83_FR_36946 83 FR 36799 - Position Limits and Position Accountability for Security Futures Products

83 FR 36799 - Position Limits and Position Accountability for Security Futures Products

COMMODITY FUTURES TRADING COMMISSION

Federal Register Volume 83, Issue 147 (July 31, 2018)

Page Range36799-36814
FR Document2018-16079

The Commodity Futures Trading Commission (``CFTC'' or ``Commission'') is proposing to amend its position limits rules for security futures products (``SFPs'') by: Increasing the default level of equity SFP position limits, and modifying the criteria for setting a higher level of position limits and position accountability levels. In addition, the proposed amended position limit regulation would provide discretion to a designated contract market (``DCM'') to apply limits to either a person's net position or a person's position on the same side of the market. The Commission also proposes criteria for setting position limits on an SFP on other than an equity security, generally based on an estimate of deliverable supply.

Federal Register, Volume 83 Issue 147 (Tuesday, July 31, 2018)
[Federal Register Volume 83, Number 147 (Tuesday, July 31, 2018)]
[Proposed Rules]
[Pages 36799-36814]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-16079]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 41

RIN 3038-AE61


Position Limits and Position Accountability for Security Futures 
Products

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is proposing to amend its position limits rules for 
security futures products (``SFPs'') by: Increasing the default level 
of equity SFP position limits, and modifying the criteria for setting a 
higher level of position limits and position accountability levels. In 
addition, the proposed amended position limit regulation would provide 
discretion to a designated contract market (``DCM'') to apply limits to 
either a person's net position or a person's position on the same side 
of the market. The Commission also proposes criteria for setting 
position limits on an SFP on other than an equity security, generally 
based on an estimate of deliverable supply.

DATES: Comments must be received on or before October 1, 2018.

ADDRESSES: You may submit comments, identified by RIN 3038-AE61 and 
``Position Limits and Position Accountability for Security Futures 
Products,'' by any of the following methods:
     CFTC website: http://comments.cftc.gov. Follow the 
instructions for submitting comments through the Comments Online 
process on the website.
     Mail: Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand delivery/courier: Same as Mail above.
    Please submit your comments using only one method.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that is exempt from disclosure under the Freedom of 
Information Act, a petition for confidential treatment of the exempt 
information may be submitted according to the procedures set forth in 
section 145.9 of the Commission's regulations.\1\
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    \1\ All Commission regulations referred to herein are found in 
chapter I of title 17 of the Code of Federal Regulations. Commission 
regulations are accessible on the Commission's website, http://www.cftc.gov.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.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

[[Page 36800]]

applicable laws, and may be accessible under the Freedom of Information 
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Act.

FOR FURTHER INFORMATION CONTACT: Thomas M. Leahy, Jr., Associate 
Director, Product Review, Division of Market Oversight, 202-418-5278, 
TLeahy@cftc.gov; or Riva Spear Adriance, Senior Special Counsel, Chief 
Counsel's Office, Division of Market Oversight, 202-418-5494, 
radriance@cftc.gov; Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Overview

    On December 21, 2000, the Commodity Futures Modernization Act 
(``CFMA'') became law and amended the Commodity Exchange Act (``CEA''). 
The CFMA removed a long-standing ban \2\ on trading futures on single 
securities and narrow-based security indexes \3\ in the United States. 
As amended by the CFMA, in order for a DCM to list SFPs,\4\ the SFPs 
and the securities underlying the SFPs must meet a number of 
criteria.\5\ One of the criteria requires that trading in the SFP is 
not readily susceptible to manipulation of the price of such SFP, nor 
to causing or being used in the manipulation of the price of any 
underlying security, option on such security, or option on a group or 
index including such securities.\6\
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    \2\ See section 251(a) of the CFMA. This trading previously was 
prohibited by 7 U.S.C. 2(a)(1)(B)(v).
    \3\ See 7 U.S.C. 1a(35) for the definition of ``narrow-based 
security index.''
    \4\ The term ``security futures product'' is defined in section 
1a(45) of the CEA and section 3(a)(56) of the Exchange Act to mean a 
security future or any put, call, straddle, option, or privilege on 
any security future. The term ``security future'' is defined in 
section 1a(44) of the CEA and section 3(a)(55)(A) of the Exchange 
Act to include futures contracts on individual securities and on 
narrow-based security indexes. The term ``narrow-based security 
index'' is defined in section 1a(35) of the CEA and section 
3(a)(55)(B) of the Exchange Act.
    \5\ See 7 U.S.C. 2(a)(1)(D)(i).
    \6\ 7 U.S.C. 2(a)(1)(D)(i)(VII).
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    As the Commission noted when it proposed to adopt criteria for 
trading of SFPs:

    It is important that the listing standards and conditions in the 
CEA and the [Securities Exchange Act of 1934 (``Exchange Act'')] be 
easily understood and applied by [DCMs]. The rules proposed today 
address issues related to these standards and establish uniform 
requirements related to position limits, as well as provisions to 
minimize the potential for manipulation and disruption to the 
futures markets and underlying securities markets.\7\
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    \7\ See Listing Standards and Conditions for Trading Security 
Futures Products, proposed rules, 66 FR 37932, 37933 (July 20, 2001) 
(``2001 Proposed SFP Rules''). The Commission further noted, ``The 
speculative position limit level adopted by a [DCM] should be 
consistent with the obligation in section 2(a)(1)(D)(i)(VII) of the 
CEA that the [DCM] maintain procedures to prevent manipulation of 
the price of the [SFP] and the underlying security or securities.'' 
Id. at 37935.
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    Among those provisions is current Commission regulation 
41.25(a)(3), which requires a DCM that lists SFPs to establish position 
limits or position accountability standards. The Commission's SFP 
position limits regulations were set at levels that are generally 
comparable but not identical to the limits that currently apply to 
options on individual securities.\8\
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    \8\ See Listing Standards and Conditions for Trading Security 
Futures Products, 66 FR 55078, 55082 (November 1, 2001) (``2001 
Final SFP Rules'').
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    Under the existing regulations, a DCM is required to establish for 
each SFP a position limit, applicable to positions held during the last 
five trading days of an expiring contract month, of no greater than 
13,500 (100-share) contracts, except under specific conditions.\9\ If a 
security underlying an SFP has either (i) an average daily trading 
volume of at least 20 million shares; or (ii) an average daily trading 
volume of at least 15 million shares and at least 40 million shares 
outstanding, then the DCM may establish a position limit for the SFP of 
no more than 22,500 contracts.\10\ A DCM may adopt position 
accountability for an SFP on a security that has: (i) An average daily 
trading volume of at least 20 million shares; and (ii) at least 40 
million shares outstanding.\11\ Under any position accountability 
regime, upon a request from a DCM, traders holding a position of 
greater than 22,500 contracts, or such lower threshold as specified by 
the DCM, must provide information to the exchange regarding the nature 
of the position.\12\ Under position accountability, traders must also 
consent to halt increases in the size of their positions upon the 
direction of the DCM.\13\ The position limits and position 
accountability trigger levels specified in the Commission's regulations 
are based on a contract size of 100 shares in the underlying security. 
DCMs may use part 150 of the Commission's regulations as guidance when 
approving exemptions from SFP position limit rules.\14\
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    \9\ 17 CFR 41.25(a)(3)(i). The 13,500 limit level is premised on 
an SFP contract size of 100 shares of an underlying equity security.
    \10\ 17 CFR 41.25(a)(3)(i)(A).
    \11\ 17 CFR 41.25(a)(3)(i)(B).
    \12\ Id.
    \13\ Id.
    \14\ Although part 150 previously provided requirements for 
exchange-set position limits, it was rendered ``mere guidance'' by 
the CFMA. See, e.g., 81 FR 96704, 96742 (Dec. 30, 2016); see also 74 
FR 12178, 12183 (March 23, 2009) (noting ``the part 150 rules 
essentially constitute guidance for DCMs administering position 
limits regimes'').
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B. Differences Between Initially Adopted SFP and Equity Option Position 
Limit Rules

    In response to the 2001 Proposed SFP rules, three commenters noted 
several differences between the SFP position limit regulations and 
position limit rules for equity security options listed on national 
security exchanges or associations (``NSE'') approved by the Securities 
and Exchange Commission (``SEC''): (1) The specification that position 
limits for SFPs are on a net, rather than a gross,\15\ basis; (2) the 
numerical limits on SFPs differ from those on security options; and (3) 
the position limits for SFPs are applicable only during the last five 
trading days prior to expiration, rather than at any time in the 
lifespan of a security option contract.\16\ Commenters also requested 
that the Commission coordinate with the SEC so that the SFP position 
limit regulations are the same as those applicable to security and 
securities index options, or, alternatively, that such position limit 
regulations more closely resemble existing limits on security and 
securities index options.\17\ The Commission noted that the provisions 
in Commission regulation 41.25(a)(3) as finalized were consistent with 
the Commission's customary approach for all other futures markets,\18\ 
were necessary to effectively oversee the markets, and were consistent 
with the obligation of a DCM to prevent manipulation of the price of an 
SFP and its underlying security or securities.\19\
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    \15\ The Commission understands that ``gross'' in this context 
means on the same side of the market, as discussed infra.
    \16\ 2001 Final SFP Rules at 55081.
    \17\ Id. at 55082.
    \18\ See infra discussion regarding part 150 of the Commission's 
regulations.
    \19\ 2001 Final SFP Rules at 55082.
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    There was one other difference between the position limit rules for 
SFPs and security options, on which no one commented. Specifically, the 
volume test adopted by the Commission for position limits on SFPs was 
based on average trading volume over a six-month period while the 
volume test for security options was based on total trading volume over 
a six-month period. This difference typically results in position 
limits for SFPs that are more restrictive than those on analogous 
security options.\20\
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    \20\ Although DCMs may adopt for certain SFPs position 
accountability provisions with an accountability level of 22,500 
(100-share) SFP contracts, in lieu of position limits, the analogous 
security option is subject to a position limit likely to be set at a 
level of 250,000 (100-share) option contracts, as shown below in 
Table A.

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[[Page 36801]]

C. Subsequent Developments in SFP Position Limit Regulations

    Since the 2001 Final SFP Rules, the Commission's SFP position limit 
regulations have not been substantively amended to account for SFPs on 
securities other than common stock, although the statute authorizes it. 
CEA section 2(a)(1)(D)(i) authorizes DCMs to list for trading SFPs 
based upon common stock and such other equity securities as the 
Commission and the Securities and Exchange Commission jointly determine 
appropriate.\21\ The CFMA further authorized the Commission and the SEC 
(collectively ``Commissions'') to allow SFPs to be based on securities 
other than equity securities.\22\ The Commissions used their authority 
to allow SFPs on Depositary Receipts; \23\ Exchange Traded Funds, Trust 
Issued Receipts and Closed End Funds; \24\ and debt securities.\25\
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    \21\ 7 U.S.C. 2(a)(1)(D)(i)(III).
    \22\ 7 U.S.C. 2(a)(1)(D)(v)(I).
    \23\ See Joint Order Granting the Modification of Listing 
Standards Requirements under section 6(h) of the Securities Exchange 
Act of 1934 and the Criteria under section 2(a)(1) of the Commodity 
Exchange Act, August 20, 2001 https://www.sec.gov/rules/other/34-44725.htm.
    \24\ See 67 FR 42760 (June 25, 2002).
    \25\ See 17 CFR 41.21(a)(2)(iii) (providing that the underlying 
security of an SFP may include a note, bond, debenture, or evidence 
of indebtedness); see also 71 FR 39534 (July 13, 2006) (describing 
debt securities to include notes, bonds, debentures, or evidences of 
indebtedness).
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D. Subsequent Equity Security Option Position Limit Increases

    Since the Commission's initial adoption of SFP position limits, the 
SEC has granted approval to increase position limits for equity 
security options listed on NSEs, but the Commission has not amended its 
SFP regulations to reflect those changes. For example, under current 
position limits for equity security options that are uniform across 
rules of NSEs,\26\ position limits are at least 25,000 option 
contacts.\27\ Also, as noted above, NSEs set higher levels based on 
six-month total trading volume or, alternatively, a combination of six-
month total trading volume and shares outstanding, as shown in Table 
A.\28\
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    \26\ See, e.g., the Cboe Exchange, Inc. (``Cboe'') rule 4.11, 
Nasdaq ISE, LLC (``ISE'') rule 412, NYSE American LLC (``NYSE 
American'') rule 904, Nasdaq PHLX LLC (``Phlx'') rule 1001.
    \27\ See, e.g., 73 FR 10076 (February 25, 2008) (granting 
permanent approval of an increase in position and exercise limits 
for equity security options).
    \28\ Id. at 10076-77.

                               Table A--NSE Equity Security Option Position Limits
                                              [As of Dec. 6, 2017]
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                                       Six-month total trading  Or, if six-month total trading volume and shares
  Option contract limit (100 shares/     volume is at least:           currently outstanding are at least:
              contract)               --------------------------------------------------------------------------
                                       Trading volume (shares)  Trading volume (shares)     Shares outstanding
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25,000...............................  Default................  Default................  Default.
50,000...............................  20 million.............  15 million.............  40 million.
75,000...............................  40 million.............  30 million.............  120 million.
200,000..............................  80 million.............  60 million.............  240 million.
250,000..............................  100 million............  75 million.............  300 million.
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    Each equity security option contract limit is applicable on a gross 
basis to option positions on both sides of the market.\29\ The NSEs 
permit certain exemptions, including for qualified hedging transactions 
and positions and for facilitation of orders with customers. Generally, 
limits for options on registered investment companies, organized as 
open-end management companies, unit investment trusts or similar 
entities, are the same as the positions limits applicable to equity 
options.\30\
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    \29\ For example, Cboe applies limits to an aggregate position 
in an option contract ``of the put type and call type on the same 
side of the market.'' Cboe rule 4.11. For this purpose, under the 
rule, long positions in put options are combined with short 
positions in call options; and short positions in put options are 
combined with long position in call options.
    \30\ NSEs have established position limits higher than shown in 
Table A for certain security options on products with broad-based 
holdings of underlying securities; for example, the Cboe position 
limit in the DIAMONDS Trust option is 300,000 contracts, iShares 
Russell 2000 Index Fund option is 500,000 contracts, PowerShares QQQ 
Trust option is 900,000 contracts, and iShares MSCI Emerging Markets 
Index Fund option is 500,000 contracts. Similarly, BOX Options 
Exchange, Inc., Cboe, Nasdaq ISE, LLC, Nasdaq PHLX, LLC, NYSE 
American, LLC, and NYSE Arca, Inc. all recently adopted position 
limits for security options on the Standard and Poor's Depositary 
Receipts Trust that are 1,800,000 contracts. See, e.g., 83 FR 28274 
(June 18, 2018) (allowing the SPY Pilot Program to terminate and 
making immediately effective the new limit).
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    In addition to position limits under NSE rules, NSEs establish 
uniform exercise limits for the aggregate exercise of a long position 
in any option contract within any five consecutive business days, 
generally at the levels of the applicable position limits.\31\ This 
exercise limit may serve to reduce the potential for manipulation (such 
as a squeeze on short option position holders) by restricting the 
number of shares demanded for delivery by a long call option position 
holder, in a similar manner to a DCM's position limit, under current 
Commission regulation 41.25(a)(3), thus restricting the number of 
shares that may be demanded during the last five days of trading.
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    \31\ See, e.g., Cboe rule 4.12, ISE rule 414, NYSE American rule 
905, and Phlx rule 1001.
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E. Commission's Position Limit Approach in Other Commodity Futures

    The Commission's customary approach for position limits in futures 
contracts other than SFPs is found in part 150 of the Commission's 
regulations, which establishes a position limits regime that generally 
includes three components: (1) The level of the limits, which sets a 
threshold that restricts the number of speculative positions that a 
person may hold in the spot-month, individual month, and all months 
combined; (2) exemptions for positions that constitute bona fide 
hedging transactions and certain other types of transactions; and (3) 
rules to determine which accounts and positions a person must aggregate 
for the purpose of determining compliance with the position limit 
levels. For exchange-set position limits, on physically-delivered 
contracts, the spot month limit level should be no greater than one-
quarter of the estimated spot month deliverable supply, calculated 
separately for each month to be listed, and for cash settled contracts, 
the spot month limit level should be no greater than necessary to 
minimize the potential for manipulation

[[Page 36802]]

or distortion of the contract's or the underlying commodity's 
price.\32\
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    \32\ See 17 CFR 150.5(b)(1); see also supra note 14.
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II. The Proposal

A. Overview

    The Commission notes that SFPs and security options may serve 
economically equivalent or similar functions.\33\ As noted above, when 
adopted, the Commission's SFP position limits regulations were set at 
levels that are generally comparable but not identical to the limits 
that currently apply to options on individual securities. However, over 
time, while the default level for position limits for SFPs did not 
change, those of security options on the same security have in some 
cases changed, allowing the position limit for the security option, as 
observed above, to be set at a much higher default level. This may 
place SFPs at a competitive disadvantage. One goal of this proposal, 
therefore, is to provide a level regulatory playing field.\34\
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    \33\ For example, the price of a long call option with a strike 
price well below the prevailing market price of the underlying 
security is expected to move almost in lock step with the price of a 
long SFP on the same underlying security. Similarly, the price of a 
long put option with a strike price well above the prevailing market 
price of the underlying security is expected to move almost in lock 
step with the price of a short SFP on the same underlying security.
    \34\ As the Commission notes above, commenters also requested 
that the SFP position limit regulations be the same as those 
applicable to security and securities index options, or, 
alternatively, that such position limit regulations more closely 
resemble existing limits on security and securities index options. 
See supra note 17 and accompanying text.
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    When determining appropriate limit levels, the Commission took note 
of the experience of NSEs over several years with higher position limit 
levels on security options, with no apparent significant issues, 
suggesting, therefore, that it may be reasonable for SFP position 
limits to closely resemble existing contract limits for equity options 
at NSEs. To allow DCMs to adapt as NSE position limits change, the 
current draft would be flexible, providing a formula for a DCM to set a 
higher level, rather than the specific levels in a current rule of an 
NSE.
    However, as has been noted, some aspects of the position limits 
regime under current Commission regulation 41.25 differ from those on 
security options as the Commission determined certain approaches were 
necessary to effectively oversee the markets, and consistent with the 
obligation of a DCM to prevent manipulation of the price of an SFP and 
its underlying security or securities.\35\ In light of its experience 
since the first adoption of a position limits regime for SFPs in 2001, 
the Commission believes in the merit of updating Commission regulation 
41.25 under an incremental approach, for example, by providing DCMs 
with discretion to increase limits, generally consistent with those 
currently permitted for equity options listed by an NSE, while allowing 
the Commission to assess the impact on SFP markets.
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    \35\ See 2001 Final SFP Rules at 55082. The approach NSEs may 
use to set an equity option's position limit is not consistent with 
existing Commission policy and may, in the Commission's opinion, as 
noted previously, render position limits ineffective.
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    The Commission proposes to maintain the requirement in current 
Commission regulation 41.25(a)(3) that DCMs establish position limits 
or, in certain cases, accountability standards for SFPs. The proposal 
would increase the default level for speculative position limits in 
SFPs in equity securities to 25,000 100-share contracts (or the 
equivalent if the contract size is different than 100 shares per 
contract) from 13,500 100-share contracts. The proposal would change 
the criterion that DCMs use to set higher levels of speculative 
position limits to no more than 12.5 percent of the estimated 
deliverable supply \36\ of the relevant underlying security, from no 
greater than 22,500 100-share contracts if certain criteria are met in 
current Commission regulation 41.25(a)(3)(i).\37\ The proposed 12.5 
percent criterion is discussed further below. In this regard, the 
Commission believes that exchange-set position limits for SFPs based on 
estimated deliverable supply would provide flexibility to DCMs while 
ensuring that position limits appropriately reflect current market 
conditions for the specific securities that underlie their SFPs.
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    \36\ See infra regarding proposed guidance on estimated 
deliverable supply.
    \37\ The current criteria for a level higher than 13,500 100-
share contracts are six-month average daily trading volume in the 
underlying security exceeds 20 million shares, or exceeds 15 million 
shares and there are more than 40 million shares of the underlying 
security outstanding.
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    The Commission also proposes to amend the position accountability 
provisions so that a DCM could substitute position accountability for 
position limits when six-month total trading volume in the underlying 
security exceeds 2.5 billion shares and there are more than 40 million 
shares of estimated deliverable supply, rather than the current 
criteria of six-month average daily trading volume in the underlying 
security exceeds 20 million shares and there are more than 40 million 
outstanding shares. In addition, the maximum accountability level under 
the position accountability regime would be increased to 25,000 
contracts, from the current level of 22,500 contracts.
    This proposal also addresses SFPs based on products other than a 
single equity security. As discussed below, these products are a 
physically-delivered basket equity SFP, a cash-settled equity index 
SFP, and an SFP on one or more debt securities.\38\
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    \38\ The SFP definition permits the listing of SFPs on debt 
securities (other than exempted securities). See supra note 22 and 
accompanying text. While an SFP may not be listed on a debt security 
that is an exempted security, futures contracts may be listed on an 
exempted security. See infra note 69 and accompanying text.
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    The Commission proposes to maintain the provision that requires 
position limits to be applied during a period of time of no shorter 
than the last five trading days in an expiring contract month. However, 
the proposed regulation would require a longer period than five trading 
days in the event the terms of an SFP provide for delivery prior to the 
last five trading days.
    The Commission proposes that a DCM should have discretion to apply 
position limits or position accountability levels either on a net 
basis, as under current regulations, or on the same side of the 
market.\39\ If a DCM imposes limits on the same side of the market, 
then the DCM could not net positions in SFPs in the same security on 
opposite sides of the market.
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    \39\ The Commission notes that, although it has not proposed an 
aggregation rule that would define ``person'' for purposes of SFP 
position limits, current 17 CFR 150.5(g) provides guidance to DCMs 
in setting aggregation standards for exchange-set position limits. 
The Commission believes a DCM should have reasonable discretion to 
set aggregate standards based on a person's control or ownership of 
SFP positions, including in the same manner as that of an NSE for 
equity security options.
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    This proposal permits DCMs to approve exemptions to limits, 
provided such exemptions are consistent with the guidance in current 
Commission regulation 150.5, which addresses exchange-set position 
limits, rather than consistent with current Commission regulation 
150.3, which addresses exemptions to Commission-set position limits. In 
addition, the proposal permits DCMs to approve exemptions consistent 
with those of an NSE.
    Under this proposal, DCMs would be required to calculate estimated 
deliverable supply and six-month total trading volume no less 
frequently than semi-annually, rather than the monthly requirement 
under the current regulations. The proposal requires that a DCM lower 
the position limit levels if the estimated deliverable supply

[[Page 36803]]

justifies lower position limits. Similarly, the proposal requires that 
a DCM adopt position limits if the estimated deliverable supply or six-
month total trading volume no longer supports position accountability 
provisions.
    Finally, as discussed further below, these proposed regulations 
provide the definitions for ``estimated deliverable supply and ``same 
side of the market'', terms used in Commission regulation 41.25, by 
adding those definitions into a new paragraph (a).\40\
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    \40\ In connection with adding the definitions into a new 
paragraph (a), paragraphs (a) through (d) would be re-designated as 
paragraphs (b) through (e).
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B. Section-by-Section Discussion

1. Commission Regulation 41.25(a), Definitions
    The proposal includes two definitions used in Commission regulation 
41.25: Estimated deliverable supply; and same side of the market. These 
definitions are included in new paragraph (a).
    Estimated deliverable supply is defined under the proposal as the 
quantity of the security underlying a security futures product that 
reasonably can be expected to be readily available to short traders and 
salable by long traders at its market value in normal cash marketing 
channels during the specified delivery period. The proposal provides 
guidance for estimating deliverable supply in proposed appendix A to 
subpart C of part 41, as discussed below.
    The proposal defines same side of the market to mean long positions 
in physically-delivered security futures contracts and cash settled 
security futures contracts, in the same security, and, separately, 
short positions in physically-delivered security futures contracts and 
cash settled security futures contracts, in the same security. The 
Commission invites comment on whether it should also include options on 
security futures contracts in this definition, although options on SFPs 
are not currently permitted to be listed.\41\ Generally, a long call 
and a short put, on a futures equivalent basis, would be aggregated 
with a long futures contract; and a short call and a long put, on a 
futures equivalent basis, would be aggregated with a short futures 
contract.
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    \41\ Under CEA section 2(a)(1)(D)(iii)(II), the CFTC and SEC 
may, by Order, jointly determine to permit the listing of options on 
SFPs; that authority has not been exercised.
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2. Commission Regulation 41.25(b)(3), Position Limits or Accountability 
Rules Required
    As with current Commission regulation 41.25(a)(3), under this 
proposal, the paragraph, as re-designated regulation 41.25(b)(3), would 
continue to require a DCM to establish position limits or position 
accountability rules in each SFP for the expiring futures contract 
month.
3. Commission Regulation 41.25(b)(3)(i), Limits for Equity SFPs
    Proposed changes to regulation 41.25(a)(3)(i), re-designated as 
regulation 41.25(b)(3)(i), would increase the default level of position 
limits in an equity SPF to no greater than 25,000 100-share contracts 
(or the equivalent if the contract size is different than 100 shares 
per contract), either net or on the same side of the market, from the 
existing regulation's default level of no greater than 13,500 100-share 
contracts on a net basis. The default level of 25,000 100-share 
contracts is equal to 2,500,000 shares. The Commission notes that 12.5 
percent of 20 million shares equals 2,500,000 shares. Thus, for an 
equity security with less than 20 million shares of estimated 
deliverable supply, the default position limit level for the equity SFP 
would be larger than 12.5 percent of estimated deliverable supply. 
While a DCM could adopt the default position limit for SFPs in equity 
securities with fewer than 20 million shares, consistent with a 
position limit applicable to an option on that security, the Commission 
would expect a DCM to assess the liquidity of trading in the underlying 
security to determine whether the DCM should set a lower position limit 
level, as appropriate to ensure compliance with DCM Core Principles 3 
and 5. In this regard, the Commission seeks comment on whether it 
should provide greater specificity with respect to this liquidity 
assessment and whether there are circumstances where the position limit 
level should be set lower than 25,000 100-share contracts (for example, 
no greater than 12.5 percent of estimated deliverable supply).\42\
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    \42\ Core Principle 3, 7 U.S.C. 7(d)(3), provides that DCMs 
shall list only contracts that are not readily susceptible to 
manipulation, while Core Principle 5, 7 U.S.C. 7(d)(5), provides for 
the adoption of position limits and position accountability, as is 
necessary and appropriate, to deter the threat of manipulation. 
Moreover, 7 U.S.C. 2(a)(1)(D)(i)(VII) and 17 CFR 41.22(f) require 
that trading in an SFP: (i) Be not readily susceptible to 
manipulation of the SFP; or (ii) cause the manipulation of any 
underlying security, an option on such security, or an option on a 
group or index including such security or securities.
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    The Commission notes that minimum position limits for equity 
security option positions on NSEs are 25,000 100-share option contracts 
on the same side of the market. Thus, the proposal would allow a DCM to 
coordinate the default position limit level for SFPs to that of an 
equity option traded on a NSE. Accordingly, as previously requested by 
commenters in the context of the CFTC's adoption of its current SFP 
position limit requirements, this proposed default level for SFP limits 
would closely resemble existing minimum limit levels on security 
options.
    As noted above, SFPs and security options may serve economically 
equivalent or similar functions.\43\ However, under current Commission 
regulation 41.25(a)(3), as previously detailed, the default level for 
position limits for SFPs must be set no greater than 13,500 (100-share) 
contracts, while security options on the same security may be, and 
currently are, set at a much higher default level of 25,000 
contracts,\44\ which may place SFPs at a competitive disadvantage. 
Closer coordination of limit levels is intended to provide a level 
regulatory playing field.
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    \43\ For example, the price of a long call option with a strike 
price well below the prevailing market price of the underlying 
security is expected to move almost in lock step with the price of a 
long SFP on the same underlying security. Similarly, the price of a 
long put option with a strike price well above the prevailing market 
price of the underlying security is expected to move almost in lock 
step with the price of a short SFP on the same underlying security.
    \44\ See current Cboe rule 4.11.
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    However, because limit levels would not apply to a market 
participant's combined position between SFPs and security options, the 
Commission is not proposing a default limit level for an SFP higher 
than 12.5 percent of estimated deliverable supply. That is, under the 
proposal, a market participant with positions at the limits in each of 
an SFP and a security option on the same underlying security might be 
equivalent to about 25 percent of estimated deliverable supply, which 
is at the outer bound of where the Commission has historically 
permitted spot month limit levels. The Commission invites comment on 
whether this proposed default level is appropriate.
    The proposal would include, in the requirements for limits for 
equity SFPs, securities such as exchange trading funds (``ETFs'') and 
other securities that represent ownership in a group of underlying 
securities. The Commission requests comment on whether this is 
appropriate and invites further comment, below, in the discussion of 
estimated deliverable supply.
    This proposal would provide discretion to a DCM to apply position 
limits on a gross basis (``on the same side of the market'') or net 
basis, rather than the current regulation's net basis.

[[Page 36804]]

For example, if there were a physically-delivered SFP on equity XYZ, a 
dividend-adjusted SFP on equity XYZ, and a cash-settled SFP on equity 
XYZ, then a DCM's rules could provide that long positions held by the 
same person across each of these classes of SFP based on equity XYZ 
would be aggregated for the purpose of determining compliance with the 
position limit. A gross position in a futures contract is larger than a 
net position in the event a person holds positions on opposite sides of 
the market. That is, a net basis is computed by subtracting a person's 
short futures position from that person's long futures positions, and, 
under current regulations, a single position limit applies on a net 
basis to that net long or net short position. Under the proposal, at 
the discretion of a DCM, a person's long futures position would be 
subject to the position limit and, separately, a person's short futures 
position also would be subject to the position limit. As previously 
requested by commenters, adding this proposed gross basis approach (in 
addition to net basis) to SFP limits would more closely resemble 
existing limits on security options that apply on the same side of the 
market per the rules of the NSEs. A DCM that elects to implement limits 
on a gross basis would be providing its market participants with the 
same metric for position limit compliance as is currently the case on 
NSEs, which may reduce compliance costs and encourage cross-market 
participation. However, limits on a gross basis may be more restrictive 
than limits on a net basis, which could reduce the position sizes that 
may be held, without an applicable exemption.
    In addition, the Commission would continue to permit DCMs to apply 
limits on a net basis at the DCM's discretion. In this regard, the 
Commission believes it is possible for a DCM's application of limits to 
further the goals of the CEA whether applied on a net or a gross 
basis.\45\ This would be true, for example, if a DCM applied limits on 
a net basis and did not permit netting of physically-delivered 
contracts with cash settled contracts. But if, instead, the DCM 
permitted netting of physically-delivered contracts and cash settled 
contracts in the same security, it would render position limits 
ineffective.\46\ For example, a person should not be permitted to avoid 
limits by obtaining a large long position in a physically-delivered 
contract (which could be used to corner or squeeze) and a similarly 
large short position in a cash settled contract that would net to zero.
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    \45\ CEA section 2(a)(1)(D)(i)(VII) requires that trading in 
SFPs is not readily susceptible to manipulation of the price of the 
SFP, the SFP's underlying security, or an option on the SFP's 
underlying security.
    \46\ Although no DCM currently lists both physically-delivered 
SFPs contracts and cash-settled SFP contracts for the same 
underlying security, and this concern may be theoretical, the 
Commission believes that providing clarity reduces uncertainty 
regarding netting in such circumstances, which may facilitate 
listing of such contracts in the future. Therefore, the Commission 
proposes to provide in 17 CFR 41.25(b)(3)(vii) that, for a DCM 
applying limits on a net basis, netting of physically-delivered 
contracts and cash settled-contracts in the same security is not 
permitted as it would render position limits ineffective. This 
concern is not applicable to a DCM applying limits on the same side 
of the market, as limits are applied separately to long positions 
and to short positions.
---------------------------------------------------------------------------

4. Commission Regulation 41.25(b)(3)(i)(A), Higher Position Limits in 
Equity SFPs \47\
---------------------------------------------------------------------------

    \47\ As noted above, the proposal would re-designate 17 CFR 
41.25(a)(3)(i)(A) as 17 CFR 41.25(b)(3)(i)(A).
---------------------------------------------------------------------------

    For an SFP based on an underlying security with an estimated 
deliverable supply of more than 20 million shares, the proposal would 
permit a DCM to set a higher limit level based on 12.5 percent of the 
estimated deliverable supply of the underlying security, if appropriate 
in light of the liquidity of trading in the underlying security. By way 
of example, if the estimated deliverable supply were 40 million shares, 
then the proposed regulation would permit a DCM to set a limit level of 
no greater than 50,000 100-share contracts; computed as 40 million 
shares times 12.5 percent divided by 100 shares per contract.
    This level of 50,000 100-share contracts is the same as permitted 
under current rules of NSEs for an underlying security with 40 million 
shares outstanding, although an NSE would also require the most recent 
six-month trading volume of the underlying security to have totaled at 
least 15 million shares. While this proposed provision for SFP position 
limits would more closely resemble existing limits on security options, 
the Commission is proposing to permit a DCM to use its discretion in 
assessing the liquidity of trading in the underlying security, rather 
than imposing a prescriptive trading volume requirement.\48\ The 
Commission preliminarily does not believe that trading volume alone is 
an appropriate indicator of liquidity.\49\ In this regard, the proposed 
regulation would permit a DCM to set a position limit at a level lower 
than 12.5 percent of estimated deliverable supply. The Commission 
invites comment on whether it is appropriate to provide a DCM with 
discretion in its assessment of liquidity in the underlying security, 
rather than the Commission imposing a liquidity requirement. Core 
Principle 5 requires DCMs to adopt, as is necessary and appropriate, 
position limits to deter the adverse market impact of manipulation. The 
Commission invites comment on whether estimated deliverable supply 
alone serves as an adequate proxy for market impact.
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    \48\ Generally, under CEA section 5(d)(1)(B), unless otherwise 
restricted by a Commission regulation, a DCM has reasonable 
discretion in establishing the manner in which it complies with core 
principles, including Core Principle 5 regarding position limits or 
position accountability. See 7 U.S.C. 7(d)(1) and (5).
    \49\ Under current 17 CFR 41.25(a)(3)(i)(A), for example, a DCM 
may adopt a net position limit no greater than 22,500 shares, 
provided the six-month average daily trading volume exceeds 15 
million shares and there are more than 40 million shares of the 
security outstanding. The Commission notes that almost all stocks 
with at least 40 million shares outstanding also had a six-month 
average trading volume of at least 15 million shares. Thus, the 
current trading volume criterion generally is not a meaningful 
restriction.
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    Although the Commission is proposing a criterion of 12.5 percent of 
estimated deliverable supply, the Commission expects a DCM to conduct a 
reasoned analysis as to whether setting a level for a limit based on 
such criterion is appropriate. In this regard, for example, assume 
security QRS and security XYZ have equal free float of shares. Assume, 
however, that trading in QRS is not as liquid as trading in XYZ. Under 
these assumptions, it may be appropriate for a DCM to adopt a position 
limit for XYZ equivalent to 12.5 percent of deliverable supply, but to 
adopt a lower limit for QRS because a lesser number of shares would be 
readily available for shorts to make delivery.
    The Commission notes that the proposed criterion of 12.5 percent of 
estimated deliverable supply is half the level for DCM-set spot month 
speculative position limits in current Commission regulation 
150.5(c),\50\ which, as previously noted, has been rendered ``mere 
guidance'' since the CFMA.\51\ That regulation provides that, for 
physically-delivered contracts, the spot month limit level should be no 
greater than one-quarter of the estimated spot month deliverable 
supply.\52\ The Commission is proposing a lower percent of estimated 
deliverable supply in light of current limits on equity security 
options listed at NSEs. In this regard, the proposal would result in 
SFP position limits that closely resemble the existing 25,000 and 
50,000 contract

[[Page 36805]]

limits for equity options at NSEs, set when certain trading volume has 
been reached or a combination of trading volume and shares currently 
outstanding, as shown in Table A above. For example, a position at a 
50,000 (100-share) option contract limit is equivalent to 5 million 
shares. 12.5 percent of 40 million shares equals 5 million shares; that 
is, the proposed criterion for a DCM to set a limit would be similar to 
that of the criteria for an NSE to set such a limit. Under this 
proposal, a similar 50,000 contract position limit on an SFP on such a 
security would be an increase from the 22,500 contract limit currently 
permitted for such an SFP. The Commission believes the proposed 
incremental approach to increasing SFP limits is a measured response to 
changes in the SFP markets, while retaining consistency with the 
existing requirements for equity security options listed by NSEs.
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    \50\ 17 CFR 150.5(c).
    \51\ See supra discussion of the impact of the CFMA on part 150; 
see also 74 FR 12177 at 12183 (March 23, 2009).
    \52\ 17 CFR 150.5(c)(1).
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    However, as noted above, SFPs and equity security options in the 
same underlying security are not subject to a combined position limit 
across DCMs and NSEs. Accordingly, the Commission is proposing a 
maximum SFP limit level that is half the guidance level for DCM-set 
spot month futures contract limits of 25 percent of estimated 
deliverable supply.
    Further, as shown in Table A above, the Commission notes that 
limits for equity security options at NSEs do not increase in a linear 
manner for all increases in shares outstanding; for example, upon a 
doubling of shares outstanding, the 100-share equity security option 
contract limit increases only to 75,000 contracts from 50,000 
contracts, while, under similar circumstances of a doubling of 
estimated deliverable supply, the Commission proposes to permit a 
linear increase for a SFP limit to 100,000 contracts from 50,000 
contracts. The Commission invites comments as to whether the proposed 
linear approach based on estimated deliverable supply is appropriate.
    Alternative Criteria for Setting Levels of Limits. As an 
alternative to the proposed criteria for setting position limit levels 
based on estimated deliverable supply, the Commission invites comments 
on whether the Commission should permit a DCM to mirror the position 
limit level set by an NSE in a security option with the same underlying 
security or securities as that of the DCM's SFP. This alternative has 
the advantage of consistency in position limits across exchange-traded 
derivatives based on the same security.
    However, the Commission notes that NSEs may set an equity option's 
position limit by the use of trading volume as a sole criterion. That 
approach is not consistent with existing Commission policy regarding 
use of estimated deliverable supply to support position limits in an 
expiring contract month, as stated in part 150 of the Commission's 
regulations.\53\ The Commission notes that use of trading volume as a 
sole criterion for setting the level of a position limit could result 
in a position limit that exceeds the number of outstanding shares when 
the underlying security exhibits a very high degree of turnover. Such a 
resulting high limit level would render position limits ineffective.
---------------------------------------------------------------------------

    \53\ For example, Cboe rules also permit a 50,000 contract 
position limit based on the total most recent six-month trading 
volume of 20 million shares, without regard to shares outstanding.
---------------------------------------------------------------------------

5. Commission Regulation 41.25(b)(3)(i)(B), Position Accountability in 
Lieu of Limits \54\
---------------------------------------------------------------------------

    \54\ As noted above, the proposal would re-designate 17 CFR 
41.25(a)(3)(i)(B) as 17 CFR 41.25(b)(3)(i)(B).
---------------------------------------------------------------------------

    This proposal would continue to permit a DCM to substitute position 
accountability for a position limit in an equity SFP that meets two 
criteria. The proposal would require six-month total trading volume of 
at least 2.5 billion shares, which generally is equivalent to the 
current first criterion that six-month average daily trading volume in 
the underlying security must exceed 20 million shares.\55\ The proposal 
would tighten the second criterion. Rather than require that the 
underlying security have more than 40 million shares outstanding, under 
the proposal the second criterion would require the underlying security 
to have more than 40 million shares of estimated deliverable supply, 
which generally would be smaller than shares outstanding. This change 
conforms to the proposed use of estimated deliverable supply in setting 
a position limit. The Commission believes an appropriate refinement to 
its criterion for position accountability is to quantify those equity 
shares that are readily available in the market, rather than all shares 
outstanding. Generally, a short position holder may expect to obtain at 
or close to fair value shares that are readily available in the market 
and a long position holder may expect to sell such shares at or close 
to fair value. However, in contrast, shares that are issued and 
outstanding by a corporation may not be readily available in a timely 
manner, such as shares held by the corporation as treasury stock.\56\ 
Therefore, to ensure that position holders will generally be able to 
obtain equity shares at or close to fair value, the DCM should consider 
whether the shares are readily available in the market when estimating 
deliverable supply.
---------------------------------------------------------------------------

    \55\ 20 million shares times 125 trading days in a typical six-
month period equals 2.5 billion shares. In regards to total trading 
volume rather than average daily trading volume, the Commission 
notes that use of total trading volume is consistent with the rules 
of NSEs, which use six-month total trading volume in their criteria 
for setting position limits, as shown in Table A above.
    \56\ Treasury stock means any shares that a company holds 
itself. Such treasury stock may be authorized by the corporate 
charter but not yet issued to the public or, in contrast, may have 
been previously issued to the public but was the subject of a stock 
repurchase program to buy back the shares from the public.
---------------------------------------------------------------------------

    In addition, the proposal would amend the accountability level to 
no greater than 25,000 contracts, either net or on the same side of the 
market, from 22,500 contracts net, conforming to the proposed default 
position limit level. The Commission notes a DCM would be able to set a 
lower accountability level, should it desire. The Commission 
preliminarily believes it is appropriate to set a position 
accountability level no higher than 25,000 contracts because the 
Commission believes a DCM should have the authority, but not the 
obligation, to inquire with very large position holders and to order 
such position holders not to increase positions.\57\ The Commission 
preliminarily believes a maximum position accountability level of 
25,000 contracts is at the outer bounds for purposes of providing a DCM 
with authority to obtain information from position holders; for 
example, a position of 25,000 100-share contracts has a notional size 
of $125 million when the price of the underlying stock is $50 per 
share.
---------------------------------------------------------------------------

    \57\ By way of comparison, under 17 CFR 15.03, the Commission's 
reporting level for large traders (``reportable position'') is 1,000 
contracts for individual equity SFPs and 200 contracts for narrow-
based SFPs. Under 17 CFR 18.05, the Commission may request any 
pertinent information concerning such a reportable position.
---------------------------------------------------------------------------

6. Commission Regulation 41.25(b)(3)(ii), Limits for Physically-
Delivered Basket Equity SFPs
    This proposal would amend the existing position limits and position 
accountability provisions for a physically-delivered SFP comprised of 
more than one equity security \58\ by

[[Page 36806]]

basing the criteria on the underlying equity security with the lowest 
estimated deliverable supply, rather than the lowest average daily 
trading volume.\59\ Specifically, under the proposal, for an SFP on 
more than one security, the criteria in proposed regulations 
41.25(b)(3)(i)(A) and (B) \60\ would apply to the underlying security 
with the lowest estimated deliverable supply in the basket, with an 
appropriate adjustment to the level of the position limit or 
accountability level for a contract size different than 100 shares per 
underlying security.
---------------------------------------------------------------------------

    \58\ The Commission notes that there is not a limit per se on 
the maximum number of securities in a narrow-based security index. 
Rather, under CEA section 1a(35), a narrow-based security index 
generally means, among other criteria, an index that has 9 or fewer 
component securities; in which a component security comprises more 
than 30 percent of the index's weighting; in which the five highest 
weighted component securities in the aggregate comprise more than 60 
percent of the index's weight; or in which the lowest weighted 
component securities, comprising the lowest 25 percent of the 
index's weight, have an aggregate dollar value of average daily 
trading volume of less than $50 million.
    \59\ This means that, under proposed 17 CFR 41.25(b)(3)(i), the 
default level position limit would be no greater than 25,000 100-
share contracts, unless the underlying equity security with the 
lowest estimated deliverable supply supports a higher level.
    \60\ As noted above, as proposed, 17 CFR 41.25(a)(3)(i)(A) and 
(B) would be re-designated as 17 CFR 41.25(b)(3)(i)(A) and (B).
---------------------------------------------------------------------------

    The proposal is based on the premise that the limit on a 
physically-delivered basket equity SFP should be consistent with the 
most restrictive of each limit that would be applicable to SFPs based 
on each component of such basket of deliverable securities. This would 
restrict a person from obtaining a larger exposure to a particular 
security through a physically-delivered basket equity SFP, than could 
be obtained directly in a single equity SFP. However, this proposal 
would not aggregate positions in single equity SFPs with positions in 
basket deliverable SFPs.
7. Commission Regulation 41.25(b)(3)(iii), Limits for Cash-Settled 
Equity Index SFPs
    For setting levels of limits on an SFP comprised of more than one 
security, current Commission regulation 41.25(a)(3)(ii) specifies 
certain criteria for trading volume and shares outstanding that must be 
applied to the security in the index with the lowest average daily 
trading volume. However, the Commission is not proposing to retain 
those criteria for setting levels of limits for cash-settled equity 
index SFPs for a number of reasons. For an equity index that is price 
weighted, it appears that use of shares outstanding or trading volume 
may result in an inappropriately restrictive level for a position 
limit.\61\ For an equity index that is value weighted, it also appears 
that such use may result in an inappropriately restrictive level for a 
position limit.\62\ The Commission observes that while trading volume, 
as an indicator of liquidity, may be an appropriate factor for a DCM to 
consider in setting position limits, trading volume is not generally 
used in construction of equity indexes.
---------------------------------------------------------------------------

    \61\ For example, assume the level of a simple price-weighted 
index is computed by adding the price of each equity security in the 
index and dividing by the number of different equity securities. For 
such a simple index, a given percentage change in the price of a 
company with a higher share price would have a greater impact on the 
index than a given percentage change in the price of a company with 
a lower share price. In such a circumstance, the Commission 
preliminarily believes the DCM should have discretion, in setting 
the position limit, to give consideration to the equity (or 
equities) with the greater weight(s) in the index, rather than only 
with regard to the equity with the lowest number of shares 
outstanding.
    \62\ For example, the level of a value-weighted index will 
change in relation to the change in the market capitalization of 
each component equity security. In such a circumstance, a given 
percentage change in the market value of a higher capitalized 
company would have a greater impact on the index than a given 
percentage change in the market value of a lower capitalized 
company. In such a circumstance, the Commission preliminarily 
believes the DCM should have discretion, in setting the position 
limit, to give consideration to the equity (or equities) with the 
greater weight(s) in the index, rather than only with regard to the 
equity with the lowest number of shares outstanding.
---------------------------------------------------------------------------

    Proposed appendix A to subpart C provides guidance and acceptable 
practices for setting the limit level for a cash-settled equity index 
SFP, discussed below. However, as noted above, the proposal would 
continue to require a DCM, for cash-settled equity index SFPs, to 
establish position limits or position accountability rules in each SFP 
for the expiring futures contract month in the last five trading days 
of an expiring contract month. As also discussed above, the proposal 
provides discretion to a DCM to set such a limit either net or on the 
same side of the market.
8. Commission Regulation 41.25(b)(3)(iv), Limits for Debt SFPs \63\
---------------------------------------------------------------------------

    \63\ As noted above, as proposed, 17 CFR 41.25(a)(3) would be 
re-designated as 17 CFR 41.25(b)(3).
---------------------------------------------------------------------------

    As previously detailed, for setting levels of limits on an SFP 
comprised of more than one security, current Commission regulation 
41.25(a)(3)(ii) specifies certain criteria for trading volume and 
shares outstanding that must be applied to the security in the index 
with the lowest average daily trading volume. However, the Commission 
is not proposing to retain those criteria for setting levels of limits 
for debt SFPs because debt securities generally are neither issued in 
terms of shares nor trading volume measured in terms of shares.
    Proposed appendix A to subpart C provides guidance and acceptable 
practices for setting the limit level for a debt SFP, discussed below. 
This proposal would require a DCM to set a position limit on a debt 
SFP, either net or on the same side of the market, applicable to 
positions held during the last five trading days of an expiring 
contract month, as is the case for equity SFPs under the proposal.
9. Commission Regulation 41.25(b)(3)(v), Required Minimum Position 
Limit Time Period
    Although DCMs do not currently list SFPs where the product permits 
delivery before the close of trading, the Commission proposes that, for 
such a product, the DCM would be required to apply position limits 
beginning no later than the first day that long position holders may be 
assigned delivery notices, if such period is longer than the last five 
trading days of an expiring contract month. The Commission notes that 
the current DCM practice for other commodity futures contracts is to 
apply spot month position limits at the close of business before 
delivery notices are assigned to holders of long positions in futures 
contracts that provide for physical delivery prior to the close of 
trading. Further, this provision is analogous to provisions of NSEs 
that apply exercise limits for any five consecutive business days, 
applicable to American exercise style equity options.\64\
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    \64\ American exercise style refers to the right of an option 
holder to exercise the option at any time prior to, and including, 
expiration. In contrast, a European exercise style option only can 
be exercised at expiration.
---------------------------------------------------------------------------

10. Commission Regulation 41.25(b)(3)(vi), Requirements for Re-Setting 
Levels of Position Limits \65\
---------------------------------------------------------------------------

    \65\ The proposal would re-designate 17 CFR 41.25(a)(3)(iv) to 
17 CFR 41.25(b)(3)(vi).
---------------------------------------------------------------------------

    This proposal would require a DCM to consider, on at least a semi-
annual basis, whether position limits were set at appropriate levels, 
through consideration of estimated deliverable supply. In the event 
that estimated deliverable supply has decreased, then a DCM would be 
required to lower the level of a position limit in light of that 
decreased deliverable supply. In the event that estimated deliverable 
supply has increased, then a DCM would have discretion to increase the 
level of a position limit. In addition, a DCM that has substituted a 
position accountability rule for a position limit would be required to 
consider whether estimated deliverable supply and total six-month

[[Page 36807]]

trading volume continue to justify that position accountability rule.
    Current provisions require a DCM to calculate trading volume 
monthly. The Commission believes that review of position limit levels 
and position accountability rules on at least a semi-annual basis 
rather than a monthly basis generally should be adequate to ensure 
appropriate levels because deliverable supply generally does not change 
to a great degree from month to month. For example, the number of 
shares outstanding may increase through periodic issuance of additional 
shares, and may decrease through stock repurchase programs, but, as a 
general observation, such issuance or repurchases are not a large 
percentage of free float. Of course, there could be situations where 
deliverable supply changes to a great degree before the semi-annual 
period and the rule does not prevent a DCM from considering those 
changes before such period.
    The Commission also proposes a technical change to the filing 
requirement whenever a DCM makes such changes to limit levels. While 
the proposal continues to provide that changes to limit levels be filed 
pursuant to the requirements of Commission regulation 41.24, it removes 
the superfluous provision in the current regulation that provides that 
the change be effective no earlier than the day after the DCM has 
provided notification to the Commission and to the public. Instead, the 
regulation simply cites to Commission regulation 41.24, which specifies 
that changes must be received by the Commission no later than the day 
prior to the implementation.
11. Appendix A to Subpart C of Part 41, Guidance and Acceptable 
Practices for Position Limits and Position Accountability for SFPs
    Section (a), Guidance on Estimating Deliverable Supply. The 
proposal provides guidance for estimating deliverable supply. For an 
equity security, deliverable supply should be no greater than the free 
float of the security. For a debt security, deliverable supply should 
not include securities that are committed for long-term agreements 
(e.g., closed-end investment companies, structured products, or similar 
securities).
    Regarding the guidance for estimating deliverable supply for equity 
securities, free float of the security generally means issued and 
outstanding shares less restricted shares. Restricted shares include 
restricted and control securities, which are not registered with the 
SEC to sell in a public marketplace.\66\ The Commission requests 
comment on whether there are any other adjustments that should be made 
in estimating deliverable supply for equities. For example, should the 
guidance exclude from deliverable supply any equity shares held by 
ETFs, mutual funds, or similar investment vehicles? If so, how would 
such counts of shares be determined or estimated?
---------------------------------------------------------------------------

    \66\ For a general discussion of restricted and control 
securities, see https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144htm.html.
---------------------------------------------------------------------------

    Also regarding the guidance for estimating deliverable supply for 
equity securities, the Commission notes that authorized participants 
may increase the number of outstanding shares in an ETF.\67\ In setting 
a position limit for an ETF, the Commission has not proposed that DCMs 
look through the ETF to the lowest deliverable supply in an underlying 
security, as is the case in the proposal for limits for physically-
delivered basket equity SFPs. Rather, the Commission has proposed to 
restrict the estimate of deliverable supply in an ETF to existing 
shares of the ETF. As an alternative, the Commission requests comment 
on whether an estimate of deliverable supply for an ETF should include 
an allowance for the creation of ETF shares. If so, how would one 
estimate such an allowance?
---------------------------------------------------------------------------

    \67\ An authorized participant generally is an institutional 
investor, such as a broker dealer, who acts to create or redeem ETF 
shares. The authorized participant buys shares that underlie the ETF 
and exchanges those underlying shares with the ETF sponsor for 
shares in the ETF, thus creating new ETF shares that it may sell to 
the public. An authorized participant may also purchase ETF shares 
in the market place and redeem those shares with the ETF sponsor, 
thus reducing the number of ETF shares outstanding.
---------------------------------------------------------------------------

    Section (b), Guidance on Setting Limits on Cash-Settled Equity 
Index SFPs. As noted above, the Commission is proposing guidance for 
setting limits on cash-settled equity index SFPs. This proposed 
guidance would permit a DCM to set the limit level for a cash-settled 
SFP on a narrow-based security index of equity securities to that of a 
similar narrow-based security index equity option listed on an NSE. As 
an alternative for setting the level based on that of a similar equity 
option, the proposal provides guidance and acceptable practices that 
would allow a DCM, in setting a limit, to consider the deliverable 
supply of securities underlying the equity index, and the equity index 
weighting and SFP contract multiplier.
    As an example of an acceptable practice, for a cash-settled equity 
index SFP on a security index weighted by the number of shares 
outstanding, a DCM could set a position limit as follows: First, 
compute the limit on an SFP on each underlying security under proposed 
regulation (b)(3)(i)(A) (currently designated as (a)(3)(i)(A)); second, 
multiply each such limit by the ratio of the 100-share contract size 
and the shares of the security in the index; and third, determine the 
minimum level from step two and set the limit to that level, given a 
contract size of one dollar times the index, or for a larger contract 
size, reduce the level proportionately. As the Commission is proposing 
for physically-delivered basket equity SFPs, the proposal is based on 
the premise that the limit on a cash-settled SFP on a narrow-based 
security index of equity securities should be as restrictive as the 
limit for an SFP based on the underlying security with the most 
restrictive limit.
    Section (c), Guidance on Setting Limits on Debt SFPs. The proposal 
would provide guidance that an appropriate level for limits on debt 
SFPs generally would be no greater than the equivalent of 12.5 percent 
of the par value of the estimated deliverable supply of the underlying 
debt security. The Commission notes that this approach is guidance 
because there may be other reasonable bases for setting levels of debt 
SFPs position limits and the Commission does not want to foreclose 
those bases. For example, a coupon stripped from an interest bearing 
corporate bond does not have a par value in terms of such corporate 
bond, but instead such coupon is the amount of interest due at the time 
the corporate issuer is scheduled to pay such coupon under the 
corporate bond indenture.\68\
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    \68\ An interest bearing bond may be structured in a conduit and 
divided into separate obligations, where the cash flow from the 
principal of the bond and the cash flow from each coupon may be sold 
as separate securities. Each such separate security is a zero-coupon 
security.
---------------------------------------------------------------------------

    Although no DCM currently lists an SFP based on a debt security, 
the Commission believes a framework for position limits may reduce 
uncertainty regarding acceptable practices for listing such contracts 
on non-exempted securities and, thereby, may facilitate listing of such 
contracts. The Commission notes that futures contracts in exempted 
securities, such as U.S. Treasury notes, have been listed for many 
years.\69\ The Commission is proposing 12.5 percent of the par value of 
the estimated deliverable supply of the underlying debt security as 
guidance

[[Page 36808]]

on an appropriate basis based on the existing levels of limits for 
equity option contracts on NSEs. The Commission invites comment on 
whether a level based on par value is appropriate, or whether some 
other metric would be appropriate.
---------------------------------------------------------------------------

    \69\ In this regard, an exempted security refers to certain 
exempted securities under the Securities Act of 1933 or the 
Securities Exchange Act of 1934. See CEA section 2(a)(1)(C).
---------------------------------------------------------------------------

    Section (d), Guidance on Position Accountability. The Commission 
proposes, as guidance, that a DCM may adopt a position accountability 
rule for any SFP, including an SFP where a position limit is required 
or adopted. Under the proposal, a position accountability rule would 
provide, at a minimum, that the DCM have authority to obtain 
information from a market participant with a position at or above the 
accountability level and that the DCM have authority, in its 
discretion, to order such a market participant to halt increasing their 
position. The Commission notes that position accountability can work in 
tandem with a position limit rule, particularly where the 
accountability level is set at a low level, in comparison to the level 
of the position limit. Further, the Commission notes that a DCM may 
adopt a position accountability rule to provide authority to the DCM to 
order market participants to reduce position sizes, for example, to 
maintain orderly trading or to ensure an orderly delivery.
    Section (e), Guidance for Exemptions.\70\ The proposed regulation 
would continue to provide a DCM with discretion to grant exemptions to 
position limits. The proposal provides guidance that such exemptions 
may be consistent with current Commission regulation 150.5 regarding 
exchange-set position limits or consistent with rules of an NSE 
regarding securities option exemptions. This guidance differs from the 
provisions of the current regulation, which references Commission 
regulation 150.3 regarding federal position limits in certain physical 
commodity futures contracts. The Commission believes the guidance 
should reference exemption provisions applicable to exchange-set limits 
in Commission regulation 150.5, rather than federal limits, because the 
exemptions for federal limits are written largely in terms of the 
federal limits on physical commodity contracts in Commission regulation 
150.2.
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    \70\ In addition to re-designating 17 CFR 41.25(a)(3) as 17 CFR 
41.25(b)(3), the proposal would re-designate current 17 CFR 
41.25(a)(3)(iii) to appendix A to subpart C.
---------------------------------------------------------------------------

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \71\ requires that federal 
agencies consider whether a proposed rule will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis of the impact. The proposed 
amendments generally apply to exchange-set position limits. The 
proposed amendments would permit a DCM to increase the level of 
position limits for SFPs and may change the application of those limits 
from a trader's net position to a trader's gross position. The proposed 
amendments would affect DCMs. The Commission has previously established 
certain definitions of ``small entities'' to be used in evaluating the 
impact of its rules on small entities in accordance with the RFA, and 
has previously determined that DCMs are not small entities for purpose 
of the RFA.\72\
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    \71\ 5 U.S.C. 601 et seq.
    \72\ See Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, 18619 (Apr. 30, 1982).
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    Therefore, the Commission believes that the amendments to the SFP 
position limits regulations would not have a significant economic 
impact on a substantial number of small entities. Accordingly, the 
Chairman, on behalf of the Commission, hereby certifies, pursuant to 5 
U.S.C. 605(b), that the proposed amendments will not have a significant 
economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \73\ provides that a 
federal agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid control number issued by the Office of Management and 
Budget (``OMB''). The collection of information related to this 
proposed rule is OMB control number 3038-0059--Security Futures 
Products.\74\ As a general matter, the proposed amendments to the SFP 
position limits regulation (1) permit a DCM to increase the level of 
limits; and (2) may change the application of exchange-set limits from 
a net basis to a gross basis. The Commission believes that the proposed 
amendments will not impose any new information collection requirements 
that require approval of OMB under the PRA. As such, the proposed 
amendments do not impose any new burden or any new information 
collection requirements in addition to those that already exist in 
connection with filing to list SFPs under Commission regulation 41.23 
or to amend exchange rules for SFPs under Commission regulation 
41.24.\75\
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    \73\ 44 U.S.C. 3501 et seq.
    \74\ Regarding Security Futures Products (OMB Control No. 3038-
0059), the Commission recently published a notice of a request for 
extension of the currently approved information collection. See 82 
FR 48496 (Oct. 18, 2017).
    \75\ Similarly, the Commission previously determined that a rule 
expanding the listing standards for security futures did not require 
a new collection of information on the part of any entities. See 71 
FR 39534 at 39539 (July 13, 2006) (adopting a rule to permit 
security futures to be based on individual debt securities or a 
narrow-based security index comprised of such securities).
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C. Cost-Benefit Considerations

1. Introduction
    Section 15(a) of the CEA requires the CFTC to consider the costs 
and benefits of its actions before promulgating a regulation under the 
CEA or issuing certain orders.\76\ CEA 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. The CFTC considers the costs and benefits resulting 
from its discretionary determinations with respect to the section 15(a) 
factors below.
---------------------------------------------------------------------------

    \76\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    Where reasonably feasible, the CFTC has endeavored to estimate 
quantifiable costs and benefits. Where quantification is not feasible, 
the CFTC identifies and describes costs and benefits qualitatively.
    The CFTC requests comment on the costs and benefits associated with 
the proposed rule amendments. In particular, the CFTC requests that 
commenters provide data and any other information or statistics that 
the commenters relied on to reach any conclusions regarding the CFTC's 
proposed considerations of costs and benefits.
2. Economic Baseline
    The CFTC's economic baseline for this proposed rule amendment 
analysis is the SFP position limits rule requirement that exists today. 
In the 2001 Final SFP Rules, the Commission adopted an SFP position 
limits rule that is consistent with the statutory requirements of CEA 
section 2(a)(1)(D). In particular, CEA section 2(a)(1)(D)(i)(VII) 
requires generally that

[[Page 36809]]

trading in an SFP is not readily susceptible to manipulation of the 
price of that SFP or its underlying security. The CFTC regulation that 
is in effect currently states that, ``the [DCM] shall have rules in 
place establishing position limits or position accountability 
procedures for the expiring futures contract month.'' \77\ The 2001 
Final SFP Rules also provide criteria for a maximum level of position 
limits and criteria that permit a DCM to adopt an exchange rule for 
position accountability in lieu of position limits.\78\ In addition, 
the 2001 Final SFP Rules permit a DCM to approve exemptions from 
position limits pursuant to exchange rules that are consistent with 
CFTC regulation 150.3.
---------------------------------------------------------------------------

    \77\ 17 CFR 41.25(a)(3).
    \78\ 17 CFR 41.25(a)(3).
---------------------------------------------------------------------------

    The CFTC will analyze the costs and benefits of the rules in this 
proposal against the current default net position limit level of 13,500 
(100-share) contracts; or a higher net position limit level of 22,500 
(100-share) contracts for equity SFPs meeting either a criterion of at 
least 20 million shares of average daily trading volume, or criteria of 
at least 15 million shares of average daily trading volume and more 
than 40 million shares of the underlying security outstanding.
    The current regulation permits (but does not require) a DCM to 
adopt an exchange rule for position accountability in lieu of position 
limits, provided that average daily trading volume in the underlying 
security exceeds 20 million shares and there are more than 40 million 
shares of the underlying security outstanding.
3. Summary of Proposed Requirements
    For equity SFPs, the proposed amendment would increase the default 
position limit level from 13,500 (100-share) contracts to 25,000 (100-
share) contracts. The proposed amendment also permits a DCM to 
establish a higher position limit level than 25,000 (100-share) 
contracts, equivalent to 12.5 percent of estimated deliverable supply 
of the underlying security (which, under proposed guidance, should not 
exceed the free float of the underlying security). In connection with 
this change, a DCM would be required to estimate deliverable supply at 
least semi-annually, rather than to calculate the average daily trading 
volume at least monthly.
    Also for equity SFPs, the proposed amendment would change one of 
the criteria that permit a DCM to adopt an exchange rule for position 
accountability in lieu of position limits, from more than 40 million 
shares of the underlying security outstanding, to an estimated 
deliverable supply of more than 40 million shares. The proposal 
generally would retain the other criterion, namely six-month average 
daily trading volume in the underlying security exceeding 20 million 
shares, but convert that criterion to 2.5 billion shares of six-month 
total trading volume, based on 125 trading days in a typical six-month 
period.
    For physically-delivered basket equity SFPs, the proposed amendment 
would change the criteria for the position limit to the underlying 
security with the lowest estimated deliverable supply, from the 
security in the index with the lowest average daily trading volume. The 
proposed amendment also would clarify that an appropriate adjustment 
would be made to the level of the limit for a contract size different 
than 100 shares per underlying security.
    For SFPs that are cash settled to a narrow-based security index of 
equity securities, the proposed amendment provides guidance that a DCM 
may set the limit level to that of a similar narrow-based security 
index equity option. The proposal also provides guidance and an 
acceptable practice, which would provide a safe harbor for a DCM itself 
to set such a limit level.
    For SFPs in debt securities, the proposal would establish a 
requirement that a DCM must adopt a position limit either net or on the 
same side of the market, and would provide guidance that the level of 
such limit generally should be set no greater than the equivalent of 
12.5 percent of the par value of the estimated deliverable supply of 
the underlying debt security. There currently are no SFPs in debt 
securities listed for trading.
    The proposal would establish a required minimum position limit time 
period beginning no later than the first day that a holder of a long 
position may be assigned a delivery notice, if such period is longer 
than the last five trading days, where the SFP permits delivery before 
the close of trading. There currently are no SFPs listed for trading 
that provide for delivery before the close of trading.
    The proposed amendment would provide DCMs with the discretion to 
alter the basis for applying a position limit from a net position to a 
gross position on the same side of the market.\79\
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    \79\ In this regard, OneChicago, LLC (``OneChicago''), a DCM 
listing SFPs, permits concurrent long and short positions to be 
held. See OneChicago exchange rule 424, available at https://www.onechicago.com/wp-content/uploads/content/OneChicago_Current_Rulebook.pdf.
---------------------------------------------------------------------------

    The proposal would establish guidance that a DCM may adopt an 
exchange rule for position accountability in addition to an exchange 
rule for a position limit.
    The proposal would amend the guidance for exemptions from position 
limits by changing the reference to CFTC regulation 150.3, regarding 
exemptions to federal position limits, to CFTC regulation 150.5, 
regarding guidance for exchange-set limits. The proposal also would add 
guidance for exemptions from position limits to permit a DCM to provide 
exemptions consistent with those of a NSE regarding securities options 
position limits or exercise limits.
    The proposal would amend the requirements for re-setting levels of 
position limits by changing the required review period from monthly to 
semi-annually; and imposing a requirement that a DCM must lower the 
position limit for an SFP with data that no longer justifies a higher 
limit level, rather than guidance that a DCM may lower such position 
limit. The proposal also would make clear that a DCM must impose a 
position limit for an SFP with data that no longer justifies an 
exchange rule for position accountability in lieu of a position limit. 
The proposal would continue to permit a DCM to use discretion as to 
whether to increase the level of a position limit for an SFP with data 
that justifies a higher level.
    The proposal would establish a general definition of estimated 
deliverable supply, consistent with the guidance on estimating 
deliverable supply in appendix C to part 38, and provide guidance on 
estimating delivery supply that is specific to an SFP.
    Finally, the proposal would establish a definition of same side of 
the market, for clarity in the proposed limit levels on a gross basis. 
The definition would distinguish long positions for an SFP in the same 
security from short positions in an SFP in the same security.\80\
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    \80\ These two definitions would be added into a new paragraph 
(a) of 17 CFR 41.25; in conjunction with the addition of the new 
paragraph (a), current paragraphs (a) through (d) would be re-
designated as paragraphs (b) through (e).
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4. Costs
    The proposal would as a general matter reduce costs relative to the 
existing Commission regulation 41.25(a)(3),\81\ since it will reduce 
the frequency of hedge exemption requests (as discussed in the benefits 
section) and reduce the frequency of required DCM reviews of position 
limits from monthly to semi-annually. Under the

[[Page 36810]]

proposal, DCMs that list SFPs for trading would continue to be required 
to adopt position limits or position accountability, but the proposal 
would generally increase the levels of position limits. The Commission 
preliminarily believes that the proposal would impose certain costs on 
such DCMs, and that these costs are necessary to establish appropriate 
position limits or position accountability trigger levels based on 
deliverable supply and such additional criteria that the listing DCM 
determines to be appropriate. The Commission also believes that these 
costs are comparable to those incurred under current regulations 
(whereby DCMs must calculate average daily trading volume) and notes 
that these costs will be incurred only semi-annually under the proposal 
rather than monthly as under current regulations. The Commission 
believes that DCMs would be able to exercise control over the extent of 
these costs depending on the degree of standardization such DCMs use to 
determine position limits and accountability and the Commission 
anticipates that DCMs will choose from among the lower-cost options. 
For example, a DCM could, consistent with the proposal, adopt a simple 
rule for equity securities based on the number of free-float 
outstanding shares. For equity securities, free-float information is 
readily available on certain publicly-available market websites and on 
Bloomberg terminals and similar services (which DCMs are likely to have 
access to for other business reasons). Reducing the frequency with 
which DCMs are required to review position limits and accountability to 
semi-annually from monthly will reduce costs to DCMs. Thus, the 
Commission anticipates that estimating deliverable supply would not be 
more costly (and would likely be less costly) than estimating average 
daily trading volume as required under current regulations.
---------------------------------------------------------------------------

    \81\ Re-designated under the proposal as 17 CFR 41.25(b)(3).
---------------------------------------------------------------------------

    The Commission notes that under the proposed rule, DCMs have the 
discretion to implement the default position limit of 25,000 contracts 
regardless of deliverable supply and that this may result in position 
limit levels in some contracts greater than 12.5 percent of deliverable 
supply. However, this discretion is limited by Core Principle 5 (which 
requires DCMs to set position levels at necessary and appropriate 
levels to deter manipulation) and by Core Principle 3 (which requires 
that DCMs may only list contracts that are not readily susceptible to 
manipulation). To the extent that DCMs comply with these core 
principles, this DCM discretion should not impair the protection of 
market participants and the public or otherwise impose significant 
costs on the markets for SFPs market or related securities.
    To the extent that a DCM lists equity SFPs on deliverable baskets, 
the costs of implementing the proposed position limit provisions for 
such SFPs would be similar to the costs of the analogous provisions for 
single stock SFPs, but there are no current costs associated with those 
proposed changes to the regulations since such SFPs are not currently 
listed for trading. There are also no listed SFPs at this time on debt 
securities. To the extent that there is less publicly-available 
information related to the deliverable supply of debt securities, 
estimating deliverable supply may be more costly for debt securities 
than for equity securities. However, these costs will only be incurred 
in the event that a DCM begins listing security futures on non-exempted 
debt securities. Moreover, these deliverable supply provisions are set 
out as guidance so that DCMs are free to implement less costly methods 
to comply with the rule, which provides only that futures on debt 
securities must have position limits. While DCMs have not listed debt 
security SFPs absent the proposed changes to the regulation, it is 
theoretically possible that the costs associated with estimating 
deliverable supply or otherwise determining position limit levels may 
affect future decisions regarding whether or not to list such SFPs. The 
costs of the proposed regulation for debt securities would be otherwise 
similar to the costs of the proposed regulation for equity securities.
    The proposal to permit DCMs to implement position limits on a net 
basis or on positions on the same side of the market (e.g., on 
physically-delivered and cash settled contracts on the same security, 
should a DCM ever list both types of contracts) would not require DCMs 
to change their current practice, and will thus not impose new costs on 
DCMs. Any change that imposes new costs on market participants would be 
made at the discretion of the DCM.
    The proposal to establish a required minimum position limit time 
period beginning no later than the first day that a holder of a long 
position may be assigned a delivery notice, if such period is longer 
than the last five trading days, in instances where the SFP permits 
delivery before the close of trading currently imposes no costs since 
contracts of this nature are not currently listed for trading. If a DCM 
listed such contracts, the proposal would require market participants 
to incur the costs of complying with position limits or applying for 
hedge exemptions (and would require DCMs to incur the costs of 
reviewing such applications) earlier in the life of the contract than 
absent the proposal.
5. Benefits
    The Commission reviews its regulations to help ensure they keep 
pace with technological developments and industry trends, and to reduce 
regulatory burden where needed. The proposal would allow DCMs to adopt 
position limits that they deem to be appropriate. The Commission 
preliminarily believes that DCMs will adopt position limits that are 
large enough not to significantly inhibit liquidity, but will 
appropriately mitigate against potential manipulations and other 
concerns that may be associated with overly large positions in SFPs. 
Moreover, to the extent that the proposal would lead to position limits 
that are higher than current position limits, the proposal could 
alleviate the costs to hedgers of filing hedge exemptions for positions 
that are larger than a current position limit, but lower than a new 
position limit under the proposal. In that regard, Commission staff 
reviewed the largest positions in SFPs that were held during the 
calendar year 2017 and found that there were 16 positions held during 
the last five trading days of expiring SFP contract months across all 
listed SFPs on OneChicago, currently the only DCM to list SFPs for 
trading. These positions generally appear to have been associated with 
securities lending agreements \82\ and thus appear to have been 
eligible for hedge exemptions. These 16 positions exceeded the current 
applicable limit for their underlying securities of the default 13,500 
contracts. If the proposed default position limit of 25,000 contracts 
had been in effect in 2017, fewer than four positions would have been 
above that default position limit and would have required hedge 
exemptions. While the Commission believes that the monetary cost of 
filing a hedge exemption form is very small for an entity large enough 
to maintain a position that exceeds a position limit (perhaps less than 
$100), it is possible that the burden of filing a hedge exemption may 
discourage hedging at sizes exceeding position limits and, thus, that 
raising position limits may encourage larger hedges. The Commission 
also notes that to the extent SFPs are now or in the future used for

[[Page 36811]]

speculation,\83\ speculators could establish larger positions under the 
proposal without a need for concern about position limits and may thus 
increase their trading activity. Any potential increase in trading 
activity could improve liquidity in the SFP markets.
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    \82\ OneChicago describes itself on its website, https://onechicago.com, as ``the Securities Finance Exchange'' and states 
that ``single stock futures are ideally suited to replace 
`agreements' in equity repo and securities lending transactions.''
    \83\ As noted above, SFPs may be used for securities finance 
transactions that are not speculative in nature.
---------------------------------------------------------------------------

    Requiring DCMs to set position limits and accountability based on 
semi-annual deliverable supply estimates should help ensure on an 
ongoing basis that position limits and accountability are set at levels 
that are necessary and appropriate to deter manipulation consistent 
with DCM Core Principles 3 and 5.
    The Commission preliminarily believes that the proposed frameworks 
for position limits in SFPs on deliverable equity baskets and debt 
securities (all based on deliverable supply estimates) should help 
ensure that such products, if they are ever listed for trading, are 
reasonably protected from manipulation. Further, the Commission 
preliminarily believes that the proposal may help foster position 
limits consistent with those in analogous securities options (where 
applicable).
    The proposal to permit DCMs to implement position limits on a net 
basis or on positions on the same side of the market (such as 
physically-delivered or cash settled contracts on the same security, 
should a DCM ever list both types of contracts) will give DCMs the 
discretion to implement position limits in a manner that they see fit.
    The proposal to establish a required minimum position limit time 
period beginning no later than the first day that a holder of a long 
position may be assigned a delivery notice, if such period is longer 
than the last five trading days, where the SFP permits delivery before 
the close of trading currently provides no benefits since contracts of 
this nature are not listed for trading. If a DCM listed such contracts, 
the proposal would help ensure that such contracts are not readily 
susceptible to manipulation during the entire delivery period.
6. CEA Section 15(a) Factors
i. Protection of Market Participants and the Public
    The Commission preliminarily believes that this proposal maintains 
the protection of market participants and the public provided by the 
current regulation. The proposal will continue to protect market 
participants and the public by maintaining the requirement that DCMs 
that list SFPs adopt and enforce appropriate position limits or 
position accountability consistent with DCM Core Principle 5 and 
implementing for SFPs the longstanding Commission policy that spot-
month position limits should be set based on estimates of deliverable 
supply. Linking the levels of position limits and accountability to 
deliverable supply protects market participants and the public by 
helping prevent congestion, manipulation, or other problems that can be 
associated with speculative positions in expiring contracts that are 
overly large relative to deliverable supply.
ii. Efficiency, Competitiveness, and Financial Integrity of Markets
    As discussed above, under the proposal, it is reasonable to 
anticipate that many or most SFPs would be subject to higher position 
limits compared to the current position limits. Therefore, hedgers may 
be able to take larger positions without the need to apply for hedge 
exemptions. This also could alleviate the DCM's need to review hedge 
exemptions improving resource allocation efficiency for exchanges and 
certain market participants. Moreover, with less restrictive position 
limits, it is theoretically possible that more traders could be enticed 
into the market and thus improve the liquidity and pricing efficiency 
of the SFP market.
    The current position limit regulation (a default of 13,500 
contracts) often leads to position limits that are tighter than 
analogous position limits for security options (a default of 25,000 
contracts). The proposal would raise the default limit level in SFPs to 
match that in securities options. More closely aligning the position 
limits in SFPs to those in securities options may enhance the 
competitiveness of the SFP market relative to the securities option 
market.
iii. Price Discovery
    The Commission believes that price discovery typically occurs in 
the liquid and generally transparent security markets underlying 
existing SFPs rather than the relatively low-volume SFPs themselves. 
Nevertheless, as noted above, to the extent that trading activity in 
SFP markets increases due to less restrictive position limits, the 
price discovery function of SFPs could be enhanced by reducing 
liquidity risk and thereby facilitating arbitrage between the 
underlying security and SFP markets.
iv. Sound Risk Management Practices
    The current position limit regulation often leads to position 
limits that are tighter than analogous position limits for security 
options. It is conceivable that this could discourage potential hedgers 
or other risk managers from using SFPs rather than security options 
because of burdens associated with the hedge exemption process. Risk 
managers might also find that the liquidity risk in the current SFP 
market is too high, due to a lack of speculators in the SFP market 
(among other causes). In this regard, it is possible that the current 
position limits might be too tight for speculators to perform 
adequately their role of providing liquidity in a futures market. 
Because the proposal raises the default limit to 25,000 contracts to 
match the default in security options, and thus would likely lead to 
higher position limits for many SFPs, it is possible that both risk 
managers and speculators enter or increase trading in the SFP market 
under the proposal.
v. Other Public Interest Considerations
    The Commission has not identified any additional public interest 
considerations associated with the proposal.
7. Consideration of Alternatives
    The Commission considered regulations that would require DCMs to 
conform the position limits in SFPs to those in securities options to a 
greater degree than under the proposal (consistent with comments to the 
original SFP rule proposal), including applying position limits 
throughout the life of the contract (rather than only in the last five 
trading days) and no longer permitting position accountability for SFPs 
on securities with higher trading volume and deliverable supply. The 
Commission believes that permitting position accountability for certain 
SFPs and only requiring spot month limits is consistent with Core 
Principle 5 and that these requirements are sufficient to ensure that 
SFPs are not readily susceptible to manipulation as required by Core 
Principle 3. Thus, not permitting position accountability and requiring 
DCMs to apply position limits throughout the life of the contract would 
significantly increase costs on market participants while not 
significantly enhancing protection of market participants and the 
public or providing significant benefits beyond those of the proposed 
position limits framework.
    The Commission also considered not setting default position limits 
for equity

[[Page 36812]]

SFPs and simply requiring that position limits and accountability be 
set based on deliverable supply, as is done in many other futures 
products. However, the Commission preliminarily determined not to make 
such a proposal because some exchanges and market participants (based 
on past comments) \84\ appear to believe that there are benefits to 
conforming position limits in SFPs to those in securities options to 
the extent practicable.
---------------------------------------------------------------------------

    \84\ See supra discussion of the 2001 Final SFP Rules.
---------------------------------------------------------------------------

8. Request for Comments
    The Commission invites public comment on its cost-benefit 
considerations, including the CEA section 15(a) factors described 
above. Commenters are also invited to submit any data or other 
information that they may have quantifying or qualifying the costs and 
benefits of the proposal with their comment letters.
    The Commission specifically seeks comment on the following:
    1. Are there alternatives to the proposal (whether discussed in 
this release or not) that would be superior from a cost-benefit 
standpoint?
    2. Would the proposal affect costs for those market participants 
that seek hedge exemptions?
    3. Would DCMs that list for trading SFPs face additional costs in 
adopting and setting position limits and position accountability levels 
for SFPs under the proposal that are not discussed in this 
consideration of costs and benefits?
    4. Do DCMs and market participants expect to see benefits under the 
proposal that are not discussed in this consideration of costs and 
benefits? Please quantify or describe such benefits.
    5. Should the Commission eliminate default position limits for 
equity SFPs and instead simply require that position limits and 
accountability be set based on deliverable supply, as is done in many 
other futures products?
    6. Is it feasible to estimate deliverable supply for debt 
securities at reasonable cost?
    7. Are there benefits associated with the Commission implementing 
rules for types of SFPs that are not currently listed for trading? Does 
implementing such rules have the potential to impose costs associated 
with possibly deterring innovation?

D. Anti-Trust Considerations

    CEA Section 15(b) requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
objectives, polices and purposes of the CEA, in issuing any order or 
adopting any Commission rule or regulation (including any exemption 
under section 4(c) or 4c(b)), or in requiring or approving any bylaw, 
rule, or regulation of a contract market or registered futures 
association established pursuant to CEA section 17.\85\
---------------------------------------------------------------------------

    \85\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether the proposal implicates any other specific 
public interest to be protected by the antitrust laws. The Commission 
has considered the proposal to determine whether it is anticompetitive 
and has preliminarily identified no anticompetitive effects. The 
Commission requests comment on whether the proposal is anticompetitive 
and, if it is, what the anticompetitive effects are.
    Because the Commission has preliminarily determined that the 
proposal is not anticompetitive and has no anticompetitive effects, the 
Commission has not identified any less anticompetitive means of 
achieving the purposes of the Act. The Commission requests comment on 
whether there are less anticompetitive means of achieving the relevant 
purposes of the Act that would further the objective of this proposal, 
such as leveling the regulatory playing field between SFPs and security 
options listed on NSEs.

List of Subjects in 17 CFR Part 41

    Position accountability, Position limits, Security futures 
products.

    For the reasons discussed in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 41 as set forth below:

PART 41--SECURITY FUTURES PRODUCTS

0
1. The authority citation for part 41 continues to read as follows:

    Authority:  Sections 206, 251 and 252, Pub. L. 106-554, 114 
Stat. 2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).

0
2. In Sec.  41.25:
0
a. Redesignate paragraphs (a) through (d) as paragraphs (b) through 
(e);
0
b. Add new paragraph (a);
0
c. Revise newly redesignated paragraphs (b)(3), (c)(2) and (3), and 
(e).
    The addition and revisions read as follows:


Sec.  41.25  Additional conditions for trading for security futures 
products.

    (a) Definitions. For purposes of this section:
    Estimated deliverable supply means the quantity of the security 
underlying a security futures product that reasonably can be expected 
to be readily available to short traders and salable by long traders at 
its market value in normal cash marketing channels during the specified 
delivery period. For guidance on estimating deliverable supply, 
designated contract markets may refer to appendix A of this subpart.
    Same side of the market means the aggregate of long positions in 
physically-delivered security futures products and cash-settled 
security futures products, in the same security, and, separately, the 
aggregate of short positions in physically-delivered security futures 
products and cash-settled security futures products, in the same 
security.
    (b) * * *
    (3) Speculative position limits. A designated contract market shall 
have rules in place establishing position limits or position 
accountability procedures for the expiring futures contract month as 
specified in this paragraph (b)(3).
    (i) Limits for equity security futures products. For a security 
futures product on a single equity security, including a security 
futures product on an underlying security that represents ownership in 
a group of securities, e.g., an exchange traded fund, a designated 
contract market shall adopt a position limit no greater than 25,000 
100-share contracts (or the equivalent if the contract size is 
different than 100 shares), either net or on the same side of the 
market, applicable to positions held during the last five trading days 
of an expiring contract month; except where:
    (A) For a security futures product on a single equity security 
where the estimated deliverable supply of the underlying security 
exceeds 20 million shares, a designated contract market may adopt, if 
appropriate in light of the liquidity of trading in the underlying 
security, a position limit no greater than the equivalent of 12.5 
percent of the estimated deliverable supply of the underlying security, 
either net or on the same side of the market, applicable to positions 
held during the last five trading days of an expiring contract month; 
or
    (B) For a security futures product on a single equity security 
where the six-month total trading volume in the underlying security 
exceeds 2.5 billion shares and there are more than 40

[[Page 36813]]

million shares of estimated deliverable supply, a designated contract 
market may adopt a position accountability rule, either net or on the 
same side of the market, applicable to positions held during the last 
five trading days of an expiring contract month. Upon request by a 
designated contract market, traders who hold positions greater than 
25,000 100-share contracts (or the equivalent if the contract size is 
different than 100 shares), or such lower level specified pursuant to 
the rules of the designated contract market, must provide information 
to the designated contract market and consent to halt increasing their 
positions when so ordered by the designated contract market.
    (ii) Limits for physically-delivered basket equity security futures 
products. For a physically-delivered security futures product on more 
than one equity security, e.g., a basket of deliverable securities, a 
designated contract market shall adopt a position limit, either net or 
on the same side of the market, applicable to positions held during the 
last five trading days of an expiring contract month and the criteria 
in paragraph (b)(3)(i) of this section must apply to the underlying 
security with the lowest estimated deliverable supply. For a 
physically-delivered security futures product on more than one equity 
security with a contract size different than 100 shares per underlying 
security, an appropriate adjustment to the limit must be made. If each 
of the underlying equity securities in the basket of deliverable 
securities is eligible for a position accountability level under 
paragraph (b)(3)(i)(B) of this section, then the security futures 
product is eligible for a position accountability level in lieu of 
position limits.
    (iii) Limits for cash-settled equity index security futures 
products. For a security futures product cash settled to a narrow-based 
security index of equity securities, a designated contract market shall 
adopt a position limit, either net or on the same side of the market, 
applicable to positions held during the last five trading days of an 
expiring contract month. For guidance on setting limits for a cash-
settled equity index security futures product, designated contract 
markets may refer to section (b) of appendix A of this subpart.
    (iv) Limits for debt security futures products. For a security 
futures product on one or more debt securities, a designated contract 
market shall adopt a position limit, either net or on the same side of 
the market, applicable to positions held during the last five trading 
days of an expiring contract month. For guidance on setting limits for 
a debt security futures product, designated contract markets may refer 
to section (c) of appendix A of this subpart.
    (v) Required minimum position limit time period. For position 
limits required under this section where the security futures product 
permits delivery before the termination of trading, a designated 
contract market shall apply such position limits for a period beginning 
no later than the first day that long position holders may be assigned 
delivery notices, if such period is longer than the last five trading 
days of an expiring contract month.
    (vi) Requirements for re-setting levels of position limits. A 
designated contract market shall calculate estimated deliverable supply 
and six-month total trading volume no less frequently than semi-
annually.
    (A) If the estimated deliverable supply data supports a lower 
speculative limit for a security futures product, then the designated 
contract market shall lower the position limit for that security 
futures product pursuant to the submission requirements of Sec.  41.24. 
If the data require imposition of a reduced position limit for a 
security futures product, the designated contract market may permit any 
trader holding a position in compliance with the previous position 
limit, but in excess of the reduced limit, to maintain such position 
through the expiration of the security futures contract; provided, that 
the designated contract market does not find that the position poses a 
threat to the orderly expiration of such contract.
    (B) If the estimated deliverable supply or six-month total trading 
volume data no longer supports a position accountability rule in lieu 
of a position limit for a security futures product, then the designated 
contract market shall establish a position limit for that security 
futures product pursuant to the submission requirements of Sec.  41.24.
    (C) If the estimated deliverable supply data supports a higher 
speculative limit for a security futures product, as provided under 
paragraph (b)(3)(i)(A) of this section, then the designated contract 
market may raise the position limit for that security futures product 
pursuant to the submission requirements of Sec.  41.24.
    (vii) Restriction on netting of positions. If the designated 
contract market lists both physically-delivered contracts and cash 
settled-contracts in the same security, it shall not permit netting of 
positions in the physically-delivered contract with that of the cash-
settled contract for purposes of determining applicability of position 
limits.
    (c) * * *
    (2) Notwithstanding paragraph (c)(1) of this section, if an opening 
price for one or more securities underlying a security futures product 
is not readily available, the final settlement price of the security 
futures product shall fairly reflect:
    (i) The price of the underlying security or securities during the 
most recent regular trading session for such security or securities; or
    (ii) The next available opening price of the underlying security or 
securities.
    (3) Notwithstanding paragraph (c)(1) or (2) of this section, if a 
derivatives clearing organization registered under Section 5b of the 
Act or a clearing agency exempt from registration pursuant to Section 
5b(a)(2) of the Act, to which the final settlement price of a security 
futures product is or would be reported determines, pursuant to its 
rules, that such final settlement price is not consistent with the 
protection of customers and the public interest, taking into account 
such factors as fairness to buyers and sellers of the affected security 
futures product, the maintenance of a fair and orderly market in such 
security futures product, and consistency of interpretation and 
practice, the clearing organization shall have the authority to 
determine, under its rules, a final settlement price for such security 
futures product.
* * * * *
    (e) Exemptions. The Commission may exempt a designated contract 
market from the provisions of paragraphs (b)(2) and (c) of this 
section, either unconditionally or on specified terms and conditions, 
if the Commission determines that such exemption is consistent with the 
public interest and the protection of customers. An exemption granted 
pursuant to this paragraph shall not operate as an exemption from any 
Securities and Exchange Commission rules. Any exemption that may be 
required from such rules must be obtained separately from the 
Securities and Exchange Commission.
0
3. Add appendix A to subpart C to read as follows:

Appendix A to Subpart C of Part 41--Guidance on and Acceptable 
Practices for Position Limits and Position Accountability for Security 
Futures Products

    (a) Guidance for estimating deliverable supply. (1) For an 
equity security, deliverable supply should be no greater than the 
free float of the security.
    (2) For a debt security, deliverable supply should not include 
securities that are committed for long-term agreements (e.g., 
closed-end investment companies, structured products, or similar 
securities).

[[Page 36814]]

    (3) Further guidance on estimating deliverable supply, including 
consideration of whether the underlying security is readily 
available, is found in appendix C to part 38 of this chapter.
    (b) Guidance and acceptable practices for setting limits on 
cash-settled equity index security futures products--(1) Guidance 
for setting limits on cash-settled equity index security futures 
products. For a security futures product cash settled to a narrow-
based security index of equity securities, a designated contract 
market:
    (i) May set the level of a position limit to that of a similar 
equity index option listed on a national security exchange or 
association; or
    (ii) Should consider the deliverable supply of equity securities 
underlying the index, and should consider the index weighting and 
contract multiplier.
    (2) Acceptable practices for setting limits on cash-settled 
equity index security futures products. For a security futures 
product cash settled to a narrow-based security index of equity 
securities weighted by the number of shares outstanding, a 
designated contract market may set a position limit as follows: 
First, determine the limit on a security futures product on each 
underlying equity security pursuant to Sec.  41.25(b)(3)(i); second, 
multiply each such limit by the ratio of the 100-share contract size 
and the shares of the equity securities in the index; and third, 
determine the minimum level from step two and set the limit to that 
level, given a contract size of one U.S. dollar times the index, or 
for a larger contract size, reduce the level proportionately. If 
under these procedures each of the equity securities underlying the 
index is determined to be eligible for position accountability 
levels, the security futures product on the index itself is eligible 
for a position accountability level.
    (c) Guidance and acceptable practices for setting limits on debt 
security futures products--(1) Guidance for setting limits on debt 
security futures products. A designated contract market should set 
the level of a position limit to no greater than the equivalent of 
12.5 percent of the par value of the estimated deliverable supply of 
the underlying debt security. For a security futures product on more 
than one debt security, the limit should be based on the underlying 
debt security with the lowest estimated deliverable supply.
    (2) Acceptable practices for setting limits on debt security 
futures products.
    [Reserved.]
    (d) Guidance on position accountability. A designated contract 
market may adopt a position accountability rule for any security 
futures product, in addition to a position limit rule required or 
adopted under this section. Upon request by the designated contract 
market, traders who hold positions, either net or on the same side 
of the market, greater than such level specified pursuant to the 
rules of the designated contract market must provide information to 
the designated contract market and consent to halt increasing their 
positions when so ordered by the designated contract market.
    (e) Guidance on exemptions from position limits. A designated 
contract market may approve exemptions from these position limits 
pursuant to rules that are consistent with Sec.  150.5 of this 
chapter, or to rules that are consistent with rules of a national 
securities exchange or association regarding exemptions to 
securities option position limits or exercise limits.

    Issued in Washington, DC, on July 24, 2018, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Position Limits and Position Accountability for Security 
Futures Products--Commission Voting Summary and Commissioner's 
Statement

Appendix 1--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz 
and Behnam voted in the affirmative. No Commissioner voted in the 
negative.

Appendix 2--Concurring Statement of Commissioner Rostin Behnam

    I respectfully concur with the Commodity Futures Trading 
Commission's approval of its proposed rule regarding Position Limits 
and Position Accountability for Security Futures Products (the 
``Proposal''). I commend staff on their hard work in producing this 
Proposal, and for their thoughtful responses to my questions. I look 
forward to hearing from market participants and other stakeholders 
regarding the amendments to the existing position limits rules for 
security futures products. In particular, I will be interested in 
comments regarding the appropriateness of increasing the default 
level of equity security futures products position limits from 
13,500 contracts to 25,000 contracts. While today's Proposal only 
would amend the Commission's Part 41 rules regarding security 
futures products, I nonetheless encourage market participants and 
interested stakeholders to consider how the Proposal might impact or 
interplay with the Commission's position limits rules in Part 150 
and any future amendments to them.

[FR Doc. 2018-16079 Filed 7-30-18; 8:45 am]
 BILLING CODE 6351-01-P



                                                                          Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules                                                   36799

                                                 addition, FSIS offers an email                           from edible products so as to avoid their             setting a higher level of position limits
                                                 subscription service which provides                      distribution as human food. Pet food or               and position accountability levels. In
                                                 automatic and customized access to                       similar uninspected, inedible products                addition, the proposed amended
                                                 selected food safety news and                            must be labeled or otherwise identified               position limit regulation would provide
                                                 information. This service is available at:               in accordance with § 325.11(d) of this                discretion to a designated contract
                                                 http://www.fsis.usda.gov/subscribe.                      subchapter.                                           market (‘‘DCM’’) to apply limits to either
                                                 Options range from recalls to export                                                                           a person’s net position or a person’s
                                                 information, regulations, directives, and                PART 381—POULTRY PRODUCTS                             position on the same side of the market.
                                                 notices. Customers can add or delete                     INSPECTIONS REGULATIONS                               The Commission also proposes criteria
                                                 subscriptions themselves, and have the                   ■ 3. The authority citation for part 381              for setting position limits on an SFP on
                                                 option to password protect their                         continues to read as follows:                         other than an equity security, generally
                                                 accounts.                                                                                                      based on an estimate of deliverable
                                                                                                            Authority: 7 U.S.C. 138f; 7 U.S.C. 450; 21          supply.
                                                 List of Subjects                                         U.S.C. 451–470; 7 CFR 2.18, 2.53.
                                                                                                                                                                DATES: Comments must be received on
                                                 9 CFR Part 318                                           ■ 4. Section 381.152 is revised to read               or before October 1, 2018.
                                                   Food additives, Food packaging,                        as follows:
                                                                                                                                                                ADDRESSES: You may submit comments,
                                                 Laboratories, Meat inspection, Reporting                 § 381.152 Manufacture of uninspected,                 identified by RIN 3038–AE61 and
                                                 and recordkeeping requirements, Signs                    inedible products at official establishments.         ‘‘Position Limits and Position
                                                 and symbols.                                               (a) Official establishments may                     Accountability for Security Futures
                                                 9 CFR Part 381                                           manufacture pet food or similar                       Products,’’ by any of the following
                                                                                                          uninspected, inedible products in areas               methods:
                                                   Administrative practice and                            where edible products also are                           • CFTC website: http://
                                                 procedure, Animal diseases, Crime,                       produced, provided that the                           comments.cftc.gov. Follow the
                                                 Exports, Food grades and standards,                      manufacture of uninspected, inedible                  instructions for submitting comments
                                                 Food labeling, Food packaging,                           products does not:                                    through the Comments Online process
                                                 Government employees, Grant                                (1) Adulterate edible products;                     on the website.
                                                 programs-agriculture, Intergovernmental                    (2) Create insanitary conditions in the                • Mail: Christopher Kirkpatrick,
                                                 relations, Laboratories, Meat inspection,                official establishment whereby edible                 Secretary of the Commission,
                                                 Nutrition, Polychlorinated biphenyls,                    products may be adulterated; or                       Commodity Futures Trading
                                                 Poultry and poultry products, Reporting                    (3) Prevent or interfere with                       Commission, Three Lafayette Centre,
                                                 and recordkeeping requirements,                          inspection or other program tasks                     1155 21st Street NW, Washington, DC
                                                 Seizures and forfeitures, Signs and                      performed by FSIS personnel in the                    20581.
                                                 symbols, Technical Assistance,                                                                                    • Hand delivery/courier: Same as
                                                                                                          official establishment.
                                                 Transportation.                                                                                                Mail above.
                                                                                                            (b) The immediate container of
                                                   For the reasons set forth in the                                                                                Please submit your comments using
                                                                                                          uninspected, inedible products
                                                 preamble, FSIS is proposing to amend 9                                                                         only one method.
                                                                                                          manufactured in an official                              All comments must be submitted in
                                                 CFR parts 318 and 381 as follows:                        establishment shall be conspicuously                  English, or if not, accompanied by an
                                                                                                          labeled so as to distinguish them from                English translation. Comments will be
                                                 PART 318—ENTRY INTO OFFICIAL
                                                                                                          human food.                                           posted as received to http://
                                                 ESTABLISHMENTS; REINSPECTION
                                                 AND PREPARATION OF PRODUCTS                                Done in Washington, DC.                             www.cftc.gov. You should submit only
                                                                                                          Paul Kiecker,                                         information that you wish to make
                                                 ■ 1. The authority citation for part 318                 Acting Administrator.                                 available publicly. If you wish the
                                                 continues to read as follows:                            [FR Doc. 2018–16339 Filed 7–30–18; 8:45 am]           Commission to consider information
                                                   Authority: 7 U.S.C. 138f, 450, 1901–1906;              BILLING CODE 3410–DM–P                                that is exempt from disclosure under the
                                                 21 U.S.C. 601–695; 7 CFR 2.18, 2.53.                                                                           Freedom of Information Act, a petition
                                                                                                                                                                for confidential treatment of the exempt
                                                 ■ 2. Section 318.12 is revised to read as
                                                                                                                                                                information may be submitted according
                                                 follows:                                                 COMMODITY FUTURES TRADING
                                                                                                                                                                to the procedures set forth in section
                                                                                                          COMMISSION
                                                 § 318.12 Manufacture of uninspected,                                                                           145.9 of the Commission’s regulations.1
                                                 inedible products at official establishments.            17 CFR Part 41                                           The Commission reserves the right,
                                                   (a) Official establishments may                                                                              but shall have no obligation, to review,
                                                                                                          RIN 3038–AE61                                         pre-screen, filter, redact, refuse or
                                                 manufacture pet food or similar
                                                 uninspected, inedible products in areas                                                                        remove any or all of your submission
                                                                                                          Position Limits and Position                          from http://www.cftc.gov that it may
                                                 where edible products also are                           Accountability for Security Futures
                                                 produced, provided that the                                                                                    deem to be inappropriate for
                                                                                                          Products                                              publication, such as obscene language.
                                                 manufacture of uninspected, inedible
                                                 products does not:                                       AGENCY:  Commodity Futures Trading                    All submissions that have been redacted
                                                   (1) Adulterate edible products;                        Commission.                                           or removed that contain comments on
                                                   (2) Create insanitary conditions in the                ACTION: Proposed rule.
                                                                                                                                                                the merits of the rulemaking will be
daltland on DSKBBV9HB2PROD with PROPOSALS




                                                 official establishment whereby edible                                                                          retained in the public comment file and
                                                 products may be adulterated; or                          SUMMARY:   The Commodity Futures                      will be considered as required under the
                                                   (3) Prevent or interfere with                          Trading Commission (‘‘CFTC’’ or                       Administrative Procedure Act and other
                                                 inspection or other program tasks                        ‘‘Commission’’) is proposing to amend
                                                                                                                                                                  1 All Commission regulations referred to herein
                                                 performed by FSIS personnel in the                       its position limits rules for security
                                                                                                                                                                are found in chapter I of title 17 of the Code of
                                                 official establishment.                                  futures products (‘‘SFPs’’) by: Increasing            Federal Regulations. Commission regulations are
                                                   (b) Pet food and similar uninspected,                  the default level of equity SFP position              accessible on the Commission’s website, http://
                                                 inedible products must be distinguished                  limits, and modifying the criteria for                www.cftc.gov.



                                            VerDate Sep<11>2014   16:40 Jul 30, 2018   Jkt 244001   PO 00000   Frm 00008   Fmt 4702   Sfmt 4702   E:\FR\FM\31JYP1.SGM   31JYP1


                                                 36800                    Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules

                                                 applicable laws, and may be accessible                      Among those provisions is current                   B. Differences Between Initially Adopted
                                                 under the Freedom of Information Act.                    Commission regulation 41.25(a)(3),                     SFP and Equity Option Position Limit
                                                 FOR FURTHER INFORMATION CONTACT:                         which requires a DCM that lists SFPs to                Rules
                                                 Thomas M. Leahy, Jr., Associate                          establish position limits or position
                                                                                                          accountability standards. The                             In response to the 2001 Proposed SFP
                                                 Director, Product Review, Division of
                                                                                                          Commission’s SFP position limits                       rules, three commenters noted several
                                                 Market Oversight, 202–418–5278,
                                                                                                          regulations were set at levels that are                differences between the SFP position
                                                 TLeahy@cftc.gov; or Riva Spear
                                                                                                          generally comparable but not identical                 limit regulations and position limit
                                                 Adriance, Senior Special Counsel, Chief
                                                                                                          to the limits that currently apply to                  rules for equity security options listed
                                                 Counsel’s Office, Division of Market
                                                                                                          options on individual securities.8                     on national security exchanges or
                                                 Oversight, 202–418–5494, radriance@
                                                                                                             Under the existing regulations, a DCM               associations (‘‘NSE’’) approved by the
                                                 cftc.gov; Commodity Futures Trading
                                                                                                          is required to establish for each SFP a                Securities and Exchange Commission
                                                 Commission, Three Lafayette Centre,
                                                                                                          position limit, applicable to positions                (‘‘SEC’’): (1) The specification that
                                                 1155 21st Street NW, Washington, DC
                                                                                                          held during the last five trading days of              position limits for SFPs are on a net,
                                                 20581.
                                                                                                          an expiring contract month, of no                      rather than a gross,15 basis; (2) the
                                                 SUPPLEMENTARY INFORMATION:                                                                                      numerical limits on SFPs differ from
                                                                                                          greater than 13,500 (100-share)
                                                 I. Background                                            contracts, except under specific                       those on security options; and (3) the
                                                                                                          conditions.9 If a security underlying an               position limits for SFPs are applicable
                                                 A. Overview                                                                                                     only during the last five trading days
                                                                                                          SFP has either (i) an average daily
                                                    On December 21, 2000, the                             trading volume of at least 20 million                  prior to expiration, rather than at any
                                                 Commodity Futures Modernization Act                      shares; or (ii) an average daily trading               time in the lifespan of a security option
                                                 (‘‘CFMA’’) became law and amended the                    volume of at least 15 million shares and               contract.16 Commenters also requested
                                                 Commodity Exchange Act (‘‘CEA’’). The                    at least 40 million shares outstanding,                that the Commission coordinate with
                                                 CFMA removed a long-standing ban 2 on                    then the DCM may establish a position                  the SEC so that the SFP position limit
                                                 trading futures on single securities and                 limit for the SFP of no more than 22,500               regulations are the same as those
                                                 narrow-based security indexes 3 in the                   contracts.10 A DCM may adopt position                  applicable to security and securities
                                                 United States. As amended by the                         accountability for an SFP on a security                index options, or, alternatively, that
                                                 CFMA, in order for a DCM to list SFPs,4                  that has: (i) An average daily trading                 such position limit regulations more
                                                 the SFPs and the securities underlying                   volume of at least 20 million shares; and              closely resemble existing limits on
                                                 the SFPs must meet a number of                           (ii) at least 40 million shares                        security and securities index options.17
                                                 criteria.5 One of the criteria requires that             outstanding.11 Under any position                      The Commission noted that the
                                                 trading in the SFP is not readily                        accountability regime, upon a request                  provisions in Commission regulation
                                                 susceptible to manipulation of the price                 from a DCM, traders holding a position                 41.25(a)(3) as finalized were consistent
                                                 of such SFP, nor to causing or being                     of greater than 22,500 contracts, or such              with the Commission’s customary
                                                 used in the manipulation of the price of                 lower threshold as specified by the                    approach for all other futures markets,18
                                                 any underlying security, option on such                  DCM, must provide information to the                   were necessary to effectively oversee the
                                                 security, or option on a group or index                  exchange regarding the nature of the                   markets, and were consistent with the
                                                 including such securities.6                              position.12 Under position                             obligation of a DCM to prevent
                                                    As the Commission noted when it                       accountability, traders must also                      manipulation of the price of an SFP and
                                                 proposed to adopt criteria for trading of                consent to halt increases in the size of               its underlying security or securities.19
                                                 SFPs:                                                    their positions upon the direction of the                 There was one other difference
                                                    It is important that the listing standards            DCM.13 The position limits and position                between the position limit rules for
                                                 and conditions in the CEA and the                        accountability trigger levels specified in             SFPs and security options, on which no
                                                 [Securities Exchange Act of 1934 (‘‘Exchange             the Commission’s regulations are based                 one commented. Specifically, the
                                                 Act’’)] be easily understood and applied by              on a contract size of 100 shares in the                volume test adopted by the Commission
                                                 [DCMs]. The rules proposed today address                                                                        for position limits on SFPs was based on
                                                 issues related to these standards and
                                                                                                          underlying security. DCMs may use part
                                                 establish uniform requirements related to                150 of the Commission’s regulations as                 average trading volume over a six-
                                                 position limits, as well as provisions to                guidance when approving exemptions                     month period while the volume test for
                                                 minimize the potential for manipulation and              from SFP position limit rules.14                       security options was based on total
                                                 disruption to the futures markets and                                                                           trading volume over a six-month period.
                                                 underlying securities markets.7                          SFP Rules’’). The Commission further noted, ‘‘The      This difference typically results in
                                                                                                          speculative position limit level adopted by a [DCM]    position limits for SFPs that are more
                                                    2 See section 251(a) of the CFMA. This trading        should be consistent with the obligation in section
                                                                                                          2(a)(1)(D)(i)(VII) of the CEA that the [DCM]
                                                                                                                                                                 restrictive than those on analogous
                                                 previously was prohibited by 7 U.S.C. 2(a)(1)(B)(v).
                                                    3 See 7 U.S.C. 1a(35) for the definition of           maintain procedures to prevent manipulation of the     security options.20
                                                 ‘‘narrow-based security index.’’                         price of the [SFP] and the underlying security or
                                                    4 The term ‘‘security futures product’’ is defined    securities.’’ Id. at 37935.                            74 FR 12178, 12183 (March 23, 2009) (noting ‘‘the
                                                                                                            8 See Listing Standards and Conditions for           part 150 rules essentially constitute guidance for
                                                 in section 1a(45) of the CEA and section 3(a)(56) of
                                                 the Exchange Act to mean a security future or any        Trading Security Futures Products, 66 FR 55078,        DCMs administering position limits regimes’’).
                                                 put, call, straddle, option, or privilege on any         55082 (November 1, 2001) (‘‘2001 Final SFP               15 The Commission understands that ‘‘gross’’ in

                                                 security future. The term ‘‘security future’’ is         Rules’’).                                              this context means on the same side of the market,
                                                                                                            9 17 CFR 41.25(a)(3)(i). The 13,500 limit level is   as discussed infra.
                                                 defined in section 1a(44) of the CEA and section
                                                                                                          premised on an SFP contract size of 100 shares of        16 2001 Final SFP Rules at 55081.
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                                                 3(a)(55)(A) of the Exchange Act to include futures
                                                 contracts on individual securities and on narrow-        an underlying equity security.                           17 Id. at 55082.
                                                                                                            10 17 CFR 41.25(a)(3)(i)(A).
                                                 based security indexes. The term ‘‘narrow-based                                                                   18 See infra discussion regarding part 150 of the
                                                 security index’’ is defined in section 1a(35) of the       11 17 CFR 41.25(a)(3)(i)(B).
                                                                                                                                                                 Commission’s regulations.
                                                 CEA and section 3(a)(55)(B) of the Exchange Act.           12 Id.                                                 19 2001 Final SFP Rules at 55082.
                                                    5 See 7 U.S.C. 2(a)(1)(D)(i).                           13 Id.                                                 20 Although DCMs may adopt for certain SFPs
                                                    6 7 U.S.C. 2(a)(1)(D)(i)(VII).                          14 Although part 150 previously provided             position accountability provisions with an
                                                    7 See Listing Standards and Conditions for            requirements for exchange-set position limits, it      accountability level of 22,500 (100-share) SFP
                                                 Trading Security Futures Products, proposed rules,       was rendered ‘‘mere guidance’’ by the CFMA. See,       contracts, in lieu of position limits, the analogous
                                                 66 FR 37932, 37933 (July 20, 2001) (‘‘2001 Proposed      e.g., 81 FR 96704, 96742 (Dec. 30, 2016); see also     security option is subject to a position limit likely



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                                                                                 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules                                                                            36801

                                                 C. Subsequent Developments in SFP                                      CFMA further authorized the                                            position limits for equity security
                                                 Position Limit Regulations                                             Commission and the SEC (collectively                                   options listed on NSEs, but the
                                                                                                                        ‘‘Commissions’’) to allow SFPs to be                                   Commission has not amended its SFP
                                                    Since the 2001 Final SFP Rules, the                                 based on securities other than equity                                  regulations to reflect those changes. For
                                                 Commission’s SFP position limit                                        securities.22 The Commissions used                                     example, under current position limits
                                                 regulations have not been substantively                                their authority to allow SFPs on                                       for equity security options that are
                                                 amended to account for SFPs on                                         Depositary Receipts; 23 Exchange Traded                                uniform across rules of NSEs,26 position
                                                 securities other than common stock,                                    Funds, Trust Issued Receipts and Closed
                                                 although the statute authorizes it. CEA                                                                                                       limits are at least 25,000 option
                                                                                                                        End Funds; 24 and debt securities.25                                   contacts.27 Also, as noted above, NSEs
                                                 section 2(a)(1)(D)(i) authorizes DCMs to
                                                 list for trading SFPs based upon                                       D. Subsequent Equity Security Option                                   set higher levels based on six-month
                                                 common stock and such other equity                                     Position Limit Increases                                               total trading volume or, alternatively, a
                                                 securities as the Commission and the                                     Since the Commission’s initial                                       combination of six-month total trading
                                                 Securities and Exchange Commission                                     adoption of SFP position limits, the SEC                               volume and shares outstanding, as
                                                 jointly determine appropriate.21 The                                   has granted approval to increase                                       shown in Table A.28

                                                                                                       TABLE A—NSE EQUITY SECURITY OPTION POSITION LIMITS
                                                                                                                                           [As of Dec. 6, 2017]

                                                                                                        Six-month total trading volume is                    Or, if six-month total trading volume and shares currently outstanding
                                                                                                                    at least:                                                               are at least:
                                                            Option contract limit
                                                           (100 shares/contract)                                    Trading volume                                       Trading volume
                                                                                                                                                                                                                        Shares outstanding
                                                                                                                       (shares)                                             (shares)

                                                 25,000 ............................................   Default ..........................................   Default ..........................................   Default.
                                                 50,000 ............................................   20 million ......................................    15 million ......................................    40 million.
                                                 75,000 ............................................   40 million ......................................    30 million ......................................    120 million.
                                                 200,000 ..........................................    80 million ......................................    60 million ......................................    240 million.
                                                 250,000 ..........................................    100 million ....................................     75 million ......................................    300 million.



                                                   Each equity security option contract                                 exercise limit may serve to reduce the                                 limits, which sets a threshold that
                                                 limit is applicable on a gross basis to                                potential for manipulation (such as a                                  restricts the number of speculative
                                                 option positions on both sides of the                                  squeeze on short option position                                       positions that a person may hold in the
                                                 market.29 The NSEs permit certain                                      holders) by restricting the number of                                  spot-month, individual month, and all
                                                 exemptions, including for qualified                                    shares demanded for delivery by a long                                 months combined; (2) exemptions for
                                                 hedging transactions and positions and                                 call option position holder, in a similar                              positions that constitute bona fide
                                                 for facilitation of orders with customers.                             manner to a DCM’s position limit, under                                hedging transactions and certain other
                                                 Generally, limits for options on                                       current Commission regulation                                          types of transactions; and (3) rules to
                                                 registered investment companies,                                       41.25(a)(3), thus restricting the number                               determine which accounts and positions
                                                 organized as open-end management                                       of shares that may be demanded during                                  a person must aggregate for the purpose
                                                 companies, unit investment trusts or                                   the last five days of trading.                                         of determining compliance with the
                                                 similar entities, are the same as the                                                                                                         position limit levels. For exchange-set
                                                 positions limits applicable to equity                                  E. Commission’s Position Limit
                                                                                                                        Approach in Other Commodity Futures                                    position limits, on physically-delivered
                                                 options.30                                                                                                                                    contracts, the spot month limit level
                                                   In addition to position limits under                                   The Commission’s customary                                           should be no greater than one-quarter of
                                                 NSE rules, NSEs establish uniform                                      approach for position limits in futures                                the estimated spot month deliverable
                                                 exercise limits for the aggregate exercise                             contracts other than SFPs is found in                                  supply, calculated separately for each
                                                 of a long position in any option contract                              part 150 of the Commission’s                                           month to be listed, and for cash settled
                                                 within any five consecutive business                                   regulations, which establishes a position                              contracts, the spot month limit level
                                                 days, generally at the levels of the                                   limits regime that generally includes                                  should be no greater than necessary to
                                                 applicable position limits.31 This                                     three components: (1) The level of the                                 minimize the potential for manipulation

                                                 to be set at a level of 250,000 (100-share) option                       26 See, e.g., the Cboe Exchange, Inc. (‘‘Cboe’’) rule                on products with broad-based holdings of
                                                 contracts, as shown below in Table A.                                  4.11, Nasdaq ISE, LLC (‘‘ISE’’) rule 412, NYSE                         underlying securities; for example, the Cboe
                                                   21 7 U.S.C. 2(a)(1)(D)(i)(III).                                      American LLC (‘‘NYSE American’’) rule 904,                             position limit in the DIAMONDS Trust option is
                                                   22 7 U.S.C. 2(a)(1)(D)(v)(I).
                                                                                                                        Nasdaq PHLX LLC (‘‘Phlx’’) rule 1001.                                  300,000 contracts, iShares Russell 2000 Index Fund
                                                                                                                          27 See, e.g., 73 FR 10076 (February 25, 2008)
                                                   23 See Joint Order Granting the Modification of
                                                                                                                                                                                               option is 500,000 contracts, PowerShares QQQ
                                                                                                                        (granting permanent approval of an increase in                         Trust option is 900,000 contracts, and iShares MSCI
                                                 Listing Standards Requirements under section 6(h)                      position and exercise limits for equity security                       Emerging Markets Index Fund option is 500,000
                                                 of the Securities Exchange Act of 1934 and the                         options).
                                                                                                                                                                                               contracts. Similarly, BOX Options Exchange, Inc.,
                                                 Criteria under section 2(a)(1) of the Commodity                          28 Id. at 10076–77.
                                                                                                                                                                                               Cboe, Nasdaq ISE, LLC, Nasdaq PHLX, LLC, NYSE
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                                                 Exchange Act, August 20, 2001 https://                                   29 For example, Cboe applies limits to an
                                                                                                                                                                                               American, LLC, and NYSE Arca, Inc. all recently
                                                 www.sec.gov/rules/other/34-44725.htm.                                  aggregate position in an option contract ‘‘of the put
                                                                                                                                                                                               adopted position limits for security options on the
                                                   24 See 67 FR 42760 (June 25, 2002).                                  type and call type on the same side of the market.’’
                                                                                                                                                                                               Standard and Poor’s Depositary Receipts Trust that
                                                   25 See 17 CFR 41.21(a)(2)(iii) (providing that the
                                                                                                                        Cboe rule 4.11. For this purpose, under the rule,
                                                                                                                        long positions in put options are combined with                        are 1,800,000 contracts. See, e.g., 83 FR 28274 (June
                                                 underlying security of an SFP may include a note,                      short positions in call options; and short positions                   18, 2018) (allowing the SPY Pilot Program to
                                                 bond, debenture, or evidence of indebtedness); see                     in put options are combined with long position in                      terminate and making immediately effective the
                                                 also 71 FR 39534 (July 13, 2006) (describing debt                      call options.                                                          new limit).
                                                 securities to include notes, bonds, debentures, or                       30 NSEs have established position limits higher                        31 See, e.g., Cboe rule 4.12, ISE rule 414, NYSE

                                                 evidences of indebtedness).                                            than shown in Table A for certain security options                     American rule 905, and Phlx rule 1001.



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                                                 36802                    Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules

                                                 or distortion of the contract’s or the                   securities.35 In light of its experience               million outstanding shares. In addition,
                                                 underlying commodity’s price.32                          since the first adoption of a position                 the maximum accountability level
                                                                                                          limits regime for SFPs in 2001, the                    under the position accountability
                                                 II. The Proposal
                                                                                                          Commission believes in the merit of                    regime would be increased to 25,000
                                                 A. Overview                                              updating Commission regulation 41.25                   contracts, from the current level of
                                                                                                          under an incremental approach, for                     22,500 contracts.
                                                    The Commission notes that SFPs and                                                                              This proposal also addresses SFPs
                                                                                                          example, by providing DCMs with
                                                 security options may serve                                                                                      based on products other than a single
                                                                                                          discretion to increase limits, generally
                                                 economically equivalent or similar                                                                              equity security. As discussed below,
                                                                                                          consistent with those currently
                                                 functions.33 As noted above, when                                                                               these products are a physically-
                                                                                                          permitted for equity options listed by an
                                                 adopted, the Commission’s SFP position                                                                          delivered basket equity SFP, a cash-
                                                                                                          NSE, while allowing the Commission to
                                                 limits regulations were set at levels that                                                                      settled equity index SFP, and an SFP on
                                                                                                          assess the impact on SFP markets.
                                                 are generally comparable but not                            The Commission proposes to                          one or more debt securities.38
                                                 identical to the limits that currently                   maintain the requirement in current                       The Commission proposes to
                                                 apply to options on individual                           Commission regulation 41.25(a)(3) that                 maintain the provision that requires
                                                 securities. However, over time, while                    DCMs establish position limits or, in                  position limits to be applied during a
                                                 the default level for position limits for                certain cases, accountability standards                period of time of no shorter than the last
                                                 SFPs did not change, those of security                   for SFPs. The proposal would increase                  five trading days in an expiring contract
                                                 options on the same security have in                     the default level for speculative position             month. However, the proposed
                                                 some cases changed, allowing the                         limits in SFPs in equity securities to                 regulation would require a longer period
                                                 position limit for the security option, as               25,000 100-share contracts (or the                     than five trading days in the event the
                                                 observed above, to be set at a much                      equivalent if the contract size is                     terms of an SFP provide for delivery
                                                 higher default level. This may place                     different than 100 shares per contract)                prior to the last five trading days.
                                                 SFPs at a competitive disadvantage. One                  from 13,500 100-share contracts. The                      The Commission proposes that a DCM
                                                 goal of this proposal, therefore, is to                  proposal would change the criterion                    should have discretion to apply position
                                                 provide a level regulatory playing                       that DCMs use to set higher levels of                  limits or position accountability levels
                                                 field.34                                                 speculative position limits to no more                 either on a net basis, as under current
                                                    When determining appropriate limit                    than 12.5 percent of the estimated                     regulations, or on the same side of the
                                                 levels, the Commission took note of the                  deliverable supply 36 of the relevant                  market.39 If a DCM imposes limits on
                                                 experience of NSEs over several years                    underlying security, from no greater                   the same side of the market, then the
                                                 with higher position limit levels on                     than 22,500 100-share contracts if                     DCM could not net positions in SFPs in
                                                 security options, with no apparent                       certain criteria are met in current                    the same security on opposite sides of
                                                 significant issues, suggesting, therefore,               Commission regulation 41.25(a)(3)(i).37                the market.
                                                 that it may be reasonable for SFP                        The proposed 12.5 percent criterion is                    This proposal permits DCMs to
                                                 position limits to closely resemble                      discussed further below. In this regard,               approve exemptions to limits, provided
                                                 existing contract limits for equity                      the Commission believes that exchange-                 such exemptions are consistent with the
                                                 options at NSEs. To allow DCMs to                        set position limits for SFPs based on                  guidance in current Commission
                                                 adapt as NSE position limits change, the                 estimated deliverable supply would                     regulation 150.5, which addresses
                                                 current draft would be flexible,                         provide flexibility to DCMs while                      exchange-set position limits, rather than
                                                 providing a formula for a DCM to set a                   ensuring that position limits                          consistent with current Commission
                                                 higher level, rather than the specific                   appropriately reflect current market                   regulation 150.3, which addresses
                                                 levels in a current rule of an NSE.                      conditions for the specific securities                 exemptions to Commission-set position
                                                    However, as has been noted, some                      that underlie their SFPs.                              limits. In addition, the proposal permits
                                                 aspects of the position limits regime                       The Commission also proposes to                     DCMs to approve exemptions consistent
                                                 under current Commission regulation                      amend the position accountability                      with those of an NSE.
                                                 41.25 differ from those on security                      provisions so that a DCM could                            Under this proposal, DCMs would be
                                                 options as the Commission determined                     substitute position accountability for                 required to calculate estimated
                                                 certain approaches were necessary to                     position limits when six-month total                   deliverable supply and six-month total
                                                 effectively oversee the markets, and                     trading volume in the underlying                       trading volume no less frequently than
                                                 consistent with the obligation of a DCM                  security exceeds 2.5 billion shares and                semi-annually, rather than the monthly
                                                 to prevent manipulation of the price of                  there are more than 40 million shares of               requirement under the current
                                                 an SFP and its underlying security or                    estimated deliverable supply, rather                   regulations. The proposal requires that a
                                                                                                          than the current criteria of six-month                 DCM lower the position limit levels if
                                                   32 See  17 CFR 150.5(b)(1); see also supra note 14.    average daily trading volume in the                    the estimated deliverable supply
                                                   33 For  example, the price of a long call option       underlying security exceeds 20 million
                                                 with a strike price well below the prevailing market                                                               38 The SFP definition permits the listing of SFPs

                                                 price of the underlying security is expected to move
                                                                                                          shares and there are more than 40                      on debt securities (other than exempted securities).
                                                 almost in lock step with the price of a long SFP on                                                             See supra note 22 and accompanying text. While an
                                                                                                            35 See 2001 Final SFP Rules at 55082. The
                                                 the same underlying security. Similarly, the price                                                              SFP may not be listed on a debt security that is an
                                                 of a long put option with a strike price well above      approach NSEs may use to set an equity option’s        exempted security, futures contracts may be listed
                                                 the prevailing market price of the underlying            position limit is not consistent with existing         on an exempted security. See infra note 69 and
                                                 security is expected to move almost in lock step         Commission policy and may, in the Commission’s         accompanying text.
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                                                 with the price of a short SFP on the same                opinion, as noted previously, render position limits      39 The Commission notes that, although it has not
                                                 underlying security.                                     ineffective.                                           proposed an aggregation rule that would define
                                                    34 As the Commission notes above, commenters            36 See infra regarding proposed guidance on
                                                                                                                                                                 ‘‘person’’ for purposes of SFP position limits,
                                                 also requested that the SFP position limit               estimated deliverable supply.                          current 17 CFR 150.5(g) provides guidance to DCMs
                                                 regulations be the same as those applicable to             37 The current criteria for a level higher than      in setting aggregation standards for exchange-set
                                                 security and securities index options, or,               13,500 100-share contracts are six-month average       position limits. The Commission believes a DCM
                                                 alternatively, that such position limit regulations      daily trading volume in the underlying security        should have reasonable discretion to set aggregate
                                                 more closely resemble existing limits on security        exceeds 20 million shares, or exceeds 15 million       standards based on a person’s control or ownership
                                                 and securities index options. See supra note 17 and      shares and there are more than 40 million shares       of SFP positions, including in the same manner as
                                                 accompanying text.                                       of the underlying security outstanding.                that of an NSE for equity security options.



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                                                                           Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules                                                      36803

                                                 justifies lower position limits. Similarly,              proposal, the paragraph, as re-                           position limit level for SFPs to that of
                                                 the proposal requires that a DCM adopt                   designated regulation 41.25(b)(3), would                  an equity option traded on a NSE.
                                                 position limits if the estimated                         continue to require a DCM to establish                    Accordingly, as previously requested by
                                                 deliverable supply or six-month total                    position limits or position                               commenters in the context of the
                                                 trading volume no longer supports                        accountability rules in each SFP for the                  CFTC’s adoption of its current SFP
                                                 position accountability provisions.                      expiring futures contract month.                          position limit requirements, this
                                                    Finally, as discussed further below,                                                                            proposed default level for SFP limits
                                                 these proposed regulations provide the                   3. Commission Regulation 41.25(b)(3)(i),
                                                                                                                                                                    would closely resemble existing
                                                 definitions for ‘‘estimated deliverable                  Limits for Equity SFPs
                                                                                                                                                                    minimum limit levels on security
                                                 supply and ‘‘same side of the market’’,                     Proposed changes to regulation                         options.
                                                 terms used in Commission regulation                      41.25(a)(3)(i), re-designated as                             As noted above, SFPs and security
                                                 41.25, by adding those definitions into                  regulation 41.25(b)(3)(i), would increase                 options may serve economically
                                                 a new paragraph (a).40                                   the default level of position limits in an                equivalent or similar functions.43
                                                                                                          equity SPF to no greater than 25,000                      However, under current Commission
                                                 B. Section-by-Section Discussion                         100-share contracts (or the equivalent if                 regulation 41.25(a)(3), as previously
                                                 1. Commission Regulation 41.25(a),                       the contract size is different than 100                   detailed, the default level for position
                                                 Definitions                                              shares per contract), either net or on the                limits for SFPs must be set no greater
                                                    The proposal includes two definitions                 same side of the market, from the                         than 13,500 (100-share) contracts, while
                                                 used in Commission regulation 41.25:                     existing regulation’s default level of no                 security options on the same security
                                                 Estimated deliverable supply; and same                   greater than 13,500 100-share contracts                   may be, and currently are, set at a much
                                                 side of the market. These definitions are                on a net basis. The default level of                      higher default level of 25,000
                                                 included in new paragraph (a).                           25,000 100-share contracts is equal to                    contracts,44 which may place SFPs at a
                                                    Estimated deliverable supply is                       2,500,000 shares. The Commission notes                    competitive disadvantage. Closer
                                                 defined under the proposal as the                        that 12.5 percent of 20 million shares                    coordination of limit levels is intended
                                                 quantity of the security underlying a                    equals 2,500,000 shares. Thus, for an                     to provide a level regulatory playing
                                                 security futures product that reasonably                 equity security with less than 20 million                 field.
                                                 can be expected to be readily available                  shares of estimated deliverable supply,                      However, because limit levels would
                                                 to short traders and salable by long                     the default position limit level for the                  not apply to a market participant’s
                                                 traders at its market value in normal                    equity SFP would be larger than 12.5                      combined position between SFPs and
                                                 cash marketing channels during the                       percent of estimated deliverable supply.                  security options, the Commission is not
                                                 specified delivery period. The proposal                  While a DCM could adopt the default                       proposing a default limit level for an
                                                 provides guidance for estimating                         position limit for SFPs in equity                         SFP higher than 12.5 percent of
                                                 deliverable supply in proposed                           securities with fewer than 20 million                     estimated deliverable supply. That is,
                                                 appendix A to subpart C of part 41, as                   shares, consistent with a position limit                  under the proposal, a market participant
                                                 discussed below.                                         applicable to an option on that security,                 with positions at the limits in each of an
                                                    The proposal defines same side of the                 the Commission would expect a DCM to                      SFP and a security option on the same
                                                 market to mean long positions in                         assess the liquidity of trading in the                    underlying security might be equivalent
                                                 physically-delivered security futures                    underlying security to determine                          to about 25 percent of estimated
                                                 contracts and cash settled security                      whether the DCM should set a lower                        deliverable supply, which is at the outer
                                                 futures contracts, in the same security,                 position limit level, as appropriate to                   bound of where the Commission has
                                                 and, separately, short positions in                      ensure compliance with DCM Core                           historically permitted spot month limit
                                                 physically-delivered security futures                    Principles 3 and 5. In this regard, the                   levels. The Commission invites
                                                 contracts and cash settled security                      Commission seeks comment on whether                       comment on whether this proposed
                                                 futures contracts, in the same security.                 it should provide greater specificity                     default level is appropriate.
                                                 The Commission invites comment on                        with respect to this liquidity assessment                    The proposal would include, in the
                                                 whether it should also include options                   and whether there are circumstances                       requirements for limits for equity SFPs,
                                                 on security futures contracts in this                    where the position limit level should be                  securities such as exchange trading
                                                 definition, although options on SFPs are                 set lower than 25,000 100-share                           funds (‘‘ETFs’’) and other securities that
                                                 not currently permitted to be listed.41                  contracts (for example, no greater than                   represent ownership in a group of
                                                                                                          12.5 percent of estimated deliverable                     underlying securities. The Commission
                                                 Generally, a long call and a short put,
                                                                                                          supply).42                                                requests comment on whether this is
                                                 on a futures equivalent basis, would be
                                                                                                             The Commission notes that minimum                      appropriate and invites further
                                                 aggregated with a long futures contract;
                                                                                                          position limits for equity security option                comment, below, in the discussion of
                                                 and a short call and a long put, on a
                                                                                                          positions on NSEs are 25,000 100-share                    estimated deliverable supply.
                                                 futures equivalent basis, would be                                                                                    This proposal would provide
                                                 aggregated with a short futures contract.                option contracts on the same side of the
                                                                                                                                                                    discretion to a DCM to apply position
                                                                                                          market. Thus, the proposal would allow
                                                 2. Commission Regulation 41.25(b)(3),                                                                              limits on a gross basis (‘‘on the same
                                                                                                          a DCM to coordinate the default
                                                 Position Limits or Accountability Rules                                                                            side of the market’’) or net basis, rather
                                                 Required                                                    42 Core Principle 3, 7 U.S.C. 7(d)(3), provides that
                                                                                                                                                                    than the current regulation’s net basis.
                                                    As with current Commission                            DCMs shall list only contracts that are not readily
                                                                                                                                                                      43 For example, the price of a long call option
                                                                                                          susceptible to manipulation, while Core Principle 5,
                                                 regulation 41.25(a)(3), under this
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                                                                                                          7 U.S.C. 7(d)(5), provides for the adoption of            with a strike price well below the prevailing market
                                                                                                          position limits and position accountability, as is        price of the underlying security is expected to move
                                                    40 In connection with adding the definitions into                                                               almost in lock step with the price of a long SFP on
                                                                                                          necessary and appropriate, to deter the threat of
                                                 a new paragraph (a), paragraphs (a) through (d)          manipulation. Moreover, 7 U.S.C. 2(a)(1)(D)(i)(VII)       the same underlying security. Similarly, the price
                                                 would be re-designated as paragraphs (b) through         and 17 CFR 41.22(f) require that trading in an SFP:       of a long put option with a strike price well above
                                                 (e).                                                     (i) Be not readily susceptible to manipulation of the     the prevailing market price of the underlying
                                                    41 Under CEA section 2(a)(1)(D)(iii)(II), the CFTC    SFP; or (ii) cause the manipulation of any                security is expected to move almost in lock step
                                                 and SEC may, by Order, jointly determine to permit       underlying security, an option on such security, or       with the price of a short SFP on the same
                                                 the listing of options on SFPs; that authority has not   an option on a group or index including such              underlying security.
                                                 been exercised.                                          security or securities.                                     44 See current Cboe rule 4.11.




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                                                 36804                    Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules

                                                 For example, if there were a physically-                 example, a person should not be                         this regard, the proposed regulation
                                                 delivered SFP on equity XYZ, a                           permitted to avoid limits by obtaining a                would permit a DCM to set a position
                                                 dividend-adjusted SFP on equity XYZ,                     large long position in a physically-                    limit at a level lower than 12.5 percent
                                                 and a cash-settled SFP on equity XYZ,                    delivered contract (which could be used                 of estimated deliverable supply. The
                                                 then a DCM’s rules could provide that                    to corner or squeeze) and a similarly                   Commission invites comment on
                                                 long positions held by the same person                   large short position in a cash settled                  whether it is appropriate to provide a
                                                 across each of these classes of SFP based                contract that would net to zero.                        DCM with discretion in its assessment
                                                 on equity XYZ would be aggregated for                                                                            of liquidity in the underlying security,
                                                                                                          4. Commission Regulation
                                                 the purpose of determining compliance                                                                            rather than the Commission imposing a
                                                                                                          41.25(b)(3)(i)(A), Higher Position Limits
                                                 with the position limit. A gross position                                                                        liquidity requirement. Core Principle 5
                                                                                                          in Equity SFPs 47
                                                 in a futures contract is larger than a net                                                                       requires DCMs to adopt, as is necessary
                                                 position in the event a person holds                        For an SFP based on an underlying                    and appropriate, position limits to deter
                                                 positions on opposite sides of the                       security with an estimated deliverable                  the adverse market impact of
                                                 market. That is, a net basis is computed                 supply of more than 20 million shares,                  manipulation. The Commission invites
                                                 by subtracting a person’s short futures                  the proposal would permit a DCM to set                  comment on whether estimated
                                                 position from that person’s long futures                 a higher limit level based on 12.5                      deliverable supply alone serves as an
                                                 positions, and, under current                            percent of the estimated deliverable                    adequate proxy for market impact.
                                                 regulations, a single position limit                     supply of the underlying security, if                      Although the Commission is
                                                 applies on a net basis to that net long                  appropriate in light of the liquidity of                proposing a criterion of 12.5 percent of
                                                 or net short position. Under the                         trading in the underlying security. By                  estimated deliverable supply, the
                                                 proposal, at the discretion of a DCM, a                  way of example, if the estimated                        Commission expects a DCM to conduct
                                                 person’s long futures position would be                  deliverable supply were 40 million                      a reasoned analysis as to whether setting
                                                 subject to the position limit and,                       shares, then the proposed regulation                    a level for a limit based on such
                                                 separately, a person’s short futures                     would permit a DCM to set a limit level                 criterion is appropriate. In this regard,
                                                 position also would be subject to the                    of no greater than 50,000 100-share                     for example, assume security QRS and
                                                 position limit. As previously requested                  contracts; computed as 40 million                       security XYZ have equal free float of
                                                 by commenters, adding this proposed                      shares times 12.5 percent divided by                    shares. Assume, however, that trading
                                                 gross basis approach (in addition to net                 100 shares per contract.                                in QRS is not as liquid as trading in
                                                 basis) to SFP limits would more closely                     This level of 50,000 100-share                       XYZ. Under these assumptions, it may
                                                 resemble existing limits on security                     contracts is the same as permitted under                be appropriate for a DCM to adopt a
                                                 options that apply on the same side of                   current rules of NSEs for an underlying                 position limit for XYZ equivalent to
                                                 the market per the rules of the NSEs. A                  security with 40 million shares                         12.5 percent of deliverable supply, but
                                                 DCM that elects to implement limits on                   outstanding, although an NSE would                      to adopt a lower limit for QRS because
                                                 a gross basis would be providing its                     also require the most recent six-month                  a lesser number of shares would be
                                                 market participants with the same                        trading volume of the underlying                        readily available for shorts to make
                                                 metric for position limit compliance as                  security to have totaled at least 15                    delivery.
                                                 is currently the case on NSEs, which                     million shares. While this proposed                        The Commission notes that the
                                                 may reduce compliance costs and                          provision for SFP position limits would                 proposed criterion of 12.5 percent of
                                                 encourage cross-market participation.                    more closely resemble existing limits on                estimated deliverable supply is half the
                                                 However, limits on a gross basis may be                  security options, the Commission is                     level for DCM-set spot month
                                                 more restrictive than limits on a net                    proposing to permit a DCM to use its                    speculative position limits in current
                                                 basis, which could reduce the position                   discretion in assessing the liquidity of                Commission regulation 150.5(c),50
                                                 sizes that may be held, without an                       trading in the underlying security,                     which, as previously noted, has been
                                                 applicable exemption.                                    rather than imposing a prescriptive                     rendered ‘‘mere guidance’’ since the
                                                    In addition, the Commission would                     trading volume requirement.48 The                       CFMA.51 That regulation provides that,
                                                 continue to permit DCMs to apply limits                  Commission preliminarily does not                       for physically-delivered contracts, the
                                                 on a net basis at the DCM’s discretion.                  believe that trading volume alone is an                 spot month limit level should be no
                                                 In this regard, the Commission believes                  appropriate indicator of liquidity.49 In                greater than one-quarter of the estimated
                                                 it is possible for a DCM’s application of                                                                        spot month deliverable supply.52 The
                                                 limits to further the goals of the CEA                   Commission believes that providing clarity reduces      Commission is proposing a lower
                                                                                                          uncertainty regarding netting in such                   percent of estimated deliverable supply
                                                 whether applied on a net or a gross                      circumstances, which may facilitate listing of such
                                                 basis.45 This would be true, for example,                contracts in the future. Therefore, the Commission      in light of current limits on equity
                                                 if a DCM applied limits on a net basis                   proposes to provide in 17 CFR 41.25(b)(3)(vii) that,    security options listed at NSEs. In this
                                                 and did not permit netting of                            for a DCM applying limits on a net basis, netting       regard, the proposal would result in SFP
                                                                                                          of physically-delivered contracts and cash settled-     position limits that closely resemble the
                                                 physically-delivered contracts with cash                 contracts in the same security is not permitted as
                                                 settled contracts. But if, instead, the                  it would render position limits ineffective. This       existing 25,000 and 50,000 contract
                                                 DCM permitted netting of physically-                     concern is not applicable to a DCM applying limits
                                                 delivered contracts and cash settled                     on the same side of the market, as limits are applied   greater than 22,500 shares, provided the six-month
                                                                                                          separately to long positions and to short positions.    average daily trading volume exceeds 15 million
                                                 contracts in the same security, it would                    47 As noted above, the proposal would re-            shares and there are more than 40 million shares
                                                 render position limits ineffective.46 For                designate 17 CFR 41.25(a)(3)(i)(A) as 17 CFR            of the security outstanding. The Commission notes
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                                                                                                          41.25(b)(3)(i)(A).                                      that almost all stocks with at least 40 million shares
                                                    45 CEA section 2(a)(1)(D)(i)(VII) requires that          48 Generally, under CEA section 5(d)(1)(B), unless   outstanding also had a six-month average trading
                                                 trading in SFPs is not readily susceptible to            otherwise restricted by a Commission regulation, a      volume of at least 15 million shares. Thus, the
                                                 manipulation of the price of the SFP, the SFP’s          DCM has reasonable discretion in establishing the       current trading volume criterion generally is not a
                                                 underlying security, or an option on the SFP’s           manner in which it complies with core principles,       meaningful restriction.
                                                                                                                                                                    50 17 CFR 150.5(c).
                                                 underlying security.                                     including Core Principle 5 regarding position limits
                                                    46 Although no DCM currently lists both               or position accountability. See 7 U.S.C. 7(d)(1) and      51 See supra discussion of the impact of the

                                                 physically-delivered SFPs contracts and cash-            (5).                                                    CFMA on part 150; see also 74 FR 12177 at 12183
                                                 settled SFP contracts for the same underlying               49 Under current 17 CFR 41.25(a)(3)(i)(A), for       (March 23, 2009).
                                                 security, and this concern may be theoretical, the       example, a DCM may adopt a net position limit no          52 17 CFR 150.5(c)(1).




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                                                                          Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules                                                     36805

                                                 limits for equity options at NSEs, set                     However, the Commission notes that                    long position holder may expect to sell
                                                 when certain trading volume has been                     NSEs may set an equity option’s                         such shares at or close to fair value.
                                                 reached or a combination of trading                      position limit by the use of trading                    However, in contrast, shares that are
                                                 volume and shares currently                              volume as a sole criterion. That                        issued and outstanding by a corporation
                                                 outstanding, as shown in Table A above.                  approach is not consistent with existing                may not be readily available in a timely
                                                 For example, a position at a 50,000 (100-                Commission policy regarding use of                      manner, such as shares held by the
                                                 share) option contract limit is                          estimated deliverable supply to support                 corporation as treasury stock.56
                                                 equivalent to 5 million shares. 12.5                     position limits in an expiring contract                 Therefore, to ensure that position
                                                 percent of 40 million shares equals 5                    month, as stated in part 150 of the                     holders will generally be able to obtain
                                                 million shares; that is, the proposed                    Commission’s regulations.53 The                         equity shares at or close to fair value,
                                                 criterion for a DCM to set a limit would                 Commission notes that use of trading                    the DCM should consider whether the
                                                 be similar to that of the criteria for an                volume as a sole criterion for setting the              shares are readily available in the
                                                 NSE to set such a limit. Under this                      level of a position limit could result in               market when estimating deliverable
                                                 proposal, a similar 50,000 contract                      a position limit that exceeds the number                supply.
                                                 position limit on an SFP on such a                       of outstanding shares when the                             In addition, the proposal would
                                                 security would be an increase from the                   underlying security exhibits a very high                amend the accountability level to no
                                                 22,500 contract limit currently                          degree of turnover. Such a resulting                    greater than 25,000 contracts, either net
                                                 permitted for such an SFP. The                           high limit level would render position                  or on the same side of the market, from
                                                 Commission believes the proposed                         limits ineffective.                                     22,500 contracts net, conforming to the
                                                 incremental approach to increasing SFP                                                                           proposed default position limit level.
                                                                                                          5. Commission Regulation
                                                 limits is a measured response to changes                                                                         The Commission notes a DCM would be
                                                                                                          41.25(b)(3)(i)(B), Position
                                                 in the SFP markets, while retaining                                                                              able to set a lower accountability level,
                                                                                                          Accountability in Lieu of Limits 54
                                                 consistency with the existing                                                                                    should it desire. The Commission
                                                 requirements for equity security options                    This proposal would continue to                      preliminarily believes it is appropriate
                                                 listed by NSEs.                                          permit a DCM to substitute position                     to set a position accountability level no
                                                    However, as noted above, SFPs and                     accountability for a position limit in an               higher than 25,000 contracts because the
                                                 equity security options in the same                      equity SFP that meets two criteria. The                 Commission believes a DCM should
                                                 underlying security are not subject to a                 proposal would require six-month total                  have the authority, but not the
                                                 combined position limit across DCMs                      trading volume of at least 2.5 billion                  obligation, to inquire with very large
                                                 and NSEs. Accordingly, the Commission                    shares, which generally is equivalent to                position holders and to order such
                                                 is proposing a maximum SFP limit level                   the current first criterion that six-month              position holders not to increase
                                                 that is half the guidance level for DCM-                 average daily trading volume in the                     positions.57 The Commission
                                                 set spot month futures contract limits of                underlying security must exceed 20                      preliminarily believes a maximum
                                                 25 percent of estimated deliverable                      million shares.55 The proposal would                    position accountability level of 25,000
                                                 supply.                                                  tighten the second criterion. Rather than               contracts is at the outer bounds for
                                                    Further, as shown in Table A above,                   require that the underlying security                    purposes of providing a DCM with
                                                 the Commission notes that limits for                     have more than 40 million shares                        authority to obtain information from
                                                 equity security options at NSEs do not                   outstanding, under the proposal the                     position holders; for example, a position
                                                 increase in a linear manner for all                      second criterion would require the                      of 25,000 100-share contracts has a
                                                 increases in shares outstanding; for                     underlying security to have more than                   notional size of $125 million when the
                                                 example, upon a doubling of shares                       40 million shares of estimated                          price of the underlying stock is $50 per
                                                 outstanding, the 100-share equity                        deliverable supply, which generally                     share.
                                                 security option contract limit increases                 would be smaller than shares
                                                                                                          outstanding. This change conforms to                    6. Commission Regulation
                                                 only to 75,000 contracts from 50,000                                                                             41.25(b)(3)(ii), Limits for Physically-
                                                 contracts, while, under similar                          the proposed use of estimated
                                                                                                          deliverable supply in setting a position                Delivered Basket Equity SFPs
                                                 circumstances of a doubling of
                                                 estimated deliverable supply, the                        limit. The Commission believes an                         This proposal would amend the
                                                 Commission proposes to permit a linear                   appropriate refinement to its criterion                 existing position limits and position
                                                 increase for a SFP limit to 100,000                      for position accountability is to quantify              accountability provisions for a
                                                 contracts from 50,000 contracts. The                     those equity shares that are readily                    physically-delivered SFP comprised of
                                                 Commission invites comments as to                        available in the market, rather than all                more than one equity security 58 by
                                                 whether the proposed linear approach                     shares outstanding. Generally, a short
                                                 based on estimated deliverable supply is                 position holder may expect to obtain at                    56 Treasury stock means any shares that a

                                                                                                          or close to fair value shares that are                  company holds itself. Such treasury stock may be
                                                 appropriate.                                                                                                     authorized by the corporate charter but not yet
                                                    Alternative Criteria for Setting Levels               readily available in the market and a                   issued to the public or, in contrast, may have been
                                                 of Limits. As an alternative to the                                                                              previously issued to the public but was the subject
                                                                                                             53 For example, Cboe rules also permit a 50,000      of a stock repurchase program to buy back the
                                                 proposed criteria for setting position                   contract position limit based on the total most         shares from the public.
                                                 limit levels based on estimated                          recent six-month trading volume of 20 million              57 By way of comparison, under 17 CFR 15.03, the
                                                 deliverable supply, the Commission                       shares, without regard to shares outstanding.           Commission’s reporting level for large traders
                                                 invites comments on whether the                             54 As noted above, the proposal would re-            (‘‘reportable position’’) is 1,000 contracts for
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                                                 Commission should permit a DCM to                        designate 17 CFR 41.25(a)(3)(i)(B) as 17 CFR            individual equity SFPs and 200 contracts for
                                                                                                          41.25(b)(3)(i)(B).                                      narrow-based SFPs. Under 17 CFR 18.05, the
                                                 mirror the position limit level set by an                   55 20 million shares times 125 trading days in a     Commission may request any pertinent information
                                                 NSE in a security option with the same                   typical six-month period equals 2.5 billion shares.     concerning such a reportable position.
                                                 underlying security or securities as that                In regards to total trading volume rather than             58 The Commission notes that there is not a limit

                                                 of the DCM’s SFP. This alternative has                   average daily trading volume, the Commission            per se on the maximum number of securities in a
                                                                                                          notes that use of total trading volume is consistent    narrow-based security index. Rather, under CEA
                                                 the advantage of consistency in position                 with the rules of NSEs, which use six-month total       section 1a(35), a narrow-based security index
                                                 limits across exchange-traded                            trading volume in their criteria for setting position   generally means, among other criteria, an index that
                                                 derivatives based on the same security.                  limits, as shown in Table A above.                                                                 Continued




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                                                 36806                     Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules

                                                 basing the criteria on the underlying                    For an equity index that is value                          Proposed appendix A to subpart C
                                                 equity security with the lowest                          weighted, it also appears that such use                  provides guidance and acceptable
                                                 estimated deliverable supply, rather                     may result in an inappropriately                         practices for setting the limit level for a
                                                 than the lowest average daily trading                    restrictive level for a position limit.62                debt SFP, discussed below. This
                                                 volume.59 Specifically, under the                        The Commission observes that while                       proposal would require a DCM to set a
                                                 proposal, for an SFP on more than one                    trading volume, as an indicator of                       position limit on a debt SFP, either net
                                                 security, the criteria in proposed                       liquidity, may be an appropriate factor                  or on the same side of the market,
                                                 regulations 41.25(b)(3)(i)(A) and (B) 60                 for a DCM to consider in setting position                applicable to positions held during the
                                                 would apply to the underlying security                   limits, trading volume is not generally                  last five trading days of an expiring
                                                 with the lowest estimated deliverable                    used in construction of equity indexes.                  contract month, as is the case for equity
                                                 supply in the basket, with an                               Proposed appendix A to subpart C                      SFPs under the proposal.
                                                 appropriate adjustment to the level of                   provides guidance and acceptable
                                                 the position limit or accountability level               practices for setting the limit level for a              9. Commission Regulation
                                                 for a contract size different than 100                   cash-settled equity index SFP, discussed                 41.25(b)(3)(v), Required Minimum
                                                 shares per underlying security.                          below. However, as noted above, the                      Position Limit Time Period
                                                   The proposal is based on the premise                   proposal would continue to require a                        Although DCMs do not currently list
                                                 that the limit on a physically-delivered                 DCM, for cash-settled equity index                       SFPs where the product permits
                                                 basket equity SFP should be consistent                   SFPs, to establish position limits or                    delivery before the close of trading, the
                                                 with the most restrictive of each limit                  position accountability rules in each                    Commission proposes that, for such a
                                                 that would be applicable to SFPs based                   SFP for the expiring futures contract                    product, the DCM would be required to
                                                 on each component of such basket of                      month in the last five trading days of an                apply position limits beginning no later
                                                 deliverable securities. This would                       expiring contract month. As also                         than the first day that long position
                                                 restrict a person from obtaining a larger                discussed above, the proposal provides                   holders may be assigned delivery
                                                 exposure to a particular security                        discretion to a DCM to set such a limit                  notices, if such period is longer than the
                                                 through a physically-delivered basket                    either net or on the same side of the                    last five trading days of an expiring
                                                 equity SFP, than could be obtained                       market.                                                  contract month. The Commission notes
                                                 directly in a single equity SFP.                                                                                  that the current DCM practice for other
                                                                                                          8. Commission Regulation
                                                 However, this proposal would not                                                                                  commodity futures contracts is to apply
                                                                                                          41.25(b)(3)(iv), Limits for Debt SFPs 63
                                                 aggregate positions in single equity SFPs                                                                         spot month position limits at the close
                                                 with positions in basket deliverable                        As previously detailed, for setting
                                                                                                          levels of limits on an SFP comprised of                  of business before delivery notices are
                                                 SFPs.
                                                                                                          more than one security, current                          assigned to holders of long positions in
                                                 7. Commission Regulation                                 Commission regulation 41.25(a)(3)(ii)                    futures contracts that provide for
                                                 41.25(b)(3)(iii), Limits for Cash-Settled                specifies certain criteria for trading                   physical delivery prior to the close of
                                                 Equity Index SFPs                                        volume and shares outstanding that                       trading. Further, this provision is
                                                    For setting levels of limits on an SFP                must be applied to the security in the                   analogous to provisions of NSEs that
                                                 comprised of more than one security,                     index with the lowest average daily                      apply exercise limits for any five
                                                 current Commission regulation                            trading volume. However, the                             consecutive business days, applicable to
                                                 41.25(a)(3)(ii) specifies certain criteria               Commission is not proposing to retain                    American exercise style equity
                                                 for trading volume and shares                            those criteria for setting levels of limits              options.64
                                                 outstanding that must be applied to the                  for debt SFPs because debt securities                    10. Commission Regulation
                                                 security in the index with the lowest                    generally are neither issued in terms of                 41.25(b)(3)(vi), Requirements for Re-
                                                 average daily trading volume. However,                   shares nor trading volume measured in                    Setting Levels of Position Limits 65
                                                 the Commission is not proposing to                       terms of shares.
                                                 retain those criteria for setting levels of                                                                          This proposal would require a DCM to
                                                 limits for cash-settled equity index SFPs                price of each equity security in the index and           consider, on at least a semi-annual
                                                 for a number of reasons. For an equity                   dividing by the number of different equity               basis, whether position limits were set
                                                                                                          securities. For such a simple index, a given
                                                 index that is price weighted, it appears                 percentage change in the price of a company with
                                                                                                                                                                   at appropriate levels, through
                                                 that use of shares outstanding or trading                a higher share price would have a greater impact         consideration of estimated deliverable
                                                 volume may result in an inappropriately                  on the index than a given percentage change in the       supply. In the event that estimated
                                                 restrictive level for a position limit.61                price of a company with a lower share price. In          deliverable supply has decreased, then
                                                                                                          such a circumstance, the Commission preliminarily
                                                                                                          believes the DCM should have discretion, in setting      a DCM would be required to lower the
                                                 has 9 or fewer component securities; in which a          the position limit, to give consideration to the         level of a position limit in light of that
                                                 component security comprises more than 30                equity (or equities) with the greater weight(s) in the   decreased deliverable supply. In the
                                                 percent of the index’s weighting; in which the five      index, rather than only with regard to the equity
                                                 highest weighted component securities in the             with the lowest number of shares outstanding.
                                                                                                                                                                   event that estimated deliverable supply
                                                 aggregate comprise more than 60 percent of the             62 For example, the level of a value-weighted          has increased, then a DCM would have
                                                 index’s weight; or in which the lowest weighted          index will change in relation to the change in the       discretion to increase the level of a
                                                 component securities, comprising the lowest 25           market capitalization of each component equity           position limit. In addition, a DCM that
                                                 percent of the index’s weight, have an aggregate         security. In such a circumstance, a given percentage
                                                 dollar value of average daily trading volume of less     change in the market value of a higher capitalized
                                                                                                                                                                   has substituted a position accountability
                                                 than $50 million.                                        company would have a greater impact on the index         rule for a position limit would be
                                                   59 This means that, under proposed 17 CFR
                                                                                                          than a given percentage change in the market value       required to consider whether estimated
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                                                 41.25(b)(3)(i), the default level position limit would   of a lower capitalized company. In such a                deliverable supply and total six-month
                                                 be no greater than 25,000 100-share contracts,           circumstance, the Commission preliminarily
                                                 unless the underlying equity security with the           believes the DCM should have discretion, in setting
                                                 lowest estimated deliverable supply supports a           the position limit, to give consideration to the           64 American exercise style refers to the right of an

                                                 higher level.                                            equity (or equities) with the greater weight(s) in the   option holder to exercise the option at any time
                                                   60 As noted above, as proposed, 17 CFR                 index, rather than only with regard to the equity        prior to, and including, expiration. In contrast, a
                                                 41.25(a)(3)(i)(A) and (B) would be re-designated as      with the lowest number of shares outstanding.            European exercise style option only can be
                                                 17 CFR 41.25(b)(3)(i)(A) and (B).                          63 As noted above, as proposed, 17 CFR                 exercised at expiration.
                                                   61 For example, assume the level of a simple           41.25(a)(3) would be re-designated as 17 CFR               65 The proposal would re-designate 17 CFR

                                                 price-weighted index is computed by adding the           41.25(b)(3).                                             41.25(a)(3)(iv) to 17 CFR 41.25(b)(3)(vi).



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                                                                          Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules                                                     36807

                                                 trading volume continue to justify that                  to sell in a public marketplace.66 The                 number of shares outstanding, a DCM
                                                 position accountability rule.                            Commission requests comment on                         could set a position limit as follows:
                                                    Current provisions require a DCM to                   whether there are any other adjustments                First, compute the limit on an SFP on
                                                 calculate trading volume monthly. The                    that should be made in estimating                      each underlying security under
                                                 Commission believes that review of                       deliverable supply for equities. For                   proposed regulation (b)(3)(i)(A)
                                                 position limit levels and position                       example, should the guidance exclude                   (currently designated as (a)(3)(i)(A));
                                                 accountability rules on at least a semi-                 from deliverable supply any equity                     second, multiply each such limit by the
                                                 annual basis rather than a monthly basis                 shares held by ETFs, mutual funds, or                  ratio of the 100-share contract size and
                                                 generally should be adequate to ensure                   similar investment vehicles? If so, how                the shares of the security in the index;
                                                 appropriate levels because deliverable                   would such counts of shares be                         and third, determine the minimum level
                                                 supply generally does not change to a                    determined or estimated?                               from step two and set the limit to that
                                                 great degree from month to month. For                       Also regarding the guidance for                     level, given a contract size of one dollar
                                                 example, the number of shares                            estimating deliverable supply for equity               times the index, or for a larger contract
                                                 outstanding may increase through                         securities, the Commission notes that                  size, reduce the level proportionately.
                                                 periodic issuance of additional shares,                  authorized participants may increase                   As the Commission is proposing for
                                                 and may decrease through stock                           the number of outstanding shares in an                 physically-delivered basket equity SFPs,
                                                 repurchase programs, but, as a general                   ETF.67 In setting a position limit for an              the proposal is based on the premise
                                                 observation, such issuance or                            ETF, the Commission has not proposed                   that the limit on a cash-settled SFP on
                                                 repurchases are not a large percentage of                that DCMs look through the ETF to the                  a narrow-based security index of equity
                                                 free float. Of course, there could be                    lowest deliverable supply in an                        securities should be as restrictive as the
                                                 situations where deliverable supply                      underlying security, as is the case in the             limit for an SFP based on the underlying
                                                 changes to a great degree before the                     proposal for limits for physically-                    security with the most restrictive limit.
                                                 semi-annual period and the rule does                     delivered basket equity SFPs. Rather,                     Section (c), Guidance on Setting
                                                 not prevent a DCM from considering                       the Commission has proposed to restrict                Limits on Debt SFPs. The proposal
                                                 those changes before such period.                        the estimate of deliverable supply in an               would provide guidance that an
                                                                                                          ETF to existing shares of the ETF. As an               appropriate level for limits on debt SFPs
                                                    The Commission also proposes a                        alternative, the Commission requests                   generally would be no greater than the
                                                 technical change to the filing                           comment on whether an estimate of                      equivalent of 12.5 percent of the par
                                                 requirement whenever a DCM makes                         deliverable supply for an ETF should                   value of the estimated deliverable
                                                 such changes to limit levels. While the                  include an allowance for the creation of               supply of the underlying debt security.
                                                 proposal continues to provide that                       ETF shares. If so, how would one                       The Commission notes that this
                                                 changes to limit levels be filed pursuant                estimate such an allowance?                            approach is guidance because there may
                                                 to the requirements of Commission                           Section (b), Guidance on Setting                    be other reasonable bases for setting
                                                 regulation 41.24, it removes the                         Limits on Cash-Settled Equity Index                    levels of debt SFPs position limits and
                                                 superfluous provision in the current                     SFPs. As noted above, the Commission                   the Commission does not want to
                                                 regulation that provides that the change                 is proposing guidance for setting limits               foreclose those bases. For example, a
                                                 be effective no earlier than the day after               on cash-settled equity index SFPs. This                coupon stripped from an interest
                                                 the DCM has provided notification to                     proposed guidance would permit a DCM                   bearing corporate bond does not have a
                                                 the Commission and to the public.                        to set the limit level for a cash-settled              par value in terms of such corporate
                                                 Instead, the regulation simply cites to                  SFP on a narrow-based security index of                bond, but instead such coupon is the
                                                 Commission regulation 41.24, which                       equity securities to that of a similar                 amount of interest due at the time the
                                                 specifies that changes must be received                  narrow-based security index equity                     corporate issuer is scheduled to pay
                                                 by the Commission no later than the day                  option listed on an NSE. As an                         such coupon under the corporate bond
                                                 prior to the implementation.                             alternative for setting the level based on             indenture.68
                                                 11. Appendix A to Subpart C of Part 41,                  that of a similar equity option, the                      Although no DCM currently lists an
                                                 Guidance and Acceptable Practices for                    proposal provides guidance and                         SFP based on a debt security, the
                                                 Position Limits and Position                             acceptable practices that would allow a                Commission believes a framework for
                                                 Accountability for SFPs                                  DCM, in setting a limit, to consider the               position limits may reduce uncertainty
                                                                                                          deliverable supply of securities                       regarding acceptable practices for listing
                                                    Section (a), Guidance on Estimating                   underlying the equity index, and the                   such contracts on non-exempted
                                                 Deliverable Supply. The proposal                         equity index weighting and SFP                         securities and, thereby, may facilitate
                                                 provides guidance for estimating                         contract multiplier.                                   listing of such contracts. The
                                                 deliverable supply. For an equity                           As an example of an acceptable                      Commission notes that futures contracts
                                                 security, deliverable supply should be                   practice, for a cash-settled equity index              in exempted securities, such as U.S.
                                                 no greater than the free float of the                    SFP on a security index weighted by the                Treasury notes, have been listed for
                                                 security. For a debt security, deliverable                                                                      many years.69 The Commission is
                                                 supply should not include securities                       66 For a general discussion of restricted and
                                                                                                                                                                 proposing 12.5 percent of the par value
                                                 that are committed for long-term                         control securities, see https://www.sec.gov/           of the estimated deliverable supply of
                                                 agreements (e.g., closed-end investment                  reportspubs/investor-publications/investorpubs
                                                                                                          rule144htm.html.                                       the underlying debt security as guidance
                                                 companies, structured products, or                         67 An authorized participant generally is an
                                                 similar securities).
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                                                                                                                                                                    68 An interest bearing bond may be structured in
                                                                                                          institutional investor, such as a broker dealer, who
                                                    Regarding the guidance for estimating                 acts to create or redeem ETF shares. The authorized    a conduit and divided into separate obligations,
                                                                                                          participant buys shares that underlie the ETF and      where the cash flow from the principal of the bond
                                                 deliverable supply for equity securities,                exchanges those underlying shares with the ETF         and the cash flow from each coupon may be sold
                                                 free float of the security generally means               sponsor for shares in the ETF, thus creating new       as separate securities. Each such separate security
                                                 issued and outstanding shares less                       ETF shares that it may sell to the public. An          is a zero-coupon security.
                                                 restricted shares. Restricted shares                     authorized participant may also purchase ETF              69 In this regard, an exempted security refers to

                                                                                                          shares in the market place and redeem those shares     certain exempted securities under the Securities
                                                 include restricted and control securities,               with the ETF sponsor, thus reducing the number of      Act of 1933 or the Securities Exchange Act of 1934.
                                                 which are not registered with the SEC                    ETF shares outstanding.                                See CEA section 2(a)(1)(C).



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                                                 36808                     Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules

                                                 on an appropriate basis based on the                     III. Related Matters                                    requirements that require approval of
                                                 existing levels of limits for equity option                                                                      OMB under the PRA. As such, the
                                                                                                          A. Regulatory Flexibility Act
                                                 contracts on NSEs. The Commission                                                                                proposed amendments do not impose
                                                 invites comment on whether a level                          The Regulatory Flexibility Act                       any new burden or any new information
                                                 based on par value is appropriate, or                    (‘‘RFA’’) 71 requires that federal agencies             collection requirements in addition to
                                                 whether some other metric would be                       consider whether a proposed rule will                   those that already exist in connection
                                                                                                          have a significant economic impact on                   with filing to list SFPs under
                                                 appropriate.
                                                                                                          a substantial number of small entities                  Commission regulation 41.23 or to
                                                   Section (d), Guidance on Position                      and, if so, provide a regulatory                        amend exchange rules for SFPs under
                                                 Accountability. The Commission                           flexibility analysis of the impact. The                 Commission regulation 41.24.75
                                                 proposes, as guidance, that a DCM may                    proposed amendments generally apply
                                                 adopt a position accountability rule for                 to exchange-set position limits. The                    C. Cost-Benefit Considerations
                                                 any SFP, including an SFP where a                        proposed amendments would permit a                      1. Introduction
                                                 position limit is required or adopted.                   DCM to increase the level of position
                                                                                                                                                                     Section 15(a) of the CEA requires the
                                                 Under the proposal, a position                           limits for SFPs and may change the
                                                                                                                                                                  CFTC to consider the costs and benefits
                                                 accountability rule would provide, at a                  application of those limits from a
                                                                                                                                                                  of its actions before promulgating a
                                                 minimum, that the DCM have authority                     trader’s net position to a trader’s gross
                                                                                                                                                                  regulation under the CEA or issuing
                                                 to obtain information from a market                      position. The proposed amendments
                                                                                                                                                                  certain orders.76 CEA section 15(a)
                                                 participant with a position at or above                  would affect DCMs. The Commission
                                                                                                                                                                  further specifies that the costs and
                                                 the accountability level and that the                    has previously established certain
                                                                                                                                                                  benefits shall be evaluated in light of
                                                 DCM have authority, in its discretion, to                definitions of ‘‘small entities’’ to be used
                                                                                                                                                                  five broad areas of market and public
                                                                                                          in evaluating the impact of its rules on
                                                 order such a market participant to halt                                                                          concern: (1) Protection of market
                                                                                                          small entities in accordance with the
                                                 increasing their position. The                                                                                   participants and the public; (2)
                                                                                                          RFA, and has previously determined
                                                 Commission notes that position                                                                                   efficiency, competitiveness, and
                                                                                                          that DCMs are not small entities for
                                                 accountability can work in tandem with                                                                           financial integrity of futures markets; (3)
                                                                                                          purpose of the RFA.72
                                                 a position limit rule, particularly where                   Therefore, the Commission believes                   price discovery; (4) sound risk
                                                 the accountability level is set at a low                 that the amendments to the SFP                          management practices; and (5) other
                                                 level, in comparison to the level of the                 position limits regulations would not                   public interest considerations. The
                                                 position limit. Further, the Commission                  have a significant economic impact on                   CFTC considers the costs and benefits
                                                 notes that a DCM may adopt a position                    a substantial number of small entities.                 resulting from its discretionary
                                                 accountability rule to provide authority                 Accordingly, the Chairman, on behalf of                 determinations with respect to the
                                                 to the DCM to order market participants                  the Commission, hereby certifies,                       section 15(a) factors below.
                                                                                                          pursuant to 5 U.S.C. 605(b), that the                      Where reasonably feasible, the CFTC
                                                 to reduce position sizes, for example, to
                                                                                                          proposed amendments will not have a                     has endeavored to estimate quantifiable
                                                 maintain orderly trading or to ensure an
                                                                                                          significant economic impact on a                        costs and benefits. Where quantification
                                                 orderly delivery.                                                                                                is not feasible, the CFTC identifies and
                                                                                                          substantial number of small entities.
                                                   Section (e), Guidance for                                                                                      describes costs and benefits
                                                 Exemptions.70 The proposed regulation                    B. Paperwork Reduction Act                              qualitatively.
                                                 would continue to provide a DCM with                        The Paperwork Reduction Act of 1995                     The CFTC requests comment on the
                                                 discretion to grant exemptions to                        (‘‘PRA’’) 73 provides that a federal                    costs and benefits associated with the
                                                 position limits. The proposal provides                   agency may not conduct or sponsor, and                  proposed rule amendments. In
                                                 guidance that such exemptions may be                     a person is not required to respond to,                 particular, the CFTC requests that
                                                 consistent with current Commission                       a collection of information unless it                   commenters provide data and any other
                                                 regulation 150.5 regarding exchange-set                  displays a currently valid control                      information or statistics that the
                                                 position limits or consistent with rules                 number issued by the Office of                          commenters relied on to reach any
                                                 of an NSE regarding securities option                    Management and Budget (‘‘OMB’’). The                    conclusions regarding the CFTC’s
                                                 exemptions. This guidance differs from                   collection of information related to this               proposed considerations of costs and
                                                 the provisions of the current regulation,                proposed rule is OMB control number                     benefits.
                                                 which references Commission                              3038–0059—Security Futures                              2. Economic Baseline
                                                 regulation 150.3 regarding federal                       Products.74 As a general matter, the
                                                                                                          proposed amendments to the SFP                             The CFTC’s economic baseline for
                                                 position limits in certain physical                                                                              this proposed rule amendment analysis
                                                                                                          position limits regulation (1) permit a
                                                 commodity futures contracts. The                                                                                 is the SFP position limits rule
                                                                                                          DCM to increase the level of limits; and
                                                 Commission believes the guidance                                                                                 requirement that exists today. In the
                                                                                                          (2) may change the application of
                                                 should reference exemption provisions                    exchange-set limits from a net basis to                 2001 Final SFP Rules, the Commission
                                                 applicable to exchange-set limits in                     a gross basis. The Commission believes                  adopted an SFP position limits rule that
                                                 Commission regulation 150.5, rather                      that the proposed amendments will not                   is consistent with the statutory
                                                 than federal limits, because the                         impose any new information collection                   requirements of CEA section 2(a)(1)(D).
                                                 exemptions for federal limits are written                                                                        In particular, CEA section
                                                 largely in terms of the federal limits on                     71 5
                                                                                                                U.S.C. 601 et seq.                                2(a)(1)(D)(i)(VII) requires generally that
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                                                 physical commodity contracts in                               72 See
                                                                                                                   Policy Statement and Establishment of
                                                 Commission regulation 150.2.                             Definitions of ‘‘Small Entities’’ for Purposes of the      75 Similarly, the Commission previously

                                                                                                          Regulatory Flexibility Act, 47 FR 18618, 18619          determined that a rule expanding the listing
                                                                                                          (Apr. 30, 1982).                                        standards for security futures did not require a new
                                                                                                            73 44 U.S.C. 3501 et seq.                             collection of information on the part of any entities.
                                                                                                            74 Regarding Security Futures Products (OMB           See 71 FR 39534 at 39539 (July 13, 2006) (adopting
                                                   70 In addition to re-designating 17 CFR 41.25(a)(3)
                                                                                                          Control No. 3038–0059), the Commission recently         a rule to permit security futures to be based on
                                                 as 17 CFR 41.25(b)(3), the proposal would re-            published a notice of a request for extension of the    individual debt securities or a narrow-based
                                                 designate current 17 CFR 41.25(a)(3)(iii) to             currently approved information collection. See 82       security index comprised of such securities).
                                                 appendix A to subpart C.                                 FR 48496 (Oct. 18, 2017).                                  76 7 U.S.C. 19(a).




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                                                                              Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules                                                   36809

                                                 trading in an SFP is not readily                           from more than 40 million shares of the                   The proposal would establish
                                                 susceptible to manipulation of the price                   underlying security outstanding, to an                  guidance that a DCM may adopt an
                                                 of that SFP or its underlying security.                    estimated deliverable supply of more                    exchange rule for position
                                                 The CFTC regulation that is in effect                      than 40 million shares. The proposal                    accountability in addition to an
                                                 currently states that, ‘‘the [DCM] shall                   generally would retain the other                        exchange rule for a position limit.
                                                 have rules in place establishing position                  criterion, namely six-month average                       The proposal would amend the
                                                 limits or position accountability                          daily trading volume in the underlying                  guidance for exemptions from position
                                                 procedures for the expiring futures                        security exceeding 20 million shares,                   limits by changing the reference to
                                                 contract month.’’ 77 The 2001 Final SFP                    but convert that criterion to 2.5 billion               CFTC regulation 150.3, regarding
                                                 Rules also provide criteria for a                          shares of six-month total trading                       exemptions to federal position limits, to
                                                 maximum level of position limits and                       volume, based on 125 trading days in a                  CFTC regulation 150.5, regarding
                                                 criteria that permit a DCM to adopt an                     typical six-month period.                               guidance for exchange-set limits. The
                                                 exchange rule for position                                    For physically-delivered basket equity               proposal also would add guidance for
                                                 accountability in lieu of position                         SFPs, the proposed amendment would                      exemptions from position limits to
                                                 limits.78 In addition, the 2001 Final SFP                  change the criteria for the position limit              permit a DCM to provide exemptions
                                                 Rules permit a DCM to approve                              to the underlying security with the                     consistent with those of a NSE regarding
                                                 exemptions from position limits                            lowest estimated deliverable supply,                    securities options position limits or
                                                 pursuant to exchange rules that are                        from the security in the index with the                 exercise limits.
                                                 consistent with CFTC regulation 150.3.                     lowest average daily trading volume.                      The proposal would amend the
                                                    The CFTC will analyze the costs and                     The proposed amendment also would                       requirements for re-setting levels of
                                                 benefits of the rules in this proposal                     clarify that an appropriate adjustment                  position limits by changing the required
                                                 against the current default net position                   would be made to the level of the limit                 review period from monthly to semi-
                                                 limit level of 13,500 (100-share)                          for a contract size different than 100                  annually; and imposing a requirement
                                                 contracts; or a higher net position limit                  shares per underlying security.                         that a DCM must lower the position
                                                 level of 22,500 (100-share) contracts for                     For SFPs that are cash settled to a                  limit for an SFP with data that no longer
                                                 equity SFPs meeting either a criterion of                  narrow-based security index of equity                   justifies a higher limit level, rather than
                                                 at least 20 million shares of average                      securities, the proposed amendment                      guidance that a DCM may lower such
                                                 daily trading volume, or criteria of at                    provides guidance that a DCM may set                    position limit. The proposal also would
                                                 least 15 million shares of average daily                   the limit level to that of a similar                    make clear that a DCM must impose a
                                                 trading volume and more than 40                            narrow-based security index equity                      position limit for an SFP with data that
                                                 million shares of the underlying                           option. The proposal also provides                      no longer justifies an exchange rule for
                                                 security outstanding.                                      guidance and an acceptable practice,                    position accountability in lieu of a
                                                    The current regulation permits (but                     which would provide a safe harbor for                   position limit. The proposal would
                                                 does not require) a DCM to adopt an                        a DCM itself to set such a limit level.                 continue to permit a DCM to use
                                                 exchange rule for position                                    For SFPs in debt securities, the                     discretion as to whether to increase the
                                                 accountability in lieu of position limits,                 proposal would establish a requirement                  level of a position limit for an SFP with
                                                 provided that average daily trading                        that a DCM must adopt a position limit                  data that justifies a higher level.
                                                 volume in the underlying security                          either net or on the same side of the                     The proposal would establish a
                                                 exceeds 20 million shares and there are                    market, and would provide guidance                      general definition of estimated
                                                 more than 40 million shares of the                         that the level of such limit generally                  deliverable supply, consistent with the
                                                 underlying security outstanding.                           should be set no greater than the                       guidance on estimating deliverable
                                                                                                            equivalent of 12.5 percent of the par                   supply in appendix C to part 38, and
                                                 3. Summary of Proposed Requirements                        value of the estimated deliverable                      provide guidance on estimating delivery
                                                    For equity SFPs, the proposed                           supply of the underlying debt security.                 supply that is specific to an SFP.
                                                 amendment would increase the default                       There currently are no SFPs in debt                       Finally, the proposal would establish
                                                 position limit level from 13,500 (100-                     securities listed for trading.                          a definition of same side of the market,
                                                 share) contracts to 25,000 (100-share)                        The proposal would establish a                       for clarity in the proposed limit levels
                                                 contracts. The proposed amendment                          required minimum position limit time                    on a gross basis. The definition would
                                                 also permits a DCM to establish a higher                   period beginning no later than the first                distinguish long positions for an SFP in
                                                 position limit level than 25,000 (100-                     day that a holder of a long position may                the same security from short positions
                                                 share) contracts, equivalent to 12.5                       be assigned a delivery notice, if such                  in an SFP in the same security.80
                                                 percent of estimated deliverable supply                    period is longer than the last five
                                                 of the underlying security (which, under                   trading days, where the SFP permits                     4. Costs
                                                 proposed guidance, should not exceed                       delivery before the close of trading.                      The proposal would as a general
                                                 the free float of the underlying security).                There currently are no SFPs listed for                  matter reduce costs relative to the
                                                 In connection with this change, a DCM                      trading that provide for delivery before                existing Commission regulation
                                                 would be required to estimate                              the close of trading.                                   41.25(a)(3),81 since it will reduce the
                                                 deliverable supply at least semi-                             The proposed amendment would                         frequency of hedge exemption requests
                                                 annually, rather than to calculate the                     provide DCMs with the discretion to                     (as discussed in the benefits section)
                                                 average daily trading volume at least                      alter the basis for applying a position                 and reduce the frequency of required
                                                 monthly.                                                   limit from a net position to a gross                    DCM reviews of position limits from
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                                                    Also for equity SFPs, the proposed                      position on the same side of the                        monthly to semi-annually. Under the
                                                 amendment would change one of the                          market.79
                                                 criteria that permit a DCM to adopt an                                                                               80 These two definitions would be added into a

                                                 exchange rule for position                                      79 In
                                                                                                                   this regard, OneChicago, LLC                     new paragraph (a) of 17 CFR 41.25; in conjunction
                                                                                                            (‘‘OneChicago’’), a DCM listing SFPs, permits           with the addition of the new paragraph (a), current
                                                 accountability in lieu of position limits,                 concurrent long and short positions to be held. See     paragraphs (a) through (d) would be re-designated
                                                                                                            OneChicago exchange rule 424, available at https://     as paragraphs (b) through (e).
                                                   77 17   CFR 41.25(a)(3).                                 www.onechicago.com/wp-content/uploads/content/            81 Re-designated under the proposal as 17 CFR
                                                   78 17   CFR 41.25(a)(3).                                 OneChicago_Current_Rulebook.pdf.                        41.25(b)(3).



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                                                 36810                    Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules

                                                 proposal, DCMs that list SFPs for                        not impair the protection of market                   applying for hedge exemptions (and
                                                 trading would continue to be required to                 participants and the public or otherwise              would require DCMs to incur the costs
                                                 adopt position limits or position                        impose significant costs on the markets               of reviewing such applications) earlier
                                                 accountability, but the proposal would                   for SFPs market or related securities.                in the life of the contract than absent the
                                                 generally increase the levels of position                   To the extent that a DCM lists equity              proposal.
                                                 limits. The Commission preliminarily                     SFPs on deliverable baskets, the costs of
                                                                                                          implementing the proposed position                    5. Benefits
                                                 believes that the proposal would impose
                                                 certain costs on such DCMs, and that                     limit provisions for such SFPs would be                  The Commission reviews its
                                                 these costs are necessary to establish                   similar to the costs of the analogous                 regulations to help ensure they keep
                                                 appropriate position limits or position                  provisions for single stock SFPs, but                 pace with technological developments
                                                 accountability trigger levels based on                   there are no current costs associated                 and industry trends, and to reduce
                                                 deliverable supply and such additional                   with those proposed changes to the                    regulatory burden where needed. The
                                                 criteria that the listing DCM determines                 regulations since such SFPs are not                   proposal would allow DCMs to adopt
                                                 to be appropriate. The Commission also                   currently listed for trading. There are               position limits that they deem to be
                                                 believes that these costs are comparable                 also no listed SFPs at this time on debt              appropriate. The Commission
                                                 to those incurred under current                          securities. To the extent that there is               preliminarily believes that DCMs will
                                                 regulations (whereby DCMs must                           less publicly-available information                   adopt position limits that are large
                                                 calculate average daily trading volume)                  related to the deliverable supply of debt             enough not to significantly inhibit
                                                 and notes that these costs will be                       securities, estimating deliverable supply             liquidity, but will appropriately mitigate
                                                 incurred only semi-annually under the                    may be more costly for debt securities                against potential manipulations and
                                                 proposal rather than monthly as under                    than for equity securities. However,                  other concerns that may be associated
                                                 current regulations. The Commission                      these costs will only be incurred in the              with overly large positions in SFPs.
                                                 believes that DCMs would be able to                      event that a DCM begins listing security              Moreover, to the extent that the
                                                 exercise control over the extent of these                futures on non-exempted debt                          proposal would lead to position limits
                                                 costs depending on the degree of                         securities. Moreover, these deliverable               that are higher than current position
                                                 standardization such DCMs use to                         supply provisions are set out as                      limits, the proposal could alleviate the
                                                 determine position limits and                            guidance so that DCMs are free to                     costs to hedgers of filing hedge
                                                 accountability and the Commission                        implement less costly methods to                      exemptions for positions that are larger
                                                                                                          comply with the rule, which provides                  than a current position limit, but lower
                                                 anticipates that DCMs will choose from
                                                                                                          only that futures on debt securities must             than a new position limit under the
                                                 among the lower-cost options. For
                                                                                                          have position limits. While DCMs have                 proposal. In that regard, Commission
                                                 example, a DCM could, consistent with
                                                                                                          not listed debt security SFPs absent the              staff reviewed the largest positions in
                                                 the proposal, adopt a simple rule for
                                                                                                          proposed changes to the regulation, it is             SFPs that were held during the calendar
                                                 equity securities based on the number of
                                                                                                          theoretically possible that the costs                 year 2017 and found that there were 16
                                                 free-float outstanding shares. For equity
                                                                                                          associated with estimating deliverable                positions held during the last five
                                                 securities, free-float information is
                                                                                                          supply or otherwise determining                       trading days of expiring SFP contract
                                                 readily available on certain publicly-
                                                                                                          position limit levels may affect future               months across all listed SFPs on
                                                 available market websites and on
                                                                                                          decisions regarding whether or not to                 OneChicago, currently the only DCM to
                                                 Bloomberg terminals and similar                                                                                list SFPs for trading. These positions
                                                                                                          list such SFPs. The costs of the
                                                 services (which DCMs are likely to have                                                                        generally appear to have been associated
                                                                                                          proposed regulation for debt securities
                                                 access to for other business reasons).                                                                         with securities lending agreements 82
                                                                                                          would be otherwise similar to the costs
                                                 Reducing the frequency with which                                                                              and thus appear to have been eligible for
                                                                                                          of the proposed regulation for equity
                                                 DCMs are required to review position                                                                           hedge exemptions. These 16 positions
                                                                                                          securities.
                                                 limits and accountability to semi-                          The proposal to permit DCMs to                     exceeded the current applicable limit
                                                 annually from monthly will reduce                        implement position limits on a net basis              for their underlying securities of the
                                                 costs to DCMs. Thus, the Commission                      or on positions on the same side of the               default 13,500 contracts. If the proposed
                                                 anticipates that estimating deliverable                  market (e.g., on physically-delivered                 default position limit of 25,000
                                                 supply would not be more costly (and                     and cash settled contracts on the same                contracts had been in effect in 2017,
                                                 would likely be less costly) than                        security, should a DCM ever list both                 fewer than four positions would have
                                                 estimating average daily trading volume                  types of contracts) would not require                 been above that default position limit
                                                 as required under current regulations.                   DCMs to change their current practice,                and would have required hedge
                                                    The Commission notes that under the                   and will thus not impose new costs on                 exemptions. While the Commission
                                                 proposed rule, DCMs have the                             DCMs. Any change that imposes new                     believes that the monetary cost of filing
                                                 discretion to implement the default                      costs on market participants would be                 a hedge exemption form is very small
                                                 position limit of 25,000 contracts                       made at the discretion of the DCM.                    for an entity large enough to maintain a
                                                 regardless of deliverable supply and that                   The proposal to establish a required               position that exceeds a position limit
                                                 this may result in position limit levels                 minimum position limit time period                    (perhaps less than $100), it is possible
                                                 in some contracts greater than 12.5                      beginning no later than the first day that            that the burden of filing a hedge
                                                 percent of deliverable supply. However,                  a holder of a long position may be                    exemption may discourage hedging at
                                                 this discretion is limited by Core                       assigned a delivery notice, if such                   sizes exceeding position limits and,
                                                 Principle 5 (which requires DCMs to set                  period is longer than the last five                   thus, that raising position limits may
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                                                 position levels at necessary and                         trading days, in instances where the SFP              encourage larger hedges. The
                                                 appropriate levels to deter                              permits delivery before the close of                  Commission also notes that to the extent
                                                 manipulation) and by Core Principle 3                    trading currently imposes no costs since              SFPs are now or in the future used for
                                                 (which requires that DCMs may only list                  contracts of this nature are not currently
                                                 contracts that are not readily susceptible               listed for trading. If a DCM listed such                82 OneChicago describes itself on its website,

                                                 to manipulation). To the extent that                     contracts, the proposal would require                 https://onechicago.com, as ‘‘the Securities Finance
                                                                                                                                                                Exchange’’ and states that ‘‘single stock futures are
                                                 DCMs comply with these core                              market participants to incur the costs of             ideally suited to replace ‘agreements’ in equity repo
                                                 principles, this DCM discretion should                   complying with position limits or                     and securities lending transactions.’’



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                                                                           Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules                                           36811

                                                 speculation,83 speculators could                         public by maintaining the requirement                 iv. Sound Risk Management Practices
                                                 establish larger positions under the                     that DCMs that list SFPs adopt and                       The current position limit regulation
                                                 proposal without a need for concern                      enforce appropriate position limits or                often leads to position limits that are
                                                 about position limits and may thus                       position accountability consistent with               tighter than analogous position limits
                                                 increase their trading activity. Any                     DCM Core Principle 5 and                              for security options. It is conceivable
                                                 potential increase in trading activity                   implementing for SFPs the longstanding                that this could discourage potential
                                                 could improve liquidity in the SFP                       Commission policy that spot-month                     hedgers or other risk managers from
                                                 markets.                                                 position limits should be set based on                using SFPs rather than security options
                                                    Requiring DCMs to set position limits                 estimates of deliverable supply. Linking              because of burdens associated with the
                                                 and accountability based on semi-                        the levels of position limits and
                                                 annual deliverable supply estimates                                                                            hedge exemption process. Risk
                                                                                                          accountability to deliverable supply                  managers might also find that the
                                                 should help ensure on an ongoing basis                   protects market participants and the
                                                 that position limits and accountability                                                                        liquidity risk in the current SFP market
                                                                                                          public by helping prevent congestion,                 is too high, due to a lack of speculators
                                                 are set at levels that are necessary and                 manipulation, or other problems that
                                                 appropriate to deter manipulation                                                                              in the SFP market (among other causes).
                                                                                                          can be associated with speculative                    In this regard, it is possible that the
                                                 consistent with DCM Core Principles 3                    positions in expiring contracts that are
                                                 and 5.                                                                                                         current position limits might be too
                                                                                                          overly large relative to deliverable                  tight for speculators to perform
                                                    The Commission preliminarily
                                                                                                          supply.                                               adequately their role of providing
                                                 believes that the proposed frameworks
                                                 for position limits in SFPs on                           ii. Efficiency, Competitiveness, and                  liquidity in a futures market. Because
                                                 deliverable equity baskets and debt                      Financial Integrity of Markets                        the proposal raises the default limit to
                                                 securities (all based on deliverable                                                                           25,000 contracts to match the default in
                                                 supply estimates) should help ensure                        As discussed above, under the                      security options, and thus would likely
                                                 that such products, if they are ever                     proposal, it is reasonable to anticipate              lead to higher position limits for many
                                                 listed for trading, are reasonably                       that many or most SFPs would be                       SFPs, it is possible that both risk
                                                 protected from manipulation. Further,                    subject to higher position limits                     managers and speculators enter or
                                                 the Commission preliminarily believes                    compared to the current position limits.              increase trading in the SFP market
                                                 that the proposal may help foster                        Therefore, hedgers may be able to take                under the proposal.
                                                 position limits consistent with those in                 larger positions without the need to                  v. Other Public Interest Considerations
                                                 analogous securities options (where                      apply for hedge exemptions. This also
                                                 applicable).                                             could alleviate the DCM’s need to                       The Commission has not identified
                                                    The proposal to permit DCMs to                        review hedge exemptions improving                     any additional public interest
                                                 implement position limits on a net basis                 resource allocation efficiency for                    considerations associated with the
                                                 or on positions on the same side of the                  exchanges and certain market                          proposal.
                                                 market (such as physically-delivered or                  participants. Moreover, with less                     7. Consideration of Alternatives
                                                 cash settled contracts on the same                       restrictive position limits, it is
                                                 security, should a DCM ever list both                    theoretically possible that more traders                 The Commission considered
                                                 types of contracts) will give DCMs the                   could be enticed into the market and                  regulations that would require DCMs to
                                                 discretion to implement position limits                  thus improve the liquidity and pricing                conform the position limits in SFPs to
                                                 in a manner that they see fit.                           efficiency of the SFP market.                         those in securities options to a greater
                                                    The proposal to establish a required                                                                        degree than under the proposal
                                                                                                             The current position limit regulation              (consistent with comments to the
                                                 minimum position limit time period                       (a default of 13,500 contracts) often
                                                 beginning no later than the first day that                                                                     original SFP rule proposal), including
                                                                                                          leads to position limits that are tighter             applying position limits throughout the
                                                 a holder of a long position may be                       than analogous position limits for
                                                 assigned a delivery notice, if such                                                                            life of the contract (rather than only in
                                                                                                          security options (a default of 25,000                 the last five trading days) and no longer
                                                 period is longer than the last five                      contracts). The proposal would raise the
                                                 trading days, where the SFP permits                                                                            permitting position accountability for
                                                                                                          default limit level in SFPs to match that             SFPs on securities with higher trading
                                                 delivery before the close of trading                     in securities options. More closely
                                                 currently provides no benefits since                                                                           volume and deliverable supply. The
                                                                                                          aligning the position limits in SFPs to               Commission believes that permitting
                                                 contracts of this nature are not listed for              those in securities options may enhance
                                                 trading. If a DCM listed such contracts,                                                                       position accountability for certain SFPs
                                                                                                          the competitiveness of the SFP market                 and only requiring spot month limits is
                                                 the proposal would help ensure that                      relative to the securities option market.
                                                 such contracts are not readily                                                                                 consistent with Core Principle 5 and
                                                 susceptible to manipulation during the                   iii. Price Discovery                                  that these requirements are sufficient to
                                                 entire delivery period.                                                                                        ensure that SFPs are not readily
                                                                                                            The Commission believes that price                  susceptible to manipulation as required
                                                 6. CEA Section 15(a) Factors                             discovery typically occurs in the liquid              by Core Principle 3. Thus, not
                                                 i. Protection of Market Participants and                 and generally transparent security                    permitting position accountability and
                                                 the Public                                               markets underlying existing SFPs rather               requiring DCMs to apply position limits
                                                                                                          than the relatively low-volume SFPs                   throughout the life of the contract
                                                    The Commission preliminarily
                                                                                                          themselves. Nevertheless, as noted                    would significantly increase costs on
                                                 believes that this proposal maintains the
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                                                                                                          above, to the extent that trading activity            market participants while not
                                                 protection of market participants and
                                                                                                          in SFP markets increases due to less                  significantly enhancing protection of
                                                 the public provided by the current
                                                                                                          restrictive position limits, the price                market participants and the public or
                                                 regulation. The proposal will continue
                                                                                                          discovery function of SFPs could be                   providing significant benefits beyond
                                                 to protect market participants and the
                                                                                                          enhanced by reducing liquidity risk and               those of the proposed position limits
                                                   83 As noted above, SFPs may be used for                thereby facilitating arbitrage between                framework.
                                                 securities finance transactions that are not             the underlying security and SFP                          The Commission also considered not
                                                 speculative in nature.                                   markets.                                              setting default position limits for equity


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                                                 36812                    Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules

                                                 SFPs and simply requiring that position                  least anticompetitive means of                             § 41.25 Additional conditions for trading
                                                 limits and accountability be set based                   achieving the objectives, polices and                      for security futures products.
                                                 on deliverable supply, as is done in                     purposes of the CEA, in issuing any                           (a) Definitions. For purposes of this
                                                 many other futures products. However,                    order or adopting any Commission rule                      section:
                                                 the Commission preliminarily                             or regulation (including any exemption                        Estimated deliverable supply means
                                                 determined not to make such a proposal                   under section 4(c) or 4c(b)), or in                        the quantity of the security underlying
                                                 because some exchanges and market                        requiring or approving any bylaw, rule,                    a security futures product that
                                                 participants (based on past                              or regulation of a contract market or                      reasonably can be expected to be readily
                                                 comments) 84 appear to believe that                      registered futures association                             available to short traders and salable by
                                                 there are benefits to conforming position                established pursuant to CEA section                        long traders at its market value in
                                                 limits in SFPs to those in securities                    17.85                                                      normal cash marketing channels during
                                                 options to the extent practicable.                          The Commission believes that the                        the specified delivery period. For
                                                                                                          public interest to be protected by the                     guidance on estimating deliverable
                                                 8. Request for Comments                                                                                             supply, designated contract markets
                                                                                                          antitrust laws is generally to protect
                                                    The Commission invites public                         competition. The Commission requests                       may refer to appendix A of this subpart.
                                                 comment on its cost-benefit                              comment on whether the proposal                               Same side of the market means the
                                                 considerations, including the CEA                                                                                   aggregate of long positions in
                                                                                                          implicates any other specific public
                                                 section 15(a) factors described above.                                                                              physically-delivered security futures
                                                                                                          interest to be protected by the antitrust
                                                 Commenters are also invited to submit                                                                               products and cash-settled security
                                                                                                          laws. The Commission has considered
                                                 any data or other information that they                                                                             futures products, in the same security,
                                                                                                          the proposal to determine whether it is
                                                 may have quantifying or qualifying the                                                                              and, separately, the aggregate of short
                                                                                                          anticompetitive and has preliminarily
                                                 costs and benefits of the proposal with                                                                             positions in physically-delivered
                                                                                                          identified no anticompetitive effects.
                                                 their comment letters.                                                                                              security futures products and cash-
                                                                                                          The Commission requests comment on
                                                    The Commission specifically seeks                                                                                settled security futures products, in the
                                                                                                          whether the proposal is anticompetitive
                                                 comment on the following:                                                                                           same security.
                                                                                                          and, if it is, what the anticompetitive                       (b) * * *
                                                    1. Are there alternatives to the                      effects are.
                                                 proposal (whether discussed in this                                                                                    (3) Speculative position limits. A
                                                                                                             Because the Commission has                              designated contract market shall have
                                                 release or not) that would be superior                   preliminarily determined that the
                                                 from a cost-benefit standpoint?                                                                                     rules in place establishing position
                                                                                                          proposal is not anticompetitive and has                    limits or position accountability
                                                    2. Would the proposal affect costs for                no anticompetitive effects, the
                                                 those market participants that seek                                                                                 procedures for the expiring futures
                                                                                                          Commission has not identified any less                     contract month as specified in this
                                                 hedge exemptions?                                        anticompetitive means of achieving the
                                                    3. Would DCMs that list for trading                                                                              paragraph (b)(3).
                                                                                                          purposes of the Act. The Commission                           (i) Limits for equity security futures
                                                 SFPs face additional costs in adopting
                                                                                                          requests comment on whether there are                      products. For a security futures product
                                                 and setting position limits and position
                                                                                                          less anticompetitive means of achieving                    on a single equity security, including a
                                                 accountability levels for SFPs under the
                                                                                                          the relevant purposes of the Act that                      security futures product on an
                                                 proposal that are not discussed in this
                                                                                                          would further the objective of this                        underlying security that represents
                                                 consideration of costs and benefits?
                                                                                                          proposal, such as leveling the regulatory                  ownership in a group of securities, e.g.,
                                                    4. Do DCMs and market participants
                                                                                                          playing field between SFPs and security                    an exchange traded fund, a designated
                                                 expect to see benefits under the
                                                                                                          options listed on NSEs.                                    contract market shall adopt a position
                                                 proposal that are not discussed in this
                                                 consideration of costs and benefits?                     List of Subjects in 17 CFR Part 41                         limit no greater than 25,000 100-share
                                                 Please quantify or describe such                                                                                    contracts (or the equivalent if the
                                                                                                            Position accountability, Position                        contract size is different than 100
                                                 benefits.
                                                                                                          limits, Security futures products.                         shares), either net or on the same side
                                                    5. Should the Commission eliminate
                                                 default position limits for equity SFPs                    For the reasons discussed in the                         of the market, applicable to positions
                                                 and instead simply require that position                 preamble, the Commodity Futures                            held during the last five trading days of
                                                 limits and accountability be set based                   Trading Commission proposes to amend                       an expiring contract month; except
                                                 on deliverable supply, as is done in                     17 CFR part 41 as set forth below:                         where:
                                                 many other futures products?                                                                                           (A) For a security futures product on
                                                    6. Is it feasible to estimate deliverable             PART 41—SECURITY FUTURES                                   a single equity security where the
                                                 supply for debt securities at reasonable                 PRODUCTS                                                   estimated deliverable supply of the
                                                 cost?                                                                                                               underlying security exceeds 20 million
                                                    7. Are there benefits associated with                 ■ 1. The authority citation for part 41                    shares, a designated contract market
                                                 the Commission implementing rules for                    continues to read as follows:                              may adopt, if appropriate in light of the
                                                 types of SFPs that are not currently                        Authority: Sections 206, 251 and 252, Pub.              liquidity of trading in the underlying
                                                 listed for trading? Does implementing                    L. 106–554, 114 Stat. 2763, 7 U.S.C. 1a, 2, 6f,            security, a position limit no greater than
                                                 such rules have the potential to impose                  6j, 7a–2, 12a; 15 U.S.C. 78g(c)(2).                        the equivalent of 12.5 percent of the
                                                 costs associated with possibly deterring                                                                            estimated deliverable supply of the
                                                                                                          ■ 2. In § 41.25:
                                                 innovation?                                                                                                         underlying security, either net or on the
                                                                                                          ■ a. Redesignate paragraphs (a) through                    same side of the market, applicable to
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                                                 D. Anti-Trust Considerations                             (d) as paragraphs (b) through (e);                         positions held during the last five
                                                                                                          ■ b. Add new paragraph (a);
                                                   CEA Section 15(b) requires the                                                                                    trading days of an expiring contract
                                                                                                          ■ c. Revise newly redesignated                             month; or
                                                 Commission to take into consideration
                                                 the public interest to be protected by the               paragraphs (b)(3), (c)(2) and (3), and (e).                   (B) For a security futures product on
                                                 antitrust laws and endeavor to take the                    The addition and revisions read as                       a single equity security where the six-
                                                                                                          follows:                                                   month total trading volume in the
                                                   84 See supra discussion of the 2001 Final SFP                                                                     underlying security exceeds 2.5 billion
                                                 Rules.                                                        85 7   U.S.C. 19(b).                                  shares and there are more than 40


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                                                                          Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules                                               36813

                                                 million shares of estimated deliverable                  designated contract markets may refer to                 (2) Notwithstanding paragraph (c)(1)
                                                 supply, a designated contract market                     section (c) of appendix A of this                     of this section, if an opening price for
                                                 may adopt a position accountability                      subpart.                                              one or more securities underlying a
                                                 rule, either net or on the same side of                     (v) Required minimum position limit                security futures product is not readily
                                                 the market, applicable to positions held                 time period. For position limits required             available, the final settlement price of
                                                 during the last five trading days of an                  under this section where the security                 the security futures product shall fairly
                                                 expiring contract month. Upon request                    futures product permits delivery before               reflect:
                                                 by a designated contract market, traders                 the termination of trading, a designated                 (i) The price of the underlying
                                                 who hold positions greater than 25,000                   contract market shall apply such                      security or securities during the most
                                                 100-share contracts (or the equivalent if                position limits for a period beginning no             recent regular trading session for such
                                                 the contract size is different than 100                  later than the first day that long position           security or securities; or
                                                 shares), or such lower level specified                   holders may be assigned delivery                         (ii) The next available opening price
                                                 pursuant to the rules of the designated                  notices, if such period is longer than the            of the underlying security or securities.
                                                 contract market, must provide                            last five trading days of an expiring                    (3) Notwithstanding paragraph (c)(1)
                                                 information to the designated contract                   contract month.                                       or (2) of this section, if a derivatives
                                                 market and consent to halt increasing                       (vi) Requirements for re-setting levels            clearing organization registered under
                                                 their positions when so ordered by the                   of position limits. A designated contract             Section 5b of the Act or a clearing
                                                 designated contract market.                              market shall calculate estimated                      agency exempt from registration
                                                    (ii) Limits for physically-delivered                  deliverable supply and six-month total                pursuant to Section 5b(a)(2) of the Act,
                                                 basket equity security futures products.                 trading volume no less frequently than                to which the final settlement price of a
                                                 For a physically-delivered security                      semi-annually.                                        security futures product is or would be
                                                 futures product on more than one equity                     (A) If the estimated deliverable supply            reported determines, pursuant to its
                                                 security, e.g., a basket of deliverable                  data supports a lower speculative limit               rules, that such final settlement price is
                                                 securities, a designated contract market                 for a security futures product, then the              not consistent with the protection of
                                                 shall adopt a position limit, either net                 designated contract market shall lower                customers and the public interest,
                                                 or on the same side of the market,                       the position limit for that security                  taking into account such factors as
                                                 applicable to positions held during the                  futures product pursuant to the                       fairness to buyers and sellers of the
                                                 last five trading days of an expiring                    submission requirements of § 41.24. If                affected security futures product, the
                                                 contract month and the criteria in                       the data require imposition of a reduced              maintenance of a fair and orderly
                                                 paragraph (b)(3)(i) of this section must                 position limit for a security futures                 market in such security futures product,
                                                 apply to the underlying security with                    product, the designated contract market               and consistency of interpretation and
                                                 the lowest estimated deliverable supply.                 may permit any trader holding a                       practice, the clearing organization shall
                                                 For a physically-delivered security                      position in compliance with the                       have the authority to determine, under
                                                 futures product on more than one equity                  previous position limit, but in excess of             its rules, a final settlement price for
                                                 security with a contract size different                  the reduced limit, to maintain such                   such security futures product.
                                                 than 100 shares per underlying security,                 position through the expiration of the                *       *    *      *    *
                                                 an appropriate adjustment to the limit                   security futures contract; provided, that                (e) Exemptions. The Commission may
                                                 must be made. If each of the underlying                  the designated contract market does not               exempt a designated contract market
                                                 equity securities in the basket of                       find that the position poses a threat to              from the provisions of paragraphs (b)(2)
                                                 deliverable securities is eligible for a                 the orderly expiration of such contract.              and (c) of this section, either
                                                 position accountability level under                         (B) If the estimated deliverable supply            unconditionally or on specified terms
                                                 paragraph (b)(3)(i)(B) of this section,                  or six-month total trading volume data                and conditions, if the Commission
                                                 then the security futures product is                     no longer supports a position                         determines that such exemption is
                                                 eligible for a position accountability                   accountability rule in lieu of a position             consistent with the public interest and
                                                 level in lieu of position limits.                        limit for a security futures product, then            the protection of customers. An
                                                    (iii) Limits for cash-settled equity                  the designated contract market shall                  exemption granted pursuant to this
                                                 index security futures products. For a                   establish a position limit for that                   paragraph shall not operate as an
                                                 security futures product cash settled to                 security futures product pursuant to the              exemption from any Securities and
                                                 a narrow-based security index of equity                  submission requirements of § 41.24.                   Exchange Commission rules. Any
                                                 securities, a designated contract market                    (C) If the estimated deliverable supply            exemption that may be required from
                                                 shall adopt a position limit, either net                 data supports a higher speculative limit              such rules must be obtained separately
                                                 or on the same side of the market,                       for a security futures product, as                    from the Securities and Exchange
                                                 applicable to positions held during the                  provided under paragraph (b)(3)(i)(A) of              Commission.
                                                 last five trading days of an expiring                    this section, then the designated                     ■ 3. Add appendix A to subpart C to
                                                 contract month. For guidance on setting                  contract market may raise the position                read as follows:
                                                 limits for a cash-settled equity index                   limit for that security futures product               Appendix A to Subpart C of Part 41—
                                                 security futures product, designated                     pursuant to the submission                            Guidance on and Acceptable Practices
                                                 contract markets may refer to section (b)                requirements of § 41.24.                              for Position Limits and Position
                                                 of appendix A of this subpart.                              (vii) Restriction on netting of
                                                    (iv) Limits for debt security futures                                                                       Accountability for Security Futures
                                                                                                          positions. If the designated contract
                                                 products. For a security futures product                                                                       Products
                                                                                                          market lists both physically-delivered
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                                                 on one or more debt securities, a                        contracts and cash settled-contracts in                  (a) Guidance for estimating deliverable
                                                 designated contract market shall adopt a                 the same security, it shall not permit                supply. (1) For an equity security, deliverable
                                                 position limit, either net or on the same                netting of positions in the physically-               supply should be no greater than the free
                                                 side of the market, applicable to                                                                              float of the security.
                                                                                                          delivered contract with that of the cash-                (2) For a debt security, deliverable supply
                                                 positions held during the last five                      settled contract for purposes of                      should not include securities that are
                                                 trading days of an expiring contract                     determining applicability of position                 committed for long-term agreements (e.g.,
                                                 month. For guidance on setting limits                    limits.                                               closed-end investment companies, structured
                                                 for a debt security futures product,                        (c) * * *                                          products, or similar securities).



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                                                 36814                    Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules

                                                    (3) Further guidance on estimating                    approve exemptions from these position                committee to prepare proposed
                                                 deliverable supply, including consideration              limits pursuant to rules that are consistent          regulations for the Federal Student Aid
                                                 of whether the underlying security is readily            with § 150.5 of this chapter, or to rules that        programs authorized under title IV of
                                                 available, is found in appendix C to part 38             are consistent with rules of a national
                                                                                                          securities exchange or association regarding
                                                                                                                                                                the Higher Education Act of 1965, as
                                                 of this chapter.
                                                    (b) Guidance and acceptable practices for             exemptions to securities option position              amended (HEA) (title IV, HEA
                                                 setting limits on cash-settled equity index              limits or exercise limits.                            programs). We also announce our
                                                 security futures products—(1) Guidance for                                                                     intention to create two subcommittees
                                                                                                            Issued in Washington, DC, on July 24,
                                                 setting limits on cash-settled equity index              2018, by the Commission.
                                                                                                                                                                for this committee. In addition, we
                                                 security futures products. For a security                                                                      announce three public hearings at
                                                 futures product cash settled to a narrow-                Robert Sidman,
                                                                                                                                                                which interested parties may comment
                                                 based security index of equity securities, a             Deputy Secretary of the Commission.
                                                                                                                                                                on the topics suggested by the
                                                 designated contract market:                                Note: The following appendices will not             Department and may suggest additional
                                                    (i) May set the level of a position limit to          appear in the Code of Federal Regulations.            topics that should be considered for
                                                 that of a similar equity index option listed on
                                                 a national security exchange or association;                                                                   action by the negotiating committee. We
                                                 or                                                       Appendices to Position Limits and                     will also accept written comments on
                                                    (ii) Should consider the deliverable supply           Position Accountability for Security                  the topics suggested by the Department
                                                 of equity securities underlying the index, and           Futures Products—Commission Voting                    and suggestions for additional topics
                                                 should consider the index weighting and                  Summary and Commissioner’s                            that should be considered for action by
                                                 contract multiplier.                                     Statement                                             the negotiating committee. The
                                                    (2) Acceptable practices for setting limits                                                                 Department will present negotiators
                                                 on cash-settled equity index security futures            Appendix 1—Commission Voting
                                                                                                          Summary                                               with proposed regulatory language at
                                                 products. For a security futures product cash
                                                 settled to a narrow-based security index of
                                                                                                                                                                the first negotiating session.
                                                                                                            On this matter, Chairman Giancarlo and
                                                 equity securities weighted by the number of                                                                    DATES: The dates, times, and locations
                                                                                                          Commissioners Quintenz and Behnam voted
                                                 shares outstanding, a designated contract                in the affirmative. No Commissioner voted in          for the public hearings are listed under
                                                 market may set a position limit as follows:              the negative.                                         SUPPLEMENTARY INFORMATION. We must
                                                 First, determine the limit on a security                                                                       receive written comments on the topics
                                                 futures product on each underlying equity                Appendix 2—Concurring Statement of                    suggested by the Department and
                                                 security pursuant to § 41.25(b)(3)(i); second,           Commissioner Rostin Behnam                            additional topics that should be
                                                 multiply each such limit by the ratio of the
                                                                                                             I respectfully concur with the Commodity           considered for action by the negotiating
                                                 100-share contract size and the shares of the
                                                 equity securities in the index; and third,
                                                                                                          Futures Trading Commission’s approval of its          committee on or before September 14,
                                                                                                          proposed rule regarding Position Limits and           2018.
                                                 determine the minimum level from step two
                                                                                                          Position Accountability for Security Futures
                                                 and set the limit to that level, given a                                                                       ADDRESSES: Submit your comments
                                                                                                          Products (the ‘‘Proposal’’). I commend staff
                                                 contract size of one U.S. dollar times the                                                                     through the Federal eRulemaking Portal
                                                                                                          on their hard work in producing this
                                                 index, or for a larger contract size, reduce the                                                               or via postal mail, commercial delivery,
                                                                                                          Proposal, and for their thoughtful responses
                                                 level proportionately. If under these                    to my questions. I look forward to hearing            or hand delivery. We will not accept
                                                 procedures each of the equity securities                 from market participants and other
                                                 underlying the index is determined to be                                                                       comments by fax or by email. To ensure
                                                                                                          stakeholders regarding the amendments to              that we do not receive duplicate copies,
                                                 eligible for position accountability levels, the         the existing position limits rules for security
                                                 security futures product on the index itself is                                                                please submit your comments only
                                                                                                          futures products. In particular, I will be
                                                 eligible for a position accountability level.            interested in comments regarding the
                                                                                                                                                                once. In addition, please include the
                                                    (c) Guidance and acceptable practices for             appropriateness of increasing the default             Docket ID at the top of your comments.
                                                 setting limits on debt security futures                  level of equity security futures products                • Federal eRulemaking Portal: Go to
                                                 products—(1) Guidance for setting limits on              position limits from 13,500 contracts to              www.regulations.gov to submit your
                                                 debt security futures products. A designated             25,000 contracts. While today’s Proposal only         comments electronically. Information
                                                 contract market should set the level of a                would amend the Commission’s Part 41 rules            on using Regulations.gov, including
                                                 position limit to no greater than the                    regarding security futures products, I                instructions for accessing agency
                                                 equivalent of 12.5 percent of the par value of           nonetheless encourage market participants
                                                 the estimated deliverable supply of the                                                                        documents, submitting comments, and
                                                                                                          and interested stakeholders to consider how           viewing the docket, is available on the
                                                 underlying debt security. For a security                 the Proposal might impact or interplay with
                                                 futures product on more than one debt                    the Commission’s position limits rules in             site under ‘‘Help.’’
                                                 security, the limit should be based on the               Part 150 and any future amendments to them.              • Postal Mail, Commercial Delivery,
                                                 underlying debt security with the lowest                                                                       or Hand Delivery: The Department
                                                                                                          [FR Doc. 2018–16079 Filed 7–30–18; 8:45 am]
                                                 estimated deliverable supply.                                                                                  strongly encourages commenters to
                                                    (2) Acceptable practices for setting limits           BILLING CODE 6351–01–P
                                                                                                                                                                submit their comments electronically.
                                                 on debt security futures products.                                                                             However, if you mail or deliver your
                                                    [Reserved.]                                                                                                 comments, address them to Aaron
                                                    (d) Guidance on position accountability. A            DEPARTMENT OF EDUCATION
                                                 designated contract market may adopt a
                                                                                                                                                                Washington, U.S. Department of
                                                 position accountability rule for any security                                                                  Education, 400 Maryland Ave. SW,
                                                                                                          34 CFR Chapter VI
                                                 futures product, in addition to a position                                                                     Room 294–12, Washington, DC 20202.
                                                 limit rule required or adopted under this                [Docket ID ED–2018–OPE–0076]                             Privacy Note: The Department’s
                                                 section. Upon request by the designated                                                                        policy is to make all comments received
                                                 contract market, traders who hold positions,             Negotiated Rulemaking Committee;                      from members of the public available for
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                                                 either net or on the same side of the market,            Public Hearings                                       public viewing in their entirety on the
                                                 greater than such level specified pursuant to                                                                  Federal eRulemaking Portal at
                                                 the rules of the designated contract market              AGENCY:  Office of Postsecondary
                                                                                                          Education, Department of Education.                   www.regulations.gov. Therefore,
                                                 must provide information to the designated                                                                     commenters should be careful to
                                                 contract market and consent to halt                      ACTION: Intent to establish negotiated
                                                                                                                                                                include in their comments only
                                                 increasing their positions when so ordered by            rulemaking committee.
                                                 the designated contract market.                                                                                information that they wish to make
                                                    (e) Guidance on exemptions from position              SUMMARY:   We announce our intention to               publicly available.
                                                 limits. A designated contract market may                 establish a negotiated rulemaking                     FOR FURTHER INFORMATION CONTACT:



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Document Created: 2018-11-06 10:29:42
Document Modified: 2018-11-06 10:29:42
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionProposed Rules
ActionProposed rule.
DatesComments must be received on or before October 1, 2018.
ContactThomas M. Leahy, Jr., Associate Director, Product Review, Division of Market Oversight, 202-418-5278, [email protected]; or Riva Spear Adriance, Senior Special Counsel, Chief Counsel's Office, Division of Market Oversight, 202-418-5494, [email protected]; Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
FR Citation83 FR 36799 
RIN Number3038-AE61
CFR AssociatedPosition Accountability; Position Limits and Security Futures Products

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