American Bakers Association 

June 15, 2009 

Mr. David Stawick 

Secretary 

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RE: 17 CFR Part 150: Concept Release to Eliminate Bona Fide Hedge Exemption for ap ~ Dealers & Create New Limited Risk Management Exemption from Speculative Position 

Limits. 

Dear Secretary Stawick: 

The American Bakers Association (ABA) would like to thank the Commodity Futures Trading 

Commission and its Commissioners for allowing participants of the commodity futures markets 

to submit comments regarding the CFTC Concept Release on whether to eliminate the bona fide 

hedge exemption for swap dealers and create a new limited risk management exemption from 

speculative limits. 

As you are aware, ABA represents the interest of bakers before the U.S. Congress, federal 

agencies, state legislatures and international regulatory authorities. ABA advocates on behalf of 

over 250 members, both bakers and their suppliers. ABA members produce bread, rolls, 

crackers, bagels, sweet goods, tortillas and many other wholesome, nutritious baked products for 

America's families. The baking industry generates over $70 billion in economic activity 

annually and employs close to half a million highly skilled people. 

When implementing possible new regulation on the futures markets, ABA urges the CFTC to 

take into account its proposals to address market volatility and convergence issues: 

Redefine the parameters of a true commercial hedger: The definition of a commercial 

hedger should exclude those who do not purchase the physical product for production 

purposes. 

ABA believes the index/swap participant is not a commercial hedger, but is a speculator, 

exercising a bias that commodity prices will generate a negative correlation to changes in stock 

returns and capital market returns. Although the swap dealer is hedging a financial obligation in 

the futures pits, the originator ofthe position (the retail investor) is speculating. 

13001 Street, NW, Suite 700 West • Washington, DC 20005 

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Restructure reporting classifications to accurately report contract holdings of commercial 

hedgers, index funds, and all other contract holding entities. 

ABA believes the current market participant classifications group together too many dissimilar 

entities into too few categories. More classifications would help provide better transparency and 

improve the confidence in the market's function. The CFTC should report all index fund 

positions and not just the agricultural positions. Agriculture represents only about 20% of the 

total index fund positions. Reporting all positions would greatly improve the transparency of the 

market. 

Using this premise, ABA's responses to the questions posed in the concept release are as 

follows: 

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? 

Yes, unless the swap is executed to hedge against a genuine (and demonstrated) 

physical exposure. 

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)? 

The exemption would need to clearly define a traditional commercial hedger: those 

entities who consume or produce physical commodities and therefore have a 

legitimate quantified exposure to price changes in physical commodities as a part of 

the ongoing operation of their business enterprise. 

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? 

These positions should be liquidated. /fit is inappropriate to hold them, they 

should not be held. A methodical reduction in holdings over a prescribed period is 

acceptable. 

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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? 

Yes. The logic also applies to energies, base, and precious metals. Speculators can 

continue to participate, utilizing CFTC position limits. 

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? 

See number A.2. above .... 

6. How should the Commission (and, if applicable, the responsible industry selfregulatory 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.? 

The CFTC form 40 should suffice. This is a legal document subject to prosecution. 

However, a footnote should be added to the Form 410 to make this abundantly 

clear. 

7. For a swap dealer's noncommercial clients, should the rules distinguish between 

different classes ofnoncommercials--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)? 

For reporting purposes, yes, so that all classes ofparticipants can be tracked. For 

position limits, no. All participants above are speculators. 

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? 

ABA does not support any exemptions for swap dealers for risk taken against 

index-fund clients. Index funds should be under strict contract limits, similar to 

the traditional non-commercial market speculator. 

In reference to the question, ~fCFTC allows swap dealers an exemption for risk 

taken on against index-fund clients, as all exchange participants are required to 

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register, all swap participants should be required to register with the CFTC. Swap 

Dealer clients should also register and disclose holdings to the CFTC. 

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 tum 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? See C.8. 

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. 

A new limited risk management exemption reporting requirement should be 

triggered when any non-commercial category exceeds 10% of open interest, not 

25%. While index funds are composed of many participants, they all act as a single 

participant. 

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? 

This is not the problem; the root cause is that the index has created a group of 

individual participants who carry up to 25% of all open interest, yet they operate as 

a single unit- all buying and selling at the same time. 

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-monthscombined 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." 

Yes. 

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? 

Index participation as a percent of futures open interest. For example, in 

agricultural commodities, possibly consider annual production as a measurement. 

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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? 

Similar to the scenario in question 3, these positions should be liquidated. If 

regulation deems these positions inappropriate to hold, then the contracts should 

not be held. Again, a methodical reduction in holdings over a prescribed period 

would be acceptable. 

A recent example of the impact of index speculators occurred in early June. On June 1st, 

wheat contracts at the Chicago Board of Trade (CBOT) increased by 37 cents, or over 5 percent 

of the total price. Then, just two days later, wheat contracts at CBOT ended 52 cents lower than 

the starting price. While these two examples may be the extremes of recent volatility, these 

examples are representative of the larger issue: volatility is increasingly unmanageable for most 

traditional market participants. 

To reiterate ABA's position on this issue, commodity futures markets have never been 

considered an investment class until recently. As defined in A.2. above, index speculators have 

no physical reason for participating in these markets and must be treated as a speculator. The 

position that their activities are passive and have no impact is erroneous, as all market 

participants have some impact on market functionality. 

ABA applauds the Commodity Futures Trading Commission for taking a proactive 

approach in addressing volatility with the markets. ABA believes that by eliminating the bona 

fide hedge exemption for swap dealers, the markets will be given an opportunity to return to 

operating under their original intent. 

Thank you for your consideration of these recommendations. 

President and CEO 

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