The Commodity Futures Trading Commission revised its November 2013 proposal related to the aggregation of accounts in connection with its speculative position limits requirements.
Under its earlier proposal, the Commission would have required any entity owning more than 50 percent of another entity formally to apply to the Commission for approval to disaggregate positions of the other entity to the extent it may have qualified for relief.
Under the Commission’s new proposal, any qualified entity owning 10 percent or more of another entity up to 100 percent may file a notice of disaggregation, which would be effective upon submission. The notice would be required to include a description of the relevant conditions that warrant disaggregation and a certification by a senior officer that the conditions have been met.
In addition, under its earlier proposed aggregation rules the CFTC would have disallowed disaggregation for an owned entity if the entity was required to be and was consolidated in the financial statement of its ultimate owner. This provision has been eliminated in the new proposal because the CFTC found “merit” in arguments that “ownership of 50 percent interest in an entity (and the related consolidation of financial statements) may not mean that the owner actually controls day-to-day trading decisions of the owned entity.”
Generally, under the CFTC’s current aggregation rules, a person must combine all positions where it controls the trading decisions with all positions where the person has a 10 percent or more ownership interest in an account or position, as well as the positions of two or more persons acting according to an express or implied agreement. (Click here to access the CFTC’s current aggregation requirements – CFTC Regulation 150.4.) There are currently a number of potential exemptions to the CFTC aggregation requirements, including those pertaining to eligible entities with so-called independent account controllers; ownership interests of limited partners in pooled accounts; discretionary accounts; and customer trading programs of futures commission merchants.
In its November 2013 proposal, the Commission provided for persons meeting certain requirements to disaggregate positions of separately organized entities solely where the person’s ownership interest was between 10 and 50 percent. This ability would have been subject to a notice filing. (Click here for an overview of the CFTC’s November 2013 proposed aggregation rules in a November 7, 2013 Advisory entitled “CFTC Proposes Revised Aggregation Rules” by Katten Muchin Rosenman LLP.)
Under the new revised proposal, this capability is expanded to persons owning between 10 and 100 percent of another entity. Aggregation is still the “default requirement,” says the CFTC, unless a person (including any account such person must aggregate):
- does not have knowledge of trading decisions of the other entity;
- trades according to separately developed and independent trading systems;
- has and enforces written procedures that prevent each from having knowledge of and gaining access to, or receiving information about, trades of the other (this would include document routing and other procedures or security arrangements including separate physical locations);
- does not share employees that control the trading decisions of the other entity; and
- does not have risk management systems that permit the sharing of trades or trading strategies.
The CFTC will maintain its other exemptions from its aggregation rules for eligible entities under its revised proposal.
Commissioner J. Christopher Giancarlo voted to approve the revised aggregation rule proposal along with CFTC Chairman Timothy Massad and Commissioner Sharon Bowen. However, Mr. Giancarlo expressed concern that the Commission’s proposed revised rule prohibited disaggregation where an owner and subsidiary entity has risk management systems that permitted the sharing of trades or trading strategies. According to Mr. Giancarlo,
[this] proposed rule may stymie critical risk-mitigation efforts. Owners and their affiliates may need to share information regarding trades or trading strategy to verify compliance with applicable credit limits as well as restrictions and collateral requirements for inter-affiliate transactions, among other risk-management and compliance related objectives.
Comments will be accepted by the CFTC on its revised aggregation rule proposals for 45 days after publication in the Federal Register. (Click here for further information on the CFTC proposed revised aggregation rules in the article “CFTC Proposes Revisions to Pending Aggregation Rules” in the September 28, 2015 Advisory by Katten Muchin Rosenman LLP.)