On November 4, 2015, the CME Group (comprised of CME, CBOT, NYMEX & COMEX) issued a Market Regulation Advisory Notice (Advisory) providing some helpful interpretative guidance on the exchanges’ rules regarding position limits and exemptions (Rule 559), position accountability (Rule 560), and position limit violations (Rule 562). Additionally, the Advisory provides market participants a list of frequently asked questions, some with examples, addressing situations regarding the CME Group’s interpretation of how options on futures are counted for position limits, how to aggregate contracts, and how to obtain an exemption from an exchange’s position limits.

As the Commodity Futures Trading Commission (CFTC) continues to grapple with its proposed position limits and position aggregation rules, the possibility of the CFTC delegating more authority under those rules to the exchanges makes it all the more important for market participants to understand how the CME Group interprets and implements its own rules.

While the Advisory includes much information and is worth review in its entirety, some key points include the following:

• An explanation of the difference between “position limits” (which a market participant may not exceed without an approved exemption) and “position accountability levels” (which a market participant may exceed upon exchange of approval, subject to making certain relevant information available to the exchange’s regulatory department).

• An explanation of how aggregation of positions works on the exchanges, with a detailed example.

• An explanation of how options on futures are counted for position limit purposes by aggregating them into the underlying futures contract pursuant to their delta equivalent value.

• A definition for a “diminishing balance contract” and how to calculate its futures equivalent for purposes of position limits, including specific examples.

• An explanation that a clearing member shall not be in violation of the rules if it carries customer positions in excess of position limits for such reasonable period of time (generally one business day) as the firm may require to discover and liquidate the excess positions.

• The method for aggregating accounts with respect to position limits and position accountability levels, including exceptions to this requirement.

• The method for obtaining an exemption from position limits.

Additionally, the CME Group briefly explains: (1) that position limits are effective intraday; (2) that violation of a position limit is a strict liability offense; and (3) that positions established as a result of Trading at Settlement (TAS), Trading at Marker (TAM), and Basis Trade at Index Close (BTIC) are also subject to position limits.

The full text of the CME Group’s Advisory can be found here.