Report on the Study of the Commodity Exchange Act and the 

Commission’s Rules and Orders Governing the Conduct of 

Registrants Under the Act

Pursuant to Section 125 of the 

Commodity Futures Modernization Act of 2000 

Commodity Futures Trading Commission

June 2002 
TABLE OF CONTENTS 

I. Introduction .............................................................................................................................. 1 

II. Recent Regulatory Reform .................................................................................................... 3 

A. General Reforms................................................................................................................. 3 

1. Revised Regulatory Framework......................................................................................... 3 

2. Online Registration............................................................................................................ 3 

3. Electronic Signatures......................................................................................................... 4

B. FCMs and IBs...................................................................................................................... 4 

1. Investment of Customer Funds........................................................................................... 4 

2. Secured Amount Depositories............................................................................................ 4 

3. NYMEX OTC Clearing Arrangement ................................................................................ 5 

4. Offsetting Deficits with Readily Marketable Securities..................................................... 5 

5. Foreign Order Transmittal ................................................................................................ 5 

6. CME-MEFF Clearing Arrangement.................................................................................. 5 

7. Capital Charge for Foreign Broker Receivables............................................................... 6 

8. Review of Subordination Agreements................................................................................ 6 

9. Withdrawal of Equity Capital............................................................................................ 6 

10. Average Price Calculation............................................................................................... 6

C. CPOs and CTAs.................................................................................................................. 6 

1. Exemption from Registration for CTAs Providing Standardized Advice........................... 6 

2. Expansion of the Definition of QEP................................................................................... 7 

3. Fund of Funds Annual Reports.......................................................................................... 7 

4. Profile Disclosures for CPOs ............................................................................................ 7 

5. Exclusion from Definition of CPO for Church Plans........................................................ 7

D. Proposed Regulatory Reforms........................................................................................... 8 

1. Notional Funds................................................................................................................... 8 

2. Foreign Futures Broker Registration ................................................................................ 8

III. Summary of Comments, Interviews, and Public Hearing Comments ............................. 8 

A. FCMs and IBs...................................................................................................................... 8 

1. Bunched Orders................................................................................................................. 8 

2. Denomination of Customer Funds and Location of Depositories..................................... 9 

3. Minimum Capital Requirements...................................................................................... 10 

4. Foreign Futures and Options........................................................................................... 11 

5. Permitting FCMs to Carry Multiple Products in Customer Segregated Accounts ......... 13 

6. Recordkeeping.................................................................................................................. 14 

7. Pre-Dispute Arbitration................................................................................................... 14 

8. Reparations Program....................................................................................................... 15 

9. Registration...................................................................................................................... 15 

10. Unsubstantiated Claims................................................................................................. 16 

11. Disclosure Statements.................................................................................................... 16 

12. Large Trader Reports .................................................................................................... 16

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13. Block Orders.................................................................................................................. 17 

14. Internalization of Order Flow........................................................................................ 17 

15. Transmittal of Orders by Introducing Brokers.............................................................. 17 

16. Trading Standards ......................................................................................................... 18 

17. FCM Liability for Guaranteed IBs ................................................................................ 18 

18. Investment of Customer Funds....................................................................................... 19 

19. Loans to Customers ....................................................................................................... 19 

20. Opting Out of Segregation............................................................................................. 19 

21. Agricultural Trade Options............................................................................................ 20

B. CPOs and CTAs ................................................................................................................ 20 

1. CPO Registration............................................................................................................. 20 

2. Disclosure, Reporting, and Recordkeeping Requirements.............................................. 21 

3. Timing of Disclosure Document Delivery........................................................................ 21 

4. Interpretation of "Person" under Section 4m(1) of the Act ............................................. 22 

5. Codification of Disclosure and Reporting Relief for Master-Feeder Funds................... 22 

6. Schedule of Investments in Commodity Pool Annual Reports......................................... 22 

7. Application of Anti-Money Laundering Requirements to CPOs and CTAs..................... 23 

8. Coordination Among Agencies........................................................................................ 23

C. Other Issues....................................................................................................................... 23 

IV. Conclusions .......................................................................................................................... 25 

A. Core Principles.................................................................................................................. 25

B. Commission Rules............................................................................................................. 25

C. Delegation of Regulatory Functions to a Registered Futures Association................... 25

D. Moving Forward ............................................................................................................... 25 

Appendix...................................................................................................................................... 27 

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I. INTRODUCTION 

The Commodity Futures Modernization Act of 2000 ("CFMA")1

 requires the Commodity 

Futures Trading Commission ("CFTC" or "Commission") to conduct a study of the Commodity 

Exchange Act ("Act")2

 and the Commission’s rules

3

 and orders governing the conduct of

registrants under the Act.4

 This report responds to the CFMA’s requirement that the 

Commission submit a report on the results of its study to the Committee on Agriculture of the 

House of Representatives and the Committee on Agriculture, Nutrition and Forestry of the 

Senate. Pursuant to the CFMA, the study was to be completed by December 21, 2001 (one year 

from the date of enactment of the CFMA). In response to requests from industry groups, the 

Commission petitioned Congress to extend the statutory deadline for the study. Congressional 

leaders responded by extending the deadline to June 21, 2002, stating that "[t]he volume and 

complexity of recent regulatory initiatives have greatly strained the varied resources that are 

necessary to complete a meaningful study."5

 

The study must address: (1) the core principles and interpretations of acceptable business 

practices that the Commission has adopted or intends to adopt to replace provisions of the Act 

and rules thereunder, and the extent to which these changes have been or may be made pursuant 

to the Commission's exemptive authority under Section 4(c) of the Act; (2) the rules that the 

Commission has determined must be retained and the reasons therefor; and (3) the regulatory 

functions that the Commission performs that can be delegated to a registered futures association 

and the regulatory functions that the Commission has determined must be retained and the 

reasons therefor. The CFMA directed the Commission to solicit the views of the public as well 

as Commission registrants, registered entities,6

 and registered futures associations in conducting 

its study. 

The Commission published a request for comment in the Federal Register on June 22, 

2001.7

 The Commission received two comment letters.8 In addition, Commission staff 

1

 Commodity Futures Modernization Act of 2000, Pub. L. No. 106-554 – Appendix E, §125, 114 Stat. 2763A-365

(2000). 

2 7 U.S.C. § 1 et seq. (2000).

3

 Commission rules referred to herein are found at 17 C.F.R. Ch I (2002). 

4

 Persons required to register under the Act include futures commission merchants, introducing brokers, commodity

pool operators, commodity trading advisors, associated persons of any of the foregoing, floor brokers and floor

traders, as defined in Sections 1a(20), 1a(23), 1a(5), 1a(6), 4k, 1a(16) and 1a(17), respectively, of the Act. 

5

 Letter from the Honorable Tom Harkin, Chairman, and the Honorable Richard Lugar, Ranking Member, Senate

Committee on Agriculture, Nutrition and Forestry, to the Honorable James E. Newsome, Acting Chairman, 

Commodity Futures Trading Commission (Oct. 30, 2001).

6

 The term "registered entities" is defined in Section 1a(29) of the Act to include designated contract markets, 

registered derivatives transaction execution facilities, and registered derivatives clearing organizations. 

7

 66 Fed. Reg. 33531 (June 22, 2001). 

8

 In response to the Federal Register release, the Commission received comment letters from the Futures Industry 

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interviewed representatives of futures commission merchants ("FCMs"), introducing brokers 

("IBs"), commodity pool operators ("CPOs"), commodity trading advisors ("CTAs"), exchanges, 

clearing organizations, and self-regulatory organizations, as well as attorneys and accountants 

practicing in the futures industry. Interviews were conducted in Chicago, New York, 

Washington, and by telephone. The Commission also held a public hearing in Washington on 

June 6, 2002.9

 A list of commenters, interviewees, and hearing participants is included as an 

Appendix. 10

Section II of this report discusses regulatory reforms the Commission has undertaken to 

date. Section III discusses proposals that were raised by participants in the course of the study. 

The Commission’s overall conclusions and plans for future action are set forth in Section IV.

A common theme running through many of the comment letters, interviews, and 

presentations was a desire that the Commission provide additional flexibility to registrants in 

meeting their obligations under the Act. None of the commenters, however, advocated that the 

existing rules be deleted wholesale and replaced by a defined set of core principles. Some

commenters indicated that such an approach would be unworkable in areas such as financial 

requirements, while others expressed concern about the legal uncertainty that might result. The 

commenters focused instead on specific rules or sets of rules within the existing framework that 

they believed should be modified or eliminated. With regard to delegation of functions to a 

registered futures association, two potential candidates were identified. They are discussed 

below. 

 

Commenters, particularly the hearing participants, indicated that their overriding 

concerns with the futures industry could not necessarily be addressed by changes to the 

Commission's rules, although they identified particular areas where rule changes would be 

beneficial. Commenters instead noted that their greatest concerns involved market structure 

issues and the effect they have on promoting competition within the markets. It was noted by 

more than one commenter that the competition at the exchange and clearing organization level 

expected as a result of the CFMA has not yet materialized. While these same commenters noted 

that it might be too soon after the enactment of the CFMA to state definitively why the expected 

competition did not occur, two particular characteristics of the market structure of the futures 

industry were identified as possible causes: the lack of fungibility of products across exchanges 

and the lack of common clearing. These issues are discussed more fully below in Section III C. 

Association and Phillip McBride Johnson. 

9

 Comment letters and written statements from the hearing participants are contained in CFTC Public Comment File 

01-013, which is available at http://www.cftc.gov/foia/comment01/foi01--013_1.htm. A transcript of the public

hearing will be placed in the comment file as soon as it is available. 

10 To the extent that comments to Commission staff were received only through interviews, and therefore are not

reflected in the public comment file referenced in note 9 above, the report refers to those offering such comments as 

interviewees. Where comments or suggestions were made in comment letters or the public hearing, as well as 

during interviews with Commission staff, the report refers to those offering such comments or suggestions as 

commenters. 

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During the conduct of the study, numerous issues worthy of further analysis were raised. 

In this regard, the Commission has determined to hold a series of roundtable meetings with 

futures industry representatives to discuss further, in detail, upcoming Commission rule 

proposals and the Commission's role in addressing the issues facing the futures industry. In the 

coming months, the Commission will have a roundtable to discuss its intended proposal to 

change Commission rules regarding the allocation of bunched orders. The Commission will also 

hold a roundtable to discuss the effects of overlapping Commission, Securities and Exchange 

Commission ("SEC"), and state jurisdiction faced by members of the managed funds industry. 

Finally, the Commission will soon be organizing a roundtable on clearing issues to discuss the 

elements of an appropriate oversight program with respect to Derivatives Clearing 

Organizations, a new registration category. At this roundtable, the Commission also wants to 

discuss common clearing and fungibility of products, their role in encouraging competition in the 

futures market, and the Commission's function in helping to facilitate greater competition. 

 

II. RECENT REGULATORY REFORM 

In recognition of the rapidly changing nature of the futures industry, the Commission is 

engaged in a continuous process of reviewing its regulations to identify areas in which it can 

lessen the burden on registrants and promote competition and market efficiency, while 

continuing to meet its regulatory mandates to ensure the financial integrity of the futures and 

options markets, and to protect market participants and the public. In this regard, concurrent 

with the development and implementation of the CFMA, the Commission has proposed and 

adopted amendments to numerous provisions of its regulations that affect intermediaries. 

A. General Reforms

1. Revised Regulatory Framework

In October 2001, as part of a revised regulatory framework, the Commission adopted a 

number of rule changes relating to intermediaries. These changes provided for, among other 

things: (a) elimination of the required submission of a certified financial report as part of IB 

registration procedures; (b) replacement of the specific ethics training rule for Commission 

registrants with a Statement of Acceptable Practices; (c) amendment of the definition of 

"principal" to exclude certain officers of firms from otherwise applicable listing and 

fingerprinting requirements; (d) simplification of account opening procedures by permitting a 

single signature for all documents; (e) codification of a previous interpretation permitting 

electronic transmission of account statements; and (f) greater customer choice concerning the 

close-out of offsetting positions.

 11

 2. Online Registration

In May 2002, the Commission adopted amendments to Part 3 of its rules, which governs 

 

11 66 Fed. Reg. 53510 (Oct. 23, 2001). Many of these changes had been previously adopted in December 2000 as

part of the Commission's new regulatory framework, but were subsequently withdrawn following passage of the 

CFMA. 

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the registration of intermediaries in the futures industry. These amendments were adopted to 

facilitate the implementation of an online registration system.

12 The online registration system

should provide applicants with a more streamlined process for registering, resulting in less 

redundancy and quicker processing of applications by the National Futures Association 

("NFA").13 Through the online registration system, registrants and applicants should be able to 

provide NFA with required information more quickly and easily and enable NFA to process this 

information more efficiently, while maintaining most of the features of the previous, paper-based 

system. Additionally, information on registrants should be more readily accessible by the 

Commission, NFA, and the public. 

3. Electronic Signatures

In March 2000, the Commission adopted new Rule 1.4, permitting the use of electronic 

signatures in lieu of handwritten signatures where the Act or Commission rules require a 

customer's signature.14

B. FCMs and IBs 

 1. Investment of Customer Funds

In December 2000, the Commission adopted amendments to Rule 1.25, expanding the 

permitted investments of customer funds by FCMs and clearing organizations.15 Previously, 

FCMs and clearing organizations were limited to investing in U.S. and municipal 

government-guaranteed debt securities. The expanded list of permitted investments includes 

highly-rated commercial paper, corporate notes, foreign sovereign debt, and U.S. government 

sponsored agency debt, as well as money market mutual funds regulated by the SEC. This rule 

change significantly increased potential earnings for FCMs, clearing organizations, and 

customers. 

 2. Secured Amount Depositories

In October 2000, the Commission clarified its interpretation of the foreign futures or 

foreign options secured amount requirement of Rule 30.7.16 The Commission previously 

interpreted that rule to require FCMs, and firms exempt from FCM registration under Rule 30.10 

 

12 67 Fed. Reg. 38869 (June 6, 2002). 

13 The Commission has previously delegated the authority to process applications for registration of intermediaries 

and floor traders under the Act to NFA. See 58 Fed. Reg. 19657 (Apr. 15, 1993) (floor traders); 51 Fed. Reg. 34490

(Sep. 29, 1986) (floor brokers); 49 Fed. Reg. 39593 (Oct. 9, 1984) (futures commission merchants, commodity pool

operators, commodity trading advisors, and associated persons thereof); 48 Fed. Reg. 35158 (Aug. 3, 1983)

(introducing brokers and associated persons thereof). 

14 65 Fed. Reg. 12466 (Mar. 9, 2000). 

15 65 Fed. Reg. 77993 (Dec. 13, 2000); 65 Fed. Reg. 82270 (Dec. 28, 2000). 

16 65 Fed. Reg. 60557 (Oct. 11, 2000). 

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("Rule 30.10 firms"), to perform an inquiry with respect to the treatment of secured amount 

funds by any depository holding such funds. If this inquiry revealed that a depository beyond the 

initial depository would not hold secured amount funds in a manner consistent with Rule 30.7, 

the FCM or Rule 30.10 firm would have to set aside funds in an acceptable depository, i.e., a 

"mirror" account. The Commission revised its interpretation so that firms need not perform the 

inquiry referred to above if they obtain the acknowledgement required by Rule 30.7 from the 

initial depository of secured amount funds and provide disclosure to customers concerning the 

risks of transactions and funds deposited in other jurisdictions. 

3. NYMEX OTC Clearing Arrangement

In May 2002, the Commission issued an order permitting the New York Mercantile

Exchange ("NYMEX") and its clearing members to commingle in a single account funds 

received from customers trading on designated contract markets with funds received in 

connection with NYMEX's clearing of certain over-the-counter energy contracts.17

 4. Offsetting Deficits with Readily Marketable Securities

In August 2001, the Commission amended its rules to provide that an FCM, when 

computing its segregation requirements, may offset deficits in customer accounts with readily 

marketable securities deposited by customers to margin their futures and options positions. The 

amount of the offset is limited to the market value of the securities, less the applicable haircuts 

set forth in the rules of the SEC.18

5. Foreign Order Transmittal

In August 2000, the Commission adopted new Rule 30.12 that permits certain foreign 

firms acting in the capacity of FCMs and IBs to accept and execute foreign futures and options 

orders received directly from certain sophisticated U.S. customers without being required to 

register with the Commission.19

6. CME-MEFF Clearing Arrangement

In June 2001, the Commission issued an order permitting the Chicago Mercantile 

Exchange ("CME") and its clearing members to commingle in a single account the funds 

received from customers trading on designated contract markets with the funds received in 

connection with the CME's clearing of certain products traded on or through the MEFF Sociedad 

Recotra de Productos Financieros Derivados de Renta Variable ("MEFF"), a board of trade 

located in Spain.20

 

17 A copy of the order may be viewed on the Commission's web site at:

http://www.cftc.gov/tm/tmnymexotcorder.htm. 

18 66 Fed. Reg. 41131 (Aug. 7, 2001). 

19 65 Fed. Reg. 47275 (Aug. 2, 2000). 

20 66 Fed. Reg. 34110 (June 27, 2001). 

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7. Capital Charge for Foreign Broker Receivables

In November 2000, the Commission amended its minimum financial requirements for 

FCMs and IBs by increasing the amount eligible for exclusion from the capital charge against 

unsecured receivables due from foreign brokers.21

8. Review of Subordination Agreements

In August 2000, the Commission adopted amendments to its minimum financial 

requirements for FCMs and IBs by modifying the treatment of subordination agreements, to 

permit a futures industry self-regulatory organization ("SRO") to rely on a securities industry 

designated examining authority's review and approval of a proposed subordination agreement 

and related transactions.22 Previously, FCMs and IBs were required to get the approval of both 

the futures industry SRO and the securities industry designated examining authority. 

9. Withdrawal of Equity Capital

In April 2000, the Commission amended Rule 1.17 to ease the restrictions on withdrawal 

of equity capital from an FCM.23 Previously, the withdrawal of equity capital from an FCM for 

certain purposes was prohibited if, after giving effect to the withdrawal, the FCM's adjusted net 

capital would be less than seven percent of the customer funds required to be segregated. The 

amendment reduced the limit to six percent. 

10. Average Price Calculation

In February 2000, the Commission issued an Advisory permitting an FCM to calculate 

and confirm to its customers an average price when multiple prices are received on an order or 

series of orders involving contracts traded on domestic as well as non-domestic exchanges, 

provided that certain criteria were met.24

C. CPOs and CTAs

1. Exemption from Registration for CTAs Providing Standardized Advice

In March 2000, the Commission adopted Rule 4.14(a)(9). This rule exempts from

registration CTAs who do not direct client accounts or provide advice based on, or tailored to, 

their clients' circumstances.25

 

21 65 Fed. Reg. 66618 (Nov. 7, 2000). 

22 65 Fed. Reg. 51529 (Aug. 24, 2000). 

23 65 Fed. Reg. 21309 (Apr. 21, 2000). 

24 65 Fed. Reg. 4807 (Feb. 1, 2000).

25 65 Fed. Reg. 12938 (Mar. 10, 2000). 

- 6 - 
2. Expansion of the Definition of QEP

Commission Rule 4.7 provides an exemption from certain disclosure, reporting, and 

recordkeeping requirements for CPOs whose participants meet specified eligibility criteria and 

are defined as qualified eligible persons ("QEPs"), and for CTAs who direct or guide the 

commodity interest accounts of clients who are QEPs. In August 2000, the Commission 

expanded the scope of persons included within the definition of a QEP, to include: (a) principals 

of registered investment professionals who themselves are defined as QEPs; (b) certain 

registered securities investment advisers and their principals; (c) "qualified purchasers" and 

"knowledgeable employees" as those terms are defined under the federal securities laws; (d) 

certain employees and agents of pools, CPOs, and CTAs, as well as certain of those employees’ 

and agents’ immediate family members; (e) trusts whose advisors and settlors are QEPs; and (f) 

"non-United States persons." In addition, the revisions make it easier for certain charitable 

organizations, trusts, and collective investment vehicles to be classified as QEPs.26

 3. Fund of Funds Annual Reports

In December 2000, the Commission adopted rule amendments to permit CPOs to submit 

a claim for an extension of time to file a pool’s annual report where the pool invests in other 

collective investment vehicles, and the CPO cannot obtain the information that its accountant 

requires about the collective investment vehicles in time for the pool’s annual report to be 

prepared, audited, and distributed by the due date.27

4. Profile Disclosures for CPOs

In October 2000, the Commission adopted rule amendments to permit CPOs to deliver to 

prospective participants a summary "profile" document containing only key information about a 

pool prior to providing them with the pool's disclosure document.28 These amendments 

accommodated a rule submitted by NFA for Commission approval concerning the use of profile 

documents. 

5. Exclusion from Definition of CPO for Church Plans

Commission Rule 4.5 excludes from the definition of CPO certain persons that are 

otherwise regulated with respect to the operation of enumerated qualifying entities. 

Additionally, under Rule 4.5, certain employee benefit plans are not commodity pools. In April 

2000, the Commission adopted amendments to Rule 4.5 to include a plan defined as a "church 

plan" in Section 3(33) of Title I of the Employee Retirement Income Security Act of 197429 as a 

 

26 65 Fed. Reg. 47848 (Aug. 4, 2000). 

27 65 Fed. Reg. 81333 (Dec. 26, 2000). 

28 65 Fed. Reg. 58648 (Oct. 2, 2000). 

29 29 U.S.C. § 1002(33) (1994). 

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type of plan that is not a commodity pool.30

D. Proposed Regulatory Reforms

In addition to the regulatory reforms the Commission has already adopted, as discussed 

above, the Commission has pending proposed reforms that will provide relief to futures 

intermediaries. 

1. Notional Funds

In July 1999, the Commission proposed rule amendments to provide that the rate of 

return for partially-funded, or "notionally funded," accounts of CTAs be computed by dividing 

net performance by the nominal account size agreed upon between the CTA and the client to 

establish the client’s level of trading in the CTA’s program.

31 The Commission expects staff 

recommendations concerning this proposal in the near future. 

2. Foreign Futures Broker Registration

In August 1999, the Commission proposed to codify some of the interpretations and 

positions that its staff has taken regarding registration requirements under Part 30 of its rules.32 

The Commission proposed to modify Rule 30.4(a) by clarifying that foreign futures and options 

brokers, including those with U.S. bank branches, are not required to register as FCMs pursuant 

to Rule 30.4, or seek Rule 30.10 relief, if they fall generally into the following categories: (a) 

those that carry customer omnibus accounts for U.S. FCMs; (b) those that carry U.S. affiliate 

accounts that are proprietary to the foreign futures and options broker; and (c) those that carry 

U.S. accounts that are proprietary to a U.S. FCM. In addition, proposed Rule 30.10(a) would 

specify representations that must be made by a foreign futures and options broker that has U.S. 

bank branches in order to obtain Rule 30.10 relief or to come within the registration exception of 

Rule 30.4. Staff expects to make recommendations to the Commission concerning this proposal 

in the near future. 

III. SUMMARY OF COMMENTS, INTERVIEWS, AND PUBLIC HEARING 

COMMENTS

 A. FCMs and IBs 

1. Bunched Orders 

By far the suggestion most often raised by commenters was to change Commission Rule 

1.35, regarding the allocation of bunched orders. In particular, commenters indicated that the 

 

30 65 Fed. Reg. 24127 (Apr. 25, 2000). 

31 64 Fed. Reg. 41843 (Aug. 2, 1999). 

32 64 Fed. Reg. 46613 (Aug. 26, 1999). 

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procedures for post-execution allocation of bunched orders are cumbersome and the 

recordkeeping requirements imposed on FCMs result in unnecessary delays. It was also noted 

that with the increased use of electronic order routing and execution systems, which permit 

account managers to place orders for execution directly, FCMs do not have the ability to monitor 

these transactions prior to execution and clearing. Indeed, FCMs have frequently noted that 

many account managers place orders through multiple FCMs, rendering it impossible for any one 

FCM to assess the overall fairness of allocations. Many commenters indicated that the burden of 

allocating bunched orders and maintaining required records should be placed solely on the 

account managers, as opposed to FCMs. 

The Commission understands this issue is a high priority of the futures industry. 

Changes in order placement and execution caused by the increased use of electronic systems and 

the impact these changes have on the capability of FCMs to make and/or monitor allocations are 

issues which must be examined in considering changes to the currently available methodologies 

for the placement and allocation of bunched orders, or in considering whether to shift certain 

responsibilities from FCMs to account managers. In addition, any proposed changes in this area 

will require increased monitoring by NFA. The Commission also believes that any proposed 

changes to this rule must be considered in light of concerns regarding the possibilities of fraud 

and money laundering. 

In the near future, the Commission will be organizing a roundtable with industry 

representatives to discuss proposed rule changes in this regard. At that time, the Commission 

intends to be able to provide a more complete picture of the form these rule changes might take 

and to discuss more fully any resulting responsibilities that will attach to the respective 

intermediaries. 

2. Denomination of Customer Funds and Location of Depositories

In 1988, the Commission issued Financial and Segregation Interpretation No. 12 ("Interp. 

12"),33 which provides that, under certain conditions, an FCM may deposit segregated funds of 

customers domiciled in the U.S. in foreign depositories. Under Interp. 12, before an FCM may 

deposit a customer's funds offshore, it must obtain a subordination agreement from the customer 

that becomes operative in the event the FCM is placed in bankruptcy or receivership and there 

are insufficient funds available for distribution from the funds held in the particular currency to 

satisfy all customer claims against those funds.34

 

In conducting the study, one of the requests the Commission heard most often was that 

the requirements of Interp. 12 be revised. In particular, commenters indicated that the 

requirement to obtain a subordination agreement should be eliminated. 

33 Financial and Segregation Interpretation No. 12 -- Deposit of Customer Funds in Foreign Depositories, 53 Fed.

Reg. 46911 (Nov. 21, 1988). The document was published in the Federal Register as a Statement of Agency

Interpretation. It was also published in the Commodity Futures Law Reporter at ¶ 7122 together with a series of 

Financial and Segregation Interpretations issued by the Commission's Division of Trading and Markets. 

34 53 Fed. Reg. at 46913. 

- 9 - 
Commission staff have worked closely with the Futures Industry Association ("FIA") and 

the exchanges' Joint Audit Committee ("JAC") to develop rules that would address these 

concerns while continuing to address financial integrity and customer protection concerns 

identified in Interp. 12.35 In the very near future, the Commission expects to consider staff 

recommendations that the Commission propose rules that would modify the conditions under 

which FCMs and derivatives clearing organizations may deposit customer funds in foreign 

depositories and in certain currencies other than U.S. dollars and would address the 

subordination requirement and the bankruptcy distribution issues. 

3. Minimum Capital Requirements

Many commenters stated that they would like the Commission to adopt risk-based capital 

requirements for FCMs. In January 1998, several commodity exchanges in the U.S. adopted a 

risk-based component to their minimum adjusted net capital requirement for members. In 

October 2000, NFA also adopted a risk-based capital requirement. Therefore, virtually all FCMs 

required to be registered with the Commission are subject to risk-based minimum adjusted net 

capital requirements. 

In April 2001, the Division of Trading and Markets of the Commission issued a report 

comparing the risk-based capital requirements of the SROs and the Commission's minimum 

adjusted net capital requirements.36 The report recommended that the Commission replace its 

current minimum capital requirement, based on four percent of the amount of funds required to 

be segregated or set aside for customers, with a risk-based capital requirement proportionate to 

the risk to an FCM of the positions it carries for its customers' and non-customers' accounts. The 

Commission expects to consider proposed rules to implement this concept in the near future. 

One interviewee suggested that FCMs that do not clear trades should be subject to 

reduced minimum capital requirements. Additionally, another interviewee suggested that the 

Commission expand the definition of the term "cover", under Rule 1.17(j), to include the 

circumstances where a person owns the securities underlying a futures contract on a securities 

index. The Commission may consider these items in connection with the rule proposal regarding 

risk-based capital. 

Commission Rule 1.10(b)(2)(iii) requires that financial statements required to be certified 

by a public accountant must be filed in paper form. NFA has indicated its belief that this rule 

should be amended to permit certified statements to be filed electronically. Under Commission 

rules, certain financial reports, requests, and notices must be filed with both the Commission and 

the registrant's designated self-regulatory organization ("DSRO"). NFA has recommended that 

the Commission amend its rules so as to require such reports be filed only with the DSRO. NFA 

noted that the Commission could obtain copies of any report it needed from the DSRO. NFA 

 

35 In December 1997, the Commission requested comments from the public on how to address risks related to

holding segregated funds offshore or in foreign currencies. 62 Fed. Reg. 67841 (Dec. 30, 1997). 

36 A copy of the report may be viewed on the Commission's web site at:

http://www.cftc.gov/files/tm/tmriskbasedcapitalreview42701.pdf. 

- 10 - 
also indicated that the Commission should permit these reports and notifications to be submitted 

electronically. The Commission already permits quarterly financial reports to be filed 

electronically. 

Pursuant to Commission Rule 1.12, if an FCM's adjusted net capital falls below early 

warning levels, it must file monthly financial statements. NFA indicated that, in light of the fact 

that NFA and the designated contract markets require FCMs for which they are the DSRO to file 

financial statements for each month end, virtually all FCMs are required to file monthly financial 

statements regardless of financial condition. NFA suggested that the monthly filing component 

of the early warning requirements of Rule 1.12 is no longer needed and should be eliminated. 

NFA also recommended that it be delegated authority to approve changes in a registrant's fiscal 

year-end, and to grant extensions of time to file financial and annual reports. As part of the rule 

proposal regarding risk-based capital, the Commission will consider the changes suggested by 

NFA. 

4. Foreign Futures and Options

The Commission staff has discussed with commenters and interviewees many issues 

related to the trading of foreign futures and options. Some of these issues also involve the SEC. 

Pursuant to Section 2(a)(1)(E) of the Act, the Commission and the SEC have been 

granted authority to issue rules jointly to permit the offer and sale to U.S. persons of security 

futures products ("SFPs") traded on or subject to the rules of a foreign board of trade. 

Commenters have encouraged the Commission to adopt a regulatory standard defining a 

broad-based security index, pursuant to the authority granted under this section of the Act. On 

May 31, 2002, the Commission and the SEC issued a joint order excluding from the definition of 

the term "narrow-based security index" those security indexes that qualified for the "grandfather" 

exclusion from that definition under Section 1a(25)(B)(v) of the Act. The order is effective as of 

June 21, 2002. 

Additionally, Section 2(a)(1)(F)(ii) of the Act provides that the Act is not intended to 

prohibit an eligible contract participant37 located in the U.S. from purchasing SFPs traded on or 

subject to the rules of a foreign board of trade to the same extent that such persons may be 

authorized to purchase other securities traded on a foreign board of trade. Some commenters 

indicated that the Commission should confirm the right of eligible contract participants located 

in the U.S. to take advantage of this section of the Act. As this issue involves the sale of 

securities, it must be addressed not only by the Commission, but also by the SEC. The 

Commission will continue to work with the SEC to provide U.S. customers with access to 

foreign SFPs. 

Commenters have also encouraged the Commission to work with the SEC to implement 

Section 2(a)(1)(F)(i) of the Act. Section 2(a)(1)(F)(i) permits FCMs to carry SFPs traded on or 

subject to the rules of a foreign board of trade in the accounts of persons located outside the U.S. 

FIA, in particular, noted that it has discussed this matter with the SEC, but has been unsuccessful 

 

37 An eligible contract participant is defined in Section 1a(12) of the Act.

- 11 - 
in having this section implemented. The Commission has also been working with the SEC on 

this issue, among many others involving SFPs, and is hopeful that an agreement will be reached 

to implement this section of the Act. 

Another issue raised relates to the use of non-U.S. exchange terminals located in the U.S. 

Through a series of no-action letters, the Commission's Division of Trading and Markets has 

authorized certain foreign futures exchanges to locate terminals for the execution of transactions 

on those exchanges in the U.S. These no-action positions were subject to the condition that, 

among other things, only transactions in futures contracts that had been approved for trading by 

or on behalf of U.S. customers could be executed through these terminals. Commenters have 

indicated their desire to be permitted to execute transactions through these terminals on behalf of 

non-U.S. customers for non-approved contracts. Because these contracts generally involve 

security index contracts, their trading on these terminals might raise issues that must be jointly 

resolved with the SEC. The Commission intends to work with the SEC to address any such 

issues. 

Some commenters expressed concern about the length of time required under current 

procedures for the approval of broad-based security index products on foreign markets for 

trading by U.S. persons. The Commission endeavors to approve such requests as quickly as 

possible. However, these requests involve issues that are, by their nature, complex and often 

Commission staff require additional information from the requester. The Commission will 

continue to work with requesters to act as efficiently as possible in approving these requests. 

Pursuant to Rule 30.10, the Commission permits persons located outside the U.S. and 

subject to a comparable regulatory structure in the jurisdiction in which they are principally 

located to seek an exemption from certain of the requirements under Part 30 of the Commission's 

rules jurisdiction based upon substituted compliance with the regulatory requirements of the 

foreign. Appendix A to Part 30, "Interpretative Statement With Respect to the Commission's 

Exemptive Authority Under § 30.10 of Its Rules" ("Appendix A"), generally sets forth the 

elements the Commission will evaluate in determining whether a particular regulatory program

may be found to be comparable for purposes of exemptive relief pursuant to Rule 30.10.38 

During the conduct of this study, it was suggested by some commenters that the requirement that 

a country's regulatory system be comparable to the Commission's is no longer relevant and 

impedes the ability of U.S. customers to conduct business on these markets. Additionally, 

commenters noted that regulation of the significant overseas markets has vastly improved since 

implementation of the Commission's policy. 

The Commission, in determining whether to provide exemptive relief pursuant to Rule 

30.10, must balance the desire to permit U.S. customers access to the opportunities of non-U.S. 

markets with its mandate under the Act to protect market participants. While the Commission 

requires a regulatory system to be comparable, it does not require it to be identical. However, 

there are certain protections that must be in place, such as the protection of customer funds from

misapplication, sales practice standards, procedures to audit for compliance with, and to take 

action against those persons who violate, the requirements of the regulatory program, and an 

 

38 52 Fed. Reg. 28990, 29001 (Aug. 5, 1987). 

- 12 - 
information sharing arrangement between the foreign regulator and the Commission to ensure 

access to information as necessary. The Commission believes that these types of protections are 

essential to fulfilling its regulatory mandate of protecting market participants. Accordingly, the 

Commission will continue to look at every application submitted pursuant to Rule 30.10 on a 

case-by-case basis and will grant an exemption where the foreign regulatory scheme adequately 

protects market participants. 

Pursuant to Rule 30.12, an FCM may permit certain authorized customers (generally 

"eligible swap participants" as that term is defined in Commission Rule 35.1(b)(2)) to place 

orders directly with a foreign broker for execution in the FCM's foreign futures and options 

customer omnibus account. Commenters encouraged the Commission to expand the definition 

of customers permitted to directly place orders under Rule 30.12 to include eligible contract 

participants. The Commission will consider making this change. 

Pursuant to Rule 30.8, FCMs registered for purposes of offering foreign futures or 

options must file with NFA quarterly reports containing information as to the number and type of 

foreign futures and options transactions effected. NFA has indicated that it does not use these 

records for any regulatory purpose and that the reports present a recordkeeping burden for it and, 

accordingly, NFA has suggested that the Commission remove the Rule. The Commission will 

consider making the suggested change, along with other appropriate amendments to Part 30, in 

the near future. 

Finally, interviewees requested that the Commission define the permitted investments of

customer funds held by firms offering trading in foreign futures and options as is done under 

Rule 1.25 regarding domestic futures and options. The Commission is studying the types of 

investments that firms offering this type of trading use, and expects to develop a proposal to 

amend Part 30 to clearly define the permitted investment of customer funds. 

5. Permitting FCMs to Carry Multiple Products in Customer Segregated 

Accounts

The Commission has also heard from some commenters that they would like to be 

permitted to hold collateral for non-futures positions along with collateral for futures positions in 

a single customer segregated account. Currently, under Commission rules, an FCM may not 

deposit in the customer segregated account funds and other property of the customer that the 

FCM holds for purposes other than trading in commodity futures or options. As noted in Section 

II, however, the Commission has issued orders that permit customer funds relating to OTC 

derivatives cleared by NYMEX and certain foreign futures cleared by CME to be carried in 

segregation subject to specified safeguards. The Commission recognizes that certain efficiencies 

can be achieved by holding collateral for other types of instruments in the customer segregated 

account. The Commission stands ready to consult with the industry to take additional steps to 

attain these efficiencies in a manner that will not impair the financial integrity of the markets, the

protection of customer funds, or, in the unlikely event of bankruptcy, the equitable distribution of 

funds. In pursuit of these goals, the Commission will also endeavor to confer with other 

financial regulators, such as the SEC, and other interested parties, such as the Securities Investor 

Protection Corporation. 

- 13 - 
 6. Recordkeeping 

Recordkeeping requirements are necessary to ensure compliance with the Act and 

Commission rules. Recordkeeping also can be important in resolving disputes between 

customers and futures intermediaries. The Commission has always attempted to balance the 

regulatory needs for recordkeeping with the needs of intermediaries to operate with minimal 

constraints. To this end, Commission rules permit intermediaries to maintain such records in 

electronic form. Rule 1.31(b) provides certain requirements for maintaining records in electronic 

form, including, among other things, that the system preserves records exclusively in a 

non-rewritable, non-erasable format and automatically verifies the quality and accuracy of the 

storage media recording process. To the extent that certain records are handwritten, they must be 

maintained in hardcopy format. 

Some commenters suggested that recordkeeping requirements imposed by Commission 

rules should be reduced. NFA has indicated that these requirements should be replaced with 

general reliability and accessibility standards requiring intermediaries to "adopt and enforce 

reasonable procedures to keep the books and records from being altered or destroyed."39 The 

Commission will continue to explore ways in which it can meet its regulatory needs for readily 

available records while imposing the least amount of burden on intermediaries. The Commission 

has sought to conform its recordkeeping requirements with those of the SEC to minimize 

burdens on firms dually registered with the Commission and the SEC. With the large number of 

dual registrants and the advent of SFPs, the Commission will continue to work with the SEC in 

this regard. 

7. Pre-Dispute Arbitration

In August 2001, the Commission adopted new Rule 166.5 permitting intermediaries to 

enter into pre-dispute arbitration agreements with customers that are eligible contract participants 

or QEPs. However, while an eligible contract participant may waive the right to seek reparations

and may be required to sign the agreement as a condition of opening an account, a QEP may not 

waive the right to seek reparations and signing the agreement may not be made a condition to 

opening an account. Some commenters have suggested that the Commission broaden this rule to 

permit intermediaries to enter into pre-dispute arbitration agreements with customers that are not 

eligible contract participants or QEPs. The Commission is considering this issue. 

In a comment letter in response to a joint proposed rulemaking with the SEC regarding 

the treatment of customer funds for purposes of trading SFPs,40 NFA stated that security futures 

positions carried in securities accounts should be exempted from Commission Rule 166.5. NFA 

noted that, absent such an exemption, a securities broker-dealer would have to either apply Rule 

166.5 to all transactions in the account, including traditional securities products, or be required to 

 

39 Letter from Thomas W. Sexton, Vice President and General Counsel, NFA, to John C. Lawton, Acting Director, 

Division of Trading and Markets, Commodity Futures Trading Commission (May 29, 2002). 

40 66 Fed. Reg. 50786 (Oct. 4, 2001). 

- 14 - 
have an agreement that treated the transactions in the account differently depending on whether 

they are SFPs or traditional securities transactions. The Commission is considering the NFA's 

comment. 

8. Reparations Program

NFA and several interviewees indicated that the Commission's reparations program

should be eliminated because it was unnecessary and redundant in light of NFA's arbitration 

program. NFA has indicated that, if the reparations program is not eliminated, the Commission 

should delegate administration of the program to NFA. NFA noted that the reparations 

proceedings could continue to be governed by the Commission's Part 12 rules and presided over 

by the current administrative law judges and hearing officers, but Commission staff would not 

need to administer the program. NFA further noted that the infrastructure NFA has developed 

for its arbitration program could be adapted to administer the reparations program. 

The reparations program is specifically provided for under Section 14 of the Act and, 

thus, its elimination would require action by Congress. The Commission may, however, be able 

to use its authority under Section 4(c) of the Act to exempt certain classes of persons or types of 

claims from reparations jurisdiction. In addition, the Commission has authority under Sections 

14(a)(2) and (b) of the Act to modify the scope of the program. The Commission is committed 

to examining the public policy implications of any changes to the reparations program. 

9. Registration

NFA suggested that the Commission remove its Part 3 registration rules in light of the 

fact that the Commission has delegated registration processing to NFA. NFA noted that when it 

wishes to change its registration processing rules, in addition to NFA submitting the rules for 

Commission approval, the Commission must also amend its rules. NFA also indicated its 

support for simplified registration for FCMs and IBs who are currently registered with another 

financial regulator and trade solely for institutional customers.41 NFA also suggested that 

questions on Form 8-R regarding the employment, residential, and educational background of 

applicants be eliminated. NFA noted that it does not use this information to determine an 

applicant's fitness for registration. The delegation of the registration processing functions to 

NFA has been very beneficial in making Commission resources available to be used in other 

areas of the Commission’s regulatory mission. Moreover, the Commission has found NFA to be 

very proficient in its implementation of the registration process and feels confident in NFA's 

ability to ensure that registrants meet the appropriate fitness standards. The Commission looks 

forward to working with NFA in the future and continuing to discuss ways in which the 

registration process can be made more efficient, including the possibility of amending or 

removing some of the Commission's registration processing regulations. 

NFA has also proposed that Commission Rule 166.4, regarding the name used by a 

 

41 The CFMA provides for notice-registration of broker-dealers registered with the SEC as an FCM or IB solely for 

purposes of trading security futures products. See, Section 252(b) of the CFMA (codified at Section 4f(a) of the 

Act); see also, Rule 3.10(a)(3). 

- 15 - 
branch office of a registrant, be amended. Currently, Rule 166.4 requires that each branch office 

of a Commission registrant use the name of the firm of which it is a branch. This requirement is 

meant to ensure that customers are fully aware of the firm with which they are dealing. NFA has 

indicated that it will submit a proposed rulemaking that would permit the use of a name other 

than the registrant's, but does not mislead customers as to the branch office's identity and 

affiliation. The Commission looks forward to receiving NFA's proposal. 

 10. Unsubstantiated Claims

One interviewee suggested that greater regulation might be necessary in some areas. This 

interviewee stated that the CFTC or NFA should ensure that firms do not make claims that they 

cannot or will not fulfill, but that permit them to take business from more conscientious firms. 

These actions tend to bring disrepute on the entire industry. The Commission's staff is 

considering, for example, working with NFA to publicize those firms that are registered as 

FCMs, yet claim not to handle customer funds. The intention would be to discourage persons 

from sending funds to such firms that may not be equipped to handle customer funds. 

11. Disclosure Statements

The Commission heard from some interviewees that the disclosure statements required

under Commission rules should be shortened and simplified. Commission rules require that 

FCMs and IBs, when soliciting retail futures customers, provide a prescribed one-page risk 

disclosure statement about the futures markets and the risks involved in trading in these markets. 

The Commission also permits the use of a generic risk disclosure statement that has also been 

approved for use in the U.K., Ireland, and Singapore. Where the customer is an eligible 

contract participant, a risk disclosure statement is not required before opening an account. 

In a comment letter, NFA indicated its belief that Commission rules should not dictate 

the manner in which disclosures and consents are delivered and acknowledged.42 The National 

Introducing Brokers Association ("NIBA") expressed its agreement with NFA's comment letter 

in this respect. NFA offered to draft a statement of acceptable practices in this area, which the 

Commission will consider. Additionally, the Commission is prepared to work with industry 

representatives on these issues. 

12. Large Trader Reports

Some interviewees indicated their belief that the large trader reporting levels are too low, 

resulting in the collection of substantial amounts of unnecessary information. In March 2000, 

the Commission adopted amendments to its large trader reporting rules.43 The Commission, 

among other things: (a) raised the reporting levels at which a firm and traders must file large 

trader reports in several commodities; (b) removed the requirement that a firm identify the 

number and name of other accounts that the trader controlled or owned that were not included in 

 

42 See, 66 Fed. Reg. at 53513. 

43 65 Fed. Reg. 14452 (Mar. 17, 2000). 

- 16 - 
the special account; and (c) removed the requirement that exchanges provide weekly option 

trader data directly to the Commission. The Commission closely monitors the information that is 

required to be collected as a result of its large trader reporting rules. When the reporting levels 

result in large amounts of information being filed with the Commission that do not enhance the 

Commission's market monitoring responsibilities, the Commission has in the past, and will in the 

future, amend its rules accordingly. 

13. Block Orders

In June 1999, the Commission issued an Advisory on Alternative Execution, or Block 

Trading, Procedures for the Futures Industry.

44 In the Advisory, the Commission announced its 

intention to consider contract market proposals to adopt alternative execution, or block trading, 

procedures for large size or other types of orders on a case-by-case basis under a flexible 

approach to the requirements of the Act and the rules thereunder. The Commission recognized 

that such procedures could use any combination of competitive and “noncompetitive” (that is, 

negotiated) trading practices. Under the Commission’s approach, each contract market retains 

the discretion to permit alternative execution procedures and is able to develop procedures that 

reflect the particular characteristics and needs of its individual markets and market participants. 

At least one interviewee noted that, pursuant to Commission rules, an executable customer order 

must be submitted before any order in the same commodity for a proprietary account.45 In this 

manner, the grouping of proprietary and customer orders in block orders is effectively 

prohibited. It was suggested by the interviewee that the Commission amend its rules so as to 

permit the grouping of proprietary and customer orders for purposes of block orders and require 

that the proprietary trades receive the least desirable fill price. The Commission will consider 

proposing changes to its trading standard rules. 

14. Internalization of Order Flow 

One interviewee suggested that FCMs be permitted to execute customer orders internally, 

matching a customer order with the order of another customer, rather than submitting the order to 

an exchange. It was noted that sending an order to an exchange for execution increases the cost

of trading, which is passed on to customers. However, another interviewee indicated that 

internalization of order flow would run contrary to the goal of a transparent marketplace and 

provide a disincentive to market makers to participate in the markets, reducing liquidity. Section 

5(b)(3) of the Act, as amended by the CFMA, permits FCMs to internalize order flow in 

accordance with contract market rules. The Commission would consider any such rules in the 

context of the contract market's price discovery and transparency obligations. 

15. Transmittal of Orders by Introducing Brokers

Rule 1.57 requires that an IB transmit customer orders to a carrying FCM or a floor 

broker ("FB") if the IB's carrying FCM is the clearing member with respect to the customer 

 

44 64 Fed. Reg. 31195 (June 10, 1999); 64 Fed. Reg. 34851 (June 29, 1999) (corrections). 

45 See, Commission Rule 155.3.

- 17 - 
order. NFA noted that the rule would not permit an IB to transmit an order directly to an

exchange using a terminal or an automated order-routing system ("AORS") provided by the 

exchange or to transmit an order to an FB through an AORS if the carrying FCM is not a 

clearing member of the exchange. NFA suggested that the rule be amended to permit an IB to 

transmit a customer order directly to an FB, executing FCM, or electronic trading system if the 

IB's carrying FCM has authorized the IB to transmit orders in this manner and the carrying FCM 

has systems or procedures to monitor those orders promptly after they are transmitted. The 

Commission will consider this proposal. 

16. Trading Standards 

The Commission's rules pertaining to trading standards require that, among other things, 

if an individual is employed by an FCM or IB, copies of all statements and order tickets must be 

sent to the individual's employer. Commenters suggested that it is unnecessary to require copies 

of the order tickets be provided to the employer, and that copies of the order tickets should be 

provided only if requested by the employer. It is important that an FCM or IB be aware of 

futures trading by its employees to ensure that employees are not trading ahead of customer 

orders or engaging in any other inappropriate activity. To this end, an FCM or IB must be aware 

not only of what trades have been made by its employees, but also of information about these 

trades, such as when they were placed. The Commission will review trading standards and 

consider what procedures would provide sufficient information to alert an FCM or IB to any 

inappropriate trading by its employees. 

In a comment letter submitted regarding the Commission's adoption of rule amendments 

relating to intermediaries, NFA indicated its belief that the Commission's existing rules relating 

to trading standards should be extended to trading on DTEFs regardless of the type of customer. 

NIBA, as part of this study, indicated its agreement with these sentiments. NIBA noted that 

abusive trading practices could occur just as easily on a DTEF as on a designated contract 

market. Commission Rule 155.6(b), adopted in October 2001, sets forth a general standard of 

practice regarding the intermediation of trades by institutional customers at DTEFs. As noted at 

the time the Commission adopted this rule, this approach was taken to strike a balance between 

preserving rules that have been successful in curbing abusive trading practices, and relaxing 

certain specific provisions of existing rules in regard to trading on DTEFs by more sophisticated 

customers.46 As the Commission gains experience with trading standards for trading on 

DTEFs, it may consider changes in this area. 

 

17. FCM Liability for Guaranteed IBs 

An IB may comply with the minimum financial requirements under the Commission's

rules by entering into a guarantee agreement with a registered FCM. It has been suggested by 

some interviewees that the liability of an FCM for the activities of an IB that it guarantees be 

limited. The purpose of permitting an IB to satisfy the minimum financial requirements by way 

of a guarantee agreement is to provide IBs with an alternative to meeting the adjusted net capital 

requirements and to protect the customers of an IB. Customers are protected through a guarantee 

 

46 66 Fed. Reg. at 53514. 

- 18 - 
agreement by ensuring that the IB is not judgment proof and by providing coverage for the 

potential liability of the IB arising from its business operations and customer relations.47 In the 

Federal Register release adopting the final rules, the Commission indicated that an FCM 

entering into a guarantee agreement with an IB is not precluded from entering into a separate 

indemnification agreement with the IB.

48 Additionally, the Commission notes that the United 

States Court of Appeals for the District of Columbia Circuit, in affirming an order of the 

Commission holding an FCM jointly and severally liable for violations of Commission rules 

committed by an IB guaranteed by the FCM, found that the regulation permitting the use of

guarantee agreements to satisfy minimum financial requirements was valid and not subject to 

customer waiver.49

18. Investment of Customer Funds

As noted above, in December 2000, amendments to Rule 1.25 were adopted that 

expanded the permitted investments of customer funds by FCMs and clearing organizations.50 

Among other things, the permitted investments were expanded to include certain money market 

mutual funds. Some interviewees suggested that Rule 1.25 be modified again so as to permit 

investments in bank money market funds. Commission staff is currently considering a proposal 

from an FCM to permit this type of investment of customer funds. Some interviewees stated that 

the two percent haircut on investments in money market mutual funds, which is established by 

the SEC and incorporated by reference in the Commission's rules, is excessive. Commission 

staff is continuing to discuss this issue with SEC staff. 

19. Loans to Customers

Some interviewees indicated that FCMs should be permitted to lend funds to customers, 

at least non-retail customers. Commission Rule 1.30 explicitly permits an FCM to lend its own 

funds to a customer on a secured basis. Commission rules are silent as to lending funds to 

customers on an unsecured basis. However, the FCM must appropriately account for unsecured 

loans to customers under Commission Rule 1.17 when calculating its adjusted net capital and 

take a 100% charge. 

 20. Opting Out of Segregation

Section 5a(f) of the Act provides that a registered DTEF may authorize an FCM to offer 

its customers that are eligible contract participants the right not to have separate accounting and 

segregation for their funds that are carried by the FCM for purposes of trading on a registered 

DTEF. In April 2001, as required by the Act, the Commission approved final rules permitting 

eligible contract participants to opt out of having their funds segregated by an FCM for trades on 

 

47 48 Fed. Reg. 35248, 35264 (Aug. 3, 1983). 

48 Id. 

49 First American Discount Corp. v. Commodity Futures Trading Commission, 22 F.3d 1008 (D.C. Cir. 2000). 

50 65 Fed. Reg. 77993 (Dec. 13, 2000); 65 Fed. Reg. 82270 (Dec. 28, 2000). 

- 19 - 
or through a registered DTEF.51 In conducting this study, the Commission heard from some

commenters the suggestion that the Commission permit eligible contract participants to opt out 

of having their funds segregated by an FCM for trades on any board of trade, not just DTEFs. 

As noted above, the Act only provides for permitting eligible contract participants to opt out of

having their funds segregated for trades on or through a registered DTEF. The Commission 

will consider this issue. 

21. Agricultural Trade Options

In December 2000, the Commission proposed to amend Rule 32.13(g) so as to make the 

exemption from its trade option rule consistent with a broader exemption that was separately 

proposed for adoption regarding certain bilateral transactions.52 Commenters encouraged the 

Commission to adopt the proposed amendments to Rule 32.13(g). The Commission notes, 

however, that the amendment was proposed in light of amendments to Part 35 that were 

subsequently withdrawn upon passage of the CFMA.53 Accordingly, the proposed amendments 

to Rule 32.13(g) were never adopted. The Commission will consider whether similar 

amendments should be proposed in light of amendments to the Act by the CFMA. 

B. CPOs and CTAs 

 1. CPO Registration 

The Managed Funds Association ("MFA") has proposed that the Commission adopt an 

exemption from CPO registration for operators of funds offered solely to certain QEPs or 

accredited investors in private transactions exempt from registration under the Securities Act of 

1933. The proposed exemption is intended, in part, to address the reluctance of operators of 

collective investment vehicles to use futures products due to the perceived burden of registration 

and regulation by NFA and the Commission. Concerns about registration included: testing 

requirements; fingerprinting; oversight by NFA; prescriptive requirements for financial reports; 

and the possibility that existing regulations that currently may not be seen as burdensome may be 

changed in the future. 

 

Commenters were generally in favor of such an exemption. Current Rule 4.7, as noted 

above, provides an exemption from certain disclosure, reporting, and recordkeeping 

requirements for CPOs whose participants are defined as QEPs. Some interviewees suggested 

that CPOs currently operating pools pursuant to Rule 4.7 were likely to remain in that status and 

not claim the exemption from registration proposed by MFA. There are alternatives that would 

address some of the same concerns, such as: (a) exemption from CPO registration based on a de 

minimis level of futures trading; (b) expanding the relief available under Rule 4.7; and (c) 

providing relief from some or all of the testing requirements for operators of entities whose 

 

51 66 Fed. Reg. 20740 (Apr. 25, 2001). 

52 65 Fed. Reg. 77838 (Dec. 13, 2000). 

53 See, 65 Fed. Reg. 82272 (Dec. 28, 2000). 

- 20 - 
futures activities are limited. NFA has previously proposed that the Commission adopt an 

exemption from CPO registration for operators of pools engaging in a de minimis amount of 

futures trading and an exemption from registration as a CTA to persons who provide advice 

solely to these pools. The Commission expects to review staff recommendations in this area. 

2. Disclosure, Reporting, and Recordkeeping Requirements 

Some of the interviewees stated that many of the specific disclosure requirements under 

Part 4 are overly prescriptive, and that they supported moving toward more of a materiality 

standard. They expressed concern that literal compliance with the rules creates a safe harbor and 

may mitigate any incentive for qualitative efforts to provide information that is important to 

clients. There was some agreement, however, that performance standards should remain, as they 

permit comparability over time among firms. Moreover, other interviewees expressed a belief 

that specific disclosure requirements and concrete guidance are helpful, especially for smaller 

firms. Most supported elimination of boilerplate statements that Commission rules currently 

require to be presented in capital letters and boldface type. The Commission will consider 

amendments to these rules. 

Some interviewees noted a discrepancy between the periodic reporting requirements 

applicable to different types of pools. Pools exempt under Rule 4.7 that do not issue units do not 

have the option that exists in Rule 4.22(a) to disclose, as an alternative, the value of the 

participant’s interest in the pool. A rule change to address this issue could be included as part of 

a related rulemaking, mentioned above. 

Another suggestion by commenters was to eliminate from the recordkeeping provisions 

in Rule 4.23 for CPOs, and Rule 4.33 for CTAs, the requirement that books and records be 

maintained at the firm’s main business office, with appropriate alternate means of permitting 

Commission and SRO access for auditing and investigative purposes. In addition, a 

recommendation was made to amend Rule 4.2 to permit electronic filing of notices of eligibility

for various exemptions available under Part 4. The Commission will consider amendments to 

these rules. 

3. Timing of Disclosure Document Delivery 

 

Pursuant to Commission rules, a CPO or CTA must provide a disclosure document to a 

prospective participant or client before directly or indirectly soliciting such prospective 

participant or client. Several commenters expressed concern that Commission requirements 

regarding when a disclosure document must be given are too restrictive. CPOs and CTAs may 

want to give out some preliminary information to determine whether there is interest in an 

offering before going forward with a disclosure document. Commenters suggested that the Part 

4 rules dealing with provision of a disclosure document (Rule 4.21 for CPOs and Rule 4.31 for 

CTAs) might be relaxed to permit some information or materials to be disseminated prior to 

distributing the disclosure document. The disclosure document would continue to be provided 

prior to accepting any funds from a participant or entering into an agreement with a client. As 

mentioned in Section II above, the Commission provided some relief in this regard when it 

issued the profile disclosure rules. The Commission will consider additional steps. 

- 21 - 
4. Interpretation of "Person" under Section 4m(1) of the Act 

Section 4m(1) of the Act provides that the registration requirements do not apply to a 

CTA who has not advised more than 15 persons in the past 12 months and does not hold himself 

out generally to the public as a CTA. For the purpose of calculating the total number of clients a 

CTA advises, where the client is other than a natural person, the staff has generally “looked 

through” the client and counted the individual participants therein. Two interviewees felt that 

the Commission should conform its interpretation with that of the SEC, which, in applying a 

similar provision of the Investment Advisers Act, counts each collective entity as one person. 

Commission staff understands that there has been discussion in the securities industry that SEC 

may reconsider this interpretation. The Commission will consider changing the current 

interpretation. 

5. Codification of Disclosure and Reporting Relief for Master-Feeder Funds 

Commenters also noted that codification of relief may be warranted due to the number of 

virtually identical requests for relief from disclosure and reporting requirements for situations, 

known as “master-feeder funds,” in which a CPO operates a “master fund” whose only 

participants are one or more “feeder fund(s).” Rules 4.21 and 4.22 require that a CPO provide 

participants with certain disclosure documents and periodic and annual reports. Therefore, the 

CPO of the master fund would be required to provide disclosure documents, periodic reports, and 

an annual report to itself as the CPO of the feeder fund(s), absent the relief that the Division has 

generally provided in response to CPOs’ requests. The Commission will consider amendments 

to address these issues. 

6. Schedule of Investments in Commodity Pool Annual Reports 

 

Since 1995, non-public investment entities have been required to include a schedule of 

investments in their annual reports as specified by AICPA Statement of Position (SOP) 95-2, 

Financial Reporting by Nonpublic Investment Partnerships (the Guide). Investment partnerships 

that were commodity pools subject to regulation under the Act were exempted from this 

requirement. A recent amendment to SOP 95-2 has revoked that exemption.54 The amended 

SOP 95-2 is effective for commodity pools’ financial statements issued for periods ending after 

December 15, 2001. SOP 95-2 provides that investments in the securities of a single issuer 

should be disclosed if they exceed five percent of a pool’s net asset value. CPOs have objected 

to this requirement for a number of reasons, primarily on the grounds that it results in providing 

trading strategies to competitors and compromising the private nature of investee funds. Any 

changes regarding SOP 95-2 would have to be made by AICPA, and Commission will work with 

AICPA and registrants to this end. 

54 AICPA SOP 01-1, Amendment to Scope of Statement of Position 95-2, Financial Reporting by Nonpublic 

Investment Partnerships. 

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7. Application of Anti-Money Laundering Requirements to CPOs and CTAs 

Interviewees had some questions about the manner in which anti-money laundering 

provisions of the USA PATRIOT Act would be applied to CPOs and CTAs. On April 24, 2002, 

the Treasury Department deferred the application of section 352 of the USA PATRIOT Act 

(requiring anti-money laundering programs) to CPOs and CTAs for up to six months. The 

Commission will continue to address these issues with other federal financial regulatory agencies

and through its participation in the President’s Working Group on Financial Markets. 

8. Coordination Among Agencies 

Some commenters indicated a desire for more coordination between the Commission and 

the SEC on issues such as definitions of sophisticated persons, disclosure documents and reports 

for public pools, and oversight of firms’ operations. With respect to publicly offered commodity 

pools, an additional concern was raised regarding regulation by the states, which may act as an 

entry barrier for public pools. One commenter suggested certain legislative changes that he 

believed Congress should adopt. In particular, in noting the often overlapping regulatory 

schemes of the Commission, the SEC, and the states where CPOs and CTAs operate, the 

commenter suggested that Congress amend the Securities Exchange Act of 1933 to provide that 

securities issued by commodity pools be subjected to review by a single regulator. 

Regarding the overlapping jurisdictions of the Commission and the SEC over CPOs and 

CTAs, the Commission will soon host a roundtable that includes representatives from the 

managed funds industry, as well as representatives of the SEC, to discuss, among other things, 

ways in which this regulatory environment may be made less confusing and burdensome. 

Possible topics of discussion might include further conforming the rules of the Commission and 

the SEC and exempting certain persons from agency rules if they are otherwise regulated. 

C. Other Issues 

In addition to the issues noted above, many commenters also raised issues that, although 

perhaps outside the scope of the study required by the CFMA, are important to maintaining and 

increasing the competitiveness of the futures markets and industry. In particular, commenters 

noted three issues: fungibility of products, common clearing, and technology. 

Fungibility of products across exchanges would permit a market participant to enter into 

a contract on one exchange and offset the position on another exchange. Fungibility could help 

to promote liquidity in specific futures products. It was noted that this liquidity might alleviate 

some of the hesitancy of market participants to enter into a contract on a new exchange because 

they would have some expectation that the contract could be offset without difficulty. On the 

other hand, the development of new products can require a significant expenditure of capital. 

The current system tends to reward those who create successful new products. Mandating 

fungibility could decrease the potential reward and therefore decrease the incentive for 

innovation. 

Another topic that has been raised is the concept of common clearing. Common clearing 

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would provide for clearing organizations to be independent of the exchanges whose contracts 

they clear. In this regard, for example, a futures contract purchased on the Chicago Mercantile 

Exchange could be cleared through the Board of Trade Clearing Corporation, instead of only 

being permitted to clear through the Chicago Mercantile Exchange Clearing House, as is 

currently required. It was noted that common clearing could reduce the costs to FCMs and their 

customers and permit them to better manage their risks across exchanges. Commenters 

suggested that common clearing could work to heighten competition between exchanges and 

clearing organizations. However, mandating common clearing would have the effect of 

subjecting clearing organizations to one another's credit risk involuntarily. 

 

The Act and Commission rules do not prevent the adoption of fungibility or common 

clearing. Nor do they require that the Commission mandate them. As stated in Section 3(b) of 

the Act, one of the purposes of the Act, and by extension one of the functions of the 

Commission, is to promote competition among boards of trade, markets, and market participants. 

As it always has in the past, the Commission will continue to work with the entire futures 

industry to promote and facilitate a competitive environment that will best serve the public 

interest. In this regard, the Commission will organize a roundtable to discuss the elements of an 

appropriate oversight program in respect of derivatives clearing organizations, a new registration 

category. At this roundtable, the Commission also intends to discuss common clearing and 

fungibility of products, their role in encouraging competition in the futures market, and the 

Commission's function in helping to facilitate greater competition. 

The Commission's Technology Advisory Committee -- a committee composed of 

industry participants -- recently forwarded to the Commission for its consideration a report 

entitled Recommendations for Standardization of Protocol and Content of Order Flow Data.

55 

The report recommended standardization of content by June 30, 2003, and the voluntary 

development of best practices for protocol at about the same time. NFA endorsed the 

recommendations and encouraged the Commission to adopt them within the report's suggested 

timeframes. It was noted by FIA that, while it supports the development of technology 

protocols, it believes that mandating a specific date as called for in the report will impose 

significant costs on intermediaries. Additionally, FIA noted that this comes at a time when the 

futures industry is already under significant financial challenges due to the costs involved in 

increased technology infrastructure requirements, the implementation of SFP trading, and the 

increased concerns over disaster recovery and business continuity procedures in the wake of the 

terrorist attacks of September 11. The Commission has always encouraged and attempted to 

facilitate the use of technological advancements in the futures industry so as to increase the 

efficiency and competitiveness of the markets, while maintaining essential participant and public 

protections. The Commission will continue to work with the industry to ensure that the latest 

technologies are used in a manner that is beneficial to the markets and intermediaries while 

imposing minimal burdens, yet maintaining the necessary protections for the public and market 

participants.

It was also suggested that the Commission work to establish uniform international 

55 A copy of the report may be viewed on the Commission's web site at:

http://www.cftc.gov/files/ac/acrecommstandardreport.pdf. 

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standards regarding the use of the Internet by futures intermediaries. The Commission has a long 

history of working with foreign regulators to help foster the growing internationalization of the 

futures and options industry and will continue to do so. 

IV. CONCLUSIONS

A. Core Principles 

As noted above, the commenters and interviewees generally were not in favor of 

replacing the provisions of the Act and rules thereunder with core principles. Commenters noted 

that such an approach is not viable in some areas, particularly rules regarding financial 

requirements. Additionally, commenters indicated that this approach might result in legal 

uncertainty, making it more difficult for registrants to identify what steps are necessary to remain 

in compliance with the Act. 

B. Commission Rules

While commenters did not advocate the wholesale replacement of existing Commission 

rules with core principles, they did note specific rules or sets of rules that they believed should be 

modified or eliminated. The Commission will consider changes to rules in the specific areas 

indicated by commenters. As noted at various places in the report, the Commission has begun 

work in a number of these areas. 

C. Delegation of Regulatory Functions to a Registered Futures Association

The Commission has had a long and mutually beneficial relationship with NFA, currently 

the only registered futures association. The Commission has delegated to NFA many regulatory 

functions, such as the registration of futures intermediaries and the review of CPO and CTA 

disclosure documents. The Commission has found that NFA exercises its authority pursuant to 

these delegations in a proficient manner and the Commission remains confident that it will 

continue to do so in the future. The Commission will examine the appropriate role for a 

registered futures association in reviewing allocation of bunched orders, developing an option 

disclosure statement, and possibly in the administration of reparations proceedings. In addition 

to the administration of reparations proceedings, NFA also suggested a delegation of authority to 

approve changes in fiscal year-end and to grant extensions of time to file financial and annual 

reports. 

D. Moving Forward

The Commission appreciates the assistance of the many individuals who contributed to 

the study. They provided many valuable insights and raised a number of issues worthy of further 

analysis. The Commission considers this report to be a first step in identifying areas of the 

futures regulatory framework that must be reassessed in light of the current realities of the 

futures industry. To further the process of implementing some of the changes discussed in this 

report, the Commission will be organizing and hosting a series of roundtables with industry 

representatives. Specifically, the Commission will, in the coming months, hold three roundtables

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to discuss: (1) Rule changes regarding the allocation of bunched orders; (2) the issue of 

overlapping jurisdiction faced by members of the managed funds industry; and (3) the elements 

of an appropriate oversight program in respect of derivatives clearing organizations, a new 

registration category, as well as common clearing, fungibility of products, and the Commission's

function in helping to facilitate greater competition. The Commission will provide 

intermediaries with the flexibility they need to meet their customer and business needs while 

maintaining the mandate of the Act to promote competition, to ensure the integrity of the 

markets, and to protect market participants and the public. 

The Commission, along with the futures industry, must move forward in not only 

considering the changes suggested through the study, but in continually reassessing the 

applicability of the Commission's rules and its regulatory role to permit continued growth and 

expansion of the industry in a fair and competitive manner. 

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Appendix 

List of Interviewees, Commenters, and Hearing Participants 

FCMs and IBs

ADM Investor Services, Inc. 

Cargill Investor Services, Inc. 

Gelber Group, LLC 

Goldman Sachs & Co. 

Infinity Brokerage 

J.P. Morgan Futures Inc.

Man Financial, Inc. 

Marquette Electronic Brokerage, LLC 

Zaner and Company 

Morgan Stanley Dean Witter & Co., Inc. 

Refco, LLC 

CPOs and CTAs

Caxton Corporation 

Commonfund Asset Management Company, Inc 

John W. Henry & Company Inc. 

MLIM Alternative Strategies, LLC 

Millburn Ridgefield Corporation 

Renaissance Technologies Corp. 

Industry Organizations

Futures Industry Association 

Managed Funds Association 

National Futures Association 

National Introducing Brokers Association 

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Attorneys and Accountants

The Association of the Bar of New York City, Committee on Futures Regulation 

Arthur F. Bell, Jr., Arthur F. Bell, Jr. & Associates

Phillip McBride Johnson, Esq. 

Leo Melamed, Melamed and Associates 

Paul B. Uhlenhop, Esq., Lawrence, Saunders, Kamin & Uhlenhop 

Emily M. Zeigler, Esq., Willkie Farr & Gallagher 

Exchanges and Clearing Organizations

Board of Trade Clearing Corporation 

Chicago Board of Trade 

Chicago Mercantile Exchange 

New York Board of Trade 

New York Clearing Corporation 

New York Mercantile Exchange 

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