On August 1, 2019, the Division of Market Oversight ("DMO") of the Commodity Futures Trading Commission (the "CFTC" or "Commission") issued time-limited no-action relief extending existing DMO no-action relief regarding the Commission's position aggregation rule (the "Aggregation Rule").1
In August 2017, the DMO issued a two-year no-action relief letter,2 which was, by its terms, scheduled to expire at 12:01 a.m. eastern standard time on August 12, 2019. Letter 19-19 has now extended the application of Letter 17-37 for three years, until 12:01 a.m. eastern standard time on August 12, 2022. Letter 19-19 does not make any substantive changes or provide any additional clarifications to the terms and conditions of Letter 17-37, or any broader no-action relief.
As described in our memorandum on Letter 17-37, the Commission issued the Aggregation Rule in 2016. The Aggregation Rule determines which accounts and positions a person must aggregate for purposes of determining compliance with the applicable position limit levels set forth in Commission Rule 150.2.3 The Aggregation Rule also sets forth the requirements pursuant to which a person may file with the CFTC a notice seeking an exemption from such aggregation requirements in order to "disaggregate" its positions from those of another entity with which it has certain ownership or control relationships.
Overview of Relief:
Among other things, Letters 19-19 and 17-37 provide relief from the Aggregation Rule in the manner described below.
For the duration of the relief, an entity eligible for an exemption from aggregation need not submit a prospective notice filing pursuant to the Aggregation Rule in order to rely on the exemption, but instead must only do so upon request by the CFTC, a Designated Contract Market (a "DCM"), or their respective staffs within five business days (subject to extension by the requestor). Any such notice filing need only address the circumstances warranting disaggregation for the particular accounts or positions specified. An entity seeking to rely on an aggregation exemption may voluntarily submit a notice filing to the CFTC or DCM prior to being contacted by the CFTC or a DCM if it so chooses.
Owned Entity Exemption:
The Aggregation Rule includes an "owned entity" exemption permitting any person who owns 10% or more (up to and including a 100% interest) of another entity to disaggregate the positions of the owned entity, upon filing a notice with the CFTC stating that certain specified criteria demonstrating the absence of trading control have been met.
Pursuant to Letters 19-19 and 17-37, an owner's certification in any such notice filing may be limited such that it:
- May provide that the requirement that each entity "not have knowledge of the trading decisions of the other" is met "only in connection with derivatives trading;"4
- May address "in regards to controlling the owned entity or having routine access to relevant information about the owned entity [ ... ] only derivatives trading;"5
- May "provide[...] that it does not control derivatives trading of the owned entity nor have routine access to derivatives trading information about the owned entity with no mention of whether it is able to do so;"6 or
- May "only address[...] the owner, and not the owned entity, in circumstances where the owner is not aware, and should not be aware, of the derivatives trading activity of the owned entity."7
Independent Account Controller Exemption:
The Aggregation Rule also includes other previously existing aggregation exemptions such as the independent account controller ("IAC") exemption. Among other things, the IAC exemption in the Aggregation Rule permits accounts "carried by an independent account controller" not to be aggregated. An IAC is required by the Aggregation Rule to be appointed by certain types of "eligible entity," as defined, including, among others, a registered commodity trading advisor ("CTA"). The types of entities that may be an IAC also include a registered CTA.
Letters 19-19 and 17-37 permit exempt CTAs to be treated as being included in both the "eligible entity" and IAC definitions, and permit certain types of entities not included in the "eligible entity" definition, such as foundations, endowments, and foreign pension vehicles, to be treated as eligible entities if they appoint an IAC in a fiduciary capacity.
Substantially Identical Trading Strategies Requirement:
Notwithstanding the availability of any exemption, and even if a person's ownership interest in each account or pool is less than 10%, the Aggregation Rule requires that any person aggregate its positions in all pools or accounts with substantially identical trading strategies.
Under Letters 19-19 and 17-37, DMO provides relief from this requirement, unless the person holds or controls the trading of positions in more than one account or pool with substantially identical trading strategies in order to willfully circumvent applicable position limits.
Letter 19-19 extends for an additional three years the substantial relief which Letter 17-37 originally provided from the Aggregation Rule.
DMO states in Letter 19-19 that it will use the relief period for three purposes: (1) to continue to evaluate the effects of the relief; (2) to evaluate whether the relief granted is hindering Commission staff's ability to conduct appropriate market surveillance, and (3) to consider long-term solutions to be implemented through a notice and comment rulemaking.