U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5260 

Facsimile: (202) 418-5527 

www.cftc.gov

Division of 

Market Oversight

 

CFTC letter No. 06-19 

September 6, 2006 

No-Action 

Division of Market Oversight 

Re: Request for No-Action Relief with Regard to Commodity Exchange Act Section 4a 

and Commission Regulation 150.2, Speculative Position Limits for Certain Soybean and 

Wheat Futures Positions 

Dear : 

As you know, pursuant to Section 4a(a) of the Commodity Exchange Act (the “Act”), the 

Commission establishes and enforces speculative position limits for futures and option contracts 

on a limited group of agricultural commodities, including corn, soybeans and wheat traded on the 

Chicago Board of Trade (“CBOT”). Those limits are set out at § 150.2 of the Commission’s 

regulations. 

By letter dated June 13, 2006, supplemented by an amended letter dated July 14, 2006, you have 

requested, on behalf of your client, X, no-action relief with respect to certain positions in CBOT 

corn, soybeans and wheat futures, to be held pursuant to P, a proprietary commodity investment 

program created by X.1 Specifically, you have asked that the Division of Market Oversight 

(“Division”) confirm that it will not recommend to the Commission that enforcement action be 

taken with respect to such corn, soybean and wheat futures positions if the positions (in any 

month other than the spot month) are in excess of the applicable speculative position limits. For 

the reasons, and subject to the conditions, described in the remainder of this letter, the Division 

hereby grants the no-action relief you have requested.2

Factual Background 

The P Investments 

As described in your letter, X’s clients can invest in the P program in several ways. X is a 

registered commodity pool operator (“CPO”) and commodity trading advisor (“CTA”). A client 

can invest in P through a separate account with a futures commission merchant (“FCM”), 

managed by X in its CTA capacity. A client can also invest in P through a fund that could be 

1

 In addition to your June 13 and July 14 letters, including Exhibit A, “New 2006 P Weights,” and Exhibit B, a copy 

of a “Confidential Private Placement Memorandum,” dated December 2005, you have provided the Division with 

additional information through various e-mail and telephone contacts. 

2

 As you know, the CBOT has adopted speculative position limit rules that mirror the limits set out in Commission 

regulation 150.2. This letter does not provide relief with respect to those CBOT rules. Therefore, X will have to 

secure relief from the CBOT’s speculative position limits directly from the exchange. 
operated by X in its CPO capacity. Finally, a client can invest in P through a fund operated by a 

third party, which is advised or sub-advised by X in its CTA capacity. Such a fund could be 

offered in accordance with the Commission’s Part 4 rules or pursuant to an exemption from 

certain provisions of the Part 4 rules, such as, for example, Rule 4.7, Rule 4.13(a)(3) or Rule 

4.13(a)(4) (a “Rule 4.7 pool,” a “Rule 4.13(a)(3) pool,” or a “Rule 4.13(a)(4) pool”).3

X manages these various funds and individual and pool accounts pursuant to P. X currently 

manages over $1 billion of assets pursuant to P. The no-action relief you have requested would 

apply to the aggregate of all positions managed or traded in accordance with P. 

The P Strategy 

You have stated that P’s rules require investments in three commodities in each of the following 

six tangible commodity groups: agricultural (grains and grain byproducts); livestock (meats and 

animals); energy (the petroleum complex and natural gas); precious metals (gold, silver, and the 

platinum complex that are primarily held for investment or used in jewelry); industrial metals 

(copper, aluminum, zinc, nickel, tin and lead that are used almost exclusively for industrial 

purposes); and soft commodities and foods (coffee, sugar, cocoa and orange juice, as well as 

cotton and lumber). P’s rules require further that investments in no one of these tangible 

commodity groups constitute more than 35% of P and that no single commodity constitute more 

than 70% of its respective tangible commodity group. These tangible commodity group 

weightings and individual commodity weightings are calculated in accordance with a 

mathematical formula that blends two-thirds of five-year global production and one-third of fiveyear trading volume of futures contracts traded in U.S. dollars. Both production and trading 

volume are valued using the average commodity prices during the preceding year. Weightings 

of each commodity group and of each commodity are reset at the beginning of each year, and 

each commodity is rebalanced to its target weighting if its actual weighting deviates from the 

target weighting by more than 10% of its intended weight. X reserves the right to assign 

different bands to each commodity, but historically has used this single band (+/-10%) to 

quantify acceptable deviation for all commodities in all cases. 

You note that, during 2005, the percentage of corn, soybean or wheat futures contracts was 

rebalanced a total of ten times, in each case in accordance with P’s predetermined rebalancing 

threshold, i.e., when the actual weighting of the respective commodity deviated from the target 

weighting relative to all other commodities by more than 10%. You point out that rebalancing 

never reflects a view that a position in a particular commodity is trading at a discount to its fair 

value or that a position in a particular commodity will be more profitable than a position in 

another commodity. As described in Exhibit A to your letter, since the most recent reset early in 

 

3

 In the case of a Rule 4.13(a)(4) pool, one such investment structure is described in Exhibit B, the Confidential 

Private Placement Memorandum that accompanied your letter. According to that Memorandum, Y, Inc. serves as 

the Investment Manager to (the “Fund”) and (the “Master Fund”), with responsibility for the day-to-day 

management of the Fund’s investments and administrative affairs, while X serves as the sub-advisor to the Fund and 

the Master Fund. Subject to the general supervision of the Investment Manager, X has complete discretion and 

responsibility with respect to the Fund’s and the Master Fund’s investments. Investors purchase membership 

interests in the Fund and all of the capital of the Fund is, in turn, invested in the Master Fund. The assets of the 

Master Fund consist of a long-only portfolio of exchange-traded, U.S. dollar-denominated futures and forward 

contracts in tangible commodities. 

2
2006, corn futures contracts account for 3.94% of P, soybean futures contracts account for 4.84% 

and wheat futures contracts account for 4.72%. 

You have stated that X’s clients are furnished with a level of disclosure and transparency about P 

appropriate for the product, based upon the provisions of the Act and the CFTC’s Part 4 rules. 

For example, X provides each prospective separate account client with a CTA disclosure 

document, even if the client is a “qualified eligible person” as defined in Rule 4.7. A separate 

account client also receives account statements no less frequently than monthly from the FCM 

carrying the account. In the case of an offering that is not subject to an exemption from the Part 

4 rules, prospective participants receive a pool disclosure document containing the information 

required under the Commission’s Part 4 rules, as well as periodic statements and a certified 

annual report of the fund’s financial condition. In the case of a Rule 4.7, Rule 4.13(a)(3), or 

Rule 4.13(a)(4) fund, prospective participants receive a private placement memorandum (see

Exhibit B), periodic statements, and a certified annual report of the fund’s financial condition, 

even if not required under the relevant rules. 

Trading Activities 

You have stated that P is a long-only, diversified tangible commodity futures trading program 

that is designed to maintain consistent, fully collateralized exposure to tangible commodities as 

an asset class. P is intended to provide diversification for traditional portfolios of equities and 

fixed income instruments, as well as some protection from inflation risk. To implement P, X 

enters into long positions in a diversified basket of U.S. dollar-denominated futures and forward 

contracts on tangible commodities that have an annual trading volume in excess of 250,000 

contracts. These contracts are traded on both U.S. and non-U.S. exchanges. In connection with 

managing accounts pursuant to P, X does not seek to incur any additional price exposure for 

itself in the futures markets, but rather seeks to offset the exposure it incurs in the course of 

offering P investments to its clients, by entering into exchange-traded transactions in the futures 

markets. P does not seek to generate speculative profits by predicting price trends. 

You further state that P requires all futures positions to be rolled into later contract months prior 

to the last trading day or first notice of delivery day, whichever is earlier. You note that, to 

prevent the market from front running any of the roll orders, there has not been any fixed roll 

date and time. Rather, X has exercised its judgment in determining the precise timing of the roll, 

as well as the subsequent contract month to which the positions will be rolled. In that regard, 

you note that X evaluates such factors as liquidity, prevailing prices and spreads, and other 

market conditions. Nonetheless, you represent that positions in front month futures contracts are 

typically rolled during the week before the earlier of the last trading day or the first notice of 

delivery day, and that positions are never held into the delivery month. 

Maximum Size of Corn, Soybean and Wheat Futures Positions 

You have stated that, in view of the growth of interest in P and the development and marketing 

of new products, X anticipates that the amount of assets it manages pursuant to P could reach 

$4.5 billion over the next 12 months. At that level, the corn, soybean and wheat positions held 

3
pursuant to P could exceed the Commission’s speculative position limits.4

 Given the foregoing 

considerations, and X’s critical need to use futures contracts to offset its exposure, you have 

requested that X be allowed to hold: (1) in CBOT corn futures, a net long position of, (a) up to 

17,500 contracts for a single month (other than the spot month) and (b) up to 27,000 contracts for 

all months combined (with no change in the spot month limit); (2) in CBOT soybean futures, a 

net long position of, (a) up to 9,000 contracts for a single month (other than the spot month) and 

(b) up to 15,000 contracts for all months combined (with no change to the spot month limit); and 

(3) in CBOT wheat futures, a net long position of, (a) up to 11,000 contracts for a single month 

(other than the spot month) and (b) up to 13,000 contracts for all months combined (again, with 

no change to the spot month limit). You have stated that these limits reflect a conservative 

estimate of X’s reasonably anticipated requirements for meeting its risk management needs for 

the near future. 

Analysis 

You note that the P strategy, and the relief you have requested, are similar to the index trading 

program described, and the relief granted, in CFTC Letter 06-09.5 First, as in the program 

described in CFTC Letter 06–09, P is a long-only, fully collateralized trading strategy. Thus, the 

value of the long futures positions will not exceed the aggregate amount of cash or cash 

equivalents (such as cash deposited in a money market mutual fund) set aside in an identifiable 

manner in respect of such futures positions plus any accrued profits on such futures positions 

held at the FCM. The unleveraged nature of the strategy is indicative of the absence of 

speculative intent and also minimizes any risk that these futures positions could be subjected to a 

forced liquidation due to adverse market movements. 

Second, you point out that the cash market underlying the CBOT’s corn, soybean and wheat 

futures contracts has a high degree of demonstrated liquidity relative to the size of X’s 

anticipated futures positions. The Commission has traditionally recognized in its market 

oversight activities that the liquidity of the underlying cash market and the potential for 

substantial arbitrage positions between the cash and futures markets mitigate the influence that 

large futures positions may have on futures prices. 

Third, you state that P’s rules-based, non-speculative trading methodology is no more conducive 

to market manipulation or disruption than other currently recognized non-speculative strategies. 

As described, P utilizes a predetermined set of mathematical rules and criteria for calculating the 

weightings for tangible commodity groups and individual commodities and for the annual reset 

and any rebalancings. Thus, X resets the weightings annually based upon the economic 

significance and liquidity of each tangible commodity group in relation to all other tangible 

commodity groups, and of each commodity within a particular tangible commodity group in 

 

4

 Under Rule 150.2, the speculative position limit in CBOT corn futures contracts, separately or in combination, net 

long or short, is 600 contracts for the spot month, 13,500 contracts for a single month other than the spot month, and 

22,000 contracts for all months combined. The speculative position limit in CBOT soybean futures contracts, 

separately or in combination, net long or net short, is 600 contracts for the spot month, 6,500 contracts for a single 

month other than the spot month, and 10,000 contracts for all months combined. The speculative position limit in 

CBOT wheat futures contracts, separately or in combination, net long or net short, is 600 contracts for the spot 

month, 5,000 contracts for a single month other than the spot month, and 6,500 contracts for all months combined. 

5

 CFTC No-Action Letter No. 06-09, 2006 WL 1419389 (CFTC), May 5, 2006. 

4
relation to all other commodities in such group, not on the basis of speculative market views, 

price targets, or price trends. Similarly, any periodic rebalancing is implemented in accordance 

with a predetermined numerical threshold and not on the basis of speculative market views, price 

targets, or price trends. 

Fourth, you note that, as with the program described in CFTC Letter 06–09, implementing the P 

strategy should not pose any concerns about trading activity in the spot month because X rolls all 

long futures positions into later contract months prior to the last trading day or first notice of 

delivery day, whichever is earlier. Thus, X is not requesting any increase in the spot month 

limit. 

Finally, you state your belief that granting this request is supported by, and consistent with, the 

Division’s no-action position in CFTC Letter No. 06–09 and that the facts and circumstances 

presented in your request are analogous to those presented in that recent no-action letter.6

 

Consistent with the relief granted in CFTC Letter No. 06–09, you have also requested that, in the 

event of subsequent growth in the amount of assets under management pursuant to P requiring 

additional long futures positions, X be permitted to notify the Division in reliance on the noaction relief granted in this letter. Upon receipt of such a request, the Division could either 

confirm that the increased position size is permissible pursuant to the relief granted herein or is 

not permissible unless X requests and receives additional no-action or other relief. In either 

event, X would be able to learn the Division’s decision through a simple notice filing and would 

not be required to reapply for no-action relief de novo. 

Conclusion 

For the reasons, and subject to the conditions, described in this letter, the Division has 

determined that it will not recommend to the Commission that enforcement action be taken for 

violation of Commission regulation 150.2 with respect to the corn, soybean and wheat futures 

trading activity conducted by X, and the futures positions held in connection with the P strategy, 

if those positions (in any month other than the spot month) are in excess of the applicable 

speculative position limits. In particular, the conditions governing this no-action relief include: 

• The futures trading activity passively tracks the P strategy; 

• The P strategy continues to reflect a broadly diversified basket of tangible commodities, 

calculated and rebalanced based on an objective, predetermined mathematical formula, as 

described in your letter; 

• The futures trading activity is unleveraged; 

• The futures trading does not result in price exposure for X (i.e., the price exposure is 

passed on to the individual account holders or the various pool participants, including 

investors in funds subject to, or exempt from, the Part 4 rules, as the case may be); 

 

6

 Also, consistent with the no-action request that gave rise to CFTC Letter 06-09, your request does not constitute a 

request pursuant to Commission regulation 1.47 to classify the positions in question as bona fide hedging under 

Commission regulation 1.3(z)(3). 

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• As noted, positions in excess of the speculative limits are not carried into the spot month; 

• X’s clients are provided with at least the level of disclosure and transparency described in 

your letter; and 

• The maximum long CBOT corn, soybean and wheat futures positions held pursuant to the 

no-action relief do not exceed 17,500 contracts for a single non-spot month (27,000 

contracts for all months combined) in corn, 9,000 contracts for a single non-spot month 

(15,000 contracts all months combined) in soybeans, and 11,000 contracts for a single 

non-spot month (13,000 contracts all months combined) in wheat. 

The position taken herein is based upon the representations you have made to the Division. Any 

different, changed or omitted facts or conditions, including revisions to the legal requirements 

applicable to speculative position limits and exemptions thereto, might require the Division to 

reach a different conclusion. The relief granted in this letter applies only with respect to 

regulation 150.2 and does not excuse X from complying with any otherwise applicable 

provisions of the Act or Commission regulations. You must notify the Division immediately in 

the event that there is any significant change from the facts presented to us concerning the 

activities of X, or the Funds, as described in your letter. Further, this letter represents the 

position of the Division of Market Oversight only and does not necessarily represent the views of 

the Commission or any other division or office of the Commission. 

If you have any questions concerning this correspondence, please contact Donald H. Heitman, an 

attorney on my staff, by email at dheitman@cftc.gov, or by phone at (202) 418-5041. 

Very truly yours, 

Richard A. Shilts 

Director 

Division of Market Oversight 

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