e8-24315

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