[Federal Register: May 8, 2002 (Volume 67, Number 89)]
[Rules and Regulations]
[Page 30785-30788]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08my02-20]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 30
Foreign Futures and Options Transactions
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is granting an exemption to designated members of Eurex
Deutschland (``Eurex'') from the application of certain of the
Commission's foreign futures and option rules based on substituted
compliance with certain comparable regulatory and self-regulatory
requirements of a foreign regulatory authority consistent with
conditions specified by the Commission, as set forth herein. This Order
is issued pursuant to Commission Rule 30.10, which permits specified
persons to file a petition with the Commission for exemption from the
application of certain of the rules set forth in Part 30 and authorizes
the Commission to grant such an exemption if such action would not be
otherwise contrary to the public interest or to the purposes of the
provision from which exemption is sought. By this Order, the Commission
also confirms that members of Eurex that have received confirmation of
the relief set forth herein may engage in limited marketing conduct
from a non-permanent U.S. location with respect to the offer and sale
to certain qualified customers located in the U.S. of foreign futures
and foreign options, subject to the terms and conditions of prior
Commission orders.
EFFECTIVE DATE: May 8, 2002.
FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Esq., Associate
Chief Counsel, Susan A. Elliott, Esq., Staff Attorney, or Andrew V.
Chapin, Esq., Staff Attorney, Division of Trading and Markets,
Commodity Futures Trading Commission, 1155 21st Street, NW.,
Washington, DC 20581. Telephone: (202) 418-5430.
[[Page 30786]]
SUPPLEMENTARY INFORMATION: The Commission has issued the following
Order:
Order Under CFTC Rule 30.10 Exempting Firms Designated by Eurex
Deutschland (``Eurex'') From the Application of Certain of the Foreign
Futures and Option Rules the Later of the Date of Publication of the
Order Herein in the Federal Register or After Filing of Consents by
Such Firms and the Regulatory or Self-Regulatory Organization, as
Appropriate, to the Terms and Conditions of the Order Herein; and
Confirming that Designated Members of Eurex May Engage in Limited
Marketing Conduct With Respect to Qualified Customers Located in the
U.S., as Set Forth in Prior Commission Orders
Commission rules governing the offer and sale of commodity futures
and option contracts traded on or subject to the rules of a foreign
board of trade to customers located in the U.S. are contained in Part
30 of the Commission's rules.\1\ These rules include requirements for
intermediaries with respect to registration, disclosure, capital
adequacy, protection of customer funds, recordkeeping and reporting,
and sales practice and compliance procedures, that are generally
comparable to those applicable to transactions on U.S. markets.
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\1\ Commission rules referred to herein are found at 17 CFR Ch.
I (2001).
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In formulating a regulatory program to govern the offer and sale of
foreign futures and option products to customers located in the U.S.,
the Commission, among other things, considered the desirability of
ameliorating the potential extraterritorial impact of such a program
and avoiding duplicative regulation of firms engaged in international
business. Based upon these considerations, the Commission determined to
permit persons located outside the U.S. and subject to a comparable
regulatory structure in the jurisdiction in which they were located to
seek an exemption from certain of the requirements under Part 30 of the
Commission's rules based upon substituted compliance with the
comparable regulatory requirements of the foreign jurisdiction.
Appendix A to Part 30, ``Interpretative Statement With Respect to
the Commission's Exemptive Authority Under 30.10 of Its Rules''
(``Appendix A''), generally sets forth the elements the Commission will
evaluate in determining whether a particular regulatory program may be
found to be comparable for purposes of exemptive relief pursuant to
Rule 30.10.\2\ These elements include: (1) Registration, authorization
or other form of licensing, fitness review or qualification of persons
through whom customer orders are solicited and accepted; (2) minimum
financial requirements for those persons who accept customer funds; (3)
protection of customer funds from misapplication; (4) recordkeeping and
reporting requirements; (5) sales practice standards; (6) procedures to
audit for compliance with, and to take action against those persons who
violate, the requirements of the program; and (7) information sharing
arrangements between the Commission and the appropriate governmental
and/or self-regulatory organization to ensure Commission access on an
``as needed'' basis to information essential to maintaining standards
of customer and market protection within the U.S.
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\2\ 52 FR 28980, 29001 (August 5, 1987).
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Moreover, the Commission specifically stated in adopting Rule 30.10
that no exemption of a general nature would be granted unless the
persons to whom the exemption is to be applied: (1) Submit to
jurisdiction in the U.S. by designating an agent for service of process
in the U.S. with respect to transactions subject to Part 30 and filing
a copy of the agency agreement with the National Futures Association
(``NFA''); (2) agree to provide access to their books and records in
the U.S. to Commission and Department of Justice representatives; and
(3) notify NFA of the commencement of business in the U.S.\3\
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\3\ 52 FR 28980, 28981 and 29002.
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By letter dated April 23, 2001 and subsequent correspondence
through November 21, 2001, Eurex petitioned the Commission on behalf of
certain firms located and doing business in Germany for an exemption
from the application of the Commission's Part 30 rules to those firms.
In support of its petition, Eurex states that granting such an
exemption with respect to firms that it has authorized to conduct
foreign futures and options transactions on behalf of customers located
in the U.S. would not be contrary to the public interest or to the
purposes of the provisions from which the exemption is sought because
such firms are subject to a regulatory framework comparable to that
imposed by the Commodity Exchange Act (``Act'') and the rules
thereunder.
Based upon a review of the petition, supporting materials filed by
Eurex and the recommendation of the Commission's staff, the Commission
has concluded that the standards for relief set forth in Rule 30.10
and, in particular, Appendix A thereof, have generally been satisfied
and that compliance with applicable German law and Eurex rules may be
substituted for compliance with those sections of the Act and rules
thereunder more particularly set forth herein.
By this Order, the Commission hereby exempts, subject to specified
conditions, those firms identified to the Commission by Eurex as
eligible for the relief granted herein from: --Registration with the
Commission for firms and for firm representatives;
--The separate account requirement contained in Commission Rule 30.7,
17 CFR 30.7;
--The requirement in Commission Rule 30.6(a) and (d), 17 CFR 30.6(a)
and (d), that firms provide customers located in the U.S. with the risk
disclosure statements in Commission Rule 1.55(b), 17 CFR 1.55(b) and
Commission Rule 33.7, 17 CFR 33.7, or as otherwise approved under
Commission Rule 1.55(c), 17 CFR 1.55(c);
--Those sections of Part 1 of the Commission's financial rules that
apply to foreign futures and options sold in the U.S. as set forth in
Part 30; and
--Those sections of Part 1 of the Commission's rules relating to books
and records that apply to transactions subject to Part 30, based upon
substituted compliance by such persons with the applicable statutes and
regulations in effect in Germany.
This determination to permit substituted compliance is based on,
among other things, the Commission's finding that the regulatory scheme
governing persons in Germany who would be exempted hereunder provides:
(1) A system of qualification or authorization of firms who deal in
transactions subject to regulation under Part 30 that includes, for
example, criteria and procedures for granting, monitoring, suspending
and revoking licenses, and provisions for requiring and obtaining
access to information about authorized firms and persons who act on
behalf of such firms;
(2) Financial requirements for firms including, without limitation,
a requirement that all firms immediately notify Eurex if the firms'
liable equity capital falls below a specified level and daily mark-to-
market settlement and/or accounting procedures;
(3) A system for the protection of customer assets that is designed
to preclude the use of customer assets to satisfy house obligations and
requires separate accounting for such assets, augmented by a
compensation program
[[Page 30787]]
designed to compensate customers whose assets are segregated and who
have suffered a loss as a result of fraud and/or insolvency of a firm;
(4) Recordkeeping and reporting requirements pertaining to
financial and trade information including, without limitation, order
tickets, trade confirmations, monthly customer account statements,
customers' segregation records, accounting records for customer and
proprietary trades and discretionary account documentation;
(5) Sales practice standards for authorized firms and persons
acting on their behalf that include, for example, a requirement that
authorized persons know their customers, required disclosures to
prospective customers and prohibitions on misleading advertising and
improper trading activities;
(6) Procedures to audit for compliance with, and to redress
violations of, customer protection and sales practice requirements
including, without limitation, an affirmative surveillance program
designed to detect trading activities that take advantage of customers,
and the existence of broad powers of investigation relating to sales
practice abuses; and
(7) Mechanisms for sharing of information between the Commission,
the Eurex, and the relevant German regulators on an ``as needed'' basis
including, without limitation, confirmation data, data necessary to
trace funds related to trading futures products subject to regulation
in Germany, position data, and data on firms' standing to do business
and financial condition.
This Order does not provide an exemption from any provision of the
Act or rules thereunder not specified herein, for example, without
limitation, the santifraud provision in Rule 30.9. Moreover, the relief
granted is limited to brokerage activities undertaken on behalf of
customers located in the U.S. with respect to transactions on or
subject to the rules of Eurex for products that customers located in
the U.S. may trade.\4\ The relief also extends to otherwise permitted
transactions on or subject to the rules of any other non-U.S. market
where Eurex members are authorized by Germany law to conduct brokerage
activities.\5\ The relief, however, does not extend to rules relating
to trading, directly or indirectly, on U.S. exchanges. For example, a
firm trading in U.S. markets for its own account would be subject to
the Commission's large trader reporting requirements.\6\ Similarly, if
such a firm were carrying a position on a U.S. exchange on behalf of
foreign clients, it would be subject to the reporting requirements
applicable to foreign brokers.\7\ The relief herein is inapplicable
where the firm solicits or accepts orders from customers located in the
U.S. for transactions on U.S. markets. In that case, the firm must
comply with all applicable U.S. laws and regulations, including the
requirement to register in the appropriate capacity.
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\4\ This Order granting exemptive relief does not authorize the
offer or sale of any contract beyond the scope of the Part 30 rules
or otherwise inconsistent with the CEA. Thus, for example, Eurex
members may not offer or sell to U.S. customers any security futures
product or any non-narrow-based stock index futures product. See,
e.g., Sections 2(a)(1)(c) and (d) of the Commodity Exchange Act.
\5\ See, e.g., 64 FR 50248, 50251 (September 16,
1999)(permitting designated members of the Singapore Exchange
Derivatives Trading Limited to solicit and accept from U.S.
customers foreign futures and foreign options orders for otherwise
permitted transactions on an exchange located outside Singapore).
\6\ See, e.g., 17 CFR Part 18 (2001).
\7\ See, e.g., 17 CFR Parts 17 and 21 (2001).
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The eligibility of any firm to seek relief under this exemptive
Order is subject to the following conditions:
(1) The regulatory or self-regulatory organization responsible for
monitoring the compliance of such firms with the regulatory
requirements described in the Rule 30.10 petition must represent in
writing to the CFTC that:
(a) Each firm for which relief is sought is registered, licensed or
authorized, as appropriate, and is otherwise in good standing under the
standards in place in Germany; such firm is engaged in business with
customers in Germany as well as in the U.S.; and such firm and its
principals and employees who engage in activities subject to Part 30
would not be statutorily disqualified from registration under Section
8a(2) of the Act, 7 U.S.C. 12(a)(2);
(b) It will monitor firms to which relief is granted for compliance
with the regulatory requirements for which substituted compliance is
accepted and will promptly notify the Commission or NFA of any change
in status of a firm that would affect its continued eligibility for the
exemption granted hereunder, including the termination of its
activities in the U.S.;
(c) All transactions with respect to customers located in the U.S.
will be made on or subject to the rules of Eurex and the Commission
will receive prompt notice of all material changes to the relevant laws
in Germany, any rules promulgated thereunder and Eurex rules;
(d) Customers located in the U.S. will be provided no less
stringent regulatory protection than German customers under all
relevant provisions of German law; and
(e) It will cooperate with the Commission with respect to any
inquiries concerning any activity subject to regulation under the Part
30 rules, including sharing the information specified in Appendix A on
an ``as needed'' basis and will use its best efforts to notify the
Commission if it becomes aware of any information that in its judgment
affects the financial or operational viability of a member firm doing
business in the U.S. under the exemption granted by this Order.
(2) Each firm seeking relief hereunder must represent in writing
that it:
(a) Is located outside the U.S., its territories and possessions,
and where applicable, has subsidiaries or affiliates domiciled in the
U.S. with a related business (e.g., banks and broker/dealer affiliates)
along with a brief description of each subsidiary's or affiliate's
identity and principal business in the U.S.;
(b) Consents to jurisdiction in the U.S. under the Act by filing a
valid and binding appointment of an agent in the U.S. for service of
process in accordance with the requirements set forth in Rule 30.5;
(c) Agrees to provide access to its books and records related to
transactions under Part 30 required to be maintained under the
applicable statutes and regulations in effect in Germany upon the
request of any representative of the Commission or U.S. Department of
Justice at the place in the U.S. designated by such representative,
within 72 hours, or such lesser period of time as specified by that
representative as may be reasonable under the circumstances after
notice of the request;
(d) Has no principal, or employee who solicits or accepts orders
from customers located in the U.S., who would be disqualified from
directly applying to do business in the U.S. under Section 8a(2) of the
Act, 7 U.S.C. 12(a)(2);
(e) Consents to participate in any NFA arbitration program that
offers a procedure for resolving customer disputes on the papers where
such disputes involve representations or activities with respect to
transactions under Part 30, even in circumstances where the claim
involves a matter arising primarily out of delivery, clearing,
settlement or floor practices, and consents to notify customers located
in the U.S. of the availability of such a program;
[[Page 30788]]
(f) Consents to refuse customers resident in the U.S. the option of
not segregating funds notwithstanding relevant provisions of the German
regulatory system and otherwise consents to provide all customers
resident in the U.S. no less stringent regulatory protection than
German customers under all relevant provisions of German law; and
(g) Undertakes to comply with the applicable provisions of German
laws and Eurex rules that form the basis upon which this exemption from
certain provisions of the Act and rules thereunder is granted.
As set forth in the Commission's September 11, 1997 Order delegating to
NFA certain responsibilities, the written representations set forth in
paragraph (2) shall be filed with NFA.\8\ Each firm seeking relief
hereunder has an ongoing obligation to notify NFA should there be a
material change to any of the representations required in the firm's
application for relief.
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\8\ 62 FR 47792, 47793 (September 11, 1999). Among other duties,
the Commission authorized NFA to receive requests for confirmation
of Rule 30.10 relief on behalf of particular firms, to verify such
firms' fitness and compliance with the conditions of the appropriate
Rule 30.10 Order and to grant exemptive relief from registration to
qualifying firms.
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The Commission also confirms that Eurex members that receive
confirmation of relief set forth herein may engage in limited marketing
conduct with respect to certain qualified customers located in the U.S.
from a non-permanent location in the U.S., subject to the terms and
conditions set forth in prior Commission Orders.\9\ The Commission
notes that any firm and their employees or other representatives which
engage in marketing conduct pursuant to this relief are deemed to have
consented to the Commission's jurisdiction over such marketing
activities by their filing of a valid and binding appointment of an
agent in the U.S. for service of process.
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\9\ See 57 FR 49644 (November 3, 1992)(permitted limited
marketing of foreign futures and foreign options products to certain
governmental and institutional customers located in the U.S.); 59 FR
42156 (August 17, 1994)(expanding the relief set forth in the 1992
release to conduct directed towards ``accredited investors'', as
defined in the Securities and Exchange Commission's Regulation D
issued pursuant to the Securities Act of 1933).
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This Order will become effective as to any designated Eurex member
firm the later of the date of publication of the Order in the Federal
Register or the filing of the consents set forth in paragraph (2). Upon
filing of the notice required under paragraph (1)(b) as to any such
firm, the relief granted by this Order may be suspended immediately as
to that firm. That suspension will remain in effect pending further
notice by the Commission, or the Commission's designee, to the firm and
Eurex.
This Order is issued pursuant to Rule 30.10 based on the
comparability representations made and supporting material provided to
the Commission and the recommendation of the staff, and is made
effective as to any firm granted relief hereunder based upon the
filings and representations of such firms required hereunder. Any
material changes or omissions in the facts and circumstances pursuant
to which this Order is granted might require the Commission to
reconsider its finding that the standards for relief set forth in Rule
30.10 and, in particular, Appendix A, have generally been satisfied.
Further, if experience demonstrates that the continued effectiveness of
this Order in general, or with respect to a particular firm, would be
contrary to public policy or the public interest, or that the systems
in place for the exchange of information or other circumstances do not
warrant continuation of the exemptive relief granted herein, the
Commission may condition, modify, suspend, terminate, withhold as to a
specific firm, or otherwise restrict the exemptive relief granted in
this Order, as appropriate, on its own motion.
The Commission will continue to monitor the implementation of its
program to exempt firms located in jurisdictions generally deemed to
have a comparable regulatory program from the application of certain of
the foreign futures and option rules and will make necessary
adjustments if appropriate.
Issued in Washington, DC on April 29, 2002.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-11013 Filed 5-7-02; 8:45 am]
BILLING CODE 6351-01-P