June 27, Mr. Thomas LaSala Managing Director & Global Chief Regulatory Officer CME Group One North End Avenue New York, New York 10282

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1 June 27, 2014 Mr. Thomas LaSala Managing Director & Global Chief Regulatory Officer CME Group One North End Avenue New York, New York Re: CME Rule 538 EFRPs Dear Mr. LaSala: The National Grain and Feed Association (NGFA) remains very concerned about pending changes in the interpretation of CBOT Rule 538, scheduled to become effective August 4. This letter is intended to provide an explanation of how exchange-for-physical (EFP) transactions are used in the grain, feed and processing industry and to put forward our view, consistent with practices for decades, of proper reporting by the industry and oversight by the CME Group. The NGFA will be requesting a meeting with appropriate CME personnel to resolve issues of interpretation on this critically important issue. We want to emphasize that the objectives of NGFA-member firms are consistent with those of the CME Group: to ensure fair and transparent markets with the highest market integrity that provide firms the means and opportunities for risk transfer and/or price discovery. We want no protection in the system for bad apples, and we support oversight by CME and the Commodity Futures Trading Commission of the use of EFPs; but we differ on how Rule 538 should operate with regard to our industry. The Q&A document published by the CME and comments from CME staff indicate that the parties to an unpriced (basis) cash contract seeking to do an exchange of futures to price the contract must report the transaction to CME Clearing within one hour of the time relevant terms are agreed upon. The key is the definition of agreeing upon the relevant terms. Our industry has for many decades understood and followed the process that when it is time for a basis/unpriced contract to be priced by EFP, the two parties to the contract give matching but opposite EFP instructions to their respective brokerage/clearing firms. Those brokerage firms then contact each other during that session and match up the relevant terms per the orders: commodity, quantity, price, futures month, and name of the cash market firms. If those relevant terms match, the respective brokerage firms/clearing firms report the trade to their respective customers as complete, and each clearing member firm submits the trade to CME Clearing. How quickly each clearing firm reports the

2 Mr. Thomas LaSala June 27, 2014 Page 2 trade to CME is, of course, beyond individual customers control. We also note that it is the exception rather than the rule for an unpriced basis contract to be written with the futures price agreed upon at the time of the contract. More commonly, the Giver of futures determines the futures price at the time of the EFP transaction. Interpreting Rule 538 to indicate that two parties to an unpriced cash contract must somehow report anything to CME Clearing within one hour of the time of the cash market contract is unworkable and illogical on several fronts and could have the unintended consequence of erroneous or extraneous information being submitted to CME. For example: 1. Until or unless the parties to a cash market contract initiate an actual EFP, we do not believe that the CME Group or the CFTC is entitled to the proprietary information pertinent to a privately negotiated contract. 2. National Grain and Feed Association Trade Rules state that the Giver of futures shall have the right to determine the price at which futures are exchanged. Therefore, cash contract Sellers will not necessarily know at what price an EFP might occur at some undefined time in the future. 3. Some unpriced contracts eventually are offset by subsequent unpriced contracts with no EFP ever occurring. The CME Group would not be involved in this situation and there would be nothing to report. Requiring submission to CME at the time of the initial contract would then have resulted in irrelevant, extraneous information going to Market Surveillance. The logical method to assure the EFP process is used properly is not to have arbitrary deadlines and requirements for submitting information on contracts that may not even lead to an eventual EFP transaction. This would only create a plethora of information flowing to CME which would, in most cases, be reported again to CME Clearing when the actual EFP is executed and submitted for clearing by the respective brokerage firms. The NGFA maintains that the current system used by commercial firms reporting EFP terms/data to CME Clearing at the time of the EFP through submission of the trade tickets is the proper way for CME to have an accurate base of data. We suggest that the more efficient way to police the system if the CFTC suspects abuses in agricultural futures though we are unaware of such abuses is through increased random auditing of EFP transactions by CME Market Surveillance as they are doing today. This would include the currently required documentation and data such as copies of the actual cash contract(s), documentation of payment, and other information as an appropriate and necessary aspect of market surveillance. EFPs are an important part of the CME Group s agricultural business, and they are an integral tool for NGFA member firms to use in managing risk. EFPs allow cash buyers and sellers to work on slightly smaller margins; neither side will have the risk of price slippage if each were to enter orders to Globex or the trading pits for execution. EFPs all but eliminate error risk; there is no trade until both sides agree on all terms and submit and match them at CME Clearing. Adding burdensome reporting requirements on parties to EFPs might only serve to drive this clean, efficient volume out of futures or force commercial firms to alter their contracting terms to use less efficient pricing orders instead of EFPs. As used by grain hedgers, EFPs serve no price discovery function and should be widely supported and encouraged by the CME Group, not burdened and discouraged.

3 Mr. Thomas LaSala June 27, 2014 Page 3 In conclusion, relevant terms are finalized only when the actual EFP orders are processed by the futures clearing firm(s). To illustrate the challenges of altering that interpretation, a number of examples of EFP transactions are attached to this letter. These are representative of the myriad nuances to executing and pricing grain/soy cash market contracts. This list is far from complete; it s just a sampling. Adding the complexities of international trading would just magnify some of the problems. These examples demonstrate that reporting to CME Clearing prior to executing the actual EFP would at times result in Clearing receiving erroneous or at least extraneous information of no value for regulatory oversight. As it stands now, there is widespread confusion on the upcoming revisions to Rule 538, and that is not good for CME or for EFP participants. Sincerely, Attachment MJ Anderson Chair, Risk Management Committee cc: Robert Sniegowski Tim Andriesen Dave Lehman

4 EXAMPLES OF EFP TRANSACTIONS IN THE GRAIN, FEED AND PROCESSING INDUSTRY Example 1 Day 1: Buyer A and Seller B agree on a cash contract for 100,000 bushels of corn for delivery by truck to an ethanol plant at +15 CK14, including the language: To be priced prior to delivery. Day 4: Buyer A notifies Seller B in the afternoon that they will exchange futures the next day at a price to be determined by Buyer A (giver of futures). Day 5: Buyer A reports the exchange to their broker at 9 a.m. with instructions to give 20 May corn futures at the high of the day at noon CT. Day 5: Seller B gives their broker instructions to take 20 contracts of July corn from Buyer A's broker at a price to be set by Buyer A. Day 5: At 1 pm CT Buyer A's broker attempts to give 20 contracts of May corn to Seller B's broker at 5.09, the high of the day at 12 CT on May corn. Day 5: Seller B's broker refuses to take it, and says their instructions are to take July corn, not May. Seller B's broker calls Seller B to report the discrepancy and finds Seller B's merchandiser is out for the day and can't be reached. Nobody else at Seller B's office knows anything about the contract. Seller B's broker goes back to Buyer A's broker and refuses the EFP. Day 6: On the morning of Day 6, Seller B discovers the exchange did not go thru due to the discrepancy on which futures month was to be exchanged and calls Buyer A to sort out the discrepancy and try again to exchange futures on Day 6. Day 6: No quantity/price/month data available yet to report to CME Clearing. Example 2: A variation of the above situation Day 5: Buyer A's broker contacts Seller B's broker on the trading floor at 1 pm CT and says they're giving 20 contracts of May at 5.09 to Seller B. Day 5: In this situation it's extremely hectic on the floor due to a Globex shutdown. May and July futures are trading at almost exactly the same price and Seller B's broker doesn't notice that Buyer A said to give May futures even though Seller B's instructions say to take July futures. Day 5: Seller B's broker says "okay" and reports it back to Seller B that the exchange went thru, as taking 20 July corn contracts at Day 5: Buyer A's broker reports back to Buyer A that the exchange went thru, giving 20 May corn at Day 6: The discrepancy is not discovered until the trade doesn't clear properly after the Day 5 trading day is over. On Day 6 both brokers report back to the two parties, Buyer A and Seller B, that there is no trade yet available to clear. Day 5: Quantity/price/month data were reported to CME Clearing but resulted in an outtrade. Example 3 Day 1: Buyer A and Seller B agree on a cash contract for 100,000 bushels of corn to deliver by truck to an ethanol plant at +15 CK14. Day 4: Buyer A notifies Seller B in the afternoon that they will exchange futures on Day 5 at a price to be determined by Buyer A (giver of futures). Day 5: Seller B calls their Broker in the morning and gives the order to take 20 May corn from Buyer A's broker at any price A specifies. Day 5: Seller B's broker waits until 12:30 pm CT and when he hasn't heard from Buyer A's broker about the exchange, B's broker goes to A's broker and asks where the exchange is.

5 Buyer A's broker says he doesn't have any information about an exchange, and calls Buyer A's main hedge desk. Day 5: The main hedge desk for Buyer A says they don't know anything about it but they'll call the local office of Buyer A that's supposed to be involved in the trade. Day 5: Buyer A's local office tells their main hedge desk at 1 pm CT that the exchange is valid and to go ahead and give 20 May corn to Seller B at the high of the day. Day 5: Buyer A's main hedge desk gets busy and forgets to call their broker on the floor before the close. Day 5: Seller B's broker makes one last attempt to check with Buyer A's broker at 1:25 pm CT and A's broker says they never heard anything, so "No EFP today." Day 5: Seller B says Okay no harm, no foul. We'll exchange tomorrow. Day 5 p.m. No quantity/price/month data available yet to report to CME Clearing. Example 4 Day 1: Buyer A and Seller B have a cash contract for 295,000 bushels of corn to ship by rail at -5 CZ14, to be priced prior to loading. Day 26: Buyer A notifies the seller that rail cars will be arriving and A & B should price the contract now. Day 27: At 10:45am CT they agree to exchange futures at $4.95 CZ14. Buyer A gives the EFP order to his brokerage firm at this time. Day 27: Seller B gives the order to his hedge desk who sits on the EFP order until 1pm CT. Day 27: At 1pm the hedge desk for Seller B gives all exchanges for the day to his brokerage firm which then reaches out to Buyer A s brokerage/clearing firm and the transactions are completed. Day 27 is the 1 st time when EFP price is known and available for reporting to Clearing. Example 5 Day 1: Buyer A buys 50,000 bushels of +5 WN14 from Seller B at 4:30pm CT. Day 1: To allow for finalizing all contract details that same day, both agree to price this contract tomorrow by EFP at Day 1 s WN14 closing price of $6.80. This makes a contract price of $6.85. Day 1: Both sides enter their contracts into their respective accounting systems and generate cash contract confirmations. Day 2: Before the open on Day 2, each party gives their brokerage firm an order to exchange ten contracts of $6.80. Day 2: The two brokerage firms match the offsetting orders, report back to their respective customers, and the clearing firms submit the trade details to CME Clearing on Day 2. Day 1 is the first time EFP price is known, but the contract was not inked until after the close of the CME market session on Day 1. Example 6 Day 1 a.m.: Buyer A has noticed an overfill of 5,000 bushels of soybeans from Seller B. Day 1: Buyer A calls Seller B at 2:00pm Eastern and both agree to use +60 SK14 for the basis, and to exchange one contract of $15.00 to price the contract overfill. Day 1: Buyer A gives the order to his hedge desk, Seller B forgets to give the order to his desk. Day 1: The session closes and the exchange never happens. Day 1 p.m.: After the close Buyer A calls Seller B and they agree to exchange tomorrow and to pick a new price based off the overnight trade. Day 2: Both parties enter the proper instructions to their respective clearing firms

6 Day 2 is the first time when both parties/clearing firms have the information available on price/quantity/etc. to report to clearing. Example 7 Day 1: Buyer A and Seller B agree on a contract for three barges of soybeans, loading 3 months from now, at a basis of +90SN delivered Gulf, to be priced by date of loading. Day 45: Seller B finds they can sell their soybeans to a local crusher at a much higher basis and then goes to the barge market to find the value for three barges on the same terms as the original contract with Buyer A and discovers the market is approximately +75 SN. Day 45: Seller B (in the original deal) calls Buyer A to discuss a buy-back/cancellation of the Day 1 contract. Buyer A and Seller B agree on a value of +76SN and Buyer A purchases the three barges back which effectively cancels the original contract which has remained unpriced. Day 45: The original contract is offset at a basis difference of 14 cents (+90SN v +76SN), a gain for Seller B and a loss for Buyer A. Presumably, Buyer A then goes into the cash market to buy another three barges from a third party. Day 45: The original contract was never priced no information due to CME Clearing. Post-Day 45: Presumably Seller B will sell soybeans to that local crusher and that contract will be priced at some point. Example 8 Day 1: Buyer A and Seller B agree on a cash contract for delivery of 350,000 bushels of corn by rail to an ethanol plant at a basis of +45 CZ delivered two months from now, to be priced by EFP prior to delivery. Day 55: Buyer A calls Seller B about pricing the contract. Buyer A tells Seller B that instead of exchanging futures by EFP, Buyer A wants Seller B to call B s clearing firm and put in an order to buy 70 contracts of Dec corn at the market to price the contract. Day 55: Seller B calls their clearing firm and the clearing firm enters a Globex order to buy 70 CZ14 at the market. The order is filled immediately at $5.30/bu. Day 55: Seller B calls Buyer A and reports the pricing order is filled at $5.30/bushel. Day 55: The original contract s cash price is now fixed at $5.75 ( basis) Day 55: A cash contract that was originally intended to be priced via EFP instead was priced by the Seller buying futures per Buyer A s instructions. There was no EFP data to report to Clearing.