[Federal Register: October 11, 2000 (Volume 65, Number 197)]
[Rules and Regulations]
[Page 60557-60560]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11oc00-26]
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Part V
Commodity Futures Trading Commission
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17 CFR Part 30
Foreign Futures and Options Transactions; Final Rules
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 30
Foreign Futures and Options Transactions
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule; Interpretative statement.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is clarifying its interpretation of the foreign futures or
foreign options secured amount requirement set forth in Commission Rule
30.7 (``secured amount requirement''). The Commission previously
interpreted Rule 30.7 to require futures commission merchants
(``FCMs'') and certain firms exempt from such registration to perform
an inquiry with respect to the treatment of the foreign futures or
foreign options secured amount by any depository handling those funds.
Under that interpretation, if a firm determines that any depository,
including those beyond the initial depository, would not hold the funds
set aside to cover the secured amount in a manner consistent with the
provisions of the rule, then the firm must set aside funds with an
acceptable depository in order to include such funds in the daily
computation of the secured amount. As part of the Commission's ongoing
program of regulatory reform, the Commission is revising its
interpretation of Rule 30.7 to clarify the obligations of an FCM or a
firm exempt from FCM registration in accordance with Rule 30.10
concerning the treatment of funds of foreign futures or foreign options
customers under Rule 30.7. The Commission's revised interpretation set
forth herein is a revised appendix to our Rules.
EFFECTIVE DATE: October 11, 2000.
FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel, or Andrew V. Chapin, Staff Attorney, Division of Trading and
Markets, Commodity Futures Trading Commission, 1155 21st Street, NW.,
Washington, DC 20581. Telephone: (202) 418-5430.
SUPPLEMENTARY INFORMATION: The current Appendix B to Part 30 sets forth
option contracts permitted to be offered or sold in the U.S. pursuant
to Rule 30.3(a).\1\ The Commission previously amended Rule 30.3(a) to
eliminate the requirement that the Commission authorize the offer and
sale of a particular foreign exchange-traded commodity option before it
can be offered or sold in the U.S., except for those involving stock
indices or foreign government debt futures.\2\ That action rendered
existing Appendix B to Part 30 generally irrelevant. Accordingly, the
Commission proposed to remove the current Appendix B and replace it
with the Interpretative Statement to Rule 30.7 contained herein.\3\
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\1\ Commission rules referred to herein are found at 17 CFR
Chapter I.
\2\ 61 FR 10891 (March 18, 1996).
\3\ 65 FR 53946 (September 6, 2000). Persons concerned with what
options on foreign stock index or government debt futures can be
lawfully offered or sold to customers located in the U.S. may
consult the foreign instruments approval backgrounder on the
Commission's website at http://www.cftc.gov/opa/backgrounder/
opapart30.htm.
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The Commission received one favorable comment on the proposed
Interpretative Statement. The commenter noted that ``the extra
requirements imposed by the current interpretation effectively compel
FCMs to choose between becoming insurers of funds their customers
knowingly commit to foreign markets or refusing to accept those
trades[,]'' and stated that the revised interpretation ``is a more
logical approach to balancing the desire of U.S. customers to trade on
foreign exchanges with the increased insolvency risks involved in
trading in some of those jurisdictions.''
Administrative Procedures Act
The Administrative Procedures Act provides that the required
publication of a substantive rule shall be made not less than 30 days
before its effective date, but provides an exception for ``a
substantive rule which grants or recognizes an exemption or relieves a
restriction.'' The Interpretative Statement to Rule 30.7 set forth in
revised Appendix B will relieve the obligation of FCMs and certain
foreign firms exempt from registration as an FCM under Rule 30.10 to
set aside their own funds to satisfy the secured amount requirement set
forth in Rule 30.7. Accordingly, the Commission has determined to make
Appendix B effective immediately.
List of Subjects in 17 CFR Part 30
Consumer protection, Definitions, Foreign futures, Foreign options,
Treatment of foreign futures or foreign options secured amount.
Accordingly, the Commission hereby amends Chapter I of Title 17 of
the Code of Federal Regulations as follows:
PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS
1. The authority citation for Part 30 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 6, 6c and 12a, unless otherwise
noted.
2. Appendix B is revised to read as follows:
Appendix B to Part 30--Interpretative Statement With Respect to the
Secured Amount Requirement Set Forth in Sec. 30.7
1. Rule 30.7 requires FCMs who accept money, securities or
property from foreign futures and foreign options customers to
maintain in a separate account or accounts such money, securities
and property in an amount at least sufficient to cover or satisfy
all of its current obligations to those customers.\1\ This amount is
denominated as the ``foreign futures or foreign options secured
amount'' and that term is defined in Rule 1.3(rr). The separate
accounts must be maintained under an account name that clearly
identifies the funds as belonging to foreign futures and foreign
options customers at a depository that meets the requirements of
Rule 30.7(c). Further, each FCM must obtain and retain in its files
for the period provided in Rule 1.31 an acknowledgment from the
depository that the depository was informed that such money,
securities or property are held for or on behalf of foreign futures
and foreign options customers and are being held in accordance with
the provisions of these regulations.
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\1\ ``Foreign futures or foreign options customer'' means ``any
person located in the United States, its territories or possessions
who trades in foreign futures or foreign options: Provided, That an
owner or holder of a proprietary account as defined in paragraph (y)
of [Rule 1.3] shall not be deemed to be a foreign futures or foreign
options customer within the meaning of [Rules 30.6 and 30.7].'' Rule
30.1(c). ``Foreign futures'' means ``any contract for the purchase
or sale of any commodity for future delivery made, or to be made, on
or subject to the rules of any foreign board of trade.'' Rule
30.1(a). ``Foreign option'' means ``any transaction or agreement
which is or is held out to be of the character of, or is commonly
known to the trade as, an `option,' `privilege,' `indemnity,' `bid,'
`offer,' `put,' `call,' `advance guaranty,' or `decline guaranty,'
made or to be made on or subject to the rules of any foreign board
of trade.'' Rule 30.1(b).
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2. In a series of orders issued pursuant to Rule 30.10, the
Commission required that certain foreign firms exempt from
registration as FCMs essentially comply with the standards of Rule
30.7.\2\ Specifically, the
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Commission stated that ``[the secured amount] requirement is
intended to ensure that funds provided by U.S. customers for foreign
futures and options transactions, whether held at a U.S. FCM under
Rule 30.7(c) or a firm exempted from registration as an FCM under
CFTC Rule 30.10, will receive equivalent protection at all
intermediaries and exchange clearing organizations.'' \3\ The
Commission further interpreted Rule 30.7 to require each FCM and
Rule 30.10 firm to take appropriate action (i.e., set aside funds in
a ``mirror'' account) in the event that it becomes aware of facts
leading it to conclude that foreign futures and foreign options
customer funds are not being handled consistent with the
requirements of Commission rules or relevant order for relief by any
subsequent intermediary or exchange clearing organization.
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\2\ Under Rule 30.10, the Commission may exempt a foreign firm
acting in the capacity of an FCM from registration under the
Commodity Exchange Act (``Act'') and compliance with certain
Commission rules based upon the firm's compliance with comparable
regulatory requirements imposed by the firm's home-country regulator
or self-regulatory organization (``SRO''). Once the Commission
determines that the foreign jurisdiction's regulatory structure
offers comparable regulatory oversight, the Commission may issue an
Order granting general relief subject to certain conditions. Firms
seeking confirmation of relief (referred to herein as ``Rule 30.10
firms'') must make certain representations set forth in the Rule
30.10 order issued to the regulator or SRO from the firm's home
country. For a list of those foreign regulators and SROs that have
been issued a Rule 30.10 order, see Appendix C to Part 30. In
certain cases, where a foreign regulator or SRO has requested that
firms subject to its jurisdiction be granted broader relief to
engage in transactions on exchanges other than in its home
jurisdiction (referred to herein as ``expanded relief''), the relief
has been granted where the relevant authority has represented that
it will monitor its firms for compliance with the terms of the order
in connection with such offshore transactions. Although Rule 30.10
orders generally exempt foreign intermediaries from compliance with
the secured amount requirement under Rule 30.7, firms seeking
confirmation of the expanded relief must represent that, with
respect to transactions entered into on behalf of U.S. customers on
any non-U.S. exchange located outside their home country, they will
treat U.S. customer funds in a manner consistent with the provisions
of Rule 30.7. For the most recent order granting expanded relief,
see 64 FR 50248 (September 16, 1999) (Singapore Exchange Derivatives
Trading Limited).
\3\ 64 FR 50248, 50251, n.19 (emphasis added).
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3. Upon further analysis and reconsideration of this matter, the
Commission has determined to revise its prior interpretation of the
Rule 30.7 secured amount requirement. The Commission notes that the
initial depository's ability to identify customer funds affords
foreign futures and foreign options customers a measure of
protection in the event that the intermediating FMC or foreign firm
becomes insolvent. Moreover, Rule 30.6(a) requires that foreign
futures and foreign options customers receive a Rule 1.55 written
disclosure explaining that the treatment of customer funds outside
the U.S. may not afford the same level of protection offered in the
U.S. These protections exist whetehr the intermediating firm is a
U.S. FCM or a firm exempt from such registration under Rule
30.10.\4\
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\4\ Although orders for expanded relief exempt foreign firms
from compliance with Rule 1.55, sales practice standards and the
treatment of customer funds constitute two of 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 Rule 30.10. Appendix A to
Part 30.
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4. The Commission further notes, however, that, in February
1998, Rule 30.6 was amended to permit an FCM to open a commodity
account for a foreign futures or foreign options customer without
providing the Rule 1.55 risk disclosure statement or obtaining an
acknowledgment of receipt of such statement, provided that the
customer is, at the time at which the account is opened, one of
several types of sophisticated customers enumerated in Rule 1.55(f)
(``Rule 1.55(f) customers'').\5\ While the amendment to Rule 30.6(a)
extinguished the obligation to provide a standardized risk
disclosure statement to Rule 1.55(f) customers at the time of the
account opening, the Commission stated that FCMs have obligations to
these customers independent of such a duty that would be material in
the circumstances of a given transactions.\6\
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\5\ 63 FR 8566 (February 20, 1998). The list of sophisticated
customers referenced in Rule 1.55(f) closely tracks, with one
exception, the list of ``eligible swap participants'' in Rule 35.1.
\6\ Id. at 8569.
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5. After careful consideration of the issue, the Commission has
determined that intermediaries should advise all customers
(regardless of their level of sophistication) to consider making
appropriate inquiries relating to the treatment of customer funds by
depositories located outside the jurisdiction of the intermediating
firm. Accordingly, the Commission has determined that an FCM, at a
minimum, must provide each foreign futures or foreign option
customer with a written disclosure tracking the language in either:
(1) Rule 1.55(b)(7),\7\ or (2) Paragraphs 6 and 8 of Appendix A to
Rule 1.55(c).\8\ Rule 30.10 firms must provide each foreign futures
or foreign options customer with a written disclosure tracking the
language in either Rule 1.55(b)(7) or paragraphs 6 and 8 of Appendix
A to Rule 1.55(c), or a comparable disclosure statement prescribed
by the firm's home country regulator. The Commission further
encourages all firms, whether domestic or foreign, to provide a Rule
1.55 written risk disclosure to all customers, regardless of each
customer's respective level of experience. The Commission notes
that, in any instance where a firm provides a Rule 1.55(f) customer
with a written disclosure, it is not necessary for the firm to
obtain an acknowledgment of receipt. In addition, those FCMs that
already have provided customers with a disclosure tracking either
Rule 1.55(b)(7) or paragraphs 6 and 8 of Appendix A to Rule 1.55(c)
(or in the case of Rule 30.10 firm, a comparable disclosure
statement prescribed by its home country regulatory) need not
provide those same customers with an additional written disclosure.
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\7\ Rule 1.55(b)(7) reads as follows: Foreign futures
transactions involve executing and clearing trades on a foreign
exchange. This is the case even if the foreign exchange is formally
``linked'' to a domestic exchange whereby a trade executed on one
exchange liquidates or establishes a position on the other exchange.
No domestic organization regulates the activities of a foreign
exchange, including the execution, delivery and clearing of
transactions on such exchange, and no domestic regulator has the
power to compel enforcement of the rules of the foreign exchange or
the laws of the foreign country. Moreover, such laws or regulations
will vary depending on the foreign country in which the transaction
occurs. For these reasons, customers who trade on foreign exchanges
may not be afforded certain of the protections which apply to
domestic transactions, including the right to use alternative
dispute resolution. In particular, funds received from customers to
margin foreign futures transactions may not be provided the same
protections as funds received to margin futures transactions on
domestic exchanges. Before you trade, you should familiarize
yourself with the foreign rules which will apply to your particular
transaction.
\8\ Appendix A to Rule 1.55(c) is the Generic Risk Disclosure
Statement, which FCMs may use as an alternative to the Risk
Disclosure Statement prescribed in Rule 1.55(b). The Commission
understands that most FCMs, in particular those that are most active
in international markets, use the Generic Risk Disclosure Statement.
Paragraphs 6 and 8 of Appendix A to Rule 1.55(c) read as
follows:
6. Deposited cash and property.
You should familiarize yourself with the protections accorded
money or property you deposit for domestic and foreign transactions,
particularly in the event of a firm insolvency or bankruptcy. The
extent to which you may recover your money or property may be
governed by specified legislation or local rules. In some
jurisdictions, property which has been specifically identifiable as
your own will be pro-rated in the same manner as cash for purposes
of distribution in the event of a shortfall.
8. Transactions in other jurisdictions.
Transactions on markets in other jurisdictions, including
markets formally linked to a domestic market, may expose you to
additional risk. Such markets may be subject to regulation which may
offer different or diminished investor protection. Before you trade
you should enquire about any rules relevant to your particular
transactions. Your local regulatory authority will be unable to
compel the enforcement of the rules of the regulatory authorities or
markets in other jurisdictions where your transactions have been
effected. You should ask the firm with which you deal for details
about the types of redress available in both your home jurisdiction
and other relevant jurisdictions before you start to trade.
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6. For the reasons set forth above, the Commission is revising
its interpretation of the secured amount requirement set forth in
Rule 30.7. The Commission believes that the Rule 30.7 acknowledgment
required of FCMs, or other appropriate acknowledgment required by
Rule 30.10 firms, only applies to the maintenance of the account or
accounts containing foreign futures and foreign options customer
funds by the initial depository, and not to the manner in which any
subsequent depository holds or subsequently transmits those funds.
If an FCM receives from the initial depository the acknowledgment
described in Rule 30,7, furnishes to each foreign futures or foreign
options customer a written disclosure statement tracking the
language set forth in Rule 1.55(b)(7) or paragraphs 6 and 8 of
Appendix A of Rule 1.55(c) and otherwise complies with the
provisions of Rule 30.7, then it may include all funds maintained in
the separate account or accounts in calculating its secured amount
requirement. A Rule 30.10 firm must satisfy the same requirements,
except that it may provide each foreign futures or foreign options
customer with a comparable disclosure statement prescribed by is
home regulator.
7. IF an FCM or Rule 30.10 firm fails to receive the required
acknowledgment from the initial depository or provide the above
written disclosure statement (and in certain circumstances, receive
from customers and acknowledgment of receipt), then it must set
aside funds with an acceptable depository and receive from such
depository the required acknowledgment.
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8. The Commission's interpretation of the Rule 30.7 secured
amount requirement will apply to all regulated activities with all
new and existing foreign futures and foreign options customers as of
October 11, 2000. The Commission's interpretation does not alter any
other requirement set forth in Rule 30.7 or any other section of
Part 30.
Dated: Issued in Washington, D.C. on October 5, 2000.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-26068 Filed 10-10-00; 8:45 am]
BILLING CODE 6351-01-M
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