Mr. Charles P. Carey
Mr. Bernard W. Dan.
August 1, 2005

Page 4

The problems posed by the aggregation requirement apply to internal, as well as external, clients.
A number of FIA member firms are also primary dealers in government securities. These firms
typically have multiple desks that trade Treasury futures and options for their own book,
completely unaware of and unaffected by the actions of others within their firm. (For example, a
primary dealer might have, in addition to the group that submits bids in the Treasury auctions,
wholly independent groups trading repos, swaps, corporate and sovereign debt, and over-the-
counter (‘OTC”) options on Treasury securities, each of which will independently decide when to
put on or lift a trade.) FIA is not aware of any bookkeeping system, whether internal or offered
by SunGard or Rolfe & Nolan, that can track all of this activity in real time.

A similar problem is faced by FCMs whose broker-dealer and foreign affiliates operate on
platforms that are different from those used by the FCM. In such a case, the futures clearer
simply is not in a position to timely monitor the trading activity of its affiliates. Given that fact, it
is almost inevitable that firms will go over the limits inadvertently. Comparable problems are
faced by FCMs that are affiliated with “special purpose vehicles” that are established to act as
swap counterparties. These companies may or may not clear through the FCM, but will be
combined for purposes of the position limits. An even more intractable problem results from an
FCM’s investment in a hedge fund or a hedge fund manager—once that investment reaches the
10% level, the FCM will have to count the fund’s or the manager’s positions as its own, even
though the FCM has no ability whatsoever to control the fund’s or the manager’s trading.

When asked about this concern, CBOT staff replied that the firm would typically not be
sanctioned but would be required promptly to take steps to reduce its position. FIA member firms
are not monolithic organizations, where a simple notice to someone in compliance is sufficient to
effect the necessary adjustments. If, for example, Primary Dealer A started the day in compliance
but found itself the next morning with a combined position that is 10,000 contracts over the limit,
how is that overage going to be allocated? Ratably across all desks? Ratably across the desks in
the United States that are open for business? Will they be permitted to close out the excess by
making intra-company transfer trades to avoid having to go into the pit and give back a tick or two
on every trade?®

FIA cannot understand why the CBOT would want to revert to the rigid, inflexible standard that
applied prior to the adoption of Commission Rule 150.3 and CBOT Regulation 425.05. They

5 Some FCMs also are affiliated with Securities and Exchange Commission-registered investment

advisers and investment companies that, under this ownership standard, would have their positions aggregated
with those of the FCM/broker-dealer. A registered investment adviser or investment company has a fiduciary
responsibility to the clients whose assets they manage; affiliated investment advisers and investment companies
frequently clear their business other than through their affiliated FCM to avoid any suggestion of conflicts of
interest. ‘These affiliates will be aggregated, even though they are walled off from the firm’s proprietary traders
and have no idea that the combined position is approaching or exceeding the limit. How, then, would the FCM
determine whose positions should be reduced? Would a mutual fund’s positions have to be reduced just because
it is managed by an affiliate of the FCM and another affiliate is engaged in proprietary trading?


Mr. Charles P. Carey
Mr. Bernard W. Dan
August 1, 2005

Page 9

dealer would be unable to hedge its position in the futures market. The proposed position limits
also would deny hedgers the ability to carry their positions throughout the delivery month. This
would have an especially deleterious effect on hedgers who are short the cash and who may need.
to hold their positions through expiration to be assured that they will be able to take delivery on
their futures contracts. '®

Adopting a position limit without a hedge exemption is not merely unwise — it would be virtually
unprecedented. Congress has prohibited the Commission from doing so,'® and the few cases
where an exchange has adopted such a rule have involved cases where there were serious
concems about the availability of cash supplies. There obviously is no risk of a shortage of
deliverable securities. Just as obviously, there is no reason to deny hedgers an exemption from
any position limits that the CBOT may adopt.

Position Accountability is Superior to Position Limits. CBOT Regulations 425.06, 425.07 and
425.09 impose a position accountability requirement on market participants whose positions
exceed specified levels. The position accountability thresholds are already far lower than the new
position limits’? and, taken together with the authority conferred by those Regulations, allow the
CBOT to require market users to supply information relating to the nature of their positions, their
trading strategy and, if applicable, their use of the contract in question to hedge cash market, repo
or reverse repo exposures.

8 The argument is sometimes made that the futures markets are not designed to be delivery markets and

that long and short hedgers should address their obligations to buy or sell the underling commodity in the cash
market, rather than through the delivery mechanisms of the futures market. See Cargill, Inc. v. Hardin, 452 F.2d
1154, 1172 (8® Cir, 1971) (“While the obligation to make or take delivery is a bona fide feature of the futures
contract, the futures market is not an altemative spot market...”), Statements to this effect ignore the importance
of delivery as a means of assuring the convergence of the futures price and the price of the underlying. See, 2.g.,
62 Fed. Reg. 60831, 60838 (November 13, 1997) (Commission Order changing com and soybean delivery
specifications); Jn the Matter of Fenchurch Capital Management, Comm. Fut. L. Rep. (CCH) 126,747, at 44,091
(Commission 1996) (Ten-Year Treasury Notes); it the Matter af Cox, Comm. Fut. L. Rep. (CCH) (23,786, at
34,064 (Commission 1987) (wheat); in the Matter of Indiana Farm Bureau, Comm. Fut. L. Rep. (CCH) 721,796,
at 27,288 n.2 (Commission 1983) (com).

ad Section 4a(c) of the Commodity Exchange Act, 7 U.S.C. § 6a(c).

20
‘Spot Month Position Accountability | Spot Month Position Limit (Last
Threshold 10 Trading Days)

Treasury Bonds 10,000 (incl. mini-sized Treasury 25,000
Bonds)

Ten-Year Treasury Notes 7,500 50,000

Five-Year Treasury Notes 7,500 35,000

Two-Year Treasury Notes 7,500 25,000

Mini-Sized Treasury Bonds See above None



Mr. Charles P. Carey
Mr. Bernard W. Dan.
August 1, 2005

Page 6

fails to take into account the very real possibility that others, whose positions tend to be somewhat
smaller, may become reluctant to use the CBOT market for fear that they may “hit the limit” and
not be able to continue to hedge their cash, swap, OTC option and repo books. The market can ill
afford the additional disruption that will be caused by the imposition of an artificial cap on the
size of the positions that market users can hold.

Position Limits Are Unwise and Unnecessary. The Commission formerly required the contract
markets, including the CBOT, to establish speculative position limits for all of their contracts,
believing that position limits were necessary to dampen “excessive speculation” that can cause
“sudden or unreasonable fluctuations or unwarranted changes in the price” of a contract.'°
Ultimately, the Commission accepted the argument made by the CBOT and other exchanges that
a system of “position accountability” would be equally effective for contracts, such as Treasury
futures and options, with liquid futures and cash markets because of the ease with which market
participants can arbitrage between exchange-traded contracts and the underlying securities.'' We
fail to understand, and the CBOT has offered no explanation, why position accountability rules
apparently are no longer effective during the last ten days of the delivery month.

True, deliveries during some of the recent expirations have been larger than normal, but that is not
surprising, considering that open interest in some of the Treasury contracts has increased
dramatically in recent years. Although the number of Treasury securities being delivered has
gone up, the rate of increase is still less than the rate of increase in open interest.

Further, some of the shorts had to deliver securities in addition to the cheapest-to-deliver
(“CTD”). The Treasury contracts provide for the delivery of any one of a basket of deliverable
securities, however, and market participants on both sides of the market—both long and short—
recognize that they can deliver and may receive something other than the CTD. In fact, there
have been more than 30 multiple-issue deliveries in the Treasury contracts in the last five years
alone, including one case (the September 02 Bond) where nine different securities—ranging from
the 6% of February 2002 to the 9% of November 2018—were delivered over the course of the
month.

That this can happen should not be any cause for concem. Indeed, the June 29 notice to the
membership makes this point abundantly clear:

The establishment of position limits during the last ten trading days does not
ensure that the cheapest to deliver security will be the only security necessary to

10 46 Fed. Reg. 50938 (October 16, 1981) (quoting Section 4a of the Commodity Exchange Act).

1 56 Fed. Reg. 51687, 51688 (October 15, 1991). That approach has been carried forward into the Core
Principles for designated contract markets. See Application Guidance to Core Principle 5 of Section 5(d) of the
Commodity Exchange Act, 17 C.F.R. Part 38, Appendix B (contract markets not required to adopt position limits
for contracts based on financial instruments with “very liquid and deep underlying cash markets”).

0 http://www. Commission.gov/files/dea/delivery/deahisdel.xls.



Mr. Charles P. Carey
Mr. Bernard W. Dan
August 1, 2005

Page 5

have worked well and have not been the subject of abuse. The CBOT should adopt a similar
disaggregation approach to the Treasury contracts.”

Position Limits Have the Potential to Affect the Pricing of the Treasury Contracts. The way
the markets currently operate is optimal—commodity pools and trading advisors and other
speculative accounts that are unable or unwilling to make or take delivery get out of their
positions by rolling them forward before first notice day. The imposition of a position limit
during the last ten days of trading is likely to have one of two effects — either hedgers and other
large institutional users will scale down their use of the Treasury contracts to ensure that they stay
under the limits or there will be a second “roll” during every expiration.

The roll creates its own pricing dynamic, because those who need to move their positions into the
next delivery month are forced to buy or sell at the prices being offered or bid by locals and other
liquidity providers. A last-ten-day position limit would add a second roll that, unlike the
traditional roll, is likely to be price-distorting. That is because open interest during the delivery
month is typically much smaller than it was before the (traditional) roll. A reduced pool of buyers
and sellers means that hedgers, spreaders and others who need to liquidate to get below the limit
will have to be “price takers” from those who know (from the Commission’s Commitments of
Traders or other sources) that there is going to be a forced liquidation — that hedgers and other
holders of large positions are going to have to buy in or sell out some part of their position during,
the first few days of the delivery month. Stated differently, a second roll is itself likely to cause
an artificial price — precisely the evil that position limits are designed to prevent.

Position Limits Will Drive Market Users to the Cash, Swap and OTC Option Markets. It is
clear that the nature of the cash Treasury market and with it, the Treasury futures and option
markets, are changing. An ever-larger Federal deficit and the shift in the yield curve caused by
the phase-out of the long Bond have made it more important than ever that market participants
have a reliable mechanism that they can use to lay off ever-increasing interest rate risk. Artificial
limits on the size of positions are going to make the CBOT market much less attractive to the
largest users of the futures and futures option market, however.

As discussed above, position limits that are applied during the last ten days of trading are
effectively going to result in two rolls — one before first notice day, the other before position limit
day. The largest market users have other alternatives — they can readily trade in the cash, repo,
OTC option and swap markets — and are not likely to want to expose themselves to this additional
tisk.

It is our understanding that only a small number of market participants are expected to be affected
by position limits during any expiration. That may be true, but it fails to take into account the
potential consequences to all other market users if the biggest institutions start to withdraw from
the CBOT and lay off more and more of their risk in the swap and OTC option markets. It also

° Regulation 425.05 would need to be amended for Treasury products, however, because it does not

apply in the spot month. That is not unreasonable in relation to agricultural products (for which the Commission
requires such a restriction) or to thinly traded products such as gold and silver, but would be unnecessary and
counterproductive if applied to Treasury products.


Mr. Charles P. Carey
Mr. Bernard W. Dan.
August 1, 2005

Page 8

conditions. . .. The Commission has approved contract amendments for implementation in trading
months with open interest only where implementation of the proposed rule change would not
affect the value of existing positions or traders had notice of the impending change prior to
opening their positions.”'* The rule amendment fails both these tests.

First, traders did not have knowledge of this change prior to opening their positions. As EMF
noted in its June 30, 2005 letter to the Commission, as of June 29, open interest in the December
10-year Treasury Note contract was 109,702 contracts, or a cash equivalent of nearly $11 billion.
Second, and as discussed above, the imposition of position limits have and will “affect the value
of existing positions.” As EMF further noted, changes in position limits affect open interest,
which in turn affects demand for the CTD, which in turn affects the financing rate for the CTD in
the repo market, which in turn affects the value of the futures contract. This is not a merely
hypothetical or conjectural statement—the announcement that Treasury position limits were going
to be imposed apparently resulted in an immediate 25 basis point decline in the repo rate for the
December 10-Year contract’s CTD.'* FIA has not undertaken a complete analysis of the effects
of the CBOT’s action, but it is reasonable to infer such a 25 basis point move would result in
millions of dollars being made and lost in the futures, cash and repo markets.

Any Position Limits That May Be Adopted Must Be Coupled With a Risk Management
Exemption. Ifthe CBOT is unwilling to repeal the amendment, it must be revised to include a
tisk management exemption. Any concern that exceptions for risk management positions would.
tender the limits meaningless because market participants with large positions are almost
invariably managing the risks associated with their cash Treasury and repo and reverse repo books
only confirms the importance of such an exemption.

One of the most important purposes of the futures and option markets is risk shifting—providing
commercial users of the underlying commodity with a means to transfer their risk to speculators
who are willing to bear that risk in exchange for the possibility of profit.'? The proposed position
limits would make it impossible for dealers to respond to customers’ requests to sell large blocks
of Treasury securities during the last ten trading days of a delivery month, however, since the

1s 64 Fed Reg. 66373, 66377 & n. 21 (November 26, 1999) (emphasis added). We understand that the

Commission made these statements in promulgating Rule 5.3, which was removed following the enactment of
the Commodity Futures Modernization Act of 2000. The policy, however, is still sound. To this end, section
5c(c)(2) of the Act specifically requires Commission approval of any rules altering the terms and conditions of
contracts in the enumerated commodities, if the rules apply to contracts that have been listed for trading and have
open interest.

16 EMF letter, p. 1.
7 “Hedging, a major economic purpose of futures markets, is buying or selling futures contracts to offset
the risks of changing prices in the cash markets. This risk-transfer mechanism has made futures contracts
virtually indispensable in efforts to control costs and protect profit margins.” Chicago Board of Trade,
Commodity Trading Manual, at 13 (1989 ed.); see Section 3 of the Commodity Exchange Act, 7 U.S.C. § 5
(‘The transactions subject to this Act are affected with a national public interest by providing a means for
managing and assuming price risks...”).


mara Futures Industry Association

2001 Pennsylvania Ave. NW 202.466.5460
Suite 600 202.296.3184 fax
Washington, DC 20006-1823 www. futuresindustry.org

SRETARIAT

August 15, 2005

Ms. Jean A. Webb

Secretariat

Commodity Futures Trading Commission
Three Lafayette Centre

1155 21* Street NW

Washington, DC 20581

Dear Jean:

Per your discussion with Toby Taylor, I hereby give permission to post on the CFTC website the
FIA's response to the CBOT Letter to FIA re: CBOT - Position Limits in Treasury Futures
During Last Ten Trading Days.

Should you have any questions please do not hesitate to contact me. Thank you.

Sincerely,

John M. Damgard
President


Mr. Charles P. Carey
Mr. Bernard W. Dan
August 1, 2005

Page 10

It is true that a position accountability regime of this nature would not stop a trader from
accumulating a large position in the first place (1e., before being told that it cannot add to the
position).’' The CBOT is far from powerless in such a situation, however. The Business Conduct
Committee may suggest—and, if need be, order—a firm with a large position to reduce the size of
that position to the level, and within the timeframe, specified by the committee.

The position accountability system has worked well for years. We see nothing in the current
market situation that would call for throwing out a system that allows the CBOT to discharge its
market surveillance responsibilities without interfering with the workings of the marketplace.

Heke

In summary, FIA believes that significant rule changes such as the amendments to Regulation
425.01 should be preceded by diverse consultation, that operational considerations should be
taken into account and, consistent with historical practice, that such changes should not be applied
to contracts in which there is open interest. We further believe that the CBOT and the
Commission should consider whether the self-certification procedures should be invoked when
the rules adopted affect contracts with open interest. More immediately, we urge the CBOT to
conform its amended regulation to its existing policies regarding other contracts: (1) require
aggregation only where there is common control; and (2) provide exemptions for risk
management positions.

We appreciate the opportunity to make its views known on this important subject. We would
welcome the opportunity to discuss these matters with you in greater detail at your convenience.

Sincerely,

John M. Damgard
President

ce: Honorable Reuben Jeffery IIT
Honorable Sharon Brown-Hruska
Honorable Walter L. Lukken
Honorable Fred Hatfield
Honorable Michael V. Dunn
Richard A. Shilts
James L. Carley
Patrick J. McCarty

a The CBOT is already authorized by Regulation 425.07 (relating to Two-, Five- and Ten-Year Treasury

Notes) to prohibit a trader from increasing its position above the levels set forth therein. It is not apparent why a
similar rule could not be adopted for Treasury Bonds.


Mr. Charles P. Carey
Mr. Bernard W. Dan
August 1, 2005

Page 7

satisfy delivery obligations, nor does it ensure that a contract’s fair value will be
priced exclusively with reference to its CTD. If the level of contract open interest
at expiration exceeds the available supply of the CTD, then at least some short
position holders in the contract will necessarily have to fulfill their delivery
obligations with a security other than the CTD, selected from the relevant basket
of deliverable-grade securities. Market factors will thus dictate whether the
futures contract prices a single-issue or a multi-issue delivery.'*

CBOT officials also have expressed concem that market participants with very large positions are
in a position to dictate the value of the contract. We think this concer is ill-founded as long as
the supply of securities that is actually available for delivery exceeds the open interest. Besides, it
is well known that smaller, more frequent auctions by the Treasury Department are resulting in
smaller issuances of the CTD. Indeed, one of things that has made the Treasury contracts so
attractive to hedgers, arbitrageurs and other market professionals is their optionality—the ability
ofa short to determine not only what security to deliver but when."*

Position limits serve one purpose—to reduce the possibility of a corner or squeeze in the delivery
month. There has been no indication that Treasury Bond or Note deliveries have either caused or
exacerbated any market dislocations. We would agree that remedial action that affects the entire
marketplace might be necessary if there was evidence of market manipulations that distorted
prices. Structural changes to the design and operation of these contracts should not be made,
however, inthe absence of any empirical evidence to suggest such a problem. There are doubtless
those who would say that the delivery of securities other than the CTD is evidence of a problem
that needs to be fixed. We disagree. The delivery of more that one Bond or Note is not, by itself,
evidence of market manipulation or a squeeze. Rather, it is evidence of a well-functioning market
that allows those making delivery who do not have the CTD to substitute other Bonds or Notes to
discharge their contractual obligations.

Position Limits Should Not Be Applied to Contracts That Have Open Interest. It is
axiomatic that neither an exchange nor the Commission can change the terms and conditions of a
contract in a way that will have an effect on prices: “[A]mendments to the terms and conditions
of contracts trading pursuant to exchange certification [may] be implemented only for contract
months having no open interest. That implementation practice has been required by the
Commission . . . to provide traders with legal certainty regarding the contract's terms and.

8 (Emphasis added.) The Treasury Department and the Federal Reserve Board both expressed substantial

reservations about Treasury futures contracts that permitted the delivery of only one security when these
contracts were first proposed in the late 1970s. For its part, the CBOT chose to go with a deliverable basket; the
CME opted for the certainty of single-issue deliveries. The CBOT’s Treasury products are thriving; the CME’s
‘Treasury contracts are defunct. This is clear evidence that the market can adapt and has adapted to the prospect
of multiple-issue deliveries.

" Among other things, shorts have the ability to take advantage of the “switch” option that arises when
the second-cheapest to deliver security becomes the CTD during the last seven business days of the delivery
month (after trading has ceased), but is priced (invoiced) on the basis of what had been the CTD when the
contract was still trading.


Mr. Charles P. Carey
Mr. Berard W. Dan.
August 1, 2005

Page 3

into the proposed rule.”* Further, Commission Rule 40.5(a)(1 iv) requires an SRO, in submitting
atule for approval, to include in its submission, an explanation of the operation, purpose and
effect of the rule, including, as applicable, a description of the anticipated benefits, any potential
anticompetitive effects, and how the rule fits into the framework of self-regulation.’ The CBOT’s
submission to the Commission did not address any of these issues.

We submit that the CBOT cannot comply with the provisions of these rules—and the Commission.
cannot properly determine whether the CBOT’s rules violate applicable core principles—unless
the CBOT’s rulemaking procedures solicit input from members and affected market participants
on significant rule proposals. If FIA member firms had had the opportunity to provide such input,
the CBOT would have had the benefit of the points made in this letter before acting and the
CBOT would have had the opportunity to address these concerns and to explain the rationale for
its decision.

The Aggregation Requirements Are Unworkable and Will Inevitably Result in Violations of
the Limits. The June 29 notice indicates that “all positions in accounts for which the person
controls trading shall be aggregated. A 10% or more financial ownership interest in an account
constitutes control; consequently, separate accounts owned by the same legal entity are
aggregated, irrespective of whether the accounts have independent account controllers.” This
causes several problems.

First, and most importantly, the bookkeeping systems used by clearing firms to track positions for
purposes of large trader reporting and position limits focus on control and are incapable of
additionally tracking positions on the basis of ownership.’ For example, a pension plan that uses
in-house and external managers will have its positions attributed to the different managers,
whether extemal or in-house. In like fashion, the positions established by a hedge fund with
multiple advisers will be assigned for purposes of large trader reporting purposes (and, therefore,
for position limits) to the fund’s advisers, not to the account of the fund. Clearing firms,
therefore, simply cannot aggregate positions on the basis of ownership, at least not with the
systems that currently are in existence.

, Rule 40.5(a)(1)(v); Rule 40.6(a)(3)(iv) is similar.
6 Although an SRO is not technically required to include such a written explanation in self-certifying a
rule pursuant to Rule 40.6, we fail to see how an SRO could certify that the rule complies with the Act and the
Commission’s regulations unless it prepared such an analysis for consideration by the board or appropriate
committee prior to the adoption of the rule.

7 FIA understands that the rules governing large trader reporting and position limits require aggregation
of accounts subject to common control or ownership. However, Commission Rule 150.3 and CBOT Regulation
425.05 grant exemptions from aggregation for position limit purposes to the accounts of “eligible entities”
defined as in Commission Rule 150.1(d), if positions are carried in the separate account or accounts of an
independent account controller. Along this same line, the Form 102, which FCMs file on behalf of large traders,
requires the FCM to specify whether the account is owned and controlled by the same person or is controlled by
an advisor or legal entity that is independent of the account owner. In the latter case, the FCM files information
only with respect to the account controller.


Mr. Charles P. Carey
Mr. Bernard W. Dan
August 1, 2005
Page 2

we believe is essential to permit the Commodity Futures Trading Commission (‘Commission”) to
fulfill its responsibilities under the Commodity Exchange Act and, as important, to engender
confidence in the exchange rulemaking process. In announcing its decision to impose position
limits, the CBOT left the clear impression that the exchange had identified a weakness, even a
defect, in the existing terms and conditions of these contracts that would interfere with their
ability to “perform their price discovery and risk management functions in the best interests of the
broad spectrum of market users, both hedgers and speculators.” The CBOT, however, does not
disclose what that weakness or defect is.

Further, the CBOT states that the decision to adopt these amendments “was made following an
analysis of relevant market factors and consideration of the feedback received from a diverse
group of market participants. Various government agencies were also briefed on our decision to
take this action.” Again, however, the factors the Board of Directors considered, the identity of
the market participants consulted and the government agencies briefed (and their response to the
CBOT’s proposal) are not disclosed.’

EMF Financial Products, LLC (“EMF”) may be one market participant with which the CBOT
consulted, but we know that only because EMF filed a comment letter with the Commission
opposing the amendments, noting in part, that “the CBOT repeatedly assured us and other market
participants that there would be no changes in specifications to contracts with existing open
interest."? Whatever assurances may have been given to EMF and “other market participants”
certainly were not given uniformly to FIA member firms or to other institutional market
participants.‘

FIA understands that neither the Act nor the Commission’s rules prescribe the procedures that an
SRO such as the CBOT should follow in adopting rules. Nonetheless, we believe the essential
elements of these procedures are found in Part 40 of the Commission’s rules. In particular,
Commission Rules 40.5(a)(1)(v) (voluntary submission of rules for review and approval) and
40.6(a)(3)(iv) (self-certification of rules) each require a contract market to “describe any
substantive opposing views expressed with respect to the proposed mule that were not incorporated

2 Nor is it clear that the CBOT has filed a copy of these amendments with the Secretary of the Treasury

as required under section 5¢(c)(1) of the Act.

3 EMF Letter, at 1.
4 The lack of transparency in this process raises the concern that certain market participants may have
had advance notice of the CBOT’s actions. The announcement that Treasury position limits were going to be
imposed apparently resulted in an immediate 25 basis point decline in the repo rate for the December Ten-Year
contract’s cheapest to deliver. The futures, cash and repo markets are symmetrical, a ‘zero-sum game.” Every
dollar lost by our members and their customers as aresult of the CBOT’s decision was made by someone else. It
is, therefore, essential that the CBOT disclose the identities of the “diverse group of market participants” with
whom it consulted prior to any announcement of the position limits and, using its powers as a self-regulatory
organization, determine if CBOT members and others who were positioned to take advantage of any special
advance knowledge did so, to the detriment of other market users.


Futures Industry Association
2001 Pennsylvania Ave NW 202.466.5460
202.296.3184 fax
ashingten, DC 20006. ¥ uresindustry ong

August 1, 2005

Mr. Charles P. Carey

Mr. Bernard W. Dan
Chicago Board of Trade

141 West Jackson Boulevard
Chicago, Mlinois 60604

Re: Position Limits for Treasury Futures and Options Contracts
Gentlemen:

The Futures Industry Association (‘FIA”),! whose membership executes and clears trades on
behalf of many of the largest users of the CBOT’s Treasury futures and option markets, opposes
the decision of the Board of Directors to impose position limits during the last ten days of trading
inthe Treasury Bond and Two-, Five- and Ten-Year Treasury Note contracts, which the Chicago
Board of Trade (“CBOT”) announced in notices issued on June 29, 2005 and “reaffirmed” on July
25, 2005. It is our position that an exchange should not adopt unilateral changes to the terms and
conditions of contracts in which there are open positions, absent a market emergency. Further, we
question whether the self-certification procedures are appropriate when the rules adopted affect
contracts with open interest.

As explained in detail below, we are concerned that the operational challenges that certain FIA
member firms have discussed with the CBOT, and to which the CBOT referred in its July 25
notice, will place member firms—and the CBOT itself—in an untenable position. Therefore, we
urge the CBOT to amend its policy requiring aggregation of all accounts in which there is 10% or
more common ownership, even if trading in such accounts is directed by independent account
controllers. Consistent with existing policy in all other contracts, aggregation should be required.
only where there is common control. As important, these limits may cause lasting damage to the
liquidity and, therefore, the commercial utility of the CBOT’s Treasury contracts. In this regard,
we also urge the CBOT to revise its policy and, consistent with existing policy in all other
contracts, provide exemptions for risk management positions.

The CBOT’s Rationale and Process Are Opaque. Before turning to these issues,
however, we want to express our deep reservations conceming the process by which the
amendments to Regulation 425.01 were adopted. In brief, the process lacks the transparency that

! FIA is a principal spokesman for the commodity futures and options industry. FIA’s regular

membership is comprised of approximately 40 of the largest futures commission merchants (“FCMs”) in the
United States. Among its associate members are representatives from virtually all other segments of the futures
industry, both national and intemational. Reflecting the scope and diversity of its membership, FIA estimates
that its members effect more than eighty percent of all customer transactions executed on United States contract
markets.