BRICKFIELO BURCHETTE 

RITTS &STONE, PC 

WASHINGTON, D.C. 

AUSTIN, TEXAS 

July 13, 2009 

Mr. David Stawick, Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

C.F.T.C. 

OFFICE OF THE SECRETARIAT 

f009 JUL 1 ~ P r1 ~ 1 ~ 

COMMENT 

Re: The Commodity Futures Trading Commission ("CFTC" or "Commission") 

review to determine whether the Henry Financial LD1 Fixed Price contract, 

traded on the IntercontinentalExchange, Inc. ("ICE"), an exempt commercial 

market ("ECM") under sections 2(h)(3}-(5) of the Commodity Exchange Act 

("CEA" or the "Act"), performs a significant price discovery function. 

Dear Mr. Stawick: 

Steel Manufacturer's Association ("SMA") and East Texas Electric Cooperative, 

("ETEC") (collectively referred to as "SMA and ETEC") submit this letter in response to 

the CFTC's invitation for comments reported in 74 Fed. Reg. 28028. 

The members of SMA and ETEC regularly enter into power purchase agreements 

and hedges, which are largely or directly based on the price of natural gas. ETEC and its 

members regularly execute physical and financial natural gas transactions. The members 

of SMA and ETEC are substantially affected by disproportionate financial "investment" 

in natural gas commodities to the extent that such investment creates periods of excessive 

prices and increased volatility. SMA and ETEC submit that this natural gas investment is 

enabled and driven, in part, by natural gas transactions executed on ICE, and take this 

opportunity to respond to the Commission's request for comments. In the request for 

comments, the CFTC provided: 1 

In determining whether an ECM's contract is or is not a [Significant Price Discovery 

Contract ("SPDC")], the Commission will consider the contract's material liquidity, 

price linkage to other contracts, potential for arbitrage with other contracts traded on 

designated contract markets or derivatives transaction execution facilities, use of the 

1 Regarding the Commission's request for capacity in which the commenter is knowledgeable on the 

subject, the primary author of these comments formerly practiced as a commodities compliance vice 

president for a reputable dealer that traded substantially on ICE and NYMEX. The author also investigated 

multiple natural gas and derivative products related market issues as a FERC enforcement attorney and 

SEC Economist and currently provides legal advice on the negotiation of physical and financial natural gas 

and power transactions as an attorney for Brickfield Burchette Ritts & Stone., PC. 

1025 THOMAS JEFFERSON STREET, N.W. EIGHTH FLOOR, WEST TOWER WASHINGTON, D.C. 20007 (202) 342-0800 FAX (202) 342·0807 www.bbrslaw.corn 
Mr. David Stawick, Secretary 

July 13, 2009 

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BRICKFIELJ;> BURCHETTE 

RITTS C'?"STONE, PC 

ECM contract's prices to execute or settle other transactions, and other factors... The 

Commission will publish a notice to receive written data, views, and arguments relevant 

to its determination from the ECM and other interested persons. 

2 

SMA and ETEC provide these comments, along with late filed comments 

submitted under 74 Fed. Reg. 12282 regarding the Concept Release on a new Limited 

Risk Management Exemption from Speculative Position Limits ("Concept Release"). 

SMA and ETEC submit that this LD 1 review and Concept Release are interrelated, as we 

will explain below. We support recognition ofLD1 as an SPDC, which should be subject 

to increased oversight by the Commission, and particularly, to position limits. 

Specifically, to the extent the CFTC determines to extend position limits and 

implement the Limited Risk Management Exemption to natural gas commodities, such as 

NYMEX's NG 1 ("NG 1 "), such a determination will likely shift liquidity from NG 1 to 

LD1, as a means to avoid newly enacted position limits, unless the Commission also 

subjects LD 1 to position limits applicable to SPDCs under the Core Principles applicable 

to SPDCs.3 SMA and ETEC would like to highlight this risk and ask that it be 

considered in the CFTC's evaluation. 

The need for this expansion of CFTC oversight arises due to the sophistication of 

fund managers and the breadth of financial "investment" in natural gas commodity 

products. The CFTC needs the ability to aggregate positions of specific non-commercial 

market participants across all exchanges that make substantial markets in natural gas. 

Without this ability, speculative traders with outsized positions will shift into markets 

where they have yet to reach a position limit, or to a market that has no limit at all. All 

exchanges that maintain a significant market share of the natural gas commodity should 

be subject to these limitations. 

Gaming across exchanges, or the intention to do so, was made patently clear when 

Platts Gas Daily reported the comments of John Hyland, the portfolio manager and chief 

2 74 FR 28028,28029 (June 12, 2009). 

3 17 CFR 36, Appendix B to Part 36-Guidance on, and Acceptable Practices in, Compliance With Core 

Principles: Core Principle of Section 2(h)(7)(C)-Position Limitations or Accountability. The electronic 

trading facility shall adopt, where necessary and appropriate, position limitations or position accountability 

for speculators in significant price discovery contracts, taking into account positions in other agreements, 

contracts and transactions that are treated by a derivatives clearing organization, whether registered or not 

registered, as fungible with such significant price discovery contracts to reduce the potential threat of 

market manipulation or congestion, especially during trading in the delivery month. 

2 
Mr. David Stawick, Secretary 

July 13, 2009 BRICKFIELO BURCHETTE 

RITTS C?"STONE, PC Page3 

investment officer of United States Natural Gas Fund, LP ("UNG"), on May 22, 2009.4 

The natural gas newsletter reported that "Hyland told Platts earlier this week that if 

NYMEX asked the fund to reduce its percentage of open interest, it could move positions 

to ICE."5 For these reasons, ICE Henry Hub natural gas products should also be subject 

to position limits and proposed limited risk management exemption rules. 

Recent trading activity in UNG created concerns for SMA and ETEC regarding 

excessive speculation. The explosion in UNG volume that started in April 2009 and 

peaked in June 2009 correlated well with excessive volatility and price increases. These 

exchange traded security volumes represent a significant portion of both ICE and 

NYMEX open interest. 6 Trading activity during this period reversed a period of decline 

in the natural gas markets, despite continued fundamental weakness -- record storage, 

strong production and substantial excess production capacity. 

This UNG activity provides a textbook case on the ability of a single commodity 

"investment" product to impact the price of natural gas on the NYMEX and ICE. On 

July 9, 2009, Platts Gas Daily reported rather dramatic comments by traders relating to 

the Security and Exchange Commission's ("SEC") failure to approve the UNO's issuance 

of more shares:7 

The fund, which warned in a Securities and Exchange Commission 

filing Monday that it faced running out of registered units if the SEC did 

not approve its June 5 new-registration request, did just that Tuesday, 

leading the New York Stock Exchange to order a 45-minute trading halt 

for UNG while the fund provided the SEC more information. Several 

traders noted an immediate drop in the August NYMEX gas futures 

contract, which slid 8.2 cents in the last hour of trading. "You saw such a 

bearish reaction immediately," a Houston-based NYMEX trader said. "Big 

black box funds are ready to start arbitraging this." 

4 See UNG Prospectus (May 6, 2009). UNG is a commodity pool and an exchange traded security. The 

investment objective ofUNG is to have the changes in percentage terms of the units' net asset value reflect 

the changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana, as 

measured by the changes in the price of the futures contract on natural gas traded on the New York 

Mercantile Exchange that is the near month contract to expire, except when the near month contract is 

within two weeks of expiration, in which case it will be measured by the futures contract that is the next 

month contract to expire, less UNG's expenses. 

5 NYMEX keeping eye on heavily traded gas fund, Platts Gas Daily (Platts), May 22, 2009 p. 7. 

6 !d. 

7 Traders watch NYMEX for sign of gas fund's impact, Platts Gas Daily (Platts), July 9, 2009 p. 3. 

3 
Mr. David Stawick, Secretary 

July 13, 2009 BRICKFIELJ;> BURCHETTE 

RITTS (7-' STONE, PC Page4 

Speculation of another large drop Wednesday materialized to some 

degree as the contract closed another 7.6 cents lower ... [Sempra's Brison] 

Bickerton said the halt of new capital into UNG could have a longer-term 

bearish effect on prices. "Getting a 7-cent sell-off despite weather maps 

that are a little bit warmer is impressive. It says that the market is selling 

off in the face of UNG." Stephen Schork, president of Schork Group, 

agreed, saying he believes the lack of new money will have a bearish 

effect on gas prices. "Wall Street has been selling [UNG] since the winter, 

and the clients don't have much to show for it so far. Perhaps this is the 

breather they need to step back and realize just because a commodity is 

cheap doesn't mean it has to get expensive," Schork said. "If we take out 

this lift that UNG could have been providing the market, you could very 

well see this flush down below $3." 

A recent report from Credit Suisse said the vacuum created by 

UNG's sudden absence would lead to continued downward pressure on 

prices, and that many UNG investors may take this opportunity to divest 

themselves. "That bid is going to be missing from the futures market now. 

You've filled up a bag and you can't put any more in it. It's a very bearish 

dynamic," a Houston based NYMEX trader added. 

But according to Bickerton, the real impact will come when the 

SEC makes a ruling on whether UNG gets its new units. "It could spark a 

major short-covering market," Bickerton said. "If the market postulates 

that big volumes are on the way, you [might] have a rip-your-face-off 

short-covering rally. It's kind of a scary thought." 

These comments, in summary, indicate that the lack of additional gas purchasing 

by UNG, due to SEC restrictions, generated significant bearish sentiment, and caused 

natural gas prices to fall substantially. If the comments of the various market participants 

in the excerpt above are accurate, the UNG exchange traded security created excessive 

volatility and temporarily increased prices above levels suggested by economic 

fundamentals. 

Due to the clear price impact ofUNG on the natural gas markets currently, it must 

be the case that UNG's primary hedging tools would generate significant price discovery. 

To the extent UNG relies on LD 1 to effect its hedging, this supports the significance of 

LD 1 as an SPDC. The latest UNG posting of its natural gas commodity positions reflects 

4 
Mr. David Stawick, Secretary 

July 13, 2009 

PageS 

BRICKFIELJ;) BURCHETTE 

RITTS (7i5TONE, PC 

a majority of natural gas product open interest as held on ICE in LD1 when compared to 

NYMEX futures. 8 

Daily Holdings 

As of7 /10/2009 

Current Holdings (subject to change) 

SecuritY 

NYMEXNat. (:-. · .. __ :;.' ... - .. · 

· •··.. : Gas Future NG 

~~~: ICE N~u~: .. OthetNafuf~l Cleared Swap 

G~slnteresis ·.. ICE LOT Aug09 

NYMEXNat. 

Gas Future NN 

Aug09 

27,203 

339,234 

51,746 

3.373 917,557,190 

3.373 2,860,590,705 

3.373 436,348,145 

Based on the above, whether investors in UNG consisted of sophisticated funds, 

or a herd of individual investors, these financial investors significantly impacted natural 

gas prices via hedges with LDI. SMA and ETEC support subjecting all natural gas 

investment vehicles to aggregate position limits and the proposed limited risk 

management exemption. The recognition of LD1 as an SPDC is an important step 

toward achieving that goal. 

In addition to the current lack of CFTC based position limits on exchange traded 

natural gas commodity products, UNG benefits from CFTC no-action letters that indicate 

the CFTC will not subject commodity pools similar to UNG to position limits.9 Based on 

impact of UNG, SMA and ETEC also request the CFTC to reconsider this exemption 

from position limits provided to the Commodity Index exchange traded securities. 

In summary, the CFTC should extend application of position limits and 

implement the proposed limited risk management exemption considered under the 

8 UNG Daily Holdings, United States Natural Gas Fund, LP available at 

http://www.unitedstatesnaturalgasfund.com/ung holdings.asp 

9 See CFTC Letters 06-09 (May 5, 2006) and 06-19 (September 6, 2006). 

5 
Mr. David Stawick, Secretary 

July 13, 2009 

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BRICKFIELJ;> BURCHETTE RITTS~STONE, PC 

Concept Release to LD 1. This extension would enable the CFTC to aggregate positions 

of specific non-commercial market participants across significant natural gas exchanges 

and prevent excessive speculation from creating market dislocations. Due to the 

excessive impact of UNG on the price of natural gas through NG 1 and LD 1, and for 

consistency and equity, the CFTC should also reconsider no-action relief granted to 

exempt commodity index funds from position limits. 

Sincerely, 

Peter G. Haller 

Counsel for SMA and ETEC 

6