July 6, 2009 

David A Stawick 

Secretary 

C.F.T.C. 

OFFICE OF THE SECRETARIAT 

2009 JUL 13 Prl 3 28 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street N.W. 

Washington, D.C. 20581 

FCStone· 

UNDERSTANO•SIMPLIFY•SUCCEED 

FCSTONE GROUP, INC. 

COMMODITY RISK INTELLIGENCE 

1251 NW Briarcliff Parkway 

Suite 800 

Kansas City, Missouri 64116 

816-410-7120 OFFICE 

800-255-6381 TOLL FREE 

www.fcstone.com 

COMMENT 

Re: Revised Adjusted Net Capital Requirements for Futures Commission Merchants and 

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

Dear Mr. Stawick: 

FCStone Group Inc. appreciates the opportunity to provide comments on the Commodity Futures 

Trading Commission's ("CFTC or Commission") Federal Register Release dated May 7, 2009 

("the Release"). The Commission is proposing to revise adjusted net capital requirements for 

Futures Commission Merchants and Introducing Brokers. 

FCStone Group Inc. was originally formed as a cooperative of grain cooperatives, but is now a 

publicly held for-profit corporation. FCStone's chief operating subsidiary is FCStone, LLC 

("FCStone"). FCStone is a registered Futures Commission Merchant ("ECM") FCStone Group, 

Inc. and its subsidiaries provide commodity risk management consulting and transaction 

execution services to commercial commodity intermediaries, end-users and producers. FCStone 

and its subsidiaries assist primarily middle-market customers in optimizing their profit margins 

and mitigating exposure to commodity price risk. 

FCStone is one of a limited number of FCMs that are dedicated to serve a core customer base of 

farmer owned cooperatives located in America's heartland. 

The commodity futures industry has a strong agricultural history. It originally evolved to provide 

producers and consumers of agriculture products with a facility to manage exposure to price risk. 

Today, the use of the futures markets to hedge market risk has greatly expanded beyond the 

agricultural markets. Nevertheless, the futures markets continue to play a vital role in agriculture, 

both in America and worldwide. 

FCStone strongly supports the Commission's oversight of the commodity futures industry, 

especially during the current global economic turmoil. It is a commendable achievement that not 

one dollar of customer segregated funds held in an operational FCM has been lost. In our view, 

the regulation and enforcement of segregated funds requirements by the Commission to protect 

customers has been an unqualified success. 

FCStone believes, however, that some of the details of the Release present significant problems. 

In particular the provisions of the Release that will increase capital required to carry customer 

positions based on margin in customer accounts from eight percent to ten percent and noncustomer accounts from four percent to ten percent will cause considerable hardship and result in 

certain unintended consequences. 

In FCStone's view there are three major problems with the increased capital requirement as 

presented in the Release. First, the Release fails to distinguish between capital that should be 

required to carry hedging positions from capital that Should be required to carry speculative 

positions. Second, the Release will impose unnecessary added costs and burdens on midsize 
Mr. David A. Stawick 

Page2 

producers, users and consumers of commodities, particularly in agriculture. Third, it will further 

reinforce the trend of undue concentration that currently threatens the breadth and diversity of the 

FCM community. Each point will be further discussed below. 

Hedge vs. Speculative Trading-One size does not fit all. 

FCStone strongly encourages the Commission to consider the type of transactional activity a 

FCM is performing in setting capital requirements. FCStone's core business remains risk 

management consulting and clearing and execution services to commercial commodity 

intermediaries. In excess of 50 percent of our risk based capital requirements are driven by our 

core commercial commodity intermediaries. We provide facilities for small producers to hedge 

their commodity activities, whether it is agriculture, energy, food services, financial products, or 

metals. 

By their very nature, the hedging positions placed by our customers present less risk than similar 

speculative positions because any reduction of value in a futures position will be offset by an 

opposite movement in the value of the underlying physical position. Indeed the entire point of a 

hedge is to manage the risk of price movements to protect the financial position of the hedger. 

The Commission has historically recognized the difference between positions established for 

speculation from those established for hedging purposes with the two tier margining system. Yet 

the Release does away with that distinction, and in so doing ignores the substantial difference in 

risk presented by the two kinds of positions. Simply stated, the speculative position is riskier to 

the FCM, and the capital requirements should take this into account. 

Imposing a significant increase in capital requirements on a mid sized FCM such as FCStone tllal 

primarily serves bona fide hedging activities is thus not only burdensome but is also unnecessary. 

The Increased Capital Requirements of the Release Will Harm Midsize Hedgers 

Of course, all regulation comes with a cost and an increase in capital requirements is no 

exception. In this case, however, the cost falls with particular impact on mid-size firms such as 

those served by FCStone generally and in agriculture in particular. 

The need for the mid-size producer to hedge price risk is not at question. However, as working 

capital is constrained and credit facilities are limited, the capital requirement increase as set forth 

in the Release will increase the cost of capital of FCMs. These increased costs will likely be 

passed on to the customer. 

The net capital revision as proposed in the Release will also reduce the number of FCMs that are 

accessible to the small or middle-size hedger. The lack of competition will surely lead to 

increased costs. Further, it has been our experience that dually-registered broker/dealer FCMs, 

including those affiliated with large financial institutions, will not offer hedging services to these 

mid-size producers. Thus, the lack of market access could potentially prevent producers from 

hedging these products thereby increasing their risk to price movements and ultimately increasing 

prices to the consumer. 

The potential effect of the proposed capital increase may be the ultimate elimination from the 

commodity futures markets of the very market participants for whom this market was originally 

developed. 

The Increased Capital Requirements of the Release Will Increase Industry Concentration 

FCStone believes the Release as presented will lead to consolidation of current FCMs in order 

meet the requirements and to reduce capital costs. This will ultimately increase the concentration 
Mr. David A. Stawick 

Page3 

of business into fewer FCMs. As the Commission noted in the Release, the number of FCMs has 

fallen from 255 to 134 in less than 15 years. FCStone has noted approximately 181 of the 134 

FCMs operate on a fully disclosed basis and a minimum 15 of these 134 FCMs deal in Forex 

transactions only. Therefore only about 100 of the 134 registered FCMs operate as traditional 

FCMs. We believe the increase in capital requirements will reduce the number of traditional 

operating FCMs even further. 

As noted above FCStone believes fewer FCMs will lead to higher costs to the bona fide hedgers 

and fewer choices for the customer to execute trades, but perhaps even more importantly the 

changes will actually lead to increased systematic risk by reinforcing and accelerating the existing 

trend toward ever greater concentration in the commodities industry. 

For the reasons stated above, FCStone Group, Inc. and its subsidiaries believe the Commission 

should re-consider various aspects of its proposed rule changes to the adjusted net capital 

requirements for FCMs. 

Please contact the undersigned at 816-410-7120 if you have any questions. 

~cely, 

Chief 

Pa~ Executive Officer 

cc· Hor:torable Gary Gensler, Chairman 

Honorable Michael Dunn, Commissioner 

Honorable Jill E. Sommers, Commissioner 

Honorable Bart Chilton, Commissioner 

Honorable Walter Lukken, Commissioner 

Ananda Radhakrishnan, Director-Division of Clearing and Intermediary Oversight 

1 This information was provided to us by the National Futures Association.