Via Electronic Mail: secretarv@cftc.gov 

David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street, N.W. 

Washington, D.C. 20581 

June 1~0Jo~UN 23 Pr'l 3 25 

COMMENT 

Re: 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 

Dear Mr. Stawick: 

Managed Funds Association ("MFA") 1 appreciates the opportunity to comment on the 

Commodity Futures Trading Commission's (the "Commission" or "CFTC") 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").2 MFA's members are active participants in the commodity markets, including the 

over-the-counter ("OTC") swap markets; provide important liquidity to both the long and shortside of the markets; and often assume the price risk that hedgers in the futures market and OTC 

swap market wish to off-set. 

I. SUMMARY 

The Concept Release raises issues related to the general regulation of OTC derivatives, 

which have since been raised in the context of a Congressional proposal, several Congressional 

hearings and the Obama Administration's regulatory reform plan.3 As market participants, 

1 MFA is the voice of the global alternative investment industry. Its members are 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 $1.5 trillion 

invested in absolute return strategies. MFA is headquartered in Washington, D.C., with an office in New 

York. 

2 74 FR 12282 (Mar. 24, 2009) (the "Concept Release"). 

3 See H.R. 2454, Ill th Cong. (2009); Regulatory Reform and the Derivatives Markets: Hearing Before the 

Senate Committee on Agriculture, Nutrition and Forestry, llllh Cong. (June 4, 2009); The Effective 

Regulation of the Over-the-Counter Derivatives Markets: Hearing Before the Subcomm. on Capital 

Markets of the House Comm. on Financial Services, llllh Cong. (June 9, 2009); and Regulatory Reform 

Over-The-Counter Derivatives, U.S. Dept. of the Treasury (May 13, 2009) available at: 

http://www.treasury.gov!press!releases/tgl29.htm. See also Over-the-Counter Derivatives: Modernizing 

Oversight to Increase Transparency and Reduce Risks, Hearing scheduled to take place Before the 

2025 M Street, NW, Suite 610 I Washington, DC 20036 I 202.367.1140 I fax 202.367.2140 I www.managedfunds.org 
Mr. Stawick 

June 17,2009 

Page 2 of7 

MFA's members are actively involved in the reform dialogue and share a strong interest in 

greater transparency and accountability in the commodity markets. We believe it is important for 

the Commission to consider the bona fide hedge exemption for swap dealers within the broader 

OTC derivatives regulatory reform context rather than in isolation. We also believe that the 

Commission should seek more market data to understand the role and market impact of these 

bona fide hedge exemptions before it makes a determination on their elimination and/or 

replacement. The current data are insufficient to support a data driven rulemaking process and 

could result in premature action with unintended consequences. We believe greater transparency 

is needed in the commodity markets and recommend the Commission propose rulemaking to 

collect futures market and OTC swap market information on a regular basis. Such data will help 

inform the discussion on bona fide hedge exemption, shine further light on the activity of swap 

dealers and index traders, and assist the Commission in monitoring for market manipulation. 

Finally, we believe the Commission should consider the alternative roles of speculators 

and index traders in the market when considering the OTC derivatives proposals and the bona 

fide hedge exemption issue. The importance of speculators is well established and essential to the 

smooth functioning of the commodity markets. In contrast to index funds, hedge funds and 

managed futures are long-time participants in the commodity markets who provide liquidity to 

both the long and short sides of the market and often assume the price risk hedgers wish to offset. 

II. BACKGROUND 

A. General Background 

In the spring and summer of 2008, volatility and price increases in energy and 

agricultural commodities sparked widespread public and political concern. During this period, 

crude oil, wheat, corn, rice, soybeans and oats all reached record high prices.4 Economic 

analyses indicate that supply and demand fundamentals caused the price changes.s Nevertheless, 

certain individuals and interest groups allege that excessive speculation by long-only traders 

caused the price changes and prompted Congress to introduce legislation that would limit 

speculation through CFTC-set position limits and by eliminating the ability of swap dealers to use 

the bonafide hedge exemption to hedge financial risk.6 

Subcomm. on Securities, Insurance and Investment of the Senate Banking Comm., Ill th Cong. (June 22, 

2009). 

4 CFTC Staff Report on Commodity Swap Dealers & Index Traders with Commission Recommendations, 

September 2008 ("September 2008 Report") at p.IO. 

5 See International Energy Agency World Energy Outlook, November 2007; Oil Sketches Monthly, 

Commodities Research, May 22, 2008, Barclays Capital; IMF World Economic Outlook, Chapters I and 3, 

International Monetary Fund (October 2008), available at: 

http://www.imf.org/external/pubs/ft/weo/2008/02/index.htm. 

6 See, e.g., Testimony of Michael W. Masters before the U.S. Senate Committee on Homeland Security and 

Governmental Affairs on May 20, 2008; H.R. 6604, I lOth Cong. (2008). 
Mr. Stawick 

June 17, 2009 

Page 3 of7 

In June of 2008, the Commission initiated a special call to futures traders, including swap 

dealers engaged in commodity index business, other large swap dealers and commodity index 

funds, to collect more information on the off-exchange commodity trading activity of swap 

dealers.? The Commission provided an analysis of the special call information in the "Staff 

Report on Commodity Swap Dealers & Index Traders with Commission Recommendations" 

("September 2008 Report"). As part of its recommendations, the Commission recommended the 

staff review whether to eliminate the bona fide hedge exemption for swap dealers and create a 

new limited risk management exemption. Accordingly, the Commission staff issued and seeks 

comment on the Concept Release. 

B. The Bona Fide Hedge Exemption 

Section 4a( c) of the Commodity Exchange Act ("CEA") provides that speculative 

position limits shall not apply to positions held for bona fide hedging purposes as defined by the 

CFTC. As noted in the Concept Release, the Commission has periodically amended the 

exemptive rules applicable to Federal speculative position limits in response to changing 

conditions and practices in the futures markets.s In 1986, both the House and Senate Agricultural 

Committees urged the Commission to consider including risk management in its hedging 

definition to ensure that the definition was "consistent with the legitimate needs and practices of 

the industry."9 In 1987, upon the recommendation of the Commission's Financial Products 

Advisory Committee, the Commission issued interpretive guidance providing that "riskmanagement" be included as a type of speculative position limit exemption.IO 

In 1991 the Commission began granting bona fide hedge exemptions in agricultural 

futures markets to a number of swap dealers who were seeking to manage price risk on their 

books as a result of their serving as market makers to their OTC clients. 11 These clients included 

pension funds, index funds, managed funds and other institutional investors seeking exposure to 

commodities as an asset class. Swap dealers provided these clients commodities exposure 

through swap contracts that tracked published commodity indexes such as the S&P Goldman 

Sachs Commodity Index or the Dow Jones AIG Commodity Index. 

7 September 2008 Report. 

8 Concept Release at 12283. 

9 S. Rep. 99-291, at 22 (1986) (urging the Commission to consider "whether the concept of prudent risk 

management [should] be incorporated in the general definition of hedging as an alternative to the risk 

reduction standard."); see also H.R. Rep. No. 99-624, at 44-46 (1986) (urging the Commission to 

"undertake a review of its hedging definition ... and to consider giving certain concepts, uses, and 

strategies 'non-speculative' treatment."). 

IO Risk Management Exemptions from Speculative Position Limits Approved under Commission Regulation 

1.61, 52 FR 34633 (Sept. 14, 1987); Clarification of Certain Aspects of the Hedging Definition, 52 FR 

27195 (July 20, 1987). 

II Concept Release at 12284. 
Mr. Stawick 

June 17,2009 

Page 4 of7 

In the last decade, swap trading has become especially popular with the advent and 

development of commodity index funds, exchange-traded funds for commodities ("ETFs") and 

exchange-traded notes ("ETNs")-all primarily transacted through swap trading. The influx of 

index traders has contributed to the volume growth in the futures markets, as well as to the 

growth of the OTC commodity derivatives markets. 

II. DISCUSSION 

The purpose of the Commission's special call, which remains ongoing, is to gather more 

information regarding the off-exchange commodity trading activity of swap dealers to better 

characterize their activity and understand their potential to influence the futures markets, such as 

the price and volatility of these markets. The Concept Release requests comment on whether to 

eliminate the bona fide hedge exemption for swap dealers and replace it with a limited risk 

management exemption that is conditioned upon, among other things: (1) an obligation to report 

to the CFTC and applicable self-regulatory organizations when certain noncommercial swap 

clients reach a certain position level; and/or (2) a certification that none of a swap dealer's 

noncommercial swap clients exceed specified position limits in related exchange-regulated 

commodities (the "Limited Risk Management Exemption"). 

A. Regulatory Reform of OTC Derivatives Markets 

Since the Commission issued the Concept Release, there have been a number of 

legislative developments with respect to OTC derivatives regulation. On May 13, the Obama 

Administration issued a framework for OTC derivatives regulation, and on June 17, issued a 

financial regulatory reform white paper that includes OTC derivatives regulation. 12 On June 4, 

the Senate Agriculture Committee held a hearing on OTC derivatives; on June 9, the Capital 

Markets Subcommittee of the House Financial Services Committee held a hearing on OTC 

derivatives; and we understand that many more Congressional hearings will be scheduled on this 

issue as part of the larger debate on U.S. financial regulatory reform. 

MFA supports the four key objectives of OTC derivatives regulation set forth by the 

Obama administration: 

• Preventing activities in those markets from posing risk to the financial system; 

• Promoting the efficiency and transparency of those markets; 

• Preventing market manipulation, fraud and other market abuses; and 

• Ensuring that OTC derivatives are not marketed inappropriately to unsophisticated 

parties. 13 

Also, the U.S. Senate confirmed Chairman Gensler since the Commission issued the 

Concept Release, and he is providing leadership on a comprehensive regulatory framework on 

OTC derivative markets and has requested an in-depth review of the bona fide hedge exemption 

issue specifically. 

12 Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation, 

Department of the Treasury, June 17, 2009 available at: 

http://www.financialstability.gov!docs!regs!FinalReport web.pdf 

13 Letter to the Honorable Harry Reid, Senator, from Timothy F. Geithner, Secretary, Department of the 

Treasury, on May 13, 2009 available at: http://www.financialstability.gov/docs/OTCletter.pdf. 
Mr. Stawick 

June 17, 2009 

Page 5 of7 

We believe the Commission should consider the bona fide hedge exemption for swap 

dealers in the context of the broader goals of OTC derivatives regulatory reform. Regulation of 

swap derivatives and swap dealers should be consistent with regulation of other OTC derivative 

products and dealers. As the Commission considers rulemaking in this area, we urge the 

Commission to coordinate its activities with other financial regulators. 

B. The Bona Fide Hedge Exemption 

MFA commends the Commission staff for its work and analysis in reviewing a large 

volume of OTC market information in a relatively short period to produce the September 2008 

Report. MFA finds the quantitative data provided in the September 2008 Report highly 

informative to the regulatory and rulemaking process. In fact, MFA submits that rulemaking 

should generally be predicated on empirical evidence to minimize market disruptions. 

The CFTC produced the September 2008 Report in response to allegations that index 

traders and other speculators were the cause of the volatility and high price of oil and other 

commodities during 2008. On one hand, the Commission found that recent price movements are 

attributable to market fundamentals and not to trading by speculators. On the other hand, the 

Commission found that its preliminary survey could not accurately determine and quantify the 

amount of speculative trading occurring in the futures markets. 

1. Speculation: Managed Futures vs. Index Funds 

First, MFA would like to distinguish the role in the commodity markets between its 

members and index traders. Hedge funds and managed futures traders are active and long-time 

participants in the commodity markets. Unlike index funds, our members provide important 

liquidity to both the long and short-sides of the markets, often assume the price risk that 

commercial hedgers in the futures market and OTC swap market wish to off-set. Hedge funds 

and managed futures, as speculators, are not eligible for a Commission-granted bona fide hedge 

exemption from position limits. 14 In contrast, index funds are relatively new participants to the 

commodity markets, are passively-managed, long-only investors that are granted the bona fide 

hedge exemption from the Commission. As the Commission examines more data on market 

activity and reviews the bona fide hedge exemptions for swap dealers, we believe it is important 

to consider the respective roles of different market participants. 

2. The Bona Fide Hedge Exemption and Index Funds 

As market participants, MFA members share the Commission's concern about the impact 

of the influx of long-only positions for orderly markets. We believe, however, that the 

Commission should further examine the impact of ETFs, ETNs and index funds on the futures 

markets before issuing rulemaking aimed at changing market composition. The data to date are 

insufficient to ensure an empirically driven rulemaking process. We believe rulemaking should 

be predicated on empirical data to prevent negative unintended consequences and disruption to 

the markets. In addition, the Commission should examine the structure of the indices and 

!4 However, hedge funds and managed futures are eligible for exchange-granted exemptions from time to 

time and on a case by case basis. 
Mr. Stawick 

June 17,2009 

Page 6 of7 

underlying contracts to determine whether market issues, such as the lack of cash-futures 

convergence could be caused by the structure of contracts rather than exemptions to position 

limits. 

C. Greater Transparency in the Swap Markets 

MFA believes that greater information on commodities that are related to commodity 

futures is needed in order to reduce market uncertainty, to better understand the fundamentals 

driving the market, to bring greater transparency to the OTC swap markets and to better monitor 

for manipulation in commodity futures markets. To achieve this objective, the Commission 

should propose rulemaking to regularly collect information from swap dealers and commodity 

index funds relating to their total activity in the futures and OTC swap markets, and to categorize 

the activities of their customers, similar to the information the Commission currently collects 

through its special call. 

We believe greater transparency, information and understanding of the OTC swap 

markets will more directly address the concerns behind the Commission's Concept Release and 

the objectives of the contemplated Limited Risk Management Exemption. With such a rule, the 

Commission should explore the types and format of additional information that could be collected 

from swap dealers on a regular basis to help the Commission better understand the relationship 

between the OTC swap markets and the futures markets. 

In addition, we believe the Commission should provide the public with greater 

transparency with respect to OTC swap markets relating to commodity futures markets through 

aggregated reports. Aggregate reports would protect the confidentiality of the individual 

positions and trade secrets of customers, in compliance with section 8 of the CEA. We believe 

the public would benefit from information, such as the size of various OTC swap markets, the 

value of swap positions that are internally netted by swap dealers, and the number of futures 

market trades effected by swap dealers to offset risk. Such information would also help inform 

the regulatory and rulemaking process, should the Commission determine that rulemaking 

relating to the bonafide hedge exemption becomes necessary. 

Accordingly, MFA recommends that the Commission propose rulemaking to collect 

information from swap dealers and commodity index funds on a permanent, ongoing basis. 

III. CONCLUSION 

In light of the recent legislative and policy making activity concerning the regulation of 

the OTC derivatives markets, we believe it is important for the Commission to consider the bona 

fide hedge exemption in the context of the broader OTC derivatives regulatory reform goals and 

objectives. MFA members are active participants in the commodity markets, and as such, have a 

strong interest in the integrity, transparency and efficiency of these markets. MFA urges the 

Commission to carefully examine the causes behind recent market distortions. Finally, MFA 

supports greater transparency with respect to OTC swap market activity and recommends that the 

Commission propose rulemaking to require swap dealers and index traders to report OTC swap 

market transactions to the Commission on a permanent, ongoing basis. 
Mr. Stawick 

June 17,2009 

Page 7 of7 

We would be happy to discuss our comments at greater length with the staff. If the staff 

has questions or comments, please do not hesitate to call Jennifer Han or the undersigned at (202) 

367-1140. 

Respectfully submitted, 

Is/ Stuart J. Kaswell 

Stuart J. Kaswell 

Executive Vice President & General Counsel 

CC: The Hon. Gary Gensler, Chairman 

The Hon. Michael Dunn, Commissioner 

The Hon. Walter Lukken, Commissioner 

The Hon. Jill E. Sommers, Commissioner 

The Hon. Bart Chilton, Commissioner