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June 15, 2009 

VIA ELECTRONIC MAIL 

David Stawick 

. Secretary of the Corrunission 

Commodities Futures Trading Commission 

Three Lafayette Center 

11552151 Street NW 

Washington, bC 20581 

secretary@cftc.gov 

Dear Mr. Stawick: 

C.F.T.C . OFFICE OF THE SECRETARIAT 

ZD09 JUN 16 Arl 9 18 

Attad1ed are my~omments on the,"Concept Rel~ase 011 Whether '1:9 Eliminate the Bona 

Fide Hedge Exen~ption for CertainSwaps Dealers and Create a New Limited Risk 

Management Exemption From Speculative Position Limits" (Federal Register I VoL 74, 

No. 55/ Tuesday, March 24,2009 I Proposed Rules I pages 12282Ml2286). 

Thank you very much for accepting and considering my comments. 

LSincerel~ 

Michael W. Masters 

Portfolio Manager I Managing Member 

Masters Capital Management, LLC 

P.O. Box 224229 

Christiansted, VI 00822 

(340) 692M51 02 
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. 

General Comments 

The futures markets for non-fmancial consumable commodities1 exist strictly for the benefit 

of bona fide physical hedgers. Speculators should only be permitted in these markets to the 

extent that they provide a level of liquidity sufficient to enable the smooth functioning of 

these markets. Speculators have never been entitled to unlimited access to the futures 

markets. 

Farmers produce crops that are essential to life. Energy companies produce oil and natural 

gas that are essential to industry and to our economy's health. In so doing, these physical 

commodity producers incur risk due to the daily fluctuation in prices for these commodities. 

The futures markets exist so that they can hedge their price risk. 

Price risk is inherent in the day-to-day business operations of bona fide physical producers 

and consumers, as they provide the vital commodities that feed our citizens and power our 

economy. In contrast, speculators incur price risk only when they choose to, in the pursuit 

of personal trading profits. Speculators can eliminate their price risk simply by unwinding 

their speculative positions. This option is not available to bona fide physical hedgers whose 

livelihood is the production of the vital commodities that our entire populace relies upon. 

Commodity swap dealers, in their purest form, function as middlemen, bundling and 

packaging baskets of commodity futures into swaps. This often involves some basis risk in 

the form of time, place or quality of the physical commodity referenced. 

When this function is performed on behalf of bona fide physical hedgers, these swap dealers 

provide a valuable service that benefits the economy as a whole. When this function is 

performed on behalf of speculators seeking to take positions that exceed limits on the 

exchanges, then swap dealers contribute to excessive speculation. This speculation, when 

left unchecked, will cause price bubbles to form in the affected commodities. 

For these reasons, swap dealers are not intrinsically good or bad. An effective regulatory 

regime must look through the swap dealers to the ultimate counterparty in order to 

effectively apply aggregate speculative position limits. These limits are necessary to prevent 

excessive speculation - not just manipulation. It is also critical to note that swap dealers 

speculating for their own account by taking proprietary positions or by managing an 

unbalanced swaps book must face speculative position limits just like all other speculators. 

1 Commodities that are consumed, such as agricultural (com, cattle, etc.), energy (crude oil, 

natural gas, etc.) and non-precious metals (copper, zinc, etc.). 
The best solution for effective regulation of the over-the-counter (OTC) derivatives markets 

for consumable commodities is to mandate that all derivatives clear through a Derivatives 

Clearing Organization (DCO) with novation, so that the DCO becomes the central 

counterparty to both sides of the trade. This would allow every OTC position to be seen by 

regulators. Unfortunately, this would most likely require Congress to pass new legislation 

in order to be implemented. 

In the meantime, I commend the efforts of the CFTC to do more to combat excessive 

speculation by requiring more transparency in the OTC markets. 

I would propose that any entity that wants to exceed aggregate speculative position limits on 

the exchange and/or over-the-counter (OTC) must agree to the following two conditions as 

part of their exemption. 

1. They must agree that all of their counterparties I clients will fill out Form 40 with the 

CFTC declaring (under penalty oflaw) what category of trader they are. The CFTC 

will then issue their counterparties I clients a Large Trader Identification Number 

(LTIN). 

2. They must agree to report to the CFTC on a daily basis: 

a. A list (by L TIN) of all traders with futures-equivalent positions that exceed 

the limit for Reportable positions 

b. An aggregate amount of all remaining futures-equivalent positions 

distinguishing between counterparty I client positions and proprietary trading 

positions 

Note that this aggregate amount should not exceed aggregate speculative 

position limits. 

The only way a non-commercial entity (be it a swap dealer, commodity mutual fund or 

some other intermediary) can exceed aggregate speculative position limits is to agree to the 

above two conditions. Otherwise, they should be treated like every other speculator who 

exceeds position limits. 

Every trader with a Reportable position on the futures exchanges must also fill out Form 40 

with the CFTC and obtain a Large Trader Identification Number (LTIN). LTINs apply at 

the control-entity level and no entity can have more than one LTIN. 

Once this reporting system is in place, the CFTC can compile futures and futures-equivalent 

positions by L TIN in order to ensure that no speculator is exceeding aggregate speculative 

position limits. The use ofLTINs will make it much simpler and faster for the CFTC to 

compile this information when compared with other methods. 
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? 

Swap dealers must not receive what amounts to a blanket exemption from position limits. 

They absolutely should be required to divulge the composition of their entire swaps book in 

order to exceed position limits on contract markets. 

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)? 

Swap dealers must be held to a higher standard than that which currently exists. The 

proposed "limited risk-management exemption" is a good step in the right direction, but it 

should go even further in terms of the disclosures required of swap dealers. In my general 

comments, I detail an alternative system that would lead to greater disclosures and simplify 

the imposition of aggregate speculative position limits. 

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 existingfotures positions that no 

longer qualify for the new risk-management exemption? For example, should existingfotures 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? 

Any speculator that is determined to exceed aggregate speculative position limits should be 

immediately placed into "liquidation only" mode. That speculator can then reduce their 

position, but cannot add to it. They would also not be able to roll that position forward to a 

different maturity. 

In order to effectively accomplish this, all swap dealers and other intermediaries would need 

to be notified whenever a speculator enters liquidation-only mode so that they know to only 

perform liquidating trades with that speculator. 
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? 

These new rules must apply to all commodities that are non-fmancial and consumable, 

including energy and metals. 

Speculative position limits have a role to play in preventing manipulation, but their primary 

purpose is the elimination of excessive speculation. All non-fmancial consumable 

commodities are susceptible to the formation of price bubbles as a result of "irrational 

exuberance" I speculative euphoria. When a bubble forms in emerging markets or 

technology stocks, investors feel good as the bubble expands. In contrast, when a bubble 

forms in food and energy commodities, tremendous pain is inflicted on innocent bystanders 

who are forced to consume these items at drastically inflated prices. 

In most cases, the exchange position limits are currently too high and are designed to 

prevent manipulation but not excessive speculation. Also, accountability rules are not 

actual speculative position limits. The CFTC should directly set aggregate speculative 

position limits for all non-fmancial consumable commodities. If it is not within their current 

power to directly set these limits, then the CFTC should direct the exchanges to lower their . 

position limits substantially. · 

These speculative position limits must apply in aggregate across all trading venues. 

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? 

As mentioned in my general comments, I believe that all counterparties and clients of those 

swap dealers and other intermediaries that are receiving an exemption from aggregate 

speculative position limits must fill out CFTC Form 40 and receive a Large Trader 

Identification Number (LTIN). This way, each one of those clients would be classified 

according to the established guidelines of Form 40. 
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.? 

As mentioned in my general comments, I believe that all counterparties and clients of those 

swap dealers and other intermediaries that are receiving an exemption from aggregate 

speculative position limits must fill out CFTC Form 40 and receive a Large Trader 

Identification Number (LTIN). Therefore, the counterparties and clients themselves will be 

filling out these forms under penalty oflaw. They should be required to update their status 

by filing a new Form 40 any time their status changes. The CFTC should perform audits 

and spot checks to ensure that fraudulent forms are not being filled out and to make sure 

that entities update their status as required. 

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)? 

As mentioned in my general comments, swap dealers must report (by LTIN) the futures--

equivalent positions of all counterparties with positions exceeding the Reportable threshold. 

If any of these counterparties serve as intermediaries, then they also would be required to 

comply with the two reporting requirements I outline in my general comments in order to 

be exempt from speculative position limits in the over-the-counter (OTC) markets. If they 

do not comply with these reporting requirements, then they should not be allowed to take 

OTC derivatives positions in excess of aggregate speculative position limits. 

I have outlined extensively, in Congressional testimonies and published research reports, the 

damaging effects of passive investment in the consumable commodities derivatives markets. 

My strong belief is that a trader making a passive "investment" in consumable commodities 

(including indexes) should face an aggregate speculative position limit that is 1 0% of the 

limit for non-passive investments. For instance, in Com, the speculative position limit is 

22,000 contracts; therefore, the passive investment limit should be 2,200 contracts. 
8. If a swap dealer were allowed an exemption for risk taken on against index-fond clients, how would 

the dealer satisfy the Commission that the fond is made up of many participants and is passively 

managed? Is certification by the dealer or fond sufficient or should the dealer or fond be required to 

identify the fond's largest clients? 

The swap dealer would be responsible to make sure that the fund has filled out Form 40 

with the CFTC and acquired an L TIN. The fund would then be responsible to fulfill the 

two reporting requirements I outlined in my general comments in order to exceed aggregate 

speculative position limits. These reporting requirements include the disclosure by LTIN of 

every client that has a futures-equivalent position in excess of the Reportable threshold. 

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? 

The swap dealer would be responsible to make sure that the intermediary has filled out 

Form 40 with the CFTC and acquired an LTIN. The intermediary would then be 

responsible to fulfill the two reporting requirements I outlined in my general comments in 

order to exceed aggregate speculative position limits. These reporting requirements include 

the disclosure by LTIN·of every client that has a futures-equivalent position in excess of the 

Reportable threshold. 

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 fonds 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. 

Any counterparty that has a futures equivalent position that exceeds the Reportable 

threshold level on an exchange must report this position. All remaining futures equivalent 

positions can be aggregated and reported in sum as long as these positions do not exceed 

aggregate speculative position limits. 

So as an example, any trader with more than 150 Com contracts (750,000 bushels) on an 

exchange has to report this position to the CFTC. The exact same level- 750,000 bushelsshould apply to over-the-counter (OTC) transactions as well. 
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? 

If the swap dealer has no clients that exceed a reportable futures equivalent position, then 

they can send in a report of their total overall positions segmented between counterparty 

positions and proprietary trading positions. Proprietary trading positions cannot exceed 

aggregate speculative position limits. 

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 monthend open interest for the most recent calendar year. " 

Yes, there should be an overall limit for swap dealers, because they wield enormous market 

power and they are never obligated to run a fully hedged book, which means they often 

move their hedges around and seek to profit from these maneuvers. A physical hedger puts 

his hedge on and he's done. A swap dealer is continuously adjusting his hedges and seeking 

to profit every time he does so. Therefore, each swap dealers' net position should not. 

exceed 5% of open interest. 

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? 

Because swap dealers are engaged in physical commodities businesses and proprietary 

trading for the bank's account, these two elements have to be factored into this monitoring 

scheme. 

All physical commodity producers and consumers, including swap dealers with physical 

businesses, should be allowed to hedge their physical market risk, but they should not be 

allowed to "over hedge." Nor should they be allowed to speculate counter to what hedging 

would dictate. 

As an example, if a swap dealer owns an oil refmery, this would naturally make them short 

crude oil and long refmed products. If they refme 50,000 barrels per day, then they could be 

long up to 54 million barrels of crude oil futures contracts (3 years supply) but they cannot 

be long 200 million barrels of crude oil since that is clearly a proprietary speculative 

position. Nor can they be net short crude oil derivatives since that is purely speculative. 
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? 

The two index traders should be treated exactly the same as every other entity that wants 

exemptions from aggregate speculative position limits. They must meet the two reporting 

requirements that I outlined in my general comments. 

15. What information should be required in a swap dealer's application for a limited risk- management 

exemption? 

Please see my general comments.