[Federal Register: July 1, 2003 (Volume 68, Number 126)]
[Rules and Regulations]
[Page 39006-39009]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01jy03-2]
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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 firms designated by the ASX
Futures Exchange Party Limited ("ASXF") 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
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.
EFFECTIVE DATE: July 1, 2003.
FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Esq., Deputy
Director, Susan A. Elliott, Esq., Staff Attorney, or Andrew V. Chapin,
Esq., Staff Attorney, Division of Clearing and Intermediary Oversight,
Commodity Futures Trading Commission, 1155 21st Street, NW.,
Washington, DC 20581. Telephone: (202) 418-5430.
SUPPLEMENTARY INFORMATION: The Commission has issued the following
Order:
Order Under CFTC Rule 30.10 Exempting Firms Designated by the
ASX Futures Exchange Party Limited ("ASXF") 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 Granting Expanded Relief for Otherwise
Permitted Transactions on all non-U.S. exchanges where ASXF Firms
are authorized by Exchange Regulations to Conduct Futures Business
for Customers, Subject to Certain Conditions.
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 (2002).
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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
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
that solicit and accept customer orders; (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 28990, 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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[[Page 39007]]
By letter dated March 6, 2002, ASXF petitioned the Commission on
behalf of its Participants ("firms"), located and doing business in
Australia, for an exemption from the application of the Commission's
part 30 rules to those firms. In support of its petition, ASXF states
that granting such an exemption with respect to such 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
ASXF 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 been met and that
compliance with applicable Australian law and ASXF 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 ASXF as
eligible for the relief granted herein from:
--Registration with the Commission for firms and for firm
representatives;
--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);
--The separate account requirement contained in Commission Rule 30.7,
17 CFR 30.7;
--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 which apply to transactions subject to part 30,
based upon substituted compliance by such persons with the applicable
statutes and regulations in effect in Australia.
This determination to permit substituted compliance is based on,
among other things, the Commission's finding that the regulatory scheme
governing persons in Australia 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 for a minimum level of working capital 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;
(4) Recordkeeping and reporting requirements pertaining to
financial and trade information;
(5) Sales practice standards for authorized firms and persons
acting on their behalf that include, for example, required
disclosures to prospective customers and prohibitions on improper
trading advice;
(6) Procedures to audit for compliance with, and to redress
violations of, the customer protection and sales practice
requirements referred to above, 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, ASXF, and the Australian regulatory authorities on an
"as needed" basis including, without limitation, confirmation
data, data necessary to trace funds related to trading futures
products subject to regulation in Australia, 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, such as the antifraud
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 ASXF
for products that customers located in the U.S. may trade.\4\ The
relief 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.\5\ 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.\6\ 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\ See, e.g., Sections 2(a)(1)(C) and (D) of the Act.
\5\ See, e.g., 17 CFR Part 18 (2002).
\6\ See, e.g., 17 CFR Parts 17 and 21 (2002).
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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 \7\ that:
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\7\ As described below, these representations are to be filed
with NFA.
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(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 Australia; such firm is engaged in
business with customers in Australia 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. 12a(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 resident in the
U.S. will be made on or subject to the rules of ASXF and the
Commission will receive prompt notice of all material changes to the
relevant laws in Australia, any rules promulgated thereunder and
ASXF rules;
(d) Customers located in the U.S. will be provided no less
stringent regulatory protection than Australian customers under all
relevant provisions of Australian 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.\8\
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\8\ ASIC represented to the Commission that the existing
Memorandum of Understanding governing the sharing of information
between ASIC and the Commission "will extend to activities of the
ASXF and its members." See Letter from Greg Tanzer, Executive
Director, Regional Coordination & International Relations for ASXF,
to Jane Kang Thorpe, Director for the Division of Clearing and
Intermediary Oversight, dated May 16, 2003.
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(2) Each firm seeking relief hereunder must represent in writing
that it:
[[Page 39008]]
(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 Australia 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 under
Section 8a(2) of the Act, 7 U.S.C. 12a(2), from doing business in
the U.S.;
(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, and consents to notify
customers located in the U.S. of the availability of such a program;
(f) Undertakes to comply with the applicable provisions of
Australian laws and ASXF rules that form the basis upon which this
exemption from certain provisions of the Act and rules thereunder is
granted; and
(g) Maintains the greater of regulatory capital as required by
ASXF or four percent of funds segregated on behalf of customers
resident in the United States.
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.\9\ 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. 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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\9\ 62 FR 47792, 47793 (September 11, 1999).
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Expanded Relief
As requested in the ASXF Petition,\10\ this order also grants
expanded relief to permit ASXF firms to trade on other non-U.S.
exchanges where such firms are authorized by the Australian
Corporations Law (CL) to conduct futures business for customers,
contingent upon compliance with the prior provisions of this Order and
with these conditions, to the extent they impose duties additional to
those already specified:\11\
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\10\ ASXF "is essentially seeking the same level of relief as
that afforded participants on the SFE Corporation Limited ("SFE")
(formerly Sydney Futures Exchange Limited) market. This is
particularly relevant given many of the participants who would seek
to solicit and accept orders from U.S. customers are participants on
both the SFE and the ASXF market." ASXF Petition at p. 1. SFE was
given expanded relief by Orders of April 13, 1993 (58 FR 19209),
March 1, 1997 (62 FR 10445) and October 11, 2000 (65 FR 60560,
60562).
\11\ These conditions are the same as those specified in the SFE
original expanded relief order of April 13, 1993, 58 FR 19209.
(1) ASXF will carry out its compliance, surveillance and rule
enforcement activities with respect to solicitations and acceptance
of orders by designated ASXF members of U.S. customers for futures
business on Recognized Futures Exchanges, as defined in section 9(b)
of the CL,\12\ other than a contract market designated as such
pursuant to section 5 of the Act or a derivatives transaction
execution facility registered as such pursuant to section 5a of the
Act, to the same extent that it conducts such activities in regard
to ASXF business;
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\12\ The term "recognised futures exchange" or "RFE" is
defined in section 9(b) of the Corporations Law to mean a body
corporate that conducts a futures market outside Australia. Schedule
11 of the CL contains the list of RFEs, which currently includes
over 40 U.S. and non-U.S. futures exchanges. For an exchange to be
included on the Schedule 11 list of RFEs, the relevant lead
regulator must have an information sharing arrangement with ASIC and
the applicable regulatory program must provide a comparative level
of regulation, similar to the requirements for an exemption under
Commission Rule 30.10.
(2) ASXF will cooperate with the Commission with respect to any
inquiries concerning any activity that relates to expanded relief,
including sharing the information specified in Appendix A to the
part 30 rules on an "as needed" basis, on the same basis as set
forth in the part 30 relief conditions of this Order; and
(3) Each ASXF member firm confirmed for rule 30.10 relief
seeking to engage in activities that are the subject of this Order
must agree to provide the books and records related to such
transactions required to be maintained under the applicable
statutes, regulations, and Exchange rules in effect in Australia, on
the same basis as set forth in the part 30 relief conditions of this
Order.
With respect to transactions effected on behalf of U.S. customers
on any non-U.S. futures and options exchange other than SFE and ASXF,
whether by the ASXF firm directly as a clearing member of such other
exchange or through the intermediation of one or more intermediaries,
each ASXF firm must use the following procedures, consistent with the
requirements applicable to Commission registered FCMs concerning the
protection of customer funds under the provisions of Commission rule
30.7:\13\
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\13\ These are the conditions imposed in the 1997 SFE Expanded
Relief Order of March 1, 1997 (62 FR 10445) as amended by the Order
of October 11, 2000 (65 FR 60560, 60562).
(a) Comply with the terms and procedures of Commission rule
30.7, with the amount required to be segregated under ASXF rules and
Australian laws to be substituted for the secured amount requirement
as set forth in such paragraphs.
OR
(b)(1) Maintain in a separate account or accounts money,
securities and property in an amount denominated as the foreign
futures or foreign options secured amount in an amount sufficient to
satisfy all of its current obligations to U.S. customers;
(2) Not commingle such money, securities and property with the
money, securities or property of the member, or with any proprietary
account of such member and not use such money, securities and
property to secure or guarantee the obligations of, or extend credit
to, the member or any proprietary account of the member;
(3) Deposit, if it wishes, together with the secured amount
required to be on deposit in the separate account or accounts
referred to in paragraph (b)(1) above money, securities or property
held for or on behalf of non-U.S. customers of the member for the
purpose of entering into foreign futures and options transactions.
If the firm chooses to do so, the amount that must be deposited in
such separate account or accounts must be no less than the greater
of (i) the foreign futures and foreign options secured amount
required by paragraph (b)(1) above plus the amount that would be
required to be on deposit if all such customers (including non-U.S.
customers) were subject to such requirement, or (ii) the foreign
futures and foreign options secured amount required by paragraph
(b)(1) above plus the amount required to be held in a separate
account or accounts for or on behalf of such non-U.S. customers
pursuant to any applicable law, rule, regulation or order, or any
rule of any self-regulatory organization;
(4) Maintain the separate account or accounts referred to in
paragraph (b)(1) above under an account name that clearly identifies
them as such, with any of the following depositories:
(i) Another person registered with the Commission as an FCM or a
firm exempted from FCM registration pursuant to CFTC rule 30.10;
(ii) The clearing organization of any foreign board of trade;
(iii) Any member and/or clearing member of such foreign board of
trade; or
(iv) A bank or trust company which any of the depositories
identified in (i)-(iii) above may use consistent with the applicable
laws and rules of the jurisdiction in which the depository is
located;
(5) Obtain and retain in its files for the period required by
applicable law and Exchange rules an acknowledgment from a
[[Page 39009]]
depository identified in paragraph b(4)(i)-(iv) above that the
depository was informed that such money, securities or property are
held for or on behalf of foreign futures and foreign options
customers and are being held in accordance with the provision of
these regulations; and
(6) Provide each foreign futures and foreign options customer
with one of the written disclosure statements in (A), (B), or (C)
below:
(A) Foreign futures transactions involve executing and clearing
trades on a foreign exchange. This is the case even if the foreign
exchange is formally "linked" to a domestic exchange whereby a
trade executed on one exchange liquidates or establishes a position
on the other exchange. No domestic organization regulates the
activities of a foreign exchange, including the execution, delivery
and clearing of transactions on such exchange, and no domestic
regulator has the power to compel enforcement of the rules of the
foreign exchange or the laws of the foreign country in which the
transaction occurs. For these reasons, customers who trade on
foreign exchanges may not be afforded certain of the protections
that apply to domestic transactions, including the right to use
alternative dispute resolution. In particular, funds received from
customers to margin foreign futures transactions may not be provided
the same protections as funds received to margin futures
transactions on domestic exchanges. Before you trade, you should
familiarize yourself with the foreign rules that will apply to your
particular transaction.
OR
(B) You should familiarize yourself with the protections
accorded money or property you deposit for domestic and foreign
transactions, particularly in the event of a firm insolvency or
bankruptcy. The extent to which you may recover your money or
property may be governed by specified legislation or local rules. In
some jurisdictions, property that has been specifically identifiable
as your own will be pro-rated in the same manner as cash for
purposes of distribution in the event of a shortfall.
Transactions on markets in other jurisdictions, including
markets formally linked to a domestic market, may expose you to
additional risk. Such markets may be subject to regulation that may
offer different or diminished investor protection. Before you trade
you should enquire about any rules relevant to your particular
transactions. Your local regulatory authority will be unable to
compel the enforcement of the rules of the regulatory authorities or
markets in other jurisdictions where your transactions have been
effected. You should ask the firm with which you deal for details
about the types of redress available in both your home jurisdiction
and other relevant jurisdictions before you start to trade.
OR
(C) A comparable disclosure statement prescribed by ASXF.
This Order will become effective as to any designated ASXF firm the
later of the date of publication of the Order in the Federal Register
or the filing of the representations and consents set forth in
paragraphs (2)(a)-(g), as verified by NFA. 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 ASXF.
This Order is issued pursuant to Rule 30.10 based on the
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 been met. 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 and expanded relief granted herein, the
Commission may condition, modify, suspend, terminate, withhold as to a
specific firm, or otherwise restrict the exemptive or expanded 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, D.C. on June 25, 2003.
Jean A. Webb
Secretary of the Commission.
[FR Doc. 03-16516 Filed 6-30-03; 8:45 am]
BILLING CODE 6351-01-P