ICE Futures US (“ICE”) adopted a new rule, effective March 18, 2016, that provides relief from position limit aggregation requirements applicable to “owned entities.” Specifically, the rule amendment permits certain affiliated entities to disaggregate their positions for purposes of compliance with ICE’s position limits.
ICE imposes spot-month position limits on all its futures contracts, which limit the number of futures positions (other than those held for bona fide hedging) that a person may hold in the last few days of trading for a given contract. When parent and subsidiary companies trade the same contracts, the exchange requires the combined non-bona fide hedging positions of such affiliated entities to be below the relevant position limits. This “aggregation requirement” is difficult for some corporate enterprises to comply with, particularly when affiliates do not communicate with one another for competitive or legal reasons.
The CFTC has incorporated an “owned entity disaggregation” provision in its proposed regulations regarding position limits and aggregation requirements. Under this proposed rule, a company that owns 10% or more of another entity would not have to aggregate its positions with those of the owned entity if it can establish certain indicia of trading independence (i.e., a lack of control over the owned entity’s trading). The ICE rule permits disaggregation of positions under circumstances very similar to those proposed by the CFTC.
How Does the New ICE Rule Work?
Specifically, amended ICE Rule 6.12(c) permits ICE (upon written request) to exclude any person from having to aggregate the positions of a 10% or greater owned entity if:
- The individuals controlling the trading decisions of the relevant accounts do not have knowledge of the trading decisions made by each other;
- The accounts trade pursuant to separately developed and independent trading strategies;
- There are written procedures designed to preclude access to information regarding the trades, positions and strategies of each account; and
- There is no sharing of personnel controlling the respective trading decisions.
This exclusion does not apply to futures contracts (or swaps) that are subject to CFTC-imposed position limits (which for ICE is currently limited to the Cotton No. 2 futures).
Unlike the CFTC’s proposed rule, ICE Rule 6.12(c) requires affiliated entities relying on the exclusion to trade pursuant to independent trading strategies and to have procedures that preclude the sharing of certain trading information. The CFTC’s proposed rule, on the other hand, would require entities to trade pursuant to independent trading systems and to have risk management systems that preclude the sharing of certain information. In ICE’s view, requiring entities to have separate risk management systems would restrict many market participants from relying on the relief, despite ICE’s belief that compliance and risk personnel should be encouraged to access information across owned entities.
The ICE rule also provides an exclusion from aggregation if the sharing of information associated with such aggregation creates a reasonable risk of violating other laws (provided that certain conditions are met). ICE adopted this exclusion in response to concerns from some energy participants on its markets that sharing information between aggregated affiliates in order to stay below position limits would violate certain FERC regulations applicable to them.
What are the Implications?
The CFTC had the ability to reject or stay new ICE Rule 6.12(c), but did neither. This suggests that it will likely adopt its proposed disaggregation rule for owned entities, and thus does not object to ICE doing so in the meantime. It is expected that other futures exchanges will now follow suit.
This is important because the CFTC has been wrestling with its proposed position limits and aggregation regulations for nearly 2.5 years. Although CFTC Chairman Timothy Massad said in a recent speech that a CFTC “priority for this year is to finalize the [proposed] rules related to position limits” and that the agency is “making good progress toward finalizing these rules,” it is unclear whether action actually will be taken given the CFTC’s other pressing priorities in an election year.
Thus, initiatives taken by the exchanges to fill the vacuum by adopting sensible rules for the participants on their markets, such as ICE Rule 6.12(c), are welcome developments.