7/31/2019 58303 Jiri Krol

1/5

Alternat ive Investment Management Association

The Alternat ive Invest ment Management Associat i on Limit ed

167 Fleet St reet , London, EC4A 2EA

Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 E-m ail: info@aima.org In ternet : www.a ima .o rgRegistere d in England as a Company Lim it ed by Guarante e, No. 4437037. VAT regist rat ion no: 577 5913 90. Registered Off ice as above

David A. Stawick,Secret ary of t he Commission,Comm odit y Futur es Trading Comm ission,

Three Lafayette Centre,1155 21st Street, NW.,Washington, DC 20581

Submitted via email : secretary@cftc.gov

6 July 2012

Dear Mr St awi ck,

CFTC Notice of Proposed Rulemaking - Aggregation Under Part 151, Position Limits for Futures and Swaps

The Alternative Investment Management Association (AIMA) 1

1. Introduction

apprec ia tes the opportun i ty to prov ide comment onthe Commodity Futures Trading Commission (CFTC) Notice of Proposed Rulemaking on aggregation under Part151, Posit ion Limit s for Fut ures and Swaps (the Not ice). The Not ice proposes clari f icat i on and amendm ent of t heCFTC Final Rule and Interim Final Rule of 18 November 2011, which establ ished a posit ion l imits regime for 28exempt and agricultural commodity futures and opt ions contracts and the physical commodity swaps which areeconomical ly equivalent t o such contract s.

AIMAs members are act ive part ic ipants in the US commodity markets and play a key role in providing l iquidityt o aid price di scovery by act ing as wi l l ing buyers for pr oducers and wil l ing sel ler s for end users. As set out in ourprevious responses to the CFTC, we cont inue to bel ieve that the part ic ipat ion of f inancial inst i tut ions in thecommodi ty markets , inc lud ing the der iva t ives market , is o f genu ine u t i l i ty and that l i t t le ev idence ex is ts o f a

d i rect causa l re la t i onsh ip betw een market vo lat i l i t y , h igher pr ices and t he part ic ipat ion o f f inancial i nst i tu t ionswi t h in the marke t .

AIMA bel ieves that the Not ice is a posit ive development in relat ion to the CFTC posit ion l imits regime andwelcomes the CFTCs wil l ingness to take the reasoned opinions of industry stakeholders into account. Inpart icu lar , we welcome the CFTCs c lar i f ica t ion o f how the v io la t ion o f laws exempt ion would be app l ied tocircumstances involving a reasonable r isk of breach and the proposed extension of the lat ter exemption toinclude t he provisions of US st ates and foreign j urisdict ions.

We are keen to assist the CFTCs work in ensuring that i ts posit ion l imit ru les are effect ive and proport ionate inachieving their object ives. We, therefore, set out below a number of construct ive comments on the proposedrules contained within the Not ice, in part icular regarding the owned ent i ty exemption, along with suggest ionsfor amendment and fur t her gu idance.

2. AIMAs Detailed Comment sa) Owned Ent i t y Exempt ionAIMA largel y agrees t hat aggregati on should be on the basis of cont rol. This is especiall y so in the cont ext ofinvestment funds, where an ind iv idua l managed cap i ta l investor may techn ica l ly own, d i rect ly or ind i rect ly , agreater t han 10% st ake in an ent i t y, yet be ent i re ly passive regarding the comm ercial decision-making of thatent i t y. The requirem ent for invest ors t o aggregate posit ions held by such account s wi t h their own isdisproport ionately burdensome on m anaged capit al i nvest ors and should be amended.

1 AIMA is the t rade body for t he hedge fund i ndust ry globally; our m embership represents al l consti tuencies wit h in t he sector including

hedge fund managers, fund of hedge funds managers, pr ime brokers, fund admini str ators, accountants and lawyers. Our membershipcomprises over 1,300 corporate bodies in 45 countries.

mailto:info@aima.orgmailto:info@aima.orgmailto:info@aima.orghttp://www.aima.org/http://www.aima.org/http://www.aima.org/mailto:secretary@cftc.govmailto:secretary@cftc.govmailto:secretary@cftc.govmailto:secretary@cftc.govhttp://www.aima.org/mailto:info@aima.org

7/31/2019 58303 Jiri Krol

2/5

2

AIMA, t herefore, wel comes t he possibi l i t y of an exempt ion fr om aggregat ion of t he posit ions held by an ent i t y inwhich a person holds great er t han 10% equit y or ownership int erest wi t h the l at t er persons own posit ions.However, we would h igh l ight the fo l lowing key areas which we be l ieve mer i t fu r ther amendment , c lar i f ica t ionand guidance:

i ) Greater t han 50% Equit y or Owner ship Thr esholdAIMA appreciates the CFTCs concerns that i t may be inconsistent with the statutory requirement to aggregateon the basis of ow nership positi ons held by an ent it y in w hich a person has a greater t han 50% ow nership orequi t y in t erest are exc luded f rom t he aggregat i on requ irement .

However, for the purpose of CFTC concerns regarding direct or indirect inf luence on, or coordinat ion of,posit ions as a result of hi gh levels of owner ship, AIMA consider s t hat t he greater t han 50% t hreshold isunnecessary.

The combined e f fect o f the o ther cr i te r ia conta ined wi th in the Owned Ent i ty Exempt ion would render the 50%ownership threshold less relevant. Taken together (a) enforcement of the mutual prohibit ion of knowledge of

the others t rading decisions; (b) the requirement for the adopt ion of procedural barriers to the sharing ofknowledge of and access to each others t rades; (c) the prohibit ion on sharing employees who control t radingdecisions; and (d) the requirement for t rading to be pursuant to independent trading systems would mean thatent i t ies could not coordinate or exert inf luence upon decisions as they would have no knowledge of, and beprocedural ly separate from, the decision making process. Nonetheless, i f the CFTC wishes to maintain thegreat er t han 50% owner ship t hreshold, AIMA believes that t here should be the possibi lit y of a case-by-caseappl ica t ion for re l ie f .

i i ) Shared Employees wit h Cont rolProposed Rule 151.7(b)(1)( i)(D) prevents the sharing of employees which control the trading decisions ownedent i t ies. However, when combined wit h Proposed Rule 151.7(b)(1)( i)(A), th is requir ement is seeminglyextended to proh ib i t the shar ing o f any employees which may be ab le to a t t r ibu te knowledge o f the t rad ing

decisions of t he opposing ent i t y. AIMA st rongly bel ieves t hat any sharing of emp loyees who are held t o att r ibut eknowledge to an ent i ty for the purpose of Proposed Rule 157(b)(1)( i)(A) should not include any individual whodoes not have contr ol of t he t rading decisions of his/ her respect ive ent i t y. In response t o t he CFTC s directquery regarding the suitabi l i ty of sharing at torneys, accountants, r isk managers, compliance and other mid-and back-off ice personnel which do not have the authori ty to inf luence trading decisions, we do not bel ievet hat such sharing would involve any loss or compr omise of independence.

i i i ) Appl icat i on of t he Exempt ion Cr i t er ia t o both Invest or and Owned Ent i t y As current ly drafted, Proposed rules 151.7(b)(1)( i)(A)&(C) within the Not ice would appear to prohibit e i therparty from having knowledge of the others trading decisions and to require both part ies to have enforcedwrit ten procedures to preclude any such knowledge of, access to and recept ion of t rade data regarding thet rades of t he other. AIMA quest ions t he necessit y of applying t he aforem enti oned requirement s t o the relevant

owned ent i t y in whi ch the person has invest ed.

As conf irmed within the Not ice, aggregat ion under the CFTC regime is just i f ied on the basis of both ownershipand control. Individuals who ow n less t han 10% of an ent i t y are considered not t o have contr ol, w hereas i f anindividual ow ns an equal t o or greater t han 10% equit y st ake in an ent i t y, t hat indi vidual is subj ect t o arebuttable presumption that he does exercise control. In both situat ions, the owned ent i ty i tself has no suchownership or control interest in i ts investor, and therefore, should not be required to adopt any procedures orincur undue costs associated with the regime. Whether the owned ent i ty has knowledge of i ts investors t radingdecisions is ent ire ly irre levant for the purposive intent ion of the str ict condit ions under Proposed rule151.7(b)(1)( i) , namely to prevent circumvent ion of the posit ion aggregat ion regime by individuals in control ofan owned ent i t y .

In add i t ion , a requ i rement for an ind iv idual t o conf i r m t o the CFTC t hat an owned ent i t y in fact compl ies wi t h

the cr i t e r ia is not pract ica l ly v iable .AIMA would suggest that, in order to ensure the proport ional i ty of the regime, the condit ions for the OwnedEntity Exemption be appl ied to the individual seeking appl icat ion and not to the owned ent i ty.

7/31/2019 58303 Jiri Krol

3/5

3

i v) Requir ement f or Separat ely Developed and Independent Trading Syst emsAIMA agrees with the CFTC that, in order to prevent the circumvent ion of the aggregat ion rules and theexploitat ion of the Owned Ent i ty Exemption, the condit ions for i ts appl icat ion must be r igorous. In th is regard,

we support the requ irement wi th in the Not ice for the exempt ion app l icant and owned ent i ty to operateindependent trading systems so that knowledge of t rading decisions and other data is not shared between thetw o, t hus lead ing to potent ia l co l laborat ion and d i rect or ind i rect in f luence.

However, we bel ieve that the requirement under Proposed rule 151.7(b)(1)( i)(B) for t rading to be pursuant toseparately developed t rading systems would place a disproport ionate burden upon market part ic ipants, whichcould be d i f f icu l t t o overcome.

Many trading systems operated by investment f i rms are developed by special ist th ird-party ent i t ies whichl icense their products to numerous part ic ipants across the market; th is is especial ly so for of f-the-shelfexecut ion algori thms used by many investment managers. Such special ist development, through comparat iveadvantage, enables higher qual i ty and more eff ic ient systems to be created than would otherwise be possible,thus resu l t ing in m ore consistent and e f f ic ient markets and great er pro f i t ab i l i ty fo r a l l par t ic ipants.

Economica l ly , i f par t ic ipants do choose t o comply w i t h t he separate deve lopment requ i rement , th is would m eanthat specialist systems developers would suffer a large fall in demand; possibly leading to unnecessary businessfai lures. Accordingly, th is would require individual part ic ipants to develop their own systems, thereby losing al lef f ic iency benef i ts of the comparat ive advantage current ly enjoyed by special ist th ird party developers sinceeach would lack the consol idated expert ise or the economies of scale to undertake the extensive research anddevelopment of successful syst ems and algori t hmic product s.

From the v iew poin t o f opt imi sing proport iona l i ty , t he requ irement for t he use o f separate ly deve loped systemswould a lso resu l t in t he arb i t rary wi t hho lding of t he aggregat i on exempt ion due to the inc identa l fact that theindividual appl icant for the exemption had l icensed the same system as the relevant owned ent i ty. This wouldhave the counterintuit ive result of barring the possibi l i ty of an Owned Ent i ty Exemption, even though theindividual and owned ent i ty s systems were, in pract ice, ent ire ly separate and operated independent ly of eachother.

The requ irement , as current ly formula ted, is not a su i tab le means by which to ach ieve the ob ject ive o fprevent i ng surrept i t ious col laborat ion and goes far beyond t hat which is necessary by imposing undue cost s uponpart ic ipant s and the m arket s as a whole.

AIMA, therefore, proposes that the owned ent i ty exemption condit ion be amended so that, as long as thet r ad ing system s operate independent ly and no in form at ion may be l eaked betw een them, i t should not mat t erwhet her t he syst ems wer e orig inal ly developed by a common party.

v) Requirement to Have and Enforce Writ ten Procedures to Preclude Each Other from Having Knowledge of,Gaining Access to or Receiving Data about Trades of the Other

AIMA has concerns that the requirement and examples contained within Proposed rule 151.7(b)(1)( i)(C) areoverly broad and t oo vague.

Certa in o f our m embers, in part icu lar , have inqu i red as to w hat is meant by the t erms document r out ing andwhether t he not ion o f separate physica l locat ions is simply a requ i rement for f i rms to document t he fact t hatal l c l ients must be geographical ly separate. In addit ion, we would quest ion whether the necessity forprocedures to main ta in t he independence o f the i r act iv i t ies is consistent wi t h t he pr inc ipal r equ i rement under

Proposed rule 151.7(b)(1)( i)(C), which relates not to independence of act iv i t ies, but to knowledge, access andt rade data. AIMA s mem bers would be especial ly gratef ul for f urt her guidance t o be provided by t he CFTC on

this procedural cri terion, in a similar manner as has been undertaken, for example, for Proposed rule151.7(b)(1)( i)(A).

AIMA would also be grateful for clari f icat ion of the how the cri terion within Proposed rule 151.7(b)(1)( i)(C)wou ld in te ract w i th tha t w i th in Proposed rule 151.7(b)(1)( i)(A). For example, page 26 of t he Not i ce assert s t hatthe CFTC does not consider knowledge of overal l end of day posit ion information to necessari ly const i tute

knowledge o f t r ad ing decisions , t here fore sat is fy ing the cr i t e r ia wi th in Proposed rule 151.7(b)(1) (i) (A). AIMA is

7/31/2019 58303 Jiri Krol

4/5

4

in terested to d iscover whether th is would mean that the prov is ion o f end o f day posi t ion in format ion ( incompliance with the above Proposed rule on having knowledge of t rading decisions) would st i l l result in non-compliance with Proposed rule 151.7(b)(1)( i)(C) regarding the adopt ion of procedures to prevent knowledgeof / access to / rece ip t o f data on the t rad ing o f t he other ent i t y .

b) Violat ion of Laws Exempt ionAIMA welcomes the CFTCs provisions for the exemption from aggregat ion of si tuat ions when the sharing ofinformation between a person and an owned ent i ty regarding posit ion information would result in the violat ionof federal law. We are part icul arly grat eful t hat t he CFTC has clari f ied that t he exempt ion appl ies in si t uat i onswhen the sharing of such information would result in a reasonable r isk of a breach of laws or regulat ions, andis extended t o include both state r ules and laws of a foreign j urisdict ion.

Our m embers, however , have cert ain suggest ions which t hey would l ike t o be considered by t he CFTC:

i ) Ext ension t o a l l laws, regula t ions, admin i st ra t ive ru l ings and court ordersThe Notice current ly provides exemptions in si tuat ions which r isk a breach of the laws or regulat ions of the US

federal government , US st ates and law s of a f oreign jur isdict ion. Thi s is a posit ive st ep. However, t o ensure t heequal app l ica t ion o f the exempt ion to a l l market par t ic ipants, AIMA be l ieves that i t is important fo r i t to beexpanded to include al l laws, regulat ions, administrat ive rul ings and court orders from any governmentalauthori t y which has j urisdict ion over t he persons seeking to ut i l ise i t .

i i ) Requir ement t o gain an opini on of CounselAIMA understands the pet i t ioners concerns regarding the requirement to obtain an opinion of Counsel - whichhas been conf irmed by the CFTC within the Not ice - and agrees that th is requirement may impose anunreasonable and disproport ionate burden on market part ic ipants seeking to ut i l ise the exempt ion.

We would argue that legal opinions are typical ly issued by law f irms and attorneys on specif ic matters such asenforceabi l i ty or securi ty interests and may not be suitable for the issue of vio lat ion of laws. In part icular, lawfirms may not be wil l ing, or may not be able, to provide an opinion. This lack of certainty may disincent ivise

part ic ipants f rom apply ing in good fa i t h for a prospect ive exempt ion i n t he f i rs t p lace.AIMA would propose that the requirement of an opinion of counsel be replaced by a support ing legaldocumentat ion requ i rement . Such support ing lega l documentat ion cou ld inc lude:

a legal opinion prepared by int ernal or ext ernal counsel; a legal memor andum prepared by int ernal or exter nal counsel; a copy of a court order; a copy of an administ rat ive rul ing; or any other document(s) which the CFTC considers would enable i t to review the facts and circumstances in

support o f t he c la imed exempt ion.

Maximising the f lexibi l i ty of the regime in th is way would place a more proport ionate burden on appl icants,whilst st i l l achieving the CFTCs legislat ive aim of providing rel iable off ic ia l documentat ion by which to evaluateof appl ica t ions for exempt i on.

c) Exempt ion for Independent Account Cont roll ers (IACs)As the CFTC wil l be aware, investment funds may be structured in numerous dif ferent ways, including LimitedLiabi l i ty Companies and Limited Partnerships. AIMA, therefore, welcomes the addit ion of the manager ormanaging member o f a l im i ted l i ab i l i ty company to t he def in i t ion o f an IAC. We would however, l i ke to s t ressthat the ru les conta ined wi th in the Not ice do not take the impact o f the ext ra terr i to r ia l app l ica t ion o f theCFTCs rules into account.

A great number of foreign investment funds and ent i t ies could potent ia l ly be treated as commodity pools, CTAsor CPOs - despit e not being organised as such - and i t is vi ta l for such commodit y pools which are not st ruct uredas l im it ed l iabi l i t y companies or part nerships t o be able to m ake use of the IAC exempt ion. For t h is reason,

AIMA proposes that the CFTCs rules on the exemption of IACs from the aggregation regime should ensure thatany ent i ty or person is included in the def in it ion of an IAC where that ent i ty or person has a role in respect toan ent i ty wh ich is substant ia l ly equ ivalent t o t he ro le o f a genera l par tner w i t h in a l imi t ed l iab i l i ty par tnersh ipor manager/ managing member wi t h in a l imi t ed l iab i l i ty company.

7/31/2019 58303 Jiri Krol

5/5

5

3. ConclusionOveral l , AIMA supports the pol icy object ives of the proposed rules contained within the Not ice. However, i t isvita l for industry part ic ipants that proport ional i ty is ensured and legal certainty maximised so that they are able

to cont inue providing benef i ts, such as l iquidity, to the commodit ies market and may conf ident ly budget for,develop and adopt syst ems and procedures accordingly t o ensure t heir ef f ic i ent compliance.

We thank you for th is opportunity to comment on the Commissions proposed rules and are, of course, happy todiscuss any of our comm ent s wi t h you in great er det ai l i f t h is would assist .

Yours sincer ely,

Ji KrlDirector of Government & Regulatory Affairs