Received CFTC 

Records ~tlon b t6(b7 CMEGroup ( 9 

ACME/Chicago Board of Trade/NYMEX Company 

C.F.T.O. 

OFFICE OF THE SECRETARIAT 

2009 JUN 16 Arllll~ 

June 16, 2009 

VIA ELECTRONIC MAIL 

David Stawick 

Secretary of the Commission 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

secretary@cftc. gov 

COMMENT 

Craig S. Donohue 

Chief Executive Officer 

Re: Whether To Eliminate the Bona Fide Hedge Exemption for Certain Swap Dealers and Create a 

New Limited Risk Management Exemption from Speculative Position Limits- 74 Fed. Reg. 

12282 (Mar. 24, 2009) 

Dear Mr. Stawick: 

CME Group Inc. ("CME Group"), on behalf of its four designated contracts markets ("DCMs"), appreciates 

the opportunity to comment on the Commodity Futures Trading Commission's (the "Commission") 

concept release on whether to eliminate the bona fide hedge exemption for certain swap dealers and 

create a new limited risk management exemption from speculative position limits (the "Concept Release"). 

CME Group was formed by the merger of Chicago Mercantile Exchange Holdings Inc. and CBOT 

Holdings Inc. in 2007, and subsequently merged with NYMEX Holdings, Inc. in 2008. CME Group is the 

parent of four DCMs: (1) the Chicago Mercantile Exchange ("CME"); (2) the Chicago Board of Trade 

("CBOT"); (3) the New York Mercantile Exchange ("NYMEX"); and (4) the Commodity Exchange 

("COMEX"). CME is also among the largest derivatives clearing organizations in the world. The CME 

Group exchanges serve the risk management needs of customers around the globe. As an international 

marketplace, the CME Group exchanges bring buyers and sellers together on the CME Globex electronic 

trading platform and on trading floors in Chicago and New York. The CME Group exchanges offer the 

widest range of benchmark products available across all major asset classes, including futures and 

options based on interest rates, equity indexes, foreign exchange, energy, emissions, agricultural 

commodities, metals, and alternative investment products such as weather and real estate. 

I. Background 

A. Exemptions for Bona Fide Hedging 

Most physical delivery and some financial futures and option contracts are subject to speculative position 

limits. The Commission establishes Federal position limits for futures contracts on a specified group of 

agricultural commodities (i.e., corn, oats, wheat, soybeans, soybean oil, soybean meal, and cotton), 

which are set forth in Commission Regulation 150.2. 1 For other commodities, exchanges determine the 

position limits or position accountability levels, pursuant to Core Principle 5 for DCMs in the Commodity 

1 17 C.F.R. §150.2. 
David Stawick 

June 16, 2009 

Page 2 

Exchange Act ("CEA"). 2 With respect to CME Group exchanges, contracts subject to Federal position 

limits are listed on CBOT (i.e., corn, oats, wheat, soybeans, soybean oil and soybean meal). Violations of 

Federal position limits are subject to enforcement action by the Commission and exchange disciplinary 

action. Violations of exchange-set position limits are subject to exchange disciplinary action and 

enforcement action by the Commission where it approved the exchange's speculative limit rules. 

Exemptions from Federal position limits must be granted by both the Commission and the relevant 

exchanges, and are limited to "bona fide hedging." For products not subject to Federal limits, exchanges 

may also grant other types of exemptions from position limits, including but not limited to exemptions for 

risk management or arbitrage positions. 

The general definition of "bona fide hedging" is in Commission Regulation 1.3(z)(1 ), which provides in 

part that "no transactions or positions will be classified as bona fide hedging ... unless their purpose is to 

offset price risks incidental to commercial cash or spot operations and such positions are established and 

liquidated in an orderly manner in accordance with sound commercial practices .... "

3 The second part of 

the definition lists various types of hedges which the Commission views as conforming to the general 

description in the first part of the definition. 4 The third part of the definition provides that, for purposes of 

exemptions from Federal position limits, the Commission may recognize hedges other than those 

enumerated in the second part of the definition as bona fide hedges. 5 To obtain a hedge exemption from 

the Commission, an applicant must, among other things, provide the Commission with evidence that the 

transactions or positions are consistent with the general definition of bona fide hedging in 1.3(z)(1 ). 

The CME Group exchanges incorporate the Commission's definition of bona fide hedging into their rules, 6 

and provide processes whereby persons seeking exemptions from exchange-set position limits may apply 

for exemptive relief. 7 In granting an exemption, the Commission or an exchange may impose any terms 

and conditions on the exemption that it deems· appropriate. ·If a hedge exemption is granted, an 

exemption level is set at a specified quantity higher than the applicable speculative limit so as not to give 

a limitless exemption. 8 The Commission periodically reviews how each exchange grants exemptions from 

position limits, how the exchange monitors compliance with its limits, and what types of disciplinary action 

the exchange takes when a position limit or exemption is violated. 

Certain commodity swap dealers and other market participants with swap exposure have applied for, and 

received, exemptions from position limits from the exchanges and/or the Commission. Swap dealers act 

as market makers in over-the-counter ("OTC") markets for clients that are seeking to hedge price risks as 

2 "Position Limits or Accountability - To reduce the potential threat of market manipulation or congestion, 

especially during trading in the delivery month, the board of trade shall adopt position limitations or position 

accountability for speculators, where necessary and appropriate." 7 U.S.C. §7(d)(5). 

3 17 C.F.R. §1.3(z)(1)(iii). 

4 17 C.F.R. §1.3(z)(2). 

5 17 C.F.R. §1.3(z)(3). 

6 CBOT Rule 559A; CME Rule 559A; NYMEX/COMEX Rule 9A.28. 

7 CBOT Rules 559 and 559F; CME Rules 559 and 559F; NYMEX/COMEX Rules 9A.29 and 9A.30. 

8 The Commission also sets a specified exemption level for those exemptions it grants in non-enumerated hedges 

under Regulation 1.3(z)(3). 
David Stawick 

June 16, 2009 

Page 3 

well as for clients that are seeking to gain price exposure. "[F]utures market trades by swap dealers are 

essentially an amalgam of hedging and speculation by their clients. Thus, any particular trade that a 

swap dealer brings to the futures market may reflect information and decisions that originated with a 

hedger, a speculator, or some combination of both."9 Hedge exemptions granted to swap dealers 

generally entail a number of restrictions, including that: (1) the futures positions must offset specific 

market price risk; (2) the dollar value of the futures positions must be no greater than the dollar value of 

the underlying risk; and (3) for agricultural commodities, the futures positions must not be carried into the 

delivery or "spot" month. 0 

B. The September 2008 Staff Report 

In September 2008, the Commission issued its Staff Report on Commodity Swap Dealers and Index 

Traders with Commission Recommendations (the "Staff Report" or the "Report"). The Staff Report 

contains information gathered pursuant to a special call issued to 32 swap dealers and commodity index 

funds requiring them to provide data relating to their activity in the futures and OTC markets. The special 

call (which was initiated in June 2008 and is ongoing) has required swap dealers to produce details of 

their bilateral, single-commodity swap business including, by market, the futures equivalent positions 

arising from swaps referenced to or hedged in a U.S. market, and in aggregate form, a classification of 

their single-commodity swap clients as commercial, noncommercial or intermediary. For these purposes, 

"commercial" means "a clientlcounterparty who has market risk arising from physical market activities in 

the subject commodity, and the swap agreement is part of a risk-management strategy"; "noncommercial'' 

means "a counterparty who is not using the swap relative to physical market activities"; and the 

"intermediary" category "includes clients/counterparties that are intermediaries (other swap dealers, 

banks, etc.) for whom the [dealer] had no information on·· whether they are acting on behalf of 

noncommercial or commercial clients." 11 •·· ·•·· 

The special call also has required swap dealers to identify clients whose aggregate OTC positions 

(measured in standardized futures contract equivalents) across all expirations in a commodity is at or 

above 25 percent of the single-month position limit or accountability level for the same commodity in the 

on-exchange futures market. 12 As the Staff Report explains: 

9 Staff Report on Commodity Swap Dealers and Index Traders with Commission Recommendations (Sept. 2008) 

("Staff Report"), p. 1. 

10 In addition to exemptions for bona fide hedging as defined in Regulation 1.3(z)(1), NYMEX grants exemptions in 

connection with exposure resulting from commodity swap transactions consistent with the Commission's Policy 

Statement Concerning Commodity Swap Transactions, 54 Fed. Reg. 30694 (July 21, 1989), or the Commission's Part 

35 Regulations. These exemptions are provided for in NYMEX/COMEX Rule 9A.29 and apply to energy and metals 

contracts listed on NYMEX or COM EX. Exemptions in energy contracts are generally for the last three trading days 

as these contracts expire and go to physical delivery or, in the case of metals, are in effect for the pendency of the 

delivery month as these contracts generally deliver while still being available for trading (similar to certain 

agricultural contracts). 

11 Staff Report, p. 18, n.31. 

12 "Swap dealers were instructed to apply the 25 percent threshold as follows: add up all of the client's futures 

equivalent exposure gross long and short across all expiration months in a market, and then compare each of the 

gross long and gross short in that market to 25 percent of that market's single-month position limit or 

accountability level. For example, in NYMEX WTI crude oil, the single-month accountability level is 10,000 contracts 

net long or short and 25 percent of that is 2,500 contracts. If a dealer has a client that is equivalent to 1,000 long in 

the August future, 1,500 short in the September future, and 2,000 long in the October future, then their gross 
David Stawick 

June 16, 2009 

Page4 

It is important to note that "positions" reported are not necessarily the same as futures 

and options positions held in the name of the clientlcounterparty. In the case of a 

swap dealer, the counterparty position may be offset against another OTC 

counterparty, offset throu~h a non-U.S. exchange, or netted internally with other parts 

of the dealer's business. 1 

After receiving data from the special call, the Commission determined which of the clients identified by 

swap dealers were also identified in the Commission's large-trader reporting system and held concurrent 

futures or options positions in the same commodity. Outright futures equivalent positions (i.e., futures 

plus futures-equivalent options) held in the trader's name were aggregated with the estimated OTC 

futures-equivalent positions attributed to the client by those responding to the special call. 

Findings in the Report, based on Commissions staff's analysis of this data, contradict the notion that 

noncommercial traders rely on OTC markets to evade speculative position limits or accountability 

thresholds. Although a small number of noncommercial traders appeared to have an aggregate position 

(i.e., on-exchange positions combined with OTC futures-equivalent positions) that would have been 

above a position limit or an exchange accountability level if all the positions had been on-exchange, the 

amount by which any trader appeared to exceed a limit or level was negligible in comparison to exchange 

open interest in the relevant market. 14 The Report shows, for example, that aggregate positions in West 

Texas Intermediate crude oil contracts that exceeded NYMEX accountability levels totaled just 25,000 

long contracts and 15,300 short contracts out of total NYMEX open interest of 2.8 million contracts. The 

amounts by which CBOT speculative limits were exceeded in wheat, corn and soybeans also were 

negligible when compared to total open interest. These findings are consistent with numerous empirical 

studies that have shown that market fundamentals, rather than the activity ofswap dealers or their clients, 

have been responsible for recent periods of increased volatility and/or price swings in commodity 

markets. 15 

One of the recommendations in the Staff Report was to review whether to eliminate the bona fide hedge 

exemption for swap dealers and replace it with a limited risk management exemption conditioned upon, 

among other things, an obligation to report to the Commission and applicable self regulatory 

organizations ("SROs") when noncommercial clients reach a certain position level, and/or to certify that 

none of the OTC swap positions of the dealer's noncommercial clients (in futures-contract equivalents) 

exceed position limits in related exchange-traded commodities. The Concept Release contains a list of 

questions designed to help inform the Commission's decision on this issue. As further explained in our 

responses to those questions below, CME Group believes that eliminating the bona fide hedge exemption 

for swap dealers, or otherwise further restricting their ability to obtain exemptions, is unnecessary and 

inappropriate and would be harmful to U.S. futures exchanges. We do, however, support the concept of 

continuing to require swap dealers to report the type of information described in the special call, which we 

exposure (3,000 long and 1,500 short) meets the reporting criteria of 2,500 contracts, even though the position in 

any one futures month was less than 25 percent of the single-month accountability level." /d., p. 19, n.33. 

13 /d., p. 18, n.32. 

14 "These combined positions do not violate current law or regulations and the amounts by which each trader 

exceeded a limit or level were generally small." /d., p. 5. 

15 Eight empirical studies reviewed by the Government Accountability Office ("GAO") "generally found limited 

statistical evidence of a causal relationship between speculation in the futures markets and changes in commodity 

prices-regardless of whether the studies focused on index traders, specifically, or speculators, generally." Letter 

from Orice Williams, GAO, to Hon. Collin Peterson, Chairman, House Committee on Agriculture, p. 5 (Jan. 30, 2009) 

(GA0-09-285R Commodity Indexes). 
David Stawick 

June 16, 2009 

Page 5 

believe will enhance transparency with respect to trading that occurs in the OTC markets and assist the 

Commission and SROs in making appropriate regulatory and policy decisions. 

II. CME Group's Responses to Questions in the Concept Release 

A. Response to Question 1 

Should swap dealers no longer be allowed to qualify for exemption under the existing bona fide hedge 

definition? 

Swap dealers are legitimate hedgers that should continue to be allowed to qualify for an exemption from 

speculative position limits pursuant to the existing "bona fide hedging" definition. As the Staff Report 

explains, the products offered by swap dealers play an important role in the financial markets: 

[F]or many financial entities, the OTC derivatives products offered by swap dealers 

have distinct advantages relative to futures contracts. While futures markets offer a 

high degree of liquidity ... , futures contracts are more standardized, meaning that they 

may not meet the exact needs of a hedger. Swaps, on the other hand, offer additional 

flexibility since the counterparties can tailor the terms of the contract to meet specific 

hedging needs. 16 

Swap dealers that assume risks in the OTC market, which are consistent with their legitimate businesses, 

should be able to transfer the residual market risk from their swap books to the futures markets under 

current standards for exemptive relief. Increased restrictions on swap dealers' ability to obtain hedge 

exemptions may cause two undesirable affects. First, limiting the hedge exemption for swap dealers 

could make it more costly for commercial enterprises to execute strategies in the OTC market to meet 

their hedging needs. Second, swap dealers may widen spreads in order to internalize risks or to attempt 

to hedge their risk through increased use of OTC instruments rather than exchange-traded futures. Both 

strategies undercut current efforts to reduce systemic risk by driving OTC-generated risk into a central 

counterparty clearing context. 

Furthermore, existing rules presently allow the Commission and the exchanges to limit the hedge 

exemptions afforded to swap dealers (and other market participants) as deemed necessary and 

appropriate to protect the market. To the extent that swap dealers merit different treatment, it is 

effectively addressed by the ability of the Commission and the exchanges to impose conditions upon and 

restrict the size of any exemptions that they grant. For example, the Commission and CBOT presently 

condition swap-dealer exemptions for contracts with Federal position limits by including requirements 

that: ( 1) the futures position offset specific price risk; (2) the dollar value of the futures positions must not 

exceed the dollar value of the underlying risk; and (3) the futures position not be carried into the spot 

month. 17 

16 Staff Report, p. 11. 

17 See 74 Fed. Reg. 12284. Similarly, in granting no-action relief to index funds, Commission staff has imposed 

certain conditions, including requirements that: (1) fund positions are passively managed; (2) fund positions are 

unleveraged, so that financial conditions should not trigger rapid liquidations; and (3) fund positions are not 

carried into the delivery month, when physical delivery markets are most vulnerable to manipulation or 

congestion. CFTC Letter 06-Q9 (Apr. 19, 2006); CFTC Letter 06-19 (Sept. 6, 2006). 
David Stawick 

June 16, 2009 

Page 6 

B. Response to Question 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)? 

It would be impractical to base any exemption from position limits for swap dealers on the nature of the 

dealer's clients. The Staff Report explains that swap dealers do not use the futures markets to hedge 

price risk associated with specific swap clients or specific OTC transactions: 

Since swap dealers are willing to enter into swap contracts on either side of a market, 

at times they will enter into swaps that create offsetting exposures, reducing the swap 

dealer's overall market price risk associated with the firm's individual positions 

opposite its counterparties. Since it is unlikely, however, that a swap dealer could 

completely offset the market price risks associated with its swap business at all times, 

dealers often enter the futures markets to offset the residual market price risk. 18 

With respect to energy and metals markets in particular (which are subject to exchange-set position limits 

and accountability levels and are not subject to Federal limits), the Staff Report further observes that 

... many swap dealers, in addition to their commodity index-related OTC activity, enter 

into other OTC derivative transactions in individual commodities, both with commercial 

firms hedging price risk and with speculators taking on price risk. In addition, some 

swap dealers are very actively engaged in commercial activity in the underlying cash 

market, such as physical merchandising or dealing activity. The futures positions of 

these swap dealers represent a hedge of their net exposure, taking into account their 

overall long and short positions in various markets and derivative transactions. As a 

result, the overall futures positions held by these energy and metals traders in 

Commission-regulated exchanges do not necessarily correspond closely with their 

hedging of OTC commodity index transactions in particular. 19 

Because swap dealers use the futures markets to hedge residual market risk in their swap books, 

particular futures positions of a dealer cannot be linked to a particular swap client or identified OTC 

transaction. Therefore, it would be illogical and unworkable to condition a risk management exemption 

for swap dealers on the dealers' ability to show that they are hedging risk arising from an OTC transaction 

with a client that is a traditional commercial hedger. 

Furthermore, futures markets are used for more sophisticated hedging than "traditional" commercial 

hedging {i.e., a substitute for transactions to be made or positions to be taken at a later time in a physical 

marketing channel). For example, electric utilities may hedge capacity risks associated with weather 

events by use of degree day unit futures contracts, although that hedge involves no substitute for a 

transaction in a physical marketing channel. Similarly, insurance companies may hedge hurricane or 

other weather risks. Enterprises that consume a commodity not used in a physical marketing channel, 

such as airlines that use jet fuel, generating facilities that use gas and produce electricity, freight 

18 Staff Report, p. 12 (emphasis added). See also Letter from Grice Williams, GAO, to Hon. Collin Peterson, 

Chairman, House Committee on Agriculture, p. 4 (Jan. 30, 2009) (GA0-09-285R Commodity Indexes) (" ... swap 

dealers use futures to hedge their net exposure-the residual risk remaining after a dealer internally nets OTC 

swaps with offsetting exposures-and may not be able to untangle and identify the futures positions that are 

attributable specifically to commodity swap indexes"). 

19 Staff Report, p. 48 (emphasis added). 
David Stawick 

June 16, 2009 

Page 7 

companies whose loads depend on geographic pricing differentials and hundreds of other important 

examples that readily present themselves, are not traditional commercial hedgers with respect to such 

transactions. If the Commission were to create a new limited risk management exemption for swap 

dealers, it would have to ensure that it neither limits such commercial participants' ability to hedge 

legitimate commercial risk (either in the same commodity or a substantially related commodity) via a 

swap, nor limits swaps dealers' ability to hedge the residual financial exposure in their swap books. 

C. Response to Question 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? 

As explained above, we do not believe that a swap dealer's futures positions can be linked to a particular 

swap client or identified OTC transactions, which makes establishing a limited risk management 

exemption for swap dealers on that basis impractical. If the Commission nevertheless attempts to 

proceed along those lines, it must take into account that, although swap dealers generally carry their 

futures positions in liquid, nearby contracts, the risks they are hedging arise in part from OTC contracts 

that often extend out for a period of years. Swap dealers cannot simply close out those OTC positions 

when related futures contracts expire (which renders impractical the "grandfathering" option). Nor can 

they simply close out their OTC positions as of the effective date of any new risk management exemption 

rules (which renders impractical the third option listed in Question 3). Swap dealers should either be 

allowed to roll forward existing futures positions until their corresponding risk expires, or they should be 

given reasonable time to put in place alternative hedges and bring their futures positions into compliance 

with Federal limits. 

D. Response to Question 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? 

Exchanges are in the best position to understand their listed contracts and their customers' risk 

management needs, and to provide appropriate hedge, risk management or swap exemptions 

accordingly. The Commission's Core Principle 5 for DCMs requires boards of trade to adopt position 

limits or position accountability where necessary and appropriate, and the Commission, in evaluating a 

contract market's speculative limit program, considers the specified limit levels, aggregation policies, the 

types of exemptions allowed, and the methods for monitoring and enforcing compliance with the limits. 
David Stawick 

June 16, 2009 

Page 8 

Additionally, all exchange rules governing positions limits and exemptions therefrom are certified to the 

Commission. 

CME, CBOT, NYMEX and COMEX rules governing exemptions from position limits for bona fide hedging 

positions in physical commodities incorporate by reference the "bona fide hedging" definition in 

Regulation 1.3(z).20 Thus, any revision to, or reinterpretation of, that definition would necessarily be 

reflected in these exchange rules. 21 Further, NYMEX/COMEX Rule 9A.29 governs exemptions in energy 

and metals for exposure in commodity swap transactions, and CME/CBOT Rule 559.8. governs risk 

management exemptions in products without Federal position limits. 

Given the existing framework, it is unnecessary for the Commission to extend any reinterpretation of 

"bona fide hedging" or any new limited risk management exemption for swap dealers to other 

commodities. The Commission should continue to allow each exchange, subject to Commission 

oversight of its compliance with DCM Core Principles, to establish rules consistent with the objectives of 

reducing the potential threat of market manipulation or problems arising from excessively large 

speculative positions and facilitating orderly trading and expirations. 

E. Response to Question 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 explained above, we believe that swap dealers should be permitted to offset their residual risk in the 

futures market, and that it would be illogical and unworkable to condition any new risk management 

exemption for swap dealers on the nature of the dealers' clients. Nevertheless, if the Commission were 

to attempt to restrict a new risk management exemption to risk taken on by swap dealers on behalf of 

commercial clients, the term "commercial client" should be defined to include any customer that enters 

into a swap agreement for the purpose of reducing, controlling and/or redefining a risk incurred in the 

ordinary course of that customer's business. Futures markets are not used solely for "traditional" 

commercial hedging, but also for more sophisticated forms of commercial hedging that do not entail a 

substitute for a transaction in a physical marketing channel (e.g., airlines hedging the price of jet fuel or 

insurance companies hedging risks associated with weather events). If a new risk management 

exemption is created for swap dealers, it must not limit such commercial participants' ability to hedge 

legitimate commercial risk (either in the same commodity or a substantially related commodity) via a 

swap, nor swaps dealers' ability to hedge the residual exposure in their swap books. 

F. Response to Question 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)? 

Again, we do not believe that the hedge exemption for swap dealers can or should be based upon the 

commercial or noncommercial nature of the dealers' swap clients. However, for purposes of reporting by 

swap dealers when noncommercial clients reach a certain futures-equivalent position level (or certifying 

2

° CBOT Rule 559A; CME Rule 559A; NYMEX/COMEX Rule 9A.28. 

21 Any revisions to these or other exchange rules, or any new rules adopted by an exchange with respect to 

exemptions from position limits, must be filed with the Commission as a certification filing, or as a voluntary 

request for Commission approval. 
David Stawick 

June 16, 2009 

Page 9 

that none of their noncommercial clients exceed specified position limits in related exchange-regulated 

commodities), we see no benefit in distinguishing between different types of noncommercial clients, 

particularly if swap dealers provide regulators with the identity of such clients. 

G. Response to Question 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? 

An efficient way for the Commission to confirm that an index fund is made up of many participants and is 

passively managed would be to review the fund's prospectus. 

H. Response to Question 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. 

The Staff Report states that the 25-percent level specified in the ongoing special call "was set at a 

relatively low level in order to see more, rather than less, data."22 We believe this is an appropriate level 

for a reporting requirement, particularly in light of the recent emphasis on obtaining better data on 

activities in OTC derivatives markets. The fact that swap dealers subject to the special call have 

established ·systems to report at the 25-percent level is an additional reason to maintain the reporting 

requirement for any new risk management exemption at that level. 

I. Response to Question 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? 

Certification by the swap dealer should suffice, as supplemented by the Commission's special call 

authority to request books and records to audit on occasion. 

J. Response to Question 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 

§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." 

No "overall" position limits should be imposed on swap dealers who, as previously noted, generally hedge 

their net swap exposure acquired from trades with an amalgam of commercial and non-commercial 

22 Staff Report, p. 18. 
David Stawick 

June 16, 2009 

Page 10 

clients. Swap dealers already must apply for and be granted an exemption in order to exceed position 

limits. Such exemptions are granted at the discretion of the exchanges and the Commission (in the case 

of products with Federal limits) and are subject to terms and conditions as the regulators deem 

appropriate to protect the integrity and orderly functioning of the market. NYMEX/COMEX Rule 9A.29, for 

example, specifies that one factor considered in establishing an appropriate exemption level is the 

"liquidity, depth and volume of the market in which the exemption is sought" and allows the regulatory 

staff "to modify, revoke or place limitations on the exemption" at any time. In addition, all exemptions are 

granted subject to a requirement that the participant initiate and liquidate positions in an orderly manner. 

In those products for which single-month or all-months-combined position limits do not apply, exchangeset position accountability rules provide exchanges with the necessary tools to deter and prevent market 

manipulation and ensure fair and orderly trading. Monitoring the positions of large traders in each of our 

markets is a critical component of our market surveillance program. On a daily basis, exchange 

surveillance staff reviews large-trader data to monitor reportable positions in our markets. All participants 

with open positions that exceed set reporting levels as of close of business the prior day are reported, 

generally accounting for approximately 85% of all open positions through this process. Surveillance staff 

uses this data and various analytical tools to identify any positions that merit closer monitoring or 

intervention by regulatory staff. 

Imposing; single-month or all-months-combined limits on swap dealers, without exemptions, may cause 

clients of swap dealers to allocate business across a broader number of dealers without substantively 

changing the composition of the market. It will not, however, enhance the ability of the Commission or 

the exchanges to deter and prevent market manipulation and ensure fair and orderly trading. 

K. Response to Question 14 

How should the two index traders who have received no-action relief from Federal speculative position 

limits be treated under any new regulatory scheme as discussed herein? 

As explained above, we do not believe the Commission should create a limited risk management 

exemption for swap dealers that would attempt to look through the dealers to their clients. We support 

continued reporting requirements for dealers when aggregate OTC positions of a swap client (including 

but not limited to index funds) reach or exceed a specified level. However, this type of a reporting 

requirement should not affect the no-action relief the Commission has granted to certain index traders. 

L. Response to Question 15 

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

exemption? 

Swap dealers seeking an exemption from position limits should be required to provide the same type of 

information to the Commission and the relevant exchange that they currently must provide to obtain 

hedge or similar exemptions. For those commodities with Federal limits, applicants must file an 

exemption request to the Commission in conformity with the requirements of Regulation 1.47.23 The 

required information includes, among other things, detailed information "which will demonstrate that the 

purchases and sales are economically appropriate to the reduction of risk exposure attendant to the 

conduct and management of a commercial enterprise."24 

23 17 C.F.R. §1.47. 

24 17 C.F.R. §1.47(b)(2). 
.. 

David Stawick 

June 16, 2009 

Page 11 

In order to obtain a hedge exemption from CBOT for contracts with Federal limits, a swap dealer must 

complete a hedge exemption application, pursuant to CBOT Rule 559. The applicant must also provide: 

(a) the exemption request made to the Commission and the Commission's approval letter; (b) the notional 

value of the OTC instruments outstanding and, if the exemption is for anticipated exposure, the basis for 

the anticipatory request; (c) the prospectus of the relevant index, if required; (d) details of how the futures 

hedge will be initiated, rolled and liquidated; and (e) such supplemental information as the exchange may 

request regarding the positions or the underlying OTC exposure. The same type of information is 

required by all of the CME Group exchanges from swap dealers and other parties seeking exemptive 

relief related to swap exposure in those products that are not subject to Federal position limits. 

II. Conclusion 

The CME Group exchanges support the Commission's efforts to continue to obtain the type of information 

about OTC transactions that swap dealers and index funds have been reporting pursuant to the 

Commission's ongoing special call. This type of information should assist the Commission and others in 

making appropriate regulatory and policy decisions. Existing rules, however, presently enable the 

Commission and the exchanges to limit the exemptions from position limits afforded to swap dealers (and 

other market participants) as necessary and appropriate to protect the market. We strongly believe that 

eliminating the bona fide hedge exemption for swap dealers, or otherwise further restricting their ability to 

obtain exemptions from Commission-set or exchange-set position limits, is unnecessary and 

inappropriate and would be detrimental to U.S. futures exchanges. 

CME Group thanks the Commission for the opportunity to comment on this matter. We would be happy 

to discuss any of these issues with Commission staff. If you have any comments or questions, please 

feel free to contact me at (312) 930-8275 or Craig.Donohue@cmegroup.com; or Lisa Dunsky, Director 

and Associate General Counsel, at (312) 338-2483 or Lisa.Dunsky@cmegroup.com. 

cc: Chairman Gary Gensler 

Commissioner Michael Dunn 

Commissioner Walter Lukken 

Commissioner Bart Chilton 

Commissioner Jill Sommers 

Donald Heitman 

Sincerely, 

Craig S. Donohue 

Chief Executive Officer 

CME Group Inc.