Dan M. Berkovitz 

General Counsel 

Jonathan L. Marcus 

Deputy General Counsel 

Robert B. Wasserman 

Chief Counsel, Division of Clearing and Risk 

Martin B. White 

Assistant General Counsel 

Robert A. Schwartz 

Assistant General Counsel 

U.S. COMMODITY FUTURES TRADING COMMISSION 

Three Lafayette Plaza 

1155 21st Street N.W. 

Washington, DC 20581 

(202) 418-5000 

jmarcus@cftc.gov 

rwasserman@cftc.gov 

mwhite@cftc.gov 

rschwartz@cftc.gov 

UNITED STATES DISTRICT COURT 

SOUTHERN DISTRICT OF NEW YORK 

In re: 

MF GLOBAL Inc., 

Debtor. 

Case No. 1:12-cv-06014-KBF 

STATEMENT OF THE COMMODITY FUTURES TRADING COMMISSION IN 

RESPONSE TO CONOCOPHILLIPS’ MOTION TO WITHDRAW THE REFERENCE 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 1 of 18
TABLE OF CONTENTS

TABLE OF CONTENTS ................................................................................................................. i

TABLE OF AUTHORITIES .......................................................................................................... ii

INTRODUCTION .......................................................................................................................... 1

DISCUSSION ................................................................................................................................. 1

I. The CFTC Has Broad Authority to Issue Preemptive Regulations of 

the Futures Industry. ........................................................................................................... 1 

II. Congress, in the Bankruptcy Reform Act of 1978, Delegated to the CFTC General 

Rulemaking Authority for Commodity Broker Bankruptcies. ........................................... 3

III. The Legal Certainty for Bank Products Act of 2000 Is Not Relevant. ............................. 10

CONCLUSION ............................................................................................................................. 12

CERTIFICATE OF SERVICE

 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 2 of 18
ii 

TABLE OF AUTHORITIES 

Cases 

In re Stotler & Co., 144 B.R. 385 (N.D. Ill. 1992) ......................................................................... 5 

Statutes 

7 U.S.C. § 1a ........................................................................................................................... 10, 11 

7 U.S.C. § 2 ......................................................................................................................... 2, 10, 11 

7 U.S.C. § 5 ..................................................................................................................................... 3 

7 U.S.C. § 6r ................................................................................................................................. 11 

7 U.S.C. § 6s ................................................................................................................................. 11 

7 U.S.C. § 6d ......................................................................................................................... 2, 3, 12 

7 U.S.C. § 12a ................................................................................................................................. 3 

7 U.S.C. § 24 ................................................................................................................................... 6 

7 U.S.C. § 27a ......................................................................................................................... 10, 11 

11 U.S.C. § 761 ................................................................................................................. 1, 5, 6, 12 

11 U.S.C. § 762 ............................................................................................................................... 1 

11 U.S.C. § 766 ........................................................................................................................... 1, 5 

Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (1978) ............................. 5, 6 

Commodity Exchange Act, 7 U.S.C. §§ 1, et seq. ................................................................. passim

Commodity Futures Trading Commission Act, Pub L. 93-463, 88 Stat. 1389 (1974) ................... 2 

Legal Certainty for Bank Products Act of 2000, Pub. L. No. 106-554, 114 Stat. 2763 (2000).... 10 

Federal Regulations and Register Releases 

17 C.F.R. § 39.13 ............................................................................................................................ 3 

17 C.F.R. § 190.01 .......................................................................................................................... 7 

17 C.F.R. § 190.08 ................................................................................................................. passim

Bankruptcy, 46 Fed. Reg. 57535 (Nov. 24, 1981) .......................................................................... 9 

Bankruptcy, 48 Fed. Reg. 8716 (Mar. 1, 1983) .................................................................... 3, 9, 10 

Business Conduct Standards for Swap Dealers & Major Swap Participants with Counterparties, 

77 Fed. Reg. 9734 (Apr. 17, 2012) ........................................................................................... 11 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 3 of 18
iii 

Legislative History

H.R. Rep. 93-1383 (1974) (Conf. Rep.), reprinted in 1974 U.S.C.C.A.N. 5894 ........................... 2 

H.R. Rep. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N. 5963 .................................................. 5 

S. Rep. 95-989 (1978), reprinted in 1978 U.S.C.C.A.N. 5787 ....................................................... 5 

The Bankr. Reform Act Revision of the Salary Fixing Procedure for Bankr. Judges Adjustment of 

Debts of Political Subdivisions & Pub. Agencies & Instrumentalities: Hearing on S. 235 & S. 

236 Before the S. Subcomm. on Improvements in Judicial Mach. (1975) .............................. 3, 4 

Treatises

6-760 Collier on Bankr. P 760.01 (LexisNexis 2012) .................................................................... 5 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 4 of 18
INTRODUCTION

The U.S. Commodity Futures Trading Commission (“CFTC” or “Commission”) has 

appeared in the proceedings below, pursuant to 11 U.S.C. § 762(b), to assist the bankruptcy court 

and to express the views of the Commission on laws within the CFTC’s jurisdiction. Although 

the Commission takes no position with respect to which court should decide the Trustee’s motion 

to confirm the determination of ConocoPhillips’ claims, the CFTC submits that the following 

information is relevant to a complete understanding of ConocoPhillips’ motion to withdraw the 

reference and the CFTC regulations cited therein. The Commission will brief in full the issues 

raised concerning CFTC regulations at the appropriate time in the proper forum. 

DISCUSSION 

This dispute concerns the definition and proper treatment of “customer property” in the 

liquidation of a Futures Commission Merchant (or “FCM”), MF Global, Inc. Specifically, the 

question presented is whether the full face value of a letter of credit held by the FCM to margin 

futures trades is “customer property,” a term used in Chapter 7 of the Bankruptcy Code and in 

CFTC regulations to describe assets subject to pro rata distribution among the customers of a 

bankrupt FCM. See, e.g., 11 U.S.C. §§ 761(10), 766(h); 17 C.F.R. § 190.08. CFTC regulations 

provide that the full face value of such a letter of credit is, in fact, customer property. Id. 

§ 190.08(a)(i)(E). To understand this issue in context, some background is necessary concerning 

Chapter 7 of the Bankruptcy Code, FCM regulation, and the role of the CFTC. 

I. The CFTC Has Broad Authority to Issue Preemptive Regulations of the Futures 

Industry.

1. An FCM is an individual or entity that solicits or accepts orders for the purchase or 

sale of commodity futures. An FCM executes customer trades on an exchange, through a 

clearinghouse. “Margin” is money, securities, or other property that serves as collateral in a 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 5 of 18
2 

futures transaction. The customer must deposit margin with its FCM in order to trade, and the 

FCM must deposit margin with the clearinghouse. Margin functions as a performance bond: If 

the customer’s positions lose value, margin serves to guarantee that the customer will cover the 

loss. “Initial margin” or “original margin” is the deposit required of the market participant in 

order to trade, while “variation” (or “variation margin”) is a payment that becomes due if the 

positions lose value. Movants here were commodity customers of MF Global, Inc., who 

deposited standby letters of credit, rather than cash, as original margin for their trading activity. 

2. Futures trading is comprehensively regulated by Congress under the Commodity 

Exchange Act, 7 U.S.C. §§ 1, et seq. (“CEA”), which gives special attention to the treatment and 

protection of customer property. A key provision is CEA Section 4d, which requires an FCM to 

segregate and separately account for “all money, securities, and property received by” the FCM, 

“to margin, guarantee, or secure the trades or contracts of any customer.” Id. § 6d(a). The 

purpose of this requirement is to ensure that assets belonging to customers are not vulnerable to 

risks to the FCM’s business. 

Congress, in 1974, established the CFTC with a “broad grant of authority” to “regulate 

the futures trading industry” including “exclusive jurisdiction” over “all futures transactions.” 

H.R. Rep. 93-1383 (1974) (Conf. Rep.), reprinted in 1974 U.S.C.C.A.N. 5894, 5897; see 

Commodity Futures Trading Commission Act, Pub L. 93-463, 88 Stat. 1389 (1974).1

 Congress 

intended that the CEA and all “regulations issued by the Commission” would supersede state law 

and “preempt the field insofar as futures regulation is concerned.” H.R. Rep. 93-1383, 1974 

U.S.C.C.A.N. at 5897. The CFTC’s powers include not only explicit authority to regulate 

FCMs, see, e.g., 7 U.S.C. §§ 6d(a), 6f(a)-(b), but also the plenary authority “to make or 

 

1

 Today, the Commission’s exclusive jurisdiction extends to futures, swaps, and options. See

7 U.S.C. § 2(a)(1)(A). 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 6 of 18
3 

promulgate such rules and regulations as, in the judgment of the Commission, are reasonably 

necessary to effectuate any of the provisions or to accomplish any of the purposes of the” CEA, 

id. § 12a(5). Those purposes include “to ensure the financial integrity of all transactions subject 

to” the CEA and “the avoidance of systemic risk,” as well as to “protect all market participants 

from . . . misuses of customer assets.” Id. § 5(b). 

Currently, the CEA and CFTC regulations permit a broad range of property to be used as 

margin. See, e.g., id. § 6d(a)(1) (referring to “money, securities, and property” to be used as 

margin); 17 C.F.R. § 190.08(a)(i) (“All cash, securities, or other property”). Although the CFTC 

has expressed reservations about the use of letters of credit as margin, Bankruptcy, 48 Fed. Reg. 

8716, 8718-19 (Mar. 1, 1983) (stating that “it would be unwise to adopt a policy which would 

further encourage the use of letters of credit” in this way), and the Commission has broad 

authority to regulate in this area, 7 U.S.C § 12a(7)(D) (empowering the CFTC to set “margin 

requirements” to protect the financial integrity of clearing organizations); id. § 12a(5) (plenary 

rulemaking authority), some market participants find the practice useful, and there currently is no 

prohibition on the use of letters of credit to margin futures and options. But see 17 C.F.R. 

§ 39.13(g)(10) (stating that a clearinghouse “shall not accept letters of credit as initial margin for 

swaps”). 

II. Congress, in the Bankruptcy Reform Act of 1978, Delegated to the CFTC General 

Rulemaking Authority for Commodity Broker Bankruptcies.

1. Soon after Congress established the CFTC, the agency’s first Chairman, William 

Bagley, alerted Congress to the need for bankruptcy reform to “provide specific statutory 

protection for commodity customers” of failed FCMs and other futures intermediaries. The 

Bankr. Reform Act Revision of the Salary Fixing Procedure for Bankr. Judges Adjustment of 

Debts of Political Subdivisions & Pub. Agencies & Instrumentalities: Hearing on S. 235 & S. 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 7 of 18
4 

236 Before the S. Subcomm. on Improvements in Judicial Mach. (1975) (statement of Chairman 

William T. Bagley). Chairman Bagley detailed in a lengthy submission “the unique problems 

which may be encountered in the event of the failure of” an FCM, among the most serious of 

which is the potential for a shortfall in margin belonging to customers. Id. He noted the 

disparate ways in which a trustee might address such a shortfall, including: (1) to “attempt to 

trace and identify, to the extent possible, each asset to a particular customer, and return that asset 

to such customer”; or (2) to “designate all money, securities, and property traceable or 

identifiable as belonging to commodity customers in general as a single and separate fund in 

which the commodity customers of the [FCM] share ratably.” Id. 

The Chairman explained that, in the context of the futures industry, a system of tracing 

would create serious “inequities.” Id. While large traders may deposit securities or other forms 

of property as margin, small traders typically must use cash. Id. In the event of a shortfall, 

“[t]he absolute fungibility of cash oftentimes defies tracing.” Id. “Consequently, should [an 

FCM] go into bankruptcy inadequately segregated,” the “small cash customers may recover only 

a small percentage of their investments,” while “large investors may recover their entire 

investments.” Id. The Chairman, therefore, urged Congress to amend the Bankruptcy Code to 

provide, inter alia, that “[a]ll money, securities, and property received by the bankrupt [FCM] to 

margin, guarantee, or secure the trades or contracts of customers” should “constitute a single and 

separate fund” in which “[a]ll commodity customers” would be “entitled to shar[e] ratably.” Id. 

This would “eliminat[e] the inequities of specific tracing which unfairly favor the large 

sophisticated industrial hedger over the small and generally unsophisticated hedger or speculator, 

who is typically a member of the general public.” Id. 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 8 of 18
5 

Congress agreed and, in the Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 

Stat. 2549 (1978), established Subchapter IV of Chapter 7 of the Bankruptcy Code, “derived 

largely from the testimony of Chairman Bagley.” H.R. Rep. 95-595, at 271 (1977), reprinted in

1978 U.S.C.C.A.N. 5963; see also S. Rep. 95-989, at 8 (1978), reprinted in 1978 U.S.C.C.A.N. 

5787, 5794 (recognizing “unique problems raised by commodity broker bankruptcies” and 

agreeing that preexisting bankruptcy law was “potentially disruptive” of futures and options 

markets). Subchapter IV includes a series of specialized provisions applicable only to 

commodity broker liquidations, see 11 U.S.C. §§ 761-767, reflecting a “clear mandate” that 

courts ensure “customer protection” in those proceedings, In re Stotler & Co., 144 B.R. 385, 392 

(N.D. Ill. 1992); see also 6-760 Collier on Bankruptcy P 760.01 (LexisNexis 2012) (“The first 

[objective] is the protection of commodity customers from the effects of an insolvency of a 

commodity broker.”). 

2. The linchpin of the Bankruptcy Code’s Subchapter IV customer protection regime is 

Section 766(h), which directs the trustee to distribute all “customer property,” on a pro rata basis, 

in priority to substantially all other claims against the estate: 

Except as provided in subsection (b) of this section, the trustee shall distribute 

customer property ratably to customers on the basis and to the extent of such 

customers’ allowed net equity claims, and in priority to all other claims, except 

claims of a kind specified in section 507(a)(2) of this title that are attributable to 

the administration of customer property. 

11 U.S.C. § 766(h) (emphases added).2

At the same time, however, Congress decided against codifying “detailed rules to govern 

every contingency.” S. Rep. 95-989, at 8. Congress recognized the “germinal state of regulation 

 

2

 The referenced subsection (b) instructs the trustee as to the handling of commodity contracts 

that remain open and permits the trustee to operate the debtor’s business for certain limited 

purposes. It is not directly relevant to the present dispute. 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 9 of 18
6 

of the commodities industry” and, therefore, established “only a framework” in Subchapter IV, 

while delegating “general rulemaking authority” to the CFTC. Id. For example, Section 761(10) 

defines “customer property” to include, among other things, “cash, a security, or other property,” 

that was “received, acquired, or held to margin, guarantee, secure, purchase, or sell a commodity 

contract.” 11 U.S.C. § 761(10). But, Congress granted the CFTC broad discretion to clarify or 

alter that definition to include or exclude property from pro rata distribution: 

Notwithstanding title 11 of the United States Code, the Commission may provide, 

with respect to a commodity broker that is a debtor under chapter 7 of title 11 of 

the United States Code, by rule or regulation— 

(1) that certain cash, securities, other property, or commodity contracts are to be 

included in or excluded from customer property or member property[.] 

Bankruptcy Reform Act of 1978, P.L. 95-958 § 302, codified at 7 U.S.C. § 24(a)(1). Among 

other things, Congress also delegated to the CFTC authority to establish “how the net equity of a 

customer is to be determined,” i.e., how to calculate the value of a customer’s claim. Id. 

§ 24(a)(5). 

3. To implement these delegations, the CFTC adopted the “Part 190” rules. See 17 

C.F.R. §§ 190.01-.10. The rules are a comprehensive set of instructions to a liquidation trustee 

for administering the bankrupt commodity broker’s estate and compensating injured customers. 

For example, the rules instruct the trustee to liquidate most property in the estate, id. § 190.02(f), 

and to calculate a “funded balance” – that is, each customer’s pro rata share of the resulting 

proceeds, other cash, and property in the estate. With several important caveats not relevant in 

this overview, the “funded balance” is roughly equal to the product of (1) the ratio of a 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 10 of 18
7 

customer’s net equity claim to (2) all net equity claims in the estate3

 (3) times the total value of 

property recovered to that estate: 

Customer’s Net Equity Claim x 

 “Customer 

Property” = “Funded Balance” 

All Customers’ Net Equity Claims (pro rata share) 

The Part 190 rules explain how to calculate each component of this formula. See id. §§ 190.07 

(net equity), 190.08 (customer property). ConocoPhillips focuses here on the rules for 

calculating the multiplicand, “customer property.” 

4. Rule 190.08(a) provides that “customer property” is determined by totaling the value 

of each of the following, most of which will have been liquidated by the trustee (but, even if not, 

all of which is subject to pro rata distribution): 

(i) All cash, securities, or other property or the proceeds of such cash, securities or 

other property received, acquired, or held by or for the account of the debtor, from 

or for the account of a customer, including a non-public customer, which is: 

(A) Property received, acquired or held to margin, guarantee, secure, 

purchase or sell a commodity contract; 

(B) Open commodity contracts; 

(C) Warehouse receipts, bills of lading, or other documents of title or 

property held or acquired by the debtor to fulfill a commodity contract; 

(D) Profits or contractual rights accruing to a customer as the result of a 

commodity contract; 

(E) The full proceeds of a letter of credit if such letter of credit was 

received, acquired or held to margin, guarantee, secure, purchase or sell 

a commodity contract; 

 

3

 This calculation is performed for each “account class,” each of which, the rules provide, “will 

constitute a separate estate.” 17 C.F.R. § 190.08. An “account class” means each of several 

types of account, including futures accounts, foreign futures accounts, leverage accounts, 

commodity option accounts, delivery accounts, and cleared over-the-counter derivative accounts. 

Id. § 190.01(a). 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 11 of 18
8 

(F) Property hypothecated under § 1.30 of this chapter to the extent that 

the value of such property exceeds the proceeds of any loan of margin 

made with respect thereto, and 

(ii) All cash, securities, or other property which: 

(A) Is segregated on the filing date; 

(B) Is a security owned by the debtor to the extent there are customer 

claims for securities of the same class and series of an issuer; 

(C) Is specifically identifiable to a customer; 

(D) Is property of a type described in paragraph (a)(1)(i)(A) of this section 

which has been withdrawn and subsequently is recovered by the avoidance 

powers of the trustee; 

(E) Represents recovery of any debit balance, margin deficit, or other 

claim of the debtor against a customer account; 

(F) Was unlawfully converted but is part of the debtor’s estate; 

 

(G) Is property of the debtor that any applicable law, rule, regulation, or 

order requires to be set aside for the benefit of customers, unless including 

such property in the customer estate would not significantly increase the 

customer estate; 

(H) Is property of the debtor’s estate recovered by the Commission in any 

proceeding brought against the principals, agents, or employees of the 

debtor; 

(I) Is proceeds from the investment of customer property by the trustee 

pending final distribution; or 

(J) Is cash, securities or other property of the debtor’s estate, including the 

debtor's trading or operating accounts and commodities of the debtor held 

in inventory, but only to the extent that the property enumerated in 

paragraphs (a)(1)(i)(E) and (a)(1)(ii)(A) through (a)(1)(ii)(H) of this 

section is insufficient to satisfy in full all claims of public customers. 

Id. § 190.08(a) (emphasis added). ConocoPhillips protests the inclusion in this sum of “[t]he full 

proceeds of a letter of credit if such letter of credit was received, acquired or held to margin, 

guarantee, secure, purchase or sell a commodity contract.” Id. § 190.08(a)(i)(E). In 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 12 of 18
9 

promulgating the Part 190 rules, however, the Commission considered and rejected similar 

arguments, reasoning that to exclude letters of credit from the calculation would be 

(1) inconsistent with equitable, pro rata distribution of customer property; and (2) an incentive to 

expanded use of letters of credit as margin, which the Commission viewed as undesirable from a 

policy perspective. 

5. The Commission’s objectives in creating Part 190 were, among other things, “to 

promote equitable treatment of customers” and “to enhance certainty as to the effects of a 

bankruptcy distribution.” Bankruptcy, 46 Fed. Reg. 57535, 57535 (proposed Nov. 24, 1981). 

The Commission was aware that certain market participants were depositing letters of credit and 

various other kinds of property besides cash as margin for futures trades, id. at 57539, 57552, 

and expressed concern that “high-volume or preferred customer[s]” with the wherewithal to do 

so would “enjoy a status superior to that of other customers in a liquidation.” Id. at 57538. 

Accordingly, the Commission proposed that “the full value of a letter of credit posted as margin 

would be drawn in the event of a bankruptcy and the full proceeds thereof would be treated as 

customer property.” Id. at 57553. 

Several commenters objected to this provision, arguing that letters of credit should not be 

included in the calculation of “customer property” because the letters “generally condition 

payment on delivery of a certification that additional funds are required to margin or to cover a 

default with respect to a contract.” Bankruptcy, 48 Fed. Reg. at 8718 (Final Release). The 

Commission, however, rejected this characterization, noting that “it is the letter of credit itself 

which is posted as original margin,” while the “standby feature,” or the ability to present it for 

payment, “only guarantees the payment of variation margin.” Thus, in this context, the letter of 

credit has an intrinsic value equivalent to the amount of cash for which it can substitute as 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 13 of 18
10 

original margin. (See, e.g., Decl. of Emil A. Kleinhaus, Exs. L&M (ECF Docs. # 3-12, 3-13) 

(ConocoPhillips account statements listing the face amounts of each letter of credit as 

components of “Account Value at Market”).) The Commission explained that it would therefore 

be “inherently unfair” to exempt letters of credit from pro rata treatment, because it would “favor 

large customers at the expense of smaller market participants.” 48 Fed. Reg. at 8718. And, if 

letters of credit were accorded more favorable treatment than other non-cash deposits, “there 

would be substantial incentive to use and accept such letters of credit as margin as they would be 

a means of avoiding the pro rata distribution of margin funds, contrary to the [Bankruptcy] 

Code.” Id. 

Such incentive could be destabilizing. The Commission expressed concern about the 

“viability of such instruments as margin deposits” because letters of credit are comparatively 

cumbersome to convert to cash in response to a market event. Id.; see also id. at 8718 n.14 

(noting policy changes at some clearing organizations with respect to letters of credit in response 

to “periods of volatility”). Thus, it would be “unwise to adopt a policy which would further 

encourage the use of letters of credit and, indeed, their substitution for other forms of margin.” 

Id. at 8719. The Commission concluded, therefore, that “customers using a letter of credit to 

meet original margin obligations” should “be treated no differently than customers depositing 

other forms of non-cash margin or customers with excess cash margin deposits.” Id. at 8718. 

Rule 190.08 was adopted in substantially its current form. Id. at 8749-50. 

III. The Legal Certainty for Bank Products Act of 2000 Is Not Relevant.

 ConocoPhillips relies in part on the Legal Certainty for Bank Products Act of 2000, Pub. 

L. No. 106-554, 114 Stat. 2763, which clarifies that a traditional letter of credit is not a future or 

“swap” subject to CFTC regulation of those products, 7 U.S.C . § 27a(a)(1), but that law is not 

relevant here. 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 14 of 18
11 

1. The CEA states that the CFTC has “exclusive jurisdiction” over, inter alia, 

“transactions involving swaps or contracts of sale of a commodity for future delivery.” Id. 

§ 2(a)(1)(A). The definitions of “commodity” and “swap” are extremely broad. Id. §§ 1a(9), 

1a(47). A “commodity” includes “all services, rights, and interests . . . in which contracts for 

future delivery are presently or in the future dealt in.” Id. § 1a(9). A “swap” includes “any 

agreement, contract, or transaction . . . that provides for any purchase, sale, payment, or delivery 

. . . that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an 

event or contingency associated with a potential financial, economic, or commercial 

consequence.” Id. § 1a(47). 

Absent exclusion, bank products such as letters of credit might qualify as swaps, and, as a 

result, be subject to a panoply of requirements under the CEA and CFTC regulations. See, e.g., 7 

U.S.C. §§ 2(h) (clearing requirement for swaps), 6r (reporting and recordkeeping for uncleared 

swaps), 6s (registration and regulation of swap dealers and major swap participants); Business 

Conduct Standards for Swap Dealers & Major Swap Participants with Counterparties, 77 Fed. 

Reg. 9734 (Apr. 17, 2012). The Legal Certainty for Bank Products Act provides such an 

exclusion, stating that an “identified banking product,” such as a letter of credit, is not subject to 

these laws unless a banking agency, in consultation with the CFTC, determines that the product 

“would meet the definition of a ‘swap’ under section 1a(47) of the Commodity Exchange Act” 

and “has become known to the trade as a swap . . . or otherwise has been structured as an 

identified banking product for the purpose of evading the provisions of” the CEA. 7 U.S.C. 

§ 27a(a). The bank product would then become subject to the full scope of the CEA and CFTC 

regulation. Id. 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 15 of 18
12 

 2. None of this has any bearing on the proper treatment of various kinds of instruments 

in a commodity broker bankruptcy. The inclusion of letters of credit as customer property, in 

particular, does not subject those instruments to regulatory requirements under the CEA and 

CFTC regulations. Much “customer property” under Subchapter IV and Part 190 consists of 

instruments not subject to the CEA or CFTC regulation, including securities, cash, warehouse 

receipts, bills of lading, and other documents of title. 11 U.S.C. § 761(10); 17 C.F.R. 

§ 190.08(a)(i). The CEA itself contains explicit provisions that pertain to “identified banking 

products,” without subjecting such products to CFTC “regulatory authority.” See 7 U.S.C. 

§ 6d(b) (prohibiting misuse of margin property in a deposit account, an “identified banking 

product” under Section 206 of the Graham-Leach-Bliley Act). Provisions governing the 

treatment in an FCM bankruptcy of specific types of instruments do not constitute the regulation 

of those instruments as “products,” within the meaning of the Legal Certainty for Bank Products 

Act. 

3. Congress, in the Bankruptcy Reform Act, directed the CFTC to establish a process for 

dividing the value of all such instruments within a commodity broker bankruptcy estate, pro rata, 

among injured customers. The Part 190 rules do so in a manner that is fair, efficient, and 

consistent with Congress’s instructions. 

CONCLUSION

 The Commission respectfully submits the foregoing to assist the Court in considering 

ConocoPhillips’ motion to withdraw the reference. 

 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 16 of 18
13 

Respectfully submitted, 

 COMMODITY FUTURES TRADING COMMISSION 

By: /s/ Robert A. Schwartz 

Dan M. Berkovitz, General Counsel 

Jonathan L. Marcus, Deputy General Counsel 

Robert B. Wasserman, 

 Chief Counsel, Division of Clearing and Risk 

Martin B. White, Assistant General Counsel 

Robert A. Schwartz, Assistant General Counsel 

 

U.S. Commodity Futures Trading Commission 

Three Lafayette Plaza 

1155 21st Street N.W. 

Washington, DC 20581 

(202) 418-5000 

jmarcus@cftc.gov 

rwasserman@cftc.gov 

mwhite@cftc.gov 

rschwartz@cftc.gov 

Dated: August 23, 2012

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 17 of 18
CERTIFICATE OF SERVICE

 I hereby certify that on August 23, 2012, I caused the foregoing document to be served on 

all counsel via the Court’s CM/ECF system. 

 /s/Robert A. Schwartz 

 Robert A. Schwartz 

 Assistant General Counsel

U.S. Commodity Futures Trading Commission 

Three Lafayette Plaza 

1155 21st Street N.W. 

Washington, DC 20581 

(202) 418-5958 

rschwartz@cftc.gov 

Case 1:12-cv-06014-KBF Document 20 Filed 08/23/12 Page 18 of 18