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 

BRIEF OF THE COMMODITY FUTURES TRADING COMMISSION 

IN SUPPORT OF THE TRUSTEE’S MOTION TO CONFIRM 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 1 of 32
TABLE OF CONTENTS

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

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

INTRODUCTION .......................................................................................................................... 1

REGULATORY BACKGROUND ................................................................................................ 2

STANDARDS OF REVIEW .......................................................................................................... 6

DISCUSSION ................................................................................................................................. 9

I. The Trustee’s Interpretation of Rule 190.08(a)(1)(i)(E) Is Correct. ................................... 9

II. Rule 190.08(a)(1)(i)(E) Is Not Arbitrary, Capricious, or Contrary to the CEA. .............. 11

a. The Rule Is Rationally Based on Relevant Factors. ...................................................... 11

b. The Rule Is Consistent with the CEA. ........................................................................... 12

III. State Law Does Not Prevent the Application of Part 190. ............................................... 21

a. There Is No Preemption Question Because ConocoPhillips 

Agreed to Abide by the Part 190 Rules. ........................................................................ 21

b. Rule 190.08 Preempts State Law to the Extent of Any Conflict. .................................. 22

IV. The Trustee’s Calculation Does Not Depend on the Letter’s Expiration Date. ................ 24

CONCLUSION ............................................................................................................................. 25

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

 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 2 of 32
ii 

TABLE OF AUTHORITIES

Cases

2 Tudor City Place Assocs. v. 2 Tudor City Tenants Corp., 924 F.2d 1247 (2d Cir. 1991) ......... 21 

Auer v. Robbins, 519 U.S. 452 (1997) ................................................................................ 8, 11, 24 

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

CFTC v. Schor, 478 U.S. 833 (1986) .................................................................................. 7, 18, 20 

Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 (1984) ................................................... passim 

Cohn v. United States, 872 F.2d 533 (2d Cir. 1989) ....................................................................... 2 

Comm’r v. Engle, 464 U.S. 206 (1984) ........................................................................................ 15 

Consarc Corp. v. Iraqi Ministry, 27 F.3d 695 (D.C. Cir. 1994) ..................................................... 8 

Costello v. Grundon, 651 F.3d 614 (7th Cir. 2011) ...................................................................... 21 

Dobrova v. Holder, 607 F.3d 297 (2d Cir. 2010) ......................................................................... 17 

Feimei Li v. Renaud, 654 F.3d 376 (2d Cir. 2011) ................................................................... 7, 14 

Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141 (1982) ............................................. 23 

First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287 (1985) ................................. 25 

Handberry v. Thompson, 446 F.3d 335 (2d Cir. 2006) ........................................................... 14, 20 

Harmelin v. Man Fin., Inc., No. 06-1944, 

 2007 U.S. Dist. LEXIS 73851 (E.D. Pa. Oct. 2, 2007) ............................................................. 21 

In re SI Restructuring, Inc., 542 F.3d 131 (5th Cir. 2008) ............................................................. 9 

Iowa, Chi. & R.R. Corp. v. Wash. County, 384 F.3d 557 (8th Cir. 2004) .............................. 14, 20 

Khouzam v. Ashcroft, 361 F.3d 161 (2d Cir. 2004) ........................................................................ 8 

KMW Int’l v. Chase Manhattan Bank, N. A., 606 F.2d 10 (2d Cir. 1979) .................................... 12 

Kruse v. Wells Fargo Home Mortg., Inc., 383 F.3d 49 (2d Cir. 2004) ........................................... 7 

Leist v. Simplot, 638 F.2d 283 (2d Cir. 1980) ........................................................................... 2, 22 

Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158 (2007)................................................ 8, 11 

Lorillard v. Pons, 434 U.S. 575 (1978) ........................................................................................ 18 

Lumber Liquidators, Inc. v. Stone Mt. Carpet Mills, Inc., No. 3:08-cv-573, 

 2009 U.S. Dist. LEXIS 59388 (E.D. Va. July 10, 2009) ............................................................ 9 

Marshall v. Barlow’s, Inc., 436 U.S. 307 (1978) ...................................................................... 9, 19 

McDaniel v. Bear Stearns & Co., 196 F. Supp. 2d 343 (S.D.N.Y. 2002) .................................... 21 

Mei Fun Wong v. Holder, 633 F.3d 64 (2d Cir. 2011) ................................................................... 8 

Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) ................. 7, 11 

Motrade v. Rizkozaan, Inc., 95 Civ. 6545, 

1999 U.S. Dist. LEXIS 10397 (S.D.N.Y. July 6, 1999) ........................................................... 10 

National R.R. Passenger Corp. v. Boston & Me. Corp., 503 U.S. 407 (1992) ............................... 7 

New Jersey Bank, N.A. v. Bradford Sec. Operations, Inc., 690 F.2d 339 (3d Cir. 1982) ............. 22 

NRA of Am., Inc. v. Reno, 216 F.3d 122 (D.C. Cir. 2000) .............................................................. 8 

Resolution Trust Corp. v. Diamond, 45 F.3d 665 (2d Cir. 1995) ................................................. 22 

Skandalis v. Rowe, 14 F.3d 173 (2d Cir. 1994) .............................................................................. 7 

Solimino v. Astoria Fed. Sav. & Loan Ass’n, 901 F.2d 1148 (2d Cir. 1990) ............................... 18 

Stuber v. Hill, 170 F. Supp. 2d 1146 (D. Kan. 2001) ............................................................... 2, 22 

Talk Am., Inc. v. Mich. Bell Tel. Co., 131 S. Ct. 2254 (2011) ........................................................ 8 

Twp. of Spring v. Std. Ins. Co., No. 09-5518, 

 2011 U.S. Dist. LEXIS 59241 (E.D. Pa. June 1, 2011) .............................................................. 9 

Udall v. Tallman, 380 U.S. 1 (1965)......................................................................................... 8, 11 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 3 of 32
iii 

Union Carbide Corp. v. Comm’r of Internal Revenue, _ F.3d_, No. 11-2552, 

 2012 U.S. App. LEXIS 18876 (2d Cir. Sept. 7, 2012) ......................................................... 8, 24 

United States v. Mead Corp., 533 U.S. 218 (2001) ........................................................................ 8 

United States v. Wilson, 503 U.S. 329 (1992) .............................................................................. 18 

Vencor, Inc. v. Webb, 33 F.3d 840 (7th Cir. 1994) ....................................................................... 21 

Wyeth v. Levine, 555 U.S. 555 (2009) .................................................................................... 23, 24 

Statutes

5 U.S.C. § 553 ................................................................................................................................. 4 

7 U.S.C. § 1a ........................................................................................................................... 15, 16 

7 U.S.C. § 2(a)(1)(A) ............................................................................................................. passim 

7 U.S.C. § 2(a)(1)(C)(i)(I) ............................................................................................................. 15 

7 U.S.C. § 2(a)(1)(H) .................................................................................................................... 16 

7 U.S.C. § 5(a) ................................................................................................................................ 2 

7 U.S.C. § 5(b) .............................................................................................................................. 13 

7 U.S.C. § 5-103(c) ....................................................................................................................... 22 

7 U.S.C. § 6a ................................................................................................................................. 15 

7 U.S.C. § 6d(a)(2) ........................................................................................................................ 19 

7 U.S.C. § 6f ................................................................................................................................. 15 

7 U.S.C. § 6k ................................................................................................................................. 15 

7 U.S.C. § 6m ................................................................................................................................ 15 

7 U.S.C. § 6p ................................................................................................................................. 15 

7 U.S.C. § 6r ................................................................................................................................. 16 

7 U.S.C. § 6s ................................................................................................................................. 16 

7 U.S.C. § 7a-1(c)(1)..................................................................................................................... 15 

7 U.S.C. § 12a ........................................................................................................................... 3, 13 

7 U.S.C. § 12a ........................................................................................................................... 2, 18 

7 U.S.C. § 13b ............................................................................................................................... 15 

7 U.S.C. § 18 ................................................................................................................................. 15 

7 U.S.C. § 24(a) ........................................................................................................................ 3, 13 

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

11 U.S.C. § 761(10) ........................................................................................................................ 3 

11 U.S.C. § 766(h) .............................................................................................................. 3, 10, 24 

Bankruptcy Abuse Prevention & Consumer Protection Act of 2005, 

 P.L. 109-8, 119 Stat. 23 (April 20, 2005) ................................................................................. 18

Dodd-Frank Wall Street Reform & Consumer Protection Act, 

 P.L. 111-203, 124 Stat. 1376 (July 21, 2010) ..................................................................... 17, 18 

Gramm-Leach-Bliley Act, Pub. L. No. 106–102, 113 Stat. 1338 (Nov. 12, 1999) ...................... 19 

UCC § 1-102(a)............................................................................................................................. 22 

UCC § 1-103(b) ............................................................................................................................ 22 

UCC § 5-114, cmt. 1 ..................................................................................................................... 12 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 4 of 32
iv 

Federal Regulations and Register Release

17 C.F.R. §§ 1.25-1.28 .................................................................................................................. 14 

17 C.F.R. § 39.13(g)(10) ............................................................................................................... 19 

17 C.F.R. § 190.02(f) .................................................................................................................. 3, 9 

17 C.F.R. § 190.04(e)(3) ............................................................................................................... 10 

17 C.F.R. § 190.05(a)(3) ............................................................................................................... 10 

17 C.F.R. § 190.07(b) ................................................................................................................... 10 

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

Bankruptcy, 46 Fed. Reg. 57535 (proposed Nov. 24, 1981) ................................................. passim 

Bankruptcy, 48 Fed. Reg. 8716 (Mar. 1, 1983) ..................................................................... passim 

Business Conduct Standards for Swap Dealers & Major Swap Participants with Counterparties, 

77 Fed. Reg. 9734 (Apr. 17, 2012) ........................................................................................... 16 

Legislative History

146 Cong. Rec. E2181 (Dec. 14, 2000) (Rep. Ewing) .................................................................. 18 

146 Cong. Rec. S11855 (Dec. 15, 2000) (Sen. Gramm) ........................................................ 16, 17 

146 Cong. Rec. S11918 (Dec. 15, 2000) (Sen. Lugar) ................................................................. 14 

H.R. Rep. 93-1383 (1974) (Conf. Rep.), reprinted in 1974 U.S.C.C.A.N. 5894 ............... 2, 22, 24 

H.R. Rep. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N. 5963 .................................................. 2 

S. Rep. 95-989 (1978), reprinted in 1978 U.S.C.C.A.N. 5787 ....................................................... 3 

Other Authorities

Ltr. from Chicago Bd. of Trade to J. Stuckey, Secretariat, CFTC (May 14, 1982) ........................ 4 

Ltr. from E. Schroeder to J. Stuckey (May 15, 1982) ..................................................................... 5 

Ltr. from FIA to CFTC (May 12, 1982) ......................................................................................... 4 

Random House Unabridged Dictionary (2d ed. 1993) ................................................................. 10 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 5 of 32
INTRODUCTION 

ConocoPhillips agreed, when it opened its futures accounts at MF Global, Inc., that its 

transactions would be subject to the CFTC’s regulations.1 It did so expressly, and by operation 

of state and federal law. When ConocoPhillips chose to margin futures transactions through 

those accounts using letters of credit, it could do so only under conditions permitted by the 

CFTC. One of those conditions, established in 1983 through formal notice and comment 

rulemaking, is that, in the event the commodity broker (here, a Futures Commission Merchant or 

“FCM”) should become bankrupt, the liquidation trustee would be entitled to claim the full face 

value of the letter. ConocoPhillips now seeks to avoid that commitment, exacerbating the 

injuries already suffered by all other MF Global customers with whom it is to share pro rata in 

the estate’s limited assets. 

To achieve that result, ConocoPhillips asks this Court to overrule a 30-year-old 

interpretation by the CFTC of its own regulation. Alternatively, ConocoPhillips asks that the 

Court simply void the provision. The latter course of action, as ConocoPhillips has framed the 

issues, would require the Court to ignore the company’s contractual commitments to abide by 

CFTC rules, impose counter-textual limitations on the CFTC’s explicit authority to preempt state 

law, and/or manufacture additional limitations on the CFTC’s jurisdiction that Congress never 

intended. These arguments, as explained below, reflect a thorough misreading of the 

Commission’s organic statute, the Commodity Exchange Act (“CEA”), and would require the 

Court to contravene the statute’s text, ignore various other expressions of Congressional intent, 

and deny the Commission, improperly, the Chevron deference to which it is entitled. For the 

 

1

 Plaintiffs are ConocoPhillips Company (“CPC”) and ConocoPhillips Canada Marketing & Trading UCL (“CP 

Canada”) (collectively “ConocoPhillips” or “Plaintiffs”). 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 6 of 32
2 

reasons explained below, the Court may not do so, and the Trustee’s claim determination should 

be confirmed. 

REGULATORY BACKGROUND

 CEA Section 2(a)(1)(A) grants the CFTC “exclusive jurisdiction” to regulate 

“transactions involving,” inter alia, “contracts of sale of a commodity for future delivery.” 

7 U.S.C. § 2(a)(1)(A). This provision “preempts the application of state law.” Leist v. Simplot, 

638 F.2d 283, 322 (2d Cir. 1980) (Friendly, J.); see also Stuber v. Hill, 170 F. Supp. 2d 1146, 

1150-51 (D. Kan. 2001). That plain meaning is confirmed by the statute’s legislative history, 

which says that “regulations issued by the Commission . . . preempt the field insofar as futures 

regulation is concerned,” and, if state law conflicts with the Commission’s regulations, “Federal 

law w[ill] govern.” H.R. Rep. 93-1383 (1974) (Conf. Rep.), reprinted in 1974 U.S.C.C.A.N. 

5894, 5897; see Cohn v. United States, 872 F.2d 533, 534 (2d Cir. 1989) (“Since the conference 

report sets forth the final agreement of both houses, it is entitled to great weight in determining 

congressional intent.”). Congress codified in the CEA a specific legislative finding that 

transactions involving commodity futures are “affected with a national public interest.” 

7 U.S.C. § 5(a). Based on that finding, Congress vested the CFTC with plenary power, within its 

exclusive jurisdiction, “to make or promulgate such rules and regulations as, in the judgment of 

the Commission, are reasonably necessary to effectuate any of the provisions or to accomplish 

any of the purposes of the” CEA. Id. § 12a(5). 

Soon after enacting the CEA, Congress recognized a special need for customer 

protections in commodity broker bankruptcies. In the Bankruptcy Reform Act of 1978, 

therefore, Congress established Subchapter IV of Chapter 7, 11 U.S.C. §§ 761-67, which it 

“derived largely from the testimony of” the CFTC’s then Chairman. H.R. Rep. 95-595, at 271 

(1977), reprinted in 1978 U.S.C.C.A.N. 5963. The linchpin of the Subchapter IV customer 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 7 of 32
3 

protection regime is Section 766(h), which requires the trustee to distribute all “customer 

property” to customers “ratably” and in priority to other claims. 11 U.S.C. § 766(h). Subchapter 

IV defines “customer property” to include all “property, or the proceeds of such . . . property, 

received, acquired, or held by or for the account of the debtor, from or for the account of a 

customer” including such property “held to margin” a commodity contract. Id. § 761(10). Thus, 

all property that the debtor has received from a customer to margin a commodity contract, and 

all proceeds derived from that property, are subject to pro rata distribution. 

In establishing this “framework,” Congress recognized that it would be undesirable to 

legislate “detailed rules to govern every contingency.” S. Rep. 95-989, at 8 (1978), reprinted in 

1978 U.S.C.C.A.N. 5787. It therefore delegated “general rulemaking authority” to the CFTC. 

Id. Among the powers it delegated, Congress charged the Commission with establishing (1) the 

“method by which the business of [a] commodity broker is to be . . . liquidated”; (2) the formula 

for calculating customers’ “net equity” claims against the estate; and (3) what constitutes 

“customer property” to be distributed pro rata. 7 U.S.C. § 24(a). Pursuant to these delegated 

powers, including its plenary power under 7 U.S.C. § 12a(5), the CFTC in 1983 enacted the Part 

190 Rules, 17 C.F.R. §§ 190.01 et seq., to govern comprehensively the liquidation of a 

commodity broker, the calculation of allowed claims, and the marshaling and distribution of 

assets to customers on a pro rata basis. See Bankruptcy, 48 Fed. Reg. 8716, 8739 (Mar. 1, 1983). 

As relevant here, Rule 190.02(f) directs the liquidation trustee to “liquidate” all “property 

held by or for the account of” the debtor. 17 C.F.R. § 190.02(f). If that property includes a letter 

of credit held by the FCM to margin a customer’s trades, Rule 190.08(a)(1)(i)(E) states that the 

“full proceeds” of that letter become “customer property” to be distributed pro rata. Id. 

§ 190.08(a)(1)(i)(E). 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 8 of 32
4 

The Commission adopted these rules, as well as the disputed interpretation, pursuant to a 

formal APA notice and comment process. See 5 U.S.C. § 553. The Commission proposed Part 

190 in 1981, along with detailed interpretations and explanations of how the rules would operate 

in practice. See Bankruptcy, 46 Fed. Reg. 57535 (proposed Nov. 24, 1981). In the proposal, the 

Commission “singled out” letters of credit, specifying that, if a customer chose to use such an 

instrument to margin trades, it did so on the condition that the trustee would draw its full face 

value, and treat those proceeds as customer property, in the event of the FCM’s bankruptcy: 

Letters of credit are singled out for special treatment because the Commission 

believes that it is important to make clear that the full value of a letter of credit 

posted as margin would be drawn in the event of a bankruptcy and the full 

proceeds thereof would be treated as customer property. 

Id. at 57553 (emphasis added). 

 A six-month comment period followed. 48 Fed. Reg. at 8716. The Commission received 

several submissions, including three from prominent commenters who focused on the proposed 

treatment of letters of credit. The Futures Industry Association (FIA), for example, argued that 

the rule would “impose an unfair burden on those who post letters of credit for margin” and 

recommended that “Section 190.08(a)(1)(i)(E) should be amended to provide that letters of credit 

may be drawn by a trustee only to meet a broker’s or customer’s margin requirement.” Ltr. from 

FIA to CFTC (May 12, 1982) at 40-41 (emphasis added) (Schwartz Decl. Ex. A). Similarly, the 

Chicago Board of Trade argued that “Section 190.08(a)(1)(i)(E) dealing with the full proceeds of 

a Letter of Credit” would be “unfair” and proposed that the rule “should be amended to provide 

that Letters of Credit may be drawn upon by a trustee, and made property of the bankrupt estate, 

only to meet the margin requirements of the broker or customer providing said Letters of Credit.” 

Ltr. from Chicago Bd. of Trade to J. Stuckey, Secretariat, CFTC (May 14, 1982) at 10-11 

(emphasis added) (Schwartz Decl. Ex. B). Finally, the ABA Committee on Commodities 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 9 of 32
5 

Regulation agreed that “Proposed § 190.08(a)(1)(i)(E) . . . would require the trustee to draw the 

full proceeds of a letter of credit into the estate” and argued that it “should be amended” because 

it would “impose an unfair burden” and “cause a reduction in the use of letters of credit for this 

purpose.” Ltr. from E. Schroeder to J. Stuckey (May 15, 1982) at 39 (emphasis added) 

(Schwartz Decl. Ex. C). Although the ABA Committee included a section of “Technical 

Comments,” proposing clarifications to the language of multiple provisions, id. at 45-48, no 

commenter suggested that the CFTC was misinterpreting the language of its own proposed rules. 

 The Commission considered the commenters’ suggestions, consulted with futures 

clearing organizations and the trustee in a then-pending liquidation, and voted unanimously to 

adopt Rule 190.08(a)(1)(i)(E) as proposed. See CFTC Minutes (Feb. 15, 1983) at 1 (Schwartz 

Decl. Ex. D); 48 Fed. Reg. at 8718, 8738. Throughout the adopting release, the unanimous 

Commission emphasized that its objective was to implement Congress’ design of equitable, pro 

rata distribution in a manner that would protect small customers from unfair disadvantage. See, 

e.g., id. at 8719 (noting that the Code was “intended to assure parity between customers with 

margining power and those without it”); id. (“[T]he Code itself . . . contains no provisions for the 

reclamation of property free of a pro rata distribution”); id. at 8724 (rejecting a suggestion that 

“would undermine the basic concept of a bankruptcy proceeding which is intended to ensure that 

no one obtains more than his pro rata share”). With respect to letters of credit, the Commission 

explained that conditioning their use in futures markets on subjection to pro rata distribution in 

bankruptcy was necessary to protect other customers, especially smaller traders, from injury in 

the form of diminished pro rata shares: 

The Commission’s proposal was intended to assure that customers using a letter 

of credit to meet original margin obligations would be treated no differently than 

customers depositing other forms of non-cash margin or customers with excess 

cash margin deposits. If letters of credit are treated differently than Treasury bills 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 10 of 32
6 

or other non-cash deposits, there would be a substantial incentive to use and 

accept such letters of credit as margin as they would be a means of avoiding the 

pro rata distribution of margin funds, contrary to the intent of the Code. 

Id. at 8718. In response to the objecting commenters, the Commission explained that the 

commenters’ approach “would favor large customers at the expense of smaller market 

participants since only larger customers are permitted to make non-cash deposits of margin.” Id. 

at 8719. For every large customer permitted to exclude its margin from customer property, the 

universe of assets to be distributed pro rata would be diminished. The Commission concluded 

that this would be contrary to the intent of Subchapter IV and “inherently unfair.” Id. 

 The Commission also was “guided by additional policy considerations” related to market 

stability. It expressed concern about the “viability” of letters of credit as margin deposits, 

because they are relatively cumbersome to convert to cash in response to a market event. Id.; see 

also id. at 8718 n.14 (noting clearing organizations’ policy changes in response to “periods of 

volatility”). It would therefore be “unwise,” the Commission explained, “to adopt a policy 

which would further encourage the use of letters of credit and, indeed, their substitution for other 

forms of margin.” Id. at 8719. Accordingly, the Commission resolved that if a customer does 

choose to margin using a letter of credit, it may do so only on the condition that, in the event of 

bankruptcy, the trustee would be entitled to the full face amount of the letter. Id. at 8718. 

STANDARDS OF REVIEW 

 ConocoPhillips asks the Court to overrule multiple interpretations by the CFTC of its 

organic statute, the CEA, and of the Commission’s own regulations. The standards for doing so 

are extremely high. 

1. Where, as here, “Congress has explicitly left a gap for the agency to fill, there is an 

express delegation of authority,” and the resulting “legislative regulations are given controlling 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 11 of 32
7 

weight unless they are arbitrary, capricious, or manifestly contrary to the statute.” Chevron, 

U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 843-44 (1984). The Court must affirm the agency’s 

action so long as it “is rational, based on consideration of the relevant factors, and within the 

scope of the authority delegated.” Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 

463 U.S. 29, 42 (1983). This review is “narrow,” and “[the] court is not to substitute its 

judgment for that of the agency.” Id. at 43. So long as the agency acts in “a reasonable way,” 

the Court must defer, “even if it is not the answer the court would have reached if the question 

initially had arisen in a judicial proceeding.” Kruse v. Wells Fargo Home Mortg., Inc., 383 F.3d 

49, 55 (2d Cir. 2004). The Supreme Court has cautioned that the CFTC’s “expertise is superior 

to that of a court when,” as here, “a dispute centers on whether a particular regulation is 

‘reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes’” 

of the CEA; “the agency’s position, in such circumstances, is therefore due substantial 

deference.” CFTC v. Schor, 478 U.S. 833, 845 (1986). 

2. It is likewise “a dominant, well-settled principle of federal law,” National R.R. 

Passenger Corp. v. Boston & Me. Corp., 503 U.S. 407, 417 (1992), that “[a]n agency’s 

interpretation of [the] statute” it “administers is entitled to considerable deference.” Skandalis v. 

Rowe, 14 F.3d 173, 178 (2d Cir. 1994). The first question is “whether Congress has directly 

spoken to the precise question at issue.” Chevron, 467 U.S. at 842-843. The Court must use 

“traditional tools of statutory construction” to determine whether “Congress had an intention on 

the precise question” presented. Id. at 843 n.9. This includes review of the statute’s “text, 

legislative history, structure, and purpose.” Feimei Li v. Renaud, 654 F.3d 376, 382 (2d Cir. 

2011) (internal quotation marks omitted). If Congress has not “unambiguously expressed” a 

“clear” intent on the issue, the question is “whether the agency’s answer is based on a 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 12 of 32
8 

permissible construction of the statute.” Chevron, 467 U.S. at 842-843. In this inquiry, “the 

court does not simply impose its own construction” of the statute. Id. Rather, it must accept 

“any reasonable interpretation” by the agency. Mei Fun Wong v. Holder, 633 F.3d 64, 74 (2d 

Cir. 2011); Khouzam v. Ashcroft, 361 F.3d 161, 164 (2d Cir. 2004) (a court must defer “so long 

as that construction is reasonable”). This standard is “highly deferential.” NRA of Am., Inc. v. 

Reno, 216 F.3d 122, 137 (D.C. Cir. 2000). 

 3. Where an agency is interpreting its own regulation, “an even greater degree of 

deference than the Chevron standard” is required. Consarc Corp. v. Iraqi Ministry, 27 F.3d 695, 

702 (D.C. Cir. 1994). The agency’s view is “controlling” unless “plainly erroneous or 

inconsistent with the regulation” itself. Auer v. Robbins, 519 U.S. 452, 461 (1997) (internal 

quotation marks omitted). Deference is “even more clearly in order” when the agency offers a 

“contemporaneous construction” of its own regulation at enactment, Udall v. Tallman, 380 U.S. 

1, 16 (1965) (internal quotation marks omitted), and courts must “normally accord particular 

deference to an agency interpretation of ‘longstanding’ duration.” Barnhart v. Walton, 535 U.S. 

212, 220 (2002). Nevertheless, controlling deference is due “even if th[e] interpretation appears 

in a legal brief.” Union Carbide Corp. v. Comm’r of Internal Revenue, _ F.3d_, No. 11-2552, 

2012 U.S. App. LEXIS 18876, at *11-12 (2d Cir. Sept. 7, 2012); see also Talk Am., Inc. v. Mich. 

Bell Tel. Co., 131 S. Ct. 2254, 2261 (2011); Auer, 519 U.S. at 461. 

 4. Finally, whether the agency is interpreting a statute or regulation, the highest 

deference is required where, as here, the interpretation was subject to notice and comment and, 

therefore, can “create no unfair surprise.” Long Island Care at Home, Ltd. v. Coke, 551 U.S. 

158, 170-71 (2007); United States v. Mead Corp., 533 U.S. 218, 226-27 (2001). 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 13 of 32
9 

DISCUSSION

I. The Trustee’s Interpretation of Rule 190.08(a)(1)(i)(E) Is Correct. 

The Trustee is correct that when a customer uses a letter of credit to margin futures 

trades, it does so on the condition that, if the FCM becomes bankrupt, the trustee is entitled to the 

full face amount of the letter, which must be distributed pro rata. Indeed, that is precisely what 

the Commission stated when it enacted Part 190. 46 Fed. Reg. at 57553; 48 Fed. Reg. at 8718. 

A customer must agree to this condition, as ConocoPhillips did, if it chooses to use a letter of 

credit as collateral in CFTC-regulated transactions and markets. See Marshall v. Barlow’s, Inc., 

436 U.S. 307, 313 (1978) (“The businessman in a regulated industry in effect consents to the 

restrictions placed upon him.”). This is clear on the face of Part 190, and it is confirmed by the 

agency’s contemporaneous interpretation of those rules. Plaintiffs’ contrary interpretation is, as 

explained below, not plausible and, in any event, cannot overcome the deference owed the 

Commission’s long-standing construction, established through notice and comment. 

1. Rule 190.02(f) states that, once an FCM is placed into bankruptcy, all “property held 

by or for the account of [the] debtor must be liquidated . . . by the trustee promptly and in an 

orderly manner.” 17 C.F.R. § 190.02(f). To “liquidate,” as used here, means to “convert (a 

nonliquid asset) into cash” or “[t]o settle (an obligation) by payment or other adjustment.” Twp. 

of Spring v. Std. Ins. Co., No. 09-5518, 2011 U.S. Dist. LEXIS 59241, at *16 (E.D. Pa. June 1, 

2011) (quoting Black’s Law Dictionary 1014 (9th ed. 2009)); Lumber Liquidators, Inc. v. Stone 

Mt. Carpet Mills, Inc., No. 3:08-cv-573, 2009 U.S. Dist. LEXIS 59388, *21-22 (E.D. Va. July 

10, 2009) (stating that “‘liquidate’ can be defined broadly . . . to mean ‘to convert assets to 

cash’” (quoting Webster’s New Collegiate Dictionary 697 (9th ed. 1987)). To “liquidate” a letter 

of credit means to draw it down. See, e.g., In re SI Restructuring, Inc., 542 F.3d 131, 134 n.3 

(5th Cir. 2008); Motrade v. Rizkozaan, Inc., 95 Civ. 6545, 1999 U.S. Dist. LEXIS 10397, at *3, 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 14 of 32
10 

*7 (S.D.N.Y. July 6, 1999) (Chin, J.). Thus, when an FCM goes into bankruptcy, the trustee is 

directed to draw down or otherwise convert to cash any letters of credit the FCM is holding in a 

customer account. See 46 Fed. Reg. at 57553; 48 Fed. Reg. at 8718. 

2. Rule 190.08(a)(1)(i)(E) provides that, once the letter of credit is liquidated, the “full 

proceeds” are customer property, subject to pro rata distribution. 11 U.S.C. § 766(h); 17 C.F.R. 

§ 190.08(a)(1)(i)(E). The term “proceeds” has its usual meaning: “something that results or 

accrues; the total amount derived from a sale or other transaction.” Random House Unabridged 

Dictionary 1542 (2d ed. 1993). “[P]roceeds” is used consistently in this way throughout Part 

190. 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). Thus, when customer property includes a letter of credit as margin, the trustee must 

designate the total amount of the letter for pro rata distribution. 

3. Plaintiffs’ contrary interpretation, summarized in footnote 6 of the Court’s October 4, 

2012 Memorandum and Order (ECF Doc. No. 26 at 11 n.6), is not possible. As the Court 

summarized Plaintiffs’ position, Rule 190.08(a)(1)(i)(E) “could apply to a situation where there 

has been a trigger for a letter of credit and the trigger may actually have occurred thereby making 

the CFTC provision live and actually relate to real proceeds as opposed to generation of 

proceeds.” But such proceeds would not generally be customer property. Instead, they would be 

owed as margin payments to cover trading losses already incurred. As the CFTC explained in 

the Part 190 releases, “margin payments would not be able to be distributed pro rata because, as 

in ordinary practice, they would be credited directly for the account to which they were made.” 

46 Fed. Reg. at 57542; see also 48 Fed. Reg. at 8727. The CFTC explained that “the standby 

feature of the letter [of credit] only guarantees the payment of variation margin.” 48 Fed. Reg. at 

8718. Thus, if there is a margin call and the customer defaults, the funds received cannot be 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 15 of 32
11 

distributed pro rata, because they are owed to the clearinghouse to cover losses. Plaintiffs’ 

interpretation is implausible, because it misapprehends the mechanics of a futures transaction. 

4. In any event, even if this were a possible reading of the rule, the Commission’s 

contemporaneous interpretation, established through notice and comment, would control. Coke, 

551 U.S. at 170-71; Auer, 519 U.S. at 461; Udall, 380 U.S. at 16. Plaintiffs attempt to avoid the 

required deference by arguing that the rule text unambiguously supports their interpretation. 

But, for the reasons given above, their interpretation is not even possible, let alone clearly 

correct. And even if it were possible, a unanimous Commission did not agree with their reading, 

nor did the FIA, Chicago Board of Trade, or the ABA Committee on Commodities Regulation, 

all of whom urged the Commission to amend the regulation to avoid the very result 

ConocoPhillips protests here. ConocoPhillips’s reading is an outlier and, as described above, the 

Commission’s reading is sound. Thus, Plaintiffs cannot show that the CFTC was unambiguously 

misinterpreting its own words at the time it proposed and adopted Part 190. 

II. Rule 190.08(a)(1)(i)(E) Is Not Arbitrary, Capricious, or Contrary to the CEA. 

Rule 190.08(a)(1)(i)(E) is well within Congress’ delegations of authority to the CFTC, 

and it was adopted almost thirty years ago through a formal notice and comment process in 

which the Commission rationally considered all relevant factors. Chevron, 467 U.S. at 843-44; 

State Farm, 463 U.S. at 42. There is no basis to invalidate the rule. 

a. The Rule Is Rationally Based on Relevant Factors.

1. The CFTC adopted Rule 190.08(a)(1)(i)(E) to prevent large customers from “avoiding 

the pro rata distribution of margin funds, contrary to the intent of the Code,” because such 

avoidance would aggravate the injuries suffered by cash customers and others in the event of a 

shortfall. 48 Fed. Reg. at 8718; see also id. (“[E]ncouraging use of letters of credit would favor 

large customers at the expense of smaller market participants[.]”). The Commission explained 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 16 of 32
12 

that this would be “inherently unfair” and contravene the “intent of the Code.” Id. The 

Commission also cited “additional policy considerations” related to market stability as militating 

against encouraging expanded use of letters of credit as margin. See id. at 8718 & n.14. The 

Commission concluded, therefore, that customers using a letter of credit to margin should be 

“treated no differently than customers depositing other forms of non-cash margin or customers 

with excess cash margin deposits.” Id. at 8718. This was rational, not arbitrary or capricious. 

 2. The Commission also considered commenters’ contention that, in preexisting practice 

subject to state law, the terms of a letter of credit used to margin would “generally condition 

payment on delivery of a certification that additional funds are required to margin or cover a 

default.” Id. The Commission noted, on the other hand, that many letters of credit in use are 

“unconditional” and the bank “cannot refuse to pay it based upon nonperformance of an 

underlying contract.” Id.

2

 To the extent, however, that commenters urged that such state-law 

payment conditions control in an FCM bankruptcy, the Commission rejected that approach as 

inconsistent with and damaging to the pro rata system established by Congress. Id. This too was 

rational, not arbitrary or capricious. 

b. The Rule Is Consistent with the CEA.

1. Rule 190.08(a)(1)(i)(E) is also well within the CFTC’s authority to regulate futures 

transactions and commodity broker bankruptcies. The rule plainly falls within the Commission’s 

statutory powers to establish the “method by which the business of [a] commodity broker is to be 

. . . liquidated”; the formula for calculating customers’ “net equity” claims; and what constitutes 

 

2

 Contrary to an assertion by ConocoPhillips at the September 25, 2012 hearing (9/25/2012 Tr. at 29), this is a 

correct statement of law. UCC § 5-114, cmt. 1 (“[T]he issuer is under a duty to honor the drafts or demands for 

payment which in fact comply with the terms of the credit without reference to their compliance with the terms of 

the underlying contract.”); KMW Int’l v. Chase Manhattan Bank, N. A., 606 F.2d 10, 15 (2d Cir. 1979) (“As a matter 

of law, a bank’s obligation under a letter of credit is totally independent of the underlying transaction.”). 

ConocoPhillips has cited an exception for fraud, but the Trustee has made clear that he would not make false 

representations to a bank. 9/25/2012 Tr. at 43. 

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13 

“customer property” to be distributed pro rata to customers. 7 U.S.C. § 24(a). The Rule is 

likewise within the Commission’s authority to make rules “reasonably necessary to effectuate 

any of the provisions or to accomplish any of the purposes of the” CEA. Id. § 12a(5). Relevant 

CEA purposes include ensuring “the financial integrity of all transactions subject to” the CEA 

and “the avoidance of systemic risk,” as well as to “protect all market participants from . . . 

misuses of customer assets.” Id. § 5(b). The relevance of these purposes to Rule 

190.08(a)(1)(i)(E) is obvious. If large customers who obtain letters of credit were permitted to 

opt out of pro rata distribution, customers posting cash and securities would be harmed. Prior to 

transacting, customers posting cash and securities would have no way to determine whether any, 

and if so how many, of the FCM’s customers use letters of credit to margin and, under Plaintiffs’ 

interpretation, would be able to escape the pro rata system, exacerbating any shortfall. Such a 

rule would undermine confidence in the markets. It would also encourage large customers to use 

letters of credit to margin, with potentially adverse effects on stability and equitable distribution. 

48 Fed. Reg. at 8718. The purposes of the Part 190 Rules, among other things, are “[t]o promote 

equitable treatment of customers,” and to “enhance certainty as to the effects of a bankruptcy 

distribution.” 46 Fed. Reg. at 57535. The rule is equitable precisely because a customer using a 

letter of credit to margin knows or should know before transacting that the full face value would 

be owed in the event of a bankruptcy, and it may adjust its practice accordingly. 

2. ConocoPhillips has never taken issue with these statutory sources of authority, but 

instead misconstrues an unrelated CEA provision, 7 U.S.C. § 27a, as an implied repeal of Rule 

190.08(a)(1)(i)(E) and its enabling legislation, 9/25/2012 at 67 (arguing that Dodd-Frank 

superseded these provisions), and argues that Section 27a “prohibit[s] the CFTC from adopting 

any regulation with respect to letters of credit.” ECF Doc. No. 2 at 9 of 30. However, repeals by 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 18 of 32
14 

implication are strongly disfavored, Handberry v. Thompson, 446 F.3d 335, 345 (2d Cir. 2006); 

Iowa, Chi. & R.R. Corp. v. Wash. County, 384 F.3d 557, 561 (8th Cir. 2004), and ConocoPhillips 

has misstated the language of the statute. Section 27a states that the CFTC “shall not exercise 

regulatory authority under the Commodity Exchange Act (7 U.S.C. 1 et seq.) with respect to, an 

identified banking product.” 7 U.S.C. § 27a(a)(1) (emphasis added). The CFTC’s “regulatory 

authority under the [CEA]” is its exclusive jurisdiction over, inter alia, commodity futures. See

7 U.S.C. § 2(a)(1)(A). Congress chose this language to provide “certainty that products offered 

by banking institutions will not be regulated as futures contracts.” 146 Cong. Rec. S11918, 

11925 (Dec. 15, 2000) (Sen. Lugar) (emphasis added). It does not purport to restrict the CFTC 

from regulating what concededly are futures transactions, like ConocoPhillips’s transactions 

with MF Global.3 To the extent Plaintiffs have identified any ambiguity, the Commission’s 

interpretation is entitled to Chevron deference. 

3. Step 1 of Chevron requires the Court to use “traditional tools of statutory 

construction,” 467 U.S. at 843 n.9, including review of the statute’s text, legislative history, 

structure, and purpose, Feimei Li, 654 F.3d at 382, to determine whether Congress has barred the 

CFTC from imposing conditions on the use of letters of credit in a futures transaction. Here, the 

statute’s text, considered properly in context, does not support Plaintiffs’ claim. Rather than 

prohibiting the CFTC from “any regulation with respect to” letters of credit, even in futures 

transactions, Congress provided that the CFTC shall not “exercise regulatory authority under the 

[CEA]” over those products. The CEA delineates that authority, first in Section 2(a)(1)(A)’s 

grant to the CFTC of “exclusive jurisdiction” over “accounts, agreements . . . and transactions 

involving” futures and swaps, id., and then, in numerous other sections, authorizing and directing 

 

3

 In this respect Rule 190.08(a)(1)(i)(E) is no different from rules by which the CFTC regulates the use of securities 

as margin for futures transactions even though regulatory authority over securities as such rests with the SEC. See, 

e.g., 17 C.F.R. §§ 1.25-1.28 (permissible investment of customer margin funds in securities). 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 19 of 32
15 

the Commission to regulate those transactions comprehensively through, inter alia: 

(1) registration, minimum financial requirements, and ethics training for market participants, 

e.g., id. §§ 6f(b), 6k, 6m, 6p(b), 7a-1(c)(1), 7a-1(c)(2)(B); (2) requirements for clearing, id. 

§ 2(h)(2); (3) rules concerning fraud, risk disclosures, books and records, and safeguarding 

customer funds, id. §§ 6(b), 6d(2); (4) the authority to impose fines, id. § 13b(d); (5) position 

limits in CFTC-regulated products, id. § 6a; and (6) the adjudication of disputes arising in the 

CFTC’s jurisdictional markets, id. § 18. Rule 190.08(a)(1)(i)(E) does not purport to bring letters 

of credit within the CFTC’s “regulatory authority” in that sense, i.e., to regulate them as 

commodity futures, nor is it a regulation “with respect to an identified banking product,” because 

it has no application to such products except to the extent a particular letter of credit is part of a 

transaction over which the CFTC has exclusive jurisdiction. Rather, Rule 190.08(a)(1)(i)(E) is a 

regulation of futures transactions and FCM liquidations, well within the CFTC’s statutory 

authority. 

4. This reading is confirmed by related sections of the statute, which the Court must 

consider in interpreting Section 27a(a). Comm’r v. Engle, 464 U.S. 206, 223 (1984) (cautioning 

that the “true meaning of a single section of a statute . . . cannot be ascertained if it be considered 

apart from related sections”). The Section 27a(a) limit on the CFTC’s regulatory authority is 

linked, in Section 2(a)(1)(A), to the definitions of “commodity” and “swap,” which are 

extremely broad. Id. §§ 1a(9)&(47). Absent other limitations, the sweep of Section 2(a)(1)(A) 

might subject certain products to treatment as futures or swaps when Congress did not intend that 

result. Thus, the CEA contains provisions specifying that certain financial products are not

subject to the CFTC’s regulatory authority, but are reserved for other regulators. See, e.g., 7 

U.S.C. § 2(a)(1)(C)(i)(I) (“this Act shall not apply to and the Commission shall have no 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 20 of 32
16 

jurisdiction” with respect to options on securities); id. § 2(a)(1)(H) (“the [CFTC] shall have no 

jurisdiction under [the Dodd-Frank Act] with respect to, any security”). Section 27a is one such 

provision, intended by Congress to “clarify the jurisdictional line between the regulation of 

banking products and futures products.” 146 Cong. Rec. S11855, 11867 (Dec. 15, 2000) (Sen. 

Gramm). 

In Dodd-Frank, Congress expanded the CFTC’s jurisdiction to include “swaps”, which it 

defined to include “any agreement, contract, or transaction . . . that provides for any . . . payment 

. . . that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an 

event or contingency associated with a potential financial, economic, or commercial 

consequence.” 7 U.S.C. § 1a(47). Without a separate exclusion, certain bank products like 

letters of credit might qualify as swaps, and, as a result, be subject to the CFTC’s regulatory 

authority, including a panoply of requirements under the CEA and CFTC swap regulations. See, 

e.g., id. §§ 2(h) (clearing requirement), 6r (reporting and recordkeeping), 6s (registration and 

regulation of swap dealers and major swap participants); Bus. Conduct Standards, 77 Fed. Reg. 

9734 (Apr. 17, 2012). Section 27a gives “legal certainty” to banks and their customers that their 

transactions will not be drawn inadvertently into this regime, but there is no indication that it is 

intended to enable traders to intentionally access CFTC-regulated markets unfettered by CFTC 

regulations of general applicability. 

The purpose to distinguish banking products from “swaps” is further evident in Sections 

27a(b) and (c), which provide exceptions to the “identified banking products” exclusion for 

products structured “for the purpose of evading the provisions of the” CEA. 7 U.S.C. § 27a(b)-

(c) (emphasis added). Congress used the phrase “the provisions of,” collectively, because the 

purpose of Section 27a is to draw a line between the CFTC’s exclusive jurisdiction and the 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 21 of 32
17 

jurisdiction of banking regulators. Under subparagraph (b), when a banking regulator identifies 

a product designed to evade “the provisions of” the CEA, but that “would meet the [CEA] 

definition of a ‘swap’,” that regulator can “except [the] identified banking product . . . from the 

exclusion in subsection (a).” Id. § 27a(b). The product is then subject to the CFTC’s “regulatory 

authority,” including the entire regime applicable to swaps. 

In the same vein, amended Section 27a was enacted as part of Dodd-Frank Section 725, 

the main Dodd-Frank section establishing requirements for derivatives clearinghouses. DoddFrank Wall Street Reform & Consumer Protection Act (“Dodd-Frank”) P.L. 111-203, § 725, 124 

Stat. 1376, 1685 (July 21, 2010). Those requirements are comprehensive, pertaining, inter alia, 

to participant and product eligibility, risk management, settlement procedures, rules for customer 

defaults, reporting, and recordkeeping. Banking regulators, of course, impose their own 

requirements in these respects, and the placement of the amendments to Section 27a among those 

provisions supports the Commission’s conclusion that Congress intended the carve out for 

“identified banking products” to make clear that these products are not subject to dual regulation 

as futures or swaps. Dobrova v. Holder, 607 F.3d 297, 301 (2d Cir. 2010) (explaining that “the 

placement and purpose of th[e] words in the statutory scheme” is part of their “plain meaning” 

(internal quotation marks omitted)). 

5. Numerous references in the legislative history confirm that Section 27a was intended 

to limit the CFTC from regulating bank products as futures. See, e.g., 146 Cong. Rec. S11855, 

11867 (Dec. 15, 2000) (Sen. Gramm) (stating that the provision is intended to “clarify the 

jurisdictional line between the regulation of banking products and futures products”); 146 Cong. 

Rec. S11918, 11925 (Dec. 15, 2000) (Sen. Lugar) (“[T]his legislation provides certainty that 

products offered by banking institutions will not be regulated as futures contracts.”); 146 Cong. 

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18 

Rec. E2181 (Dec. 14, 2000) (Rep. Ewing) (“Title IV, the ‘Legal Certainty for Bank Products Act 

of 2000’, excludes identified banking products from the Commodity Exchange Act. It provides 

guidelines to determine the proper regulator for hybrid products.”). Conversely, there is no 

reference in the statute or legislative history, or any other source, indicating that Congress 

intended to alter the treatment as customer property of letters of credit – or any other banking 

products – that have been used as collateral by customers of an FCM in bankruptcy. The Court 

may not “reject [this] plain evidence of congressional intent,” nor may it accept Plaintiffs’ 

invitation to “manufacture a restriction on the CFTC’s jurisdiction that was nowhere 

contemplated by Congress.” Schor, 478 U.S. at 847. 

6. Congress has also, since 1983, several times amended Subchapter IV, see, e.g., 

Bankruptcy Abuse Prevention & Consumer Protection Act of 2005, P.L. 109-8, §§ 907(a)(3), (l), 

1502(a)(4), 119 Stat. 23, 174 (April 20, 2005); Dodd-Frank, P.L. 111-203, § 724(b), 124 Stat. at 

1684, and, in Dodd-Frank, amended the CEA’s delegation to the CFTC of authority to regulate 

commodity broker liquidations, id. § 713, 124 Stat. at 1647. Despite having numerous 

opportunities to do so, Congress has never addressed the rules or interpretations at issue here. 

This is further strong evidence that the Commission has correctly interpreted Congress’ 

delegation. Lorillard v. Pons, 434 U.S. 575, 580-81 (1978); Solimino v. Astoria Fed. Sav. & 

Loan Ass’n, 901 F.2d 1148, 1153-54 & n.9 (2d Cir. 1990). 

7. Plaintiffs’ interpretation should also be rejected because it would lead to absurd 

results. See United States v. Wilson, 503 U.S. 329, 334 (1992). It is clear, for example, that the 

CFTC could altogether bar market participants from margining futures trades using letters of 

credit. 7 U.S.C § 12a(7)(D) (empowering the CFTC to set “margin requirements” to protect the 

financial integrity of clearing organizations); id. § 12a(5) (plenary rulemaking authority); 17 

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C.F.R. § 39.13(g)(10) (stating that a clearinghouse “shall not accept letters of credit as initial 

margin for swaps”). However, the Commission recognizes that certain market participants find 

the practice useful, and, accordingly, has not imposed a categorical bar. Instead, the 

Commission identified a specific risk associated with this practice – that it could unfairly harm 

other customers in the event of a bankruptcy – and imposed a condition, which market 

participants accept by their own actions. See Marshall, 436 U.S. at 313. On Plaintiffs’ theory, 

the CFTC may ban altogether the use of letters of credit to margin futures, but it may not impose 

reasonable conditions designed to protect market participants. Absent any indication that 

Congress intended that anomalous result, Plaintiffs’ interpretation should be rejected. 

8. Plaintiffs’ interpretation may also cast doubt on other aspects of commodities 

regulation, with no evidence that Congress intended such a result. For example, CEA Section 4d 

establishes that an FCM must segregate customers’ property deposited as margin. 7 U.S.C. 

§ 6d(a)(2). This is the requirement at the center of the MF Global controversy that, if properly 

applied, ought to have allowed all customers to be repaid promptly and in full. A critical aspect 

of this protection is Section 4d(b), which applies to “any depository” in which customer property 

is kept. Id. § 6d(b). The statute renders it “unlawful for any person” receiving such property 

“for deposit in a separate account” to “hold, dispose of, or use such money, securities, or 

property as belonging . . . to any person other than the customers.” Id. Like the Part 190 Rules, 

Section 4d(b) is a condition by which one must abide in order to participate in transactions 

involving commodity futures. In so conditioning participation, the statute places a restriction on 

an identified banking product – a deposit account, see Gramm-Leach-Bliley Act § 206, Pub. L. 

No. 106–102, 113 Stat. 1338 (Nov. 12, 1999) – but, again, only to the extent a given deposit 

account is involved in a commodity transaction. Similarly, much “customer property” subject to 

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20 

Part 190 consists of instruments not within the CFTC’s “regulatory authority,” including 

securities, but which is nevertheless subject to the CEA and CFTC regulations to the extent it is 

part of a futures transaction. See 11 U.S.C. § 761(10); 17 C.F.R. § 190.08(a)(i). Contrary to 

ConocoPhillips’ argument, Congress did not abrogate such provisions, sub silentio, in Section 

27a. Handberry, 446 F.3d at 345; Iowa, Chi. & R.R. Corp., 384 F.3d at 561.

9. At most, Plaintiffs have identified an ambiguity. If it were otherwise, ConocoPhillips 

would not have based its argument on a rewording of the statute. See ECF Doc. No. 2 at 9 of 30 

(stating that Section 27a “prohibit[s] the CFTC from adopting any regulation with respect to 

letters of credit”); 9/25/2012 Tr. at 67 (arguing that the rule’s validity turns on whether it is “a 

regulation”). To the extent of any ambiguity, the Court must resolve it in favor of the CFTC’s 

interpretation. Schor, 478 U.S. at 844-45; Chevron, 467 U.S. at 843-44. As explained, the 

Commission interprets Section 27a to specify that the CFTC cannot regulate identified banking 

products as futures and swaps, but not to abrogate any of the Part 190 Rules. The Commission 

bases this conclusion on (1) the words Congress used, including in exceptions to the exclusion, 

7 U.S.C. § 27a(a)-(c); (2) the structure of the CEA and Dodd-Frank, including the broad 

definitions of “swap” and “commodity,” which necessitate limiting provisions like Section 27a; 

(3) numerous statements in the legislative history of Section 27a; (4) the absence of any 

reference in the legislative history to Part 190; (5) Congress’ placement of amended Section 27a 

within Dodd-Frank Section 725; (6) the avoidance of the absurd and harmful consequences that 

would result from Plaintiffs’ interpretation; and (7) the need to prevent unfair harm to other 

customers, which the Commission believes Congress would have addressed if it intended to alter 

Part 190. This interpretation is reasonable, and therefore entitled to Chevron deference. 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 25 of 32
21 

III. State Law Does Not Prevent the Application of Part 190.

a. There Is No Preemption Question Because ConocoPhillips Agreed to Abide by 

the Part 190 Rules.

ConocoPhillips’ objections based on state law are unfounded, because its customer 

agreements provide that federal regulations, including CFTC regulations and the Commission’s 

interpretations, govern its transactions with MF Global. CPC’s agreement states that “[a]ll 

transactions shall be subject to all applicable regulations of all federal . . . agencies.” See CPC 

Agreement ¶ 2 (ECF Doc. No. 3-3); see also id. § 29.A (“This Agreement . . . shall be governed 

by . . . the laws of the United States.”). CP Canada’s agreement adopts “all rules and 

interpretations of the Commodity Futures Trading Commission.” CP Canada Agreement (ECF 

Doc. No. 3-9 at 11 of 35) ¶ 1 (emphasis added). These undertakings are binding. Vencor, Inc. v. 

Webb, 33 F.3d 840, 844 (7th Cir. 1994) (holding that Illinois courts “will enforce” a choice of 

law clause)4

; Harmelin v. Man Fin., Inc., No. 06-1944, 2007 U.S. Dist. LEXIS 73851, at *15-16 

(E.D. Pa. Oct. 2, 2007) (enforcing same “all applicable . . . federal” law clause in case involving 

MF Global predecessor entity); McDaniel v. Bear Stearns & Co., 196 F. Supp. 2d 343, 360 & 

n.12 (S.D.N.Y. 2002) (applying an SEC release under identical clause). 

In any event, even if the agreements had not expressly incorporated all CFTC regulations, 

the Part 190 Rules would nevertheless apply as a matter of state contract law. Costello v. 

Grundon, 651 F.3d 614, 640 (7th Cir. 2011) (“[U]nder Illinois law, laws in existence at the time 

a contract is executed, are deemed, in the absence of contractual language to the contrary, part of 

the contract as though they were expressly incorporated therein.” (internal quotation marks 

omitted)); 2 Tudor City Place Assocs. v. 2 Tudor City Tenants Corp., 924 F.2d 1247, 1254 (2d 

Cir. 1991) (holding under New York law that “[l]aws and statutes in existence at a time a 

 

4

 Both entities’ customer agreements provide that Illinois supplies the applicable state law. CPC Agreement ¶ 29.A 

(ECF Doc. No. 3-3); Conoco Canada Agreement ¶ 13(a) (ECF Doc. No. 3-9 at 13 of 35). 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 26 of 32
22 

contract is executed are considered a part of the contract”). “When parties enter into a contract, 

they are presumed to accept all the rights and obligations imposed on their relationship by state 

(or federal) law.” Resolution Trust Corp. v. Diamond, 45 F.3d 665, 673 (2d Cir. 1995). And, 

while ConocoPhillips relies on various UCC provisions to argue that there is a conflict, the UCC 

provides that “principles of law and equity, including . . . bankruptcy, . . . supplement its 

provisions.” UCC. § 1-103(b); see also New Jersey Bank, N.A. v. Bradford Sec. Operations, 

Inc., 690 F.2d 339, 345 (3d Cir. 1982) (“[T]he UCC does not purport to preempt the entire body 

of law affecting the rights and obligations of parties to a commercial transaction.”). The UCC 

also states that its terms “may be varied by agreement,” UCC § 1-102(a), and Article 5, 

governing letters of credit specifically, states that “the effect of this article may be varied by 

agreement,” id. § 5-103(c), which ConocoPhillips expressly and impliedly did here. 

Thus, there is no conflict between Part 190 and state law, and ConocoPhillips must honor 

its commitment to abide by CFTC regulations. 

b. Rule 190.08 Preempts State Law to the Extent of Any Conflict. 

 If state law did purport to govern the conditions on which a letter of credit may be used to 

margin futures trades, it would be preempted by the CEA and applicable CFTC regulations in 

Part 190. Because the CFTC’s authority over “transactions involving” commodity futures is 

“exclusive,” CFTC regulations preempt state law. 7 U.S.C. § 2(a)(1)(A); Leist v. Simplot, 638 

F.2d 283, 322 (2d Cir. 1980) (Friendly, J.) (“[T]he courts have held that § 2(a)(1) of the CEA 

preempts the application of state law.”); Stuber v. Hill, 170 F. Supp. 2d 1146, 1150-1151 (D. 

Kan. 2001) (holding that 7 U.S.C. § 2(a)(1)(A) “precludes states from exercising supplementary 

regulatory authority over commodity transactions”); H.R. Rep. 93-1383 (1974) (Conf. Rep.), 

reprinted in 1974 U.S.C.C.A.N. 5894, 5897 (“Federal law would govern.”). ConocoPhillips’s 

transactions, in which it provided MF Global with letters of credit in consideration for futures 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 27 of 32
23 

contracts, plainly were “transactions involving” commodity futures. The CFTC therefore has 

exclusive jurisdiction, and its rules apply, notwithstanding any state law to the contrary. 

 Plaintiffs have mischaracterized the CFTC’s position in this regard. It is not the 

“Supplemental Information” in the rule release that preempts state law of its own force – it is the 

CEA and Part 190 Rules. See Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 153 

(1982) (“Federal regulations have no less pre-emptive effect than federal statutes.”). Plaintiffs, 

therefore, are mistaken to rely on Wyeth v. Levine, 555 U.S. 555 (2009). There, the Supreme 

Court found no preemption because “Congress ha[d] not authorized the FDA to pre-empt state 

law.” Id. at 576; see, e.g., id. at 575 (“Congress has not enacted such a provision for prescription 

drugs.”); id. at 578 (citing “Congress’ decision not to pre-empt common-law tort suits”). The 

Court scoured the legislative history of the Federal Food, Drug, and Cosmetic Act for any 

indication that the FDA was so authorized, but found “silence on this issue,” which was 

“powerful evidence that Congress did not intend” preemption. Id. at 574-75 & n.7. The Court 

also faulted the FDA for failing to give adequate notice of the purported preemptive effects of its 

rule. Id. at 577. In its proposal, the FDA stated that its rule would “not . . . preempt State law.” 

Id. (emphasis added). But, in the final rule, the agency reversed course “without offering States 

or other interested parties notice or opportunity for comment.” Id. The Court held that the 

FDA’s “views on state law [we]re inherently suspect in light of this procedural failure.” Id. 

This case presents the opposite circumstances. The CFTC’s power to preempt state law 

is codified in CEA Section 2(a)(1)(A). The CEA also specifies applications of state law that are 

not preempted – none of which are relevant here. 7 U.S.C. § 12(e). In contrast to Wyeth, where 

the legislative history was “silen[t]” on preemption, 555 U.S. at 575, the CEA’s legislative 

history confirms that CFTC regulations preempt state law: 

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24 

Under the exclusive grant of jurisdiction to the Commission, the authority in the 

Commodity Exchange Act (and the regulations issued by the Commission) would 

preempt the field insofar as futures regulation is concerned. Therefore, if any 

substantive State law regulating futures trading was contrary to or inconsistent 

with Federal law, the Federal law would govern. In view of the broad grant of 

authority to the Commission to regulate the futures trading industry, the 

Conferees do not contemplate that there will be a need for any supplementary 

regulation by the States. 

H.R. Rep. 93-1383, reprinted in 1974 U.S.C.C.A.N. 5894, 5897 (emphasis added). Finally, in 

contrast to the FDA in Wyeth, the CFTC here thoroughly vetted the preemptive effect of the rule 

in formal notice and comment rulemaking. See 46 Fed. Reg. at 57553. At the culmination of 

that process, the Commission considered and reasonably rejected commenters’ proposals to 

amend the rules so that only state law would apply. 48 Fed. Reg. at 8718-19. 

 Thus, even if ConocoPhillips had not agreed, as it did, to abide by CFTC regulations, the 

CEA and Part 190 Rules would preempt any conflicting state law. 

IV. The Trustee’s Calculation Does Not Depend on the Letter’s Expiration Date.

The Commission interprets the reference in Rule 190.08(a)(1)(i)(E) to the “full proceeds” 

of a letter of credit to indicate the letter’s full value as margin, equivalent to cash, at the time of 

the bankruptcy filing. This interpretation is required for consistency with the pro rata 

distribution system established in 11 U.S.C. § 766(h) and the Part 190 Rules, and is 

“controlling.” Auer, 519 U.S. at 461 (holding agency’s interpretation of own regulation in 

amicus brief “controlling unless plainly erroneous or inconsistent with the regulation.”); see also 

Union Carbide, _ F.3d_, 2012 U.S. App. LEXIS 18876, at *11-12. 

 As commenters noted, Rule 190.08(a)(1)(i)(E) entitles the trustee to the full proceeds of 

letters of credit “irrespective of their terms.” 48 Fed. Reg. at 8718. The Commission adopted 

Rule 190.08(a)(1)(i)(E), as proposed, so as to “assure that customers using a letter of credit to 

meet original margin obligations would be treated no differently than customers depositing other 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 29 of 32
25 

forms of non-cash margin or customers with excess cash margin deposit.” Id. Indeed, “[t]he 

purpose of a letter of credit is to substitute for, and therefore support, an engagement to pay 

money.” First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287, 294 (1985). Once 

the FCM is placed into bankruptcy, the Trustee’s right to that money, and any resulting 

obligations on the part of the customer, are fixed. The Commission, in fact, stressed the need “to 

‘fix’” each customer’s “bankruptcy loss at a particular point in time.” 46 Fed. Reg. at 57547. 

Each of these purposes would be defeated if a letter-of-credit customer were to receive a 

windfall, which it would have no basis to expect or to rely on, based on the expiration of the 

letter of credit after the bankruptcy filing date. 

The Commission also notes ConocoPhillips’ admission that it “probably would have 

[sought] an injunction” if the Trustee had presented the letter for payment. 9/25/2012 Tr. at 30. 

The Commission stated in the adopting release that it was “not the intent of the Commission to 

require the trustee to engage in useless activities or to expend debtor funds needlessly.” 48 Fed. 

Reg. at 8720. In light of ConocoPhillips’ position, it would have been futile for the Trustee to 

present the letter for payment, and the fact that he did not do so should not increase the 

distribution to ConocoPhillips at the expense of other customers. If, in a given case, there is to 

be litigation, it would be wasteful of estate assets to require that it be done hurriedly in the 

context of an injunction proceeding. On the other hand, no purpose would be served by having 

the allocation of the limited estate assets among customers turn on whether the trustee makes 

demand before or after the expiration date, so long as the letter was valid and being used to 

margin at the time of bankruptcy. 

CONCLUSION 

 For these reasons, and the reasons set forth in the Trustee’s memoranda, the Trustee’s 

claim determination should be confirmed. 

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 30 of 32
26 

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: October 26, 2012

Case 1:12-cv-06014-KBF Document 33 Filed 10/26/12 Page 31 of 32
CERTIFICATE OF SERVICE

 I hereby certify that on October 26, 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 33 Filed 10/26/12 Page 32 of 32