Received CFTC 

Records Section 

CMEGroup 

A CME/Chleago Board of Trade Company 

1jls/P9 Kathleen M. Cronin 

Managing Director. General Counsel 

Legal and Market Regulatory 

September 14, 2009 

VIA ELECTRONIC MAIL ~ 0 c:::::> 

c::::o ., David Stawick c.Q ., CJ') 0 

Secretary of the Commission r-r1 rt1 

Commodity Futures Trading Commission 

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Washington, D.C. 20581 COMMENT :::3 1"1"10 

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Re: RIN 3038-AC82- Account Class- 74 FR 40794 (August 13, 2009} ~ 

Dear Mr. Stawick: 

CME Group Inc. ("CME Group") appreciates the opportunity to comment on the Commodity Futures 

Trading Commission's ("Commission") proposed amendments to its Part 190 Bankruptcy Regulations to 

create a separate "account class" applicable to the bankruptcy of a futures commission merchant ("FCM") 

for positions in over-the-counter ("OTC") derivatives and their accompanying margins. 

CME Group is the holding company for Chicago Mercantile Exchange Inc. ("CME"), the Board of Trade of 

the City of Chicago, Inc. ("CBOT"), the New York Mercantile Exchange, Inc. ("NYMEX") and the 

Commodity Exchange, Inc. ("COMEX"), and is the world's largest and most diverse derivatives 

marketplace. CME Group Exchanges offer the widest range of benchmark products available across all 

major asset classes, including futures and options based on interest rates, equity indexes, foreign 

exchange, energy, metals, agricultural commodities, and alternative investment products. CME Clearing, 

a division of CME, is one of the largest central counterparty clearing services in the world, which provides 

clearing and settlement services for exchange-traded contracts, as well as for OTC derivatives 

transactions through CME ClearPort. The CME Group Exchanges serve the hedging, risk management 

and trading needs of our global customer base by facilitating transactions through the CME Globex 

electronic trading platform, our open outcry trading facilities in New York and Chicago, as well as through 

privately negotiated transactions. 

I. Background 

The Commission is proposing to amend its Part 190 Bankruptcy Regulations to create a separate account 

class that would include positions in cleared OTC derivatives and the money, securities, and/or other 

property that margin such positions. It is our understanding, however, that this account class would not 

include cleared OTC derivatives that are subject to a 4d order permitting them to be included in the 

account class for U.S. futures contracts. 1 As noted by the Commission, a bankruptcy trustee considers 

each account class separately in calculating a bankrupt FCM's liability to a customer and the customer's 

1 A 4d order is issued by the Commission under Section 4d of the Commodity Exchange Act, as amended ("CEA"), 

and permits cleared OTC derivatives positions and their margins to be commingled with futures and options positions 

and their margins in a 4d account. 

20 South Wacker Drive Chicago. Illinois 60606 r312 930 3488 F312 930 4556 kath!een.cronin@cmegroup.com cmegroup.com 

l> 

-:i 
David Stawick 

September 14, 2009 

Page 2 

pro rata share of the assets available to pay that liability. 

Under current Regulation 190.01(a), "account class" is defined to include "futures accounts", "foreign 

futures accounts", "leverage accounts", "commodity option accounts" and "delivery accounts", although 

exchange-traded commodity options are treated as being part of the futures account class. For the past 

several years, registered derivatives clearing organizations ("DCOs"), and FCMs that have cleared OTC 

positions through DCOs, have held such positions and their margins either in Regulation 30.7 accounts or 

in futures accounts pursuant to a 4d order. 2 On September 26, 2008, the Commission issued an 

InterpretatiVe Statement ("Statement on Cleared OTC Derivatives") in which it stated that any cleared 

OTC derivatives that were held in 4d accounts pursuant to a 4d order would be treated as part of the 

"futures account" class for bankruptcy purposes. The CFTC has not issued a similar interpretation 

regarding, and current regulations do not address, whether cleared OTC derivatives that are held in a 

30.7 account would be treated as part of the "foreign futures" account class. 3 

Therefore, the Commission has stated that its proposal is designed to address" ... the need to enhance 

certainty regarding the treatment of cleared OTC derivatives in the bankruptcy of a commodity broker that 

is an FCM." 74 FRat 40796. The Commission proposes to do so by creating a cleared OTC derivatives 

account class to address how a bankruptcy trustee should treat claims arising out of such derivatives in 

the absence of a 4d order. In addition, the Commission is proposing to codify its Statement on Cleared 

OTC Derivatives (and its earlier October 21, 2004 Interpretative Statement ("Statement on Commingling 

Foreign Futures Positions")) by incorporating a general provision in Regulation 190.01(a) that states that 

if positions in contracts of one account class (and their margins) are commingled with futures positions 

(and their margins), pursuant to a Commission order, they will be treated as being held in the futures 

account class. 

We appreciate the Commission's efforts to provide certainty with respect to the bankruptcy treatment of 

cleared OTC derivatives. In particular, we support the Commission's proposal to codify generally its 

Statement on Cleared OTC Derivatives and Statement on Commingling Foreign Futures Positions. We 

discuss below our several concerns with the Commission's proposal regarding the definition of a cleared 

OTC derivatives account class and the bankruptcy treatment of cleared OTC derivatives that are not 

subject to a 4d order, as well as our recommendation that the Commission adopt standards for permitting 

cleared OTC derivatives to be included in 4d accounts. 

II. Any cleared OTC derivatives account class should apply to the bankruptcy of a 

clearing organization as well as the bankruptcy of an FCM 

The Commission's Part 190 Regulations are generally applicable to the bankruptcy of a "commodity 

2 See CME Rule 8F03. 

3 Regulation 30.7 accounts explicitly include money, securities, and property at least sufficient to cover obligations to 

foreign futures and options customers, i.e., U.S. customers trading on foreign markets. Regulation 30.7 also permits 

FCMs to deposit money, securities and property held on behalf of foreign customers trading on foreign markets. 

Although not addressed in Regulation 30.7 itself, the Commission's 1-FR Instructions indicate that 30.7 accounts may 

also include "other "non-regulated" transactions". It is the tatter category which forms the basis of the current use of 

30.7 accounts for cleared OTC derivatives. 
David Stawick 

September 14, 2009 

Page 3 

broker." A "commodity broker" is defined in both Section 101(6) of the Bankruptcy Code, 11 U.S.C. 

§101(6), and Regulation 190.01(f), to include, among other things, DCOs, as well as FCMs. The 

proposed cleared OTC derivatives account class would apply only to the bankruptcy of an FCM and not 

to the bankruptcy of a DCO. There is no such exclusion with respect to any of the other account classes 

defined in Regulation 190.01 (a). 

If, as proposed by the Commission, an FCMwere to utilize a separate account for customers' cleared 

OTC derivatives in the absence of a 4d order, the DCO must also maintain a similar account for holding 

such positions and their accompanying margins. If the cleared OTC derivatives account class will not 

apply in the unlikely event of a DCO bankruptcy, then it is unclear what account class would apply to the 

funds in the DCO's separate account for those OTC derivatives that it clears on behalf of its clearing 

FCMs' customers. 

By contrast, the Commission also proposes to amend its regulations to state that if positions in one 

account class are commingled with positions in the futures account class, pursuant to a Commission 

order, they will be treated as being held in the futures account class. This proposed amendment would 

apply to all commodity brokers, including DCOs, thus clearly defining the applicable class with respect to 

margins for cleared OTC derivatives held by a bankrupt DCO in a 4d segregated account. 

The commodity broker bankruptcy provisions in Subchapter IV of Chapter 7 of the Bankruptcy Code do 

not require that a new cleared OTC derivatives account class must apply only to FCMs and not to DCOs. 

The Commodity Futures Modernization Act of 2000 ("CFMA") extended the application of the commodity 

broker bankruptcy provisions to cleared OTC derivatives by expanding the term "contract market" to 

include any "registered entity" for the purpose of the Bankruptcy Code. 11 U.S.C. §761 (7). At the same 

time, the CFMA defined a "registered entity" to include DCOs, 7 U.S.C. §1a(29), and incorporated this 

definition into the Bankruptcy Code by reference. 11 U.S.C. §761 (8). 

The definition of a "contract market" is relevant to the Bankruptcy Code's definition of a "commodity 

contract". Section 761(4) defines a "commodity contract" separately for FCMs and for clearing 

organizations as follows: 

(4) "commodity contract" means-

(A) with respect to a futures commission merchant, contract for the purchase or sale of 

a commodity for future delivery on, or subject to the rules of, a contract market or 

board of trade; 

* * * * 

(D) with respect to a clearing organization, contract for the purchase or sale of a 

commodity for future delivery on, or subject to the rules of, a contract market or 

board of trade that is cleared by such clearing organization, or commodity option 

traded on, or subject to the rules of, a contract market or board of trade that is 

cleared by such clearing organization; 

The Commission's exclusion of DCOs with respect to the proposed cleared OTC derivatives account 
David Stawick 

September 14, 2009 

Page4 

class appears to rest upon an assumption that cleared OTC derivatives do not meet the definition of 

"commodity contract'' in Section 761(4)(D). However, cleared OTC derivatives clearly meet the definition 

of "commodity contract" both with respect to a futures commission merchant and with respect to a 

clearing organization. Cleared OTC derivatives are contracts for the purchase or sale of a commodity for 

future delivery subject to the rules of a DCO, a "contract market". This requirement appears in the 

definition of "commodity contract" for FCMs and for clearing organizations. There is a second element of 

the definition of a "commodity contract" with respect to a clearing organization, which is that the contract 

is cleared by the clearing organization. The definition of a commodity contract with respect to a clearing 

organization does not require that there be a contract market that is a different entity than the clearing 

organization. A cleared OTC derivatives contract may be both subject to the rules of a DCO and be 

cleared by that DCO, i.e., "cleared by such clearing organization" should be read to modify the word 

"contract" rather than "contract market or board of trade". For example, CME currently clears certain 

ethanol and agricultural OTC swaps. The clearing and settlement of these swaps are subject to Chapter 

8-F of the CME Rulebook, which governs Over-the-Counter Derivative Clearing. In these instances, the 

ethanol and agricultural swaps are subject to the rules of the CME OCO (a "contract market" as defined in 

the Bankruptcy Code) and are cleared by the CME OCO, thus meeting the definition of a "commodity 

contract" with respect to a clearing organization under Section 761 (4)(0). Therefore, there is no statutory 

basis for excluding OCOs with respect to a cleared OTC derivatives account class. 

Failing to recognize a cleared OTC derivatives account class with respect to DCOs, even when those 

DCOs maintain cleared OTC derivatives accounts for the deposit of customer margins, will create greater 

uncertainty regarding the treatment of cleared OTC derivatives in the unlikely event of the bankruptcy of a 

DCO. In addition, if the Commission were to define cleared OTC derivatives as a separate account class 

for FCMs but not for DCOs, it could create uncertainty with respect to the application of CME Rule 818 

(Close-Out Netting). Rule 818.C. provides, in relevant part, that in the event of the bankruptcy of CME: 

[a]t such time as a Clearing Member's positions are closed, the obligations of the Clearing House 

to a Clearing Member in respect of all of its proprietary positions, accounts, collateral and 

deposits to the security deposit fund shall be netted, in accordance with the Bankruptcy Code, the 

Commodity Exchange Act and the regulations adopted thereunder in each case, against the 

obligations of that Clearing Member in respect of both its proprietary and its customers' positions, 

accounts, collateral and its then matured obligations to the security deposit fund to the Clearing 

House and to the Exchange. All obligations of the Clearing House to a Clearing Member in 

respect of its customer positions, accounts, and collateral shall be separately netted against the 

positions, accounts and collateral of its customers in accordance with the requirements of the 

Bankruptcy Code, the Commodity Exchange Act and the Regulations adopted thereunder in each 

case. 

* * * * 

In other words the Clearing House's proprietary obligations to a Clearing Member would be netted against 

the Clearing Member's proprietary and customer obligations to the Clearing House, while the Clearing 

House's customer obligations to a Clearing Member would be netted only against the Clearing Member's 

customer obligations to the Clearing House. In both instances such netting shall be done "in accordance 

with the requirements of the Bankruptcy Code, the Commodity Exchange Act and the Regulations 

adopted thereunder." Under the Part 190 Regulations, customer obligations must be netted separately 
David Stawick 

September 14, 2009 

Page 5 

for each account class. However, if the FCM has an account for cleared OTC derivatives that 

Commission Regulations identify as a separate account class and the Clearing House has an account for 

cleared OTC derivatives that Part 190 does not recognize as a separate account class, an issue is 

presented with respect to the appropriateness of netting these two accounts. 

Ill. The Commission should clarify in its proposed definition of cleared OTC derivatives 

that such transactions must be cleared through an FCM but are not required to be 

submitted to the clearing system directly by an FCM 

The Commission has defined "cleared OTC derivatives" in its proposed amendments to include: 

... positions in commodity contracts that have not been entered into or traded on a contract 

market ... or on a derivatives transaction execution facility ... , but which nevertheless are 

submitted by a commodity broker that is a futures commission merchant ... for clearing by a 

clearing organization .... (emphasis added). 

74 FRat 40799. 

The Commission stated in its Federal Register release·that it intended to incorporate the defini~ion of 

"cleared OTC derivatives" from its September 26, 2008 Statement on Cleared OTC Derivatives into 

Regulation 190.01. The definition in that Statement defined "cleared OTC derivatives" as contracts that: 

... although not executed or traded on a Designated Contract Market or a Derivatives 

Transaction Execution Facility, are subsequently submitted for clearing through a Futures 

Commission Merchant . .. to a Derivatives Clearing Organization. (emphasis added). 

These two definitions are substantively different in that the proposed amendment to Regulation 190.01 

requires that cleared OTC positions must be submitted by an FCM, and the definition in the Statement on 

Cleared OTC Derivatives requires that the cleared OTC positions must be submitted through an FCM. 

We request that the Commission modify its proposed amendment to Regulation 190.01 to replace 

"submitted by a commodity broker that is a futures commission merchant" with "submitted for clearing 

through a futures commission merchant" to effectuate its intent to incorporate the same definition set forth 

in its Statement on Cleared OTC Derivatives. This will clarify that the Commission does not intend to 

prohibit clearing FCMs from authorizing their customers to directly enter their transactions into the 

clearing system, in order to meet the definition of cleared OTC derivatives, as long as the transactions are 

cleared through an FCM. 

IV. If each DCO is expected to define its own rules for the treatment of positions and 

margins in a cleared OTC derivatives account, different DCOs could impose varying 

and potentially inconsistent requirements 

The Commission has proposed to define "cleared OTC derivatives" as positions: 

... which are required to be segregated, in accordance with a rule, regulation, or order issued by 

the Commission, or which are required to be held in a separate account for cleared OTC derivatives 

only, in accordance with the rules or bylaws of a clearing organization ... (emphasis added) 
David Stawick 

September 14, 2009 

Page 6 

The Commission stated in its Federal Register release that: 

[t]he Commission does not intend to specify substantive requirements for the treatment of cleared 

OTC derivatives (and the money, securities, and/or other property margining, guaranteeing, or 

securing such derivatives). Rather, the Commission proposes to define "cleared OTC 

derivatives" in such a manner as to specify the sources from which such substantive 

requirements may originate. 

7 4 FR at 40796. 

Therefore, it appears that the Commission has left the task of defining such requirements to each DCO. 

This could pose a number of issues. 

The Commission described the rationale for the concept of account class as being the fact that the 

Regulations apply different requirements to the treatment of positions, and therefore different protections, 

with respect to different types of commodity contracts. For example, the Commission noted that the 

segregation requirements in Regulations 1.20 through 1.30 are more stringent than the Regulation 30.7 

requirements. However, the same segregation requirements apply to all contracts that are in the futures 

account class, and the same 30.7 requirements apply to all contracts that are in the foreign futures 

account class (and apply to all cleared OTC derivatives that are held in 30.7 accounts). 

If each individual DCO that clears OTC derivatives can make the rules that define the requirements for 

the treatment of positions and margins in a cleared OTC derivatives account, with no guidelines from the 

Commission other than that such positions would be "required to be held in a separate account for 

cleared OTC derivatives only", there could be various levels of protection afforded by different DCOs. For 

example, one DCO could model its rule on the requirements for 4d segregated accounts which limit the 

instruments in which such funds may be invested to those set forth in Regulation 1.25, while another 

DCO could use Regulation 30.7 requirements as its guide, and choose not to specify permissible 

investments. DCOs may also impose differing requirements with respect to the frequency of the 

computations of the amounts on deposit in such accounts, or with respect to requirements for obtaining 

acknowledgement letters. 

Depending on how much the requirements for cleared OTC derivatives accounts vary among DCOs, 

FCMs could find themselves in the position of having to maintain multiple cleared OTC derivatives 

accounts with respect to different DCOs. Moreover, under the Commission proposal, all cleared OTC 

derivatives accounts are considered to be part of the same account class, even if the accounts relate to 

multiple DCOs with varying requirements for such accounts. Therefore, the available funds in the cleared 

OTC derivatives account class could be diluted for customers of a bankrupt FCM who hold OTC 

derivatives cleared by a DCO with more stringent requirements because the account class also contains 

the margins of customers who hold OTC derivatives cleared by a DCO with less stringent requirements. 

Given that the Commission's goal is to ensure that customers clearing OTC derivatives receive 

bankruptcy protection, and in the interest of providing consistency in the safeguards for OTC customer 

positions and margins, the Commission should define the minimum requirements that must apply to 

cleared OTC derivatives accounts for transactions that are cleared through any DCO with respect to 

those areas that the Commission has already addressed for 4d accounts, including permitted 
David Stawick 

September 14, 2009 

Page 7 

investments, recordkeeping, and acknowledgement letters. We believe that such requirements should 

be consistently applied to both 4d accounts and cleared OTC derivatives accounts.4 Doing so would also 

eliminate any incentive for DCOs to impose less stringent requirements and any opportunity for regulatory 

arbitrage, both of which could negatively impact certain customers. 

V. The Commission should adopt standards for permitting cleared OTC derivatives to be 

included in 4d accounts 

Many of the market participants that clear, or would clear, their OTC transactions through a DCO also 

trade futures and options on designated contract markets. These participants have indicated a strong 

desire to be able to realize the capital efficiency benefits of margin offsets between their related OTC and 

futures and options positions. Although it is clear that such margin offsets may be provided by FCMs and 

DCOs with respect to related positions within a 4d account, Commission staff has raised issues regarding 

the appropriateness of margin offsets between segregated futures positions and cleared OTC derivatives 

positions that are held in 30.7 accounts. Our understanding is that the Commission would apply the 

same analysis with respect to potential margin offsets between positions in 4d accounts and accounts 

that contain only cleared OTC derivatives positions. 

Since the Commission has proposed to define cleared OTC derivatives to include those " ... which are 

required to be segregated, in accordance with a rule, regulation, or order issued by the Commission ... ", 

it appears that the Commission anticipates that it will continue to review and grant 4d petitions after the 

adoption of any rules relating to a separate account class for cleared OTC derivatives. We expect to 

continue to request 4d relief for the vast majority of the new OTC products that we intend to clear, 

regardless of the availability of a new account class, in large part, to enable us to provide market 

participants with the benefit of margin offsets between their cleared OTC derivatives positions and related 

futures and options. 

It has proved to be burdensome for DCOs to submit multiple 4d petitions and requests for amendments to 

4d orders, and it is also burdensome for the Commission to review such petitions and requests from 

multiple DCOs. We believe it would be beneficial to DCOs and the Commission if the Commission were 

to adopt standards that would define the requirements that must be met for a cleared OTC derivative 

product to qualify for 4d treatment. Such standards would facilitate and streamline DCO requests for, and 

Commission approvals of, 4d orders for particular cleared OTC derivatives. Increasing the efficiency of 

the process for obtaining 4d relief for these products is likely, in turn, to enhance the competitiveness of 

U.S. DCOs and further encourage market participants to bring their OTC transactions to such DCOs for 

clearing. 5 

4 Similarly, in our July 21, 2009 comment letter with respect to RIN 3038-AC79, 74 FR 23962 (May 22, 2009) 

(Investment of Customer Funds and Funds Held in an Account for Foreign Futures and Foreign Options 

Transactions), we stated that "CME Group is not aware of any business reason or risk related reason to require 

different standards between Regulation 1.25 and Regulation 30.7 investments and encourages the CFTC to 

harmonize the two investment standards." (pg. 6). 

5 In addition to adopting standards which would govern those cleared OTC derivatives that would qualify for inclusion 

in a 4d account, the Commission should consider whether a structure can be created that would allow for portfolio 

margining between cleared OTC derivatives accounts and 4d accounts. 
David Stawick 

September 14, 2009 

Page 8 

VI. Conclusion 

The Commission's proposal reflects its intent to replace the use of 30.7 accounts for cleared OTC 

derivatives with new accounts for cleared OTC derivatives only, unless subject to a 4d order. If the 

Commission adopts the proposed rules, we request that the Commission allow a sufficient period of time 

before their effective date for DCOs to adopt any necessary implementing rules, and for DCOs and FCMs 

to establish such accounts and transfer positions and margins. 

CME Group thanks the Commission for the opportunity to comment on this matter. We would be happy 

to discuss any of these issues with Commission staff. If you have any comments or questions, please 

feel free to contact me at (312) 930-3488 or Kathleen.Cronin@cmegroup.com; or Anne Polaski, 

Associate Director and Regulatory Counsel, at (312) 338-2679 or Anne.Polaski@cmegroup.com. 

cc: Chairman Gary Gensler 

Commissioner Michael Dunn 

Commissioner Bart Chilton 

Commissioner Jill Sommers 

Robert B. Wasserman 

Sincerely, 

~~~· Kathleen Cronin 

Managing Director, General Counsel 

and Corporate Secretary 

CME Group Inc.