[Federal Register: January 25, 2008 (Volume 73, Number 17)]
[Proposed Rules]
[Page 4499-4502]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25ja08-19]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 3 and 30
RIN 3038-AC26
Exemption From Registration for Certain Firms With Regulation
30.10 Relief
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rules.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
proposing to amend the regulations regarding the registration of
certain firms located outside the U.S. that are engaged in commodity
interest activities with respect to trading on U.S. designated contract
markets (``DCMs'') and U.S. derivative transaction execution facilities
(``DTEFs'').\1\ The amended regulation would codify past actions of the
Commission's staff permitting certain foreign firms that have confirmed
relief from registration as futures commission merchants (``FCMs'') in
accordance with the regulations to introduce to registered FCMs certain
U.S. customers in connection with trading U.S. DCM and DTEF listed
futures and commodity options without having to register as an
introducing broker pursuant to section 4d of the Commodity Exchange Act
(``Act''). The Commission also is proposing to revoke the regulations
regarding quarterly reporting requirements for foreign futures and
foreign options transactions.
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\1\ Commission regulations referred to herein are found at 17
CFR Ch. I (2007). References to trading on U.S. DCMs or DTEFs shall
include trading that is subject to the rules of such entities as
well.
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DATES: Comments must be received on or before February 25, 2008.
ADDRESSES: Comments may be submitted, identified by RIN 3038-AC26, by
any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: secretary@cftc.gov. Include ``Exemption from
Registration for Certain Firms with Regulation 30.10 Relief'' in the
subject line of the message.
Fax: 202/418-5521.
Mail or Courier: Send to David Stawick, Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
St., NW., Washington, DC 20581.
All comments received will be posted without change to http://www.cftc.gov
, including any personal information provided.
FOR FURTHER INFORMATION CONTACT: Andrew V. Chapin, Special Counsel, at
(202) 418-5465, Division of Clearing and Intermediary Oversight,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581. Electronic mail: achapin@cftc.gov.
SUPPLEMENTARY INFORMATION:
I. Background Information
A. Registration Requirements for Commodity Interest Activities on U.S.
Markets
Part 3 of the Commission's regulations governs the registration of
intermediaries engaged in the offer and sale of, and providing advice
concerning, futures and commodity options traded on U.S. markets,
including both DCMs and DTEFs. In particular, Regulation 3.10 sets
forth the manner in which FCMs, introducing brokers (``IBs''),
commodity trading advisors (``CTAs''), commodity pool operators
(``CPOs'') and leverage transaction merchants must apply for
registration with the Commission. Regulation 3.10(c) also provides an
exemption from registration for certain persons. For example,
Regulation 3.10(c)(1) provides an exemption from registration as an FCM
for any person trading solely for proprietary accounts, as defined in
Regulation 1.3(y).
The Commission recently adopted amendments to Regulation 3.10(c) to
codify the Commission's longstanding policy towards certain foreign
intermediaries, known as foreign brokers.\2\ New Regulation 3.10(c)(2)
provides an exemption from registration as an FCM to any foreign broker
that limits its customers to persons located outside the U.S. and
submits transactions executed on U.S. exchanges for clearing on an
omnibus basis through a registered FCM. The Commission also promulgated
Regulation 3.10(c)(3) to provide an exemption from registration to any
foreign person engaged in the activity of an introducing broker,
commodity pool operator or commodity trading advisor solely on behalf
of customers located outside the U.S., provided that all commodity
interest transactions are submitted for clearing to a registered
FCM.\3\
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\2\ 72 FR 63976 (November 14, 2007).
\3\ Id.
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B. Part 30 of the Commission's Regulations
In 1987, the Commission adopted a new Part 30 of its regulations to
govern the offer and sale to U.S. persons of futures and option
contracts entered into on or subject to the rules of a foreign board of
trade.\4\ These regulations were promulgated pursuant to Sections
2(a)(1)(A), 4(b) and 4c of the Act, which vest the Commission with
exclusive jurisdiction over the offer and sale, in the U.S., of futures
and commodity option contracts traded on or subject to the rules of a
board of trade, exchange or market located outside of the U.S.
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\4\ 52 FR 28980 (August 5, 1987).
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Part 30 sets forth regulations governing foreign futures and
foreign option transactions executed on behalf of customers located in
the U.S., referred to in the regulations as foreign futures or foreign
options customers.\5\ For example, Regulation 30.4 requires any person
engaged in the activities that are described in the regulation to
register with the Commission as an FCM, IB, CPO or CTA, respectively,
unless such person claims relief from registration under Part 30. The
activities described in Regulation 30.4 essentially are similar to
those of an FCM, IB, CPO or CTA defined in the Act, except that the
transactions that the person intermediates are conducted on or subject
to the rules of a foreign board of trade. The transactions that are
subject to regulation and require registration under Part 30 include
the solicitation or acceptance of orders for trading any foreign
futures or foreign option contract and acceptance of money, securities
or property to margin, guarantee or secure any foreign futures or
foreign option trades or contracts.\6\
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\5\ Regulations 30.1(a), (b) and (c), define the terms ``foreign
futures,'' ``foreign options,'' and ``foreign futures or foreign
options customer,'' respectively.
\6\ See Regulation 30.4.
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Under Part 30, certain persons located outside the U.S. may obtain
an exemption from registration and certain other requirements. For
example, under Regulation 30.10 and Appendix A thereto, the Commission
may exempt a foreign firm that solicits or accepts orders (and accepts
money, securities or property to margin the trades made thereto) from
customers located in the U.S. from compliance with certain
[[Page 4500]]
Commission rules, including those rules pertaining to registration,
provided that a comparable regulatory system exists in the firm's home
country and that certain safeguards are in place to protect U.S.
investors, including an information-sharing arrangement between the
Commission and the firm's home country regulator.\7\ Relief from
registration pursuant to Regulation 30.10 does not extend to any
activities related to acting as an intermediary with respect to
trading, directly or indirectly, on any U.S. exchanges.
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\7\ See Appendix A to Part 30; 62 FR 47792 (September 11, 1997).
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C. Interpretation of the Rule 30.10 Exemption
The Division of Clearing and Intermediary Oversight (``Division'')
has issued a series of no-action letters that permit, in limited
circumstances, a foreign firm exempt from FCM registration pursuant to
Regulation 30.10 (``Regulation 30.10 firm''), to intermediate
transactions executed on U.S. exchanges on behalf of U.S. customers.
Specifically, the Division confirmed that it would not recommend that
the Commission commence any enforcement action against certain FCMs and
affiliated Regulation 30.10 firms if such unregistered affiliates
introduced certain sophisticated U.S. customers to a registered FCM for
the purpose of trading on U.S. designated contract markets.\8\ The
relief in each no-action letter issued by the Division was predicated
upon the relevant FCM's acknowledgment that it would be jointly and
severally liable for any violations of the Act or the Commission's
regulations committed by the foreign affiliate in connection with those
activities, even if the FCM did not submit the trade for clearing. In
addition, the no-action relief required that all U.S. customers be
introduced on a fully-disclosed basis, and that any non-U.S. affiliate
would not be permitted either to solicit any U.S. customer or handle
any U.S. customer funds for trading on U.S. markets.
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\8\ See, e.g., CFTC Letter 07-23, [Current Transfer Binder]
Comm. Fut. L. Rep. (CCH) ]------ (November 23, 2007).
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In granting the above no-action relief, the Division recognized
that a U.S. institutional customer may achieve greater operational and
economic efficiencies by eliminating the need to use multiple order
entry systems to engage in transactions in both U.S. and non-U.S.
markets. In addition, the Division acknowledged that, by consolidating
orders into a single execution system, an intermediating FCM may
mitigate more effectively the increased systemic and liquidity risks
associated with such activities.
Given that the no-action relief provided by the Division applies
only to the recipients of each no-action letter, the Commission
believes that it may be appropriate to provide relief for all FCMs and
their affiliates that provide brokerage services to U.S. institutional
investors in like cirumstances. Like those FCMs addressed by the
Division's no-action relief, these FCMs also have institutional U.S.
customers that trade globally throughout the 24-hour trading day, and
who currently must use multiple order entry systems to execute
transactions both domestically and abroad. Accordingly, the Commission
has determined to propose to amend Regulation 3.10(c) to address the
issue without the need for separate no-action letters, and invites
public comment on all aspects of the proposed rule.
II. Proposed Regulations
The Commission proposes to codify the staff interpretations
described in Section I.C above. Specifically, the Commission proposes
to promulgate Regulation 3.10(c)(4) to exempt from registration as an
IB a firm located outside the U.S. that introduces certain
sophisticated U.S. customers to a registered FCM for the purpose of
trading on a DCM or DTEF. The exemption would be limited to those
foreign firms that are affiliated with an FCM and have obtained
confirmation of relief pursuant to the terms and conditions of an order
issued by the Commission pursuant to Regulation 30.10. Any account
introduced pursuant to this exemption must be introduced on a fully-
disclosed basis in accordance with Regulation 1.57 and the foreign firm
would not be permitted to solicit any U.S. customers nor handle any
U.S. customer funds for trading on U.S. markets. The Commission has
proposed to limit the exemption in Regulation 3.10(c)(4) to Regulation
30.10 firms because Regulation 30.10 relief is predicated on the
existence of a comparable regulatory program in the jurisdiction in
which the affiliate is located, and the presence of certain safeguards
to protect U.S. investors, including standards for fitness and an
information-sharing arrangement between the Commission and the
authorities in the affiliate's home country.
The Commission notes that the Division's existing no-action letters
provide exemptive relief to foreign firms acting on behalf of certain
``institutional'' and ``commercial'' entities. In search of a workable
universal standard, the Commission has proposed to structure the
exemption so as to limit the offer and sale of U.S. contracts to
institutional customers, as defined in Regulation 1.3(g). The
Commission also proposes Regulation 3.10(c)(6) that, for the purposes
of this regulation, the term ``affiliate'' means any person that: (i)
Owns 50 percent or more of the FCM; (ii) is owned 50 percent or more by
the FCM; or (iii) is owned 50 percent or more by a third person that
also owns 50 percent or more of the FCM.\9\
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\9\ See, e.g., CFTC Staff Letter 07-06, [Current Transfer
Binder], Comm. Fut. L. Rep. (CCH) ] ---------- at ----------, n.3
(May 24, 2007). CFTC Letter 07-06 is one of a series of letters
issued by the Division of Market Oversight that permits members of a
particular foreign exchange located in the U.S. to connect directly
to the foreign exchange's order and trade matching system without
the exchange having to register as a DCM or DTEF. For the purposes
of the no-action relief, the term ``members'' includes
``affiliates'' as defined consistent with this proposal. The
Commission notes that, as a condition of the no-action relief,
members connected directly to the foreign exchange are ultimately
responsible for the conduct of any affiliate.
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Consistent with the terms and conditions of relief established by
the Division in the no-action process, the Commission also proposes to
predicate the availability of the exemption upon the relevant FCM's
acknowledgment, to be filed with NFA pursuant to proposed Regulation
3.10(c)(4)(iii), that it would be jointly and severally liable for any
violations of the Act or the Commission's regulations committed by the
foreign affiliate in connection with those activities, even if the FCM
ultimately did not submit the trade for clearing. As such, the
Commission has proposed to limit the exemption to firms affiliated with
an FCM so that the FCM may maintain the appropriate level of oversight
to ensure that the foreign affiliate complies with the conditions for
relief as set forth in the proposed regulation.
Proposed regulation 3.10(c)(4), in keeping with the no-action
letters issued to date, prohibits the firm wishing to take advantage of
the IB registration exemption from soliciting customer orders for
trading on U.S. exchanges. This registration exemption only is intended
to be a convenience for institutional customers so that they need not
use multiple order entry processes to transact related business. For
example, an institutional customer seeking to establish a position on
the London Metal Exchange (LME) may desire to hedge that position with
contracts listed on the New York Mercantile Exchange (NYMEX). Absent
relief, a Regulation 30.10 firm executing and/or submitting for
clearing the LME transaction may not participate in the
[[Page 4501]]
acceptance of orders for any NYMEX contracts. Pursuant to the proposed
regulation, a Regulation 30.10 firm may introduce the institutional
customer to a registered FCM for the purposes of submitting the NYMEX
transaction for clearing, provided that the institutional customer
initiates the transaction.
The exemption from registration also is not intended to be used by
firms as a promotional vehicle. The proposed regulation would not
permit a Regulation 30.10 firm to solicit new customers based on its
ability to access U.S. markets. As stated above, the Commission is
proposing to create a limited-purpose exemption from IB registration so
that existing institutional customers may reduce transactional costs
associated with the use of multiple order entry processes.
The Commission also notes that the proposed amendments to
Regulation 3.10(c) are intended to provide a limited-purpose
registration exemption available only to those foreign firms engaging
in bona fide global futures brokerage activities on behalf of
institutional customers located in the U.S. Absent such relief, these
firms would be required to register with the Commission in the
appropriate capacity, because the applicable Regulation 30.10 relief
does not extend to brokerage activities undertaken, directly or
indirectly, on U.S. exchanges on behalf of any U.S. person. A foreign
firm not engaged in bona fide global futures brokerage activities on
behalf of institutional customers, e.g., a firm limiting its brokerage
activities on behalf of U.S. customers to trading solely on U.S.
exchanges, may not rely on the proposed exemptions to circumvent the IB
registration requirement. An FCM submitting the acknowledgment set
forth in proposed Regulation 3.10(c)(4)(iii) could be held liable for
any violations of a foreign affiliate in an attempt to circumvent the
Commission's registration requirements in this regard.
The Commission further notes that proposed Regulation 3.10(c)(4)
would replace prior staff letters as the sole source of authorization
for those unregistered foreign firms that introduce to an FCM U.S.
customers for the purpose of trading on U.S. markets.\10\ A firm that
fails to comply with any of the terms or conditions of the applicable
Regulation 30.10 order, including a failure to comply with any element
of the regulatory program on which relief was predicated, would make
the firm ineligible for relief set forth in proposed Regulation
3.10(c)(4).
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\10\ The following letters for no-action relief will be
superceded if the proposed rules are adopted: CFTC Letters 03-28,
04-09, 04-14, 05-06, 07-05, 07-08, 07-16, 07-17, 07-20 and 07-23.
The Commission seeks comments from any party adversely affected by
the determination to rescind these CFTC Letters.
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In each of the existing no-action letters on this subject cited in
the footnote, the Division considered the size of the FCM and its
relationship with its particular non-U.S. affiliate prior to
determining that relief would not be contrary to the public interest.
More specifically, the Division determined that the financial strength
and organizational structure of each FCM provided a reasonable basis
upon which to rely that it could honor the acknowledgement of joint and
several liability. Accordingly, the Commission solicits comments as to
whether it would be appropriate to establish minimum capital or other
standards for the affiliated FCM as a condition for exemptive
relief.\11\
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\11\ Compare Regulation 30.12, 17 CFR 30.12 (Direct Foreign
Order Transmittal). Pursuant to Regulation 30.12(b)(1)(i), an FCM
must possess, for example, $20,000,000 in adjusted net capital in
order for one of its ``authorized customers'' to engage in direct
foreign order transmittal with an unregistered foreign futures and
options broker for the purpose of trading foreign futures or options
through the FCM's customer omnibus account.
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The Commission also solicits comment as to whether the proposed
limited-purpose registration exemption should be extended to otherwise
qualified foreign persons that advise institutional customers for the
purposes of trading on U.S. markets. This relief would be available,
for example, to the foreign affiliate of an FCM that provides trading
advice tailored to the particular circumstances of U.S. customers that
meet the institutional customer standards regarding the trading of both
domestic and foreign futures as part of an overall global strategy.
The Commission also is proposing to revoke Regulation 30.8.
Regulation 30.8 requires each FCM to provide NFA with a quarterly
report containing data for the total volume of foreign futures and
options contracts effected on foreign boards of trade. From its
experience, the Commission recognizes that FCMs are engaging in both
domestic and foreign futures and options transactions on behalf of
customers located in the U.S., and therefore are subject to other
extensive reporting and recordkeeping requirements set forth in Part 1
of its regulations. As such, the Commission believes that the reporting
requirement set forth in Regulation 30.8 is overly burdensome and no
longer necessary. The Commission solicits comments as to whether
remaining reporting requirements are sufficient for FCMs engaged in
foreign futures and options transactions on behalf of customers located
in the U.S.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611,
requires that agencies, in proposing regulations, consider the impact
of those regulations on small businesses. The Commission has previously
established certain definitions of ``small entities'' to be used by the
Commission in evaluating the impact of its regulations on such entities
in accordance with the RFA.\12\ The Commission previously has
determined that registered FCMs are not small entities for the purpose
of the RFA because each FCM has an underlying fiduciary relationship
with its customers, regardless of the size of the FCM.\13\ The
Commission notes that the foreign persons affected by the proposed
changes to the Commission's regulations would be registered as FCMs if
not for the exemption provided therein and, as such, would maintain a
fiduciary relationship with customers similar to the relationship
maintained by each registered FCM. Therefore, the Acting Chairman, on
behalf of the Commission, hereby certifies, pursuant to 5 U.S.C.
605(b), that these proposed regulations will not have a significant
economic impact on a substantial number of small entities. Nonetheless,
the Commission specifically requests comment on the impact these
proposed rules may have on small entities.
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\12\ 47 FR 18618-18621 (April 30, 1982).
\13\ 47 FR 18619-18620.
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') (44 U.S.C. 3501 et
seq. (Supp. I 1995)) imposes certain requirements on federal agencies
(including the Commission) in connection with their conducting or
sponsoring any collection of information as defined by the PRA.
While the proposed rule discussed herein has no burden, the group
of rules (3038-0023, Rules, Regulations and Forms for Domestic and
Foreign Futures and Options Related to Registration with the
Commission) of which it is a part has the following burden:
Average Burden Hours per Response: 18.11.
Number of Respondents: 76,750.
Frequency of Response: Annually and on occasion.
The Office of Management and Budget (``OMB'') approved the
collection of information associated with this group of rules on August
17, 2004. Copies of the OMB-approved information collection submission
are available from
[[Page 4502]]
the CFTC Clearance Officer, 1155 21st Street, NW., Washington, DC
20581, (202) 418-5160.
C. Costs and Benefits of the Proposed Rules
Section 15(a) of the Act requires the Commission to consider the
costs and benefits of its actions before issuing new regulations under
the Act. By its terms, Section 15(a) does not require the Commission to
quantify the costs and benefits of new regulations or to determine
whether the benefits of the proposed regulations outweigh their costs.
Rather, Section 15(a) requires the Commission to ``consider the cost
and benefits'' of the subject regulations.
Section 15(a) further specifies that the costs and benefits of the
proposed regulations shall be evaluated in light of five broad areas of
market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
may, in its discretion, give greater weight to any one of the five
enumerated areas of concern and may, in its discretion, determine that,
notwithstanding its costs, a particular regulation is necessary or
appropriate to protect the public interest or to effectuate any of the
provisions or to accomplish any of the purposes of the Act.
The proposed regulations should foster the protection of market
participants and the public by providing greater legal certainty to the
commodity interest activities of persons located outside the U.S. As
the activity set forth in the proposed regulations presently is
permitted under staff interpretation and no-action, the proposed
regulations should have no material impact from the standpoint of
imposing costs or creating benefits, on efficiency, competitiveness and
financial integrity of financial markets, price discovery, sound risk
management practices, or any other public interest considerations.
List of Subjects
17 CFR Part 3
Definitions, Foreign futures, Consumer protection, Foreign options,
Registration requirements.
17 CFR Part 30
Definitions, Foreign futures, Consumer protection, Foreign options,
Registration requirements.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, sections
2(a)(1), 4(b), 4c and 8a thereof, 7 U.S.C. 2, 6(b), 6c and 12a (1982),
and pursuant to the authority contained in 5 U.S.C. 552 and 552b
(1982), the Commission hereby proposes to amend Chapter I of Title 17
of the Code of Federal Regulations as follows:
PART 3--REGISTRATION
1. The authority citation for part 3 continues to read as follows:
Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b,
13c, 16a, 18, 19, 21, 23, unless otherwise noted.
2. Section 3.10 is amended by adding paragraph (c)(4) to read as
follows:
Sec. 3.10 Registration of futures commission merchants, introducing
brokers, commodity trading advisors, commodity pool operators and
leverage transaction merchants.
* * * * *
(c) Exemption from registration for certain persons.
* * * * *
(4) A person located outside the United States, its territories or
possessions that is exempt from registration as a futures commission
merchant in accordance with Sec. 30.10 of this chapter is not required
to register as an introducing broker in accordance with section 4d of
the Act if:
(i) Such a person is affiliated with a futures commission merchant
registered in accordance with section 4d of the Act;
(ii) Such a person introduces, on a fully-disclosed basis in
accordance with Sec. 1.57 of this chapter, any institutional customer,
as defined in Sec. 1.3(g) of this chapter, to a registered futures
commission merchant for the purpose of trading on a designated contract
market or derivatives execution facility;
(iii) Prior to a person located outside the United States, its
territories or possessions, that is exempt from registration as a
futures commission merchant pursuant to Sec. 30.10 of this chapter,
engaging in the introducing activities described in this paragraph, the
affiliated futures commission merchant has filed with the National
Futures Association (ATTN: Vice President, Compliance) an
acknowledgement that it will be jointly and severally liable for any
violations of the Act or the Commission's regulations committed by such
person in connection with those introducing activities, whether or not
the affiliated futures commission merchant submits for clearing any
trades resulting from those introducing activities; and
(iv) Such person does not solicit any person located in the United
States, its territories or possessions for trading on a designated
contract market or derivatives transaction execution facility, nor does
such person handle the customer funds of any person located in the
United States, its territories or possessions for the purpose of
trading on any designated contract market or derivatives transaction
execution facility.
(v) For the purposes of this paragraph, a person shall be
affiliated with a futures commission merchant if such a person:
(A) Owns 50 percent or more of the futures commission merchant;
(B) Is owned 50 percent or more by the futures commission merchant;
or
(C) Is owned 50 percent or more by a third person that also owns 50
percent or more of the futures commission merchant.
* * * * *
PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS
3. The authority citation for part 30 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 6, 6c, and 12a, unless otherwise
noted.
Sec. 30.8 [Removed and reserved]
4. Section 30.8 is removed and reserved:
Dated: January 15, 2008.
By the Commission.
David Stawick,
Secretary of the Commission.
[FR Doc. E8-979 Filed 1-24-08; 8:45 am]
BILLING CODE 6351-01-P