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==-~~ - 1701 K Srreer, N.W. 

Suire 200 ACSA Washingron, D.C. 20006 

Phone (202) 296-7116 

Fax (202) 659-5322 

American $-,/ Cotton 7 Ship~~ 

AssOCtatton 

April 21, 2009 COMMENT -~ ,.g 

David Stawick, Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

Re: 

Dear Mr. Stawick: 

17 CFR Part 150 

Concept Release 

Whether to Eliminate Bona Fide 

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Hedge Exemption for Swap Dealers & 

Create New Limited Risk Management 

Exemption from Speculative Position Limits 

Pursuant to the Federal Register Notice (74 FR 12282) of March 24, 2009, the 

American Cotton Shippers Association submits the following comments on the issues 

posed by the Commission. 

A. General Advisability of Eliminating the Existing Bona Fide Hedge Exemption 

for Swap Dealers in Favor of a Limited Risk Management Exemption. 

1. Should swap dealers no longer be allowed to quality for exemption under the 

existing bona fide hedge definition? 

Swap dealers should no longer be allowed to qualify for exemptions under the 

existing bona fide hedge exemption. Only bona fide commercial entities 

actually producing, processing, merchandising, manufacturing, or consuming 

the physical commodity should be able to qualify for a hedge exemption. 

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)? 

Yes, provided that both the swaps dealer and the commercial hedger, on 

whose behalf it is trading, be required to file a weekly report of all 

transactions entered into for or on its behalf and that such trades be reconciled 

and aggregated by the Commission from all risk management exemption 

entities to prevent the speculative limit from being exceeded. 

Federared Adamic Co non Associarion Texas Corron Associarion 

Associarions: Sourhern Conan Associarion Wesrern Co non Shippers Assocarion 
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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? 

No. A time horizon should be given after which all positions would need to be 

in full compliance with the new regulations. Otherwise, positions could be 

moved to much later expirations to avoid compliance. All positions should be 

afforded the same consideration by the Commission. A trading entity with a 

position in a nearby month should not be treated differently than trading 

entities with distant month positions- each should be subject to the same 

liquidation schedule. 

Should swap dealers holding such positions be given a time limit within which 

to bring their futures position into compliance with Federal speculative limits? 

Yes, see above. 

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? 

Yes. 

B. Scope of a Potential New Limited Risk Management Exemption for Swap 

Dealers. 

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? 

Yes. The bona fide hedge exemption should be extended to all commodities 

produced, processed, merchandised, manufactured, and consumed by any 

interest that uses the contract markets for hedging purposes in their 

commercial business. 
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C. Terms of a Potential New Limited Risk Management Exemption for Swap 

Dealers. 

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? 

A commercial interest is an individual or entity that produces, processes, 

merchandises, manufacturers, or consumes the commodity traded on a 

contract market. 

6. How should the Commission (and if applicable, the responsible industry selfregulatory organization (SRO) and the swap dealer itself verify that a dealer's 

clients are commercial? 

All such individuals or entities holding themselves out to be a commercial 

should be required to register with the Commission and report their 

commercial activities. Such reports should be subject to verification audits by 

Commission on no less than a yearly basis. 

The swap dealer should be required to file similar reports for each of its 

commercial clients and the Commission should be required to reconcile and 

aggregate the positions of the commercial client and the swap dealer. 

7. Is certification by the dealer sufficient or would something more be required 

from either the dealer or the client? 

Certification would be insufficient. The reporting procedure described above 

in response number 6 should be the minimum requirement. 

If so, what should be reported and how often- weekly, monthly, etc.? 

As stated above, mere certification is insufficient and would lead to abuses. 

The Commission must require regular reports of the swap dealer and his or 

her commercial client, monitor such reports closely, and reconcile and 

aggregate them to prevent trading in excess of the speculative limits. 

8. For a swap dealer's noncommercial clients, should the rules distinguish 

between different classes of non-commercials- 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)? 
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No. All noncommercial clients of a swap dealer should be treated similarly 

since each of them are speculators, each should be held to the same standards 

of reporting compliance, and each should be monitored closely to prevent 

trading in excess of the speculative limits. Particular attention should be given 

when a swap dealer is acting on behalf of another swap dealer allegedly 

trading on behalf of an alleged undisclosed commercial since this stratagem 

has been extensively used in recent years by swaps dealers to exceed the 

speculative limits. 

9. If a swap dealer were allowed an exemption for risk taken on against indexfund clients, how would the dealer satisfy the Commission that the fund is 

made up of many participants and is passively managed? 

The Commission should require the index funds to report the amount of each 

individual or entity's investment so as to be certain that no single investor has 

exceeded his speculative position limits through a large index fund 

investment. 

10. Is certification by the dealer or fund sufficient or should the dealer or fund be 

required to identify the fund's largest clients? 

No. Certification is not sufficient. All funds or dealers should register with the 

Commission and all of the funds clients should be identified to the 

Commission in order to assure that no commercial or non-commercial interest 

is using a fund to exceed the limits. 

11. If a swap dealer were allowed an exemption for risk taken on against another 

intermediary, how would the dealer satisfy the Commission that its 

intermediary client does not in turn have noncommercial clients that are in 

excess of position limits? 

As stated above in response number 8, no such exemptions should be 

permitted since this was the primary stratagem utilized by swaps dealers to 

exceed the speculative limits. 

Is certification by the dealer or second intermediary sufficient or should the 

dealer or intermediary be required to separately identify the intermediary's 

largest clients? 

Certification should never be sufficient, especially if the Commission ignores 

the realities of this questionable practice. Under such circumstances, all of the 

intermediary's clients should be identified to the Commission, as explained in 

comment number 1 0, in order to assure that no commercial or noncommercial interest is attempting to exceed the limits. 
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12. 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 allmonths-combined limit. 

The reporting requirement should be established at the same level currently 

required for each contract traded on a regulated commodity exchange. 

13. 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? 

The swap dealer should report his aggregate activity regularly regardless of 

whether or not his client exceeds the speculative limit. 

14. 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-monthscombined position in an agricultural commodity named in Sec.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." 

Yes, a sensible standard or criteria should be applied to the aggregate 

positions of the swap dealer and his or her commercial and non-commercial 

clients so as to prevent any distortion and/or control of the market which 

could destroy its economic purpose of price discovery, convergence, and 

hedging. 

15. If a new limited risk -management exemption for swap dealers is created, what 

additional elements, other than those listed here, should be considered by the 

Commission in developing such an exemption? 

Such an exemption should require weekly reporting, disclosure of counter 

parties, and aggregation of positions. 
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D. Other Questions 

16. 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?1 

The no-action relief should be rescinded. 

17. What information should be required in a swap dealer's application for a 

limited risk management exemption? 

The minimum information required should include its reporting capabilities 

and compliance procedures. 

Thank you for the consideration of these comments and recommendations. 

Respectfully submitted, 

Joseph T. Nicosia, 

President 

1 The two index traders offered investors the opportunity to participate in a broadly diversified commodity 

index-based fund or program ("index fund"). The futures positions of these index funds differed from the 

futures positions taken by the swap dealers who had earlier received hedge exemptions. The swap dealer 

positions were taken to offset OTC swaps exposure that was directly linked to the price of an index. For 

that reason, Commission staff granted hedge exemptions to these swap dealer positions. On the other hand, 

in the index fund positions described in the no-action letters, the price exposure results from a promise or 

obligation to track an index, rather than from holding an OTC swap position whose value is directly linked 

to the price of the index. Commission staff believed that this difference was significant enough that the 

index fund positions would not qualify for a hedge exemption. Nevertheless, because the index fund 

positions represented a legitimate and potentially useful investment strategy, Commission staff granted the 

index funds no-action relief, subject to certain conditions intended to protect the futures markets from 

potf(ntial ill effects. These conditions included: (1) The positions must be passively managed: (2) They 

must be unleveraged (so that fmancial conditions should not trigger rapid liquidations); and (3) the 

positions must not be carried into the delivery month (when physical delivery markets are most vulnerable 

to manipulation or congestion).