~~CMEGroup ACME/Chicago Board of Trade Company 

October 23, 2007 

Mr. David A. Stawick 

Secretary 

RECEIVED 

C.F. T.C. 

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COMMENT 

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Commodity Futures Trading Commission 

1155 21st Street NW 

Washington DC 

07-13 

d) 

John P. Davidson Ill 

Managing Director 

Chief Corporate Development Officer 

'· "' Received CFTC 

Records .~tion 

~ ID/~ct(07 

RE: Petition for Exemptive Relief Pursuant to Section 4(c) of the CEA from 

Registration as an FCM 

Dear Mr. Stawick: 

On July 27, 2007, Chicago Mercantile Exchange Inc. ("CME") 1 petitioned the Commodity 

Futures Trading Commission ("CFTC") for exemptive relief, pursuant to section 4(c) of the 

Commodity Exchange Act ("CEA" or ''Act") from the requirement that the China Foreign 

Exchange Trade System and National Interbank Funding Center ("CFETS") and its members 

register as futures commission merchants ("FCM"). The CFTC placed the petition for exemptive 

relief in the Federal Register on August 23, 2007, and requested comments be filed within thirty 

days. On September 21, 2007, the Futures Industry Association ("FIA") requested additional 

time to submit its comment letter and on October 9, 2007, FIA filed its comment letter. CME 

submits this letter in response to the FIA comment letter. 

FIA opposes the exemption for three reasons. First, FIA argues that the exemption would not 

promote economic or financial innovation and fair competition. Second, FIA argues that the 

exemption would not be consistent with the public interest and purpose of the Act. Finally, FIA 

states that the proposed exemption would adversely affect the ability of the Commission and the 

CME to discharge their responsibilities. As discussed below, FIA's arguments lack any real 

substance. 

A. The Exemption Provision within the CEA is Designed to Accommodate Unique 

Situations not Otherwise Contemplated in the Act 

The FIA argues that CFETS' inability to satisfy all of the CEA's registration requirements for 

an FCM is a reason that it should not receive an exemption from FCM registration. This 

argument is faulty. 

Section 4(c) of the CEA provides in part that the Commission may grant an exemption under 

the following circumstances. 

1 CME Group (http://www.cmegroup.com/) is the world's largest and most diverse exchange. Formed by the 2007 merger of 

the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT), CME Group serves the risk 

management needs of customers around the globe. As an international marketplace, CME Group brings buyers and sellers 

together on the CME Globex electronic trading platform and on its trading floors. CME Group offers the widest range of 

benchmark products available across all major asset classes, including futures and options based on interest rates, equity 

indexes, foreign exchange, agricultural commodities, and alternative investment products such as weather and real estate. 

20 South Wacker Drive Chicago, Illinois 60606 T 312 930 3175 F312 634 8652 john.p.davidson@cmegroup.com cmegroup.com 
October 23, 2007 

Page 2 

i. The exemption will promote economic or financial innovation and fair 

competition. 

ii. The exemption will be consistent with the public interest and the purposes 

of the CEA. 

iii. The exemption will not have a material adverse effect on the ability of the 

Commission or any contract market to discharge its self-regulatory duties 

under the CEA. 

CFETS is a sub-institution of the Peoples Bank of China ("PBC"). CFETS is not separately 

capitalized and as a sub-institution of a central bank of a sovereign nation is not able to 

directly subject itself to the jurisdiction of the CFTC. ·Nonetheless, this unique and 

internationally important arrangement with CFETS fully satisfies the FCM registration 

exemption requirements of section 4(c) of the CEA. 

B. The Exemption Request Promotes Economic or Financial Innovation and Fair 

Competition 

Pursuant to the Agreement for Order Routing and Super-Clearing ("Agreement") between 

CME and CFETS, CME agreed to provide extensive education and training to CFETS with 

respect to the operations of the futures industry. The purpose of the training is to familiarize 

both CME and CFETS with the trading conventions and regulatory environment each is 

operating under in their home jurisdictions. Although CME is expending a large amount of 

financial and human capital as part of the Agreement with CFETS, U.S. businesses, 

including FCMs, bookkeeping services, technology companies and others will certainly reap 

long-term benefits from the exposure CFETS, CFETS member banks, Chinese regulatory 

authorities, the PBC and the country of China are receiving as a result of the education and 

training provided by CME. Contrary to the assertion by FIA, any net financial benefit that 

may ultimately be received by CME as a result of the arrangement with CFETS will not be 

realized, if at all, until sometime in the distant future. 

The FIA argues that there are no financial or economic innovations that are expected to flow 

from the super-clearing relationship. This conclusion is incorrect. The training and education 

provided by CME to CFETS has been broad-based and comprehensive. CFETS staff has 

received training on the operations and risk management procedures of an exchange and a 

clearing house. CFETS staff has also met with representatives of the CFTC and the 

National Futures Association to gain a better understanding of the regulatory roles these 

entities play in the derivatives industry. CFETS business and technology staff has received 

training in Shanghai by CME focusing on margin procedures, segregation requirements and 

high level trading, order-routing, clearing and risk management functions. CME has also 

met with Chinese banking and regulatory officials to discuss exchange management, market 

surveillance and regulation. The mutual training and education received in connection with 

the super-clearing arrangement will undoubtedly lead to further financial and economic 

innovation in China. 

To emphasize the importance of this relationship to the U.S. government's on-going efforts 

to foster a relationship with China, on June 8, 2004, as a precursor to the Agreement, CME 

and CFETS executed a Memorandum of Understanding ("MOU"). At that time, Treasury 

Secretary Snow stated that "this cooperative initiative is an outstanding example of the kinds 

of exchange-rate-related technical cooperation efforts Treasury has consistently advocated 

20 South Wacker Drive Chicago, Illinois 60606 T 312 930 3175 F 312 634 8652 john.p.davidson@cmegroup.com cmegroup.com 
October 23, 2007 

Page 3 

as part of our on-going technical cooperation program with China's financial sector and 

financial regulators." 

The MOU and the subsequent execution of the Agreement represent a commitment by 

China to strengthen its financial system and to become more integrated into the world 

capital markets. In addition, the technological cooperation between CME, CFETS and other 

third parties, necessitated by the arrangement, will provide benefits to other entities that 

transact business in China. CME believes that the technology and education provided 

through the super-clearing arrangement will assist other entities to further innovate in China. 

China has demonstrated a willingness to become more open to the world's capital markets. 

In fact, a recent press release indicated that J.P. Morgan Chase & Co. won governmental 

approval in China to form a joint venture with a Chinese futures-brokerage firm. The press 

coverage states that, "the U.S.-based bank's venture comes as international investment 

banks are scouring China for joint-venture partners to take advantage of growing global 

interest in the country's exchanges. The partnership with Zhongshan Futures Co. a futures 

brokerage based in southern Guangdong province, gives J.P. Morgan the ability to trade on 

China's commodities exchanges, which feed China's huge and growing appetite for 

commodities and influence prices on global markets."2 

The Agreement between CME and CFETS is limited to certain foreign currency and interest 

rate products. The entities that will participate in the super-clearing arrangement are entities 

that would otherwise not be able to trade regulated foreign currency and interest rate 

products in the United States. Through the super-clearing arrangement, member banks of 

CFETS will be exposed to, and gain experience in, trading U.S. derivative products. This 

experience in trading and financial market operations will ultimately benefit the entire U.S. 

futures industry and all of its participants as the regulatory environment in China continues 

to evolve and become more open to U.S. businesses. 

C. The Exemption Request is Consistent with the Public Interest and the Purposes of the 

CEA 

CFETS is not separately capitalized and does not have a separate balance sheet. 3 

Accordingly, CFETS is not technically able to satisfy CME rules related to capital. However, 

contrary to FIA's assertion that CFETS will not be subject to financial, recordkeeping and 

reporting, and customer protection requirements, CFETS will be subject to all of the noncapital CME rules applicable to a clearing member. In addition, CFETS will also be subject 

to the risk management and financial oversight provided by the CME Clearing House and 

the CME Market Regulation Department. CFETS will, for example: 

i. Satisfy CME's security deposit requirement ($500,000 minimum which may be 

risk adjusted upward as necessary). 

ii. Satisfy the financial equivalent of CME's membership and share requirement 

for clearing members. 

iii. Comply with all applicable settlement and performance bond payments through 

a CME-approved bank domiciled in the U.S. 

2 Toehold in China Futures, Dow Jones Newswire, Rick Carew (September 26, 2007). 3 The Peoples Bank of China currently has foreign currency reserves of approximately $1.3 trillion. 

20 South Wacker Drive Chicago, Illinois 60606 T 312 930 3175 F 312 634 8652 john.p.davidson@cmegroup.com cmegroup.com 
October 23, 2007 

Page4 

iv. Be subject to daily mark-to-market and margining of its CME positions. 

v. Be subject to CME's real-time position and price information at the superclearing and individual CFETS member level. 

vi. Be subject to CME's Large Trader reporting and Account Monitoring systems. 

vii. Be subject to on-going surveillance and audit activities of CME Clearing and 

on-going review by the CME Clearing House Risk Committee, the primary 

governing body for CME Clearing risk management policies and programs. 

Accordingly, CFETS will be subject to virtually all of the risk management and financial 

oversight requirements that any other "registered" FCM is subject to with the exception of 

certain capital requirements it is not able to meet given the structure of the PBC. CFETS' 

inability to register as an FCM does not compromise the public interest. On the contrary, the 

protections set forth in th~ Agreement and the requirements in the proposed CFTC Order 

satisfy the customer protection, market integrity and financial integrity interests of the 

marketplace. 

The CFTC has the ability to request documents or information from CME or CFETS 

regarding the super-clearing arrangement. The CFTC also has the final authority to 

terminate the super-clearing arrangement if it determines any part of the .arrangement poses 

a risk. In the event the CFTC encounters any non-compliance with the terms of its Order by 

CME or CFETS, the CFTC may revoke the Order and/or hold CME responsible for any 

noncompliance with the Order. A revocation of the Order will also result in the termination of 

the super-clearing arrangement. 

The super-clearing arrangement does not prohibit CFETS members from trading foreign 

currencY·and interest rate products through any entity once the Chinese government relaxes 

its existing regulations regarding foreign investments. There is no exclusive requirement in 

the Agreement that CFETS members trade U.S. derivative or any other products only 

through the super-clearing arrangement. Additionally, the super-clearing arrangement only 

applies to a limited number of foreign currency and interest rate products. 

Importantly, nothing in the Agreement may be interpreted to modify or override CME's 

authority as a designated contract market ("DCM") and derivatives clearing organization 

("DCO") to take action, modify practices or modify requirements under its emergency 

powers. In the event CME determines that an emergency situation is present, it can take 

any necessary actions to resolve the situation. In addition, the Agreement and the legal 

relationships of CME and CFETS are governed by and construed in accordance with the 

laws of the United States. 4 

4 CFETS has agreed to be subject to U.S. law and the applicable Rules of CME. Accordingly, CFETS will be subject to 

assessment pursuant to Rule 802 in the event of a default by another CME clearing member. In addition, in the unlikely 

event of a CFETS default (PBC has foreign currency reserves in excess of $1.3 trillion), not only are all of CFETS' 

customers non-U.S. citizens but CME will be segregating CFETS customer funds at the CFETS level. Further, generally 

speaking, assets of a bankrupt foreign FCM held in the U.S. would be subject to the jurisdiction of a U.S. bankruptcy court. A 

court or other governmental agency presiding over a bankruptcy proceeding in the home country of the FCM would have no 

jurisdiction over its U.S. assets but can ask a U.S. bankruptcy court to "recognize" the foreign bankruptcy proceeding, which 

results in the application of U.S. bankruptcy law to the foreign FCM's U.S. assets. Accordingly, in such a bankruptcy 

situation, there would be no barrier to CME's termination and liquidation of its contracts with the foreign FCM, netting 

obligations across products and applying the foreign FCM's security deposit and any other available assets to satisfy any net 

obligation to CME. Our analysis indicates that the above procedures would also apply to CFETS. 

20 South Wacker Drive Chicago, Illinois 60606 T312 930 3175 F 312 634 8652. john.p.davidson@cmegroup.com cmegroup.com 
October 23, 2007 

Page 5 

D. The Exemption Request Will Not Have a Material Adverse Affect on the Ability of the 

Commission or Any Contract Market to Discharge its Self-Regulatory Duties Under 

the CEA 

CME is a self-regulatory organization registered as a DCM and a DCO with the CFTC and is 

statutorily required to remain in compliance with all of the applicable CFTC Core Principles. 

The super-clearing arrangement with CFETS in no way impacts CME's ability to comply with 

its statutory responsibilities on a daily basis. 

The CFTC will not be impacted in any manner by the super-clearing arrangement from 

conducting regular rule enforcement reviews of CME as it currently does in its normal course 

of business or from requesting information about trading activity through the super-clearing 

arrangement. If the CFTC finds any aspect of CME's risk management or financial oversight 

of the relationship to be lacking, the CFTC has the authority to revoke its Order and 

terminate the super-clearing arrangement. 

Additionally, if CME determines that CFETS is in breach of the Agreement at any time, CME 

can terminate the Agreement. In addition, CME has the unilateral right to terminate the 

participation of individual CFETS member banks in the super-clearing arrangement if CME 

believes the member bank poses a financial, operational or compliance risk to the Exchange 

or any of its clearing members. Accordingly, there are a number of safety features built into 

the super-clearing arrangement and the CFTC's proposed Order that allow CME to scale 

back participation by CFETS member banks or that allow CME and the CFTC to terminate 

the arrangement. 

E. Conclusion 

The FCM exemption request of CFETS and its member banks should be granted. FIA's 

comment letter does not raise any bona fide reason why the exemption should not be 

approved. As set forth above, the exemption request promotes economic and financial 

innovation and fair competition. The request is consistent with the public interest and the 

purposes of the CEA. Finally, the exemption request will not have a material adverse affect 

on the ability of the CFTC or CME to discharge their statutory and self-regulatory duties. 

In addition, FIA's request to further delay approval of the FCM exemption request, as set 

forth in the last paragraph of its comment letter, should be rejected. The CFTC placed the 

exemption request in the Federal Register for a thirty day comment period. On the twentyninth day of the comment period, FIA asked for "additional time to submit a comment 

letter."5 The CFTC provided FIA fourteen days to file its comment letter. On the fourteenth 

day of the extension period, FIA filed its comment letter. The last paragraph of FIA's 

comment letter states in part that, "If, notwithstanding the foregoing, the Commission 

determines that the petition should be granted, subject to certain terms and conditions, we 

request that any such terms and conditions, as well as the contractual terms agreed by the 

parties, be published for additional comment before the Commission takes any action to 

approve the CME petition."6 

5 FIA letter from its General Counsel to the CFTC requesting additional time to file a comment letter. (September 21, 2007) 6 ld. 

20 South Wacker Drive Chicago. Illinois 60606 T 312 930 3175 F 312 634 8652 john.p.davidson@cmegroup.com cmegroup.com 
October 23, 2007 

Page 6 

Prior to filing its comment letter, representatives of FIA requested a meeting with CME. 

CME displayed its good faith by arranging a meeting with these representatives. CME staff 

then explained the risk management and financial safeguards associated with the superclearing arrangement and answered FIA's questions. FIA's new request is unwarranted and 

the Commission should not allow this request to further delay the implementation of this 

unique and innovative super-clearing relationship between CME and CFETS. As CME has 

demonstrated previously and once again in this letter, granting the requested exemption 

pursuant to section 4(c) of the CEA is entirely appropriate. We urge the Commission to do 

so promptly. 

Very Truly Yours, 

cc: Honorable Walter Lukken, Acting Chairman 

Honorable Michael Dunn, Commissioner 

Honorable Jill E. Sommers, Commissioner 

Honorable Bart Chilton, Commissioner 

SMS/6386 

Division of Clearing and Intermediary Oversight 

Ananda Radakrishnan, Director 

Robert B. Wasserman, Associate Director 

Division of International Affairs 

Jacqueline Hamra Mesa, Director 

Robert H. Rosenfeld, Associate Director 

20 South Wacker Drive Chicago. illinois 60606 T 312 930 3175 r312 634 8652 john.p.davidson@cmegroup.com cmegroup.com