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e9-1153

  • [Federal Register: January 21, 2009 (Volume 74, Number 12)]

    [Notices]

    [Page 3570-3572]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr21ja09-57]

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    COMMODITY FUTURES TRADING COMMISSION

    Notice of Additional Conditions on the No-Action Relief When

    Foreign Boards of Trade That Have Received Staff No-Action Relief To

    Permit Direct Access to Their Automated Trading Systems From Locations

    in the United States List for Trading From the U.S. Linked Futures and

    Option Contracts and a Revision of Commission Policy Regarding the

    Listing of Certain New Option Contracts

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice.

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    SUMMARY: The Commodity Futures Trading Commission (Commission) is

    providing notice requiring foreign boards of trade that may receive

    Commission staff no-action relief permitting them to make their

    automated trading systems directly available from the U.S. to comply

    with additional conditions for the no-action relief to remain effective

    if they list for trading from the U.S. contracts that are linked to

    contracts traded on certain U.S.-based entities. Separately, the

    Commission is providing notice that it is revising its policy regarding

    the notification procedures applicable to listing an option on a

    futures contract that already is (or can be) listed for trading from

    the U.S.

    DATES: Effective Date: The conditions and notification procedures are

    effective immediately.

    FOR FURTHER INFORMATION CONTACT: Duane C. Andresen, Senior Special

    Counsel, Division of Market Oversight, Commodity Futures Trading

    Commission, Three Lafayette Center, 1155 21st Street, NW., Washington,

    DC 20581. Telephone: 202-418-5492. E-mail: dandresen@cftc.gov.

    SUPPLEMENTARY INFORMATION:

    I. Background

    Since 1996,\1\ Commission staff has issued no-action letters \2\ to

    foreign boards of trade (FBOT) stating that, subject to compliance with

    certain conditions, the staff will not recommend that the Commission

    take enforcement action against the FBOT or its members if the FBOT

    permits its members or participants in the United States to have direct

    access \3\ to its electronic trading system without seeking designation

    under the Commodity Exchange Act (CEA or Act) as a contract market

    (DCM) or registration as a derivatives transaction execution facility

    (DTEF).\4\ On June 2, 1999, the Commission issued an order which, among

    other things, withdrew proposed rules that would have governed

    automated access to FBOTs from the U.S. and instructed the Commission

    staff to begin immediately processing no-action requests from FBOTs

    seeking to place trading terminals in the U.S., and to issue responses

    where appropriate, pursuant to the general guidelines included in the

    Eurex (DTB) no-action process, or other guidelines established by the

    Commission.\5\ On October 22, 2006, the Commission issued a Statement

    of Policy that affirmed the use of the no-action process to permit

    FBOTs to provide direct access to their electronic trading systems to

    U.S. members or authorized participants.\6\

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    \1\ In February 1996, Commission staff issued no-action relief

    to Deutsche Terminborse (DTB), an automated international futures

    and options exchange headquartered in Frankfurt, Germany, that

    permitted DTB, subject to certain terms and conditions, to place

    computer terminals in the U.S. offices of its members for principal

    trading. See CFTC Interpretative Letter No. 96-28 (1996-1997

    Transfer Binder) Comm. Fut. L. Rep. (CCH) para. 26,669 (Feb. 29.

    1996). In June 1998, DTB merged with the Swiss Options and Financial

    Futures Exchange and DTB changed its name to Eurex Deutschland.

    \2\ See Commission Rule 140.99, 17 CFR 140.99 (2006), which

    defines the term ``no-action letter'' as a written statement issued

    by the staff of a Division of the Commission or of the Office of

    General Counsel that it will not recommend enforcement action to the

    Commission for failure to comply with a specific provision of the

    Act or of a Commission rule, regulation or order if a proposed

    transaction is completed or a proposed activity is conducted by the

    beneficiary.

    \3\ Direct access means that the member in the U.S. may enter an

    order directly into the trade matching engine to be matched

    according to the trade matching algorithm. Direct access is

    different from an automated order routing system (AORS) in that an

    order transmitted via AORS is intermediated in that it is entered

    into the trade matching engine by or through the intermediary, i.e.,

    the intermediary, not the member in the U.S., has direct access.

    \4\ The no-action letters issued to FBOTs, formerly referred to

    as ``foreign terminal no-action letters,'' are currently referred to

    as ``direct access no-action letters'' and are published on the

    Commission's Web site at: http://www.cftc.gov/dea/

    deaforeignterminaltable.htm. Hereinafter the letters are simply

    referred to as ``no-action letters.'' Reference to DTEFs in the no-

    action letters was added following the establishment of that

    registration category by the Commodity Futures Modernization Act of

    2000.

    \5\ Access to Automated Boards of Trade, 64 FR 32829 (June 18,

    1999).

    \6\ Boards of Trade Located Outside of the United States and No-

    Action Relief from the Requirement to Become a Designated Contract

    Market or Derivatives Transaction Execution Facility, 71 FR 64443

    (November 2, 2006).

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    Commission staff has issued 21 no-action letters since the DTB

    letter, all of which grant the no-action relief requested subject to a

    series of terms and conditions. The terms and conditions, among other

    things, assure the Division (1) That the FBOT continues to be a bona

    fide FBOT subject to effective regulation in its home country; (2) that

    direct access is restricted to authorized entities; (3) that the

    Division receives notice of any material changes in the information

    provided to it in support of the no-action request including, without

    limitation, any modification of the FBOT's membership criteria, the

    location of its management, personnel or operations, the basic

    structure, nature, or operation of the trading system, or the

    regulatory or self-regulatory structure applicable to its members; and

    (4) that satisfactory information-sharing arrangements between the

    Commission, the FBOT, and the FBOT's relevant regulatory authorities

    will remain in effect.

    With respect to the listing of new contracts, initially FBOTs that

    received no-action relief that wished to list additional futures and

    option contracts for trading by direct access from the U.S. were

    required to request in writing and receive supplemental no-action

    relief from Commission staff prior to listing the new contracts. On

    June 30, 2000, the Commission issued a Statement of Policy that

    permitted FBOTs with no-action relief to list additional futures and

    option contracts for trading from the U.S. merely by filing with

    Commission staff no later

    [[Page 3571]]

    than the business day preceding the initial listing of the contracts:

    (1) A copy of the initial terms and conditions of the additional

    contracts and (2) a certification that it is in compliance with the

    terms and conditions of its no-action letter and that the additional

    futures and option contracts would be traded in accordance with such

    terms and conditions.\7\ On April 14, 2006, in light of its experience

    since the issuance of the Statement of Policy and in recognition of the

    fact that the listing of new products may raise previously unidentified

    regulatory issues, the Commission issued a revision to the new contract

    listing policy (Notice of Revision).\8\ The Commission determined to

    establish a ten business day advance notification requirement in order

    to give Commission staff the opportunity to review the terms and

    conditions of proposed additional contracts to address any regulatory

    issues raised prior to the contract being made available for trading by

    direct access from the U.S.

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    \7\ See Statement of Policy of the Commodity Futures Trading

    Commission Regarding the Listing of New Futures and Option Contracts

    by Foreign Boards of Trade That Have Received Staff No-Action Relief

    to Place Electronic Trading Devices in the U.S., 65 FR 41641 (July

    6, 2000). The Statement of Policy did not apply to broad-based stock

    index futures and option contracts that are now covered by Section

    2(a)(1)(C) of the Commodity Exchange Act. Foreign boards of trade

    were (and presently are) required to seek and receive written

    supplemental no-action relief from Commission staff prior to

    offering or selling such contracts.

    \8\ See Notice of Revision of Commission Policy Regarding the

    Listing of New Futures and Option Contracts by Foreign Boards of

    Trade That Have Received Staff No-Action Relief To Provide Direct

    Access to Their Automated Trading Systems from Locations in the

    United States, 71 FR 19877 (April 18, 2006). The notice of revision

    did not alter a FBOT's obligation to seek and receive written

    supplemental no-action relief from Commission staff prior to

    offering or selling broad-based stock index futures and option

    contracts. The FBOT is still required to file with Commission staff

    a copy of the initial terms and conditions of the additional

    contracts and a certification that it is in compliance with the

    terms and conditions of its no-action letter and that the additional

    futures and option contracts would be traded in accordance with such

    terms and conditions.

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    II. Additional Conditions on the No-Action Relief

    On January 17, 2006, ICE Futures Europe \9\ notified the Division

    pursuant to the Statement of Policy of its intent to list for direct

    access from the U.S. a West Texas Intermediate (WTI) Light Sweet Crude

    Oil Futures Contract that cash-settled on the price of a physically-

    settled Light Sweet Crude Oil Futures contract traded on the New York

    Mercantile Exchange (NYMEX), a U.S. DCM. On April 12, 2006, ICE Futures

    Europe notified the Division of its intent to list for direct access

    from the U.S. the ICE Futures New York Harbour Heating Oil Futures

    Contract and the ICE Futures New York Harbour Unleaded Gasoline

    Blendstock (RBOB) Futures Contract, each of which cash-settled on the

    price of physically-settled contracts traded on the NYMEX. On April 2,

    2007, ICE Futures Europe notified the Division of its intent to launch

    the ICE Futures WTI Light Sweet Crude Oil Options Contract. On December

    19, 2007 the Dubai Mercantile Exchange (DME) \10\ notified the Division

    pursuant to the Notice of Revision of its intent to list for trading

    for direct access from the U.S. on DME Direct the DME WTI Crude Oil

    Financial Futures Contract which cash-settled based on the NYMEX Light,

    Sweet Crude Oil futures settlement price on the penultimate trading

    day.

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    \9\ On November 12, 1999, the Division of Trading and Markets

    granted to the International Petroleum Exchange of London (IPE) (now

    ICE Futures Europe) no-action relief to make its electronic trading

    and order matching system, Energy Trading System II (ETS), available

    to IPE members in the United States. CFTC Staff Letter No. 99-69

    (November 12, 1999). The November 12, 1999 IPE no-action letter was

    amended by the Division of Market Oversight (Division) four times

    between July 26, 2002 and April 14, 2003 as trading of the contracts

    was transitioned from the ETS to the ICE Platform operated by

    IntercontinentalExchange, Inc., in Atlanta, Georgia and trading

    hours were extended.

    \10\ On May 24, 2007, the Division granted to the DME no-action

    relief to make its electronic trading and order matching system,

    known as DME Direct, available to DME members in the U.S. CFTC Staff

    Letter No. 07-06 (May 24, 2007).

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    The listing for trading by direct access from the U.S. by ICE

    Futures Europe and DME of contracts which settle on the price of

    contracts traded on a CFTC-regulated exchange raises very serious

    concerns for the Commission. Such linkages can create virtually a

    single market for the subject contracts consisting of both the

    underlying contract at the CFTC-regulated exchange and the cash-settled

    ``look-alike'' contract traded on the FBOT. In the absence of certain

    preventive measures at the FBOT, this contract linkage could compromise

    the Commission's ability to carry out its market surveillance

    responsibilities, as well as the integrity of prices established on

    CFTC-regulated exchanges.

    In response to these concerns, the Division amended the no-action

    relief granted to ICE Futures Europe and DME, in letters dated June 17,

    2008 and July 3, 2008 respectively,\11\ by adding certain conditions

    \12\ with respect to any ICE Futures Europe or DME contract which

    settles against any price, including the daily or final settlement

    price, of (1) a contract listed for trading on a DCM or DTEF, or (2) a

    contract listed for trading on an exempt commercial market (ECM) that

    has been determined to be a significant price discovery contract \13\

    (collectively, linked contracts).\14\ The purpose of the conditions is

    to ensure that ICE Futures Europe and DME apply to any linked contract

    comparable principles or requirements regarding the daily publication

    of trading information and the imposition of position limits or

    accountability levels for speculators as apply to the DCM, DTEF or ECM

    contract against which the linked contract settles. The conditions

    would also ensure that ICE Futures Europe and DME provide the

    Commission with information regarding the extent of speculative and

    nonspeculative trading in linked contracts that is comparable to the

    information provided to the Commission by DCMs, DTEFs or ECMs for

    publication of the Commitments of Traders Reports.

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    \11\ CFTC Staff Letter No. 08-09 (June 17, 2008); CFTC Staff

    Letter No. 08-10 (July 3, 2008).

    \12\ The no-action letters include a provision pursuant to which

    the Division may further condition the relief granted therein. See,

    e.g., CFTC Staff Letter No. 99-69 (November 12, 1999), issued to the

    International Petroleum Exchange, Inc., which states as follows:

    ``As with all no-action letters, the Division retains the authority

    to condition further, modify, suspend, terminate, or otherwise

    restrict the terms of the no-action relief provided herein, in its

    discretion.''

    \13\ In 2008 Congress authorized the Commission to determine, in

    its discretion, that a contract performs a significant price

    discovery function under criteria established in Section 2(h)(7) of

    the CEA, including price linkage, arbitrage, material price

    reference, and material liquidity. When the Commission by order

    makes such a determination, the ECM on which the significant price

    discovery contract is traded must assume, with respect to that

    contract, all the responsibilities and obligations of a registered

    entity under the CEA and Commission regulations, and must comply

    with nine core principles established by Section 2(h)(7)(C). See

    CFTC Reauthorization Act of 2008, Pub. L. 110-246 at sec. 12304. See

    also Notice of Proposed Rulemaking: ``Significant Price Discovery

    Contracts on Exempt Commercial Markets,'' 73 FR 75888 (December 12,

    2008).

    \14\ ICE Futures Europe has listed for trading by direct access

    from the U.S. the four linked contracts previously identified. DME

    has not listed the one linked contract notified to the Division.

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    Accordingly, the ICE Futures Europe and DME no-action letters were

    amended with respect to the linked contracts to include the following

    conditions, to be satisfied within 120 days of the date of the amended

    no-action letter:

    (1) ICE Futures Europe (DME) will impose on linked contracts, by

    rule or otherwise, position limits or position accountability levels

    (including related hedge exemption provisions) that are comparable to

    the existing position limits or position accountability levels

    (including related hedge exemption provisions) as adopted by: (i) The

    DCM, DTEF or ECM for the contract against which the linked contract

    settles or (ii) the DCM, DTEF or ECM for a

    [[Page 3572]]

    financially-settled equivalent of such contract;

    (2) ICE Futures Europe (DME) will inform the Commission in a

    quarterly report of any trader that had positions in a linked contract

    above the applicable ICE Futures Europe (DME) position limit, whether a

    hedge exemption was granted, and if not, whether a disciplinary action

    was taken;

    (3) ICE Futures Europe (DME) will publish daily trading information

    (e.g., settlement prices, volume, open interest, and opening and

    closing ranges) that is comparable to the daily trading information

    published by the DCM, DTEF or ECM for the contract against which the

    ICE Futures Europe (DME) contract settles; and

    (4) ICE Futures Europe (DME) will provide to the CFTC (through the

    Financial Services Authority (FSA) in the case of ICE Futures Europe),

    a daily report of large trader positions in each linked contract for

    all contract months in a form and manner that (a) can be fully

    integrated into the CFTC's market surveillance systems, including full

    identification of each position's beneficial owner comparable to the

    reporting that is provided by the DCM, DTEF, or ECM; and (b) can,

    (subject to any Memorandum of Understanding between the CFTC and FSA in

    the case of ICE Futures Europe), be fully integrated into the CFTC's

    Commitments of Traders Report, including appropriate categorization of

    traders and their positions.

    The Commission is hereby providing notice that these conditions

    henceforth will be imposed on the no-action relief of any FBOT that

    lists for trading by direct access from the U.S. any futures or option

    contract which settles against any price, including the daily or final

    settlement price, of (1) a contract listed for trading on a DCM or

    DTEF, or (2) a contract listed for trading on an ECM that has been

    determined to be a significant price discovery contract.

    III. Listing Option Contracts

    Both the Statement of Policy and the Notice of Revision required

    separate notification for futures and option contracts in order to

    permit the contracts to be listed for direct access from the U.S. Thus,

    even if the futures contract is currently listed, the FBOT must

    separately notify the Division, pursuant to the ten business day

    advance notification requirement of the Notice of Revision, of its

    desire to list the option on that futures contract. In contrast, when

    the Commission's Office of General Counsel (OGC) issues a no-action

    letter to allow the offer or sale of a FBOT-traded broad-based security

    index futures contract to persons located in the U.S., the option on

    that particular futures contract may also be offered or sold in the

    U.S. without any further regulatory action from OGC. This leads to an

    unusual situation when the FBOT, pursuant to Appendix D of Part 30,\15\

    requests permission to list a futures contract for trading by direct

    access from the U.S. in the same no-action request letter in which the

    FBOT requests the OGC no-action position. When OGC issues the no-action

    letter, both the futures contract and the option on that contract may

    be offered or sold in the U.S. and, with the concurrence of the

    Division, the futures contract (but not the option on that futures

    contract) may be listed for direct access from the U.S. pursuant to the

    terms and conditions of the direct access no-action relief. The FBOT

    must then separately request permission from the Division to make the

    option contract available by direct access.

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    \15\ 17 CFR 30, App. D. (2003), 68 FR 33623.

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    In order to eliminate this inconsistency and to streamline the

    procedures for listing option contracts for direct access from the

    U.S., the Commission is hereby providing notice that the provisions in

    the Notice of Revision, insofar as they apply to options on futures

    contracts that are, or could be,\16\ listed for trading by direct

    access from the U.S. pursuant to the conditions of the FBOT's no-action

    relief, are revised as follows:

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    \16\ This procedure also applies where the FBOT has permission

    to list the futures contract for trading by direct access but has

    not yet done so at the time it also decides to list the option

    contract.

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    (1) If the option is on a broad-based security index futures

    contract which may be offered or sold in the U.S. and listed for direct

    access from the U.S. pursuant to a no-action letter issued by OGC, the

    option contract may be listed for direct access without further action

    by either the requesting FBOT or the Division.

    (2) If the option is on a futures contract that is neither a linked

    contract nor a broad-based security index futures contract which may be

    offered or sold in the U.S., the option contract may be listed for

    direct access merely by filing with Commission staff no later than the

    business day preceding the initial listing of the contract: (i) a copy

    of the initial terms and conditions of the additional contract and (ii)

    a certification that the FBOT is in compliance with the terms and

    conditions of its no-action letter and that the additional option

    contract would be traded in accordance with such terms and conditions.

    (3) If the option is on a futures contract that is a linked

    contract, the option contract may be listed for direct access merely by

    filing with Commission staff no later than the business day preceding

    the initial listing of the contract: (i) a copy of the initial terms

    and conditions of the additional contract and (ii) a certification that

    the FBOT is in compliance with the terms and conditions of its no-

    action letter, including the conditions specifically applicable to

    linked contracts, and that the additional option contract would be

    traded in accordance with such terms and conditions.

    Issued in Washington, DC on January 14, 2009, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E9-1153 Filed 1-16-09; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: January 22, 2009



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