Aggregating Positions Across Related Sugar Futures Clients
A broker's Karachi office has three sugar futures positions in the same near-month deliverable contract: Client A, a sugar mill, holds 1,300 lots; Client B, a wholly owned trading subsidiary of Client A, holds 900 lots; and the broker's proprietary desk holds 400 lots. The exchange's position limit is 2,000 lots per client and 1,000 lots for a broker's proprietary account, with aggregation for accounts acting in concert or under common control. The sales head argues that A and B are separate legal entities with separate bank accounts, so each is under the limit, and that the proprietary position is "just hedging." The risk manager notes that A's treasury officer places all orders for both entities and that B's address and board overlap with A's. New buy orders for 300 lots for A are pending.
1. Does the position limit aggregate Clients A and B? Calculate the effective positions and identify any breach.
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The exchange limit is per client and aggregates accounts under common control or acting in concert. A and B are separate legal persons, but the facts indicate common control: B is wholly owned by A, the same treasury officer places all orders for both, and their addresses and boards overlap. On these facts, A and B should be treated as one economic client.
Combined position: 1,300 + 900 = 2,200 lots. That is already 200 lots above the 2,000-lot client limit.
The proprietary 400 lots are separate from client positions but must be measured against the 1,000-lot proprietary limit. It is within that limit, but the "hedging" label must be supported by documented exposure. Separate bank accounts do not defeat aggregation; substance and control matter.
2. What should the broker do with the pending 300-lot buy order and the existing positions?
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The broker should reject the pending 300-lot buy order for A. It should not accept any order that increases the aggregated A/B position. It should notify A and B in writing that they are treated as a single client for position-limit purposes and that the combined position exceeds the limit.
The broker should require a reduction plan to bring the combined position to 2,000 lots or below within the exchange's prescribed cure period. It should not execute sell orders for one entity matched by buys for the other unless the transactions genuinely reduce the aggregate. Any reduction should be monitored daily and documented. The risk committee and legal should be involved before any further orders are accepted from either entity.
3. What reporting and control actions follow from the breach?
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The breach should be reported to the exchange and SECP as required, with a timeline, order records and the aggregation analysis. The broker should preserve emails, board records and order logs. It should also review onboarding: did the broker disclose the aggregation rule and obtain an undertaking from A and B?
The proprietary desk's "hedging" label should be tested against documented exposure; if the position is directional, it must be managed within the proprietary limit and conflicts of interest addressed. If the broker knowingly facilitated the breach, that is a serious conduct matter requiring escalation. Remediation should include enhanced monitoring of related-account groups and training for sales staff on aggregation rules.