Navigating the Regulatory Trap of Futures Position Limits — CFTC Staff Permits Position Limit Disaggregation for Two Affiliates

The US Commodity Futures Trading Commission (“CFTC”) requires and enforces speculative position limits for exchange-traded futures and options contracts on certain agricultural commodities. Specifically, CFTC Rule 150.2 sets out speculative limits for several contract types that trade on one of the following designated contract markets: the Chicago Board of Trade, the Minneapolis Grain Exchange, ICE Futures U.S. and the Kansas City Board of Trade.¹ In cases where one person directly or indirectly owns 10 percent or more of the equity or other ownership interests in another entity or entities (each an “owned entity” of such common owner), CFTC Rule 150.4 generally requires that the common owner aggregate all Rule 150.2 positions in accounts of such owned entities with such positions held or controlled by the common owner.² Other factors that may trigger aggregation include direct or indirect trading control, accounts or pools with substantially identical trading strategies, and acting pursuant to an expressed or implied agreement or understanding with others. Although limited exemptions from aggregation are available through a notice filing process set out in Rule 150.4, the position limits and aggregation framework has become a confusing regulatory trap for many agricultural commodity market participants.

On behalf of a client, we recently sought and obtained no-action relief from the CFTC staff that permits two specific affiliated entities with a shared employee to disaggregate their Rule 150.2 positions, subject to certain firewall conditions. In response to our request, the CFTC’s Division of Market Oversight (“DMO”) issued Staff Letter 18-33,³ in which the staff took a no-action position to permit the two affiliated entities to rely on the “owned entity exemption” under CFTC Rule 150.4(b)(2), notwithstanding that one of the conditions of the exemption prohibits the sharing of employees that control the trading decisions of either entity. Only the two entities described anonymously in Staff Letter 18-33 may rely on the relief.

Specific Relief

Staff Letter 18-33 grants specific no-action relief to permit disaggregation of positions between an unnamed grain marketing company and an owned entity of that company. The owned entity buys, handles, sells and transports such commodities. The grain marketing company entered into an agreement to lend one of its employees with specialized physical grain market expertise to the owned entity for purposes of buying and selling physical grain for export on the marketing company’s behalf. Under the terms of the agreement, the services provided by the shared employee are limited to physical grain transactions and related activities, but do not include derivatives trading.

One of the conditions of the owned entity exemption under Rule 150.4(b)(2) is that the two entities do not share employees that control the “trading decisions” of either entity. The relief granted in effect limits the scope of this condition to “derivatives trading decisions,” where “derivatives trading” refers to the “trading of derivatives subject to the [CFTC]’s jurisdiction.”  All other regulatory requirements, including the remaining conditions set forth in CFTC Rule 150.4(b)(2), must be met. Among other things, this means that the entities must have policies and procedures that preclude each from having knowledge of, gaining access to or receiving data about trades of the other. These procedures must include security arrangements, including separate physical locations, which would maintain the independence of their activities.

The letter is significant because it is the first the CFTC staff has granted for a shared trader employee who is engaged in the physical trading activities of one of the two related entities.  The relief provided by Staff Letter 18-33 remains in effect until 12:01 am eastern standard time on August 12, 2019. During the period of the relief, DMO will continue to evaluate whether the relief granted hinders staff’s ability to conduct surveillance and may alter it accordingly.

Owned Entity Exemption

Under the owned entity exemption provided by CFTC Rule 150.4(b)(2),⁴ a person need not aggregate the accounts or positions of an owned entity, provided that:

(i) Such person, including any entity that such person must aggregate, and the owned entity (to the extent that such person is aware or should be aware of the activities and practices of the aggregated entity or the owned entity):

(A) Do not have knowledge of the trading decisions of the other;

(B) Trade pursuant to separately developed and independent trading systems;

(C) Have and enforce written procedures to preclude each from having knowledge of, gaining access to, or receiving data about, trades of the other. Such procedures must include security arrangements, including separate physical locations, which would maintain the independence of their activities;

(D) Do not share employees that control the trading decisions of either; and

(E) Do not have risk management systems that permit the sharing of its trades or its trading strategy with employees that control the trading decisions of the other; and

(ii) Such person files a notice with the CFTC, including a senior officer’s certification that the conditions of the aggregation exemption have been met.

In Staff Letter 17-37,⁵ DMO staff took a no-action position that limited the scope of the reference to “trading” under condition (i)(A) above to include only derivatives trading and not cash-market trading. In the same letter, DMO staff also permitted a similar limitation to derivatives trading for certain purposes related to the certifications required to be made in the notice filing to claim the exemption.  However, Staff Letter 18-33, discussed above, was the first occasion on which DMO staff extended the application of the distinction between cash-market trading and derivatives trading to condition (i)(D) above, the prohibition against sharing employees who control trading decisions.

¹ 17 CFR 150.2. Speculative position limits apply to the following contracts on the Chicago Board of Trade: Corn and Mini-Corn, Oats, Soybeans and Mini-Soybeans, White and Mini-Wheat, Soybean Oil and Soybean Meal.  On the Minneapolis Grain Exchange, speculative position limits apply to Hard Red Spring Wheat; on ICE Futures U.S., to Cotton No. 2; and on the Kansas City Board of Trade, to Hard Winter Wheat. 

² 17 CFR 150.4(b)(2).

³ CFTC No-Action Ltr. No. 18-33 (Dec. 21, 2018).

⁴ The exemption does not apply with respect to pools or accounts with substantially identical trading strategies. See 17 CFR 150.4(a)(2), 150.4(b). However, CFTC Staff Letter 17-37, discussed in other respects below, provides partial, time-limited no-action relief from aggregation on account of substantially identical trading strategies. 

⁵ CFTC No-Action Ltr. No. 17-37, at p. 15 (Aug. 10, 2017). The relief granted under Staff Letter 17-37 remains in effect until August 12, 2019 at 12:01 a.m. eastern standard time.