[Code of Federal Regulations]
[Title 17, Volume 1]
[Revised as of April 1, 2007]
From the U.S. Government Printing Office via GPO Access
[CITE: 17CFR30.12]
[Page 340-349]
TITLE 17--COMMODITY AND SECURITIES EXCHANGES
CHAPTER I--COMMODITY FUTURES TRADING COMMISSION
PART 30_FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS--Table of Contents
Sec. 30.12 Direct foreign order transmittal.
(a) Authorized customers defined. For the purposes of this section,
an ``authorized customer'' of a futures commission merchant shall mean
any foreign futures or foreign options customer, as defined in Sec.
30.1(c), or its designated representative, that:
(1) The futures commission merchant has authorized to place orders
for the account of the futures commission merchant's foreign futures and
options customer omnibus account; and
(2)(i) Is an eligible swap participant, as defined in Sec.
35.1(b)(2) of this chapter, or
(ii) Whose investment decisions with respect to foreign futures and
foreign option transactions are made by a commodity trading advisor
subject to regulation under the Act, including any investment adviser
registered as such with the Securities and Exchange Commission that is
exempt from regulation as a commodity trading advisor under the Act or
Commission regulations, or a foreign person performing a similar role or
function subject as such to foreign regulation, provided that the
commodity trading advisor has total assets under management exceeding
$50,000,000 and that the commodity trading advisor places the foreign
futures or foreign options order.
(b) Procedures for futures commission merchants. It shall be
unlawful for any futures commission merchant to permit an authorized
customer to place orders for execution in the futures commission
merchant's foreign futures and options customer omnibus account directly
with a person exempt from registration under paragraphs (c) and (d) of
this section, unless, such futures commission merchant:
(1) Meets one of the following capital requirements, as determined
by the futures commission merchant's most recent required filing of a
Form 1-FR-FCM with the Commission:
(i) Possesses $20,000,000 in adjusted net capital, as defined by
Sec. 1.17(c)(5) of this chapter; or
(ii) Possesses the greater of three times the amount of adjusted net
capital required by Sec. 1.17(a)(1)(i)(A) of this chapter or three
times the amount of adjusted net capital required by Sec.
1.17(a)(1)(i)(B) of this chapter; and
(2) Has established control procedures that will serve as guidelines
for permitting direct contacts between any authorized customer of the
futures commission merchant and any person exempt from registration
under paragraphs (c) or (d) of this section, and has in place
appropriate risk management procedures to monitor its own risk relative
to its authorized customers' risk aggregated across all markets,
including, but not limited to, procedures to ensure that each authorized
customer
[[Page 341]]
satisfies the participation criteria set forth in paragraph (a) of this
section and to specify the manner in which trades may be executed
through its customer omnibus account pursuant to this section;
(3) Furnishes a written disclosure statement to each such authorized
customer advising the customer of the additional risks the customer may
be assuming in placing orders directly with the foreign broker. The
disclosure statement must read as follows:
Direct Order Transmittal Client Disclosure Statement
This statement applies to the ability of authorized customers \1\ of
[FCM] to place orders for foreign futures and options transactions
directly with non-US entities (each, an ``Executing Firm'') that execute
transactions on behalf of [FCM's] foreign futures and options customer
omnibus accounts.
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\1\ You should contact your account executive regarding your
eligibility to participate in the direct order transmittal process.
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Please be aware of the following should you be permitted to place
the type of orders specified above.
The orders you place with an Executing Firm are
for [FCM's] foreign futures and options customer omnibus account
maintained with a foreign clearing firm. Consequently, [FCM] may limit
or otherwise condition the orders you place with the Executing Firm.
You should be aware of the relationship of the
Executing Firm and [FCM]. [FCM] may not be responsible for the acts,
omissions, or errors of the Executing Firm, or its representatives, with
which you place your orders. In addition, the Executing Firm may not be
affiliated with [FCM]. If you choose to place orders directly with an
Executing Firm, you may be doing so at your own risk.
It is your responsibility to inquire about the
applicable laws and regulations that govern the foreign exchanges on
which transactions will be executed on your behalf. Any orders placed by
you for execution on that exchange will be subject to such rules and
regulations, its customs and usages, as well as any local laws that may
govern transactions on that exchange. These laws, rules, regulations,
customs and usages may offer different or diminished protection from
those that govern transactions on US exchanges. In particular, funds
received from customers to margin foreign futures transactions may not
be provided the same protections as funds received to margin futures
transactions on domestic exchanges. Before you trade, you should
familiarize yourself with the foreign rules which will apply to your
particular transaction. United States regulatory authorities may be
unable to compel the enforcement of the rules of regulatory authorities
or markets in non-US jurisdictions where transactions may be effected.
It is your responsibility to determine whether
the Executing Firm has consented to the jurisdiction of the courts in
the United States. In general, neither the Executing Firm nor any
individuals associated with the Executing Firm will be registered in any
capacity with the Commodity Futures Trading Commission. Similarly, your
contacts with the Executing Firm may not be sufficient to subject the
Executing Firm to the jurisdiction of courts in the United States in the
absence of the Executing Firm's consent. Accordingly, neither the courts
of the United States nor the Commission's reparations program may be
available as a forum for resolution of any disagreements you may have
with the Executing Firm, and your recourse may be limited to actions
outside the United States.
Unless you object within five (5) days, by giving
notice as provided in your customer agreement after receipt of this
disclosure, [FCM] will assume your consent to the aforementioned
conditions.
(c) Exemption for foreign futures and options brokers. Any person
not located in the United States, its territories or possessions, who is
otherwise required in accordance with this part to be registered with
the Commission as a futures commission merchant or as an introducing
broker will be exempt from such registration, notwithstanding that such
person accepts orders for foreign futures and foreign options
transactions from authorized customers of a registered futures
commission merchant that meets the requirements of paragraph (b)(1) of
this section, provided, that:
(1) The orders are executed for or on behalf of the foreign futures
and options customer omnibus account of a registered futures commission
merchant;
(2) The person does not solicit or accept any money, securities or
property (or extend credit in lieu thereof) directly from any U.S.
foreign futures and options customer to margin, guarantee or secure any
trades or contracts that result or may result therefrom; and
(3) The person is a foreign futures and options broker, as defined
by Sec. 30.1(e).
[[Page 342]]
(d) Exemption for foreign futures and options brokers carrying a
foreign futures and options customer omnibus account. Any person not
located in the United States, its territories or possessions, who is
otherwise required in accordance with this part to be registered with
the Commission as a futures commission merchant will be exempt from such
registration, notwithstanding that such person:
(1) Carries the foreign futures and options customer omnibus account
of a futures commission merchant that meets the requirements of
paragraph (b)(1) of this section;
(2) Accepts orders for foreign futures and foreign options
transactions from authorized customers for the execution of the trades
for or on behalf of the foreign futures and options customer omnibus
account of a registered futures commission merchant either directly or
pursuant to a give-up arrangement; and
(3) The person is a foreign futures and options broker, as defined
by Sec. 30.1(e).
[65 FR 47280, Aug. 2, 2000]
Appendix A to Part 30--Interpretative Statement With Respect to the
Commission's Exemptive Authority Under Sec. 30.10 of Its Rules
Part 30 of the Commission's regulations establishes the regulatory
structure governing the offer and sale in the United States of futures
and options contracts made or to be made on or subject to the rules of a
foreign board of trade. Section 30.10 of these regulations provides
that, upon petition, the Commission may exempt any person from any
requirement of this part. Specifically, section 30.10 states:
Any person adversely affected by any requirement of this part may
file a petition with the Secretary of the Commission, which petition
must set forth with particularity the reasons why that person believes
that he should be exempt from such requirement. The Commission may, in
its discretion, grant such an exemption if that person demonstrates to
the Commission's satisfaction that the exemption is not otherwise
contrary to the public interest or to the purposes of the provision from
which exemption is sought. The petition will be granted or denied on the
basis of the papers filed. The petition may be granted subject to such
terms and conditions as the Commission may find appropriate.
As the provisions of this section make clear, any person subject to
regulation under part 30 may petition the Commission for an exemption.
In adopting these regulations, however, the Commission noted in
particular that persons located outside the United States that solicit
or accept orders directly from United States customers for foreign
futures or options transactions and that are subject to a comparable
regulatory scheme in the country in which they are located may apply
under section 30.10 for exemption from some or all of the requirements
that would otherwise be applicable to such persons. This interpretative
statement sets forth the elements that the Commission intends to
evaluate in determining whether a particular regulatory program may be
found to be comparable to the Commission's program.
The Commission wishes to emphasize, however, that this
interpretative statement is not all inclusive, and that information with
respect to other aspects of a particular regulatory program may be
submitted by a petitioner or requested by the Commission. In this
connection, 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 and conversely may assess
how particular elements are in fact applied by offshore authorities.
Thus, for example, in order to find that a particular program is
comparable, the regulations thereunder would have to be applicable to
all United States customers, notwithstanding any exemptions that might
otherwise be available to particular classes of customer located
offshore. A petitioner, therefore, must set forth with particularity the
factual basis for a finding of comparability and the reasons why such
policies and purposes are met, notwithstanding differences of degree and
kind in its regulatory program.
No exemptions of a general nature will be granted unless the persons
to which the exemption is to be applied consent to submit to
jurisdiction in the United States by designating an agent for service of
process pursuant to the provisions of rule 30.5 with respect to any
activities of such persons otherwise subject to regulation under this
part and to notify the National Futures Association of the commencement
or termination of business in the United States. In this connection, to
be exempted, such person must further agree to respond to a request to
confirm that it continues to do business in the United States.
Persons located outside the United States may seek an exemption on
their own behalf or an exemption may be sought on a general
[[Page 343]]
basis through the governmental agency responsible for the implementation
and enforcement of the regulatory program in question, or the self-
regulatory organizations of which such persons are members. The
appropriate petitioner is a matter of judgment and may be determined by
the parties seeking the exemption. The Commission, however, notes that
it will be able to address petitions more efficiently if they are filed
by the governmental agency or self-regulatory organization responsible
for the regulatory program.
In this connection, as will be discussed in more detail below, any
exemption of a general nature based on comparability will be conditioned
upon appropriate information sharing arrangements between the Commission
and the relevant governmental agency and/or self-regulatory
organization. Representations from the appropriate governmental agency
with respect to the applicability of any blocking statutes that may
prevent the sharing of information requested under private arrangements
would also be considered. Finally, in considering an exemption request,
the Commission will take into account the extent to which United States
persons or contracts regulated by the Commission are permitted to engage
in futures-related activities or be offered in the country from which an
exemption is sought.
In the Commission's review, the minimum elements of a comparable
regulatory program would include: (1) Registration, authorization or
other form of licensing, fitness review or qualification of persons
through which customer orders are solicited and accepted; (2) minimum
financial requirements for those persons that accept customer funds; (3)
protection of customer funds from misapplication; (4) recordkeeping and
reporting requirements; (5) minimum sales practice standards, including
disclosure of the risks of futures and opotions transactions and, in
particular, the risk of transactions undertaken outside the jurisdiction
of domestic law; and (6) compliance.
Qualification. Under domestic law, registration identifies to the
Commission, the public and other governmental agencies the individuals
and entities that are properly authorized to solicit and accept customer
orders and are in good standing. Equally important, the procedure
provides the Commission, through the National Futures Association, the
opportunity to determine whether applicants are unfit to deal with the
public. In this connection, the standards for determining whether a
person through its principals is fit for registration with the
Commission are set forth in section 8a(2)-8a(4) of the Act. Timely
access to information as to a firm's good standing and the application
by relevant authorities of membership and licensing criteria, as well as
the criteria themselves, will be considered by the Commission in
assessing comparability.
Minimum Financial Requirements. Minimum financial requirements for
persons that handle customer funds serve at least three critical
functions. First, they provide a cushion together with margin such that
in the event of a default of a customer, the losses of that customer
need not adversely affect the funds held on behalf of other customers.
Second, they help ensure that the person has sufficient funds to operate
its business and, therefore, is less likely to be tempted to misapply
customer funds for its own purposes. Third, they ensure that the person
holding customer funds has some financial stake in its business and,
therefore, is serious in its intent. In assessing comparability, capital
rules or their equivalent will be considered together with any
provisions made for insuring customer losses, the scope of clearing
guarantees and segregation or customer trust calculation and accounting
requirements which, to the extent they cover undermargined accounts, can
provide significant protection of one customer from another customer's
losses.
Customer Funds. The Act requires the strict segregation of customer
funds from those of the person holding such funds. One of the primary
purposes of this requirement is to prevent the misapplication of those
funds for purposes other than those intended by the customer, which may
affect not only the customer but the market as a whole. The purpose of
segregation is also to identify customer deposits as assets of the
customer, rather than the firm, in order that in bankruptcy such funds
are payable only to satisfy the carrying firm's obligations to such
customers and not other obligations of the firm. In assessing
comparability of protection of customer funds, the Commission will
consider protections accorded customer funds in a bankruptcy under
applicable law, as well as protection from fraud.
Recordkeeping and Reporting. Recordkeeping requirements have long
been recognized as the linchpin of the Commission's regulatory scheme.
Reporting and recordkeeping requirements assist in determining that a
registrant is acting in accordance with the provisions of the Act and
the rules, regulations and orders of the Commission thereunder.
Similarly, reporting requirements ensure that customers are timely
advised of the transactions that have been executed on their behalf,
thus ensuring that they are aware of their positions in the markets and
may object to any transactions that they believe are in error. The
Commission will consider the types of records maintained, the ability
through those records to trace funds and transactions, and the period of
retention and accessibility of records under the information sharing
arrangements
[[Page 344]]
discussed below in considering comparability.
Sales Practice Standards. In 1982, Congress reaffirmed the
importance of minimum sales practice standards to protect customers from
fraud or misrepresentation by requiring any futures association
registered by the Commission to adopt and enforce rules governing the
sales practices of its members. The Commission has consistently provided
that written disclosure of the risks of futures and options trading is
essential to ensure that potential customers are aware of these risks
and are not otherwise misled and that other appropriate disclosure is
made. The Commission will review the type and manner of disclosure given
and the mechanisms for assuring the disclosure requirements are met and,
in particular, the treatment of discretionary accounts for which, for
example, Commission rule 166.2 requires particularized documentation of
intent to confer discretion in the case of foreign futures and options
transactions.
Compliance. Finally, in assessing comparability of a program, the
Commission will examine the procedures employed by the governmental
authority or the appropriate self-regulatory organization to audit for
compliance with, and to take action as appropriate against those persons
that violate, the requirements of that program.
Information Sharing. As noted above, any exemption of a general
nature would also require an information sharing arrangement between the
Commission and the appropriate governmental or self-regulatory
organization to ensure Commission access to information on an as needed
basis as may be necessary to fulfill its regulatory responsibilities.
The information subject to these arrangements generally would be of a
type necessary in the first instance to monitor domestic markets and to
protect domestic customers trading on foreign markets.
Firm-specific information that is potentially relevant to protection
of domestic customers engaged in foreign transactions could include the
following: (1) Registration qualification status; (2) names of
principals; (3) current capital; (4) location of customer funds; (5)
address of main office and branches; (6) exchange and self-regulatory
organization memberships; (7) the existence of any derogatory
information such as that required to be disclosed on the Commission's
Form 7-R; (8) notice of limitations imposed on activities; (9) notice of
undersegregation or undercapitalization; (10) notice of misuse of
customer funds; and (11) notice of sanctions or of expulsion from
exchange or self-regulatory organization membership. The Commission
believes that much of the above information would be public in the
ordinary course in most jurisdictions. From time to time, the Commission
also may need immediate access to financial information concerning risks
posed to domestic firms by the carrying of foreign positions.
In addition to information that relates to the financial stability
and creditworthiness of the firm, the Commission should have access to
transaction-specific information that confirms the execution of orders
and prices and facilitates tracing of customer funds. Such data could
include records reflecting: (1) That an order has been received by a
firm on behalf of one or more United States customers; (2) that an order
has been executed on an exchange on behalf of one or more United States
customers; (3) that funds to margin, guarantee or secure United States
customer transactions have been received by a firm and deposited in an
appropriate depository; and (4) the price at which a transaction was
executed and general access to pricing information.
Again, such information is likely to be maintained in the ordinary
course of business. Tracing of customer funds would be most essential in
cases of insolvency where repatriation of funds is at issue.
The Commission may also seek relevant position data information,
including the identity of the position holder and related positions, in
connection with surveillance of a potential ``market disruption.'' This
is particularly true in the case of integrated markets.
The Commission wishes to emphasize that the information sharing
arrangements discussed herein are not necessarily a substitute for, nor
would they preclude, a more formal agreement or arrangement with respect
to the sharing of information.
Marketing Activities by Firms Granted Rule 30.10 Relief
FR date and citation: November 3, 1992, 57 FR 49644; August 17,
1994, 59 FR 42158.
[52 FR 28998, Aug. 5, 1987, as amended at 59 FR 42158, Aug. 17, 1994]
Appendix B to Part 30--Interpretative Statement With Respect to the
Secured Amount Requirement Set Forth in Sec. 30.7
1. Rule 30.7 requires FCMs who accept money, securities or property
from foreign futures and foreign options customers to maintain in a
separate account or accounts such money, securities and property in an
amount at least sufficient to cover or satisfy all of its current
obligations to those customers.\1\ This amount is denominated as the
[[Page 345]]
``foreign futures or foreign options secured amount'' and that term is
defined in Rule 1.3(rr). The separate accounts must be maintained under
an account name that clearly identifies the funds as belonging to
foreign futures and foreign options customers at a depository that meets
the requirements of Rule 30.7(c). Further, each FCM must obtain and
retain in its files for the period provided in Rule 1.31 an
acknowledgment from the depository that the depository was informed that
such money, securities or property are held for or on behalf of foreign
futures and foreign options customers and are being held in accordance
with the provisions of these regulations.
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\1\ ``Foreign futures or foreign options customer'' means ``any
person located in the United States, its territories or possessions who
trades in foreign futures or foreign options: Provided, That an owner or
holder of a proprietary account as defined in paragraph (y) of [Rule
1.3] shall not be deemed to be a foreign futures or foreign options
customer within the meaning of [Rules 30.6 and 30.7].'' Rule 30.1(c).
``Foreign futures'' means ``any contract for the purchase or sale of any
commodity for future delivery made, or to be made, on or subject to the
rules of any foreign board of trade.'' Rule 30.1(a). ``Foreign option''
means ``any transaction or agreement which is or is held out to be of
the character of, or is commonly known to the trade as, an `option,'
`privilege,' `indemnity,' `bid,' `offer,' `put,' `call,' `advance
guaranty,' or `decline guaranty,' made or to be made on or subject to
the rules of any foreign board of trade.'' Rule 30.1(b).
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2. In a series of orders issued pursuant to Rule 30.10, the
Commission required that certain foreign firms exempt from registration
as FCMs essentially comply with the standards of Rule 30.7.\2\
Specifically, the Commission stated that ``[the secured amount]
requirement is intended to ensure that funds provided by U.S. customers
for foreign futures and options transactions, whether held at a U.S. FCM
under Rule 30.7(c) or a firm exempted from registration as an FCM under
CFTC Rule 30.10, will receive equivalent protection at all
intermediaries and exchange clearing organizations.'' \3\ The Commission
further interpreted Rule 30.7 to require each FCM and Rule 30.10 firm to
take appropriate action (i.e., set aside funds in a ``mirror'' account)
in the event that it becomes aware of facts leading it to conclude that
foreign futures and foreign options customer funds are not being handled
consistent with the requirements of Commission rules or relevant order
for relief by any subsequent intermediary or exchange clearing
organization.
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\2\ Under Rule 30.10, the Commission may exempt a foreign firm
acting in the capacity of an FCM from registration under the Commodity
Exchange Act (``Act'') and compliance with certain Commission rules
based upon the firm's compliance with comparable regulatory requirements
imposed by the firm's home-country regulator or self-regulatory
organization (``SRO''). Once the Commission determines that the foreign
jurisdiction's regulatory structure offers comparable regulatory
oversight, the Commission may issue an Order granting general relief
subject to certain conditions. Firms seeking confirmation of relief
(referred to herein as ``Rule 30.10 firms'') must make certain
representations set forth in the Rule 30.10 order issued to the
regulator or SRO from the firm's home country. For a list of those
foreign regulators and SROs that have been issued a Rule 30.10 order,
see Appendix C to Part 30. In certain cases, where a foreign regulator
or SRO has requested that firms subject to its jurisdiction be granted
broader relief to engage in transactions on exchanges other than in its
home jurisdiction (referred to herein as ``expanded relief''), the
relief has been granted where the relevant authority has represented
that it will monitor its firms for compliance with the terms of the
order in connection with such offshore transactions. Although Rule 30.10
orders generally exempt foreign intermediaries from compliance with the
secured amount requirement under Rule 30.7, firms seeking confirmation
of the expanded relief must represent that, with respect to transactions
entered into on behalf of U.S. customers on any non-U.S. exchange
located outside their home country, they will treat U.S. customer funds
in a manner consistent with the provisions of Rule 30.7. For the most
recent order granting expanded relief, see 64 FR 50248 (September 16,
1999) (Singapore Exchange Derivatives Trading Limited).
\3\ 64 FR 50248, 50251, n.19 (emphasis added).
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3. Upon further analysis and reconsideration of this matter, the
Commission has determined to revise its prior interpretation of the Rule
30.7 secured amount requirement. The Commission notes that the initial
depository's ability to identify customer funds affords foreign futures
and foreign options customers a measure of protection in the event that
the intermediating FMC or foreign firm becomes insolvent. Moreover, Rule
30.6(a) requires that foreign futures and foreign options customers
receive a Rule 1.55 written disclosure explaining that the treatment of
customer funds outside the U.S. may not afford the same level of
protection offered in the U.S. These protections exist whetehr the
intermediating firm is a U.S. FCM or a firm exempt from such
registration under Rule 30.10.\4\
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\4\ Although orders for expanded relief exempt foreign firms from
compliance with Rule 1.55, sales practice standards and the treatment of
customer funds constitute two of the specific elements examined in
evaluating whether the particular foreign regulatory program provides a
basis for permitting substituted compliance for purposes of exemptive
relief pursuant to Rule 30.10. Appendix A to Part 30.
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[[Page 346]]
4. The Commission further notes, however, that, in February 1998,
Rule 30.6 was amended to permit an FCM to open a commodity account for a
foreign futures or foreign options customer without providing the Rule
1.55 risk disclosure statement or obtaining an acknowledgment of receipt
of such statement, provided that the customer is, at the time at which
the account is opened, one of several types of sophisticated customers
enumerated in Rule 1.55(f) (``Rule 1.55(f) customers'').\5\ While the
amendment to Rule 30.6(a) extinguished the obligation to provide a
standardized risk disclosure statement to Rule 1.55(f) customers at the
time of the account opening, the Commission stated that FCMs have
obligations to these customers independent of such a duty that would be
material in the circumstances of a given transactions.\6\
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\5\ 63 FR 8566 (February 20, 1998). The list of sophisticated
customers referenced in Rule 1.55(f) closely tracks, with one exception,
the list of ``eligible swap participants'' in Rule 35.1.
\6\ Id. at 8569.
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5. After careful consideration of the issue, the Commission has
determined that intermediaries should advise all customers (regardless
of their level of sophistication) to consider making appropriate
inquiries relating to the treatment of customer funds by depositories
located outside the jurisdiction of the intermediating firm.
Accordingly, the Commission has determined that an FCM, at a minimum,
must provide each foreign futures or foreign option customer with a
written disclosure tracking the language in either: (1) Rule
1.55(b)(7),\7\ or (2) Paragraphs 6 and 8 of Appendix A to Rule
1.55(c).\8\ Rule 30.10 firms must provide each foreign futures or
foreign options customer with a written disclosure tracking the language
in either Rule 1.55(b)(7) or paragraphs 6 and 8 of Appendix A to Rule
1.55(c), or a comparable disclosure statement prescribed by the firm's
home country regulator. The Commission further encourages all firms,
whether domestic or foreign, to provide a Rule 1.55 written risk
disclosure to all customers, regardless of each customer's respective
level of experience. The Commission notes that, in any instance where a
firm provides a Rule 1.55(f) customer with a written disclosure, it is
not necessary for the firm to obtain an acknowledgment of receipt. In
addition, those FCMs that already have provided customers with a
[[Page 347]]
disclosure tracking either Rule 1.55(b)(7) or paragraphs 6 and 8 of
Appendix A to Rule 1.55(c) (or in the case of Rule 30.10 firm, a
comparable disclosure statement prescribed by its home country
regulatory) need not provide those same customers with an additional
written disclosure.
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\7\ Rule 1.55(b)(7) reads as follows: Foreign futures transactions
involve executing and clearing trades on a foreign exchange. This is the
case even if the foreign exchange is formally ``linked'' to a domestic
exchange whereby a trade executed on one exchange liquidates or
establishes a position on the other exchange. No domestic organization
regulates the activities of a foreign exchange, including the execution,
delivery and clearing of transactions on such exchange, and no domestic
regulator has the power to compel enforcement of the rules of the
foreign exchange or the laws of the foreign country. Moreover, such laws
or regulations will vary depending on the foreign country in which the
transaction occurs. For these reasons, customers who trade on foreign
exchanges may not be afforded certain of the protections which apply to
domestic transactions, including the right to use alternative dispute
resolution. In particular, funds received from customers to margin
foreign futures transactions may not be provided the same protections as
funds received to margin futures transactions on domestic exchanges.
Before you trade, you should familiarize yourself with the foreign rules
which will apply to your particular transaction.
\8\ Appendix A to Rule 1.55(c) is the Generic Risk Disclosure
Statement, which FCMs may use as an alternative to the Risk Disclosure
Statement prescribed in Rule 1.55(b). The Commission understands that
most FCMs, in particular those that are most active in international
markets, use the Generic Risk Disclosure Statement.
Paragraphs 6 and 8 of Appendix A to Rule 1.55(c) read as follows:
6. Deposited cash and property.
You should familiarize yourself with the protections accorded money
or property you deposit for domestic and foreign transactions,
particularly in the event of a firm insolvency or bankruptcy. The extent
to which you may recover your money or property may be governed by
specified legislation or local rules. In some jurisdictions, property
which has been specifically identifiable as your own will be pro-rated
in the same manner as cash for purposes of distribution in the event of
a shortfall.
8. Transactions in other jurisdictions.
Transactions on markets in other jurisdictions, including markets
formally linked to a domestic market, may expose you to additional risk.
Such markets may be subject to regulation which may offer different or
diminished investor protection. Before you trade you should enquire
about any rules relevant to your particular transactions. Your local
regulatory authority will be unable to compel the enforcement of the
rules of the regulatory authorities or markets in other jurisdictions
where your transactions have been effected. You should ask the firm with
which you deal for details about the types of redress available in both
your home jurisdiction and other relevant jurisdictions before you start
to trade.
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6. For the reasons set forth above, the Commission is revising its
interpretation of the secured amount requirement set forth in Rule 30.7.
The Commission believes that the Rule 30.7 acknowledgment required of
FCMs, or other appropriate acknowledgment required by Rule 30.10 firms,
only applies to the maintenance of the account or accounts containing
foreign futures and foreign options customer funds by the initial
depository, and not to the manner in which any subsequent depository
holds or subsequently transmits those funds. If an FCM receives from the
initial depository the acknowledgment described in Rule 30,7, furnishes
to each foreign futures or foreign options customer a written disclosure
statement tracking the language set forth in Rule 1.55(b)(7) or
paragraphs 6 and 8 of Appendix A of Rule 1.55(c) and otherwise complies
with the provisions of Rule 30.7, then it may include all funds
maintained in the separate account or accounts in calculating its
secured amount requirement. A Rule 30.10 firm must satisfy the same
requirements, except that it may provide each foreign futures or foreign
options customer with a comparable disclosure statement prescribed by is
home regulator.
7. IF an FCM or Rule 30.10 firm fails to receive the required
acknowledgment from the initial depository or provide the above written
disclosure statement (and in certain circumstances, receive from
customers and acknowledgment of receipt), then it must set aside funds
with an acceptable depository and receive from such depository the
required acknowledgment.
8. The Commission's interpretation of the Rule 30.7 secured amount
requirement will apply to all regulated activities with all new and
existing foreign futures and foreign options customers as of October 11,
2000. The Commission's interpretation does not alter any other
requirement set forth in Rule 30.7 or any other section of Part 30.
[65 FR 60558, Oct. 11, 2000]
Appendix C to Part 30--Foreign Petitioners Granted Relief From the
Application of Certain of the Part 30 Rules Pursuant to Sec. 30.10
Firms designated by the Sydney Futures Exchange Limited.
FR date and citation: November 7, 1988, 53 FR 44856.
FR date and citation: April 13, 1993, 58 FR 19210.
FR date and citation: March 7, 1997, 62 FR 10447.
FR date and citation: 70 FR 40395, July 17, 2006.
Firms designated by the Singapore International Monetary Exchange
Limited.
FR date and citation: January 10, 1989, 54 FR 809.
FR date and citation: September 16, 1999, 64 FR 50251.
Firms designated by the Montreal Exchange.
FR date and citation: March 17, 1989, 54 FR 11182.
FR date and citation: February 27, 1997, 62 FR 8877.
Firms designated by the Toronto Futures Exchange.
FR date and citation: March 22, 1990, 55 FR 10614.
Authorized Persons as designated in Annex E to the Mutual Recognition
Memorandum of Understanding
FR date and citation: June 13, 1990, 55 FR 2390; December 23, 1991,
56 FR 66345.
Firms designated by the Tokyo Grain Exchange.
FR date and citation: February 23, 1993, 58 FR 10957; May 2, 1994,
59 FR 22506.
Firms designated by the MEFF Sociedad Rectora de Productos Financieros
Derivados de Renta Fija (``MEFF Renta Fija'').
FR date and citation: June 9, 1995, 60 FR 30466.
Firms designated by the New Zealand Futures and Options Exchange
(``NZFOE'').
FR date and citation: December 10, 1996, 61 FR 64989.
Firms designated by the MEFF Sociedad Rectora de Productos Financieros
Derivados de Renta Variable (``MEFF Rental Variable.'')
FR date and citation: April 8, 1997, 62 FR 16690.
Firms designated by the Financial Services Authority (``FSA'').
FR date and citation: October 10, 2003, 68 FR 58587.
Firms designated by the Australian Stock Exchange Limited (``ASXL'').
FR date and citation: 68 FR 39006, July 1, 2003.
FR date and citation: 70 FR 75937, December 22, 2005.
[54 FR 809, Jan. 10, 1989, as amended at 54 FR 11182, Mar. 17, 1989; 54
FR 21604, 21609, 21614, and 21618, May 19, 1989; 55 FR 10614, Mar. 22,
1990; 55 FR 23909, June 13, 1990; 56 FR 14019, Apr. 5, 1991; 56 FR
66345, Dec. 23, 1991; 58 FR 10957, Feb. 23, 1993; 58 FR 19210, Apr. 13,
1993; 59 FR 22506, May 2, 1994; 60 FR 30466, June 9, 1995; 61 FR 64989,
Dec. 10, 1996; 62 FR 8877, Feb. 27, 1997; 62 FR 10447-10450, Mar. 7,
1997; 62 FR 16690, Apr. 8, 1997; 64 FR 50251, Sept. 16, 1999; 68 FR
58587, Oct. 10, 2003; 70 FR 75937, Dec. 22, 2005; 70 FR 40396, July 17,
2006]
[[Page 348]]
Appendix D to Part 30--Information That a Foreign Board of Trade Should
Submit When Seeking No-Action Relief To Offer and Sell, to Persons
Located in the United States, a Futures Contract on a Foreign Non-
Narrow-Based Security Index Traded on That Foreign Board of Trade
A. Section 2(a)(1)(C)(iv) of the Commodity Exchange Act (``Act'')
generally prohibits any person from offering or selling a futures
contract based on a security index in the U.S., except as otherwise
permitted under the Act, including Section 2(a)(1)(C)(ii) of the Act. By
its terms, Section 2(a)(1)(C)(iv) of the Act applies to futures
contracts on security indices traded on both domestic and foreign boards
of trade. Section 2(a)(1)(C)(ii) of the Act sets forth three criteria to
govern the trading of futures contracts on a group or index of
securities on contract markets and derivatives transaction execution
facilities:
(1) The contract must provide for cash settlement;
(2) The contract must not be readily susceptible to manipulation or
to being used to manipulate any underlying security; and
(3) The group or index of securities must not constitute a narrow-
based security index.
B. While Section 2(a)(1)(C)(ii) of the Act provides that no board of
trade or derivatives transaction execution facility may trade a security
index futures contract unless it meets the three criteria noted above,
it does not explicitly address the standards to be applied to a foreign
security index futures contract traded on a foreign board of trade. The
Office of General Counsel has applied those same three criteria in
evaluating requests by foreign boards of trade to allow the offer and
sale within the United States of their foreign security index futures
contracts when those foreign boards of trade do not seek designation as
a contract market or registration as a derivatives transaction execution
facility to trade those products.\1\
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\1\ With regard to the third criterion, and CFTC and SEC jointly
promulgated Rule 41.13 under the Act and Rule 3a55-3 under the
Securities Exchange Act of 1934 (``Exchange Act''), governing security
index futures contracts traded on foreign boards of trade. These rules
provide that ``[w]hen a contract of sale for future delivery on a
security index is traded on or subject to the rules of a foreign board
of trade, such index shall not be a narrow-based security index if it
would not be a narrow-based security index if a futures contract on such
index were traded on a designated contract market or registered
derivatives transaction execution facility.'' CFTC Rule 41.13, 17 C.F.R.
Sec. 41.13; Exchange Act Rule 3a55-3, 17 C.F.R. Sec. 240.3a55-3.
---------------------------------------------------------------------------
C. In the analysis of a no-action request for a foreign security
index futures contract traded on a foreign board of trade, the Office of
the General Counsel asks the Division of Market Oversight (Division) to
evaluate the foreign security index futures contract to ensure that it
complies with the three criteria of Section 2(a)(1)(C)(ii) of the Act.
D. Because security index futures contracts are cash settled, the
Division also evaluates the contract to ensure that the contract terms
and conditions relating to cash settlement are consistent with the
Commission's Guideline No. 1 requirements for cash settled contracts. In
that regard, Guideline No. 1 requires that the cash price series be
reliable, acceptable, publicly available and timely; that the cash
settlement price be reflective of the underlying cash market; and that
the cash settlement price not be readily susceptible to manipulation. In
making its determination, the Division considers the design and
maintenance of the index, the method of index calculation, the nature of
the component security prices used to calculate the index, the breadth
and frequency of index dissemination, and any other relevant factors.
E. In considering the susceptibility of an index to manipulation,
the Division examines several factors, including the structure of the
primary and secondary markets for the component equities, the liquidity
of the component stocks, the method of index calculation, the total
capitalization of stocks underlying he index, the number, weighting and
capitalization of individual stocks in the index, and the existence of
surveillance sharing agreements between the board of trade and the
securities exchange(s) on which the underlying securities are traded.
F. To verify that the index is not narrow based, the Division
considers the number and weighting of the component securities and the
value of average daily trading volume of the lowest weighted quartile of
securities. Under the Act, a security index is narrow-based if it meets
any one of the following criteria:
(1) The index is composed of fewer than 10 securities;
(2) Any single security comprises more than 30% of the total index
weight
(3) The five largest securities comprise more than 60% of the total
index weight; or
(4) The lowest-weighted securities that together account for 25% of
the total weight of the index have an aggregate dollar value of average
daily trading volume of less than US$30 million (or US$50 million if the
index includes fewer than 15 securities).
G. Accordingly, a foreign board of trade seeking no-action relief to
offer and to sell,
[[Page 349]]
to persons located in the U.S., a futures contract on a non-narrow based
foreign security index traded on that foreign board of trade should
submit to the Office of General Counsel the following in English:
(1) The terms and conditions of the contract and all other relevant
rules of the exchange and, if applicable, of the exchange on which the
underlying securities are traded, which have an effect on the over-all
trading of the contract, including circuit breakers, price limits,
position limits or other controls on trading;
(2) Surveillance agreements between the foreign board of trade and
the exchange(s) on which the underlying securities are traded;
(3) Assurances from the foreign board of trade of its ability and
willingness to share information with the Commission, either directly or
indirectly;
(4) When applicable, information regarding foreign blocking statutes
and their impact on the ability of United States government agencies to
obtain information concerning the trading of such contracts;
(5) Information and data denoted in U.S. dollars (and the conversion
date and rate used) relating to:
(i) The method of computation, availability, and timeliness of the
index;
(ii) The total capitalization, number of stocks (including the
number of unaffiliated issuers if different from the number of stocks),
and weighting of the stocks by capitalization and, if applicable, by
price in the index as well as the combined weighting of the five
highest-weighted stocks in the index;
(iii) Procedures and criteria for selection of individual securities
for inclusion in, or removal from, the index, how often the index is
regularly reviewed, and any procedures for changes in the index between
regularly scheduled reviews;
(iv) Method of calculation of the case-settlement price and the
timing of its public release;
(v) Average daily volume of trading, measured by share turnover and
dollar value, in each of the underlying securities for a six-month
period of time and, separately, the dollar value of the average daily
trading volume of the securities comprising the lowest weighted 25% of
the index for the past six calendar months, calculated pursuant to
Commission Rule 41.11; and
(vi) If applicable, average daily futures trading volume;
(6) A statement that the index is not a narrow-based security index
as defined in Section 1a(25) of the Act and the analysis supporting that
statement; and
(7) When applicable, a request to make the futures contract
available for trading in accordance with the terms and conditions of,
and through the electronic trading devices identified in, the Foreign
Trading System No-Action letter that the foreign board of trade received
from Commission staff and a certification from the foreign board of
trade that it is in compliance with the terms and conditions of that no-
action letter.
[68 FR 33624, June 5, 2003]