On May 2, 2018, staff of the Division of Market Oversight of the Commodity Futures Trading Commission (“CFTC”) issued an interpretation regarding CFTC Reg. 150.4(b)(1), 17 CFR 150.4(b)(1), which provides an exemption from the CFTC’s position limits aggregation rules for certain passive investors in commodity pools (CFTC Staff Letter No. 18-12).

In general, market participants are required to aggregate all positions in accounts for which the person, by power of attorney or otherwise, directly or indirectly controls trading or holds a 10 percent or greater ownership or equity interest, absent an exemption. CFTC Reg. 150.4(b)(1) provides an exemption from aggregation to a person who is a passive investor (i.e., a person that is a limited partner, limited member, shareholder, or other similar pool participant) that holds a 10 percent or greater ownership or equity interest in a commodity pool, unless the person is excluded by one of the three exceptions contained in the regulation.

The requestor of the interpretation asked the CFTC staff to consider a situation in which a large institutional investor, through its passive ownership interest in private equity or venture capital funds that retain the right to invest in commodity interests and thus are considered commodity pools, might indirectly own more than 10 percent of an underlying “portfolio company” in which the pool was invested. Such portfolio companies were operating companies that might be engaged in commercial operations in the agricultural and energy sectors. The requestor sought clarification that it would not be required to aggregate any commodity interest positions that might be held by these portfolio companies by virtue of its indirect ownership interest through its passive pool investment.

The CFTC staff’s interpretation clarifies that, so long as the institutional investor is otherwise eligible for the aggregation exemption in CFTC Reg. 150.4(b)(1) (i.e., a passive investor in a commodity pool eligible to rely upon the exemption and not excluded through one of Reg. 150.4(b)(1)’s three exemptions) and did not either control trading for, or have another relationship with, the portfolio company that would require aggregation (such as an express or implied agreement to trade in concert), the investor would not be required to “look through” the commodity pool to aggregate the positions of the underlying portfolio companies invested in by the pool with its own positions. In other words, the interpretation clarifies that the institutional investor’s CFTC Reg.150.4(b)(1) aggregation exemption with respect to its investment in a commodity pool extends to its 10 percent or greater indirect interest (via the pool) in portfolio companies for which it does not control trading or have another relationship requiring aggregation. The interpretation notes, however, that it does not apply in a situation in which a passive investor invests in alternative or parallel funds with the intention to circumvent position limits.

The interpretation is available here.