~ ~ Prudential Richard A. Miller 

Ms. Elizabeth M. Murphy, Secretary 

Securities and Exchange Commission 

100 F Street, NE 

Washington, DC 20549-0609 

Vice President and Corporate Counsel 

Financial Management Law 

The Prudential Insurance Company of America 

Two Gateway Center, 5th Floor. Newark NJ 07102 

Tel 973 802-5901 973 367-5135 

richard.a.miller@prudential.com 

February 17, 2011 

Mr. David A. Stawick, Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

Re: Definitions contained in Title VII of Dodd-Frank Wall Street Reform and 

Consumer Protection Act, 75 Fed. Reg. 80173 (Dec. 21, 2010) 

Dear Ms. Murphy and Mr. Stawick: 

I am pleased to share the comments of Prudential Financial Inc. ("PFI") with the Commodity 

Futures Trading Commission (the "CFTC") and the Securities and Exchange Commission 

Gointly, the "Commissions") on several issues raised in the Proposed Rule regarding the further 

definition of "swap dealer" (the "Proposed Rule") pursuant to the Dodd-Frank Wall Street 

Reform and Consumer Protection Act of 2010 ("Dodd-Frank"). We appreciate the careful 

thought and consideration of the Commissions in crafting the definitions in the Proposed Rule 

and we believe that the definition of "swap dealer" in the Proposed Rule has generally identified 

the appropriate criteria to determine if a market participant is a "swap dealer." 

We have previously submitted a comment letter on the issue of affiliate transactions, in which we 

recommended that such transactions not be subject to the clearing and execution requirements 

under Dodd-Frank and the related rules to be promulgated by the CFTC ("PFI Comment 

Letter"). 1 As set forth in the PFI Comment Letter and below, we believe that transactions 

between affiliates do not present the issues and risks that give rise to a need for swap dealer 

registration or the application of the other requirements applicable to swaps (particularly, 

mandatory clearing and execution requirements), and were not intended by Congress to be 

encompassed by the relevant provisions of Dodd-Frank. We urge the Commissions to make this 

clear in their fmal rules. 

Comment Letter, from Richard A. Miller, Vice President and Corporate Counsel, 

Financial Management Law, dated February 17, 2011. 
Ms. Elizabeth M. Murphy 

Mr. David A. Stawick 

February 17, 2011 

Page -2-

To that end, we urge the CFTC to ensure that the defmition of"swap dealer" in Section 1a(39) of 

the Commodity Exchange Act ("CEA"), as amended by Section 721 of Dodd-Frank, is not 

applied so broadly as to require that internal transactions between wholly owned subsidiaries of a 

parent company be considered in determining whether any such entity is required to register as a 

"swap dealer." As we noted in the PFI Letter, we believe that a contrary interpretation, under 

which such an entity would be subject to registration, would be inconsistent with Dodd-Frank 

and its Congressional intent, as Senate Banking Committee Chairman Christopher Dodd stated 

that swap transactions with an affiliate should not be considered in determining an entity's status 

as a swap dealer? 

In addition, we seek confirmation that internal transactions, regardless of whether either or both 

parties are "financial entities" pursuant to Section 2(h)(7)(C) of the CEA, as amended by 

Section 723 of Dodd-Frank, will not be subject to the clearing and execution requirements of 

Dodd-Frank. As discussed below and in the PFI Letter, we believe that, without such 

conflilllation, many market participants, including PFI, will be subject to significant uncertainty 

as to their requirements under Dodd-Frank. 

Affiliate Transactions Should Not Be Included as to Determination of Status as a Swap Dealer 

In the PFI Comment Letter, we explained that PFI uses Prudential Global Funding LLC ("PGF"), 

to face the market directly as a "conduit" to hedge the netted commercial and fmancial risk of the 

various operating affiliates within the PFI organization. We believe that this is the most efficient 

manner for PFI to allocate and manage financial risk among our various affiliates and we note 

that this approach has been adopted by many other enterprise-type companies with commonly 

owned, but legally separate entities. As addressed in the PFI Comment Letter, PGF, as the sole 

conduit for the various affiliates within the group of affiliated companies, "diminishes the 

demands on PFI's financial liquidity, operational assets and management resources, as affiliates 

within PFI avoid having to establish independent relationships and unique infrastructure to face 

the market." As also noted in the PFI Comment Letter, however, we are concerned that these 

transactions will be subject to the new regulatory requirements applicable to "swap" transactions 

under Dodd-Frank. We do not believe that this result was intended; however, without further 

clarity from the CFTC, there may be significant uncertainty as to whether those internal 

transactions between affiliates could be required to be taken into account in determining whether 

an entity is a "swap dealer'' under the Proposed Rules, causing PGF to potentially qualify as a 

"swap dealer." 

We believe that the Proposed Rule supports the interpretation that the long-standing conduit 

activities of PGF and other similarly situated entities should not themselves result in PGF or such 

other entities being considered swap dealers. However, the Proposed Rule does not expressly 

2 156 Cong. Rec. S5907, July 15, 2010. 

-2-
Ms. Elizabeth M. Murphy 

Mr. David A. Stawick 

February 17, 2011 

Page -3-

address the treatment of affiliate transactions, and additional clarity from the CFTC is needed to 

allow market participants to utilize a "conduit" structure to allocate and manage financial risk 

among various affiliates. The adopting release accompanying the Proposed Rule states that "[i]n 

determining whether a particular legal person is a swap dealer or security-based swap dealer, we 

preliminarily believe it would be appropriate for the person to consider the economic reality of 

any swaps and security-based swaps it enters into with affiliates (i.e., legal persons under 

common control with the person at issue), including whether those swaps and security-based 

swaps simply represent an allocation of risk within a corporate group."3 We firmly agree with 

this statement and we urge the CFTC to provide clear relief to entities, such as PGF, that meet 

these criteria. 

The release accompanying the Proposed Rule also notes that "[s]waps and security-based swaps 

between persons under common control may not involve the interaction with unaffiliated persons 

that we believe is a hallmark of the elements of the definitions that refer to holding oneself out as 

a dealer or being commonly known as a dealer.'.4 We concur and note that the various insurance 

affiliates within PFI enter into interest rate, equity, credit and currency swaps with PGF to hedge 

their assets and liabilities, as specifically permitted and circumscribed in amount by state 

insurance law and derivative use plans. 

The release reflects the fact that affiliate transactions between wholly owned subsidiaries do not 

pose the same risks or regulatory concerns as transactions with external counterparties, primarily 

because internal transactions do not create the systemic risk or credit exposures between market 

participants that Dodd-Frank seeks to address. Accordingly, there is no reason to impose the 

various requirements under Dodd-Frank (e.g., clearing and central execution) on such 

transactions. Doing so will undermine, and possibly eviscerate, the utility of the conduit 

mechanism and clearly undermine the legitimate risk allocation methods used by a wide variety 

of market participants. In addition, given PFI's long-standing use of PGF as a conduit, PGF 

clearly does not enter into these transactions as an attempt to evade being labeled a "swap 

dealer." In this regard, we note that clause (C) of the swap dealer definition excludes a person 

that "enters into swaps for such person's own account ... but not as part of a regular business." 

In the release accompanying the Proposed Rule, the Commissions noted that the phrase "regular 

business" should be interpreted to refer to entities that "accommodate demand for swaps from 

other parties and enter into swaps in response to interest expressed by other parties." 

In light of the statements noted above regarding affiliate transactions, we believe that "other 

parties," as used in this section of the release, must be construed to refer to unaffiliated third 

3 

4 

Further Definition of"Swap Dealer," "Security-Based Swap Dealer," "Major Swap 

Participant," "Major Security-Based Swap Participant," and "Eligible Contract 

Participant," 75 Fed. Reg. 80174 (Dec. 21, 2010). 

!d. 

-3-
Ms. Elizabeth M. Murphy 

Mr. David A. Stawick 

February 17, 2011 

Page -4-

parties, and not to affiliates. Indeed, we believe it would subvert Congress's intent to conclude 

that an entity entering into swaps with its affiliates is engaged in a "regular business" within the 

meaning of the exclusion. Based on the criteria identified in the proposing release, therefore, we 

urge the CFTC to clarify that conduits, such as PGF, will not be deemed to be a "swap dealer," 

as a result of the internal swap transactions that it enters into with the wholly owned financial 

subsidiaries ofPFI, its parent company. 

Clarity on Status of Internal Transaction 

We also urge the CFTC to conflfOl that, regardless of whether one or both parties are financial 

entities, internal transactions between affiliates will not be subject to the clearing and execution 

requirements under Dodd-Frank. Without such clarity, PGF could be forced to clear and 

centrally execute its internal swap transactions with its affiliates, as many of its affiliates are 

insurance companies, and are therefore "financial entities" that would not themselves be eligible 

for the clearing and execution exemption available under Section 2(h)(7) ofthe CEA.5 We note 

that the imposition of a clearing and execution requirement on these internal transactions would 

be contrary to Congressional intent. As Senate Agriculture Committee Chairwoman Blanche 

Lincoln said, "[I]t would be appropriate for regulators to exempt from mandatory clearing and 

trading inter affiliate swap transactions which are between wholly-owned affiliates of a fmancial 

entity."6 As addressed in the PFI Letter, we noted that, in the past, the CFTC staff has 

"acknowledged and accommodated transactions between affiliates that are functionally outside 

the intended scope of its regulatory domain."7 Exempting internal transactions from the clearing 

and execution requirements would be consistent with Congressional intent and CFTC policy 

regarding transactions between affiliates. 

As addressed in the PFI Comment Letter, we believe that a contrary outcome would be very 

harmful to the commercial enterprises that use conduits to efficiently allocate commercial risk 

between various affiliates, both fmancial and non-financial entities. Furthermore, such a result 

would create significant confusion and uncertainty among market participants, and particularly 

affiliated entities, with respect to the applicability of the clearing and execution requirements. In 

order to avoid any such confusion, we respectfully request that the CFTC provide clarity on this 

5 

6 

7 

Section 4(k) of the Bank Holding Company Act includes "insuring, guaranteeing, or 

indemnifying against loss, harm, damage, illness, disability, or death, or providing and 

issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing 

in any state." Thus, the activities of the insurance affiliates within PFI would be 

"financial activities." 

156 Cong. Rec. S5921, July 15,2010. 

CFTC Letter Interpretation, Re: Request for Confirmation of Interpretations Regarding 

"Bona Fide Hedging" and "Exchanges of Futures for Product" (available May 9, 1994). 

-4-
Ms. Elizabeth M. Murphy 

Mr. David A. Stawick 

February 17, 2011 

Page -5-

point. Of course, PGF will, with respect to any transactions with external third parties, be fully 

subject to any requirements of Dodd-Frank and the CEA that are applicable to such transactions. 

We appreciate the opportunity to provide our comments to the CFTC on these issues and would 

welcome the opportunity to discuss any questions the CFTC may have with respect to our 

comments. Any questions about this letter may be directed to me at (973) 802-5901. 

Sincerely, 

Richard A. Miller 

(Enclosure: PFI Comment Letter) 

-5-
~ ~ Prudential Richard A. Miller 

Mr. David Stawick 

Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 2 1st Street, NW 

Washington, DC 2058 1 

Vice President and Corporate Counsel 

Financial Management Law 

The Prudential Insurance Company of America 

Two Gateway Center. 5th Floor. Newark NJ 07102 

Tel 973 802-5901 973 367-5135 

richard.a.miller@prudential.com 

September 17, 2010 

Re: Definitions Contained in Title VII of Dodd-Frank Wall Street Reform and 

Consumer Protection Act, 75 Fed. Reg. 51429 (Aug. 20, 2010) 

Dear Mr. Stawick: 

I am pleased to share the comments of Prudential Financial Inc. ("PFI") 

with the Commodity Futures Trading Commission (the "CFTC") on the particular issue 

of the interpretation of the definition of "swap" with respect to internal transactions under 

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. No. 

111-203) ("Dodd-Frank"). Our comment letter specifically addresses the treatment of 

internal transactions between wholly-owned financial subsidiaries of a parent company, 

under Dodd-Frank. We are concerned that Dodd-Frank could require the clearing and 

execution of internal swap transactions between wholly-owned financial subsidiaries of a 

parent company. We recommend that these internal transactions not be treated as "swap 

transactions" for the purposes of applying the execution and clearing requirements under 

regulations to be promulgated by the CFTC, as required by Dodd-Frank. 1 

Dodd-Frank requires the CFTC to: (i) define the universe of swaps that 

will be regulated as "swaps"; (ii) impose clearing and execution requirements on certain 

parties that enter into "swap" transactions; (iii) impose recordkeeping and reporting 

requirements for parties that enter into "swap" transactions; (iv) set capital and margin 

requirements on certain parties that enter into "swap" transactions; (v) impose business 

conduct standards for certain parties that enter into "swap" transactions; and (vii) create 

position limits, including aggregate position limits across futures and swap markets, for 

market participants that enter into "swap" transactions. 
Mr. David Stawick -2-

Many business enterprises, including PFI, elect to operate in a manner that 

assigns specific functions to related and commonly-controlled affiliates. With regard to 

swap transactions, it has long been our practice, as an enterprise-type company with 

separate legal entities that are commonly owned by PFI to use one affiliate, Prudential 

Global Funding LLC ("PGF"), to directly face the market as a "conduit" to hedge the net 

commercial and financial risk of the various operating affiliates within PFJ. Under this 

practice, only PGF (i.e., the conduit) is required to trade with external market 

participants, while the internal affiliates within PFI trade directly with the PGF. The use 

of PGF as the single conduit for the various affiliates within PFI diminishes the demands 

on PFI's financial liquidity, operational assets and management resources, as affiliates 

within PFI avoid having to establish independent relationships and unique infrastructure 

to face the market. Moreover, use of PGF as a conduit within PFI permits the netting of 

our affiliates' trades (e.g., one affiliate is hedging floating rates while another is hedging 

fixed rates). This effectively reduces the overall risk ofPFI and our affiliates, and allows 

us to manage fewer outstanding positions with external market participants. 

Under Dodd-Frank, all swap transactions must now be cleared through a 

derivatives clearing organization ("DCO") and executed on an exchange or swap 

execution facility ("SEF"), unless the swap is not required to be cleared or one of the 

counterparties to the swap (l) is not a financial entity, (2) is using swaps to hedge or 

mitigate commercial risk, and (3) notifies the CFTC as to how it generally meets its 

financial obligations associated with entering into uncleared swaps. For the purposes of 

the clearing exemption under Section 723 of Dodd-Frank, a financial entity is defined to 

include, among other entities, "a person predominantly engaged in activities that are in 

the business of banking, or in activities that are financial in nature, as defined in section 

4(k) of the Bank Holding Company Act of 1956." Pursuant to regulations promulgated 

by the Board of Governors of the Federal Reserve System under section 4(k), such 

financial activities include engaging as a principal in certain swap activities, including 

interest rate swaps and foreign exchange transactions? Therefore, conduits that are 

solely (and therefore "predominantly") engaged in just facilitating their affiliates' swaps, 

including PGF, will become by virtue of the operation of sub-paragraph (VIII) "financial 

entities" for purposes of the determination of which counterparties are eligible for the 

clearing exemption, pursuant to Section 723 of Dodd-Frank. 

When a conduit financial entity faces an affiliate that is itself a financial 

entity (e.g., in the case of PFI, an insurance company), the clearing exemption becomes 

inapplicable and the internal transaction would now have to clear through a DCO and be 

centrally executed. Obviously, this unintended consequence of Dodd-Frank, ifleft un2 12 C.F.R. §§ 225.28(8)(ii)(C) 
Mr. David Stawick -3-

remediated, will defeat the legitimate purpose of having a conduit structure, because it 

will make no sense to margin and clear the same trade twice: once between the conduit 

and its affiliate and again between the conduit and its street-side counterparty. As a result, 

conduits, including PGF, will be rendered incapable of providing their enterprise-wide 

risk management and control. Consequently, absent a conduit structure, PFis' operating 

financial affiliates will be forced to go directly to the market to hedge their risks, 

requiring reallocations of capital and/or expertise in order to directly enter into swap 

transactions with third parties. 

Importantly, our concern in this regard was shared by one of the principal 

architects of Dodd-Frank, Senate Agriculture Committee Chairman Blanche Lincoln, 

who also believes that such an outcome is not an intended consequence of Dodd-Frank. 

She noted in a floor colloquy during consideration of Dodd-Frank, "it would appropriate 

for regulators to exempt from mandatory clearing and trading inter affiliate swap 

transactions which are between wholly owned affiliates of a financial entity." 3 Senator 

Susan Collins also noted, in a colloquy with the Senate Banking Committee Chairman 

that it was not Congressional intent to "capture as swap dealers end users that primarily 

enter into swaps to manage their business risks, including risks among affiliates."4 

Senate Banking Committee Chairman Chris Dodd agreed with Senator Collins that swap 

transactions with an affiliate should not be considered in determining an entity's status as 

a swap dealer, further clarifying that internal transactions between end users and affiliates 

should not determine whether an entity would be deemed a swap dealer as a result of 

such transactions. 5 

The staff of the CFTC has previously acknowledged and accommodated 

transactions between affiliates that are functionally outside the intended scope of its 

regulatory domain. Thus, for example, in response to a request for an interpretation of 

CFTC regulations, the CFTC staff noted that commonly-owned and controlled entities 

were considered to be a single entity or the "same person" for purposes of compliance 

with CFTC regulations, including Regulation 1.3(z) and Regulation 150.2 ("CFTC 

Interpretive Letter").6 Under the CFTC Interpretive Letter, the CFTC Staff agreed that 

where a physical commodity transaction and the related hedging futures trading were 

3 

4 

5 

156 Cong. Rec. S592 1, July 15,2010. 

156 Cong. Rec. S5907, July 15,2010. 

!d. 

6 CFTC Letter Interpretation, Re: Request for Confirmation of 

Interpretations Regarding "Bona Fide Hedging" and "Exchanges of Futures for Product" 

(available May 9, 1994). 
Mr. David Stawick -4-

conducted by separate but commonly-owned corporations or other legal entities, "the 

mere existence of the above structures should not disqualify" such transactions from bona 

fide hedging transactions. In other words, the physical transaction and the hedging 

transaction would be viewed as one and the separation between the commonly-owned 

legal entities is disregarded. This conclusion is consistent with the CFTC requirement 

that there must be a bona fide trade, which would not occur here because there is no 

change in ultimate beneficial ownership. We believe that the CFTC should continue to 

limit the regulatory requirements it imposes on internal transactions between affiliates of 

a parent company, as we do not believe that the statute would require such an 

interpretation. In order to do so, the CFTC should clarify that internal swap transactions 

between wholly-owned subsidiaries of a parent company are not subject to the clearing 

and execution requirements under any rulemakings promulgated by the CFTC, as 

required under Dodd-Frank. 

We believe that the CFTC has the authority to provide such clarity to all 

market participants. Section 723 of Dodd-Frank requires the CFTC to create an approval 

process for swaps that are required to be cleared through a DCO. Section 723 also 

mandates that all swaps that are required to be cleared must be executed on a designated 

contract market and/or a SEF. Under these rulemakings, the CFTC should clarify that 

internal swap transactions between wholly-owned affiliates and subsidiaries are not 

required to be cleared by DCOs and that such transactions are not subject to the execution 

requirement. Through this process, the CFTC can avoid imposing unnecessary regulatory 

burdens on market participants, while ensuring that all swap transactions between an 

internal conduit and external counterparties will be subject to the regulatory requirements 

ofDodd-Frank, as necessary. 

We appreciate the opportunity to provide our comments to the CFTC on 

this issue and would welcome the opportunity to discuss any questions the CFTC may 

have with respect to our comments. Any questions about this letter may be directed to 

me at (973) 802-5901. 

Richard A. Miller 

Vice President and Corporate Counsel 

Enclosure: CFTC Interpretive Letter 
Philip McBride Johnson, Esq. 

Skadden, Arps, Slate, Meagher & Flom 

1440 New York Avenue, N.W. 

Washington, D.C. 20005-21 11 

Page I 

1994 CFTC Ltr. LEXIS 42, * 

Re: Request for Confirmation of Interpretations Regarding "Bona Fide Hedging" and "Exchanges of Futures for 

Product" 

Dear Mr. Johnson: 

This is in response to your letter dated March 23, 1994, in which you requested confirmation from the Division of 

Trading and Markets ("Division") regarding certain views expressed therein. Based upon the representations made in 

the letter, we understand the facts to be as follows. 

You have received inquiries from clients regarding what constitutes "bona fide hedging" and what qualifies as a 

permissible "exchange of futures for physicals or product" ("EFPs") where the physical commodity transactions and the 

related futures trading are under common control although they may be conducted by separate but commonly owned 

[*2] corporations or other legal entities. These inquiries have related to situations where separation of physicals transactions from other functions such as futures activity is viewed as desirable, such as where an entity seeks to isolate environmental risks in a particular affiliate. 

With respect to bona tide hedging, you note that the examples in Commission Regulation 1.3(z) each posit that the 

physical and futures activity are engaged in by "the same person." In this context an issue may arise whether a hedge is 

bona fide should an ultimate parent organization choose as a matter of routine practice to own and market physical 

commodities directly or through an affiliate which it owns and controls and to trade futures to hedge the physicals acti vity through another affiliate it owns and controls. For this purpose, you have defined ownership as follows: 

100% ownership [which] may be diluted minimally due to employee stock ownership plans or other reasons, but ... in all cases nearly complete ownership and effective control of the affiliates exist. 

You also state that we should assume there is 

no doubt that the physical and futures transactions associated with the hedges [*3] and the EFPs are 

genuine and legitimate and that the only issue is that which is presented in ... [your] letter. 

Similarly, you state that contract market EFP rules may require that the physical and futures legs be entered into by 

one party on each side of the EFP. Here, there can be an issue whether an EFP is bona fide where the physical and 

futures activity on one side of the EFP are each engaged in, as a matter of routine practice, by different commonly 

owned and controlled affiliates of the same parent organization. 

You state your view that the mere existence of the above structures should not disqualify the hedging or EFP activity described and request staff confirmation of that view. Based upon the representations set forth in your March 23, 

1994 letter, the Division and the Division of Economic Analysis confirm their view that the corporate structure and routine allocation of functions described therein and summarized above are not inconsistent with Commission Regulation 

1.3(z), which defines bona fide hedging, and Commodity Exchange Act Section 4c(a), which permits contract markets 

to provide for EFPs to be entered into in accordance with their Commission approved rules. [*4] 

The Commission staff historically has considered commonly owned and controlled entities to be a single entity or 

the "same person" for purposes of compliance with Commission regulation 1.3(z). nl As to EFPs, the Commission staff 

previously has focused, in general, on the legitimacy of the cash leg of an EFP and the nature of the relationship between the contra parties. The staff has not required that, under the circumstances you have described, the same legal 

entity handle both the physical and futures legs on one side of an EFP. Accordingly, the Division and the Division of 

Economic Analysis also would not object to a contract market interpretation consistent with the views expressed herein. 
Page 2 

1994 CFTC Ltr. LEXIS 42, * 

nl Commission Regulation 150.2, which addresses speculative position limits, has been applied by Commission staff in a similar manner. 

Any different, omitted, or changed facts or conditions might require a different conclusion. Finally, you should 

note that the views expressed herein are solely those of the Division and Division of Economic Analysis and are not 

binding on the Commission or any other division or office of the Commission. 

Sincerely, 

Andrea M. Corcoran 

Director 

[*5] 

March 23, 1994 

Andrea M. Corcoran, Esq. 

Director 

Division of Trading and Markets 

Commodity Futures Trading Commission 

2033 K Street, N.W. 

Washington, D.C. 20581 

Re: Request for Confirmation of Interpretations Regarding "Bona Fide Hedging" and "Exchanges of Futures for 

Product" 

Dear Ms. Corcoran: 

On repeated occasions, we have been asked by clients to advise them on compliance with requirements under the 

Commodity Exchange Act (CEAct") and the regulations of the Commodity Futures Trading Commission ("Commission") pertaining to what constitutes "bona fide hedging" and what qualifies as a permissible "exchange of futures for 

product (or physicals)" also known as "EFPs" where the physical commodity transactions and the related futures trading 

are under common control although they may be conducted by separate but commonly owned corporations or other 

legal entities. Frequently, these issues arise when a client is considering a reorganization for reasons unrelated to the 

CEAct where separation of physicals transactions from other functions such as futures activity is viewed as desirable 

(e.g., to isolate environmental risks). To assist those clients, we request confirmation of(*6) our interpretations of 

CEAct § 4c (EFPs) and Commission Reg. § 1.3(z) (bona fide hedging) in the context of the organizational structure 

described below. 

Many business enterprises elect to operate in a manner that assigns different functions to related and controlled affiliates. For example, an ultimate parent organization may carry on various business operations through affiliates that it 

owns n I and controls or may choose to conduct some activities itself while assigning other functions to such an affiliate. 

For present purposes, let us suppose that the parent organization or one subsidiary (either referred to herein as "A") engages in the ownership and marketing of physical commodities while another commonly controlled affiliate ("B") engages in futures market activities to hedge "A's" physical transactions and to implement the futures aspects ofEFPs for 

which "A" has carried out the physical transactions. n2 In many instances, the results of those entities' operations are 

combined and included in consolidated fmancial statements and reports, although not in all cases. 

n I I 00% ownership may be diluted minimally due to employee stock ownership plans or other reasons, but 

this letter assumes that in all cases nearly complete ownership and effective control of the affiliates exist. 
Page 3 

1994 CFTC Ltr. LEXIS 42, * 

[*7) 

n2 It is assumed in this example that there is no doubt that the physical and futures transactions associated 

with the hedges and the EFPs are genuine and legitimate, and that the only issue is that which is presented in the 

next paragraph of this letter. 

Commission Reg.§ l.3(z) enumerates several examples of"bona fide hedging" transactions. In each instance, it is 

posited that the physical transactions and the futures activity are !by "the same person." As, in the example above, if two 

commonly controlled entities were deemed to be different legal persons under Commission Reg. § l.3(z), questions may 

arise regarding whether the activities of"B" in the futures market can qualify as bona fide hedging. Similarly, at those 

contract markets whose rules allow EFPs only where the physical and the futures legs are entered into by one party on 

each side of the EFP, a similar question might be raised under the described organizational structure. In our view, the 

mere existence of this structure should not disqualify either the hedging or the EFP activity of those entities as commonly-controlled and owned organizations. 

Accordingly, we request confirmation that the corporate structure [*8) and allocation of functions as described 

herein are consistent with CEAct § 4c and Commission Reg. § l .3(z). While we do not ask the Commission to interpret the rules of any relevant contract market with respect to these matters, we also request confirmation that the Commission would not disapprove an interpretation consistent with our view if it were adopted by a contract market, where 

EFPs are limited to physical and futures transactions between the "same persons," the "same parties," or equivalent language. 

Sincerely, 

Philip McBride Johnson 

XXX XX 

CONTACT: 

Aton L. Seifert 

Andrea M. Corcoran 

Division ofTrading and Markets 

Commodity Futures Trading Commission 

2033 K Street, NW 

Washington, DC 20581 

(202) 254-8955 

(202) 254-80 I 0 Facsimile