MANAGED FUNDS ASSOCIATION 

The Voice of the Global Alternative Investment Industry 

WASHINGTON, DC I NEW YORK 

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August 21, 2008 

Mr. David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, N.W. 

Washington, D.C. 20581 

Received cVJI~MENT 

Records Section 

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Re: Comment Letter Regarding Petitioner's Request To Exempt Certain 

Over-the-Counter Swaps From Certain of the Requirements Imposed by 

Commission Regulation 35.2, Pursuant to the Authority in Section 4(c) of 

the Commodity Exchange Act, 73 FR 38403 (July 7, 2008) 

Dear Mr. Stawick: 

Managed Funds Association ("MFA") 1 appreciates the opportunity to submit comments 

with respect to the above-referenced petition, which was submitted jointly by the Chicago 

Mercantile Exchange, Inc. ("CME") and the Board of Trade of the City of Chicago, Inc. 

("CBOT"). CME and CBOT's petition was submitted in connection with certain agricultural 

over-the-counter ("OTC") contracts to be listed for clearing-only on the CBOT and cleared 

through the CME (the "CME Clearing House"). CME and CBOT are requesting that the 

Commodity Futures Trading Commission ("Commission") issue an order under Section 4(c) of 

the Commodity Exchange Act ("CEA") that would permit qualified participants who enter into 

OTC corn basis swaps and OTC calendar swaps for corn, wheat, and soybeans (collectively 

"OTC Swaps") to submit those contracts to the CME Clearing House for clearing. The 

Commission has requested comment on whether to exempt the OTC Swaps from certain of the 

requirements otherwise imposed by Commission Regulation 35.2. 

MFA's members are active participants in the commodities and OTC derivatives markets, 

and trade agricultural contracts both on exchanges and in OTC markets. Accordingly, MFA has 

a strong interest in the fairness and efficiency of these markets and the above referenced petition. 

MFA supports the Commission's efforts to enhance the transparency and efficiency of 

derivatives markets. We believe that granting the request of the CME and CBOT will further 

advance those goals. We strongly support the petition by the CME and CBOT as we believe the 

exemption: (I) will facilitate risk management, improve liquidity and market efficiency, 

1 MFA is the voice of the global alternative investment industry. Its members include professionals in hedge funds, 

funds of funds and managed futures funds, as well as industry service providers. Established in 1991 , MFA is the 

primary source of information for policy makers and the media and the leading advocate for sound business 

practices and industry growth. MFA members include the vast majority of the largest hedge fund groups in the 

world who manage a substantial portion of the approximately $2 trillion invested in absolute return strategies. MFA 

is headquartered in Washington, D.C., with an office in New York. 

2025 M Street, NW. Suire 6 10 I Washington, DC 20036 I 202.367.11 40 I Fax 202.367.2140 I www.managedfunds.org 
Mr. David Stawick 

August 21, 2008 

Page2 

enhance OTC market transparency, and reduce systemic risk; (2) is consistent with existing 

industry and regulatory initiatives; and (3) is consistent with the underlying policies of the CEA 

and Commodity Futures Modernization Act of2000 (the "CFMA"). 

1. The requested exemption will facilitate risk management, improve liquidity and 

market efficiency, enhance OTC market transparency and reduce systemic risk. 

The clearing of OTC Swaps through a central counterparty has the potential to free up 

credit lines for many agricultural market participants. This will assist agricultural market 

participants in their ability to utilize OTC derivatives to manage their market risk, which may 

otherwise be constrained by the cost of posting collateral with counterparties. This is 

particularly important given the reported tightening of credit standards and the difficulty some 

agricultural market participants are experiencing in financing their hedge positions. 

The clearing of OTC Swaps will also facilitate creation of a fungible market for the OTC 

Swaps, and in turn, enhance market liquidity, although this will necessitate the adoption of more 

standardized contract terms. Today, OTC market participants must perform extensive financial 

due diligence on their prospective counterparties and enter into credit support agreements. This 

reduces the number of potential m.arket participants and increases the amount of time and 

expense necessary to negotiate an OTC transaction. Clearing through a central counterparty 

allows market participants to trade without regard to the credit risk of their trade counterparty, 

further enhancing trading liquidity and reducing transaction costs. One example of the increased 

market liquidity and increased market efficiency that clearing of OTC Swaps can facilitate is in 

the OTC ethanol swap market. Before OTC ethanol swaps were centrally cleared, the OTC 

market in ethanol was illiquid and characterized by sporadic trading and extremely wide bid/ask 

spreads. Since the advent of clearing of OTC swaps in ethanol, liquidity and volume have 

improved, and bid/ask spreads have narrowed (indicative of a more liquid/efficient market). 

The standardization of contracts combined with centralized clearing will make it easier 

for parties to exit transactions, which will also improve market liquidity. Today, when market 

participants want to exit an OTC contract they can do so only by negotiating an offsetting 

transaction with the original counterparty, negotiating an offsetting transaction with another 

counterparty who agrees to assume responsibility for the original contract (a "novation"), or 

negotiating an offsetting transaction with another counterparty and maintaining two offsetting 

positions, one with the original counterparty and an economically offsetting transaction with a 

second counterparty. Those approaches entail significant counterparty risk and are inefficient 

from a capital usage standpoint. Centrally cleared OTC Swap contracts will permit a market 

participant to exit a position and substantially eliminate counterparty risk by entering an 

offsetting transaction with any other counterparty that is a qualified participant. 

In addition to facilitating risk management and enhancing market liquidity, permitting 

qualified participants who enter into OTC Swaps to submit such contracts to the CME for 

clearing will provide greater regulatory transparency. The CME Clearing House will clear the 

202S M Street, NW, Suite 6 10 I Washington, DC 20036 I 202.367.11 40 I Fax 202.367.2140 I www.managedfunds.org 
Mr. David Stawick 

August 21, 2008 

Page3 

OTC Swaps in compliance with the core principles of the CEA applicable to derivatives clearing 

organizations, and the Commission's rules and regulations with respect to, among other things, 

market surveillance and financial surveillance. The OTC Swap transactions will be subject to 

large trader reporting and position accountability levels. This will enhance the information 

available to the Commission regarding OTC transactions in agricultural derivatives. 

Furthermore, the clearance of OTC Swaps may provide additional transaction information to 

market participants regarding agricultural markets, which may enhance price discovery. 

Transparent markets facilitate accurate valuation of positions and reduce transaction costs. 

Finally, clearing standardized OTC Swap contracts through a central clearing house 

reduces operational complexity, costs, and systemic risks. Currently, the processing of the OTC 

derivatives transactions is difficult to automate because each OTC contract is a customized 

agreement between two parties. As a result, when trade volumes increase, the back offices of 

market participants experience increased difficulty in processing OTC derivatives transactions. 

The centralized clearing of standardized OTC Swap contracts allows for automation of the 

clearance and settlement process, which increases operational efficiency and reduces costs. A 

centralized clearing house would also reduce systemic risk by functioning as a back-stop to 

prevent the failure of a single market participant from having a disproportionate effect on the 

overall market. 

2. The requested exemption is consistent with existing industry and regulatory 

initiatives. 

The OTC Swaps exemption petitioned for by CME and CBOT is consistent with MFA 

and the major OTC derivatives dealers' initiatives with respect to recent innovations in other 

OTC derivative products, particularly in the credit derivatives markets.2 Over the last several 

years, MFA and the major OTC derivatives dealers have worked extensively with regulators, 

including the Federal Reserve Bank of New York, the Securities and Exchange Commission and 

the U.K. Financial Services Authority, to promote fairness, financial security and efficiency in 

OTC derivatives markets, as well as to reduce counterparty credit risk and systemic risk in those 

markets. MFA and its members continues to consistently support and participate in innovative 

and collaborative industry efforts that seek to improve market access, operational infrastructure 

and efficiency of the OTC derivatives markets. Such efforts include, enhancing operational 

efficiency (e.g., counterparty credit risk, operational risk, etc.) to reduce risk and MFAsponsored seminars and meetings to educate industry participants and promote industry-wide 

infrastructure innovations that seek to achieve fairness, security and flexibility in the processing 

of OTC derivatives transactions. 

2 These efforts include the consideration of establishing a central counterparty for the clearing of all OTC credit 

derivatives products. 

2025 M Sucet. NW, Suite 6!0 I Washingwn, DC 20036 I 202.367.11 40 I Fax 202.367.2140 I www.managcdfuods.org 
Mr. David Stawick 

August 21, 2008 

Page4 

3. The requested exemption is consistent with the underlying policies of the CEA and 

CFMA. 

Lastly, MFA believes that CME and CBOT's petition to exempt certain OTC swaps from 

certain provisions of Regulation 35.2 is consistent with the underlying policies of the CEA and in 

particular the CFMA, which encourage innovation in commodities markets, and specifically, the 

clearing of OTC commodity derivatives. 

Conclusion 

MFA is a proponent of fair, open and competitive commodities and OTC derivatives 

markets and of appropriate regulatory oversight to prevent market manipulation and systemic 

risk. To that end, we believe that granting the CME and CBOT their request to exempt certain 

OTC swaps from certain provisions of Regulation 35.2 will facilitate risk management, improve 

liquidity and market efficiency, enhance OTC market transparency, and reduce systemic risk. 

Thank you again for affording us the opportunity to submit these comments. As always, 

MFA welcomes the opportunity to further discuss our position. If you have any questions 

concerning the matters discussed above, please do not hesitate to contact me at (202) 367-1140. 

cc: Acting Chairman Walter Lukken 

Commissioner Bart Chilton 

Commissioner Michael Dunn 

Commissioner Jill E. Sommers 

Very truly yours, 

Richard H. Baker, 

CEO and President 

Managed Funds Association 

202S M Street, NW, Suite 610 I Washington, DC 20036 I 202.367.1140 I Fax 202.367.2140 I www.managedfunds.org