[Federal Register: August 23, 2007 (Volume 72, Number 163)]
[Notices]
[Page 48262-48264]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23au07-44]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Petition of the Chicago Mercantile Exchange Inc. for Exemptive
Relief, Pursuant to Section 4(c) of the Commodity Exchange Act, From
the Requirement That the China Foreign Exchange Trade System and
National Interbank Funding Center or Its Members Register as Futures
Commission Merchants
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed order and request for comment.
-----------------------------------------------------------------------
SUMMARY: The Chicago Mercantile Exchange Inc. (CME) has petitioned the
Commodity Futures Trading Commission (Commission) for exemptive relief,
pursuant to section 4(c) of the Commodity Exchange Act (Act or CEA),
from the requirement that the China Foreign Exchange Trade System and
National Interbank Funding Center (CFETS) or its members register as
futures commission merchants (FCMs). The Commission seeks comment on
CME's petition. Copies of the petition are available for inspection at
the Office of the Secretariat by mail at the address listed below, by
telephoning (202) 418-5100, or on the Commission's Web site (http://www.cftc.gov
).
DATES: Comments must be received on or before September 24, 2007.
ADDRESSES: Comments should be sent to David A. Stawick, Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581. Comments may be sent by facsimile
transmission to (202) 418-5521, or by e-mail to secretary@cftc.gov.
Reference should be made to ``CME Petition for Exemption from FCM
Registration on Behalf of CFETS.'' Comments may also be submitted by
connecting to the Federal eRulemaking Portal at http://www.regulations.gov
and following the comment submission instructions.
Comments will be published on the Commission's Web site.
FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate
Director, (202) 418-5092, rwasserman@cftc.gov, Division of Clearing and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
By petition dated July 27, 2007 (Petition), CME applied for an
exemption, pursuant to section 4(c) of the Act, 7 U.S.C. 6(c), from the
requirement (pursuant to section 4d of the Act, 7 U.S.C. 6d) that CFETS
or its members register as FCMs.
According to the Petition, CFETS is a non-profit affiliate of the
People's Bank of China (PBC). CFETS operates an electronic trading
system with respect to trading in the interbank foreign exchange
market, Renminbi (RMB) lending, and trading on the bond market in
China. The foreign currencies traded against the RMB through CFETS
include the U.S. dollar, Japanese yen, Euro, and Hong Kong dollar, and
CFETS provides trading services for foreign exchange spot, forwards,
and swaps. CFETS also operates China's interbank RMB money
[[Page 48263]]
market and facilitates the trading of government securities and repo
transactions. CFETS has over 270 members engaged in foreign exchange
trading, including all of the major Chinese banks. CFETS members also
include insurance and securities companies, fund management companies,
and foreign financial institutions.
CME and CFETS have entered into an agreement pursuant to which
CFETS will become a ``super-clearing'' member of CME authorized to
clear foreign currency and interest rate futures transactions on behalf
of CFETS members and their customers domiciled in China. Although CFETS
members include non-Chinese financial institutions, only those of its
members (and their customers) that are domiciled in China would be
permitted to clear CME contracts through CFETS under the agreement.
Pursuant to the agreement, CME will, among other things, provide
consulting services and technical assistance to CFETS. In addition, CME
and CFETS will cooperate to complete both a comprehensive training
program and a marketing program. Under the arrangement, CFETS'
compliance with CME operational procedures will not be enforced via
regulatory processes applicable to other clearing members, but instead
under the terms of the agreement.
As a clearing member of CME, CFETS would fall within the FCM
definition of section 1a(20) of the Act, 7 U.S.C. 1a(20), in that it
would ``accept[] orders for the purchase or sale of [a] commodity for
future delivery on or subject to the rules of [a] contract market * * *
and * * * in or in connection with such * * * acceptance of orders,
[would] accept[] * * * money, securities, or property * * * to margin,
guarantee, or secure * * * trades or contracts that * * * result
therefrom.'' While the Commission and its predecessor agencies have not
applied the FCM registration requirement to foreign brokers \1\ that
clear through U.S. FCMs, Commission staff have stated that the FCM
registration requirement of Section 4d(a)(1) of the Act, 7 U.S.C.
6d(a)(1), applies to foreign brokers that clear directly through a
U.S.-based clearinghouse,\2\ as CFETS will under the proposed
arrangement with CME.
---------------------------------------------------------------------------
\1\ In this context, ``foreign broker'' means any person located
outside the U.S., its territories, or possessions who is engaged in
soliciting or in accepting orders only from persons located outside
the U.S., its territories, or possessions for the purchase or sale
of any commodity interest transaction on or subject to the rules of
any designated contract market or derivatives execution facility and
that, in or in connection with such solicitation or acceptance of
orders, accepts any money, securities, or property (or extends
credit in lieu thereof) to margin, guarantee, or secure any trades
or contracts that result or may result therefrom. See Exemption From
Registration for Certain Foreign Persons, 72 FR 15,637 (Apr. 2,
2007) (proposing to revise and redesignate a definition for the term
``foreign broker'').
\2\ The Commission has recently proposed to codify its
longstanding view that a foreign broker is not required to register
if the foreign broker: (1) Limits its customers to foreign
customers; (2) submits the trades of such foreign customers that are
entered into on U.S. markets for clearing on an omnibus basis
through a registered FCM; and (3) does not solicit or accept orders
from U.S. customers for trading on U.S. markets. See supra note 1;
see also CFTC Staff Letter 89-07, [1987-1990 Transfer Binder] Comm.
Fut. L. Rep. (CCH) ] 24,479 at 36,096-97 (June 22, 1989) (``The
Commission has not required a person located outside the United
States which engages in the conduct described in section 2(a)(1)(A)
of [the Act] for or on behalf of foreign customers through a U.S.
FCM to register as an FCM''). In the proposal, the Commission
specifically noted that, by limiting exemptive relief in the past to
activities conducted ``though a U.S. FCM'' ``staff did not extend
the exemptive relief available to a foreign broker to include the
submission of trades executed for its customer and non-customer
accounts directly to a clearing organization for a U.S. market.''
See 72 FR at 15,638.
---------------------------------------------------------------------------
CME states that, given CFETS' status as an entity that is not
separately capitalized, ``CFETS itself will not be in a position to
provide net capital information to CME. Therefore, CFETS cannot meet
the requirements that would apply if it were required to register as an
FCM.'' \3\ CME further states that, in light of CFETS' existing
business environment, CFETS is currently unable to establish a
capitalized subsidiary in the U.S. that could otherwise meet the
requirements applicable to registered FCMs. Consequently, CME is
seeking an exemption, pursuant to section 4(c) of the Act, 7 U.S.C.
6(c), on behalf of CFETS, from the FCM registration requirement. CME is
also seeking relief from any FCM registration requirement that might
apply to CFETS members.
---------------------------------------------------------------------------
\3\ Petition, at 3.
---------------------------------------------------------------------------
Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), empowers the
Commission to ``promote responsible economic or financial innovation
and fair competition'' by exempting any transaction or class of
transactions, including any person offering or entering into such
transaction, from any of the provisions of the CEA (subject to
exceptions not relevant here) where the Commission determines that the
exemption would be consistent with the public interest.\4\
---------------------------------------------------------------------------
\4\ Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), provides that:
In order to promote responsible economic or financial innovation
and fair competition, the Commission by * * * order, after notice
and opportunity for hearing, may ( * * * on application of any
person, including any board of trade designated or registered as a
contract market * * *) exempt any agreement, contract, or
transaction (or class thereof) that is otherwise subject to
subsection (a) of this section (including any person or class of
persons offering, entering into, rendering advice or rendering other
services with respect to, the agreement, contract, or transaction),
either unconditionally or on stated terms or conditions or for
stated periods * * * from any * * * provision of this chapter
(except subparagraphs (C)(ii) and (D) of section 2(a)(1) of this
title, except that the Commission and the Securities and Exchange
Commission may by rule, regulation, or order jointly exclude any
agreement, contract, or transaction from section 2(a)(1)(D) of this
title), if the Commission determines that the exemption would be
consistent with the public interest.
While Section 4(c)(2) of the Act, 7 U.S.C. 6(c)(2), imposes
additional requirements with respect to any exemption from the
requirements of Section 4(a) of the Act, 7 U.S.C. 6(a), CME is not
seeking such relief.
---------------------------------------------------------------------------
The Petition includes, among other things, the following conditions
that could be included in any order granting an exemption to CFETS
pursuant to section 4(c), Sec. 6(c):
CFETS shall be required to comply with financial
requirements that substitute for those applicable to CME's clearing
members. Specifically, CFETS shall be required to satisfy CME's
security deposit requirement, which is currently a minimum of $500,000.
CFETS shall be required to maintain ``surrogate capital'' \5\ of 8% of
aggregate required customer performance bond, but in any case, no less
than $10 million. All such surrogate capital shall be required to be
held in the form of U.S. dollars or Treasury securities (subject to any
haircuts required by Regulation 1.17) in a CME-controlled account in
the U.S.
---------------------------------------------------------------------------
\5\ If the Commission were to grant CFETS' request for relief,
CFETS would not be required to meet the minimum capital requirements
of Regulation 1.17. See Regulation 1.17, 17 CFR 1.17 (minimum
capital requirements applicable to persons ``registered as a futures
commission merchant''). ``Surrogate capital'' refers to alternative
minimum capital requirements that CME represents that CFETS would be
required to meet that are intended to parallel, in effect, the
minimum capital requirements of Regulation 1.17. These requirements
may be imposed on CFETS as conditions of a Commission order pursuant
to Section 4(c)(1), 6(c)(1).
---------------------------------------------------------------------------
CME shall be required to provide the Commission a monthly
report detailing surrogate capital amounts and calculation (which
report, or portions thereof, would be published on the Commission's Web
site). CME shall be required to provide next-day notice to the
Commission if: (i) Surrogate capital falls below 110% of the
requirement; or (ii) if a customer margin call exceeds excess surrogate
capital on deposit.\6\
[[Page 48264]]
CME shall be required to provide the Commission immediate notice of any
deficiency in surrogate capital.
---------------------------------------------------------------------------
\6\ For example, if CFETS had a surrogate capital requirement of
$10 million, it would be required to maintain surrogate capital of
$11 million (110% of the requirement) in a CME-controlled account in
order to avoid providing the Commission with next-day notice of its
surrogate capital on deposit.
---------------------------------------------------------------------------
CME and CFETS shall be required to provide all large-
trader reporting information at the same time and in the same format
that CFETS would be required to provide if CFETS were registered as an
FCM. CME and CFETS shall be required to act as agent for service of
process regarding trading on CME for both CFETS members and customers
of CFETS members.
CME shall not hold CFETS positions and associated funds in
U.S. customer accounts segregated pursuant to section 4d of the Act, 7
U.S.C. 6d.
CME and CFETS shall be required to maintain records, in
English, in the U.S., sufficient to permit the Commission to confirm
compliance with any provision of any order issued by the Commission.
CME and CFETS shall be required to make such records available to the
Commission in the U.S. within 72 hours of any request.
CME and CFETS shall be required to comply with U.S. anti-
money laundering requirements as determined by the U.S. Treasury.
CME and CFETS shall be required to accept joint and
several liability in any Commission enforcement action relating to
compliance with any order issued by the Commission.
CME and CFETS shall be required to file a report with the
Commission providing statistics and analyzing issues (to be determined)
within 18 months after issuance of any relief.
II. Request for Comments
The Commission requests public comment on any aspect of the
Petition that commenters believe may raise issues under the CEA or
Commission regulations. In particular, the Commission invites comment
regarding: (1) Whether the proposed exemption is consistent with the
requirements for relief set forth in section 4(c) of the Act, 7 U.S.C.
6(c), including whether granting the exemption would be consistent with
the public interest and the purposes of the CEA; (2) whether CME's
representations, as discussed above, if imposed as conditions of an
order pursuant to section 4(c)(1), section 6(c)(1), would provide
adequate safeguards with respect to the U.S. clearing system in light
of CFETS' exemption from the FCM registration requirement; (3) whether
an order granting the request for relief should include requirements
different from or in addition to those discussed above; (4) whether an
order granting the request for relief should exclude any one or more of
the requirements discussed above; (5) any material adverse effects that
granting the petition would have upon other derivatives clearing
organizations, exchanges, or other Commission registrants from a
competitive \7\ or other perspective \8\; and (6) any other issues
relevant to this petition.
---------------------------------------------------------------------------
\7\ As noted above, the Commission may grant an exemption
pursuant to Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), ``[i]n
order to promote responsible economic or financial innovation and
fair competition.'' Section 15(b) of the Act, 7 U.S.C. 19(b),
provides that the ``Commission shall take into consideration the
public interest to be protected by the antitrust laws and endeavor
to take the least anticompetitive means of achieving the objectives
of this chapter, as well as the policies and purposes of this
chapter, in issuing any order * * *.''
\8\ The Commission notes that Section 15(a) of the Act, 7 U.S.C.
19(a), requires that the Commission, before issuing an order,
consider the costs and benefits in light of considerations of
protection of market participants and the public; considerations of
the efficiency, competitiveness, and financial integrity of futures
markets; considerations of price discovery; considerations of sound
risk management practices; and other public interest considerations.
Issued in Washington, DC, on August 8, 2007 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E7-16641 Filed 8-22-07; 8:45 am]
BILLING CODE 6351-01-P