e9-1153

[Federal Register: January 21, 2009 (Volume 74, Number 12)]

[Notices]

[Page 3570-3572]

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

[DOCID:fr21ja09-57]

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COMMODITY FUTURES TRADING COMMISSION

Notice of Additional Conditions on the No-Action Relief When

Foreign Boards of Trade That Have Received Staff No-Action Relief To

Permit Direct Access to Their Automated Trading Systems From Locations

in the United States List for Trading From the U.S. Linked Futures and

Option Contracts and a Revision of Commission Policy Regarding the

Listing of Certain New Option Contracts

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is

providing notice requiring foreign boards of trade that may receive

Commission staff no-action relief permitting them to make their

automated trading systems directly available from the U.S. to comply

with additional conditions for the no-action relief to remain effective

if they list for trading from the U.S. contracts that are linked to

contracts traded on certain U.S.-based entities. Separately, the

Commission is providing notice that it is revising its policy regarding

the notification procedures applicable to listing an option on a

futures contract that already is (or can be) listed for trading from

the U.S.

DATES: Effective Date: The conditions and notification procedures are

effective immediately.

FOR FURTHER INFORMATION CONTACT: Duane C. Andresen, Senior Special

Counsel, Division of Market Oversight, Commodity Futures Trading

Commission, Three Lafayette Center, 1155 21st Street, NW., Washington,

DC 20581. Telephone: 202-418-5492. E-mail: [email protected]

SUPPLEMENTARY INFORMATION:

I. Background

Since 1996,\1\ Commission staff has issued no-action letters \2\ to

foreign boards of trade (FBOT) stating that, subject to compliance with

certain conditions, the staff will not recommend that the Commission

take enforcement action against the FBOT or its members if the FBOT

permits its members or participants in the United States to have direct

access \3\ to its electronic trading system without seeking designation

under the Commodity Exchange Act (CEA or Act) as a contract market

(DCM) or registration as a derivatives transaction execution facility

(DTEF).\4\ On June 2, 1999, the Commission issued an order which, among

other things, withdrew proposed rules that would have governed

automated access to FBOTs from the U.S. and instructed the Commission

staff to begin immediately processing no-action requests from FBOTs

seeking to place trading terminals in the U.S., and to issue responses

where appropriate, pursuant to the general guidelines included in the

Eurex (DTB) no-action process, or other guidelines established by the

Commission.\5\ On October 22, 2006, the Commission issued a Statement

of Policy that affirmed the use of the no-action process to permit

FBOTs to provide direct access to their electronic trading systems to

U.S. members or authorized participants.\6\

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\1\ In February 1996, Commission staff issued no-action relief

to Deutsche Terminborse (DTB), an automated international futures

and options exchange headquartered in Frankfurt, Germany, that

permitted DTB, subject to certain terms and conditions, to place

computer terminals in the U.S. offices of its members for principal

trading. See CFTC Interpretative Letter No. 96-28 (1996-1997

Transfer Binder) Comm. Fut. L. Rep. (CCH) para. 26,669 (Feb. 29.

1996). In June 1998, DTB merged with the Swiss Options and Financial

Futures Exchange and DTB changed its name to Eurex Deutschland.

\2\ See Commission Rule 140.99, 17 CFR 140.99 (2006), which

defines the term ``no-action letter'' as a written statement issued

by the staff of a Division of the Commission or of the Office of

General Counsel that it will not recommend enforcement action to the

Commission for failure to comply with a specific provision of the

Act or of a Commission rule, regulation or order if a proposed

transaction is completed or a proposed activity is conducted by the

beneficiary.

\3\ Direct access means that the member in the U.S. may enter an

order directly into the trade matching engine to be matched

according to the trade matching algorithm. Direct access is

different from an automated order routing system (AORS) in that an

order transmitted via AORS is intermediated in that it is entered

into the trade matching engine by or through the intermediary, i.e.,

the intermediary, not the member in the U.S., has direct access.

\4\ The no-action letters issued to FBOTs, formerly referred to

as ``foreign terminal no-action letters,'' are currently referred to

as ``direct access no-action letters'' and are published on the

Commission's Web site at: http://www.cftc.gov/dea/

deaforeignterminaltable.htm. Hereinafter the letters are simply

referred to as ``no-action letters.'' Reference to DTEFs in the no-

action letters was added following the establishment of that

registration category by the Commodity Futures Modernization Act of

2000.

\5\ Access to Automated Boards of Trade, 64 FR 32829 (June 18,

1999).

\6\ Boards of Trade Located Outside of the United States and No-

Action Relief from the Requirement to Become a Designated Contract

Market or Derivatives Transaction Execution Facility, 71 FR 64443

(November 2, 2006).

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Commission staff has issued 21 no-action letters since the DTB

letter, all of which grant the no-action relief requested subject to a

series of terms and conditions. The terms and conditions, among other

things, assure the Division (1) That the FBOT continues to be a bona

fide FBOT subject to effective regulation in its home country; (2) that

direct access is restricted to authorized entities; (3) that the

Division receives notice of any material changes in the information

provided to it in support of the no-action request including, without

limitation, any modification of the FBOT's membership criteria, the

location of its management, personnel or operations, the basic

structure, nature, or operation of the trading system, or the

regulatory or self-regulatory structure applicable to its members; and

(4) that satisfactory information-sharing arrangements between the

Commission, the FBOT, and the FBOT's relevant regulatory authorities

will remain in effect.

With respect to the listing of new contracts, initially FBOTs that

received no-action relief that wished to list additional futures and

option contracts for trading by direct access from the U.S. were

required to request in writing and receive supplemental no-action

relief from Commission staff prior to listing the new contracts. On

June 30, 2000, the Commission issued a Statement of Policy that

permitted FBOTs with no-action relief to list additional futures and

option contracts for trading from the U.S. merely by filing with

Commission staff no later

[[Page 3571]]

than the business day preceding the initial listing of the contracts:

(1) A copy of the initial terms and conditions of the additional

contracts and (2) a certification that it is in compliance with the

terms and conditions of its no-action letter and that the additional

futures and option contracts would be traded in accordance with such

terms and conditions.\7\ On April 14, 2006, in light of its experience

since the issuance of the Statement of Policy and in recognition of the

fact that the listing of new products may raise previously unidentified

regulatory issues, the Commission issued a revision to the new contract

listing policy (Notice of Revision).\8\ The Commission determined to

establish a ten business day advance notification requirement in order

to give Commission staff the opportunity to review the terms and

conditions of proposed additional contracts to address any regulatory

issues raised prior to the contract being made available for trading by

direct access from the U.S.

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\7\ See Statement of Policy of the Commodity Futures Trading

Commission 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 U.S., 65 FR 41641 (July

6, 2000). The Statement of Policy did not apply to broad-based stock

index futures and option contracts that are now covered by Section

2(a)(1)(C) of the Commodity Exchange Act. Foreign boards of trade

were (and presently are) required to seek and receive written

supplemental no-action relief from Commission staff prior to

offering or selling such contracts.

\8\ See Notice of Revision 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 Provide Direct

Access to Their Automated Trading Systems from Locations in the

United States, 71 FR 19877 (April 18, 2006). The notice of revision

did not alter a FBOT's obligation to seek and receive written

supplemental no-action relief from Commission staff prior to

offering or selling broad-based stock index futures and option

contracts. The FBOT is still required to file with Commission staff

a copy of the initial terms and conditions of the additional

contracts and a certification that it is in compliance with the

terms and conditions of its no-action letter and that the additional

futures and option contracts would be traded in accordance with such

terms and conditions.

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II. Additional Conditions on the No-Action Relief

On January 17, 2006, ICE Futures Europe \9\ notified the Division

pursuant to the Statement of Policy of its intent to list for direct

access from the U.S. a West Texas Intermediate (WTI) Light Sweet Crude

Oil Futures Contract that cash-settled on the price of a physically-

settled Light Sweet Crude Oil Futures contract traded on the New York

Mercantile Exchange (NYMEX), a U.S. DCM. On April 12, 2006, ICE Futures

Europe notified the Division of its intent to list for direct access

from the U.S. the ICE Futures New York Harbour Heating Oil Futures

Contract and the ICE Futures New York Harbour Unleaded Gasoline

Blendstock (RBOB) Futures Contract, each of which cash-settled on the

price of physically-settled contracts traded on the NYMEX. On April 2,

2007, ICE Futures Europe notified the Division of its intent to launch

the ICE Futures WTI Light Sweet Crude Oil Options Contract. On December

19, 2007 the Dubai Mercantile Exchange (DME) \10\ notified the Division

pursuant to the Notice of Revision of its intent to list for trading

for direct access from the U.S. on DME Direct the DME WTI Crude Oil

Financial Futures Contract which cash-settled based on the NYMEX Light,

Sweet Crude Oil futures settlement price on the penultimate trading

day.

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\9\ On November 12, 1999, the Division of Trading and Markets

granted to the International Petroleum Exchange of London (IPE) (now

ICE Futures Europe) no-action relief to make its electronic trading

and order matching system, Energy Trading System II (ETS), available

to IPE members in the United States. CFTC Staff Letter No. 99-69

(November 12, 1999). The November 12, 1999 IPE no-action letter was

amended by the Division of Market Oversight (Division) four times

between July 26, 2002 and April 14, 2003 as trading of the contracts

was transitioned from the ETS to the ICE Platform operated by

IntercontinentalExchange, Inc., in Atlanta, Georgia and trading

hours were extended.

\10\ On May 24, 2007, the Division granted to the DME no-action

relief to make its electronic trading and order matching system,

known as DME Direct, available to DME members in the U.S. CFTC Staff

Letter No. 07-06 (May 24, 2007).

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The listing for trading by direct access from the U.S. by ICE

Futures Europe and DME of contracts which settle on the price of

contracts traded on a CFTC-regulated exchange raises very serious

concerns for the Commission. Such linkages can create virtually a

single market for the subject contracts consisting of both the

underlying contract at the CFTC-regulated exchange and the cash-settled

``look-alike'' contract traded on the FBOT. In the absence of certain

preventive measures at the FBOT, this contract linkage could compromise

the Commission's ability to carry out its market surveillance

responsibilities, as well as the integrity of prices established on

CFTC-regulated exchanges.

In response to these concerns, the Division amended the no-action

relief granted to ICE Futures Europe and DME, in letters dated June 17,

2008 and July 3, 2008 respectively,\11\ by adding certain conditions

\12\ with respect to any ICE Futures Europe or DME contract which

settles against any price, including the daily or final settlement

price, of (1) a contract listed for trading on a DCM or DTEF, or (2) a

contract listed for trading on an exempt commercial market (ECM) that

has been determined to be a significant price discovery contract \13\

(collectively, linked contracts).\14\ The purpose of the conditions is

to ensure that ICE Futures Europe and DME apply to any linked contract

comparable principles or requirements regarding the daily publication

of trading information and the imposition of position limits or

accountability levels for speculators as apply to the DCM, DTEF or ECM

contract against which the linked contract settles. The conditions

would also ensure that ICE Futures Europe and DME provide the

Commission with information regarding the extent of speculative and

nonspeculative trading in linked contracts that is comparable to the

information provided to the Commission by DCMs, DTEFs or ECMs for

publication of the Commitments of Traders Reports.

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\11\ CFTC Staff Letter No. 08-09 (June 17, 2008); CFTC Staff

Letter No. 08-10 (July 3, 2008).

\12\ The no-action letters include a provision pursuant to which

the Division may further condition the relief granted therein. See,

e.g., CFTC Staff Letter No. 99-69 (November 12, 1999), issued to the

International Petroleum Exchange, Inc., which states as follows:

``As with all no-action letters, the Division retains the authority

to condition further, modify, suspend, terminate, or otherwise

restrict the terms of the no-action relief provided herein, in its

discretion.''

\13\ In 2008 Congress authorized the Commission to determine, in

its discretion, that a contract performs a significant price

discovery function under criteria established in Section 2(h)(7) of

the CEA, including price linkage, arbitrage, material price

reference, and material liquidity. When the Commission by order

makes such a determination, the ECM on which the significant price

discovery contract is traded must assume, with respect to that

contract, all the responsibilities and obligations of a registered

entity under the CEA and Commission regulations, and must comply

with nine core principles established by Section 2(h)(7)(C). See

CFTC Reauthorization Act of 2008, Pub. L. 110-246 at sec. 12304. See

also Notice of Proposed Rulemaking: ``Significant Price Discovery

Contracts on Exempt Commercial Markets,'' 73 FR 75888 (December 12,

2008).

\14\ ICE Futures Europe has listed for trading by direct access

from the U.S. the four linked contracts previously identified. DME

has not listed the one linked contract notified to the Division.

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Accordingly, the ICE Futures Europe and DME no-action letters were

amended with respect to the linked contracts to include the following

conditions, to be satisfied within 120 days of the date of the amended

no-action letter:

(1) ICE Futures Europe (DME) will impose on linked contracts, by

rule or otherwise, position limits or position accountability levels

(including related hedge exemption provisions) that are comparable to

the existing position limits or position accountability levels

(including related hedge exemption provisions) as adopted by: (i) The

DCM, DTEF or ECM for the contract against which the linked contract

settles or (ii) the DCM, DTEF or ECM for a

[[Page 3572]]

financially-settled equivalent of such contract;

(2) ICE Futures Europe (DME) will inform the Commission in a

quarterly report of any trader that had positions in a linked contract

above the applicable ICE Futures Europe (DME) position limit, whether a

hedge exemption was granted, and if not, whether a disciplinary action

was taken;

(3) ICE Futures Europe (DME) will publish daily trading information

(e.g., settlement prices, volume, open interest, and opening and

closing ranges) that is comparable to the daily trading information

published by the DCM, DTEF or ECM for the contract against which the

ICE Futures Europe (DME) contract settles; and

(4) ICE Futures Europe (DME) will provide to the CFTC (through the

Financial Services Authority (FSA) in the case of ICE Futures Europe),

a daily report of large trader positions in each linked contract for

all contract months in a form and manner that (a) can be fully

integrated into the CFTC's market surveillance systems, including full

identification of each position's beneficial owner comparable to the

reporting that is provided by the DCM, DTEF, or ECM; and (b) can,

(subject to any Memorandum of Understanding between the CFTC and FSA in

the case of ICE Futures Europe), be fully integrated into the CFTC's

Commitments of Traders Report, including appropriate categorization of

traders and their positions.

The Commission is hereby providing notice that these conditions

henceforth will be imposed on the no-action relief of any FBOT that

lists for trading by direct access from the U.S. any futures or option

contract which settles against any price, including the daily or final

settlement price, of (1) a contract listed for trading on a DCM or

DTEF, or (2) a contract listed for trading on an ECM that has been

determined to be a significant price discovery contract.

III. Listing Option Contracts

Both the Statement of Policy and the Notice of Revision required

separate notification for futures and option contracts in order to

permit the contracts to be listed for direct access from the U.S. Thus,

even if the futures contract is currently listed, the FBOT must

separately notify the Division, pursuant to the ten business day

advance notification requirement of the Notice of Revision, of its

desire to list the option on that futures contract. In contrast, when

the Commission's Office of General Counsel (OGC) issues a no-action

letter to allow the offer or sale of a FBOT-traded broad-based security

index futures contract to persons located in the U.S., the option on

that particular futures contract may also be offered or sold in the

U.S. without any further regulatory action from OGC. This leads to an

unusual situation when the FBOT, pursuant to Appendix D of Part 30,\15\

requests permission to list a futures contract for trading by direct

access from the U.S. in the same no-action request letter in which the

FBOT requests the OGC no-action position. When OGC issues the no-action

letter, both the futures contract and the option on that contract may

be offered or sold in the U.S. and, with the concurrence of the

Division, the futures contract (but not the option on that futures

contract) may be listed for direct access from the U.S. pursuant to the

terms and conditions of the direct access no-action relief. The FBOT

must then separately request permission from the Division to make the

option contract available by direct access.

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\15\ 17 CFR 30, App. D. (2003), 68 FR 33623.

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In order to eliminate this inconsistency and to streamline the

procedures for listing option contracts for direct access from the

U.S., the Commission is hereby providing notice that the provisions in

the Notice of Revision, insofar as they apply to options on futures

contracts that are, or could be,\16\ listed for trading by direct

access from the U.S. pursuant to the conditions of the FBOT's no-action

relief, are revised as follows:

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\16\ This procedure also applies where the FBOT has permission

to list the futures contract for trading by direct access but has

not yet done so at the time it also decides to list the option

contract.

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(1) If the option is on a broad-based security index futures

contract which may be offered or sold in the U.S. and listed for direct

access from the U.S. pursuant to a no-action letter issued by OGC, the

option contract may be listed for direct access without further action

by either the requesting FBOT or the Division.

(2) If the option is on a futures contract that is neither a linked

contract nor a broad-based security index futures contract which may be

offered or sold in the U.S., the option contract may be listed for

direct access merely by filing with Commission staff no later than the

business day preceding the initial listing of the contract: (i) a copy

of the initial terms and conditions of the additional contract and (ii)

a certification that the FBOT is in compliance with the terms and

conditions of its no-action letter and that the additional option

contract would be traded in accordance with such terms and conditions.

(3) If the option is on a futures contract that is a linked

contract, the option contract may be listed for direct access merely by

filing with Commission staff no later than the business day preceding

the initial listing of the contract: (i) a copy of the initial terms

and conditions of the additional contract and (ii) a certification that

the FBOT is in compliance with the terms and conditions of its no-

action letter, including the conditions specifically applicable to

linked contracts, and that the additional option contract would be

traded in accordance with such terms and conditions.

Issued in Washington, DC on January 14, 2009, by the Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. E9-1153 Filed 1-16-09; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: January 22, 2009