[Federal Register Volume 74, Number 55 (Tuesday, March 24, 2009)]
[Proposed Rules]
[Pages 12282-12286]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-6187]


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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 
<a href="/cdn-cgi/l/email-protection#6112040213041500131821020715024f060e17"><span class="__cf_email__" data-cfemail="0675636574637267747f466560726528616970">[email protected]</span></a>. 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 <a href="/cdn-cgi/l/email-protection#6105090408150c000f21020715024f060e17"><span class="__cf_email__" data-cfemail="690d010c001d040807290a0f1d0a470e061f">[email protected]</span></a>.

[[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]
BILLING CODE


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