[Federal Register: January 21, 2009 (Volume 74, Number 12)]
[Notices]
[Page 3570-3572]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21ja09-57]
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COMMODITY FUTURES TRADING COMMISSION
Notice of Additional Conditions on the No-Action Relief When
Foreign Boards of Trade That Have Received Staff No-Action Relief To
Permit Direct Access to Their Automated Trading Systems From Locations
in the United States List for Trading From the U.S. Linked Futures and
Option Contracts and a Revision of Commission Policy Regarding the
Listing of Certain New Option Contracts
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice.
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SUMMARY: The Commodity Futures Trading Commission (Commission) is
providing notice requiring foreign boards of trade that may receive
Commission staff no-action relief permitting them to make their
automated trading systems directly available from the U.S. to comply
with additional conditions for the no-action relief to remain effective
if they list for trading from the U.S. contracts that are linked to
contracts traded on certain U.S.-based entities. Separately, the
Commission is providing notice that it is revising its policy regarding
the notification procedures applicable to listing an option on a
futures contract that already is (or can be) listed for trading from
the U.S.
DATES: Effective Date: The conditions and notification procedures are
effective immediately.
FOR FURTHER INFORMATION CONTACT: Duane C. Andresen, Senior Special
Counsel, Division of Market Oversight, Commodity Futures Trading
Commission, Three Lafayette Center, 1155 21st Street, NW., Washington,
DC 20581. Telephone: 202-418-5492. E-mail: [email protected].
SUPPLEMENTARY INFORMATION:
I. Background
Since 1996,\1\ Commission staff has issued no-action letters \2\ to
foreign boards of trade (FBOT) stating that, subject to compliance with
certain conditions, the staff will not recommend that the Commission
take enforcement action against the FBOT or its members if the FBOT
permits its members or participants in the United States to have direct
access \3\ 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).\4\ On June 2, 1999, the Commission issued an order which, among
other things, withdrew proposed rules that would have governed
automated access to FBOTs from the U.S. and instructed the Commission
staff to begin immediately processing no-action requests from FBOTs
seeking to place trading terminals in the U.S., 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.\5\ On October 22, 2006, the Commission issued a Statement
of Policy that affirmed the use of the no-action process to permit
FBOTs to provide direct access to their electronic trading systems to
U.S. members or authorized participants.\6\
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\1\ In February 1996, Commission staff issued no-action relief
to Deutsche Terminborse (DTB), an automated international futures
and options exchange headquartered in Frankfurt, Germany, that
permitted DTB, subject to certain terms and conditions, to place
computer terminals in the U.S. offices of its members for principal
trading. See CFTC Interpretative Letter No. 96-28 (1996-1997
Transfer Binder) Comm. Fut. L. Rep. (CCH) para. 26,669 (Feb. 29.
1996). In June 1998, DTB merged with the Swiss Options and Financial
Futures Exchange and DTB changed its name to Eurex Deutschland.
\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
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\ Direct access means that the member in the U.S. may enter an
order directly into the trade matching engine to be matched
according to the trade matching algorithm. Direct access is
different from an automated order routing system (AORS) in that an
order transmitted via AORS is intermediated in that it is entered
into the trade matching engine by or through the intermediary, i.e.,
the intermediary, not the member in the U.S., has direct access.
\4\ The no-action letters issued to FBOTs, formerly referred to
as ``foreign terminal no-action letters,'' are currently referred to
as ``direct access no-action letters'' and are published on the
Commission's Web site at: http://www.cftc.gov/dea/
deaforeignterminaltable.htm. Hereinafter the letters are simply
referred to as ``no-action letters.'' Reference to DTEFs in the no-
action letters was added following the establishment of that
registration category by the Commodity Futures Modernization Act of
2000.
\5\ Access to Automated Boards of Trade, 64 FR 32829 (June 18,
1999).
\6\ Boards of Trade Located Outside of the United States and No-
Action Relief from the Requirement to Become a Designated Contract
Market or Derivatives Transaction Execution Facility, 71 FR 64443
(November 2, 2006).
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Commission staff has issued 21 no-action letters since the DTB
letter, all of which grant the no-action relief requested subject to a
series of terms and conditions. The terms and conditions, among other
things, assure the Division (1) That the FBOT continues to be a bona
fide FBOT subject to effective regulation in its home country; (2) that
direct access is restricted to authorized entities; (3) that the
Division receives notice of any material changes in the information
provided to it in support of the no-action request including, without
limitation, any modification of the FBOT's membership criteria, the
location of its management, personnel or operations, the basic
structure, nature, or operation of the trading system, or the
regulatory or self-regulatory structure applicable to its members; and
(4) that satisfactory information-sharing arrangements between the
Commission, the FBOT, and the FBOT's relevant regulatory authorities
will remain in effect.
With respect to the listing of new contracts, initially FBOTs that
received no-action relief that wished to list additional futures and
option contracts for trading by direct access from the U.S. were
required to request in writing and receive supplemental no-action
relief from Commission staff prior to listing the new contracts. On
June 30, 2000, the Commission issued a Statement of Policy that
permitted FBOTs with no-action relief to list additional futures and
option contracts for trading from the U.S. merely by filing with
Commission staff no later
[[Page 3571]]
than the business day preceding the initial listing of the contracts:
(1) A copy of the initial terms and conditions of the additional
contracts and (2) a certification that it is in compliance with the
terms and conditions of its no-action letter and that the additional
futures and option contracts would be traded in accordance with such
terms and conditions.\7\ On April 14, 2006, in light of its experience
since the issuance of the Statement of Policy and in recognition of the
fact that the listing of new products may raise previously unidentified
regulatory issues, the Commission issued a revision to the new contract
listing policy (Notice of Revision).\8\ The Commission determined to
establish a ten business day advance notification requirement in order
to give Commission staff the opportunity to review the terms and
conditions of proposed additional contracts to address any regulatory
issues raised prior to the contract being made available for trading by
direct access from the U.S.
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\7\ See Statement of Policy of the Commodity Futures Trading
Commission Regarding the Listing of New Futures and Option Contracts
by Foreign Boards of Trade That Have Received Staff No-Action Relief
to Place Electronic Trading Devices in the U.S., 65 FR 41641 (July
6, 2000). The Statement of Policy did not apply to broad-based stock
index futures and option contracts that are now covered by Section
2(a)(1)(C) of the Commodity Exchange Act. Foreign boards of trade
were (and presently are) required to seek and receive written
supplemental no-action relief from Commission staff prior to
offering or selling such contracts.
\8\ See Notice of Revision of Commission Policy Regarding the
Listing of New Futures and Option Contracts by Foreign Boards of
Trade That Have Received Staff No-Action Relief To Provide Direct
Access to Their Automated Trading Systems from Locations in the
United States, 71 FR 19877 (April 18, 2006). The notice of revision
did not alter a FBOT's obligation to seek and receive written
supplemental no-action relief from Commission staff prior to
offering or selling broad-based stock index futures and option
contracts. The FBOT is still required to file with Commission staff
a copy of the initial terms and conditions of the additional
contracts and a certification that it is in compliance with the
terms and conditions of its no-action letter and that the additional
futures and option contracts would be traded in accordance with such
terms and conditions.
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II. Additional Conditions on the No-Action Relief
On January 17, 2006, ICE Futures Europe \9\ notified the Division
pursuant to the Statement of Policy of its intent to list for direct
access from the U.S. a West Texas Intermediate (WTI) Light Sweet Crude
Oil Futures Contract that cash-settled on the price of a physically-
settled Light Sweet Crude Oil Futures contract traded on the New York
Mercantile Exchange (NYMEX), a U.S. DCM. On April 12, 2006, ICE Futures
Europe notified the Division of its intent to list for direct access
from the U.S. the ICE Futures New York Harbour Heating Oil Futures
Contract and the ICE Futures New York Harbour Unleaded Gasoline
Blendstock (RBOB) Futures Contract, each of which cash-settled on the
price of physically-settled contracts traded on the NYMEX. On April 2,
2007, ICE Futures Europe notified the Division of its intent to launch
the ICE Futures WTI Light Sweet Crude Oil Options Contract. On December
19, 2007 the Dubai Mercantile Exchange (DME) \10\ notified the Division
pursuant to the Notice of Revision of its intent to list for trading
for direct access from the U.S. on DME Direct the DME WTI Crude Oil
Financial Futures Contract which cash-settled based on the NYMEX Light,
Sweet Crude Oil futures settlement price on the penultimate trading
day.
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\9\ On November 12, 1999, the Division of Trading and Markets
granted to the International Petroleum Exchange of London (IPE) (now
ICE Futures Europe) no-action relief to make its electronic trading
and order matching system, Energy Trading System II (ETS), available
to IPE members in the United States. CFTC Staff Letter No. 99-69
(November 12, 1999). The November 12, 1999 IPE no-action letter was
amended by the Division of Market Oversight (Division) four times
between July 26, 2002 and April 14, 2003 as trading of the contracts
was transitioned from the ETS to the ICE Platform operated by
IntercontinentalExchange, Inc., in Atlanta, Georgia and trading
hours were extended.
\10\ On May 24, 2007, the Division granted to the DME no-action
relief to make its electronic trading and order matching system,
known as DME Direct, available to DME members in the U.S. CFTC Staff
Letter No. 07-06 (May 24, 2007).
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The listing for trading by direct access from the U.S. by ICE
Futures Europe and DME of contracts which settle on the price of
contracts traded on a CFTC-regulated exchange raises very serious
concerns for the Commission. Such linkages can create virtually a
single market for the subject contracts consisting of both the
underlying contract at the CFTC-regulated exchange and the cash-settled
``look-alike'' contract traded on the FBOT. In the absence of certain
preventive measures at the FBOT, this contract linkage could compromise
the Commission's ability to carry out its market surveillance
responsibilities, as well as the integrity of prices established on
CFTC-regulated exchanges.
In response to these concerns, the Division amended the no-action
relief granted to ICE Futures Europe and DME, in letters dated June 17,
2008 and July 3, 2008 respectively,\11\ by adding certain conditions
\12\ with respect to any ICE Futures Europe or DME contract which
settles against any price, including the daily or final settlement
price, of (1) a contract listed for trading on a DCM or DTEF, or (2) a
contract listed for trading on an exempt commercial market (ECM) that
has been determined to be a significant price discovery contract \13\
(collectively, linked contracts).\14\ The purpose of the conditions is
to ensure that ICE Futures Europe and DME apply to any linked contract
comparable principles or requirements regarding the daily publication
of trading information and the imposition of position limits or
accountability levels for speculators as apply to the DCM, DTEF or ECM
contract against which the linked contract settles. The conditions
would also ensure that ICE Futures Europe and DME provide the
Commission with information regarding the extent of speculative and
nonspeculative trading in linked contracts that is comparable to the
information provided to the Commission by DCMs, DTEFs or ECMs for
publication of the Commitments of Traders Reports.
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\11\ CFTC Staff Letter No. 08-09 (June 17, 2008); CFTC Staff
Letter No. 08-10 (July 3, 2008).
\12\ The no-action letters include a provision pursuant to which
the Division may further condition the relief granted therein. See,
e.g., CFTC Staff Letter No. 99-69 (November 12, 1999), issued to the
International Petroleum Exchange, Inc., which states as follows:
``As with all no-action letters, the Division retains the authority
to condition further, modify, suspend, terminate, or otherwise
restrict the terms of the no-action relief provided herein, in its
discretion.''
\13\ In 2008 Congress authorized the Commission to determine, in
its discretion, that a contract performs a significant price
discovery function under criteria established in Section 2(h)(7) of
the CEA, including price linkage, arbitrage, material price
reference, and material liquidity. When the Commission by order
makes such a determination, the ECM on which the significant price
discovery contract is traded must assume, with respect to that
contract, all the responsibilities and obligations of a registered
entity under the CEA and Commission regulations, and must comply
with nine core principles established by Section 2(h)(7)(C). See
CFTC Reauthorization Act of 2008, Pub. L. 110-246 at sec. 12304. See
also Notice of Proposed Rulemaking: ``Significant Price Discovery
Contracts on Exempt Commercial Markets,'' 73 FR 75888 (December 12,
2008).
\14\ ICE Futures Europe has listed for trading by direct access
from the U.S. the four linked contracts previously identified. DME
has not listed the one linked contract notified to the Division.
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Accordingly, the ICE Futures Europe and DME no-action letters were
amended with respect to the linked contracts to include the following
conditions, to be satisfied within 120 days of the date of the amended
no-action letter:
(1) ICE Futures Europe (DME) will impose on linked contracts, by
rule or otherwise, position limits or position accountability levels
(including related hedge exemption provisions) that are comparable to
the existing position limits or position accountability levels
(including related hedge exemption provisions) as adopted by: (i) The
DCM, DTEF or ECM for the contract against which the linked contract
settles or (ii) the DCM, DTEF or ECM for a
[[Page 3572]]
financially-settled equivalent of such contract;
(2) ICE Futures Europe (DME) will inform the Commission in a
quarterly report of any trader that had positions in a linked contract
above the applicable ICE Futures Europe (DME) position limit, whether a
hedge exemption was granted, and if not, whether a disciplinary action
was taken;
(3) ICE Futures Europe (DME) will publish daily trading information
(e.g., settlement prices, volume, open interest, and opening and
closing ranges) that is comparable to the daily trading information
published by the DCM, DTEF or ECM for the contract against which the
ICE Futures Europe (DME) contract settles; and
(4) ICE Futures Europe (DME) will provide to the CFTC (through the
Financial Services Authority (FSA) in the case of ICE Futures Europe),
a daily report of large trader positions in each linked contract for
all contract months in a form and manner that (a) can be fully
integrated into the CFTC's market surveillance systems, including full
identification of each position's beneficial owner comparable to the
reporting that is provided by the DCM, DTEF, or ECM; and (b) can,
(subject to any Memorandum of Understanding between the CFTC and FSA in
the case of ICE Futures Europe), be fully integrated into the CFTC's
Commitments of Traders Report, including appropriate categorization of
traders and their positions.
The Commission is hereby providing notice that these conditions
henceforth will be imposed on the no-action relief of any FBOT that
lists for trading by direct access from the U.S. any futures or option
contract which settles against any price, including the daily or final
settlement price, of (1) a contract listed for trading on a DCM or
DTEF, or (2) a contract listed for trading on an ECM that has been
determined to be a significant price discovery contract.
III. Listing Option Contracts
Both the Statement of Policy and the Notice of Revision required
separate notification for futures and option contracts in order to
permit the contracts to be listed for direct access from the U.S. Thus,
even if the futures contract is currently listed, the FBOT must
separately notify the Division, pursuant to the ten business day
advance notification requirement of the Notice of Revision, of its
desire to list the option on that futures contract. In contrast, when
the Commission's Office of General Counsel (OGC) issues a no-action
letter to allow the offer or sale of a FBOT-traded broad-based security
index futures contract to persons located in the U.S., the option on
that particular futures contract may also be offered or sold in the
U.S. without any further regulatory action from OGC. This leads to an
unusual situation when the FBOT, pursuant to Appendix D of Part 30,\15\
requests permission to list a futures contract for trading by direct
access from the U.S. in the same no-action request letter in which the
FBOT requests the OGC no-action position. When OGC issues the no-action
letter, both the futures contract and the option on that contract may
be offered or sold in the U.S. and, with the concurrence of the
Division, the futures contract (but not the option on that futures
contract) may be listed for direct access from the U.S. pursuant to the
terms and conditions of the direct access no-action relief. The FBOT
must then separately request permission from the Division to make the
option contract available by direct access.
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\15\ 17 CFR 30, App. D. (2003), 68 FR 33623.
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In order to eliminate this inconsistency and to streamline the
procedures for listing option contracts for direct access from the
U.S., the Commission is hereby providing notice that the provisions in
the Notice of Revision, insofar as they apply to options on futures
contracts that are, or could be,\16\ listed for trading by direct
access from the U.S. pursuant to the conditions of the FBOT's no-action
relief, are revised as follows:
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\16\ This procedure also applies where the FBOT has permission
to list the futures contract for trading by direct access but has
not yet done so at the time it also decides to list the option
contract.
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(1) If the option is on a broad-based security index futures
contract which may be offered or sold in the U.S. and listed for direct
access from the U.S. pursuant to a no-action letter issued by OGC, the
option contract may be listed for direct access without further action
by either the requesting FBOT or the Division.
(2) If the option is on a futures contract that is neither a linked
contract nor a broad-based security index futures contract which may be
offered or sold in the U.S., the option contract may be listed for
direct access merely by filing with Commission staff no later than the
business day preceding the initial listing of the contract: (i) a copy
of the initial terms and conditions of the additional contract and (ii)
a certification that the FBOT is in compliance with the terms and
conditions of its no-action letter and that the additional option
contract would be traded in accordance with such terms and conditions.
(3) If the option is on a futures contract that is a linked
contract, the option contract may be listed for direct access merely by
filing with Commission staff no later than the business day preceding
the initial listing of the contract: (i) a copy of the initial terms
and conditions of the additional contract and (ii) a certification that
the FBOT is in compliance with the terms and conditions of its no-
action letter, including the conditions specifically applicable to
linked contracts, and that the additional option contract would be
traded in accordance with such terms and conditions.
Issued in Washington, DC on January 14, 2009, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-1153 Filed 1-16-09; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: January 22, 2009