CFTC letter No. 04-36

July 26, 2004

No-Action

Division of Market Oversight

Ms. Stephanie Ford

Vice President, Legal/Compliance 

HedgeStreet, Inc. 

1825 South Grant Street, Ste. 500 

San Mateo, CA 94402 

 

RE: Request for No-Action Relief from CFTC Regulation §15.03(b) 

Dear Ms. Ford: 

This is in response to your letter dated July 8, 2004. In that letter you request no-action 

relief on behalf of HedgeStreet, Inc. ("HedgeStreet"), a newly designated contract market and 

derivatives clearing organization, from certain reporting levels stipulated in Part 15 of the 

Commission’s Regulations. 

We understand the facts to be as follows. HedgeStreet offers cash-settled binary option 

contracts (“HedgeStreet Contracts” or “Contracts”) on a variety of underlying interests and 

articles, many of which have no cash market. HedgeStreet’s contracts have small notional values 

in comparison with traditional futures and option contracts. 

In the Commission’s recent proposed rulemaking amending the Large Trader Reporting 

Rules (“Proposed Rules”),1

 the Commission set the large trader reporting level for HedgeStreet 

Contracts on economic indexes at 125,000 contracts. The reporting level applied to Europeanstyle binary options based on economic indexes2

 that paid a fixed $10.00 if in the money upon 

expiration. In light of the relatively low value of these products, the Commission proposed a 

reporting level of 125,000 contracts, but limited the application of the reporting level to 

economic indices offered by HedgeStreet "in the manner and size described."3

 To relieve 

HedgeStreet and its members from compliance with lower reporting levels during the pendency 

of a final rulemaking, the Commission embedded no-action relief for the referenced contracts 

within the Federal Register release for the Proposed Rules. Absent further Commission 

rulemaking or relief, any other product offered by HedgeStreet would be subject to the lower 

reporting levels of current Regulation 15.03(b), including the default reporting level of 25 

contracts. 

 

1

 69 Fed. Reg. 26333 (May 12, 2004). 

2

 The contracts could have been based on either macroeconomic or microeconomic indexes. 

3

 69 Fed. Reg. 26333, 26334 (this limitation was based upon the Commission's understanding 

that HedgeStreet initially intended to list only such contracts). 
HedgeStreet now requests that the Division of Market Oversight ("Division") grant noaction relief from Commission Regulation 15.03(b) for those contracts that do not have 

economic indexes as the underlying and increase the reporting level for all HedgeStreet 

Contracts to 125,000 contracts. HedgeStreet has listed contracts on gold, gasoline, federal funds 

rates, mortgage rates and currencies (collectively “Non-EI Contracts”) which are not deemed 

economic indexes and therefore, do not fall under the 125,000 contract reporting level structured 

by the Commission in the Proposed Rules. 

The Division notes that the large trader reporting system is an important Commission 

oversight tool. The rules governing this system require the reporting to the Commission of 

position information of the largest futures and option traders and require the traders themselves 

to provide certain identifying information. Reporting levels are set in the designated futures and 

option markets under the authority of Sections 4i and 4c(b) of the Commodity Exchange Act 

("Act") to ensure that the Commission receives adequate information to carry out its market 

surveillance programs. These market surveillance programs are designed to detect and to 

prevent price manipulation and market congestion. The Commission, however, also is mindful 

of the burden associated with these reporting requirements and reviews them with an eye to 

easing that burden to the extent compatible with its responsibilities for rigorous surveillance of 

the commodity futures and option markets. 

The Division agrees that the reporting levels otherwise applicable to HedgeStreet Non-EI 

Contracts, including the default reporting level of 25 contracts, are too low and therefore are 

unlikely to assist the Commission in conducting meaningful large trader surveillance. The 

reporting levels delineated in Regulation 15.03(b) generally are structured for contracts with 

higher notional values. For example, the NYMEX gold contract has a notional value of 

approximately $30,000 per contract.4

 Therefore, the notional value for a reporting level of 200 

contracts would be $6,000,000. In comparison, the notional value for a reporting level of 200 

contracts for a HedgeStreet gold contract would be relatively negligible. HedgeStreet positions 

with such small notional values are unlikely to be used for market manipulation. Given the 

aforementioned, the Division believes that reports of 125,000 contracts for all HedgeStreet 

contracts with a maximum payout of $10 would appropriately apprise the Commission of 

significant positions while relieving unnecessary burdens on HedgeStreet and its members.5

 

In light of the foregoing, the Division will not recommend any enforcement action to the 

Commission based on Sections 4a, 4c(b), 4i of the Act, or Commission Rule 15.03(b), if 

HedgeStreet complies with a 125,000 contract reporting level for any contract that has a 

maximum value of $10. This no-action position is taken herein by the Division only and does 

not necessarily reflect the views of the Commission or any other division or member of the 

Commission’s staff. Because this position is based upon facts and representations contained in 

 

4

 100 troy ounces x $300 per ounce = $30,000 per contract. 

5

 Due to current limitations in the Commission's large trader record format (see 17 CFR 

17.00(g)(1)), HedgeStreet positions are to be reported under 17 CFR Part 17 by rounding down 

to the nearest 1000 and then dividing by 1000. For example, a position of 177,955 contracts 

would be rounded down to 177,000, divided by 1000 and reported as 177. 
the no-action letter, it should be noted that any different, omitted or changed facts or conditions 

might require a different conclusion. This position also is contingent on the continued 

compliance of HedgeStreet with all otherwise applicable obligations under the Act, and 

regulatory conditions imposed by the Commission. In addition, HedgeStreet must bring its 

conduct into compliance with reporting levels adopted in any final rulemaking to the extent that 

final reporting levels differ from those imposed herein or by the Proposed Rules. 

 If you have any questions regarding this correspondence, please contact David P. Van 

Wagner at (202) 418-5481 or Bruce Fekrat at (202) 418-5578. 

 Sincerely, 

 Richard A. Shilts 

 Acting Director