FR Doc E8-24315[Federal Register: October 14, 2008 (Volume 73, Number 199)]
[Rules and Regulations]
[Page 60625-60627]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14oc08-8]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 30
Foreign Futures and Options Transactions
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is granting an exemption to firms designated by the Tokyo Financial
Exchange, Inc. (TFX) from the application of certain of the
Commission's foreign futures and option regulations based upon
substituted compliance with certain comparable regulatory and self-
regulatory requirements of a foreign regulatory authority consistent
with conditions specified by the Commission, as set forth herein. This
Order is issued pursuant to Commission Regulation 30.10, which permits
persons to file a petition with the Commission for exemption from the
application of certain of the Regulations set forth in Part 30 and
authorizes the Commission to grant such an exemption if such action
would not be otherwise contrary to the public interest or to the
purposes of the provision from which exemption is sought.
DATES: Effective Date: October 14, 2008.
FOR FURTHER INFORMATION CONTACT: Andrew V. Chapin, Associate Director;
Helene Schroeder, Special Counsel; or Peter B. Sanchez, Special
Counsel, Division of Clearing and Intermediary Oversight, Commodity
Futures Trading Commission, 1155 21st Street, NW., Washington, DC
20581. Telephone: (202) 418-5430. E-mail: [email protected].
SUPPLEMENTARY INFORMATION: The Commission has issued the following
Order:
Order Under CFTC Regulation 30.10 Exempting Firms Designated by
the Tokyo Financial Exchange, Inc. (TFX) From the Application of
Certain of the Foreign Futures and Option Regulations the Later of
the Date of Publication of the Order Herein in the Federal Register
or After Filing of Consents by Such Firms and TFX, as Appropriate,
to the Terms and Conditions of the Order Herein.
Commission Regulations governing the offer and sale of commodity
futures and option contracts traded on or subject to the regulations of
a foreign board of trade to customers located in the U.S. are contained
in Part 30 of the Commission's regulations.\1\ These regulations
include requirements for intermediaries with respect to registration,
disclosure, capital adequacy, protection of customer funds,
recordkeeping and reporting, and sales practice and compliance
procedures that are generally comparable to those applicable to
transactions on U.S. markets.
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\1\ Commission regulations referred to herein are found at 17
CFR Ch. I (2007).
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In formulating a regulatory program to govern the offer and sale of
foreign futures and option products to customers located in the U.S.,
the Commission, among other things, considered the desirability of
ameliorating the potential extraterritorial impact of such a program
and avoiding duplicative regulation of firms engaged in international
business. Based upon these considerations, the Commission determined to
permit persons located outside the U.S. and subject to a comparable
regulatory structure in the jurisdiction in which they were located to
seek an exemption from certain of the requirements under Part 30 of the
Commission's regulations based upon substituted compliance with the
regulatory requirements of the foreign jurisdiction.
Appendix A to Part 30, ``Interpretative Statement With Respect to
the Commission's Exemptive Authority Under Sec. 30.10 of Its Rules''
(Appendix A), generally sets forth the elements the Commission will
evaluate in determining whether a particular regulatory program may be
found to be comparable for purposes of exemptive relief pursuant to
Regulation 30.10.\2\ These elements include: (1) Registration,
authorization or other form
[[Page 60626]]
of licensing, fitness review or qualification of persons that solicit
and accept customer orders; (2) minimum financial requirements for
those persons who accept customer funds; (3) protection of customer
funds from misapplication; (4) recordkeeping and reporting
requirements; (5) sales practice standards; (6) procedures to audit for
compliance with, and to take action against those persons who violate,
the requirements of the program; and (7) information sharing
arrangements between the Commission and the appropriate governmental
and/or self-regulatory organization to ensure Commission access on an
``as needed'' basis to information essential to maintaining standards
of customer and market protection within the U.S.
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\2\ 52 FR 28990, 29001 (August 5, 1987).
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Moreover, the Commission specifically stated in adopting Regulation
30.10 that no exemption of a general nature would be granted unless the
persons to whom the exemption is to be applied: (1) Submit to
jurisdiction in the U.S. by designating an agent for service of process
in the U.S. with respect to transactions subject to Part 30 and filing
a copy of the agency agreement with the National Futures Association
(NFA); (2) agree to provide access to their books and records in the
U.S. to Commission and Department of Justice representatives; and (3)
notify NFA of the commencement of business in the U.S.\3\
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\3\ 52 FR 28980, 28981 and 29002.
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On August 10, 2007, TFX petitioned the Commission on behalf of its
member firms, located and doing business in Japan, for an exemption
from the application of the Commission's Part 30 Regulations to those
firms.\4\ In support of its petition, TFX states that granting such an
exemption with respect to such firms that it has authorized to conduct
foreign futures and option transactions on behalf of customers located
in the U.S. would not be contrary to the public interest or to the
purposes of the provisions from which the exemption is sought because
such firms are subject to a regulatory framework comparable to that
imposed by the Commodity Exchange Act (Act) and the regulations
thereunder.
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\4\ The Commission previously reviewed petitions from two
Japanese self-regulatory organizations--the Tokyo Grain Exchange
(TGE) and the Tokyo Commodity Exchange (TOCOM). See 58 FR10953
(February 23, 1993) (TGE); 71 FR 6759 (February 9, 2006) (TOCOM).
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Based upon a review of the petition, supplementary materials filed
by TFX and the recommendation of the Commission's staff, the Commission
has concluded that the standards for relief set forth in Regulation
30.10 and, in particular, Appendix A thereof, have been met and that
compliance with applicable Japanese law and TFX regulations may be
substituted for compliance with those sections of the Act and
regulations thereunder more particularly set forth herein.
By this Order, the Commission hereby exempts, subject to specified
conditions, those firms identified to the Commission by TFX as eligible
for the relief granted herein from:
--Registration with the Commission for firms and for firm
representatives;
--The requirement in Commission Regulation 30.6(a) and (d), 17 CFR
Sec. 30.6(a) and (d), that firms provide customers located in the
U.S. with the risk disclosure statements in Commission Regulation
1.55(b), 17 CFR 1.55(b), and Commission Regulation 33.7, 17 CFR
33.7, or as otherwise approved under Commission Regulation 1.55(c),
17 CFR 1.55(c);
--The separate account requirement contained in Commission
Regulation 30.7, 17 CFR 30.7;
--Those sections of Part 1 of the Commission's financial regulations
that apply to foreign futures and options sold in the U.S. as set
forth in Part 30; and
--Those sections of Part 1 of the Commission's regulations relating
to books and records which apply to transactions subject to Part 30,
based upon substituted compliance by such persons with the applicable
statutes and regulations in effect in Japan.
This determination to permit substituted compliance is based on,
among other things, the Commission's finding that the regulatory
framework governing persons in Japan who would be exempted hereunder
provides:
(1) A system of qualification or authorization of firms who deal
in transactions subject to regulation under Part 30 that includes,
for example, criteria and procedures for granting, monitoring,
suspending and revoking licenses, and provisions for requiring and
obtaining access to information about authorized firms and persons
who act on behalf of such firms;
(2) Financial requirements for firms including, without
limitation, a requirement for a minimum level of working capital and
daily mark-to-market settlement and/or accounting procedures;
(3) A system for the protection of customer assets that is
designed to preclude the use of customer assets to satisfy house
obligations and requires separate accounting for such assets;
(4) Recordkeeping and reporting requirements pertaining to
financial and trade information;
(5) Sales practice standards for authorized firms and persons
acting on their behalf that include, for example, required
disclosures to prospective customers and prohibitions on improper
trading advice;
(6) Procedures to audit for compliance with, and to redress
violations of, the customer protection and sales practice
requirements referred to above, including, without limitation, an
affirmative surveillance program designed to detect trading
activities that take advantage of customers, and the existence of
broad powers of investigation relating to sales practice abuses; and
(7) Mechanisms for sharing of information between the
Commission, TFX, and the Japanese regulatory authorities on an ``as
needed'' basis including, without limitation, confirmation data,
data necessary to trace funds related to trading futures products
subject to regulation in Japan, position data, and data on firms'
standing to do business and financial condition.
Commission staff have concluded, upon review of the petition of TFX
and accompanying exhibits, that Japan's regulation of financial futures
and options exchanges is comparable to that of the U.S. in the areas
specified in Appendix A of Part 30, as described above.
This Order does not provide an exemption from any provision of the
Act or regulations thereunder not specified herein, such as the
antifraud provision in Regulation 30.9. Moreover, the relief granted is
limited to brokerage activities undertaken on behalf of customers
located in the U.S. with respect to transactions on or subject to the
regulations of TFX for products that customers located in the U.S. may
trade.\5\ The relief does not extend to regulations relating to
trading, directly or indirectly, on U.S. exchanges. For example, a firm
trading in U.S. markets for its own account would be subject to the
Commission's large trader reporting requirements.\6\ Similarly, if such
a firm were carrying positions on a U.S. exchange on behalf of foreign
clients and submitted such transactions for clearing on an omnibus
basis through a firm registered as a futures commission merchant under
the Act, it would be subject to the reporting requirements applicable
to foreign brokers.\7\ The relief herein is inapplicable where the firm
solicits or accepts orders from customers located in the U.S. for
transactions on U.S. markets. In that case, the firm must comply with
all applicable U.S. laws and regulations, including the requirement to
register in the appropriate capacity.
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\5\ See, e.g., Sections 2(a)(1)(C) and (D) of the Act.
\6\ See, e.g., 17 CFR Part 18 (2007).
\7\ See, e.g., 17 CFR Parts 17 and 21 (2007).
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The eligibility of any firm to seek relief under this exemptive
Order is subject to the following conditions:
(1) The regulatory or self-regulatory organization responsible for
monitoring the compliance of such firms with the regulatory
requirements described in the
[[Page 60627]]
Regulation 30.10 petition must represent in writing to the CFTC \8\
that:
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\8\ As described below, these representations are to be filed
with NFA.
(a) Each firm for which relief is sought is registered, licensed
or authorized, as appropriate, and is otherwise in good standing
under the standards in place in Japan; such firm is engaged in
business with customers in Japan as well as in the U.S.; and such
firm and its principals and employees who engage in activities
subject to Part 30 would not be statutorily disqualified from
registration under Section 8a(2) of the Act, 7 U.S.C. 12a(2);
(b) It will monitor firms to which relief is granted for
compliance with the regulatory requirements for which substituted
compliance is accepted and will promptly notify the Commission or
NFA of any change in status of a firm that would affect its
continued eligibility for the exemption granted hereunder, including
the termination of its activities in the U.S.;
(c) All transactions with respect to customers resident in the
U.S. will be made on or subject to the regulations of TFX and the
Commission will receive prompt notice of all material changes to the
relevant laws in Japan, any regulations promulgated thereunder and
TFX regulations;
(d) Customers located in the U.S. will be provided no less
stringent regulatory protection than Japanese customers under all
relevant provisions of Japanese law; and
(e) It will cooperate with the Commission with respect to any
inquiries concerning any activity subject to regulation under the
Part 30 Regulations, including sharing the information specified in
Appendix A on an ``as needed'' basis and will use its best efforts
to notify the Commission if it becomes aware of any information that
in its judgment affects the financial or operational viability of a
member firm doing business in the U.S. under the exemption granted
by this Order.
(2) Each firm seeking relief hereunder must represent in writing
that it:
(a) Is located outside the U.S., its territories and possessions
and, where applicable, has subsidiaries or affiliates domiciled in
the U.S. with a related business (e.g., banks and broker/dealer
affiliates) along with a brief description of each subsidiary's or
affiliate's identity and principal business in the U.S.;
(b) Consents to jurisdiction in the U.S. under the Act by filing
a valid and binding appointment of an agent in the U.S. for service
of process in accordance with the requirements set forth in
Regulation 30.5;
(c) Agrees to provide access to its books and records related to
transactions under Part 30 required to be maintained under the
applicable statutes and regulations in effect in Japan upon the
request of any representative of the Commission or U.S. Department
of Justice at the place in the U.S. designated by such
representative, within 72 hours, or such lesser period of time as
specified by that representative as may be reasonable under the
circumstances after notice of the request;
(d) Has no principal or employee who solicits or accepts orders
from customers located in the U.S. who would be disqualified under
Section 8a(2) of the Act, 7 U.S.C. 12a(2), from doing business in
the U.S.;
(e) Consents to participate in any NFA arbitration program that
offers a procedure for resolving customer disputes on the papers
where such disputes involve representations or activities with
respect to transactions under Part 30, and consents to notify
customers located in the U.S. of the availability of such a program;
(f) Undertakes to comply with the applicable provisions of
Japanese laws and TFX regulations that form the basis upon which
this exemption from certain provisions of the Act and Regulations
thereunder is granted.
As set forth in the Commission's September 11, 1997 Order
delegating to NFA certain responsibilities, the written representations
set forth in paragraph (2) shall be filed with NFA.\9\ Each firm
seeking relief hereunder has an ongoing obligation to notify NFA should
there be a material change to any of the representations required in
the firm's application for relief.
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\9\ 62 FR 47792, 47793 (September 11, 1997). Among other duties,
the Commission authorized NFA to receive requests for confirmation
of Regulation 30.10 relief on behalf of particular firms, to verify
such firms' fitness and compliance with the conditions of the
appropriate Regulation 30.10 Order and to grant exemptive relief
from registration to qualifying firms.
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The Commission also confirms that TFX members that receive
confirmation of relief set forth herein may engage in limited marketing
conduct with respect to certain qualified customers located in the U.S.
from a non-permanent location in the U.S., subject to the terms and
conditions set forth in prior Commission Orders.\10\ The Commission
notes that any firm and their employees or other representatives which
engage in marketing conduct pursuant to this relief are deemed to have
consented to the Commission's jurisdiction over such marketing
activities by their filing of a valid and binding appointment of an
agent in the U.S. for service of process.
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\10\ See 57 FR 49644 (November 3, 1992) (permitted limited
marketing of foreign futures and foreign option products to certain
governmental and institutional customers located in the U.S.); 59 FR
42156 (August 17, 1994) (expanding the relief set forth in the 1992
release to conduct directed towards ``accredited investors'', as
defined in the Securities and Exchange Commission's Regulation D
issued pursuant to the Securities Act of 1933).
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This Order will become effective as to any designated TFX firm the
later of the date of publication of the Order in the Federal Register
or the filing of the consents set forth in paragraphs (2)(a)-(f). Upon
filing of the notice required under paragraph (1)(b) as to any such
firm, the relief granted by this Order may be suspended immediately as
to that firm. That suspension will remain in effect pending further
notice by the Commission, or the Commission's designee, to the firm and
TFX.
This Order is issued pursuant to Regulation 30.10 based on the
representations made and supporting material provided to the Commission
and the recommendation of the staff, and is made effective as to any
firm granted relief hereunder based upon the filings and
representations of such firms required hereunder. Any material changes
or omissions in the facts and circumstances pursuant to which this
Order is granted might require the Commission to reconsider its finding
that the standards for relief set forth in Regulation 30.10 and, in
particular, Appendix A, have been met. Further, if experience
demonstrates that the continued effectiveness of this Order in general,
or with respect to a particular firm, 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 firm,
or otherwise restrict the exemptive relief granted in this Order, as
appropriate, on its own motion.
The Commission will continue to monitor the implementation of its
program to exempt firms located in jurisdictions generally deemed to
have a comparable regulatory program from the application of certain of
the foreign futures and option regulations and will make necessary
adjustments if appropriate.
Dated: October 8, 2008.
By the Commission.
David Stawick,
Secretary of the Commission.
[FR Doc. E8-24315 Filed 10-10-08; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: October 14, 2008