CFTC Letter 04-04

CFTC letter No. 04-04

January 15, 2004

Interpretation

Division of Clearing and Intermediary Oversight

James L. Carley 

Director 

Re: Rule 1.57(a)(1) – Request for Relief from Requirement that a Guaranteed Introducing 

Broker Must Open and Carry All Customer Accounts with the Guarantor Futures Commission 

Merchant 

Dear : 

This is in response to a letter from your firm’s former Director of Compliance dated September 4, 2003, 

to the Division of Clearing and Intermediary Oversight (the “Division”) of the Commodity Futures 

Trading Commission (the “Commission”), as supplemented by your letter dated December 11, 2003 and 

by telephone conversations with Division staff. By this correspondence, you request, on behalf of “V”, 

relief from the requirement in Commission Rule 1.57(a)(1)[1] that a guaranteed introducing broker 

(“IB”) must open and carry each customer account with the IB’s guaranteeing futures commission 

merchant (“FCM”). 

Based upon the representations made in your correspondence, we understand the facts to be as follows. 

“V” is registered under Section 4d[2] of the Commodity Exchange Act (the “Act”) as an FCM. “W”

maintains an account with “V” that is introduced by “X”, an IB that is guaranteed by “V”. Heretofore, 

all trades entered by “W” with “X” have been executed and cleared by “V”. “W” has requested that 

orders it places be executed by “V”, but cleared through “Y”, another registered FCM with which “W”

maintains an account. “V” will “give up” these trades to “Y”. “X” will not be compensated by “Y” in 

connection with orders that “W” enters with “X” and that are cleared through “Y”, but will be 

compensated solely by “V”. 

You represent that to the best of your knowledge “V” has sufficient adjusted net capital to meet all 

obligations that “V” may have to “X’s” customers, without regard to whether those customers’ accounts 

are carried by “V”. Specifically, you represent that, as of September 30, 2003, “V” had adjusted net 

capital of ______ and excess net capital of _______. Further, you affirm that “V” accepts liability for 

obligations of “X” under the Act and the regulations thereunder with respect to the solicitation of, and 

transactions involving all customers of “X”, including “W”. 

Commission Rule 1.57(a)(1) provides that an IB that has entered into a guarantee agreement with an 

FCM must open and carry customer accounts with such guarantor FCM on a fully-disclosed basis. 

file:///H|/Desktop/04letters/tm04-04.htm (1 of 2) [5/6/2010 5:27:06 PM]
CFTC Letter 04-04

Accordingly, in order to protect the customers of the IB, an FCM that has entered into a guarantee 

agreement with an IB must carry all of the customer accounts introduced by the IB.[3]

Based upon the foregoing and consistent with prior positions taken by the Division in this area, the 

Division believes that granting your request would not be contrary to the “customer protection”

objective of Rule 1.57(a)(1).[4] This is based principally upon your representation as to the substantial 

capital held by “V” and that “W”

[5] has requested to have its trades cleared through “Y”. 

This letter, and the relief issued herein, are based upon the representations that have been made to us. 

Any different, changed or omitted material facts or circumstances might render this letter void. You 

must notify the Division immediately in the event that the operations or activities of “X” or “V” change 

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

Division only and does not necessarily reflect the views of the Commission or of any other office or 

division of the Commission. 

If you have any questions concerning this correspondence, please contact me or Christopher W. 

Cummings, Special Counsel, at (202) 418-5445. 

Very truly yours, 

James L. Carley 

Director 

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

[2] 7 U.S.C. §6d (2000). 

[3] See 57 Fed. Reg. 23136, 23137 (June 2, 1992). 

[4] See, e.g., CFTC Staff Letter No. 01-20, [2000-2002 Transfer Binder] Comm. Fut. L. Rep. (CCH) 

¶28502 (March 26, 2001). 

[5] “W’s” quarterly report on Form 10-Q for the period ended September 30, 2003 indicated total assets 

of _______. Pursuant to Section 1a(12)(A)(v)(I) of the Act, a corporation with total assets in excess of 

______ is an Eligible Contract Participant. 

file:///H|/Desktop/04letters/tm04-04.htm (2 of 2) [5/6/2010 5:27:06 PM]