markets on financial

instruments having a highly liquid futures or cash market, but not of

the same magnitude of liquidity as those in the highest class. For this

class of contract, the position accountability rule should include, in

addition to the specified reporting requirements, automatic consent of

the trader not to increase further those positions which exceed the

triggering level when so ordered by the exchange acting in its

discretion.\14\ See, 56 FR 51688-89. Examples of contract markets

falling within this category include CBT U.S. Treasury notes and

Eurodollars, NYCE 5-year U.S. Treasury notes, CME one-month LIBOR, and

MCE U.S. Treasury bonds.

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\14\ The Commission also noted that all such exemptions under

rule 1.61(e) must include appropriate plans for the continued

surveillance and exchange supervision of trading in these contract

markets and for monitoring and review of the operation of the

exemption.

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Finally, the Commission noted that certain contractors for tangible

commodities such as precious metals and energy contracts are

characterized by underlying cash markets with liquidity equivalent to

or greater than certain of the financial futures and options which the

Commission exempted. Because of the limitation on the delivery

mechanisms of physically-delivered contracts, however, the Commission

limited the exemption for such contracts on physical commodities to the

deferred trading months, requiring retention of a spot-month

speculative position limit. COMEX gold,

[[Page 38530]]

silver, and copper contracts are examples of such contracts.\15\

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\15\ Although the Commission cited certain energy contracts as

eligible for such treatment, the New York Mercantile Exchange

(NYMEX) has not sought such treatment for its contract markets.

COMEX was acquired by NYMEX and is now a division of NYMEX.

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These policies were first considered by the Commission in

connection with specific exemptive requests by exchanges for existing

contracts and, because they are based in part on the liquidity of the

futures markets, are applicable only to existing markets. Except for

several applications for designation of new foreign currency futures

adoption contracts,\16\ the Commission has approved few additional

exemptions since granting the initial exemptive requests.\17\ Moreover,

the Commission has never formally promulgated these exceptions, nor has

it incorporated these policies into Guideline No. 1, the Commission's

guideline for exchange compliance with the requirements for contract

market designation. As a consequence, the exemptions, which appear only

in a number of Federal Register notices, are not readily accessible to

those unfamiliar with Commission precedent.

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\16\ Although the Commission exempted foreign currency contracts

from the requirement for position accountability rules based upon

the recognized liquidity of the underlying cash markets in the major

foreign currencies, it has also approved, as a matter of exchange

preference, ``category 2'' position accountability rules (a purely

informational provision) for a number of such contracts. Futures and

option contracts based on a non-major foreign currency, which are

required to include position accountability rules, have been

approved for ``category 4'' position accountability rules with spot-

month speculative position limits.

\17\ However, the Commission did approve for position

accountability rules several newly designated contracts which are

spreads between existing contracts on financial instruments that are

the subject of contracts already having position accountability

rules. These spread contracts, the CBT Yield Curve Spreads, were

approved for the ``category 4'' position accountability exception.

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Similarly, the open-interest criterion and numeric formula used by

the Commission in its 1991 proposed amendment of Commission speculative

position limits, which have provided the most definitive guidance by

the Commission to date on acceptable levels for speculative position

limits for tangible commodities, have not been promulgated as

Commission rules.\18\ Rather, the staff routinely has applied that

formula (and its associated minimum levels) as a matter of

administrative practice when reviewing proposed exchange speculative

position limits under Commission rule 1.61. The staff examines exchange

speculative position limit rules in connection with its review of

applications for designation of futures and option contracts and of any

subsequent proposed increases to those limits. Despite the formula's

widespread use as a rule of thumb, it is not readily accessible in its

present form.

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\18\ In addition, in reviewing applications for contract

designation for tangible commodities, the staff has relied upon the

Commission's formulation providing for a minimum level of 1,000

contracts for non-spot-month speculative position limits. Moreover,

the Commission has routinely approved a level of 5,000 contracts for

non-spot months in applications for designation of financial futures

and energy contracts and that level has become a rule of thumb as a

matter of administrative practice.

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The Commission is proposing to promulgate these informal policies

as rules and, in a companion notice of proposed rulemaking located

elsewhere in this edition of the Federal Register, is proposing

conforming amendments to Guideline No. 1. Promulgating these policies

within a single section of the Commission's rules will increase

significantly their accessibility and clarify their terms.

As proposed by the Commission, the rules clarify several issues

that the policies do not address. First, the proposed rules make clear

that no speculative position limit or position accountability rule is

required for designated contract markets in major foreign currencies.

No such limitations are necessary because of the nearly inexhaustible

deliverable supply of the major foreign currencies. Such foreign

currencies are defined in the Commission's fast-track designation rule

as a foreign currency ``for which there is no legal impediment to

delivery and for which there exists a liquid cash market.'' 17 CFR

5.1(a)(2)(i). The Commission is proposing that contract markets in

other, less liquid foreign currencies be treated as a futures or option

contract on any other financial instrument or product.\19\

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\19\ Although the Commission approved an exchange proposal to

apply ``category 2'' position accountability rules, which is a

purely informational provision, to its futures and option contracts

on major foreign currencies, the Commission does not require any

position accountability rule for such contracts. Futures and option

contracts on non-major foreign currencies are required to include a

position accountability rule. Accordingly, the Commission approved a

``category 4'' position accountability exception (spot month limit

and a provision enabling the exchange to order a trader not to

increase further a position) for such a non-major foreign currency.

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The remaining position accountability categories are proposed to

apply only to existing futures and option contracts.\20\ Consistent

with the policies, under the proposed rule, the type of position

accountability rule that applies to a particular contract market is

determined by the liquidity of the futures market, the liquidity of the

cash market and the Commission's oversight experience. The Commission

is proposing, however, to restate the criteria with greater clarity and

precision, particularly in measuring the necessary levels of liquidity

of the futures and option markets.\21\

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\20\ As explained above, the only instances where position

accountability rules were permitted in the absence of prior trading

history was where the contracts were closely related to existing

contracts for which position accountability rules had already been

approved.

\21\ The policy provided that position accountability could be

based on either a liquid futures or cash market. The Commission is

proposing to require that both the cash and futures markets be

liquid. Accordingly, no futures contract can meet the proposed

rule's requirement at the time of its initial designation and must

first establish a trading history. The Commission will apply the

rule prospectively, and any designated contracts or pending

designation applications that have position accountability rules in

place in reliance on the liquidity of the cash market alone may

continue to rely on the policy. The Commission is seeking comment

specifically on this proposed change, its proposed application only

to designation applications filed after the effective date of the

rule and whether the proposed rule would entail any adverse

consequences.

---------------------------------------------------------------------------

The Commission is proposing to quantify the necessary levels of

futures market liquidity similar to its use of a formula to set (and to

increase) speculative position limits. The formula is based upon a

market's open interest, a measure of its overall relative size.\22\

When substituting position accountability rules for speculative

position limits, however, the liquidity of the futures and option

market--measured by volume of trading--is also particularly

important.\23\ Accordingly, the Commission is proposing to restate the

futures market liquidity criterion as a required minimum level of open

interest combined with specified, increasing levels of trading volume.

As the level of open interest increases, the extent of the exemptive

relief increases as well.

---------------------------------------------------------------------------

\22\ The rationale for this criterion is that, as a market's

overall size grows, the size of the individual speculative positions

that it can absorb and carry without adverse impact increases.

\23\ A liquid market is one which has sufficient trading

activity to enable individual trades coming to a market to be

transacted without significantly affecting the price. A high degree

of liquidity in the futures and option market better enables traders

to arbitrage these markets with the underlying cash markets. Where

the underlying cash markets in turn are very liquid and have

extremely large deliverable supplies, the threat of market

manipulation or distortions caused by large speculative positions is

lessened. See, 56 FR at 51689.

---------------------------------------------------------------------------

Specifically, the Commission is proposing that contract markets be

eligible for position accountability rules in the non-spot months if

they have a minimum month-end open interest of 50,000 contracts and an

average daily volume of 5,000 contracts, both measured in terms of all

months combined for the most recent calendar year. Financial futures

contracts, as well

[[Page 38531]]

as contracts on tangible commodities having the requisite cash market

liquidity, are eligible for this proposed exemptive treatment.

Financial futures contracts having a minimum month-end open interest of

50,000 contracts and an average daily trading volume of 25,000

contracts need not impose a spot month limit, but must have a position

accountability rule that enables the exchange to order traders not to

increase further their positions. Financial futures contracts having a

minimum month-end open interest of 50,000 contracts and an average

daily trading volume of 100,000 contracts may have a position

accountability rule which only requires that traders provide specified

information to the exchange if so ordered.

In addition to a liquid futures market, the Commission has looked

to the liquidity in the underlying cash market and to its

administrative experience in approving position accountability rules

for particular contract markets. The Commission is not proposing to

quantify an acceptable measure of cash market liquidity. Cash markets

differ greatly, and many are decentralized, making it difficult to

propose a uniform means of measuring their liquidity. Generally,

however, in assessing the liquidity of cash markets, the Commission

looks to the depth of the market and the tightness of bids and offers.

The final criterion--administrative experience--is based upon a

contract market's surveillance history, whether it has been subject to

problem expirations or liquidations and whether its terms or conditions

are consistent with current cash market conditions.

IV. Issues Relating to Aggregation and Exemptions for Independently

Controlled Accounts

Section 4a of the Act provides that, in determining whether a

position exceeds the speculative position 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.

The Commission and its predecessor agency have interpreted the

``held or controlled'' standard as applying both to ownership of

positions or to control of trading decisions. Each aggregation

criterion is applied separately.\24\ However, beginning in 1979, the

Commission has recognized a number of exceptions from the general

principle. In its ``Statement of Policy on Aggregation of Accounts,''

44 FR 83839 (June 13, 1979) (1979 Aggregation Policy), the Commission

determined that a futures commission merchant (FCM) need not aggregate

the discretionary trading accounts or customer trading programs through

which a trader affiliated with, but independent of, the FCM directs

trading of customer-owned positions or accounts. To demonstrate the

trader's independence, the FCM must maintain only supervisory control

over the trader, and trading decisions in the discretionary account or

program must be made independently of trading decisions in all other

accounts held by the FCM.\25\ Id. at 33843

---------------------------------------------------------------------------

\24\ See, e.g., Commission rule 18.01 (``holds, has a financial

interest in or controls''). Using two independent criteria may lead

to positions being aggregated in more than one manner. Although the

Commission's large trader reporting system routinely aggregates

positions reported by FCMs on the basis of the control criterion,

Commission staff may direct FCMs to report particular accounts on

the basis of ownership, as well. In addition, the Commission may

require by special call that individual traders file large-trader

reports for all positions which they own or control.

\25\ The 1979 Aggregation Policy offered guidance on the

criteria considered in determining whether the FCM exercises control

over the trading decisions of the customer discretionary accounts or

trading programs. These included the customer account agreement,

advertising, the agreements between the FCM and its employee or

other trader, the degree of supervision, the confidentiality of the

program's trading decisions, reliance on the FCM for market

information, and financial investment by the FCM in the program

greater than 10% and common trading patterns. Id. at 33844.

---------------------------------------------------------------------------

The 1979 Aggregation Policy was based in part on structural changes

made by the futures industry to respond to the increased acceptance of

professional management of trading accounts and the use of trading

programs. Id. at 83840. Further responding to this continuing trend,

the Commission in 1988 promulgated rule 150.3, 17 CFR 150.3, an

exemption from speculative position limits for commodity pools or

similar entities which use independent account controllers. 53 FR 41563

(October 24, 1988). Commodity pools, pension funds, and other similar

entities are required to aggregate their positions as the owner of the

trading accounts, even if those accounts are traded independently by

multiple independent account controllers. Commission rule 150.3

exempted such entities which use independent account controllers from

speculative position limits outside of the spot-month. The exemption

permits the total positions of the trading entity or vehicle to exceed

speculative limits during non-spot months, but requires that each

independent account controller trading on the entity's behalf comply

with the applicable limits. During the spot month, all positions of the

entity are required to be aggregated and are subject to the spot-month

speculative position limit level. Under the exemption as originally

promulgated, those seeking exemptive treatment were required to file an

application with the Commission and to document the independence of

their account controllers.

In 1991, the Commission extended eligibility for this exemption to

commodity trading advisors and greatly streamlined the application

procedure. Subsequently, in 1992 the Commission made the exemption

self-executing. 57 FR 44492 (September 28, 1992). Commenters on both

the 1991 and 1992 amendments suggested that, in addition to commodity

trading advisors, the exemption should be extended to others, including

investment banks, other financial intermediaries, parent/affiliate

firms, corporate divisions, commercial banks, merchant banks, and

insurance companies. The Commission declined to do so, saying that it:

is aware of no adverse market effects resulting from the exemptions

granted so far.

Nevertheless, * * * [t]he current exemption and the proposed

expansion are limited to those who trade professionally for others.

* * * The classes of trader suggested by commenters for inclusion in

the exemption differ from this pattern. The Commission will

undertake further expansion of the exemption after it has had an

opportunity to assess the impact of the current expansion and has

gained a better understanding of the characteristics of the market

user who might benefit from, and their need for, such an exemption.

56 FR 14308, 14312 (April 9, 1991).

Commission rule 150.3 generally has worked well. It has provided

flexibility to the markets, accommodating the continuing trend toward

professional management of speculative trading accounts, while at the

same time protecting the markets from the undue accumulation of large

speculative positions owned by a single person or entity in the spot

month. Since its amendment in 1991, most questions concerning rule

150.3 have related to its application to integrated financial services

companies. The number and complexity of these companies has grown in

the intervening years, a consequence of mergers and consolidation in

the financial services sector. Such companies generally may include

affiliated futures commission

[[Page 38532]]

merchants (FCMs), commodity pool operators, and non-Commission

registrants which may also trade futures and option contracts for their

own accounts. They may grant their affiliates or subsidiaries

independent trading authority with appropriate safeguards to maintain

the affiliates' independence and the confidentiality of the affiliates'

trading decisions. However, presently only affiliated commodity pool

operators and commodity trading advisors meet the rule's eligibility

requirement.\26\

---------------------------------------------------------------------------

\26\ FCMs have similar but not identical relief under the 1979

Aggregation Policy discussed above.

---------------------------------------------------------------------------

The Commission is proposing to amend rule 150.3 better to reflect

the continuing trend to greater complexity in the structure of

financial services companies. Such companies, as a matter of business

preference, may provide their affiliates with independent trading

authority and are structured in a manner which meets the policies of

rule 150.3. The Commission is proposing to include the separately

incorporated affiliates of commodity pool operator, commodity trading

advisor or futures commission merchant as eligible entities for the

exemptive relief of rule 150.3.\27\

---------------------------------------------------------------------------

\27\ Affiliated companies are generally understood to include

one company that owns, or is owned by, another or companies that

share a common owner.

---------------------------------------------------------------------------

The Commission is also proposing to expand the classes of entities

which are eligible for the exemption in response to the continuing

trend toward greater professional management of trading funds. Single-

investor commodity pools or commodity pools having a very limited

number of participants have been created as part of this trend. Often

these pools are organized as limited partnerships, and in many cases,

the limited partner or partners, who may also trade professionally,

provide almost all of the trading capital. The operators of such

commodity pools generally, by virtue of having fewer than fifteen

participants in the pools and less than $200,000 in capital

contributions, would be exempt from registration under Commission rule

4.13. As discussed in greater detail below, the Commission is of the

view that the trading of these limited partnerships should not be

disaggregated from trading by such a limited partner. However, because

these commodity pools may provide for the pool's trading by an

independent account controller, the Commission believes that they

appropriately can be included within the exemption from speculative

position limits for the non-spot month limits under Commission rule

150.3.

The Commission is also proposing to include with the exemption

banks, trust companies, savings and loan associations, insurance

companies and the separately incorporated affiliates of any of the

above entities. These additional classes of eligible entity were

suggested for inclusion by some commenters when the Commission last

proposed to revise the rule 150.3 exemption. In light of the successful

operation of the exemption during the intervening years, the Commission

believes that it should now consider extending the exemption to these

entities. Accordingly, the Commission is proposing that any of the

above entities that grants its affiliates or subsidiaries independent

trading authority, maintains only the supervisory authority over their

trading activity consistent with its fiduciary, statutory and

regulatory responsibilities \28\ and creates a system of controls to

ensure that it or its affiliates have no knowledge of the trading

decisions of other of its affiliates can exceed speculative position

limits outside of the spot month. During the spot month, all of the

affiliates' accounts, except for those of an affiliated FCM qualifying

under the 1979 Aggregation Policy, must be aggregated for speculative

position purposes as positions belonging to a single owner.

---------------------------------------------------------------------------

\28\ See e.g., sections 2(a)(1)(A)(iii) and 4f(c) of the Act and

Commission rule 166.3.

---------------------------------------------------------------------------

The Commission is proposing to codify in rule 150.4 the substance

of its policies on aggregation, particularly its 1979 Aggregation

Policy. The substance of its aggregation policies currently is

contained in rules 17.00 and 18.01, 17 CFR 17.00 and 18.01, which

specify the manner of identifying accounts for reporting purposes. The

Commission is of the view that its rules on aggregating positions for

speculative limit compliance should be codified as such, rather than be

drawn by inference from the Commission's large-trader reporting

requirements.

In codifying these policies, the Commission also is proposing to

amend the limited partner exception of Commission rule 18.01.\29\

Commission rule 18.01 governs the Commission's reporting requirements

and parallels the 1979 Aggregation standard. It defines an account

owner as a person or entity having a 10% or greater financial interest

in the account, except for limited partners. Limited partners had been

exempt from definitions of ownership beginning with the Commission's

predecessor agency, the Commodity Exchange Authority, based upon the

assumption that limited partners by definition were required to be

passive investors and were prohibited from exercising control over the

trading activities of the partnership. However, the degree to which

limited partners can be involved in the operation of a partnership

varies under state law. Although limited partners generally are

precluded from ``controlling'' the business of the partnership, they

may not be precluded from being involved to some degree in the

partnership's trading decisions.\30\

---------------------------------------------------------------------------

\29\ As discussed above, the Commission is proposing to include

within the exemption from speculative position limits under

Commission rule 150.3 the operators of commodity pools which are

exempt from registration under Commission rule 4.13.

\30\ Section 303(b) of the Revised Uniform Limited Partnership

Act provides in part that:

A limited partner does not participate in the control of the

business * * * solely by * * * (2) consulting with and advising a

general partner with respect to the business of the limited

partnership. * * *

---------------------------------------------------------------------------

The Commission has become aware of, and concerned of, trading by

single-investor commodity pools. In these commodity pools, a single

limited partner may contribute virtually all of the pool's trading

capital, relying upon the general partner to control trading in the

account. Previously, persons with this type of ownership interest may

not have aggregated the pool's positions with their own in reliance of

the exception under Commission rule 18.01 for limited partners in a

commodity pool.\31\

---------------------------------------------------------------------------

\31\ Commission rule 18.01 provides, in part, that:

If any trader holds, has a financial interest in or controls

more than one account, * * * all such accounts shall be considered

as a single account for * * * the purpose of reporting. For the

purpose of Sec. 18.01, except for the interest of a limited partner

or shareholder (other than the CPO) in a commodity pool, the term

``financial interest'' shall mean an interest of 10 percent or more

in ownership or equity of an account.

---------------------------------------------------------------------------

In light of the possibility that limited partners may be less than

wholly passive investors, the likelihood that limited partners may be

involved to some degree in the trading decisions of the partnership's

trading activity rises as the overall number of limited partners in a

commodity pool decreases, such as in the single or limited-number

investor pool or when a small number of limited partners have a

relatively dominant ownership interest. Accordingly, the Commission is

proposing to require a limited partner, shareholder or other type of

pool participant (such as a member of a limited liability company), to

aggregate the pool's positions with the trader's other positions if the

trader has as an ownership interest of 25% or

[[Page 38533]]

greater in the pooled account or if the pool has ten or fewer

participants.\32\

---------------------------------------------------------------------------

\32\ It should be noted that, while such positions must be

aggregated, the Commission has also proposed to include such

entities within the exemption of rule 150.3. Accordingly, where the

limited partners in fact treat the partnership as an independent

trader, they qualify for an exemption from speculative position

limits for non-spot months. During the spot month, however, the

limited partners or shareholders would be required to aggregate the

partnership positions.

---------------------------------------------------------------------------

The Commission does not intend by this proposal to modify the

general treatment of limited partners or shareholders in commodity

pools, but rather intends to require aggregation by limited partners or

shareholders in unusual or atypical arrangements.\33\ The Commission

requests comments specifically to address the typical organization for

pools and whether levels proposed are appropriate for reaching only

unusual ownership forms.

---------------------------------------------------------------------------

\33\ The Commission is proposing to clarify that participants in

additional categories of limited-liability business organizations,

such as members of limited liability companies, for the purpose of

these rules, are treated the same as limited partners or

shareholders.

---------------------------------------------------------------------------

The Commission is proposing an additional revision to the existing

limited partnership exemption to clarify its application to commodity

pool operators. Currently, commodity pools are excluded from the

limited partnership exemption. Accordingly, commodity pool operators

which are also a limited partner have a financial interest which causes

them to aggregate their positions if their ownership interest is ten

percent or greater. This is apart from the requirement that they

aggregate positions based upon trading control. The question has arisen

whether the commodity pool operator's principals or affiliates, if

investing as limited partners, are covered by the ten percent interest

requirement. The Commission is of the view that principles and

affiliates of the commodity pool operator were intended to be treated

under the rule the same as the commodity pool operator itself. This

would be consistent with the explicit treatment of FCMs investing in

customer trading programs or pools under the 1979 Aggregation Policy.

The Commission is proposing to amend the limited partner exception to

make explicit its understanding of the rule's application to the

principals and affiliates of the pool operator.

III. Other Matters

A. Paperwork Reduction Act

When publishing proposed rules, the Paperwork Reduction Act of 1995

(Pub. L. 104-13 (May 13, 1996)) imposes certain requirements on federal

agencies (including the Commission) in connection with their conducting

or sponsoring any collection of information as defined by the Paperwork

Reduction Act. In compliance with the Act, the Commission, through this

rule proposal, solicits comment to:

(1) Evaluate whether the proposed collection of information is

necessary for the proper performance of the functions of the agency,

including the validity of the methodology and assumptions used; (2)

evaluate the accuracy of the agency's estimate of the burden of the

proposed collection of information including the validity of the

methodology and assumptions used; (3) enhance the quality utility, and

clarity of the information to be collected; and (4) minimize the burden

of the collection of the information on those who are to respond

through the use of appropriate automated, electronic, mechanical, or

other technological collection techniques or other forms of information

technology, e.g., permitting electronic submission of responses.

The Commission has submitted the proposed rule and its associated

information collection requirements to the Office of Management and

Budget. The proposed rules are part of two approved information

collections. The burdens associated with these rules are as follows:

Collection Number

[3038-0013]

------------------------------------------------------------------------

------------------------------------------------------------------------

Average burden hours per response........ 6

Number of respondents.................... 12

Frequency of response.................... On occasion

------------------------------------------------------------------------

Collection Number

[3038-0009]

------------------------------------------------------------------------

------------------------------------------------------------------------

Average burden hours per response........ 4.74

Number of respondents.................... 3709

Frequency of response.................... On occasion

------------------------------------------------------------------------

Persons wishing to comment on the information which would be

required by this proposed/amended rule should contact the Desk Officer,

CFTC, Office of Management and Budget, Room 10202, NEOB, Washington, DC

20503, (202) 395-7340. Copies of the information collection submission

to OMB are available from the CFTC Clearance Officer, 1155 21st St

N.W., Washington, DC 20581, (202) 418-5160.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) 5 U.S.C. 601 et seq., requires

that agencies, in proposing rules, consider the impact of those rules

on small businesses. The Commission has previously determined that

large traders are not small entities for purposes of the RFA.\34\ The

Commission believes that the proposed rule amendments to raise

Commission speculative position limits would only impact large traders.

In addition, the Commission is of the opinion that the proposed

amendments to Commission rule 150.3, under which certain eligible

entities will be exempted from speculative limits (except in the spot-

month) would apply exclusively to large traders, as would the proposal

to codify in rule 150.4 its policies on aggregation. Similarly, the

Commission's proposal to aggregate the positions of participants in

pooled accounts with a greater than 25 percent ownership interest in

the accounts is not expected to impact a significant number of small

entities. The Chairperson, on behalf of the Commission, hereby

certifies, pursuant to 5 U.S.C. 605(b), that the action taken herein

will not have a significant economic impact on a substantial number of

small entities. The certification is based on the fact that the

proposed rules will lift speculative limits levels, extend exemptive

relief from speculative limits (except in the spot-month) to certain

eligible entities and codify the Commission policies on aggregation,

including its rules on aggregating positions for speculative limit

compliance. The proposed rules permitting such transactions subject to

the specified conditions, therefore, remove a burden for all entities,

regardless of size.

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\34\ 47 FR 18618 (April 30, 1982).

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List of Subjects

17 CFR Part 1

Brokers, Commodity futures, Consumer protection, Reporting and

recordkeeping requirements, Segregation requirements.

17 CFR Part 17

Brokers, Commodity futures, Reporting and recordkeeping

requirements.

17 CFR Part 18

Brokers, Commodity futures, Reporting and recordkeeping

requirements.

[[Page 38534]]

17 CFR Part 150

Agricultural commodities, Bona fide hedge positions, Position

limits, Spread exemptions.

In consideration of the foregoing, and pursuant to the authority

contained in the Act, and in particular sections 2(a)(1), 2(a)(2), 4a,

4c, 4f, 4g, 4i, 4n, 5, 5a, 6b, 6c, 8a, and 15, 7 U.S.C. 2, 6a, 6c, 6f,

6g, 6i, 6n, 7, 7a, 12a, 13a, 13a-1, and 19, the Commission hereby

proposes to amend parts 1, 17, 18, and 150 of chapter I of title 17 of

the Code of Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

1. The authority for part 1 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,

6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,

12c, 13a, 13a-l, 16, 16a, 19, 21, 23, and 24.

2. Section 1.61 is proposed to be removed and reserved.

PART 17--REPORTS BY FUTURES COMMISSION MERCHANTS, MEMBERS OF

CONTRACT MARKETS AND FOREIGN BROKERS

3. The authority citation for part 17 continues to read as follows:

Authority: 7 U.S.C. 6a, 6d, 6f, 6g, 6i, 7, and 12a.

4. Section 17.00 is proposed to be amended by renumbering paragraph

(b)(1) as (b) and revising it, by removing paragraphs (b)(2) and (c),

by renumbering paragraphs (b)(1)(i) and (b)(1)(ii) as (b)(1) and

(b)(2), respectively, and by adding paragraph (b)(3), to read as

follows:

Sec. 17.00 Information to be furnished by futures commission

merchants, clearing members and foreign brokers.

* * * * *

(b) Interest in or control of several accounts. Except as otherwise

instructed by the Commission or its designee and as specifically

provided in Sec. 150.4 of this chapter, if any person holds or has a

financial interest in or controls more than one account, all such

accounts shall be considered by the futures commission merchant,

clearing member or foreign broker as a single account for the purpose

of determining special account status and for reporting purposes. For

purposes of this section, the following shall apply:

(1) * * *

(3) Account ownership--Multiple accounts owned by a trader shall be

considered a single account as provided under Sec. Sec. 150.4(b), (c)

and (d) of this chapter.

PART 18--REPORTS BY TRADERS

5. The authority citation for part 18 continues to read as follows:

Authority: 7 U.S.C. 2, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a,

and 19; 5 U.S.C. 552 and 552(b) unless otherwise noted:

6. Section 18.01 is proposed to be revised to read as follows:

Sec. 18.01 Interest in or control of several accounts.

If any traders holds, has a financial interest in or controls

positions in more than one account, whether carried with the same or

with different futures commission merchants or foreign brokers, all

such positions and accounts shall be considered as a single account for

the purpose of determining whether such trader has a reportable

position and, unless instructed otherwise in the special call to report

under Sec. 18.00 of this part, for the purpose of reporting.

PART 150--LIMITS ON POSITIONS

6. The authority citation for part 150 continues to read as

follows:

Authority: 7 U.S.C. 6a, 6c and 12a(5).

7. In Sec. 150.1 the introductory text of paragraph (d), and

paragraphs (d)(2), (e)(2) and (e)(5) are proposed to be revised to read

as follows:

Sec. 150.1 Definitions.

* * * * *

(d) Eligible entity means--

A commodity pool operator, the operator of a trading vehicle which

is excluded or who itself has qualified for exclusion from the

definition of the term ``pool'' or commodity pool operator,''

respectively, under Sec. 4.5 of this chapter; the limited partner or

shareholder in a commodity pool the operator of which is exempt from

registration under Sec. 4.13 of this chapter; a commodity trading

advisor; a bank or trust company; a savings and loan association; an

insurance company; or the separately incorporated affiliates of a

futures commission merchant or of any of the above entities:

(1) * * *

(2) Which maintains: (i) only such minimum control over the

independent account controller as is consistent with its fiduciary

responsibilities and necessary to fulfill its duty to supervise

diligently the trading done on its behalf; or (ii) if a limited partner

or shareholder of a commodity pool exempt from registration under

Sec. 4.13 of this chapter, only such limited control as is consistent

with its status.

(e) Independent account controller means a person--

(1) * * *

(2) Over whose trading the eligible entity maintains only such

minimum control as is consistent with its fiduciary responsibilities to

fulfill its duty to supervise diligently the trading done on its behalf

or as is consistent with such other legal rights or obligations which

may be incumbent upon the eligible entity to fulfill;

(3) * * *

(5) Who is registered as a futures commission merchant, introducing

broker, commodity trading advisor or an associated person of any such

registrant or a commodity pool operator that is exempt from

registration under Sec. 4.13 of this chapter.

8. Section 150.2 is proposed to be revised to read as follows:

Sec. 150.2 Position limits.

No person may hold or control positions, separately or in

combination, net long or net short, for the purchase or sale of a

commodity for future delivery or, on a futures-equivalent basis,

options thereon, in excess of the following:

Speculative Position Limits

[By contract]

------------------------------------------------------------------------

Limits by number of contracts

--------------------------------------

Contract Single

Spot month month All months

------------------------------------------------------------------------

CHICAGO BOARD OF TRADE

------------------------------------------------------------------------

Corn............................. 600 5,500 9,000

Oats............................. 600 1,000 1,500

[[Page 38535]]

Soybeans......................... 600 3,500 5,500

Wheat............................ 600 3,000 4,000

Soybean Oil...................... 540 3,000 4,000

Soybean Meal..................... 720 3,000 4,000

------------------------------------------------------------------------

MIDAMERICA COMMODITY EXCHANGE

------------------------------------------------------------------------

Corn............................. 3000 6000 6000

Oats............................. 2000 2000 2000

Soybeans......................... 3000 6000 6000

Wheat............................ 3000 6000 6000

Soybean Meal..................... 800 800 800

------------------------------------------------------------------------

MINNEAPOLIS GRAIN EXCHANGE

------------------------------------------------------------------------

Hard Red Spring Wheat............ 600 3,000 4,000

White Wheat...................... 600 1,200 1,200

------------------------------------------------------------------------

NEW YORK COTTON EXCHANGE

------------------------------------------------------------------------

Cotton No. 2..................... 300 2,500 3,500

------------------------------------------------------------------------

KANSAS CITY BOARD OF TRADE

------------------------------------------------------------------------

Hard Winter Wheat................ 600 3,000 4,000

------------------------------------------------------------------------

9. Section 150.4 is proposed to be revised to read as follows:

Sec. 150.4 Aggregation of positions.

(a) Positions to be aggregated. The position limits set forth in

Sec. 150.2 of this part shall apply to all positions in accounts for

which any person by power of attorney or otherwise directly or

indirectly holds positions or controls trading or to positions held 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 of the position were done by, a single individual.

(b) Ownership of accounts. For the purpose of applying the position

limits set forth in Sec. 150.2, except for the ownership interest of

limited partners or shareholders as set forth in paragraph (c) of this

section, any trader holding positions in more than one account, or

holding accounts or positions in which the trader by power of attorney

or otherwise directly or indirectly has a 10 percent or greater

ownership or equity interest, must aggregate all such accounts or

positions.

(c) Ownership by limited partners, shareholders or other pool

participants. For the purpose of applying the position limits set forth

in Sec. 150.2, any trader having a 25 percent or greater ownership or

equity interest in an account or positions as a limited partner,

shareholder or other category of pool participant must aggregate those

accounts or positions with all other accounts or positions owned or

controlled by the trader; Provided however, that:

(1) A limited partner, shareholder or other pool participant that

is also a principal or affiliate of the commodity pool operator must

aggregate the pooled account or positions with all other accounts or

positions owned or controlled by that trader if the trader's ownership

or equity interest in the pooled accounts or positions is 10 percent or

greater; or

(2) Each limited partner, shareholder or other pool participant

having an ownership interest in a pooled account or positions with ten

or fewer partners or shareholders must aggregate the pooled account or

positions with all other accounts or positions owned or controlled by

the trader if the trader's ownership or equity interest in the pooled

accounts or positions is 10 percent or greater.

(d) Trading Control by Futures Commission Merchants. The position

limits set forth in Sec. 150.2 of this part shall be construed to apply

to all positions held by a futures commission merchant in a

discretionary account, or in an account which is part of, or

participates in, or receives trading advice from a customer trading

program of a futures commission merchant, or any of the officers,

partners, or employees of such futures commission merchant, unless:

(1) A trader other than the futures commission merchant directs

trading in such an account;

(2) The futures commission merchant maintains only such minimum

control over the trading in such an account as is necessary to fulfill

its duty to supervise diligently trading in the account; and

(3) Each trading decision of the discretionary account or the

customer trading program is determined independently of all trading

decisions in other accounts which the futures commission merchant

holds, has a financial interest of 10 percent or more in, or controls.

10. New Sec. 150.5 is proposed to be added to read as follows:

Sec. 150.5 Exchange-set speculative position limits.

(a) Exchange limits. Each contract market, as a condition of

designation under part 5, appendix A of this chapter, shall by bylaw,

rule, regulation, or resolution limit the maximum number of contracts a

person may hold or control, separately or in combination, net long or

net short, for the purchase or sale of a commodity for future delivery

or, on a futures equivalent basis, options thereon. This section shall

not apply to a contract market for

[[Page 38536]]

which position limits are set forth in Sec. 150.2 of this part or for a

futures or option contract market on a major foreign currency for which

there is no legal impediment to delivery and for which there exists a

highly liquid cash market. Nothing in this section shall be construed

to prohibit a contract market from fixing different and separate

position limits for different types of futures contracts based on the

same commodity, different position limits for different futures or for

different delivery months, or from exempting positions which are

normally known in the trade as ``spreads, straddles, or arbitrage,'' or

from fixing limits which apply to such positions which are different

from limits fixed for other positions.

(b) Levels at designation. At the time of its initial designation,

a contract market must provide for speculative position limit levels as

follows:

(1) The spot month limit level for physical delivery contracts must

be no greater than one-quarter of the estimated spot month deliverable

supply calculated separately for each month to be listed and for cash-

settled contracts based on a small or not highly liquid underlying cash

market must be at a level that will tend to prevent or diminish price

manipulation;

(2) Individual non-spot month or all-months-combined levels must be

no greater than 1,000 contracts for tangible commodities other than

energy products;

(3) individual non-spot month or all-months-combined levels must be

no greater than 5,000 contracts for energy products and non-tangible

commodities, including contracts on financial products.

(c) Adjustments to levels. Twelve months after a contract market's

initial listing for trading, or an any time thereafter, contract

markets may adjust their speculative limit levels as follows:

(1) The spot month limit level for physical delivery contracts must

be no greater than one-quarter of the estimated spot month deliverable

supply calculated separately for each month to be listed and for cash-

settled contracts based on a small or not highly liquid underlying cash

market must be at a level that will tend to prevent or diminish price

manipulation; and

(2) Individual non-spot month or all-months-combined levels must be

no greater than 10 percent of the average combined futures and delta-

adjusted option month-end open interest for the most recent calendar

year up to 25,000 contracts with a marginal increase of 2.5 percent

thereafter, or be based on position sizes customarily held by

speculative traders on the contract market, which shall not be

extraordinarily large relative to total open positions in the contract,

the breadth and liquidity of the cash market underlying each delivery

month and the opportunity for arbitrage between the futures market and

cash market in the commodity underlying the futures contract.

(d) Hedge exemption. (1) No exchange by law, rule regulation, or

resolution adopted pursuant to this section shall apply to bona fide

hedging positions as defined by a contract market in accordance with

Sec. 1.3(z)(1) of this chapter. Provided, that the contract market may

limit bona fide hedging positions or any other positions which have

been exempted pursuant to paragraph (e) of this section which it

determines are not in accord with sound commercial practices or exceed

an amount which may be established and liquidated in an orderly

fashion.

(2) Traders must apply to the contract market for exemption from

its speculative position limit rules. In considering whether to grant

such an application for exemption, contract markets must take into

account the factors contained in paragraph (d)(1) of this section.

(e) Trader accountability exemption. Tweleve months after a

contract market's initial listing for trading, or at any time

thereafter, contract markets may submit for Commission approval under

section 5a(a)(12) of the Act and Sec. 1.41(b) of this chapter, a bylaw,

rule, regulation, or resolution, substituting for the position limits

required under paragraphs (a), (b) and (c) of this section, an exchange

rule requiring traders to be accountable for large positions as

follows:

(1) For futures and option contracts on a financial instrument or

product having an average month-end open interest of 50,000 contracts

and an average daily trading volume of 100,000 contracts and a very

highly liquid cash market, an exchange bylaw, regulation or resolution

requiring traders to provide information about their position upon

request by the exchange;

(2) For futures and option contracts on a financial instrument or

product or on an intangible commodity having an average month-end open

interest of 50,000 and an average daily volume of 25,000 contracts and

a highly liquid cash market, an exchange bylaw, regulation or

resolution requiring traders to provide information about their

position upon request by the exchange and to consent to halt increasing

further the trader's positions if so ordered by the exchange;

(3) For futures and option contracts on a tangible commodity,

including but not limited to metals, energy products, or international

soft agricultural products, having an average month-end open interest

of 50,000 contracts and an average daily volume of 5,000 contracts and

a liquid cash market, an exchange bylaw, regulation or resolution

requiring traders to provide information about their position upon

request by the exchange and to consent to halt increasing further the

trader's positions if so ordered by the exchange, provided, however,

such contract markets are not exempt from the requirement of paragraphs

(b) or (c) that they adopt an exchange bylaw, regulation or resolution

setting a spot month speculative position limit with a level no greater

than one-quarter of the estimated spot month deliverable supply;

(4) For purposes of this paragraph, trading volume and month-end

open interest shall be calculated based upon the futures contract and

its related option contract, on a delta-adjusted basis, for all trading

months listed during the most recent twelve month period.

(f) Other exemptions. Exchange speculative position limits adopted

pursuant to this section shall not apply to any position acquired in

good faith prior to the effective date of any bylaw, rule, regulation,

or resolution which specifies such limit or to a person that is

registered as a futures commission merchant or as a floor broker under

authority of the Act except to the extent that transactions made by

such person are made on behalf of or for the account or benefit of such

person. In addition to the express exemptions specified in this

section, a contract market may propose such other exemptions from its

position limits consistent with the purposes of this section and shall

submit such rules for Commission review under section 5a(a)(12) of the

Act and Sec. 1.41(b) of this chapter.

(g) Aggregation. In determining whether any person has exceeded the

limits established under this section, all positions in accounts for

which such person by power of attorney or otherwise directly or

indirectly controls trading shall be included with the positions held

by such person; such limits upon positions shall apply to positions

held by two or more person acting pursuant to an expressed or implied

agreement or understanding, the same as if the positions were held by a

single person.

[[Page 38537]]

Issued by the Commission this 13th day of July, 1998, in

Washington, D.C.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 98-19114 Filed 7-16-98; 8:45 am]

BILLING CODE 6351-01-M