CFTC Staff Letter 92-14 (No-Action): No-Action Relief for J. Aron & Company Regarding GSCI Spread Trading

DIVISION OF
ECONOMIC ANALYSIS
Dear·
COMMODITY FUTURES TRADING COMMISSION
2033 K STREET, N.W., W'ASHINGTON, D.C. 20581
(202) 254-6265 fACSIMILE
September 2, 1992
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This is in response to your letter of July 27, 1992, in which you requested tha~ the Division of Economic Analysis (the "Divi￾sion") confirm that it will not recommend any enforcement action be initiated against · _ . _ . for violation of Federal speculative position limits for positions taken by as
part of spread or arbitrage trading in the GSCI Nearby Index
futures contracts and options on such futures contracts (collec￾tively, the "GSCI contracts") and in the underlying futures · contracts or options on such futures contracts .. ("underlying contracts"). The facts which you have represented in your letter are as follows. · The GSCI Nearby Index futures contract is based on the Goldman Sachs Commodity Index, a world production-weighted, arithmetic average of the prices of futures contracts on physical commodities which satisfy specified eligibility criteria. The components of the GSCI presently include, among other futures contracts, those based on wheat, corn, soybeans and cott·on which are subject to Commission position limits. represents that it intends to trade the GSCI contract for its proprietary account in two way~: (1} ·by voluntarily acting as a market·maker, providing liquidity t·o the market during its Rstart-up phase"; and (2).by engaging in arbitrage transactions between the GSCI contracts and the underlying futures contracts .. · expects to conduct this trading .activity primarily through the use of ·spread transactions comprised of positions in the GSCI · contracts and offsetting positions in .the futures or option contracts underlying the GSCI, in order. to .reduce the risk which woi\ld otherWise be incurred through th~ trading of the GSCI contracts alone. . For example, if . sold a GSCI contract, it would purc::hase each ·of the underlying .. futures · contracts, in . quantities which reflect the weighing. of each such contract in the · GSCI. Because movements. in · the "basket" of futures contracts included in the GSCI ·will· necessarily be re·flected · in·movements in. the value of the GSCI. itself, any losses on the· GSCI contract position ·should be offset by gains . on the positions in t:he underlying contracts. Conversely, if · . purchased the GSCI

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  2 contract, it would sell the underlying futures contracts, based on the same weighing fo~ula.
  Each such spread or arbitrage po~Jition in the underlying futures contracts would, to the extent possible, be in the same delivery month as the month which is reflected in the corresponding GSCI. contract. . ·anticipates that the GSCI contract positions and the positions in the underlying contracts would be established s~ltaneously or nearly simultaneously, in order to achieve risk red~c.tion objectives. · . intends to liquidate each such position in a GSCI contract, along with its position in the corresponding unoerlying contracts, by no later than the expiration day of the GSCI contract, which will be the fourth business day of the delivery month. Accordingly,. will not hold such spread positions·in t~e spot month of any of the underlying futures· contracts. In addition, ·anticipates that it will liguidate its spreaQ. osition during the course of its t:radin on i · n the GSCI con :ract. As a :result, does not expect such liquidations to occur at ·the close of the market, although it could be necessary to liquidate positions at the close under certain
• market conditions.
  Commission Rule 150.3 (a) provides exemptive :relief from Commission speculative limits for certain kinds of spread and arbitrage trading. Commission Rule 150.3 (a) (2) prqvide·s an exemption fo:t: spread or arbitrage. positions between futures . and option cont'racts ·traded on the same board of trade in any one commodity, for positions outside of the spot month, which are as a totality offsetting. . Commission Rule 150.3 (a) (3 ). provides an exemption for spread o:r arbitrage positions between 'single mo~ths of a futures contract traded on the same board of trade outside of the spot month. · · Since the spread or arbitrage trading described in your letter does not Involve 'the same commodity. and does not involve commodi~ -ties traded on the same board of trade it does not. currently al1f for ex 1v Commiss1on u e Nevertheless,· you represent .that the positions taken in t e GSCI contracts and . the underlying futures · contracts will be as a totality offsetting; because the GSCI contracts are based on the weighted values of the underlying futures contracts, the legs of the .spread or arbitrage positions will be precisely opposit-e and offsetting and movements in_the underlying contracts will neces~ sarily pe reflected in the value of the GSCI contracts.

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Commission any enforcement action under §4a(l) of the Commodity Exchange Act (7 u.~LC. §6a(l}) related to spread ana· arbitrage . ...to ... ~ trading·of the GSCI contract and the underlving contracts, as de- ~·~ i . J1 8 .,;.c'l scr bed in your letter, if the following conditions are met: · the spread or arbitrage positions are as a totality offsetting,; 2 the positions in the underlying contracts are not in the spot month; and t1)) the positions in any individual month or- in ali months combined do not exceed the all months combined limit

• specified in Commission Rule 150.2
  .This determination does not excuse· from complying with any otherwise applicable provisions of the Commodity Exchange Act o~ the Commission's regulations, thereunder. This determination is based upon the :facts and representations contained in your letter and conversations with the 113taff. Any different, omitted or changed facts or conditions might require a differen~ conclusion. Moreover, it should be noted that this determination is that of the staff of the Division of Economic Analysis and is not binding upon the Commission o:t: on any other of its staff. ·Finally, any subsequent rule amendments relating to the application of. specula- tive· position limits may require a ·reconsideration of this determination. Sincerely yours, /) ffi1 .~-- ,/) /,tftt?ir !,/ {l~~;:b. - ~~~ald D. Gay Director