CFTC Letter 04-15

CFTC letter No. 04-15

March 22, 2004

Interpretation

Division of Clearing and Intermediary Oversight

 

Re: Section 1a(23) and Regulation 1.3(mm) -- Request for Interpretation in Connection with the 

Definition of an Introducing Broker 

Dear : 

This is in response to your letter dated October 24, 2003, to the Division of Clearing and Intermediary 

Oversight (“Division") of the Commodity Futures Trading Commission ("Commission"), as 

supplemented by telephone conversations with Commission staff. By your correspondence, you request 

that the Division concur with your assessment that “X”, would not be an Introducing Broker ("IB") 

under the Commodity Exchange Act ("Act"),[1] with regard to providing its customers a software 

program with the ability to access the order-entry system of the futures commission merchant ("FCM") 

of their choice. 

Facts

Based upon your representations, we understand the relevant facts to be as follows. “X”is a registered 

broker dealer that controls rights to a trading and order manangement software program called “Y”, that 

allows institutional customers to gather and analyze market data. The software assists “X’s” customers 

in trading decisions, but does not provide express “buy” or “sell” signals. 

You represented that “X” plans on licensing “Y” to institutional customers to permit these customers to 

access the order-entry system of the FCM of their choice.[2] “X” will not license “Y” to individuals. You 

represented that “X’s” customers that would use “Y” would select their own FCMs and negotiate any 

and all fees between themselves and the FCM. The “Y” software would reside on the customers’

computers and “X” would have no network connection to “Y”. Customers will use the “Y” software to 

periodically generate a report of the number of contracts that are executed using the “Y” software and 

submit these reports to “X”, who will, in turn, use these reports to calculate how much money is due to 

“X” by the FCM, which will be based on the number of contracts executed with “Y”, not the dollar 

amount of the contracts or the FCM’s commission. “X” will not recommend, propose, or encourage 

customers to use any particular FCM, even in response to a customer inquiry, nor will it solicit 

customers for an FCM in any other manner. The customer will inform “X” of the FCM with which it has 

an account and “X” will work with the FCM to develop the required technology to provide the customer 

access to the FCM's order-entry system.[3] When the technology has been implemented, the customer 

file:///H|/Desktop/04letters/tm04-15.htm (1 of 5) [5/6/2010 5:29:04 PM]
CFTC Letter 04-15

will be able to directly access its selected FCM's order-entry system through the “Y” screen, without 

opening a new application. The customer will log into the FCM’s system and enter its trade in the 

FCM's system as it normally would, except that it would be trading through the “Y” screen. As a result, 

the customer will log-on and place orders with the FCM directly through the “Y” screen. In a browserbased system, the mouse-click will result in a separate browser window being automatically launched to 

provide the customer access to the FCM's order-entry system. By providing a method of entering trades 

without opening a separate application, “X” is providing technology that facilitates order-entry in a more 

efficient manner. 

You have represented that this software will be available to all of “X’s” customers and that “X” is not 

involved in any way with the selection of an FCM for any customer. “X” does not receive any form of 

payment from its customers for the use of the “Y” software, except in the event that a customer’s usage 

does not generate fees from the FCM that exceed a certain minimum amount that may be negotiated 

with the customer, in which case the customer will be liable for the difference between the fees 

generated and the minimum amount.[4] “X” does not have a right or ability to view a customer’s orders, 

positions or the types of contracts traded or the time or prices of these trades. The orders go directly 

from the customer’s computer terminal to the FCM’s computer (without passing through “X’s”

computers). “X’s” customers who request the “Y” software do not pay “X” any more for its data 

services than those customers who do not request the integration tool. “X” receives a transmission fee 

from the FCM. The fee is based on the number of contracts executed using the “Y” software and is not 

associated in any way with fees the customer might pay to the FCM for executing the trade. 

Analysis

Section 1a(23) of the Act defines an introducing broker ("IB") as: 

[A]ny person (except an individual . . . registered as an associated person of a futures commission 

merchant) engaged in soliciting or in accepting orders for the purchase or sale of any commodity for 

future delivery on or subject to the rules of any contract market or derivatives transaction execution 

facility who does not accept any money, securities, or property (or extend credit in lieu thereof) to 

margin, guarantee, or secure any trades or contracts that result or may result therefrom. 

Rule 1.3(mm)[5] similarly defines an IB, in relevant part, as: 

Any person who, for compensation or profit, whether direct or indirect, is engaged in soliciting or in 

accepting orders (other than in a clerical capacity) for the purchase or sale of any commodity for future 

delivery on or subject to the rules of a contract market who does not accept any money, securities, or 

property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that 

result or may result therefrom. 

The Futures Trading Act of 1982,[6] amended the Act to require persons known as "agents" of FCMs to 

file:///H|/Desktop/04letters/tm04-15.htm (2 of 5) [5/6/2010 5:29:04 PM]
CFTC Letter 04-15

register as IBs, so as to "resolve[ ] any existing uncertainty as to the status of [these] agents."[7] In 

creating the separate IB registration category, Congress intended to "protect the public" from the "sales 

abuses" of such agents for which FCMs "frequently disavow[ed] any responsibility."[8]

In establishing the rules relating to IBs and their registration, the Commission noted that the intent of the 

Futures Trading Act of 1982 was "to require those persons who performed the type of activities 

traditionally engaged in by agents to register with the Commission as an [IB]."[9] The Commission 

indicated that "[h]istorically, agents . . . carried all of their accounts on a fully-disclosed basis with an 

FCM which provided 'back office' services for those accounts."[1] The Commission further stated that 

"the phrase 'soliciting or accepting orders,' . . . must be construed to encompass not just the literal 

solicitation or acceptance of customers' orders, but also the solicitation of customers . . . for referral to an 

FCM for the institution of a trading relationship and the execution of those orders."[1]

“X’s” central business activities are the collection and distribution of data services and it is not involved 

with the intermediation of trading on the futures markets. “X” does not solicit customers or orders for an 

FCM or the trading of futures contracts. Customers indicate to “X” the FCM with which they have an 

existing relationship or with whom they wish to trade. Even in response to a customer inquiry, “X” does 

not recommend, propose, or encourage that customers use any particular FCM, or place any orders for 

futures contracts. The fees paid to “X” by the FCM and are not associated with the fees paid to the FCM 

for the placement of customer orders—the fee is paid by the FCM based on the number of contracts 

executed with the FCM, not based on the FCM’s commission or the price of the contract traded. Because 

“X” is collecting a fee based on the number of contracts executed with FCMs, using “Y”, and to which 

customers wish to establish a link, “X’s” net income may be affected by its providing this additional 

service. “X”, however, is not accepting customer orders, since it has no involvement with the placing of 

the customers orders and does not recommend a particular trade or an FCM, even if asked to do so by 

the customer. “X” is simply providing technology that connects the customer to its FCM's order entry 

system. The customer is submitting its order to the FCM and not to “X”. The Division concurs with your 

assessment that “X” is not an IB and, therefore, is not required to register as such.[12]

The position taken herein is based upon the representations that have been made to the Division. Any 

different, changed, or omitted facts or conditions might require the Division to reach a different 

conclusion. You must notify the Division immediately in the event the operations or activities of “X”

change in any material way from those represented to us. Further, this letter represents the position of 

this Division only and does not necessarily represent the views of the Commission or any other division 

or office of the Commission. 

If you have any questions concerning this correspondence, please contact Peter B. Sanchez, an attorney 

on my staff, at (202) 418-5437. 

 

file:///H|/Desktop/04letters/tm04-15.htm (3 of 5) [5/6/2010 5:29:04 PM]
CFTC Letter 04-15

Very truly yours, 

James L. Carley 

Director 

[1] 7 U.S.C. § 1 et seq. (2000).[2]

2 You state that “institutional customer” “mean[s] a corporation, partnership, limited liability company 

or Masschusetts or similar business trust that was not formed for the specific purpose of using “Y” and 

is engaged in the business of investing in, owning, holding or trading securities, futures contracts and 

other financial instruments, either for its own account or for the account of others.”

[3] You represent that the “Y” will use the “Z”, and that “X” has successfully tested “Y’s” ability to 

transmit a customer’s order information to five different FCMs. You represent that “Z” is a standardized 

protocol used to transmit financial data and that it is widely-used in the financial services industry. [4]

4 You represent that, in lieu of compensation from the FCM based on the number of contracts, a 

customer may instead choose a simple license fee that does not depend on the amount of contracts 

executed using the “Y” system. “X” may, separately, contract with customers to provide software 

technical support or data feeds from third party providers, but such technical support will not involve 

buy/sell recommendations and customers who obtain data feeds directly from unafilliated third-party 

providers, instead of “X”, will receive equal treatment. 

[5] 17 C.F.R. § 1.3(mm). Commission rules referred to herein are found at 17 C.F.R. Ch.1 (2003). 

[6] Pub. L. No. 97-444, 96 Stat. 2294 (1983).[7]

7 H.R. Rep. No. 97-565, pt. 1, at 49 (1982).[8]

8 Id. [9]

9 48 Fed. Reg. 35248, 35250 (August 3, 1983), quoting 48 Fed. Reg. 14933, 14935 (April 6, 1983).[1]

10 Id. [1]

11 Id. 

[12] The Staff has only once previously opined as to the registration requirements under the Act as they 

relate to data service providers, such as “X”, that provide technology to facilitate the order entry process 

file:///H|/Desktop/04letters/tm04-15.htm (4 of 5) [5/6/2010 5:29:04 PM]
CFTC Letter 04-15

and do not engage in activities that would otherwise require registration. See CFTC Staff Letter 02-91, 

July 30, 2002. In that instance, however, the entity did not receive a per-contract compensation from the 

FCMs. If in the future the Commission determines that such entities must be registered under the Act, 

“X” may have to comply with the applicable registration requirements at that time. 

file:///H|/Desktop/04letters/tm04-15.htm (5 of 5) [5/6/2010 5:29:04 PM]