[Federal Register: October 11, 2000 (Volume 65, Number 197)]
[Rules and Regulations]
[Page 60560-60564]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11oc00-27]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 30
Foreign Futures and Options Transactions
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: The Commodity Futures Trading Commission ("Commission" or
"CFTC") is amending the orders issued pursuant to Rule 30.10 to the
New Zealand Futures and Options Exchange, the Montreal Exchange, the
Sydney Futures Exchange, the U.K. Securities and Futures Authority, the
U.K. Investment Management Regulatory Organisation Limited, and the
Singapore Exchange Derivatives Trading Limited. The amendment reflects
the Commission's revised interpretation of the Rule 30.7 foreign
futures or foreign options secured amount requirement ("secured amount
requirement") as it applies to both futures commission merchants
("FCMs") and certain foreign firms exempt from such registration.
Specifically, the Commission has determined to revise 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 of
the secured amount requirement is set out in a revised appendix issued
concurrently with this release and published elsewhere in today's
Federal Register.
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 Commisison, 1155 21st Street, NW,
Washington, DC 20581. Telephone: (202) 418-5430.
SUPPLEMENTARY INFORMATION: The Commission has issued the following
Order:
Order Amending Prior Orders Issued Pursuant to Rule 30.10 to the
New Zealand Futures and Options Exchange, the Montreal Exchange,
the Sydney Futures Exchange, the U.K. Securities and Futures
Authority, the U.K. Investment Management Regulatory Organisation
Limited, and the Singapore Exchange Derivatives Trading Limited
I. Background
Part 30 of the Commission's rules sets forth rules governing
foreign futures \1\ and foreign option \2\ transactions. Under Rule
30.10, the Commission may exempt a foreign firm acting in the capacity
of a futures commission merchant ("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").\3\ 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.\4\ 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.\5\
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\1\ "Foreign futures" as defined in Part 30 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). Commission rules referred to
herein are found at 17 CFR Ch. I (2000).
\2\ "Foreign option" as defined in Part 30 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).
\3\ The specific elements examined by the Commission in
evaluating whether the particular foreign regulatory program
provides a basis for issuing an order pursuant to Rule 30.10 are set
forth in Appendix A to Part 30. See 52 FR 28990, 29001 (August 5,
1987).
\4\ These conditions 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 make certain
representations regarding the fitness of each firm seeking to
receive confirmation of Rule 30.10 relief, the protections to be
afforded to U.S. Customers, and the exchange of information with the
Commission. See 62 FR 47792, 47793, n.7 (September 11, 1997).
\5\ For a list of representations typically required of each
Rule 30.10 firm, see 62 FR 47792, 47793, n.8.
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In certain cases, where a foreign regulator or SRO has requested
that firms subject to its jurisdiction to be granted broader relief to
engage in transaction 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.\6\ 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.
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\6\ The Commission has issued orders granting expanded relief to
the U.K. Investment Management Regulatory Organisation ("IMRO") 62
FR 10449 (March 7, 1997), the U.K. Securities and Futures
Association ("SFA") 62 FR 10447 (March 7, 1997, New Zealand
Futures and Options Exchange ("NZFOE"), 61 FR 64985 (December 10,
1996), the Montreal Exchange, 62 FR 8875 (February 27, 1997) and the
Sydney Futures Exchange ("SFE"), 62 FR 10445 (March 7, 1997). In
addition, the Commission has authorized members of the Singapore
International Monetary Exchange, now known as the Singapore Exchange
Derivatives Trading Limited ("SGX-DT"), to solicit and accept
orders from U.S. customers for otherwise permitted transactions on
Eurex Deutschland, 64 FR 50248 (September 16, 1999). Although
applicants for Rule 30.10 orders generally have obtained relief from
transactions entered into from within their home country before
seeking expanded relief applicable to transactions entered into on
an exchange located outside their borders, e.g., IMRO, the
Commission has combined the two forms of relief into one single
order, e.g., NZFOE.
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The orders granting expanded relief require Rule 30.10 firms to
either set aside funds constituting the secured amount requirement in a
separate account: (1) As set forth in the relevant order for expanded
relief (see below), (2) as set forth in Rule 30.7 (treating those funds
in the manner prescribed by that rule), or (3) in compliance with
either of the above procedures, with the amount required to be
segregated under local law to be substituted for the secured amount.
The alternative secured amount requirement described within each order
for expanded relief states, in relevant part:
The separate account or accounts referred to [herein] may be
deemed a good secured amount depository only if the [firm] obtains
and retains in its files for the period required by applicable law
and [exchange or SRO] rules, a written acknowledgment from such
separate account depository that:
[[Page 60561]]
It was informed that such money, securities or property
are held for or on behalf of customers of the [firm]; and
It will ensure that such money, securities or property
will be held and treated in accordance with the provisions of this
paragraph; and, provided further, that the [firm] assures itself
that such separate account depository will not pass on such money,
securities or property to any other depository unless the [firm] has
assured itself that all such other separate account depositories
will treat such funds in a manner consistent with the procedures
described [herein]. (emphasis added)
In other words, the Commission required each Rule 30.10 firm with
expanded relief to perform an inquiry before customer funds were sent
to another intermediary, and to take appropriate action (i.e., set
aside funds in a "mirror" account) in the event that it became aware
of facts leading it to conclude that U.S. customer funds were not being
handled consistent with this requirement by any intermediary or
exchange clearing organization beyond the initial depository. The
Commission further stated that "[the secured amount] requirement [set
forth herein] 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." \7\
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\7\ For the most recent order, see 64 FR 50248, 50251, n.19
(SGX-DT).
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II. Amendment
Upon further analysis and reconsideration of this matter, the
Commission has determined to revise its interpretation of the secured
amount requirement set forth in Rule 30.7 and the orders for expanded
relief. As set forth in Appendix B to Part issued concurrently with
this order, the Commission believes that existing written risk
disclosures provide foreign futures and foreign options customers with
notice that the treatment of customer funds outside the U.S. may differ
from the treatment of customer funds inside the U.S. The Commission
also believes 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 firm becomes
insolvent. Accordingly, the Commission believes that the Rule 30.7
acknowledgment required of certain Rule 30.10 firms should apply only
to the maintenance of the account or accounts containing foreign
futures and foreign options customer funds by the initial depository.
Appendix B provides that FCMs and certain Rule 30.10 firms need not
maintain mirror accounts, provided that they obtain from the initial
depository the acknowledgment described in Rule 30.7 and that they
furnish a written disclosure statement to customers concerning
treatment of customer funds by other jurisdictions set forth either in
Rule 1.55(b)(7) or paragraphs 6 and 8 of Appendix A to Rule 1.55(c), or
in a comparable disclosure statement prescribed by the firm's home
country regulator. The Commission believes that Rule 30.10 firms
transacting business for foreign futures and foreign option customers
outside of the firms' jurisdictions should be able to operate in a
similar fashion. Accordingly, if a Rule 30.10 firm operating pursuant
to an order for expanded relief receives from the initial depository
the acknowledgment described in Rule 30.7 and furnishes to foreign
futures and foreign option customers the written disclosure statement
set forth either in 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 its
home country regulator, then it may include all funds maintained in the
account or accounts in calculating its secured amount requirement.
Should a Rule 30.10 firm fail to receive from the initial depository
the required acknowledgment or to furnish the required risk disclosure,
then it must set aside funds with an acceptable depository and receive
from such depository the required acknowledgment.
III. Conclusion and Order
The Commission has determined to revise its interpretation of the
secured amount requirement. For drafting purposes, the Commission has
determined to amend the alternative secured amount requirement set
forth in prior Rule 30.10 orders for expanded relief to track as
closely as possible the language of Rule 30.7. In addition, the
Commission is adding to each order the requirement that each Rule 30.10
firm furnish to each foreign futures and foreign option customer a risk
disclosure statement containing the language set forth either in 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. For the sake of clarity, the Commission also is deleting
from each order granting expanded relief the footnote describing the
obligation to perform an inquiry with respect to depositories beyond
the initial depository and, if necessary, to set aside funds. These
amendments are made to the following orders:
NZFOE (61 FR 64988-89)
The text of paragraphs describing the secured amount requirement is
amended to read:
II. Each Dealer seeking rule 30.10 relief hereunder must apply
in writing whereby it:
* * * * *
K. With respect to transactions effected on behalf of U.S.
customers on any non-U.S. futures and options exchange other than
the NZFOE and the SFE \20\ [footnote unchanged], whether by the
Dealer directly as a clearing member of such other exchange or
through the intermediation of one or more intermediaries, complies
with paragraphs 1 or 2 below:
1.a. Must maintain in a separate account or accounts money,
securities and property in an amount at least sufficient to cover or
satisfy all of its current obligations to U.S. customers denominated
as the foreign futures or foreign options secured amount;
* * * * *
e. Each Member must obtain and retain in its files for the
period required by applicable law and Exchange rules an
acknowledgment from a depository identified in paragraph d.(1)-(4)
above 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
provision of these regulations.
f. Each Member must provide each foreign futures and foreign
options customer with one of the written disclosure statements in
(1), (2) or (3) below:
(1) 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.
OR
[[Page 60562]]
(2) 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.
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. You 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
OR
(3) A comparable disclosure statement prescribed by the NZFOE;
or
2. Must comply with the terms and procedures of paragraph 1,
with the amount required to be segregated under NZFOE rules and New
Zealand laws to be substituted for the secured amount requirement as
set forth in paragraph 1.\21\ [formerly footnote 22]
* * * * *
For the sake of clarity, the Commission notes that language
similar to the following HAS BEEN STRICKEN from each order, using
the NZFOE order as an example:
1. * * *
e. The separate account or accounts referred to in paragraph
1.a. may be deemed to be a good secured amount depository only if
the Dealer obtains and retains in its files for the period required
by Exchange rules, a written acknowledgment from such separate
account depository that:
(1) It was informed that such money, securities or property are
held for or on behalf of customers of the Dealer; and
(2) It will ensure that such money, securities or property will
be held and treated at all times effectively in accordance with the
provisions of this paragraph; and, provided further, that the Dealer
assures itself that such separate account depository will not pass
on such money, securities, or property to any other depository
unless the Dealer has assured itself that all such other separate
account depositories will treat such funds in a manner consistent
with the procedures described in this paragraph 1 herein; \21\
[footnote 21 deleted]
2. Must set aside funds constituting the entire secured amount
requirement in a separate account as set forth in Commission rule
30.7, 17 CFR 30.7 (2000), and treat those funds in the manner
described by that rule.
* * * * *
The Montreal Exchange (62 FR 8875, 8876)
The text of paragraphs describing the secured amount requirement is
amended to read:
Accordingly, the expanded relief permitted Montreal Exchange
Member firms to engage in foreign futures and [foreign] options
transactions for U.S. customers other than on the Montreal Exchange
under this Supplemental Order will be contingent upon compliance by
the Exchange Member firm with the following additional conditions:
* * * * *
(6) With respect to transactions effected on any non-U.S.
futures and options exchange on behalf of U.S. customers, whether by
the Montreal Exchange Member directly as a clearing member of such
other exchange or through the intermediation of one or more
intermediaries, complies with paragraph 1 below:
1.a. Must maintain in a separate account or accounts money,
securities and property in an amount at least sufficient to cover or
satisfy all of its current obligations to U.S. customers denominated
as the foreign futures or foreign options secured amount;
* * * * *
e. Each Member must obtain and retain in its files for the
period required by applicable law and Exchange rules an
acknowledgement from a depository identified in paragraph d.(1)-(4)
above 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
provision of these regulations.
f. Each Member must provide each foreign futures and foreign
options customers with one of the written disclosure statements in
(1), (2) or (3) below:
(1) 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 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, refunds 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.
OR
(2) You should familiarize yourself with the protect
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