2015-06687
Federal Register, Volume 80 Issue 57 (Wednesday, March 25, 2015)
[Federal Register Volume 80, Number 57 (Wednesday, March 25, 2015)]
[Rules and Regulations]
[Pages 15680-15683]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-06687]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
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 certain firms designated by the Hong Kong
Securities and Futures Commission (HKSFC) 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 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. The
Commission notes that the relief granted by this Order is not
applicable to any licensed corporation subject to joint oversight by
the Hong Kong Monetary Authority (HKMA) and the HKSFC, or to any
registered institution subject to oversight solely by the HKMA.
Further, this Order does not pertain to any
[[Page 15681]]
transaction in swaps, as defined in Section 1a(47) of the Commodity
Exchange Act.
DATES: Effective March 25, 2015.
FOR FURTHER INFORMATION CONTACT: Andrew V. Chapin, Associate Director,
(202) 418-5465, [email protected], or Scott W. Lee, Special Counsel,
(202) 418-5090, [email protected], Division of Swap Dealer and Intermediary
Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION: The Commission has issued the following
Order:
Order Under CFTC Regulation 30.10 Exempting Certain Firms
Designated by Hong Kong Securities and Futures Commission From the
Application of Certain of the Foreign Futures and Option Regulations as
of the Later of the Date of Publication of the Order Herein in the
Federal Register or After Filing of Consents by Such Firms and HKSFC,
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 (2014).
---------------------------------------------------------------------------
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 impact of such a program. Based upon these
considerations, the Commission determined to permit persons located
outside the U.S. and 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.\2\
---------------------------------------------------------------------------
\2\ ``Foreign Futures and Foreign Options Transactions,'' 52 FR
28290 (Aug. 5, 1987).
---------------------------------------------------------------------------
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.\3\ 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 who accept customer
funds; (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 (SRO) to
ensure Commission access on an ``as needed'' basis to information
essential to maintaining standards of customer and market protection
within the U.S.
---------------------------------------------------------------------------
\3\ 52 FR 28990, 29001.
---------------------------------------------------------------------------
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 the Commission and Department of Justice representatives; and
(3) notify NFA of the commencement of business in the U.S.\4\
---------------------------------------------------------------------------
\4\ 52 FR 28980, 28981, and 29002.
---------------------------------------------------------------------------
On September 8, 2012, the HKSFC petitioned the Commission on behalf
of its member firms, known as ``licensed corporations'', for which it
is the sole regulatory body, located and doing business in Hong Kong,
for an exemption from the application of the Commission's Part 30
Regulations to those firms. In support of its petition, the HKSFC
stated 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 thereunder.
Based upon a review of the petition, including supplementary
materials filed by the HKSFC, 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
Hong Kong law and 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 the HKSFC as
eligible for the relief granted herein from:
Registration with the Commission for firms and for firm
representatives;
The requirement in Commission Regulation 30.6(a) and (d),
17 CFR 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 1.55(b), and Commission Regulation 33.7, 17 CFR 33.7,
or as otherwise approved under Commission Regulation 1.55(c), 17 CFR
1.55(c);
The separate account requirement contained in Commission
Regulation 30.7, 17 CFR 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
applicable statutes and regulations in effect in Hong Kong.
This determination to permit substituted compliance is based on,
among other things, the Commission's finding that the regulatory
framework governing persons in Hong Kong who would be exempted
hereunder provides:
(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 for a minimum level of working capital and daily mark-to-
[[Page 15682]]
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,
and the HKSFC on an ``as needed'' basis including, without limitation,
confirmation data, data necessary to trace funds related to trading
futures products subject to regulation in Hong Kong, position data, and
data on firms' standing to do business and financial condition.
Commission staff has concluded, upon review of the petition of the
HKSFC and accompanying exhibits, that the HKSFC's regulation of
financial futures and options intermediaries 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 by certain licensed
corporations on behalf of customers located in the U.S. with respect to
transactions on a foreign futures and options exchange located in Hong
Kong subject to exclusive regulatory oversight by the HKSFC for
products that customers located in the U.S. may trade.\5\ The relief
does not extend to regulations relating to trading, directly or
indirectly, on U.S. exchanges, and does not pertain to any transaction
in swaps, as defined in Section 1a(47) of the Act. For example, a
licensed corporation trading in U.S. markets for its own account would
be subject to the Commission's large trader reporting requirements.\6\
Similarly, if such a licensed corporation 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.\7\ The relief
herein is not applicable where the licensed corporation solicits or
accepts orders from customers located in the U.S. for transactions on
U.S. exchanges. In that case, the firm must comply with all applicable
U.S. laws and regulations, including the requirement to register in the
appropriate capacity. The Commission further notes that the relief
granted by this Order is not applicable to any licensed corporation
subject to joint oversight by the Hong Kong Monetary Authority (HKMA)
and the HKSFC.\8\
---------------------------------------------------------------------------
\5\ See, e.g., Sections 2(a)(1)(C) and (D) of the Act.
\6\ See, e.g., 17 CFR part 18 (2014).
\7\ See, e.g., 17 CFR parts 17 and 21 (2014).
\8\ The HKMA administers the Hong Kong Banking Ordinance and is
the government authority in Hong Kong responsible for maintaining
monetary and banking stability. Certain financial institutions may
be required to become a licensed corporation by virtue of
undertaking certain regulated activities subject to HKSFC oversight.
Elements of the HKMA's regulatory program did not form the basis, in
whole or in part, for this exemptive relief.
---------------------------------------------------------------------------
The eligibility of any firm to seek relief under this exemptive
Order is subject to the following conditions:
(1) The regulator or SRO 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 Commission
that:
(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 Hong Kong; such firm is engaged in business with
customers located in Hong Kong 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. 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 located in the U.S.
will be made subject to the regulations of the HKSFC and the Commission
will receive prompt notice of all material changes to the relevant laws
in Hong Kong, any rules promulgated thereunder and HKSFC rules;
(d) Customers located in the U.S. will be provided no less
stringent regulatory protection than Hong Kong customers under all
relevant provisions of Hong Kong 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 Hong Kong 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. 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; provided,
[[Page 15683]]
however, that the firm may require its customers located in the U.S. to
execute a consent concerning the exhaustion of certain mediation or
conciliation procedures made available by the HKSFC prior to bringing
an NFA arbitration proceeding;
(f) Undertakes to comply with the applicable provisions of Hong
Kong laws and HKSFC rules that form the basis upon which this exemption
from certain provisions of the Act and regulations thereunder is
granted; and
(g) Consents to refuse those customers located in the U.S. the
option of not segregating funds notwithstanding relevant provisions of
Hong Kong law or regulations promulgated by the HKSFC.
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.\9\ 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.
---------------------------------------------------------------------------
\9\ 62 FR 47792, 47793 (Sept. 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 HKSFC firm on
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 the HKSFC.
This Order is issued pursuant to Regulation 30.10 based on the
representations made and supporting material provided to the Commission
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 19, 2015, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Appendix to Foreign Futures and Options Transactions--Commission Voting
Summary
On this matter, Chairman Massad and Commissioners Wetjen, Bowen,
and Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
[FR Doc. 2015-06687 Filed 3-24-15; 8:45 am]
BILLING CODE 6351-01-P