~SIFMA Securities Industry and 

Financial Markets Association 

David A. Stawick 

Secretary of the Commission 

Commodity Futures Trading Commission 

Three Lafayette Center 

1 15 5 21st Street, N. W. 

Washington, DC 20581 

C.F.T.C. 

OFFICE OF THE SECRETARIAT 

2009 JUL 7 fU'J 9 ~z 

July 6, 2009 

Received CFTC 

Records Section 

c?llo7lzaJtl 

COMMENT 

Re: RIN 3038-AC66; Revised Adjusted Net Capital Requirements for Futures 

Commission Merchants and Introducing Brokers, 74 Fed. Reg. 21290 

(May 7, 2009) 

Dear Mr. Stawick: 

The Capital Steering Committee (the "Committee") of SIFMA 1 appreciates the 

opportunity to comment on the Commodity Futures Trading Commission's ("CFTC") 

proposal regarding proposed changes to the net capital requirements ("the proposal") for 

futures commission merchants ("FCMs") and introducing brokers ("BIDs"). 

Overview 

The Committee believes that the lack of any economic analysis offered for the 

CFTC proposal, and its inconsistency with the general thrust of, and a number of specific 

recommendations contained in, the Administration's proposal as outlined in the U.S. 

Treasury's recently released report, Financial Regulatory Reform: A New Foundation 

("Treasury Report") argues against proceeding further with the proposal. We respectfully 

suggest that the CFTC refrain from taking action on it until such time as it has undertaken 

an analysis of the issue and coordinated its actions with the Treasury Report and the 

anticipated actions arising out of that document. 

1 The Securities Industry and Financial Markets Association brings together the shared interests of more 

than 600 securities firms, banks and asset managers. SIFMA's mission is to promote policies and practices 

that work to expand and perfect markets, foster the development of new products and services and create 

efficiencies for member firms, while preserving and enhancing the public's trust and confidence in the 

markets and the industry. SIFMA works to represent its members' interests locally and globally. It has 

offices in New York, Washington D.C., and London and its associated frrm, the Asia Securities Industry 

and Financial Markets Association, is based in Hong Kong. 

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Below are some general observations on the proposal, followed by our specific 

responses to a number of questions posed in the release. 

General Observations: 

• No economic rationale for the substantial increase in capital requirements is 

provided in the release. We believe that an analysis demonstrating that the 

current capital requirements are insufficient should be a prelude to any proposal to 

increase capital requirements so substantially. We believe that such analyses are 

critical to a productive and informed dialogue between regulators and the industry 

with respect to the regulatory infrastructure, particularly in the case of 

determining regulatory capital standards. 

• The Committee finds itself unable to take a position regarding the proposal to 

raise the required minimum dollar amount of adjusted net capital ("ANC") of 

FCMs from $250,000 to $1,000,000, or to increase the FCM capital requirement 

from 8 percent of the risk margin for positions in customer accounts and 4 percent 

of the risk margin for positions in non-customer accounts to 10 percent for both. 

In the absence of data and an analysis of the impact upon FCMs of the market 

disturbances of the last year, we are not in a position to know if those numbers are 

appropriate, too high, or too low. 

• From our perspective, the Committee believes that the CFTC's current capital 

requirements appeared to function well during the Fall of2008. We understand 

that the unwinding of Bear Steams' and Lehman Brothers' futures businesses did 

not create any significant problems2

, and we know of no instance of an FCM 

failing during that period as the result of inadequate capital. 

• In the current debates about future capital requirements, virtually all regulators 

have discussed the desirability of creating a "counter-cyclical" capital regime 

rather than a framework that accentuates market movements. 3 To adopt the 

current proposal at a point in time when it is premature to conclude that the 

economy has definitely rebounded and that the financial markets are in a recovery 

phase, is certainly inconsistent with that goal. 

• The Administration has outlined a plan to publish a "fundamental reassessment of 

existing regulatory capital requirements" by December 31,2009.4 Larger FCMsand their affiliates- are subject to the regulatory requirements of many different 

2 It is our understanding that capital per se was not the primary problem at either Bear Stearns or Lehman 

Brothers, but instead problems with liquidity and funding. Insofar as the CFTC's proposals concern only 

minimum capital requirements and do not address either liquidity or funding, if in effect last year they do 

not seem likely to have had any significant impact in maintaining the solvency of those fmns, or to have 

provided any additional protection for customer assets of their affiliated FCMs. 

"We also urge the BCBS to complete an in-depth review of the Basel II framework to mitigate its procyclical effects." Treasury Report, p. 16 4 Treasury Report, p. ll 

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domestic and foreign banking, securities, and futures supervisors. As a means of 

allowing firms to more efficiently plan for the deployment and usage of capital, 

we respectfully request that the CFTC withhold taking action on the proposal until 

after the publication of that report. 

Specific Responses: 

Below are specific responses to various issues contained in the CFTC proposal and the 

Solicitation of Comments. 

Rule 1.17(a)(l)(i)(A) -- Increase in minimum ANC requirement from $250,000 to 

$1,000,000. 

As mentioned above, in the absence of data and an economic analysis, we don't feel we 

are in a position to offer a firm opinion regarding the appropriateness of the increase. We 

will note that insofar as the proposing release suggests that the CFTC is significantly 

concerned by the concentration of customer assets at fewer and fewer firms, as a matter 

of first impression it would appear that raising the minimum ANC will exacerbate that 

concern, and drive further consolidation of the futures business. 5 

Rule 1.17(a)(l)(i)(B) Increase in minimum ANC from 8% of customer risk margin 

requirement plus 4% of non-customer risk margin requirement to 10% of the sum of the 

two requirements. 

The lack of data and an empirical analysis prevents us from takipg a definitive view. 

However, it is clear that a number of regulatory bodies are currently considering 

proposals that may force financial institutions to review their organizational structure and 

lines of business. In particular, the Treasury Report has focused attention on OTC 

derivatives and the harmonization of futures and securities regulation, and calls for 

stricter capital and liquidity requirements for Tier 1 Financial Holding Companies, a 

number of which are active participants in the futures markets. We would recommend 

deferring any substantive revision of Rule 1.17 until more clarity exists regarding 

potential revisions in the regulatory environment. 

Rule 1.17(b)(2-4) and (7-10) --Revision of definitions of"customer", "proprietary 

account", "noncustomer account", "customer account", and "risk margin", and addition 

of definitions of"cleared over the counter derivative positions", and "cleared over the 

counter customer". 

The proposed revisions and additions of definitions appear appropriate given the CFTC's 

intention to address the clearance of OTC derivatives. That said, the revisions and new 

~This point would also seem to run counter to some of the findings in the discussion of the "Cost-Benefit 

Analysis" in the proposing release. In particular, the statement that "The proposed amendments ... should 

have no effect on the following areas: efficiency, competitiveness or price discovery." While we concede 

that the CFTC must consider a variety of criteria and concerns in making its decisions, we do not see how 

quadrupling the minimum required ANC would have no effect on those areas. 

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definitions, and their potential impact on segregated funds and capital adequacy 

requirements, further suggest the merits of deferring revisions of CFTC Rule 1.17. At 

this point in time and with the regulatory landscape in such a state of flux, the Committee 

believes that it is difficult to impossible to estimate the potential impact of the proposed 

revisions of CFTC Rule 1.17 on those computations. Accordingly, we are unable to offer 

a definitive view on the appropriateness or relevance of the proposed changes in 

determining FCMs' capital requirements. 

Rule 1.17 (c)(S)(x) --Revision of definition of ANC to include a requirement for cleared 

OTC derivative positions. 

The Committee believes including proprietary cleared OTC derivative positions in the 

determination of ANC is appropriate. We note that, as in the case of proprietary futures 

and granted options positions ofFCMs, the CFTC intends to apply to cleared OTC 

derivative positions a deduction of 100% of the maintenance margin requirements for 

positions that are cleared by clearing organizations of which an FCM is a member, and a 

deduction of 150% of the maintenance margin requirements for positions that are cleared 

by clearing organizations of which an FCM is not a member. Once again, no analysis is 

supplied in support of this aspect of the proposal. However, given the distinctly different 

characteristics of listed futures and options on the one hand and OTC derivatives on the 

other (e.g., differences in liquidity; duration; complexity; etc.) it is not apparent to us that 

the application of identical requirements to both categories of instruments is necessarily 

appropriate. 

Solicitation of Comments -- The CFTC has asked for comments regarding the 

"advisability of expanding ANC requirements for FCMs that are also securities brokers 

and dealers ('FCM!BDs'), by increasing their ANC by the amount of net capital required 

by SEC Rule 15c3-1 (a)." The rationale offered is that "This would help ensure that the 

FCMIBD's capital requirements reflected more fully the scope of customer activity by 

both its securities and futures customers." 

At the risk of seeming tiresome, we would again point out the lack of any data or factual 

examination supporting this suggestion. The Committee believes that the transfer and 

liquidation of clients' futures accounts were not significant issues in the unwinding of 

Bear Stearns and Lehman Brothers, suggesting that the CFTC's rule set appears to have 

been effective in preserving futures customers' assets. Additionally, the prevailing view 

is that consolidating the number of operating entities generally strengthens the risk 

management and internal controls of a firm. Under that view, regulations should provide 

an incentive for firms to do so. However, a regulation that would permit no reduction of 

capital requirements for firms to take actions that improve their risk profile and bolsters 

controls is militating against prudent management. 

And as indicated above, in light of ongoing regulatory proposals in the U.S. and 

internationally to reassess the overall regulatory framework and capital requirements for 

financial institutions, it appears to us premature and inopportune for the CFTC to adopt 

such a proposal acting independently of other U.S. regulators. In particular, we strongly 

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urge the CFTC to work in close cooperation with the Securities and Exchange 

Commission in addressing the appropriate capital requirements for entities that are both 

FCMs and BIDs. Such cooperation will be even more important if and when additional 

categories of financial instruments move from trading and clearing on a bilateral basis to 

other formats. 

If there are any questions concerning our observations or if the CFTC wishes the 

Committee to expand upon them, please do not hesitate to contact me or our Committee 

staff advisor, Jerry Quinn, of the SIFMA staff. Thank you. 

~ncerely, } ·) 

J •' '

l i . ,• '/ ' 4.:4~ I J 

{ ~ r · .· ,// <A , / {Lb<_-- '-/;/ ·r L.l..b(_.. / t "i,.. -·-· ·· 

Daniel Mcisaac, Chair 

Capital Steering Committee 

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