[Federal Register: June 27, 2001 (Volume 66, Number 124)]
[Rules and Regulations]
[Page 34110-34112]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jn01-17]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1 and 30
Treatment of Customer Funds
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
issuing an Order regarding the treatment of customer funds carried by a
futures commission merchant (``FCM'') for the purpose of margining,
guaranteeing or securing customers' trades executed on or through a
board of trade located outside the U.S. but cleared by a derivatives
clearing organization located in the U.S. Subject to the terms and
conditions set forth herein, certain designated members of the Chicago
Mercantile Exchange (``CME'') may commingle in a single account the
funds received from customers trading on or through designated contract
markets or derivatives trading execution facilities with those funds
received in connection with the CME's clearing of certain products
traded on or though the MEFF Sociedad Recotra de Productos Financieros
Derivados de Renta Variable (``MEFF''), a board of trade located in
Spain. This Order is issued pursuant to Sections 4(b) and 4d of the
Commodity Exchange Act and Commission Rule 30.10.
EFFECTIVE DATE: June 20, 2001.
FOR FURTHER INFORMATION CONTACT: 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 Commission has issued the following
Order: Order Regarding the Treatment of Customer Funds Carried in
Connection with Transactions Entered into on or through MEFF Sociedad
Rectora de Productos Financieros Derivados de Renta Variable and
Cleared through the Chicago Mercantile Exchange.
A. The CME-MEFF Arrangement
The CME has entered into a clearing arrangement with MEFF involving
the trading and clearing of certain stock index futures products based
on the Standard and Poor's (``S&P'') Euro Index, the S&P Europe 350
Index, and certain sector indices from the S&P Europe 350 Index
(collectively, ``Designated Future Contracts'' or ``DFC'').\1\ Pursuant
to the arrangement, referred to as the Master Agreement, MEFF will list
these products for trading on its electronic trading platform, MEFF S/
MART, execute these trades subject to MEFF rules, and submit these
transactions for clearing to the CME. In accordance with part 30 of the
Commission's rules, any DFC transaction involving a customer located in
the U.S. will be intermediated by an FCM or a firm exempt from such
registration pursuant to Rule 30.10.\2\ MEFF has received previously
from the Commission an order issued pursuant to
[[Page 34111]]
Rule 30.10 and certain MEFF members have received confirmation of such
relief.\3\
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\1\ Receipt of a no-action position from Commission staff is a
necessary prerequisite to the offer and sale of foreign futures and
option contracts on non-narrow foreign stock indices in the U.S. On
June 13, 2001, the Commission's Office of General Counsel issued a
no-action letter to MEFF permitting the offer and sale in the U.S.
of futures and options contracts on the S&P Euro and S&P Europe 350
stock indices. MEFF has not sought similar relief with respect to
any of the Europe 350 sector indices.
\2\ Rule 30.10 permits a person affected by the requirements
contained in Part 30 of the Commission's rules to petition the
Commission for an exemption from such requirements. Appendix A to
the Part 30 rules provides an interpretative statement that
clarifies that a foreign regulator or self-regulatory organization
(``SRO'') can petition the Commission under Rule 30.10 for an order
to permit firms that are members of the SRO and subject to
regulation by the foreign regulator to conduct business from
locations outside of the United States for United States persons on
non-United States boards of trade without registering under the
Commodity Exchange Act, based upon the person's substituted
compliance with a foreign regulatory structure found comparable to
that administered by the Commission under the Act.
Among the issues considered by the Commission in determining
whether to grant Rule 30.10 relief to a foreign regulatory or self-
regulatory authority are the authority's: (i) requirements relating
to the registration, authorization, or other form of licensing,
fitness review, or qualification of persons through whom customer
orders are solicited and accepted; (ii) minimum financial
requirements for those persons that accept customer funds; (iii)
minimum sales practice standards, including risk disclosures, and
the risk of transactions undertaken outside of the United States;
(iv) procedures for auditing compliance with the requirements of the
regulatory program, including recordkeeping and reporting
requirements; (v) standards for the protection of customer funds
from misapplication; and (vi) arrangements for the sharing of
information with the United States. Interpretative Statement with
Respect to the Commission's Exemptive Authority Under Sec. 30.10 of
its Rules, 17 CFR Part 30, Appendix A (2001).
\3\ See 62 FR 16687 (April 8, 1997).
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For the purpose of clearing transactions involving DFCs, MEFF will
be designated as a Special Clearing Member of the CME and generally
will be required to comply with all CME rules.\4\ As such, MEFF will
open a special clearing account with CME. In the case of a trade
intermediated by a MEFF clearing member, the CME will post the legs of
the trade to the appropriate sub-account for each MEFF clearing member
in the MEFF's special clearing account. In the case of a trade
intermediated by a CME clearing member, the CME will post the trade
directly into the appropriate clearing member's account at the CME.
Customer funds will be held either by MEFF in its special clearing
account or by a CME clearing member.
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\4\ For example, MEFF will be required to: (i) deposit with CME
the initial margin equal to the account required of other CME
clearing members; (ii) comply with certain CME capital requirements;
(iii) file monthly financially reports; (iv) submit an annual
certified audit; and (v) provide CME with access to its books and
records.
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B. Request for Relief
By letter dated May 24, 2001, the CME requested, on behalf of its
clearing members, an exemption from certain requirements set forth in
Section 4d of the Commodity Exchange Act (``Act''), and Commission
Rules 1.20 and 30.7.\5\
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\5\ Letter from Stephen M. Szarmack, Director and Associate
General Counsel, CME, to John C. Lawton, Acting Director, Division
of Trading and Markets, Commission, dated May 24, 2001.
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Section 4d of the Act provides, inter alia, that FCMs shall ``treat
and deal'' with funds deposited by a customer to margin or settle
trades or contracts ``as belonging to such customer.'' \6\ Further, an
FCM must segregate and separately account for customer funds and
property but may, for purposes of convenience, deposit such funds and
property in the same account or accounts with any one of the listed
depositories. Section 4d(a)(2) further states that it shall be unlawful
for any depository to hold, dispose or use any money, securities or
property deposited by customers as belonging to the depository or any
person other than the customers of said depository. Section 4d also
prohibits a depository from commingling funds attributable to trading
on or through a designated contract market (``DCM'') or derivatives
transactions execution facility (``DTF'') with those funds on deposit
for the purpose of trading on or through a board of trade other than a
DCM or DTF. Commission Rules 1.20-1.30, 1.32, 1.35 and 1.36 implement
section 4d.
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\6\ 7 U.S.C. Sec. 6d (2001).
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Rule 30.7 sets forth similar, but not identical, requirements with
respect to the treatment of funds held on deposit for foreign futures
or foreign options customers, i.e., customers located in the U.S.
trading on or subject to the rules of a foreign board of trade \7\
Unlike section 4d and Rule 1.20, Rule 30.7 requires an FCM to maintain
in a separate account only an amount sufficient to cover or satisfy all
of its current obligations to foreign futures and foreign options
customers, defined in Rule 1.3(rr) as the foreign futures and foreign
options secured amount, and not an amount equal to all money,
securities or property on deposit. Like section 4d and Rule 1.20,
however, Rule 30.7 requires an FCM to separate customer funds from non-
customer funds and permits an FCM to commingle all customer funds into
one account. In addition, Rule 30.7(d) also states that ``[I]n no event
may money, securities or property representing the foreign futures or
foreign options secured amount be held or commingled and deposited with
customer funds in the same account or accounts required to be
separately accounted for and segregated pursuant to section 4d of the
Act and the regulations thereunder.''
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\7\ See Rule 30.1.
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Notwithstanding the previously cited provisions, however, Section
4d provides further;
in accordance with such terms and conditions as the Commission may
prescribe by rule, regulation, or order, such money, securities, and
property of the customers of such FCM may be commingled and
deposited as provided in this section with any other money,
securities, and property received by such FCM and required by the
Commission to be separately accounted for and treated and dealt with
as belonging to customers of such FCM.
In addition, Rule 30.10 permits any party adversely affected by any
requirement under Part 30 of the Commission's rules to petition the
Commission for relief from such requirement.
Absent any relief, CME clearing members would be required to hold
U.S. customer funds in accordance with the Rule 30.7 secured amount
requirement and would not be permitted to commingle customer funds
associated with DFCs in a Section 4d segregated account along with
customer funds associated with domestically-traded contracts.
The CME has represented that it believes that existing protections
and protections afforded by the Master Agreement are sufficient to
protect the funds of customers trading domestic products (and held in a
Section 4d segregated account) in the event of a default by MEFF or a
CME clearing member as a result of trading in DFCs. The CME notes that
MEFF, as a special clearing member, will be subject to essentially the
same capital requirements and financial reporting obligations of other
CME clearing members. In addition, CME notes that the clearing of DFCs
will be subject to CME oversight and risk management polices. The CME
further notes that the Commission previously examined the regulatory
structure governing transactions entered on or subject to the rules of
MEFF and determined that compliance with applicable Spanish law and
MEFF rules may be substituted for compliance with certain provisions of
the Act and Commission rules.\8\
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\8\ See infra, n.3.
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C. Terms and Conditions
Upon due consideration, the Commission has determined to issue an
Order pursuant to Sections 4(b) and 4d of the Act and Rule 30.10.
Subject to the following terms and conditions, clearing members of the
CME may commingle customer funds used to margin, secure, or guarantee
transactions in DFCs with funds used to margin, secure, or guarantee
transactions in domestically-traded contracts in a segregated account
or accounts maintained in accordance with Section 4d of the Act and
Rule 1.20. The terms and conditions for relief are as follows:
1. CME will maintain a clearing system that will perform the
following functions:
a. mark-to-market the prices of DFCs on a daily basis;
b. pay settlement variation and option premium to, and collect
settlement variation and option premium from, MEFF and CME clearing
members on a daily basis;
c. verify and post matched trades;
d. hold the initial margin deposits of MEFF and CME clearing
members;
e. determine and record MEFF's gross open positions;
f. maintain sub-accounts for each MEFF clearing member on CME's
books;
g. determine and record margin requirements, exercise and
assignment, and final cash settlement records;
h. determine and report daily price fluctuations, total open
interest and trading volume for each contract traded pursuant to the
Master Agreement for each trading session; and
[[Page 34112]]
i. ensure the timely and orderly flow of funds in settlement of
MEFF's trading profits and losses.
2. MEFF will become and remain a special clearing member of CME
subject to all of the rules and policies of CME that govern the rights
and responsibilities of other clearing members at the CME including,
but not limited to, meeting required security deposit requirements and
being subject to CME assessment powers.
3. For each trade executed pursuant to the Master Agreement, MEFF
will submit to CME a clearing record submission containing information
as CME may require, including, at a minimum, the following information:
a. an indication that the trade is being made pursuant to the
Master Agreement;
b. identification of the executing clearing member(s);
c. identification of the terms of the contract being traded,
including the delivery month, put/call indicator, strike price,
underlying futures contract, if applicable, house or customer origin,
whether the trade was a buy or sell transaction, and the date the trade
was executed;
d. the number of contracts and the price at which the contracts
traded; and
e. an indication as to whether each side of a matched trade will
clear in the MEFF special clearing account or in a CME clearing
member's account.
4. Upon receipt of each clearing record submission, CME will
validate the transaction to ensure the trades are for DFCs and for the
existence of two offsetting legs with a trade price that is within a
reasonable price range for the contract, and, where necessary, inform
MEFF as soon as practicable of any reason validation failed and return
the trade to MEFF for correction or nullification.
5. Upon acceptance of a trade for clearing and guarantee, the CME
will post the legs of the trade to the appropriate clearing member sub-
account of the MEFF special clearing account or to the appropriate CME
clearing member's account.
6. CME will retain the right to adjust the marking price for
clearing purposes to be different from the settlement price in cases
where the settlement prices vary significantly form the theoretical
market value of the instruments as determined by the CME.
7. For the purpose of making and receiving margin and daily
settlement payments in connection with the clearing of DCFs, CME and
MEFF will establish separate accounts at a mutually-agreed upon bank
located outside the U.S. authorized to effectuate transfers between
accounts.
8. CME will determine the initial and variation margin levels for
each DFC required to be maintained by MEFF and calculate MEFF's margin
requirements based upon MEFF's net positions with respect to each
delivery month, taking into account any applicable spread margin
reductions.
9. In the event of a MEFF default, as defined by the Master
Agreement, CME may, in addition to all other rights and remedies
contained therein, or otherwise permitted by applicable law:
a. apply margin deposits to the obligations of MEFF to make
payments to the CME when and as they become due;
b. liquidate the positions and collateral of MEFF, including but
not limited to its security and seat assignment deposits and apply
other assets of MEFF available to the CME to discharge the obligations
of MEFF to make payments to the CME when and as they become due;
c. by notice to MEFF, suspend the operation of the MEFF special
clearing account as to all subsequent trades;
d. establish an alternative market for DFCs through electronic
means or otherwise; and
e. allow MEFF clearing members to transfer their positions to a CME
clearing member.
Notwithstanding the above, if a MEFF default exists because of a
failure by MEFF to make a payment required by the Master Agreement, the
CME may liquidate the positions in the MEFF special clearing account.
10. CME will receive from MEFF the following information on an
ongoing basis:
a. upon written request and within three business days, all
information relating to the markets in DFCs that may assist the CME in
its efforts to maintain the integrity of the marketplace;
b. periodic reports listing all large trade positions setting forth
positions equal to or exceeding a threshold to be determined jointly by
CME and MEFF; and
c. upon a special call and within 24 hours, a report that contains,
at a minimum, information required to be included in large trader
reports and account identification information.
11. All money, securities, and property received by a participating
FCM to margin, guarantee, or secure DCFs, or accruing as a result of
DCFs, and held subject to the terms of this Order, shall be deemed to
have been received by the participating FCM and shall be accounted for
and treated and dealt with as belonging to the customers of the
participating FCM consistently with Section 4d of the Act.
12. Subject to the terms and conditions of this Order,
notwithstanding any provision to the contrary in the Commission's rules
(including, but not limited to, Rules 1.20(a), 1.22 and 1.24), the
money, securities, and property described in the preceding paragraph of
this Order may be commingled with money, securities, and property
received by a participating FCM to margin, guarantee, or secure trades
or positions in commodity futures or commodity option contracts on a
DCM or DTEF, or accruing as a result of such trades or contracts, and
otherwise required by the Commission to be segregated under the Act.
This Order does not provide an exemption from any provision of the
Act or rules thereunder not specified herein, for example, the
registration provision of Rule 30.4 applicable to the offer and sale of
foreign futures and foreign options to customers located in the U.S.
Moreover, the relief granted is limited to the contracts and activities
described in the Master Agreement and does not extend to the clearing
of transactions entered into on or subject to the rules of any other
board of trade located outside the U.S. The relief also does not extend
to the use of electronic devices by persons located in the U.S. to
access MEFF directly.
This Order is issued pursuant to Sections 4(b) and 4d of the Act
and Rule 30.10 based upon the representations made and supporting
material provided to the Commission by the CME. 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 relief set forth herein is appropriate. Further, if experience
demonstrates that the continued effectiveness of this Order in general,
or with respect to a particular firm, would be contrary to or the
public interest, 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.
Issued in Washington, DC on June 20, 2001.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-16018 Filed 6-26-01; 8:45 am]
BILLING CODE 6351-01-M