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					                       FUTURES INDUSTRY ASSOCIATION
                                                                                                                   INC.
                           2001 Pennsylvania Avenue N.W. • Suite 600 • Washington, DC 20006 -1807 • (202) 466-5460
                                                                                             Fax: (202) 296-3184




March 6, 2003                                                                                         Revised


US Department of the Treasury
USA PATRIOT Act Task Force
1500 Pennsylvania Avenue NW
Washington, DC 20220

        Re:      Anti-Money Laundering Rules Affecting Futures Commission Merchants

Ladies and Gentlemen:

In response to the Department of the Treasury’s (“Treasury’s”) USA PATRIOT Act Task Force
invitation, the Futures Industry Association (“FIA”)1 welcomes this opportunity to present these
additional views concerning the appropriate scope and substance of anti-money laundering rules
and regulations implementing the USA PATRIOT Act of 2001 (“PATRIOT Act”) 2 as such rules
and regulations may affect futures commission merchants (“FCMs”).

The Derivatives Markets

To place the following discussion in the proper context, we believe it would be helpful to describe
the market environment in which the FCM community to which these rules would apply operates.
US FCMs act as intermediaries on behalf of international commercial entities and other
institutional participants, including banks, insurance companies and other financial institutions
that use the derivatives markets both to manage the risks they incur in their cash market activities
and for speculative purposes. Registered and unregistered investment companies, including
hedge funds and commodity pools, are significant participants in the derivatives markets and are
essential to providing the liquidity that these markets demand. (Registered and unregistered
investment companies are collectively referred to in this letter as “collective investment
vehicles.”).


1        FIA is a principal spokesman for the commodity futures and options industry. Our regular membership
is comprised of approximately 50 of the largest futures commission merchants in the United States. Among our
approximately 150 associate members are representatives of virtually all other segments of the futures industry,
both national and international, including US and international exchanges, banks, legal and accounting firms,
introducing brokers, commodity trading advisors, commodity pool operators and other market participants, and
information and equipment providers. Reflecting the scope and diversity of our membership, FIA estimates that
our members effect more than 90 percent of all customer transactions executed on US contract markets. (More
information about the FIA is available on its home page: http://www.futuresindustry.org.)
2
         “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001,” Pub. L. No. 107-56 (2001), signed into law by President Bush on October 26,
2001.
US Department of the Treasury
March 6, 2003
Page 2


These participants also trade on markets worldwide. In 2002, volume on US derivatives markets
comprised less than one third of the approximately six billion derivatives contracts traded
globally. The Chicago Mercantile Exchange and the Chicago Board of Trade, once the dominant
derivatives exchanges, now rank fourth and fifth, respectively, behind European and Asian
exchanges.3

In light of the institutional nature of the market participants that dominate the derivatives markets
and the international scope of their activities, the FCMs that, directly or indirectly, serve these
participants not surprisingly have both the international presence and the regulatory capital that
these participants require to support their trading activities on derivatives exchanges and all other
financial markets. For example, approximately 90 percent of the approximately $62.5 billion
customer funds on deposit with FCMs for trading on US and non-US markets as of December 31,
2002 was held by just 20 of the larger FCMs.4 Of these 20 firms, 12 have regulatory net capital in
excess of $1 billion and seven have net capital in excess of $2 billion. All but three of the 20 are
also registered with the Securities and Exchange Commission (“SEC”) as broker-dealers and two
of the three have affiliates that are registered as broker-dealers. Moreover, all 20 firms have non-
US affiliates and eight have non-US parents.

The Essential Role of Intermediaries

FIA has advised Treasury of the myriad relationships that FCMs have with intermediaries both
domestic and international in connection with providing services to derivatives market
participants. Foreign brokers and non-clearing member FCMs open omnibus accounts with
FCMs that are clearing members of the several derivatives exchanges. US FCMs, in turn, open
omnibus accounts with foreign brokers to execute and clear trades on non-US derivatives
exchanges on behalf of their customers. Further, as noted above, collective investment vehicles
are significant participants in the derivatives markets.

In addition, advisors and introducing brokers, both foreign and domestic, introduce customers to
FCMs whose accounts the FCMs carry on a fully disclosed basis. In this regard, among the larger
FCMs, it is estimated that a majority of all derivatives market transactions are executed and
cleared on behalf of customers whose accounts are managed by advisors. Finally, and perhaps
most significantly, FCMs provide execution-only services for an overwhelming number of
participants through so-called give-up arrangements.



3
        These and other relevant statistics are set forth in a press release issued by FIA, dated February 13,
2003.
4
        Commission records indicate that approximately $52.3 billion were held in customer segregated
accounts for trading on US futures exchanges and approximately $10.2 were held in foreign secured amount
accounts for trading on non-US futures exchanges. As of December 31, 2002, 168 entities were registered with
the Commission as FCMs. However, approximately 100 FCMs held no customer funds at all.
US Department of the Treasury
March 6, 2003
Page 3


Omnibus Accounts and Collective Investment Vehicles

In the July 23, 2002 Federal Register release proposing rules governing the customer
identification procedures of FCMs, Treasury acknowledged that, in appropriate circumstances,
the proposed rules would authorize FCMs to rely on intermediaries to perform the customer
identification function.5 This is especially true when the intermediary is a collective investment
vehicle or opens an omnibus account with the FCM. In these circumstances, an FCM will have a
direct principal/agent relationship solely with the collective investment vehicle or other entity
itself and, as the Agencies recognized, “may have little or no information about the identities and
transaction activities of the underlying participants or beneficiaries of such accounts.” The
release further states:

         In most instances, given Treasury’s risk-based approach to anti-money
         laundering programs for financial institutions generally, it is expected that the
         focus of each futures commission merchant’s and introducing broker’s CIP
         [Customer Identification Program] will be the intermediary itself, and not the
         underlying participants or beneficiaries. Thus, futures commission merchants
         and introducing brokers should assess the risks associated with different types of
         intermediaries based upon an evaluation of relevant factors, including the type of
         intermediary; its location; the statutory and regulatory regime that applies to a
         foreign intermediary (e.g., whether the jurisdiction complies with the European
         Union anti-money laundering directives or has been identified as non-cooperative
         by the Financial Action Task Force); the futures commission merchant’s or
         introducing broker’s historical experience with the intermediary; references from
         other financial institutions regarding the intermediary; and whether the
         intermediary is itself a BSA financial institution required to have an anti-money
         laundering program. 67 Fed.Reg. 48328, 48331.

FIA endorsed the Agencies’ position at that time and wishes to reemphasize here the importance
of being able to rely on these intermediaries in appropriate circumstances. Only these
intermediaries—collective investment vehicles and entities that open omnibus accounts—have a
direct relationship with the underlying participants or beneficiaries. 6 Consequently, only they are
in a position to undertake the procedures necessary to confirm the identity of such persons. For
purely competitive reasons, such intermediaries are unlikely to disclose willingly the identities of
the participants in or beneficiaries of an account. A contrary position, therefore, requiring FCMs
to institute a customer identification program with respect to the underlying participants or
beneficiaries in such accounts, would impose an insurmountable burden on FCMs.


5
         67 Fed.Reg. 48328 July 23, 2002).
6
         Conversely, the FCM has no relationship with these underlying participants or beneficiaries and enters
into a contractual relationship solely with the intermediary. All trades are made in the name of the intermediary;
all margin calls are made to and paid by the intermediary.
US Department of the Treasury
March 6, 2003
Page 4


The rationale supporting reliance on these intermediaries is equally compelling when the
intermediary is a foreign broker or a foreign collective investment vehicle, although the factors an
FCM should take into account in assessing such intermediaries obviously differ. In this regard,
consistent with the Agencies’ earlier position, we respectfully submit that, provided the non-US
intermediary operates in a jurisdiction that is a member of the Financial Action Task Force
(“FATF”) and the US FCM has no reason to know that the intermediary is not fulfilling its
obligations under applicable laws and regulations, US FCMs should be able to rely on such
intermediaries. Of course, if the US FCM has any knowledge that would cause it to conclude that
its reliance is not reasonable, the US FCM could not rely on the non-US intermediary’s customer
identification program simply because the non-US intermediary conducts business from a
jurisdiction that is a member of FATF.7

Fully Disclosed Accounts

The previous discussion assumes a relationship between an FCM and an intermediary in which
the FCM generally acts as an agent for the intermediary alone and has “little or no information
about the identities and transaction activities of the underlying participants or beneficiaries of
such accounts.” There are circumstances, however, in which the intermediary and the FCM each
have a direct relationship with the underlying customer. Each performs services directly for and
on behalf of the customer. For example, an advisor will have discretionary trading authority over
a customer’s account, which is carried by an FCM. Similarly, an introducing broker will
introduce a customer’s account to an FCM.

In each instance, the FCM carries the customer’s account on a fully disclosed basis. It is the
introducing broker or advisor, however, that, from a practical standpoint, has the more direct
relationship with the customer and is in a better position to undertake the procedures necessary to
verify the customer’s identity.8 In these circumstances, consistent with the Treasury’s risk-based


7
        The National Futures Association (“NFA”) also recognized that FCMs may rely on non-US
intermediaries in appropriate circumstances. In April 2002, NFA adopted an Interpretive Statement setting out
the minimum standards that must be a part of any member firm’s anti-money laundering program. This statement
provided, in relevant part:

         FCMs may also carry accounts introduced or referred by a regulated intermediary located in a
         foreign jurisdiction. In those instances, the FCM must make a risk-based determination
         whether it can rely on the foreign intermediary’s due diligence with respect to its customer.
         Some factors to consider in making this determination include whether the foreign
         intermediary is located in a FATF member jurisdiction; the FCM’s historical experience with
         the foreign intermediary; and the intermediary’s reputation in the investment business.

A copy of the Interpretive Statement is enclosed.
8
        In fact, the customer frequently plays a limited role in the selection of the FCM through which the
customer’s trades are executed and cleared. The introducing broker or advisor chooses the FCM and facilitates
the execution of all necessary account documents. The larger FCMs estimate that advisors exercising
US Department of the Treasury
March 6, 2003
Page 5


approach to customer identification programs, FIA submits that the FCM, in appropriate
circumstances, may reasonably rely on the intermediary with which it shares a customer to verify
the identity of the customer.9

This is especially true where the introducing broker or advisor is located in the US. Such
intermediaries are “financial institutions” under the USA PATRIOT Act and, therefore, are now
or will be subject to substantially the same anti-money laundering requirements as FCMs. Under
the Treasury’s risk-based approach, an FCM on the one hand and an advisor or introducing broker
on the other, each of which has a direct relationship with the owner of an account, should be
permitted to allocate responsibility between them for verifying the identity of the customer. 10
This approach will also reduce the administrative burden on legitimate customers that otherwise
could have to respond to numerous identification verification inquiries.

Although non-US advisors and introducing brokers are not subject to the USA PATRIOT Act and
the regulations promulgated thereunder, they are, in many cases, subject to a comparable anti-
money laundering regulatory scheme. We submit, therefore, that, in appropriate circumstances,
the regulations implementing the PATRIOT Act should permit a US FCM and a non-US advisor
or broker to agree that the advisor or broker will perform the customer verification function.
Specifically, as we urged above with respect to intermediated accounts, provided the non-US
advisor or broker operates in a FATF member jurisdiction and the US FCM has no reason to
know that the intermediary is not fulfilling its obligations under applicable laws and regulations,
US FCMs should be able to rely on such intermediaries. 11 We understand that this approach,
whether with respect to US advisors or introducing brokers or non-US advisors or brokers, does

discretionary trading authority over the accounts of their clients are responsible for a majority of futures
exchange transactions.
9
         Another relationship in which more than one intermediary may know the identity of, and have contact
with, the underlying customer is the so-called give-up relationship. Give-up relationships are discussed
separately below.
10
         FIA notes that, under the several securities laws as well as the Commodity Exchange Act, certain
persons with authority to exercise discretionary trading authority over the accounts of their clients are not
required to be registered as advisors with the appropriate regulatory authorities. Nonetheless, we understand that
these persons are or will be subject to federal anti-money laundering regulations. Provided an advisor is subject
to such regulations, we suggest that the lack of registration, by itself, should not be the deciding factor in
determining whether an FCM may rely on the advisor to perform the customer verification function. It is, of
course, one factor that an FCM should consider.
11
        As noted, FIA believes that an FCM generally should be able to rely on intermediaries that operate in a
FATF member jurisdiction. We also note, however, that the Commission, either alone or in conjunction with the
SEC, has entered into a number of Memoranda of Understanding with other jurisdictions establishing procedures
for cooperative enforcement or the sharing of information.            These agreements are summarized at
www.cftc.gov/opa/backgrounder/opamou.htm. Such agreements could serve as a model for assuring access to
customer verification information obtained from non-US intermediaries inn such jurisdictions, and we encourage
Treasury to work with the Commission, the SEC and their international counterparts to this end.
US Department of the Treasury
March 6, 2003
Page 6


not relieve an FCM of the obligation to verify the identity of its customers. It simply permits the
FCM to rely upon another party to perform this function when such reliance is reasonable. 12

Give-Up Relationships

As indicated above, one type of relationship involving multiple intermediaries is the so-called
give-up relationship. In a give-up relationship, a customer elects to execute transactions through
one or more FCMs, known as executing brokers. The executing broker then “gives-up” the trade
to another FCM, known as the carrying or clearing broker, which (a) carries the customer’s
account and (b) is responsible for handling such customer’s funds.13

Give-up arrangements first evolved in the United States where, on New York exchanges, booths
for receiving customer orders on the trading floors were dominated by independent floor brokers,
not exchange member FCMs. These floor brokers would solicit the execution business of
institutional customers directly from such customers independent of the FCMs that cleared the
customers’ accounts. The practice spread to the Chicago exchanges, as floor brokers there
competed for execution business. Various FCMs initially became involved as executing brokers
in their capacities as primary clearing members for the floor brokers that executed the customers’
trades. They soon recognized execution business as an important additional source of revenue
and began to compete with other clearing firms for that portion of the customers’ business. 14
With the transition from trading floors to electronic trading platforms, the role of the floor broker
obviously has diminished. The competition for execution business nevertheless remains strong. 15

Give-up arrangements generally fall within one of two types, each of which involves directly
three parties. The executing FCM and the carrying broker are participants in each type of
arrangement. In one, however, the third party is the customer; in the other, the third party is the

12
         FCMs would be expected to engage in the same analysis the Agencies described in the Federal Register
release and quoted above. That is, FCMs should assess the risks associated with different types of intermediaries
based upon an evaluation of relevant factors, including the type of intermediary; its location; the statutory and
regulatory regime that applies to the foreign intermediary; the FCM’s historical experience with the intermediary;
and references from other financial institutions regarding the intermediary.
13
           A memorandum describing give-up relationships in greater detail, which FIA prepared in connection
with the UK Financial Services Authority’s consideration of its anti-money laundering regime, is enclosed with
this letter.
14
         Executing brokers, therefore, are acting essentially in the capacity of floor brokers, who are not
“financial institutions” under the USA PATRIOT Act.
15
         The continued growth of electronic trading platforms will not necessarily diminish the desire or need for
give-up relationships. For example, FCMs find that certain customers or their advisors frequently prefer one
FCM’s front-end electronic order routing system in lieu of the system that the clearing broker provides. Yet, they
continue to prefer to clear their transactions through another broker for a number of reasons, including offering
centralized clearing across global markets, having superior back office systems or being more highly capitalized.
US Department of the Treasury
March 6, 2003
Page 7


customer’s advisor to which the customer, more often than not a large institutional customer, has
granted discretionary trading authority, including the authority to enter into give-arrangements on
the customer’s behalf. Typically, in these latter circumstances, the identity of the customers on
whose behalf it is acting are not disclosed to the executing FCM. Only the carrying broker will
know the identity of the advisor’s customers. The executing FCM will know only the customers’
account numbers or an identifier for bunched orders placed on behalf of multiple accounts over
which the advisor exercises discretionary trading authority. The substantial number of give-up
arrangements today fall into this latter category.16

In a give-up arrangement, therefore, it is the carrying broker that has the more direct, more
comprehensive relationship with the customer. Only the carrying broker: (1) enters into an
account agreement with the customer, establishing the parties’ respective rights and obligations,
and in the process, conducts a credit review and obtains documentation from the customer
covering areas such as identity verification, legal entity structure and authority to trade; (2) is
responsible for maintaining records of, and is able to monitor on a daily basis, each of the
customer’s transactions that it carries; and (3) most important for purposes of the anti-money
laundering programs, accepts customer funds to margin or secure such transactions and disburses
such funds in accordance with the customer’s instructions. We respectfully urge Treasury to
conclude that, in cases involving give-up arrangements and particularly in light of the discreet
function that the executing FCM plays in the customer relationship, executing FCMs and carrying
brokers may allocate responsibility for fulfilling their mutual customer identification
obligations.17

The Effect on International Give-Up Relationships

The ability to allocate this responsibility among parties to a give-up arrangement is essential to an
efficient international market structure. For example, a customer in London that has an account
with a UK carrying broker may enter into a give-up relationship with a London-based executing
broker to execute transactions on its behalf both in the UK and the US (or the customer may
begin the relationship solely for the purpose of executing transactions on European exchanges and
determine at a later time to use the executing broker for transactions in the US). In either case,

16
         We assume that an executing FCM would not be required to determine the identity of customers that are
not direct parties to a give-up arrangement. That is, in circumstances in which the give-up arrangement is entered
into with an advisor acting on behalf of the advisor’s customers, the executing FCM’s customer for purposes of
complying with relevant anti-money laundering programs would be the advisor. The executing FCM may be
required to confirm the identity of the advisor and exercise other due diligence consistent with its anti-money
laundering policies and procedures, but it would not be required to confirm the identity of the advisor’s
underlying customers. The carrying FCM, of course, would be responsible for verifying the identity of its
customers.
17
           As with other aspects of an FCM’s customer identification program, the executing FCM’s reliance on
the carrying broker would have to be reasonable, based upon a consideration of the particular facts and
circumstances of a specific relationship. The executing broker cannot ignore obvious warning signs or fail to act
if it has actual knowledge that the carrying broker is not fulfilling its responsibilities.
US Department of the Treasury
March 6, 2003
Page 8


the UK executing broker will use its US affiliate to execute trades in the US. (Typically, the
customer will call the US executing broker directly.) Similarly, the UK carrying broker usually
will use its US affiliate to clear the trades and then pass them through the customer omnibus
account that the UK carrying broker maintains with its US affiliate.

In these circumstances, the US executing broker and US carrying broker will not enter into a
separate agreement with the London-based customer. The US executing broker and carrying
broker each will rely on the agreement entered into between their respective UK affiliates and the
customer. The relationship can also start with a US executing broker and carrying broker.
Affiliates in other jurisdictions will then rely on the agreements executed in the US.

If executing brokers and carrying brokers are not permitted to allocate responsibility for fulfilling
the customer verification function, the potential adverse effect on international business would be
significant.18 As we have previously indicated, for purely competitive reasons, an advisor or
carrying broker, which has the more direct relationship with its customers, is unlikely to disclose
their identities willingly to an executing broker. Moreover, it would be impractical for an
executing broker to assume responsibility for verifying the identity of a customer with which the
broker has only an indirect relationship. As important, customers, directly or through the advisors
managing their accounts, may be unwilling to undertake the administrative burden of responding
to numerous identification verification inquiries from executing brokers.

As a consequence, it is probable that cross-border business in general will be reduced. US FCMs
may be forced to turn away business from non-US sources, and the customer or its advisor will
look for alternative means of obtaining the same economic benefit currently derived from trading
on organized exchanges without undergoing the same administrative burden. Non-US exchanges
such as LIFFE or Eurex, for example, could well develop “look-alike” contracts to serve non-US
advisors and customers.19




18
          The larger FCMs indicate that a significant portion of all cross-border transactions involve give-up
transactions. The potential adverse consequences described in this section are not limited to give-up
relationships, however. Rather, the inability to rely on other intermediaries that are subject to the same or
comparable anti-money laundering regulations, i.e., intermediaries operating in FATF member jurisdictions, will
affect all international market relationships generally.
19
        At the very least, we believe that US FCMs should be able to rely on the customer verification functions
undertaken by their non-US affiliates. US FCMs are able to assure that their non-US affiliates have in place and
implement appropriate customer identification programs. Moreover, US FCMs are assured greater access to their
non-US affiliates’ records developed in verifying their customers’ identities. As discussed earlier, institutions
and commercial entities generally open accounts with FCMs that have affiliates worldwide. Such customers
should not be required to verify their identity with each affiliate.
US Department of the Treasury
March 6, 2003
Page 9


Conclusion

FIA appreciates this opportunity to present these additional views on the proposed rules
governing the development and implementation of anti-money laundering programs for
Commission registrants in compliance with the provisions of the USA PATRIOT Act. We
believe the adoption of the standards described in this letter will permit FCMs to develop anti-
money laundering programs that are both “reasonable and practicable” and will permit the more
efficient use of resources devoted to anti-money laundering activities both in the US and globally.
If the members of the Task Force have any questions concerning the comments in this letter,
please contact me at (202) 466-5460.

Sincerely,

/s/

Barbara Wierzynski
Executive Vice President and General Counsel


cc:    Patrick J. McCarty
           General Counsel, Commodity Futures Trading Commission
       Thomas W. Sexton, III
           General Counsel, National Futures Association

Enclosures

				
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