FR Doc E9-6187[Federal Register: March 24, 2009 (Volume 74, Number 55)]
[Proposed Rules]
[Page 12282-12286]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24mr09-19]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 150
RIN 3038-AC40
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 Position Limits
AGENCY: Commodity Futures Trading Commission.
ACTION: Advance notice of proposed rulemaking; request for public
comment.
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SUMMARY: In June and July of 2008, the Commodity Futures Trading
Commission (''Commission'') issued a special call for information from
swap dealers and index traders regarding their over-the-counter
(``OTC'') market activities. In September of 2008, the Commission
released a ``Staff Report on Commodity Swap Dealers and Index Traders
with Commission Recommendations'' (the ``September 2008 Report'') with
several preliminary Commission recommendations. Recommendation five of
the September 2008 Report directs the staff to develop an advance
notice of proposed rulemaking that would review whether to eliminate
the bona fide hedge exemption for swap dealers and replace it with a
limited risk management exemption that is conditioned upon, among other
things, an obligation to report to the CFTC and applicable self-
regulatory organizations when certain noncommercial swap clients reach
a certain position level and/or a certification that none of a swap
dealer's noncommercial swap clients exceed specified position limits in
related exchange-regulated commodities.\1\
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\1\ Staff Report on Commodity Swap Dealers and Index Traders
with Commission Recommendations, Commodity Futures Trading
Commission, September 2008, at 6.
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This concept release reviews the underlying statutory and
regulatory background, as well as the regulatory history and relevant
marketplace developments, as described in the September 2008 Report,
which led to the foregoing recommendation. It then poses a number of
questions designed to help inform the Commission's decision as to
whether to proceed with the recommendation to eliminate the bona fide
hedge exemption for swap dealers and replace it with a conditional
limited risk management exemption; and if so, what form the new limited
risk management exemptive rules should take and how they might be
implemented most effectively.
DATES: Comments must be received on or before May 26, 2009.
ADDRESSES: Comments should be submitted to David Stawick, Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581. Comments also may be sent by
facsimile to (202) 418-5521, or by electronic mail to
[email protected]. Reference should be made to ``Whether to Eliminate
the Bona Fide Hedge Exemption for Certain Swap Dealers and Create a New
Limited Risk Management Exemption from Speculative Position Limits.''
Comments may also be submitted by connecting to the Federal eRulemaking
Portal at http://www.regulations.gov and following comment submission
instructions.
FOR FURTHER INFORMATION CONTACT: Donald Heitman, Senior Special
Counsel, Division of Market Oversight, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581, telephone (202) 418-5041, facsimile number (202) 418-5507,
electronic mail [email protected].
[[Page 12283]]
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory Framework
Speculative position limits have been a tool for the regulation of
the U.S. futures markets since the adoption of the Commodity Exchange
Act of 1936. Section 4a(a) of the Commodity Exchange Act (``Act''), 7
U.S.C. 6a(a), now provides \2\ that excessive speculation in any
commodity under contracts of sale of such commodity for future delivery
made on or subject to the rules of contract markets or derivatives
transaction execution facilities, or on electronic trading facilities
with respect to a significant price discovery contract, causing sudden
or unreasonable fluctuations or unwarranted changes in the price of
such commodity, is an undue and unnecessary burden on interstate
commerce in such commodity.
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\2\ References in Sec. 4a(a) to ``electronic trading
facilitie(s) with respect to a significant price discovery
contract'' were added to the CEA by Public Law 110-246, May 22, 2008
(the 2008 Farm Bill).
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Accordingly, section 4a(a) of the Act provides the Commission with
the authority to fix such limits on the amounts of trading which may be
done or positions which may be held by any person under contracts of
sale of such commodity for future delivery on or subject to the rules
of any contract market or derivatives transaction execution facility,
or on an electronic trading facility with respect to a significant
price discovery contract, as the Commission finds are necessary to
diminish, eliminate, or prevent such burden.
This longstanding statutory framework providing for Federal
speculative position limits was supplemented with the passage of the
Futures Trading Act of 1982, which added section 4a(e) to the Act. That
provision acknowledged the role of exchanges in setting their own
speculative position limits and provided that limits set by exchanges
and approved by the Commission would be subject to Commission
enforcement.
Finally, the Commodity Futures Modernization Act of 2000 (``CFMA'')
established designation criteria and core principles with which a
designated contract market (``DCM'') must comply to receive and
maintain designation. Among these, Core Principle 5 in section 5(d) of
the Act states: Position Limitations or Accountability--To reduce the
potential threat of market manipulation or congestion, especially
during trading in the delivery month, the board of trade shall adopt
position limitations or position accountability for speculators, where
necessary and appropriate.
B. Regulatory Framework
The regulatory structure based upon these statutory provisions
consists of three elements, the levels of the speculative position
limits, certain exemptions from the limits (for hedging, spreading/
arbitrage, and other positions), and the policy on aggregating commonly
owned or controlled accounts for purposes of applying the limits. This
regulatory structure is administered under a two-pronged framework.
Under the first prong, the Commission establishes and enforces
speculative position limits for futures contracts on a limited group of
agricultural commodities. These Federal limits are enumerated in
Commission regulation 150.2, and apply to the following futures and
option markets: Chicago Board of Trade (``CBOT'') corn, oats, soybeans,
wheat, soybean oil, and soybean meal; Minneapolis Grain Exchange
(``MGEX'') hard red spring wheat and white wheat; ICE Futures U.S.
(formerly the New York Board of Trade) cotton No. 2; and Kansas City
Board of Trade (``KCBT'') hard winter wheat.
Under the second prong, individual DCMs establish and enforce their
own speculative position limits or position accountability provisions
(including exemption and aggregation rules), subject to Commission
oversight and separate authority to enforce exchange-set speculative
position limits approved by, or certified to, the Commission. Thus,
responsibility for enforcement of speculative position limits is shared
by the Commission and the DCMs.\3\
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\3\ Provisions regarding the establishment of exchange-set
speculative position limits were originally set forth in CFTC
regulation 1.61. In 1999, the Commission simplified and reorganized
its rules by relocating the substance of regulation 1.61's
requirements to part 150 of the Commission's rules, thereby
incorporating within part 150 provisions for both Federal
speculative position limits and exchange-set speculative position
limits (see 64 FR 24038, May 5, 1999). With the passage of the
Commodity Futures Modernization Act in 2000 and the Commission's
subsequent adoption of the Part 38 regulations covering DCMs in 2001
(66 FR 42256, August 10, 2001), Part 150's approach to exchange-set
speculative position limits was incorporated as an acceptable
practice under DCM Core Principle 5--Position Limitations and
Accountability. Section 4a(e) provides that a violation of a
speculative position limit set by an exchange rule that has been
approved by the Commission, or certified by a registered entity
pursuant to Sec. 5c(c)(1) of the Act, is also a violation of the
Act. Thus, the Commission can enforce directly violations of
exchange-set speculative position limits as well as those provided
under Commission rules.
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Commission regulation 150.3, ``Exemptions,'' lists certain types of
positions that may exceed the Federal speculative position limits. In
particular, under Sec. 150.3(a)(1), bona fide hedging transactions, as
defined in Sec. 1.3(z) of the Commission's regulations, may exceed the
limits.\4\ The Commission has periodically amended the exemptive rules
applicable to Federal speculative position limits in response to
changing conditions and practices in futures markets. These amendments
have included an exemption from speculative position limits for the
positions of multi-advisor commodity pools and other similar entities
that use independent account controllers,\5\ and an amendment to extend
the exemption for positions that have a common owner but are
independently controlled to include certain commodity trading
advisors.\6\ In 1987, the Commission also issued an agency
interpretation clarifying certain aspects of the hedging definition.\7\
The Commission has also issued guidance with respect to exchange
speculative limits, including guidelines regarding the exemption of
risk-management positions from exchange-set speculative position limits
in financial futures contracts.\8\ However, the last significant
amendment to the Commission's exemptive rules was implemented in 1991.
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\4\ Section 4a(c) of the Act specifically provides that
speculative position limit rules issued by the Commission shall not
apply to bona fide hedging transactions or positions as such terms
shall be defined by the Commission.
\5\ 53 FR 41563 (October 24, 1988).
\6\ 56 FR 14308 (April 9, 1991).
\7\ 52 FR 27195 (July 20, 1987).
\8\ 52 FR 34633 (September 14, 1987).
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C. Regulatory History and Marketplace Developments
The intervening 18 years have seen significant changes in trading
patterns and practices in derivatives markets. As noted in the
September 2008 Report, there has been an influx of new traders into the
market, particularly commodity index traders (including pension and
endowment funds, as well as individual investors participating in
commodity index-based funds or trading programs). These investors are
seeking exposure to commodities as an asset class, through passive,
long term investment in commodity indexes, as a way of diversifying
portfolios that might otherwise be limited to stocks and interest rate
instruments.\9\ New market participants also include swap dealers
seeking to hedge price risk from OTC
[[Page 12284]]
trading activity (frequently opposite the same commodity index traders
described in the preceding sentences).
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\9\ The argument has also been made that commodities act as a
general hedge of liability obligations that are linked to inflation.
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As described in the September 2008 Report, the development of the
OTC swap industry is related to the exchange-traded futures and options
industry in that a swap agreement \10\ can either compete with or
complement futures and option contracts.\11\ Market participants often
use swaps because they can offer the ability to customize contracts to
match particular hedging or price exposure needs. In contrast, futures
markets typically involve standardized contracts that, while traded in
a highly liquid market, may not precisely meet the needs of a
particular hedger or speculator.
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\10\ A swap is a privately negotiated exchange of one asset or
cash flow for another asset or cash flow. In a commodity swap, at
least one of the assets or cash flows is related to the price of one
or more commodities.
\11\ The bilateral contracts that swap dealers create can vary
widely, from terms tailored to meet the needs of a specific
customer, to relatively standardized contracts.
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Swap dealers, often affiliated with a bank or other large financial
institution, act as swap counterparties to both commercial firms
seeking to hedge price risks and speculators seeking to gain price
exposure. The swap dealer, in turn, utilizes the more standardized
futures markets to manage the net risk resulting from its OTC market
activities.\12\ In addition, some swap dealers also deal directly in
the merchandising of physical commodities.
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\12\ Because swap agreements can be highly customized, and the
liquidity for a particular swap contract can be low, swap dealers
may also use other swaps and physical market positions, in addition
to futures, to offset the residual risks of their swap books.
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Beginning in 1991, the Commission staff granted bona fide hedge
exemptions, in various agricultural futures markets subject to Federal
speculative position limits, to a number of swap dealers who were
seeking to manage price risk on their books as a result of their
serving as market makers to their OTC clients. The first such hedge
exemption involved a large commodity merchandising firm that engaged in
commodity related swaps as a part of a commercial line of business. The
firm, through an affiliate, wished to enter into an OTC swap
transaction with a qualified counterparty (a large pension fund)
involving an index based on the returns afforded by investments in
exchange-traded futures contracts on certain non-financial commodities
\13\ meeting specified criteria. The commodities making up the index
included wheat, corn and soybeans, all of which were (and still are)
subject to Federal speculative position limits. As a result of the
swap, the swap dealing firm would, in effect, be going short of the
index. In other words, it would be required to make payments to the
pension fund counterparty if the value of the index was higher at the
end of the swap payment period than at the beginning. In order to
protect itself against this risk, the swap dealer planned to establish
a portfolio of long futures positions in the commodities making up the
index, in such amounts as would replicate its exposure under the swap
transaction. By design, the index did not include contract months that
had entered the delivery period and the swap dealer, in replicating the
index, stated that it would not maintain futures positions based on
index-related swap activity into the spot month (when physical
commodity markets are most vulnerable to manipulation and attendant
unreasonable price fluctuations). With this risk mitigation strategy,
the swap dealer's composite return on its futures portfolio would
offset the net payments that the dealer would be required to make to
the pension fund counterparty.
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\13\ The commodities comprising such indexes typically may
include energy commodities, metals, world agricultural commodities
(coffee, sugar, cocoa) and domestic agricultural commodities subject
to Federal speculative position limits.
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The futures positions the swap dealer would have to establish to
cover its exposure on the swap transaction's domestic agricultural
component would be in excess of the speculative position limits on
wheat, corn and soybeans. Accordingly, the swap dealer requested, and
was granted, a hedge exemption for those futures positions, which
offset risks directly related to the OTC swap transaction. The swap
transaction allowed the pension fund to add commodities exposure to its
portfolio without resorting to exchange-based futures contracts (and
their applicable position limits) through the OTC trade with the swap
dealer. The pension fund could have gained exposure to commodities
directly through exchange-based futures contracts, but would, of
course, have been subject to applicable position limits.\14\
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\14\ The pension fund would have been limited in its ability to
take on this commodities exposure directly, by putting on the long
futures position itself, because the pension fund--having no
offsetting price risk incidental to commercial cash or spot
operations--would not have qualified for a hedge exemption with
respect to the position. (See Sec. 1.3(z) of the Commission's
regulations.)
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Similar hedge exemptions were subsequently granted in other cases
where the futures positions clearly offset risks related to swaps or
similar OTC positions involving both individual commodities and
commodity indexes. These non-traditional hedges (i.e., hedges not
associated with dealings in the physical commodity) were all subject to
specific limitations to protect the marketplace from potential ill
effects. The limitations included: (1) The futures positions must
offset specific price risk; (2) the dollar value of the futures
positions would be no greater than the dollar value of the underlying
risk; and (3) the futures positions would not be carried into the spot
month.\15\
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\15\ More recently, Commission staff issued two no-action
letters involving another type of index-based trading. (CFTC Letter
06-09, April 19, 2006, and CFTC Letter 06-19, September 6, 2006).
Both cases involved trading that offered investors the opportunity
to participate in a broadly diversified commodity index-based fund
or program (``index fund''). The futures positions of these index
funds differed from the futures positions taken by the swap dealers
who had earlier received hedge exemptions. The swap dealer positions
were taken to offset OTC swaps exposure that was directly linked to
the price of an index. For that reason, Commission staff granted
hedge exemptions to these swap dealer positions. On the other hand,
in the index fund positions described in the no-action letters, the
price exposure results from a promise or obligation to track an
index, rather than from holding an OTC swap position whose value is
directly linked to the price of the index. Commission staff believed
that this difference was significant enough that the index fund
positions would not qualify for a hedge exemption. Nevertheless,
because the index fund positions represented a legitimate and
potentially useful investment strategy, Commission staff granted the
index funds no-action relief, subject to certain conditions intended
to protect the futures markets from potential ill effects. These
conditions included: (1) The positions must be passively managed;
(2) they must be unleveraged (so that financial conditions should
not trigger rapid liquidations); and (3) the positions must not be
carried into the delivery month (when physical delivery markets are
most vulnerable to manipulation or congestion).
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Separately, an issue had arisen regarding the classification of
trading activity for purposes of the Commission's Commitments of
Traders (``COT'') reports.\16\ The COT reports, from their inception in
1924 (as an annual report by the USDA Grain Futures Administration),
classified positions, based on trading activity, as ``hedging'' or
``speculative.'' After it was established in 1974, the Commission
continued to publish these reports. However, in 1982, due to a change
in CFTC large trader reporting requirements,\17\ the COT reports began
[[Page 12285]]
classifying positions by reference to the trading entity as
``commercial'' or ``noncommercial.'' By 2006, trading practices had
evolved to such an extent that the positions of non-traditional
hedgers, including swap dealers who had been granted hedge exemptions
and were included in the ``commercial'' category, represented a
significant portion of the long side open interest in a number of major
physical commodity futures contracts. This raised questions as to
whether the COT reports could reliably be used to assess overall
futures activity by traditional hedgers, i.e., persons directly
involved in the underlying physical commodity markets.
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\16\ The COT reports are weekly reports, published by the
Commission showing aggregate trader positions in certain futures and
options markets. For a comprehensive history of the COT reports, see
71 FR 35627, June 21, 2006.
\17\ The Series '03 large trader reports, in which individual
traders had reported their futures positions to the CFTC and
classified their trading activity as ``hedging'' or ``speculation,''
were suspended in 1981. Thereafter, position data was drawn from
reports filed by futures commission merchants, which did not include
such classifications. Therefore, the Commission was required to
classify positions based on trader identification provided on each
reportable trader's Form 40, Statement of Reporting Trader. In those
reports, traders identify themselves as ``commercial'' or
``noncommercial'' traders. See id. at 35629-10 for more details.
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In January 2007, the Commission attempted to address this issue by
initiating publication of a supplemental COT report, breaking out in a
separate category the positions of ``index traders'' in certain
physical commodity markets.\18\ These index traders included managed
funds, pension funds and other institutional investors seeking exposure
to commodities as an asset class in an unleveraged and passively-
managed manner using a standardized commodity index, as well as swap
dealers holding long futures positions to hedge short OTC commodity
index exposure opposite institutional traders such as pension funds
(including those swap dealers described above who had received bona
fide hedging exemptions). Nevertheless, substantial questions remained
regarding the proper classification of trading activity by swap dealers
and index traders. As noted in the September 2008 Report, ``futures
market trades by swap dealers are essentially an amalgam of hedging and
speculation by their clients. Thus, any particular trade that a swap
dealer brings to the futures market may reflect information that
originated with a hedger, a speculator, or some combination of both.''
\19\
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\18\ See Commission Actions in Response to the ``Comprehensive
Review of the Commitment of Traders Reporting Program,'' Commodity
Futures Trading Commission, December 5, 2006.
\19\ September 2008 Report, at 1.
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In the spring of 2008, the Commission took note of ongoing concerns
about the proper classification of swap dealer trading, along with a
number of factors. In addition to an influx of new traders into the
market, including non-traditional hedgers, such as index traders and
swap dealers, futures markets had experienced other significant
changes. Volume growth had increased fivefold over the preceding
decade, and in the preceding year, the volatility and the price of oil
and other commodities had reached unprecedented levels. Numerous
Congressional hearings were held relating to these issues, and
significant concern was expressed by members of Congress, academics,
and market participants relating to commodity price volatility and the
influx of non-traditional speculative activity in these markets. The
Commission responded to these factors by issuing a special call for
information from commodity swap dealers and index traders.
II. The Commission's Special Call to Swap Dealers and Index Traders
A. Substance of the Special Call
As noted in the September 2008 Report, in May and June of 2008, as
part of certain initiatives relating to the energy and agricultural
markets, the Commission announced it would gather more information
regarding the off-exchange commodity trading activity of swap dealers
and would revisit whether swap dealers' futures trading is being
properly classified.\20\ Thereafter, pursuant to its authority under
regulation 18.05, the Commission issued a special call to swap dealers
and index traders to gather pertinent information regarding these
entities.\21\
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\20\ See Commission press releases: http://www.cftc.gov/
newsroom/generalpressreleases/2008/pr5503-08.html and http://
www.cftc.gov/newsroom/generalpressreleases/2008/pr5504-08.html.
\21\ Commission Regulation 18.05 provides that traders with
reportable positions in any futures contract must, upon request,
furnish to the Commission any pertinent information concerning the
traders' positions, transactions, or activities involving the cash
market as well as other derivatives markets, including their OTC
business.
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The special call involved staff issuing 43 written requests to 32
entities and their sub-entities compelling these futures traders to
produce data relating to their OTC market activities. Of the 43
requests, 16 were directed to swap dealers known to have significant
commodity index swap business; 13 were directed to traders identified
as swap dealers (but not known to engage in significant commodity index
swap business) and who, at the time of the call, held futures positions
that were large relative to Commission or exchange-set speculative
position limits or accountability levels; and 14 were directed to
commodity index funds (including asset managers and sponsors of
exchange traded funds (ETFs) and exchange-traded notes (ETNs) whose
returns are based upon a commodity index). The special call required
the subject entities to provide data for month-end dates beginning
December 31, 2007, and continuing through June 30, 2008.
While the September 2008 Report is based on this initial data, the
special call remains ongoing, with the subject entities under a
continuing obligation to provide data for each month-end date. The
information requested by the special call, the data received, and the
Commission's findings and recommendations based on that data are laid
out in detail in the September 2008 Report, including its eight
appendices and glossary.
B. Recommendation Five of the September 2008 Report
For purposes of this Concept Release, the Commission is concerned
primarily with the Report's fifth recommendation, which provides as
follows:
Review Whether to Eliminate Bona Fide Hedge Exemptions for Swap
Dealers and Create New Limited Risk Management Exemptions: The
Commission has instructed staff to develop an advance notice of
proposed rulemaking that would review whether to eliminate the bona
fide hedge exemption for swap dealers and replace it with a limited
risk management exemption that is conditioned upon, among other
things: (1) An obligation to report to the CFTC and applicable self-
regulatory organizations when certain noncommercial \22\ swap
clients reach a certain position level and/or (2) a certification
that none of a swap dealer's noncommercial swap clients exceed
specified position limits in related exchange-regulated commodities.
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\22\ In this context, a ``noncommercial'' counterparty would
include any entity other than a traditional commercial hedger
involved in the production, processing or marketing of a commodity.
As noted in the body of the September 2008 Report, by eliminating
the existing bona fide hedge exemption for swap dealers and replacing
it with a limited risk management exemption that would essentially look
through the swap dealer to its counterparty traders, Recommendation
Five has the potential to bring greater transparency and accountability
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to the marketplace and to guard against possible manipulation.
While more information is needed to fully evaluate this
recommendation, requiring swap dealers to monitor and restrict the
position sizes of their counterparty traders, subject to CFTC
reporting and audits, as a condition of obtaining and maintaining
such an exemption, is a practicable way of ensuring that
noncommercial counterparties are not purposefully evading the
oversight and limits of the CFTC and exchanges, and
[[Page 12286]]
that manipulation is not occurring outside of regulatory view.\23\
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\23\ September 2008 Report, at 34.
This Concept Release is intended to provide the Commission with
information and comment that will help to inform the Commission's
decision as to: (1) Whether to proceed with the recommendation to
eliminate the bona fide hedge exemption for swap dealers and replace it
with a conditional limited risk management exemption; and (2) if so,
what form the new limited risk management exemptive rules should take
and how they might be implemented most effectively.
III. Request for Comments
Commenters responding to this Concept Release are encouraged to
provide their general views and comments regarding the appropriate
regulatory treatment of swap dealers with respect to the existing bona
fide hedge exemptions and a potential conditional, limited risk
management exemption. In addition, commenters are requested to provide
their views in response to the following specific questions.
A. General Advisability of Eliminating the Existing Bona Fide Hedge
Exemption for Swap Dealers in Favor of a Limited Risk Management
Exemption
1. Should swap dealers no longer be allowed to qualify for
exemption under the existing bona fide hedge definition?
2. If so, should the Commission create a limited risk-management
exemption for swap dealers based upon the nature of their clients
(e.g., being allowed an exemption to the extent a client is a
traditional commercial hedger)?
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? For example,
should existing futures positions in excess of current Federal
speculative position limits be grandfathered until the futures and
option contract in which they are placed expire? Should swap dealers
holding such position be given a time limit within which to bring their
futures position into compliance with Federal speculative limits?
Should swap dealers holding such positions be required to bring their
futures positions into compliance with the Federal limits as of the
effective date of the new rules?
B. Scope of a Potential New Limited Risk Management Exemption for Swap
Dealers
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?
C. Terms of a Potential New Limited Risk Management Exemption for Swap
Dealers
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?
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.?
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)?
8. If a swap dealer were allowed an exemption for risk taken on
against index-fund 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?
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?
10. What futures equivalent position level should trigger the new
limited risk management exemption reporting requirement? For example,
under the rules of the on-going 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 all-months-combined limit.
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?
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 all-months-combined position in an
agricultural commodity named in Sec. 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.''
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?
D. Other Questions
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?
15. What information should be required in a swap dealer's
application for a limited risk management exemption?
Issued by the Commission this 17th day of March, 2009, in
Washington, DC.
David Stawick,
Secretary of the Commission.
[FR Doc. E9-6187 Filed 3-23-09; 8:45 am]
Last Updated: March 24, 2009