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Nfl\J NATIONAL FUTURES ASSOCIATION 

Received CFTC 

RecOrds,Sectlon 

IJ/17/ oc; 

Via E-mail: secretary@cftc.gov 

Mr. David Stawick 

Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

June 16, 2009 

COMMENT 

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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 

Dear Mr. Stawick: 

National Futures Association ("NFA") appreciates the opportunity to 

comment on the Commission's concept release regarding the bona fide hedge 

exemption for swap dealers. At the outset, NFA recognizes that one of the CFTC's 

paramount regulatory concerns is market integrity and the CFTC's regulatory approach 

has long fostered markets that reflect the forces of supply and demand for an underlying 

commodity, and that are free of abusive and manipulative trading activity. In 

implementing this regulatory approach, the Commission has successfully relied upon 

certain basic tools-the use of speculative position limits and position accountability 

provisions, certain exemptions from the limits, and an aggregation policy applied to 

commonly owned or controlled accounts. In addition, Commission market surveillance 

staff assess an individual trader's activities, potential market power, and enforce 

speculative position limits by using a large trader reporting system, which is critical to 

the Commission's reliance on the other tools. 

NFA also recognizes that the Commission last made amendments to the 

exemptive rules in 1991, nearly twenty years ago. Given significant changes in market 

participants, trading patterns and practices in the derivatives market, NFA also applauds 

the Commission for undertaking a review of these exemptive rules at this time. NFA 

understands that in undertaking this review the Commission is concerned that 

noncommercial counterparties may be purposefully evading the oversight and limits of 

the CFTC and exchanges by amassing speculative OTC positions in energy and 

agricultural commodities that distort prices in the futures market and undermine its price 

discovery function. 

300 S. Riverside Plaza Suite 1800 Chicago, Illinois 60606 312.781.1300 800.621.3570 312.781.1467 fax www.nfa.futures.org 
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David Stawick June 16, 2009 

Of course, an analysis of market data is critical to any determination as to 

whether certain market participants have amassed these types of OTC positions. In 

2008, the Commission took a very methodical approach in collecting and analyzing 

market data relating to energy and agricultural OTC positions. In particular, in June 

2008, the Commission issued a special call to swap dealers and index traders seeking 

information on the types of end-user clients trading over-the-counter commodity 

transactions with swap dealers and the extent to which these clients hold aggregate 

positions that would exceed position limits or accountability levels if converted to onexchange futures equivalent positions. The Commission staff's report on Commodity 

Swap Dealers and Index Traders ("Staff Report") found that although some noncommercial traders appeared to have an aggregate position that would have exceeded 

position limits or accountability levels if converted to futures equivalent positions, these 

amounts were negligible in comparison to the overall size of the futures market in the 

particular commodity. The Staff Report was based on data collected for the time period 

December 31, 2007 through June 30, 2008. 

Despite the Staff Report's findings, NFA believes that the Commission 

cannot be complacent and that the current review of its exemptive rules is 

commendable. While NFA recognizes that the Commission's 2008 special call 

continues today, NFA strongly recommends that the Commission make clear that this 

special call will be a permanent tool utilized by the Commission. The call permits the 

Commission to obtain a more complete picture of the interplay between on-exchange 

and over-the-counter transactions and the effect, if any, on price discovery. By 

obtaining and analyzing information obtained over a longer period of time, the 

Commission may be in a better position to craft a more precise, effective, and 

comprehensive regulatory scheme. To that end, NFA recognizes that the Commission 

has been collecting special call data since June 30, 2008 and we encourage the 

Commission to release its analysis of this longer-term data, and determine whether 

findings from this analysis are consistent with the 2008 Staff Report or alter the Staff 

Report's findings and recommendations. 

In proposing changes to exemptive rules that have been in place for 

approximately twenty years, NFA urges careful analysis and extreme caution. The 

creation of a new risk management exemption certainly would alter the manner in which 

swap dealers manage their risk, which could also have an impact upon the risk 

management capabilities of their noncommercial and commercial clients. If a new risk 

management exemption proves unduly burdensome, swap dealers may be less willing 

to participate in the swap market thereby limiting the ability of OTC market participants 

to manage their risk and protect against price volatility. Additionally, if swap dealer 

activity declines, then their corresponding need to participate and hedge in the futures 

markets may also significantly diminish leading to less liquidity and increased price 

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David Stawick June 16, 2009 

volatility. In the worst case, swap dealers may engage in OTC swaps but simply elect 

not to use the futures markets to offset their risk, which may raise significant systemic 

risks. 

NFA believes that a hasty decision that eliminates hedge exemptions for 

swap dealers may not only do great harm but could also be rendered moot by other 

regulatory initiatives. In particular, given the current interest in regulating OTC 

derivatives, NFA encourages the Commission to ensure that any proposed changes to 

the swap dealer hedge exemption be consistent with other changes to the regulatory 

structure for OTC derivatives. As you are aware, during the last two years, various 

Senators and Congressmen have proposed a number of bills that would restrict 

hedging, impose speculative and aggregate position limits, increase transparency, 

and/or require the Commission to conduct studies. Additionally, on May 13, 2009, the 

Commission, the Department of Treasury, and the SEC jointly announced a proposed 

comprehensive regulatory framework for OTC derivatives that calls for the clearing of 

standardized transactions. This framework, recently supported by CFTC Chairman 

Gensler's June 4, 2009 Congressional testimony, also includes robust reporting 

requirements imposed upon dealers and calls for the Commission to set aggregate 

position limits, including OTC derivatives. Given the outline of this framework and, in 

particular, its emphasis upon aggregate position limits, we strongly recommend that the 

Commission coordinate its own review of its exemptive rules with any future legislation 

proposed by the Administration and Congress. 

The fact remains that a legislative proposal may not be finalized for 

several months. Therefore, NFA favors the development of an interim tool-a reporting 

system for end-user positions of all OTC contracts that relate to a physical commodity 

traded on a regulated futures market, analogous to the current large trader reporting 

system in place for futures positions. The development of this system will not cause 

any of the potential dire market consequences described above relating to tampering 

with swap dealer hedge exemptions and will not be rendered moot by future regulatory 

initiatives. It will, however, add significantly greater transparency to end-user trading 

activity and bolster public confidence in the markets. 

Under this approach, each swap dealer would have an obligation to report 

to the Commission when a commercial or noncommercial end-user's open OTC 

positions reach a certain level in terms of futures equivalent positions. NFA believes 

that this type of reporting system would allow the CFTC to track open positions of OTC 

end users and to evaluate what, if any, market impact these positions may have upon 

the futures markets. Based upon this information, the Commission may determine that 

it needs to take appropriate action if it found that noncommercial end-users have 

purposefully evaded the oversight and limits of the CFTC and exchanges by amassing 

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David Stawick June 16, 2009 

an OTC position in energy and agricultural commodities that distorts prices in the 

futures market and undermines its price discovery function. 

In conclusion, NFA appreciates the opportunity to comment on this 

extremely important issue. We believe that our recommendations, if adopted, will 

provide increased transparency to OTC market activity and guard against potential 

market abuses. Additionally, these measures will provide the Commission with critical 

information regarding noncommercial end-user activity and allow the Commission time 

to further study this issue based upon additional data collection. Lastly, as previously 

stated, NFA strongly recommends the Commission coordinate its own review of its 

exemptive rules with any future legislation proposed by the Administration and 

Congress. 

m:lmamplltr_cftc_comment_swapdealerhedgeex 

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Thomas W. Sexton 

Senior Vice President and 

General Counsel