CFTC Staff Letter 00-79: No-Action Position on Capital Charge for Hedged GSCI Futures Positions

00-79
CFTC Letter No. 00-79
June 30, 2000
No-Action
Division of Trading & Markets
Re: Request for Relief from Commission Regulation 1.17(c) (5)(x) -- Capital Charge on Proprietary Futures and Option Positions Dear:
This is in response to letters and electronic mail messages dated April 3 through June 8, 2000, to the Division of Trading and Markets ("Division") of the Commodity Futures Trading Commission ("Commission"). By this correspondence, as supplemented by telephone conversations with Division staff, you request, on behalf of "X", that the Division not recommend that the Commission commence any enforcement action against "X" for failure to comply with Section 4f(b) of the Commodity Exchange Act ("Act") and Commission Regulation 1.17(c)(5)(x) if "X", in computing its adjusted net capital, does not take full capital charges on open futures positions associated with its market making activities in the Goldman Sachs Commodity Index ("GSCI") futures contract.1 Based upon your representations, we understand the facts to be as follows. "X", a registered futures commission merchant ("FCM") and commodity trading advisor, is a clearing member of the Chicago Mercantile Exchange ("CME"). "X" engages in market making activities in the GSCI futures contract, which trades on the CME. The GSCI is an index developed by Goldman Sachs & Co that tracks the performance of a "basket" of 26 commodity futures contracts traded on nine exchanges worldwide.2 The primary long participants in the GSCI contract are large pension funds and other professionally managed pools of capital (hereinafter "Institutional Traders"), which hold the GSCI contract as a diversification to their existing stock and bond portfolios. "X" estimates that 95 percent of the open interest of the GSCI futures contract represents this type of long-term, professional position. "X" and two other CME member firms generally hold the majority of the short open interest. These three firms act as market makers by facilitating the trading activities of the Institutional Traders. "X" manages the risk associated with its short position by hedging each GSCI futures contract with long positions in the 26 futures contracts comprising the GSCI. Because each GSCI futures contract is hedged by a "basket" of underlying futures contracts, the daily change in value of each GSCI futures contract file:///S|/Website%20Management/LegacyDataCopyasof2010-04-21/tm/letters/00letters/tm00-79.htm (1 of 3) [5/6/2010 6:22:11 PM]