[Federal Register: June 13, 2006 (Volume 71, Number 113)]
[Notices]
[Page 34070-34074]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13jn06-37]

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COMMODITY FUTURES TRADING COMMISSION


Boards of Trade Located Outside of the United States and the
Requirement To Become a Designated Contract Market or Derivatives
Transaction Execution Facility

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for comment.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is
publishing this request for comment in advance of a public hearing
scheduled for June 27, 2006.\1\ The purpose of the hearing is to
solicit the views of the public on how to identify and address certain
issues with respect to boards of trade established in foreign countries
and located outside the U.S. (foreign board of trade or FBOT).
Specifically, the Commission wishes to address the point at which an
FBOT that makes its products available for trading in the U.S. by
permitting direct access to its electronic trading system from the U.S.
(direct access) is no longer ``located outside the U.S.'' for purposes
of section 4(a) of the Commodity Exchange Act (Act). If it is
determined that the FBOT is not ``located outside the U.S.,'' it
becomes subject to section 4(a) and may be required to become a
designated contract market (DCM) or derivatives transaction execution
facility (DTEF).
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    \1\ See Sunshine Act Meeting Notice, 71 FR 30665 (May 30, 2006);
corrected at 71 FR 32059 (June 2, 2006).
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    Currently, FBOTs that wish to permit direct access do so pursuant
to Commission staff no-action letters (terminal placement no-action
letter) in which Commission staff represents that it will not recommend
that the Commission institute enforcement action against the FBOT or
its members if the FBOT, subject to certain conditions, permits direct
access without becoming a DCM or DTEF. Terminal placement no-action
letters state that Commission staff will examine trade volume
information submitted by the FBOT, including volume generated through
U.S. terminals, and any change in the nature or extent of the FBOT's
activities in the U.S., to ascertain whether such trade volume or FBOT
activities might warrant reconsideration of the no-action relief
because the FBOT may no longer be ``located outside the U.S.'' for the
purposes of section 4(a) of the Act.
    Terminal placement no-action letters do not, however, identify the
specific circumstances when no-action relief is no longer appropriate.
In order to promote regulatory clarity in this area, the Commission is
considering whether to set forth objective criteria for determining
when an FBOT is no longer ``located outside the U.S.'' for purposes of
Section 4(a) of the Act. In order to foster useful discussion and
provide transparency with respect to the Commission's determinations in
this area, the Commission is issuing this request for comment to
solicit public views regarding issues raised herein. The Commission
also believes that this request for comment should help generate and
guide discussion on this same topic at its June 27, 2006, public
hearing.

DATES: Comments must be received by July 12, 2006.

ADDRESSES: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581, attention: Office of the Secretariat. Comments may be sent by
facsimile transmission to 202-418-5521 or, by e-mail to 
secretary@cftc.gov. Reference should be made to ``What Constitutes a

Board of Trade Located Outside of the United States.'' Comments may
also be submitted to the Federal eRulemaking Portal:  href=
"http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov">http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov
.


FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Chief Counsel,
(202) 418-5481, e-mail dvanwagner@cftc.gov; or Duane C. Andresen,
Special Counsel, (202) 418-5492, e-mail dandresen@cftc.gov; Division of
Market Oversight, Commodity Futures Trading Commission, Three Lafayette
Center, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    Generally, under section 4(a) of the Act,\2\ a futures contract may
be executed lawfully in the U.S. only if it is traded on or subject to
the rules of a board of trade that has been designated as a DCM or
registered as a DTEF (for ease of reference, hereinafter referred to as
DCM/DTEF registration) pursuant to section 5 or 5a of the Act,\3\
respectively, unless the contract is either (i) traded on or subject to
the rules of a board of trade, exchange or market located outside the
U.S. or (ii) exempted from the Act pursuant to section 4(c).\4\

[[Page 34071]]

Accordingly, an FBOT that permits direct access that is not located
outside the U.S. for purposes of section 4(a) may be required to obtain
DCM/DTEF registration absent an exemption under section 4(c) of the
Act. The Commission is considering adopting objective standards that
would identify a threshold level of presence in the U.S. at which such
an FBOT would no longer be considered to be located outside the U.S.
for purposes of section 4(a) of the Act. When such an FBOT crosses that
threshold, it would become subject to section 4(a) and could,
accordingly, be required to seek DCM/DTEF registration.
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    \2\ 7 U.S.C. 6(a) (2002).
    \3\ 7 U.S.C. 7 and 7a (2002).
    \4\ Section 4(a) of the Act states in relevant part: [I]t shall
be unlawful for any person to offer to enter into, to enter into, to
execute, to confirm the execution of, or to conduct any office or
business anywhere in the United States, its territories or
possessions, for the purpose of soliciting or accepting any order
for, or otherwise dealing in, any transaction in, or in connection
with, a contract for the purchase or sale of a commodity for future
delivery (other than a contract which is made on or subject to the
rules of a board of trade, exchange, or market located outside the
United States, its territories or possessions) unless--
    (1) Such transaction is conducted on or subject to the rules of
a board of trade which has been designated or registered by the
Commission as a contract market or derivatives transaction execution
facility for such commodity;
    (2) Such contract is executed or consummated by or through a
contract market; and
    (3) Such contract is evidenced by a record in writing.* * *
    Section 4(c) of the Act provides the Commission with authority
``by rule, regulation, or order'' to exempt ``any agreement,
contract, or transaction'' from the requirements of section 4(a) of
the Act if the Commission determines that the exemption would be
consistent with the public interest, that the contracts would be
entered into solely between appropriate persons, and that the
exemption would not have a material adverse effect on the ability of
the Commission or any contract market or derivatives transaction
execution facility to discharge its regulatory or self-regulatory
duties under the Act. 7 U.S.C. 6(a) and 6(c) (2002).
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    The Commission has previously addressed this issue on several
occasions. On July 24, 1998, the Commission published in the Federal
Register a Concept Release seeking public comment on issues related to
permitting the use in the U.S. of automated trading systems providing
access to electronic boards of trade otherwise primarily operating
outside the U.S.\5\ On September 24, 1998, the Commission's Global
Markets Advisory Committee (GMAC) met to consider the issues raised in
the Concept Release.\6\ On March 24, 1999, the Commission published in
the Federal Register proposed rules that would have, among other
things, established a procedure for an electronic exchange operating
primarily outside the U.S. to petition the Commission for an order that
would permit use of automated trading systems that provide access to
the board of trade from within the U.S. without requiring the board of
trade to be designated as a U.S. contract market.\7\ During the comment
period on the proposed rules, the Commission held a Public Roundtable
to discuss the issues raised.\8\
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    \5\ 63 FR 39779 (July 24, 1998).
    \6\ The Report of the GMAC Working Group on Electronic Terminals
can be found on the Commission's Web site at  href=
"http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/files/foia/comment98/foicf9830b004.pdf">http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/files/foia/comment98/foicf9830b004.pdf
.

    \7\ 64 FR 14159 (March 24, 1999).
    \8\ A transcript of the Public Roundtable can be found on the
Commission's Web site at  href=
"http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/files/foia/comment99/foicf9911b001a.pdf">http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/files/foia/comment99/foicf9911b001a.pdf
.

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    On June 2, 1999, the Commission issued an order that withdrew the
proposed rules and committed the Commission to ``proceed expeditiously
toward adoption of rules and/or guidelines'' with respect to foreign
boards of trade seeking to place trading terminals in the U.S. and ``to
simultaneously initiate processes to address the comparative regulatory
levels between U.S. and foreign electronic trading systems so as not to
provide one with a competitive advantage.'' \9\ The order instructed
Commission staff to begin immediately processing no-action requests
from foreign boards of trade seeking to place trading terminals in the
U.S., and to issue responses where appropriate, pursuant to the general
guidelines that had been followed in the process that resulted in the
issuance of the 1996 Eurex (DTB) no-action letter.\10\ Since the
withdrawal of the proposed rulemaking, Commission staff has processed
no-action requests from FBOTs seeking to permit direct access and
issued terminal placement no-action letters pursuant to the general
guidelines included in the Eurex (DTB) no-action process.
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    \9\ The order is published in the Federal Register at 64 FR
32829, 32830 (June 18, 1999). In the Federal Register release, the
Commission stated that it was apparent from the comments received on
the proposed rules, and from the wide-ranging positions on the
issues as outlined at the Roundtable Discussion and in the meeting
of the Commission's GMAC, that further consensus needed to be sought
before rules or guidelines could be finalized. Accordingly, the
Commission determined to withdraw the proposed rules and defer
adoption of final rules or guidelines pending further consideration
of those issues.
    \10\ In February 1996, Commission staff issued a no-action
letter to the Deutsche Terminborse (DTB), an all-electronic futures
and option exchange headquartered in Frankfurt, Germany, in which
Commission staff agreed, subject to certain conditions, not to
recommend enforcement action to the Commission if DTB placed
computer terminals in the U.S. offices of its members. CFTC Staff
Letter No. 96-28 (February 29, 1996). DTB changed its name to Eurex
on June 8, 1998, in anticipation of the business combination between
DTB's administrative and operating institution, Deutsche Boerse AG,
and the Swiss Exchange, the parent company of the Swiss Options and
Financial Futures Exchange (SOFFEX).
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    On June 30, 2000, noting that one year had passed since the first
terminal placement no-action letter was issued and that seven such
letters had been issued,\11\ and in light of the staff's experience
with the relief thus provided, the Commission issued a policy statement
permitting FBOTs that had received terminal placement no-action letters
to make additional futures and option contracts available for trading
through their electronic trading systems in the U.S. without obtaining
written, supplemental no-action relief from Commission staff.\12\ Under
that policy statement, subject to minor exceptions, FBOTs seeking to
list additional contracts for direct access would, on the business day
prior to listing, submit to Commission staff: (1) A copy of the initial
terms and conditions of the additional contracts, and (2) a
certification that the FBOT was in compliance with the terms and
conditions of the no-action letter and that the additional contracts
would be traded in accordance with those same terms and conditions.
Since the issuance of the policy statement, nine terminal placement no-
action letters have been issued.\13\
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    \11\ Commission staff had issued no-action letters to LIFFE
(CFTC Staff Letter No. 99-31, July 23, 1999); Parisbourse SA (CFTC
Staff Letter No. 99-33, August 10, 1999); Sydney Futures Exchange
Ltd. (SFE) (CFTC Staff Letter No. 99-37, August 10, 1999); Eurex
Deutschland (CFTC Staff Letter No. 99-48, August 10, 1999);
International Petroleum Exchange (IPE) (now ICE Futures) (CFTC Staff
Letter No. 99-69, November 12, 1999); Singapore Exchange Ltd. (now
SGX-DT) (CFTC Staff Letter No. 99-63, December 17, 1999); and Hong
Kong Futures Exchange Ltd. (HKFE) (CFTC Staff Letter No. 00-75, June
9, 2000).
    \12\ Notice of Statement 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 Place Electronic
Trading Devices in the United States, 65 FR 41641 (July 6, 2000).
The policy statement did not apply to futures and option contracts
covered by Section 2(a)(1)(B) of the Act. The policy statement was
rescinded and the advance notification requirement was revised on
April 14, 2006. 71 FR 19877 (April 18, 2006); corrected at 71 FR
21003 (April 24, 2006).
    \13\ No-action letters have ben issued to: OM London Exchange
Ltd. (CFTC Staff Letter No. 00-93, September 21, 2000); Eurex Zurich
Ltd. (CFTC Staff Letter No.00-104, November 16, 2000); London Metal
Exchange Limited (LME) (CFTC Staff Letter No. 01-11, March 12,
2001); Bourse de Montreal Inc. (CFTC Staff Letter No. 02-24,
February 27, 2002); MEFF (CFTC Staff Letter No. 02-29, March 8,
2002); European Energy Exchange (EEX) (CFTC Staff Letter No. 04-33,
October 25, 2004); Winnipeg Commodity Exchange (WCE) (CFTC Staff
Letter No. 04-35, December 15, 2004); Euronext Amsterdam (CFTC Staff
Letter No. 05-16, August 26, 2005); and NYMEX Europe Limited (NEL)
(CFTC Staff Letter No. 05-24, December 16, 2005). No such letters
have been issued since the policy statement was revised.
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    In January 2006, Commission staff issued a letter stating that the
Commission would be evaluating the use of the terminal placement no-
action process.\14\ Currently, Commission staff generally examines the
following when reviewing an FBOT's request for

[[Page 34072]]

terminal placement no-action relief: General information about the
FBOT, as well as detailed information about: (i) Membership criteria
(including financial requirements); (ii) various aspects of the
automated trading system (including the order-matching system, the
audit trail, response time, reliability, security, and, of particular
importance, adherence to the IOSCO principles for screen-based
trading); (iii) settlement and clearing (including financial
requirements and default procedures); (iv) the regulatory regime
governing the FBOT in its home jurisdiction; (v) the FBOT's status in
its home jurisdiction and its rules and enforcement thereof (including
market surveillance and trade practice surveillance); and (vi) extant
information-sharing agreements among the Commission, the FBOT, and the
FBOT's regulatory authority. When issued, the terminal placement no-
action letters conclude with a standard set of terms and conditions for
the granting of the relief which include, among other things, a
quarterly volume reporting requirement.
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    \14\ Letter from Richard Shilts, Director, Division of Market
Oversight, to Mark Woodward, Regulation and Compliance Policy
Manager, ICE Futures, dated January 31, 2006, in response to ICE
Futures January 17, 2006, letter notifying Commission staff of its
intent to launch a West Texas Intermediate Light Sweet Crude Oil
Futures Contract (WTI Contract) on February 3, 2006. Notably, the
WTI Contract was the first futures contract listed for trading by an
FBOT permitting direct access pursuant to a terminal placement no-
action letter for which the product ultimately underlying the
futures contract was produced, traded and stored principally in the
U.S., and the commercial participants trading the underlying product
were mostly located in the U.S. (The ICE Futures WTI Contract is
itself not a physically-settled contract. Rather, it cash settles
off of the settlement price set by the New York Mercantile
Exchange's physically-settled WTI contract.)
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    In the context of its evaluation of the use of the terminal
placement no-action process, the Commission may either continue to have
its staff issue foreign terminal no-action letters or propose and adopt
rules that would codify the current no-action process as a rule-based
regime that would entail the Commission's issuance of terminal
placement orders. Irrespective of the approach taken, any FBOT seeking
to permit direct access would have to be a bona fide board of trade
subject to a regulator that provides for effective oversight.\15\
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    \15\ In the Concept Release, the Commission described the
foreign board of trade that it assumed would petition the Commission
for an order to place its terminals in the U.S. as a bona fide board
of trade that is subject to an established rulemaking structure. The
Commission stated that this view was consistent with Congressional
intent with respect to what is meant by the term ``foreign board of
trade'' under the Act. It noted that the legislative history
suggested that when Congress amended the Act in 1982, it intended
that the exclusion of futures contracts traded on ``a board of
trade, exchange or market located outside the United States'' from
the off-exchange ban in Section 4(a) of the Act to apply only to
``bona fide foreign futures contracts'' traded in a regulated
exchange environment. See S. Rep. 384, 97th Cong., 2d Sess. 45-47,
84-85 (1982); H.R. Rep. No. 565, Part I, 97th Cong., 2d Sess. 84-85
(1982). The Commission further stated that, consistent with
Congressional intent, the Part 30 rules do not permit the offer and
sale in the U.S. of foreign futures or options that are not executed
on or subject to the rules of a foreign board of trade. 63 FR 39779,
39788.
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    In addition, and also as part of the Commission's evaluation of the
use of the no-action process, on May 3, 2006 the Commission instructed
staff to initiate a formal process, including a public hearing
conducted by the Commission, to define what constitutes ``a board of
trade, exchange, or market located outside the United States, its
territories or possessions'' as that phrase is used in section 4(a) of
the Act.

II. Request for Comment

    The Commission solicits comment from the public on the issues
related to an objective standard establishing a threshold that, if
crossed by an FBOT that permits direct access, would indicate that the
board of trade is no longer outside of the U.S. and, accordingly, may
be required to become registered as a DCM/DTEF. The Commission notes
that any action taken in this area would be taken to ensure that the
Commission is able to carry out its obligations under the Act to
maintain the integrity of the U.S. futures markets, to protect the
public interest with respect to transactions entered into in interstate
and international commerce, and to provide protection to U.S.
customers. At the same time, the Commission recognizes that cross-
border trading is a growing segment of the trading volume for all
futures exchanges, both foreign and domestic. Accordingly, in
formulating its regulatory approach the Commission will strive to
ensure that it neither inhibits cross-border trading nor imposes
unnecessary regulatory burdens.

1. The Level of U.S. Presence and the Requirement for DCM/DTEF
Registration

    In the March 24, 1999, proposed rules, the Commission stated that
any FBOT that wishes to permit direct access can be required to
register if the FBOT is not subject to a generally comparable
regulatory structure or if the FBOT has been established and structured
purposefully to evade U.S. regulation.\16\ In the Concept Release and
the proposed rules, the Commission indicated that at some level of U.S.
activity, an FBOT that provides direct access can no longer claim to be
outside the U.S. and should be required to be designated.\17\ The
Commission specifically mentioned the presence of FBOT activities and
personnel in the U.S., as well as trading volume on the FBOT
originating in the U.S.\18\ The Commission also indicated that an
FBOT's main business activities must take place outside of the U.S.
(i.e., its management, back office operations, order matching/execution
facilities, clearing facilities, and the vast majority of its personnel
must be located outside the U.S.).\19\ As discussed above, however, the
proposed rules were subsequently withdrawn.
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    \16\ 64 FR 14159, 14160.
    \17\ 63 FR 39779, 39787; 64 FR 14159, 14167.
    \18\ 63 FR 39779 at 39787-8; 64 FR 14159 at 14167 and 14170.
    \19\ Id. at 14167.
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    The Commission is seeking comments with respect to whether the
extent of the FBOT's presence in the U.S. is an appropriate threshold,
particularly in light of the capability to contract out various
exchange activities to entities in different jurisdictions. If the
extent of the FBOT's presence in the U.S. is an appropriate threshold,
what level of presence would be a reasonable threshold for determining
whether to require DCM/DTEF registration? What factors should be
considered in making such a determination, and what level of activities
should trigger a U.S. registration requirement? Could a comprehensive
list of exchange activities be established and used for the purposes of
determining when these activities warrant registration? Would a more
focused U.S. presence criteria be more helpful, such as the location of
the governing board or executive level management, i.e., where the
critical business decisions are made? \20\ If the FBOT organizes its
business as a U.S. entity, should registration be required even if most
of its activities take place outside the U.S.?
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    \20\ The Commission understands that at least one foreign
regulator, the U.K. Financial Services Authority, views this factor
as critical in determining whether an exchange is foreign or
domestic.
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    The Commission previously has indicated that trade volume from
within the U.S. is relevant in assessing whether a board of trade's
contacts in the U.S. are so extensive that the FBOT should be required
to be registered as a DCM.\21\ In the proposed rules, subsequently
withdrawn, the Commission proposed that FBOTs report quarterly for each
contract available to be traded through direct execution systems and
automated order routing systems (AORS) located in the U.S. the total
trade volume originating from such systems located in the U.S and total
trade volume worldwide from any source.\22\
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    \21\ 64 FR 14159, 14170.
    \22\ Id. at 14177. Direct execution system was defined as any
system of computers, software or other devices that allows entry of
orders for products traded on a board of trade's computer or other
automated device where, without substantial human intervention,
trade matching or execution takes place. AORS was defined as 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, without substantial human
intervention, trade matching or execution takes place.

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[[Page 34073]]

    FBOT trading volume that is attributable to direct access from the
U.S. may trigger a unique regulatory interest. Direct access to an
FBOT's trading platform enables U.S. market participants to directly
interact with a market, including observing prices, bids, offers and
the depth of market in real-time, making trading decisions and
executing orders in a non-intermediated, non-filtered manner. Notably,
in the proposed rules that were subsequently withdrawn, the Commission
stated that boards of trade that were accessible from within the U.S.
via trading screens, the internet, or other automated trading systems
were not ``located outside the U.S.'' for purposes of section 4(a) of
the Act.\23\
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    \23\ Id. at 14160. In the release accompanying its subsequently
withdrawn proposed rules, the Commission distinguished direct access
trading and order placement via AORS from an order placed by
telephone with a firm that is registered with the Commission as a
futures commission merchant or that is exempt from such registration
pursuant to Commission Rule 30.10 Firm in that a customer placing an
order by telephone would not be entering an order on a board of
trade's computer or other automated device where trade matching or
execution takes place. Id. at 14171.
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    Currently, FBOTs with terminal placement no-action letters report
to Commission staff quarterly the volume originating from the U.S. and
the worldwide volume for those contracts available for direct access
from the U.S.\24\ The Commission is seeking comments with respect to
whether the volume originating from the U.S. is an appropriate
criterion. If so, should the Commission consider overall volume, such
that if some percentage of the overall volume for those contracts
available for direct access from the U.S. originated in the U.S., the
FBOT would be required to register? What, if any, U.S. volume
percentage figure could serve as a reasonable threshold level?
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    \24\ When computing the percentage of volume originating from
the U.S., Commission staff does not include the volume of any FBOT
contracts which are not available for direct access.
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    What does providing direct access to its electronic trading system
from the U.S. mean in terms of the volume that should be counted?
Should orders transmitted via AORS from the U.S. to firms located
outside the U.S. for entry into the trading system be counted as U.S.
volume for purposes of determining whether any volume threshold has
been crossed? \25\ Should orders transmitted via telephone from the
U.S. to firms located outside the U.S. for entry into the trading
system be counted as U.S. volume for purposes of determining whether
any volume threshold has been crossed? \26\
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    \25\ The Commission in this process is not considering whether
to regulate AORS generally, and seeks comments only as to whether
and how to measure volume generated through AORS in determining
whether a board of trade is located outside the U.S.. Staff believes
that the volume data currently reported by FBOTs quarterly does not
include as volume originating from the U.S. an order transmitted
from the U.S. via AORS and entered into the trading system by a firm
located outside the U.S.
    \26\ Staff believes that the volume data currently reported by
FBOTs quarterly does not include as volume originating from the U.S.
an order transmitted from the U.S. via telephone and entered into
the trading system by a firm located outside the U.S.
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    If volume emanating from the U.S. is deemed to be a relevant
criterion, should the Commission measure volume on a contract-by-
contract basis, and require that the FBOT seek registration only with
respect to those individual contracts that exceed a percentage
threshold? Does percentage of volume in contracts from the U.S. alone
create a meaningful threshold? \27\
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    \27\ If more than 50 percent of the volume of an FBOT's contract
originates in the U.S., then it is unlikely that any other country
can demonstrate a greater interest in that contract.
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    Notwithstanding a contract's level of volume from the U.S., the
nature of certain contracts made available by FBOTs for direct access
also might independently implicate the Commission's regulatory
interests. Specifically, the Commission's regulatory interests may
extend to FBOT contracts with an underlying product whose cash market
impacts interstate commerce in the U.S., such as where prices of the
underlying product are discovered principally in the U.S., the
underlying product is produced, created and held principally in the
U.S., and commercial participants trading the underlying product are
mostly located in the U.S.
    One of the primary purposes of regulating futures contracts is to
ensure fair and orderly markets for U.S. producers and other commercial
participants who use such contracts for price basing or hedging.
Accordingly, would it be appropriate for the Commission to exercise
jurisdiction over FBOTs that permit direct access when they list
contracts with underlying products that are integral to the U.S.
economy? If the Commission were to take special cognizance of such
contracts, should it do so independently of, or in conjunction with,
the type of U.S. volume threshold mentioned above? If such contracts
were analyzed in conjunction with a volume test, would it be
appropriate for the Commission to set the U.S. volume threshold at a
lower level than it would for contracts whose underlying products do
not have a significant U.S. cash market? What are the implications
generally for the business activities and organization of an FBOT of
requiring designation on a contract-by-contract basis?

2. DCM Designation Criteria, DTEF Registration Criteria and Core
Principles

    As indicated above, section 4(a) of the Act requires that a futures
contract may only be executed lawfully in the U.S. only if it is traded
on or subject to the rules of a board of trade that has been designated
as a DCM or registered as a DTEF, unless the contract is traded on a
board of trade located outside the U.S. or is exempted from section
4(a) pursuant to section 4(c). Accordingly, if an FBOT that permits
direct access engaged in a level of U.S. activity such that it was no
longer considered to be located outside the U.S. under a Commission-
prescribed standard, the FBOT would have to either obtain DCM/DTEF
registration or be granted section 4(c) exemptive relief (as discussed
above, at least with respect to those contracts that meet the
applicable threshold).
    In determining its policy regarding FBOTs that become subject to
section 4(a) in these circumstances, the Commission notes that,
consistent with its obligations with respect to any market that
implicates section 4(a), its paramount obligations would be to maintain
the integrity of the FBOT's futures markets and to provide protection
to U.S. customers using those markets. Along with those
responsibilities, however, the Commission would seek to avoid any
measures that would stifle cross-border trading or create unnecessary
regulatory burdens.
    The Commission anticipates that FBOTs that become subject to
section 4(a) under any Commission-prescribed standard would be required
to apply for DCM designation (or DTEF registration) and to demonstrate
compliance with the DCM designation criteria and core principles in
Section 5 of the Act in accordance with the procedures described in
Parts 38 and 40 of the Commission's regulations (or with the DTEF
registration criteria and core principles in Section 5a of the Act in
accordance with Parts 37 and 40 of the Commission's regulations).
Furthermore, once the FBOT became registered as a DCM/DTEF, the
Commission would expect the DCM/DTEF to continue to meet the
requirements of the designation/registration criteria and core
principles with respect to any contracts for which it was required to
designate/register.
    Notably, the Act's designation/registration criteria and core
principles

[[Page 34074]]

are non-prescriptive and can be satisfied in different ways, including
by rules and procedures that may have originally been adopted to
satisfy the requirements of a foreign regulatory regime. In fact, in
conducting an analysis of foreign regulatory programs, the Commission
may determine that core principles are already being met. Accordingly,
in situations such as this, requiring DCM/DTEF registration of FBOTs
that are no longer considered to be located outside of the U.S. should
not pose an undue burden on the board of trade or a material impediment
to cross-border business. Similarly, the Commission could recognize a
board of trade's prior experiences with particular rules and procedures
in evaluating whether the board of trade would likewise satisfy the
Commission's requirements for DCMs/DTEFs.
    In the interest of reducing any burden that may arise at either the
exchange or regulator level due to the dual regulation, the Commission
also notes that it would always have the discretion to work out
appropriate arrangements to rely on the foreign regulator for
assistance in ensuring that a DCM/DTEF continues to meet the
designation/registration requirements. The Commission particularly
solicits comments on which, if any, areas of its regulatory oversight
responsibilities may be appropriate for such reliance. Should the
Commission establish a standardized approach to such reliance on
foreign regulatory authorities, or should coordination of these
oversight responsibilities be done on a case-by-case basis.
Alternatively, should the Commission consider using its section 4(c)
authority to create a special exchange registration category for boards
of trade that become subject to section 4(a) in these limited
circumstances? If so, what substantive requirements should apply to
such a category?

    Issued in Washington, DC, on June 8, 2006 by the Commission.
Eileen Donovan,
Acting Secretary of the Commission.
 [FR Doc. E6-9191 Filed 6-12-06; 8:45 am]

BILLING CODE 6351-01-P