·------------------------ Rational Grain anti Feed Association 

Mr. David Stawick 

Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st St., NW 

Washington, DC 20581 

Dear Mr. Secretary: 

June 16, 2009 

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 Positions Limits"- Federal Register, March 24, 2009 

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The National Grain and Feed Association (NGFA) appreciates the opportunity to 

provide comments on the CFTC's advance notice of proposed rulemaking (ANPR) 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. Generally, we 

believe such action would enhance performance of U.S. agricultural futures contracts; 

and, specifically, we believe this action could be an important contributor toward reestablishing a predictable relationship between cash and futures in the CBOT wheat 

contract and restoring convergence. 

The NGF A believes strongly that increased participation of investment capital in 

U.S. agricultural futures markets has contributed to a cash/futures disconnect and to lack 

of convergence in the wheat contract. The situation came to a head in 2008 when futures 

advanced strongly, resulting in much wider basis levels than seen historically and 

subjecting commercial grain hedgers to significant financial stress in meeting margining 

requirements. Even today, following a retreat in futures price levels, commodity index 

traders as defined in the CFTC Commitments of Traders report hold open interest 

equivalent to more than twice the annual soft wheat crop; and basis levels continue to 

demonstrate a cash/futures disconnect. It is clear to us that a close examination of the 

Commission's hedge exemption policy for swap dealers is merited, and that a more 

limited granting of such exemptions could be beneficial to contract performance. 

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The NGF A offers the following observations in response to questions posed by 

the Commission in its March 24 concept release: 

Question 1: Should swap dealers no longer be allowed to qualify for exemption under 

the existing bona fide hedge definition? 

Response: The NGFA agrees that the current swap exemption, in place since 1991, is 

due for re-examination. As the March 24 Federal Register ANPR notes, U.S. agricultural 

futures markets and, in particular, over-the-counter (OTC) markets have changed 

dramatically since 1991. We believe it is no longer appropriate to automatically grant 

bona fide hedge exemptions to swap dealers; rather, a new process for granting 

conditional and limited exemptions to swap dealers could contribute to much-improved 

contract performance. 

Question 2: If so, should the Commission create a limited risk-management exemption 

for swap dealers based upon the nature oftheir clients (e.g., being allowed an exemption 

to the extent a client is a traditional commercial hedger)? 

Response: The NGF A supports replacing the swap exemption with a limited risk 

management exemption. As the question suggests, we believe granting such an 

exemption to swap dealers may depend on the nature of the swap dealers clients - in 

other words, to the extent the client is a traditional commercial hedger who would 

otherwise qualify for a hedge exemption, the swap dealer could be granted a risk 

management exemption for that client's legitimate commercial business. If a swap dealer 

is granted an exemption for a client or clients deemed noncommercial and subject to 

position limits, in no way should the dealer's exemption be allowed to modify the client'•s 

position limits. Position limits must continue to apply to the noncommercial client under 

all circumstances. 

Question 3: If 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? 

Response: The NGF A does not advocate forced liquidation of swap dealers' existing 

positions. Such action could be disruptive to the marketplace. We suggest that these 

positions could be grandfathered until expiration of the futures or option contract in 

which the swap dealer holds a position. Alternatively, it may be logical to require 

compliance with a new limited risk management exemption at such time as the swap 

dealer's agreement with a customer expires. 

Question 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 to exchange position limits or position accountability rules? 
Response: The NGF A's primary concern is to apply the new limited risk management 

exemption to agricultural commodities. Generally, though, it would seem to make sense 

that the new rule be applied consistently to commodities that currently are subject to 

position limits or accountability limits. 

Question 5: If a new limited risk 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 define what constitutes a commercial client? 

Response: We suggest that a commercial client is an entity involved in the production, 

processing, merchandising, manufacturing or utilization of a product traded on a contract 

market. This traditional definition of a commercial hedger seems a good, common-sense 

place to start. 

Question 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? Is certification by the dealer sufficient or would something more 

be required from either the dealer or the client? If so, what should be reported and how 

often- weekly, monthly, etc.? 

Response: Consistent with existing CFTC rules, we believe the onus would lie with the 

swap dealer and/or the dealer's clients to satisfy the Commission that they qualify as a 

commercial hedger. We believe certification by the dealer and/or clients probably is not 

sufficient. Regular reporting to the Commission should be a requirement for the dealer 

and its clients, with such reporting subject to auditing by the Commission. 

Question 7: For a swap dealer's noncommercial clients, should the rules distinguish 

between different classes of noncommercials -for example: (1) 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 of whom may be commercials)? 

Response: While the added transparency of differentiating between noncommercial 

clients of swap dealers may be desirable - and while such information may be useful to 

the Commission- as a practical matter, it would be unnecessary to distinguish among 

different types of noncommercials for purposes of granting the limited risk management 

exemption. Simply put, noncommercials should not qualify for a hedge exemption, 

regardless of how they access the futures markets. In the specific case of a swap dealer 

trading on behalf of another swap dealer whose clients are Undisclosed, we would urge 

that the Commission exert heightened vigilance, as this could be an attempt to work 

around position limits. 

Question 8: If a swap dealer were allowed an exemption for risk taken on against indexfund 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 the dealer or fund be required to identify the fund's largest clients? 

Response: The NGF A believes that index funds, as noncommercial participants, should 

be subject to speculative position limits. This would be the case whether a fund accesses 

the futures market directly or through a swap dealer. The NGF A would suggest that 

certification by the dealer or its clients is not sufficient and that regular reporting to the 

Commission should be required to help ensure that all noncommercial clients of swap 

dealers are held to position limits. 

Question 9: If a swap dealer were allowed an exemption for risk taken on against 

another intermediary, how would the dealer satisfy the Commission that its intermediary 

client does not in turn have noncommercial clients that are in excess of position limits? 

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

intermediary be required to separately identify the intermediary's largest clients. 

Response: As noted above in the response to Question 7, the NGF A would strongly 

suggest that the Commission exercise special vigilance in this instance. Establishing an 

intermediary entity could be an attempt to circumvent position limits for noncommercial 

participants. In all cases, but especially in this scenario, the Commission should require 

regular reporting by the swap dealer, the intermediary client and the ultimate client to 

· ensure compliance with position limits, and regular auditing by the Commission should 

be expected. While it likely will prove difficult, the Commission should vigorously 

pursue a policy of looking through the swap dealer and any intermediary parties to the 

final client. 

Question 10: What futures equivalent position level should trigger the new limited risk 

management exemption reporting requirement? For example, under the rules of the ongoing 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 allmonths-combined limit. 

Response: The reporting rules established by the Commission in its ongoing special call 

seem appropriate as a starting point for the limited risk management exemption proposal. 

Question 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? 

Response: Whether or not a swap dealer's clients exceed required reporting levels, the 

dealer should still be responsible for reporting aggregate activity. 

Question 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? For example, "A swap dealer may not hold an individual month or allmonths-combined position in an agricultural commodity named in Section 150.2 in 

excess of 10% of the average combined futures and delta-adjusted option month-end 

open interest for the most recent calendar year." 

Response: It seems reasonable to place some limit on a swap dealer's positions. While 

we do not have a specific figure to recommend at this time, the limits should contain 

specific reference to single-month and all-months-combined open interest. 

Question 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? 

Response: No additional elements to suggest at this time. 

Question 14: How should the two index traders who have received no-action relief from 

Federal speculative position limits (see footnote 15) be treated under any new regulatory 

scheme as discussed herein? 

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Response: We advocate treating all noncommercial participants the same; therefore, we 

suggest that the two index traders be required to comply with new position limits within 

some reasonable period of time. 

Question 15: What information should be required in a swap dealer's application for a 

limited risk management exemption? 

Response: Generally, we would like to see the swap dealer demonstrate that the limited 

risk management exemption is being sought to hedge risks incurred by the dealer as the 

result of a transaction with a commercial hedger or hedgers. This may involve reporting 

to the CFTC the identity of clients to enable the Commission to verify their commercial 

hedger status. 

Sincerely, 

Rod Clark 

Chair, Risk Management Committee