December 7, 1992
TO: CLOSED-END FUND COMMITTEE NO. 31-92
SEC RULES COMMITTEE NO. 91-92
RE: INSTITUTE COMMENT LETTER ON PROPOSED AMENDMENTS TO CFTC
REGULATION 4.5
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As we previously informed you, the Commodity Futures
Trading Commission recently proposed amendments to Regulation 4.5
under the Commodity Exchange Act, which provides an exclusion
from the definition of "commodity pool operator" under that Act
for certain otherwise regulated entities such as registered
investment companies. (See Memorandum to Closed-End Fund
Committee No. 27-92 and SEC Rules Committee No. 83-92, dated
November 2, 1992.) The proposed amendments are intended to
expand the ability of qualified entities to engage in commodity
futures and commodity options transactions without being required
to register with the CFTC. The Institute has filed a comment
letter with the CFTC generally supporting the proposal, but
suggesting certain modifications. A copy of the Institute’s
comment letter on the proposed amendments is attached.
Under the current rule, entities wishing to qualify for the
exclusion must file a notice with the CFTC containing certain
representations. Among these are a representation that the
entity will use commodity futures or commodity options solely for
"bona fide hedging" purposes, or in accordance with an
alternative test in the case of certain long positions. The
Institute’s comment letter commends the CFTC for recognizing that
the current provision is unduly restrictive, and for seeking to
accomplish the objectives of Section 4.5 in "a more ’strategy
neutral’ way." As noted in the comment letter, the Institute had
proposed similar changes to Section 4.5 in a January 1991 letter
to the CFTC (a copy of which is attached to the comment letter).
With respect to the specific provisions of the proposed
amendments, the Institute’s letter suggests certain changes to
the proposed new "market exposure" test under the rule. As
proposed by the CFTC, that test would permit an eligible entity
to engage in commodity futures and commodity options transactions
that do not constitute bona fide hedging or meet the existing
alternative test under the rule, as long as the collective market
exposure attained through such transactions does not predominate
the total market exposure of the entity’s portfolio. The
Institute’s comment letter proposes that investment companies
relying on the market exposure test not be subject to the two
other quantitative trading restraints contained in the proposal,
i.e., the requirement to set aside cash and/or short-term debt
securities with respect to positions entered into under the
market exposure test and a 5% limit on the amount of initial
margin and premiums paid in connection with such positions.
Frances M. Stadler
Assistant Counsel
Attachment