U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5438 

Facsimile: (202) 418-5547 

jcarley@cftc.gov

Division of Clearing and 

Intermediary Oversight

James L. Carley 

Director 

CFTC letter No. 05-15 

August 15, 2005 

Exemption 

Division of Clearing and Intermediary Oversight 

Re: Section 4m(1) – Request for Relief from the CPO Registration Requirement

Dear : 

 This is in response to your letter dated August 27, 2003, to the Division of Clearing and 

Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the 

“Commission”), as supplemented by your email messages dated October 30, 2003, November 

12, 2003, November 19, 2003, November 20, 2003, March 31, 2004, and June 21, 2004, and 

telephone conversations with Division staff (the “correspondence”). By that correspondence, 

you requested relief from the commodity pool operator (“CPO”) registration requirement of 

Section 4m(1) of the Commodity Exchange Act (the “Act”).1

 Based upon the representations contained in the correspondence, we understand the facts 

to be as follows. You are both the director of the “Fund” and the President of the Fund’s 

investment adviser. Investors participate in the Fund through a feeder fund, “A”, of which you 

are also General Partner. You are not subject to any statutory disqualification under Section 

8a(2) or (3) of the Act.2

You intend the Fund to trade interest rate futures contracts, Eurodollar futures contracts, 

and options on interest rate futures contracts for the limited purpose of hedging the Fund’s 

portfolio of mortgage-backed securities.3

 Currently, there are thirty-four participants in the 

 

1

 7 U.S.C. § 6m(1) (2000). The provisions of the Act and the Commission’s rules cited 

herein may be accessed at http://www.access.gpo.gov/uscode/title7/chapter1_.html and 

www.gpoaccess.gov/ecfr/, respectively. 

2

 7 U.S.C. § 12a(2) or (3). 

3

 You have confirmed that all commodity interest positions will be used to establish “bona 

fide hedging transactions and positions,” as that term is defined in Rule 1.3(z)(1). 
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Fund. But for the fact that seven of these participants are non-accredited investors, you would be 

eligible to claim the CPO registration exemption of Rule 4.13(a)(3).4

 The seven non-accredited 

investors are either your family members or certain of your close friends. With the exception of 

two of your family members, each of the non-accredited investors has participated in the Fund 

for over three years.5

In support of registration relief, you stated that the Fund could achieve most of its 

hedging objectives by committing no more than four percent of its liquidation value to establish 

its commodity interest positions. However, given the relatively low hedge margin on Eurodollar 

and interest rate futures contracts, the Division believes that the Fund would likely be able to 

satisfy its hedging objectives using significantly less than four percent of the liquidation value of 

its portfolio.6

 Based upon the representations made in the correspondence, including your 

representations as to the non-accredited investors and your representations that that the Fund will 

trade commodity interests solely for bona fide hedging purposes, the Division will not 

 

4

 Because we are treating your letter as a request for relief from the registration 

requirement of Section 4m(1) of the Act, it has not been necessary to consider your letter as a 

request for relief from the pool participant criterion of Rule 4.13(a)(3). 

 The Division notes that when the Commission adopted the CPO registration exemption of 

Rule 4.13(a)(3), it specifically noted that there may be persons that do not meet the criteria of 

Rule 4.13, but that nonetheless, under their particular facts or circumstances, merit relief. 

Accordingly, the Commission directed staff to continue to issue relief from the CPO registration 

requirement of Section 4m(1) of the Act on a case-by-case basis. See 68 Fed. Reg. 47221, 47228 

(August 8, 2003). 

5

 However, these two persons have participated for over two years. 

6

 For example, based upon hedge margins in effect on the Chicago Board of Trade as of 

June 2, 2005, assuming that the Fund were to hedge half of the value of its portfolio, it appears 

that the Fund would need to commit just under a half percent of the Fund’s assets to establish 

commodity interest positions using both 10-year U.S. Treasury Note futures contracts and 5-year 

U.S. Treasury Note futures contracts. Moreover, based upon the various hedging scenarios you 

presented in the correspondence, it appears that the Fund should be able adequately to achieve 

most of its hedging objectives using a maximum of one percent of the liquidation value of the 

Fund’s portfolio. In this regard, the Division notes that the commodity interest trading limitation 

articulated in Rule 4.13(a)(3), allowing for up to five percent of the liquidation value of a pool’s 

portfolio to be used to establish commodity interest positions, in the majority of cases allows for 

the use of commodity interest positions far in excess of what would otherwise be required to 

hedge the entire value of a pool’s portfolio. 
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recommend that the Commission take any enforcement action under Section 4m(1) of the Act 

against you for failure to register as a CPO in connection with your activities as director of the 

Fund. This position is, however, subject to the condition that the aggregate initial margin and 

premiums the Fund commits to establish its commodity interest positions will not exceed one 

percent of the liquidation value of the Fund’s portfolio. 

The relief issued by this letter does not excuse you from compliance with any otherwise 

applicable requirements contained in the Act or the Commission’s regulations issued thereunder. 

For example, you remain subject to all antifraud provisions of the Act and the regulations, the 

reporting requirements for traders set forth in Parts 15, 18, and 19 of the regulations, and to all 

other applicable provisions of Part 4 of the regulations. Also, this relief is subject to compliance 

with the condition set forth above. 

 This letter, and the relief issued herein, is based upon the representations that have been 

made to us. Any different, changed, or omitted facts or conditions might render this letter void. 

In this regard, you must notify the Division immediately in the event that the operations of the 

Fund, including its participant composition, change in any material way from those represented 

to us. Further, this letter represents the position of this Division only and does not necessarily 

reflect the views of the Commission or any other division or office of the Commission. 

 If you have any questions concerning this correspondence, please contact R. Stephen 

Painter Jr., an attorney on my staff, at (202) 418-5416. 

 Very truly yours, 

 James L. Carley 

 Director