Futures Industry Association 

2001 Pennsylvania Ave. NW 

Suite 600 

202.466. 5460 

202.296.3184 fax 

Wnshinf!t<ln, DC 20006-182.3 www. fu turesindu~try.o rg 

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By Electronic Mail 

December 14, 2009 

Mr. David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 2lsr Street NW 

Washington DC 20581 

COMMENT 

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Re: Kansas City Board of Trade and Kansas City Board of Trade Clearing Corporation 

Petition Pursuant to Section 4( c) of the Commodity Exchange Act 

Dear Mr. Stawick: 

The Futures Industry Association ("FIA") 1 is pleased to submit this letter in support of the petition 

filed by the Kansas City Board of Tracie ("KCBT") and the Kansas City Board of Trade Clearing 

Corporation ("Clearing Corporation" and, collectively with the KCBT, the "Petitioners"), pursuant to 

section 4(c) of the Commodity Exchange Act ("Act"), for an exemption from certain requirements of 

Commodity Futures Trading Commission ("Commission") Rule 35.2, 17 CFR § 35.2, in order to list 

for clearing and clear, respectively, wheat calendar swap contracts.2 FIA also supports the Petitioners' 

request that the Commission issue an order, pursuant to section 4d(a)(2) of the Act, authorizing the 

Clearing Corporation and any FCM carrying cleared-only wheat calendar swap contracts to hold funds 

deposited by customers to margin, guarantee or secure such contracts with customer funds otherwise 

required to be held in a customer segregated account ("section 4d account"). 

The relief the Petitioners have requested is similar to the relief that the Commission has previously 

granted to ICE Clear US, the Chicago Mercantile Exchange and their respective clearing member 

FCMs, in which they were authorized to clear, and to commingle in a section 4d account funds 

FIA is a principal spokesman for the commodity futures and options industry. FIA's regular 

membership is comprised of approximately 30 of the largest futures commission merchants ("FCMs") in the 

United States. Among FIA's associate members are representatives from virtually all other segments of the 

futures industry, both national and international. Ret1ecting the scope and diversity of its membership, FIA 

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

contract markets. 

2 Specifically, the Petitioners have requested relief from the provisions of Commission Rule 35.2, which 

provide (i) that a swap agreement may not be part of a fungible class of agreements that are standardized as to 

their material terms and, further, (ii) that the creditworthiness of any party having an interest under the 

agreement be a material consideration in entering into or negotiating the agreement. 

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Mr. David A. Stawick 

December 14, 2009 

Page 2 

supporting positions in, certain cleared-only OTC agricultural swaps? In this regard, the Petitioners 

have indicated that their cleared-only wheat calendar swap contracts will be subject to essentially the 

same requirements as those to which the ICE Clear US and CME swaps are subject. That is: 

• The wheat calendar swap contracts will submitted for clearing by a clearing member of the 

Clearing Corporation; 

• Each cleared-only contract will be marked to market on a daily basis; 

.. The Clearing Corporation will apply its margining system and calculate required margin for 

each cleared-only contract in accordance with its nom1al and customary practices; 

e The Clearing Corporation will apply appropriate risk management procedures with respect to 

transactions and open interest in the cleared-only contracts; 

.. The Clearing Corporation will conduct financial surveillance and oversight of clearing 

members clearing cleared~only contracts sufficient to assure the Clearing Corporation that the 

clearing member has appropriate operational capabilities necessary to manage defaults in such 

contracts; and 

" The Clearing Corporation will make available open interest and settlement price information 

for c!eared~only contracts in the same manner as exchange-traded contracts.4 

The Petitioners' proposed wheat calendar swap contract also appears to meet the criteria supporting a 

finding that cleared-only OTC contracts and related margin should be permitted to be held in a 

customer segregated account, which we preliminarily identified in our ietter to the Commission dated 

September 14, 2009.5 Specifically: (i) the wheat calendar swap contract is integrally related with an 

exchange-traded contract; (ii) the contract is sufficiently liquid to permit offset in the event of a 

clearing member default; (iii) in the absence of offset, the risk of canying the positions may be easily 

hedged; and (iv) the cleared-only contract provides opportunities for cross-margining with exchangetraded contracts. 

Commission Order dated December 12, 2008, 73 Fed.Reg. 77015 (December 18, 2008) (with respect to 

cleared-only OTC swaps on coJTee, sugar and cocoa and other agricultural products cleared by ICE Clear US); 

and Commission Order dated March 18, 2009, 74 Fed.Reg. 12316 (March 24, 2009) (with respect to in clearedonly OTC swaps on corn, wheat and soybeans cleared by the CME). 

We note that, because the products underlying each of the cleared-only agricultural swaps also underlie 

exchange contracts traded on each clearing organization's related designated contract market ("DCM"), each 

Commission order was also subject to the conditions that: (i) the related DCM establishes a coordinated market 

surveillance program that encompasses the cleared-only contracts and corresponding futures contracts listed on 

the DCM; (ii) the related DCM adopts speculative position limits for each cleared-only. contracts that are the 

same as the limits for the corresponding contract listed by the DCM; (iii) the cleared-only contracts are not be 

treated as fungible with any contract listed for trading on the related DCM; (iv) each FCM acting pursuant to the 

order keeps the types of records that are described in section 4g of the Act and Commission rules thereunder, 

including Rule 1.35; and (v) the relevant DCM applies large trader reporting requirements to cleared-only 

contracts. To the extent the KCBT has not already undertaken to do so, we would expect the Commission to 

impose similar terms and conditions here. 

Letter fi:om John M. Damgard, President, Futures Industry Association, to David A. Stawick, Secretary 

to the Commission. 
Mr. David A. Stawick 

December 14, 2009 

Page 3 

As the Commission will recall, in that comment letter, FIA generally supported the Commission's 

proposal to amend its bankruptcy rules, 17 CFR Part 190, to establish a separate account class for 

those cleared-only contracts with respect to which the Commission has not issued an order requiring 

such positions and assets to be held in a section 4d account ("cleared OTC derivatives"). At that time, 

we encouraged the Commission, concurrent with the creation of the proposed separate account class, 

to adopt (after notice in the Federal Register and a reasonable opportunity for comment) objective 

standards by which the Commission will determine which cleared OTC derivatives will be eligible or 

required to be held in a section 4d segregated account and which cleared OTC derivatives will be 

required to be held in separate, i.e., non-section 4d, accounts. We expressed concern that failure to 

adopt such objective standards will result in legal uncertainty in the event of an FCM bankruptcy, 

which may threaten the integrity of the section 4d customer segregated account. We want to take this 

opportunity to reiterate this recommendation. 

Conclusion 

We appreciate the opportunity to submit these comments in support of the Petitioners' requests (i) for 

an exemption from certain requirements of Commission Rule 35.2, with respect to the Petitioners' 

proposed wheat calendar swap contract, and (ii) for an order, pursuant to section 4d(a)(2) of the Act, 

authorizing the Clearing Corporation and any FCM carrying cleared-only wheat calendar swap 

contracts to hold funds deposited by customers to margin such contracts with customer funds 

otherwise required to be held in a section 4d account. If the Commission has any questions 

concerning the matters discussed in this letter, please contact Tammy Botsford, FIA's Assistant 

Generafl Counsel, at (20 ) 466-5460. 

Sincere] , 

_J 

cc: Honorable Gary Gensler, Chairman 

Honorable Michael Dunn, Commissioner 

Honorable Jill E. Sommers, Commissioner 

Honorable Bart Chilton, Commissioner 

Honorable Scott O'Malia, Commissioner 

Division of Clearing and Intermediary Oversight 

Anand a Radhakrishnan, Director 

Phyllis P. Dietz, Associate Director 

Eileen A. Donovan, Special Counsel