July 24, 2009 

Mr. David Stawick 

Secretary 

Received CFTC 

Records Section 

~o/or 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

Dear Mr. Stawick: 

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Re: Concept Release 74 FR 12282- Whether to Eliminate the Bona Fide Hedge 

Exemption for Certain Swap Dealers and Create A New Limited Risk 

Management Exemption for Speculative Position Limits (the "Concept Release") 

Introduction 

I am Adam Felesky, Chief Executive Officer ofBetaPro Management Inc. 

("BPM"), the manager of the Horizons BetaPro ETFs (the "HBP ETFs"), which is a 

family of exchange traded funds ("ETFs") domiciled in Ontario, Canada and listed on the 

Toronto Stock Exchange (the "TSX"). I would like to respond to the Concept Release 

released by the Commodity Futures Trading Commission (the "CFTC") earlier this year 

with respect to its impact on our investors as well as on our business capabilities. 

The HBP ETFs currently have assets in excess ofCdn. $2.5 billion among 38 

ETFs- 14 of which are commodity based. BPM specializes in offering leveraged 

exposure long and short - and was the first manager to offer such products for 

commodities in North America. Currently we manage the second largest natural gas ETF 

in North America. Our ETFs are used by a vast cross section of investors, including 

mutual funds, hedge funds, pensions, insurance companies, dealer liability desks, 

financial advisors and retail clients. Many of our investors use the HBP ETFs exclusively 

to manage the risk within their existing portfolios. Several of the commodity-based HBP 

ETFs have been or are the most actively traded securities on the TSX. 

While the HBP ETFs are not domiciled in the United States, the exposure for 

many of our ETFs is obtained indirectly through an over-the-counter ("OTC") swap with 

a Canadian counterparty dealer which, to varying degrees, hedges its position in the 

underlying futures market. 

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Concept Release 

BPM would like to submit the following comments on the Concept Release in 

advance of the July 2009 scheduled hearings on this matter. We believe that the HBP 

ETFs should continue to be eligible for an exemption from the proposed specified 

position limits for the following reasons: 

1) The HBP ETFs are Exchange Traded Funds that track an underlying index 

such as a commodity and depending on the investment objective of the HBP 

ETF deliver a return that is a multiple of the performance of its underlying 

index (e.g., +200%, -100% or -200%). Although the HBP ETFs use leverage 

to varying degrees, they are passively managed and are rebalanced daily, 

which limits the exposure of investors. By virtue of the swap activity 

currently undertaken by the HBP ETFs, they have been very successful in 

providing investment results that almost perfectly track their investment 

objectives. In addition, by being listed on the TSX, the HBP ETFs are 

transparent and are not a source of market manipulation or speculation. 

2) Our commodity-based HBP ETFs provide a limited risk, exchange-listed 

alternative for investors compared to an OTC swap or future position which 

can involve unlimited risk of their capital. 

3) Our commodity-based HBP ETFs never hold spot month futures to expiry. 

Long commodity HBP ETFs roll out of the current nearby future to the next 

by selling the spot month which is the most relevant for the end user/ 

consumer. As a result, if there is any direct price impact emanating from the 

long HBP ETF activity on the prompt month contract it would be to exert a 

downward effect on price, serving to moderate any upward price pressures 

attributable to other market factors. 

4) In the spring and summer of2008, the crude oil futures curve was in 

backwardation most of the time, with the second month forward contract 

(which would absorb the HBP ETF's buying activity) trading at a discount to 

where physical market players were largely establishing the prompt month 

contract price. Consequently, as the second month contract was trading at a 

discount, the HBP ETF buying activity in the second contract month did not 

force up the prompt contract (see Appendix A). 

5) Our commodity-based HBP ETFs have attracted sellers when there was 

significant price appreciation and buyers when there was significant price 

declines- not vice versa- which arguably promotes price stability, not 

volatility. This was further established and presented in the CFTC September 

2008 Staff Report on Commodity Swap Dealers and Index Traders. In 

addition, ETFs that provide short exposure, such as the Horizons BetaPro 

Crude Oil Bear+ ETF, provide a unique means by which investors can take a 

position against a perceived inflated market, versus simply reducing an 

existing long position (see Appendix B). Finally it should be noted that the 
- 3-

HBP ETFs that are leveraged long and short oil and gas have holding periods 

of only 1 to 3 days (see Appendix C). Hence, while these HBP ETFs provide 

tremendous additional market liquidity (see Appendix D), they do not result in 

a sustained market position over longer periods. 

6) The assets in our commodity-based HBP ETFs are the aggregate investment 

of thousands of investors and to our knowledge no one investor has indirectly 

obtained a position in a commodity-based HBP ETF in excess of the 

speculative limit that would otherwise be imposed directly on such an ETF. 

Our commodity-based HBP ETFs only held on average less than 0.20 

contracts per unit holder as of December 31, 2008 (see Appendix E). 

That said, BPM supports any regulatory efforts to ensure that there is adequate 

transparency and is willing to immediately enter into discussions with the 

Ontario Securities Commission, the HBP ETF's principal regulator, to achieve 

that result. 

7) The HBP ETFs, which are not actively managed, require a customized passive 

swap which tracks its customized underlying index, which allows the 

underlying commodity returns to be hedged back to the Canadian dollar. This 

exposure would not be attainable in the futures market on a same margin 

basis. 

8) If the bona fide hedge exemption is eliminated and if no exemption was 

allowed by the CFTC for the HBP ETF's related swap activity, each HBP 

ETF could conceivably dissolve into a series ofETFs to ensure it was below 

the CFTC speculative limit. This could result in a larger number of ETFs to 

monitor, greater costs to the investor (i.e., due to reduced economies of scale), 

and arguably, increased risk that an individual could aggregate a position in 

excess of the CFTC speculative limit across several ETFs with the same 

investment objective without triggering a traditional securities disclosure 

event. 

9) Ifthe bona fide hedge exemption is eliminated and if no exemption was 

allowed by the CFTC for the HBP ETF's related swap activity, there would 

also be an attraction for dealers that are currently not involved in commodityrelated trading activity to enter the market, as the scarcity value of speculative 

limits for non-commercial clients would be significant. We believe in time the 

market structure and price dynamics would be unchanged but the CFTC may 

have significantly more dealers to monitor and the costs to investors may be 

substantially higher. 

Possible Response 

Our perception is the CFTC is most concerned about market transparency and 

potentially imposing speculative limits to avoid market manipulation and to mitigate 

excessive speculation, while at the same time ensuring that non-commercial activity is 
-4-

sufficiently robust in order to support commercial hedging needs. To achieve these goals 

while still exempting commodity-based ETFs, like our commodity-based HBP ETFs, 

from the proposed speculative limits, the CFTC might want to consider: 

a) Requiring disclosure to the CFTC by such ETFs of any investors who 

indirectly hold investments in such ETFs with a value that is more than a 

specified level (e.g., 33%) ofthe speculative limit on a monthly basis; 

b) Mandating any investor in such ETFs to notify the manager of such ETFs if 

their investment in such ETFs at any time exceeds 100% ofthe speculative 

limit; and 

c) Requiring the managers of such ETFs to have the ability to force an investor 

in such ETFs to redeem a portion or all of their investment in such ETFs such 

that the investor does not exceed any stipulated guidelines adopted by the 

CFTC. 

The foregoing would help assist the CFTC in monitoring an individual investor's 

position in such ETFs and potentially in such ETFs in the same fund complex. As you 

can appreciate, implementing such a solution will require the coordination of all 

applicable regulatory authorities (i.e., the Securities and Exchange Commission and the 

Canadian securities administrators in the case of the HBP ETFs). However, as the 

number of investors that will likely be impacted is probably quite small, the cost of 

imposing these requirements may be appropriate. 

Conclusion 

In summary, we strongly believe that commodity-based ETFs, like our 

commodity based HBP ETFs, play an integral role in enhancing the underlying liquidity 

of the commodities market through a structure which is cost effective, transparent and 

liquid (i.e., as they are usually listed on an exchange). Furthermore, our data with respect 

to our commodity-based HBP ETFs and other competitors indicate that the recent price 

appreciation in crude oil in June 2008 was curtailed by crude oil ETFs, rather than being 

exaggerated. In addition, the inability of such ETFs to limit the price move in crude oil in 

2008 further illustrates that the physical market continues to be substantially larger and of 

greater influence. 

The possible elimination of the bona fide hedge exemption could also result in an 

immediate fractionalization ofETFs and potentially increase the number of dealers that 

would begin acting as counterparties, which would increase the need for regulatory 

oversight and potentially the cost for investors. Commodity-based ETFs, such as our 

commodity-based HBP ETFs, which passively track an index, are listed on a public 

exchange, are subject to regulatory oversight and do not take delivery of the commodity, 

are transparent and are important investment vehicles for many investors. They should 

not be viewed negatively and should not be restricted from providing benefits to 

investors, particularly when they are not a source of market manipulation or speculation. 
- 5-

Thank you for considering my remarks. Please do not hesitate to contact me at 

416 933 5739 if I can be of any other assistance. 

Sincerely, 

Adam 

~~ Felesky 

Chief Executive Officer, 

BetaPro Management Inc. 
Appendix A - Crude Bull Market Review: 2007 - 2008 

Storage Arbitrage versus Prompt WTI 

$4.00 $160.00 

Storage arbitrage driver NO STORAGE ARBITRAGE DRIVER! 

$3.00 $140.00 

$2.00 $120.00 

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2nd - Spot WTI Spread 

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Source: National Bank Financial 
Appendix B- HBP ETF Assets under Management and Corresponding Notional Values 

Relative to Underlying Futures Contract Prices 

Assets Under Management: 

Horizons BetaPro NYMEX Crude Oil Bull+ ETF (HOU) vs. Horizons BetaPro NYMEX Crude Oil Bear+ ETF (HOD) 

$600,000,000.00 .--------------------------------..,. $160.00 

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Notional Value: Horizons BetaPro NYMEX Crude Oil Bull+ ETF (HOU) vs. Horizons Beta Pro NYMEX Crude Oil 

Bear+ ETF (HOD) 

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Source: Bloomberg 

*Data from ETF inception (January 15, 2008) to June 30, 2009 
Appendix C- Average Hold Periods for Horizons BetaPro ETFs 

Horizons BetaPro ETFs- Average Hold Period (June l, 2009- June 30, 2009) 

ETF Avera2e Hold* (Days) 

Horizons BetaPro NYMEX® Crude Oil Bull+ ETF 3 

Horizons BetaPro NYMEX® Crude Oil Bear+ ETF 3 

Horizons BetaPro NYMEX® Natural Gas Bull+ ETF 2 

Horizons BetaPro NYMEX® Natural Gas Bear+ ETF 1 

Source: BetaPro Management Inc., Bloomberg 

*Average Hold calculated as: dollar value ofETFs traded per day (Volume*NA VPU) divided by Assets 

under Management for each ETF 
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Appendix E- Number of Underlying Futures Contracts Held per Unit Holder* 

Number of Contracts 

ETF per Unit Holder 

Horizons BetaPro NYMEX Crude Oil Bull+ ETF 0.1606 

Horizons Beta Pro NYMEX Crude Oil Bear+ ETF 0.1884 

Horizons BetaPro NYMEX Natural Gas Bull+ ETF 0.1194 

Horizons BetaPro NYMEX Natural Gas Bear+ ETF 0.0016 

Source: BetaPro Management Inc., Bloomberg 

*Number of Contracts per Unitholder calculated as: Assets under Management divided by the underlying 

Futures Contract Value divided by the number ofunitholders for each ETF. 

All data as at December 31, 2008