Alert July 31, 2012

CFTC Issues No-Action Relief Regarding Aggregation Provisions in Position Limits Rule

The CFTC’s Division of Market Oversight issued a letter providing temporary no-action relief with respect to aggregation provisions of its rule entitled “Position Limits for Futures and Swaps.”  The rule establishes a position limits regime for 28 commodity futures and options contracts and economically equivalent physical commodity swaps and is scheduled to go into effect 60 days after the forthcoming publication of the product definition rules in the Federal Register.  As reported in the December 6, 2011 Financial Services Alert, the rule is currently the subject of a lawsuit by the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association (International Swaps and Derivatives Association, Inc., et al. v. United States Commodity Futures Trading Commission, Case No. 11-cv-2146 (RLW) (D.D.C.)). 

The core of the lawsuit revolves around whether the CFTC, in enacting the rule, appropriately discharged its statutory duties in considering the necessity and appropriateness of the rule.  The plaintiffs allege that the CFTC failed to identify excessive speculation as a real problem in the commodities markets needing corrective action and argue that the rule, if implemented, will have a number of deleterious effects on the financial markets, including potentially causing more price volatility.  The plaintiffs also state that implementation of the rule will require costly compliance efforts and make it difficult for market participants to manage risk.  In addition, because the rule requires the aggregation of positions held in accounts for which a given person has at least a 10% ownership or equity interest, the plaintiffs state that certain market participants may need to fundamentally restructure their corporate relationships to comply with the position limits. 

The CFTC has previously proposed easing the aggregation rules by permitting persons to disaggregate accounts or positions in which they hold at least a 10% (but no greater than 50%) ownership or equity interest, provided certain requirements are met.  The comment period on the proposal, which the no-action letter refers to as the “Aggregation Notice,” has closed. 

Persons seeking to avail themselves of the no-action relief have two choices:  (1) comply with the final rule as if it were amended as proposed in the Aggregation Notice, or (2) comply with the final rule except that a person need not aggregate certain positions held by another entity that meet certain requirements enumerated in the letter.  Persons seeking to avail themselves of the no-action letter must inform the CFTC prior to the date upon which that person intends to rely on the relief.

The no-action relief remains in effect until the earliest of (1) 60 days after the CFTC issues an order declining to take further action on the Aggregation Notice; (2) 60 days after publication in the Federal Register of a rule finalizing changes to the CFTC’s aggregation policy; and (3) December 31, 2012.