[Federal Register: August 2, 2000 (Volume 65, Number 149)]
[Rules and Regulations]
[Page 47275-47281]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02au00-12]

=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 30

RIN 3038-AB46


Exemption From Registration for Certain Foreign FCMs and IBs

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

-----------------------------------------------------------------------

[[Page 47276]]

SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
adopting amendments to Part 30 of the Commission's rules to include new
Rule 30.12.\1\ The new rule permits certain foreign firms acting in the
capacity of FCMs and IBs to accept and to execute foreign futures and
options orders directly from certain U.S. customers without having to
register with the Commission. The Commission also is amending Rule 30.1
to include definitions of ``foreign futures and options customer
omnibus account'' and ``foreign futures and options broker.''
---------------------------------------------------------------------------

    \1\ Commission rules referred to herein are found at 17 CFR Ch.
I (2000).

---------------------------------------------------------------------------
EFFECTIVE DATE: September 1, 2000.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel, or Andrew V. Chapin, Staff Attorney, Division of Trading and
Markets, Commodity Futures Trading Commission, 1155 21st Street, NW,
Washington, DC 20581. Telephone: (202) 418-5430.

SUPPLEMENTARY INFORMATION:

I. Proposed Rules

    On August 26, 1999, the Commission published proposed amendments to
Part 30 of its rules.\2\ Part 30 sets forth rules governing the offer
and sale of foreign futures \3\ and foreign option \4\ contracts. For
example, with respect to foreign futures or foreign options
customers,\5\ Rule 30.4 requires any person engaged in the activities
of a futures commission merchant (``FCM'') or introducing broker
(``IB''), as those activities are defined within the rule, to register
with the Commission unless such person claims relief from registration
under Part 30. The activities that are subject to regulation and that
require registration under Part 30 include the solicitation or
acceptance of orders for trading any foreign futures or foreign option
contract and acceptance of money, securities or property to margin,
guarantee or secure any foreign futures or foreign option trades or
contracts.\6\ Rule 30.10 allows the Commission to exempt a firm from
compliance with any or all of the requirements of Part 30.\7\
---------------------------------------------------------------------------

    \2\ 64 FR 46613 (August 26, 1999); 64 FR 46618 (August 26,
1999).
    \3\ ``Foreign futures'' means ``any contract for the purchase or
sale of any commodity for future delivery made, or to be made, on or
subject to the rules of any foreign board of trade.'' Rule 30.1(a).
    \4\ ``Foreign option'' means ``any transaction or agreement
which is or is held out to be of the character of, or is commonly
known to the trade as, an `option', `privilege', `indemnity', `bid',
`offer', `put', `call', `advance guaranty', or `decline guaranty',
made or to be made on or subject to the rules of any foreign board
of trade.'' Rule 30.1(b).
    \5\ ``Foreign futures or foreign options customer'' means ``any
person located in the United States, its territories or possessions
who trades in foreign futures or foreign options: Provided, That an
owner or holder of a proprietary account as defined in paragraph (y)
of [Rule 1.31] shall not be deemed to be a foreign futures or
foreign options customer within the meaning of [Rules 30.6 and 30.7]
of this part.'' Rule 30.1(c).
    \6\ See Rule 30.4.
    \7\ In particular, the Commission may exempt a foreign firm
acting in the capacity of an FCM from registration under the Act and
compliance with certain provisions of Part 30 based upon the firm's
compliance with comparable regulatory requirements imposed by the
firm's home-country regulator (referred to herein as ``Rule 30.10
relief'').
---------------------------------------------------------------------------

    In response to requests from industry representatives, the
Commission proposed to adopt Rule 30.12 to permit certain foreign firms
acting in the capacity of FCMs and IBs (referred to herein as foreign
futures and options brokers (``FFOBs'')) \8\ to accept and to execute
foreign futures and options orders directly from certain, sophisticated
U.S. customers without having to register with the Commission.\9\ Prior
to the amendment to Part 30 adopted herein, only those FFOBs that were
foreign affiliates of U.S. FCMs were permitted, subject to certain
terms and conditions set forth in advisories issued by the Division of
Trading and Markets (``T&M''), to accept and to execute orders from
certain sophisticated U.S. customers, known as ``authorized
customers,'' through the FCM's foreign futures and options customer
omnibus account.\10\ As set forth in the final rule, any unregistered
FFOB may accept orders directly from authorized customers for execution
for or on behalf of such customers to be carried in the FCM's foreign
futures and options customer omnibus account at the FFOB, or to be
given up to another unregistered FFOB carrying the FCM's customer
omnibus account. The Commission believes that permitting greater
flexibility with respect to the direct foreign order transmittal
process will provide authorized customers with more efficient access to
international futures markets without requiring these customers to
forfeit the operational and economic efficiencies that are the natural
consequence of having all futures and options transactions carried by a
well-capitalized U.S. FCM. The Commission also notes that such an
arrangement affords the FCM a more complete picture of aggregate risk
that the customer, and hence the FCM, is incurring.
---------------------------------------------------------------------------

    \8\ As defined in amended Rule 30.1(e), ``foreign futures and
options broker'' means any person located outside the United States,
its territories or possessions that is a member of a foreign board
of trade, as defined in Rule 1.3(ss), and is licensed, authorized or
otherwise subject to regulation in the jurisdiction in which the
foreign board of trade is located; or a foreign affiliate of U.S.
futures commission merchant licensed, authorized or otherwise
subject to regulation in the jurisdiction in which the affiliate is
located.
    \9\ 64 FR 46618 (August 26, 1999).
    \10\ See CFTC Advisory No. 93-115, Comm. Fut. L. Rep. (CCH)
para. 25,932 at 41,047 (T&M December 23, 1993)(permitting
unregistered foreign affiliates of a U.S. FCM that carry the
customer omnibus account of the FCM to receive orders for trades
placed directly by certain foreign futures and options customers for
execution for or on behalf of such customers through the FCM's
customer omnibus account, provided that the affiliate had obtained
confirmation of Rule 30.10 relief); CFTC Advisory No. 95-08, Comm.
Fut. L. Rep. (CCH) para. 26,300 at 42,489 (T&M January 25,
1995)(extending the relief in Advisory No. 93-115 to unregistered
foreign affiliates who had not received confirmation of Rule 30.10
relief). For a list of ``authorized customers,'' see CFTC Advisory
No. 93-115, para. 25,932 at 41,052-053. For a list of the terms and
conditions governing the direct foreign order transmittal process
under CFTC Advisories Nos. 93-115 and 95-08, see para. 25,932 at
41,053-054; para. 26,300 at 42,490-491, respectively.
    As defined in amended Rule 30.1(d), ``foreign futures and
options customer omnibus account'' means an account in which the
transactions of one or more foreign futures or foreign options
customers are combined and carried in the name of the originating
futures commission merchant rather than in the name of each
individual foreign futures or foreign options customer. The
Commission notes that a foreign futures and options customer omnibus
account may contain one or more accounts of persons located outside
the U.S. (i.e., persons excluded from the definition of ``foreign
futures or foreign options customer''), provided that all customer
funds are treated in a manner consistent with Commission rules.
---------------------------------------------------------------------------

II. Final Rule 30.12

    The Commission received seven comment letters on the proposed
rulemaking: One from a U.S. commodity exchange; one from the National
Futures Association; two from futures industry professional
associations; two from U.S. FCMs; and one from a global investment
banking firm. The commenters generally supported the relief provided by
proposed Rule 30.12, but suggested that the relief did not go far
enough with respect to the participants in the direct foreign order
transmittal process and the means by which orders may be transmitted. A
discussion of the comments follows.

A. Authorized Customers

    Proposed Rule 30.12 restricted the direct foreign order transmittal
process to certain sophisticated U.S. customers, known as ``authorized
customers.'' The Commission derived its definition of ``authorized
customers'' from the list of ``eligible swap participants'' (``ESPs'')
in Part 35 of the Commission's rules and the list of customers eligible
to participate in the limited foreign order transmittal process set
forth in prior advisories issued by T&M. As requested by industry
representatives, the Commission also included in its definition certain
commodity trading

[[Page 47277]]

advisors (``CTAs'') and those foreign persons performing a similar
function.
    Commenters on the proposed rulemaking recommended that the
Commission's definition of ``authorized customer'' be modified in two
ways. First, the commenters sought uniformity in defining the class of
sophisticated U.S. customers to which less regulatory protections
apply. Currently, there exist within Commission rules six definitions
of sophisticated U.S. customers: qualified eligible participants,
qualified eligible clients, ESPs, eligible participants for exchange
transactions under Sec. 4(c) of the Commodity Exchange Act (``Act''),
eligible customers for post-execution allocation, and customers for
which FCMs and IBs are not required to provide the Rule 1.55 risk
disclosure statement. One commenter stated, ``[t]his new definition [of
``authorized customer''], along with the others, subjects firms to
unnecessary compliance burdens without adding any real regulatory
benefit.'' Second, the commenters specifically questioned why the
category of persons who are eligible to engage in direct foreign order
transmittal should be any more restrictive than the category of persons
who are eligible to engage in complex, over-the-counter swap
transactions addressed in Part 35.\11\
---------------------------------------------------------------------------

    \11\ From the list of ESPs, the definition of ``authorized
customers'' in proposed Rule 30.12 excluded: floor brokers, floor
traders, employee benefit plans, individuals with net worth in
excess of $10,000,000, state and local governments, and non-U.S.
persons trading on their own behalf (the latter do not come within
the definition of foreign futures or foreign options customer in
Rule 30.1(c)).
---------------------------------------------------------------------------

    Upon review of these comments and its own reconsideration of the
issue, the Commission has determined to revise the definition of
``authorized customer'' in the final rule to incorporate those changes
recommended by the commenters. The Commission notes, however, that
certain characteristics unique to the direct foreign order transmittal
process prevent the Commission from merely cross-referencing the
definition of an ESP (or any other current class of sophisticated
customer) in the definition for ``authorized customer.'' For example,
Part 30 generally does not govern the offer and sale of foreign futures
and foreign options contracts to persons located outside the U.S.\12\
As such, rules regulating the conduct of an FCM (or any firm exempt
from such registration) are generally limited to the firm's interaction
with U.S. customers or to customers engaged in transactions on U.S.
markets. In light of the obligations, discussed below, that will be
required of an FCM (or a firm exempt from such registration) flowing
from a customer's classification as an ``authorized customer,'' the
definition of ``authorized customer'' does not include persons located
outside the U.S. Additionally, at the request of futures industry
representatives, Rule 30.12, unlike Part 35, will focus on the
financial sophistication of the person managing the assets and not the
individual contributors to a commodity pool or the clients of a CTA. As
such, Rule 30.12 will permit certain domestic and foreign trading
advisors to place orders directly for foreign futures and foreign
options contracts for customers that do not otherwise qualify as ESPs.
The inclusion of advisors in this context thus provides for greater
participation in direct foreign order transmittal than is permitted in
swaps.\13\
---------------------------------------------------------------------------

    \12\ But see, e.g., Rule 30.9(a)(``It shall be unlawful for any
person * * * in or in connection with any account, agreement or
transaction involving any foreign futures contract or foreign
options transaction: (a) To cheat or defraud or attempt to cheat or
defraud any other person.'' (emphasis added)); In re Sogemin Metals,
CFTC Docket No. 00-04 (February 7, 2000) (Commission order
instituting administrative proceedings against and accepting an
offer of settlement from respondent located in the U.S. dealing with
non-U.S. customers for trading on a non-U.S. exchange).
    \13\ See Rule 35.1(b)(2).
---------------------------------------------------------------------------

    As previously stated, Rule 30.12 defines an authorized customer, in
part, as a foreign futures or foreign options customer that the
carrying FCM has authorized to place orders for the account of the
FCM's foreign futures and foreign options customer omnibus account.
Since non-U.S. persons cannot, by definition, be foreign futures or
foreign options customers, Rule 30.12 does not regulate the manner in
which they execute foreign futures and option transactions through an
FCM's foreign futures and options customer omnibus account. Non-U.S.
persons, however, may act on behalf of authorized customers, provided
that the non-U.S. persons independently qualify as an eligible direct
foreign order transmittal participant. To clarify that non-U.S. persons
may act on behalf of authorized customers, the Commission has
determined to define ``authorized customer'' as ``[a]ny foreign futures
or foreign options customer, as defined in paragraph (c) of Sec. 30.1,
or its designated representative,'' that the FCM has authorized to
place orders for the account of the FCM's foreign futures and options
customer omnibus account.
    As noted, the Commission also is incorporating the request from
industry representatives to focus on the financial sophistication of
the person managing the assets and not on the sophistication of the
individual contributors to the clients of a CTA. The Commission is
adopting Rule 30.12 to include in the definition of ``authorized
customer'' any person whose investment decisions with respect to
foreign futures and foreign option transactions are made by a CTA,
including any investment adviser registered as such with the Securities
and Exchange Commission that is exempt from regulation as a CTA under
the Act or Commission regulations, or a foreign person performing a
similar role or function subject as such to foreign regulation,
provided that the CTA has total assets under management exceeding
$50,000,000 and that the CTA places the foreign futures or foreign
options order. The Commission recognizes that, under this scenario, the
contact with the unregistered FFOB is limited to contact with the
individual with the demonstrated financial sophistication, i.e., the
CTA. For the sake of consistency, the $50,000,000 asset under
management test will apply to those CTAs providing the investment
decisions for employee benefit plans subject to the Employee Retirement
Income Security Act of 1974 that do not independently have total assets
exceeding $5,000,000.

B. Carrying FCMs

1. Capital Requirements
    In the proposed rulemaking, the Commission proposed to limit direct
foreign order transmittal to authorized customers of FCMs whose
adjusted net capital exceeds certain minimum requirements. As discussed
in the rule proposal, a participating FCM may not be able to prevent an
authorized customer from placing orders in excess of its trading limits
with an unaffiliated FFOB.\14\ Under these circumstances, an FCM may be
responsible for the trades even though the positions exceed a
customer's trading limits. Therefore, FCMs should possess sufficient
capital to meet an unusually large margin call and thereby mitigate the
increased systemic risk.\15\ Accordingly, as set forth in paragraph
(b)(1) of the proposed rule, the Commission proposed to require FCMs
whose authorized customers use

[[Page 47278]]

direct foreign order transmittal to maintain either $50,000,000 in
adjusted net capital as defined by Rule 1.17(c)(5), or three times the
amount of adjusted net capital required by Rule 1.17(a)(1)(i)(B).\16\
In the alternative, the proposed rule stated that any FCM not
satisfying either standard could seek relief from the capital
requirement in accordance with the petition process described in Rule
140.99.
---------------------------------------------------------------------------

    \14\ Financial obligations arising from a customer trading in
excess of its limits are resolved according to privately-negotiated
contractual arrangements entered into by the customer, the FCM and/
or the intermediating FFOBs, and/or the rules of the exchange or
clearing organization governing such a transaction.
    \15\ While some of these risks are present in domestic give-up
arrangements, they are mitigated by the fact that on U.S. exchanges
all participants to the transaction, including the floor brokers and
floor traders, are either clearing members of that exchange or
guaranteed by clearing members. Not all foreign exchanges have
similar requirements.
    \16\ Rule 1.17(a)(1)(i)(B). Rule 1.17(a)(1)(i) requires FCMs to
maintain adjusted net capital equal to or in excess of the greatest
of various defined amounts, including:
    (A) $250,000, or
    (B) Four percent of the following amount: The customer funds
required to be segregated pursuant to the Act and the regulations in
this part and the foreign futures or foreign options secured amount,
less the market value of commodity options purchased by customers on
or subject to the rules of a contract market or a foreign board of
trade for which the full premiums have been paid: Provided, however,
That the deduction for each customer shall be limited to the amount
of customer funds in such customer's account(s) and foreign futures
and foreign options secured accounts.
---------------------------------------------------------------------------

    Three of the seven commenters addressed the capital requirements
for carrying FCMs. One commenter agreed with the Commission that
capital requirements are a necessary element of direct foreign order
transmittal, but suggested that the standard for adjusted net capital
be $50,000,000, or the greater of three times the FCM's capital
requirement under Rule 1.17(a)(1)(i)(A) or three times the FCM's
capital requirement under Rule 1.17(a)(i)(B) (and not just paragraph
(a)(1)(i)(B)). The commenter noted that, under certain circumstances,
an FCM possessing adjusted net capital of three times the amount set
forth in paragraph (a)(1)(i)(B), i.e., three times four percent of the
required segregated and secured amounts, but not (a)(1)(i)(A), i.e.,
three times $250,000, or $750,000, may not possess sufficient capital
to provide the necessary cushion in the event of a systemic failure.
The second commenter requested that the Commission more specifically
describe the type of showing an FCM would be required to make in order
to obtain relief from the capital requirement and recommended that the
petition for relief from the capital requirement be made in accordance
with Rule 30.10, instead of Rule 140.99. The third commenter questioned
whether ``less onerous [capital] requirements'' for FCMs that cannot
satisfy either capital standard are justified.
    The Commission has determined to adopt Rule 30.12 by incorporating
certain comments regarding the capital requirement for carrying FCMs.
As adopted, Rule 30.12 will require that FCMs maintain adjusted net
capital of $20,000,000, or the greater of three times the FCM's capital
requirement under Rule 1.17(a)(1)(i)(A) or three times the FCM's
capital requirement under Rule 1.17(a)(i)(B). After careful
consideration, the Commission has determined that $20,000,000 in
adjusted net capital provides sufficient cushion to protect against the
risk of defaulting authorized customers. Accordingly, the Commission is
adopting, for those FCMs who do not meet the requirement to maintain at
least triple their minimum capital requirement under Rule 1.17, a
$20,000,000 minimum adjusted net capital figure rather than the
proposed $50,000,000. The decrease in the minimum capital requirement
is consistent with the Commission's recent proposal to permit FCMs with
at least $20,000,000 in adjusted net capital to act as intermediaries
for non-institutional customers on derivatives transaction
facilities.\17\
---------------------------------------------------------------------------

    \17\ 65 FR 39008 (June 22, 2000).
---------------------------------------------------------------------------

    The Commission believes that the decrease in the required minimum
capital for FCMs under Rule 30.12 as amended as compared to proposed
Rule 30.12 should reduce the need for relief from this requirement. The
Commission further believes that any request for relief from this
capital requirement must be addressed on a case-by-case basis and
believes that a petition for relief from this requirement should be
made in accordance with Rule 140.99. The Commission expects that any
FCM seeking relief from the Rule 30.12 capital requirement shall be
required to likewise demonstrate its ability to mitigate the risk
associated with the activities of its authorized customers, including,
but not limited to, the use of internal controls to evaluate on an
ongoing basis the risk of default for any given authorized customer.
2. Internal Controls
    The proposed rulemaking also required carrying FCMs to institute
internal controls designed to regulate the direct foreign order
transactions entered into by authorized customers (or their designated
representatives), including procedures to determine which customers
qualify as authorized customers and to monitor the FCM's risk relative
to its authorized customers' risk aggregated across all markets. The
Commission did not receive any comments dealing with these aspects of
the proposed rule.
3. Disclosure
    The Commission received one comment regarding the requirement that
carrying FCMs furnish a written disclosure to each authorized customer
advising the customer of the additional risks the customer may be
assuming in placing orders directly with an FFOB. The commenter
inquired whether the FCM may provide the disclosure as a separate
document or as additional text in the customer account agreement.
Either method will be acceptable. The Commission also has determined to
eliminate from the final rule the requirement that the written
disclosure be ``in a form acceptable to the Commission.'' In light of
the existing requirement for written disclosures to track the language
set forth in the rule, the requirement as to form is superfluous.
Accordingly, paragraphs (b)(3)(i) and (ii) have been combined into one
paragraph for the final rule.

C. Eligibility Requirements for Foreign Futures and Options Brokers

    Proposed Rule 30.12 would have required participating foreign
brokers to be FFOBs, as defined in Amended Rule 30.1(e), and either a
clearing member of the foreign exchange on which the trade is executed,
a majority-owned affiliate of such a clearing member, or an affiliate
of the FCM carrying the authorized customer's account. Amended Rule
30.1(e) defines FFOB to mean a non-U.S. person that is a member of a
foreign board of trade, as defined in Rule 1.3(ss), licensed,
authorized or otherwise subject to regulation in the jurisdiction where
the foreign board of trade is located, or a foreign affiliate of a U.S.
FCM, licensed, authorized or otherwise subject to regulation in the
jurisdiction where the affiliate is located.
    Two commenters addressed the eligibility requirements for foreign
brokers. While one commenter recommended that Rule 30.12 require a
participating foreign broker to be an FFOB and either a clearing member
on any foreign exchange (or its majority-owned affiliate) or an
affiliate of any FCM, another commenter stated that any FFOB should be
eligible to participate in the direct foreign order transmittal
process.
    In light of these comments and the foreign order transmittal-
specific risk disclosure to be distributed by each authorized
customer's FCM, combined with the sophisticated nature of the
participating customers and the required internal controls for FCMs,
the Commission has determined that the additional layer of protection
set forth in the eligibility requirements for foreign brokers is not
necessary. Accordingly, the adopted rule only will require
participating foreign brokers to

[[Page 47279]]

be FFOBs, as defined in Amended Rule 30.1(e).
    Commenters also requested that the Commission clarify the
application of Rule 30.12 with respect to FFOBs that carry the customer
account for any foreign futures and options customer directly rather
than on an omnibus basis. The Commission confirms that an FFOB that
directly carries the customer account for any foreign futures and
options customer may permit that customer to place orders directly with
another FFOB in accordance with the procedures set forth herein,
provided that: (i) The carrying FFOB has registered as an FCM, or has
applied for and received confirmation of Rule 30.10 relief in
accordance with existing procedures; (ii) the carrying FFOB complies
with the terms and conditions set forth in the rule; and (iii) the
foreign futures and options customer qualifies as an authorized
customer. Additionally, the Commission confirms that authorized
customers of FCMs that maintain a customer omnibus account with a
single foreign affiliate who, in turn, maintains customer omnibus
accounts with clearing brokers at foreign exchanges also may
participate in the direct foreign order transmittal process described
in Rule 30.12.

D. Automated Order Routing Systems

    Proposed Rule 30.12 permitted qualifying FFOBs to accept orders
directly from authorized customers only via telephone, facsimile and
email. The relief from registration under proposed Rule 30.12 did not
extend to orders placed directly with FFOBs via automated order routing
systems (``AORSs''). With one exception, the commenters generally
requested that the Commission modify proposed Rule 30.12 to permit
FFOBs to accept orders placed via AORSs.
    The Commission has determined to revise Rule 30.12 to permit
qualifying FFOBs to accept orders directly from authorized customers
via an AORS.\18\ The Commission notes that the requirement for each
carrying FCM to establish control procedures governing the direct
contacts between authorized customers and FFOBs and to have in place
appropriate risk management procedures to monitor its own risk relative
to its authorized customers' risk aggregated across all markets applies
regardless of whether the authorized customer places the order via
telephone, facsimile, e-mail or an AORS.
---------------------------------------------------------------------------

    \18\ For purposes of Rule 30.12, an AORS generally means any
system of computers, software or other devices that allows entry of
orders through another party for transmission to a board of trade's
computer or other automated device where trade matching or execution
takes place.
---------------------------------------------------------------------------

E. Effect of the Adopted Rule

    In the proposed rulemaking, the Commission noted that Rule 30.12,
if adopted, would replace prior T&M advisories as the sole source of
authorization for unregistered FFOBs to accept orders directly from
foreign futures and options customers. The Commission invited comment
from any party adversely affected by that determination. Having
received no comment on this issue, the Commission hereby rescinds CFTC
Advisories Nos. 93-115 and 95-08. Adopted Rule 30.12 will apply to all
regulated activities with all current and new foreign futures and
foreign options customers as of the effective date of the new rule. As
a point of clarification, adopted Rule 30.12 will not apply to
brokerage activities originating with non-U.S customers. Additionally,
this rule does not amend, abrogate or otherwise alter the transactional
relationship between any U.S. foreign futures and foreign options
customer and any non-U.S. firm that has received confirmation of Rule
30.10 relief. With respect to U.S. customers, a firm with Rule 30.10
relief must continue to abide by the local laws, rules and regulations
deemed acceptable for substituted compliance by the Commission, as well
as the Commission laws and regulations outlined in orders issued by the
Commission.

III. Amendments to Rule 30.1

    In the Federal Register notice issued concurrently with proposed
Rule 30.12, the Commission proposed, among other things, to amend Rule
30.1 to include definitions for ``foreign futures and options customer
omnibus account'' and FFOBs.\19\ Currently, for purposes of Parts 15
through 21 of the Act, Rule 15.00(a)(1) defines the term ``foreign
broker'' to mean ``any person located outside the United States or its
territories who carries an account in commodity futures or commodity
options on any contract market for any other person.'' For the sake of
clarity, the Commission believes that a formal definition of FFOB is
necessary to distinguish it from the definition of ``foreign broker.''
Having gradually expanded the relief associated with direct foreign
order transmittal by reference to customer omnibus accounts, it is also
appropriate to define the term ``foreign futures and options customer
omnibus account.'' The Commission did not receive any comments
regarding either of the proposed definitions. Accordingly, the
Commission is adopting the proposed definitions of ``foreign futures
and options customer omnibus account'' and ``foreign futures and
options brokers'' as Rules 30.1(d) and (e), respectively.
---------------------------------------------------------------------------

    \19\ 64 FR 46613.
---------------------------------------------------------------------------

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611,
requires that agencies, in adopting rules, consider the impact of those
rules on small businesses. The Commission has previously established
certain definitions of ``small entities'' to be used by the Commission
in evaluating the impact of its rules on such entities in accordance
with the RFA.\20\ The Commission previously has determined that
registered FCMs and CPOs are not small entities for the purpose of the
RFA.\21\ With respect to CTAs, the Commission has stated that it would
evaluate within the context of a particular rule proposal whether all
or some affected CTAs would be considered to be small entities and, if
so, the economic impact on them of any rule.\22\ Due to the minimum
requirements for the amount of money under management for eligible CTAs
under Rule 30.12, the Commission believes that it is unlikely that
firms defined as small businesses could qualify as an authorized
customer for the purpose of engaging in direct order transmittal.
Further, the final rule would not add any legal, accounting, consulting
or expert costs because the determination of whether a business
qualifies as an authorized person requires minimal analysis of data
that will be readily accessible. Therefore, the Chairman, on behalf of
the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that
these regulations will not have a significant economic impact on a
substantial number of small entities.
---------------------------------------------------------------------------

    \20\ 47 FR 18618-18621 (April 30, 1982).
    \21\ 47 FR 18619-18620.
    \22\ 47 FR 18618-18620.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    When publishing final rules, the Paperwork Reduction Act of 1995
(PRA) (44 U.S.C. 3501 et seq. (Supp. I 1995)) imposes certain
requirements on federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by the PRA. These rules contain information
collection requirements. As required by the PRA, the Commission has
submitted a copy of this rule to the Office of Management and Budget
(OMB) for its review. (44 U.S.C. 3504(h)). In response

[[Page 47280]]

to the Commission's invitation in the proposed rulemakings to comment
on any potential paperwork burden associated with these rules, no
comments were received.

List of Subjects in 17 CFR Part 30

    Definitions, Foreign futures, Consumer protection, Foreign options,
Registration requirements.
    In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, sections
2(a)(1), 4(b), 4c and 8a thereof, 7 U.S.C. 2, 6(b), 6c and 12a (1982),
and pursuant to the authority contained in 5 U.S.C. 552 and 552b
(1982), the Commission hereby amends Chapter I of Title 17 of the Code
of Federal Regulations as follows:

PART 30--FOREIGN FUTURES AND OPTIONS TRANSACTIONS

    1. The authority citation for part 30 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6, 6c and 12a, unless otherwise
noted.


    2. Section 30.1 is amended by adding paragraphs (d) and (e) to read
as follows:


Sec. 30.1  Definitions.

* * * * *
    (d) Foreign futures and options customer omnibus account is defined
as an account in which the transactions of one or more foreign futures
and foreign options customers are combined and carried in the name of
the originating futures commission merchant rather than in the name of
each individual foreign futures or foreign options customer.
    (e) Foreign futures and options broker (FFOB) is defined as a non-
U.S. person that is a member of a foreign board of trade, as defined in
Sec. 1.3(ss) of this chapter, licensed, authorized or otherwise subject
to regulation in the jurisdiction in which the foreign board of trade
is located; or a foreign affiliate of a U.S. futures commission
merchant, licensed, authorized or otherwise subject to regulation in
the jurisdiction in which the affiliate is located.

    3. Section 30.12 is added to read as follows:


Sec. 30.12  Direct Foreign Order Transmittal.

    (a) Authorized customers defined. For the purposes of this section,
an ``authorized customer'' of a futures commission merchant shall mean
any foreign futures or foreign options customer, as defined in
Sec. 30.1(c), or its designated representative, that:
    (1) The futures commission merchant has authorized to place orders
for the account of the futures commission merchant's foreign futures
and options customer omnibus account; and
    (2)(i) Is an eligible swap participant, as defined in
Sec. 35.1(b)(2) of this chapter, or
    (ii) Whose investment decisions with respect to foreign futures and
foreign option transactions are made by a commodity trading advisor
subject to regulation under the Act, including any investment adviser
registered as such with the Securities and Exchange Commission that is
exempt from regulation as a commodity trading advisor under the Act or
Commission regulations, or a foreign person performing a similar role
or function subject as such to foreign regulation, provided that the
commodity trading advisor has total assets under management exceeding
$50,000,000 and that the commodity trading advisor places the foreign
futures or foreign options order.
    (b) Procedures for futures commission merchants. It shall be
unlawful for any futures commission merchant to permit an authorized
customer to place orders for execution in the futures commission
merchant's foreign futures and options customer omnibus account
directly with a person exempt from registration under paragraphs (c)
and (d) of this section, unless, such futures commission merchant:
    (1) Meets one of the following capital requirements, as determined
by the futures commission merchant's most recent required filing of a
Form 1-FR-FCM with the Commission:
    (i) Possesses $20,000,000 in adjusted net capital, as defined by
Sec. 1.17(c)(5) of this chapter; or
    (ii) Possesses the greater of three times the amount of adjusted
net capital required by Sec. 1.17(a)(1)(i)(A) of this chapter or three
times the amount of adjusted net capital required by
Sec. 1.17(a)(1)(i)(B) of this chapter; and
    (2) Has established control procedures that will serve as
guidelines for permitting direct contacts between any authorized
customer of the futures commission merchant and any person exempt from
registration under paragraphs (c) or (d) of this section, and has in
place appropriate risk management procedures to monitor its own risk
relative to its authorized customers' risk aggregated across all
markets, including, but not limited to, procedures to ensure that each
authorized customer satisfies the participation criteria set forth in
paragraph (a) of this section and to specify the manner in which trades
may be executed through its customer omnibus account pursuant to this
section;
    (3) Furnishes a written disclosure statement to each such
authorized customer advising the customer of the additional risks the
customer may be assuming in placing orders directly with the foreign
broker. The disclosure statement must read as follows:

Direct Order Transmittal Client Disclosure Statement

    This statement applies to the ability of authorized customers
\1\ of [FCM] to place orders for foreign futures and options
transactions directly with non-US entities (each, an ``Executing
Firm'') that execute transactions on behalf of [FCM's] foreign
futures and options customer omnibus accounts.
---------------------------------------------------------------------------

    \1\ You should contact your account executive regarding your
eligibility to participate in the direct order transmittal process.
---------------------------------------------------------------------------

    Please be aware of the following should you be permitted to
place the type of orders specified above.
     The orders you place with an Executing Firm are for
[FCM's] foreign futures and options customer omnibus account
maintained with a foreign clearing firm. Consequently, [FCM] may
limit or otherwise condition the orders you place with the Executing
Firm.
     You should be aware of the relationship of the
Executing Firm and [FCM]. [FCM] may not be responsible for the acts,
omissions, or errors of the Executing Firm, or its representatives,
with which you place your orders. In addition, the Executing Firm
may not be affiliated with [FCM]. If you choose to place orders
directly with an Executing Firm, you may be doing so at your own
risk.
     It is your responsibility to inquire about the
applicable laws and regulations that govern the foreign exchanges on
which transactions will be executed on your behalf. Any orders
placed by you for execution on that exchange will be subject to such
rules and regulations, its customs and usages, as well as any local
laws that may govern transactions on that exchange. These laws,
rules, regulations, customs and usages may offer different or
diminished protection from those that govern transactions on US
exchanges. In particular, funds received from customers to margin
foreign futures transactions may not be provided the same
protections as funds received to margin futures transactions on
domestic exchanges. Before you trade, you should familiarize
yourself with the foreign rules which will apply to your particular
transaction. United States regulatory authorities may be unable to
compel the enforcement of the rules of regulatory authorities or
markets in non-US jurisdictions where transactions may be effected.
     It is your responsibility to determine whether the
Executing Firm has consented to the jurisdiction of the courts in
the United States. In general, neither the Executing Firm nor any
individuals associated with the Executing Firm will be registered in
any capacity with the Commodity Futures Trading Commission.
Similarly, your contacts with the Executing Firm may not be
sufficient to subject the Executing Firm to the

[[Page 47281]]

jurisdiction of courts in the United States in the absence of the
Executing Firm's consent. Accordingly, neither the courts of the
United States nor the Commission's reparations program may be
available as a forum for resolution of any disagreements you may
have with the Executing Firm, and your recourse may be limited to
actions outside the United States.
     Unless you object within five (5) days, by giving
notice as provided in your customer agreement after receipt of this
disclosure, [FCM] will assume your consent to the aforementioned
conditions.

    (c) Exemption for foreign futures and options brokers. Any person
not located in the United States, its territories or possessions, who
is otherwise required in accordance with this part to be registered
with the Commission as a futures commission merchant or as an
introducing broker will be exempt from such registration,
notwithstanding that such person accepts orders for foreign futures and
foreign options transactions from authorized customers of a registered
futures commission merchant that meets the requirements of paragraph
(b)(1) of this section, provided, that:
    (1) The orders are executed for or on behalf of the foreign futures
and options customer omnibus account of a registered futures commission
merchant;
    (2) The person does not solicit or accept any money, securities or
property (or extend credit in lieu thereof) directly from any U.S.
foreign futures and options customer to margin, guarantee or secure any
trades or contracts that result or may result therefrom; and
    (3) The person is a foreign futures and options broker, as defined
by Sec. 30.1(e).
    (d) Exemption for foreign futures and options brokers carrying a
foreign futures and options customer omnibus account. Any person not
located in the United States, its territories or possessions, who is
otherwise required in accordance with this part to be registered with
the Commission as a futures commission merchant will be exempt from
such registration, notwithstanding that such person:
    (1) Carries the foreign futures and options customer omnibus
account of a futures commission merchant that meets the requirements of
paragraph (b)(1) of this section;
    (2) Accepts orders for foreign futures and foreign options
transactions from authorized customers for the execution of the trades
for or on behalf of the foreign futures and options customer omnibus
account of a registered futures commission merchant either directly or
pursuant to a give-up arrangement; and
    (3) The person is a foreign futures and options broker, as defined
by Sec. 30.1(e).

    Dated: July 27, 2000.

    By the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-19444 Filed 8-1-00; 8:45 am]
BILLING CODE 6351-01-U


======== RETURN TO INDEX ========