CFTC Staff Letter 99-01: Application of Rule 1.57(a) to Entities Registered as Both IBG and CPO

CFTC Letter 99-01
CFTC Letter No. 99-01
December 23, 1998
Division of Trading & Markets
Re: Interpretation of Rule 1.57(a)
Dear :
This is in response to the letter dated January 23, 1998 from "X", a registered futures commission merchant ("FCM"), to Mr. Bob Agnew of the Southwestern Regional Office of the Division of Trading and Markets ("Division") of the Commodity Futures Trading Commission ("Commission"). "X's" letter was referred to this office for reply. Subsequently, "X" submitted additional information to this office by letter dated January 28, 1998, as supplemented by letters from "Y" dated February 4, February 20, and December 3, 1998, and from "Z" dated March 9, 1998. By this correspondence, "Y", a registered commodity pool operator ("CPO") and a registered introducing broker ("IB") guaranteed by "Z", a registered FCM, requests confirmation that it may open an account with "X" for a commodity pool operated by "Y" and that such action is permissible under Rule 1.57(a).1 Since the requirements of that rule relate to the obligations of an IB, we believe that it is appropriate to address this letter to "Y" despite the fact that the original request for interpretation was submitted by "X". Rule 1.57(a) requires that an IB that has entered into a guarantee agreement with an FCM (an "IBG") must open and carry a customer or option customer account with its guarantor FCM on a fully-disclosed basis. By this rule, the Commission sought to make clear that an IBG must introduce all of its customer and option customer accounts to its guarantor FCM on a fully-disclosed basis.2 The purpose of the guarantee agreement is to protect the IBG's customers. The FCM that is a party to the agreement guarantees performance by the IBG of, and is jointly and severally liable for, all obligations of the IBG under the Act and the rules, regulations, and orders promulgated thereunder with respect to the solicitation of and transactions involving all customer and option customer accounts.3 Based upon the representations made in "X's" January 23, 1998 letter, as supplemented, we understand the relevant facts to be as follows. "Y" will serve as the CPO of the "Pool".4 "Y" will open an account in the name of the Pool with "X" for execution of trades on both United States contract markets and foreign exchanges.5 You have asked us to confirm that it is permissible for "Y" to open an account in the name of the Pool at "X" under Rule 1.57(a). The Division believes that, if an entity is registered file:///S|/Website%20Management/LegacyDataCopyasof2010-04-21/tm/letters/99letters/tm99-01.htm (1 of 3) [5/6/2010 7:12:16 PM]