12282 Federal Register / Vol. 74, No. 55 / Tuesday, March 24, 2009 / Proposed Rules 

1Staff Report on Commodity Swap Dealers and 

Index Traders with Commission Recommendations, 

Commodity Futures Trading Commission, 

September 2008, at 6. 

*****

RHODE ISLAND 

Narragansett Bay 

Survey Area 

Rhode Island: 

Bristol 

Newport 

The following cities and towns: 

Kent County 

Anthony 

Coventry 

East Greenwich 

Greene 

Warwick 

West Warwick 

Providence County 

Ashton 

Burrillville 

Central Falls 

Cranston 

Cumberland 

Cumberland Hill 

East Providence 

Esmond 

Forestdale 

Greenville 

Harrisville 

Johnston 

Lincoln 

Manville 

Mapleville 

North Providence 

North Smithfield 

Oakland 

Pascoag 

Pawtucket 

Providence 

Saylesville 

Slatersville 

Smithfield 

Valley Falls 

Wallum Lake 

Woonsocket 

Washington County 

Davisville 

Galilee 

Lafayette 

Narragansett 

North Kingstown 

Point Judith 

Quonset Point 

Saunderstown 

Slocum 

Massachusetts: 

The following cities and towns: 

Bristol County 

Attleboro 

Fall River 

North Attleboro 

Rehoboth 

Seekonk 

Somerset 

Swansea 

Westport 

Norfolk County 

Caryville 

Plainville 

South Bellingham 

Worcester County 

Blackstone 

Millville 

Area of Application. Survey area plus: 

Rhode Island: 

The following cities and towns in: 

Kent County 

West Greenwich 

Providence County 

Foster 

Glocester 

Scituate 

Washington County 

Charlestown 

Exeter 

Hopkinton 

New Shoreham 

Richmond 

South Kingstown 

Westerly 

Massachusetts: 

The following cities and towns in: 

Bristol County 

Acushnet 

Berkley 

Dartmouth 

Dighton 

Fairhaven 

Freetown 

Mansfield 

New Bedford 

Norton 

Raynham 

Taunton 

*****

[FR Doc. E9–6364 Filed 3–23–09; 8:45 am] 

BILLING CODE 6325–39–P 

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. 

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 selfregulatory 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

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 secretary@cftc.gov. 

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 dheitman@cftc.gov. 

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2References in § 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). 

3Provisions 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 § 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. 

4Section 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). 

9The argument has also been made that 

commodities act as a general hedge of liability 

obligations that are linked to inflation. 

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. 

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 exchangeset 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

Commission regulation 150.3, 

‘‘Exemptions,’’ lists certain types of 

positions that may exceed the Federal 

speculative position limits. In 

particular, under § 150.3(a)(1), bona fide 

hedging transactions, as defined in 

§ 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. 

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 

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10A 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. 

11The bilateral contracts that swap dealers create 

can vary widely, from terms tailored to meet the 

needs of a specific customer, to relatively 

standardized contracts. 

12Because 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. 

13The 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. 

14The 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 

§ 1.3(z) of the Commission’s regulations.) 

15More recently, Commission staff issued two noaction 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). 

16The 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. 

17The 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 

trading activity (frequently opposite the 

same commodity index traders 

described in the preceding sentences). 

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. 

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. 

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. 

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 exchangebased futures contracts, but would, of 

course, have been subject to applicable 

position limits.14

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

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 

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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. 

18See Commission Actions in Response to the 

‘‘Comprehensive Review of the Commitment of 

Traders Reporting Program,’’ Commodity Futures 

Trading Commission, December 5, 2006. 

19September 2008 Report, at 1. 

20See Commission press releases: http:// 

www.cftc.gov/newsroom/generalpressreleases/2008/ 

pr5503-08.html and http://www.cftc.gov/newsroom/ 

generalpressreleases/2008/pr5504-08.html. 

21Commission 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. 

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. 

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. 

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 passivelymanaged 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

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 nontraditional 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 nontraditional 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 offexchange 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

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 exchangeregulated commodities. 

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 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 

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12286 Federal Register / Vol. 74, No. 55 / Tuesday, March 24, 2009 / Proposed Rules 

23September 2008 Report, at 34. 

that manipulation is not occurring outside of 

regulatory view.23

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 

§ 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] 

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