On September 22, 2015, the CFTC issued a “supplemental” proposed rulemaking (the “2015 Proposal”) to revise its long-pending proposal on aggregation for position limit purposes published in November 2013 (the “2013 Proposal”). The 2015 Proposal, if finalized, would provide companies with over 50% ownership or equity interest in affiliated entities with an easier mechanism to disaggregate their positions in futures and swaps for position limit purposes than the CFTC set out in the 2013 Proposal. In a nutshell, the 2015 Proposal would extend this easier mechanism for disaggregation (based on certain lack-of-control and knowledge of trading activities criteria) to affiliates that are 100% owned, up from a maximum of 50% owned in the 2013 Proposal.
The CFTC’s turnaround, which will undoubtedly be well received by derivatives users, recognized a central complaint about the 2013 Proposal – that aggregation of the positions of majority-owned affiliates within a corporate family “may in some cases be impractical, burdensome, or not in keeping with modern corporate structures.” Comments on the 2015 Proposal will be due 45 days after publication in the Federal Register.
2013 Proposal – disaggregation by notice filing for 10% to 50% ownership
The 2013 Proposal, as we described in our prior post, would have required companies to aggregate positions for position limit purposes based on a company’s ownership of another entity (and not solely on its ownership of a futures or swap trading “account”), but allowed for disaggregation in several circumstances:
- First, companies were not required to aggregate the positions of affiliated entities if they had an ownership position of less than 10%.
- Second, companies with an ownership or equity interest in another entity of 10%, but not more than 50%, could disaggregate positions if they submitted to the CFTC a “notice filing” (effective upon filing) attesting to meeting the following lack-of-control and knowledge criteria demonstrating that they trade independently: the affiliated companies (1) do not have knowledge of the trading decisions of the other; (2) trade pursuant to separately developed and independent trading systems; (3) have and enforce written procedures to preclude each from having knowledge of, gaining access to, or receiving data about, trades of the other (including separate physical locations, etc.); (4) do not share employees that control the trading decisions of either; and (5) do not have risk management systems that permit the sharing of trades or trading strategy.
- Third, if ownership interest exceeded 50%, a company could apply to the CFTC for relief from aggregation of positions only if certain very restrictive (and impractical) conditions were met, such as that the financial statements of related entities were not consolidated and that the applicant certified that the owned entity’s positions either qualify as bona fide hedging positions or do not exceed 20% of any position limit.
2015 Proposal – extending disaggregation by notice filing to majority-owned affiliates
The 2015 Proposal significantly streamlines the 2013 Proposal by extending the disaggregation criteria and notice filing process, formerly applicable only to the 10% to 50% ownership category, to all affiliates, regardless of ownership percentage. Gone are the provisions in the 2013 Proposal related to seeking prior CFTC approval for disaggregation for majority-owned affiliates, and severely limiting the ability of majority-owned affiliates to obtain disaggregation. Under the 2015 Proposal, a company seeking to disaggregate a 10-100% owned entity’s positions would simply need to submit a notice filing with the CFTC showing that the lack-of-control and knowledge criteria are met. (The 2015 Proposal retains all other aspects of the 2013 Proposal, including, for example: (1) the requirement of a statement by a senior officer certifying that the conditions for disaggregation have been met and (2) certain other aggregation exemptions such as the Independent Account Controller, underwriting, and broker-dealer activity exemptions, among others.)
CFTC policy and legal conclusions
In changing its proposed aggregation rules, the CFTC acknowledged that actual control of trading, rather than presumed control based merely on ownership, should be the governing factor in position limit aggregation, regardless of ownership percentage. As the CFTC conceded, “ownership of a greater than 50 percent interest in an entity (and the related consolidation of financial statements) may not mean that the owner actually controls day-to-day trading decisions of the owned entity.” “On balance,” the CFTC explained, “the overall purpose of the position limits regime (to diminish the burden of excessive speculation which may cause unwarranted changes in commodity prices) would be better served by focusing the aggregation requirement on situations where the owner is, in view of the circumstances, actually able to control the trading of the owned entity.”
Finally, the CFTC rejected the arguments, raised by some commenters, that the Commodity Exchange Act (“CEA”) only requires aggregation of positions based on ownership of “accounts” held or controlled by the same person (and not based on ownership of an entity). In addressing this issue head-on, the CFTC provided clarity on how it interprets its authority under the CEA with respect to position aggregation.
Benefits of the 2015 Proposal
The 2015 Proposal will be of particular importance to companies with complex group structures, including multi-affiliate and global enterprises, private equity firms, and financial institutions. As the CFTC has now acknowledged, the 2013 Proposal was simply too restrictive and unworkable for majority-owned affiliate structures. Under the 2015 Proposal, complex corporate groups will be able to avoid facing significant compliance costs associated with monitoring positions across all affiliates by filing for disaggregation, assuming they meet the lack-of-control and knowledge criteria.
The road ahead
As for timing of any final new position limits rules, CFTC Chairman Massad’s Statement on the 2015 Proposal: (1) reiterated that the CFTC ”intend[s] to take the time necessary to get it right” and (2) expressed hope that the CFTC will “have more to say” about position limits issues “in the coming months.”