[Federal Register: September 11, 1997 (Volume 62, Number 176)]
[Notices]
[Page 47792-47797]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11se97-46]
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COMMODITY FUTURES TRADING COMMISSION
Performance of Certain Functions by National Futures Association
With Respect to Non-U.S. Firms and Non-U.S. Markets
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice and order.
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SUMMARY: The Commodity Futures Trading Commission (Commission) is
authorizing National Futures Association (NFA) to perform fitness
checks with respect to (1) foreign firms acting in the capacity of
futures commission merchants (FCMs) seeking relief under Rule 30.10 and
(2) any applicant for registration or registrant having or seeking to
add a foreign principal, subject to any limitations by individual
offshore jurisdictions that fitness information solely be communicated
to and among regulators. In addition, the Commission is authorizing NFA
(1) to receive filings from foreign firms acting in the capacities of
commodity pool operators (CPOs) and commodity trading advisors (CTAs)
filing for exemption from registration under Rule 30.5, (2) to monitor
compliance with Rule 30.10, Rule 30.5, and the provisions of Deutsche
Terminborse (DTB) terminal placement relief, (3) to receive filings
from FCMs with respect to order transmittal procedure relief for
foreign futures and options orders, (4) to receive documentation
pertaining to Globex and New York Mercantile Exchange (NYMEX) ACCESS
"pass-the-book" relief, and (5) to maintain and serve as the official
custodian of certain Commission records.
EFFECTIVE DATE: September 11, 1997.
FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel, Division of Trading and Markets, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington,
D.C. 20581. Telephone: (202) 418-5430.
United States of America
Before the Commodity Futures Trading Commission Order Authorizing the
Performance of Certain Functions With Respect to Non-U.S. Firms and
Non-U.S. Markets
I. Authority and Background
Section 8a(10) of the Commodity Exchange Act \1\ (Act) provides
that the Commission may authorize any person to perform any portion of
the registration functions under the Act, notwithstanding any other
provision of law, in accordance with rules adopted by such person and
submitted to the Commission for approval or, if applicable, for review
pursuant to Section 17(j) of the Act \2\ and subject to the provisions
of the Act applicable to registrations granted by the Commission.
Section 17(o)(1) of the Act \3\ provides that the Commission may
require NFA to perform Commission registration functions, in accordance
with the Act and NFA rules. The Commission's Division of Trading and
Markets (Division) received a letter from NFA expressing NFA's
willingness to perform certain functions now performed by the
Commission, to undertake to protect the confidentiality, security and
integrity of information received and to abide by any additional use
requirements or limitations regarding the receipt and handling of
information from foreign jurisdictions, as discussed below.\4\
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\1\ 7 U.S.C. Sec. 12a(10) (1994).
\2\ 7 U.S.C. Sec. 21(j) (1994).
\3\ 7 U.S.C. Sec. 21(o)(1) (1994).
\4\ The Division received the letter from NFA on August 27,
1997.
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Upon consideration, the Commission has determined to authorize NFA,
effective September 11, 1997, to perform the following functions,
subject to any limitations by individual offshore jurisdictions that
fitness information solely be communicated to and among governmental
regulators: (1) For foreign firms acting in the capacity of an FCM,
fitness checks and monitoring of compliance with Rule 30.10 \5\ relief
granted to the firm's regulator or self-regulatory organization (SRO);
(2) for foreign firms acting in the capacities of CPOs and CTAs,
accepting filings that comply with Rule 30.5; (3) conducting fitness
inquiries directed to foreign regulatory and self-regulatory bodies
with respect to any firm applying for registration under the Act or any
registrant having or adding a foreign principal; (4) receiving
documentation pertaining to Globex and NYMEX ACCESS "pass-the-book"
relief; (5) receiving filings from FCMs with respect to order
transmittal procedure relief for foreign futures and options orders;
(6) monitoring DTB terminal placement relief; and (7) maintaining and
serving as the official custodian of records for the filings and
acknowledgment requirements submitted by (a) exchange member firms
seeking "pass-the-book" relief, (b) FCMs seeking order transmittal
procedure relief, or (c) firms intending to operate DTB computer
terminals in the U.S., and maintaining requests and related materials
submitted pursuant to Rules 30.10 and 30.5 or obtained in the course of
conducting foreign fitness inquiries. As discussed below, each of these
functions involves the registration or exemption from registration of
non-U.S. persons or is related to trading by U.S. persons on non-U.S.
markets. In the future, the Commission may delegate other similar
administrative and processing functions by letter and Commission
Advisory.
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\5\ Commission rules referred to herein can be found at 17 CFR
Ch. I (1997).
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A. Foreign FCM Fitness and Compliance With Rule 30.10
Rule 30.10 allows the Commission to exempt a foreign firm acting in
the capacity of an FCM from compliance with certain Commission rules
and regulations based upon the firm's compliance with comparable
regulatory requirements imposed by the firm's home-country regulator.
The Commission has established a process whereby a foreign regulator or
SRO can petition on behalf of its regulatees or members, respectively,
for such an exemption based upon the comparability of the regulatory
structure in the foreign jurisdiction to that under the Act.\6\ This
petition process requires
[[Page 47793]]
that the Commission issue an Order granting general relief subject to
certain conditions \7\ and that individual firms then be granted
confirmation of such relief. Firms seeking confirmation of Rule 30.10
relief must make the required representations \8\ set forth in the Rule
30.10 Order issued to the regulator or SRO from the firm's home
country. The regulator or SRO forwards to the Commission the firm's
representations along with a request for confirmation of Rule 30.10
relief as to the particular firm. The Commission grants a particular
firm Rule 30.10 relief after verifying the firm's fitness \9\ and
compliance with the conditions of the appropriate Rule 30.10 Order and
with Division of Trading and Markets Advisory 41-93, if applicable.\10\
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\6\ The specific elements examined in evaluating whether the
particular foreign regulatory program provides a basis for
permitting substituted compliance for purposes of exemptive relief
pursuant to Commission Rule 30.10 are set forth in Appendix A to
part 30, "Interpretative Statement with Respect to Commission's
Exemptive Authority Under Section 30.10 of its Rules" and include
the following: (1) Registration, authorization or other form of
licensing, fitness review or qualification of persons (both
individuals and firms) through which customer orders are solicited
and accepted; (2) minimum financial requirements for these persons
who accept customer funds; (3) protection of customer funds from
misapplication; (4) minimum sales practice standards, including the
disclosure of the risks of futures transactions; (5) recordkeeping
and reporting requirements; (6) procedures to audit for compliance
with, and to take action against those persons who violate, the
requirements of the program; and (7) the existence of appropriate
information-sharing arrangements.
\7\ These conditions usually require the regulator or SRO
responsible for monitoring the compliance of the firm with the
regulatory requirements described in the Rule 30.10 petition to
represent in writing to the Commission the following: (1) Each firm
for which relief is sought is registered, licensed or authorized, as
appropriate, and is otherwise in good standing under the standards
of its place of domicile; such firm is engaged in business with
customers located in the location of the regulator or SRO as well as
in the U.S.; and, such firm would not statutorily disqualified from
registration under Section 8a(2) of the Act; (2) 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 which would affect its continued eligibility for the exemption
granted hereunder, including the termination of its activities in
the U.S.; (3) all transactions on the exchanges under the
jurisdiction of the regulator or SRO with respect to customers
resident in the U.S. will be made on or subject to the rules of each
respective exchange and the Commission will receive prompt notice of
all material changes in such exchanges' codes and regulations; (4)
customers resident in the U.S. will be provided no less stringent
regulatory protection than customers in the country where the
regulator or SRO is located under all relevant provisions of law;
and (5) it will cooperative with the Commission with respect to any
inquires concerning any activity subject to regulation under the
Part 30 rules, including sharing the information specified in
Appendix A to the Part 30 rules on an "as needed" basis, and
becomes aware of any information which in its judgment affects the
financial or operational viability of a firm doing business in the
U.S. pursuant to an exemption granted under Rule 30.10.
\8\ These representations generally require the firm to: (1)
Consent to jurisdiction in the U.S. and designate an agent for
service of process in the U.S. in accordance with the requirements
set forth in Rule 30.5; (2) agree to make its books and records
available upon the request of any representative of the Commission
or the U.S. Department of Justice; (3) agree that all futures or
regulated option transactions with respect to U.S. customers will be
made on or subject to the rules of the applicable exchange and will
be undertaken consistent with rules and codes under which such firm
operates; (4) represent that no principal of the firm would be
disqualified under Section 8a(2) of the Act from registering to do
business in the U.S. and notify the Commission promptly of any
change in that representation; (5) disclose the identify of each
U.S. affiliate or subsdiary; (6) agree to be subject to NFA
arbitration; (7) consent to the release of certain financial
information; (8) refuse U.S. customers the option of not having
their funds segregated from the firm's proprietary funds, even if
that option is generally available under local law; (9) consent to
report the value of funds required to be segregated on behalf of
U.S. customers; and (10) undertake to comply with the provisions of
law and rules which form the basis for granting the exemption. These
representations may vary from order to order depending upon the
regulatory structure of the firm's home country. To date, eleven
orders have been issued for the following regulators and self-
regulatory organizations; Sydney Futures Exchange, 53 FR 44856
(November 7, 1988); Singagpore International Monetary Exchange
Limited, 54 FR 806 (January 10, 1989); Montreal Exchange, 54 FR
11179 (March 17, 1989); United Kingdom regulators and/or SROs
(Securities and Investments Board, Securities and Futures
Association, and Investment Management Regulatory Organization), 54
FR 21599, 21604, 21609, and 21614 (May 19, 1989), 56 FR 14017 (April
5, 1991); Toronto Futures Exchange, 55 FR 10611 (March 22, 1990);
Tokyo Grain Exchange, 58 FR 10953 (February 23, 1993); MEFF Renta
Fija, 60 FR 30462 (June 9, 1995); New Zealand Futures and Options
Exchange, 61 FR 64985 (December 10, 1996); and MEFF Renta Variable,
62 FR 16687 (April 8, 1997).
\9\ The firm's fitness is verified by checking the following
sources for any information on the firm: (1) The Office of
Proceedings for reparations cases; (2) the Division of Trading and
Markets for contract market exchange actions; and (3) NFA's
Clearinghouse of Disciplinary Information (CDI) for NFA actions.
\10\ Division of Trading and Markets Advisory 41-93 outlines
procedures for firms applying for confirmation of exemptive relief
under Rule 30.10 that have affiliates or subsidiaries in the U.S. It
is reprinted as CFTC Interpretative Letter No. 93-65, (1992-1994
Transfer Binder) Comm. Fut. L. Rep. (CCH) para.25,784 (July 26,
1993).
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The Commission believes that, once it has examined the foreign
jurisdiction's regulatory structure and issued an Order under Rule
30.10 granting general relief based upon the comparability of that
structure to the structure under the Act, the steps needed to determine
if relief is appropriate for particular firms are similar to those
undertaken in the course of fitness checks performed by NFA with
respect to applicants for registration under the Act. The Commission
further believes that it is appropriate for NFA to undertake the
performance of these steps to the extent the appropriate foreign
regulator and/or other market authority can share information directly
with NFA, since it has previously been authorized to perform similar
steps for applicants. Accordingly, by this Order, NFA is authorized to
receive requests for Rule 30.10 relief on behalf of firms which are
acting in the capacity of an FCM for purposes of handling orders for
foreign futures or futures options products for U.S. persons and which
are regulatees of a foreign regulator or members of a foreign SRO to
which the Commission has issued an order pursuant to Rule 30.10, to
verify such firms' fitness and compliance with the conditions of the
appropriate Rule 30.10 Order and Division of Trading and Markets
Advisory 41-93, and to exempt qualifying firms from registration
pursuant to Rule 30.10.
B. Foreign CPO and CTA Compliance With Rule 30.5
Rule 30.5 provides an exemption from registration as a CPO, CTA or
introducing broker (IB) to any qualifying non-domestic person, other
than a person required to be registered as an FCM, who solicits U.S.
residents to trade foreign futures or options. To qualify for the
exemption from registration under Rule 30.5, the non-domestic person
must enter into a written agency agreement with one of the following:
(1) The FCM carrying the foreign futures or options account that the
non-domestic person solicited in the U.S.; (2) any futures association
registered under the Act; \11\ or (3) any other person located in the
U.S. in the business of acting as an agent for service of process. The
agreement must provide that the FCM, registered futures association or
other designated person is authorized to serve as the agent of the non-
domestic person for purposes of accepting delivery and service of
communications from the Commission, U.S. Department of Justice, any SRO
or any foreign futures or foreign options customer.\12\ Qualifying
persons who act in the capacities of IBs, CPOs and CTAs and who are
located outside of the U.S. may be eligible to use the procedure
provided by Rule 30.5. By this Order, NFA is authorized to accept
filings for exemption from registration under Rule 30.5 and supporting
agreements from qualifying persons acting as CPOs or CTAs \13\ provided
such persons offer their products and services solely to qualified
eligible participants (QEPs) or qualified eligible clients (QECs) as
described in Rule 4.7.\14\ Under Rule
[[Page 47794]]
30.5(d), any person exempt from registration with the Commission in
accordance with the provisions of Rule 30.5 must, upon the request of
any representative of the Commission or the U.S. Department of Justice,
provide the records such person is required to maintain under Rule 30.5
at the place in the U.S. designated by the representative within 72
hours after the person receives the request.
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\11\ NFA is currently the only futures association so regulated.
\12\ 52 FR 28980, 28990 (August 5, 1987).
\13\ NFA already accepts filings for exemption from registration
under Rule 30.5 and supporting agreements from qualifying persons
acting as IBs.
\14\ Such persons are generally, FCMs, CPOs, CTAs, broker-
dealers, investment companies, banks, insurance companies, employee
benefit plans, business development companies, certain business
entities with total assets in excess of $5,000,000, natural persons
with net worth in excess of $1,000,000 (or with individual income in
each of the two most recent years in excess of $200,000 or joint
income of $300,000), certain governmental entities and non-U.S.
persons.
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C. Foreign Fitness Inquiries of Any Applicant for CFTC Registration or
Registrant Having a Foreign Principal
As part of the registration process, NFA reviews the fitness of any
foreign principal of an applicant for registration and any foreign
principal subsequently listed with a registrant by means of a criminal
background check through INTERPOL.\15\ In addition, in cases of a
foreign-domiciled applicant firm with a foreign principal, NFA's
fitness review encompasses a check with a foreign regulator or SRO.
Under current practice, NFA must forward the request for fitness
information to the Division, which then requests the information from
the foreign regulator and/or SRO in the jurisdiction of the principal's
residence. Information received from the foreign regulator and/or SRO
by the Commission's staff is subsequently forwarded to NFA. NFA
evaluates this information based on the standards set forth in its
Registration Investigation Procedures Manual in making its
determination as to whether to grant registration. These standards were
reviewed by the Commission in February 1996.\16\ The Division has
recommended that NFA consider expanding foreign fitness inquiries to
include previous employment locations within the prior five years in
addition to requesting information from authorities in the foreign
jurisdiction where the applicant resides.\17\ The Division also
recommended that NFA consider enhancing foreign fitness inquiries to
include any principal with a U.S. residence who has worked abroad for a
period of at least six months during the prior five years. By this
Order, NFA is authorized to request fitness information directly from
the relevant foreign regulator(s) and/or SRO(s) of any applicant for
registration or registrant having a foreign principal to the extent the
Commission has advised NFA such regulator is willing to transfer such
information directly to NFA. The relevant foreign regulator(s) and/or
SRO(s) of any applicant for registration includes foreign regulators
and/or SROs in all employment locations of the applicant for the five
years prior to the date of the application. NFA is further authorized
to request fitness information on any principal who has worked outside
of the U.S. for at least six months during the five years preceding the
filing of Form 8-R to the same extent.\18\
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\15\ For these purposes, NFA considers a foreign principal to be
any person with a current address outside of the U.S. It does not
include a foreign national who has recently moved to the U.S. but
would include a U.S. citizen who has moved abroad.
\16\ Review of the Registration Fitness Program of National
Futures Association, Commodity Futures Trading Commission, Division
of Trading and Markets (February 1996) (hereinafter, the Review).
\17\ Review, Recommendation No. 3b at 7-8.
\18\ Each firm applying for registration must file a Form 8-R
for each principal, and registrants must file a Form 8-R for each
new principal. Rules 3.10(a)(2), 3.32.
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D. Globex and NYMEX ACCESS "Pass-the-Book" Relief
The Chicago Mercantile Exchange's (CME's) Globex trading system and
NYMEX's ACCESS trading system permit the trading of contracts of those
respective exchanges, and those of certain foreign exchanges, via
electronic media outside of regular U.S. trading hours. In response to
a request for relief on behalf of FCM member firms of the CME and the
Chicago Board of Trade (CBT),\19\ the Division adopted a no-action
position with respect to certain Commission registration requirements
that would apply to the member firms and their foreign affiliates in
France and the United Kingdom that "pass the book" \20\ of customer
orders for entry into the Globex \21\ electronic trading system and to
personnel involved in that process.\22\ The Division required the
exchanges to notify the Commission to confirm the applicability of the
no-action relief with respect to the placement of Globex terminals in
other jurisdictions, and such notice has been received with respect to
Hong Kong \23\ and Japan.\24\ The Division also granted similar relief
to FCM member firms of the NYMEX and their foreign affiliates in the
United Kingdom who "pass the book" of customer orders and engage in
certain order acceptance activities involving the NYMEX ACCESS trading
system.\25\ The Division also has received a notice from NYMEX as to
the placement of Sydney Computerized Overnight Market (SYCOM) terminals
in Australia that would permit Sydney Futures Exchange member firms to
execute NYMEX transactions for NYMEX member firms and their foreign
affiliates.\26\
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\19\ CBT was a participant in Globex from June 1992 through May
1994.
\20\ The term "pass the book" refers to the process which
orders for exchange contracts received for or on behalf of customers
of an exchange member firm are transferred for entry into Globex
terminals located in a non-U.S. office of a foreign affiliate of
that exchange member firm outside normal U.S. business hours.
\21\ The June 20, 1988 agreement between the Chicago Mercantile
Exchange and Reuters Holdings PLC which established certain rights
and responsibilities of the parties related to Globex is set to
expire in 1998. CME intends to continue to provide an electronic
execution system that will retain the Globex name.
\22\ CFTC Interpretative Letter No. 92-11, [1990-1992 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 25,325 (June 25, 1992),
superseded in part by CFTC Interpretative Letter No. 93-83, [1992-
1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 25,849 (August
9, 1993).
\23\ The Division received the notice with respect to Hong Kong
on August 15, 1993.
\24\ The Division received the notice with respect to Japan on
December 16, 1993.
\25\ The Division issued the letter granting relief to NYMEX
members that "pass the book" to their foreign affiliates in the
United Kingdom utilizing NYMEX ACCESS terminals in the United
Kingdom on October 29, 1993 and expanded it to Hong Kong on June 10,
1997.
\26\ The Division received the notice with respect to Australia
on September 28, 1995.
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Exchange member FCMs seeking to avail themselves of the Globex and
NYMEX no-action relief must comply with filing, acknowledgment, and
other requirements described in CFTC Interpretative Letter No. 93-
83.\27\ Currently, the Commission receives a
[[Page 47795]]
letter from each firm intending to operate pursuant to pass-the-book
relief setting forth these filings, acknowledgments and
representations, and the Division verifies the completeness of the
letter. By this Order, NFA is authorized to serve as the repository for
the filings, acknowledgments and representations submitted by exchange
member FCMs seeking to avail themselves of Globex and NYMEX pass-the-
book relief and is authorized to verify that the filings,
acknowledgments and representations made by the firms are complete as
described in CFTC Interpretative Letter No. 93-83.
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\27\ CFTC Interpretative Letter No. 93-83, [1992-1994 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 25,849 (August 9, 1993). For
example, each exchange member FCM intending to operate pursuant to
pass-the-book relief must, among other undertakings: (1) Identify
itself, its foreign affiliates, and "designated persons" at such
affiliates authorized to solicit, accept or enter orders from
customers on behalf of the exchange member firm in writing to
appropriate exchanges, NFA and the Commission; (2) carry all
customer accounts on the books of the exchange member firm as
customer accounts of that firm, including for purposes of computing
net capital; (3) ensure that all written communication with
customers is by the exchange member firm on its own stationery; (4)
maintain all monies, securities, and property of customer accounts
in accordance with appropriate statutory and regulatory requirements
as segregated or secured amount funds, depending upon whether the
transaction is effected on or subject to the rules of a contract
market or a foreign exchange, respectively; (5) have the right to
terminate the authority of any designated person at the foreign
affiliate to solicit, accept, or enter orders on behalf of
customers; and (6) be liable under the Act, the Commission's
regulations and exchange rules for all solicitations, acceptances or
entries of orders for exchange contracts on Globex by the foreign
affiliate through its designated persons for or on behalf of
customers of the exchange member firm. Generally, the filing and
acknowledgment requirements are intended to give exchanges the
ability to monitor and to investigate trading on Globex involving
passing the book equivalent to their ability to do so in connection
with orders placed directly at the exchange member firm.
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E. FCM Order Transmittal Procedure Relief
The Division permits certain customers\28\ of FCMs to transmit
foreign futures and options orders directly to qualified foreign firms
that: (1) Are affiliated with the customer's FCM through a parent/
subsidiary relationship or through common ownership; and (2) carry such
FCM's omnibus account. When the order transmittal procedure relief was
granted initially, the foreign firm receiving these orders must already
have been granted relief under Rule 30.10.\29\ The Division
subsequently expanded the order transmittal procedure relief to allow
U.S. FCMs to implement the order transmittal procedures with their
foreign affiliates which had not received Rule 30.10 relief, provided
that certain additional conditions were met and representations were
given.\30\ When a U.S. FCM and its foreign affiliate wish to operate
pursuant to the order transmittal procedure relief, they write a letter
to the Commission representing that they will comply with the
conditions outlined in Letter No. 93-115 and, if applicable, with the
conditions outlined in Letters No. 95-8 and No. 95-83.\31\ The Division
then verifies that the U.S. FCM and its foreign affiliate have made the
appropriate representations. By this Order, NFA is authorized to
receive filings for order transmittal procedure relief and to verify
the completeness of the representations contained therein.
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\28\ Such customers are identified in Interpretative Letter No.
93-115 and are similar in description to persons that qualify as
QEPs under Commission Rule 4.7. See CFTC Interpretative Letter No.
93-115, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
25,932 (December 23, 1993).
\29\ In order to assure that the order transmittal procedure is
structured in a manner that facilitates an FCM's ability to
supervise its financial condition, the Division conditioned relief
on the following: (1) The FCM's establishment of and adherence to
written procedures that make explicit the internal control
procedures that apply to any direct contacts between the FCM's
customers and the foreign affiliate, including authorization,
identification, and supervision of orders; (2) identification by the
FCM to the foreign affiliate of the FCM's customers authorized to
transmit orders directly to the foreign affiliate; (3) the foreign
affiliate's identification of the customer on the order ticket at
the time it is created; (4) written confirmation of receipt and
execution of the customer's order by the foreign affiliate, along
with an audit trail and designated personnel with authority to
reconcile certain trades; (5) the FCM's establishment of and
adherence to procedures to monitor customer positions aggregated
across all markets, including the ability to assess whether a
customer is assuming too high a degree of financial risk with
respect to these and any other positions the customer may have with
the FCM that is greater than the FCM, in its business judgment,
based on reasonable reviews, believes is appropriate for that
customer; (6) a written agreement between the FCM and its affiliate
specifying that the FCM is directly liable to the foreign affiliate
for margin payments related to the omnibus accounts; and (7)
documentation provided to the customer from the FCM advising
customers that (a) orders delivered pursuant to the direct order
transmittal procedure are for their FCM's omnibus account with the
foreign affiliate, (b) such customers are customers of the FCM only
and are not customers of the foreign affiliate, and (c) the customer
has five days to object to the conditions imposed on the direct
order transmittal procedure. CFTC Interpretative Letter No. 93-115.
\30\ CFTC Interpretative Letter No. 95-8, [1994-1996 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 26,300 (January 25, 1995). In
addition to compliance with all the terms and conditions set forth
in Interpretative Letter No. 93-115, foreign affiliates of U.S. FCMs
which do not have Rule 30.10 relief and the U.S. FCMs are required
to comply with the terms and conditions summarized as follows: (1)
The U.S. FCM must accept liability under the Act and the
Commission's rules for all acts of the foreign affiliate undertaken
by certain persons; (2) the designated persons of the foreign
affiliate authorized to solicit, accept and enter orders must be
listed and procedures must be established to ensure that customers
deal only with such designated persons; (3) at least one designated
person must be registered with the Commission as an associated
person (AP) and all designated persons must be supervised by an AP;
(4) all designated persons who accept or enter orders must be
registered with the Commission as an AP; (5) all designated persons
not registered as APs must acknowledge that they are subject to the
Act and the Commission's rules, and must not be subject to statutory
disqualification from registration under Section 8a(2) of the Act;
(6) the Commission must be assured access to original books and
records related to the solicitation, acceptance or entry of U.S.
institutional customer orders on behalf of the U.S. FCM at the
foreign affiliate; and (7) the foreign affiliate must appoint the
U.S. FCM as its agent for service of process with respect to any
materials arising out of its activities concerning these orders.
\31\ As Japanese and Hong Kong laws require that original books
and records of the U.S. FCM's foreign affiliate be maintained within
the local jurisdiction, U.S. FCMs with foreign affiliates in Japan
or Hong Kong may comply with the following terms and conditions in
satisfaction of the requirement that an FCM and its foreign
affiliate assure the Commission access to the foreign affiliate's
original books and records: (1) The U.S. FCM and its Japanese or
Hong Kong affiliate will provide authenticated copies of the foreign
affiliate's original books and records upon request of a Commission
representative; (2) the U.S. FCM and its affiliate will provide
access to original books and records in the foreign jurisdiction;
(3) to the U.S. FCM and its affiliate waive objection to the
admissibility of the copies as evidence in a Commission action
against the FCM or its affiliate; and (4) the U.S. FCM and its
affiliate agree in the event of a proceeding to provide a witness to
authenticate copies of books and records given to the Commission.
CFTC Interpretative Letter 95-83, [1994-1996 Transfer Binder]) Comm.
Fut. L. Rep. (CCH) para. 26,559 (September 29, 1995).
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F. DTB Terminal Placement Relief
By letter dated February 29, 1996, the Division stated that it
would not recommend that the Commission commence an enforcement action
against DTB\32\ in connection with the placement of DTB computer
terminals in the U.S. in order to permit DTB members to execute
transactions involving DTB futures and option products which are
otherwise approved for trading by U.S. persons without the DTB being
deemed a U.S.-based board of trade required to be designated as a
contract market pursuant to Section 5 of the Act.\33\ Relief was
conditioned upon, among other conditions, the filing of materials
identifying all DTB members that intend to operate pursuant to the
relief. The Division has also established a procedure that requires
firms to submit an acknowledgment of jurisdiction and compliance with
the terms of the relief as outlined in the February 29, 1996 letter
(the Acknowledgment).
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\32\ The DTB, located in Frankfurt, Germany, is a fully
automated international options and futures exchange on which all
trades are executed and cleared electronically. Trading is conducted
via computer terminals. The market participants' computers and
terminals are linked to the DTB computer center by means of a wide-
ranging telecommunications network.
\33\ CFTC Interpretative Letter No. 96-28, [Current Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 26,669 (February 29, 1996).
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By this Order, the NFA is authorized to receive and to review
identification filings and Acknowledgments from firms intending to
operate DTB terminals in the U.S. NFA is authorized to verify that the
identification filings accurately identify the firms and that the
Acknowledgments include the terms and conditions required for
relief.\34\
[[Page 47796]]
NFA is further authorized to conduct a fitness review of the firm such
as is performed in connection with registration with the Commission.
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\34\ These terms and conditions are listed in the February 29,
1996 letter, as supplemented by a May 9, 1997 letter, from the
Division to DTB granting relief to DTB and are as follows: (1) DTB
terminals will be located only in U.S. offices of DTB members or on
the floor of the CME; (2) all DTB members that intend to operate
pursuant to the relief will be identified to the Commission and the
NFA; (3) pursuant to the DTB's rules, DTB members must apply to the
DTB for DTB terminal placement and identify the location and
connection of user devices to DTB's electronic trading system and,
upon request, DTB shall provide information received from its
members and in its possession to the Commission regarding the
location of all such terminals in the U.S., and shall update such
information on a periodic basis upon reasonable request; (4) all
orders executed pursuant to the relief will be for "principal"
accounts if executed by a non-FCM DTB member firm and the Division
will be notified promptly in the event that there is a change under
applicable German laws or rules of the DTB concerning the definition
of the word "principal"; (5) participating DTB members will
provide, upon the request of the Commission or NFA, prompt access to
original books and records and the premises where DTB terminals are
installed in the U.S., and will consent to Commission jurisdiction
for purposes of ensuring compliance with the conditions of the no-
action relief; (6) DTB will continue to adhere to the "Principles
for Oversight of Screen Based Trading Systems for Derivative
Products," a statement of regulatory policy recommended by the
International Organization of Securities Commissions and adopted by
the Commission on November 21, 1990; (7) DTB will submit to the
Commission, on at least a quarterly basis, information reflecting
the volume of trades originated from U.S.-based computer terminals
compared to DTB's overall trading volume; and (8) DTB will undertake
to provide the Division with prompt notice of all material changes
to DTB rules, the German Exchange Act, the German Securities Act,
and other German laws relevant to futures and options which may
impact on the issuance of DTB Terminal Placement relief.
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G. Recordkeeping Requirements
By prior orders, the Commission has authorized NFA to maintain
various other Commission registration records and certified NFA as the
official custodian of such records for this agency.\35\ The Commission
has now determined, in accordance with its authority under Section
8a(10) of the Act, to authorize NFA to maintain and to serve as the
official custodian of records for the filings and acknowledgment
requirements submitted by: (1) Exchange member FCMs in connection with
"pass-the-book" relief; (2) FCMs and their foreign affiliates in
connection with order transmittal procedure relief; and (3) firms
intending to operate DTB computer terminals in the U.S. In this
connection, NFA has undertaken to abide by any special use restrictions
applicable to information received from a foreign market authority to
the full extent permitted by law. The Division also has determined to
authorize NFA to maintain requests and related materials submitted
pursuant to Rules 30.10 and 30.5 or obtained in the course of
conducting foreign fitness inquiries. These determinations are based
upon NFA's representations regarding the implementation of rules and
procedures for maintaining and safeguarding all such records, as well
as the need to facilitate NFA's preparations for assuming
responsibility for the above-mentioned activities.
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\35\ 49 FR 39593 (October 9, 1984); 50 FR 34885 (August 28,
1985); 51 FR 25929 (July 17, 1986); 54 FR 19594 (May 8, 1989); 54 FR
41133 (October 5, 1989); 58 FR 19657 (April 15, 1993).
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In maintaining the Commission's records pursuant to this Order, NFA
shall be subject to all other requirements and obligations imposed upon
it by the Commission in existing or future orders or regulations. In
this regard, NFA shall also implement such additional procedures (or
modify existing procedures) as are necessary to ensure the security and
integrity of the records in NFA's custody and acceptable to the
Commission; to facilitate prompt access to those records by the
Commission and its staff, particularly as described in other Commission
orders or rules; to facilitate disclosure of public or nonpublic
information in those records when permitted by Commission orders or
rules and to keep logs as required by the Commission concerning
disclosure of nonpublic information; and otherwise to safeguard the
confidentiality of the records.
II. Conclusion and Order
The Commission has determined, in accordance with the provisions of
Sections 8a(10) and 17(o)(1) of the Act and NFA's letter dated August
27, 1997, subject to any restriction by a given jurisdiction that
information must pass directly between regulatory authorities, to
authorize NFA to perform the following functions:
(1) To grant, either with or without conditions, exemptive relief
to firms acting in the capacity of FCMs which are members of regulatory
or self-regulatory bodies to which an order under Commission Rule 30.10
has been issued from the registration requirements of part 30;
(2) To maintain filings for exemption from the registration
requirements of part 30 and supporting agreements submitted pursuant to
the provisions of Commission Rule 30.5 by qualifying persons acting as
CPOs or CTAs who offer their products and services solely to
"qualified eligible participants" or "qualified eligible clients,"
as those terms are defined in Commission Rule 4.7;
(3) To grant, either with or without conditions, the registration
of any applicant for registration with a foreign principal and the
addition by a registrant of a foreign principal after NFA verifies the
fitness of the foreign principal\36\ with the relevant foreign
regulatory authority,\37\ where NFA previously would have forwarded the
request for fitness information to the Commission in order for the
Commission to request the fitness information from the appropriate
foreign regulatory body;
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\36\ This should include a person residing in the U.S. who has
resided outside of the U.S. for at least six months during the five
years immediately prior to the filing of Form 8-R.
\37\ The relevant foreign regulatory authority can include an
authority in any jurisdiction where the principal has worked during
the prior five eyars as well as the authority for the principal's
current residence.
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(4) To maintain the filings and acknowledgments submitted by
exchange member FCMs in connection with Globex and NYMEX Access "pass-
the-book" relief;
(5) To maintain filings of FCMs and their foreign affiliates made
in connection with order transmittal relief where the filings contain
the required representations for claiming such relief;
(6) To maintain identification filings and acknowledgments from
firms intending to operate DTB terminals in the U.S. where such
identification filings and acknowledgments contain the required
representations and information for claiming relief; and
(7) To maintain filings, acknowledgments, and records pertaining to
the functions previously delegated in this Order and to serve as the
official custodian of those Commission records.\38\
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\38\ The Commission may delegate other similar administrative
and processing functions by letter and Commission Advisory. The
Commission also will furnish to NFA existing Commission records that
it identifies as pertaining to the matters discussed in this Order.
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The Commission is in the process of preparing an update to its
systems of records (with respect to CFTC-12 and CFTC-20) to make
permissible under the Privacy Act of 1974 the concomitant disclosure to
NFA of personal information on individuals that may be contained in
these filings, acknowledgments, and records.
NFA shall perform these functions in accordance with the standards
established by the Act and the regulations and orders promulgated
thereunder, particularly Rule 30.10 and Commission orders issued
thereunder, and shall provide the Commission with such summaries and
periodic reports as the Commission may determine are necessary for
effective oversight of this program.
These determinations are based upon the Congressional intent
expressed in Sections 8a(10) and 17(o) of the Act that the Commission
have the authority to delegate to NFA any portion of the Commission's
registration responsibilities under the Act for purposes of carrying
out these responsibilities in the most efficient and cost-effective
manner and NFA's representations concerning the standards and
procedures to be followed and the reports to be generated in
administering these functions.
[[Page 47797]]
This Order does not, however, authorize NFA to render "no-action"
opinions or interpretations with respect to applicable registration
requirements.
Nothing in this Order or in Sections 8a(10) or 17(o) of the Act
shall affect the Commission's authority to review the granting of a
registration application by NFA in the performance of Commission
registration functions, or to review the maintenance of registration by
NFA.
NFA is authorized to perform all functions specified herein until
such time as the Commission orders otherwise. Nothing in this Order
shall prevent the Commission from exercising the authority delegated
herein. NFA may submit to the Commission for decision any specific
matters that have been delegated to it and Commission staff will be
available to discuss with NFA staff issues relating to the
implementation of this Order. Nothing in this Order affects the
applicability of any previous orders issued by the Commission under
Part 30.
Issued in Washington, D.C. on September 5, 1997 by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 97-24015 Filed 9-10-97; 8:45 am]
BILLING CODE 6351-01-P
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