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COMMENT 

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FfA Futures Industry Association 

Received CFTC RacOr~s Section 

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October 9, 2007 

Mr. David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street NW 

Washington DC 20581 

2001 Pennsylvania Ave. NW 202.466.5460 

Suite 600 202.296.3184 fax 

Washington, DC 20006-1823 www.futuresindustry.org 

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Re: CME Petition for Exemption from Registration 

CFETS, 72 Fed.Reg. 48262 (August 23, 2007) 

as an FCM on baalf of 

Dear Mr. Stawick: 

The Futures Industry Association ("FIA") 1 appreciates the opportunity to comment on the 

petition that the Chicago Mercantile Exchange ("CME") has filed on behalf of the China Foreign 

Exchange Trading System ("CFETS") and its members for an exemption from registration as a 

futures commission merchant ("FCM"). The petition was filed pursuant to section 4(c) of the 

Commodity Exchange Act ("Act"), which authorizes the Commodity Futures Trading 

Commission ("Commission") to exempt any person from any provision of the Act if, among 

other things, the Commission finds that the exemption "would be consistent with the public 

interest." For the reasons set forth in detail below and based upon the record available to us, we 

submit that the CME has not made the showing required under the provisions of section 4(c) of 

the Act to support its request for exemption.2 

The CME petition on behalf of CFETS 

As described in the Federal Register release, CFETS is a not for profit affiliate of the People's 

Bank of China ("PBC"), which "operates an electronic trading system with respect to trading in 

the interbank foreign exchange market, Renminbi (RMB) lending, and trading on the bond 

FIA is a principal spokesman in the United States for the commodity futures and options industry. Our 

regular membership is comprised of approximately 40 of the largest FCMs in the United States, all but six of which 

are clearing members of the CME. FIA estimates that our members are responsible for more than 90 percent of all 

customer transactions executed on US contract markets. 

Our comments are based on the limited information set out in the Federal Register release and certain 

additional information provided orally by· CME staff in a meeting with representatives of several FIA member ftrms 

on Thursday, September 27. At the meeting, CME staff advised these ftrms that the terms and conditions of the 

agreement between the CME and CFETS referenced in the Federal Register release would not be made available to 

them for review. Without access to this agreement, our ability to comment fully is limited. 
market in China .... CFETS also operates China's Interbank RMB money market and facilitates 

the trading of government securities and repo transactions."3 

The CME has entered into an agreement with CFETS, pursuant to which CFETS will become a 

"super clearing" member of the CME, authorized to clear foreign currency and interest rate 

futures contracts on behalf of CFETS members, which include all of the major Chinese banks 

and their customers located in China. As noted in the Federal Register release, the Commission 

historically has taken the position that a foreign broker that clears transactions on behalf of 

customers directly through a US-based clearing organization must be registered with the 

Commission as an FCM.4 However, the CME has advised the Commission that CFETS is not 

separately capitalized and, therefore, would not be able to comply with the Commission's 

minimum net capital rules. 17 CFR § 1.1 7. For the same reason, CFETS would not be able to 

file an annual report certified by an independent public accountant in accordance with 

Commission rule 1.16, as required by Commission rule 1.10(b)(1)(ii). Consequently, CFETS is 

unable to satisfy the requirements for registration as an FCM and, unless the CME's petition for 

exemption is granted, will be unable to become a "super-clearing" member of the CME. 

The CME has not met its burden under section 4(c) of the Act.5 

At the outset, we want to emphasize that we are encouraged by the Chinese government's recent 

actions to expand the ability of Chinese banks and other financial institutions to use the futures 

markets to hedge their foreign currency and interest rate risks, and we are excited about the 

opportunities that such expansion presents to FIA member firms. We are also pleased that the 

PBC has called upon the expertise of the CME to provide consulting and technical assistance to 

CFETS. Nonetheless, the CME has provided no compelling reason why the Commission should 

deviate from its consistent, historic policy and permit CFETS to become a clearing member of 

the CME for the purpose of clearing transactions on behalf of its member institutions located in 

China and their customers without being registered as an FCM. 

The CME has asserted that CFETS requires an exemption from registration as an FCM because, 

as a not-for-profit affiliate of the PBC, CFETS is not separately capitalized. However, the CME 

has not suggested any reason why CFETS cannot be separately capitalized. Is there some reason 

why, as a matter of law, CFETS cannot be separately capitalized or why CFETS could not form 

an affiliate that would be separately capitalized? Nor has the CME explained why it is necessary 

72 Fed.Reg. 48262-48263 (August 23, 2007). The capacity in which CFETS conducts its activities is 

unclear. As described by the CME, CFETS would appear to be acting primarily in the capacity of a foreign board of 

trade rather than a foreign broker. If that is the case, the Commission should consider whether the relationship that 

the CME and CFETS have entered into under the terms of the agreement is more in the nature of a joint venture 

between boards of trade and should be analyzed accordingly. 

4 As the Commission further notes, it reaffirmed this position no less than six months ago. 72 Fed.Reg. 

15637 (April2, 2007). 

Our comments are focused on the request that CFETS be exempt from registration as an FCM. We note, 

however, that the CME petition would extend the requested relief to CFETS members as well. Based on the 

information set forth in the Federal Register release, we can discern no reason why CFETS members would be 

engaging in activities that would require registration as FCMs and, therefore, will not address this aspect of the 

CME petition. Nonetheless, if any CFETS member were to engage in activities that, under the Act and existing 

Commission interpretations, would require registration as an FCM, that member should be so registered. 
for CFETS to become a CME clearing member at all. Is there some reason why, as a matter of 

law, CFETS and its members cannot open accounts with other authorized brokers and, through 

them, with CME clearing members that are registered as FCMs? 

To grant a petition for exemption, the Commission must find that the exemption: (1) will 

promote economic or financial innovation and fair competition; (2) will be consistent with the 

public interest and the purposes of the Act; and (3) will not have a material adverse affect on the 

ability of the Commission or any contract market to discharge its regulatory or self-regulatory 

duties under the Act. The CME has chosen not to address any of these statutory standards and, 

therefore, it has not met its burden under section 4(c). 

The exemption would not promote economic or rmancial innovation and fair competition. 

Based on the information available to FIA, there appears to be no factual evidence that would 

support the several Commission findings that section 4(c) requires. For example, although the 

CME and CFETS no doubt anticipate economic or financial benefits from the venture that they 

have entered into, the Federal Register release discloses no financial or economic innovations 

that are expected to flow from the relationship, in particular, innovations that would require 

CFETS to become a clearing member of the CME. Nor would the requested relief promote 

competition. Rather, allowing CFETS to become a clearing member without first being 

registered as an FCM would likely result in CFETS having a competitive advantage in soliciting 

Chinese banks and other institutional clients to trade on the CME and CBOT. 

When an FIA member firm, or an affiliate, makes the decision to enter a new market, it must 

comply with the applicable laws and regulations of the country in which the market is located, in 

addition to the rules of the market itself, including all financial, recordkeeping and reporting, and 

customer protection requirements.6 The firm would also be subject to disciplinary proceedings 

for violating any such laws or regulations. If CFETS wants to enjoy the benefits of being a 

clearing member of the CME, we see no reason why it, or an affiliate formed for this purpose 

with dedicated capital, should not likewise subject itself to the laws and regulations of the United 

States, in particular the Act and Commission regulations, as well as the risk of disciplinary 

actions thereunder. 

The Chinese market has just begun to open to non-Chinese brokers, and FIA member firms look 

forward to competing among each other and with their Chinese counterparts for the opportunity 

to serve the many banks and other institutions that may trade on US contract markets, including 

the banks and institutions that are CFETS members. "Fair competition", however, requires that 

all CME clearing members be subject to the same US laws and regulations and contract market 

and clearing organization rules. 

·6 In China, for example, foreign brokerage firms initially will not be permitted to establish independent 

entities. Instead, foreign firms currently are permitted to participate in Chinese markets only through taking 

minority interests in local brokerage fmns. 
The exemption would not be consistent with the public interest and the purposes of the Act. 

The underlying purposes of the Act and, consequently, the public interests to be servedcustomer protection, market integrity and financial integrity-are achieved in substantial part 

through compliance with the provisions of section 4f and 4d of the Act, which require (1) the 

registration of all persons acting in the capacity of an FCM and (2) the segregation of an· funds 

received by an FCM to margin, guarantee or secure transactions executed on designated contract 

markets. Section 4d imposes a similar obligation on clearing organizations and specifically 

prohibits a clearing organization from treating any customer funds received from an FCM as 

belonging to such FCM. 

For their part, designated contract markets and derivatives clearing organizations ("DCOs") 

foster the purposes of the Act and the public interest by compliance with the core principles set 

out in sections 5 and Sb, respectively. Of particular relevance for our analysis are the following 

core principles for derivatives clearing organizations: (1) F, which provides that a DCO must 

have standards and procedures designed to protect and ensure the safety of member and 

participant funds; (2) G, which requires a DCO to have rules and procedures designed to ensure 

the efficient, fair and safe management of events when members and participants become 

insolvent or otherwise default on their obligations to the DCO; (3) M, which requires a DCO to 

enter into and abide by all appropriate and applicable domestic and international information 

sharing agreements; and (4) N, which requires a DCO to avoid adopting any rule or taking any 

action that results in any unreasonable restraint of trade, unless necessary to achieve the purposes 

of the Act. 

The requested exemption would appear to be inconsistent with each of these provisions of the 

Act and would result in a loss of the protections they are designed to assure. Yet, the CME's 

petition provides no information to explain why, notwithstanding such inconsistencies, the 

exemption would be consistent with the public interest. 

Registration has been called a linchpin of the Commission's regulatory program, and properly 

so. Registration identifies to the Commission, the public and other governmental agencies the 

individuals and entities that are properly authorized to solicit and accept customer orders. More 

important, registration assures that registrants, wherever located, are subject to the provisions of 

the Act and the Commission's rules and, in connection therewith, are subject to the jurisdiction 

of the Commission, the Department of Justice and the US courts. 

Registration as an FCM is imperative in the case of a member of a clearing organization that 

clears customer transactions. Given the critical role that clearing members play in assuring (1) 

the efficient operation of the exchange markets, (2) compliance with applicable Commission and 

exchange trade practice requirements and, in particular, (3) the financial integrity of exchange 

transactions, it is essential that the Commission's jurisdiction and authority over clearing 

members be unimpaired. 

If the Commission were to grant the CME petition and exempt CFETS from the requirement that 

it be registered as an FCM, the regulatory benefits arising from such registration would be lost, 

or at least significantly impaired. Critically, only an FCM has an obligation to segregate 

customer funds and to hold and treat such funds as separate from its own; only an FCM is a 
commodity broker under Subchapter IV of Chapter 7 of the Bankruptcy Code and Part 190 of the 

Commission's rules (with respect to transactions executed on a designated contract market). If 

CFETS were not required to be registered as an FCM, therefore, the legal uncertainty with 

respect to their status would deny CFETS customers the protections generally accorded customer 

funds under the Act. 

This is especially true in the event, however unlikely, that CFETS were to default on its 

obligations to the CME. How would such an event be treated under the Bankruptcy Code? 

Would the Commission have any right to be heard as provided in section 762 of the Code? 

Would Part 190 of the Commission's rules be applicable? Would CFETS customers have a 

priority with to respect to CFETS assets held at the CME? Would CFETS customers have a 

priority with respect to other CFETS assets? Would CFETS customers have the right to expect 

that they would receive such priority? Would positions of CFETS customers be able to be 

transferred to non-defaulting FCMs? Without knowing the answers to such questions, the CME 

would be unable to demonstrate compliance with core principles F and G.7 

As noted earlier, if the Commission were to grant the CME petition and exempt CFETS from the 

requirement that it be registered as an FCM, CFETS would not be subject to the jurisdiction of 

the Commission, the Department of Justice or the US courts. Although we understand that 

CFETS may have waived to some extent the sovereign immunity to which it may be entitled as 

an affiliate of the PBC, we are not aware of the extent to which CFETS may have done so. In 

any event, we suggest that any such waiver (even if effective) would be of limited value, since 

CFETS apparently has no assets. We submit, therefore, that the Commission should consider 

carefully the scope of any such waiver and the impact that the sovereign immunity of CFETS 

may have on the Commission's regulatory program and the right of other clearing members to 

seek redress under section 22 of the Act. 8 

We recognize that the Commission has granted exemptions from registration as an FCM, but 

only in limited circumstances. Under Commission rule 3.10(c), for example, entities that trade 

solely for proprietary accounts are exempt from registration. In addition, in accordance with 

Commission rule 30.10, the Commission has granted exemptions to foreign firms that have met 

the criteria set forth in Appendix A to Part 30. That is: (1) the activities of such firms are limited 

to soliciting or accepting orders for execution on foreign boards of trade; (2) the Commission has 

found that such firms are subject to comparable regulation in the jurisdiction in which they are 

located, including matters such as registration qualifications, minimum capital requirements, 

recordkeeping and reporting requirements, sales practice standards, and compliance; and (3) the 

Commission and the appropriate governmental authority or self-regulatory organization have 

entered into an information sharing arrangement, assuring the Commission access to information 

7 The CME has advised FIA member firms that the Commission staff insisted that, if the exemption were 

granted, CFETS funds would have to be held in the house account rather than the customer funds account 

maintained by the CME in its capacity as a DCO for the very reason that CFETS would not be registered. We do 

not disagree with the staffs conclusion and simply note that this only reinforces the concerns discussed above. 

In this connection, we note with some concern that CFETS did not join in the petition, make any 

representations or warranties concerning its structure and business activities, or directly agree to any undertaking 

suggested in the petition as a condition to the requested exemption being granted. 
necessary to fulfill its regulatory responsibilities.9 The Commission has not been asked to make, 

and has not made, a finding of comparability with respect to the Chinese regulatory system. 

In any event, in the one case of which FIA is aware, the Commission staff declined to allow a 

foreign firm that qualified for an exemption from registration as an FCM pursuant to 

Commission rule 30.10 to become a member of a DCO without registration as an FCM. 

Enskilda Futures Limited ("Enskilda"), located in London, is an approved firm with the 

Financial Services Authority. Although Enskilda intended to clear only proprietary accounts and 

accounts of non-US customers, we understand that Commission staff advised Enskilda that it 

would have to be registered as an FCM. We see no reason to take a different approach here. 10 

Although the CME has crafted and has undertaken to enforce a form of ''substituted compliance" 

to address some of the supervisory issues that would arise if its petition were granted, such 

"substituted compliance" is not an adequate substitute for the Commission's direct regulatory 

authority over CFETS. 11 Moreover, we are concerned that a critical aspect of the CME's 

"substituted compliance" program is its apparent agreement to be jointly and severally liable 

with CFETS "in any Commission enforcement action relating to compliance with any order 

issued by the Commission." The scope of any such liability would, of course, be defined by the 

scope of the Commission's order if it were to grant the CME's petition. Whatever its potential 

scope, under no circumstances should the CME assume joint and several liability for the 

violation of a Commission order by a member firm. As shareholders and clearing members of 

the exchange, FIA member firms assume a certain amount of financial risk. However, they have 

not assumed the risk that the value of their shares will be impaired as the result of a CME 

guarantee of the conduct of another member. The CME properly would not agree to be jointly 

and severally liable in any Commission enforcement action involving all of its members; it 

should not assume such responsibility with respect to one such member. 

The proposed exemption would adversely affect the ability of the Commission and the 

CME to discharge their responsibilities. 

Section 4( c )(2) of the Act provides, in part, that the Commission shall not grant an exemption 

under this section, unless the Commission determines that the exemption "will not have a 

material adverse effect on the ability of the Commission or any contract market ... to discharge 

its regulatory or self-regulatory duties under this Act." For the reasons discussed above, we 

submit that the requested exemption would have such a material effect on the Commission's 

ability to discharge its regulatory responsibilities. Moreover, in light of the CME's agreement to 

9 FIA supported the adoption of Commission rule 30.10 and the exemptions from registration granted 

thereby. Although the exemptions were not granted pursuant to section 4(c), we note that the exemptions promoted 

economic innovation and fair competition among both markets and intermediaries. 

10 If the petition were granted, we submit the Commission would have no basis to deny similar relief to other 

foreign brokers that might seek to become members of a derivatives clearing organization. Therefore, the 

Commission should consider carefully the regulatory implications of granting the petition. 

II For example, CME apparently has undertaken that i.t and CFETS will comply with US anti-money 

laundering requirements as determined by the US Treasury. The effect of this representation is unclear since neither 

the CME, as a DCM, nor CFETS, as an unregistered entity, is subject to US anti-money laundering requirements. In 

any event, the Commission should not waive its authority to enforce relevant anti-money laundering requirements. 
be jointly and severally liable for CFETS conduct (to some undetermined extent), the CME 

would be placed in the untenable position of investigating itself. In particular, among other 

things, the CME's Compliance Department will be in the position of monitoring for trade 

practice abuses, granting hedge exemption requests, granting relief from other exchange 

requirements, determining which accounts should be aggregated for position limit purposes and 

setting position limits for these new market entrants. This inherent conflict of interest would 

impair the CME's ability to fulfill its self-regulatory responsibilities. 

Conclusion 

For all ofthe above reasons, FIA respectfully submits that the CME has not met its burden under 

section 4( c) of the Act. If, notwithstanding the foregoing, the Commission determines that the 

petition should be granted, subject to certain· terms and conditions, we request that any such 

terms and conditions, as well as the contractual terms agreed by the parties, be published for 

additional comment before the Commission takes any action to approve the CME petition. We 

would be pleased to meet with the members of the Commission or staff at their convenience to 

discuss in greater detail the matters set forth in this letter. 

Sincerely, 

John M. Damgard 

President 

cc: Honorable Walter Lukken, Acting Chairman 

Honorable Michael Dunn, Commissioner 

Honorable Jill E. Sommers, Commissioner 

Honorable Bart Chilton, Commissioner 

Division of Clearing and Intermediary Oversight 

Ananda Radhakrishnan, Director 

Robert B. Wasserman, Associate Director 

Office of International Affairs 

Jacqueline Hamra Mesa, Director 

Robert H. Rosenfeld, Deputy Director