Received CFTC 

Records SecUon 7/9/oi 

By Electronic Mail 

July 8, 2008 

Mr. Robert Wasserman 

Associate Director 

-9 AH 10: 50 

01:-c. OF T!-:E SECHETf'::.RIJ\T 

COMMENT 

Division of Clearing and Intermediate Oversight 

Commodity Futures Trading Commission 

1155 21st Street NW 

Washington DC 20581 

Re: CBOT Request Involving Cleared-Only 

Denatured Fuel Ethanol Swaps and Options 

Dear Bob: 

Katten 

KattenMuchinRosenman LLP 

525 W. Monroe Street 

Chicago,ll6o661·3693 

312.902.szoo tel 

312.902.1o61 fax 

KEVIN M. FOLeY 

kevin.foley@kattenlaw.com 

312.902.5372 direct 

312.Sn.8724 fax 

On behalf of the Executive Committee of the Law and Compliance Division of the Futures 

Industry Association ("Executive Committee"), I want to thank the staff of the Division of 

Clearing and Intermediary Oversight ("Division") for providing us the opportunity at this late 

date in the process to submit these comments with respect to the petition of the Chicago Board of 

Trade ("CBOT") to commingle customer funds used to margin CBOT contracts executed in 

OTC markets, and cleared by the Chicago Mercantile Exchange ("CME") on behalf of the 

CBOT, with other funds held in customer segregated funds ("Petition"). We ask that this letter 

be included in the comment file on the Commission's request for comment on the Petition. 

We want to emphasize that our concerns are not with the end result that the CBOT, CME and 

Division staff seek to achieve. We support efforts to enhance the protection of customer funds 

employed in trading derivatives transactions, whether on exchange or OTC. Our concerns lie 

only with the means by which the parties would realize this goal. 

The CBOT Petition differs in one critical respect from similar petitions earlier filed by the New 

York Mercantile Exchange ("NYMEX") with respect to OTC contracts in energy products 

cleared through Clearport and by the CME with respect to certain OTC Eurodollar contracts and 

foreign currency contracts cleared through the CME. In each of the two latter petitions, the 

applicable rules provide that the OTC contracts are to be converted to futures contracts when 

accepted for clearing through exchange of futures for swaps ("EFS") procedures. Thus, the 

CHICAGO CHARLOTTE IRVING LONDON LOS ANGELES NEW YORK PALO ALTO WASHINGTON, DC WWW.KATTENLAW.COM 

LONDON AFFILIATE: KATTEN MUCHIN ROSENMAN CORNISH LLP 

A limited liability partnership including professional corporations 
Mr. Robert B. Wasserman 

July 8, 2008 

Page2 

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KattenMuchinRosenman LLP 

contracts carried on the books and records of the respective clearing organization and clearing 

member futures commission merchant ("FCM") are futures contracts and the funds held to 

margin, guarantee or secure such contracts are properly customer segregated funds under section 

4d(a)(2) of the Commodity Exchange Act ("Act"). 

If the CBOT Petition had provided that the OTC ethanol contracts would convert to futures 

contracts when accepted for clearing, we would have welcomed the proposal without comment. 

However, for reasons that are not entirely clear, we understand that Commission staff dissuaded 

the CBOT from incorporating an EFS procedure in its proposal to clear OTC ethanol swaps. As 

a result, in contrast to the NYMEX OTC energy contracts and the CME OTC Eurodollar and 

foreign currency contracts that are converted to futures contracts when accepted for clearing, the 

OTC ethanol swaps will remain OTC swaps. In light of the serious legal and policy concerns 

discussed below, we strongly encourage the Commission staff to reconsider its position.2 

Division staff and we agree that, under the Commodity Broker Liquidation provisions of the 

Bankruptcy Code ("Code"), Subchapter IV of Chapter 7, a person trading OTC cleared-only 

contracts through an FCM is entitled to a priority in the event of a commodity broker default, 

only if that person is a "customer" under the Code, which, in turn, requires the person to hold a 

claim against the defaulting FCM on account of a "commodity contract". We disagree, 

however, with the staff's conclusion that a cleared swap can be a commodity contract under 

Subchapter IV. 

As we have discussed, the Executive Committee is concerned that, unless the OTC contracts are 

converted to futures contracts when accepted for clearing, they will not be "commodity 

contracts,,, Our analysis follows. 

See, Order, Treatment of Funds Held in Connection with the Clearing of Over-the-Counter products by the 

New York Mercantile Exchange, dated May 30, 2002; and Order, Treatment of Funds Held in Connection with the 

Clearing of Over-the-Counter products by the Chicago Mercantile Exchange, dated March 3, 2006. 

By letter dated September 11, 2007, ICE Clear U.S., Inc. has filed a similar petition with respect to OTC contracts in 

coffee, sugar and cocoa. As with NYMEX and the CME, the rules of ICE Clear U.S., Inc. would provide that the 

OTC contracts would be converted to futures contracts when accepted for clearing. By Federal Register release 

dated July 7, 2008, the Commission has requested comment on a petition that the CME and CBOT have filed to 

clear certain OTC contracts in agricultural products. We have not had an opportunity to review that submission. 

However, we understand that, as with the ethanol swaps, the CME and CBOT have not proposed to convert these 

contracts to futures contracts when accepted for clearing. As discussed below, we request that the Commission 

defer acting on the instant Petition at least until the comment period with respect to this latter petition has closed on 

August 21 has closed and the Commission has had an opportunity to consider any comments that may be received in 

response to the Commission's request for comment. 

2 Even in the absence of such concerns, a consistent approach among derivatives clearing organizations with 

respect to the treatment of cleared swaps contracts and the funds deposited to margin, guarantee or secure such 

contracts will enhance legal certainty and reduce the risk of customer confusion. 
Mr. Robert B. Wassemian 

July 8, 2008 

Katten 

KattenMuchlnRosenman LLP 

Page3 

A "customer" is defined in section 761(9) of the Code to mean: 

(A) with respect to a futures commission merchant- (i) entity for or with whom such 

futures commission merchant deals and that holds a claim against such futures 

commission merchant on account of a commodity contract made, received, acquired, or 

held by or through such futures commission merchant in the ordinary course of such 

futures commission merchant's business as a futures commission merchant from or for 

the commodity futures account of such entity; or 

(ii) entity that holds a claim against such futures commission merchant arising out of-

(I) the making, liquidation, or change in the value of a commodity contract of a kind 

specified in clause (i) of this subparagraph; 

(II) a deposit or payment of cash, a security, or other property with such futures 

commission merchant for the purpose of making or margining such a commodity 

contract; or 

(Ill) the making or taking of delivery on such a commodity contract. 

A "commodity contract", in tum, is defined in section 761(4) to mean, in relevant part: 

(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; 

(B) with respect to a foreign futures commission merchant, foreign future; 

*** 

(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[.] 

Under the provisions of Subchapter IV, therefore, a cleared OTC swap transaction is a 

"commodity contract" only if it is determined to be a "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." 

Under the Act, of course, a "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" is generally understood to be a 

futures contract. 

We agree that, under section 761(8) of the Code, the term "contract market" includes, by 

reference to section 1a(29) of the Act, a derivative clearing organization ("DCO"). Therefore, a 
Mr. Robert B. Wasserman 

July 8, 2008 

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KattenMuchlnRosenman LLP 

contract for the purchase or sale of a commodity for future delivery that is not executed on a 

designated contract market but is cleared through a DCO may be a "commodity contract" under 

the Code. We disagree only with the staff's conclusion, as set forth in the excerpt of the draft 

interpretation that staff provided to us on July 3, that a swap contract, "when cleared through a 

DCO, ... would be considered a 'commodity contract' [i.e., a contract for the purchase or sale of 

a commodity for future delivery] under section 761(4) of the Bankruptcy Code." 

Staff's conclusion is based, in part, on the fact that, "[w]hen cleared, [swaps] are subject to 

performance bond requirements, daily variation settlement, the potential for offset, and final 

settlement procedures that are substantially similar, and often identical, to those applicable to 

exchange-traded products at the same clearinghouse." An additional, and determining, factor 

underlying the staff's analysis, which we understand from our conversation with Division staff 

on July 3, is the DCO's decision to request the Commission to issue an order under section 

4d(a)(2) of the Act authorizing the DCO and its FCM clearing members to hold customer funds 

posted with the DCO and FCM to margin cleared-only swap transactions in a customer 

segregated account. That is, if the DCO requests authority to hold the funds in a customer 

segregated account, the cleared swap will be considered a commodity contract for purposes of 

the Code; if the DCO does not make such a request, the cleared swap will not be a commodity 

contract. 

In sum, we understand staff's position to be that the Commission has the authority, upon the 

request of a DCO, to determine that a cleared swap contract, which is not converted to a futures 

contract when accepted for clearing, is nonetheless a "contract for the purchase or sale of a 

commodity for future delivery," i.e., a futures contract, solely for the purpose of Subchapter IV 

of the Code. Further, in staff's view, the Commission's determination in this regard would not 

alter the Commission's refusal to date-since at least 1989-to hold that OTC swap contracts are 

contracts for the purchase or sale of a commodity for future delivery.3 · 

We respectfully disagree. We submit that a Commission interpretation holding that a cleared 

swap is a contract for the purchase or sale of a commodity for future delivery solely for purposes 

of the Bankruptcy Code-and no other-would constitute an amendment to the definition of a 

"commodity contract" under the Code to include, essentially, such other contracts cleared by a 

registered derivatives clearing organization as the Commission, in its sole discretion, may 

Congress similarly has declined to take a position that swaps are "contracts for the purchase or sale of a 

commodity for future delivery." For example, in adopting section 4(c) of the Act in the Futures Trading Practices 

Act of 1992, Congress authorized the Commission to exempt swap transactions "to the extent such agreements may 

be regarded as subject to the provisions of this Act." Section 4(c)(5) of the Act. More recently, in the Commodity 

Futures Modernization Act ("CFMA"), Congress added section 2(g) to exclude swap transactions generally from the 

provisions of the Act. 

Although the Commission may have jurisdiction under section 5b of the Act over the clearing of swap contracts 

through a clearing organization that has elected to register as a DCO for this purpose, such authority by itself does 

not change the essential characteristics of swap transactions or convert them to contracts for the purchase or sale of a 

commodity for future delivery. 
Mr. Robert B. Wasserman 

July 8, 2008 

PageS 

Katten 

KattenMuchin Rosenman LLP 

determine.4 Under the provisions of section 20(b) of the Act, however, the Commission is not 

authorized to amend the definition of a "commodity contract." Consequently, in the event of a 

commodity broker default, a swap participant's claim that it is a "customer" under Subchapter 

IV would be subject to challenge, thereby delaying the distribution of assets to futures customers 

and preventing the transfer of the defaulting commodity broker's customer accounts to a nondefaulting FCM. 

Even if the Commission, as a matter of law, were able to split the baby in this manner, we do not 

believe that it should do so as a matter of policy. A cleared swap is either a contract for the 

purchase or sale of a commodity for future delivery or it is not. Legal certainty would be 

significantly undermined if the Commission were to hold that a cleared swap could be a contract 

for the purchase or sale of a commodity for future delivery for purposes of the Bankruptcy Code 

only, but not for purposes of the Act, the statute that Congress has charged the Commission with 

enforcing. The resulting legal uncertainty would be exacerbated by the fact that the proposed 

interpretation would vest in a DCO the decision on whether a cleared swap would be viewed as a 

contract for the purchase or sale of a commodity for future delivery for purposes of the Code, a 

decision that would be based not on the essential characteristics of the contract, but on the 

DCO' s preference for the account in which the collateral supporting these contracts should be 

held.5 

We respectfully submit that the Commission should not adopt such a position at this time, 

without requesting additional public comment. As the staff is aware, the recent events involving 

credit default swaps and other OTC products has led to an increasing interest, in particular 

among the Commission's colleagues on the President's Working Group, in establishing a 

4 We do not believe that the Commission's 2004 Interpretative Statement Regarding Funds Determined to be 

Held in the Futures Account Type of Customer Account Class, 69 Fed.Reg. 69510 (November 30, 2004) supports 

staff's position. The underlying circumstances are substantially different. There, the Commission held that, where 

the Commission had issued an order authorizing funds that would otherwise be held in a secured amount account 

under Commission rule 30.7 to be held in a customer segregated account under Commission rule 1.20, foreign 

futures customers would be treated as futures customers in the event of the FCM's default. However, in contrast to 

a swap transaction, a foreign futures is a commodity contract under the Code. Therefore, the Commission was not 

expanding the scope of contracts clearly defined as commodity contracts under the Code. 

Further, the Commission generally prohibited an FCM from commingling foreign futures and foreign options funds 

in a customer segregated account out of "concern that to permit such commingling would possibly dilute the pool of 

funds available to U.S. futures customers in the event of a bankruptcy of the futures commission merchant to the 

extent funds located overseas could not be repatriated." In the circumstances in which the Commission has 

authorized such commingling, all foreign futures and options funds are required to be held in the US with either a 

US FCM or a DCO. As a result, the Commission's primary reason for prohibiting the commingling of US futures 

and foreign futures accounts, i.e., the concerns that funds held overseas would not be repatriated, thus diluting the 

pool of available assets to meet US futures customer claims, was successfully addressed. 

5 Thus, for example, at the CME, ethanol swaps would be carried in the customer segregated account, while 

OTC contracts to be cleared through Swapstream would be carried in the clearing member's house account for the 

benefit of its customers. Yet, we understand that the CME intends to manage the risk associated with these products 

in essentially the same manner. Both products will be subject to performance bond requirements, daily variation 

settlement, the potential for offset, and final settlement procedures. 
Mr. Robert B. Wasserman 

July 8, 2008 

Page6 

Katten 

KattenMuchlnRosenman LLP 

structure that would encourage the clearing of OTC products. Moreover, in addition to the OTC 

conunodity products discussed above, The Clearing Corporation and the Depository Trust and 

Clearing Corporation have announced a credit default swap clearing facility; ICE has purchased 

Creditex Group with a view toward enhancing OTC processing; the CME currently clears OTC 

foreign currency transactions through FXMarketSpace; and the Conunission itself has directed 

the staff to prepare a proposal with respect to the clearing of OTC agricultural swaps. 

In these circumstances and in the interest of legal certainty, we believe the treatment of cleared 

swap contracts in the event of a default of a swap participant should be addressed in a 

comprehensive manner by the several financial regulatory authorities. Cleared swap contracts 

should not be subject to different Bankruptcy Code treatment simply because the contracts are 

cleared at different clearing organizations. Nor should the bankruptcy treatment result in 

competitive advantages for one clearing organization. No less important, having instructed its 

staff to develop a proposal for cleared agricultural swaps, the Conunission should not 

inadvertently pre-empt its own consideration of the most appropriate way to protect customer 

collateral deposits with respect to cleared agricultural swaps, which consideration we assume 

will include an opportunity for public conunent and participation. At the very least, therefore, as 

noted earlier, we would ask the Commission to defer any action on this Petition until the 

conunent period with respect to the petition of the CME and CBOT certain OTC agricultural 

swaps closes on August 21, and the Conunission has had an opportunity to consider any 

conunents that may be filed. 

We close this letter as we began it. We support the Conunission's efforts to enhance the 

protection of customer funds deposited as collateral for cleared OTC swap transactions and look 

forward to working with the Conunission and the staff to this end. We believe the most efficient 

way to achieve this shared goal in the near term, without having to address the legal and policy 

concerns above, is for the staff to reconsider its position with respect to the use of EFS 

procedures and encourage the CBOT to amend its rules to provide that OTC ethanol swaps will 

convert to futures contracts when accepted for clearing by the CME. We urge the staffto do so. 

Thank you again for affording us the opportunity to submit these conunents. If you have any 

questions concerning the matters discussed above, please contact Barbara Wierzynski, FIA's 

General Counsel, at (202) 466-5460, or me at (312) 902-5372. 

With best regards, 

~~~ ~-:~oley - ( 
Mr. Robert B. Wasserman 

July 8, 2008 

Page7 

cc: Honorable Walter Lukken, Acting Chairman 

Honorable Michael Dunn, Commissioner 

Honorable Jill E. Sommers, Commissioner 

Honorable Bart Chilton, Commissioner 

Division of Clearing and Intermediary Oversight 

Ananda Radhakrishnan, Director 

John Lawton, Deputy Director and Chief Counsel 

Phyllis Dietz, Associate Director 

Office of the General Counsel 

Terry Arbit, General Counsel 

Division of Market Oversight 

Richard Shilts, Director 

Office of the Secretariat 

David Stawick 

CMEGroup 

Katten 

KattenMuchlnRosenrnan LLP 

Dean Payton, Managing Director and Chief Regulatory Officer 

Anne Polaski, Associate Director and Regulatory Counsel 

Barbara Wierzynski, General Counsel, Futures Industry Association