[Federal Register: March 7, 1997 (Volume 62, Number 45)]
[Rules and Regulations]
[Page 10447-10449]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07mr97-14]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 30
Foreign Futures and Option Transactions
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC''), is clarifying the procedures applicable in its prior Orders
issued on May 15, 1989 (the ``Original Orders''), authorizing
designated members of The Securities Association (``TSA'') and the
Association of Futures Brokers and Dealers (``AFBD''),<SUP>1 which
subsequently merged to form the Securities and Futures Association
(``SFA'') <SUP>2 to solicit and to accept orders from U.S. customers
for otherwise permitted transactions on all non-U.S. exchanges which
have been designated as a Designated Investment Exchange (``DIE'') by
the United Kingdom Securities and Investments Board (``SIB'').<SUP>3
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\1\ See 54 FR 21604 (May 19, 1989) (granting rule 30.10 relief
to firms designated by the AFBD) and 54 FR 21609 (May 19, 1989)
(granting rule 30.10 relief to firms designated by the TSA).
\2\ Following the April 1, 1991 merger of the AFBD and TSA to
form the SFA, the Commission issued an Order, which, among other
things, confirmed that the earlier Orders granting rule 30.10 relief
to the AFBD and TSA and their respective members continued to be
effective as to the successor SFA and its designated members. See 56
FR 14017, 14018 (April 5, 1991) (the ``SFA Order'').
\3\ An exchange carrying on investment business in the United
Kingdom must be authorized by the SIB as a Recognized Investment
Exchange (``RIE''). See United Kingdom Financial Services Act
(``FSA'') Sections 3, 36, and 37. DIE's are certain non-U.K.
exchanges determined by the SIB to meet adequate standards of
investor protection. See Financial Services (Glossary and
Interpretation) Rules and Regulations 1990. Under the terms of the
Original Orders, an SFA member firm may only handle transactions on
behalf of U.S. customers on an RIE or DIE. See 54 FR 21604, 21605
and 54 FR 21609, 21610.
The Commission also notes that although a rule 30.10 Order was
issued to the SIB concurrently with the Original Orders (54 FR 21599
(May 19, 1989)), there are no firms currently designated by the SIB
for rule 30.10 relief. Under the current United Kingdom regulatory
structure the SIB no longer has direct supervisory responsibility
for any firm engaged in investment business involving derivatives
under the FSA. See, e.g., Andrew Large, Financial Services
Regulation--Making the Two Tier System Work at 21 (SIB, 1993).
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This Supplemental Order is issued pursuant to (1) Commission rule
30.10, which permits the Commission to grant an exemption from certain
provisions of Part 30 of the Commission's regulations, (2) the
Commission's Original Orders, granting relief under rule 30.10 to
designated members of the AFBD and TSA, and (3) the Commission's SFA
Order.
EFFECTIVE DATE: March 7, 1997.
FOR FURTHER INFORMATION CONTACT:Jane C. Kang, Esq., or Warren Gorlick,
Esq., Division of Trading and Markets, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington,
D.C. 20581. Telephone: (202) 418-5430.
SUPPLEMENTARY INFORMATION: The Commission has issued the following
Supplemental Order:
Supplemental Order Clarifying Conditions under which Certain
Members of the Securities and Futures Authority Designated for
Relief Under Commission Rule 30.10 May Solicit and Accept Orders
from U.S. Customers for Otherwise Permitted Transactions on All
Non-U.S. Markets Where Such Members Are Authorized by United
Kingdom Law to Conduct Futures Business for Customers.
In Orders issued on May 15, 1989, the Commission authorized
designated members of the TSA and AFBD to offer or sell certain futures
and option contracts on or subject to the rules of an RIE in the United
Kingdom, or any other non-U.S. exchange <SUP>4 which is a DIE.
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\4\ The term ``non-U.S. exchange'' refers to a foreign board of
trade which is defined in Commission rule 1.3 (ss), 17 C.F.R.
1.3(ss) (1996) as:
Any board of trade, exchange or market located outside the
United States, its territories or possessions, whether incorporated
or unincorporated, where foreign futures or foreign options
transactions are entered into.
Thus, contracts that are traded on a market that has been
designated as a contract market pursuant to section 5 of the CEA are
not within the scope of the Original Orders and this Supplemental
Order.
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The Commission now seeks to clarify the procedures with which SFA
members should comply in order to operate pursuant to the Original
Orders and the SFA Order authorizing SFA member firms to engage in
foreign futures and options transactions for U.S. customers on a DIE
other than a U.S. exchange designated as a contract market pursuant to
section 5 of the Commodity Exchange Act (``CEA'' or ``Act''). This
Order clarifies that the funds of U.S. foreign futures and options
customers must be subject to consistent protection irrespective of
whether the SFA member firm effects trades directly on an RIE <SUP>5 or
effects trades on a DIE directly or through the intermediation of a
foreign exchange member.<SUP>6 Accordingly, the Commission
[[Page 10448]]
has determined to clarify that the relief authorized in its Original
Orders with respect to transactions on a DIE is applicable only if an
SFA member firm complies with the following procedures, which are
consistent with the requirements applicable to Commission-registered
futures commission merchants (``FCMs'') concerning the protection of
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customer funds under the provisions of Commission rule 30.7: <SUP>7
\5\ With respect to transactions on an RIE, applicable U.K.
laws and regulations and the Original Orders require segregation of
all money, securities and property deposited on behalf of U.S.
customers in respect of such transactions and the accruals thereon.
See paragraphs 2(c) and (h) of the Original Orders, 54 FR 21604,
21606, and 54 FR 21609, 21611.
\6\ The Commission notes that substantially similar conditions
were imposed in its Order authorizing members of the New Zealand
Futures and Options Exchanges (NZFOE) that are designated for relief
under Commission rule 30.10 to solicit and to accept orders from
U.S. customers for otherwise permitted transactions on all non-U.S.
exchanges where such members are authorized by the rules of the
NZFOE to conduct futures business for customers. See 61 FR 64985
(December 10, 1996).
\7\ See Commission rule 30.7, 17 C.F.R. 30.7 (1996). To the
extent that a depository is unable to provide the required
acknowledgement (for example, as in the case of an intermediary firm
which does not segregate customer from house assets), that foreign
depository is not a good secured amount depository. To use such an
intermediary, an FCM must establish a ``mirror'' account in the
United States to meet its secured amount obligations. Thus, the
procedures articulated in this Order are intended to be consistent
with the requirements applicable to the treatment of customer funds
under rule 30.7 by FCMs and to clarify that these same obligations
apply to foreign firms operating under rule 30.10 orders permitting
the execution of trades on exchanges outside of their home
jurisdiction (see n.6 above).
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With respect to transactions effected on behalf of U.S.
customers on any non-U.S. futures and options exchange which is a
DIE, whether by the SFA member directly as a clearing member of such
other exchange or through the intermediation of one or more
intermediaries, the SFA member complies with paragraphs a, b or c
below:
a. (1) Maintains in a separate account or accounts money,
securities and property in an amount denominated as the foreign
futures or foreign options secured amount, at least sufficient to
cover or satisfy all of its current obligations to U.S. customers;
(2) Does not commingle such money, securities and property with
the money, securities or property of the member, or with any
proprietary account of such member and does not use such money,
securities and property to secure or guarantee the obligations of,
or extend credit to, the member or any proprietary account of the
member;
(3) Provided that it may deposit together with the secured
amount required to be on deposit in the separate account or accounts
referred to in paragraph a-1 above money, securities or property
held for or on behalf of non-U.S. customers of the member for the
purpose of entering into foreign futures and options transactions.
In such a case, the amount that must be deposited in such separate
account or accounts must be no less than the greater of (1) the
foreign futures and foreign options secured amount required by
paragraph a-1 above plus the amount that would be required to be on
deposit if all such customers (including non-U.S. customers) were
subject to such requirement, or (2) the foreign futures and foreign
options secured amount required by paragraph a-1 above plus the
amount required to be held in a separate account or accounts for or
on behalf of such non-U.S. customers pursuant to any applicable law,
rule, regulation or order, or any rule of any self-regulatory
organization;
(4) Maintains the separate account or accounts referred to in
paragraph a-1 above under an account name that clearly identifies
them as such, with any of the following depositories:
(a) Another person registered with the Commission as an FCM or a
firm exempted from FCM registration pursuant to CFTC rule 30.10;
(b) The clearing organization of any foreign board of trade;
(c) Any member and/or clearing member of such foreign board of
trade; or
(d) A bank or trust company which any of the depositories
identified in (a)-(c) above may use consistent with the applicable
laws and rules of the jurisdiction in which the depository is
located; and
(5) The separate account or accounts referred to in paragraph a-
1 may be deemed located at a good secured amount depository only if
the member obtains and retains in its files for the period required
by applicable law and Exchange rules a written acknowledgement from
such separate account depository that:
(a) It was informed that such money, securities or property are
held for or on behalf of customers of the member; and
(b) It will ensure that such money, securities or property will
be held and treated at all times in accordance with the provisions
of this paragraph; and, provided further, that the member assures
itself that such separate account depository will not pass on such
money, securities or property to any other depository unless the
member has assured itself that all such other separate account
depositories will treat such funds in a manner consistent with the
procedures described in paragraph a hereof; <SUP>8 or
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\8\ This proviso is intended to clarify that the originating
member makes reasonable inquiries and understands prior to the
initiation of a trade the conditions under which its customers'
funds will be held at all subsequent depositories, so that it may
determine whether a particular intermediary or clearing house is a
good separate account depository for purposes of this Order or must
alternatively set aside funds in the manner set forth in paragraph
b. The member would be expected to discuss with its immediate
intermediary broker whether funds would be transferred to any
subsequent depositories and determine the conditions under which
such funds would be treated. Compliance with this proviso would be
satisfied by the member obtaining relevant information or assurances
from appropriate sources such as, for example, the immediate
intermediary broker, exchanges or clearinghouses, exchange
regulators, banks, attorneys or other relevant references, including
regulatory sources.
This Supplemental Order is intended to clarify 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. Thus, for example, an exchange that
does not segregate customer from firm obligations and firms which
trade on such exchanges and which do not arrange to comply otherwise
with any of the procedures described herein would not be deemed an
acceptable separate account. Specifically, such exchange or firms
could not provide a valid and binding acknowledgement to a rule
30.10 exempted firm.
This provision is not necessarily intended to create a duty on a
rule 30.10 firm that it audit intermediaries it uses for continued
compliance with the undertakings it has obtained based on
discussions with those relevant intermediaries. It is intended to
make clear that firms seeking the benefit of the Commission's 30.10
relief must undertake a due diligence inquiry before customer funds
are transferred to another intermediary and must take appropriate
action (i.e., set aside funds) in the event that such firms become
aware of facts leading them to conclude that customer funds are not
being handled consistent with the requirements of Commission rules
or this Order by any subsequent intermediary or clearing house.
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b. Sets aside funds constituting the entire secured amount
requirement in a separate account as set forth in Commission rule
30.7, 17 C.F.R. 30.7 (1996), and treats those funds in the manner
described by that rule; or
c. Complies with the terms and procedures of paragraph a or b,
except that the amount required to be segregated under SFA rules and
United Kingdom laws may be substituted for the secured amount
requirement as set forth in such paragraphs.<SUP>9
\9\ Any United Kingdom laws or regulations or SFA rules which
permit an SFA member firm to obtain from its customers a waiver,
acknowledgement or similar document in which such customer
effectively waives the right to segregation protection would be
inconsistent with compliance with paragraphs a, b, and c.
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The rule 30.10 relief already granted to the SFA also is contingent
upon SFA and SFA members' continued compliance with the Original Orders
and the enumerated conditions above.
Further, if experience demonstrates that the continued
effectiveness of this Order in general, or with respect to a particular
member, 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 member, or otherwise restrict the
exemptive relief granted in this Order, as appropriate, on its own
motion. If necessary, provisions will be made for servicing existing
client positions.
List of Subjects in 17 CFR Part 30
Commodity futures, Commodity options, Foreign futures.
Accordingly, 17 CFR Part 30 is amended as set forth below:
PART 30--FOREIGN FUTURES AND OPTIONS TRANSACTIONS
1. The authority citation for Part 30 continues to read as follows:
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Authority: Secs. 2(a)(1)(A), 4, 4c and 8a of the Commodity
Exchange Act, 7 U.S.C. 2, 6, 6c and 12a.
2. Appendix C to Part 30 is amended by adding the following
citation to the existing entry for the Association of Futures Brokers
and Dealers and The Securities Association to read as follows:
Appendix C--Foreign Petitioners Granted Relief from the Application
of Certain Part 30 Rules Pursuant to rule 30.10.
* * * * *
FR date and citation, March 7, 1997, 62 FR.
Issued in Washington, D.C. on March 3, 1997.
Jean Webb,
Secretary of the Commission.
[FR Doc. 97-5668 Filed 3-6-97; 8:45 am]
BILLING CODE 6351-01-P
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