The Pulse ofFinance 

Received CFTC 

Records Section 

vj n/ oq 

BY E-MAIL AND OVERNIGHT MAIL 

August 17, 2009 

Mr. David A. Stawick 

Secretary to the Commission 

Commodity Futures Trading Commission 

Three Lafayette Centre 

115 5 21st Street, N. W. 

Washington, D.C. 20581 

secretary@cftc. gov 

C.F.T.C. 

OFFICE OF THE SECRETARIAT 

~009 AUG 18 Arl 10 50 

-----.-__.,._., 

or-r 

([) 

COMMENT 

Re: Commodity Futures and Trading Commission ("CFTC") Rule Proposal Relating 

to the Account Ownership and Control Report, R1N 3038-AC63 ("Proposal"). 

Dear Mr. Stawick: 

Newedge USA, LLC ("Newedge USA, LLC") is pleased to submit this comment letter 

on behalf of itself and its parent company, Newedge Group, relating to the proposal by 

the Commodity Futures Trading Commission ("CFTC") to collect certain account 

ownership and control data from designated contract markets and other registered entities 

via an Ownership and Control Report ("OCR"). 

As an initial matter, Newedge clearly recognizes the importance for the CFTC to gather 

and analyze trade information in order to carry out its mandate of monitoring the US 

futures markets and enforcing applicable rules and regulations. Indeed, it is without 

question that the CFTC plays a critical role in regulating the US futures markets and thus, 

as it notes in the Proposal, must have "the information necessary to conduct effective 

oversight, ensure market integrity, and protect customers from fraud and abuse." That 

being said, we believe that: (a) the Proposal, although directed at exchanges, will most 

significantly impact futures commission merchants ("FCMs"); (b) the Proposal will in 

fact result in an inordinate amount of work and expense for many, if not most FCMs; (c) 

the benefits to be gained by the Proposal do not justify this substantial burden, and; (d) 

there are more cost-effective ways of enhancing the Staffs monitoring abilities. 

Newedge USA, LLC 

630 Fifth Avenue 

Suite 500 

New York, NY 10111 

TEL 646 557 9000 

FAX 646 557 8480 

A subsidiary of Newedge Group 

Member SIPC and FINRA www.newedgegroup.com 
Specifically, the OCR will require FCMs to obtain certain account information they do 

not possess, convert other account information they currently maintain in paper format to 

electronic format, and cross-reference large amounts of account information they 

currently do not reconcile on an across-the-board basis. For FCMs that provide a fullservice offering- i.e., execute and clear trades, have US and non-US customers, facilitate 

multiple trading systems, maintain accounts for customers with different traders and/or 

commodity trading advisors ("CT A") and seek to conduct adequate surveillance of all 

these functions - these will be difficult and time-consuming tasks. And, when compared 

to this significant undertaking, we believe the benefits to be gained by the Staff through 

the OCR - essentially integrating two data repositories already maintained by the CFTC 

(i.e., the large trader reports and the exchange trade registers)- appear to be, in our view, 

relatively small. Moreover, all these additional burdens are being proposed during a time 

when FCM profitability is being severely challenged by the costs associated with the 

potential need to raise additional capital, 1 and a decline in revenue because of reduced 

exchange volumes and very low interest rates. 

We believe some effective ways to enhance the Staffs ability to monitor markets on a 

more real-time basis without unduly burdening FCMs could include: integrating the 

trade register and large trader repositories at the CFTC; requiring account ownership and 

control information to be included by traders on front-end systems at the time of order 

entry and execution, and; petitioning the US Government for more investigative 

resources and staffing. 

BACKGROUND 

Newedge, which is one of the world's largest brokerage organizations, offers its 

customers clearing and execution facilities across multiple asset classes including futures, 

securities (fixed income and equity), options, FX and various OTC instruments. 

"Newedge" refers to Newedge Group, a 50%-50% joint venture between Calyon (part of 

Credit Agricole) and Societe Generale, headquartered in Paris, France, and all of its 

worldwide branches, subsidiaries and other units. Newedge maintains offices in over 15 

countries, and is a member of over 80 exchanges worldwide. Newedge estimates that its 

customers- who are principally institutional- execute 6.4 million lots and clear 7.0 

million lots, globally, on a daily basis. 2 

Newedge USA is one ofthe leading broker-dealer ("BD")/FCMs in the US. Indeed, 

according to CFTC statistics, Newedge USA currently holds the largest pool of customer 

"segregated" and "secured" assets of all US-based FCMs.3 Newedge USA's primary 

function is that of a broker- i.e., to execute and clear customer transactions across 

multiple asset classes on either an agency or riskless principal basis. Newedge USA 

conducts only a very limited amount of proprietary trading, and then generally only to 

1 See CFTC's Proposed Adjusted Net Capital Requirements for FCMs and Introducing Brokers, 17 CFR 

Part 1, RIN 3038-AC66. 2 As ofDecember 31,2008. 3 As of June 2009. 

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hedge positions acquired through customer facilitation. As a result, Newedge USA does 

not generally hold large positions in inventory. 

DISCUSSION 

A. Implementation of the OCR Will Impose a Significant Burden on FCMs. 

As noted, it is the FCMs, rather than the exchanges, that would to be most significantly 

impacted by the OCR proposal, since it is the FCMs that face the account owners and 

controllers primarily, and thus, have the most direct access to the information requested. 

And, as further noted, the OCR will impose a significant burden on many, if not most 

FCMs by, among other things, requiring them to obtain account information they do not 

possess, convert account information they maintain in paper format to electronic format, 

and reconcile a large amount of account information that is not currently cross-referenced 

on an across-the-board basis.4 

1. The OCR Will Require Many FCMs to Obtain Information They Do Not 

Currently Possess. 

At this time, FCMs are not required to obtain the social security numbers or tax 

identification numbers of the CT As that trade their clients' accounts unless the FCM will 

be making direct payments to a CT A. Consequently, many FCMs do not keep records of 

such information. However, since this information is required by the OCR, such FCMs 

would be required to obtain the information which, for those that conduct business with 

numerous CT As, would be a time-consuming task. 5 

Moreover, it is our understanding that while many FCMs maintain current Form 102 

information for large reporting customers, this information is generally updated on a 

manual and "as needed" basis such as in response to a regulatory inquiry. The OCR, 

however, would require FCMs to keep all such information continuously current. 

2. The OCR Will Require Many FCMs to Convert Information Recorded on Paper 

to Electronic Format. 

Many FCMs, including Newedge, maintain Form 102 information in paper format. 

Because the OCR will apparently require FCMs to transmit such information to the 

exchanges electronically, many FCMs will be required to convert such information to an 

automated format. In this regard, it should be noted that large FCMs, such as Newedge, 

can receive approximately 150-200 Form 102 requests each month. Converting this 

4 The OCR would require FCMs to provide to the exchanges a large variety of information, including: 

trading account number; name and address oftrading account owner; the account controllers' name, 

address and CTA number; date on which the trading account was assigned to its current controllers; 

indication if account is reportable; indication if account is an omnibus account; name of the executing firm 

trading the account; name of the clearing firm and its unique identifier, and; the last four digits of the social 

security number or taxpayer ID of the trading account's owners and controllers. 5 We also note that most off-shore CTAs and account owners- which can make up a relatively large 

percentage of many FCMs' business- do not have social security or tax identification numbers. 

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information to an automated format will be a time-consuming and expensive task for 

many FCMs.6 

In addition, some FCMs, including Newedge, maintain certain other account information 

required under the OCR- but not generally included on Form 1 02s- in paper format, 

such as: the date or dates on which a trading account was assigned to its controller(s); the 

account controller's CT A number; indication of whether the account is a reportable 

account, and; the name of the executing firm for the trading account and its unique 

identifier. Again, converting such information to a form capable of electronic 

transmission would be a significant and expensive undertaking for many FCMs. 7 

3. The OCR Will Require FCMs to Reconcile Information That Is Not Currently 

Cross-Referenced on an Across-The-Board Basis. 

While FCMs generally maintain trade reporting numbers for individual accounts as well 

as identification numbers for the individuals and systems trading such accounts, it is our 

understanding that many FCMs do not cross-reference or reconcile such data on an 

across-the-board basis. Rather, such information generally is reconciled only on an "as 

needed'' basis, such as in response to a regulatory inquiry. For example, when an 

executing firm transmits trade information to its clearing firm, it generally does not 

provide data relating to trader or system IDs. The clearing FCM, however, may obtain 

such information through a separate clearing or trade file from the relevant exchanges. 

Consequently, many FCMs maintain trade reporting information and trader/system IDs in 

different locations. In order to comply with the OCR, however, FCMs would be required 

to cross-reference, in electronic format, each trader and system identification number 

with each trade reporting number. 8 For firms that do not currently reconcile such 

information, creating a cross-reference table to do so - and keeping such information 

current - will be a difficult and time-consuming task (particularly since account 

controllers accessing markets directly are able to establish or change their trader 

identification numbers on their own and sometimes neglect to advise the FCM of such 

new numbers). 

6 Further, to the extent the Staff believes that replacement of the Form 102 process by the OCR may save 

FCMs time and effort, we note that considering Form 102 information would be required by the OCR for 

all accounts- as opposed to just those reaching the reporting threshold- such a replacement is not likely 

result in a significant savings of time and resources for FCMs. 7 We also note that obtaining and transmitting in electronic format sensitive information such as account 

owner and controller social security numbers and tax identification numbers will put new and increased 

information security burdens on FCMs, which will be responsible for ensuring the confidentiality of such 

information. 

8 We note in this regard that the trader identification number does not necessarily correspond to the account 

owner or even account controller; it is simply indicative of the individual inputting the trade into the frontend trading system. 

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4. The Significant Costs Associated with the Proposal on FCMs Could 

Result in a Reduction ofthe Number ofFCMs in the Marketplace. 

As noted above, the costs associated with the Proposal on FCMs would be significant and 

- coming at a time when FCM profitability is down substantially as a result of, among 

other things, lowered trading volume and interest rates- could, we believe, cause some 

FCMs to go out of business, merge into more profitable firms or reduce the number and 

variety of business activities they perform. Consequently, the Proposal, in our view, 

could have an anticompetitive impact on the industry and exacerbate the current trend 

toward consolidation among FCMs. Indeed, as the Staff is aware, there has been a 

significant trend toward consolidation among FCMs in the US over the past ten years. In 

its pending proposal regarding a capital increase for FCMs, the CFTC notes that there 

were 255 FCMs in the US as of August 31, 1995, but only 134 FCMs as of December 31, 

2008. Further, as the Staff is aware, a number of the largest FCMs have merged in recent 

years, including Fimat USA, LLC and Calyon Financial, Inc., which has resulted in 

approximately 80% of all global segregated customer funds being held by only six FCMs. 

The time, expense and effort that would have to be expended by FCMs in complying with 

the OCR cannot be minimized. Indeed, for some smaller or less profitable FCMs, 

implementation of the Proposal could be the final factor in their determination not to stay 

in business. 

As the Staff is aware, the CFTC must consider the potential anticompetitive impact when 

promulgating rules, and "take the least anticompetitive means of achieving [its] 

objectives." See Section 15(b) ofthe Commodity Exchange Act ("[t]he Commission 

shall take into consideration the public interest to be protected by the antitrust laws and 

endeavor to take the least anti competitive means of achieving the objectives of the Act 

..... in issuing any order or adopting any Commission rule") and Section 15(a) of the 

CEA ("Before promulgating a regulation under this Act ..... the Commission shall 

consider the rule's impact on the "competitiveness ..... of futures markets"). 

5. Answers to Open Issues Could Further Impact the Burden on FCMs. 

We believe there are a relatively large number of open issues and questions relating to the 

OCR the answers to which could impact the burden on FCMs in complying with the 

directive. For example: 

• who will create the software designed to consolidate and store OCR 

information - the CFTC, the exchanges, outside vendors or FCMs 

themselves? 

• will the OCR replace Form 102 requests and, if not, will Form 102s be 

processed through the OCR or separately? 

• will the OCR file replace the current trading file submitted by exchanges 

to FCMs for purposes of, among other things, internal surveillance 

systems? 

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• how often would OCR information need to be updated? 

• how often would OCR information need to be transmitted to the 

exchanges? 

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will the OCR be standardized across the industry or will it be conducted 

on an exchange-by-exchange basis? (in this regard, we note that currently 

the various exchange data gathering and dissemination systems are not 

standardized, and to create an effective OCR, we believe they would have 

to be which could require significant effort on the part of the exchanges 

and FCMs) 

how much time will FCMs be given to obtain information they currently 

do not collect but is required by the OCR? 

will non-clearing FCMs or introducing brokers be required to report 

information to the OCR and, if not, what type of responsibilities will such 

entities have under the OCR? 

in a give-up arrangement, which FCM (executing or clearing) will be 

responsible for the submission of required data to the OCR, and if it is the 

clearing firm's responsibility, how can it be assured that the clearing firm 

will receive the required information from the executing firm in an 

appropriate form on a timely basis? 

will FCMs be required to transmit such information or simply make it 

available for exchanges and the Staff to access in non-sorted format? 

what recourse will FCMs have against account owners and controllers that 

do not provide updated information either voluntarily or upon request? 

will exchanges and/or the CFTC be willing to bear some of the related 

expenses through reduced membership and trading fees and costs? 

what information security measures can the CFTC or the exchanges 

provide to ensure the confidentiality of sensitive account owner and 

controller information submitted by FCMs in complying with the OCR? 

can the CFTC ensure that exchanges will not use sensitive account 

ownership or controller information for their own purposes? 

We suggest that the CFTC create an industry working group - which would include 

representatives from various FCMs, introducing brokers, back-office vendors and frontend vendors -to reach practical answers to these questions. 

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B. The Benefits to be Gained by Implementation of the OCR do Not, in Our View, 

Outweigh the Burdens Imposed on FCMs. 

As noted above, we believe that implementation of the OCR will impose substantial 

burdens on many FCMs. The question then becomes whether the benefits to be gained 

by the Staff in implementing the OCR outweigh those burdens. We respectfully believe 

that they do not. As an initial matter, the Staff is already in possession of- or can gain 

access relatively quickly to- most of the important account and trade relating to large 

trades- i.e., those that have the most impact on markets, customers and registrants.9 

Indeed, as the Staff concedes, it is able currently to obtain such information through 

exchange trade registers and subsequent manual Form 102 requests conducted on a caseby-case basis. 10 And, while the Form 102 process may take several days to complete: (a) 

FCMs are obliged to provide the Staff with such information on a timely basis, and (b) 

the Staff does not need to follow-up on all trades, just those that are problematic. We 

question the benefits to be gained by obtaining Form 102-type information for small 

trades and/or inactive accounts, and certainly do not believe any such benefits justify the 

burdens imposed on FCMs in providing this information. 

Indeed, even the Securities and Exchange Commission ("SEC") - which is charged with 

monitoring a much large number of registrants and trades - does not have the ability to 

investigate all trades on a real-time basis. Rather, the SEC staff is generally relegated to 

identifying problematic trades or positions and following up on such activities with 

"bluesheet" requests through which it seeks to match the trading activity with account 

ownership. We also note this fact in light of the SEC's and the CFTC's current mandate 

to harmonize their requirements, rules and procedures where possible in order to provide 

registrants and customers with a more clear-cut and understandable regulatory 

framework. Maintaining the consistency of the manner in which the two agencies gather 

information from registrants in connection with the investigation of problematic trades -

i.e., through an initial assessment and subsequent review via a Form 102 or bluesheet 

request - would appear to be an important step toward that goal. 

In short, we do not believe the US futures markets have been subject to the types of largescale frauds, manipulations or disruptions over the past twenty-five years or so- even 

with the onset of electronic trading and the minimization of the open outcry market- that 

would justify or necessitate the large-scale data assembly and transmission changes 

contemplated by the OCR. In other words, we believe that the Staffs current system of 

gathering and analyzing potential information is working, even during times of market 

volatility and substantial electronic trading. Thus, while we acknowledge that 

implementation of the OCR would most likely "speed up" the Staffs ability to analyze 

certain trades, we do not believe the CFTC has demonstrated an investigative or 

9 As noted in the Proposal, "[i]n many cases, the Commission already receives the information it requires 

for effective regulation, including large trader reports for market surveillance and exchange trade registers 

for trade practice surveillance ..... [and] [t]he detail and depth of the regulatory data available to the 

Commission is substantial." 10 As noted in the Proposal, a "case-by-case manual inquiry [into problematic trading] is possible" by the 

Staff utilizing the CFTC's current information sources and procedures. 

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enforcement need- i.e., "stated a case"- that justifies the burden to be imposed on 

FCMs. 11 Indeed, based on the Proposal, it does not appear that the CFTC has considered 

the burden that would be imposed on FCMs other than to a relatively nominal extent. 12 

C. There Appear to Be Other Means of Enhancing the Staffs Surveillance 

Capabilities That Would be Less Burdensome on FCMs. 

We believe there are a number of other means to enhance the Staffs surveillance 

capabilities that are less burdensome on FCMs. We set forth some of these possibilities 

below. 

• The CFTC could seek to reconcile its Integrated Surveillance System 

("ISS") (large trade information) and Trade Surveillance System ("TSS") 

(trade register information) independent of an OCR process. The CFTC 

notes in its Proposal that one of the key goals of the OCR is to reconcile 

the ISS with the TSS ("[o]ne valuable benefit ofthe OCR is that it will 

effectively integrate these two primary systems"). While we can see the 

importance of integrating these two systems - since one contains trade 

information and the other contains owner account and controller 

information- we are not clear as to why the integration can only be 

accomplished in connection with large-scale changes to the current 

information gathering and dissemination process. As the CFTC concedes, 

it already has most of the information it needs, it just needs to reconcile 

the databases. 

• The CFTC should consider requiring traders to enter account ownership 

and controller information - as well as all other information required 

under the OCR- into their front-end trading platforms at the time of order 

entry and execution. While this could require certain vendors and FCMs 

to re-configure their trading systems to allow for the capture of such 

information, it would appear to be a simpler and more cost-effective 

process than requiring FCMs, on an after-the-fact basis, to reconstruct and 

reconcile such information from various different data repositories. 

11 We do not believe the CFTC's stated goals of assisting its Office of Chief Economist or Division of 

Market Oversight justify the burdens associated with implementation ofthe OCR since, in our view, there 

really is no need for immediate, real-time trading assessments by these divisions in accomplishing their 

respective mandates. 12 The SEC, for example, appears to spend a fairly significant amount of time examining the administrative 

burden new rules will have on registrants. For example, the SEC generally: conducts a cost-benefit 

analysis in which it estimates, among other things, the amount of man-hours registrants will be required to 

devote on a yearly basis in complying with the proposed rule; analyzes new rules under the Paperwork 

Reduction Act to the extent they constitute a "collection of information" and, in so doing, assesses the total 

annual reporting and recordkeeping burdens imposed on registrants; prepares a final regulatory flexibility 

analysis in which it sets forth the need for the new rule, analyzes the impact it will have on small 

businesses, and determines whether there are any duplicative, overlapping or conflicting rules and 

requirements, and; assesses the impact the new rule will have on competition and efficiency in the 

marketplace. 

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• The CFTC should take this opportunity- in which the President and his 

advisors are considering the implementation of substantial changes to the 

regulatory structure of US financial services markets - to petition for more 

staffing, a larger budget and more assistance from other federal and state 

agencies in conducting its investigative and enforcement activities. 

• The CFTC should put more regulatory onus on the individual exchanges 

and self-regulatory organizations in conducting trade surveillance. Indeed, 

the CFTC may want to consider separating, on a more formal basis, the 

regulatory functions of exchanges with their respective business functions 

as has now been done in the securities industry. 

We would be pleased to discuss these suggestions further at the Staffs request. 

* * * 

Again, we clearly acknowledge the CFTC's critical role in monitoring the futures 

markets, and the importance of gathering relevant trade information on a timely basis to 

that mission. However, as noted above, we do believe there are other effective ways of 

enhancing the Staffs investigative abilities which are less burdensome on FCMs than the 

current OCR proposal. 

anaging Director and Group General Counsel 

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