Any person adversely by any requirement in Part 30 may file a petition with the Secretary of the Commission, setting forth the reasons why that person should be exempt from a particular requirement. Persons located outside the United States that solicit or accept orders directly from U.S. customers for foreign futures and options transactions, who are subject to a comparable regulatory scheme in the country in which they are located, may apply under Regulation 30.10 for exemption from some or all requirements of Part 30. A petition for exemption pursuant to § 30.10 is typically filed on behalf of persons located and doing business outside the U.S. that seek access to U.S. customers by: (1) a governmental agency responsible for implementing and enforcing the foreign regulatory program; or (2) an SRO of which such persons are members.
Appendix A of Part 30 sets forth the elements that the Commission evaluates in determining regulatory program comparability. Petitioning parties should strive to address these elements in a petition, and submit the petition and supporting documentation to Secretary of the Commission.
Qualification
The U.S. registration process for FCMs offers the Commission and NFA the opportunity to determine whether applicants are qualified to deal with the public. The Commission and NFA considers an applicant’s past disciplinary history or conduct -- sometimes referred to as “statutory disqualifications” -- to determine whether an individual, or a firm through its principals, is and remains fit for registration under the CEA. Registration also identifies to the public, the Commission and other governmental agencies, the individuals and entities that are authorized to solicit and accept customer business under the CEA. In 1984, the Commission delegated FCM registration responsibility to NFA. The Commission oversees NFA in its exercise of the registration function.
Any person seeking to register with the Commission in any capacity must complete and file with NFA a Form 7-R. The 7-R requires the applicant to provide basic background and ownership information along with any past disciplinary history. Any individual that would be listed as a principal or an associated person of the applicant is required to provide fingerprints for processing by the Federal Bureau of Investigations. In addition, any associated person must have passed the National Commodity Futures Examination (known as the Series 3 exam) within two years preceding any application.
Any person seeking to register with the Commission as an FCM must file a Form 1-FR-FCM demonstrating compliance with certain minimum financial requirements. The 1-FR-FCM must include financial statements certified by an independent public accountant. An applicant for FCM registration also may be asked to provide compliance procedures, additional documents and/or written representations as part of the application. A person’s FCM registration application will not be complete until the FCM designates an individual as a Chief Compliance Officer (CCO) and lists the CCO as a principal of the FCM.
A petition for exemptive relief under Regulation 30.10 should show that the petitioner is subject to a regulatory scheme that has comparable qualification standards. The regulatory scheme should create a registration and licensing program that is sufficient to identify individuals and entities that are properly authorized to conduct derivatives business.
Minimum Financial Requirements
Appendix A to Part 30 describes three critical functions served by minimum financial requirements. First, they provide a cushion, together with margin, so that the default of a particular customer does not adversely affect the funds held on behalf of other customers. Second, the minimum financial requirements are intended to provide a person or firm with sufficient funds to operate its business and, therefore, make it less likely to misapply customer funds for its own purposes. Third, they ensure that the person or firm holding customer funds has a financial stake in its business and, therefore, is serious in its intent. In assessing comparability, capital rules or their equivalent are considered together with: (a) any provisions made for insuring customer losses; (b) the scope of clearing guarantees; and (c) segregation or customer trust calculation and accounting requirements which, to the extent they cover under margined accounts, can provide significant protection for a customer from another customer’s losses.
Pursuant to § 30.2 an FCM conducting brokerage activities in foreign futures and options must comply with the minimum financial requirements set forth in § 1.17 and the early warning requirements of § 1.12. Regulation 1.17 generally requires an FCM to maintain adjusted net capital of at least $1,000,000, or the greater of, among other things, 8% of the domestic and foreign-domiciled customer and non-customer risk maintenance margin or performance bond requirements for all domestic and foreign futures and options and cleared swaps positions. NFA adopted a similar requirement for all FCM Member firms in Section 1 of the NFA Manual (Futures Commission Merchant Financial Requirements).
Pursuant to § 1.12, an FCM must comply with several requirements upon the occurrence of defined events that may raise concerns regarding the firm’s ability to meet its obligations to the market, safeguard customer funds, or otherwise continue normal business operations. For example, § 1.12(a) provides that if a FCM’s adjusted net capital falls below its early warning capital level, as defined by § 1.12(b), the FCM must file written notice with the Commission, the Securities and Exchange Commission (if the FCM is also a securities broker-dealer), NFA, and the firm’s designated self-regulatory organization (DSRO). The requirements set forth within § 1.12 enhance the ability of the Commission and the firm’s DSRO to respond with a heightened degree of surveillance, as may be necessary or prudent, in light of the possibility of deteriorating operating or financial conditions at a firm. These requirements therefore are generally referred to as “early warning” requirements.
A successful petition for exemption from Part 30 requirements must show that the early warning requirements and the minimum financial requirements applicable to the Petitioner’s member firms, as set forth by the regulatory program, are comparable to and generally address similar financial integrity concerns as the financial requirements set forth in the CEA and in the Commission’s regulations as applicable to FCMs. The financial requirements should be designed to provide a cushion in the event of a customer default such that losses of the defaulting customer need not adversely affect funds held on behalf of other customers; to ensure that a relief recipient has a financial stake in its business; and to help ensure that each recipient has sufficient funds to operate its business.
Customer Funds
In the U.S., the CEA requires the segregation of customer funds from those of the FCM holding such funds as well as its affiliated entities. One of the primary purposes of this requirement is to prevent the misapplication of those funds and to identify customer deposits as assets of customers rather than the firm. With respect to foreign futures and foreign options positions, § 30.7 requires each FCM to set aside in separate accounts a sufficient amount of funds to cover the full account balances of both U.S. and foreign-domiciled customers. A customer of an FCM may not opt-out of the segregation of customer funds. Moreover, § 30.7(e) prohibits an FCM from commingling foreign futures and options customer funds with customer funds held in section 4d(a)(2) domestic futures and options accounts and section 4d(f) cleared swap customer accounts.
Pursuant to § 30.7(d), each FCM is required to receive and maintain an acknowledgment letter from each depository holding foreign futures and options customer funds confirming that the depository was informed that such funds are held for or on behalf of foreign futures and foreign options customers. Regulation 30.7(h) permits an FCM to invest customer funds to the same extent it may invest section 4d customer funds as described in § 1.25. Generally, § 1.25 permits FCMs to invest customer funds only in safe or non-speculative investments (e.g., U.S. Treasuries) with the objective of preserving principal and maintaining liquidity.
The Commission will evaluate a petitioner’s regulatory framework for inclusion of certain customer fund provisions, including segregation, the separate custody and management of client deposits, handling of customer deposits, programs to resolve customer issues, margin requirements. These provisions must be comparable to and generally address the same financial integrity concerns as the requirements set forth in the CEA and Commission regulations.
Recordkeeping and Reporting
CEA Section 4(g) specifies the types of reports, books, and records required to be maintained by FCMs. Commission §§ 1.31 to 1.39 detail the recordkeeping requirements for FCMs. Pursuant to § 30.2 (Applicability of the CEA and rules), an FCM conducting brokerage activities in foreign futures and options must comply with several of these requirements. For example, § 1.31 generally provides that an FCM must maintain all books and records for a period of five years and make the records readily accessible during the first two years of the five-year period. Regulation 1.33 provides that an FCM must promptly furnish in writing to each customer a monthly statement setting forth any open contracts, unrealized profits or losses on any open contracts, and the amount of any secured amount carried with the FCM. Section 1.35(a)(1) requires an FCM to keep full, complete and systematic records, which include all pertinent data of all transactions relating to its dealings in, among other things, foreign futures and options – to include documentation such as trading cards, journals, confirmations, and copies of statements, as well as records of all oral communications (whether communicated by telephone, voicemail, instant messaging, chat room, etc.). An FCM also is required to file monthly unaudited financial reports (Form 1-FR-FCM) with the Commission and its DSRO.
The recordkeeping and reporting requirements imposed upon a petitioner by its regulatory scheme must provide timely information to customers about executed transactions and financial information to the regulatory authority. These requirements must be comparable to the requirements in effect under the Commission’s regulatory framework for FCMs.
Sales Practice Standards
In the U.S., sales practice standards aimed at protecting the individual retail customer are set forth in various Commission regulations and NFA rules and are verified through the SRO audit programs. For example, the Commission has consistently required that written disclosure of the risks of futures and options trading is essential to ensuring that potential customers are aware of risk, and are not otherwise misled. There are differing levels of protection depending upon the sophistication of the customer, namely, retail customers versus eligible contract Members.
A petitioner must show that the regulatory authority under which is operates has similar requirements regarding risk disclosures to customers of Member firms, customer protection mandates, fiduciary obligations, the prohibition of fraudulent activities, and other protections afford comparable sales practice safeguards to those provided in the Commission’s regulations.
Compliance
In the United States, FCMs are subject to multiple layers of compliance, oversight, and supervision – at the Commission level, the exchange level and/or at the level of the futures association (the latter two as SROs under Commission oversight) in which they are members. For example, FCMs must adhere to Commission rules and SRO rules with respect to registration, financial, and recordkeeping and reporting requirements. With regards to auditing, while the SROs have authority under the CEA to prescribe and enforce their own rules, the Commission nonetheless reserves the right to conduct its own reviews if deemed necessary.
For example, the Division of Market Oversight conducts rule enforcement reviews of designated contract markets and DSIO conducts reviews of NFA’s and other SRO’s programs. Specifically, under § 1.52, two or more SROs may file with the Commission and the Commission may approve a joint audit plan for any FCM or introducing broker that is a member of more than one SRO. To maintain the designation of a board of trade as a contract market, the board of trade must comply with the core principles pursuant to § 38.5. Finally, while the Commission has emergency powers over registered entities, U.S. exchanges are also authorized, “to adopt rules to provide for the exercise of emergency authority, in consultation or cooperation with the Commission, where necessary and appropriate….”
For § 30.10 petitioners, the compliance programs implemented by the government agency or SRO must be comparable to the laws and regulations applicable to FCMs subject to Commission and NFA oversight.
Information Sharing
Any exemption issued pursuant to § 30.10 requires an information sharing arrangement between the Commission and the appropriate governmental agency and/or SRO to ensure access to information on an “as needed” basis. The Commission must have access to firm-specific and transaction-specific information that is relevant to the protection of U.S. customers engaged in foreign futures and options transactions. Appendix A also states that the Commission may seek relevant position data information, including the identity of the position holder and the related positions, in connection with the surveillance of a potential “market disruption,” especially in the case of “integrated markets.”