05-15-r):?; II: Jr) 1202..J.I :3552 ·1 

COMMENT e ~ 

PLAINS COTTON COOPERATIVE ASSOCIATION 0 P.O. BOX 2827 0 LUBBOCK, TX 79468 0 PH: (806) 763-8011 0 FAX (806) 762-7333 

May 15,2009 

Mr. David Stawick 

Secretary 

Commodity Futures 'l'rading Commission 

l'hree Lafayette Centre 

1155 21st Street N.W. 

Washington, DC 20581 

Received CFTC 

Rec~JdS Section 

s-;;sfo1 ::a 

. :::0' 

-~ 

·~ -

.•.. /I 

0 

"TJ 

"TJ 

.0 

(TJ 

0 

"'11 

-tO 

::c· 

rn .:'11 (I)·~ ~- . 0 

:::3 ~. 

. ;%I 

Re: "Whether to Eliminate the Bona Fide Hedge Exemption for Certain Swap Dealer~~ cmate 

a New Limited Risk Management Exemption from Speculative Position Limits." ..c · .s; 

Dear Mr. Stawick: 

C) )> 

-f 

I am writing on behalf of the 25,000 members of Plains Cotton Coop~::rativc i\.ssuciarion to convey 

our comments and answer questions contained in the CFTC's Concept Release lfederal Register: 

March 24, 2009 (Volume 74, Number 55)]. 

We fully agree with statements made hy Joe Nicosia, representing thr:: American Cotton Shippers 

Association, and Woods Eastland, representing AMCOT, on April 22, 2008, before;: the CFTC 

Roundtable. Spt:cifically, we agree that an index fund with a hedge exemption should re!'trict its 

position in a commodity to lhe dollar allocation or the percentage of funds allocated to that 

commodity as defined in its prospectus and recorded with the CFTC. Further, any variation 

should be subject to speculative position limits, and that such funds should report their cash 

positions on a wer::kly basis. And further, that lhe CFTC monitor and oversee all swaps and OTC 

activity hy requiring the reporting of all swap and OTC contracts by market participants, and that 

it determine the aggregation of positions from all sources, including the exchanges, ETFs, .swaps, 

OTC, and all other trading entities. And finally, that all non-traditional hedge accounts, those not 

involved in the commercial enterprise of physically trading hales of cotton, he reported as a 

separate individual category. 

Our answers to the 15 questions contained in the Concept Relea<;e are as follows: 

A. General Advisahi lity of Eliminating the Existing J3ona Fide Hedge Exemption for Swap 

Dealr::rs in favor of a Limited Risk Management Exemption 

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

bona fide hedge definition? Yes 

2. I r ~o. should the Commission create a limited risk-management exemption for swap 

dealers based upon the nature or their clients (e.g., being allowed an exemption to the 

extent a client is a traditional commercial hedger)? Yes 

3. lf 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? Existing 
# 3 4 

futures positions ill excess of current Federal specu/ath'e position limits should he 

grandfatltered wztil tile futures and option contract in wlticll they are plllced expire. 

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 lo 

exchange position limits or position accountability rules? Yes 

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

5. If a new limited ri~k 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 de tine what 

constitutes a commercial client? A commercial client should be a trallilimral hedger, Le., 

Judgers iltvo/ved as a commercial enterprlroe in the productimr, distributlotz or 

consumption of the physical commodity. 

6. How should the Commission (and, if applicable, the responsible industry self-regulatory 

organization (SRO)) and the swap dealer itself verify that a dealer's clients are 

commercial? They need to confirm with tlte client that the client is a commercial. 

ls certification by the dealer suflicient or would something more be required from either 

the dealer or the client? If so, what should be reported and how often-etc? Commercial 

and nolt-commercia/ltedgers should file monthly report~· directly to CFTC. Reports 

should contain tlteir aggregated position of plrysicals,ftJtures,futures equil-•alent 

options, and OTC instrument.\·. 

7. For a swap dealer's noncommercid.l <:lients, should the rules distinguish between 

different classes ofnon-commercials-l(>r example: (l) 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 ofwhom may be commercials)? Yes 

8. lf a swap dealer were allowed an exemption for risk taken on against index-fund clients, 

how would the dealer satisfy the Commission that the fund is made up of many 

participants and is passively managed? Is certification by the dealer or fund sufficient or 

should lhe dealer or fund be required to identify the fund's largest clients? Certijicatio11 by 

tile dealer am/lor fimd is insufficient; therefore, the fum/ sltould he required to itlelttify 

its largest clients. 

9. If a swap dealer were allowed an exemption tor risk taken on against another 

intem,ediary, how would the dealer satisfy the Commission that its intermediary client 

does not in tum have non-commercial clients that are in excess of position limits? 

Commercial a11d non-commercial hedgers slwuldfile monthly reports directly to CFTC 

Reports should co11tain their aggregated posifio11 ofpltysical!t,futures,jiJtures 

equh•alellt optiolls, and OTC i11strumenl!i. 
05-·15-o:?; 1·1: 30 12024 ·1 B552 ·1 

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

intermediary be required lo separately identify the intermediary's largest clients? 11tey 

sltould identify tlze intermediary's largest clients. 

1 0. What futures equivalent position level should trigger the new limited risk management 

exemption reporting requirement? For example, under the rules ofthe 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 all-months-combined 

limit. Continue operating under the rules oft!te ongoing special call. 

11. 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? Yes, a certification by the swap dealer to the Commission 

to that effect. 

12. 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? Yes 

13. 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? The overall size of the individual commodity market 

D. Other Questions 

I 4. 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? Current positions limits should he gralldfathered wztil the futures and/or option 

contract ill which tltey are placed expire. 

15. What infonnation should be required in a swap dealer's application for a limited risk 

management exemption? 1. Identify the parties of the tra~tsaclion. 2. How tile l'Wap is 

margined. 3. All terms of the swap, i.e., dates it is to he entered rmd exited, how 

offsettingfutures would be ente1·ed and exited, and whether it is actively or passively 

1tumaged. 4. Wiry the exemptwnfrom speculative limits sltould be grouted. 5. Tile 

purpose oftheftuul enteri11g i11to the swap.