COMMODITY FUTURES TRADING COMMISSION 

2033 K STREET, N.W., WASHINGTON, D.C. 20581 

DIVISION OF 

TRADING AND MARKETS 

Dear Mr. 

\\)6 f\C..'\1()1\) Pesn1o1V ~&r f'l OifZec.\-eJ 

\r-~·:.k~ o"'vtr- Rv~e. 4, S 

July 16, 1985 

This is in response to your letter dated June 10, 1985, by which you 

requested on behalf of "the Bank" the relief fran regulation as a carm:x:lity 

pool operator ("CPO") available under Rule 4.5 1/ in connection with "the 

Bank's" operation of "the Trust". -

Fran the representations you previously made to us by your letter 

dated February 7, 1985, we understand the facts concerning "the Trust" in 

general to be as follows: 

"The Bank" is trustee to rrore than $85 billion in 

assets of pension, profit-sharing and other employee 

benefit trusts. . • • More than $9.6 billion of the 

assets to which "the Bank" is trustee are maintained in 

"the General Trust," a collective or carroingled 

invest:.rrent trust . • • under which "the Bank" as 

trustee and fiduciary may hold, administer, invest and 

reinvest the assets of participating employee benefit 

trusts and gover1"Hrent plans and units (each a 11 Plan11 ), 

pursuant to separate agreerrents with the participating 

plan sponsors and governm:mt entities. Assets within 

"the General Trust" are segregated into several 

invest:.rrent portfolios, each managed by ''the Bank." 

"The Trust" is one of the corrrn:ingled investrrent 

programs managed by "the Bank" within "the General 

Trust." 

"The Trust" is managed to replicate the performance of 

the Standard and Poor' s 500 Index using stock inde.x 

futures and rroney market instrurrents. It was 

established and is maintained as a vehicle for 

temporary investrrent of funds earmarked for long-tenn 

equity invest:Irent. "The Trust" ..• has since its 

1/ 50 Fed. Reg. 15868 (April 23, 1985). 
Page 2 

2/ 

inception been available only to Plans whose agreanents 

pennit participation in "tbe General Trust." "The 

Trust" is a service used by a relatively small nurrber 

of our "General Trust" participants. Since its 

inception it has had a total of four participants and 

at present has four. ?:_I 

Because its objective is to provide a temporary rreans 

to mirror the investment experience of a broadly 

diversified equities portfolio, "the Trust" invests in 

long futures contracts in dCI'l'estically traded, broad 

based stock indices. The face value of these contracts 

approximates the arrount of "the General Trust" assets 

ccmnitted to "the Trust." Essentially all "Trust" 

assets are maintained in rroney market instrurrents. 

"The Trust" deposits United States Treasury obligations 

as initial futures margin. • • . 

Plans may participate in "the Trust" by transferring 

funds to "the Trust" with the approval of "the Bank". 

In making Rule 4.5 effective upon its pUblication in the Federal Register 

on April 23, 1985, the Ccmnission stated: 

[We recognize) that, pending the canpletion of the §4.5 

rulemaki.ng proceeding, there may have been uncertainty 

on the part of persons affected thereby as to whether, 

and under \llhat criteria, they would be eligible to 

claim the relief from regulation as a CPO available 

under the final rule. In light of that uncertainty, 

those persons may be engaging in activities for which 

they nCM would be eligible for regulatory relief under 

§4. 5 as adopted without having sought (and received) a 

"not a pool" or a "no-action" letter fran Ccmnission 

staff. In light of such uncertainty, and subject to 

continued canpliance with all of the other provisions 

of §4.5, the Ccmnission has determined that it will not 

take any enforcerrent action solely for failure to 

register as a CPO against any such person who files a 

notice of eligibility as specified in §4.5(c) within 60 

days from the date hereof. 50 Fed. Reg. 15868, 15871. 

In this regard, we note that "the Bank" has filed the subject request for 

relief under Rule 4. 5 (and also a notice of eligibility, as discussed 

belCM) within such 60 day period. 
Page 3 

The value of each "Trust" unit is calculated as of the 

close of each business day on which there is trading on 

the exchanges in the futures contracts held by "the 

Trust." A Plan acquiring "Trust" units bears the 

invesbrent experience of its pro rata share of "the 

Trust" between the tirre of acquisition and any 

redemption, including proportional deduction of any 

maintenance margins, brokerage ccmnissions, taxes, fees 

and other related expenses as well as "the Bank's" 

daily rnanagerrent fee at an annualized rate of 

one-quarter of one percent of "the Trust's" market 

value. 

Rule 4. 5 makes an exclusion fran the definition of the term "corrm:::xli ty 

pJOl operator" available to certain otherwise regulated persons - ~, a 

State-regulated bank such as "the Bank" --with respect to their operation of 

certain qualifying entities - ~' the assets of any trust account for 

which the bank is acting as a fiduciary and for which it is vested with 

investm:mt authority. Rules 4.5(a) (3) and 4.5(b) (3), respectively. To claim 

the exclusion, the otherwise regulated person must file a notice of 

eligibility with the Ccmnission, which notice rrust contain certain 

identifying information and representations on the manner in which the 

qualifying entity will be operated. Rules 4.5 (c) (1) and (c) (2) (i) through 

(v) , respectively. 

Preliminarily, we note that by your June 10, 1985 letter you also 

filed on behalf of "the Bank" a notice of eligibility under Rule 4.5 in 

connection with its operation of "the Trust" with respect to those trust 

account assets for which "the Bank" is a discretionary trustee at all tilres 

-- ~' for which "the Bank" serves as an invest:rrent manager while those 

assets are held in trust by "the Bank" both outside and inside of "the 

Trust." Inasrruch as the notice of eligibility is effective upon filing, no 

response to that notice is required. Rule 4.5(d). ~/ Accordingly, and as 

3/ 

We do note, hCMever, that the notice contains the identifying information 

and specified representations required by Rule 4.5(c). 

With respect to Rule 4.5 (c) (2) (ii), the notice represents that "the Bank" 

will not enter into camodi ty futures contracts for which the aggregate 

initial margin exceeds 5 per cent of the fair market value of "the 

Trust's" assets. In this regard, your letter explains: 

"The Trust" policy does not provide for options 

transactions, haNever, should "the Trust" policy 

change, such policy will comply with the provisions of 

Rule 4.5 (c) (2) (ii) with respect to the percentage of 

(Footnote continued) 
Page 4 

you have requested, our resp:mse to your letter focuses solely on the 

operation of "the Trust" in those circumstances where "the Bank" is a 

discretionary trustee over certain trust account assets only while they are 

in "the Trust." 

With respect to the operation of "the Trust" under those cirCLnllstances, your letter contains all of the identifying infonnation and, subject 

to one exception, the specified representations on operating criteria 

required by Rule 4. 5 (c) . That exception pertains to the requirerrent in Rule 

4.5 (c) (2) (i) that a qualifying entity will use carm::x:lity futures or ccmrodity 

options contracts solely for bona fide hedging purposes within the nean.ing 

and intent of Rule 1.3 (z) (1). 4/ This is because where "the Bank" is a 

discretionary trustee over certain trust account assets only while they are 

in "the Trust," it is unable to directly substantiate that their use of "the 

Trust" will corre within Rule 1.3(z) (1) - i.e., that upon their withdrawal 

from "the Trust" those assets will be used to purchase securities a 

substantial majority of the time. ~/ 

In support of your request, your June 10, 1985 letter makes the 

following representations: 

"The Bank" ••• agrees ..• to make or to receive and 

record from the appropriate inves1:::rrent manager of 

assets carmi tted to "the Trust" a representation that 

the futures contracts purchased through "the Trust" 

will be used solely for "bona fide hedging" purposes 

(Footnote continued) 

4/ 

"the Trust's" assets carrmitted to options premiums. 

Your letter also represents that "the Bank" will arrend "the Trust" 

description in conformance with Rule 4.5(c) (2) (ii). 

Rule 4.5 (c) (2) (i) also provides an alternate representation with respect 

to certain long contracts. With respect to both sets of circumstances 

under which "the Trust" may be offered your letter represents: 

"The Trust" policy provides solely for hedging, 

ho.vever, should "the Trust" policy change, such policy 

will comply with the hedging alternative set forth in 

Rule §4. 5 (c) (2) (i) . 

In this regard, your letter further represents that "the Bank" will arrend 

its "Trust" description and its prarotional literature to indicate that 

"the Trust" is to be used for hedging purposes. 

~/ See 50 Fed. Reg. 15868 at 15876-77 for the Commission's discussion of 

this "crnpletion" component of Rule 1.3 (z) (1) with respect to the use of 

such "long hedge" strategies as "the Trust" errploys. 
Page 5 

within the reani.ng and intent of Rule 1. 3 (z) (1) and a 

representation as to completion of the hedges such that 

at least 75% of transactions purchasing units of "the 

Trust" will 1 .2sult in the purchase of stock. 

"The Bank" will also cbtain fran the investrrent manager 

• • . identification of the specific hedging strategy 

used, and will request notice if the strategy is no 

longer being follc:Med. The Trustee of "the Trust" will 

allc:M a participating Plan, as defined in the February 

7, 1985 letter, to acquire units only when it is 

i.rrpractical for the Plan to purchase camon stocks 

i.ntrediately. §_I 

Based upon the foregoing, this Division will not recommend that the 

Ccmni.ssion take any enforcerrent action against "the Bank", or any principal 

or employee thereof, for failure to register as a CPO in connection with its 

operation of "the Trust" in those circumstances where "the Bank" is a 

discretionary trustee over certain trust account assets only while they are 

in "the Trust. " 

This position is based upon the representations that have been made to 

us, as stated above. Any different, changed, or emitted facts or conditions 

might require us to reach different conclusions. In this connection, we 

request that you notify us immediately in the event the operations and 

activities of either "the Bank" or "the Trust" change in any way from that as 

represented to us. 

Veri truly yours, 

Andrea M. Corcoran 

Director 

6/ By your letter you provide five separate reasons for such "delay." We 

note that these reasons -- and the facts and the representations quoted 

above -- are similar to those previously provided to us by another 

financial depository institution who sought and received a position 

similar to that requested herein. See Division of Trading and Markets 

Interpretative Letter No. 85-5, Ccmn. Fut. L. Rep. (CCH) '.11.22,506 

(February 28, 1985) • 

We further note that it appears that "the Bank" would be able to 

indirectly substantiate that the use of "the Trust" cane within Rule 

1.3 (z) (1) by cbtaining "canpletion" representations fran "the Trust11 

participants. This is because in light of the specified reasons for 

which 11 the Trust11 may be used, and the representations users IID.lst make, 

it appears that a substantial majority of a participant's "the Trust11 

transactions would be campleted.