Position Limits for Derivatives

1 17 CFR 145.9.
2 7 U.S.C. 1 et seq.
3 17 CFR part 150. Part 150 of the Commission’s regulations establishes federal position limits (that is, position limits established by the Commission, as opposed to exchange-set limits) on nine agricultural contracts. Agricultural contracts refers to the list of commodities contained in the definition of ‘‘commodity’’ in CEA section 1a; 7 U.S.C. 1a. This list of agricultural contracts currently includes nine contracts: CBOT Corn (and Mini-Corn) (C), CBOT Oats (O), CBOT Soybeans (and Mini-Soybeans) (S), CBOT Wheat (and MiniWheat) (W), CBOT Soybean Oil (SO), CBOT Soybean Meal (SM), MGEX Hard Red Spring Wheat (MWE), CBOT KC Hard Red Winter Wheat (KW), and ICE Cotton No. 2 (CT). See 17 CFR 150.2. The position limits on these agricultural contracts are referred to as ‘‘legacy’’ limits because these contracts have been subject to federal position limits for decades. 4See 17 CFR 150.2. 5See 17 CFR 150.3. 6See 17 CFR 150.4. 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: Proposed rule. SUMMARY: The Commodity Futures Trading Commission (‘‘Commission’’ or ‘‘CFTC’’) is proposing amendments to regulations concerning speculative position limits to conform to the Wall Street Transparency and Accountability Act of 2010 (‘‘Dodd-Frank Act’’) amendments to the Commodity Exchange Act (‘‘CEA’’ or ‘‘Act’’). Among other amendments, the Commission proposes 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 limits; new and amended definitions for use throughout the position limits regulations, including a revised definition of ‘‘bona fide hedging transactions or positions’’ 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 limits; new enumerated hedges; and amendments to certain regulatory provisions that would eliminate Form 204, enabling the Commission to leverage cash-market reporting submitted directly to the exchanges. DATES: Comments must be received on or before April 29, 2020. ADDRESSES: You may submit comments, identified by ‘‘Position Limits for Derivatives’’ and RIN 3038–AD99, by any of the following methods:

CFTC Comments Portal: https://
comments.cftc.gov. Select the ‘‘Submit Comments’’ link for this rulemaking and follow the instructions on the Public Comment Form.
Mail: Send to Christopher
Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the
same instructions as for Mail, above. Please submit your comments using only one of these methods. To avoid possible delays with mail or in-person deliveries, submissions through the CFTC Comments Portal are encouraged. All comments must be submitted in English, or if not, be accompanied by an English translation. Comments will be posted as received to https:// comments.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (‘‘FOIA’’), a petition for confidential treatment of the exempt information may be submitted according to the procedures established in § 145.9 of the Commission’s regulations.1 The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse, or remove any or all submissions from https://www.comments.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under FOIA. FOR FURTHER INFORMATION CONTACT:
Aaron Brodsky, Senior Special Counsel, (202) 418–5349, abrodsky@cftc.gov; Steven Benton, Industry Economist, (202) 418–5617, sbenton@cftc.gov; Jeanette Curtis, Special Counsel, (202) 418–5669, jcurtis@cftc.gov; Steven Haidar, Special Counsel, (202) 418– 5611, shaidar@cftc.gov; Harold Hild, Policy Advisor, 202–418–5376, hhild@ cftc.gov; or Lillian Cardona, Special Counsel, (202) 418–5012, lcardona@ cftc.gov; Division of Market Oversight, in each case at the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Introduction
B. Executive Summary
C. Summary of Proposed Amendments
D. The Commission Preliminarily 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
II. Proposed Rules
A. § 150.1—Definitions
B. § 150.2—Federal 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 NonEnumerated 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. Introduction
B. Key Statutory Provisions
C. Ambiguity of Section 4a With Respect
to Necessity Finding
D. Resolution of Ambiguity E. Evaluation of Considerations Relied Upon by the Commission in Previous Interpretation of Paragraph 4a(a)(2) F. Necessity Finding G. Request for Comment
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 and options on futures contracts on various agricultural commodities as authorized by the CEA.2 The existing part 150 position limits regulations 3 include three components:
(1) The level of the limits, which currently apply to nine agricultural commodity derivatives contracts and set a maximum that restricts the number of speculative positions that a person may hold in the spot month, individual month, and all-months-combined; 4 (2) exemptions for positions that constitute bona fide hedges and for certain other types of transactions; 5 and (3) regulations to determine which accounts and positions a person must aggregate for the purpose of determining compliance with the position limit levels.6 The existing federal speculative position limits function in parallel to exchange-set limits required by

8 7 U.S.C. 6a(a)(1); see infra Section III.F. (discussion of the necessity finding). 9 7 U.S.C. 6a(a)(5). 10Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 2011); Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011) (‘‘2011 Final Rulemaking’’). 11 Int’l Swaps & Derivatives Ass’n v. U.S. Commodity Futures Trading Comm’n, 887 F. Supp. 2d 259 (D.D.C. 2012) (‘‘ISDA’’). 12Position 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). 13Unless indicated otherwise, the use of the term ‘‘exchanges’’ throughout this proposal refers to DCMs and Swap Execution Facilities. 14Aggregation 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 percent 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. 15Because the earlier proposals are withdrawn, comments on them will not be part of the administrative record with respect to the current proposal, except where expressly referenced herein. Commenters 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. 16The specific proposed new regulations are discussed in detail later in this release. designated contract market (‘‘DCM’’) Core Principle 5.7 Certain contracts are thus subject to both federal and DCMset limits, whereas others 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’’ ‘‘[e]xcessive speculation . . . causing sudden or unreasonable fluctuations or unwarranted changes in . . . price . . .’’ 8 The Commission also interprets these amendments as tasking the Commission with establishing position limits on any ‘‘economically equivalent’’ swaps.9 The Commission previously issued proposed and final rules in 2011 to implement the provisions of the DoddFrank Act regarding position limits and the bona fide hedge definition.10 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 150.2.11 Subsequently, the Commission proposed position limits regulations in 2013 (‘‘2013 Proposal’’), June of 2016 (‘‘2016 Supplemental Proposal’’), and again in December of 2016 (‘‘2016 Reproposal’’).12 The 2016 Reproposal would have amended part 150 to, among other things: establish federal position limits for 25 physical commodity futures contracts and for ‘‘economically equivalent’’ futures, options on futures, and swaps; revise the existing exemptions from such limits, including for bona fide hedges; and establish a framework for exchanges 13 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 those prior rulemakings. In a companion proposed rulemaking, the CFTC also proposed, and later adopted in 2016, amendments to rules governing aggregation of positions for purposes of compliance with federal position limits.14 These aggregation rules currently apply only to the nine agricultural contracts subject to existing federal limits, and going forward would apply to the commodities that would be subject to federal limits under this release. After reconsidering the prior proposals, including reviewing the comments responding thereto, the Commission is withdrawing from further consideration the 2013 Proposal, the 2016 Supplemental Proposal, and the 2016 Reproposal.15 Instead, the Commission is now issuing a new proposal (‘‘2020 Proposal’’). The 2020 Proposal is intended to (1) recognize differences across commodities and contracts, including differences in commercial hedging and cash-market reporting practices; (2) focus on derivatives contracts that are critical to price discovery and distribution of the underlying commodity such that the burden of excessive speculation in the derivatives contract may have a particularly acute impact on interstate commerce for that commodity; and (3) reduce duplication and inefficiency by leveraging existing expertise and processes at DCMs. For these general reasons, discussed in turn below, the Commission proposes new regulations, rather than finalizing the 2016 Reproposal.16 First, the Commission preliminarily believes that any position limits regime must take into account differences across commodity and contract types. The existing federal position limits regulations apply only to nine contracts, all of which are physically-settled futures on agricultural commodities. Limits on these commodities have been in place for decades, as have the federal program for exemptions from these limits and the federal rules governing DCM-set limits on such commodities. The existing framework is largely a historical remnant of an approach that predates cash-settled futures contracts, let alone swaps, institutional-investor interest in commodity indexes, and highly liquid energy markets. 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 price; and establishing limits on swaps that are ‘‘economically equivalent’’ to certain futures contracts. The Commission has preliminarily determined that an approach that is flexible enough to accommodate potential future, unpredictable developments in commercial hedging practices would be well-suited for the current derivatives markets by accommodating differences in commodity types, contract specifications, hedging practices, cashmarket trading practices, organizational structures of hedging participants, and liquidity profiles of individual markets. The Commission proposes to build this flexibility into several parts of the proposed regulations, including:
Exchange-set limits and/or accountability, rather than federal limits, outside of the spot month for referenced contracts based on commodities other than the nine legacy agricultural commodities; the ability for exchanges to use more than one formula when setting their own limit levels; an updated formula for federal non-spot month levels on the nine legacy agricultural contracts that is calibrated to recently observed trading activity; a bona fide hedging definition that is broad enough to accommodate common commercial hedging practices, including anticipatory hedging practices such as anticipatory merchandising; a broader range of exchange-granted recognitions for purposes of federal and

17See infra Section III.F.
18See infra Section III.F.1.
19While the Commission is proposing federal non-spot month limits only for the nine legacy agricultural core referenced futures contracts, exchanges would be required to establish, consistent with Commission standards set forth in this proposal, exchange-set position limits and/or position accountability levels in the non-spot months for the non-legacy agricultural, metals, and energy core referenced futures contracts. exchange-set limits that are in line with common commercial hedging practices; the elimination of a restriction for purposes of federal limits on holding positions during the last trading days of the spot month; and broader discretion for market participants to measure risk in the manner most suitable for their business. Second, the proposal establishes limits on a limited set of commodities for which the Commission preliminarily finds that speculative position limits are necessary.17 As described below, this necessity finding is based on a combination of factors including: The particular importance of these contracts in the price discovery process for their respective underlying commodities, the fact that they require physical delivery of the underlying commodity, and, in some cases, the commodities’ particular importance to the national economy and especially acute economic burdens on interstate commerce that would arise from excessive speculation causing sudden or unreasonable fluctuations or unwarranted changes in the price of the commodities underlying these contracts.18 Third, the Commission preliminarily believes that 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’ self-regulatory responsibilities, resources, deep knowledge of their markets and trading practices, close interactions with market participants, existing programs for addressing exemption requests, and ability to generally act more quickly than the Commission, the Commission preliminarily believes that cooperation between the Commission and the exchanges on position limits should not only be continued, but enhanced. For example, exchanges are particularly well-positioned to provide the Commission with estimates of deliverable supply, to recommend limit levels for the Commission’s consideration, and to help administer the program for recognizing bona fide hedges. Further, given that the Commission is proposing to require exchanges to collect, and provide to the Commission upon request, cash-market information from market participants requesting bona fide hedges, the Commission also proposes to eliminate Form 204, which market participants with bona fide hedging positions in excess of limits currently file each month with the Commission to demonstrate cash-market positions justifying such overages. The Commission preliminarily believes that enhanced collaboration will maintain the Commission’s access to information
and result in a more efficient administrative process, in part by reducing duplication of efforts. The Commission invites comments on all aspects of this rulemaking. B. Executive Summary This executive summary provides an overview of the key components of this proposal. The summary only highlights certain aspects of the proposed regulations and generally uses shorthand to summarize complex topics. The executive summary is neither intended to be a comprehensive recitation of the proposal 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 proposed regulations, and Section V includes the actual regulations.

Contracts Subject to Federal
Speculative Position Limits Federal speculative position limits would apply to ‘‘referenced contracts,’’ which include: (a) 25 ‘‘core referenced futures contracts;’’ (b) futures and options directly or indirectly linked to a core referenced futures contract; and (c) ‘‘economically equivalent swaps.’’ a. Core Referenced Futures Contracts Federal speculative position limits would apply to the following 25 physically-settled core referenced futures contracts:
Legacy agricultural
(federal limits during and outside the spot month) Non-legacy agricultural (federal limits only during the spot month) 19 Metals (federal limits only during the spot month) CBOT Corn (C) ................................................... CBOT Rough Rice (RR) .................................. COMEX Gold (GC). CBOT Oats (O) .................................................. ICE Cocoa (CC) ............................................... COMEX Silver (SI) CBOT Soybeans (S) .......................................... ICE Coffee C (KC) ........................................... COMEX Copper (HG). CBOT Wheat (W) ............................................... ICE FCOJ–A (OJ) ............................................ NYMEX Platinum (PL). CBOT Soybean Oil (SO) .................................... ICE U.S. Sugar No. 11 (SB) ............................ NYMEX Palladium (PA). CBOT Soybean Meal (SM) ................................ ICE U.S. Sugar No. 16 (SF) ............................ Energy (federal limits only during the spot month) MGEX Hard Red Spring Wheat (MWE) ............. CME Live Cattle (LC) ....................................... NYMEX Henry Hub Natural Gas (NG). ICE Cotton No. 2 (CT) ........................................ NYMEX Light Sweet Crude Oil (CL). CBOT KC Hard Red Winter Wheat (KW) .......... NYMEX New York Harbor ULSD Heating Oil (HO). NYMEX New York Harbor RBOB Gasoline (RB). b. Futures and Options on Futures Linked to a Core Referenced Futures Contract Referenced contracts would also include futures and options on futures that are directly or indirectly linked to the price of a core referenced futures contract or to the same commodity underlying the applicable core referenced futures contract for delivery at the same location as specified in that core referenced futures contract. Referenced contracts, however, would not include location basis contracts, commodity index contracts, swap guarantees, and trade options that meet certain requirements.

20The proposed federal spot month limit for Live Cattle would feature a step-down limit similar to the CME’s existing Live Cattle step-down exchange set limit. The proposed federal spot month stepdown 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. 21The proposed federal spot month limit for Light Sweet Crude Oil would feature the following stepdown limit: (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.
c. Economically Equivalent Swaps
Referenced contracts would also include economically equivalent swaps, which would be defined as swaps with ‘‘identical material’’ contractual specifications, terms, and conditions to a referenced contract. Swaps in commodities other than natural gas that have identical material specifications, terms, and conditions to a referenced contract, but differences in lot size specifications, notional amounts, or delivery dates diverging by less than one calendar day, would still be deemed economically equivalent swaps. Natural gas swaps that have identical material specifications, terms, and conditions to a referenced contract, but differences in lot size specifications, notional amounts, or delivery dates diverging by less than two calendar days, would still be deemed economically equivalent swaps.
2. Federal Limit Levels During the Spot
Month
Federal spot month limits would apply to referenced contracts on all 25 core referenced futures contracts. The following proposed spot month limit levels, summarized in the table below, are set at or below 25 percent of deliverable supply, as estimated using recent data provided by the DCM listing the core referenced futures contract, and verified by the Commission. The proposed spot month limits would apply on a futures-equivalent basis based on the size of the unit of trading of the relevant core referenced futures contract, and would apply ‘‘separately’’ to physically-settled and cash-settled referenced contracts. Therefore, a market participant could net positions across physically-settled referenced contracts, and separately could net positions across cash-settled referenced contracts, but would not be permitted to net cash-settled referenced contracts with physically-settled referenced contracts. Core referenced futures contract 2020 Proposed spot month limit Existing federal spot month limit Existing exchange-set spot month limit Legacy Agricultural Contracts CBOT Corn (C) .............................................................................................. 1,200 600 600
CBOT Oats (O) .............................................................................................. 600
CBOT Soybeans (S) ...................................................................................... 1,200 600 600 CBOT Soybean Meal (SM) ............................................................................ 1,500 720 720 CBOT Soybean Oil (SO) ............................................................................... 1,100 540 540 CBOT Wheat (W) .......................................................................................... 1,200 600 600/500/400/300/220 CBOT KC Hard Red Winter Wheat (KW) ..................................................... 1,200 600 600 MGEX Hard Red Spring Wheat (MWE) ........................................................ 1,200 600 600 ICE Cotton No. 2 (CT) ................................................................................... 1,800 300 300 Other Agricultural Contracts CME Live Cattle (LC) .................................................................................... 20 600/300/200 n/a 450/300/200 CBOT Rough Rice (RR) ................................................................................ 800 n/a 600/200/250 ICE Cocoa (CC) ............................................................................................. 4,900 n/a 1,000 ICE Coffee C (KC) ......................................................................................... 1,700 n/a 500 ICE FCOJ–A (OJ) .......................................................................................... 2,200 n/a 300 ICE U.S. Sugar No. 11 (SB) .......................................................................... 25,800 n/a 5,000 ICE U.S. Sugar No. 16 (SF) .......................................................................... 6,400 n/a n/a Metals Contracts COMEX Gold (GC) ........................................................................................ 6,000 n/a 3,000 COMEX Silver (SI) ......................................................................................... 3,000 n/a 1,500 COMEX Copper (HG) .................................................................................... 1,000 n/a 1,500 NYMEX Platinum (PL) ................................................................................... 500 n/a 500 NYMEX Palladium (PA) ................................................................................. 50 n/a 50 Energy Contracts NYMEX Henry Hub Natural Gas (NG) .......................................................... 2,000 n/a 1,000 NYMEX Light Sweet Crude Oil (CL) ............................................................. 21 6,000/5,000/4,000 n/a 3,000 NYMEX New York Harbor ULSD Heating Oil (HO) ...................................... 2,000 n/a 1,000 NYMEX New York Harbor RBOB Gasoline (RB) .......................................... 2,000 n/a 1,000
3. Federal Limit Levels Outside of the
Spot Month
Federal limits outside of the spot month would apply only to referenced contracts based on the nine legacy agricultural commodities subject to existing federal limits. All other referenced contracts subject to federal limits would be subject to federal limits only during the spot month, as specified above, and otherwise would only be subject to exchange-set limits and/or position accountability levels outside of the spot month.

22 In addition, as explained further below, exchanges may choose to participate in the Commission’s new proposed streamlined process for reviewing bona fide hedge exemption applications for purposes of federal limits. 23The existing definition of ‘‘bona fide hedging transactions and positions’’ enumerates the following hedging transactions: (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 contracts under 1.3(z)(2)(ii)(A); (4) certain crosscommodity hedges under 1.3(z)(2)(ii)(B); (5) hedges of unfilled anticipated requirements under 1.3(z)(2)(ii)(C) and (6) hedges of offsetting unfixed price cash commodity sales and purchases under 1.3(z)(2)(iii). The following additional hedging practices are not enumerated in the existing regulation, but are included as enumerated hedges in the 2020 Proposal: (1) Hedges by agents; (2) hedges of anticipated royalties; (3) hedges of services; (4) offsets of commodity trade options; and (5) hedges of anticipated merchandising. The following proposed non-spot month limit levels, summarized in the
table below, are set at 10 percent of
open interest for the first 50,000 contracts, with an incremental increase of 2.5 percent of open interest thereafter, and would apply on a futuresequivalent basis based on the size of the unit of trading of the relevant core referenced futures contract:
Core referenced futures contract 2020 Proposed single month and all-months combined limit Existing federal single month and all-monthscombined limit Existing exchange-set single month and all-monthscombined limit CBOT Corn (C) .......................................................................................................... 57,800 33,000 33,000 CBOT Oats (O) .......................................................................................................... 2,000 CBOT Soybean (S) .................................................................................................... 27,300 15,000 15,000 CBOT Soybean Meal (SM) ........................................................................................ 16,900 6,500 6,500 CBOT Soybean Oil (SO) ........................................................................................... 17,400 8,000 8,000 CBOT Wheat (W) ...................................................................................................... 19,300 12,000 12,000 CBOT KC HRW Wheat (KW) .................................................................................... 12,000 MGEX HRS Wheat (MWE) ........................................................................................ 12,000 ICE Cotton No. 2 (CT) ............................................................................................... 11,900 5,000 5,000
4. Exchange-Set Limits and Exemptions
Therefrom a. Contracts Subject to Federal Limits An exchange that lists a contract subject to federal limits, as specified above, would be required to set its own limits for such contracts at a level that is no higher than the federal level. Exchanges would be allowed to grant exemptions from their own limits, provided the exemption does not subvert the federal limits framework.22 b. Physical Commodity Contracts Not Subject to Federal Limits For physical commodity contracts not subject to federal limits, an exchange would generally be required to set spot month limits no greater than 25 percent of deliverable supply, but would have flexibility to submit other approaches for review by the Commission, provided the approach results in spot month 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, such an exchange would have 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 would provide several examples of formulas that the Commission has determined would meet this standard, but an exchange would have the flexibility to develop other approaches. Exchanges would be provided flexibility to grant a variety of exemption types, provided that the exchange must take into account whether the exemption would result in a position that would not be in accord with ‘‘sound commercial practices’’ in the market for which the exchange is considering the application, and/or would ‘‘exceed an amount that may be established and liquidated in an orderly fashion in that market.’’
5. Limits on ‘‘Pre-Existing Positions’’
Certain ‘‘Pre-Existing Positions’’ that were entered into prior to the effective date of final position limits rules would not be subject to federal limits. Both ‘‘Pre-Enactment Swaps,’’ which are swaps entered into prior to the DoddFrank Act whose terms have not expired, and ‘‘Transition Period Swaps,’’ which are swaps entered into between July 22, 2010 and 60 days after the publication of final position limits rules, would not be subject to federal limits. All other ‘‘Pre-Existing Positions’’ that are acquired in good faith prior to the effective date of final position limits rules would be subject to federal limits during, but not outside, the spot month.
6. Substantive Standards for Exemptions
From Federal Limits a. Bona Fide Hedge Recognition Hedging transactions or positions may continue to exceed federal limits if they satisfy all three elements of the ‘‘general’’ bona fide hedging definition:
(1) The hedge represents a substitute for transactions or positions made at a later time in a physical marketing channel (‘‘temporary substitute test’’); (2) the hedge is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise (‘‘economically appropriate test’’); and (3) the hedge arises from the potential change in value of actual or anticipated assets, liabilities, or services (‘‘change in value requirement’’). The Commission proposes several changes to the existing bona fide hedging definition, including those described immediately below, and also proposes a streamlined process for granting bona fide hedge recognitions, described further below. First, for referenced contracts based on the 25 core referenced futures contracts listed in § 150.2(d), the Commission would expand the current list of enumerated bona fide hedges to cover additional hedging practices included in the 2016 Reproposal, as well as hedges of anticipated merchandising.23 Persons who hold a bona fide hedging transaction or position in accordance with § 150.1 in referenced contracts based on one of the 25 core referenced futures contracts and whose hedging practice is included in the list of enumerated hedges in
Appendix A of part 150 would not be
required to request prior approval from

24The 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. the Commission to hold such bona fide hedge position. That is, such exemptions would be self-effectuating for purposes of federal speculative position limits, so a person would only be required to request the bona fide hedge exemption from the relevant exchange for purposes of exchange-set limits. Transactions or positions that do not fit within one of the enumerated hedges could still be recognized as a bona fide hedge, provided the Commission, or an exchange subject to Commission oversight, recognizes the position as such using one of the processes described below. The Commission would be open to adopting additional enumerated hedges as it becomes more comfortable with evolving hedging practices, particularly in the energy space, and provided the practices comply with the general bona fide hedging definition. Second, the Commission is clarifying its position on whether and when market participants may measure risk on a gross basis rather than on a net basis in order to provide market participants with greater flexibility. Instead of only being permitted to hedge on a ‘‘net basis’’ except in a narrow set of circumstances, market participants would also now be able to hedge positions on a ‘‘gross basis’’ in certain circumstances, provided that the participant has done so over time in a consistent manner and is not doing so to evade the federal limits. Third, market participants would have additional leeway to hold bona fide hedging positions in excess of limits during the last five days of the spot period (or during the time period for the spot month if less than five days). The proposal would not include such a restriction for purposes of federal limits, and would make clear that exchanges continue to have the discretion to adopt such restrictions for purposes of exchange-set limits. The proposal would also include flexible guidance on the circumstances under which exchanges may waive any such limitation for purposes of their own limits. Finally, the proposal would modify 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 would generally no longer be allowed to treat positions entered into for ‘‘risk management purposes’’ 24 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 a 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. b. Spread Exemption Transactions or positions may also continue to exceed federal limits if they qualify as a ‘‘spread transaction,’’ which includes the following common types of spreads: Calendar spreads, intercommodity spreads, quality differential spreads, processing spreads (such as energy ‘‘crack’’ or soybean ‘‘crush’’ spreads), product or by-product differential spreads, or futures-option spreads. Spread exemptions may be granted using the process described below.
c. Financial Distress Exemption
This exemption would allow a market participant to exceed federal limits if necessary to take on the positions and associated risk of another market participant during a potential default or bankruptcy situation. This exemption would be available on a case-by-case basis, depending on the facts and circumstances involved. d. Conditional Spot Month Limit Exemption in Natural Gas The rules would allow market participants with cash-settled positions in natural gas to exceed the proposed 2,000 contract spot month limit, provided that the participant exits its spot month positions in the New York Mercantile Exchange (‘‘NYMEX’’) Henry Hub (NG) physically-settled natural gas contracts, and provided further that the participant’s position in cash-settled natural gas contracts does not exceed 10,000 NYMEX Henry Hub Natural Gas (NG) equivalent-size natural gas contracts per DCM that lists a natural gas referenced contract. Such market participants would be permitted to hold an additional 10,000 contracts in cashsettled natural gas economically equivalent swaps.
7. Process for Requesting Bona Fide
Hedge Recognitions and Spread Exemptions a. Self-Effectuating Enumerated Bona Fide Hedges For referenced contracts based on any core referenced futures contract listed in § 150.2(d), bona fide hedge recognitions for positions that fall within one of the proposed enumerated hedges, including the proposed anticipatory enumerated hedges, would be self-effectuating for purposes of federal limits, provided the market participant separately applies to the relevant exchange for an exemption from exchange-set limits. Such market participants would no longer be required to file Form 204/304 with the Commission on a monthly basis to demonstrate cash-market positions justifying position limit overages. Instead, the Commission would have access to cash-market information such market participants submit as part of their application to an exchange for an exemption from exchanges-set limits, typically filed on an annual basis. b. Bona Fide Hedges That Are Not SelfEffectuating The Commission will consider adding to the proposed list of enumerated hedges at a later time once the Commission becomes more familiar with common commercial hedging practices for referenced contracts subject to federal position limits. Until that time, all bona fide hedging recognitions that are not enumerated in
Appendix A of part 150 would be
granted pursuant to one of the proposed processes for requesting a nonenumerated bona fide hedge recognition, as explained below. A market participant seeking to exceed federal limits for a nonenumerated bona fide hedging transaction or position would be able to choose whether to apply directly to the Commission or, alternatively, apply to the applicable exchange using a new proposed streamlined process. If applying directly to the Commission, the market participant would also have to separately apply to the relevant exchange for relief from exchange-set position limits. If applying to an exchange using the new proposed streamlined process, a market participant would be able to file an application with an exchange, generally at least annually, which would be valid both for purposes of federal and exchange-set limits. Under this streamlined process, if the exchange determines to grant a non-enumerated bona fide hedge recognition for purposes of its exchange-set limits, the

25The categories are: Calendar spreads, intercommodity spreads, quality differential spreads, processing spreads (such as energy ‘‘crack’’ or soybean ‘‘crush’’ spreads), product or by-product differential spreads, and futures-option spreads. 26This 2020 Proposal does not propose to amend current § 150.4 dealing with aggregation of positions for purposes of compliance with federal position limits. Section 150.4 was amended in 2016 in a prior rulemaking. See Final Aggregation Rulemaking, 81 FR at 91454. 27The seven additional agricultural contracts that would be 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 U.S. Sugar No. 11 (SB), and ICE U.S. Sugar No. 16 (SF). The four energy contracts that would be 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 would be 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 proposing federal limits only during the spot month would be subject to exchange-set limits and/or accountability outside of the spot month. 28The 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 MiniCorn) (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. exchange must notify the Commission and the applicant simultaneously. Then, 10 business days (or two business days in the case of sudden or unforeseen bona fide hedging needs) after the exchange issues such a determination, the market participant could rely on the exchange’s determination for purposes of federal limits unless the Commission (and not staff) notifies the market participant otherwise. After the 10 business days expire, the bona fide hedge exemption would be valid both for purposes of federal and exchange position limits and the market participant would be able to take on a position that exceeds federal position limits. Under this streamlined process, during the 10 business day review period, any rejection of an exchange determination would require Commission action. Further, if, for purposes of federal position limits, the Commission determines to reject an application for exemption, the applicant would not be subject to any position limits violation
during the period of the Commission’s review nor once the Commission has issued its rejection, provided the person reduces the position within a commercially reasonable amount of time, as applicable. Under the proposal, positions that do not fall within one of the enumerated hedges could thus still be recognized as bona fide hedges, provided the exchange deems the position to comply with the general bona fide hedging definition, and provided that the Commission does not object to such a hedge within the ten-day (or two-day, as appropriate) window. Requests and approvals to exceed limits would generally have to be obtained in advance of taking on the position, but the proposed rule would allow market participants with sudden or unforeseen hedging needs to file a request for a bona fide hedge exemption within five business days of exceeding the limit. If the Commission rejects the application, the market participant would not be subject to a position limit violation, provided the participant reduces its position within a commercially reasonable amount of time. Among other changes, market participants would also no longer be required to file Form 204/304 with the Commission on a monthly basis to demonstrate cash-market positions justifying position limit overages.
c. Spread Exemptions
For referenced contracts on any commodity, spread exemptions would be self-effectuating for purposes of federal limits, provided that the position: Falls within one of the categories set forth in the proposed ‘‘spread transaction’’ definition,25 and provided further that the market participant separately applies to the applicable exchange for an exemption from exchange-set limits. Market participants with a spread position that does not fit within the ‘‘spread transaction’’ definition with respect to any of the commodities subject to the proposed federal limits may apply directly to the Commission, and must also separately apply to the applicable exchange.
8. Comment Period and Compliance
Date
The public may comment on these rules during a 90-day period that starts after this proposal has been approved by the Commission. Market participants and exchanges would be required to comply with any position limit rules finalized from herein no later than 365 days after publication in the Federal Register.
C. Summary of Proposed Amendments
The Commission is proposing 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 the addition of §§ 150.8, 150.9, and Appendices A– F to part 150.26 Most noteworthy, the Commission proposes the following amendments to the foregoing rule sections, each of which, along with all other proposed changes, is discussed in greater detail in Section II of this release. The following summary is not intended to provide a substantive overview of this proposal, but rather is intended to provide a guide to the rule sections that address each topic. Please see the executive summary above for an overview of this proposal organized by topic, rather than by section number.

The Commission preliminarily
finds that federal speculative position limits are necessary for 25 core referenced futures contracts and proposes federal limits on physicallysettled and linked cash-settled futures, options on futures, and ‘‘economically equivalent’’ swaps for such commodities. The 25 core referenced futures contracts would include the nine ‘‘legacy’’ agricultural contracts currently subject to federal limits and 16 additional non-legacy contracts, which would include: seven additional agricultural contracts, four energy contracts, and five metals contracts.27 Federal spot and non-spot month limits would apply to the nine ‘‘legacy’’ agricultural contracts currently subject to federal limits,28 and only federal spot month limits would apply to the additional 16 non-legacy contracts. Outside of the spot month, these 16 non-legacy contracts would be subject to exchange-set limits and/or accountability levels if listed on an exchange.
Amendments to § 150.1 would 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 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 limits; a ‘‘spread transaction’’ definition; and a definition of ‘‘bona fide hedging transactions or positions’’ 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 would list
the 25 core referenced futures contracts which, along with any associated referenced contracts, would be subject

29Proposed § 150.5 addresses exchange-set position limits and exemptions therefrom, whereas proposed § 150.3 addresses exemptions from federal limits, and proposed § 150.9 addresses federal limits and acceptance of exchange-granted bona fide hedging recognitions for purposes of federal 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. 30 ISDA, 887 F.Supp.2d at 259, 281. 31 7 U.S.C. 6a(a)(2)(A). 32 7 U.S.C. 6a(a)(1). 33 2011 Final Rulemaking, 76 FR at 71626, 71627. 34 ISDA, 887 F.Supp.2d at 279–280. 35 Id. at 281. 36See infra Section III.F. 37 17 CFR 1.3 and 150.1, respectively. 38 In addition to the amendments described below, the Commission proposes 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, Continued to federal limits; and specify the proposed federal spot and non-spot month limit levels. Federal spot month limit levels would be set at or below 25 percent of deliverable supply, whereas federal non-spot month limit levels would be set at 10 percent of open interest for the first 50,000 contracts of open interest, with an incremental increase of 2.5 percent of open interest thereafter.

Amendments to § 150.3 would
specify the types of positions for which exemptions from federal position limit requirements may be granted, and would 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 preenactment and transition period swaps. For all contracts subject to federal limits, bona fide hedge exemptions listed in Appendix A to part 150 as an enumerated bona fide hedge would be self-effectuating for purposes of federal limits. For non-enumerated hedges, market participants must request approval in advance of taking a position that exceeds the federal position limit, except in the case of sudden or unforeseen hedging needs.
Amendments to § 150.5 would
refine the process, and establish nonexclusive 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 limits and physical commodity derivatives not subject to federal limits.29 While the Commission will oversee compliance with federal position limits on swaps, amended § 150.5 would not apply to exchanges with respect to swaps until a later time once exchanges have access to sufficient data to monitor compliance with limits on swaps across exchanges.
New § 150.9 would establish a
streamlined process for addressing requests for bona fide hedging recognitions for purposes of federal limits, leveraging off exchange expertise and resources while affording the Commission an opportunity to intervene as-needed. This process would be used by market participants with nonenumerated positions. Under the proposed rule, market participants could provide one application for a bona fide hedge to a designated contract market or swap execution facility, as applicable, and receive approval of such request for purposes of both exchangeset limits and federal limits.
New Appendix A to part 150 would
contain enumerated hedges, some of which appear in the definition of bona fide hedging transactions and positions in current § 1.3, which would be examples of positions that would comply with the proposed bona fide hedging definition. As the enumerated hedges would be examples of bona fide hedging positions, positions that do not fall within any of the enumerated hedges could still potentially be recognized as bona fide hedging positions, provided the position otherwise complies with the proposed bona fide hedging definition and all other applicable requirements.
Amendments to part 19 and related
provisions would eliminate Form 204, enabling the Commission to leverage cash-market reporting submitted directly to the exchanges under §§ 150.5 and 150.9. D. The Commission Preliminarily 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.’’ 30 The provision states in relevant part that ‘‘the Commission shall’’ establish position limits ‘‘as appropriate’’ for contracts in physical commodities other than excluded commodities ‘‘[i]n accordance with the standards set forth in’’ the preexisting section 4a(a)(1).31 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.32 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.33 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.34 The court vacated the 2011 Final Rulemaking and directed the Commission to apply its experience and expertise to resolve that ambiguity.35 The Commission has done so and preliminarily 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.36 A full legal analysis is set forth infra at
Section III.F.
The Commission preliminarily finds that position limits are necessary for the 25 core referenced futures contracts, and any associated referenced contracts. This preliminary finding is based on a combination of factors including: The particular importance of these contracts in the price discovery process for their respective underlying commodities, the fact that they require physical delivery of the underlying commodity, and, in some cases, the commodities’ particular importance to the national economy and especially acute economic burdens that would arise from excessive speculation causing sudden or unreasonable fluctuations or unwarranted changes in the price of the commodities underlying these contracts.
II. Proposed Rules
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.37 The Commission proposes to update and supplement the definitions in § 150.1, including by moving a revised definition of ‘‘bona fide hedging transactions and positions’’ from § 1.3 into § 150.1. The proposed changes are intended, among other things, to conform the definitions to the DoddFrank Act amendments to the CEA.38

(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.’’). 39 7 U.S.C. 6a(c)(1). While portions of the CEA and proposed § 150.1 respectively refer, and would refer, to the phrase ‘‘bona fide hedging transactions or positions,’’ the Commission may use the phrases ‘‘bona fide hedging position,’’ ‘‘bona fide hedging definition,’’ and ‘‘bona fide hedge’’ throughout this
section of the release as shorthand to refer to the
same.
40 7 U.S.C. 6a(c)(2).
41See, 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 newlyestablished Commission defined that term. Id. 42 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 current 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 proposes to address the need to formally remove the incorrect version of the bona fide hedging definition as part of this rulemaking. 43See infra Section II.C.2. (discussion of proposed § 150.3) and Section II.G.3. (discussion of proposed § 150.9). 44 17 CFR 1.3. 45 17 CFR part 19. 46 17 CFR 1.3. 47 Id. 48See Revision of Federal Speculative Position Limits, 52 FR 38914 (Oct. 20, 1987). 49Commodity Futures Modernization Act of 2000, Public Law 106–554, 114 Stat. 2763 (Dec. 21, 2000). 50See 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b–3(f)(6). Each proposed defined term is discussed in alphabetical order below.

‘‘Bona Fide Hedging Transactions or
Positions’’ a. Background 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 . . . .’’ 39 The Dodd-Frank Act directed the Commission, for purposes of implementing CEA section 4a(a)(2), to adopt a definition consistent with CEA section 4a(c)(2).40 The current definition of ‘‘bona fide hedging transactions and positions,’’ which first appeared in § 1.3 of the Commission’s regulations in the 1970s,41 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 proposes to remove the current bona fide hedging definition from § 1.3 and replace it with an updated bona fide hedging definition that would appear alongside all of the other position limits related definitions in proposed § 150.1.42 This definition would be applied in determining whether a position is a bona fide hedge that may exceed the proposed federal limits set forth in § 150.2. The Commission’s current bona fide hedging definition is described immediately below, followed by a discussion of the proposed new definition. This section of the release describes the substantive standards for bona fide hedges. The process for granting bona fide hedge recognitions is discussed later in this release in connection with proposed §§ 150.3 and 150.9.43 b. The Commission’s Existing Bona Fide Hedging Definition in § 1.3 Paragraph (1) of the current bona fide hedging definition in § 1.3 contains what is currently labeled the ‘‘general’’ bona fide hedging definition, which has five key elements and requires that the position must: (1) ‘‘normally’’ represent a substitute for transactions or positions made at a later time in a physical marketing channel (‘‘temporary substitute test’’); (2) be economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise (‘‘economically appropriate test’’); (3) arise from the potential change in value of actual or anticipated assets, liabilities, or services (‘‘change in value requirement’’); (4) have a purpose to offset price risks incidental to commercial cash or spot operations (‘‘incidental test’’); and (5) be established and liquidated in an orderly manner (‘‘orderly trading requirement’’).44 Additionally, paragraph (2) currently sets forth a non-exclusive list of four categories of ‘‘enumerated’’ hedging transactions that are included in the general bona fide hedging definition in paragraph (1). Market participants thus need not seek recognition 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, as required by part 19 of the Commission’s regulations.45 The four existing categories of enumerated hedges are: (1)
Hedges of ownership or fixed-price cash commodity purchases and hedges of unsold anticipated production; (2) hedges of fixed-price cash commodity sales and hedges of unfilled anticipated requirements; (3) hedges of offsetting unfixed-price cash commodity sales and purchases; and (4) cross-commodity hedges.46 Paragraph (3) of the current bona fide hedging definition states that the Commission may recognize nonenumerated 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.47
c. Proposed Replacement of the Bona
Fide Hedging Definition in § 1.3 With a New Bona Fide Hedging Definition in § 150.1
i. Background
The list of enumerated hedges found in paragraph (2) of the current bona fide hedging definition in § 1.3 was developed at a time when only agricultural commodities were subject to federal limits, has not been updated since 1987,48 and is likely too narrow to reflect common commercial hedging practices, including for metal and energy contracts. Numerous market and regulatory developments have taken place since then, 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 CFMA 49 and Dodd-Frank Act introduced various regulatory reforms, including the enactment of position limits core principles.50 The Commission is thus proposing to update its bona fide hedging definition to better conform to the current state of the law

51 In this rulemaking, the Commission proposes to allow qualifying exchanges to process requests for non-enumerated bona fide hedge recognitions for purposes of federal limits. See infra Section II.G.3. (discussion of proposed § 150.9). 52Bona 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. 53 7 U.S.C. 6a(c)(2)(A)(i). 54 17 CFR 1.3. 55 7 U.S.C. 6a(c)(2)(A)(i). 56Previously, 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, and 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. See Clarification of Certain Aspects of the Hedging Definition, 52 FR 27195, 27196 (July 20, 1987). In other words, that 1987 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. 57 7 U.S.C. 6a(c)(2)(B). 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 outside of the spot month in excess of federal limits in order to offset commodity index swap or related exposure, typically opposite an institutional investor for which the swap was not a bona fide hedge. As 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.c.v. (discussion of proposed pass-through language). 58 7 U.S.C. 6a(c)(2)(B). See infra Section II.A.1.c.v. (discussion of 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 Continued and to better reflect market developments over time. While one option for doing so could be to expand the list of enumerated hedges to encompass a larger array of hedging strategies, the Commission does not view this alone to be a
practical solution. It would be difficult to maintain a list that captures all hedging activity across commodity types, and any list would inherently fail to take into account future changes in industry practices and other developments. The Commission proposes to create a new bona fide hedging definition in proposed § 150.1 that would work in connection with limits on a variety of commodity types and accommodate changing hedging practices over time. The Commission proposes to couple this updated definition with an expanded list of enumerated hedges. While positions that fall within the proposed enumerated hedges, discussed below, would be examples of positions that comply with the bona fide hedging definition, they would certainly not be the only types of positions that could be bona fide hedges. The proposed enumerated hedges are intended to ensure that the framework proposed herein does not reduce any clarity inherent in the existing framework; the proposed enumerated hedges are in no way intended to limit the universe of hedging practices that could otherwise be recognized as bona fide. The Commission anticipates these proposed modifications would provide a significant degree of flexibility to market participants in terms of how they hedge, and to exchanges in terms of how they evaluate transactions and positions for purposes of their position limit programs, without sacrificing any of the clarity provided by the existing bona fide hedging definition. Further, as described in detail in connection with the discussion of proposed § 150.9 later in this release, the Commission anticipates that allowing the exchanges to process applications for bona fide hedges for purposes of federal limits would be significantly more efficient than the existing processes for exchanges and the Commission.51 The Commission discusses each element of the proposed bona fide hedging definition below, followed by a discussion of the proposed enumerated hedges. The Commission’s intent with this proposal is to acknowledge to the greatest extent possible, consistent with the statutory language, existing bona fide hedging exemptions provided by exchanges.
ii. Proposed Bona Fide Hedging
Definition for Physical Commodities The Commission proposes to maintain the 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), and proposes to eliminate the elements that do not. In particular, the Commission proposes to include the updated versions of the temporary substitute test, economically appropriate test, and change in value requirements that are described below, and eliminate the incidental test and orderly trading requirement, which are not included in the revised statutory text. Each of these proposed changes is described below.52 (1) Temporary Substitute Test The language of the temporary substitute test that appears in the Commission’s existing bona fide hedging definition is inconsistent in some ways with the language of the temporary substitute test that currently appears in the statute. In particular, the bona fide hedging definition in section 4a(c)(2)(A)(i) of the CEA currently provides, among other things, that a bona fide hedging position ‘‘represents a substitute for transactions made or to be made or positions taken or to be taken at a later time in a physical marketing channel.’’ 53 The Commission’s definition currently provides that a bona fide hedging position ‘‘normally represent[s] a substitute for transactions to be made or positions to be taken at a later time in a physical marketing channel’’ (emphasis added).54 The Dodd-Frank Act amended the temporary substitute language that previously appeared in the statute by removing the word ‘‘normally’’ from the phrase ‘‘normally represents a substitute for transactions made or to be made or positions taken or to be taken at a later time in a physical marketing channel. . . .’’ 55 The Commission preliminarily interprets this change as reflecting Congressional 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.56 Accordingly, the Commission preliminarily interprets this change to signal that the Commission should cease to recognize ‘‘risk management’’ positions as bona fide hedges for physical commodities, unless the position satisfies the pass-through swap/swap offset requirements in
section 4a(c)(2)(B) of the CEA, discussed
further below.57 In order to implement that statutory change, the Commission proposes a narrower bona fide hedging definition for physical commodities in proposed § 150.1 that does not include the word ‘‘normally’’ currently found in the temporary substitute language in paragraph (1) of the existing § 1.3 bona fide hedging definition. The practical effect of conforming the temporary substitute test in the regulation to the amended statutory provision would be to prevent market participants from treating positions entered into for risk management purposes as bona fide hedges for contracts subject to federal limits, unless the position qualifies under the pass-through swap provision in CEA
section 4a(c)(2)(B).58 As noted above,

restrictions on risk management exemptions that apply to physical commodities subject to federal limits do not apply to excluded commodities. 59See infra Section II.C.2.g. (discussion of revoking existing risk management exemptions). 60See 7 U.S.C. 6a(c)(2)(B)(i). The pass-through swap offset language in the proposed bona fide hedging definition is discussed in greater detail below. 61See infra Section II.B.2.d. (discussion of nonspot month limit levels). 62The proposed non-spot month levels for the nine legacy agricultural contracts were calculated using a methodology that, with the exception of CBOT Oats (O), CBOT KC HRW Wheat (KW), and MGEX HRS Wheat (MWE), would result in higher levels than under existing rules and prior proposals. See infra Section II.B.2.d (discussion of proposed non-spot month limit levels). 63See infra Section II.A.1.c.v. (discussion of proposed pass-through language). 64 7 U.S.C. 6a(c)(2)(A)(ii) and 17 CFR 1.3. 65See, e.g., 2013 Proposal, 78 FR at 75709, 75710. 66For 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). ‘‘Value’’ is generally understood to mean price times quantity. Dodd-Frank added CEA section 4a(c)(2), which copied the economically appropriate test from the Commission’s definition in § 1.3. See also 2013 Proposal, 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’’). 67See, e.g., 2016 Reproposal, 81 FR at 96847. 68The Commission proposes to replace the phrase ‘‘liabilities which a person owns,’’ which appears in the statute erroneously, with ‘‘liabilities which the Commission previously viewed positions in physical commodities, entered into for risk management purposes to offset the risk of swaps and other financial instruments and not as substitutes for transactions or positions to be taken in a physical marketing channel, as bona fide hedges. However, given the statutory change, positions that reduce the risk of such swaps and financial instruments would no longer meet the requirements for a bona fide hedging position under CEA section 4a(c)(2) and under proposed § 150.1. As discussed below, any such previouslygranted risk management exemptions would generally no longer apply after the effective date of the speculative position limits proposed herein.59 Further, retaining such exemptions for swap intermediaries, without regard to the purpose of their counterparty’s swap, would be inconsistent with
the statutory restrictions on pass-through swap offsets, which require that the swap position being offset qualify as a bona fide hedging position.60 Aside from this change, the Commission is not proposing any other modifications to its existing temporary substitute test. While the Commission preliminarily interprets the Dodd-Frank amendments to the CEA as constraining the Commission from recognizing as bona fide hedges risk management positions involving physical commodities, the Commission has in part addressed the hedging needs of persons seeking to offset the risk from swap books by proposing the pass-through swap and pass-through swap offset provisions discussed below. The Commission observes that while ‘‘risk management’’ positions would not qualify as bona fide hedges, some other provisions in this proposal may provide flexibility for existing and prospective risk management exemption holders in a manner that comports with the statute. In particular, the Commission anticipates that the proposal to limit the applicability of federal non-spot month limits to the nine legacy agricultural contracts,61 coupled with the proposed adjustment to non-spot limit levels based on updated open interest numbers for the nine legacy agricultural contracts currently subject to federal limits,62 may accommodate risk management activity that remains below the proposed levels in a manner that comports with the CEA. Further, to the extent that such activity would be opposite a counterparty for whom the swap is a bona fide hedge, the Commission would encourage intermediaries to consider whether they would qualify under the bona fide hedging position definition for the proposed pass-through swap treatment, which is explicitly authorized by the CEA and discussed in greater detail below.63 Moreover, while positions entered into for risk management purposes may no longer qualify as bona fide hedges, some may satisfy the proposed requirements for spread exemptions. Finally, consistent with existing industry practice, exchanges may continue to recognize risk management positions for contracts that are not subject to federal limits, including for excluded commodities. (2) Economically Appropriate Test The 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 appropriate to the reduction of risks in the conduct and management of a commercial enterprise.’’ 64 The Commission proposes to replicate this standard in the new definition in § 150.1, 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 limits,65 the Commission proposes to make explicit that the word ‘‘risks’’ refers to, and is limited to, ‘‘price risk.’’ This proposed clarification does not reflect any change in policy, as the Commission has, when defining bona fide hedging, historically focused on transactions that offset price risk.66 Commenters have previously requested flexibility for hedges of nonprice risk.67 However, re-interpreting ‘‘risk’’ to mean something other than ‘‘price risk’’ would make determining whether a particular position is economically appropriate to the reduction of risk too subjective to effectively evaluate. While 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. For example, for any given non-price risk, such as political risk, there could be multiple commodities, directions, and contract months which a particular market participant may view as an economically appropriate offset for that risk, and multiple market participants might take different views on which offset is the most effective. Reinterpreting ‘‘risk’’ to mean something other than ‘‘price risk’’ would introduce an element of subjectivity that would make a federal position limit framework difficult, if not impossible, to administer. The Commission remains open to receiving new product submissions, and should those submissions include contracts or strategies that are used to hedge something other than price risk, the Commission could at that point evaluate whether to propose regulations that would recognize hedges of risks other than price risk as bona fide hedges. (3) Change in Value Requirement The Commission proposes 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.68 Aside

a person owes,’’ which the Commission believes was the intended wording. The Commission interprets 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 proposes several other non-substantive modifications in sentence structure to improve clarity. 69 7 U.S.C. 6a(c)(2)(A)(iii). 70 17 CFR 1.3. 71 7 U.S.C. 6a(c)(2). 72The orderly trading requirement has been a part of the regulatory definition of bona fide hedging since 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).
73 7 U.S.C. 6c(a)(5).
74 17 CFR 1.3.
75See infra Section II.C.2. (discussion of proposed § 150.3) and Section II.G.3. (discussion of proposed § 150.9). 76As 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. 77Bona Fide Hedging Transactions or Positions, 42 FR 14832 (Mar. 16, 1977). 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).69 (4) Incidental Test and Orderly Trading Requirement While the Commission proposes to maintain the substance of the three core elements of the existing bona fide hedging definition described above, with some modifications, the Commission also proposes 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.70 Notably, Congress eliminated the incidental test from the statutory bona fide hedging definition in CEA section 4a(c)(2).71 Further, the Commission views the incidental test as redundant because the Commission is proposing to maintain the change in value requirement (value is generally understood to mean price per unit times quantity of units), and 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. The Commission does not view the proposed elimination of the incidental test in the definition that appears in the regulations as a change in policy. The proposed elimination would not result in any changes to the Commission’s interpretation of the bona fide hedging definition for physical commodities. The Commission also preliminarily believes that the orderly trading requirement should be deleted from the definition in the Commission’s regulations because the statutory bona fide hedging definition does not include an orderly trading requirement,72 and because the meaning of ‘‘orderly trading’’ is unclear in the context of the over-the counter (‘‘OTC’’) swap market and in the context of permitted offexchange transactions, such as exchange for physicals. The proposed elimination of the orderly trading requirement would also have no bearing on an exchange’s ability to impose its own orderly trading requirement. Further, in proposing to eliminate the orderly trading requirement from the definition in the regulations, the Commission is not proposing any amendments or modified interpretations to any other related requirements, including to any of the anti-disruptive trading prohibitions in CEA section 4c(a)(5),73 or to any other statutory or regulatory provisions. Taken together, the proposed retention of the updated temporary substitute test, economically appropriate test, and change in value requirement, coupled with the proposed 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.
iii. Proposed Enumerated Bona Fide
Hedges for Physical Commodities Federal position limits currently only apply to referenced contracts based on nine legacy agricultural commodities, and, as mentioned above, the bona fide hedging definition in existing § 1.3 includes a list of four categories of enumerated hedges that may be exempt from federal position limits.74 So as not to reduce any of the clarity provided by the current list of enumerated hedges, the Commission proposes to maintain the existing enumerated hedges, some with modification, and, for the reasons described below, to expand this list. Such enumerated bona fide hedges would be self-effectuating for purposes of federal limits.75 The Commission also proposes to move the expanded list to proposed Appendix A to part 150 of the Commission’s regulations. The Commission preliminarily believes that the list of enumerated hedges should appear in an appendix, rather than be included in the definition, because each enumerated hedge represents just one way, but not the only way, to satisfy the proposed bona fide hedging definition and § 150.3(a)(1).76 In some places, as described below, the Commission proposes to modify and/or re-organize the language of the current enumerated hedges; such proposed changes are intended only to provide clarifications, and, unless indicated otherwise, are not intended to substantively modify the types of practices currently listed as enumerated hedges. In other places, however, the Commission proposes substantive changes to the existing enumerated hedges, including the elimination of the five-day rule for purposes of federal limits, while allowing exchanges to impose a five-day rule, or similar restrictions, for purposes of exchange-set limits. With the exception of risk management positions previously recognized as bona fide hedges, and assuming all regulatory requirements continue to be satisfied, bona fide hedging recognitions that are currently in effect under the Commission’s existing rules, either by virtue of § 1.47 or one of the enumerated hedges currently listed in § 1.3, would be grandfathered once the rules proposed herein are adopted. 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.’’ 77 Similarly, the proposed enumerated hedges would reflect fact patterns for which the Commission has preliminarily 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 proposal would in no way foreclose the recognition of other hedging practices as bona fide hedges. The Commission would be open, on a case-by-case basis, to recognizing as bona fide hedges positions or transactions that may fall outside the bounds of these enumerated hedges, but that nevertheless satisfy the proposed

78See infra Section II.G.3. (discussion of proposed § 150.9). 79See, e.g., 2016 Reproposal, 81 FR at 96752. 80The Commission stated when it proposed this enumerated hedge, ‘‘[i]n 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). 81 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 discussed in connection with paragraph (3) of the proposed definition of ‘‘referenced contract.’’ 82For 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. 83 In 2013, the Commission provided an example regarding this enumerated hedge: ‘‘The 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.’’ 2013 Proposal, 78 FR at 75715. 84See 2011 Final Rulemaking, 76 FR at 71646. As noted above, part 151 was subsequently vacated. bona fide hedging definition and section 4a(c)(2) of the CEA.78 The Commission does not anticipate that moving the list of enumerated hedges from the bona fide hedging definition to an appendix per se would have a substantial impact on market participants who seek clarity regarding bona fide hedges. However, the Commission is open to feedback on this point. Positions in referenced contracts subject to position limits that meet any of the proposed enumerated hedges would, for purposes of federal limits, meet the bona fide hedging definition in CEA section 4a(c)(2)(A), as well as the Commission’s proposed bona fide hedging definition in § 150.1. Any such recognitions would be self-effectuating for purposes of federal limits, provided the market participant separately requests an exemption from the applicable exchange-set limit established pursuant to proposed § 150.5(a). The proposed enumerated hedges are each described below, followed by a discussion of the proposal’s treatment of the five-day rule. (1) Hedges of Unsold
Anticipated Production This hedge is currently enumerated in paragraph (2)(i)(B) of the bona fide hedging definition in § 1.3, and is subject to the five-day rule. The Commission proposes to maintain it as an enumerated hedge, with the modification described below. This enumerated hedge would allow a market participant who anticipates production, but who has not yet produced anything, to enter into a short derivatives position in excess of limits to hedge the anticipated production. While existing paragraph (2)(i)(B) limits this enumerated hedge to twelvemonths’ unsold anticipated production, the Commission proposes to remove the twelve-month limitation. The twelvemonth limitation may be unsuitable in connection with additional contracts based on agricultural and energy commodities covered by this release, which may have longer growth and/or production cycles than the nine legacy agricultural commodities. Commenters have also previously recommended removing the twelve-month limitation on agricultural production, stating that it is unnecessarily short in comparison to the expected life of investment in production facilities.79 The Commission preliminarily agrees. (2) Hedges of Offsetting Unfixed Price Cash Commodity Sales and Purchases This hedge is currently enumerated in paragraph (2)(iii) of the bona fide hedging definition in § 1.3 and is subject to the five-day rule. The Commission proposes to maintain it as an enumerated hedge, with one proposed modification described below. This enumerated hedge allows a market participant to use commodity derivatives in excess of limits to offset an unfixed price cash commodity purchase coupled with an unfixed price cash commodity sale. Currently, under paragraph (2)(iii), the cash commodity must be bought and sold at unfixed prices at a basis to different delivery months, meaning the offsetting derivatives transaction would be used to reduce the risk arising from a time differential in the unfixed-price purchase and sale contracts.80 The Commission proposes to expand this provision to also 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 are in the same calendar month. The Commission is proposing 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 81 or a time differential in unfixed-price purchase and sale contracts in the same cash commodity. Both an unfixed-price cash commodity purchase and an offsetting unfixed-price cash commodity sale must be in hand in order to be eligible for this enumerated hedge, because having both the unfixed-price sale and purchase in hand would allow for an objective evaluation of the hedge.82 Absent either the unfixed-price purchase or the unfixed-price sale (or absent both), it would be less clear how the transaction
could be classified as a bona fide hedge, that is, a transaction that reduces price risk.83 This is not to say that an unfixedprice cash commodity purchase alone, or an unfixed-price cash commodity sale alone, could never be recognized as a bona fide hedge. Rather, an additional facts and circumstances analysis would be warranted in such cases. Further, upon fixing the price of, or taking delivery on, the purchase contract, the owner of the cash commodity may hold the short derivative leg of the spread as a hedge against a fixed-price purchase or inventory. However, the long derivative leg of the spread would no longer qualify as a bona fide hedging position, since the commercial entity has fixed the price or taken delivery on the purchase contract. Similarly, if the commercial entity first fixed the price of the sales contract, the long derivative leg of the spread may be held as a hedge against a fixed-price sale, but the short derivative leg of the spread would no longer qualify as a bona fide hedging position. Commercial entities in these circumstances thus may have to consider reducing certain positions in order to comply with the regulations proposed herein. (3) Short Hedges of Anticipated Mineral Royalties The Commission is proposing a new acceptable practice that is not currently enumerated in § 1.3 for short hedges of anticipated mineral royalties. The Commission previously adopted a similar provision as an enumerated hedge in part 151 in response to a request from commenters.84 The proposed provision would permit an owner of rights to a future royalty to lock in the price of anticipated mineral production by entering into a short position in excess of limits in a commodity derivative contract to offset the anticipated change in value of mineral royalty rights that are owned by that person and arise out of the production of a mineral commodity

85A 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. 86See 2011 Final Rulemaking, 76 FR at 71646. As noted above, part 151 was subsequently vacated. 87As the Commission previously stated, regarding a proposed hedge for services, ‘‘crop insurance providers and other agents that provide services in the physical marketing channel could qualify for a bona fide hedge of their contracts for services arising out of the production of the commodity underlying a [commodity derivative contract].’’ 2013 Proposal, 78 FR at 75716. 88For example, existing paragraph (2)(iv) of the bona fide hedging definition recognizes as an enumerated hedge the offset of a cash-market position in one commodity, such as soybeans, through a derivatives position in a different commodity, such as soybean oil or soybean meal. 89Specifically, for: (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, a crosscommodity hedge could be used to offset risks arising from a commodity other than the cash commodity underlying the commodity derivatives contract. 90For 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 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 passthrough 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). 91See proposed Appendix A to part 150. 92 Id. 93 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. (e.g., oil and gas).85 The Commission preliminarily believes that this remains a common hedging practice, and that positions that satisfy the requirements of this acceptable practice would conform to the general definition of bona fide hedging without further consideration as to the particulars of the case. The Commission proposes to limit this acceptable practice to mineral royalties; the Commission preliminarily believes that while royalties have been paid for use of land in agricultural production, the Commission has not received any evidence of a need for a bona fide hedge recognition from owners of agricultural production royalties. The Commission requests comment on whether and why such an exemption might be needed for owners of agricultural production or other royalties. (4) Hedges of Anticipated Services The Commission is proposing a new enumerated hedge that is not currently enumerated in the § 1.3 bona fide hedging definition for hedges of anticipated services. The Commission previously adopted a similar provision as an enumerated hedge in part 151 in response to a request from commenters.86 This enumerated hedge would recognize as a bona fide hedge a long or short derivatives 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.87 The Commission preliminarily believes that this remains a common hedging practice, and that positions that satisfy the requirements of this acceptable practice would conform to the general definition of bona fide hedging without further consideration as to the particulars of the case. (5) Cross-Commodity Hedges Paragraph (2)(iv) of the existing § 1.3 bona fide hedge definition enumerates the offset of cash purchases, sales, or purchases and sales with a commodity derivative other than the commodity that comprised the cash position(s).88 The Commission proposes to include this hedge in the enumerated hedges and expand its application such that cross-commodity hedges could be used to establish compliance with: Each of the proposed enumerated hedges listed in Appendix A to part 150; 89 and hedges in 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 satisfies each element of the relevant acceptable practice.90 This enumerated hedge is conditioned on the fluctuations in value of the position in the commodity derivative contract or of the underlying cash commodity being ‘‘substantially related’’ 91 to the
fluctuations in value of the actual or anticipated cash position or pass-through swap. To be ‘‘substantially related,’’ the derivative and cash market position, which may be in different commodities, should have a reasonable commercial relationship.92 For example, there is a reasonable commercial relationship between grain sorghum, used as a food grain for humans or as animal feedstock, with corn underlying a derivative. There currently is not a futures contract for grain sorghum grown in the United States listed on a U.S. DCM, so corn represents a substantially related commodity to grain sorghum in the United States.93 In contrast, there does 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 are not reasonable substitutes for each other in that they have very different pricing drivers. 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. (6) Hedges of Inventory and Cash Commodity Fixed-Price Purchase Contracts Hedges of inventory and cashcommodity fixed-price purchase contracts are included in paragraph (2)(i)(A) of the existing § 1.3 bona fide hedge definition, and the Commission proposes to include them as an enumerated hedge with minor modifications. This proposed enumerated hedge acknowledges that a commercial enterprise is exposed to price risk (e.g., that the market price of the inventory could decrease) if it has obtained inventory in the normal course of business or has entered into a fixedprice 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. 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. To satisfy the requirements of this particular enumerated hedge, a bona fide hedge would be to establish a short position in a commodity derivative contract to offset such price risk. An exchange may require such short position holders to demonstrate the ability to deliver against the short

94For 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. 95For example, the Commission proposes 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. 96 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. 97 17 CFR 32.3. 98 It may not be possible to compute a futuresequivalent basis for a trade option that does not have a fixed strike price. Thus, under this enumerated hedge, a market participant may not use a trade option as a basis for a bona fide hedging position until a fixed strike price reasonably may be determined. For example, a commodity trade option with a fixed strike price may be converted to a futures-equivalent basis, and, on that futuresequivalent 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. 99The proposed inclusion of unfilled anticipated requirements for resale by a utility to its customers does not appear in the existing § 1.3 bona fide hedging definition. This provision is analogous to the unfilled anticipated requirements provision of existing paragraph (2)(ii)(C) of the existing bona fide hedging definition, except the commodity is not for use by the same person (that is, the utility), but rather for anticipated use by the utility’s customers. This would recognize a bona fide hedging position where a utility is required or encouraged by its public utility commission to hedge. 100This 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. 101See, e.g., 2016 Reproposal, 81 FR at 96751. position in order to demonstrate a legitimate purpose for holding a position deep into the spot month.94 (7) Hedges of Cash Commodity FixedPrice Sales Contracts This hedge is enumerated in paragraphs (2)(ii)(A) and (B) of the existing § 1.3 bona fide hedge definition, and the Commission proposes to maintain it as an enumerated hedge. This enumerated hedge acknowledges that a commercial enterprise is exposed to price risk (i.e., that the market price of a commodity might be higher than the price of a fixed-price sales contract for that commodity) if it has entered into a spot or forward fixed-price sales contract calling for delivery in the physical marketing channel of a cashmarket commodity, and has not offset that price risk. To satisfy the requirements of this particular enumerated hedge, a bona fide hedge would be to establish a long position in a commodity derivative contract to offset such price risk. (8) Hedges by Agents This proposed enumerated hedge is included in paragraph (3) of the existing § 1.3 bona fide hedge definition as an example of a potential non-enumerated bona fide hedge. The Commission proposes to include this example as an enumerated hedge, with nonsubstantive modifications,95 because the Commission preliminarily believes that this is a common hedging practice, and that positions which satisfy the requirements of this enumerated hedge would conform to the general definition of bona fide hedging without further consideration as to the particulars of the case. This proposed provision would allow an agent who has the responsibility to trade cash commodities on behalf of another entity for which such positions would qualify as bona fide hedging positions to hedge those cash positions on a long or short basis. For example, an agent may trade on behalf of a farmer or a producer, or a government may wish to contract with a commercial firm to manage the government’s cash wheat inventory; in such circumstances, the agent or the commercial firm would not take ownership of the commodity it trades on behalf of the farmer, producer, or government, but would be an agent eligible for an exemption to hedge the risks associated with such cash positions. (9) Offsets of Commodity Trade Options The Commission is proposing a new enumerated hedge to recognize certain offsets of commodity trade options as a bona fide hedge. Under this proposed enumerated hedge, a commodity trade option meeting the requirements of § 32.3 96 of the Commission’s regulations 97 may be deemed a cash commodity fixed-price purchase or cash commodity fixed-price sales contract, as the case may be, provided that such option is adjusted on a futuresequivalent basis.98 Because the Commission proposes to include hedges of cash commodity fixed-price purchase contracts and hedges of cash commodity fixed-price sales contracts as enumerated hedges, the Commission also proposes to
include hedges of commodity trade options as an enumerated hedge. (10) Hedges of Unfilled Anticipated Requirements This proposed enumerated hedge appears in paragraph (2)(ii)(C) of the existing § 1.3 bona fide hedge definition. The Commission proposes to include it as an enumerated hedge, with modification. To satisfy the requirements of this particular enumerated hedge, a bona fide hedge would be to establish a long position in a commodity derivative contract to offset the expected price risks associated with the anticipated future purchase of the cash-market commodity underlying the commodity derivative contract. Such unfilled anticipated requirements could include requirements for processing, manufacturing, use by that person, or resale by a utility to its customers.99 Consistent with the existing provision, for purposes of exchange-set limits, exchanges may wish to consider adopting rules providing 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.100 Any such quantity limitation may help prevent the use of long futures to source large quantities of the underlying cash commodity. The Commission preliminarily believes that the two-month limitation would allow for an amount of activity that is in line with common commercial hedging practices, without jeopardizing any statutory objectives. Although existing paragraph (2)(ii)(C) limits this enumerated hedge to twelvemonths’ unfilled anticipated requirements outside of the spot period, the Commission proposes to remove the twelve-month limitation because commenters have previously stated, and the Commission preliminarily believes, that there is a commercial need to hedge unfilled anticipated requirements for a time period longer than twelve months.101 (11) Hedges of Anticipated Merchandising The Commission is proposing a new enumerated hedge to recognize certain offsets of anticipated purchases or sales as a bona fide hedge. Under this proposed enumerated hedge, a merchant may establish a long or short position in

102See infra Section II.D.4. (discussion of proposed § 150.5). 103CEA section 6(c)(2), 7 U.S.C. 9(2); CEA section 9(a)(3), 7 U.S.C. 13(a)(3); CEA section 9(a)(4), 7 U.S.C. 13(a)(4); 18 U.S.C. 1001. 104The Working Group BFH Petition is available at http://www.cftc.gov/stellent/groups/public/@ rulesandproducts/documents/ifdocs/wgbfhpetition 012012.pdf. a commodity derivative contract to offset the anticipated change in value of the underlying commodity that the merchant anticipates purchasing or selling in the future. To safeguard against misuse, the enumerated hedge would be subject to certain conditions. First, the commodity derivative position must not exceed in quantity twelve months’ of purchase or sale requirements of the same commodity that is anticipated to be merchandised. This requirement is intended to ensure that merchants are hedging their anticipated merchandising exposure to the value change of the underlying commodity, while calibrating the anticipated need within a reasonable timeframe and the limitations in physical commodity markets, such as annual production or processing capacity. Unlike in the enumerated hedge for unsold anticipated production, where the Commission is proposing to eliminate the twelvemonth limitation, the Commission has preliminarily determined that a twelvemonth limitation for anticipatory 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. Second, the Commission is proposing to limit this enumerated hedge to merchants who are in the business of purchasing and selling the underlying commodity that is anticipated to be merchandised, and who can demonstrate that it is their historical practice to do so. Such demonstrated history should include a history of making and taking delivery of the underlying commodity, and a demonstration of an ability to store and move the underlying commodity. The Commission has a longstanding practice of providing exemptive relief to commercial market participants to enable physical commodity markets to continue to be well-functioning markets. The proposed anticipatory merchandising hedge requires that the person be a merchant handling the underlying commodity that is subject to the anticipatory merchandising hedge and that such merchant is entering into the anticipatory merchandising hedge solely for purposes related to its merchandising business. A merchandiser that lacks the requisite history of anticipatory merchandising activity could still potentially receive bona fide hedge recognition under the proposed non-enumerated process, so long as the merchandiser can otherwise show activities in the physical marketing channel, including, for example, arrangements to take or make delivery of the
underlying commodity. The Commission preliminarily believes 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. Positions which satisfy the requirements of this acceptable practice would thus conform to the general definition of bona fide hedging. While each of the proposed enumerated hedges described above would be self-effectuating for purposes of federal limits, the Commission and the exchanges would 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 limits would also be subject to exchange-set limits, all traders seeking to exceed federal position limits would have to request an exemption from the relevant exchange for purposes of the exchange limit, regardless of whether the position falls within one of the enumerated hedges. In other words, enumerated bona fide hedge recognitions that are selfeffectuating for purposes of federal limits would not be self-effectuating for purposes of exchange 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 limits. As discussed in greater detail below, proposed § 150.5 102 would ensure that such programs require, among other things, that: Exemption applications filed with an exchange include sufficient information to enable the exchange to determine, and the Commission to verify, 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 that the exchange provides the Commission with a monthly report showing the disposition of all exemption applications, including cash market information justifying the exemption. The Commission expects exchanges will be thoughtful and deliberate in granting exemptions, including anticipatory exemptions. The Commission and the exchanges also have a variety of other tools designed to help prevent misuse of selfeffectuating exemptions. For example, market participants who submit an application to an exchange as required under § 150.5 would be subject to the Commission’s false statements authority that carries with it substantial penalties under both the CEA and federal criminal statutes.103 Similarly, the Commission can use 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 hedging needs and speculative trading masquerading as a bona fide hedge. In the 2013 Proposal,
the Commission previously addressed a petition for exemptive relief for 10 transactions described as bona fide hedging transactions by the Working Group of Commercial Energy Firms (which has since reconstituted itself as the ‘‘Commercial Energy Working Group’’) (‘‘BFH Petition’’).104 In the 2013 Proposal, the Commission included examples Nos. 1, 2, 6, 7 (scenario 1), and 8 as being permitted under the proposed definition of bona fide hedging. With respect to the rules proposed herein, the Commission has preliminarily determined that example #4 (binding, irrevocable bids or offers) and #5 (timing of hedging physical transactions) from the BFH Petition potentially fit within the proposed
Appendix A paragraph (a)(11)
enumerated hedge of anticipatory merchandising, so long as the transaction complies with each condition of that proposed enumerated hedge. In addition, as discussed further below, because the Commission is also proposing to eliminate the five-day rule from the enumerated hedges to which the five-day rule currently applies, the Commission has preliminarily determined that example #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

105Similarly, other examples of anticipatory merchandising that have been 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. 106Paragraphs (2)(i)(B), (ii)(C), (iii), and (iv) of the existing § 1.3 bona fide hedging definition are subject to some form of the five-day rule. 107 Definition of Bona Fide Hedging and Related Reporting Requirements, 42 FR 42748, 42750 (Aug. 24, 1977). 108 Id. 109See, e.g., 42 FR at 42749. 110Energy contracts typically have a three-day spot period, whereas the spot period for agricultural contracts is typically two weeks. 111For 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. requirements) from the BFH Petition potentially fit within the proposed
Appendix A paragraph (a)(5)
enumerated hedge, so long as the transaction otherwise complies with the additional conditions of all applicable enumerated hedges and other requirements. Regarding 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), while the Commission has preliminarily determined that the positions described within those examples do not fit within any of the proposed enumerated hedges, market participants seeking bona fide hedge recognition for such positions may apply for a non-enumerated recognition under proposed §§ 150.3 or 150.9, and a facts and circumstances decision would be made.105 As included in the request for comment on this
section, the Commission requests
additional information on the scenarios listed above, particularly for the positions that the Commission preliminarily views as falling outside the proposed list of enumerated hedges.
iv. Elimination of a Federal Five Day
Rule
Under the existing bona fide hedging definition in § 1.3, to help protect orderly trading and the integrity of the physical-delivery process, certain enumerated hedging positions in physical-delivery contracts are not recognized as bona fide hedges that may exceed limits when the position is held during the last five days of trading during the spot month. The goal of the five-day rule is to help ensure that only those participants who actually intend to make or take delivery maintain positions toward the end of the spot period.106 When the Commission adopted the five-day rule, it believed that, as a general matter, there is little commercial need to maintain such positions in the last five days.107 However, persons wishing to exceed position limits during the five last trading days could submit materials supporting a classification of the position as a bona fide hedge, based on the particular facts and circumstances.108 The Commission has viewed the fiveday rule as an important way to help ensure that futures and cash-market prices converge and to prevent excessive speculation as a physicaldelivery contract nears expiration, thereby protecting the integrity of the delivery process and the price discovery function of the market, and deterring or preventing types of market manipulations such as corners and squeezes. The enumerated hedges currently subject to the five-day rule are either: (i) Anticipatory in nature; or (ii) involve a situation where there is no need to make or take delivery. The Commission has historically questioned the need for such positions in excess of limits to be held into the spot period if the participant has no immediate plans and/or need to make or take delivery in the few remaining days of the spot period.109 While the Commission continues to believe that the justifications described above for the existing five-day rule remain valid, the Commission has preliminarily determined that for contracts subject to federal limits, the exchanges, subject to Commission oversight, are better positioned to decide whether to apply the five-day rule in connection with their own exchange-set limits, or whether to apply other tools that may be equally effective. Accordingly, consistent with this proposal’s focus on leveraging existing exchange practices and expertise when appropriate, the Commission proposes to eliminate the five-day rule from the enumerated hedges to which the fiveday rule currently applies, and instead to afford exchanges with the discretion to apply, and when appropriate, waive the five-day rule (or similar restrictions) for purposes of their own limits. Allowing for such discretion 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,110 the flexible approach allowed
for herein may allow for the development and implementation of additional solutions other than a fiveday rule that protect convergence while minimizing the impact on market participants. The proposed approach would allow 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. As proposed § 150.5(a) would require that any exchange-set limits for contracts subject to federal 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. The Commission expects that exchanges would closely scrutinize any participant who requests a recognition during the last five days of the spot period or in the time period for the spot month. To assist exchanges that wish to establish a five-day rule, or a similar provision, the Commission proposes guidance in paragraph (b) of Appendix B that would set forth circumstances when a position held during the spot period may still qualify as a bona fide hedge. The guidance would provide that a position held during the spot period may still qualify as a bona fide hedging position, provided that, among other things: (1) The position complies with the bona fide hedging 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.111 In addition, the guidance would provide that the person wishing to exceed federal position limits during the spot period: (1) Intends to make or take delivery during that period; (2) provides materials to the exchange supporting the waiver of the five-day rule; (3)

112That is, the person has inventory on-hand in a deliverable location and in a condition in which the commodity can be used upon delivery. 113That is, the delivery comports with the person’s demonstrated need for the commodity, and the contract is the cheapest source for that commodity. 114 Id. at 96747. 115For 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 that would result in the participant having no net price risk to hedge as the participant had no price risk exposure to the commodity prior to establishing such derivative position. Instead, the participant created price risk exposure to the commodity by establishing the derivative position. 116See 2016 Reproposal, 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). 117This proposed guidance on measuring risk is consistent in many ways with the manner in which the 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. The Commission preliminarily believes that such consistency is a strong indicator that the participant is not measuring risk on a gross basis simply to evade regulatory requirements. 118See, e.g., Bona Fide Hedging Transactions or Positions, 42 FR at 14834. 119 7 U.S.C. 6a(c)(2)(B). 120CEA section 4a(c)(2)(B)(i) recognizes as a bona fide hedging position a position that reduces risk 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 bona fide positions 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). demonstrates supporting cash-market exposure in-hand that is verified by the exchange; (4) demonstrates that, for short positions, the delivery is feasible, meaning that the person has the ability to deliver against the short position; 112 and (5) demonstrates that, for long positions, the delivery is feasible, meaning that the person has the ability to take delivery at levels that are economically appropriate.113 This proposed guidance is intended to include a non-exclusive list of considerations for determining whether to waive a five-day rule established at the discretion of an exchange.
v. Guidance on Measuring Risk
In prior proposals involving position limits, the Commission discussed the issue of whether the Commission may recognize as bona fide both ‘‘gross hedging’’ and ‘‘net hedging.’’ 114 Such attempts reflected the Commission’s longstanding preference for net hedging, which, 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.115 In an effort to clarify its current view on this issue, the Commission proposes guidance in paragraph (a) to Appendix B. The Commission is of the preliminary view that there are myriad ways in which organizations are structured and engage in commercial hedging practices, including the use of multi-line business strategies in certain industries that would be subject to federal limits for the first time under this proposal. Accordingly, the Commission does not propose a one-size-fits-all approach to the manner in which risk is measured across an organization. The proposed guidance reflects the Commission’s historical practice of recognizing positions hedged on a net basis as bona fide; 116 however, as the Commission has also previously allowed, the proposed guidance also may in certain circumstances allow for the recognition of gross hedging as bona fide, provided that: (1) The manner in which the person measures risk is consistent over time and follows a person’s regular, historical practice 117 (meaning the person is not switching between net hedging and gross hedging on a selective basis simply to justify an increase in the size of his/her derivatives positions); (2) 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; (3) the person is able to demonstrate (1) and (2) to the Commission and/or an exchange upon request; and (4) 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). The 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.118 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 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 as it considers applications under § 150.9,
subject to Commission review and oversight. The Commission believes that permitting market participants with bona fide hedges to use either or both gross or net hedging will help ensure that market participants are able to hedge efficiently. Large, complex entities may have hedging needs that cannot be efficiently and effectively met with either gross or net hedging. For instance, some firms may hedge on a global basis while others may hedge by trading desk or business line. Some risks that appear offsetting may in fact need to be treated separately where a difference in delivery location or date makes net hedging of those positions inappropriate. To prevent ‘‘cherry-picking’’ when determining whether to gross or net hedge certain risks, hedging entities should have policies and procedures setting out when gross and net hedging is appropriate. Consistent usage of appropriate gross and/or net hedging in line with such policies and procedures can demonstrate compliance with the Commission’s regulations. On the other hand, usage of gross or net hedging that is inconsistent with an entity’s policies 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.
vi. Pass-Through Provisions
As the Commission has noted above, CEA section 4a(c)(2)(B) 119 further contemplates bona fide hedges that by themselves do not meet the criteria of CEA section 4a(c)(2)(A), but that are executed by a pass-through swap counterparty opposite a bona fide hedging swap counterparty, or used by a bona fide hedging swap counterparty to offset its swap exposure that does satisfy CEA section 4a(c)(2)(A).120 The

121As described above, the Commission has preliminarily interpreted the revised statutory temporary substitute test as limiting its 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. 122While proposed paragraph (2)(i) of the bona fide hedging definition in § 150.1 would require the pass-through swap counterparty to be able to demonstrate the bona fides of the pass-through swap upon request, the proposed rule would not prescribe the manner by which the pass-through swap counterparty obtains the information needed to support such a demonstration. 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. 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. 123Examples 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. 124See supra Section II.A.1.c.ii.(1) (discussion of the temporary substitute test). 125The selection of the proposed core referenced futures contracts is explained below in the discussion of proposed § 150.2. 126CEA 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 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 Commission preliminarily believes that, in affording bona fide hedging recognition to positions used to offset exposure opposite a bona fide hedging swap counterparty, Congress in CEA
section 4a(c)(2)(B) intended: (1) To
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; but also (2) to prohibit risk management positions that are not opposite a bona fide hedging swap counterparty from being recognized as bona fide hedges.121 The Commission proposes to implement this pass-through swap language in paragraph (2) of the bona fide hedging definition for physical commodities in proposed § 150.1. Each component of the proposed passthrough swap provision is described in turn below. Proposed paragraph (2)(i) of the bona fide hedging definition would address a situation where a particular swap qualifies as a bona fide hedge by satisfying the temporary substitute test, economically appropriate test, and change in value requirement under proposed paragraph (1) for one of the counterparties (the ‘‘bona fide hedging swap counterparty’’), but not for the other counterparty, and where those bona fides ‘‘pass 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 such as a swap dealer, for example, that provides liquidity to the bona fide hedging swap counterparty. Under the proposed rule, the passthrough of the bona fides from the bona fide hedging swap counterparty to the pass-through swap counterparty would be contingent on: (1) The pass-through swap counterparty’s ability to demonstrate that the pass-through swap is a bona fide hedge upon request from the Commission and/or from an exchange; 122 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 are 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, options on futures, or swap position entered into by the pass-through swap counterparty to offset the pass-through swap (i.e. to offset the swap opposite the bona fide hedging swap counterparty). The pass-through swap counterparty could thus exceed federal limits for the bona fide hedge swap opposite the bona fide hedging swap counterparty and for any offsetting futures, options on futures, or swap position in the same physical commodity, even though any such position on its own would not qualify as a bona fide hedge for the passthrough swap counterparty under proposed paragraph (1). Proposed paragraph (2)(ii) of the bona fide hedging definition would address a situation where a 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 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 futures, options on futures, or swaps in excess of 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.123 Proposed paragraph (2)(ii) would allow such a bona fide hedging swap counterparty to use futures, options on futures, or swaps in excess of federal 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) 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 offsets would not be eligible for a passthrough exemption under (2) unless the offsets themselves meet the bona fide hedging definition. 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 passthrough exemption. As discussed more fully above, 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.124
2. ‘‘Commodity Derivative Contract’’
The Commission proposes 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)).
3. ‘‘Core Referenced Futures Contract’’
The Commission proposes to provide a list of 25 futures contracts in proposed § 150.2(d) to which proposed position limit rules would apply. The Commission proposes the term ‘‘core referenced futures contract’’ as a shorthand phrase to denote such contracts.125 As per the ‘‘referenced contract’’ definition described below, position limits would also apply to any contract that is directly/indirectly linked to, or that has certain pricing relationships with, a core referenced futures contract.
4. ‘‘Economically Equivalent Swap’’
CEA section 4a(a)(5) requires that when the Commission imposes limits on futures and options on futures pursuant to CEA section 4a(a)(2), the Commission also establish limits simultaneously for ‘‘economically equivalent’’ swaps ‘‘as appropriate.’’ 126

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 2016 Reproposal, 81 FR at 96736 (the Commission noting that certain commenters may have been confusing the two definitions). 127The proposed ‘‘economically equivalent’’ language is distinct from the terms ‘‘futures equivalent,’’ ‘‘economically appropriate,’’ and other similar terms used in the Commission’s regulations. For the avoidance of doubt, the Commission’s proposed definition of ‘‘economically equivalent swap’’ for the purposes of CEA section 4a(a)(5) does not impact the application of any such other terms as they appear in part 20 of the Commission’s regulations, in the Commission’s proposed bona fide hedge definition, or elsewhere. 128The proposed definition of ‘‘referenced contract’’ would 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 proposed definition of ‘‘economically equivalent swap’’ would be included as a type of ‘‘referenced contract,’’ but, as discussed herein, would include a relatively narrower class of swaps compared to look-alike futures and options contracts, for the reasons discussed below. 129See infra Section II.B.2.k. (discussion of netting). 130See infra Section III.F. (necessity finding). 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). Under the Commission’s proposed definition of an ‘‘economically equivalent swap,’’ a swap on any referenced contract (including core referenced futures contracts), except for natural gas referenced contracts, would qualify as ‘‘economically equivalent’’ with respect to that referenced contract so long as the swap shares identical ‘‘material’’ contractual specifications, terms, and conditions with the referenced contract, disregarding any differences with respect to: (i) Lot size or notional amount, (ii) delivery dates diverging by less than one calendar day (if the swap and referenced contract are physically-settled), or (iii) post-trade risk management
arrangements.127 For reasons described further below, natural gas swaps would qualify as economically equivalent with respect to a particular referenced contract under the same circumstances, except that physically-settled swaps with delivery dates diverging by less than two calendar days, rather than one calendar day, could qualify as economically equivalent. In promulgating the position limits framework, Congress instructed the Commission to consider several factors:
First, CEA section 4a(a)(3) requires the Commission when establishing federal 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 limits to shift to trading on a foreign exchange. Accordingly, any definition of ‘‘economically equivalent swap’’ must consider these statutory objectives. The Commission also recognizes that physical commodity swaps are largely bilaterally negotiated, traded offexchange (i.e., OTC), and potentially include customized (i.e., ‘‘bespoke’’) terms, while futures contracts are exchange traded with standardized terms. As explained further below, due to these differences between swaps and exchange-traded futures and options, the Commission has preliminarily determined that Congress’s underlying policy goals in CEA section 4a(a)(2)(C) and (3) are best achieved by proposing a narrow definition of ‘‘economically equivalent swaps,’’ compared to the broader definition of ‘‘referenced contract’’ the Commission is proposing to apply to look-alike futures and related options.128 The Commission’s proposed ‘‘referenced contract’’ definition in § 150.1 would include ‘‘economically equivalent swaps,’’ meaning any economically equivalent swap would be subject to federal limits, and thus would be required to be added to, and could be netted against, as applicable, other referenced contracts in the same commodity for the purpose of determining one’s aggregate positions for federal position limit levels.129 Any swap that is not deemed economically equivalent would not be a referenced contract, and thus could not be netted with referenced contracts nor would be required to be aggregated with any referenced contract for federal position limits purposes. The proposed definition is based on a number of considerations. First, the proposed definition would support the statutory objectives in CEA
section 4a(a)(3)(i) and (ii) by helping to
prevent excessive speculation and market manipulation, including corners and squeezes, by: (1) Focusing on swaps that are the most economically equivalent in every significant way to futures or options on futures for which the Commission deems position limits to be necessary; 130 and (2) simultaneously limiting the ability of speculators to obtain excessive positions through netting. Any swap that meets the proposed definition would offer identical risk sensitivity to its associated referenced futures or options on futures 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 or options on futures contract. Because OTC swaps are bilaterally negotiated and customizable, the Commission has preliminarily determined not to propose a more inclusive ‘‘economically equivalent swap’’ definition that would encompass additional swaps because such definition could make it easier for market participants to inappropriately net down against their core referenced futures contracts by allowing market participants to structure swaps that do not necessarily offer identical risk or economic exposure or sensitivity. In contrast, the Commission preliminarily believes that this is less of a concern with exchange-traded futures and related options since these instruments have standardized terms and are subject to exchange rules and oversight. As a result, the proposal would generally allow market participants to net certain positions in referenced contracts in the same commodity across economically equivalent swaps, futures, and options on futures, but the proposed economically equivalent swap definition would focus on swaps with identical material terms and conditions in order to reduce the ability of market participants to accumulate large, speculative positions in excess of federal limits by using tangentiallyrelated (i.e., non-identical) swaps to net down such positions. Second, the proposed definition would address statutory objectives by focusing federal limits on those swaps that pose the greatest threat for facilitating corners and squeezes—that is, those swaps with similar delivery

131See EU Commission Delegated Regulation (EU) 2017/591, 2017 O.J. (L 87). The applicable European 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 Commission’s proposed definition is similar, the Commission’s proposed definition requires ‘‘identical material’’ terms rather than ‘‘identical’’ terms. Further, the Commission’s proposed 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.’’ 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 onvenue contracts against only roughly similar OTC positions.’’). The applicable EU regulator, the European Securities and Markets Authority (‘‘ESMA’’), recently 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. 132 7 U.S.C. 6a(a)(2)(C). 133When developing its definition of an ‘‘economically equivalent swap,’’ the Commission, based on its experience, preliminarily has determined that for a swap to be ‘‘economically equivalent’’ to a futures contract, the material contractual specifications, terms, and conditions would need to 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. 134For 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, could be deemed to be economically equivalent to the referenced contract. 135The Commission preliminarily 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 but 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. dates and identical material economic terms to futures and options on futures subject to federal limits—while also minimizing market impact and liquidity for bona fide hedgers by not unnecessarily subjecting other swaps to the new federal framework. For example, if the Commission were to adopt an alternative definition of economically equivalent swap that encompassed a broader range of swaps by including delivery dates that diverge by one or more calendar days—perhaps by several days or weeks—a speculator with a large portfolio of swaps may be more likely to be constrained by the applicable position limits and therefore may have an incentive either to minimize its swaps activity, or move its swaps activity to foreign jurisdictions. If there were many similarly situated speculators, 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 preliminarily determined that the proposed definition’s relatively narrow scope of swaps 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 as discussed above. Third, the proposed definition would help prevent regulatory arbitrage and would strengthen international comity. If the Commission proposed a definition that captured a broader range of swaps, 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 proposed 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.131 The proposed definition of economically equivalent swaps thus furthers statutory goals, including those 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.132 Further, market participants trading in both U.S. and EU markets should find the proposed definition 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 proposed definition, as well as the proposed exclusions from the definition, is described below. a. Scope of Identical Material Terms Only ‘‘material’’ contractual specifications, terms, and conditions would be relevant to the analysis of whether a particular swap would qualify as an economically equivalent swap. The proposed definition would thus not require that a swap be identical in all respects to a referenced contract in order to be deemed ‘‘economically equivalent.’’ ‘‘Material’’ specifications, terms, and conditions would be limited to those provisions that drive the economic value of a swap, including with respect to pricing and risk. Examples of ‘‘material’’ provisions would include, for example: The underlying commodity, including commodity reference price and grade differentials; maturity or termination dates; settlement type (e.g., cash- versus physically-settled); and, as applicable for physically-delivered swaps, delivery specifications, including commodity quality standards or delivery locations.133 Because settlement type would be considered to be a material ‘‘contractual specification, term, or condition,’’ a cash-settled swap could only be deemed economically equivalent to a cash-settled referenced contract, and a physically-settled swap could only be deemed economically equivalent to a physically-settled referenced contract; however, a cashsettled 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. In addition, a swap that either references another referenced contract, or incorporates its terms by reference, would be deemed to share identical terms with the referenced contract and therefore would qualify as an economically equivalent swap.134 Any change in the material terms of such a swap, however, would render the swap no longer economically equivalent for position limits purposes.135 In contrast, the Commission generally would consider those swap contractual terms, provisions, or terminology (e.g., ISDA terms and definitions) that are unique to swaps (whether standardized

136Commodity swaps, which generally are traded OTC, are less standardized compared to exchangetraded 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 may not find such differences to be material for purposes of determining the swap to be economically equivalent for federal position limits purposes. 137As noted below, the Commission reserves the authority under this proposal 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.d. (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 differs from the market participant’s. 138As discussed under Section II.A.16. (definition of ‘‘referenced contract’’), the Commission proposes to include a list of futures and related options 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. 139This aspect of the proposed definition would be irrelevant for cash-settled swaps since ‘‘delivery date’’ applies only to physically-settled swaps. 140A swap as so described that is not ‘‘economically equivalent’’ would not be subject to a federal speculative position limit under this proposal. 141Similar to the Commission’s understanding of ‘‘material’’ terms, the Commission construes ‘‘posttrade 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. or bespoke) not to be material for purposes of determining whether a swap is economically equivalent to a particular referenced contract. For example, swap provisions or terms 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 are generally unique to swaps and/or otherwise not material, and therefore would not be dispositive for determining whether a swap is economically equivalent.136 The Commission is unable to publish a list of swaps it would deem to be economically equivalent swaps because any such determination would involve a facts and circumstances analysis, and because most 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 preliminarily 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 would demonstrate whether the swap qualifies as ‘‘economically equivalent’’ with respect to a referenced contract. The Commission emphasizes that under this proposal, market participants would have the discretion to make such determination as long as they make a reasonable, good faith effort in reaching their determination, and that the Commission would not bring any enforcement action for violating the Commission’s speculative position limits against such market participants as long as the market participant performed the necessary due diligence and is able to provide sufficient evidence, if requested, to support its reasonable, good faith effort.137 Because market participants would be provided with discretion in making any ‘‘economically equivalent’’ swap determination, the Commission preliminarily anticipates that this flexibility should provide a greater level of certainty to market participants in contrast to the alternative in which market participants would be required to first submit swaps to the Commission staff and wait for feedback.138 b. Exclusions From the Definition of ‘‘Economically Equivalent Swap’’ As noted above, the Commission’s proposed definition would expressly provide 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 would not disqualify a swap from being deemed to be ‘‘economically equivalent’’ to a particular referenced contract.
i. Delivery Dates Diverging by Less Than
One Calendar Day
The proposed definition as it applies to commodities other than natural gas would encompass swaps with delivery dates that diverge by less than one calendar day from that of a referenced contract.139 As a result, a swap with a delivery date that differs from that of a referenced contract by one calendar day or more would not be deemed to be economically equivalent under the Commission proposal, and such swaps would not be required to be added to, nor permitted to be netted against, any referenced contract when calculating one’s compliance with federal position limit levels.140 The Commission recognizes that while a penultimate contract may be significantly correlated to its corresponding spot-month contract, it 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. Accordingly, the Commission has preliminarily determined that it would not be appropriate to permit market participants to net such penultimate positions against their core referenced futures contract positions since such positions do not necessarily reflect equivalent economic or risk exposure.
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.141 Moreover, since the core referenced futures contracts, along with futures contracts and options on futures in general, are traded on DCMs with vertically integrated clearing houses, as a practical matter, it is impossible for OTC commodity swaps, which historically have been uncleared, to share identical post-trade clearing house or other post-trade risk management arrangements with their associated core referenced futures contracts. Therefore, if differences in post-trade risk management arrangements were sufficient to exclude a swap from economic equivalence to a core

142 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 proposes later in this release to 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). 143Such 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). 144As noted above, the Commission is proposing a relatively narrow ‘‘economically equivalent swap’’ definition in order to prevent market participants from inappropriately netting positions in core referenced futures contracts against swap positions further out on the curve. The Commission preliminarily 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 certain constraints exist that militate against this occurring. First, there may be basis risk between the penultimate swap and the core referenced futures contract. Second, compared to most 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. Since the constraints described above do not necessarily apply to the natural gas futures markets, the Commission preliminarily believes that liquidity may be incentivized to shift from NG to penultimate natural gas swaps in order to avoid federal position limits in the absence of the Commission’s proposed exception for natural gas in the ‘‘economically equivalent swap’’ definition. 145See supra II.A.4.a. (discussing market participants’ discretion in determining whether a swap is economically equivalent). 146See 17 CFR 150.1(d). 147 7 U.S.C. 1a(38). 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 preliminarily determined that differences in posttrade risk management arrangements should not prevent a swap from qualifying as economically equivalent with an otherwise materially identical referenced contract.
iii. Lot Size or Notional Amount
The last exclusion would clarify that differences in lot size or notional amount would not prevent a swap from being deemed to be economically equivalent to its corresponding referenced contract. The Commission’s use of ‘‘lot size’’ and ‘‘notional amount’’ refer to the same general concept— while futures terminology usually employs ‘‘lot size,’’ swap terminology usually employs ‘‘notional amount.’’ Accordingly, the Commission proposes to use both terms to convey the same general meaning, and in this context does not mean to suggest a substantive difference between the two terms.
c. 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 core referenced futures contract (‘‘NG’’), which is physically settled, to an ICE contract, which is cash settled. This trend reflects certain market participants’ desire for exposure to natural gas prices without having to make or take delivery.142 NYMEX and ICE also list several ‘‘penultimate’’ cashsettled 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.143 In order to recognize the existing natural gas markets, which include active and vibrant markets in penultimate natural gas contracts, the Commission thus proposes a slightly broader economically equivalent swap definition for natural gas so that 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 limits. The Commission intends for this change to prevent and disincentivize manipulation and regulatory arbitrage and to prevent volume from shifting away from NG to penultimate natural gas contract futures and/or penultimate swap markets in order to avoid federal position limits.144 d. Commission Determination of Economic Equivalence While the Commission would primarily rely on market participants to determine whether their swaps meet the proposed ‘‘economically equivalent swap’’ definition, the Commission is proposing paragraph (3) to the 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 may 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 the proposed federal position limits framework. 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 also would be able to serve as a backstop in case market participants fail to properly treat economically equivalent swaps as such. As noted above, the Commission would 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.145
5. ‘‘Eligible Affiliate’’
The Commission proposes to create the new defined term ‘‘eligible affiliate,’’ which would be used in proposed § 150.2(k), discussed in connection with proposed § 150.2 below. As discussed further in that section of the release, 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).
6. ‘‘Eligible Entity’’
The Commission adopted a revised ‘‘eligible entity’’ definition in the 2016 Final Aggregation Rulemaking.146 The Commission is not proposing any further amendments to this definition, but is including that revised definition in this document so that all defined terms are included. As noted above, the Commission is also proposing a nonsubstantive 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’’
The Commission proposes defining ‘‘entity’’ to mean ‘‘a ‘person’ as defined in section 1a of the Act.’’ 147 The term, not defined in existing § 150.1, is used throughout proposed part 150 of the Commission’s regulations.
8. ‘‘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

148 7 U.S.C. 1a(19).
149Under CEA sections 4a(a)(2) and 4a(a)(5), speculative position limits apply to agricultural and exempt commodity swaps that are ‘‘economically equivalent’’ to DCM futures and options on futures contracts. 7 U.S.C. 6a(a)(2) and (5). 150See 17 CFR 150.1(e). 151 7 U.S.C. 6a(a)(2)(A) and (B). 152 17 CFR 150.2. 153A more detailed discussion of when netting is permitted appears below. See infra Section II.B.2.k. (discussion of netting). 154For example, ICE’s Henry Penultimate Fixed Price Future, which cash-settles directly to Continued Commission proposes including a definition of ‘‘excluded commodity’’ in
part 150 that references that term as
defined in CEA section 1a(19).148
9. ‘‘Futures-Equivalent’’
This phrase 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,149 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 on which the Commission has established limits. In order to aggregate positions in futures, options on futures, and swaps, it is necessary to adjust the position sizes, since such contracts may have varying units of trading (e.g., the amount of a commodity underlying a particular swap contract could be larger than the amount of a commodity underlying a core referenced futures contract). The Commission thus proposes to adjust position sizes to an equivalent position based on the size of the unit of trading of the core referenced futures contract. The phrase ‘‘futuresequivalent’’ is used for that purpose throughout the proposed rules, including in connection with the ‘‘referenced contract’’ definition in proposed § 150.1. The Commission also proposes broadening this definition to include references to the proposed term ‘‘core referenced futures contracts.’’
10. ‘‘Independent Account Controller’’
The Commission adopted a revised ‘‘independent account controller’’ definition in the 2016 Final Aggregation Rule.150 The Commission is not proposing any further amendments to this definition, but is including that revised definition in this document so that all defined terms appear together.
11. ‘‘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 proposes 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.
12. ‘‘Physical Commodity’’
The Commission proposes 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.’’ 151 The proposed definition of ‘‘physical commodity’’ thus would include both exempt and agricultural commodities, but not excluded commodities.
13. ‘‘Position Accountability’’
Existing § 150.5 permits position accountability in lieu of 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 proposes a definition of ‘‘position accountability’’ for use throughout proposed § 150.5 as discussed in greater detail in connection with proposed § 150.5 below.
14. ‘‘Pre-Enactment Swap’’
The Commission proposes 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 have not expired as of the date of enactment of that 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 speculative position limits, although such swaps could not be netted with post-effective date swaps for purposes of complying with spot month speculative position limits.
15. ‘‘Pre-Existing Position’’
The Commission proposes 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 position limits would apply to such positions.
16. ‘‘Referenced Contract’’
The nine contracts currently subject to federal limits, which are all physically-settled futures, are all listed in existing § 150.2.152 As the Commission is proposing to expand the position limits framework to cover certain cash-settled futures and options on futures contracts and certain economically equivalent swaps, the Commission proposes a new defined term, ‘‘referenced contract,’’ for use throughout proposed part 150 to refer to contracts that would be subject to federal limits. The referenced contract definition would thus include: (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 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 would include look-alike futures and options on futures contracts (as well as options or economically equivalent swaps with respect to such look-alike contracts) and contracts of the same commodity but different sizes (e.g., mini contracts). Positions in referenced contracts may in certain circumstances be netted with positions in other referenced contracts. However, to avoid evasion and undermining of the position limits framework, nonreferenced contracts on the same commodity could not be used to net down positions in referenced contracts.153 a. Cash-Settled Referenced Contracts Under these proposed provisions, federal limits would apply to all cashsettled futures and options on futures contracts on physical commodities that are linked in some manner, whether directly or indirectly, to physicallysettled contracts subject to federal limits, and to any cash settled swaps that are deemed ‘‘economically equivalent swaps’’ with respect to a particular cash-settled referenced contract.154 While the Commission

NYMEX’s Henry Hub Natural Gas core referenced futures contract, would be considered a referenced contract under the rules proposed herein. 155The Commission has previously found that traders with positions in look-alike cash-settled contracts may have an incentive to manipulate and undermine price discovery in the physical-delivery contracts to which the cash-settled contract is linked. The practice known as ‘‘banging the close’’ or ‘‘marking the close’’ is one such manipulative practice that the Commission prosecutes and that this proposal seeks to prevent. 156As discussed above, the Commission is proposing a definition of ‘‘economically equivalent swap’’ that is narrower than the class of futures and options on futures that would be included as referenced contracts. See supra Section II.A.4. (discussion of economically equivalent swaps). 157See infra Section II.B.2.k. (discussion of netting). 158While 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 limits. The Commission would be 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 they would be more costly to try to use in a manipulation. 159 7 U.S.C. 6a(c)(2)(B). While 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 limits. The Commission would be comfortable with this outcome because the commodities 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. acknowledges previous comments to the effect that cash-settled contracts are less susceptible to manipulation and thus should not be subject to federal limits, 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 limits. This view is informed by the Commission’s experience overseeing derivatives markets, where it has observed that it is common for the same market participant to arbitrage linked cash- and physically-settled contracts, and where it has also observed instances where linked cashsettled and physically-settled contracts have been used together as part of a manipulation.155 In the Commission’s view, cash-settled contracts are generally economically equivalent to physical-delivery contracts in the same commodity. In the absence of position limits, a trader with positions in both the physically-delivered and cashsettled contracts may have increased ability and incentive to manipulate one contract to
benefit positions in the other. The proposal to include futures contracts and options on futures that are ‘‘indirectly linked’’ to the core referenced futures contract under the definition of ‘‘referenced contract’’ is intended to prevent the evasion of position limits through the creation of an economically equivalent futures contract or option on a future, 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.156 On the other hand, an outright derivative contract whose settlement price 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) would not be directly or indirectly linked to the core referenced futures contract. Similarly, a physical-delivery derivative contract whose settlement price was based on the same underlying commodity at a different delivery location (e.g., a hypothetical physicaldelivery futures contract on ultra-low sulfur diesel delivered at L.A. Harbor instead of the NYMEX ultra-low sulfur diesel futures contract delivered in New York Harbor core referenced futures contract) would not be linked, directly or indirectly, to the core referenced futures contract because the price of the physically-delivered L.A. Harbor contract would reflect the L.A. Harbor market price for ultra-low sulfur diesel. b. Exclusions From the Referenced Contract Definition While the proposed referenced contract definition would include linked contracts, it would also explicitly exclude certain other types of contracts. Paragraph (3) of the proposed referenced contract definition would explicitly exclude from that definition a location basis contract, a commodity index contract, a swap guarantee, or a trade option that meets the requirements of § 32.3 of this chapter. First, failing to exclude location basis contracts from the referenced contract definition could enable speculators to net portions of the location basis contract with outright positions in one of the locations comprising the basis contract, which would permit extraordinarily large speculative positions in the outright contract.157 For example, under the proposed rules, a large outright position in Henry Hub Natural Gas futures could not be netted down against a location basis contract that cash-settles to the difference in price between Gulf Coast Natural Gas and Henry Hub Natural Gas. Absent the proposed exclusion, a market participant could otherwise increase its exposure in the outright contract by using the location basis contract to net down, and then increase further, an outright contract position that would otherwise be restricted by position limits.158 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. Similarly, the proposed exclusion of commodity index contracts from the referenced contract definition would help ensure that market participants could not use a position in a commodity index contract to net down an outright position that was a component of the commodity index contract. If the Commission did not exclude commodity index contracts, then speculators would be allowed to take on massive outright positions in referenced contracts, which could lead to excessive speculation. As noted above, 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. This would have the effect of subverting the statutory pass-through swap language 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.159 In order to clarify the types of contracts that would qualify as location basis contracts and commodity index contracts, and thus would be excluded from the referenced contract definition, the Commission proposes guidance in
Appendix C to part 150 of the
Commission’s regulations. The proposed guidance would include information which would help define the parameters of the terms ‘‘location basis contract’’ and ‘‘commodity index contract.’’ To the extent a particular contract fits within the proposed guidance, such contract would not be a referenced contract, would not be subject to federal limits, and could not

160See infra Section II.B.2.k. (discussion of netting). 161See generally Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48207 (Aug. 13,
2012) (‘‘Product Definitions Adopting Release’’). 162See id. at 48226. 163To the extent that swap guarantees may lower
costs for uncleared OTC swaps in particular by incentivizing counterparties to agree to the swap, excluding swap guarantees arguably 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. 164 In the trade options final rule, the Commission stated its belief that federal 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 14966, 14971 (Mar. 21, 2016). 165As discussed above, the Commission will provide market participants with reasonable, goodfaith discretion to determine whether a swap would qualify as economically equivalent for federal position limit purposes. See supra Section II.A.4. (discussion of economically equivalent swaps). be used to net down positions in referenced contracts.160 Second, swap guarantees are explicitly excluded from the proposed referenced contract definition. In connection with further defining the term ‘‘swap’’ jointly with the Securities and Exchange Commission in connection with the ‘‘Product Definition Adopting Release,’’ 161 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.162 Excluding guarantees of swaps from the definition of referenced contract should 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 preliminarily believes that swap guarantees neither contribute to excessive speculation, market manipulation, squeezes, or corners nor were contemplated by Congress when Congress articulated its policy goals in CEA sections 4a(a)(1)–(3).163 Third, trade options that meet the requirements of § 32.3 would also be excluded from the proposed referenced contract definition. The Commission has traditionally exempted trade options from a number of Commission requirements because they are typically used 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.164
c. List of Referenced Contracts
In an effort to provide clarity to market participants regarding which exchange-traded contracts are subject to federal limits, the Commission anticipates publishing, and regularly updating, a list of such contracts on its website.165 The Commission thus proposes to publish a CFTC Staff Workbook of Commodity Derivative Contracts under the Regulations Regarding Position Limits for Derivatives along with this release, 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. As always, market participants may request clarification from the Commission. In order to ensure that the list remains up-to-date and accurate, the Commission is proposing 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 submissions. In particular, under existing rules, including §§ 40.2, 40.3, and 40.4, DCMs and SEFs are required to comply with certain submission requirements related to the listing of certain products. Many of the required submissions must include the product’s ‘‘terms and conditions,’’ which is defined in § 40.1(j) and which includes, under § 40.1(j)(1)(vii), ‘‘Position limits, position accountability standards, and position reporting requirements.’’ The Commission proposes to expand § 40.1(j)(1)(vii), which addresses futures and options on futures, to also include an indication as to whether the contract meets the definition of a referenced contract as defined in § 150.1, and, if so, the name of the core referenced futures contract on which the referenced contract is based. The Commission proposes to also expand § 40.1(j)(2)(vii), which addresses swaps, to include an indication as to whether the contract meets the definition of economically equivalent swap as defined in § 150.1 of this
chapter, and, if so, the name of the
referenced contract to which the swap is economically equivalent. This information would enable the Commission to maintain on its website, www.cftc.gov, an up-to-date list of DCM and SEF contracts subject to federal limits.
17. ‘‘Short Position’’
The Commission proposes 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.
18. ‘‘Speculative Position Limit’’
The Commission proposes 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 is 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.
19. ‘‘Spot Month,’’ ‘‘Single Month,’’ and
‘‘All-Months’’
The Commission proposes to expand the existing definition of ‘‘spot month’’ to account for the fact that the proposed limits would apply to both physicallysettled and certain cash-settled contracts, to clarify that the spot month for referenced contracts would be the same period as that of the relevant core referenced futures contract, and to account for variations in spot month conventions that differ by commodity. In particular, for the ICE U.S. 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 until the contract expires. For the ICE U.S. 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 until 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 fifth business day of the contract month until the contract expires. The Commission also proposes to eliminate the existing definitions of ‘‘single month’’ and ‘‘all-months’’ because the definitions for those terms would be built into the proposed definition of ‘‘speculative position limits’’ described above.

166For 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. 167As 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.’’ 168 7 U.S.C. 1a(47) and 1a(49); 17 CFR 1.3.
20. ‘‘Spread Transaction’’
The Commission proposes to incorporate a definition for transactions normally known to the trade as ‘‘spreads,’’ which would list the types of transactions that could qualify for spread exemptions for purposes of federal position limits. The proposed list would cover common types of intercommodity and intra-commodity spreads such as: Calendar spreads; quality differential spreads; processing spreads (such as energy ‘‘crack’’ or soybean ‘‘crush’’ spreads); product or by-product differential spreads; and futures-options spreads.166 Separately, under proposed § 150.3(a)(2)(ii), the Commission could determine to exempt any other spread transaction that is not included in the spread transaction definition, but that the Commission has determined is consistent with CEA
section 4a(a)(3)(B),167 and exempted,
pursuant to proposed § 150.3(b).
21. ‘‘Swap’’ and ‘‘Swap Dealer’’
The Commission proposes 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.168
22. ‘‘Transition Period Swap’’
The Commission proposes to create the defined term ‘‘transition period swap’’ to mean any swap entered into during the period commencing July 22, 2010 and ending 60 days after the publication of a final federal position limits rulemaking in the Federal Register, the terms of which have not expired as of that date. As discussed in connection with proposed § 150.3 later in this release, if acquired in good faith, such swaps would be exempt from federal speculative position limits, although such swaps could not be netted with post-effective date swaps for purposes of complying with spot month speculative position limits. Finally, the Commission proposes to eliminate existing § 150.1(i), which includes a chart 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. Now that the current and proposed single month and all months combined limits are the same, and now that the Commission is proposing a new process for granting spread exemptions in § 150.3, this provision is no longer needed.
23. Request for Comment
The Commission requests comment on all aspects of the proposed amendments and additions to the definitions in § 150.1. The Commission also invites comments on the following:
(1) Should the Commission include the enumerated hedges in regulations, rather than in an appendix of acceptable practices? Why or why not? (2) Should the Commission list any additional common commercial hedging practices as enumerated hedges? (3) The Commission proposes to eliminate the five day rule on federal position limits, instead allowing exchanges discretion on whether to apply or waive any five day rule or equivalent on their exchange position limits. The Commission believes that the five day rule can be an important way to help ensure that futures and cash market prices converge. As such, should the Commission require that exchanges apply the five day rule to some or all bona fide hedging positions and/or spread exemptions? If so, to which bona fide hedging positions? Should the exchanges retain the ability to waive such five day rule? (4) The Commission requests comment on the nature of anticipated merchandising exemptions that have been granted by DCMs in connection with the 16 non-legacy commodities or in connection with exemptions from exchange limits in 9 legacy commodities. (5) To what extent do the enumerated hedges proposed in this release encompass the types of positions discussed in the BFH Petition? Should additional types of positions identified in the BFH Petition, including examples nos. 3 (unpriced physical purchase and sale commitments) and 7 (scenario 2) (use of physical delivery referenced contracts to hedge physical transactions using calendar month averaging pricing), be enumerated as bona fide hedges, after notice and comment? (6) The Commission requests comment as to 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. (7) While an ‘‘economically equivalent swap’’ qualifies as a referenced contract under paragraph (2) of the ‘‘referenced contract’’ definition, paragraph (1) of the ‘‘referenced contract’’ definition applies a broader test to determine whether futures contracts or options on a futures contract would qualify as a referenced contract. Instead of a separate definition for ‘‘economically equivalent swaps,’’ should the same test (e.g., paragraph (1) of the ‘‘referenced contract’’ definition) that applies to futures and options on futures for determining status as ‘‘referenced contracts’’ also apply to determine whether a swap is an ‘‘economically equivalent swap,’’ and therefore a ‘‘referenced contract’’? Why or why not? (8) The Commission is proposing to define ‘‘economically equivalent swap’’ in a manner that is generally consistent with the EU’s definition, with the exception that a swap must have ‘‘identical material’’ terms, disregarding differences in lot size or notional amount, delivery dates diverging by less than one calendar day (or for natural gas, by less than two calendar days), or post-trade
risk management arrangements. Is this approach either too narrow or too broad? Why or why not? (9) The Commission requests comment how a market participant subject to both the CFTC’s and EU’s position limits regimes expects to comply with both regimes for contracts subject to both regimes. (10) With respect to economically equivalent swaps, the Commission proposes an exception that would capture penultimate swaps only for natural gas contracts, including

169See 2016 Reproposal, 81 FR at 96966. 170Position Limits for Derivatives, U.S. Commodity Futures Trading Commission website, available at https://www.cftc.gov/LawRegulation/ DoddFrankAct/Rulemakings/PositionLimitsfor Derivatives/index.htm. 171See, e.g., National Gas Supply Association Comment Letter at 4 (Feb. 28, 2017) in response to 2016 Reproposal (listing operational risk, liquidity risk, credit risk, locational risk, and seasonal risk). 172 17 CFR 150.2. penultimate swaps on the NYMEX NG core referenced futures contract. Is this exception for such penultimate natural gas swaps appropriate, or should economically equivalent natural gas swaps be treated the same as other economically equivalent swaps? Why or why not? (11) Should the Commission broaden the definition of ‘‘economically equivalent swap’’ to include penultimate referenced contracts for all (or at least a subset of) commodities subject to federal position limits? Why or why not? (12) The Commission is proposing that a physically-settled swap may qualify as economically equivalent even if its delivery date diverges by less than one calendar day from its corresponding physically-settled referenced contract. Should the Commission include a similar provision for cash-settled swaps where cash-settled swaps could qualify as economically equivalent if their cash settlement price determination diverged from their corresponding cash-settled referenced contract by less than one calendar day? (13) Under the proposed definition of ‘‘economically equivalent swaps,’’ a cash-settled swap that otherwise shares identical material terms with a physically-settled referenced contract (and vice-versa) would not be deemed to be economically equivalent due to the difference in settlement type. Should the Commission consider treating swaps that share identical material terms, other than settlement type (i.e., cash-settled versus physically-settled swaps), to be economically equivalent? Why or why not? (14) Consistent with the 2016 Reproposal, the Commission is proposing to explicitly exclude swap guarantees from the referenced contract definition.169 Should the Commission again propose to exclude swap guarantees from the referenced contract definition? Why or why not? If the Commission does exclude swap guarantees, should such exclusion be limited to guarantees for affiliated entities only? Why or why not? (15) Please indicate if any updates or other modifications are needed to: (1) The proposed list of referenced contracts that would appear in the CFTC Staff Workbook of Commodity Derivative Contracts Under the Regulations Regarding Position Limits for Derivatives posted on the Commission’s website; 170 or (2) the proposed Appendix D to part 150 list of commodities deemed ‘‘substantially the same’’ for purposes of the term ‘‘location basis contract’’ as used in the proposed ‘‘referenced contract’’ definition. (16) Should the Commission require exchanges to maintain a list of referenced contracts and
location basis contracts listed on their platforms? (17) The Commission has previously requested, and commenters have previously provided, a list of risks other than price risk for which commercial enterprises commonly need to hedge.171 Please explain which hedges of nonprice risks could be objectively and systematically verified as bona fide hedges by the Commission, and how the Commission would verify that such positions are bona fide hedges, including how the Commission would consistently and definitively quantify and assess whether any such hedges of non-price risks are bona fide hedges that comply with the proposed bona fide hedging definition. (18) The Commission proposes to define spread transactions to include:
Either a calendar spread, intercommodity spread, quality differential spread, processing spread (such as energy ‘‘crack’’ or soybean ‘‘crush’’ spreads), product or by-product differential spread, or futures-option spread. Are there other types of transactions commonly known to the trade as ‘‘spreads’’ that the Commission should include in its spread transaction definition? Please provide any examples or descriptions that will help the Commission determine whether such transactions would be consistent with CEA section 4a(a)(3)(B) and should be included in the definition of spread transaction. (19) Should the Commission require market participants that trade economically equivalent swaps OTC, rather than on a SEF or DCM, to selfidentify and report to the Commission that in their view, such swaps meet the Commission’s proposed economically equivalent swap definition? B. § 150.2—Federal Limit Levels

Existing § 150.2
Federal spot month, single month, and all-months-combined position limits currently apply to nine physically-settled futures contracts on agricultural commodities listed in existing § 150.2, and, on a futuresequivalent basis, to options contracts thereon. Existing federal limit levels set forth in § 150.2 172 apply net long or net short and are as follows:
EXISTING LEGACY AGRICULTURAL CONTRACT FEDERAL SPOT MONTH, SINGLE MONTH, AND ALL-MONTHS-COMBINED LIMIT LEVELS Contract Spot month limit Single month and all-monthscombined limit Chicago Board of Trade (‘‘CBOT’’) Corn (C) .............................................................................................. 600 33,000 CBOT Oats (O) ............................................................................................................................................ 600 2,000 CBOT Soybeans (S) .................................................................................................................................... 600 15,000 CBOT Soybean Meal (SM) .......................................................................................................................... 720 6,500 CBOT Soybean Oil (SO) ............................................................................................................................. 540 8,000 CBOT Kansas City Hard Red Winter Wheat (KW) ..................................................................................... 600 12,000 CBOT Wheat (W) ........................................................................................................................................ 600 12,000 ICE Futures U.S. (‘‘ICE’’) Cotton No. 2 (CT) .............................................................................................. 300 5,000 Minneapolis Grain Exchange (‘‘MGEX’’) Hard Red Spring Wheat (MWE) ................................................. 600 12,000

173This portion of the release is organized by subject matter, rather than by lettered provision, and will proceed in the following order: (1) Contracts subject to federal limits; (2) proposed spot month limit levels; (3) proposed methodology for setting spot month limit levels; (4) proposed nonspot month limit levels; (5) proposed methodology for setting non-spot month limit levels; (6) subsequent levels; (7) relevant contract month for purposes of referenced contracts; (8) limits on preexisting positions; (9) limits for positions on foreign boards of trade; (10) anti-evasion provision; (11) netting of positions; (12) eligible affiliates and aggregation; and (13) request for comment. 174Proposed § 150.2(d) provides that each core referenced futures contract includes any ‘‘successor’’ contracts. An example of a successor contract would be the RBOB Gasoline contract that was listed due to a change in gasoline specifications and that ultimately replaced the Unleaded Gasoline contract. For some time, both contracts were listed for trading to allow open interest to migrate to the new RBOB contract; once trading migrated, the Unleaded Gasoline contract was delisted. 175As described above, the proposed term ‘‘referenced contract’’ includes: (1) Futures and options on futures contracts that, with respect to a particular core referenced futures contract, are directly or indirectly linked to the price of that core referenced futures contract, or directly or indirectly linked to the price of the same commodity underlying the core referenced futures contract for delivery at the same location; and (2) ‘‘economically equivalent swaps.’’ See proposed ‘‘referenced contract’’ and ‘‘economically equivalent swap’’ definitions in 150.1. 176CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). 177See infra Section II.A.4. (definition of ‘‘economically equivalent swap’’). 178As described below, federal non-spot month limit levels would only apply to the nine legacy agricultural commodities. The 16 non-legacy commodities would be subject to federal limits during the spot month, and exchange-set limits and/or accountability outside of the spot month. See infra Section II.B.2.d. (discussion of proposed non-spot month limit levels). 179See infra Section III. (Legal Matters). 180CBOT’s existing exchange-set limit for Wheat (W) is 600 contracts. However, for its May contract month, CBOT has a variable spot limit 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 position limit 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 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. 181The proposed federal spot month limit for CME Live Cattle (LC) would feature a step-down limit similar to the CME’s existing Live Cattle (LC) step-down exchange set limit. The proposed 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. 182CME’s existing exchange-set limit for Live Cattle (LC) has a step-down spot month limit: (1) 450 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. 183CBOT’s existing exchange-set spot month limit for Rough Rice (RR) is 600 contracts for all contract months. However, for July and September, there is a step-down limit from 600 contracts. In the last five trading days of the expiring futures month, the speculative 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. 184NYMEX recommends implementing a stepdown federal spot position limit for its Light Sweet Crude Oil (CL) 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. While not explicit in § 150.2, the Commission’s practice has been to set spot month limit levels at or below 25 percent of deliverable supply based on DCM estimates of deliverable supply verified by the Commission, and to set limit levels outside of the spot month at 10 percent of open interest for the first 25,000 contracts of open interest, with a marginal increase of 2.5 percent of open interest thereafter.
2. Proposed § 150.2 173
a. Contracts Subject to Federal Limits The Commission proposes to establish federal limits on the 25 core referenced futures contracts listed in proposed § 150.2(d),174 and on their associated referenced contracts, which would include swaps that qualify as ‘‘economically equivalent swaps.’’ 175 The Commission proposes to establish position limits on futures and options on these 25 commodities on the basis that position limits on such contracts are ‘‘necessary.’’ A discussion of the necessity finding and the characteristics of the 25 core referenced futures contracts is in Section III.F. In order to comply with CEA section 4a(a)(5), the Commission also proposes to establish limits on swaps that are ‘‘economically equivalent’’ to the above.176 As discussed above, under the Commission’s proposed definition of ‘‘economically equivalent swap’’ set forth in § 150.1, a swap would generally qualify as economically equivalent with respect to a particular referenced contract so long as the swap shares identical material contract specifications, terms, and conditions with the referenced contract, disregarding any differences with respect to lot size or notional amount, delivery dates diverging by less than one calendar day, (or for natural gas, by less than two calendar days) or posttrade risk-management arrangements.177 As described in greater detail below, the proposed federal limits would apply during all contract months for the nine legacy agricultural commodity contracts and only during the spot month for the 16 other commodity contracts. Proposed § 150.2(e) would provide that the levels set forth below for the 25 contracts are listed in Appendix E to
part 150 of the Commission’s
regulations and would set the compliance date for such levels at 365 days after publication of final position limits regulations in the Federal Register. b. Proposed Federal Spot Month Limit Levels Under the rules proposed herein, federal spot month limit levels would apply to all 25 core referenced futures contracts, and any associated referenced contracts.178 Federal spot month limits for referenced contracts on all 25 commodities are essential for deterring and preventing excessive speculation, manipulation, corners and squeezes.179 Proposed § 150.2(e) provides that federal spot month levels are set forth in proposed Appendix E to part 150 and are as follows:
Core referenced futures contract 2020 Proposed spot month limit Existing federal spot month limit Existing exchange-set spot month limit Legacy Agricultural Contracts CBOT Corn (C) ............................................................................ 1,200 600 600
CBOT Oats (O) ............................................................................ 600
CBOT Soybeans (S) .................................................................... 1,200 600 600 CBOT Soybean Meal (SM) .......................................................... 1,500 720 720 CBOT Soybean Oil (SO) ............................................................. 1,100 540 540 CBOT Wheat (W) ........................................................................ 1,200 600 180 600/500/400/300/220 CBOT KC HRW Wheat (KW) ...................................................... 1,200 600 600

185See ICE Comment Letter at 8 (May 14, 2019); MGEX Comment Letter at 2, 4–8 (Aug. 31, 2018); and Summary DSE Proposed Limits, CME Group Comment Letter (Nov. 26, 2019), available at https://comments.cftc.gov (comment file for RIN 3038–AD99). 186 7 U.S.C. 6a(a)(3)(B). 187 7 U.S.C. 6a(a)(3)(B). 188The recommended levels range from approximately 7 percent of deliverable supply to 25 percent of deliverable supply. 189See, e.g., Revision of Federal Speculative Position Limits and Associated Rules, 64 FR 24038 (May 5, 1999). Core referenced futures contract 2020 Proposed spot month limit Existing federal spot month limit Existing exchange-set spot month limit MGEX HRS Wheat (MWE) .......................................................... 1,200 600 600 ICE Cotton No. 2 (CT) ................................................................. 1,800 300 300 Other Agricultural Contracts CME Live Cattle (LC) .................................................................. 181 600/300/200 n/a 182 450/300/200 CBOT Rough Rice (RR) .............................................................. 800 n/a 183 600/200/250 ICE Cocoa (CC) ........................................................................... 4,900 n/a 1,000 ICE Coffee C (KC) ....................................................................... 1,700 n/a 500 ICE FCOJ–A (OJ) ........................................................................ 2,200 n/a 300 ICE U.S. Sugar No. 11 (SB) ........................................................ 25,800 n/a 5,000 ICE U.S. Sugar No. 16 (SF) ........................................................ 6,400 n/a n/a Metals Contracts COMEX Gold (GC) ...................................................................... 6,000 n/a 3,000 COMEX Silver (SI) ....................................................................... 3,000 n/a 1,500 COMEX Copper (HG) .................................................................. 1,000 n/a 1,500 NYMEX Platinum (PL) ................................................................. 500 n/a 500 NYMEX Palladium (PA) ............................................................... 50 n/a 50 Energy Contracts NYMEX Light Sweet Crude Oil (CL) ........................................... 184 6,000/5,000/4,000 n/a 3,000 NYMEX NYH ULSD Heating Oil (HO) ........................................ 2,000 n/a 1,000 NYMEX NYH RBOB Gasoline (RB) ............................................ 2,000 n/a 1,000 NYMEX Henry Hub Natural Gas (NG) ........................................ 2,000 n/a 1,000 Limits for any contract with a proposed limit above 100 contracts would be rounded up to the nearest 100 contracts from the exchangerecommended level and/or from 25 percent of deliverable supply.
c. Process for Calculating Federal Spot
Month Limit Levels
The existing federal spot month limit levels on the nine legacy agricultural contracts have remained constant for decades, yet the markets have changed significantly during that time period, including the advent of electronic trading and the implementation of extended trading hours. Further, open interest and trading volume have since reached record levels, and some of the deliverable supply estimates on which the existing federal spot month limits were originally based are now decades out of date. In light of these and other factors, CME Group, ICE, and MGEX recommended federal spot month limit levels for each of their respective core referenced futures contracts, including contracts that would be subject to federal limits for the first time under this proposal.185 Commission staff reviewed these recommendations and conducted its own analysis of them, including by requesting additional information and by independently assessing the recommended levels using its own experience, observations, and knowledge. The Commission proposes to adopt each of the exchangerecommended levels as federal spot month limit levels. In setting federal limits, the Commission considers the four policy objectives in CEA section 4a(a)(3)(B). That is, to set limits, to the maximum extent practicable, in its discretion, to:
(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.186 In setting federal position limit levels, the Commission endeavors to maximize these objectives by setting limits that are low enough to prevent excessive speculation, manipulation, squeezes, and corners that could disrupt price discovery, but high enough so as not to restrict liquidity for bona fide hedgers. Based on the Commission’s experience overseeing federal position limits for decades, and overseeing exchange-set position limits submitted to the Commission pursuant to part 40 of its regulations, the Commission has analyzed and evaluated the information provided by CME Group, ICE, and MGEX, and preliminarily finds that none of the recommended levels considered in preparing this release appear improperly calibrated such that they might hinder liquidity for bona fide hedgers, or invite excessive speculation, manipulation, corners, or squeezes, including activity that could impact price discovery. For these reasons, discussed in turn below, the Commission preliminarily believes that the DCMs’ recommended spot month limit levels all further the statutory objectives set forth in CEA section 4a(a)(3)(B).187
i. The Proposed Spot Month Limit
Levels Are Low Enough To Prevent Excessive Speculation and Protect Price Discovery All 25 of the exchange-recommended levels are at or below 25 percent of deliverable supply.188 The Commission has long used deliverable supply as the basis for spot month position limits due to concerns regarding corners, squeezes, and other settlement-period manipulative activity.189 It would be difficult, in the absence of other factors, for a participant to corner or squeeze a market if the participant holds less than or equal to 25 percent of deliverable supply because, among other things, any

190 Id.
191See ICE Comment Letter at 8 (May 14, 2019); MGEX Comment Letter at 2, 4–8 (Aug. 31, 2018); and Summary DSE Proposed Limits, CME Group Comment Letter (Nov. 26, 2019), available at https://comments.cftc.gov (comment file for RIN 3038–AD99).CME Group submitted updated estimates of deliverable supply and recommended federal spot month limit levels for CBOT Corn (C), CBOT Oats (O), CBOT Rough Rice (RR), CBOT Soybeans (S), CBOT Soybean Meal (SM), CBOT Soybean Oil (SO), CBOT Wheat (W), and CBOT KC HRW Wheat (KW); COMEX Gold (GC), COMEX Silver (SI), NYMEX Platinum (PL), NYMEX Palladium (PA), and COMEX Copper (HG); and NYMEX Henry Hub Natural Gas (NG), NYMEX Light Sweet Crude Oil (CL), NYMEX NY Harbor ULSD Heating Oil (HO), and NYMEX NY Harbor RBOB Gasoline (RB). ICE submitted updated estimates of deliverable supply and recommended federal spot month limit levels for ICE Cocoa (CC), ICE Coffee C (KC), ICE Cotton No. 2 (CT), ICE FCOJ– A (OJ), ICE U.S. Sugar No. 11 (SB), and ICE U.S. Sugar No. 16 (SF). MGEX submitted an updated deliverable supply estimate and indicated that if the Commission adopted a specific spot month position limit, MGEX believes the federal spot month limit level for MGEX Hard Red Spring Wheat (MWE) should be no less than 1,000 contracts. Commission staff reviewed the exchange submissions and conducted its own research. Commission staff reviewed the data submitted, confirmed that the data submitted accurately reflected the source data, and considered whether the data sources were authoritative. Commission staff considered whether the assumptions made by the exchanges in the submissions were acceptable, or whether alternative assumptions would lead to similar results. In some cases, Commission staff conducted trade source interviews. Commission staff replicated the calculations included in the submissions. 192See CME Group Comment Letter (Apr. 15, 2016); CME Group Comment Letter (addressing natural gas) (Sept. 15, 2016); CME Group Comment Letter (addressing ULSD) (Sept. 15, 2016); ICE Comment Letter (Apr. 20, 2016); and MGEX Comment Letter (Jul. 13, 2016), available at https:// comments.cftc.gov/PublicComments/ CommentList.aspx?id=1772&ctl00_ctl00_ cphContentMain_MainContent_ gvCommentListChangePage=8_50. At that time, the Commission reviewed the methodologies that the DCMs used to prepare the estimates, among other things, and verified the deliverable supply estimates as reasonable. See 2016 Reproposal, 81 FR at 96754. 193 17 CFR part 38, Appendix C. 194CEA section 4a(a)(1); 7 U.S.C. 6a(a)(1). 195See infra Section III.F. 196With the exception of CBOT Oats (O), open interest for the legacy agricultural commodities has increased dramatically over the past several decades, some by a factor of four. 197While the proposed spot month limit levels are generally higher than the existing federal or exchange-set levels, the proposed federal level for COMEX Copper (HG) is below the existing exchange-set level, the proposed federal level for
CBOT Oats (O) is the same as the existing federal and exchange-set level, and the proposed federal levels for NYMEX Platinum (PL) and NYMEX Palladium (PA) are the same as the existing exchange-set levels. 198For the following core referenced futures contracts, CME Group recommended spot month levels below 25 percent of deliverable supply:
CBOT Corn (C) (9.22% of deliverable supply), CBOT Oats (O) (19.29%), CBOT Soybeans (S) (15.86%), CBOT Soybean Meal (SM) (16.77%), Soybean Oil (SO) (8.31%), CBOT Wheat (W) (9.24%), CBOT KC HRW Wheat (KW) (9.24%), CME Live Cattle (LC) (step-down limits 15.86%–7.93%– 5.29%), CBOT Rough Rice (RR) (8.94%), COMEX Gold (GC) (12.72%), COMEX Silver (SI) (12.62%), COMEX Copper (HG) (9.66%), NYMEX Platinum (PL) (13.60%), NYMEX Palladium (PA) (17.18%), NYMEX Light Sweet Crude Oil (CL) (step-down limits 11.16%–9.30%–7.44%), NYMEX NYH ULSD Heating Oil (HO) (10.85%), and NYMEX NYH RBOB Gasoline (RB) (7.41%). CME Group recommended spot month levels at 25 percent of estimated deliverable supply for NYMEX Henry Hub Natural Gas (NG). ICE and MGEX recommended limit levels at 25 percent of estimated deliverable supply for each of their core referenced futures contracts: Cocoa (CC), Coffee C (KC), FCOJ–A (OJ), Cotton No. 2 (CT), U.S. Sugar No. 11 (SB), and U.S. Sugar No. 16 (SF) on ICE, and Hard Red Spring Wheat (MWE) on MGEX. See ICE Comment Letter at 1–7 (May 14, 2019); MGEX Comment Letter at 2, 4–8 (Aug. 31, 2018); and Summary DSE Proposed Limits, CME Group Comment Letter (Nov. 26, 2019), available at https://comments.cftc.gov (comment file for RIN 3038–AD99). 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. By restricting positions to a proportion of the deliverable supply of the commodity, the spot month position limits require that no one speculator can hold a position larger than 25 percent 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 cashsettled derivative contracts, reducing that trader’s incentive to manipulate the cash settlement price.190 Further, by proposing levels that are sufficiently low to prevent market manipulation, including corners and squeezes, the proposed 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. Each of the exchange-recommended levels is based on a percentage of deliverable supply estimated by the relevant exchange and submitted to the Commission for review.191 The Commission has closely assessed the estimates, which CME Group, ICE, and MGEX updated with recent data using the methodologies they used during the 2016 Reproposal.192 The Commission hereby verifies that the estimates submitted by the exchanges are reasonable. In verifying the DCMs’ estimates of
deliverable supply, the Commission is not endorsing any particular methodology for estimating deliverable supply beyond what is already set forth in Appendix C to part 38 of the Commission’s regulations.193 As circumstances change over time, such DCMs may need to adjust the methodology, assumptions, and allowances that they use to estimate deliverable supply to reflect then current market conditions and other relevant factors.
ii. The Proposed Spot Month Limit
Levels are High Enough To Ensure Sufficient Market Liquidity for Bona Fide Hedgers
Section 4a(a)(1) of the CEA addresses
‘‘excessive speculation. . .causing sudden or unreasonable fluctuations or unwarranted [price] changes . . .’’ 194 Speculative activity that is not ‘‘excessive’’ in this manner is not a focus of section 4a(a)(1). Rather, speculative activity may generate liquidity by enabling market participants with bona fide hedging positions to trade more efficiently. Setting position limits too low could result in reduced liquidity, including for bona fide hedgers. The Commission has not observed, or received any complaints about, a lack of liquidity for bona fide hedgers in the markets for the 25 core referenced futures contracts. In fact, as described later in this release, the 25 core referenced futures contracts represent some of the most liquid markets overseen by the Commission.195 Market developments that have taken place since federal spot month limits were last amended decades ago, such as electronic trading and expanded trading hours, have likely only contributed to these already liquid markets.196 Market participants have more opportunities than ever to enter, trade, or exit a position. By proposing to generally increase the existing federal spot month limit levels, and by proposing federal spot month limit levels that are generally equal to or higher than existing exchange-set levels,197 yet in all cases still low enough to prevent excessive speculation, manipulation, corners and squeezes, the Commission does not expect the proposed limits to result in a reduction in liquidity for bona fide hedgers.
iii. The Proposed Spot Month Limit
Levels Fall Within a Range of Acceptable Levels ICE and MGEX recommended federal spot month limit levels at 25 percent of deliverable supply, while CME Group generally recommended levels below 25 percent of deliverable supply.198 These

199CME Group has indicated that for its own exchange-set limits, it historically has not typically set the limit at the full 25 percent of deliverable supply when launching a new product, regardless of asset class or commodity. CME Group’s recommended spot month limit levels are based on observations regarding the orderliness of liquidations and monitoring for appropriate price convergence. CME Group indicated that the recommended levels reflect a measured approach calibrated to avoid the risk of disruption to its markets, and stated that upon analyzing a reasonable body of data relating to the expirations with the recommended spot month limit levels, CME Group would consider in the future making any recommendations for increases in limits if any additional increases were appropriate. Summary DSE Proposed Limits, CME Group Comment Letter (Nov. 26, 2019), available at https:// comments.cftc.gov (comment file for RIN 3038– AD99). 200See, e.g., Revision of Federal Speculative Position Limits, 57 FR at 12766, 12770 (Apr. 13, 1992). 201Commenters, including those responding to the 2016 Reproposal, have previously requested that limit levels should be set on a commodity-bycommodity basis to recognize differences among commodities, including differences in liquidity, seasonality, and other economic factors. See, e.g., AQR Capital Management Comment Letter at 12 (Feb. 28, 2017); Copperwood Asset Management Comment Letter at 3 (Feb. 28, 2017); Managed Funds Association, Asset Management Group of the Securities Industry and Financial Markets Association, and the Alternative Investment Management Association Comment Letter at 9–12 (Feb. 28, 2017); and National Grain and Feed Association Comment Letter at 2 (Feb. 28, 2017). 202As noted above, CME Group’s recommended federal level of 1,000 for COMEX Copper (HG) is below the existing exchange-set level of 1,500, and CME Group’s recommended federal levels for NYMEX Platinum (PL) and NYMEX Palladium (PA) are equal to the existing exchange-set levels of 500 and 50, respectively. CME Group recommended federal levels of 6,000 for COMEX Gold (GC) and 3,000 for COMEX Silver (SI), which would represent an increase over the existing exchange-set levels of 3,000 and 1,500, respectively. While CME Group’s recommended federal COMEX Gold (GC) and COMEX Silver (SI) levels are higher than the existing exchange-set levels, the recommended levels still represent only approximately 13 percent of deliverable supply each. Summary DSE Proposed Limits, CME Group Comment Letter (Nov. 26, 2019), available at https://comments.cftc.gov (comment file for RIN 3038–AD99). 203The volatility was based on factors such as the bust in the housing market in 2008, the severe recession in the United States in 2009, and high demand for copper exports to China, which has grown continually over the past 20 years. distinctions reflect philosophical and other differences among the exchanges and differences between the core referenced futures
contracts and their underlying commodities, including a preference on the part of CME Group not to increase existing limit levels applicable to its core referenced futures contracts too drastically.199 The Commission has previously stated that ‘‘there is a range of acceptable limit levels,’’ 200 and continues to believe this is true, both for spot and non-spot month limits. There is no single ‘‘correct’’ spot month limit level for a given contract, and it is likely that a number of limit levels within a certain range could effectively address the 4a(a)(3) factors. While the CME Group, ICE, and MGEX recommended levels all fall at different ends of the deliverable supply range, the levels all fall at or below 25 percent of deliverable supply, which is critical for protecting the spot month from excessive speculation, manipulation, corners and squeezes.
iv. The Proposed Spot Month Limit
Levels Account for Differences Between Markets In addition to being high enough to ensure sufficient liquidity, and low enough to prevent excessive speculation and manipulation, the proposed spot month limit levels are also calibrated to further address CEA section 4a(a)(3) by accounting for differences between markets for the core referenced futures contracts and for their underlying commodities.201 For the agricultural commodities, the Commission considered a variety of factors in evaluating the exchangerecommended spot month levels, including concentration and composition of market participants, the historical price volatility of the commodity, convergence between the futures and cash market prices at the expiration of the contract, and the Commission’s experience observing how the supplies of agricultural commodities are affected by weather (drought, flooding, or optimal growing conditions), storage costs, and delivery mechanisms. In the Commission’s view, the exchanges’ recommended spot month levels for each of the agricultural contracts would allow for speculators to be present in the market while preventing speculative positions from being so large as to harm convergence and otherwise hinder statutory objectives. The Commission also considered the delivery mechanisms for the agricultural commodities in assessing the exchangerecommended spot month levels. For example, for the CME Live Cattle (LC) contract, the Commission considered the physical limitation that exists on how many cattle can be processed (inspected, graded, and weighed) at the delivery facilities. CME Group currently has an exchange-set step-down spot month limit, and recommended a federal step-down limit for CME Live Cattle (LC) of 600/300/200 contracts in order to avoid congestion and to foster convergence by gradually reducing the limit levels in a manner that meets the processing capacity of the delivery facilities. The Commission proposes to adopt this step-down limit due to the unique attributes of the CME Live Cattle (LC) contract. For the metals contracts, which are all listed on NYMEX, the Commission took delivery mechanisms, among other factors, into account in assessing the recommended spot month limit levels. Upon expiration, the long for each metals contract receives the ownership certificate (warrant) for the metal already in the warehouse/depository and can continue to store the metal where it is, load-out the metal, or short a futures contract to sell the ownership certificate. This delivery mechanism, which allows for the resale of the warrant while the metal remains in the warehouse, provides for relatively inexpensive and simple delivery when compared to the delivery mechanisms for other commodity types. Further, metals tend not to spoil and are cheap to store on a per dollar basis compared to other commodities. As metals are generally easier to obtain, store, and sell than other commodity types, it is also potentially cheaper to accomplish a corner or
squeeze in metals than in other commodity types. The Commission has previously observed manipulative activity in metals as evidenced by the Hunt Brother silver and Sumitomo copper events. The Commission kept this history in mind in accepting CME Group’s recommendation to take a fairly cautious approach with respect to the recommended levels for each metal contract, which are each well below 25 percent of deliverable supply.202 Commission staff has, however, reviewed each of the metals contracts previously and confirms that these contracts satisfy all regulatory requirements, including the DCM Core Principle 3 requirement that the contracts are not readily susceptible to manipulation. Additionally, the Commission considered the volatility in the estimated deliverable supply for metals. For the COMEX Copper (HG) contract, the estimated deliverable supply for copper (measured by copper stocks in COMEX-approved warehouses) has experienced considerable volatility during the past decade, resulting in COMEX amending its exchange-set spot month position limit multiple times, decreasing or increasing the limit level to reflect the amount of copper in its approved warehouses.203 Similarly, volatility in deliverable supplies has been observed for the NYMEX Palladium (PA) contract, where production of palladium from major producers has been declining while demand for palladium by the auto

204See, e.g., NYMEX Submissions Nos. 14–463 (Oct. 31, 2014), 15–145 (Apr. 14, 2015), and 15–377 (Aug. 27, 2015). 205See U.S. Oil and Gas Pipeline Mileage, Bureau of Transportation Statistics website, available at www.bts.gov/content/us-oil-and-gas-pipelinemileage. 206 Market Resources, ICE Futures 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). 207See infra Section II.B.2.e. industry for catalytic converters has increased. This trend in palladium stocks in exchange-approved depositories has been observed since
2014. In a series of amendments,
NYMEX reduced its exchange-set spot month limit from 650 contracts to below 200 contracts over time.204 The Commission has not observed similar volatility in the deliverable supply estimates for agricultural or energy commodities. Given this history of volatility in deliverable supply estimates for metals, if the Commission were to set limit levels at, rather than below, 25 percent of deliverable supply, and if deliverable supply were to subsequently change drastically, the spot month limit level could end up being well above (or below) 25 percent of deliverable supply, and thus potentially too high (or too low) to further statutory objectives. For the energy complex, the Commission considered factors such as the underlying infrastructure and connectivity. For example, as of 2017, generally, out of commodities underlying the core referenced futures contracts in energy, natural gas had the most robust infrastructure for moving the commodity, with over 1,600,000 miles of pipeline (including distribution mains, transmission pipelines, and gathering lines) in the United States, compared to only 215,000 miles of pipeline for oil (including crude and product lines).205 The robust infrastructure for moving natural gas supports CME Group’s recommended spot month limit level at 25 percent of estimated deliverable supply for the NYMEX Henry Hub Natural Gas (NG) contract, while comparatively smaller crude oil and crude product pipeline infrastructure support CME Group’s recommended spot month limit levels below 25 percent of estimated deliverable supply for the NYMEX Light Sweet Crude Oil (CL) and NYMEX NYH RBOB Gasoline (RB) contracts. The Commission also considered factors such as the large amounts of liquidity in the cash-settled natural gas referenced contracts relative to the physically settled NYMEX Henry Hub Natural Gas (NG) core referenced futures contract. For that contract, CME Group recommended setting the spot month limit at 25 percent of estimated deliverable supply (2,000 contract spot month limit) with a conditional limit exemption of 10,000 contracts net long or net short conditioned on the participant not holding or controlling any positions during the spot month in the physically-settled NYMEX Henry Hub Natural Gas (NG) core referenced futures contract. Speculators who desire price exposure to natural gas will likely trade in the cash-settled contracts because, generally, they do not have the ability to make or take delivery; trading in the cash-settled contract removes the chance that they may be unable to exit the physically-settled NYMEX Henry Hub Natural Gas (NG) contract and be selected to make or take delivery of natural gas. Thus, speculators are likely to remain out of the NYMEX Henry Hub Natural Gas (NG) contract during the spot month. Since corners and squeezes cannot be effected using cash settled contracts, the Commission proposes a spot month limit set at 25 percent of deliverable supply for the NYMEX Henry Hub Natural Gas
(NG) core referenced futures contract. Further, for certain energy commodities, CME Group recommended step-down limits, including for commodities where delivery constraints could hinder convergence or where market participants otherwise provided feedback that such limits would help maintain orderly markets. In the case of NYMEX Light Sweet Crude Oil (CL), CME Group currently has a single spotmonth limit of 3,000 contracts, but is recommending a step down limit that would end at 4,000 contracts (stepdown limits of 6,000/5,000/4,000). Historically, as liquidity decreases in the contract, the exchange would have a step down mechanism in its exemptions that it had granted to force market participants to lower their positions to the current 3,000 contract spot month limit. Given the recommended increase to a final stepdown limit of 4,000 contracts, the exchange, through feedback from market participants, recommended a step-down spot month limit that would in effect provide the same diminishing effect on positions. d. Proposed Federal Single Month and All-Months Combined (‘‘Non-Spot Month’’) Limit Levels Under the rules proposed herein, federal non-spot month limits would only apply to the nine agricultural commodities currently subject to federal limits. The 16 additional contracts covered by this proposal would be subject to federal limits only during the spot month, and exchange-set limits and/or accountability requirements outside of the spot month.206 The Commission proposes to maintain federal non-spot month limits for the nine legacy agricultural contracts, with the modifications set forth below, because the Commission has observed no reason to eliminate them. These non-spot month limits have been in place for decades, and while the Commission is proposing to modify the limit levels,207 removing the levels entirely could potentially result in market disruption. In fact, commercial market participants trading the nine legacy agricultural contracts have requested that the Commission maintain federal limits outside the spot month in order to promote market integrity. For the following reasons, however, the Commission is not proposing limits outside the spot month for the other 16 contracts.

208 In the case of certain commodities where open interest in the deferred month contracts may be much larger, it may become difficult to exert market power via concentrated futures positions. 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 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. 209See infra Section II.D.4. (discussion of proposed § 150.5). 210 Id. 211Under the proposed ‘‘position accountability’’ definition in § 150.1, DCM accountability rules would have to require a trader whose position exceeds the accountability level to consent to: (1) Provide information about its position to the DCM; and (2) halt increasing further its position or reduce its position in an orderly manner, in each case as requested by the DCM. 212See, e.g., 56 FR 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). First, corners and squeezes cannot occur outside the spot month when there is no threat of delivery, and there are tools other than federal position limits for deterring and preventing manipulation outside of the spot month.208 Surveillance at both the exchange and federal level, coupled with exchange-set limits and/or accountability, would continue to offer strong deterrence and protection against manipulation outside of the spot month. In particular, under this proposal, for the 16 contracts that would be subject to federal limits only during the spot month, exchanges would be required to establish either position limit levels or position accountability levels outside of the spot month.209 Any such accountability and limit levels would be subject to standards established by the Commission 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.’’ 210 Exchanges would also be required to submit any rules adopting or modifying such position limit and/or accountability levels to the Commission pursuant to part 40 of the Commission’s regulations.211 Exchange position accountability establishes a level at which an exchange will ask traders additional questions, including regarding the trader’s purpose for the position, and will evaluate existing market conditions. If the 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 not to increase the position further, or to reduce the position. Accountability is a particularly flexible and effective tool because it provides the exchanges with an opportunity to intervene once a position hits a relatively low level, while still affording market participants with the flexibility to establish a large position when warranted by the nature of the position and the condition of the market. The Commission has decades of experience overseeing accountability levels implemented by exchanges,212 including for all 16 contracts that would not be subject to federal limits outside of the spot month under this proposal. Such accountability levels apply to all participants on the exchange, whether commercial or non-commercial, and regardless of whether the participant would qualify for an exemption. In the Commission’s experience, these levels have functioned as-intended, and the Commission views exchange accountability outside of the spot month as an equally robust, yet more flexible, alternative to federal non-spot month speculative position limits. Second, applying federal limits during the spot month to referenced contracts based on all 25 core referenced
futures contracts, and outside of the spot month only to referenced contracts based on the nine legacy agricultural commodities, furthers statutory goals while minimizing the impact on existing industry practice and leveraging existing exchange-set limits and accountability levels that appear to have functioned well. The Commission thus endeavors to minimize market disruption that could result from eliminating existing federal non-spot month limits on certain agricultural commodities and from adding new nonspot limits on certain metals and energy commodities that have never been subject to federal limits. Layering federal non-spot month limits for the 16 additional contracts on top of existing exchange-set limit/accountability levels may only provide minimal benefits, if any, and would forego the benefits associated with flexible accountability levels, which provide many of the same protections as hard limits but with significantly more flexibility for market participants to exceed the accountability level in cases where the position would not harm the market. As set forth in proposed § 150.2(e), proposed federal non-spot month levels applicable to referenced contracts based on the nine legacy agricultural contracts are listed in proposed Appendix E and are as follows:
Core referenced futures contract 2020 Proposed single month and all-months combined limit based on new 10/2.5 formula for first 50,000 OI Existing federal single month and all-monthscombined limit Existing exchange-set single month and all-monthscombined limit CBOT Corn (C) ............................................................................................................................ 57,800 33,000 33,000 CBOT Oats (O) ............................................................................................................................ 2,000 CBOT Soybeans (S) .................................................................................................................... 27,300 15,000 15,000 CBOT Soybean Meal (SM) .......................................................................................................... 16,900 6,500 6,500 CBOT Soybean Oil (SO) ............................................................................................................. 17,400 8,000 8,000 CBOT Wheat (W) ........................................................................................................................ 19,300 12,000 12,000 KC HRW Wheat (KW) ................................................................................................................. 12,000 MGEX HRS Wheat (MWE) .......................................................................................................... 12,000 ICE Cotton No. 2 (CT) ................................................................................................................. 11,900 5,000 5,000

213For example, assume a commodity contract has an aggregate open interest of 200,000 contracts over the past 12 month period. Applying the 10, 2.5 percent formula to an aggregate open interest of 200,000 contracts would yield a non-spot month limit of 6,875 contracts. That is, 10 percent of the first 25,000 contracts would equal 2,500 contracts (25,000 contracts × 0.10 = 2,500 contracts). Then add 2.5 percent of the remaining 175,000 of aggregate open interest or 4,375 contracts (175,000 contracts × 0.025 = 4,375 contracts) for a total nonspot month limit of 6,875 contracts (2,500 contracts

4,375 contracts = 6,875 contracts).
214See, e.g., Revision of Federal Speculative Position Limits and Associated Rules, 64 FR at 24038 (May 5, 1999) (increasing deferred-month limit levels based on 10 percent of open interest up to an open interest of 25,000 contracts, with a marginal increase of 2.5 percent thereafter). Prior to 1999, the Commission had given little weight to the size of open interest in the contract in determining the position limit level—instead, the Commission’s traditional standard was to set limit levels based on the distribution of speculative traders in the market. See, e.g., 64 FR at 24039; Revision of Federal Speculative Position Limits and Associated Rules, 63 FR at 38525, 38527 (July 17, 1998). 215See 64 FR at 24038. See also 63 FR at 38525, 38527 (The 1998 proposed revisions to non-spot month levels, which were eventually adopted in 1999, were based upon two criteria: ‘‘(1) the distribution of speculative traders in the markets; and (2) the size of open interest.’’). 216Revision of Federal Speculative Position Limits, 57 FR 12766, 12770 (Apr. 13, 1992). The Commission also stated that providing for a marginal increase was ‘‘based upon the universal observation that the size of the largest individual positions in a market do not continue to grow in proportion with increases in the overall open interest of the market.’’ Id. 217 Delta is a ratio comparing the change in the price of an asset (a futures contract) to the corresponding change in the price of its derivative (an option on that futures contract) and has a value that ranges between zero and one. In-the-money call options get closer to 1 as their expiration approaches. At-the-money call options typically have a delta of 0.5, and the delta of out-of-themoney call options approaches 0 as expiration nears. The deeper in-the-money the call option, the closer the delta will be to 1, and the more the option will behave like the underlying asset. Thus, deltaadjusted options on futures will represent the total position of those options as if they were converted to futures. e. Methodology for Setting Proposed Non-Spot Month Limit Levels The Commission’s practice has been to set non-spot month limit levels for the nine legacy agricultural contracts at 10 percent of the open interest for the first 25,000 contracts and 2.5 percent of the open interest thereafter (the ‘‘10, 2.5 percent formula’’).213 The existing nonspot month limit levels have not been updated to reflect changes in open interest data in over a decade, and the 10, 2.5 percent formula has been used since the 1990s, and was based on the Commission’s experience up until that time.214 The Commission’s adoption of the 10, 2.5 percent formula was based on two primary factors: growth in open interest and the size of large traders’ positions.215 The Commission proposes to maintain the 10, 2.5 percent formula for non-spot limits, with the limited change that the 2.5 percent calculation will be applied to open interest above 50,000 contracts rather
than to the current level of 25,000 contracts. The Commission believes that this change is warranted due to the significant overall increase in open interest in these markets, which has roughly doubled since federal limits were set on these markets. The Commission would apply the modified formula to recent open interest data for the periods from July 2017–June 2018 and July 2018–June 2019 of the applicable futures and delta adjusted futures options. The resulting proposed limit levels, set forth in the second column in the table above, would generally be higher than existing limit levels, with the exception of CBOT Oats (O), CBOT KC HRW Wheat (KW), and MGEX HRS Wheat (MWE), where proposed levels would remain at the existing levels. The Commission continues to believe that a formula based on a percentage of open interest is an appropriate tool for establishing limits outside the spot month. As the Commission stated when it initially proposed to use an open interest formula, taking open interest into account ‘‘will permit speculative position limits to reflect better the changing needs and composition of the futures markets . . .’’ 216 Open interest is a measure of market activity that reflects the number of contracts that are ‘‘open’’ or live, where each contract of open interest represents both a long and a short position. Relative to contracts with smaller open interest, contracts with larger open interest may be better able to mitigate the disruptive impact of excessive speculation because there may be more activity to oppose, diffuse, or otherwise counter a potential pricing disruption. Limiting positions to a percentage of open interest: (1) Helps ensure that positions are not so large relative to observed market activity that they risk disrupting the market; (2) allows speculators to hold sufficient contracts to provide a healthy level of liquidity for hedgers; and (3) allows for increases in position limits and position sizes as markets expand and become more active. While the Commission continues to prefer a formula based on a percentage of open interest, market and potential regulatory changes counsel in favor of proposing a slight modification to the existing formula. In particular, as discussed in detail below, open interest has grown, and market composition has changed, significantly since the 1990s. The proposed increase in the open interest portion of the non-spot month limit formula from 25,000 to 50,000 contracts would provide a modest increase in the non-spot month limit of 1,875 contracts (over what the limit would be if the 10, 2.5 percent formula were applied at 25,000 contracts), assuming the underlying commodity futures market has open interest of at least 50,000 contracts. The Commission believes that the amended non-spot month formula would provide a conservative increase in the non-spot month limits for most contracts to better reflect the general increase observed in open interest across futures markets since the late
1990s, as discussed below.
i. Increases in Open Interest
The table below provides data that describes the market environment during the period prior to, and subsequent to, the adoption of the 10,
2.5 percent formula by the Commission
in 1999. The data includes futures contracts and the delta-adjusted options on futures open interest.217 The first column of the table provides the maximum open interest in the nine legacy agricultural contracts over the five year period ending in 1999. The CBOT Corn (C) contract had maximum open interest of approximately 463,000 contracts, and the CBOT Soybeans (S) contract had maximum open interest of approximately 227,000 contracts. The other seven contracts had maximum open interest figures that ranged from less than 20,000 contracts for CBOT Oats (O) to approximately 172,000 for CBOT Soybean Oil (SO). Hence, when adopting the 10, 2.5 percent formula in 1999, the Commission’s experience in these markets was of aggregate futures and options on futures open interest well below 500,000 contracts.
TABLE—MAXIMUM FUTURES AND OPTIONS ON FUTURES OPEN INTEREST, 1994–2018
1994–1999 2000–2004 2005–2009 2010–2014 2015–2018 CBOT Corn (C) .................................................................... 463,386 828,176 1,897,484 2,052,678 2,201,990 ICE Cotton No. 2 (CT) ......................................................... 122,989 140,240 388,336 296,596 344,302

218See infra Section II.B.2.e.iii. (discussion of proposed non-spot month limit level for CBOT Oats (O)). 219Stewart, Blair, An Analysis of Speculative Trading in Grain Futures, Technical Bulletin No. 1001, U.S. Department of Agriculture (Oct. 1949). 220Bank Participation Reports, U.S. Commodity Futures Trading Commission website, available at https://www.cftc.gov/MarketReports/ BankParticipationReports/index.htm . 221The term ‘‘reportable position’’ is defined in § 15.00(p) of the Commission’s regulations. 17 CFR 15.00(p). 222Commitments of Traders, U.S. Commodity Futures Trading Commission website, available at www.cftc.gov/MarketReports/ CommitmentsofTraders/index.htm. There are generally still as many large commercial traders in the markets today as there were in the 1990s. 223Staff Report on Commodity Swap Dealers & Index Traders with Commission Recommendations, U.S. Commodity Futures Trading Commission (Sept. 2008), available at https://www.cftc.gov/sites/ default/files/idc/groups/public/@newsroom/ documents/file/cftcstaffreportonswapdealers09.pdf.
TABLE—MAXIMUM FUTURES AND OPTIONS ON FUTURES OPEN INTEREST, 1994–2018—Continued
1994–1999 2000–2004 2005–2009 2010–2014 2015–2018 CBOT Oats (O) .................................................................... 18,879 17,939 16,860 15,375 11,313 CBOT Soybeans (S) ............................................................ 227,379 327,276 672,061 991,258 997,881 CBOT Soybean Meal (SM) .................................................. 155,658 183,255 241,917 392,265 544,363 CBOT Soybean Oil (SO) ..................................................... 172,424 191,337 328,050 395,743 547,784 CBOT Wheat (W) ................................................................. 163,193 187,181 507,401 576,333 621,750 CBOT Wheat: Kansas City Hard Red Winter (KW) ............ 76,435 87,611 159,332 189,972 311,592 MGEX Wheat: Minneapolis Hard Red Spring (MWE) ......... 24,999 36,155 57,765 68,409 80,635 The table also displays the maximum open interest figures for subsequent periods up to, and including, 2018. The maximum open interest for all of these contracts, except for oats, generally increased over the period.218 By the 2015–2018 period covered in the last column of the table, five of the contracts had maximum open interest greater than 500,000 contracts. The contracts for CBOT Corn (C), CBOT Soybeans (S), and CBOT Hard Red Winter Wheat (KW) saw maximum open interest increase by a factor of four to five times the maximum open interest during the 1994–1999 period leading up to the Commission’s adoption of the 10, 2.5 percent formula in 1999.
ii. Changes in Market Composition
As open interest has increased, the current non-spot limits have become significantly more restrictive over time. In particular, because the 2.5 percent incremental increase applies after the first 25,000 contracts of open interest, limits on commodities with open interest above 25,000 contracts (i.e., all commodities other than oats) continue to increase at a much slower rate of 2.5 percent rather than 10 percent, as for the first 25,000 contracts. This gradual increase was less of a problem in the latter part of the 1990s, for example, when open interest in each of the nine legacy agricultural contracts was below 500,000, and in many cases below 200,000. More recently, however, open interest has grown above 500,000 for a majority of the legacy contracts. The 10,
2.5 percent formula has thus become
more restrictive for market participants, including those entities with positions that may not be eligible for a bona fide hedging exemption, but who might otherwise provide valuable liquidity to commercial firms. This problem has become worse over time because dealers play a much more significant role in the market today than at the time the Commission adopted the 10, 2.5 percent formula. Prior to 1999, the Commission regulated physical commodity markets where the largest participants were often large commercial interests who held short positions. The offsetting positions were often held by small, individual traders, who tended to be long.219 Several years after the Commission adopted the 10,
2.5 percent formula, the composition of
futures market participants changed, as dealers began to enter the physical commodity futures market in larger size. The table below presents data from the Commission’s publicly available ‘‘Bank Participation Report’’ (‘‘BPR’’), as of the December report for 2002–2018.220 The
table displays the number of banks
holding reportable positions for the seven futures contracts for which federal limits apply and that were reported in the BPR.221 The report presents data for every market where five or more banks hold reportable positions. The BPR is based on the same large-trader reporting system database used to generate the Commission’s Commitments of Traders (‘‘COT’’) report.222 No data was reported for the seven futures contracts in December 2002, indicating that fewer than five banks held reportable positions at the time of the report. The December 2003 report shows that five or more banks held reportable positions in four of the commodity futures. The number of banks with reportable positions generally increased in the early to mid2000s. As described in the Commission’s 2008 Staff Report on Commodity Swap Dealers & Index Traders, major changes in the composition of futures markets developed over the 20 years prior to 2008, including an influx of swap dealers (‘‘SDs’’), affiliated with banks or other large financial institutions, acting as aggregators or market makers and providing swaps to commercial hedgers and to other market participants.223 The dealers functioned in the swaps market and also used the futures markets to hedge their exposures. When the Commission adopted the 10, 2.5 percent formula in 1999, it had limited experience with physical commodity derivatives markets in which such banks were significant participants.
TABLE—NUMBER OF REPORTING COMMERCIAL BANKS WITH LONG FUTURES POSITIONS
Year Corn Cotton Soybeans Soybean meal Soybean oil Wheat Wheat KCBT 2002 ............................. NR 2003 ............................. 5 6 7 NR NR 5 NR 2004 ............................. 5 10 7 NR NR 7 NR 2005 ............................. 10 8 6 NR 5 9 9 2006 ............................. 11 11 9 NR 7 14 7 2007 ............................. 13 8 12 NR 6 14 6 2008 ............................. 17 13 16 NR 6 14 9

224Applying the proposed modified 10, 2.5 percent formula to recent open interest data for these two contracts would result in limit levels of 11,900 and 5,700, respectively. 225Wheat Sector at a Glance, USDA Economic Research Service, available at https:// www.ers.usda.gov/topics/crops/wheat/wheat-sectorat-a-glance. 226Estimated Areas, Yield, Production, Average Farm Price and Total Farm Value of Principal Field Crops, In Metric and Imperial Units, Statistics Canada website, available at https:// www150.statcan.gc.ca/t1/tbl1/en/tv.action? pid=3210035901.
TABLE—NUMBER OF REPORTING COMMERCIAL BANKS WITH LONG FUTURES POSITIONS—Continued
Year Corn Cotton Soybeans Soybean meal Soybean oil Wheat Wheat KCBT 2009 ............................. 8 NR NR 13 NR 2010 ............................. 7 NR NR 11 NR 2011 ............................. 10 11 9 5 5 10 NR 2012 ............................. 8 10 11 6 6 13 5 2013 ............................. 11 11 13 10 6 11 5 2014 ............................. 15 12 15 10 9 15 6 2015 ............................. 12 13 13 12 9 16 9 2016 ............................. 15 14 15 12 10 15 6 2017 ............................. 16 13 12 11 9 16 8 2018 ............................. 16 15 18 15 13 18 12 NR = ‘‘Not Reported’’. For 2003, the first year in the report with reported data on the futures for these physical commodities, the BPR showed, as displayed in the table below, that the reporting banks held modest positions, totaling 3.4 percent of futures long open interest for wheat and smaller positions in other futures. The positions displayed in the table below increased over the next several years, generally peaking around 2005/2006 as a fraction of the long open interest.
TABLE—PERCENT OF FUTURES LONG OPEN INTEREST HELD BY COMMERCIAL BANKS
Year
(Dec.) Corn Cotton Soybeans Soybean meal Soybean oil Wheat Wheat KCBT 2002 .. NR 2003 .. 1.5% 1.4% 0.8% NR NR 3.4% NR 2004 .. 7.0 6.5 3.6 NR NR 14.5 NR 2005 .. 12.5 13.8 8.3 NR 6.8 20.2 5.2 2006 .. 9.4 14.2 7.7 NR 6.7 17.0 6.9 2007 .. 9.2 9.7 6.7 NR 6.5 13.5 5.5 2008 .. 8.9 18.2 10.0 NR 6.4 18.7 7.1 2009 .. 4.3 6.5 3.6 NR NR 9.3 NR 2010 .. 3.7 2.5 4.7 NR NR 6.9 NR 2011 .. 4.1 3.3 4.9 1.9 4.4 7.7 NR 2012 .. 4.7 9.9 3.7 5.8 5.5 7.4 3.5 2013 .. 5.3 9.1 4.4 7.0 4.1 6.2 6.4 2014 .. 9.7 10.0 6.3 6.7 6.5 7.7 10.1 2015 .. 8.1 10.1 5.0 5.9 6.4 7.8 4.3 2016 .. 8.1 8.5 7.1 10.7 6.6 7.3 5.2 2017 .. 5.5 9.5 4.3 9.1 7.3 7.7 4.8 2018 .. 5.8 8.3 5.9 9.2 7.6 10.2 7.0 NR = ‘‘Not Reported’’.
iii. Proposed Non-Spot Month Limits for
Hard Red Wheat and Oats
The Commission proposes partial wheat parity outside of the spot month:
limits for CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) would be set at 12,000 contracts, while limits for CBOT Wheat (W) would be set at 19,300 contracts. Based on the Commission’s experience since 2011 with non-spot month speculative position limit levels at 12,000 for the CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) core referenced futures contracts, the Commission is proposing to maintain the current non-spot month limit levels for those two contracts, rather than reducing the existing levels to the lower levels that would result from applying the proposed modified 10, 2.5 percent formula.224 The current 12,000 contract level appears to have functioned well for these contracts, and the Commission sees no market-based reason to reduce the levels. CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) are both hard red wheats representing about 60 percent of the wheat grown in the United States 225 and about 80 percent of the wheat grown in Canada.226 Although the CBOT Wheat (W) contract allows for delivery of hard red wheat, it typically sees deliveries of soft white wheat varieties, which comprises a smaller percentage of the wheat grown in North America. Even though the CBOT Wheat (W) contract has the majority of liquidity among the three wheat contracts as measured by open interest and trading volume, it is the hard red wheats that make up the bulk of wheat crops in North America. Thus, the Commission proposes to maintain the non-spot month limit for the CBOT KC HRW Wheat (KW) contract and MGEX HRS Wheat (MWE) contract at the 12,000 contract level even though both contracts would have a lower nonspot month limit based solely on the open interest formula. The Commission preliminarily believes that maintaining partial parity and the existing non-spot month limits in this manner will benefit the MWE and KW markets since the two species of wheat are similar (i.e., hard red wheat) to one another relative to CBOT Wheat (W), which is soft white

227See Statement of Layne Carlson, CFTC Agricultural Advisory Committee meeting, Sept. 22, 2015, at 38–44. 228See supra Section II.A.20. (definition of spread transaction). 229Applying the proposed modified 10, 2.5 percent formula to recent open interest data for oats would result in a 700 contract limit level. 230Revision of Speculative Position Limits, 57 FR 12770, 12766 (Apr. 13, 1992). See also Revision of Speculative Position Limits and Associated Rules, 63 FR at 38525, 38527 (July 17, 1998). Cf. 2013 Proposal, 78 FR at 75729 (there may be range of spot month limits that maximize policy objectives). 231 64 FR 24038, 24039 (May 5, 1999). 232 7 U.S.C. 6a(a)(3)(B). 233For example, under DCM Core Principle 4, DCMs are required to ‘‘have the capacity and responsibility to prevent manipulation, price distortion, and disruptions of the delivery or cashsettlement process through market surveillance, compliance, and enforcement practices and procedures,’’ including ‘‘methods for conducting real-time monitoring of trading’’ and ‘‘comprehensive and accurate trade reconstructions.’’ 7 U.S.C. 7(d)(4). 234See infra Section II.D.4.g. (discussion of Commission enforcement of exchange-set limits). wheat; and as a result, the Commission has preliminarily determined that decreasing the non-spot month levels for MWE could impose liquidity costs on the MWE market and harm bona fide hedgers, which could further harm liquidity for bona fide hedgers in the related KW market. However, the Commission has determined not to raise the proposed limit levels for CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) to the proposed 19,300 contract limit level for CBOT Wheat (W) because 19,300 contracts appears to be extraordinarily large in comparison to open interest in the CBOT KC HRW Wheat (KW) and MGEX HRS Wheat (MWE) markets, and the limit levels for both contracts are already larger than a limit level based on the 10, 2.5 percent formula. The Commission is concerned that substantially raising non-spot limits on the KW or MWE contracts could create a greater likelihood of excessive speculation given their smaller overall trading relative to the CBOT Wheat (W) contract. In response to prior proposals, which would have resulted in lower non-spot limits for MWE, MGEX had requested parity among all wheat contracts. In part, MGEX reasoned that intermarket spread trading among the three contracts is vital to their price discovery function.227 The Commission notes that intermarket spreading is permitted under this proposal.228 The intermarket spread exemption should address any concerns over the loss of liquidity in spread trades among the three wheat contracts. Likewise, based on the Commission’s experience since 2011 with the current non-spot month speculative position limit of 2,000 contracts for CBOT Oats (O), the Commission is proposing to maintain the current 2,000 contract level rather than reducing it to the lower levels that would result from applying the updated 10, 2.5
formula.229 The existing 2,000 contract limit for CBOT Oats (O) appears to have functioned well, and the Commission sees no reason to reduce it. While retaining the existing non-spot month limits for the MWE and KW contracts and for CBOT Oats (O) does break with the proposed non-spot month formula, the Commission has confidence that the existing contract limits should continue to be appropriate for these contracts. Furthermore, even when relying on a single criterion, such as percentage of open interest, the Commission has historically recognized that there can ‘‘result . . . a range of acceptable position limit levels.’’ 230 For all of the core referenced contracts, based on decades of experience overseeing exchange-set position limits and administering its own federal position limits regime, the Commission is of the view that the proposed non-spot month limit levels are also low enough to diminish, eliminate, or prevent excessive speculation, and to deter and prevent market manipulation, squeezes, and corners. The Commission has previously studied prior increases in federal non-spot month limits and concluded that the overall impact was modest, and that any changes in market performance were most likely attributable to factors other than changes in the federal position limit rules.231 The Commission has since gained further experience which supports that conclusion, including by monitoring amendments to position limit levels by exchanges. Further, given the significant increases in open interest and changes in market composition that have occurred since the 1990s, the Commission is comfortable that the proposal to amend the 10, 2.5 percent formula will adequately address each of the policy objectives set forth in CEA
section 4a(a)(3).232
iv. Conclusion
With the exception of the CBOT KC HRW Wheat (KW), MGEX HRS Wheat (MWE), and CBOT Oats (O) contracts, as noted above, the proposed formula would result in higher non-spot month limit levels than those currently in place. Furthermore, as noted above, under the rules proposed herein, the nine legacy agricultural contracts would be the only contracts subject to limits outside of the spot month. Aside from the CBOT Oats (O) contract, these contracts all have high open interest, and thus their pricing may be less likely to be affected by the trading of large position holders in non-spot months. Further, consistent with the approach proposed herein to leverage existing exchange-level programs and expertise, the proposed federal non-spot month limit levels would serve simply as ceilings—exchanges would remain free to set exchange levels below the federal limit. The exchanges currently have systems and processes in place to monitor and surveil their markets in real time, and have the ability, and regulatory responsibility, to act quickly in the event of a disturbance.233 Additionally, exchanges have tools other than position limits for protecting markets. For instance, exchanges can establish position accountability levels well below a position limit level, and can impose liquidity and concentration surcharges to initial margin if they are vertically integrated with a derivatives clearing organization. One reason that the Commission is proposing to update the formula for calculating non-spot month limit levels is that the exchanges may be able in certain circumstances to act much more quickly than the Commission, including quickly altering their own limits and accountability levels based on changing market conditions. Any decrease in an exchange-set limit would effectively lower the federal limit for that contract, as market participants would be required to comply with both federal and exchange-set limits, and as the Commission has the authority to enforce violations of both federal and exchangeset limits.234 f. Subsequent Spot and Non-Spot Month Limit Levels Prior to amending any of the proposed spot or non-spot month levels, if adopted, the Commission would provide for public notice and comment by publishing the proposed levels in the Federal Register. Under proposed § 150.2(f), should the Commission wish to rely on exchange estimates of deliverable supply to update spot month speculative limit levels, DCMs would be required to supply to the Commission deliverable supply estimates upon request. Proposed § 150.2(j) would delegate the authority to make such requests to the Director of the Division of Market Oversight. Recognizing that estimating deliverable supply can be a time and resource consuming process for DCMs and for the Commission, the Commission is not proposing to require

235For example, if a contract has problems with pricing convergence between the futures and the cash market, it could be a symptom of a deliverable supply issue in the market. In such a situation, the Commission may request an updated deliverable supply estimate from the relevant DCM to help identify the possible cause of the pricing anomaly. 236 17 CFR part 38, Appendix C. 237 7 U.S.C. 6a(a)(6). 238Commission regulation § 48.2(c) defines ‘‘direct access’’ to mean an explicit grant of authority by a foreign board of trade to an identified member or other participant located in the United States to enter trades directly into the trade matching system of the foreign board of trade. 17 CFR 48.2(c). 239 In addition, CEA section 4(b)(1)(B) prohibits the Commission from permitting an FBOT to provide direct access to its trading system to its participants located in the United States unless the Commission determines, in regards to any FBOT contract that settles against any price of one or more contracts listed for trading on a registered entity, that the FBOT (or its foreign futures authority) adopts position limits that are comparable to the position limits adopted by the registered entity. 7 U.S.C. 6(b)(1)(B). CEA section 4(b)(1)(B) provides that the Commission may not permit a foreign board of trade to provide to the members of the foreign board of trade or other participants located in the United States direct access to the electronic trading and order-matching system of the foreign board of trade with respect to an agreement, contract, or transaction that settles against any price (including the daily or final settlement price) of 1 or more contracts listed for trading on a registered entity, unless the Commission determines that the foreign board of trade (or the foreign futures authority that oversees the foreign board of trade) adopts position limits (including related hedge exemption provisions) for the agreement, contract, or transaction that are comparable to the position limits (including related hedge exemption provisions) adopted by the registered entity for the 1 or more contracts against which the agreement, contract, or transaction traded on the foreign board of trade settles. 240 7 U.S.C. 12a(5). DCMs to submit such estimates on a regular basis; instead, DCMs would be required to submit estimates of deliverable supply if requested by the Commission.235 DCMs would also have the option of submitting estimates of deliverable supply and/or recommended speculative position limit levels if they wanted the Commission to consider them when setting/adjusting federal limit levels. Any such information would be included in a Commission action proposing changes to the levels. The Commission encourages exchanges to submit such estimates and recommendations voluntarily, as the exchanges are uniquely situated to recommend updated levels due to their knowledge of individual contract markets. When submitting estimates, DCMs would be required under
proposed § 150.2(f) to provide a description of the methodology used to derive the estimate, as well as any statistical data supporting the estimate, so that the Commission can verify that the estimate is reasonable. DCMs should consult the guidance regarding estimating deliverable supply set forth in
Appendix C to part 38.236
g. Relevant Contract Month Proposed § 150.2(c) clarifies that the spot month and single month for any given referenced contract is determined by the spot month and single month of the core referenced futures contract to which that referenced contract is linked. This requires that referenced contracts be linked to the core referenced futures contract in order to be netted for position limit purposes. For example, for the NYMEX NY Harbor ULSD Heating Oil (HO) futures core referenced futures contract, the spot month period starts at the close of trading three business days prior to the last trading day of the contract. The spot month period for the NYMEX NY Harbor ULSD Financial (MPX) futures referenced contract would thus start at the same time—the close of trading three business days prior to the last trading day of the core referenced futures contract. h. Limits on ‘‘Pre-Existing Positions’’ Under proposed § 150.2(g)(1), other than pre-enactment swaps and transition period swaps as defined in proposed § 150.1, ‘‘pre-existing positions,’’ defined in proposed § 150.1 as positions established in good faith prior to the effective date of a final federal position limits rulemaking, would be subject to federal spot month limit levels. This clarification is intended to avoid rendering spot month limits ineffective—failing to apply spot month limits to such pre-existing positions could result in a large, preexisting position either intentionally or unintentionally causing a disruption to the price discovery function of the core referenced futures contract as positions are rolled into the spot month. The Commission is particularly concerned about protecting the spot month in physical-delivery futures from price distortions or manipulation that would disrupt the hedging and price discovery utility of the futures contract. Proposed § 150.2(g)(2) would provide that the proposed non-spot month limit levels would not apply to positions acquired in good faith prior to the effective date of such limit, recognizing that pre-existing large positions may have a relatively less disruptive effect outside of the spot month than during the spot month given that physical delivery occurs only during the spot month. However, other than preenactment swaps and transition period swaps, any pre-existing positions held outside the spot month would be attributed to such person if the person’s position is increased after the effective date of a final federal position limits rulemaking.
i. Positions on Foreign Boards of Trade
CEA section 4a(a)(6) directs the Commission to, among other things, establish limits on the aggregate number of positions in contracts based upon the same underlying commodity that may be held by any person across contracts listed by DCMs, certain contracts traded on a foreign board of trade (‘‘FBOT’’) with linkages to a contract traded on a registered entity, and swap contracts that perform or affect a significant price discovery function with respect to regulated entities.237 Pursuant to that directive, proposed § 150.2(h) would apply the proposed limits to a market participant’s aggregate positions in referenced contracts executed on a DCM and on, or pursuant to the rules of, an FBOT, provided that the referenced contracts settle against a price of a contract listed for trading on a DCM or SEF, and that the FBOT makes such contract available in the United States through ‘‘direct access.’’ 238 In other words, a market participant’s positions in referenced contracts listed on a DCM and on an FBOT registered to provide direct access would collectively have to stay below the federal limit level for the relevant core referenced futures contract. The Commission preliminarily believes that, as proposed, § 150.2(h) would lessen regulatory arbitrage by eliminating a potential loophole whereby a market participant could accumulate positions on certain FBOTs in excess of limits in referenced contracts.239 j. Anti-Evasion Pursuant to the Commission’s rulemaking authority in section 8a(5) of the CEA,240 the Commission proposes § 150.2(i), which is intended to deter and prevent a number of potential methods of evading the position limits proposed herein. The proposed antievasion provision is not intended to capture a trading strategy merely because it may result in smaller position size for purposes of position limits, but rather is intended to deter and prevent cases of willful evasion of federal position limits, the specifics of which the Commission may be unable to anticipate. The proposed federal position limit requirements would apply during the spot month for all referenced contracts subject to federal limits and non-spot position limit requirements would only apply for the nine legacy agricultural contracts.

241See supra Section II.A.16.b. (explanation of proposed exclusions from the ‘‘referenced contract’’ definition). 242See Further Definition of ‘‘Swap,’’ ‘‘SecurityBased Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48207, 48297– 48303 (Aug. 13, 2012); Clearing Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284, 74317–74319 (Dec. 13, 2012). 243See Clearing Requirements Determination Under Section 2(h) of the CEA, 77 FR at 74319. 244See Further Definition of ‘‘Swap,’’ ‘‘SecurityBased Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48207, 48297– 48303 and Clearing Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284, 74317–74319. 245See In re Squadrito, [1990–1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,262 (CFTC Mar. 27, 1992) (adopting definition of ‘‘willful’’ in McLaughlin v. Richland Shoe Co., 486 U.S. 128 (1987)). Under this proposed framework, and because the threat of corners and squeezes is the greatest in the spot month, the Commission preliminarily anticipates that it may focus its attention on anti-evasion activity during the spot month. First, the proposed rule would consider a commodity index contract and/or location basis contract used to willfully circumvent position limits to be a referenced contract subject to federal limits. Because commodity index contracts and location basis contracts are excluded from the proposed ‘‘referenced contract’’ definition and thus not subject to federal limits,241 the Commission intends that proposed § 150.2(i) would close a potential loophole whereby a market participant who has reached its limits could purchase a commodity index contract in a manner that allowed the participant to exceed limits when taking into account the weighting in the component commodities of the index contract. The proposed rule would close a similar potential loophole with respect to location basis contracts. Second, proposed § 150.2(i) would provide that a bona fide hedge recognition or spread exemption would no longer apply if used to willfully circumvent speculative position limits. This provision is intended to help ensure that bona fide hedge recognitions and spread exemptions are granted and utilized in a manner that comports with the CEA and Commission regulations, and that the ability to obtain a bona fide hedge recognition or spread exemption does not become an avenue for market participants to inappropriately exceed speculative position limits. Third, a swap contract used to willfully circumvent speculative position limits would be deemed an economically equivalent swap, and thus a referenced contract, even if the swap does not meet the economically equivalent swap definition set forth in proposed § 150.1. This provision is intended to deter and prevent the structuring of a swap in order to willfully evade speculative position limits. The
determination of whether particular conduct is intended to circumvent or evade requires a facts and circumstances analysis. In preliminarily interpreting these anti-evasion rules, the Commission is guided by its interpretations of anti-evasion provisions appearing elsewhere in the Commission’s regulations, including the interpretation of the anti-evasion rules that the Commission adopted in its rulemakings to further define the term ‘‘swap’’ and to establish a clearing requirement under section 2(h)(1)(A) of the CEA.242 Generally, consistent with those interpretations, in evaluating whether conduct constitutes evasion, the Commission would consider, among other things, the extent to which the person lacked a legitimate business purpose for structuring the transaction in that particular manner. For example, an analysis of how a swap was structured could reveal that persons crafted derivatives transactions, structured entities, or conducted themselves in a manner without a legitimate business purpose and with the intent to willfully evade position limits by structuring a swap such that it would not meet the proposed ‘‘economically equivalent swap’’ definition. As stated in a prior rulemaking, a person’s specific consideration of, for example, costs or regulatory burdens, including the avoidance thereof, is not, in and of itself, dispositive that the person is acting without a legitimate business purpose in a particular case.243 The Commission will view legitimate business purpose considerations on a case-by-case basis in conjunction with all other relevant facts and circumstances. Further, as part of its facts and circumstances analysis, the Commission would look at factors such as the historical practices behind the market participant and transaction in question. For example, with respect to § 150.2(i)(3), the Commission would consider whether a market participant has a history of structuring its swaps one way, but then starts structuring its swaps a different way around the time the participant risked exceeding a speculative position limit as a result of its swap position, such as by modifying the delivery date or other material terms and conditions such that the swap no longer meets the definition of an ‘‘economically equivalent swap.’’ Consistent with interpretive language in prior rulemakings addressing evasion,244 when determining whether a particular activity constitutes willful evasion, the Commission will consider the extent to which the activity involves deceit, deception, or other unlawful or illegitimate activity. Although it is likely that fraud, deceit, or unlawful activity will be present where willful evasion has occurred, the Commission does not believe that these factors are a prerequisite to an evasion finding because a position that does not involve fraud, deceit, or unlawful activity could still lack a legitimate business purpose or involve other indicia of evasive activity. The presence or absence of fraud, deceit, or unlawful
activity is one fact the Commission will consider when evaluating a person’s activity. That said, the proposed anti-evasion provision does require willfulness, i.e. ‘‘scienter.’’ The Commission will interpret ‘‘willful’’ consistent with how the Commission has in the past, that acting either intentionally or with reckless disregard constitutes acting ‘‘willfully.’’ 245 In determining whether a transaction has been entered into or structured willfully to evade position limits, the Commission will not consider the form, label, or written documentation as dispositive. The Commission also is not requiring a pattern of evasive transactions as a prerequisite to prove evasion, although such a pattern may be one factor in analyzing whether evasion has occurred. In instances where one party willfully structures a transaction to evade but the other counterparty does not, proposed § 150.2(i) would apply to the party who willfully structured the transaction to evade. Finally, entering into transactions that qualify for the forward exclusion from the swap definition shall not be considered evasive. However, in circumstances where a transaction does not, in fact, qualify for the forward exclusion, the transaction may or may not be evasive depending on an analysis of all relevant facts and circumstances. k. Netting For the reasons discussed above, the referenced contract definition in proposed § 150.1 includes, among other things, cash-settled contracts that are linked, either directly or indirectly, to a core referenced futures contract; and any ‘‘economically equivalent

246See supra Section II.A.16. (discussion of the proposed referenced contract definition). 247 In practice, the only physically-settled referenced contracts under this proposal would be the 25 core referenced futures contracts, none of which are listed on multiple DCMs, although there could potentially be physically-settled OTC swaps that would satisfy the ‘‘economically equivalent swap’’ definition and therefore would also qualify as referenced contracts. 248Consistent with CEA section 4a(a)(6), this would include positions across exchanges. 249Proposed Appendix C to part 150 provides guidance regarding the referenced contract definition, including that the following types of contracts are not deemed referenced contracts, meaning such contracts are not subject to federal limits and cannot be netted with positions in referenced contracts for purposes of federal limits:
Location basis contracts; commodity index contracts; and trade options that meet the requirements of 17 CFR 32.3. 250For example, absent such a restriction in the spot month, a trader could stand for 100 percent of deliverable supply during the spot month by holding a large long position in the physicaldelivery contract along with an offsetting short position in a cash-settled contract, which effectively would corner the market. 251See, e.g., Elimination of Daily Speculative Trading Limits, 44 FR 7124, 7125 (Feb. 6, 1979). swaps.’’ 246 Under proposed § 150.2(a), federal spot month limits would apply to physical-delivery referenced contracts separately from federal spot month limits applied to cash-settled referenced contracts, meaning that during the spot month, positions in physically-settled contracts may not be netted with positions in linked cashsettled contracts. Specifically, all of a trader’s positions (long or short) in a given physically-settled referenced contract (across all exchanges and OTC as applicable) 247 are netted and subject to the spot month limit for the relevant commodity, and all of such trader’s positions in any cash-settled referenced contracts (across all exchanges and OTC as applicable) linked to such physicallysettled core referenced futures contract are netted and independently (rather than collectively along with the physically-settled positions) subject to the federal spot month limit for that commodity.248 A position in a commodity contract that is not a referenced contract is therefore not subject to federal limits, and, as a consequence, cannot be netted with positions in referenced contracts for purposes of federal limits.249 For example, a swap that is not a referenced contract because it does not meet the economically equivalent swap definition could not be netted with positions in a referenced contract. Allowing the netting of linked physically-settled and cash-settled contracts during the spot month could lead to disruptions in the price discovery function of the core referenced futures contract or allow a market participant to manipulate the price of the core referenced futures contract. Absent separate spot month limits for physically-settled and cashsettled contracts, the spot month limit would be rendered ineffective, as a participant could maintain large positions in excess of limits in both the physically-settled contract and the linked cash-settled contract, enabling the participant to disrupt the price discovery function as the contracts go to expiration by taking large opposite positions in the physically-settled core referenced futures and cash-settled referenced contracts, or potentially allowing a participant to effect a corner or squeeze.250 Proposed § 150.2(b), which would establish limits outside the spot month, does not use the ‘‘separately’’ language. Accordingly, outside of the spot month, participants may net positions in linked physically-settled and cash-settled referenced
contracts, because there is no immediate threat of delivery. Finally, proposed § 150.2(a) and (b) also provide that spot and non-spot limits apply ‘‘net long or net short.’’ Consistent with existing § 150.2, this language requires that, both during and outside the spot month, and subject to the provisions governing netting described above, a given participant’s long positions in a particular contract be aggregated (including across exchanges and OTC as applicable), and a participant’s short positions be aggregated (including across exchanges and OTC as applicable), and those aggregate long and short positons be netted—in other words, it is the net value that is subject to federal limits. Consistent with current and historical practice, the speculative position limits proposed herein would apply to positions throughout each trading session, including as of the close of each trading session.251
l. ‘‘Eligible Affiliates’’ and Aggregation
Proposed § 150.2(k) addresses entities that qualify as an ‘‘eligible affiliate’’ as defined in proposed § 150.1. Under the proposed definition, an ‘‘eligible affiliate’’ includes certain entities that, among other things, are required to aggregate their positions under § 150.4 and that do not claim an exemption from aggregation. There may be certain entities that are eligible for an exemption from aggregation but that prefer to aggregate rather than disaggregate their positions; for example, when aggregation would result in advantageous netting of positions with affiliated entities. Proposed § 150.2(k) is intended to address such a circumstance by making clear that an ‘‘eligible affiliate’’ may opt to aggregate its positions even though it is eligible to disaggregate. m. Request for Comment The Commission requests comment on all aspects of proposed § 150.2. The Commission also invites comments on the following:
(20) Are there legitimate strategies on which the Commission should offer guidance with respect to the antievasion provision? (21) Should the Commission list by regulation specific factors/ circumstances in which it may set spot month limits with other than the at or below 25 percent of deliverable supply formula, and non-spot month limits with other than the modified 10, 2.5 percent formula proposed herein? If so, please provide examples of any such factors, including an explanation of whether and why different formulas make sense for different commodities. (22) Is the proposed compliance date of twelve months after publication of a final federal position limits rulemaking in the Federal Register an appropriate amount of time for compliance? If not, please provide reasons supporting a different timeline. Do market participants support delaying compliance until one year after a DCM has had its new § 150.9 rules approved by the Commission under § 40.5? (23) The Commission understands that it may be possible for a market participant trading options to start a trading day below the delta-adjusted federal speculative position limit for that option, but end up above such limit as the option becomes in-the-money during the spot month. Should the Commission allow for a one-day grace period with respect to federal position limits for market participants who have exercised options that were out-of-the money on the previous trading day but that become in-the-money during the trading day in the spot month? (24) Given that the contracts in corn and soybean complex are more liquid than CBOT Oats (O) and the MGEX HRS (MWE) wheat contract, should the Commission employ a higher open interest formula for corn and the soybean complex? (25) Should the Commission phase-in the proposed increased federal non-spot month limits incrementally over a period of time, rather than implementing the entire increase upon the effective date? Please explain why or why not. If so, please comment on an appropriate phase-in schedule, including whether different

252 17 CFR 150.3(a).
253 17 CFR 150.3(b).
254 17 CFR 1.47.
255 17 CFR 1.47(a).
256 17 CFR 1.47(b).
257 17 CFR 1.48.
258 Id.
259Since 1938, the Commission (known as the Commodity Exchange Commission in 1938) has recognized the use of spread positions to facilitate liquidity and hedging. Notice of Proposed Order in the Matter of Limits on Position and Daily Trading in Grain for Future Delivery, 3 FR 1408 (June 14, 1938). 260See 7 U.S.C. 6a(a)(1) and 17 CFR 150.3(a)(3) (providing that the position limits set in § 150.2 may be exceeded to the extent such positions are:
Spread or arbitrage positions between single months of a futures contract and/or, on a futuresequivalent 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.). Although existing § 150.3(a)(3) does not specify a formal process for granting spread exemptions, the Commission is able to monitor traders’ gross and net positions using part 17 data, the monthly Form 204, and information from the applicable DCMs to identify any such spread positions. 261The Commission revised § 150.3(a) in 2016, relocating the independent account controller aggregation exemption from § 150.3(a)(4) in order to consolidate it with the Commission’s aggregation requirements in § 150.4(b)(4). See Final Aggregation Rulemaking, 81 FR at 91489–90. 262See infra Section II.D.4.a. See also proposed § 150.5(a)(2)(ii)(A)(1). commodities should be subject to different schedules. (26) The Commission is aware that the non-spot month open interest is skewed to the first new crop (usually December or November) for the nine legacy agricultural contracts. The Commission understands that cotton may be unique because it has an extended harvest period starting in July in the south and working its way north until November. There may be some concern with positions being rolled from the prompt month into deferred contract months causing disruption to the price discovery function of the Cotton futures. Should the Commission consider lowering the single month limit to a percentage of the all months limits for Cotton? If so, what percentage of the all month limit should be used for the single month limit? Please provide a rationale for your percentage. (27) Should the Commission allow market participants who qualify for the conditional spot month limit in natural gas to net cash-settled natural gas referenced contracts across DCMs? Why or why not?
C. § 150.3—Exemptions From Federal
Position Limits

Existing §§ 150.3, 1.47, and 1.48
Existing § 150.3(a), which pre-dates the Dodd-Frank Act, lists positions that may, under certain circumstances, exceed federal limits: (1) Bona fide hedging transactions, as defined in the current bona fide hedging definition in § 1.3; and (2) certain spread or arbitrage positions.252 So that the Commission can effectively oversee the use of such exemptions, existing § 150.3(b) provides that the Commission or certain Commission staff may make special calls to demand certain information from exemption holders, including information regarding positions owned or controlled by that person, trading done pursuant to that exemption, and positions that support the claimed exemption.253 Existing § 150.3(a) allows for bona fide hedging transactions to exceed federal limits, and the current process for a person to request such recognitions for non-enumerated hedges appears in § 1.47.254 Under that provision, persons seeking recognition by the Commission of a non-enumerated bona fide hedging transaction or position must file statements with the Commission.255 Initial statements must be filed with the Commission at least 30 days in advance of exceeding the limit. 256 Similarly, existing § 1.48 sets forth the process for market participants to file an application with the Commission to recognize certain enumerated anticipatory positions as bona fide hedging positions.257 Under that provision, such recognitions must be requested 10 days in advance of exceeding the limit.258 Further, the Commission provides self-effectuating spread exemptions for the nine legacy agricultural contracts currently subject to federal limits, but does not specify a formal process for granting such spread exemptions.259 The Commission’s authority and existing regulation for exempting certain spread positions can be found in section 4a(a)(1) of the Act and existing § 150.3(a)(3) of the Commission’s regulations, respectively.260 In particular, CEA section 4a(a)(1) provides the Commission with authority to exempt from position limits transactions ‘‘normally known to the trade as ‘spreads’ or ‘straddles’ or ‘arbitrage.’ ’’
Proposed § 150.3
As described elsewhere in this release, the Commission is proposing a new bona fide hedging definition in § 150.1 (described above) and a new streamlined process in proposed § 150.9 for recognizing non-enumerated bona fide hedging positions (described further below). The Commission thus proposes to update § 150.3 to conform to those new proposed provisions. Proposed § 150.3 also includes new exemption types not explicitly listed in existing § 150.3, including: (i) Exemptions for financial distress situations; (ii) conditional exemptions for certain spot month positions in cashsettled natural gas contracts; and (iii) exemptions for pre-enactment swaps and transition period swaps.261 Proposed § 150.3(b)–(g) respectively address: Requests for relief from position limits submitted directly to the Commission or Commission staff (rather than to an exchange under proposed § 150.9, as discussed further below); previously-granted risk management exemptions to position limits; exemption-related recordkeeping and special-call requirements; the aggregation of accounts; and the delegation of certain authorities to the Director of the Division of Market Oversight. a. Bona Fide Hedging Positions and Spread Exemptions The Commission has years of experience granting and monitoring spread exemptions, and enumerated and non-enumerated bona fide hedges, as well as overseeing exchange processes for administering exemptions from exchange-set limits on such contracts. As a result of this experience, the Commission has determined to continue to allow self-effectuating enumerated bona fide hedges and certain spread exemptions for all contracts that would be subject to federal position limits, as explained further below.
i. Bona Fide Hedging Positions
First, under proposed § 150.3(a)(1)(i), bona fide hedge recognitions for positions in referenced contracts that fall within one of the proposed enumerated hedges set forth in proposed Appendix A to part 150, discussed above, would be selfeffectuating for purposes of federal position limits. Market participants would thus not be required to request Commission approval prior to exceeding federal position limits in such cases, but would be required to request a bona fide hedge exemption from the relevant exchange for purposes of exchange-set limits established pursuant to proposed § 150.5(a), and submit required cashmarket information to the exchange as
part of such request.262 The Commission
has also determined to allow the proposed enumerated anticipatory bona fide hedges (some of which are not currently self-effectuating and thus are required to be approved by the Commission under existing § 1.48) to be self-effectuating for purposes of federal limits (and thus would not require prior

263See infra Section II.D.4. (discussion of proposed § 150.5). 264See infra Section II.G.3. (discussion of proposed § 150.9). 265See infra Section II.H.2. (discussion of the proposed elimination of Form 204). 266See supra Section II.A.20. (proposed definition of ‘‘spread transaction’’ in § 150.1, which would cover: Calendar spreads; quality differential spreads; processing spreads (such as energy ‘‘crack’’ or soybean ‘‘crush’’ spreads); product or by-product differential spreads; and futures-options spreads.) 267 Id. 268 17 CFR 140.97. 269The Commission would expect that applicants would provide cash market data for at least the prior year. 270For example, the Commission may, in its discretion, request a description of any positions in other commodity derivative contracts in the same commodity underlying the commodity derivative contract for which the application is submitted. Other commodity derivatives contracts could include other futures, options, and swaps (including over-the-counter swaps) positions held by the applicant. Commission approval for such enumerated anticipatory hedges). The Commission may consider expanding the proposed list of enumerated hedges at a later time, after notice and comment, as it gains experience with the new federal position limits framework proposed herein. Second, under proposed § 150.3(a)(1)(ii), for positions in referenced contracts that do not fit within one of the proposed enumerated hedges in Appendix A, (i.e., nonenumerated bona fide hedges), market participants must request approval from the Commission, or from an exchange, prior to exceeding federal limits. Such exemptions thus would not be selfeffectuating and market participants in such cases would have two options for requesting such a non-enumerated bona fide hedge recognition: (1) Apply directly to the Commission in accordance with proposed § 150.3(b) (described below), and separately also apply to an exchange pursuant to exchange rules established under proposed § 150.5(a); 263 or, alternatively (2) apply to an exchange pursuant to proposed § 150.9 for a non-enumerated bona fide hedge recognition that could be valid both for purposes of federal and exchange-set position limit requirements, unless the Commission (and not staff) objects to the exchange’s determination within a limited period of time.264 As discussed elsewhere in this release, market participants relying on enumerated or non-enumerated bona fide hedge recognitions would no longer have to file the monthly Form 204/304 with supporting cash market information.265
ii. Spread Exemptions
Under proposed § 150.3(a)(2)(i), spread exemptions for positions in referenced contracts would be selfeffectuating, provided that the position fits within one of the types of spreads listed in the spread transaction definition in proposed § 150.1,266 and provided further that the market participant separately requests a spread exemption from the relevant exchange’s limits established pursuant to proposed § 150.5(a). The Commission anticipates that such spread exemptions might include spreads that are ‘‘legged in,’’ that is, carried out in two steps, or alternatively are ‘‘combination trades,’’ that is, all components of the spread are executed simultaneously or near simultaneously. The list of spread transactions in proposed § 150.1 reflects the most common types of spread strategies for which the Commission and/or exchanges have previously granted spread exemptions. Under proposed § 150.3(a)(2)(ii), for all contracts subject to federal limits, if the spread position does not fit within one of the spreads listed in the spread transaction definition in proposed § 150.1, market participants must apply for the spread exemption relief directly from the Commission in accordance with proposed § 150.3(b). The market participant must receive notification of the approved spread exemption under proposed § 150.3(b)(4) before exceeding the federal speculative position limits for that spread position. The Commission may consider expanding the proposed spread transactions definition at a later time, after notice and comment, as it gains experience with the new federal position limits framework proposed herein.
iii. Removal of Existing §§ 1.47, 1.48,
and 140.97
Given the proposal set forth in § 150.9, as described in detail below, to allow for a streamlined process for recognizing bona fide hedges for purposes of federal limits,267 the Commission also proposes to delete existing §§ 1.47 and 1.48. The Commission preliminarily believes that overall, the proposed approach would lead to a more efficient bona fide hedge recognition process. As the Commission proposes to delete §§ 1.47 and 1.48, the Commission also proposes to delete existing § 140.97, which delegates to the Director of the Division of Enforcement or his designee authority regarding requests for classification of positions as bona fide hedges under existing §§ 1.47 and 1.48.268 The Commission does not intend the proposed replacement of §§ 1.47 and
1.48 to have any bearing on bona fide
hedges previously recognized under those provisions. With the exception of certain recognitions for risk management positions discussed below, positions that were previously recognized as bona fide hedges under §§ 1.47 or 1.48 would continue to be recognized, provided they continue to meet the statutory bona fide hedging definition and all other existing and proposed requirements. b. Process for Requesting CommissionProvided Relief for Non-Enumerated Bona Fide Hedges and Spread Exemptions Under the proposed rules, nonenumerated bona fide hedging recognitions may only be granted by the Commission as proposed in § 150.3(b), or under the streamlined process proposed in § 150.9. Further, spread exemptions that do not meet the proposed spread transaction definition may only be granted by the Commission as proposed in § 150.3(b). Under the Commission process in § 150.3(b), a person seeking a bona fide hedge recognition or spread exemption may submit a request to the Commission. With respect to bona fide hedge recognitions, such request must include:
(i) A description of the position in the commodity derivative contract for which the application is submitted, including the name of the underlying commodity and the position size; (ii) information to demonstrate why the position satisfies section 4a(c)(2) of the Act and the definition of bona fide hedging transaction or position in proposed § 150.1, including factual and legal analysis; (iii) a statement concerning the maximum size of all gross positions in derivative contracts for which the application is submitted (in order to provide a view of the true footprint of the position in the market); (iv) information regarding the applicant’s activity in the cash markets and the swaps markets for the commodity underlying the position for which the application is submitted; 269 and (v) any other information that may help the Commission determine whether the position meets the requirements of section 4a(c)(2) of the Act and the definition of bona fide hedging transaction or position in § 150.1.270 With respect to spread exemptions, such request must include: (i) A description of the spread transaction for which the exemption application is

271The nature of such description would depend on the facts and circumstances, and different details may be required depending on the particular spread. 272Where a person requests a bona fide hedge recognition within five business days after they exceed federal position limits, such person would be required to demonstrate that they encountered sudden or unforeseen circumstances that required them to exceed federal position limits before submitting and receiving approval of their bona fide hedge application. These applications submitted after a person has exceeded federal position limits should not be habitual and will be reviewed closely. If the Commission reviews such application and finds that the position does not qualify as a bona fide hedge, then the applicant would be required to bring their position into compliance within a commercially reasonable time, as determined by the Commission in consultation with the applicant and the applicable DCM or SEF. If the applicant brings the position into compliance within a commercially reasonable time, then the applicant will not be considered to have violated the position limits rules. Further, any intentional misstatements to the Commission, including statements to demonstrate why the bona fide hedging needs were sudden and unforeseen, would be a violation of sections 6(c)(2) and 9(a)(2) of the Act. 273See proposed § 150.3(b)(5). Currently, the Commission does not require automatic updates to bona fide hedge applications, and does not require applications or updates thereto for spread exemptions, which are self-effectuating. Consistent with current practices, under proposed § 150.3(b)(5), the Commission would not require automatic annual updates to bona fide hedge and spread exemption applications; rather, updated applications would only be required if there are changes to information the requestor initially submitted or upon Commission request. This approach is different than the proposed streamlined process in § 150.9, which would require automatic annual updates to such applications, which is more consistent with current exchange practices. See, e.g., CME Rule 559. 274This proposed authority to revoke or modify a bona fide hedge recognition or spread exemption would not be delegated to Commission staff. 275See, e.g., 2016 Reproposal, 81 FR 96704 at 96833. 276See, e.g., CFTC Press Release No. 5551–08, CFTC Update on Efforts Underway to Oversee Markets, (Sept. 19, 2008), available at http:// www.cftc.gov/PressRoom/PressReleases/pr5551-08. 277See 7 U.S.C. 6a(a)(3). submitted; 271 (ii) a statement concerning the maximum size of all gross positions in derivative contracts for which the application is submitted; and (iii) any other information that may help the Commission determine whether the position is consistent with
section 4a(a)(3)(B) of the Act.
Under proposed § 150.3(b)(2), the Commission, or Commission staff pursuant to delegated authority proposed in § 150.3(g), may request additional information from the requestor and must provide the requestor with ten business days to respond. Under proposed § 150.3(b)(3) and (4), the requestor, however, may not exceed federal position limits unless it receives a notice of approval from the Commission or from Commission staff pursuant to delegated authority proposed in § 150.3(g); provided however, that, due to demonstrated sudden or unforeseen increases in its bona fide hedging needs, a person may request a recognition of a bona fide hedging transaction or position within five business days after the person established the position that exceeded the federal speculative position limit.272 Under this proposed process, market participants would be encouraged to submit their requests for bona fide hedge recognitions and spread exemptions as early as possible since proposed § 150.3(b) would not set a specific timeframe within which the Commission must make a determination for such requests. Further, all approved bona fide hedge recognitions and spread exemptions must be renewed if there are any changes to the information submitted as
part of the request, or upon request by
the Commission or Commission staff.273 Finally, the Commission (and not staff) may revoke or modify any bona fide hedge recognition or spread exemption at any time if the Commission determines that the bona fide hedge recognition or spread exemption, or portions thereof, are no longer consistent with the applicable statutory and regulatory requirements.274 The Commission anticipates that most market participants would utilize the streamlined process set forth in proposed § 150.9 and described below, rather than the process as proposed in § 150.3(b), because exchanges would generally be able to make such determinations more efficiently than Commission staff, and because market participants are likely already familiar with the proposed processes set forth in § 150.9, which is intended to leverage the processes currently in place at the exchanges for addressing requests for exemptions from exchange-set limits. Nevertheless, proposed § 150.3(a)(1) and (2) clarify that market participants may seek relief from federal position limits for non-enumerated bona fide hedges and spread transactions that do not meet the proposed spread transactions definition directly from the Commission. After receiving any approval of a bona fide hedge or spread exemption from the Commission, the market participant would still be required to request a bona fide hedge recognition or spread exemption from the relevant exchange for purposes of exchange-set limits established pursuant to proposed § 150.5(a).
c. Request for Comment
The Commission requests comments on all aspects of proposed § 150.3(a)(1) and (2). The Commission also invites comment on the following:
(28) Out of concern that large demand for delivery against long nearby futures positions may outpace demand on spot cash values, the Commission has previously discussed allowing cash and carry exemptions as spreads on the condition that the exchange ensures that exit points in cash and carry spread exemptions would facilitate an orderly liquidation.275 Should the Commission allow the granting of cash and carry exemptions under such conditions? If so, please explain why, including how such exemptions would be consistent with the Act and the Commission’s regulations. If not, please explain why not, and if other circumstances would be better, including better for preserving convergence, which is essential to properly functioning markets and price discovery. If cash and carry exemptions were allowed, how could an exchange ensure that exit points in cash and carry exemptions facilitate convergence of cash and futures? d. Financial Distress Exemptions Proposed § 150.3(a)(3) would allow for a financial distress exemption in certain situations, including the potential default or bankruptcy of a customer or a potential acquisition target. For example, in periods of financial distress, such as a customer default at an FCM or a potential bankruptcy of a market participant, it may be beneficial for a financiallysound market participant to take on the positions and corresponding risk of a less stable market participant, and in doing so, exceed federal speculative position limits. Pursuant to authority delegated under §§ 140.97 and 140.99, Commission staff previously granted exemptions in these types of situations to avoid sudden liquidations required to comply with a position limit.276 Such sudden liquidations could otherwise potentially hinder statutory objectives, including by reducing liquidity, disrupting price discovery, and/or increasing systemic risk.277 The proposed exemption would be available to positions of ‘‘a person, or related persons,’’ meaning that a financial distress exemption request should be specific to the circumstances of a particular person, or to persons related to that person, and not a more general request by a large group of unrelated people whose financial distress circumstances may differ from one another. The proposed exemption would be granted on a case by case basis in response to a request submitted pursuant to § 140.99, and would be

278Some examples include natural gas contracts that use the NYMEX NG futures contract as a reference price, such as ICE’s Henry Financial Penultimate Fixed Price Futures (PHH), options on Henry Penultimate Fixed Price (PHE), Henry Basis Futures (HEN) and Henry Swing Futures (HHD); NYMEX’s E-mini Natural Gas Futures (QG), Henry Hub Natural Gas Last Day Financial Futures (HH), and Henry Hub Natural Gas Financial Calendar Spread (3 Month) Option (G3); and Nasdaq Futures, Inc.’s (‘‘NFX’’) Henry Hub Natural Gas Financial Futures (HHQ), and Henry Hub Natural Gas Penultimate Financial Futures (NPQ). 279Under the referenced contract definition proposed in § 150.1, cash-settled natural gas referenced contracts are those futures or options contracts, including spreads, that are:
(1) Directly or indirectly linked, including being partially or fully settled on, or priced at a fixed differential to, the price of the physically-settled NYMEX NG core referenced futures contract; or (2) 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 the physically-settled NYMEX NG core referenced futures contract for delivery at the same location or locations as specified in the NYMEX NG core referenced futures contract. As proposed, the referenced contract definition does not include a location basis contract, a commodity index contract, or a trade option that meets the requirements of § 32.3 of this chapter. See proposed § 150.1. 280On November 12, 2019, Nodal announced that it had reached an agreement to acquire the core assets of NFX. See Nodal Exchange Acquires U.S. Commodities Business of Nasdaq Futures, Inc. (NFX), Nodal Exchange website (Nov. 12, 2019), available at https://www.nodalexchange.com/wpcontent/uploads/20191112-Nodal-NFX-releaseFinal.pdf (press release). The acquisition includes all of NFX’s energy complex of futures and options contracts, including NFX’s Henry Hub Natural Gas Financial Futures contract. Because that contract will become part of Nodal’s offerings, that contract, as well as Nodal’s existing Henry Hub Monthly Natural Gas contract, would continue to qualify as referenced contracts under the proposed definition herein, and thus would be subject to federal limits by virtue of being cash-settled to the physicallysettled NYMEX NG core referenced futures contract. According to the November 12, 2019 press release, ‘‘Nodal Exchange and Nodal Clear plan to complete the integration of U.S. Power contracts by December
2019. U.S. Natural Gas, Crude Oil and Ferrous
Metals contracts could transfer to Nodal as soon as spring 2020.’’ Id. 281While the NYMEX NG is the only natural gas contract included as a core referenced futures contract in this release, the conditional spot month exemption proposed herein would also apply to any other physically-settled natural gas contract that the Commission may in the future designate as a core referenced futures contract, as well as to any physically-delivered contract that is substantially identical to the NYMEX NG and that qualifies as a referenced contract, or that qualifies as an economically equivalent swap. 282As noted above, current exchange rules establish a spot month limit of 1,000 NYMEX equivalent sized contracts. The Commission proposes a federal spot month limit of 2,000 NYMEX equivalent sized contracts based on updated deliverable supply estimates. See supra
Section II.B.2.b. (2020 proposed spot month limit
chart). The proposed conditional spot month limit exemption of 10,000 contracts per exchange is thus five times the proposed federal spot month limit. 283See ICE Rule 6.20(c), NYMEX Rule 559.F, NFX Rule Chapter V, Section 13(a), and Nodal Rule
6.5.2. The spot month for such contracts is three
days. See also Position Limits, CMG Group website, available at https://www.cmegroup.com/marketregulation/position-limits.html (NYMEX position limits spreadsheet); Market Resources, ICE Futures website, available at https://www.theice.com/ futures-us/market-resources (ICE position limits spreadsheet). NYMEX rules establish an exchangeset spot month limit of 1,000 contracts for its physically-settled NYMEX NG Futures contract and a separate spot month limit of 1,000 contracts for its cash-settled Henry Hub Natural Gas Last Day Financial Futures contract. As the ICE natural gas contract is one quarter the size of the NYMEX contract, ICE’s exchange-set natural gas limits are shown in NYMEX equivalents throughout this
section of the release. ICE thus has rules in place
establishing an exchange-set spot month limit of 4,000 contracts (equivalent to 1,000 NYMEX contracts) for its cash-settled Henry Hub LD1 Fixed Price Futures contract. evaluated based on the specific facts and circumstances of a particular person or related persons. Any such financial distress position would not be a bona fide hedging transaction or position unless it otherwise met the substantive and procedural requirements set forth in proposed §§ 150.1, 150.3, and 150.9, as applicable. e. Conditional Spot Month Exemption in Natural Gas Certain natural gas contracts are currently subject to exchange-set limits, but not federal limits.278 This proposal would apply federal limits to certain natural gas contracts for the first time by including the physically-settled NYMEX Henry Hub Natural Gas (‘‘NYMEX NG’’) contract as a core referenced futures contract listed in proposed § 150.2(d). As set forth in proposed Appendix E to
part 150, that physically-settled
contract, as well as any cash-settled natural gas contract that qualifies as a referenced contract,279 would be separately subject to a federal spot month limit, net long or net short, of 2,000 NYMEX NG equivalent-size contracts. Under the referenced contract definition in proposed § 150.1, ICE’s cash-settled Henry Hub LD1 contract, ICE’s Henry Financial Penultimate Fixed Price Futures, NYMEX’s cashsettled Henry Hub Natural Gas Last Day Financial Futures contract, Nodal Exchange’s (‘‘Nodal’’) cash-settled Henry Hub Monthly Natural Gas contract, and NFX cash-settled Henry Hub Natural Gas Financial Futures contract, for example, would each qualify as a referenced contract subject to federal limits by virtue of being cashsettled to the physically-settled NYMEX NG core referenced futures contract.280 Any other cash-settled contract that meets the referenced contract definition would also be subject to federal limits, as would an ‘‘economically equivalent swap,’’ as defined in proposed § 150.1, with respect to any natural gas referenced contract. Proposed § 150.3(a)(4) would permit a new federal conditional spot month limit exemption for certain cash-settled natural gas referenced contracts. Under proposed § 150.3(a)(4), market participants seeking to exceed the proposed 2,000 NYMEX NG equivalentsize contract spot month limit for a cash-settled natural gas referenced contract listed on any DCM could receive an exemption that would be capped at 10,000 NYMEX NG equivalent-size contracts net long or net short per DCM, plus an additional 10,000 NYMEX NG futures equivalent size contracts in economically equivalent swaps. A grant of such an exemption would be conditioned on the participant not holding or controlling any positions during the spot month in the physically-settled NYMEX NG core referenced futures contract.281 This proposed conditional exemption level of 10,000 contracts per DCM in natural gas would codify into federal regulations the industry practice of an exchange-set conditional limit that is five times the size of the spot month limit that has developed over time, and which the Commission preliminarily believes has functioned well. The practice balances the needs of certain market participants, who may currently hold or control 5,000 contracts in each DCM’s cash-settled natural gas futures contracts and prefer a sizeable position in a cash-settled contract in order to obtain the desired exposure without needing to make or take delivery of natural gas, with the policy objectives of the Commission, which has historically had concerns about the possibility of traders attempting to manipulate the physically-settled NYMEX NG contract (i.e., mark-the close) in order to benefit from a larger position in the cash-settled ICE LD1 Natural Gas Swap and/or NYMEX Henry Hub Natural Gas Last Day Financial Futures contract during the spot month as these contracts expired.282 NYMEX, ICE, NFX, and Nodal currently have rules in place establishing a
conditional spot month limit exemption equivalent to up to 5,000 contracts (in NYMEX-equivalent size) for their respective cash-settled natural gas contracts, provided that the trader does not maintain a position in the physically-settled NYMEX NG contract during the spot month.283 Together, the ICE, NYMEX, NFX, and Nodal rules allow a trader to hold up to 20,000 (NYMEX-equivalent size) contracts during the spot month combined across ICE, NYMEX, NFX, and Nodal cash-settled natural gas contracts, provided the trader does not hold positions in excess of 5,000

284 In practice, a majority of the trading in such contracts is on ICE and NYMEX. As noted above, Nodal is acquiring NFX, including its Henry Hub Natural Gas Financial Futures contract. 285See supra Section II.B.2.k. (discussion of netting). 286 ‘‘Pre-enactment swap’’ would mean any swap entered into prior to enactment of the Dodd-Frank Act of 2010 (July 21, 2010), the terms of which have not expired as of the date of enactment of that Act. ‘‘Transition period swap’’ would mean a swap entered into during the period commencing after the enactment of the Dodd-Frank Act of 2010 (July 21, 2010), and ending 60 days after the publication in the Federal Register of final amendments to this
part implementing section 737 of the Dodd-Frank
Act of 2010.
287See supra Section II.A.1.c.ii.(1). (discussion of the temporary substitute test and risk-management exemptions). 288See supra Section II.A.1.c.vi. (discussion of proposed pass-through language). contracts on any one DCM, and provided further that the trader does not hold any positions in the physicallysettled NYMEX NG contract during the spot month.284 The DCMs originally adopted these rules, in consultation with Commission staff, in large 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, and to accommodate certain trading dynamics unique to the natural gas contracts. In particular, in natural gas, open interest tends to decline in the NYMEX NG contract approaching expiration and tends to increase rapidly in the ICE cash-settled Henry Hub LD1 contract. These dynamics suggest that cashsettled natural gas contracts serve an important function for hedgers and speculators who wish to recreate and/or hedge the physically-settled NYMEX NG contract price without being required to make or take delivery. The condition in proposed § 150.3(a)(4), however, should remove the potential to manipulate the physically-settled natural gas contract in order to benefit a sizeable position in the cash-settled contract. To qualify for the exemption, market participants would not be permitted to hold any spot month positions in the physicallysettled contract. This proposed conditional exemption would prevent manipulation by traders with leveraged positions in the cash-settled contracts (in comparison to the level of the limit in the physical-delivery contract) who might otherwise attempt to mark the close or distort physical-delivery prices in the physically-settled contract to benefit their leveraged cash-settled positions. Thus, the exemption would establish a higher conditional limit for the cash-settled contract than for the physical-delivery contract, so long as the cash-settled positions are decoupled from spot-month positions in physicaldelivery contracts which set or affect the value of such cash-settled positions. While the Commission is unaware of any natural gas swaps that would qualify as ‘‘economically equivalent swaps,’’ the Commission proposes to apply the conditional exemption to swaps as well, provided that a given market participant’s positions in such cash-settled swaps do not exceed 10,000 futures-equivalent contracts and provided that the participant does not hold spot-month positions in physically settled natural gas contracts. Because swaps may generally be fungible across markets, that is, a position may be established on one SEF and offset on another SEF or OTC, the Commission proposes that economically equivalent swap contracts have a conditional spot month limit of 10,000 economically equivalent contracts in total across all SEFs and OTC. A market participant that sought to hold
positions in both the NYMEX NG physically-settled contract and in any cash-settled natural gas contract would not be eligible for the proposed conditional exemption. Such a participant could only hold up to 2,000 contracts net long or net short across exchanges/OTC in physically-settled natural gas referenced contract(s), and another 2,000 contracts net long or net short across exchanges/OTC in cashsettled natural gas contract referenced contract(s).285 f. Exemption for Pre-Enactment Swaps and Transition Period Swaps In order to promote a smooth transition to compliance for swaps not previously subject to federal speculative position limits, proposed § 150.3(a)(5) would provide that federal speculative position limits shall not apply to positions acquired in good faith in any pre-enactment swap or in any transition period swap, in either case as defined by § 150.1.286 Any swap that meets the proposed economically equivalent swap definition, but that otherwise qualifies as a pre-enactment swap or transition period swap, would thus be exempt from federal speculative position limits. This exemption would be selfeffectuating and would not require a market participant to request relief. In order to further lessen the impact of the proposed federal limits on market participants, for purposes of complying with the proposed federal non-spot month limits, the proposed rule would also allow both pre-enactment swaps and transition period swaps to be netted with commodity derivative contracts acquired more than 60 days after publication of final rules in the Federal Register. Any such positions would not be permitted to be netted during the spot month so as to avoid rendering spot month limits ineffective—the Commission is particularly concerned about protecting the spot month in physical-delivery futures from price distortions or manipulation that would disrupt the hedging and price discovery utility of the futures contract. g. Previously-Granted Risk Management Exemptions As discussed elsewhere in this release, the Commission previously recognized, as bona fide hedges under § 1.47, certain risk-management positions in physical commodity futures and/or options on futures contracts thereon held outside of the spot month that were used to offset the risk of commodity index swaps and other related exposure, but that did not represent substitutes for transactions or positions to be taken in a physical marketing channel. However, as noted earlier in this release, the Commission interprets Dodd-Frank Act amendments to the CEA as eliminating the Commission’s authority to grant such relief unless the position satisfies the pass-through provision in CEA section 4a(c)(2)(B).287 Accordingly, to ensure consistency with the Dodd-Frank Act, the Commission will not recognize further risk management positions as bona fide hedges, unless the position otherwise satisfies the requirements of the pass-through provisions.288 In addition, the Commission proposes in § 150.3(c)
that such previouslygranted exemptions shall not apply after the effective date of a final federal position limits rulemaking implementing the Dodd-Frank Act. Proposed § 150.3(c) uses the phrase ‘‘positions in financial instruments’’ to refer to such commodity index swaps and related exposure and would have the effect of revoking the ability to use previously-granted risk management exemptions once the limits proposed in § 150.2 go into effect. h. Recordkeeping Proposed § 150.3(d) establishes recordkeeping requirements for persons who claim any exemptions or relief under proposed § 150.3. Proposed § 150.3(d) should help to ensure that any person who claims any exemption permitted under proposed § 150.3 can demonstrate compliance with the applicable requirements. Under proposed § 150.3(d)(1), any persons

289See supra Section II.A.1.c.vi. (discussion of proposed pass-through language). 290See 7 U.S.C. 7(d)(5). 291See 7 U.S.C. 7b–3(f)(6). 292See 7 U.S.C. 7(d)(1) and 7 U.S.C. 7b–3(f)(1). 293 17 CFR 150.5. claiming an exemption would be required to keep and maintain complete books and records concerning all details of their related cash, forward, futures, options on futures, and swap positions and transactions, including anticipated requirements, production and royalties, contracts for services, cash commodity products and by-products, crosscommodity hedges, and records of bona fide hedging swap counterparties. Proposed § 150.3(d)(2) addresses recordkeeping requirements related to the pass-through swap provision in the proposed definition of bona fide hedging transaction or position in proposed § 150.1.289 Under proposed § 150.3(d)(2), a pass-through swap counterparty, as contemplated by proposed § 150.1, that relies on a representation received from a bona fide hedging swap counterparty that a swap qualifies in good faith as a bona fide hedging position or transaction under proposed § 150.1, would be required to:
(i) Maintain any written representation for at least two years following the expiration of the swap; and (ii) furnish the representation to the Commission upon request.
i. Call for Information
The Commission proposes to move existing § 150.3(b), which currently allows the Commission or certain Commission staff to make special calls to demand certain information regarding positions or trading, to proposed § 150.3(e), with some technical modifications. Together with the recordkeeping provision of proposed § 150.3(d), proposed § 150.3(e) should enable the Commission to monitor the use of exemptions from speculative position limits and help to ensure that any person who claims any exemption permitted by proposed § 150.3 can demonstrate compliance with the applicable requirements. j. Aggregation of Accounts Proposed § 150.3(f) would clarify that entities required to aggregate under § 150.4 would be considered the same person for purposes of determining whether they are eligible for a bona fide hedge recognition under § 150.3(a)(1). k. Delegation of Authority Proposed § 150.3(g) would delegate authority to the Director of the Division of Market Oversight to: Grant financial distress exemptions pursuant to proposed § 150.3(a)(3); request additional information with respect to an exemption request pursuant to proposed § 150.3(b)(2); determine, in consultation with the exchange and applicant, a commercially reasonable amount of time required for a person to bring its position within the federal position limits pursuant to proposed § 150.3(b)(3)(ii)(B); make a determination whether to recognize a position as a bona fide hedging transaction or to grant a spread exemption pursuant to proposed § 150.3(b)(4); and to request that a person submit updated materials or renew their request pursuant to proposed § 150.3(b)(2) or (5). This proposed delegation would enable the Division of Market Oversight to act quickly in the event of financial distress and in the other circumstances described above.
l. Request for Comment
The Commission requests comment on all aspects of proposed § 150.3. In addition, the Commission understands that there may be certain not-for-profit electric and natural gas utilities that have certain public service missions and that are prohibited, by their governing body, risk management policies, or otherwise, from speculating, and that would request relief from federal position limits once federal limits on swaps are implemented. The Commission requests comment on all aspects of the concept of an exemption from part 150 of the Commission’s regulations for certain not-for-profit electric and natural gas utility entities that have unique public service missions to provide reliable, affordable energy services to residential, commercial, and industrial customers, and that are prohibited from speculating. In addition, the Commission requests comment on whether the definition of ‘‘economically equivalent swap’’ would cover the types of hedging activities such utilities engage in with respect to their OTC swap activity. The Commission also invites comments on the following:
(29) What are the overarching issues or concerns the Commission should consider regarding a potential exemption from position limits for such not- for-profit electric and natural gas utilities? (30) Are there certain provisions in
part 150 of the Commission’s
regulations that should apply to such not-for-profit electric and natural gas utilities even if the Commission were to grant such entities an exemption with respect to federal position limits? (31) Are there other types of entities, similar to the not-for-profit electric and natural gas utilities described above, for which the Commission should also consider granting such exemptive relief by rule, and why? (32) What types of conditions, restrictions, or criteria should the Commission consider applying with respect to such an exemption? (33) Should higher position limits in cash-settled natural gas futures be conditioned on the closing of any positions in the physically delivered natural gas contract? Are there characteristics of the natural gas futures markets that weigh in favor of or against the higher conditional limits? D. § 150.5—Exchange-Set Position Limits and Exemptions Therefrom

Background
For the avoidance of confusion, the discussion of § 150.5 that follows addresses exchange-set limits and exemptions therefrom, not federal limits. For a discussion of the proposed processes by which an exemption may be recognized for purposes of federal limits, please see the discussion of proposed § 150.3 above and § 150.9 below. Under DCM Core Principle 5, DCMs shall adopt for each contract, as is necessary and appropriate, position limitations or position accountability for speculators, and, for any contract subject to a federal position limit, DCMs must establish exchange-set limits for that contract no higher than the federal limit level.290 Similarly, under SEF Core Principle 6, SEFs that are trading facilities shall adopt for each contract, as is necessary and appropriate, position limitations or position accountability for speculators, and, for any contract subject to a federal position limit, SEFs that are trading facilities must establish exchange-set limits for that contract no higher than the federal limit, and must monitor positions established on or through the SEF for compliance with the limit set by the Commission and the limit, if any, set by the SEF.291 Beyond these and other statutory and Commission requirements, unless otherwise determined by the Commission, DCM and SEF Core Principle 1 afford DCMs and SEFs ‘‘reasonable discretion’’ in establishing the manner in which they comply with the core principles.292 The current regulatory provisions governing exchange-set position limits and exemptions therefrom appear in

294While existing § 150.5 on its face only applies to contracts that are not subject to federal limits, DCM Core Principle 5, as amended by Dodd-Frank, and SEF Core Principle 6, establish requirements both for contracts that are, and are not, subject to federal limits. 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b– 3(f)(6). 295Significant changes proposed herein include the process set forth in proposed § 150.9 and revisions to the bona fide hedging definition proposed in § 150.1. 296The Commission has observed in prior releases that courts have upheld relieving regulated entities of their statutory obligations where compliance is impossible or impracticable. 2016 Supplemental Proposal, 81 FR at 38462. 297 2016 Supplemental Proposal, 81 FR at 38459– 62; 2016 Reproposal, 81 FR at 96784–86. 298 7 U.S.C. 6a(a)(3). 299Existing § 150.5(a) states that the requirement to set position limits shall not apply to futures or option contract markets on major foreign currencies, for which there is no legal impediment to delivery and for which there exists a highly liquid cash market. 17 CFR 150.5(a). 300See 17 CFR 150.5(b)(1)–(3) (no greater than one-quarter of the estimated spot month deliverable supply for physical delivery contracts during the spot month; no greater than necessary to minimize the potential for manipulation or distortion of the contract’s or the underlying commodity’s price for cash-settled contracts during the spot month; no greater than 1,000 contracts for tangible commodities other than energy outside the spot month; and no greater than 5,000 contracts for energy products and nontangible commodities, including financials outside the spot month). 301See 17 CFR 150.5(d)(1). 302 17 CFR 150.5(e). 303 17 CFR 150.5(e)(1)–(4). 304 17 CFR 150.5(f). 305 Id. 306As mentioned above, while proposed § 150.5 will include references to swaps and SEFs, the proposed rule would initially only apply to DCMs, as requirements relating to exchange-set limits on swaps would be phased in at a later time. Frank statutory changes 294 and with other changes proposed herein,295 the Commission proposes a new version of § 150.5. This new proposed § 150.5 would generally afford exchanges the discretion to decide for themselves how best to set limit levels and grant exemptions from such limits in a manner that best reflects their specific markets.
2. Implementation of Exchange-Set
Limits on Swaps
With respect to the DCM Core Principle 5 and SEF Core Principle 6 requirements addressing exchange-set limits on swaps, the Commission is preliminarily determining that it is reasonable to delay implementation because requiring compliance would be impracticable, and in some cases impossible, at this time.296 The Commission has previously explained why it has proposed to temporarily delay imposition of exchange-set position limits on swaps.297 The decision to delay imposing exchange-set position limits on swaps is based largely on the lack of exchange access to sufficient data regarding individual market participants’ open swap positions, which means that, without action to provide further access to swap data to exchanges, the exchanges cannot effectively monitor swap position limits. The Commission preliminarily believes that delayed implementation of exchange-set speculative position limits on swaps at this time is not inconsistent with the statutory objectives outlined in
section 4a(a)(3) of the CEA: To diminish
excessive speculation, to deter market manipulation, to ensure sufficient liquidity for bona fide hedgers, and to ensure that the price discovery function of the underlying market it not disrupted.298 Accordingly, while proposed § 150.5 will apply to DCMs and SEFs, the requirements associated with swaps would be enforced at a later time. In other words, exchanges must comply with proposed § 150.5 only with respect to futures and options on futures traded on DCMs, and with respect to swaps at a later time as determined by the Commission.
3. Existing § 150.5
As noted above, existing § 150.5 predates the Dodd-Frank Act and addresses the establishment of DCM-set position limits for all contracts not subject to federal limits under existing § 150.2 (aside from certain major foreign currencies).299 Existing § 150.5(a) authorizes DCMs to set different limits for different contracts and contract months, and permits DCMs to grant exemptions from DCM-set limits for spreads, straddles, or arbitrage trades. Existing § 150.5(b) provides a limited set of methodologies for DCMs to use in establishing initial limit levels, including separate maximum limit levels for spot month limits in physicaldelivery contracts, spot month limits in cash-settled contracts, non-spot month limits for tangible commodities other than energy, and non-spot month limits for energy products and non-tangible commodities, including financials.300 Existing § 150.5(c) provides that DCMs may adjust their speculative initial levels as follows: (i) No greater than 25 percent of deliverable supply for adjusted spot month levels in physically-delivered contracts; (ii) ‘‘no greater than necessary to minimize the potential for manipulation or distortion of the contract’s or the underlying commodity’s price’’ for adjusted spot month levels in cash-settled contracts; and (iii) for adjusted non-spot month limit levels, either no greater than 10 percent of open interest, up to 25,000 contracts, with a marginal increase of
2.5 percent thereafter, or based on
position sizes customarily held by speculative traders on the DCM. Existing § 150.5(d) addresses bona fide hedging exemptions from DCM-set limits, including an exemption application process, providing that exchange-set speculative position limits shall not apply to bona fide hedging positions as defined by a DCM in accordance with the definition of bona fide hedging transactions and positions for excluded commodities in § 1.3. Existing § 150.5(d) also addresses factors for consideration by DCMs in recognizing bona fide hedging exemptions (or position accountability), including whether such positions ‘‘are not in accord with sound commercial practices or exceed an amount which may be established and liquidated in an orderly fashion.’’ 301 Existing § 150.5(e) permits DCMs in certain circumstances to submit for Commission approval, as a substitute for the position limits required under § 150.5(a), (b), and (c), a DCM rule requiring traders ‘‘to be accountable for large positions,’’ meaning that under certain circumstances, traders must provide information about their position upon request to the exchange, and/or consent to halt increasing further a position if so ordered by the exchange.302 Among other things, this provision includes open interest and volume-based parameters for determining when DCMs may do so.303 Existing § 150.5(f) provides that DCM speculative position limits adopted pursuant to § 150.5 shall not apply to certain positions acquired in good faith prior to the effective date of such limits or to a person that is registered as an FCM or as a floor broker under authority of the CEA except to the extent that transactions made by such person are made on behalf of or for the account or benefit of such person.304 This provision also provides that in addition to the express exemptions specified in § 150.5, a DCM may propose such other exemptions from the requirements of § 150.5 as are consistent with the purposes of § 150.5, and provides procedures for doing so.305 Finally, existing § 150.5(g) addresses aggregation of positions for which a person directly or indirectly controls trading.
4. Proposed § 150.5
Pursuant to CEA sections 5(d)(1) and 5h(f)(1), the Commission proposes a new version of § 150.5.306 Proposed § 150.5 is intended to provide the ability for DCMs and SEFs to set limit levels

307To avoid confusion created by the parallel federal and exchange-set position limit frameworks, the Commission clarifies that proposed § 150.5 deals solely with exchange-set position limits and exemptions therefrom, whereas proposed § 150.9 deals solely with federal limits and recognition of exchange-granted exemptions and bona fide hedging determinations for purposes of federal limits. 308Under the proposal, requests for exemptions for financial distress positions would be submitted directly to the Commission (or delegated staff) for consideration, and any approval of such exemption would be issued in the form of an exemption letter from the Commission (or delegated staff) pursuant to § 140.99. 309For example, an exchange would not be permitted to adopt rules allowing for risk management exemptions in physical commodities because the Commission interprets Dodd-Frank amendments to CEA section 4a(c)(2) as prohibiting risk management exemptions in such commodities. See supra Section II.A.1.c.ii.(1). (discussion of the temporary substitute test and risk-management exemptions). 310For example, as discussed below, proposed § 150.5(a)(2)(ii)(C) would require that exchanges take into account whether the requested exemption would result in positions that are not in accord with sound commercial practices in the relevant commodity derivative market and/or would not exceed an amount that may be established and liquidated in an orderly fashion in that market. and grant exemptions in a manner that best accommodates activity particular to their markets, while promoting compliance with DCM Core Principle 5 and SEF Core Principle 6 and ensuring consistency with other changes proposed herein, including the process for exchanges to administer applications for non-enumerated bona fide hedge exemptions for purposes of federal limits proposed in § 150.9.307 Proposed § 150.5 contains two main sub-sections, with each sub-section addressing a different category of contract: (i) Proposed § 150.5(a) would include rules governing exchange-set limits for contracts subject to federal limits; and (ii) proposed § 150.5(b) would include rules governing exchange-set limits for physical commodity contracts that are not subject to federal limits. As described in further detail below, the proposed provisions addressing exchange-set limits on contracts that are not subject to federal limits reflect a principles-based approach and include acceptable practices that provide for non-exclusive methods of compliance with the principles-based regulations. The Commission would therefore provide exchanges with the ability to set limits and grant exemptions in the manner that most suits their unique markets. Each proposed provision of § 150.5 is described in detail below. a. Proposed § 150.5(a)—Requirements for Exchange-Set Limits on Commodity Derivative Contracts Subject to Federal Limits Set Forth in § 150.2 Proposed § 150.5(a) would apply to all contracts subject to the federal limits
proposed in § 150.2 and, among other things, is intended to help ensure that exchange-set limits do not undermine the federal limits framework. Under proposed § 150.5(a)(1), for any contract subject to a federal limit, DCMs and, ultimately, SEFs, would be required to establish exchange-set limits for such contracts. Consistent with DCM Core Principle 5 and SEF Core Principle 6, the exchange-set limit levels on such contracts, whether cash-settled or physically-settled, and whether during or outside the spot month, would have to be no higher than the level specified for the applicable referenced contract in proposed § 150.2. Exchanges would be free to set position limits that are more stringent than the federal limit for a particular contract, and would also be permitted to adopt position accountability at a level lower than the federal limit, in addition to an exchange-set position limit that is equal to or less than the federal limit. Proposed § 150.5(a)(2) would permit exchanges to grant exemptions from exchange-set limits established under proposed § 150.5(a)(1) as follows:
First, if such exemptions from exchange-set limits conform to the types of exemptions that may be granted for purposes of federal limits under proposed §§ 150.3(a)(1)(i), 150.3(a)(2)(i), and 150.3(a)(4)–(5) (enumerated bona fide hedge recognitions and spread exemptions that are listed in the spread transaction definition in proposed § 150.1, as well as exempt conditional spot month positions in natural gas and pre-enactment and transition period swaps), then the level of the exemption may exceed the applicable federal position limit under proposed § 150.2. Since the proposed exemptions listed above are self-effectuating for purposes of federal position limit levels, exchanges may grant such exemptions pursuant to proposed § 150.5(a)(2)(i). Second, if such exemptions from exchange-set limits conform to the exemptions from federal limits that may be granted under proposed §§ 150.3(a)(1)(ii) and 150.3(a)(2)(ii) (respectively, non-enumerated bona fide hedges and spread transactions that are not currently listed in the spread transaction definition in proposed § 150.1), then the level of the exemption may exceed the applicable federal position limit under proposed § 150.2, provided that the exemption for purposes of federal limits is first approved in accordance with proposed § 150.3(b) or § 150.9, as applicable. Third, if such exemptions conform to the exemptions from federal limits that may be granted under proposed § 150.3(a)(3) (financial distress positions), then the level of the exemption may exceed the applicable federal position limit under proposed § 150.2, provided that the Commission has first issued a letter approving such exemption pursuant to a request submitted under § 140.99.308 Finally, for purposes of exchange-set limits only, exchanges may grant exemption types that are not listed in § 150.3(a). However, in such cases, the exemption level would have to be capped at the level of the applicable federal position limit, so as not to undermine the federal limit framework, unless the Commission has first approved such exemption for purposes of federal limits pursuant to § 150.3(b). Exchanges that wish to offer exemptions from their own limits other than the types listed in proposed § 150.3(a) could also submit rules to the Commission allowing for such exemptions pursuant to part 40. The Commission would carefully review any such exemption types for compliance with applicable standards, including any statutory requirements 309 and Commission-set standards.310 Under proposed § 150.5(a)(2)(ii)(A), exchanges that wish to grant exemptions from their own limits would have to require traders to file an application. Aside from the requirements discussed below, including the requirement that the exchange collect cash-market and swaps market information from the applicant, exchanges would have flexibility to establish the application process as they see fit, including adopting protocols to reduce burdens by leveraging existing processes with which
their participants are already familiar. For all exemption types, exchanges would have to generally require that such applications be filed in advance of the date such position would be in excess of the limits, but exchanges would be given the discretion to adopt rules allowing traders to file applications within five business days after a trader established such position. Exchanges wishing to grant such retroactive exemptions would have to require market participants to demonstrate circumstances warranting a sudden and unforeseen hedging need. Proposed § 150.5(a)(2)(ii)(B) would provide that exchanges must require that a trader reapply for the exemption granted under proposed § 150.5(a)(2) at least annually so that the exchange and the Commission can closely monitor exemptions for contracts subject to

311Currently, DCMs review and set exemption levels annually based on the facts and circumstances of a particular exemption and the market conditions at that time. As such, a DCM may decide to deny, limit, condition, or revoke a particular exemption, typically, if the DCM determines that certain conditions have changed and warrant such action. This may happen if, for example, there are droughts, floods, embargoes, trade disputes, or other events that cause shocks to the supply or demand of a particular commodity and thus impact the DCM’s disposition of a particular exemption. 314 In the monthly report, exchanges may elect to list new recognitions or exemptions, and modifications to or revocations of prior recognitions and exemptions each month; alternatively, exchanges may submit cumulative monthly reports listing all active recognitions and exemptions (i.e., including exemptions that are not new or have not changed). 315An exchange could determine to recognize as a bona fide hedge or spread exemption all, or a portion, of the commodity derivative position for which an application has been submitted, provided that such determination is made in accordance with the requirements of proposed § 150.5 and is consistent with the Act and the Commission’s regulations. In addition, an exchange could require that a bona fide hedging positon or spread position be subject to ‘‘walk-down’’ provisions that require the trader to scale down its positions in the spot month in order to reduce market congestion as needed based on the facts and circumstances. federal speculative position limits, and to help ensure that the exchange and the Commission remain aware of the trader’s activities. Proposed § 150.5(a)(2)(ii)(C) would authorize exchanges to deny, limit, condition, or revoke any exemption request in accordance with exchange rules,311 and would set forth a principles-based standard for the granting of exemptions that do not conform to the type that the Commission may grant under proposed § 150.3(a). Specifically, exchanges would be required to take into account:
(i) Whether the requested exemption from its limits would result in a position that is ‘‘not in accord with sound commercial practices’’ in the market in which the DCM is granting the exemption; and (ii) whether the requested exemption would result in a position that would ‘‘exceed an amount that may be established or liquidated in an orderly fashion in that market.’’ Exchanges’ evaluation of exemption requests against these standards would be a facts and circumstances determination. Activity may reflect ‘‘sound commercial practice’’ for a particular market or market participant but not for another. Similarly, activity may reflect ‘‘sound commercial practice’’ outside the spot month but not in the spot month. Further, activity with manipulative intent or effect, or that has the potential or effect of causing price distortion or disruption, would be inconsistent with ‘‘sound commercial practice,’’ even if common practice among market participants. While an exemption granted to an individual market participant may reflect ‘‘sound commercial practice’’ and may not ‘‘exceed an amount that may be established or liquidated in an orderly fashion in that market,’’ the Commission expects exchanges to also evaluate whether the granting of a particular exemption type to multiple participants could have a collective impact on the market in a manner inconsistent with ‘‘sound commercial practice’’ or in a manner that could result in a position that would ‘‘exceed an amount that may be established or liquidated in an orderly fashion in that market.’’ The Commission understands that the above-described parameters for exemptions from exchange-set limits are generally consistent with current industry practice among DCMs. Bearing in mind that proposed § 150.5(a) would apply to contracts subject to federal limits, the Commission proposes codifying such parameters, as they would establish important, minimum standards needed for exchanges to administer, and the Commission to oversee, a robust program for granting exemptions from exchange-set limits in a manner that does not undermine the federal limits framework. Proposed § 150.5(a) also would afford exchanges the ability to generally oversee their programs for granting exemptions from exchange limits as they see fit, including to establish different application processes and requirements to accommodate the unique characteristics of different contracts. If adopted, changes proposed herein may result in certain ‘‘pre-existing positions’’ being subject to speculative position limits even though the position predated the adoption of such limits.312 So as not to undermine the federal position limits framework during the spot month, and to minimize disruption outside the spot month, the Commission proposes § 150.5(a)(3), which would require that during the spot month, for contracts subject to federal limits, exchanges must impose limits no larger than federal levels on ‘‘pre-existing positions,’’ other than for
pre-enactment swaps and transition period swaps. However, outside the spot month, exchanges would not be required to impose limits on such positions, provided the position is acquired in good faith consistent with the ‘‘preexisting position’’ definition of proposed § 150.1, and provided further that if the person’s position is increased after the effective date of the limit, such pre-existing position, other than preenactment swaps and transition period swaps, along with the position increased after the effective date, would be attributed to the person. This provision is consistent with the proposed treatment of pre-existing positions for purposes of federal limits set forth in proposed § 150.2(g) and is intended to prevent spot month limits from being rendered ineffective. Not subjecting pre-existing positions to spot month limits could result in a large, pre-existing position either intentionally or unintentionally causing a disruption as it is rolled into the spot month, and the Commission is particularly concerned about protecting the spot month in physical-delivery futures from corners and squeezes. Outside of the spot month, however, concerns over corners and squeezes may be less acute.313 Finally, the Commission seeks a balance between having sufficient information to oversee the exchangegranted exemptions, and not burdening exchanges with excessive periodic reporting requirements. The Commission thus proposes under § 150.5(a)(4) to require one monthly report by each exchange. Certain exchanges already voluntarily file these types of monthly reports with the Commission, and proposed § 150.5(a)(4) would standardize such reports for all exchanges that process applications for bona fide hedges, spread exemptions, and other exemptions for contracts that are subject to federal limits. The proposed report would provide information regarding the disposition of any application to recognize a position as a bona fide hedge (both enumerated and non-enumerated) or to grant a spread or other exemption, including any renewal, revocation of, or modification to the terms and conditions of, a prior recognition or exemption.314 As specified under proposed § 150.5(a)(4), the report would provide certain details regarding the bona fide hedging position or spread exemption, including: The effective date and expiration date of any recognition or exemption; any unique identifier assigned to track the application or position; identifying information about the applicant; the derivative contract or positions to which the application pertains; the maximum size of the commodity derivative position that is recognized or exempted by the exchange (including any ‘‘walk-down’’ requirements); 315 any size limitations the exchange sets for the position; and a brief narrative summarizing the applicant’s relevant cash market activity.

316The Commission would provide such form and manner instructions on the Forms and Submissions page at www.cftc.gov. Such instructions would likely be published in the form of a technical guidebook. 317See infra Section III.F. 318See supra Section II.B.2. (discussion of proposed § 150.2). 319 Guidance for calculating deliverable supply can be found in Appendix C to part 38. 17 CFR part 38, Appendix C. With respect to any unique identifiers to be included in the proposed monthly report, the exchange’s assignment of a unique identifier would assist the Commission’s tracking process. The unique identifier could apply to each of the bona fide hedge or spread exemption applications that the exchange receives, and, separately, each type of commodity derivative position that the exchange wishes to recognize as a bona fide hedge or spread exemption. Accordingly, the Commission suggests that, as a ‘‘best practice,’’ the exchange’s procedures for processing bona fide hedging position and spread exemption applications contemplate the assignment of such unique identifiers. The proposed report would also be required to specify the maximum size and/or size limitations by contract month and/or type of limit (e.g., spot month, single month, or all-monthscombined), as applicable. The proposed monthly report would be a critical element of the Commission’s surveillance program by facilitating its ability to track bona fide hedging positions and spread exemptions approved by exchanges. The proposed monthly report would also keep the Commission informed as to the manner in which an exchange is administering its application procedures, the exchange’s rationale for permitting large positions, and relevant cash market activity. The Commission expects that exchanges would be able to leverage their current exemption processes and recordkeeping procedures to generate such reports. In certain instances, information included in the proposed monthly report may prompt the Commission to request records required to be maintained by an exchange. For example, the Commission proposes that, for each derivative position that an exchange wishes to recognize as a bona fide hedge, or any revocation or modification of such recognition or exemption, the report would include a concise summary of the applicant’s activity in the cash markets and swaps markets for the commodity underlying the position. The Commission expects that this summary would focus on the facts and circumstances upon which an exchange based its determination to recognize a bona fide hedge, to grant a spread exemption, or to revoke or modify such recognition or exemption. In light of the information provided in the summary, or any other information included in the proposed monthly report regarding the position, the Commission may request the exchange’s complete record of the application. The Commission expects that it would only need to request such complete records in the event that it noticed an issue that could cause
market disruptions. Proposed § 150.5(a)(4) would require an exchange, unless instructed otherwise by the Commission, to submit such monthly reports according to the form and manner requirements the Commission specifies. In order to facilitate the processing of such reports, and the analysis of the information contained therein, the Commission would establish reporting and transmission standards. The proposal would also require that such reports be submitted to the Commission using an electronic data format, coding structure, and electronic data transmission procedures approved in writing by the Commission, as specified on its website.316 Request for Comment The Commission requests comment on all aspects of proposed § 150.5(a). The Commission also invites comments on the following:
(34) The Commission has proposed that exchanges submit monthly reports under § 150.5(a)(4). Do exchanges prefer that the Commission specify a particular day each month as a deadline for submitting such monthly reports or do exchanges prefer to have discretion in determining which day to submit such reports? b. Proposed § 150.5(b)—Requirements and Acceptable Practices for ExchangeSet Limits on Commodity Derivative Contracts in a Physical Commodity That Are Not Subject to the Limits Set Forth in § 150.2 As described elsewhere in this release, the Commission is proposing federal speculative limits on 25 core referenced futures contracts and their respective referenced contracts.317 DCMs, and, ultimately, SEFs, listing physical commodity contracts for which federal limits do not apply would have to comply with proposed § 150.5(b), which includes a combination of rules and references to acceptable practices. Under proposed § 150.5(b), for physical commodity derivatives that are not subject to federal limits, whether cash-settled or physically-settled, exchanges would be subject to flexible standards during the product’s spot month and non-spot month. During the spot month, under proposed § 150.5(b)(1)(i), exchanges would be required to establish position limits, and such limits would have to be set at a level that is no greater than 25 percent of deliverable supply. As described in detail in connection with the proposed federal spot month limits described above, it would be difficult, in the absence of other factors, for a participant to corner or squeeze a market if the participant holds less than or equal to 25 percent of deliverable supply, and the Commission has long used deliverable supply as the basis for spot month position limits due to concerns regarding corners, squeezes, and other settlement-period manipulative activity.318 The Commission recognizes, however, that there may be circumstances where an exchange may not wish to use the 25 percent formula, including, for example, if the contract is cash-settled, does not have a measurable deliverable supply, or if the exchange can demonstrate that a different parameter is better suited for a particular contract or market.319 Accordingly, the proposal would afford exchanges the ability to submit to the Commission alternative potential methodologies for calculating spot month limit levels required by proposed § 150.5(b)(1), provided that the limits are set 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.’’ This standard has appeared in existing § 150.5 since its adoption in connection with spot month limits on cash-settled contracts. As noted above, existing § 150.5 includes separate parameters for spot month limits in physical-delivery contracts and for cashsettled contracts, but does not include flexibility for exchanges to consider alternative parameters. In
an effort to both simplify the regulation and provide the ability for exchanges to consider multiple parameters that may be better suited for certain products, the Commission proposes the above standard as a principles-based requirement for both cash-settled and physically-settled contracts subject to proposed § 150.5(b). Outside of the spot month, where, historically, attempts at certain types of market manipulation are generally less of a concern, proposed § 150.5(b)(2)(i) would allow exchanges to choose between position limits or position accountability for physical commodity

320The acceptable practices proposed in
Appendix F to part 150 herein reflect non-exclusive
methods of compliance. Accordingly, the language of this proposed acceptable practice, along with the other acceptable practices proposed herein, uses the word ‘‘shall’’ not to indicate that the acceptable practice is a required method of compliance, but rather to indicate that in order to satisfy the acceptable practice, a market participant must (i.e., shall) establish compliance with that particular acceptable practice. 321For example, if speculative traders in a particular contract typically make up 12 percent of open interest in that contract, the exchange could set limit levels no greater than 12 percent of open interest. 322For exchanges that choose to adopt a non-spot month limit level of 5,000 contracts, this level assumes that the notional quantity per contract is set at a level that reflects the size of a typical cash market transaction in the underlying commodity. However, if the notional quantity of the contract is larger/smaller than the typical cash market transaction in the underlying commodity, then the DCM must reduce/increase the 5,000 contract nonspot month limit until it is proportional to the notional quantity of the contract relative to the typical cash market transaction. These required adjustments to the 5,000 contract metric are intended to avoid a circumstance where an exchange could allow excessive speculation by setting excessively large notional quantities relative to typical cash-market transaction sizes. For example, if the notional quantity per contract is set at 30,000 units, and the typical observed cash market transaction is 2,500 units, the notional quantity per contract would be 12 times larger than the typical cash market transaction. In that case, the non-spot month limit would need to be 12 times smaller than 5,000 (i.e., at 417 contracts.). Similarly, if the notional quantity per contract is 1,000 contracts, and the typical observed cash market transaction is 2,500 units, the notional quantity per contract would be 2.5 times smaller than the typical cash market transaction. In that case, the non-spot month limit would need to be 2.5 times larger than 5,000, and would need to be set at 12,500 contracts. 323 In connection with the proposed Appendix F to part 150 acceptable practices, open interest should be calculated by averaging the month-end open positions in a futures contract and its related option contract, on a delta-adjusted basis, for all months listed during the most recent calendar year. 324 17 CFR 150.5(b) and (c). Proposed § 150.5(b) would address physical commodity contracts that are not subject to federal limits. 325While existing § 150.5(e) includes openinterest and volume-based limitations on the use of accountability, the Commission opts not to include such limitations in this proposal. Under the rules proposed herein, if an exchange submitted a part 40 filing seeking to adopt position accountability, the Commission would determine on a case-by-case basis whether such rules are
consistent with the Act and the Commission’s regulations. The Commission does not want to use one-size-fits-all volume-based limitations for making such determinations. contracts that are not subject to federal limits. While exchanges would be provided the ability to decide whether to use limit levels or accountability levels for any such contract, under either approach, the exchange would have to set 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.’’ To help exchanges efficiently demonstrate compliance with this standard for physical commodity contracts outside of the spot month, the Commission proposes separate acceptable practices for exchanges that wish to adopt non-spot month position limits and exchanges that wish to adopt non-spot month accountability.320 For exchanges that choose to adopt non-spot month position limits, rather than position accountability, proposed paragraph (a)(1) to Appendix F of part 150 would set forth non-exclusive acceptable practices. Under that provision, exchanges would be deemed in compliance with proposed § 150.5(b)(2)(i) if they set non-spot limit levels for each contract subject to § 150.5(b) at a level no greater than: (1) The average of historical position sizes held by speculative traders in the contract as a percentage of the contract’s open interest; 321 (2) the spot month limit level for the contract; (3) 5,000 contracts (scaled up proportionally to the ratio of the notional quantity per contract to the typical cash market transaction if the notional quantity per contract is smaller than the typical cash market transaction, or scaled down proportionally if the notional quantity per contract is larger than the typical cash market transaction); 322 or (4) 10 percent of open interest in that contract for the most recent calendar year up to 50,000 contracts, with a marginal increase of 2.5 percent of open interest thereafter.323 When evaluating average position sizes held by speculative traders, the Commission expects exchanges: (i) To be cognizant of speculative positions that are extraordinarily large relative to other speculative positions, and (ii) to not consider any such outliers in their calculations. These proposed parameters have largely appeared in existing § 150.5 for many years in connection with non-spot month limits, either for initial or subsequent levels.324 The Commission is of the view that these parameters would be useful, flexible standards to carry forward as acceptable practices. For example, the Commission expects that the 5,000-contract acceptable practice would be a useful benchmark for exchanges because it would allow them to establish limits and demonstrate compliance with Commission regulations in a relatively efficient manner, particularly for new contracts that have yet to establish open interest. Similarly, for purposes of exchange-set limits on
physical commodity contracts that are not subject to federal limits, the Commission proposes to maintain the baseline 10,
2.5 percent formula as an acceptable
practice. Because these parameters are simply acceptable practices, exchanges may, after evaluation, propose higher non-spot month limits or accountability levels. Along those lines, the Commission recognizes that other parameters may be preferable and/or just as effective, and would be open to considering alternative parameters submitted pursuant to part 40 of the Commission’s regulations, provided, at a minimum, that the parameter complies with § 150.5(b)(2)(i). The Commission encourages exchanges to submit potential new parameters to Commission staff in draft form prior to submitting them under part 40. For exchanges that choose to adopt position accountability, rather than limits, outside of the spot month, proposed paragraph (a)(2) of Appendix F to part 150 would set forth a nonexclusive acceptable practice that would permit exchanges to comply with proposed § 150.5(b)(2)(i) by adopting rules establishing ‘‘position accountability’’ as defined in proposed § 150.1. ‘‘Position accountability’’ would mean rules, submitted to the Commission pursuant to part 40, that require traders to, upon request by the exchange, consent to: (i) Provide information to the exchange about their position, including, but not limited to, information about the nature of the their positions, trading strategies, and hedging information; and (ii) halt further increases to their position or to reduce their position in an orderly manner.325 Proposed § 150.5(b)(3) addresses a circumstance where multiple exchanges list contracts that are substantially the same, including physically-settled contracts that have the same underlying commodity and delivery location, or cash-settled contracts that are directly or indirectly linked to a physically-settled contract. Under proposed § 150.5(b)(3), exchanges listing contracts that are substantially the same in this manner must either adopt ‘‘comparable’’ limits for such contracts, or demonstrate to the Commission how the non-comparable levels comply with the standards set forth in proposed § 150.5(b)(1) and (2). Such a determination also must address how 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. Proposed § 150.5(b)(3) would apply equally to cash-settled and physicallysettled contracts, and to limits during and outside of the spot month, as

326For reasons discussed elsewhere in this release, this provision would not apply to natural gas contracts. See supra Section II.C.2.e. (discussion of proposed conditional spot month exemption in natural gas). 327See supra Section II.A.16. (discussion of the proposed referenced contract definition and linked contracts). 328The Commission understands an intramarket spread position to be a long position in one or more commodity derivative contracts in a particular commodity, or its products or its by-products, and a short position in one or more commodity derivative contracts in the same, or similar, commodity, or its products or by-products, on the same DCM. The Commission understands an intermarket spread position to be a long (or short) position in one or more commodity derivative contracts in a particular commodity, or its products or its by-products, at a particular DCM and a short (or long) position in one or more commodity derivative contracts in that same, or similar, commodity, or its products or its by-products, away from that particular DCM. For instance, the Commission would consider a spread between CBOT Wheat (W) futures and MGEX HRS Wheat (MWE) futures to be an intermarket spread based on the similarity of the commodities. 329As noted above, proposed § 150.3 would allow for several exemption types, including: Bona fide hedging positions; certain spreads; financial distress positions; and conditional spot month limit exemption positions in natural gas. 330See Position Limits and Position Accountability for Security Futures Products, 83 FR at 36799, 36802 (July 31, 2018). 331 Id. See also Listing Standards and Conditions for Trading Security Futures Products, 66 FR at 55078, 55082 (Nov. 1, 2001) (explaining the Commission’s adoption of position limits for security futures products). 332See 83 FR at 36799, 36802 (July 31, 2018). 333See Position Limits and Position Accountability for Security Futures Products, 84 FR at 51005, 51009 (Sept. 27, 2019). 334See 17 CFR 41.25. Rule § 41.25 establishes conditions for the trading of security futures products. 335Under § 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 percent or greater ownership interest. Commission Regulation § 150.4(b) sets forth several permissible exemptions from aggregation. See Final Aggregation Rulemaking, 81 FR at 91454. 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. applicable.326 Proposed § 150.5(b)(3) is intended to help ensure that position limits established on one exchange would not jeopardize market integrity or otherwise harm other markets. Further, proposed § 150.5(b)(3) would be consistent with the Commission’s proposal to generally apply equivalent
federal limits to linked contracts, including linked contracts listed on multiple exchanges.327 Finally, under proposed § 150.5(b)(4), exchanges would be permitted to grant exemptions from any limits established under proposed § 150.5(b). As noted, proposed § 150.5(b) would apply to physical commodity contracts not subject to federal limits; thus, exchanges would be given flexibility to grant exemptions in such contracts, including exemptions for both intramarket and intermarket spread positions,328 as well as other exemption types not explicitly listed in proposed § 150.3.329 However, such exchanges must require that traders apply for the exemption. In considering any such application, the exchanges would be required to take into account whether the exemption would result in a position that would not be in accord with ‘‘sound commercial practices’’ in the market for which the exchange is considering the application, and/or would ‘‘exceed an amount that may be established and liquidated in an orderly fashion in that market.’’ While exchanges would be subject to the requirements of § 150.5(a) and (b) described above, such proposed requirements are not intended to limit the discretion of exchanges to utilize other tools to protect their markets. Among other things, an exchange would have the discretion to: impose additional restrictions on a person with a long position in the spot month of a physical-delivery contract who stands for delivery, takes that delivery, then reestablishes a long position; establish limits on the amount of delivery instruments that a person may hold in a physical-delivery contract; and impose such other restrictions as it deems necessary to reduce the potential threat of market manipulation or congestion, to maintain orderly execution of transactions, or for such other purposes consistent with its responsibilities.
c. Proposed § 150.5(c)—Requirements
for Security Futures Products As the Commission has previously noted, security futures products and security options may serve economically equivalent or similar functions to one another.330 Therefore, when the Commission originally adopted position limits regulations for security futures products in part 41, it set levels that were generally comparable to, although not identical with, the limits that applied to options on individual securities.331 The Commission has pointed out that security futures products may be at a competitive disadvantage if position limits for security futures products vary too much from those of security options.332 As a result, the Commission in 2019 adopted amendments to the position limitations and accountability requirements for security futures products, noting that one goal was to provide a level regulatory playing field with security options.333 Proposed § 150.5(c), therefore, would include a cross-reference clarifying that for security futures products, position limitations and accountability requirements for exchanges are specified in § 41.25.334 This would allow the Commission to take into account the position limits regime that applies to security options when considering position limits regulations for security futures products. d. Proposed § 150.5(d)—Rules on Aggregation As noted earlier in this release, the Commission adopted in 2016 final aggregation rules under § 150.4 that apply to all contracts subject to federal limits. The Commission recognizes that with respect to contracts not subject to federal limits, market participants may find it burdensome if different exchanges adopt different aggregation standards. Accordingly, under proposed § 150.5(d), all DCMs, and, ultimately, SEFs, that list any physical commodity derivatives, regardless of whether the contract is subject to federal limits, would be required to adopt aggregation rules for such contracts that conform to § 150.4.335 Exchanges that list excluded commodities would be encouraged to also adopt aggregation rules that conform to § 150.4. Aggregation policies that otherwise vary from exchange to exchange would increase the administrative burden on a trader active on multiple exchanges, as well as increase the administrative burden on the Commission in monitoring and enforcing exchange-set position limits. e. Proposed § 150.5(e)—Requirements for Submissions to the Commission Proposed § 150.5(e) reflects that, consistent with the definition of ‘‘rule’’ in existing § 40.1, any exchange action establishing or modifying exchange-set position limits or exemptions therefrom, or position accountability, in any case pursuant to proposed § 150.5(a), (b), (c), or Appendix F to part 150, would qualify as a ‘‘rule’’ and must be submitted to the Commission as such pursuant to part 40 of the Commission’s regulations. Such rules would also include, among other things, parameters used for determining position limit levels, and policies and related processes
setting forth parameters addressing, among other things, which types of exemptions are permitted, the parameters for the granting of such exemptions, and any exemption application requirements.

336An acceptable, regular review regime would consist of both a periodic review and an eventspecific review (e.g., in the event of supply and demand shocks such as unanticipated shocks to supply and demand of the underlying commodity, geo-political shocks, and other events that may result in congestion and/or other disruptions). The Commission also expects that exchanges would reevaluate such levels in the event of unanticipated shocks to the supply or demand of the underlying commodity. 337See Futures Trading Act of 1982, Public Law 97–444, 96 Stat. 2299–30 (1983). 338See CFTC Reauthorization Act of 2008, Food, Conservation and Energy Act of 2008, Public Law 110–246, 122 Stat. 1624 (June 18, 2008) (also known as the ‘‘Farm Bill’’) (amending CEA section 4a(e), among other things, to assure that a violation of position limits, regardless of whether such position limits have been approved by or certified to the Commission, would constitute a violation of the Act that the Commission could independently enforce). See also Federal Speculative Position Limits for Referenced Energy Contracts and Associated Regulations, 75 FR at 4144, 4145 (Jan. 26, 2010) (summarizing the history of the Commission’s authority to directly enforce violations of exchangeset speculative position limits). 339 17 CFR 150.6. Proposed § 150.5(e) further provides that exchanges would be required to review regularly 336 any position limit levels established under proposed § 150.5 to ensure the level continues to comply with the requirements of those sections. For example, in the case of § 150.5(b), exchanges would be expected to ensure the limits comply with the requirement that limits be set ‘‘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.’’ Exchanges would also be required to update such levels as needed, including if the levels no longer comply with the proposed rules. f. Delegation of Authority to the Director of the Division of Market Oversight The Commission proposes to delegate its authority, pursuant to proposed § 150.5(a)(4)(ii), to the Director of the Commission’s Division of Market Oversight, or such other employee(s) that the Director may designate from time to time, to provide instructions regarding the submission of information required to be reported by exchanges to the Commission on a monthly basis, and to determine the manner, format, coding structure, and electronic data transmission procedures for submitting such information. g. Commission Enforcement of Exchange-Set Limits As discussed throughout this release, the framework for exchange-set limits operates in conjunction with the federal position limits framework. The Futures Trading Act of 1982 gave the Commission, under CEA section 4a(5) (since re-designated as section 4a(e)), the authority to directly enforce violations of exchange-set, Commissionapproved speculative
position limits in addition to position limits established directly by the Commission.337 Since 2008, it has also been a violation of the Act for any person to violate an exchange position limit rule certified to the Commission by such exchange pursuant to CEA section 5c(c)(1).338 Thus, under CEA section 4a(e), it is a violation of the Act for any person to violate an exchange position limit rule certified to or approved by the Commission, including to violate any subsequent amendments thereto, and the Commission has the authority to enforce those violations. h. Request for Comment The Commission requests comment on all aspects of proposed § 150.5. E. § 150.6—Scope Existing § 150.6 provides that nothing in this part shall be construed to affect any provisions of the Act relating to manipulation or corners nor to relieve any contract market or its governing board from responsibility under section 5(4) of the Act to prevent manipulation and corners.339 Position limits are meant to diminish, eliminate, or prevent excessive speculation and deter and prevent market manipulation, squeezes, and corners. The Commission stresses that nothing in the proposed revisions to
part 150 would impact the antidisruptive, anti-cornering, and antimanipulation provisions of the Act and
Commission regulations, including but not limited to CEA sections 6(c) or 9(a)(2) regarding manipulation, section 4c(a)(5) regarding disruptive practices including spoofing, or sections 180.1 and 180.2 of the Commission’s regulations regarding manipulative and deceptive practices. It may be possible for a trader to manipulate or attempt to manipulate the prices of futures contracts or the underlying commodity with a position that is within the federal position limits. It may also be possible for a trader holding a bona fide hedge recognition from the Commission or an exchange to manipulate or attempt to manipulate the markets. The Commission would not consider it a defense to a charge under the antimanipulation provisions of the Act or the regulations that a trader’s position was within position limits. Like existing § 150.6, proposed § 150.6 is intended to make clear that fulfillment of specific part 150 requirements alone does not necessarily satisfy other obligations of an exchange. Proposed § 150.6 would provide that
part 150 of the Commission’s
regulations shall only be construed as having an effect on position limits set by the Commission or an exchange including any associated recordkeeping and reporting requirements. Proposed § 150.6 would provide further that nothing in part 150 shall affect any other provisions of the Act or Commission regulations including those relating to actual or attempted manipulation, corners, squeezes, fraudulent or deceptive conduct, or to prohibited transactions. For example, proposed § 150.5 would require DCMs, and, ultimately, SEFs, to impose and enforce exchange-set speculative position limits. The fulfillment of the requirements of § 150.5 alone would not satisfy any other legal obligations under the Act or Commission regulations applicable to exchanges to prevent manipulation and corners. Likewise, a market participant’s compliance with position limits or an exemption thereto does not confer any type of safe harbor or good faith defense to a claim that the participant had engaged in an attempted or perfected manipulation. Further, the proposed amendments are intended to help clarify that § 150.6 applies to: Regulations related to position limits found outside of part 150 of the Commission’s regulations (e.g., relevant sections of part 1 and part 19); and recordkeeping and reporting regulations associated with speculative position limits. F. § 150.8—Severability The Commission proposes to add new § 150.8 to provide for the severability of individual provisions of part 150. Should any provision(s) of part 150 be declared invalid, including the application thereof to any person or circumstance, § 150.8 would provide that all remaining provisions of part 150 shall not be affected to the extent that such remaining provisions, or the application thereof, can be given effect without the invalid provisions. G. § 150.9—Process for Recognizing Non-Enumerated Bona Fide Hedging Transactions or Positions With Respect to Federal Speculative Position Limits

Background and Overview
For the nine legacy agricultural contracts currently subject to federal position limits, the Commission’s current processes for recognizing nonenumerated bona fide hedge positions and certain enumerated anticipatory bona fide hedge positions exist in

340Alternatively, under the proposed framework, a trader could submit a request directly to the Commission pursuant to proposed § 150.3(b). A trader that submitted such a request directly to the Commission for purposes of federal limits would have to separately request an exemption from the applicable exchange for purposes of exchange-set limits. As discussed earlier in this release, the Commission proposes to separately allow for enumerated hedges and spreads that meet the ‘‘spread transaction’’ definition to be selfeffectuating. See supra Section II.C.2. (discussion of proposed § 150.3). 341 In particular, the Commission recognizes that, in the energy and metals spaces, market participants are familiar with exchange application processes and are not familiar with the Commission’s processes since, currently, there are no federal position limits for those commodities. 342See 7 U.S.C. 6a(c) and 17 CFR 1.3, 1.47, and 1.48. 343 7 U.S.C. 6a(c)(1). 344As described above, the Commission proposes to move an amended version of the bona fide hedging definition from § 1.3 to § 150.1. See supra
Section II.A. (discussion of proposed § 150.1).
345As described below, the Commission proposes to eliminate Form 204 and to rely instead on the cash-market information submitted to exchanges pursuant to proposed §§ 150.5 and 150.9. See infra
Section II.H.3. (discussion of proposed amendments
to part 19).
346Exchange 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. 347 7 U.S.C. 7(d)(5). 348 17 CFR 150.5(d). 349See, e.g., CME Rule 559 and ICE Rule 6.29 (addressing position limits and exemptions). parallel with exchange processes for granting exemptions from exchange-set limits, as described below. The exchange processes for granting exemptions vary by exchange, and generally do not mirror the Commission’s processes. Thus, when requesting certain bona fide hedging position recognitions that are not selfeffectuating, market participants must currently comply with the exchanges’ processes for exchange-set limits and the Commission’s processes for federal limits. Although this disparity is currently only an issue for the nine agricultural futures contracts subject to both federal and exchange-set limits, the parallel approaches may become more inefficient and burdensome once the Commission adopts limits on additional commodities. Accordingly, the Commission is proposing § 150.9 to establish a separate framework, applicable to proposed referenced contracts in all commodities, whereby a market participant who is seeking a bona fide hedge recognition that is not enumerated in proposed
Appendix A can file one application
with an exchange to receive a bona fide hedging recognition for purposes of both exchange-set limits and for federal limits.340 Given the proposal to significantly expand the list of enumerated hedges, the Commission expects the use of the proposed § 150.9 non-enumerated process described below would be rare and exceptional. This separate framework would be independent of, and serve as an alternative to, the Commission’s process for reviewing exemption requests under proposed § 150.3. Among other things, proposed § 150.9 would help to streamline the process by which nonenumerated bona fide hedge recognition requests are addressed, minimize disruptions by leveraging existing exchange-level processes with which many market participants are already familiar,341 and reduce inefficiencies created when market participants are required to comply with different federal and exchange-level processes. For instance, currently, market participants seeking recognitions of non-enumerated bona fide hedges for the nine legacy agricultural commodities must request recognitions from both the Commission under existing § 1.47, and from the relevant exchange. If the recognition is for an ‘‘enumerated’’ hedge under existing § 1.3 (other than anticipatory enumerated hedges), the market participant would not need to file an application with the Commission (as the enumerated hedge has a self-effectuating recognition for purposes of federal limits). If the exemption is for a ‘‘nonenumerated’’ hedge or certain enumerated anticipatory hedges under existing § 1.3, the market participant would need to file an application with the Commission pursuant to §§ 1.47 or 1.48, respectively. In either case, the market participant would also still need to seek an exchange exemption and file a Form 204/304 on a monthly basis with the Commission. As discussed more fully in this section, with respect to bona fide hedges that are not selfeffectuating for purposes of federal limits, proposed § 150.9 would permit such a market participant to file a single application with the exchange and relieve the market participant from having to separately file an application and/or monthly cash-market reporting information with the Commission. The existing Commission and exchange level approaches are described in more detail below, followed by a more detailed discussion of proposed § 150.9.
2. Existing Approaches for Recognizing
Bona Fide Hedges
The Commission’s authority and existing processes for recognizing bona fide hedges can be found in section 4a(c) of the Act, and §§ 1.3, 1.47, and
1.48 of the Commission’s regulations.342
In particular, CEA section 4a(c)(1) provides that no CFTC rule issued under CEA section 4a(a) applies to ‘‘transactions or positions which are shown to be bona fide hedging transactions or positions.’’ 343 Further, under the existing definition of ‘‘bona fide hedging transactions and positions’’ in § 1.3,344 paragraph (1) provides the Commission’s general definition of bona fide hedging transactions or positions; paragraph (2) provides a list of enumerated bona fide hedging positions that, generally, are self-effectuating, and must be reported (along with supporting cash-market information) to the Commission monthly on Form 204 after the positions are taken; 345 and paragraph (3) provides a procedure for market participants to seek recognition from the Commission for nonenumerated bona fide hedging positions. Under paragraph (3), any person that seeks Commission recognition of a position as a nonenumerated bona fide hedge must submit an application to the Commission in advance of taking on the position, and pursuant to the processes found in § 1.47 (30 days in advance for non-enumerated bona fide hedges) or § 1.48 (10 days in advance for enumerated anticipatory hedges), as applicable. b. Exchanges’ Existing Approach for Granting Bona Fide Hedge Exemptions 346 With Respect to Exchange-Set Limits Under DCM Core Principle 5,347 DCMs have, for some time, established exchange-set limits for futures contracts that are subject to federal limits, as well as for contracts that are not. In addition, under existing § 150.5(d), DCMs may grant exemptions to exchange-set position limits for positions that meet the Commission’s general definition of bona fide hedging transactions or positions as defined in paragraph (1) of § 1.3.348 As such, with respect to exchange-set limits, exchanges have adopted processes for handling trader requests for bona fide hedging exemptions, and generally have granted such requests pursuant to exchange rules that incorporate the Commission’s existing general definition of bona fide hedging transactions or positions in paragraph (1) of § 1.3.349 Accordingly, DCMs currently have rules and application forms in place to process applications to exempt bona fide

350 Id.
351 7 U.S.C. 7b–3(f)(6). The Commission codified Core Principle 6 under § 37.600. 17 CFR 37.600. 352 Id. 353 17 CFR 37.601. Under Appendix B to part 37, for Required Transactions, as defined in § 37.9, SEFs may demonstrate compliance with SEF Core Principle 6 by setting and enforcing position limits or position accountability levels only with respect to trading on the SEF’s own market. For Permitted Transactions, as defined in § 37.9, SEFs may demonstrate compliance with SEF Core Principle 6 by setting and enforcing position accountability levels or by sending the Commission a list of Permitted Transactions traded on the SEF. 354 Id. 355Proposed § 150.9(a)(5) of the 2016 Reproposal provided that an applicant’s derivatives position shall be deemed to be recognized as a nonenumerated bona fide hedging position exempt from federal position limits at the time that a designated contract market or swap execution facility notifies an applicant that such designated contract market or swap execution facility will recognize such position as a non-enumerated bona fide hedging position. 356 In U.S. Telecom Ass’n v. FCC, the D.C. Circuit held ‘‘that, while federal agency officials may subdelegate their decision-making authority to subordinates absent evidence of contrary congressional intent, they may not subdelegate to outside entities—private or sovereign—absent affirmative evidence of authority to do so.’’ U.S. Telecom Ass’n v. FCC, 359 F.3d 554, 565–68 (D.C. Cir. 2004) (citing Shook v. District of Columbia Fin. Responsibility & Mgmt. Assistance Auth., 132 F.3d 775, 783–84 & n. 6 (D.C. Cir.1998); Nat’l Ass’n of Reg. Util. Comm’rs (‘‘NARUC’’) v. FCC, 737 F.2d 1095, 1143–44 & n. 41 (D.C. Cir.1984); Nat’l Park and Conservation Ass’n v. Stanton, 54 F.Supp.2d 7, 18–20 (D.D.C.1999). Nevertheless, the D.C. Circuit recognized three circumstances that the agency may ‘‘delegate’’ its authority to an outside party because they do not involve subdelegation of decisionmaking authority: (1) Establishing a reasonable condition for granting federal approval; (2) fact gathering; and (3) advice giving. The first instance involves conditioning of obtaining a permit on the approval by an outside entity as an element of its Continued hedging positions with respect to exchange-set position limits.350 Separately, under SEF Core Principle 6, currently SEFs are required to adopt, as is necessary and appropriate, position limits or position accountability levels for each swap contract to reduce the potential threat of market manipulation or congestion.351 For contracts that are subject to a federal position limit, the SEF must set its position limits at a level that is no higher than the federal limit, and must monitor positions established on or through the SEF for compliance with both the Commission’s federal limit and the exchange-set limit.352 Section 37.601 further implements SEF Core Principle 6 and specifies that until such time that SEFs are required to comply with the
Commission’s position limits regulations, a SEF may refer to the associated guidance and/or acceptable practices set forth in Appendix B to part 37 of the Commission’s regulations.353 Currently, in practice, there are no federal position limits on swaps for which SEFs would be required to establish exchange-set limits. As noted above, the application processes currently used by exchanges are different than the Commission’s processes. In particular, exchanges typically use one application process to grant all exemption types, whereas the Commission has different processes for different exemptions, as explained below. Also, exchanges generally do not require the submission of monthly cashmarket information, whereas the Commission has various monthly reporting requirements under Form 204 and part 17 of the Commission’s regulations. Finally, exchanges generally require exemption applications to include cash-market information supporting positions that exceed the limits, to be filed annually prior to exceeding a position limit, and to be updated on an annual basis.354 The Commission, on the other hand, currently has different processes for permitting enumerated bona fide hedges and for recognizing positions as nonenumerated bona fide hedges. Generally, for bona fide hedges enumerated in paragraph (2) of the bona fide hedge definition in § 1.3, no formal process is required by the Commission. Instead, such enumerated bona fide hedge recognitions are self-effectuating and Commission staff reviews monthly reporting of cash-market positions on existing Form 204 and part 17 position data to monitor such positions. Recognition requests for nonenumerated bona fide hedging positions and for certain enumerated anticipatory bona fide hedge positions, as explained above, must be submitted to the Commission pursuant to the processes in existing §§ 1.47 and 1.48 of the regulations, as applicable.
3. Proposed § 150.9
Under the proposed procedural framework, an exchange’s determination to recognize a non-enumerated bona fide hedge in accordance with proposed § 150.9 with respect to exchange-set limits would serve to inform the Commission’s own decision as to whether to recognize the exchange’s determination for purposes of federal speculative position limits set forth in proposed § 150.2. Among other conditions, the exchange would be required to base its determination on standards that conform to the Commission’s own standards for recognizing bona fide hedges for purposes of federal position limits. Further, the exchange’s determination with respect to its own position limits and application process would be subject to Commission review and oversight. These requirements would facilitate Commission review and determinations by ensuring that any bona fide hedge recognized by an exchange for purposes of exchange-set limits and in accordance with proposed § 150.9 conforms to the Commission’s standards. For a given referenced contract, proposed § 150.9 would potentially allow a person to exceed federal position limits if the exchange listing the contract has recognized the position as a bona fide hedge with respect to exchange-set limits. Under this framework, the exchange would make such determination with respect to its own speculative position limits, set in accordance with proposed § 150.5(a), and, unless the Commission denies or stays the application within ten business days (or two business days for applications, including retroactive applications, filed due to sudden or unforeseen circumstances), the exemption would be deemed approved for purposes of federal positions limits. The exchange’s exemption would be valid only if the exchange meets the following additional conditions, each described in greater detail below: (1) The exchange maintains rules, approved by the Commission pursuant to § 40.5, that establish application processes for recognizing bona fide hedges in accordance with § 150.9; (2) the exchange meets specified prerequisites for granting such recognitions; (3) the exchange satisfies specified recordkeeping requirements; and (4) the exchange notifies the Commission and the applicant upon determining to recognize a bona fide hedging transaction or position. A person may exceed the applicable federal position limit ten business days (for new and annually renewed exemptions) or two business days (for applications, including retroactive applications, submitted due to sudden and unforeseen circumstances) after the exchange makes its determination, unless the Commission notifies the exchange and the applicant otherwise. The above-described elements of the proposed approach differ from the regulations proposed in the 2016 Reproposal, which did not require a 10- day Commission review period. The 2016 Reproposal allowed DCMs and SEFs to recognize non-enumerated bona fide hedges for purposes of federal position limits.355 However, the 2016 Reproposal may
not have conformed to the legal limits on what an agency may delegate to persons outside the agency.356 The 2016 Reproposal

decision process. The second provides the agency with nondiscretionary information gathering. The third allows a federal agency to turn to an outside entity for advice and policy recommendations, provided the agency makes the final decisions itself. Id. at 568. ‘‘An agency may not, however, merely ‘rubber-stamp’ decisions made by others under the guise of seeking their ‘advice,’ [ ], nor will vague or inadequate assertions of final reviewing authority save an unlawful subdelegation, [ ].’’ Id. 357The Commission finds that financial products are not substitutes for positions taken or to be taken in a physical marketing channel. Thus, the offset of financial risks arising from financial products would be inconsistent with the definition of bona fide hedging transactions or positions for physical commodities in proposed § 150.1. See supra Section II.A.1.c.ii.(1) (discussion of the temporary substitute test and risk-management exemptions). delegated to the DCMs and SEFs a significant component of the Commission’s authority to recognize bona fide hedges for purposes of federal position limits. Under that proposal, the Commission did not have a substantial role in reviewing the DCMs’ or SEFs’ recognitions of non-enumerated bona fide hedges for purposes of federal position limits. Upon further reflection, the Commission believes that the 2016 Reproposal may not have retained enough authority with the Commission under case law on sub-delegation of agency decision making authority. Under the new proposed model, the Commission would be informed by the exchanges’ determinations to make the Commission’s own determination for purposes of federal position limits within a 10-day review period. Accordingly, the Commission would retain its decision-making authority with respect to the federal position limits and provide legal certainty to market participants of their determinations. Both DCMs and SEFs would be eligible to allow traders to utilize the processes set forth under proposed § 150.9. However, as a practical matter, the Commission expects that upon implementation of § 150.9, the process proposed therein will likely be used primarily by DCMs, rather than by SEFs, given that most economically equivalent swaps that would be subject to federal position limits are expected to be traded OTC and not executed on SEFs. The Commission emphasizes that proposed § 150.9 is intended to serve as a separate, self-contained process that is related to, but independent of, the proposed regulations governing: (1) The process in proposed § 150.3 for traders to apply directly to the Commission for a bona fide hedge recognition; and (2) exchange processes for establishing exchange-set limits and granting exemptions therefrom in proposed § 150.5. Proposed § 150.9 is intended to serve as a voluntary process exchanges can implement to provide additional flexibility for their market participants seeking non-enumerated bona fide hedges to file one application with an exchange to
receive a recognition or exemption for purposes of both exchange-set limits and for federal limits. Proposed § 150.9 is discussed in greater detail below. Request for Comment The Commission requests comment on all aspects of proposed § 150.9. The Commission also invites comments on the following:
(35) Considering that the Commission’s proposed position limits would apply to OTC economically equivalent swaps, should the Commission develop a mechanism for exchanges to be involved in the review of non-enumerated bona fide hedge applications for OTC economically equivalent swaps? (36) If so, what, if any, role should exchanges play in the review of nonenumerated bona fide hedge applications for OTC economically equivalent swaps? a. Proposed § 150.9(a)—Approval of Rules Under proposed § 150.9(a), the exchange must have rules, adopted pursuant to the rule approval process in § 40.5 of the Commission’s regulations, establishing processes and standards in accordance with proposed § 150.9, described below. The Commission would review such rules to ensure that the exchange’s standards and processes for recognizing bona fide hedges from its own exchange-set limits conform to the Commission’s standards and processes for recognizing bona fide hedges from the federal limits. b. Proposed § 150.9(b)—Prerequisites for an Exchange To Recognize NonEnumerated Bona Fide Hedges in Accordance With This Section This section sets forth conditions that would require an exchange-recognized bona fide hedge to conform to the corresponding definitions or standards the Commission uses in proposed §§ 150.1 and 150.3 for purposes of the federal position limits regime. An exchange would be required to meet the following prerequisites with respect to recognizing bona fide hedging positions under proposed § 150.9(b): (i) The exchange lists the applicable referenced contract for trading; (ii) the position is consistent with both the definition of bona fide hedging transaction or position in proposed § 150.1 and section 4a(c)(2) of the Act; and (iii) the exchange does not recognize as bona fide hedges any positions that include commodity index contracts and one or more referenced contracts, nor does the exchange grant risk management exemptions for such contracts.357 Request for Comment The Commission requests comment on all aspects of proposed § 150.9. The Commission also invites comments on the following:
(37) Does the proposed compliance date of twelve-months after publication of a final federal position limits rulemaking in the Federal Register provide a sufficient amount of time for exchanges to update their exemption application procedures, as needed, and begin reviewing exemption applications in accordance with proposed § 150.9? If not, please provide an alternative longer timeline and reasons supporting a longer timeline.
c. Proposed § 150.9(c)—Application
Process
Proposed § 150.9(c) sets forth the information and representations that the exchange, at a minimum, would be required to obtain from applicants as
part of the application process for
granting bona fide hedges. In this connection, exchanges may rely upon their existing application forms and processes in making such determinations, provided they collect the information outlined below. The Commission believes the information set forth below is sufficient for the exchange to determine, and the Commission to verify, whether a particular transaction or position satisfies the federal definition of bona fide hedging transaction for purposes of federal position limits.
i. Proposed § 150.9(c)(1)—Required
Information for Bona Fide Hedging Positions With respect to bona fide hedging positions in referenced contracts, proposed § 150.9(c)(1) would require that any application include: (i) A description of the position in the commodity derivative contract for which the application is submitted (which would include the name of the underlying commodity and the position size); (ii) information to demonstrate why the position satisfies section 4a(c)(2) of the Act and the definition of bona fide hedging transaction or position in proposed § 150.1, including factual and legal analysis; (iii) a

358The Commission would expect that exchanges would require applicants to provide cash market data for at least the prior year. 359Under proposed § 150.9(c)(1)(iv) and (v), exchanges, in their discretion, could request additional information as necessary, including information for cash market data similar to what is required in the Commission’s existing Form 204. See infra Section II.H.3. (discussion of Form 204 and proposed amendments to part 19). Exchanges could also request a description of any positions in other commodity derivative contracts in the same commodity underlying the commodity derivative contract for which the application is submitted. Other commodity derivatives contracts could include other futures, options, and swaps (including OTC swaps) positions held by the applicant. 360Requirements regarding the keeping and inspection of all books and records required to be kept by the Act or the Commission’s regulations are found at § 1.31, 17 CFR 1.31. DCMs are already required to maintain records of their business activities in accordance with the requirements of § 1.31 of § 38.951, 17 CFR 38.951. 361The Commission does not intend, in proposed § 150.9(d), to create any new obligation for an exchange to record conversations with applicants or their representatives; however, the Commission does expect that an exchange would preserve any written or electronic notes of verbal interactions with such parties. 362Consistent with existing § 1.31, the Commission expects that these records would be readily available during the first two years of the required five year recordkeeping period for paper records, and readily accessible for the entire fiveyear recordkeeping period for electronic records. In addition, the Commission expects that records required to be maintained by an exchange pursuant Continued statement concerning the maximum size of all gross positions in derivative contracts for which the application is submitted (in order to provide a view of the true footprint of the position in the market); (iv) information regarding the applicant’s activity in the cash markets for the commodity underlying the position for which the application is submitted; 358 and (v) any other information the exchange requires, in its discretion, to enable the exchange to determine, and the Commission to verify, whether such position should be recognized as a bona fide hedge.359 These proposed application requirements are similar to current requirements for recognizing a bona fide hedging position under existing §§ 1.47 and 1.48. Market participants have raised concerns that such requirements, even if administered by the exchanges, would require hedging entities to change internal books and records to track which category of bona fide hedge a position would fall under. The Commission notes that, as part of this current proposal, exchanges would not need to require the identification of a hedging need against a particular identified category. So long as the
requesting party satisfies all applicable requirements in proposed § 150.9, including demonstrating with a factual and legal analysis that a position would fit within the bona fide hedge definition, the Commission is not intending to require the hedging party’s books and records to identify the particular type of hedge being applied.
ii. Proposed § 150.9(c)(2)—Timing of
Application
The Commission does not propose to prescribe timelines (e.g., a specified number of days) for exchanges to review applications because the Commission believes that exchanges are in the best position to determine how to best accommodate the needs of their market participants. Rather, under proposed § 150.9(c)(2), the exchange must separately require that applicants submit their application in advance of exceeding the applicable federal position limit for any given referenced contract. However, an exchange may adopt rules that allow a person to submit a bona fide hedge application within five days after the person has exceeded federal speculative limits if such person exceeds the limits due to sudden or unforeseen increases in its bona fide hedging needs. Where an applicant claims a sudden or unforeseen increase in its bona fide hedging needs, the proposed rules would require exchanges to require that the person provide materials demonstrating that the person exceeded the federal speculative limit due to sudden or unforeseen circumstances. Further, the Commission would caution exchanges that applications submitted after a person has exceeded federal position limits should not be habitual and should be reviewed closely. Finally, if the Commission finds that the position does not qualify as a bona fide hedge, then the applicant would be required to bring its position into compliance, and could face a position limits violation if it does not reduce the position within a commercially reasonable time.
iii. Proposed § 150.9(c)(3)—Renewal of
Applications
Under proposed § 150.9(c)(3), the exchange must require that persons with bona fide hedging recognitions in referenced contracts granted pursuant to proposed § 150.9 reapply at least on an annual basis by updating their original application, and receive a notice of approval from the exchange prior to exceeding the applicable position limit.
iv. Proposed § 150.9(c)(4)—Exchange
Revocation Authority
Under proposed § 150.9(c)(4), the exchange retains its authority to limit, condition, or revoke, at any time, any recognition previously issued pursuant to proposed § 150.9, for any reason, including if the exchange determines that the recognition is no longer consistent with the bona fide hedge definition in proposed § 150.1 or section 4a(c)(2) of the Act. Request for Comment The Commission requests comment on all aspects of proposed § 150.9. The Commission also invites comments on the following:
(38) As described above, the Commission does not propose to prescribe timelines for exchanges to review applications. Please comment on what, if any, timing requirements the Commission should prescribe for exchanges’ review of applications pursuant to proposed § 150.9. (39) Currently, certain exchanges allow for the submission of exemption requests up to five business days after the trader established the position that exceeded the exchange-set limit. Under proposed § 150.9, should exchanges continue to be permitted to recognize bona fide hedges and grant spread exemptions retroactively—up to five days after a trader has established a position that exceeds federal position limits? d. Proposed § 150.9(d)—Recordkeeping Proposed § 150.9(d) would set forth recordkeeping requirements for purposes of § 150.9. The required records would form a critical element of the Commission’s oversight of the exchanges’ application process and such records could be requested by the Commission as needed. Under proposed § 150.9(d), exchanges must maintain complete books and records of all activities relating to the processing and disposition of applications in a manner consistent with the Commission’s existing general regulations regarding recordkeeping.360 Such records must include all information and documents submitted by an applicant in connection with its application; records of oral and written communications between the exchange and the applicant in connection with the application; and information and documents in connection with the exchange’s analysis of and action on such application.361 Exchanges would also be required to maintain any documentation submitted by an applicant after the disposition of an application, including, for example, any reports or updates the applicant filed with the exchange. Exchanges would be required to store and produce records pursuant to existing § 1.31,362 and would be subject

to this section would be readily accessible during the pendency of any application, and for two years following any disposition that did not recognize a derivative position as a bona fide hedge. 363See 17 CFR 38.5 (requiring, in general, that upon request by the Commission, a DCM must file responsive information with the Commission, such as information related to its business, or a written demonstration of the DCM’s compliance with one or more core principles). to requests for information pursuant to other applicable Commission regulations, including, for example, existing § 38.5.363 Request for Comment The Commission requests comment on all aspects of proposed § 150.9. The Commission also invites comments on the following:
(40) Do the proposed recordkeeping requirements set forth in § 150.9 comport with existing practice? Are there any ways in which the Commission could streamline the proposed recordkeeping requirements while still maintaining access to sufficient information to carry out its statutory responsibilities? e. Proposed § 150.9(e)—Process for a Person To Exceed Federal Position Limits Under proposed § 150.9(e), once an exchange recognizes a bona fide hedge with respect to its own speculative position limits established pursuant to § 150.5(a), a person could rely on such determination for purposes of exceeding federal position limits provided that specified conditions are met, including that the exchange provide the Commission with notice of any approved application as well as a copy of the application and any supporting materials, and the Commission does not object to the exchange’s determination. The exchange is only required to provide this notice to the Commission with respect to its initial (and not renewal) determinations for a particular application. Under proposed § 150.9(e), the exchange must provide such notice to the Commission concurrent with the notice provided to the applicant, and, except as provided below, a trader can exceed federal position limits ten business days after the exchange issues the required notification, provided the Commission does not notify the exchange or applicant otherwise. However, for a person with sudden or unforeseen bona fide hedging needs that has filed an application, pursuant to proposed § 150.9(c)(2)(ii), after they already exceeded federal speculative position limits, the exchange’s retroactive approval of such application would be deemed approved by the Commission two business days after the exchange issues the required notification, provided the Commission does not notify the exchange or applicant otherwise. That is, the bona fide hedge recognition would be deemed approved by the Commission two business days after the exchange issues the required notification, unless the Commission notifies the exchange and the applicant otherwise during this two business day timeframe. Once those ten (or two) business days have passed, the person could rely on the bona fide hedge recognition both for purposes of exchange-set and federal limits, with the certainty that the Commission (and not Commission staff) would only revoke that determination in the limited circumstances set forth in proposed § 150.9(f)(1) and (2) described further below. However, under proposed § 150.9(e)(5), if, during the ten (or two) business day timeframe, the Commission notifies the exchange and applicant that the Commission (and not staff) has determined to stay the application, the person would not be able to rely on the exchange’s approval of the application for purposes of exceeding federal position limits, unless the Commission approves the application after further review. Separately, under proposed § 150.9(e)(5), the Commission (or
Commission staff) may request additional information from the exchange or applicant in order to evaluate the application, and the exchange and applicant would have an opportunity to provide the Commission with any supplemental information requested to continue the application process. Any such request for additional information by the Commission (or staff), however, would not stay or toll the ten (or two) business day application review period. Further, under proposed § 150.9(e)(6), the applicant would not be subject to any finding of a position limits violation during the Commission’s review of the application. Or, if the Commission determines (in the case of retroactive applications) that the bona fide hedge is not approved for purposes of federal limits after a person has already exceeded federal position limits, the Commission would not find that the person has committed a position limits violation so long as the person brings the position into compliance within a commercially reasonable time. The Commission believes that the ten (or two) business day period to review exchange determinations under proposed § 150.9 would allow the Commission enough time to identify applications that may not comply with the proposed bona fide hedging position definition, while still providing a mechanism whereby market participants may exceed federal position limits pursuant to Commission determinations. Request for Comment The Commission requests comment on all aspects of proposed § 150.9. The Commission also invites comments on the following:
(41) The Commission has proposed, in § 150.9(e)(3), a ten business day period for the Commission to review an exchange’s determination to recognize a bona fide hedge for purposes of the Commission approving such determination for federal position limits. Please comment on whether the review period is adequate, and if not, please comment on what would be an appropriate amount of time to allow the Commission to review exchange determinations while also providing a timely determination for the applicant. (42) The Commission has proposed a two business day review period for retroactive applications submitted to exchanges after a person has already exceeded federal position limits. Please comment on whether this time period properly balances the need for the Commission to oversee the administration of federal position limits with the need of hedging parties to have certainty regarding their positions that are already in excess of the federal position limits. (43) With respect to the Commission’s review authority in § 150.9(e)(5), if the Commission stays an application during the ten (or two) business-day review period, the Commission’s review, as would be the case for an exchange, would not be bound by any time limitation. Please comment on what, if any, timing requirements the Commission should prescribe for its review of applications pursuant to proposed § 150.9(e)(5). (44) Please comment on whether the Commission should permit a person to exceed federal position limits during the ten business day period for the Commission’s review of an exchangegranted exemption. (45) Under proposed § 150.9(e), an exchange is only required to notify the Commission of its initial approval of an exemption application (and not any renewal approvals). Should the Commission require that exchanges submit approved renewals of applications to the Commission for review and approval if there are material changes to the facts and circumstances underlying the renewal application?

364None of the provisions in proposed § 150.9 would compromise the Commission’s emergency authorities under CEA section 8a(9), including the Commission’s authority to fix ‘‘limits that may apply to a market position acquired in good faith prior to the effective date of the Commission’s action.’’ CEA section 8a(9). 7 U.S.C. 12a(9). 365CFTC Form 204: Statement of Cash Positions in Grains, Soybeans, Soybean Oil, and Soybean Meal, U.S. Commodity Futures Trading Commission website, available at https:// www.cftc.gov/sites/default/files/idc/groups/public/ @forms/documents/file/cftcform204.pdf (existing Form 204). 366CFTC Form 304: Statement of Cash Positions in Cotton, U.S. Commodity Futures Trading Commission website, available at http:// www.cftc.gov/ucm/groups/public/@forms/ documents/file/cftcform304.pdf (existing Form 204). Parts I and II of Form 304 address fixed-price cash positions used to justify cotton positions in excess of federal limits. As described below, Part III of Form 304 addresses unfixed-price cotton ‘‘oncall’’ information, which is not used to justify cotton positions in excess of limits, but rather to allow the Commission to prepare its weekly cotton on-call report. 367 17 CFR 19.01. 368Proposed amendments to Part III of the Form 304, which addresses cotton on-call, are discussed below. 369The cash-market reporting regime discussed in this section of the release only pertains to bona fide hedges, not to spread exemptions, because the Commission has not traditionally relied on cashmarket information when reviewing requests for spread exemptions. f. Proposed § 150.9(f)—Commission Revocation of an Approved Application Proposed § 150.9(f) sets forth the limited circumstances under which the Commission would revoke a bona fide hedge recognition granted pursuant to proposed § 150.9. The Commission expects such revocation to be rare, and this authority would not be delegated to Commission staff. First, under proposed § 150.9(f)(1), if an exchange revokes its recognition of a bona fide hedge, then such bona fide hedge would also be deemed revoked for purposes of federal limits. Second, under proposed § 150.9(f)(2), if the Commission determines that an application that has been approved or deemed approved by the Commission is no longer consistent with the applicable sections of the Act and the Commission’s regulations, the Commission shall notify the person and exchange, and, after an opportunity to respond, the Commission can require the person to reduce the derivatives position within a commercially reasonable time, or otherwise come into compliance. In determining a commercially reasonable amount of time, the Commission must consult with the applicable exchange and applicant, and may consider factors including, among others, current market conditions and the protection of price discovery in the market. The Commission expects that it would only exercise its revocation authority under circumstances where the disposition of an
application has resulted, or is likely to result, in price anomalies, threatened manipulation, actual manipulation, market disruptions, or disorderly markets. In addition, the Commission’s authority to require a market participant to reduce certain positions in proposed § 150.9(f)(2) would not be subject to the requirements of CEA section 8a(9), that is, the Commission would not be compelled to find that a CEA section 8a(9) emergency condition exists prior to requiring that a market participant reduce certain positions pursuant to proposed § 150.9(f)(2). If the Commission determines that a person must reduce its position or otherwise bring it into compliance, the Commission would not find that the person has committed a position limit violation so long as the person comes into compliance within the commercially reasonable time identified by the Commission in consultation with the applicable exchange and applicant. The Commission intends for persons to be able to rely on recognitions and exemptions granted pursuant to § 150.9 with the certainty that the exchange decision would only be reversed in very limited circumstances. Any action compelling a market participant to reduce its position pursuant to § 150.9(f)(2) would be a Commission action, and would not be delegated to Commission staff. 364 g. Proposed § 150.9(g)—Delegation of Authority to the Director of the Division of Market Oversight The Commission proposes to delegate certain of its authorities under proposed § 150.9 to the Director of the Commission’s Division of Market Oversight, or such other employee(s) that the Director may designate from time to time. Proposed § 150.9(g)(1) would delegate the Commission’s authority, in § 150.9(e)(5), to request additional information from the exchange and applicant. The Commission does not propose, however, to delegate its authority, in proposed § 150.9(e)(5) and (6) to stay or reject such application, nor proposed § 150.9(f)(2), to revoke a bona fide hedge recognition granted pursuant to § 150.9 or to require an applicant to reduce its positions or otherwise come into compliance. The Commission believes that if an exchange’s disposition of an application raises concerns regarding consistency with the Act, presents novel or complex issues, or requires remediation, then the Commission, and not Commission staff, should make the final determination, after taking into consideration any supplemental information provided by the exchange or the applicant. As with all authorities delegated by the Commission to staff, the Commission would maintain the authority to consider any matter which has been delegated, including the proposed delegations in §§ 150.3 and
150.9 described above. The Commission
will closely monitor staff administration of the proposed processes for granting bona fide hedge recognitions. H. Part 19 and Related Provisions— Reporting of Cash-Market Positions

Background
Key reports currently used for purposes of monitoring compliance with federal position limits include Form 204 365 and Form 304,366 known collectively as the ‘‘series ‘04’’ reports. Under existing § 19.01, market participants that hold bona fide hedging positions in excess of limits for the nine commodities currently subject to federal limits must justify such overages by filing the applicable report each month:
Form 304 for cotton, and Form 204 for the other commodities.367 These reports are generally filed after exceeding the limit, show a snapshot of such traders’ cash positions on one given day each month, and are used by the Commission to determine whether a trader has sufficient cash positions that justify futures and options on futures positions above the speculative limits.
Proposed Elimination of Form 204
and Cash-Reporting Elements of Form 304 For the reasons set forth below, the Commission proposes to eliminate Form 204 and Parts I and II of existing Form 304, which requests information on cash-market positions for cotton akin to the information requested in Form 204.368 First, the Commission would no longer need the cash-market information currently reported on Forms 204 and 304 because the exchanges would collect, and make available to the Commission, cash-market information needed to assess whether any such position is a bona fide hedge.369 Further, the Commission would continue to have access to information, including cash-market information, by issuing special calls relating to positions exceeding limits. Second, Form 204 as currently constituted would be inadequate for the

370See, e.g., ICE Rule 6.29 and CME Rule 559. 371For certain physically-delivered agricultural contracts, some exchanges may require that spot month exemption applications be renewed several times a year for each spot month, rather than annually. 372As discussed earlier in this release, proposed § 150.9 also includes reporting and recordkeeping requirements pertaining to spread exemptions. Those requirements will not be discussed again in this section of the release, which addresses cashmarket reporting in connection with bona fide hedges. This section of the release focuses on the cash-market reporting requirements in § 150.9 that pertain to bona fide hedges. 373See proposed § 150.5(a)(2)(ii)(A)(1). 374As discussed above in connection with proposed § 150.9, market participants who wish to request a bona fide hedge recognition under § 150.9 would not be required to file such applications with both the exchange and the Commission. They would only file the applications with the exchange, which would then be subject to recordkeeping requirements in proposed § 150.9(d), as well as proposed §§ 150.5 and 150.9 requirements to provide certain information to the Commission on a monthly basis and upon demand. 375See proposed § 150.9(c)(1)(iv)–(v). 376See proposed § 150.5(a)(4). 377See, e.g., proposed § 150.9(d) (requiring that all such records, including cash-market information submitted to the exchange, be kept in accordance with the requirements of § 1.31) and proposed § 19.00(b) (requiring, among other things, all persons exceeding speculative limits who have received a special call to file any pertinent information as specified in the call). 378See proposed § 150.9(d). 379See proposed § 19.00(b). reporting of cash-market positions relating to certain energy contracts which would be subject to federal limits for the first time under this proposal. For example, when compared to agricultural contracts, energy contracts generally expire more frequently, have a shorter delivery cycle, and have significantly more product grades. The information required by Form 204, as well as the timing and procedures for its filing, reflects the way agricultural contracts trade, but is inadequate for purposes of reporting cash-market information involving energy contracts. While the Commission considered proposing to modify Form 204 to cover energy and metal contracts, the Commission has opted instead to propose a more streamlined approach to cash-market reporting that reduces duplication between the Commission and the exchanges. In particular, to obtain information with respect to cash market positions, the Commission proposes to leverage the cash-market information reported to the exchanges, with some modifications. When granting exemptions from their own limits, exchanges do not use a monthly cash-market reporting framework akin to Form 204. Instead, exchanges generally require market participants who wish to exceed exchange-set limits, including for bona fide hedging
positions, to submit an annual exemption application form in advance of exceeding the limit.370 Such applications are typically updated annually and generally include a month-by-month breakdown of cashmarket positions for the previous year supporting any position-limits overages during that period.371 To ensure that the Commission continues to have access to the same information on cash-market positions that is already provided to exchanges, the Commission proposes several reporting and recordkeeping requirements in §§ 150.3, 150.5, and 150.9, as discussed above.372 First, exchanges would be required to collect applications, updated at least on an annual basis, for purposes of granting bona fide hedge recognitions from exchange-set limits for contracts subject to federal limits,373 and for recognizing bona fide hedging positions for purposes of federal limits.374 Among other things, such applications would be required to include: (1) Information regarding the applicant’s activity in the cash markets for the underlying commodity; and (2) any other information to enable the exchange to determine, and the Commission to verify, whether the exchange may recognize such position as a bona fide hedge.375 Second, consistent with existing industry practice for certain exchanges, exchanges would be required to file monthly reports to the Commission showing, among other things, for all bona fide hedges (whether enumerated or non-enumerated), a concise summary of the applicant’s activity in the cash markets.376 Collectively, these proposed §§ 150.5 and 150.9 rules would provide the Commission with monthly information about all recognitions and exemptions granted for purposes of contracts subject to federal limits, including cash-market information supporting the applications, and annual information regarding all month-by-month cash-market positions used to support a bona fide hedging recognition. These reports would help the Commission verify that any person who claims a bona fide hedging position can demonstrate satisfaction of the relevant requirements. This information would also help the Commission perform market surveillance in order to detect and deter manipulation and abusive trading practices in physical commodity markets. While the Commission would no longer receive the monthly snapshot data currently included on Form 204, the Commission would have broad access, at any time, to the cash-market information described above, as well as any other data or information exchanges collect as part of their application processes.377 This would include any updated application forms and periodic reports that exchanges may require applicants to file regarding their positions. To the extent that the Commission observes market activity or positions that warrant further investigation, § 150.9 would also provide the Commission with access to any supporting or related records the exchanges would be required to maintain.378 Furthermore, the proposed changes would not
impact the Commission’s existing provisions for gathering information through special calls relating to positions exceeding limits and/or to reportable positions. Accordingly, as discussed further below, the Commission proposes that all persons exceeding the proposed limits set forth in § 150.2, as well as all persons holding or controlling reportable positions pursuant to § 15.00(p)(1), must file any pertinent information as instructed in a special call.379 Finally, the Commission understands that the exchanges maintain regular dialogue with their participants regarding cash-market positions, and that it is common for exchange surveillance staff to make informal inquiries of market participants, including if the exchange has questions about market events or a participant’s use of an exemption. The Commission encourages exchanges to continue this practice. Similarly, the Commission anticipates that its own staff would engage in dialogue with market participants, either through the use of informal conversations or, in limited circumstances, via special call authority. For market participants who are accustomed to filing Form 204s with information supporting classification as a federally enumerated hedging position, the proposed elimination of Form 204 would result in a slight change in practice. Under the proposed rules, such participants’ bona fide hedge recognitions could still be selfeffectuating for purposes of federal limits, provided the market participant also separately applies for a bona fide hedge exemption from exchange-set limits established pursuant to proposed § 150.5(a), and provided further that the participant submits the requisite cashmarket information to the exchange as required by proposed § 150.5(a)(2)(ii)(A)(1).

380 17 CFR 19.01. 381 17 CFR 19.00(a)(3). 382 17 CFR 15.01. 383 17 CFR 19.00(a)(3). 384Cotton On-Call, U.S. Commodity Futures Trading Commission website, available at https:// www.cftc.gov/MarketReports/CottonOnCall/ index.htm (weekly report). 385Among other things, the proposed changes to the instructions would clarify that traders must identify themselves on Form 304 using their Public Trader Identification Number, in lieu of the CFTC Code Number required on previous versions of Form 304. This proposed change would help Commission staff to connect the various reports filed by the same market participants. This release includes a representation of the proposed Form 304, which would be submitted in an electronic format published pursuant to the proposed rules, either via the Commission’s web portal or via XML-based, secure FTP transmission. 386 17 CFR part 17. 387See Final Aggregation Rulemaking. Specifically, the Commission proposes to delete paragraphs (1), (2), and (3) from § 17.00(b). 17 CFR 17.00(b). 388Under § 150.4(e)(2), which was adopted in the 2016 Final Aggregation Rulemaking, the Director of the Division of Market Oversight is delegated authority to, among other things, provide instructions relating to the format, coding structure, and electronic data transmission procedures for submitting certain data records. 17 CFR 150.4(e)(2). A subsequent rulemaking changed this delegation Continued
3. Proposed Changes to Parts 15 and 19
To Implement the Proposed Elimination of Form 204 and Portions of Form 304 The market and large-trader reporting rules are contained in parts 15 through 21 of the Commission’s regulations. Collectively, these reporting rules effectuate the Commission’s market and financial surveillance programs by enabling the Commission to gather information concerning the size and composition of the commodity derivative markets and to monitor and enforce any established speculative position limits, among other regulatory goals. To effectuate the proposed elimination of Form 204 and the cashmarket reporting components of Form 304, the Commission proposes corresponding amendments to certain provisions in parts 15 and 19. These amendments would eliminate: (i) Existing § 19.00(a)(1), which requires persons holding reportable positions which constitute bona fide hedging positions to file a Form 204; and (ii) existing § 19.01, which, among other things, sets forth the cash-market information required on Forms 204 and
304.380 Based on the proposed
elimination of existing § 19.00(a)(1) and Form 204, the Commission also proposes to remove related provisions from: (i) The ‘‘reportable position’’ definition in § 15.00(p); (ii) the list of ‘‘persons required to report’’ in § 15.01; and (iii) the list of reporting forms in § 15.02.
4. Special Calls
Notwithstanding the proposed elimination of Form 204, the Commission does not propose to make any significant substantive changes to information requirements relating to positions exceeding limits and/or to reportable positions. Accordingly, in proposed § 19.00(b), the Commission proposes that all persons exceeding the proposed limits set forth in § 150.2, as well as all persons holding or controlling reportable positions pursuant to § 15.00(p)(1), must file any pertinent information as instructed in a special call. This proposed provision is similar to existing § 19.00(a)(3), but would require any such person to file the information as instructed in the special call, rather than to file a series ’04 report.381 The Commission also proposes to add language to existing § 15.01(d) to clarify that persons who have received a special call are deemed ‘‘persons required to report’’ as defined in § 15.01.382 The Commission proposes this change to clarify an existing requirement found in § 19.00(a)(3), which requires persons holding or controlling positions that are reportable pursuant to § 15.00(p)(1) who have received a special call to respond.383 The proposed changes to part 19 operate in tandem with the proposed additional language for § 15.01(d) to reiterate the Commission’s existing special call authority without creating any new substantive reporting obligations. Finally, proposed § 19.03 would delegate authority to issue such special calls to the Director of the Division of Enforcement, and proposed § 19.03(b) would delegate to the Director of the Division of Enforcement the authority in proposed § 19.00(b) to provide instructions or to determine the format, coding structure, and electronic data transmission procedures for submitting data records and any other information required under part 19.
5. Form 304 Cotton On-Call Reporting
With the proposed elimination of the cash-market reporting elements of Form 304 as described above, Form 304 would be used exclusively to collect the information needed to publish the Commission’s weekly cotton on call report, which shows the quantity of unfixed-price cash cotton purchases and sales that are outstanding against each cotton futures month.384 The requirements pertaining to that report would remain in proposed §§ 19.00(a) and 19.02, with minor modifications to existing provisions. The Commission proposes to update cross references (including to renumber § 19.00(a)(2) as § 19.00(a)) and to clarify and update the procedures and timing for the submission of Form 304. In particular, proposed § 19.02(b) would require that each Form 304 report be made weekly, dated as of the close of business on Friday, and filed not later than 9 a.m. Eastern Time on the third business day following that Friday using the format, coding structure, and electronic data transmission procedures approved in writing by the Commission. The Commission also proposes some modifications to the Form 304 itself, including conforming and technical changes to the organization, instructions, and required identifying information.385 Request for Comment The Commission requests comment on all aspects of the proposed amendments to Part 19 and related provisions. The Commission also invites comments on the following:
(46) To what extent, and for what purpose, do market participants and others rely on the information contained in the Commission’s weekly cotton oncall report? (47) Does publication of the cotton oncall report create any informational advantages or disadvantages, and/or otherwise impact competition in any way? (48) Should the Commission stop publishing the cotton on-call report, but continue to collect, for internal use only, the information required in Part III of Form 304 (Unfixed-Price Cotton ‘‘On Call’’)? (49) Alternatively, should the Commission stop publishing the cotton on-call report and also eliminate the Form 304 altogether, including Part III?
6. Proposed Technical Changes to Part
17
Part 17 of the Commission’s
regulations addresses reports by reporting markets, FCMs, clearing members, and foreign brokers.386 The Commission proposes to amend existing § 17.00(b), which addresses information to be furnished by FCMs, clearing members, and foreign brokers, to delete certain provisions related to aggregation, because those provisions have become duplicative of aggregation provisions that were adopted in § 150.4 in the 2016 Final Aggregation Rulemaking.387 The Commission also proposes to add a new provision, § 17.03(i), which delegates certain authority under § 17.00(b) to the Director of the Office of Data and Technology.388

of authority from the Director of the Division of Market Oversight to the Director of the Office of Data and Technology, with the concurrence of the Director of the Division of Enforcement. See 82 FR at 28763 (June 26, 2017). The proposed addition of § 17.03(i) would conform § 17.03 to that change in delegation. 389See supra note 11 and accompanying discussion. 390 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, § 737(a)(4), Public Law 111– 203, 124 Stat. 1376, 1723 (July 21, 2010). 391 7 U.S.C. 6a(a)(2)(A). 392 7 U.S.C. 6a(a)(1). 393 887 F. Supp.2d 259. 394See, e.g., 2013 Proposal, 78 FR at 75680,
75684. 395See, e.g., id. 396 7 U.S.C. 6a(a)(1). 397 Id.
398Public Law 74–675 § 5, 49 Stat. 1491, 1492 (June 15, 1936).
I. Removal of Part 151
Finally, the Commission is proposing to remove and reserve part 151 in response to its vacatur by the U.S. District Court for the District of Columbia,389 as well as in light of the proposed revisions to part 150 that conform part 150 to the amendments made to the CEA section 4a by the Dodd-Frank Act.
III. Legal Matters
A. Introduction
Section 737 (a)(4) of the Dodd-Frank
Act,390 codified as section 4a(a)(2)(A) of the Commodity Exchange Act,391 states in relevant part that ‘‘the Commission shall’’ establish position limits for contracts in physical commodities other than excluded commodities ‘‘[i]n accordance with the standards set forth in’’ section 4a(a)(1), which primarily contains the Commission’s preexisting authority to establish such position limits as it ‘‘finds are necessary.’’ 392 In connection with the 2011 Final Rulemaking, the Commission determined that section 4a(a)(2)(A) is an unambiguous mandate to establish position limits for all physical commodities. In ISDA,393 however, the U.S. District Court for the District of Columbia held that the term ‘‘standards set forth in paragraph (1)’’ is ambiguous as to whether it includes the requirement under section 4a(a)(1) that before the Commission establishes a position limit, it must first find it ‘‘necessary’’ to do so. The court therefore vacated the 2011 Final Rulemaking and directed the Commission to determine, in light of the Commission’s ‘‘experience and expertise’’ ’’ and the ‘‘competing interests at stake,’’ whether section 4a(a)(2)(A) requires the Commission to make a necessity finding before establishing the relevant limits, or if
section 4a(a)(2)(A) is a mandate from
Congress to do so without that antecedent finding. Following the court’s order, the Commission subsequently determined that the ‘‘standards set forth in paragraph (1)’’ do not include the requirement in that paragraph that the Commission find position limits ‘‘necessary.’’ 394 Rather, the Commission determined, ‘‘the standards set forth in paragraph (1)’’ refer only to what the Commission called the ‘‘aggregation standard’’ and the ‘‘flexibility standard.’’ 395 The ‘‘aggregation standard’’ referred to directions under
section 4a(a)(1)(A) that in determining
whether any person has exceeded an applicable position limit, the Commission must aggregate the positions a party controls directly or indirectly, or held by two persons acting in concert ‘‘the same as if the positions were held by, or the trading were done by, a single person.’’ 396 The ‘‘flexibility standard’’ referred to the statement in
section 4a(a)(1)(A) that ‘‘[n]othing in
this section shall be construed to prohibit’’ the Commission from fixing different limits for different commodities, markets, futures, delivery months, numbers of days remaining on the contract, or for buying and selling operations.397 The Commission here preliminarily reaches a different conclusion. In light of its experience with and expertise in position limits and the competing interests at stake, the Commission now determines that it should interpret ‘‘the standards set forth in paragraph (1)’’ to include the traditional necessity and aggregation standards. The Commission also preliminarily determines that the ‘‘flexibility standard’’ is not an accurate way of describing the statute’s lack of a prohibition on differential limits, and therefore is not included in ‘‘the standards set forth in paragraph (1)’’ with which position limits must accord. However, even if that were not so, the Commission would still preliminarily determine that ‘‘the standards set forth in paragraph (1)’’ should be interpreted to include necessity. B. Key Statutory Provisions The Commission’s authority to establish position limits dates back to the Commodity Exchange Act of
1936.398 The relevant CEA language,
now codified in its present form as
section 4a(a)(1), states, among other
things that the Commission ‘‘shall, from time to time . . . proclaim and fix such limits on the amounts of trading which may be done or positions which may be held by any person under such contracts’’ as the Commission ‘‘finds are necessary to diminish, eliminate, or prevent such burden.’’ Thus, the Commission’s original authority to establish a position limit required it first to find that it was necessary to do so.
Section 4a(a)(1) also includes what the
Commission has referred to as the aggregation and flexibility standards.
Section 4a(a)(2)(A) provides, in
relevant part, that ‘‘[i]n accordance with the standards set forth in paragraph (1) of this subsection,’’ i.e., paragraph 4a(a)(1) discussed above, the Commission shall, by rule, regulation, or order establish limits on the amount of positions, as appropriate, other than bona fide hedge positions, that may be held by any person with respect to contracts of sale for future delivery or with respect to options on the contracts or commodities traded on or subject to the rules of a DCM. This direction applies only to physical commodities other than excluded commodities. Paragraph 4a(a)(2)(B) states that the limits for exempt physical commodities ‘‘required’’ under subparagraph (A) ‘‘shall’’ be established within 180 days, and for agricultural commodities the limits ‘‘required’’ under subparagraph (A) ‘‘shall’’ be established within 270 days. Paragraph 4a(a)(2)(C) establishes as a ‘‘goal’’ that the Commission ‘‘shall strive to ensure that trading on foreign boards of trade in the same commodity will be subject to comparable limits’’ and that any limits imposed by the Commission not cause price discovery to shift to foreign boards of trade. Next, paragraph 4a(a)(3) establishes certain requirements for position limits set pursuant to paragraph 4a(a)(2). It directs that when the Commission establishes ‘‘the limits required in paragraph (2),’’ it shall, ‘‘as appropriate,’’ set limits on the number of positions that may be held in the spot month, each other month, and the aggregate number of positions that may be held by any person for all months; and ‘‘to the extent practicable, in its discretion’’ the Commission shall fashion the limits to (i) ‘‘diminish, eliminate, or prevent excessive speculation as described under this
section;’’ (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.’’ Paragraph 4a(a)(5) adds a further requirement that when the Commission establishes limits under paragraph 4a(a)(2), the Commission must establish limits on the amount of positions, ‘‘as appropriate,’’ on swaps that are ‘‘economically equivalent’’ to futures

399 ISDA, 887 F.Supp.2d at 274.
400 Id.
401 Id. at 276–278.
402 Id.
403 Id.
404 Id. at 280.
405 Id. at 281.
406 ISDA, Defendant Commodity Futures Trading Commission’s Cross-Motion for Summary Judgment at 24–25, (quoting definition of ‘‘standard’’ as ‘‘something set up and established by authority as a rule for the measure of quantity, weight, extent, value, or quality’’ from Merriam-Webster’s Collegiate Dictionary 1216 (11th ed. 2011)). 407Black’s Law Dictionary 1624 (10th ed. 2014) (‘‘A criterion for measuring acceptability, quality, or accuracy.’’); The American Heritage Dictionary of the English Language (5th ed. 2011) (‘‘A degree or level of requirement, excellence, or attainment.’’); New Oxford American Dictionary 1699 (3rd ed.
2010) (‘‘an idea or thing used as a measure, norm,
or model in comparative evaluations’’); The Random House Unabridged Dictionary 1857 (2d ed.
1993) (‘‘rule or principle that is used as a basis for
judgment’’); XVI The Oxford English Dictionary 505 (2d ed. 1989) (‘‘A rule, principle, or means of judgment or estimation; a criterion, measure.’’). 408Home Buyers Warranty Corp. v. Hanna, 750 F.3d 427, 435 (4th Cir. 2014) (applying a ‘‘ ‘necessity’ standard’’ under Fed. R. Civ. P. 19(a)(1)(A)); United States v. Cartagena, 593 F.3d 104, 111 n.4 (1st Cir. 2010) (discussing a ‘‘necessity standard’’ under the Omnibus Crime Control and Safe Streets Act of 1968); Fones4All Corp. v. F.C.C., 550 F.3d 811, 820 (9th Cir. 2008) (applying a ‘‘necessity standard’’ under the Telecommunications Act of 1996); Swonger v. Surface Transp. Bd., 265 F.3d 1135, 1141–42 (10th Cir. 2001) (applying a ‘‘necessity standard’’ under transportation law); see also Minnesota v. Mille Lacs Band of Chippewa Indians, 526 U.S. 172, 205 (1999) (‘‘conservation necessity standard’’); Int’l Union, United Auto., Aerospace & Agr. Implement Workers of Am., UAW v. Johnson Controls, Inc., 499 U.S. 187, 198 (1991) (‘‘business necessity standard’’). 409 7 U.S.C. 6a(a)(1)(A). 410See, e.g., OSU Student Alliance v. Ray, 699 F.3d 1053, 1064 (9th Cir. 2012) (holding that the First Amendment was violated by enforcement of a rule that ‘‘created no standards to cabin discretion’’); Lenis v. U.S. Attorney General, 525 F.3d 1291, 1294 (11th Cir. 2008) (dismissing petition for review where agency procedural regulation ‘‘specifie[d] no standards for a court to use to cabin’’ the agency’s discretion); Tamenut v. Mukasey, 521 F.3d 1000, 1004 (8th Cir. 2008); Drake v. FAA, 291 F.3d 59, 71 (D.C. Cir. 2002) (similar). 411Tamenut v. Mukasey, 521 F.3d 1000, 1004 (8th Cir. 2008) (explaining that a statute placing ‘‘no constraints on the [agency’s] discretion . . . specifie[d] no standards’’); United States v. Gonzalez-Aparicio, 663 F.3d 419, 435 (9th Cir.
2011) (Tashima, J., dissenting) (‘‘If we can pick
whatever standard suits us, free from the direction of binding principles, then there is no standard at all.’’); Downs v. Am. Emp. Ins. Co., 423 F.2d 1160, 1163 (5th Cir. 1970) (‘‘best judgment is no standard at all’’). 412E.g., ISDA, Commission Appellate Brief at 37– 38. 413 Michigan v. EPA, 135 S.Ct. 2699, 2707 (2015). Because Michigan was not a CEA case, the Commission does not mean to imply that Michigan would be controlling or compels any particular result in determining when a position limit is appropriate. To the contrary, the court in ISDA held that the CEA is ambiguous in that regard. The Commission merely finds the Supreme Court’s discussion in Michigan useful in reasonably resolving that ambiguity. 414 7 U.S.C. 5, 6a(a)(2)(C) and (a)(3)(B). and options contracts subject to paragraph 4a(a)(2).
C. Ambiguity of Section 4a With Respect
to Necessity Finding
The district court held that section 4a(a)(2) is ambiguous as to whether, before the Commission establishes a position limit, it must first find that a limit is ‘‘necessary.’’ The court found the phrase ‘‘[i]n accordance with the standards set forth in paragraph (1) of this subsection’’ unclear as to whether it includes the proviso in paragraph (1) that position limits be established only ‘‘as the Commission finds are necessary.’’ 399 The court noted that, by some definitions of ‘‘standard,’’ a requirement that position limits be ‘‘necessary’’ could qualify.400 The district court found the ambiguity compounded by the phrase ‘‘as appropriate’’ in sections 4a(a)(2)(A), 4a(a)(3), and 4a(a)(5).401 It was unclear to the court whether this phrase gives the Commission discretion not to impose position limits at all if it finds them not appropriate, or if the discretion extends only to determining ‘‘appropriate’’ levels at which to set the limits.402 Neither the grammar of the relevant provisions nor the available legislative history resolved these issues to the court’s satisfaction.403 In sum, ‘‘the Dodd-Frank amendments do not constitute a clear and unambiguous mandate to set position limits.’’ 404 The court therefore directed the Commission to resolve the ambiguity, not by ‘‘rest[ing] simply on its parsing of the statutory language,’’ but by ‘‘bring[ing] its experience and expertise to bear in light of the competing interests at stake.’’ 405 D. Resolution of Ambiguity The Commission has applied its experience and expertise in light of the competing interests at stake and preliminarily determined that paragraph 4a(a)(2) should be interpreted as incorporating the requirement of paragraph 4a(a)(1) that position limits be established only ‘‘as the Commission finds are necessary.’’ This is based on a number of considerations. First, while the Commission has previously taken the position that necessity does not fall within the definition of the word ‘‘standard,’’ that view relied on only one of the many dictionary definitions of ‘‘standard,’’ 406 and the Commission now believes it was an overly narrow interpretation. The word ‘‘standard’’ is used in different ways in different contexts, and many reasonable definitions would encompass ‘‘necessity.’’ 407 In legal contexts, ‘‘necessity’’ is routinely called a ‘‘standard.’’ 408 The Commission preliminarily believes that the more natural reading of ‘‘standard’’ in section 4a(a)(2)(A) does include the requirement of a necessity finding. Second, and relatedly, the Commission believes the term ‘‘standard’’ is a less natural fit for the language in subparagraph 4a(a)(1) that the Commission has previously called the ‘‘flexibility standard.’’ The sentence provides that ‘‘[n]othing in this section shall be construed to prohibit the Commission from fixing different trading or position limits for different’’ contracts or situations.409 Typically a legal standard constrains an agency’s discretion.410 But nothing in the
socalled ‘‘flexibility’’ language constrains the Commission at all. In other words, the express lack of any prohibition of differential limits under section 4a(a)(1) is better understood as the absence of any standard.411 And if flexibility is not a standard, then necessity must be, because section 4a(a)(2)(A) refers to ‘‘standards,’’ plural. Third, the requirement that position limits be ‘‘appropriate’’ is an additional ground to interpret the statute as lacking an across-the board-mandate. In the past, the Commission has taken the view that the word ‘‘appropriate’’ as used in section 4a(a)(2)(A)—and in sections 4a(a)(3) and 4a(a)(5) in connection with position limits established pursuant to section 4a(a)(2)(A)—refers to position limit levels but not to the determination of whether to establish a limit.412 However, the Supreme Court has opined in the context of the Clean Air Act that ‘‘[n]o regulation is ‘appropriate’ if it does significantly more harm than good.’’ 413 That was not a CEA case, but the Commission finds the Court’s reasoning persuasive in this context. It is reasonable to interpret the direction to set a position limit ‘‘as appropriate’’ to mean that in a given context, it may be that no position limit is justified. Under an across-the-board mandate, however, the Commission would be compelled to impose some limit even if any level of position limit would do significantly more harm than good, including with respect to the public interests Congress set forth in
section 4a(a)(1) itself and elsewhere in
section 4a and the CEA generally.414
The Commission does not believe that is the best reading of section 4a(a)(2)(A). Rather, Congress’s use of ‘‘appropriate’’ in that section and elsewhere in the Dodd-Frank amendments is more consistent with a directive that the

415 135 S.Ct. at 2707, 2711. 416E.g., Whiteman v. American Trucking Assns., Inc., 531 U.S. 457, 468 (2000) (Congress . . . does not alter the fundamental details of a regulatory scheme in vague terms. . . .’’); EEOC v. Staten Island Sav. Bank, 207 F.3d 144, (2d Cir. 2000) (‘‘we are reluctant to infer . . . a mandate for radical change absent a clearer legislative command’’); Canup v. Chipman-Union, Inc., 123 F.3d 1440, (11th Cir. 1997) (‘‘We would expect Congress to speak more clearly if it intended such a radical change. . . .’’). 417See, e.g., Daily Agricultural Volume and Open Interest, CME Group website, available at https:// www.cmegroup.com/market-data/volume-openinterest/agriculture-commodities-volume.html (tables of daily trading volume and open interest for CME futures contracts). 418E.g., 2013 Proposal, 78 FR at 75787 nn.122– 124; ISDA, Brief for Appellant Commodity Futures Trading Commission at 14–15. 419 Id. 420 7 U.S.C. 6a(a)(2)(B). 421The Commission also does not believe that establishing and enforcing position limits for all contracts on physical commodities, regardless of their importance to the price or delivery process of the underlying commodities or to the economy more broadly, would be a productive use of the public resources Congress has appropriated to the Commission. Commission consider all relevant factors and, on that basis, set an appropriate limit level—or no limit at all, if to establish one would contravene the public interests Congress articulated in section 4a(a)(1) and the CEA generally. That is also better policy. To be clear, this does not mean the Commission must conduct a formal cost-benefit analysis in which each advantage and disadvantage is assigned a monetary value. To the contrary, the Commission retains broad discretion to decide how to determine whether a position limit is appropriate.415 Fourth, mandatory federal position limits for all physical commodities would be a sea change in derivatives regulation, and the Commission does not believe it should infer that Congress would have acted so dramatically without speaking clearly and unequivocally.416 It is important to understand the reach of the proposition that the Commission must impose position limits for every physical commodity. The Commission estimates, based on information from the Commission’s surveillance system, that currently there are over 1,200 contracts on physical commodities listed on DCMs. Some of these contracts have little or no active trading.417 Absent clearer statutory language than is present in the statute, the Commission does not believe it should interpret the statute as though Congress had concerns about or even considered each and every one of the similar number of contracts listed at the time of DoddFrank. In a similar vein, the Commission previously has cited Senate Subcommittee’s staff studies of potential excessive speculation that preceded the enactment of section 4a(a)(2).418 But those studies covered only a few
commodities—oil, natural gas, and wheat.419 While these studies demonstrate that Senate subcommittee’s concern with potential excessive speculation, the Commission does not believe it should interpret a statute by extrapolating from one Senate subcommittee’s interest in three specific commodities to a requirement to impose limits on all of the many hundreds of physical futures contracts listed on exchanges, where Congress as a whole has not said so unambiguously. DCMs also regularly create new contracts. If Congress intended federal position limits to apply to all physical commodity contracts, the Commission would expect there to be a provision directing it to establish position limits on a continuous basis. There is no such provision—and Congress directed the Commission to complete its positionlimits rulemaking within 270 days.420 The only other relevant provision is the preexisting and broadly discretionary requirement that the Commission make an assessment ‘‘from time to time.’’ That structure is inconsistent, both as a statutory and policy matter, with an across-the-board mandate. Fifth, the Commission believes as a matter of policy judgment that requiring a necessity finding better carries out the purposes of section 4a. As Congress presumably was aware, position limits create costs as well as potential benefits. The Commission has recognized, and Congress also presumably understood, that there are costs even for well-crafted position limits. As discussed below in the Commission’s consideration of costs and benefits, market participants must monitor their positions and have safeguards in place to ensure compliance with limits. In addition to compliance costs, position limits may constrain some economically beneficial uses of derivatives, because a limit calculated to prevent excessive speculation or to restrict opportunities for manipulation may, in some circumstances, affect speculation that is desirable. While the Commission has designed limits to avoid interference with normal trading, certain negative effects cannot be ruled out. For example, to interpret section 4a(a)(2) as a mandate even where unnecessary could pose risks to liquidity and hedging. Well-calibrated position limits can protect liquidity by checking excessive speculation, but unnecessary limits can have the opposite effect by drawing capital out of markets. Indeed, the liquidity of a futures contract, upon which hedging depends, is directly related to the amount of speculation that takes place. Speculators contribute valuable liquidity to commodity markets, and
section 4a(a)(1) identified ‘‘excessive
speculation’’—not all speculation—as ‘‘an undue burden on interstate commerce.’’ To needlessly reduce liquidity, impair price discovery, and make hedging more difficult for commodity end-users without sufficient beneficial effects on interstate commerce is unsound policy, as Congress has defined the policy. If Congress had drafted the statute unambiguously to reflect the judgment that these costs of position limits are justified in all instances, the Commission of course would follow it. Without such clarity, the Commission does not believe it should interpret the statute to impose those costs regardless of whether and to what extent doing so advances Congress’ stated goals. Sixth, while Congress has deemed position limits an effective tool, it is sound regulatory policy for the Commission to apply its experience and expertise to determine whether economic conditions with respect to a given commodity at a given point in time render it likely that position limits will achieve positive outcomes. A mandate without the requirement of a necessity finding would eliminate the Commission’s expertise and experience from the process and could lead to position limits that do not have significantly positive effects, or even position limits that are counterproductive. Necessity findings may also enhance public confidence that position limits in place are necessary to their statutory purposes, potentially improving public confidence in the markets themselves. It is therefore sound policy to construe the statute in a way that requires the Commission to make a necessity finding before establishing position limits.421 Finally, also as a matter of policy, the Commission’s approach will prevent market participants from suffering the costs of statutory ambiguity. Mandating position limits across all products would automatically impose costs on market participants regardless of whether doing so fulfills the purpose of
section 4a. The associated compliance
costs remain as long as those limits are in place. Reading a mandate into section 4a would exchange regulatory convenience, with or without any public benefit, for long-term burdens on market participants. The Commission does not believe that ambiguity should

422 7 U.S.C. 6a(a).
423E.g., 2016 Reproposal, 81 FR at 96715, 96716 (discussing comments on past releases); 2013 Proposal, 78 FR at 75684. 424 7 U.S.C. 6a(a)(3). 425E.g., 2016 Reproposal, 81 FR at 96716 (discussing comments on earlier releases). 426 Id. 427See, e.g., 2013 Proposal, 78 FR at 75682 and nn.24–26 (describing Congressional studies). be resolved reflexively in a manner that shifts costs to market participants. Rather, the Commission believes that where an agency has discretion to choose from among reasonable alternative interpretations, it should not impose costs without a strong justification, which in this context would be lacking without a necessity finding. E. Evaluation of Considerations Relied Upon by the Commission in Previous Interpretation of Paragraph 4a(a)(2) As noted above, the Commission previously has identified a number of considerations it believed supported interpreting paragraph 4a(a)(2) to mandate position limits for all physical commodities other than excluded commodities, without the need for a necessity finding. Although the Administrative Procedure Act does not require the Commission to rebut those previous points, the Commission believes it is useful to discuss them. While certain of these considerations could support such an interpretation, the Commission is no longer persuaded that, on balance, they support interpreting paragraph 4a(a)(2) as an across-the-board mandate. Considerations on which the Commission previously relied include the following:

When Congress enacted paragraph
4a(a)(2), the text of what previously was paragraph 4a(a),422 already provided that the Commission ‘‘shall . . . proclaim and fix’’ position limits ‘‘as the Commission finds are necessary’’ to diminish, eliminate, or prevent the burdens on commerce associated with excessive speculation. This directive applied—and still applies—to all exchange-traded commodities, including the physical commodities that are the subject of paragraph 4a(a)(2). The Commission has previously reasoned that if paragraph 4a(a)(2) were not a mandate to establish position limits without such a necessity finding, it would be a nullity.423 That is, the Commission already had the authority to issue position limits, so 4a(a)(2) would add nothing were it not a mandate. The Commission is no longer convinced that is correct. Whereas the Commission’s preexisting authority under the predecessor to paragraph 4a(a)(1) directed the Commission to establish position limits ‘‘from time to time,’’ new paragraph 4a(a)(2) directed the Commission to consider position limits promptly within two specified time limits after Congress passed the DoddFrank Act. That is a new directive, and it is consistent with maintaining the requirement for, and preserving the benefits of, a necessity finding. This interpretation is also consistent with the Commission’s belief that Congress would not have intended a drastic mandate without a clear statement to that effect. This interpretation is likewise consistent with Congress’ addition of swaps to the Commission’s jurisdiction—it makes sense to direct the Commission to give prompt consideration to whether position limits are necessary at the same time Congress was expanding the Commission’s oversight responsibilities to new markets, and the Commission believes that is sound policy to ensure that the regime works well as a whole. Rather than leave it to the Commission’s preexisting discretion to set limits ‘‘from time to time,’’ it is reasonable to believe that Congress found it important for the Commission to focus on this issue at a time certain. In addition, paragraph 4a(a)(2) triggers other requirements added to section 4a(a) by Dodd-Frank and not included in paragraph 4a(a)(1). For example, as described above, paragraph 4a(a)(3)(B) identifies objectives the Commission is required to pursue in establishing position limits, including three, set forth in subparagraphs 4a(a)(3)(B)(ii)–(iv), that are not explicitly mentioned in paragraph 4a(a)(1). The Commission previously opined that paragraph 4a(a)(5), which directs the Commission to establish, position limits on swaps ‘‘economically equivalent’’ to futures subject to new position limits, would add nothing to paragraph 4a(a)(1), because if there were no mandate. The Commission no longer finds that reasoning persuasive. Paragraph 4a(a)(5) goes beyond paragraph 4a(a)(1), because it separately requires that when the Commission imposes limits on futures pursuant to paragraph 4a(a)(2), it also does so on
economically equivalent swaps. Without that text, the Commission would have no such obligation to issue both types of limits at the same time.
The Commission has also
previously been influenced by the requirements of paragraph 4a(a)(3), which directs the Commission, ‘‘as appropriate’’ when setting limits, to establish them for the spot month, each other month, and all months; and sets forth four policy objectives the Commission must pursue ‘‘to the maximum extent practicable.’’ 424 The Commission described these as ‘‘constraints’’ and found it ‘‘unlikely’’ that Congress intended to place new constraints on the Commission’s preexisting authority to establish position limits, given the background of the amendments and in particular the studies that preceded their enactment.425 However, on further consideration of this statutory language, the Commission does not interpret that language as a set of constraints in the sense of directing the Commission to make less use of limits or to impose higher limits than in the past. Rather, it focuses the Commission’s decision process by identifying relevant objectives and directing the Commission to achieve them to the maximum extent practicable. Requiring the Commission to prioritize, to the extent practicable, preventing excessive speculation and manipulation, ensuring liquidity, and avoiding disruption of price discovery is reasonable regardless of whether there is an across-the-board mandate. In past releases the Commission has also suggested that it is unclear why Congress would have imposed the decisional ‘‘constraints’’ of paragraph 4a(a)(3) ‘‘with respect to physical commodities but not excluded commodities or others’’ unless this provision was enacted as part of a mandate to impose limits without a necessity finding.426 However, all of these relevant amendments pertain only to physical commodities other than excluded commodities. The Congressional studies that preceded the enactment of paragraph 4a(a)(2) demonstrated concern specifically with problems in markets for physical commodities such as oil and natural gas.427 It therefore is not surprising that Congress enacted provisions specifically addressing limits for physical commodities and not others, whether or not Congress intended a necessity finding. Those physical commodities were the focus of Congress’ concern.
The Commission has previously
stated that the time requirements for establishing limits set forth in subparagraph 4a(a)(2)(B) are inconsistent with a necessity finding because, based on past experience, necessity findings for individual commodity markets cannot be made

428E.g., 2016 Reproposal, 81 FR at 96708; 2013 Proposal, 78 FR at 75682, 75683. 429The Commission’s reasoning in this respect has also assumed that a necessity finding means a granular market-by-market study of whether position limits will be useful for a given contract. As explained below, however, the Commission here preliminarily determines that such an analysis is not required. Under the Commission’s current preliminary interpretation of the necessity finding requirement, it would have been plausible to complete the required findings under the deadlines Congress established. 430E.g., 2013 Proposal, 78 FR at 75683, 75684. 431 Id. 432Establishment of Speculative Position Limits, 46 FR at 50945 (Oct. 16, 1981). 433 Id. 434 Id. at 50946. 435 Id. at 50945. 436 Id. 437 Id. 438 46 FR at 50945 (section 1.61(a)(1)). 439 Id. at 50943; Speculative Position Limits, 45 FR at 79834. 440 46 FR at 50945 (in section 1.61(a)(2)); 45 FR at 79833, 79834. 441See, e.g., 2016 Reproposal, 81 FR at 96709, 96710. 442 Id. at 96710. 443E.g., ISDA, Brief for Appellant Commodity Futures Trading Commission at 26–27. within the specified time periods.428 However, the fact that many decades ago a number of months may have elapsed between proposals and final position limits does not mean that much time was necessary then or is necessary now. There are a number of possible reasons, such as limits on agency resources and why the agency took that amount of time. It is not a like-to-like comparison, because the agencies acting many decades ago were not acting pursuant to a mandate. The speed with which an agency could or would enact discretionary position limits is not necessarily a good proxy for how long would be required under a mandate.429 There is accordingly no inconsistency, and thus the deadlines do not necessarily imply that Congress intended to eliminate a necessity finding for limits under paragraph 4a(a)(2).
4. The Commission previously has
stated that Congress appears to have modeled the text of paragraph 4a(a)(2) on the text of the Commission’s 1981 rule requiring exchanges to set speculative position limits for all contracts.430 The Commission has further stated that the 1981 rule treated aggregation and flexibility as ‘‘standards,’’ and Congress therefore likely did the same in paragraph 4a(a)(2).431 The Commission no longer agrees with that description or that reasoning. Under the 1981 rule, former section 1.61(a) of the Commission’s regulations required exchanges to adopt position limits for all contracts listed to trade.432 The rule also established requirements similar to the current statutory aggregation requirements: Section 1.61(a) required that limits apply to positions a person may either ‘‘hold’’ or ‘‘control,’’ 433 section 1.61(g) established more detailed aggregation requirements.434 Section 1.61(a)(1) contained language the Commission has called the ‘‘flexibility standard,’’ i.e., that ‘‘nothing’’ in section 1.61 ‘‘shall be construed to prohibit a contract market from fixing different and separate position limits for different types of futures contracts based on the same commodity, different position limits for different futures, or for different delivery months, or from exempting positions which are normally known in the trade as ‘spreads, straddles or arbitrage’ or from fixing limits which apply to such positions which are different from limits fixed for other positions.’’ 435 Section 1.61(d)(1) of the rule required every exchange to submit information to the Commission demonstrating that it had ‘‘complied with the purpose and standards set forth in paragraph (a).’’ 436 In the 2013 and 2016 proposals, the Commission concluded that the cross-reference to the ‘‘standards set forth in paragraph (a)’’ meant both the aggregation and flexibility language, because both of those sets of language appear in paragraph (a). By contrast, paragraph (a) did not include a requirement for a necessity finding, since the 1981 rule required position limits on all actively traded contracts.437 On further review, the Commission does not find this reasoning persuasive. The ‘‘flexibility’’ language gave the exchange unfettered discretion to set different limits for different kinds of positions—there was expressly ‘‘nothing’’ in that language to limit the exchange’s discretion.438 In other words, there is nothing in that flexibility text with which to ‘‘comply,’’ so it cannot be part of what section 1.61(d)(1) referenced as a ‘‘standard’’ for which compliance must be demonstrated. As discussed above, ‘‘standard’’ is an ill-fitting label for this lack of a prohibition. Indeed, the 1981 release and associated 1980 NPRM did use the word ‘‘standard’’ to refer to certain language directing and constraining the discretion of the exchanges, a much more natural use of that word. For example, the preambles to both releases called requirements to aggregate certain holdings ‘‘aggregation
standards.’’ 439 And, in both the 1980 NPRM (in the preamble) and the 1981 Final Rule (in rule text), the Commission used the word ‘‘standard’’ to describe factors, such as position sizes customarily held by speculative traders, that exchanges were required to consider in setting the level of position limits.440 Although the wording of the 1981 rule and paragraph 4a(a)(2) have similarities, there are also differences. These differences weaken the inference that Congress intended the statute to hew closely to the rule. There is no legislative history articulating any relationship between the two. And even if Congress in Dodd-Frank did borrow concepts from the 1981 rule, there is little reason to infer that Congress was borrowing the precise meaning of any individual word—much less that the use of ‘‘standards’’ includes what ‘‘nothing in this section shall be construed to prohibit . . . .’’
5. In past releases the Commission has
also observed that, in 1983, as part of the Futures Trading Act of 1982, Public Law 96–444, 96 Stat. 2294 (1983), Congress added a provision to the CEA making it a violation of the Act to violate exchange-set position limits, thus, in effect, ratifying the Commission’s 1981 rule.441 The Commission reasoned that this history supports the possibility that Congress could reasonably have followed an across-the-board approach here.442 But while that may be so, the Commission today does not find that mere possibility helpful in interpreting the ambiguous term ‘‘standards,’’ because there is no evidence that Congress in 1982 considered the lack of a prohibition on different position limit levels in the rule to be a ‘‘standard.’’ By extension, the Futures Trading Act does not bear on the Commission’s preliminary interpretation of ‘‘standards’’ in section 4a(a)(2)(A) today.
6. In briefs in the ISDA case, the
Commission pointed out that CEA paragraphs 4a(a)(2)(B) and 4a(a)(3) repeatedly use the word ‘‘required’’ in connection with position limits established pursuant to paragraph 4a(a)(2), implying that the Commission is required to establish those limits regardless of whether it finds them to be necessary.443 But that is not the only way to interpret the word ‘‘required.’’ Position limits are required under certain circumstances even if there is no across-the-board mandate—i.e., when the Commission finds that they are ‘‘necessary.’’ Under the Commission’s current preliminary interpretation, the Commission was required to assess within a specified timeframe if position limits were ‘‘necessary’’ and, if so,
section 4a(a)(2) states that the
Commission ‘‘shall’’ establish them.

444See, e.g., 2013 Proposal, 78 FR at 75684, 75685 (discussing evolution of statutory language as supporting mandate). 445See, e.g., id. at 75684. 446See, e.g., id. 447See, e.g., 2016 Reproposal, 81 FR at 96709. 448See H.R. Rep. 111–385 part 1 at 4 (Dec. 19, 2009). 449 Id. at 19. 450See Actions—H.R.977—111th Congress (2009–
2010) Derivatives Markets Transparency and
Accountability Act of 2009, Congress website, available at https://www.congress.gov/bill/111thcongress/house-bill/977/all-actions? overview=closed#tabs (bill history). 451 155 Cong. Rec. H14682, H14692 (daily ed. Dec. 10, 2009). 452 Id. at H14705. 453 Dodd-Frank Wall Street Reform and Consumer Protection Act, Conference Report to Accompany H.R. 4173 at 969 (H.R. Rep. 111–517 June 29, 2010). 454He stated, ‘‘This conference report includes the tools we authorized [in response to concerns about excessive speculation] and the direction to the CFTC to mitigate outrageous price spikes we saw 2 years ago.’’ 156 Cong. Rec. H5245 (daily ed. June 30, 2010). 455 156 Cong. Rec. S5919 (daily ed. July 15, 2010). 456 In addition, the remainder of the Senate chairman’s floor statement with regard to position limits focused on volatility and price discovery problems arising from the use of commodity swaps, implying that her reference to setting position limits ‘‘across all markets’’ refers to Dodd-Frank’s extension of position limits authority to swaps markets. 156 Cong. Rec. at S5919–20 (daily ed. July 15, 2010). 457See, e.g., 2016 Reproposal, 81 FR at 96711– 96713. Thus, the word ‘‘required’’ in paragraphs 4a(a)(2)(B) and 4a(a)(3) leaves open the question of whether paragraph 4a(a)(2) itself requires position limits for all physical commodity contracts or, on the other hand, only requires them where the Commission finds them necessary under the standards of paragraph 4a(a)(1). The use of the word ‘‘required’’ in paragraphs 4a(a)(2)(B) and 4a(a)(3) therefore does not resolve the ambiguity in the statute. For the same reason, the evolution of the statutory language during the legislative process, during which the word ‘‘may’’ was changed to ‘‘shall’’ in a number of places, also does not resolve the ambiguity.444
7. The Commission has pointed out
that section 719 of the Dodd-Frank Act required the Commission to ‘‘conduct a study of the effects (if any) of the position limits imposed’’ pursuant to paragraph 4a(a)(2) and report the results to Congress within twelve months after the imposition of limits.445 The Commission has suggested that Congress would not have required such a study if paragraph 4a(a)(2) left the Commission with discretion to find that limits were unnecessary so that there would be nothing for the Commission to study and report on to Congress.446 However, while the study requirement implies that Congress perhaps anticipated that at least some limits would be imposed pursuant to paragraph 4a(a)(2), it leaves open the question of whether Congress mandated limits for every physical commodity without the need for a necessity finding. In addition, the phrase ‘‘the effects (if any)’’ language does not imply that Congress expected position limits on all physical commodities. This language simply recognizes that new position limits could be imposed, but have no demonstrable effects.
8. In past releases and court filings,
the Commission has stated that the legislative history of section 4a, as amended by the Dodd-Frank Act, supports the conclusion that paragraph 4a(a)(2) requires the establishment of position limits for all physical commodities whether or not the Commission finds them necessary to achieve the objectives of the statute.447 However, the most relevant legislative history, taken as a whole, does not resolve the ambiguity in the statutory language or compel the conclusion that Congress intended to drop the necessity finding requirement when it enacted paragraph 4a(a)(2) as part of the DoddFrank Act. The language of paragraph 4a(a)(2) derives from section 6(a) of a bill, the Derivatives Markets Transparency and Accountability Act of 2009, H.R. 977 (111th Cong.), which was approved by the House Committee on Agriculture in February of 2009.448 The committee report on this bill included explanatory language stating that the relevant provision required the Commission to set position limits ‘‘for all physical commodities other than excluded commodities.’’ 449 However, H.R. 977 was never approved by the full House of Representatives.450 The relevant language concerning position limits was incorporated into the House of Representatives version of what became the Dodd-Frank Act, H.R. 4173 (111th Cong.), as part of a floor amendment that was introduced by the chairman of the Committee on Agriculture.451 In explaining the amendment’s language regarding position limits, the chairman stated that it ‘‘strengthens confidence in position limits on physically deliverable commodities as a way to prevent excessive speculation trading’’ but did not specify that limits would be required for all physical commodities without the need for a necessity finding.452 The House of Representatives language regarding position limits was ultimately incorporated into the Dodd-Frank Act by a conference committee. However, the explanatory statement in the Conference report states, with respect to position limits, only that the act’s ‘‘regulatory framework outlines provisions for: . . . [p]osition limits on swaps contracts that perform or affect a significant price discovery function and requirements to aggregate limits across markets.’’ 453 In subsequent floor debate, the chairman of the House Agriculture Committee alluded to position limits provisions deriving from earlier bills reported by that committee, but did not describe them with specificity.454 In the Senate, the chairman of the Senate Committee on Agriculture, Nutrition, and Forestry stated that the conference bill would ‘‘grant broad authority to the Commodity Futures Trading Commission to once and for all set aggregate position limits across all markets on non-commercial market participants.’’ 455 The statement that the bill would grant ‘‘authority’’ to set position limits implies an exercise of judgement by the Commission in determining whether to set particular limits.456 Thus, this legislative history is itself ambiguous
on the question of whether federal position limits are now mandatory on all physical commodities in the absence of a finding of necessity. Looking at legislative history in more general terms, the Commission, in past releases, has pointed out that the enactment of paragraph 4a(a)(2) followed congressional investigations in the late 1990s and early 2000s that concluded that excessive speculation accounted for volatility and prices increases in the markets for a number of commodities.457 However, while the history of congressional investigations supports the conclusion that Congress intended the Commission to take action with respect to position limits, it does not resolve the specific interpretive issue of whether the ‘‘[i]n accordance with the standards set forth in paragraph (1)’’ language that was ultimately enacted by Congress incorporates a necessity finding. As discussed above, the congressional investigations focused on only a few commodities, which weakens the inference that Congress considered the question of what speculative positions to limit a closed question. Overall, in past releases the Commission has expressed the view that construing section 4a as an ‘‘integrated whole’’ leads to the conclusion that paragraph 4a(a)(2) does not require a

458See, e.g., 2016 Reproposal, 81 FR at 96713, 96714. 459As discussed, the Commission is not proposing non-spot-month limits apart from the legacy agricultural contracts. Non-spot-month prices serve as references for cash-market transactions much less frequently than spot-month prices. Accordingly, the burdens of excessive speculation in non-spot-months on commodities in interstate commerce would be substantially less than the burdens of excessive speculation in spotmonths. It is also not possible to execute a corner or squeeze in non-spot-months. And because there generally are fewer market participants in non-spotmonths, holders of large speculative positions may play a more important role in providing liquidity to bona fide hedgers. 460 7 U.S.C. 6a(a)(1). 461 7 U.S.C. 6a(a)(1). 462 It is not the Commission’s role to determine if these findings are correct. See Public Citizen v. FTC, 869 F.2d 1541, 1557 (D.C. Cir. 1989) (‘‘[A]gencies surely do not have inherent authority to second-guess Congress’ calculations.’’); see also 46 FR at 50938, 50940 (‘‘Section 4a(1) [now 4a(a)(1)] represents an express Congressional finding that excessive speculation is harmful to the market, and a finding that speculative limits are an effective prophylactic measure.’’). 463 Jewell v. Life Ins. Co. of N. Am., 508 F.3d 1303, 1310 (10th Cir. 2007). 464 Jewell v. Life Ins. Co. of N. Am., 508 F.3d 1303, 1310 (10th Cir. 2007); see also Black’s Law Dictionary 1227 (3d ed. 1933) (‘‘As used in jurisprudence, the word ‘necessary’ does not always import an actual physical necessity, so strong that one thing, to which another may be termed ‘necessary,’ cannot exist without the other. . . . To employ the means necessary to an end is generally understood as employing any means calculated to produce the end, and not as being confined to those single means without which the end would be entirely unattainable.’’ (citing McCullouch v. Maryland, 4 Wheat. 216, 4 L. Ed. 579 (1819)). 465 7 U.S.C. 9(1), 9(3), 13(a)(2). 466 7 U.S.C. 6c(a). 467 7 U.S.C. 7(d). 468 7 U.S.C. 12a(9). 469See Nat. Res. Def. Council, Inc. v. Thomas, 838 F.2d 1224, 1236–37 (D.C. Cir. 1988) (‘‘[A] measure may be ’necessary’ even though acceptable alternatives have not been exhausted.’’); F.T.C. v. Rockefeller, 591 F.2d 182, 188 (2d Cir. 1979) (rejecting ‘‘the notion that ’necessary’ means that the [Federal Trade Commission] must pursue all other ‘reasonably available alternatives’’’ before undertaking the measure at issue). Indeed, where the Commission considers setting such prophylactic limits, it is unlikely to be knowable whether position limits will be the only effective tool. The existence of other tools to prevent unwarranted volatility and price changes may be relevant, but cannot be dispositive in all cases. 470See, e.g., 7 U.S.C. 2(h)(4)(A) (empowering the Commission to prescribe rules ‘‘as determined by the Commission to be necessary to prevent evasions of the mandatory clearing requirements’’); 7
U.S.C. 2(h)(4)(B)(iii) (requiring that the Commission ‘‘shall’’ take such actions ‘‘as the Commission determines to be necessary’’ when it finds that certain swaps subject to the clearing requirement are not listed by any derivatives clearing organization); 7 U.S.C. 21(e) (subjecting registered persons to such ‘‘rules and regulations as the Commission may find necessary to protect the public interest and promote just and equitable principles of trade.’’). necessity finding.458 However, for reasons explained above, the Commission preliminarily believes that the better interpretation is that prior to imposing position limits, it must make a finding that the position limits are necessary. F. Necessity Finding The Commission preliminarily finds that federal speculative position limits are necessary for the 25 core referenced futures contracts, and any associated referenced contracts. This preliminary finding is based on a combination of factors including: The particular importance of these contracts in the price discovery process for their respective underlying commodities; the fact that they require physical delivery of the underlying commodity; and, in some cases, the especially acute economic burdens that would arise from excessive speculation causing sudden or unreasonable fluctuations or unwarranted changes in the price of the commodities underlying these contracts. The Commission has preliminarily determined that the benefit of advancing the statutory goal of preventing those undue burdens with respect to these commodities in interstate commerce justifies the potential burdens or negative consequences associated with establishing these targeted position limits.459

Meaning of ‘‘Necessary’’ Under
Section 4a(a)(1)
Section 4a(a)(1) of the Act contains a
congressional finding that ‘‘[e]xcessive speculation . . . causing sudden or unreasonable fluctuations or unwarranted changes in . . . price . . . is an undue and unnecessary burden on interstate commerce in such commodity.’’ 460 For the purpose of ‘‘diminishing, eliminating, or preventing’’ that burden, section 4a(a)(1) tasks the Commission with establishing such position limits as it finds are ‘‘necessary.’’ 461 The Commission’s analysis, therefore, proceeds on the basis of these legislative findings that excessive speculation threatens negative consequences for interstate commerce and the accompanying proposition that position limits are an effective tool to diminish, eliminate, or prevent the undue and unnecessary burdens Congress has targeted in the statute.462 The Commission will therefore determine whether position limits are necessary for a given contract, in light of those premises, considering facts and circumstances and economic factors. The statute does not define ‘‘necessary.’’ In legal contexts, the term can have ‘‘a spectrum of meanings.’’ 463 ‘‘At one end, it may ‘import an absolute physical necessity, so strong, that one thing, to which another may be termed necessary, cannot exist without that other;’ at the opposite, it may simply mean ‘no more than that one thing is convenient, or useful, or essential to another.’ ’’ 464 The Commission does not believe Congress intended either end of this spectrum in section 4a(a)(1). On one hand, ‘‘necessary’’ in this context cannot mean that position limits must be the only means capable of addressing the burdens associated with excessive speculation. The Act contains numerous provisions designed to prevent, diminish, or eliminate price disruptions or distortions or unreasonable volatility. For example, the Commission’s antimanipulation authority is designed to stop, redress, and deter intentional acts that may give rise to uneconomic prices or unreasonable volatility.465 Other examples include prohibitions on disruptive trading practices,466 certain core principles for contract markets,467 and the Commission’s emergency powers.468 Yet the Commission is directed by
section 4a(a)(1) not only to impose
position limits to diminish or eliminate sudden and unwarranted fluctuations in price caused by excessive speculation once those other protections have failed, it is directed to establish position limits as necessary to ‘‘prevent’’ those burdens on interstate commerce from arising in the first place. It makes little sense to suppose that Congress meant for the Commission to ‘‘prevent’’ unreasonable fluctuations or unwarranted price changes caused by excessive speculation only after they have already begun to occur, or when the Commission can somehow predict with confidence that the Act’s other tools will be absolutely ineffective.469 The Act uses the word ‘‘necessary’’ in a number of places to authorize measures it is highly unlikely Congress meant to apply only where the relevant policy goals will otherwise certainly fail.470 On the other hand, the Commission also does not believe that Congress intended position limits where they are merely ‘‘useful’’ or ‘‘convenient.’’ As explained above, Congress has already determined that position limits are useful in preventing undue burdens on interstate commerce associated with excessive speculation, but requires the Commission to make the further finding that they are also necessary. A ‘‘convenience’’ standard would be similarly toothless. Rather than accepting either extreme, the Commission preliminarily interprets that sections 4a(a)(1) and 4a(a)(2) direct the Commission to establish position

471The Commission will also be mindful that the undue burdens Congress tasked the Commission with diminishing, eliminating, or preventing would not generally be borne exclusively by speculators or other participants in futures and swaps markets, but instead the public at large or a certain industry or sector of the economy. In a given context, the Commission may find that this factor supports a finding that position limits are necessary. 472The Commission is well positioned to select from among all commodities within the scope of 4a(a)(1) and (2)(A), from its ongoing regulatory activities, including but not limited to market surveillance and product review. 473 7 U.S.C. 19(a). 474See, e.g., Limits on Position and Daily Trading in Soybeans for Future Delivery, 16 FR at 8107 (Aug. 16, 1951); Findings of Fact, Conclusions, and Order in the Matter of Limits on Position and Daily Trading in Cotton for Future Delivery, 5 FR at 3198 (Aug. 28, 1940); In re Limits on Position and Daily Trading in Wheat, Corn, Oats, Barley, Rye, and Flaxseed, for Future Delivery, 3 FR at 3146, 3147 (Dec. 24, 1938). 475See, e.g., Limits on Position and Daily Trading in Soybeans for Future Delivery, 16 FR at 8107 (Aug. 16, 1951); Findings of Fact, Conclusions, and Order in the Matter of Limits on Position and Daily Trading in Cotton for Future Delivery, 5 FR at 3198 (Aug. 28, 1940); In re Limits on Position and Daily Trading in Wheat, Corn, Oats, Barley, Rye, and Flaxseed, for Future Delivery, 3 FR at 3146, 3147 (Dec. 24, 1938). 476The records available from the National Archives during this period are sparse. 477Compare 5 FR at 3198 (cotton) with 3 FR at 3146, 3147 (six types of grain). 478 46 FR at 50945. 479 Id. at 50938, 50940. Section 4a(a)(1) was at the time numbered 4a(1). 480 46 FR at 50940 (Oct. 16, 1981). The Commission based this finding in part upon thenrecent events in the silver market, an apparent reference to the corner and squeeze perpetrated by members of the Hunt family in 1979 and 1980. 481 2013 Proposal, 78 FR at 75686, 75693. 482 Id. at 75691, 75193. 483See 2016 Reproposal, 81 FR at 96894, 96924. 484 In any event, the Commission found those studies inconclusive. 2016 Reproposal, 81 FR at 96723. 485 2016 Reproposal, 81 FR at 96722; see also Corn Products Refining Co. v. Benson, 232 F.2d 554, Continued limits where the Commission finds, based on the relevant facts and circumstances, that position limits would be an efficient mechanism to advance the congressional goal of preventing undue burdens on interstate commerce in the given underlying commodity caused by excessive speculation. For example, it may be that for a given commodity, volatility in derivatives markets would be unlikely to cause high levels of sudden or unreasonable fluctuations or unwarranted changes in the price of the underlying commodity and would have little overall impact on the national economy/interstate commerce. Under those circumstances, the Commission may find that position
limits are unnecessary. There are, however, also contract markets in which volatility would be highly likely to cause sudden or unreasonable fluctuations or unwarranted changes in the price of the underlying commodity or have significantly negative effects on the broader economy. Even if such disruptions would be unlikely due to the characteristics of an individual market, the Commission may nevertheless determine that position limits are necessary as a prophylactic measure given the potential magnitude or impact of the event.471 Most commodities lie somewhere in between, with varying degrees of linkage between derivative contracts and cash-market prices, and differences in importance to the overall economy. There is no mathematical formula to make this determination, though the Commission will consider relevant data where it is available. The Commission must instead exercise its judgment in light of facts and circumstances, including its experience and expertise, to determine what limits are economically justified.472 In all instances, the Commission will consider the applicable costs and benefits as required under section 15(a) of the Act.473 With this interpretation of ‘‘necessary’’ in mind, the Commission below explains its selection of the 25 core referenced futures contracts, and any associated referenced contracts. Going forward, the Commission will make this assessment ‘‘from time to time’’ as required under section 4a(a)(1). The Commission recognizes that this approach differs from that taken in earlier necessity findings. For example, when the Commission’s predecessor agency, the Commodity Exchange Commission (‘‘CEC’’), established position limits, it would publish them in the Federal Register along with necessity findings that were generally conclusory recitations of the statutory language.474 The published basis would be a recitation that trading of a given commodity for future delivery by a person who holds or controls a net position in excess of a given amount tends to cause sudden or unreasonable fluctuations or changes in the price of that commodity, not warranted by changes in the conditions of supply and demand.475 Apart from that, the CEC typically would refer to a public hearing, but provide no specifics of the evidence presented or what the CEC found persuasive.476 The CEC variously imposed limits one commodity at a time, or for several commodities at once.477 In 1981, the Commission issued a rule directing all exchanges to establish position limits for each contract not already subject to federal limits, and for which delivery months were listed to trade.478 There, as here, the Commission explained that section 4a(a)(1) represents an ‘‘express Congressional finding that excessive speculation is harmful to the market, and a finding that speculative limits are an effective prophylactic measure.’’ 479 The Commission observed that all futures markets share the salient characteristics that make position limits a useful tool to
prevent the potential burdens of excessive speculation. Specifically, ‘‘it appears that the capacity of any contract market to absorb the establishment and liquidation of large speculative positions in an orderly manner is related to the relative size of such positions, i.e., the capacity of the market is not unlimited.’’ 480 In 2013, the Commission proposed a necessity finding applicable to all physical commodities, and then reproposed it in 2016. In that finding, the Commission discussed incidents in which the Hunt family in 1979 and 1980 accumulated unusually large silver positions, and in which Amaranth Advisors L.L.C. in 2006 accumulated unusually large natural gas positions.481 The Commission preliminarily determined that the size of those positions contributed to unwarranted volatility and price changes in those respective markets, which imposed undue burdens on interstate commerce, and that position limits could have prevented this.482 The Commission here preliminarily finds those parts of the 2013 and 2016 proposed necessity finding to be beside the point, because Congress has already determined that excessive speculation can place undue burdens on interstate commerce in a commodity, and that position limits can diminish, eliminate, or prevent those burdens. In 2013 and 2016, the Commission also considered numerous studies concerning position limits.483 To the extent that those studies merely examined whether or not position limits are an effective tool, the Commission here does not find them directly relevant, again because Congress has already determined that position limits can be effective to diminish, eliminate, or prevent sudden or unreasonable fluctuations or unwarranted changes in commodity prices.484 In the 2013 and 2016 necessity findings, the Commission stated again that ‘‘all markets in physical commodities’’ are susceptible to the burdens of excessive speculation because all such markets have a finite ability to absorb the establishment and liquidation of large speculative positions in an orderly manner.485 The

560 (1956) (finding it ‘‘obvious that transactions in such vast amounts as those involved here might cause ‘sudden or unreasonable fluctuations in the price’ of corn and hence be an undue and unnecessary burden on interstate commerce’’ (alteration omitted)). 486See supra Section III.D. 487 ISDA Survey of the Derivatives Usage by the World’s Largest Companies 2009. It has also been estimated that the use of commercial derivatives added 1.1 percent to the size of the U.S. economy between 2003 and 2012. See Apanard Prabha et al., Deriving the Economic Impact of Derivatives, (Mar. 2014), available at http:// assets1b.milkeninstitute.org/assets/Publication/ ResearchReport/PDF/Derivatives-Report.pdf. 488The Commission observes that there has been much written in the academic literature about price discovery of the 25 core referenced futures contracts. This demonstrates the importance of the commodities underlying such contracts in our society. The Commission’s Office of the Chief Economist conducted a preliminary search on the JSTOR and Science Direct academic research databases for journal articles that contain the key words: Price Discovery <Commodity Name> Futures. While the articles made varying conclusions regarding aspects of the futures markets, and in some cases position limits, almost all articles agreed that the futures markets in general are important for facilitating price discovery within their respective markets. Commission here, however, preliminarily determines that this characteristic is not sufficient to support a finding that position limits are ‘‘necessary’’ for all physical commodities, within the meaning of
section 4a(a)(1). Congress has already
determined that excessive speculation can give rise to unwarranted burdens on interstate commerce and that position limits can be an effective tool to eliminate, diminish, or prevent those burdens. Yet the statute directs the Commission to establish position limits only when they are ‘‘necessary.’’ In that context, the Commission considers it unlikely that Congress intended the Commission to find that position limits are ‘‘necessary’’ even where facts and circumstances show the significant potential that they will cause disproportionate negative consequences for markets, market participants, or the commodity end users they are intended to protect. Similarly, because the Commission has preliminarily determined that section 4a(a)(2) does not mandate federal speculative position limits for all physical commodities,486 it cannot be that federal position limits are ‘‘necessary’’ for all physical commodities, within the meaning of section 4a(a)(1), on the basis of a property shared by all of them, i.e., a limited capacity to absorb the establishment and liquidation of large speculative positions in an orderly fashion. The Commission requests comments on all aspects of this interpretation of the requirement in section 4a(a)(1) of a necessity finding.
2. Necessity Findings as to the 25 Core
Referenced Futures Contracts As noted above, the proposed rule would impose federal position limits on: 25 core referenced futures contracts, including 16 agricultural products, five metals products, and four energy products; any futures or options on futures directly or indirectly linked to the core referenced futures contracts; and any economically equivalent swaps. As discussed above, the Commission’s necessity analysis proceeds on the basis of certain propositions reflected in the text of section 4a(a)(1): First, that excessive speculation in derivatives markets can cause sudden or unreasonable fluctuations or unwarranted changes in the price of an underlying commodity, i.e., fluctuations not attributable to the forces of supply of and demand for that underlying commodity; second, that such price fluctuations and changes are an undue and unnecessary burden on interstate commerce in that commodity, and; third, that position limits can diminish, eliminate, or prevent that burden. With those propositions established by Congress, the Commission’s task is to make the further determination of whether it is necessary to use position limits, Congress’s prescribed tool to address those burdens on interstate commerce, in light of the facts and circumstances. Unlike prior preliminary necessity findings which focused on evidence of excessive speculation in just wheat and natural gas, this necessity finding addresses all 25 core referenced futures contracts and focuses on two interrelated factors: (1) The importance of the derivatives markets to the underlying cash markets, including whether they call for physical delivery of the underlying commodity; and (2) the importance of the cash markets underlying the referenced futures contracts to the national economy. The Commission will apply the relevant facts and circumstances holistically rather than formulaically, in light of its experience and expertise. With respect to the first factor, the markets for the 25 core referenced futures contracts are large in terms of notional value and open interest, and are critically important to the underlying cash markets. These derivatives markets enable food processors, farmers, mining operations, utilities, textile merchants, confectioners, and others to hedge the risks associated with volatile changes in price that are the hallmark of cash commodity markets. Futures markets were established to allow industries that are vital to the U.S. economy and critical to the American public to accurately manage future receipts, expenses, and financial obligations with a high level of certainty. In general, futures markets perform valuable functions for society such as ‘‘price discovery’’ and by allowing counterparties to transfer price risk to their counterparty. The risk transfer function that the futures markets facilitate allows someone to hedge against price movements by establishing a price for a commodity for a time in the future. Prices in derivatives markets can inform
the cash market prices of, for example, energy used in homes, cars, factories, and hospitals. More than 90 percent of Fortune 500 companies use derivatives to manage risk, and over 50 percent of all companies use derivatives in physical commodity markets such as the 25 core referenced futures contracts.487 The 25 core referenced futures contracts are vital for establishing reliable commodity prices and enabling the beneficial risk transfer between buyers and sellers of commodities, allowing participants to hedge risk and undertake planning with greater certainty. By providing a highly efficient marketplace for participants to offset risks, the 25 core referenced futures contracts attract a broad range of participants, including farmers, ranchers, producers, utilities, retailers, investors, banking institutions, and others. These participants hedge production costs and delivery prices so that, among other things, consumers can always find plenty of food at reliable prices on the grocery store shelves. Futures prices are used for pricing of cash market transactions but also serve as economic signals that help various members of society plan. These signals help farmers decide which crops to plant as well as assist producers to decide how to implement their production processes given the anticipated costs of various inputs and the anticipated prices of any anticipated finished products, and they serve similar functions in other areas of the economy. For the commodities that are the subject of this necessity finding, the Commission preliminarily has determined that there is a significant amount of participation in these commodity markets, both directly and indirectly, through price discovery signals.488 Two key features of the 25 core referenced futures contracts are the role they play in the price discovery process for their respective underlying commodities and the fact that they

489Futures contracts are traded for settlement at a date in the future. At a contract’s delivery month and date, a commodity cash market price and its futures price converge, allowing an efficient transfer of physical commodities between buyers and sellers of the futures contract. 490Standardized terms and conditions for physically-settled futures contracts typically include delivery quantities, qualities, sizes, grades and locations for delivery that are commonly used in the commodity cash market. 491See The Bureau of Economic Analysis, U.S. Department of Commerce, Interactive Access to Industry Economic Accounts Data: GDP by Industry (Historical) that includes GDP contributions by U.S. Farms, Oil & Gas extraction, pipeline transportation, petroleum and coal products, utilities, mining and support activities, primary and fabricated metal products and finance in securities, commodity contracts and investments. 492For energy contracts, physical delivery of the underlying commodity does not occur during the spot month. This allows time to schedule pipeline deliveries and so forth. Instead, a shipping certificate (a financial instrument claim to the physical product), not the underlying commodity, is the delivery instrument that is exchanged at expiration of the futures contract. require physical delivery of the underlying commodity. Price discovery is the process by which markets, through the interaction of buyers and sellers, produce prices that are used to value underlying futures contracts that allow society to infer the value of underlying physical commodities. Adjustments in futures market requirements and valuations by a diverse array of futures market participants, each with different perspectives and access to supply and demand information, can result in adjustments to the pricing of the commodities underlying the futures contract. The futures markets are generally the first to react to such pricemoving information, and price movements in the futures markets reflect a judgment of what is likely to happen in the future in the underlying cash markets. The 25 core referenced futures contracts were selected in part because they generally serve as reference prices for a large number of cash-market transactions, and the Commission knows from large trader reporting that there is a significant presence of commercial traders in these contracts, many of whom may be using the contracts for hedging and price discovery purposes. For example, a grain elevator may use the futures markets as a benchmark for the price it offers local farmers at harvest. In return, farmers look to futures prices to determine for themselves whether they are getting fair value for their crops. The physical delivery mechanism further links the cash and futures markets, with cash and futures prices expected to converge at settlement of the futures contract.489 In addition to facilitating price convergence, the physical delivery mechanism allows the 25 core referenced futures
contracts to be an alternative means of obtaining or selling the underlying commodity for market participants. While most physicallysettled futures contracts are rolled-over or unwound and are not ultimately settled using the physical delivery mechanism, because the futures contracts have standardized terms and conditions that reflect the cash market commodity, participants can reasonably expect that the commodity sold or purchased will meet their needs.490 This physical delivery and price discovery process contributes to the complexity of the markets for the 25 core referenced futures contracts. If these markets function properly, American producers and consumers enjoy reliable commodity prices. Excessive speculation causing sudden or unreasonable fluctuations or unwarranted changes in the price of those commodities could, in some cases, have far reaching consequences for the U.S. economy by interfering with proper market functioning. The cash markets underlying the 25 core referenced futures contracts are to varying degrees vitally important to the U.S. economy, driving job growth, stimulating economic activity, and reducing trade deficits while impacting everyone from consumers to automobile manufacturers and farmers to financial institutions. These 25 cash markets include some of the largest cash markets in the world, contributing together, along with related industries, approximately 5 percent to the U.S. gross domestic product (‘‘GDP’’) directly and a further 10 percent indirectly.491 As described in detail below, the cash markets underlying the 25 core referenced futures contracts are critical to consumers, producers, and, in some cases, the overall economy. By ‘‘excessive speculation,’’ the Commission here refers to the accumulation of speculative positions of a size that threaten to cause the ills Congress addressed in Section 4a— sudden or unreasonable fluctuations or unwarranted changes in the price of the underlying commodity. These potentially violent price moves in the futures markets could impact producers such as utilities, farmers, ranchers, and other hedging market participants. Such unwarranted volatility could result in significant costs and price movements, compromising budgeting and planning, making it difficult for producers to manage the costs of farmlands and oil refineries, and impacting retailers’ ability to provide reliable prices to consumers for everything from cereal to gasoline. To be clear, volatility is sometimes warranted in the sense that it reflects legitimate forces of supply and demand, which can sometimes change very quickly. The purpose of this proposed rule is not to constrain those legitimate price movements. Instead, the Commission’s purpose is to prevent volatility caused by excessive speculation, which Congress has deemed a potential burden on interstate commerce. Further, excessive speculation in the futures market could result in price uncertainty in the cash market, which in turn could cause
periods of surplus or shortage that would not have occurred if prices were more reliable. Properly functioning futures markets free from excessive speculation are essential for hedging the volatility in cash markets for these commodities that are the result of real supply and demand. Specific attributes of the cash and derivatives markets for these 25 commodities are discussed below.
3. Agricultural Commodities
Futures contracts on the 16 agricultural commodities are essential tools for hedging against price moves of these widely grown crops, and are key instruments in helping to smooth out volatility and to ensure that prices remain reliable and that food remains on the shelves. These agricultural futures contracts are used by grain elevators, farmers, merchants, and others and are particularly important because prices in the underlying cash markets swing regularly depending on factors such as crop conditions, weather, shipping issues, and political events. Settlement prices of futures contracts are made available to the public by exchanges in a process known as ‘‘price discovery.’’ To be an effective hedge for cash market prices, futures contracts should converge to the spot price at expiration of the futures contract. Otherwise, positions in a futures contract will be a less effective tool to hedge price risk in the cash market since the futures positions will less than perfectly offset cash market positions. Convergence is so important for the 16 agricultural contracts that exchanges have deliveries occurring during the spot month, unlike for the energy commodities covered by this proposal.492 This delivery mechanism helps to force convergence because shorts who can deliver cheaper than the futures prices may do so, and longs can stand in for delivery if it’s cheaper to

493CME Group website, available at https:// www.cmegroup.com/trading/products/ #pageNumber=1&sortAsc=false&sortField=oi. 494Notional values here and throughout this
section of the release are derived from CFTC
internal data obtained from the Commitments of Traders Reports. Notional value means the U.S. dollar value of both long and short contracts without adjusting for delta in options. Data is as of June 30, 2019. 495What is Agriculture’s Share of the Overall U.S. Economy, USDA Economic Research Services, available at https://www.ers.usda.gov/dataproducts/chart-gallery/gallery/chart-detail/ ?chartId=58270. 496Ag and Food Sales and the Economy, USDA Economic Research Services, available at https:// www.ers.usda.gov/data-products/ag-and-foodstatistics-charting-the-essentials/ag-and-foodsectors-and-the-economy. 497Outlook for U.S. Agricultural Trade, USDA Economic Research Services, available at https:// www.ers.usda.gov/topics/international-markets-ustrade/us-agricultural-trade/outlook-for-usagricultural-trade. 498The 16 agricultural core referenced futures contracts are: CBOT Corn (C), CBOT Oats (O), CBOT Soybeans (S), CBOT Soybean Meal (SM), CBOT Soybean Oil (SO), CBOT Wheat (W), CBOT KC HRW Wheat (KW), ICE Cotton No. 2 (CT), MGEX HRS Wheat (MWE), CBOT Rough Rice (RR), CME Live Cattle (LC), ICE Cocoa (CC), ICE Coffee C (KC), ICE FCOJ–A (OJ), ICE U.S. Sugar No. 11 (SB), and ICE U.S. Sugar No. 16 (SF). 499 Decision Innovation Solutions, 2018 Soybean Meal Demand Assessment, United Soybean Board, available at https://www.unitedsoybean.org/wpcontent/uploads/LOW-RES-FY2018-Soybean-MealDemand-Analysis-1.pdf. 500Wheat Sector at a Glance, USDA Economic Research Service, available at https:// www.ers.usda.gov/topics/crops/wheat/wheat-sectorat-a-glance. 501Cattle & Beef Sector at a Glance, USDA Economic Research Service, available at https:// www.ers.usda.gov/topics/animal-products/cattlebeef/sector-at-a-glance. 502World of Cotton, National Cotton Council of America, available at http://www.cotton.org/econ/ world/index.cfm. 503 Feedgrains Sector at a Glance, USDA Economic Research Service, available at https:// www.ers.usda.gov/topics/crops/corn-and-otherfeedgrains/feedgrains-sector-at-a-glance. 504Where is Rice Grown, Think Rice website, available at http://www.thinkrice.com/on-the-farm/ where-is-rice-grown. 505The United States Meat Industry at a Glance, North American Meat Institute website, available at https://www.meatinstitute.org/index.php?ht=d/sp/i/ 47465/pid/47465. 506The Economic Impact of the Coffee Industry, National Coffee Association, available at http:// www.ncausa.org/Industry-Resources/EconomicImpact. 507U.S. Sugar Industry, The Sugar Association, available at https://www.sugar.org/about/usindustry. While Sugar No. 11 (SB) is primarily an international benchmark, the contract is still used for price discovery and hedging within the United States and has significantly more open interest and daily volume than the domestic Sugar No. 16 (SF). As a pair, these two contracts are crucial tools for risk management and for ensuring reliable pricing, with much of the price discovery occurring in the higher-volume Sugar No. 11 (SB) contract.
508Although the macroeconomic impact of these markets is smaller, the Commission reiterates that it has selected the 25 core referenced futures contracts also based on the importance of derivatives in these commodities to cash-market pricing. 509 Feed Outlook: May 2019, USDA Economic Research Service, available at https:// www.ers.usda.gov/publications/pub-details/ ?pubid=93094. 510Economic Profile of the U.S. Chocolate Industry, World Cocoa Foundation, available at https://www.worldcocoafoundation.org/wp-content/ uploads/Economic_Profile_of_the_US_Chocolate_ Industry_2011.pdf. obtain the underlying through the futures market than the cash market. The Commission does not collect information on all cash market transactions. Nevertheless, the Commission understands that futures prices are often used by counterparties to settle many cash-market transactions due to approximate convergence of the futures contract price to the cash-market price at expiration. Agricultural futures markets are some of the most active, and open interest on agricultural futures have some of the highest notional value. The CBOT Corn (C) and CBOT Soybean (S) contracts, for example, trade over 350,000 and 200,000 contracts respectively per day.493 Outstanding futures and options notional values range anywhere from approximately $ 71 billion for CBOT Corn (C) to approximately $ 70 million for CBOT Oats (O), with the other core referenced futures contracts on agricultural commodities all falling somewhere in between.494 The American agricultural market, including markets for the commodities underlying the 16 agricultural core referenced contracts, is foundational to the U.S. economy. Agricultural, food, and related industries contributed $
1.053 trillion to the U.S. economy in
2017, representing 5.4 percent of U.S. GDP.495 In 2017, agriculture provided
21.6 million full and part time jobs, or
11 percent of total U.S. employment.496 Agriculture’s contribution to international trade is also sizeable. For fiscal year 2019, it was projected that agricultural exports would exceed $ 137 billion, with imports at $ 129 billion for a net balance of trade of $ 8 billion.497 This balance of trade is good for the nation and for American farmers. The U.S. commodity futures markets have provided risk mitigation and pricing that reflects the economic value of the underlying commodity to farmers, ranchers, and producers. The 16 agricultural core referenced futures contracts 498 are key drivers to the success of the American agricultural industry. The commodities underlying these markets are used in a variety of consumer products including:
Ingredients in animal feeds for production of meat and dairy (soybean meal and corn); margarine, shortening, paints, adhesives, and fertilizer (soybean oil); home furnishings and apparel (cotton); and food staples (corn, soybeans, wheat, oats, frozen orange juice, cattle, rough rice, cocoa, coffee, and sugar). The cash markets underlying the 16 agricultural core referenced futures contracts help create jobs and stimulate economic activity. The soybean meal market alone has an implied value to the U.S. economy through animal agriculture which contributed more than 1.8 million American jobs,499 and wheat remains the largest produced food grain in the United States, with planted acreage, production, and farm receipts ranking third after corn and soybeans.500 The United States is the world’s largest producer of beef, and also produced 327,000 metric tons of frozen orange juice in 2018.501 Total economic activity stimulated by the cotton crop is estimated at over $ 75 billion.502 Many of these markets are also significant export commodities, helping to reduce the trade deficit. The United States exports between 10 and 20 percent of its corn crop and 47 percent of its soybean crop, generating tens of billions of dollars in annual economic output.503 Many of these agricultural commodities are also crucial to rural areas. In Arkansas alone, which ranks first among rice-producing states, the annual rice crop contributes $1.3 billion to the state’s economy and accounts for tens of thousands of jobs to an industry that contributes more than $35 billion to the U.S. economy on an annual basis.504 Similarly, the U.S. meat and poultry industry, which includes cattle, accounts for $1.02 trillion in total economic output equaling 5.6 percent of GDP, and is responsible for 5.4 million jobs.505 Coffee-related economic activity comprises 1.6 percent of total U.S. GDP,506 and U.S. sugar producers generate nearly $20 billion per year for the U.S. economy, supporting 142,000 jobs in 22 states.507 Even some of the smaller agricultural markets have a noteworthy economic impact.508 For example, oats are planted on over 2.6 million acres in the United States, with the total U.S. supply in the order of 182 million bushels,509 and in 2010 the United States exported chocolate and chocolate-type confectionary products worth $799 million to more than 50 countries around the world. 510
4. Metal Commodities
The core referenced futures contracts on metal commodities play an important role in the price discovery process and are some of the most active and valuable in terms of notional value.

511 Gold Futures Quotes, CME Group website, available at https://www.cmegroup.com/trading/ metals/precious/gold_quotes_globex.html. 512Calculations based on data submitted to the Commission pursuant to part 16 of the Commission’s regulations. 513 Mineral Commodity Summaries 2019, U.S. Geological Survey, available at http://prd-wret.s3- us-west-2.amazonaws.com/assets/palladium/ production/atoms/files/mcs2019_all.pdf. 514CPM Gold Yearbook 2019, CPM Group, available at https://www.cpmgroup.com/store/cpmgold-yearbook-2019; Goldhub, World Gold Council, available at https://www.gold.org/goldhub. 515World Silver Survey 2019, The Silver Institute, available at https://www.silverinstitute.org/wpcontent/uploads/2019/04/WSS2019V3.pdf. 516 Id. 517Creamer, Martin, Global Mining Derives 45%- Plus of World GDP, Mining Weekly (July. 4, 2012), available at https://www.miningweekly.com/printversion/global-mining-drives-45-plus-of-world-gdpcutifani-2012-07-04. Platinum and palladium mine production in 2018 was less substantial, worth $114 million and $695 million, respectively (All such valuations throughout this release are at current prices as of July 2, 2019.). See Bloxham, Lucy, et al., Pgm Market Report May 2019, Johnson Matthey, available at http://www.platinum.matthey.com/ documents/new-item/pgm%20market%20reports/ pgm_market_report_may_19.pdf. However, derivatives contracts in those commodities do play a role in price discovery. 518Historical Data, SPDR Gold Shares, available at http://www.spdrgoldshares.com/usa/historicaldata. Data as of July 1, 2019. 519 iShares Silver Trust Fund, iShares, available at https://www.ishares.com/us/products/239855/ ishares-silver-trust-fund/1521942788811. ajax?fileType=xls&fileName=iShares-Silver-Trust_ fund&dataType=fund, https:// www.aberdeenstandardetfs.us/institutional/us/enus/products/product/etfs-physical-platinum-sharespplt-arca#15. 520Calculations based on data submitted to the Commission pursuant to part 16 of the Commission’s regulations. 521Calculations based on data submitted to the Commission pursuant to part 16 of the Commission’s regulations. 522CME Comment letter dated April 24, 2015 at 79. 523 Id. at 136. 524Natural Gas and Oil National Factsheet, API Energy, available at https://www.api.org/∼/media/ Files/Policy/Jobs/National-Factsheet.pdf. 525The four energy core referenced futures contracts are: NYMEX Light Sweet Crude Oil (CL), NYMEX NY Harbor ULSD Heating Oil (HO), NYMEX NY Harbor RBOB Gasoline (RB), and NYMEX Henry Hub Natural Gas (NG). The Gold (GC) contract, for example, trades the equivalent of nearly 27 million ounces and 170,000 contracts daily. 511 Outstanding futures and options notional values range from approximately $234 billion in the case of Gold (GC), to approximately $2.34 billion in the case of Palladium (PA), with the other metals core referenced futures contracts all falling somewhere in between.512 Metals futures are used by a diverse array of commercial endusers to hedge
their operations, including mining companies, merchants and refiners. The underlying commodities are also important to the U.S. economy. In 2018, U.S. mines produced $82.2 billion of raw materials, including the commodities underlying the five metals core referenced futures contracts:
COMEX Gold (GC), COMEX Silver (SI), COMEX Copper (HG), NYMEX Platinum (PL), and NYMEX Palladium (PA).513 U.S. mines produced 6.6 million ounces of gold in 2018 worth around $9.24 billion as of July 1, 2019, and the United States holds the largest official gold reserves of any country, worth around $366 billion and representing 75 percent of the value of total U.S. foreign reserves.514 U.S. silver refineries produced around 52.5 million ounces of silver worth around $800 million in 2018 at current prices.515 Major industries, including steel, aerospace, and electronics, process and transform these materials, creating about $3.02 trillion in value-added products.516 The five metals commodities are key components of these products, including for use in:
Batteries, solar panels, water purification systems, electronics, and chemical refining (silver); jewelry, electronics, and as a store of value (gold); building construction, transportation equipment, and industrial machinery (copper); automobile catalysts for diesel engines and in chemical, electric, medical and biomedical applications, and petroleum refining (platinum); and automobile catalysts for gasoline engines and in dental and medical applications (palladium). A disruption in any of these markets would impact highly important and sensitive industries, including those critical to national security, and would also impact the price of consumer products. The underlying metals markets also create jobs and contribute to GDP. Over 20,000 people were employed in U.S. gold and copper mines and mills in 2017 and 2018, metal ore mining contributed $54.5 billion to U.S. GDP in 2015, and the global copper mining industry drives more than 45 percent of the world’s GDP, either on a direct basis or through the use of products that facilitate other industries.517 The gold and silver markets are especially important because they serve as financial assets and a store of value for individual and institutional investors, including in times of economic or political uncertainty. Several exchange-traded funds (‘‘ETFs’’) that are important instruments for U.S. retail and institutional investors also hold significant quantities of these metals to back their shares. A disruption to any of these metals markets would thus not only impact producers and retailers, but also potentially retail and institutional investors. The iShares Silver Trust ETF, for example, holds around 323.3 million ounces of silver worth $4.93 billion, and the largest U.S. listed gold-backed ETF holds around
25.5 million ounces to back its shares
worth around $35.7 billion.518 Platinum and palladium ETFs are worth hundreds of millions of dollars as well.519
5. Energy Commodities
The energy core referenced futures markets are crucial tools for hedging price risk for commodities which can be highly volatile due to changes in weather, economic health, demandrelated price swings, and pipeline and supply availability or disruptions. These futures contracts are used by some of the largest refiners, exploration and production companies, distributors, and by other key players in the energy industry, and are some of the most widely traded and valuable contracts in the world in terms of notional value. The NYMEX Light Sweet Crude Oil (CL) contract, for example, is the world’s most liquid and actively traded crude oil contract, trading nearly 1.2 million contracts a day, and the NYMEX Henry Hub Natural Gas (NG) contract trades 400,000 contracts daily.520 Futures and option notional values range from $ 53 billion in the case of NYMEX NY Harbor RBOB Gasoline (RB) and NYMEX NY Harbor ULSD Heating Oil (HO), to $ 498 billion for NYMEX Light Sweet Crude Oil (CL).521 Some of the energy core referenced futures contracts also serve as key benchmarks for use in pricing cashmarket and other transactions. NYMEX NY Harbor RBOB Gasoline (RB) is the main benchmark used for pricing gasoline in the U.S. petroleum products market, a huge physical market with total U.S. refinery capacity of approximately 9.5 million barrels per day of gasoline.522 Similarly, the NYMEX NY Harbor ULSD Heating Oil (HO) contract is the main benchmark used for pricing the distillate products market, which includes diesel fuel, heating oil, and jet fuel. 523 The U.S. energy markets are some of the most important and complex in the world, contributing over $ 1.3 trillion to the U.S. economy.524 Crude oil, heating oil, gasoline, and natural gas, the commodities underlying the four energy core reference futures contracts,525 are key contributors to job growth and GDP. In 2015, the natural gas and oil industries supported 10.3 million jobs directly and indirectly, accounting for
5.6 percent of total U.S. employment,
and generating $ 714 billion in wages to

526Natural Gas and Oil National Factsheet, API Energy, available at https://www.api.org/∼/media/ Files/Policy/Jobs/National-Factsheet.pdf; PricewaterhouseCoopers, Impacts of the Natural Gas and Oil Industry on the US Economy in 2015, API Energy, available at https://www.api.org/∼/ media/Files/Policy/Jobs/Oil-and-Gas-2015- Economic-Impacts-Final-Cover-07-17-2017.pdf. 527PricewaterhouseCoopers, Impacts of the Natural Gas and Oil Industry on the US Economy in 2015, API Energy, at 12, available at https:// www.api.org/∼/media/Files/Policy/Jobs/Oil-andGas-2015-Economic-Impacts-Final-Cover-07-17- 2017.pdf. 528CME Comment Letter dated April 24, 2015 at 135. 529Natural Gas: The Facts, American Gas Association, available at https://www.aga.org/ globalassets/2019-natural-gas-factsts-updated.pdf. 530 Id. 531The Bloomberg Commodity Index Methodology, Bloomberg, at 17 (Dec. 2018) available at https://data.bloomberglp.com/ professional/sites/10/BCOM-MethodologyDecember-2019.pdf. The list of commodities that Bloomberg deems eligible for inclusion in its index overlaps significantly with the Commission’s proposed list of 25 core referenced futures contracts. 532S&P GSCI Methodology, S&P Dow Jones Indices, at 8 (Oct. 2019) available at https:// us.spindices.com/documents/methodologies/ methodology-sp-gsci.pdf?force_download=true. 533FIA notes that volume for exchange-traded futures is measured by the number of contracts traded on a round-trip basis to avoid doublecounting. Furthermore, FIA notes that open interest for exchange-traded futures is measured by the number of contracts outstanding at the end of the month. 534CEA section 4a(a)(1). 535See infra Section IV.A. (discussion of costbenefit considerations for the proposed changes). 536See infra Section IV.A.2.a. (cost-benefit discussion of market liquidity and integrity). account for 6.7 percent of national income.526 Crude oil alone, which is a key component in making gasoline, contributes 7.6 percent of total U.S. GDP. RBOB gasoline, which is a byproduct of crude oil that is used as fuel for vehicles and appliances, contributes $ 35.5 billion in income and $57 billion in economic activity.527 ULSD comprises all on-highway diesel fuel consumed in the United States, and is also commonly used as heating oil.528 Natural gas is similarly important, serving nearly 69 million homes, 185,400 factories, and 5.5 million businesses such as hotels, restaurants, hospitals, schools, and supermarkets. More than 2.5 million miles of pipeline transport natural gas to more than 178 million Americans.529 Natural gas is also a key input for electricity generation and comprises more than one quarter of all primary energy used in the United States. 530 U.S. agricultural producers also rely on an affordable, dependable supply of natural gas, as fertilizer used to grow crops is composed almost entirely of natural gas components.
6. Consistency With Commodity Indices
The criteria underlying the Commission’s necessity finding is consistent with the criteria used by several widely tracked third party commodity index providers in determining the composition of their indices. Bloomberg selects commodities for its Bloomberg Commodity Index that in its view are ‘‘sufficiently significant to the world economy to merit consideration,’’ that are ‘‘tradeable through a qualifying related futures contract’’ and that generally are the ‘‘subject of at least one futures contract that trades on a U.S. exchange.’’ 531 Similarly, S&P’s GSCI index is, among other things, ‘‘designed to reflect the relative significance of each of the constituent commodities to the world economy.’’ 532 Applying these criteria, Bloomberg and S&P have deemed eligible for inclusion in their indices lists of commodities that overlap significantly with the Commission’s proposed list of 25 core referenced futures contracts. Independent index providers thus appear to have arrived at similar conclusions to the Commission’s preliminary necessity finding regarding the relative importance of certain commodity markets.
7. Conclusion
This proposal only sets limits for referenced contracts for which a DCM currently lists a physically-settled core referenced futures contract. As discussed above, there are currently over 1,200 contracts on physical commodities listed on DCMs, and there are physical commodities other than those underlying the 25 core referenced futures contracts that are important to the national economy, including, for example, steel, butter, uranium, aluminum, lead, random length lumber, and ethanol. However, unlike the 25 core referenced futures contracts, the derivatives markets for those commodities are not as large as the markets for the 25 core referenced futures contracts and/or play a less significant role in the price discovery process. For example, the futures contracts on steel, butter, and uranium were not included as core referenced futures contracts because they are cash-settled contracts that settle to a third party index. Among the agricultural commodity futures listed on CME that are cash-settled only to an index are:
class III milk, feeder cattle, and lean hogs. All three of these were included in the 2011 Final Rulemaking. Because there are no physically-settled futures contracts on these commodities, these cash-settled contracts would not qualify as referenced contracts are would not be subject to the proposed rule. While the futures contracts on aluminum, lead, random length lumber, and ethanol are physically settled contracts, their open interest and trading volume is lower than that of the CBOT Oats contract, which is the smallest market included among the 25 core referenced futures contracts as measured by open interest and volume. In that regard, based on FIA end of month open interest data and 12-month total trading volume data for December 2019, CBOT Oats had end of month open interest of 4,720 contracts and 12-month total trading volume ending in December 2019 of 162,682 round turn contracts.533 In comparison, the end of month December 2019 open interest and 12-month total trading volume ending in December 2019 for the other commodity futures contracts that were not selected to be included as core referenced futures contracts were as follows: COMEX Aluminum (267 OI/ 2,721 Vol), COMEX Lead (0 OI/0 Vol), CME Random Length Lumber (3,275 OI/ 11,893 Vol), and CBOT Ethanol (708 OI/ 2,686 Vol.). It would be impracticable for the Commission to analyze in comprehensive fashion all contracts that have either feature, so the Commission has chosen commodities for which the underlying and derivatives markets both play important economic roles, including the potential for especially acute burdens on a given commodity in interstate commerce that would arise from excessive speculation in derivatives markets. Line drawing of this nature is inherently inexact, and the Commission will revisit these and other contracts ‘‘from time to time’’ as the statute requires.534 Depending on facts and circumstances, including the Commission’s experience administering the proposed limits with respect to the 25 core referenced futures contracts, the Commission may determine that additional limits are necessary within the meaning of section 4a(a)(1). As discussed in the cost benefit consideration below, the Commission’s proposed limits are not without costs, and there are potential burdens or negative consequences associated with establishing the proposed limits.535 In particular, if the levels are set too high, there is a greater risk of excessive speculation that could harm market participants and the public. If the levels are set too low, transaction costs may rise and liquidity could be reduced.536 Nevertheless, the Commission preliminarily believes that the specific proposed limits applicable to the 25 core referenced futures contracts would

537 7 U.S.C. 19(a).
538 Id.
539This cost-benefit consideration section is divided into seven parts, including this introductory section, each discussing their respective baseline benchmarks with respect to any applicable CEA or regulatory provisions. 540For example, the proposal could result in increased costs to market participants who may need to adjust their trading and hedging strategies to ensure that their aggregate positions do not exceed federal position limits, particularly those who will be subject to federal position limits for the first time (i.e., those who may trade contracts for which there are currently no federal limits). On the other hand, existing costs could decrease for those existing traders whose positions would fall below the new proposed limits and therefore would not be forced to adjust their trading strategies and/or apply for exemptions from the limits, particularly if the Commission’s proposal improves market liquidity or other metrics of market health. Similarly, for those market participants who would become subject to the federal position limits, general costs would be lower to the extent such market participants can leverage their existing compliance infrastructure in connection with existing exchange position limit regimes relative to those market participants that do not currently have such systems. 541With respect to the Commission’s analysis under its discussion of its obligations under the Paperwork Reduction Act (‘‘PRA’’), the Commission has endeavored to quantify certain costs and other burdens imposed on market participants related to collections of information as defined by the PRA. See generally Section IV.B. (discussing the Commission’s PRA determinations). 542While the general themes contained in comments submitted in response to prior proposals informed this rulemaking, the Commission is withdrawing the 2013 Proposal, the 2016 Supplemental Proposal, and the 2016 Reproposal. See supra Section I.A. limit such potential costs, and that the significant benefits associated with advancing the statutory goal of preventing the undue burdens associated with excessive speculation in these commodities justify the potential costs associated with establishing the proposed limits. G. Request for Comment The Commission requests comment on all aspects of the proposed necessity finding. The Commission also invites comments on the following:
(50) Does the proposed necessity finding take into account the relevant factors to ascertain whether position limits would be necessary on a core referenced futures contract? (51) Does the proposed necessity finding base its analysis on the correct levels of trading volume and open interest? If not, what would be a more appropriate minimum level of trading volume and/or open interest upon which to evaluate whether federal position limits are necessary to prevent excessive speculation? (52) Are there particular attributes of any of the 25 proposed core referenced futures contracts that the Commission should consider when determining whether federal position limits are or are not necessary for that particular product?
IV. Related Matters
A. Cost-Benefit Considerations

Introduction
Section 15(a) of the Commodity
Exchange Act (‘‘CEA’’ or ‘‘Act’’) requires the Commodity Futures Trading Commission (‘‘Commission’’) to consider the costs and benefits of its actions before promulgating a regulation under the CEA.537 Section 15(a) further specifies that the costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations (collectively, the ‘‘section 15(a) factors’’).538 The Commission interprets section 15(a) to require the Commission to consider only those costs and benefits of its proposed changes that are attributable to the Commission’s discretionary determinations (i.e., changes that are not otherwise required by statute) compared to the existing status quo requirements. For this purpose, the status quo requirements include the CEA’s statutory requirements as well as any applicable Commission regulations that are consistent with the CEA.539 As a result, any proposed changes to the Commission’s regulations that are required by the CEA or other applicable statutes would not be deemed to be a discretionary change for purposes of discussing related costs and benefits. The Commission anticipates that the proposed position limits regulations will affect market participants differently depending on their business model and scale of participation in the commodity contracts that are covered by the proposal.540 The Commission also anticipates that the proposal may result in ‘‘programmatic’’ costs to some market participants. Generally, affected market participants may incur increased costs associated with developing or revising, implementing, and maintaining compliance functions and procedures. Such costs might include those related to the monitoring of positions in the relevant referenced contracts; related filing, reporting, and recordkeeping requirements, and the costs of changes to information technology systems. The Commission has preliminarily determined that it is not feasible to quantify the costs or benefits with reasonable precision and instead has identified and considered the costs and benefits qualitatively.541 The Commission believes that for many of the costs and benefits that quantification is not feasible with reasonable precision because doing so would require understanding all market participants’ business models, operating models, cost structures, and hedging strategies, including an evaluation of the potential alternative hedging or business strategies that could be adopted under the proposal. Further, while Congress has tasked the Commission with establishing such position limits as the Commission finds are ‘‘necessary,’’ some of the benefits, such as mitigating or eliminating manipulation or excessive speculation, may be very difficult or infeasible to quantify. These benefits,
moreover, would likely manifest over time and be distributed over the entire market. In light of these limitations, to inform its consideration of costs and benefits of the proposed regulations, the Commission in its discretion relies on:
(1) Its experience and expertise in regulating the derivatives markets; (2) information gathered through public comment letters 542 and meetings with a broad range of market participants; and (3) certain Commission data, such as the Commission’s Large Trader Reporting System and data reported to swap data repositories. In addition to the specific questions included throughout the discussion below, the Commission generally requests comment on all aspects of its consideration of costs and benefits, including: Identification and assessment of any costs and benefits not discussed herein; data and any other information to assist or otherwise inform the Commission’s ability to quantify or qualify the costs and benefits of the proposed rules; and substantiating data, statistics, and any other information to support positions posited by commenters with respect to the Commission’s consideration of costs and benefits. The Commission preliminarily considers the benefits and costs discussed below in the context of international markets, because market participants and exchanges subject to the Commission’s jurisdiction for purposes of position limits may be organized outside of the United States; some industry leaders typically conduct operations both within and outside the United States; and market participants may follow substantially similar business practices wherever located.

543 7 U.S.C. 2(i).
544The nine legacy agricultural contracts currently subject to federal spot and non-spot month limits are: CBOT Corn (C), CBOT Oats (O), CBOT Soybeans (S), CBOT Wheat (W), CBOT Soybean Oil (SO), CBOT Soybean Meal (SM), MGEX Hard Red Spring Wheat (MWE), ICE Cotton No. 2 (CT), and CBOT KC Hard Red Winter Wheat (KW). 545 17 CFR 150.2. Because the Commission has not yet implemented the Dodd-Frank Act’s amendments to the CEA regarding position limits, except with respect to aggregation (see generally Final Aggregation Rulemaking, 81 FR at 91454) and the vacated 2011 Position Limits Rulemaking’s amendments to 17 CFR 150.2 (see International Swaps and Derivatives Association v. United States Commodity Futures Trading Commission, 887 F. Supp. 2d 259 (D.D.C. 2012)), the baseline or status quo consists of the provisions of the CEA relating to position limits immediately prior to effectiveness of the Dodd-Frank Act amendments to the CEA and the relevant provisions of existing parts 1, 15, 17, 19, 37, 38, 140, and 150 of the Commission’s regulations, subject to the aforementioned exceptions. 546The 16 proposed new products that would be subject to federal spot month limits would include seven agricultural (CME Live Cattle (LC), CBOT Rough Rice (RR), ICE Cocoa (CC), ICE Coffee C (KC), ICE FCOJ–A (OJ), ICE U.S. Sugar No. 11 (SB), and ICE U.S. Sugar No. 16 (SF)), four energy (NYMEX Light Sweet Crude Oil (CL), NYMEX New York Harbor ULSD Heating Oil (HO), NYMEX New York Harbor RBOB Gasoline (RB), NYMEX Henry Hub Natural Gas (NG)), and five metals (COMEX Gold (GC), COMEX Silver (SI), COMEX Copper (HG), NYMEX Palladium (PA), and NYMEX Platinum (PL)) contracts. 547See supra Section III.F. (discussion of the necessity finding). 548 In promulgating the position limits framework, Congress instructed the Commission to consider several factors: First, CEA section 4a(a)(3) requires the Commission when establishing 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 position limits to shift to trading on a foreign exchange. 549See supra Section III.F. (discussion of the necessity finding). 550Open interest for this purpose includes the sum of open contracts, as defined in § 1.3 of the Commission’s regulations, in futures contracts and in futures option contracts converted to a futuresequivalent amount, as defined in current § 150.1(f) of the Commission’s regulations. See 17 CFR 1.3 and 150.1(f). 551Notional value of open interest for this purpose is open interest multiplied by the unit of trading for
the relevant futures contract multiplied by the price of that futures contract. 552A combination of higher average trading volumes and open interest is an indicator of a contract’s market liquidity. Higher trading volumes make it more likely that the cost of transactions is lower with narrower bid-ask spreads. Where the Commission does not specifically refer to matters of location, the discussion of benefits and costs below refers to the effects of this proposal on all activity subject to the proposed regulations, whether by virtue of the activity’s physical location in the United States or by virtue of the activity’s connection with or effect on U.S. commerce under CEA section 2(i).543 The Commission will identify and discuss the costs and benefits organized conceptually by topic, and certain topics may generally correspond with a specific proposed regulatory section. The Commission’s discussion is organized as follows: (1) The scope of the commodity derivative contracts that would be subject to the proposed position limits framework, including with respect to the 25 proposed core referenced futures contracts and the proposed definitions of ‘‘referenced contract’’ and ‘‘economically equivalent swaps;’’ (2) the proposed federal position limit levels (proposed § 150.2); (3) the proposed federal bona fide hedging definition (proposed § 150.1) and other Commission exemptions from federal position limits (proposed § 150.3); (4) proposed streamlined process for the Commission and exchanges to recognize bona fide hedges and to grant exemptions for purposes of federal position limits (proposed §§ 150.3 and 150.9) and related reporting changes to part 19 of the Commission’s regulations; (5) the proposed exchange-set position limits framework and exchange-granted exemptions thereto (proposed § 150.5); and (6) the section 15(a) factors.
2. ‘‘Necessity Finding’’ and Scope of
Referenced Futures Contracts Subject to Proposed Federal Position Limit Levels Federal spot and non-spot month limits currently apply to futures and options on futures on the nine legacy agricultural commodities.544 The Commission’s proposal would expand the scope of commodity derivative contracts currently subject to the Commission’s existing federal position limits framework 545 so that federal spotmonth limits would apply to futures and options on futures on 16 additional physical commodities, for a total of 25 physical commodities.546 The Commission has preliminarily interpreted CEA section 4a to require that the Commission must make an antecedent ‘‘necessity’’ finding that establishing federal position limits is ‘‘necessary’’ to diminish, eliminate, or prevent certain burdens on interstate commerce with respect to the physical commodities in question.547 As the statute does not define the term ‘‘necessary,’’ 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), as noted throughout this discussion of the Commission’s cost-benefit considerations.548 As discussed in greater detail in the preamble, the Commission proposes to establish position limits on futures and options on futures for these 25 commodities on the basis that position limits on such contracts are ‘‘necessary.’’ In determining to include the proposed 25 core referenced futures contracts within the proposed federal position limit framework, the Commission considered the effects that these contracts have on the underlying commodity, especially with respect to price discovery; the fact that they require physical delivery of the underlying commodity and therefore may be more affected by manipulation such as corners and squeezes compared to cash-settled contracts; and, in some cases, the especially acute economic burdens on interstate commerce that could arise from excessive speculation in these contracts causing sudden or unreasonable fluctuations or unwarranted changes in the price of the commodities underlying these contracts.549 More specifically, the 25 core referenced futures contracts were selected because they: (i) Physically settle, (ii) have high levels of open interest 550 and significant notional value of open interest,551 (iii) serve as a reference price for a significant number of swaps and/or cash market transactions, and/or (iv) have, in most cases, relatively higher average trading volumes.552 These factors reflect the important and varying degrees of linkage between the derivatives markets and the underlying cash markets. The Commission preliminarily acknowledges that there is no mathematical formula that would be dispositive, though the Commission has considered relevant data where it is available. As a result, the Commission preliminarily has concluded that it must exercise its judgment in light of
facts and circumstances, including its experience and expertise, to determine whether federal position limit levels are economically justified. For example, based on its general experience, the Commission preliminarily recognizes that contracts that physically settle can, in certain circumstances during the spot month, be at risk of corners and squeezes, which could distort pricing and resource allocation, make it more costly to implement hedge strategies, and harm the underlying cash market. Similarly, certain contracts with higher

Position Limits for Derivatives

Lineage: In force

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