CORRECTED VERSION 

By Electronic Mail 

July 6, 2009 

Mr. David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street NW 

Washington DC 20581 

Futures Industry Association 

200.1 Pennsylvania Ave. I'I'W 202.466.5460 

Suite 600 202.296.3lli4 fax 

Washington, DC 20006-1823 www.futuresindu~t,.Y.org 

COMMENT 

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Re: Revised Adjusted Net Capital Requirements for Futures Commission Merchants 

and Introducing Brokers, 74 Fed.Reg. 21290 (May 7, 2009) 

Dear Mr. Stawick: 

The Futures Industry Association ("FIA'') is pleased to submit these comments on the 

Commodity Futures Trading Commission's ("Commission's") proposed. amendments to its 

minimum financial requirements (17 CFR § 1.17). FIA is a principal spokesman for the 

commodity futures and options industry. FIA's regular membership is comprised of 

approximately 30 of the largest futures commission merchants ("FCMs") in the United States, 

the majority of which are either registered with the Securities and Exchange Commission 

("SEC") as broker-dealers or are affiliates of registered broker-dealers. Our larger members 

are part of integrated financial services companies, with affiliates world-wide. 1 

The Commission's minimum financial requirements currently require an FCM to maintain 

adjusted net capital equal to or in excess of the greatest of: (i) $250,000; (ii) 8 percent of the 

tota1 risk margin requirement for positions carried in customer accounts, plus 4 percent of the 

total risk margin requirement for positions carried in non-customer accounts ("risk-based 

capital requirement"); (iii) the amount of adjusted net capital required by a registered futures 

association of which it is a member; and (iv) for securities brokers and dealers, the amount of 

net capital required by SEC Rule 15c3-l(a). 17 CFR § 1.17(a)(l)(i). 

Among PIA's associate. members are. representatives from virtually all other segments of the futures 

industry, both national and international. Reflecting the scope and diversity of its membership, FIA estimates 

that its members effect more than eighty percent of all customer transactions executed on United States contract 

markets. 
Mr. David A. Stawick 

July 6, 2009 

Page 2 

To "ensure the sound financial strength'' of FCMs, the Commission proposes to amend Rule 

1.1 7(a)(l )(i) to increase the minimum dollar amount of adjusted net capital that an FCM 

would be required to maintain from $250,000 to $1,000,000, and to increase to 10 percent 

from 8 percent and 4 percent, respectively, the alternative risk-based capital requirement for 

customer and non-customer positions.2 The Commission further proposes to amend the 

definitions of."customer" and "non-customer account" set out in Commission Rule 1.17 (b) to 

confirm that cleared over-the-counter (OTC) derivative instruments (whether cleared in the 

U.S. or abroad) would be included in the calculation of an FCM's risk-based capital 

requirement.3 The definition of a "proprietary account" in Rule 1.17(b) is similarly proposed 

to be revised to assure that art FCM takes an appropriate capital charge with respect to the 

FCM's proprietary positions in cleared OTC derivatives.4 

Separately, the Commission has requested comment on the advisability of increasing the 

Commission's adjusted net capital requirements for FCMs that are also securities brokerdealers to include, in addition to the amount that would otherwise be required by the 

Commission's rules, an amount equal to such FCM/broker-dealer' s net capital requirement 

under SEC Rule 15c3-l. Currently, Commission and SEC rules each require a duallyregistered firm to maintain net capital in excess of the higher of the two capital requirements. 

If the Commission were to move forward, a 'dually-registered firm's requirement would be the 

sum ofthetwo calculations.5 . . . . . ... .. 

PIA appreciates and supports the Commission's interest in assuring that FCMs maintain 

sufficient capital to maintain their futures-related and other business activities. We, therefore, 

are pleased to endorse several of the Commission's proposals. In particular, we support the 

proposed amendment to Rule 1.17(a)(l )(A)(i), which would increase the minimum dollar 

2 The Commission has also proposed to increase the minimum adjusted net capital requirement for 

introducing brokers from $30,000 to $45,000. As the Commission notes, the National Futures Association 

("NFA") currently requires introducing brokers to maintain adjusted net capital of at least $45,000. Therefore, 

adoption of this proposed amendment would not increase the adjusted net capital requirement for introducing 

brokers. 

A "cleared over-the-counter derivatives instrument" is defined in proposed rule 1.17(b )(9) to mean an 

"over the counter derivative instrument" (as defined in 12 USC 4421), positions of any person carried on the 

books of the futures commission merchant and cleared by any organization permitted. to dear such instruments 

under the laws of the relevant jurisdiction." 

4 As with exchange-traded futures and options positions, an FCM would not take a capital charge with 

respect to positions in cleared OTC derivatives that are "covered," as defined in Commission Rule 1.170). In 

general, a transaction or position in a contract for future delivery on a board of trade or commodity option is 

"covered" where such transaction or position normally represents a substitute for transactions to be made or 

positions to be taken at a later time in a physical marketing channel. 

FIA understands that the request for comment on the advisability of requiring a joint FCM/brokerdealer to maintain adjusted net capital equal to the sum of its capital requirements under Commission and SEC 

rules is in the nature of an advance notice of proposed rulemaking. Thus, the Commission would not amend its 

rules to impose such a requirement without first publishing a notice of proposed rulemaking and soliciting 

additional comments. 

'.; 
Mr. David A. Stawick 

July 6, 2009 

Page 3 

adjusted net capital requirement for FCMs from $250,000 to $1,000,000. We also favor 

adoption of the proposed amendments to Rule 1.17(b ), revising the definitions of "customer," 

"non-customer account" and "proprietary account" to ensure that cleared OTC derivatives are 

taken into account in computing an FCM's risk-based capital requirement and required capital 

charges for uncovered positions. 

Further, we agree with the Commission that "the risk associated with non-customer accounts 

may not necessarily be less than the risk associated with customer accounts under conditions 

of financial stress for the FCM." 74 Fed.Reg. 21290, 21293 (May 7, 2009). Therefore, we 

can support applying the same percentage to customer and non-customer accounts in 

calculating an FCM's risk-based capital requirement.6 However, we oppose the proposal to 

increase this percentage to 10 percent and, instead encourage the Commission to require that 

risk-based capital be calculated at 8 percent for positions carried in both customer and noncustomer accounts.7 

FIA understands that, based on financial reports filed routinely by its member FCMs, the 

Chicago Mercantile Exchange ("CME") provided an historical analysis of the impact of a 10 

percent requirement in calculating risk-based capital and found that the proposed increase 

would have an adverse impact on a significant number of CME clearing member firms. FIA 

obviously does not have acc~ss to the same financial reports as the CME .. However, based on 

discussions with man~ of our member firms, we have every reason to believe the CME's 

findings are accurate. Rough calculations based on the monthly financial data for FCMs 

published on the Commission?s website confirm that the increased capital requirements for 

larger firms could be in the hundreds of millions of dollars. 

We appreciate that many of the larger FCMs may appear to have substantial. excess capital, 

but a number of the smaller firms do not.9 In any event, institutional investors generally 

prefer to deal with FCMs and broker-dealers that hold significant amount of excess capital. A 

substantial reduction in excess capital, even if combined with a corresponding increase in 

required capital, could cause institutional customers to move their business to other FCMs or 

simply reduce their use of the futures markets entirely. 

6 We believe many FCMs will need more than 60 days to implement this change, however, and request 

that any final rules be effective no earlier than 120 days after publication in the Federal Register. 

We note that the Federal Register release accompanying the proposed amendments provides no 

empirical, or even anecdotal, evidence that the current 8 percent risk based capital requirement is inadequate. 

8 In its comment letter to the Commission, Newedge USA, LLC estimated that its minimum capital 

requirements coul.d increase by as much as 45 percent, without any change in its risk profile. 

9 In addition, most firms meet some portion of their capital requirements through the use of subordinated 

loans either directly or indirectly through a parent or affiliate. The interest payments on these loans are likely to 

be significant. Further, these loan agreements may have coven!lllts that require the FCM to maintain a certain 

amount of excess capital. 
Mr. David A. Stawick 

July 6, 2oo9 

Page4 

Moreover, as the Commission is aware, the Administration's comprehensive financial 

regulatory reform proposal anticipates that the capital requirements of all financial firms will 

be strengthened. 10 It is likely, therefore, that with respect to those FCMs that are part of an 

integrated financial services company - which includes essentially all of the ma:jor FCMs, 

including the ten largest - affiliated entities will also face a demand for more capital, which 

may require FCMs to reduce their excess capital further. As a result of these potentially 

competing demands for capital, certain FCMs may elect to withdraw from registration and 

deploy their capital for use in more profitable business lines. 

We respectfully disagree, therefore, with the Commission's conclusion that, if adopted, the 

proposed amendments should have no effect on competitiveness. To the contrary, adoption of 

the proposed amendments may well lead to further concentration of customer funds in a 

handful of FCMs. In light of the fact that the Commission's current capital rules served the 

industry and the markets well during the recent financial crisis, including the unwinding of 

Bear Stearns & Co. and the bankruptcy of Lehman Brothers Holdings, Inc., we encourage the 

Commission to move cautiously before imposing additional capital requirements that may be 

unnecessary to protect customers and the financial integrity of the markets and would serve 

only to reduce further competition within the financial services industry. 

Appropriatedc;apital requirements, of course,are not the sole means by which customer 

protection and the financial integrity, of the markets are ensured. The obligations imposed by 

customer segregation provisions under section 4d of the Commodity Exchange Act ("Act") 

and Commission Rules 1.20-1.29,-ahmg with theforeign futures and foreign options secured 

amount account provisions in Commission Rule 30.7, are the primary regulatory vehicles 

through which the protection of customer funds is ensured. Financial integrity of the markets 

is achieved in large part through the implementation at the several derivatives clearing 

organizations ("DCOs") of sophisticated risk management systems required under Core 

PrincipleD in section 5b(c)(2)(D) of the Act, assupplemented by Appendix A to Part 39 of 

the Commission's Rules. DCOs use these risk management systems, among other things, to 

determine the permitted forms and necessaR' levels of margin "to secure prudentially 

obligations arising from clearing transactions."1 

For the same reasons that we oppose the proposal to require FCMs to calculate their riskbased capital based on I 0 percent of their total risk margin requirement, we would strongly 

oppose an amendment requiring a joint- FCM!broker-dealer to maintain adjusted net capital 

equal to the sum of the firm's Commission and SEC capital requirements. Our members have 

not analyzed fully the financial or business implications of this suggestion. Nonetheless, it 

appears certain that the adverse financial impact described above would be magnified if firms 

10 In this connection, although we understand the Commission's desire to move forward, we ask the 

Commission to consider whether it would be more appropriate to defer acting on the proposed amendments so 

they may be considered in coordination with the Administration's comprehensive regulatory reform proposals. 

11 FCMs also endeavor to mange the risks of their businesses properly and, in that regard, may require 

their customers to deposit margin in excess of the minimum required by a relevant exchange or DCO. 
Mr. David A. Stawick 

July 6, · 2009 

Page 5 

were required to meet such a requirement. The contemplated approach, if adopted, would 

have an equally dramatic effect on the securities-related activities of these firms. 

We urge the Commission to consider carefully the potential adverse consequences before 

making any proposals to amend so drastically its minimum financial requirements for FCMs. · 

In this regard, if the Commission were to determine to move forward and propose such a 

requirement, Commission should first conduct a thorough economic analysis supporting such 

a dramatic increase, including the cost-benefit analysis required under section 15 of the Act 

and, to the extent appropriate, make that analysis, not simply its findings and conclusions, 

available to the public. 

Thank you for the opportunity to submit these comments with respect to the proposed 

amendments to the Commission's minimum financial requirements. Ifthe Commission has 

any questions concerning the matter discussed in this letter, please contact me at (202) 466-

5460. 

Sincerely, 

John M. Damgard 

President ; ·, 

cc: Honorable Gary Gensler, Chairman 

Honorable Michael Dunn, Commissioner 

Honorable Walter Lukken, Commissioner 

Honorable Jill E. Sommers, Commissioner 

Honorable Bart Chilton, Commissioner 

Division of Clearing and Intermediary Oversight 

Ananda Radhakrishnan, Director 

Thelma Diaz, Associate Director 

Mark Bretscher, Special Counsel