[Federal Register: March 7, 1997 (Volume 62, Number 45)]
[Rules and Regulations]
[Page 10445-10447]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07mr97-13]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 30
Foreign Futures and Option Transactions
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC''), is clarifying the procedures applicable in its prior Order
issued on April 13, 1993 (``1993 Order''), authorizing members of the
Sydney Futures Exchange Limited (``Exchange'' or ``SFE'') to solicit
and to accept orders from U.S. customers for otherwise permitted
transactions on all non-U.S. exchanges where such members are
authorized by the Australian Corporations Law (``ACL'') to conduct
futures business for customers.
This Supplemental Order is issued pursuant to Commission rule
30.10, which permits the Commission to grant an exemption from certain
provisions of Part 30 of the Commission's regulations, the Commission's
Order dated November 7, 1988 (``Original Order''), granting relief
under rule 30.10 to designated members of the Exchange, and the 1993
Order.
EFFECTIVE DATE: March 7, 1997.
FOR FURTHER INFORMATION CONTACT: Jane C. Kang, Esq., or Warren Gorlick,
Esq., Division of Trading and Markets, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington,
D.C. 20581. Telephone: (202) 418-5430.
SUPPLEMENTARY INFORMATION: The Commission has issued the following
Supplemental Order:
Supplemental Order Clarifying Conditions Under Which Certain Members of
the Sydney Futures Exchange Designated for Relief Under Commission Rule
30.10 May Solicit and Accept Orders From U.S. Customers for Otherwise
Permitted Transactions on All Non-U.S. Markets Where Such Members Are
Authorized by Australian Law to Conduct Futures Business for Customers
On November 1, 1988, the Commission issued the Original Order under
rule 30.10 authorizing designated members of the SFE to offer or sell
certain futures and option contracts traded on the Exchange to persons
located in the United States. 53 FR 44856 (November 7, 1988). The
Original Order limited the scope of permissible brokerage activities
undertaken by designated SFE members on behalf of U.S. customers to
transactions ``on or subject to the rules of the Exchange.'' 53 FR
44856, 44857.
By letter dated March 11, 1993, counsel to the SFE petitioned the
Commission to revise the Original Order to include all non-U.S markets
where SFE members are authorized by the ACL to conduct futures business
for customers.<SUP>1 As represented in that letter, section 1258 of the
ACL prohibits futures brokers (including Exchange members confirmed for
relief under rule 30.10) from dealing on behalf of another person
unless the dealing is effected on an Australian futures exchange or a
``recognized'' foreign futures exchange. The Recognized Futures
Exchanges, as defined in section 9(b) of the ACL as well as Regulation
8.02.02 thereunder, appear in Schedule 11 of such Regulations.
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\1\ Letter from Philip McBride Johnson, counsel to the SFE, to
William P. Albrecht, Acting Chairman, Commission, dated March 11,
1993.
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On April 13, 1993, the Commission issued its 1993 Order authorizing
members of the SFE designated for rule 30.10 relief to solicit and
accept orders from U.S. customers for otherwise permitted transactions
on all non-U.S. exchanges <SUP>2 where such members are authorized by
Australian law to conduct futures business for customers. See 58 FR
19209 (April 13, 1993). The expanded rule 30.10 relief, however, is
contingent on the SFE's and SFE members' compliance with the Original
Order and their compliance with certain specified conditions.<SUP>3
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\2\ The term ``non-U.S. exchange'' refers to a foreign board of
trade which is defined in Commission rule 1.3 (ss), 17 C.F.R.
Sec. 1.3(ss) (1996) as:
Any board of trade, exchange or market located outside the
United States, its territories or possessions, whether incorporated
or unincorporated, where foreign futures or foreign options
transactions are entered into.
Thus, contracts that are traded on a market that has been
designated as a contract market pursuant to section 5 of the
Commodity Exchange Act (``CEA'' or ``Act'') are not within the scope
of the 1993 Order and this Supplemental Order.
\3\ These conditions are the following:
1. SFE will carry out its compliance, surveillance and rule
enforcement activities with respect to solicitations and acceptance
of orders by designated SFE members of U.S. customers for futures
business on Recognized Futures Exchanges, as defined in section 9(b)
of the ACL, other than a contract market designated as such pursuant
to section 5a of the CEA, to the same extent that it conducts such
activities in regard to SFE business;
2. SFE will cooperate with the Commission with respect to any
inquiries concerning any activity which is the subject of this [1993
Order], including sharing the information specified in Appendix A to
the Part 30 rules on an ``as needed'' basis, on the same basis as
set forth in the Original Order; and
3. Each SFE member firm confirmed for Sec. 30.10 relief seeking
to engage in activities which are the subject of this [1993 Order]
must agree to provide the books and records related to such
transactions required to be maintained under the applicable
statutes, regulations and Exchange rules in effect in Australia, on
the same basis as set forth in the Original Order.
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[[Page 10446]]
The Commission now seeks to clarify the procedures with which SFE
members should comply in order to operate pursuant to the expanded
relief permitting certain SFE member firms to engage in foreign futures
and options transactions for U.S. customers other than on the SFE. This
Order clarifies that the funds of U.S. foreign futures and options
customers must be subject to consistent protection irrespective of
whether the SFE member firm effects trades directly on the SFE, <SUP>4
or effects trades on another foreign futures and options exchange
directly or through the intermediation of a foreign exchange member.
<SUP>5
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\4\ With respect to transactions on the SFE, applicable
Australian laws and regulations and the Original Order require
segregation of all money, securities and property deposited on
behalf of U.S. customers in respect of such transactions and the
accruals thereon. See paragraphs 2(f) and (g) of the Original Order,
53 FR 44856, 44858.
\5\ The Commission notes that substantially similar conditions
were imposed in its Order authorizing members of the New Zealand
Futures and Options Exchanges (``NZFOE'') that are designated for
relief under Commission rule 30.10 to solicit and to accept orders
from U.S. customers for otherwise permitted transactions on all non-
U.S. exchanges where such members are authorized by the rules of the
NZFOE to conduct futures business for customers. See 61 FR 64985
(December 10, 1996).
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Accordingly, the Commission has determined to clarify that the
relief set forth in the expanded relief authorized pursuant to the 1993
Order is applicable only if the Exchange member firm complies with the
following procedures, which are consistent with the requirements
applicable to Commission registered FCMs concerning the protection of
customer funds under the provisions of Commission rule 30.7: <SUP>6
\6\ See Commission rule 30.7, 17 C.F.R. Sec. 30.7 (1996). To the
extent that a depository is unable to provide the required
acknowledgement (for example, as in the case of an intermediary firm
which does not segregate customer from house assets), that foreign
depository is not a good secured amount depository. To use such an
intermediary, an FCM must establish a ``mirror'' account in the
United States to meet its secured amount obligations. Thus, the
procedures articulated in this Order are intended to be consistent
with the requirements applicable to the treatment of customer funds
under rule 30.7 by FCMs and to clarify that these same obligations
apply to foreign firms operating under rule 30.10 orders permitting
the execution of trades on exchanges outside of their home
jurisdiction (see n.5 above).
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With respect to transactions effected on behalf of U.S.
customers on any non-U.S. futures and options exchange other than
the NZFOE <SUP>7 and the SFE whether by the SFE member directly as a
clearing member of such other exchange or through the intermediation
of one or more intermediaries, the SFE member complies with
paragraphs a, b or c below:
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\7\ As noted above, the NZFOE received rule 30.10 relief from
the Commission on December 10, 1996. That exchange is a wholly-owned
subsidiary of the SFE, and the SFE Clearing House (``SFECH'') is the
designated clearing house for all transactions effected on the
NZFOE. The NZFOE and its members are required to segregate customer
funds from money and property belonging to the firm and cannot use
customer funds to satisfy the firm's obligations, both at the firm
level and at the SFECH. See the New Zealand Futures Industry (Client
Funds) Regulations (1990) sections 6, 14, and 20 and n.5, above.
Consequently, taking into account the common ownership, use of the
same clearing house, and relevant segregation requirements on both
the SFE and NZFOE, with respect to transactions on the NZFOE on
behalf of U.S. foreign futures and options customers, SFE members
may comply with existing SFE and NZFOE rules in connection with this
paragraph relating to the foreign futures and options secured
amount.
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a. (1) Maintains in a separate account or accounts money,
securities and property in an amount denominated as the foreign
futures or foreign options secured amount, at least sufficient to
cover or satisfy all of its current obligations to U.S. customers;
(2) Does not commingle such money, securities and property with
the money, securities or property of the member, or with any
proprietary account of such member and does not use such money,
securities and property to secure or guarantee the obligations of,
or extend credit to, the member or any proprietary account of the
member;
(3) Provided that it may deposit together with the secured
amount required to be on deposit in the separate account or accounts
referred to in paragraph a-1 above money, securities or property
held for or on behalf of non-U.S. customers of the member for the
purpose of entering into foreign futures and options transactions.
In such a case, the amount that must be deposited in such separate
account or accounts must be no less than the greater of (1) the
foreign futures and foreign options secured amount required by
paragraph a-1 above plus the amount that would be required to be on
deposit if all such customers (including non-U.S. customers) were
subject to such requirement, or (2) the foreign futures and foreign
options secured amount required by paragraph a-1 above plus the
amount required to be held in a separate account or accounts for or
on behalf of such non-U.S. customers pursuant to any applicable law,
rule, regulation or order, or any rule of any self-regulatory
organization;
(4) Maintains the separate account or accounts referred to in
paragraph a-1 above under an account name that clearly identifies
them as such, with any of the following depositories:
(a) Another person registered with the Commission as an FCM or a
firm exempted from FCM registration pursuant to CFTC rule 30.10;
(b) The clearing organization of any foreign board of trade;
(c) Any member and/or clearing member of such foreign board of
trade; or
(d) A bank or trust company which any of the depositories
identified in (a)-(c) above may use consistent with the applicable
laws and rules of the jurisdiction in which the depository is
located; and
(5) The separate account or accounts referred to in paragraph a-
1 may be deemed located at a good secured amount depository only if
the member obtains and retains in its files for the period required
by applicable law and Exchange rules a written acknowledgement from
such separate account depository that:
(a) It was informed that such money, securities or property are
held for or on behalf of customers of the member; and
(b) It will ensure that such money, securities or property will
be held and treated at all times in accordance with the provisions
of this paragraph; and, provided further, that the member assures
itself that such separate account depository will not pass on such
money, securities or property to any other depository unless the
member has assured itself that all such other separate account
depositories will treat such funds in a manner consistent with the
procedures described in paragraph a hereof; <SUP>8 or
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\8\ This proviso is intended to clarify that the originating
member makes reasonable inquiries and understands prior to the
initiation of a trade the conditions under which its customers'
funds will be held at all subsequent depositories, so that it may
determine whether a particular intermediary or clearing house is a
good separate account depository for purposes of this Order or must
alternatively set aside funds in the manner set forth in paragraph
b. The member would be expected to discuss with its immediate
intermediary broker whether funds would be transferred to any
subsequent depositories and determine the conditions under which
such funds would be treated. Compliance with this proviso would be
satisfied by the member obtaining relevant information or assurances
from appropriate sources such as, for example, the immediate
intermediary broker, exchanges or clearinghouses, exchange
regulators, banks, attorneys or other relevant references, including
regulatory sources.
This Supplemental Order is intended to clarify that funds
provided by U.S. customers for foreign futures and options
transactions, whether held at a U.S. FCM under rule 30.7(c) or a
firm exempted from registration as an FCM under CFTC rule 30.10,
will receive equivalent protection at all intermediaries and
exchange clearing organizations. Thus, for example, an exchange that
does not segregate customer from firm obligations and firms which
trade on such exchanges and which do not arrange to comply otherwise
with any of the procedures described herein would not be deemed an
acceptable separate account. Specifically, such exchange or firms
could not provide a valid and binding acknowledgement to a rule
30.10 exempted firm.
This provision is not necessarily intended to create a duty on a
rule 30.10 firm that it audit intermediaries it uses for continued
compliance with the undertakings it has obtained based on
discussions with those relevant intermediaries. It is intended to
make clear that firms seeking the benefit of the Commission's 30.10
relief must undertake a due diligence inquiry before customer funds
are transferred to another intermediary and must take appropriate
action (i.e., set aside funds) in the event that such firms become
aware of facts leading them to conclude that customer funds are not
being handled consistent with the requirements of Commission rules
or this Order by any subsequent intermediary or clearing house.
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b. Sets aside funds constituting the entire secured amount
requirement in a separate account as set forth in Commission rule
30.7, 17 C.F.R. 30.7 (1996), and treats those funds in the manner
described by that rule; or
c. Complies with the terms and procedures of paragraph a or b,
except that the amount required to be segregated under SFE rules
[[Page 10447]]
and Australian laws may be substituted for the secured amount
requirement as set forth in such paragraphs.<SUP>9
\9\ Any Australian laws or regulations or SFE rules which permit
an SFE member firm to obtain from its customers a waiver,
acknowledgement or similar document in which such customer
effectively waives the right to segregation protection would be
inconsistent with compliance with paragraphs a, b, and c.
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The expanded rule 30.10 relief already granted to the SFE also is
contingent upon the SFE's and SFE members' continued compliance with
the Original Order and the 1993 Order, and the enumerated conditions
above.
Further, if experience demonstrates that the continued
effectiveness of this Order in general, or with respect to a particular
member, would be contrary to public policy or the public interest, or
that the systems in place for the exchange of information or other
circumstances do not warrant continuation of the exemptive relief
granted herein, the Commission may condition, modify, suspend,
terminate, withhold as to a specific member, or otherwise restrict the
exemptive relief granted in this Order, as appropriate, on its own
motion. If necessary, provisions will be made for servicing existing
client positions.
List of Subjects in 17 CFR Part 30
Commodity Futures, Commodity Options, Foreign Futures.
Accordingly, 17 CFR Part 30 is amended as set forth below:
PART 30--FOREIGN FUTURES AND OPTIONS TRANSACTIONS
1. The authority citation for Part 30 continues to read as follows:
Authority: secs. 2(a)(1)(A), 4, 4c and 8a of the Commodity
Exchange Act, 7 U.S.C. 2, 6, 6c and 12a.
2. Appendix C to Part 30 is amended by adding the following
citation to the existing entry for the Sydney Futures Exchange to read
as follows:
Appendix C--Foreign Petitioners Granted Relief From the Application of
Certain Part 30 Rules Pursuant to Rule 30.10
* * * * *
FR date and citation, March 7, 1997, 62 FR.
Issued in Washington, D.C. on March 3, 1997.
Jean Webb,
Secretary of the Commission.
[FR Doc. 97-5658 Filed 3-6-97; 8:45 am]
BILLING CODE 6351-01-P
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