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Interpretative Letters

Date
Interpretative Letters
01/08/2002
02-04 PDF Image; Section 2(c) of the Act; Interpretation
The Division of Trading and Markets responded to an inquiry about the regulation of the foreign currency market by the operator of an investment club that limits its activities to the trading of foreign currency on an off-exchange basis. The Division indicated that the Commodity Futures Modernization Act of 2000 had amended the Commodity Exchange Act to make clear that the offering of off-exchange foreign currency futures and options contracts to retail customers is unlawful unless the counterparty is a regulated entity enumerated in the Commodity Exchange Act, such as a registered FCM. The Division noted that, generally, an investment trust, syndicate, or similar enterprise operated for the purpose of trading commodity interests is a "pool" and a person who operates a "pool" is a CPO and must register as such. However, with respect to a person that operates a "pool" that limits its trading activities to off-exchange foreign currency with a registered FCM acting as a counterparty under Section 2(c)(2)(B)(ii) of the Act, the person is not required to register with the Commission as a CPO, but may voluntarily do so.
01/08/2002
02-05 PDF Image; Section 2(c) of the Act; Interpretation
The Division of Trading and Markets responded to an inquiry about the regulation of the foreign currency market by a registered FCM offering trading in off-exchange foreign currency to retail customers. The Division indicated that the Commodity Futures Modernization Act of 2000 had amended the Commodity Exchange Act to make clear that the offering of off-exchange foreign currency futures and options contracts to retail customers is unlawful unless the counterparty is a regulated entity enumerated in the Commodity Exchange Act, such as a registered FCM. The Division noted that licensees of the FCM's software trading platform would not be affiliates of the FCM so as to qualify as one of the enumerated counterparties for retail foreign currency trading under the Act. Additionally, the Division indicated that the terms of the customer agreement between the licensees and the customers and the manner in which the licensees are operated, in particular the fact that the licensees operate under their own names without any reference to the FCM's role in the transactions and receive customer monies in the name of the licensees, have the indicia of the licensees being the counterparties to the retail customers. Accordingly, the Division stated that the licensees, to continue operating as they are currently, must be one of the enumerated counterparties under Section 2(c)(2)(B)(ii) of the Act. The FCM, in addition to offering trading to retail customers as counterparty, was also providing a second trading platform through which retail customers could trade directly with one another. The Division indicated that, to the extent that retail customers, trading through this second platform, become counterparties to one another, such transactions would fail to meet the requirement that the counterparty to a retail customer must be one of the entities enumerated under Section 2(c)(2)(B)(ii) of the Act and would, therefore, violate Section 4(a) of the Act.
03/21/2002
02-27 PDF Image; Sections 4e, 4k(5) and 4f(a)(3); Interpretation
A registered securities exchange asked for confirmation that its members who are individual traders and executing brokerage firms and meet the requirements of Sections 4k(5) and 4f(a)(3) of the Act, respectively, are, therefore, exempt from the registration requirements of Section 4e of the Act. Regarding individual traders, the Division confirmed that, if the traders are associated persons of registered securities broker-dealers (BDs), as represented in the request, and limit their solicitation, acceptance, execution, or placing of orders on behalf of others involving futures contracts, or options thereon, to security futures products, then they meet the requirements of Section 4k(5) of the Act and, therefore, are exempt from, among other provisions, Section 4e of the Act. Additionally, the Division confirmed that, if the executing brokerage firms are, as represented in the request, BDs registered with the SEC and such registration has not been suspended pursuant to an order of the SEC and they limit their activities on behalf of others involving futures contracts to security futures products, then they meet the requirements of Section 4f(a)(3) of the Act and, accordingly, they are exempt from the registration requirements of Section 4e of the Act.
04/04/2002
02-43 PDF Image; Rule 3.1(a)(1); Interpretation
The Division of Trading and Markets issued an interpretation that an employee of a Commission registrant who had limited check-signing privileges was not required to be listed as a principal of the registrant where the employee could sign checks drawn only on a holding account, the balance of which was sufficient only to pay the registrant's current bills. Moreover, the employee had no other duties or responsibilities that would require registration with the Commission, and the employee did not supervise any person registered, or required to be registered, with the Commission.
04/09/2002
02-44 PDF Image; Section 4m(1); Interpretation
The Division of Trading and Markets issued an interpretation that the developer of an interactive Internet website would not be required to register as a CTA, where the interactive website would be open exclusively to eligible contract participants (ECPs) and would generate suggestions regarding appropriate OTC energy-related financial instrument transactions based on variables submitted by such ECP bulk users of gas and electricity. ECP customers would not trade such instruments on the website, but could separately negotiate transactions with the website developer or with other ECPs. The Division noted that energy-related financial products are generally "exempt commodities" under the Commodity Futures Modernization Act of 2000, and that transactions in such instruments by ECPs not entered into on a trading facility are generally exempt from the provisions of the Commodity Exchange Act (except for anti-fraud and anti-manipulation provisions). The Division further cautioned the requester that visitors to a non-interactive version of the website should be informed that the OTC instruments discussed on the website are available only to ECPs.
07/30/2002
02-91 PDF Image; Section 1a(23) and Regulation 1.3(mm); Interpretation
The Division of Clearing and Intermediary Oversight provided an interpretation that a data service provider that makes available to its customers an integration tool to permit the customers to access the order-entry system of the FCM of their choice is not an IB and, therefore, not required to register as such. The Division noted, in particular, that the data service provider does not solicit customers or orders for an FCM or the trading of futures contracts (customers indicate to the data service provider the FCM with which they have an existing relationship), does not recommend, propose, or encourage that customers use any particular FCM, or place any orders for futures contracts, and is not accepting customer orders, but simply providing technology that connects the customer to its FCM's order entry system. The customer is submitting its order to the FCM and not the data service provider. The Division further noted that the fees paid to the data service provider by the FCM are a reflection of the costs of the development and ongoing support of the required technology and are intended to cover these costs and are not associated with the placement of customer orders (the fee is paid by the FCM whether the trade is executed or not).
10/02/2002
02-104 PDF Image; Section 2(c)(2)(B); Interpretation
The Division of Clearing and Intermediary Oversight provided an interpretation that a registered FCM who limits its activities to acting solely as a counterparty under Section 2(c)(2)(B)(ii) of the Act for foreign currency transactions conducted on an off-exchange basis, would not be subject to CFTC Rule 1.33. The Division noted, however, that the FCM remains subject to certain provisions of the Act as set forth in Section 2(c)(2)(C) of the Act, including the relevant antifraud provisions.
11/20/2002
02-112 PDF Image; Regulations 1.3(k) and 1.3(y); Interpretation
The Division of Clearing and Intermediary Oversight provided an interpretation that an account for an FCM carried on the books of another registered FCM, in which the carrying FCM receives, in lieu of commissions, a portion of the profits of the other FCM, but is not the owner of the account or the account holder, would not fall within the definition of a proprietary account under Commission Rule 1.3(y). The account would, instead, be carried as a customer account, subject to the sections of the Act and Commission Rules applicable to such accounts.

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