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e7-16641

  • FR Doc E7-16641[Federal Register: August 23, 2007 (Volume 72, Number 163)]

    [Notices]

    [Page 48262-48264]

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

    [DOCID:fr23au07-44]

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    COMMODITY FUTURES TRADING COMMISSION

    Petition of the Chicago Mercantile Exchange Inc. for Exemptive

    Relief, Pursuant to Section 4(c) of the Commodity Exchange Act, From

    the Requirement That the China Foreign Exchange Trade System and

    National Interbank Funding Center or Its Members Register as Futures

    Commission Merchants

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed order and request for comment.

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    SUMMARY: The Chicago Mercantile Exchange Inc. (CME) has petitioned the

    Commodity Futures Trading Commission (Commission) for exemptive relief,

    pursuant to section 4(c) of the Commodity Exchange Act (Act or CEA),

    from the requirement that the China Foreign Exchange Trade System and

    National Interbank Funding Center (CFETS) or its members register as

    futures commission merchants (FCMs). The Commission seeks comment on

    CME's petition. Copies of the petition are available for inspection at

    the Office of the Secretariat by mail at the address listed below, by

    telephoning (202) 418-5100, or on the Commission's Web site (http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov

    ).

    DATES: Comments must be received on or before September 24, 2007.

    ADDRESSES: Comments should be sent to David A. Stawick, Secretary,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581. Comments may be sent by facsimile

    transmission to (202) 418-5521, or by e-mail to secretary@cftc.gov.

    Reference should be made to ``CME Petition for Exemption from FCM

    Registration on Behalf of CFETS.'' Comments may also be submitted by

    connecting to the Federal eRulemaking Portal at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov

    and following the comment submission instructions.

    Comments will be published on the Commission's Web site.

    FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate

    Director, (202) 418-5092, rwasserman@cftc.gov, Division of Clearing and

    Intermediary Oversight, Commodity Futures Trading Commission, Three

    Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    By petition dated July 27, 2007 (Petition), CME applied for an

    exemption, pursuant to section 4(c) of the Act, 7 U.S.C. 6(c), from the

    requirement (pursuant to section 4d of the Act, 7 U.S.C. 6d) that CFETS

    or its members register as FCMs.

    According to the Petition, CFETS is a non-profit affiliate of the

    People's Bank of China (PBC). CFETS operates an electronic trading

    system with respect to trading in the interbank foreign exchange

    market, Renminbi (RMB) lending, and trading on the bond market in

    China. The foreign currencies traded against the RMB through CFETS

    include the U.S. dollar, Japanese yen, Euro, and Hong Kong dollar, and

    CFETS provides trading services for foreign exchange spot, forwards,

    and swaps. CFETS also operates China's interbank RMB money

    [[Page 48263]]

    market and facilitates the trading of government securities and repo

    transactions. CFETS has over 270 members engaged in foreign exchange

    trading, including all of the major Chinese banks. CFETS members also

    include insurance and securities companies, fund management companies,

    and foreign financial institutions.

    CME and CFETS have entered into an agreement pursuant to which

    CFETS will become a ``super-clearing'' member of CME authorized to

    clear foreign currency and interest rate futures transactions on behalf

    of CFETS members and their customers domiciled in China. Although CFETS

    members include non-Chinese financial institutions, only those of its

    members (and their customers) that are domiciled in China would be

    permitted to clear CME contracts through CFETS under the agreement.

    Pursuant to the agreement, CME will, among other things, provide

    consulting services and technical assistance to CFETS. In addition, CME

    and CFETS will cooperate to complete both a comprehensive training

    program and a marketing program. Under the arrangement, CFETS'

    compliance with CME operational procedures will not be enforced via

    regulatory processes applicable to other clearing members, but instead

    under the terms of the agreement.

    As a clearing member of CME, CFETS would fall within the FCM

    definition of section 1a(20) of the Act, 7 U.S.C. 1a(20), in that it

    would ``accept[] orders for the purchase or sale of [a] commodity for

    future delivery on or subject to the rules of [a] contract market * * *

    and * * * in or in connection with such * * * acceptance of orders,

    [would] accept[] * * * money, securities, or property * * * to margin,

    guarantee, or secure * * * trades or contracts that * * * result

    therefrom.'' While the Commission and its predecessor agencies have not

    applied the FCM registration requirement to foreign brokers \1\ that

    clear through U.S. FCMs, Commission staff have stated that the FCM

    registration requirement of Section 4d(a)(1) of the Act, 7 U.S.C.

    6d(a)(1), applies to foreign brokers that clear directly through a

    U.S.-based clearinghouse,\2\ as CFETS will under the proposed

    arrangement with CME.

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    \1\ In this context, ``foreign broker'' means any person located

    outside the U.S., its territories, or possessions who is engaged in

    soliciting or in accepting orders only from persons located outside

    the U.S., its territories, or possessions for the purchase or sale

    of any commodity interest transaction on or subject to the rules of

    any designated contract market or derivatives execution facility and

    that, in or in connection with such solicitation or acceptance of

    orders, accepts any money, securities, or property (or extends

    credit in lieu thereof) to margin, guarantee, or secure any trades

    or contracts that result or may result therefrom. See Exemption From

    Registration for Certain Foreign Persons, 72 FR 15,637 (Apr. 2,

    2007) (proposing to revise and redesignate a definition for the term

    ``foreign broker'').

    \2\ The Commission has recently proposed to codify its

    longstanding view that a foreign broker is not required to register

    if the foreign broker: (1) Limits its customers to foreign

    customers; (2) submits the trades of such foreign customers that are

    entered into on U.S. markets for clearing on an omnibus basis

    through a registered FCM; and (3) does not solicit or accept orders

    from U.S. customers for trading on U.S. markets. See supra note 1;

    see also CFTC Staff Letter 89-07, [1987-1990 Transfer Binder] Comm.

    Fut. L. Rep. (CCH) ] 24,479 at 36,096-97 (June 22, 1989) (``The

    Commission has not required a person located outside the United

    States which engages in the conduct described in section 2(a)(1)(A)

    of [the Act] for or on behalf of foreign customers through a U.S.

    FCM to register as an FCM''). In the proposal, the Commission

    specifically noted that, by limiting exemptive relief in the past to

    activities conducted ``though a U.S. FCM'' ``staff did not extend

    the exemptive relief available to a foreign broker to include the

    submission of trades executed for its customer and non-customer

    accounts directly to a clearing organization for a U.S. market.''

    See 72 FR at 15,638.

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    CME states that, given CFETS' status as an entity that is not

    separately capitalized, ``CFETS itself will not be in a position to

    provide net capital information to CME. Therefore, CFETS cannot meet

    the requirements that would apply if it were required to register as an

    FCM.'' \3\ CME further states that, in light of CFETS' existing

    business environment, CFETS is currently unable to establish a

    capitalized subsidiary in the U.S. that could otherwise meet the

    requirements applicable to registered FCMs. Consequently, CME is

    seeking an exemption, pursuant to section 4(c) of the Act, 7 U.S.C.

    6(c), on behalf of CFETS, from the FCM registration requirement. CME is

    also seeking relief from any FCM registration requirement that might

    apply to CFETS members.

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    \3\ Petition, at 3.

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    Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), empowers the

    Commission to ``promote responsible economic or financial innovation

    and fair competition'' by exempting any transaction or class of

    transactions, including any person offering or entering into such

    transaction, from any of the provisions of the CEA (subject to

    exceptions not relevant here) where the Commission determines that the

    exemption would be consistent with the public interest.\4\

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    \4\ Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), provides that:

    In order to promote responsible economic or financial innovation

    and fair competition, the Commission by * * * order, after notice

    and opportunity for hearing, may ( * * * on application of any

    person, including any board of trade designated or registered as a

    contract market * * *) exempt any agreement, contract, or

    transaction (or class thereof) that is otherwise subject to

    subsection (a) of this section (including any person or class of

    persons offering, entering into, rendering advice or rendering other

    services with respect to, the agreement, contract, or transaction),

    either unconditionally or on stated terms or conditions or for

    stated periods * * * from any * * * provision of this chapter

    (except subparagraphs (C)(ii) and (D) of section 2(a)(1) of this

    title, except that the Commission and the Securities and Exchange

    Commission may by rule, regulation, or order jointly exclude any

    agreement, contract, or transaction from section 2(a)(1)(D) of this

    title), if the Commission determines that the exemption would be

    consistent with the public interest.

    While Section 4(c)(2) of the Act, 7 U.S.C. 6(c)(2), imposes

    additional requirements with respect to any exemption from the

    requirements of Section 4(a) of the Act, 7 U.S.C. 6(a), CME is not

    seeking such relief.

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    The Petition includes, among other things, the following conditions

    that could be included in any order granting an exemption to CFETS

    pursuant to section 4(c), Sec. 6(c):

    CFETS shall be required to comply with financial

    requirements that substitute for those applicable to CME's clearing

    members. Specifically, CFETS shall be required to satisfy CME's

    security deposit requirement, which is currently a minimum of $500,000.

    CFETS shall be required to maintain ``surrogate capital'' \5\ of 8% of

    aggregate required customer performance bond, but in any case, no less

    than $10 million. All such surrogate capital shall be required to be

    held in the form of U.S. dollars or Treasury securities (subject to any

    haircuts required by Regulation 1.17) in a CME-controlled account in

    the U.S.

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    \5\ If the Commission were to grant CFETS' request for relief,

    CFETS would not be required to meet the minimum capital requirements

    of Regulation 1.17. See Regulation 1.17, 17 CFR 1.17 (minimum

    capital requirements applicable to persons ``registered as a futures

    commission merchant''). ``Surrogate capital'' refers to alternative

    minimum capital requirements that CME represents that CFETS would be

    required to meet that are intended to parallel, in effect, the

    minimum capital requirements of Regulation 1.17. These requirements

    may be imposed on CFETS as conditions of a Commission order pursuant

    to Section 4(c)(1), 6(c)(1).

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    CME shall be required to provide the Commission a monthly

    report detailing surrogate capital amounts and calculation (which

    report, or portions thereof, would be published on the Commission's Web

    site). CME shall be required to provide next-day notice to the

    Commission if: (i) Surrogate capital falls below 110% of the

    requirement; or (ii) if a customer margin call exceeds excess surrogate

    capital on deposit.\6\

    [[Page 48264]]

    CME shall be required to provide the Commission immediate notice of any

    deficiency in surrogate capital.

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    \6\ For example, if CFETS had a surrogate capital requirement of

    $10 million, it would be required to maintain surrogate capital of

    $11 million (110% of the requirement) in a CME-controlled account in

    order to avoid providing the Commission with next-day notice of its

    surrogate capital on deposit.

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    CME and CFETS shall be required to provide all large-

    trader reporting information at the same time and in the same format

    that CFETS would be required to provide if CFETS were registered as an

    FCM. CME and CFETS shall be required to act as agent for service of

    process regarding trading on CME for both CFETS members and customers

    of CFETS members.

    CME shall not hold CFETS positions and associated funds in

    U.S. customer accounts segregated pursuant to section 4d of the Act, 7

    U.S.C. 6d.

    CME and CFETS shall be required to maintain records, in

    English, in the U.S., sufficient to permit the Commission to confirm

    compliance with any provision of any order issued by the Commission.

    CME and CFETS shall be required to make such records available to the

    Commission in the U.S. within 72 hours of any request.

    CME and CFETS shall be required to comply with U.S. anti-

    money laundering requirements as determined by the U.S. Treasury.

    CME and CFETS shall be required to accept joint and

    several liability in any Commission enforcement action relating to

    compliance with any order issued by the Commission.

    CME and CFETS shall be required to file a report with the

    Commission providing statistics and analyzing issues (to be determined)

    within 18 months after issuance of any relief.

    II. Request for Comments

    The Commission requests public comment on any aspect of the

    Petition that commenters believe may raise issues under the CEA or

    Commission regulations. In particular, the Commission invites comment

    regarding: (1) Whether the proposed exemption is consistent with the

    requirements for relief set forth in section 4(c) of the Act, 7 U.S.C.

    6(c), including whether granting the exemption would be consistent with

    the public interest and the purposes of the CEA; (2) whether CME's

    representations, as discussed above, if imposed as conditions of an

    order pursuant to section 4(c)(1), section 6(c)(1), would provide

    adequate safeguards with respect to the U.S. clearing system in light

    of CFETS' exemption from the FCM registration requirement; (3) whether

    an order granting the request for relief should include requirements

    different from or in addition to those discussed above; (4) whether an

    order granting the request for relief should exclude any one or more of

    the requirements discussed above; (5) any material adverse effects that

    granting the petition would have upon other derivatives clearing

    organizations, exchanges, or other Commission registrants from a

    competitive \7\ or other perspective \8\; and (6) any other issues

    relevant to this petition.

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    \7\ As noted above, the Commission may grant an exemption

    pursuant to Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), ``[i]n

    order to promote responsible economic or financial innovation and

    fair competition.'' Section 15(b) of the Act, 7 U.S.C. 19(b),

    provides that the ``Commission shall take into consideration the

    public interest to be protected by the antitrust laws and endeavor

    to take the least anticompetitive means of achieving the objectives

    of this chapter, as well as the policies and purposes of this

    chapter, in issuing any order * * *.''

    \8\ The Commission notes that Section 15(a) of the Act, 7 U.S.C.

    19(a), requires that the Commission, before issuing an order,

    consider the costs and benefits in light of considerations of

    protection of market participants and the public; considerations of

    the efficiency, competitiveness, and financial integrity of futures

    markets; considerations of price discovery; considerations of sound

    risk management practices; and other public interest considerations.

    Issued in Washington, DC, on August 8, 2007 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E7-16641 Filed 8-22-07; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: August 23, 2007



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