In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 06-4412

ADM INVESTOR SERVICES, INC.,

Plaintiff-Appellee,

v.

MARK W. COLLINS,

Defendant-Appellant.

____________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 05 C 1823—John F. Grady, Judge.

____________

ARGUED SEPTEMBER 25, 2007—DECIDED FEBRUARY 7, 2008

____________

Before EASTERBROOK, Chief Judge, and BAUER and

KANNE, Circuit Judges.

EASTERBROOK, Chief Judge. Mark Collins traded futures

contracts on the Chicago Board of Trade through ADM

Investor Services, a futures commission merchant (the

equivalent of a stockbroker for derivatives). Over

the course of 18 months, Collins made almost $1 million.

His last trade, on July 27, 2004, was in soybean contracts.

Collins purchased 40 contracts for delivery in August 2004

while selling 40 contracts for delivery in November.

Matched pairs of long and short contracts take a position in the difference between the prices, which the

futures business calls the spread. On July 27 the August

contract was selling for $6.69 per bushel and the Novem-
2 No. 06-4412

ber contract for $5.89, a spread of 80¢. Collins stood

to make money if the spread increased and to lose if

it decreased.

Three days later the spread was down to 30¢. The

November price had declined to $5.69, so the short position for that month had increased in value, but the August

price stood at $5.995, and Collins had lost $99,000 more

on his long position than he gained on his short position. ADM made a margin call. Collins posted only

$15,000, so ADM liquidated his position by offsetting

purchases. It sent Collins a bill for $85,521.83, which he

did not pay. ADM filed this suit under the diversity

jurisdiction to collect, and the district court entered

judgment in its favor. 2006 U.S. Dist. LEXIS 3282 (N.D. Ill.

Jan. 26, 2006), 2006 U.S. Dist. LEXIS 68049 (N.D. Ill. Sept.

26, 2006).

Collins has two defenses. One is that Shell Rock Enterprises, an introducing broker, has paid ADM about $75,000

under its contractual guarantee of Collins’s trades. This

means, Collins insists, that ADM is not the real party

in interest. The brief reads as if counsel (Collins’s brother)

had never heard of the collateral-source doctrine. That a

third party reimburses part of a loss does not disable

the injured person from recovering under tort or contract

law. ADM did not assign its rights to Shell Rock (there

is no subrogation agreement), so ADM is the proper

plaintiff. How ADM and Shell Rock settle accounts between themselves is none of Collins’s business.

The other defense is that the soybean contracts were

“illegal” because on July 27, 2004, a margin call was

outstanding on another of Collins’s trades. He insists

that ADM should have used the money tendered as margin on the soybean spread to satisfy the margin call on the

existing trade; had ADM done this, it could not have

executed the soybean-spread trades, because the initial
No. 06-4412 3

margin would have been insufficient. Rule 431.012(11) of

the Chicago Board of Trade provides:

Members shall not accept orders for new trades

from a customer, unless the minimum initial

margin on the new trades is deposited and unless

the margin on old commitments in an account

equals or exceeds the initial requirements on

hedging and spreading trades and/or the maintenance requirements specified in Regulations

431.03 and 431.05 on all other trades.

The Commodity Exchange Act requires futures commission merchants to abide by a board of trade’s rules; it

follows, Collins insists, that his trades of July 27 were

illegal and that he need not cover his losses. He invokes

the principle that courts do not enforce “illegal contracts”—for example, cartel agreements or wagering

debts in states where gambling is prohibited. ADM replies

that on July 27 Collins still had time to meet the margin

call on his older trades, so “the maintenance requirements specified in Regulations 431.03 and 431.05 on all

other trades” did not prevent ADM from allowing its

customer to make additional trades. We need not decide

whether this is right, because Collins’s argument

founders on more fundamental grounds.

A soybean spread is not “illegal” in the sense of the rule

against enforcing “illegal contracts.” There is nothing

unlawful about buying or selling futures contracts for

soybeans. They are freely traded on public exchanges. A

contract does not become “illegal” just because a trader

fails to put down a deposit (that’s what margin is in a

futures market), any more than a buyer’s failure to

post earnest money makes a contract to sell Blackacre

“illegal.” Failure to post security as required enables

the other side to rescind but does not provide benefits

to the person who has failed to honor his own obligations.
4 No. 06-4412

Another way to see this is to ask why margin is required in futures transactions. In securities markets, the

full purchase price must be paid to the seller before a

transaction is complete; margin is a loan from the dealer

to the customer, secured by the assets acquired in the

transaction. The Federal Reserve regulates these loans,

along with many other aspects of financial intermediation, as part of its control of the aggregate money supply. Regulation of this kind could be seen as an effort to

protect the general public from the effects of investors’ and

brokers’ activities. Margin in the futures business, by

contrast, does not represent an extension of credit, and

there are no third-party effects.

A futures contract is executory; no asset changes hands

when the contract is formed. See generally CFTC v.

Zelener, 373 F.3d 861 (7th Cir. 2004). The buyer (the

holder of the long position) transacts with the seller (the

creator of the short position) through a clearing corporation. When a long and a short agree to a contract, each

makes his promise to the clearing corporation, which

then becomes the counterparty of each original party. The

risk that the clearing corporation assumes is that an

obligor won’t perform when the time comes to deliver the

soybeans (or to pay for them). Reducing this risk of

nonperformance, usually called the “counterparty risk” in

derivatives markets, is the role of margin. See Lester G.

Telser, Margins and Futures Contracts, 1 J. Futures

Markets 225 (1981); Haiwei Chen, Price Limits and

Margin Requirements in Futures Markets, 37 Financial

Rev. 105 (2002).

Exchanges and clearing corporations set margin high

enough that short-term price movement is likely to leave

a net equity balance available to the dealer. If price

movements reduce its security unduly, the dealer may

have time to demand an additional deposit—and to

liquidate the position, before the balance goes negative,
No. 06-4412 5

as a form of self-protection if the investor does not meet

the margin call. Occasionally, though, prices move so

fast that a position’s value is negative before a margin

call can be issued; what happened in July 2004 to the

August–November soybean spread shows the risk. The

futures commission merchant then is on the hook, for it

is a condition of participation in these markets that

each dealer guarantee customers’ trades. When Collins

did not post the margin, ADM had to buy offsetting

positions in the market, which enabled the clearing

corporation to close Collins’s trades without absorbing

a loss.

It should now be apparent that margin requirements

in futures markets are not designed to protect investors

such as Collins from adverse price movements. Margin

protects counterparties from investors who may be unwilling or unable to keep their promises. Counterparties

are protected directly by clearing corporations (that’s

why trading can be anonymous and contracts homogeneous); clearing corporations are protected not only by

the balance in their portfolios (every long position exactly

offsets a short) but also by the futures commission merchants, which generally are substantial businesses; the

futures commission merchants are protected, to a degree,

by the margin deposits posted by customers such as

Collins. So the person injured by a shortfall of margin

was ADM, not Collins, and ADM’s failure to take all

available steps to protect itself from defaulting customers is hardly a reason why customers should be

allowed to renege. No surprise, then, that both circuits

that have addressed the issue have held that a customer’s

failure to post required margin for a futures contract

does not excuse him from paying. See Merrill Lynch,

Pierce, Fenner & Smith, Inc. v. Brooks, 548 F.2d 615 (5th

Cir. 1977); Thomson McKinnon Securities, Inc. v. Clark,

901 F.2d 1568 (11th Cir. 1990). We agree with these
6 No. 06-4412

decisions. As Justice Holmes once put it, there is a vital

“policy of preventing people from getting other people’s

property for nothing when they purport to be buying it.”

Continental Wall Paper Co. v. Louis Voight & Sons Co.,

212 U.S. 227, 271 (1909) (Holmes, J., dissenting).

Still another way to see this point is to observe that

balky customers are not in the zone of interests protected

by margin-posting requirements. Margin protects dealers

and counterparties from defaulting customers, who are

in no position to complain when the protection of their

trading partners turns out to be incomplete.

Collins is particularly poorly positioned. Almost $450,000

of his $1 million net profit on transactions through ADM

came from trades executed while a margin call was

pending on another open position. If, as Collins maintains,

any contract entered into while a margin call is pending

is void, then Collins is the loser: the cost to him of avoiding an $85,000 debt will be the need to make restitution

of the rest, for a net judgment of $365,000 in ADM’s favor.

Collins should give thanks that he has lost this appeal.

AFFIRMED

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—2-7-08