e9-6187

FR Doc E9-6187[Federal Register: March 24, 2009 (Volume 74, Number 55)]

[Proposed Rules]

[Page 12282-12286]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr24mr09-19]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 150

RIN 3038-AC40

Concept Release on Whether To Eliminate the Bona Fide Hedge

Exemption for Certain Swap Dealers and Create a New Limited Risk

Management Exemption From Speculative Position Limits

AGENCY: Commodity Futures Trading Commission.

ACTION: Advance notice of proposed rulemaking; request for public

comment.

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SUMMARY: In June and July of 2008, the Commodity Futures Trading

Commission (''Commission'') issued a special call for information from

swap dealers and index traders regarding their over-the-counter

(``OTC'') market activities. In September of 2008, the Commission

released a ``Staff Report on Commodity Swap Dealers and Index Traders

with Commission Recommendations'' (the ``September 2008 Report'') with

several preliminary Commission recommendations. Recommendation five of

the September 2008 Report directs the staff to develop an advance

notice of proposed rulemaking that would review whether to eliminate

the bona fide hedge exemption for swap dealers and replace it with a

limited risk management exemption that is conditioned upon, among other

things, an obligation to report to the CFTC and applicable self-

regulatory organizations when certain noncommercial swap clients reach

a certain position level and/or a certification that none of a swap

dealer's noncommercial swap clients exceed specified position limits in

related exchange-regulated commodities.\1\

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\1\ Staff Report on Commodity Swap Dealers and Index Traders

with Commission Recommendations, Commodity Futures Trading

Commission, September 2008, at 6.

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This concept release reviews the underlying statutory and

regulatory background, as well as the regulatory history and relevant

marketplace developments, as described in the September 2008 Report,

which led to the foregoing recommendation. It then poses a number of

questions designed to help inform the Commission's decision as to

whether to proceed with the recommendation to eliminate the bona fide

hedge exemption for swap dealers and replace it with a conditional

limited risk management exemption; and if so, what form the new limited

risk management exemptive rules should take and how they might be

implemented most effectively.

DATES: Comments must be received on or before May 26, 2009.

ADDRESSES: Comments should be submitted to David Stawick, Secretary,

Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

Street, NW., Washington, DC 20581. Comments also may be sent by

facsimile to (202) 418-5521, or by electronic mail to

[email protected] Reference should be made to ``Whether to Eliminate

the Bona Fide Hedge Exemption for Certain Swap Dealers and Create a New

Limited Risk Management Exemption from Speculative Position Limits.''

Comments may also be submitted by connecting to the Federal eRulemaking

Portal at http://www.regulations.gov and following comment submission

instructions.

FOR FURTHER INFORMATION CONTACT: Donald Heitman, Senior Special

Counsel, Division of Market Oversight, Commodity Futures Trading

Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,

DC 20581, telephone (202) 418-5041, facsimile number (202) 418-5507,

electronic mail [email protected]

[[Page 12283]]

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory Framework

Speculative position limits have been a tool for the regulation of

the U.S. futures markets since the adoption of the Commodity Exchange

Act of 1936. Section 4a(a) of the Commodity Exchange Act (``Act''), 7

U.S.C. 6a(a), now provides \2\ that excessive speculation in any

commodity under contracts of sale of such commodity for future delivery

made on or subject to the rules of contract markets or derivatives

transaction execution facilities, or on electronic trading facilities

with respect to a significant price discovery contract, causing sudden

or unreasonable fluctuations or unwarranted changes in the price of

such commodity, is an undue and unnecessary burden on interstate

commerce in such commodity.

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\2\ References in Sec. 4a(a) to ``electronic trading

facilitie(s) with respect to a significant price discovery

contract'' were added to the CEA by Public Law 110-246, May 22, 2008

(the 2008 Farm Bill).

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Accordingly, section 4a(a) of the Act provides the Commission with

the authority to fix such limits on the amounts of trading which may be

done or positions which may be held by any person under contracts of

sale of such commodity for future delivery on or subject to the rules

of any contract market or derivatives transaction execution facility,

or on an electronic trading facility with respect to a significant

price discovery contract, as the Commission finds are necessary to

diminish, eliminate, or prevent such burden.

This longstanding statutory framework providing for Federal

speculative position limits was supplemented with the passage of the

Futures Trading Act of 1982, which added section 4a(e) to the Act. That

provision acknowledged the role of exchanges in setting their own

speculative position limits and provided that limits set by exchanges

and approved by the Commission would be subject to Commission

enforcement.

Finally, the Commodity Futures Modernization Act of 2000 (``CFMA'')

established designation criteria and core principles with which a

designated contract market (``DCM'') must comply to receive and

maintain designation. Among these, Core Principle 5 in section 5(d) of

the Act states: Position Limitations or Accountability--To reduce the

potential threat of market manipulation or congestion, especially

during trading in the delivery month, the board of trade shall adopt

position limitations or position accountability for speculators, where

necessary and appropriate.

B. Regulatory Framework

The regulatory structure based upon these statutory provisions

consists of three elements, the levels of the speculative position

limits, certain exemptions from the limits (for hedging, spreading/

arbitrage, and other positions), and the policy on aggregating commonly

owned or controlled accounts for purposes of applying the limits. This

regulatory structure is administered under a two-pronged framework.

Under the first prong, the Commission establishes and enforces

speculative position limits for futures contracts on a limited group of

agricultural commodities. These Federal limits are enumerated in

Commission regulation 150.2, and apply to the following futures and

option markets: Chicago Board of Trade (``CBOT'') corn, oats, soybeans,

wheat, soybean oil, and soybean meal; Minneapolis Grain Exchange

(``MGEX'') hard red spring wheat and white wheat; ICE Futures U.S.

(formerly the New York Board of Trade) cotton No. 2; and Kansas City

Board of Trade (``KCBT'') hard winter wheat.

Under the second prong, individual DCMs establish and enforce their

own speculative position limits or position accountability provisions

(including exemption and aggregation rules), subject to Commission

oversight and separate authority to enforce exchange-set speculative

position limits approved by, or certified to, the Commission. Thus,

responsibility for enforcement of speculative position limits is shared

by the Commission and the DCMs.\3\

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\3\ Provisions regarding the establishment of exchange-set

speculative position limits were originally set forth in CFTC

regulation 1.61. In 1999, the Commission simplified and reorganized

its rules by relocating the substance of regulation 1.61's

requirements to part 150 of the Commission's rules, thereby

incorporating within part 150 provisions for both Federal

speculative position limits and exchange-set speculative position

limits (see 64 FR 24038, May 5, 1999). With the passage of the

Commodity Futures Modernization Act in 2000 and the Commission's

subsequent adoption of the Part 38 regulations covering DCMs in 2001

(66 FR 42256, August 10, 2001), Part 150's approach to exchange-set

speculative position limits was incorporated as an acceptable

practice under DCM Core Principle 5--Position Limitations and

Accountability. Section 4a(e) provides that a violation of a

speculative position limit set by an exchange rule that has been

approved by the Commission, or certified by a registered entity

pursuant to Sec. 5c(c)(1) of the Act, is also a violation of the

Act. Thus, the Commission can enforce directly violations of

exchange-set speculative position limits as well as those provided

under Commission rules.

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Commission regulation 150.3, ``Exemptions,'' lists certain types of

positions that may exceed the Federal speculative position limits. In

particular, under Sec. 150.3(a)(1), bona fide hedging transactions, as

defined in Sec. 1.3(z) of the Commission's regulations, may exceed the

limits.\4\ The Commission has periodically amended the exemptive rules

applicable to Federal speculative position limits in response to

changing conditions and practices in futures markets. These amendments

have included an exemption from speculative position limits for the

positions of multi-advisor commodity pools and other similar entities

that use independent account controllers,\5\ and an amendment to extend

the exemption for positions that have a common owner but are

independently controlled to include certain commodity trading

advisors.\6\ In 1987, the Commission also issued an agency

interpretation clarifying certain aspects of the hedging definition.\7\

The Commission has also issued guidance with respect to exchange

speculative limits, including guidelines regarding the exemption of

risk-management positions from exchange-set speculative position limits

in financial futures contracts.\8\ However, the last significant

amendment to the Commission's exemptive rules was implemented in 1991.

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\4\ Section 4a(c) of the Act specifically provides that

speculative position limit rules issued by the Commission shall not

apply to bona fide hedging transactions or positions as such terms

shall be defined by the Commission.

\5\ 53 FR 41563 (October 24, 1988).

\6\ 56 FR 14308 (April 9, 1991).

\7\ 52 FR 27195 (July 20, 1987).

\8\ 52 FR 34633 (September 14, 1987).

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C. Regulatory History and Marketplace Developments

The intervening 18 years have seen significant changes in trading

patterns and practices in derivatives markets. As noted in the

September 2008 Report, there has been an influx of new traders into the

market, particularly commodity index traders (including pension and

endowment funds, as well as individual investors participating in

commodity index-based funds or trading programs). These investors are

seeking exposure to commodities as an asset class, through passive,

long term investment in commodity indexes, as a way of diversifying

portfolios that might otherwise be limited to stocks and interest rate

instruments.\9\ New market participants also include swap dealers

seeking to hedge price risk from OTC

[[Page 12284]]

trading activity (frequently opposite the same commodity index traders

described in the preceding sentences).

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\9\ The argument has also been made that commodities act as a

general hedge of liability obligations that are linked to inflation.

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As described in the September 2008 Report, the development of the

OTC swap industry is related to the exchange-traded futures and options

industry in that a swap agreement \10\ can either compete with or

complement futures and option contracts.\11\ Market participants often

use swaps because they can offer the ability to customize contracts to

match particular hedging or price exposure needs. In contrast, futures

markets typically involve standardized contracts that, while traded in

a highly liquid market, may not precisely meet the needs of a

particular hedger or speculator.

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\10\ A swap is a privately negotiated exchange of one asset or

cash flow for another asset or cash flow. In a commodity swap, at

least one of the assets or cash flows is related to the price of one

or more commodities.

\11\ The bilateral contracts that swap dealers create can vary

widely, from terms tailored to meet the needs of a specific

customer, to relatively standardized contracts.

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Swap dealers, often affiliated with a bank or other large financial

institution, act as swap counterparties to both commercial firms

seeking to hedge price risks and speculators seeking to gain price

exposure. The swap dealer, in turn, utilizes the more standardized

futures markets to manage the net risk resulting from its OTC market

activities.\12\ In addition, some swap dealers also deal directly in

the merchandising of physical commodities.

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\12\ Because swap agreements can be highly customized, and the

liquidity for a particular swap contract can be low, swap dealers

may also use other swaps and physical market positions, in addition

to futures, to offset the residual risks of their swap books.

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Beginning in 1991, the Commission staff granted bona fide hedge

exemptions, in various agricultural futures markets subject to Federal

speculative position limits, to a number of swap dealers who were

seeking to manage price risk on their books as a result of their

serving as market makers to their OTC clients. The first such hedge

exemption involved a large commodity merchandising firm that engaged in

commodity related swaps as a part of a commercial line of business. The

firm, through an affiliate, wished to enter into an OTC swap

transaction with a qualified counterparty (a large pension fund)

involving an index based on the returns afforded by investments in

exchange-traded futures contracts on certain non-financial commodities

\13\ meeting specified criteria. The commodities making up the index

included wheat, corn and soybeans, all of which were (and still are)

subject to Federal speculative position limits. As a result of the

swap, the swap dealing firm would, in effect, be going short of the

index. In other words, it would be required to make payments to the

pension fund counterparty if the value of the index was higher at the

end of the swap payment period than at the beginning. In order to

protect itself against this risk, the swap dealer planned to establish

a portfolio of long futures positions in the commodities making up the

index, in such amounts as would replicate its exposure under the swap

transaction. By design, the index did not include contract months that

had entered the delivery period and the swap dealer, in replicating the

index, stated that it would not maintain futures positions based on

index-related swap activity into the spot month (when physical

commodity markets are most vulnerable to manipulation and attendant

unreasonable price fluctuations). With this risk mitigation strategy,

the swap dealer's composite return on its futures portfolio would

offset the net payments that the dealer would be required to make to

the pension fund counterparty.

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\13\ The commodities comprising such indexes typically may

include energy commodities, metals, world agricultural commodities

(coffee, sugar, cocoa) and domestic agricultural commodities subject

to Federal speculative position limits.

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The futures positions the swap dealer would have to establish to

cover its exposure on the swap transaction's domestic agricultural

component would be in excess of the speculative position limits on

wheat, corn and soybeans. Accordingly, the swap dealer requested, and

was granted, a hedge exemption for those futures positions, which

offset risks directly related to the OTC swap transaction. The swap

transaction allowed the pension fund to add commodities exposure to its

portfolio without resorting to exchange-based futures contracts (and

their applicable position limits) through the OTC trade with the swap

dealer. The pension fund could have gained exposure to commodities

directly through exchange-based futures contracts, but would, of

course, have been subject to applicable position limits.\14\

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\14\ The pension fund would have been limited in its ability to

take on this commodities exposure directly, by putting on the long

futures position itself, because the pension fund--having no

offsetting price risk incidental to commercial cash or spot

operations--would not have qualified for a hedge exemption with

respect to the position. (See Sec. 1.3(z) of the Commission's

regulations.)

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Similar hedge exemptions were subsequently granted in other cases

where the futures positions clearly offset risks related to swaps or

similar OTC positions involving both individual commodities and

commodity indexes. These non-traditional hedges (i.e., hedges not

associated with dealings in the physical commodity) were all subject to

specific limitations to protect the marketplace from potential ill

effects. The limitations included: (1) The futures positions must

offset specific price risk; (2) the dollar value of the futures

positions would be no greater than the dollar value of the underlying

risk; and (3) the futures positions would not be carried into the spot

month.\15\

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\15\ More recently, Commission staff issued two no-action

letters involving another type of index-based trading. (CFTC Letter

06-09, April 19, 2006, and CFTC Letter 06-19, September 6, 2006).

Both cases involved trading that offered investors the opportunity

to participate in a broadly diversified commodity index-based fund

or program (``index fund''). The futures positions of these index

funds differed from the futures positions taken by the swap dealers

who had earlier received hedge exemptions. The swap dealer positions

were taken to offset OTC swaps exposure that was directly linked to

the price of an index. For that reason, Commission staff granted

hedge exemptions to these swap dealer positions. On the other hand,

in the index fund positions described in the no-action letters, the

price exposure results from a promise or obligation to track an

index, rather than from holding an OTC swap position whose value is

directly linked to the price of the index. Commission staff believed

that this difference was significant enough that the index fund

positions would not qualify for a hedge exemption. Nevertheless,

because the index fund positions represented a legitimate and

potentially useful investment strategy, Commission staff granted the

index funds no-action relief, subject to certain conditions intended

to protect the futures markets from potential ill effects. These

conditions included: (1) The positions must be passively managed;

(2) they must be unleveraged (so that financial conditions should

not trigger rapid liquidations); and (3) the positions must not be

carried into the delivery month (when physical delivery markets are

most vulnerable to manipulation or congestion).

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Separately, an issue had arisen regarding the classification of

trading activity for purposes of the Commission's Commitments of

Traders (``COT'') reports.\16\ The COT reports, from their inception in

1924 (as an annual report by the USDA Grain Futures Administration),

classified positions, based on trading activity, as ``hedging'' or

``speculative.'' After it was established in 1974, the Commission

continued to publish these reports. However, in 1982, due to a change

in CFTC large trader reporting requirements,\17\ the COT reports began

[[Page 12285]]

classifying positions by reference to the trading entity as

``commercial'' or ``noncommercial.'' By 2006, trading practices had

evolved to such an extent that the positions of non-traditional

hedgers, including swap dealers who had been granted hedge exemptions

and were included in the ``commercial'' category, represented a

significant portion of the long side open interest in a number of major

physical commodity futures contracts. This raised questions as to

whether the COT reports could reliably be used to assess overall

futures activity by traditional hedgers, i.e., persons directly

involved in the underlying physical commodity markets.

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\16\ The COT reports are weekly reports, published by the

Commission showing aggregate trader positions in certain futures and

options markets. For a comprehensive history of the COT reports, see

71 FR 35627, June 21, 2006.

\17\ The Series '03 large trader reports, in which individual

traders had reported their futures positions to the CFTC and

classified their trading activity as ``hedging'' or ``speculation,''

were suspended in 1981. Thereafter, position data was drawn from

reports filed by futures commission merchants, which did not include

such classifications. Therefore, the Commission was required to

classify positions based on trader identification provided on each

reportable trader's Form 40, Statement of Reporting Trader. In those

reports, traders identify themselves as ``commercial'' or

``noncommercial'' traders. See id. at 35629-10 for more details.

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In January 2007, the Commission attempted to address this issue by

initiating publication of a supplemental COT report, breaking out in a

separate category the positions of ``index traders'' in certain

physical commodity markets.\18\ These index traders included managed

funds, pension funds and other institutional investors seeking exposure

to commodities as an asset class in an unleveraged and passively-

managed manner using a standardized commodity index, as well as swap

dealers holding long futures positions to hedge short OTC commodity

index exposure opposite institutional traders such as pension funds

(including those swap dealers described above who had received bona

fide hedging exemptions). Nevertheless, substantial questions remained

regarding the proper classification of trading activity by swap dealers

and index traders. As noted in the September 2008 Report, ``futures

market trades by swap dealers are essentially an amalgam of hedging and

speculation by their clients. Thus, any particular trade that a swap

dealer brings to the futures market may reflect information that

originated with a hedger, a speculator, or some combination of both.''

\19\

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\18\ See Commission Actions in Response to the ``Comprehensive

Review of the Commitment of Traders Reporting Program,'' Commodity

Futures Trading Commission, December 5, 2006.

\19\ September 2008 Report, at 1.

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In the spring of 2008, the Commission took note of ongoing concerns

about the proper classification of swap dealer trading, along with a

number of factors. In addition to an influx of new traders into the

market, including non-traditional hedgers, such as index traders and

swap dealers, futures markets had experienced other significant

changes. Volume growth had increased fivefold over the preceding

decade, and in the preceding year, the volatility and the price of oil

and other commodities had reached unprecedented levels. Numerous

Congressional hearings were held relating to these issues, and

significant concern was expressed by members of Congress, academics,

and market participants relating to commodity price volatility and the

influx of non-traditional speculative activity in these markets. The

Commission responded to these factors by issuing a special call for

information from commodity swap dealers and index traders.

II. The Commission's Special Call to Swap Dealers and Index Traders

A. Substance of the Special Call

As noted in the September 2008 Report, in May and June of 2008, as

part of certain initiatives relating to the energy and agricultural

markets, the Commission announced it would gather more information

regarding the off-exchange commodity trading activity of swap dealers

and would revisit whether swap dealers' futures trading is being

properly classified.\20\ Thereafter, pursuant to its authority under

regulation 18.05, the Commission issued a special call to swap dealers

and index traders to gather pertinent information regarding these

entities.\21\

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\20\ See Commission press releases: http://www.cftc.gov/

newsroom/generalpressreleases/2008/pr5503-08.html and http://

www.cftc.gov/newsroom/generalpressreleases/2008/pr5504-08.html.

\21\ Commission Regulation 18.05 provides that traders with

reportable positions in any futures contract must, upon request,

furnish to the Commission any pertinent information concerning the

traders' positions, transactions, or activities involving the cash

market as well as other derivatives markets, including their OTC

business.

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The special call involved staff issuing 43 written requests to 32

entities and their sub-entities compelling these futures traders to

produce data relating to their OTC market activities. Of the 43

requests, 16 were directed to swap dealers known to have significant

commodity index swap business; 13 were directed to traders identified

as swap dealers (but not known to engage in significant commodity index

swap business) and who, at the time of the call, held futures positions

that were large relative to Commission or exchange-set speculative

position limits or accountability levels; and 14 were directed to

commodity index funds (including asset managers and sponsors of

exchange traded funds (ETFs) and exchange-traded notes (ETNs) whose

returns are based upon a commodity index). The special call required

the subject entities to provide data for month-end dates beginning

December 31, 2007, and continuing through June 30, 2008.

While the September 2008 Report is based on this initial data, the

special call remains ongoing, with the subject entities under a

continuing obligation to provide data for each month-end date. The

information requested by the special call, the data received, and the

Commission's findings and recommendations based on that data are laid

out in detail in the September 2008 Report, including its eight

appendices and glossary.

B. Recommendation Five of the September 2008 Report

For purposes of this Concept Release, the Commission is concerned

primarily with the Report's fifth recommendation, which provides as

follows:

Review Whether to Eliminate Bona Fide Hedge Exemptions for Swap

Dealers and Create New Limited Risk Management Exemptions: The

Commission has instructed staff to develop an advance notice of

proposed rulemaking that would review whether to eliminate the bona

fide hedge exemption for swap dealers and replace it with a limited

risk management exemption that is conditioned upon, among other

things: (1) An obligation to report to the CFTC and applicable self-

regulatory organizations when certain noncommercial \22\ swap

clients reach a certain position level and/or (2) a certification

that none of a swap dealer's noncommercial swap clients exceed

specified position limits in related exchange-regulated commodities.

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\22\ In this context, a ``noncommercial'' counterparty would

include any entity other than a traditional commercial hedger

involved in the production, processing or marketing of a commodity.

As noted in the body of the September 2008 Report, by eliminating

the existing bona fide hedge exemption for swap dealers and replacing

it with a limited risk management exemption that would essentially look

through the swap dealer to its counterparty traders, Recommendation

Five has the potential to bring greater transparency and accountability

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to the marketplace and to guard against possible manipulation.

While more information is needed to fully evaluate this

recommendation, requiring swap dealers to monitor and restrict the

position sizes of their counterparty traders, subject to CFTC

reporting and audits, as a condition of obtaining and maintaining

such an exemption, is a practicable way of ensuring that

noncommercial counterparties are not purposefully evading the

oversight and limits of the CFTC and exchanges, and

[[Page 12286]]

that manipulation is not occurring outside of regulatory view.\23\

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\23\ September 2008 Report, at 34.

This Concept Release is intended to provide the Commission with

information and comment that will help to inform the Commission's

decision as to: (1) Whether to proceed with the recommendation to

eliminate the bona fide hedge exemption for swap dealers and replace it

with a conditional limited risk management exemption; and (2) if so,

what form the new limited risk management exemptive rules should take

and how they might be implemented most effectively.

III. Request for Comments

Commenters responding to this Concept Release are encouraged to

provide their general views and comments regarding the appropriate

regulatory treatment of swap dealers with respect to the existing bona

fide hedge exemptions and a potential conditional, limited risk

management exemption. In addition, commenters are requested to provide

their views in response to the following specific questions.

A. General Advisability of Eliminating the Existing Bona Fide Hedge

Exemption for Swap Dealers in Favor of a Limited Risk Management

Exemption

1. Should swap dealers no longer be allowed to qualify for

exemption under the existing bona fide hedge definition?

2. If so, should the Commission create a limited risk-management

exemption for swap dealers based upon the nature of their clients

(e.g., being allowed an exemption to the extent a client is a

traditional commercial hedger)?

3. If the bona fide hedge exemption were eliminated for swap

dealers, and replaced with a new, limited risk management exemption,

how should the new rules be applied to existing futures positions that

no longer qualify for the new risk-management exemption? For example,

should existing futures positions in excess of current Federal

speculative position limits be grandfathered until the futures and

option contract in which they are placed expire? Should swap dealers

holding such position be given a time limit within which to bring their

futures position into compliance with Federal speculative limits?

Should swap dealers holding such positions be required to bring their

futures positions into compliance with the Federal limits as of the

effective date of the new rules?

B. Scope of a Potential New Limited Risk Management Exemption for Swap

Dealers

4. The existing bona fide hedge exemptions granted by the

Commission extend only to those agricultural commodities subject to

Federal speculative position limits. Should the reinterpretation of

bona fide hedging and any new limited risk management exemption extend

to other physical commodities, such as energy and metals, which are

subject to exchange position limits or position accountability rules?

C. Terms of a Potential New Limited Risk Management Exemption for Swap

Dealers

5. If a new limited risk management exemption were to be permitted

to the extent a swap dealer is taking on risk on behalf of commercial

clients, how should the rules define what constitutes a commercial

client?

6. How should the Commission (and, if applicable, the responsible

industry self-regulatory organization (SRO)) and the swap dealer itself

verify that a dealer's clients are commercial? Is certification by the

dealer sufficient or would something more be required from either the

dealer or the client? If so, what should be reported and how often--

weekly, monthly, etc.?

7. For a swap dealer's noncommercial clients, should the rules

distinguish between different classes of noncommercials--for example:

(1) Clients who are speculators (e.g., a hedge fund); (2) clients who

are index funds trading passively on behalf of many participants; and

(3) clients who are intermediaries (e.g., another swap dealer trading

on behalf of undisclosed clients, some of whom may be commercials)?

8. If a swap dealer were allowed an exemption for risk taken on

against index-fund clients, how would the dealer satisfy the Commission

that the fund is made up of many participants and is passively managed?

Is certification by the dealer or fund sufficient or should the dealer

or fund be required to identify the fund's largest clients?

9. If a swap dealer were allowed an exemption for risk taken on

against another intermediary, how would the dealer satisfy the

Commission that its intermediary client does not in turn have

noncommercial clients that are in excess of position limits? Is

certification by the dealer or second intermediary sufficient or should

the dealer or intermediary be required to separately identify the

intermediary's largest clients?

10. What futures equivalent position level should trigger the new

limited risk management exemption reporting requirement? For example,

under the rules of the on-going special call to swap dealers and index

funds described earlier, a swap dealer must report any client in any

individual month that exceeds 25% of the spot month limit, or the net

long or short position of a client that in all months combined exceeds

25% of the all-months-combined limit.

11. If none of a swap dealer's clients exceed required reporting

levels in a given commodity, or none of such clients exceed reporting

levels in any commodity, what type of report should be filed with the

Commission--e.g., a certification by the swap dealer to the Commission

to that effect?

12. Should there be an overall limit on a swap dealer's futures and

option positions in any one market regardless of the commercial or

noncommercial nature of their clients? For example, ``A swap dealer may

not hold an individual month or all-months-combined position in an

agricultural commodity named in Sec. 150.2 in excess of 10% of the

average combined futures and delta-adjusted option month-end open

interest for the most recent calendar year.''

13. If a new limited risk-management exemption for swap dealers is

created, what additional elements, other than those listed here, should

be considered by the Commission in developing such an exemption?

D. Other Questions

14. How should the two index traders who have received no-action

relief from Federal speculative position limits (see footnote 15) be

treated under any new regulatory scheme as discussed herein?

15. What information should be required in a swap dealer's

application for a limited risk management exemption?

Issued by the Commission this 17th day of March, 2009, in

Washington, DC.

David Stawick,

Secretary of the Commission.

[FR Doc. E9-6187 Filed 3-23-09; 8:45 am]

Last Updated: March 24, 2009