RECEIVED 

C.F.T.C. 

07-13 

(!) 

ib CMEGroup 

ACME/Chicago Board of Trade Company Zfll JAN -2 PH 2: 33 

Crrug S. Donohue 

Ch1ef Executl\'e Olhcer 

,ECORO SECTiON 

Acting Chairman Walter Lukken 

Commissioner Michael Dunn 

Commissioner Jill E. Sommers 

Commissioner Bart Chilton 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, D.C. 20581 

Dear Commissioners: 

December 27, 2007 c 

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In its October 9, 2007, letter commenting on the China Foreign Exchange Trading System and National 

Interbank Funding Center's (CFETS) petition for relief from futures commission merchant (FCM) 

registration, the Futures Industry Association (FIA) raised questions concerning the financial integrity of 

CFETS and its fitness to operate as a CME clearing member firm, as well as competitive concerns related 

to an alleged un-level playing field between CFETS and its members on the one hand and FIA's FCM 

members on the other hand. 

In our letter dated December 18, 2007, we responded to the issues raised by the FIA in terms of CFETS' 

financial integrity and the manner in which CME Group would ensure adequate financial resources from, 

as well as prudential oversight of CFETS in terms of trading activity, credit controls, risk management and 

financial condition of CFETS' member firms. We believe we have adequately addressed these issues 

with a set of requirements that are equal to or greater than those than would apply to CME Group clearing 

member firms. 

The purpose of this letter is to directly respond to the inaccurate and disingenuous claims of the FIA and 

its members that the proposed Order Routing and Super-Clearing Agreement between CME Group and 

CFETS (Agreement) would disadvantage U.S. firms seeking to access the Chinese market for agency 

brokerage or proprietary trading activity involving Chinese banks. A closer examination of the following 

business-related and competitive facts demonstrates that these claims are unfounded, that U.S. based 

investment banks are already actively involved in brokerage and trading activity involving Chinese banks 

in both the spot and OTC FX and interest rate markets, and that any CFTC decision preventing or limiting 

the implementation of the Agreement will only serve to retard growth and use of exchange-traded futures 

and options products by Chinese banks and financial institutions. Rather than protecting U.S. FCMs from 

an un-level playing field , any such decision would simply funnel more trading activity into exempt OTC 

markets, benefiting these same firms in their other lines of business and creating a more significant unlevel playing field between OTC and exchange-traded futures and options markets. 

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Commodity Futures Trading Commission 

December 27, 2007 

Page 2 

Chinese Regulators Continue to Expand In-Bound Participation of U.S. Banks and Broker-Dealers 

in Chinese Financial Markets While Also Expanding Out-Bound Participation by Chinese Banks 

and Investors in Off-Shore Financial Markets 

In its letter dated October 9, 2007, the FIA states that" . .. [a]llowing 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." The FIA does not 

explain why an exemption from registration for CFETS would confer such an advantage on it relative to 

U.S. FCMs. More importantly, FIA failed to point out the numerous regulatory reforms adopted in recent 

years and months that actually facilitate participation by U.S. investment banks and financial institutions in 

Chinese markets or with Chinese banks and financial institutions trading non-Chinese markets. 

For example, starting in 2001, the CSRC and SAFE enacted regulations permitting Chinese corporations 

to trade foreign derivatives products to hedge corporate risks.

1 In 2005, the CSRC adopted regulations 

permitting foreign institutions to invest in or acquire up to a 49% interest in Chinese FCMs in order to 

permit off-shore intermediaries access to Chinese investors and customers.2 While some FCMs have 

complained about the limitations on ownership of Chinese FCMs, it is worth noting that Chinese 

regulatory authorities have not adopted any such permission for foreign futures and options exchanges to 

invest in or acquire such a significant percentage of ownership in a Chinese exchange in order to expand 

business there. More recently, the China Securities Regulatory Commission (CSRC) adopted The Trial 

Measures for the Administration of Overseas Securities Investment by Qualified Domestic Institution 

Investors (QD/1) which allows domestic brokerages and fund management firms to invest clients' funds in 

overseas fixed income, stocks and other financial derivatives. This expands the category of eligible 

investors from banks and insurance companies only to brokerages and fund management firms. These 

investor categories will now be able to raise funds to invest in overseas fixed-income and equity products 

along with forwards, swaps, warrants, options and futures in markets whose regulators have signed 

cooperative supervisory MOUs with the CSRC.

3 Finally, in 2007, the Chinese Banking Regulatory 

Commission (CBRC) adopted rules allowing Chinese commercial banks to engage in off-shore brokerage 

activity for their Chinese clients in investment grade products and in financial derivatives products.4 

1 Domestic Corporation to Hedge in Foreign Markets Regulation, CSRC 2001 -81. 

2 Foreign Investors Involved in Chinese FCMs, CSRC 2005-138. 

3 (Full texts in Chinese: llttp://www.csrc.gov.cn/n575458/n575667/n642011 /3866131 .html. 

http://www. csrc. qov .cn/n57 5458/nS 75667 /n6420 11 /3866223 .l1tml) 

4 Adjustment for Commercial Banks to Do Offshore Brokerage Business. CBRC 2007-114. 
Commodity Futures Trading Commission 

December 27, 2007 

Page 3 

U.S. Investment Banks Already Actively Participate in OTC Foreign Exchange Transactions with 

Chinese Banks Through CFETS 

The Chinese government has been actively fostering the development and expansion of the OTC ·foreign 

exchange market within China for several years, including the active participation of U.S. banks.

5 For 

example, on May 18, 2005, ABN-AMRO announced that it has signed an agreement with CFETS to 

become one of the first international market makers for China's inter-bank FX trading business.

6 On 

August 22, 2005, Standard Chartered announced it had received in-principal approval from CFETS, to 

participate on its multi-bank portal as a liquidity provider.7 

In July, 2006, a master agreement for RMB cross-currency forwards and swaps drawn up by CFETS was 

approved by the State Administration of Foreign Exchange (SAFE). The press release announcing the 

implementation of this agreement noted that "SAFE released the master agreement after months of 

consultation with market players, including local and foreign banks [emphasis added]." This master 

agreement was modeled after the 1992/2002 ISDA.Master Agreement. On April 9, 2007, CFETS 

launched trading in five currency pairs against the RMB, utilizing a new trading platform based on the 

Reuters Electronic Trading system customized to support RMB. Participants on the platform include the 

300 CFETS member banks, as well as 20 liquidity providers. Six of the 20 liquidity providers are FIA 

members or affiliates of FIA members:.Bank of Montreal, Citigroup8

; Deutsche Bank9; HSBC, RBS and 

UBS.10 

5 In 2006, Moody's Investors Service noted that "(u]nder its World Trade Organization (WTO} accession commitment 

made in 2001 , China will 'fully' open up its banking sector to foreign competition after December 11, 2006. Having 

gradually relaxed constraints over the past five years, China will allow foreign banks access to RMB retail business 

and lift all geographic and client constraints on their operations, eliminating any existing non-prudential measures 

restricting ownership, operations, internal branching and licenses." Moody's Investors Service, November 2006, 

"Special Comment: China's Banking Sector Opening Under WTO Commitments-Beneficial to Foreign and Domestic 

Banks alike, but a Gradual Process; No Near-Term Rating Impact," at page 1. 

6 Steven Metzler, Executive Director of Technology Alliances, FX & Futures, at ABN-AMRO said: "The launch of 

CFETS FX trading is conducive to the development of China's FX market as it provides broader access to global FX 

liquidity in China." "China Foreign Exchange Trade System Goes Live with Reuters Electronic Trading," at page 1, 

Xinhua-PRNewswire (Shanghai, May 18, 2007)." 

7 Mike Bass, Global Head for Rates and FX at Standard Chartered Bank said: "Standard Chartered is pleased to 

have been accepted by CFETS as one of their liquidity providers. We are committed to developing our business in 

China and we believe that our participation on this portal will reinforce our position as a leader in Asia's largest 

emerging market. Our clients need quick time-to-market, ease of connectivity and local support, and this electronic 

trading solution is key to our ensuring we provide them with premium quality service .. " "Standard Chartered Grows 

its Foreign Exchange Capabilities in China with CFETS Membership," at pages 1-2, www.StandardChartered.com 

(press release, Shanghai, May 18, 2007)." 

8 Paulus Mok, Managing Director, Citibank China, head of fixed income, currencies and commodities and country 

treasurer said: "The newly launched CFETS portal, which combines G7 currencies and the Chinese Yuan in one 

centralized system, will generate significant benefits to all market players in China and have a profound impact on the 

future development of China's foreign exchange market. Citi is privileged to be a market-maker for both G7 and 

Yuan currency trading. With our strong global trading capacity and deep commitment to the Chinese market, we are 

confident that our partnership with CFETS will substantially increase the breadth and depth of the currency market in 

China. "CFETS Today Launches New Foreign Exchange Trading System to Trade RMB Using Reuters Technology," 

at pages 2-3 (Business Wire summary of Reuters and CFETS press release, Shanghai, April 9, 2007)." 
Commodity Futures Trading Commission 

December 27, 2007 

Page 4 

As can be seen from the above, CFETS and its members already have broad access to the OTC FX 

market. More importantly, it is evident that U.S. investment banks are actively participating in spot, 

forward and swap transactions, on both an agency brokerage and proprietary trading basis, with Chinese 

banks through SAFE and CFETS sponsored mechanisms. CFTC approval of the Agreement will not 

create an un-level playing field for U.S. FCMs; rather, it will enhance the ability of FCMs to compete with 

other business lines or affiliates within the same investment banking organization. More germane to CME 

Group, CFTC approval of the agreement will eliminate an un-level playing field between exempt OTC FX 

markets and regulated exchange-traded futures and options markets in foreign exchange and interest 

rates. 

It should be noted that CME Group is one of the largest FX platforms in the world, with a leadership 

position in both the listed FX products market as well as in the broader community of OTC FX 

participants. According to an Aite Group LLC report from May 2007 ("Institutional FX Trading Platforms: 

Old Habits Are Hard to Break"), CME Group ranks third among the largest FX platforms, and is the only 

exchange model among the balance of the field of bilateral models. CME Group's exchange model 

provides the CFTC with 100% regulatory market oversight. where the existing bi-lateral models operate in 

the opaque world of OTC and are therefore not similarly regulated. Excluding on-shore Chinese 

institutions from participating in CME's FX market via the proposed Order Routing and Super-Clearing 

Agreement would be to the detriment of the domestic Chinese market. This would create an inherently 

un-level playing field between the domestic Chinese market (without access to CME's exchange model) 

and the global FX market (where CME continues to grow). This would further disadvantage the global FX 

market by missing the opportunity to create regulatory oversight of FX business which will increasingly 

emanate from China and ripple out into the broader FX market. Please find below a ranking of the largest 

FX ECNs as reported by Aite Group LLC in May 2007. This provides the context for the petition to 

provide access to CME Group's exchange model, and clearly demonstrates the power of CME Group's 

value proposition of the transparency to the entire spectrum of global FX market participants relative to 

the existing bi-lateral models currently in the market. 

9 Michele Wee, Vice President, Corporate & Investment Banking at Deutsche Bank, said: "The CFETS-FX platform 

allows liquidity providers such as Deutsche Bank to provide streaming FX prices with one-click trading, order module 

and RFQ functionality. This new platform will encourage development of China's FX market and provide 

opportunities for both Deutsche Bank and CFETS member banks "China Foreign Exchange Trade System Goes 

Live with Reuters Electronic Trading," at page 2, Xinhua-PRNewswire (Shanghai, May 18, 2007)." 

10 "Riding e-FX Wave in China", presentation by Zhu Rong (CFETS staff), Shanghai, November 14, 2007. 
Commodity Futures Trading Commission 

December 27, 2007 

Page 5 

FX Average Daily Volume 

$180 

$160 

$140 

Ill $120 1: 

0 

m $100 

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en $80 

=> 

1: 

$60 

$40 

$20 

$0 

EBS Reuters CME Group FXAII Curren ex HotSpot 

It should also be pointed out that the Agreement is not exclusive: Chinese banks, with the permission of 

CFETS, may execute transactions through approved foreign brokers rather than strictly through CFETS 

as a super clearing member firm of CME Group.

11 Finally, CME Group believes that the Agreement, if 

successful, will ultimately lead to broader hedging, trading and risk management activity on the part of 

Chinese banks in global futures and options markets.12 As this growth and maturation occurs, it is not 

only likely, but probable, that Chinese banks will seek a broader range of services through professional 

financial intermediaries, including U.S. FCMs and investment banks. 

11 In this regard, it should be noted that the Chinese government has a legitimate interest in carefully managing the 

evolution of hedging and risk management practices of Chinese banks in derivatives markets. While such permission 

may not yet exist on a wise scale basis, we believe that the Agreement can and will serve as an incubation laboratory 

for better developing these practices, ultimately paving the way for Chinese banks to access a broader range of 

global exchange markets through on-shore and off-shore intermediaries. 

12 The ability to engage in such hedging activity has been set forth in regulations issued by the State Council on 

March 16, 2007 and effective on April15, 2007. See Reuters article entitled, "China relaxes gold, futures industry 

controls" (Beijing, March 16, 2007) which notes that "China will gradually relax controls over the import and export of 

gold and allow more foreign access to domestic futures markets, the central bank said on Friday in a lengthy 

announcement of new financial reforms .... China will also allow more domestic firms to hedge in overseas futures 

markets .... " This information is collaborated by a bulletin on "The Economic and Commercial Section of the 

Consulate General of the People's Republic of China in Vancouver," citing an April17, XinHua News Agency article. 
Commodity Futures Trading Commission 

December 27, 2007 

Page 6 

U.S. Investment Banks Already Actively Participate in OTC Fixed Income Transactions with 

Chinese Banks Through CFETS 

Similar to the development of FX market activity by Chinese Banks, CFETS has announced or 

implemented arrangements that facilitate activity between Chinese banks and U.S. and European fixed 

income trading platforms. On February 14, 2006, MTS, the premier electronic market for fixed-income 

securities in Europe, announced the signing of a letter of intent with CFETS to develop a domestic fixedincome market in the People's Republic of China. On September 13, 2007, the Shanghai CFETS-ICAP 

International Money Braking Co. Ltd. (CFETS-ICAP) commenced voice braking operations. CFETS-ICAP 

is a 67/33 joint venture interdealer broker, providing voice braking services to the money, bond and 

derivative markets in both the RMB and international markets.

13 

Summary 

The CFTC's approval of the request for exemptive relief will enable CFETS and its member banks access 

to, and the benefits of, deep, liquid, transparent exchange-traded and CFTC-regulated markets for 

financial futures and options. The Agreement is limited to foreign exchange and interest rate products 

only. The Chinese entities that will participate in the super-clearing arrangement are entities that would 

otherwise be unable to trade regulated foreign exchange and interest rate products in the United States. 

Through our Agreement, member banks of CFETS will be exposed to, and gain experience in, trading 

U.S. exchange traded derivative products. This experience in trading and financial market operations will 

ultimately benefit the entire U.S. futures industry and all of its participants as the regulatory environment 

in China continues to evolve and become more open to U.S. businesses. As Chinese entities gain 

experience and expertise in trading the narrow group of derivative products that are included within the 

Agreement, they will likely seek assistance from other U.S. businesses in the future in order to trade 

additional exchange traded derivative products under more complex trading strategies. The Agreement 

and the relationship between CME and CFETS is an important step in that process. 

In its comment letter, FIA states: "[w]e are pleased that the PBC has called upon the expertise of the 

CME to provide consulting and technical assistance to CFETS." FIA recognizes that the People's Bank of 

China, SAFE and CFETS will benefit from the unique and innovative linkage arrangement represented by 

our Agreement. The ability to access a liquid, transparent and regulated market in a carefully supervised 

manner under the auspices of CFETS, and with the educational and technical assistance desired by 

Chinese government authorities is a necessary first step in improving hedging and risk management 

practices within Chinese Banks, particularly where such practices are both embryonic within China and 

13 Michael Spencer, ICAP Group Chief Executive, commented "China represents a significant opportunity for ICAP to 

take part, together with the CFETS, in the rapid development and growth of the interbank financial markets. This is 

an exciting prospect for ICAP, in the next few years the volume of transactions in Chinese wholesale financial 

products will rise rapidly and China will be recognized globally as one of the most important and liquid markets. 

"China Foreign Exchange Trade System and ICAP are approved to prepare to form joint venture in Shanghai," 

www.thisismoney.co.uk (ICAP PLC press release, London and Shanghai, July 26, 2006). 
Commodity Futures Trading Commission 

December 27, 2007 

Page 7 

have been plagued by past failures within China when unaccompanied by such close supervision and 

oversight. 

Based on the foregoing information and facts, we believe the Agreement meets the statutory standards 

for an exemption under section 4(c) of the Act. The Agreement and petition for exemption will promote 

economic and financial innovation by permitting Chinese banks to acquire hedging and risk management 

expertise in a closely supervised structure, accompanied by significant educational and technical risk 

management assistance provided by CME Group that would otherwise be unavailable to CFETS. The 

Agreement will also promote competition by facilitating Chinese bank access to liquid, transparent and 

regulated futures markets, in addition to their existing access to OTC markets, thereby expanding their 

range of choice in accomplishing their hedging and risk management needs. Second, the Agreement and 

petition for exemption is consistent with the public interest and the purposes of the Act in that the ability of 

Chinese banks to hedge interest rate and foreign currency exposures will better enable the Chinese 

government to further liberalize fluctuations in the RMB and more effectively move toward a free market 

economy approach to financial markets. Indeed, this objective has been of paramount interest to the U.S. 

government, as evidenced by the numerous comments of support for the Agreement for Treasury 

Department and Administration officials.

14 Finally, as already explained in our letters dated October 23 

and December 18, 2007, the Agreement and the petition for exemption will not have a material adverse 

affect on the ability of the CFTC or CME Group to discharge their regulatory and self-regulatory duties 

under the Act. 

We therefore request a timely approval of the petition for exemption and authorization to implement our 

Agreement in an expedited fashion. 

CSD/7188 ltr 

cc: Ananda Radhakrishnan 

Jacqueline Hamra Mesa 

Sincerely, 

~j f fJ~ML,_ Craig S. Donohue 

14 Upon the execution of our Memorandum of Understanding with CFETS, the precursor to our Agreement, former 

Treasury Secretary John Snow stated that "this cooperative initiative is an outstanding example of the kinds of 

exchange-rate-related technical cooperation efforts Treasury has consistently advocated as part of our ongoing 

technical cooperation program with China's financial sector and financial regulators."