NEWS & INSIGHTS

On July 24, 2012, the staff of the Division of Market Oversight (“DMO”) of the Commodity Futures Trading Commission (the “CFTC”) issued a no-action letter (the “Letter”) providing relief from certain of the aggregation provisions of the final rules issued on November 18, 2011 establishing a position limits regime for certain commodity futures and options contracts and economically equivalent swaps (the “Position Limit Rules”). The Position Limit Rules include criteria to be used in determining when accounts and positions held by a person must be aggregated for purposes of determining compliance with the position limit levels.

For further information concerning the Position Limit Rules see our previous Sidley Update, which is available at http://www.sidley.com/sidleyupdates/Detail.aspx?news=4996.

On May 30, 2012, in response to a petition seeking relief from certain provisions of the Position Limit Rules, the CFTC issued a notice of proposed rulemaking (the “Aggregation Notice”). The Aggregation Notice proposed to modify the Position Limit Rules by revising, among other provisions, the 10% ownership threshold for aggregation, so that a person with an ownership or equity interest in an owned entity of greater than or equal to 10% ownership, but not greater than 50%, need not aggregate positions held by the owned entity provided that an appropriate firewall exists between the entities. The Aggregation Notice provides specific criteria that a person must meet to avail itself of an exception from the aggregation requirement of the Position Limit Rules.

For further information concerning the Aggregation Notice see our previous Sidley Update, which is available at http://www.sidley.com/sidleyupdates/Detail.aspx?news=5235.

The Position Limit Rules become effective 60 days after the term “swap” is further defined by the CFTC in joint rulemaking with the Securities and Exchange Commission (“SEC”) pursuant to Section 712(d)(1) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFTC and SEC issued joint rulemaking defining “swap” on July 10, 2012, although as of the date of this Sidley Update the Federal Register has not published the joint rulemaking.

Given that the Aggregation Notice is only a proposal, however, it is very likely that the Position Limit Rules would by their terms become effective prior to the effective date of the amendments described in the Aggregation Notice, if ultimately adopted. This would mean that, for a period of time, persons would be subject to the Position Limit Rules without the benefit of the disaggregation provisions contemplated by the CFTC in the Aggregation Notice.

The Letter addresses the above timing discrepancy by stating that DMO will not recommend that the CFTC commence an enforcement action against any person that:

1. complies with the Position Limit Rule as if the Position Limit Rule were amended to include the provisions proposed in the Aggregation Notice; or
2. complies with the Position Limit Rule, except that the person does not aggregate positions held by another entity that would otherwise be required to be aggregated, if:

• the person believes that the information sharing would result in a reasonable risk of violating federal, state, or foreign law, rule or regulation.¹
• the person has 50% or lesser ownership or equity interest in the owned entity and has taken reasonable steps to ensure independence between the person and that entity, which may include, but need not be limited to, compliance with the current standards set forth in the independent account controller exemption requirements under the prior position limits regime or the Position Limit Rules; or
• the person acquires a 50% or lesser ownership or equity interest in that entity in the normal course of business as a broker-dealer registered with the SEC or similarly registered with a foreign regulatory authority.

Paragraph (2) above closely mirrors the requirements for disaggregation under the Aggregation Notice, but there are some notable differences that make the requirements for no-action relief under the Letter more liberal than the proposed requirements under the Aggregation Notice. These notable differences are:

• First, while the Aggregation Notice requires an opinion of counsel to be filed by a person seeking to avail itself of the exemption from information sharing per applicable law, rule or regulation, the Letter states only that DMO will take into consideration whether a person has provided written advice of legal counsel.
• Second, the Letter does not condition no-action relief under the applicable law, rule or regulation exception on the person’s not having actual knowledge of information associated with the aggregation; furthermore, the Letter does not carve out from this exception federal, state, or foreign laws which serve as a means of evading aggregation.
• Third, to take advantage of the relief for a minority-owned independent entity the person need only take “reasonable” steps to ensure independence between the person and the owned entity. The Aggregation Notice, by contrast, provides specific criteria for qualification.²
• Fourth, the Letter does not include the proviso that a person acquiring a 50% or lesser ownership or equity interest in that entity in the normal course of business as a broker-dealer cannot have actual knowledge of the trading decisions of the owned entity.

It is possible that these differences between the requirements for no-action relief under the Letter and the requirements under the Aggregation Notice are an indication of how final rulemaking on aggregation may differ from the Aggregation Notice, but DMO has not indicated that this will be the case.

Any person who seeks to avail himself of the no-action relief described in the Letter must provide notice to DMO using the email address  prior to the date upon which the person intends to rely on the relief. The notice must state that the person is relying on this relief and provide the names of any entities holding positions that the person is not aggregating. The no-action relief provided in the Letter remains in effect until the earliest of: (1) 60 days after the CFTC issues an order declining to take further action on the Aggregation Notice; (2) 60 days after publication in the Federal Register of a rule finalizing changes to the Aggregation Notice; and (3) December 31, 2012.

If you have any questions regarding this update, the Letter or the Position Limit Rules, please contact the Sidley lawyer with whom you usually work.

¹In the Letter, DMO stated that the Division will consider written advice from legal counsel in evaluating whether the person’s determination regarding the risk of violating federal, state or foreign law is reasonable. However, DMO noted in the Letter that advice of legal counsel is not a per se condition to the relevant no-action relief.

²It should be noted that the Letter does include the criteria for qualification that are applicable to the Independent Account Controller requirements provided in the Position Limit Rules and the prior position limits regime as examples of “reasonable” steps to ensure independence. The Letter references §150.3(a)(4)(i) and §151.7(f)(1), which are the additional requirements for the Independent Account Controller exemption under the prior position limits regime and the Position Limit Rules, respectively.

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This Sidley update has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.

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