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June 04, 1997

Via Facsimile and Regular Mail
Ms. Jean A. Webb
Secretariat
Commodity Futures Trading Commission
Three Lafayette Centre
Washington, D.C. 20581

RE: The Commodity Futures Trading Commission's Notice of Interpretation and Approval Order relating to bunched orders and account identification

Dear Ms. Webb:

National Futures Association ("NFA") respectfully submits the following comments in response to a release issued by the Commodity Futures Trading Commission ("Commission or CFTC") on May 9, 1997. That release requested comments on the Commission's notice of interpretation and approval order relating to bunched orders and account identification. That release also expressly withdraws proposed Regulation 1.35 (a-1)(5) , which required, in part, that if certain entities bunch orders with customer orders then the customer must receive a better or equal fill price. NFA submits this letter in strong support of this notice of interpretation and approval order.

CFTC Regulation 1.35 requires that each futures commission merchant ("FCM") receiving a customer order immediately prepare a written record of the order which includes an appropriate account identification. The purpose of this regulation is to prevent various forms of customer abuse, such as the fraudulent allocation of trades, by providing an adequate audit trail which allows customer orders to be tracked at every step of the order processing system. Since this regulation was originally adopted, however, there have been dramatic changes in the way business is done. With the explosive growth of the managed funds business and the increasing use of "give-up" agreements, it is not at all uncommon for some commodity trading advisors ("CTA") to place bunched orders for hundreds of accounts on markets around the world, with orders executed by one or more FCMs and cleared by other FCMs. How the basic requirements of CFTC Regulation 1.35 apply to bunched orders for multiple accounts has been the source of considerable difficulty and confusion.

With respect to bunched orders, the Commission has previously interpreted Regulation 1.35 to require that, at or before the time the order is placed, the FCM must be provided with information which identifies the accounts included in the bunched order and which specifies the number of contracts to be allotted to each account. In most instances, a CTA can verbally provide all of that information contemporaneously with the placement of the order. Some of the time, however, this is not practical. Verbal transmission of numerous account numbers and allocation information could easily result in significant price slippage in filling bunched market orders. Most CTAs can deal with this problem by pre-filing with the FCM standing instructions which contain all of the necessary information.

For a limited number of larger and more sophisticated CTAs, however, pre filing standing instructions is not practical either. For these CTAs, although their basic allocation methodology does not change, the specific allocation instructions produced by the methodology may change on a daily basis. For example, a large CTA with a dynamic trading program may regularly change its order size based upon market volatility and historical price data. Certainly, if a CTA changes its order size, then the precise number of contracts allocated to each account within the CTA's trading program will also change. Other factors could cause regular changes to a CTA's order size and/or allocation breakdowns such as the number of accounts which open and close and any additions and withdrawals made in existing accounts. In the above instances, although the specific application of a CTA's allocation methodology to the universe of its accounts may cause allocation adjustments, the allocation methodology itself remains constant. Though these CTAs could provide allocation information to their FCMs in advance of each order, this information could disclose their trading strategies, which they are obviously reluctant to do.

NFA staff has discussed the aforementioned difficulties experienced by certain CTAs with a Special Committee which included representatives of the FCM, CTA and exchange communities. In addition, we issued a notice requesting Member comments and discussed the issues with the FCM, IB and CPO/CTA Advisory Committees.

NFA's Interpretive Notice

NFA's proposed Interpretive Notice to Compliance Rule 2-10 Relating to the Allocation of Block Orders for Multiple Accounts discusses two alternative methods to the verbal filing of account identification and allocation information contemporaneously with order placement. Pursuant to the first alternative method, a CTA may provide its FCM with a pre filed set of instructions identifying the accounts included in bunched orders and the allocation of contracts to accounts included in executed bunched orders. Pursuant to the second alternative, under certain specified and stringent circumstances, a CTA may send its FCM, by facsimile or other form of electronic transmission, instructions relating to account identification and the allocation of contracts included in a bunched order contemporaneously with the placement of an order. NFA's proposed Interpretive Notice also makes clear that pre filed or contemporaneous instructions must include a methodology to allocate split and partial fills and it clarifies the application of these procedures to "give-up" arrangements.

NFA believes that the order execution procedures set forth in its proposed Interpretive Notice are consistent with the requirements of Commission Regulation 1.35 and, at the same time, provide needed guidance to NFA Member firms relating to account identification and allocation procedures. Therefore, NFA strongly encourages the Commission to adopt NFA's proposed Interpretive Notice to Compliance Rule 2-10 Relating to the Allocation of Block Orders for Multiple Accounts.

Commission Guidance

In its Federal Register release, the Commission also sets forth specific guidance relating to the handling of bunched orders by Commission registrants (i.e., floor brokers), who are neither NFA Members nor under the supervision of an NFA Member. After reviewing this guidance, NFA believes that comparable regulatory requirements exist, relating to Regulation 1.35's account identification requirements, for both NFA Member firms and floor brokers receiving customer orders. Additionally, NFA is prepared to accept pre filed allocation instructions from CTAs seeking to comply with the Commission guidance.

In conclusion, NFA again expresses strong support for the Commission's notice of interpretation and approval order relating to bunched orders and account identification. At this time, NFA also wishes to recognize the cooperative effort of the Commission in addressing these issues. As always, NFA encourages the Commission to give serious consideration to the industry's comments regarding both NFA's proposed Interpretive Notice and the Commission guidance set forth in the approval order.

Sincerely,

Daniel J. Roth
General Counsel

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