2010-23310. Petition of the National Futures Association, Pursuant to Rule 13.2, to the U.S. Commodity Futures Trading Commission To Amend of the Rule 4.5

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Notice of Petition and Request for Comment.

SUMMARY:

The National Futures Association (“NFA”) has petitioned the Commodity Futures Trading Commission (“Commission” or “CFTC”) to amend a rule that excludes certain otherwise regulated persons from the definition of the term “commodity pool operator” (“CPO”) with respect to certain qualifying entities. The rule presently requires any person desiring to claim the exclusion to file a notice of eligibility with NFA, which must identify the qualifying entity to be operated pursuant to the exclusion.

NFA requests the Commission amend its rule to limit the scope of the exclusion for registered investment companies (“RICs”). Specifically, NFA has requested that any RIC include in its notice of eligibility a representation that the RIC's qualifying entity (1) Will use commodity futures or commodity options contracts solely for bona fide hedging purposes, (2) will not have the initial margin and premiums required to establish any commodity futures or commodity options not used for bona fide hedging purposes exceeding five percent (5%) of the liquidation value of the qualifying entity's portfolio, and (3) will not be marketed to the public as a commodity pool or as a vehicle for investment in commodity futures or commodity options.

The Commission seeks comment on NFA's petition and any related questions. Copies of the petition are available for inspection at the Office of the Secretariat, by mail at the address listed below, by telephoning [phone], or on the Commission's Web site (http://www.cftc.gov).

DATES:

Comments must be received on or before October 18, 2010. Comments must be in English or, if not, accompanied by an English translation.

ADDRESSES:

Comments should be sent to David A. Stawick, Secretary, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Comments may be sent by facsimile transmission to [phone], or by e-mail to [e-mail]. Reference should be made to “National Futures Association Petition to Amend Commission Rule 4.5.” Comments may also be submitted by connecting to the Federal eRulemaking Portal at http://www.regulations.gov and following the comment submission instructions. Comments will be published on the Commission's Web site.

FOR FURTHER INFORMATION CONTACT:

Kevin P. Walek, Assistant Director, Telephone: [phone], E-mail: [e-mail] or Daniel S. Konar II, Attorney-Advisor, Telephone: [phone], E-mail: [e-mail], Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

In 1985, the Commission adopted Rule 4.5, which provides an exclusion from the definition of “CPO” for certain otherwise regulated persons that operated certain qualifying entities.^[1] At the time of its adoption, any person seeking to claim the exclusion was required to file with the Commission a notice of eligibility that contained a representation that

* * * such person will operate the qualifying entity specified therein in a manner such that the qualifying entity: (i) Will use commodity futures or commodity options contracts solely for bona fide hedging purposes within the meaning and intent of § 1.3(z)(1) [subject to certain provisions] * * * (ii) Will not enter into commodity futures and commodity options contracts for which the aggregate initial margin and premiums exceed 5 percent of the fair market value of the entity's assets, after taking into account unrealized profits and unrealized losses on any such contracts * * * and (iii) Will not be, and has not been, marketing participations to the public as or in a commodity pool or otherwise as or in a vehicle for trading in the commodity futures or commodity options markets.^[2]

In 2003, the Commission amended Rule 4.5 by deleting the bona fide hedging requirement, the limitation on aggregate initial margin, and the prohibition on marketing.^[3] In proposing these amendments to Rule 4.5, the Commission explained that its decision to delete the hedging requirement and the limitation on aggregate initial margin was driven by the fact that persons and qualifying entities that are otherwise regulated “may not need to be subject to any commodity interest trading criteria to qualify for the exclusion afforded by Rule 4.5.” ^[4] The Commission further explained when adopting the final amendments that its decision to delete the prohibition on marketing was driven by comments claiming that “the `otherwise regulated' nature of the qualifying entities * * * would provide adequate customer protection, and, further, that compliance with the subjective nature of the marketing restriction could give rise to the possibility of unequal enforcement where commodity interest trading was restricted.” ^[5]

Rule 4.5 currently requires only that notices of eligibility include representations that

* * * the qualifying entity: (i) Will disclose in writing to each participant, whether existing or prospective, that the qualifying entity is operated be a person who has claimed an exclusion from the definition of the term `commodity pool operator' under the [Commodity Exchange] Act, and therefore, who is not subject to registration or regulation as a pool operator under the [Commodity Exchange] Act * * * and (ii) Will submit to special calls as the Commission may require.^[6]

II. NFA's Petition

By letter dated August 18, 2010 (“Petition”), NFA, a registered futures association, petitioned the Commission under Rule 13.2 ^[7] to amend Rule 4.5. Specifically, NFA requested that, in addition to the two current representations required in a person's notice of eligibility, Rule 4.5 should require the following representation:

(iii) Furthermore, if the person claiming the exclusion is an investment company registered as such under the Investment Company Act of 1940, then the notice of eligibility must also contain representations that such person will operate the qualifying entity as described in [Rule] 4.5(b)(1) in a manner such that the qualifying entity: (a) Will use commodity futures or commodity options contracts solely for bona fide hedging purposes within the meaning and intent of [Rule] 1.3(z)(1); Provided however, That in addition, with respect to positions in commodity futures or commodity option contracts that may be held by a qualifying entity only which do not come within the meaning and intent of [Rule] 1.3(z)(1), a qualifying entity may represent that the aggregate initial margin and premiums required to establish such positions will not exceed five percent of the liquidation value of the qualifying entity's portfolio, after taking into account unrealized profits and unrealized losses on any such contracts it has entered into; and, Provided further, That in the case of an option that is in-the-money at the time of purchase, the in-the-money amount as defined in [Rule] 190.01(x) may be excluded in computing such [five] percent; (b) Will not be, and has not been, marketing participations to the public as or in a commodity pool or otherwise as or in a vehicle for trading in (or otherwise seeking investment exposure to) the commodity futures or commodity options markets.

III. Request for Comments

The Commission requests public comment on any aspect of the Petition that commenters believe may raise issues under the Commodity Exchange Act or Commission regulations.

* * * * *

Issued in Washington, DC, on September 13, 2010 by the Commission.

David A. Stawick,

Secretary of the Commission.

Footnotes

1.  50 FR 15868-01 (April 23, 1985).

2.  Id. at 15883.

3.  68 FR 47221-01, 47223 (Aug. 8, 2003).

4.  68 FR 12622-02, 12626 (March 17, 2003).

5.  68 FR 47223.

6.  17 CFR 4.5(c)(2).

7.  17 CFR 13.2 (enumerating the process by which the Commission may be petitioned for the issuance, amendment or repeal of a rule).