Position Limits for Derivatives

1 7 U.S.C. 1 et seq.
2 17 CFR part 150. Part 150 of the Commission’s regulations establishes Federal position limits (that is, position limits established by the Commission) on the nine legacy agricultural contracts. The nine legacy agricultural contracts are: CBOT Corn (and Mini-Corn) (C), CBOT Oats (O), CBOT Soybeans (and Mini-Soybeans) (S), CBOT Wheat (and Mini￾Wheat) (W), CBOT Soybean Oil (SO), CBOT Soybean Meal (SM), MGEX Hard Red Spring Wheat (MWE), CBOT KC Hard Red Winter Wheat (KW), COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 1, 15, 17, 19, 40, 140, 150 and 151 RIN 3038–AD99 Position Limits for Derivatives AGENCY: Commodity Futures Trading Commission. ACTION: Final rule. SUMMARY: The Commodity Futures Trading Commission (‘‘Commission’’ or ‘‘CFTC’’) is adopting amendments in this final rule (‘‘Final Rule’’) to conform regulations concerning speculative position limits to the relevant Wall Street Transparency and Accountability Act of 2010 (‘‘Dodd-Frank Act’’) amendments to the Commodity Exchange Act (‘‘CEA’’). Among other regulatory amendments, the Commission is adopting: New and amended Federal spot-month limits for 25 physical commodity derivatives; amended single month and all-months￾combined limits for most of the agricultural contracts currently subject to Federal position limits; new and amended definitions for use throughout the position limits regulations, including a revised definition of ‘‘bona fide hedging transaction or position’’ and a new definition of ‘‘economically equivalent swaps’’; amended rules governing exchange-set limit levels and grants of exemptions therefrom; a new streamlined process for bona fide hedging recognitions for purposes of Federal position limits; new enumerated bona fide hedges; and amendments to certain regulatory provisions that would eliminate Form 204 while also enabling the Commission to leverage and receive cash-market reporting submitted directly to the exchanges by market participants. DATES:
Effective date: This Final Rule will become effective on March 15, 2021. Compliance date: Compliance dates for this Final Rule shall be as follows:

• January 1, 2022 in connection with
  the Federal speculative position limits for the 16 non-legacy core referenced futures contracts subject to Federal position limits for the first time under this Final Rule. This compliance date also applies to any associated referenced contracts other than economically equivalent swaps. Such swaps are subject to a separate compliance date noted below.
• January 1, 2022 in connection with
  an exchange’s requirements under § 150.5, as adopted in this Final Rule.
• January 1, 2023 in connection with
  Federal speculative position limits for economically equivalent swaps, as defined under this Final Rule.
• January 1, 2023 in connection with
  the elimination of previously-granted risk management exemptions described in § 150.3(c), as adopted in this Final Rule. FOR FURTHER INFORMATION CONTACT:
  Dorothy DeWitt, Director, (202) 418– 6057, ddewitt@cftc.gov; Rachel Reicher, Chief Counsel, (202) 418–6233, rreicher@cftc.gov; Steven A. Haidar, Assistant Chief Counsel, (202) 418– 5611, shaidar@cftc.gov; Aaron Brodsky, Senior Special Counsel, (202) 418–5349, abrodsky@cftc.gov; Steven Benton, Industry Economist, (202) 418–5617, sbenton@cftc.gov; Lillian Cardona, Assistant Chief Counsel, (202) 418– 5012, lcardona@cftc.gov; Jeanette Curtis, Assistant Chief Counsel, (202) 418– 5669, jcurtis@cftc.gov; Harold Hild, Policy Advisor, (202) 418–5376, hhild@ cftc.gov; Division of Market Oversight, in each case, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581; Michael Ehrstein, Special Counsel, (202) 418– 5957, mehrstein@cftc.gov; Chang Jung, Special Counsel, (202) 418–5202, cjung@cftc.gov; Division of Swap Dealer and Intermediary Oversight, in each case, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581; Rachel Hayes, Trial Attorney, (816) 960–7741, rhayes@cftc.gov; Division of Enforcement, Commodity Futures Trading Commission, 4900 Main Street, Suite 500, Kansas City, MO 64112; or Brigitte Weyls, Trial Attorney, (312) 596–0547, bweyls@cftc.gov; Division of Enforcement, Commodity Futures Trading Commission, 525 West Monroe Street, Suite 1100, Chicago, IL 60661. SUPPLEMENTARY INFORMATION:
  Table of Contents
  I. Background
  A. Introduction
  B. Executive Summary
  C. Section-by-Section Summary of Final
  Rule
  D. Effective Date and Compliance Period E. The Commission Construes CEA Section 4a(a) To Require the Commission To Make a Necessity Finding Before Establishing Position Limits for Physical Commodities Other Than Excluded Commodities F. The Commission’s Use of Certain Terminology G. Recent Volatility in the WTI Contract H. Brief Summary of Comments Received
  II. Final Rule
  A. § 150.1—Definitions
  B. § 150.2—Federal Position Limit Levels
  C. § 150.3—Exemptions From Federal
  Position Limits
  D. § 150.5—Exchange-Set Position Limits and Exemptions Therefrom E. § 150.6—Scope F. § 150.8—Severability G. § 150.9—Process for Recognizing Non￾Enumerated Bona Fide Hedging Transactions or Positions With Respect to Federal Speculative Position Limits H. Part 19 and Related Provisions— Reporting of Cash-Market Positions
  I. Removal of Part 151
  III. Legal Matters
  A. Interpretation of Statute Regarding Whether Necessity Finding Is Required for Position Limits Established Pursuant to CEA 4a(a)(2) B. Legal Standard for Necessity Finding
  C. Necessity Finding as to the 25 Core
  Referenced Futures Contracts D. Necessity Finding as to Linked Contracts E. Necessity Finding for Spot/Non-Spot Month Position Limits
  IV. Related Matters
  A. Cost-Benefit Considerations B. Paperwork Reduction Act
  C. Regulatory Flexibility Act
  D. Antitrust Considerations
  I. Background
  A. Introduction
  The Commission has long established and enforced speculative position limits for futures contracts and options on futures contracts on nine agricultural commodities as authorized by the CEA.1 These nine agricultural commodity contracts, which have been subject to Federal position limits for decades, are generally referred to as the ‘‘nine legacy agricultural contracts.’’ Under this Final Rule, the Commission additionally will establish Federal speculative position limits for certain commodity derivatives contracts associated with 16 additional commodities. The Commission refers to these 16 new commodities and their associated commodity derivatives contracts throughout this release as the ‘‘non-legacy’’ contracts since they are subject to Federal position limits for the first time under this Final Rule. Accordingly, under the Final Rule, certain commodity derivatives contracts associated with 25 commodities are subject to Federal position limits. The Commission’s existing position limits regulations 2 in existing part 150

and ICE Cotton No. 2 (CT). See 17 CFR 150.2. The Federal position limits on these agricultural contracts are referred to as ‘‘legacy’’ limits because these contracts have been subject to Federal position limits for decades. 3See 17 CFR 150.2. 4See 17 CFR 150.3. 5See 17 CFR 150.4. 6 7 U.S.C. 7(d)(5); 17 CFR 38.300. Paragraph (A) of DCM Core Principle 5 provides: To reduce the potential threat of market manipulation or congestion (especially during trading in the delivery month), the board of trade shall adopt for each contract of the board of trade, as is necessary and appropriate, position limitations or position accountability for speculators. Position limits generally cannot be exceeded absent an exemption, whereas position accountability allows an exchange to establish a level at which market participants, including those participants who do not qualify for an exemption, are required to: Provide position information to the exchange prior to increasing a position above the accountability level; halt further position increases; and/or reduce positions in an orderly manner. Core Principle 6 in part 37 of the Commission’s regulations for swap execution facilities (‘‘SEFs’’) contains similar language. 17 CFR 38.600. 7 7 U.S.C. 6a(a)(1); see infra Section III.C. (discussion of the necessity finding). 8 7 U.S.C. 6a(a)(5); see also infra Section II.B.1.iii. 9Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 2011) (‘‘2011 Proposal’’); Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011) (‘‘2011 Final Rulemaking’’). 10 Int’l Swaps & Derivatives Ass’n v. U.S. Commodity Futures Trading Comm’n, 887 F. Supp. 2d 259 (D.D.C. 2012) (‘‘ISDA’’). 11Position Limits for Derivatives, 78 FR 75680 (Dec. 12, 2013) (‘‘2013 Proposal’’); Position Limits for Derivatives: Certain Exemptions and Guidance, 81 FR 38458 (June 13, 2016) (‘‘2016 Supplemental Proposal’’); and Position Limits for Derivatives, 81 FR 96704 (Dec. 30, 2016) (‘‘2016 Reproposal’’). 12Unless indicated otherwise, the use of the term ‘‘exchanges’’ throughout this release refers to DCMs and SEFs. 13Aggregation of Positions, 81 FR 91454 (Dec. 16,
2016) (‘‘Final Aggregation Rulemaking’’); see 17
CFR 150.4. Under the Final Aggregation Rulemaking, unless an exemption applies, a person’s positions must be aggregated with positions for which the person controls trading or for which the person holds a 10% or greater ownership interest. The Division of Market Oversight has issued time-limited no-action relief from some of the aggregation requirements contained in that rulemaking. See CFTC Letter No. 19–19 (July 31, 2019), available at https:// www.cftc.gov/csl/19-19/download. 14Because the earlier proposals were withdrawn in the 2020 NPRM, comments on the earlier proposals are not part of the administrative record with respect to the 2020 NPRM nor with respect to this Final Rule, except where expressly referenced herein. In the 2020 NPRM, the Commission stated that commenters to the 2016 Reproposal should resubmit comments relevant to the subject proposal; commenters who wish to reference prior comment letters should cite those prior comment letters as specifically as possible. (85 FR at 11597). Accordingly, this Final Rule will not discuss comments submitted in connection with the 2016 Reproposal unless such comments were resubmitted for the 2020 NPRM. 15Comments were originally due by April 29,
2020. Due to the COVID–19 pandemic, the
Continued of the Commission’s regulations include three components:
First, the Commission’s existing regulations establish separate position limit levels for each of the nine legacy agricultural contracts. These Federal position limit levels set the maximum speculative positions in each of the nine legacy agricultural contracts that a person may hold in the spot month, individual month, and all-months￾combined.3 Second, the existing Federal position limits framework provides exemptions to the Federal position limit levels for positions that constitute ‘‘bona fide hedging transactions or positions’’ and for certain ‘‘spread or arbitrage’’ positions.4 Third, the Commission’s existing regulations determine which accounts and positions a person must aggregate for the purpose of determining compliance with the Federal position limit levels.5 The existing Federal speculative position limits function in parallel to exchange-set position limits and/or exchange-set position accountability required by designated contract market (‘‘DCM’’) Core Principle 5.6 As a result, the nine legacy agricultural contracts are subject to both Federal and exchange-set limits, whereas other exchange-traded futures contracts and options on futures contracts are subject only to DCM-set limits and/or position accountability. As part of the Dodd-Frank Act, Congress amended the CEA’s position limits provisions, which since 1936 have authorized the Commission (and its predecessor) to impose limits on speculative positions to prevent the harms caused by excessive speculation. As discussed below, the Commission interprets these amendments as, among other things, tasking the Commission with establishing such position limits as it finds are ‘‘necessary’’ for the purpose of ‘‘diminishing, eliminating, or preventing’’ excessive speculation causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity.7 The Commission also interprets these amendments as tasking the Commission with establishing position limits on any ‘‘economically equivalent’’ swaps.8 The Commission previously issued proposed and final rules in 2011 (‘‘2011 Final Rulemaking’’) to implement the provisions of the Dodd-Frank Act regarding position limits and the bona fide hedge definition.9 A September 28, 2012 order of the U.S. District Court for the District of Columbia vacated the 2011 Final Rulemaking, with the exception of the rule’s amendments to 17 CFR 150.2.10 Subsequently, the Commission proposed position limits regulations in 2013 (‘‘2013 Proposal’’), in June of 2016 (‘‘2016 Supplemental Proposal’’), and again in December of 2016 (‘‘2016 Reproposal’’).11 The 2016 Reproposal would have amended part 150 of the Commission’s regulations to, among other things: Establish Federal position limits for 25 physical commodity futures contracts and their linked futures contracts, options on futures contracts, and ‘‘economically equivalent’’ swaps; revise the existing exemptions from such limits, including for bona fide hedges; and establish a framework for
exchanges 12 to recognize certain positions as bona fide hedges and thus exempt from position limits. To date, the Commission has not issued any final rulemaking based on the 2013 Proposal, 2016 Supplemental Proposal, or 2016 Reproposal. The 2016 Reproposal generally addressed comments received in response to the 2013 Proposal and the 2016 Supplemental Proposal. In a separate 2016 proposed rulemaking, the CFTC also proposed, and later adopted in 2016, amendments to rules in § 150.4 of the Commission’s regulations governing aggregation of positions for purposes of compliance with Federal position limits.13 These aggregation rules currently apply only to the nine legacy agricultural contracts subject to existing Federal position limits. Going forward, these aggregation rules will apply to all commodity derivative contracts that are subject to Federal position limits under this Final Rule. The Commission published a notice of a proposed rulemaking in the Federal Register on February 27, 2020 for a new position limits proposal (‘‘2020 NPRM’’). After reconsidering the prior proposals, including reviewing the comments responding thereto, the Commission in the 2020 NPRM withdrew from further consideration the 2013 Proposal, the 2016 Supplemental Proposal, and the 2016 Reproposal.14 In the 2020 NPRM, the Commission intended to: (1) Recognize differences across commodities and contracts, including differences in commercial hedging and cash-market reporting practices; (2) focus on commodity derivative contracts that are critical to price discovery and distribution of the underlying commodities such that the burden of excessive speculation in the commodity derivative contracts may have a particularly acute impact on interstate commerce for the underling commodities; and (3) reduce duplication and inefficiency by leveraging existing expertise and processes at DCMs. The public comment period for the 2020 NPRM ended May 15, 2020,15 and

Commission extended the deadline to May 15, 2020. 16The Commission states ‘‘approximately 75 relevant comment letters’’ since several commenters submitted additional, or supplemental, comments. As a result, the total could change slightly depending on whether one includes these supplemental comment letters in the total. Thus, for the avoidance of doubt, the Commission uses ‘‘approximately.’’ The Commission received comments from: American Cotton Shippers Association (‘‘ACSA’’); American Feed Industry Association (‘‘AFIA’’); American Gas Association (‘‘AGA’’); AQR Capital Management, LLC (‘‘AQR’’); Archer Daniels Midland (‘‘ADM’’); AMCOT; Americans for Financial Reform (‘‘AFR’’); Arthur Dunavant Investments (‘‘Dunavant’’); ASR Group International, Inc. (‘‘ASR’’); Atlantic Cotton Association (‘‘ACA’’); Barnard, Chris (Individual); Better Markets, Inc. (‘‘Better Markets’’); Cargill, Inc. (‘‘Cargill’’); Castleton Commodities International LLC (‘‘CCI’’); Chevron USA Inc. (‘‘Chevron’’); Choice Cotton Company, Inc. (‘‘Choice Cotton’’); CHS Inc. (‘‘CHS Inc.’’) and CHS Hedging, LLC (‘‘CHS Hedging’’) (collectively, ‘‘CHS’’); Citadel; CME Group Inc. (‘‘CME Group’’); Commodity Markets Council (‘‘CMC’’); DECA Global LLC (‘‘DECA’’); East Cotton Company (‘‘East Cotton’’); Ecom Agroindustrial (‘‘Ecom’’); Edison Electric Institute (‘‘EEI’’) and Electric Power Supply Association (‘‘EPSA’’) (collectively, the ‘‘Joint Associations’’ or ‘‘EEI/EPSA’’); Futures Industry Association (‘‘FIA’’); Glencore Agriculture Limited, Glencore Agriculture B.V. (collectively, ‘‘Glencore’’); ICE Futures U.S. (‘‘IFUS’’); IMC Companies (‘‘IMC’’); Industrial Energy Consumers of America; Institute for Agriculture & Trade Policy (‘‘IATP’’); Intercontinental Exchange, Inc. (‘‘ICE’’); International Energy Credit Association (‘‘IECA’’); International Swaps and Derivatives Association, Inc. (‘‘ISDA’’); Jess Smith & Sons (‘‘Jess Smith’’); Lawson/O’Neill Global Institutional Commodity (LOGIC) Advisors (‘‘Lawson/O’Neill’’); Long Island Power Authority (‘‘LIPA’’); Louis Dreyfus Company (‘‘LDC’’); Mallory Alexander International Logistics (‘‘Mallory Alexander’’); Managed Funds Association and Alternative Investment Management Association (collectively, the ‘‘Associations’’ or ‘‘MFA/AIMA’’); Marshal, Gerald (Independent Trader); Matsen, Eric (Individual—Physical Commodity Risk Management Consultant); McMeekin Cotton LLC (‘‘McMeekin’’); Memtex Cotton Marketing, LLC (‘‘Memtex’’); Minneapolis Grain Exchange, Inc. (‘‘MGEX’’); Moody Compress & Warehouse Company (‘‘Moody Compress’’); Namoi Cotton Alliance (‘‘Namoi’’); National Cotton Council (‘‘NCC’’); National Council of Farmer Cooperatives (‘‘NCFC’’); National Council of Textile Organizations (‘‘NCTO’’); National Energy & Fuels Institute (‘‘NEFI’’); National Grain and Feed Association (‘‘NGFA’’); National Oilseed Processors Association (‘‘NOPA’’); National Rural Electric Cooperative; Association American Public Power Association; and American Public
Gas Association (collectively, ‘‘NRECA’’); Natural Gas Supply Association (‘‘NGSA’’); Olam International Limited (‘‘Olam’’); Omnicotton Inc. (‘‘Omnicotton’’); Pacific Investment Management Company LLC (‘‘PIMCO’’); Parkdale Mills (‘‘Parkdale’’); Petroleum Marketers Association of America (‘‘PMAA’’); Public Citizen; Robert Rutkowski (‘‘Rutkowski’’); S. Canale Cotton Co. (‘‘Canale Cotton’’); Shell Energy North America (US), L.P. and Shell Trading (US) Company (collectively, ‘‘Shell’’); SIFMA Asset Management Group (‘‘SIFMA AMG’’); Skylar Capital Management LP (‘‘SCM’’); Southern Cotton Association (‘‘Southern Cotton’’); Southwest Ag Sourcing (‘‘SW Ag’’); Suncor Energy Marketing Inc. and Suncor Energy USA Marketing Inc. (collectively, ‘‘SEMI’’); Texas Cotton Association (‘‘Texas Cotton’’); The Coalition of Physical Energy Companies; The Commercial Energy Working Group (‘‘CEWG’’); The Walcot Trading Company, LLC (‘‘Walcot’’); Toyo Cotton Company (‘‘Toyo’’); VLM Commodities (‘‘VLM’’); Western Cotton Shippers Association (‘‘WCSA’’); White Gold Cotton Marketing, LLC (‘‘White Gold’’). 17The Final Rule’s regulations are discussed in detail throughout this release. 18See infra Section III.C.2. 19 Id. the Commission received approximately 75 public comment letters.16 After reviewing these public comment letters, and for the general reasons discussed in this release, the Commission is adopting the 2020 NPRM with certain modifications in this Final Rule.17 Before addressing the specifics of the Final Rule, the Commission outlines several themes underscoring the Commission’s approach in the Final Rule. First, the Commission believes that any position limits regime must take into account differences across commodities and contract types. The existing Federal position limits regulations apply only to the nine legacy agricultural contracts, all of which are physically-settled futures on agricultural commodities. Limits on these nine legacy agricultural contracts have been in place for decades, as have the Federal rules governing both the exemptions from these Federal position limits and the exchange-set position limits on the nine legacy agricultural contracts. The existing framework is largely a historical remnant of an approach that predates cash-settled futures contracts, institutional-investor interest in commodity indexes, highly liquid energy markets, and the Commission’s jurisdiction over certain swaps. Congress has tasked the Commission with establishing such limits as it finds are ‘‘necessary’’ for the purpose of preventing the burdens associated with excessive speculation causing sudden or unreasonable fluctuations or unwarranted changes in the price of an underlying commodity; and establishing limits on swaps that are ‘‘economically equivalent’’ to any futures contracts or options on futures contracts subject to Federal position limits. An approach that is flexible enough to accommodate potential future, unpredictable developments in commercial hedging
practices is well-suited for the current derivatives markets by accommodating differences in commodity types, contract specifications, hedging practices, cash-market trading practices, organizational structures of hedging participants, and liquidity profiles of individual markets. The Commission is building this flexibility into several parts of the Final Rule, including: (1) Exchange-set limits or accountability levels outside of the spot month for referenced contracts based on commodities other than the nine legacy agricultural contracts; (2) the ability for exchanges to use more than one formula when setting their own limit levels; (3) an updated formula for Federal non-spot month position limit levels on the nine legacy agricultural contracts that is calibrated to recently observed open interest, which has generally increased over time; (4) a bona fide hedging definition that is broad enough to accommodate common commercial hedging practices, including unfixed-price transactions as well as anticipatory hedging practices, such as anticipatory merchandising; (5) a simplified process for market participants to submit a single application to obtain non-enumerated bona fide hedge recognitions for purposes of Federal and exchange-set position limits that are in line with common commercial hedging practices; (6) the elimination of a restriction for purposes of Federal position limits on holding positions during the last trading days of the spot month; and (7) broader discretion for market participants to measure risk in the manner most suitable for their businesses. Second, the Final Rule establishes position limits with respect to 16 additional commodities during the spot month, for a total of 25 core referenced futures contracts, and certain derivative contracts linked thereto, for which the Commission finds that speculative position limits are necessary.18 As described below, this necessity finding for the 25 core referenced futures contracts is based on two interrelated factors: (1) The importance of the 25 core referenced futures contracts to their respective underlying cash markets, including that they require physical delivery of the underlying commodity; and (2) the particular importance to the national economy of the commodities underlying the 25 contracts.19 Third, there is an opportunity for greater collaboration between the Commission and the exchanges within the statutorily created parallel Federal and exchange-set position limit regimes. Given the exchanges’ obligations to carry out self-regulatory responsibilities, resources, deep knowledge of their markets and trading practices, close interactions with market participants, existing programs for addressing exemption requests, and direct ability to leverage these resources to generally act more quickly than the Commission, the Commission believes that cooperation between the Commission and the exchanges on position limits should not only be continued, but enhanced. For

20Reference to, or discussion of, derivatives contracts listed on IFUS, the DCM and subsidiary of ICE, will be referred to herein as ‘‘ICE [Commodity] [IFUS Commodity Code]’’ (e.g., ICE Sugar No. 16 (SF)). Additionally, ‘‘CBOT’’ refers to the DCM Board of Trade of the City of Chicago, Inc.; ‘‘CME’’ refers to the DCM Chicago Mercantile Exchange, Inc.; ‘‘COMEX’’ refers to the DCM Commodity Exchange, Inc.; and ‘‘NYMEX’’ refers to the DCM New York Mercantile Exchange, Inc. example, exchanges are particularly well-positioned to: Provide the Commission with estimates of deliverable supply in connection with their commodity contracts that require physical delivery; recommend limit levels for the Commission’s consideration; and help administer the program for recognizing bona fide hedges. Further, given that the Final Rule requires exchanges to collect, and provide to the Commission upon request, cash-market information from market participants requesting recognition of bona fide hedges, the Commission is eliminating the Form 204 and part of the Form 304, which market participants with bona fide hedging positions in excess of position limits currently file each month with the Commission to demonstrate cash￾market positions justifying such overages. Under enhanced collaboration, the Commission will maintain its access to such information from the exchanges, which will result in a more efficient administrative process, in part by reducing duplication of efforts. B. Executive Summary This executive summary provides an overview of the key components of the Final Rule. The summary only highlights certain aspects of the final regulations and generally uses shorthand to summarize complex topics. The executive summary is neither intended to be a comprehensive recitation of the Final Rule nor intended to supplement, modify, or replace any interpretive or other language contained herein. Section II of this release includes a more detailed and comprehensive discussion of all of the final regulations. The final regulations and related appendices and guidance follow Section IV (Related Matters) of this release.

1. Contracts Subject to Federal
   Speculative Position Limits Federal position limits apply to ‘‘referenced contracts,’’ which, as described in turn below, include: (i) 25 ‘‘core referenced futures contracts’’ (i.e., the nine legacy agricultural contracts together with the new 16 non-legacy contracts); (ii) futures contracts and options on futures contracts directly or indirectly linked to a core referenced futures contract; and (iii) ‘‘economically equivalent swaps.’’
   i. Core Referenced Futures Contracts
   Federal position limits under the Final Rule will apply to the following 25 20 physically-settled core referenced futures contracts:

21While the Final Rule includes Federal non-spot month limits only for referenced cintracts on the nine legacy agricultural contracts, the Final Rule requires exchanges to establish, consistent with Commission standards set forth in this Final Rule, exchange-set position limits and/or position accountability levels in the non-spot months for the 16 non-legacy core referenced futures contracts and for any associated referenced contracts. 22For clarity, clause (2) is intended to encompass potential physically-settled ‘‘look-alike’’ contracts that do not directly reference a core referenced futures contract but that are nonetheless based on the same commodity and delivery location as a core referenced futures contract.
ii. Futures Contracts and Options on
Futures Contracts Linked to a Core Referenced Futures Contract The term ‘‘referenced contract’’ encompasses any core referenced futures contract as well as any futures contract and any option on a futures contract that is: (1) Directly or indirectly linked to the price of a core referenced futures contract; or (2) directly or indirectly linked to the price of the same commodity underlying the applicable core referenced futures contract, for delivery at the same location as specified in that core referenced futures contract.22 The term ‘‘referenced contract,’’ however, explicitly excludes location basis contracts, commodity index contracts, contracts that are based on prices across a month (i.e., contracts commonly referred to as calendar month average contracts, trade month average contracts, or balance of month contracts), outright contracts that are based on a price reporting agency index price, swap guarantees, and trade options that meet certain requirements.
iii. Economically Equivalent Swaps
The term referenced contracts also includes economically equivalent swaps, defined as swaps with ‘‘identical material’’ contractual specifications, terms, and conditions to a referenced contract. Swaps in a commodity other than natural gas that have identical material specifications, terms, and conditions to a referenced contract are still deemed economically equivalent swaps even if they differ from the referenced contract with respect to one or more of the following: (a) Lot size specifications or notional amounts, (b) delivery dates diverging by less than one calendar day for physically-settled swaps, or (c) post-trade risk management arrangement (e.g., uncleared swaps versus cleared futures contracts). The same general definition applies to natural gas swaps, except that the definition is expanded to include swaps with delivery dates diverging from the corresponding core referenced futures contract by less than two calendar days. Instruments that are exempt from Commission jurisdiction or otherwise not deemed to be swaps under the Commission’s regulations (e.g., instruments that are excluded by the CEA’s ‘‘swap’’ definition or Commission regulations as physically-settled forward contracts) are not ‘‘economically equivalent swaps’’ even if they otherwise fall within the ‘‘economically equivalent swap’’ definition.
2. Federal Position Limit Levels During
the Spot Month
ER14JA21.000</GPH>

Federal spot month position limits apply to all 25 core referenced futures contracts and their associated referenced contracts. The Final Rule establishes the spot month position limit levels summarized in the table below. Each spot month limit is set at or below 25% of deliverable supply, as estimated using recent data provided by the DCM listing the core referenced futures contract, and verified by the Commission. The Federal spot month position limits apply on a futures￾equivalent basis based on the size of the unit of trading of the relevant core referenced futures contract. BILLING CODE 6351–01–P ER14JA21.001</GPH>

23As of October 15, 2020.
24The Federal spot month limit for Live Cattle adopted herein features a step-down limit similar to the CME’s existing Live Cattle step-down exchange-set limit. The Federal spot month step￾down limit is: (1) 600 at the close of trading on the first business day following the first Friday of the contract month; (2) 300 at the close of trading on the business day prior to the last five trading days of the contract month; and (3) 200 at the close of trading on the business day prior to the last two trading days of the contract month. 25 ICE technically does not have an exchange-set spot month position limit level for ICE Sugar No. 16 (SF). However, it does have a single-month position limit level of 1,000 contracts, which effectively operates as a spot month position limit. 26As discussed below, the NYMEX Henry Hub Natural Gas (NG) Federal spot month limit for cash￾settled look-alike referenced contracts will apply on a per-exchange and per-OTC swaps market basis rather than on an aggregate basis across exchanges. 27Currently, the cash-settled natural gas contracts are subject to an exchange-set spot month position limit level of 1,000 equivalent-sized contracts per exchange. As of publication of the Final Rule, there are three exchanges that list cash-settled natural gas contracts: NYMEX, IFUS, and Nodal. As a result, a market participant may hold up to 3,000 equivalent￾sized cash-settled natural gas contracts under existing exchange-set limits. The exchanges also have a conditional position limit framework for natural gas contracts. This exchange-set conditional spot month position limit permits up to 5,000 cash-settled NYMEX NG equivalent-sized referenced contracts per exchange that lists such contracts, provided that the market participant does not hold positions in the physically-settled NYMEX NG referenced contract. 28The Federal spot month limit for Light Sweet Crude Oil adopted herein features the following step-down limit: (1) 6,000 contracts as of the close BILLING CODE 6351–01–C ER14JA21.002</GPH>

of trading three business days prior to the last trading day of the contract; (2) 5,000 contracts as of the close of trading two business days prior to the last trading day of the contract; and (3) 4,000 contracts as of the close of trading one business day prior to the last trading day of the contract. 29As discussed further under Section II.B.3.vi, cash-settled NYMEX NG referenced contracts under the Final Rule are subject to per-exchange and per￾OTC swaps market Federal position limits. As a result, market participants are not required to aggregate their positions in natural gas referenced contracts across different exchanges and the OTC swaps markets but also may not net such positions across different exchanges or the OTC swaps market. 30 ‘‘Nodal’’ refers to the Nodal Exchange, LLC.
i. Application of Federal Spot Month
Limits to Commodities Other Than Natural Gas With the exception of natural gas, the Federal spot month position limit levels apply in the aggregate across exchanges and the over-the-counter (‘‘OTC’’) swap markets. During the spot month, Federal position limits apply ‘‘separately’’ to physically-settled and cash-settled referenced contracts.29 Accordingly, during the spot month, a market participant is required to aggregate its net physically-settled positions, and separately its net cash-settled positions, across exchanges and the OTC swaps markets, but may not net cash-settled referenced contracts with physically￾settled referenced contracts.
ii. Application of Federal Spot Month
Limits to Natural Gas
For the NYMEX Henry Hub Natural Gas (‘‘NYMEX NG’’) physically￾delivered core referenced futures contract and its associated cash-settled referenced contracts, the Final Rule modifies the 2020 NPRM by providing that Federal position limits apply to NYMEX NG cash-settled referenced contracts on a per-exchange and per￾OTC swaps market basis (i.e., cash￾settled positions are not aggregated across different exchanges and the OTC swaps market). Specifically, a market participant may hold up to 2,000 cash-settled NYMEX NG referenced contracts (i.e., the NYMEX NG Federal spot month position limit) on each exchange that lists for trading a cash-settled NYMEX NG referenced contract as well as the OTC swap market. Currently, three exchanges (NYMEX, IFUS, and Nodal) 30 list cash-settled ‘‘look-alike’’ NYMEX NG referenced contracts. Thus, a market participant is able to hold 2,000 cash-settled NYMEX NG referenced futures contracts on each exchange, which is 6,000 cash-settled look-alike NYMEX NG referenced contracts in total. In addition, a market participant is able to hold a position of 2,000 cash-settled NYMEX NG equivalent-sized economically equivalent swaps in the OTC swaps markets for a total position of 8,000 cash-settled NYMEX NG referenced contracts across the four markets (i.e., NYMEX, IFUS, Nodal, and the OTC swaps market). As noted above, because Federal spot month position limit levels apply ‘‘separately’’ to cash-settled and physically-settled referenced contracts, a market participant further is able to hold an additional position of 2,000 physically-settled NYMEX NG referenced contracts for a total position of 10,000 NYMEX NG referenced contracts. As discussed further below, market participants may hold additional cash￾settled NYMEX NG referenced contracts under the Final Rule’s Federal spot month conditional position limit exemption as long as the market participant satisfies certain requirements. However, for the avoidance of doubt, the Commission notes that the per-exchange 2,000 contract Federal spot month position limit level for cash-settled NYMEX NG referenced contracts discussed above is not part of the Federal spot month conditional position limit exemption but rather constitutes the default speculative Federal spot month position limit.
3. Federal Position Limit Levels Outside
of the Spot Month
Under the Final Rule, Federal position limits outside of the spot month (‘‘non-spot month’’ position limits) apply only to the nine legacy agricultural contracts and their associated referenced contracts. In contrast, referenced contracts based on the 16 core referenced futures contracts subject to Federal position limits for the first time under the Final Rule are only subject to Federal position limits during the spot month, and are otherwise only subject to exchange-set limits or position accountability outside of the spot month. The following Federal non-spot month position limit levels, summarized in the table below, are set at 10% of open interest for the first 50,000 contracts, with an incremental increase of 2.5% of open interest thereafter, and apply on a futures￾equivalent basis based on the size of the unit of trading of the relevant core referenced futures contract:

31With the exception of the ICE Cotton No. 2 (CT) contract discussed below, for each of the legacy agricultural contracts, the single month limit is equal to the all-months-combined limit under the Final Rule. 32As of October 15, 2020. 33The single month limit for ICE Cotton No. 2 (CT) is set at 50% of the all-months-combined limit, or 5,950 contracts, as discussed more fully below.
4. Exchange-Set Limits and Exemptions
Therefrom
i. Contracts Subject to Federal Position
Limits
An exchange that lists a contract subject to Federal position limits, as specified above, is required to set its own limits for such contracts at a level that is no higher than the Federal level. Exchanges may grant exemptions from their own limits to a level that exceeds the applicable Federal limit, provided the exemption is self-effectuating (e.g., an enumerated bona fide hedge or a spread that satisfies the ‘‘spread transaction’’ definition) or provided the exemption is recognized by the Commission for purposes of Federal position limits (pursuant to an application submitted either directly to the Commission under § 150.3 or indirectly to the Commission through an exchange under § 150.9, as applicable). Exchanges may grant exemptions that are not recognized by the Final Rule; however, such exemptions must be capped at a level that is not higher than the applicable Federal position limit level.
ii. Physical Commodity Contracts Not
Subject to Federal Position Limits For physical commodity contracts, for which no necessity finding was supported, and which are therefore not subject to Federal position limits, an exchange is generally required to set spot month position limit levels at no greater than 25% of deliverable supply, but has flexibility to submit other approaches for review by the Commission, provided the approach results in spot month position limit levels that are ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index’’ and complies with all other applicable regulations. Outside of the spot month, an exchange has additional flexibility to set either position limits or position accountability levels, provided the levels are ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ Non￾exclusive Acceptable Practices are included in new Appendix F to part 150 under the Final Rule and provide several examples of formulas that the Commission has determined meet this standard, but an exchange has flexibility to develop other approaches. An exchange has flexibility to grant a variety of exemption types. Exchanges must take into account whether the exemption results in a position that is ER14JA21.003</GPH>

34However, as discussed further below, the Commission is providing for a compliance period until January 1, 2022 for the 16 non-legacy referenced contracts that will be subject to Federal position limits for the first time under this Final Rule. Similarly, the Commission is providing for a compliance period for any economically equivalent swaps, as well as in connection with the elimination of the risk management exemption, until January 1, 2023. 35The existing definition of ‘‘bona fide hedging transactions and positions’’ enumerates the following hedging transactions or positions: (1) Hedges of inventory and cash commodity fixed￾price purchase contracts under 1.3(z)(2)(i)(A); (2) hedges of unsold anticipated production under 1.3(z)(2)(i)(B); (3) hedges of cash commodity fixed￾price sales and (4) hedges of fixed price sales of their cash products and byproducts contracts under 1.3(z)(2)(ii)(A) and (B); (5) hedges of unfilled anticipated requirements under 1.3(z)(2)(ii)(C); (6) hedges of offsetting unfixed price cash commodity sales and purchases under 1.3(z)(2)(iii); and (7) cross-commodity hedges under 1.3(z)(2)(iv). The following additional hedging practices are not enumerated in the existing regulation, but are included as enumerated hedges in the Final Rule:
(1) Hedges of anticipated merchandising; (2) hedges by agents; (3) hedges of anticipated royalties; (4) hedges of services; and (5) offsets of commodity trade options. 36The processes for obtaining bona fide hedge recognitions and non-enumerated bona fide hedge recognitions are summarized in Section 7 below of this executive summary (Processes for Requesting Bona Fide Hedge Recognitions and Spread Exemptions). ‘‘not in accord with sound commercial practices’’ in the market for which the exchange is considering the application, and/or ‘‘exceed[s] an amount that may be established and liquidated in an orderly fashion in that market.’’
5. Limits on ‘‘Pre-Existing Positions’’
As discussed above, only swaps that qualify as ‘‘economically equivalent swaps’’ are subject to Federal position limits under the Final Rule. However, economically equivalent swaps entered into in good faith prior to the Final Rule’s Effective Date, including both ‘‘Pre-Enactment Swaps,’’ which are swaps entered into prior to the Dodd￾Frank Act whose terms have not expired, and ‘‘Transition Period Swaps,’’ which are swaps entered into between July 22, 2010 and the Final Rule’s effective date, are not subject to Federal position limits. Other pre￾existing positions (i.e., pre-existing positions that are futures contracts or options on futures contracts) will be subject to the Final Rule’s Federal position limits.34 Market participants may net down their post-Effective Date positions in commodity derivatives contracts with any pre-existing swaps (as long as such swaps qualify as economically equivalent swaps) for purposes of complying with non-spot month Federal position limits. In contrast, during the spot month, market participants may not apply these pre-existing swap positions to net down their positions so as to avoid rendering Federal spot month position limits ineffective. The Commission is particularly concerned about protecting the spot month in physically-delivered futures from price distortions or potential manipulation and consequent disruption of the hedging and price discovery utility of the related futures contract.
6. Legal Standards for Exemptions From
Federal Position Limits
i. Bona Fide Hedge Recognition
A bona fide hedging transaction or position may exceed Federal position limits if the hedge position satisfies all three elements of the Final Rule’s ‘‘general’’ bona fide hedging definition. That is, (1) the position represents a substitute for transactions or positions made or to be made at a later time in a physical marketing channel (‘‘temporary substitute test’’); (2) the position is economically appropriate to the reduction of price risks in the conduct and management of a commercial enterprise (‘‘economically appropriate test’’); and (3) the position arises from the potential change in value of actual or anticipated assets, liabilities, or services (‘‘change in value requirement’’). The Final Rule makes several changes to the existing bona fide hedging definition, including those described immediately below:
First, the Commission is expanding the existing list of ‘‘enumerated’’ bona fide hedges to cover additional hedging practices, including adding a bona fide hedge for anticipated merchandising.35 To provide greater certainty, the list of enumerated bona fide hedges is now incorporated into the regulation. In contrast, in the 2020 NPRM, this list of enumerated bona fide hedges was proposed in the form of non-binding acceptable practices in Appendix A to
part 150. While the enumerated bona
fide hedges will remain listed in
Appendix A under the Final Rule,
Appendix A to part 150 is now
explicitly incorporated into Commission regulations and is part of the regulatory text rather than acceptable practices. A person who holds a position that qualifies as a bona fide hedge and that is one of the enumerated hedges in
Appendix A to part 150 is not required
to request prior approval from the Commission to hold such bona fide hedge position above the Federal position limit. That is, the enumerated bona fide hedges are ‘‘self-effectuating’’ for purposes of Federal position limits. A person with an enumerated bona fide hedge position, however, would still need to request an exemption from the relevant exchange for any exchange-set limits.36 Second, with respect to the treatment of unfixed-price forward transactions and bona fide hedging under the Final Rule, the Commission clarifies that a commercial market participant may qualify for one of the Final Rule’s enumerated anticipatory bona fide hedges (i.e., enumerated bona fide hedges for unsold anticipated production, unfilled anticipated requirements, and anticipated merchandising) with respect to an unfixed-price forward transaction. The Commission believes that an unfixed￾price forward transaction should not preclude a commercial market participant from qualifying for one of these enumerated anticipatory bona fide hedges, because such unfixed-price forward transactions do not give rise to outright price risk for a commercial market participant and do not otherwise fix an outright price. Accordingly, unfixed-price transactions do not ‘‘fill’’ or ‘‘address’’ the hedging need for which the enumerated anticipatory bona fide hedges are predicated. The Commission notes that an unfixed-price forward transaction does not itself allow a market participant to qualify for one of these enumerated anticipatory bona fide hedges, and that a market participant must still satisfy the requirements of the applicable anticipatory bona fide hedge to qualify (e.g., as an initial matter, by the commercial market participant being able to demonstrate its anticipated unsold production, anticipated unfilled requirements, and/or anticipated merchandising). Third, the Final Rule clarifies whether and when market participants may measure risk on a gross basis rather than on a net basis. Instead of only being permitted to hedge on a ‘‘net basis’’ except in a narrow set of circumstances, a market participant is also able to generally hedge positions on a ‘‘gross basis,’’ provided that the participant has done so over time in a consistent manner and is not doing so to evade Federal position limits. Among other items, the Final Rule differs from the 2020 NPRM in that the Final Rule: (1) Eliminates the requirement that exchanges document their justifications when allowing gross hedging; (2) clarifies that market participants are not required to develop written policies or procedures that set forth when gross

37The phrase ‘‘risk management’’ as used in this instance refers to derivatives positions, typically held by a swap dealer, used to offset a swap position, such as a commodity index swap, with another entity for which that swap is not a bona fide hedge. 38The Final Rule expands the 2020 NPRM’s list of exempt spread transactions by also including intra-market spreads, inter-market spreads, and intra-commodity spreads. versus net hedging is appropriate; and (3) clarifies that gross hedging is permissible for both enumerated and non-enumerated hedges. Fourth, market participants are permitted to hold bona fide hedges in excess of Federal position limits during the last five days of the spot period (or during the time period for the spot month if less than five days). While the Final Rule does not include a Federal restriction on holding bona fide hedging positions in excess of Federal position limits during the spot period, exchanges continue to have the discretion to adopt such restrictions (commonly referred to by market participants as the ‘‘Five-Day Rule’’), or similar restrictions, for purposes of exchange-set limits. The Final Rule also includes guidance on the application of spot-period restrictions, including factors for exchanges with such restrictions to consider when determining to grant exemptions that are not subject to any such restrictions for purposes of their own limits. Finally, the Final Rule modifies the ‘‘temporary substitute test’’ to require that a bona fide hedging transaction or position in a physical commodity must always, and not just normally, be connected to the production, sale, or use of a physical cash-market commodity. Therefore, a market participant is generally no longer allowed to treat positions entered into for ‘‘risk management purposes’’ 37 as a bona fide hedge, unless the position qualifies as either: (i) An offset of a pass-through swap, where the offset reduces price risk attendant to the pass-through swap executed opposite a counterparty for whom the swap qualifies as a bona fide hedge; or (ii) a ‘‘swap offset,’’ where the offset is used by a counterparty to reduce price risk attendant to a swap that qualifies as a bona fide hedge and that was previously entered into by that counterparty.
ii. Spread Exemption
A transaction or position may also exceed Federal position limits if it qualifies as a ‘‘spread transaction,’’ which includes the following common types of spreads: Intra-market spreads; inter-market spreads; intra-commodity spreads; inter-commodity spreads; calendar spreads; quality differential spreads; processing spreads (such as energy ‘‘crack’’ or soybean ‘‘crush’’ spreads); product and by-product differential spreads; and futures-options spreads.38 Spread exemptions may be granted using the process described in Section 7 below of this executive summary (Processes for Requesting Bona Fide Hedge Recognitions and Spread Exemptions).
iii. Financial Distress Exemption
This exemption allows a market participant to exceed Federal position limits if necessary to take on the positions and associated risk of another market participant during a potential default or bankruptcy situation. This exemption is available on a case-by-case basis, depending on the facts and circumstances involved.
iv. Conditional Spot Month Limit
Exemption in Natural Gas As long as a market participant holds no physically-settled NYMEX NG contracts, the Final Rule allows that market participant to exceed the NYMEX NG Federal spot month position limit level of 2,000 cash-settled referenced contracts per exchange (and an additional 2,000 equivalent-sized economically equivalent OTC swaps) by holding 10,000 cash-settled NYMEX NG referenced contracts per DCM that lists cash-settled NYMEX NG referenced contracts, as well as an additional 10,000 equivalent-sized cash-settled economically equivalent NYMEX NG swaps. The Final Rule clarifies that market participants may not use a spread exemption to exceed the aforementioned conditional spot month limit for natural gas.
7. Processes for Requesting Bona Fide
Hedge Recognitions and Spread Exemptions
i. Self-Effectuating Enumerated Bona
Fide Hedges
A position that complies with the bona fide hedging definition in § 150.1 and falls within one of the enumerated bona fide hedges is self-effectuating for purposes of Federal position limits, provided the market participant separately applies to the relevant exchange for an exemption from exchange-set limits. Such market participants are no longer required to file Form 204/304 with the Commission on a monthly basis to demonstrate cash￾market positions justifying Federal position limit overages. Instead, the Commission will have access to cash￾market information that such market participants submit as part of their applications to an exchange for an exemption from exchange-set limits, typically filed on an annual basis.
ii. Bona Fide Hedges That Are Not Self￾Effectuating
The Commission may consider adding to the list of enumerated bona fide hedges at a later time, as the Commission may find appropriate. Until that time, all bona fide hedge positions that are not enumerated in Appendix A to part 150 must be granted pursuant to one of the processes for requesting a non-enumerated bona fide hedge recognition, as explained below. A market participant seeking to exceed Federal position limits for a non￾enumerated bona fide hedging transaction or position is able to choose whether to apply directly to the Commission or, alternatively, apply indirectly to the Commission through the applicable exchange using a new streamlined process. If applying directly to the Commission, the market participant must also separately apply to the relevant exchange for relief from exchange-set position limits. If applying to an exchange using the new streamlined process, a market participant may file an application with an exchange, generally at least annually, which will be valid both for purposes of Federal and exchange-set position limits. Under this streamlined process, if the exchange determines to grant a non￾enumerated bona fide hedge recognition for purposes of its exchange-set position limits, the exchange must notify the Commission and the applicant simultaneously. Then, 10 business days (or two business days in the case of retroactive applications filed late due to sudden or unforeseen bona fide hedging needs) after the exchange issues such a determination, the bona fide hedge exemption may be deemed approved for purposes of Federal position limits unless the Commission (and not Commission staff) notifies the market participant otherwise. That is, after the 10 (or two) business days expire, the bona fide hedge exemption is considered approved for purposes of Federal position limits. Under the Final Rule, once the exchange notifies the Commission and the applicant of the exchange’s determination to approve the application, the applicant may, at its own risk, exceed Federal position limits during the Commission’s 10 business￾day review period. If the Commission determines to deny an exemption application, the applicant will not be subject to any Federal position limits violation, provided the

39The Commission understands that certain exchanges may distinguish between the terms ‘‘spread,’’ ‘‘arbitrage,’’ and ‘‘straddle.’’ For the purposes of the Commission’s discussion and the Final Rule in general, the Commission’s use of the term ‘‘spread’’ is meant to include all of these related trading strategies, and any Commission reference to ‘‘spread’’ rather than ‘‘arbitrage’’ or ‘‘straddle’’ is not intended to suggest a substantive difference in meaning. 40As discussed above in Section 6 of this executive summary (Legal Standards for Exemptions from Federal Position Limits), the Commission is no longer recognizing risk management exemptions as bona fide hedges under the Final Rule. 41 In two years, the Commission will reevaluate the ability of exchanges to establish and implement appropriate surveillance mechanisms to implement DCM Core Principle 5 and SEF Core Principle 6 with respect to swaps. person filed the application in good faith and brings the position into compliance with the applicable Federal position limit within a commercially reasonable amount of time, as applicable. The Final Rule also allows a market participant with sudden or unforeseen hedging needs to file a request for a bona fide hedge exemption within five business days after exceeding the Federal limit (i.e., commonly referred to as a ‘‘retroactive’’ exemption application). If the Commission denies such application, the market participant will not be subject to a Federal position limit violation, provided the market participant filed the application in good faith and brings the position into compliance with the applicable Federal position limit within a commercially reasonable amount of time, as applicable. Among other changes, market participants are no longer required to file Forms 204 or 304, as applicable, with the Commission on a monthly basis to demonstrate cash-market positions justifying position limit overages. Under the Final Rule, the Commission will instead leverage cash￾market information submitted directly to the exchanges.
iii. Spread Exemptions
For a referenced contract on any commodity, a spread exemption is self￾effectuating for purposes of Federal position limits, provided that (1) the position falls within one of the categories set forth in the ‘‘spread transaction’’ definition, and (2) the market participant separately applies to the applicable exchange for a spread exemption from exchange-set position limits.39 A market participant with a spread position that does not fit within the ‘‘spread transaction’’ definition with respect to any of the commodities subject to Federal position limits may apply directly to the Commission, and must also separately apply to the applicable exchange.
8. Compliance Date and Effective Date
i. Summary
The Final Rule’s effective date is March 15, 2021 (the ‘‘Effective Date’’). This means that all aspects of the Final Rule will be effective as of the Effective Date, including the new enumerated bona fide hedges (e.g., anticipated merchandising) as well as the higher Federal position limits for the nine legacy agricultural contracts. However, as discussed below, the Commission is also providing for compliance dates that extend beyond the Effective Date in connection with several of the Final Rule’s requirements. The Final Rule provides market participants with a compliance date of January 1, 2022 for purposes of compliance with the Federal position limits for the 16 non-legacy core referenced futures contracts that are subject to Federal position limits for the first time under this Final Rule. This compliance date also applies to any referenced contracts (other than economically equivalent swaps, which have a separate compliance date as discussed further below) related to these 16 non-legacy core referenced futures contracts. The Final Rule also provides exchanges with a compliance date of January 1, 2022 for purposes of establishing exchange-set position limits and provisions associated with exemptions therefrom, including certain obligations to collect cash-market information from market participants in connection with market participants’ applications for bona fide hedging exemptions to exchange-set limits, and to share the same with the Commission, consistent with the requirements under the Final Rule. Additionally, the Final Rule provides a compliance date of January 1, 2023 with respect to (i) the elimination of previously-granted risk management exemptions,40 and (ii) Federal position limits for economically equivalent swaps. Because the nine legacy agricultural contracts are currently subject to Federal position limits under the existing Federal framework, the Final Rule does not provide a compliance date for the new Federal position limits under the Final Rule for such contracts, or a formal phase-in period. Therefore, such limits go into effect on the Effective Date. Thus, as of the Effective Date, market participants will be able to avail themselves of the Federal position limits under the Final Rule for the nine legacy agricultural contracts, all of which are higher than the existing Federal position limits (except for CBOT Oats, which will maintain the existing Federal position limit levels). However, the Commission notes that exchange-set position limits will remain at current levels unless and until the relevant exchange submits a rule amendment pursuant to part 40 of the Commission’s regulations to amend the relevant exchange-set position limit. Furthermore, the Commission is delaying implementation of exchange￾set position limits on swaps since exchanges cannot view market participants’ positions in swap positions across the various places they trade, including on competitor exchanges.41 However, after the January 1, 2023
compliance date for economically equivalent swaps (discussed above), the Commission underscores that it will enforce Federal position limits in connection with swaps. For convenience, the Commission is providing a table below identifying the Final Rule’s Effective Date and compliance dates for market participants and exchanges in connection with certain obligations. BILLING CODE 6351–01–P

ER14JA21.004</GPH>

42As noted above, under the Final Rule the Federal position limit levels for all of the nine legacy agricultural contracts will increase, other than CBOT Oats. However, the Commission notes that exchange-set position limits will remain at current levels unless and until the relevant exchange submits a rule amendment pursuant to
part 40 of the Commission’s regulations to amend
the relevant exchange-set position limit. 43As discussed further in this release, the Commission will no longer recognize risk management exemptions under the Final Rule. However, positions that are entered into based on a market participant’s previously-granted risk management exemptions will be subject to an extended compliance date until January 1, 2023 with respect to Federal position limits. That is, a market participant with a previously granted risk management exemption will have a compliance date of January 1, 2023 with respect to the elimination of such risk management exemption. 44Form 204 (for all nine legacy agricultural contracts other than cotton) and Parts I and II of Form 304 (for cotton) are submitted by a market participant to the Commission under the existing Federal position limits regulations in connection with Federal enumerated bona fide hedges employed by the market participants. 45The 2020 NPRM proposed to remove and reserve part 151. It did not propose to amend current § 150.4 dealing with aggregation of positions for purposes of compliance with Federal position limits, which was amended in 2016 in a prior rulemaking. See Final Aggregation Rulemaking, 81 FR at 91454. 46The seven additional agricultural contracts that are subject to Federal spot month limits are: CME Live Cattle (LC), CBOT Rough Rice (RR), ICE Cocoa (CC), ICE Coffee C (KC), ICE FCOJ–A (OJ), ICE Sugar Continued BILLING CODE 6351–01–C
C. Section-by-Section Summary of Final
Rule
The Commission is adopting revisions to §§ 150.1, 150.2, 150.3, 150.5, and
150.6 and to parts 1, 15, 17, 19, 40, and
140, as well as adding §§ 150.8, 150.9, and Appendices A–G to part 150.45 Most noteworthy, the Commission is adopting the following amendments to the foregoing rule sections, each of which, along with all other changes in the Final Rule, is discussed in greater detail in Section II of this release. The following summary is not intended to provide a substantive overview of this Final Rule, but rather is intended to provide a guide to the rule sections that address each topic. For an overview of this Final Rule organized by topic (rather than by section number), please see the executive summary above.

• The Commission finds that Federal
  speculative position limits are necessary for 25 core referenced futures contracts, and for any futures contracts and options on futures contracts linked thereto. The Commission adopts Federal position limits on physically-settled and linked cash-settled futures contracts, options on futures contracts, and ‘‘economically equivalent swaps’’ for such commodities. The 25 core referenced futures contracts include the nine ‘‘legacy’’ agricultural contracts currently subject to Federal position limits and 16 additional non-legacy contracts, which include: Seven additional agricultural contracts, four energy contracts, and five metals contracts.46 Federal spot and non-spot ER14JA21.005</GPH>

No. 11 (SB), and ICE Sugar No. 16 (SF). The four energy contracts that are subject to Federal spot month limits are: NYMEX Light Sweet Crude Oil (CL), NYMEX New York Harbor ULSD Heating Oil (HO), NYMEX New York Harbor RBOB Gasoline (RB), and NYMEX Henry Hub Natural Gas (NG). The five metals contracts that are subject to Federal spot month limits are: COMEX Gold (GC), COMEX Silver (SI), COMEX Copper (HG), NYMEX Palladium (PA), and NYMEX Platinum (PL). As discussed below, any contracts for which the Commission is adopting Federal position limits only during the spot month are subject to exchange￾set limits and/or accountability levels outside of the spot month. 47The Commission currently sets and enforces speculative position limits with respect to certain enumerated agricultural products. The ‘‘enumerated’’ agricultural products refer to the list of commodities contained in the definition of ‘‘commodity’’ in CEA section 1a; 7 U.S.C. 1a. These agricultural products consist of the following nine currently traded contracts: CBOT Corn (and Mini￾Corn) (C), CBOT Oats (O), CBOT Soybeans (and Mini-Soybeans) (S), CBOT Wheat (and Mini-Wheat) (W), CBOT Soybean Oil (SO), CBOT Soybean Meal (SM), MGEX HRS Wheat (MWE), CBOT KC HRW Wheat (KW), and ICE Cotton No. 2 (CT). See 17 CFR 150.2. 48Rule § 150.5 addresses exchange-set position limits and exemptions therefrom, whereas § 150.3 addresses exemptions from Federal position limits, and § 150.9 addresses a streamlined process for recognizing non-enumerated bona fide hedges for purposes of Federal position limits. Exchange rules typically refer to ‘‘exemptions’’ in connection with bona fide hedging and spread positions, whereas the Commission uses the nomenclature ‘‘recognition’’ with respect to bona fide hedges, and ‘‘exemption’’ with respect to spreads. 49With respect to exchange-set position limits on swaps, in two years the Commission will reevaluate the ability of exchanges to establish and implement appropriate surveillance mechanisms to implement DCM Core Principle 5 and SEF Core Principle 6. month limits apply to the nine ‘‘legacy’’ agricultural contracts currently subject to Federal position limits,47 and only Federal spot-month limits apply to the additional 16 non-legacy contracts. Outside of the spot month, these 16 non-legacy contracts are subject to exchange-set limits and/or accountability levels if listed on an exchange.

• Amendments to § 150.1 add or
  revise several definitions for use throughout part 150, including: New definitions of the terms ‘‘core referenced futures contract’’ (pertaining to the 25 physically-settled futures contracts explicitly listed in the regulations) and ‘‘referenced contract’’ (pertaining to futures contracts and options on futures contracts that have certain direct and/or indirect linkages to the core referenced futures contracts, and to ‘‘economically equivalent swaps’’) to be used as shorthand to refer to contracts subject to Federal position limits; an expanded ‘‘spread transaction’’ definition; and a ‘‘bona fide hedging transaction or position’’ definition that is broad enough to accommodate hedging practices in a variety of contract types, including hedging practices that may develop over time.
• Amendments to § 150.2 list the 25
  core referenced futures contracts which, along with any associated referenced contracts, are subject to Federal position limits; and specify the Federal spot and non-spot month position limit levels. Federal spot month position limit levels are set at or below 25 percent of estimated deliverable supply, whereas Federal non-spot month limit levels are set at 10% of open interest for the first 50,000 contracts of open interest, with an incremental increase of 2.5% of open interest thereafter.
• Amendments to § 150.3 specify the
  types of positions for which exemptions from Federal position limit requirements may be granted, and set forth and/or reference the processes for requesting such exemptions, including recognitions of bona fide hedges and exemptions for spread positions, financial distress positions, certain natural gas positions held during the spot month, and pre-enactment and transition period swaps. For all contracts subject to Federal position limits, bona fide hedge exemptions listed in Appendix A to part 150 as an enumerated bona fide hedge are self￾effectuating for purposes of Federal position limits. For non-enumerated bona fide hedges, market participants must submit an application either directly to the Commission under § 150.3 or indirectly through an exchange for Federal position limit purposes under new § 150.9 (discussed below).
• Amendments to § 150.5 refine the
  process, and establish non-exclusive methodologies, by which exchanges may set exchange-level limits and grant exemptions therefrom with respect to futures and options on futures, including separate methodologies for contracts subject to Federal position limits and physical commodity derivatives not subject to Federal position limits.48 While the Commission will oversee compliance with Federal position limits on swaps, the Commission has also determined to delay the enforcement of exchange-set position limits on swaps otherwise required in amended § 150.5 because exchanges cannot view market participants’ positions in swaps across the various places they trade, including on competitor exchanges.49
• New § 150.9 establishes a
  streamlined process for addressing requests for bona fide hedging recognitions for purposes of Federal position limits, and leveraging exchange expertise and resources. This process will be used by market participants with non-enumerated bona fide hedge positions. Under the Final Rule, market participants can provide one application for a non-enumerated bona fide hedge to a DCM or SEF, as applicable, and receive approval of such request based on the same application from both the exchange for purposes of exchange-set limits and from the Commission for purposes of Federal position limits.
• New Appendix A to part 150
  contains a list of enumerated bona fide hedges. Positions that comply with the bona fide hedging transaction or position definition in § 150.1 and that are enumerated in Appendix A may exceed Federal position limits to the extent that all applicable requirements in part 150 are met. Persons holding such positions enumerated in Appendix A may exceed Federal position limits without being required to request prior approval under § 150.3 or § 150.9. Positions that do not fall within any of the enumerated hedges could still potentially be recognized as bona fide hedging positions, provided the positions otherwise comply with the proposed bona fide hedging definition and all other applicable requirements, including the approval process under § 150.3 or § 150.9.
• Amendments to part 19 and related
  provisions eliminate Form 204 (and corresponding Parts I and II of Form 304 for cotton), enabling the Commission to leverage cash-market reporting submitted directly to the exchanges under §§ 150.5 and 150.9. The Final Rule maintains Part III of Form 304, related to the cotton on-call report. D. Effective Date and Compliance Period The 2020 NPRM included proposed § 150.2(e), which provided that the Federal position limit levels for the 25 core referenced futures contracts would have a compliance date 365 days after publication of the final position limits regulations in the Federal Register. Additionally, proposed § 150.3(c) provided that previously-granted risk management exemptions shall not be effective after the Final Rule’s effective date. The Commission is removing from the Final Rule the compliance date requirements in proposed §§ 150.2(e) and 150.3(c) and instead addressing the effective and compliance dates together within this Federal Register release. The Commission is making two modifications from the 2020 NPRM relating to the effective date and compliance period of the Final Rule. First, as noted above in the executive summary, the Commission is providing a general compliance date of January 1,

50The Commission is adopting calendar dates for compliance to provide clarity rather than the 2020 NPRM’s approach of stating that the compliance period ends 365 days after publication in the Federal Register since the Commission believes that providing a set calendar date provides greater clarity to market participants. Based on the timing of the Final Rule, the Commission believes that the January 1, 2022 general compliance date will not reduce the compliance period compared to the 2020 NPRM’s approach and may provide slightly more time prior to the commencement of the compliance period. 51For further discussion of the elimination of Form 204 and Parts I and II of Form 304, see Section II.H.2, infra. 2022 for both market participants and exchanges. In contrast, the 2020 NPRM did not provide a specific date as the compliance date but rather stated 365 days after publication in the Federal Register.50 This compliance date of January 1, 2022 applies to (i) the Federal position limits set forth in Appendix E to part 150 for only the 16 non-legacy core referenced futures contracts that are subject to Federal position limits for the first time under this Final Rule, and (ii) exchange obligations under final § 150.5. This compliance date also applies to referenced contracts for any of the 16 non-legacy core referenced futures contracts (other than economically equivalent swaps, which have a separate compliance date as discussed immediately below). In contrast, the 2020 NPRM’s compliance date applied only to market participants’ compliance with the new Federal position limit levels. However, as discussed below, the Final Rule does not provide a separate compliance date for the nine legacy agricultural contracts since they are already subject to existing Federal position limits. Second, the Commission is establishing a separate compliance date of January 1, 2023 in connection with (i) economically equivalent swaps and (ii) the elimination of previously-granted risk management exemptions (i.e., market participants may continue to rely on their previously-granted risk management exemptions until January 1, 2023). As noted above, the 2020 NPRM only had a single general compliance date and did not provide a separate compliance date for economically equivalent swaps or related to previously-granted risk management exemptions. In this section, the Commission will discuss the following related issues: (i) Compliance with Federal position limits for the nine legacy agricultural contracts; (ii) compliance by exchanges with § 150.5 under the Final Rule and market participants’ related obligation to temporarily continue providing Forms 204/304 in connection with bona fide hedges; (iii) exchanges’ voluntary implementation of § 150.9 under the Final Rule; and (iv) comments received in connection with the compliance date proposed in the 2020 NPRM.
i. Compliance With Federal Position
Limits for the Nine Legacy Agricultural Contracts With respect to the nine legacy agricultural contracts, the Commission is not providing a compliance date with respect to the spot month and non-spot month Federal position limit levels. Accordingly, the new Federal position limit levels under the Final Rule will become effective on the Effective Date. The nine legacy agricultural contracts are currently subject to Federal position limits and will continue to be subject under the Final Rule, which, as noted above, is increasing the Federal position limit levels for the nine legacy agricultural contracts (other than CBOT Oats, which will maintain the existing Federal position limit levels). The Commission has determined not to provide a separate compliance date for the nine legacy agricultural contracts since market participants trading in these markets already are familiar with Federal position limits and have established the necessary monitoring and compliance oversight processes, in connection with these legacy contracts. With respect to exchange-set position limits, the Final Rule does not require exchanges to increase their respective exchange-set position limit levels. Rather, the Final Rule only requires that exchange-set position limits are established at a level no higher than the corresponding Federal position limits. As a result, in response to the Final Rule, an exchange may: (1) Raise its exchange-set limits to be as high as (or lower than) the corresponding Federal position limits immediately on the Effective Date or anytime thereafter; (2) implement a phase-in period where exchange-set position limits increase from existing exchange-set levels over time; or (3) not increase the exchange￾set position limit levels at all, in each case as the exchange may determine appropriate for its markets.
ii. Exchange Implementation of § 150.5
and Market Participants’ Obligations To Continue Providing Forms 204 and 304, as Applicable, in Connection With Federal Enumerated Bona Fide Hedges For clarity, in connection with the nine legacy agricultural contracts, market participants may avail themselves of the new enumerated bona fide hedges (e.g., anticipatory merchandising) immediately upon the Effective Date (market participants will not need to be concerned with availing themselves of bona fide hedge recognitions for the 16 non-legacy contracts upon the Effective Date since these contracts will have a compliance date of January 1, 2022). To the extent that market participants seek to rely on any Federal enumerated bona fide hedges, market participants must continue to provide, as applicable, the Commission with Forms 204/304, which are otherwise eliminated by the Final Rule upon the Effective Date, until the relevant exchange that lists the applicable referenced contract implements § 150.5 under the Final Rule. As discussed below, final § 150.5 governs, among other things, exchange rules and procedures, including (i) the exchange’s collection of certain cash￾market information from market participants in connection with their bona fide hedge applications for exchange-set limits and (ii) the exchange’s sharing of related information with the Commission. As discussed further below, the Final Rule predicates the elimination of Forms 204/304 on the relevant exchange’s sharing of the information with the Commission under final § 150.5 (which provides for a new process for the exchange to share data with the Commission similar to data that the Commission previously obtained through Forms 204/304 under the Federal framework existing prior to the Final Rule).51 Exchanges must implement final § 150.5 by the Final Rule’s general compliance date of January 1, 2022.
iii. Exchange Implementation of § 150.9
in Connection With the Market Participants’ Applications Through Exchanges for Non-Enumerated Bona Fide Hedges for Purposes of Federal Position Limits As discussed above, the Final Rule establishes a streamlined process for market participants to apply through exchanges for non-enumerated bona fide hedges for purposes of Federal position limits. That is, a market participant may submit a single non-enumerated bona fide hedge exemption application to an exchange for purposes of both Federal and exchange-set position limits, and the Commission will review, and make a determination based on, the application that the market participant submitted to the exchange. For clarity, the Commission notes that the Final Rule does not require exchanges to participate in such process. However, if an exchange chooses to do so, the Commission is clarifying, for

52CME Group at 8; FIA at 2–3; ISDA at 2, 8; Shell at 4; and SIFMA AMG at 2, 9–10. 53MFA/AIMA at 8; NCFC at 6; NGSA at 15–16; SIFMA AMG at 9–10; and Citadel at 9–10. 54CME Group at 8. 55 ISDA, 887 F.Supp.2d at 281. 56 7 U.S.C. 6a(a)(2)(A). 57 7 U.S.C. 6a(a)(1). 58 76 FR at 71626, 71627. 59 ISDA, 887 F.Supp.2d at 279–280. 60 Id. at 281. 61See infra Section III.B. the avoidance of doubt, that the exchange may implement this streamlined process for non-enumerated bona fide hedge applications as soon as the Effective Date, or anytime thereafter (or not at all). In response to certain concerns by market participants and exchanges, discussed immediately below, the Commission believes that, to the extent an exchange chooses to participate in this streamlined application process, the implementation of § 150.9 soon after the Effective Date may help ensure minimal disruption to market participants’ existing trading strategies as well as avoid having the potentially unfeasible situation of requiring the exchanges to process a number of non-enumerated bona fide hedge applications simultaneously at the end of the general compliance period on January 1, 2022. Furthermore, the Commission clarifies in Section II.G.3.iii that market participants with existing Commission-granted non￾enumerated or anticipatory bona fide hedge recognitions in connection with the nine legacy agricultural contracts under the existing framework are not required to reapply to the Commission for a new recognition under the Final Rule.
iv. Comments—Compliance Period
Generally, commenters supported the proposed compliance date, noting that an adequate compliance period would afford sufficient time to make necessary business adjustments (e.g., time to build compliance systems, develop technology, train personnel, etc.).52 The Commission agrees with these observations and believes that a general compliance date of January 1, 2022, except for economically equivalent swaps and positions based on a previously-granted risk management exemption, will provide exchanges and market participants sufficient time to adjust their operations and compliance and monitoring systems. Some commenters also requested an extended compliance date (beyond the general compliance date) for economically equivalent swaps to mitigate the numerous legal, operational, and compliance challenges of implementing position limits for swaps for the first time.53 Unlike exchange-listed contracts that are currently subject to either Federal position limits or exchange-set limits, commenters noted that exchanges do not have existing compliance and monitoring resources for economically equivalent swaps from which to leverage. The Commission agrees with commenters that additional time for economically equivalent swaps is warranted, and, as discussed above, is thus delaying the compliance date for economically equivalent swaps for an additional year, until January 1, 2023. CME Group expressed concern that it may receive an influx of exemption applications at the end of the compliance period, and therefore suggested a rolling process where market participants are grandfathered into their current exemptions, permitting them to file for those exemptions on the same annual
schedule.54 The Commission believes
this concern is mitigated since exchanges, at their discretion, may implement final § 150.9 as soon as the Effective Date, which will allow exchanges to review non-enumerated bona fide hedge applications on a rolling basis between the Effective Date and the end of the compliance period rather than having to process a large number of applications at once. Furthermore, as noted above, market participants with existing Commission￾granted non-enumerated or anticipatory bona fide hedge recognitions are not required to reapply to the Commission for a new recognition under the Final Rule. E. The Commission Construes CEA
Section 4a(a) To Require the
Commission To Make a Necessity Finding Before Establishing Position Limits for Physical Commodities Other Than Excluded Commodities The Commission is required by ISDA to determine whether CEA section 4a(a)(2)(A) requires the Commission to find, before establishing a position limit, that such limit is ‘‘necessary.’’ 55 The provision states in relevant part that ‘‘the Commission shall’’ establish position limits ‘‘as appropriate’’ for futures contracts in physical commodities other than excluded commodities ‘‘[i]n accordance with the standards set forth in’’ the preexisting
section 4a(a)(1).56 That preexisting
provision requires the Commission to establish position limits as it ‘‘finds are necessary to diminish, eliminate, or prevent’’ certain enumerated burdens on interstate commerce.57 In the 2011 Final Rulemaking, the Commission interpreted this language as an unambiguous mandate to establish position limits without first finding that such limits are necessary, but with discretion to determine the ‘‘appropriate’’ levels for each.58 In ISDA, the U.S. District Court for the District of Columbia disagreed and held that
section 4a(a)(2)(A) is ambiguous as to
whether the ‘‘standards set forth in paragraph (1)’’ include the requirement of an antecedent finding that a position limit is necessary.59 The court vacated the 2011 Final Rulemaking and directed the Commission to apply its experience and expertise to resolve that ambiguity.60 The Commission has done so and determines that section 4a(a)(2)(A) should be interpreted to require that before establishing position limits, the Commission must determine that limits are necessary.61 A full legal analysis is set forth infra at Sections III.C.–E. The Commission finds that position limits are necessary for the 25 core referenced futures contracts, including certain commodity derivative contracts that are directly or indirectly linked to a core referenced futures contract. The Commission’s finding with respect to the 25 core referenced futures contracts is based on two interrelated factors: The particular importance of the 25 core referenced futures contracts to their respective underlying cash markets, including that they require physical delivery of the underlying commodity, and, the commodities’ particular importance to the national economy. Separately, the Commission finds that position limits are necessary during the spot month for all 25 core referenced futures contracts and outside of the spot month only for the nine legacy agricultural commodity contracts (in each instance including certain commodity derivative contracts that are directly or indirectly linked to a core referenced futures contract). A full discussion of the necessity findings is set forth infra at Sections III.C.–E. F. The Commission’s Use of Certain Terminology The Commission is aware that this Final Rule will likely be reviewed by a diverse range of members of the public from varied backgrounds and industries and with different levels of knowledge and experience with derivatives markets. Furthermore, even among experienced market participants, terminology may differ by industry, commodity, or exchange. The Commission also recognizes that certain

62PMAA at 2.
63NEFI at 3–4.
64Better Markets at 9.
65Better Markets at 13. A TAS order is an order that is placed during the trading session but is executed at the settlement price (or with a small price range around the settlement price). Trading at Settlement (TAS), https://www.cmegroup.com/ trading/trading-at-settlement.html (last visited Aug. 29, 2020); TRADE AT SETTLEMENT (TAS) FREQUENTLY ASKED QUESTIONS July 2020, https://www.theice.com/publicdocs/futures_us/ TAS_FAQ.pdf (last visited Aug. 29, 2020). 66Better Markets at 14–17. 67Better Markets at 10. terms commonly referenced by market participants may differ from the technical legal terms used in the Commission’s regulations and/or the CEA. Accordingly, unless otherwise noted, the Commission will attempt to use terms and phrases in their ordinary, plain English sense. When required, the Commission will explicitly identify technical or nuanced legal/regulatory or industry ‘‘terms of art.’’ The Commission wishes to briefly review certain terms and phrases used throughout this release below, as follows:

• Bona fide hedges. The CEA uses the
  legal term ‘‘bona fide hedging transaction or position’’ in both the singular and plural. The Commission currently defines the term in existing § 1.3 in the plural as ‘‘bona fide hedging transactions or positions’’ while the Final Rule now incorporates the singular ‘‘bona fide hedging transaction or position.’’ The Commission understands that most market participants simply refer to ‘‘bona fide hedge(s)’’ (in both the singular and the plural). Accordingly, for short hand throughout this release, the Commission may refer to ‘‘bona fide hedges,’’ ‘‘bona fide hedge positions,’’ ‘‘bona fide hedge transactions,’’ ‘‘bona fide hedges,’’ ‘‘bona fide hedging positions,’’ and similar phrasing. These terms are meant to apply as short hand and are not intended to imply a substantive difference either with the defined legal term ‘‘bona fide hedging transaction or position’’ or with one another. Similarly, the plural term in the existing Commission regulations and the singular in the Final Rule, as discussed below, are not intended to reflect a substantive difference.
• Federal position limits. The Final
  Rule creates a new defined term, ‘‘speculative position limit,’’ in part 150 of the Commission’s regulations to refer to the maximum position, net long or net short, that a market participant may maintain in a referenced contract. Throughout this release, the Commission will use as a general term either ‘‘position limits’’ or ‘‘Federal position limits’’ to refer to the general Federal position limits framework and related regulations, including the defined term ‘‘speculative position limit.’’ When discussing the individual ‘‘speculative position limit’’ levels for each commodity derivative contract, as opposed to the Final Rule’s general Federal regulatory framework, the Commission instead may refer to the ‘‘Federal position limit levels,’’ although all these phrases are intended to refer to the same general concept. The Commission may also specifically refer to exchange-set position limits when referring to the general framework, process, or specific position limit levels established by the respective exchanges.
• Exchanges. This Final Rule applies
  to both DCMs and SEFs. Unless otherwise distinguished, the Commission will refer to ‘‘exchanges’’ throughout this release to refer to any relevant DCM or SEF.
• Cash-Settled and Physically-Settled.
  The Commission throughout this release refers to ‘‘cash-settled’’ and ‘‘physically￾settled’’ commodity derivative contracts. When a futures contract expires, all open futures contract positions in such contract are settled by either: (1) Physical delivery, which the Commission refers to as a ‘‘physically￾settled’’ contract, or (2) cash settlement, which the Commission refers to as a ‘‘cash-settled’’ contract, in each case depending on the contract terms set by the exchange. Deliveries on ‘‘physically￾settled’’ futures contracts are made through the exchange’s clearinghouse, and the delivery of the physical commodity must be consummated between the buyer and seller per the exchange rules and contract specifications. On the other hand, other futures contracts are ‘‘cash-settled’’ because they do not involve the transfer of physical commodity ownership and require that all open positions at expiration be settled by a transfer of cash to or from the clearinghouse based upon the final settlement price of the contracts. The Commission further notes that some market participants may instead use the terms ‘‘physical-delivery’’ contracts or ‘‘financially-settled’’ contracts instead of the Commission’s terms ‘‘physically-settled’’ contracts and ‘‘cash-settled’’ contracts, respectively. The Commission does not intend a substantive difference in meaning with the choice of its terms.
• Spread Positions. The Commission
  views its use of the term ‘‘spread’’ to mean the same as ‘‘arbitrage’’ or ‘‘straddle’’ as those terms are used in CEA section 4a(a) and existing § 150.3(a)(3) of the Commission’s regulations. Consistent with existing regulations, the Commission’s sole use of the term ‘‘spread’’ in this Final Rule is intended to also capture arbitrage or straddle strategies referred to in CEA
  section 4a(a) and existing § 150.3(a)(3),
  and referring to ‘‘spread’’ rather than ‘‘arbitrage’’ or ‘‘straddle’’ is not intended to be a substantive difference. The Commission notes that certain exchanges may distinguish between ‘‘spread’’ and ‘‘arbitrage’’ positions for purposes of exchange exemptions, but the Commission does not make that distinction here for purposes of its ‘‘spread transaction’’ definition as used in this release.
• Unfixed Price Forward
  Transactions. Throughout this release, the Commission will use as general terms either ‘‘unfixed price forward transactions,’’ ‘‘unfixed price transactions,’’ ‘‘unfixed price forward contracts,’’ and/or ‘‘unfixed price contracts’’ to refer to transactions that are either purchases or sales of a cash commodity where the purchase or sales price, as applicable, is determined based on the settlement price of a benchmark, such as the settlement price of a commodity derivative contract on a certain date (e.g., the price on the settlement date of a core referenced futures contract) or other index price (e.g., a spot index price). Market participants may also refer to unfixed price transactions as ‘‘floating price’’ transactions, and the Commission does not intend a substantive difference in meaning with the choice of these terms. G. Recent Volatility in the WTI Contract Several commenters noted the volatility in the NYMEX Light Sweet Crude Oil (CL) contract, also known as the West Texas Intermediate crude oil contract (‘‘WTI contract’’), that occurred in April 2020 (subsequent to the issuance of the 2020 NPRM) in their comments to the 2020 NPRM. Some commenters suggested that the volatility may have been caused, in part, by excessive speculation 62 or highly leveraged traders,63 or both. Better Markets suggested that a combination of passive exchange-traded funds,64 the use of trading-at-settlement (‘‘TAS’’) orders,65 automated trading,66 and, according to Better Markets, a lack of ‘‘meaningful position limits,’’ 67 may have contributed to the volatility. Other commenters suggested that this event could have been mitigated through additional liquidity provided by financial end users during the critical

68AQR at 5–7 (‘‘The inability of position limits themselves to eliminate the unpredictability of commodity futures markets highlights the importance of existing Commission and exchange oversight of these markets and the dangers of overreliance on a single regulatory tool to address market dynamics for which it may not have been designed . . . [W]e encourage the Commission to consider not only concerns around potential manipulation, but also the potential unintended consequences of such limits and the need for liquidity during sensitive time periods for commodity futures markets.’’); SCM at 2–3 (‘‘This liquidity, provided by financial trading firms and hedge funds . . ., is essential to balance, check and smooth the otherwise uncontrollable trading that can occur when only commercial firms and unsophisticated trading participants are active in a market.’’). 69 IATP suggested that the event demonstrates the problems of Commission deference to DCMs’ ‘‘experience and capacity’’ on many of the provisions in the 2020 NPRM. See IATP at 18. Conversely, SEMI stated that a final rule should not be overly restrictive in response to the recent market conditions in WTI oil markets, given that it is the exchanges that ‘‘have the expertise, experience and existing tools to effectively manage the orderly expiration of futures contracts that are in the spot month under such circumstances.’’ SEMI at 13. 70AFR at 3; Rutkowski at 2; IATP at 2–3. 71See supra, n.16. 72E.g. AFR; Better Markets; IATP; Eric Matsen; NEFI; Public Citizen; Robert Rutkowski; SCM; and VLM. 73 17 CFR 1.3 and 150.1, respectively. 74 In addition to the amendments described below, the Commission proposed to re-order the defined terms so that they appear in alphabetical order, rather than in a lettered list, so that terms can be more quickly located. Moving forward, any new defined terms would be inserted in alphabetical order, as recommended by the Office of the Federal Register. See Document Drafting Handbook, Office of the Federal Register, National Archives and Records Administration, 2–31 (Revision 5, Oct. 2,
2017) (stating, ‘‘[i]n sections or paragraphs
containing only definitions, we recommend that you do not use paragraph designations if you list the terms in alphabetical order. Begin the definition paragraph with the term that you are defining.’’). 75 7 U.S.C. 6a(c)(1). 76 7 U.S.C. 6a(c)(2). 77See, e.g., Definition of Bona Fide Hedging and Related Reporting Requirements, 42 FR 42748 (Aug. 24, 1977). Previously, the Secretary of Agriculture, pursuant to section 404 of the Commodity Futures Trading Commission Act of 1974 (Pub. L. 93–463), promulgated a definition of bona fide hedging transactions and positions. Hedging Definition, Reports, and Conforming Amendments, 40 FR 11560 (Mar. 12, 1975). That definition, largely reflecting the statutory definition previously in effect, remained in effect until the newly￾established Commission defined that term. Id. 78 In a 2018 rulemaking, the Commission amended § 1.3 to replace the sub-paragraphs that had for years been identified with an alphabetic designation for each defined term with an alphabetized list. See Definitions, 83 FR 7979 (Feb. 23, 2018). The bona fide hedging definition, therefore, is now a paragraph, located in alphabetical order, in § 1.3, rather than in § 1.3(z). Accordingly, for purposes of clarity and ease of discussion, when discussing the Commission’s existing version of the bona fide hedging definition, this release will refer to the bona fide hedging definition in § 1.3. Further, the version of § 1.3 that appears in the Code of Federal Regulations applies only to excluded commodities and is not the version of the bona fide hedging definition currently in effect. The version currently in effect, the substance of which remains as it was amended in 1987, applies to all commodities, not just to excluded commodities. See Revision of Federal Speculative Position Limits, 52 FR 38914 (Oct. 20, 1987). While the 2011 Final Rulemaking amended the § 1.3 bona fide hedging definition to apply only to excluded commodities, that rulemaking was vacated, as noted previously, by a September 28, 2012 order of the U.S. District Court for the District of Columbia, with the exception of the rule’s amendments to 17 CFR
150.2. Although the 2011 Final Rulemaking was
vacated, the 2011 version of the bona fide hedging definition in § 1.3, which applied only to excluded commodities, has not yet been formally removed from the Code of Federal Regulations. The currently-in-effect version of the Commission’s bona fide hedging definition thus does not currently appear in the Code of Federal Regulations. The closest to a ‘‘current’’ version of the definition is the 2010 version of § 1.3, which, while substantively current, still includes the ‘‘(z)’’ denomination that was removed in 2018. The Commission proposed to address the need to formally remove the incorrect version of the bona fide hedging definition as part of the 2020 NPRM. 79See infra Section II.C. (discussing § 150.3) and
Section II.G. (discussing § 150.9).
time period, among other measures.68 Commenters also pointed to the event to bolster arguments for and against Commission deference to exchanges in implementing position limits.69 A few commenters requested that the Commission refrain from finalizing the rule until it better understands this event and other issues.70 The Commission has been closely examining the circumstances surrounding the volatility in the WTI contract since it occurred in April 2020. The Commission will continue to analyze the events of April 2020 to evaluate whether any changes to the position limits regulations may be warranted in light of the circumstances surrounding the volatility in the WTI contract. Any proposed changes that the Commission finds may be warranted would be subject to public comment pursuant to the requirements of the Administrative Procedure Act. H. Brief Summary of Comments Received As stated previously, the Commission received approximately 75 relevant comment letters in response to the 2020 NPRM.71 Though several commenters did not support the Commission adopting the 2020 NPRM and requested its withdrawal,72 most of the 75 comments received generally supported the 2020 NPRM, or supported specific elements of the 2020 NPRM. However, many of these commenters suggested modifications to portions of the 2020 NPRM, which are discussed in the relevant sections discussing the Final Rule below. In addition, several commenters requested Commission action beyond the scope of the 2020 NPRM, also discussed in the relevant sections below.
II. Final Rule
A. § 150.1—Definitions
Definitions relevant to the existing position limits regime currently appear in both §§ 1.3 and 150.1 of the Commission’s regulations.73 The Commission proposed to update and supplement the definitions in § 150.1, including moving a revised definition of ‘‘bona fide hedging transactions and positions’’ from § 1.3 into § 150.1. The proposed changes were intended, among other things, to conform the definitions to certain of the Dodd-Frank Act amendments to the CEA.74 Each proposed defined term is discussed in alphabetical order below.

1. ‘‘Bona Fide Hedging Transaction or
   Position’’
   i. Background—Bona Fide Hedging
   Transaction or Position
   Under CEA section 4a(c)(1), position limits shall not apply to transactions or positions that are shown to be bona fide hedging transactions or positions, as such terms shall be defined by the Commission.75 The Dodd-Frank Act directed the Commission, for purposes of implementing CEA section 4a(a)(2), to adopt a bona fide hedging definition consistent with CEA section 4a(c)(2).76 The existing definition of ‘‘bona fide hedging transactions and positions,’’ which first appeared in § 1.3 of the Commission’s regulations in the 1970s,77 is inconsistent, in certain ways described below, with the revised statutory definition in CEA section 4a(c)(2). Accordingly, and for the reasons outlined below, the Commission proposed to remove the existing bona fide hedging definition from § 1.3 and replace it with a revised bona fide hedging definition that would appear alongside all of the other position limits related definitions in proposed § 150.1.78 This definition would be applied in determining whether a position in a commodity derivative contract is a bona fide hedge that may exceed Federal position limits set forth in § 150.2. This section of the release discusses the bona fide hedging definition and the substantive standards for bona fide hedges. The process for granting bona fide hedge recognitions is discussed later in this release in connection with §§ 150.3 and 150.9.79 The discussion in this section is organized as follows:
   i. This background section discussion;

80 17 CFR 1.3.
81 17 CFR part 19.
82 17 CFR 1.3.
83 Id.
84The Commission is also making a non￾substantive change to the introductory language of § 150.3 by referring in the proviso to ‘‘such person’s transactions or positions.’’ The Commission views this as a clarifying edit, and does not intend a substantive difference in meaning with the choice of these terms. 85Bona fide hedge recognition is determined based on the particular circumstances of a position or transaction and is not conferred on the basis of the involved market participant alone. Accordingly, while a particular position may qualify as a bona fide hedge for a given market participant, another position held by that same participant may not. Similarly, if a participant holds positions that are recognized as bona fide hedges, and holds other positions that are speculative, only the speculative positions would be subject to position limits.
ii. An overview of the existing
‘‘general’’ elements of the bona fide hedging definition and the specific ‘‘enumerated’’ bona fide hedges listed in the existing bona fide hedge definition;
iii. A discussion of each of the
elements of the existing ‘‘general’’ bona fide hedging definition, including the (a) temporary substitute test (and the related elimination of the risk management exemption), (b) economically appropriate test, (c) change in value requirement, (d) incidental test, and (e) orderly trading requirement;
iv. The treatment of unfixed-price
transactions under the Final Rule;
v. A discussion of each enumerated
bona fide hedge in the Final Rule;
vi. A discussion of the elimination of
the Five-Day Rule;
vii. A discussion of the guidance on
measuring risk (i.e., gross versus net hedging);
viii. A discussion of the Final Rule’s
implementation of the CEA’s statutory pass-through swap and pass-through swap offset provisions; and
ix. A discussion of the form, location,
and organization of the enumerated bona fide hedges.
ii. Overview of the Commission’s
Existing Bona Fide Hedging Definition in § 1.3 Paragraph (1) of the existing bona fide hedging definition in Commission regulation § 1.3 contains what is currently labeled the ‘‘general definition’’ of bona fide hedging. This ‘‘general’’ bona fide hedging definition comprises five key elements which require that in order for a position to be deemed a bona fide hedge for Federal position limits, the position must:

• ‘‘normally’’ represent a substitute
  for transactions to be made or positions to be taken at a later time in a physical marketing channel (‘‘temporary substitute test’’);
• be economically appropriate to the
  reduction of risks in the conduct and management of a commercial enterprise (‘‘economically appropriate test’’);
• arise from the potential change in
  value of (1) assets which a person owns, produces, manufactures, processes, or merchandises or anticipates owning, producing, manufacturing, processing, or merchandising, (2) liabilities which a person owns or anticipates incurring, or (3) services which a person provides, purchases, or anticipates providing or purchasing (‘‘change in value requirement’’);
• have a purpose to offset price risks
  incidental to commercial cash or spot operations (‘‘incidental test’’); and
• be established and liquidated in an
  orderly manner (‘‘orderly trading requirement’’).80 As discussed more fully below, the Dodd-Frank Act’s amendments to the CEA included the first three factors in the amended CEA, but did not include the last two factors. Additionally, paragraph (2) of the bona fide hedging definition in existing § 1.3 currently sets forth a non-exclusive list of seven total enumerated bona fide hedges, contained in four general bona fide hedging transaction categories, that comply with the general bona fide hedging definition in paragraph (1). These bona fide hedge categories that are explicitly listed in existing § 1.3’s bona fide hedging definition are generally referred to as the ‘‘enumerated’’ bona fide hedges, a term the Commission uses throughout in this release. Market participants thus need not seek approval from the Commission of such positions as bona fide hedges prior to exceeding limits for such positions. Rather, market participants must simply report any such positions on the monthly Form 204 (or Form 304 for cotton), as required by part 19 of the Commission’s existing regulations.81 The seven existing enumerated hedges fall into the following four categories: (1) Sales of futures contracts to hedge (i) ownership or fixed-price cash commodity purchases and (ii) unsold anticipated production; (2) purchases of futures contracts to hedge (i) fixed-price cash commodity sales of the same commodity, (ii) fixed-price sales of the cash commodity’s cash products and by-products, and (iii) unfilled anticipated requirements; (3) offsetting sales and purchases of futures contracts to hedge offsetting unfixed￾price cash commodity sales and purchases; and (4) cross-commodity hedges.82 As discussed further below, market participants may not use either the existing enumerated bona fide hedges for unsold anticipated production or unfilled anticipated requirements to hedge more than twelve-months’ unsold production or unfilled requirements, respectively (the ‘‘twelve-month restriction’’). Further, the existing enumerated bona fide hedges for unsold production and for offsetting sales and purchases of unfixed price transactions do not apply during the five last trading days. Similarly, the existing enumerated bona fide hedge for unfilled anticipated requirements has a modified version of the Five-Day Rule and provides that during the ‘‘five last trading days’’ a market participant may not maintain a position that exceeds the market participant’s unfilled anticipated requirement for ‘‘that month and for the next succeeding month.’’ Paragraph (3) of the current bona fide hedging definition states that the Commission may recognize ‘‘non￾enumerated’’ bona fide hedging transactions and positions pursuant to a specific request by a market participant using the process described in § 1.47 of the Commission’s regulations.83
  iii. Amended Bona Fide Hedge
  Definition for Physical Commodities in § 150.1; ‘‘General’’ Elements of the Bona Fide Hedge Definition Under the Final Rule The Commission is adopting the proposed general elements currently found in the bona fide hedging definition in § 1.3 that conform to the revised statutory bona fide hedging definition in CEA section 4a(c)(2), as amended by the Dodd-Frank Act, and is eliminating the general elements that do not conform.84 In particular, the Commission is adopting updated versions of the temporary substitute test, economically appropriate test, and change in value requirements that are described below, and eliminating the incidental test and orderly trading requirement, which are not included in the revised statutory text. Each of these changes is discussed in more detail below.85 a. Temporary Substitute Test (1) Background—Temporary Substitute Test The language of the temporary substitute test in the Commission’s existing bona fide hedging definition is inconsistent with the language of the temporary substitute test that appears in the CEA, as amended by the Dodd-Frank Act. Specifically, the Commission’s existing regulatory definition currently provides that a bona fide hedging

86 17 CFR 1.3. As noted earlier in this release, the currently-in-effect version of the Commission’s bona fide hedging definition does not currently appear in the current Code of Federal Regulations. The closest to a ‘‘current’’ version of the definition is the 2010 version of § 1.3, which, while substantively current, still includes the ‘‘(z)’’ denomination that was removed in 2018. The Commission proposed to address the need to formally remove the incorrect version of the bona fide hedging definition as part of the 2020 NPRM. See supra n.74. 87 7 U.S.C. 6a(c)(2)(A)(i). 88See Clarification of Certain Aspects of the Hedging Definition, 52 FR 27195, 27196 (July 20, 1987). 89 Id. 90As described below, due to differences in statutory language, the phrase ‘‘risk management exemption’’ often has a broader meaning in connection with excluded commodities than with physical commodities. See infra Section II.A.1.x. (discussing proposed pass-through language). 91 85 FR at 11596. 92 7 U.S.C. 6a(c)(2)(B). 93See final § 150.3(c). See also infra Section II.A.1.x.b. (discussing proposed pass-through language). Excluded commodities, as described in further detail below, are not subject to the statutory bona fide hedging definition. Accordingly, the statutory restrictions on risk management exemptions that apply to physical commodities subject to Federal position limits do not apply to excluded commodities. 94See infra Section II.A.1.iii.a(5) (discussing of revoking existing risk management exemptions). 95AMCOT at 1; Ecom at 1; White Gold at 1–2; Walcot at 2; East Cotton at 2; CMC at 11 (stating that the increased limits and allowances for pass￾through exemptions will limit any potential loss of liquidity); NCFC at 7 (noting that it supports the elimination in light of the increased limits); NGFA at 3; LDC at 2; PMAA at 4; ACSA at 2, 4; IMC at 2; Mallory at 1; McMeekin at 1–2; Memtex at 2; Omnicotton at 2; NCC at 1; S Canale Cotton at 2; Texas Cotton at 2; SW Ag at 2; Jess Smith at 2; Choice Cotton at 1; Olam at 1–2; Better Markets at 4, 51–54 (agreeing with the proposed interpretation that the Dodd-Frank Act requires the change and stating that the elimination of the risk management exemption may mean very little in light of the increased limits); ACA at 2; Moody Compress at 2; Toyo at 2; and DECA at 1. 96See, e.g., Mallory Alexander at 1; DECA at 1; Ecom at 2; Southern Cotton at 2; Canale Cotton at 2; ACA at 2; IMC at 2; Olam at 1–2; Moody Compress at 1; SW Ag at 2; East Cotton at 2; Toyo at 2; Jess Smith at 2; McMeekin at 1–2; Omnicotton at 2; Texas Cotton at 2; Walcot at 2; White Gold at 1–2; and PMAA at 3–4 (arguing that risk management positions have the potential to create significant volatility); Better Markets at 9, 17 (noting the distortive effects of risk management positions). 97 ICE at 5–8 (noting that risk management positions are non-speculative and arguing that the pass-through provision is not an adequate substitute for such positions); FIA at
10, 21–24; ISDA at 6; PIMCO at 5–6; SIFMA AMG at 8; MGEX at 2. position normally represents a substitute for transactions to be made or positions to be taken at a later time in a physical marketing channel.86 Prior to the enactment of the Dodd-Frank Act, the temporary substitute test in section 4a(c)(2)(A)(i) of the CEA also contained the word ‘‘normally,’’ so that the Commission’s existing bona fide hedging definition mirrored the previous section 4a(c)(2)(A)(i) of the CEA prior to the Dodd-Frank Act. The word ‘‘normally’’ acted as a qualifier for the instances in which a position must be a temporary substitute for transactions or positions made at a later time in a physical marketing channel. However, the Dodd-Frank Act removed that qualifier by deleting the word ‘‘normally’’ from the temporary substitute test in CEA section 4a(c)(2)(A)(i).87 In a 1987 interpretation, the Commission stated that, among other things, the inclusion of the word ‘‘normally’’ in connection with the pre￾Dodd-Frank-Act version of the temporary substitute language indicated that the bona fide hedging definition should not be construed to apply only to firms using futures to reduce their exposures to risks in the cash market.88 Instead, the 1987 interpretation took the view that to qualify as a bona fide hedge, a transaction in the futures market did not necessarily need to be a temporary substitute for a later transaction in the cash market.89 In other words, that interpretation took the view that a futures position could still qualify as a bona fide hedging position even if it was not in connection with the production, sale, or use of a physical commodity. Commission staff has previously granted so-called ‘‘risk management exemptions’’ on such grounds. In connection with physical commodities, the phrase ‘‘risk management exemption’’ has historically been used by Commission staff to refer to non￾enumerated bona fide hedge recognitions granted under § 1.47 to allow swap dealers and others to hold agricultural futures positions in excess of Federal position limits in order to offset their positions in commodity index swaps or related exposure.90 Risk management exemptions were granted outside of the spot month, and the related swap exposure that was being offset (i.e., hedged by the futures or options position entered into based on the risk management exemption) was typically opposite an institutional investor for which the swap was not a bona fide hedge. (2) Summary of the 2020 NPRM— Temporary Substitute Test As described above, the Dodd-Frank Act clearly and unambiguously removed the word ‘‘normally’’ from the temporary substitute test in CEA section 4a(c)(2)(A)(i), as amended by the Dodd￾Frank Act. As such, in the 2020 NPRM, the Commission interpreted the Dodd￾Frank Act’s removal of the word ‘‘normally’’ as reflecting Congressional statutory direction that a bona fide hedging position in physical commodities must always (and not just ‘‘normally’’) be in connection with
the production, sale, or use of a physical cash-market commodity.91 The Commission interpreted this change to signal that the Commission should cease to recognize ‘‘risk management’’ positions as bona fide hedges for physical commodities, unless the positions satisfy the pass-through swap/ swap offset requirements in section 4a(c)(2)(B) of the CEA, further discussed below.92 In order to implement that statutory change, the Commission: (1) Proposed a narrower bona fide hedging definition for physical commodities in proposed § 150.1 that did not include the word ‘‘normally’’ currently found in the temporary substitute regulatory language in paragraph (1) of the existing § 1.3 bona fide hedging definition; and (2) proposed to eliminate all previously￾granted risk management exemptions that did not otherwise qualify for pass￾through treatment.93 Under the 2020 NPRM, any such previously-granted risk management exemption would generally no longer apply 365 days after publication of final position limits rules in the Federal Register.94 (3) Summary of the Commission Determination—Temporary Substitute Test As proposed, the Final Rule eliminates the word ‘‘normally’’ from the Commission’s temporary substitute test and eliminates the risk management exemption for contracts subject to Federal position limits. However, as described below, the Final Rule is extending the compliance date for existing risk management exemption holders. (4) Comments—Temporary Substitute Test Commenters were divided regarding the proposed elimination of the risk management exemptions. Some public interest groups and the agricultural industry supported the proposed removal of the word ‘‘normally’’ and/or the accompanying rescission of risk management exemptions.95 These commenters argued that risk management positions are harmful to the market and can adversely impact price dynamics.96 Commenters from the financial industry, ICE, and MGEX opposed the proposed removal of ‘‘normally’’ and/or the proposed elimination of the risk management exemption.97 These commenters contended that the elimination of the risk management

98FIA at 23–24 (contending that the 2020 NPRM may harm pension funds and create a bifurcated liquidity pool since dealers may need to move their hedges from physically-settled to financially-settled contracts earlier than they would otherwise); ISDA at 6, 11; PIMCO at 5–6; and ICE at 5–6. 99 ISDA at 6; FIA at 21–22; and ICE at 5, 8. 100According to the European Securities and Market Authority, ‘‘MiFID is the Markets in Financial Instruments Directive (2004/39/EC). It has been applicable across the European Union since November 2007. It is a cornerstone of the EU’s regulation of financial markets seeking to improve their competitiveness by creating a single market for investment services and activities and to ensure a high degree of harmonised protection for investors in financial instruments.’’ MiFID sets out: conduct of business and organisational requirements for investment firms; authorisation requirements for regulated markets; regulatory reporting to avoid market abuse; trade transparency obligation for shares; and rules on the admission of financial instruments to trading.’’ ‘‘On 20 October 2011, the European Commission adopted a legislative proposal for the revision of MiFID which took the form of a revised Directive and a new Regulation. After more than two years of debate, the Directive on Markets in Financial Instruments repealing Directive 2004/39/EC and the Regulation on Markets in Financial Instruments, commonly referred to as MiFID II and MiFIR, were adopted by the European Parliament and the Council of the European Union. They were published in the EU Official Journal on 12 June 2014.’’ European Securities and Market Authority website at https://www.esma.europa.eu/policy￾rules/mifid-ii-and-mifir. 101SIFMA AMG at 8. 102 ISDA at 7. 103 ICE at 6; FIA at 3, 22, 24; ISDA at 6–7; and IECA at 12. 104FIA at 3, 22; ISDA at 6–7; and ICE at 5–6. 105See 7 U.S.C. 6a(c)(2)(B)(i) (was executed opposite a counterparty for which the transaction would qualify as a bona fide hedging transaction). The pass-through swap offset language in the Final Rule’s bona fide hedging definition is discussed in greater detail below. 106See MiFID II Review report on position limits and position management (April 1, 2020), available at https://www.esma.europa.eu/sites/default/files/ library/esma70-156-2311_mifid_ii_review_report_ position_limits.pdf. The exemption under consideration for financial counterparties appears to be in line with the Final Rule’s pass-through provision, in that the ‘‘exemption would apply to the positions held by that financial counterparty that are objectively measurable as reducing risks directly related to the commercial activities of the non-financial entities of the group . . . . this hedging exemption should not be considered as an additional exemption to the position limit regime but rather as a ‘transfer’ to the financial counterparty of the group of the hedging exemption otherwise available to the commercial entities of the
group.’’ Id. at 32–33. 107For clarity, a risk management exemption holder may enter into new positions based on, and in accordance with, its previously-granted risk management exemption, during this compliance period, until January 1, 2023. 108For further discussion of the Final Rule’s compliance and effective dates, see Section I.D. Both existing risk management exemptions, as discussed herein, and swap positions, will be subject to the extended compliance data to January 1, 2023. exemption will harm the market, including by reducing liquidity,98 and that even though Congress removed ‘‘normally’’ from the statute, Congress did not use the term ‘‘always.’’ 99 One commenter opposed to the ban claimed that the European Commission is considering revising MiFID II 100 to address a ‘‘failure to include an appropriate hedge exemption for financial risks.’’ 101 Finally, several commenters noted that even if the Commission finalizes the ban as proposed, the Commission should: (i) Revoke the exemptions gradually so as to avoid disruption; 102 (ii) clarify that the Commission maintains the authority under CEA
section 4a(a)(7) to grant risk
management exemptions in the future; 103 and (iii) allow exchanges to grant risk management exemptions.104 (5) Discussion of Final Rule— Temporary Substitute Test The Commission is eliminating the word ‘‘normally’’ from the Commission’s temporary substitute test and eliminating the existing risk management exemption for contracts subject to Federal position limits as proposed. However, as described below, the Commission is extending the compliance date by which positions based on existing risk management exemptions must be reduced to levels that comply with the applicable Federal position limits. While the Commission appreciates commenter concerns regarding the elimination of the risk management exemption, the Commission interprets the Dodd-Frank Act’s removal of the word ‘‘normally’’ from the CEA’s statutory temporary substitute test as signaling Congressional intent to reverse the flexibility afforded by the presence of the word ‘‘normally’’ prior to the Dodd￾Frank Act. As such, even were the Commission inclined to retain the status quo of risk management exemptions, the Commission’s statutory interpretation prevents it from doing so. Further, retaining such exemptions for swap intermediaries, without regard to the purpose of their counterparties’ swaps, would not only be inconsistent with the post-Dodd-Frank Act version of the temporary substitute test, but would also be inconsistent with the statutory restrictions on pass-through swap offsets. In particular, the statutory pass￾through provision requires that the swap position being offset qualify as a bona fide hedging position.105 Many risk management exemptions have been used to offset swap positions that would not qualify as bona fide hedging positions. In response to the comment regarding a potential expansion of MiFID II to accommodate activity akin to risk management exemptions, the Commission believes that the European Commission’s stated posture does not appear to contemplate a blanket exemption for financial risks as suggested by the commenter. Instead, the European Commission’s approach appears to be largely consistent with the narrower pass-through approach adopted by the Commission in this Final Rule.106 The Commission is, however, making several changes and clarifications to address commenter concerns:
First, the Commission is extending the compliance date by which risk management exemption holders must reduce their risk management exemption positions to comply with Federal position limits under the Final Rule to January 1, 2023.107 This provides approximately two years beyond the Effective Date for the nine legacy agricultural contracts.108 The Commission believes that this will provide sufficient time for existing positions to roll off and/or be replaced with positions that conform with the Federal position limits adopted in this Final Rule, without adversely affecting market liquidity. Second, including pass-through swaps and pass-through swap offsets within the definition of a bona fide hedge will mitigate some of the potential impact resulting from the rescission of the risk management exemption. The Final Rule’s pass￾through provisions should help address certain of the hedging needs of persons seeking to offset the risk from swap books, allowing for sufficient liquidity in the marketplace for both bona fide hedgers and their counterparties. Third, although the Commission will no longer recognize risk management positions as bona fide hedges under this Final Rule, the Commission maintains other authorities, including the authority under CEA section 4a(a)(7), to exempt risk management positions from Federal position limits. Finally, consistent with existing industry practice, exchanges may continue to recognize risk management positions for contracts that are not subject to Federal position limits, including for excluded commodities. b. Economically Appropriate Test (1) Background—Economically Appropriate Test The statutory and regulatory bona fide hedging definitions in section 4a(c)(2)(A)(ii) of the CEA and in existing § 1.3 of the Commission’s regulations both provide that a bona fide hedging position must be economically

109 7 U.S.C. 6a(c)(2)(A)(ii) and 17 CFR 1.3. 110For example, in promulgating existing § 1.3, the Commission explained that a bona fide hedging position must, among other things, be economically appropriate to risk reduction, such risks must arise from operation of a commercial enterprise, and the price fluctuations of the futures contracts used in the transaction must be substantially related to fluctuations of the cash-market value of the assets, liabilities or services being hedged. Bona Fide Hedging Transactions or Positions, 42 FR 14832, 14833 (Mar. 16, 1977) (emphasis added). ‘‘Value’’ is generally understood to mean price times quantity. The Dodd-Frank Act added CEA section 4a(c)(2), which copied the economically appropriate test from the Commission’s definition in § 1.3. See also 78 FR at 75702, 75703 (stating that the core of the Commission’s approach to defining bona fide hedging over the years has focused on transactions that offset a recognized physical price risk). 111See, e.g., 78 FR at 75709, 75710. 112See supra n.109 for further discussion on the Commission’s longstanding policy regarding ‘‘price’’ risk. 113 85 FR at 11622. 114MGEX at 2; NGSA at 5–6; CHS at 3; NCFC at 2; FIA at 10–11; CMC at 3; LDC at 2; ICE at 4; IFUS at Exhibit 1 RFC (6). 115FIA at 10–11 (Stating that, ‘‘[T]he Commission should recognize that the statutory definition of a bona fide hedging position encompasses the reduction of all risks that affect the value of a cash￾market position, including time risk, location risk, quality risk, execution and logistics risk, counterparty credit risk, weather risk, sovereign risk, government policy risk (e.g., an embargo), and any other risks that affect price. These are objective, rather than subjective, risks that commercial enterprises incur on a regular basis in connection with their businesses as producers, processors, merchants handling, and users of commodities that underlie the core referenced futures contracts’’). 116ADM at 5. 117 Id. 118ADM at 5. 119LDC at 2. 120CMC at 3. 121Better Markets at 52–53. 122Better Markets at 53. 123MGEX at 2; FIA at 11. appropriate to the reduction of risks in the conduct and management of a commercial enterprise.109 The Commission has, when defining bona fide hedging, historically focused on transactions that offset price risk.110 (2) Summary of the 2020 NPRM— Economically Appropriate Test In the 2020 NPRM, the Commission proposed to amend the economically appropriate prong of the bona fide hedge definition with one clarification:
Consistent with the Commission’s longstanding practice regarding what types of risk may be offset by bona fide hedging positions in excess of Federal position limits,111 the Commission made explicit in the proposed bona fide hedging definition that the word ‘‘risks’’ refers to, and is limited to, ‘‘price risk.’’ This proposed clarification did not reflect a change in policy, as the Commission has a longstanding policy that hedges of non-price risk alone cannot be recognized as bona fide hedges.112 As stated in the 2020 NPRM, the Commission clarified its view that risk must be limited to price risk for purposes of the economically appropriate test due to the difficulty that the Commission or exchanges may face in objectively evaluating whether a particular derivatives position is economically appropriate to the reduction of non-price risks. For example, the Commission or an exchange’s staff can objectively evaluate whether a particular derivatives position is an economically appropriate hedge of a price risk arising from an underlying cash-market transaction, including by assessing the correlations between the risk and the derivatives position. It would be more difficult, if not impossible, to objectively determine whether an offset of non-price risk is economically appropriate for the underlying risk. Finally, the Commission requested comment on whether price risk is attributable to a variety of factors, including political and weather risk, and could therefore allow hedging political, weather, or other risks, or whether price risk is something narrower in the application of bona fide hedging.113 (3) Summary of the Commission Determination—Economically Appropriate Test The Commission is adopting the economically appropriate prong of the bona fide hedge definition as proposed. However, as discussed below, the Commission is clarifying in response to commenter requests that while the Commission is explicitly limiting ‘‘risks’’ to ‘‘price risks’’ as used in the economically appropriate test, the Commission recognizes that price risk can be informed and impacted by various other types of non-price risk. (4) Comments—Economically Appropriate Test The Commission received comments from market participants seeking greater clarity with respect to the Commission’s proposed reference to ‘‘price risk’’ in the context of applying the ‘‘economically appropriate’’ test in the bona fide hedging definition. Many commenters stated that the economically appropriate test should include offsets of non-price risk.114 Other commenters stated that a variety of non-price risk factors (i) actually affect price risk and therefore are objective,115 or (ii) are simply another form of price risk and therefore should be permitted.116 For example, ADM stated that when market participants discuss ‘‘risks’’ such as political, weather, delivery, transportation, and more, they are discussing the impact these factors may have on the price.117 Hence the risk being hedged is price risk
as influenced by these factors.118 Other commenters stated that market participants should have the flexibility to measure risk in the manner most suitable for their business.119 In addition, commenters also stated they were not opposed to ‘‘price risk’’ so long as the Commission clarified that price risk is not static or an absolute objective measure, and consequently that the term ‘‘price risks’’ incorporates a commercial hedger’s independent assessment of price risk.120 In contrast, Better Markets supported the 2020 NPRM’s rationale to permit only ‘‘price risk.’’ 121 Better Markets also suggested that the Commission clarify that the term ‘‘commercial enterprise’’ refers to ‘‘solely [a] transaction or position that would be directly and demonstrably risk reducing to ‘cash or spot operations’ for physical commodities underlying the contracts’’ to be hedged.122 Finally, ICE, MGEX, and FIA requested that if the Commission adopts the proposed economically appropriate prong, the Commission should permit market participants to use the non￾enumerated bona fide hedge process to receive recognition of bona fide hedges of non-price risk on a case-by-case basis.123 (5) Discussion of the Final Rule—The Bona Fide Hedging Definition’s ‘‘Economically Appropriate Test’’ The Commission is adopting the economically appropriate prong of the bona fide hedging definition as proposed, codifying existing practice, as well as existing § 1.3’s treatment of price risk, by making it explicit in the rule text that the word ‘‘risks’’ refers to, and is limited to, ‘‘price risk.’’ The Commission emphasizes that the Final Rule is not intended to represent a change to the Commission’s existing interpretation of the economically appropriate prong of bona fide hedging, but rather is maintaining the application of the economically appropriate test in connection with bona fide hedges on the nine legacy agricultural contracts to the 16 new non-legacy core referenced futures contracts. In promulgating existing § 1.3, the Commission explained that a bona fide hedging position must, among other things, ‘‘be economically appropriate to risk reduction, such risks must arise from operation of a commercial

124Bona Fide Hedging Transactions or Positions, 42 FR 14832, 14833 (Mar. 16, 1977) (emphasis added). ‘‘Value’’ is generally understood to mean price times quantity. The Dodd-Frank Act added CEA section 4a(c)(2), which copied the economically appropriate test from the Commission’s definition in § 1.3. See also 78 FR at 75702, 75703 (stating that the ‘‘core of the Commission’s approach to defining bona fide hedging over the years has focused on transactions that offset a recognized physical price risk’’). 125 85 FR at 11606. 126CMC at 3. 127The enumerated cross-commodity hedge provision adopted herein and discussed below offers may also offer additional flexibility to those market participants using referenced contracts to manage risk, by allowing market participants to hedge price risk associated with a particular commodity using a derivative contract based on a different commodity, assuming all applicable requirements of the cross-commodity enumerated bona fide hedge are met. 128This view is consistent with the spirit of Better Market’s comment suggesting a focus on reducing risks associated with a cash-market position in a physical commodity. See Better Markets at 53. 129 7 U.S.C. 6a(c)(2)(A)(iii), 17 CFR 1.3. 130The Commission proposed to replace the phrase ‘‘liabilities which a person owns,’’ which appears in the statute erroneously, with ‘‘liabilities which a person owes,’’ which the Commission believed was the intended wording (emphasis added). The Commission interpreted the word ‘‘owns’’ to be a typographical error. A person may owe on a liability, and may anticipate incurring a liability. If a person ‘‘owns’’ a liability, such as a debt instrument issued by another, then such person owns an asset. The fact that assets are included in CEA section 4a(c)(2)(A)(iii)(I) further reinforces the Commission’s interpretation that the reference to ‘‘owns’’ means ‘‘owes.’’ The Commission also proposed several other non￾substantive modifications in sentence structure to improve clarity. enterprise, and the price fluctuations of the futures contracts used in the transaction must be substantially related to fluctuations of the cash-market value of the assets, liabilities or services being hedged.’’ 124 (emphasis added). Consistent with this longstanding policy of the Commission to recognize hedges of price risk of an underlying commodity position as bona fide hedges (and consistent with the Commission’s existing application of bona fide hedging to the nine legacy agricultural contracts under the existing Federal position limit regulations), the Commission is also clarifying further below that price risk can be informed and impacted by various other types of risks. As the Commission stated in the 2020 NPRM and continues to believe, for any given non-price risk, such as geopolitical turmoil, weather, or counterparty credit risks, there could be multiple commodities, directions, and contract months which a particular market participant may subjectively view
as an economically appropriate offset for that non-price risk. Moreover, multiple market participants faced with the same non-price risk might take different views on which offset is the most effective.125 A system of allowing for bona fide hedges based solely by reference to such non-price risks would be difficult to administer on a pragmatic and consistently fair basis. Further, it also would be difficult to evaluate whether a particular commodity derivative contract would be the proper offset as a bona fide hedge, as defined in this Final Rule, to a potential non-price risk, or would remove exposure to the potential change in value to the market participant’s cash positions resulting from the non-price risk. Thus, hedging solely to protect against changes in value of non-price risks would fall outside the category of a bona fide hedge which offsets the ‘‘price risk’’ of an underlying commodity cash position. However, the Commission agrees with commenters who stated that market participants form independent economic assessments of how different possible events might create potential risk exposures for their business.126 Such risks that create or impact the price risk of underlying cash commodities may include, but are not limited to, geopolitical turmoil, weather, or counterparty credit risks. The Commission recognizes that these risks can create price risks and understands that firms may manage these potential risks to their businesses differently and in the manner most suitable for their business. As noted above, by limiting the economically appropriate prong to price risk, the Commission is reiterating its historical practice, which has applied well to the legacy agricultural contracts for decades, to recognize hedges of price risk of an underlying commodity position as bona fide hedges while acknowledging that price risk may itself be impacted by non-price risks. The foregoing discussion of price risk is limited to the question of whether a position in a referenced contract meets the economically appropriate test to satisfy the bona fide hedge requirements. Market participants may thus continue to manage non-price risks in a variety of ways, which may include participation in the futures markets or exposure to other financial products. In fact, market participants may decide to use futures contracts that are not subject to Federal position limits (e.g., location basis contracts), if they determine such contracts will help them manage non￾price risks faced by their businesses.127 For example, a market participant seeking to manage risk, including non￾price risk, with positions in contracts that are not referenced contracts, such as freight or weather derivatives, would not be subject to Federal speculative position limits and thus would not need to comply with the economically appropriate test in connection with such positions in non-referenced contracts. To satisfy the economically appropriate test, a position must ultimately offset the
price risk of an underlying cash commodity.128 Non￾price risk may also be a consideration in hedging decisions, but cannot be a substitute for price risk associated with the cash commodity underlying the derivatives position. The foregoing view precludes the Commission from adopting commenter suggestions to permit market participants to use the non-enumerated hedge process to receive recognition of hedges of non￾price risk on a case-by-case basis because, while the Commission acknowledges that price risk can be informed and impacted by non-price risk, price risk is required to satisfy the economically appropriate test.
c. Change in Value Requirement
(1) Background—Change in Value Requirement CEA section 4a(c)(2)(A)(iii) and existing § 1.3 include the ‘‘change in value requirement,’’ which provides that the bona fide hedging position must arise from the potential change in the value of: (I) Assets that a person owns, produces, manufactures, processes, or merchandises or anticipates owning, producing, manufacturing, processing, or merchandising; (II) liabilities that a person owns or anticipates incurring; or (III) services that a person provides, purchases, or anticipates providing or purchasing.129 (2) Summary of the 2020 NPRM— Change in Value Requirement The Commission proposed to retain the substance of the change in value requirement in existing § 1.3, with some non-substantive technical modifications, including modifications to correct a typographical error.130 Aside from the typographical error, the proposed § 150.1 change in value requirement mirrors the Dodd-Frank Act’s change in value requirement in CEA section 4a(c)(2)(A)(iii). (3) Summary of the Commission Determination—Change in Value Requirement For the same reasons set out in the 2020 NPRM, the Commission is adopting the change in value

131 7 U.S.C. 6a(c)(2).
132 17 CFR 1.3.
133NGSA at 4.
134 IATP at 14–15; Better Markets at 53. 135The orderly trading requirement was added as a part of the regulatory definition of bona fide hedging in 1975; see Hedging Definition, Reports, and Conforming Amendments, 40 FR 11560 (Mar. 12, 1975). Prior to 1974, the orderly trading requirement was found in the statutory definition of bona fide hedging position; changes to the CEA in 1974 removed the statutory definition from CEA
section 4a(3).
136 7 U.S.C. 6c(a)(5).
137See, e.g., paragraphs (2)(i)(A) and (2)(ii)(A) of existing § 1.3. 138See paragraph (2)(iii) of existing § 1.3 (Offsetting sales and purchases for future delivery on a contract market which do not exceed in quantity that amount of the same cash commodity which has been bought and sold at unfixed prices basis different delivery months of the contract market) 139Paragraph (2)(ii)(C) of existing § 1.3 provides in relevant part that the bona fide hedging definition includes purchases which do not exceed in quantity Twelve months’ unfilled anticipated requirements of the same cash commodity for processing, manufacturing, or feeding by the same person. requirement of the bona fide hedge definition as proposed. (4) Comments—Change in Value Requirement No specific comments on the change in value requirement were received. d. Incidental Test and Orderly Trading Requirement (1) Background—Incidental Test and Orderly Trading Requirement Two general requirements contained in the existing § 1.3 definition of bona fide hedging position include: (I) The incidental test and (II) the orderly trading requirement. For a position to be recognized as a bona fide hedging position, the incidental test requires that the purpose is to offset price risks incidental to commercial cash, spot, or forward operations. Under the orderly trading requirement, such position is established and liquidated in an orderly manner in accordance with sound commercial practices. Notably, Congress in the Dodd-Frank Act did not include the incidental test or the orderly trading requirement in the statutory bona fide hedging definition in CEA section 4a(c)(2).131 (2) Summary of the 2020 NPRM— Incidental Test and Orderly Trading Requirement While the Commission proposed to maintain the substance of the three core elements of the existing bona fide hedging definition described above, with some modifications, the Commission also proposed to eliminate two elements contained in the existing § 1.3 definition: The incidental test and orderly trading requirement that currently appear in paragraph (1)(iii) of the § 1.3 bona fide hedging definition.132 (3) Summary of the Commission Determination—Incidental Test and Orderly Trading Requirement The Commission is eliminating the incidental test and orderly trading requirement from the bona fide hedge definition as proposed. (4) Comments—Incidental Test and Orderly Trading Requirement NGSA supported elimination of the incidental test and orderly trading requirement, claiming that the changes will facilitate hedging,133 while IATP and Better Markets opposed the removal of these provisions, contending that the provisions are important for preventing market disruption.134 (5) Discussion of the Final Rule— Incidental Test and Orderly Trading Requirement The Commission is eliminating the incidental test and orderly trading requirement from the bona fide hedge definition as proposed. As noted above, neither the incidental test nor orderly trading requirement
is part of the CEA’s current statutory definition of bona fide hedge. The Commission views the incidental test as redundant because the Commission proposed to maintain both (1) the change in value requirement (as noted above, the reference to ‘‘value’’ in the change in value requirement is generally understood to mean price per unit times quantity of units) as well as (2) the economically appropriate test (which includes the concept of the offset of price risks in the conduct and management of, i.e., incidental to, a commercial enterprise). In response to IATP and Better Markets, the Commission does not view the orderly trading requirement as needed to prevent market disruption. The statutory bona fide hedging definition does not include an orderly trading requirement,135 and the meaning of ‘‘orderly trading’’ is unclear in the context of the OTC swap market and in the context of permitted off-exchange transactions, such as exchange for physicals. The elimination of the orderly trading requirement does not diminish an exchange’s obligation to prohibit any disruptive trading practices, including a case where an exchange believes that a bona fide hedge position may result in disorderly trading. Further, in eliminating the orderly trading requirement from the definition in the regulations, the Commission is not amending or modifying interpretations of any other related requirements, including any of the anti-disruptive trading prohibitions in CEA section 4c(a)(5),136 or any other statutory or regulatory provisions. Taken together, the retention of the updated temporary substitute test, economically appropriate test, and change in value requirement, coupled with the elimination of the incidental test and orderly trading requirement, should reduce uncertainty by eliminating provisions that do not appear in the statute, and by clarifying the language of the remaining provisions. By reducing uncertainty surrounding some parts of the bona fide hedging definition for physical commodities, the Commission anticipates that, as described in greater detail elsewhere in this release, it would be easier going forward for the Commission, exchanges, and market participants to address whether novel trading practices or strategies may qualify as bona fide hedges.
iv. Treatment of Unfixed Price
Transactions Under the Final Rule a. Background and Summary of Commission Determination—Treatment of Unfixed Price Transactions The Commission has a long history of recognizing fixed-price commitments as the basis for a bona fide hedge.137 While the existing bona fide hedging definition in § 1.3 includes one enumerated hedge that explicitly mentions ‘‘unfixed’’ prices,138 the availability of this hedge is limited to circumstances where a market participant has both an unfixed￾price purchase and an unfixed-price sale on hand, precluding a market participant with only an unfixed-price purchase or an unfixed-price sale from qualifying for this particular enumerated hedge. Further, the extent to which the other existing enumerated hedges apply to unfixed-price commitments is ambiguous from the plain reading of the text of the existing bona fide hedging definition. However, Commission staff have previously considered the extent to which market participants with unfixed￾price commitments may qualify for an enumerated hedge. Commission staff issued interpretive letter 12–07 in 2012 (‘‘Staff Letter No. 12–07’’) in response to a narrow question submitted by a market participant regarding qualifying for the existing enumerated unfilled anticipated requirements bona fide

140CFTC Staff Letter 12–07, issued August 16, 2012, https://www.cftc.gov/LawRegulation/ CFTCStaffLetters/letters.htm, title search ‘‘12–07.’’ 141CFTC Staff Letter 12–07 at 1. 142CFTC Staff Letter 12–07 at 1–2. In the 2016 Reproposal, the Commission affirmed staff’s interpretation articulated in Staff Letter No. 12–07. See 81 FR at 96750. 143CFTC Staff Letter 12–07 at 2. 144 Id. at 2–3. 145For further discussion regarding the enumerated bona fide hedge for ‘‘unsold anticipated production,’’ see Section II.A.1.vi.d. 146For further discussion regarding the new enumerated bona fide hedge for ‘‘anticipated merchandising,’’ see Section II.A.1.vi.f. 147See proposed paragraph (a)(2) of Appendix A to part 150. Like the existing enumerated hedge in paragraph (2)(iii) of § 1.3, this proposed enumerated hedge was limited to circumstances where a market participant has both an unfixed-price purchase and an unfixed-price sale in hand. This specific proposed enumerated bona fide hedge, along with all other proposed enumerated hedges, is described in detail further below. 148The Working Group BFH Petition is available at http://www.cftc.gov/stellent/groups/public/ @rulesandproducts/documents/ifdocs/ wgbfhpetition012012.pdf. In the 2013 Proposal, the Commission provided that the transactions contemplated under the working group’s examples Nos. 1, 2, 6, 7 (scenario 1), and 8 would be permitted under the proposed definition of bona fide hedging. In the 2020 NPRM, the Commission preliminarily determined that transactions described in four additional CEWG examples would comply with the proposed expanded bona fide hedging definition in the 2020 NPRM: examples #4 (Binding, Irrevocable Bids or Offers), #5 (Timing of Hedging Physical Transactions), #9 (Holding a cross-commodity hedge using a physical delivery contract into the spot month) and #10 (Holding a cross-commodity hedge using a physical delivery contract to meet unfilled anticipated requirements). 149 85 FR at 11612. 150 85 FR at 11622. 151See, e.g., Ecom at 1; ACA at 2; CEWG at 22– 24; Chevron at 11; CME Group at 8–9; DECA at 2; East Cotton at 2; Gerald Marshall at 2; IFUS at 5– 7; IMC at 2; Jess Smith at 2; LDC at 2; Mallory Alexander at 2; McMeekin at 2; Memtex at 2; Moody Compress 1; NCC at 1; NGFA at 7; Olam at 2; Omnicotton at 2; Canale Cotton at 2; Shell at 7; Southern Cotton at 2; Suncor at 7; SW Ag at 2; Toyo Continued price transactions.’’ 140 In that interpretive letter, staff clarified that a commercial entity may qualify for the existing enumerated bona fide hedge for unfilled anticipated requirements even if the commercial entity has entered into long-term, unfixed-price supply or requirements contracts because, as staff explained, the unfixed-price purchase contract does not ‘‘fill’’ the commercial entity’s anticipated requirements.141 As explained in Staff Letter No. 12–07, the price risk of such ‘‘unfilled’’ anticipated requirements is not offset by the unfixed-price forward contract because the
price risk remains with the commercial entity, even though the entity has contractually assured a supply of the commodity.142 Instead, the price risk continues until the unfixed-price contract’s price is fixed.143 Once the price is fixed on the supply contract, the commercial entity no longer has price risk, and its derivative position, to the extent the position is above an applicable position limit, and unless the market participant qualifies for another exemption (as discussed below), must be liquidated in an orderly manner in accordance with sound commercial practices.144 As discussed below, the Commission is affirming this narrow interpretation for the Final Rule—that commercial entities that enter into unfixed-price transactions may continue to qualify for the enumerated bona fide hedge for unfilled anticipated requirements—and the Commission is adopting this rationale to also apply to: (1) The existing enumerated bona fide hedge for unsold anticipated production; 145 and (2) the new enumerated bona fide hedge for anticipated merchandising.146 In other words, under this Final Rule, a commercial market participant in the physical marketing channel that enters into an unfixed-price transaction may qualify for one of these enumerated anticipatory bona fide hedges, as long as the commercial market participant otherwise satisfies all applicable requirements for such anticipatory bona fide hedge. For this section of the release, the Commission will refer to the enumerated bona fide hedges for anticipated unfilled requirements, anticipated unsold production, and anticipated merchandising, collectively, as the ‘‘anticipatory bona fide hedges.’’ Additionally, by using the term ‘‘unfixed-price transaction,’’ the Commission means a forward contract (i.e., a firm commitment) at an open price or at a price to be determined at a later date (for example, by reference to an index based on the settlement price of a corresponding futures contract). The Commission discusses the 2020 NPRM’s general treatment of unfixed price transactions below, followed by a summary of comments and the Commission’s determination on the issue of unfixed-price transactions generally. A more detailed discussion of each specific enumerated hedge, including the three anticipatory bona fide hedges, appears further below. b. Summary of the 2020 NPRM— Treatment of Unfixed Price Transactions Like the bona fide hedging definition in existing § 1.3, the proposed bona fide hedging definition in § 150.1 of the 2020 NPRM included one enumerated hedge addressing unfixed-price transactions, which required offsetting unfixed-price purchase and sale transactions.147 Aside from that one enumerated bona fide hedge, the other proposed bona fide hedges did not specify whether a market participant with an unfixed-price transaction could qualify for a bona fide hedge exemption, including any of the proposed anticipatory bona fide hedges. However, the 2020 NPRM did preliminarily and indirectly address
previous queries on the matter of unfixed-price transactions. In particular, the 2020 NPRM addressed a petition for exemptive relief submitted in response to the 2011 Final Rule. In that petition, the Working Group of Commercial Energy Firms (which has since reconstituted itself as the Commercial Energy Working Group, or ‘‘CEWG’’) requested exemptive relief for transactions that are described by 10 examples set forth therein as bona fide hedging transactions (‘‘BFH Petition’’).148 In the 2020 NPRM, the Commission preliminarily determined that commodity derivative positions described in two examples related to unfixed-price transactions did not fit within any of the proposed enumerated hedges. Specifically, the Commission preliminarily determined that the positions described in examples #3 (unpriced physical purchase or sale commitments) and #7 (scenario 2) (use of physical delivery referenced contracts to hedge physical transactions using calendar month average pricing) of the BFH Petition did not fit within any of the proposed enumerated bona fide hedges, but that market participants could apply for a non-enumerated exemption.149 The Commission requested comment on the extent to which the proposed enumerated bona fide hedges should encompass the types of positions discussed in examples #3 (unpriced physical purchase or sale commitments) and #7 (scenario 2) (use of physical delivery reference contracts to hedge physical transactions using calendar month averaging pricing) of the CEWG’s BFH Petition.150
c. Comments—Treatment of Unfixed
Price Transactions
In response to the 2020 NPRM, many commenters requested the Commission either clarify or make explicit that the proposed bona fide hedge definition would apply to commodity derivatives contracts used to hedge exposure to price risk arising from unfixed-price transactions.151

at 2; Texas Cotton at 2; Walcot at 2; White Gold at 2. 152CMC at 4; FIA at 16; ICE at 4–5; ACSA at 6– 7; ADM at 3; CME Group at 8–9; CEWG at 19–21. 153CEWG at 20 (also providing a similar example as it submitted in the original petition which included Example #3 (unpriced physical purchase and sale commitments)). 154ACSA at 12–14; Several commenters concurred with ACSA regarding exposure to calendar spread. Mallory Alexander at 2; DECA at 2; CMC at 4; IMC at 2; Olam at 2; SW Ag at 2; White Gold at 2; Walcot at 2. 155ACSA at 4–7; CMC at 4; Mallory Alexander at 2; DECA at 2; IMC at 2; Olam at 2; SW Ag at 2; White Gold at 2; Walcot at 2. 156ACSA at 5. 157MGEX at 2; IMC at 2; Mallory Alexander at 2; Walcot at 2; White Gold at 2; Olam at 2; LDC at 1; Canale at 2; Moody Compress at 1; Gerald Marshall at 2; SW Ag at 2; DECA at 2; Chevron at 12; Suncor at 11; CEWG at 21. 158Chevron at 11. 159EPSA at 5; IECA at 8. 160 Id. 161As a result, based on this rationale, a commercial market participant that has an unfixed￾price commitment is treated the same as a commercial market participant that has no unfixed￾price commitment for purposes of determining whether one qualifies for these enumerated anticipatory bona fide hedges. 162For further discussion regarding the enumerated bona fide hedge for ‘‘unsold anticipated production,’’ see Section II.A.1.vi.d. 163For further discussion regarding the new enumerated bona fide hedge for ‘‘anticipated merchandising,’’ see Section II.A.1.vi.f. 164As such, merely entering into an unfixed-price transaction is not alone sufficient to demonstrate compliance with one of the enumerated anticipatory bona fide hedges. The specific requirements associated with each enumerated bona fide hedge, including each anticipatory bona fide hedge, are described in detail further below. Several commenters provided various examples in support of their requests that the Commission recognize that unfixed price transactions may serve as the basis for an enumerated bona fide hedge position for purposes of Federal position limits.152 Comments on the treatment of unfixed price transactions often were submitted in connection with discussions on the scope of the proposed enumerated bona fide hedge for anticipated merchandising. As discussed further below, under the Final Rule’s enumerated anticipated merchandising bona fide hedge section, many commenters requested the Commission clarify whether the proposed enumerated hedge for anticipated merchandising could be used to manage price risk arising from unfixed-price physical commodity transactions. With regards to CEWG’s BFH Petition example #3 (unpriced physical purchase or sale commitments), many commenters disagreed with the Commission’s preliminary determination in the 2020 NPRM that this type of transaction would not qualify for an enumerated bona fide hedge. Generally, commenters expressed the view that unfixed-price transactions for physical commodities are a common and standard market practice.
The CEWG indicated that unfixed physical purchase or sale commitments are routinely conducted in numerous markets and commodities on a daily basis.153 Similar to the BFH Petition’s example #3 (unpriced physical purchase or sale commitments), ACSA provided examples intended to demonstrate that merchants are exposed to calendar spread and supply price risk because they typically fulfill sales contracts by selling a commodity for future delivery in advance of purchasing the commodity needed to fulfill the sale.154 ACSA, along with other commenters,155 stated that unfixed-price transactions for the purchase or sale of the physical commodities are common, where a market participant buys the commodity at a price that is based on (i.e., is ‘‘indexed’’ to) the settlement price of the nearby (or spot) futures month contract and later sells the commodity at a price that is indexed to the deferred month futures contract. ACSA and other commenters indicated that merchants do this to ‘‘effectively bridge the gap between timing mismatches of supply and demand in the global marketplace.’’ 156 Related to the BFH Petition example #7 (scenario 2) (use of physical delivery reference contracts to hedge physical transactions using calendar month averaging pricing ‘‘CMA’’), commenters requested that the Commission clarify that hedges of underlying physical transactions that utilize CMA pricing structures fall within the enumerated bona fide hedge for anticipated merchandising.157 Chevron requested the Commission clarify that commercial firms that price commercial transactions to purchase or sell physical crude oil or natural gas using a CMA pricing structure (whether they are solely merchants or conduct merchant activities as part of an integrated energy company), should receive bona fide hedge treatment for their commodity derivative contract positions that offset the risks arising from those CMA priced purchases or sales.158 Similarly, other commenters asked for clarification regarding whether the existing enumerated bona fide hedge for unfilled anticipated requirement extends to scenarios that involve unfixed-price contracts that many electric generators enter into to address their anticipated supply requirements.159 These commenters asked for clarification that unfixed-price purchase commitments do not ‘‘fill’’ an anticipated requirement such that the market participant would be able to still qualify for the enumerated unfilled anticipated requirement bona fide hedge.160 d. Discussion of Final Rule—Treatment of Unfixed Price Transactions As discussed above, the Commission is affirming and broadening the application of the interpretation articulated in Staff Letter No. 12–07. As a result, commercial market participants in the physical marketing channel that enter into unfixed price transactions may qualify for bona fide hedge treatment under the enumerated bona fide hedges for anticipatory merchandising, anticipated unsold production, or anticipated unfilled
requirements because, as discussed below, unfixed price transactions do not give rise to outright price risk and do not otherwise fix an outright price.161 Consistent with Staff Letter No. 12– 07, commercial market participants in the physical marketing channel that enter into unfixed-price transactions may continue to qualify for the enumerated bona fide hedge for unfilled anticipated requirements for those unfixed price transactions. Further, the Commission is broadening this rationale to additionally include the existing enumerated bona fide hedge for ‘‘unsold anticipated production’’ 162 and the new enumerated bona fide hedge for anticipated merchandising.163 A commercial market participant that enters into an unfixed-price transaction may qualify for one of these enumerated anticipatory bona fide hedges as long as the commercial entity otherwise satisfies all requirements for such anticipatory bona fide hedge, including demonstrating its anticipated need in the physical marketing channel related to either its unsold production, unfilled requirements, and/or merchandising, as applicable.164 Under this Final Rule, the Commission is clarifying that a commercial market participant may still qualify for an enumerated anticipatory bona fide hedge for an anticipated need, based on a good-faith expectation of that need, even if the market participant has entered into an unfixed-price transaction, since the Commission does not deem the unfixed-price transaction to ‘‘fill’’ or ‘‘address’’ the anticipated need. This rationale is predicated on the fact that an unfixed-price commitment does not offset the price risk associated with an anticipated need (i.e.,

165Consistent with the existing Federal position limits framework, under the Final Rule, commercial market participants may not qualify for any anticipatory bona fide hedge merely to offset risks associated with non-commercial (i.e., financial) activities. 166 In the case where Producer X fixes the price of its sale before delivery, while it no longer holds an anticipatory hedge, Producer X may qualify for the enumerated hedge for fixed price sales, assuming all applicable requirements for that hedge are satisfied. 167See 81 FR at 96750. anticipated unsold production, anticipated unfilled requirements, and/ or anticipated merchandising, as applicable). This is because unfixed￾price transactions do not give rise to outright price risk and therefore do not alter the outright price risks faced by a commercial market participant, even though the market participant has contractually assured either a supply of the commodity (in the case of anticipated unfilled requirements), the sale of its output (in the case of anticipated unsold production), or the purchase or sale of the commodity to be merchandised (in the case of anticipated merchandising).165 In other words, a trader with an unfixed-price commitment still has price risk related to its anticipated need until the price is fixed. Once the price has become fixed, the market participant may no longer avail itself of the enumerated anticipatory bona fide hedge, but may potentially avail itself of another enumerated bona fide hedge, (such as the bona fide hedges for fixed￾price purchase contracts or for fixed￾price sales contracts, as applicable), provided all applicable requirements of such other enumerated bona fide hedges are satisfied. Under the Final Rule, a commercial market participant must continue to be able to demonstrate an anticipated need related to unsold production, unfilled requirements, and/or merchandising. Accordingly, the Commission determines that the commercial market participant engaged in unfixed-price transactions in the BFH Petition’s example #3 (unpriced physical purchase or sale commitments) and example #7 (scenario 2) (use of physical delivery referenced contracts to hedge physical transactions using calendar month average pricing) can qualify for one of the enumerated anticipatory bona fide hedges under the Final Rule to the extent the market participant otherwise complies with the applicable conditions of the relevant enumerated anticipatory bona fide hedge in connection with the market participant’s commercial activities. For clarity, the Commission also underscores that under the Commission’s existing portfolio hedging policy, market participants, including vertically-integrated firms (i.e., those firms that may qualify as more than one of a producer; processor, manufacturer, or utility; and/or merchandiser), may continue to manage their price risks by utilizing more than one enumerated bona fide hedge (including more than one anticipatory bona fide hedge). The
Commission recognizes that there are many ways in which market participants both structure their organizations and engage in commercial hedging practices. As such, market participants may manage the price risk from their various commercial activities by utilizing multiple enumerated bona fide hedge exemptions in the manner that is most suitable to their particular circumstances. Nevertheless, for illustrative purposes, the Commission provides a general example of how market participants may utilize the enumerated anticipatory bona fide hedges in connection with their unfixed price transactions:
For example, Producer X has the physical capacity to produce 100,000 barrels of physical WTI crude oil on an annual basis. Producer X agrees to sell 80,000 barrels of WTI crude oil to Merchandiser Y via a floating/unfixed￾price contract in which the delivery will be priced at the NYMEX March 2020 WTI crude oil futures final settlement price. Producer X still does not have a buyer for its remaining 20,000 barrels, but anticipates selling all of its production, as it has in previous years. Under this scenario, Producer X may utilize the enumerated unsold anticipated production enumerated hedge to offset the price risk from its unsold production, which includes both the 80,000 barrels of oil sold to Merchandiser Y at an unfixed price, as well as the unsold 20,000 barrels.166 On the other hand, Merchandiser Y may utilize the enumerated hedge for anticipated merchandising to hedge its anticipated merchandising transactions, which include the 80,000 barrels it purchased from Producer X at an unfixed price. Because Merchandiser Y has a history of merchandising more than 80,000 barrels a year, and it anticipates merchandising more than 80,000 barrels in the next twelve months, Merchandiser Y’s anticipated merchandising hedge may include the 80,000 barrels it purchased from Producer X at an unfixed price and its remaining anticipated twelve-months’ merchandising. Separately, assuming Merchandiser Y also has crude oil it purchased at a fixed price in a storage tank, Merchandiser Y may also utilize the enumerated hedge for inventory and cash-commodity fixed-price purchase contracts to hedge the price risk from those fixed price purchases of crude oil. In response to commenters requesting that the Commission create a new enumerated bona fide hedge for unfixed-price transactions, the Commission does not believe that this is necessary because, as described above, commercial market participants may qualify for the enumerated anticipatory bona fide hedges while also entering into unfixed-price transactions. Further, the Commission believes that it is not suitable to create a new enumerated bona fide hedge expressly covering all unfixed price transactions to accomplish the same since there is an inherent difficulty in evaluating the propriety of a hedge of an unfixed price obligation with a fixed-price futures contract as there is basis risk until the unfixed price obligation is fixed. Given differences among markets, creating a new enumerated bona fide hedge for any unfixed price transaction could, under certain circumstances, harm market integrity, enable potential market manipulation, and/or allow excessive speculation by potentially affording bona fide hedging treatment for speculative transactions. For example, assume a market participant enters into an unfixed-price sales contract (e.g., priced at a fixed differential to a deferred month futures contract), and immediately enters into a calendar month spread to reduce the risk of the fixed basis moving
adversely. It may not be economically appropriate to recognize as bona fide a long futures position in the spot (or nearby) month and a short futures position in a deferred calendar month matching the market participant’s cash delivery obligation, in the event the spot (or nearby) month price is higher than the deferred contract month price (referred to as backwardation, and characteristic of a spot cash market with supply shortages), because such a calendar month futures spread would lock in a loss. A position locking in a loss generally is not economically appropriate to the reduction of risk, as it increases risk by generating a loss, and such a transaction may be indicative of an attempt—or at the very least provides inappropriate incentives—to manipulate the spot (or nearby) futures price.167 Finally, the Commission emphasizes that to the extent that a market participant does not qualify for an enumerated anticipatory bona fide hedge in connection with an unfixed￾price transaction, the market participant

168 17 CFR 1.3.
169See Revision of Federal Speculative Position Limits, 52 FR 38914 (Oct. 20, 1987). 170Commodity Futures Modernization Act of 2000, Public Law 106–554, 114 Stat. 2763 (Dec. 21, 2000). 171See 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b–3(f)(6). 172As discussed further below, the Final Rule eliminates the existing twelve-month restriction with respect to the anticipatory unsold production and the anticipated unfilled requirements bona fide hedges. However, the new anticipated merchandising bona fide hedge would be subject to its own twelve-month restriction. 173For further discussion of the exchange exemption process, see Section II.D.3.i.b. 174Bona Fide Hedging Transactions or Positions, 42 FR 14832 (Mar. 16, 1977). 175See infra Section II.C. (discussing § 150.3) and
Section II.G. (discussing § 150.9).
could still avail itself of the process under §§ 150.3 and 150.9 for requesting approval of non-enumerated bona fide hedges.
v. The Enumerated Bona Fide Hedge
Exemptions, Generally a. Background—Bona Fide Hedge Exemptions, Generally As discussed earlier in this release, the list of bona fide hedges explicitly contained in paragraph (2) of the existing bona fide hedging definition in § 1.3 of the Commission’s regulations lists (or ‘‘enumerates’’) seven bona fide hedges, which are generally referred to as the ‘‘enumerated bona fide hedges,’’ in four general categories. These four existing categories of enumerated hedges include: (1) Sales of futures contracts to hedge (i) ownership or fixed-price cash commodity purchases and (ii) unsold anticipated production; (2) purchases of futures contracts to hedge (i) fixed-price cash commodity sales and (ii) unfilled anticipated requirements; (3) offsetting sales and purchases of futures contracts to hedge offsetting unfixed-price cash commodity sales and purchases; and (4) cross￾commodity hedges.168 The list of enumerated bona fide hedges found in paragraph (2) of the existing bona fide hedging definition was developed at a time when only agricultural commodities were subject to Federal position limits, and has not been updated since 1987.169 The Commission believes, as discussed further below, that such list is too narrow to reflect common commercial hedging practices, including for metal and energy contracts. Numerous market and regulatory developments have taken place since 1987, including, among other things, increased futures trading in the metals and energy markets, the development of the swaps markets, and the shift in trading from pits to electronic platforms. In addition, the Commodity Futures Modernization Act of 2000 170 and the Dodd-Frank Act introduced various regulatory reforms, including the enactment of position limits core principles.171 The Commission thus proposed in the 2020 NPRM to update its bona fide hedging definition to better conform to the current state of the law and to better reflect market developments over time. b. Summary of the 2020 NPRM—Bona Fide Hedge Exemptions, Generally So as not to reduce any of the clarity provided by the existing list of enumerated bona fide hedges, the Commission proposed to maintain the existing enumerated bona fide hedges, with some modifications, and to expand this list. The existing definition of ‘‘bona fide hedging transactions and positions’’ enumerates the following hedging transactions:
a. Hedges of inventory and cash commodity fixed-price purchase contracts; b. hedges of cash commodity fixed￾price sales
c. hedges of the cash commodity’s
cash products and byproducts; d. hedges of offsetting unfixed price cash commodity sales and purchases e. hedges of unsold anticipated production; f. hedges of unfilled anticipated requirements; and g. cross-commodity hedges. The following additional hedging practices are not enumerated in the existing regulation, but were included in the 2020 NPRM as additional enumerated bona fide hedges:
a. Hedges by agents; b. short hedges of anticipated mineral royalties;
c. hedges of anticipated services;
d. offsets of commodity trade option; and e. hedges of anticipated merchandising. The Commission also proposed the elimination, for purposes of Federal position limits, of both the Five-Day Rule and the twelve-month restriction. However, under the 2020 NPRM, exchanges would be able to establish their own five-day rule and/or twelve￾month restriction, as applicable for any or all of their respective referenced contracts.
c. Commission Determination—Bona
Fide Hedge Exemptions, Generally First, the Commission is adopting the proposed expanded list of enumerated bona fide hedges, with the modifications described, as applicable, in the discussions of the relevant bona fide hedges below. Second, the Commission is adopting, as proposed, the elimination of both the existing Five-Day Rule and the twelve-month restriction.172 The comments received, and the Commission’s corresponding responses, in connection with these changes are discussed further below in the corresponding section discussing the applicable enumerated bona fide hedge. With respect to the treatment of the enumerated bona fide hedges under the Final Rule, the Commission notes that positions in referenced contracts subject to Federal position limits that meet any of the enumerated bona fide hedges will, for purposes of Federal position limits, be deemed to meet the bona fide hedging definition in CEA section 4a(c)(2)(A), as well as the Commission’s bona fide hedging definition in § 150.1 under the Final Rule. As a result, enumerated bona fide hedges are self￾effectuating for purposes of Federal position limits, provided the market participant separately requests an exemption from the applicable exchange-set limit established pursuant to § 150.5(a).173 The enumerated hedges are each described below, followed by a discussion of the Five-Day Rule. When first proposed, the Commission viewed the enumerated bona fide hedges as conforming to the general definition of bona fide hedging ‘‘without further consideration as to the particulars of the case.’’ 174 Similarly, the list of enumerated bona fide hedges under the Final Rule reflects categories of bona fide hedges for which the Commission has determined, based on experience over time, that no case-by-case determination or review of additional details by the Commission is needed to determine that the position or transaction is a bona fide hedge. This Final Rule does not foreclose the recognition of other hedging practices as bona fide hedges, as discussed below. While the enumerated bona fide hedges adopted herein are self￾effectuating for purposes of Federal position limits,175 the Commission and the exchanges will continue to exercise close oversight over such positions to confirm that market participants’ claimed exemptions are consistent with their cash-market activity. In particular, because all contracts subject to Federal position limits are also subject to exchange-set limits, all traders seeking to exceed Federal position limits must request an exemption from the relevant exchange for purposes of the exchange

176See infra Section II.D. For example, § 150.5 requires, among other things, that: Exemption applications filed with an exchange include sufficient information to enable the exchange and the Commission to determine whether the exchange may grant the exemption, including an indication of whether the position qualifies as an enumerated hedge for purposes of Federal limits and a description of the applicant’s activity in the underlying cash markets; and the exchange provides the Commission with a monthly report showing the disposition of all exemption applications, including cash-market information justifying the exemption. 177See infra Section II.G. (discussing § 150.9). 178The existing definition in § 1.3 of the Commission’s regulations is in the plural: ‘‘bona fide hedging transactions and positions.’’ The 2020 NPRM’s proposed definition was similarly plural. 179Appendix A to part 150 lists the following enumerated bona fide hedges: (a)(1) Hedges of Inventory and Cash Commodity Fixed-Price Purchase Contracts; (a)(2) Hedges of Cash Commodity Fixed-Price Sales Contracts; (a)(3) Hedges of Offsetting Unfixed Price Cash Commodity Sales and Purchases; (a)(4) Hedges of Unsold Anticipated Production; (a)(5) Hedges of Unfilled Anticipated Requirements; (a)(6) Hedges of Anticipated Merchandising; (a)(7) Hedges by Agents; (a)(8) Short Hedges of Anticipated Mineral Royalties; (a)(9) Hedges of Anticipated Services; (a)(10) Offsets of Commodity Trade Options; (a)(11) Cross-Commodity Hedges. As previously mentioned, the Commission has also reorganized the order of the list of enumerated hedges. The Final Rule reorders Appendix A so that the bona fide hedges are listed by hedges of purchases, sales, anticipated activities, or other new types of hedges. 180See, e.g., 7 U.S.C. 6(a)(3) (1970). That statutory definition of bona fide hedging included sales of, or short positions in, any commodity for future delivery on or subject to the rules of any contract market made or held by such person to the extent that such sales or short positions are offset in quantity by the ownership or purchase of the same cash commodity by the same person. 181 81 FR at 96964; 78 FR at 75713; 76 FR at 11609. position limit, regardless of whether the position falls within one of the enumerated hedges. In other words, enumerated bona fide hedge exemptions that are self-effectuating for purposes of Federal position limits are not self￾effectuating for purposes of exchange￾set position limits. Exchanges have well-established programs for granting exemptions, including, in some cases, experience granting exemptions for anticipatory merchandising for certain traders in markets not currently subject to Federal position limits. As discussed in greater detail below, § 150.5 as adopted herein helps ensure that such programs conform to standards established by the Commission.176 The Commission expects exchanges will continue to be thoughtful and deliberate in granting exemptions, including
anticipatory exemptions. The Commission predicates this expectation on its decades of experience working together with the relevant exchanges and observations generally of the applicable exchange￾traded futures markets. The Commission and the exchanges also have a variety of other tools designed to help prevent misuse of self￾effectuating bona fide hedge exemptions. For example, market participants who apply to an exchange as required pursuant to § 150.5 under the Final Rule are subject to the Commission’s false statements authority, which carries substantial penalties under both the CEA and Federal criminal statutes. Similarly, the Commission currently employs—and will continue to use under the Final Rule—surveillance tools, special call authority, rule enforcement reviews, and other formal and informal avenues for obtaining additional information from exchanges and market participants in order to distinguish between true bona fide hedging needs and speculative trading masquerading as a bona fide hedge. While positions that fall within the enumerated bona fide hedges, each discussed in further detail below, are the type of positions that comply with the bona fide hedging definition, the Commission recognizes that there may be other positions or hedging strategies that are not ‘‘enumerated’’ that similarly could satisfy the bona fide hedge definition.177 These ‘‘non-enumerated’’ bona fide hedges may be granted today under existing §§ 1.47 and 1.48, and the Commission can continue to recognize non-enumerated bona fide hedges under the Final Rule. For further discussion of the recognition of non-enumerated bona fide hedges, see infra Sections II.C. and II.G. With the exception of risk management positions previously recognized as bona fide hedges, and assuming all regulatory requirements continue to be satisfied, market participants’ existing bona fide hedging recognitions under existing Federal position limits are grandfathered upon the Final Rule’s Effective Date (i.e., bona fide hedge exemptions that are currently recognized for purposes of Federal position limits, other than risk management positions, will continue to be recognized under the Final Rule). Last, before describing each individual enumerated hedge, the Commission also notes that it is adopting certain non-substantive, technical changes, and such changes are intended only to provide clarifications. For example, the Commission is making a technical change to the bona fide hedging definition by adopting the term in the singular tense in order to conform to the phrasing in CEA section 4a(c)(2).178 The Commission is also re￾ordering the enumerated bona fide hedges to place related enumerated bona fide hedges closer together.
vi. Enumerated Bona Fide Hedge
Exemptions for Physical Commodities This Final Rule adopts the list of enumerated bona fide hedge exemptions as proposed in the 2020 NPRM, with certain amendments discussed below.179 a. Hedges of Inventory and Cash Commodity Fixed-Price Purchase Contracts (1) Background—Inventory and Cash Commodity Fixed-Price Purchase Contracts Inventory and fixed-price cash commodity purchase contracts have long served as the basis for a bona fide hedging position.180 This bona fide hedge is enumerated in paragraph (2)(i)(A) of the existing bona fide hedging definition in § 1.3, and recognizes as a bona fide hedge sales of any commodity for future delivery on a contract market which do not exceed in quantity ownership (i.e., inventory) or fixed-price purchase of the same commodity by the same person. Since 2011, the Commission has included hedges of inventory and cash commodity fixed-price purchase contracts in each of its position limits rulemakings, with minor proposed modifications to improve clarity.181 (2) Summary of the 2020 NPRM— Inventory and Cash Commodity Fixed￾Price Purchase Contracts This proposed enumerated bona fide hedge recognized that a commercial enterprise is exposed to price risk if it has obtained inventory in the normal course of business or has entered into a fixed-price spot or forward purchase contract calling for delivery in the physical marketing channel of a cash￾market commodity (or a combination of the two), and has not offset that price risk exposure (e.g., that the market price of the inventory could decrease). In connection with the proposed enumerated hedge, any such inventory, or a fixed-price purchase contract, must be on hand, as opposed to a non-fixed purchase contract or an anticipated purchase. An appropriate hedge to offset the price risk arising from inventory or a fixed-price purchase contract under the 2020 NPRM would be to establish a short position in a commodity derivative contract. The Commission also stated in the 2020 NPRM that an exchange may require such short position holders to demonstrate the ability to deliver against the short

182 85 FR at 11609–11610. For example, it would not appear to be economically appropriate to hold a short position in the spot month of a commodity derivative contract against fixed-price purchase contracts that provide for deferred delivery in comparison to the delivery period for the spot month commodity derivative contract. This is because the commodity under the cash contract would not be available for delivery on the commodity derivative contract. 183ASR at 2. 184See, e.g., 7 U.S.C. 6a(3) (1970). That statutory definition of bona fide hedging includes purchases of, or long positions in, any commodity for future delivery on or subject to the rules of any contract market made or held by such person to the extent that such purchases or long positions are offset by sales of the same cash commodity by the same person. 185 81 FR at 96964; 78 FR at 75824; 76 FR at 71689. 186 85 FR at 11610. 187ASR at 2. 188The Commission stated when it proposed this enumerated bona fide hedge, in particular, a cotton merchant may contract to purchase and sell cotton in the cash market in relation to the futures price in different delivery months for cotton, i.e., a basis purchase and a basis sale. Prior to the time when the price is fixed for each leg of such a cash position, the merchant is subject to a variation in the two futures contracts utilized for price basing. This variation can be offset by purchasing the future on which the sales were based and selling the future on which the purchases were based. Revision of Federal Speculative Position Limits, 51 FR 31648, 31650 (Sept. 4, 1986). 189 81 FR at 96964; 78 FR at 75714; 76 FR at 71689. 190 85 FR at 11608. 191 Id. In the case of reducing the risk of a location differential, and where each of the underlying transactions in separate derivative contracts may be in the same contract month, a position in a basis contract would not be subject to position limits, as position in order to demonstrate a legitimate purpose for holding a position deep into the spot month.182 (3) Summary of the Commission Determination—Inventory and Cash Commodity Fixed-Price Purchase Contracts The Commission is adopting the enumerated bona fide hedge of inventory and cash commodity fixed￾price purchase contracts as proposed. (4) Comments—Inventory and Cash Commodity Fixed-Price Purchase Contracts Aside from ASR, which expressed support for this enumerated hedge, the Commission did not receive any other specific comments on this enumerated hedge.183 b. Hedges of Cash Commodity Fixed￾Price Sales Contracts (1) Background—Cash Commodity Fixed-Price Sales Contracts Fixed-price cash commodity sales have long served as the basis for a bona fide hedging position.184 This bona fide hedge is enumerated in paragraphs (2)(ii)(A) and (B) of the existing bona fide hedging definition in § 1.3. This enumerated bona fide hedge recognizes as a bona fide hedging transaction or position hedges against purchases of any commodity for future delivery on a
contract market which do not exceed in quantity: (A) The fixed price sale of the same cash commodity by the same person; and (B) the quantity equivalent of fixed-price sales of the cash products and by-products of such commodity by the same person. Since 2011, the Commission has included hedges of cash commodity fixed-price sales contracts in its position limits rulemakings, with no substantive modifications.185 (2) Summary of the 2020 NPRM—Cash Commodity Fixed-Price Sales Contracts This proposed enumerated bona fide hedge made minor modifications to the existing bona fide hedge, and recognized that a commercial enterprise is exposed to price risk if it has entered into a spot or forward fixed-price sales contract calling for delivery in the physical marketing channel of a cash￾market commodity, and has not offset that price risk exposure (i.e., that the market price of a commodity might be higher than the price of its fixed-price sales contract for that commodity). Under the 2020 NPRM, an appropriate hedge of a fixed-price sales contract would be to establish a long position in a commodity derivative contract to offset such price risk.186 (3) Summary of the Commission Determination—Cash Commodity Fixed-Price Sales Contracts The Commission is adopting the enumerated hedge for hedges of cash commodity fixed-price sales contracts as proposed. (4) Comments—Cash Commodity Fixed￾Price Sales Contracts Aside from ASR, which expressed support for this enumerated hedge, the Commission did not receive any other specific comments on this enumerated hedge.187
c. Hedges of Offsetting Unfixed Price
Cash Commodity Sales and Purchases (1) Background—Offsetting Unfixed Price Cash Commodity Sales and Purchases Hedges of offsetting unfixed price cash commodity sales and purchases is currently enumerated in paragraph (2)(iii) of the existing bona fide hedging definition in § 1.3 and is subject to the Five-Day Rule. This enumerated hedge is the only existing enumerated hedge that expressly recognizes hedging the price risk arising from cash commodity unfixed-price transactions. This enumerated bona fide hedge allows a market participant to use commodity derivatives in excess of Federal position limits to offset an unfixed-price cash commodity purchase coupled with an unfixed-price cash commodity sale. Specifically, this enumerated bona fide hedge allows for ‘‘offsetting sales and purchases’’ for future delivery on a contract market which do not exceed in quantity that amount of the same cash commodity which has been bought and sold by the same person at unfixed prices basis different delivery months of the contract market. While not part of the original regulatory bona fide hedge definition, the Commission adopted this enumerated bona fide hedge in 1987 to ‘‘remove any doubt’’ that certain cotton and soybean crush inter-month spreads were covered under the Commission’s bona fide hedge definition.188 Since 2011, the Commission has included this enumerated bona fide hedge in each of its position limits rulemakings.189 (2) Summary of the 2020 NPRM— Offsetting Unfixed Price Cash Commodity Sales and Purchases The Commission proposed to maintain this bona fide hedge, with a few modifications. The 2020 NPRM proposed to expand the existing bona fide hedge, which currently requires the offsetting purchase and sale to be at basis to different delivery months of the same commodity derivative contract, to additionally permit hedges of offsetting unfixed sales and unfixed purchases for different commodity derivative contracts in the same commodity (e.g., Brent/WTI), regardless of whether the contracts are in the same delivery month. This proposed change would permit the cash commodity to be bought and sold at unfixed prices at a basis to different commodity derivative contracts in the same commodity, even if the commodity derivative contracts were in the same calendar month (i.e., buy Brent in January; sell WTI in January).190 The Commission proposed this change to allow a commercial enterprise to enter into the described derivatives transactions to reduce the risk arising from either (or both) a location differential or a time differential in unfixed-price purchase and sale contracts in the same cash commodity.191

discussed in connection with paragraph (3) of the proposed definition of ‘‘referenced contract.’’ 192For example, in the case of a calendar spread, having both the unfixed-price sale and purchase in hand would set the timeframe for the calendar month spread being used as the hedge. 193 IFUS at 4. 194CMC at 4; ACSA at 6. 195CMC at 4; FIA at 16. 196 Id. 197The Commission’s determination on the treatment of unfixed-price transactions under this Final Rule is in Section II.A.1.iv. 198The contemplated derivative positions will offset the risk that the difference in the expected delivery prices of the two unfixed-price cash contracts in the same commodity will change between the time the hedging transaction is entered and the time of fixing of the prices on the purchase and sales cash contracts. Therefore, the contemplated derivative positions are economically appropriate to the reduction of risk. 199Specifically, as discussed above, because the Commission does not view an unfixed-price commitment as filling, or satisfying, an anticipated need, market participants with unfixed-price commitments may qualify for an enumerated anticipatory bona fide hedge, provided the market participant meets all applicable requirements and conditions. See Section II.A.1.iv. 200The Final Rule also expands the ‘‘spread transaction’’ definition, so a market participant with an unfixed price purchase or sale may also qualify for a calendar spread exemption, for example, with one leg in the spot month. For further discussion of the Final Rule’s treatment of spread transactions, see Section II.A.20. 201See 7 U.S.C. 6a(3)(A) (1940). That statutory definition of bona fide hedging, enacted in 1936, included the amount of such commodity such person is raising, or in good faith intends or expects to raise, within the next twelve months, on land (in the United States or its Territories) which such person owns or leases. To be eligible for this enumerated hedge, both an unfixed-price cash commodity purchase ‘‘and’’ an offsetting unfixed-price cash commodity sale would have to be in hand, because having both the unfixed-price sale and purchase in hand would allow for an objective evaluation of the hedge.192 (3) Summary of the Commission Determination—Offsetting Unfixed Price Cash Commodity Sales and Purchases The Commission is adopting the enumerated bona fide hedge for offsetting unfixed price cash commodity sales and purchases as proposed. (4) Comments—Offsetting Unfixed Price Cash Commodity Sales and Purchases There were minimal comments on the proposed amendments to this hedge. IFUS explicitly supported the allowance of hedges against cash positions in the same delivery month.193 CMC and ACSA requested that the Commission modify the language of this enumerated bona fide hedge to include ‘‘offsetting sales or purchases.’’194 CMC and FIA stated that because merchants often sell commodities well in advance of purchasing them, such merchants are exposed to the exact same calendar
spread price risk as merchants that have executed both unfixed price legs of a transaction, because any futures market calendar spread convergence or divergence will ‘‘affect both scenarios in exactly the same manner.’’195 These commenters contended that changing the language of the enumerated hedge from ‘‘and’’ to ‘‘or’’ would allow merchants to hedge against this exposure.196 In addition, because this is the only existing enumerated hedge that expressly recognizes hedging for unfixed price transactions, several commenters cited to this hedge when requesting that the Commission explicitly endorse that commercial transactions with unfixed-prices may serve as the basis for, and satisfy, the bona fide hedging definition.197 (5) Discussion of Final Rule—Offsetting Unfixed Price Cash Commodity Sales and Purchases The Commission is adopting the enumerated bona fide hedge for offsetting unfixed price cash commodity sales and purchases as proposed. The Commission considered the comments requesting the Commission to change this bona fide hedge’s language from referring to offsetting unfixed-price purchase ‘‘and’’ sale transactions (which requires both an unfixed purchase price transaction and an unfixed sale price transaction) to instead refer to unfixed-price purchase ‘‘or’’ sales transactions (which would require only either a single unfixed￾price purchase transaction or an unfixed-price sale transaction) to facilitate hedging calendar spread price risk for those market participants that have executed only one leg of an unfixed-price physical transaction (i.e., only a physical purchase or a physical sale). The Commission continues to believe that the enumerated bona fide hedge for offsetting unfixed price cash commodity sales and purchases should continue to require both an unfixed-price cash commodity purchase and an offsetting unfixed-price cash commodity sale. For this particular bona fide hedge, absent either the unfixed-price purchase leg or the unfixed-price sale leg (or absent both legs), it would be less clear, and require a facts and circumstances analysis, to determine how the transaction could be classified as a bona fide hedge, that is, a transaction that reduces price risk.198 Under the Final Rule, a single-sided unfixed price physical transaction (i.e., a physical transaction involving an unfixed price purchase or an unfixed price sale, but not both) cannot be offset with derivatives in excess of position limits using this particular enumerated bona fide hedge. However, a market participant with an unfixed price purchase in the absence of an unfixed￾price sale, or vice versa, could potentially qualify for one or more of the enumerated anticipatory bona fide hedges.199 Additionally, depending on the facts and circumstances, a single￾sided unfixed price contract could potentially be the basis for a non￾enumerated bona fide hedge. While the Commission acknowledges concerns from commenters that market participants that have executed only one
leg of a physical transaction (i.e., only an unfixed-price purchase or an unfixed-price sale) may need to hedge calendar spread price risk, the Commission believes the Final Rule offers several avenues for hedging such risks.200 For example, under the offsetting unfixed price cash commodity sales and purchases enumerated bona fide hedge, upon fixing the price of, or taking delivery on, the purchase contract, the owner of the cash commodity no longer has offsetting unfixed priced transactions, but may continue to hold the short derivative leg of the spread as a hedge against that fixed-price purchase or as inventory under the enumerated hedge for fixed price transactions. Alternatively, under this Final Rule, if the market participant fixes the price the sales contract first, he or she may continue to hold the long derivative leg of the spread by qualifying for bona fide hedge treatment for that long position under another enumerated bona fide hedge. For example, a market participant who otherwise meets all applicable requirements of one of the anticipatory bona fide hedges may qualify for such hedge(s) regardless of whether the market participant holds an unfixed-price purchase transaction. d. Hedges of Unsold Anticipated Production (1) Background—Unsold Anticipated Production Unsold anticipated production has long served as the basis for an enumerated bona fide hedging position.201 This bona fide hedge is currently enumerated in paragraph (2)(i)(B) of the bona fide hedging definition in existing § 1.3, and is subject to the Five-Day Rule. This

202 81 FR at 96964; 78 FR at 75714; 76 FR at 71689. 203 85 FR at 11608. 204For further discussion of the Five-Day rule, see
Section II.A.1.viii, Elimination of Federal
Restriction Prohibiting Holding a Bona Fide Hedge Exemption During Last Five Trading Days, the ‘‘Five-Day Rule,’’ below. 205ASR at 2; ADM at 2; ICE at 2; IECA at 2; and IFUS at 2. 206ASR at 2. 207 IATP at 15–17; Better Markets at 57–58. 208 IATP at 15–17. 209 Id. 210Once a market participant finishes its production, the market participant will no longer qualify for this enumerated bona fide hedge since its production is no longer anticipatory. Instead, its completed production is now part of its inventory. However, the enumerated bona fide hedge for inventory and cash commodity fixed-price purchase contracts (discussed below) would become available to the market participant. 211For further discussion of the enumerated bona fide hedge for cash commodity fixed-price sales contracts, see Section II.A.1.vi.b. existing enumerated bona fide hedge includes hedges against the sales of any commodity for future delivery on a contract market which does not exceed in quantity twelve months’ unsold anticipated production of the same commodity by the same person. The bona fide hedge of unsold anticipated production is one of two existing enumerated anticipatory bona fide hedges currently included in § 1.3, the other being unfilled anticipated requirements (discussed further below). The unsold anticipated production bona fide hedge allows a market participant who anticipates production, but who has not yet produced anything, to enter into a short derivatives position in excess of Federal position limits to hedge the price risk arising from that anticipated production. Since 2011, the Commission has included hedges of unsold anticipated production in each of its position limits rulemakings, with some modifications.202 The regulatory text for this existing enumerated bona fide hedge is silent about whether it applies to unsold anticipated production that is contracted to be sold under an unfixed-price transaction. (2) Summary of the 2020 NPRM— Unsold Anticipated Production The Commission proposed to maintain the existing enumerated bona fide hedge of unsold anticipated production, with modifications as follows. First, the Commission proposed to remove the twelve-month restriction.203 Second, consistent with the treatment for the other anticipatory bona fide hedges under the 2020 NPRM, the Commission proposed to eliminate the existing restrictions during the last five days of trading (i.e., eliminate the ‘‘Five-Day Rule’’).204 (3) Summary of the Commission Determination—Unsold Anticipated Production The Commission is adopting the enumerated bona fide hedge of unsold anticipated production as proposed. (4) Comments—Unsold Anticipated Production Several commenters, including ASR, ADM, and ICE, supported eliminating the twelve-month restriction.205 ASR, for example, noted that the lifecycle of sugarcane extends beyond a twelve￾month period.206 Conversely, Better Markets and IATP opposed the elimination of the twelve￾month restriction.207 IATP stated that commercial
market participants such as storage facilities should instead use insurance policies to manage their risks.208 Further, IATP stated that if the Commission extends the duration up to 24 months, the Commission should retain discretion to require market participants to demonstrate a production level proportionate to the amount in excess of the Federal position limit throughout the duration of the bona fide hedge exemption.209 (5) Discussion of Final Rule—Unsold Anticipated Production The Commission is adopting the enumerated bona fide hedge of unsold anticipated production as proposed. This enumerated bona fide hedge allows a market participant who anticipates production, but who has not yet produced anything, to enter into a short derivatives position in excess of Federal position limits to hedge the anticipated unsold production.210 The Commission clarifies, as discussed above under Section II.A.1.iv., that the enumerated bona fide hedge for unsold production is available to a market participant who satisfies all applicable requirements regardless of whether the market participant has entered into an unfixed-price sales transaction in connection with its anticipated unsold production. However, acquiring an unfixed-price sales contract alone is not a basis for qualifying for this bona fide hedge. Rather, under the Final Rule, entering into an unfixed-price sales transaction will not prevent a market participant from qualifying for the unsold anticipated production bona fide hedge. As the Commission explains above, an unfixed-price sales commitment does not address the bona fide hedging need related to anticipated unsold production because the market participant’s price risk to its anticipated production has not been fixed (i.e., the unfixed-price sales contract may fall below the cost of production). In other words, a producer with an unfixed-price sales commitment for its production still has an anticipated need related to its price risk until the price of the commitment is fixed. However, once the market participant enters into a fixed-price sales contract, the market participant no longer has price risk that needs to be hedged (i.e., its short futures contract is no longer necessary as a hedge for its anticipated production). Accordingly, the market participant that enters into the fixed-price transaction no longer has an anticipated need to hedge the price risk associated with its unsold production (i.e., the anticipated production is deemed to be ‘‘sold’’ by fixed-price sales transaction) and would not qualify for this anticipated unsold production bona fide hedge. Consequently, if the market participant no longer qualifies for the unsold anticipated production bona fide hedging recognition (e.g., it has entered into a fixed-price sales contract), its derivative position, to the extent the position is above an applicable position limit, must be reduced in an orderly manner in accordance with sound commercial practices. However, if the market
participant entered into a fixed￾price transaction, while it could not continue to qualify for the unsold anticipated production bona fide hedge, the market participant may be able to qualify for the enumerated bona fide hedge for cash commodity fixed-price sales contracts, assuming all applicable requirements are met.211 While the Commission acknowledges the comments from Better Markets and IATP opposing the removal of the twelve-month restriction, the Commission believes that this twelve￾month restriction may be unsuitable in connection with additional core referenced futures contracts with the underlying agricultural and energy commodities that would be subject to Federal position limits for the first time under this Final Rule since these non￾legacy commodities may have longer growth and/or production cycles than the nine legacy agricultural contracts. The existing twelve-month restriction may thus be unnecessarily short in comparison to the expected life of investment in production facilities. While this enumerated bona fide hedge for unsold production does not have an associated twelve-month restriction under the Final Rule, the Commission notes that because all bona fide hedges must be economically appropriate to the

212See infra §§ 150.5 and 150.9 (reporting and recordkeeping obligations); Appendix B to part 150. 213This is essentially a less-restrictive version of the five-day rule, allowing a participant to hold a position during the end of the spot period if economically appropriate, but only up to two months’ worth of anticipated requirements. The two-month quantity limitation has long-appeared in existing § 1.3 as a measure to prevent the sourcing of massive quantities of the underlying in a short period. 17 CFR 1.3. 214CFTC Letter No. 12–07, Interpretation, Request for guidance regarding meaning of ‘‘unfilled anticipated requirements’’ for purposes of bona fide hedging under the Commission’s position limits rules (Aug. 16, 2012). 215See, e.g., 85 FR at 11610. 216 17 CFR 1.3. 217 e.g., AGA at 6–7; ADM at 2; CEWG at 4; EEI and EPSA jointly at 5; IECA at 2; NOPA at 2; NGSA at 3. 218AGA at 6–7, ADM at 2, NOPA at 2, IFUS at 2, ICE at 2, and IECA at 2. 219ADM at 2. 220Better Markets at 58–59. 221The Commission and its predecessor agency, the Commodity Exchange Authority, has decades of Continued reduction of price risk pursuant to the CEA, a market participant may only qualify for this enumerated bona fide hedge for anticipated unsold production to the extent the market participant has a good faith anticipation of legitimate anticipated unsold production giving rise to such price risk. Further, additional provisions finalized herein under the Final Rule will help ensure that all bona fide hedges, including bona fide hedges of unsold anticipated requirements, comport with the CEA and the Commission’s regulations, and are objectively verifiable and free from abuse.212 e. Hedges of Unfilled Anticipated Requirements (1) Background—Unfilled Anticipated Requirements The existing bona fide hedge for unfilled anticipated requirements is currently enumerated in paragraph (2)(ii)(C) of the existing bona fide hedging definition in § 1.3. This bona fide hedge includes hedges against purchases of any commodity for future delivery on a contract market which do not exceed in quantity twelve months’ unfilled anticipated requirements of the same cash commodity for processing, manufacturing, or feeding by the same person. Consistent with the existing enumerated bona fide hedge for anticipated unsold production, as discussed above, the existing bona fide hedge for unfilled anticipated requirements is similarly subject to the twelve-month restriction as well as a less-restrictive version of the ‘‘Five-Day Rule.’’ With respect to the Five-Day Rule, under existing § 1.3, the unfilled anticipated requirements bona fide hedge provides that the size of a market participant’s position held ‘‘in the five last trading days’’ must not exceed the person’s unfilled anticipated requirements of the same cash commodity for that month and for the next succeeding month.213 However, the regulatory text in existing § 1.3 is silent about whether the bona fide hedge applies to unfilled anticipated
requirements that are contracted to be supplied under an unfixed-price transaction or whether such unfixed-price supply transaction would ‘‘fill’’ the anticipated requirements. As discussed above, staff previously has addressed this question through Staff Letter No. 12–07, in which staff clarified that a commercial entity may qualify for the existing enumerated bona fide hedge for unfilled anticipated requirements even if the commercial entity has entered into long-term, unfixed-price supply or requirements contracts because, as staff explained, the unfixed-price purchase contract does not ‘‘fill’’ the commercial entity’s anticipated requirements.214 As explained in Staff Letter No. 12–07, the price risk of such ‘‘unfilled’’ anticipated requirements is not offset by the unfixed-price forward contract because the price risk remains with the commercial entity, even though the entity has contractually assured a supply of the commodity. Staff Letter No. 12–07 had the practical effect of affirming that market participants with firm commitments at unfixed prices may still be able to avail themselves of this enumerated anticipatory hedge for unfilled requirements. (2) Summary of the 2020 NPRM— Unfilled Anticipated Requirements The Commission proposed several amendments to the unfilled anticipated requirements bona fide hedge. First, the Commission proposed to remove the twelve-month restriction because the Commission recognized that market participants may have a legitimate commercial need to hedge unfilled anticipated requirements for a period longer than twelve months.215 Second, the Commission proposed to remove from the regulatory text the agricultural-specific term ‘‘feeding,’’ and to replace that word with a reference to ‘‘use by that person.’’ Third, recognizing that utilities are not the entities who ‘‘use’’ the commodity, the Commission also proposed to add as a permissible hedge the unfilled anticipated requirements for the contract’s underlying cash commodity for the resale by a utility to meet the anticipated demand of its customers. This proposed provision is analogous to the existing unfilled anticipated requirements provision ‘‘for processing, manufacturing or use by the same person[.]’’ 216 Under this proposed new provision, however, the commodity is not for use by the same person—that is, the utility—but rather the commodity is for anticipated use by the utility to fulfill its obligation to serve retail customers. Finally, consistent with the treatment for the other anticipatory bona fide hedges under the 2020 NPRM, the Commission proposed to eliminate the existing restrictions during the last five last days of trading. (3) Summary of the Commission Determination—Unfilled Anticipated Requirements The Commission is adopting the unfilled anticipated requirements enumerated bona fide hedge as proposed. (4) Comments—Unfilled Anticipated Requirements Commenters supported continuing to include this bona fide hedge as part of the Commission’s
amended suite of enumerated anticipatory bona fide hedges.217 As described below, commenters also requested the Commission clarify certain aspects of the proposed version. (i) Elimination of Requirement to Hedge Only Twelve Months’ Quantity of Unfilled Anticipated Requirements Only a small group of commenters directly commented on the elimination of the twelve-month restriction. ICE, IFUS, IECA, AGA, ADM and NOPA supported eliminating the twelve-month restriction,218 with ADM stating that there may be times this anticipatory hedge is needed for ‘‘commercial purposes beyond twelve-months.’’ 219 In contrast, Better Markets opposed the removal of the restriction, stating that such removal would make the hedge less reasonably verifiable and open the hedge to potential abuse.220 (a) Discussion of Final Rule—Twelve￾Month Restriction After considering public comments, the Commission has determined that the commercial need to hedge unfilled anticipated requirements for a period longer than twelve months, along with the Commission’s experience in overseeing exemptions 221 under this

expertise in granting bona fide exemptions. See 21 FR 6913 (Sep 13, 1956). 222 150.5(a)(2)(ii)(A). 223 150.5(a)(2)(ii)(G). 224This is essentially a less-restrictive version of the Five-Day rule, allowing a participant to hold a position during the end of the spot period if economically appropriate, but only up to two months’ worth of anticipated requirements. The two-month quantity limitation has long-appeared in existing § 1.3 as a measure to prevent the sourcing of massive quantities of the underlying in a short time period. 17 CFR 1.3. 225COPE at 6; IECA at 7–8; EPSA and EEI jointly at 5. 226The Commission recognizes that market participants may utilize different nomenclature to refer to unfixed-price contracts. For example, some commenters may refer to these contracts as ‘‘unpriced’’ contracts, while others may refer to these physical contracts as being at an unfixed spot index price. See FIA at 17, 31; COPE at 6. 227 IECA at 7–8. 228AGA at 6–7. 229See 7 U.S.C. 6a(c)(2)(A)(iii); 85 FR at 11610 (‘‘This would recognize a bona fide hedging position where a utility is required or encouraged by its public utility commission to hedge’’). 230AGA at 6–7. 231The Commission clarifies that unfixed-price contracts include physical fuel agreements for power production for security of supply that are priced at an unfixed spot index price. 232CFTC Staff Letter No. 12–07. enumerated bona fide hedge, suggest in favor of eliminating the twelve-month restriction. While the Commission acknowledges the comments from Better Markets opposing the removal of the twelve-month restriction, the Commission notes that, a twelve-month limitation in connection with this particular enumerated bona fide hedge may be unsuitable in connection with commodities other than the nine legacy agricultural commodities. For example, a processor or utility relying on the unfilled anticipated requirements bona fide hedge has a physical limit on processing, or energy generation, respectively, which should generally result in relatively predictable levels of activity that will not vary much year to year. Further, additional provisions finalized herein will help ensure that all bona fide hedges, including hedges of unfilled anticipated requirements, comport with the CEA and the Commission’s regulations, and are reasonably verifiable and free from abuse. For example, under § 150.5(a)(2)(ii)(A), finalized herein, all market participants seeking a bona fide hedge exemption for referenced contracts subject to Federal position limits, including those market participants with enumerated bona fide hedges that are self-effectuating for purposes of Federal position limits, must still file an application to the exchange requesting an exemption from the applicable exchange-set position limits prior to exceeding the exchange￾set limits. The application for an exemption from exchange-set limits must include information the exchange needs to determine, and the Commission can use that information to
independently determine, whether the facts and circumstances support the exchange granting such an exemption. The market participant must include a description of the applicant’s activity in the cash markets and swaps markets for the commodity underlying the position for which the application is submitted, including, but not limited to, information regarding the offsetting cash positions.222 The exchange is required to take into account whether the exemption would result in positions that would not be in accord with sound commercial practices and whether the position would exceed an amount that may be established and liquidated in an orderly fashion.223 Accordingly, if hedging more than twelve months’ quantity of unfilled anticipated requirements would not be in accord with sound commercial practices, or would exceed an amount that may be established and liquidated in an orderly fashion, the exchange would be prohibited from granting the exemption. Even in the absence of a Federal twelve-month restriction, when administering exchange-set limits, exchanges may, as they do today, implement a variety of restrictions and limitations on position size to maintain orderly markets and to fulfill their regulatory obligations. As described in further detail below, the Commission is finalizing guidance in paragraph (b) of
Appendix B to part 150 to help
exchanges determine when any such restrictions during the spot month might be appropriate, and when such restrictions may not be needed. For example, consistent with the guidance in Appendix B to part 150, paragraph (b), an exchange may consider adopting rules to require that during the lesser of the last five days of trading (or such time period for the spot month), such positions must not exceed the person’s unfilled anticipated requirements of the underlying cash commodity for that month and for the next succeeding month.224 Depending on the specific facts and circumstances, and particular market dynamics, any such quantity limitation may prevent the use of long futures to source large quantities of the underlying cash commodity. The Commission may be able to determine that an exchange’s adoption of a two￾month limitation would allow for an amount of activity that is economically appropriate and in line with common commercial hedging practices, without jeopardizing any statutory objectives. (ii) Scope of Unfilled Anticipated Requirements and Unfixed-Price Transactions Commenters questioned the extent to which anticipated requirements may be considered to be ‘‘filled’’ by unfixed￾price purchase supply contracts under the proposed enumerated bona fide hedge for unfilled anticipated requirements. COPE, IECA, EPSA and EEI requested clarification on whether this enumerated hedge covers anticipated requirements ‘‘filled’’ by an unfixed-price purchase contract common to many electric generators.225 IECA recommended the Commission should either (i) adopt a broad definition of the word ‘‘unfilled’’ that would include anticipated requirements that are ‘‘filled’’ by unfixed-price transactions, or (ii) expand this bona fide hedge to include both ‘‘unfilled’’ and ‘‘unpriced’’ 226 anticipated requirements.227 AGA also requested clarification 228 regarding the 2020 NPRM’s statement that this bona fide hedge would recognize a position where a utility is ‘‘required or encouraged’’ by its public utility commission to hedge.229 AGA noted that while the ‘‘required or encouraged’’ language is not in the proposed regulatory text, clarification of the scope for the exemption would result in more certainty for those utilities in states where the public utility commission may not directly address or require hedging activities, but instead may allow or permit hedging for the potential benefits to customers.230 (a) Discussion of Final Rule—Scope of Unfilled Anticipated Requirements Regarding the requests for clarification on the scope of the term ‘‘unfilled’’ in this enumerated hedge, the Commission clarifies that anticipated ‘‘unfilled’’ requirements are not ‘‘filled’’ by unfixed-price transactions. Accordingly, a market participant with a purchase or sale of a physical commodity, entered into at an unfixed price, may continue to avail itself of this anticipatory hedge even though the participant has entered into a firm, albeit unfixed-price, commitment, and provided
all applicable requirements are satisfied.231 As discussed above under Section II.A.1.iv., the Commission adopts the interpretation of Staff Letter No. 12–
07.232 That is, commercial entities that

233 81 FR at 96752.
234See, e.g., §§ 1.3(z)(2)(i)(B) (unsold anticipated production) and 1.3(z)(2)(ii)(C) (unfilled anticipated requirements). 235The 2011 Final Rule was the first time the Commission recognized that in some circumstances, a market participant that owns or leases an asset in the form of storage capacity could establish positions to reduce the risk associated with returns anticipated from owning or leasing that capacity. In those narrow circumstances, the Commission found that those transactions satisfied the statutory definition of a bona fide hedging transaction. 236 85 FR at 11727. 237 Id. 238AGA at 1, 8; AFR at 2; Cargill at 4–6; NGSA at 2, 4; CMC at 4–5, 7–8; ADM at 3; NCFC at 2– 4; Chevron at 2, 5; Suncor at 3, 5; IFUS at 2 (Exhibit 1 RFC 4); ICEA at 2; NGFA at 4, 7; CCI at 7–9; ASR at 2; FIA at 16; CEWG at 14. 239AGA at 8; AFR at 2; Cargill at 5–6; NGSA at 4; CMC at 5, 7; ADM at 3; NCFC at 3–4; Chevron at 5; Suncor at 5; IFUS at Exhibit 1 RFC 4; ICEA at 2; NGFA at 7; CCI at 7–9. 240Better Markets at 3, 59–60 (stating that ‘‘. . . an identical conceptual avoidance risk continues to exist across all of these anticipatory hedges— namely, that firms may claim an underlying risk is anticipated in order to justify positions well over the speculative limits in Referenced Contracts’’). 241 Id. 242CMC at 5 (stating that n.105 of the 2020 NPRM casts a significant shadow of uncertainty and that if the Commission believes limits are necessary, it must be clear with the exchanges and the end-user community about what activities are enumerated). 243Cargill at 5–6; NGFA at 7. 244 85 FR at 11612. Footnote 105 from the 2020 NPRM provided: ‘‘Similarly, other examples of anticipatory merchandising that have been Continued enter into unfixed-price transactions may continue to qualify for the enumerated bona fide hedge for unfilled anticipated requirements as long as the commercial entity otherwise satisfies the criteria for this hedge. This rationale is predicated on the fact that an unfixed￾price purchase commitment does not fill an anticipated requirement in that the market participant’s price risk to the input has not been fixed. The Commission continues to believe that unfilled anticipated requirements are those anticipated inputs that are estimated in good faith and that have not been filled. As such, an anticipated requirement may be filled by fixed-price purchase commitments, holdings of commodity inventory, or unsold anticipated production of the market participant.233 Unfixed-price transactions, however, do not fill an anticipated requirement. Under this anticipatory hedge, once the price is fixed on a supply contract, the market participant holding the anticipatory hedge position must, to the extent the position is above an applicable Federal position limit, liquidate the position in an orderly manner in accordance with sound commercial practices. Nevertheless, subject to the specific facts and circumstances, the market participant at that point may have
established the basis for a different bona fide hedge exemption to offset the price risk arising from its fixed price exposure. Finally, the Commission agrees with the commenters’ request for clarification that a utility qualifies for the unfilled anticipated requirements enumerated hedge even if the utility is not ‘‘required or encouraged’’ by its public utility commission to hedge. f. Hedges of Anticipated Merchandising (1) Background—Anticipated Merchandising The existing bona fide hedge definition in § 1.3 includes enumerated bona fide hedges that recognize offsets of certain anticipated activities,234 but does not currently include an enumerated bona fide hedge for anticipated merchandising. While the Commission’s 2011 Final Rule included an enumerated hedge for anticipated merchandising, it was a narrow hedge focused on the leasing of storage capacity,235 and that rulemaking was ultimately vacated. (2) Summary of the 2020 NPRM— Anticipated Merchandising The Commission proposed a new enumerated bona fide hedge for anticipated merchandising. The proposed anticipated merchandising hedge recognized long or short positions in commodity derivative contracts that offset the anticipated change in value of the underlying commodity that a person anticipates purchasing or selling.236 While the proposed enumerated anticipated merchandising bona fide hedge would operate as a self￾effectuating bona fide hedge, the proposed bona fide hedge was subject to the following conditions: (1) The position offsets the anticipated change in value of the underlying commodity that a person anticipates purchasing or selling; (2) the position does not exceed in quantity twelve months’ of current or anticipated purchase or sale requirements of the same cash commodity that is anticipated to be purchased or sold; (3) the person holding the position is a merchant handling the underlying commodity that is subject to the anticipated merchandising hedge; (4) that such merchant is entering into the position solely for purposes related to its merchandising business; and (5) the person has a demonstrated history of buying and selling the underlying commodity for its merchandising business.237 (3) Summary of the Commission Determination—Anticipated Merchandising The Commission is adopting the anticipated merchandising enumerated hedge as proposed, and makes certain clarifications below to respond to specific questions from commenters summarized below. The Commission recognizes that anticipated merchandising is a hedging practice commonly used by some commodity market participants, and that merchandisers play an important role in the physical supply chain. The Commission also recognizes that the derivative transactions utilized by commercial participants to manage such merchandising activity are beneficial to price discovery. (4) Comments—Anticipated Merchandising (i) Generally A majority of commenters strongly supported the addition of an enumerated bona fide hedge for
anticipatory merchandising.238 In particular, market participants from the energy industry strongly supported the inclusion of this enumerated hedge, subject to certain clarifications described in detail further below.239 On the other hand, Better Markets indicated that the enumerated anticipatory bona fide hedges generally, and particularly the enumerated hedge for anticipatory merchandising, pose a regulatory avoidance risk.240 Better Markets expressed concern that market participants could attempt to claim an underlying risk is anticipated in a cash commodity in order to justify positions in referenced contracts that exceed Federal position limits.241 In addition to expressing support for the inclusion of this enumerated bona fide hedge, most commenters also requested clarity or guidance on the scope of the proposed anticipated merchandising bona fide hedge. For example, CMC stated that the Commission must be clear with the exchanges and the end-user community about what activity is included in the enumerated anticipated merchandising bona fide hedge.242 Similarly, Cargill and NGFA supported the addition of the enumerated anticipated merchandising bona fide hedge, but urged the Commission to provide more clarity on how the enumerated bona fide hedge would be applied.243 Cargill and NGFA also requested that the Commission address language that appeared in footnote 105 of the 2020 NPRM,244

described to the Commission in response to request for comment on proposed rulemakings on position limits (i.e., the storage hedge and hedges of assets owned or anticipated to be owned) would be the type of transactions that market participants may seek through one of the proposed processes for requesting a non-enumerated bona fide hedge recognition.’’ 245Cargill at 5–6; NGFA at 7. 246FIA at 16–17. 247 Id. 248ADM at 3. The 2020 Proposal would remove the existing 12-month restriction applicable to the existing enumerated hedge for unfilled anticipated requirements. See 85 FR at 11610. 249 85 FR at 11611. 250See 7 U.S.C. 6a(c)(2)(A)(ii). 251ADM at 3. 252To verify market participants’ bona fide hedging needs, the Final Rule’s recordkeeping requirements require persons availing themselves of enumerated bona fide hedge recognitions to maintain complete books and records concerning all relevant information on their anticipated requirements, production, and merchandising activities. See 17 CFR 150.3(d)(1). Furthermore, the Commission notes that as part of the exemption application process under final § 150.5, persons seeking exemptions from exchange-set position limits are required to include a description of its activities in the cash markets and swap markets for the commodity underlying the position for which the application is submitted. 253CMC at 5; Shell at 8; Chevron at 5–6; Suncor at 5–6; CEWG at 15–16. 254Shell at 8; Chevron at 5–6; Suncor at 5–6; CEWG at 15–16. which implied that certain storage hedges and hedges of assets owned or anticipated to be owned would be evaluated through the non-enumerated bona fide hedge process, rather than as a self-effectuating enumerated anticipated merchandising bona fide hedge.245 (ii) Requirements for Anticipated Merchandising (a) Requirement to Hedge Only Twelve Months’ Worth of Anticipated Requirements Although many public comments addressed the new anticipated merchandising bona fide hedge, only a few commenters opposed the proposed requirement to limit this hedge to only twelve months’ worth of current or anticipated purchase or sale requirements of the same cash commodity that is anticipated to be purchased or sold. FIA opposed the twelve-month restriction, stating that CEA section 4a(c)(2) does not tie the validity of a bona fide hedge to the duration of the commercial requirement being hedged.246 FIA also provided an example pointing out that market participants often need hedges of anticipated purchases or sales longer than twelve months, such as when a merchant has a reasonable expectation of anticipated sales beyond a twelve￾month quantity.247 Similarly, ADM stated that anticipatory merchandising transactions should be considered similar to ‘‘hedges of anticipated requirements’’ and therefore not subject to the twelve￾month restriction.248 (b) Discussion of Final Rule—Twelve￾Month Restriction After considering the comments on the requirement to hedge only twelve months’ worth of anticipated
requirements, the Commission is adopting the twelve-month restriction as proposed. The Commission continues to believe that, as stated in the 2020 NPRM, this requirement is intended to ensure that merchants are hedging their legitimate anticipated merchandising exposure to the value change of the underlying commodity, while calibrating the anticipated need within a reasonable timeframe and subject to the limitations in physical commodity markets, such as annual production or processing capacity.249 A twelve-month restriction for anticipated merchandising is suitable in connection with contracts that are based on anticipated activity on yet-to-be established cash positions due to the uncertainty of forecasting such activity and, all else being equal, the increased risk of excessive speculation on the price of a commodity the longer the time period before the actual need arises. Regarding FIA’s comment opposing the twelve-month restriction based on FIA’s interpretation of CEA section 4a(c)(2), the Commission is comfortable that hedging twelve months’ or less of current or anticipated purchase or sale requirements of the same cash commodity that is anticipated to be purchased or sold is consistent with the CEA section 4a(c)(2)(A)(ii) requirement that bona fide hedges be economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise.250 However, hedging more than twelve months’ anticipated purchase or sale requirements could in some cases be inconsistent with that statutory requirement. Accordingly, bona fide hedges involving more than twelve months’ worth of anticipated requirements for anticipated merchandising are best evaluated on a case-by-case basis under the non￾enumerated process adopted herein. The Commission understands that commercial firms may seek to manage the price risk of more than twelve months’ anticipated merchandising activities; where such situations arise, the Commission believes a non￾enumerated bona fide hedge could be appropriate. The Commission also considered comments that stated that the Commission should treat the proposed anticipated merchandising bona fide hedge similar to the other anticipatory bona fide hedges adopted herein (i.e., the enumerated bona fide hedges for unsold anticipated production and unfilled anticipated requirements), which are no longer subject to the twelve-month restriction.251 However, the Commission believes that the enumerated bona fide hedge for anticipated merchandising, which is a new enumerated bona fide hedge, is distinguishable from the enumerated bona fide hedges for unsold anticipated production and unfilled anticipated requirements, which both have been
part of the Federal position limits
framework for decades.
In particular, the Commission has determined that a twelve-month restriction is unnecessary for bona fide hedges of unfilled anticipated requirements and unsold anticipated production in part because anticipated production and requirements, unlike merchandising, are linked and subject to inherent physical limits. For example, a processor has a physical limit on production capacity to support claims of anticipated unsold production. Likewise, a manufacturer, processor or utility has a physical limit on manufacturing, processing, or energy generation, respectively, for similar reasons to tie any claim of anticipated requirements. In each case, anticipated production or requirements generally should result in relatively predictable levels of activity that will not vary much year to year. In contrast, the amount a given market participant could claim to anticipate merchandising is potentially unlimited and less connected to physical production capacity.252 (iii) Request for Clarification—Meaning of ‘‘Merchant’’ Comments from energy market participants requested that the Commission clarify the meaning of the term ‘‘merchant’’ as such term is used in the regulatory text of the proposed anticipated merchandising hedge.253 Specifically, market participants from the energy industry expressed concern about whether the Commission would construe the term ‘‘merchant’’ such that only entities that are solely merchants, and not engaged in other business activities, would qualify for the anticipated merchandising bona fide hedge.254 These commenters explained that large energy companies with

255 Id.
256 Id.
257Trade Options, Final Rule, 81 FR 14966 (March 21, 2016). 258 85 FR at 11611. 259 Id. 260NCFC at 3–4; CMC at 4; IFUS at 4–5; NGSA at 6 (requesting the Commission unambiguously recognize hedges of index-price risk (not just fixed￾price risk), noting that exchanges currently recognize these types of hedges). vertically integrated corporate structures typically have several legal entities that perform individual business functions, including merchandising.255 As such, these commenters requested the Commission clarify that integrated energy companies routinely engaged in merchandising activities, as well as other activities such as production, processing, marketing and power generation, may utilize the enumerated hedge for anticipated merchandising in addition to other bona fide hedges.256 (a) Discussion of Final Rule—Meaning of ‘‘Merchant’’ The Commission is adopting the term ‘‘merchant’’ in the final anticipated merchandising bona fide hedge as proposed, but clarifies here the intended meaning of that term. In particular, the Commission is clarifying that the term ‘‘merchant’’ in the anticipated merchandising enumerated bona fide hedge is not limited to those entities exclusively engaged in the business of merchandising. Instead, the term ‘‘merchant’’ may include physical commodity market participants that, in addition to offering or entering into transactions solely for purposes related to their merchandising business, may otherwise also be a producer, processor, or commercial user of the commodity that underlies the anticipated merchandising transaction. The Commission’s use of the term ‘‘merchant’’ is intended to capture commercial market participants who participate in the physical commodity market, and does not exclude such participants simply because they have a vertically integrated corporate structure. That is, energy, agricultural, or metal companies in the physical commodity market with vertically-integrated or complex corporate structures are not excluded as merchants, so long as they otherwise satisfy all applicable requirements related to the anticipated merchandising bona fide hedge. The condition requiring the person to be a merchant to qualify for this enumerated hedge is consistent with the Commission’s longstanding practice of providing commercial market participants relief from certain regulatory requirements as a way of reducing regulatory compliance obligations that would otherwise burden a commercial market participant’s physical commodity business. The Commission has taken a similar approach under the trade option exemption by exempting the physically delivered commodity options purchased by commercial users of the commodities underlying the options. Under the trade option relief, the Commission recognized that commercial market participants needed relief by generally exempting qualifying commodity options from the swap requirements of the CEA and the Commission’s regulations.257 Unlike in the trade option requirements,
there is no requirement under the anticipated merchandising enumerated bona fide hedge that both counterparties qualify as merchants. The anticipated merchandising enumerated bona fide hedge, however, is intended to generally benefit the same type of market participants as the trade option exemption, that is, commercial market participants who participate in the physical commodity market for the underlying commodity being merchandised. As such, the text of the anticipated merchandising enumerated bona fide hedge excludes a party who is not entering into the anticipated merchandising activity solely for commercial purposes related to its merchandising business, but instead, to speculate on the price of the underlying commodity. For example, non￾commercial market participants who employ various arbitrage strategies, including sometimes trading arbitrage positions in cash commodity markets to speculate on the price of the underlying commodity, and those market participants with highly leveraged derivatives portfolios of non-physical commodities, would not qualify as merchants. Finally, the Commission has determined that it is not necessary to amend the regulatory text’s reference to merchant to expressly include producers or processors. As clarified above, a producer and a processor may qualify for the anticipated merchandising bona fide hedge as a merchant if a part of their business involves merchandising. Furthermore, such entities that are also producers or processors may otherwise rely on the enumerated anticipated unsold anticipated production or unfilled anticipated requirements bona fide hedges, where applicable. Thus, the Commission is providing these market participants with ample flexibility to manage the price risks arising from their anticipated merchandising activity using an expanded suite of anticipatory bona fide hedges. (iv) Requirement for a History of Merchandising The Commission did not receive any specific comments on the proposed requirement to demonstrate a history of merchandising activity. (a) Discussion of Final Rule—History of Merchandising Requirement The Commission is adopting the requirement to demonstrate a history of merchandising as proposed. Such demonstrated history must include a history of making and taking delivery of the underlying commodity, and a demonstrated ability to store and move the underlying commodity.258 A merchandiser that lacks the requisite history of anticipated merchandising activity could still potentially receive bona fide hedge recognition under the non-enumerated process, so long as the merchandiser can otherwise demonstrate compliance with the bona fide hedging definition and other applicable requirements, including demonstrating activities in the physical marketing channel, including, for example, arrangements to take or make delivery of the underlying commodity.259 (v) Scope of Anticipated Merchandising Activity In response to comments from the exchanges and market participants, the
Commission is providing further clarity on the scope of the enumerated anticipated merchandising bona fide hedge. The Commission discusses below certain non-exclusive types of activities that are covered by the enumerated anticipated merchandising bona fide hedge. (a) Request for Clarification—Unfixed￾Price Contracts and Enumerated Anticipated Merchandising Hedge Commenters requested clarification on whether the enumerated bona fide hedge for anticipated merchandising may be used to manage price risk arising from unfixed-price physical commodity transactions. Specifically, several commenters requested clarification on whether a firm may use the anticipated merchandising bona fide hedge to manage the risk associated with a single-sided unfixed purchase or sale at a moment when the same firm does not have an offsetting sale or purchase.260 In

261 ICE at 4. 262CME Group at 8. 263CEWG at 19; CMC at 8; Shell at 7–8; ACSA at 6; ICE at 5; CME Group at 8; Ecom at 1; Southern Cotton at 2; Canale Cotton at 2; Moody Compress at 1; IMC at 2; Mallory Alexander at 2; ACA at 2; East Cotton at 2; Jess Smith at 2; Olam at 2; McMeekin at 2; Memtex at 2; Omnicotton at 2; Toyo at 2; Texas Cotton at 2; NCC at 1; Walcot at 2; White Gold at 2. 264ACSA at 6–7; NCC at 2. 265See Section II.A.1.iv, addressing the treatment of unfixed price transactions. 266 85 FR at 11611. 267 85 FR at 11611–11612. 268FIA at 16. FIA supported the Commission’s preliminary determination that Examples #4 (Binding, Irrevocable Bids or Offers) and #5 (Timing of Hedging Physical Transactions) fit within the newly proposed anticipatory merchandising hedge. 269CEWG at 19. 270Cargill at 5; CMC at 5; NGFA at 7. addition to commercial market participants, ICE and CME Group also requested that the Commission recognize single-sided hedges of unfixed-price purchases or sales. Similar to energy market participants, ICE noted that pricing physical energy commodity transactions at unfixed prices is a common pricing mechanism in the energy markets.261 CME Group provided a hypothetical example of a single-side floating or unfixed-price purchase or sale to demonstrate that derivatives positions entered into to effectuate that single-sided unfixed￾price purchase or sale would reduce the price risk arising for each counterparty.262 Some commenters requested the Commission clarify that market participants can utilize the enumerated anticipatory merchandising hedge to manage the price risks arising from unfixed-price transactions.263 Other commenters suggested the Commission could create a new enumerated bona fide hedge category solely to recognize hedges of unfixed￾price transactions.264 (1) Discussion of Final Rule—Unfixed￾Price Contracts and Enumerated Anticipated Merchandising Hedge As discussed above under Section II.A.1.iv., the Commission is clarifying that market participants that enter into unfixed-price transactions may still be able to qualify for the enumerated bona fide hedge for anticipated merchandising. In other words, a commercial entity that enters into an unfixed-price transaction may qualify for an anticipated merchandising bona fide hedge as long as the market participant satisfies the other requirements, discussed above and below, of the final anticipated merchandising bona fide hedge (e.g., qualifies as a merchant, demonstrates a history of merchandising and satisfies the twelve-month restriction). This rationale is predicated on the fact that an unfixed-price transaction does not address a merchant’s anticipated merchandising need in that the merchant’s price risk to the merchandise has not been fixed. Accordingly, a merchant may use the anticipated merchandising hedge to manage the risk associated with a single sided unfixed purchase or sale at a moment when the same firm does not have an offsetting sale or purchase. The
Commission’s treatment of unfixed￾price transactions is discussed in more detail in Section II.A.1.iv.265 While the Commission understands market participants’ desire for a standalone exemption for unfixed-price transactions, the Commission finds that such an exemption is unnecessary. The Commission notes that the modified and expanded suite of enumerated bona fide hedges, including enumerated anticipatory bona fide hedges, adequately facilitates the hedging needs of qualified commercial market participants. Finally, the Commission believes that the enumerated anticipated merchandising bona fide hedge provides for ample flexibility for hedging. Similar to the enumerated unfilled anticipated requirements and unsold production bona fide hedges, this bona fide hedge may be used even when the merchant simply anticipates purchasing or selling the commodity, and even when the merchant may have yet to enter into an unfixed-price transaction, as long as the merchant has a good faith belief that it will enter into the anticipated merchandising transaction. (b) Analysis of Examples Preliminarily Recognized as Hedges of Anticipated Merchandising in the 2020 NPRM As discussed earlier in this release, in the 2020 NPRM, the Commission addressed several requests that had been submitted in CEWG’s BFH Petition in response to the 2011 Final Rule, to obtain exemptive relief for several transactions described by CEWG as bona fide hedging positions. In the 2020 NPRM, the Commission preliminarily determined that two CEWG BFH Petition examples complied with the proposed hedge of anticipated merchandising: Example #4 (Binding, Irrevocable Bids or Offers); and example #5 (Timing of Hedging Physical Transactions).266 On the other hand, as discussed in
Section II.A.1.iv., the Commission
preliminarily determined in the 2020 NPRM that the positions described in the CEWG’s BFH Petition examples #3 (unpriced physical purchase or sale commitments) and #7 (scenario 2) (use of physical delivery referenced contracts to hedge physical transactions using calendar month average pricing) did not satisfy any of the proposed enumerated hedges.267 (1) Comments—Examples Preliminarily Recognized as Hedges of Anticipated Merchandising in the 2020 NPRM The Commission received comments supporting the Commission’s preliminary determination in the 2020 NPRM that CEWG’s BFH Petition example #4 (Binding, Irrevocable Bids or Offers) 268 and example #5 (Timing of Hedging Physical Transactions) are permitted under the 2020 NPRM’s proposed enumerated hedge for anticipated merchandising.269 The public comments related to examples #3 and #7 (scenario 2) are discussed in the preamble at Section II.A.1.iv., addressing the treatment of unfixed price transactions. (2) Discussion of Final Rule—Examples Preliminarily Recognized as Hedges of Anticipated Merchandising in the 2020 NPRM The Commission has considered the public’s response to its preliminary determination that several of the CEWG BFH Petition examples fit within the 2020 NPRM. The Commission determines in this Final Rule that BFH Petition example #4 (Binding, Irrevocable Bids or Offers) and example #5 (Timing of Hedging Physical Transactions) comply with the enumerated hedge for anticipated merchandising, so long as all applicable conditions are met. In accordance with the Commission’s treatment of unfixed-price transactions under this Final Rule, discussed in
Section II.A.1.iv., the Commission has
determined that BFH Petition examples #3 and #7 (scenario 2) are also permitted under the Final Rule, so long as the position or transaction complies with the applicable conditions of the enumerated anticipatory hedge. (c) Anticipated Merchandising Includes Hedges of Anticipated Storage and Assets Owned or Anticipated To Be Owned Several commenters requested the Commission clarify the scope of the proposed anticipated merchandising bona fide hedge in light of the Commission’s observation in footnote 105 of the 2020 NPRM.270 That footnote stated that certain hedges of storage and

271 85 FR at 11612 n.105.
272NGSA at 7; CHS at 4 (requesting to include a winter storage hedge in the list of enumerated hedges); FIA at 16, 31 (requesting to include a storage hedge as a separate enumerated BFH); Shell at 7–8 (stating that assets used for the transport and storage of energy are a critical part of the energy value chain, including fuel storage tanks and pipeline assets as examples where time spreads or location basis spreads are used to lock-in the values of the assets. This commenter stated that with respect to such infrastructure assets, the Commission should clarify that the use of the hedges of anticipated storage or other physical assets is the type of risk activity that falls within the enumerated BFH for anticipated merchandising); Chevron at 9–11 (requesting that a final rule clarify that hedges of storage may qualify for the enumerated BFH for anticipated merchandising if applicable conditions are met. In the alternative, Chevron requests the Commission identify and clarify that storage hedges of this nature qualify for another enumerated exemption, notably the enumerated BFH for unfilled anticipated requirements); Suncor at 9–10 (requesting that a final rule clarify that hedges of storage may qualify for the enumerated BFH for anticipated merchandising if applicable conditions are met); CCI at 7–9; and CEWG at 16–19 (requesting that the Commission clarify that the enumerated BFH for anticipatory merchandising applies to hedges of storage). 273Chevron at 5; CCI at 8–9. 274Chevron at 11. 275Citadel at 9. 276 Id. 277 85 FR at 11612. 278CEWG at 16. 279 17 CFR 1.3(z)(3) (‘‘Such transactions and positions may include, but are not limited to, purchases or sales for future delivery on any contract market by an agent who does not own or who has not contracted to sell or purchase the offsetting cash commodity at a fixed price, provided That the person is responsible for the merchandising of the cash position which is being offset.’’). 280 81 FR at 96964; 78 FR at 75714; 76 FR at 71689. hedges of assets owned or anticipated to be owned would not be within the scope of the proposed anticipated merchandising enumerated bona fide hedge.271 However, the plain language of the proposed anticipatory merchandising bona fide hedge appeared to be broad enough to cover such activity. Commenters were thus unsure whether the proposed enumerated anticipated merchandising hedge would apply to storage transactions and to hedges of assets owned or anticipated to be owned. Most commenters from the energy industry requested the Commission allow for anticipated storage positions to be considered as falling within the enumerated hedge exemption for anticipated merchandising, contending that such hedges are recognized as bona fide hedge exemptions by the exchanges.272 Chevron and Castleton requested that the Final Rule clarify that hedges of storage may qualify for the enumerated bona fide hedge for anticipated merchandising if applicable conditions are met.273 In the
alternative, Chevron requested the Commission identify and clarify that storage hedges of this nature qualify for another enumerated exemption, notably the enumerated bona fide hedge for unfilled anticipated requirements.274 Citadel similarly requested recognition of offsetting positions related to anticipated changes in the value of the underlying commodity to be stored in facilities on lease, and up to the full storage capacity on lease, rather than only the currently utilized level of leased capacity.275 Citadel argued that storage facilities owned, but not those leased, by the merchant would be covered by the proposed anticipated merchandising enumerated bona fide hedge, and that such different treatment depending on whether the facility was owned or leased did not make sense.276 (1) Discussion of Final Rule— Anticipated Merchandising Includes Hedges of Anticipated Storage and Assets Owned or Anticipated To Be Owned In response to public comments, the Commission determines that both hedges of storage and hedges of assets owned or anticipated to be owned can potentially qualify for the enumerated hedge for anticipated merchandising if the applicable conditions are met. In footnote 105 of the 2020 NPRM, the Commission observed that market participants could use the non￾enumerated process (rather than a self￾effectuating enumerated hedge) to receive bona fide hedge recognition for storage hedges and hedges of assets owned or anticipated to be owned.277 This observation was predicated on the Commission’s recognition that different commodities have different storage roles, manners, and procedures. For example, the use of some storage facilities is not exclusive to a specific commodity and not all storage is necessarily tied to anticipated merchandising activity. As such, the Commission believed that an analysis of facts and circumstances under the non￾enumerated bona fide hedge process would facilitate a determination on whether to recognize hedges of storage or assets owned or anticipated to be owned under the proposed enumerated anticipated merchandising hedge. The Commission has considered comments with respect to the appropriate treatment of storage transactions and hedges of assets owned or anticipated to be owned under the Commission’s anticipated merchandising enumerated hedge. The Commission agrees that commercial market participants may utilize storage hedges or hedges of assets owned or anticipated to be owned as risk reducing practices.278 The Commission believes that such risk reducing hedges may be recognized as anticipated merchandising bona fide hedges, if all the applicable conditions of the anticipated merchandising hedge are satisfied. The Commission clarifies that commercial market participants in the physical marketing channel that utilize storage hedges or hedges of assets owned or anticipated to be owned may continue to qualify for the anticipated merchandising enumerated bona fide hedge, whether the commercial market
participant owns or leases the storage or asset, so long as the all other applicable requirements for the bona fide hedge are satisfied. g. Hedges by Agents (1) Background—Hedges by Agents Existing § 1.3(z)(3) includes certain hedges by agents as an example of a potential non-enumerated bona fide hedge.279 Since 2011, the Commission has included an enumerated hedge for hedges by agents in each of its position limits rulemakings.280 Under the existing non-enumerated hedge process, the Commission has recognized non-enumerated bona fide hedges for parties acting as agents who had the responsibility to trade cash commodities on behalf of another party for which such positions qualified as bona fide hedging positions. Such agents could obtain bona fide hedge treatment to offset, on a long or short basis, the risks arising from those underlying cash positions. For example, this hedge has been recognized in circumstances where a party traded or managed a farmer’s, producer’s, or a government entity’s inventory in the party’s capacity as agent. In such circumstances, the agent providing services in the physical marketing channel, such as a commercial firm, did not take ownership of the commodity and was eligible as an agent for an exemption to hedge the risks associated with such cash positions. (2) Summary of the 2020 NPRM— Hedges by Agents The Commission proposed to include hedges by agents as an enumerated hedge. The proposed hedge would grant an enumerated hedge to an agent who (1) did not own or was not contracted to sell or purchase the offsetting cash commodity at a fixed price, (2) was responsible for merchandising the cash positions being offset, and (3) had a

281For example, the Commission proposed to replace the phrase ‘‘offsetting cash commodity’’ with ‘‘contract’s underlying cash commodity’’ to use language that is consistent with the other proposed enumerated hedges. 282 85 FR at 11610. 283FIA at 16; IECA at 2; and ASR at 2. 284ASR at 2. 285 81 FR at 96964; 78 FR at 75715; 76 FR at
71689. In the 2011 Final Rule, the Commission
recognized anticipatory royalty transactions as a bona fide hedge, provided the following conditions were met: (1) The royalty or services contract arose out of the production, manufacturing, processing, use, or transportation of the commodity underlying the Referenced Contract; (2) The hedge’s value was ‘‘substantially related’’ to anticipated receipts or payments from a royalty or services contract; and (3) No such position was maintained in any physical-delivery Referenced Contract during the last five days of trading of the Core Referenced Futures Contract in an agricultural or metal commodity or during the spot month for other physical-delivery contracts. 286 85 FR at 11608–11609. A short position fixes the price of the anticipated receipts, removing exposure to change in value of the person’s share of the production revenue. A person who has issued a royalty, in contrast, has, by definition, agreed to make a payment in exchange for value received or to be received (e.g., the right to extract a mineral). Upon extraction of a mineral and sale at the prevailing cash-market price, the issuer of a royalty remits part of the proceeds in satisfaction of the royalty agreement. The issuer of a royalty, therefore, does not have price risk arising from that royalty agreement. 287 85 FR at 11609. 288 Id. 289 Id. 290FIA at 16; IECA at 2. contractual agreement with the person who (i) owned the commodity or (ii) held cash-market positions being offset. The proposed hedge of agents would substantively adopt the Commission’s existing practice under the non￾enumerated process in existing § 1.3(z)(3).281 The Commission, however, proposed to include hedges of agents in the list of enumerated hedges because it preliminarily determined this was a common hedging practice and that positions which satisfy the requirements of this enumerated hedge conformed to the general definition of bona fide hedging without further consideration as to the particulars of the case.282 (3) Summary of the Commission Determination—Hedges by Agents The Commission is adopting the enumerated bona fide hedge for hedges by agents as proposed. (4) Comments—Hedges by Agents The Commission received several comments supporting recognition of the hedge by agents, particularly as included in an expanded list of enumerated hedges.283 ASR identified hedges of agents as a type of hedge that is of particular importance to them because it is used daily within its business.284 The Commission did not receive any comments opposed to the enumerated hedge for hedges by agents. (5) Discussion of Final Rule—Hedges by Agents The Commission recognizes that agents provide important services in the physical marketing channel across different commodity markets. For example, in the agricultural sector, this enumerated hedge will accommodate a common hedging practice in the cotton industry. This hedge will be particularly useful in connection with cotton equities purchased by a cotton merchant from a producer,
which is commonly done under the U.S. Department of Agriculture’s loan program to facilitate marketing tools for cotton producers. Another example of when the enumerated hedge by agents adopted herein will apply is for those agents who are in the business of merchandising (selling) the cash grain owned by multiple warehouse operators and forwarding the merchandising revenues back to the warehouse operators less the agent’s fees. Such agents that satisfy the requirements of this enumerated hedge, such as not owning any cash commodity but being responsible for merchandising the cash grain positions of the warehouse operators pursuant to contractual agreements, will be able to hedge the price risks arising from their merchandising activity under those agreements as a bona fide hedge by agents. h. Short Hedges of Anticipated Mineral Royalties (1) Background—Anticipated Mineral Royalties The Commission’s existing bona fide hedging definition does not include an enumerated hedge for anticipated mineral royalties. Since 2011, the Commission has, however, included such a bona fide hedge in each of its position limits rulemakings.285 While the Commission’s 2011 Final Rule initially recognized the hedging of anticipated royalties generally, each proposal since then, including the latest 2020 NPRM, has proposed that this exemption apply to: (i) Short positions (ii) that arise from production (iii) in the context of mineral extraction. (2) Summary of the 2020 NPRM— Anticipated Mineral Royalties The Commission proposed a new enumerated bona fide hedge for short hedges of anticipated mineral royalties that are not currently enumerated in existing § 1.3. The proposed provision would permit an owner of rights to a future mineral royalty to lock in the price of anticipated mineral production by entering into a short position in a commodity derivative contract to offset the anticipated change in value of the mineral royalty rights that were owned by that person and arose out of the production of a mineral commodity (e.g., oil and gas).286 The owner of the rights to the future mineral royalty could be a producer, or, for example, could also be a bank that holds the relevant royalty rights and that is financing, for example, a drilling well operation for a producer. The Commission preliminarily believed that this represents a common hedging practice, and that positions that satisfied the requirements of this enumerated bona fide hedge conformed to the general definition of bona fide hedging without further consideration as to the particulars of the case.287 The Commission proposed to limit this enumerated bona fide hedge only to mineral royalties, noting that while royalties have been paid for use of land in agricultural production, the Commission did not receive any evidence of a need for a bona fide hedge recognition from owners of agricultural production royalties.288 The Commission requested comment on whether and why such an exemption might be needed for owners
of agricultural production or other royalties.289 (3) Summary of the Commission Determination—Anticipated Mineral Royalties For the reasons discussed in the NPRM, the Commission is adopting the enumerated hedge for anticipated mineral royalties as proposed. (4) Comments—Anticipated Mineral Royalties The Commission did not receive any comments either opposing the addition of an enumerated bona fide hedge for anticipated mineral royalties or requesting modifications to the hedge as proposed. Further, no commenters requested extending the enumerated hedge to other types of royalties other than mineral royalties. Several commenters expressed support for the new enumerated hedge.290
i. Hedges of Anticipated Services
(1) Background—Anticipated Services The Commission’s existing bona fide hedging definition does not include an enumerated hedge of anticipated services. Since 2011, however, the

291 81 FR at 96810; 78 FR at 75715. See 76 FR at 71646. 292 42 FR 14832, 14833 (Mar. 16, 1977). 293 85 FR at 11609. 294ASR at 2; FIA at 16. 295 IATP at 17; Better Markets at 58. 296 IATP at 17. 297 Id. 298Better Markets at 58. Commission has included an enumerated bona fide hedge exemption for hedges of anticipated services in each of its position limits rulemakings.291 Further, in 1977, the Commission noted that the existence of futures markets for both source and product commodities, such as soybeans, soybean oil, and soybean meal, affords business firms increased opportunities to hedge the value of services.292 (2) Summary of the 2020 NPRM— Anticipated Services The Commission proposed a new enumerated bona fide hedge for anticipated services, not currently enumerated in existing § 1.3. The proposed provision would recognize as a bona fide hedge a long or short derivative contract position used to hedge the anticipated change in value of receipts or payments due or expected to be due under an executed contract for services arising out of the production, manufacturing, processing, use, or transportation of the commodity underlying the commodity derivative contract.293 (3) Summary of the Commission Determination—Anticipated Services The Commission is adopting the enumerated bona fide hedge for anticipated services as proposed. (4) Comments—Anticipated Services The Commission received four comments on the proposed enumerated anticipated services bona fide hedge. ASR and FIA expressed support for its inclusion as a new enumerated bona fide hedge.294 In contrast, IATP and Better Markets urged the Commission to exclude this hedge from the list of enumerated bona fide hedges.295 IATP stated that the anticipated services bona fide hedge is ‘‘presumably connected to hedges of anticipated production’’ and that, as a result, it views the enumerated hedge as ‘‘more vulnerable to deliverable supply estimate disruption.’’ 296 IATP also contended that, absent a stronger argument for inclusion of this enumerated bona fide hedge aside from ‘‘such exemptions are granted by exchanges,’’ the proposed bona fide hedge of anticipated services merits greater Commission review before being included as an enumerated bona fide hedge.297 Better Markets stated that the definition was too vague, and that absent a time limitation, the hedge could be used as a loophole for speculation.298 (5) Discussion of the Final Rule— Anticipated Services The Commission is adopting the enumerated bona fide hedge for anticipated services as proposed. In response to IATP, the Commission believes that hedging of anticipated services may be useful to commercial market participants in a variety of commonly-occurring scenarios. For example, one scenario may be when a contract for services involves the production of a commodity such as a risk service agreement to drill an oil well between two companies where the risk service agreement between the parties provides that a portion of the revenue
receipts to one of the counterparties depends on the value of the oil produced. To reduce the risk of lower anticipated revenues resulting from an anticipated lower price of oil, the company may enter into a short position in the NYMEX Light Sweet Crude Oil referenced contract. Under this enumerated bona fide hedge of services, such a short position fixes the price at the entry price to the commodity derivative contract. For any decrease in price of the commodity that is the subject of the executed contract for services, the expected receipts from the contract for services would decline in value, but the short commodity derivative contract position would increase in value—offsetting the price risk from the expected receipts under contract for services. On the other hand, this enumerated hedge of anticipated services may also be utilized when a contract for services involves a contract where one of the counterparties is responsible for the cost of the commodity used to provide the service. Such a scenario may occur when a city contracts with a firm to provide waste management services. The contract requires that the trucks used to transport the solid waste use natural gas as a power source. According to the contract, the city would pay for the cost of the natural gas used to transport the solid waste by the waste disposal company. In the event that natural gas prices rise, the city’s waste transport expenses would rise. To mitigate this risk, the city establishes a long position in the NYMEX natural gas referenced contract that is equivalent to the expected use of natural gas over the life of the service contract. In this case, the long position fixes the exit price of the commodity derivative contract. For any increase in the commodity that is the subject of the executed contract for services, the payment due or expected to be due would increase in value, but the long commodity derivative contract would decrease in value—offsetting the price risk from the payments under the contract for services. Under both of these examples, the transactions meet the general requirements for a bona fide hedging transaction and the specific provisions for hedges of anticipated services. Regarding comments contending that deliverable supply estimates are more vulnerable to disruption under this hedge, the Commission does not believe that bona fide hedges for anticipated services will impact actual deliverable supplies. This is because this bona fide hedge allows a market participant to hedge the anticipated change in value of receipts or payments due or expected to be due under an executed contract for services, and is not an alternative means of procuring or selling the underlying commodity. In addition, the Commission will continue to have sufficient access to position and cash-market data to verify all exemptions granted. The reporting and recordkeeping obligations under §§ 150.5 and 150.9 will require exchanges to submit justifications, amendments, and other
necessary information to the Commission on a monthly basis. As such, exchanges and the Commission will have visibility into the amount of demand there is for a commodity in the spot month via the delivery notices. In the rare event that an exchange observes an imbalance, it has the ability under its rules to require the trader to reduce its positions. Finally, the Commission notes that a time limitation is unnecessary because, among other things, when administering exchange-set limits, under the Final Rule, exchanges may rely on the Commission’s guidance in Appendix B to part 150 to protect price convergence and ensure an orderly spot period. Under the guidance in Appendix B adopted herein, an exchange may adopt rules to impose a restriction on holding a position in a physically delivered referenced contract during the lesser of either the last five days of trading or the time period for the spot month in order to limit such positions to only those that are economically appropriate for that person’s specific anticipated or real needs.

299See 17 CFR 32.3(c). 300Trade Options, 81 FR at 14966, 14971 (Mar. 21, 2016). Under the trade options final rule, trade options are generally exempted from the rules otherwise applicable to swaps, subject to the conditions enumerated in § 32.3. For example, trade options do not factor into the determination of whether a market participant is an SD or MSP; trade options are exempt from the rules on mandatory clearing; and trade options are exempt from the rules related to real-time reporting of swaps transactions. 301 Id. 302 17 CFR 32.3. In order to qualify for the trade option exemption, § 32.3 requires, among other things, that: (1) The offeror is either (i) an eligible contract participant, as defined in section 1a(18) of the Act, or (ii) offering or entering into the commodity trade option solely for purposes related to its business as a ‘‘producer, processor, or commercial user of, or a merchant handling the commodity that is the subject of the’’ trade option; and (2) the offeree is offered or entering into the commodity trade option solely for purposes related to its business as ‘‘a producer, processor, or commercial user of, or a merchant handling the commodity that is the subject of the commodity’’ trade option. 303 It may not be possible to compute a futures￾equivalent basis for a trade option that does not have a fixed strike price. As discussed in the
Section II.A.1.iv., under the Commission’s existing
portfolio hedging policy, market participants may manage their price risks by utilizing more than one enumerated bona fide hedge (including a commodity trade option hedge and other anticipatory bona fide hedges, if necessary based on the market participant’s applicable facts and circumstances). For example, a commodity trade option with a fixed strike price may be converted to a futures-equivalent basis, and, on that futures￾equivalent basis, deemed a cash commodity sale contract, in the case of a short call option or long put option, or a cash commodity purchase contract, in the case of a long call option or short put option. 304 85 FR at 11610. 305 IECA at 1; CCI at 2; CEWG at 4; Chevron at 3; Suncor at 3; FIA at 16; and NGSA at 4. 306NGSA at 4. 307 42 FR 14832, 14834 (March 16, 1977). 308 81 FR at 96752–96753; 78 FR at 75716; 76 FR at 71689. 309Specifically, the 2020 NPRM allowed for cross-commodity hedging for any of the following proposed enumerated hedges: (i) Hedges of unsold anticipated production, (ii) hedges of offsetting unfixed-price cash commodity sales and purchases, (iii) hedges of anticipated mineral royalties, (iv) hedges of anticipated services, (v) hedges of inventory and cash commodity fixed-price purchase contracts, (vi) hedges of cash commodity fixed-price sales contracts, (vii) hedges by agents, and (viii) offsets of commodity trade options. 310 85 FR at 11609. For example, an airline that wishes to hedge the price of jet fuel may enter into a swap with a swap dealer. In order to remain flat, the swap dealer may offset that swap with a futures j. Offsets of Commodity Trade Options (1) Background—Offsets of Commodity Trade Options Commodity trade options are not subject to Federal position limits under existing regulations.299 Generally, a commodity trade option is a physically￾delivered commodity option purchased by commercial users of the commodities underlying the options. In the 2016 trade options final rule, the Commission stated that Federal position limits should not apply to trade options.300 Further, in that trade options final rule, the Commission indicated it would address the applicability of position limits to trade options in the context of any final rulemaking on position limits.301 (2) Summary of the 2020 NPRM— Offsets of Commodity Trade Options The Commission proposed a new enumerated hedge for offsets of commodity trade options not currently enumerated in § 1.3. Under the 2020 NPRM, a qualifying commodity trade option under § 32.3 302 would be treated as a cash position, on a futures￾equivalent basis,303 and serve as the basis for a bona fide hedge position. Treating qualifying commodity trade options as cash positions, either as a cash commodity purchase or sales contract, would allow the Commission to extend the existing enumerated hedge exemptions for cash positions to the offsets of commodity trade options. That is, the offsets of qualifying commodity trade options would be treated like the enumerated
hedges for cash commodity fixed-price purchase contracts or hedges of cash commodity fixed-price sales contracts.304 (3) Summary of the Commission Determination—Offsets of Commodity Trade Options The Commission continues to believe that Federal position limits should not apply to trade options. Thus, the Commission is adopting the enumerated bona fide hedge for offsets of commodity trade options as proposed, with a few clarifying, non-substantive technical edits in the regulatory text. (4) Comments—Offsets of Commodity Trade Options The Commission did not receive any comments opposing the addition of an enumerated hedge for offsets of commodity trade options. The Commission received comments generally supporting the bona fide hedge for offsets of commodity trade options, particularly as included in an expanded list of enumerated bona fide hedges.305 NGSA stated that defining bona fide hedging in a way that recognizes that trade options, adjusted on a futures-equivalent basis, constitute cash commodity purchase or sale contracts that underlie bona fide hedge positions should ‘‘facilitate hedging rather than restrict it.’’ 306 k. Cross-Commodity Hedges (1) Background—Cross-Commodity Hedges The Commission has long recognized cross-commodity bona fide hedging under paragraph (2)(iv) of the bona fide hedging definition in existing § 1.3, which has allowed cross-commodity bona fide hedging in connection with all of the enumerated bona fide hedges included in the existing bona fide hedge definition.307 The existing enumerated cross￾commodity bona fide hedge recognizes that risk from some cash commodity price exposures can be practically and effectively managed through commodity derivative contracts on a related commodity. As such, positions in any of the existing enumerated bona fide hedges may be offset by a cash position held in a different commodity than the commodity underlying the futures contract. The existing cross-commodity enumerated hedge, however, is subject to two conditions. First, the fluctuations in value of the position in the futures contract must be ‘‘substantially related’’ to the fluctuations in value of the actual or anticipated cash position. Second, under the cross-commodity enumerated bona fide hedge exemption, a position may not be held in excess of the Federal position limit during the last five trading days for that futures contract. Cross-commodity hedging also allows market participants to hedge the price exposure arising from the products and byproducts of a commodity where there is no futures contract for those products or byproducts, but there is a futures contract for the source commodity of those products or byproducts. Since 2011, the Commission has included an enumerated cross-commodity bona fide hedge in each of its position limits rulemakings.308 (2) Summary of the 2020 NPRM—Cross￾Commodity Hedges The Commission proposed to include cross-commodity hedges as an enumerated bona fide hedge, and to expand the
application of this bona fide hedge such that it could be used to establish compliance with: (1) Each of the proposed enumerated bona fide hedges listed in Appendix A to part 150 except for unfilled anticipated requirements and anticipated merchandising, which were excluded from the regulatory text of the cross￾commodity enumerated hedge; 309 and (2) the proposed pass-through provisions under paragraph (2) of the proposed bona fide hedging definition discussed further below; provided, in each case, that the position satisfied each element of the relevant enumerated bona fide hedge.310 In addition, the

position, for example, in ULSD. Subsequently, the airline may also offset the swap exposure using ULSD futures. In this example, under the pass￾through swap language of proposed § 150.1, the airline would be acting as a bona fide hedging swap counterparty and the swap dealer would be acting as a pass-through swap counterparty. In this example, provided each element of the enumerated hedge in paragraph (a)(5) of Appendix A, the pass￾through swap provision in § 150.1, and all other regulatory requirements are satisfied, the airline and swap dealer could each exceed limits in ULSD futures to offset their respective swap exposures to jet fuel. See infra Section II.A.1.c.v. (discussion of proposed pass-through language). 311See 85 FR at 11726–11727. 312 85 FR at 11609. 313This remains true at the publication of this rulemaking. 314 85 FR at 11609. Grain sorghum was previously listed for trading on the Kansas City Board of Trade and Chicago Mercantile Exchange, but because of liquidity issues, grain buyers continued to use the more liquid corn futures contract, which suggests that the basis risk between corn futures and cash sorghum could be successfully managed with the corn futures contract. 315 85 FR at 11609. 316 Id. 317 85 FR at 11611. 318ADM at 2; NGSA at 3–4; NOPA at 2; and ICE at 7. Prior position limits proposals included a quantitative test, whereas the 2020 NPRM included a qualitative ‘‘substantially related’’ requirement. 319Better Markets at 58. 320 ICE at 7. 321Chevron at 8–9; Suncor at 6–8; NOPA 2; CCI at 5–9; CEWG at 10–14; NGSA at 4; ICE at 2, 4; Shell at 7–8; ADM at 2; and IECA at 8. 322Chevron at 8; Suncor at 8; NOPA at 2; CCI at 5–7; CEWG at 10–14; NGSA at 4; and IECA at 8. 323 IECA at 7–8. 324Chevron at 7; Suncor at 7. Commission also proposed to eliminate the Five-Day Rule in connection with the proposed cross-commodity bona fide hedge (i.e., the 2020 NPRM eliminated the restriction from holding a position in excess of the Federal position limit under the enumerated cross-commodity bona fide hedge during the last five days of trading). The proposed cross-commodity enumerated bona fide hedge was conditioned on the existence of a ‘‘substantial relationship’’ between the commodity derivative contract and the related cash commodity position. Specifically, the fluctuations in value of the position in the commodity derivative contract, that is, of the underlying cash commodity of that derivative contract, were required to be ‘‘substantially related’’ 311 to the fluctuations in value of the actual or anticipated cash commodity position or pass-through swap.312 This was intended to be a qualitative analysis, rather than quantitative. For example, the 2020 NPRM stated that there is a substantial relationship between grain sorghum, which is used as a food grain for humans or as animal feedstock, and the corn referenced contracts. Because there is not a futures contract for grain sorghum grown in the United States listed on a U.S. DCM,313
corn represents a substantially related commodity to grain sorghum in the United States.314 The 2020 NPRM noted that, in contrast, there did not appear to be a reasonable commercial relationship between a physical commodity, say copper, and a broad-based stock price index, such as the S&P 500 Index, because these commodities were not reasonable substitutes for each other in that they had very different pricing drivers.315 That is, the price of a physical commodity is based on supply and demand, whereas the stock price index is based on various individual stock prices for different companies.316 The 2020 NPRM also preliminarily determined that CEWG BFH Petition example #9 (Holding a cross-commodity hedge using a physical delivery contract into the spot month) and example #10 (Holding a cross-commodity hedge using a physical delivery contract to meet unfilled anticipated requirements) were permitted as cross-commodity enumerated hedges.317 (3) Summary of the Commission Determination—Cross-Commodity Hedges The Commission is finalizing the cross-commodity enumerated bona fide hedge largely as proposed, with amendments to expand the ability to use cross-commodity hedges. (4) Comments—Cross-Commodity Hedges Commenters generally supported the proposed cross-commodity enumerated bona fide hedge, and a few commenters explicitly supported the Commission’s decision not to propose a quantitative test requirement for the proposed enumerated cross-commodity bona fide hedge.318 Better Markets stated that it views some cross-commodity hedges as ‘‘appropriate, normal, and legitimate market practices,’’ but claimed that there is a potential for abuse if the bona fide hedge exemption requires less than a ‘‘demonstrable price relationship’’ between the two commodities.319 ICE recommended that the Commission include a non-exclusive list of commonly-used cross-commodity hedges that satisfy the ‘‘substantially related’’ requirement, which ICE believes should include the natural gas core referenced futures contract and its linked referenced contracts as bona fide hedges of electricity price exposure, and vice versa.320 The majority of energy market participants commented on a separate item: That the express language of proposed paragraph (a)(5) of Appendix B to part 150, which sets forth the proposed cross-commodity bona fide hedge, inappropriately failed to cover bona fide hedges for unfilled anticipated requirements and anticipated merchandising.321 Chevron, Suncor, CCI, and the CEWG requested that the Commission revise the proposed cross￾commodity enumerated bona fide hedge to specifically clarify that enumerated bona fide hedges for unfilled anticipated requirements and anticipated merchandising may be utilized as cross￾commodity bona fide hedges in energy markets.322 IECA also requested that the cross-commodity enumerated hedge include bona fide hedges of anticipated requirements, which would capture bona fide hedges of anticipated requirements commonly used by
many electric utilities that enter into heat-rate transactions.323 Suncor and Chevron highlighted an internal inconsistency in the 2020 NPRM. These commenters pointed out that while the 2020 NPRM preliminarily determined that CEWG BFH Petition Example #10 (Holding a cross￾commodity hedge using a physical delivery contract to meet unfilled anticipated requirements) satisfies the proposed cross-commodity hedge, the proposed cross-commodity hedge excluded unfilled anticipated requirements.324 (5) Discussion of Final Rule—Cross￾Commodity Hedges The Commission is finalizing the cross-commodity enumerated bona fide hedge largely as proposed, with amendments to expand the ability to use cross-commodity hedges. Specifically, the Commission is amending the express language of the cross￾commodity enumerated hedge in
Appendix B to include the enumerated
hedges of unfilled anticipated requirements and hedges of anticipated merchandising so that the cross￾commodity provision applies to all enumerated hedges adopted herein. The 2020 NPRM excluded the enumerated bona fide hedges for unfilled anticipated requirements and for anticipated merchandising from the cross￾commodity provision. As a result, any internal inconsistency related to example #10 has been resolved. Separately, as stated in the 2020 NPRM, the Commission reaffirms that the requirement that the value fluctuations of the commodity derivatives contract used to hedge and the value fluctuations of the commodity

325As discussed below, proposed § 150.3(a)(1) would allow a person to exceed position limits for bona fide hedging transactions or positions, as defined in proposed § 150.1. 326 85 FR at 11622. 327MGEX at 2; FIA at 15–16. 328FIA at 16. 329CMC at 6. 330EEI/EPSA at 5. cash position being hedged must be ‘‘substantially related’’ is an important factor in determining whether a cross￾commodity hedge satisfies the requirements to be a bona fide hedge. Accordingly, the Commission believes that the ‘‘substantially related’’ requirement sufficiently ties derivative and cash positions between two different, but comparable, commodities that have a reasonable commercial relationship as a result of their ability to serve as reasonable substitutes for each other, due to, for example, similar pricing drivers. The Commission agrees with commenters who stated that market participants use cross-commodity hedging to manage their price risk, particularly when a cash commodity is not necessarily deliverable under the terms of any derivative contract or the cash-market transactions are not in the same commodity underlying the futures contract. For example, an airline that uses a predictable volume of jet fuel every month may cross hedge its anticipated jet fuel requirements with the ultralow sulfur diesel (‘‘ULSD’’) heating oil commodity derivative contract because there are no physically-settled jet fuel commodity derivative contracts available. The value fluctuations in jet fuel are substantially related to the value fluctuations in the ULSD ‘‘HO’’ futures contract. The Commission believes that a determination of whether commodities are ‘‘substantially related’’ for purposes of the cross-commodity bona fide hedge depends on a facts and circumstances analysis and that the relationship between the two is not static, as it may change over time depending on market factors. Accordingly, the Commission’s position is not to publish a list of cross￾commodity hedges satisfying the ‘‘substantially related’’ requirement at this time.
vii. Location and Regulatory Treatment
of the Enumerated Bona Fide Hedges a. Background—Location and Regulatory Treatment of the Enumerated Bona Fide Hedges As noted above, the existing enumerated bona fide hedges are explicitly incorporated in the regulatory bona fide hedging definition in § 1.3 of the Commission’s regulations. b. Summary of the 2020 NPRM— Location and Regulatory Treatment of the Enumerated Bona Fide Hedges In the 2020 NPRM, the Commission proposed to move the expanded list of the enumerated bona fide hedges from the bona fide hedging definition in regulation § 1.3 to the proposed acceptable practices in Appendix A to
part 150. The Commission stated that
the list of enumerated bona fide hedges should appear as acceptable practices in an appendix, rather than as regulations in the regulatory bona fide hedging definition, because each enumerated bona fide hedge represents just one way, but not the only way, to satisfy the proposed bona fide hedging definition and § 150.3(a)(1).325 The Commission requested comment on whether the list of enumerated hedges should be included in the regulatory text or in an
appendix as acceptable practices.326
c. Summary of the Commission
Determination—Location and Regulatory Treatment of the Enumerated Bona Fide Hedges The Commission has determined to incorporate the enumerated bona fide hedges as part of the regulatory text. While the Final Rule will maintain the enumerated bona fide hedges in
Appendix A to part 150, Appendix A
will be incorporated into final § 150.3, and therefore under the Final Rule the enumerated bona fide hedges in
Appendix A will be deemed to be part
of the regulatory text rather than treated as acceptable practices. d. Comments—Location and Regulatory Treatment of the Enumerated Bona Fide Hedges FIA and MGEX supported moving the list of enumerated bona fide hedges to the rule text.327 FIA stated that ‘‘including the list in the regulatory text would provide market participants greater regulatory certainty by making it clear that it could not be amended absent notice and comment rulemaking.’’ 328 On the other hand, CMC and the Joint Associations (i.e., EEI and EPSA) preferred keeping the enumerated hedges in Appendix A to part 150. CMC stated its understanding that an amendment to either Appendix A or the rule text would require the same formal rulemaking procedures.329 The Joint Associations based their support of
Appendix A because it allows for ‘‘for
flexibility’’ in their view.330 e. Discussion of Final Rule—Location and Regulatory Treatment of the Enumerated Bona Fide Hedges Under the Final Rule, the enumerated bona fide hedges are incorporated as
part of the regulatory text. While the
Final Rule will maintain the enumerated bona fide hedges in
Appendix A to part 150, Appendix A
will be incorporated in final § 150.3 as positions that are deemed to be bona fide hedges that are self-effectuating for purposes of Federal position limits. In other words, while the Final Rule will maintain the enumerated bona fide hedges in Appendix A, Appendix A will be deemed to be part of the regulatory text rather than treated as acceptable practices as the Commission proposed in the 2020 NPRM. The Commission agrees that including the enumerated bona fide hedges as part of the regulations, rather than as acceptable practices, provides market participants with greater regulatory certainty. To reflect that Appendix A to
part 150 is part of the regulatory text,
the Commission is amending the introductory language to the Appendix to remove any references to acceptable practices. In addition, while not a substantive change, the Commission has also re￾ordered the list of enumerated hedges. The Final Rule reorders Appendix A so that the bona fide hedges are listed by hedges of purchases, sales, anticipated activities, or other new types of hedges. Finally, the cross-commodity hedge, which applies to all the enumerated hedges in the appendix, is listed last.
viii. Elimination of Federal Restriction
Prohibiting Holding a Bona Fide Hedge Exemption During Last Five Trading Days, the ‘‘Five-Day Rule;’’ Proposed Guidance in Appendix B, Paragraph (b) a. Background—Elimination of the ‘‘Five-Day Rule;’’ Proposed Guidance in
Appendix B, Paragraph (b)
Some of the existing enumerated bona fide hedge exemptions in § 1.3 include a restriction on the market participant holding a commodity derivative contract position in excess of Federal position limits during the last five days of trading (generally referred to as the ‘‘Five-Day Rule’’). The restriction limits the applicability of exemptions during the last five days of trading because for many agricultural commodity derivative contracts, those last five days of trading coincide with the physical-delivery process. The practical effect of the Five￾Day Rule is a winnowing of the universe of market participants who maintain large positions throughout the last five days of trading to only those market

331 Definition of Bona Fide Hedging and Related Reporting Requirements, 42 FR 42748, 42750 (Aug. 24, 1977). 332The existing enumerated hedges limited by the Five-Day rule are as follows: Unsold anticipated production, unfilled anticipated requirements, offsetting sales and purchases, and cross￾commodity hedges. 333For example, an economically appropriate need for soybeans would mean obtaining soybeans from a reasonable source (considering the marketplace) that is the least expensive, at or near the location required for the purchaser, and that such sourcing does not cause market disruptions or prices to spike. 334That is, the person has inventory on-hand in a deliverable location and in a condition in which the commodity can be used upon delivery and that it represents the best sale for that inventory. 335That is, the delivery comports with the person’s demonstrated need for the commodity, and the contract is the cheapest source for that commodity. 336 IATP at 17–18; Better Markets at 61 (contending that if the CFTC does eliminate the Five-Day rule, it should at least formalize the proposed guidance in the rule text). 337 IATP at 18. 338ADM at 3; Cargill at 8; CCI at 2, 9; CEWG at 4, 24; Chevron at 3, 9; CMC at 5; CME Group at 9; ICE at 2, 8; IFUS at 2; FIA at 3; NGFA at 9; NGSA at 2; Shell at 3; Suncor at 3, 12. 339 85 FR at 11612. participants who actually intend to make or take delivery at the end of the spot period. Narrowing the universe of market participants in this way helps ensure an orderly trading environment and maintains the integrity of the physical-delivery process for those market participants who rely on price convergence between the cash and futures markets during the last days of trading. When the Commission adopted the Five-Day Rule, it believed that, as a general matter, there was little commercial need to maintain a large position that exceeds position limits during or through the last five days of trading.331 b. Summary of the 2020 NPRM— Elimination of the ‘‘Five-Day Rule;’’ Proposed Guidance in Appendix B, Paragraph (b) The Commission proposed to eliminate the restriction on holding a bona fide hedge exemption during the last five days of trading from all the enumerated hedges to which such five￾day rule restriction applies under existing § 1.3.332 Instead, under proposed § 150.5(a)(2)(ii)(D), exchanges could apply a restriction against holding positions under a bona fide hedge in excess of limits during the lesser of the last five days of trading or the time period for the spot month in such physical-delivery contract, or otherwise limit the size of such position. The exchanges would thus have the ability and discretion, but not an obligation, to apply a five-day rule or similar restriction to exemptions on any contracts subject to Federal position limits, regardless of whether such contracts have been subject to Federal position limits before. The 2020 NPRM also included guidance for exchanges on factors to consider when
applying a restriction against holding physically delivered futures contracts into the spot month. The proposed guidance set forth in
Appendix B, paragraph (b) provided
that a position held during the spot period may still qualify as a bona fide hedging position, provided that: (1) The position complies with the bona fide hedging transaction or position definition; and (2) there is an economically appropriate need to maintain such position in excess of Federal speculative position limits during the spot period, and that need relates to the purchase or sale of a cash commodity.333 In addition, the guidance provided several factors the exchange should weigh when evaluating whether a person wishing to exceed Federal position limits should be able to do so during the spot period. For example, whether the person: (1) Intends to make or take delivery during that period; (2) provided materials to the exchange supporting the waiver of the Five-Day Rule; (3) demonstrated supporting cash￾market exposure in-hand that is verified by the exchange; (4) demonstrated that, for short positions, the delivery is feasible, meaning that the person has the ability to deliver against the short position; 334 and (5) demonstrated that, for long positions, the delivery is feasible, meaning that the person has the ability to take delivery at levels that are economically appropriate.335
c. Summary of the Commission
Determination—Elimination of the ‘‘Five-Day Rule;’’ Proposed Guidance in
Appendix B, Paragraph (b)
The Commission is finalizing the proposal to eliminate the restriction on holding a bona fide hedge exemption during the last five days of trading from all the enumerated hedges to which such Five-Day Rule restriction applies under existing § 1.3. Additionally, the Commission has carefully considered the various comments regarding the proposed guidance in Appendix B, paragraph (b) and has determined to finalize the guidance, subject to several amendments and clarifications. The Commission discusses and addresses comments on the proposed elimination of the Five-Day Rule immediately below, followed by a discussion of comments on the proposed guidance further below. d. Comments—Elimination of the ‘‘Five￾Day Rule;’’ Proposed Guidance in
Appendix B, Paragraph (b)
(1) Elimination of the ‘‘Five-Day Rule’’ Several public interest commenters opposed the elimination of the Five-Day Rule.336 IATP viewed allowing the exchanges to impose a five-day rule or similar restriction as relegating the Commission’s function to merely monitoring ‘‘DCM decisions and their consequences for market participants and the public after the fact.’’ 337 Conversely, commercial market participants and exchanges generally supported the proposal to eliminate the Five-Day Rule and instead afford the exchanges the discretion whether to impose restrictions on holding physically-delivered contracts.338 (i) Discussion of the Final Rule— Elimination of the ‘‘Five-Day Rule’’ The Commission is finalizing the proposal to eliminate the restriction on holding a bona fide hedge exemption during the last five days of trading from all the enumerated hedges to which such Five-Day Rule restriction applies under existing § 1.3. In place of the ‘‘Five-Day Rule,’’ the Commission is finalizing proposed § 150.5(a)(2)(ii)(D), which provides that an exchange may grant exemptions, subject to terms, conditions, or restrictions against holding large positions in physically delivered futures contracts, as a bona fide hedge in excess of limits during the lesser of the last five days of trading or the time period for the spot month in such physical-delivery contract, or otherwise limit the size of such position under that exemption. For the legacy agricultural contracts, the Five-Day Rule has been an important way to help ensure that futures and cash-market prices converge. Price convergence helps protect the integrity of the price discovery function and facilitates an orderly delivery process, which overlaps with the last days of trading. As stated in the 2020 NPRM, however, a strict five-day rule may be inappropriate and unnecessary, as the Commission expands its Federal position limits beyond the nine legacy agricultural contracts.339

340Energy contracts typically have a three-day spot period, whereas the spot period for agricultural contracts is typically two weeks. 341 7 U.S.C. 7B–3(f)(4)(B); 7 U.S.C. 7B–3(f)(2); 7 U.S.C. 7B–3(f)(3); 7 U.S.C. 7B–3(f)(5). 342CMC at 5; CME Group at 9; IFUS at 10. 343 IFUS at 3. 344CME Group at 9. 345Better Markets supported the proposed guidance. Better Markets at 46–48. 346Chevron at 13–14; Suncor at 13–14; CCI at 9– 10; CEWG at 25–26. 347CME Group at 9. 348 Id. 349Chevron at 13. 350Chevron at 13; Suncor at 14; CCI at 9–10; CEWG at 25–26. In particular, while the Commission continues to believe that the justifications described above for the existing Five-Day Rule remain valid for contracts subject to Federal position limits, the exchanges—subject to Commission oversight—are better positioned to decide whether to apply a restriction, such as the Five-Day Rule, in connection with exemptions to their own exchange-set limits, or whether to apply other tools that may be equally effective. This Final Rule affords exchanges with the discretion to apply, and when appropriate, grant exemptions subject to terms, conditions or limitations like the Five-Day Rule (or similar restrictions) for purposes of their own exchange-set limits. Allowing for such discretion when granting exemptions will afford exchanges flexibility to quickly impose, modify, or waive any such limitation as circumstances dictate. While a strict Five-Day Rule may be inappropriate in certain circumstances, including when applied to energy contracts that typically have a shorter spot period than agricultural contracts,340 the flexible approach adopted herein may allow for the development and implementation of additional solutions other than a Five￾Day Rule that protect convergence, while minimizing the impact on market participants. This approach allows exchanges to design and tailor a variety of limitations to protect convergence during the spot period. For example, in certain circumstances, a smaller quantity restriction, rather than a complete restriction on holding positions in excess of limits during the spot period, may be effective at protecting convergence. Similarly, exchanges currently utilize other tools to achieve similar policy goals, such as by requiring market participants to ‘‘step down’’ the levels of their exemptions as they approach the spot period, or by establishing exchange-set speculative position limits that include a similar step-down feature. Since § 150.5(a) as adopted herein would require that any exchange-set limits for contracts subject to Federal position limits must be less than or equal to the Federal limit, any exchange application of the Five-Day Rule, or a similar restriction, would have the same effect as if administered by the Commission for purposes of Federal speculative position limits, but could be administered by the exchange in a more tailored and efficient manner. In response to commenters who stated this approach would relegate the
Commission’s functions to merely monitoring the DCMs’ decisions after the fact, the Commission points out that regardless of whether there is a Federal Five-Day Rule, the Commission will continue to exercise oversight over exchanges before, during, and after exchange action relating to position limits. For example, all exchange rules, including those establishing/modifying exchange-set position limits, accountability levels, step downs, and five-day rules and similar restrictions, must be submitted to the Commission in advance pursuant to part 40 of the Commission’s regulations. Additionally, any exemption granted by an exchange from its own position limits must meet standards established by the Commission in § 150.5(a)(ii)(C) of this Final Rule, including considering whether the requested exemption would result in positions that would not be in accord with sound commercial practices and/or would exceed an amount that may be established and liquidated in an orderly fashion. Further, any waiver of an exchange five-day rule or similar restriction should consider the
Appendix B guidance adopted herein.
Additionally, the Commission will continue to leverage its own market surveillance and oversight functions to ensure that exchanges continue to comply with their legal obligations, including with respect to Core Principles 2, 3, 4, and 5, among others.341 Finally, under § 150.3(b)(6) finalized herein, the Commission continues to have the authority to revoke any bona fide hedge exemption. (2) Proposed Guidance in Appendix B, Paragraph (b) There were several comments on the proposed guidance in Appendix B, paragraph (b) regarding the circumstances when an exchange may grant waivers from any exchange-set five-day rule or similar restriction. A few commenters requested that the Commission eliminate the proposed guidance altogether.342 IFUS stated that the proposed guidance is unnecessary and should be removed, contending that the guidance ‘‘reflects many of the considerations currently taken by [e]xchange staff when reviewing exemptions and spot month positions.’’ 343 CME Group expressed a similar view, stating that in lieu of the proposed guidance, ‘‘the Commission should allow exchanges to continue to rely on their established market surveillance expertise and regular interactions to make decisions around exemptions.’’ 344 Most commercial market participants and Better Markets,345 however, did not request to eliminate the proposed guidance in Appendix B, paragraph (b), but instead requested certain changes or clarifications. These commenters focused on whether the guidance: (i) Only applies to physically-settled contracts expressly designated by an exchange as subject to a five-day rule or similar restriction; 346 and (ii) is too prescriptive by imposing new documentation requirements on exchanges.347 CME Group requested clarification on whether the proposed guidance applies to all exemptions or only those exemptions previously subject to a five-day rule.348 Several energy market participants requested the Commission expressly clarify that the restrictions or guidance do not apply to markets for energy commodity derivatives.349 Alternatively, these energy market participants stated that if the Commission declined to include in a final rule an express prohibition on the application of the Five-Day Rule to energy commodity derivative contracts, the Commission should clarify that an exchange is not bound to apply the waiver guidance to any physically￾settled referenced contract that has not been expressly designated as subject to the Five-Day Rule.350 (i) Discussion of Final Rule—Appendix B, Paragraph (b) The Commission has carefully considered the various comments regarding the guidance in Appendix B, paragraph (b) and has determined to finalize the guidance, subject to several amendments and clarifications, discussed below. The Commission is not persuaded by requests to eliminate the guidance based on arguments that exchanges have current market surveillance practices or procedures to review the appropriateness of an exemption during the relevant
referenced contract’s spot period. The Commission continues to believe that the justifications described above for the existing Five-Day Rule

351See Sections II.D. and II.G.
352 81 FR at 96747–96747.
353See 81 FR at 96747 (stating that gross hedging was economically appropriate in circumstances where ‘‘net cash positions do not necessarily measure total risk exposure due to differences in the timing of cash commitments, the location of stocks, and differences in grades or the types of cash commodity.’’) See also Bona Fide Hedging Transactions or Positions, 42 FR at 14832, 14834 (Mar. 16, 1977) and Definition of Bona Fide Hedging and Related Reporting Requirements, 42 FR 42748, 42750 (Aug. 24, 1977). 354For example, using gross hedging, a market participant could potentially point to a large long cash position as justification for a bona fide hedge, even though the participant, or an entity with which the participant is required to aggregate, has an equally large short cash position. The presence of such offsetting cash positions would result in the participant having no net price risk to hedge. Instead, the participant created price risk exposure to the commodity by establishing the derivative position. 355See 85 FR at 11613. remain valid. The Commission has determined, however, that with an expanded list of contracts subject to Federal position limits, it is best to provide the exchanges additional discretion when granting exemptions to protect their markets using tools other than a Five-Day Rule, and to supplement that discretion with guidance highlighting the importance of the spot month to ensure price convergence and an orderly delivery process. For certain referenced contract markets, rather than imposing a complete restriction on holding positions in excess of limits during the spot period, an exchange may, when appropriate, grant an exemption which allows exceeding the position limit by a small increment. Such approach would be an effective way of protecting convergence while still maintaining orderly trading. Similarly, exchanges currently utilize other tools in administering their position limits. For example, CME and CBOT establish certain exchange-set speculative position limits that include a ‘‘step down’’ feature so that the permitted position limit level is lower each day as the contract nears its last trading days. Further, when granting position limit exemptions, exchanges may grant such exemptions subject to a ‘‘step down’’ level restriction as well. The Commission expects that exchanges would closely scrutinize any participant who requests recognition during the last five days of the spot period or in the time period for the spot month. The Commission clarifies that any exchange, for the purposes of exchange￾set position limits, that elects to grant an exemption subject to terms, conditions, or limitations, that restrict the size of a position during the time period for the spot month of a physically-settled contract under § 150.5(a)(2)(ii)(H) may do so on any referenced contract subject to Federal position limits under the Final Rule, not just the nine legacy agricultural contracts. As such, the Commission clarifies for
the avoidance of doubt that exemptions in energy contracts may be subject to an exchange’s restriction aimed to monitor the spot period for that energy contract. Since price convergence and an orderly trading environment serve as a deterrent or mitigate certain types of market manipulation schemes such as corners and squeezes, the guidance is intended to include a non-exclusive list of considerations the Commission expects the exchanges to consider when determining whether to allow a position in excess of limits throughout the spot month. Regarding various comments contending that the proposed guidance was too prescriptive, the Commission reiterates the appendix is not intended to be used as a mandatory checklist. Further, the Commission is finalizing various amendments to Appendix B, paragraph b, to respond to commenters’ requests. First, the Commission is amending the introductory paragraph of the guidance to clarify that under § 150.5(a)(2)(ii)(H) as finalized herein, exchanges may impose restrictions on bona fide hedge exemptions in the spot month. This discretion does not require any express designation by the exchange. Second, the Commission is modifying the proposed guidance to clarify that the guidance may be used when considering either an enumerated or non￾enumerated bona fide hedge exemption. Third, the Commission clarifies here that the guidance imposes no additional reporting requirements on market participants as the factors described in the guidance apply simply to the exchanges’ evaluation of the specific contract market when considering whether an exemption shall be granted subject to any condition or limitation in the spot month. Fourth, the Commission is eliminating the proposed factor which would have required a market participant to provide materials to the exchange supporting a classification of the position as a bona fide hedge. The Commission notes that the exchange application requirements already require market participants to provide relevant cash-market information. In addition, the Commission is amending language throughout the guidance to clarify that exchanges have flexibility when considering applying the guidance. For example, the Commission is removing proposed language that would have required the exchange to verify the market participant’s cash￾market exposure. The Commission is comfortable removing this language because the cash-market information is already required as part of the exemption application process described elsewhere in this release.351 Finally, the Commission is making technical edits to clarify that any delivery under a physical delivery contract is economically appropriate and the ‘‘most economical’’ source for that commodity.
ix. Guidance on Measuring Risk
a. Background—Measuring Risk In prior proposals, the Commission discussed the issue of whether to recognize as bona fide both ‘‘gross hedging’’ and ‘‘net hedging.’’ 352 While the Commission has previously expressed a willingness to consider gross hedging in certain limited circumstances, such proposals reflected the Commission’s longstanding preference for net hedging.353 That preference, although not stated explicitly in prior releases, has been underpinned by a concern that unfettered recognition of gross hedging could potentially allow for the cherry picking of positions in a manner that subverts the position limits rules.354 b. Summary of the 2020 NPRM— Measuring Risk The Commission recognized in the 2020 NPRM that additional flexibility to hedge on a gross basis may be warranted given that there are myriad ways in which organizations, particularly those not currently subject to Federal position limits, are structured and engage in commercial hedging practices.355 For example, in the energy space, it is common for market participants to use multi-line business strategies where risks are managed by trading desk or business line rather than on a global basis. Accordingly, in an effort to clarify its view on this issue, the Commission proposed guidance on gross hedging positions in paragraph (a) to Appendix B. The proposed guidance provided flexibility for a person to measure risk either on a net or gross basis, provided that: (A) The manner in which the person measures risk is consistent over time and follows the person’s regular, historical practice (meaning the person

356Better Markets at 60.
357ASR at 2; LDC at 2; NGSA at 3; COPE at 3; Chevron at 4; Suncor at 4. 358MGEX at 3; FIA at 14; CEWG at 4. 359Chevron at 4–5; Suncor at 4–5; CCI at 4–5; CEWG at 7–10. 360FIA at 14–15 (stating that risk managers decide on a case-by-case basis whether to hedge on a net or gross basis). 361 IFUS at 3. 362The guidance will help ensure the integrity of the position limits regime for the reasons discussed below in response to comments from Better Markets. The Commission thus disagrees with IFUS that the guidance is unnecessary, but agrees with IFUS that the proposed guidance reflects considerations currently taken by exchange staff. In particular, the guidance is consistent in many ways with the manner in which exchanges require their participants to measure and report risk, which is consistent with the Commission’s requirements with respect to the reporting of risk. For example, under § 17.00(d), futures commission merchants (‘‘FCMs’’), clearing members, and foreign brokers are required to report certain reportable net positions, while under § 17.00(e), such entities may report gross positions in certain circumstances, including if the positions are reported to an exchange or the clearinghouse on a gross basis. 17 CFR 17.00. The Commission’s understanding is that certain exchanges generally prefer, but do not require, their participants to report positions on a net basis. For those participants that elect to report positions on a gross basis, such exchanges require such participants to continue reporting that way, particularly through the spot period. Such consistency is a strong indicator that the participant is not measuring risk on a gross basis simply to evade regulatory requirements. 363Additionally, market participants seeking exemptions remain subject to a variety of recordkeeping requirements, including Commission regulation § 1.31, and the Commission will receive information about all exchange-granted exemptions, including cash-market information, via the monthly spreadsheet submission required by § 150.5(a)(4). 364The introductory language to the guidance provides in relevant part that a person’s ‘‘gross hedging positions may be deemed in compliance . . . provided that all applicable regulatory requirements are met, including that the position is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise and otherwise satisfies the bona fide hedging definition . . .’’ 365Under § 150.4, unless an exemption applies, a person’s positions must be aggregated with positions for which the person controls trading or for which the person holds a 10% or greater ownership interest. Commission Regulation § 150.4(b) sets forth several permissible exemptions from aggregation. See Final Rule, Aggregation of Positions, 81 FR 91454, (December 16, 2016). 366The Commission continues to believe that a gross hedge may be a bona fide hedge in circumstances where net cash positions do not necessarily measure total
risk exposure due to differences in the timing of cash commitments, the location of stocks, and differences in grades or types of the cash commodity. See, e.g., Bona Fide Hedging Transactions or Positions, 42 FR at 14834. However, the Commission clarifies that these may not be the only circumstances in which gross hedging may be recognized as bona fide. Like the analysis of whether a particular position satisfies is not switching between net hedging and gross hedging on a selective basis simply to justify an increase in the size of the person’s derivatives positions); (B) the person is not measuring risk on a gross basis to evade the limits set forth in proposed § 150.2 and/or the aggregation rules currently set forth in § 150.4; (C) the person is able to demonstrate (A) and (B) above to the Commission and/or an exchange upon request; and (D) an exchange that recognizes a particular gross hedging position as a bona fide hedge pursuant to proposed § 150.9 documents the justifications for doing so and maintains records of such justifications in accordance with proposed § 150.9(d).
c. Summary of the Commission
Determination—Measuring Risk The Commission is adopting the proposed guidance with modifications and clarifications to address commenter concerns. d. Comments—Measuring Risk While Better Markets expressed concern that gross hedging could be used to conduct an ‘‘end-run’’ around position limits,356 many other commenters expressed support for flexibility to hedge on a net or gross basis.357 Multiple commenters who expressed support for such flexibility also requested discrete changes to the proposed guidance and/or associated preamble, including: (i) Elimination of the requirement that exchanges document their justifications when allowing gross hedging; 358 (ii) clarification that gross hedging is permissible for both enumerated and non-enumerated hedges; 359 and (iii) clarification that market participants do not need to develop procedures setting forth when gross vs. net hedging is appropriate.360 Finally, IFUS requested that the Commission eliminate the proposed guidance on the grounds that the guidance reflects considerations currently taken by exchange staff when reviewing exemptions.361 e. Discussion of Final Rule—Measuring Risk The Commission continues to believe that the guidance on gross hedging is important because it will allow market participants to measure risk in the manner most suited to their particular circumstances, while preventing the use of gross hedging to subvert the Federal position limits regime.362 First, the Commission is eliminating proposed prong (D) of the guidance, which provided that an exchange that recognizes a gross position as a non￾enumerated bona fide hedge pursuant to § 150.9 documents the justifications for doing so. Prong (D) is unnecessary given that the Commission and exchanges have other tools for accessing such information. In particular, prong (C) of the guidance allows the Commission and exchanges to request, on an as￾needed basis, information about the manner in which market participants are measuring risk.363 To ensure the Commission and exchanges have access to sufficient information in light of the removal of prong (D), the Commission is expanding prong (C) to require that a person also demonstrate, upon request by the Commission or an exchange, justifications for measuring risk on a gross basis. Additionally, the proposed prong (D) reference to the non￾enumerated process in § 150.9 may have created confusion regarding the applicability of the proposed gross hedging guidance to enumerated hedges. Thus, the Commission is also revising the introductory language of the guidance to clarify that the guidance applies equally to enumerated and non￾enumerated bona fide hedges. Second, the Commission is clarifying that the guidance does not require market participants to develop written policies or procedures setting forth when gross or net hedging is appropriate. However, having such policies or procedures may help market participants demonstrate compliance with prongs (A), (B), and (C) of the guidance as
finalized herein. Finally, the Commission believes the concerns regarding subversion of position limits raised by Better Markets are already addressed by a combination of the guardrails in prongs (A)–(C) of the guidance as well as other Commission provisions, including some finalized herein. First, to receive recognition as a bona fide hedge, a position must comply with the bona fide hedging definition, regardless of whether the underlying risk is measured on a net or gross basis. A market participant thus may not use gross hedging to receive bona fide hedge treatment for a speculative position,364 and measuring risk on a gross basis to willfully circumvent or evade speculative position limits would potentially run afoul of the § 150.2(i)(2) anti-evasion provision finalized herein. Similarly, market participants must comply with the Commission’s aggregation requirements regardless of whether the participants are measuring risk on a net or gross basis.365 Second, concerns about cherry￾picking are addressed by the guidance. By focusing on consistency and historical practice with respect to the manner in which a person measures risk, the guidance enables market participants to measure risk on a gross basis when dictated by the nature of the exposure,366 but not simply when

the proposed bona fide hedge definition, the analysis of whether gross hedging may be utilized would involve a case-by-case determination made by the Commission and/or by an exchange using its expertise and knowledge of its participants. 367 If an entity’s (including a vertically-integrated entity’s) practice is to switch between net and gross hedging based on particular circumstances, and those circumstances do not involve evading position limits or aggregation requirements, then such switching would not run afoul of prong (A). See Section II.B.9. (discussing anti-evasion). 368 7 U.S.C. 6a(c)(2)(B). 369CEA section 4a(c)(2)(B)(i) recognizes as a bona fide hedging position a position that reduces risks attendant to a position resulting from a swap that was executed opposite a counterparty for which the transaction would qualify as a bona fide hedging transaction pursuant to’’ 4a(c)(2)(A). 7 U.S.C. 6a(c)(2)(B)(i). CEA section 4a(c)(2)(B)(ii) further recognizes as a bona fide hedging position a position that ‘‘reduce risks attendant to a position resulting from a swap that meets the requirements of 4a(c)(2)(A). 7 U.S.C. 6a(c)(2)(B)(ii). 370As described above, the Commission interprets the revised statutory temporary substitute test as limiting the Commission’s authority to recognize risk management positions as bona fide hedges unless the position is used to offset exposure opposite a bona fide hedging swap counterparty. 371While the 2020 NPRM’s proposed paragraph (2)(i) of the bona fide hedging definition in § 150.1 required the pass-through swap counterparty to be able to demonstrate the bona fides of the pass￾through swap upon request, the 2020 NPRM did not prescribe the manner by which the pass-through swap counterparty obtains the information needed to support such a demonstration. The 2020 NPRM noted that the pass-through swap counterparty could base such a demonstration on a representation made by the bona fide hedging swap counterparty, and such determination may be made at the time when the parties enter into the swap, or at some later point. The 2020 NPRM also stated that for the bona fides to pass-through as described above, the swap position need only qualify as a bona fide hedging position at the time the swap was entered into. utilizing gross hedging will yield a larger exposure than net hedging or will otherwise subvert Federal position limit or aggregation requirements. Use of gross or net hedging that is inconsistent with an entity’s historical practice, or a change from gross to net hedging (or vice versa), could be an indication that an entity is seeking to evade position limits regulations.367 Third, all market participants seeking to exceed Federal position limits must request hedge exemptions at the exchange level, regardless of whether they are measuring risk on a gross or net basis, and regardless of whether they are seeking an enumerated or non￾enumerated exemption at the Federal level. Under the Final Rule, the exchanges
would have an opportunity to confirm whether such participants’ use of gross hedging is consistent with the proposed guidance, including by reviewing detailed position information. The Commission will also have access to such information through a variety of means, including: Records maintained by market participants pursuant to Commission regulation § 1.31; the monthly spreadsheets that exchanges must submit to the Commission under § 150.5(a)(4) summarizing exchange￾granted exemptions and related cash￾market information; and the ability for the Commission to request such information directly from a market participant pursuant to prong (C) of the gross hedging guidance.
x. Pass-Through Swap and Pass￾Through Swap Offset Provisions
a. Background—Pass-Through Swap and Pass-Through Swap Offset As the Commission has noted above, CEA section 4a(c)(2)(B) 368 contemplates bona fide hedges that by themselves do not meet the criteria of CEA section 4a(c)(2)(A), but that are used to offset the swap exposure of a market participant (e.g., a dealer) to the extent that the swap exposure does satisfy CEA
section 4a(c)(2)(A) for such market
participant’s counterparty (e.g., a commercial end user).369 The Commission believes that, in affording bona fide hedging recognition for such offsets, Congress in CEA section 4a(c)(2)(B) intended to: (1) Encourage the provision of liquidity to commercial entities that are hedging physical commodity price risk in a manner consistent with the bona fide hedging definition; and (2) only recognize risk management positions as bona fide hedges when such positions are opposite a bona fide hedging swap counterparty.370 The Commission has proposed a pass-through swap provision in each of its position limits rulemakings since 2011. b. Summary of the 2020 NPRM—Pass￾Through Swap and Pass-Through Swap Offset The Commission proposed to implement the statutory pass-through swap provision in paragraph (2) of the bona fide hedging definition for physical commodities in proposed § 150.1. Proposed paragraph (2)(i) of the 2020 NPRM’s bona fide hedging definition addressed a situation where:
(a) A particular swap qualifies as a bona fide hedge by satisfying the temporary substitute test, the economically appropriate test, and the change in value requirement under proposed paragraph (1) of the bona fide hedging definition for one of the counterparties (the ‘‘bona fide hedging swap counterparty’’), but not for the other counterparty; and (b) the bona fide hedge treatment ‘‘passes through’’ from the bona fide hedging swap counterparty to the other counterparty (the ‘‘pass-through swap counterparty’’). The pass-through swap counterparty could be an entity that provides liquidity to the bona fide hedging swap counterparty (such as a swap dealer or a non-dealer that offers swaps). Under the 2020 NPRM, the pass￾through of the bona fide hedge treatment from the bona fide hedging swap counterparty to the pass-through swap counterparty was contingent on:
(1) The pass-through swap counterparty’s ability to demonstrate upon request from the Commission and/ or from an exchange that the pass￾through swap is a bona fide hedge; 371 and (2) the pass-through swap counterparty entering into a futures, option on a futures, or swap position in the ‘‘same physical commodity’’ as the pass-through swap to offset and reduce the price risk attendant to the pass￾through swap. If the two conditions above were satisfied, then the bona fides of the bona fide hedging swap counterparty ‘‘pass through’’ to the pass-through swap counterparty for purposes of recognizing as a bona fide hedge any futures position, option on futures position, or swap position entered into by the pass￾through swap counterparty to offset the pass-through swap (i.e., to offset and reduce the risks of the swap opposite the bona fide hedging swap counterparty). The pass-through swap counterparty could thus exceed Federal position limits for both: (1) The swap opposite the bona fide hedging swap counterparty, if applicable; and (2) an offsetting futures position, option on a futures position, or swap position in the same physical commodity, even though any such offsetting position on its own would not qualify as a bona fide hedge for the pass-through swap counterparty under proposed paragraph (1) of the bona fide hedging transaction or position definition. The Commission clarified that once the original bona fide pass-through swap is settled, positions held under the pass-through swap provision must be liquidated in an orderly manner in accordance with sound commercial practices. Further, under proposed § 150.3(d)(2), a pass￾through swap counterparty would be required to maintain any representation it relied on regarding the bona fide hedge status of the swap for at least two years. Proposed paragraph (2)(ii) of the bona fide hedging definition addressed a situation where a market participant who qualifies as a bona fide hedging swap counterparty (i.e., a counterparty with a position in a previously-entered into swap that qualified, at the time the

372Examples of a change in the bona fide hedging swap counterparty’s cash-market price risk could include a change in the amount of the commodity that the hedger will be able to deliver due to drought, or conversely, higher than expected yield due to growing conditions. 373See supra Section II.A.1.iii.a. (discussion of the temporary substitute test). 374CEWG at 4; CMC at 5–6; FIA at 3; ICE at 6– 7; ISDA at 12–13; and Shell at 2, 4–5. 375Shell at 4. 376NGSA at 8. 377Aggregation of Positions, 81 FR 91454 (Dec. 16, 2016). swap was entered into, as a bona fide hedge under paragraph (1)) seeks, at some later time, to offset that bona fide hedge swap position using a futures position, option on a futures position, or a swap in excess of Federal position limits. Such step might be taken, for example, to respond to a change in the bona fide hedging swap counterparty’s risk exposure in the underlying commodity.372 Proposed paragraph (2)(ii) would allow such a bona fide hedging swap counterparty to use a futures position, option on a futures position, or a swap in excess of Federal position limits to offset the price risk of the previously-entered into swap, even though the offsetting position itself does not qualify for that participant as a bona fide hedge under paragraph (1). The proposed pass-through exemption under paragraph (2) of the bona fide hedging or transaction definition would only apply to the pass￾through swap counterparty’s offset of the bona fide hedging swap, and/or to the bona fide hedging swap counterparty’s offset of its bona fide hedging swap. Any further offset would not be eligible for a pass-through exemption under paragraph (2) unless the offsetting position itself meets paragraph (1) of the proposed bona fide hedging definition. The Commission stated in the 2020 NPRM that it believes the pass-through swap provision may help mitigate some of the potential impact resulting from the removal of the ‘‘risk management’’ exemptions that are currently in effect.373
c. Summary of the Commission
Determination—Pass-Through Swap and Pass-Through Swap Offset; Related Recordkeeping Requirement; Cross￾Commodity Hedging Under the Pass￾Through Swap Provision The Commission is finalizing the pass-through swap and pass-through swap offset provision of the ‘‘bona fide hedging transaction or position’’ definition largely as proposed, with certain amendments in response to commenters’ requests discussed below:
First, the Commission is amending the 2020 NPRM’s proposed provision that would have required that the pass￾through swap counterparty demonstrate upon request that its offsetting position is attendant to a position resulting from a bona fide hedging pass-through swap. Instead, under the Final Rule, in order for a pass-through swap counterparty to treat a pass-through swap offset as a bona fide hedge, the pass-through swap counterparty must receive from the bona fide hedging swap counterparty a written representation that the pass￾through swap qualifies as a bona fide hedge. Under the Final Rule, the Commission is also amending the proposed regulatory text to add that the pass-through swap counterparty may rely in good faith on such written representation(s) made by the bona fide hedging swap counterparty, unless the pass-through swap counterparty has information that would cause a reasonable person to question the accuracy of the representation. Second, the Commission is adopting a revised paragraph (i)(B) of the bona fide hedging transaction or position definition in § 150.1 to delete the language in the pass-through swap provision that requires the offset to be in the ‘‘same physical commodity’’ as the pass-through swap. d. Comments—Application of Pass￾Through Swap Offset to Affiliates; Recordkeeping; Cross-Commodity Hedging Under the Pass-Through Swap Provision Comments generally fell into three categories, each discussed in turn below: (1) Application of pass-through swap offsets to affiliates; (2) pass￾through recordkeeping requirements; and (3) pass through swaps and cross￾commodity hedging. (1) Application of Pass-Through Swap Offset to Affiliates Commenters generally supported amending the bona fide hedge definition in accordance with the statutory language in CEA section 4a(c)(2)(B) to include a pass-through swap and pass￾through swap offset.374 Some commenters requested clarification on the application of the pass-through swap offset exemption to corporate affiliates. For example, Shell stated that an overly strict interpretation of ‘‘pass￾through swap counterparty’’ may limit the application of the pass-through swap offset exemption to only one entity within a corporate structure, and such entity may not be the affiliate entity used by the firm for its market￾facing activities or to execute transactions with exchanges to manage portfolios and position limits on an aggregated basis.375 NGSA similarly requested that the Commission’s interpretation of a pass-through swap counterparty apply to affiliates who may pass through their bona fide hedge position exemption to a market-facing, ‘‘treasury-affiliate’’ subsidiary within a corporate structure.376 (i) Discussion of Final Rule— Application of Pass-Through Swap Offset to Affiliates The Commission clarifies that within a group of entities that aggregates its positions under § 150.4 377 (such as an aggregated corporate group), any entity that is part of the aggregated group may avail itself
of the pass-through swap offset exemption. For example, the pass￾through swap offset provision extends to market-facing affiliates that are part of an aggregated group pursuant to § 150.4, such as treasury affiliate subsidiaries that firms commonly use to manage market-facing activities and portfolios. In such circumstances, recognition of a secondary pass-through swap transaction would not be necessary among an aggregated group because an aggregated group is treated as one person for purposes of Federal position limits. Separately, in response to commenter requests to allow secondary pass throughs (i.e., the further ‘‘pass￾through’’ of a pass-through exemption from one entity to another), the Commission clarifies that outside the context of an aggregated group, additional positions entered into as an offset of a pass-through swap would not be eligible for a pass-through exemption under paragraph (2) of the bona fide hedging definition unless the offsetting position itself meets the bona fide hedging definition. Accordingly, the bona fides of a transaction will not extend to a third-party through the pass￾through swap counterparty. For instance, if Producer A enters into an OTC swap with Swap Dealer B, and the OTC swap qualifies as a bona fide hedge for Producer A, then Swap Dealer B could be eligible for a pass-through exemption to offset that swap in the futures market. However, if Swap Dealer B offsets its swap opposite Producer A using an OTC swap with Swap Dealer C, Swap Dealer C would not be eligible for a pass-through exemption. (2) Pass-Through Swap Provision and Recordkeeping Commenters raised concerns with the 2020 NPRM’s requirements that the pass-through swap counterparty

378Cargill at 10; FIA at 11–12; CMC at 5; Shell at 6–7; ICE at 6–7; and ISDA at 11–12. 379 ICE at 6–7; Shell at 6. 380Cargill at 10; CMC at 5; FIA at 11–12; and ISDA at 11–12. 381The Commission believes that allowing market participants to determine the form and manner of how they will document the written representation by the bona fide hedging counterparty and allowing the pass-through swap counterparty to rely on such representation addresses NRECA’s comments on the pass-through swap provision recordkeeping obligations. NRECA at 23. 382FIA at 13 (quoting 85 FR at 11614); Shell at 5 (quoting 85 FR at 11614). document, and upon request, demonstrate the bona fides of the pass￾through swap.378 Commenters also requested that the Commission clarify the nature of the required documentation,379 and/or eliminate the required demonstration/documentation altogether, provided that the pass￾through swap counterparty has a legitimate, good-faith belief the swap is a bona fide hedge.380 (i) Discussion of Final Rule—Pass￾Through Swap Provision and Recordkeeping The Commission is amending the 2020 NPRM’s proposed provision that would have required that the pass￾through swap counterparty demonstrate upon request that its offsetting position is attendant to a position resulting from a bona fide hedging pass-through swap. For the Final Rule, the Commission is amending the pass-through swap provision’s regulatory text to clarify that in order for a pass-through swap counterparty to treat a pass-through swap as a bona fide hedge, the pass￾through swap counterparty must receive from the bona fide hedging swap counterparty a written representation that the pass-through swap qualifies as a bona fide hedge. The Commission is further amending the regulatory text to add that the pass-through swap counterparty may rely in good faith on such written representation(s) made by the bona fide hedging swap counterparty, unless the pass-through swap counterparty has information that would cause a reasonable person to question the accuracy of the representation. The Commission is adding the written representation requirement to enable to Commission to verify that only market participants with bona fide hedge exemptions are able to pass-through those exemptions to their swap counterparties. The Commission agrees with commenters who stated that the bona fide hedging counterparty is the suitable party to determine the bona fide hedging status of the pass-through swap. This is because the bona fide hedging status is determined based upon the bona fide hedging counterparty’s confidential, proprietary information. The Commission clarifies that the Commission is not requiring the bona fide hedging counterparty to share the proprietary, confidential information upon which it is basing its determination with its counterparties. Similar to the 2020 NPRM, this Final Rule does not prescribe the form or manner by which the pass-through swap counterparty obtains the written representation. The
Commission recognizes that the bona fide hedging counterparty may make such representations on a relationship basis through counterparty relationship documentation (e.g., through ISDA documentation or other forms of documentation as agreed upon by the parties) or on a transaction basis (e.g., through trade confirmations or in other forms as agreed upon by the parties).381 For example, if agreed to by the counterparties, the pass-through swap counterparty may rely on a written representation made by the bona fide hedging swap counterparty that an original pass-through swap and any subsequent pass-through swaps entered into by and between the bona fide hedging swap counterparty and the pass-through swap counterparty are bona fide hedges, unless the bona fide hedging swap counterparty provides written notice to the pass-through swap counterparty that a particular swap is not a bona fide hedge. The Commission believes providing market participants with flexibility recognizes counterparties’ ongoing relationships, while enabling the Commission to verify that the pass-through swap offset reduces the risks of a bona fide hedging swap. The Commission considered comments requesting the elimination of the pass-through swap provision recordkeeping requirement in § 150.3(d) based on arguments that requiring this recordkeeping was not practical. The Commission is not persuaded by those arguments as the recordkeeping requirements assist the Commission in verifying that the pass-through swap provision is only being utilized to offset risks arising from bona fide hedges. Accordingly, the Commission is finalizing the proposed pass-through swap recordkeeping requirement in § 150.3(d), subject to certain conforming changes to reflect amendments to the pass-through swap paragraph of the bona fide hedging definition. Since not all swaps entered into by a commercial entity would qualify as a bona fide hedge, the Commission declines commenters’ requests that a pass-through swap counterparty may reasonably rely solely upon the fact that the counterparty is a commercial end user and, absent an agreement between the counterparties, that the swap appears to be consistent with hedges entered into by end users in the same line of business. (3) Comments—Pass-Through Swap Provision and Cross-Commodity Hedging Commenters requested amending paragraph (i)(B) of the proposed bona fide hedge definition to permit the pass￾through swap provision to apply to cross-commodity hedges by eliminating the proposed requirement that the pass￾through swap offset must be in the ‘‘same physical commodity’’ as the pass￾through swap.382 (i) Discussion of Final Rule—Pass￾Through Swap Provision and Cross￾Commodity Hedging The Commission is adopting a revised paragraph (i)(B) of the bona fide hedging transaction or position definition in § 150.1 to delete the language in the pass-through swap provision that requires the offset to be in the ‘‘same physical commodity’’ as the pass￾through swap. The
Commission’s enumerated cross-commodity bona fide hedge adopted herein thus applies to all the enumerated hedges, as well as to the pass-through swap provision in the bona fide hedge definition. The revised regulatory text confirms the Commission’s intent to allow a pass￾through swap counterparty to utilize the pass-through swap offset exemption when the offset itself is a cross￾commodity hedge of the underlying pass-through swap, provided that such cross-commodity hedge meets all applicable requirements, including being substantially related to the commodity being offset.
2. ‘‘Commodity Derivative Contract’’
i. Summary of the 2020 NPRM—
Commodity Derivative Contract The Commission proposed to create the defined term ‘‘commodity derivative contract’’ for use throughout part 150 of the Commission’s regulations as shorthand for any futures contract, option on a futures contract, or swap in a commodity (other than a security futures product as defined in CEA
section 1a(45)).

383The Commission notes that these technical changes are to conform more closely to CEA section 4a(a), which refers to ‘‘contracts of sale of such commodity for future delivery’’ (7 U.S.C. 6a(a)(1) (emphasis added)), ‘‘contracts of sale for future delivery’’ (7 U.S.C. 6a(a)(2)(A) (emphasis added)), or similar phraseology. Accordingly, the Commission is making the technical change to refer to ‘‘futures contracts’’ rather than merely ‘‘futures’’ in order to more closely conform to the CEA’s terms. Similarly, CEA section 4a(a)(6) and section 1a(47) both refer to ‘‘swap’’ but not ’’ swap contract,’’ and so the Commission is making a similar conforming change. 384The selection of the proposed core referenced futures contracts is explained below in the discussions of § 150.2 at Section II.B. and the necessity finding infra at Section III.C. 385CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). In addition, CEA section 4a(a)(4) separately authorizes, but does not require, the Commission to impose Federal position limits on swaps that meet certain statutory criteria qualifying them as ‘‘significant price discovery function’’ swaps. 7 U.S.C. 6a(a)(4). The Commission reiterates, for the avoidance of doubt, that the definitions of ‘‘economically equivalent’’ in CEA section 4a(a)(5) and ‘‘significant price discovery function’’ in CEA
section 4a(a)(4) are separate concepts and that
contracts can be economically equivalent without serving a significant price discovery function. See 81 FR at 96736 (the Commission noting that certain commenters may have been confusing the two definitions). 386As discussed under the ‘‘referenced contract’’ definition, the term ‘‘referenced contract’’ includes core referenced futures contracts, linked cash￾settled futures contracts, and options thereon. For further discussion, see Section II.A.16. 387E.g., AQR at 10; FIA at 2–3; NCFC at 5; Suncor at 2; SIFMA AMG at 7; ISDA at 5; Chevron at 2; CEWG at 3; Citadel at 6. 388SIFMA AMG at 6–8; IATP at 19. 389CHS at 4–5; NCFC at 5; SIFMA AMG at 6–7; and ISDA at 5. 390Chevron at 2; FIA at 2, 3, 5; MFA/AIMA at 3; SIFMA AMG at 7; Suncor at 2; AQR at 10–11; COPE at 3; Better Markets at 4; 31; NCFC at 5; ISDA at 5; CEWG at 3; and Citadel at 6. 391 IATP at 19.
ii. Comments and Summary of the
Commission Determination— Commodity Derivative Contract No commenter addressed the proposed definition of ‘‘commodity derivative contract.’’ The Commission is adopting the definition as proposed, with some non-substantive technical modifications. These technical changes include the Final Rule’s reference to ‘‘futures contract’’ rather than merely ‘‘futures,’’ and ‘‘swap’’ rather than ‘‘swap contract’’ to conform to other uses in final § 150.1.383
3. ‘‘Core Referenced Futures Contract’’
i. Summary of the 2020 NPRM—Core
Referenced Futures Contract The Commission proposed to create the term ‘‘core referenced futures contract’’ as a short-hand phrase to refer to the futures contracts listed in proposed § 150.2(d) to which the Federal position limit rules would apply.384 As per the ‘‘referenced contract’’ definition described below, position limits would also apply to any contract that is directly or indirectly linked to, or that has certain pricing relationships with, a core referenced futures contract.
ii. Comments and Summary of the
Commission Determination—Core Referenced Futures Contract No commenter addressed the proposed definition of ‘‘core referenced futures contract.’’ The Commission is adopting the definition as proposed.
4. ‘‘Economically Equivalent Swap’’
i. Background—Economically
Equivalent Swap
The Commission’s existing regulations do not currently subject swaps to Federal position limits. Similarly, the Commission is unaware of any exchange-set limits for swaps on any of the 25 core referenced futures contracts. Pursuant to CEA section 4a(a)(5), when the Commission imposes position limits on futures and options on futures pursuant to CEA section 4a(a)(2), the Commission also must develop limits ‘‘concurrently’’ and establish limits ‘‘simultaneously’’ for ‘‘economically equivalent’’ swaps ‘‘as appropriate.’’ 385 As the statute does not define the term ‘‘economically equivalent,’’ the Commission must apply its expertise in construing such term, and, as discussed further below, must do so consistent with the policy goals articulated by Congress, including in CEA sections 4a(a)(2)(C) and 4a(a)(3).
ii. Summary of the 2020 NPRM—
Economically Equivalent Swap The 2020 NPRM proposed a new term, ‘‘economically equivalent swap.’’ Under the 2020 NPRM, a swap would be deemed an ‘‘economically equivalent swap’’ with respect to a referenced contract so long as the swap shared identical ‘‘material’’ contractual specifications, terms, and conditions with the referenced contract, and provided that any differences between the swap and referenced contract with respect to the following would be disregarded: (i) Lot size or notional amount; (ii) for a swap and relevant referenced contract that are both physically-settled, delivery dates diverging by less than one calendar day, except for a physically-settled natural gas swap which could diverge by less than two calendar days; and (iii) post￾trade risk management arrangements. Because the proposed ‘‘economically equivalent swap’’ definition referred to ‘‘referenced contracts,’’ under the 2020 NPRM’s approach a swap could be deemed to be ‘‘economically equivalent’’ to not just a core referenced futures contract, but also to any cash￾settled look alike futures contract or option on a futures contract.386
iii. Comments and Discussion of Final
Rule—Economically Equivalent Swap a. The Inclusion of Certain Swaps Within the Federal Position Limits Framework Many commenters generally supported the proposed definition.387 However, other commenters argued that swaps should not be subject to Federal position limits at all 388 or that subjecting swaps to position limits would increase costs without commensurate benefits.389 Nevertheless, several of these same commenters that stated that swaps should not be subject to Federal position limits also generally supported the proposed ‘‘economically equivalent swap’’ definition to the extent the Commission determined to include swaps within Federal position limits.390 Similarly, IATP stated that it was unclear why swaps are part of the 2020 NPRM given the Commission’s limited information on the swaps market.391 In response to these comments, as an initial matter, the Commission emphasizes that Congress has determined, through the Dodd-Frank Act’s amendments to CEA section 4a(a)(5), that the Commission must develop Federal position limits for economically equivalent swaps ‘‘concurrently,’’ and must establish such limits ‘‘simultaneously,’’ with the Federal position limits for futures and options on futures. Accordingly, the Commission has determined that, as a legal matter, a swap that qualifies as ‘‘economically equivalent’’ to any referenced contract must be included within the Federal position limits framework. While it did not oppose the proposed definition, NCFC expressed a similar concern with respect to the costs that the proposed definition could impose on commercial end users and small- and mid-sized FCMs. To mitigate these costs, NCFC suggested that any swap that qualifies for an exception to the Commission’s clearing requirement under existing § 50.50 of the Commission’s regulations should not be deemed to be an ‘‘economically equivalent swap.’’ According to NCFC, such ‘‘swap contracts already must meet the test ‘to hedge or mitigate commercial

392NCFC at 5–6.
393To the extent an FCM would not be able to qualify for a bona fide hedge, the Commission believes that excepting such swaps for purely financial firms would functionally have the same effect as maintaining the risk-management exemption, which Congress, through the Dodd￾Frank Act’s amendments to the CEA, has directed the Commission to eliminate. See Section IV.A.4.ii.a(1) (discussing elimination of the risk management exemption). 394The definition of ‘‘referenced contract’’ adopted herein will incorporate cash-settled look￾alike futures contracts and related options that are either (i) directly or indirectly linked, including being partially or fully settled on, or priced at a fixed differential to, the price of that particular core referenced futures contract; or (ii) directly or indirectly linked, including being partially or fully settled on, or priced at a fixed differential to, the price of the same commodity underlying that particular core referenced futures contract for delivery at the same location or locations as specified in that particular core referenced futures contract. See infra Section II.A.16. (definition of ‘‘referenced contract’’). The definition of ‘‘economically equivalent swap’’ adopted herein is a type of ‘‘referenced contract,’’ but, as discussed herein, the ‘‘economically equivalent swap’’ definition includes a relatively narrower class of swaps compared to other types of ‘‘referenced contracts,’’ such as look-alike futures and options on futures contracts, for the reasons discussed below. 395See infra Section II.B.10. (discussion of netting). 396See infra Section III. (necessity finding). 397For clarity, a swap may be eligible for treatment under the pass-through swap provision as either a pass-through swap or a pass-through swap offset, discussed above under the bona fide hedge definition, and not necessarily be deemed to be an ‘‘economically equivalent swap’’ since the pass￾through swap provision focuses on whether the swap serves as a bona fide hedge to one of the counterparties. Similarly, status as an economically equivalent swap is not dispositive for treatment under the pass-through swap provision. 398CME Group at 3; NEFI at 3; Better Markets at 31–33 (generally arguing that the ‘‘economically equivalent swap’’ and ‘‘referenced contract’’ definitions should be consistent to prevent loopholes). 399CME Group at 3–4; Better Markets at 33–34 (arguing that excluding penultimate swaps creates a technical delineation that is largely divorced from the economic realities relating to physical commodities underlying both contracts). risk,’ and are ‘not used for a purpose that is in the nature of speculation, investing, or trading,’’’ pursuant to § 50.50.392 The Commission understands NCFC’s concern, but believes NCFC’s alternative is unnecessary for two reasons. First, to the extent a swap described by NCFC would ‘‘hedge or mitigate commercial risk,’’ such swap likely would qualify for an enumerated bona fide hedge under
the Final Rule and therefore would not contribute to a commercial end-user’s net position for Federal position limits purposes.393 Second, commodity swaps are not required to be cleared under the Commission’s existing regulations, so determining whether the end-user clearing exemption applies is not necessarily a helpful proxy in determining whether a swap is ‘‘economically equivalent’’ for purposes of CEA section 4a(a)(5). b. Statutory Basis for the Commission’s ‘‘Economically Equivalent Swap’’ Definition In promulgating the Federal position limits framework, Congress instructed the Commission to consider several factors. First, CEA section 4a(a)(3)(B) requires the Commission when establishing Federal position limits, to the maximum extent practicable, in its discretion, to: (i) Diminish, eliminate, or prevent excessive speculation; (ii) deter and prevent market manipulation, squeezes, and corners; (iii) ensure sufficient market liquidity for bona fide hedgers; and (iv) ensure that the price discovery function of the underlying market is not disrupted. Second, CEA
section 4a(a)(2)(C) requires the
Commission to strive to ensure that any limits imposed by the Commission will not cause price discovery in a commodity subject to Federal position limits to shift to trading in foreign markets. Accordingly, any definition of ‘‘economically equivalent swap’’ must consider these statutory objectives. The Commission also recognizes that swaps may include customized (i.e., ‘‘bespoke’’) terms and are largely negotiated bilaterally and traded off￾exchange (i.e., OTC). In contrast, futures contracts have standardized terms and are generally exchange-traded or otherwise traded subject to the rules of an exchange. As explained further below, due to these differences between swaps and exchange-traded futures and related options, the Commission has preliminarily determined that Congress’s underlying policy goals in CEA section 4a(a)(2)(C) and (3)(B) are best achieved by adopting a narrow definition of ‘‘economically equivalent swap,’’ compared to the broader definition of ‘‘referenced contract.’’ 394 The ‘‘referenced contract’’ definition adopted in § 150.1 will include ‘‘economically equivalent swaps,’’ meaning any economically equivalent swap is subject to Federal position limits. Thus, a swap that is deemed economically equivalent would be required to be added to, and could be netted against, as applicable, an entity’s other referenced contracts in the same commodity for the purpose of determining one’s aggregate positions for Federal position limits.395 Any swap that is not deemed economically equivalent is not a referenced contract, and thus could not be netted with referenced contracts nor required to be aggregated with any referenced contract for Federal position limits purposes. The Commission has determined that the ‘‘economically equivalent swap’’ definition adopted herein supports the statutory objectives in CEA section 4a(a)(3)(B)(i) and (ii) by helping to prevent excessive speculation and market manipulation, including corners and squeezes, respectively, by: (1) Focusing on swaps that are the most economically equivalent in every significant way to the futures contracts and options on futures contracts for which the Commission deems position limits to be necessary; 396 and (2) limiting the ability of speculators to obtain excessive positions through netting. Any swap that meets the economically equivalent swap definition offers identical risk sensitivity to its associated referenced contract with respect to the underlying commodity, and thus could be used to effect a manipulation, benefit from a manipulation, or otherwise potentially distort prices in the same or similar manner as the associated futures contract or option on the futures contract. The Commission further has determined that the relatively narrow definition supports the statutory objective in CEA section 4a(a)(2)(C) by not causing price discovery to shift to trading in foreign markets.397
c. The Definition Balances Competing
Statutory Goals and Is Neither Too Broad Nor Too Narrow Several commenters argued that the proposed ‘‘economically equivalent swap’’ definition was too narrow and would therefore allow market participants to avoid Federal position limits.398 In particular, CME Group and Better Markets requested the general ‘‘referenced contract’’ definition that applies to futures and options on futures also apply to swaps.399 The Commission agrees with these commenters’ general concerns that the ‘‘economically equivalent swap’’ definition should not allow market participants to avoid Federal position limits. In fact, the Commission believes that the approach adopted in this Final Rule achieves that goal better than the approach proposed by Better Markets and CME Group, first and foremost by preventing parties from using netting of swaps to create large positions in the futures market. The Final Rule’s definition, compared to the relatively broader ‘‘referenced contract’’ definition that applies to futures and options on futures, better prevents inappropriate netting of market participants’ positions and advances Congress’s underlying policy goals in

400See Section II.B.10. (discussing the application of netting). 401For example, a broader economically equivalent swap definition would allow a market participant to hold a long position in a physically￾settled futures contract that exceeds the applicable Federal position limit levels by netting down with an ‘‘offsetting’’ short OTC swap, even if the swap has a different material term than the futures contract. That is, the ‘‘offsetting’’ short swap could have different delivery location(s), delivery date(s), quality differential(s), or even a different underlying commodity (depending on how broad the definition would be) than the physically-settled futures contract. Such an ‘‘offsetting’’ short swap would allow the market participant to more profitably engage in—and therefore more likely to successfully effect—a corner or squeeze in two respects. First, the ‘‘offsetting’’ short swap would allow the market participant to obtain a larger long futures position, thus creating a more dominant position on the long side of the market. Second, the ‘‘offsetting’’ short swap would allow the market participant to more easily ‘‘dispose’’ of or ‘‘bury the corpse’’ at smaller expense by enabling the market participant to deliver the underlying physical commodity, which the market participant received pursuant to its long physically-settled futures positions, under more profitable circumstances compared to the terms specified in the futures contract. For example, the ‘‘offsetting’’ short swap could allow the market participant to deliver the commodity (i.e., ‘‘dispose of’’ or ‘‘bury the corpse’’) at a different, more profitable (or at least for less of a loss) delivery location and/or wait for more favorable delivery dates with more favorable prices. 402See EU Commission Delegated Regulation (EU) 2017/591, 2017 O.J. (L 87). The applicable EU regulations define an OTC derivative to be ‘‘economically equivalent’’ when it has ‘‘identical contractual specifications, terms and conditions, excluding different lot size specifications, delivery dates diverging by less than one calendar day and different post trade risk management arrangements.’’ While the Final Rule’s ‘‘economically equivalent swap’’ definition is similar, the Final Rule’s definition requires ‘‘identical material’’ terms rather than merely ‘‘identical’’ terms. Further, the Final Rule’s definition excludes different ‘‘lot size specifications or notional amounts’’ rather than referencing only ‘‘lot size’’ since swaps terminology usually refers to ‘‘notional amounts’’ rather than to ‘‘lot sizes.’’ The Commission notes that SIFMA AMG argued in its comment letter that the Commission should adopt the economically equivalent swap definition proposed by the EU. See SIFMA AMG at 7. However, while the Commission’s definition will be similar to the EU’s definition, to the extent that the Commission’s definition differs from the EU’s by requiring ‘‘material identical’’ rather than merely ‘‘identical’’ terms, the
Commission discusses its reasoning below. Both the Commission’s definition and the applicable EU regulation are intended to prevent harmful netting. See European Securities and Markets Authority, Draft Regulatory Technical Standards on Methodology for Calculation and the Application of Position Limits for Commodity Derivatives Traded on Trading Venues and Economically Equivalent OTC Contracts, ESMA/ 2016/668 at 10 (May 2, 2016), available at https:// www.esma.europa.eu/sites/default/files/library/ 2016-668_opinion_on_draft_rts_21.pdf (‘‘[D]rafting the [economically equivalent OTC swap] definition in too wide a fashion carries an even higher risk of enabling circumvention of position limits by creating an ability to net off positions taken in on￾venue contracts against only roughly similar OTC positions.’’). The applicable EU regulator, the European Securities and Markets Authority (‘‘ESMA’’), released a ‘‘consultation paper’’ discussing the status of the existing EU position limits regime and specific comments received from market participants. According to ESMA, no commenter, with one exception, supported changing the definition of an economically equivalent swap (referred to as an ‘‘economically equivalent OTC contract’’ or ‘‘EEOTC’’). ESMA further noted that for some respondents, ‘‘the mere fact that very few EEOTC contracts have been identified is no evidence that the regime is overly restrictive.’’ See European Securities and Markets Authority, Consultation Paper MiFID Review Report on Position Limits and Position Management Draft Technical Advice on Weekly Position Reports, ESMA70–156–1484 at 46, Question 15 (Nov. 5, 2019), available at https://www.esma.europa.eu/ document/ consultation-paper-position-limits. CEA section 4a(a)(2)(C) and (3)(B) for the following three reasons. First, as the Commission stated above, it believes that a narrow ‘‘economically equivalent swap’’ definition that focuses on swaps with identical material terms and conditions reduces the ability of market participants to structure tangentially-related (i.e., non-identical) swaps simply to net down large, speculative positions in excess of Federal position limits in futures or options on futures. Because referenced contracts in the same commodity are generally netted,400 and because OTC swaps are bilaterally negotiated and customizable, market participants could structure swaps that do not necessarily offer identical risk or economic exposure or sensitivity simply to net down large positions in other referenced contracts. This is less of a concern with exchange-traded futures and related options, which are subject to exchange rules and oversight, and which have standardized terms, meaning they cannot be structured simply to net down large speculative positions in core referenced futures contracts. The Commission recognizes as reasonable the concerns of CME Group and Better Markets that a relatively narrow ‘‘economically equivalent swap’’ definition, compared to a
broader definition, could enable market participants to build excessive speculative risk exposure on one side of the market through OTC swap transactions. As discussed herein, the Commission is equally concerned that a broader definition similarly would permit a market participant to acquire a large position in a core referenced futures contract through inappropriate netting.401 However, the Commission believes that a broader ‘‘economically equivalent swap’’ definition as advocated by these commenters also would be more likely to lead to the additional harms discussed below. Accordingly, while the Commission shares the same ultimate concerns as CME Group and Better Markets with respect to protecting market integrity, the Commission has determined that the relatively narrow definition concurrently protects market integrity while also better supporting the statutory directives in CEA sections 4a(a)(2)(C) and 4a(a)(3)(B) as discussed below. Second, the Commission believes that the Final Rule’s definition addresses statutory objectives by focusing Federal position limits on those swaps that pose the greatest threat for facilitating corners and squeezes. That is, the Final rule addresses those swaps with similar delivery dates and identical material economic terms to futures and options on futures subject to Federal position limits while also minimizing market impact and liquidity for bona fide hedgers for other positions and transactions. For example, if the Commission were to adopt a broader economically equivalent swap definition that included delivery dates that diverge by one or more calendar days, perhaps by several days or weeks, a liquidity provider (including a market maker or a speculator) with a large portfolio of swaps may be more likely to be constrained by the applicable position limits and therefore may have incentive either to minimize its swaps activity or move its swaps activity to foreign jurisdictions, resulting in reduced liquidity. If there were many similarly situated market participants, the market for such swaps could become less liquid, which in turn could harm liquidity for bona fide hedgers. As a result, the Commission has determined that the relatively narrow scope of the Final Rule’s definition reasonably balances the factors in CEA section 4a(a)(3)(B)(ii) and (iii) by decreasing the possibility of illiquid markets for bona fide hedgers on the one hand while, on the other hand, focusing on the prevention of market manipulation during the most sensitive period of the spot month. Third, the ‘‘economically equivalent swap’’ definition helps prevent regulatory arbitrage as required by CEA
section 4a(a)(2)(C) and additionally will
strengthen international comity. For example, if the Commission instead adopted a broader definition, U.S.-based swaps activity could potentially migrate to other jurisdictions with a narrower definition, such as the European Union (‘‘EU’’). In this regard, the Final Rule’s definition is similar in certain ways to the EU definition for OTC contracts that are ‘‘economically equivalent’’ to commodity derivatives traded on an EU trading venue.402 The Commission’s ‘‘economically equivalent swap’’ definition thus furthers the statutory

403 7 U.S.C. 6a(a)(2)(C).
404 In developing its definition of an ‘‘economically equivalent swap,’’ the Commission, based on its experience, has determined that for a swap to be ‘‘economically equivalent’’ to a futures or option on a futures contract, the material contractual specifications, terms, and conditions must be identical. In making this determination, the Commission took into account, in regards to the economics of swaps, how a swap and a corresponding futures contract or option on a futures contract react to certain market factors and movements, the pricing variables used in calculating each instrument, the sensitivities of those variables, the ability of a market participant to gain the same type of exposures, and how the exposures move to changes in market conditions. 405For example, a cash-settled swap that either settles to the pricing of a corresponding cash-settled referenced contract, or incorporates by reference the terms of such referenced contract, would be deemed to be economically equivalent to the referenced contract. 406Commodity swaps, which generally are traded OTC, are less standardized compared to exchange￾traded futures and therefore must include these provisions in an ISDA master agreement between counterparties. While certain provisions, for example choice of law, dispute resolution mechanisms, or the general representations made in an ISDA master agreement, may be important considerations for the counterparties, the Commission would not deem such provisions material for purposes of determining economic equivalence under the Federal position limits framework for the same reason the Commission would not deem a core referenced futures contract and a look-alike referenced contract to be economically different, even though the look-alike contract may be traded on a different exchange with different contractual representations, governing law, holidays, dispute resolution processes, or other provisions unique to the exchanges. Similarly, with respect to day counts, a swap could designate a day count that is different than the day count used in a referenced contract but adjust relevant swap economic terms (e.g., relevant rates or payments, fees, basis, etc.) to achieve the same economic exposure as the referenced contract. In such a case, the Commission would not find such differences to be material for purposes of determining the swap to be economically equivalent for Federal position limits purposes. 407COPE at 4–5. 408 ICEA at 3–5; NRECA at 19–20, 27. 409SIFMA AMG at 7; PIMCO at 3; and ISDA at 5. 410Better Markets at 32. 411COPE at 4–5. 412 IECA at 3–5; NRECA at 1, 28. goals set forth in CEA section 4a(a)(2)(C), which requires the Commission to strive to ensure that any Federal position limits are ‘‘comparable’’ to foreign exchanges and will not cause ‘‘price discovery . . . to shift to trading’’ on foreign exchanges.403 Further, market participants trading in both U.S. and EU markets should find the Commission’s and the EU’s respective
definitions to be familiar, which may help reduce compliance costs for those market participants that already have systems and personnel in place to identify and monitor such swaps. Each element of the Final Rule’s definition, including the exclusions from the definition, and related comments, is discussed below. d. Scope of Identical Material Terms Under the Final Rule’s definition, only ‘‘material’’ contractual specifications, terms, and conditions are relevant to the analysis of whether a particular swap qualifies as an economically equivalent swap. The definition thus does not require that a swap be identical in all respects to a referenced contract in order to be deemed ‘‘economically equivalent’’ to that referenced contract. Under the Final Rule, ‘‘material’’ specifications, terms, and conditions are limited to those provisions that drive the economic value of a swap, including with respect to pricing and risk. Examples of ‘‘material’’ provisions include, for example: The underlying commodity, including commodity reference price and grade differentials; maturity or termination dates; settlement type (i.e., cash-settled versus physically-settled); and, as applicable for physically delivered swaps, delivery specifications, including commodity quality standards and delivery locations.404 In addition, a swap that either references another referenced contract, or incorporates by reference the other referenced contract’s terms, is deemed to share identical terms with the referenced contract and therefore qualifies as an economically equivalent swap.405 Any change in the material terms of such a swap, however, could render the swap no longer economically equivalent for Federal position limits purposes. The Commission recognizes that the material swap terms noted above are essential to determining the pricing and risk profile for swaps. However, there may be other contractual terms that also may be important for the counterparties in determining the pricing and transaction risks, but that are not necessarily ‘‘material’’ for purposes of position limits. For example, as discussed below, certain other terms, such as clearing arrangements or governing law, may not be material for the purpose of determining economic equivalence for Federal position limits, but may nonetheless affect pricing and risk or otherwise be important to the counterparties. Accordingly, the Commission generally considers those swap contractual terms, provisions, or terminology (e.g., ISDA terms and definitions) that are unique to swaps (whether standardized or bespoke) not to be material for purposes of determining whether a swap is economically equivalent to a particular referenced contract, even though such terms may be important when negotiating the swap or contribute to the valuation and/or the counterparties’ risk analysis. For example, the following swap provisions or terms are generally unique to swaps and/or otherwise not material, and therefore are not to be dispositive
for determining whether a swap is economically equivalent:
Designating business day or holiday conventions; day count (e.g., 360 or actual); calculation agent; dispute resolution mechanisms; choice of law; or representations and warranties.406 Because the Commission considers settlement type to be a material ‘‘contractual specification, term, or condition,’’ a cash-settled swap could only be deemed to be economically equivalent to a cash-settled referenced contract, and a physically-settled swap could only be deemed to be economically equivalent to a physically￾settled referenced contract. However, a cash-settled swap that initially did not qualify as ‘‘economically equivalent’’ due to no corresponding cash-settled referenced contract (i.e., no cash-settled look-alike futures contract) could subsequently become an ‘‘economically equivalent swap’’ if a cash-settled futures contract market were to develop. Commenters had various views on the treatment of cash-settled and physically￾settled swaps. First, certain commenters requested the Commission exclude physically-settled swaps from Federal position limits 407 or at least clarify the class of instruments that would be deemed to be physically-settled swaps.408 Second, other commenters requested the opposite—that the Commission instead exclude cash￾settled swaps from Federal position limits.409 Third, Better Markets argued that differentiating between cash-settled and physically-settled swaps by including settlement type as a material term would ‘‘incentivize[ ] speculative liquidity formation away from more liquid, more transparent, and more restrictive futures exchanges and to the swaps markets.’’ 410
i. Treatment of Physically-Settled Swaps
Under the Final Rule
Several commenters requested that the Commission exclude physically￾settled swaps from Federal position limits,411 or at least clarify the scope of physically-settled swaps that would be subject to Federal position limits.412 However, the Commission has determined that doing so is inconsistent with the statutory goals in CEA section

413As discussed under Section II.A.16., the ‘‘referenced contract’’ definition explicitly excludes any ‘‘trade options that meets the requirements of § 32.3’’ of the Commission’s regulations. Accordingly, a ‘‘trade option’’ is not subject to Federal position limits under the Final Rule, even if the trade option otherwise would satisfy the ‘‘economically equivalent swap’’ definition. 414 IECA at 3–5; NRECA at 1, 28. 415 IECA at 5. 416 IECA at 4–5. 417See CEA section 1a(47)(B)(ii). 418See NRECA at 18–19. For clarity, and as requested by NRECA, the Commission notes that these ‘‘rules and regulations’’ include the Commission’s trade option rule in § 32.3 as well as the Commission’s forward contract exclusion (i.e., the Brent forward exclusion) in 55 FR 39188–92 and 77 FR 48,208, 48,246 (August 13, 2012). 419NRECA at 16–20. 420For example, the Commission’s swap definition excludes certain capacity contracts and peaking supply contracts that qualify as forward contracts with ‘‘embedded volumetric optionality.’’ See Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48,246. Since such instruments are excluded from the Commission’s regulatory ‘‘swap’’ definition, they ipso facto will not be deemed to be ‘‘economically equivalent swaps’’ for purposes of Federal position limits. 421SIFMA AMG at 7; PIMCO at 3; and ISDA at 5 (PIMCO and ISDA each believe neither cash￾settled swaps nor cash-settled futures should be subject to position limits). 422Better Markets at 32 (stating that cash-settled swaps would be ‘‘essentially excluded from Federal position limits). 4a(a)(3)(B), especially the mandates to deter corners and squeezes and to ensure sufficient market liquidity for bona fide hedgers enumerated in CEA
section 4a(a)(3)(B)(ii) and (iii),
respectively. For example, excluding physically-settled swaps could potentially incentivize liquidity to move from physically-settled core referenced futures contracts to physically-settled swaps, which could both harm market liquidity for bona fide hedgers and also enable potential manipulators to accumulate large directional positions in physically-settled contracts to effect a corner and squeeze more easily. The Commission also received several comments requesting clarification regarding the Commission’s use of the term ‘‘physically-settled’’ swaps in the 2020 NPRM’s discussion of the definition. First, COPE opined that since the 2020 NPRM excluded trade options from the ‘‘referenced contract’’ definition, as a result, only cash-settled swaps would be deemed to be ‘‘economically equivalent swaps’’ for purposes of Federal position limits. The Commission confirms that under the Final Rule, any swap that qualifies as a trade option under § 32.3 is ipso facto not subject to Federal position limits.413 However, the Commission does not believe this means that only cash-settled swaps could be deemed ‘‘economically equivalent swaps.’’ For example, it is possible that a physically-settled swap may not qualify as a trade option, and if it were to otherwise satisfy the ‘‘economically equivalent swap’’ definition, it therefore would be subject to Federal position limits. Second, IECA and NRECA requested the Commission clarify what it means when using language referring to a ‘‘physically-settled swap,’’ and suggested the Commission instead refer to a ‘‘swap that allows for physical settlement or delivery.’’ 414 IECA stated that ‘‘using this term in place of the term ‘physically-settled swaps’ in the Commission’s proposed rulemaking will help to avoid confusion and misinterpretation in the future.’’ 415 While the Commission is adopting the ‘‘economically equivalent swap’’ definition as proposed (which includes the reference to ‘‘delivery date’’), the Commission agrees with IECA’s statement and confirms that when the Commission refers to ‘‘physically￾settled swaps’’ for the purpose of this definition, the Commission means a ‘‘swap that allows for physical settlement or delivery.’’ The Commission agrees with IECA that referring to ‘‘swaps that allow for physical settlement or delivery’’ does not alter the Commission’s intended meaning and may avoid confusion and misinterpretation.416 However, the Commission will continue to refer to ‘‘physically-settled swaps’’ in this preamble discussion because the Commission believes that changing the term for discussion purposes herein, compared to the 2020 NPRM’s preamble discussion, could raise additional confusion. Further, the Commission distinguishes between ‘‘cash-settled’’ and ‘‘physically-settled’’ referenced contracts throughout this preamble discussion, and using different terms to refer to swaps also could increase confusion. IECA was concerned that the term ‘‘physically-settled swap’’ could suggest that the
Commission was seeking to regulate a commodity for deferred delivery as a swap, which is otherwise excluded from the ‘‘swap’’ definition under CEA section 1a(47)(B)(ii). The Commission confirms that neither the use of ‘‘delivery dates’’ in the definition adopted herein nor the Commission’s use of the term ‘‘physically-settled swaps’’ for the purposes of this preamble discussion is intended to capture instruments that are excluded from the Commission’s jurisdiction either by statute (e.g., the CEA’s statutory exclusion of the sale of a non￾financial commodity for deferred shipment or delivery that is intended to be physically-settled) 417 or otherwise not deemed to be swaps pursuant to the Commission’s rules and regulations, interpretations, exemption orders, or other guidance.418 NRECA additionally requested the Commission clarify that the ‘‘economically equivalent swap’’ definition does not include any ‘‘customary commercial agreement, contract or transaction entered into as
part of operations (so long as it is
entered into off-facility and not involving a financial intermediary).’’ 419 As noted, to the extent such customary commercial agreement, contract, or transaction is exempt or excluded from either treatment as, or from the definition of, a ‘‘swap’’ by either statute or by the Commission’s rules and regulations, interpretations, exemption orders, or other guidance, the Commission does not deem it to be an economically equivalent swap or otherwise subject to Federal position limits under the Final Rule.420
ii. Treatment of Cash-Settled Swaps
Under the Final Rule
The Commission also received several comments discussing the treatment of cash-settled swaps under the proposed ‘‘economically equivalent swap’’ definition. Several financial industry commenters argued that the Final Rule should include only physically-settled swaps and should exclude cash-settled swaps, contending that cash-settled swaps do not affect price discovery or contribute to manipulation.421 The Commission disagrees with the commenters’ request to exclude cash￾settled swaps from the final definition, as doing so could incentivize liquidity to move from cash-settled referenced contracts to cash-settled OTC swaps, potentially harming the liquidity in the futures markets, including liquidity for bona fide hedgers. At the very least, the Commission does not want to preference OTC cash-settled swaps at the expense of corresponding exchange￾traded cash-settled futures or options on futures contracts. In contrast, Better Markets objected to the proposed definition because, according to Better Markets, under the 2020 NPRM cash-settled swaps would not be able to qualify as economically equivalent to a physically-settled core referenced futures contract.422 As Better Markets commented, distinguishing between cash-settled and physically￾settled swaps and futures contracts by

423 Id.
424The Commission notes that a swap could be deemed to be ‘‘economically equivalent’’ to any referenced contract, including cash-settled look￾alikes, and that the ‘‘economically equivalent swap’’ definition is not limited to core referenced futures contracts. 425FIA at 7–8. 426This aspect of the proposed definition would be irrelevant for cash-settled swaps since ‘‘delivery date’’ applies only to physically-settled swaps. 427A swap as so described that is not ‘‘economically equivalent’’ would not be subject to a Federal speculative position limit under the Final Rule. 428Better Markets at 32. 429As discussed under Sections II.A.16.iii.a(2)(iii) and II.B.3.vi.c, the Final Rule includes penultimate look-alike futures contracts and options on futures contracts as ‘‘referenced contracts.’’ Since futures contracts and options on futures contracts are standardized and exchange-traded, the Commission is less concerned about the potential for manipulation or evasion through inappropriate netting in this context. deeming settlement type (i.e., cash￾settled vs. physically-settled settlement) to be a material term would ‘‘incentivize[ ] speculative liquidity formation away from more liquid, more transparent, and more restrictive futures exchanges and to the swaps markets.’’ 423 The Commission believes Better Markets’ concern is mitigated since under the Final Rule, cash-settled swaps are subject to Federal position limits only if there is a corresponding (i.e., ‘‘economically equivalent’’) cash-settled futures contract or option on a futures contract.424 That is, cash-settled swaps are not subject to Federal position limits if there are no corresponding cash￾settled futures contracts or options on a futures contract. In these situations, if no corresponding futures contract or option thereon exists, then there is no liquidity formation in cash-settled futures and options on futures contracts with which a cash-settled swap would be competing for liquidity in the first place. FIA argued that cash-settled swaps should be subject to a separate spot￾month limit.425 However, as discussed in II.A.16.ii.a., the Commission has determined that FIA’s request to establish separate Federal position limits for cash-settled swaps is not, as a default rule, consistent with the statutory goals in CEA section 4a(a)(3)(B). In particular, separate position limits for cash-settled swaps would make it easier for potential manipulators to engage in market manipulation, such as ‘‘banging’’ or ‘‘marking’’ the close, by effectively permitting higher Federal position limits in cash-settled referenced contracts. For example, a market participant would be able to double its cash-settled positions by maintaining positions in both cash-settled futures and cash-settled economically equivalent swaps since positions in each class would not be required to be aggregated for purposes of Federal position limits. Furthermore, the Commission is concerned that class limits could impair liquidity
in futures contracts or swaps, as the case may be. For example, a market participant (including a market maker or speculator) with a large portfolio of swaps (or futures contracts) near a particular class limit would be assumed to have a strong preference for executing futures contracts (or swaps) transactions in order to maintain a swaps (or futures contracts) position below the class limit. If there were many similarly situated market participants, the market for such swaps (or futures contracts) could become less liquid. The absence of class limits should decrease the possibility of illiquid markets for referenced contracts subject to Federal position limits. Because economically equivalent swaps and the corresponding futures contracts and option on futures contracts are close substitutes for each other, the absence of class limits should allow greater integration between the economically equivalent swaps and corresponding futures and options markets for referenced contracts and should also provide market participants with more flexibility whether hedging, providing liquidity or market making, or speculating. e. Exclusions From the Definition of ‘‘Economically Equivalent Swap’’ As noted above, the Final Rule’s definition provides that differences in lot size or notional amount, delivery dates diverging by less than one calendar day (or less than two calendar days for natural gas), or post-trade risk management arrangements do not disqualify a swap from being deemed ‘‘economically equivalent’’ to a particular referenced contract.
i. Delivery Dates Diverging by Less Than
One Calendar Day
The definition as it applies to commodities (other than natural gas) encompasses swaps with delivery dates that diverge by less than one calendar day from that of a referenced contract.426 As a result, a swap with a delivery date that differs from that of a referenced contract by one calendar day or more is not deemed economically equivalent under the Final Rule, and such swaps are not required to be added to, nor permitted to be netted against, any referenced contract when calculating compliance with Federal position limits.427 For example, these include contracts commonly referred to as ‘‘penultimate’’ contracts, which settle on the trading day immediately preceding the final trading day of the corresponding core referenced futures contract. In response to the definition’s proposed exclusion of physically-settled penultimate swaps, Better Markets argued, among other things, that excluding penultimate swaps ‘‘creates technical delineations that are largely divorced from the economic realities relating to physical commodities underlying both contracts.’’ 428 In response, the Commission recognizes that while a penultimate contract may be significantly correlated to its corresponding spot-month contract, a penultimate contract does not necessarily offer identical economic or risk exposure to the spot-month contract, and depending on the underlying commodity and market conditions, a market participant may open itself up to material basis risk by moving from the spot-month contract to a penultimate contract.429 Accordingly, the Commission has determined that it is not appropriate ex ante to permit market participants to net such penultimate swap positions (other than natural gas) against their core referenced futures contract positions since such positions do not necessarily reflect equivalent economic or risk exposure. However, the Commission underscores that under the Final Rule, a penultimate swap still could be deemed economically equivalent to the extent that another penultimate referenced contract exists (assuming the swap and other referenced contract share identical material terms and the swap otherwise satisfies the economically equivalent swap definition). For example, if a core referenced futures contract has a corresponding penultimate futures contract that qualifies as a referenced contract, then a penultimate swap could be deemed economically equivalent to the penultimate futures contract. In such cases, the penultimate swap would be an economically equivalent swap subject to Federal position limits. The Commission acknowledges that liquidity could shift from the core referenced futures contract to penultimate swaps in cases where there are no corresponding penultimate futures contracts or options contracts (and therefore the swap would not be deemed to be an economically equivalent swap), but the Commission

430Similar to the Commission’s understanding of ‘‘material’’ terms, the Commission construes ‘‘post￾trade risk management arrangements’’ to include various provisions included in standard swap agreements, including, for example: Margin or collateral requirements, including with respect to initial or variation margin; whether a swap is cleared, uncleared, or cleared at a different clearing house than the applicable referenced contract; close-out, netting, and related provisions; and different default or termination events and conditions. 431 In addition, CEWG asked for clarification that the Commission would not extend certain preamble language in the 2020 NPRM addressing the exclusion of post-trade risk management arrangements from consideration when determining whether a swap is economically equivalent to support a finding that such swaps are actually off￾exchange futures contracts rather than swaps. CEWG at 31. The Commission confirms that excluding post-trade risk management arrangements from the determination that a swap is economically equivalent does not extend to supporting a finding that such swaps are actually off-exchange futures contracts rather than swaps. 432 In part to address historical concerns over the potential for manipulation of physically-settled natural gas contracts during the spot month in order to benefit positions in cash-settled natural gas contracts, the Commission discusses later in this release that the Final Rule will allow for a higher ‘‘conditional’’ spot month limit in cash-settled natural gas referenced contracts under the condition that market participants seeking to utilize such conditional limit exit any positions in physically￾settled natural gas referenced contracts. See infra
Section II.C.2.e. (proposed conditional spot month
limit exemption for natural gas).
433Such penultimate contracts include: ICE’s Henry Financial Penultimate Fixed Price Futures (PHH) and options on Henry Penultimate Fixed Price (PHE), and NYMEX’s Henry Hub Natural Gas Penultimate Financial Futures (NPG). believes that this concern is mitigated for two reasons. First, basis risk may exist between the penultimate swap and the referenced contract, and so the Commission believes that a market participant is less likely to hold a penultimate swap the greater the economic difference compared to the corresponding referenced contract. Second, the absence of penultimate futures contracts or options contracts may indicate lack of appropriate penultimate liquidity to hedge or offset one’s penultimate swap position and therefore may militate against entering into penultimate swaps. However, as discussed below, these reasons do not necessarily apply to penultimate swaps for natural gas.
ii. Post-Trade Risk Management
The Commission is specifically excluding differences in post-trade risk management arrangements, such as clearing or margin, in determining whether a swap is economically equivalent. As noted above, many commodity swaps are traded OTC and may be uncleared or cleared at a different clearing house than the corresponding referenced contract.430 Moreover, since the core referenced futures contracts, along with futures and options on futures contracts in general, are traded on DCMs with vertically integrated clearing houses, as a practical matter, it is unlikely that OTC commodity swaps, which historically have been uncleared, would share identical post-trade clearing house or other post-trade risk management arrangements with their associated core referenced futures contracts. However, to the extent an OTC commodity swap does share the same clearing arrangements as a corresponding referenced contract, the Commission does not want to incentivize the switching of cleared swap contracts to non-cleared status for the sake of avoiding Federal position limits. Therefore, if differences in post-trade risk management arrangements were sufficient to exclude a swap from economic equivalence to a core referenced futures contract, then such an exclusion could otherwise render ineffective the Commission’s statutory directive under CEA section 4a(a)(5) to include economically equivalent swaps within the Federal position limits framework. Accordingly, the Commission has determined that differences in post-trade risk management arrangements should not prevent a swap from qualifying as economically equivalent with an otherwise materially identical referenced contract.431
iii. Lot Size or Notional Amount
The last exclusion clarifies that differences in lot size or notional amount do not prevent a swap from being deemed economically equivalent to its corresponding referenced contract. The Commission’s use of ‘‘lot size’’ and ‘‘notional amount’’ refer to the same general concept. Futures terminology usually employs ‘‘lot size,’’ and swap terminology usually employs ‘‘notional amount.’’ Accordingly, the Commission is using both terms to convey the same general meaning, and in this context does not mean to suggest a substantive difference between the two terms. f. Economically Equivalent Natural Gas Swaps Market dynamics in natural gas are unique in several respects including, among other things, that ICE and NYMEX both list high volume contracts, whereas liquidity in other commodities tends to pool at a single DCM. As expiration approaches for natural gas contracts, volume tends to shift from the NYMEX NG core referenced futures contract that is physically-settled, to an ICE look-alike contract that is cash settled. This trend reflects certain market participants’ desire for exposure to natural gas prices without having to make or take delivery.432 NYMEX and ICE also list several ‘‘penultimate’’ cash￾settled referenced contracts that use the price of the physically-settled NYMEX contract as a reference price for cash settlement on the day before trading in the physically-settled NYMEX contract terminates.433 In order to recognize the existing natural gas markets, which include active and vibrant markets in penultimate natural gas contracts, the Final Rule includes a slightly broader economically equivalent swap definition for natural gas so that physically-settled swaps with delivery dates that diverge by less than two calendar days from an associated referenced contract could still be deemed economically equivalent and would be subject to Federal position limits. The Commission intends for this provision to prevent and disincentivize manipulation and regulatory arbitrage and to prevent volume from shifting away from the NYMEX NG core referenced futures contract to penultimate natural gas contract futures and/or penultimate swap markets in order to avoid Federal position limits. As noted above, the Commission is adopting a relatively narrow ‘‘economically equivalent swap’’ definition in order to prevent market participants from inappropriately netting positions in referenced contracts against swap positions further out on the curve. The Commission acknowledges that liquidity could shift to penultimate swaps as a result but believes that, with the exception of natural gas, this concern is mitigated since there may be basis risk between the penultimate swap and the referenced contract and lack of liquidity to specifically hedge or offset one’s penultimate swap position. However, compared to other contracts, the Commission believes that natural gas has a relatively liquid penultimate futures market that enables a market participant to hedge or set-off
its penultimate swap position. The Commission believes that without the exception to the economically equivalent swap definition for natural gas swaps, liquidity otherwise could be incentivized to shift from the NYMEX NG core referenced futures contract to penultimate natural gas swaps in order to avoid Federal position limits. CME Group stated in its comment letter that that these concerns also may apply to other energy core referenced

434CME Group at 4.
435MFA/AIMA at 9.
436NCFC at 6.
437As noted below, the Commission reserves the authority under the Final Rule to determine that a particular swap or class of swaps either is or is not ‘‘economically equivalent’’ regardless of a market participant’s determination. See infra Section II.A.4.iii.g. (discussion of commission determination of economic equivalence). As long as the market participant made its determination, prior to such Commission determination, using reasonable, good faith efforts, the Commission would not take any enforcement action for violating the Commission’s position limits regulations if the Commission’s determination subsequently differs from the determination of the market participant and the market participant comes into compliance with the applicable Federal position limits within a commercially reasonable time, as determined by the Commission in consultation with the market participant, and if applicable, any relevant exchange. 438As discussed under Section II.A.16. (definition of ‘‘referenced contract’’), the Commission is including a list of futures contracts and options on futures contracts that qualify as referenced contracts because such contracts are standardized and published by exchanges. In contrast, since swaps are largely bilaterally negotiated and OTC traded, a swap could have multiple permutations and any published list of economically equivalent swaps would be unhelpful or incomplete. 439See supra Section II.A.4. (discussing market participants’ discretion in determining whether a swap is economically equivalent). 440Better Markets at 34. 441Better Markets at 34. 442 ISDA at 10. 443 Id. futures contracts.434 As a result, the Commission intends to observe the behavior in these other markets in response to the Final Rule, but the Commission understands that the natural gas markets are likely the most sensitive to these concerns based on the size of the corresponding natural gas penultimate market. As a result, the Commission is adopting the proposed exception for natural gas, but emphasizes that it will continue to observe the other energy markets in order to determine the proper course of action with respect to those markets. g. Determination of Economic Equivalence The Commission is unable to publish a list of swaps it deems to be economically equivalent swaps because any such determination would involve a facts and circumstances analysis, and because most physical commodity swaps are created bilaterally between counterparties and traded OTC. Absent a requirement that market participants identify their economically equivalent swaps to the Commission on a regular basis, the Commission believes that market participants are best positioned to determine whether particular swaps share identical material terms with referenced contracts and would therefore qualify as ‘‘economically equivalent’’ for purposes of Federal position limits. However, the Commission understands that for certain bespoke swaps it may be unclear whether the facts and
circumstances demonstrate whether the swap qualifies as ‘‘economically equivalent’’ with respect to a referenced contract. MFA/AIMA requested that the Commission facilitate compliance by providing clearer guidance on terms that would be deemed material for determining which swaps are ‘‘economically equivalent.’’ 435 Similarly, NCFC requested that the Commission adopt a ‘‘safe harbor’’ under which ‘‘demonstrable good faith compliance with respect to inadvertent violations would not serve as the basis for an enforcement action.’’ 436 In response, the Commission emphasizes that under the Final Rule, a market participant will have the discretion to make such determination as long as the market participant makes a reasonable, good faith effort in reaching such determination. The Commission will not pursue any enforcement action for violating Federal position limits against such market participant with respect to such swaps positions as long as the market participant (i) performed the necessary due diligence and is able to provide sufficient evidence, if requested, to support its reasonable, good faith determination that the swap is or is not an economically equivalent swap and (ii) comes into compliance with the applicable Federal position limits within a commercially reasonable time, as determined by the Commission in consultation with the market participant, and if applicable, any relevant exchange.437 The Commission anticipates that this should provide a greater level of certainty to provide market participants with the comfort they need to enter into swap positions, in contrast to the alternative in which market participants would be required to first submit swaps to the Commission staff and wait for feedback before entering into swaps.438 While the Commission will primarily rely on market participants to initially determine whether their swaps meet the proposed ‘‘economically equivalent swap’’ definition, the Commission is adopting paragraph (3) to the ‘‘economically equivalent swap’’ definition to clarify that the Commission may determine on its own initiative that any swap or class of swaps satisfies, or does not satisfy, the economically equivalent definition with respect to any referenced contract or class of referenced contracts. The Commission believes that this provision will provide the ability to offer clarity to the marketplace in cases where uncertainty exists as to whether certain swaps would qualify (or would not qualify) as ‘‘economically equivalent,’’ and therefore would be (or would not be) subject to Federal position limits. Similarly, where market participants hold divergent views as to whether certain swaps qualify as ‘‘economically equivalent,’’ the Commission can ensure that all market participants treat OTC swaps with identical material terms similarly, and serve as a backstop in case market participants fail to properly treat economically equivalent swaps as such. As noted above, the Commission will not take any enforcement
action with respect to violating the Commission’s position limits regulations if the Commission disagrees with a market participant’s determination as long as the market participant is able to provide sufficient support to show that it made a reasonable, good faith effort in applying its discretion.439 Better Markets encouraged the release of additional guidance, suggesting that the Commission should delegate its authority to the DMO Director to issue guidance with respect to specific types of terms and conditions, and noting that the proposed process for the Commission to provide clarification is cumbersome.440 The Commission does not believe such delegation is necessary since Commission staff will continue to have the ability to offer informal guidance as well as formal no-action relief or interpretive guidance as needed. Better Markets also suggested that in order to ensure market participants conduct proper diligence, the Commission should clarify and codify that a swap dealer must include an
appendix in its reasonably-designed
policies and procedures under existing § 23.601 that identifies swaps ‘‘in any manner’’ referencing commodities subject to Federal position limits, regardless of whether the entity deems the swap to be ‘‘economically equivalent.’’ 441 In contrast, ISDA believed the obligations in § 23.601 impose costs that are overly burdensome and are not commensurate with benefits.442 ISDA stated that further guidance is necessary, but noted that even if further guidance is provided, the regime would still impose unnecessary burdens on swap dealers.443 ISDA requested the Commission consider including further

444 Id.
445See supra Section II.A.4. (discussing market participants’ discretion in determining whether a swap is economically equivalent). 446MFA/AIMA at 8 (requesting an additional 6– 12 months phase-in); SIFMA AMG at 9 (requesting an additional 6–12 months); Citadel at 9 (requesting an additional 6 months); and NGSA at 15–16 (requesting a general phase-in in order ‘‘to avoid the risk of harm to market recovery and to facilitate efficiency in market participant implementation’’). 447 IATP at 20. 448The 2020 NPRM stated, ‘‘Nonetheless, the Commission’s preliminary determination to permit exchanges to delay implementing Federal position limits on swaps could incentivize market participants to leave the futures markets and instead transact in economically-equivalent swaps, which could reduce liquidity in the futures and related options markets, although the Commission recognizes that this concern should be mitigated by the reality that the Commission would still oversee and enforce Federal position limits on economically equivalent swaps.’’ (emphasis added). 85 FR at 11680. 449The Commission also notes that IATP quotes from the cost-benefits considerations section of the 2020 NPRM, and thus the Commission’s focus on benefits and costs to exchanges and market participants in the excerpt quoted by IATP. 450FIA at 27–28; ISDA at 11; CHS at 6 (‘‘CHS believes that global organizations should be in a position to better understand the Commission’s approach with respect to the cross–border application of the rules to referenced contract positions. In CHS’s view, the proposal does not address whether and how global companies must aggregate referenced contract positions of affiliates around the world. As part of the retooling of the position limit regime, CHS urges the Commission to address such an application’’). 451For further discussion related to the position limits aggregation rules, see Section II.B.11. 452See Section II.B.11. clarification and/or interim relief for swap dealers.444 At this time, the Commission does not believe it is necessary to provide further detail with respect to § 23.601 because, as discussed above, the Commission will defer to a market participant’s determination as long as the market participant is able to provide sufficient support to show that it made a reasonable, good faith effort in applying its discretion.445 h. Phased Implementation of Federal and Exchange-Set Limits on Swaps As discussed under Section I.D., the Final Rule generally gives market participants until January 1, 2022 to comply with Federal position limits for the 16 non-legacy referenced contracts that are subject to Federal position limits for the first time under the Final Rule, and the Final Rule provides an extra year to comply with respect to economically equivalent swaps (January 1, 2023). After such compliance period, economically equivalent swaps will be subject to Federal position limits. In general, commenters supported a phase￾in for such swaps.446 As
discussed further under Section II.D.4.i, final § 150.5 requires exchanges to establish and enforce exchange-set limits for any referenced contract, which includes economically equivalent swaps. The Commission has determined to permit exchanges to delay enforcing their respective exchange-set position limits on economically equivalent swaps at this time. Specifically, with respect to exchange-set position limits on swaps, the Commission notes that in two years (which generally coincides with the compliance date for economically equivalent swaps), the Commission will reevaluate the ability of exchanges to establish and implement appropriate surveillance mechanisms to implement DCM Core Principle 5 and SEF Core Principle 6 with respect to economically equivalent swaps. However, after the swap compliance date (January 1, 2023), the Commission underscores that it will enforce Federal position limits in connection with OTC swaps. In response to the Commission’s proposal to allow exchanges to delay enforcing exchange-set position limits on swaps, IATP opined that the Commission’s decision to ‘‘[d]elay compliance with position limit requirement [sic] to avoid imposing costs on market participants makes it appear that the Commission is serving as a swap dealer booster, although swaps dealers are amply resourced to provide the necessary data to the exchanges and to the Commission. The Commission is bending over backward to avoid requiring swaps market participants from paying the costs of exchange trading.’’ 447 However, the Commission stated in the same section of the 2020 NPRM that it would enforce Federal position limits on swaps even though it would not require exchanges to enforce position limits on swaps until the Commission determines that exchanges have had the opportunity to access swaps data and establish appropriate swaps oversight infrastructure.448 Additionally, the Commission notes that physical commodity swaps are not subject to the Commission’s trade execution mandate to trade on exchanges, and the Commission understands that most physical commodity swaps are traded OTC rather than on exchanges. Accordingly, the Commission’s rationale for delaying the requirement that exchanges enforce position limits for swaps is based on exchanges’ existing capabilities and lack of insight into the OTC swaps markets, rather than for swap dealers who will remain subject to Federal position limits and Commission oversight.449
i. Cross-Border Application
Several commenters opined that the Commission should address the cross￾border application of the Final Rule, including in connection with OTC swaps.450 In response, the Commission makes three observations. First, as discussed above regarding the treatment of physically-settled swaps, if a swap is otherwise excluded from the Commission’s jurisdiction either by statute or pursuant to the Commission’s rules and regulations, interpretations, exemption orders, or other guidance, then the swap is not subject to Federal position limits. Accordingly, while related, this determination is distinct from the Final Rule’s position limits framework. Second, the Final Rule provides a compliance period for economically equivalent swaps until January 1, 2023. Accordingly, the Commission and its staff expect to continue to discuss the status of OTC swaps with market participants during this compliance period and provide additional feedback as necessary based on the individual facts and circumstances. Third, to a certain extent, some of the comments are more related to the position limit aggregation rules in existing § 150.4, which was finalized in 2016.451 Moreover, the 2020 NPRM did not discuss cross-border application, which is therefore beyond the scope of this rulemaking.
5. ‘‘Eligible Affiliate’’
i. Summary of the 2020 NPRM—Eligible
Affiliate
The Commission proposed to create the new defined term ‘‘eligible affiliate’’ to be used in proposed § 150.2(k). As discussed further in connection with § 150.2, an entity that qualifies as an ‘‘eligible affiliate’’ would be permitted to voluntarily aggregate its positions, even though it is eligible for an exemption from aggregation under § 150.4(b).452
ii. Comments and Summary of the
Commission Determination—Eligible Affiliate The Commission received no comments on this definition and is adopting it as proposed with certain technical changes. The Commission is making these technical changes to clarify the antecedent to the use of ‘‘its’’ and ‘‘such entity’’ in the definition. The Commission expects these changes will clarify the definition, but do not represent a substantive change in the meaning.

453See 17 CFR 150.1(d).
454 7 U.S.C. 1a(38).
455FIA at 26; MGEX at 2.
456 Id.
457MGEX at 2.
458FIA at 26.
459 Id.
460 Id.
461 7 U.S.C. 1a(19).
462As stated in this definition, the term ‘‘option’’ includes an option on a futures contract and an option that is a swap. 463MFA/AIMA at 11; CME Group at 14; FIA at 26; and IFUS Exhibit 1 RFC 23.
6. ‘‘Eligible Entity’’
i. Summary of the 2020 NPRM—Eligible
Entity
The Commission adopted a revised ‘‘eligible entity’’ definition in the 2016 Final Aggregation Rulemaking.453 The Commission proposed no further amendments to this definition, but is including the revised definition in this Final Rule given that the definitions for
part 150 are set forth or restated in
§ 150.1, thus ensuring that all defined terms are included. As noted above, the Commission also proposed a non￾substantive change to remove the lettering from this and other definitions that appear lettered in existing § 150.1, and to list the definitions in alphabetical order.
7. ‘‘Entity’’
i. Summary of the 2020 NPRM—Entity
The Commission proposed defining ‘‘entity’’ to mean ‘‘a ‘person’ as defined in section 1a of the Act.’’ 454 The term ‘‘entity,’’ not defined in existing § 150.1, is used throughout proposed part 150 of the Commission’s regulations.
ii. Comments—Entity
The Commission received two comments that recommended clarification of the proposed definition of ‘‘entity.’’ 455 FIA and MGEX contended the proposed definition of ‘‘entity’’ should not cross-reference the definition of ‘‘person’’ in section 1a of the CEA because the CEA defines ‘‘person’’ to include individuals (i.e., natural persons), as well as entities.456 MGEX argued that the definition of ‘‘entity’’ should not apply to individuals.457 FIA stated that, for purposes of the 2020 NPRM, it is unclear whether the cross-reference to the definition of ‘‘person’’ in section 1a of the CEA is meant to be limited to non-natural persons.458 If so, FIA recommended that the Commission amend the definition of ‘‘entity’’ to refer only to the non-natural persons listed in the definition of ‘‘person’’ under section 1a of the CEA.459 Further, FIA suggested that provisions in part 150 that are applicable to both natural and non￾natural persons should refer to ‘‘persons’’ and those that apply to only non-natural persons should refer to ‘‘entity.’’ 460
iii. Discussion of Final Rule—Entity
The Commission declines to adopt the commenters’ suggestion to carve ‘‘individuals’’ out of the proposed definition of ‘‘entity’’ or to otherwise differentiate between ‘‘person(s)’’ and ‘‘entity(ies)’’ for purposes of part 150 of the Final Rule. The proposed definition of ‘‘entity’’ expressly included ‘‘individuals’’ and neither commenter explained why individuals should be excluded from the definition and why the CEA’s statutory definition of ‘‘person’’ is inappropriate. Accordingly, the Commission is adopting the definition of ‘‘entity’’ as proposed.
8. ‘‘Excluded Commodity’’
i. Summary of the 2020 NPRM—
Excluded Commodity
The phrase ‘‘excluded commodity’’ is defined in CEA section 1a(19), but is not defined or used in existing part 150 of the Commission’s regulations. The Commission proposed including a definition of ‘‘excluded commodity’’ in
part 150 that references that term as
defined in CEA section 1a(19).461
ii. Comments and Summary of the
Commission Determination—Excluded Commodity No commenter addressed the proposed definition of ‘‘excluded commodity.’’ The Commission is adopting the definition as proposed.
9. ‘‘Futures-Equivalent’’
i. Background—Futures-Equivalent
The phrase ‘‘futures-equivalent’’ is currently defined in existing § 150.1(f) and is used throughout existing part 150 of the Commission’s regulations to describe the method for converting a position in an option on a futures contract to an economically equivalent amount in a futures contract. The Dodd￾Frank Act amendments to CEA section 4a, in part, direct the Commission to apply aggregate Federal position limits to physical commodity futures contracts and to swap contracts that are economically equivalent to such physical commodity futures contracts.
ii. Summary of the 2020 NPRM—
Futures-Equivalent
In order to aggregate positions in futures, options 462 on futures, and swaps for purposes of calculating compliance with the Federal position limits set forth in the 2020 NPRM, the Commission proposed adjusting position sizes to an equivalent position based on the size of the unit of trading of the relevant core referenced futures contract. The phrase ‘‘futures￾equivalent’’ is used for that purpose throughout the 2020 NPRM, including in connection with the ‘‘referenced contract’’ definition in proposed § 150.1. The Commission also proposed broadening the existing ‘‘futures￾equivalent’’ definition to include references to the proposed new term ‘‘core referenced futures contracts.’’ Additionally, with respect to options, the proposed ‘‘futures-equivalent’’ definition also provided that a participant that exceeds Federal position limits as a result of an option assignment would be allowed a one-day grace period to liquidate the excess position.
iii. Commission Determination—
Futures-Equivalent
The Commission is adopting the proposed definition of ‘‘futures￾equivalent’’ with one substantive modification: In addition to the 2020 NPRM’s grace period in connection with position limit overages dues to option assignments, under the Final Rule, the one-day grace period would also extend to an option position that exceeds Federal position limits as a result of certain changes in the option’s exposure to price changes of the underlying referenced contract, as long as the applicable option contract does not exceed such position limits under the previous business day’s exposure to the underlying referenced contract. This grace period does not apply on the last day of the spot month for the corresponding core referenced futures contract. As discussed further below, the Final Rule also includes several technical changes, including referring to an option’s ‘‘exposure’’ to price changes of the underlying referenced contract and eliminating references to an option’s ‘‘risk factors’’ and ‘‘delta coefficient.’’ As discussed below, the Commission believes these changes will add flexibility in assessing exposure to price changes of an option to the underlying futures contract and are not intended to reflect a substantive difference.
iv. Comments—Futures-Equivalent
Several commenters supported the proposed definition, including the one￾business-day grace period related to position limit overages due to options assignments.463 In addition to

464CME Group MRAN 1907–5 states that ‘‘[i]f a position exceeds position limits as a result of an option assignment, the person who owns or controls such position shall be allowed one business day to liquidate the excess position without being considered in violation of the limits. Additionally, if, at the close of trading, a position that includes options exceeds position limits when evaluated using the delta factors as of that day’s close of trading, but does not exceed the limits when evaluated using the previous day’s delta factors, then the position shall not constitute a position limit violation.’’ See CME Group Market Regulation Advisory Notice RA1907–5 (Aug. 2, 2019), available at: https://www.cmegroup.com/ content/dam/cmegroup/notices/market-regulation/ 2019/08/RA1907-5.pdf; IFUS Rule 6.13(a) similarly provides persons one business day to bring into position limits compliance any position that exceeds limits due to changes in the deltas of the options, or as the result of an option assignment. 465CME Group at 14. 466FIA at 7. 467FIA at 6–7. 468FIA at 7. 469See 17 CFR 150.1(e). 470 7 U.S.C. 6a(a)(2)(A) and (B). supporting the proposed definition, CME Group and ICE both supported expanding the proposed definition’s one business day grace period to include Federal position limit overages resulting from changes in the option’s delta coefficient, noting that such a change is consistent with their respective exchange rules.464 However, CME Group noted that exercising an in-the￾money option that results in a position over the position limit should be treated as a violation if the futures-equivalent position was over the position limit based on both the previous and current day’s delta.465 FIA sought clarification from the Commission on certain aspects of the proposed definition. FIA stated that it is unclear how a spread contract that qualifies as a referenced contract would be converted to a futures-equivalent position.466 FIA also requested the Commission clarify which calculation method applies to swaps and options that are swaps.467
v. Discussion of Final Rule—Futures￾Equivalent
The Commission agrees with CME Group and ICE that the one-business￾day grace period also should apply to position overages in connection with changes in the current day’s option’s exposure to price changes of the underlying referenced contract (e.g., option delta coefficient). The Commission understands that providing a one business day grace period for these situations is consistent with existing market practice. Further, consistent with CME Group’s comment, a market participant will not have a grace period if the market participant’s position also exceeded Federal position limits based on the previous day’s exposure (including option delta coefficient). To alleviate concerns about delivery and to help prevent corners and squeezes, this one-day grace period does not apply on the last trading day of the spot month of the option’s corresponding core referenced futures contract. Additionally, the Commission is eliminating references to an option’s ‘‘risk factor’’ and ‘‘delta co-efficient’’ and instead referring to an option’s ‘‘exposure’’ to price changes of the underlying referenced contract. The Commission understands that the term ‘‘exposure’’ in the present context is more commonly used by market participants. Accordingly, the Commission believes that the reference to an option’s ‘‘exposure’’ to price changes of the underlying referenced contract is the technically correct term to use over ‘‘risk factor’’ or ‘‘delta coefficient,’’ which are used in the existing ‘‘futures-equivalent’’ definition. However, the Commission’s use of ‘‘exposure’’ here is meant to encompass the concepts of ‘‘risk factor’’ and ‘‘delta co-efficient.’’ As a result, the Commission believes that this change provides flexibility, and is consistent with existing market practice and understanding, in assessing the exposure of an option to the price movement of futures contract and is not intended to reflect a substantive change. Additional technical changes include the Final Rule’s reference to ‘‘futures contract’’ rather than merely ‘‘futures’’ and ‘‘entity’’ rather than ‘‘participant’’ since the former terms conform to other uses in final § 150.1. The Final Rule also makes several technical changes in connection with the use of ‘‘computed’’ in the definition, and these changes are meant to clarify the meaning rather than imply a substantive change. With respect to FIA’s request for clarification regarding how a spread contract that qualifies as a referenced contract would be converted to a futures-equivalent position, the Commission recognizes the inherent challenge with converting a spread contract that qualifies as a referenced contract to a futures-equivalent position.468 The Commission expects that a market participant will adjust such a spread contract to a futures￾equivalent position consistent with existing exchange practice. With respect to FIA’s question regarding the calculation for swaps and options that are swaps, subparagraph (1) of the futures-equivalent
definition applies to an option that is a swap, and subparagraph (3) of the definition applies to a swap that is not an option.
10. ‘‘Independent Account Controller’’
i. Summary of the 2020 NPRM—
Independent Account Controller The Commission adopted a revised ‘‘independent account controller’’ definition in the 2016 Final Aggregation Rule.469 The Commission proposed no further amendments to this definition, but included that revised definition in the 2020 NPRM so that all defined terms appeared together.
11. ‘‘Long Position’’
i. Summary of the 2020 NPRM—Long
Position
The phrase ‘‘long position’’ is currently defined in § 150.1(g) to mean ‘‘a long call option, a short put option or a long underlying futures contract.’’ The Commission proposed to update this definition to apply to swaps and to clarify that such positions would be on a futures-equivalent basis. This provision would thus be applicable to options on futures and swaps such that a long position would also include a long futures-equivalent option on futures and a long futures-equivalent swap.
ii. Comments and Summary of the
Commission Determination—Long Position No commenter addressed the proposed definition of ‘‘long position.’’ The Commission is adopting the definition as proposed.
12. ‘‘Physical Commodity’’
i. Summary of the 2020 NPRM—
Physical Commodity
The Commission proposed to define the term ‘‘physical commodity’’ for position limits purposes. Congress used the term ‘‘physical commodity’’ in CEA sections 4a(a)(2)(A) and 4a(a)(2)(B) to mean commodities ‘‘other than excluded commodities as defined by the Commission.’’ 470 The proposed definition of ‘‘physical commodity’’ thus included both exempt and agricultural commodities, but not excluded commodities.
ii. Comments and Summary of the
Commission Determination—Physical Commodity No commenter addressed the proposed definition of ‘‘physical commodity.’’ The Commission is adopting the definition as proposed.

471Under CEA section 1a(47)(A), an option on a swap is deemed to be a swap.
13. ‘‘Position Accountability’’
i. Summary of the 2020 NPRM—
Position Accountability
Existing § 150.5 permits position accountability in lieu of exchange position limits in certain cases, but does not define the term ‘‘position accountability.’’ The proposed amendments to § 150.5 would allow exchanges, in some cases, to adopt position accountability levels in lieu of, or in addition to, position limits. The Commission proposed a definition of ‘‘position accountability’’ for use throughout proposed § 150.5 as discussed in greater detail in connection with proposed § 150.5.
ii. Comments and Summary of the
Commission Determination—Position Accountability No commenter addressed the proposed definition of ‘‘position accountability.’’ The Commission is adopting the definition as proposed with some non-substantive technical changes related to the numbering structure. The Commission is also changing the reference of ‘‘trader’’ to ‘‘entity’’ since ‘‘entity’’ is the proper defined term in § 150.1 under the Final Rule while ‘‘trader’’ is not a defined term under § 150.1.
14. ‘‘Pre-Enactment Swap’’
i. Summary of the 2020 NPRM—Pre￾Enactment Swap
The Commission proposed to create the defined term ‘‘pre-enactment swap’’ to mean any swap entered into prior to enactment of the Dodd-Frank Act of 2010 (July 21, 2010), the terms of which had not expired as of the date of enactment of the Dodd-Frank Act. As discussed in connection with proposed § 150.3 later in this release, if acquired in good faith, such swaps would be exempt from Federal position limits, although such swaps could not be netted with post-effective date swaps for purposes of complying with spot month Federal position limits.
ii. Comments and Summary of the
Commission Determination—Pre￾Enactment Swap No commenter addressed the proposed definition of ‘‘pre-enactment swap.’’ The Commission is adopting the definition as proposed. For further discussion of the treatment of pre￾existing positions, see Sections II.B.7. and II.C.7.
15. ‘‘Pre-Existing Position’’
i. Summary of the 2020 NPRM—Pre￾Existing Position
The Commission proposed to create the defined term ‘‘pre-existing position’’ to reference any position in a commodity derivative contract acquired in good faith prior to the effective date of a final Federal position limit rulemaking. Proposed § 150.2(g) would set forth the circumstances under which Federal position limits would apply to such positions.
ii. Comments and Summary of the
Commission Determination—Pre￾Existing Position No commenter addressed the proposed definition of ‘‘pre-existing position.’’ The Commission is adopting the term ‘‘pre-existing position’’ as proposed. However, the Commission did receive comments related to the treatment of certain pre-existing positions. For further discussion of the treatment of pre-existing positions and related comments, see Sections II.B.7. and II.C.7.
16. ‘‘Referenced Contracts’’
i. Background—Referenced Contracts
When a futures contract expires, all open futures contract positions in such contract are settled by physical delivery (which the Commission refers to as ‘‘physically-settled’’ herein) or cash settlement (which the Commission refers to as ‘‘cash-settled’’ herein), depending on the contract terms set by the exchange. The nine legacy agricultural contracts currently subject to Federal position limits are all physically-settled futures contracts. Deliveries on physically-settled futures contracts are made through the exchange’s clearinghouse, and the delivery of the physical commodity must be consummated between the buyer and seller per the exchange rules and contract specifications. On the other hand, other futures contracts are ‘‘cash￾settled’’ because they do not involve the transfer of physical commodity ownership and require that all open positions at expiration be settled by a transfer of cash to or from the clearinghouse based upon the final settlement price of the contracts. Market participants may use the settlement price of physically delivered futures contracts as a key benchmark to price cash-market contracts and other derivatives, including so-called ‘‘look￾alike’’ cash-settled derivatives (which could be futures, options on futures, or swaps contracts). Look-alike cash￾settled derivative contracts are explicitly linked to the physically￾settled futures contracts. A look-alike cash-settled derivatives contract has nearly identical specifications as its physically-settled counterpart, but rather than calling for delivery of the underlying commodity at expiration, the contract terms require a cash payment at expiration. Each look-alike cash-settled derivatives contract is linked by design to its respective physically-settled contract in that the final settlement value of the cash-settled contract is defined as the final settlement price of the physically-settled contract in the same commodity for the same month. Additionally, other types of cash-settled derivatives contracts may be similar to a look-alike, but the final settlement price of such contracts are determined based on a basis, or differential, to the final settlement price of the corresponding physically-settled contract. Existing § 150.2 applies Federal position limits to the nine legacy agricultural contracts as well as to options thereon on a futures-equivalent basis, but the existing Federal framework does not include provisions to apply Federal position limits to contracts that are linked in some manner to the nine physically-settled legacy agricultural contracts. As a result, the existing Federal position limits do not apply to any cash-settled contracts, including both look-alike contracts and contracts that settle at a basis or differential to a physically-settled contract, options on such cash-settled contracts, or swaps.471 As the Final Rule is expanding the position limits framework to cover certain cash-settled futures contracts, options on such futures contracts,
and economically equivalent swaps, for the reasons discussed below, the Commission is adopting the proposed defined term ‘‘referenced contract,’’ with modifications, for use throughout final part 150 to refer to derivatives contracts that are subject to Federal position limits.
ii. Summary of the 2020 NPRM—
Referenced Contracts
The 2020 NPRM proposed a new ‘‘referenced contract’’ definition that included:
(1) Any core referenced futures contract listed in proposed § 150.2(d); (2) any other contract (futures or option on futures), on a futures-equivalent basis with respect to a particular core referenced futures contract, that is directly or indirectly linked to the price of a core referenced futures contract, or

472A penultimate contract is a cash-settled contract in which trading ceases one business day prior to the settlement date of the corresponding referenced contract with which the penultimate contract is linked. With respect to penultimate contracts, the 2020 NPRM stated that ‘‘Federal limits would apply to all cash-settled futures and options on futures contracts on physical commodities that are linked in some manner, whether directly or indirectly, to physically-settled contracts subject to Federal limits.’’ Further to this general statement, the 2020 NPRM provided a footnote example of a penultimate contact that, because it cash-settles directly to a core referenced futures contract, the 2020 NPRM explained would therefore be included as a referenced contract. 85 FR at 11619. 473 85 FR at 11620. 474 85 FR at 11619. For further discussion of the Final Rule’s treatment of the netting of positions, see Section II.B.10. 475The Commission is providing a clarifying technical change to the ‘‘referenced contract’’ definition in that the final definition refers to ‘‘an option on a futures contract’’ instead of ‘‘options on a futures contract’’ as proposed by the 2020 NPRM, to make clear the original intent of the Commission in the 2020 NPRM that a single option would qualify as a referenced contract. 476Prong (ii) encompasses physically-settled contracts that do not directly reference a core referenced futures contract but that are nonetheless based on the same commodity and delivery location as the core referenced futures contract. 477For example, the 2020 NPRM noted that ICE’s Henry Penultimate Fixed Price Future, which cash￾settles directly to NYMEX’s Henry Hub Natural Gas core referenced futures contract, would be considered a referenced contract. 85 FR at 11620. that is directly or indirectly linked to the price of the same commodity underlying a core referenced futures contract (for delivery at the same location(s)); and (3) any economically equivalent swap, on a futures-equivalent basis. The proposed referenced contract definition thus included look-alike futures contracts and options on look￾alike futures contracts (as well as economically equivalent swaps with respect to such look-alike contracts), contracts of the same commodity but different sizes (e.g., mini contracts), and penultimate contracts.472 Additionally, the 2020 NPRM explicitly excluded from the ‘‘referenced contract’’ definition: (1) Commodity index contracts; (2) location basis contracts; (3) swap guarantees; and (4) trade options that satisfy the requirement of § 32.3 of the Commission’s regulations. Further, while not in the proposed regulatory text, the Commission indicated in the preamble to the 2020 NPRM that a contract for which the settlement price is based on an index published by a price reporting agency (a ‘‘PRA index contract’’) that surveys cash-market transactions (even if the cash-market practice is to price at a differential to a futures contract) was not deemed to
be ‘‘directly or indirectly’’ linked to a referenced contract, and thus that such PRA index contract also was excluded from the ‘‘referenced contract’’ definition under the 2020 NPRM.473 Under the 2020 NPRM, a position in a referenced contract in certain circumstances could be netted with a position in another referenced contract, including a core referenced futures contract, which as noted above is a type of referenced contract under the proposed ‘‘referenced contract’’ definition. However, to avoid evasion and undermining of the Federal position limits framework, the 2020 NPRM prohibited the use of non-referenced contracts to net down positions in referenced contracts.474 Finally, the 2020 NPRM also stated that, in an effort to provide clarity to market participants regarding which exchange-traded contracts would be subject to Federal position limits, the Commission anticipated publishing, and regularly updating, a list of such contracts on its website. The Commission thus proposed to publish a ‘‘CFTC Staff Workbook,’’ which would provide a non-exhaustive list of referenced contracts and may be helpful to market participants in determining categories of contracts that would fit within the referenced contract definition.
iii. Commission Determination—
Referenced Contracts
The Commission is adopting the proposed ‘‘referenced contract’’ definition with the modification discussed below, as well as one technical change that the Commission believes clarifies the ‘‘referenced contract’’ definition, consistent with the intent of the 2020 NPRM.475 Like the proposed definition, the final ‘‘referenced contract’’ definition also includes (1) the 25 core referenced futures contracts, (2) futures and options on futures that are directly or indirectly linked either to (i) the price of any other core referenced futures contract or (ii) the same commodity underlying a core referenced futures contract,476 and (3) economically equivalent swaps. Like the 2020 NPRM, the final definition also explicitly excludes certain contract types so that these contracts may not be netted against referenced contract positions for purposes of Federal position limits (but also are not aggregated with referenced contract positions). However, in addition to the proposed definition’s exclusions of commodity index contracts, location basis contracts, swap guarantees, and trade options that satisfy the requirement of § 32.3 of the Commission’s regulations, the Final Rule is modifying the 2020 NPRM’s definition to also exclude two additional contract types: ‘‘outright price reporting agency index contracts’’ and ‘‘monthly average pricing contracts.’’ This section will address the following issues, including related comments, in the following order:
a. Cash-settled referenced contracts and contracts that are ‘‘directly or indirectly’’ linked to a core referenced futures contract, including cash-settled and penultimate contracts; b. Contracts explicitly excluded from the ‘‘referenced contract’’ definition; and
c. The list of referenced contracts and
the related Commission staff ‘‘Workbook.’’ The Commission is also adopting ‘‘economically equivalent swaps,’’ as proposed, as part of the final ‘‘referenced contract’’ definition. However, the Commission addresses the final ‘‘economically equivalent swap’’ definition in Section II.A.4. a. Contracts That Are Directly or Indirectly Linked to a Core Referenced Futures Contract (1) Summary of the 2020 NPRM— Linked to a Core Referenced Futures Contract Paragraph (1) of the proposed referenced contract definition provided that a contract would qualify as a referenced contract if it is a core referenced futures contract, or, with respect to a particular core referenced futures contract, if it is directly or indirectly linked, including being partially or fully settled on, or priced at a fixed differential to, the price of either (i) the core referenced futures contract itself or (ii) the same commodity underlying the core referenced futures contract for delivery at the same location or locations as specified in the core referenced futures contract’s specifications. As the Commission explained in the 2020 NPRM, this provision included a cash-settled ‘‘look￾alike’’ future or an option thereon.477 (2) Summary of the Commission Determination—Linked to a Core Referenced Futures Contract The Commission is adopting as final the language in paragraph (1) of the proposed ‘‘referenced contract’’ definition. Accordingly, under paragraph (1) of the final ‘‘referenced contract’’ definition, referenced contracts include a core referenced

478Clause (ii) of this description comprises as referenced contracts any physically-settled contracts that are linked to the same commodity for delivery at the same location underlying a core referenced futures contract. The Commission believes as failure to do so could undermining this Federal position limits framework through the creation of physically-settled look-alike contracts by other exchanges. For example, without including clause (ii) above, an exchange could create a physically-settled look-alike contract, but unlike the existing core referenced futures contract, this new contract would be outside the Federal position limits framework. Such an outcome would clearly disadvantage the exchange with the existing core referenced futures contract and harm liquidity for bona fide hedgers by possibly dividing liquidity among competing physically-settled look-alike contracts, as well as provide significant incentives for market participants to trade contracts that subvert this Federal position limits framework. 479CME Group at 3–4; FIA at 7–8; ICE at 12; ISDA at 3–5; NEFI at 3; PIMCO at 3; and SIFMA AMG at 4–6. 480CME Group at 3–4 (stating ‘‘CME Group believes that economically and substantively alike contracts should be accorded the same regulatory treatment to prevent artificial distortions from opening doors for manipulators or shifting one market’s liquidity to another. . . In this regard, as noted above, CME Group recommends that the Commission apply similar provisions to both cash￾settled and physically settled swaps.’’). 481CME Group at 6. 482 Id. 483NEFI at 3. 484PIMCO at 3; SIFMA AMG at 4–6. 485 ISDA at 3–5. 486FIA at 7–8; ICE at 12. 487FIA 7–8. 488 ICE at 3, 15 (also arguing that cash-settled limits should apply per exchange, rather than across exchanges); FIA at 7–8; For further discussion on the Commission’s determination to generally apply Federal position limits on an aggregate basis across exchanges, see Section II.B.11. 489As discussed below, as an initial matter, the Commission interprets CEA section 4a(a)(6) as requiring aggregate Federal position limits across exchanges. However, as discussed below, the Commission is providing an exception to this general rule for natural gas pursuant to the Commission’s exemptive authority under CEA
section 4a(a)(7). For further discussion, see Sections
II.B.3.vi. and II.B.11.
490FIA at 7, stating ‘‘Section 4a(a)(3)(B)(ii) directs the Commission to set limits as appropriate ‘to deter and prevent market manipulation, squeezes and corners.’ ’’ The Commission notes that FIA provides an example as to the effect of squeezes and corners for cash-settled contracts—only two out of three of the points for which the Commission should set an appropriate limit—the third point, which is overlooked by the commenter (market manipulation) is also a statutory objective, and for the reasons described below, provides a basis for including cash-settled contracts within the Federal position limits regime. 491The Commission has previously found that traders with positions in a cash-settled contract may have an incentive to manipulate and undermine price discovery in the physically-settled contract to which the cash-settled contract is linked. See, e.g., CFTC v. Parnon Energy Inc. et al., No. 1:11-cv￾03543 (S.D.N.Y. 2014) (alleging defendants amassed sufficient quantity of physical WTI while contemporaneously purchasing cash-settled WTI derivatives positions on NYMEX and ICE with the intent to profit on those positions by manipulating the price of the physically-settled WTI contract). futures contract, and any cash-settled futures and options on futures that are directly or indirectly linked either to (i) the price of any other core referenced futures contract or (ii) the same commodity underlying a core referenced futures contract for delivery at the same location or locations as specified in the core referenced futures contract’s specifications.478 Further, in response to the comments described below, the Commission is reaffirming that penultimate futures contracts and options thereon qualify as referenced contracts because they satisfy paragraph (1) of the referenced contract definition under the Final Rule. (i) Comments—Cash-Settled Referenced Contracts Commenters provided differing opinions as to whether linked cash￾settled futures and related options should be subject to Federal position limits.479 CME Group and NEFI supported the Commission’s proposal to subject these contracts to Federal position limits.480 According to CME Group, absent parity between cash and physically-settled contracts, artificial distortions on one side of the market could occur due to manipulations on the other side of the market, regulatory arbitrage, or liquidity drain.481 CME Group warned that, ultimately, a lack of parity could undermine the statutory goals of position limits.482 NEFI agreed, arguing that applying Federal position limits to cash-settled contracts is essential to guard against manipulation by a trader who holds positions in both physically-settled and cash-settled contracts for the same underlying commodity.483 Other commenters disagreed. PIMCO and SIFMA AMG contended that cash￾settled referenced contracts should not be subject to Federal position limits at all because cash-settled contracts do not introduce the same risk of market
manipulation. They argued that subjecting cash-settled referenced contracts to Federal position limits would reduce market liquidity and depth in these instruments.484 ISDA argued that cash-settled contracts should not be included in an immediate Federal position limits rulemaking, and should instead be deferred until the Commission has adopted Federal limits with respect to physically-delivered spot month futures contracts, and after which the Commission should revisit Federal limits for cash-settled contracts.485 FIA and ICE suggested that Federal position limits for cash-settled referenced contracts should apply per DCM (rather than in aggregate across DCMs).486 FIA additionally suggested setting a separate Federal spot-month position limit for economically equivalent swaps.487 FIA and ICE further argued that limits for cash￾settled referenced contracts should be higher relative to Federal position limits for physically-settled referenced contracts. They similarly posited that cash-settled referenced contracts are ‘‘not subject to corners and squeezes’’ and higher limits for cash-settled contracts will ‘‘ ‘ensure market liquidity for bona fide hedgers.’ ’’ 488 (ii) Discussion of Final Rule—Cash￾Settled Reference Contracts As a general matter, the Commission does not agree with FIA and ICE that Federal position limits should be applied at the DCM level instead of in the aggregate for the reasons discussed below under Section II.B.11.489 Further, the Commission addresses FIA’s contention that the Commission should impose a separate Federal spot￾month position limit for economically equivalent swaps in further detail above under Section II.A.4.iii. While the Commission acknowledges commenter views to the effect that cash￾settled contracts are less susceptible to effectuating corners and squeezes,490 the Commission is of the view that generally speaking, linked cash-settled and physically-settled contracts form one market, and thus should be subject to Federal position limits. Because the settlement price of a physically delivered futures contract is used as a price benchmark in many other derivative and cash-market contracts, a change in the futures settlement price can affect the value of a trader’s overall portfolio of derivative and cash-market positions. Accordingly, the link between physically delivered futures and their cash-settled derivative counterparts can create incentives for manipulation. This view is informed by the Commission’s experience overseeing derivatives markets, where the Commission has observed that it is common for the same market participant to arbitrage linked cash- and physically-settled contracts, and where the Commission has also observed instances where linked cash￾settled and physically-settled contracts have been used together as part of an attempted manipulation.491 Applying position limits to both physically delivered futures and linked cash-settled contracts, including their look-alike cash-settled derivative
contracts, reduces a trader’s incentive and ability to manipulate futures markets. Without position limits on

492For example, manipulated ‘‘higher’’ futures contract prices in a cash-settled futures contract can spill over into ‘‘lower’’ prices for a physically￾settled futures contract through arbitrage trades between the two futures contracts. Traders arbitraging between the cash-settled and physically￾settled futures contracts would short the ‘‘higher priced’’ cash-settled and long the ‘‘lower-priced’’ physically-settled futures contracts until an equilibrium price is achieved. However, that equilibrium price may be distorted due to the manipulation occurring in the higher priced cash￾settled contract, and as a result the physically￾settled contract would have an artificially higher price relative to the actual cash-market price of the underlying commodity. That higher futures contract price would then act as a false price signal to the underlying cash commodity market, thus incentivizing owners of the cash commodity to increase supplies at the delivery points for the physically-settled futures contract. Accordingly, excessive speculation in cash-settled derivative contracts can produce excessive supplies at delivery points and a disruption of liquidity, price discovery, and distribution of the underlying cash commodities. 493As discussed above, the Commission adopted an ‘‘economically equivalent swap’’ definition that is narrower than the class of futures contracts and option on futures contracts that would be included as referenced contracts. For further discussion of the ‘‘economically equivalent swap’’ definition, see
Section II.A.4.
494 ICE at 13–14.
495 ISDA at 9; SIFMA AMG at 10–11. both types of futures contracts, traders could amass a substantial position in the cash-settled look-alike contract and benefit their position by manipulating the settlement price of the physically delivered futures contracts. Additionally, the absence of position limits on look-alike cash-settled derivative contracts would enable traders to manipulate a particular cash commodity price to benefit their cash￾settled derivatives position. For example, where market conditions create a shortage of a particular commodity, that shortage should increase the price of the commodity. If markets are functioning properly, the price of the physically delivered futures contract will also increase. A trader could acquire a massive long position in the look-alike cash-settled derivative contract and profit by bidding up the cash price of an already scarce cash commodity. Thus, the trader’s cash commodity positions would directly affect the price of the physically-settled futures contract and its look-alike cash￾settled derivative. The trader’s strategy to purchase the cash commodity and bid up its price could cause the value of the look-alike cash-settled derivative position to increase because of the direct links connecting all three markets (i.e., the positions in the underlying cash commodity, the physically-settled derivative, and the cash-settled derivative). Accordingly, the absence of position limits in look-alike cash-settled derivative contracts would enable traders to effectively influence and manipulate cash prices to benefit their cash-settled derivatives position, which could impact the price of the physically￾settled futures contract as well. Additionally, excessive speculation in cash-settled derivative contracts can affect the price of the physically-settled futures contract and the underlying cash commodity and therefore harm the price discovery function of the underlying markets. That is, futures prices are determined by immediate cash commodity prices, and therefore the relationship between cash and futures prices also depends, in part, on the storage location of a particular commodity in relation to its delivery point, and should result in the correct amount of a particular commodity available at the delivery point. Thus, excessive speculation in cash-settled derivative contracts can produce excessive supplies at delivery points and a disruption of the flows of money and commodities exchanged.492 Accordingly, the Commission considers cash-settled referenced contracts to be generally economically equivalent to physical-delivery contracts in the same commodity. In the absence of position limits, an entity with positions in both the physically delivered and cash-settled contracts may have an increased ability and an increased incentive to manipulate one of these contracts to benefit positions in the other contract. As such, the Commission believes that it is essential to apply Federal position limits to
cash￾settled futures and options on futures that are directly or indirectly linked to physically-settled contracts in order to further the statutory objective in CEA
section 4a(a)(3)(B)(iv) to deter and
prevent market manipulation.
Furthermore, the Commission has determined that including futures contracts and options on futures contracts that are indirectly linked to the core referenced futures contract under the ‘‘referenced contract’’ definition will help prevent the evasion of position limits through the creation of an economically equivalent futures contract or option on a futures contract, as applicable, that does not directly reference the price of the core referenced futures contract. Such contracts that settle to the price of a referenced contract but not to the price of a core referenced futures contract, for example, would be indirectly linked to the core referenced futures contract.493 However, a physically-settled derivative contract with a settlement price that is based on the same underlying commodity at a different delivery location would not be linked, directly or indirectly, to the core referenced futures contract. By way of example, a hypothetical physically￾settled futures contract on ultra-low sulfur diesel delivered at L.A. Harbor instead of the NYMEX ultra-low sulfur diesel core referenced futures contract delivered in New York Harbor would not be linked, directly or indirectly, to the core referenced futures contract because NYMEX’s ultra-low sulfur diesel futures contract does not include L.A. Harbor as a possible delivery point. Therefore, the contract specification price of the hypothetical physically delivered L.A. Harbor contract would reflect the L.A. Harbor market price for ultra-low sulfur diesel and not the NYMEX contract’s price. (iii) Comments and Discussion of Final Rule—Penultimate Contracts Are a Subset of Cash-Settled Referenced Contracts Penultimate contracts are a type of cash-settled futures contract (or an option thereon) that settles the day before the corresponding physically￾settled futures contract. Penultimate contracts therefore share the same determinative attributes as the other cash-settled look-alike referenced contracts discussed above, including the fact that the settlement price of a penultimate contract is linked to the corresponding physically-settled core referenced futures contract. In response to certain commenters requesting that the Commission exclude penultimate contracts from the 2020 NPRM’s proposed ‘‘referenced contract’’ definition (discussed below), the Commission is affirming that penultimate contracts, as a type of linked cash-settled look-alike contracts, fall within the Final Rule’s ‘‘referenced contract’’ definition. Commenters were split as to whether these penultimate contracts should be included within the ‘‘referenced contract’’ definition. ICE argued that penultimate contracts, and specifically its penultimate cash-settled natural gas contract, should be excluded from position limits for several reasons, including that its natural gas penultimate contract is economically distinct from the NYMEX NG core referenced futures contract and has no ability to impact settlement of that core referenced
futures contract.494 SIFMA AMG and ISDA broadly concurred with this position.495 In contrast, CME Group supported the inclusion of penultimate contracts within the definition of

496CME Group at 3–4 (arguing that ‘‘economically and substantively alike contracts should be accorded the same regulatory treatment to prevent artificial distortions from opening doors for manipulations or shifting one market’s liquidity to another.’’). 497 ICE at 14. 498 Id. 499Commission review of these contracts as of August 4, 2020, based on data submitted to the Commission pursuant to part 16 of the Commission’s regulations. 500The six near-month contracts reviewed by the Commission are as follows: Sep20, Oct20, Nov20, Dec20, Jan21, and Feb21, for each of NYMEX NG, H, and PHH. The Commission does not compare the spot-day price on the last day of trading of the NYMEX NG contract with the penultimate PHH contract since by definition the PHH contract settles on the penultimate day—that is, PHH settles on the day before NYMEX NG’s last day of trading and therefore there is no PHH price to compare against the NYMEX NG price on NYMEX NG’s last day of trading. 501The Commission notes that the further definition of parameters regarding a commodity index contract is responsive to the Better Markets comment letter suggesting such additional clarifications. Better Markets at 34. 502See infra Section II.B.10. (discussion of netting). 503AGA at 9; CHS at 2; FIA at 2; ICE at 10–11; NCFC at 2. 504AGA at 9; ICE at 10. referenced contract.496 As the Commission outlined above, its ‘‘one market’’ view applies to cash-settled contracts that are linked in some manner to physically-settled contracts. Penultimate futures contracts (including options thereon), as a type of linked cash-settled contract, have the same relation to their physically-settled counterparts as discussed above for other linked cash-settled contracts. The Commission therefore is applying Federal position limits to all of these instruments. In support of its view that penultimate contracts should not be subject to Federal position limits, ICE offered the example of the Henry Hub LD1 (‘‘H’’) futures contract (which has an exchange-set spot-month position limit) and the Henry Hub Penultimate (‘‘PHH’’) futures contract (which has exchange-set position accountability), stating that these contracts trade side￾by-side, and that there has been no evidence of a migration to the penultimate contract due to the presence of an accountability level rather than a hard spot-month position limit. According to ICE, this suggests that the Commission need not be concerned about an arbitrage opportunity between the two.497 However, in further support of its argument that penultimate contracts should not be subject to Federal position limits, ICE suggested that penultimate contracts ‘‘empirically’’ are not economically the same as the last day contract, as demonstrated by settlement prices.498 To that end, the Commission reviewed the settlement prices of NYMEX NG (the physically settled natural gas core referenced futures contract), H (the ICE LD1 natural gas contract cash-settled to the NYMEX NG), and PHH (the
ICE natural gas penultimate contract cash-settled to the NYMEX NG).499 Contrary to the empirical assertion made by ICE, the prices of the six near-month contracts for each of the contracts described above settled at identical prices on the relevant penultimate day for all contracts at all months.500 As reinforced by this observation, the Commission agrees with the commenter that the penultimate contract is tightly correlated (and trades side-by-side) with the cash-settled contract, as well as being demonstrated here, with the physically settled futures contract. However, it is not in spite of this tight correlation, but rather because of it, that the Commission considers these contracts to form one market, and as such, raises the importance of Federal position limits for these instruments. As noted above, the Commission believes that Federal position limits should apply to all contracts covered by the Final Rule’s ‘‘referenced contract’’ definition, including all varieties of linked cash-settled contracts, such as linked penultimate contracts, given the linkages between the physically-settled contract, the cash-settled contract (including penultimate contracts), and the underlying cash-market commodity, and the incentives and opportunities for market manipulation that those linkages create. b. Exclusions From the Referenced Contract Definition (1) Summary of the 2020 NPRM— Exclusions From the Referenced Contract Definition In the 2020 NPRM, paragraph (3) of the proposed ‘‘referenced contract’’ definition explicitly excluded: (1) A location basis contract; (2) a commodity index contract; (3) a swap guarantee; and (4) a trade option that meets the requirements of Commission regulation § 32.3. The 2020 NPRM also included guidance in proposed Appendix C setting forth additional clarification regarding the types of contracts that would qualify as either a location basis contract or a commodity index contract for purposes of the proposed exclusions from the ‘‘referenced contract’’ definition. (2) Summary of the Commission Determination—Exclusions From the Referenced Contract Definition The Commission is adopting paragraph (3) of the 2020 NPRM’s proposed ‘‘referenced contract’’ with the following changes. In addition to excluding the contracts mentioned above, the Final Rule is modifying paragraph (3) to additionally exclude ‘‘outright price reporting agency index contracts’’ and ‘‘monthly average pricing contracts’’ from the ‘‘referenced contract’’ definition. To the extent a contract fits within one of the excluded contracts in paragraph (3), such contract is not a referenced contract, is not subject to Federal position limits, and could not be used to net down positions in referenced contracts (but also is not required to be added to referenced contract positions when determining compliance with Federal position limits). In order to clarify the types of contracts that qualify as location basis contracts and commodity index contracts, and thus are
excluded from the ‘‘referenced contract’’ definition, the Commission also is adopting, with modifications described below, the guidance with respect to these instruments in Appendix C to part 150 of the Commission’s regulations. This guidance includes information to help define the parameters of the terms ‘‘location basis contract’’ and ‘‘commodity index contract.’’ 501 To the extent a particular contract fits within this guidance, such contract would not be a referenced contract, would not be subject to Federal position limits, and could not be used to net down positions in referenced contracts.502 Unlike the 2020 NPRM, the final guidance in
Appendix C will also include additional
information regarding the definition of the terms ‘‘outright price reporting agency index contracts’’ and ‘‘monthly average pricing contracts.’’ Comments on these topics, and the Commission’s responses, are set forth below. (3) Comments—Exclusions From the Referenced Contract Definition On balance, commenters were generally supportive of the 2020 NPRM’s proposed exclusions from the referenced contract definition.503 (i) Location Basis Contracts Commenters that provided an explicit opinion about location basis contracts were unanimously supportive of the Commission excluding such contracts from the definition of a referenced contract.504

505Better Markets at 34, 46; IATP at 7–8 (citing studies which they believe demonstrate that commodity index trading harms commercial hedgers). 506 ICE at 2; PIMCO at 5. 507Better Markets at 46. 508 IATP at 7–8 (citing David Frenk and Wallace Turbeville, ‘‘Commodity Index Traders: Boom and Bust in Commodity Prices,’’ Better Markets, October 2011, at 15). https://bettermarkets.com/sites/ default/files/Better%20Markets%20Commodity%20 Index%20Traders%20and%20Boom-Bust%20in %20Commodities%20Prices.pdf. 509 Industrial Energy at 3–4, suggesting a ban on natural gas commodity index contracts, which functionally equates to a Federal position limit of zero, or alternatively a limit to not exceed the current percentage of the physical market. 510PIMCO at 5. 511AGA at 8; CCI at 2; EPSA at 3–4; NGSA at 4; NRECA at 17; CEWG at 4; Chevron at 3; CHS at 2; FIA at 2; NCFC at 2; NGSA at 4; and Suncor at 3. 512CHS at 2; FIA at 2; NCFC at 2, offering general support for excluding swap guarantees, but not providing a specific rationale for doing so. 513FIA at 6; ICE at 10–11. 514CME Group at 13. 515 ICE at 12; see also FIA at 4 (recommending that the spread transaction definition should be expanded to exempt additional, commonly used spreads). For further discussion on the ‘‘spread transaction’’ definition, see Section II.A.20. 516See infra Section II.B.10. (discussion of netting). 517 85 FR at 11620. (ii) Commodity Index Contracts Commenters were divided, however, regarding the exclusion of commodity index contracts. Better Markets and IATP opposed the exclusion,505 while ICE and PIMCO supported it.506 Better Markets concurred with the view expressed by the Commission in the 2020 NPRM that commodity index contracts should not be permitted to net down referenced contract positions, but in lieu of the Commission’s proposal to exclude commodity index contracts as referenced contracts, Better Markets suggested in the alternative that the Commission adopt individual limits for commodity index contracts for persons also involved in physically-settled contracts on physical commodities serving as a constituent in the applicable index.507 IATP cited several studies, including one published by Better Markets, contending that commodity index contracts have price impacts that are detrimental to commercial hedgers.508 IECA stated that the passive speculation provided by commodity index contracts is harmful to the price discovery function of the market.509 In contrast, PIMCO argued in favor of the exclusion for commodity index contracts, contending that commodity index contracts are useful tools for investors looking for broad-based portfolio hedging or to take a view on price trends in the commodity markets.510 (iii) Trade Options All commenters offering a specific opinion regarding trade options unanimously supported the exclusion of trade options from the definition of referenced contract.511 (iv) Swap Guarantees Similarly, commenters supported the exclusion of swap guarantees
from the definition of reference contract.512 (v) Outright Price Reporting Agency Index Contracts FIA and ICE further recommended that the Commission should exclude any outright contracts whose settlement price is based on an index published by a price reporting agency that surveys cash-market transaction prices from the ‘‘referenced contract’’ definition.513 (vi) Monthly Average Pricing Contracts CME Group commented that because a significant amount of commerce is transacted on a monthly average basis, and that because monthly average pricing contracts are calculated using the daily prices during the contract month such that a final settlement price of a core referenced futures contract would have the same weight as the other twenty or more daily prices used in the monthly average price calculation, it would be extremely unlikely for monthly average pricing contracts to be used to manipulate or benefit from a manipulation during the spot period. Thus, CME Group argued monthly average pricing contracts should also be excluded from the definition of referenced contracts.514 (vii) Additional Basis, Differential, and Spread Contracts ICE recommended that certain other contracts, such as additional basis and spread contracts, should generally be excluded from the definition of a referenced contract, even if the contracts reference a core referenced futures contract as one component.515 (4) Discussion of Final Rule— Exclusions From the Referenced Contract Definition The Commission is finalizing as proposed the exclusions from the referenced contract definition for location basis contracts, commodity index contracts, swap guarantees, and trade options that meet the requirements of § 32.3. Further, as noted above, the Commission is expanding prong (3) of the proposed referenced contract definition to additionally exclude two other contract types: ‘‘outright price reporting agency index contracts’’ and ‘‘monthly average pricing contracts.’’ (i) Location Basis Contracts The Commission has determined that, unless location basis contracts are excluded from the ‘‘referenced contract’’ definition, speculators would be able to net portions of their location basis contracts with outright positions in one of the locations comprising the core referenced futures contract, which would permit extraordinarily large speculative positions in the outright core referenced futures contract.516 For example, the 2020 NPRM explained that a large outright position in NYMEX Henry Hub Natural Gas (NG) futures contracts could not be netted down against a location basis contract that cash-settles to the difference in price between the Gulf Coast Natural Gas futures contract and the NYMEX NG futures contract.517 Absent this exclusion, a market participant could increase its exposure in the outright contract by using the location basis contract to net down against its NYMEX NG futures position, thereby allowing the market participant to further increase the outright NYMEX NG
futures contract position that would otherwise exceed the Federal position limits. While excluding location basis contracts from the referenced contract definition would prevent the circumstance described above, it would also mean that location basis contracts would not be subject to Federal position limits. The Commission is comfortable with this outcome because location basis contracts generally demonstrate minimal volatility and are typically significantly less liquid than the core referenced futures contracts, meaning, in the Commission’s estimation, it is less likely that a potential manipulator would be able to effect a market manipulation using these contracts. Further, excluding location basis contracts from the referenced contract definition may allow commercial end￾users to more efficiently hedge the cost of commodities at their preferred location to the extent they may frequently require the physical commodity at a location other than the core referenced futures contract’s specified contract delivery point. (ii) Commodity Index Contracts With respect to commodity index contracts, the Commission similarly has

518 7 U.S.C. 6a(c)(2)(B).
519 In the trade options final rule, the Commission stated its belief that Federal position limits should not apply to trade options, and expressed an intention to address trade options in the context of any final rulemaking on position limits. See Trade Options, 81 FR at 14971. 520See generally Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48208 (Aug. 13,
2012) (‘‘Product Definitions Adopting Release’’).
521 77 FR at 48226.
522To the extent that swap guarantees may lower costs for uncleared OTC swaps in particular by incentivizing a counterparty to enter into a swap with the guarantor’s affiliate, excluding swap guarantees may improve market liquidity, which is consistent with the CEA’s statutory goals in CEA
section 4a(a)(3)(B) to ensure sufficient liquidity for
bona fide hedgers when establishing its position limit framework. 523CME Group at 13. determined that excluding commodity index contracts from the ‘‘referenced contract’’ definition will ensure that market participants cannot use a position in a commodity index contract to net down an outright position in a referenced contract that was a component of the commodity index contract. Regarding Better Markets’ and IATP’s requests that the Commission alter the proposed ‘‘referenced contract’’ definition to include commodity index contracts (i.e., to remove commodity index contracts from the list of excluded contracts in paragraph (3) of the ‘‘referenced contract’’ definition), the Commission notes that if it did not exclude commodity index contracts, the Commission’s rules would allow speculators to take on massive outright positions in referenced contracts by netting against a position in a commodity index contract, which could lead to excessive speculation. For example, the Commission understands that it is common for swap dealers to enter into commodity index contracts with participants for which the contract would not qualify as a bona fide hedging position (e.g., with a pension fund). Failing to exclude commodity index contracts from the referenced contract definition could enable a swap dealer to use positions in commodity index contracts to net down offsetting outright futures positions in the components of the index. Additionally, this would have the effect of subverting the statutory pass-through swap provision in CEA section 4a(c)(2)(B), which is intended to foreclose the recognition of positions entered into for risk management purposes as bona fide hedges unless the swap dealer is entering into positions opposite a counterparty for which the swap position is a bona fide hedge.518 The Commission recognizes that although excluding commodity index contracts from the ‘‘referenced contract’’ definition would prevent the potentially risky netting circumstance described above, it would also mean that commodity index contracts would not be subject to Federal position limits. The Commission concludes that this is an acceptable outcome because the contracts comprising the index would themselves be subject to limits, and because commodity index contracts generally tend to exhibit low volatility since they are diversified across many different commodities. With respect to Better Markets’, ICEA’s, and PMAA’s requests to impose separate standalone, or aggregate, position limits on commodity index contracts, the Commission does not believe doing so is useful to the extent that the individual components of a commodity index contract are subject to Federal position limits under the Final Rule. The Commission also is concerned that adopting a standalone limit for a commodity index contract could inadvertently limit transactions in commodity derivatives contracts outside the Final Rule’s scope. Specifically, a commodity index contract may contain components
that are subject to Federal position limits, as well as additional components that are not. If the Commission were to place standalone limits on these commodity index contracts, it would impose de facto constraints on commodity derivative contracts that are not intended to be the subject to the Final Rule and for which the Commission has not found position limits to be necessary. (iii) Trade Options The Commission also is finalizing, as proposed, the exclusion of trade options that meet the requirements of § 32.3 from the definition of referenced contract. The Commission has traditionally exempted trade options from a number of Commission requirements because trade options are typically employed by end-users to hedge physical risk and thus do not contribute to excessive speculation. Trade options are not subject to position limits under current regulations, and the proposed exclusion of trade options from the referenced contract definition would simply codify existing practice.519 (iv) Swap Guarantees The Commission additionally is excluding, as proposed, swap guarantees from the ‘‘referenced contract’’ definition. In connection with further defining the term ‘‘swap’’ jointly with the Securities and Exchange Commission in the ‘‘Product Definition Adopting Release,’’ 520 the Commission interpreted the term ‘‘swap’’ (that is not a ‘‘security-based swap’’ or ‘‘mixed swap’’) to include a guarantee of such swap, to the extent that a counterparty to a swap position would have recourse to the guarantor in connection with the position.521 Excluding guarantees of swaps from the definition of ‘‘referenced contract’’ will help avoid any potential confusion regarding the application of position limits to guarantees of swaps. The Commission understands that swap guarantees generally serve as insurance, and, in many cases, swap guarantors guarantee the performance of an affiliate in order to entice a counterparty to enter into a swap with such guarantor’s affiliate. As a result, the Commission believes that swap guarantees do not contribute to excessive speculation, market manipulation, squeezes, or corners. Furthermore, the Commission believes that swap guarantees were not contemplated by Congress when Congress articulated its policy goals with respect to position limits in CEA
section 4a(a).522 Accordingly, the
Commission is finalizing the exclusion of swap guarantees from the definition of ‘‘referenced contract.’’ (v) New Exclusions from the ‘‘Referenced Contract’’ Definition—Price Reporting Agency Index Contracts and Monthly Average Pricing Contracts Finally, the Commission is modifying prong (3) of the proposed ‘‘referenced contract’’ definition to additionally exclude from the Final Rule: (a) Monthly average pricing contracts and (b) outright price reporting agency index contracts. (a) Monthly Average Pricing Contracts In response to commenter suggestions, the Commission is providing non-binding guidance in
Appendix C to this Final Rule to assist
market participants and exchanges in determining whether a particular contract qualifies as a ‘‘monthly average pricing contract,’’ that the Final Rule is excluding from the ‘‘referenced contract’’ definition. Specifically, in response to Question 15 of the 2020 NPRM, CME Group commented that contract types that are generally referred to in industry nomenclature as calendar￾month average (‘‘CMA’’), trade-month average (‘‘TMA’’), and balance-of-the￾month (‘‘BALMO’’) contracts should be excluded from the list of referenced contracts and subject solely to exchange-set position limits.523 CME

524 Id.
525 ICE at 10.
526FIA at 6.
527 85 FR at 11620.
528 ICE at 12, noting contracts that capture the differential between different grades of a commodity (e.g., WTI vs. sour crude) or between different but related commodities (e.g., a crack differential) as examples of contracts it believes should excluded. 529See 78 FR at 75696–75697. 530 ICE at 12. 531For further discussion of the ‘‘spread transaction’’ definition, see Section II.A.20. Group explains the prevalence of these contracts in the market, and notes an example of the June 2020 monthly average contract (in which there are 22 U.S. business days and thus 22 daily referenced prices incorporated into the calendar month average), concluding that it is difficult to manipulate a CMA. CME Group thus posits that excluding CMAs would not incentivize manipulation of the underlying core referenced futures contract.524 As an initial matter, the Commission’s addition of the new term ‘‘monthly average pricing contracts’’ to Appendix C of this Final Rule is intended to generally cover the types of contracts addressed in CME Group’s comments, which are generally referred to in the industry as ‘‘CMAs,’’ ‘‘TMAs,’’ and ‘‘BALMOs.’’ The Commission agrees with CME Group’s rationale. The Commission understands that because the final settlement price of a core referenced futures contract is only one of many pricing points that constitute that monthly average, and as such generally has a relatively insignificant impact on such core referenced futures contract’s monthly average price, it therefore also has a relatively insignificant impact on the settlement price of the corresponding monthly average pricing contract. Accordingly, the Commission concludes that on balance, excluding monthly average pricing contracts from the definition of referenced contract is consistent with the statutory goals in CEA section 4a(a)(3), including with respect to ensuring sufficient market liquidity for bona fide hedgers due to: (1) The difficulty and expense of any entity artificially moving the price of the monthly average by manipulating one or more component prices within the contract; and (2) the widespread use and utility of these contracts to commercial entities to hedge their risk. The Commission provides non-binding guidance in Appendix C of the Final Rule to assist market participants and exchanges in determining whether a particular contract qualifies as a ‘‘monthly average pricing contract.’’ (b) Outright Price Reporting Agency Index Contracts The Commission is also modifying prong (3) of the proposed ‘‘referenced contract’’ definition to explicitly exclude ‘‘outright price reporting agency index contracts.’’ ICE supported the exclusion of such contracts in its comment letter.525 Further, FIA also commented that it believed that a price reporting agency index contract is outside the definition of a referenced contract.526 The Commission agrees with ICE and FIA and confirms this understanding. The Commission explained in the 2020 NPRM that based on its plain reading, the
‘‘referenced contract’’ definition excluded such contracts because outright price reporting agency index contracts were not ‘‘directly or indirectly’’ linked to the price of a referenced contract.527 The Commission reaffirms its conclusion that an ‘‘outright price reporting agency index contract,’’ which is based on an index published by a price reporting agency that surveys cash-market transaction prices (even if the cash-market practice is to price at a differential to a futures contract), is not directly or indirectly linked to the corresponding referenced contract. The Commission is modifying the final ‘‘referenced contract’’ definition to explicitly exclude such contracts for the sake of regulatory certainty. Similar to the other contracts excluded from the ‘‘referenced contract’’ definition, the Commission is providing non-binding guidance in Appendix C of the Final Rule to assist market participants and exchanges in determining whether a particular contract qualifies as an ‘‘outright price reporting agency index contract’’ and therefore is excluded as a referenced contract. The Commission underscores that this exclusion applies only to ‘‘outright’’ price reporting agency index contracts, and that a contract that settles to the difference (i.e., settled at a basis) between a referenced contract and the price reporting agency index would be directly linked, and thus would qualify as a referenced contract, because it settles in part to the referenced contract price. Since the Commission stated in the preamble to the 2020 NPRM that an outright price reporting agency index contract does not qualify as a ‘‘referenced contract,’’ the Commission does not believe that the Final Rule’s modification to explicitly exclude the term in the regulatory definition of ‘‘referenced contract’’ represents a change in policy. Instead, it is merely a technical change to the regulatory text to provide regulatory clarity to market participants. (vi) Additional Basis, Differential, and Spread Contracts Regarding ICE’s comment that additional basis, differential, and spread contracts should generally be excluded from the ‘‘referenced contract’’ definition,528 the Commission notes a heightened concern with potential manipulation through the use of outright positions (particularly through inappropriate netting) and spreads, compared to location basis contracts or commodity index contracts.529 Notably, and as described in greater detail above, the Commission views the constraints on the liquidity and volatility associated with location basis and commodity index contracts as not present to an equal degree in other basis and spread contracts. As noted above, while excluding location basis contracts and commodity index contracts from the referenced contract definition could permit large outright positions in such contracts, the Commission believes that excluding these contracts will nonetheless prevent the potentially risky and inappropriate netting of a core referenced
futures contract described above. Further, as stated above, the Commission believes that location basis contracts generally demonstrate minimal volatility and are typically significantly less liquid than the core referenced futures contracts, meaning they would be more costly to try to use to manipulate a core referenced futures contract. Similarly, with respect to commodity index contracts, commodities comprising the index could themselves be subject to Federal position limits, and commodity index contracts also generally tend to exhibit low volatility since they are diversified across many different commodities. Additionally, it is unclear from ICE’s discussion what additional contract types that ICE has in mind, other than outright price reporting agency index contracts that the Commission discusses above, since several of the examples provided by ICE may already be exempt under the ‘‘spread transaction’’ definition (e.g., the spread examples provided by ICE 530 may qualify for a spread exemption under the Final Rule as either a quality differential spread or an inter-commodity spread). ICE also stated that the requirement that a spread exemption be approved by the exchange seems unnecessary and is probably unworkable, but did not provide any arguments as to why obtaining exchange approval would be unnecessary.531

532As discussed above, the Commission will provide market participants with reasonable, good￾faith discretion to determine whether a swap would qualify as economically equivalent for Federal position limit purposes. Due to differences between OTC swaps and exchange-traded futures contracts and options thereon, the Staff Workbook would not include a list of economically equivalent swaps. For further discussion, see supra Section II.A.4. (discussion of economically equivalent swaps). 533AGA at 10; MFA/AIMA at 4. 534 ICE at 12. 535AGA at 10; MFA/AIMA at 9; FIA at 6; Chevron at 14; Suncor at 14; and CEWG at 29–30. 536FIA at 6; MFA/AIMA at 9. 537CME Group at 13; ICE at 12. 538FIA at 6; ICE at 9–12. ICE is specifically concerned that the proposed workbook contains Continued Additionally, the Commission notes that under the Final Rule, an exemption for any spread that is included in the ‘‘spread transaction’’ definition is self￾effectuating for purposes of Federal position limits, and, unlike the role that exchanges may play with respect to non-enumerated bona fide hedges in final § 150.9, exchanges have no analogous role with respect to spread exemptions for Federal position limits purposes under the Final Rule.
iv. List of Referenced Contracts
a. Summary of the 2020 NPRM—List of Referenced Contracts In order to provide clarity to market participants, the Commission proposed to publish, and anticipated regularly updating, a CFTC Staff Workbook of Commodity Derivative Contracts under the Regulations Regarding Position Limits for Derivatives (the ‘‘Staff Workbook’’) on the Commission’s website which would list exchange￾traded products that are subject to Federal position limits. In order to ensure that the list remained accurate, the Commission also proposed changes to certain provisions of part 40 of its regulations, which pertain to the collection of position limits information through the filing of product terms and conditions. In particular, under existing §§ 40.2, 40.3, and 40.4, DCMs and SEFs must submit certain requirements related to the listing of certain new products. Many of the required submissions include the product’s ‘‘terms and conditions,’’ as defined in § 40.1(j), which in turn includes under § 40.1(j)(1)(vii) ‘‘Position limits, position accountability standards, and position reporting requirements.’’ The Commission proposed to expand § 40.1(j)(1)(vii), which addresses futures contracts and options contracts, to also include an indication as to whether the submitted contract meets the ‘‘referenced contract’’ definition in proposed § 150.1. If so, proposed § 40.1(j)(1)(vii) required the submission to also include the name of the core referenced futures contract on which the submitted new product is based. The Commission further proposed to expand § 40.1(j)(2)(vii), which addresses swaps, to require the applicant to indicate whether the submitted contract meets the proposed ‘‘economically equivalent swap’’ definition in § 150.1. If so, proposed § 40.1(j)(2)(vii) similarly required the submission to include the name of the referenced contract to which the swap is economically equivalent. b. Comments and Summary of the Commission Determination—List of Referenced Contracts The Commission is adopting as final the 2020 NPRM’s amendments to part 40 of its regulations with one modification that relates to filing the name of the referenced contract on which the new product is based. Part 40 and the Commission’s amendments pertain to the collection of position limits information through the filing of product terms and conditions, and the publication and regular updates of exchange-traded contracts that are subject to Federal position limits.532 The Commission notes that the Staff Workbook is intended to provide a non￾exhaustive list of exchange-traded referenced contracts that are subject to Federal position limits. Although the Commission endeavors to timely update this list of contracts, the omission of a contract from the Staff Workbook does not mean that such contract is outside the definition of a referenced contract subject to Federal position limits. While proposed § 40.1(j)(1)(vii) required the submitted futures contract (or option thereon) to also include the name of the
core referenced futures contract on which the submitted new product is based, final § 40.1(j)(1)(vii) instead requires that the submitted product includes the name of either the core referenced futures contract or referenced contract, as applicable, on which the contract is based. This is because, as discussed above under the ‘‘referenced contract’’ definition, a referenced contract could be indirectly or directly linked to another referenced contract that is not a core referenced futures contract. For example, an options contract could be based on a cash-settled look-alike or penultimate futures contract that is a referenced contract rather than on the physically￾settled core referenced futures contract. The Commission’s concurrent publication of the Staff Workbook will provide a non-exhaustive list of exchange-traded referenced contracts, and will help market participants in determining categories of contracts that fit within the referenced contract definition. This effort is intended to provide clarity to market participants regarding which exchange-traded contracts are subject to Federal position limits. The proposed amendments to part 40 to specify new referenced contracts generally received support.533 ICE noted the need for clear guidance on how new contracts will be assessed, in order to determine whether such contracts will be referenced contracts, and make consistent determinations with respect to economically similar products.534 Although commenters also generally supported the publication of the Workbook, many suggested modifications, including clarifications regarding which contracts are included as referenced contracts, and the basis for making such determinations.535 The Commission believes that the amendments to part 40 will allow the Commission to consistently and accurately assess whether contracts should be included within the Staff Workbook. The Commission also believes that by providing regular updates to the Staff Workbook, market participants will have accurate and consistent information to assess whether such contracts are subject to Federal position limits. Additionally, the Staff Workbook will provide a linkage between each referenced contract, and either the core referenced futures contract or referenced contract, as applicable, to which it is linked, to aid in market participants’ understanding of the Commission’s determination. Alternatively, some commenters suggested that the Staff Workbook could include a list of all contracts Commission staff finds are not referenced contracts,536 and CME Group and ICE each provided a list of contracts they believe should be excluded from the Staff Workbook.537 The Commission believes that by providing a Staff Workbook listing core referenced futures contracts, and the referenced contracts that are directly or indirectly related to them, the Commission is presenting a list of contracts subject to Federal position limits in the clearest possible fashion. Additionally, the amendments
to part 40 will allow regular and accurate updates to this list. Some commenters expressed concern that the Staff Workbook lists contracts that are not referenced contracts,538 or

inconsistencies, such as including location basis contracts and PRA/Price Index Contracts. 539Chevron at 14; CEWG at 29. 540CEWG at 30. 541MFA/AIMA at 7; Citadel at 4–5; SIFMA AMG at 11–12. 542CME Group at 14. provided examples asking for clarification.539 One commenter recommended that the Commission appoint a task force to develop a comprehensive baseline list of referenced contracts listed for trading on exchanges.540 The Commission believes that Commission staff (as opposed to a taskforce) is best positioned to continually refine the Workbook through accurate, timely updates, as aided by the additional information required by the newly adopted amendments to part 40 under the Final Rule. Further, some commenters believed that the Commission should require exchanges to publish and maintain a definitive list of referenced contracts (other than economically equivalent swaps).541 While CME Group did not believe that the Commission should impose such a requirement on exchanges, it supported coordinating with the Commission to ensure consistency, and publishing this information on CME Group’s website.542 The Commission believes that publication of the Staff Workbook on the www.cftc.gov website will provide a centralized location for market participants to assess whether certain instruments are subject to Federal position limits. Although the Commission is encouraged that exchanges may provide redundancy in also publishing this list of core referenced futures contracts and related referenced contracts listed for trading on their respective exchanges, the Commission is not adopting a requirement for exchanges to publish this information at this time. Finally, CME Group contended that for commodities with only spot month limits, financially-settled futures and options contracts should be excluded from the Staff Workbook and not subject to Federal position limits if the final settlement/expiry of the cash-settled futures or option occurs before the spot month period of its core referenced futures contract begins. CME Group additionally asserted that option contracts that exercise into physically￾settled core referenced futures contracts should be included in the Staff Workbook and subject to Federal position limits even if final settlement/ expiry of the option occurs before spot month period begins. The Commission agrees with both of CME Group’s assertions with one exception. While the Commission agrees that cash-settled futures contracts and options on such futures contracts that are non-legacy contracts (i.e., the 16 core referenced futures contracts that will not have Federal non-spot position limits) and settle or expire prior to when the spot month limits would become effective in the spot period are not subject to Federal spot month position limits, such futures and options contracts do qualify as referenced contracts based on the settlement price being linked to a core referenced futures contract. However, because the corresponding 16 core
referenced futures contracts are not subject to non￾spot month Federal position limits, then these cash-settled futures contracts and options contracts similarly are also not subject to Federal position limits during the non-spot month. Accordingly, as contracts not subject to Federal spot or non-spot month position limits, these contracts will not be included in the Staff Workbook, even if such contracts qualify as referenced contracts. The Commission further agrees that options that exercise into the physically-settled core referenced futures contract are within the definition of referenced contract because when the options are exercised, they become positions in the core referenced futures contract. The Commission is clarifying that it will publish a revised Staff Workbook shortly after the publication of this Final Rule on the Commission’s website and before the Final Rule’s Effective Date. This revised Staff Workbook will reflect the revised ‘‘referenced contract’’ definition, clarify CME Group’s discussion with respect to options discussed in the immediately above paragraph, and generally fix any errors identified by commenters.
17. ‘‘Short Position’’
i. Summary of the 2020 NPRM—Short
Position
The Commission proposed to expand the existing definition of ‘‘short position,’’ currently defined in § 150.1(h), to include swaps and to clarify that any such positions would be measured on a futures-equivalent basis.
ii. Comments and Summary of the
Commission Determination—Short Position No commenter addressed the proposed definition of ‘‘short position.’’ The Commission is adopting the definition as proposed.
18. ‘‘Speculative Position Limit’’
i. Summary of the 2020 NPRM—
Speculative Position Limit The Commission proposed to define the term ‘‘speculative position limit’’ for use throughout part 150 of the Commission’s regulations to refer to Federal or exchange-set limits, net long or net short, including single month, spot month, and all-months-combined limits. This proposed definition was not intended to limit the authority of exchanges to adopt other types of limits that do not meet the ‘‘speculative position limit’’ definition, such as a limit on gross long or gross short positions, or a limit on holding or controlling delivery instruments.
ii. Comments and Summary of the
Commission Determination— Speculative Position Limit No commenter addressed the proposed definition of ‘‘speculative position limit.’’ The Commission is adopting the definition as proposed with some non-substantive technical changes related to the numbering structure.
19. ‘‘Spot Month,’’ ‘‘Single Month,’’ and
‘‘All-Months’’
i. Summary of the 2020 NPRM—Spot
Month, Single Month, and All Months The Commission proposed to expand the existing definition of ‘‘spot month’’ to: (1) Account for the fact that the proposed limits would apply to both physically-settled and certain cash￾settled contracts; (2) clarify that the spot month for referenced contracts would be the same period as that of the relevant core referenced futures contract; and (3) account for variations in spot month conventions that differ by commodity. In particular, for the ICE Sugar No. 11 (SB) core referenced futures contract, the spot month would mean the period of time beginning at the opening of trading on the second business day following the expiration of the regular option contract traded on the expiring futures contract and ending when the contract expires. For the ICE Sugar No. 16 (SF) core referenced futures contract, the spot month would mean the period of time beginning on the third-to-last trading day of the contract month and ending when the contract expires. For the CME Live Cattle (LC) core referenced futures contract, the spot month would mean the period of time beginning at the close of trading on the first business day following the first Friday of the contract month and ending when the contract expires. The Commission also proposed to eliminate the existing definitions of

543See 17 CFR 150.3(a)(3) (permitting spread or arbitrage positions that are ‘‘between single months of a futures contract and/or, on a futures-equivalent basis, options thereon, outside of the spot month, in the same crop year; provided, however, that such spread or arbitrage positions, when combined with any other net positions in the single month, do not exceed the all-months limit set forth in § 150.2.’’) 544As noted above, CEA section 4a(a)(3)(B) provides that the Commission shall set limits ‘‘to the maximum extent practicable, in its discretion— (i) to diminish, eliminate, or prevent excessive speculation as described under this section; (ii) to deter and prevent market manipulation, squeezes, and corners; (iii) to ensure sufficient market liquidity for bona fide hedgers; and (iv) to ensure that the price discovery function of the underlying market is not disrupted.’’ 545MFA/AIMA at 10; CMC at 7. 546 ICE at 7. 547 ICE at 7; FIA at 21. 548CME Group at 11. 549 Id. 550CEWG at 27; FIA at 20–21 (explaining that the intra-commodity spread would acknowledge the link between the prices of cash-settled and physical delivery futures involving the same commodity). See also CEWG at 27; CCI at 2–3 (requesting an exemption for intra-commodity spreads that are: (1) In the same class of referenced contract, (2) across classes of referenced contracts, or (3) across markets in referenced contracts (i.e., on different exchanges) in the same or different calendar months); CEWG at 27 (providing proposed revisions to the ‘‘spread transaction’’ regulatory text); CME Group at 11. 551FIA at 21; see also, IFUS at 7–9 (providing an example of a cash-and-carry exemption and describing such exemption as a type of calendar month spread where a person holds a long position in the spot month and a short position in the second nearby contract month) and IFUS Rule 6.29(e) (outlining its strict procedures that set the terms by which cash-and-carry exemptions may be permitted, including the following conditions: (i) The person seeking the exemption must provide the cost of carrying the physical commodity, the minimum spread differential at which it will enter into a straddle position in order to obtain profit, and the quantity of stocks currently owned in IFUS licensed warehouses or tank facilities; (ii) when granted a cash and carry exemption, the person receiving the exemption shall agree that before the price of the nearby contract month rises to a premium to the second contract month, it will liquidate all long positions in the nearby contract month; and (iii) block trades may not be used to establish positions upon which a cash and carry exemption request is based). IFUS further explained that it has a long history of granting cash and carry exemptions for certain warehoused contracts (specifically coffee, cocoa, and FCOJ), and that where there are plentiful supplies, these exemptions serve an economic purpose in the days leading up to the first notice day and throughout
the notice period, because: (1) They help maintain an appropriate economic relationship between the nearby and next successive contract month; (2) they allow commercial market participants the opportunity to compete for the ownership of certified inventories beyond the limitations of the spot-month position limit; and (3) the holder of the exemption provides liquidity so that traders that carry short positions into the notice period without capability to deliver may exit their positions in an orderly manner. According to IFUS, if the appropriate supply and price relationship exists in a given expiry, and the exchange grants the Continued ‘‘single month’’ and ‘‘all-months’’ because the definitions for those terms would be built into the proposed definition of ‘‘speculative position limit’’ described above.
ii. Comments and Summary of the
Commission Determination—Spot Month, Single Month, and All Months No commenter addressed the proposed definition of ‘‘spot month’’ or the proposed elimination of the existing definitions of ‘‘single month’’ and ‘‘all months.’’ The Commission is adopting the definition of spot month as proposed, but with a correction to reflect the proper spot month period for the Live Cattle (LC) core referenced futures contract. Final § 150.1 defines the spot month for the Live Cattle (LC) core referenced futures contract as the period of time beginning at the close of trading on the first business day following the first Friday of the contract month and ending when the contract expires. The Commission is eliminating the existing definitions of ‘‘single month’’ and ‘‘all months’’ as proposed. Finally, the Commission is adopting some non-substantive technical changes related to the numbering structure.
20. ‘‘Spread Transaction’’
i. Background—Spread Transaction,
Existing § 150.3(a)(3)
In existing § 150.3(a)(3), the Commission exempts from Federal position limits ‘‘spread or arbitrage positions,’’ subject to certain restrictions, including the restriction that the spread position be outside of the spot month.543 The existing regulations do not, however, define ‘‘spread or arbitrage positions.’’ Further, under existing regulations, spread exemptions from Federal positions limits are self-effectuating and do not require prior Commission approval. Rather, market participants must request spread exemptions from the relevant exchange(s) in advance of exceeding exchange limits.
ii. Summary of the 2020 NPRM—Spread
Transaction
The Commission proposed a ‘‘spread transaction’’ definition to exempt from Federal position limits transactions normally known to the trade as ‘‘spreads.’’ The proposed definition would explicitly include common types of spread strategies, including: Calendar spreads; inter-commodity spreads; quality differential spreads; processing spreads (such as energy ‘‘crack’’ or soybean ‘‘crush’’ spreads); product or by-product differential spreads; and futures-options spreads. The proposed spread transaction definition would also eliminate the existing § 150.3(a)(3) restrictions on spread exemptions, including the restriction that spread positions be outside of the spot-month. Under proposed § 150.3(a)(2)(i), positions that meet the ‘‘spread transaction’’ definition would be self￾effectuating for purposes of Federal position limits. Separately, under proposed § 150.3(a)(2)(ii), the Commission would, on a case-by-case basis, be able to exempt any other spread transaction that was not included in the proposed spread transaction definition, but that the Commission has determined is consistent with CEA section 4a(a)(3)(B),544 and exempted, pursuant to proposed § 150.3(b).
iii. Summary of the Commission
Determination—Spread Transaction The Commission is adopting the definition of ‘‘spread transaction’’ with certain modifications to the definition to include additional spread types, as described below, to address commenters’ views and other considerations. The Commission is providing additional clarification with respect to cash-and-carry exemptions as well as the application of spread exemptions to the NYMEX NG core referenced futures contract. The Commission is also adopting Appendix G to part 150 under the Final Rule to provide additional clarifications to market participants in connection with the Commission’s treatment of spread exemptions under the Final Rule.
iii. Comments—Spread Transaction
Generally, commenters requested that the Commission expand or clarify the ‘‘spread transaction’’ definition to ensure that other commonly-used spread strategies are exempted from Federal position limits, including: (1) Intra-market and inter-market spread positions; 545 (2) inter-market spread positions where the legs of the transaction are futures contracts in the same commodity and same calendar month or expiration; 546 (3) inter-market spreads in which one leg is a referenced contract and the other is a commodity derivative contract (including an OTC swap) that is not subject to Federal positions limits; 547 (4) a spread between a physically-settled position and a cash￾settled position; 548 (5) a spread between two cash-settled contracts in the spot period, even if one leg is not subject to Federal position limits; 549 (6) intra￾commodity spreads (including an intra￾commodity spread between two cash￾settled contracts or between the cash￾settled and related physically-settled futures contract); 550 and (7) cash-and￾carry exemptions that are currently permitted under IFUS Rule 6.29(e).551

application, then proper application of the terms as expiry approaches will assist in an orderly expiration. IFUS 7–9; FIA at 21. 552 ICE at 7. 553Citadel at 8–9. 554For example, trading activity in many commodity derivative markets is concentrated in the nearby contract month, but a hedger may need to offset risk in deferred months where derivative trading activity may be less active. A calendar spread trader could provide liquidity without exposing himself or herself to the price risk inherent in an outright position in a deferred month. Processing spreads can serve a similar function. For example, a soybean processor may seek to hedge his or her processing costs by entering into a ‘‘crush’’ spread, i.e., going long soybeans and short soybean meal and oil. A speculator could facilitate the hedger’s ability to do such a transaction by entering into a ‘‘reverse crush’’ spread (i.e., going short soybeans and long soybean meal and oil). Quality differential spreads, and product or by-product differential spreads, may serve similar liquidity-enhancing functions when spreading a position in an actively traded commodity derivatives market such as CBOT Wheat (W) against a position in another actively traded market, such as MGEX Wheat. 555Under existing regulations, the Commission views its use of the term ‘‘spread’’ to mean the same as ‘‘arbitrage’’ or ‘‘straddle’’ as those terms are used in CEA section 4a(a) and existing § 150.3(a)(3) of the Commission’s regulations. Consistent with existing regulations, the Commission’s sole use of the term ‘‘spread’’ in this rulemaking is intended to also capture arbitrage or straddle strategies, and is not intended to be a substantive change from its existing regulations. The Commission notes that certain exchanges may distinguish between ‘‘spread’’ and ‘‘arbitrage’’ positions for purposes of exchange exemptions, but the Commission does not make that distinction here for purposes of its ‘‘spread transaction’’ definition. 556See infra Section II.C.4. (discussing statutory and policy reasons why the Commission will not permit exchanges to process requests for spread exemptions that are not included in the ‘‘spread transaction’’ definition using the § 150.9 process). 557See infra Section II.D. (discussing exchanges’ obligations when setting exchange position limits and granting exemptions therefrom). 558To avoid subverting the Commission’s policy on not allowing self-effectuating risk management exemptions (except through the pass-through swap provision), the spread transaction definition would not cover a spread position in which one leg is a referenced contract and the other leg is a commodity index contract, as clarified in Appendix G. 559As final Appendix G provides, the spread transaction definition in § 150.1 permits transactions commonly known as ‘‘cash-and-carry’’ trades whereby a market participant enters a long futures positions in the spot month and an equivalent short futures position in the following
month, in order to guarantee a return that, at minimum, covers the costs of its carrying charges. In addition, commenters requested that the Commission clarify that: (1) The ‘‘spread transaction’’ definition is a non￾exhaustive list, and therefore, permit exchanges to grant spread exemptions that are not covered by § 150.3(a)(2) by using the streamlined process in § 150.9 for recognizing non-enumerated bona fide hedges; 552 and (2) a calendar spread would permit a market participant to net down its positions for the purposes of Federal spot-month and single-month limits.553
iv. Discussion of Final Rule—Spread
Transaction
The Commission is adopting the proposed definition of ‘‘spread transaction’’ with certain modifications, as described below, to address commenters’ views and other considerations. First, the Commission is expanding the definition to include additional types of spreads. Second, the Commission is clarifying the treatment of cash-and-carry exemptions as permissible calendar spreads and providing additional guidance to exchanges in connection with such spreads. Third, the Commission addresses the application of spread exemptions in connection with the NYMEX NG core referenced futures contract. The Commission is also providing additional guidance on the use of exempt spread transactions in
Appendix G of this Final Rule.
a. The ‘‘Spread Transaction’’ Definition Includes Several Additional Spread Types Under the Final Rule First, the Commission is expanding the proposed ‘‘spread transaction’’ definition to make clear that the definition as finalized includes intra￾market, inter-market, and intra￾commodity spread positions in addition to the spread strategies listed in the proposed definition. The final ‘‘spread transaction’’ definition will cover: Intra￾market spreads, inter-market spreads, intra-commodity spreads, and inter￾commodity spreads, including calendar spreads, quality differential spreads, processing spreads, product or by￾product differential spreads, and futures-options spreads.554 The Commission intends for the spread transaction definition to be sufficiently broad to capture most, if not all, spread strategies currently granted by exchanges and used by market participants. The Commission believes this is consistent with, but provides more clarity than, its existing approach to spread exemptions in existing § 150.3(a)(3), which broadly exempts ‘‘spread or arbitrage positions.’’ 555 In light of the revised ‘‘spread transaction’’ definition, the Commission expects that most spread strategies will qualify as intra-market, inter-market, inter-commodity, or intra-commodity spreads, and is providing a non￾exhaustive list of the most common specific types of spread strategies that fall within those four categories. Any requests for spread exemptions that fall outside of the spread transaction definition are required to be submitted to the Commission in advance pursuant to § 150.3(b) of the Final Rule. Accordingly, the Commission has determined not to allow exchanges to grant new types of spread exemptions using the streamlined process in § 150.9 for various reasons explained below in detail under the discussion of § 150.3.556 In addition, considering the significant number of requests for clarification commenters submitted regarding the spread transaction definition, the Commission is providing guidance on spread transactions in
Appendix G to part 150 of the
Commission’s regulations, as adopted in this Final Rule, to address those questions and other considerations. In particular, paragraph (a) of the guidance provides some recommended best practices for exchanges to consider when granting spread exemptions, especially during the spot period. Paragraph (a) of the guidance also reminds exchanges of their existing obligations as self-regulatory organizations, including under DCM Core Principle 5 and SEF Core Principle 6, as applicable, to implement their exchange-set limits and exemption granting processes in a way that (consistent with the rules and procedures in final § 150.5 adopted herein) 557 reduces the potential threat of market manipulation or congestion. Moreover, paragraph (b) of the guidance clarifies that the following spread strategies are covered by the ‘‘spread transaction’’ definition: (1) Inter-market spread positions where the legs of the transaction are futures contracts in the same commodity and same calendar month or expiration; (2) spread positions in which one leg is a referenced contract and the other is a commodity derivative contract that is not subject to Federal positions limits (including OTC commodity derivative contracts, but not including commodity index contracts); 558 (3) a spread between a physically-settled position and a cash-settled position; (4) a spread between two cash-settled contracts; (5) certain cash-and-carry exemptions, subject to certain recommendations and considerations outlined in paragraph (c) of the Commission’s guidance in
Appendix G of this Final Rule; and (6)
spreads that are ‘‘legged in’’ or carried out in two steps. b. ‘‘Cash-and-Carry’’ Exemptions Second, as mentioned above, paragraph (c) of the guidance recommends certain factors for exchanges to consider when granting cash-and-carry exemptions.559 The

With this exemption, the market participant is able to take physical delivery of the product in the nearby month and may redeliver the same product in a deferred month. 560See IFUS at 7–9 and ICE Futures U.S. Rule 6.29(e). 561See 81 FR at 96833. 562 Id. 563See 81 FR at 96833. 564See infra Section II.B.3.vi.a. (discussing the Federal spot-month limit for natural gas under § 150.2) and Section II.C.6 (discussing the conditional spot-month limit for natural gas under § 150.3(a)(4)). 565This is different from the final Federal spot month position limits for NYMEX NG, pursuant to which a trader may hold up to: (1) 2,000 cash￾settled NYMEX NG referenced contracts per exchange that lists a cash-settled NYMEX NG referenced contract; (2) an additional position in cash-settled economically equivalent NYMEX NG OTC swaps that has a notional amount equal to 2,000 equivalent-sized contracts; and (3) 2,000 physically-settled NYMEX NG referenced contracts. 566For the avoidance of doubt, traders who avail themselves of a spread exemption and enter into spread positions between the physically-settled NYMEX NG core referenced futures contract during the spot month and one or more cash-settled natural gas referenced contracts or cross commodity contracts, are not allowed under the Final Rule to avail themselves of the natural gas conditional limit until they exit the above-noted spread position. 567 7 U.S.C. 1a(47) and 1a(49); 17 CFR 1.3. Commission understands that IFUS has granted this type of calendar spread exemption for some time, and has experience monitoring the use of such exemptions to ensure that its market operates in a manner that is consistent with the applicable DCM Core Principles.560 The Commission has, however, previously expressed concern about these exemptions and their impact on the spot month price for a particular futures contract.561 In particular, the Commission has explained that a large demand for delivery on cash-and-carry positions might distort the price of the expiring futures contract upwards.562 This would particularly be a concern in those commodity markets where price discovery for the cash spot price occurred in the expiring futures contract.563 The Commission recognizes, however, the importance of cash-and-carry positions in the price discovery process in certain markets and reminds exchanges of their responsibility to monitor and safeguard against convergence issues that could arise related to the use of cash-and-carry exemptions. Accordingly, the Commission views these exemptions as a type of calendar spread strategy that warrants additional guidance to encourage exchanges to have suitable safeguards in place to ensure that they grant and monitor cash-and-carry exemptions in a manner that is consistent with their obligation to reduce the potential threat of market manipulation and congestion.
c. Treatment of Spread Transactions
Involving NYMEX NG
Third, the Commission is providing clarification regarding the intersection of the conditional natural gas spot month limit exemption and spread exemptions permitted under § 150.3. As set forth in Appendix G, the Commission reinforces that a spread transaction exemption would not cover natural gas spot month positions that exceed the conditional natural gas spot month limit in § 150.3(a)(4) of this Final Rule. That is, a market participant cannot rely on a spread transaction exemption to hold a spot month position that would exceed the equivalent of 10,000 contracts of the NYMEX Henry Hub Natural Gas core referenced futures contract per exchange that lists a natural gas cash-settled referenced contract. Additional discussion on the natural gas conditional spot month limit exemption is provided further below.564 As discussed further below, in § 150.3, the Commission is providing an exemption from the Federal spot month position limit level for natural gas. The natural gas conditional spot month limit exemption allows a trader to hold up to:
(1) 10,000 spot month cash-settled NYMEX NG referenced contracts per exchange that lists a cash-settled NYMEX NG referenced contract (of which there are currently three— NYMEX, IFUS, and Nodal); and (2) an additional position in cash-settled economically equivalent NYMEX NG OTC swaps that has a notional amount equal to 10,000 equivalent-sized contracts; provided, that the market participant does not hold positions in the spot month of the physically-settled NYMEX NG referenced contract.565 The Commission adopted the Federal conditional limit for natural gas in order to avoid disrupting the well-developed, unique liquidity characteristics of the natural gas derivatives markets, in which the cash-settled natural gas referenced contracts, when combined, have significantly higher liquidity than the physically-settled natural gas contracts. The Federal conditional limit requires divestiture of the spot month physically-settled NYMEX referenced contract due to concerns about, among other things, fostering an environment that incentivizes traders to manipulate the physically-settled NYMEX NG referenced contract in order to benefit a larger cash-settled position in natural gas (i.e., ‘‘bang’’ or ‘‘mark’’ the close). The Commission intends for the natural gas conditional limit’s position limit levels to serve as a firm cap for the maximum amount of cash-settled natural gas spot month positions a trader can hold. The Commission clarifies that a person cannot circumvent this cap using a spread transaction exemption. That is, the Commission believes that cash-settled natural gas positions that exceed the natural gas conditional limit in the spot month would be unusually large and could potentially have a disruptive effect on the physically￾settled natural gas contract, including by inhibiting convergence at expiration. Specifically, by allowing traders to layer additional cash-settled natural gas spot month positions on top of the maximum cash-settled natural gas spot month positions permitted under the natural gas conditional limit, a person could amass an extremely large cash-settled spot month position in natural gas. This extremely large cash-settled spot month position could push prices up for cash￾settled spot month contracts vis-a`-vis the physically-settled spot month contracts. In response, arbitrageurs may attempt to capitalize on this price discrepancy by going short the cash￾settled spot month contracts, which would have a downward pressure on the price of these contracts, and going long on the physically-settled spot month contracts, which would have an upward pressure on the price of these contracts. This upward price pressure on the physically-settled contract could potentially push the price of the physically-settled contract away from the actual cash price for the natural gas commodity, which could disrupt convergence upon expiration of the physically-settled contract. As such, the Commission clarifies that a person cannot layer a spread
exemption on top of the conditional spot month limit in natural gas and thereby circumvent the conditional spot month limit cap.566
21. ‘‘Swap’’ and ‘‘Swap Dealer’’
i. Summary of the 2020 NPRM—Swap
and Swap Dealer
The Commission proposed to incorporate the definitions of ‘‘swap’’ and ‘‘swap dealer’’ as they are defined in section 1a of the Act and § 1.3 of this
chapter.567
ii. Comments and Summary of the
Commission Determination—Swap and Swap Dealer No commenter addressed the proposed definitions of ‘‘swap’’ or ‘‘swap dealer.’’ The Commission is adopting these definitions as proposed.

568 In connection with the discussion of § 150.2 that appears below, for each numbered section, the Commission generally provides a summary of the proposed approach, a brief overview of the Commission’s final determination, a summary of comments, and the Commission’s response to comments. 569 17 CFR 150.2.
22. ‘‘Transition Period Swap’’
i. Summary of the 2020 NPRM—
Transition Period Swap
The Commission proposed to create the defined term ‘‘transition period swap’’ to mean any swap entered into during the period commencing after the enactment of the Dodd-Frank Act of 2010 (July 22, 2010) and ending 60 days after the publication of a final Federal position limits rulemaking in the Federal Register. As discussed in connection with proposed § 150.3 later in this release, if acquired in good faith, such swaps would be exempt from Federal position limits, although such swaps could not be netted with post￾effective date swaps for purposes of complying with spot month speculative position limits.
ii. Comments and Summary of the
Commission Determination—Transition Period Swap No commenter addressed the proposed definition of ‘‘transition period swap.’’ The Commission is adopting the definition as proposed, with two modifications. The Commission is clarifying that a transition period swap is a swap entered into during the period commencing ‘‘on the day of,’’ rather than ‘‘after,’’ the enactment of the Dodd-Frank Act of 2010 to clarify the ambiguity of the phrase ‘‘after the enactment.’’ The Commission is also adding a phrase to clarify that the terms of such swaps ‘‘have not expired as of 60 days after the publication date.’’ The Commission intended to include this in the 2020 NPRM, but the language was inadvertently omitted from the proposed definition. This modification conforms to the definition of ‘‘pre￾enactment swap,’’ which also addresses the timeframe for expiration of a swap’s terms.
23. Deletion of § 150.1(i)
i. Summary of 2020 NPRM—Deletion of
§ 150.1(i)
The Commission proposed to eliminate existing § 150.1(i), which includes a table specifying the ‘‘first delivery month of the crop year’’ for certain commodities. The crop year definition had been pertinent for purposes of the spread exemption to the individual month limit in current § 150.3(a)(3), which limits spreads to those between individual months in the same crop year and to a level no more than that of the all-months limit. This provision was pertinent at a time when the single month and all-months￾combined limits were different, which is no longer the case.
ii. Comments and Summary of the
Commission Determination—Deletion of § 150.1(i) No commenter addressed the proposed elimination of existing § 150.1(i). The Commission is adopting as proposed. Now that the current and proposed single month and all months combined limits are the same, and now that the Commission is adopting new enumerated bona fide hedges in § 150.1 and Appendix B to part 150 as well as a new process for granting spread exemptions in § 150.3, this provision is no longer needed. B. § 150.2—Federal Position Limit Levels This section will address the issues related to Federal position limit levels in final § 150.2 in the following order:568 (1) Background of the existing Federal position limit levels; (2) identification of contracts subject to both Federal spot and non-spot month position limits, and contracts subject only to Federal spot month position limits; (3) Federal spot month position limit levels; (4) Federal non-spot month position limit levels; (5) the establishment of subsequent spot month and non-spot month position limit levels; (6) relevant contract months; (7) limits on ‘‘pre-existing positions’’; (8) positions on foreign boards of trade; (9) anti-evasion; (10) netting and Federal position limit levels for cash-settled referenced contracts; and (11) ‘‘eligible affiliates’’ and position aggregation. As part of the discussion of Federal spot month position limit levels (noted as issue (3) above and found in Section II.B.3. below), the Commission also will address Federal spot month position limit levels specifically for (i) ICE Cotton No. 2 (CT), (ii) NYMEX Henry Hub Natural Gas (NG), and (iii) the three wheat core referenced futures contracts. Similarly, as part of the discussion of Federal non-spot month position limit levels (noted as issue (4) above and found in Section II.B.4. below), the Commission will also address Federal non-spot month position limit levels specifically for (i) ICE Cotton No. 2 (CT) and (ii) the three wheat core referenced futures contracts.

1. Background—Existing Federal
   Position Limit Levels—§ 150.2 Federal spot month, single month, and all-months-combined position limits currently apply to the nine physically-settled legacy agricultural contracts listed in existing § 150.2, and, on a futures-equivalent basis, to options contracts thereon. Existing Federal position limit levels set forth in § 150.2 569 apply net long or net short and are as follows:

570As noted in further detail in Section II.A.16., their associated referenced contracts are also subject to Federal position limits. 571Proposed § 150.5(b)(2). For existing exchange￾set position limits, see Market Resources, ICE Futures U.S. Website, available at https:// www.theice.com/futures-us/market-resources (ICE exchange-set position limits); Position Limits, CME Group website, available at https:// www.cmegroup.com/market-regulation/position￾limits.html; Rules and Regulations of the Minneapolis Grain Exchange, Inc., MGEX, available at http://www.mgex.com/documents/Rulebook_ 051.pdf (MGEX exchange-set position limits). 572 85 FR at 11628. 573 Id. 574See MGEX at 1; CHS at 2; CME Group at 2; IFUS at 2; ICE at 2, 3–4; Chevron at 2; CMC at 6; EEI at 4; FIA at 2; MFA/AIMA at 2–3; NCFC at 4; Shell at 3; PIMCO at 4; SIFMA AMG at 4; Suncor at 2; AQR at 2, 4–5, 7–10; CCI at 2; COPE at 4; IECA at 2; NGSA at 3; CEWG at 3; and AFIA at 2. 575 In addition to comments from NEFI and PMAA, which are discussed below, AFR and Rutkowski asserted that the 2020 NPRM will likely be ‘‘ineffective in controlling excessive speculation’’ due, in part, to its failure to ‘‘impose Federal position limits outside of the current spot month for most commodities (outside of legacy agricultural commodities).’’ AFR at 2 and Rutkowski at 2. While not explicitly stated in § 150.2, the Commission’s practice has been to set Federal spot month position limit levels at or below 25% of deliverable supply based on exchange estimates of deliverable supply (‘‘EDS’’) that are verified by the Commission, and to set Federal position limit levels outside of the spot month at 10% of open interest for the first 25,000 contracts of open interest, with a marginal increase of 2.5% of open interest thereafter.
2. Application of Federal Position
Limits During the Spot Month and the Non-Spot Month
i. Summary of the 2020 NPRM—
Application of Federal Position Limits During the Spot Month and the Non￾Spot Month The 2020 NPRM imposed Federal position limits during all contract months for the nine legacy agricultural contracts (and their associated referenced contracts), and only during the spot month for the 16 non-legacy core referenced futures contracts (and their associated referenced contracts) that would be subject to Federal position limits for the first time.570 For the 16 non-legacy core referenced futures contracts (and their associated referenced contracts), the 2020 NPRM also required that they be subject to exchange-set position limits or position accountability outside of the spot month.571 The Commission proposed to maintain (rather than remove) Federal non-spot month position limits for the nine legacy agricultural contracts, with the modifications described further below, because the Commission has observed no reason to eliminate them.572 These non-spot month position limits have been in place for decades, and while the Commission proposed to modify the Federal non-spot month position limit levels, the Commission believed that removing them entirely could potentially result in market disruption. The Commission’s position was reinforced by the feedback it received from commercial market participants trading the nine legacy agricultural contracts who requested that the Commission maintain Federal position limits outside of the spot month in order to promote market integrity.573
ii. Summary of the Commission
Determination—Application of Federal Position Limits During the Spot Month and the Non-Spot Month The Commission is adopting the approach that was proposed in the 2020 NPRM. Under the Final Rule, Federal position limits apply to all 25 core referenced futures contracts during the spot month. The 16 non-legacy core referenced futures contracts subject to Federal position limits for the first time under the Final Rule are subject to Federal position limits only during the spot month (and not outside of the spot month). Outside of the spot month, these 16 core referenced futures contracts are subject only to exchange￾set position limits or position accountability.
iii. Comments—Application of Federal
Position Limits During the Spot Month and the Non-Spot Month Many commenters generally agreed with the proposed approach and supported Federal position limits during the spot month for all 25 core referenced futures contracts, and outside of the spot month for only the nine legacy agricultural contracts.574 The Commission did not receive any comments objecting to Federal spot month position limits for all 25 core referenced futures contracts. On the other hand, the Commission received comments expressing concern over two related issues. First, a few commenters disagreed with the 2020 NPRM imposing Federal non-spot month position limits on only the nine legacy agricultural contracts.575 NEFI stated that ‘‘the proposed rule arbitrarily fails to establish limits for non-spot month referenced energy contracts’’ and stated that ‘‘distributing limits across all ER14JA21.006</GPH>

576NEFI at 3 and PMAA at 3 (with respect to energy commodity positions, ‘‘[h]istory has shown on a number of occasions that large trades in non￾spot months can distort markets and increase volatility’’). 577PMAA at 3. PMAA also suggested that the Commission apply the ‘‘traditional 2.5% limit formula to energy contracts and economically equivalent energy futures, options, and swaps in non-spot months.’’ 578NEFI at 3; PMAA at 3; and IATP at 10. 579NEFI at 3. 580 Id. 581 IATP at 10. See also PMAA at 3 (‘‘[u]nfortunately, the proposal instead finds accountability limits to be sufficient to manage speculation’’). 582See infra Section III.E. (discussing necessity finding for spot month and non-spot month position limits). 583Final § 150.5(b)(2). 584 Id. 585 17 CFR part 40. Under the final ‘‘position accountability’’ definition in § 150.1, exchange accountability rules must require a trader whose position exceeds the accountability level to consent to: (1) Provide information about its position to the exchange; and (2) halt increasing further its position or reduce its position in an orderly manner, in each case as requested by the exchange. 586Commission regulation § 38.300, which mirrors DCM Core Principle 5, states: ‘‘To reduce the potential threat of market manipulation or congestion (especially during trading in the delivery month), the board of trade shall adopt for each contract of the board of trade, as is necessary and appropriate, position limitations or position accountability for speculators. For any contract that is subject to a position limitation established by the Commission, pursuant to section 4a(a), the board of trade shall set the position limitation of the board of trade at a level not higher than the position limitation established by the Commission.’’ 17 CFR
38.300 and 7 U.S.C. 7(d)(5). Likewise, Commission
regulation § 37.600, which mirrors SEF Core Principle 6, states: ‘‘(a) In general. To reduce the potential threat of market manipulation or congestion, especially during trading in the delivery month, a swap execution facility that is a trading facility shall adopt for each of the contracts of the facility, as is necessary and appropriate, position limitations or position accountability for speculators. (b) Position limits. For any contract that is subject to a position limitation established by the Commission pursuant to section 4a(a) of the Act, the swap execution facility shall: (1) Set its position limitation at a level no higher than the Commission limitation; and (2) Monitor positions established on or through the swap execution facility for compliance with the limit set by the Commission and the limit, if any, set by the swap execution facility.’’ 17 CFR 37.600 and 7 U.S.C. 7b–3(f)(6). 587 85 FR at 11629. 588NEFI at 3 and PMAA at 3. 589 In the case of certain commodities, it may become difficult to exert market power via concentrated futures positions in deferred month contracts. For example, a participant with a large cash-market position and a large deferred futures position may attempt to move cash markets in order to benefit that deferred futures position. Any attempt to do so could become muted due to general futures market resistance from multiple vested interests present in that deferred futures month (i.e., the overall size of the deferred contracts may be too large for one individual to influence via cash-market activity). However, if a large position that is accumulated over time in a particular deferred month is held into the spot month, it is possible that such positions could form the groundwork for an attempted corner or squeeze in the spot month. months is preferable, as it would protect market convergence and mute disruptive signals from large speculative trades.’’ 576 PMAA echoed similar concerns by stating that there was ‘‘no data or discussion provided in the proposal indicating why the Commission believes limits for non-spot months are not appropriate.’’ 577 Second, commenters also expressed concern that, by only having Federal non-spot month position limits for the nine legacy agricultural contracts, the Commission is relying too much on the exchanges to address excessive speculation.578 In particular, commenters were concerned about the incentives and other conflicts of interest that exchanges may have to permit ‘‘higher trading volumes and large numbers of market participants’’ 579 and about the exchanges’ use of position accountability by alleging that it is a ‘‘voluntary’’ limit 580 and pointing to ‘‘recent notable failures in exchange accountability regimes.’’ 581
iv. Discussion of Final Rule—
Application of Federal Position Limits During the Spot Month and the Non￾Spot Month The Commission is adopting the approach that was proposed in the 2020 NPRM by applying Federal position limits to all 25 core referenced futures contracts during the spot month, but only to the existing nine legacy agricultural contracts outside of the spot month for the reasons discussed below. a. Response to Comments Opposing the 2020 NPRM’s Approach To Subject Only the Nine Legacy Agricultural Contracts to Federal Non-Spot Month Position Limits The Commission has concluded that, while it may be important and, as described below, necessary 582 to impose Federal spot month position limits on each core referenced futures contract, the analysis changes with respect to the non-spot month for the following reasons. First, while the Final Rule only applies Federal position limits to the 16 non-legacy core referenced futures contracts during the spot month, the Final Rule requires exchanges to establish either position limit levels or position accountability outside of the spot month for all such contracts.583 Accordingly, all 16 non-legacy core referenced futures contracts will be subject to either position limits or position accountability outside of the spot month at the exchange level. Any such exchange-set position limit and position accountability must comply with the standards established by the Commission in final § 150.5(b) including, among other things, that any such levels be ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ 584 Exchanges are also required to submit any rules adopting or modifying such position limit or position accountability to the Commission in advance of implementation pursuant to part 40 of the Commission’s regulations.585 Additionally, exchanges are subject to DCM Core Principle 5 or SEF Core Principle 6, as applicable, which establish additional protections against manipulation and congestion.586 These tools and legal obligations, in conjunction with surveillance at both the exchange and Federal level, will continue to offer strong deterrence and protection against manipulation and disruptions outside of the spot month.587 Second, in response to the concerns expressed by NEFI and PMAA that a lack of Federal non-spot month position limits could harm market convergence and lead to disruptive signals from large speculative trades,588 the Commission reiterates that corners and squeezes, and related convergence issues, do not occur outside of the spot month when there is no threat of delivery.589 Convergence occurs during the spot month and, specifically, at the expiration of the spot month for a physically-settled contract. As a result, positions outside of the spot month have minimal impact on convergence. The Commission, however, recognizes that it is possible that unusually large positions in contracts outside of the
spot month could distort the natural spread relationship between contract months. For example, if traders hold unusually large positions outside of the spot month, and if those traders exit those positions immediately before the spot month, that could cause congestion and also affect the pricing of the spot month contract. While such congestion or price distortion cannot be ruled out, exchange-set position limits and position accountability function to mitigate against such risks. Thus, the position limits framework adopted herein is able to guard against any such possibility through the tools and legal obligations applicable to exchanges that are described in the prior paragraph. Third, limiting Federal non-spot month position limits to the nine legacy agricultural commodities may limit any market disruptions that could result

590 85 FR at 11629. 591 Id. 592See, e.g., 56 FR at 51687 (Oct. 15, 1991) (permitting CME to establish position accountability for certain financial contracts traded on CME); Speculative Position Limits—Exemptions from Commission Rule 1.61, 57 FR 29064 (June 30,
1992) (permitting the use of accountability for
trading in energy commodity contracts); and 17 CFR 150.5(e) (2009) (formally recognizing the practice of accountability for contracts that met specified standards). 593 85 FR at 11629. 594For example, exchanges have set non-spot month position limits for the following core referenced futures contracts, even though such contracts currently are not subject to Federal non￾spot month position limits (and will continue to be subject only to Federal spot month position limits under this Final Rule): (1) CME Live Cattle (LC), which has an exchange-set single month position limit level of 6,300 contracts, but no all-months￾combined position limit; (2) ICE FCOJ–A (OJ), which has an exchange-set single month position limit level of 3,200 contracts and an all-months￾combined position limit level of 3,200 contracts; and (3) ICE Sugar No. 16, which has an exchange￾set single month position limit level of 1,000 contracts and an all-months-combined position limit level of 1,000 contracts. 595CFTC Charges Kraft Foods Group, Inc. and Mondele¯z Global LLC with Manipulation of Wheat Futures and Cash Wheat Prices (Apr. 1, 2015), U.S. Commodity Futures Trading Commission website, available at https://www.cftc.gov/PressRoom/ PressReleases/7150–15. 596 IATP at 5, 10, and 18. 597 Id. 598Final § 150.5(b)(2). 599 17 CFR part 40. 600 17 CFR 38.300 and 17 CFR 37.600. 601The Commission conducts regular rule enforcement reviews of each exchange’s audit trail, trade practice surveillance, disciplinary, and dispute resolution programs for ongoing compliance with the Core Principles. See Rule Enforcement Reviews of Designated Contract Markets, available at https://www.cftc.gov/ IndustryOversight/TradingOrganizations/DCMs/ dcmruleenf.html. 602Section II.B.3.iii.b.(3)(iii) (Concern over Exchanges’ Conflict of Interest and Improper Incentives in Maintaining Their Markets). from adding new Federal non-spot month position limits on certain metal and energy commodities that have never been subject to Federal position limits.590 b. Response to Comments Regarding the Commission’s Reliance on Exchanges In response to commenters’ specific concerns about the reliance on exchanges’ position accountability, the Commission views position accountability outside of the spot month as a more flexible alternative to Federal non-spot month position limits.591 Position accountability establishes a level at which an exchange will start investigating a trader’s current position. This will include, among other things, asking traders additional questions regarding their strategies and their purpose for the positions, while evaluating them under current market conditions. If a position does not raise any concerns, the exchange will allow the trader to exceed the accountability level. If the position raises concerns, the exchange has the authority to instruct the trader to stop adding to the trader’s position, or to reduce the position. Position accountability is a particularly effective tool because it
provides the exchanges with an opportunity to intervene once a position hits a relatively low level (vis-a`-vis the level at which a Federal or an exchange position limit level would typically be set), while still affording market participants with the flexibility to establish a position that exceeds the position accountability level if it is justified by the nature of the position and market conditions. Position accountability applies to all participants on the exchange, whether commercial or non-commercial, and regardless of whether the relevant participant would qualify for an exemption. The Commission has decades of experience overseeing position accountability implemented by exchanges, including for all 16 non￾legacy core referenced futures contracts that are not subject to Federal position limits outside of the spot month.592 Based on the Commission’s experience, position accountability has functioned effectively.593 Furthermore, the Commission notes that position accountability is not the only tool available for exchanges. As noted previously, exchanges can also utilize exchange-set position limits. Several exchanges have set non-spot month position limits for contracts that are not subject to Federal position limits, and all of them appear to have functioned effectively based on the Commission’s observation of those markets.594 With respect to IATP’s reference to ‘‘recent notable failures’’ in position accountability levels, IATP appears to be referencing the events that involve Kraft Foods Group, Inc. and Mondele¯z Global LLC with respect to the CBOT Wheat (W) contract in 2011595 and United States Oil Fund, LP (‘‘US Oil’’) with respect to the WTI contract earlier this year.596 With respect to CBOT Wheat (W), CBOT did not have position accountability for that contract at that time. With respect to the WTI contract, IATP does not describe the failure in position accountability that occurred with respect to US Oil and how such failure resulted in negative prices in the WTI contract.597 With respect to commenter concerns about the incentives of exchanges, the Commission believes that, although exchanges may have a financial interest in increased trading volume, whether speculative or hedging, the Commission closely oversees the establishment, modification, and implementation of exchange-set position limits and position accountability. As noted above, both exchange-set position limits and position accountability must comply with standards established by the Commission in final § 150.5(b) including, among other things, that any such levels be ‘‘necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ 598 Exchanges are also required to submit any rules adopting or modifying exchange-set position limits or position accountability to the Commission in advance of implementation, pursuant to part 40 of the Commission’s regulations.599
Additionally, exchanges are subject to DCM Core Principle 5 or SEF Core Principle 6, as applicable, which establishes additional protections against manipulation and congestion.600 Furthermore, exchange-set position limits and position accountability will be subject to rule enforcement reviews by the Commission.601 Finally, the Commission notes that exchanges also have significant financial incentives and regulatory obligations to maintain well￾functioning markets. This observation, which has been supported by studies, is discussed in greater detail below.602
3. Federal Spot Month Position Limit
Levels
i. Summary of the 2020 NPRM—Federal
Spot Month Position Limit Levels

603As described below, under the 2020 NPRM, Federal non-spot month position limit levels would only apply to the nine legacy agricultural contracts and their associated referenced contracts. The 16 non-legacy core referenced futures contracts and their associated referenced contracts would be subject to Federal position limits during the spot month, and exchange-set position limits or position accountability outside of the spot month. 604See Section II.B.10. 605 Id. 606Proposed 150.2(e) additionally provided that market participants would not need to comply with the Federal position limit levels until 365 days after publication of the Final Rule in the Federal Register. For further discussion of the Final Rule’s compliance and effective dates, see Section I.D. (Effective Date and Compliance Period). 607As of October 15, 2020. 608CBOT’s existing exchange-set position limit level for CBOT Wheat (W) is 600 contracts. However, for its May contract month, CBOT has a variable spot month position limit level that is dependent upon the deliverable supply that it publishes from the CBOT’s Stocks and Grain report on the Friday preceding the first notice day for the May contract month. In the last five trading days of the expiring futures month in May, the speculative spot month position limit level is: (1) 600 contracts if deliverable supplies are at or above 2,400 contracts; (2) 500 contracts if deliverable supplies are between 2,000 and 2,399 contracts; (3) 400 contracts if deliverable supplies are between Under the 2020 NPRM, the Commission proposed applying Federal spot month position limits to all 25 core referenced futures contracts and any associated referenced contracts.603 The spot month limits would apply separately to physically-settled and cash-settled referenced contracts, which meant that a market participant could net positions across physically-settled referenced contracts and separately net positions across cash-settled referenced contracts.604 However, the market participant would not be permitted to net cash-settled referenced contracts with physically-settled referenced contracts.605 Proposed § 150.2(e) provided that Federal spot month position limit levels would be set forth in proposed Appendix E to part 150.606 The proposed spot month position limit levels were as follows:
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1,600 and 1,999 contracts; (4) 300 contracts if deliverable supplies are between 1,200 and 1,599 contracts; and (5) 220 contracts if deliverable supplies are below 1,200 contracts. 609The proposed Federal spot month position limit levels for CME Live Cattle (LC) would feature step-down limit levels similar to the CME’s existing Live Cattle (LC) step-down exchange-set limit levels. The proposed Federal spot month step down limit level is: (1) 600 contracts at the close of trading on the first business day following the first Friday of the contract month; (2) 300 contracts at the close of trading on the business day prior to the last five trading days of the contract month; and (3) 200 contracts at the close of trading on the business day prior to the last two trading days of the contract month. 610CME’s existing exchange-set limit for Live Cattle (LC) has the following step-down spot month position limit levels: (1) 600 contracts at the close of trading on the first business day following the first Friday of the contract month; (2) 300 contracts at the close of trading on the business day prior to the last five trading days of the contract month; and (3) 200 contracts at the close of trading on the business day prior to the last two trading days of the contract month. 611CBOT’s existing exchange-set spot month position limit level for Rough Rice (RR) is 600 contracts for all contract months. However, for July and September, there are step-down limit levels from 600 contracts. In the last five trading days of the expiring futures month, the speculative spot month position limit for the July futures month steps down to 200 contracts from 600 contracts and the speculative position limit for the September futures month steps down to 250 contracts from 600 contracts. 612 IFUS technically does not have an exchange￾set spot month position limit level for ICE Sugar No. 16 (SF). However, it does have a single-month position limit level of 1,000 contracts, which effectively operates as a spot month position limit. 613NYMEX recommended implementing the following step-down Federal spot month position limit levels with respect to its Light Sweet Crude Oil (CL) core referenced futures contract: (1) 6,000 contracts as of the close of trading three business days prior to the last trading day of the contract; (2) 5,000 contracts as of the close of trading two business days prior to the last trading day of the contract; and (3) 4,000 contracts as of the close of trading one business day prior to the last trading day of the contract. 614 In Proposed § 150.3(a)(4), the Commission also proposed an exemption that provided a Federal conditional spot month position limit for NYMEX Henry Hub Natural Gas (NG) (‘‘NYMEX NG’’) that permits a market participation that does not hold any positions in the physically-settled NYMEX NG referenced contract to hold: (1) 10,000 NYMEX NG equivalent-sized referenced contracts per exchange that lists a cash-settled NYMEX NG referenced
contract; and (2) an additional position in cash￾settled economically equivalent swaps with respect to NYMEX NG that has a notional amount equal to 10,000 contracts. 615Currently, the cash-settled natural gas contracts are subject to an exchange-set spot month position limit level of 1,000 equivalent-sized contracts per exchange. Currently, there are three exchanges that list cash-settled natural gas contracts—NYMEX, IFUS, and Nodal. As a result, a market participant may hold up to 3,000 equivalent-sized cash-settled natural gas contracts. The exchanges also have a conditional position limit framework for natural gas. The conditional position limit permits up to 5,000 cash-settled equivalent-sized natural gas contracts per exchange that lists such contracts, provided that the market participant does not hold a position in the physically-settled NYMEX NG contract. BILLING CODE 6351–01–C ER14JA21.008</GPH>

616See Summary DSE Proposed Limits, CME Group Comment Letter (Nov. 26, 2019), available at https://comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). CME Group formally provided recommended Federal spot month position limit levels for each of its core referenced futures contracts. 617See IFUS—Estimated Deliverable Supply— Softs Methodology, IFUS Comment Letter (May 14,
2019) and Reproposal—Position Limits for
Derivatives (RIN 3038–AD99) and ICE Comment Letter (Feb. 28, 2017) (attached Sept. 28, 2016 comment letter), available at https:// comments.cftc.gov (comment file for Proposed Rule 85 FR 11596 and Proposed Rule 81 FR 96704, respectively). IFUS did not formally provide recommended Federal spot month position limit levels for each of IFUS’s core referenced futures contracts. However, ICE had previously recommended setting Federal spot month position limit levels for IFUS’s core referenced futures contracts at 25% of EDS in its comment letter in connection with the 2016 Reproposal and Commission staff also confirmed with ICE/IFUS’s representatives that ICE/IFUS’s position has remained the same with respect to the Federal spot month position limit levels since the 2016 Reproposal. The Commission notes, however, with respect to ICE Cotton No. 2 (CT), that IFUS has submitted a supplemental comment letter recommending that the Federal spot month position limit level be set at 900 contracts, instead of at 25% of EDS. See IFUS—Estimated Deliverable Supply— Cotton Methodology, August 2020, IFUS Comment Letter (August 27, 2020), available at https:// comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). 618See Updated Deliverable Supply Data— Potential Position Limits Rulemaking, MGEX Comment Letter (Aug. 31, 2018), available at https://comments.cftc.gov (comment file for Proposed Rule 85 FR 11596). MGEX did not formally provide a recommended Federal spot month position limit level for its core referenced futures contract (MGEX Hard Red Spring Wheat (MWE)) because it was opposed to providing a static number for the Federal spot month position limit level that was based on a fixed formula. Instead, MGEX sought to be able to adjust the Federal spot month position limit level based on updated EDS figures and market conditions. However, MGEX stated that the Federal spot month position limit level for MGEX Hard Red Spring Wheat (MWE) should be no lower than 1,000 contracts and also submitted calculations for setting the Federal spot month position limit level at 25% of EDS. Furthermore, MGEX supported setting the Federal spot month position limit level for MGEX Hard Red Spring Wheat (MWE) at 25% of EDS level in its comment letter. MGEX at 3. 619 85 FR at 11625. 620 Id. 621 7 U.S.C. 6a(a)(3)(B). 622 85 FR at 11625–11626. 623 Id. 624CEA section 4a(a)(1) requires the Commission to address ‘‘[e]xcessive speculation . . . causing sudden or unreasonable fluctuations or unwarranted [price] changes . . . .’’ Speculative activity that is not ‘‘excessive’’ in this manner is not a focus of CEA section 4a(a)(1). Rather, speculative activity may generate liquidity, including liquidity for bona fide hedgers, by enabling market participants with bona fide hedging positions to trade more efficiently. Setting position limits too The proposed Federal spot month position limit levels for all referenced contracts were set at 25% or less of updated EDS and were derived
from the recommendations by CME Group,616 IFUS,617 and MGEX618 for each of their respective core referenced futures contracts. Federal spot month position limit levels for any contract with a proposed level above 100 contracts were rounded up to the nearest 100 contracts from the exchange-recommended limit level or from 25% of updated EDS, as applicable. As discussed in the 2020 NPRM, the existing Federal spot month position limit levels have remained constant for decades, but the markets have changed significantly during that time period.619 As a result, some of the deliverable supply estimates on which the existing Federal spot month position limits were originally based were decades out of date.620
ii. Summary of the Commission
Determination—Federal Spot Month Position Limit Levels a. Federal Spot Month Position Limit Levels Adopted as Proposed, Except for ICE Cotton No. 2 (CT) and NYMEX Henry Hub Natural Gas (NG) The Commission is adopting the Federal spot month position limit levels as proposed, except for modifications with respect to ICE Cotton No. 2 (CT) and NYMEX NG. Specifically, the Federal spot month position limit levels for all 25 core referenced futures contracts are set at or below 25% of EDS, except for the cash-settled NYMEX NG referenced contracts. With respect to ICE Cotton No. 2 (CT), the Commission is adopting a lower Federal spot month position limit level of 900 contracts instead of the proposed 1,800 contracts. The reasons for this change are discussed in Section II.B.3.v. With respect to NYMEX NG, the Final Rule is adopting the same Federal spot month position limit level as proposed in the 2020 NPRM, but the Final Rule is applying the cash-settled portion of the Federal spot month position limit for NYMEX NG separately for each exchange that lists a cash-settled NYMEX NG referenced contract, as well as the cash-settled NYMEX NG OTC swaps market, rather than on an aggregate basis across all exchanges and the OTC swaps market as it does for each of the other core referenced futures contracts. The reasons for this change are discussed in Section II.B.3.vi. (1) The Final Rule Achieves the Four Statutory Objectives in CEA Section 4a(a)(3)(B) Before summarizing and addressing comments below regarding the proposed Federal spot month position limit levels, the Commission states at the outset that the final Federal spot month position limit levels, in conjunction with the rest of the Federal position limits framework, will achieve the four policy objectives in CEA section 4a(a)(3)(B). Namely, they will: (1) Diminish, eliminate, or prevent excessive speculation; (2) deter and prevent market manipulation, squeezes, and corners; (3) ensure sufficient market liquidity for bona fide hedgers; and (4) ensure that the price discovery function of the underlying market is not disrupted.621 In achieving these four statutory objectives, the Commission first believes that the Federal spot month position limit levels are low enough to prevent excessive speculation and also protect price discovery. Setting the Federal spot month position limit levels at or below 25% of EDS is critically important because it would be difficult, in the absence of other factors, for a market participant to corner or squeeze a market if the participant holds less than or equal to 25% of deliverable supply.622 This is because, among other things, any potential economic gains resulting from the manipulation may be insufficient to justify the potential costs, including the costs of acquiring and ultimately offloading the positions used to effectuate the manipulation.623 By restricting positions to a proportion of the deliverable supply of the commodity, the Federal spot month position limits
require that no one speculator can hold a position larger than 25% of deliverable supply, reducing the possibility that a market participant can use derivatives, including referenced contracts, to affect the price of the cash commodity (and vice versa). Limiting a speculative position based on a percentage of deliverable supply also restricts a speculative trader’s ability to establish a leveraged position in cash-settled derivative contracts, reducing that trader’s incentive to manipulate the cash settlement price. Further, by finalizing levels that are sufficiently low to prevent market manipulation, including corners and squeezes, the levels also help ensure that the price discovery function of the underlying market is not disrupted, because markets that are free from corners, squeezes, and other manipulative activity reflect fundamentals of supply and demand, rather than artificial pressures. The Commission also believes that the Federal spot month position limit levels adopted herein are high enough to ensure that there is sufficient market liquidity for bona fide hedgers.624 The

low could result in reduced liquidity, including for bona fide hedgers. 85 FR at 11626. 625 85 FR at 11626. The Commission notes that it has observed a brief period of illiquidity during the early part of the spot month for ICE Cotton No. 2 (CT), which is discussed in Section II.B.3.v. 626 Id. Eighteen of the core referenced futures contracts will have Federal spot month position limit levels that are higher than current exchange￾set spot month position limit levels. CME Live Cattle (LC), COMEX Gold (GC), COMEX Copper (HG), CBOT Oats (O), NYMEX Platinum (PL), and NYMEX Palladium (PA) will have Federal spot month position limit levels that are equal to the current exchange-set spot month position limit levels. Finally, although currently there is technically no exchange-set spot month position limit for ICE Sugar No. 16 (SF), this contract is subject to a single month position limit level of 1,000 contracts, which effectively serves as its spot month position limit level. As a result, the Federal spot month position limit level for ICE Sugar No. 16 (SF) will effectively be higher than its current exchange-set spot month position limit level. 627See, e.g., Revision of Federal Speculative Position Limits, 57 FR 12766, 12770 (Apr. 13, 1992). 628 85 FR at 11627. 629 Id. 630 Id. 631The exception to this is the cash-settled NYMEX NG referenced contracts, which is discussed in detail in Section II.B.3.vi. 632 85 FR at 11627. 633 Id. at 11628. 634 Id. 635Final § 150.5(a). For the nine legacy agricultural contracts, the Final Rule also requires exchanges to set their own non-spot month position limit levels at or below the respective Federal non￾spot month position limit level. For the 16 non￾legacy core referenced futures contracts, final § 150.5(b)(2) requires exchanges to implement either position limits or position accountability during the non-spot month for physical commodity derivatives that are not subject to Federal position limits ‘‘at a level that is necessary and appropriate to reduce the potential threat of market manipulation or price distortion of the contract’s or the underlying commodity’s price or index.’’ 636 85 FR at 11633. 637See ASR at 2; CCI at 2; Shell at 3; EEI/EPSA at 3; Suncor at 2, CEWG at 3; COPE at 2, 4; SIFMA AMG at 3–4; MGEX at 1; 3; MFA/AIMA at 1; AFIA at 1; CMC at 6; NGFA at 3; PIMCO at 6; CME Group at 4–6; NOPA at 1; FIA at 2; and AQR at 8–10. Commission has not observed a general lack of liquidity for bona fide hedgers in the markets for the 25 core referenced futures contracts, which are some of the most liquid markets overseen by the Commission.625 By generally increasing the existing Federal spot month position limit levels for the nine legacy agricultural contracts based on updated data, and by adopting Federal spot month position limit levels that are generally equal to or higher than existing exchange-set levels for the 16 non-legacy core referenced futures contracts, the Commission does not expect the final
Federal position limit levels to reduce liquidity for bona fide hedgers.626 Furthermore, the Commission has previously stated that ‘‘there is a range of acceptable limit levels,’’ 627 and continues to believe that is true.628 There is no single ‘‘correct’’ spot month position limit level for a given contract, and it is likely that a number of limit levels within a certain range could effectively achieve the four policy objectives in CEA section 4a(a)(3)(B).629 The Commission believes that the spot month position limit levels adopted herein fall within a range of acceptable levels.630 This determination is based on the Commission’s experience in administering its own Federal position limits regime, overseeing exchange-set position limits, and being closely involved in determining the EDS figures underlying the position limit levels, as well as the fact that the Federal spot month position limit levels are generally set at or below 25% of EDS.631 In addition, the Federal spot month position limit levels are properly calibrated to account for differences between markets. For example, the Commission considered the unique delivery mechanisms for CME Live Cattle (LC) and the NYMEX metals core referenced futures contracts in calibrating the Federal spot month position limit levels for those contracts.632 The Commission also considered the volatility of the EDS for COMEX Copper (HG) in determining its limit level.633 Furthermore, with respect to NYMEX NG, the Commission, in fine￾tuning the proposed limits, considered:
the underlying natural gas infrastructure vis-a`-vis commodities underlying other energy core referenced futures contracts; the relatively high liquidity in the cash￾settled markets; and the public comments received in response to the 2020 NPRM.634 (2) Federal Position Limit Levels Operate as Ceilings Finally, consistent with the 2020 NPRM and the Final Rule’s position limits framework that leverages existing exchange-level programs and expertise, the Federal position limit levels operate as ceilings. This framework, with Federal spot month limits layered over exchange-set limits, achieves the Commission’s objectives in preventing market manipulation, squeezes, corners, and excessive speculation while also ensuring sufficient market liquidity for bona fide hedgers and avoiding a disruption of the price discovery function of the underlying market. This is, in part, because a layered approach facilitates more expedited responses to rapidly evolving market conditions through exchange action. Under the Final Rule, exchanges are required to set their own spot month position limit levels at or below the respective Federal spot month position limit levels.635 They are also permitted to adjust those levels based on market conditions as long as they are set at or below the Federal spot month position limit levels. Exchanges may also impose liquidity and concentration surcharges to initial margin if they are vertically integrated with a derivatives clearing organization.636 All of these exchange actions can be implemented significantly faster than Commission action, and an immediate response is critical in managing rapidly evolving market conditions. As a result, by having the Federal position limit levels function as ceilings, the position limits framework adopted in this Final Rule will allow exchanges to lower or raise their position limit levels across a greater range of acceptable Federal position limit levels, which will facilitate a faster response to more varied market conditions than if the Federal position limit levels did not operate as ceilings.
iii. Comments and Discussion of Final
Rule—Federal Spot Month Position Limit Levels Many commenters supported the proposed Federal spot month position limit levels and the method by which the Commission determined those limit levels.637 However, some commenters raised concerns or otherwise commented with respect to: (1) The proposed Federal spot month position limit levels and the methodology used to arrive at those levels generally; (2) the Commission’s review of exchanges’ EDS figures and their recommended spot month position limit levels; (3) a lack of a phase-in for Federal spot month position limit levels; (4) the proposed spot month position limit level for ICE Cotton No. 2 (CT); (5) the proposed spot month position limit level for NYMEX NG and other issues relating to NYMEX NG; and (6) the issue of parity among the proposed Federal spot month position limit levels for the three wheat core referenced futures contracts. The Commission will discuss each of these issues, the related comments, and the Commission’s corresponding determination in greater detail below. a. Federal Spot Month Position Limit Levels and the Commission’s Underlying Methodology, Generally (1) Comments—Federal Spot Month Position Limit Levels and the Commission’s Underlying Methodology, Generally Better Markets objected to the Commission’s proposed Federal spot month position limit levels and

638Better Markets at 41.
639PMAA at 2.
640AFR at 2 and Rutkowski at 2.
641Better Markets at 37–38.
642 Id. at 38.
643 Id. at 37.
644PMAA at 2.
645See e.g., Chicago Board of Trade Futures Contracts in Corn and Soybeans; Order To Change and To Supplement Delivery Specifications, 62 FR 60831, 60838 (Nov. 13, 1997) (‘‘The 2,400-contract level of deliverable supplies constitutes four times the speculative position limit for the contract, a benchmark historically used by the Commission’s staff in analyzing the adequacy of deliverable supplies for new contracts’’). 646See 85 FR at 11629, 11633. 647 Deliverable supply is the quantity of the commodity that meets contract specifications that is reasonably expected to be readily available to short traders and salable by long traders at its market value in normal cash-marketing channels at the contract’s delivery points during the specified delivery period, barring abnormal movements in interstate commerce. 17 CFR part 38, Appendix C. suggested that there should be a presumption that the Federal spot month position limit levels be set at 10% of EDS, which could be adjusted as needed.638 Another commenter, PMAA, requested Federal spot month position limit levels of less than 25% of EDS, but did not provide a specific level or a range of levels.639 Other commenters believed that the proposed spot month levels were generally too high merely because they were higher than existing levels.640 In support of its suggestion, Better Markets claimed that, ‘‘speculative trading has been sufficient to accommodate legitimate hedging at currently permissible levels,’’ noting that the Commission has previously stated that ‘‘open interest and trading volume have reached record levels’’ and ‘‘the 25 [core referenced futures contracts] represent some of the most liquid markets overseen by the [CFTC].’’ 641 Better Markets also claimed that, if the Commission conducted a study as to whether the increase in open interest for ‘‘particular [core referenced futures contracts] would warrant lower speculative position limits,’’ those studies would have shown that substantially lower position limit levels would be warranted.642 Better Markets also took issue with the Commission’s 25% or less of EDS formula as a basis for determining Federal spot month position limit levels by stating, ‘‘while deliverable supply must be one key measure for constraining speculation, it is not sufficient to address all statutory objectives for Federal position limits.’’ 643 (2) Discussion of Final Rule—Federal Spot Month Position Limit Levels and the Commission’s Underlying Methodology, Generally The Commission declines to adopt a 10% of EDS across-the-board Federal spot month position limit level, or a general reduction in Federal spot month position limit levels to a level below 25% of EDS for those core referenced futures contracts with a proposed position limit level set at 25% of EDS. In response to Better Markets’ suggestion to adopt Federal spot month position limit levels set at 10% of EDS, the Commission first notes that, although Better Markets provided some arguments for why the
Commission should consider lower Federal position limit levels, Better Markets did not provide any support for the 10% level that it suggested, including any support for the comment letter’s implication that setting limits at or below 25% of EDS is insufficient to prevent corners and squeezes. Likewise, PMAA did not provide any support for adopting Federal spot month position limit levels of less than 25% of EDS, other than claiming that a ‘‘spot month limit of 25 percent of deliverable supply is not sufficiently aggressive to deter excessive speculation’’ and ‘‘prevent market manipulation.’’ 644 The 25% or less of EDS formula that the Commission is utilizing, and has utilized for many years, is a longstanding methodology that was adopted to address corners and squeezes based on the Commission’s experience.645 Also, as described in detail above, the Commission believes that the position limits framework in both the 2020 NPRM and the Final Rule that incorporates the 25% or less of EDS formula achieves the Commission’s statutory objectives in preventing market manipulation, squeezes, corners, and excessive speculation while also ensuring sufficient market liquidity for bona fide hedgers and avoiding a disruption of the price discovery function of the underlying market. In addition, the Final Rule’s position limits framework further addresses the statutory objectives of CEA section 4a(a)(3)(B) by utilizing the Federal position limit levels as a ceiling and leveraging the exchanges’ expertise and experience in determining and adjusting exchange-set position limit levels for their referenced contracts as appropriate, as long as they are under the Federal position limit levels.646 This exchange action can be effectuated significantly faster than a Federal position limit level adjustment, which requires the Commission to engage in a rulemaking process that includes a notice-and-comment period. As a result, compared to the alternative approaches suggested by commenters, this framework will generally facilitate a more expedited response to a more varied set of market conditions, because the exchanges can lower or raise their position limit levels across a greater range of acceptable Federal position limit levels. In response to Better Markets’ claim that the Federal spot month position limit levels should not be adjusted upward as a result of the higher open interest levels and trading volumes that exist today because they demonstrate that there are sufficient levels of speculation and liquidity under the current rules, the Commission first notes that Better Markets did not provide a methodology based on open interest and/or trading volume that the Commission should consider as an alternative to the Commission’s 25% or less of EDS approach. Regardless, the Commission believes that EDS is the more appropriate basis by which the Commission should adjust Federal spot month position limit levels, rather than open interest and/or trading volume, because the
likelihood of a corner or squeeze occurring in the spot month is more closely correlated with the percentage of deliverable supply that a market participant controls. Corners and squeezes are possible in the spot month only because of the imminent prospect of making or taking delivery in the physically-settled contract. Therefore, understanding the amount of deliverable supply in the spot month is critically important.647 Accordingly, the Commission, in consultation with the exchanges, estimated the amount of the underlying commodity available at the specified delivery points in the core referenced futures contract that meet the quality standards set forth in the core referenced futures contract’s terms and conditions in order to understand the size of the relevant commodity market underlying each core referenced futures contract. Once the Commission determined that information in the form of an EDS figure, the Commission was able to determine whether a Federal spot month position limit level would advance the statutory objectives of CEA
section 4a(a)(3)(B), including preventing
corners and squeezes.
A spot month position limit methodology based on open interest and/or trading volume does not take into account the central factors that make corners and squeezes possible (i.e., the imminent prospect of delivery on a physically-settled contract and the deliverable supply of an underlying