[Federal Register: November 2, 2006 (Volume 71, Number 212)]
[Rules and Regulations]
[Page 64443-64451]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02no06-3]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 140
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
AGENCY: Commodity Futures Trading Commission.
ACTION: Policy statement.
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SUMMARY: The Commodity Futures Trading Commission is issuing a
Statement of Policy that affirms the use of the no-action process to
permit foreign boards of trade to provide direct access to their
electronic trading systems to U.S. members or authorized participants,
and provides additional guidance and procedural enhancements.\1\
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\1\ Commission Rule 140.12, 17 CFR Sec. 140.12 Disposition of
business by seriatim Commission consideration.
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DATES: Effective Date: November 2, 2006.
FOR FURTHER INFORMATION CONTACT: Robert Rosenfeld, Deputy Director,
Office of International Affairs, 202-418-5423, [email protected];
Julian Hammar, Counsel, Office of the General Counsel, 202-418-5118,
[email protected]; or Duane Andresen, Special Counsel, Division of
Market Oversight, 202-418-5492, [email protected], Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Background
Since 1996, staff of the Commodity Futures Trading Commission (CFTC
or Commission) has issued no-action letters \2\ to foreign boards of
trade stating, subject to compliance with certain conditions, that it
will not recommend that the Commission take enforcement action if the
foreign board of trade provides its members or participants in the
United States access to its electronic trading system without seeking
designation under the Commodity Exchange Act (CEA or Act) as a contract
market (DCM) or registration as a derivatives transaction execution
facility (DTEF).\3\ In 1998 the Commission imposed a moratorium on the
issuance of such no-action letters pending the development of rules
governing access to automated foreign boards of trade.\4\ During this
period, the Commission received extensive comment on the proposed
rulemaking, as well as advice from the Commission's Global Markets
Advisory Committee and a Public Round Table. Because of the general
lack of consensus on many of the fundamental issues surrounding access
to foreign boards of trade, the Commission withdrew the proposed rules
in an order that also directed the staff:
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\2\ See Commission Rule 140.99, 17 CFR 140.99 (2006), which
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.
\3\ These letters, hereinafter referred to generally as "no-
action letters" are published on the Commission's Web site at:
http://www.cftc.gov/dea/deaforeignterminaltable.htm.
Reference to DTEFs in the no-action letters was added following the establishment
of that category by the Commodity Futures Modernization Act of 2000.
Although the letters refer to the placement of "terminals,"
the continued use of that term does not accurately reflect advances
in technology, such as open network systems accessible through the
Internet.
\4\ 63 FR 39779 (July 24, 1998) (Concept Release); 64 FR 14159
(March 24, 1999) (Proposed Rules). Under the terms of a letter dated
June 3, 1998 to Eurex Deutschland, the Division of Trading and
Markets modified the terms of the original 1996 no-action letter to
the effect that Eurex members who were not already operating U.S.-
based Eurex Terminals generally were prevented from placing Eurex
terminals in the U.S. absent written authorization from the
Division, pending adoption of Commission rules regarding electronic
access to foreign exchanges.
To begin immediately processing no-action requests from foreign
boards of trade seeking to place trading terminals in the United
States, and to issue responses where appropriate, pursuant to the
general guidelines included in the Eurex (DTB) no-action process, or
other guidelines established by the Commission, to be reviewed and
applied as appropriate on a case-by-case basis.\5\
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\5\ Commission Order dated June 2, 1999, 64 FR 32829, 32830
(June 18, 1999). The Eurex-DTB no-action process referred to by the
Commission in its 1999 Order lifting the moratorium was set forth in
a letter dated February 29, 1996 from Andrea Corcoran, Director,
Division of Trading and Markets to Lawrence Hunt, Jr., pp. 12-13
(the DTB no-action letter). CFTC Letter 96-28, indexed at
http://www.cftc.gov/opa/summaries/opanal96.htm; [1994-1995 Transfer Binder]
Comm. Fut. L. Rep. (CCH) ] 26,669 at 43,795-43,802 (February 29,
1996). On June 18, 1998, the DTB changed its name to Eurex
Deutschland, a step toward a planned merger with the Swiss Options
and Financial Futures Exchange. See 63 FR 39779, 39781 (July 24,
1998) at fn. 12.
[[Page 64444]]
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Following the lifting of the moratorium in 1999, the relevant
Commission operating division has issued seventeen additional no-action
letters.\6\ The Commission generally has not observed regulatory
problems or financial harm to participants who are accessing the
foreign boards of trade pursuant to the staff no-action relief letters.
Moreover, the no-action process has been resilient throughout a period
of increasing global competition, technological advances, changing
ownership structures and evolving business models.
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\6\ The Commission's Division of Market Oversight (successor to
the market supervisory responsibilities previously performed by the
Division of Trading and Markets) is responsible for issuance of the
direct access no-action letters.
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In 2006, ICE Futures, a U.K. registered investment exchange that
provides direct access to its U.S. members pursuant to a CFTC staff
foreign terminal no-action letter, notified the Commission that it
would list a contract on West Texas Intermediate light sweet crude oil
whose settlement price would be linked to contracts traded on the New
York Mercantile Exchange (NYMEX). ICE's notification prompted the
Commission's Division of Market Oversight (DMO) to advise ICE Futures
that the "Commission will be evaluating the use of the no-action
process in light of significant issues raised by the factual
circumstances underlying the subject notice." \7\ Among other things,
the trading of such contracts made ripe the re-examination of certain
dormant issues respecting the Commission's statutory obligations to
maintain the integrity of U.S. markets and to protect U.S. customers,
particularly the Commission's market surveillance obligations.
Accordingly, on May 3, 2006, the Commission directed its staff to
initiate a formal process to define what constitutes a "board of
trade, exchange, or market located outside the United States, its
territories or possessions" as that phrase is used in section 4(a) of
the CEA and in furtherance of that process scheduled a public
hearing.\8\ The Commission also issued a related Request for Public
Comment.\9\
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\7\ See letter dated January 31, 2006 from Richard A. Shilts,
Director, Division of Market Oversight to Mark Woodward, Regulation
and Compliance Policy Manager, ICE Futures.
http://www.cftc.gov/files/dea/cftclettertoicefutures.pdf.
\8\ See Sunshine Act Meeting Notice, 71 FR 30665 (May 30, 2006);
corrected at 71 FR 32059 (June 2, 2006). The hearing was conducted
on June 27, 2006, at the Commission's headquarters in Washington,
DC.
\9\ See 71 FR 34070 (June 13, 2006). The Commission requested
comment on the issues related to developing an objective standard
establishing a threshold that, if crossed by a foreign board of
trade that permits direct access, would indicate that the board of
trade is no longer outside the United States and, accordingly, may
be required to become registered under the CEA.
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Hearing and Request for Comment
Participants at the Commission's Hearing and comments submitted in
response to the Request for Comment (all collectively the
"commenters"),\10\ were generally supportive of the no-action
process, praising the process in general for its flexibility.\11\ Many
commenters suggested that the Commission should retain in large measure
the essential contours of the no-action process.\12\
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\10\ A transcript of the Commission's Hearing on what
constitutes a board of trade located outside the United States under
the Commodity Exchange Act section 4(a) (June 27, 2006), ("Hearing
Tr.") as well as all comment letters ("CL"), are located in
comment file 06-002 to 17 FR 34070 (June 13, 2006).
http://www.cftc.gov/foia/comment06/foi06-002_1.htm.
\11\ For comments supporting the no-action letter process
generally, see, e.g., Comments of Nicholas Weinreb, Euronext,
Hearing Tr. at 45 ("The no-action letter regime has been an
extraordinarily successful one."); comments of Benn Steil, Director
of International Economics, Council of Foreign Relations, in his
personal capacity, Hearing Tr. at 49 ("I think it is exceptionally
important to acknowledge just how successful the Commission's no-
action regime has been * * *"); For favorable hearing participant
comments on the flexibility of the no-action letter process, see,
e.g., Comments of John Foyle, Euronext Liffe, Hearing Tr. at 46;
Comments of Richard Berliand, JP Morgan Securities, Hearing Tr. at
61; Comments of Nicholas Weinreb, Euronext, Hearing Tr. at 174.
\12\ See, e.g., CL 2 (New York Board of Trade) at 3; CL 3
(Council of Foreign Relations) at 2; CL 6 (ICE Futures Exchange) at
9-10; CL 7 (Minneapolis Grain Exchange) at 2; CL 8 (Bundesanstalt
f[uuml]r Finanzdienstleitungsaufsicht) at 3; CL 16 (World Federation
of Exchanges) at 1; CL 19 (Tokyo Stock Exchange) at 2; CL 22
(Federation of European Securities Exchanges) at 4; CL 23 (Eurex
Deutschland) at 11; CL 24 (Euronext Liffe) at 5; CL 25 (Chicago
Board of Trade) at 1; CL 28 (Futures Industry Association) at 9; and
CL 45 (Committee of European Securities Regulators) at 1.
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Commenters warned against any mechanistic approaches to determining
whether an otherwise foreign organized exchange that permits direct
electronic access by its U.S. members or participants is not located
"outside" the United States for purposes of section 4(a) of the CEA,
particularly questioned the use of volume as a proxy for U.S. presence
(noting that its fluctuations could result in regulatory uncertainty),
and stressed the need to avoid rigid or "bright line" tests.\13\ Some
commenters favored a totality of circumstances approach to
location,\14\ while others urged the Commission to look to indicators
of physical location, such as the main location of an exchange's
infrastructure, its employees and headquarters.\15\
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\13\ See, e.g., CL 2 (New York Board of Trade) at 2-3; CL 6 (ICE
Futures Exchange) at 6-7; CL 9 (Chicago Mercantile Exchange) at 6;
CL 23 (Eurex Deutschland) at 7; CL 25 (Chicago Board of Trade) at 9-
10.
\14\ See, e.g., CL 22 (Federation of European Securities
Exchanges) at 3.
\15\ See, e.g., CL 6 (ICE Futures) at 2; CL 9 (Chicago
Mercantile Exchange) at 6.
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Market users stressed the need to maintain high levels of customer
and market protections, particularly where a product might impact
pricing in U.S. markets.\16\ Many U.S. exchanges requested that the
Commission give greater attention to competitive issues, particularly
when there is direct competition between a U.S. exchange and a foreign
exchange's products. U.S. exchanges in particular stressed the need for
"regulatory parity." \17\ Some commenters warned against taking
actions that inadvertently could result in policies that may inhibit
the ability of U.S. exchanges and firms to operate globally.\18\ Others
stressed the need to provide regulatory certainty generally with
respect to the applicability of the no-action process and to clarify
the treatment of intermediated electronic access.\19\
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\16\ See, e.g., CL 5 (New England Fuel Institute) at 2; CL 27
(Industrial Energy Consumers of America) at 1.
\17\ See, e.g., CL 7 (Minneapolis Grain Exchange) at 1; CL 25
(Chicago Board of Trade) at 5-6; and CL 43 (New York Mercantile
Exchange) at 10.
\18\ See, e.g., CL 2 (New York Board of Trade) at 3.
\19\ See, e.g., CL 28 (Futures Industry Association) at 8.
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Need for the Policy Statement
As made clear at the Hearing and by the written comments, the
intensity of concerns with respect to the no-action process has been
exacerbated by the global competitive environment. In particular, these
concerns have called into question: (1) The Commission's authority for
the no-action process in light of Section 4(a)'s exclusion from the
contract market designation requirement for foreign boards of trade,
(2) the continued appropriateness of the no-action process generally,
(3) whether objective threshold standards should be developed that
would indicate that a board of trade is no longer located outside the
United States for purposes of section 4(a) of the CEA, (4) whether
enhancements to the no-action process may be necessary, particularly
where trading may implicate domestic futures and cash markets, and (5)
how the no-action process relates to perceived competitive issues.
[[Page 64445]]
Continued ambiguity with respect to these fundamental issues could
result in an unacceptable degree of uncertainty that may hinder access
by U.S. users to global products and markets, inhibit continued
innovation in technology and products, and undermine the ability of
U.S. markets and intermediaries to structure their business to compete
globally. Accordingly, the Commission is issuing this Statement of
Policy in order to provide greater regulatory certainty and
transparency to issues surrounding access to foreign boards of trade.
Statement of Policy Regarding the Processing of No-Action Requests by
Foreign Boards of Trade to Provide Direct Electronic Access to Their
U.S. Members or Authorized Participants
Since 1996, foreign boards of trade planning to permit members or
other participants located in the United States to enter trades
directly into that foreign board of trade's trade matching system
("direct access") \20\ have sought staff no-action letters.
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\20\ For purposes of this Statement of Policy, the term "direct
access" refers to the explicit grant of authority by a foreign
board of trade to an identified member or other participant of that
board of trade to enter trades directly into the board of trade's
trade matching system.
In contrast, the staff no-action letters generally have defined
the term "automated order routing systems" (AORS) as meaning any
system of computers, software or other devices that allows entry of
orders through another party (an intermediary) who has been granted
direct access for transmission to the trading system where, without
substantial human intervention, trade matching or execution takes
place.
The Commission does not view the transmission of intermediated
orders via AORSs for execution on a foreign board of trade to be
"direct access" to that board of trade for purposes of the no-
action process.
In this regard, the Commission endorses the view that mere
intermediated electronic access by AORS does not create a presence
in the U.S., such that a firm exempted from registration as a
futures commission merchant (FCM) pursuant to Commission Regulation
30.10, which is prohibited from establishing a U.S. presence, would
be required to register as an FCM. See, e.g., CFTC Staff Letter No.
05-16 [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 30,127
(Aug. 26, 2005) ("For example, Rule 30.10 Firms continue to be
prohibited from maintaining a presence in the United States. Thus,
Rule 30.10 Firms cannot provide direct access to LIFFE CONNECT[reg]
in the United States (although they would be permitted to accept
orders overseas from customers located in the United States that
submit such orders by telephone or through an AORS located in the
United States").) (Emphasis added.)
This position is consistent with the Commission's historical
policy of addressing customer protection concerns with regard to the
offer or sale of foreign futures to U.S. customers primarily through
regulation of the intermediary. In this regard, nothing in the
Statement of Policy is intended to alter current Commission rules
that require that any person engaging in the offer or sale of a
foreign futures contract or foreign futures option transaction for
or on behalf of a U.S. customer must be a registered futures
commission merchant or operating pursuant to a Rule 30.10 Order.
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This Statement of Policy provides guidance for processing requests
for no-action relief. The Commission intends that this Statement of
Policy will ensure the consistent treatment of requests and the
application of an appropriate degree of review, while maintaining the
ability to respond to the individual factual circumstances raised by
particular requests.
The Commission's Statement of Policy takes into account the
Commission's desire to facilitate access to markets and products,
foster innovation and competition and eliminate unnecessary regulatory
burdens, while maintaining customer and market protections mandated by
the CEA. The adoption by the Commission of such a flexible and
adaptable policy is consistent with Congressional findings that
accompanied the enactment of the Commodity Futures Modernization Act of
2000 (CFMA).\21\
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\21\ Section 126(a) of the CFMA, Appendix E of Pub. L. No. 106-
554, 114 Stat. 2763 (2000), provides:
"SEC. 126. INTERNATIONAL ACTIVITIES OF THE COMMODITY FUTURES
TRADING COMMISSION.
(a) FINDINGS.--The Congress finds that--
(1) derivatives markets serving United States industry are
increasingly global in scope;
(2) developments in data processing and communications
technologies enable users of risk management services to analyze and
compare those services on a worldwide basis;
(3) financial services regulatory policy must be flexible to
account for rapidly changing derivatives industry business
practices;
(4) regulatory impediments to the operation of global business
interests can compromise the competitiveness of United States
businesses;
(5) events that disrupt financial markets and economies are
often global in scope, require rapid regulatory response, and
coordinated regulatory effort across international jurisdictions;
(6) through its membership in the International Organization of
Securities Commissions, the Commodity Futures Trading Commission has
promoted beneficial communication among market regulators and
international regulatory cooperation; and
(7) the Commodity Futures Trading Commission and other United
States financial regulators and self-regulatory organizations should
continue to foster productive and cooperative working relationships
with their counterparts in foreign jurisdictions."
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I. The Commission's Authority for the No-Action Process
A. Relevant Statutory Considerations: The Commodity Exchange Act
Circumscribes the Commission's Authority Over Foreign Boards of Trade
Section 4(a) of the CEA provides that a futures contract may be
traded lawfully in the U.S. only if, among other things, it is traded
on or subject to the rules of a board of trade that has been designated
as a contract market or registered as a DTEF.\22\ Section 4(a) excludes
from the designation requirement contracts made on or subject to the
rules of a board of trade, exchange, or market located outside the
United States, its territories or possessions." \23\
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\22\ Section 4(a) of the CEA provides in part:
"Unless exempted by the Commission pursuant to subsection (c)
of this section, it shall be unlawful for any person to offer to
enter into, to enter into, to execute, to confirm the execution of,
or to conduct any office or business anywhere in the United States,
its territories or possessions, for the purpose of soliciting or
accepting any order for, or otherwise dealing in, any transaction
in, or in connection with, a contract for the purchase or sale of a
commodity for future delivery (other than a contract which is made
on or subject to the rules of a board of trade, exchange, or market
located outside the United States, its territories or possessions)
(emphasis added)"
unless--
"(1) such transaction is conducted on or subject to the rules
of a board of trade which has been designated or registered by the
Commission as a contract market or derivatives transaction execution
facility * * *."
7 U.S.C. 6(b) (2000).
\23\ In the absence of no-action relief, a board of trade,
exchange or market that permits direct access by U.S. persons might
be subject to Commission action for violation of, among other
provisions, section 4(a) of the CEA, if it were not found to qualify
for the exclusion from the DCM designation or DTEF registration
requirement.
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Section 4(b) of the CEA, which authorizes the Commission to adopt
rules governing the offer and sale of foreign futures and options
contracts, explicitly prohibits the Commission from adopting rules
pursuant to that section that: (1) Require Commission approval of any
contract, rule, regulation, or action of any foreign board of trade,
exchange, or market, or clearinghouse for such board of trade,
exchange, or market, or (2) govern in any way any rule or contract term
or action of any foreign board of trade, exchange, or market, or
clearinghouse for such board of trade, exchange, or market.\24\
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\24\ Section 4(b) of the CEA provides:
"The Commission may adopt rules and regulations proscribing
fraud and requiring minimum financial standards, the disclosure of
risk, the filing of reports, the keeping of books and records, the
safeguarding of customers' funds, and registration with the
Commission by any person located in the United States, its
territories or possessions, who engages in the offer or sale of any
contract of sale of a commodity for future delivery that is made or
to be made on or subject to the rules of a board of trade, exchange,
or market located outside the United States, its territories or
possessions. Such rules and regulations may impose different
requirements for such persons depending upon the particular foreign
board of trade, exchange, or market involved. No rule or regulation
may be adopted by the Commission under this subsection that (1)
requires Commission approval of any contract, rule, regulation, or
action of any foreign board of trade, exchange, or market, or
clearinghouse for such board of trade, exchange, or market, or (2)
governs in any way any rule or contract term or action of any
foreign board of trade, exchange, or market, or clearinghouse for
such board of trade, exchange, or market."
7 U.S.C. 6(b) (2000).
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[[Page 64446]]
B. Section 4(a)'s Exclusion From Contract Market Designation Applies
Only With Respect to "Bona Fide" Boards of Trade
The Commission interprets the section 4(a) parenthetical exclusion
from contract market designation for foreign boards of trade to apply
only with respect to "bona fide" boards of trade. The term "bona
fide" in this context refers to boards of trade that, among other
things, possess the attributes of established, organized exchanges,
adhere to appropriate rules prohibiting abusive trading practices, have
been authorized by a regulatory process that examines customer and
market protections and are subject to continued oversight by a
regulator that has power to intervene in the market and share
information with the Commission. In reaching this conclusion, the
Commission relies on legislative history found in the Report of the
Senate Committee on Agriculture, Nutrition, and Forestry,\25\ which
discusses the addition of section 4(b) to the CEA. Specifically, the
Report notes that:
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\25\ S. Rep. 97-384, 97th Cong. 2d Sess. 46 (1982).
In addition, the rules and regulations developed under this
provision [section 4(b)] are not intended to place the solicitation
or acceptance of orders in the United States for bona fide foreign
futures contracts at a comparative disadvantage with similar
solicitation or acceptance of orders for domestic futures contracts.
For example, rules which require the segregation of all or part of
customers' funds in the United States would not be consistent with
the intent of this provision when there is adequate evidence that
such funds have been transferred to a bona fide market,
clearinghouse, or market principal and are adequately safeguarded
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for the protection of U.S. residents. [emphasis added]
The Commission's conclusion in this regard is harmonious with previous
Commission interpretations of "bona fide" exchange.\26\
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\26\ See 63 FR 39779, 39788 (July 24, 1998). See also Compl.
Count I, CFTC v. Topworth Int'l, Ltd., (No. 94-1256) (C.D. Cal.)
(Feb. 2, 1994).
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A commenter had questioned the appropriateness of applying a "bona
fide" limitation on the application of section 4(a).\27\ However, in
light of the legislative history quoted above, which the Commission
previously has interpreted as limiting the exclusion from Section 4(a)
to bona fide foreign boards of trade, we believe that the
interpretation we adopt today is an appropriate and reasonable exercise
of the Commission's powers to interpret and apply its governing
statute, particularly when it implicates domestic conduct and possible
effects on domestic persons and markets that the Commission is charged
with protecting.
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\27\ CL 9 (Chicago Mercantile Exchange) at 5.
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II. The Appropriateness of the No-Action Process
A. The Commission Endorses the No-Action Process
The Commission endorses the continued use of the no-action process
as an appropriate and flexible mechanism that should be used
prospectively to facilitate direct access to the electronic trading
system of a foreign board of trade by its U.S. members or authorized
participants.\28\
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\28\ We believe the no-action process to be an appropriate
exercise of discretion committed to Commission staff, subject to
appropriate Commission oversight. See Board of Trade of the City of
Chicago v. SEC, 883 F.2d 525, 530 (7th Cir. 1989); 17 CFR 140.99. In
this connection, the Commission is directing staff to continue to
circulate through the Secretariat for the Commission's review on an
"absent objection" basis, prior to issuance, all staff foreign
board of trade no-action letters.
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The no-action process is appropriate because it gives staff the
flexibility to address the factual circumstances presented in the
future, and to apply a consistent approach to reviewing applications
for no-action relief in light of innovations in electronic trading and
technology, evolving regulatory standards, and specific customer
protection and market integrity concerns. This approach is consistent
with the CFMA's goal of adopting a flexible regulatory policy that can
account for rapidly changing derivatives industry business practices, a
theme that also was voiced at the Commission's hearing and in the
written comments. Among other things, Congress found in the CFMA that
"financial services regulatory policy must be flexible to account for
rapidly changing derivatives industry business practices." CFMA
Section 126(a)(3). Moreover, Section 126(b) of the CFMA expresses the
sense of Congress that the Commission coordinate with foreign
regulatory authorities to encourage "the facilitation of cross-border
transactions through the removal or lessening of any unnecessary legal
or practical obstacles."
B. The Commission Endorses the Scope of Review of the No-Action Process
The scope of review that was established by Commission staff in the
DTB no-action letter and refined in subsequent no-action letters \29\
focuses on establishing the "bona fide" status of the foreign board
of trade and finding that no public interest would be adversely
affected by persons in the U.S. directly accessing the foreign board of
trade.\30\
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\29\ Letter dated February 29, 1996 from Andrea Corcoran,
Director, Division of Trading and Markets, to Lawrence Hunt, Jr.,
pp. 12-13 (the DTB no-action letter). CFTC Letter 96-28, indexed at
http://www.cftc.gov/opa/summaries/opanal96.htm;
[1994-1995 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 26,669 at 43,795-43,802 (February
29, 1996).
\30\ In the 1996 DTB no-action letter staff concluded that the
"the mere presence of terminals in the United States would not
cause the Commission to deem any bona fide foreign exchange for
which products are listed through that system to be a domestic
exchange, that is, a board of trade designated as a contract market
by the Commission pursuant to section 5 of the Act." (emphasis
added)
In order to conclude that the DTB was a "bona fide" foreign
board of trade, and therefore appropriately subject to the
parenthetical exclusion for foreign boards of trade in section 4(a)
of the CEA, staff generally examined the DTB's rules and the overall
regulatory environment. The text of the DTB letter makes clear that
staff recognized the prohibitions set out in section 4(b) of the
CEA, but noted that "the relationship or interface between DTB's
computer terminals and persons located in the United States may
raise regulatory concerns that are unrelated to the internal
operations of the DTB or its computer terminals in the United
States." Accordingly, the review set forth in the DTB letter also
focused narrowly on the domestic implications for U.S. persons using
the DTB direct access terminals (i.e., the system integrity and
clearing review).
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In general, staff reviews information and representations provided
by the applicant that relate to, among other things, the rules and
structure of the applicant exchange (with an emphasis on the exchange's
financial integrity, market surveillance, trade practice and rule
enforcement regime), various system integrity protections that govern
the foreign board of trade's electronic trading system (using as a
template the 1990 Principles for the Oversight of Screen-Based Trading
Systems),\31\ the system's related clearing and customer default
protections, and information concerning the regulatory structure in the
applicant's jurisdiction, with a specific emphasis on market
regulation.\32\ The staff also reviews the
[[Page 64447]]
adequacy of information sharing with the Commission by the market and
its regulator. Based upon its review of the documents and
representations submitted by the applicant, and subject to compliance
with various conditions (e.g., representations governing access to
books and records and the appointment of a U.S. agent for service of
process), staff might conclude that granting no-action relief would not
be contrary to the public interest.
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\31\ The 1990 IOSCO Principles for the Oversight of Screen-Based
Trading Systems (Screen-Based Principles) were developed by IOSCO
Working Party 7 on futures, which was chaired by the CFTC. The IOSCO
Screen-Based Principles set out in broad terms the international
consensus as to the regulatory considerations to be addressed in
reviewing mechanisms for screen-based trading. The Commission
adopted the IOSCO Screen-Based Principles as a statement of
Commission policy. See 55 FR 48670 (November 21, 1990). In adopting
the IOSCO Screen-Based Principles, the Commission made clear that
they establish general policy goals that will guide the Commission
in resolving issues arising from screen-based trading systems, but
would not mandate a particular substantive response.
\32\ The Commission previously summarized the scope of the
staff's foreign board of trade (FBOT) inquiry as follows:
"Currently, Commission staff generally examines the following
when reviewing an FBOT's request for terminal placement no-action
relief: General information about the FBOT, as well as detailed
information about: (i) membership criteria (including financial
requirements); (ii) various aspects of the automated trading system
(including the order-matching system, the audit trail, response
time, reliability, security, and, of particular importance,
adherence to the IOSCO principles for screen-based trading); (iii)
settlement and clearing (including financial requirements and
default procedures); (iv) the regulatory regime governing the FBOT
in its home jurisdiction; (v) the FBOT's status in its home
jurisdiction and its rules and enforcement thereof (including market
surveillance and trade practice surveillance); and (vi) extant
information-sharing agreements among the Commission, the FBOT, and
the FBOT's regulatory authority. When issued, the terminal placement
no-action letters conclude with a standard set of terms and
conditions for the granting of the relief which include, among other
things, a quarterly volume reporting requirement."
See 71 FR 34070, 34071 (June 13, 2006).
---------------------------------------------------------------------------
Essentially, as it has evolved, the staff review seeks to determine
that the applicant foreign board of trade is subject to governmental
authorization, appropriate rules prohibiting abusive trading practices,
and continuing oversight by a regulator that has powers to intervene in
the market and share information with the Commission. This review
generally reflects the internationally accepted approaches used by many
developed market jurisdictions to govern access to foreign electronic
exchanges. These approaches generally are based upon a review of, and
ongoing reliance upon, the foreign market's "home" regulatory regime,
and are designed to maintain regulatory protections while avoiding the
imposition of duplicative regulation.\33\
---------------------------------------------------------------------------
\33\ See, e.g., United Kingdom Financial Services Authority,
Financial Services Handbook, Recognised Overseas Investment
Exchanges (ROIE) and Recognised Overseas Clearing Houses (ROCH),
Section 6. (In comparison with full authorisation as a domestic
exchange, ROIE status "reduces the involvement which UK authorities
need to have in the day-to-day affairs of an overseas recognised
body because they are able to rely substantially on the supervisory
and regulatory arrangements in the country where the applicant's
head office is situated." See FSA Handbook, REC 6.1.2
http://fsahandbook.info/FSA/html/handbook/REC/6/1.
); Australian Securities and Investments Commission (ASIC) Policy Statement 177.8 describing
alternative licensing for overseas markets ("the alternative
licensing route in s795B(2) for overseas markets is intended to
facilitate competition and avoid regulatory duplication while
maintaining investor protection and market integrity."); Ontario
Securities Commission Staff Notice 21-702: Regulatory Approach for
Foreign-Based Stock Exchanges (exemption from recognition under
section 147 of the Securities Act (Ontario); Autorite des marches
financiers (Quebec): Policy Statement Respecting the Authorization
of Foreign-Based Exchanges; the German Bundesanstalt f[uuml]r
Finanzdienstleistungsaufsicht (BAFIN) authorizes the placement of
terminals in Germany under Sections 37i et seq. of the German
Securities Trading Act.
---------------------------------------------------------------------------
The Commission finds that the staff review appropriately addresses
the Commission's concern that relief will only be granted with respect
to bona fide foreign boards of trade.\34\ The Commission also finds
that the staff's review of foreign board of trade representations and
the related information submitted with respect to system integrity,
clearing procedures and default protections is appropriately focused
and respects the prohibitions of section 4(b). Finally, the various
terms and conditions that have been imposed in the no-action letters
have been reasonably and appropriately tailored to the factual
circumstances raised by the applications for no-action relief.
---------------------------------------------------------------------------
\34\ See Section I supra.
---------------------------------------------------------------------------
Accordingly, the Commission endorses the general scope of review
that was established in the DTB no-action letter, and as it has evolved
in subsequent staff letters. The Commission also reconfirms its prior
endorsement of the use of the IOSCO Screen-Based Trading Principles as
a general template to guide its inquiry into the foreign board of
trade's electronic trading system. The Commission notes that in 2000
IOSCO reaffirmed the continuing appropriateness of the Screen-Based
Trading Principles, concluding that they retained their relevancy
despite the evolution and increasing sophistication of electronic
systems ten years after their adoption, and that they constitute an
internationally accepted framework for the oversight of screen-based
derivatives trading systems.\35\
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\35\ Principles for the Oversight of Screen-Based Trading
Systems for Derivative Products--Review and Addition, IOSCO
Technical Committee (2000) at p. 5, section III, Part 1.
http://www.iosco.org/library/index.cfm?section=pubdocs&year=2000.
In this "Review and Addition," IOSCO adopted four additional principles
that encouraged regulatory authorities to develop cooperative
arrangements to address risks that arise from cross-border
derivatives markets, to share relevant information in an efficient
and timely manner, to maintain a transparent framework for
regulatory cooperation, and to take into account a jurisdiction's
application of the IOSCO Objectives and Principles of Securities
Regulation.
---------------------------------------------------------------------------
In this connection, staff's discretionary, selective reference to
broad regulatory objectives, such as those contained in the CEA's Core
Principles and in internationally-accepted standards,\36\ deemed by
staff in its discretion to be reflective of a bona fide regulatory
regime,\37\ is an appropriate, non-prescriptive means to structure its
review for the purposes of determining the bona fide status of a
foreign board of trade. This observation is not intended to suggest
that the review should require substituted compliance with CEA market
designation or registration requirements, apply any prescriptive
approach,\38\ or otherwise be expanded into a quasi-designation
process.\39\
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\36\ See, e.g., Objectives and Principles of Securities
Regulation, International Organization of Securities Commissions
(IOSCO); and the Tokyo Communiqu[eacute] on Supervision of Commodity
Futures Markets (1997), Annex B: Guidance on Components of Market
Surveillance and Information Sharing. Annex B of the Tokyo
Communiqu[eacute] establishes a non-prescriptive framework for
undertaking market surveillance, the types of information to which
market authorities should have access and collect, the appropriate
analysis of information, the type of powers and capacity to
investigate market abuse, the appropriate powers to intervene in the
market to address abusive practices or disorderly conditions, the
need for powers to impose disciplinary sanctions against members of
the market as well as non-members, and the components of effective
information sharing.
\37\ See, e.g., CEA Core Principle 4, section 5(b) of the CEA,
for designated contract markets, which requires the monitoring of
trading to prevent manipulation, price distortion, and disruption of
the delivery or cash settlement process. Principle 28 of the IOSCO
Objectives and Principles of Securities Regulation states that
"regulation should be designed to detect and deter manipulation and
other unfair trading practices."
\38\ In adopting the 1990 IOSCO Screen-Based Principles, the
Commission made clear that "they establish general policy goals
that will guide the Commission in resolving issues arising from
screen-based trading systems, but do not mandate a particular
substantive response." 55 FR 48671, 48672 (November 21, 1990).
\39\ See generally, footnote 30.
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C. The Commission Intends To Preserve the Flexibility and Adaptability
of the No-Action Process
The Commission's endorsement of the no-action process's overall
approach and scope of review is not intended to limit the staff's
ability to adapt or modify its review as it deems necessary to
determine the bona fide status of a foreign board of trade, or to
address any particular U.S. customer protection or market integrity
concerns, as identified in Section 3(b) of the CEA, that might be
raised by a request for no-action relief. The Commission understands
that staff potentially may need to adapt its analysis, as well as the
scope and depth of its inquiry, to address changing factual
circumstances and any specific regulatory concerns.\40\
---------------------------------------------------------------------------
\40\ See, e.g., CL 25 ( Chicago Board of Trade) at 1: "We do
believe that the analysis preceding the issuance of no-action
letters must constantly be re-evaluated and updated to reflect
changes and developments in today's dynamic marketplace."
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[[Page 64448]]
Similarly, there should be broad discretion under the no-action
process to determine, based on the totality of factors, that the
foreign exchange and the applicable regulatory regime meet relevant
regulatory objectives, notwithstanding that a particular aspect of the
foreign jurisdiction's approach is not identical to that of the
Commission's regulatory program.\41\ In this regard, the Commission
recognizes that in an international context, common regulatory
objectives can be attained through different regulatory means.\42\ The
mere fact that a foreign jurisdiction has determined to achieve a
regulatory objective in a manner that is different than the
Commission's approach often is the result of varied business histories,
experiences and legislative choices. The determinative factor in the
review should be an affirmative conclusion that the regulatory
structure in question addresses the particular regulatory objective
deemed to be most relevant.\43\
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\41\ Compare Appendix A, Part 30 Interpretative Statement with
Respect to the Commission's Exemptive Authority under Sec. 30.10 of
Its Rules, 17 CFR Part 30, Appendix A: "In this connection, the
Commission would have broad discretion to determine that the
policies of any program element generally are met, notwithstanding
the fact that the offshore program does not contain an element
identical to that of the Commission's regulatory program and
conversely may assess how particular elements are in fact applied by
offshore authorities."
\42\ See IOSCO Principles and Objectives of Securities
Regulation at 3: "There is often no single correct approach to a
regulatory issue. Legislation and regulatory structures vary between
jurisdictions and reflect local market conditions and historical
development."
\43\ This can be confirmed through the applicant's submission of
representations and relevant statutes, rules and statements of
policy, regulatory and self-regulatory oversight reports,
confirmations of good standing by the oversight regulator, and
informal staff discussions with relevant officials of the exchange
and its oversight regulator. The Commission understands the term
"regulatory structure" broadly to include the regulations and
policies of the exchange, its regulator or another self-regulatory
organization, as well as relevant laws and regulations.
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III. Whether Objective Threshold Standards Should Be Developed That
Would Indicate That a Board of Trade Is No Longer Located Outside the
United States for Purposes of Section 4(A) of the CEA Such That the
Commission Should Require DCM Designation or DTEF Registration
In its release issued in advance of the June 2006 public hearing,
the Commission requested comment on, among other things, what level of
presence by a foreign board of trade would be a reasonable threshold
for determining whether to require DCM/DTEF registration and in
particular whether volume should be a determinative factor.\44\ The
Commission also requested comment on whether it would be appropriate
for the Commission to exercise jurisdiction over foreign boards of
trade that permit direct access when they list contracts with
underlying products that are integral to the U.S. economy.\45\
---------------------------------------------------------------------------
\44\ 71 FR 34073 (June 13, 2006).
\45\ Id.
---------------------------------------------------------------------------
A. The Commission Is Not Developing Objective Standards Establishing a
Threshold Test of U.S. Location
As noted above in the summary of comments and hearing discussions,
most commenters rejected any wholesale, mechanistic adoption of
threshold indicators of U.S. location. A theme voiced by many
commenters was that the Commission should not attempt to formalize any
objective "bright line" test of U.S. location, particularly during a
period of rapid changes in the technology of direct access and market
communication, as well as in global business structures and
relationships.\46\ Among the reasons noted by U.S. industry commenters
in particular for not adopting objective standards establishing a
threshold test of U.S. location at this time were: the difficulty of
developing threshold criteria that would not be viewed as
arbitrary,\47\ the difficulty of determining primary location in a
period of rapid structural change in the futures industry,\48\ the
possible inhibition of structural and technological innovation,\49\ and
the danger that an overly-inclusive criterion could result in
duplicative regulation \50\ as well as a protectionist response in
other jurisdictions that might inhibit the ability of the U.S. futures
industry to compete effectively on a global basis.\51\
---------------------------------------------------------------------------
\46\ See, e.g., CL 3 (comments of Ben Steil, Director of
International Economics, Council on Foreign Relations) at 2.
\47\ See CL 2 (New York Board of Trade) at 2; and CL 28 (Futures
Industry Association) at 11.
\48\ See CL 25 (Chicago Board of Trade) at 9: "* * * with
cross-border joint ventures and mergers between boards of trade both
existing and proposed, it is likely to become more and more
difficult to determine the primary location of an exchange."
\49\ See CL 2 (New York Board of Trade) at 2: "Similarly, we do
not believe that defining "location" on the basis of management,
ownership arrangements or the location of offices and technology of
an exchange is instructive, as they are likely to change over time
and certain functions, such as clearing and technology services,
lend themselves to outsourcing." See also CL 9 (Chicago Mercantile
Exchange) at 7: "For example, a U.S. exchange serving EU customers
is likely to maintain an EU sales office and sales representatives,
an EU technical office or outsourced technical services to install
and service networks, routers and terminals, banking connections,
delivery facilities and data centers and/or communication hubs. In
the near future, if distributed computing makes trade matching more
effective, some part of the matching operations may occur in the EU.
It is not difficult to imagine the adverse consequences if each of
the jurisdictions in which these operations take place were to
assert its right to regulate."
\50\ See CL 9 (Chicago Mercantile Exchange, Inc.) at 7.
\51\ See CL 2 (New York Board of Trade) at 2: "such an approach
runs the risk of creating barriers to U.S. exchanges as they attempt
to expand business abroad;" CL 7 (Minneapolis Grain Exchange) at 2;
CL 25 (Chicago Board of Trade) at 7; CL 9 (Chicago Mercantile
Exchange, Inc.) at 6; CL 28 (Futures Industry Association) at 11; CL
43 (New York Mercantile Exchange) at 8; and NC 4 (Chicago Mercantile
Exchange Holdings Inc) at 2.
---------------------------------------------------------------------------
For the reasons noted above, the Commission has decided not to
adopt any objective standards establishing a threshold test of U.S.
location. Commission staff will continue to assess the legitimacy of
any particular applicant to seek relief as a "foreign" board of trade
by considering the totality of factors presented by an applicant. This
flexible, case-by-case approach will permit staff, during a period of
evolving market structure, to consider the unique combination of
factual indicators of U.S. presence that may be presented by an
applicant for relief.\52\
---------------------------------------------------------------------------
\52\ See CL 43 (New York Mercantile Exchange) at 6.
"Accordingly, while the Commission may want to reserve for the
future the possibility to revisit this area, we believe by far the
best approach at this point in time would be to provide guidance to
Commission staff in the continuation of the ongoing staff no-action
letter process."
---------------------------------------------------------------------------
B. Volume Is Not a Determinative Indicator of U.S. Location
The relevancy of U.S-originating volume as a means to determine
whether a foreign-organized electronic exchange is "located" in the
United States for purposes of CEA section 4(a) has been a long-
standing, unresolved issue since the issuance of the DTB no-action
letter.\53\
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\53\ The Commission had noted in its 1998 Concept Release that
" by conditioning its letter on the DTB providing the Division
[staff] with quarterly updates of DTB's U.S.-originating trading
volume, the Division intended to leave open the possibility that at
some point DTB's activities in the U.S. might rise to a level that
would necessitate greater Commission regulation." See 63 FR 39779,
39781 (July 24, 1998).
---------------------------------------------------------------------------
Notwithstanding the intuitive appeal of using volume as a proxy for
U.S. presence, neither the Commission nor the futures industry in its
extended consideration of this issue during the Commission's 1998-1999
rulemaking on access to automated boards of trade could reach consensus
on the specific manner in which volume could be usefully applied to
determine when a foreign board of trade's U.S. presence required
contract market designation.\54\
---------------------------------------------------------------------------
\54\ See 64 FR at 14170.
---------------------------------------------------------------------------
Comments submitted in response to the Commission's recent Request
for Comment, as well as statements made at the related public hearing,
reiterated the
[[Page 64449]]
various problems associated with the use of volume, such as the
regulatory uncertainty that would result from using a constantly
fluctuating variable such as volume, the arbitrary nature of any fixed
percentage, the difficulties in accurately measuring U.S.-based volume,
and the possible inhibiting effect on exchanges' global activities.\55\
Significantly, all of the U.S. futures exchanges agreed, as did foreign
exchanges, that volume was not a stable indicator of U.S. presence for
the purpose of requiring DCM designation or DTEF registration.\56\
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\55\ As noted at the Commission's Hearing, it is inevitable that
as exchanges consolidate, they will list contracts that are of great
economic interest in other jurisdictions and attract enormous
participation from other jurisdictions. See Hearing Tr. at 100 (Ben
Steil). If significant volume denoted grounds for exchange
licensing, then such an exchange potentially would be subject to
duplicative and burdensome regulation.
\56\ See CL 2 (New York Board of Trade) at 2; CL 7 (Minneapolis
Grain Exchange) at 1; CL 9 (Chicago Mercantile Exchange) at 6; CL 25
(Chicago Board of Trade) at 9-10; CL 43 (New York Mercantile
Exchange) at 7. See also CL 21 (Tokyo Financial exchange) at 1; CL
22 (Federation of European Securities Exchanges) at 3; and CL 23
(Eurex Deutschland) at 7-8 for representative foreign exchange
comment. Letter available at: http://www.cftc.gov/dea/deaforeignterminaltable.htm.
---------------------------------------------------------------------------
Accordingly, the Commission agrees that volume is not determinative
of U.S. location. This conclusion does not mean, however, that volume
statistics should no longer be required from boards of trade operating
under a staff no-action letter, as the submission of volume data may
serve other regulatory interests. The Commission expects that any data
collection requirement would be tailored carefully to provide
meaningful information.
C. Nature of the Underlying Contract Is Not Determinative of
Designation
Some commenters have suggested that the Commission should require
foreign boards of trade that list contracts based on a U.S.-produced or
economically important commodity to obtain contract market designation
rather than be permitted to operate under a staff no-action letter.\57\
In effect, such proposals would make the application of the
parenthetical exclusion from designation in CEA section 4(a) for boards
of trade located outside the U.S. dependent upon the nature of the
commodity underlying a particular futures contract.
---------------------------------------------------------------------------
\57\ See CL 25 (Chicago Board of Trade) at 10-11: The statement
of Policy should exclude U.S. Government Securities. See also letter
dated January 27, 2006 from the NYMEX to Reuben Jeffery III: "The
core regulatory policy question is, of course, whether the WTI crude
oil futures contract is a foreign contract or whether it is a U.S.
futures contract requiring ICE Futures to become a U.S. designated
contract market. * * * NYMEX believes that the new WTI futures
contract is a U.S. product * * * drilled and produced in the US."
---------------------------------------------------------------------------
However, the nature of the underlying commodity is not probative of
the "location" of a board of trade for purposes of CEA section 4(a).
Such an approach would lead to the anomalous result of a board of trade
being characterized as "foreign" for some contracts, but considered a
"U.S.-based" exchange for a single contract and therefore required to
seek contract market designation. In addition, several U.S. contract
markets list futures contracts on commodities that are produced or
delivered in foreign jurisdictions. Were the Commission to endorse
using such criteria to require designation, such a policy could be
cited by foreign jurisdictions as a rationale to subject U.S. markets
to regulation.\58\
---------------------------------------------------------------------------
\58\ See generally CL 2 (New York Board of Trade).
---------------------------------------------------------------------------
IV. Enhancements to the No-Action Process
Notwithstanding its endorsement of the no-action process, the
Commission has identified additional enhancements that are intended to
ensure the availability of necessary information, and to ensure that
staff will carefully consider proposals for trading contracts that
potentially could have an adverse effect on the ability of the
Commission to carry out its regulatory responsibilities.
A. The Trading of Contracts That May Adversely Affect the Commission's
Regulatory Responsibilities Should Be Addressed
Should staff become aware that the trading of products listed on a
foreign board of trade that has been granted no-action relief:
• Affects adversely the pricing of contracts traded on
any registered entity as defined in Section 1a(29) of the CEA, or of
contracts traded on any cash market for commodities subject to the
CEA;
• Creates unacceptable systemic risks or disruptions in
those markets or the U.S. financial system, including capital
markets; or
• Facilitates abusive trading practices on U.S. markets
or otherwise interferes with the ability of the Commission to carry
out its regulatory responsibilities, in particular market
surveillance,
staff may exercise its discretion and consider a full range of
responses, such as imposing conditions and requiring enhanced
information sharing arrangements and surveillance procedures (see
below), or other appropriate action. In this regard, the Commission
retains plenary authority to address manipulative or abusive trading
practices that affect U.S. futures and cash markets and market
users,\59\ and will use that authority when necessary and appropriate.
---------------------------------------------------------------------------
\59\ See, e.g., CEA Section 9(a)(2), 7 U.S.C. 13(a)(2) and CEA
section 8a(5), 7 U.S.C. 12a(5).
---------------------------------------------------------------------------
B. Enhanced Information Sharing Procedures Should Be Adopted
In a global market environment, where conduct that takes place on
markets located outside the United States may have an impact on U.S.
futures and cash markets, as well as the members and users of those
markets, the Commission needs to cooperate closely with foreign market
authorities in order to ensure that the Commission can carry out its
regulatory responsibilities. The Commission therefore endorses the
existing practice of requiring information sharing assurances as a
condition to issuance of a no-action letter and continued activities
pursuant to the granted relief. However, in light of the Commission's
experiences in this area, as well as the development of internationally
accepted information sharing arrangements and standards, the following
enhancements are appropriate.
1. Exchange and Its Regulator Should Have Power, Authority and
Willingness To Share Needed Information
In negotiating information sharing arrangements, staff should
confirm that the market and its regulator have the power to obtain the
specific types of information that may be needed by the Commission, as
well as the authority to share that information with the Commission on
an "as needed" basis. Moreover, staff should obtain evidence of the
market's and regulator's willingness to share information (e.g.,
through explicit undertakings). In this regard, staff should note
whether the applicant's regulator has signed the IOSCO Multilateral
Memorandum of Understanding (MMOU), which requires as a condition to
executing the MMOU a demonstration of power, authority and willingness
to share information. If the applicant's regulator is not a signatory
of the IOSCO MMOU, staff should ascertain whether any prohibitions to
information sharing exist.
2. Applicants for No-Action Relief Should Sign the Exchange
International MOU
When exchange member firms and market participants trade on
multiple global exchanges, no one regulator or market authority will
have all of the information necessary to evaluate the risks to its
markets. The Exchange
[[Page 64450]]
International Information Sharing Memorandum of Understanding and
Agreement (Exchange International MOU) \60\ and the Declaration on
Cooperation and Supervision of International Futures Exchanges and
Clearing Organizations (Declaration),\61\ a companion arrangement for
regulators, were developed in 1996 as an international response to
address such gaps in information. These arrangements facilitate the
identification of large exposures by firms that could have a
potentially adverse effect on multiple markets.
---------------------------------------------------------------------------
\60\ The development of the Exchange International MOU was one
of the achievements that resulted from the FIA sponsored Global Task
Force on Financial Integrity, which was convened to address the
cross-border issues that were identified in connection with the
failure of Barings Plc. To date, fifty-six global derivatives
exchanges have signed the MOU.
\61\ The Declaration was developed through discussions at the
CFTC's international regulators conference, and was motivated by
work recommendations issued from the Windsor Conference and Tokyo
Conference, which were convened by the CFTC, the U.K. FSA and
Japanese regulators (Ministry of International Trade and Industry
(MITI) and the Ministry of Agriculture, Forestry and Fisheries
(MAFF)) to respond to the cross-border issues raised by the failure
of Barings Plc. The Declaration was developed to address instances
in which an exchange would not be able to share information directly
with another exchange under the Exchange International MOU. Twenty-
eight regulators have signed the Declaration. Copy available at:
http://www.cftc.gov/oia/oiabocadec0398.htm.
---------------------------------------------------------------------------
Applicants for staff no-action relief should execute, or commit to
execute, the Exchange International MOU because it demonstrates a
commitment to share information between exchanges that is needed to
ensure the integrity of markets and to address systemic risks. In
circumstances where a foreign board of trade is unable to share
information directly with another exchange, its regulator should sign
the Declaration (or commit to share such information pursuant to an
existing MOU or other arrangement with the Commission).
3. Arrangements To Obtain and Share Information Required To Carry Out
the Commission's Domestic Market Surveillance Responsibilities Should
Be a Condition to No-Action Relief
When an applicant for, or recipient of, no-action relief trades or
will trade contracts that staff in its discretion determines may affect
the Commission's ability to carry out its surveillance responsibilities
(e.g., an economically linked contract), the foreign board of trade
should be required to provide directly to the Commission and in a
timely manner, appropriate trade and position data as deemed necessary
by Commission staff. Alternative arrangements may be acceptable where
local law or regulatory policies require the interposition of the
market regulator, provided that such arrangements supply the Commission
on a timely basis with the market information that the Commission's
staff determines is necessary to carry out the Commission's market
surveillance responsibilities.
C. The Continuing Good Standing of the Foreign Board of Trade Should Be
Verified
Although the no-action letters require that the foreign board of
trade submit to staff and keep updated on a quarterly basis certain
material information, staff should develop a non-burdensome and
efficient means to confirm the board of trade's continued "good
standing" in its authorizing jurisdiction. This could take the form of
an annual or biannual confirmation by the relevant oversight regulator
of the foreign board of trade's authorized status and the continuing
validity of any relevant representations that had been made by the
foreign board of trade in its initial application.
V. The No-Action Process Is Not the Appropriate Means To Address
Competitive Issues
In their comments, U.S. futures exchanges essentially encouraged
the Commission to review its regulations to consider the competitive
impact of differences between its regulations and those of other
jurisdictions.\62\ Some exchanges suggested that the Commission should
address perceived regulatory disparities in connection with the no-
action process,\63\ particularly where the exchanges trade similar
products.\64\
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\62\ See, e.g., (Chicago Mercantile Holdings, Inc.) Request to
Appear at the Public Hearing at 2; CL 7 (Minneapolis Grain Exchange)
at 1; CL 43 (New York Mercantile Exchange) at 2, 10-12.
\63\ See CL 25 (Chicago Board of Trade) at 1.
\64\ See Hearing Tr. (NYMEX Chairman James Newsome) at 72, 82.
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The Commission does not believe that it should address competitive
concerns within the context of any individual request for a staff no-
action letter. Claims of competitive advantage or disadvantage are
exceedingly difficult to prove. An exchange's competitive status
reflects an array of contributing factors, such as its overall rule
structure, its governance and business policy determinations, its fee
structure, type of contracts offered, the method of trading, the
efficiency of its technology and clearing systems, as well as external
factors such as statutory restrictions, tax structure and the overall
legal system.\65\ Rather, the appropriate focus of the no-action review
should be on addressing the bona fide status of, and domestic
regulatory concerns raised by, an applicant for a no-action letter.
---------------------------------------------------------------------------
\65\ In a 1999 report, the Commission's Division of Economic
Analysis attributed changes in market activity since the 1980s to
the continued market maturation process, nonregulatory cost
considerations and technological change rather than international
regulatory differences.
"In sum, neither trends in the locus of trading activity nor
regulatory developments over the last five years suggest an erosion
of U.S. futures markets' global competitive position. However, to
the extent that the movements toward electronic trading systems and
exchange consolidation that were observed over the period of this
study continue into the future, the competitive structure of global
futures markets is likely to change significantly. The Commission is
committed to continued regulatory flexibility in the face of these
trends. However, it is likely that the potential cost savings
generated by these trends, and not the nature of the differences
among the regulatory systems of various nations, will be most
important in shaping the composition and trading interest of the
global futures industry in the twenty first century."
The Global Competitiveness of U.S. Futures Markets Revisited,
the Commission's Division of Economic Analysis (November 1999),
http://www.cftc.gov/dea/compete/deaglobal_competitiveness.htm.
---------------------------------------------------------------------------
The CFMA has materially improved the competitive status of the U.S.
futures industry.\66\ Nonetheless, the Commission takes seriously the
CFMA findings, among others, that "financial services regulatory
policy must be flexible to account for rapidly changing derivatives
industry business practices," and "regulatory impediments to the
operation of global business interests can compromise the
competitiveness of United States businesses." \67\ The Commission will
continue to address these policy goals through ongoing review of its
regulatory program.
---------------------------------------------------------------------------
\66\ See, e.g. CL 9 (Chicago Mercantile Exchange): "CFMA
greatly improved the competitive environment in the U.S. and
eliminated many of the legitimate concerns of U.S. based futures
exchanges."
\67\ CFMA Sections 126(a)(3), 126(a)(4).
---------------------------------------------------------------------------
Conclusion
The U.S. futures industry is undergoing a period of dynamic change,
marked by technological innovation, consolidation, evolving business
relationships, and increasing global competition. The Commission does
not presume to be able to predict the course of ongoing industry
evolution in these areas.
The Commission's appropriate role during such a period of rapid
change is to construct policies that will foster achievement of the
Act's section 3 objectives of ensuring market and financial integrity,
addressing systemic risks, and protecting market participants, but to
do so in a flexible manner that avoids inadvertently inhibiting
technological innovation or the ability of the U.S. futures industry
[[Page 64451]]
to compete effectively in a global environment.
This Statement of Policy has been developed as a means for the
Commission to respond flexibly to the challenges posed by the ongoing
evolution in electronic access to global markets. The Commission will
continue to monitor carefully, and review the Policy Statement as
necessary in light of, the ongoing evolution of cross-border electronic
direct access and intermediation in order to ensure that it does not
adversely affect U.S. cash and futures markets, market participants and
customers, as well as the consumers affected by those foreign market
transactions.
Issued in Washington, DC, on October 27, 2006 by the Commission.
Eileen A. Donovan,
Acting Secretary of the Commission.
[FR Doc. E6-18513 Filed 11-1-06; 8:45 am]
BILLING CODE 6351-01-P