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GRESHAM INVESTMENT MANAGEMENT LLC 

Mr. David Stawick 

Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, N.W. 

Washington, D.C. 20581 

January 28, 2008 

COMMENT 

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Re: Proposed Risk Management Exemption From Federal Speculative :c.-, 

Position Limits 

Dear Mr. Stawick: 

Introduction 

Gresham Investment Management LLC ("Gresham") is pleased to submit these 

comments to the Commodity Futures Trading Commission (the "Commission" or 

"CFTC") on the proposed exemption for risk management positions in futures and 

futures equivalent option contracts on certain specified agricultural commodities (the 

"Proposal"). 72 Fed. Reg. 66097 (November 27, 2007). 

Gresham is ~·egistered as a commodity pool operator and a commodity trading 

advisor under the Commodity Exchange Act, as amended (NF A Registration No. 

0258100) and is also a registered investment adviser under the Investment Advisers Act 

of 1940, as amended. Gresham manages various funds and separate accounts pursuant 

to proprietary commodity investment programs. As of December 31, 2007, Gresham 

had approximately $4.5 billion of assets under management for its clients. Our clients 

include among others employee benefit plans, including state and local governmental 

plans, foundations and endowments, insurance company sepatate accounts, and 

govemmental entities. Gresham's assets under management have lncteased rapidly iil 

tecent years arid we anticipate continued significant growth ·in the future, due pririlarily 

to burgeoning interest by institutional investors worldwide in commodity investment 

programs involving fuliy collateralized, long-only futures positions. , .jhis development 

reflects the growing belief by institutional investots that commodities represent a 

separate asset class Md that consistent exposure to comrilodities as ail asset class can 

provide diversification for traditional equity and fixed income portfolios, as well as 

protection :fi:om inflation risk. In response to the growth in our business, Gresham 

requested and obtained no-action relief :fi:om the CFTC staff with respect to the 

applicable speculative position limits in com, soybeans and wheat. See CFTC Letter 

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67 Irving Place, 12TH Floor New York, N.Y 10003 Telephone (212) 984-1430- Fax: (212) 984-1412 

A :.\fcmber of The Falcon wood Group 
Mr. David Stawick January 28, 2008 

Page2 

No. 06-19 (September 6, 2006). See also CFTC Letter No. 06-09 (May 5, 2006). 

Discussion 

Gresham supports the Proposal in concept, subject to the comments set forth 

herein. We agree that the Commission should add a risk management exemption 

applicable to a diversified commodity investment program which is rules-based and 

designed to maintain consistent exposure to commodities as an asset class on an 

unleveraged basis. However, we urge that the Commission modify certain of the 

proposed conditions for this exemption and clarify various other related points in 

connection with issuing finalmle amendments. We also have responded to several of 

the specific questions on which the Commission is requesting public comments. 

We wish to preface our detailed comments by addressing certain concerns that 

have been expressed by some commenters on the market impact of commodity futures 

trading. by investment managers and other institutional market participants. First, there 

is no empirical evidence whatsoever that increased trading activity by institutional 

market patiicipants has increased price volatility or adversely affected the functioning 

of the commodity futures markets as a price discovery and hedging mechanism. To the 

contrary, Gresham believes that the additional volume and open interest resulting from 

such trading activity has enhanced the liquidity of these markets and thereby reduced 

price volatility. Gresham also believes that these markets are sufficiently deep and 

liquid to absorb additional investment capital with ease. 

Second, Gresham's rules-based, long-only, trading methodology is no more 

conducive to price manipulation or evasion of speculative position limits than any other 

nonspeculative strategy. As the Commission is aware, Gresham utilizes a 

predetermined set of mathematical rules and criteria for calculating the weightings for 

tangible commodity groups and individual commodities and for the annual reset and 

any rebalancings. Thus, Gresham resets the weightings annually based upon the 

economic significance and liquidity of each tangible commodity group in relation to all 

other tangible commodity groups, and of each commodity within a particular tangible 

commodity group in relation to all other commodities in such group, not on the basis of 

speculative market views, price targets, or price trends. Similru·ly, any periodic 

rebalancing is implemented in accordance with a predetermined numerical threshold 

and not on the basis of speculative market views, price targets, or price trends. 

Moreover, Gresham's trading activity is unleveraged and we do not carry positions into 

the spot month. Gresham and other investment managers who manage fully 

collateralized long futures positions in a systematic way roll their positions into later 

contract months prior to the last trading day or first notice of delivery day, whichever is 

earlier, and thus have no impact on the convergence of physical and futures prices 
Mr. David Stawick January 28, 2008 

Page3 

during the delivery period and are also not responsible for high commodity prices.1 In 

sum, Gresham ·believes that these concerns are misplaced and reflect a fundamental 

misunderstanding of the nature of fully collateralized, rules-based, long-only 

commodity investment programs. 

Definition of A Risk Management Position; Broadly Diversified 

A "risk management position", as defined in proposed Rule 150.10), would 

mean a futures or futures-equivalent position, held as part of a broadly diversified 

portfolio of long-only or short-only futures or futures-equivalent positions, that is based 

upon (i) a fiduciary obligation to match or track the results of a "broadly diversified 

index" that includes the same commodity markets in fundamentally the same 

propmtions as the futures or futures-equivalent position or (ii) a portfolio diversification 

plan that has, among other substantial asset classes, an exposure to a "broadly 

diversified index" that includes the same commodity markets in fundamentally the same 

proportions as the futures or futures-equivalent position. For this purpose, a "broadly 

diversified index", as defmed in proposed Rule 150.l(k), would mean an index based on 

physical commodities in which (i) not more than 15% of the index could be composed 

of any single agricultural commodity named in Rule 150.2; and (ii) not more than 50% 

of the index as a whole could be composed of the agricultural commodities named in 

Rule 150.2. 

Gresham objects to these numerical ctiteria which we find to be overly 

restrictive as well as unnecessary to address the Commission's concerns about market 

integrity. Together these numelical criteria would preclude the availability of a risk 

management exemption for long-only (or short-only) futures positions taken to replicate 

the returns of virtually any diversified index of agricultural commodities. For example, 

corn represents 17.2% of the TAPsm Agrjculture Index; soybeans represent 33.9% of the 

TAPsm Agriculture Index; and wheat represents 23.5% of the TAP5m Agriculture Index. 

Similarly, corn represents 23.4% of the SPGSCI Agriculture Index and 15.6% of the 

DJAIG Agriculture Index; soybeans represent 16.6% of the SPGSCI Agriculture Index 

and 41.6% ofthe DJAIG Agriculture Index; and wheat represents 40.7% of the SPGSCI 

Agriculture Index and 19.9% of the DJAIG Agriculture Index. Thus, corn, soybeans 

and wheat represent 74.6% of the TAP5111 Agriculture Index; 80.6% of the SPGSCI 

Agriculture Index; and 77.1% of the DJAIG Agriculture Index. In our view, the 

Commission should not apply these criteda to a diversified index which otherwise 

1 As Acting Chairman Walter Lukken recently stated: 

"With such high energy prices, it is not surprising that some have found fault with the futures 

markets. But blaming the futures markets for high commodity prices is like blaming a 

thermometer for it being hot outside." 

See Acting Chairman Walter Lukken, Remarks By Acting CFTC Chairman Walter Lukken on 

Compliance and Enforcement in Energy Markets- The CFTC Perspective at the FERC 

Compliance Summit (Jan. 18, 2008). 
Mr. David Stawick January 28,2008 

Page4 

meets the proposed conditions for an exemption because a commodity investment 

program based upon replicating the retums of such an index could not readily operate as 

a mechanism for evading speculative position limits in any of those commodities. In 

particular, given that trading could not occur on the basis of speculative market views, 

price targets or price trends, that the positions must be unleveraged and that such an 

index must be calculated, adjusted and re-weighted pursuant to an objective, 

predetermined mathematical formula under the Proposal, it is not likely that such 

trading would be susceptible for being used for evading speculative position limits or 

any other similar purpose. 

We also find it anomalous that a swap dealer may obtain a position limit 

exemption for long futures positions entered into to offset the exposure on commodity 

price swap transactions involving the same commodities underlying such an index, but 

an investment manager implementing a fully collateralized, rules-based, long-only 

commodity investment program involving such an index would not be eligible for a risk 

management exemption. See 72 Fed. Reg. 66097 at 66099 (discussing hedge 

exemptions granted to swap dealers). If adopted as proposed, an investment manager 

could enter into commodity price swap transactions with dealers to fulfill its fiduciary 

obligation to its clients to replicate the returns of such an index, but would be precluded 

from using the futtrres markets directly to satisfY its clients' risk management needs 

more cheaply, quickly, and efficiently. 

Accordingly, we urge that the Commission delete the proposed numerical 

criteria in connection with adopting final rule amendments. If, however, the 

Commission determines to retain numerical criteria in the fmal rule amendments, we 

ask that such criteria be substantially modified to accommodate fully collateralized, 

rules-based, long-only commodity investment programs involving a diversified index of 

agricultural commodities such as those which we have noted in this letter. 

On another point, we ask that the Commission confirm that certain language in 

the proposed definition of a "risk management position" (i.e., "the same commodity 

markets in fundamentally the same proportions") would not preclude an investment 

manager from making cet1ain adjustments to the futures or futures-equivalent position 

to address circumstances in which applicable laws, investment guidelines, religious 

beliefs or local custom prohibit a client from investment exposure to a specific 

commodity in the index (such as lean hogs), with the result that the other commodities 

in the index are given additional weight on a pro rata basis, including commodities 

subject to federal speculative position limits such as corn, soybeans and wheat. 

Conditions for Risk Management Positions 

To be eligible for an exemption, risk management positions, as defined in 

proposed Rule 150.1 G), would be required to meet the conditions specified in proposed 

Rule 150.3(a)(2): (i) the positions must be passively managed; (ii) the positions must 

be unleveraged; and (iii) the positions must not be carried into the spot month. We have 
Mr. David Stawick January 28, 2008 

Page 5 

significant concerns about certain aspects of the first two proposed conditions, but we 

do not object to the third proposed condition. 

Passively Managed 

We note that CFTC Letter No. 06-19, supra, does not impose a condition that 

the positions subject to the no-action relief be passively managed, but rather states that 

the "futures trading activity passively tracks the [index-based} strategy." Indeed, that 

letter recognizes that the investment manager exercises some element of active 

management both with respect to the timing of the roll, as well as the subsequent 

contract month to which the positions will be rolled, in consideration of such factors as 

liquidity, prevailing prices and spreads, and other market conditions. Thus, to be 

consistent with the prior no-action relief, Gresham believes that an element of active 

management as to both the timing of the roll, as well as the contract month to which the 

positions will be rolled, should be petmissible under the conditions for an exemption. 

In this regard, we ask that the Commission confum that the "passively managed" 

condition, which allows some discretion with respect to trading decisions, would permit 

and not preclude mlling fmward into more distant contract months, as well as nearby 

contract months, pursuant to an objective, pre-determined mathematical formula, so 

long as no positions are ca11ied in the spot month. 

Absence of Leverage 

Under the Proposal the notional value of qualifying futures positions may not 

exceed the sum of the value of: (i) cash set aside in an identifiable manner, or 

unencumbered short-term U.S. Treasury obligations so set aside, plus any funds 

deposited as margin on such positions; and (ii) accmed profits on such positions held at 

the futures commission merchant. In addition to cash and shott-term U.S. Treasury 

obligations, however, the prior no-action letters pe1mit qualifying futures positions to be 

covered by cash equivalents such as cash deposited in a money market mutual fund. 

Gresham believes that the use of cash equivalents such as money market mutual funds 

is fully consistent with the unleveraged nature of these strategies and should therefore 

be petmissible under the conditions for an exemption. We also note that Chicago 

Mercantile Exchange ("CME") Rule 559 and Chicago Board of Trade ("CBOT") Rule 

559, both of which provide exemptions from position limits for risk management 

positions, permit qualifying futures positions to be covered by a vadety of 

unencumbered shott-term instruments such as U.S. agency discount notes, bankers' 

acceptances, and certificates of deposit, in addition to cash and short-te1m U.S. Treasury 

obligations. We perceive no underlying policy or purpose that would be served by 

imposing a more restrictive condition in the circumstances presented here, nor has the 

Commission ruticulated any such policy or purpose. 
Mr. David Stawick 

Duty to Repmt 

January 28, 2008 

Page6 

Pursuant to proposed Rule 150.3(a)(2)(iv), a holder of a risk management 

exemption would be required to report immediately to the Commission in the event it 

knows, or has reason to know, that any person holds a greater than 25% interest in such 

position. This requirement is apparently designed to alert the Commission to the 

possibility that an individual might be attempting to use the exemption as a means of 

avoiding otherwise applicable speculative position limits. Gresham believes that this 

condition for receiving a risk management exemption is burdensome and unnecessary. 

As the commodity investment manager Gresham controls all futures and futures 

equivalent option positions entered into on behalf of its client accounts, whether funds 

or separate accounts, to implement its fully collateralized, rules-based, long-only 

commodity investment program, and no other person may exercise trading control over 

these positions. As noted, we believe that the inherent nature of these programs, in 

pruticular limited discretion with respect to trading decisions and the absence of 

leverage, precludes their effectiveness as a mechanism for avoiding otherwise 

applicable speculative position limits. Also, even though the Co:mniission recognizes 

that a fund operator may not know when a given person has acquired a 25% or more 

interest in the position held by the fund, the Commission has not provided any practical 

guidance concerning how a fund operator should attempt to comply with this condition 

if the Commission detennines to retain it in the fmalmle amendments. 

Other Types of Index-Based Trading 

Finally, Gresham believes that a risk management exemption should 

appropriately include additional types of rules-based commodity investment programs 

which are consistent with other categories of risk management or non-speculative 

positions recognized by the Commission and the exchanges in analogous contexts. See 

52 Fed. Reg. 34633 (September 14, 1987). See also CME Rule 559 and CBOT Rule 

559. For example, if to enhance its income the manager of a fully collateralized, rulesbased, long-only commodity index fund writes call options on futures contracts 

equivalent in value to a portion of its portfolio of long futures contracts to be used as 

cover for such options, we believe that the positions should be eligible for a risk 

management exemption. Similarly, if a fund manager wishes to purchase put options to 

provide some downside protection for a long-only commodity index fund, the positions 

should be eligible for a risk management exemption. Or, a manager may wish to 

engage in both writing covered call options and purchasing put options for a fund which 

is designed to offer a more conservative, income-oriented variation of a fully 

collateralized, mles-based, long-only commodity investment program. We believe that 

these positions share many fundamental attributes of long-only index-based positions or 

of other categories of risk management positions which should qualify them for an 

exemption fi·om speculative position limits. In pruticular, we note that these positions 

would be unleveraged, so that financial considerations should not cause rapid 

liquidation of positions, and no positions would be cruTied into the spot month. We 

recognize that these other types of index-based investment programs may entail a 
Mr. David Stawick January 28, 2008 

Page7 

somewhat higher level of trading discretion than would be permissible under the 

proposed conditions for an exemption, but this feature has not prevented the 

Commission from concluding that similar categories of positions (~ covered option 

writing) are eligible for a risk management exemption in analogous contexts .. 

In any event, the Commission should confirm that the final rule amendments are 

not intended to be all"inclusive, and that other types of index-based positions, upon 

further analysis, may well be eligible for receiving a risk management exemption. The 

Commission also should confirm that exchanges may include similar risk management 

exemptions in their speculative position limit rules. 

Conclusion 

Gresham appreciates this oppmtunity to submit our comments on the Proposal 

and the Commission's consideration of our views. We would be pleased to discuss our 

comments further. 

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012808/jfh 

Sincerely, 

~-~ a::~~. Spencer 

President