e8-21857

FR Doc E8-21857[Federal Register: September 18, 2008 (Volume 73, Number 182)]

[Rules and Regulations]

[Page 54069-54072]

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

[DOCID:fr18se08-7]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 3 and 30

RIN 3038-AC26

Exemption From Registration for Certain Firms With Regulation

30.10 Relief

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') has

amended the regulation concerning the registration of firms located

outside the U.S. that are engaged in commodity interest activities with

respect to trading on U.S. designated contract markets (``DCMs'') and

U.S. derivatives transaction execution facilities (``DTEFs'').\1\ The

amended regulation

[[Page 54070]]

codifies past actions of the Commission's staff to permit certain

foreign firms that have confirmed relief from registration as futures

commission merchants (``FCMs'') in accordance with the regulations to

introduce to registered FCMs certain U.S. customers in connection with

trading futures and commodity options listed on, or subject to the

rules of, a U.S. DCM or DTEF without having to register as an

introducing broker (``IB'') pursuant to Section 4d of the Commodity

Exchange Act (``Act''). The Commission also has revoked the regulation

regarding quarterly reporting requirements for foreign futures and

foreign options transactions.

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\1\ Commission regulations referred to herein are found at 17

CFR Ch. I (2007) and may be accessed through the Commission's Web

site, http://www.cftc.gov/lawandregulation/index.htm.

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DATES: Effective Date: October 20, 2008.

FOR FURTHER INFORMATION CONTACT: Andrew V. Chapin, Associate Director,

at (202) 418-5430, Division of Clearing and Intermediary Oversight,

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

Street, NW., Washington, DC 20581. Electronic mail: [email protected]

SUPPLEMENTARY INFORMATION:

I. The Proposal

Part 3 of the Commission's regulations governs the registration of

intermediaries engaged in the offer and sale of, and providing advice

concerning, futures and commodity options traded on U.S. markets,

including both DCMs and DTEFs. Regulation 3.10 sets forth the manner in

which FCMs, IBs, commodity pool operators (``CPOs''), commodity trading

advisors (``CTAs''), and leverage transaction merchants must apply for

registration with the Commission. Regulation 3.10(c) also provides an

exemption from registration for certain persons. For example,

Regulation 3.10(c)(3) provides an exemption from registration to any

foreign person engaged in the activity of an IB, CPO or CTA solely on

behalf of customers located outside the U.S., provided that all

commodity interest transactions are submitted for clearing to a

registered FCM.\2\ Part 30 of the Commission's regulations governs the

offer and sale to U.S. persons of futures and option contracts entered

into on or subject to the rules of a foreign board of trade.

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\2\ See 72 FR 63976 (Nov. 14, 2007).

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On January 25, 2008, the Commission published for comment proposed

amendments to Regulations 3.10 and 30.8 (the ``Proposal'').\3\

Specifically, the Commission proposed new Regulation 3.10(c)(4) to

exempt from registration as an IB the foreign affiliate of a registered

FCM that introduces eligible contract participants (``ECPs'') to a

registered FCM for the purpose of trading U.S. exchange-traded futures

and options. Among other conditions, the registration relief described

in the Proposal was predicated upon the foreign affiliate obtaining an

exemption from FCM registration pursuant to Regulation 30.10

(``Regulation 30.10 firm'') and the affiliated FCM's acknowledgment

that it would be jointly and severally liable for any violations of the

Act or the Commission's regulations by the foreign affiliate in

connection with those activities, even if the FCM did not submit the

trade for clearing.

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\3\ 73 FR 4499 (Jan. 25, 2008).

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As explained in the Proposal, the Commission sought to codify past

no-action positions taken by Commission staff that provided a limited-

purpose exemption from IB registration only to those foreign affiliates

of registered FCMs engaged in global futures brokerage activities on

behalf of institutional customers located in the U.S. In doing so, the

Commission recognized that institutional U.S. customers who trade

globally throughout the 24-hour trading day may achieve greater

operational and economic efficiencies by eliminating the need to use

multiple order entry systems to execute transactions both domestically

and abroad.

The Commission also proposed to revoke Regulation 30.8 requiring

each FCM to provide the National Futures Association (``NFA'') with a

quarterly report containing data for the total volume of foreign

futures and options contracts effected on foreign boards of trade. In

the Proposal, the Commission stated that the Regulation 30.8 reporting

requirement was overly burdensome in lieu of other extensive reporting

and recordkeeping requirements applicable to FCMs as set forth in Part

1 of its regulations.

II. Comments Regarding the Proposal

A. The Comments

The Commission received four comment letters. All of the commenters

supported the adoption of Regulation 3.10(c)(4). The two commenters on

the proposal to revoke Regulation 30.8 similarly supported that action.

One commenter, a registered FCM, requested the Commission to

preserve the position taken in Staff Letter 07-16, applicable to one of

the FCM's foreign affiliates.\4\ In contrast to other recipients of

prior no-action relief, the FCM's foreign affiliate was exempt from IB

registration pursuant to Regulation 30.5 and not Regulation 30.10. As

such, the FCM's foreign affiliate would not be eligible for the IB

registration exemption under the Proposal until such time that either

its foreign regulator or self-regulatory organization filed a petition

with the Commission in accordance with Regulation 30.10. Another

commenter, a membership organization comprised of FCMs and other

futures industry participants, commented that FCMs' foreign affiliates

in non-30.10 jurisdictions may be interested in obtaining exemptive

relief consistent with Regulation 3.10(c)(4) and, accordingly, it

requested that the Commission consider addressing those foreign

affiliates in the final rulemaking.

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\4\ CFTC Staff Letter 07-16, [Current Transfer Binder] Comm.

Fut. L. Rep. (CCH) ] -------- (Aug. 21, 2007). CFTC Staff Letters

issued since 1995 may be accessed through http://www.cftc.gov/

lawandregulation/exemptivenoactionandinterpretativeletters/

index.htm.

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B. The Commission's Response

The Commission does not believe it is appropriate at this time to

extend the proposed IB registration exemption for trading on domestic

markets as set forth in Regulation 3.10(c)(4) to those foreign

affiliates exempt from IB registration pursuant to Regulation 30.5.

This is because, while the limited-purpose exemption from IB

registration set forth in Regulation 3.10(c)(4) is predicated on the

existence of a comparable regulatory program in the jurisdiction in

which the Regulation 30.10 firm is located, the exemption available in

Regulation 30.5 is not. The Commission's determination to limit the

relief set forth in Regulation 3.10(c)(4) to Regulation 30.10 firms

will benefit U.S. customers by requiring any firm not registered with

the Commission as an IB to be subject to a comparable regulatory

program in lieu of compliance with the provisions of the Act and

Commission regulations applicable to IBs. As set forth in Appendix A to

Part 30, the Commission's review of each Regulation 30.10 firm's

regulatory program, among other requirements, addresses the foreign

laws and regulations applicable to registration and fitness,

recordkeeping and reporting, and minimum sales practice standards.

III. Final Rulemaking

Accordingly, the Commission has determined to adopt Regulation

3.10(c)(4) as proposed. As the Commission indicated would be the case

in the Proposal, the adoption of Regulation 3.10(c)(4) will supersede

the following Staff Letters: 03-28, 04-09, 04-14, 05-06, 07-05, 07-08,

07-16, 07-

[[Page 54071]]

17, 07-20, and 07-23 (the ``Prior Staff Letters'').

Regulation 3.10(c)(4)(iii) requires that the FCM affiliated with

the Regulation 30.10 firm seeking relief thereunder file with NFA an

acknowledgment of joint and several liability with the 30.10 Firm.

Notwithstanding that the Prior Staff Letters have been superseded by

the adoption of Regulation 3.10(c)(4), by this Federal Register release

the Commission confirms that any FCM that previously filed an

acknowledgment of joint and several liability pursuant to the

conditions of a Prior Staff Letter is not required to file a new

acknowledgment with NFA--provided that the previously filed

acknowledgment complies with Regulation 3.10(c)(4)(iii).

For the reasons provided in the Proposal, and in the absence of any

comments to the contrary, the Commission similarly has determined to

revoke and reserve Regulation 30.8.

IV. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611,

requires that agencies, in proposing regulations, consider the impact

of those regulations 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 regulations on such entities

in accordance with the RFA.\5\ The Commission previously has determined

that registered FCMs are not small entities for the purpose of the RFA

because each FCM has an underlying fiduciary relationship with its

customers, regardless of the size of the FCM.\6\ The Commission notes

that certain foreign persons affected by the changes to the

Commission's regulations would be registered as FCMs if not for the

exemption provided therein and, as such, would maintain a fiduciary

relationship with customers similar to the relationship maintained by

each registered FCM.

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\5\ 47 FR 18618-18621 (Apr. 30, 1982).

\6\ 47 FR 18619-18620.

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With respect to IBs, the Commission has stated that it would

evaluate within the context of a particular rule whether all or some

affected IBs would be considered to be small entities and, if so, the

economic impact on them of any rule.\7\ The Commission does not believe

that any affected global IBs would be considered to be small entities.

Moreover, the Commission invited public comment on the impact these

proposed rules may have on small entities and received no comments.

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\7\ 47 FR 18618; see also 48 FR 35276 (Aug. 3, 1983).

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Therefore, the Acting 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. No comment was received regarding the impact of these

amendments on small businesses.

B. Paperwork Reduction Act

As required by the Paperwork Reduction Act of 1995,\8\ the

Commission submitted a copy of the proposed rule amendments to the

Office of Management and Budget for its review. The Commission did not

receive any public comments relative to its analysis of paperwork

burdens associated with this rulemaking.

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\8\ Pub. L. 104-13 (May 13, 1995).

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C. Cost-Benefit Analysis

Section 15(a) of the Act requires the Commission to consider the

costs and benefits of its actions before issuing new regulations under

the Act. The Commission published an analysis of costs and benefits

when it proposed the rule amendments that it is now adopting.\9\ It did

not receive any public comments pertaining to the analysis.

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\9\ 73 FR at 4502.

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List of Subjects

17 CFR Part 3

Definitions, Foreign futures, Consumer protection, Foreign options,

Registration requirements.

17 CFR Part 30

Definitions, Foreign futures, Consumer protection, Foreign options,

Registration requirements.

0

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 3--REGISTRATION

0

1. The authority citation for part 3 continues to read as follows:

Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c,

6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b,

13c, 16a, 18, 19, 21, 23, unless otherwise noted.

0

2. Section 3.10 is amended by adding paragraph (c)(4) to read as

follows:

Sec. 3.10 Registration of futures commission merchants, introducing

brokers, commodity trading advisors, commodity pool operators and

leverage transaction merchants.

* * * * *

(c) * * *

(4) A person located outside the United States, its territories or

possessions that is exempt from registration as a futures commission

merchant in accordance with Sec. 30.10 of this chapter is not required

to register as an introducing broker in accordance with section 4d of

the Act if:

(i) Such a person is affiliated with a futures commission merchant

registered in accordance with section 4d of the Act;

(ii) Such a person introduces, on a fully-disclosed basis in

accordance with Sec. 1.57 of this chapter, any institutional customer,

as defined in Sec. 1.3(g) of this chapter, to a registered futures

commission merchant for the purpose of trading on a designated contract

market or derivatives execution facility;

(iii) Prior to a person located outside the United States, its

territories or possessions, that is exempt from registration as a

futures commission merchant pursuant to Sec. 30.10 of this chapter,

engaging in the introducing activities described in this paragraph, the

affiliated futures commission merchant has filed with the National

Futures Association (ATTN: Vice President, Compliance) an

acknowledgement that it will be jointly and severally liable for any

violations of the Act or the Commission's regulations committed by such

person in connection with those introducing activities, whether or not

the affiliated futures commission merchant submits for clearing any

trades resulting from those introducing activities; and

(iv) Such person does not solicit any person located in the United

States, its territories or possessions for trading on a designated

contract market or derivatives transaction execution facility, nor does

such person handle the customer funds of any person located in the

United States, its territories or possessions for the purpose of

trading on any designated contract market or derivatives transaction

execution facility.

(v) For the purposes of this paragraph, a person shall be

affiliated with a futures commission merchant if such a person:

(A) Owns 50 percent or more of the futures commission merchant;

(B) Is owned 50 percent or more by the futures commission merchant;

or

(C) Is owned 50 percent or more by a third person that also owns 50

percent

[[Page 54072]]

or more of the futures commission merchant.

* * * * *

PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS

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3. 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.

Sec. 30.8 [Removed and reserved]

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4. Section 30.8 is removed and reserved.

Dated: September 12, 2008.

By the Commission.

David Stawick,

Secretary of the Commission.

[FR Doc. E8-21857 Filed 9-17-08; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: September 18, 2008