ADDRESS: Interested persons should submit their views and comments to Jean A. Webb, Secretary of the Commission, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581. In addition, comments may be sent by facsimile transmission to facsimile number (202) 418-5521, or by electronic mail to [email protected]. Reference should be made to "Commission Rules 30.1, 30.4 and 30.10 � Registration and Exemption.�.

FOR FURTHER INFORMATION CONTACT: Laurie Plessala Duperier, Special Counsel, or Susan A. Elliott, Staff Attorney, Division of Trading and Markets, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581. Telephone: (202) 418-5430.

SUPPLEMENTARY INFORMATION:

I. Background

In 1987, the Commission adopted a new Part 30 to its regulations.¹ Part 30 governs, generally, the solicitation and sale of foreign futures² and foreign option³ contracts to customers⁴ located in the United States. These rules were promulgated pursuant to sections 2(a)(1)(A), 4(b) and 4c of the Commodity Exchange Act ("Act"), which vest the Commission with exclusive jurisdiction over the offer and sale, in the United States, of options and futures contracts traded on or subject to the rules of a board of trade, exchange or market located outside of the United States.

When it adopted Part 30, the Commission recognized that many complexities would need to be addressed by the staff in the years after adoption of these rules.⁵ Soon after the final rulemaking for Part 30 was published, the staff of the Division of Trading and Markets (the �Division�) published several interpretative letters and no-

action positions regarding the application of the registration requirements of Part 30 to foreign firms, and their ability to obtain an exemption from certain of the requirements of Part 30, pursuant to Rule 30.10. The Commission now proposes to codify some of those interpretations and positions. Each of the interpretative letters discussed below will cease to have any prospective applicability if the proposed rules are adopted. Those who properly relied on interpretative statements in the past must henceforth comply with the proposed rules if adopted. Since no-action letters may only be relied on by the entity seeking the no-action position, the entities who received the no-action letters discussed below may continue to rely on the relief provided. All other persons were, and are, required to comply with Commission rules.

A. Registration Required by Rule 30.4(a)

Rule 30.4(a) requires anyone who solicits or accepts orders and/or money for foreign futures and options contracts from foreign futures and options U.S. customers to register as an FCM. Rule 30.4(e) requires registered FCMs to maintain an office in the United States which is managed by an individual domiciled in the United States and registered with the Commission as an associated person (�AP�). Rule 30.10 allows any person to seek exemption from any provision of Part 30.

Shortly after Part 30 was adopted, it became clear that it might not be necessary for certain conduct to trigger the registration requirements of Rule 30.4(a). For example, foreign futures and options brokers that did nothing more than carry the customer omnibus account of a U.S. FCM fell within the registration provisions of Rule 30.4(a). As a result, the staff issued an interpretation in CFTC Letter 87-7 to make clear that a member of a foreign board of trade (or an affiliate of a U.S. firm that is authorized to carry accounts under relevant foreign law), whose only contact with foreign futures and option customers was limited to carrying the customer omnibus account of a U.S. FCM, would not be required to register as an FCM under Rule 30.4(a). The Division reasoned that registration should not be required in that circumstance because of the presence of an �intervening registrant [i.e., a U.S. FCM] to whom the rules would be fully applicable.�⁶ In other words, U.S. foreign futures and option customers would continue to have a relationship with and be clients of the U.S. FCM for which the foreign firm was carrying the omnibus account, and would not have direct contact with the foreign futures and options broker. Specifically, the Division stated:

�[W]here an FCM transfers its customer omnibus account to an offshore firm which is either a member of a foreign exchange or is an offshore affiliate of a U.S. FCM licensed or authorized by the offshore jurisdiction where it is located, and such foreign exchange member�s or affiliate�s contact with foreign futures and options customers is limited to carrying the customer omnibus account of a U.S. FCM for execution on the foreign exchange, such activity should not bring it within the scope of the foreign futures and options rules.�⁷

The Division sought to resolve other issues through the no-action process. For instance, CFTC Letter 87-7 was limited to the transfer of customer omnibus accounts to foreign firms and the existence of U.S. branches resulted in the bank being characterized as �present� in the United States.⁸ Thus, despite the relief offered in CFTC Letter 87-7, foreign banks that, as brokers, carried US FCMs� customer omnibus accounts, could not take advantage of that relief if the banks had bank branches in the United States. In CFTC Letter 89-11, the Division stated that it would not recommend an enforcement action against a foreign bank with U.S. bank branches if the foreign bank availed itself of the relief of CFTC Letter 87-7.⁹ The Division�s no-action position was contingent upon three undertakings by the foreign bank: (1) the U.S. branches would not solicit or accept orders for foreign futures contracts or options or engage in any activities subject to regulation by the Commission, except in connection with proprietary trading conducted by its U.S. branches; (2) the foreign bank would provide upon request of the Commission or the National Futures Association, access to the books and records of the U.S. branches to ensure compliance with undertaking (1); and (3) the bank would designate an agent for the purpose of accepting delivery and service of any communication from the Commission relating to the foreign firm�s activities in carrying the omnibus accounts.¹⁰

Still other ambiguities arose with regard to foreign firms. In the Part 30 rules, there is no specific provision relating to registration requirements for foreign futures and options brokers handling proprietary accounts. Commission Rule 3.10(c) provides a general exemption from FCM registration for persons trading solely for proprietary accounts, which is arguably applicable to foreign futures and options brokers.¹¹ Shortly after the Commission adopted Part 30, an interpretative letter was requested regarding foreign firms solely carrying U.S. customer foreign futures and options accounts that would be proprietary accounts to the foreign firm. In CFTC Letter 88-15,¹² Division staff determined that, subject to certain conditions, �in instances where a foreign firm solely carries accounts on behalf of customers in the United States which may be deemed to be proprietary accounts of the foreign firm, such foreign firm should not be subject to the registration requirement of Rule 30.4, or be required to apply for exemptive relief therefrom pursuant to Rule 30.10 based on comparability of regulation in the foreign jurisdiction.� ¹³ The Division further stated that such a firm would, however, remain subject to all other applicable provisions of the Act and rules, regulations and orders thereunder.

While the staff previously has addressed the situation where a foreign firm carries its own �proprietary� account, it has not issued an interpretative letter relating to the applicability of the Rule 30.4 registration requirement to a foreign futures and options broker when the foreign futures and options broker carries the proprietary account of a U.S. FCM that is not proprietary to the foreign firm. Pursuant to Rule 30.4(a), a U.S. FCM trading its proprietary account through a foreign futures and options broker is a �U.S. foreign futures and options customer,� requiring the foreign futures and options broker to register in order to carry the firm�s proprietary account.¹⁴ The logic of CFTC Letter 87-7, however, suggests that certain foreign futures and options brokers carrying FCM proprietary accounts similarly should not be required to register or to obtain a Rule 30.10 exemption.

The registration relief in CFTC Letter 87-7 was limited by its terms to a foreign firm which either was a member of a foreign board of trade or was an offshore affiliate of a U.S. FCM licensed, authorized or otherwise subject to regulation in the offshore jurisdiction where it was located. The staff took this position because, among other things, there would be no contact by a foreign firm with the FCM�s customers and the U.S. FCM will have engaged in all sales practices and remain responsible for compliance with the Part 30 rules. Similarly, sales practice considerations are not of particular concern where an FCM opens a firm account (i.e., noncustomer account) with a foreign board of trade member. U.S. FCMs are professionals in the commodities industry and therefore should be familiar with the risks of trading foreign commodity futures and options contracts. The FCM does not need the added protections afforded by requiring the foreign firm to register as an FCM, provided of course that the foreign firm is a member of a foreign board of trade or a registered affiliate of the U.S. FCM. Moreover, where the foreign firm carries the proprietary account of a U.S. FCM, the requirement of registration and the attendant capital and customer funds rules are not necessary because the foreign jurisdiction generally has already imposed rules to protect the foreign clearing house.

B. Availability of Rule 30.10 Exemptions to Foreign Firms with U.S. Bank Branches

Those persons located outside the United States that solicit or accept orders directly from United States customers for foreign futures or options transactions and that are subject to a comparable regulatory scheme in the country in which they are located¹⁵ may apply under Appendix A to Rule 30.10 for relief from the registration requirements of Rule 30.4. Rule 30.10 and Appendix A thereto have been the basis for exemptions granted to a number of foreign firms that, along with their governmental agency or self-regulatory organization, have demonstrated that their particular foreign regulatory program is comparable to that of the Commission.

Although the Commission orders granting general Rule 30.10 exemptive relief from FCM registration have applied only with respect to persons located outside of the United States, the Division has permitted foreign futures and options brokers with U.S. bank branches to obtain a Rule 30.10 exemption under certain conditions. In CFTC Letter 89-5,¹⁶ the Division stated that it would not recommend enforcement action if a division or branch of a foreign bank is de facto treated as a separate entity by the Office of the Comptroller of the Currency (OCC) and has no involvement with U.S. foreign futures and options customers. Under those circumstances, the branch could be treated by the bank as though it were a subsidiary or affiliate,¹⁷ and the foreign firm would be eligible for an exemption under Rule 30.10. The Division staff has required foreign firms with U.S. bank branches that are seeking confirmation of Rule 30.10 relief to make representations which ensure that the U.S. branch does not solicit or otherwise have contact with U.S. customers for transactions governed by Commission rules. In so doing, the Division noted that the bank branch �is viewed as a separate legal entity in many respects under the federal bank regulatory scheme.�¹⁸

In the ten years following the issuance of CFTC Letter 89-5, staff has issued several no-action letters to foreign firms with U.S. bank branches permitting them to obtain confirmation of Rule 30.10 relief. Since that time, the staff has not become aware of problems with foreign firms using their U.S. bank branches inappropriately. Therefore, the Commission proposes to codify the procedure by which foreign firms with U.S. bank branches may obtain 30.10 relief. Doing so will obviate the need for affected persons to seek interpretative relief or a no-action position, and will thus utilize Commission resources more efficiently.

II. The Proposed Amendments

The Commission believes it can provide clarity to its registration requirements under Part 30 by specifically addressing, in Rule 30.4, when registration by a foreign futures and options broker is not required. As discussed earlier, the Commission proposes to amend Rule 30.4(a) to clarify that it does not require registration by certain foreign futures and options brokers that carry U.S. foreign futures and foreign options customer omnibus accounts of U.S. FCMs and have no customer contact, including foreign brokers with U.S. bank branches. The Commission also proposes to amend Rule 30.4(a) to clarify that a foreign firm that carries a U.S. FCM�s proprietary account, or a foreign firm which trades for its own proprietary account (including U.S. affiliates whose accounts are �proprietary� to the foreign firm), need not register as an FCM so long as certain conditions are met. Such foreign firms would, however, otherwise remain subject to provisions of Part 30 that are not dependent upon registration as an FCM, such as the antifraud provision of Rule 30.9. While the Commission is proposing to permit foreign brokers to carry �proprietary� accounts in the broader sense of the term (as defined in Rule 1.3(y)), not just firm trading accounts or �house� accounts¹⁹, the Commission invites comment on the advisability of limiting the exemption to house accounts only.²⁰

In addition, the Commission proposes to amend Rule 30.10 to clarify that foreign firms with U.S. bank branches may be eligible for Rule 30.10 relief if certain representations are made. A foreign firm with U.S. bank branches would be able to obtain a Rule 30.10 exemption without requesting a no-action position if it files the following representations with the NFA Vice-President, Registration & Membership:

(1) No U.S. bank branch, office or division of the foreign futures and options broker will engage in the trading of futures or options on futures within or from the United States, except for its own proprietary account;

(2) No U.S. bank branch, office or division of the foreign futures and options broker will refer any foreign futures or options customer to the foreign broker or otherwise be involved in the foreign broker�s business in foreign futures and option transactions;

(3) No U.S. bank branch, office or division of the foreign futures and options broker will solicit any foreign futures or options business or purchase or sell foreign futures and option contracts on behalf of any foreign futures or option customers or otherwise engage in any activity subject to regulation under Part 30 or engage in any clerical duties related thereto. If any U.S. division, office or branch desires to engage in such activities, it will only do so through an appropriate CFTC registrant;

(4) The foreign futures and options broker will maintain outside the United States all contract documents, books and records regarding foreign futures and option transactions;

(5) The foreign futures and options broker and each of its U.S. bank branches, offices or divisions agree to provide upon request of the Commission, the NFA or the U.S. Department of Justice, access to their books and records for the purpose of ensuring compliance with the foreign undertakings and consents to make such records available for inspection at a location in the United States within 72 hours after service of the request;²¹ and

(6) Although it will continue to engage in normal commercial activities, no U.S. bank branch, office or division of the foreign futures and options broker will establish relationships in the United States with the applicant�s foreign futures and options customers for the purpose of facilitating or effecting transactions in foreign futures and option contracts in the United States.

Similarly, any foreign futures and options broker that would not be required to register under the proposed Rule 30.4(a) because it solely carries a U.S. customer omnibus account, its own proprietary account, or a U.S. FCM�s proprietary account, will not be required to register solely because it has U.S. bank branches provided that it files with the NFA, Vice President, Registration & Membership, the above representations in accordance with Rule 30.10(b).

The Commission solicits comment regarding the number of foreign futures or options brokers� non-bank branches located in the United States, as well as information concerning their activities.²² The Commission also requests comment on the advisability of expanding the relief provided by the proposed rule amendments to foreign futures and options brokers with any type of U.S. branch, not just bank branches.

Finally, the proposed rule defines �foreign futures and options customer omnibus account� in Rule 30.1(d), and �foreign futures and options broker� in Rule 30.1(e).