International Swaps and Derivatives Association, Inc. 

360 Madison A venue, 16th Floor 

New York, NY 10017 

United States of America 

Telephone: I (212) 901-6000 

Facsimile: 1 (212) 901-6001 

email: isda@isda.org 

website: www.isda.org 

Mr. David Stawick 

Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, N.W. 

Washington, DC 20581 

... ' -~ . •, - -- ~-.... 

., .... 

COMMENT 

February 10, 2009 

Re: Comments on Proposed Rules Implementing the CFTC Reauthorization 

Act of2008 

Dear Mr. Stawick: 

This letter contains the response of the International Swaps and Derivatives 

Association, Inc. ("ISDA") to the request for comments issued by the Commodity Futures 

Trading Commission (the "Commission") regarding the implementation of the CFTC 

Reauthorization Act of 2008 ('CRA'), specifically the creation of a new regulatory 

category - Exempt Commercial Markets ("ECMs") with Significant Price Discovery 

Contracts ("SPDCs"). The request for comments contained background information on the 

creation of ECMs and subsequent issues arising from the changing nature of the energy 

markets, all of which were published in the Federal Register on December 12, 2008 (73 

Fed. Reg. No. 240 at 75887 et seq.) (the "Release"). 

ISDA, which represents participants in the privately negotiated derivatives 

industry, is the largest global financial trade association, by number of member firms. 

ISDA was chartered in 1985, and today has over 800 member institutions from 56 

countries on six continents. These members include most of the world's major institutions 

that deal in privately negotiated derivatives, as well as many of the businesses, 

governmental entities and other end users that rely on over-the-counter derivatives to 

manage efficiently the financial market risks inherent in their core economic activities 

NEW YORK • LONDON • TOKYO • HONG KONG • SINGAPORE • BRUSSELS • WASHINGTON 
IS D A International Swaps and Derivatives Association, Inc. 2 

Background 

As part of the Food, Conservation and Energy Act of 2008, Congress 

passed the CFTC Reauthorization Act of 2008 ('CRA'). Arnong other provisions, the 

CRA expands the Commission's authority to provide additional oversight ofECMs, which 

have grown significantly since their inception in 2000. The CRA also directed the 

Commission to adopt regulations implementing the provisions of the CRA. ISDA 

commends the Commission for its careful consideration of the issues raised in the CRA 

and its thoughtful development of the Release. The implementation of the Release will 

allow ECMs to operate efficiently, providing commercial participants with legal certainty 

and market stability. ISDA believes that increased accountability and transparency in 

ECMs will ensure that they accurately reflect fundamental market forces and will reduce 

the opportunity for market manipulation that causes severe market disruptions. However, 

ISDA also has several concerns with the Release as drafted and welcomes this opportunity 

to shares its thoughts on these issues. 

Volume Accountability Limits. We believe that the Release goes beyond the 

Commission's mandate in the CRA by requiring accountability levels for uncleared SPDCs 

listed on an ECM. Uncleared SPDCs would be subject to a new measure of trading 

activity, the "volume accountability level," which would operate in a manner similar to 

position accountability rules. This requirement would obligate an ECM to track each 

trader's net uncleared transactions and to initiate an investigation if a trader's net volume 

exceeds the volume accountability limit. If the trading activity is not justified, the ECM 

should require the trader to reduce the volume of uncleared trades. This provision 

undermines the function of bilateral contracts and would even apply to long-term uncleared 

contracts between commercial participants with established bilateral credit lines. The 

potential for forced liquidation of uncleared trades will discourage activity on the ECM 

and thereby reduce market liquidity. 

Moreover, the CRA only requires ECMs to adopt position limits or position 

accountability for "agreements, contracts, and transactions that are treated by a derivatives 

clearing organization."1 The CRA does not give the Commission the authority to set limits 

for uncleared trades. Congress prudently recognized that the same types of limits cannot 

feasibly be imposed on uncleared contracts as on cleared contracts. The Release should be 

modified in a manner consistent with the CRA. 

Speculative Position Limits. Under the Release, ECMs would be required 

to adopt speculative position limits for SPDCs that are "economically equivalent" to 

contracts traded on a DCM, at the same level as the related DCM contract. However, the 

Release does not provide guidance as to how ECMs will identify "economically 

equivalent" contracts on DCMs and the provision will therefore require ECMs to make 

1 Title XIII of the Food, Conservation and Energy Act of2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 

2008) at Sec. 13201 (C)(ii)(IV). 
IS D A International Swaps and Derivatives Association, Inc. 3 

highly subjective judgments as to whether or not a particular SPDC is "economically 

equivalent" to a DCM contract. Moreover, requiring an ECM to adopt the same limits 

imposed by an unaffiliated DCM can be anti-competitive and provides the DCM with 

significant authority over trading on the ECM. It would allow DCMs to set the position 

limits even when the ECM is the dominant market. This would permit a DCM to set a 

limit at such a low level that it would effectively prohibit equivalent transactions on an 

ECM, thereby stifling competition. In addition, ECMs with SPDCs have independent 

regulatory responsibilities and there is no reason to believe that they could not establish 

appropriate position limits. The Commission should consider modifying the language so 

that an ECM has the authority to establish its own position limits, at a level that is 

appropriate in light of its market as well as any related DCM market. 

The Release also recommends that ECMs adopt as an "acceptable practice" 

non-spot individual month and all-months-combined position limits, based on the 

analogous rules adopted by some DCMs? However, these rules have not been adopted by 

DCMs on an industry-wide basis nor has the industry come to agreement on their added 

benefit in relation to uniform position accountability limits. The Commission should take 

a comprehensive approach to position limit requirements and this proposal should be 

addressed in new regulations promulgated by the Commission. This will provide DCMs 

and ECMs the opportunity to comment on the feasibility of applying these rules, taking 

into account the specific commodity and the manner in which it trades. 

Compliance with Core Principles. If an agreement, contract or transaction 

listed on an ECM is determined to qualify as a SPDC, the Release requires the ECM to 

demonstrate compliance with the Core Principles within 90 calendar days from the 

Commission's order designating the SPDC. This timeframe is reasonable and allows 

market participants to make the necessary changes to their trading systems to ensure 

compliance with the Core Principles. However, for each subsequent determination, an 

ECM is only allowed 15 calendar days to comply. This timeframe should be modified, 

recognizing the additional obligations compliance imposes on and the likely system 

changes required of ECM participants. 

Reference to Clearing Members and other Brokers. The Release makes 

several references to clearing members, foreign brokers and traders who are "carrying" the 

account and/or "carrying" large positions on ECMs. In addition, there are references to 

large trader reporting, which also relates more to brokers, not market participants. 3 These 

terms are not defined in the Release. For example, the discussion in the Market, 

Transaction and Large Trader Reporting Rules section refers to "ECM clearing members 

2 73 FR 75896, see Footnote 59 (December 12, 2008). 

3 73 FR 75896 (December 12, 2008). 
IS D A International Swaps and Derivatives Association, Inc. 4 

that clear SPDCs" and to accounts on ECMs "carried by such brokers."4 The Cost Benefit 

Analysis section discusses the role of brokers in monitoring and reporting large SPDC 

positions held in accounts "carried by" brokers. 5 And the discussion of the applicability of 

the Regulatory Flexibility Act states that "clearing members, foreign brokers and traders 

would be subject to the proposed regulations only if carrying or holding large positions."6 

However, ECMs, by definition, are principal-to-principal markets that do not permit 

brokers. As a result the obligations of the ECM in this context are unclear. All references 

in the Release to clearing members, brokers, foreign brokers, persons "carrying" large 

positions, and large trader reporting should be clarified to take into account the nature of 

ECMs. 

Conclusion 

The public policy rationale for the CRA is to protect energy markets from 

trading practices that significantly distort energy prices from their fundamental values 

based on supply and demand. The CRA balances the need for commercial innovation, 

while carefully providing additional regulatory authority to the Commission to ensure 

market protection. ISDA believes that public policy is best served by implementing the 

CRA, without unnecessarily expanding its scope. To that end, the Release outlines 

regulatory provisions that will provide additional accountability and transparency to 

ECMs, which ISDA welcomes. However, ISDA is concerned with certain provisions in 

the Release highlighted in this letter that may create uncertainty for commercial 

participants on ECMs as to their legal requirements. Such confusion fails to achieve the 

objectives of the CRA. 

ISDA appreciates the opportunity to provide these comments. Should you 

require any further information, please do not hesitate to contact the undersigned. 

4 73 FR 75896 (December 12, 2008). 

5 73 FR 75899 (December 12, 2008). 

6 73 FR 75900 (December 12, 2008). 

Sincerely, 

Gregory Zerzan 

Counsel & Head of Global Public Policy 

North American Regulatory Committee 

International Swaps and Derivatives 

Association, Inc.