NFA NATIONAL FUTURES 

Via E-Mail (secretary@cftc.gov) 

Mr. David A. Stawick 

Secretary of the Commission 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, N.W. 

Washington, D.C. 20581 

Received CFTC 

Records Section 

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July 6, 2009 

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COMMENT 

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

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

(May 7, 2009) 

Dear Mr. Stawick: 

National Futures Association welcomes this opportunity to comment on 

the Commission's proposed changes to its net capital requirements for FCMs and 

independent IBs. NFA applauds the Commission for reviewing its FCM and IB capital 

requirements to determine whether they are appropriate for protecting customer 

assets and ensuring that firms have the financial wherewithal to meet their 

obligations. While NFA agrees with several of the proposed changes, it believes that 

others are not appropriate at this time. 

NFA supports the Commission's proposed amendment to its rules to 

increase the IB minimum net capital from $30,000 to $45,000. Current CFTC rules 

require independent IBs to maintain the higher of $30,000 or the amount required 

by a registered futures association. Since NFA's minimum requirement is $45,000, 

the change to the CFTC's rule would harmonize those rules with NFA's rules without 

increasing the amount IBs must maintain. 

NFA also supports increasing the FCM minimum net capital 

requirement in the Commission's rules. Given that FCMs can hold customer funds 

and that the amount of these funds has increased dramatically in recent years, the 

proposed increase to $1,000,000 not only recognizes this significant increase in 

customer funds but also ensures that FCMs have an appropriate minimum level of 

capital to meet their financial obligations. 

300 South Riverside Plaza Suite 1800 Chicago, Illinois 60606 312.781.1300 800.621.3570 312.781.1672fax www.nfa.futures.org 
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The Commission also proposes two significant changes to the riskbased capital requirement, which is based on a percentage of margin requirements 

in accounts held at the FCM. NFA supports the first change-increasing the 

noncustomer percentage to match the percentage for customer positions-and 

believes that the Commission has provided a valid rationale for this change. In 

particular, the Commission states that in originally adopting the 4% requirement for 

noncustomer positions, it modeled this requirement upon SRO rules. SROs adopted 

this lower percentage for noncustomer positions vis-a-vis the 8% requirement for 

customer positions becauseSROsat the time believed that noncustomer accounts 

presented less risk to FCMs than customer accounts. As the Commission notes, 

however, more recent experience has shown that this assumption may no longer be 

correct, particularly under conditions of financial stress for the FCM. NFA 

recommends, however, that if the Commission moves the noncustomer requirement 

to 8%, then it should provide significantly longer than sixty days for FCMs to comply. 

On the other hand, we have not seen any evidence to support the 

Commission's second significant change-increasing both the customer and 

noncustomer percentage amounts to 10%. While we recognize that the Commission 

cites "rigorous standards for FCM financial strength" as the rationale for this 

increase, we question the efficacy of this rationale. In particular, during the past 

year's significant market volatility and instability, there has been no evidence that 

the current risk based capital requirement has failed or has placed FCMs in 

precarious financial situations. To the contrary, even despite the insolvencies of 

several large financial institutions, the FCM subsidiaries of these firms had more 

than adequate segregated funds and capital to meet their liability to customers. In 

short, without a reasoned justification, NFA cannot support increasing the customer 

and noncustomer percentages to 10%. 

With regard to OTC derivative positions, NFA supports including them 

in an FCM's risk based capital requirement. NFA believes, however, that the 

Commission should closely coordinate its overall capital treatment of cleared OTC 

positions-particularly those positions that are designed to hedge or offset the risk 

of other positions-with the other financial regulators so as not to provide a capital 

disincentive to clear these transactions. At this time, NFA also supports revisions to 

CFTCRegulation 1.17(j) to reflect that cleared OTC positions in proprietary accounts 

may be covered by positions that would qualify as cover for proprietary tutu res and 

options positions. 

Finally, we applaud the Commission's initiative to review whether the 

current capital rules adequately account for an FCM/BDs overall risk. For many 

years now, the Commission has been at the forefront of adopting and uti I izing capital 

rules that truly reflect the specific risk posed by a firm's operations. NFA believes 

300 South Riverside Plaza Suite 1800 Chicago, Illinois 60606 312.781.1300 800.621.3570 312.781.1672 fax www.nfa.futures.org 
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that the Commission's current FCM capital requirements work exceptionally well 

with the segregation and secured amount requirements and special provisions of the 

Bankruptcy Code in protecting customers against insolvency losses. NFA notes, in 

particular, that since 1990 there have been few insolvencies by traditional FCMs 

trading on U.S. exchanges, and no customer segregated funds have been lost. 

The Commission's actions in the capital area stand in stark contrast to 

the SEC, which still has overly simplistic capital requirements that do not truly 

account for a firm's specific risk. As you are aware, the Obama Administration's June 

2009 Financial Regulatory Reform ("FRR") proposal calls for a study regarding the 

harmonization of the securities and commodities regulatory regimes. NFA strongly 

believes that the CFTC's risk-based capital approach should be the prevailing capital 

structure that emerges after that study. 

On the other hand, we are very concerned about the current suggestion 

of increasing the ANC requirements for FCM/BDs by arbitrarily combining the CFTC 

and SEC capital requirements. While this approach may be appealing in its 

structure, it is a step backward and embraces a simplistic capital approach rather 

than being reflective and offering an approach that adequately measures specific 

firm risk. 

At this time NFA, like the Commission, recognizes that the recent 

financial crisis has justifiably heightened concerns among all regulators that 

financial institutions have adequate capital appropriate for their specific business 

risk. The Obama Administration's FRR proposal also calls for firms identified as Tier 

1 Financial Holding Companies ("Tier 1 FHCs") due to their size, leverage, and 

interconnectedness to be subject to robust consolidated regulation and supervision. 

The Administration's proposal also calls for the Federal Reserve Board to have the 

authority and accountability for consolidated supervision and regulation of these 

Tier 1 FHCs, and for the Treasury Department to lead a working group with 

participation by other federal financial regulatory agencies to conduct a 

fundamental reassessment of the existing capital requirements for banks, bank 

holding companies ("BHC"), and new Tier 1 FHCs. Treasury's review is to be 

completed by December 31, 2009, and focus on all elements of the capital 

framework, including composition of capital, scope of risk coverage, relative risk 

weights, and calibration. 

NFA believes that most large FCM/BDs are either part of a BHC or will 

be classified as part of a Tier 1 FHC. Therefore, NFAencourages the Commission to 

closely coordinate its review of FCM/BD capital requirements with Treasury's 

reassessment of existing capital requirements for BHCs and Tier 1 FHCs. In the past, 

all financial regulators have had a tendency to use simple capital formulas that have 

worked well in most cases but may not have appropriately addressed firm specific 

300 South Riverside Plaza Suite 1800 Chicago, Illinois 60606 312.781.1300 800.621.3570 312.781.1672fax www.nfa.futures.org 
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risk. We should take this opportunity now to reassess our past approaches and 

determine whether a new capital framework can more appropriately measure an 

FCM/BD's specific risk. 

NFAappreciates this opportunity to comment on theCFTC's proposals. 

We are confident the Commission will engage in a careful analysis and reach a result 

that protects customers and the futures markets without placing an undue burden 

on FCMs. 

Respectfully submitted, 

Thomas W. Sexton 

Senior Vice President and General Counsel 

(kpc/Comment Letters/Capital Requirements) 

300 South Riverside Plaza Suite 1800 Chicago, Illinois 60606 312.781.1300 800.621.3570 312.781.1672 fax www.nfa.futures.org