Dechert 

LLP C.F.T.C. 

OFfiCE OF THE SECRETARIAT 

2009 JUN 1S PrJ S 5~ 

June 16, 2009 

Mr. David A. Stawick 

Secretary to the Commission 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, N.W. 

Washington, DC 20581 

1775 I Street, N.W. 

Washington, D.C. 20006-2401 

+1 202 261 3300 Main 

+1 202 261 3333 Fax 

www.dechert.com 

Received CFTC 

Records ~. tlon l/!b/{)9 

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 ("Concept Release"). 

Dear Mr. Stawick: 

Dechert LLP appreciates the opportunity to submit these comments in response to the 

Commodity Futures Trading Commission's ("Commission's") request for public comment on its 

Concept Release concerning the treatment, for speculative position limit purposes, of futures 

positions held by certain swap dealers.1 The Concept Release addresses several issues relevant to 

our clients, who represent a broad range of participants in the investment management industry, 

including leadjng fund managers of registered investment companies, advisers to pension plans, 

'investment managers for hedge funds, commodity pools and other pooled investment vehicles, 

and advisers to institutional and individual client accounts. 

1. The Public-Benefits of Commodity-Indexed Investments 

Since the advent of commodity index investments in the 1970's, the benefits of 

diversifying stock portfolios with commodity investments have become widely recognized. 

Financial experts now generally recommend that investors, whether large or small, consider 

allocating some of their investment assets to commodity index investments, which offer 

diversification benefits, a hedge against inflation and a counter-balance to stock and bond market 

declines. Retirement plans, college endowments, charitable. foundations and millions of small 

investors now derive these important benefits from commodity index investments. For many 

. small investors, mutual funds and other passively managed investment vehicles that seek to track 

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, 74 Fed. Reg. 12,282 

(Mar. 24, 2009) [hereinafter, Concept Release]. 

US Austin Boston Charlotte Hartford New York Newport Beach Philadelphia Princeton San Francisco Silicon Valley washington DC 

EUROPE Brussels London Luxembourg Munich Paris ASIA BeiJing ·Hong Kong 
Dechert 

LLP 

Mr. David A. Stawick 

June 16, 2009 

Page2 

broad commodity indexes are the most efficient, cost-effective and accessible means of achieving 

the diversification, stock and bond market offset and inflation hedging benefits of commodity 

investments. The Concept Release recogniZes these important uses of commodity index 

investments as well as the fact that for some market participants, swaps are the preferable means 

of obtaining commodity exposure because swaps "offer the ability to customize contracts to 

match particular hedging or price exposure needs."'2 

2. The Commission's Rules Should Facilitate the Use of Commodity Index 

Strategies 

As the Concept Release reflects, the Commission and its staff have proceeded cautiously 

in addressing the application of speculative position limits to commodity index strategies. It has 

granted a small number of narrow exemptions and issued no-action letters in contexts. in which 

the use of futUres was undertaken, whether by a swap dealer or directly by an index fund, to offset 

or to obtain an exposure tied directly to specific price risks arising from passively managed 

commodity index-based funds. We believe that these carefully crafted positions represent a 

prudent accommodation of the market-protective purposes of speculative position limits and the 

legitimate investment purposes underlying commodity index strategies. 

To enable broad segments of the public to enjoy: the benefits of diversification obtained 

through commodity-indexed investments, fund managers, and investment advisers must be able to 

obtain commodity exposure through the derivatives mArkets. These investments typically' are 

made through highly-regulated, transparent investment vehicles, such as investment companies 

registered under the Investment Company Act of 1940 and retirement plans governed by the 

Employee Retirement Income Security .A,ct of 1974. Further, as codified in the no-action relief 

granted to date by the Commission staff, these investments are made ·in a manner that 

significantly limits their potential impact upon the futures markets. The Commission staff has 

conditioned relief upon the commodity index strategy being hedged (in the case of the swap 

dealer position) or pursued directly (in the case of commodity index funds obtaining direct 

commodity exposure in the futures markets) and being a long, passive, unleveraged strategy, with 

no positions being carried into the delivery month. In addition· such relief included a modified 

position limit for the trader receiving relief, among other conditions.3 

2 Concept Release, 74 Fed. Reg. at 12,284. 

The Commission staff's no-action relief also was conditioned upon the commodity index fund futures market 

activity meeting the following conditions: (1) the futures positions must be passively managed; (2) they must 

be unleveraged (so that financial 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). In addition, the Commission staff emphasized the transparency of the strategy in disclosures 
Dechert 

LLP 

a. 

Mr. David A. Stawick 

June 16, 2009 

Page3 

How Should the Commission's Rules Define A Commercial Client and 

Should the Rules Distinguish Among a Swap Dealer's Non-Commercial 

Clients? (Question 7) 

The Commission has requested comment concerning the appropriate defmition of 

"commercial clients" and whether index funds, if characterized as non-commercial clients) should 

be distinguished ftom other types of non-commercial clients. Commodity index investors are 

similar to commercial hedgers in the purpose and manner of their trading, and that their strategies 

strongly support a hedging or risk management exemption. Commercial hedgers tend to be 

consistently either net long or short a contract and use the futures m~kets to offset risks inherent 

in, for example, production or processing of a commodity. Commodity index investors tend to be 

consistently net long and use the futures markets as a buffer against the risks to retirement assets 

and other savings created by stock and bond price fluctuations and inflation. In granting no--

action relief to index investors, the Commission staff recognized that such investors employ it in 

passively managed strategies that are designed to protect against specific inflation and market 

risks. We believe that the relief structured by the Commission's staff provides a reasonable 

template for a more general risk management exemption that ·should be ma4e available for 

investment vehicles engaged in passively managed, fully · collateralized index strategies, 

consistent with the exemptive and no-action criteria developed to date. 

b. How Would a Swap Dealer Satisfy the'Commission that the Fund is 

Made Up of Many Participants and is Passively Managed? (Question 8) 

The Commission has also asked how, if a swap dealer were granted an exemption from 

speculative position limits for futures positions taken to hedge against swaps exposure opposite 

index fund counterparties, the dealer would satisfy the Commission that the fund is made up of 

many participants and is passively managed. In particular, the Commission asks whether a 

certification by the dealer or fund would be sufficient or whether the dealer or fund should be 

required to identify the fund's largest clients. We believe that a certification by the dealer based 

upon reasonable diligence in reviewing the clienfs account should suffice. Further information 

could be obtained by the Commission upon request. Normal due diligence by swap dealers 

includes review of investment objectives of funds and in the case of registered investment funds, 

publicly available data would establish the manner in which a fund is managed, the size of the 

fund and the general composition of its participants. 

to investors. See DB Commodity Services LLC, CFTC No-Action Letter No. 06-09 (May 5, 2006); CFTC 

No-Action Letter No. 06-19 {Sept 6, 2006). 
Dechert 

LLP 

3. 

Mr. David A. Stawick 

June 16, 2009 

Page4 

How Should the Two Index Traders Granted No-Action Relief Be Treated in the 

New Regulatory Scheme? (Question 14) 

We also believe tha~ the Commission should make the no-action relief previously granted 

to index traders generally available to other market participants that meet the relevant criteria. As 

the Concept Release reflects, in issuing the two 2006 no-action letters, the Commission staff 

recognized that permitting a commodity index fund to exceed speculative position limits through 

directly held futures positions rather than through a swap transaction "represented a legitimate 

and potentially useful investment strategy.'.4 The direct commodity index trading activity 

addressed in the staff's no-action letters involves trading that is substantially equivalent to the 

swap dealer transactions discussed· in the Concept Release-futures positions are not carried into 

the spot month, are unleveraged and implements a passive investment strategy that enables 

numerous investors to achieve diversification and risk management benefits on a flow-through 

basis. 

We appreciate the opportunity to share our views with the Commission on this important 

topic. Please contact Brendan C. Fox at 202.261.3381 if we can provide any additional 

information that may assist the Commission. 

Sincerely, 

DechertLLP 

4 Concept Release, 74 Fed. Reg. at 12,284 n. 15.