[Federal Register: May 21, 2001 (Volume 66, Number 98)]
[Rules and Regulations]
[Page 27859-27861]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21my01-6]
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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 granting an exemption to firms designated by the Winnipeg
Commodity Exchange (``WCE'') from the application of certain of the
Commission's foreign futures and option rules based on substituted
compliance with certain comparable regulatory and self-regulatory
requirements of a foreign regulatory authority consistent with
conditions specified by the Commission, as set forth herein. This Order
is issued pursuant to Commission Rule 30.10, which permits specified
persons to file a petition with the Commission for exemption from the
application of certain of the rules set forth in Part 30 and authorizes
the Commission to grant such an exemption if such action would not be
otherwise contrary to the public interest or to the purposes of the
provision from which exemption is sought.
EFFECTIVE DATE: May 21, 2001.
FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Esq., Associate
Chief Counsel, Susan A. Elliott, Esq., Staff Attorney, or Andrew V.
Chapin, Esq., 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 Commission has issued the following
Order:
Order Under CFTC Rule 30.10 Exempting Firms Designated by the
Winnipeg Commodity Exchange From the Application of Certain of the
Foreign Futures and Option Rules the Later of the Date of
Publication of the Order Herein in the Federal Register or After
Filing of Consents by Such Firms and the Regulatory or Self-
Regulatory Organization, as Appropriate, to the Terms and Conditions
of the Order Herein.
Commission rules governing the offer and sale of commodity futures
and option contracts traded on or subject to the rules of a foreign
board of trade to customers located in the U.S. are contained in Part
30 of the Commission's rules.\1\ These rules include requirements for
intermediaries with respect to registration, disclosure, capital
adequacy, protection of customer funds, recordkeeping and reporting,
and sales practice and compliance procedures, that are generally
comparable to those applicable to transactions on U.S. markets.
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\1\ Commission rules referred to herein are found at 17 CFR Ch.
I (2000).
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In formulating a regulatory program to govern the offer and sale of
foreign futures and option products to customers located in the U.S.,
the Commission, among other things, considered the desirability of
ameliorating the potential extraterritorial impact of such a program
and avoiding duplicative regulation of firms engaged in international
business. Based upon these considerations, the Commission determined to
permit persons located outside the U.S. and subject to a comparable
regulatory structure in the jurisdiction in which they were located to
seek an exemption from certain of the requirements under Part 30 of the
Commission's rules based upon substituted compliance with the
comparable regulatory requirements of the foreign jurisdiction.
Appendix A to Part 30, ``Interpretative Statement With Respect to
the Commission's Exemptive Authority Under 30.10 of Its Rules'
(``Appendix A''), generally sets forth the elements the Commission will
evaluate in determining whether a particular regulatory program may be
found to be comparable for purposes of exemptive relief pursuant to
Rule 30.10.\2\ These elements include: (1) Registration, authorization
or other form of licensing, fitness review or qualification of persons
through whom customer orders are solicited and accepted; (2) minimum
financial requirements for those persons who accept customer funds; (3)
protection of customer funds from misapplication; (4) recordkeeping and
reporting requirements; (5) sales practice standards; (6) procedures to
audit for compliance with, and to take action against those persons who
violate, the requirements of the program; and (7) information sharing
arrangements between the Commission and the appropriate governmental
and/or self-regulatory organization to ensure Commission access on an
``as needed'' basis to information essential to maintaining standards
of customer and market protection within the U.S.
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\2\ 52 FR 28990, 29001 (August 5, 1987).
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Moreover, the Commission specifically stated in adopting Rule 30.10
that no exemption of a general nature would be granted unless the
persons to whom the exemption is to be applied: (1) consensually submit
to jurisdiction in the U.S. by designating an agent for service of
process in the
[[Page 27860]]
U.S. with respect to transactions subject to Part 30 and filing a copy
of the agency agreement with the National Futures Association
(``NFA''); (2) agree to provide access to their books and records in
the U.S. to Commission and Department of Justice representatives; and
(3) notify NFA of the commencement of business in the U.S.\3\
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\3\ 52 FR 28980, 28981 and 29002.
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By letter dated June 29, 2000 and subsequent correspondence through
September 26, 2000, the WCE petitioned the Commission on behalf of
certain firms located and doing business in Manitoba for an exemption
from the application of the Commission's Part 30 rules to those firms.
In support of its petition, the WCE states that granting such an
exemption with respect to firms that it has authorized to conduct
foreign futures and options transactions on behalf of customers located
in the U.S. would not be contrary to the public interest or to the
purposes of the provisions from which the exemption is sought because
such firms are subject to a regulatory framework comparable to that
imposed by the Commodity Exchange Act (``Act'') and the rules
thereunder.
Based upon a review of the petition, supporting materials filed by
the WCE and the recommendation of the Commission's staff, the
Commission has concluded that the standards for relief set forth in
Rule 30.10 and, in particular, Appendix A thereof, have generally been
satisfied and that compliance with applicable Manitoba and Canadian law
and WCE rules may be substituted for compliance with those sections of
the Act and rules thereunder more particularly set forth herein.
By this Order, the Commission hereby exempts, subject to specified
conditions, those firms identified to the Commission by the WCE as
eligible for the relief granted herein from:
--Registration with the Commission for firms and for firm
representatives;
--The requirement in Commission Rule 30.6(a) and (d), 17 CFR 30.6(a)
and (d), that firms provide customers located in the U.S. with the
risk disclosure statements in Commission Rule 1.55(b), 17 CFR
1.55(b) and Commission Rule 33.7, 17 CFR 33.7, or as otherwise
approved under Commission Rule 1.55(c), 17 C.F.R. Sec. 1.55(c);
--Those sections of Part 1 of the Commission's financial rules that
apply to foreign futures and options sold in the U.S. as set forth
in Part 30; and
--Those sections of Part 1 of the Commission's rules relating to
books and records which apply to transactions subject to Part 30,
based upon substituted compliance by such persons with the
applicable statutes and regulations in effect in the province of
Manitoba.
This determination to permit substituted compliance is based on,
among other things, the Commission's finding that the regulatory scheme
governing persons in Manitoba who would be exempted hereunder provides:
(1) A system of qualification or authorization of firms who deal
in transactions subject to regulation under Part 30 that includes,
for example, criteria and procedures for granting, monitoring,
suspending and revoking licenses, and provisions for requiring and
obtaining access to information about authorized firms and persons
who act on behalf of such firms;
(2) Financial requirements for firms including, without
limitation, a requirement that all firms immediately notify WCE if
the firms' adjusted net capital falls below a specified level and
daily mark-to-market settlement and/or accounting procedures;
(3) A system for the protection of customer assets that is
designed to preclude the use of customer assets to satisfy house
obligations and requires separate accounting for such assets,
augmented by a compensation scheme designed to compensate customers
whose assets are segregated and who have suffered a loss as a result
of fraud and/or insolvency of a firm;
(4) Recordkeeping and reporting requirements pertaining to
financial and trade information including, without limitation, order
tickets, trade confirmations, monthly customer account statements,
customers' segregation records, accounting records for customer and
proprietary trades and discretionary account documentation;
(5) Sales practice standards for authorized firms and persons
acting on their behalf that include, for example, a requirement that
authorized persons know their customers, required disclosures to
prospective customers and prohibitions on misleading advertising and
improper trading activities;
(6) Procedures to audit for compliance with, and to redress
violations of, customer protection and sales practice requirements
including, without limitation, an affirmative surveillance program
designed to detect trading activities that take advantage of
customers, and the existence of broad powers of investigation
relating to sales practice abuses; and
(7) Mechanisms for sharing of information between the
Commission, the WCE, and the MSC on an ``as needed'' basis
including, without limitation, confirmation data, data necessary to
trace funds related to trading futures products subject to
regulation in Manitoba, position data, and data on firms' standing
to do business and financial condition.
This Order does not provide an exemption from any provision of the
Act or rules thereunder not specified herein, for example, without
limitation, the antifraud provision in Rule 30.9. Moreover, the relief
granted is limited to brokerage activities undertaken on behalf of
customers located in the U.S. with respect to transactions on or
subject to the rules of the WCE for products that customers located in
the U.S. may trade.\4\ The relief does not extend to rules relating to
trading, directly or indirectly, on U.S. exchanges. For example, a firm
trading in U.S. markets for its own account would be subject to the
Commission's large trader reporting requirements.\5\ Similarly, if such
a firm were carrying a position on a U.S. exchange on behalf of foreign
clients, it would be subject to the reporting requirements applicable
to foreign brokers.\6\ The relief herein is inapplicable where the firm
solicits or accepts orders from customers located in the U.S. for
transactions on U.S. markets. In that case, the firm must comply with
all applicable U.S. laws and regulations, including the requirement to
register in the appropriate capacity.
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\4\ See, e.g., Sections 2(a)(1)(C) and (D) of the Commodity
Exchange Act.
\5\ See, e.g., 17 CFR Part 18 (2000).
\6\ See, e.g., 17 CFR Parts 17 and 21 (2000).
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The relief also does not extend to trading, directly or indirectly,
on any other non-U.S. exchanges. Should the WCE seek to extend the Rule
30.10 relief set forth herein to permit designated members to solicit
and accept orders from customers located in the U.S. for otherwise
permitted transactions on any other non-U.S. exchange, it must apply
for and receive prior approval from the Commission. In a petition to
extend the relief set forth herein to other non-U.S. exchanges, the WCE
must: (1) Represent that local law prohibits its members from
intermediating otherwise permitted transactions for customers located
in the U.S. on unapproved foreign exchanges as set forth therein, and
must specify which exchanges are authorized by local law; (2) represent
that member firms with customers located in the U.S. will comply with
all the terms and conditions of this Order with respect to transactions
entered into on or subject to the rules of a foreign exchange located
outside its jurisdiction; and (3) confirm that it has the authority and
the ability to enforce its laws, rules and/or regulations with respect
to those transactions to the same extent that it conducts such
activities on an exchange located within its jurisdiction.\7\
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\7\ See 64 FR 50248, 50251 (September 16, 1999)(permitting
designated members of the Singapore Exchange Derivatives Trading
Limited to solicit and accept orders from customers located in the
U.S. for otherwise permitted transactions on Eurex Deutschland).
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[[Page 27861]]
The eligibility of any firm to seek relief under this exemptive
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Order is subject to the following conditions:
(1) The regulatory or self-regulatory organization responsible
for monitoring the compliance of such firms with the regulatory
requirements described in the Rule 30.10 petition must represent in
writing to the CFTC that:
(a) Each firm for which relief is sought is registered, licensed
or authorized, as appropriate, and is otherwise in good standing
under the standards in place in Manitoba; such firm is engaged in
business with customers in Manitoba as well as in the U.S.; and such
firm and its principals and employees who engage in activities
subject to Part 30 would not be statutorily disqualified from
registration under Section 8a(2) of the Act, 7 U.S.C. Sec. 12(a)(2);
(b) 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 that would affect its
continued eligibility for the exemption granted hereunder, including
the termination of its activities in the U.S.;
(c) All transactions with respect to customers made in the U.S.
will be made on or subject to the rules of WCE and the Commission
will receive prompt notice of all material changes to the relevant
laws in Manitoba, any rules promulgated thereunder and WCE rules;
(d) Customers located in the U.S. will be provided no less
stringent regulatory protection than Canadian customers under all
relevant provisions of Manitoba law; and
(e) It will cooperate with the Commission with respect to any
inquiries concerning any activity subject to regulation under the
Part 30 rules, including sharing the information specified in
Appendix A on an ``as needed'' basis and will use its best efforts
to notify the Commission if it becomes aware of any information that
in its judgment affects the financial or operational viability of a
member firm doing business in the U.S. under the exemption granted
by this Order.
(2) Each firm seeking relief hereunder must represent in writing
that it:
(a) Is located outside the U.S., its territories and
possessions, and where applicable, has subsidiaries or affiliates
domiciled in the U.S. with a related business (e.g., banks and
broker/dealer affiliates) along with a brief description of each
subsidiary's or affiliate's identity and principal business in the
U.S.;
(b) Consents to jurisdiction in the U.S. under the Act by filing
a valid and binding appointment of an agent in the U.S. for service
of process in accordance with the requirements set forth in Rule
30.5;
(c) Agrees to provide access to its books and records related to
transactions under Part 30 required to be maintained under the
applicable statutes and regulations in effect in Manitoba upon the
request of any representative of the Commission or U.S. Department
of Justice at the place in the U.S. designated by such
representative, within 72 hours, or such lesser period of time as
specified by that representative as may be reasonable under the
circumstances after notice of the request;
(d) Has no principal, or employee who solicits or accepts orders
from customers located in the U.S., who would be disqualified from
directly applying to do business in the U.S. under Section 8a(2) of
the Act, 7 U.S.C. Sec. 12(a)(2), and will notify the Commission
promptly of any change in that representation based on a change in
control as generally defined in Rule 3.32;
(e) Consents to participate in any NFA arbitration program that
offers a procedure for resolving customer disputes on the papers
where such disputes involve representations or activities with
respect to transactions under Part 30, even in circumstances where
the claim involves a matter arising primarily out of delivery,
clearing, settlement or floor practices, and consents to notify
customers located in the U.S. of the availability of such a program;
(f) Agrees to maintain, on behalf of customers located in the
U.S., funds equivalent to the ``foreign futures and foreign options
secured amount'' described in Rule 1.3(rr), in a separate account as
set forth in Rule 30.7, and to treat those funds in the manner
described by that rule; and
(g) Undertakes to comply with the applicable provisions of
Manitoba laws and WCE rules that form the basis upon which this
exemption from certain provisions of the Act and rules thereunder is
granted.
As set forth in the Commission's September 11, 1997 Order
delegating to NFA certain responsibilities, the written representations
set forth in paragraph (2) shall be filed with NFA.\8\ Each firm
seeking relief hereunder has an ongoing obligation to notify NFA should
there be a material change to any of the representations required in
the firm's application for relief.
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\8\ 62 FR 47792, 47793 (September 11, 1999). Among other duties,
the Commission authorized NFA to receive requests for confirmation
of Rule 30.10 relief on behalf of particular firms, to verify such
firms' fitness and compliance with the conditions of the appropriate
Rule 30.10 Order and to grant exemptive relief from registration to
qualifying firms.
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This Order will become effective as to any designated WCE member
firm the later of the date of publication of the Order in the Federal
Register or the filing of the consents set forth in paragraph (2). Upon
filing of the notice required under paragraph (1)(b) as to any such
firm, the relief granted by this Order may be suspended immediately as
to that firm. That suspension will remain in effect pending further
notice by the Commission, or the Commission's designee, to the firm and
WCE.
This Order is issued pursuant to Rule 30.10 based on the
comparability representations made and supporting material provided to
the Commission and the recommendation of the staff, and is made
effective as to any firm granted relief hereunder based upon the
filings and representations of such firms required hereunder. Any
material changes or omissions in the facts and circumstances pursuant
to which this Order is granted might require the Commission to
reconsider its finding that the standards for relief set forth in Rule
30.10 and, in particular, Appendix A, have generally been satisfied.
Further, if experience demonstrates that the continued effectiveness of
this Order in general, or with respect to a particular firm, would be
contrary to public policy or the public interest, or that the systems
in place for the exchange of information or other circumstances do not
warrant continuation of the exemptive relief granted herein, the
Commission may condition, modify, suspend, terminate, withhold as to a
specific firm, or otherwise restrict the exemptive relief granted in
this Order, as appropriate, on its own motion.
The Commission will continue to monitor the implementation of its
program to exempt firms located in jurisdictions generally deemed to
have a comparable regulatory program from the application of certain of
the foreign futures and option rules and will make necessary
adjustments if appropriate.
Issued in Washington, DC on May 15, 2001.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-12696 Filed 5-18-01; 8:45 am]
BILLING CODE 6351-01-P