On September 22, 2015, the Commodity Futures Trading Commission (the “Commission” or “CFTC”) approved a supplemental proposal (the “Supplement”) modifying the aggregation provisions proposed in 2013 (the “2013 Proposal”) for determining compliance with its speculative position limits rules.1 The three CFTC Commissioners voted unanimously to propose the Supplement, which is designed to simplify the exemption process from the aggregation requirements, but not alter the standard for when aggregation is required. Except for a few conforming amendments, the Supplement primarily addresses how an exemption from the aggregation requirements could be obtained in situations involving an ownership interest of greater than 50% in another entity. In essence, the Supplement modifies the 2013 Proposal so that any person who owns 10% or more (up to and including 100% interest) of another entity would be permitted to obtain relief from having to aggregate the positions of the owned entity upon filing a notice with the Commission stating that certain specified conditions demonstrating its lack of trading control have been met. Comments are due 45 days after publication in the Federal Register.
Background: The 2013 Aggregation Proposal2
In 2013, the Commission proposed new speculative position limit rules and aggregation standards for determining compliance with the position limits. The 2013 Proposal would generally require that a person aggregate positions in any account or of any entity in which it has a 10% or greater ownership interest when determining compliance with the position limits, absent an available exemption. The 2013 Proposal retained the longstanding requirement that positions must be aggregated on the basis of control over trading and also trading in concert (i.e., when two persons are acting pursuant to an expressed or implied agreement or understanding). The 2013 Proposal also included a new requirement that positions in more than one account or pool with substantially identical trading strategies must be aggregated.
Notably, the 2013 Proposal expanded the existing exemptions from aggregation, including two different exemptions for ownership interests in an owned entity, depending on whether the ownership interest constitutes a majority interest. In addition, the 2013 Proposal included existing aggregation exemptions for limited partners, shareholders and other pool participants, futures commission merchants and their affiliates, and independent account controllers.
As noted above, the 2013 Proposal introduced, among others, two new exemptions for the positions of owned entities, one applicable to an ownership interest in another entity between 10% and 50%, and another applicable to a majority ownership interest in another entity.
Specifically, the 2013 Proposal would establish a notice filing procedure, effective upon submission, for relief from aggregation for a person with an ownership interest in another entity between 10% and 50%, provided that
- Such person (and any entity that such person must aggregate with) and the owned entity:
- do not have knowledge of the trading decisions of the other;
- trade pursuant to separately developed and independent trading systems;
- have and enforce written procedures to preclude each from gaining access to or receiving data about trades of the other;
- do not share employees that control trading decisions;
- do not have risk management systems that permit the sharing of trades or trading strategy; and
- Such person makes a notice filing with the CFTC, which is effective upon filing and includes a description of the circumstances and a statement of a senior officer certifying that the conditions of the exemption have been met.
In contrast, the proposed exemption for a person holding an ownership interest in another entity in excess of 50% was more limited in scope and subject to several additional requirements, including requiring any such person to certify that:
- the owned entity is not required to be consolidated on the financial statements of the person;
- the person does not control the trading of the owned entity and that procedures are in place that are reasonably effective to prevent coordinated trading decisions with the owned entity;
- each representative (if any) of the person on the owned entity’s board of directors (or equivalent governance body) attests that he or she does not control the trading decisions of the owned entity; and
- the person certifies that either (x) all of the owned entity’s positions qualify as bona fide hedging transactions or (y) the owned entity’s positions that do not so qualify do not exceed 20% of any position limit currently in effect.
Moreover, the relief for a person holding a greater than 50% ownership interest in another entity was not effective upon filing with the Commission. Instead, relief was solely in the Commission’s discretion, based on its review of the application and its process for determining whether such relief would be appropriate, with no time limit on the length of the review period. The Supplement eliminates these additional requirements for relief from aggregation in the case of an ownership interest in another entity in excess of 50%.
Summary of Modifications Proposed in the Supplement
The Supplement would modify the 2013 Proposal to permit any owner of 10% or more of an owned entity (up to and including 100% of an owned entity) to disaggregate the positions of the owned entity using the same notice filing procedure and subject to the same set of specified conditions. The 2013 Proposal, including the aggregation standards and the proposed criteria for disaggregation relief, would otherwise remain essentially unchanged, except for a few conforming amendments such as removing the greater than 50% cap in the exemption for broker-dealer activity.3
Please note that, as of now, the 2013 Proposal and the Supplement would only apply to positions in futures and options contracts on the nine agricultural commodities set forth in CFTC Rule 150.2 (e.g., corn, soybeans, wheat, etc). However, if the Commission amends the position limits rules as proposed4, the requirements and exemptions set forth in the 2013 Proposal and the Supplement would apply to positions in 28 exempt (i.e, energy and metals) and agricultural commodity futures and options contracts as well as swaps that are economically equivalent to such contracts. CFTC Chairman Massad noted that the Commission is continuing to work on the position limits rules.