I. INTRODUCTION

The Commodity Futures Trading Commission (the “Commission” or “CFTC”) is proposing for public comment certain amendments to Rule 18.05 which would (i) require a person holding or controlling a reportable futures or option position to retain books and records and make available to the Commission upon request any pertinent information with respect to all other positions and transactions in the commodity in which the trader has a reportable position, including positions held or controlled or transactions which are executed over-the-counter, on exempt trading platforms, or on foreign exchanges and (ii) expand its applicability with respect to hedging activity. 72 Fed. Reg. 34413 (June 22, 2007). According to the Commission, these amendments are designed to enhance its ability to deter and prevent price manipulation or other disruptions to market integrity, ensure the avoidance of systemic risk, and clarify the meaning of the rule. Comments must be received by July 23, 2007.

Under the Commission’s large trader reporting system, once a trader such as an investment manager, whether registered or exempt from registration with the Commission, holds or controls a reportable position (i.e., a number of contracts in excess of a specified amount set forth in Rule 15.03) in an exchange-traded futures contract or option, the trader is subject to Rule 18.05, which requires that the trader keep books and records showing all details concerning (1) all positions and transactions for future delivery in the commodity on all reporting markets; (2) all positions and transactions in the commodity option; (3) all positions and transactions in the cash commodity, its products and byproducts; and (4) commercial activities that the trader hedges in the commodity underlying the futures contract in which the trader is reportable. In addition, a reportable trader must furnish the Commission upon request any pertinent information concerning such positions, transactions or activities. A trader who does not hold or control a reportable position in an exchange-traded futures contract or option does not have any obligations under Rule 18.05.

II. DISCUSSION

Most significantly, the proposed amendments would require that a reportable trader make and retain books and records and make available to the CFTC upon request pertinent information with respect to all non-reporting transactions in the underlying commodity, including over-the-counter transactions which are excluded or exempted from regulation under the Commodity Exchange Act (the “Act”), 7 U.S.C. § 1 et seq. and the CFTC’s rules, as well as transactions effected on foreign exchanges (collectively, hereinafter referred to as “non-reporting transactions.”) According to the Commission, it is critical that its staff be able to assess a reportable trader’s overall position in the same commodity in non-reporting transactions to obtain a complete picture of the reportable trader’s positions in the commodity for market surveillance purposes. In this regard, reference is made to such factors as the growing volume of non-reporting transactions and the close relationship among various products and markets in the same commodity.

The Commission specifically alluded to both the New York Mercantile Exchange (“NYMEX”) and Intercontinental Exchange (“ICE”) natural gas markets and the NYMEX and ICE Futures light sweet crude oil markets, and stated that information with respect to positions and transactions in the ICE markets is relevant to effective surveillance and supervision of the regulated NYMEX market. 72 Fed. Reg. 34413 at 34414-15.

The Commission believes that it has ample authority under to Sections 3(b), 4i and 8a(5) of the Act to require book and recordkeeping and providing pertinent information with respect to non-reporting transactions. In that connection, the CFTC staff apparently has interpreted Rule 18.05 in its current form to include position and transaction data for non-reporting transactions and has received such information in response to requests made pursuant thereto. 72 Fed. Reg. 34413 at 33415.

The Commission is also proposing to amend Rule 18.05 with respect to a reportable trader’s hedging activity. As currently written, a reportable trader must keep books and records showing all details concerning commercial activities that the trader hedges in the commodity underlying the futures contract in which the trader is reportable and provide pertinent information to the Commission upon request. As proposed, this language would be expanded to include activities with respect to hedges in other than the cash commodity, its products or by-products such as hedges of positions in related commodities, as well as to include hedges in the option contract in which the trader is reportable. For example, under the proposed amendment, a trader with a reportable position in gold futures that is a hedge of a cash position in silver would be required to comply with the requirements of Rule 18.05 with respect to the silver position.

III. ANALYSIS

As noted, the Commission has cited Sections 3(b), 4i and 8a(5) of the Act as providing it with ample authority to adopt the proposed amendments. Section 3(b) recites that a fundamental purpose of the Act is to deter and prevent market manipulation or other disruptions to market integrity and to ensure the avoidance of systemic risk; Section 4i provides for large trader reporting with respect to transactions conducted on a contract market or a derivatives transaction execution facility (i.e., regulated transactions and includes a recordkeeping requirement with respect to transactions in the same commodity traded on or subject to the rules of “any other board of trade” and cash or spot transactions in such commodity; and Section 8a(5) gives the Commission general rulemaking authority. In this regard, a “board of trade” is defined in Section 1a(2) of the Act to mean “any organized exchange or other trading facility”, but generally has been understood to mean a formally organized exchange in this context.

It is unfortunate that the Commission has not provided any further explanation regarding the interaction of Sections 3(b), 4i and 8a(5) of the Act with the various exemptions for transactions executed over-thecounter or on exempt trading platforms under Sections 2(d), 2(g) or 2(h) of the Act and Part 35 of its rules, or the provisions of the Part 30 rules, which are applicable to foreign futures and options contracts. For example, these exemptive provisions and the Part 30 rules do not reserve the applicability of Section 4i of the Act to transactions within their ambit. Nor have market participants with reportable positions reasonably expected to become subject to Rule 18.05 with respect to their non-reporting transactions on a routine basis. The Commission also has not provided a compelling policy rationale for this proposal beyond generalized expressions of concern about effective market surveillance and potential market manipulation.

In sum, these proposed amendments, if adopted, would expand the scope of Rule 18.05 in a number of significant respects and do not appear to have an adequate statutory or policy basis. It is quite attenuated to argue that imposing additional obligations on market participants under Rule 18.05 is necessary and appropriate in furtherance of the Commission’s antimanipulation authority under the Act. It is also unclear how these amendments by themselves would enhance the Commission’s ability to detect and prevent market manipulation or other disruptions to market integrity or ensure against systemic risk, the objectives identified in the Federal Register notice.