Comment Text:
10-002
COMMENT
CL-02711
April 20, 201
(t
Mr,
David Slawick
Secretary
Commodity Futures Trading Commission
Three Lalhyetle Centre
1155 21sl Slreel, NW
Washmghm, DC 20581
Re:
Proposed Federal Specnlative Position Limits for Referenced Energy
Conlracts and Associated Regulation% 75 Fed. ReR. 4144 (January 2(~ 20
Dear Mr, Slawick:
We are writing
to
the Commodity Futures Trading Commission ('CFTC") on behalf of a
client which is a rcgislered commodily trading advisor and in such capacily a member of the
Natmnal Futures Association (the
"CTA')
regarding the CI:'IT"s Proposed Part 151 - Vederal
Spccuhitive !~osilion Limits 17w Rel~renced Energy Conlracls (hereinafter, the "Proposed Part
151 Rcgulalitlns"),
By way of background, the CTA is
p;iil era
conglomerate that includes bona l]de hedgers
and independent account controllers (lhe "Affilialed Traders") which irade commodity f'utures
and options pursuanl 1o separalely developed, executed and marketed stralegies. Consistent with
CFTC Reg. § 150.3{a)(d)(i)(A)-(D) (the 'qndependent Account Controller Safe l-larbor" or the
"SaFe Harbor"), lhe CTA and lhe Al'filiated Traders have in place infbrmation sharing walls Io
prevent lhe al'filiales fl'om knowing or having access to posilion data about trades oflhe others.
Because o|'the numerous negative consequences sel fi)rth below, tile C'TA has requested
that we commenl (o express ils views thal the CFTC should not adopt tile Proposed Part 151
Regulations without the addilion of an exemption fi'om aggregation of positions along the lines
of the Independent Account Controller Sat'(:
Harbor,
Park / New 'York, NY 100;'{1~ / 212872 1000Mr, David Slawick
April 20, 2010
Page 2
10-002
COMMENT
CL-02711
As currenlly drafted, the Proposed Part 151 Regulations will not provMe %r an
excn~ption from aggregation of positions in referenced energy contracls outside off lhe spot
month ti',r indcpcnden~ account controllers, including tbr independent account controllers which
arc afiiliated entities. An analogous exemption is cun'ently provided in the lndependenl Account
Comroller Sal~ HarBor. In this regard, lhe Proposed Pro1 151 Regulations represcnl a significant
depmlure limn, and a direct rcvcrsal of, more lhan 30 years of CFTC rulemaking in this area
dating hack ~o ¢l~c C I' [C ," 1979 Statemenl of' Poti%~alion of Accounts and Ado[~tion
of Related Rqp~3in~plcf!, 44 Fed. Reg. 115 at P 33839 (July 13, 1979). Without this
exemption, the eTA bdievcs flint the Proposed Pa,~ 151 Regulations will needlessly mad unjustly
damage organizations with affiliates which have separately-developed indcpcndenl trading
slrategies that hold or control positions tbr different clients in relbrenced energy contracls and
who comply with the requirements of the Sate Harbor. These organizations maintain and entbrce
written procedures to ensure that no person or company wiflain the conglomerate outside the
h'ading enlily ilself has knowledge of or has access In the overall t~turcs posilions. As such, lhe
CTA believes there is no need to oblige flmse organizations to aggregate flaeir positions with
positions of their afl]lialcs. Nevertheless, under the Proposed Part 151 Regulations they would be
bound to do so.
The CFTC has not mliculated any legal or thctual basis for not including tlae independent
account controller exemption and the additional requirements tbr at~liated entities in the
Proposed Part 151 Regulalions. Raflmr, the CFTC only stated that an exemption "thai woukl
alh)w traders Io eslablish a series of positions each near a proposed ouler bound posilion limit
withoul aggrcgalion, may nol be appropriate," ll'two or more traders were acling in concert,
fl~is would be an appropriale concern. However, where two or more traders have acted
completely indcpendemly in establishing positions, each should be permiIled to trade up to the
applicable speculative position limit wilhoul aggrogalion with the other tbr contracts outside the
spot month. The CFTC has historically exercised its en%rcemcnt aulhorily when two or more
persons acling in concert have exceeded speculative position limits.
See tbr example
Commodil2 Fulures Trading (omm~ssmn versus Nelson Bunker Hunl et. a~, 591 F. 2d 1221,
(January 8, 1979) and In lhc Mailer of Volume Investors Cor~ James Pnruch, Gerald
Westhcimer and Valarie Westheimer, CFTC No. 85-25, Comm. Ful. L. Rep. P 25,234 1992 WL
25341 (February 10, 1992). As such, the CTA is of the view that lhe CFTC has the ability to
el't)ctively police speculative position limits. Ftu~hemmre, the CFTC has not identified any
malfiunction or inslances of potential harm under the current independent accounl controller
exempIion li)r at'filiaIed entities. Thm'elbrc, if Ihe CFTC adopts the Proposed Part 15tMr.
David Stawick
April 20, 2010
Page )
10-002
COMMENT
CL-02711
Regulations, the rules should be revised to include an exemption
for
independent account
controllers as well as further condilions for independent account controllers which are affiliates
as currenlly codified in the Safe Harbor. As drafted, the Proposed Part 151 Regulations
disregard a long-standing legilimale exemption fi'om aggregation.
In addilion, the CTA believes that not including an exemption fi-om aggregalion of
positions in ret~renced energy contracts along the lines of the Salb Harbor will have the
lbl!owing adverse side effects Ihat are, in part, contrary to the CFTC's stated mandate to prevent
excess spcculalion and in contlicl wilh what the CFTC's aims in a broader sense:
First, the Proposed Part 151 Regulations n-my lead 1o an effective decrease in the number
of indcpcndenI markel participants, Affiliated trading advisors that operate independently with
scpamlely developed, executed and marketed trading strategies lhal lrade l;~r difl~renl clients
would be lbrccd Io aggregate their positions in retbrenced energy contracts. As a consequence,
flmse affiliates would be lbrced to share confidential in!bnnation aboul ll~e positions they control
lbr clients and while doing so they will indirectly obtain access to each others' trading stralegies,
Besides tills, such lbrccd intbrmation sharing will create a dismcenlive tbr conglomerates'and
holding companies to permit more than a single trading advisor in the group to engage in trading
the retk, renced energy conlracls, thereby also reducing liquidiIy in lhe markels and increasing the
potential tbr price volatility.
Second, (he CTA believes lha! the l'roposed Part 151 Regulations will lead to a decrease
ot" market transparency because conglomerates will be stimulated to search for alternative means
to optimize the use of narrow speculative position limits by way of in-house malching of trades
or moving away from regulated exchanges to the less transparent OTC market, This will also
have a negative effect on lhe number of independent market participants, the market liquidity
and lhc potential for price volatility.
Third, tl~e Cq'A believes that the Proposed Part 151 Regulations will significantly weaken
inli~rmation sharing walls wilhin conglomerate organizations because under the Proposed Part
151 Regulations position inibrmation in rel?rcnced energy products would need 1o be shared
between afliliales. This sharing will make such conglomerates more vulnerable
to
unintended
disclosure of confidential inRmnation which would othem, ise not be shared due
intbm~ation sharing walls. As such, instead of preventing afl]liale entities within conglomerales
t]'om acting in concerl, the Proposed Part 15l Regulations will fbrce affiliales to work together
respect of aggregating positions and may increase the possibility of the misuse of such
confidential inlkmnation with possible attendant consequences of increased price volatility.Mr. David Stawick
April 20, 2010
Page
4
10-002
COMMENT
CL-02711
Thc foregoing adverse side effects will make tbr a less liquid market and will
al'l~rmatively require, the sharing ot: inlbnnati~m among att~liated entities in a ~vay that would
ti~cilitate, whether intenlionally or unintentionally, acting in concert.
Finally, hecause d~ere are approximately 100 "referenced energy contracts," the CTA
believes lhal if the Proposed Parl 151 Regulalions are adopted without an exemplion fi-om
aggregation of positions along the lines of the Independent Account Controller Safe Harbor, an
additional unintended and undesirable consequence will be a significant increase in
in fiastmclurc, IF and personnel cosls to assure compliance,
In conclusion, the CTA urges the CFTC to adopt the independent account controller
exemption, including the additional requirements for affiliales as sel tbrth in CFTC Reg. ~
150.3(a)(4)(i)(A)-(D), as pat~ of the Proposed Part 151 Regulalions to the extenl thai such
regulations arc approved.
The views expressed in this letter are those of the C.TA and not of Akin Gump Strauss
l lauer & Feld 1 I.P or m~y other client of Akin
Gump
Strauss Hauer & Fold I,LI'.
On behalf of the CTA, we would like to thank the CFFC fi~r the opportunity Io be able
provide comments on lhc Proposed
Part
151 Regulations,
JPB{jms
Co: William Mortis, Esq.
Mark Bmlh, Esq.
Sincerely,
