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CFTC rule 1.46

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					IS THIS INTERPRETATION CORRECT?????

Per this letter and the rule itself, an interpretation follows:


CFTC Letter No. 00-30

February 23, 2000
Rule 1.46 was originally adopted by the Commission's predecessor agency, the
Commodity Exchange Authority, in 1948 4 "in aid of the prohibition against wash
sales and fictitious sales." 5 The rule serves to protect market integrity, helping to
ensure the accuracy of market information, including actual open interest. Accurate
reporting of open interest provides a guide to the relative liquidity of the market,
benefiting all who trade in the futures and options markets, or who rely upon prices
in those markets for pricing transactions in cash market channels. In addition, the
rule safeguards customers from certain abusive practices relating to the holding open
of offsetting positions, such as wrongful allocation of trades, concealment of losses,
or unnecessary commission-fee generation. The rule also serves to protect against
the inadvertent holding of a position into the delivery period.6
4 13 Fed. Reg. 7820, 7840 (December 18, 1948).
5 57 Fed. Reg. 34533 at 34535 (August 5, 1992).
6 Id.
The link for the above letter is: http://www.cftc.gov/tm/letters/00letters/tm00-
30.htm


THE RULE ITSELF:

[Code of Federal Regulations]
[Title 17, Volume 1]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 17CFR1.46]

[Page 88-89]

TITLE 17--COMMODITY AND SECURITIES EXCHANGES

CHAPTER I--COMMODITY FUTURES TRADING COMMISSION

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT--Table of
Contents

Sec. 1.46 Application and closing out of offsetting long and short positions.

(a) Application of purchases and sales. Except with respect to purchases or sales
which are for omnibus accounts, or where the customer has instructed otherwise,
any futures commission merchant who, on or subject to the rules of a designated
contract market or registered derivatives transaction execution facility:
(1) Purchases any commodity for future delivery for the account of any customer
when the account of such customer at the time of such purchase has a short position
in the same future of the same commodity on the same market;
(2) Sells any commodity for future delivery for the account of any customer when
the account of such customer at the time of such sale has a long position in the
same future of the same commodity on the same market;
(3) Purchases a put or call option for the account of any option customer when the
account of such option customer at the time of such purchase has a short put or call
option position with the same underlying futures contract or same underlying
physical, strike price, expiration date and contract market as that purchased; or
(4) Sells a put or call option for the account of any option customer when the
account of such option customer at the time of such sale has a long put or call option
position with the same underlying futures contract or same underlying physical,
strike price, expiration date and contract market as that sold shall on the same day
apply such purchase or sale against such previously held short or long futures or
option position, as the case may be, and shall, for futures transactions, promptly
furnish such customer a statement showing the financial result of the transactions
involved and, if applicable, that the account was introduced to the futures
commission merchant by an introducing broker and the names of the futures
commission merchant and introducing broker.
(b) Close-out against oldest open position. In all instances wherein the short or long
futures or option position in such customer's or option customer's account
immediately prior to such offsetting purchase or sale is greater than the quantity
purchased or sold, the futures commission merchant shall apply such offsetting
purchase or sale to the oldest portion of the previously held short or long position:
Provided, That upon specific instructions from the customer or option customer the
offsetting transaction shall be applied as specified by the customer or option
customer without regard to the date of acquisition of the previously held position.
Such instructions may also be accepted from any person who, by power of attorney
or otherwise, actually directs trading in the customer's or option customer's account
unless the person directing the trading is the futures commission merchant
(including any partner thereof), or is an officer, employee, or agent of the futures
commission merchant. With respect to every such offsetting transaction that, in
accordance with such specific instructions, is not applied to the oldest portion of the
previously held position, the futures commission merchant shall clearly show on the
statement issued to the customer or option customer in connection with the
transaction, that because of the specific instructions given by or on behalf of the
customer or option customer the transaction was not applied in the usual manner,
i.e., against the oldest portion of the previously held position. However, no such
showing need be made if the futures commission merchant has received such
specific instructions in writing from the customer or option customer for whom such
account is carried.
(c) In-and-out trades; day trades. Notwithstanding the provisions of paragraphs (a)
and (b) of this section shall not be deemed to require the application of purchases or
sales closed out during the same day (commonly known as ``in-and-out trades'' or
``day trades'') against short or long positions carried forward from a prior date.
(d) Exceptions. The provisions of this section shall not apply to:
(1) Purchases or sales of commodity options constituting ``bona fide hedging
transactions'' pursuant to rules of the contract market which have been adopted in
accordance with the requirements of Sec. 1.61(b) and approved by the Commission
pursuant to; section 5a(a)(12)(A) of the Act Provided, That no contract market or
futures commission merchant shall permit such option positions to be offset other
than by open and competitive execution in the trading pit or ring provided by the
contract market, during the regular hours prescribed by the contract market for
trading in such commodity option.
(2) Purchases or sales constituting ``bona fide hedging transactions'' as defined in
Sec. 1.3(z); nor
(3) Sales during a delivery period for the purpose of making delivery during such
delivery period if such sales are accompanied by instructions to make delivery
thereon, together with warehouse receipts or other documents necessary to
effectuate such delivery.
(4)-(7) [Reserved]
(8) Purchases or sales held in error accounts, including but not limited to floor broker
error accounts, and purchases or sales identified as errors at the time they are
assigned to an account that contains other purchases or sales not identified as errors
and held in that account (``error trades''), provided that:
(i) Each error trade does not offset another error trade held in the same account;
(ii) Each error trade is offset by open and competitive means on or subject to the
rules of a contract market by not later than the close of business on the business day
following the day the error trade is discovered and assigned to an error account or
identified as an error trade, unless at the close of business on the business day
following the discovery of the error trade, the relevant market has reached a daily
price fluctuation limit and the trader is unable to offset the error trade, in which case
the error trade must be offset as soon as practicable thereafter; and
(iii) No error trade is closed out by transferring such an open position to another
account also controlled by that same trader.
(e) The statements required by paragraph (a) of this section may be furnished to the
customer or the person described in Sec. 1.33(d) by means of electronic
transmission, in accordance with Sec. 1.33(g).

(Approved by the Office of Management and Budget under control number
3038-0007)

(Secs. 4g, 5, 42 Stat. 1000, 49 Stat. 1496; 7 U.S.C. 6g, 7; secs. 4g, 5,
8a; 7 U.S.C. 6g, 7, 12a)

[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 54524, Nov. 3, 1981; 46
FR 63035, Dec. 30, 1981; 47 FR 57009, Dec. 22, 1982; 48 FR 35289, Aug.
3, 1983; 49 FR 19972, May 11, 1984; 50 FR 26, Jan. 2, 1985; 51 FR 17473,
May 13, 1986; 53 FR 614, Jan. 11, 1988; 56 FR 14314, Apr. 9, 1991; 57 FR
55085, Nov. 24, 1992; 59 FR 5526, Feb. 7, 1994; 66 FR 53517, Oct. 23,
2001]


The Link for the above regulation is:
http://a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.access.gpo.gov/
cfr_2002/aprqtr/17cfr1.46.htm


Some Definitions that are used above are:

(k) Customer; commodity customer. These terms have the same meaning and refer
to a customer trading in any commodity named in the definition of commodity
herein: Provided, however, An owner or holder of a proprietary account as defined in
paragraph (y) of this section shall not be deemed to be a customer within the
meaning of section 4d of the Act, the regulations that implement sections 4d and 4f
of the Act and Sec. 1.35, and such an owner or holder of such a proprietary account
shall otherwise be deemed to be a customer within the meaning of the Act and Secs.
1.37 and 1.46 and all other sections of these rules, regulations and orders which do
not implement sections 4d and 4f.
(p) Futures commission merchant. This term means:
(1) Individuals, associations, partnerships, corporations, and trusts engaged in
soliciting or in accepting orders for the purchase or sale of any commodity for future
delivery on or subject to the rules of any contract market and that, in or in
connection with such solicitation or acceptance of orders, accepts any money,
securities, or property (or extends credit in lieu thereof) to margin, guarantee or
secure any trades or contracts that result or may result therefrom; and
(2) Shall include any person required to register as a futures commission merchant
under the Act by virtue of part 32 or part 33 of this chapter.


(y) Proprietary account. This term means a commodity futures or commodity option
trading account carried on the books and records of an individual, a partnership,
corporation or other type association (1) for one of the following persons, or (2) of
which ten percent or more is owned by one of the following persons, or an aggregate
of ten percent or more of which is owned by more than one of the following persons:
(i) Such individual himself, or such partnership, corporation or association itself;
(ii) In the case of a partnership, a general partner in such partnership;
(iii) In the case of a limited partnership, a limited or special partner in such
partnership whose duties include:
(A) The management of the partnership business or any part thereof,
(B) The handling of the trades or customer funds of customers or option customers
of such partnership,
(C) The keeping of records pertaining to the trades or customer funds of customers
or option customers of such partnership, or
(D) The signing or co-signing of checks or drafts on behalf of such partnership;
(iv) In the case of a corporation or association, an officer, director or owner of ten
percent or more of the capital stock, of such organization;
(v) An employee of such individual, partnership, corporation or association whose
duties include:
(A) The management of the business of such individual, partnership, corporation or
association or any part thereof,
(B) The handling of the trades or customer funds of customers or option customers
of such individual, partnership, corporation or association,
(C) The keeping of records pertaining to the trades or customer funds of customers
or option customers of such individual, partnership, corporation or association, or
(D) The signing or co-signing of checks or drafts on behalf of such individual,
partnership, corporation or association;
(vi) A spouse or minor dependent living in the same household of any of the
foregoing persons;
(vii) A business affiliate that directly or indirectly controls such individual,
partnership, corporation or association.
(viii) A business affiliate that, directly or indirectly is controlled by or is under
common control with, such individual, partnership, corporation or association.
Provided, however, That an account owned by any shareholder or member of a
cooperative association of producers, within the meaning of sections 5(5) and 6a of
the Act, which association is registered as a futures commission merchant and
carries such account on its records, shall be deemed to be an account of a customer
or option customer and not a proprietary account of such association, unless the
shareholder or member is an officer, director or manager of the association.

The link for the above definitions is:
http://a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.access.gpo.gov/
cfr_2002/aprqtr/17cfr1.3.htm


I would like to see if any one agrees with these interpretations:

This rule basically was implemented to maintain open interest integrity and thus
directs the brokerage (Futures commission merchant) to dispose of the oldest
existing positions if an offsetting order is given by the customer without specific
instruction to do otherwise.

According to the definitions we are the customer, and RJ O’Brien or Lind Waldock are
the Futures commission merchants. And these are instructions to the Futures
commission merchants not to the customers (us) for handling the trades and
accounting of those trades. We the customer have the right and the ability to direct
the Futures Commission merchants as to our intentions.

The reason that one might not want to dispose of existing position could be that they
are hedging futures against equities as one strategy, while executing a speculative
futures strategy. OR Another reason is that one would be trading two independent
strategies in individual accounts without the intention of using the positions from one
account to offset the position in the other account to close out. Thus this maintains
the integrity of open interest.


Thus R.J. O’Brien and Lind Waldock are getting confirmation of there instructions so
that they can properly maintain there records and not doing anything against the
customers desires with the documents they have the customer sign.

The RJO Related Account Authorization states “Customer acknowledges the his/her
separate accounts will not contain long positions in one account and OFFSETTING
short positions in another account unless such accounts are INDEPENDTLY traded or
unless one account is a Speculative Account and the other is a Hedge Account. In
any event, Customer understands that positions in separate accounts cannot be
transferred from one account to another account if such transfer would result in
offsetting positions.” This statement refers to us as the Customer. It basically
summarizes that our intentions are not to be in one speculate strategy in one
account and another speculative strategy in another account and expect them to
offset one another OR one is used for hedging. Regardless it is not our intention to
offset positions in one account with positions in another account, thus this maintains
the integrity of the open interest.

Lind Waldock’s letter is somewhat misleading in that it states “I understand the
exchange regulation section 1.46 that does not allow me to be long and short in the
same contract and month at the same time. It is not my intention to be long and
short in the same commodity in the the same month at the same time.” Actually we
the customer can direct them otherwise. However, this does give them the specific
instructions that it is not our intention to be long and short at the same time and
thus to follow the rules laid out by 1.46. It does not address separate accounts,
however.

The statements posted in the forum are somewhat unnerving in that they state that
it is illegal to be long and short in separate accounts. Is this really true? Is this
interpretation missing something? And why would Dean@TSSec, Forum
administrator of TradeStation Securities Support and a TradeStation Securities
representative advise us via a posting in the TradeStation Securities Support forum
that “Currently you will need 2 accounts for strategy trading that can be
simultaneously on both sides of the market” in response to a question clearly about
ES futures trading, per the following:

TradeStation 7 Support Discussions
Order Execution: Automated Execution
New Topic

multiple emini automated systems: one account

gopher

27 Posts Posted - 06/10/2003 : 17:07:11

Can you please review all the options on how i can get multiple SP e mini systems
automated in one account? What has worked best for everyone would be helpfull as
well.

ie can you trade ESM03, ESM03.E, and @ES?(any other?)
does stacking systems on one chart work?
does combining all easy language into one system work?

I heard about one accont for long positions, one account for short positions, uggg!

any help, thanks


Dean@TSSec

1201 Posts Posted - 06/11/2003 : 08:26:27

gopher,

Currently you will need 2 accounts for strategy trading that can be simultaneously on
both sides of the market. We are working on removing this limitation. Otherwise, you
can stack strategies.

The continuous contract @ES is not tradable, you must specify the month.

I'll leave it other traders to discuss what works well for them.

Dean Corry
Registered Representative, TradeStation Securities

				
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