PI M C 0 

May 28,2009 C.f.T;C. 

OFFICE. OF THE $ECRETARIAT 

840 Newport Center Drive 

Newport Beach, CA 92660 

Tel: 949.720.6000 

Fax: 949.720.1376 

David Stawick 20.09 l'lRV 29 Arlll 2~ Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

Received CFTC 

Records Section 

6Aioo 

1155 21st Street, NW I! I . 

Washington, DC 20581 COMMENT 

Dear Mr. Stawick, 

PIMCO welcomes the Commission's solicitation of comments on the subject outlined in 

its "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 Limits." PIMCO is a registered CTA, Commodity Pool Operator, and 

Investment Advisor who is responsible for managing the retirement savings and other 

funds of millions of investors, large and small. We recognize the value that properly 

. managed commodity exposure, including the tracking commodity indexes, can bring to 

investor portfolios by mitigating inflation risk and financial risk, just as traditional 

commercial interests use these markets to mitigate their business risks. 

This letter is a comment specifically on Questions 7, 8, and 14 of the Concept Release. 

Question 7 asks, "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 .... " 

An understanding of the differences between index investors and hedge fund speculators 

clearly leads to the conclusion that indeed these types of market participants should be 

treated differently. Specifically, commodity index investors should have a risk 

management exemption from speculative limits because they are in fact not speculators, 

they have the characteristics of hedgers, they promote market stability, and they broaden 

the scope for production hedging by other market participants. 

(A) Index investors have more in common with commercial hedgers than they do 

with speculators. These investors always have net long positions in the markets 

and are using those positions to hedge the inflation risk and financial risk that 

exists elsewhere in their portfolios. So they are using the futures markets for risk 

mitigation, just as traditional commercial participants use the markets to hedge 

business risk. Some larger institutions, such as pension funds and endowments, 

directly make these index investments to hedge their fmancial risk and inflation 

risk. But there are also hundreds of thousands of individual savers who have no 

means to mitigate these same risks except by participating in commingled 

vehicles such as commodity index mutual funds. 

(B) Index investors will roll their positions forward prior to the first delivery day of a 

contract. Therefore they do not hold positions in the spot month, which, 

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May28, 2009 

Page2 

according to the CFTC Concept Release, is "when physical commodity markets 

are most vulnerable to manipulation and attendant unreasonable price 

fluctuations." 

(C) Because index investors always have net long positions, they are a natural 

counterparty to the producers who are seeking to offset their price risks. 

(D) Index investors hold fully collateralized long positions. Since they do not have 

the same vulnerability to margin calls that speculators might have, these index 

investors represent a source of stability to the markets. 

(E) Economic reasoning, as well as the CFTC's own data from their special call, 

support the idea that index investors do not have a meaningful impact on price 

levels in the physical commodity markets. For instance, in the first half of2008, 

when crude oil prices experienced a large increase, index investors were actually 

reducing their positions in crude. 

Question 8 asks how a fund could be determined to be an index investor. Such a fund 

should be defmed as an account which followed predetermined rules for investing in a 

diversified basket of commodity futures markets. By covering a range of markets, such a 

fund would not be a vehicle which a speculator would use to take a view on one specific 

market. The rules for investing should require that the fund fully collateralize its futures 

positions and that it hold net long positions in each commodity which is part of the 

"basket" .. The fund, or index investor, should have flexibility, within its predetermined 

rules, to determine on an ongoing basis when to roll its positions, in what month to hold 

its positions, and on what exchange to hold its positions in any particular commodity. 

Any trading by the fund in a manner other than that described above could be separately 

reported by the fund as non-index investment. 

Question 14 asks how the no action relief that has been granted to two index traders 

should be treated. This no action relief is appropriate for the reasons stated above and 

should be maintained, but should extend to other index investors as well whether 

commingled index funds or separate index investors. 

PIMCO believes that CFTC actions in the last two years, and especially the separate 

reporting of index positions, has provided beneficial transparency to the commodity 

futures markets, as reporting by dealers has shown the ability to adapt to this requirement. 

By allowing index investors to continue legitimate hedging of business risks while 

reporting those positions, the markets will be able to enhance the efficient transfer of risk 

while offering transparency that will prevent manipulation. We appreciate your 

consideration ofthese comments, since resolution of issues raised by the Commission are 

critical to a diverse cross-section of investors, hedgers and traders who depend on these 

markets for management of risks, hundreds of thousands of whom are our clients. 

PIMCO stands ready to assist the Commission in addressing the issues raised in the 

Concept Release and would be pleased to provide any additional information or thoughts 

that the Commission might fmd useful. 
May 28,2009 

Page 3 

Sincerely, 

8---t--

Brent R. Harris, 

z 

CF A 

w~ Managing Director 

Via: Email 

Via: Federal Express Overnight