The Chicago Mercantile Exchange Group proposed to amend its position limits and accountability rules to potentially permit accounts under independent control owned directly or indirectly by the same person or within the same legal entity or structure not to be aggregated to assess compliance with its position limits requirements (click here to access current CME Group Rules 559, 560 and 562 that address position limits and accountability). Generally, with the exception of certain accounts of eligible entities enumerated by the Commodity Futures Trading Commission (e.g., commodity pool operators, commodity trading advisors, banks, trust companies), a person must aggregate all accounts for which it directly or indirectly holds positions (e.g., through 10 percent or more ownership interest) or controls trading by power of attorney or otherwise. (Accounts that may be excluded from aggregation pursuant to CFTC rules must be traded by a so-called “independent account controller"; click here to access CFTC Rule 150.1(d) for details.) CME Group proposes that accounts owned directly or indirectly by the same person or within the same legal entity or structure may be deemed independently controlled, if the accounts’ traders do not have knowledge of each other’s trading decisions; trade according to separate strategies; and implement and enforce written procedures that “...preclude each from having knowledge of, gaining access to or receiving data concerning the trades of the other.” Such relief – which would have to be applied for in advance – would apply only to CME Group products not subject to CFTC limits. CME Group’s disaggregation proposal is modeled after a similar CFTC proposal made in September 2015, but not yet adopted. (Click here to access details of the CFTC proposed de-aggregation rule in the article, “CFTC Revises Aggregation Proposal Related to Position Limits,” in the September 27, 2015 edition of Bridging the Week.) CME Group’s rule proposal resembles a similar rule adopted by ICE Futures U.S. earlier this month. (Click here to access the article, “IFUS to Adopt CFTC Proposed Aggregation Rule as Its Own in Advance of CFTC Adoption While ICE Futures Europe Permits Use of EFPs to Roll Forward Soft Commodities Futures Contracts Because of Delivery Issues” in the March 13, 2016 edition of Bridging the Week.) CME Group’s proposed amendments are scheduled to be effective April 4, 2016, absent CFTC objection.
Compliance Weeds: CME Group’s proposed disaggregation rule is similar but not identical to ICE Futures U.S.’s recently adopted disaggregation rule. Under CME Group’s proposed rule, procedures adopted by independent account controllers to evidence independence “must include document routing and other procedures or security arrangements, including separate physical locations, which would maintain the independence of their activities.” IFUS’s rule does not prescribe any specific elements of the procedures to evidence independence. However, IFUS’s rule expressly states that there may be “no sharing of personnel controlling the respective trading decisions.” As a result, firms designing compliant programs for both the CME Group and IFUS should aggregate the requirements of each exchange in their overall procedures.