[Federal Register Volume 75, Number 223 (Friday, November 19, 2010)]
[Proposed Rules]
[Pages 70974-70998]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29023]
[[Page 70973]]
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Part II
Commodity Futures Trading Corporation
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17 CFR Part 48
Registration of Foreign Boards of Trade; Proposed Rule
Federal Register / Vol. 75 , No. 223 / Friday, November 19, 2010 /
Proposed Rules
[[Page 70974]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 48
RIN 3038-AD19
Registration of Foreign Boards of Trade
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing rules to implement new statutory provisions enacted by
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection
Act. These proposed rules establish a registration requirement that
applies to foreign boards of trade (FBOT) that wish to provide their
identified members or other participants located in the United States
with direct access to their electronic trading and order matching
systems.
DATES: Comments must be received on or before January 18, 2011. The
Commission is not inclined to grant extensions of this comment period.
ADDRESSES: You may submit comments, identified by RIN number 3038-AD19,
by any of the following methods:
Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
Hand Delivery/Courier: same as mail above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that is exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the established procedures in
CFTC Regulation 145.9.\1\
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\1\ 17 CFR 145.9.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT: Duane C. Andresen, Senior Special
Counsel, (202) 418-5492, [email protected], or David Steinberg,
Special Counsel, (202) 418-5102, [email protected], Division of
Market Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the Dodd-Frank Act).\2\ Title VII
of the Dodd-Frank Act \3\ amended the Commodity Exchange Act (CEA or
the Act) \4\ to establish a comprehensive new regulatory framework for
swaps and security-based swaps. The legislation was enacted to reduce
risk, increase transparency, and promote market integrity within the
financial system by, among other things: (1) Providing for the
registration and comprehensive regulation of swap dealers and major
swap participants; (2) imposing clearing and trade execution
requirements on standardized derivative products; (3) creating robust
recordkeeping and real-time reporting regimes; and (4) enhancing the
Commission's rulemaking and enforcement authorities with respect to,
among others, all registered entities and intermediaries subject to the
Commission's oversight.
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\2\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at http://www.cftc.gov./
LawRegulation/OTCDERIVATIVES/index.htm.
\3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\4\ 7 U.S.C. 1 et seq.
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Section 738 of the Dodd-Frank Act amends Section 4(b) of the CEA to
provide that the Commission may adopt rules and regulations requiring
registration with the Commission for an FBOT that provides the members
of the FBOT or other participants located in the United States with
direct access to the electronic trading and order matching system of
the FBOT, including rules and regulations prescribing procedures and
requirements applicable to the registration of such FBOTs. The
Commission has determined to promulgate rules to implement these
provisions by July 15, 2011.\5\
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\5\ See Section 738 of the Dodd-Frank Act.
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Accordingly, the Commission is proposing to adopt a new part 48 \6\
to its regulations to establish a registration requirement and related
registration procedures and conditions that apply to FBOTs that wish to
provide their members or other participants located in the United
States with direct access to their electronic trading and order
matching systems. The Commission requests comment on all aspects of the
proposed rules, as well as comment on the specific provisions and
issues highlighted in the discussion below.
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\6\ Commission regulations referred to herein are found at 17
CFR Ch. 1.
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II. Relief Granted to Foreign Boards of Trade
Since 1996, FBOT requests to provide direct access to their
electronic trading and order matching systems (trading systems) from
within the U.S. have been addressed by Commission staff via the no-
action process set forth in Commission regulation 140.99.\7\
Specifically, an FBOT wishing to provide its U.S.-located participants
with direct access to the FBOT's trading system traditionally has
submitted a request for a no-action letter to the Division of Market
Oversight (DMO). The FBOT's no-action request must be accompanied by
representations and supporting documentation from the FBOT regarding,
among other things, its organization, presence in the U.S.,
participants, the products it wishes to list for direct access, its
trading system and the regulatory regime and information-sharing
arrangements to which the FBOT is subject. Staff then reviews the
request and related information and documentation and, where
appropriate, issues a ``direct access'' (formerly known as a ``foreign
terminal'') no-action relief letter. When reviewing no-action requests,
staff looks for a home regulatory regime that provides oversight over
the FBOT in a manner that is comparable to the CFTC's oversight of
DCMs. Specifically, does the FBOT's regulatory authority
[[Page 70975]]
support and enforce ``substantially equivalent regulatory objectives''
in its oversight of the FBOT?
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\7\ See, e.g., CFTC Letter No. 96-28 (February 29, 1996).
Commission regulation 140.99 defines the term ``no-action letter''
as a written statement issued by the staff of a Division of the
Commission or of the Office of the General Counsel that it will not
recommend enforcement action to the Commission for failure to comply
with a specific provision of the Act or of a Commission rule,
regulation or order if a proposed transaction is completed or a
proposed activity is conducted by the beneficiary.
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In the no-action letter, DMO staff represents that, provided the
FBOT meets the conditions set out in the letter, DMO will not recommend
that the Commission institute enforcement action against the FBOT for
failure to register as a designated contract market (DCM) or
derivatives transaction execution facility (DTEF) if the FBOT provides
direct access to its order entry and trade matching system to FBOT
members and other participants located in the U.S. The scope of the
staff no-action relief has been restricted to providing relief from (1)
the requirement that the FBOT obtain DCM or DTEF registration pursuant
to Sections 5 and 5a of the CEA and (2) regulatory requirements related
to the trading or offering of contracts on a DCM and DTEF if the
contracts identified in the no-action letter (foreign futures or option
contracts) are made available in the U.S. for trading in the manner set
forth in the letter.
The no-action relief also has been limited historically to FBOTs
that provide direct access to the FBOTs' members and other participants
that: (1) Trade in the U.S. for their proprietary accounts; (2) are
registered with the Commission as futures commission merchants (FCM);
or (3) are registered with the Commission as commodity pool operators
(CPO) or are exempt from such registration and that are submitting
orders for execution on behalf of U.S. pools they operate or commodity
trading advisors (CTA) or are exempt from such registration and that
are submitting orders for execution on behalf of accounts for which
they have discretionary authority. With respect to such CPOs or CTAs,
an FCM or a firm exempt from registration as an FCM pursuant to
Commission Rule 30.10 (Rule 30.10 Firm) \8\ must act as a clearing firm
and guarantees such trades. The no-action relief typically has been
subject to numerous conditions designed to keep staff informed
regarding the FBOT's status and activities from within the U.S.,
additional contracts to be made available, and significant changes in
the information provided to the Commission in support of the no-action
request. Significant changes in information include changes in the
membership criteria, the location of the management, personnel or
operations (particularly changes that may suggest an increased nexus
between the FBOT's activities and the U.S.); the basic structure,
nature, or operation of the trading system or its clearing
organization; the regulatory or self-regulatory regime the FBOT is
subject to; and any change in the authorization, licensure or
registration of the FBOT.
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\8\ A Rule 30.10 order permits firms that are members of a self-
regulatory organization and subject to regulation by the foreign
regulator to conduct business from locations outside of the U.S. for
U.S. persons on non-U.S. boards of trade without registering under
the Act, based upon the person's substituted compliance with a
foreign regulatory structure found comparable to that administered
by the Commission under the CEA.
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In 2006, following a series of market events and Commission
deliberations, the Commission endorsed the continued use of the no-
action process as a mechanism for facilitating direct access to an
FBOT's trading system. On January 17, 2006, ICE Futures Europe, a U.K.
recognized investment exchange that provided direct access to its U.S.
members pursuant to a no-action letter,\9\ notified the Commission that
it would list a futures contract on West Texas Intermediate (WTI) light
sweet crude oil whose settlement price would be linked to contracts
traded on the New York Mercantile Exchange (NYMEX).\10\ ICE Futures
Europe's notification of the proposed contract linked to a U.S.
domestic contract prompted the Commission to undertake an evaluation of
the use of the no-action process to permit direct access, including a
re-examination of certain issues with respect to the Commission's
statutory obligations to maintain the integrity of U.S. markets and to
protect U.S. customers. Accordingly, on May 3, 2006, the Commission
directed its staff to initiate a formal process to define what
constitutes a ``board of trade, exchange, or market located outside the
United States, its territories or possessions'' as that phrase is used
in section 4(a) of the CEA and, in furtherance of that process,
scheduled a public hearing.\11\ The Commission also issued a related
Request for Public Comment.\12\ On October 27, 2006, following
extensive debate, a review of comments submitted pursuant to the
Commission's request for public comment and the Commission Hearing,\13\
the Commission issued a Policy Statement in which it endorsed the no-
action process for FBOTs that want to provide direct access to their
trading systems to U.S.-based participants.\14\
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\9\ On November 12, 1999, the Commission's Division of Trading
and Markets (the predecessor to the CFTC's Division of Market
Oversight) granted no-action relief to the International Petroleum
Exchange of London (now ICE Futures Europe), permitting it to make
its electronic trading and order matching system, known as Energy
Trading System II, available to its members in the United States.
CFTC Letter No. 99-69 (November 12, 1999).
\10\ On April 12, 2006, ICE Futures Europe notified the Division
of Market Oversight of its intent to launch the ICE Futures New York
Harbour Heating Oil Futures Contract and the ICE Futures New York
Harbour Unleaded Gasoline Blendstock (RBOB) Futures Contract each of
which is cash-settled on the price of physically-settled contracts
traded on the NYMEX.
\11\ The hearing was conducted on June 27, 2006, at the
Commission's headquarters in Washington, DC.
\12\ 71 FR 34070 (June 13, 2006). The Commission requested
comment on the issues related to developing an objective standard
establishing a threshold that, if crossed by a foreign board of
trade that permits direct access, would indicate that the board of
trade is no longer outside the United States and, accordingly, may
be required to become registered under the CEA.
\13\ Comments submitted in response to the request for comment
and at the Commission's Hearing were generally supportive of the no-
action process, praising the process in general for its flexibility.
Many commenters suggested that the Commission should retain in large
measure the essential contours of the no-action process. A
transcript of the Commission's Hearing on what constitutes a board
of trade located outside the United States under the Commodity
Exchange Act section 4(a) (June 27, 2006), (``Hearing Tr.'') as well
as all comment letters (``CL''), are located in comment file 06--002
to 17 FR 34070 (June 13, 2006), available at http://www.cftc.gov/foia/comment06/foi06-002_1.htm.
\14\ Boards of Trade Located Outside of the United States and
No-Action Relief From the Requirement To Become A Designated
Contract Market or Derivatives Transaction Execution Facility, 71 FR
64843 (Nov. 2, 2006) (Policy Statement). In the Policy Statement,
the Commission endorsed the no-action process for addressing FBOT
direct access relief requests: ``The Commission endorses the
continued use of the no-action process as an appropriate and
flexible mechanism that should be used prospectively to facilitate
direct access to the electronic trading system of a foreign board of
trade by its U.S. members or authorized participants.'' Id. at
64846.
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In order to address concerns raised by the listing by ICE Futures
Europe of the linked WTI contract for trading by direct access,
Commission staff, on June 17, 2008, amended ICE Futures Europe's no-
action relief letter by adding additional conditions. The additional
conditions included requirements relating to the reporting of large
trader positions, the publication of daily trading information in the
linked contracts, and the establishment of position limits or
accountability levels that are comparable to the position limits or
accountability levels for the counterpart linked contracts at
NYMEX.\15\
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\15\ CFTC Letter No. 08-09 (June 17, 2008). The Commission
subsequently announced in the Federal Register that these additional
conditions would apply to any FBOT that made available for trading
by direct access a linked contract. See Notice of Additional
Conditions on the No-Action Relief When Foreign Boards of Trade That
Have Received Staff No-Action Relief To Permit Direct Access to
Their Automated Trading Systems from Locations in the United States
List for Trading from the U.S. Linked Futures and Option Contracts
and a Revision of Commission Policy Regarding the Listing of Certain
New Option Contracts. 74 FR 3570 (January 21, 2009).
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[[Page 70976]]
Commission staff subsequently reexamined the issues raised by
linked contracts and concluded that there were additional measures that
should be taken to further allay concerns with respect to effective
market surveillance and maintaining the integrity of the market.
Accordingly, on June 20, 2009, staff again amended ICE Futures Europe's
no-action relief by adding additional conditions with respect to linked
contracts. These conditions included requirements that ICE Futures
Europe provide CFTC staff trade execution and audit trail data for all
linked contracts; copies of, or hyperlinks to, all rules, rule
amendments, circulars and other notices published by the exchange; and
copies of all disciplinary notices involving the linked contracts. They
also provided for CFTC on-site visits to examine ICE Futures Europe's
ongoing compliance with its no-action relief and, in the event that the
CFTC directs that NYMEX take emergency action with respect to a linked
contract (e.g., to cease trading in the contract), ICE Futures Europe,
subject to information-sharing arrangements between the CFTC and the
United Kingdom's Financial Services Authority (FSA), is required to
promptly take similar action (e.g., cease trading in the contract) with
respect to the linked contract at ICE Futures Europe.\16\
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\16\ CFTC Letter No. 09-37 (August 20, 2009).
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Since 1996, Commission staff has issued 23 direct access no-action
relief letters to FBOTs, 20 of which remain active (one relief letter
was superseded and two were revoked when the FBOTs ceased
operations).\17\ While the no-action process has served a useful
purpose, given the clear authority provided by Congress to create a
registration program for FBOTs, the Commission concludes that it is in
the public interest to replace the staff-initiated no-action process
with a formal Commission registration provision.
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\17\ Currently, 14 of the FBOTs with active no-action relief
report volume originating from the U.S. via direct access.
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The no-action process is better suited for discrete, unique factual
circumstances and where regulations do not address the issue presented.
In circumstances where the same type of relief is granted on a regular
and recurring basis, as it has been with respect to permitting FBOTs to
provide direct access to their trading systems to specified members and
other participants that are located in the U.S., the Commission
concludes believes that it is no longer appropriate to handle such
matters through the no-action process. Instead, the process should
become more transparent and standardized through generally applicable
regulations. Among other things, a rulemaking would provide for a
uniform application process, enhance the visibility of the process to
both applicants and the public and assure fair and consistent treatment
to all applicants. Further, no-action relief letters are issued by the
staff and are not binding on the Commission and do not provide the same
legal certainty to the FBOT recipients that a Commission-issued order
would provide. The Commission believes that a formal registration
procedure would provide more legal certainty for registered FBOTs and
would be more consistent with the manner in which other countries
permit U.S. DCMs to provide direct access internationally. Accordingly,
for the reasons noted above and pursuant to the new authority of
amended CEA Section 4(b), new Part 48 of the Commission's regulations,
as proposed herein, would replace the existing policy of accepting and
reviewing requests for no-action relief to permit an FBOT to provide
for direct access to its trading system from within the U.S. with a
requirement that an FBOT seeking to provide such access must apply for
and be granted registration with the Commission.\18\
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\18\ The proposed rules would provide for a ``limited''
application process for FBOTs currently operating under existing no-
action relief. The limited application would have to be submitted
within 120 days of the effective date of the registration rules and
the FBOT could continue to operate pursuant to the no-action relief
during the 120 day period and until the Commission notifies the FBOT
that the application has been approved or denied. In the event that
the Commission denies an FBOT's application, it would expect staff
to simultaneously withdraw the FBOT's no-action relief.
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As a starting point for the proposed registration requirements, the
Commission considered the experience gained from the current no-action
review process. The proposed application submission requirements and
staff review standards for FBOT registration under the new regulations
generally are consistent with the application requirements and review
standards that have guided the Commission's staff in issuing the more
recent FBOT no-action relief letters. Under the proposed registration
requirements, for instance, the Commission would not evaluate FBOTs for
compliance with the core principles and/or regulatory requirements
applicable to DCMs. Rather, the Commission would look to the FBOT's
regulatory authority to determine that the home regulatory regime
provides oversight over the FBOT in a manner that is comparable to the
CFTC's oversight of DCMs. Specifically, the Commission would review the
application to determine if the FBOT's regulatory authority supports
and enforces substantially equivalent regulatory objectives, such as
prevention of market manipulation and customer protection, in its
oversight of the FBOT.
The Commission notes that the staff's no-action process has not
remained static since the first no-action relief letter was issued in
1996. Instead, staff has generally been expanding the scope and level
of its review of FBOTs to address activities not originally foreseen
when the first no-action letter was issued. Likewise, the number and
types of conditions imposed upon FBOTs seeking no-action relief have
gradually expanded over time.\19\ Those conditions have generally been
included in the proposed regulations, along with proposed conditions
intended to address increasing technological innovation, new types of
products, the impact on the market of different trading entities
listing substantially similar or even connected products, and the
requirements of the Dodd-Frank Act.
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\19\ The first no-action relief letter required that Deutsche
Terminborse comply with eight terms and conditions. CFTC Letter No.
96-28 (February 29, 1996). Subsequent letters generally have
required compliance with approximately 16 conditions, although the
number varies based on the manner in which the FBOT operates. More
recent additions to the conditions address, among other things,
restriction to certain types of members, the inclusion of CTAs and
CPOs as entities eligible for no-action relief, and a requirement
that the FBOT provide an annual certification from its regulatory
authority that the FBOT retains its authorization in good standing
as an FBOT in its home country. As previously discussed, the staff
has also added several conditions to the ICE Futures Europe no-
action letter in order to address the listing of linked contracts.
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III. The Proposed Rules
The proposed regulation is divided into 10 sections and an appendix
(Appendix), each proposed as described below.
A. Scope
The first section, 48.1, provides that part 48 applies to any FBOT
that is registered or is applying to become registered with the
Commission in order to provide its identified members or other
participants located in the U.S.\20\ with direct access to its
electronic trading and order matching system.
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\20\ For purposes of FBOT registration, the term ``United
States'' or ``U.S.'' includes the United States, its territories and
possessions.
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B. Definitions
Section 48.2 includes definitions applicable to FBOT registration.
For instance, section 48.2 defines an ``FBOT'' as any board of trade,
exchange or market located outside the U.S., its territories or
possessions, whether incorporated or unincorporated, where foreign
agreements, contracts or transactions are entered into. Section 48.2
also identifies certain criteria an FBOT would have to meet in order to
register to provide direct access, such as possessing the attributes of
an established, organized exchange; adhering to appropriate rules
prohibiting abusive trading practices; and enforcing appropriate rules
to maintain market and financial integrity. Another defined term,
further addressed below, is ``direct access,'' which is defined in the
Dodd-Frank Act to refer to ``an explicit grant of authority by a
foreign board of trade to an identified member or other participant
located in the United States to enter trades directly into the trade
matching system of the foreign board of trade.'' Section 48.2 also
includes definitions, for purposes of this part, of ``linked
contract,'' ``communications,'' ``material change,'' ``clearing
organization,'' ``existing no-action relief,'' ``swaps,'' ``affiliate''
and ``member or other participant.''
C. Registration Required
Section 48.3 provides that, except as otherwise specified in
proposed new Part 48, it shall be unlawful for an FBOT to permit direct
access to its electronic trading and order matching system from within
the U.S. unless and until the Commission has issued an Order of
Registration to the FBOT pursuant to the provisions of Part 48. The
proposal also would provide that it would be unlawful for a board of
trade to make false or misleading statements in any application for
registration or in connection with any application for registration.
D. Registration Eligibility
Section 48.4 describes registration eligibility. Generally, FBOTs
that meet the requirements of the definition in section 48.2(b) would
be eligible to be registered. Section 48.4 also identifies the persons
to whom the registered FBOT could grant authority to trade by direct
access. The Commission proposes that the persons that would be
permitted by the FBOT to trade by direct access from the U.S. pursuant
to the registration rules would be the types of persons that are
currently able to trade by direct access pursuant to staff issued no-
action relief letters. Specifically, an FBOT could request registration
in order to permit direct access from within the U.S. by identified
members and other participants \21\ that: (1) Trade in the U.S. for
their proprietary accounts; (2) are registered with the Commission as
FCMs and submit orders to the trading system for execution on behalf of
U.S. customers; or (3) are, subject to a specific clearing and
guarantee requirement, registered with the Commission as CPOs or CTAs,
or are exempt from such registration pursuant to Commission Rules 4.13
or 4.14. The CPOs would be permitted to submit orders for execution on
behalf of U.S. pools they operate, and CTAs would be permitted to do so
for accounts of U.S. customers for which they have discretionary
authority. The Commission requests comment concerning additional
entities that should be eligible for direct access to the trading and
order matching systems of the FBOT from the U.S.
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\21\ For purposes of FBOT registration, identified member or
other participant of the FBOT shall include any affiliate of any
registered FBOT's member or other participant that has been granted
direct access by the registered FBOT to the trading system. An
affiliate of a registered FBOT member or other participant shall
mean any person, as that term is defined in section 1a(38) of the
CEA, that: (i) Owns 50% or more of the member or other participant;
(ii) is owned 50% or more by the member or other participant; or
(iii) is owned 50% or more by a third person that also owns 50% or
more of the member or other participant.
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E. Registration Procedures
Section 48.5 describes procedures to be followed to request and
receive registration.\22\ The registration application must be
submitted electronically, must be signed by the FBOT's chief executive
officer (or functional equivalent), and must include the information
and documentation set forth in the Appendix to Part 48 and any
information and documentation necessary, in the discretion of the
Commission, to effectively demonstrate that the FBOT and its clearing
organization satisfy the registration requirements set forth in section
48.7.
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\22\ Draft submissions and a request for a preliminary review by
Commission staff would be encouraged under the proposed rule. The
Commission proposes that the final copy of an application for
registration would be published on its Web site.
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Section 48.5 also provides that the Commission will review the
application for FBOT registration and may approve or deny the
application. At this time, the proposed rule does not contain a
timeline for Commission action.\23\ If the application is approved, the
Commission will so notify the FBOT and will issue an Order of
Registration. The Commission could, after appropriate notice and an
opportunity for a hearing, amend, suspend, terminate or otherwise
restrict the terms of the Order of Registration. If the application is
denied, the Commission will issue a Notice of Action specifying that
the application was not approved and the FBOT will not be registered
and may not provide direct access to its trade matching engine from
within the U.S. Following a denial, the FBOT may reapply for
registration 360 days after the date of denial.
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\23\ The Commission expects a surge of activity shortly after
the registration rule goes into effect. Once this period has ended,
the Commission anticipates that a timeline would be established.
Such a timeline might require a Commission response to a completed
application for registration within 120 days after the Commission,
in its sole discretion, determines that the application is complete.
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The Commission is also proposing that, in determining whether to
grant or deny an application for FBOT registration, the Commission will
thoroughly review the information and documentation submitted in the
application and, as necessary, conduct an on-site due diligence visit
at the FBOT to determine, as mandated by the Dodd-Frank Act, whether
the FBOT and its clearing organization are subject to comprehensive
supervision and regulation by the appropriate governmental authorities
in their home country that is comparable to the comprehensive
supervision and regulation to which DCMs and derivatives clearing
organizations (DCO) are subject in the U.S.\24\ In this context, as
previously noted, comparable does not necessarily mean identical. The
comparability determination for registration purposes will be similar
to that followed when reviewing direct access no-action requests. The
Commission will evaluate whether the FBOT's home regulatory authority
supports and enforces regulatory objectives in its oversight of the
FBOT that are substantially equivalent to the regulatory objectives
supported and enforced by the Commission in its oversight of DCMs.
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\24\ The Dodd-Frank Act also mandated that the Commission
consider any previous Commission findings that the FBOT and its
clearing organization are subject to such comprehensive supervision
and regulation by the appropriate government authorities in their
home country. Such previous Commission findings would include staff
conclusions drawn previously during the course of reviewing an
application for direct access no-action relief.
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The Commission notes that it uses a similar ``comparability''
analysis when evaluating foreign entities in the context of issuing
Rule 30.10 exemptions to
[[Page 70978]]
intermediaries.\25\ When determining whether to issue a Rule 30.10
exemption, staff evaluates whether the applicant is subject to a
comparable regulatory scheme in the country in which it is located. In
this evaluation, comparable does not necessarily mean identical: as set
forth in Appendix A to Rule 30.10 with respect to the comparability
determination, ``the Commission would have broad discretion to
determine that the policies of any program element generally are met,
notwithstanding the fact that the offshore program does not contain an
element identical to that of the Commission's regulatory program.'' In
the case of FBOT registration, a determination that the foreign
regulatory authority enforces substantially equivalent regulatory
objectives is a determination of comparability: The regulatory regime
is comparable, although not necessarily identical, to that of the CFTC.
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\25\ See supra note 8.
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In its review, the Commission would also consider whether the FBOT
is eligible to be registered as defined in section 48.2(b) of this part
and whether the FBOT has adequately demonstrated that it meets the
requirements for registration specified in section 48.7 and any other
requirements that the Commission, in its discretion, believes are
necessary or appropriate to impose under the facts and circumstances
presented.
F. FBOTs Providing Direct Access Pursuant to No-action Relief
In Section 48.6, the Commission proposes to provide for a
``limited'' application process for FBOTs currently operating pursuant
to existing no-action relief. Such FBOTs would apply for registration
by (1) identifying the specific requirements for registration set forth
in section 48.7 or information and documentation required by the
Appendix to Part 48 that are satisfied by information previously
submitted in the request for no-action relief that remain current and
true and resubmitting such information and documentation,\26\ and (2)
submitting any information and documentation required in a complete
application for registration that was not previously provided or is no
longer current. The limited application for registration would have to
be submitted within 120 days of the effective date of the registration
rules, during which time the FBOT could continue to operate pursuant to
the no-action relief. The no-action relief would, upon notice to the
FBOT, be revoked after 120 days if a complete limited application is
not received by the Commission by that time. If the FBOT files an
application for registration within 120 days, the FBOT could continue
to operate pursuant to the no-action relief until notified by the
Commission that the application has been approved or denied. If the
Commission revokes the no-action relief or denies the application, it
will provide for a transition period for phasing out direct access.
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\26\ The Commission is requesting resubmission of original
documentation, where appropriate, because such documentation, some
of which dates back as much as fourteen years, may no longer be
readily available for review because of incomplete and or misplaced
files.
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G. Requirements for Registration
Section 48.7 describes the requirements that the Commission
proposes that an FBOT would be required to demonstrate in order to be
registered. The requirements are divided into the same seven general
categories currently evaluated during the course of a review of an
application for no-action relief and they would be reviewed in a
similar manner. Whether they are successfully met would be determined
by a review of the information and documentation submitted by the
applicant pursuant to the Appendix to proposed Part 48, any additional
information or documentation requested by the Commission in connection
with the application review, and, as necessary, a Commission staff due
diligence on-site visit to the FBOT and clearing organization.
First, with respect to FBOT and clearing membership, the FBOT would
be required to demonstrate that FBOT and clearing organization members
and other participants are fit and proper and meet appropriate
financial and professional standards; that the FBOT and clearing
organization have adequate conflict of interest provisions; and that
the FBOT and clearing organization have and enforce rules prohibiting
the disclosure of material, non-public information obtained as a result
of a member's/other participant's performance of official duties.
Second, the FBOT's automated trading system would be required to
comply with the Principles for the Oversight of Screen-Based Trading
Systems for Derivative Products developed by the Technical Committee of
the International Organization of Securities Commissions (IOSCO
Principles) and adopted by the Commission on November 21, 1990.\27\ In
addition, the FBOT's trade matching algorithm would be required to
match trades fairly and timely, the audit trail would be required to
capture all relevant data (including changes to orders), and audit
trail data would be required to be securely maintained and available
for an adequate time period. Trade data would be required to be made
available to users and to the public, the trading system would be
required to have demonstrated reliability, and access to the trading
system would be required to be secure and protected. Finally, adequate
provisions for emergency operations and disaster recovery would be
required, trading data would be required to be backed up to prevent its
loss, and only approved contracts could be made available for trading
by direct access from the U.S.
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\27\ The Commission adopted the IOSCO Principles as a statement
of regulatory policy for the oversight of screen-based trading
systems for derivative products. Policy Statement Concerning the
Oversight of Screen-Based Trading Systems, 55 FR 48670 (Nov. 21,
1990).
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Third, the contracts to be made available by direct access in the
U.S. would be required to be futures, option or swaps contracts that
would be eligible to be traded on a DCM and would be subject to prior
review by the Commission. With respect to swaps, Section 733 of the
Dodd-Frank Act adds section 5h to the CEA, which provides that a person
operating a facility for the trading or processing of swaps must be
registered as a swaps execution facility (SEF) or as a DCM. Section 733
also adds section 5(g) to the CEA which provides that the ``Commission
may exempt, conditionally or unconditionally, a swap execution facility
from registration under this section if the Commission finds that the
facility is subject to comparable, comprehensive supervision and
regulation on a consolidated basis by the [SEC], a prudential
regulator, or the appropriate governmental authorities in the home
country of the facility.'' The approach for granting a SEF exemption
(namely, ``subject to comparable, comprehensive supervision and
regulation * * * in the home country of the facility'') is similar to
that which applies to FBOTs seeking registration. Moreover, there is
nothing in the Dodd-Frank Act, including Section 738 of the Dodd-Frank
Act amending Section 4(b) of the CEA, which expressly precludes a
registered FBOT from offering swaps through direct access.\28\
Accordingly, the Commission is proposing to permit a registered FBOT to
offer and trade swaps though direct access, subject to the condition
that the FBOT meet
[[Page 70979]]
certain standards or requirements that may apply to SEFs, as the
Commission deems appropriate. The Commission requests comment with
respect to whether a registered FBOT should be allowed to make
available swaps through direct access and if so, under what conditions.
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\28\ Furthermore, under the Dodd-Frank Act, a DCM may trade
swaps without additionally registering as a SEF.
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Contracts that are linked to a contract listed for trading on a
U.S. registered entity would be required to be identified, as would
contracts that share any other commonality with a contract listed for
trading on a U.S. registered entity, i.e., both the FBOT's and the U.S.
registered entity's contract settle to the price of the same third
party-constructed index. Finally, the FBOT would be required to certify
that it has listing standards in place that require that contracts not
be readily susceptible to manipulation.\29\
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\29\ The Commission considers that contracts that can be found
to have the following are less likely to be susceptible to
manipulation: (1) They rely for settlement pricing on a robust and
transparent calculation, whether based on the contract's own trading
or an externally calculated index; (2) they are subject to measures
to reduce the ability of any party to disrupt pricing, e.g. position
limits, intraday surveillance, and pre-trade screens; and (3) there
is either ample deliverable supply or flexibility in the contract
(alternate delivery mechanisms).
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Fourth, with respect to settlement and clearing, the clearing
organization, would be required to comply with the current
Recommendations for Central Counterparties (RCCPs) that have been
issued jointly by the Committee on Payment and Settlement Systems
(CPSS) and the Technical Committee of the International Organization of
Securities Commissions (IOSCO), as updated, revised or otherwise
amended, or successive standards, principles and guidance for central
counterparties or financial market infrastructures adopted jointly by
IOSCO and CPSS, and the clearing organization would be required to be
in good regulatory standing in its home country jurisdiction. In the
alternative, the clearing organization may be registered with the
Commission as a DCO.\30\
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\30\ The Commission is including the option for the clearing
organization to be registered as a DCO because it is aware that some
foreign clearing organizations are registered as such. These include
ICE Clear Europe Limited, LCH Clearnet Ltd. and Natural Gas Exchange
Inc.
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Fifth, the FBOT's and the clearing organization's regulatory
authorities would be required to provide comprehensive supervision and
regulation of the FBOT and the clearing organization that is comparable
to the comprehensive supervision and regulation to which DCMs and DCOs
are subject in the U.S., would be required to have the power to
intervene in the market and authority to share information with the
Commission, and would be required to provide for ongoing regulatory
supervision of the FBOT and its trading system, the clearing
organization and its clearing system and intermediaries--with
particular attention to market integrity and customer protection and
the manner in which the exchange enforces its rules. In the case of
FBOTs with listed swaps, the Commission proposes to take into
consideration the regulation of relevant market participants (e.g.,
swap dealers) regarding their exchange-trading activity when analyzing
the comparability and comprehensiveness of the regulatory regime
applicable to exchange-listed swaps in the FBOT's home country.
Sixth, the FBOT and the clearing organization would be required to
have appropriate rules and would be required to enforce them. Among
other things, the FBOT and the clearing organization would be required
to have sufficient compliance staff and resources to fulfill their
respective regulatory responsibilities, including the capacity to
detect, investigate, and sanction persons who violate their respective
rules. The FBOT would be required to implement and enforce rules
relating to oversight of trading practices, including appropriate trade
practice surveillance, real-time market monitoring and market
surveillance. The FBOT's and the clearing organization's rules would be
required to authorize the compliance staff to obtain, from market
participants, any information and cooperation necessary to conduct
effective rule enforcement and investigations, and the FBOT would be
required to have and enforce rules with respect to access to the
trading system and the means by which the connection is accomplished.
The FBOT and the clearing organization (or their respective regulatory
authorities) would be required to have implemented and enforce
disciplinary procedures that empower them to recommend and prosecute
disciplinary actions for suspected rule violations, impose adequate
sanctions for such violations, and provide adequate protections to
charged parties pursuant to fair and clear standards. The FBOT would be
required to have the capacity to detect and deter market manipulation,
attempted manipulation, price distortion, and other disruptions of the
market and would be required to have and enforce rules designed to
maintain market and financial integrity and prohibit other trading and
market abuses. Finally, the FBOT would be required to have and enforce
rules and procedures that ensure a competitive, open and efficient
market and mechanism for executing transactions.
Finally, satisfactory information-sharing arrangements among the
FBOT, the clearing organization, their respective regulatory
authorities, and the Commission would be required to be in place. The
regulatory authorities would be required to be signatories to the IOSCO
Multilateral Memorandum of Understanding (IOSCO MOU) \31\ or, if not
signatories to the IOSCO MOU, would have to inform the Commission of
the reasons why the document has not been signed, supply any additional
information requested by the Commission, and ensure alternative
information sharing arrangements that are satisfactory to the
Commission are in place. The regulatory authority also would be
required to be a signatory to the Declaration on Cooperation and
Supervision of International Futures Exchanges and Clearing
Organizations (Boca Declaration),\32\ or otherwise commit to share the
types of information contemplated by the International Information
Sharing Memorandum of Understanding and Agreement (Exchange
International MOU) \33\ with the Commission. The FBOT would be required
to have executed, or have committed to execute, the Exchange
International MOU. In addition, pursuant to the proposed conditions of
registration described in section 48.8(a)(6)(iii), the FBOT would
[[Page 70980]]
be required to provide certain information directly to the Commission.
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\31\ Memorandum of Understanding Concerning Consultation,
Cooperation and the Exchange of Information of the International
Organization of Securities Commissions, October 16, 2003. The IOSCO
MOU is the first worldwide multilateral enforcement cooperation
arrangement among securities and derivatives regulators. It provides
for the exchange of essential information to investigate cross-
border securities and derivatives violations, including the most
serious offenses, such as manipulation, insider trading and customer
fraud. The IOSCO MOU enables regulators to share critical
information, including bank, brokerage, and client identification
records and to use that information in civil and criminal
prosecutions.
\32\ The Boca Declaration was developed through discussions at
the CFTC's international regulators conference, and was motivated by
work recommendations issued from the Windsor Conference and Tokyo
Conference, which were convened by the CFTC, the U.K. FSA and
Japanese regulators to respond to the cross-border issues raised by
the failure of Barings Plc. The Declaration was developed to address
instances in which an exchange would not be able to share
information directly with another exchange under the Exchange
International MOU, described below.
\33\ The development of the Exchange International MOU was one
of the achievements that resulted from the Futures Industry
Association-sponsored Global Task Force on Financial Integrity,
which was convened to address the cross-border issues that were
identified in connection with the failure of Barings Plc.
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H. Conditions Upon FBOT Registration
As previously noted, Section 738 of the Dodd-Frank Act amends
Section 4(b) of the CEA to provide that the Commission may adopt rules
and regulations requiring registration with the Commission of an FBOT
that provides identified members of the FBOT or other participants
located in the United States with direct access to the electronic
trading and order matching system of the FBOT, including rules and
regulations prescribing procedures and requirements applicable to the
registration of such FBOTs. Proposed Section 48.8 provides for certain
procedures and requirements applicable to maintaining the registration
of such FBOTs and describes the specified conditions upon FBOT
registration that the Commission believes are essential in assuring
effective market integrity and customer protection. As previously
noted, the conditions applicable to existing no-action relief have
expanded over time to address activities not foreseen when the earliest
no-action letters were issued. In the proposed regulations, the
Commission has added further conditions to address increasing
technological innovation, new types of products, the impact on the
market of different trading entities listing substantially similar or
even connected products, and the requirements of the Dodd-Frank Act.
The specified conditions are divided into three categories: Specified
conditions for maintaining registration, other continuing obligations,
and additional specified conditions for FBOTs with linked contracts. A
registered FBOT would have an ongoing obligation to monitor and enforce
compliance with the specified conditions of its registration and with
any additional conditions that the Commission, in its discretion and
upon notice to the FBOT and subsequent to an opportunity to be heard,
may impose.
(1) Specified Conditions
With respect to the regulatory regimes under which they operate,
the FBOT and the clearing organization, respectively, would be required
to continue to satisfy the criteria for a regulated market and clearing
organization pursuant to their home regulatory regimes identified in
the application for registration and would be required to continue to
be subject to oversight by their home regulatory authorities. In
addition, the laws, systems, rules, and compliance mechanisms of the
applicable regulatory regimes would be required to continue to require
the FBOT to maintain fair and orderly markets; prohibit fraud, abuse,
and market manipulation; and provide that such requirements are subject
to the oversight of appropriate regulatory authorities. With respect to
international standards, the FBOT would be required to continue to
adhere to the IOSCO Principles, to the extent such principles do not
contravene U.S. law. The clearing organization would be required to
continue to satisfy, as applicable, the rules, regulations and core
principles applicable to its registration as a DCO or the RCCPs or
successive standards, principles or guidance that may be adopted
jointly by IOSCO and CPSS, to the extent such recommendations,
standards, principles or guidance do not contravene U.S. law.
The FBOT would be required to restrict direct access to the trading
system from the U.S. to identified members or other participants and
take reasonable steps to prevent third parties from providing such
access to the FBOT's trading system to persons other than the
identified members or other participants.\34\ All orders transmitted
through the FBOT's trading system by an FBOT-identified member or other
participant by direct access would be required to be for the member's
or other participant's own account unless: (a) The member or other
participant is an FCM or (b) subject to certain clearing requirements,
the member or other participant is a CPO or CTA, or is exempt from such
registration pursuant to Commission regulation 4.13 or 4.14.
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\34\ The Commission believes that such steps would include
specific prohibitions on sharing access in the FBOT's rules and
membership agreements and a review of how access is granted by and
to the identified member's or other participant's infrastructure
during audits of those entities.
The Commission will continue to evaluate new developments in
technology and business arrangements that may be used by FBOTs to
provide U.S. participants with direct access to its trade matching
system in the context of these proposed rules.
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The specified conditions also include several documentation
requirements to assist the Commission in monitoring the activities of a
registered FBOT and the clearing organization. Each current and
prospective member or other participant that is granted direct access
to the FBOT's trading system from the U.S. and that is not registered
as an FCM, a CTA or a CPO would be required to file with the FBOT (a) A
written representation stating that the member or other participant
agrees to and submits to the jurisdiction of the CFTC with respect to
activities conducted pursuant to the registration; (b) a valid and
binding appointment of a U.S. agent for service of process in the U.S.;
and (c) a written representation that the member or other participant
granted direct access pursuant to this regulation will provide, upon
the request of the Commission, the U.S. Department of Justice and, if
appropriate, the National Futures Association (NFA) (collectively, the
U.S. Agencies), prompt access to the entity's, member's or other
participant's original books and records or, at the election of the
requesting U.S. Agency, a copy of specified information containing such
books and records, as well as access to the premises where the trading
system is available in the U.S. The FBOT and the clearing organization
also would be required to file with the Commission a valid and binding
appointment of an agent for service of process in the U.S. and maintain
with the FBOT written representations concerning U.S. Agencies' access
to original books and records or, at the election of the requesting
U.S. Agency, a copy of specified information containing such books and
records, as well as access to the premises where the trading system is
available in the U.S. The FBOT would be required to maintain all the
representations required pursuant to this regulation as part of its
books and records and make them available upon the request of a
Commission representative.
With respect to information sharing, the specified conditions
mandate that information-sharing arrangements satisfactory to the
Commission are in effect among the Commission and the regulatory
authorities that oversee both the FBOT and the clearing organization
and that the Commission is able to obtain sufficient information
regarding the FBOT, the clearing organization and their respective
members and other participants operating pursuant to the FBOT's
registration. The FBOT would be required to provide information
directly to the Commission in response to a Commission request. In the
event that the FBOT and the clearing organization are separate
entities, the proposed rule would require the clearing organization to
enter into a written agreement with the FBOT in which the clearing
organization is contractually obligated to promptly provide any and all
information and documentation that may be required of the clearing
organization under the regulation.
With respect to swaps contracts, if the FBOT makes swaps contracts
available by direct access, the FBOT would be required to report to the
public, on a real-time basis, data relating to each
[[Page 70981]]
swap transaction, including price and volume, as soon as
technologically practicable after execution of the swap transaction. In
addition, the FBOT would be required to ensure that all swap
transaction data is timely reported to a swap data repository that is
either registered with, or has an information-sharing arrangement with,
the Commission. The FBOT also must agree to coordinate with the
Commission with respect to arrangements established to address cross
market oversight issues, including surveillance, emergency actions and
the monitoring of trading. In addition, particularly with respect to
the listing of swaps contracts, the Commission may, in its discretion
and after notice and an opportunity to be heard, impose additional
conditions upon the FBOT's registration. Finally, all futures, option
and swaps contracts must be cleared.
(2) Other Continuing Obligations
Among the proposed specified conditions identified as other
continuing obligations are quarterly, upon occurrence, and annual
reporting requirements that the Commission determines are necessary to
provide ongoing visibility with respect to a registered FBOT's
performance as it relates to U.S. persons. First, as is the case now
with the no-action relief recipients, the FBOT would be required to
maintain and provide to the Commission on at least a quarterly basis,
and at any time promptly upon request, volume data that reflects the
percentage of trading originating in the U.S. Thus, the FBOT would be
required to provide, for each contract available to be traded through
its trading system, the following: (a) The total trade volume
originating from electronic trading devices providing direct access to
the trading system in the U.S., (b) the total trade volume for such
products traded through the trading system worldwide, and (c) the total
trade volume for such products traded on the FBOT generally. The FBOT
would also be required to provide a listing of the names, NFA ID
numbers (if applicable), and main business addresses in the U.S. of all
members and other participants that have access to the trading system
in the U.S.
With respect to reporting the occurrence of events that may have an
impact on the FBOT's capability to meet its registration requirements,
the FBOT would be required to promptly provide the Commission with
written notice of the following: (a) Any material change in the
information provided in the FBOT's registration application or in the
FBOT's or clearing organization's rules or in the laws, rules, and
regulations in the home jurisdictions of the FBOT or the clearing
organization; (b) any matter known to the FBOT or the clearing
organization that, in their judgment, could affect the financial or
operational viability of the FBOT or the clearing organization; (c) any
default, insolvency, or bankruptcy of any FBOT trading member or other
participant that may have a material, adverse impact upon the condition
of the FBOT or upon any U.S. customer or firm, or any default,
insolvency or bankruptcy of any member of the FBOT's clearing
organization; (d) any known violation by the FBOT, its clearing
organization or any trading or clearing member or other participant of
the specified conditions of registration or failure to satisfy the
requirements for registration; and (e) any disciplinary action taken by
the FBOT or its clearing organization against any FBOT trading member
or other participant or a member of the clearing organization that
involves any market manipulation, fraud, deceit, or conversion or that
results in suspension or expulsion that involves a contract or
contracts available for trading from within the U.S. pursuant to
registration.
Finally, the FBOT or the clearing organization, as applicable,
would be required to provide the following to the Commission on an
annual basis: (a) A certification from the FBOT's regulatory authority
confirming that the FBOT retains its authorization in good standing as
a regulated market/exchange; (b) a certification from the clearing
organization's regulatory authority confirming the clearing
organization's regulatory status (i.e., its authorization, licensure,
or registration) and continued ``good standing'' in its authorized
jurisdiction; (c) if the clearing organization is not a DCO,
recertification of the clearing organization's compliance with the
RCCPs or successive standards, principles or guidance; (d) a
description of any material changes to any relevant representation
regarding the FBOT or clearing organization made to the Commission that
have not been previously disclosed; (e) a description of any
significant disciplinary or enforcement actions that have been
instituted by or against the FBOT or the clearing organization or the
senior officers of either in the prior year; and (f) a written
description of any material changes to the regulatory regime to which
the FBOT or the clearing organization are subject that have not been
previously disclosed, in writing, to the Commission (or a certification
that no material changes have been made).
(3) Linked Contract Conditions
The proposed rule also would include additional specified
conditions for FBOTs that make linked contracts available for direct
access. These proposed additional specified conditions are divided into
two categories: Statutory conditions, which are specifically required
by the Dodd-Frank Act, and other conditions on linked contracts, which
are additional conditions that the Commission believes are necessary
because such linkages create a single market for the subject contracts
and, in the absence of certain preventive measures at the FBOT, could
compromise the Commission's ability to carry out its market
surveillance responsibilities. Because of the linkage, the trading of
the linked contracts on an FBOT affects the pricing of contracts traded
on U.S.-registered entities.
(a) Statutory Conditions
The statutory conditions mandated by Section 738 of the Dodd-Frank
Act are substantially similar to the previously discussed additional
conditions the Commission imposed on the no-action relief issued to ICE
Futures Europe when that exchange made available a WTI futures contract
that cash-settled on the price of a physically-settled Light Sweet
Crude Oil futures contract traded on the NYMEX,\35\ include the
following: (i) The FBOT must make public certain daily trading
information regarding the linked contract; (ii) the FBOT (or its
regulatory authority) must (A) Adopt position limits for the linked
contract that are comparable to the position limits adopted by the
registered entity for the contract to which it is linked; (B) have the
authority to require or direct market participants to limit, reduce, or
liquidate any position the FBOT (or its regulatory authority)
determines to be necessary to prevent or reduce the threat of price
manipulation, excessive speculation as described in section 4a of the
Act, price distortion, or disruption of delivery or the cash settlement
process; (C) agree to promptly notify the Commission, with regard to
the linked contract, of any changes with respect to (i) and (ii) above
and any other area of interest expressed by the Commission to the FBOT
or its regulatory authority; (D) provide information to the Commission
regarding large trader positions in the linked contract that is
comparable to the large trader position information collected by the
Commission for the contract to which it is linked; and (E) provide the
Commission such information as is necessary to publish
[[Page 70982]]
reports on aggregate trader positions for the linked contract that are
comparable to such reports on aggregate trader positions for the
contract to which it is linked.
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\35\ See CFTC Letter No. 08-09 (June 17, 2008).
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One statutory condition is mandated by Section 737 of the Dodd-
Frank Act, and would require that if the Commission establishes
speculative position limits (including related hedge exemption
provisions) on the aggregate number or amount of positions in a
contract traded on a U.S. registered entity and the registered FBOT
lists a linked contract, the FBOT (or its regulatory authority) must
adopt position limits (including related hedge exemption provisions)
for the linked contract as determined by the Commission.
(b) Other Conditions on Linked Contracts
The other conditions on linked contracts, also imposed pursuant to
the Commission's new Section 4(b)(1)(A) authority to adopt rules and
regulations prescribing procedures and requirements applicable to the
registration of FBOTs, represent the second set of additional
conditions the Commission imposed on the no-action relief issued to ICE
Futures Europe when that exchange made available for trading by direct
access contracts linked to the prices of contracts traded on NYMEX.\36\
The conditions as proposed would require that the FBOT, among other
things, (i) Inform the Commission in a quarterly report of any member
that had positions in a linked contract above the applicable FBOT
position limit, (ii) provide trade execution and audit trail data for
input to the CFTC's Trade Surveillance System on a trade-date plus one
basis, (iii) provide for CFTC on-site visits for the purpose of
overseeing the FBOT's and the clearing organization's ongoing
compliance with registration requirements and the conditions of
registration, (iv) provide, at least one day prior to the effective
date, copies of, or hyperlinks to, all rules, rule amendments,
circulars and other notices published by the FBOT with respect to all
linked contracts, (v) provide copies of all Disciplinary Notices
involving the FBOT's linked contracts upon closure of the action, and
(vi) promptly take similar action with respect to its linked contract
in the event that the CFTC, pursuant to its emergency powers authority,
directs that the U.S. registered entity which lists the contract to
which the FBOT's contract is linked to take emergency action with
respect to a linked contract (e.g., to cease trading in the contract).
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\36\ See CFTC Letter No. 09-37 (August 20, 2009).
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The Commission questions whether there are additional conditions
that it could impose on registered FBOTs that list linked contracts to
promote orderly markets and customer protection, such as automatic
safety features to protect against errors in the entry of orders,
price-banding mechanisms, maximum order size limitations, or trading
pauses to prevent cascading stop-loss orders.\37\
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\37\ Many of these mechanisms are discussed in the Commission's
recent joint study with the SEC of the market events of May 6, 2010.
See Preliminary Findings Regarding the Market Events of May 6,
2010--Report of the Staffs of the CFTC and SEC to the Joint Advisory
Committee on Emerging Regulatory Issues (May 18, 2010), Appendix B-
11.
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I. Revocation of Registration
Section 48.9 addresses certain events which could lead the
Commission to revoke an FBOT's registration. With respect to failure to
satisfy any of the registration requirements or conditions of
registration, the proposed rule provides that if the Commission
believes that a registration requirement or condition is not being met,
the Commission may request that the registered FBOT file a written
demonstration showing it is in compliance with the requirement or
condition. If the Commission determines that an FBOT (or its clearing
organization) has failed to satisfy any of the registration
requirements or conditions, the FBOT would be given an opportunity to
bring itself into compliance with the requirement or condition. If the
FBOT fails to make changes necessary to comply with the requirement or
condition within 30 days after receiving a notification that it was not
satisfying one or more requirements or conditions, the Commission may
revoke the FBOT's registration, after appropriate notice and an
opportunity for a hearing. If the Commission revokes the registration,
it will provide for a transition period for phasing out direct access.
Finally, an FBOT whose registration has been revoked for failure to
satisfy a registration requirement or condition could apply for re-
registration after 360 days if the deficiency causing the revocation
has been cured or relevant facts and circumstances have changed.
Section 48.9 of the proposed rule also identifies four other events
that, without limitation, could result in revocation, generally after
appropriate notice and an opportunity for a hearing. The Commission may
revoke an FBOT's registration (1) If the Commission determines that a
representation made in the application for registration relevant to the
Commission's decision to register the entity is found to have been
untrue or materially misleading; (2) if there is a material change in
the regulatory regime applicable to the FBOT or clearing organization;
(3) in the event of an emergency or in a circumstance where the
Commission determines that revocation would be necessary or appropriate
in the public interest; or (4) the FBOT or the clearing organization is
no longer authorized, licensed or registered, as applicable, as a
regulated market and/or exchange or clearing organization or ceases to
operate as an FBOT or clearing organization. Revocation under these
circumstances would not necessarily follow the procedures delineated
for revocation for failure to continue to satisfy registration
requirements or conditions, but would be handled by the Commission as
relevant facts or circumstances warrant.
The Commission acknowledges that there are other actions that, if
undertaken by a registered FBOT, could lead the Commission to exercise
its discretion and consider a full range of corrective actions,
including revocation of the FBOT's registration, requiring enhanced
information sharing arrangements and surveillance procedures, imposing
trading restrictions on U.S. persons trading on the FBOT, imposing
additional conditions on the registration, or taking other appropriate
action. For instance, the Commission believes that the listing of
certain products on an FBOT could potentially have an adverse impact on
the market and the public interest. Thus, the Commission would take
corrective action as necessary if it become aware that a registered
FBOT permits the trading of products that potentially could: (1) Affect
adversely the pricing of contracts traded on any registered entity as
defined in section 1a(40) of the Act, or of contracts traded on any
cash market for commodities subject to the CEA; (2) create unacceptable
systemic risks or disruptions in those markets or the U.S. financial
system, including capital markets; or (3) facilitate abusive trading
practices on U.S. markets or otherwise interfere with the ability of
the Commission to carry out its regulatory responsibilities. The
Commission retains plenary authority to address manipulative or abusive
trading practices that affect U.S. futures and cash markets and market
users, and would use that enforcement authority when necessary and
appropriate.
[[Page 70983]]
J. Additional Contracts
Section 48.10 would establish the procedures for a registered FBOT
to make available futures, option and swaps contracts that were not
included in the registration application on a trading system to which
FBOT members and other participants in the U.S. have been granted
direct access. These procedures are substantially similar to the
procedures established for the listing of additional contracts under
direct access no-action relief.\38\ Generally, for other than security
index futures contracts, a registered FBOT would be required to submit
a written request prior to offering the additional futures and option
and swaps contracts from within the U.S. Such a written request would
include the terms and conditions of the additional contracts to be made
available and a certification that (1) the additional contracts meet
the requirements of Section 48.7(c) of this part and (2) the FBOT and
the clearing organization continue to satisfy the conditions of
registration. The FBOT would be permitted to make available for trading
the additional contracts ten business days after the date of receipt by
the Commission of the written request, unless the Commission notifies
the FBOT that additional time is needed to complete its review of
policy or other issues pertinent to the additional contracts.
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\38\ See Notice of Revision of Commission Policy Regarding the
Listing of New Futures and Option Contracts by Foreign Boards of
Trade That Have Received Staff No-Action Relief to Provide Direct
Access to Their Automated Trading Systems from Locations in the
United States. 71 FR 19877 (April 18, 2006); corrected at 71 FR
21003 (April 24, 2006).
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A registered foreign board of trade would be permitted to list for
trading an additional futures contract on a non-narrow-based security
index pursuant to the no-action relief procedures set forth in Appendix
D to Part 30 of the Commissions regulations. Such procedures would
require that the registered FBOT's request to make the non-narrow-based
security index futures contract available for trading by direct access
be included in the FBOT's request that the Commission's Office of the
General Counsel issue no-action relief providing that the non-narrow-
based security index futures contract may be offered or sold to persons
located within the U.S. in accordance with Section 2(a)(1)(C)(iv) of
the Act.
With respect to making available for trading by direct access an
option contract on a previously approved futures contract, the proposed
procedures are also substantially similar to the procedures established
for the listing such option contracts under direct access no-action
relief.\39\ The proposed procedures would provide the following,
depending on the type of option contract. (1) If the option is on a
futures contract that is not a linked contract, the option contract
could be made available for trading by direct access by filing with the
Commission no later than the business day preceding the initial listing
of the contract: (i) A copy of the terms and conditions of the
additional contract and (ii) a certification that the FBOT continues to
satisfy the conditions of its registration. (2) If the option is on a
futures contract that is a linked contract, the option contract may be
made available for trading by direct access in the same manner as (1)
above except that the certification must represent that the FBOT
continues to satisfy the conditions of its registration, including the
conditions specifically applicable to linked contracts set forth in
Section 48.8(c). (3) If the option is on a non-narrow-based security
index futures contract which may be offered or sold in the U.S.
pursuant to a no-action letter issued by the Office of General Counsel,
the option contract could be listed for direct access without further
action by either the registered FBOT or the Commission.
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\39\ See Notice of Additional Conditions on the No-Action Relief
When Foreign Boards of Trade That Have Received Staff No-Action
Relief To Permit Direct Access to Their Automated Trading Systems
from Locations in the United States List for Trading from the U.S.
Linked Futures and Option Contracts and a Revision of Commission
Policy Regarding the Listing of Certain New Option Contracts. 74 FR
3570 (January 21, 2009).
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K. Appendix to Part 48--Contents of Application
The Appendix to the proposed Part 48 includes a description of what
the Commission believes should be included in the application for
registration in order for the FBOT to demonstrate, and for the
Commission to conclude, that the FBOT meets the requirements for
registration. The Appendix reflects submission requirements in eight
areas, including general information about the FBOT and seven areas
that specifically address the registration requirements identified in
Section 48.7. The Commission requests comments with respect to whether
the application contents requirements of the Appendix are adequate to
completely address the registration requirements.
IV. Request for Comments Regarding the Proposed Registration Procedures
In the proposed rule, the Commission has included swaps in the set
of contracts that a registered FBOT may list on a trading system to
which it has provided direct access to U.S.-located members and other
participants. As previously stated, there is nothing in the Dodd-Frank
Act, including Section 738 of the Dodd-Frank Act amending Section 4(b)
of the CEA, which expressly precludes a registered FBOT from offering
swaps through direct access. Accordingly, the Commission is proposing
to permit a registered FBOT to offer and trade swaps though direct
access, subject to the condition that the FBOT meet certain standards
or requirements that may apply to SEFs, as the Commission deems
appropriate.\40\ The Commission requests comment with respect to
whether a registered FBOT should be allowed to make available swaps
through direct access and if so, under what conditions. FBOTs have
historically, at least in the context of granting direct access no-
action relief, been viewed by Commission staff as DCM-equivalent
entities. The proposed FBOT registration requirements are based upon
the premise that in reviewing the FBOT for being subject to comparable,
comprehensive supervision and regulation by the appropriate
governmental authorities in its home country, the point of reference is
how DCMs operate and are regulated and overseen by the CFTC.
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\40\ As previously noted, under the Dodd-Frank Act, a DCM may
trade swaps without additionally registering as a SEF.
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Finally, the Commission requests comment on whether, to the extent
an FBOT is permitted to list swaps on a trading system to which the
FBOT has granted direct access to members and other participants in the
U.S., the Commission should examine the oversight of relevant market
participants (e.g., the functional equivalents of swap dealers and
major swap participants, as those terms are defined by the Dodd-Frank
Act) in the applicable home country jurisdictions when making a
determination as to the comparability and comprehensiveness of the
supervision and regulation of the relevant regulatory regime. For
example, the Commission may wish to consider whether swap dealers are
permitted to provide counterparties with the right to segregate
collateral. In the case of swaps, certain portions of the regulatory
regime applicable to market participants with respect to their exchange
trading activity (e.g., business conduct standards) may be imposed by
the primary regulatory authority in the home jurisdiction of the
participant instead of by the exchange on which such participants
conduct their transactions. Accordingly, it may be necessary or
appropriate to review the
[[Page 70984]]
regulations applicable to such participants in order to ascertain
whether the foreign regulatory regime with respect to the foreign board
of trade, in its totality, is both comprehensive and comparable to that
in the U.S. The Commission requests comment regarding whether such a
review is necessary or appropriate. The Commission invites public
comment with respect to all areas described in the proposed
registration rule.
V. Related Matters
A. The Paperwork Reduction Act
The purposes of the Paperwork Reduction Act (``PRA'') are, among
other things, to minimize the paperwork burden to the private sector,
ensure that any collection of information by a government agency is put
to the greatest possible uses, and minimize duplicative information
collections across government.\41\ The PRA applies with extraordinary
breadth to all information, ``regardless of form or format,'' a
government agency is ``obtaining, causing to be obtained [or]
soliciting'' and includes requiring ``disclosure to third parties or
the public, of facts or opinion,'' when the information collection
calls for ``answers to identical questions posed to, or identical
reporting or recordkeeping requirements imposed on, ten or more
people.'' \42\ This provision has been determined to include not only
mandatory but also voluntary information collections, and to not only
written but also oral communications.\43\
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\41\ 44 U.S.C. 3501.
\42\ 44 U.S.C. 3502.
\43\ 5 CFR 1320.3(c)(1).
---------------------------------------------------------------------------
To effect the purposes of the PRA, Congress requires all agencies
to quantify and justify the burden of any information collection it
imposes.\44\ This includes submitting each collection, whether or not
it is contained in a rulemaking, to the Office of Management and Budget
(``OMB'') for review.\45\ The OMB submission process includes
completing a form 83-I and a supporting statement with the agency's
burden estimate and justification for the collection. When the
information collection is established within a rulemaking, the agency's
burden estimate and justification should be provided in the proposed
rulemaking, subjecting it to the rulemaking's public comment process.
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\44\ 44 U.S.C. 3506.
\45\ 44 U.S.C. 3507.
---------------------------------------------------------------------------
The Commission will protect proprietary information according to
the Freedom of Information Act and 17 CFR part 145, ``Commission
Records and Information.'' In addition, section 8(a)(1) of the Act
strictly prohibits the Commission, unless specifically authorized by
the Act, from making public ``data and information that would
separately disclose the business transactions or market positions of
any person and trade secrets or names of customers.'' The Commission
also is required to protect certain information contained in a
government system of records according to the Privacy Act of 1974, 5
U.S.C. 552a.
If the proposed rules are promulgated in final form, they would
require FBOT registrants to collect and submit, pursuant to part 48 of
the Regulations, information to the Commission, which has never been
required. For each proposed requirement, set forth below are estimates
of: (i) The number of respondents; (ii) the number of annual responses
by each respondent; (iii) the average hours per response; and (iv) the
aggregate annual reporting burden. New OMB control numbers will be
assigned to these proposed information collection requirements.
1. New Collection 3038-NEW
Regulation 48.6 requires each FBOT currently providing direct
access pursuant to no-action relief to submit a ``complete limited
application'' with the Commission to satisfy the registration
requirement, which includes information and documentation set forth in
the Appendix to this part that was not previously provided or is not
current.
OMB Control Number 3038-NEW.
Estimated number of respondents: 20.
Annual responses by each respondent: 1.
Estimated average hours per response: 50.
Aggregate annual reporting burden: 1,000.
2. New Collection 3038-NEW
Regulation 48.7 provides the information and documentation
requirements that a new FBOT must submit to become registered with the
Commission, including FBOT membership information, automated trading
system, terms and conditions of contracts to be made available in the
U.S., settlement and clearing, the regulatory regime governing the FBOT
and clearing organization, the FBOT and clearing organization rules and
enforcement thereof, and information sharing agreements.
OMB Control Number 3038-NEW.
Estimated number of respondents: 7.
Annual responses by each respondent: 1.
Estimated average hours per response: 1,000.
Aggregate annual reporting burden: 7,000.
3. New Collection 3038-NEW
Regulation 48.8(a)(8)(i) requires each registered FBOT that makes
swap contracts available by direct access to report to the public, on a
real-time basis, data relating to each swap transaction, including
price and volume, as soon as technologically practicable after
execution of the swap transactions.\46\
---------------------------------------------------------------------------
\46\ Because the Commission has not previously regulated the
swap market, the Commission was unable to collect data relevant to
these estimates. Therefore, the Commission requests comment on these
estimates.
---------------------------------------------------------------------------
OMB Control Number 3038-NEW.
Estimated number of respondents: 4.
Annual responses by each respondent: 250.
Estimated average hours per response: 8.32.
Aggregate annual reporting burden: 8,320.
4. New Collection 3038-NEW
Regulation 48.8(a)(8)(ii) requires each registered FBOT that makes
swap contracts available by direct access to ensure that all swap
transaction data is timely reported to a swap data repository.\47\
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\47\ Because the Commission has not previously regulated the
swap market, the Commission was unable to collect data relevant to
these estimates. Therefore, the Commission requests comment on these
estimates.
---------------------------------------------------------------------------
OMB Control Number 3038-NEW.
Estimated number of respondents: 4.
Annual responses by each respondent: 250.
Estimated average hours per response: 8.32.
Aggregate annual reporting burden: 8,320.
5. New Collection 3038-NEW
Regulation 48.8(b)(1)(i)(A) and (B) requires each registered FBOT
to provide the Commission with certain trading volume information and
certain information regarding the FBOT members and other participants
in the U.S. that have direct access to the FBOT's trading system on at
least a quarterly basis.
OMB Control Number 3038-NEW.
Estimated number of respondents: 27.
Annual responses by each respondent: 4.
Estimated average hours per response: 6.
Aggregate annual reporting burden: 648.
6. New Collection 3038-NEW
Regulation 48.8(b)(1)(ii)(A)-(F) requires each registered FBOT to
[[Page 70985]]
provide the Commission on an ongoing basis with written notice of
certain information, including any material changes to the registration
information and documents previously submitted to the Commission; any
matter known to the FBOT concerning the financial or operational
viability of the FBOT or its clearing organization; and any known
violation by the FBOT, its clearing organization, any member of the
FBOT or its clearing organization or any other participant of the terms
or conditions of registration.
OMB Control Number 3038-NEW.
Estimated number of respondents: 27.
Annual responses by each respondent: 1.
Estimated average hours per response: 2.
Aggregate annual reporting burden: 54.
7. New Collection 3038-NEW
Regulation 48.8(b)(1)(iii)(A)-(F) requires each registered FBOT to
provide the Commission on an annual basis with certain information
including a certification from the FBOT's regulatory authority that the
FBOT retains its authorization in good standing as a regulated exchange
under the licensing used in the FBOT's home country, a description of
any significant disciplinary or enforcement actions that have been
instituted by the FBOT in the prior year, and a written description of
any material changes to the regulatory regime to which the FBOT is
subject to that have not previously been disclosed to the Commission.
OMB Control Number 3038-NEW.
Estimated number of respondents: 27.
Annual responses by each respondent: 1.
Estimated average hours per response: 4.
Aggregate annual reporting burden: 108.
8. New Collection 3038-NEW
Regulation 48.8(c)(1)(ii)(C)(1)-(4) requires each registered FBOT
to promptly notify the Commission, with regard to the linked contract,
of any changes regarding information that the FBOT will make publicly
available, enforcement of position limits, and position reductions
required to prevent manipulation, excessive speculation as described in
section 4a of the Act, price distortion, or disruption of delivery or
the cash settlement process, and any other area of interest expressed
by the Commission to the FBOT or its regulatory authority.
OMB Control Number 3038-NEW.
Estimated number of respondents: 1.
Annual responses by each respondent: 2.
Estimated average hours per response: 3.
Aggregate annual reporting burden: 6.
9. New Collection 3038-NEW
Regulation 48.8(c)(1)(ii)(D) requires each registered FBOT with a
linked contract to provide the Commission with large trader position
information.
OMB Control Number 3038-NEW.
Estimated number of respondents: 1.
Annual responses by each respondent: 250.
Estimated average hours per response: 2.
Aggregate annual reporting burden: 500.
10. New Collection 3038-NEW
Regulation 48.8(c)(1)(ii)(E) requires each registered FBOT with a
linked contract to provide the Commission with such information as
necessary to publish reports on aggregate trader positions.
OMB Control Number 3038-NEW.
Estimated number of respondents: 1.
Annual responses by each respondent: 250.
Estimated average hours per response: 2.
Aggregate annual reporting burden: 500.
11. New Collection 3038-NEW
Regulation 48.8(c)(2)(i) requires each registered FBOT with a
linked contract to provide the Commission with a quarterly report of
any member that had positions in a linked contract above the FBOT
position limit, whether a hedge exemption was granted, and if not,
whether a disciplinary action was taken.
OMB Control Number 3038-NEW.
Estimated number of respondents: 1.
Annual responses by each respondent: 4.
Estimated average hours per response: 3.
Aggregate annual reporting burden: 12.
12. New Collection 3038-NEW
Regulation 48.8(c)(2)(ii) requires each registered FBOT with a
linked contract to provide the Commission with trade execution and
audit trail data on a trade-date plus one basis.
OMB Control Number 3038-NEW.
Estimated number of respondents: 1.
Annual responses by each respondent: 250.
Estimated average hours per response: 3.
Aggregate annual reporting burden: 750.
13. New Collection 3038-NEW
Regulation 48.8(c)(2)(iv) requires each registered FBOT with a
linked contract to provide the Commission with a copy of all rules,
rule amendments, and other notices published by the FBOT with respect
to all linked contracts.
OMB Control Number 3038-NEW.
Estimated number of respondents: 1.
Annual responses by each respondent: 20.
Estimated average hours per response: 2.
Aggregate annual reporting burden: 40.
14. New Collection 3038-NEW
Regulation 48.8(c)(2)(v) requires each registered FBOT with a
linked contract to provide the Commission with a copy of all
disciplinary notices involving the FBOT's linked contract upon closure
of the action.
OMB Control Number 3038-NEW.
Estimated number of respondents: 1.
Annual responses by each respondent: 2.
Estimated average hours per response: 2.
Aggregate annual reporting burden: 4.
15. New Collection 3038-NEW
Regulation 48.9 requires each registered FBOT, upon request by the
Commission, to file a written demonstration that the FBOT is in
compliance with the conditions for registration.
OMB Control Number 3038-NEW.
Estimated number of respondents: 26.
Annual responses by each respondent: .25.
Estimated average hours per response: 8.
Aggregate annual reporting burden: 52.
16. New Collection 3038-NEW
Regulation 48.10 requires each registered FBOT that wishes to list
additional futures and options contracts for trading by direct access
to request in writing and receive approval from the Commission prior to
offering the contracts from within the U.S.
OMB Control Number 3038-NEW.
Estimated number of respondents: 27.
Annual responses by each respondent: 1.
Estimated average hours per response: 4.
Aggregate annual reporting burden: 108.
The Commission invites the public and other Federal agencies to
comment on any aspect of the reporting and recordkeeping burdens
discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission
solicits comments in order to: (i) Evaluate whether the proposed
collection of information is necessary for the proper performance of
the
[[Page 70986]]
functions of the Commission, including whether the information will
have practical utility; (ii) evaluate the accuracy of the Commission's
estimate of the burden of the proposed collection of information; (iii)
determine whether there are ways to enhance the quality, utility, and
clarity of the information to be collected; and (iv) minimize the
burden of the collection of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
Comments may be submitted directly to the Office of Information and
Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at
[email protected]. Please provide the Commission with a copy
of submitted comments so that all comments can be summarized and
addressed in the final rule preamble. Refer to the Addresses section of
this notice of proposed rulemaking for comment submission instructions
to the Commission. A copy of the supporting statements for the
collections of information discussed above may be obtained by visiting
RegInfo.gov. OMB is required to make a decision concerning the
collection of information between 30 and 60 days after publication of
this release in the Federal Register. Consequently, a comment to OMB is
most assured of being fully effective if received by OMB (and the
Commission) within 30 days after publication of this notice of proposed
rulemaking. Nothing in the foregoing affects the deadline enumerated
above for public comment to the Commission on the proposed rules.
B. Cost Benefit Analysis
Section 15(a) of the Act requires the Commission to consider the
costs and benefits of its actions before issuing a new regulation or
order under the Act.\48\ By its terms, Section 15(a) does not require
the Commission to quantify the costs and benefits of a new rule or to
determine whether the benefits of the adopted rule outweigh its costs.
Rather, Section 15(a) requires the Commission to ``consider the costs
and benefits'' of a proposed rule. Section 15(a) further specifies the
costs and benefits of proposed rules 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. In conducting its analysis, the Commission may, in its
discretion, give greater weight to any one of the five enumerated areas
of concern and may determine that, notwithstanding its costs, a
particular rule 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 rule.\49\
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\48\ 7 U.S.C. 19(a).
\49\ E.g., Fishermen's Dock Co-op., Inc v. Brown, 75 F3d 164
(4th Cir. 1996); Center for Auto Safety v. Peck, 751 F.2d 1336 (D.C.
Cir. 1985) (agency has discretion to weigh factors in undertaking
cost-benefit analyses).
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The proposed regulations implement the Dodd-Frank Act by
establishing a registration requirement for all FBOTs that wish to
provide their members or other participants located in the U.S. with
direct access to the FBOT's electronic trading and order matching
system. Pursuant to proposed Commission Regulation 48.5, FBOTs wishing
to provide direct access to their trading systems to members and other
participants located in the U.S. would be required to file an
application for registration with the Commission that contains all of
the information and documentation set forth in the Appendix to the Part
48 regulations and any additional information and documentation
required to successfully demonstrate that the FBOT satisfies the
registration requirements contained in Rule 48.7.
Regarding FBOTs that currently do not have no-action relief from
Commission staff, the Commission understands that costs associated with
the submission of an application for registration could be
considerable. However, the cost of applying for no-action relief under
existing procedures is substantial. FBOTs requesting no-action relief
currently are required to provide much of the information that would be
required under the proposed regulation. For example, FBOTs requesting
no-action relief under existing procedures have been required to
provide the Commission with information including the FBOT's trading
system, terms and conditions of contracts made available in the U.S.,
and the regulatory regime governing the FBOT in its home country. This
same information would be required as part of the registration process
under the proposed regulations. The additional cost of applying for
registration rather than applying for no-action relief is significant,
but not overly large.
FBOTs that currently have no-action relief from the Commission
would be required to register with the Commission and only provide a
limited application pursuant to the proposed regulations. This should
have the effect of limiting the costs to these FBOTs since they would
be required only to provide information that was not previously
provided or is not current.
The proposed regulations would authorize the Commission to impose
additional conditions on FBOTs that desire to make a linked contract
available by direct access to members of the FBOT or other participants
located in the U.S. These conditions would be required as part of the
FBOT registration process, and include among other things, the
imposition of speculative position limits and the submission of audit
trail data and large trader position information to the Commission for
all linked contracts. Any additional costs incurred by an FBOT with
existing no-action relief would be offset in part due to the
substantial overlap between the conditions already promulgated by the
Commission as a general policy applicable to FBOTs with linked
contracts and the conditions being proposed by the Commission under
regulation 48.8.\50\
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\50\ See CFTC Letter No. 08-09, June 17, 2008.
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The proposed FBOT registration regulations offer significant
benefits over the no-action process through which requests to provide
direct access to FBOT trading systems were handled in the past. While
the no-action process has served a useful purpose, the no-action
process is designed for discrete, unique factual circumstances where
regulations do not address the issue presented. Where the same type of
relief is granted on a regular and recurring basis, as it has been with
respect to direct access to FBOT trading systems, the Commission
believes that it is more appropriate to provide the relevant relief
through a generally applicable rulemaking. The proposed regulations
would provide a more standardized and efficient application process,
enhance the visibility of the process to both applicants and the
public, and ensure fair and consistent treatment to applicants.
Moreover, the Order of Registration issued by the Commission pursuant
to this proposal would provide greater legal certainty to FBOTs
operating pursuant to those Orders than no-action letters, which are
issued by the staff and not binding on the Commission.
In addition, there is substantial value in the information and
documentation that the Commission will be able to obtain, and the
obligations that may be imposed pursuant to the conditions applicable
to FBOT registration. For example, an FBOT that lists for trading a
contract which settles on the price of
[[Page 70987]]
a contract traded on a Commission-regulated exchange raises serious
concerns for the Commission. The position limit requirement and the
submission of large trader position information and audit trail data to
the Commission, pursuant to the conditions placed upon an FBOT that
offers a linked contract for trading via direct access to its members
or other participants located in the U.S., will enhance the
Commission's ability to carry out its market surveillance
responsibilities. The proposed regulations and related conditions also
will ensure that transactions executed on an FBOT do not adversely
affect U.S. cash and futures markets, market participants, and
customers, as well as the consumers affected by those transactions.
Finally, the proposed regulations are designed to ensure that the U.S.
commodity markets operate fairly and efficiently and are free from
fraud, manipulation and other market abuses.
After considering the costs and benefits, the Commission has
determined to propose the regulations discussed above. The Commission
invites public comment on its evaluation of the costs and benefits of
the proposed regulations. Specifically, commenters are invited to
submit data quantifying the costs and benefits of the proposed
regulations with their comment letters.
C. The Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \51\ requires that
agencies consider whether the rules they propose will have a
significant economic impact on a substantial number of small entities
and, if so, provide a regulatory flexibility analysis respecting the
impact.\52\ The proposed rules detailed in this release would only
affect FBOTs. The rules would replace the policy of issuing staff no-
action letters to permit FBOTs to provide for direct access, defined in
the Dodd-Frank Act to refer to an explicit grant of authority by an
FBOT to an identified member or other participant to enter trades
directly into the FBOT's trade matching system.
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\51\ 5 U.S.C. 601 et seq.
\52\ 5 U.S.C. 601 et seq.
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As a threshold matter, because the proposed application
requirements and standards for FBOT registration under the new rules
generally are consistent with the application requirements and review
standards that have guided the Commission's staff in issuing FBOT no-
action relief letters, the Commission believes that these rules will
not have a significant economic effect on any substantial number of
FBOTs, whether they are large or small entities. Moreover, the
Commission does not believe that FBOTs would be small entities. For
both reasons, the Commission believes that a regulatory flexibility
analysis is not required for this rulemaking.
The Commission has not previously addressed the question whether
FBOTs are, in fact, small entities for purposes of the RFA since FBOTs
are a new category of registrant created by the Dodd-Frank Act.
However, the term ``foreign board of trade'' has been used in the CEA
and defined in the Commission Regulations to be a ``board of trade,
exchange or market located outside the U.S.'' \53\ The term ``board of
trade,'' in turn, is defined in the CEA as ``any organized exchange or
trading facility.'' \54\ An organized exchange includes designated or
registered exchanges, such as DCMs.\55\
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\53\ See Commission Regulation 1.33(ss). Additionally, the term
``board of trade, exchange or market located outside the U.S.'' is
used interchangeably in the CEA with the term ``foreign board of
trade.'' For example, Section 4(a) carves out ``board of trade,
exchange or market located outside the U.S.'' from the requirement
that futures contracts in the U.S. must be traded on a DCM or DTEF;
new Section 4(b)(2)(C) provides that the Commission may not, except
as provided in section 4(b)(1) and (2), directly regulate a
``foreign board of trade.''
\54\ CEA Sec. 1a(2).
\55\ CEA Sec. 1a(27).
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The Commission has previously determined that DCMs are not ``small
entities'' for purposes of the RFA.\56\ Key to the Commission's
determination was that DCMs perform a central role in the regulatory
scheme for futures trading, requiring the DCM to employ significant
resources, including personnel, in the performance of this statutory
role. The Commission designates a contract market only when it meets
specific criteria including expenditure of sufficient resources to
establish and maintain adequate self-regulatory programs.
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\56\ 47 FR 18618, 18619 (April 30, 1982).
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Likewise, the Commission will register an FBOT to provide direct
access only after it has met similar criteria. Critically, an FBOT will
only be registered by demonstrating that it possesses the attributes of
an established, organized exchange; adheres to appropriate rules
prohibiting abusive trading practices; and enforces appropriate rules
to maintain market and financial integrity. Because FBOTs and DCMs are
functionally equivalent entities in these regards, the Commission is
determining that FBOTs, like DCMs, are not small entities for purposes
of the RFA. In light of the foregoing, the Chairman on behalf of the
Commission hereby certifies, pursuant to 5 U.S.C. 605(b), that the
proposed rules will not have a significant impact on a substantial
number of small entities.
List of Subjects in 17 CFR Part 48
Foreign boards of trade, Commodity futures, Options, Swaps, Direct
access, Linked contract, Registration, Existing no-action relief,
Conditions of registration.
In consideration of the foregoing, and pursuant to the authority
contained in the Act, and, in particular, sections 3, 4 and 8a of the
Act, the Commission hereby proposes to amend Chapter I of Title 17 of
the Code of Federal Regulations by adding a new part 48 to read as
follows:
PART 48--REGISTRATION OF FOREIGN BOARDS OF TRADE
Sec.
48.1 Scope.
48.2 Definitions.
48.3 Registration required.
48.4 Registration eligibility.
48.5 Registration procedures.
48.6 Foreign boards of trade providing direct access pursuant to
existing no-action relief.
48.7 Requirements for registration.
48.8 Conditions of registration.
48.9 Revocation of registration.
48.10 Additional contracts.
Appendix--Part 48--Contents of Application
Authority: 7 U.S.C. 5, 6 and 12a, unless otherwise noted.
Sec. 48.1 Scope.
The provisions of this part apply to any foreign board of trade
that is registered or is applying to become registered with the
Commission in order to provide its identified members or other
participants located in the United States with direct access to its
electronic trading and order matching system.
Sec. 48.2 Definitions.
(a) Foreign board of trade. For purposes of this part, foreign
board of trade means any board of trade, exchange or market located
outside the United States, its territories or possessions, whether
incorporated or unincorporated, where foreign agreements, contracts or
transactions are entered into.
(b) Foreign board of trade eligible to be registered. A foreign
board of trade eligible to be registered means a foreign board of trade
that satisfies the requirements for registration specified in section
48.7 of this part and
(1) Possesses the attributes of an established, organized exchange,
[[Page 70988]]
(2) Adheres to appropriate rules prohibiting abusive trading
practices,
(3) Enforces appropriate rules to maintain market and financial
integrity,
(4) Has been authorized by a regulatory process that examines
customer and market protections, and
(5) Is subject to continued oversight by a regulator that has power
to intervene in the market and the authority to share information with
the Commission.
(c) Direct access. For purposes of this part, direct access means
an explicit grant of authority by a foreign board of trade to an
identified member or other participant located in the United States to
enter trades directly into the trade matching system of the foreign
board of trade.
(d) Linked contract. For purposes of this part, a linked contract
is a futures or option or swaps contract made available for direct
access from the United States by a registered foreign board of trade
that settles against any price (including the daily or final settlement
price) of one or more contracts listed for trading on a registered
entity as defined in section 1a(40) of the Act.
(e) Communications. For purposes of this part, communications is
defined to include any summons, complaint, order, subpoena, request for
information, notice, or any other written or electronic documentation
or correspondence issued by or on behalf of the Commission.
(f) Material change. For purposes of this part, material changes in
the information provided to the Commission in support of the
registration application would include, without limitation, a
modification of any of the following: The membership criteria of the
foreign board of trade or its clearing organization; the location of
the management, personnel or operations of the foreign board of trade
or its clearing organization (particularly changes that may suggest an
increased nexus between the foreign board of trade's activities and the
United States); the basic structure, nature, or operation of the
trading system or its clearing organization; the regulatory or self-
regulatory regime applicable to the foreign board of trade, its
clearing organization, and their respective members and other
participants (including, without limitation, the rules applicable to or
oversight thereof), any change in the authorization, licensure or
registration of the foreign board of trade or clearing organization,
and any information that may impact the ability of the clearing
organization to satisfy the current Recommendations for Central
Counterparties that have been issued jointly by the Committee on
Payment and Settlement Systems and the Technical Committee of the
International Organization of Securities Commissions as updated,
revised or otherwise amended, or successive standards, principles and
guidance for central counterparties or financial market infrastructures
adopted jointly by the International Organization of Securities
Commissions and the Committee on Payment and Settlement Systems.
(g) Clearing organization. For purposes of this part, clearing
organization means the foreign board of trade, affiliate of the foreign
board of trade or any third party clearing house, clearing association,
clearing corporation or similar entity, facility or organization that,
with respect to any agreement, contract or transaction executed on or
through the foreign board of trade, would be:
(1) Defined as a derivatives clearing organization under section
1a(9) of the Act;
(2) Defined as a central counterparty by the Recommendations for
Central Counterparties that have been issued jointly by the Committee
on Payment and Settlement Systems and the Technical Committee of the
International Organization of Securities Commissions, as updated,
revised or otherwise amended, or successive standards, principles and
guidance for central counterparties adopted or financial market
infrastructures adopted jointly by the Committee on Payment and
Settlement Systems or the International Organization of Securities
Commissions; or
(3) Otherwise interposes itself between the counterparties to the
agreements, contracts or transactions (or subset thereof) executed on
or through the foreign board of trade, becoming the buyer to every
seller and the seller to every buyer.
(h) Existing no-action relief. For purposes of this part, existing
no-action relief means a no-action letter issued by a division of the
Commission to the foreign board of trade in which the division informs
the foreign board of trade that it will not recommend that the
Commission institute enforcement action against the foreign board of
trade if the foreign board of trade does not seek designation as either
a designated contract market pursuant to section 5 of the Act or a
derivatives transaction execution facility pursuant to section 5a of
the Act in connection with the provision of direct access to the
foreign board of trade's trade matching system by its members and other
participants located in the United States.
(i) Swaps. For purposes of this part, swaps is defined to mean
swaps as defined in section 1a(47) of the Act, and any Commission
regulation adopted thereunder, and any transaction or contract that is
regulated as a swap under the regulatory regime to which the FBOT is
subject.
(j) Affiliate. For purposes of this part, an affiliate of a
registered foreign board of trade member or other participant shall
mean any person, as that term is defined in section 1a(38) of the CEA,
that:
(1) Owns 50% or more of the member or other participant;
(2) Is owned 50% or more by the member or other participant; or
(3) Is owned 50% or more by a third person that also owns 50% or
more of the member or other participant.
(k) Member or other participant. For purposes this part, the terms
member or other participant of the registered foreign board of trade
shall include any affiliate of any registered foreign board of trade's
member or other participant that has been granted direct access to the
trading system by the registered foreign board of trade.
Sec. 48.3 Registration required.
(a) Except as specified in this part, it shall be unlawful for a
foreign board of trade to permit direct access to its electronic
trading and order matching system from within the United States unless
and until the Commission has issued a valid and current Order of
Registration to the foreign board of trade pursuant to the provisions
of this part.
(b) It shall be unlawful for a board of trade to make false or
misleading statements in any application for registration or in
connection with any application for registration under this part.
Sec. 48.4 Registration eligibility.
(a) Only foreign boards of trade eligible to be registered, as
defined in Sec. 48.2(b) of this part, are eligible for registration
with the Commission pursuant to this part.
(b) An applicant may request foreign board of trade registration in
order to permit direct access from within the United States to its
members and other participants that:
(1) Trade in the United States for their proprietary accounts;
(2) Are registered with the Commission as futures commission
merchants and submit orders for United States customers to the trading
system for execution; or
(3) Are registered with the Commission as a commodity pool
[[Page 70989]]
operator or commodity trading advisor, or are exempt from such
registration pursuant to section 4.13 or 4.14 of this chapter, and that
submit orders for execution on behalf of United States pools they
operate or accounts of United States customers for which they have
discretionary authority, respectively, provided that a futures
commission merchant or a firm exempt from such registration pursuant to
Commission Rule 30.10 acts as clearing firm and guarantees, without
limitation, all such trades of the commodity pool operator or commodity
trading advisor effected through submission of orders to the trading
system.
Sec. 48.5 Registration procedures.
(a) A foreign board of trade seeking registration with the
Commission pursuant to this part must electronically file an
application for registration, labeled as an Application for Foreign
Board of Trade Registration pursuant to part 48 of the Commission's
Regulations, with the Secretary of the Commission, at
[email protected].
(b) An application for registration must be signed by the foreign
board of trade's chief executive officer (or functional equivalent) and
must include the information and documentation set forth in the
Appendix to this part 48 and any information and documentation
necessary, in the discretion of the Commission, to effectively
demonstrate that the foreign board of trade and its clearing
organization satisfy the registration requirements set forth in this
part. The application must include a certification by the chief
executive officer (or functional equivalent) of the foreign board of
trade and the clearing organization that representations made in
connection with, or relevant to, the application and the information
and documentation provided in support thereof are true, correct and
complete.
(c) A foreign board of trade registration applicant must identify
with particularity any information in the application that will be
subject to a request for confidential treatment and must provide
support for any request for confidential treatment pursuant to the
procedures set forth in section 145.9 of this chapter.
(d) The Commission will review the application for foreign board of
trade registration and, if the Commission finds the application to be
complete, may approve or deny the application. In its review, the
Commission will consider, among other things:
(1) Whether the foreign board of trade is eligible to be registered
as defined in section 48.2(b) of this part;
(2) Whether the foreign board of trade and its clearing
organization are subject to comprehensive supervision and regulation by
the appropriate governmental authorities in their home country that is
comparable to the comprehensive supervision and regulation to which
designated contract markets and derivatives clearing organizations are
respectively subject in the United States;
(3) Any previous Commission findings that the foreign board of
trade and its clearing organization are subject to comprehensive
supervision and regulation by the appropriate government authorities in
the foreign board of trade's home country that is comparable to the
comprehensive supervision and regulation to which designated contract
markets and derivatives clearing organizations are subject in the
United States; and
(4) Whether the foreign board of trade and its clearing
organization have adequately demonstrated that they meet the
requirements for registration specified in section 48.7 of this part.
(e) If the Commission approves the application, the Commission will
register the foreign board of trade by issuing an Order of
Registration. If the Commission does not approve the application, the
foreign board of trade will not be registered and may not provide
direct access to its electronic trading and order matching systems from
within the United States, and the Commission will issue a Notice of
Action specifying that the application was not approved and setting
forth the reasons therefor. The Commission may, after appropriate
notice and an opportunity for a hearing, amend, suspend, terminate or
otherwise restrict the terms of the Order of Registration.
(f) A foreign board of trade whose application is not approved may
reapply for registration 360 days after the issuance of the Notice of
Action if the foreign board of trade has addressed any deficiencies in
its original application or facts and circumstances relevant to the
Commission's review of the application have changed.
Sec. 48.6 Foreign boards of trade providing direct access pursuant to
existing no-action relief.
(a) A foreign board of trade operating pursuant to existing no-
action relief as of the effective date of this Part 48 must register
with the Commission pursuant to this Part 48 in order to continue to
provide direct access to its electronic trading and order matching
system from the United States.
(b) Such foreign board of trade's application for registration must
include all of the information and documentation set forth in the
Appendix to this part 48. To the extent that the foreign board of trade
intends to rely upon previously submitted information or documentation
to demonstrate that it satisfies the requirements of the Appendix or
the registration requirements set forth in section 48.7 of this part,
the foreign board of trade must resubmit the information or
documentation, identify the specific requirements for registration set
forth in section 48.7 of this part that are satisfied by the
resubmitted information, and certify that the information remains
current and true (limited application).
(c) Foreign boards of trade operating pursuant to existing no-
action relief must submit a complete limited application for
registration within 120 days of the effective date of this regulation
and the no-action relief will, upon notice to the foreign board of
trade, be revoked if a complete limited application is not received by
the Commission within that 120 days. The foreign board of trade may
continue to provide direct access from the United States pursuant to
the no-action relief during the 120-day period, during the period in
which the complete limited application is being reviewed by the
Commission, and until the Commission notifies the foreign board of
trade that the application has been approved or not approved or that
the existing no-action relief has otherwise been withdrawn.
Sec. 48.7 Requirements for registration.
An applicant for registration under this part must include all of
the information and documentation set forth in the Appendix to this
Part 48 and any other information and documentation necessary or
appropriate to determine that the following requirements for
registration are met. The Commission, in its discretion, may impose
additional registration requirements and request additional information
and documentation in connection with an application for registration.
An applicant for registration must provide promptly any additional
information or documentation requested by the Commission in connection
with the application.
(a) Foreign Board of Trade and Clearing Membership. An applicant
for registration must demonstrate that:
(1) The members and other participants of the foreign board of
trade and its clearing organization are fit and proper and meet
appropriate financial and professional standards,
[[Page 70990]]
(2) The foreign board of trade and its clearing organization have
and enforce provisions to minimize and resolve conflicts of interest,
and
(3) The foreign board of trade and its clearing organization have
and enforce rules prohibiting the disclosure of material non-public
information obtained as a result of a member's or other participant's
performance of duties as a member of their respective governing boards
and significant committees.
(b) The Automated Trading System. An applicant for registration
must demonstrate that:
(1) The trading system complies with Principles for the Oversight
of Screen-Based Trading Systems for Derivative Products developed by
the Technical Committee of the International Organization of Securities
Commissions,
(2) The trade matching algorithm matches trades fairly and timely,
(3) The audit trail captures all relevant data, including changes
to orders, and audit trail data is securely maintained and available
for an adequate time period,
(4) Trade data is made available to users and the public,
(5) The trading system has demonstrated reliability,
(6) Access to the trading system is secure and protected,
(7) There are adequate provisions for emergency operations and
disaster recovery,
(8) Trading data is backed up to prevent loss of data, and
(9) Only those futures and option contracts or swaps that have been
identified to the Commission as part of the application or permitted to
be made available for trading by direct access pursuant to the
procedures set forth in section 48.10 of this part are made available
for trading on connections in the United States.
(c) Terms and Conditions of Contracts To Be Made Available in the
United States.
(1) Contracts that may be made available by direct access must meet
the following standards:
(i) Contracts must be futures, option or swaps contracts--only such
contracts as would be eligible to be traded on a designated contract
market are eligible to be traded by direct access on a registered
foreign board of trade,
(ii) Contracts must be cleared,
(iii) Contracts must not be prohibited from being traded by United
States persons, and
(iv) Contracts must not be readily susceptible to manipulation.
(2) Contracts that have the following characteristics must be
identified:
(i) Contracts that are linked to a contract listed for trading on a
United States registered entity, and
(ii) Contracts that share any other commonality with a contract
listed for trading on a United States registered entity, for example,
if both the foreign board of trade's and the United States registered
entity's contract settle to the price of the same third party-
constructed index.
(d) Settlement and Clearing. An applicant for registration must
demonstrate that:
(1) The clearing organization complies with the current
Recommendations for Central Counterparties that have been issued
jointly by the Committee on Payment and Settlement Systems and the
Technical Committee of the International Organization of Securities
Commissions as updated, revised or otherwise amended, or successive
standards, principles and guidance for central counterparties and
financial market infrastructures adopted jointly by the International
Organization of Securities Commissions and the Committee on Payment and
Settlement Systems or is registered with the Commission as a
derivatives clearing organization, and
(2) The clearing organization is in good regulatory standing in its
home country jurisdiction.
(e) The Regulatory Regime Governing the Foreign Board of Trade and
the Clearing Organization. An applicant for registration must
demonstrate that:
(1) The regulatory authorities governing the activities of the
foreign board of trade and clearing organization provide comprehensive
supervision and regulation of the foreign board of trade and the
clearing organization that is comparable to the comprehensive
supervision and regulation provided by the Commission to designated
contract markets and derivatives clearing organizations, that is, the
regulatory authorities support and enforce regulatory objectives in the
oversight of the foreign board of trade and clearing organization that
are substantially equivalent to the regulatory objectives supported and
enforced by the Commission in its oversight of designated contract
markets and derivatives clearing organizations,
(2) The regulatory authorities governing the activities of the
foreign board of trade, the clearing organization and their respective
members and other participants engage in ongoing regulatory supervision
and oversight of the foreign board of trade and its trading system, the
clearing organization and its clearing system, the members,
intermediaries and other participants of the foreign board of trade and
clearing organization, with respect to, among other things, market
integrity, customer protection, clearing and settlement and the
enforcement of exchange and clearing organization rules,
(3) The regulatory authorities governing the foreign board of trade
and the clearing organization have the power to share information
directly with the Commission, upon request, including information
necessary to evaluate the continued eligibility of the foreign board of
trade for registration and to audit for compliance with the terms and
conditions of the registration.
(4) The regulatory authorities governing the foreign board of trade
and the clearing organization have the power to intervene in the
market.
(f) The Rules of the Foreign Board of Trade and Clearing
Organization and Enforcement Thereof. An applicant for registration
must demonstrate that:
(1) The foreign board of trade and its clearing organization have
implemented and enforce rules to ensure compliance with the
requirements of registration contained in this part,
(2) The foreign board of trade and its clearing organization have
the capacity to detect, investigate, and sanction persons who violate
their respective rules,
(3) The foreign board of trade and the clearing organization (or
their respective regulatory authorities) have implemented and enforce
disciplinary procedures that empower them to recommend and prosecute
disciplinary actions for suspected rule violations, impose adequate
sanctions for such violations, and provide adequate protections to
charged parties pursuant to fair and clear standards,
(4) The foreign board of trade and its clearing organization are
authorized by rule or by contractual agreement to obtain, from members
and other participants, any information and cooperation necessary to
conduct investigations, to effectively enforce their respective rules,
and to ensure compliance with the conditions of registration,
(5) The foreign board of trade and its clearing organization have
sufficient compliance staff and resources, including by delegation and/
or outsourcing to a third party, to fulfill their respective regulatory
responsibilities, including appropriate trade practice surveillance,
real time market monitoring, market surveillance, financial
surveillance, protection of customer funds, enforcement of clearing and
settlement provisions and other compliance and regulatory
responsibilities,
[[Page 70991]]
(6) The foreign board of trade has implemented and enforces rules
with respect to access to the trading system and the means by which the
connection is accomplished,
(7) The foreign board of trade's audit trail captures and retains
sufficient order and trade-related data to allow its compliance staff
to detect trading and market abuses and to reconstruct all transactions
within a reasonable period of time,
(8) The foreign board of trade has implemented and enforces rules
relating to prohibited trading practices (for example wash sales or
trading ahead),
(9) The foreign board of trade has the capacity to detect and
deter, and has implemented and enforces rules relating to, market
manipulation, attempted manipulation, price distortion, and other
disruptions of the market, and
(10) The foreign board of trade has and enforces rules and
procedures that ensure a competitive, open and efficient market and
mechanism for executing transactions.
(g) Information Sharing. An applicant for registration must
demonstrate that:
(1) The regulatory authorities governing the activities of and
providing supervision and oversight of the foreign board of trade and
the clearing organization are signatories to the International
Organization of Securities Commissions Multilateral Memorandum of
Understanding; if the regulatory authorities are not signatories to the
International Organization of Securities Commissions Multilateral
Memorandum of Understanding, they must inform the Commission of the
reasons why the document has not been signed, supply any additional
information requested by the Commission, and ensure alternative
information sharing arrangements that are satisfactory to the
Commission are in place.
(2) The regulatory authorities governing the activities of and
providing supervision and oversight of the foreign board of trade and
the clearing organization are signatories to the Declaration on
Cooperation and Supervision of International Futures Exchanges and
Clearing Organizations or otherwise commits to share the types of
information contemplated by the International Information Sharing
Memorandum of Understanding and Agreement with the Commission,
(3) The foreign board of trade has executed, or commits to execute,
the International Information Sharing Memorandum of Understanding and
Agreement, and
(4) Pursuant to the conditions described in section 48.8(a)(6) of
this part, the foreign board of trade and clearing organization must
provide directly to the Commission information necessary to evaluate
the continued eligibility of the foreign board of trade clearing
organization, or their respective members or other participants for
registration, to audit for and enforce compliance with the specified
conditions of the registration, or to enable the Commission to carry
out its duties under the Act and Commission regulations.
Sec. 48.8 Conditions of registration.
Immediately upon registration, and on an ongoing basis thereafter,
the foreign board of trade and the clearing organization shall comply
with the conditions of registration set forth in this section and any
additional conditions that the Commission may impose, in its
discretion, and after appropriate notice and opportunity for a hearing.
Such conditions could include, but are not limited to, the conditions
set forth in section 48.8(c) of this part and, with respect to the
listing of swaps contracts, any additional conditions that the
Commission deems necessary. Continued registration is expressly
conditioned upon satisfaction of these conditions.
(a) Specified Conditions for Maintaining Registration.
(1) Registration Requirements: The foreign board of trade and its
clearing organization shall continue to satisfy all of the requirements
for registration set forth in section 48.7 and the conditions for
maintaining registration set forth herein.
(2) Regulatory Regime:
(i) The foreign board of trade will continue to satisfy the
criteria for a regulated market pursuant to the regulatory regime
described in its application and will continue to be subject to
oversight by the regulatory authorities described in its application
with respect to transactions effected through the foreign board of
trade's trading system.
(ii) The clearing organization will continue to satisfy the
criteria for a regulated clearing organization pursuant to the
regulatory regime described in the application for registration; the
clearing organization and its participants will continue to be subject
to comprehensive supervision, regulation and oversight by the
regulatory authorities as described in the application and that is
comparable to the comprehensive supervision, regulation to which such
entities would be subject in the United States; and the clearing
organization shall continue to be in good standing with the relevant
regulatory authority.
(iii) The laws, systems, rules, and compliance mechanisms of the
regulatory regime applicable to the foreign board of trade will
continue to require the foreign board of trade to maintain fair and
orderly markets; prohibit fraud, abuse, and market manipulation; and
provide that such requirements are subject to the oversight of
appropriate regulatory authorities.
(3) Satisfaction of Comparable International Standards:
(i) The foreign board of trade will continue to adhere to the
Principles for the Oversight of Screen-Based Trading Systems for
Derivative Products developed by the Technical Committee of the
International Organization of Securities Commissions, as updated,
revised, or otherwise amended, to the extent such principles do not
contravene United States law.
(ii) The clearing organization will continue to: (A) Be registered
as a derivatives clearing organization and be in compliance with the
laws and regulations related thereto or (B) satisfy the Recommendations
for Central Counterparties that have been issued jointly by the
Committee on Payment and Settlement Systems and the Technical Committee
of the International Organization of Securities Commissions, as
updated, revised or otherwise amended, or successive standards,
principles and guidance for central counterparties or financial market
infrastructures adopted jointly by the Committee on Payment and
Settlement Systems and the Technical Committee of the International
Organization of Securities Commissions.
(4) Restrictions on Direct Access:
(i) Only the foreign board of trade's identified members or other
participants will have direct access to the foreign board of trade's
trading system from the United States and the foreign board of trade
will not provide, and will take reasonable steps to prevent, third
parties from providing direct access to the foreign board of trade to
persons other than the identified members or other participants.
(ii) All orders that are transmitted through the foreign board of
trade's trading system by a foreign board of trade identified member or
other participant that is operating pursuant to the foreign board of
trade's registration will be solely for the member's or trading
participant's own account unless such member or other participant is
registered with the Commission as a futures commission merchant or such
member or other participant is registered with the Commission as a
commodity pool operator or commodity trading advisor, or is exempt from
such
[[Page 70992]]
registration pursuant to section 4.13 or 4.14 of this chapter, provided
that a futures commission merchant or a firm exempt from such
registration pursuant to Commission Rule 30.10 acts as clearing firm
and guarantees, without limitation, all such trades of the commodity
pool operator or commodity trading advisor effected through submission
of orders on the trading system.
(5) Submission to Commission Jurisdiction:
(i) The foreign board of trade will require that each current and
prospective member or other participant that is granted direct access
to the foreign board of trade's trading system pursuant to the foreign
board of trade's registration and that is not registered with the
Commission as a futures commission merchant, a commodity trading
advisor or a commodity pool operator file with the foreign board of
trade a written representation, executed by a person with the authority
to bind the member or other participant, stating that as long as the
member or other participant grants direct access to the foreign board
of trade's trading system pursuant to the foreign board of trade
registration, the member or other participant agrees to and submits to
the jurisdiction of the Commission with respect to activities conducted
pursuant to the registration.
(ii) The foreign board of trade and its clearing organization will
file with the Commission a valid and binding appointment of an agent
for service of process in the United States pursuant to which the agent
is authorized to accept delivery and service of communications issued
by or on behalf of the Commission.
(iii) The foreign board of trade will require that each current and
prospective member or other participant of the foreign board of trade
that is granted direct access to the foreign board of trade's trading
system pursuant to the foreign board of trade's registration with the
Commission and that is not registered with the Commission as a futures
commission merchant, a commodity trading advisor or a commodity pool
operator file with the foreign board of trade a valid and binding
appointment of a United States agent for service of process in the
United States pursuant to which the agent is authorized to accept
delivery and service of communications issued by or on behalf of the
Commission.
(iv) The foreign board of trade, clearing organization, and each
current and prospective member or other participant of either that is
granted direct access to the foreign board of trade's trading system
pursuant to the foreign board of trade's registration and that is not
registered with the Commission as a futures commission merchant, a
commodity trading advisor, or a commodity pool operator will maintain
with the foreign board of trade written representations, executed by
persons with the authority to bind the entity making them, stating that
as long as the foreign board of trade is registered under this
regulation, the foreign board of trade, the clearing organization or
member of either or other participant granted direct access pursuant to
this regulation will provide, upon the request of the Commission, the
United States Department of Justice and, if appropriate, the National
Futures Association, prompt access to the entity's, member's, or other
participant's original books and records or, at the election of the
requesting agency (the Commission, the United States Department of
Justice, or the National Futures Association), a copy of specified
information containing such books and records, as well as access to the
premises where the trading system is available in the United States.
(v) The foreign board of trade will maintain all representations
required pursuant to this regulation as part of its books and records
and will make them available to the Commission upon request.
(6) Information Sharing:
(i) Information-sharing arrangements satisfactory to the
Commission, including but not limited to those set forth in section
48.7(g) of the registration requirements, are in effect between the
Commission and the regulatory authorities that supervise both the
foreign board of trade and the clearing organization.
(ii) The Commission is, in fact, able to obtain sufficient
information regarding the foreign board of trade, the clearing
organization, their respective members and participants and the
activities related to the foreign board of trade's registration.
(iii) The foreign board of trade, and its clearing organization, as
applicable, will provide directly to the Commission any information
necessary to evaluate the continued eligibility of the foreign board of
trade or its members or other participants for registration, the
capability and determination to enforce compliance with these specified
conditions of the registration or, in the event that the Commission has
been unable to satisfactorily obtain necessary information from the
regulatory authority, to enable the Commission to carry out its duties
under the Act and Commission regulations and to provide adequate
protection to the public or United States registered entities.
(iv) In the event that the foreign board of trade and the clearing
organization are separate entities, the foreign board of trade will
require the clearing organization to enter into a written agreement in
which the clearing organization is contractually obligated to promptly
provide any and all information and documentation that may be required
of the clearing organization under this regulation and such agreement
shall be made available to the Commission, upon request.
(7) Monitoring for Compliance:
The foreign board of trade and the clearing organization will
employ reasonable procedures for monitoring and enforcing compliance
with the specified conditions of its registration.
(8) Conditions Applicable to Swaps Trading:
(i) If the foreign board of trade makes swaps contracts available
by direct access, the foreign board of trade must report to the public,
on a real-time basis, data relating to each swap transaction, including
price and volume, as soon as technologically practicable after
execution of the swap transaction.
(ii) If the foreign board of trade makes swaps contracts available
by direct access, the foreign board of trade must ensure that all swap
transaction data is timely reported to a swap data repository that is
either A. registered with the Commission, or B. has an information
sharing arrangement with, the Commission.
(iii) If the foreign board of trade makes swaps contracts available
by direct access, the foreign board of trade must agree to coordinate
with the Commission with respect to arrangements established to address
cross market oversight issues, including surveillance, emergency
actions and the monitoring of trading.
(b) Other Continuing Obligations.
(1) Foreign boards of trade registered under this part and their
clearing organizations must also comply with the following regulatory
obligations on an ongoing basis:
(i) The foreign board of trade will maintain the following updated
information and submit such information to the Commission on at least a
quarterly basis, not later than 30 days following the end of the
quarter, and at any time promptly upon the request of a Commission
representative, computed based upon separating buy sides and sell
sides:
(A) For each contract available to be traded through the foreign
board of trade's trading system,
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(1) The total trade volume originating from electronic trading
devices providing direct access to the trading system in the United
States,
(2) The total trade volume for such products traded through the
trading system worldwide, and
(3) The total trade volume for such products traded on the foreign
board of trade generally; and
(B) A listing of the names, National Futures Association
identification numbers (if applicable), and main business addresses in
the United States of all members and other participants that have
direct access to the trading system in the United States.
(ii) The foreign board of trade will promptly provide to the
Commission written notice of the following:
(A) Any material change in the information provided in the
registration application.
(B) Any material change in the foreign board of trade's or clearing
organization's rules or the laws, rules, and regulations in the home
country jurisdictions of the foreign board of trade or clearing
organization relevant to futures, options and swaps contracts.
(C) Any matter known to the foreign board of trade, the clearing
organization or its representatives that, in the judgment of the
foreign board of trade or clearing organization judgment, may affect
the financial or operational viability of the foreign board of trade or
its clearing organization with respect to contracts traded by direct
access, including, but not limited to, any significant system failure
or interruption.
(D) Any default, insolvency, or bankruptcy of any foreign board of
trade member or other participant that is or should be known to the
foreign board of trade or its representatives or the clearing
organization or its representatives that may have a material, adverse
impact upon the condition of the foreign board of trade as it relates
to trading by direct access, its clearing organization or upon any
United States customer or firm or any default, insolvency or bankruptcy
of any member of the foreign board of trade's clearing organization.
(E) Any violation of the specified conditions of the foreign board
of trade's registration or failure to satisfy the requirements for
registration under this part that is known or should be known by the
foreign board of trade, the clearing organization or any of their
respective members or participants.
(F) Any disciplinary action by the foreign board of trade or its
clearing organization with respect to any contract available to be
traded by direct access taken against any of their respective members
or participants that involves any market manipulation, fraud, deceit,
or conversion or that results in suspension or expulsion.
(iii) The foreign board of trade and the clearing organization, as
applicable, must provide the following to the Commission on an annual
basis.
(A) A certification from the foreign board of trade's regulatory
authority confirming that the foreign board of trade retains its
authorization, licensure or registration, as applicable, as a regulated
market and/or exchange under the authorization, licensing or other
registration methodology used by the foreign board of trade's
regulatory authority and that the foreign board of trade is in
continued good standing.
(B) A certification from the clearing organization's regulatory
authority confirming that the clearing organization retains its
authorization, licensure or registration, as applicable, as a clearing
organization under the authorization, licensing or other registration
methodology used by the clearing organization's regulatory authority
and is in continued good standing.
(C) If the clearing organization is not a derivatives clearing
organization, a recertification of the clearing organization's
compliance with the Recommendations for Central Counterparties that
have been issued jointly by the Committee on Payment and Settlement
Systems and the Technical Committee of the International Organization
of Securities Commissions, as updated, revised or otherwise amended, or
successive standards, principles and guidance for central
counterparties and financial market infrastructures adopted jointly by
the Committee on Payment and Settlement Systems and the International
Organization of Securities Commissions.
(D) A certification that affiliates of members and other
participants, as defined in Sec. 48.2(j) of this part continue to be
required to comply with appropriate registration requirements,
conditions for registration and the rules of the foreign board of trade
and that the members or other participants to which they are affiliated
remain responsible to the foreign board of trade for ensuring their
affiliates' compliance.
(E) A description of any material changes to any relevant
representation regarding the foreign board of trade or clearing
organization made to the Commission that have not been previously
disclosed, in writing, or a certification that no material changes have
been made.
(F) A description of any significant disciplinary or enforcement
actions that have been instituted by or against the foreign board of
trade or the clearing organization or the senior officers of either in
the prior year.
(G) A written description of any material changes to the regulatory
regime to which the foreign board of trade or the clearing organization
are subject that have not been previously disclosed, in writing, to the
Commission, or a certification that no material changes have occurred.
(2) The above-referenced materials must be signed by an officer of
the foreign board of trade or the clearing organization who maintains
the authority to bind the foreign board of trade or clearing
organization, as applicable, and be based on the officer's personal
knowledge.
(c) Additional Specified Conditions for Foreign Boards of Trade
with Linked Contacts. If a registered foreign board of trade grants
members or other participants located in the United States direct
access and makes available to them a linked contract, the following
additional conditions apply:
(1) Statutory Conditions.
(i) The foreign board of trade must make public daily trading
information regarding the linked contract that is comparable to the
daily trading information published by the registered entity for the
contract to which the foreign board of trade's contract is linked, and
(ii) The foreign board of trade (or its regulatory authority) must:
(A) Adopt position limits (including related hedge exemption
provisions) applicable to all market participants for the linked
contract that are comparable to the position limits (including related
hedge exemption provisions) adopted by the registered entity for the
contract to which it is linked;
(B) Have the authority to require or direct any market participant
to limit, reduce, or liquidate any position the foreign board of trade
(or its regulatory authority) determines to be necessary to prevent or
reduce the threat of price manipulation, excessive speculation as
described in section 4a of the Act, price distortion, or disruption of
delivery on the cash settlement process;
(C) Agree to promptly notify the Commission, with regard to the
linked contract, of any change regarding--
(1) The information that the foreign board of trade will make
publicly available,
(2) The position limits that foreign board of trade or its
regulatory authority will adopt and enforce,
[[Page 70994]]
(3) The position reductions required to prevent manipulation,
excessive speculation as described in section 4a of the Act, price
distortion, or disruption of delivery or the cash settlement process,
and
(4) Any other area of interest expressed by the Commission to the
foreign board of trade or its regulatory authority;
(D) Provide information to the Commission regarding large trader
positions in the linked contract that is comparable to the large trader
position information collected by the Commission for the contract to
which it is linked; and
(E) Provide the Commission such information as is necessary to
publish reports on aggregate trader positions for the linked contract
that are comparable to such reports on aggregate trader positions for
the contract to which it is linked, and
(iii) If the Commission establishes speculative position limits
(including related hedge exemption provisions) on the aggregate number
or amount of positions in a contract traded on a United States
registered entity and the registered foreign board of trade lists a
contract that is linked to the contract listed for trading on the
registered entity, the foreign board of trade (or its regulatory
authority) must adopt position limits (including related hedge
exemption provisions) for the linked contract as determined by the
Commission.
(2) Other Conditions on Linked Contracts:
(i) The foreign board of trade will inform the Commission in a
quarterly report of any member that had positions in a linked contract
above the applicable foreign board of trade position limit, whether a
hedge exemption was granted, and if not, whether a disciplinary action
was taken.
(ii) The foreign board of trade will provide Commission staff,
either directly or through its agent, with trade execution and audit
trail data for the Commission's Trade Surveillance System on a trade-
date plus one basis and in a form, content and manner acceptable to the
Commission for all linked contracts.
(iii) The foreign board of trade and the clearing organization will
permit and cooperate with Commission on-site visits for the purpose of
overseeing the foreign board of trade's ongoing compliance with
registration requirements and conditions of registration. The
Commission will provide notice to the foreign board of trade's
regulatory authority of any requests for an on-site visit.
(iv) The foreign board of trade will provide to Commission staff,
at least one day prior to the effective date thereof, except in the
event of an emergency market situation, copies of, or hyperlinks to,
all rules, rule amendments, circulars and other notices published by
the foreign board of trade with respect to all linked contracts.
(v) The foreign board of trade will provide to Commission staff
copies of all Disciplinary Notices involving the foreign board of
trade's linked contracts upon closure of the action. Such Notices
should include the reason the action was undertaken, the results of the
investigation that led to the disciplinary action, and any sanctions
imposed.
(vi) In the event that the Commission, pursuant to its emergency
powers authority, directs that the United States registered entity
which lists the contract to which the foreign board of trade's contract
is linked take emergency action with respect to a linked contract (for
example, to cease trading in the contract), the foreign board of trade,
subject to information-sharing arrangements between the Commission and
its regulatory authority, agrees to promptly take similar action with
respect to its linked contract.
Sec. 48.9 Revocation of registration.
(a) Failure to Satisfy Registration Requirements or Conditions:
Upon request by the Commission, a registered foreign board of trade
shall file with the Commission a written demonstration, containing such
supporting data, information, and documents, in such form and manner
and within such timeframe as the Commission may specify, that the
foreign board of trade or clearing organization is in compliance with
the registration requirements or conditions for registration.
(1) If the Commission determines that a registered foreign board of
trade (or the clearing organization) has failed to satisfy any of the
registration requirements or conditions for registration, the
Commission shall notify the foreign board of trade of such
determination and afford the foreign board of trade an opportunity to
make appropriate changes to bring the foreign board of trade into
compliance with the registration requirements or conditions for
registration.
(2) If, not later than 30 days after receiving a notification under
subsection (1) of this paragraph, the foreign board of trade fails to
make changes that, in the opinion of the Commission are necessary to
comply with the registration requirements or conditions for
registration, the Commission may revoke the foreign board of trade's
registration, after appropriate notice and an opportunity for a
hearing, by issuing an Order Revoking Registration which sets forth the
reasons therefor.
(3) A foreign board of trade whose registration has been revoked
for failure to satisfy a registration requirement or condition of
registration may apply for re-registration 360 days after the issuance
of the Order Revoking Registration if the deficiency causing the
revocation has been cured or relevant facts and circumstances have
changed.
(b) Other Events that Could Result in Revocation. Revocation under
these circumstances would not necessarily follow the procedures
delineated above, but will be handled by the Commission as relevant
facts or circumstances warrant.
(1) The Commission may revoke a foreign board of trade's
registration, after appropriate notice and an opportunity for a
hearing, if the Commission determines that a representation made in the
application for registration is found to be untrue or materially
misleading.
(2) The Commission may revoke a foreign board of trade's
registration, after appropriate notice and an opportunity for a
hearing, if there is a material change in the regulatory regime
applicable to the foreign board of trade or clearing organization.
(3) The Commission may revoke a foreign board of trade's
registration in the event of an emergency or in a circumstance where
the Commission determines that revocation would be necessary or
appropriate in the public interest. Following revocation, the
Commission will provide an opportunity for a hearing.
(4) The Commission may revoke a foreign board of trade's
registration in the event the foreign board of trade or the clearing
organization is no longer authorized, licensed or registered, as
applicable, as a regulated market and/or exchange or clearing
organization or ceases to operate as a foreign board of trade or
clearing organization.
Sec. 48.10 Additional contracts.
(a) Generally. Registered foreign boards of trade that wish to list
additional futures and option and swaps contracts for trading by direct
access to the foreign board of trades' electronic trading and order
matching systems from the United States must submit a written request
prior to offering the contracts from within the United States. Such a
written request must include the terms and conditions of the additional
[[Page 70995]]
futures and option and swaps contracts that the foreign board of trade
wishes to make available and a certification that the additional
contracts meet the requirements of section 48.7(c) of this part and the
foreign board of trade and the clearing organization continue to
satisfy the conditions of registration. The foreign board of trade can
make available for trading the additional contracts ten business days
after the date of receipt by the Commission of the written request,
unless the Commission notifies the foreign board of trade that
additional time is needed to complete its review of policy or other
issues pertinent to the additional contracts. A registered foreign
board of trade may list for trading an additional futures contract on a
non-narrow-based security index pursuant to the procedures set forth in
Appendix D to part 30 of this chapter.
(b) Option contracts on previously approved futures contracts.
(1) If the option is on a futures contract that is not a linked
contract, the option contract may be made available for trading by
direct access by filing with the Commission no later than the business
day preceding the initial listing of the contract:
(i) A copy of the terms and conditions of the additional contract
and
(ii) A certification that the foreign board of trade and the
clearing organization continue to satisfy the conditions of its
registration.
(2) If the option is on a futures contract that is a linked
contract, the option contract may be made available for trading by
direct access by filing with the Commission no later than the business
day preceding the initial listing of the contract:
(i) A copy of the terms and conditions of the additional contract
and
(ii) A certification that the foreign board of trade and the
clearing organization continue to satisfy the conditions of its
registration, including the conditions specifically applicable to
linked contracts set forth in section 48.8(c) of this part.
(3) If the option is on a non-narrow-based security index futures
contract which may be offered or sold in the United States pursuant to
a no-action letter issued by the Commission's Office of the General
Counsel, the option contract may be listed for trading by direct access
without further action by either the registered foreign board of trade
or the Commission.
Appendix--Part 48--Contents of Application
I. General Information and Documentation
(a) General Information. A description of the following for the
foreign board of trade and clearing organization: Location; history,
size; ownership and corporate structure; governance and committee
structure; current or anticipated presence of staff in the United
States; and anticipated volume of business emanating from members
and other participants that will be provided direct access to the
foreign board of trade's trading system and the percentage of that
volume compared to the foreign board of trade's total volume.
(b) Initial Documentation. The following documents for the
foreign board of trade and clearing organization:
(1) Articles of association, constitution, or other similar
organizational documents;
(2) Membership and trading participant agreements;
(3) Clearing agreements;
(4) Terms and conditions of contracts to be available from
within the United States pursuant to the specified conditions of
registration;
(5) The national statutes, laws and regulations governing the
activities of the foreign board of trade and clearing organization
and their respective participants;
(6) The current rules, regulations, guidelines and bylaws of the
foreign board of trade or clearing organization;
(7) Evidence of the authorization, licensure or registration of
the foreign board of trade and clearing organization pursuant to the
regulatory regime in their home country jurisdiction and a
representation by their respective regulators that they are in good
regulatory standing in the capacity in which they are authorized,
licensed or registered;
(8) A summary of any disciplinary or enforcement actions or
proceedings that have been brought against the foreign board of
trade and clearing organization, or the senior officers thereof, in
the past five years and the resolution of those actions or
proceedings;
(9) An undertaking by the chief compliance officer(s) (or
functional equivalent[s]) of the foreign board of trade and the
clearing organization to notify Commission staff promptly if any of
the representations made in connection with or related to the
foreign board of trade's application for registration cease to be
true or correct, or become incomplete or misleading.
II. Membership Criteria
The following for the foreign board of trade and the clearing
organization:
(a) Membership or Participant Categories and Access.
A description of the categories of membership and participation
in the foreign board of trade or clearing organization and the
access, trading and clearing privileges provided by the board of
trade or clearing organization, as applicable. The description
should include any restrictions thereto for all entities to which
the foreign board of trade intends to grant direct access to its
trading system.
(b) Membership Criteria.
(1) A description of requirements for membership and
participation on the trading or clearing system, as applicable, and
the manner in which members and other participants must demonstrate
their compliance with these requirements.
(2) Professional Standards. A description of the professional
requirements, qualifications, and/or competencies required of
members or other participants and/or their staff.
(c) Financial Integrity.
(1) A description of the manner in which the foreign board of
trade and the clearing organization evaluate the financial resources
holdings of its members or participants, including any financial
requirements, standards, guides, or thresholds used to qualify
members and other participants.
(2) Describe the process by which applicants demonstrate
compliance with financial requirements for membership participation
including:
(i) Working capital and collateral requirements,
(ii) Risk management mechanisms for members allowing customers
to place orders.
(d) Authorization, Licensure or Registration Requirements.
Describe any regulatory and self-regulatory authorization, licensure
or registration requirements that the foreign board of trade and the
clearing organization impose upon its members and other participants
including, but not limited to any authorization, licensure or
registration requirements imposed by the regulatory authorities in
the home country jurisdiction(s) of the foreign board of trade and
clearing organization. Describe the process by which the foreign
board of trade and the clearing organization, as applicable, confirm
compliance with those requirements.
(e) Fit and Proper. Describe how the foreign board of trade and
clearing organization ensure that potential members/other
participants meet fit and proper standards.
(f) Qualifications for Board and/or Committee Membership.
Describe the requirements applicable to membership on the governing
board and significant committees of the foreign board of trade and
clearing organization, and describe how the foreign board of trade
and clearing organization ensure that potential governing board and
committee members/other participants meet these standards.
(g) Conflict of Interest Provisions. Describe the provisions to
minimize and resolve conflicts of interest with respect to
membership on the governing board and significant committees of the
foreign board of trade and the clearing organization.
(h) Disclosure of Information. Describe the rules with respect
to the disclosure of material non-public information obtained as a
result of a member's or other participant's performance on the
governing board or significant committee.
III. The Automated Trading System
(a) A description of the following:
(1) the order matching/execution system, including a complete
description of all permitted ways in which members or other
participants (or their customers) may connect
[[Page 70996]]
to the trade matching/execution system and the related requirements
(for example, authorization agreements, technical compliance
verifications, identification of order routing systems and/or users,
(2) the architecture of the systems, including hardware and
distribution network, as well as any pre-trade risk-management
controls that are made available to system users,
(3) the security features of the systems,
(4) the length of time such systems have been operating,
(5) any significant system failures or interruptions,
(6) the nature of any technical review of the order matching/
execution system performed by the home country regulator,
(7) provide a copy of any order or certification or self-
certification received and any discrepancies between the standard of
review and the Principles for the Oversight of Screen-Based Trading
Systems for Derivative Products developed by the Technical Committee
of the International Organization of Securities Commissions,
(8) trading hours,
(9) types and duration of orders accepted,
(10) information that must be included on orders,
(11) trade confirmation and trade error procedures,
(12) anonymity of participants,
(13) trading system connectivity with clearing system,
(14) response time,
(15) ability to determine depth of market,
(16) market continuity provisions,
(17) reporting and recordkeeping requirements, and
(18) error trade policies.
(b) A description of the manner in which the foreign board of
trade assures the following with respect to the trading system:
(1) Algorithm. The trade matching algorithm matches trades
fairly and timely.
(2) IOSCO Principles. The trading system's compliance with the
Principles for the Oversight of Screen-Based Trading Systems for
Derivative Products developed by the Technical Committee of the
International Organization of Securities Commissions.
(3) Audit Trail.
(i) The audit trail captures all relevant data, including
changes to orders.
(ii) Audit trail data is securely maintained and available for
an adequate time period.
(4) Public Data. Trade data is available to users and the
public.
(5) Reliability. The trading system has demonstrated
reliability.
(6) Secure Access. Access to the trading system is secure and
protected.
(7) Emergency Provisions. There are adequate provisions for
emergency operations and disaster recovery.
(8) Data Loss Prevention. Trading data is backed up to prevent
loss of data.
(9) Contracts Available. Mechanisms are available to ensure that
only those futures and option contracts or swaps that have been
identified to the Commission as part of the application or permitted
to be made available for trading by direct access pursuant to the
procedures set forth in section 48.10 of this part are made
available for trading on connections in the United States.
(10) Predominance of the Centralized Market. Mechanisms are
available that ensure a competitive, open and efficient market and
mechanism for executing transactions.
IV. The Terms and Conditions of Contracts Proposed To Be Made Available
in the United States
(a) Provide the terms and conditions of futures, option and
swaps contracts intended to be made available for direct access.
(b) Demonstrate that contracts are not prohibited from being
traded by United States persons.
(c) Demonstrate that contracts are cleared.
(d) Identify any contracts that are linked to a contract listed
for trading on a United States-registered entity, for example, a
contract that settles against any price (including the daily or
final settlement price) of one or more contracts listed for trading
on a United States-registered entity.
(e) Identify any contracts that share any other commonality with
a contract listed for trading on a United States-registered entity,
for example, both the foreign board of trade's and the United
States-registered entity's contract settle to the price of the same
third party-constructed index.
(f) Demonstrate that the contracts are not readily susceptible
to manipulation, as follows:
(1) Generally. For contracts other than broad-based stock
indexes, provide the information required in Appendix A to Part 40
(Guideline No. 1) with regard to manipulation.
(i) For delivered contracts: a demonstration that the terms and
conditions of the contract will result in a deliverable supply so
that the contract will not be conducive to price manipulation or
distortion and that the deliverable supply reasonably can be
expected to be available to short traders and salable by long
traders at its market value in normal cash marketing channels.
(ii) For cash-settled contracts: a demonstration that cash
settlement mechanism of the contract is at a price reflecting the
underlying cash market (or the level or index if there is no
underlying cash market), will not be readily subject to manipulation
or distortion, and is reliable, acceptable, publicly available and
timely.
(iii) To deter and detect abusive or disruptive trading behavior
that could result in price distortions: A demonstration that the
foreign board of trade has rules and mechanisms, for example,
position limits, restrictions on size and pricing of block trades,
restrictions on market on close or trade at settlement orders during
the daily close and settlement, and prohibitions on, and the
capacity to detect, ``marking'' of the trading close or important
economic announcements.
(2) Broad-Based Stock Indexes. For non-narrow based stock index
futures contracts, provide the information required in Appendix D to
Part 30 of this chapter. A no-action letter from the Commission's
Office of General Counsel is required to offer futures contracts on
non-narrow-based stock index futures contracts to United States
citizens.
(3) Manipulation Cases. With respect to contracts to be listed
for trading by direct access, describe each investigation, action,
proceeding or case involving manipulation and involving a contract
traded on the foreign board of trade in the three years preceding
the application date, whether initiated by the foreign board of
trade, a regulatory or self-regulatory authority or agency or
another government or prosecutorial agency. For each such action,
proceeding or case, describe the alleged manipulative activity and
the current status re resolution thereof.
V. Settlement and Clearing
(a) Clearing System. A description of the clearing
organization's clearing and settlement systems.
(b) Certification. A certification, signed by the chief
executive officer (or functional equivalent) of the clearing
organization, that the clearing system complies with the current
Recommendations for Central Counterparties that have been issued
jointly by the Committee on Payment and Settlement Systems and the
Technical Committee of the International Organization of Securities
Commissions, as updated, revised or otherwise amended, or successive
standards, principles and guidance for central counterparties or
financial market infrastructures adopted jointly by the Committee on
Payment and Settlement Systems or the International Organization of
Securities Commissions.
(c) RCCP Compliance. A detailed description of the manner in
which the clearing organization complies with each of the
Recommendations for Central Counterparties that have been issued
jointly by the Committee on Payment and Settlement Systems and the
Technical Committee of the International Organization of Securities
Commissions, as updated, revised or amended, (or successive
standards, principles and guidance for central counterparties or
financial infrastructures adopted jointly by the Committee on
Payment and Settlement Systems or the International Organization of
Securities Commissions) and documentation supporting the
representations made, including any relevant rules or written
policies or procedures of the clearing organization.
VI. The Regulatory Regime Governing the Foreign Board of Trade and
Clearing Organization in Their Home Countries
Provide information or documentation necessary to demonstrate
that the foreign board of trade and its clearing organization are
subject to comprehensive supervision and regulation by the
appropriate governmental authorities in their home countries that is
comparable to the comprehensive supervision and regulation to which
designated contract markets, derivatives clearing organizations and
market participants are subject in the United States. The
information and documentation provided must be sufficient to
demonstrate that the foreign board of trade and clearing
organization are subject to an established regulatory regime that is
based upon regulatory objectives equivalent (not necessarily
identical) to those applicable to designated contract markets and
derivatives
[[Page 70997]]
clearing organizations in the United States and that provides basic
protections for customers trading on markets and for the integrity
of the markets themselves:
(a) Regulatory Authority.
(1) Structure, function and powers. Describe the regulatory
authority's structure, resources, staff and scope of authority; the
regulator's authorizing statutes, including the source of its
authority to supervise the foreign board of trade and the clearing
organization; the rules and policy statements issued by the
regulator with respect to the authorization and continuing oversight
of markets, electronic trading systems and clearing organizations
and the financial protections afforded customer funds. Provide
copies of recent public reports disclosing the regulator's oversight
and enforcement activities which are, in the judgment of the
regulator, relevant to the FBOT's status as a registered FBOT.
(2) Authorization and continuing oversight of the foreign board
of trade and clearing organization. Describe and provide copies
(with, as applicable, English translations) of the laws, rules,
regulations and policies applicable to the authorization, licensure
or registration of the foreign board of trade and clearing
organization and the continuing oversight thereof; the regulatory
authority's program for the ongoing supervision and oversight of the
foreign board of trade and clearing organization and the enforcement
of their respective trading and clearing rules; the financial
resources requirements applicable to the authorization, licensure or
registration of the foreign board of trade and clearing organization
and the continued operations thereof; the extent to which the
Principles for the Oversight of Screen-Based Trading Systems for
Derivative Products developed by the Technical Committee of the
International Organization of Securities Commissions and the current
Recommendations for Central Counterparties that have been issued
jointly by the Committee on Payment and Settlement Systems and the
Technical Committee of the International Organization of Securities
Commissions, as updated, revised or amended, or successive
standards, principles and guidance for central counterparties or
financial market infrastructures adopted jointly by the Committee on
Payment and Settlement Systems or the International Organization of
Securities Commissions are used or applied by the regulatory
authority in its supervision and oversight of the foreign board of
trade or clearing organization or are incorporated into its rules
and regulations and the extent to which the regulatory authorities
review the applicable trading and clearing systems for compliance
therewith; the extent to which the regulatory authority reviews and/
or approves the trading and clearing rules of the foreign board of
trade or clearing organization prior to their implementation; the
extent to which the regulatory authority reviews and/or approves
exchange contracts prior to their being listed for trading; and the
regulatory authority's approach to the detection and deterrence of
market manipulation and other unfair trading practices.
(3) Intermediary Oversight. Describe the laws, rules,
regulations and policies that govern the authorization and ongoing
supervision and oversight of market intermediaries who may deal with
United States participants accessing the foreign board of trade,
including:
(i) Recordkeeping requirements,
(ii) The protection of customer funds, and
(iii) Procedures for dealing with the failure of a market
intermediary in order to minimize damage and loss to investors and
to contain systemic risk.
(4) Enforcement. Describe the regulatory authority's inspection,
investigation and surveillance powers; and the program pursuant to
which the regulatory authority uses those powers to inspect,
investigate, and enforce rules applicable to the foreign board of
trade and the clearing organization.
(b) Demonstration of Continuing Regulatory ``Good Standing.''
The regulatory authorities governing the activities of the
foreign board of trade and clearing organization must submit a
report confirming that the foreign board of trade and clearing
organization are in regulatory good standing. The report should
include:
(1) Confirmation of regulatory status (including proper
authorization, licensure and registration) of the foreign board of
trade and clearing organization;
(2) Any recent oversight reports generated by the regulatory
authority which are, in the judgment of the regulatory authority,
relevant to the FBOT's status as a registered FBOT;
(3) Disclosure of any significant regulatory concerns, inquiries
or investigations by the regulatory authority, including any
concerns, inquiries or investigations with regard to the foreign
board of trade's arrangements to monitor trading by members or other
participants located in the United States, the adequacy of the risk
management controls of the trading or of the clearing system; and
(4) A description of any investigations (formal or informal) or
disciplinary actions initiated by the regulatory authority or any
other self-regulatory, regulatory or governmental entity against the
foreign board of trade, the clearing organization or any of their
respective senior officers during the past year.
(c) Staff Visits with Regulatory Authorities. The regulatory
authorities governing the activities of the foreign board of trade
and the clearing organization must agree to cooperate with a
Commission staff visit subsequent to the application period on an
``as needed basis,'' the objective of which will be to familiarize
Commission staff with oversight supervisory staff of the regulatory
authority; discuss any changes to the law, rules and regulations
that formed the basis of the application; discuss the cooperation
and coordination between the authorities, including, without
limitation, information sharing arrangements; and discuss issues of
concern as they may develop from time to time (for example, linked
contracts, unusual trading that may be of concern to Commission
surveillance staff).
VII. The Rules of the Foreign Board of Trade and Its Clearing
Organization and Enforcement Thereof
With respect to the foreign board of trade and the clearing
organization, as applicable:
(a) Describe the regulatory or compliance department, to include
size, experience level, competencies, duties and responsibilities.
(b) Describe the foreign board of trade's trade practice rules.
Include in the description the following:
(1) Capacity of the foreign board of trade. Does the foreign
board of trade have the capacity to detect, investigate, and
sanction persons who violate foreign board of trade rules?
(2) Abusive Trading Practices Prohibited. Does the foreign board
of trade implement and enforce rules that prohibit abusive trading
practices (for example, wash sales or trading ahead) and other
market abuses, including the ability to detect and deter insider
trading?
(3) Trade Surveillance System. Does the foreign board of trade
maintain a trade practice surveillance system appropriate to the
foreign board of trade capable of detecting and investigating
potential trade practice violations?
(4) Trade Practice/Audit Trail. Does the foreign board of
trades' audit trail capture and retain sufficient order and trade-
related data to allow their compliance staffs to detect trading and
market abuses and to reconstruct all transactions within a
reasonable period of time?
(5) Real-time Market Monitoring. Does the foreign board of trade
maintain appropriate resources to conduct real-time supervision of
trading?
(6) Compliance Staff and Resources. Does the foreign board of
trade have sufficient compliance staff and resources, including
those outsourced or delegated to third parties, to fulfill their
regulatory responsibilities?
(7) Ability to Obtain Information. Do the foreign board of
trade's rules authorize compliance staff to obtain, from market
participants, any information and cooperation necessary to conduct
effective rule enforcement and investigations?
(8) Investigations and Investigation Reports. Does the foreign
board of trade's compliance staff investigate suspected rule
violations and prepare reports of their finding and recommendations?
(9) Access Requirements. Does the foreign board of trade
implement and enforce rules relating to the persons that may trade
on the foreign board of trade, and the means by which they connect
to it?
(10) Jurisdiction. Does the foreign board of trade require
market participants to submit to the foreign board of trade's
jurisdiction as a condition of access to the market?
(c) Describe the foreign board of trade's and, if appropriate,
the clearing organization's disciplinary rules, addressing the
following:
(1) Disciplinary Authority and Procedures. Do the foreign board
of trade and, the clearing organization, have and enforce
disciplinary procedures that empower staff to recommend and
prosecute disciplinary actions for suspected rule violations? Do the
procedures include the authority to fine, suspend, or expel any
market participant pursuant to fair and clear standards?
(2) Warning Letters and Summary Actions. Do the foreign board of
trade and the clearing
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organization authorize staff to issue warning letters and/or summary
fines for specified rule violations?
(3) Review of Investigation Reports. Do the compliance staffs of
the foreign board of trade and the clearing organization present
their findings to a disciplinary panel or other authority for
issuance of charges, instruction to investigate further, or finding
that insufficient basis exists to issue charges?
(4) Disciplinary Committees. Do the foreign board of trade and
the clearing organization take disciplinary action via disciplinary
committees and formal disciplinary processes unless the violation is
subject to foreign board of trade staff's summary fining authority?
(5) Disciplinary Decisions. Do the foreign board of trade,
clearing organization or their regulatory authorities articulate the
rationale for their decisions?
(6) Adequacy of Sanctions. Are the sanctions commensurate with
the violations committed and do they serve as effective deterrents
to future violations?
(d) Describe Market Surveillance rules, addressing the
following:
Does the foreign board of trade have a dedicated market
surveillance department or effective delegation or outsourcing of
that function? If so, provide a general description of the staff,
the data collected on traders' market activity, data collected to
determine whether prices are responding to supply and demand, data
on the size and ownership of deliverable supplies, a description of
the manner in which the foreign board of trade detects and deters
market manipulation, for cash-settled contracts, methods of
monitoring the settlement price or value, and any foreign board of
trade large-trader or other position reporting system.
(e) Describe the Clearing Organization rules, addressing the
following:
Does the clearing organization maintain rules that require that
the clearing organization comply with the Recommendations for
Central Counterparties that have been issued jointly by the
Committee on Payment and Settlement Systems and the Technical
Committee of the International Organization of Securities
Commissions (or successive standards) and, if so, provide copies of
the rules.
VIII. Information Sharing Agreements Among the Commission, the Foreign
Board of Trade, the Clearing Organization and Relevant Regulatory
Authorities
With respect to the foreign board of trade, the clearing
organization, and their respective regulatory authorities:
(a) Describe the arrangements among the Commission, the foreign
board of trade, the clearing organization and the relevant foreign
regulatory authorities that govern the sharing of information
regarding the transactions that are executed pursuant to the foreign
board of trade's registration and the clearing and settlement of
those transactions. This discussion should include:
(1) The foreign board of trade, clearing organization and the
regulatory authorities governing the activities of the foreign board
of trade and clearing organization commit, in writing to provide
immediately and directly to the Commission information and
documentation requested by Commission staff that Commission staff
determines is needed:
(i) To evaluate the continued eligibility of the foreign board
of trade for registration,
(ii) To enforce compliance with the specified conditions of the
registration,
(iii) To enable the Commission to carry out its duties under the
Act and Commission regulations and to provide adequate protection to
the public or registered entities,
(iv) To respond to potential market abuse associated with
trading by direct access on the registered foreign board of trade,
and
(v) Where Commission staff, in its discretion, determines that a
contract traded on a registered foreign board of trade may affect
the Commission's ability to carry out surveillance with respect to a
United States-registered entity.
(2) Exchange International MOU. The foreign board of trade must
execute, or commit to execute, the International Information Sharing
Memorandum of Understanding and Agreement.
(b) Regulatory Authority and the IOSCO MOU. The regulatory
authorities governing the activities of and providing supervision
and oversight of the foreign board of trade and clearing
organization must be signatories to the International Organization
of Securities Commissions Multilateral Memorandum of Understanding.
If the regulator is not a signatory to the International
Organization of Securities Commissions Multilateral Memorandum of
Understanding, the regulator must inform the Commission of the
reasons why the document has not been signed (for example, in the
process of applying, application is under consideration by the
International Organization of Securities Commissions Multilateral
Memorandum of Understanding Screening Group) and supply any
additional information requested by the Commission. The Commission
will determine, on a case-by-case basis, whether any interim
information sharing arrangement will be acceptable.
(c) Declaration on Cooperation and Supervision of International
Futures Exchanges and Clearing Organizations (Boca Declaration). The
regulatory authorities governing the activities of and providing
supervision and oversight of the foreign board of trade and clearing
organization must sign the Declaration on Cooperation and
Supervision of International Futures Exchanges and Clearing
Organizations or otherwise commit to share the types of information
contemplated by the International Information Sharing Memorandum of
Understanding and Agreement with the Commission pursuant to an
existing memorandum of understanding or other arrangement with the
Commission.
Issued in Washington, DC, November 10, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
Statement of Chairman Gary Gensler
Notice of Proposed Rulemaking--Registration of Foreign Boards of Trade
I support the proposed rulemaking to implement a registration
system for Foreign Boards of Trade (FBOTs) seeking to offer market
participants in the United States direct access to the FBOTs'
trading systems. This registration system replaces the agency's
current practice of issuing no-action letters to such FBOTs.
Importantly, this will bring consistency and transparency to the
Commission's oversight of such entities. Today's proposal also
provides that FBOTs subject to comparable, comprehensive supervision
and regulation in their home country and that meet conditions
outlined in the proposal would be allowed to make available swaps
contracts through direct access to U.S. market participants.
[FR Doc. 2010-29023 Filed 11-18-10; 8:45 am]
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