"CFTC Proposes Amendments to Aggregation Requirements for Position Limits"

by Skadden, Arps, Slate, Meagher & Flom LLP
Contact

[authors: Mark D. Young, Maureen A. Donley, Prashina J. Gagoomal, Daniel S. Konar II]

On May 30, 2012, the Commodity Futures Trading Commission (CFTC) published in the Federal Register a notice of proposed rulemaking (Proposal) that, if adopted, would broaden key exemptions from and make what the CFTC characterizes as “technical changes” to the aggregation requirements under the position limits rule (Final Rule) adopted in November 2011.1 These proposed amendments are being issued, in part, in response to a petition for exemptive relief that was submitted by the Working Group of Commercial Energy Firms in January 2012. The comment period on the Proposal ends on June 29, 2012.

What Would Change? 

Owned Entity Exemption

The Final Rule requires persons with an ownership or equity interest of at least 10 percent in another entity (an “owned entity”) to aggregate the accounts and positions owned or controlled by the owned entity with the person’s own accounts or positions.2 The Proposal would provide an exemption from the aggregation requirement to a person with an ownership or equity interest in an owned entity of at least 10 percent but not greater than 50 percent, provided that the following five conditions are satisfied: 

  • Neither the person nor the owned entity has knowledge of the trading decisions of the other;  
  • Each entity trades pursuant to separately developed and independent trading systems;   
  • Each entity has, and enforces, written procedures to preclude the other entity from having knowledge of, gaining access to, or receiving data about, trades of the entity; 
  • Neither shares employees that control trading decisions of the other entity; and 
  • Neither have risk management systems that permit the sharing of trades or trading strategy with the other.3 

As with other exemptions from aggregation, persons seeking to claim this exemption would be required to file a notice in accordance with CFTC Rule 151.7(h).4 The Proposal would continue to require aggregation of an owned entity’s accounts and positions if a person has a greater than 50 percent ownership or equity interest in the owned entity.5

Market Making Exemption

The Final Rule provides an exemption from aggregation where a person’s ownership or equity interests in an owned entity result from underwriting activities.6 The Proposal would expand this underwriting exemption to include reasonable market making activities.7 Specifically, the Proposal would exempt a broker-dealer registered with the Securities and Exchange Commission (SEC) from aggregating an owned entity’s accounts and positions if the ownership interest was acquired as part of “reasonable activity in the normal course of [its] business as a dealer, provided that the [broker-dealer] does not have actual knowledge of the trading decisions of the owned entity.”8 The CFTC notes in the preamble (but not in the proposed rule text) that the market making exemption would not apply where a broker-dealer acquires more than a 50 percent ownership or equity interest because the CFTC does not believe that such a large interest would be consistent with market making.9

Information Sharing Restriction Exemption

Under the Final Rule, a person is exempted from aggregating the positions of an owned or controlled entity if sharing information about the owned or controlled entity’s positions would cause either the person or the entity to violate a federal law or regulation.10 The Proposal would broaden this information sharing restriction exemption to include state and foreign laws and regulations, as well as federal law.11 The Proposal also would recognize that a person need not claim that sharing such information would result in a per se violation of federal, state or foreign law in order to claim the exemption, only that sharing such information would present a “reasonable risk” of a violation.12 The CFTC indicates that whether a “reasonable risk” exists is a facts-and-circumstances analysis and will depend on “the interconnection of the applicable statute and regulatory guidance.”13 The amended information sharing restriction exemption would continue to require an opinion of counsel that a reasonable risk exists.14

Higher-Tier Entities

The Proposal would allow a person to rely on the aggregation exemptions claimed by an owned entity.15 The CFTC provides the following example: “if company A has a 30 percent interest in company B, and company B has filed an exemption notice for the accounts and positions of company C, then company A may rely upon company B’s exemption notice for the accounts and positions of company C.”16  A higher-tier person would not need to file a notice of exemption with respect to the accounts and positions identified in the owned entity’s notice filing provided that the following three conditions are satisfied:

  • The person complies with the conditions applicable to the exemption specified in the owned entity’s notice filing, other than the filing requirements;  
  • The person does not otherwise control trading of the accounts or positions identified in the owned entity’s notice filing; and  
  • Upon call by the CFTC, the person provides information concerning his compliance with these requirements.17

Various Technical Changes

The CFTC includes in the Proposal various amendments that it views as “technical changes.”18 These changes would include requiring a futures commission merchant (FCM) to file a notice of exemption in accordance with Rule 151.7(h) in order to claim the FCM aggregation exemption, clarifying that the notice filing required in the information sharing restriction exemption is the same notice required under Rule 151.7(h), and revising the language in Rule 151.10(b)(4) to make clear that the notice required by Rule 151.7(h) is effective upon filing.19 The CFTC also includes as a “clarification” language in Rule 151.7(h) that would require such notice to be certified by a senior officer and that would impose a duty to promptly amend any notice in the event of a material change.20  Finally, the Proposal would amend the definitions of “eligible entity” and “independent account controller” to include limited members and managing members, respectively, of a commodity pool that is structured as a limited liability corporation and whose operator is exempt from registration under Rule 4.13.21

When Would These Amendments Take Effect?

The Proposal does not provide any guidance on when the CFTC will finalize these amendments or, upon adoption, when the amendments will take effect. The Final Rule adopted in November 2011 will be phased-in beginning 60 days after the CFTC and SEC publish in the Federal Register a joint final rule to further define the term “swap.” While the Proposal does not address timing, the abbreviated 30-day comment period for this Proposal may be an indication that the CFTC expects to adopt amendments to the Final Rule’s aggregation requirements prior to the implementation of the Final Rule.

___________________________

1 Aggregation Under Part 151, Position Limits for Futures and Swaps, 77 Fed. Reg. 31767 (May 30, 2012). For a discussion of the Final Rule, see Skadden’s November 18, 2011 Client Alert.

2 17 C.F.R. § 151.7(b)(1). The Final Rule exempts participants in commodity pools, subject to certain conditions, from this owned entity aggregation requirement. 17 C.F.R. § 151.7(b), (c).

3 77 Fed. Reg. at 31782.

4 77 Fed. Reg. at 31775.

5 77 Fed. Reg. at 31774.

6 77 Fed. Reg. at 31776.

7 Id.

8 Id.

9 77 Fed. Reg. at 31776, 31782.

10 17 C.F.R. § 151.7(i).

11 77 Fed. Reg. at 31771-72.

12 77 Fed. Reg. at 31771.

13 Id.

14 77 Fed. Reg. at 31772.

15 Supra note 6.

16 Supra note 6.

17 77 Fed. Reg. at 31782.

18 Supra note 12.

19 Supra note 12.

20 Supra note 4.

21 77 Fed. Reg. at 31777.

 

Download PDF Version
 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Skadden, Arps, Slate, Meagher & Flom LLP | Attorney Advertising

Written by:

Skadden, Arps, Slate, Meagher & Flom LLP
Contact
more
less

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!