September 22, 2015
I support these proposed changes to the aggregation rules because I believe they make the position limits regime more workable. However, this is just the first of many steps needed to make the CFTC’s approach to position limits less harmful to the risk management activities of American farmers, energy producers, manufacturers, risk-hedgers and trading institutions that do business around the globe. We must avoid at all costs adopting flawed government regulations that prevent our markets from operating effectively at a time of plunging commodity prices.1 That means not displacing the everyday commercial judgement of farmers and businesses with a small set of allowable hedging options pre-selected by a Washington Commission with limited experience in commercial risk management.
As I recently stated,2 the CFTC must change the proposed requirement that a market participant aggregate trading positions across subsidiaries over which it has no control or in which it may only be invested on a short-term basis. The proposal from 2013 essentially requires a market participant to apply for permission from the CFTC before it can disaggregate a position if the participant owns more than fifty percent of an entity, even if it has zero control or influence over that entity. This approach does not reflect the realities of modern commerce in which global trading firms may often have many unconnected subsidiaries that neither communicate nor share trading strategies or market position information.
I commend the CFTC staff for taking into account public comments and putting forward a revised rule proposal that better recognizes the varied corporate structures of contemporary market participants. I am hopeful that today’s proposal will serve as the basis for a workable solution to the flawed approach to aggregation in the previous proposal.
In addition, today’s proposal would relieve the Commission of the obligation to conduct a detailed, individualized inquiry into the relationships of the owned entities of a majority-owner applicant that seeks to disaggregate its trading positions across a global corporate enterprise. I agree with commenters that characterized the 2013 process as unworkable and a burden on already-limited Commission resources.
Furthermore, this proposed reform appears considerably more attentive to liquidity concerns than the 2013 proposal. By permitting majority owners that lack trading control to file a disaggregation notice with immediate effect rather than navigating a case-by-case Commission approval process, the 2015 framework significantly reduces barriers to disaggregation, thereby possibly increasing market participation.
One area discussed at length in the current proposal is the issue of control of a corporate entity. Specifically, I invite public comment on whether there should be a removal of the presumption of control of an entity for all minority ownership interests. This would allow the exclusion now available to minority owners with a stake below ten percent, while retaining the presumption for interests exceeding fifty percent.
In addition, I am concerned that, by requiring an owner to aggregate an owned entity’s positions when its affiliates have risk-management systems that permit the sharing of trades or trading strategy, the proposed rule may stymie critical risk-mitigation efforts. Owners and their affiliates may need to share information regarding trades or trading strategy to verify compliance with applicable credit limits as well as restrictions and collateral requirements for inter-affiliate transactions, among other risk-management and compliance-related objectives.3
Accordingly, I invite public comment on whether the Commission should consider modifying the current proposal to clarify that owners and their affiliates may share such trading information as is necessary for effective risk safeguards without forfeiting eligibility for disaggregation. If the Commission remains concerned that this accommodation will facilitate coordinated trading, it might require affiliates sharing trading data to restrict dissemination of the information to those responsible for compliance and risk-management efforts, maintaining internal firewalls to conceal the information from employees who develop or execute trading strategies.
I also welcome public comment on whether the Commission should consider modifying the proposed rule to clarify that an owner filing a notice of trading independence in order to claim an exemption from aggregation under this rule need only make subsequent filings in the event of a material change in the owner’s degree of control over its subsidiary’s positions. The text of the proposed rule does not appear to require periodic filings following the initial notice of trading independence, but the Commission’s calculation of the proposal’s costs seems to assume that such filings will be made on an annual basis.
I encourage the public to comment on my above concerns and propose potential solutions if appropriate.
1 See Ira Iosebashvili and Tatyana Shumsky, Investors Flee Commodities, The Wall Street Journal, Jul. 20, 2015, available at http://www.wsj.com/articles/investors-flee-commodities-1437434367; See also Veronica Brown and Pratima Desai, Speculators Show Global Commodities Rout Still Has Legs, Reuters, Jul. 27, 2015, available at http://www.reuters.com/article/2015/07/27/us-markets-commodities-rout-idUSKCN0Q11TJ20150727.
2 See Keynote Address by Commissioner J. Christopher Giancarlo, 7th Annual Capital Link Global Commodities, Energy & Shipping Forum, Sept. 16, 2015, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-8.
3 Letter from Walt Lukken, President and Chief Executive Officer, Futures Industry Association, to Melissa Jurgens, Secretary, CFTC (Feb. 6, 2014), at 8–9, available at https://secure.fia.org/downloads/Aggregation_Comment_Letter_020614.pdf.
Last Updated: September 22, 2015