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  • [Federal Register: March 28, 2007 (Volume 72, Number 59)]

    [Rules and Regulations]

    [Page 14413-14416]

    From the Federal Register Online via GPO Access []





    17 CFR Part 30

    Foreign Futures and Options Transactions

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Order.


    SUMMARY: The Commodity Futures Trading Commission (Commission or (CFTC) is granting an exemption to firms designated by the Taiwan Futures Exchange (TAIFEX) from the application of certain of the Commission's foreign futures and option regulations based upon substituted compliance with certain comparable regulatory and self-regulatory requirements of a foreign regulatory authority consistent with

    [[Page 14414]]

    conditions specified by the Commission, as set forth herein. This Order is issued pursuant to Commission Regulation 30.10, which permits persons to file a petition with the Commission for exemption from the application of certain of the Regulations 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.

    DATES: Effective Date: March 28, 2007.

    FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Esq., Deputy

    Director, Division of Clearing and Intermediary Oversight, Commodity

    Futures Trading Commission, 1155 21st Street, NW., Washington, DC

    20581. Telephone: (202) 418-5439.

    SUPPLEMENTARY INFORMATION: The Commission has issued the following


    Order Under CFTC Regulation 30.10 Exempting Firms Designated by the

    Taiwan Futures Exchange (TAIFEX) From the Application of Certain of the

    Foreign Futures and Option Regulations the Later of the Date of

    Publication of the Order Herein in the Federal Register or After Filing

    of Consents by Such Firms and TAIFEX, as Appropriate, to the Terms and

    Conditions of the Order Herein.

    Commission Regulations governing the offer and sale of commodity

    futures and option contracts traded on or subject to the regulations of

    a foreign board of trade to customers located in the U.S. are contained

    in Part 30 of the Commission's regulations.\1\ These regulations

    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.


    \1\ Commission regulations referred to herein are found at 17

    CFR Ch. I (2006).


    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. the 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 regulations based upon substituted compliance with the

    regulatory requirements of the foreign jurisdiction.

    Appendix A to Part 30 ``Interpretative Statement With Respect to

    the Commission's Exemptive Authority Under Sec. 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

    Regulation 30.10. \2\ These elements include: (1) Registration,

    authorization or other form of licensing, fitness review or

    qualification of persons that solicit and accept customer orders; (2)

    minimum financial requirements for those persons that solicit and

    accept customer orders; (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.


    \2\ 52 FR 28990, 29001 (August 5, 1987).


    Moreover, the Commission specifically stated in adopting Regulation

    30.10 that no exemption of a general nature would be granted unless the

    persons to whom the exemption is to be applied: (1) Submit to

    jurisdiction in the U.S. by designating an agent for service of process

    in the 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\


    \3\ 52 FR 28980, 28981 and 29002.


    On September 20, 2005, TAIFEX petitioned the Commission on behalf

    of its member firms, located and doing business in Taiwan, for an

    exemption from the application of the Commission's Part 30 Regulations

    to those firms. In support of its petition, TAIFEX states that granting

    such an exemption with respect to such firms that it has authorized to

    conduct foreign futures and option 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 regulations


    Based upon a review of the petition, supplementary materials filed

    by TAIFEX and the recommendation of the Commission's staff, the

    Commission has concluded that the standards for relief set forth in

    Regulation 30.10 and, in particular, Appendix A thereof, have been met

    and that compliance with applicable Taiwanese law and TAIFEX

    regulations may be substituted for compliance with those sections of

    the Act and regulations thereunder more particularly set forth herein.

    By this Order, the Commission hereby exempts, subject to specified

    conditions, those firms identified to the Commission by TAIFEX as

    eligible for the relief granted herein from:

    --Registration with the Commission for firms and for firm


    --The requirement in Commission Regulation 30.6(a) and (d), 17 CFR

    Sec. 30.6(a) and (d), that firms provide customers located in the

    U.S. with the risk disclosure statements in Commission Regulation

    1.55(b), 17 CFR Sec. 1.55(b), and Commission Regulation 33.7, 17

    CFR Sec. 33.7, or as otherwise approved under Commission Regulation

    1.55(c), 17 CFR Sec. 1.55(c);

    --The separate account requirement contained in Commission

    Regulation 30.7, 17 CFR Sec. 30.7;

    --Those sections of Part 1 of the Commission's financial regulations

    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 regulations relating

    to books and records which apply to transactions subject to Part 30,

    based upon substituted compliance by such persons with the application

    statutes and regulations in effect in Taiwan.

    This determination to permit substituted compliance is based on,

    among other things, the Commission's finding that the regulatory

    framework governing persons in Taiwan who would be exempted hereunder


    (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

    [[Page 14415]]

    for a minimum level of working capital 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;

    (4) Recordkeeping and reporting requirements pertaining to

    financial and trade information;

    (5) Sales practice standards for authorized firms and persons

    acting on their behalf that include, for example, required

    disclosures to prospective customers and prohibitions on improper

    trading advice;

    (6) Procedures to audit for compliance with, and to redress

    violations of, the customer protection and sales practice

    requirements referred to above, 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, TAIFEX, and the Taiwanese regulatory authorities on an

    ``as needed'' basis including, without limitation, confirmation

    data, data necessary to trace funds related to trading futures

    products subject to regulation in Taiwan, position data, and data on

    firms' standing to do business and financial condition.

    Commission staff have concluded, upon review of the petition of

    TAIFEX and accompanying exhibits, that Taiwan's regulation of futures

    and options exchanges is comparable to that of the U.S. in the areas

    specified in Appendix A of Part 30, as described above.

    This Order does not provide an exemption from any provision of the

    Act or regulations thereunder not specified herein, such as the

    antifraud provision in Regulation 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

    regulations of TAIFEX for products that customers located in the U.S.

    may trade.\4\ The relief does not extend to regulations 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 positions on a U.S. exchange on behalf of foreign

    clients and submitted such transactions for clearing on an omnibus

    basis through a firm registered as a futures commission merchant under

    the Act, 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.


    \4\ See, e.g., Sections 2(a)(1)(C) and (D) of the Act.

    \5\ See, e.g., 17 CFR part 18 (2006).

    \6\ See, e.g., 17 CFR parts 17 and 21 (2006).


    The eligibility of any firm to seek relief under this exemptive

    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 Regulation 30.10 petition must

    represent in writing to the CFTC \7\ that:


    \7\ As described below, these representations are to be filed

    with NFA.


    (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 Taiwan; such firm is engaged in

    business with customers in Taiwan 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. 12a(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 resident in the

    U.S. will be made on or subject to the regulations of TAIFEX and the

    Commission will receive prompt notice of all material changes to the

    relevant laws in Taiwan, any regulations promulgated thereunder and

    TAIFEX regulations;

    (d) Customers located in the U.S. will be provided no less

    stringent regulatory protection than Taiwanese customers under all

    relevant provisions of Taiwanese law; and

    (e) It will cooperate with the Commission with respect to any

    inquiries concerning any activity subject to regulation under the

    Part 30 Regulations, 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

    Regulation 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 Taiwan 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 under

    Section 8a(2) of the Act, 7 U.S.C. Sec. 12a(2), from doing business

    in the U.S.;

    (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, and consents to notify

    customers located in the U.S. of the availability of such a program;

    (f) Undertakes to comply with the applicable provisions of

    Taiwanese laws and TAIFEX regulations that form the basis upon which

    this exemption from certain provisions of the Act and Regulations

    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.


    \8\ 62 FR 47792, 47793 (September 11, 1997). Among other duties,

    the Commission authorized NFA to receive requests for confirmation

    of Regulation 30.10 relief on behalf of particular firms, to verify

    such firms' fitness and compliance with the conditions of the

    appropriate Regulation 30.10 Order and to grant exemptive relief

    from registration to qualifying firms.


    This Order will become effective as to any designated TAIFEX firm

    the later of the date of publication of the Order in the Federal

    Register or the filing of the consents set forth in paragraphs (2)(a)-

    (f). 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 TAIFEX.

    This Order is issued pursuant to Regulation 30.10 based on the

    representations made and supporting material provided to the Commission

    [[Page 14416]]

    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 Regulation 30.10 and, in

    particular, Appendix A, have been met. 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 regulations and will make necessary

    adjustments if appropriate.

    Issued in Washington, DC on March 23, 2007.

    Eileen A. Donovan,

    Acting Secretary of the Commission.

    [FR Doc. 07-1521 Filed 3-27-07; 8:45 am]

    BILLING CODE 6351-01-M

    Last Updated: June 29, 2007