U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5430 

Facsimile: (202) 418-5547 

aradhakrishnan@cftc.gov

Division of Clearing and 

Intermediary Oversight

Ananda Radhakrishnan 

Director 

 

CFTC letter No. 06-20 

September 7, 2006 

No-Action 

Division of Clearing and Intermediary Oversight 

 

 Re: 

Dear : 

 This is in response to your letter dated March 23, 2006, to the Division of Clearing and 

Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the 

“Commission” or “CFTC”), as supplemented by telephone conversations with Division staff. By 

your correspondence, you request, on behalf of “A”, that the Division modify its prior relief, as 

set forth in CFTC Staff Letter 02-22 (the “Prior Letter”).1

 Specifically, you request that the 

Division confirm that it will not recommend that the Commission take any enforcement action 

against registered broker-dealers (“BDs”) or their registered representatives (“RRs”) if they give 

“institutional customers” (as defined in the Prior Letter) executing transactions in “B”2

 the 

option either: 

1. to maintain a traditional futures account at a registered introducing broker (“IB”) or 

futures commission merchant (“FCM”), place orders with an associated person (“AP”) 

of the IB or FCM or directly through “C”, and to comply with “A”’s standard 

performance bond and settlement variation requirements; or 

1

 [2002 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶28,955 (July 11, 2001). Pursuant to 

the Prior Letter, an “institutional customer” is anyone who would qualify as a “qualified 

institutional buyer” under Securities and Exchange Commission Rule 144A, 17 C.F.R. 

§230.144A, or who is a “A” member registered with the CFTC as a floor broker or as a floor 

trader. 

2

 “B” are cash-settled, electronically-traded futures contracts on broad-based, dynamic 

indices of stocks, bonds, currencies and other financial instruments. “B” are more fully 

described in the Prior Letter. Both terms are service marks of “D” 
Page 2 

2

2. to maintain a securities account and execute trades through a BD/FCM3

 in full 

compliance with the Prior Letter as it relates to “B” trades by non-institutional 

customers. 

Under the terms of the Prior Letter, institutional customers were restricted to the first of the 

foregoing options. You argue that the requested modification to the Prior Letter would provide 

an institutional customer the same ability to trade “B” through either a futures account or a 

securities account that is currently available to non-institutional customers, as well as the same 

protective measures applicable to non-institutional customers. For example, the institutional 

customer choosing to execute “B” transactions through a securities account will be required to 

deposit cash equal to 100 percent of the current “B” market value to establish a long “B” 

position. 

 Based upon the representations made in your letter, the Division believes that your 

request is not contrary to the purposes of the Act, the Commission’s regulations or the Prior 

Letter. Accordingly, the Division will not recommend that the Commission commence any 

enforcement action against a BD or RR that is notice-registered with the Commission for the 

purpose of offering and selling “B” based solely upon the BD or RR permitting an institutional 

customer to buy or sell “B” through either a futures account or a securities account. This 

position is conditioned upon the BD or RR requiring institutional customers that choose to trade 

“B” through a securities account to comply with the same requirements under the Prior Letter 

applicable to non-institutional customers.4 

 This position is further conditioned upon the inclusion in each “B” prospectus in the 

discussion of risk factors the following language: 

This statement is furnished to you because the Commodity Futures Trading Commission 

requires it for reasons of fair notice unrelated to this company's current financial 

condition. 

1. You should know that, in the unlikely event of this company's bankruptcy, positions 

related to “B” and money, securities and other property margining such 

positions, will not be protected by the Securities Investors Protection 

Corporation (SIPC) . 

 

3

 A BD/FCM is a registered broker-dealer who is also notice-registered with the 

Commission as a limited purpose FCM for purposes of accepting and executing orders for “B”. 

4

 In accordance with CFTC Staff Letter 02-90 ([2002-2003 Transfer Binder] Comm. Fut. 

L. Rep. (CCH) ¶29,127 (July 22, 2002)), a BD/FCM notice-registered to offer and sell “B” may 

also offer and sell security futures products. Because of changes to the Commission’s 

regulations in the interim, numbered paragraph 3 of the relief granted by the Prior Letter is now 

moot. 
Page 3 

3

2. Positions related to “B” and money, securities and other property margining 

such positions may or may not be protected under the commodity broker 

provisions of the bankruptcy code, 11 U.S.C. §§761-767. The Commission's 

regulations concerning bankruptcies of commodity brokers can be found at 17 Code 

of Federal Regulations Part 190. 

For existing “B” customers, the text set forth above must be included with distribution of the 

next monthly account statement. 

 This letter does not absolve “A”, or any BD or RR involved in the offering or selling “B” 

from compliance with any other applicable requirements contained in the Act or in the 

Commission’s regulations issued thereunder. For example, each remains subject to the relevant 

antifraud provisions of the Act and Commission regulations. This letter is applicable to “A”, 

BDs and RRs solely in connection with the activities described above. 

The no-action position taken in this letter represents the views of this Division only and 

does not necessarily represent the views of the Commission or of any other office or division of 

the Commission. If you have any questions concerning this correspondence, please contact me 

or Christopher W. Cummings, an attorney on my staff, at (202) 418-5445. 

 Very truly yours, 

 Ananda Radhakrishnan 

 Director