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OFC. OF THE SECRETAR\AT 

January 5, 2009 

Mr. David A. Stawick 

Secretary to the Commission 

Commodity Futures Trading Commission 

1155 21st Street, NW 

Washington, DC 20581 

Futures Industry Association 

2001 Pennsylvania Ave. NW 

Suiw 600 

Washington, DC 20006-1823 

Re: Proposed Rules for Trading Off the Centralized Market 

73 Fed.Reg. 54097 (September 18, 2008) 

Dear Mr. Stawick: 

of@t- 202.466.5460 

202.296.3184f~x lj / 

www.futuresindustry.org 

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. 

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COMM:ENJ:. ' . ;; 

The Futures Industry Association ("FIA") 1 is pleased to submit this letter in response to the 

Commodity Futures Trading Commission's ("Commission's") request for comments on the 

proposed amendments to Commission rule 1.38 and the related proposed guidance on Core 

Principle 9 ("Guidance"). The proposed amendments and Guidance attempt to sttike an 

appropriate balance between the need of institutional customers to effect certain transactions off 

a centralized market (and the desire of designated contract markets ("DCMs") to accommodate 

such transactions) with a DCM's obligation under Core Principle 9 to "provide a competitive, 

open, and efficient market and mechanism for executing transactions." 

As the Commission is aware, PIA filed a comment letter when the Commission first proRosed 

amendments to rule 1.38 and guidance with respect to Core Principle 9 in July 2004. 69 

Fed.Reg. 39880 (July 1, 2004). At that time, we supported the proposed amendments to rule 

1.38, while opposing the adoption of the proposed guidance to Core Principle 9. Specifically, we 

expressed concem that the proposed Guidance would have the effect of stifling innovation with 

respect to transactions that may be executed off a DCM's centralized market. 

FIA is a principal spokesman for the commodity futures and options industry. FIA's regular membership is 

comprised of approximately 30 of the largest futures commission merchants ("FCMs") in the United States. Among 

its associate members are representatives from virtually all other segments of the futures industry, both national and 

international. Reflecting the scope and diversity of its membership, FIA estimates that its members effect more than 

eighty percent of all customer transactions executed on United States contract markets. 

Letter from John M. Damgard, President, Futures Industry Association, to Jean A. Webb, Secretary to the 

Commission, dated August 27, 2004. 
· Mr. David A. Stawick 

January 5, 2009 

Page2 

Guidance on Core Principle 9. We continue to oppose adoption of the Guidance. With the 

exception of the discussion on the appropriate minimum size of a block trade, the proposed 

Guidance, as was the case in 2004, does little more than synthesize existing exchange rules that 

have either been approved by the Commission or certified by the relevant exchange. We 

understand that the proposed Guidance would not provide the exclusive means for complying 

with Core Principle 9. Nonetheless, adoption of the Guidance would appear to impose on a 

DCM a significant burden in establishing to the Commission's satisfaction that any block trading 

procedures and other procedures for trading away fi"om the centralized market that differ from 

those that the Commission has previously approved comply with section 5(d)(9) of the 

Commodity Exchange Act.3 

Further, adoption of the proposed Guidance may cause uncertainty among market participants. 

An example is in the area of transitory EFPs. As the Commission is aware, the use of transitory 

EFPs was discussed in detail in the Division of Trading and Markets Report on Exchanges of 

Futures for Physicals, dated October 1, 1987 (pp. 192-201). Since that time, market participants 

have developed a means ofconducting business .in. a.manner consistentwiththe pol~Gies set out 

therein. Publication of the proposed Guidance has already caused ce1iain market patiicipants to 

question whether this signals a change in the Commission's position with respect to transitory 

EFPs. We assume the Commission intends no change. However, if the Commission determines 

to adopt the proposed Guidance, we request the Commission to provide assurance on this point. 

Although FIA opposes adoption of the proposed Guidance in its entirety, we are pleased that the 

Commission responded to a number of our comments in preparing this latest proposal, in 

particular, as they related to the Commission's original proposed guidance with respect to block 

trading. We endorse specifically the Commission's decision to replace the earlier numerical test 

for determining the appropriate minimum size of a block trade and to propose instead that the 

appropriate minimum size of a block trade should be the size at which it is reasonable to assume 

that the order could not be filled in its entirety at a single price. 

As the Commission is aware, FIA has long supported the adoption of block trade procedures at 

the several exchanges. Block trade procedures can fulfill "a compelling need for alternative 

procedures to facilitate the execution of large orders in all contract markets in order to enhance 

the ability of these markets to meet the needs of institutional participants concerning transaction 

size and price. "

4 To date, however, DCMs have set the minimum size of a block trade of several 

of the more critical contracts at a level that is substantially above the size at which it is 

Adoption of the proposed Guidance at this time, therefore, appears to be particularly incongruous, as the 

several DCMs and their related derivatives clearing organizations provide facilities for the execution and clearance 

of an increasing number of transactions effected off the centralized market, e.g., ClearPort, Swapstream, and the 

various proposals for clearing credit default swaps. Any guidance with respect to Core Principle 9 should consider 

all such off central market transactions. FIA would be pleased to work with the Commission staff and the several 

DCMs in developing guidance that more appropriately addresses these transactions more broadly. 

4 Letter from Ronald H. Filler, President, FIA Law and Compliance Committee, to Jean A. Webb, Secretary 

to the Commission, dated April 24, 2000. 
·Mr. David A. Stawick 

January 5, 2009 

Page 3 

reasonable to assume that the order could not be filled in its entirety at a single price. Upon 

adoption of this Guidance, we would encourage the DCMs to review the minimum size ofblock 

trades for all contracts and reduce them accordingly. 

Proposed Rule 1.38(b )(2). In light of the significant discretion the Commission is proposing to 

grant DCMs in determining the appropriate minimum size of a block trade, it is especially 

troubling that the Commission is proposing concunently to restrict the authority DCMs as it 

relates to block trades, in particular, trades between affiliates.5 The proposed conditions are 

considerably more restrictive than those currently in place at several DCMs, including the 

Chicago Board of Trade and the Chicago Mercantile Exchange. Rule 526 of each exchange, for 

example, in no way restricts block trades between affiliates. In the absence of empirical 

evidence of abuse by affiliates under the existing exchange rules-and the Commission cited no 

such evidence in the Federal Register release accompanying the proposal-we see no reason to 

impose additional restrictions on affiliates and other parties engaged in block trades. FIA, 

therefore, opposes the adoption ofproposed rule 1.38(b)(2) in its entirety. 

Conclusion 

We appreciate the opportunity to submit these views on the proposed amendments to rule 1.38 

and the proposed Guidance on Core Principle 9. If the Commission has any questions 

concerning our comments, please feel free to contact Tammy Botsford, PIA's Assistant General 

Counsel, (202) 466-5460. 

cc: Honorable Walter L. Lukken, Acting Chaim1an 

Honorable Michael Dunn, Commissioner 

Honorable Jill E. Sommers, Commissioner 

Honorable Bart Chilton, Cmmnissioner 

Division ofMarket Oversight 

Richard A. Shilts, Acting Director 

Gabrielle A. Sudik, Special Counsel 

Moreover, by proposing to incorporate conditions goveming block trades between affiliates in a new rule 

1.38(b)(2), rather than in the Guidance as was proposed in 2004, the Commission would further limit the flexibility 

that has been accorded DCMs to date.