CFE

November 17, 2010

Via Electronic Submission

Mr. David Stawick

Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N. W.
Washington, D. C. 20581

Re: Comment Letter on Proposed Rulemaking Relating to Mitigation of

Conflicts of Interest RIN 303 g-AD01 75 FR 63732 October 18 2010

Dear Mr. Stawick:

CBOE Futures Exchange, LLC ("CFE") appreciates the opportunity to provide its
comments to the Commodity Futures Trading Commission ("CFTC") with respect to the CFTC's
proposals in the above-referenced release ("Release" ). The Release proposes to implement
certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-
Frank Act") by setting forth proposed requirements ("Proposed Requirements" ) for derivatives
clearing organizations ("DCOs"), designated contract markets ("DCMs"), and swap execution
facilities ("SEFs") relating to mitigation of conflicts of interest. Because CFE is a DCM, CFE's
comments are focused on the Proposed Requirements as they relate to DCMs.

CFE A rees with the CFTC that the Same Governance and Ownershi Re uirements
Should Be A lied to Both SEFs and DCMs

CFE strongly supports the CFTC's approach in the Release of applying the same
governance and ownership requirements to SEFs as are to be applied to DCMs. As the CFTC
notes in the Release, SEFs, like DCMs, are required to fulfill self-regulatory obligations under the
Commodity Exchange Act and the Dodd-Frank Act. Therefore, it is important to hold SEFs to
the same governance and ownership standards that are applicable to DCMs to ensure that SEFs
appropriately prioritize their self-regulatory obligations. Additionally, the Dodd-Frank Act
contemplates that both DCMs and SEFs may list swap contracts and thus compete with one
another. Accordingly, it is crucial that there be a level playing field between both DCMs and
SEFs and that there be no regulatory disparities that would make it more advantageous to list a
swap on a SEF as opposed to a DCM. Otherwise, the result will be regulatory arbitrage and the
goal of promoting competition between DCMs and SEFs will not be realized. This concept is not
only applicable with respect to governance and ownership standards and mitigation of conflicts of
interest. The CFTC should also take the same approach in its other rulemakings concerning SEFs
and apply the same standards and requirements to both SEFs and DCMs with respect to all
aspects of their provision and regulation of a venue for the trading of swap contracts.

Consistent with the foregoing, to the extent that CFE's other comments below with
respect to the Proposed Requirements as they relate to DCMs would be applicable to equivalent
provisions relating to SEFs and DCOs, CFE would support the same requested change or
clarification being made with respect the SEF and DCO provisions.

400 South LaSalle Street Chicago, illinois 60605-1 023 www. cboe, coin/cfe
Mr. David Stawick
Page 2 of 5

The Pro used Dis uglification for Public Directors Servin on a Re late Oversi ht
Committee "ROC" or Membershi Committee Is Unnecessa and Ambi uous and
Should Not Be Ado ted

The Proposed Requirements include a new proposed requirement for the qualification of
public directors that serve on a DCM ROC or Membership Committee. Specifically, proposed
Regulation 1.3(zz)(C)(1)(v) provides that an individual that otherwise qualifies as a public
director is disqualified from serving on a DCM ROC or Membership Committee if the individual
accepts, directly or indirectly, any consulting, advisory, or other compensatory fee from the
DCM, any affiliate of the DCM, any member of the DCM, or any afflliate of a member of the
DCM, subject to two limited exceptions.

CFE believes that the CFTC should not adopt the proposed requirement set forth in
proposed Regulation 1.3(zz)(C)(1)(v) for the following reasons.

First, CFE does not believe that proposed Regulation 1.3(zz)(C)(1)(v) is necessary or
justified. The Proposed Requirements contain a similar requirement in proposed Regulation
1.3(zz)(CXI)(iv) which already addresses the same concerns as those sought to be addressed by
proposed Regulation 1.3(zz)(C)(1)(v). Proposed Regulation 1.3(zz)(C)(1)(iv) disqualifies an
individual from serving as a DCM public director if the individual, or an entity with which the
individual is a partner, officer, employee, or director, receives more than $100, 000 in combined
annual payments for legal, accounting, or consulting services from the DCM, any afflliate of the
DCM, any member of the DCM, or any affiliate of a member of the DCM, subject to the same
two types of limited exceptions as under proposed Regulation 1.3(zz)(C)(1)(v). Proposed
Regulation 1.3(zz)(C)(1)(iv) applies to all public directors of a DCM and is patterned after a
currently existing provision under Subsection (b)(2)(ii)(C) of the acceptable practices recently
adopted by the CFTC for the DCM core principle relating to conflicts of interest. The CFTC is
also proposing to expand this current provision as set forth in proposed Regulation
1.3(zz)(C)(1)(iv) by applying the provision to payments from DCM members and affiliates of
DCM members as well as to payments from the DCM and DCM affiliates whereas the current
provision under the acceptable practices only applies to payments from the DCM and DCM
affiliates. The Release does not cite to any instances in which the current provision is not
adequately addressing the underlying concern it was intended to address nor does the Release
provide any justification as to why the current provision as it is currently proposed to be
augmented in proposed Regulation 1.3(zz)(C)(1)(iv) is not sufflcient to address that concern. In
fact, the explanatory section of the Release does not even specifically mention or discuss the new
proposed requirement set forth in proposed Regulation 1.3(zz)(C)(1)(v).

Second, CFE believes that proposed Regulation 1.3(zz)(C)(1)(v) is ambiguous and overly
broad. In particular, the inclusion of the direct or indirect acceptance of "any. . . other
compensatory fee" as a disqualifying event could potentially be read to include just about any
type of payment, no matter how immaterial, remote, and unrelated to the public director. The
following real life example involving CFE illustrates this point. One of CFE's public directors is
Michael Gorham. Mr. Gorham is an Industry Professor and the Director of the IIT Stuart Center
for Financial Markets at the Illinois Institute of Technology ("IIT"). He is also a member of the
CFTC Technology Advisory Committee and previously served as a Director of the CFTC
Division of Market Oversight. In the event that a CFE Trading Privilege Holder ("TPH") were to
attend IIT and pay tuition to IIT or some other fee to IIT such as a fee to park the TPH's car in an
IIT parking lot, no regulatory purpose would be served by disqualifying an individual like Mr.
Gorham from serving on the CFE ROC under some theory that these fees ultimately indirectly
contribute toward the payment of his salary. Proposed Regulation 1.3(zz)(C)(1)(iv) is much more
Mr. David Stawick
Page 3 of 5

reasonable by excluding de-minimus payments and focusing upon the types of

in its approach
payments both
that proposed Regulation 1.3(zz)(C)(1)(iv) and proposed Regulation
1.3(zz)(C)(1)(v) appear to be targeting (i.e., legal, accounting, consulting, and advisory fees).

Third, proposed Regulation 1.3(C)(1)(v) is not consistent with either (i) the self-
regulatory organization governance standards proposed by the Securities and Exchange
Commission ("SEC") in 2004 in SEC Release Number 34-50699, 69 FR 71127 (December 8,
2004) or (ii) the SEC's proposed governance and ownership requirements for security-based swap
clearing agencies, security-based swap execution facilities, and national securities exchanges that
post or make available for trading security-based swaps set forth in SEC Release Number 34-
63107, 75 FR 65882 (October 26, 2010). The Release states that some of the modifications that
the CFTC is proposing to the definition of public director are intended to bring several aspects of
the definition in line with what the SEC proposed in 2004 in order to allow for greater
harmonization with the SEC. However, nowhere in either the SEC's 2004 or 2010 proposals did
or does the SEC propose to apply the test set forth in proposed Regulation 1.3(C)(1)(v) to public
directors that serve on a ROC (or for that matter a Membership Committee, which the SEC did
not and does not propose to require). Instead, the SEC proposed and proposes to apply such a test
to directors that serve on an Audit Committee. This is a much different context in that public
company Audit Committees are already required to comply with a similar requirement by Section
10A(m)(3)(B)(i) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act
Rule IOA-3(b)(1)(ii)(A). There is no such statutory requirement like this for a DCM ROC or
Membership Committee. Additionally, the Audit Committee of CFE's public parent company is
already subject to Exchange Act Rule I OA-3(B)(1)(ii)(A) through exchange listing requirements.

Finally, it would also not be sufficient justification for proposed Regulation 1.3(C)(l)(v)
that it only applies to a subset of a DCM's public directors and that a DCM may also have public
directors that do not satisfy the proposed requirement. CFE is a small DCM with a five-person
Board of Directors in which all of its public directors serve on its ROC. Accordingly, for a small
DCM like CFE, the practical effect of the proposed requirement is that it would apply to all of
CFE's public directors.

For all of these reasons, CFE submits that the CFTC should rely on proposed Regulation
1.3(CXI)(iv) to address the underlying issue that is sought to be addressed by both proposed
Regulation 1.3(C)(1)(iv) and proposed Regulation 1.3(C)(1)(v) and should not adopt proposed
Regulation 1.3(C)(l)(v). If despite these reasons the CFTC still intends to proceed to adopt
proposed Regulation 1.3(C)(1)(v), the proposed requirement needs at a minimum to further define
the types of compensatory fees that are intended to be covered by the proposed requirement like
the SEC did in adopting Exchange Act Rule 10A-3(B)(1)(ii)(A). Among other things, Exchange
Act Rule 10A-3 includes paragraph (e)(8) which provides that:

The term indirect acceptance by a member of an audit committee of any consulting,

advisory or other compensatory fee includes acceptance of such a fee by a spouse, a
minor child or stepchild or a child or stepchild sharing a home with the member or by an
entity in which such member is a partner, member, an offlcer such as a managing director
occupying a comparable position or executive officer, or occupies a similar position
(except limited partners, non-managing members and those occupying similar positions
who, in each case, have no active role in providing services to the entity) and which
provides accounting, consulting, legal, investment banking or financial advisory services
to the issuer or any subsidiary of the issuer.

Additionally, the carve-out in proposed Regulation 1.3(C)(1)(v) for payments received in the
Mr. David Stawick
Page 4 of 5

capacity of a committee member or director of the DCM should be extended to payments

received as a committee member or director of the DCM's affiliates consistent with proposed
Regulation 1.3(C)(3) which provides that a public director of a DCM may also serve as a public
director of a DCM afliliate if the individual otherwise meets the public director qualification
requirements.

However, CFE believes that the best course of action is for the CFTC to simply not adopt
proposed Regulation 1.3(C)(1 Xv) in any form.

The CFTC Should Clari that the Pro osed Re uirement that a ROC Review All
Re ulato Pro o als Prior to Im lementation Is Directed to Re late Pro sais that
Have a Si ificant Re ulato Im act

CFE requests that the CFTC clarify its proposed requirement that a DCM ROC review all
regulatory proposals prior to implementation and advise the DCM's Board of Directors as to
whether and how such changes may impact regulation. This proposed requirement is set forth in
proposed Regulation 38.250(b)(1)(ii)(E) and is substantially similar to a current provision under
Subsection (bX3XiIXG) of the acceptable practices for the DCM core principle relating to
conflicts of interest. The current provision under the acceptable practices is that a ROC shall
review regulatory proposals and advise the Board of Directors as to whether and how such
changes may impact regulation. The only difference in the two provisions is the application of
the proposed requirement to all regulatory proposals instead of just to regulatory proposals and
the inclusion in the proposed requirement of a stipulation that the review by the ROC occur prior
to implementation of the proposal.

In light of the insertion word "all" in the proposed requirement

of the under proposed
Regulation 38.250(b)(1)(ii)(E), CFE is concerned that it is possible that the proposed requirement
could potentially be construed to encompass day-to-day, routine regulatory operations, notices,
circulars, and rule amendments. CFE believes that such an interpretation would be cumbersome
and ultimately slow down and hinder the timeliness and effectiveness of the regulatory process,
especially when coupled with a requirement that all regulatory proposals be reviewed by the ROC
prior to implementation. CFE also believes that such an interpretation would be inconsistent with
the stated approach of the CFTC in the CFTC release that originally adopted the acceptable
practices applicable to ROCs (CFTC Release RIN 3038-AC28, 72 FR 6936, February 14, 2007)).
In that adopting release, the CFTC repeated from the CFTC's proposing release for the acceptable
practices (CFTC Release RIN 3038-AC28, 71 FR 38740 (July 7, 2006)) that the purpose of the
substantially similar provision under the acceptable practices was that ROCs should be given the
opportunity to review, and, if they wish, present formal opinions to management and the Board of
Directors on any proposed rule or programmatic changes originating outside of the ROCs, but
which they or their Chief Regulatory Officers believe may have a significant regulatory impact.
The CFTC also made clear in that adopting release that ROCs are oversight bodies and are not
expected to perform managerial responsibilities or direct compliance work. CFE agrees with
these clarifying statements and requests that the CFTC clarify that they are applicable to proposed
Regulation 38.250(b)(1)(ii)(E) as well so that it is clear that the types of regulatory proposals that
a ROC is required to review prior to implementation are those with a significant regulatory
impact.

CFE A ees that a Board of Directors Should Not Be Re uired to Use Exte al
Facilitators for Performance Reviews

Proposed Regulation 40.9(b)(5) proposes to require that a DCM Board of Directors

Mr. David Stawick
Page 5 of 5

review its performance and that of its individual members annually. Proposed Regulation
40.9(b)(5) also provides that a DCM Board of Directors should consider periodically using
external facilitators for such reviews. CFE agrees with the approach taken by the CFTC in this
provision of not requiring a DCM Board to use an external facilitator and of providing instead
that the Board consider whether or not to periodically do so. A Board may determine after due
consideration that use of an external facilitator is not necessary and thus should not be required to
use one. Although proposed Regulation 40.9(b)(5) does not by its literal meaning require use of
an external facilitator, CFE wishes to make clear its understanding that the provision should not
be read or interpreted as a de facto requirement that a Board periodically use an external
facilitator or as an expectation that a Board will need to do so.

CFE is available to provide any further input desired by the CFTC regarding these issues
and to work cooperatively with the CFTC to address them. Please contact Arthur Reinstein in our
Legal Division at (312) 786-7570 if you have any questions regarding our comments.

Edward T. Tilly
Chairman of the Board
CBOE Futures Exchange, LLC