Received CFTC 

Rlcords Section 

loj31/lJ7 

October 30, 2007 

Mr. David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street NW 

Washington DC 20581 

Futures Industry Association 

200.1 Pennsylvania Ave. NW 

Suite 600 

Washington, DC 20006-1823 

COMMENT. 

202.466.5460 

202.296.3184 fax 

www.futuresindustry.org 

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Re: CME Petition for Exemption from Registration as an FCM on behalf of 

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

Dear Mr. Stawick: 

The Futures Industry Association ("FIA") has reviewed the response the Chicago Mercantile 

Exchange ("CME") submitted to our October 9, 2007 corrunent letter, in which we expressed the 

view that, based upon the record available to us, the CME had not made the showing required 

under the provisions of section 4(c) of the Commodity Exchange Act ("Act") to support its 

request, 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"). We 

regret that the CME did not respond to the essential issues that we raised and that we believe 

should inform the Commission's decision. 

The CME's burden under section 4(c) of the Act is significantly different from its burden under 

section 5c(c)(1), which simply requires the CME to certify that a proposed action complies with 

the Act. The CME's responsibility under section 4(c) is to provide the Commission with the 

information that it needs to make the aftitmati ve determinations set forth in that section. Rather 

than addressing the statutory requirements, however, the CME attempts to shift to FIA the 

burden of establishing why the Commission should not grant the requested exemption. 

Nothing in the CME response would allow the Commission to find that the requested exemption 

would (i) promote fair competition, (ii) be consistent with the public interest and the purposes of 

the Act, or (iii) not have a material adverse effect on the Commission's ability to discharge its 

obligations under the Act. To the contrary, although the CME states that granting the exemption 

to CFETS and its members will promote fair competition, we learn for the first time that, for an 

undetermined period of time, CFETS member firms will be prohibited from trading regulated 

foreign currency and interest rate products in the United States, except through CFETS. The 

CME's assurance that nothing in the CME's arrangement with CFETS would prevent CFETS 

member firms tram clearing through other entities "once the Chinese government relaxes its 

existing regulations regarding foreign investments" provides no comfort to firms that may want 

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to compete for the opportunity to serve CFETS member banks and other institutions that may 

trade on US contract markets. The competitive advantage to CFETS is undeniable. 1 

Further, the CME has confirmed that, "as a sub-institution of a central bank of a sovereign nation 

[CFETS] is not able to directly subject itself to the [Commission's] jurisdiction."2 Nor would 

CFETS be subject to the jurisdiction of the Department of Justice or the U.S. Courts.3 Therefore, 

notwithstanding that CFETS initially will be the sole clearing member through which Chinese 

banks and other institutions will be permitted to trade futures on foreign currency and interest 

rates listed on CME markets, the Commission will have no jurisdiction over CFETS or its 

principals. We reiterate that, 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. 

It is not sufficient that the CME, which is effectively a joint venturer with CFETS and has agreed 

to be jointly and severally liable with CFETS "in any Commission enforcement action relating to 

compliance with any order issued by the Comrilission," has agreed to exercise jurisdiction over 

CFETS. Clearly, the CME would be faced with an inherent conflict of interest; just as clearly, 

the Commission's ability to discharge its responsibilities under the Act would be affected, 

materially and adversely . . ~-

Sincerely, 

The CME's attempt to downplay this advantage by noting repeatedly that the arrangement is "limited to 

certain foreign currency and interest rate products" ignores the fact the such contracts constitute approximately 50 

percent of the volume on U.S. markets and would likely constitute an overwhelming majority of the contracts that 

would be traded by CFETS member banks and their customers. 

2 In footnote 4, the CME seems to contradict this statement, asserting that "CFETS has agreed to be subject 

to U.S. law." However, as clarified in the text to which the footnote relates, there is no contradiction. CFETS has 

simply agreed that "the Agreement and the legal relationships of the CME and CFETS are governed by and 

construed in accordance with the laws of the United States." 

Separately in footnote 4, the CME implies that the People's Bank of Cbina ("PBC") has guaranteed 

CFETS' obligations to the CME and to CFETS' member banks. The Commission should confirm the extent to 

which the PBC has guaranteed CFETS' obligations, if at all, in any order the Commission may issue. Similarly, 

notwithstanding the CME's summary of its analysis of the application of the Bankruptcy Code in the event of 

CFETS's default, the Commission should make an independent determination of the likely treatment of CFETS and, 

in particular, its customers under the Code. 

In contrast, foreign firms that receive an exemption from registration under Commission rule 30.10 must 

consent to the jurisdiction of the U.S. under the Act. 
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