Federal Register, Volume 76 Issue 247 (Friday, December 23, 2011)[Federal Register Volume 76, Number 247 (Friday, December 23, 2011)]
[Rules and Regulations]
[Pages 80674-80723]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31637]
[[Page 80673]]
Vol. 76
Friday,
No. 247
December 23, 2011
Part VI
Commodity Futures Trading Commission
-----------------------------------------------------------------------
17 CFR Part 48
Registration of Foreign Boards of Trade; Final Rule
Federal Register / Vol. 76, No. 247 / Friday, December 23, 2011 /
Rules and Regulations
[[Page 80674]]
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 48
RIN 3038-AD19
Registration of Foreign Boards of Trade
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is issuing final rules to implement new statutory provisions enacted by
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act). On November 19, 2010, the Commission requested
comment on proposed rules that would 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. After reviewing the comments submitted in response to
the proposed rules, the Commission has determined to issue these final
FBOT registration rules substantially as originally proposed, with
certain modifications.
DATES: Effective Date--February 21, 2012.
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:
Table of Contents
I. Background
A. Introduction
B. Foreign Boards of Trade and Direct Access
1. History of the No-action Process
2. Commission Determination To Adopt Formal Registration Rules
3. Overview of NPRM
II. Summary of Comments
A. General Comments
B. Specific Comments
1. Application for Registration
a. Treatment of FBOTs With Existing No-action Relief
(i). Grandfathering and the Scope of the Limited Application
(ii). 120 Days To File Limited Application
(iii). Treatment of FBOTs That Have Not Obtained No-action
Relief
b. Timeliness of Commission Review of an Application
2. Standard of Review
a. Need for Registration
b. Foreign Supervision and the Comparable, Comprehensive
Determination
(i). Consideration of the Totality of Regulation
(ii). Comparability Reviews
(iii). Limitations of Comparability Reviews
(iv). Reconfirmation and Withdrawal of Registration
c. International Standards
d. Clearing Standards
(i). DCOs
(ii). RCCPs Standards for Non-DCOs
e. Foreign Regulation of FBOT Participants
3. Contracts
a. Linked Contracts
(i) Definition
(ii). Conditions
b. Swaps and Other Contracts
(i). Swaps
(ii). Clearing of Swaps
(iii). Swaps Data Reporting
(iv). Contracts Other Than Futures, Options and Swaps
(v). Review of Contracts
4. Direct Access Definition
5. Scope of Registration (i.e., CEA Sections 5 and 5a)
6. Registration Requirements and Conditions
a. Trading Rules
b. Information Sharing
c. Submission of U.S.-Domiciled Entities to Service of Process
7. Modification of Registration Requirements
8. Other Concerns
a. Prescriptive Nature of the Regulations
b. Alternative Trading Platforms
c. Impact of FBOT Registration Rules
9. On-going Review of Registered FBOTs
10. The Appendix
III. Conclusion and Effective Date
A. Conclusion
B. Effective Date
IV. Related Matters
A. Paperwork Reduction Act
B. Cost Benefit Considerations
C. Regulatory Flexibility Act
I. Background
A. Introduction
On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\
Title VII of the Dodd-Frank Act \2\ amended the Commodity Exchange Act
(CEA or the Act) \3\ 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.
---------------------------------------------------------------------------
\1\ 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.
\2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\3\ 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------
Section 738 of the Dodd-Frank Act amended CEA section 4(b) to
provide that the Commission may adopt rules and regulations requiring
FBOTs that wish to provide their members or other participants located
in the United States with direct access to the FBOT's electronic
trading and order matching system to register with the Commission.
Direct access is defined in the statute as an explicit grant of
authority by an FBOT to an identified member or other participant
located in the U.S. to enter trades directly into the FBOT's trade
matching system.\4\ CEA section 4(b) also authorizes the Commission to
promulgate rules and regulations prescribing procedures and
requirements applicable to the registration of such FBOTs.
---------------------------------------------------------------------------
\4\ Direct access is defined in CEA section 4(b)(1)(A).
---------------------------------------------------------------------------
Accordingly, on November 19, 2010, the Commission published a
notice of proposed rulemaking that set forth proposed regulations that
would establish a registration requirement and related registration
procedures and conditions applicable 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 system
(NPRM).\5\ The Commission requested comment on all aspects of the
proposed regulations. After thoroughly reviewing the comments submitted
in response to the NPRM, the Commission has determined to issue these
final rules which are substantially the same as those proposed, with
some modifications made in response to certain of the comments received
and with a partially revised format, as discussed below.
---------------------------------------------------------------------------
\5\ See Registration of Foreign Boards of Trade, 75 FR 70974
(November 19, 2010).
---------------------------------------------------------------------------
B. Foreign Boards of Trade and Direct Access
1. History of the No-action Process
Since 1996, FBOT requests to provide members and other participants
that are located in the U.S. with direct access to their electronic
trading and order matching systems have been addressed
[[Page 80675]]
by Commission staff in accordance with the no-action process set forth
in Commission regulation 140.99.\6\ Specifically, such FBOTs seeking to
provide direct access to members and participants located in the U.S.
have requested, and, where appropriate, received from the relevant
division of the Commission, a no-action letter in which division staff
represents that, provided the FBOT satisfies the conditions set forth
therein, the division 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 facility
(DTEF). Since 1996, Commission staff has issued 24 direct access no-
action relief letters (formerly referred to as foreign terminal no-
action relief letters) to FBOTs, 20 of which remain active.\7\ A
detailed discussion of the history and evolution of the FBOT no-action
process and the scope of the relief provided can be found in the
NPRM.\8\
---------------------------------------------------------------------------
\6\ 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.
\7\ One no-action relief letter was superseded and three were
revoked when the FBOTs ceased operations as regulated or recognized
markets. Currently, 14 of the FBOTs with active no-action relief
report volume originating from the U.S. via direct access.
\8\ 75 FR 70974-76.
---------------------------------------------------------------------------
While the no-action process has served a useful purpose, the
Commission, given the new authority provided by Congress in the Dodd-
Frank Act to promulgate registration requirements applicable to FBOTs
that provide direct access, has determined to replace the staff no-
action process with generally applicable Commission regulations.
2. Commission Determination To Adopt Formal Registration Rules
In determining to adopt formal registration rules for FBOTs, the
Commission has also considered that the no-action process is generally
better suited for discrete, unique factual circumstances and for
situations where neither the CEA nor the Commission's regulations
address the issue presented. The Commission has determined that, where
the same type of relief is being 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., it is no longer appropriate
to handle requests for the relief through the no-action process.
Rather, such matters should be addressed in generally applicable
registration regulations.
By implementing uniform application procedures and registration
requirements and conditions, the process by which FBOTs are permitted
to provide members and other participants located in the United States
with direct access to their trading systems will become more
standardized and more transparent to both registration applicants and
the general public and will promote fair and consistent treatment of
all applicants. Further, generally applicable regulations will provide
greater legal certainty for FBOTs providing direct access than the no-
action relief process because no-action letters are issued by the staff
and are not binding on the Commission. The Commission also notes that
an FBOT registration regime will be more consistent with the statutory
authority pursuant to which other countries, including the United
Kingdom, Australia, Singapore, Japan and Germany, among others, permit
U.S.-based DCMs to provide direct access internationally.
Accordingly, for the reasons noted above and pursuant to the new
authority provided by amended CEA section 4(b), the Commission has
determined to adopt FBOT registration regulations. The final rules will
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 with a requirement that an FBOT seeking to provide such
access must apply for and be granted registration with the
Commission.\9\
---------------------------------------------------------------------------
\9\ In 2006, 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.
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). With the exception of the Commission's
endorsement of the use of no-action relief to permit direct access,
which is superseded by this final rule, the Policy Statement remains
effective.
---------------------------------------------------------------------------
3. Overview of NPRM
As noted above, on November 19, 2010, the Commission published a
NPRM in which it proposed regulations that would require 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 to become registered with the Commission. The proposed rules
described the types of FBOTs that would be eligible for registration
under the proposed regulations and prescribed the application
procedures, requirements, and conditions that would be applicable to
such registration. The rules were proposed to be codified in new Part
48 of the Commission's regulations. The proposed regulations provided
that it would be unlawful for an FBOT to permit direct access to
members and other participants in the U.S. unless the FBOT was
registered with the Commission. The proposed requirements for
registration were divided into the same seven general categories
evaluated during the course of a review of a request for FBOT no-action
relief: membership criteria, trading system, contracts, settlement and
clearing, regulatory authorities, rules and rule enforcement, and
information sharing. Pursuant to the proposed regulations, whether the
registration requirements are successfully met would be determined by
review of the information and documentation submitted by the applicant
and, if appropriate, a staff on-site visit to the FBOT and clearing
organization and their regulatory authorities to observe and discuss
procedures and policies described in the information submitted by the
applicant. The proposal also contained the conditions that a registered
FBOT would be required to meet to retain its registration, including
continued satisfaction of the registration requirements; conditions
related to the FBOT's regulation in its home country; satisfaction of
comparable international standards; restrictions upon the FBOT's
provision of direct access; acknowledgement and agreement to Commission
jurisdiction; information-sharing requirements; monitoring for and
enforcing compliance with the conditions of registration; conditions
specifically applicable to swap trading; reporting obligations; and
special conditions that would apply to linked contracts.\10\ As
proposed, the rules provided for a ``limited'' application process for
FBOTs currently operating pursuant to existing no-action relief.\11\
[[Page 80676]]
The proposal also set forth the procedures to be followed should an
FBOT wish to list additional contracts for trading by direct access
after being registered. Finally, the proposal identified certain events
that may trigger the revocation of an FBOT's registration.
---------------------------------------------------------------------------
\10\ CEA section 4(b)(1)(B) defines a linked contract as an
agreement, contract, or transaction that settles against any price
(including the daily or final settlement price) of one or more
contracts listed for trading on a registered entity.
\11\ The proposed rules would have required that FBOTs operating
under existing no-action relief submit a limited application for
registration within 120 days of the effective date of the
registration rules. An FBOT would be permitted to continue to
operate pursuant to the no-action relief during the 120-day period
and until the Commission notified the FBOT that the application was
approved or denied.
---------------------------------------------------------------------------
II. Summary of Comments
A. General Comments
The Commission received 147 comments in response to the NPRM.\12\
The comments included 24 comment letters that addressed a variety of
substantive issues raised by the proposal. Those 24 comment letters
came from entities representing a broad range of interests, including
eleven letters representing fourteen FBOTs currently providing direct
access to members or other participants in the U.S. pursuant to staff
direct access no-action relief letters \13\ and three letters from
FBOTs that were not currently providing direct access to U.S.
participants.\14\ The Commission also received comments from a U.S.
derivatives marketplace,\15\ three industry or trade associations,\16\
a non-profit organization,\17\ a natural gas company,\18\ a foreign
regulator,\19\ a United States Senator,\20\ and the Commodity Market
Oversight Coalition.\21\
---------------------------------------------------------------------------
\12\ The comment file is available on the Commission's Web site
at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=902.
\13\ Dubai Mercantile Exchange (DME), London Metal Exchange
(LME), Australian Securities Exchange (ASX), Montreal Exchange Inc.
(MX), Intercontinental Exchange (ICE) (owner of ICE Futures Europe
and ICE Futures Canada), European Energy Exchange AG (EEX), Hong
Kong Futures Exchange Limited (HKFE), BM&F Bovespa (BM&F), Nasdaq
OMX Oslo ASA (OMX), NYSE Euronext (NYX) (operator of three FBOTs,
Liffe Administration and Management, Euronext Paris SA, and Euronext
Amsterdam N.V.), and Eurex Deutschland (Eurex).
\14\ Osaka Securities Exchange (OSE), Natural Gas Exchange, Inc.
(NGX), and Bursa Malaysia Derivatives Exchange (Bursa Derivatives).
A direct access no-action letter was issued to OSE on June 1, 2011.
NGX is currently operating as an exempt commercial market (ECM), and
will continue to do so under the ECM grandfather relief provided for
in the Dodd-Frank Act.
\15\ CME Group, which includes four CFTC-registered DCMs: The
Chicago Mercantile Exchange Inc. (CME), the Board of Trade of the
City of Chicago, Inc. (CBOT), the New York Mercantile Exchange, Inc.
(NYMEX), and the Commodity Exchange, Inc. (COMEX).
\16\ Futures and Options Association (FOA), Air Transport
Association of America (ATA) (two comment letters), and Petroleum
Marketers Association of America and the New England Fuel Institute
(Petroleum Marketers).
\17\ Better Markets, Inc. (Better Markets). Better Markets
describes themselves as a non-profit organization that promotes the
public interest in capital and commodity markets.
\18\ BG Americas & Global LNG (BG Americas).
\19\ European Securities and Markets Authority (ESMA).
\20\ Senator Carl Levin, Chairman of the United States Senate
Permanent Subcommittee on Investigations.
\21\ The Commodity Market Oversight Coalition (CMOC) states that
it represents an array of interests, including the interests of
commodity producers, processors, distributors, retailers, commercial
and industrial end-users, and average American consumers and that it
was established to promote government policy and regulation in the
commodity trading markets that preserve the interests of bona fide
hedgers and consumers and the health of the broader economy.
---------------------------------------------------------------------------
The Commission also received 94 virtually identical comment letters
from self-identified small business owners in the oil and gas industry
and/or grocery industry. Each of these letters presented a range of
comments spanning several provisions of the Dodd-Frank Act and, with
respect to the proposed FBOT regulations, included nearly identical
text in which the commenters generally expressed support for the
requirement that FBOTs register with the Commission and for the
requirements that FBOTs adopt position limits, implement prohibitions
on manipulation and excessive speculation, and be subject to ownership
caps.\22\
---------------------------------------------------------------------------
\22\ Each of these letters contained a similar short paragraph
specifically addressing the proposed FBOT rules. A representative
letter stated: ``I support the requirement that FBOTs register with
the CFTC and make their trading data available as well as requiring
that they adopt position limits and implement prohibitions on
manipulation and excessive speculation. They should also be subject
to ownership caps.'' The Commission also received a brief comment
from a private citizen. In addition, the comment file includes 26
comments submitted in response to the Commission's reopening of the
comment period for several Dodd-Frank related rulemakings. See
Reopening and Extension of Comment Periods for Rulemakings
Implementing the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR 25274 (May 4, 2011) (extending the comment
deadline for multiple Dodd-Frank Act rulemakings to June 3, 2011).
None of the comments submitted in response to the reopening of the
comment period specifically addressed the proposed FBOT registration
regulations and, therefore, they are not addressed in this document.
---------------------------------------------------------------------------
Of the 24 comment letters addressing various substantive FBOT
registration issues in the proposed regulations, 17 letters voiced
general support for the proposed rules and for the adoption of an FBOT
registration process.\23\ For example, OMX stated:
---------------------------------------------------------------------------
\23\ See letters from ASX, BM&F, Bursa Derivatives, Eurex, EEX,
LME, MX, OMX, NGX, OSE, FOA, ATA, BG Americas, Petroleum Marketers,
CMOC and Senator Levin. ICE commented that the CFTC ``generally
strikes the right balance with the proposed rulemaking.''
Our overall impression of the proposed rules is that they will
create a more transparent and standardized process that will provide
a greater legal certainty for FBOTs. We are thus under the
impression that the new rules will represent an improvement of the
---------------------------------------------------------------------------
legal process related to FBOTs.
Similarly, Eurex commented:
Eurex supports the proposed regulations as set forth in the
[NPRM] and it values the legal certainty that registration by the
Commission will provide. Eurex looks forward to being registered by
the Commission as an FBOT and to the fuller participation in the
development of the U.S. derivatives industry that it expects will
accompany registration.
Each of the generally supportive comments, however, also offered
varying critiques that focused on specific issues. These are discussed
in greater detail below.
Four of these comment letters generally did not support the
proposed rules \24\ and one comment letter raised concerns with respect
to the impact of FBOT registration on the effectiveness of the Dodd-
Frank Act.\25\ For example, NYX and ESMA questioned whether a
registration regime was superior to the existing no-action process.
Specifically, NYX noted, ``[W]e are not convinced that a move from the
existing regime to a more formal, rules-based solution is either
necessary or desirable.'' ESMA noted that, ``It seems to us that there
is no legal provision that would require the CFTC to depart from the
present practice of issuing no-action relief letters. [* * *] [T]he new
registration procedure and the mandatory application of very
comprehensive, ongoing requirements to all FBOTs would be burdensome
and costly without any apparent improvements for the safeguard of
public interests such as the maintenance of fair and orderly markets,
investor protection and the resilience of the market.'' Similarly, LME,
while supporting the Commission's desire to establish a standardized
regulatory framework for FBOTs that wish to provide direct access to
U.S.-domiciled market participants, commented that the approach of
requiring FBOTs to register with the Commission would constitute an
unnecessary burden on the CFTC and FBOT applicant resources and stated
its preference for a comparability-based exemptive approach, which
would accomplish the same objectives, rather than a registration
regime. HKFE commented that creating unnecessary obstacles to cross-
border trading will affect all markets and market participants and
limit the use of risk mitigating instruments traded in global markets.
---------------------------------------------------------------------------
\24\ NYX, HKFE, ESMA, and CME Group.
\25\ Better Markets.
---------------------------------------------------------------------------
The CME Group expressed concern that the prescriptive nature of the
rules
[[Page 80677]]
may result in retaliatory, anti-competitive action by foreign
---------------------------------------------------------------------------
regulators. CME Group commented that:
[W]e have significant concern that the proposed rules are overly
prescriptive and will have the effect of engendering retaliatory
action by foreign regulators that will inhibit our ability to
continue to grow our business and compete effectively in the current
global environment.
CME Group also argued that since the Dodd-Frank Act did not intend to
grant the Commission general regulatory authority over FBOTs, the
imposition of an information gathering process with limited utility
would do little more than stretch already limited Commission resources.
Better Markets argued that enabling FBOTs to provide direct access
to members and other participants in the U.S. would ``undercut[] the
effectiveness of the Dodd-Frank Act'' unless FBOTs were subject to
regulatory requirements that are ``the same as or equivalent to the
Dodd-Frank Act structure.'' Better Markets expressed concern that, even
if there are parallel systems that are adequately structured in foreign
jurisdictions, there is a risk that the regulatory regime will not be
administered similarly to the markets subject to Commission oversight.
B. Specific Comments
The specific issues raised by commenters can be grouped generally
into nine categories and include the following: Application for
registration; standard of review; contracts; direct access definition;
scope of registration; registration requirements and conditions;
modification of registration requirements; other concerns; and ongoing
review of registered FBOTs. These concerns and the Commission's
conclusions with respect to them are discussed below.
1. Application for Registration
a. Treatment of FBOTs With Existing No-Action Relief
Proposed regulation 48.6 provides that FBOTs currently providing
direct access pursuant to a Commission staff no-action letter would be
required to apply for registration within 120 days of the effective
date of the FBOT registration regulations, but would permit them to
file a limited application, as described in the proposed regulation.
Eurex expressly supported the proposed limited application process; ASX
welcomed the formalization of the registration requirements. Twelve of
the comment letters, however, were in favor of either further narrowing
the scope of the limited application process or completely
grandfathering FBOTs currently operating pursuant to no-action relief.
Several commenters also requested that the time period for submitting a
limited application be expanded.
(i) Grandfathering and the Scope of the Limited Application
Eight of the twelve commenters, including commenters representing
11 FBOTs providing direct access to their trading systems pursuant to
existing no-action relief \26\ and the CME Group and FOA, specifically
requested that the CFTC significantly narrow proposed Sec. 48.6 to
either provide grandfathered registration to FBOTs operating under
existing no-action relief or to require FBOTs applying for registration
to supply only that information which (1) has materially changed since
the time the FBOT's no-action relief was granted, (2) was not
previously filed with the Commission or (3) relates to newly imposed
registration requirements. The commenters generally argued that the
limited application process set forth in proposed Sec. 48.6 is too
burdensome and is unnecessary given that FBOTs and their regulatory
regimes were reviewed by Commission staff during the process of issuing
a no-action letter.
---------------------------------------------------------------------------
\26\ BM&F, DME, EEX, HKFE, ICE, MX, OMX, and NYX.
---------------------------------------------------------------------------
FOA commented that FBOTs currently operating under no-action relief
should not have to reapply for approval to allow direct access to their
markets and recommended that the CFTC should principally rely on
information previously provided by the FBOT and its regulator to
satisfy the proposed registration requirements and should identify for
each FBOT operating under a no-action letter what specific additional
information is required. NYX generally agreed with this recommendation
and further suggested that, if a limited application for registration
is necessary, the FBOTs should be required to consult with the
Commission in order to identify which specific information not
previously submitted would be necessary to demonstrate compliance with
the registration requirements. BM&F commented that where an FBOT had
been granted no-action relief following adoption by the Commission of
the 2006 Policy Statement, that FBOT should only be required to certify
that there have been no material changes to the information or
representations in its request for no-action relief or, if there have
been changes, to identify those changes and demonstrate how they would
be in compliance with the registration rule. ICE commented that the
FBOT should only be required to submit additional relevant information
necessary to update the Commission's understanding of the foreign
regulatory regime.
The Commission does not believe that it would be prudent to
grandfather FBOTs that are operating under existing no-action relief
without any further review to determine that the registration
requirements set forth in Sec. 48.7 are being met. FBOT requests for
no-action relief were assessed based upon the information and
documentation presented at the particular time of the request (some as
early as 1999), were based upon a comparison of the regulatory regimes
in the U.S. and the applicable foreign jurisdiction that existed at the
time, were subject to varying standards of review that applied at the
time (which have changed as statutes and policies have evolved), and
were reviewed on a case-by-case basis. Just as the Dodd-Frank Act
represents a significant change in the regulatory approach in the U.S.,
many foreign jurisdictions have changed their approaches since the time
the existing no-action letters were granted as well.
The Commission also does not believe that it would be either
feasible or appropriate for the Commission staff to ascertain for each
FBOT operating under existing no-action relief the precise information
or documentation in its individual no-action request submission that
would need to be updated or revised in order to satisfy registration
requirements. The FBOTs are in a better position to recognize their own
particular circumstances and to identify any information and
documentation that may require updating in light of those changes. This
is especially true of information regarding the relevant foreign
regulations to which the FBOT is presently subject, as these may have
differing applicability depending upon the FBOT's particular business
model. The FBOT should be afforded the opportunity to provide materials
demonstrating that the foreign regime currently is comparable and
comprehensive to the regulatory regime in the United States.
In response to the comments received, the Commission has determined
to modify the limited application documentation requirements in one
aspect. The proposed limited application process required that, to the
extent an FBOT operating under existing no-action relief intends to
rely upon previously submitted information or documentation to
demonstrate that it satisfies the registration requirements,
[[Page 80678]]
the FBOT must resubmit the information or documentation, identify the
specific requirements for registration set forth in proposed Sec. 48.7
that are satisfied by the resubmitted information, and certify that the
information remains current and true. The Commission has determined to
streamline the Sec. 48.6 application requirements for any FBOT whose
original no-action relief request was submitted electronically and
remains on file with the Commission staff.\27\ In lieu of re-
transmitting to the Commission previously submitted information and
documentation, such FBOTs would be permitted to simply refer to each
portion of their original submission that satisfies a particular
registration requirement, identify the specific registration
requirement that is fulfilled by that section, and certify that the
information or documentation originally provided remains current and
true. The FBOT would continue to be required to submit new information
or documentation, to the extent that its original application would not
adequately demonstrate that the FBOT would be in compliance with one or
more of the registration requirements. This typically would be
necessary where one of the registration requirements, such as a
requirement applicable to clearing and settlement, imposes a standard
that was not applied at the time of the original application for no-
action relief.
---------------------------------------------------------------------------
\27\ Documents submitted electronically can be more easily
identified and located and can be retransmitted quickly and at less
cost than documents in hard copy. It is also easier to identify and
highlight those segments of an electronically submitted document
that would satisfy a current requirement of registration.
---------------------------------------------------------------------------
(ii) 120 Days To File Limited Application
Seven commenters, including six FBOTs and one industry association,
requested that the proposed 120-day time period within which an FBOT
operating under existing no-action relief would be required to file a
limited application be extended. Four specifically asked that the
period be lengthened to 180 days,\28\ while another asked for a
year.\29\ Two entities commented that the registration rules should
provide that FBOTs with existing no-action relief may continue to
operate as such as long as they submit an application within the 120-
day period, which is determined in good faith by the applicant to be
complete.\30\ Such commenters expressed concern that there may be an
extended period of legal uncertainty after the 120-day period, but
before the Commission acted upon the application.
---------------------------------------------------------------------------
\28\ BM&F, EEX, LME, and MX.
\29\ ICE.
\30\ NYX and FOA.
---------------------------------------------------------------------------
In response to these comments the Commission has determined to
adopt the proposal with certain modifications. The final regulations
provide that the required timeframe within which an FBOT operating
pursuant to existing no-action relief is required to submit a limited
application for registration, determined in good faith by the applicant
to be complete, is 180 days from the effective date of the FBOT
registration rules.\31\ The final rule also provides legal certainty in
that Sec. 48.6 provides that an FBOT ``may continue to operate
pursuant to the existing no-action relief, subject to the terms and
conditions contained therein, during the 180-day period, while the
Commission is reviewing its application, and until the Commission
approves or disapproves the application or otherwise withdraws the
existing no-action relief.'' Thus, FBOTs could continue to provide for
direct access pursuant to the no-action relief during the 180-day
period and, if they submitted timely and complete applications for
registration, until such time as the Commission acts upon the
registration applications.
---------------------------------------------------------------------------
\31\ If, at any time after the 180-day deadline but before a
limited application is approved or disapproved, the Commission
determines that the application is materially incomplete, the
Commission may, after providing the FBOT with notice and an
opportunity to respond to the determination of incompleteness,
withdraw the existing no-action relief if the Commission determines
that the application cannot be made complete in a timely manner.
---------------------------------------------------------------------------
(iii) Treatment of FBOTs That Have Not Obtained No-action Relief
NGX asked whether FBOTs with pending applications could file a
limited application and stated that, if so, the review of such
applications should take precedence over the review of applications of
FBOTs currently operating under existing no-action relief. Bursa
Derivatives asked if the Commission would take into consideration any
Regulation 30.10 relief granted by the Commission to an FBOT or any
visit made to an FBOT in the Regulation 30.10 review when evaluating
such FBOT's application under the proposed registration process.\32\
---------------------------------------------------------------------------
\32\ A Rule 30.10 order permits firms that are members of a
self-regulatory organization and subject to regulation by a 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 CEA, based upon the firm's substituted compliance with a foreign
regulatory structure found comparable to that administered by the
Commission under the CEA. Among the issues considered by the
Commission in determining whether to grant Rule 30.10 relief based
on a foreign regulatory or self-regulatory authority are the
authority's: (i) Requirements relating to the registration,
authorization, or other form of licensing, fitness review, or
qualification of persons through whom customer orders are solicited
and accepted; (ii) minimum financial requirements for those persons
that accept customer funds; (iii) minimum sales practice standards,
including risk disclosures, and the risk of transactions undertaken
outside of the United States; (iv) procedures for auditing
compliance with the requirements of the regulatory program,
including recordkeeping and reporting requirements; (v) standards
for the protection of customer funds from misapplication; and (vi)
arrangements for the sharing of information with the United States.
---------------------------------------------------------------------------
In consideration of the comments concerning limited applications
for registration, the Commission has determined that an FBOT with a
pending request for direct access no-action relief should be permitted
to file a limited application for registration, recognizing that some
of the required information and documentation is likely to have been
recently submitted and, therefore, up-to-date. Thus, Sec. 48.6 has
been modified to provide that an FBOT that has submitted a complete
application for no-action relief that is pending as of the effective
date of the final rule could, as part of its application for
registration, identify information or documents provided in its request
for no-action relief that would satisfy particular registration
requirements. Those aspects of the registration requirements that were
not addressed in the materials submitted in connection with the no-
action request would have to be addressed directly in the FBOT's
registration application. With respect to the question of precedence of
review, the Commission is not assigning precedence to any group of
applicants. The Commission does, however, anticipate that the
applications of FBOTs with pending relief requests generally will be
submitted, and acted upon, before those of FBOTs which have no-action
relief, largely because the latter FBOTs can continue to operate
pursuant to the existing no-action relief during the 180-day timeframe
for submission of an application and so long as a complete and timely
application is submitted. In contrast, those FBOTs with pending relief
requests cannot provide for direct access until they submit an
application and receive an Order of Registration.
With respect to consideration of any regulation 30.10 relief
granted by the Commission to an FBOT or related visits in evaluating
the FBOT's application for registration, the Commission believes it
would be appropriate to consider such information only to the extent
that it is
[[Page 80679]]
relevant to particular registration requirements (e.g., requirements
that members be fit and proper and other foreign regulatory regime
standards applicable to market participants) and is identified as such
by the FBOT. The Commission notes that there is limited overlap between
the factors considered when granting regulation 30.10 relief and those
that will be examined in connection with FBOT registration. Regulation
30.10 review primarily is focused on the foreign regulatory standards
applicable to market participants. While regulation 30.10 relief could
inform the Commission's decision to register an FBOT, it would not be
an appropriate substitute for the comparability and comprehensiveness
analysis required under the FBOT registration regulations.
b. Timeliness of Commission Review of an Application
The proposed regulations did not include a proposed timeline for
completion of Commission staff review of an application. Bursa
Derivatives suggested that the Commission adopt a timeline of 180 days
for the Commission to notify FBOTs whether an application has been
approved or denied. The commenter noted that this would be consistent
with the 180 days allotted for reviewing a designated contract market
application.
The Commission has determined not to adopt a firm timeline for
completion of Commission staff review of an application. The Commission
is committed to completing its review of applications for FBOT
registration within a year or in as timely a manner as circumstances
and resources will allow. However, the Commission can neither predict
the total number of applications for registration that will be
submitted nor whether such applications will be received simultaneously
or over a period of time and, thus, cannot be assured that it would
have sufficient resources at all times to meet such a self-imposed
deadline. The Commission is likely to receive applications from most of
the 20 FBOTs currently operating under existing no-action relief in
addition to applications from other FBOTs that wish to register. The
Commission notes that the lack of a specific deadline for the review of
FBOT registration applications will not have a significant impact on
those FBOTs currently able to provide direct access pursuant to a staff
no-action letter that submit timely applications for registration. As
previously noted, the final regulations permit such FBOTs to continue
to provide direct access to FBOT members and other participants located
in the U.S. during the review period, subject to compliance with the
terms and conditions of their no-action relief letters.
2. Standard of Review
a. Need for Registration
One foreign regulator, ESMA, questioned whether replacing the
practice of issuing no-action letters with a process whereby FBOTs
would register with, and become subject to, the jurisdiction of the
Commission would provide sufficiently enhanced public safeguards to
outweigh the burdens imposed. Noting that section 738 of the Dodd-Frank
Act seems to provide the Commission full flexibility on whether and how
to implement the rules on registration, ESMA stated that: ``Since the
CFTC has also verified in the past that a FBOT and its clearing
organisation are subject to comprehensive regulation and comparable
oversight by the home regulatory authority, * * * the creation of new
US regulatory measures with extra-territorial application should be
avoided as far as possible and replaced by effective co-operation
between the home and host regulatory authorities. Jurisdiction should
indeed generally be exercised by the home country alone. The necessary
cooperation could be ensured by an MoU determining how the home and the
host authority should collaborate, exchange information and conduct
common reviews and inspections.'' \33\
---------------------------------------------------------------------------
\33\ ESMA.
---------------------------------------------------------------------------
HKFE and MX commented that the CFTC has already determined that
FBOTs currently allowed to operate in the U.S. are subject to
comprehensive and comparable regulation in their home jurisdictions
under the no-action relief regime. HKFE further stated that, therefore,
a substantive or a rule-by-rule review by the CFTC for the purposes of
FBOT registration may not be necessary or appropriate except where the
CFTC has fundamental concerns about a jurisdiction's regulations,
regulatory objectives or practices.
As previously noted, requests for no-action relief were submitted
to and reviewed by Commission staff and not by the Commission itself
and the letters granting no-action relief are not binding upon the
Commission. Moreover, in analyzing requests for no-action relief, staff
did not review the requests under the same standards that will be
universally applied under the final regulations. For example, staff did
not specifically consider whether an FBOT or its clearing organization
was subject to ``comprehensive regulation and comparable oversight by
the home regulatory authority.'' Rather, staff's standard of review has
ranged from determining that the FBOT is regulated by a legitimate
regulatory authority to determining that the FBOT and its regulatory
authority support and enforce standards for trading and customer and
market protection that are equivalent to those supported by the CFTC
and its regulated DCMs.
The Commission believes that the application procedures contained
in the final registration regulation would provide for appropriate
review. While the rule would create a new registration category, that
category would operate pursuant to open and transparent standards and
procedures that may not have been uniformly applied with respect to
FBOT no-action letters. The proposed regulatory measures are applicable
only to FBOTs that choose to provide for direct access to their trading
systems to persons located in the U.S. In addition, the Commission
believes that the rule, as proposed, would encourage effective co-
operation between the home and host regulatory authorities in that it,
among other things, provides for expanded information sharing between
the regulatory authorities. Finally, with respect to the comment that
the proposal is creating new U.S. regulatory measures with extra-
territorial application, the Commission notes that Congress has
authorized the registration of FBOTs in the Dodd-Frank Act. Moreover,
the FBOT registration process relies significantly upon the
Commission's determination that the FBOT's home country regulatory
authority provides for comparable, comprehensive supervision and
regulation. The Commission finds it particularly noteworthy that other
countries that permit direct access, including the UK, Japan,
Singapore, Hong Kong, Germany and Australia, among others, do so under
a registration or licensing scheme. Accordingly, the Commission
believes that the establishment of the FBOT registration regime in the
final rule is generally consistent with international practices.
b. Foreign Supervision and the Comparable, Comprehensive Determination
As required by CEA section 4(b)(1)(A)(i), proposed Sec. 48.5(d)(2)
provided that the Commission, when reviewing an application for FBOT
registration, will consider whether the FBOT and its clearing
organization are subject to comprehensive supervision
[[Page 80680]]
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),
respectively, are subject in the United States. Seven commenters
specifically addressed this provision, offering critiques of the
Commission's approach to evaluating an FBOT's home regulatory
regime.\34\
---------------------------------------------------------------------------
\34\ Eurex, FOA, LME, EEX, OMX, Better Markets, and CME Group.
---------------------------------------------------------------------------
Two commenters recommended that the Commission make a determination
as to whether an FBOT is subject to a comparable comprehensive
regulatory regime on a jurisdiction-by-jurisdiction basis where
appropriate.\35\ For example, if more than one FBOT is subject to the
regulatory regime in the United Kingdom, the Commission could make a
single determination as to the comparability and comprehensiveness of
the regulatory regime in the United Kingdom.
---------------------------------------------------------------------------
\35\ LME and EEX. EEX commented that all trading venues
recognized as a ``Regulated Market'' under the European Union's (EU)
Markets in Financial Instruments Directive (MiFID) should be deemed
fit to meet the regulatory standards of a registered FBOT. LME
commented that the Commission should take the same jurisdictional
approach with respect to the review of clearing organizations.
---------------------------------------------------------------------------
In consideration of these comments, the final regulation, in the
application form for registration, Form FBOT,\36\ provides for a
jurisdiction-based review of the comparability of the foreign
regulatory regime when multiple FBOTs that are subject to the same
regulatory regime are applying for registration. Specifically, the
regulation, through the Form FBOT, provides that multiple FBOTs that
are subject to the same regulatory regime and that are applying for
registration at the same time may collectively provide information
regarding the regulatory regime under which they operate. The
information may be provided by the FBOTs themselves, or by the
applicable foreign regulatory authority.
---------------------------------------------------------------------------
\36\ The proposed rules included an appendix that identified the
information required in, and provided guidelines for submitting, an
application for registration as an FBOT. That appendix included
detailed descriptions of the minimum required documentation and
information that should be included in an application. In these
final rules, the Commission has revised the proposed appendix to
include the submission requirements identified therein in
standardized application forms, Form FBOT and Supplement S-1 to Form
FBOT. Form FBOT is to be completed by an FBOT applying for
registration and Supplement S-1 is to be completed by the clearing
organization affiliated with the FBOT. The substance and content of
Form FBOT and Supplement S-1 are parallel to those requirements and
guidelines that were originally included in the appendix to the
proposed rules.
---------------------------------------------------------------------------
The Commission does not agree, however, that a determination that
an FBOT operating in one jurisdiction should be registered eliminates
the need to conduct a subsequent inquiry into the laws and regulations
applicable to a different FBOT in the same jurisdiction that applies
for registration at a different time. Additionally, a single
jurisdictional analysis of comprehensiveness and comparability may not
be able to take into account the fact that different FBOTs operating in
the same jurisdiction may be subject to different regulations,
depending upon a host of factors including, among other things, their
business structure, the participants they accept, the products they
trade and the exceptions and exemptions provided in the relevant
regulatory regime. Accordingly, two FBOTs operating in the same country
may be subject to regulation that differs in substantive ways.
Moreover, financial markets worldwide are currently in an enhanced
state of regulatory flux, making it a particularly inopportune time to
state that once a jurisdiction is deemed comparable, it will be deemed
comparable for the purpose of all future applications.\37\
---------------------------------------------------------------------------
\37\ Notwithstanding the above, in a situation where an FBOT
applying for registration is located in the same jurisdiction and
subject to the same regulatory regime as a registered FBOT, the
Commission believes that it would be acceptable for the FBOT
applying for registration to include by reference, as part of its
application, information about the regulatory regime that is posted
on the Commission's Web site. The FBOT applying for registration
must specifically identify the applicable information and certify
that the information thus included in the application is directly
applicable to it and remains current and valid.
---------------------------------------------------------------------------
(i) Consideration of the Totality of Regulation
Eurex, noting that in many jurisdictions the concept of self-
regulation is not as established as in the U.S. and that foreign
exchanges are not empowered in the same way as DCMs, recommended that,
in considering the comparability of regulation, the CFTC explicitly
incorporate that it may rely on the totality of the regulation--self
and governmental--of the FBOT in evaluating the FBOT for comparable
comprehensive supervision and regulation. The Commission has determined
to adopt the rule as proposed, but notes that consistent with this
Eurex comment, the Commission will rely on the totality of the
regulation of the FBOT and its clearing organization in evaluating
whether they are subject to comparable comprehensive supervision and
regulation.
(ii) Comparability Reviews
FOA expressed concern that the proposed registration regulations
would change the approach to comparability used under the existing no-
action review process into what is effectively a rules-equivalence
approach and that this could lead to a ``line by line'' examination of
the European Union's approach to the regulation of derivatives
transactions, central counterparties and trade repositories. FOA
commented that a ``line by line'' examination of the foreign
regulator's approach would complicate cross-border business and
increase the risk of inadvertent breaches.
The Commission has determined to adopt the rule as proposed. As in
the case of the review performed under the no-action review process,
the Commission's determination of the comparability of the foreign
regulatory regime to which the FBOT applying for registration is
subject will not be a ``line by line'' examination of the foreign
regulator's approach to supervision of the FBOTs it regulates. Rather,
it will be a principles-based review conducted in a manner consistent
with the part 48 regulations pursuant to which the Commission will look
to determine if that regime supports and enforces regulatory objectives
in the oversight of the FBOT and the clearing organization that are
substantially equivalent to the regulatory objectives supported and
enforced by the Commission in its oversight of DCMs and DCOs.
(iii) Limitations of Comparability Reviews
CME Group suggested that the Commission's analysis should be more
narrowly tailored and that the Commission should limit its inquiry to
questions regarding the comparability of the regulatory regime in the
FBOT's home jurisdiction, focusing on (1) the regulatory regime in the
FBOT's home jurisdiction, (2) the FBOT's status in its home
jurisdiction and its rules and enforcement thereof, and (3) any
existing information-sharing agreements between the FBOT, the
Commission, and the home jurisdiction regulator. CME Group argued that
such an approach would focus the Commission's attention on the
legitimacy of the home regulator rather than on the broader inquiries
that have informed the no-action process.
The Commission has determined to adopt the rule as proposed. The
Commission does not believe that its review of an FBOT seeking to
provide direct access to its trading system to persons located in the
U.S. should be
[[Page 80681]]
restricted to the three areas suggested by the commenter. The
Commission believes that the broader review contemplated by the
proposed regulations, which is an outgrowth of the review conducted
during the no-action process, is necessary to ensure the protection of
persons located in the U.S. that will be trading by direct access on
the FBOT. Accordingly, the final regulations continue to require the
FBOT to provide sufficient information and to demonstrate that the
registration requirements set forth in Sec. 48.7 are satisfied (e.g.,
information and documentation on the relevant membership standards, the
contracts to be made available in the U.S. and the automated trading
and clearing and settlement systems). The Commission believes that its
review of the information and documentation provided in these areas is
necessary to provide greater assurance that, among other things, the
members of the FBOT and its clearing organization members are subject
to appropriate standards, the contracts to be made available are not
readily susceptible to manipulation, all linked contracts are
identified, the trading system complies with the Principles for Screen-
Based Trading developed by the Technical Committee of the International
Organization of Securities Commissions (IOSCO Principles) \38\ and
produces an adequate audit trail, and the clearing and settlement
systems satisfy appropriate standards.
---------------------------------------------------------------------------
\38\ The IOSCO Principles were formulated by eight jurisdictions
which comprised Working Party 7 (Working Party) of the Technical
Committee of IOSCO under the chairmanship of the Commission. The
Working Party's mandate included, among other things, the
identification of issues related to screen-based trading systems for
derivative products. In considering the special concerns for screen-
based trading systems, the Working Party identified and addressed
the following issues: transparency, order execution algorithms,
operational issues, security and system vulnerability, access,
financial integrity, disclosure, and the role of system providers,
and articulated for each issue a broad principle to assist
regulatory authorities in overseeing screen-based trading systems.
The IOSCO Principles were adopted by IOSCO on November 15, 1990 and
set out in broad terms the international consensus as to the
regulatory considerations to be addressed in reviewing mechanisms
for cross-border screen-based trading. 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).
---------------------------------------------------------------------------
(iv) Reconfirmation and Withdrawal of Registration
Better Markets commented that proposed Sec. 48.8(a)(2)(iii), which
would impose continuing requirements on the foreign regulatory
structure to maintain its laws governing the FBOT, was too narrow and
too focused on the letter of the law, rather than the realities of the
marketplace. Better Markets proposed an annual reconfirmation and
demonstration of the appropriateness of the FBOT's regulatory regime
and, further, that an FBOT's registration should be discontinued if the
foreign regulatory regime changes in ways such that the FBOT would not
be able to qualify for initial registration.
The Commission has determined to adopt the rule as proposed, with
slight modifications. The Commission notes that the regulations contain
multiple provisions designed to demonstrate that the FBOT continues to
be subject to an appropriate regulatory regime. For example, Sec.
48.8(a)(1) conditions continued FBOT registration upon the FBOT's and
its clearing organization's satisfaction of all of the registration
requirements set forth in Sec. 48.7; Sec. 48.8(a)(2)(i) conditions
registration upon the FBOT continuing to satisfy the criteria for a
regulated market or licensed exchange pursuant to the regulatory regime
described in its application and continuing to be subject to oversight
by the regulatory authorities described in the registration
application; Sec. 48.8(a)(2)(ii) imposes a similar condition with
respect to the FBOT's clearing organization; Sec. 48.8(a)(2)(iii)
conditions registration upon the laws, systems, rules, and compliance
mechanisms of the regulatory regime applicable to the FBOT continuing
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; and Sec. 48.8(a)(3) conditions continued registration
upon the FBOT's and, if the FBOT's clearing organization is not a DCO,
the clearing organization's satisfaction of certain internationally
recognized standards.
In addition, Sec. 48.8(b)(1)(iii)(G) requires that the FBOT and
its clearing organization, or their respective regulatory authorities,
as applicable, provide to the Commission annually a written description
of any material changes to the regulatory regime to which the foreign
board of trade or the clearing organization is subject that have not
been previously disclosed or a certification that no material changes
have occurred. Further, proposed Sec. 48.9(b)(2) provides that the
Commission may revoke an FBOT's registration, after appropriate notice
and an opportunity for a hearing, if there is a material change in the
regulatory regime applicable to the FBOT or its clearing organization.
The Commission has modified Sec. 48.9(b)(2) to provide that the
Commission may revoke an FBOT's registration, after appropriate notice
and an opportunity to respond, if there is a material change in the
regulatory regime applicable to the FBOT or its clearing organization
such that the regulatory regime no longer satisfies any registration
requirement or condition for registration applicable to the regulatory
regime. The Commission believes that in this instance, as in other
instances in the final rule where the FBOT is provided appropriate
notice by the Commission of an issue about which it is expected to
communicate with the Commission, an opportunity to respond is adequate
for the purpose of addressing the issue.
c. International Standards
The requirements for and conditions of registration set forth in
proposed Sec. 48.7 and Sec. 48.8, respectively, would require an FBOT
and its clearing organization to observe specified international
standards. In order to become registered, an FBOT would be required to
successfully demonstrate that its trading system complied with the
current IOSCO Principles.\39\ Unless the FBOT's clearing organization
is registered with the Commission as a DCO, the FBOT also would be
required to demonstrate that the clearing organization observed: (1)
The current Recommendations for Central Counterparties jointly issued
by the Committee on Payment and Settlement Systems (CPSS) and the
Technical Committee of IOSCO, as updated, revised or otherwise amended,
or (2) successor standards, principles and guidance for central
counterparties or financial market infrastructures adopted jointly by
CPSS and IOSCO's Technical Committee (RCCPs). OMX commented that, in
order to provide more flexibility, the registration requirements should
refer to ``recognized international standards,'' rather than specific
international regulations.
---------------------------------------------------------------------------
\39\ A review of the FBOT requests for no-action relief to
permit direct access reveals that most of the applicants stated that
their regulatory authority has endorsed the IOSCO Principles.
Several of the FBOTs indicated that that their regulatory authority,
in its review of the FBOT's trading system during development and/or
on an ongoing basis, specifically took into account the IOSCO
Principles.
---------------------------------------------------------------------------
The Commission has determined to adopt Sec. Sec. 48.7(b)(1) and
(d)(1) and Sec. 48.8(a)(3) substantially as proposed. The use of a
singular set of internationally recognized standards provides clarity,
consistency and certainty to the application requirements and the
standards
[[Page 80682]]
identified in the proposal are directly relevant to the review to be
afforded FBOTs and their clearing organizations. In addition, due to
the breadth of participation by sponsoring organizations \40\ and the
approval of the standards by IOSCO and CPSS, these principles are
considered the premier standards in the industry and are likely to have
greater global recognition than similar regional standards.
---------------------------------------------------------------------------
\40\ The current RCCPs were finalized in 2004 by a CPSS-IOSCO
Task Force that included representatives from the following
entities: National Bank of Belgium; Comiss[atilde]o de Valores
Mobili[aacute]rios, Brazil; People's Bank of China; Czech National
Bank; European Central Bank; Autorit[eacute] des March[eacute]s
Financiers, France; Bank of France; Deutsche Bundesbank; BaFin
(German Financial Services Authority); Securities and Futures
Commission, Hong Kong; Reserve Bank of India; Securities and
Exchange Board of India; Commissione Nazionale per le Societ[agrave]
e la Borsa, Italy; Bank of Japan, Financial Services Authority,
Japan; Malaysian Securities Commission; Bank of Mexico; Netherlands
Authority for Financial Markets; Saudi Arabian Monetary Agency;
Comisi[oacute]n Nacional del Mercado de Valores, Spain; Monetary
Authority of Singapore; Bank of England; Financial Services
Authority, United Kingdom; Securities and Exchange Commission; CFTC;
Board of Governors of the Federal Reserve System; Federal Reserve
Bank of New York; International Monetary Fund; and the World Bank.
The recommendations were initially released in a consultative
document that requested public comment. The final version
incorporates consideration of the comments received from central
banks, regulators and the operators of and participants in central
counterparties.
---------------------------------------------------------------------------
The Commission did not receive comments specifically related to the
requirement that an FBOT's clearing organization observe any
``successor standards, principles and guidance'' to the current RCCPs
that may be jointly issued by CPSS and IOSCO in the future. The
Commission wishes to clarify, however, that such standards would
include, to the extent applicable, the ``Principles for Financial
Market Infrastructures'' (FMI Principles) \41\ that CPSS and the IOSCO
Technical Committee intend to finalize in early 2012 and that, when
effective, would replace the current RCCPs as the CPSS/IOSCO standards
applicable to central counterparties. In March 2011, CPSS and the IOSCO
Technical Committee publicly issued a ``Consultative Report'' that
included the then-current draft of the FMI Principles and that
requested comment upon the draft by July 29, 2011. CPSS and the IOSCO
Technical Committee are in the process of reviewing the comments
received and finalizing the FMI Principles. The Commission would not
expect an FBOT's clearing organization to observe the FMI Principles
until the effective date thereof established by CPSS and IOSCO.
However, because it is anticipated that several FBOTs may wish to apply
for registration between the time that the final FMI Principles are
published and the time that the FMI Principles become effective and
that clearing organizations for FBOTs may find that they already
observe the FMI Principles, an FBOT that applies for registration after
the FMI Principles are published in final form may demonstrate that its
clearing organization observes those principles in lieu of
demonstrating observance of the RCCPs.
---------------------------------------------------------------------------
\41\ Not all of the FMI Principles are applicable to central
counterparties.
---------------------------------------------------------------------------
d. Clearing Standards
The FBOT registration requirements set forth in proposed Sec. 48.7
include certain substantive standards that would have to be satisfied
by an FBOT's clearing organization or the FBOT itself, if it is
performing its own clearing functions. Among other things, an FBOT
would be required to demonstrate that the members of its clearing
organization are fit and proper and meet appropriate financial and
professional standards; that the clearing organization is registered
with the Commission as a DCO or observes the RCCPs or successor
standards; that the clearing organization is in good regulatory
standing in its home country jurisdiction; that the regulatory
authorities governing the activities of the clearing organization
provide comprehensive supervision and regulation comparable to that
provided by the Commission to DCOs and engage in ongoing supervision
and oversight of the clearing organization; that the clearing
organization has the capacity to detect, investigate and sanction
persons who violate its rules; and that the clearing organization has
sufficient compliance staff and resources.
(i) DCOs
LME and CME Group commented that if an FBOT's clearing organization
is registered with the Commission as a DCO, the FBOT should not be
required to establish that the clearing organization satisfies the
remaining criteria set forth in the proposed regulation. The Commission
has determined to adopt the approach suggested by the commenters. Much
of the criteria set forth in Sec. 48.7 are likely to have been
reviewed in connection with the clearing organization's application for
a registration as a DCO and any additional review would be redundant.
Accordingly, proposed Sec. 48.7 has been modified to reflect that the
registration requirements applicable to an FBOT's clearing
organizations may alternatively be demonstrated by a statement from the
clearing organization that it is registered and in good standing with
the Commission as a DCO.
(ii) RCCPs Standards for Non-DCOs
Certain commenters questioned the appropriateness of the proposal's
requirement that clearing organizations that are not CFTC-registered
DCOs would have to demonstrate compliance with the RCCPs. MX suggested
that the Commission should instead require the clearing organization to
demonstrate that the regulations, standards, and policies of the
applicable foreign regulator are comparable to those of the Commission;
ICE suggested that the CFTC should rely on the expertise of the foreign
regulator to regulate its own clearing organizations. As noted above,
OMX recommended that the registration requirements permit clearing
firms to demonstrate that they satisfy certain recognized international
standards for central counterparties, rather than referring
specifically to the RCCPs. By contrast, Eurex suggested that the
inquiry into a firm's clearing organization should be restricted to a
demonstration that the RCCPs are satisfied.
NYX suggested that if the proposed RCCP standard is adopted, the
CFTC should obtain confirmation of that fact from the firm's home
country regulator, in lieu of requiring the information from the
clearing organization itself. Bursa Derivatives suggested that the
Commission should clarify that a clearing organization's reasons for
non-compliance with certain RCCPs would be considered by the Commission
and asked whether a time period would be specified for the clearing
organization to comply with all of the RCCPs in such instance.
The Commission has determined to adopt Sec. Sec. 48.7(d)(1) and
48.8(a)(3)(ii) substantially as proposed. As noted above, the
Commission believes that requiring an FBOT's clearing organization to
demonstrate that it observes a singular set of internationally
recognized standards provides clarity, consistency and certainty to the
application requirements. Such representations also enable the
Commission to obtain assurance that the clearing organizations used by
the FBOTs observe, among other things, appropriate criteria for
participation; measurement and management of credit exposures;
management of custody, investment and operational risk; margin;
financial resources; default procedures; governance; and transparency
without specifically requiring the clearing organizations to
demonstrate compliance with requirements that are identical to those
that would be
[[Page 80683]]
imposed upon a DCO. The use of an international standard that is
substantially similar, though not identical, to the requirements
imposed upon U.S. registrants is consistent with the directive in CEA
section 4(b)(1)(A)(i) that the Commission consider whether the relevant
regulatory regime is ``comparable'' and ``comprehensive.'' It is also
consistent with section 752 of the Dodd-Frank Act, which seeks to
promote consistency in global regulation of swaps and futures contracts
and the requirement set forth in Sec. Sec. 48.7(b)(1) and
48.8(a)(3)(i) that the FBOT itself comply with the IOSCO Principles.
The RCCPs were developed with broad participation and comment from
entities from multiple nations and have been approved by both IOSCO's
Technical Committee and the CPSS. The same will be true of the FMI
Principles, when finalized. Accordingly, the Commission believes that
the RCCPs and their successor standards are the appropriate criteria to
use when reviewing an FBOT's clearing organization that is not
registered as a DCO.
The Commission notes that the RCCPs consist of recommendations that
are expressed as general principles, explanations thereof, and key
issues and questions to be considered when assessing observance of the
recommendations, rather than a checklist of obligations to be reviewed.
The Commission recognizes that the generality of the recommendations
and the explanations thereof afford some flexibility in assessing a
clearing organization's observance thereto. The Commission anticipates
that, for purposes of an FBOT registration application, clearing
organizations may demonstrate observance of individual RCCPs, as well
as observance of the RCCPs as a whole, in a variety of ways.\42\
---------------------------------------------------------------------------
\42\ The Commission expects to take a similar approach with
respect to the FMI Principles, when finalized. As currently drafted,
the FMI Principles will include general principles, key
considerations that explain the general principle, and explanatory
notes that discuss the objective and rationale behind the principle
and that provide guidance on how the standards expressed therein can
be implemented. In some cases, annexes will provide additional
information and guidance. When published, the document also will be
accompanied by an assessment methodology.
---------------------------------------------------------------------------
CPSS and IOSCO encourage relevant national authorities to assess
observance of the RCCPs by the central counterparties in their
jurisdictions as well as RCCP assessments by international financial
institutions (i.e., the International Monetary Fund and the World Bank)
as part of their Financial Sector Assessment Programs. The Commission
anticipates that a similar approach will be taken with regard to the
FMI Principles. The Commission encourages FBOT registration applicants
to submit with their registration applications any such assessments
that have been made of their clearing organizations and any other
information from their home country regulator(s) (provided that
submitting such assessments to the Commission is not inconsistent with
any applicable laws of the home country) that would be relevant to a
determination that the clearing organization observes the RCCPs. Such
assessments will inform the Commission's review of the clearing portion
of the application. Due to the generality of the RCCPs, however, the
Commission believes that a certification from a regulatory authority
that the clearing organization observes the RCCPs, without more, would
not provide it with sufficient information as to the relevant clearing
operations to adequately assess the FBOT application and, thus, would
not be sufficient to demonstrate that the RCCP requirement is met.
With respect to Bursa Derivatives' request that the Commission
consider a clearing organization's reasons for non-compliance with
certain RCCPs, the Commission generally believes that a registered
FBOT's clearing organization should be able to represent that it
observes the RCCPs or successor standards. However, the Commission
recognizes that a clearing organization may have very unique factual
circumstances that may warrant an exception to the requirement with
respect to a limited scope of RCCPs. Accordingly, the Commission would,
where circumstances warrant, entertain applications from FBOT's whose
clearing organizations do not observe all of the RCCPs.
e. Foreign Regulation of FBOT Participants
In the proposed rules, the Commission specifically asked for
comment as to whether, to the extent an FBOT is permitted to list
swaps, the Commission should examine the regulatory oversight of
relevant market participants (e.g., the functional equivalents of swap
dealers (SD) and major swap participants (MSP)) in the applicable
foreign jurisdictions when making a determination as to the
comparability and comprehensiveness of the supervision and regulation
of the relevant regulatory regime. Three commenters addressed the
issues related to market participants. Better Markets commented that
``[s]uch examination is critical * * * [and must include an assessment
of] rules relating to collateral, business conduct and trading
behavior.'' It noted that ``SDs and MSPs are subject to rigorous
standards because safeguards for these important market participants
enhance the continued financial integrity of the marketplace.'' Better
Markets further argued that the requirements for the foreign
equivalents of SDs and MSPs should be the same as or equivalent to
those imposed by the Dodd-Frank Act. In contrast, ICE commented that
requiring equivalent or comparable regulation of foreign swap dealers
or major swap participants is premature, positing that the proper
course is for the CFTC to ``work with foreign regulators to ensure
high-level comparable regulation of market participants.'' As
previously noted, FOA expressed concern that this type of analysis
could easily lead to a ``line by line'' examination of the EU's
approach to the regulation of derivatives transactions, central
counterparties and trade repositories, which would complicate cross-
border business and increase the risk of inadvertent breaches of rules.
The Commission has determined that it would not be appropriate, in
the context of this rulemaking, when making a determination as to the
comparability and comprehensiveness of the supervision and regulation
of the relevant regulatory regime with respect to the registration of
an FBOT, to require examination of the regulatory oversight of SDs and
MSPs in the applicable home country jurisdictions. CEA section 4(b)
applies with respect to FBOTs that wish to provide for direct access
and the CEA section 4(b)(1)(A)(i) standard of review to be applied is
``whether any such foreign board of trade is subject to comparable,
comprehensive supervision and regulation by the appropriate
governmental authorities in the foreign board of trade's home
country.'' The Commission believes that the review standard is thereby
appropriately focused on an FBOT's operations, including its clearing
organization, and its regulatory authority. Thus, the appropriate
review here is to examine the FBOT's membership and trading participant
standards as they relate to trading on the FBOT. If such membership
and/or trading participant standards have been determined to be
adequate by the FBOT's regulatory authority, which has been determined
to provide comparable, comprehensive supervision and regulation of the
FBOT, any further participant review would be beyond the scope of CEA
section 4(b).
[[Page 80684]]
3. Contracts
a. Linked Contracts
(i) Definition
Proposed Sec. 48.2(d) defined a linked contract as ``a futures or
option or swap 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.'' \43\ Three commenters requested
clarification with respect to this definition.\44\ NGX requested that
the Commission clarify the definition of linked contract to take into
account the nuanced distinction between (1) contracts which are settled
against the settlement price of a contract listed for trading on a U.S.
contract market and (2) basis contracts, the prices of which are merely
quoted with reference to another market. Better Markets commented that
the definition of linked contract is far too narrow, and argued that it
should include contracts that are reasonably likely to influence prices
of the DCM/SEF-traded contracts as well as contracts that directly
reference the prices of DCM/SEF-traded contracts. LME requested
clarification on the scope of the definition of linked contract,
commenting that LME did not believe the definition captured any
contract of the type traded on LME.
---------------------------------------------------------------------------
\43\ Registered entity is defined in CEA section 1a(40) to mean:
(A) A board of trade designated as a contract market under section 5
of the Act; (B) a derivatives clearing organization registered under
section 5b of the Act; (C) a board of trade designated as a contract
market under section 5f of the Act; (D) a swap execution facility
registered under section 5h of the Act; (E) a swap data repository
registered under section 21 of the Act; and (F) with respect to a
contract that the Commission determines is a significant price
discovery contract, any electronic trading facility on which the
contract is executed or traded.
\44\ NGX, Better Markets, and LME.
---------------------------------------------------------------------------
The Commission has determined to adopt the definition in Sec.
48.2(d) substantially as proposed. The definition of linked contract
leading to the requirement to impose additional conditions on such
contracts is based upon the statutory description of linked contracts
found in CEA section 4(b)(1)(B).\45\ With respect to contracts that do
not meet the definition of linked contracts, the proposal provided that
applicants must identify contracts that share any other commonality
(changed to relationship in the final rule) with a contract listed for
trading on a registered entity-- for example, if both the FBOT's and
the registered entity's contracts settle to the price of the same third
party-constructed index. With respect to these types of contracts, as
with all conditions of registration, the final rule provides that the
Commission, in its discretion and after appropriate notice and
opportunity to respond, may impose additional conditions on the
registered FBOT. Such additional conditions would be imposed if deemed
necessary by the Commission to maintain its ability to carry out its
market surveillance responsibilities when faced with contract
relationships that essentially create a single market for the contracts
listed by the FBOT and the registered entity and could include, among
others, the conditions applicable to the listing of a linked contract.
---------------------------------------------------------------------------
\45\ The Commission does not believe that any LME contract
currently made available for direct access under LME's no-action
relief, all of which settle against prices generated by the LME,
would fall into that definition.
---------------------------------------------------------------------------
(ii) Conditions
Proposed Sec. 48.8(c) applied certain additional specified
conditions for FBOTs that make linked contracts available by direct
access. \46\ The conditions included in Sec. 48.8(c)(1), as set forth
in CEA section 4(b)(1)(B), included: (1) Making public daily trading
information regarding the linked contract that is comparable to the
daily trading information published for the contract to which it is
linked; (2) adopting 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; (3) having the authority to require
or direct any market participant to limit, reduce, or liquidate any
position; (4) agreeing to promptly notify the Commission of certain
changes with respect to the linked contract; (5) providing 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
(6) providing 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.
---------------------------------------------------------------------------
\46\ Under the proposed regulations, the requirements to
register and to comply with the conditions for making available
linked contracts are applicable only to those FBOTs which make such
contracts available through direct access. The registration and
linked contract provisions of the final rule do not extend to FBOTs
that do not provide direct access to the FBOT's trade matching
system from the U.S.
---------------------------------------------------------------------------
The other conditions on linked contracts, set forth in Sec.
48.8(c)(2), are based on 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 certain
contracts in energy commodities linked to the prices of contracts
traded on NYMEX.\47\ The conditions would require that the FBOT, among
other things, (1) inform the Commission in a quarterly report of any
member that had positions in a linked contract above the applicable
FBOT position limit, (2) provide trade execution and audit trail data
for input to the CFTC's Trade Surveillance System (TSS), (3) 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 conditions, (4) 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, (5) provide copies of all disciplinary
notices involving the FBOT's linked contracts, and (6) 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 reduce positions in or cease trading in the
contract).
---------------------------------------------------------------------------
\47\ See CFTC Letter No. 09-37 (August 20, 2009).
---------------------------------------------------------------------------
Five commenters addressed these additional conditions.\48\ With
respect to linked contracts and position limits, LME, noting that
foreign markets may well implement restrictions that could be more
effective than position limits in addressing the regulatory objectives
to be addressed by position limits, suggested that FBOTs should be
permitted to adopt the position limits of a linked market as a safe
harbor, but that the CFTC should also permit applicants to submit for
approval any alternative approach that the Commission determines to be
comparable in result. OSE argued that the proposed additional
conditions for linked contracts are only necessary when an FBOT has
more than a de minimis amount of trading in a linked contract.
---------------------------------------------------------------------------
\48\ LME, OSE, Senator Carl Levin, CMOC and ATA.
---------------------------------------------------------------------------
OSE also noted that the burdens associated with proposed Sec.
48.8(c)(2) may be overly costly and could be narrowed. Specifically,
OSE commented on proposed Sec. 48.8(c)(2)(ii), which would require
that the FBOT provide trade execution and audit trail data on
[[Page 80685]]
a linked contract for input into the TSS on a routine basis by the day
following the trade date. OSE suggested that the Commission assess the
relative burdens of the requirement and whether it could achieve the
regulatory purpose through a more targeted requirement, such as
requiring the data on an ``as necessary'' rather than on a daily basis.
OSE also expressed concern about proposed Sec. 48.8(c)(2)(vi), which
would require the FBOT, in the event that the Commission directs that
the registered entity that lists the contract to which the FBOT's
contract is linked take emergency action with respect to a linked
contract, subject to information-sharing arrangements between the
Commission and its regulatory authority, to promptly take similar
action with respect to the its linked contract. OSE suggested that it
is preferable for the Commission to coordinate the actions that the
FBOT should take in response to a market disruption or event through
the FBOT's regulator, in recognition of international comity.
Two commenters, Senator Carl Levin and ATA, strongly supported the
proposed linked contract conditions, both specifically identifying the
requirement that the FBOT share its trade execution and audit trail
data, as well as the position limit provisions. Senator Levin commented
that sharing trading data is vital for the Commission to detect price
manipulation and excessive speculation involving U.S. futures traded on
foreign exchanges. Further, Senator Levin noted that he believed the
linked contract provisions would help to close the ``London loophole''
(a scheme, whereby, according to Senator Levin, traders move their
trading activity to foreign markets to avoid position limits set by
U.S. exchanges) by ensuring that the Commission is able to police FBOT
trading in U.S. commodities to stop excessive speculation, price
manipulation, and market disruptions. CMOC encouraged the CFTC to
require that the FBOT impose position limits that are at least equal to
or lower than the limits to be imposed in the U.S. on registered
entities under the Dodd-Frank Act.
The Commission has determined to adopt Sec. 48.8(c) substantially
as proposed. The first set of conditions for linked contracts, found in
Sec. 48.8(c)(1) are statutory-based conditions which are specifically
required by the CEA section 4(b)(1)(B). The second set of conditions
for linked contracts, found in Sec. 48.8(c)(2), as previously noted,
represent the second group 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. These conditions remain
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 potentially affects the pricing of
contracts traded on registered entities.
With respect to the proposed Sec. 48.8(c)(2)(ii) trade execution
and audit trail data on a linked contract reporting requirement, the
Commission has considered comments urging the Commission to require the
data on an ``as necessary'' rather than on a daily basis and has
determined that the timely provision of such information is essential
if the Commission is to adequately carry out its trade practice and
market surveillance responsibilities with respect to the linked
contract listed on the registered entity. Commission staff conducts
surveillance and reviews the trading data on a daily basis, and the
trade data from the FBOT's linked contract are a critical component of
this surveillance. With respect to the proposed Sec. 48.8(c)(2)(vi)
coordinated emergency action requirement, the Commission believes that
the timeliness of any required emergency action, which would be taken
only if necessary to protect the market and the public, is critical and
outweighs the benefit that would be derived from coordinating actions
through the FBOT's regulator. The Commission notes that the requirement
to take emergency action is an extremely rare event and, in the normal
course of business, the Commission would, time permitting, coordinate
with the FBOT's regulator regarding critical actions to be taken
concerning a linked contract.
The Commission has determined to modify the second set of
conditions on linked contracts by moving the requirement in proposed
Sec. 48.8(c)(2)(iii), which provided for CFTC on-site visits for the
purpose of overseeing the FBOT's and the clearing organization's
ongoing compliance with registration requirements and conditions, to
Sec. 48.8(a)(8), thus making it a general condition for maintaining
registration.
b. Swaps and Other Contracts
(i) Swaps
Under proposed Sec. 48.7(c)(1)(i), a registered FBOT would be
permitted to provide direct access to futures, options, and swap
contracts that would be eligible to be listed for trading on a DCM.
Five commenters supported permitting the execution of swaps on an FBOT
by persons located in the U.S. by direct access.\49\ Eurex, for
instance, commented that the Commission should permit FBOTs to provide
trading access to qualified U.S. persons for trading swaps that are
listed on the FBOT, noting that the currently proposed conditions on
FBOTs would be sufficient for them to comply with the purposes of the
Dodd-Frank Act regarding swap trading.
---------------------------------------------------------------------------
\49\ Eurex, ICE, NGX, MX, and BG.
---------------------------------------------------------------------------
The Commission has determined to adopt the rule as proposed. The
Commission notes, however, that the regulations would only permit an
FBOT to make swaps available to persons located in the U.S. for trading
by direct access after the FBOT, its clearing organization, and the
swaps to be made available by direct access have been determined by the
Commission to be subject to comparable, comprehensive supervision and
regulation by the appropriate governmental authorities in the FBOT's
home country. Moreover, only swaps that would be permitted to be traded
on a DCM could be made available, all such traded swaps would be
required to be cleared, and the parties trading such swaps would be
required to satisfy FBOT membership/trading participant standards that
would have been reviewed and approved by the FBOT's regulatory
authority.\50\
---------------------------------------------------------------------------
\50\ The Commission notes that its decision to permit registered
FBOTs to make swaps available via direct access to persons located
in the U.S. is guided in part by the fact that the Dodd-Frank Act
permits swaps to be listed for trading on a DCM and the FBOTs that
are eligible to be registered are defined by Sec. 48.2(b) as FBOTs
that possess the attributes of an established, organized exchange.
This definition was intended to restrict FBOT registration
eligibility to entities similar in nature to those that received
direct access no-action relief in the past (e.g., entities that are
comparable in operation and regulation to registered DCMs).
Moreover, there is nothing in the Dodd-Frank Act, including section
738 of the Dodd-Frank Act amending section 4(b) of the Act, which
expressly precludes a registered FBOT from offering swaps through
direct access. However, the Commission also believes that the terms
and conditions of any swap contract to be made available to persons
located in the United States through direct access must demonstrate
that such contract would meet review standards similar to those of a
swap to be listed on a DCM and must demonstrate that the contract is
not one that a U.S. person would be prohibited from trading.
---------------------------------------------------------------------------
Registered FBOTs that permit swaps to be traded by direct access
would also be subject to additional conditions, including the
requirement to ensure that all swap transaction data, including price
and volume, are timely reported as soon as technologically practicable
after execution of the swap transaction to a
[[Page 80686]]
swap data repository (SDR) that is either registered with the
Commission or has an information-sharing arrangement with the
Commission. Additionally, the FBOT must agree to coordinate with the
Commission with respect to arrangements established to address cross
market oversight issues involving swaps trading, including
surveillance, emergency actions, and the monitoring of trading.
Finally, based on its experience in administering these FBOT
registration provisions and other rules related to swaps trading, the
Commission may, in its discretion and after notice and an opportunity
to respond, impose additional conditions upon the FBOT's registration
with respect to the listing of swaps contracts.
(ii) Clearing of Swaps
Under proposed Sec. 48.7(c)(1)(ii), all contracts that could be
made available to be traded by direct access, including swaps, would be
required to be cleared. ICE, BG Americas, and NGX opposed the mandatory
clearing requirement for swaps. ICE commented that the clearing mandate
contained in the proposed regulations differed from the clearing
requirements applicable to swaps transactions on U.S. markets.
Specifically, transactions executed on a swap execution facility (SEF)
would not be required to be cleared if such transactions were not
subject to the mandatory clearing requirements set forth in the Act.
NGX noted that end users executing swaps on SEFs would be exempt from
the mandatory clearing requirements pursuant to section 2(h)(7) of the
Act. Similarly, BG Americas commented that the mandatory clearing
standard applicable to transactions executed on an FBOT would be higher
than that applicable to U.S. exchanges, in light of the available
exemptions from the clearing requirement in the CEA, and recommended
that the Commission clarify in the final rule that the mandatory
clearing requirements on FBOTs will be no different from the clearing
requirements on U.S. exchanges.
The Commission has determined to adopt Sec. 48.7(c)(1)(ii) as
proposed. All three commenters supported their view by referencing the
clearing standards applicable to transactions executed on SEFs, not on
DCMs. As stated above, both the proposed and final Sec. 48.2(b)
restrict the universe of FBOTs that are eligible to be registered under
part 48 to those that possess ``the attributes of an established,
organized exchange or other trading facility.'' This provision is
intended to limit FBOT registration eligibility to the types of
entities to which direct access no-action relief has been granted in
the past (e.g., entities that are comparable in operation and
regulation to registered DCMs). Accordingly, the Commission believes
that the treatment of swaps that registered FBOTs will make available
for trading to members and other participants located in the U.S.
through direct access should parallel the treatment afforded to swaps
transactions that may be traded on DCMs.
The CEA requires swaps transactions that are traded on a DCM to be
cleared. Specifically, CEA section 5(d)(11) includes DCM Core Principle
11, ``Financial Integrity of Transactions,'' which requires a board of
trade to establish and enforce rules and procedures for ensuring the
financial integrity of transactions entered into on or through the
facilities of the contract market (including the clearing and
settlement of transactions with a DCO). Accordingly, the Commission
believes that it is appropriate to require that all transactions
(including swaps) that are eligible to be traded by direct access
pursuant to an FBOT registration be cleared.
(iii) Swaps Data Reporting
Under proposed Sec. 48.8(a)(9)(i), a registered FBOT permitting
swaps to be traded by direct access would be required 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 transaction. Under proposed Sec.
48.8(a)(9)(ii), a registered FBOT permitting swaps to be traded by
direct access would be required to ensure that all swap transaction
data is timely reported to an SDR that is either registered with the
Commission or has an information-sharing arrangement with the
Commission.
Two commenters addressed these reporting requirements. ATA
expressed concern about the effect of real-time reporting on their
members' ability to hedge and recommended that this requirement be
revised to allow delayed reporting to permit counterparties to close
their related transactions. ICE expressed the view that the CFTC should
not require all FBOTs to report swaps transactions to an SDR.\51\
---------------------------------------------------------------------------
\51\ ICE noted that the SDR rules for domestic markets have not
been finalized and SDRs are not yet operational and that,
accordingly, the CFTC should delay implementation of this
requirement until SDR rules are finalized and SDRs are operational.
Further, the CFTC could rely on reporting to the CFTC from the FBOT,
its clearing organization, or the foreign regulatory authority under
an information-sharing arrangement.
---------------------------------------------------------------------------
The Commission has determined to retain both reporting
requirements, but to modify the proposed rule with respect to the
responsibility for real-time reporting of swaps transaction information
to the public. The Commission recognizes that the real-time reporting
of swaps information to the public and the reporting of swaps
transactions to an SDR are key objectives of the Dodd-Frank Act. Real-
time reporting enhances price discovery. Reporting swaps transactions
is necessary to permit the Commission and other regulatory authorities
to view the market as a whole. As previously stated, Sec. 48.2 is
intended to restrict the universe of FBOTs that are eligible to be
registered under part 48 to those entities that are comparable in
operation and regulation to registered DCMs. The Commission anticipates
that DCMs will be required to ensure that all swap transaction data,
including price and volume, are timely reported to an SDR after
execution of the swap transaction. Real-time swap transaction and
pricing data will then, in turn, be publicly disseminated by the SDR.
Accordingly, the Commission has determined to limit the registered FBOT
reporting requirements contained in Sec. 48.8(a)(9)(i) to an
obligation to ensure that all transaction data relating to each swap
transaction, including price and volume, be reported to an SDR that is
registered with the Commission or has an information sharing
arrangement with the Commission.
The Commission is aware that no SDRs are either registered or
operational at this time. Accordingly, until such time as appropriate
SDR operations are in place, the conditions contained in Orders of
Registration issued to FBOTs that wish to permit members and other
participants to trade swaps via direct access will indicate that the
FBOT may list such swaps for direct access but will be required to
comply with Sec. 48.8(a)(9)(i) as soon as practicable following the
licensing or registration of a SDR that meets applicable requirements.
(iv) Contracts Other Than Futures, Options, and Swaps
Proposed Sec. 48.7(c)(1)(i) provided that contracts that may be
made available by direct access by a registered FBOT must be futures,
option, or swaps contracts. LME and NGX requested clarification with
respect to whether the proposed rules would permit an FBOT to offer
spot and forward contracts and other similar physically-settled
transactions. NGX also asked the Commission to clarify that, although
the proposed regulations would permit a registered FBOT to list for
trading through direct access any contract that is legally
[[Page 80687]]
offered in the U.S., only those contracts that are regulated under the
Act would be within the scope of the FBOT registration provision.
The Commission has determined to adopt the rule as proposed. As
stated in the proposal, those types of contracts subject to the CFTC's
jurisdiction are within the ambit of the FBOT registration rules. The
registration provisions do not preclude an FBOT from making available
to participants located in the U.S. other products (e.g., spot
contracts and forward contracts) to the extent applicable law otherwise
allows. The Commission also has determined to remove any reference to
products from the FBOT definition set forth in Sec. 48.2(a).
(v) Review of Contracts
Proposed Sec. 48.7(c) would require that an FBOT, as part of its
application for registration, provide, among other things, the terms
and conditions of the futures, option and swaps contracts intended to
be made available for direct access. Additionally, proposed Sec. 48.10
would require a registered FBOT that wishes to offer new contracts
subsequent to registration to submit such contracts to the CFTC for
review prior to making the additional contracts available for trading
by direct access. LME commented that the Commission should adopt an
exemptive, rather than a registration, regime and require contract
designation, similar to that applied by the Commission when a DCM
submits a new contract for listing, only with respect to linked
contracts.
The Commission has determined to adopt Sec. Sec. 48.7(c) and 48.10
as proposed, modified to reflect newly adopted procedures, discussed
below, applicable to the offer or sale, to persons in the U.S., of non-
narrow-based security index futures and option contracts. The
Commission believes that it is necessary to review the terms and
specifications of all contracts before they are made available for
trading by direct access to ensure that the contracts would be legally
permitted to be traded on a DCM and otherwise conform to the
requirements and conditions applicable to contracts listed on the FBOT
for trading by direct access by persons located in the U.S. The
Commission also believes that it is necessary and appropriate to review
new contracts in order to, among other things, determine that the
contracts are actually futures, option, or swap contracts; ensure that
they are not contracts determined by the Commission pursuant to CEA
section 5c(c)(5)(C)(i) to be contrary to the public interest; ensure
that they are not contracts on such products as security futures or
narrow-based stock indexes or other securities regulated by the U.S.
Securities and Exchange Commission; and determine whether the contract
is linked to or may otherwise have some impact on a contract traded on
a CFTC-regulated entity. The Commission notes that the treatment of new
products set forth in the proposed and final rules is consistent with
the existing practice under the no-action regime. The Commission
further notes that, in the past, Commission staff has attempted to
complete its review of additional contracts proposed to be made
available for direct access promptly. Thus, an FBOT's ability to bring
such contracts to market quickly generally has not been impaired.
With respect to the listing of additional non-narrow-based security
index futures and option contracts to be made available by direct
access, proposed Sec. 48.10 provided that a registered FBOT could list
for trading such an additional futures contract pursuant to the
procedures set forth in Appendix D to Part 30. Proposed Sec. 48.10
also provided that a registered FBOT could, without further action by
either the FBOT or the Commission, list for trading an additional
option contract on a non-narrow-based security index futures contract
which could be offered or sold in the United States pursuant to a no-
action letter issued by the Commission's Office of the General Counsel.
HKFE requested clarification with respect to any interrelationship
between the proposed rules and the approval process for the offer and
sale of index products to persons in the U.S.
The Commission has revised its procedures applicable to the offer
or sale, to persons in the U.S., of a non-narrow-based security index
futures contract traded on an FBOT to conform to recent amendments to
its regulations.\52\ Generally, the new procedures involve the issuance
of a Commission certification rather than a no-action letter.
Accordingly, Sec. 48.7(c)(2) has been added and provides that foreign
futures (and option contracts) on non-narrow-based security indexes
must have been certified by the Commission pursuant to the procedures
set forth in Sec. 30.13, and Sec. 48.10 has been updated and now
provides that a registered FBOT may list for trading by direct access
an additional futures (or option contract) on a non-narrow-based
security index pursuant to the Commission certification procedures set
forth in Sec. 30.13(d) and Appendix D to Part 30. Further, with
respect to option contracts, 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 Commission certification issued pursuant to
Sec. 30.13, the option contract may be listed for trading by direct
access without further action by either the registered FBOT or the
Commission.\53\ In response to HKFE's query, the Commission notes that
the Commission certification procedures for non-narrow-based security
indexes and the FBOT registration procedures are independent of each
other, with the exception that a registered FBOT applying for
Commission certification to offer or sell to persons located within the
U.S. a non-narrow-based security index contract may, in that same
request, pursuant to Sec. 30.13(k), request that such contract be made
available for trading by direct access.
---------------------------------------------------------------------------
\52\ See Foreign Futures and Options Contracts on a Non-Narrow-
Based Security Index; Commission Certification Procedures, 76 FR
59241 (September 26, 2011).
\53\ Upon the implementation date, regulations 48.7(c) and 48.10
supersede and replace the provisions included in the ``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) and the
``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).
---------------------------------------------------------------------------
4. Direct Access Definition
Proposed Sec. 48.2(c) defines direct access to mean ``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,'' which is identical to the definition provided in CEA section
4(b)(1)(A). LME and HKFE requested clarification of the definition.
LME requested clarification of the degree to which the definition
covers access to application programming interfaces (API) developed by
members to interface with exchange systems. LME indicated that it
understood the direct access definition to include access to the
graphical user interface of an FBOT, and not indirect access via an
API. HKFE asked the Commission to clarify the meaning of ``explicit
grant of authority'' and to provide examples of the kind of conduct or
actions on the part of an FBOT that would be regarded
[[Page 80688]]
as ``an explicit grant of authority.'' HKFE also requested that the
CFTC clarify the position taken previously in connection with the
granting of a direct access no-action letter that an automatic order
routing connection from the U.S. to an FBOT would not be considered as
``direct access.'' Similarly, in relation to proposed Sec. 48.8(a)(4),
which addresses restrictions on direct access, ASX requested that the
placement of terminals in non-exchange participant offices, and the
conditions thereof, be specified in the new rules.
The Commission has determined to adopt the rule as proposed. Direct
access is defined in the CEA and in the proposed and final regulations
to mean an explicit grant of authority by an FBOT to an identified
member or other participant located in the U.S. to enter trades
directly into the trade matching system of the foreign board of trade.
This means that the FBOT itself, and not its members or participants,
has identified and permitted a member or participant to enter trades
directly into the FBOT's order matching and trade entry system from the
U.S. The electronic means of entry to the trading system may be through
the internet, a dedicated closed electronic system, an API, or other
type of electronic interface--the dispositive factor is that the order
is transmitted by an identified member or other participant located in
the U.S. and the order is entered directly into the trade matching
system. Thus, it does not constitute direct access if the order is sent
by a person in the U.S. by means of an automated order routing system
(AORS) to an intermediary located outside of the U.S. for further
action or to pass through an order entry or risk management filter at
the intermediary prior to reaching the trade matching engine.
Proposed Sec. 48.8(a)(4), which addresses restrictions on direct
access, requires that the FBOT not provide, and take reasonable steps
to prevent, third parties from providing direct access to the FBOT.
This provision is intended to restrict direct access to FBOT-authorized
persons by such methods as restricted access to hardware, password
control, and other similar physical or electronic security measures. It
is not intended to prohibit a registered FBOT from authorizing its
member firms or other participants eligible to handle U.S. customer
orders to permit their customers in the U.S. to access the trading
system using the member firm's or participant's member ID (mnemonic) or
password. In other words, a registered FBOT's member or participant
located outside of the U.S. may, if so authorized by the FBOT, permit
customers in the U.S. to transmit orders directly to the trade matching
engine. The Commission is aware that two FBOTs currently operating with
direct access no-action relief--ASX \54\ and HKFE \55\--permit their
exchange participants to allow non-exchange participants in the U.S. to
have access to the exchanges' trading systems, subject to a guarantee
from an exchange participant firm.
---------------------------------------------------------------------------
\54\ CFTC Letters No. 01-75 (July 30, 2001) and No. 04-32
(October 25, 2004).
\55\ CFTC Letter No. 01-74 (July 30, 2001).
---------------------------------------------------------------------------
5. Scope of Registration (i.e., CEA Sections 5 and 5a)
HKFE commented that there is no express provision in the proposed
rules stating that registration under Part 48 would relieve an FBOT
from compliance with CEA section 5 or 5a (that is, registering as
either a DCM or DTEF). HKFE asked for clarification as to whether
registration would relieve an FBOT from compliance with CEA section 5
or 5a.
The Commission has determined to adopt the rule as proposed.
Registration with the Commission under the Part 48 regulations would
relieve an FBOT from compliance with CEA section 5 and its requirement
to register with the Commission as a DCM and comply with the core
principles and regulations associated with DCMs to the extent that its
activity within the U.S. is limited to permitting members and other
participants located in the U.S. to have direct access to its trade
matching system, subject to the terms and conditions of registration,
and so long as it remains an FBOT. Of course, the registered FBOT
could, alternatively, choose to comply with CEA section 5 and become a
registered DCM, subject to the regulatory requirements applicable
thereto. The Commission notes that CEA section 5a was repealed by the
Dodd-Frank Act.
6. Registration Requirements and Conditions
Proposed Sec. 48.7 identified certain requirements that must be
satisfied by an FBOT seeking to register with the Commission. Proposed
Sec. 48.8 imposed various continuing conditions on registered FBOTs.
Several commenters raised issues related to the proposed requirements
and conditions.
a. Trading Rules
Proposed Sec. 48.7(b) identified the attributes of the automated
trading system that would be required to be met by any FBOT seeking to
register with the Commission. In response to the proposal's request for
comment with respect to whether the Commission should require FBOTs to
adopt additional conditions to promote orderly markets and customer
protection, such as automated 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,
ICE commented that the Commission should not issue prescriptive trading
rules for FBOTs and that the foreign regulator, not the CFTC, has the
primary interest in adopting rules in this area. Further, ICE noted
that the CFTC should work through international regulatory groups like
IOSCO to implement consistent controls, instead of prescriptive rules.
The Commission has determined not to require, as a requirement for,
or a condition of, registration, that FBOTs adopt such automated safety
features. The Commission believes that the primary interest in adopting
rules in this area remains with the foreign regulatory authority. The
Commission believes that the trading system attributes described in and
required by Sec. 48.7(b), which include compliance with the IOSCO
Principles for Screen-Based Trading, are adequate to ensure the FBOT's
trading system, among other things, is fair, reliable, capable of
responding to emergencies, provides an adequate audit trail, and
provides for reporting of trade data. They are features common to all
automated trading systems that staff has reviewed in the context of the
no-action process.
b. Information Sharing
Proposed Sec. 48.8(a)(6) imposed certain information sharing
obligations on a registered FBOT and its clearing organization. NYX
asserted that the CFTC should not seek to obtain information directly
from a clearing organization. Rather, the CFTC should look to the
exchange--which should always be able to provide all the information
held by the clearing organization in relation to business conducted on
that exchange. NYX also commented that some European clearing
organizations have the status of banks (e.g., LCH Clearnet SA), and so
may find it difficult to share information directly with the Commission
rather than through their regulators.
The Commission continues to believe that it would be appropriate
and expedient to obtain information regarding the clearing function
directly from the clearing organization, in lieu of relying upon
intermediation by another entity. Nonetheless, with respect to the FBOT
being better able to provide
[[Page 80689]]
information requested of the clearing organization, the Commission
notes that Sec. 48.8(a)(6)(iii) provides that the FBOT and its
clearing organization, as applicable, will provide information for
certain purposes directly to the Commission. Accordingly, an FBOT could
provide the information directly to the Commission, if it were better
able to do so. Such information also could be provided by the
applicable regulatory authority, although the FBOT and its clearing
organization remain ultimately responsible to provide the information
directly to the Commission under the final rule.
c. Submission of U.S.-Domiciled Entities to Service of Process
As a condition of registration, proposed Sec. 48.8(a)(5) would
require that certain members or other participants granted direct
access by a registered FBOT (1) file a written representation with the
Commission submitting to the CFTC's jurisdiction, (2) file a valid and
binding appointment with the FBOT of an agent for service of process in
the U.S., and (3) maintain a written representation with the FBOT that
it will provide the Commission and other U.S. authorities with access
to books and records and to the premises where the FBOT's trading
system is made available in the U.S. LME questioned the need to require
U.S.-based persons with direct access to foreign markets (FBOTs) that
trade from the U.S. to comply with these three conditions. LME argued
that in terms of personal jurisdiction, a U.S.-based person with direct
access to an FBOT raises no more jurisdictional issues than a U.S.-
based person trading on a U.S. market, as long as both traders are
conducting their trading from the U.S.
Upon further review and consideration of the comments received, the
Commission has determined that Sec. 48.8(a)(5)(iii), which obligated a
registered FBOT to require that each current and prospective member or
other participant that is granted direct access pursuant to the FBOT's
registration and that is not registered with the Commission as a FCM, a
CTA or a CPO file with the FBOT a valid and binding appointment of a
U.S. agent for service of process in the U.S., is not necessary.
Accordingly, that section has been deleted from the final rule.
However, the Commission has determined that the remaining two
conditions applicable to members and participants should be adopted as
proposed. The Commission believes these conditions remain necessary to
ensure that the FBOT members and other participants that have been
granted direct access to an FBOT's trading system knowingly consent to
submit to the CFTC's jurisdiction and to provide the Commission and
other appropriate U.S. authorities with access to relevant books,
records and trading premises in the U.S.
7. Modification of Registration Requirements
Proposed Sec. 48.5(e) provided that the Commission may, after
appropriate notice and an opportunity for hearing, amend, suspend,
terminate or otherwise restrict the terms of an Order of Registration.
ASX noted that the proposed rules refer to the ability to modify
relief, and asked whether the Commission would provide any clarity with
respect to applying for modification and the criteria for modification.
The Commission believes it is not necessary to promulgate a
specific procedure for applying for modification of FBOT registration
requirements or to delineate the circumstances under which modification
might be granted. While the Commission would consider a request for
modification of specified registration requirements or conditions if
such request is supported by adequate justification and appropriate
documentation, the Commission does not anticipate that modifications
would be granted unless particularly unique factual circumstances are
presented. Given that such requests would involve a unique set of facts
and circumstances, the Commission believes that a case-by-case approach
is appropriate and thus, is adopting Sec. 48.5(e) substantially as
proposed, except that the rule now provides for appropriate notice and
an opportunity to respond.
8. Other Concerns
a. Prescriptive Nature of the Regulations
Three commenters voiced concern regarding the risk of protectionism
by foreign regulators that might arise in the event that the Commission
adopts overly prescriptive registration regulations for FBOTs.\56\ FOA
noted that the standards set in the U.S. for recognition of foreign
regulators would impact, for example, the European approach to the
recognition of U.S. market infrastructures. CME Group expressed concern
that the proposed rules were overly prescriptive and noted that the
Commission should be cognizant of the ``realistic possibility'' that
enacting the proposed rules might encourage foreign regulators to adopt
a reactive regulatory stance toward U.S.-based exchanges. HKFE asserted
that the adoption of the proposed rules would be a departure from the
CFTC's long-standing policy of mutual recognition and comity and that
this could lead to the diminution rather than the expansion of global
connectivity.
---------------------------------------------------------------------------
\56\ HKFE, FOA, and CME Group.
---------------------------------------------------------------------------
The Commission has determined to adopt the rule as proposed. The
Commission believes that its final regulations properly standardize the
process by which FBOTs are permitted to provide direct access to U.S.-
located persons, enhance the transparency of that process, ensure
consistency and fairness to all applicants for registration, provide
greater legal certainty to registered FBOTs, and are more consistent
with the manner in which other countries permit U.S. DCMs to provide
direct access to their trading systems from within their borders. As
previously noted, the Commission believes that the registration
requirements in the final rule represent a principles-based approach to
limited oversight and are not overly prescriptive. FBOTs will be
required to demonstrate, in a manner consistent with the part 48
regulations, that they operate under supervision and regulation that is
comparable to that provided by the Commission's regulatory regime for
DCMs, but will not be required to comply with the core principles
applicable to DCMs under the CEA and the Commission's regulations.
b. Alternative Trading Platforms
HKFE questioned whether the proposal's definition of FBOT would
cover alternative trading platforms such as non-U.S.-based dark pools.
Further, HKFE questioned whether, if the intention of the proposed
rules is to not cover non-U.S. based dark pools or is designed with
such threshold requirements as to effectively affect only traditional
exchanges in overseas jurisdictions (as not all FBOTs (as defined) are
eligible for registration under the proposed rules), an uneven playing
field may be created in favor of these dark pools if access to them is
available from the U.S.\57\
---------------------------------------------------------------------------
\57\ The definition of ``board of trade'' as set forth in CEA
section 1a(2) refers to ``any organized exchange or other trading
facility.'' As such, the statutory definition of ``board of trade''
does not preclude the possibility of alternative trading platforms
being covered by the FBOT registration scheme.
---------------------------------------------------------------------------
The Commission has determined to adopt the rule as proposed. The
proposal generally limited the markets eligible for FBOT registration
to bona fide exchanges that satisfy the eligibility standards set forth
in Sec. 48.2(b). The Commission expects that such exchanges might
include, for example,
[[Page 80690]]
exchanges recognized in the EU as Regulated Markets, in the UK as
Recognized Investment Exchanges (RIE), or in Japan as Licensed
Financial Instruments Exchanges. Of course, even if deemed a ``foreign
board of trade eligible to be registered'' under Sec. 48.2(b), the
FBOT would still have to satisfy all of the requirements and conditions
for registration set forth in the regulations. Foreign SEFs and similar
entities likely would not be eligible for FBOT registration unless they
could demonstrate they are operated and regulated in a manner that is
comparable and comprehensive to the manner in which DCMs (not U.S.
SEFs), are regulated by the Commission. The FBOT registration rule
should not create an uneven playing field in favor of dark pools since
such pools are not likely to qualify for registration and, thus, could
not provide for direct access under the FBOT registration rules.
c. Impact of FBOT Registration Rules
ICE suggested that the CFTC should consider the impact of its
registration scheme against the broader impact of the Dodd-Frank Act
and similar financial reform measures taken by other countries. The
Commission has determined to adopt the rule as proposed. The proposed
FBOT rules were considered against the international implications of
the Dodd-Frank Act and similar financial reform measures being taken by
other countries. Relevant financial reform measures taken by other
countries will be reviewed as part of the examination of the FBOT's
application for registration and, to the extent that such relevant
reform measures support regulatory objectives that are consistent with
those supported by the CFTC, will be favorably considered. The
Commission notes that the historical process of examining whether the
FBOT is subject to comparable and comprehensive regulation in its home
country has been, and will continue to be, the proper approach to
maintaining this balance between reliance upon a foreign regulatory
regime and ensuring that an FBOT whose trading and order matching
system can be accessed by U.S. customers provides adequate protections.
9. On-Going Review of Registered FBOTs
Three commenters indicated that under their interpretation of the
NPRM, the Commission would conduct on-going surveillance and
examination of FBOTs and their clearing organizations.\58\ For example,
Better Markets expressed the view that it is important to continuously
monitor both the structure of the foreign regulatory regime to which an
FBOT is subject and the quality of the administration of that structure
and that FBOTs should be required to annually re-affirm and demonstrate
the appropriateness of their foreign regulatory regimes, based upon the
standards relevant to their initial application for registration.
---------------------------------------------------------------------------
\58\ Better Markets, CME Group, and Senator Levin.
---------------------------------------------------------------------------
As previously discussed, CME Group suggested that the Commission's
analysis of the FBOT and its regulatory regime should be more narrowly
tailored and that the Commission should limit its inquiry to questions
regarding the comparability of the regulatory regime in the FBOT's home
jurisdiction. If this approach were adopted, CME Group indicated that
it would expect that the Commission would continue to vigorously
monitor compliance with the core regulatory principles and ensure that
the process is not being abused to avoid legitimate CFTC regulation.
Senator Levin similarly commented that, to ensure market integrity,
the Commission must effectively police U.S.-based trading in FBOTs and
incorporate that activity into its regular surveillance and enforcement
efforts. He also noted that the proposed rules would need a robust
program of FBOT supervision, as well as surveillance and examination
programs that include an integrated review of the FBOT's U.S. trading
activity, asserting that the Commission also would need to bring
enforcement cases against individuals who engage in manipulative or
abusive trading practices that affect U.S. futures and cash markets and
market users and attempt to avoid detection by trading in foreign
markets in order to deter such activity.
The Commission has determined to adopt the rule as proposed. As
previously discussed, FBOTs will be required, prior to being
registered, to submit information and documentation demonstrating that
they 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 are subject in the U.S. While the regulations require the FBOT and
its regulatory authority to provide critical information on an ongoing
basis to the Commission, any on-going review of the FBOT and its
clearing organization by the Commission generally will be limited to
reviewing the required information and documentation that the FBOT must
submit periodically to the CFTC and will not include direct
surveillance of trading activity. Staff may conduct periodic on-site
visits to validate information submitted as part of the registration
application and/or required to be submitted as a condition of
registration. Staff will, however, conduct additional review with
respect to linked contracts, and will monitor these contracts pursuant
to the additional conditions levied upon the FBOT for listing such
contracts, e.g., large trader and TSS reporting and comparable position
limits. The Commission believes that these provisions are adequate to
monitor the activities of the FBOT conducted pursuant to an Order of
Registration.
10. The Appendix
For purposes of enhanced clarity and standardization, the
Commission has elected to revise the proposed Appendix to Part 48 to
include the submission requirements identified therein in the proposal
in a standardized application form, Form FBOT and Supplement S-1 (for
the clearing organization) to Form FBOT. The Commission believes that
the use of this form will make it easier to guide applicants in the
organization and presentation of information and documentation and to
ensure that all required information is included in the application.
Use of the form also will improve the staff's ability to organize and
review the information in a timely manner.
III. Conclusion and Effective Date
A. Conclusion
For the reasons stated above and in the NPRM and after considering
the complete record in this matter, including all comments, the
Commission is adopting part 48 substantially as proposed, subject to
the revisions to the proposed rules identified above in response to
comments submitted or otherwise initiated by the Commission. This new
part 48 provides the rules and procedures to be followed by FBOTs that
wish to register in order to provide identified members and other
participants that are located in the U.S. with direct access to the
FBOT's order entry and trade matching system. Part 48 replaces the
practice, used since 1996, of issuing staff direct access no-action
relief letters to permit FBOTs to provide their members and other
participants located in the U.S. with direct access to their trading
systems and provides a transitional period for
[[Page 80691]]
those FBOTs that have received staff no-action relief.
B. Effective Date
This rule shall become 60 days after publication in the Federal
Register.
IV. Related Matters
A. The Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) \59\ imposes certain
requirements on federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by the PRA. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number. The
final Part 48 rules impose new collection of information requirements
within the meaning of the PRA. Accordingly, the Commission requested,
but the Office of Management and Budget (OMB) has not yet assigned a
control number for the new collection of information. However, OMB has
assigned the reference number 201011-3038-003 in the interim. The
Commission has submitted this final rule along with supporting
documentation for OMB's review in accordance with 44 U.S.C. 3507(d) and
5 CFR 1320.11. The information collection burdens in the final rules
are identical to the collection burdens estimated by the Commission in
the proposing release, subject to the modifications discussed
below.\60\
---------------------------------------------------------------------------
\59\ 44 U.S.C. 3501 et seq.
\60\ See the Commission's Paperwork Reduction Act analysis at 75
FR 70984-86 (Nov. 19, 2010).
---------------------------------------------------------------------------
The Commission protects 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 is also
required to protect certain information contained in a government
system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.
The Commission invited the public and other Federal agencies to
comment on any aspect of the information collection requirements
discussed in the NPRM. Pursuant to 44 U.S.C. 3506(c)(2)(B), the
Commission solicited comments in order to: (i) Evaluate whether the
proposed collections of information were necessary for the proper
performance of the functions of the Commission, including whether the
information will have practical utility; (ii) evaluate the accuracy of
the Commission's estimates of the burden of the proposed collections 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 collections of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology.
In response to the Commission's request in the NPRM for comments on
any potential paperwork burden associated with the final rules, two
commenters provided substantive comments addressing the merits of the
Commission's proposed PRA calculations with respect to Sec. 48.6 and
the ``limited'' application. DME argued that limited applications by
FBOTs operating under no-action relief could easily take 200 to 300
hours to complete rather than the Commission's proposed estimate of 50
hours. Similarly, HKFE contended that the work involved in submitting a
limited application under the proposed regime would be substantially
more than the 50 hours estimated by the Commission.
The Commission estimated in the NPRM that a total of 20 FBOTs would
file a registration application with the Commission pursuant to the
limited application procedures in Sec. 48.6. The Commission notes that
the final rules governing the limited application differentiate between
those FBOTs whose original no-action relief request was submitted
electronically and remains on file with Commission staff and those
FBOTs whose original no-action relief request was not submitted
electronically to the Commission. The Commission estimates that ten
FBOTs would be able to take advantage of the streamlined application
procedures in final Sec. 48.6. Indeed, the ten FBOTs would be
permitted to simply refer to each portion of their original submissions
that satisfies a particular registration requirement, identify the
specific registration requirement that is fulfilled by that section,
and certify that the information or documentation originally provided
remains current and true. After considering the comments from DME and
HKFE, in conjunction with the streamlined application requirements
adopted by the Commission in the final rules, the Commission has
determined that it is not amending its estimate of 50 burden hours for
the FBOTs whose original no-action relief request was submitted
electronically. However, with respect to the ten FBOTs that would need
to submit the complete limited application because Commission staff
does not have the original no-action relief request on file in an
electronic format, the Commission finds some merit in the comments from
DME and HKFE and the Commission is revising its estimates accordingly.
Specifically, the Commission estimates that the effect of the final
rules on these FBOTs will be to increase the information collection
burden by approximately 200 hours, and result in approximately 250
hours per FBOT. Consequently, it is anticipated that ten FBOTs will
incur an aggregate of 2,500 burden hours compared to the 500 burden
hours estimated in the NPRM for such FBOTs.
The Commission is also revising its information burden collection
estimate for FBOTs with pending requests for direct access no-action
relief. In the NPRM, the Commission estimated that seven FBOTs,
including one new FBOT and six FBOTs that currently have pending
requests for no-action relief, would submit a full FBOT registration
application. The Commission estimated that the seven FBOTs would expend
1,000 burden hours per FBOT to satisfy the registration requirement.
However, the Commission has determined to amend its proposal to
substantially reduce the information collection requirements for the
six FBOTs with pending requests for no-action relief. Specifically, the
final rules provide that an FBOT with a pending no-action request as of
the effective date of the rule could, as part of its application for
registration, identify information or documents provided in its
original no-action submission that would satisfy particular
registration requirements. In light of the amendments to the
Commission's final rules, the Commission is revising its previous
estimate by reducing the information collection burden for the six
FBOTs from 1,000 burden hours to 250 hours for each FBOT. Thus, it is
anticipated that the six FBOTs will incur an aggregate reduction of
4,500 burden hours than what was stated in the NPRM.
Finally, the Commission estimated in the NPRM that four registered
FBOTs would permit swaps to be traded by direct access. Proposed Sec.
48.8(a)(8)(i) required a registered FBOT 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 transaction. In the final rules, the Commission
is eliminating the real-time reporting
[[Page 80692]]
requirement for FBOTs because that requirement is being placed on swap
data repositories. The Commission previously estimated that each of the
four FBOTs would incur an annual reporting burden of 2,080 hours to
comply with the real-time reporting requirement. Therefore, the
Commission has determined that this rule modification will result in an
aggregate reduction of 8,320 burden hours.
Accordingly, the Commission has submitted to the OMB an amended
calculation of the annual burden hours for FBOTs.
B. Cost Benefit Considerations
Section 15(a) of the CEA requires the Commission to ``consider the
costs and benefits'' of its actions 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.\61\ The
Commission may, in its discretion, give greater weight to any one of
the five enumerated areas and may determine that, notwithstanding
costs, a particular rule protects the public interest.
---------------------------------------------------------------------------
\61\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
1. Background
(a) Description of the Statutory Registration Authority per the Dodd-
Frank Act
Section 738 of the Dodd-Frank Act amended CEA section 4(b) to
provide that the Commission may adopt rules and regulations requiring
FBOTs that wish to provide their members or other participants located
in the United States with direct access to register with the
Commission.\62\ Section 738 also authorizes the Commission to
promulgate rules and regulations prescribing procedures and
requirements applicable to the registration of such FBOTs. Accordingly,
on November 19, 2010, the Commission published a notice of proposed
rulemaking that set forth proposed regulations that would establish a
registration requirement and related registration procedures and
conditions applicable to FBOTs that wish to provide their members or
other participants located in the United States with direct access to
the FBOT's electronic trading and order matching system (NPRM).\63\
---------------------------------------------------------------------------
\62\ Direct access is defined in section 4(b) of the CEA, as
amended by section 738 of the Dodd-Frank Act, to refer to an
explicit grant of authority by an FBOT to an identified member or
other participant located in the U.S. to enter trades directly into
the FBOT's trade matching system.
\63\ See Registration of Foreign Boards of Trade, 75 FR 70974
(Nov. 19, 2010).
---------------------------------------------------------------------------
(b) Prior No-Action Regime
Since 1996, FBOT requests to provide members and other participants
with direct access to their electronic trading and order matching
systems from within the U.S. have been addressed by Commission staff
pursuant to the no-action process set forth in Commission regulation
140.99.\64\ Specifically, such FBOTs have requested, and, where
appropriate, received from the relevant Commission division, a no-
action letter. As part of the no-action letter, division staff would
represent that the division will not recommend that the Commission
institute enforcement action against the FBOT for failure to register
as a DCM or DTEF if the FBOT provides direct access to members and
participants located in the U.S, provided the FBOT satisfies the
conditions set forth therein. A no-action request from an FBOT was
required to include 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. As noted above,
since 1996, Commission staff has issued 24 direct access no-action
relief letters to FBOTs, 20 of which remain active.\65\ A detailed
discussion of the history and evolution of the FBOT no-action process
and the scope of the relief provided can be found in the NPRM.\66\
---------------------------------------------------------------------------
\64\ See, e.g., CFTC Letter No. 96-28 (Feb. 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.
\65\ One no-action relief letter was superseded and three were
revoked when the FBOTs ceased operations as regulated or recognized
markets. Currently, 14 of the FBOTs with active no-action relief
report volume originating from the U.S. via direct access.
\66\ 75 FR 70974-76.
---------------------------------------------------------------------------
(c) Replacing No-Action Regime With Registration Requirement
(i) Overview. As described in detail in the preamble, the
registration regime established in new part 48 will replace the direct
access no-action relief process. That registration regime is being
established pursuant to the Commission's authority found in section
4(b) of the CEA, as amended by section 738 of the Dodd-Frank Act, as
described above. Based on the nature of the directives in CEA section
4(b), this final rulemaking contains certain statutorily mandated
components as well as other discretionary components.
(ii) Mandatory components of statute. The adoption of a
registration regime applicable to FBOTs that desire to provide their
members or other participants located in the U.S. with direct access to
their trading systems is discretionary. However, if the Commission
determines to adopt such a registration regime, certain non-
discretionary guidelines are mandated in the statute. Specifically, CEA
section 4(b)(1)(A) provides that:
In adopting such rules and regulations, the Commission shall
consider--
(i) Whether any such foreign board of trade is subject to
comparable, comprehensive supervision and regulation by the
appropriate governmental authorities in the foreign board of trade's
home country; and
(ii) Any previous commission findings that the foreign board of
trade is subject to comparable comprehensive supervision and
regulation by the appropriate government authorities in the foreign
board of trade's home country.
Because the Commission is promulgating an FBOT registration scheme,
the Commission is required to incorporate these two guidelines in
issuing the final rules. In accordance with these two guidelines, part
48 includes certain requirements, procedures, and conditions for FBOT
registration. While there are some costs inherent in a FBOT
registration scheme that follows the scope of review mandated by
Congress, the Commission considers the costs and benefits associated
with implementing the discretionary components of this FBOT
registration scheme below.
Several provisions applicable to a linked contract are mandatory
regardless of whether the Commission adopts FBOT registration
rules.\67\ Specifically, CEA section 4(b)(1)(B), as amended by the
Dodd-Frank Act, mandates that the Commission may not permit an FBOT to
make a linked contract available via direct access absent several
statutorily specified conditions. These conditions, set forth
[[Page 80693]]
in Sec. 48.8(c)(1), address (1) making public daily trading
information regarding the linked contract that is comparable to the
daily trading information published for the contract to which it is
linked; (2) adopting 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; (3) having the authority to require
or direct any market participant to limit, reduce, or liquidate any
position; (4) agreeing to promptly notify the Commission of certain
changes with respect to the linked contract; (5) providing 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
(6) providing 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.
---------------------------------------------------------------------------
\67\ Based upon the statutory provision regarding linked
contracts in CEA section 4(b)(1)(B), Sec. 48.2(d) defines a linked
contract as a futures, option or swap contract that is made
available for trading by direct access by a registered FBOT 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.
---------------------------------------------------------------------------
Congress mandated these linked-contract conditions on FBOTs. To the
extent that these new rules reflect the statutory provisions of the
Dodd-Frank Act, such rules will not create costs and benefits in
addition to the costs and benefits that already will result from the
action of Congress in passing the Dodd-Frank Act. However, such rules
may generate costs and benefits that are attributable to the
determinations made by the Commission regarding the manner in which
statutory provisions in the Dodd-Frank Act should be implemented. The
costs and benefits of these Commission determinations are considered in
light of the five factors set forth in CEA section 15(a).
(d) Purpose of the Final Rules
As described in the preamble, the purpose of these final rules is
to formalize and standardize the process by which an FBOT may provide
traders located in the U.S. with direct access to its trading system.
By implementing uniform application procedures and registration
requirements and conditions, the process will become more standardized
and more transparent to both registration applicants and the general
public and will promote fair and consistent treatment of all
applicants. Further, generally applicable regulations will provide
greater legal certainty for FBOTs providing direct access than the no-
action relief process because no-action letters are issued by the staff
and are not binding on the Commission.
In determining to adopt formal registration rules for FBOTs, the
Commission has considered that the no-action process is generally
better suited for discrete, unique factual circumstances and for
situations where neither the CEA nor the Commission's regulations
directly address the issue presented. The Commission has determined
that, where the same type of relief is being 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., it is no longer
appropriate to handle requests for the relief through the no-action
process. Rather, such matters should be addressed in generally
applicable regulations. The Commission also notes that a statutory-
based regulatory FBOT registration regime will be more consistent with
the statutory-based framework under which other countries, including
the UK, Australia, Singapore, Japan and Germany, among others, permit
DCMs to provide direct access internationally.
(e) Public Comment
As described in detail in the preamble, the Commission, in
preparing these final rules, sought and incorporated comment from the
public. In the NPRM, the Commission specifically requested comment on
the cost benefit section and invited commenters to provide data
quantifying the costs and benefits of the proposed regulations. The
Commission received 14 comments discussing the costs and benefits of
the proposed rules, but none that provided quantitative data. These
comments included 10 letters from entities representing thirteen FBOTs
operating under existing no-action relief,\68\ one letter from another
exchange,\69\ and one letter each from FOA, CME Group, and ESMA. Those
comments are specifically addressed in the context of the extended cost
benefit consideration discussion below.
---------------------------------------------------------------------------
\68\ DME, LME, MX, ICE (owner of ICE Futures Europe and ICE
Futures Canada), HKFE, BM&F, OMX, NYX (operator of Liffe, Euronext
Paris SA, and Euronext Amsterdam N.V.), Eurex, and OSE.
\69\ NGX.
---------------------------------------------------------------------------
2. Summary of the Final Rules
As described in detail in section III of the preamble, new part 48
provides the procedures, requirements, and conditions to be met by
FBOTs that seek to provide their members and other participants in the
U.S. with direct access to the FBOT's order entry and trade matching
system. The final rules set forth, among other things, procedures an
FBOT must follow in applying for registration, requirements that an
FBOT must meet in order to obtain registration, conditions that an FBOT
must satisfy on a continuing basis upon obtaining registration, and
provisions for the termination of registration.
Specifically, Sec. 48.1 sets forth the scope of the rules and
Sec. 48.2 provides definitions applicable to the registration
provisions. Section 48.3 makes it clear that registration is required
if an FBOT wishes to provide for direct access. Section 48.4
establishes registration eligibility and identifies the entities to
which an FBOT can permit direct access once it is registered. Pursuant
to Sec. 48.5, FBOTs wishing to provide direct access to their trading
systems to members and other participants located in the U.S. will be
required to file an application for registration with the Commission
that contains all of the information and documentation necessary to
successfully demonstrate that the FBOT satisfies the registration
requirements contained in Sec. 48.7. In addition, Sec. 48.5 describes
the procedures for applying for registration, notices the applicant
that the Commission will be considering the two statutorily-mandated
guidelines, among other things, in its review of the application, and
describes the Commission response following approval or disapproval of
the application. Section 48.6 provides a limited application procedure
for FBOTs currently operating under existing no-action relief and FBOTs
that have submitted a complete application for no-action relief that is
pending as of the effective date of this regulation. Section 48.7,
previously mentioned, includes the requirements that must be met before
an FBOT can be registered. Once registered, all FBOTs will have to
maintain continuing compliance with the conditions listed in Sec. 48.8
of the final rules, including the statutorily-mandated conditions on
linked contracts. Section 48.9 provides the rules for the revocation of
registration. Finally, Sec. 48.10 establishes the process for an FBOT
to make additional contracts available for direct access following an
initial registration.
3. Factors Affecting the Scope of the Final Rules
The costs that the rules impose on FBOTs seeking registration will
vary depending on various factors including the size of the FBOT and
whether the FBOT's clearing organization is a DCO. Larger FBOTs are
more likely to have the means to hire U.S. counsel or sufficient staff
expertise to submit a complete registration application in an
[[Page 80694]]
efficient manner than smaller FBOTs. It may be less costly to
demonstrate that a clearing organization is a DCO than that it complies
with the RCCPs. Another factor that could affect costs is demonstrating
the comparability of the supervision by the FBOT's home regulator,
since regulatory structures in different countries vary. Moreover, the
cost of filing a limited application for FBOTs operating under the no-
action regime will vary, depending on whether or not the FBOT's
original request was filed electronically and remains on file with the
Commission.
The Commission's consideration of costs and benefits contains
discussions of three general aspects of the rulemaking: the
requirements for filing a new registration application; the limited
application requirement for FBOTs operating under the current no-action
regime; and compliance costs. The Commission is only considering the
marginal costs and benefits of the proposed regulations that are in
addition to, or in lieu of, the costs and benefits associated with the
current no-action regime.
4. Filing a New Application for Registration
Costs: The Commission estimates that it will cost approximately
$46,310 for an FBOT to submit a new registration application. This is
based on an average wage for a compliance staffer and a compliance
attorney of $46.31 per hour \70\ and a total burden of 1,000 hours. The
Commission recognizes that some FBOTs hire outside counsel based in the
U.S. with expertise in the FBOT registration process. While the
Commission is uncertain about the billing rates that FBOTs pay for U.S.
counsel, the Commission believes that such counsel may bill at a rate
of several hundred dollars per hour. U.S. counsel may be able to
leverage its expertise to substantially reduce the number of hours
needed to fill out an application, but an FBOT that utilizes outside
counsel may incur higher costs than an FBOT that does not use outside
counsel. The Commission notes that any determination to use outside
counsel is at the discretion of the FBOT.
---------------------------------------------------------------------------
\70\ As noted on page six of the Paperwork Reduction Act
Supporting Statement (PRA Supporting Statement) for the final FBOT
registration rules, this number is derived from SIFMA's ``Report on
Management & Professional Earnings in the Securities Industry--
2010'' and represents the estimated average wage of a compliance
attorney and a compliance staffer in the U.S. While wages in the
home countries of FBOTs may differ, the Commission does not have
access to data on the compensation of compliance staffers in other
countries and is using the information in the SIFMA report as a best
available estimate. The PRA Supporting Statement can be accessed at
http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201011-3038-003.
---------------------------------------------------------------------------
The Commission notes that the proposed registration process is an
outgrowth of the existing policy of allowing FBOTs to provide U.S.-
based traders with direct access to their trading systems through staff
no-action letters and that most of the costs associated with this rule
also are associated with applying for no-action relief. The costs that
will be incurred by an FBOT as a result of the registration
requirements and the conditions contained in the proposed regulations,
with certain exceptions (e.g., additional submission requirements
related to the FBOTs regulatory authority and clearing and settlement
policies and procedures), substantially replicate the costs that would
otherwise be incurred by an FBOT applying for no-action relief under
the existing process. For example, FBOTs requesting no-action relief
under existing procedures are required to provide the Commission staff
with similar information and documentation to that which would be
required for registration under the proposed regulations (e.g.,
information regarding the FBOT's trading system, terms and conditions
of contracts to be made available by direct access in the U.S., and the
regulatory regime governing the FBOT in its home country). The
Commission believes that these costs, for the most part, do not
represent a substantial increased burden, but rather reflect the
continuation of an existing process--which is now proposed to be
formalized. The Commission estimates that the increase in costs for new
FBOTs to register rather than obtain a no-action letter is within a
range between 100 hours or $4,631 per FBOT and 200 hours or $9,262 per
FBOT.\71\
---------------------------------------------------------------------------
\71\ This increase in costs reflects the registration
requirements that were not required in the no-action process,
including additional submission requirements related to the FBOTs
regulatory authority and clearing and settlement policies and
procedures.
---------------------------------------------------------------------------
There may be some costs for certain FBOTs if they need to upgrade
their systems or procedures to meet the registration requirements. For
example, an FBOT electing to offer linked contracts that did not
previously impose position limits may need to establish a procedure for
enforcing position limits. The Commission is unable to quantify these
costs since it does not know what particular changes future FBOTs may
need to make in their systems or procedures to comply with the
registration requirements. However, the Commission anticipates that
FBOTs applying for registration in the future, like FBOTs that applied
for no-action relief in the past, generally will be compliant with the
requirements before submitting their applications, so the cost of
upgrading their systems and procedures should be minimal for most
FBOTs. As discussed in the preamble, the FBOT requirements generally
reflect existing industry practice and FBOTs are required to be subject
to a comparable regulatory regime. Therefore, the Commission expects
that FBOTs that meet the requirements of their home regulator and
follow industry practice will meet the registration requirements and
that most FBOTs will not need to make any upgrades to their systems or
procedures.
As noted above, the Commission has determined to amend its proposal
to substantially reduce the information collection requirements for the
six FBOTs with pending requests for no-action relief. Specifically, the
final rules provide that an FBOT with a pending no-action request as of
the effective date of the rule could, as part of its application for
registration, identify information or documentation provided in its
original no-action submission that would satisfy particular
registration requirements. As noted in the PRA section, the Commission
estimates that each of these FBOTs will have to devote 250 hours to
converting the no-action request to a registration application at a
cost of about $11,578 per FBOT for a cumulative cost of $69,468.
Benefits: The Commission notes that the no-action process has been
effective in permitting FBOTs to provide for direct access while
protecting U.S. persons trading by direct access by seeking to ensure
that the FBOT's rules and procedures are adequate and that the
regulatory regime of its home regulatory authority supports regulatory
objectives that are substantially similar to those supported by the
CFTC. The Commission believes that formalizing the registration process
will provide the additional benefits of increased standardization for
filing requirements and greater levels of legal certainty for operating
FBOTs. In addition, formalized registration rules, including the
application form, will create an efficient application process with
enhanced visibility to ensure fair and consistent treatment of
applicants. In particular, the registration procedure and application
form will also assist applicants in determining what information needs
to be provided to obtain registration, which may reduce costs by making
it more likely that the application will be complete upon initial
submission. These benefits, which are not readily quantifiable, are
[[Page 80695]]
not, for the most part, currently available under the no-action
process.
Public Comments: The Commission received comments about the
registration system in general as well as about specific aspects,
including the regulatory comparability and clearing requirements.
Registration System: Five commenters \72\ stated that the proposed
registration system was overly burdensome, overly prescriptive, or that
it unnecessarily subjected FBOTs to duplicative regulation without
corresponding benefit. OMX stated: ``Our main concern related to the
proposed rules is that they will involve a quite extensive process in
order to obtain and maintain registration. [* * *] [E]xtensive and
detailed requirements * * * may be deemed to impose an unreasonable
burden on the applicants.'' ESMA said, ``[T]he new registration
procedure and the mandatory application of very comprehensive, ongoing
requirements to all FBOTs would be burdensome and costly without any
apparent improvements for the safeguard of public interests such as the
maintenance of fair and orderly markets, investor protection and the
resilience of the market.''
---------------------------------------------------------------------------
\72\ OMX, NYX, FOA, ESMA, and CME.
---------------------------------------------------------------------------
As discussed above, the Commission notes that the proposed
registration process is an outgrowth of the existing policy of issuing
no-action letters and that it entails costs that are similar to that of
the existing no-action process.
In connection with commenters criticizing the ``overly
prescriptive'' nature of the proposed rules, the Commission has
identified, based upon its experience with its regulation of DCMs and
the Commission staff experience in reviewing and evaluating FBOTs for
purposes of no-action relief, several areas which it considers critical
in determining if the FBOT has established its ability to provide on an
ongoing basis, adequate protection to U.S. participants who trade and
clear on the FBOT. These areas include, among others, compliance of the
trading system with the IOSCO Principles, adequate trade practice and
market surveillance programs, and a clearing and settlement
organization that meets universally recognized standards. Moreover,
amended CEA section 4(b) requires the Commission to consider whether
the relevant FBOT is subject to comparable, comprehensive supervision
and regulation by appropriate governmental authorities in the FBOT's
home country. The Commission believes that, in these instances, rules
are necessary in order to ensure that the Commission receives
sufficient information and documentation to make these assessments and
to ensure that registration applicants are subject to standardized and
transparent obligations. The Commission also notes that the proposed
regulations were drafted to provide flexibility where possible and
warranted. For example, the final rules require the FBOT's clearing
organization to successfully demonstrate that it satisfies the RCCPs,
but do not mandate the manner in which the clearing organization must
fulfill those principles.
Nonetheless, the Commission has identified specific areas in which
it is able to set forth the FBOT registration requirements in a less-
prescriptive manner. For example, the Commission is modifying the
proposed regulations to clarify that an FBOT whose clearing
organization is registered with the Commission as a DCO would not be
required to separately establish that it satisfies the requirements
contained in proposed Sec. 48.7 (e.g., a clearing organization that is
registered as a DCO would not be required to demonstrate that its
participants are fit and proper and meet appropriate financial and
professional standards).
Finally, in an effort to avoid unnecessary duplication in the text
of the rule, the Commission has removed the appendix from the rules and
is replacing it with a standardized application form.
Regulatory Comparability: Two comment letters stated that the
comparability analysis in conjunction with the broad set of
requirements and conditions described in the proposed rules was overly
burdensome. LME suggested that it would be better if the Commission
made a single comparability determination for FBOTs residing in the
same jurisdiction. CME suggested that the proposed comparability
evaluation by the Commission was too burdensome on both FBOTs and the
Commission. As an alternative, CME suggested that the Commission should
limit its assessment to whether an FBOT is subject to a comparable
regulatory regime by its home country regulator. This commenter said,
``[W]e have a significant concern that the proposed rules are too
prescriptive and would impose significant burdens without corresponding
benefit.''
The Commission reiterates that the statute requires that if the
Commission implements a formal registration system, it must review
whether any applicant ``is subject to comparable, comprehensive
supervision and regulation by the appropriate governmental authorities
in the foreign board of trade's home country.'' The Commission does
have discretion on how to implement this requirement and is using that
discretion to revise the final rule to provide an option for evaluation
of the regulatory authority when multiple FBOTs that are subject to the
same regulatory regime are applying for registration at the same time.
In other words, the rule, as adopted, would permit multiple FBOTs that
are subject to the same regulatory regime that are applying for
registration at the same time to collectively provide information
regarding their regulatory regime and would permit a foreign regulator
(rather than the FBOT) to provide the required information regarding
the regulatory regime to which those multiple FBOTs may be subject.
This should significantly reduce the cost burden to FBOTs when there
are multiple FBOTs under the same regulatory regime. However, the
Commission notes that any evaluation will not begin and end with a
review of the FBOT's regulatory authority. The nature of the FBOT's
trading and clearing systems, rule enforcement, surveillance practices,
and information-sharing ability, among other things, are critical to
any pre-registration review.
Clearing: As discussed in section II.B.2.d. above, Eurex stated
that extending the Commission's review to FBOT clearing would impose
increased burdens on the Commission's limited resources. This commenter
suggested that the Commission should rather require than an FBOT simply
demonstrate that, if its clearing organization is not a DCO, the
clearing organization complies with the RCCPs.
The Commission notes that consideration of a foreign board of
trade's clearing and settlement function, to a certain extent, is
already incorporated into the existing no-action process and,
accordingly, is not itself a totally new requirement. In this respect,
the final rules seek to provide transparency and standardization with
respect to the necessary clearing organization attributes by requiring
that the clearing firm either satisfy an internationally recognized
standard for central counterparties or be registered as a DCO. This
will benefit U.S. persons trading on the FBOT by providing an added
level of security in knowing that the FBOT's clearing organization has
represented that it meets internationally recognized standards or is a
DCO. The Commission, however, has streamlined the regulation in the
final rule to eliminate the requirements contained in Sec. 48.7 if the
clearing firm is registered
[[Page 80696]]
with the Commission as a DCO. The cost of demonstrating that a clearing
organization is a DCO is de minimus. Because the manner of satisfying
the RCCPs or their successor standards is at the discretion of the
FBOT's clearing organization, the Commission is unable to quantify the
costs of demonstrating that the clearing organization observes the
RCCPs or their successor standards.
ICE stated that ``the CFTC should not place a greater burden on
FBOTs than it does on U.S. regulated markets,'' in particular by
imposing mandatory clearing requirements on swaps executed on FBOTs.
ICE noted that SEFs are not subject to mandatory clearing requirements.
However, the Commission notes that under the Dodd-Frank Act, swaps
traded on DCMs will be subject to mandatory clearing requirements. The
Commission believes that the treatment of swaps registered FBOTs will
make available for trading to members and other participants located in
the U.S. through direct access should parallel the treatment afforded
to swaps transactions that may be traded on DCMs and, thus, they must
be cleared. It is not clear whether a foreign SEF-equivalent would meet
the FBOT eligibility requirements outlined in Rule 48.2(b) or be
eligible for FBOT registration, but it is unlikely that such an entity
would be eligible unless the entity could demonstrate that it is
operated and regulated in a manner that is comparable and comprehensive
to the manner in which DCMs (not U.S. SEFs), are regulated by the
Commission. An FBOT could still offer non-cleared swaps to its market
participants, but would be unable to offer such contracts via direct
access in the U.S. The Commission is unable to quantify the costs of
mandatory clearing of swaps on FBOT market participants, but such costs
would approximate the costs of clearing futures since any listed swap
contracts would have standardized terms and would resemble futures
contracts. The Commission also cannot predict, at this time, whether
FBOTs will elect to list swap contracts for direct access and, if so,
how many FBOTs will make available how many swaps contracts.
5. Filing a Limited Application
Costs: As noted, the Commission is requiring the 20 FBOTs currently
operating under no-action relief to register, but is permitting them to
file a limited application for registration. This is an additional cost
being imposed on these FBOTs as a consequence of this rule. The ten
FBOTs that filed their no-action requests electronically will be able
to simply refer to each portion of their original submissions that
satisfies each particular registration requirement and certify that the
information or documentation originally provided remains current and
true. The Commission estimates that the cost of filing a limited
application for each of these FBOTs will be approximately $2,316 (50
hours at $46.31 per hour) for a cumulative cost of $23,160. The
remaining 10 FBOTs that did not file electronically will have to
resubmit much of the material and therefore will each incur higher
costs of approximately $11,578 (250 hours at $46.31 per hour) for a
cumulative cost of $115,780. The cumulative cost across 20 FBOTs will
be $138,940.
Benefits: FBOTs using the limited application process will receive
the benefits noted above of receiving a formal Commission registration
order rather than a staff no-action letter (which provided for less
legal certainty). These FBOTs will be operating on firmer legal ground
and the Commission, market participants, and the public will benefit
from the knowledge that all FBOTs offering direct access in the U.S.
meet the registration requirements. There are also benefits that accrue
to registering all FBOTs under the same transparent requirements, thus
ensuring a ``level playing field'' going forward and ensuring that the
Commission has the same set of information on file regarding each
registered FBOT.
Public Comments: As discussed above, several commenters \73\
addressed the proposed ``limited application'' scheme, suggesting that
the limited application was overly burdensome, of limited value, or
even unnecessary--preferring a grandfather provision for FBOTs
operating under existing no-action relief. They commented in the
context of the cost benefit section that the limited application
process was too burdensome in its entirety for an FBOT that had
previously obtained no-action relief. And at least two of the
commenters, DME and CME, noted that, in the context of evaluating the
burdens imposed by the proposed registration process, providing
grandfather registration for FBOTs with existing no-action relief would
be the better course. Finally, as addressed above, multiple commenters
requested that the time-frame within which a limited application must
be filed should be extended to at least 180 days following the
effective date of final registration rules in order to ease the
administrative burden of preparing and filing the proper documentation.
Specifically, NYX stated:
---------------------------------------------------------------------------
\73\ BM&F, OMX, NYX, DME, CME, and MX.
Under the [p]roposal, an FBOT with an existing no-action relief
letter is required to submit a completed limited application for
registration within 120 days of the effective date of the Proposal.
The Proposal, however, would create a burdensome process requiring
re-submission of voluminous materials, information and data that was
previously provided to the Commission--a time-consuming and
expensive exercise for FBOTs that previously have invested
considerable resources to receive and maintain no-action relief
---------------------------------------------------------------------------
letters.
In the context of the burdens of preparing documentation for the
limited application, MX argues that, ``Placing greater reliance on [the
Commission's] past findings [of comparability] under the no-action
process will not only lessen the burden on FBOTs, but it will conserve
constrained Commission resources with no diminution of protections to
the public or any increase in systemic risk.'' NGX stated that an FBOT
with a pending no-action request should be considered to be eligible to
file a limited application rather than a complete application.
As discussed above, the Commission is extending the time for filing
a limited application to 180 days from 120 after the effective date of
this final rule. This change will address comments that the 120 day
timeline placed an excessive burden on applicants. The Commission also
is revising the rule to permit an FBOT with a pending no-action request
to file a limited application rather than a complete application.
The limited application procedure will, as noted, benefit market
participants, and the public by ensuring that all FBOTs offering direct
access in the U.S. meet the current registration requirements. This
benefit would be foregone if the Commission were to grandfather FBOTs
that are operating under existing no-action relief without any further
review. FBOT requests for no-action relief were assessed based upon the
information and documentation presented at the particular time of the
request (as early as 1999) and the assessments were based upon a
comparison of the regulatory regimes in the U.S. and the applicable
foreign jurisdiction that existed at the time. In addition, early no-
action letters included only a limited analysis of the FBOT's clearing
system because the current regulatory structure applicable to U.S.
clearing organizations did not exist at that time of issuance.
The Commission also does not believe that it would be either
feasible or appropriate for the Commission staff to ascertain for each
FBOT operating under
[[Page 80697]]
existing no-action relief the precise information in its individual no-
action request that would need to be updated or revised to satisfy
registration requirements. The FBOTs are in a better position to
recognize their own particular circumstances and to identify the
additional information and documentation that may require updating in
light of those changes. The FBOT should be afforded the opportunity to
provide materials demonstrating that the foreign regime is comparable
and comprehensive to the regulatory regime in the U.S.
6. Complying With Conditions Applicable to Registration
Once registered, an FBOT will be required to file a number of
reports with the Commission. Most of these reports are required under
the current no-action regime and therefore requiring these reports of
registrants will not impose additional costs on FBOTs that are
currently providing direct access pursuant to no-action letters.
Specific reporting requirements that are currently required under the
no-action regime include Sec. 48.8(b)(1)(i)(A) and (B) regarding
trading volume information, Sec. 48.8(b)(1)(ii)(A)-(F) regarding
material changes to registration information (except where requirements
specifically address the FBOT's clearing organization), and Sec. 48.10
regarding the listing of additional futures and options contracts. New
requirements include Sec. 48.8(b)(1)(iii)(B)-(G) regarding annual
submission of information and Sec. 48.9 regarding demonstration of
compliance with conditions for registration, as well as the requirement
regarding material changes to the clearing organization. In the PRA
section of the NPRM, it was estimated that the total annual burden of
all reporting requirements for all registered FBOTs combined was 972
hours.\74\ The Commission estimates that approximately 150 of these 972
hours represent the new reporting requirements that were not required
under the no-action regime and the cumulative annual cost of complying
with these new requirements will be $6,947 (150 hours at $46.31 per
hour).
---------------------------------------------------------------------------
\74\ See 75 FR 70984-85 (Nov. 19, 2010) and PRA Supporting
Statement at 12 (Nov. 23, 2010).
---------------------------------------------------------------------------
There are also a number of provisions that apply to contracts that
are linked to U.S. futures contracts. These provisions, set forth in
Sec. 48.8(c)(1) and described above, and their associated costs
generally are required under the CEA as amended by Dodd-Frank and the
Commission lacks discretion regarding their implementation. Other
provisions, set forth in Sec. 48.8(c)(2), are also currently imposed
on FBOTs with linked contracts operating under no-action relief.\75\
Therefore, the costs associated with the linked contract provisions
required by Sec. 48.8(c)(2) are not increased relative to those
incurred by FBOTs currently.
---------------------------------------------------------------------------
\75\ See CFTC Letter No. 09-37 (August 20, 2009).
---------------------------------------------------------------------------
Benefits: The new recordkeeping requirements in Regulation
48.8(b)(1)(iii)(B)-(G) regarding annual submission of information and
Regulation 48.9 regarding demonstration of compliance with conditions
for registration will provide the Commission, market participants and
the public with the benefit of knowing that registered FBOTs are
continuing to meet the requirements for registration, including
providing fair and equitable trading platforms, and that the contracts
available for direct access are not readily susceptible to
manipulation.
Public comments: The Commission received cost-benefit related
comments regarding the linked contract provisions.
Linked contract provisions: In connection with the burdens imposed
by the proposed linked contract provisions, OSE stated that extra
conditions were only necessary for FBOTs offering linked contracts in
which there is more than a de minimis amount of trading. OSE
specifically highlighted the imposition of speculative position limits
on linked contracts as an example of a condition which would create an
excessive burden. OSE also objected to the requirement that trade
execution and audit trail data for linked contracts be submitted to the
Commission on a daily basis. They suggested that the benefit of such a
condition, in comparison to the costs, may be more useful if FBOTs were
only required to submit trade execution and audit trail data for linked
contracts on an ``as necessary'' basis--rather than on a daily basis.
The Commission notes that some of the linked contract conditions/
requirements in the final rule are mandated by the Dodd-Frank Act,
including the position limit requirements. Other provisions, such as
the requirement that trade execution and audit trail data for linked
contracts be submitted to the Commission on a daily basis, have been
imposed by Commission staff on FBOTs that list linked contracts and
have been found to be useful in accomplishing the Commission's market
surveillance responsibilities. Commission staff conducts surveillance
and reviews the trading data on a daily basis, and the trade data
submitted daily from the FBOT's linked contract are a critical
component of this surveillance. The Commission is of the opinion that
the linked contract provisions serve to enhance the Commission's market
surveillance capabilities 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 potentially
affects the pricing of contracts traded on U.S.-registered entities.
Section 15(a) Factors
1. Protection of Market Participants and the Public
The final rules will further the protection of market participants
and the public in numerous ways, including ensuring that FBOTs'
automated trading systems comply with the IOSCO principles, match
trades fairly and timely with a proper audit trail, and meet other
requirements as described in Rule 48.7(b) and that the clearing
organizations are DCOs or observe the RCCPs or their successor
standards. The rules requiring that contracts offered by FBOTs are not
readily susceptible to manipulation and the rules regarding linked
contracts, including the requirement that linked contracts have
appropriate position limits, will also further the protection of market
participants and the public. Further protection is provided by the
requirement that FBOTs offering direct access to U.S. participants and
their clearing organizations have proper rule enforcement procedures
and are subject to comprehensive supervision and regulation by the
appropriate government authorities in their home country that is
comparable to the Commission's comprehensive supervision and regulation
and that information sharing agreements are in place. Finally, the
examination of FBOT and clearing organization membership standards will
also further the protection of market participants and the public.
2. Efficiency, Competitiveness, and Financial Integrity of the Markets
The requirements that the FBOTs' automated trading systems contain
a trade matching algorithm that matches trades in a fair and timely
manner and that trading data be made available to users and the public
will further the efficiency and competitiveness of the markets. The
financial integrity of the markets will be furthered by the rules
[[Page 80698]]
requiring that clearing organizations be DCOs and meet DCO requirements
or specifically represent that they observe each of the RCCPs (or their
successor standards) and by the examination of FBOT and clearing
organization membership standards. The rules requiring that contracts
offered by FBOTs not be readily susceptible to manipulation will also
further these considerations. The linked contract rules, including the
position limit requirement, will also further the efficiency,
competitiveness, and financial integrity of markets.
3. Price Discovery
The rules regarding the automated trading systems, including the
trade matching rule, will further the price discovery process in FBOT
contracts. The linked contract provisions will protect the price
discovery process for linked contracts and the U.S. contracts that they
are linked to by ensuring that the linked contracts have position
limits and accountability provisions comparable to the corresponding
U.S.-based contracts and that the price and volume data for linked
contracts are disseminated in a comparable manner to their U.S.
counterparts. The rules requiring that contracts offered by FBOTs for
direct access not be readily susceptible to manipulation will also help
protect the price discovery process.
4. Sound Risk Management Procedures
The requirement that FBOTs' clearing organizations be DCOs or
demonstrate observance of the RCCPs or their successor standards will
further sound risk management procedures by ensuring that clearing
organizations represent that they use risk management procedures that
are consistent either with Commission regulations or internationally
recognized standards.
5. Other Public Interest Considerations
The Commission believes that adopting formal registration
provisions will further other public interest considerations by
replacing the no-action procedure with a standardized and transparent
application process and providing enhanced legal certainty to
registered FBOTs and their clearing organizations.
C. The Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires Federal agencies
to consider the impact of its rules on ``small entities.'' \76\ A
regulatory flexibility analysis or certification typically is required
for ``any rule for which the agency publishes a general notice of
proposed rulemaking pursuant to'' the notice-and-comment provisions of
the Administrative Procedure Act, 5 U.S.C. 553(b).\77\ The Commission
noted in the proposing release that although it has established certain
definitions of ``small entity'' to be used in evaluating the impact of
its rules under the RFA, it had not previously addressed the question
of whether FBOTs are small entities for purposes of the RFA.\78\ The
Commission previously determined that DCMs are not small entities for
purposes of the RFA.\79\ In the proposing release, the Commission
determined that because FBOTs and DCMs are functionally equivalent
entities, FBOTs like DCMs are not ``small entities'' for purposes of
the RFA.
---------------------------------------------------------------------------
\76\ 5 U.S.C. 601 et seq.
\77\ 5 U.S.C. 601(2), 603, 604 and 605.
\78\ See 75 FR 70987 (Nov. 19, 2010).
\79\ See 47 FR 18618, 18619, Apr. 30, 1982.
---------------------------------------------------------------------------
In response to the Proposed Rules, the Not-For-Profit Electric End
User Coalition (Coalition) submitted a comment generally criticizing
the Commission's ``rule-makings [as] an accumulation of interrelated
regulatory burdens and costs on non-financial small entities like the
NFP Electric End Users, who seek to transact in Energy Commodity Swaps
and ``referenced contracts'' only to hedge the commercial risks of
their not-for-profit public service activities.'' \80\ In addition, the
Coalition requested ``that the Commission streamline the use of the
bona fide hedging exemption for non-financial entities, especially for
those that engage in CFTC-regulated transactions as `end user only/bona
fide hedger only' market participants.''
---------------------------------------------------------------------------
\80\ See Coalition at 29.
---------------------------------------------------------------------------
After further consideration in light of this comment, the
Commission has determined that this final rulemaking, which is
applicable only to FBOTs, will not have a substantial economic effect
on a substantial number of small businesses. Accordingly, for the
reasons stated in the proposal and the fact that the Coalition does not
represent bodies that will be registering with the Commission as FBOTs,
the Chairman, on behalf of the Commission, hereby certifies pursuant to
5 U.S.C. 605(b) that these rules will not have a significant economic
impact on a substantial number of small entities. The Chairman made the
same certification in the NPRM, and the Commission did not receive any
comments on the RFA in relation to the proposed rulemaking.
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 amends Chapter I of Title 17 of the Code of
Federal Regulations by adding 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 and scope.
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--Form FBOT
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, required to be registered, or 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.
For purposes of this part:
(a) Foreign board of trade. 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.
(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 Sec.
48.7 and:
(1) Possesses the attributes of an established, organized exchange,
(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.
[[Page 80699]]
(c) Direct access. 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. Linked contract means a futures, option or
swap contract that is made available for trading by direct access 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. Communications means any written or electronic
documentation or correspondence issued by or on behalf of the
Commission, the United States Department of Justice, or the National
Futures Association.
(f) Material change. Material change means a material change in the
information provided to the Commission in support of an application for
registration under this part. Subsequent to registration, material
change also includes a material change in the operations of the foreign
board of trade or its clearing organization and, without limitation, a
change in any of the following: The membership or participant 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; the structure, nature, or
operation of the trading or clearing systems; the regulatory or self-
regulatory regime applicable to the foreign board of trade, its
clearing organization, or their respective members and other
participants; the authorization, licensure, registration or recognition
of the foreign board of trade or clearing organization; and the ability
of the clearing organization to observe the Recommendations for Central
Counterparties.
(g) Clearing organization. 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(15) of the Act; or
(2) Defined as a central counterparty by the Recommendations for
Central Counterparties.
(h) Existing no-action relief. 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
granting of direct access.
(i) Swap. Swap means a swap as defined in section 1a(47) of the Act
and any Commission regulation further defining the term adopted
thereunder.
(j) Recommendations for Central Counterparties. Recommendations for
Central Counterparties means:
(1) The current Recommendations for Central Counterparties 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
(2) Successor standards, principles and guidance for central
counterparties or financial market infrastructures adopted jointly by
the Technical Committee of the International Organization of Securities
Commissions and the Committee on Payment and Settlement Systems.
(k) Affiliate. An affiliate of a registered foreign board of trade
member or other participant means any person, as that term is defined
in section 1a(38) of the Act, 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.
(l) Member or other participant. Member or other participant means
a member or other participant of a foreign board of trade that is
registered under this part and any affiliate thereof that has been
granted direct access by the 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 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 foreign board of trade or the
clearing organization to make false or misleading statements in or in
connection with any application for registration under this part.
Sec. 48.4 Registration eligibility and scope.
(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) A foreign board of trade may apply for registration under this
part in order to permit the members and other participants of the
foreign board of trade that are located in the United States to enter
trades directly into the trading and order matching system of the
foreign board of trade, to the extent that such members or other
participants are:
(1) Entering orders for the member's or other participant's
proprietary accounts;
(2) Registered with the Commission as futures commission merchants
and are submitting customer orders to the trading system for execution;
or
(3) Registered with the Commission as a commodity pool operator or
commodity trading advisor, or are exempt from such registration
pursuant to Sec. 4.13 or Sec. 4.14 of this chapter, and are
submitting orders for execution on behalf of a United States pool that
the member or other participant operates or an account of a United
States customer for which the member or other participant has
discretionary authority, respectively, provided that a futures
commission merchant or a firm exempt from such registration pursuant to
Sec. 30.10 of this chapter 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 with the Secretary of the Commission at
its Washington DC headquarters at [email protected].
(b) A complete application for registration must include:
(1) A completed Form FBOT and Form Supplement S-1, as set forth in
the Appendix to this part, or any successor forms, and all information
and documentation described in such forms; and
(2) Any additional information and documentation necessary, in the
discretion of the Commission, to supplement the application including,
but not limited to, documentation and
[[Page 80700]]
information provided during the course of an on-site visit, as
applicable, to the foreign board of trade, the clearing organization
and the regulatory authority or authorities, to effectively demonstrate
that the foreign board of trade and its clearing organization satisfy
the registration requirements set forth in Sec. 48.7.
(c) An applicant for registration 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 Sec.
145.9 of this chapter.
(d) If, upon review, the Commission finds the application for
registration to be complete, the Commission may approve or deny the
application. In reviewing the application, the Commission will
consider, among other things:
(1) Whether the foreign board of trade is eligible to be registered
as defined in Sec. 48.2(b) and;
(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 or
countries that is comparable to the comprehensive supervision and
regulation to which designated contract markets and derivatives
clearing organizations are respectively subject under the Act,
Commission regulations, and other applicable United States laws and
regulations, if any, and;
(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
their home country or countries that is comparable to the comprehensive
supervision and regulation to which designated contract markets and
derivatives clearing organizations are subject under the Act,
Commission regulations, and other applicable United States laws and
regulations, if any; and
(4) Whether the foreign board of trade and its clearing
organization have adequately demonstrated that they meet the
requirements for registration specified in Sec. 48.7.
(5) The Commission's determination that the foreign board of trade
and its clearing organization are subject to comprehensive supervision
and regulation by the appropriate government authorities in their home
country or countries that is comparable to the comprehensive
supervision and regulation to which designated contract markets and
derivatives clearing organizations are subject will be based upon a
principles-based review conducted in a manner consistent with this part
48 pursuant to which the Commission will look to determine if the
government authorities support and enforce regulatory objectives in the
oversight of the foreign board of trade and the 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.
(e) If the Commission approves the application, the Commission will
issue an Order of Registration. If the Commission does not approve the
application, the Commission will, after appropriate notice and an
opportunity to respond, issue a Notice of Action specifying that the
application was not approved and setting forth the reasons therefor.
The Commission, in its discretion, may impose conditions in the Order
of Registration and may, after appropriate notice and an opportunity to
respond, amend, suspend, or otherwise restrict the terms of an issued
Order of Registration or issue an Order revoking 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 in order to continue to
provide direct access to its electronic trading and order matching
system from the United States.
(b)(1) The application of a foreign board of trade operating
pursuant to existing no-action relief must include a complete Form FBOT
and Supplement S-1, as set forth in the Appendix to this part. If the
foreign board of trade, as part of its application for registration,
wishes to rely on information and documentation previously submitted
electronically in connection with its request for no-action relief in
order to demonstrate that it satisfies the registration requirements
set forth in Sec. 48.7, (limited application) the foreign board of
trade must:
(i) Specifically identify the information or documentation
previously submitted;
(ii) Identify the specific registration requirements set forth in
Sec. 48.7 that are satisfied by such information or documentation; and
(iii) Certify that the information remains accurate and current.
(2) If the foreign board of trade wishes to rely on information and
documentation previously submitted in hard copy in connection with its
application for no-action relief, the foreign board of trade must also
resubmit the identified information or documentation. A foreign board
of trade that has submitted a complete application for no-action relief
that is pending as of February 21, 2012 may also apply for registration
pursuant to these limited application procedures.
(c) A foreign board of trade operating pursuant to existing no-
action relief must submit a limited application for registration,
determined in good faith by the applicant to be complete, within 180
days of February 21, 2012. If, at any time after August 20, 2012 but
before a limited application is approved or disapproved, the Commission
determines that the application is materially incomplete, the
Commission may, after providing the foreign board of trade with notice
and an opportunity to respond to the determination of incompleteness,
withdraw the existing no-action relief if the Commission determines
that the application cannot be made complete in a timely manner. The
foreign board of trade may continue to operate pursuant to the existing
no-action relief, subject to the terms and conditions contained
therein, August 20, 2012, while the Commission is reviewing its
application, and until the Commission approves or disapproves the
application or otherwise withdraws the existing no-action relief. The
no-action relief is automatically withdrawn upon issuance of an Order
of Registration or upon disapproval.
Sec. 48.7 Requirements for registration.
An applicant for registration must demonstrate that it and, where
applicable, its clearing organization meet the following requirements.
The registration requirements applicable to clearing organizations may
alternatively be met by demonstrating that the clearing organization is
registered and in good standing with the Commission as a derivatives
clearing organization. The Commission, in its discretion, may request
additional information and documentation in connection with an
application for registration and an applicant for registration must
provide
[[Page 80701]]
promptly any such additional information or documentation. The
Commission, in its discretion, also may impose additional registration
requirements that the Commission deems necessary after appropriate
notice and opportunity to respond.
(a) Foreign Board of Trade and Clearing Membership:
(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;
(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, both during and
subsequent to service on a board or committee, 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:
(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) Adequate and appropriate 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, option or swap contracts that have been
identified to the Commission in the foreign board of trade's
application for registration or permitted to be made available for
trading by direct access pursuant to the procedures set forth in Sec.
48.10 of this part are made available for trading by direct access.
(c) Terms and Conditions of Contracts to Be Made Available in the
United States.
(1) Contracts must meet the following standards:
(i) Contracts must be futures, option or swap contracts that would
be eligible to be traded on a designated contract market;
(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) Foreign futures and option contracts on non-narrow-based
security indexes must have been certified by the Commission pursuant to
the procedures set forth in Sec. 30.13 of this chapter.
(3) Contracts that have the following characteristics must be
specifically identified as having such characteristics:
(i) Contracts that are linked to a contract listed for trading on a
registered entity as defined in section 1a(40) of the Act, and
(ii) Contracts that have any other relationship with a contract
listed for trading on a registered entity (for example, if both the
foreign board of trade's and the registered entity's contract settle to
the price of the same third party-constructed index).
(d) Settlement and Clearing:
(1) The clearing organization observes the Recommendations for
Central Counterparties 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 Regimes Governing the Foreign Board of Trade and
the Clearing Organization:
(1) The regulatory authorities provide comprehensive supervision
and regulation of the foreign board of trade, the clearing
organization, and the type of contracts to be made available through
direct access that is comparable to the comprehensive supervision and
regulation provided by the Commission to designated contract markets,
derivatives clearing organizations and such contracts. That is, the
regulatory authorities support and enforce regulatory objectives in the
oversight of the foreign board of trade, clearing organization and the
type of contracts that the foreign board of trade wishes to make
available through direct access that are substantially equivalent to
the regulatory objectives supported and enforced by the Commission in
its oversight of designated contract markets, derivatives clearing
organizations, and such products.
(2) The regulatory authorities engage in ongoing regulatory
supervision and oversight of the foreign board of trade and its trading
system, the clearing organization and its clearing system, and 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 the rules of the foreign board of trade and the clearing
organization.
(3) The regulatory authorities 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 have the power to intervene in the
market.
(f) The Rules of the Foreign Board of Trade and the Clearing
Organization and Enforcement Thereof:
(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;
(6) The foreign board of trade has implemented and enforces rules
with respect to access to the trading system
[[Page 80702]]
and the means by which the connection thereto 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
prohibiting fraud and abusive trading practices including, but not
limited to, wash sales and 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:
(1) The regulatory authorities governing the activities of the
foreign board of trade and the clearing organization are signatories to
the International Organization of Securities Commissions Multilateral
Memorandum of Understanding, or otherwise ensure that substitute
information sharing arrangements that are satisfactory to the
Commission are in place;
(2) The regulatory authorities governing the activities 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 commit, in writing,
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 the International
Information Sharing Memorandum of Understanding and Agreement; and
(4) Pursuant to the conditions described in Sec. 48.8(a)(6), the
foreign board of trade and clearing organization agree to provide
directly to the Commission, upon request, any information necessary, in
the discretion of the Commission, to evaluate the continued eligibility
and appropriateness of the foreign board of trade and the clearing
organization, or their respective members or other participants for
registration, to audit for and enforce compliance with the requirements
and 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.
Upon registration under this part, and on an ongoing basis
thereafter, the foreign board of trade and the clearing organization
shall comply with the applicable conditions of registration set forth
in this section and any additional conditions that the Commission deems
necessary and may impose, in its discretion, and after appropriate
notice and opportunity to respond. Such conditions could include, but
are not limited to, additional conditions applicable to the listing of
swap contracts. 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 Sec. 48.7.
(2) Regulatory Regime:
(i) The foreign board of trade will continue to satisfy the
criteria for a regulated market or licensed exchange 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.
(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 and
will 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
other disruptions of the market; and provide that such requirements are
subject to the oversight of appropriate regulatory authorities.
(3) Satisfaction of International Standards:
(i) The foreign board of trade will continue 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, 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 with the Commission as a derivatives clearing
organization and be in compliance with the laws and regulations related
thereto; or
(B) Observe the Recommendations for Central Counterparties.
(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 persons other than the
identified members or other participants.
(ii) All orders that are transmitted to the foreign board of
trade's trading system by a foreign board of trade's 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 registration pursuant to Sec. 4.13 or Sec. 4.14 of this chapter,
provided that a futures commission merchant or a firm exempt from such
registration pursuant to Sec. 30.10 of this chapter 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) Prior to operating pursuant to registration under this part and
on a continuing basis thereafter, a registered 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 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 is authorized to enter orders directly into the trade
matching system of the foreign board of trade, the member or other
participant agrees to and submits to the jurisdiction of the Commission
with respect to activities conducted pursuant to the registration.
[[Page 80703]]
(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, as
defined in Sec. 48.2(e) issued by or on behalf of the Commission, the
United States Department of Justice, or the National Futures
Association.
(iii) The foreign board of trade, clearing organization, and each
current and prospective member or other participant that is granted
direct access to the foreign board of trade's trading system 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, 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.
(iv) The foreign board of trade will maintain all representations
required pursuant to Sec. 48.8(a)(5) as part of its books and records
and 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 Sec.
48.7(g), are in effect between the Commission and the regulatory
authorities that govern the activities of 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 and appropriateness of
the foreign board of trade for registration, the capability and
determination to enforce compliance with the requirements and
conditions of the registration, or 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) On-Site Visits: The foreign board of trade and the clearing
organization will permit and will cooperate with Commission staff with
respect to on-site visits for the purpose of overseeing ongoing
compliance of the foreign board of trade and the clearing organization
with registration requirements and conditions of registration.
(9) Conditions Applicable to Swap Trading:
(i) The foreign board of trade will ensure that all transaction
data relating to each swap transaction, including price and volume, are
reported as soon as technologically practicable after execution of the
swap transaction to a swap data repository that is either registered
with the Commission or has an information sharing arrangement with the
Commission.
(ii) The foreign board of trade will agree to coordinate with the
Commission with respect to arrangements established to address cross
market oversight issues involving swap trading, including surveillance,
emergency actions and the monitoring of trading.
(b) Other Continuing Obligations.
(1) Registered foreign boards of trade and their clearing
organizations will continue to comply with the following 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, in a format as determined by the Commission:
(A) For each contract available to be traded through the foreign
board of trade's trading system;
(1) The total trade volume originating from electronic trading
devices providing direct access;
(2) The total trade volume for such contracts traded through the
trading system worldwide;
(3) The total trade volume for such contracts 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.
(ii) The foreign board of trade will promptly provide to the
Commission written notice of the following:
(A) Any material change to the information provided in the foreign
board of trade's registration application.
(B) Any material change in the rules of the foreign board of trade
or clearing organization or the laws, rules, or regulations in the home
country jurisdictions of the foreign board of trade or clearing
organization relevant to futures, option or swap contracts made
available by direct access.
(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, 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 any 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
[[Page 80704]]
clearing organization or any of their respective members or
participants.
(F) Any disciplinary action by the foreign board of trade or its
clearing organization, or any regulatory authority that governs their
respective activities, taken against any of their respective members or
participants with respect to any contract available to be traded by
direct access that involves any market manipulation, abuse, fraud,
deceit, or conversion or that results in suspension or expulsion.
(iii) The foreign board of trade and the clearing organization, or
their respective regulatory authorities, as applicable, will provide
the following to the Commission annually as of June 30 and not later
than July 31.
(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, recognition
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) If the clearing organization is not a derivatives clearing
organization registered with the Commission, 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 registered with the Commission, a recertification of the
clearing organization's observance of the Recommendations for Central
Counterparties.
(D) A certification that affiliates, as defined in Sec. 48.2(k),
continue to be required to comply with the rules of the foreign board
of trade and clearing organization 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 regarding the foreign
board of trade or clearing organization that have not been previously
disclosed, in writing, to the Commission, or a certification that no
such material changes have occurred.
(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
during 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 annual reports 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 must 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 direct access and makes available for
trading a linked contract, the following additional conditions apply:
(1) Statutory Conditions.
(i) The foreign board of trade will 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) will:
(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,
(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.
(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 the Commission, 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 will provide to the Commission, 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.
(iv) The foreign board of trade will provide to the Commission
copies of all reports of disciplinary action involving the foreign
board of trade's linked contracts upon closure of the action. Such
reports should include the reason the action was undertaken, the
results of the investigation that led to the disciplinary action, and
any sanctions imposed.
(v) In the event that the Commission, pursuant to its emergency
powers authority, directs that the registered entity which lists the
contract to which the foreign board of trade's contract is linked to
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
[[Page 80705]]
arrangements between the Commission and its regulatory authority, will
promptly take similar action with respect to the its linked contract.
Sec. 48.9 Revocation of registration.
(a) Failure to Satisfy Registration Requirements or Conditions:
(1) If the Commission determines that a registered foreign board of
trade or the clearing organization has failed to satisfy any
registration requirements or conditions for registration, the
Commission shall notify the foreign board of trade of such
determination, including the particular requirements or conditions that
are not being satisfied, and shall afford the foreign board of trade or
clearing organization an opportunity to make appropriate changes to
bring it into compliance.
(2) If, not later than 30 days after receiving a notification under
paragraph (a)(1) of this section, the foreign board of trade or
clearing organization fails to make changes that, in the opinion of the
Commission, are necessary to comply with the registration requirements
or conditions of registration, the Commission may revoke the foreign
board of trade's registration, after appropriate notice and an
opportunity to respond, 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. Notwithstanding
Sec. 48.9(a), revocation under these circumstances 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 to respond,
if the Commission determines that a representation made in the foreign
board of trade's application for registration is found to be untrue or
materially misleading or if the foreign board of trade failed to
include information in the application that would have been material to
the Commission's determination as to whether to issue an Order of
Registration.
(2) The Commission may revoke a foreign board of trade's
registration, after appropriate notice and an opportunity to respond,
if there is a material change in the regulatory regime applicable to
the foreign board of trade or clearing organization such that the
regulatory regime no longer satisfies any registration requirement or
condition for registration applicable to the regulatory regime.
(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 notice and an opportunity to respond.
(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, subject to notice and an opportunity to respond.
(c) Upon request by the Commission, a registered foreign board of
trade must 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 and/or conditions for registration.
Sec. 48.10 Additional contracts.
(a) Generally. A registered foreign board of trade that wishes to
make an additional futures, option or swap contract available for
trading by identified members or other participants located in the
United States with direct access to its electronic trading and order
matching system 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 futures, option or
swap contracts and a certification that the additional contracts meet
the requirements of Sec. 48.8(c), if applicable, and that the foreign
board of trade and the clearing organization continue to satisfy the
requirements and conditions of registration. The foreign board of trade
can make available for trading by direct access 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 by direct access
an additional futures or option contract on a non-narrow-based security
index pursuant to the Commission certification procedures set forth in
Sec. 30.13(d) and 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 Sec. 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 United States pursuant to
a Commission certification issued pursuant to Sec. 30.13 of this
chapter, 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 to Part 48--Form FBOT
COMMODITY FUTURES TRADING COMMISSION
FORM FBOT
FOREIGN BOARD OF TRADE APPLICATION FOR REGISTRATION (IN ORDER TO PERMIT
DIRECT ACCESS TO MEMBERS AND OTHER PARTICIPANTS)
APPLICATION INSTRUCTIONS
DEFINITIONS
1. Unless the context requires otherwise, all terms used in this
application have the same meaning as in the Commodity Exchange Act, as
[[Page 80706]]
amended (CEA or Act),\1\ and in the regulations of the Commodity
Futures Trading Commission (Commission or CFTC).\2\
---------------------------------------------------------------------------
\1\ 7 U.S.C. 1 et seq.
\2\ 17 CFR chapter I.
---------------------------------------------------------------------------
2. For the purposes of this Form FBOT, the term ``applicant''
refers to the foreign board of trade applying for registration pursuant
to CEA section 4(b) and part 48 of the Commission's regulations. The
term ``clearing organization'' refers to the clearing organization that
will be clearing trades executed on the trading system of such foreign
board of trade.
GENERAL INSTRUCTIONS
1. A Form FBOT (including exhibits) shall be completed by any
foreign board of trade applying for registration with the Commission
pursuant to CEA section 4(b) and part 48 of the Commission's
regulations.
2. Form FBOT (including exhibits and any supplement thereto)
(collectively, the ``application'' or ``application for registration'')
must be filed electronically with the Secretary of the Commission at
[email protected]. Applicants may prepare their own Form FBOT,
but must follow the format prescribed herein.
3. The name of any individual listed in Form FBOT shall be provided
in full (Last Name, First Name and Middle Name or Initial).
4. Form FBOT must be signed by the Chief Executive Officer (or the
functional equivalent) of the foreign board of trade who must possess
the authority to bind the foreign board of trade.
5. If this Form FBOT is being filed as a new application for
registration, all applicable items on the Form FBOT must be answered in
full. Non-applicable items should be indicated by marking ``none'' or
``N/A.''
6. Submission of a complete Form FBOT (including all information,
documentation and exhibits requested therein, and any required
supplement) is mandatory and must be received by the Commission before
it will begin to process a foreign board of trade's application for
registration. The information provided with a Form FBOT (including
exhibits and any supplement thereto) will be used to determine whether
the Commission should approve or deny registration to an applicant.
Pursuant to its regulations, the Commission may determine that
information and/or documentation in addition to that requested in the
Form FBOT is required from the applicant in order to process the
application for registration or to determine whether registration is
appropriate.
7. Pursuant to Commission regulations, an applicant or its clearing
organization must identify with particularity any information in the
application (including, but not limited to, any information contained
in this Form FBOT) that will be the subject of a request for
confidential treatment and must provide support for any request for
confidential treatment pursuant to the procedures set forth in
Commission regulation 145.9.\3\ Except in cases where confidential
treatment is granted by the Commission pursuant to the Freedom of
Information Act and Commission regulations, information supplied in the
Form FBOT (including exhibits and any supplement thereto) will be
included routinely in the public files of the Commission and will be
available for inspection and comment by any interested person.
---------------------------------------------------------------------------
\3\ 17 CFR 145.9.
---------------------------------------------------------------------------
8. A Form FBOT that is not prepared and executed in compliance with
applicable requirements and instructions may be returned as not
acceptable for filing.\4\ Acceptance of a Form FBOT by the Commission,
however, shall not constitute a finding that the Form FBOT has been
filed as required or that the information submitted is verified to be
true, current, or complete. The Commission may revoke a foreign board
of trade's registration, after appropriate notice and an opportunity to
respond, if the Commission determines that a representation made in
this Form FBOT is found to be untrue or materially misleading or if the
foreign board of trade failed to include information in this Form FBOT
that would have been material to the Commission's determination as to
whether to issue an Order of Registration.
---------------------------------------------------------------------------
\4\ Applicants and their clearing organizations are encouraged
to correspond with the Commission's Division of Market Oversight
regarding any content, procedural, or formatting questions
encountered in connection with the preparation of a Form FBOT, or
any exhibits or supplements thereto, prior to formally submitting
those documents to the Commission. When appropriate, potential
applicants and clearing organizations, as applicable, may provide a
complete draft Form FBOT (including exhibits and any required
supplement) to the Division of Market Oversight for early review to
minimize the risk of having a submission returned or otherwise
denied as not acceptable for filing. Review of draft submissions by
any division of the Commission and any comments provided by a
division of the Commission are for consultation purposes only and do
not bind the Commission. To obtain instructions for submitting
drafts, please contact the Division of Market Oversight.
---------------------------------------------------------------------------
9. In addition to this Form FBOT, the clearing organization
associated with the foreign board of trade must complete and submit
Supplement S-1 to this Form FBOT in accordance with the instructions
thereto. To the extent a single document or description is responsive
to more than one request for the same information in either the Form
FBOT or the Supplement S-1, the document or description need only be
provided once and may be cross-referenced elsewhere.
10. All documents submitted as part of this Form FBOT (or exhibits
thereto) must be written in English or accompanied by a certified
English translation.
UPDATING INFORMATION ON THE FORM FBOT
Pursuant to the Commission's regulations, if any information or
documentation contained in this Form FBOT (including exhibits or any
supplement or amendment thereto) is or becomes inaccurate for any
reason prior to the issuance of an Order of Registration, an amendment
correcting such information must be filed promptly with the Commission.
A registered foreign board of trade also may submit an amendment to
this Form FBOT to correct information that has become inaccurate
subsequent to the receipt of an Order of Registration.
BILLING CODE 6351-01-P
[[Page 80707]]
[GRAPHIC] [TIFF OMITTED] TR23DE11.051
[[Page 80708]]
[GRAPHIC] [TIFF OMITTED] TR23DE11.052
[[Page 80709]]
[GRAPHIC] [TIFF OMITTED] TR23DE11.053
[[Page 80710]]
[GRAPHIC] [TIFF OMITTED] TR23DE11.054
BILLING CODE 6351-01-C
INSTRUCTIONS FOR EXHIBITS TO FORM FBOT
1. The following exhibits must be filed with the Commission by any
foreign board of trade (1) seeking registration for purposes of
granting direct access to its members and other participants or (2)
amending a
[[Page 80711]]
previously submitted application, pursuant to CEA section 4(b) and part
48 of the Commission's regulations. The information and documentation
requested relates to the activities of the foreign board of trade,
unless otherwise stated.
2. The exhibits should be filed in accordance with the General
Instructions to this Form FBOT and labeled as specified herein. If any
exhibit is not applicable, please specify the exhibit letter and number
and indicate by marking ``none'' or ``N/A.'' If any exhibit may be
satisfied by documentation or information submitted in a different
exhibit, the documentation or information need not be submitted more
than once--please use internal cross-references where appropriate.
GENERAL REQUIREMENTS
A foreign board of trade applying for registration must submit
sufficient information and documentation to successfully demonstrate to
Commission staff that the foreign board of trade and its clearing
organization satisfy all of the requirements of Commission regulation
48.7. With respect to its review of the foreign board of trade, the
Commission anticipates that such information and documentation would
necessarily include, but not be limited to, the following:
EXHIBIT A--GENERAL INFORMATION AND DOCUMENTATION
Attach, as Exhibit A-1, a description of the following for the
foreign board of trade: Location, history, size, ownership and
corporate structure, governance and committee structure, current or
anticipated presence of offices or 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.
Attach, as Exhibit A-2, the following:
Articles of association, constitution, or other similar
organizational documents.
Attach, as Exhibit A-3, the following:
(1) Membership and trading participant agreements.
(2) Clearing agreements.
Attach, as Exhibit A-4, the following:
Terms and conditions of contracts to be available through direct
access (as specified in Exhibit E).
Attach, as Exhibit A-5, the following:
The national statutes, laws and regulations governing the
activities of the foreign board of trade and its respective
participants.
Attach, as Exhibit A-6, the following:
The current rules, regulations, guidelines and bylaws of the
foreign board of trade.
Attach, as Exhibit A-7, the following:
Evidence of the authorization, licensure or registration of the
foreign board of trade pursuant to the regulatory regime in its home
country jurisdiction and a representation by its regulator(s) that it
is in good regulatory standing in the capacity in which it is
authorized, licensed or registered.
Attach, as Exhibit A-8, the following document:
A summary of any disciplinary or enforcement actions or proceedings
that have been brought against the foreign board of trade, or any of
the senior officers thereof, in the past five years and the resolution
of those actions or proceedings.
Attach, as Exhibit A-9, the following document:
An undertaking by the chief executive officer(s) (or functional
equivalent[s]) of the foreign board of trade 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.
EXHIBIT B--MEMBERSHIP CRITERIA
Attach, as Exhibit B, the following, separately labeling each
description:
(1) A description of the categories of membership and participation
in the foreign board of trade and the access and trading privileges
provided by the foreign board of trade. The description should include
any restrictions applicable to members and other participants to which
the foreign board of trade intends to grant direct access to its
trading system.
(2) A description of all requirements for each category of
membership and participation on the trading system and the manner in
which members and other participants are required to demonstrate their
compliance with these requirements. The description should include, but
not be limited to, the following:
(i) Professional Qualification. A description of the specific
professional requirements, qualifications, and/or competencies required
of members or other participants and/or their staff and a description
of the process by which the foreign board of trade confirms compliance
with such requirements.
(ii) Authorization, Licensure and Registration. A description of
any regulatory and self-regulatory authorization, licensure or
registration requirements that the foreign board of trade imposes upon,
or enforces against, its members and other participants including, but
not limited to any authorization, licensure or registration
requirements imposed by the regulatory regime/authority in the home
country jurisdiction(s) of the foreign board of trade. Please also
include a description of the process by which the foreign board of
trade confirms compliance with such requirements.
(iii) Financial Integrity. A description of the following:
(A) The financial resource requirements, standards, guides or
thresholds required of members and other participants.
(B) The manner in which the foreign board of trade evaluates the
financial resources/holdings of its members or participants.
(C) The process by which applicants demonstrate compliance with
financial requirements for membership or participation including, as
applicable:
(i) Working capital and collateral requirements, and
(ii) Risk management mechanisms for members allowing customers to
place orders.
(iv) Fit and Proper Standards. A description of how the foreign
board of trade ensures that potential members/other participants meet
fit and proper standards.
EXHIBIT C--BOARD AND/OR COMMITTEE MEMBERSHIP
Attach, as Exhibit C, the following:
(1) A description of the requirements applicable to membership on
the governing board and significant committees of the foreign board of
trade.
(2) A description of the process by which the foreign board of
trade ensures that potential governing board and committee members/
other participants meet these standards.
(3) A description of 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.
(4) A description of 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.
EXHIBIT D--THE AUTOMATED TRADING SYSTEM
Attach, as Exhibit D-1, a description of (or where appropriate,
documentation addressing) the following, separately labeling each
description:
(1) The order matching/trade execution system, including a complete
[[Page 80712]]
description of all permitted ways in which members or other
participants (or their customers) may connect to the trade matching/
execution system and the related requirements (for example,
authorization agreements).
(2) The architecture of the systems, including hardware and
distribution network, as well as any pre- and post-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/trade
execution system performed by the foreign board of trade, the home
country regulator, or a third party.
(7) Trading hours.
(8) Types and duration of orders accepted.
(9) Information that must be included on orders.
(10) Trade confirmation and error trade procedures.
(11) Anonymity of participants.
(12) Trading system connectivity with clearing system.
(13) Response time.
(14) Ability to determine depth of market.
(15) Market continuity provisions.
(16) Reporting and recordkeeping requirements.
Attach, as Exhibit D-2, a description of the manner in which the
foreign board of trade assures the following with respect to the
trading system, separately labeling each description:
(1) Algorithm. The trade matching algorithm matches trades fairly
and timely.
(2) IOSCO Principles. The trading system complies 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). Provide a copy of any independent certification received
or self-certification performed and identify any system deficiencies
with respect to the IOSCO Principles.
(3) Audit Trail.
(i) The audit trail timely 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. Adequate and appropriate 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, option or swap contracts 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 Sec. 48.10 are made available for trading by direct access.
(10) Predominance of the Centralized Market. Mechanisms are
available that ensure a competitive, open, and efficient market and
mechanism for executing transactions.
EXHIBIT E--THE TERMS AND CONDITIONS OF CONTRACTS PROPOSED TO BE MADE
AVAILABLE IN THE UNITED STATES
Attach, as Exhibit E-1, a description of the terms and conditions
of futures, option or swap contracts intended to be made available for
direct access. With respect to each contract, indicate whether the
contract is regulated or otherwise treated as a futures, option or swap
contract in the regulatory regime(s) of the foreign board of trade's
home country.
As Exhibit E-2, demonstrate that the contracts are not prohibited
from being traded by United States persons, i.e., the contracts are not
prohibited security futures or single stock contracts or narrow-based
index contracts. For non-narrow based stock index futures contracts,
demonstrate that the contracts have received Commission certification
pursuant to the procedures set forth in Sec. 30.13 and Appendix D to
part 30 of this chapter.
As Exhibit E-3, demonstrate that the contracts are required to be
cleared.
As Exhibit E-4, identify any contracts that are linked to a
contract listed for trading on a United States-registered entity, as
defined in section 1a(40) of the Act. A linked contract is a contract
that settles against any price (including the daily or final settlement
price) of one or more contracts listed for trading on such registered
entity.
As Exhibit E-5, identify any contracts that have any other
relationship with a contract listed for trading on a registered entity,
i.e., both the foreign board of trade's and the registered entity's
contract settle to the price of the same third party-constructed index.
As Exhibit E-6, demonstrate that the contracts are not readily
susceptible to manipulation. In addition, for each contract to be
listed, describe each investigation, action, proceeding or case
involving manipulation and involving such contract 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 other
government or prosecutorial agency. For each such action, proceeding or
case, describe the alleged manipulative activity and the current status
or resolution thereof.
EXHIBIT F--THE REGULATORY REGIME GOVERNING THE FOREIGN BOARD OF TRADE
IN ITS HOME COUNTRY \5\ OR COUNTRIES
With respect to each relevant regulatory regime or authority
governing the foreign board of trade, attach, as Exhibit F, the
following (including, where appropriate, an indication as to whether
the applicable regulatory regime is dependent on the home country's
classification of the product being traded on the foreign board of
trade as a future, option, swap, or otherwise, and a description of any
difference between the applicable regulatory regime for each product
classification type):
---------------------------------------------------------------------------
\5\ Where multiple foreign boards of trade subject to the same
regulatory regime/authority and are similarly regulated are applying
for registration at the same time, a single Exhibit E-1 may be
submitted as part of the application for all such foreign boards of
trade either by one of the applicant foreign boards of trade or by
the regulatory regime/authority with responsibility to oversee each
of the multiple foreign boards of trade applying for registration.
Where an FBOT applying for registration is located in the same
jurisdiction and subject to the same regulatory regime as a
registered FBOT, the FBOT applying for registration may include by
reference, as part of its application, information about the
regulatory regime that is posted on the Commission's Web site. The
FBOT applying for registration must certify that the information
thus included in the application is directly applicable to it and
remains current and valid.
---------------------------------------------------------------------------
(1) A description of the regulatory regime/authority's structure,
resources, staff, and scope of authority; the regulatory regime/
authority's authorizing statutes, including the source of its authority
to supervise the foreign board of trade; 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.
(2) A description of and, where applicable, copies of the laws,
rules, regulations and policies applicable to: \6\
---------------------------------------------------------------------------
\6\ To the extent that any such laws, rules, regulations or
policies were provided as part of Exhibit A-5, they need not be
duplicated. They may be cross-referenced.
---------------------------------------------------------------------------
[[Page 80713]]
(i) The authorization, licensure or registration of the foreign
board of trade.
(ii) The regulatory regime/authority's program for the ongoing
supervision and oversight of the foreign board of trade and the
enforcement of its trading rules.
(iii) The financial resource requirements applicable to the
authorization, licensure or registration of the foreign board of trade
and the continued operations thereof.
(iv) The extent to which the IOSCO Principles are used or applied
by the regulatory regime/authority in its supervision and oversight of
the foreign board of trade or are incorporated into its rules and
regulations and the extent to which the regulatory regime/authority
reviews the applicable trading systems for compliance therewith.
(v) The extent to which the regulatory regime/authority reviews
and/or approves the trading rules of the foreign board of trade prior
to their implementation.
(vi) The extent to which the regulatory regime/authority reviews
and/or approves futures, option or swap contracts prior to their being
listed for trading.
(vii) The regulatory regime/authority's approach to the detection
and deterrence of abusive trading practices, market manipulation, and
other unfair trading practices or disruptions of the market.
(3) A description of the laws, rules, regulations and policies that
govern the authorization and ongoing supervision and oversight of
market intermediaries who may deal with members and other participants
located in the United States participants, including:
(i) Recordkeeping requirements.
(ii) The protection of customer funds.
(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) A description of the regulatory regime/authority's inspection,
investigation and surveillance powers; and the program pursuant to
which the regulatory regime/authority uses those powers to inspect,
investigate, and enforce rules applicable to the foreign board of
trade.
(5) For both the foreign board of trade and the clearing
organization (unless addressed in Supplement S-1), a report confirming
that the foreign board of trade and clearing organization are in
regulatory good standing, which report should be prepared subsequent to
consulting with the regulatory regime/authority governing the
activities of the foreign board of trade and any associated clearing
organization. The report should include:
(i) Confirmation of regulatory status (including proper
authorization, licensure and registration) of the foreign board of
trade and clearing organization.
(ii) Any recent oversight reports generated by the regulatory
regime/authority that are, in the judgment of the regulatory regime/
authority, relevant to the foreign board of trade's status as a
registered foreign board of trade.
(iii) Disclosure of any significant regulatory concerns, inquiries
or investigations by the regulatory regime/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 or the adequacy of the risk
management controls of the trading or of the clearing system.
(iv) A description of any investigations (formal or informal) or
disciplinary actions initiated by the regulatory regime/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.
(6) For both the foreign board of trade and the clearing
organization (unless addressed in Supplement S-1), a confirmation that
the regulatory regime/authority governing the activities of the foreign
board of trade and the clearing organization agree to cooperate with a
Commission staff visit subsequent to submission of the application on
an ``as needed basis,'' the objectives of which will be to, among other
things, familiarize Commission staff with supervisory staff of the
regulatory regime/authority; discuss the laws, rules and regulations
that formed the basis of the application and any changes thereto;
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 or unusual trading that may be of concern to
Commission surveillance staff).
EXHIBIT G--THE RULES OF THE FOREIGN BOARD OF TRADE AND ENFORCEMENT
THEREOF
Attach, as Exhibit G-1, the following:
A description of the foreign board of trade's regulatory or
compliance department, including its size, experience level,
competencies, duties and responsibilities.
Attach, as Exhibit G-2, the following:
A description of the foreign board of trade's trade practice rules,
including but not limited to rules that address the following--
(1) Capacity of the foreign board of trade to detect, investigate,
and sanction persons who violate foreign board of trade rules.
(2) Prohibition of fraud and abuse, as well as abusive trading
practices including, but not limited to, wash sales and trading ahead,
and other market abuses.
(3) A trade surveillance system appropriate to the foreign board of
trade and capable of detecting and investigating potential trade
practice violations.
(4) An audit trail that captures and retains sufficient order and
trade-related data to allow the compliance staff to detect trading and
market abuses and to reconstruct all transactions within a reasonable
period of time.
(5) Appropriate resources to conduct real-time supervision of
trading.
(6) Sufficient compliance staff and resources, including those
outsourced or delegated to third parties, to fulfill regulatory
responsibilities.
(7) Rules that authorize compliance staff to obtain, from market
participants, information and cooperation necessary to conduct
effective rule enforcement and investigations.
(8) Staff investigations and investigation reports demonstrating
that the compliance staff investigates suspected rule violations and
prepares reports of their finding and recommendations.
(9) Rules determining access requirements with respect to the
persons that may trade on the foreign board of trade, and the means by
which they connect to it.
(10) The requirement that market participants submit to the foreign
board of trade's jurisdiction as a condition of access to the market.
Attach, as Exhibit G-3, the following:
A description of the foreign board of trade's disciplinary rules,
including but not limited to rules that address the following--
(1) Disciplinary authority and procedures that empower staff to
recommend and prosecute disciplinary actions for suspected rule
violations and that provide the authority to fine, suspend, or expel
any market participant pursuant to fair and clear standards.
(2) The issuance of warning letters and/or summary fines for
specified rule violations.
(3) The review of investigation reports by a disciplinary panel or
other authority for issuance of charges or
[[Page 80714]]
instructions to investigate further, or findings that an insufficient
basis exists to issue charges.
(4) Disciplinary committees of the foreign board of trade that take
disciplinary action via formal disciplinary processes.
(5) Whether and how the foreign board of trade articulates its
rationale for disciplinary decisions.
(6) The sanctions for particular violations and a discussion of the
adequacy of sanctions with respect to the violations committed and
their effectiveness as a deterrent to future violations.
Attach, as Exhibit G-4, the following:
A description of the market surveillance program (and any related
rules), addressing the following--
The dedicated market surveillance department or the delegation or
outsourcing of that function, including 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 position
limit, position management, large trader or other position reporting
system.
EXHIBIT H--INFORMATION SHARING AGREEMENTS AMONG THE COMMISSION, THE
FOREIGN BOARD OF TRADE, THE CLEARING ORGANIZATION, AND RELEVANT
REGULATORY AUTHORITIES
Attach, as Exhibit H, the following:
(1) A description of 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 will be executed pursuant to the
foreign board of trade's registration with the Commission and the
clearing and settlement of those transactions. This description should
address or identify whether and how the foreign board of trade,
clearing organization, and the regulatory authorities governing the
activities of the foreign board of trade and clearing organization
agree to provide 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 CFTC 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.
(v) To enable Commission staff to effectively accomplish its
surveillance responsibilities with respect to a registered entity where
Commission staff, in its discretion, determines that a contract traded
on a registered foreign board of trade may affect such ability.
(2) A statement as to whether and how the foreign board of trade
has executed the International Information Sharing Memorandum of
Understanding and Agreement.
(3) A statement as to whether the regulatory authorities governing
the activities of the foreign board of trade and clearing organization
are signatories to the International Organization of Securities
Commissions Multilateral Memorandum of Understanding. If not, describe
any substitute information-sharing arrangements that are in place.
(4) A statement as to whether the regulatory authorities governing
the activities of the foreign board of trade and clearing organization
are signatories to the Declaration on Cooperation and Supervision of
International Futures Exchanges and Clearing Organizations. If not, a
statement as to whether and how they have committed to share the types
of information contemplated by the International Information Sharing
Memorandum of Understanding and Agreement with the Commission, whether
pursuant to an existing memorandum of understanding or some other
arrangement.
EXHIBIT I--ADDITIONAL INFORMATION AND DOCUMENTATION
Attach, as Exhibit I, any additional information or documentation
necessary to demonstrate that the requirements for registration
applicable to the foreign board of trade set forth in Commission
regulation 48.7 are satisfied.
Continuation of Appendix to Part 48--Supplement S-1 to Form FBOT
COMMODITY FUTURES TRADING COMMISSION
SUPPLEMENT S-1 to FORM FBOT
CLEARING ORGANIZATION SUPPLEMENT TO FOREIGN BOARD OF TRADE APPLICATION
FOR REGISTRATION
SUPPLEMENT INSTRUCTIONS
DEFINITIONS
1. Unless the context requires otherwise, all terms used in this
supplement have the same meaning as in the Commodity Exchange Act, as
amended (CEA or Act),\7\ and in the regulations of the Commodity
Futures Trading Commission (Commission or CFTC).\8\
---------------------------------------------------------------------------
\7\ 7 U.S.C. 1 et seq.
\8\ 17 CFR chapter I.
---------------------------------------------------------------------------
2. For the purposes of this Supplement S-1, the term ``applicant''
refers to the foreign board of trade applying for registration pursuant
to CEA section 4(b) and part 48 of the Commission's regulations. The
term ``clearing organization'' refers to the clearing organization that
will be clearing trades executed on the trading system of such foreign
board of trade.
GENERAL INSTRUCTIONS
1. A Supplement S-1 (including exhibits) shall be completed by each
clearing organization that will be clearing trades executed on the
trading system of a foreign board of trade applying for registration
with the Commission pursuant to CEA section 4(b) and part 48 of the
Commission's regulations. Each clearing organization shall submit a
separate Supplement S-1.
2. In the event that the clearing functions of the foreign board of
trade applying for registration will be performed by the foreign board
of trade itself, the foreign board of trade shall complete this
Supplement S-1, but need not duplicate information provided on its Form
FBOT. Specific reference to or incorporation of information or
documentation (including exhibits) on the associated Form FBOT, where
appropriate, is acceptable. To the extent a singular document or
description is responsive to more than one request for information in
this Supplement S-1, the document or description need only be provided
once and may be cross-referenced elsewhere.
3. Supplement S-1, including exhibits, should accompany the foreign
board of trade's Form FBOT and must
[[Page 80715]]
be filed electronically with the Secretary of the Commission at
[email protected]. Clearing organizations may prepare their own
Supplement S-1, but must follow the format prescribed herein.
4. The name of any individual listed in Supplement S-1 shall be
provided in full (Last Name, First Name and Middle Name or Initial).
5. Supplement S-1 must be signed by the Chief Executive Officer (or
the functional equivalent) of the clearing organization who must
possess the authority to bind the clearing organization.
6. If this Supplement S-1 is being filed in connection with a new
application for registration, all applicable items must be answered in
full. If any item is not applicable, indicate by marking ``none'' or
``N/A.''
7. Submission of a complete Form FBOT and Supplement S-1 (including
all information, documentation and exhibits requested therein) is
mandatory and must be received by the Commission before it will begin
to process a foreign board of trade's application for registration. The
information provided with a Form FBOT and Supplement S-1 will be used
to determine whether the Commission should approve or deny registration
to an applicant. Pursuant to its regulations, the Commission may
determine that information and/or documentation in addition to that
requested in the Form FBOT and Supplement S-1 is required from the
applicant and/or its clearing organization(s) in order to process the
application for registration or to determine whether registration is
appropriate.
8. Pursuant to Commission regulations, an applicant or its clearing
organization must identify with particularity any information in the
application (including, but not limited to, any information contained
in this Supplement S-1), that will be the subject of a request for
confidential treatment and must provide support for any request for
confidential treatment pursuant to the procedures set forth in
Commission regulation 145.9.\9\ Except in cases where confidential
treatment is granted by the Commission, pursuant to the Freedom of
Information Act and Commission regulations, information supplied in the
Supplement S-1 will be included routinely in the public files of the
Commission and will be available for inspection by any interested
person.
---------------------------------------------------------------------------
\9\ 17 CFR 145.9.
---------------------------------------------------------------------------
9. A Supplement S-1 that is not prepared and executed in compliance
with applicable requirements and instructions may be returned as not
acceptable for filing.\10\ Acceptance of either a Form FBOT or
Supplement S-1 by the Commission, however, shall not constitute a
finding that the either have been filed as required or that the
information submitted is verified to be true, current, or complete. The
Commission may revoke a foreign board of trade's registration, after
appropriate notice and an opportunity to respond, if the Commission
determines that a representation made in this Supplement S-1 is found
to be untrue or materially misleading or if the foreign board of trade
and/or clearing organization failed to include information in this
Supplement S-1 that would have been material to the Commission's
determination as to whether to issue an Order of Registration.
---------------------------------------------------------------------------
\10\ Applicants and their clearing organizations are encouraged
to correspond with the Commission's Division of Market Oversight
regarding any content, procedural, or formatting questions
encountered in connection with the preparation of a Form FBOT,
Supplement S-1, or exhibits thereto prior to formally submitting
those documents to the Commission. When appropriate, potential
applicants and clearing organizations, as applicable, may provide a
complete draft Form FBOT and Supplement S-1 to the Division of
Market Oversight for early review to minimize the risk of having a
submission returned or otherwise denied as not acceptable for
filing. Review of draft submissions by any division of the
Commission and any comments provided by a division of the Commission
are for consultation purposes only and do not bind the Commission.
To obtain instructions for submitting drafts, please contact the
Division of Market Oversight.
---------------------------------------------------------------------------
10. All documents submitted as part of this Supplement S-1 (or
exhibits thereto) must be written in English or accompanied by a
certified English translation.
UPDATING INFORMATION
Pursuant to the Commission's regulations, if any information or
documentation contained in this Supplement S-1 (including exhibits) is
or becomes inaccurate for any reason prior to the issuance of an Order
of Registration, an amendment correcting such information must be filed
promptly with the Commission. A clearing organization also may submit
an amendment to this Supplement S-1 to correct information that has
become inaccurate subsequent to the issuance of an Order of
Registration.
BILLING CODE 6351-01-P
[[Page 80716]]
[GRAPHIC] [TIFF OMITTED] TR23DE11.055
[[Page 80717]]
[GRAPHIC] [TIFF OMITTED] TR23DE11.056
[[Page 80718]]
[GRAPHIC] [TIFF OMITTED] TR23DE11.057
[[Page 80719]]
[GRAPHIC] [TIFF OMITTED] TR23DE11.058
[[Page 80720]]
[GRAPHIC] [TIFF OMITTED] TR23DE11.059
BILLING CODE 6351-01-C
INSTRUCTIONS FOR EXHIBITS TO SUPPLEMENT S-1
1. The following exhibits must be filed with the Commission by the
clearing organization(s) that will be clearing trades executed on the
trading system of a foreign board of trade applying for registration
with the Commission pursuant to CEA section 4(b) and part 48 of
Commission's regulations. The information and documentation requested
relates to the activities of the clearing organization.
2. The exhibits should be filed in accordance with the General
Instructions to this Supplement S-1 and labeled as specified herein. If
any exhibit is not applicable, please specify the exhibit letter and
number and indicate by marking ``none'' or ``N/A.'' If any exhibit may
be satisfied by documentation or information submitted in a different
exhibit, the documentation or information need not be submitted more
than once--please use internal cross-references where appropriate.
[[Page 80721]]
GENERAL REQUIREMENTS
A foreign board of trade applying for registration must submit
sufficient information and documentation to successfully demonstrate to
Commission staff that the foreign board of trade and its clearing
organization satisfy all of the requirements of Commission regulation
48.7. With respect to its review of the foreign board of trade's
clearing organization, the Commission anticipates that such information
and documentation would necessarily include, but not be limited to, the
following:
EXHIBIT A--GENERAL INFORMATION AND DOCUMENTATION
Attach, as Exhibit A-1, a description of the following for the
clearing organization:
Location, history, size, ownership and corporate structure,
governance and committee structure, and current or anticipated presence
of staff in the United States.
Attach, as Exhibit A-2, the following:
Articles of association, constitution, or other similar
organizational documents.
Attach, as Exhibit A-3, the following:
(1) Membership and participation agreements.
(2) Clearing agreements.
Attach, as Exhibit A-4, the following:
The national statutes, laws and regulations governing the
activities of the clearing organization and its members.
Attach, as Exhibit A-5, the following:
The current rules, regulations, guidelines and bylaws of the
clearing organization.
Attach, as Exhibit A-6, the following:
Evidence of the authorization, licensure or registration of the
clearing organization pursuant to the regulatory regime in its home
country jurisdiction(s) and a representation by its regulator(s) that
it is in good regulatory standing in the capacity in which it is
authorized, licensed or registered.
Attach, as Exhibit A-7, the following document:
A summary of any disciplinary or enforcement actions or proceedings
that have been brought against the clearing organization, or any of the
senior officers thereof, in the past five years and the resolution of
those actions or proceedings.
Attach, as Exhibit A-8, the following document:
An undertaking by the chief executive officer(s) (or functional
equivalent[s]) of the clearing organization to notify Commission staff
promptly if any of the representations made in connection with this
supplement cease to be true or correct, or become incomplete or
misleading.
EXHIBIT B--MEMBERSHIP CRITERIA
Attach, as Exhibit B, the following, separately labeling each
description:
(1) A description of the categories of membership and participation
in the clearing organization and the access and clearing privileges
provided to each by the clearing organization.
(2) A description of all requirements for each category of
membership and participation and the manner in which members and other
participants are required to demonstrate their compliance with these
requirements. The description should include, but not be limited to,
the following:
(i) Professional Qualification. A description of the specific
professional requirements, qualifications, and/or competencies required
of members or other participants and/or their staff and a description
of the process by which the clearing organization confirms compliance
with such requirements.
(ii) Authorization, Licensure and Registration. A description of
any regulatory or self-regulatory authorization, licensure or
registration requirements that the clearing organization imposes upon,
or enforces against, its members and other participants including, but
not limited to any authorization, licensure or registration
requirements imposed by the regulatory regime/authority in the home
country jurisdiction(s) of the clearing organization, and a description
of the process by which the clearing organization confirms compliance
with such requirements.
(iii) Financial Integrity. A description of the following:
(A) The financial resource requirements, standards, guides or
thresholds required of members and other participants.
(B) The manner in which the clearing organization evaluates the
financial resources/holdings of its members or other participants.
(C) The process by which applicants for clearing membership or
participation demonstrate compliance with financial requirements
including:
(1) Working capital and collateral requirements, and
(2) Risk management mechanisms.
(iv) Fit and Proper Standards. A description of any other ways in
which the clearing organization ensures that potential members/other
participants meet fit and proper standards.
EXHIBIT C--BOARD AND/OR COMMITTEE MEMBERSHIP
Attach, as Exhibit C, the following:
(1) A description of the requirements applicable to membership on
the governing board and significant committees of the clearing
organization.
(2) A description of how the clearing organization ensures that
potential governing board and committee members meet these standards.
(3) A description of the clearing organization's provisions to
minimize and resolve conflicts of interest with respect to membership
on the governing board and significant committees of the clearing
organization.
(4) A description of the clearing organization's rules with respect
to the disclosure of material non-public information obtained as a
result of a member's performance on the governing board or on a
significant committee.
EXHIBIT D--SETTLEMENT AND CLEARING
Attach, as Exhibit D-1, the following:
A description of the clearing and settlement systems, including,
but not limited to, the manner in which such systems interface with the
foreign board of trade's trading system and its members and other
participants.
Attach, as Exhibit D-2, the following:
A certification, signed by the chief executive offer (or functional
equivalent) of the clearing organization, that the clearing system
observes (1) 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 (2) successor 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 (RCCPs).
Attach, as Exhibit D-3, the following:
A detailed description of the manner in which the clearing
organization observes each of the RCCPs or successor standards and
documentation supporting the representations made, including any
relevant rules or written policies or procedures of the clearing
organization. Each RCCP should be addressed separately within the
exhibit.
[[Page 80722]]
EXHIBIT E--THE REGULATORY REGIME GOVERNING THE CLEARING ORGANIZATION IN
ITS HOME COUNTRY OR COUNTRIES
With respect to each relevant regulatory regime or authority
governing the clearing organization, attach, as Exhibit E, the
following:
(1) A description of the regulatory regime/authority's structure,
resources, staff and scope of authority.
(2) The regulatory regime/authority's authorizing statutes,
including the source of its authority to supervise the clearing
organization.
(3) A description of and, where applicable, copies of the laws,
rules, regulations and policies applicable to: \11\
---------------------------------------------------------------------------
\11\ To the extent that any such laws, rules, regulations or
policies were provided as part of Exhibit A-4, they need not be
duplicated. They may be cross-referenced.
---------------------------------------------------------------------------
(i) The authorization, licensure or registration of the clearing
organization.
(ii) The financial resource requirements applicable to the
authorization, licensure or registration of the clearing organization
and the continued operations thereof.
(iii) The regulatory regime/authority's program for the ongoing
supervision and oversight of the clearing organization and the
enforcement of its clearing rules.
(iv) The extent to which the current RCCPs are used or applied by
the regulatory regime/authority in its supervision and oversight of the
clearing organization or are incorporated into its rules and
regulations and the extent to which the regulatory regime/authority
reviews the clearing systems for compliance therewith.
(v) The extent to which the regulatory regime/authority reviews
and/or approves the rules of the clearing organization prior to their
implementation.
(vi) The regulatory regime/authority's inspection, investigation
and surveillance powers; and the program pursuant to which the
regulatory regime/authority uses those powers to inspect, investigate,
sanction, and enforce rules applicable to the clearing organization.
(vii) The financial protection afforded customer funds.
EXHIBIT F--THE RULES OF THE CLEARING ORGANIZATION AND ENFORCEMENT
THEREOF
Attach, as Exhibit F-1, the following:
A description of the clearing organization's regulatory or
compliance department, including its size, experience level,
competencies, duties and responsibilities of staff.
Attach, as Exhibit F-2, the following:
A description of the clearing organization's rules and how they are
enforced, with reference to any rules provided as part of Exhibit A-5
that require the clearing organization to comply with one or more of
the RCCPs.
Attach, as Exhibit F-3, the following, to the extent not included
in Exhibit F-2:
A description of the clearing organization's disciplinary rules,
including but not limited to rules that address the following--
(1) Disciplinary authority and procedures that empower staff to
recommend and prosecute disciplinary actions for suspected rule
violations and that provide the authority to fine, suspend, or expel
any clearing participant pursuant to fair and clear standards.
(2) The issuance of warning letters and/or summary fines for
specified rule violations.
(3) The review of investigation reports by a disciplinary panel or
other authority for issuance of charges or instructions to investigate
further, or findings that an insufficient basis exists to issue
charges.
(4) Disciplinary committees of the clearing organization that take
disciplinary action via formal disciplinary processes.
(5) Whether and how the clearing organization articulates its
rationale for disciplinary decisions.
(6) The sanctions for particular violations and a discussion of the
adequacy of sanctions with respect to the violations committed and
their effectiveness as deterrents to future violations.
Attach, as Exhibit F-4, the following, to the extent not provided
in Exhibit F-2:
A demonstration that the clearing organization is authorized by
rule or contractual agreement to obtain, from members and other
participants, any information and cooperation necessary to conduct
investigations, to effectively enforce its rules, and to ensure
compliance with the conditions of registration.
EXHIBIT G--INFORMATION SHARING AGREEMENTS AMONG THE COMMISSION, THE
FOREIGN BOARD OF TRADE, THE CLEARING ORGANIZATION, AND RELEVANT
REGULATORY AUTHORITIES
Attach, as Exhibit G, the following:
(1) A description of 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 will be executed pursuant to the
foreign board of trade's registration with the Commission and the
clearing and settlement of those transactions. This description should
address or identify whether and how the foreign board of trade,
clearing organization, and the regulatory authorities governing the
activities of the foreign board of trade and clearing organization
agree to provide 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 CFTC 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.
(v) To enable Commission staff to effectively accomplish its
surveillance responsibilities with respect to a registered entity where
Commission staff, in its discretion, determines that a contract traded
on a registered foreign board of trade may affect such ability.
(2) A statement as to whether the regulatory authorities governing
the activities of the foreign board of trade and clearing organization
are signatories to the International Organization of Securities
Commissions Multilateral Memorandum of Understanding. If not, describe
any substitute information-sharing arrangements that are in place.
(3) A statement as to whether the regulatory authorities governing
the activities of the foreign board of trade and clearing organization
are signatories to the Declaration on Cooperation and Supervision of
International Futures Exchanges and Clearing Organizations. If not, a
statement as to whether and how they have committed to share the types
of information contemplated by the International Information Sharing
Memorandum of Understanding and Agreement with the Commission, whether
pursuant to an existing memorandum of understanding or some other
arrangement.
EXHIBIT H--ADDITIONAL INFORMATION AND DOCUMENTATION
Attach, as EXHIBIT H, any additional information or documentation
necessary to demonstrate that the requirements for registration
applicable to the clearing
[[Page 80723]]
organization or clearing system set forth in Commission regulation 48.7
are satisfied.
Issued in Washington, DC, December 5, 2011, by the Commission.
David A. Stawick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations
Appendices to Final Rule--Registration of Foreign Boards of
Trade--Commission Voting Summary and Statements of Commissioners
Appendix 1--Commission Voting Summary
In this matter, Chairman Gensler and Commissioners Sommers,
Chilton, O'Malia and Wetjen voted in the affirmative; no
Commissioner noted in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the final rule to implement a registration system for
Foreign Boards of Trade (FBOTs) seeking to make futures and swaps
contracts directly available to U.S. market participants. This
registration system replaces the Commodity Futures Trading
Commission's current practice of staff issuing no-action letters to
FBOTs to permit them to provide such direct access for futures
contracts. Importantly, the registration system will bring
consistency, standardization and transparency--both for applicants
and the public--to the process. In order to directly access U.S.
market participants, the FBOTs and their clearing organizations must
be subject to comparable and comprehensive supervision and
regulation in their home countries and meet certain standards in the
rule.
[FR Doc. 2011-31637 Filed 12-22-11; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: December 23, 2011