Futures Industry Association 

2001 Pennsylvania Ave. NYV 

Suite 600 

202.466.5460 

202.296.3184 Hr\ 

Washington, DC 20006-1 g23 www. futuresindustry.org 

By Electronic Mail 

January 15,2010 

Mr. David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

115 5 21st Street NW 

Washington DC 20581 

COMMENT 

Re: Operation, in the Ordinary Course of Business, of a Commodity Broker 

74 Fed.Reg. 66598 (December 16, 2009) 

Dear Mr. Stawick: 

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The Futures Industry Association ("FIA") 1 welcomes the opportunity to submit this letter in 

response to the Commodity Futures Trading Commission's ("Commission's) proposal to amend 

its bankruptcy rules, 17 CPR Part 190 ("Bankruptcy Rules"), to permit a trustee in bankruptcy, 

with the written permission of the Commission, to operate the business of a commodity broker, 

in the ordinary course. Specifically, the Commission proposes to amend Rule 190.04( d) to add a 

, new subparagraph (3) to provide: 

Exception to liquidation only. Notwithstanding paragraph (d)(2) of this section,2 

the trustee may, with the written permission of the Commission, operate the 

business of the debtor in the ordinary course, including the purchase or sale of 

new commodity contracts on behalf of the customers of the debtor under 

appropriate circumstances, as determined by the Commission. 

FIA is a principal spokesman for the commodity futures and options industry. FIA's regular membership is 

comprised of approximately 30 of the largest futures commission merchants ("FCMs") in the United States. Among 

FIA 's associate members are representatives from virtually all other segments of the futures industry, both national 

and international. Reflecting the scope and diversity of its membership, FIA estimates that its members effect more 

than eighty percent of all customer transactions executed on United States contract markets. 

2 Rule 190.04(d)(2) authorizes a trustee to enter into new commodity transactions only for the purposes of 

( 1) offsetting open commodity contracts, (2) transferring a transferable notice applicable to an open commodity 

contract, or (3) covering, in its discretion and with the Commission's approval, inventory or commodity contracts of 

the commodity broker that cannot be liquidated immediately because of market conditions. 

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The purpose of the proposed amendment is "to enable customers to manage their accounts, after 

their commodity broker enters into bankruptcy and prior to the transfer of their accounts, in 

cetiain circumstances? [Emphasis supplied.] 

PIA appreciates that there may be occasions when it would be appropriate to authorize a trustee 

to operate the business of an FCM for a limited period of time, in particular, as the Commission 

notes, when an FCM has sufficient capital to continue operating and has reached an agreement to 

transfer all customer positions to another, solvent FCM. For example, the trustee for Lehman 

Brothers, Inc. ("Lehman") was authorized to operate the business of Lehman for a brief period of 

time pending the Court's approval of the sale of Lehman's business to Barclays Capital Inc. 

("Barclays").4 

Nonetheless, we cannot support adoption of the proposed rule at this time and in this form. For 

the reasons set forth below, we believe further action on the proposed rule is premature. 

Moreover, standing alone, the proposed rule is overly broad and fails to give sufficient guidance 

to either the trustee or the Commission staff charged with implementing its provisions. 5 As such, 

the proposed rule does not provide an opportunity for meaningful comment on its substance. 

The proposed rule should be considered only in connection with a comprehensive review of 

the relevant provisions of the Bankruptcy Code and the Commission's Rules. 

The proposed amendment represents the second revision to the Commission's bankruptcy rules 

published for comment within a four-month period. In August, the Commission proposed to 

amend Rule 190.01(a) to (i) codify the Commission's September 2008 Interpretative Statement 

Regarding Funds Relating to Cleared-Only Contracts Determined to be Included in a 

Customer's Net Equity ("Interpretative Statement"),6 and (ii) add a sixth and separate account 

class for a limited group of cleared over-the-counter ("OTC") derivatives.7 

In our comment letter on the Commission's August proposal, we discussed the degree of legal 

uncertainty surrounding the treatment of cleared OTC derivatives under the Bankruptcy Code 

("Code") and noted that the Commission had recently proposed amendments to the Code that 

would extend to swap dealers, their counterpmiies and their customers the special protections 

that Subchapter IV of Chapter 7 of the Code provides to customers of commodity brokers. 

While encouraging the Commission to pursue with Congress the adoption of appropriate 

amendments to the Code, we concluded: 

3 74 Fed.Reg. 66598, 66600 (December 16, 2009). 

4 The Court's order appointing the trustee authorized the trustee to operate Lehman's business until 6:00PM 

on Friday, September 19, 2008. We understand that Barclays guaranteed all transactions effected by Lehman's 

customers during this period. 

5 As the Commission notes, in accordance with the provisions of Rule 190.10(d), the Commission has 

delegated to the Director of the Division of Clearing and Intermediary Oversight ("DCIO"), and such Commission 

staff acting under the Director's direction, essentially all functions of the Commission under Part 190. Therefore, 

the DCIO Director would be expected to exercise the authority reserved to the Commission under the proposed rule. 

6 73 Fed.Reg. 65514 (November 4, 2008). 

7 74 Fed.Reg. 40794 (August 13, 2009). 
With the state of the law surrounding cleared OTC derivatives in such flux, 

especially in the event of a default of an FCM carrying such cleared OTC 

derivatives, we respectfully suggest it may be appropriate that the Commission 

defer action on the proposed amendments to the Bankruptcy Rules creating a 

"cleared OTC derivatives" account class, until Congress has an opportunity to 

decide how to respond to the various recommendations presented.8 

Since FIA submitted its comment letter in September, the House of Representatives has adopted 

HR 4173, The Wall Street Reform and Consumer Protection Act of 2009. In this bill, the House 

instructs the Commission, in coordination with the Securities and Exchange Commission and the 

several bank regulatory authorities, to recommend, within 180 days of enactment of the bill, 

legislative changes to the federal insolvency laws (i) to enhance legal certainty with respect to 

swap participants clearing non-proprietary swap positions with a swap clearinghouse, (ii) to 

clarify and harmonize the insolvency law applicable to entities that are both FCMs and brokerdealers, and (iii) to facilitate the portfolio margining of securities and commodities positions 

through entities that are both FCMs and broker-dealers. 

FIA supports the comprehensive review of the relevant provlSlons of the Code and the 

Commission's bankruptcy rules contemplated by the above provision of HR 4173 and urges the 

Commission, along with other regulatory authorities, to undertake such a review even if this 

provision of the bill does not become law. 9 Pending completion of such a review and the 

development of recommendations for comprehensive reform, we cannot support any 

amendments designed to address discrete issues that may be identified by the Commission. 

The Code and the Commission's bankruptcy rules embody complex legal structures. A change 

in one section of the Code or rules may very well affect other provisions in ways that are not 

always obvious. Each proposed amendment to the rules, therefore, requires an analysis of its 

potential impact on all other sections of the rules. In light of the current uncertainty surrounding 

the scope of the Commission's jurisdiction over OTC derivatives -cleared and unclearedany such analysis is time-consuming and, ultimately, unce1iain. The process is, at best, 

inefficient, but may also result in the adoption of amendments that have unintended 

consequences. 

Letter from John M. Damgard, President, Futures Industry Association, to David A. Stawick, Secretary to 

the Commission, dated September 14, 2009, page 7. 9 This provision of HR 4173 is consistent with the recommendations of participants who took part in the 

hearings on harmonization of regulation held by the Commission and the Securities and Exchange Commission in 

September. In a Report published in October, the agencies noted that several participants at the joint hearings held 

in September testified that as more OTC derivatives are traded on exchanges and cleared through clearing 

organizations, it will be important to develop and implement a more uniform customer account regime that protects 

both customer assets and the integrity of the market in the event of a default of a major firm. In the absence of 

amendments to the Code relating to the liquidation of stockbrokers and commodity brokers, the participants 

encouraged the agencies to develop uniform procedures to guide a trustee, as well as the Bankruptcy Court, when a 

joint BD/FCM becomes insolvent. 
In the absence of legislative changes, the Commission and the Securities and Exchange 

Commission, in coordination with the Securities Investor Protection Corporation, should 

first develop uniform procedures to guide a trustee of an insolvent FCM/broker-dealer. 

As measured by adjusted net capital, all but seven (7) of the 50 largest FCMs are also registered 

broker-dealers. 10 Therefore, it is likely that the trustee appointed to oversee an insolvent 

FCM/broker-dealer will be appointed by the Securities Investor Protection Corporation 

("SIPC"). 11 The Commission, on the other hand, has no statutory control over the selection of a 

trustee. 12 Consequently, although a SIPC trustee may be authorized by the court to operate the 

business of an FCM/broker-dealer, 13 the trustee selected by SIPC may not have sufficient 

knowledge or experience to operate the FCM-related business of the FCM/broker-dealer. 

In these circumstances, if the proposed amendment were adopted, responsibility for operating the 

FCM-related business of the FCM/broker-dealer would fall by default to DCIO staff. We 

question whether it is appropriate for Commission staff to undertake this responsibility and 

whether staff would have the necessary expertise to do so. 

We understand that the Commission has suggested an amendment to the Code to grant it a 

deciding voice in the selection of a commodity broker trustee. Among the legislative 

recommendations the Commission transmitted to Congress in August was an amendment to 

section 762 of the Code that would require a court to appoint as trustee for the liquidation of a 

commodity broker "such person as the Commission, in its sole discretion, specifies." 14 

However, Congress has yet to act on this proposal. In either event, it is clear that coordination 

between the Commission and SIPC, as well as the Securities and Exchange Commission, will be 

essential in selecting, and providing guidance to, a trustee of an FCM/broker-dealer. 15 Without 

such written guidance, the proposed amendment, if adopted, would have little value. 

10 Financial Data for Futures Commission Merchants as ofNovember 30, 2009. 

II Under the provisions of the Securities Investor Protection Act ("SIPA"), if SIPC determines that a SIPC 

member has failed or is in danger of failing to meet its obligations to customers, SIPC may apply to the court for a 

protective order. If the court grants the order, the court is required to appoint as trustee of a bankrupt broker-dealer, 

and as attorney for the trustee, "such persons as SIPC, in its sole discretion, specifies." 15 USC § 78eee. The 

trustee has the same duties as a trustee under Chapter 7 of the Code, including the duties specified in Subchapter IV. 

78 usc § 78fff-1. 

12 This is true even in the case of a stand-alone FCM. Although the Commission has the right to appear and 

be heard on any matter involving a commodity broker liquidation, the court is not required to appoint a trustee 

selected by the Commission. 11 USC § 762. In the ordinary course, a Chapter 7 trustee is randomly selected by the 

US Trustee from the approved trustee panel. 

13 11 USC§ 721. We understand that an order authorizing the trustee to operate the business of the brokerdealer usually extends only until the end of the day on which the order is issued in order to close out the day's 

trading. For example, the order appointing the Lehman trustee authorized the trustee to operate the business until 

6:00PM on that Friday. Even if the Commission adopts the proposed amendment, it is likely that a trustee will want 

the court's blessing before undertaking to operate a firm's FCM-related business. In this regard, the Commission 

may want to consider simply amending its rules to authorize the trustee to apply for an order under section 721 to 

oferate the business of an FCM. 

1 Letter from Gary Gensler, Commission Chairman, to the Chairmen and Ranking Members of the relevant 

Congressional Committees, dated August 17, 2009, and attached legislative recommendations. 

15 We understand that this recommendation is not a new idea. When the Commission adopted Part 190 in 

1983, it noted that "the Commission intends to instruct its staff to initiate discussions with SIPC with a view towards 
We urge the Commission and SIPC, therefore, to act expeditiously to develop appropriate 

uniform procedures to guide a trustee. Following an opportunity for public comment, we 

recommend that these procedures then be adopted as an appendix to Part 190. 

The proposed amendment is overly broad and does not provide sufficient guidance to a 

trustee and Commission staff charged with implementing the rule. 

Adoption of the procedures as an appendix to Part 190 would also address the amendment's 

failure to provide proper guidance to prospective trustees and Commission staff. We recognize 

that the Commission cannot anticipate every circumstance in which the exercise of this authority 

may be in the best interests of an FCM's customers. Nonetheless, we also understand that the 

primary purpose of the proposed amendment is to authorize a trustee to operate the business of 

an FCM for a discrete period of time pending the transfer of the customer positions of an FCM 

experiencing financial difficulties to a solvent FCM. 

However, in the Federal Register release accompanying the proposed amendment, the 

Commission states only that (1) whether the FCM has entered into an agreement providing for 

the imminent transfer of customer accounts to another FCM, and (2) whether the FCM has 

sufficient capital to continue operating its business in the ordinary course until all customer 

accounts have been transferred are among factors it may consider in authorizing a trustee to 

operate the business of an FCM. 16 

We believe these factors should be viewed as necessary conditions precedent to the exercise of 

such authority. 17 If the Commission believes there are other circumstances in which it may be 

appropriate to authorize a trustee to operate the business of the FCM, the public should have an 

opportunity to comment on those circumstances. 

Among other issues, we recommend that the procedures: 

• Confirm that the authority of the trustee to operate the business of the FCM will not 

interfere with the authority of the relevant designated contract markets and derivatives 

clearing organizations to order the liquidation of positions or otherwise restrict the ability 

of the FCM to execute and clear transactions. 

developing a common proposal or understanding as to the appropriate treatment of the joint commodity brokersecurities dealer in bankruptcy. In this regard, the Commission is aware that the number of such joint firms is 

increasing and as a result the need for a satisfactory resolution of this matter may become even more apparent in the 

future." 48 Fed.Reg. 8716 (March 1, 1983). Further, as mentioned earlier, several participants in the joint hearings 

on harmonization of regulation made a similar recommendation. 

16 74 Fed.Reg. 66598, 66600 (December 16, 2009). 

17 As noted above, in connection with the transfer of customer accounts from Lehman to Barclays, Barclays 

guaranteed all transactions effected on behalf of Lehman customers pending the transfer. In these circumstances, 

there would appear to be no reason not to authorize a trustee to operate the business of the FCM. 
• Provide guidance on the type of customers that will be permitted to enter into new 

transactions. (An FCM may have thousands of customers, and it may not be possible to 

permit all customers to execute transactions.) 18 

• Offer guidance regarding any special margin requirements that might apply to new 

positions. 

• Confirm the degree of control that the trustee and Commission staff, respectively, will be 

authorized to exercise. The proposed amendment provides that the trustee will act with 

the "written permission" of the Commission. The procedures should address whether the 

decision to operate the business of the FCM will rest in the first instance with the trustee, 

or whether there are circumstances in which the staff might seek to instruct the trustee to 

operate the business. The procedures should also explain the extent to which the trustee 

will be required to have decisions approved by the staff before they are implemented. 

• Confirm whether the trustee will have the authority to permit a customer to transfer its 

account to another FCM or to liquidate its account and withdraw its funds. 

Conclusion 

FIA appreciates the opportunity to submit these comment on the proposed amendment to 

Commission Rule 190.04. If the Commission has any questions concerning the matters 

discussed in this letter, please contact Tammy Botsford, FIA's Vice President and Assistant 

General Counsel, at (202) 466-5460. 

Sincerely, 

John M. Damgard 

President 

cc: Honorable Gary Gensler, Chairman 

Honorable Michael Dunn, Commissioner 

Honorable Jill E. Sommers, Commissioner 

Honorable Bart Chilton, Commissioner 

Honorable Scott O'Malia, Commissioner 

Division of Clearing and Intermediary Oversight 

Ananda Radhakrishnan, Director 

Robert B. Wasserman, Associate Director 

Nancy Schnabel, Attorney Advisor 

18 If the ability to enter into new transactions is to be limited to a particular type of customer, the Commission 

may want to consider whether this issue might be addressed more easily by expanding the definition of specifically 

identifiable property in Commission Rule 190.0l(kk).