Dan M. Berkovitz 

General Counsel 

Jonathan L. Marcus 

Deputy General Counsel 

Robert B. Wasserman 

Chief Counsel, Division of Clearing and Risk 

Martin B. White 

Assistant General Counsel 

Robert A. Schwartz 

Assistant General Counsel 

U.S. COMMODITY FUTURES TRADING COMMISSION 

Three Lafayette Plaza 

1155 21st Street N.W. 

Washington, DC 20581 

(202) 418-5000 

jmarcus@cftc.gov 

rwasserman@cftc.gov 

mwhite@cftc.gov 

rschwartz@cftc.gov 

UNITED STATES DISTRICT COURT 

SOUTHERN DISTRICT OF NEW YORK 

CONOCOPHILLIPS COMPANY, et al., 

Plaintiffs, 

v. 

JAMES W. GIDDENS, Trustee for the SIPA 

Liquidation of MF Global, Inc., 

Defendant. 

Case No. 1:12-cv-06014-KBF 

REPLY BRIEF OF THE COMMODITY FUTURES TRADING COMMISSION 

IN SUPPORT OF THE TRUSTEE’S MOTION TO CONFIRM 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 1 of 16
TABLE OF CONTENTS 

TABLE OF CONTENTS ................................................................................................................. i

TABLE OF AUTHORITIES .......................................................................................................... ii

I. The Plain Meaning of the Part 190 Rules Supports the Trustee. ........................................ 1

II. Section 27a Is Inapplicable. ................................................................................................ 1

III. Federal Law Controls. ......................................................................................................... 8

IV. The Deadline for Certifying a Default Is Irrelevant to the Trustee’s Calculation. ............. 9

CONCLUSION ............................................................................................................................. 10

CERTIFICATE OF SERVICE ......................................................................................................... 

 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 2 of 16
ii 

TABLE OF AUTHORITIES 

Cases

Barnhart v. Walton, 535 U.S. 212 (2002) ................................................................................... 7, 8 

CFTC v. Schor, 478 U.S. 833 (1986) .............................................................................................. 8 

Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156 (2012) .............................................. 1 

Comm’r v. Engle, 464 U.S. 206 (1984) .......................................................................................... 6 

Cuomo v. Clearing House Ass’n, 557 U.S. 519 (2009) .................................................................. 1 

Eastman Kodak Co. v. STWB, Inc., 452 F.3d 215 (2d Cir. 2006) ................................................... 7 

Jones v. Am. Postal Workers Union, 192 F.3d 417 (4th Cir. 1999) ............................................... 8 

KMW Int’l v. Chase Manhattan Bank, N. A., 606 F.2d 10 (2d Cir. 1979) ...................................... 9 

Leist v. Simplot, 638 F.2d 283 (2d Cir. 1980) ................................................................................. 8 

Lin v. U.S., 459 F.3d 255 (2d Cir. 2006)......................................................................................... 1 

Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158 (2007)...................................................... 4 

N.Y. Currency Research Corp. v. CFTC, 180 F.3d 83 (2d Cir. 1999) ............................................ 1 

Tax Analysts v. IRS, 117 F.3d 607 (D.C. Cir. 1997) ....................................................................... 7 

Thomas Jefferson Univ. v. Shalala, 512 U.S. 504 (1994) ............................................................... 1 

Transactive Corp. v. United States, 91 F.3d 232 (D.C. Cir. 1996) ................................................. 4 

Wyeth v. Levine, 555 U.S. 555 (2009) ........................................................................................ 8, 9 

Statutes

7 U.S.C. § 2(a)(1)(A) .................................................................................................................. 8, 9 

7 U.S.C. § 12a ......................................................................................................................... 5, 7, 8 

7 U.S.C. § 24(a) ...................................................................................................................... 5, 7, 8 

7 U.S.C. § 27a ................................................................................................................................. 4 

11 U.S.C. § 762(b) .......................................................................................................................... 8 

Pub. L. 105-277, § 760, 112 Stat. 2681 (Oct. 21, 1998) ................................................................. 5 

Federal Regulations and Register Releases

17 C.F.R. § 190.01(n) ..................................................................................................................... 2 

17 C.F.R. § 190.02(f) ...................................................................................................................... 1 

17 C.F.R. § 190.02(g) ..................................................................................................................... 2 

17 C.F.R. § 190.04 .......................................................................................................................... 3 

17 C.F.R. § 190.05 .......................................................................................................................... 3 

17 C.F.R. § 190.07 ...................................................................................................................... 2, 3 

17 C.F.R. § 190.08(a)(1)(i)(E) ............................................................................................... passim 

17 C.F.R. § 190.08(a)(1)(ii)(E) ....................................................................................................... 2 

Bankruptcy, 48 Fed. Reg. 8716 (Mar. 1, 1983) ................................................................ 2, 7, 9, 10 

Over-the-Counter Derivatives, 63 Fed. Reg. 26114 (May 12, 1998) ............................................. 5 

Legislative History

H.R. Rep. 93-1383 (1974) (Conf. Rep.), reprinted in 1974 U.S.C.C.A.N. 5894 ........................... 9 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 3 of 16
iii 

Other Authorities

Derivatives & the Legal Origin of the 2008 Credit Crisis, 30 Banking & Fin. Svcs. Policy Rep. 

13 (2011) ..................................................................................................................................... 5 

Joint Statement by Treasury Sec’y R. Rubin, Fed. Reserve Bd. Chairman A. Greenspan, and SEC 

Chairman A. Levitt (May 7, 1998) , available at http://www.treasury.gov/press-center/pressreleases/Pages/rr2426.aspx. ........................................................................................................ 5 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 4 of 16
ConocoPhillips’s objection to the Trustee’s claim determination has come to depend 

primarily on persuading this Court to take the extraordinary step of overruling the CFTC’s 

30-year-old interpretation of its own regulation, established through public notice and comment 

contemporaneously with the rule. But agency interpretations established in that way are near 

unassailable, and Plaintiffs fail to cite even a single case in which a court has disapproved one.1

 

Indeed, courts lack the power to reject an interpretation by an agency of its own rules unless the 

competing interpretation is “compelled by the regulation’s plain language.” Thomas Jefferson 

Univ. v. Shalala, 512 U.S. 504, 512 (1994). Far from “compelled,” however, Plaintiffs’ 

interpretation here is aberrant – all interested commenters shared the CFTC’s interpretation – and 

ignores key portions of the rules. There is, therefore, no basis for this Court to decline to follow 

the CFTC’s authoritative view. On the other hand, Plaintiffs’ alternative theories have receded 

considerably since the Court agreed to hear this case. Plaintiffs now admit, for example, that 

Congress did not intend Section 27a to invalidate any existing CFTC regulation – merely to 

cabin the Commission from expanded exercise of regulatory authority. And, while Plaintiffs 

continue to claim that state law governs, they fail even to cite, much less to address, the statute 

that preempts state law here. Accordingly, the Court should confirm the Trustee’s determination. 

I. The Plain Meaning of the Part 190 Rules Supports the Trustee. 

1. The Part 190 Rules direct the trustee to “liquidate[]” any letter of credit or other 

property held by the debtor as margin, 17 C.F.R. § 190.02(f), and to treat the “full proceeds” 

obtained thereby as “customer property,” id. § 190.08(a)(1)(i)(E). As the CFTC explained in its 

opening brief, a letter of credit may be liquidated by drawing it down or otherwise converting it 

 

1

 Counsel for the Commission likewise have not found any such cases. Plaintiffs cite Christopher v. SmithKline 

Beecham Corp., 132 S. Ct. 2156, 2165 (2012) (interpretation first “announced in an uninvited amicus brief”); 

Cuomo v. Clearing House Ass’n, 557 U.S. 519, 531 (2009) (interpretation announced only in the final release); Lin 

v. U.S., 459 F.3d 255, 262 (2d Cir. 2006) (“gloss” imposed in adjudication); and N.Y. Currency Research Corp. v. 

CFTC, 180 F.3d 83, 90-93 (2d Cir. 1999) (adjudicatory interpretation where earlier decisions suggested a “contrary 

reading”), none of which are precedent for what Plaintiffs ask the Court to do here. 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 5 of 16
2 

to cash. (Doc. No. 33 at 14-15 of 32.) ConocoPhillips simply ignores this and asserts that the 

rule “says nothing” to suggest that a trustee may do so. (Doc. No. 39 at 17 of 44.) Because 

Plaintiffs fail to address Rule 190.02(f) in this context, their interpretation is defective on its face. 

2. Having ignored the trustee’s liquidation power, Plaintiffs posit that the rules require a 

trustee to do nothing but direct to the customer property estate any margin payments that happen 

to occur after the bankruptcy filing. But the rules instruct the trustee not to do so. Plaintiffs are 

fundamentally mistaken when they suggest that the only alternatives are to treat margin 

payments as either “customer property” or “the broker’s property.” (Id. at 24 of 44.) “Customer 

property” is a defined term encompassing only “property subject to pro rata distribution.” 

17 C.F.R. § 190.01(n). The rules direct the trustee not to divert margin payments to the pro rata 

pool of customer property, but to credit 100 percent of those funds to the funded balance of the 

individual customer for which the payment was made. See id. §§ 190.02(g)(1)(iii)-(2)(iii), 

190.07(c)(1)(ii). Plaintiffs’ contrary interpretation is not “compelled,” but wrong. 

Plaintiffs attempt to salvage their interpretation by reference to a separate rule, 

190.08(a)(1)(ii)(E), which states that customer property includes “recovery of any debit balance 

[or] margin deficit,” but they appear wrongly to equate a margin payment with the recovery of a 

margin deficit. If a customer collateralizes an account with a letter of credit, “the letter of credit 

itself” serves as margin, Bankruptcy, 48 Fed. Reg. 8716, 8718 (Mar. 1, 1983), and no “margin 

deficit” exists when funds owed are covered by the letter. Such a deficit only exists if there is 

insufficient collateral of any kind in the account to margin open positions or, once the customer’s 

positions are closed, the losses incurred exceed the amount of collateral provided. For example, 

if the customer posts $1 million in collateral and then loses $1.5 million in trading before the 

position is closed, there is a “margin deficit” of $500,000. Typically, the clearinghouse would 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 6 of 16
3 

claim the $500,000 from the FCM’s pooled customer account. If the liquidating FCM can 

recover that margin deficit, the money is customer property, because its restoration is necessary 

to make other customers whole. If the $1 million in collateral was in the form of a letter of 

credit, the “full proceeds” would, by definition, be insufficient to address any margin deficit. 

 Plaintiffs also suggest that “full proceeds” might refer to a hypothetical letter with terms 

that allow the beneficiary to “draw the full proceeds of a letter of credit when only some of those 

proceeds are needed to cure a default.” (Doc. No. 39 at 24 of 44.) But, far from “compelled,” as 

would be necessary to upend the CFTC’s authoritative interpretation, Plaintiff’s theory is 

inconsistent with the rule text, which states, without such qualification, that the “full proceeds” 

are customer property so long as “such letter of credit was received, acquired or held to margin, 

guarantee, secure, purchase or sell a commodity contract.” 17 C.F.R. § 190.08(a)(1)(i)(E). 

 3. While Plaintiffs insist that the “plain language” controls, they nevertheless urge the 

Court to apply a presumption that the rule codifies only state-law rights. (Doc. No. 39 at 17, 19 

of 44.) But none of the pro rata distribution requirements in Part 190 or the Bankruptcy Code 

derive from state law. Plaintiffs cite no state law that would, for example, permit an FCM to 

liquidate a customer’s securities or physical property and distribute the proceeds pro rata – Part 

190 requirements indistinguishable from the rule at issue here. Similarly, Plaintiffs argue for a 

narrow state-law definition of “proceeds” used in the UCC (id. at 17-18 of 44), but the CFTC did 

not adopt that definition in Part 190. Rather, Part 190 uses “proceeds” consistently, see 17 

C.F.R. §§ 190.04(e)(3), 190.05(a)(3), 190.07(b)(1)(iii)(A)(2), (B)(3), & (e)(1), (4)-(5), in a 

manner much closer to the other definition Plaintiffs quote: “the value of land, goods, or 

investments when converted into money, or . . . something received upon selling, exchanging, 

collecting, or otherwise disposing of collateral” (Doc. No. 39 at 17 of 44 (quotation marks 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 7 of 16
4 

omitted)). The CFTC intended this term to have the same meaning throughout Part 190, which is 

presumed when an agency uses identical language in related regulations. Transactive Corp. v. 

United States, 91 F.3d 232, 238 (D.C. Cir. 1996). Finally, Plaintiffs argue that “full proceeds” as 

used by the CFTC would improperly “expand” the estate’s property beyond “MF Global’s 

conditional right” under state law “to draw on those letters,” but they ask the Court to ignore that 

ConocoPhillips specifically agreed, expressly and by operation of state and federal law, that the 

CFTC’s regulations and interpretations would govern. (Doc. No. 33 at 26-27 at 32.) Plaintiffs 

now assert that they did not intend to accept these regulations and interpretations (Doc. No. 39 at 

39 of 44), but the agreements say otherwise (Doc. No. 3-3, ¶ 2 (“all applicable regulations”); 

Doc. No. 3-9 at 11 of 35, ¶1 (“all rules and interpretations of the [CFTC]”) (emphases added)). 

Moreover, an agency’s interpretation established through notice and comment cannot cause 

unfair surprise. Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 170-71 (2007). Thus, 

ConocoPhillips’s state-law rights with respect to these assets and transactions have, from their 

inception, been subject to and circumscribed by federal law, including Part 190. 

4. In light of Plaintiffs’ misapprehensions, it is unsurprising that no commenter shared 

their reading of Rule 190.08(a)(1)(i)(E). While Plaintiffs assert that commenters merely “feared” 

that the rule would be interpreted as the CFTC does (Doc. No. 39 at 26 of 44), that alone would 

confirm that Plaintiffs’ interpretation is not “compelled” and may not, therefore, be accepted. In 

fact, however, ConocoPhillips misstates the views of commenters, each of whom read the 

language just as the CFTC does. (Doc. No. 33 at 9-10 of 32.) Thus, Plaintiffs’ interpretation 

clearly is not “compelled,” and the CFTC’s interpretation is binding. 

II. Section 27a Is Inapplicable. 

ConocoPhillips’s opposition makes the startling concession that, in the Legal Certainty 

for Bank Products Act (“Legal Certainty Act”), 7 U.S.C. § 27a, Congress did not alter, but 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 8 of 16
5 

merely “clarifie[d] what [was] already the current state of the law” in 2000. (Doc. No. 39 at 31 

of 44 (quoting 146 Cong. Reg. 27176, 27208 (Dec. 15, 2000) (Sen. Harkin).) This concession 

disposes of Plaintiffs’ Section 27a argument because they can cite no source of law that would 

have restricted the CFTC from enacting Rule 190.08(a)(1)(i)(E) before 2000. Nor does 

ConocoPhillips dispute that the rule otherwise falls within the CFTC’s cited powers. See, e.g., 

7 U.S.C. §§ 12a(5), 24(a). Thus, the rule was valid at its adoption in 1983 and remains so today. 

1. The Legal Certainty Act was Congress’s direct response to a 1998 CFTC release 

indicating that the Commission “might seek to exercise regulatory authority over financial 

derivatives” transacted by banks, Derivatives & the Legal Origin of the 2008 Credit Crisis, 30 

Banking & Fin. Svcs. Policy Rep. 13, 18 (2011) (emphasis added) (citing Over-the-Counter 

Derivatives, 63 Fed. Reg. 26114 (May 12, 1998)), including commodity “swaps,” as well as 

some “hybrid instruments” including letters of credit with certain “commodity futures or option 

characteristics.” 63 Fed. Reg. at 26116, 20-21; 12 C.F.R. § 204.2 (a)(1) & (b)(1)(v). The release 

contemplated that the CFTC might assert regulatory authority over these categories of product by 

imposing requirements of registration, minimum capital, internal controls, disclosure to 

customers, personnel supervision, recordkeeping, and financial reporting, much like the regime 

applicable to futures. 63 Fed. Reg. at 26124-27. Other regulators “question[ed] the scope of the 

CFTC’s jurisdiction in this area,”2

 and Congress reacted swiftly, first, by imposing a six-month 

“restraint period” in which the CFTC was barred from moving forward. Pub. L. 105-277, § 760, 

112 Stat. 2681 (Oct. 21, 1998). Congress stated that the temporary nature of this action should 

not be construed as “implying a determination that a qualifying hybrid instrument or swap 

agreement, is subject to the” CEA. Id. Soon after, Congress passed the Legal Certainty Act, 

 

2 See Joint Statement by Treasury Sec’y R. Rubin, Fed. Reserve Bd. Chairman A. Greenspan, and SEC Chairman A. 

Levitt (May 7, 1998), available at http://www.treasury.gov/press-center/press-releases/Pages/rr2426.aspx. 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 9 of 16
6 

including Section 27a, to restrict the CFTC from moving to “exercise regulatory authority under 

the [CEA]” as the 1998 release described. Thus, as ConocoPhillips concedes, Section 27a did 

not reduce the CFTC’s authority or void existing regulations, but simply “clarif[ied] what [wa]s 

already the current state of the law” in which the CFTC “d[id] not regulate traditional banking 

products.” (Doc. No. 39 at 31 of 44.) Rule 190.08(a)(1)(i)(E), accordingly, was unaffected. 

2. This history strongly supports the CFTC’s analysis of the phrase “exercise regulatory 

authority under the [CEA],” to which ConocoPhillips has largely been unable to respond. Under 

its plain meaning, to “exercise regulatory authority . . . with respect to [a] product,” 7 U.S.C. 

§ 27a, is to establish rules of general applicability to that product; to do so “under the [CEA]” is 

to regulate that product as if it were a future or swap. As the Supreme Court has warned, 

moreover, such language “cannot be understood if considered apart from the related sections,” 

Comm’r v. Engle, 464 U.S. 206, 223 (1984), yet Plaintiffs say nothing to dispute that: (1) the 

CEA, in several ways, gives content to this phrase that supports the CFTC’s reading; (2) Sections 

27a(b) and (c) confirm that the statute’s function is simply to determine whether a product is or 

is not subject to the regulatory regime applicable to “swaps” and commodity products; or (3) that 

placement of the later-revised Section 27a within Dodd-Frank Section 725 underscores 

Congress’s intention merely to foreclose dual regulation of these products as futures or swaps. 

(Doc. No. 33 at 20-22.) Similarly, while the CFTC pointed out that ConocoPhillips’s 

interpretation may disrupt other aspects of commodity regulation with no Congressional intent to 

do so, ConocoPhillips responds only with the non sequitur that these other provisions “do not 

affect the basic attributes of a letter of credit.” (Doc. No. 39 at 30 of 44.) But they do place 

additional restrictions on other products outside the CFTC’s “regulatory authority” within the 

meaning of Section 27a. (Doc. No. 33 at 24-25 of 32.) And, while ConocoPhillips does not 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 10 of 16
7 

dispute that the CFTC could altogether bar the use of letters of credit as margin, Plaintiffs offer 

no reason to infer that Congress nevertheless intended to stop the CFTC from permitting the 

practice, subject only to reasonable conditions protecting other customers. (Id.) 

3. Because the parties agree that Section 27a did not curtail the CFTC’s exercise of 

existing regulatory authority, and Plaintiffs fail to address these other issues, the outcome here 

does not turn on the applicable level of deference. See Eastman Kodak Co. v. STWB, Inc., 452 

F.3d 215, 222 (2d Cir. 2006) (declining to decide whether Chevron or Skidmore deference 

applies because “the agency interpretation . . . is persuasive”). In any event, Chevron applies. 

Plaintiffs assert that Chevron “is reserved for agency interpretations contained in ‘formal 

adjudications or notice-and-comment rulemaking.’” (Doc. No. 39 at 33 of 44 (quoting 

Christensen v. Harris County, 529 U.S. 579, 587 (2000)).) Even if that were true, Chevron

would apply here – since Section 27a did not roll back existing CFTC regulations, the operative 

rulemaking entitled to deference is the 1983 rulemaking adopting the rules pursuant to the 

CFTC’s view of Congress’s delegations under, inter alia, 7 U.S.C. §§ 12a(5) & 24(a). 48 Fed. 

Reg. at 8739. But Plaintiffs’ contention is not correct – the Supreme Court has confirmed that 

Christensen identified formal adjudications and notice-and-comment rulemakings only as 

illustrative sources of binding interpretation. See Barnhart v. Walton, 535 U.S. 212, 222 (2002) 

(stating that if Christensen “suggested an absolute rule,” the Court’s “later opinion in United 

States v. Mead Corp., [533 U.S. 218 (2001)], denied the suggestion”). Chevron thus applies 

more broadly, where Congress has delegated interpretive authority to the agency and the 

interpretation represents the administrator’s “fair and considered judgment on the matter.” Tax 

Analysts v. IRS, 117 F.3d 607, 613 (D.C. Cir. 1997) (quotation marks omitted) (Chevron

deference to interpretation in a brief); Jones v. Am. Postal Workers Union, 192 F.3d 417, 427 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 11 of 16
8 

(4th Cir. 1999) (same); see Barnhart, 535 U.S. at 222 (factors for determining if “Chevron 

provides the appropriate legal lens”). Here, in addition to the delegation of plenary power to 

issue any regulation “reasonably necessary to effectuate” the CEA, 7 U.S.C. § 12a(5), Congress 

explicitly directed the CFTC to issue regulations establishing procedures for liquidating FCMs 

and defining what is and is not “customer property,” id. § 24(a). The rules directing a trustee to 

liquidate letters of credit and treat the full proceeds as customer property are exactly that. 

Congress also granted the Commission the right to “appear and be heard on any issue” in an 

FCM liquidation. 11 U.S.C. § 762(b). The CFTC’s interpretation of Section 27a is a fair and 

considered exercise of this authority (Doc. No. 33 at 17-25), to which deference is owed. CFTC 

v. Schor, 478 U.S. 833, 844 (1986) (cautioning deference to CFTC’s view of its plenary power). 

III. Federal Law Controls. 

1. With respect to preemption, Plaintiffs fail even to cite CEA Section 2(a)(1)(A), which 

establishes that CFTC regulations supersede state law. Leist v. Simplot, 638 F.2d 283, 322 (2d 

Cir. 1980). Plaintiffs characterize this power as applicable only to “certain narrow categories,” 

but the language they ignore grants the CFTC “exclusive jurisdiction” over all “transactions 

involving” commodity futures. 7 U.S.C. § 2(a)(1)(A). Plaintiffs’ transactions with MF Global, 

in which they obtained commodity futures in consideration for collateral including letters of 

credit, plainly were “transactions involving” commodity futures. Put another way, no CFTC 

regulation applies to letters of credit except in “transactions involving” CFTC-regulated 

products. Plaintiffs’ argument is, therefore, foreclosed by the plain language of the CEA, and, if 

there were any ambiguity, the CFTC would be entitled to Chevron deference. 

2. Instead of addressing the statute, Plaintiffs persist in misstating the Supreme Court’s 

holding in Wyeth v. Levine – which has no application here because, there, “Congress ha[d] not 

authorized the [agency] to pre-empt state law.” 555 U.S. 555, 576 (2009). Plaintiffs now assert 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 12 of 16
9 

that Wyeth is a “landmark” establishing a new requirement that federal agencies explain, 

according to heightened standards, how “state law would impact the federal scheme.” (Doc. No. 

39 at 36-37 of 44.) But Wyeth says no such thing. Rather, in the passage upon which Plaintiffs 

mistakenly rely, the Court explained that where “Congress has not authorized the [agency] to 

pre-empt state law directly,” a court may nevertheless find preemption if state law would “pose 

an obstacle to” Congressional objectives. 555 U.S. at 576-77 (emphasis added). In that inquiry, 

the Court may give “some weight to the agency’s views about the impact of [state] law on 

federal objectives,” but only to the extent of the explanation’s “thoroughness, consistency, and 

persuasiveness.” Id. (quotation marks omitted). That discussion is irrelevant here, because 

Congress directly authorized the CFTC to preempt state law. 7 U.S.C. § 2(a)(1)(A); H.R. Rep. 

93-1383 (1974) (Conf. Rep.), reprinted in 1974 U.S.C.C.A.N. 5894, 5897. 

3. In any event, the CFTC’s analysis here met any applicable standard and addressed the 

state-law issues that Plaintiffs raise. The Commission reasonably concluded – and Plaintiffs do 

not dispute – that the rule is necessary to protect customers from unfairly exacerbated injury in 

the event of a property shortfall, and to ward off the potentially destabilizing effects of increased 

use of letters of credit as margin. In that discussion, the CFTC correctly noted that a bank 

“cannot refuse to pay” on a letter of credit “based upon nonperformance of an underlying 

contract.” 48 Fed. Reg. at 8718; see KMW Int’l v. Chase Manhattan Bank, 606 F.2d 10, 15 (2d 

Cir. 1979). ConocoPhillips protests that there are exceptions for fraud, but, as the Trustee has 

explained, and the CFTC agrees, a trustee need not and should not make a false certification of 

default – Part 190 entitles the estate to the full proceeds of the letter without such certification. 

IV. The Deadline for Certifying a Default Is Irrelevant to the Trustee’s Calculation. 

 Because the Trustee was not required to certify a default, the instrument’s deadline for 

doing so is irrelevant. Plaintiffs, in fact, have admitted that there is no need here to involve a 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 13 of 16
10 

bank at all: Asked by the Court whether, depending on the outcome, “there could be a draw[] on 

the letters of credit,” Plaintiffs responded in the negative, explaining that, if it is decided that the 

“Trustee was entitled to draws,” the parties would “allocate the dollars according[ly]” in the 

Trustee’s claim determinations. (9/25/2012 Tr. at 7.) No party asserts any need to draw 

additional cash into the estate, from the issuing bank or any other source, to satisfy 

ConocoPhillips’s claims to a pro rata share of customer property, much less to do so according to 

terms for certifying a default that is not a condition of the estate’s rights to the property. Nor do 

Plaintiffs dispute that it would have been futile and wasteful, and for that reason unnecessary, for 

the Trustee to attempt collection from the bank, because they admittedly would have sought an 

injunction. (Doc. No. 33 at 30 of 32.) In that context, Plaintiffs resort to mischaracterizing the 

Commission’s adopting release – which they otherwise claim is entitled to “no weight” – as 

proof that the CFTC meant to require a “draw” under all circumstances. (Doc. No. 39 at 40 of 

44.) But the partial sentence they quote is excerpted misleadingly: The passage directs the 

trustee “to draw the full value of [the] letter . . . irrespective of the margin secured thereby.” 48 

Fed. Reg. at 8718 (emphases added). Plaintiffs omit the last clause apparently to suggest that the 

CFTC imposed a requirement of a bank draw rather than, for example, an allocation along the 

lines that ConocoPhillips itself suggests and admits would be proper, but the passage simply 

confirms that the “full value” is customer property, not merely the amount securing open 

positions. Thus, the Trustee should treat each of the letters alike in his calculation of Plaintiffs’ 

allowed claim. 

CONCLUSION 

 For these additional reasons, the Trustee’s claim determination should be confirmed. 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 14 of 16
11 

Respectfully submitted, 

 COMMODITY FUTURES TRADING COMMISSION 

By: /s/ Robert A. Schwartz 

Dan M. Berkovitz, General Counsel 

Jonathan L. Marcus, Deputy General Counsel 

Robert B. Wasserman, 

 Chief Counsel, Division of Clearing and Risk 

Martin B. White, Assistant General Counsel 

Robert A. Schwartz, Assistant General Counsel 

 

U.S. Commodity Futures Trading Commission 

Three Lafayette Plaza 

1155 21st Street N.W. 

Washington, DC 20581 

(202) 418-5000 

jmarcus@cftc.gov 

rwasserman@cftc.gov 

mwhite@cftc.gov 

rschwartz@cftc.gov 

Dated: December 3, 2012

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 15 of 16
CERTIFICATE OF SERVICE

 I hereby certify that on December 3, 2012, I caused the foregoing document to be served 

on all counsel via the Court’s CM/ECF system. 

 /s/Robert A. Schwartz 

 Robert A. Schwartz 

 Assistant General Counsel

U.S. Commodity Futures Trading Commission 

Three Lafayette Plaza 

1155 21st Street N.W. 

Washington, DC 20581 

(202) 418-5958 

rschwartz@cftc.gov 

Case 1:12-cv-06014-KBF Document 42 Filed 12/03/12 Page 16 of 16