The Commodity Futures Trading Commission is seeking comments on an advance notice of proposed rulemaking (ANOPR) that would review whether to eliminate the bona fide hedge exemption for swap dealers, which applied only to certain agricultural commodities, and replace it with a conditional limited risk management exemption that could extend to energy and metal commodities.

Receiving a limited risk management exemption would be conditioned on 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.

If industry favors a limited risk management exemption, the CFTC has asked for comments on “what form the new limited risk management exemptive rules should take and how they might be implemented most effectively.” Comments on the ANOPR, which was published in the Federal Register Tuesday, are due at the CFTC on or before May 26.

“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?” the CFTC also asked.

The CFTC last summer issued a special call for information from swap dealers and index traders regarding their over-the-counter market activities. This was followed up by a September 2008 report that directed agency staff to develop the ANOPR on potentially replacing the bona fide hedge exemption (see Daily GPI, Sept. 12, 2008). The CFTC first granted this exemption from the speculative position limit rules in 1991.

“As noted in…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, [it] has the potential to bring greater transparency and accountability to the marketplace and to guard against possible manipulation,” the CFTC said.

“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 that manipulation is not occurring outside of regulatory view.”

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