0{-~ 

--~-------~..:.:.;:"'"' NFJ\)N AT I 0 N A L FUTURES ASSOCIATIO~ 

Received CFTC 

Records Section 

3/~~~ 

Via E:-Mail lsecretarv@cftc.gov) 

Mr. David A. Stawick 

Secretary of the Commission 

Commodity Futures Trading Commission 

March 23, 2009 . ~' 

i 'I 

' ' 

Three Lafayette Centre 

1155 21st Street, N.W. 

Washington, D.C. 20581 

COMMENT 

Re: RIN 3038-AC72; Acknowledgment Letters for Customer Funds and 

Secured Amount Funds, 7 4 Fed. Reg. 7838 (February 20, 2009) 

Dear Mr. Stawick: 

Segregation is the cornerstone of the futures industry's customer funds 

protection scheme. The proposed amendments strengthen that scheme and should be 

adopted. 

As you know, the primary purpose of segregation is to protect customer 

funds in the event of an FCM insolvency. 1 Special provisions in the bankruptcy laws 

work with the segregation requirement to give customers a priority in the funds in 

segregation. As a result, when funds are properly segregated, customer funds are 

protected against insolvency losses. 

Segregation also serves a more immediate function, however. In the 

event of an FCM liquidation or any other situation where open customer positions need 

to be transferred quickly, the segregation requirements ensure that customers' margin 

funds transfer along with the positions. Without this protection, customers would be 

1 While this discussion focuses on FCM segregated funds, the rationale is the same for 

DCO segregated funds and foreign futures and options secured amounts. 

300 South Riverside Plaza Suite 1800 Chicago, Illinois 60606 312.781. 1300 BOO. 621.3570 312. 781.1672fax www.nfa.futures.org 
2 

required to post duplicative margin or-if unable or unwilling to do so-face forced 

liquidation of their positions. 

The system fails in its second function when a bank or other entity holding 

the segregated funds refuses to release them so that they can follow customer 

positions. We understand that this was the case with the recent Lehman insolvency, 

where the bank holding the FCM's segregated funds account froze the funds several 

days after the parent filed for bankruptcy and continued the hold for many days, 

apparently lifting the freeze only under pressure from regulators. 

CFTC Regulations 1.20(a) and (b) require an FCM and a designated 

clearing organization, respectively, to obtain a signed acknowledgment of the nature of 

the funds from a depository before placing segregated funds there. Proposed new 

sections (d) and (e) strengthen the language in the acknowledgment to make it crystal 

clear that the depository has no legal interest in the funds in a segregated account and 

must release them immediately upon request. Therefore, NFA supports these proposed 

amendments aswell as the proposed amendments to CFTC Regulations 1.26 and 30.7. 

NFA does, however, recommend a minor change to proposed Regulations 

1.20(d)(3) and 30.7(c)(2)(iii). If the Commission believes that the acknowledgments 

should be filed with the CFTC, then we request that they be filed with NFA as well when 

NFA is the firm's DSRO. This will ensure that we have ready access to the same 

information as the CFTC does.2 We are also aware that other commentors may 

recommend standardized language for the acknowledgment letters and a centralized 

electronic filing system, and NFA would be happy to assist with these initiatives. 

We also believe the Commission should clarify when acknowledgment 

letters should be amended for changes made after the effective date of the proposed 

rules. For example, if an FCM opens a new segregated account at a bank with which it 

has an existing relationship, is there a particular time period in which it must amend the 

acknowledgment letter to add the new account number? If an FCM changes its name 

or undergoes a legal reorganization that does not negate its contractual obligations 

(e.g., a merger), must it still obtain new acknowledgment letters? 

The law is clear that the funds in a segregated account cannot be used to 

meet the firm's (or its parent's) obligations to the bank carrying the account, and the 

bank holding the Lehman funds had presumably signed the acknowledgment currently 

required by CFTC Regulation 1.20(a). The bank froze the funds in spite of their 

separate legal ownership and its own contractual commitment, and there is no 

2 NFA does not express an opinion on the need for FCMs to provide the 

acknowledgments to regulators absent an audit or a specific request, however. 

300 South Riverside Plaza Suite 1800 Chicago, Illinois 60606 312.781.1300 800.621.3570 312.781.1672 fax www.nfa.futures.org 
3 

guarantee that the CFTC's current proposal will deter this type of conduct in the future. 

Nonetheless, the stronger language in the proposed (lcknowledgment should convince 

more depositories to release the funds quickly or, where the depository is derelict in its 

duty, could result in quicker action by a court with jurisdiction over the matter. 

Respectfully submitted, 

Thomas W. Sexton 

Senior Vice President and General Counsel 

(kpc/Comment Letters/Seg Funds Acknowledgments) 

300 South Riverside Plaza Suite 1800 Chicago, Illinois 60606 312.781.1300 800.621.3570 312.781.1672fax www.nfa.futures.org