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Comment for Proposed Rule 75 FR 71397

  • From:

    Comment No: 54170
    Date: 11/24/2010

    Comment Text:

    Boro Fuel Oil Company, Inc.
    Jeffrey Cohn
    Boro Fuel Oil Company, Inc.
    2 Church Avenue
    Brooklyn, NY 11218-3096

    November 24, 2010

    David Stawick
    Commodity Futures Trading Commission
    Three Lafayette Centre
    1155 21st Street, NW
    Washington, DC 20581

    Dear Mr. Stawick:

    I am writing to urge the Commission and its staff to consider the
    following comments on several key areas requiring rulemakings under Title
    VII of the Dodd-Frank Wall Street Reform Act.

    This legislation seeks to reverse irresponsible deregulation of the
    derivatives markets that has occurred over the past two decades. This
    deregulation has resulted in opaque markets that cater to the needs of
    financial speculators rather than bona-fide hedgers and consumers for
    which futures, options and swaps were created in the first place.

    For energy companies like mine that serve thousands of consumers and play
    a vital role in the health and growth of the American economy,
    deregulation and the absence of transparency, oversight and accountability
    has resulted in diminished confidence in these markets. The resulting
    excess volatility and speculation in commodities, including energy (e.g.,
    crude oil, gasoline and home heating fuels), skews the price discovery
    function of these markets, unhinges them from concrete economic
    fundamentals such as supply and demand, creates a difficult environment
    for hedgers seeking to manage price risk and subjects their consumers to
    erratic and unwarranted price spikes.

    Robust implementation and vigorous enforcement of the regulatory
    initiatives under the Dodd-Frank Act is vital if the legislation is to
    have its desired effects, including increased confidence, security and
    stability in the derivatives markets while preserving market liquidity,
    competition, and hedging and price discovery functions.

    I. Definitions

    1. Commercial Risk
    The definition of commercial risk should be narrowly tailored to apply
    only to those entities whose business activities expose them to risk from
    physical commodity price fluctuations. Commercial risk should not include
    risks that are purely financial in nature, including balance sheet risk.

    2. Major Swap Participant
    It was the intent of Congress to require that only large market
    participants be captured under this definition. I am supportive of the
    exclusion for positions held for hedging or mitigating commercial risk,
    but again, this should not be defined so broadly as to create a new
    loophole for financial speculators to avoid requirements under the new

    3. Captive Finance Affiliates
    The major swap participant definition also includes an exception for
    captive finance affiliates. I similarly encourage the Commission not to
    allow the exception to be abused or too broadly interpreted.

    4. Swap
    The legislative definition excludes forward delivery contracts (and
    options on such contracts) for commodities that are intended to be
    physically settled. Any exemption for forward delivery contracts and
    options should be limited to benefit only bona fide commercial end-users.

    II. Governance & Possible Limits on Ownership & Control - Swap Dealers

    The CFTC must establish both a meaningful limit on individual ownership
    and a limit on collective ownership if the proposed rule is to have the
    intended effect of limiting conflict of interest, assuring transparency
    and open competition, and preventing clearinghouses and exchanges from
    catering to the interests of a few large participants in the financial
    community. This requires both a cap on ownership for individual entities
    as well as a sector-wide aggregate cap on banks.

    III. End-User Exception

    The end-user exception should remain narrowly tailored to those businesses
    that produce, refine, process, market or consume an underlying commodity
    and counter-parties buying or selling a position to an end-user. Purely
    financial risk, including broad terms such as balance sheet risk, should
    not be considered legitimate commercial risk.

    Furthermore, for any entity that is not a legitimate end-user as described
    above, the exception should be limited so that it is in direct proportion
    with their physical holdings, i.e. an investment bank or hedge fund cannot
    claim to be an end-user and thereby obtain an exemption from speculative
    position limits or other requirements or restrictions merely because it
    holds a few hundred thousand barrels of inventory.

    IV. New Registration Requirements for Foreign Boards of Trade (FBOTs)

    I support the requirement that FBOTs register with the CFTC and make their
    trading data available as well as requiring that they adopt position
    limits and implement prohibitions on manipulation and excessive
    speculation. They should also be subject to ownership caps as described

    V. Anti-Manipulation & Disruptive Trading Practices

    I strongly support prohibitions on insider trading based on nonpublic
    information, strengthened prohibitions on manipulation, and new authority
    provided to the CFTC under the Act that allows them to identify swaps that
    are abusive by virtue of being potentially detrimental to either the
    stability of the market or its participants. I urge the CFTC to be
    thorough in its interpretation and enforcement of these new authorities.

    I also encourage the Commission to scrutinize the use of
    computerized/algorithm-based trading programs to determine if their
    application and use in the commodities markets has a disruptive affect on
    market stability or function.

    VI. Position Limits, Aggregate Position Limits & the Bona Fide Hedging

    I support enforcement of the strongest possible speculative position
    limits as required under the Dodd Frank Act. Further, the Act requires
    that such limits be established and enforced within 180 days from
    enactment for exempt commodities (including energy commodities), not
    simply that the commission promulgate formulae for such limits and then
    impose them at some later date, as has been suggested.

    Due to their passive approach to commodity trading, Exchange Traded Funds
    and Notes (including index funds) treat finite commodities such as energy
    as an asset class and a long-term investment rather than as vital
    resources to American industries, businesses and consumers. I believe the
    Commission should establish separate and more aggressive limits on the
    positions of Exchange Traded Funds and Notes, including index funds.

    I also have concerns regarding the bona fide hedging exemption that are
    similar to my concerns regarding the definition of commercial risk and the
    end-user exemption. Too broad of a definition would allow continued
    watering down of the hedging exemption and provide additional incentives
    for financial speculators to enter the market under the guise of
    legitimate hedgers, thereby evading position limits and other requirements.

    VI. Conclusion

    American businesses and consumers are relying on CFTC Commissioners and
    their staffs to read and vigorously enforce these rules in such a manner
    as to restore confidence, stability and transparency to the derivatives
    markets - especially in the energy commodities markets. Americans of all
    stripes are depending on you to protect energy consuming businesses and
    individuals, as well as the broader economy, from fraud, manipulation, and
    disruptive/abusive trading practices and from excessive volatility,
    speculation and unwarranted price spikes.

    This legislation gives the Commission powerful tools in this regard, and I
    hope that you will use them to their fullest extent.

    Thank you in advance for your consideration.


    Jeffrey Cohn

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