2010-29023

FR Doc 2010-29023[Federal Register: November 19, 2010 (Volume 75, Number 223)]

[Proposed Rules]

[Page 70973-70998]

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

[DOCID:fr19no10-19]

[[Page 70973]]

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Part II

Commodity Futures Trading Corporation

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17 CFR Part 48

Registration of Foreign Boards of Trade; Proposed Rule

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 48

RIN 3038-AD19

Registration of Foreign Boards of Trade

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

is proposing rules to implement new statutory provisions enacted by

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection

Act. These proposed rules establish a registration requirement that

applies to foreign boards of trade (FBOT) that wish to provide their

identified members or other participants located in the United States

with direct access to their electronic trading and order matching

systems.

DATES: Comments must be received on or before January 18, 2011. The

Commission is not inclined to grant extensions of this comment period.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD19,

by any of the following methods:

Agency Web site, via its Comments Online process: http://

comments.cftc.gov. Follow the instructions for submitting comments

through the Web site.

Mail: David A. Stawick, Secretary of the Commission,

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

Street, NW., Washington, DC 20581.

Hand Delivery/Courier: same as mail above.

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

All comments must be submitted in English, or if not, accompanied

by an English translation. Comments will be posted as received to

http://www.cftc.gov. You should submit only information that you wish

to make available publicly. If you wish the Commission to consider

information that is exempt from disclosure under the Freedom of

Information Act, a petition for confidential treatment of the exempt

information may be submitted according to the established procedures in

CFTC Regulation 145.9.\1\

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\1\ 17 CFR 145.9.

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The Commission reserves the right, but shall have no obligation, to

review, pre-screen, filter, redact, refuse or remove any or all of your

submission from http://www.cftc.gov that it may deem to be

inappropriate for publication, such as obscene language. All

submissions that have been redacted or removed that contain comments on

the merits of the rulemaking will be retained in the public comment

file and will be considered as required under the Administrative

Procedure Act and other applicable laws, and may be accessible under

the Freedom of Information Act.

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

Counsel, (202) 418-5492, [email protected], or David Steinberg,

Special Counsel, (202) 418-5102, [email protected], Division of

Market Oversight, Commodity Futures Trading Commission, Three Lafayette

Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

Reform and Consumer Protection Act (the Dodd-Frank Act).\2\ Title VII

of the Dodd-Frank Act \3\ amended the Commodity Exchange Act (CEA or

the Act) \4\ to establish a comprehensive new regulatory framework for

swaps and security-based swaps. The legislation was enacted to reduce

risk, increase transparency, and promote market integrity within the

financial system by, among other things: (1) Providing for the

registration and comprehensive regulation of swap dealers and major

swap participants; (2) imposing clearing and trade execution

requirements on standardized derivative products; (3) creating robust

recordkeeping and real-time reporting regimes; and (4) enhancing the

Commission's rulemaking and enforcement authorities with respect to,

among others, all registered entities and intermediaries subject to the

Commission's oversight.

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\2\ See Dodd-Frank Wall Street Reform and Consumer Protection

Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

Dodd-Frank Act may be accessed at http://www.cftc.gov./

LawRegulation/OTCDERIVATIVES/index.htm.

\3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may

be cited as the ``Wall Street Transparency and Accountability Act of

2010.''

\4\ 7 U.S.C. 1 et seq.

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Section 738 of the Dodd-Frank Act amends Section 4(b) of the CEA to

provide that the Commission may adopt rules and regulations requiring

registration with the Commission for an FBOT that provides the members

of the FBOT or other participants located in the United States with

direct access to the electronic trading and order matching system of

the FBOT, including rules and regulations prescribing procedures and

requirements applicable to the registration of such FBOTs. The

Commission has determined to promulgate rules to implement these

provisions by July 15, 2011.\5\

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\5\ See Section 738 of the Dodd-Frank Act.

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Accordingly, the Commission is proposing to adopt a new part 48 \6\

to its regulations to establish a registration requirement and related

registration procedures and conditions that apply to FBOTs that wish to

provide their members or other participants located in the United

States with direct access to their electronic trading and order

matching systems. The Commission requests comment on all aspects of the

proposed rules, as well as comment on the specific provisions and

issues highlighted in the discussion below.

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\6\ Commission regulations referred to herein are found at 17

CFR Ch. 1.

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II. Relief Granted to Foreign Boards of Trade

Since 1996, FBOT requests to provide direct access to their

electronic trading and order matching systems (trading systems) from

within the U.S. have been addressed by Commission staff via the no-

action process set forth in Commission regulation 140.99.\7\

Specifically, an FBOT wishing to provide its U.S.-located participants

with direct access to the FBOT's trading system traditionally has

submitted a request for a no-action letter to the Division of Market

Oversight (DMO). The FBOT's no-action request must be accompanied by

representations and supporting documentation from the FBOT regarding,

among other things, its organization, presence in the U.S.,

participants, the products it wishes to list for direct access, its

trading system and the regulatory regime and information-sharing

arrangements to which the FBOT is subject. Staff then reviews the

request and related information and documentation and, where

appropriate, issues a ``direct access'' (formerly known as a ``foreign

terminal'') no-action relief letter. When reviewing no-action requests,

staff looks for a home regulatory regime that provides oversight over

the FBOT in a manner that is comparable to the CFTC's oversight of

DCMs. Specifically, does the FBOT's regulatory authority

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support and enforce ``substantially equivalent regulatory objectives''

in its oversight of the FBOT?

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\7\ See, e.g., CFTC Letter No. 96-28 (February 29, 1996).

Commission regulation 140.99 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 the 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.

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In the no-action letter, DMO staff represents that, provided the

FBOT meets the conditions set out in the letter, DMO will not recommend

that the Commission institute enforcement action against the FBOT for

failure to register as a designated contract market (DCM) or

derivatives transaction execution facility (DTEF) if the FBOT provides

direct access to its order entry and trade matching system to FBOT

members and other participants located in the U.S. The scope of the

staff no-action relief has been restricted to providing relief from (1)

the requirement that the FBOT obtain DCM or DTEF registration pursuant

to Sections 5 and 5a of the CEA and (2) regulatory requirements related

to the trading or offering of contracts on a DCM and DTEF if the

contracts identified in the no-action letter (foreign futures or option

contracts) are made available in the U.S. for trading in the manner set

forth in the letter.

The no-action relief also has been limited historically to FBOTs

that provide direct access to the FBOTs' members and other participants

that: (1) Trade in the U.S. for their proprietary accounts; (2) are

registered with the Commission as futures commission merchants (FCM);

or (3) are registered with the Commission as commodity pool operators

(CPO) or are exempt from such registration and that are submitting

orders for execution on behalf of U.S. pools they operate or commodity

trading advisors (CTA) or are exempt from such registration and that

are submitting orders for execution on behalf of accounts for which

they have discretionary authority. With respect to such CPOs or CTAs,

an FCM or a firm exempt from registration as an FCM pursuant to

Commission Rule 30.10 (Rule 30.10 Firm) \8\ must act as a clearing firm

and guarantees such trades. The no-action relief typically has been

subject to numerous conditions designed to keep staff informed

regarding the FBOT's status and activities from within the U.S.,

additional contracts to be made available, and significant changes in

the information provided to the Commission in support of the no-action

request. Significant changes in information include changes in the

membership criteria, the location of the management, personnel or

operations (particularly changes that may suggest an increased nexus

between the FBOT's activities and the U.S.); the basic structure,

nature, or operation of the trading system or its clearing

organization; the regulatory or self-regulatory regime the FBOT is

subject to; and any change in the authorization, licensure or

registration of the FBOT.

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\8\ A Rule 30.10 order permits firms that are members of a self-

regulatory organization and subject to regulation by the foreign

regulator to conduct business from locations outside of the U.S. for

U.S. persons on non-U.S. boards of trade without registering under

the Act, based upon the person's substituted compliance with a

foreign regulatory structure found comparable to that administered

by the Commission under the CEA.

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In 2006, following a series of market events and Commission

deliberations, the Commission endorsed the continued use of the no-

action process as a mechanism for facilitating direct access to an

FBOT's trading system. On January 17, 2006, ICE Futures Europe, a U.K.

recognized investment exchange that provided direct access to its U.S.

members pursuant to a no-action letter,\9\ notified the Commission that

it would list a futures contract on West Texas Intermediate (WTI) light

sweet crude oil whose settlement price would be linked to contracts

traded on the New York Mercantile Exchange (NYMEX).\10\ ICE Futures

Europe's notification of the proposed contract linked to a U.S.

domestic contract prompted the Commission to undertake an evaluation of

the use of the no-action process to permit direct access, including a

re-examination of certain issues with respect to the Commission's

statutory obligations to maintain the integrity of U.S. markets and to

protect U.S. customers. Accordingly, on May 3, 2006, the Commission

directed its staff to initiate a formal process to define what

constitutes a ``board of trade, exchange, or market located outside the

United States, its territories or possessions'' as that phrase is used

in section 4(a) of the CEA and, in furtherance of that process,

scheduled a public hearing.\11\ The Commission also issued a related

Request for Public Comment.\12\ On October 27, 2006, following

extensive debate, a review of comments submitted pursuant to the

Commission's request for public comment and the Commission Hearing,\13\

the Commission issued a Policy Statement in which it endorsed the no-

action process for FBOTs that want to provide direct access to their

trading systems to U.S.-based participants.\14\

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\9\ On November 12, 1999, the Commission's Division of Trading

and Markets (the predecessor to the CFTC's Division of Market

Oversight) granted no-action relief to the International Petroleum

Exchange of London (now ICE Futures Europe), permitting it to make

its electronic trading and order matching system, known as Energy

Trading System II, available to its members in the United States.

CFTC Letter No. 99-69 (November 12, 1999).

\10\ On April 12, 2006, ICE Futures Europe notified the Division

of Market Oversight of its intent to launch 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 is cash-settled on the price of physically-settled contracts

traded on the NYMEX.

\11\ The hearing was conducted on June 27, 2006, at the

Commission's headquarters in Washington, DC.

\12\ 71 FR 34070 (June 13, 2006). The Commission requested

comment on the issues related to developing an objective standard

establishing a threshold that, if crossed by a foreign board of

trade that permits direct access, would indicate that the board of

trade is no longer outside the United States and, accordingly, may

be required to become registered under the CEA.

\13\ Comments submitted in response to the request for comment

and at the Commission's Hearing were generally supportive of the no-

action process, praising the process in general for its flexibility.

Many commenters suggested that the Commission should retain in large

measure the essential contours of the no-action process. A

transcript of the Commission's Hearing on what constitutes a board

of trade located outside the United States under the Commodity

Exchange Act section 4(a) (June 27, 2006), (``Hearing Tr.'') as well

as all comment letters (``CL''), are located in comment file 06--002

to 17 FR 34070 (June 13, 2006), available at http://www.cftc.gov/

foia/comment06/foi06-002_1.htm.

\14\ 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

64843 (Nov. 2, 2006) (Policy Statement). In the Policy Statement,

the Commission endorsed the no-action process for addressing FBOT

direct access relief requests: ``The Commission endorses the

continued use of the no-action process as an appropriate and

flexible mechanism that should be used prospectively to facilitate

direct access to the electronic trading system of a foreign board of

trade by its U.S. members or authorized participants.'' Id. at

64846.

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In order to address concerns raised by the listing by ICE Futures

Europe of the linked WTI contract for trading by direct access,

Commission staff, on June 17, 2008, amended ICE Futures Europe's no-

action relief letter by adding additional conditions. The additional

conditions included requirements relating to the reporting of large

trader positions, the publication of daily trading information in the

linked contracts, and the establishment of position limits or

accountability levels that are comparable to the position limits or

accountability levels for the counterpart linked contracts at

NYMEX.\15\

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\15\ CFTC Letter No. 08-09 (June 17, 2008). The Commission

subsequently announced in the Federal Register that these additional

conditions would apply to any FBOT that made available for trading

by direct access a linked contract. See 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. 74 FR 3570 (January 21, 2009).

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Commission staff subsequently reexamined the issues raised by

linked contracts and concluded that there were additional measures that

should be taken to further allay concerns with respect to effective

market surveillance and maintaining the integrity of the market.

Accordingly, on June 20, 2009, staff again amended ICE Futures Europe's

no-action relief by adding additional conditions with respect to linked

contracts. These conditions included requirements that ICE Futures

Europe provide CFTC staff trade execution and audit trail data for all

linked contracts; copies of, or hyperlinks to, all rules, rule

amendments, circulars and other notices published by the exchange; and

copies of all disciplinary notices involving the linked contracts. They

also provided for CFTC on-site visits to examine ICE Futures Europe's

ongoing compliance with its no-action relief and, in the event that the

CFTC directs that NYMEX take emergency action with respect to a linked

contract (e.g., to cease trading in the contract), ICE Futures Europe,

subject to information-sharing arrangements between the CFTC and the

United Kingdom's Financial Services Authority (FSA), is required to

promptly take similar action (e.g., cease trading in the contract) with

respect to the linked contract at ICE Futures Europe.\16\

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\16\ CFTC Letter No. 09-37 (August 20, 2009).

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Since 1996, Commission staff has issued 23 direct access no-action

relief letters to FBOTs, 20 of which remain active (one relief letter

was superseded and two were revoked when the FBOTs ceased

operations).\17\ While the no-action process has served a useful

purpose, given the clear authority provided by Congress to create a

registration program for FBOTs, the Commission concludes that it is in

the public interest to replace the staff-initiated no-action process

with a formal Commission registration provision.

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\17\ Currently, 14 of the FBOTs with active no-action relief

report volume originating from the U.S. via direct access.

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The no-action process is better suited for discrete, unique factual

circumstances and where regulations do not address the issue presented.

In circumstances where the same type of relief is granted on a regular

and recurring basis, as it has been with respect to permitting FBOTs to

provide direct access to their trading systems to specified members and

other participants that are located in the U.S., the Commission

concludes believes that it is no longer appropriate to handle such

matters through the no-action process. Instead, the process should

become more transparent and standardized through generally applicable

regulations. Among other things, a rulemaking would provide for a

uniform application process, enhance the visibility of the process to

both applicants and the public and assure fair and consistent treatment

to all applicants. Further, no-action relief letters are issued by the

staff and are not binding on the Commission and do not provide the same

legal certainty to the FBOT recipients that a Commission-issued order

would provide. The Commission believes that a formal registration

procedure would provide more legal certainty for registered FBOTs and

would be more consistent with the manner in which other countries

permit U.S. DCMs to provide direct access internationally. Accordingly,

for the reasons noted above and pursuant to the new authority of

amended CEA Section 4(b), new Part 48 of the Commission's regulations,

as proposed herein, would replace the existing policy of accepting and

reviewing requests for no-action relief to permit an FBOT to provide

for direct access to its trading system from within the U.S. with a

requirement that an FBOT seeking to provide such access must apply for

and be granted registration with the Commission.\18\

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\18\ The proposed rules would provide for a ``limited''

application process for FBOTs currently operating under existing no-

action relief. The limited application would have to be submitted

within 120 days of the effective date of the registration rules and

the FBOT could continue to operate pursuant to the no-action relief

during the 120 day period and until the Commission notifies the FBOT

that the application has been approved or denied. In the event that

the Commission denies an FBOT's application, it would expect staff

to simultaneously withdraw the FBOT's no-action relief.

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As a starting point for the proposed registration requirements, the

Commission considered the experience gained from the current no-action

review process. The proposed application submission requirements and

staff review standards for FBOT registration under the new regulations

generally are consistent with the application requirements and review

standards that have guided the Commission's staff in issuing the more

recent FBOT no-action relief letters. Under the proposed registration

requirements, for instance, the Commission would not evaluate FBOTs for

compliance with the core principles and/or regulatory requirements

applicable to DCMs. Rather, the Commission would look to the FBOT's

regulatory authority to determine that the home regulatory regime

provides oversight over the FBOT in a manner that is comparable to the

CFTC's oversight of DCMs. Specifically, the Commission would review the

application to determine if the FBOT's regulatory authority supports

and enforces substantially equivalent regulatory objectives, such as

prevention of market manipulation and customer protection, in its

oversight of the FBOT.

The Commission notes that the staff's no-action process has not

remained static since the first no-action relief letter was issued in

1996. Instead, staff has generally been expanding the scope and level

of its review of FBOTs to address activities not originally foreseen

when the first no-action letter was issued. Likewise, the number and

types of conditions imposed upon FBOTs seeking no-action relief have

gradually expanded over time.\19\ Those conditions have generally been

included in the proposed regulations, along with proposed conditions

intended to address increasing technological innovation, new types of

products, the impact on the market of different trading entities

listing substantially similar or even connected products, and the

requirements of the Dodd-Frank Act.

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\19\ The first no-action relief letter required that Deutsche

Terminborse comply with eight terms and conditions. CFTC Letter No.

96-28 (February 29, 1996). Subsequent letters generally have

required compliance with approximately 16 conditions, although the

number varies based on the manner in which the FBOT operates. More

recent additions to the conditions address, among other things,

restriction to certain types of members, the inclusion of CTAs and

CPOs as entities eligible for no-action relief, and a requirement

that the FBOT provide an annual certification from its regulatory

authority that the FBOT retains its authorization in good standing

as an FBOT in its home country. As previously discussed, the staff

has also added several conditions to the ICE Futures Europe no-

action letter in order to address the listing of linked contracts.

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III. The Proposed Rules

The proposed regulation is divided into 10 sections and an appendix

(Appendix), each proposed as described below.

A. Scope

The first section, 48.1, provides that part 48 applies to any FBOT

that is registered or is applying to become registered with the

Commission in order to provide its identified members or other

participants located in the U.S.\20\ with direct access to its

electronic trading and order matching system.

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\20\ For purposes of FBOT registration, the term ``United

States'' or ``U.S.'' includes the United States, its territories and

possessions.

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B. Definitions

Section 48.2 includes definitions applicable to FBOT registration.

For instance, section 48.2 defines an ``FBOT'' as any board of trade,

exchange or market located outside the U.S., its territories or

possessions, whether incorporated or unincorporated, where foreign

agreements, contracts or transactions are entered into. Section 48.2

also identifies certain criteria an FBOT would have to meet in order to

register to provide direct access, such as possessing the attributes of

an established, organized exchange; adhering to appropriate rules

prohibiting abusive trading practices; and enforcing appropriate rules

to maintain market and financial integrity. Another defined term,

further addressed below, is ``direct access,'' which is defined in the

Dodd-Frank Act to refer to ``an explicit grant of authority by a

foreign board of trade to an identified member or other participant

located in the United States to enter trades directly into the trade

matching system of the foreign board of trade.'' Section 48.2 also

includes definitions, for purposes of this part, of ``linked

contract,'' ``communications,'' ``material change,'' ``clearing

organization,'' ``existing no-action relief,'' ``swaps,'' ``affiliate''

and ``member or other participant.''

C. Registration Required

Section 48.3 provides that, except as otherwise specified in

proposed new Part 48, it shall be unlawful for an FBOT to permit direct

access to its electronic trading and order matching system from within

the U.S. unless and until the Commission has issued an Order of

Registration to the FBOT pursuant to the provisions of Part 48. The

proposal also would provide that it would be unlawful for a board of

trade to make false or misleading statements in any application for

registration or in connection with any application for registration.

D. Registration Eligibility

Section 48.4 describes registration eligibility. Generally, FBOTs

that meet the requirements of the definition in section 48.2(b) would

be eligible to be registered. Section 48.4 also identifies the persons

to whom the registered FBOT could grant authority to trade by direct

access. The Commission proposes that the persons that would be

permitted by the FBOT to trade by direct access from the U.S. pursuant

to the registration rules would be the types of persons that are

currently able to trade by direct access pursuant to staff issued no-

action relief letters. Specifically, an FBOT could request registration

in order to permit direct access from within the U.S. by identified

members and other participants \21\ that: (1) Trade in the U.S. for

their proprietary accounts; (2) are registered with the Commission as

FCMs and submit orders to the trading system for execution on behalf of

U.S. customers; or (3) are, subject to a specific clearing and

guarantee requirement, registered with the Commission as CPOs or CTAs,

or are exempt from such registration pursuant to Commission Rules 4.13

or 4.14. The CPOs would be permitted to submit orders for execution on

behalf of U.S. pools they operate, and CTAs would be permitted to do so

for accounts of U.S. customers for which they have discretionary

authority. The Commission requests comment concerning additional

entities that should be eligible for direct access to the trading and

order matching systems of the FBOT from the U.S.

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\21\ For purposes of FBOT registration, identified member or

other participant of the FBOT shall include any affiliate of any

registered FBOT's member or other participant that has been granted

direct access by the registered FBOT to the trading system. An

affiliate of a registered FBOT member or other participant shall

mean any person, as that term is defined in section 1a(38) of the

CEA, that: (i) Owns 50% or more of the member or other participant;

(ii) is owned 50% or more by the member or other participant; or

(iii) is owned 50% or more by a third person that also owns 50% or

more of the member or other participant.

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E. Registration Procedures

Section 48.5 describes procedures to be followed to request and

receive registration.\22\ The registration application must be

submitted electronically, must be signed by the FBOT's chief executive

officer (or functional equivalent), and must include the information

and documentation set forth in the Appendix to Part 48 and any

information and documentation necessary, in the discretion of the

Commission, to effectively demonstrate that the FBOT and its clearing

organization satisfy the registration requirements set forth in section

48.7.

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\22\ Draft submissions and a request for a preliminary review by

Commission staff would be encouraged under the proposed rule. The

Commission proposes that the final copy of an application for

registration would be published on its Web site.

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Section 48.5 also provides that the Commission will review the

application for FBOT registration and may approve or deny the

application. At this time, the proposed rule does not contain a

timeline for Commission action.\23\ If the application is approved, the

Commission will so notify the FBOT and will issue an Order of

Registration. The Commission could, after appropriate notice and an

opportunity for a hearing, amend, suspend, terminate or otherwise

restrict the terms of the Order of Registration. If the application is

denied, the Commission will issue a Notice of Action specifying that

the application was not approved and the FBOT will not be registered

and may not provide direct access to its trade matching engine from

within the U.S. Following a denial, the FBOT may reapply for

registration 360 days after the date of denial.

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\23\ The Commission expects a surge of activity shortly after

the registration rule goes into effect. Once this period has ended,

the Commission anticipates that a timeline would be established.

Such a timeline might require a Commission response to a completed

application for registration within 120 days after the Commission,

in its sole discretion, determines that the application is complete.

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The Commission is also proposing that, in determining whether to

grant or deny an application for FBOT registration, the Commission will

thoroughly review the information and documentation submitted in the

application and, as necessary, conduct an on-site due diligence visit

at the FBOT to determine, as mandated by the Dodd-Frank Act, whether

the FBOT and its clearing organization are subject to comprehensive

supervision and regulation by the appropriate governmental authorities

in their home country that is comparable to the comprehensive

supervision and regulation to which DCMs and derivatives clearing

organizations (DCO) are subject in the U.S.\24\ In this context, as

previously noted, comparable does not necessarily mean identical. The

comparability determination for registration purposes will be similar

to that followed when reviewing direct access no-action requests. The

Commission will evaluate whether the FBOT's home regulatory authority

supports and enforces regulatory objectives in its oversight of the

FBOT that are substantially equivalent to the regulatory objectives

supported and enforced by the Commission in its oversight of DCMs.

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\24\ The Dodd-Frank Act also mandated that the Commission

consider any previous Commission findings that the FBOT and its

clearing organization are subject to such comprehensive supervision

and regulation by the appropriate government authorities in their

home country. Such previous Commission findings would include staff

conclusions drawn previously during the course of reviewing an

application for direct access no-action relief.

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The Commission notes that it uses a similar ``comparability''

analysis when evaluating foreign entities in the context of issuing

Rule 30.10 exemptions to

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intermediaries.\25\ When determining whether to issue a Rule 30.10

exemption, staff evaluates whether the applicant is subject to a

comparable regulatory scheme in the country in which it is located. In

this evaluation, comparable does not necessarily mean identical: as set

forth in Appendix A to Rule 30.10 with respect to the comparability

determination, ``the Commission would have broad discretion to

determine that the policies of any program element generally are met,

notwithstanding the fact that the offshore program does not contain an

element identical to that of the Commission's regulatory program.'' In

the case of FBOT registration, a determination that the foreign

regulatory authority enforces substantially equivalent regulatory

objectives is a determination of comparability: The regulatory regime

is comparable, although not necessarily identical, to that of the CFTC.

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\25\ See supra note 8.

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In its review, the Commission would also consider whether the FBOT

is eligible to be registered as defined in section 48.2(b) of this part

and whether the FBOT has adequately demonstrated that it meets the

requirements for registration specified in section 48.7 and any other

requirements that the Commission, in its discretion, believes are

necessary or appropriate to impose under the facts and circumstances

presented.

F. FBOTs Providing Direct Access Pursuant to No-action Relief

In Section 48.6, the Commission proposes to provide for a

``limited'' application process for FBOTs currently operating pursuant

to existing no-action relief. Such FBOTs would apply for registration

by (1) identifying the specific requirements for registration set forth

in section 48.7 or information and documentation required by the

Appendix to Part 48 that are satisfied by information previously

submitted in the request for no-action relief that remain current and

true and resubmitting such information and documentation,\26\ and (2)

submitting any information and documentation required in a complete

application for registration that was not previously provided or is no

longer current. The limited application for registration would have to

be submitted within 120 days of the effective date of the registration

rules, during which time the FBOT could continue to operate pursuant to

the no-action relief. The no-action relief would, upon notice to the

FBOT, be revoked after 120 days if a complete limited application is

not received by the Commission by that time. If the FBOT files an

application for registration within 120 days, the FBOT could continue

to operate pursuant to the no-action relief until notified by the

Commission that the application has been approved or denied. If the

Commission revokes the no-action relief or denies the application, it

will provide for a transition period for phasing out direct access.

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\26\ The Commission is requesting resubmission of original

documentation, where appropriate, because such documentation, some

of which dates back as much as fourteen years, may no longer be

readily available for review because of incomplete and or misplaced

files.

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G. Requirements for Registration

Section 48.7 describes the requirements that the Commission

proposes that an FBOT would be required to demonstrate in order to be

registered. The requirements are divided into the same seven general

categories currently evaluated during the course of a review of an

application for no-action relief and they would be reviewed in a

similar manner. Whether they are successfully met would be determined

by a review of the information and documentation submitted by the

applicant pursuant to the Appendix to proposed Part 48, any additional

information or documentation requested by the Commission in connection

with the application review, and, as necessary, a Commission staff due

diligence on-site visit to the FBOT and clearing organization.

First, with respect to FBOT and clearing membership, the FBOT would

be required to demonstrate that FBOT and clearing organization members

and other participants are fit and proper and meet appropriate

financial and professional standards; that the FBOT and clearing

organization have adequate conflict of interest provisions; and that

the FBOT and clearing organization have and enforce rules prohibiting

the disclosure of material, non-public information obtained as a result

of a member's/other participant's performance of official duties.

Second, the FBOT's automated trading system would be required to

comply with the Principles for the Oversight of Screen-Based Trading

Systems for Derivative Products developed by the Technical Committee of

the International Organization of Securities Commissions (IOSCO

Principles) and adopted by the Commission on November 21, 1990.\27\ In

addition, the FBOT's trade matching algorithm would be required to

match trades fairly and timely, the audit trail would be required to

capture all relevant data (including changes to orders), and audit

trail data would be required to be securely maintained and available

for an adequate time period. Trade data would be required to be made

available to users and to the public, the trading system would be

required to have demonstrated reliability, and access to the trading

system would be required to be secure and protected. Finally, adequate

provisions for emergency operations and disaster recovery would be

required, trading data would be required to be backed up to prevent its

loss, and only approved contracts could be made available for trading

by direct access from the U.S.

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\27\ The Commission adopted the IOSCO Principles as a statement

of regulatory policy for the oversight of screen-based trading

systems for derivative products. Policy Statement Concerning the

Oversight of Screen-Based Trading Systems, 55 FR 48670 (Nov. 21,

1990).

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Third, the contracts to be made available by direct access in the

U.S. would be required to be futures, option or swaps contracts that

would be eligible to be traded on a DCM and would be subject to prior

review by the Commission. With respect to swaps, Section 733 of the

Dodd-Frank Act adds section 5h to the CEA, which provides that a person

operating a facility for the trading or processing of swaps must be

registered as a swaps execution facility (SEF) or as a DCM. Section 733

also adds section 5(g) to the CEA which provides that the ``Commission

may exempt, conditionally or unconditionally, a swap execution facility

from registration under this section if the Commission finds that the

facility is subject to comparable, comprehensive supervision and

regulation on a consolidated basis by the [SEC], a prudential

regulator, or the appropriate governmental authorities in the home

country of the facility.'' The approach for granting a SEF exemption

(namely, ``subject to comparable, comprehensive supervision and

regulation * * * in the home country of the facility'') is similar to

that which applies to FBOTs seeking registration. Moreover, there is

nothing in the Dodd-Frank Act, including Section 738 of the Dodd-Frank

Act amending Section 4(b) of the CEA, which expressly precludes a

registered FBOT from offering swaps through direct access.\28\

Accordingly, the Commission is proposing to permit a registered FBOT to

offer and trade swaps though direct access, subject to the condition

that the FBOT meet

[[Page 70979]]

certain standards or requirements that may apply to SEFs, as the

Commission deems appropriate. The Commission requests comment with

respect to whether a registered FBOT should be allowed to make

available swaps through direct access and if so, under what conditions.

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\28\ Furthermore, under the Dodd-Frank Act, a DCM may trade

swaps without additionally registering as a SEF.

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Contracts that are linked to a contract listed for trading on a

U.S. registered entity would be required to be identified, as would

contracts that share any other commonality with a contract listed for

trading on a U.S. registered entity, i.e., both the FBOT's and the U.S.

registered entity's contract settle to the price of the same third

party-constructed index. Finally, the FBOT would be required to certify

that it has listing standards in place that require that contracts not

be readily susceptible to manipulation.\29\

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\29\ The Commission considers that contracts that can be found

to have the following are less likely to be susceptible to

manipulation: (1) They rely for settlement pricing on a robust and

transparent calculation, whether based on the contract's own trading

or an externally calculated index; (2) they are subject to measures

to reduce the ability of any party to disrupt pricing, e.g. position

limits, intraday surveillance, and pre-trade screens; and (3) there

is either ample deliverable supply or flexibility in the contract

(alternate delivery mechanisms).

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Fourth, with respect to settlement and clearing, the clearing

organization, would be required to comply with the current

Recommendations for Central Counterparties (RCCPs) that have been

issued jointly by the Committee on Payment and Settlement Systems

(CPSS) and the Technical Committee of the International Organization of

Securities Commissions (IOSCO), as updated, revised or otherwise

amended, or successive standards, principles and guidance for central

counterparties or financial market infrastructures adopted jointly by

IOSCO and CPSS, and the clearing organization would be required to be

in good regulatory standing in its home country jurisdiction. In the

alternative, the clearing organization may be registered with the

Commission as a DCO.\30\

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\30\ The Commission is including the option for the clearing

organization to be registered as a DCO because it is aware that some

foreign clearing organizations are registered as such. These include

ICE Clear Europe Limited, LCH Clearnet Ltd. and Natural Gas Exchange

Inc.

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Fifth, the FBOT's and the clearing organization's regulatory

authorities would be required to provide comprehensive supervision and

regulation of the FBOT and the clearing organization that is comparable

to the comprehensive supervision and regulation to which DCMs and DCOs

are subject in the U.S., would be required to have the power to

intervene in the market and authority to share information with the

Commission, and would be required to provide for ongoing regulatory

supervision of the FBOT and its trading system, the clearing

organization and its clearing system and intermediaries--with

particular attention to market integrity and customer protection and

the manner in which the exchange enforces its rules. In the case of

FBOTs with listed swaps, the Commission proposes to take into

consideration the regulation of relevant market participants (e.g.,

swap dealers) regarding their exchange-trading activity when analyzing

the comparability and comprehensiveness of the regulatory regime

applicable to exchange-listed swaps in the FBOT's home country.

Sixth, the FBOT and the clearing organization would be required to

have appropriate rules and would be required to enforce them. Among

other things, the FBOT and the clearing organization would be required

to have sufficient compliance staff and resources to fulfill their

respective regulatory responsibilities, including the capacity to

detect, investigate, and sanction persons who violate their respective

rules. The FBOT would be required to implement and enforce rules

relating to oversight of trading practices, including appropriate trade

practice surveillance, real-time market monitoring and market

surveillance. The FBOT's and the clearing organization's rules would be

required to authorize the compliance staff to obtain, from market

participants, any information and cooperation necessary to conduct

effective rule enforcement and investigations, and the FBOT would be

required to have and enforce rules with respect to access to the

trading system and the means by which the connection is accomplished.

The FBOT and the clearing organization (or their respective regulatory

authorities) would be required to have implemented and enforce

disciplinary procedures that empower them to recommend and prosecute

disciplinary actions for suspected rule violations, impose adequate

sanctions for such violations, and provide adequate protections to

charged parties pursuant to fair and clear standards. The FBOT would be

required to have the capacity to detect and deter market manipulation,

attempted manipulation, price distortion, and other disruptions of the

market and would be required to have and enforce rules designed to

maintain market and financial integrity and prohibit other trading and

market abuses. Finally, the FBOT would be required to have and enforce

rules and procedures that ensure a competitive, open and efficient

market and mechanism for executing transactions.

Finally, satisfactory information-sharing arrangements among the

FBOT, the clearing organization, their respective regulatory

authorities, and the Commission would be required to be in place. The

regulatory authorities would be required to be signatories to the IOSCO

Multilateral Memorandum of Understanding (IOSCO MOU) \31\ or, if not

signatories to the IOSCO MOU, would have to inform the Commission of

the reasons why the document has not been signed, supply any additional

information requested by the Commission, and ensure alternative

information sharing arrangements that are satisfactory to the

Commission are in place. The regulatory authority also would be

required to be a signatory to the Declaration on Cooperation and

Supervision of International Futures Exchanges and Clearing

Organizations (Boca Declaration),\32\ or otherwise commit to share the

types of information contemplated by the International Information

Sharing Memorandum of Understanding and Agreement (Exchange

International MOU) \33\ with the Commission. The FBOT would be required

to have executed, or have committed to execute, the Exchange

International MOU. In addition, pursuant to the proposed conditions of

registration described in section 48.8(a)(6)(iii), the FBOT would

[[Page 70980]]

be required to provide certain information directly to the Commission.

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\31\ Memorandum of Understanding Concerning Consultation,

Cooperation and the Exchange of Information of the International

Organization of Securities Commissions, October 16, 2003. The IOSCO

MOU is the first worldwide multilateral enforcement cooperation

arrangement among securities and derivatives regulators. It provides

for the exchange of essential information to investigate cross-

border securities and derivatives violations, including the most

serious offenses, such as manipulation, insider trading and customer

fraud. The IOSCO MOU enables regulators to share critical

information, including bank, brokerage, and client identification

records and to use that information in civil and criminal

prosecutions.

\32\ The Boca Declaration was developed through discussions at

the CFTC's international regulators conference, and was motivated by

work recommendations issued from the Windsor Conference and Tokyo

Conference, which were convened by the CFTC, the U.K. FSA and

Japanese regulators to respond to the cross-border issues raised by

the failure of Barings Plc. The Declaration was developed to address

instances in which an exchange would not be able to share

information directly with another exchange under the Exchange

International MOU, described below.

\33\ The development of the Exchange International MOU was one

of the achievements that resulted from the Futures Industry

Association-sponsored Global Task Force on Financial Integrity,

which was convened to address the cross-border issues that were

identified in connection with the failure of Barings Plc.

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H. Conditions Upon FBOT Registration

As previously noted, Section 738 of the Dodd-Frank Act amends

Section 4(b) of the CEA to provide that the Commission may adopt rules

and regulations requiring registration with the Commission of an FBOT

that provides identified members of the FBOT or other participants

located in the United States with direct access to the electronic

trading and order matching system of the FBOT, including rules and

regulations prescribing procedures and requirements applicable to the

registration of such FBOTs. Proposed Section 48.8 provides for certain

procedures and requirements applicable to maintaining the registration

of such FBOTs and describes the specified conditions upon FBOT

registration that the Commission believes are essential in assuring

effective market integrity and customer protection. As previously

noted, the conditions applicable to existing no-action relief have

expanded over time to address activities not foreseen when the earliest

no-action letters were issued. In the proposed regulations, the

Commission has added further conditions to address increasing

technological innovation, new types of products, the impact on the

market of different trading entities listing substantially similar or

even connected products, and the requirements of the Dodd-Frank Act.

The specified conditions are divided into three categories: Specified

conditions for maintaining registration, other continuing obligations,

and additional specified conditions for FBOTs with linked contracts. A

registered FBOT would have an ongoing obligation to monitor and enforce

compliance with the specified conditions of its registration and with

any additional conditions that the Commission, in its discretion and

upon notice to the FBOT and subsequent to an opportunity to be heard,

may impose.

(1) Specified Conditions

With respect to the regulatory regimes under which they operate,

the FBOT and the clearing organization, respectively, would be required

to continue to satisfy the criteria for a regulated market and clearing

organization pursuant to their home regulatory regimes identified in

the application for registration and would be required to continue to

be subject to oversight by their home regulatory authorities. In

addition, the laws, systems, rules, and compliance mechanisms of the

applicable regulatory regimes would be required to continue to require

the FBOT to maintain fair and orderly markets; prohibit fraud, abuse,

and market manipulation; and provide that such requirements are subject

to the oversight of appropriate regulatory authorities. With respect to

international standards, the FBOT would be required to continue to

adhere to the IOSCO Principles, to the extent such principles do not

contravene U.S. law. The clearing organization would be required to

continue to satisfy, as applicable, the rules, regulations and core

principles applicable to its registration as a DCO or the RCCPs or

successive standards, principles or guidance that may be adopted

jointly by IOSCO and CPSS, to the extent such recommendations,

standards, principles or guidance do not contravene U.S. law.

The FBOT would be required to restrict direct access to the trading

system from the U.S. to identified members or other participants and

take reasonable steps to prevent third parties from providing such

access to the FBOT's trading system to persons other than the

identified members or other participants.\34\ All orders transmitted

through the FBOT's trading system by an FBOT-identified member or other

participant by direct access would be required to be for the member's

or other participant's own account unless: (a) The member or other

participant is an FCM or (b) subject to certain clearing requirements,

the member or other participant is a CPO or CTA, or is exempt from such

registration pursuant to Commission regulation 4.13 or 4.14.

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\34\ The Commission believes that such steps would include

specific prohibitions on sharing access in the FBOT's rules and

membership agreements and a review of how access is granted by and

to the identified member's or other participant's infrastructure

during audits of those entities.

The Commission will continue to evaluate new developments in

technology and business arrangements that may be used by FBOTs to

provide U.S. participants with direct access to its trade matching

system in the context of these proposed rules.

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The specified conditions also include several documentation

requirements to assist the Commission in monitoring the activities of a

registered FBOT and the clearing organization. Each current and

prospective member or other participant that is granted direct access

to the FBOT's trading system from the U.S. and that is not registered

as an FCM, a CTA or a CPO would be required to file with the FBOT (a) A

written representation stating that the member or other participant

agrees to and submits to the jurisdiction of the CFTC with respect to

activities conducted pursuant to the registration; (b) a valid and

binding appointment of a U.S. agent for service of process in the U.S.;

and (c) a written representation that the member or other participant

granted direct access pursuant to this regulation will provide, upon

the request of the Commission, the U.S. Department of Justice and, if

appropriate, the National Futures Association (NFA) (collectively, the

U.S. Agencies), prompt access to the entity's, member's or other

participant's original books and records or, at the election of the

requesting U.S. Agency, a copy of specified information containing such

books and records, as well as access to the premises where the trading

system is available in the U.S. The FBOT and the clearing organization

also would be required to file with the Commission a valid and binding

appointment of an agent for service of process in the U.S. and maintain

with the FBOT written representations concerning U.S. Agencies' access

to original books and records or, at the election of the requesting

U.S. Agency, a copy of specified information containing such books and

records, as well as access to the premises where the trading system is

available in the U.S. The FBOT would be required to maintain all the

representations required pursuant to this regulation as part of its

books and records and make them available upon the request of a

Commission representative.

With respect to information sharing, the specified conditions

mandate that information-sharing arrangements satisfactory to the

Commission are in effect among the Commission and the regulatory

authorities that oversee both the FBOT and the clearing organization

and that the Commission is able to obtain sufficient information

regarding the FBOT, the clearing organization and their respective

members and other participants operating pursuant to the FBOT's

registration. The FBOT would be required to provide information

directly to the Commission in response to a Commission request. In the

event that the FBOT and the clearing organization are separate

entities, the proposed rule would require the clearing organization to

enter into a written agreement with the FBOT in which the clearing

organization is contractually obligated to promptly provide any and all

information and documentation that may be required of the clearing

organization under the regulation.

With respect to swaps contracts, if the FBOT makes swaps contracts

available by direct access, the FBOT would be required to report to the

public, on a real-time basis, data relating to each

[[Page 70981]]

swap transaction, including price and volume, as soon as

technologically practicable after execution of the swap transaction. In

addition, the FBOT would be required to ensure that all swap

transaction data is timely reported to a swap data repository that is

either registered with, or has an information-sharing arrangement with,

the Commission. The FBOT also must agree to coordinate with the

Commission with respect to arrangements established to address cross

market oversight issues, including surveillance, emergency actions and

the monitoring of trading. In addition, particularly with respect to

the listing of swaps contracts, the Commission may, in its discretion

and after notice and an opportunity to be heard, impose additional

conditions upon the FBOT's registration. Finally, all futures, option

and swaps contracts must be cleared.

(2) Other Continuing Obligations

Among the proposed specified conditions identified as other

continuing obligations are quarterly, upon occurrence, and annual

reporting requirements that the Commission determines are necessary to

provide ongoing visibility with respect to a registered FBOT's

performance as it relates to U.S. persons. First, as is the case now

with the no-action relief recipients, the FBOT would be required to

maintain and provide to the Commission on at least a quarterly basis,

and at any time promptly upon request, volume data that reflects the

percentage of trading originating in the U.S. Thus, the FBOT would be

required to provide, for each contract available to be traded through

its trading system, the following: (a) The total trade volume

originating from electronic trading devices providing direct access to

the trading system in the U.S., (b) the total trade volume for such

products traded through the trading system worldwide, and (c) the total

trade volume for such products traded on the FBOT generally. The FBOT

would also be required to provide a listing of the names, NFA ID

numbers (if applicable), and main business addresses in the U.S. of all

members and other participants that have access to the trading system

in the U.S.

With respect to reporting the occurrence of events that may have an

impact on the FBOT's capability to meet its registration requirements,

the FBOT would be required to promptly provide the Commission with

written notice of the following: (a) Any material change in the

information provided in the FBOT's registration application or in the

FBOT's or clearing organization's rules or in the laws, rules, and

regulations in the home jurisdictions of the FBOT or the clearing

organization; (b) any matter known to the FBOT or the clearing

organization that, in their judgment, could affect the financial or

operational viability of the FBOT or the clearing organization; (c) any

default, insolvency, or bankruptcy of any FBOT trading member or other

participant that may have a material, adverse impact upon the condition

of the FBOT or upon any U.S. customer or firm, or any default,

insolvency or bankruptcy of any member of the FBOT's clearing

organization; (d) any known violation by the FBOT, its clearing

organization or any trading or clearing member or other participant of

the specified conditions of registration or failure to satisfy the

requirements for registration; and (e) any disciplinary action taken by

the FBOT or its clearing organization against any FBOT trading member

or other participant or a member of the clearing organization that

involves any market manipulation, fraud, deceit, or conversion or that

results in suspension or expulsion that involves a contract or

contracts available for trading from within the U.S. pursuant to

registration.

Finally, the FBOT or the clearing organization, as applicable,

would be required to provide the following to the Commission on an

annual basis: (a) A certification from the FBOT's regulatory authority

confirming that the FBOT retains its authorization in good standing as

a regulated market/exchange; (b) a certification from the clearing

organization's regulatory authority confirming the clearing

organization's regulatory status (i.e., its authorization, licensure,

or registration) and continued ``good standing'' in its authorized

jurisdiction; (c) if the clearing organization is not a DCO,

recertification of the clearing organization's compliance with the

RCCPs or successive standards, principles or guidance; (d) a

description of any material changes to any relevant representation

regarding the FBOT or clearing organization made to the Commission that

have not been previously disclosed; (e) a description of any

significant disciplinary or enforcement actions that have been

instituted by or against the FBOT or the clearing organization or the

senior officers of either in the prior year; and (f) a written

description of any material changes to the regulatory regime to which

the FBOT or the clearing organization are subject that have not been

previously disclosed, in writing, to the Commission (or a certification

that no material changes have been made).

(3) Linked Contract Conditions

The proposed rule also would include additional specified

conditions for FBOTs that make linked contracts available for direct

access. These proposed additional specified conditions are divided into

two categories: Statutory conditions, which are specifically required

by the Dodd-Frank Act, and other conditions on linked contracts, which

are additional conditions that the Commission believes are necessary

because such linkages create a single market for the subject contracts

and, in the absence of certain preventive measures at the FBOT, could

compromise the Commission's ability to carry out its market

surveillance responsibilities. Because of the linkage, the trading of

the linked contracts on an FBOT affects the pricing of contracts traded

on U.S.-registered entities.

(a) Statutory Conditions

The statutory conditions mandated by Section 738 of the Dodd-Frank

Act are substantially similar to the previously discussed additional

conditions the Commission imposed on the no-action relief issued to ICE

Futures Europe when that exchange made available a WTI futures contract

that cash-settled on the price of a physically-settled Light Sweet

Crude Oil futures contract traded on the NYMEX,\35\ include the

following: (i) The FBOT must make public certain daily trading

information regarding the linked contract; (ii) the FBOT (or its

regulatory authority) must (A) Adopt position limits for the linked

contract that are comparable to the position limits adopted by the

registered entity for the contract to which it is linked; (B) have the

authority to require or direct market participants to limit, reduce, or

liquidate any position the FBOT (or its regulatory authority)

determines to be necessary to prevent or reduce the threat of price

manipulation, excessive speculation as described in section 4a of the

Act, price distortion, or disruption of delivery or the cash settlement

process; (C) agree to promptly notify the Commission, with regard to

the linked contract, of any changes with respect to (i) and (ii) above

and any other area of interest expressed by the Commission to the FBOT

or its regulatory authority; (D) provide information to the Commission

regarding large trader positions in the linked contract that is

comparable to the large trader position information collected by the

Commission for the contract to which it is linked; and (E) provide the

Commission such information as is necessary to publish

[[Page 70982]]

reports on aggregate trader positions for the linked contract that are

comparable to such reports on aggregate trader positions for the

contract to which it is linked.

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\35\ See CFTC Letter No. 08-09 (June 17, 2008).

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One statutory condition is mandated by Section 737 of the Dodd-

Frank Act, and would require that if the Commission establishes

speculative position limits (including related hedge exemption

provisions) on the aggregate number or amount of positions in a

contract traded on a U.S. registered entity and the registered FBOT

lists a linked contract, the FBOT (or its regulatory authority) must

adopt position limits (including related hedge exemption provisions)

for the linked contract as determined by the Commission.

(b) Other Conditions on Linked Contracts

The other conditions on linked contracts, also imposed pursuant to

the Commission's new Section 4(b)(1)(A) authority to adopt rules and

regulations prescribing procedures and requirements applicable to the

registration of FBOTs, represent the second set of additional

conditions the Commission imposed on the no-action relief issued to ICE

Futures Europe when that exchange made available for trading by direct

access contracts linked to the prices of contracts traded on NYMEX.\36\

The conditions as proposed would require that the FBOT, among other

things, (i) Inform the Commission in a quarterly report of any member

that had positions in a linked contract above the applicable FBOT

position limit, (ii) provide trade execution and audit trail data for

input to the CFTC's Trade Surveillance System on a trade-date plus one

basis, (iii) provide for CFTC on-site visits for the purpose of

overseeing the FBOT's and the clearing organization's ongoing

compliance with registration requirements and the conditions of

registration, (iv) provide, at least one day prior to the effective

date, copies of, or hyperlinks to, all rules, rule amendments,

circulars and other notices published by the FBOT with respect to all

linked contracts, (v) provide copies of all Disciplinary Notices

involving the FBOT's linked contracts upon closure of the action, and

(vi) promptly take similar action with respect to its linked contract

in the event that the CFTC, pursuant to its emergency powers authority,

directs that the U.S. registered entity which lists the contract to

which the FBOT's contract is linked to take emergency action with

respect to a linked contract (e.g., to cease trading in the contract).

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\36\ See CFTC Letter No. 09-37 (August 20, 2009).

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The Commission questions whether there are additional conditions

that it could impose on registered FBOTs that list linked contracts to

promote orderly markets and customer protection, such as automatic

safety features to protect against errors in the entry of orders,

price-banding mechanisms, maximum order size limitations, or trading

pauses to prevent cascading stop-loss orders.\37\

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\37\ Many of these mechanisms are discussed in the Commission's

recent joint study with the SEC of the market events of May 6, 2010.

See Preliminary Findings Regarding the Market Events of May 6,

2010--Report of the Staffs of the CFTC and SEC to the Joint Advisory

Committee on Emerging Regulatory Issues (May 18, 2010), Appendix B-

11.

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I. Revocation of Registration

Section 48.9 addresses certain events which could lead the

Commission to revoke an FBOT's registration. With respect to failure to

satisfy any of the registration requirements or conditions of

registration, the proposed rule provides that if the Commission

believes that a registration requirement or condition is not being met,

the Commission may request that the registered FBOT file a written

demonstration showing it is in compliance with the requirement or

condition. If the Commission determines that an FBOT (or its clearing

organization) has failed to satisfy any of the registration

requirements or conditions, the FBOT would be given an opportunity to

bring itself into compliance with the requirement or condition. If the

FBOT fails to make changes necessary to comply with the requirement or

condition within 30 days after receiving a notification that it was not

satisfying one or more requirements or conditions, the Commission may

revoke the FBOT's registration, after appropriate notice and an

opportunity for a hearing. If the Commission revokes the registration,

it will provide for a transition period for phasing out direct access.

Finally, an FBOT whose registration has been revoked for failure to

satisfy a registration requirement or condition could apply for re-

registration after 360 days if the deficiency causing the revocation

has been cured or relevant facts and circumstances have changed.

Section 48.9 of the proposed rule also identifies four other events

that, without limitation, could result in revocation, generally after

appropriate notice and an opportunity for a hearing. The Commission may

revoke an FBOT's registration (1) If the Commission determines that a

representation made in the application for registration relevant to the

Commission's decision to register the entity is found to have been

untrue or materially misleading; (2) if there is a material change in

the regulatory regime applicable to the FBOT or clearing organization;

(3) in the event of an emergency or in a circumstance where the

Commission determines that revocation would be necessary or appropriate

in the public interest; or (4) the FBOT or the clearing organization is

no longer authorized, licensed or registered, as applicable, as a

regulated market and/or exchange or clearing organization or ceases to

operate as an FBOT or clearing organization. Revocation under these

circumstances would not necessarily follow the procedures delineated

for revocation for failure to continue to satisfy registration

requirements or conditions, but would be handled by the Commission as

relevant facts or circumstances warrant.

The Commission acknowledges that there are other actions that, if

undertaken by a registered FBOT, could lead the Commission to exercise

its discretion and consider a full range of corrective actions,

including revocation of the FBOT's registration, requiring enhanced

information sharing arrangements and surveillance procedures, imposing

trading restrictions on U.S. persons trading on the FBOT, imposing

additional conditions on the registration, or taking other appropriate

action. For instance, the Commission believes that the listing of

certain products on an FBOT could potentially have an adverse impact on

the market and the public interest. Thus, the Commission would take

corrective action as necessary if it become aware that a registered

FBOT permits the trading of products that potentially could: (1) Affect

adversely the pricing of contracts traded on any registered entity as

defined in section 1a(40) of the Act, or of contracts traded on any

cash market for commodities subject to the CEA; (2) create unacceptable

systemic risks or disruptions in those markets or the U.S. financial

system, including capital markets; or (3) facilitate abusive trading

practices on U.S. markets or otherwise interfere with the ability of

the Commission to carry out its regulatory responsibilities. The

Commission retains plenary authority to address manipulative or abusive

trading practices that affect U.S. futures and cash markets and market

users, and would use that enforcement authority when necessary and

appropriate.

[[Page 70983]]

J. Additional Contracts

Section 48.10 would establish the procedures for a registered FBOT

to make available futures, option and swaps contracts that were not

included in the registration application on a trading system to which

FBOT members and other participants in the U.S. have been granted

direct access. These procedures are substantially similar to the

procedures established for the listing of additional contracts under

direct access no-action relief.\38\ Generally, for other than security

index futures contracts, a registered FBOT would be required to submit

a written request prior to offering the additional futures and option

and swaps contracts from within the U.S. Such a written request would

include the terms and conditions of the additional contracts to be made

available and a certification that (1) the additional contracts meet

the requirements of Section 48.7(c) of this part and (2) the FBOT and

the clearing organization continue to satisfy the conditions of

registration. The FBOT would be permitted to make available for trading

the additional contracts ten business days after the date of receipt by

the Commission of the written request, unless the Commission notifies

the FBOT that additional time is needed to complete its review of

policy or other issues pertinent to the additional contracts.

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\38\ 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); corrected at 71 FR

21003 (April 24, 2006).

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A registered foreign board of trade would be permitted to list for

trading an additional futures contract on a non-narrow-based security

index pursuant to the no-action relief procedures set forth in Appendix

D to Part 30 of the Commissions regulations. Such procedures would

require that the registered FBOT's request to make the non-narrow-based

security index futures contract available for trading by direct access

be included in the FBOT's request that the Commission's Office of the

General Counsel issue no-action relief providing that the non-narrow-

based security index futures contract may be offered or sold to persons

located within the U.S. in accordance with Section 2(a)(1)(C)(iv) of

the Act.

With respect to making available for trading by direct access an

option contract on a previously approved futures contract, the proposed

procedures are also substantially similar to the procedures established

for the listing such option contracts under direct access no-action

relief.\39\ The proposed procedures would provide the following,

depending on the type of option contract. (1) If the option is on a

futures contract that is not a linked contract, the option contract

could be made available for trading by direct access by filing with the

Commission no later than the business day preceding the initial listing

of the contract: (i) A copy of the terms and conditions of the

additional contract and (ii) a certification that the FBOT continues to

satisfy the conditions of its registration. (2) If the option is on a

futures contract that is a linked contract, the option contract may be

made available for trading by direct access in the same manner as (1)

above except that the certification must represent that the FBOT

continues to satisfy the conditions of its registration, including the

conditions specifically applicable to linked contracts set forth in

Section 48.8(c). (3) If the option is on a non-narrow-based security

index futures contract which may be offered or sold in the U.S.

pursuant to a no-action letter issued by the Office of General Counsel,

the option contract could be listed for direct access without further

action by either the registered FBOT or the Commission.

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\39\ See 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. 74 FR

3570 (January 21, 2009).

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K. Appendix to Part 48--Contents of Application

The Appendix to the proposed Part 48 includes a description of what

the Commission believes should be included in the application for

registration in order for the FBOT to demonstrate, and for the

Commission to conclude, that the FBOT meets the requirements for

registration. The Appendix reflects submission requirements in eight

areas, including general information about the FBOT and seven areas

that specifically address the registration requirements identified in

Section 48.7. The Commission requests comments with respect to whether

the application contents requirements of the Appendix are adequate to

completely address the registration requirements.

IV. Request for Comments Regarding the Proposed Registration Procedures

In the proposed rule, the Commission has included swaps in the set

of contracts that a registered FBOT may list on a trading system to

which it has provided direct access to U.S.-located members and other

participants. As previously stated, there is nothing in the Dodd-Frank

Act, including Section 738 of the Dodd-Frank Act amending Section 4(b)

of the CEA, which expressly precludes a registered FBOT from offering

swaps through direct access. Accordingly, the Commission is proposing

to permit a registered FBOT to offer and trade swaps though direct

access, subject to the condition that the FBOT meet certain standards

or requirements that may apply to SEFs, as the Commission deems

appropriate.\40\ The Commission requests comment with respect to

whether a registered FBOT should be allowed to make available swaps

through direct access and if so, under what conditions. FBOTs have

historically, at least in the context of granting direct access no-

action relief, been viewed by Commission staff as DCM-equivalent

entities. The proposed FBOT registration requirements are based upon

the premise that in reviewing the FBOT for being subject to comparable,

comprehensive supervision and regulation by the appropriate

governmental authorities in its home country, the point of reference is

how DCMs operate and are regulated and overseen by the CFTC.

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\40\ As previously noted, under the Dodd-Frank Act, a DCM may

trade swaps without additionally registering as a SEF.

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Finally, the Commission requests comment on whether, to the extent

an FBOT is permitted to list swaps on a trading system to which the

FBOT has granted direct access to members and other participants in the

U.S., the Commission should examine the oversight of relevant market

participants (e.g., the functional equivalents of swap dealers and

major swap participants, as those terms are defined by the Dodd-Frank

Act) in the applicable home country jurisdictions when making a

determination as to the comparability and comprehensiveness of the

supervision and regulation of the relevant regulatory regime. For

example, the Commission may wish to consider whether swap dealers are

permitted to provide counterparties with the right to segregate

collateral. In the case of swaps, certain portions of the regulatory

regime applicable to market participants with respect to their exchange

trading activity (e.g., business conduct standards) may be imposed by

the primary regulatory authority in the home jurisdiction of the

participant instead of by the exchange on which such participants

conduct their transactions. Accordingly, it may be necessary or

appropriate to review the

[[Page 70984]]

regulations applicable to such participants in order to ascertain

whether the foreign regulatory regime with respect to the foreign board

of trade, in its totality, is both comprehensive and comparable to that

in the U.S. The Commission requests comment regarding whether such a

review is necessary or appropriate. The Commission invites public

comment with respect to all areas described in the proposed

registration rule.

V. Related Matters

A. The Paperwork Reduction Act

The purposes of the Paperwork Reduction Act (``PRA'') are, among

other things, to minimize the paperwork burden to the private sector,

ensure that any collection of information by a government agency is put

to the greatest possible uses, and minimize duplicative information

collections across government.\41\ The PRA applies with extraordinary

breadth to all information, ``regardless of form or format,'' a

government agency is ``obtaining, causing to be obtained [or]

soliciting'' and includes requiring ``disclosure to third parties or

the public, of facts or opinion,'' when the information collection

calls for ``answers to identical questions posed to, or identical

reporting or recordkeeping requirements imposed on, ten or more

people.'' \42\ This provision has been determined to include not only

mandatory but also voluntary information collections, and to not only

written but also oral communications.\43\

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\41\ 44 U.S.C. 3501.

\42\ 44 U.S.C. 3502.

\43\ 5 CFR 1320.3(c)(1).

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To effect the purposes of the PRA, Congress requires all agencies

to quantify and justify the burden of any information collection it

imposes.\44\ This includes submitting each collection, whether or not

it is contained in a rulemaking, to the Office of Management and Budget

(``OMB'') for review.\45\ The OMB submission process includes

completing a form 83-I and a supporting statement with the agency's

burden estimate and justification for the collection. When the

information collection is established within a rulemaking, the agency's

burden estimate and justification should be provided in the proposed

rulemaking, subjecting it to the rulemaking's public comment process.

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\44\ 44 U.S.C. 3506.

\45\ 44 U.S.C. 3507.

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The Commission will protect proprietary information according to

the Freedom of Information Act and 17 CFR part 145, ``Commission

Records and Information.'' In addition, section 8(a)(1) of the Act

strictly prohibits the Commission, unless specifically authorized by

the Act, from making public ``data and information that would

separately disclose the business transactions or market positions of

any person and trade secrets or names of customers.'' The Commission

also is required to protect certain information contained in a

government system of records according to the Privacy Act of 1974, 5

U.S.C. 552a.

If the proposed rules are promulgated in final form, they would

require FBOT registrants to collect and submit, pursuant to part 48 of

the Regulations, information to the Commission, which has never been

required. For each proposed requirement, set forth below are estimates

of: (i) The number of respondents; (ii) the number of annual responses

by each respondent; (iii) the average hours per response; and (iv) the

aggregate annual reporting burden. New OMB control numbers will be

assigned to these proposed information collection requirements.

1. New Collection 3038-NEW

Regulation 48.6 requires each FBOT currently providing direct

access pursuant to no-action relief to submit a ``complete limited

application'' with the Commission to satisfy the registration

requirement, which includes information and documentation set forth in

the Appendix to this part that was not previously provided or is not

current.

OMB Control Number 3038-NEW.

Estimated number of respondents: 20.

Annual responses by each respondent: 1.

Estimated average hours per response: 50.

Aggregate annual reporting burden: 1,000.

2. New Collection 3038-NEW

Regulation 48.7 provides the information and documentation

requirements that a new FBOT must submit to become registered with the

Commission, including FBOT membership information, automated trading

system, terms and conditions of contracts to be made available in the

U.S., settlement and clearing, the regulatory regime governing the FBOT

and clearing organization, the FBOT and clearing organization rules and

enforcement thereof, and information sharing agreements.

OMB Control Number 3038-NEW.

Estimated number of respondents: 7.

Annual responses by each respondent: 1.

Estimated average hours per response: 1,000.

Aggregate annual reporting burden: 7,000.

3. New Collection 3038-NEW

Regulation 48.8(a)(8)(i) requires each registered FBOT that makes

swap contracts available by direct access to report to the public, on a

real-time basis, data relating to each swap transaction, including

price and volume, as soon as technologically practicable after

execution of the swap transactions.\46\

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\46\ Because the Commission has not previously regulated the

swap market, the Commission was unable to collect data relevant to

these estimates. Therefore, the Commission requests comment on these

estimates.

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OMB Control Number 3038-NEW.

Estimated number of respondents: 4.

Annual responses by each respondent: 250.

Estimated average hours per response: 8.32.

Aggregate annual reporting burden: 8,320.

4. New Collection 3038-NEW

Regulation 48.8(a)(8)(ii) requires each registered FBOT that makes

swap contracts available by direct access to ensure that all swap

transaction data is timely reported to a swap data repository.\47\

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\47\ Because the Commission has not previously regulated the

swap market, the Commission was unable to collect data relevant to

these estimates. Therefore, the Commission requests comment on these

estimates.

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OMB Control Number 3038-NEW.

Estimated number of respondents: 4.

Annual responses by each respondent: 250.

Estimated average hours per response: 8.32.

Aggregate annual reporting burden: 8,320.

5. New Collection 3038-NEW

Regulation 48.8(b)(1)(i)(A) and (B) requires each registered FBOT

to provide the Commission with certain trading volume information and

certain information regarding the FBOT members and other participants

in the U.S. that have direct access to the FBOT's trading system on at

least a quarterly basis.

OMB Control Number 3038-NEW.

Estimated number of respondents: 27.

Annual responses by each respondent: 4.

Estimated average hours per response: 6.

Aggregate annual reporting burden: 648.

6. New Collection 3038-NEW

Regulation 48.8(b)(1)(ii)(A)-(F) requires each registered FBOT to

[[Page 70985]]

provide the Commission on an ongoing basis with written notice of

certain information, including any material changes to the registration

information and documents previously submitted to the Commission; any

matter known to the FBOT concerning the financial or operational

viability of the FBOT or its clearing organization; and any known

violation by the FBOT, its clearing organization, any member of the

FBOT or its clearing organization or any other participant of the terms

or conditions of registration.

OMB Control Number 3038-NEW.

Estimated number of respondents: 27.

Annual responses by each respondent: 1.

Estimated average hours per response: 2.

Aggregate annual reporting burden: 54.

7. New Collection 3038-NEW

Regulation 48.8(b)(1)(iii)(A)-(F) requires each registered FBOT to

provide the Commission on an annual basis with certain information

including a certification from the FBOT's regulatory authority that the

FBOT retains its authorization in good standing as a regulated exchange

under the licensing used in the FBOT's home country, a description of

any significant disciplinary or enforcement actions that have been

instituted by the FBOT in the prior year, and a written description of

any material changes to the regulatory regime to which the FBOT is

subject to that have not previously been disclosed to the Commission.

OMB Control Number 3038-NEW.

Estimated number of respondents: 27.

Annual responses by each respondent: 1.

Estimated average hours per response: 4.

Aggregate annual reporting burden: 108.

8. New Collection 3038-NEW

Regulation 48.8(c)(1)(ii)(C)(1)-(4) requires each registered FBOT

to promptly notify the Commission, with regard to the linked contract,

of any changes regarding information that the FBOT will make publicly

available, enforcement of position limits, and position reductions

required to prevent manipulation, excessive speculation as described in

section 4a of the Act, price distortion, or disruption of delivery or

the cash settlement process, and any other area of interest expressed

by the Commission to the FBOT or its regulatory authority.

OMB Control Number 3038-NEW.

Estimated number of respondents: 1.

Annual responses by each respondent: 2.

Estimated average hours per response: 3.

Aggregate annual reporting burden: 6.

9. New Collection 3038-NEW

Regulation 48.8(c)(1)(ii)(D) requires each registered FBOT with a

linked contract to provide the Commission with large trader position

information.

OMB Control Number 3038-NEW.

Estimated number of respondents: 1.

Annual responses by each respondent: 250.

Estimated average hours per response: 2.

Aggregate annual reporting burden: 500.

10. New Collection 3038-NEW

Regulation 48.8(c)(1)(ii)(E) requires each registered FBOT with a

linked contract to provide the Commission with such information as

necessary to publish reports on aggregate trader positions.

OMB Control Number 3038-NEW.

Estimated number of respondents: 1.

Annual responses by each respondent: 250.

Estimated average hours per response: 2.

Aggregate annual reporting burden: 500.

11. New Collection 3038-NEW

Regulation 48.8(c)(2)(i) requires each registered FBOT with a

linked contract to provide the Commission with a quarterly report of

any member that had positions in a linked contract above the FBOT

position limit, whether a hedge exemption was granted, and if not,

whether a disciplinary action was taken.

OMB Control Number 3038-NEW.

Estimated number of respondents: 1.

Annual responses by each respondent: 4.

Estimated average hours per response: 3.

Aggregate annual reporting burden: 12.

12. New Collection 3038-NEW

Regulation 48.8(c)(2)(ii) requires each registered FBOT with a

linked contract to provide the Commission with trade execution and

audit trail data on a trade-date plus one basis.

OMB Control Number 3038-NEW.

Estimated number of respondents: 1.

Annual responses by each respondent: 250.

Estimated average hours per response: 3.

Aggregate annual reporting burden: 750.

13. New Collection 3038-NEW

Regulation 48.8(c)(2)(iv) requires each registered FBOT with a

linked contract to provide the Commission with a copy of all rules,

rule amendments, and other notices published by the FBOT with respect

to all linked contracts.

OMB Control Number 3038-NEW.

Estimated number of respondents: 1.

Annual responses by each respondent: 20.

Estimated average hours per response: 2.

Aggregate annual reporting burden: 40.

14. New Collection 3038-NEW

Regulation 48.8(c)(2)(v) requires each registered FBOT with a

linked contract to provide the Commission with a copy of all

disciplinary notices involving the FBOT's linked contract upon closure

of the action.

OMB Control Number 3038-NEW.

Estimated number of respondents: 1.

Annual responses by each respondent: 2.

Estimated average hours per response: 2.

Aggregate annual reporting burden: 4.

15. New Collection 3038-NEW

Regulation 48.9 requires each registered FBOT, upon request by the

Commission, to file a written demonstration that the FBOT is in

compliance with the conditions for registration.

OMB Control Number 3038-NEW.

Estimated number of respondents: 26.

Annual responses by each respondent: .25.

Estimated average hours per response: 8.

Aggregate annual reporting burden: 52.

16. New Collection 3038-NEW

Regulation 48.10 requires each registered FBOT that wishes to list

additional futures and options contracts for trading by direct access

to request in writing and receive approval from the Commission prior to

offering the contracts from within the U.S.

OMB Control Number 3038-NEW.

Estimated number of respondents: 27.

Annual responses by each respondent: 1.

Estimated average hours per response: 4.

Aggregate annual reporting burden: 108.

The Commission invites the public and other Federal agencies to

comment on any aspect of the reporting and recordkeeping burdens

discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission

solicits comments in order to: (i) Evaluate whether the proposed

collection of information is necessary for the proper performance of

the

[[Page 70986]]

functions of the Commission, including whether the information will

have practical utility; (ii) evaluate the accuracy of the Commission's

estimate of the burden of the proposed collection of information; (iii)

determine whether there are ways to enhance the quality, utility, and

clarity of the information to be collected; and (iv) minimize the

burden of the collection of information on those who are to respond,

including through the use of automated collection techniques or other

forms of information technology.

Comments may be submitted directly to the Office of Information and

Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at

[email protected] Please provide the Commission with a copy

of submitted comments so that all comments can be summarized and

addressed in the final rule preamble. Refer to the Addresses section of

this notice of proposed rulemaking for comment submission instructions

to the Commission. A copy of the supporting statements for the

collections of information discussed above may be obtained by visiting

RegInfo.gov. OMB is required to make a decision concerning the

collection of information between 30 and 60 days after publication of

this release in the Federal Register. Consequently, a comment to OMB is

most assured of being fully effective if received by OMB (and the

Commission) within 30 days after publication of this notice of proposed

rulemaking. Nothing in the foregoing affects the deadline enumerated

above for public comment to the Commission on the proposed rules.

B. Cost Benefit Analysis

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

costs and benefits of its actions before issuing a new regulation or

order under the Act.\48\ By its terms, Section 15(a) does not require

the Commission to quantify the costs and benefits of a new rule or to

determine whether the benefits of the adopted rule outweigh its costs.

Rather, Section 15(a) requires the Commission to ``consider the costs

and benefits'' of a proposed rule. Section 15(a) further specifies the

costs and benefits of proposed rules shall be evaluated in light of

five broad areas of market and public concern: (1) Protection of market

participants and the public; (2) efficiency, competitiveness, and

financial integrity of futures markets; (3) price discovery; (4) sound

risk management practices; and (5) other public interest

considerations. In conducting its analysis, the Commission may, in its

discretion, give greater weight to any one of the five enumerated areas

of concern and may determine that, notwithstanding its costs, a

particular rule is necessary or appropriate to protect the public

interest or to effectuate any of the provisions or to accomplish any of

the purposes of the rule.\49\

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\48\ 7 U.S.C. 19(a).

\49\ E.g., Fishermen's Dock Co-op., Inc v. Brown, 75 F3d 164

(4th Cir. 1996); Center for Auto Safety v. Peck, 751 F.2d 1336 (D.C.

Cir. 1985) (agency has discretion to weigh factors in undertaking

cost-benefit analyses).

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The proposed regulations implement the Dodd-Frank Act by

establishing a registration requirement for all FBOTs that wish to

provide their members or other participants located in the U.S. with

direct access to the FBOT's electronic trading and order matching

system. Pursuant to proposed Commission Regulation 48.5, FBOTs wishing

to provide direct access to their trading systems to members and other

participants located in the U.S. would be required to file an

application for registration with the Commission that contains all of

the information and documentation set forth in the Appendix to the Part

48 regulations and any additional information and documentation

required to successfully demonstrate that the FBOT satisfies the

registration requirements contained in Rule 48.7.

Regarding FBOTs that currently do not have no-action relief from

Commission staff, the Commission understands that costs associated with

the submission of an application for registration could be

considerable. However, the cost of applying for no-action relief under

existing procedures is substantial. FBOTs requesting no-action relief

currently are required to provide much of the information that would be

required under the proposed regulation. For example, FBOTs requesting

no-action relief under existing procedures have been required to

provide the Commission with information including the FBOT's trading

system, terms and conditions of contracts made available in the U.S.,

and the regulatory regime governing the FBOT in its home country. This

same information would be required as part of the registration process

under the proposed regulations. The additional cost of applying for

registration rather than applying for no-action relief is significant,

but not overly large.

FBOTs that currently have no-action relief from the Commission

would be required to register with the Commission and only provide a

limited application pursuant to the proposed regulations. This should

have the effect of limiting the costs to these FBOTs since they would

be required only to provide information that was not previously

provided or is not current.

The proposed regulations would authorize the Commission to impose

additional conditions on FBOTs that desire to make a linked contract

available by direct access to members of the FBOT or other participants

located in the U.S. These conditions would be required as part of the

FBOT registration process, and include among other things, the

imposition of speculative position limits and the submission of audit

trail data and large trader position information to the Commission for

all linked contracts. Any additional costs incurred by an FBOT with

existing no-action relief would be offset in part due to the

substantial overlap between the conditions already promulgated by the

Commission as a general policy applicable to FBOTs with linked

contracts and the conditions being proposed by the Commission under

regulation 48.8.\50\

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\50\ See CFTC Letter No. 08-09, June 17, 2008.

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The proposed FBOT registration regulations offer significant

benefits over the no-action process through which requests to provide

direct access to FBOT trading systems were handled in the past. While

the no-action process has served a useful purpose, the no-action

process is designed for discrete, unique factual circumstances where

regulations do not address the issue presented. Where the same type of

relief is granted on a regular and recurring basis, as it has been with

respect to direct access to FBOT trading systems, the Commission

believes that it is more appropriate to provide the relevant relief

through a generally applicable rulemaking. The proposed regulations

would provide a more standardized and efficient application process,

enhance the visibility of the process to both applicants and the

public, and ensure fair and consistent treatment to applicants.

Moreover, the Order of Registration issued by the Commission pursuant

to this proposal would provide greater legal certainty to FBOTs

operating pursuant to those Orders than no-action letters, which are

issued by the staff and not binding on the Commission.

In addition, there is substantial value in the information and

documentation that the Commission will be able to obtain, and the

obligations that may be imposed pursuant to the conditions applicable

to FBOT registration. For example, an FBOT that lists for trading a

contract which settles on the price of

[[Page 70987]]

a contract traded on a Commission-regulated exchange raises serious

concerns for the Commission. The position limit requirement and the

submission of large trader position information and audit trail data to

the Commission, pursuant to the conditions placed upon an FBOT that

offers a linked contract for trading via direct access to its members

or other participants located in the U.S., will enhance the

Commission's ability to carry out its market surveillance

responsibilities. The proposed regulations and related conditions also

will ensure that transactions executed on an FBOT do not adversely

affect U.S. cash and futures markets, market participants, and

customers, as well as the consumers affected by those transactions.

Finally, the proposed regulations are designed to ensure that the U.S.

commodity markets operate fairly and efficiently and are free from

fraud, manipulation and other market abuses.

After considering the costs and benefits, the Commission has

determined to propose the regulations discussed above. The Commission

invites public comment on its evaluation of the costs and benefits of

the proposed regulations. Specifically, commenters are invited to

submit data quantifying the costs and benefits of the proposed

regulations with their comment letters.

C. The Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA'') \51\ requires that

agencies consider whether the rules they propose will have a

significant economic impact on a substantial number of small entities

and, if so, provide a regulatory flexibility analysis respecting the

impact.\52\ The proposed rules detailed in this release would only

affect FBOTs. The rules would replace the policy of issuing staff no-

action letters to permit FBOTs to provide for direct access, defined in

the Dodd-Frank Act to refer to an explicit grant of authority by an

FBOT to an identified member or other participant to enter trades

directly into the FBOT's trade matching system.

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\51\ 5 U.S.C. 601 et seq.

\52\ 5 U.S.C. 601 et seq.

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As a threshold matter, because the proposed application

requirements and standards for FBOT registration under the new rules

generally are consistent with the application requirements and review

standards that have guided the Commission's staff in issuing FBOT no-

action relief letters, the Commission believes that these rules will

not have a significant economic effect on any substantial number of

FBOTs, whether they are large or small entities. Moreover, the

Commission does not believe that FBOTs would be small entities. For

both reasons, the Commission believes that a regulatory flexibility

analysis is not required for this rulemaking.

The Commission has not previously addressed the question whether

FBOTs are, in fact, small entities for purposes of the RFA since FBOTs

are a new category of registrant created by the Dodd-Frank Act.

However, the term ``foreign board of trade'' has been used in the CEA

and defined in the Commission Regulations to be a ``board of trade,

exchange or market located outside the U.S.'' \53\ The term ``board of

trade,'' in turn, is defined in the CEA as ``any organized exchange or

trading facility.'' \54\ An organized exchange includes designated or

registered exchanges, such as DCMs.\55\

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\53\ See Commission Regulation 1.33(ss). Additionally, the term

``board of trade, exchange or market located outside the U.S.'' is

used interchangeably in the CEA with the term ``foreign board of

trade.'' For example, Section 4(a) carves out ``board of trade,

exchange or market located outside the U.S.'' from the requirement

that futures contracts in the U.S. must be traded on a DCM or DTEF;

new Section 4(b)(2)(C) provides that the Commission may not, except

as provided in section 4(b)(1) and (2), directly regulate a

``foreign board of trade.''

\54\ CEA Sec. 1a(2).

\55\ CEA Sec. 1a(27).

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The Commission has previously determined that DCMs are not ``small

entities'' for purposes of the RFA.\56\ Key to the Commission's

determination was that DCMs perform a central role in the regulatory

scheme for futures trading, requiring the DCM to employ significant

resources, including personnel, in the performance of this statutory

role. The Commission designates a contract market only when it meets

specific criteria including expenditure of sufficient resources to

establish and maintain adequate self-regulatory programs.

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\56\ 47 FR 18618, 18619 (April 30, 1982).

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Likewise, the Commission will register an FBOT to provide direct

access only after it has met similar criteria. Critically, an FBOT will

only be registered by demonstrating that it possesses the attributes of

an established, organized exchange; adheres to appropriate rules

prohibiting abusive trading practices; and enforces appropriate rules

to maintain market and financial integrity. Because FBOTs and DCMs are

functionally equivalent entities in these regards, the Commission is

determining that FBOTs, like DCMs, are not small entities for purposes

of the RFA. In light of the foregoing, the Chairman on behalf of the

Commission hereby certifies, pursuant to 5 U.S.C. 605(b), that the

proposed rules will not have a significant impact on a substantial

number of small entities.

List of Subjects in 17 CFR Part 48

Foreign boards of trade, Commodity futures, Options, Swaps, Direct

access, Linked contract, Registration, Existing no-action relief,

Conditions of registration.

In consideration of the foregoing, and pursuant to the authority

contained in the Act, and, in particular, sections 3, 4 and 8a of the

Act, the Commission hereby proposes to amend Chapter I of Title 17 of

the Code of Federal Regulations by adding a new part 48 to read as

follows:

PART 48--REGISTRATION OF FOREIGN BOARDS OF TRADE

Sec.

48.1 Scope.

48.2 Definitions.

48.3 Registration required.

48.4 Registration eligibility.

48.5 Registration procedures.

48.6 Foreign boards of trade providing direct access pursuant to

existing no-action relief.

48.7 Requirements for registration.

48.8 Conditions of registration.

48.9 Revocation of registration.

48.10 Additional contracts.

Appendix--Part 48--Contents of Application

Authority: 7 U.S.C. 5, 6 and 12a, unless otherwise noted.

Sec. 48.1 Scope.

The provisions of this part apply to any foreign board of trade

that is registered or is applying to become registered with the

Commission in order to provide its identified members or other

participants located in the United States with direct access to its

electronic trading and order matching system.

Sec. 48.2 Definitions.

(a) Foreign board of trade. For purposes of this part, foreign

board of trade means any board of trade, exchange or market located

outside the United States, its territories or possessions, whether

incorporated or unincorporated, where foreign agreements, contracts or

transactions are entered into.

(b) Foreign board of trade eligible to be registered. A foreign

board of trade eligible to be registered means a foreign board of trade

that satisfies the requirements for registration specified in section

48.7 of this part and

(1) Possesses the attributes of an established, organized exchange,

[[Page 70988]]

(2) Adheres to appropriate rules prohibiting abusive trading

practices,

(3) Enforces appropriate rules to maintain market and financial

integrity,

(4) Has been authorized by a regulatory process that examines

customer and market protections, and

(5) Is subject to continued oversight by a regulator that has power

to intervene in the market and the authority to share information with

the Commission.

(c) Direct access. For purposes of this part, direct access means

an explicit grant of authority by a foreign board of trade to an

identified member or other participant located in the United States to

enter trades directly into the trade matching system of the foreign

board of trade.

(d) Linked contract. For purposes of this part, a linked contract

is a futures or option or swaps contract made available for direct

access from the United States by a registered foreign board of trade

that settles against any price (including the daily or final settlement

price) of one or more contracts listed for trading on a registered

entity as defined in section 1a(40) of the Act.

(e) Communications. For purposes of this part, communications is

defined to include any summons, complaint, order, subpoena, request for

information, notice, or any other written or electronic documentation

or correspondence issued by or on behalf of the Commission.

(f) Material change. For purposes of this part, material changes in

the information provided to the Commission in support of the

registration application would include, without limitation, a

modification of any of the following: The membership criteria of the

foreign board of trade or its clearing organization; the location of

the management, personnel or operations of the foreign board of trade

or its clearing organization (particularly changes that may suggest an

increased nexus between the foreign board of trade's activities and the

United States); the basic structure, nature, or operation of the

trading system or its clearing organization; the regulatory or self-

regulatory regime applicable to the foreign board of trade, its

clearing organization, and their respective members and other

participants (including, without limitation, the rules applicable to or

oversight thereof), any change in the authorization, licensure or

registration of the foreign board of trade or clearing organization,

and any information that may impact the ability of the clearing

organization to satisfy the current Recommendations for Central

Counterparties that have been issued jointly by the Committee on

Payment and Settlement Systems and the Technical Committee of the

International Organization of Securities Commissions as updated,

revised or otherwise amended, or successive standards, principles and

guidance for central counterparties or financial market infrastructures

adopted jointly by the International Organization of Securities

Commissions and the Committee on Payment and Settlement Systems.

(g) Clearing organization. For purposes of this part, clearing

organization means the foreign board of trade, affiliate of the foreign

board of trade or any third party clearing house, clearing association,

clearing corporation or similar entity, facility or organization that,

with respect to any agreement, contract or transaction executed on or

through the foreign board of trade, would be:

(1) Defined as a derivatives clearing organization under section

1a(9) of the Act;

(2) Defined as a central counterparty by the Recommendations for

Central Counterparties that have been issued jointly by the Committee

on Payment and Settlement Systems and the Technical Committee of the

International Organization of Securities Commissions, as updated,

revised or otherwise amended, or successive standards, principles and

guidance for central counterparties adopted or financial market

infrastructures adopted jointly by the Committee on Payment and

Settlement Systems or the International Organization of Securities

Commissions; or

(3) Otherwise interposes itself between the counterparties to the

agreements, contracts or transactions (or subset thereof) executed on

or through the foreign board of trade, becoming the buyer to every

seller and the seller to every buyer.

(h) Existing no-action relief. For purposes of this part, existing

no-action relief means a no-action letter issued by a division of the

Commission to the foreign board of trade in which the division informs

the foreign board of trade that it will not recommend that the

Commission institute enforcement action against the foreign board of

trade if the foreign board of trade does not seek designation as either

a designated contract market pursuant to section 5 of the Act or a

derivatives transaction execution facility pursuant to section 5a of

the Act in connection with the provision of direct access to the

foreign board of trade's trade matching system by its members and other

participants located in the United States.

(i) Swaps. For purposes of this part, swaps is defined to mean

swaps as defined in section 1a(47) of the Act, and any Commission

regulation adopted thereunder, and any transaction or contract that is

regulated as a swap under the regulatory regime to which the FBOT is

subject.

(j) Affiliate. For purposes of this part, an affiliate of a

registered foreign board of trade member or other participant shall

mean any person, as that term is defined in section 1a(38) of the CEA,

that:

(1) Owns 50% or more of the member or other participant;

(2) Is owned 50% or more by the member or other participant; or

(3) Is owned 50% or more by a third person that also owns 50% or

more of the member or other participant.

(k) Member or other participant. For purposes this part, the terms

member or other participant of the registered foreign board of trade

shall include any affiliate of any registered foreign board of trade's

member or other participant that has been granted direct access to the

trading system by the registered foreign board of trade.

Sec. 48.3 Registration required.

(a) Except as specified in this part, it shall be unlawful for a

foreign board of trade to permit direct access to its electronic

trading and order matching system from within the United States unless

and until the Commission has issued a valid and current Order of

Registration to the foreign board of trade pursuant to the provisions

of this part.

(b) It shall be unlawful for a board of trade to make false or

misleading statements in any application for registration or in

connection with any application for registration under this part.

Sec. 48.4 Registration eligibility.

(a) Only foreign boards of trade eligible to be registered, as

defined in Sec. 48.2(b) of this part, are eligible for registration

with the Commission pursuant to this part.

(b) An applicant may request foreign board of trade registration in

order to permit direct access from within the United States to its

members and other participants that:

(1) Trade in the United States for their proprietary accounts;

(2) Are registered with the Commission as futures commission

merchants and submit orders for United States customers to the trading

system for execution; or

(3) Are registered with the Commission as a commodity pool

[[Page 70989]]

operator or commodity trading advisor, or are exempt from such

registration pursuant to section 4.13 or 4.14 of this chapter, and that

submit orders for execution on behalf of United States pools they

operate or accounts of United States customers for which they have

discretionary authority, respectively, provided that a futures

commission merchant or a firm exempt from such registration pursuant to

Commission Rule 30.10 acts as clearing firm and guarantees, without

limitation, all such trades of the commodity pool operator or commodity

trading advisor effected through submission of orders to the trading

system.

Sec. 48.5 Registration procedures.

(a) A foreign board of trade seeking registration with the

Commission pursuant to this part must electronically file an

application for registration, labeled as an Application for Foreign

Board of Trade Registration pursuant to part 48 of the Commission's

Regulations, with the Secretary of the Commission, at

[email protected]

(b) An application for registration must be signed by the foreign

board of trade's chief executive officer (or functional equivalent) and

must include the information and documentation set forth in the

Appendix to this part 48 and any information and documentation

necessary, in the discretion of the Commission, to effectively

demonstrate that the foreign board of trade and its clearing

organization satisfy the registration requirements set forth in this

part. The application must include a certification by the chief

executive officer (or functional equivalent) of the foreign board of

trade and the clearing organization that representations made in

connection with, or relevant to, the application and the information

and documentation provided in support thereof are true, correct and

complete.

(c) A foreign board of trade registration applicant must identify

with particularity any information in the application that will be

subject to a request for confidential treatment and must provide

support for any request for confidential treatment pursuant to the

procedures set forth in section 145.9 of this chapter.

(d) The Commission will review the application for foreign board of

trade registration and, if the Commission finds the application to be

complete, may approve or deny the application. In its review, the

Commission will consider, among other things:

(1) Whether the foreign board of trade is eligible to be registered

as defined in section 48.2(b) of this part;

(2) Whether the foreign board of trade and its clearing

organization are subject to comprehensive supervision and regulation by

the appropriate governmental authorities in their home country that is

comparable to the comprehensive supervision and regulation to which

designated contract markets and derivatives clearing organizations are

respectively subject in the United States;

(3) Any previous Commission findings that the foreign board of

trade and its clearing organization are subject to comprehensive

supervision and regulation by the appropriate government authorities in

the foreign board of trade's home country that is comparable to the

comprehensive supervision and regulation to which designated contract

markets and derivatives clearing organizations are subject in the

United States; and

(4) Whether the foreign board of trade and its clearing

organization have adequately demonstrated that they meet the

requirements for registration specified in section 48.7 of this part.

(e) If the Commission approves the application, the Commission will

register the foreign board of trade by issuing an Order of

Registration. If the Commission does not approve the application, the

foreign board of trade will not be registered and may not provide

direct access to its electronic trading and order matching systems from

within the United States, and the Commission will issue a Notice of

Action specifying that the application was not approved and setting

forth the reasons therefor. The Commission may, after appropriate

notice and an opportunity for a hearing, amend, suspend, terminate or

otherwise restrict the terms of the Order of Registration.

(f) A foreign board of trade whose application is not approved may

reapply for registration 360 days after the issuance of the Notice of

Action if the foreign board of trade has addressed any deficiencies in

its original application or facts and circumstances relevant to the

Commission's review of the application have changed.

Sec. 48.6 Foreign boards of trade providing direct access pursuant to

existing no-action relief.

(a) A foreign board of trade operating pursuant to existing no-

action relief as of the effective date of this Part 48 must register

with the Commission pursuant to this Part 48 in order to continue to

provide direct access to its electronic trading and order matching

system from the United States.

(b) Such foreign board of trade's application for registration must

include all of the information and documentation set forth in the

Appendix to this part 48. To the extent that the foreign board of trade

intends to rely upon previously submitted information or documentation

to demonstrate that it satisfies the requirements of the Appendix or

the registration requirements set forth in section 48.7 of this part,

the foreign board of trade must resubmit the information or

documentation, identify the specific requirements for registration set

forth in section 48.7 of this part that are satisfied by the

resubmitted information, and certify that the information remains

current and true (limited application).

(c) Foreign boards of trade operating pursuant to existing no-

action relief must submit a complete limited application for

registration within 120 days of the effective date of this regulation

and the no-action relief will, upon notice to the foreign board of

trade, be revoked if a complete limited application is not received by

the Commission within that 120 days. The foreign board of trade may

continue to provide direct access from the United States pursuant to

the no-action relief during the 120-day period, during the period in

which the complete limited application is being reviewed by the

Commission, and until the Commission notifies the foreign board of

trade that the application has been approved or not approved or that

the existing no-action relief has otherwise been withdrawn.

Sec. 48.7 Requirements for registration.

An applicant for registration under this part must include all of

the information and documentation set forth in the Appendix to this

Part 48 and any other information and documentation necessary or

appropriate to determine that the following requirements for

registration are met. The Commission, in its discretion, may impose

additional registration requirements and request additional information

and documentation in connection with an application for registration.

An applicant for registration must provide promptly any additional

information or documentation requested by the Commission in connection

with the application.

(a) Foreign Board of Trade and Clearing Membership. An applicant

for registration must demonstrate that:

(1) The members and other participants of the foreign board of

trade and its clearing organization are fit and proper and meet

appropriate financial and professional standards,

[[Page 70990]]

(2) The foreign board of trade and its clearing organization have

and enforce provisions to minimize and resolve conflicts of interest,

and

(3) The foreign board of trade and its clearing organization have

and enforce rules prohibiting the disclosure of material non-public

information obtained as a result of a member's or other participant's

performance of duties as a member of their respective governing boards

and significant committees.

(b) The Automated Trading System. An applicant for registration

must demonstrate that:

(1) The trading system complies with Principles for the Oversight

of Screen-Based Trading Systems for Derivative Products developed by

the Technical Committee of the International Organization of Securities

Commissions,

(2) The trade matching algorithm matches trades fairly and timely,

(3) The audit trail captures all relevant data, including changes

to orders, and audit trail data is securely maintained and available

for an adequate time period,

(4) Trade data is made available to users and the public,

(5) The trading system has demonstrated reliability,

(6) Access to the trading system is secure and protected,

(7) There are adequate provisions for emergency operations and

disaster recovery,

(8) Trading data is backed up to prevent loss of data, and

(9) Only those futures and option contracts or swaps that have been

identified to the Commission as part of the application or permitted to

be made available for trading by direct access pursuant to the

procedures set forth in section 48.10 of this part are made available

for trading on connections in the United States.

(c) Terms and Conditions of Contracts To Be Made Available in the

United States.

(1) Contracts that may be made available by direct access must meet

the following standards:

(i) Contracts must be futures, option or swaps contracts--only such

contracts as would be eligible to be traded on a designated contract

market are eligible to be traded by direct access on a registered

foreign board of trade,

(ii) Contracts must be cleared,

(iii) Contracts must not be prohibited from being traded by United

States persons, and

(iv) Contracts must not be readily susceptible to manipulation.

(2) Contracts that have the following characteristics must be

identified:

(i) Contracts that are linked to a contract listed for trading on a

United States registered entity, and

(ii) Contracts that share any other commonality with a contract

listed for trading on a United States registered entity, for example,

if both the foreign board of trade's and the United States registered

entity's contract settle to the price of the same third party-

constructed index.

(d) Settlement and Clearing. An applicant for registration must

demonstrate that:

(1) The clearing organization complies with the current

Recommendations for Central Counterparties that have been issued

jointly by the Committee on Payment and Settlement Systems and the

Technical Committee of the International Organization of Securities

Commissions as updated, revised or otherwise amended, or successive

standards, principles and guidance for central counterparties and

financial market infrastructures adopted jointly by the International

Organization of Securities Commissions and the Committee on Payment and

Settlement Systems or is registered with the Commission as a

derivatives clearing organization, and

(2) The clearing organization is in good regulatory standing in its

home country jurisdiction.

(e) The Regulatory Regime Governing the Foreign Board of Trade and

the Clearing Organization. An applicant for registration must

demonstrate that:

(1) The regulatory authorities governing the activities of the

foreign board of trade and clearing organization provide comprehensive

supervision and regulation of the foreign board of trade and the

clearing organization that is comparable to the comprehensive

supervision and regulation provided by the Commission to designated

contract markets and derivatives clearing organizations, that is, the

regulatory authorities support and enforce regulatory objectives in the

oversight of the foreign board of trade and clearing organization that

are substantially equivalent to the regulatory objectives supported and

enforced by the Commission in its oversight of designated contract

markets and derivatives clearing organizations,

(2) The regulatory authorities governing the activities of the

foreign board of trade, the clearing organization and their respective

members and other participants engage in ongoing regulatory supervision

and oversight of the foreign board of trade and its trading system, the

clearing organization and its clearing system, the members,

intermediaries and other participants of the foreign board of trade and

clearing organization, with respect to, among other things, market

integrity, customer protection, clearing and settlement and the

enforcement of exchange and clearing organization rules,

(3) The regulatory authorities governing the foreign board of trade

and the clearing organization have the power to share information

directly with the Commission, upon request, including information

necessary to evaluate the continued eligibility of the foreign board of

trade for registration and to audit for compliance with the terms and

conditions of the registration.

(4) The regulatory authorities governing the foreign board of trade

and the clearing organization have the power to intervene in the

market.

(f) The Rules of the Foreign Board of Trade and Clearing

Organization and Enforcement Thereof. An applicant for registration

must demonstrate that:

(1) The foreign board of trade and its clearing organization have

implemented and enforce rules to ensure compliance with the

requirements of registration contained in this part,

(2) The foreign board of trade and its clearing organization have

the capacity to detect, investigate, and sanction persons who violate

their respective rules,

(3) The foreign board of trade and the clearing organization (or

their respective regulatory authorities) have implemented and enforce

disciplinary procedures that empower them to recommend and prosecute

disciplinary actions for suspected rule violations, impose adequate

sanctions for such violations, and provide adequate protections to

charged parties pursuant to fair and clear standards,

(4) The foreign board of trade and its clearing organization are

authorized by rule or by contractual agreement to obtain, from members

and other participants, any information and cooperation necessary to

conduct investigations, to effectively enforce their respective rules,

and to ensure compliance with the conditions of registration,

(5) The foreign board of trade and its clearing organization have

sufficient compliance staff and resources, including by delegation and/

or outsourcing to a third party, to fulfill their respective regulatory

responsibilities, including appropriate trade practice surveillance,

real time market monitoring, market surveillance, financial

surveillance, protection of customer funds, enforcement of clearing and

settlement provisions and other compliance and regulatory

responsibilities,

[[Page 70991]]

(6) The foreign board of trade has implemented and enforces rules

with respect to access to the trading system and the means by which the

connection is accomplished,

(7) The foreign board of trade's audit trail captures and retains

sufficient order and trade-related data to allow its compliance staff

to detect trading and market abuses and to reconstruct all transactions

within a reasonable period of time,

(8) The foreign board of trade has implemented and enforces rules

relating to prohibited trading practices (for example wash sales or

trading ahead),

(9) The foreign board of trade has the capacity to detect and

deter, and has implemented and enforces rules relating to, market

manipulation, attempted manipulation, price distortion, and other

disruptions of the market, and

(10) The foreign board of trade has and enforces rules and

procedures that ensure a competitive, open and efficient market and

mechanism for executing transactions.

(g) Information Sharing. An applicant for registration must

demonstrate that:

(1) The regulatory authorities governing the activities of and

providing supervision and oversight of the foreign board of trade and

the clearing organization are signatories to the International

Organization of Securities Commissions Multilateral Memorandum of

Understanding; if the regulatory authorities are not signatories to the

International Organization of Securities Commissions Multilateral

Memorandum of Understanding, they must inform the Commission of the

reasons why the document has not been signed, supply any additional

information requested by the Commission, and ensure alternative

information sharing arrangements that are satisfactory to the

Commission are in place.

(2) The regulatory authorities governing the activities of and

providing supervision and oversight of the foreign board of trade and

the clearing organization are signatories to the Declaration on

Cooperation and Supervision of International Futures Exchanges and

Clearing Organizations or otherwise commits to share the types of

information contemplated by the International Information Sharing

Memorandum of Understanding and Agreement with the Commission,

(3) The foreign board of trade has executed, or commits to execute,

the International Information Sharing Memorandum of Understanding and

Agreement, and

(4) Pursuant to the conditions described in section 48.8(a)(6) of

this part, the foreign board of trade and clearing organization must

provide directly to the Commission information necessary to evaluate

the continued eligibility of the foreign board of trade clearing

organization, or their respective members or other participants for

registration, to audit for and enforce compliance with the specified

conditions of the registration, or to enable the Commission to carry

out its duties under the Act and Commission regulations.

Sec. 48.8 Conditions of registration.

Immediately upon registration, and on an ongoing basis thereafter,

the foreign board of trade and the clearing organization shall comply

with the conditions of registration set forth in this section and any

additional conditions that the Commission may impose, in its

discretion, and after appropriate notice and opportunity for a hearing.

Such conditions could include, but are not limited to, the conditions

set forth in section 48.8(c) of this part and, with respect to the

listing of swaps contracts, any additional conditions that the

Commission deems necessary. Continued registration is expressly

conditioned upon satisfaction of these conditions.

(a) Specified Conditions for Maintaining Registration.

(1) Registration Requirements: The foreign board of trade and its

clearing organization shall continue to satisfy all of the requirements

for registration set forth in section 48.7 and the conditions for

maintaining registration set forth herein.

(2) Regulatory Regime:

(i) The foreign board of trade will continue to satisfy the

criteria for a regulated market pursuant to the regulatory regime

described in its application and will continue to be subject to

oversight by the regulatory authorities described in its application

with respect to transactions effected through the foreign board of

trade's trading system.

(ii) The clearing organization will continue to satisfy the

criteria for a regulated clearing organization pursuant to the

regulatory regime described in the application for registration; the

clearing organization and its participants will continue to be subject

to comprehensive supervision, regulation and oversight by the

regulatory authorities as described in the application and that is

comparable to the comprehensive supervision, regulation to which such

entities would be subject in the United States; and the clearing

organization shall continue to be in good standing with the relevant

regulatory authority.

(iii) The laws, systems, rules, and compliance mechanisms of the

regulatory regime applicable to the foreign board of trade will

continue to require the foreign board of trade to maintain fair and

orderly markets; prohibit fraud, abuse, and market manipulation; and

provide that such requirements are subject to the oversight of

appropriate regulatory authorities.

(3) Satisfaction of Comparable International Standards:

(i) The foreign board of trade will continue to adhere to the

Principles for the Oversight of Screen-Based Trading Systems for

Derivative Products developed by the Technical Committee of the

International Organization of Securities Commissions, as updated,

revised, or otherwise amended, to the extent such principles do not

contravene United States law.

(ii) The clearing organization will continue to: (A) Be registered

as a derivatives clearing organization and be in compliance with the

laws and regulations related thereto or (B) satisfy the Recommendations

for Central Counterparties that have been issued jointly by the

Committee on Payment and Settlement Systems and the Technical Committee

of the International Organization of Securities Commissions, as

updated, revised or otherwise amended, or successive standards,

principles and guidance for central counterparties or financial market

infrastructures adopted jointly by the Committee on Payment and

Settlement Systems and the Technical Committee of the International

Organization of Securities Commissions.

(4) Restrictions on Direct Access:

(i) Only the foreign board of trade's identified members or other

participants will have direct access to the foreign board of trade's

trading system from the United States and the foreign board of trade

will not provide, and will take reasonable steps to prevent, third

parties from providing direct access to the foreign board of trade to

persons other than the identified members or other participants.

(ii) All orders that are transmitted through the foreign board of

trade's trading system by a foreign board of trade identified member or

other participant that is operating pursuant to the foreign board of

trade's registration will be solely for the member's or trading

participant's own account unless such member or other participant is

registered with the Commission as a futures commission merchant or such

member or other participant is registered with the Commission as a

commodity pool operator or commodity trading advisor, or is exempt from

such

[[Page 70992]]

registration pursuant to section 4.13 or 4.14 of this chapter, provided

that a futures commission merchant or a firm exempt from such

registration pursuant to Commission Rule 30.10 acts as clearing firm

and guarantees, without limitation, all such trades of the commodity

pool operator or commodity trading advisor effected through submission

of orders on the trading system.

(5) Submission to Commission Jurisdiction:

(i) The foreign board of trade will require that each current and

prospective member or other participant that is granted direct access

to the foreign board of trade's trading system pursuant to the foreign

board of trade's registration and that is not registered with the

Commission as a futures commission merchant, a commodity trading

advisor or a commodity pool operator file with the foreign board of

trade a written representation, executed by a person with the authority

to bind the member or other participant, stating that as long as the

member or other participant grants direct access to the foreign board

of trade's trading system pursuant to the foreign board of trade

registration, the member or other participant agrees to and submits to

the jurisdiction of the Commission with respect to activities conducted

pursuant to the registration.

(ii) The foreign board of trade and its clearing organization will

file with the Commission a valid and binding appointment of an agent

for service of process in the United States pursuant to which the agent

is authorized to accept delivery and service of communications issued

by or on behalf of the Commission.

(iii) The foreign board of trade will require that each current and

prospective member or other participant of the foreign board of trade

that is granted direct access to the foreign board of trade's trading

system pursuant to the foreign board of trade's registration with the

Commission and that is not registered with the Commission as a futures

commission merchant, a commodity trading advisor or a commodity pool

operator file with the foreign board of trade a valid and binding

appointment of a United States agent for service of process in the

United States pursuant to which the agent is authorized to accept

delivery and service of communications issued by or on behalf of the

Commission.

(iv) The foreign board of trade, clearing organization, and each

current and prospective member or other participant of either that is

granted direct access to the foreign board of trade's trading system

pursuant to the foreign board of trade's registration and that is not

registered with the Commission as a futures commission merchant, a

commodity trading advisor, or a commodity pool operator will maintain

with the foreign board of trade written representations, executed by

persons with the authority to bind the entity making them, stating that

as long as the foreign board of trade is registered under this

regulation, the foreign board of trade, the clearing organization or

member of either or other participant granted direct access pursuant to

this regulation will provide, upon the request of the Commission, the

United States Department of Justice and, if appropriate, the National

Futures Association, prompt access to the entity's, member's, or other

participant's original books and records or, at the election of the

requesting agency (the Commission, the United States Department of

Justice, or the National Futures Association), a copy of specified

information containing such books and records, as well as access to the

premises where the trading system is available in the United States.

(v) The foreign board of trade will maintain all representations

required pursuant to this regulation as part of its books and records

and will make them available to the Commission upon request.

(6) Information Sharing:

(i) Information-sharing arrangements satisfactory to the

Commission, including but not limited to those set forth in section

48.7(g) of the registration requirements, are in effect between the

Commission and the regulatory authorities that supervise both the

foreign board of trade and the clearing organization.

(ii) The Commission is, in fact, able to obtain sufficient

information regarding the foreign board of trade, the clearing

organization, their respective members and participants and the

activities related to the foreign board of trade's registration.

(iii) The foreign board of trade, and its clearing organization, as

applicable, will provide directly to the Commission any information

necessary to evaluate the continued eligibility of the foreign board of

trade or its members or other participants for registration, the

capability and determination to enforce compliance with these specified

conditions of the registration or, in the event that the Commission has

been unable to satisfactorily obtain necessary information from the

regulatory authority, to enable the Commission to carry out its duties

under the Act and Commission regulations and to provide adequate

protection to the public or United States registered entities.

(iv) In the event that the foreign board of trade and the clearing

organization are separate entities, the foreign board of trade will

require the clearing organization to enter into a written agreement in

which the clearing organization is contractually obligated to promptly

provide any and all information and documentation that may be required

of the clearing organization under this regulation and such agreement

shall be made available to the Commission, upon request.

(7) Monitoring for Compliance:

The foreign board of trade and the clearing organization will

employ reasonable procedures for monitoring and enforcing compliance

with the specified conditions of its registration.

(8) Conditions Applicable to Swaps Trading:

(i) If the foreign board of trade makes swaps contracts available

by direct access, the foreign board of trade must report to the public,

on a real-time basis, data relating to each swap transaction, including

price and volume, as soon as technologically practicable after

execution of the swap transaction.

(ii) If the foreign board of trade makes swaps contracts available

by direct access, the foreign board of trade must ensure that all swap

transaction data is timely reported to a swap data repository that is

either A. registered with the Commission, or B. has an information

sharing arrangement with, the Commission.

(iii) If the foreign board of trade makes swaps contracts available

by direct access, the foreign board of trade must agree to coordinate

with the Commission with respect to arrangements established to address

cross market oversight issues, including surveillance, emergency

actions and the monitoring of trading.

(b) Other Continuing Obligations.

(1) Foreign boards of trade registered under this part and their

clearing organizations must also comply with the following regulatory

obligations on an ongoing basis:

(i) The foreign board of trade will maintain the following updated

information and submit such information to the Commission on at least a

quarterly basis, not later than 30 days following the end of the

quarter, and at any time promptly upon the request of a Commission

representative, computed based upon separating buy sides and sell

sides:

(A) For each contract available to be traded through the foreign

board of trade's trading system,

[[Page 70993]]

(1) The total trade volume originating from electronic trading

devices providing direct access to the trading system in the United

States,

(2) The total trade volume for such products traded through the

trading system worldwide, and

(3) The total trade volume for such products traded on the foreign

board of trade generally; and

(B) A listing of the names, National Futures Association

identification numbers (if applicable), and main business addresses in

the United States of all members and other participants that have

direct access to the trading system in the United States.

(ii) The foreign board of trade will promptly provide to the

Commission written notice of the following:

(A) Any material change in the information provided in the

registration application.

(B) Any material change in the foreign board of trade's or clearing

organization's rules or the laws, rules, and regulations in the home

country jurisdictions of the foreign board of trade or clearing

organization relevant to futures, options and swaps contracts.

(C) Any matter known to the foreign board of trade, the clearing

organization or its representatives that, in the judgment of the

foreign board of trade or clearing organization judgment, may affect

the financial or operational viability of the foreign board of trade or

its clearing organization with respect to contracts traded by direct

access, including, but not limited to, any significant system failure

or interruption.

(D) Any default, insolvency, or bankruptcy of any foreign board of

trade member or other participant that is or should be known to the

foreign board of trade or its representatives or the clearing

organization or its representatives that may have a material, adverse

impact upon the condition of the foreign board of trade as it relates

to trading by direct access, its clearing organization or upon any

United States customer or firm or any default, insolvency or bankruptcy

of any member of the foreign board of trade's clearing organization.

(E) Any violation of the specified conditions of the foreign board

of trade's registration or failure to satisfy the requirements for

registration under this part that is known or should be known by the

foreign board of trade, the clearing organization or any of their

respective members or participants.

(F) Any disciplinary action by the foreign board of trade or its

clearing organization with respect to any contract available to be

traded by direct access taken against any of their respective members

or participants that involves any market manipulation, fraud, deceit,

or conversion or that results in suspension or expulsion.

(iii) The foreign board of trade and the clearing organization, as

applicable, must provide the following to the Commission on an annual

basis.

(A) A certification from the foreign board of trade's regulatory

authority confirming that the foreign board of trade retains its

authorization, licensure or registration, as applicable, as a regulated

market and/or exchange under the authorization, licensing or other

registration methodology used by the foreign board of trade's

regulatory authority and that the foreign board of trade is in

continued good standing.

(B) A certification from the clearing organization's regulatory

authority confirming that the clearing organization retains its

authorization, licensure or registration, as applicable, as a clearing

organization under the authorization, licensing or other registration

methodology used by the clearing organization's regulatory authority

and is in continued good standing.

(C) If the clearing organization is not a derivatives clearing

organization, a recertification of the clearing organization's

compliance with the Recommendations for Central Counterparties that

have been issued jointly by the Committee on Payment and Settlement

Systems and the Technical Committee of the International Organization

of Securities Commissions, as updated, revised or otherwise amended, or

successive standards, principles and guidance for central

counterparties and financial market infrastructures adopted jointly by

the Committee on Payment and Settlement Systems and the International

Organization of Securities Commissions.

(D) A certification that affiliates of members and other

participants, as defined in Sec. 48.2(j) of this part continue to be

required to comply with appropriate registration requirements,

conditions for registration and the rules of the foreign board of trade

and that the members or other participants to which they are affiliated

remain responsible to the foreign board of trade for ensuring their

affiliates' compliance.

(E) A description of any material changes to any relevant

representation regarding the foreign board of trade or clearing

organization made to the Commission that have not been previously

disclosed, in writing, or a certification that no material changes have

been made.

(F) A description of any significant disciplinary or enforcement

actions that have been instituted by or against the foreign board of

trade or the clearing organization or the senior officers of either in

the prior year.

(G) A written description of any material changes to the regulatory

regime to which the foreign board of trade or the clearing organization

are subject that have not been previously disclosed, in writing, to the

Commission, or a certification that no material changes have occurred.

(2) The above-referenced materials must be signed by an officer of

the foreign board of trade or the clearing organization who maintains

the authority to bind the foreign board of trade or clearing

organization, as applicable, and be based on the officer's personal

knowledge.

(c) Additional Specified Conditions for Foreign Boards of Trade

with Linked Contacts. If a registered foreign board of trade grants

members or other participants located in the United States direct

access and makes available to them a linked contract, the following

additional conditions apply:

(1) Statutory Conditions.

(i) The foreign board of trade must make public daily trading

information regarding the linked contract that is comparable to the

daily trading information published by the registered entity for the

contract to which the foreign board of trade's contract is linked, and

(ii) The foreign board of trade (or its regulatory authority) must:

(A) Adopt position limits (including related hedge exemption

provisions) applicable to all market participants for the linked

contract that are comparable to the position limits (including related

hedge exemption provisions) adopted by the registered entity for the

contract to which it is linked;

(B) Have the authority to require or direct any market participant

to limit, reduce, or liquidate any position the foreign board of trade

(or its regulatory authority) determines to be necessary to prevent or

reduce the threat of price manipulation, excessive speculation as

described in section 4a of the Act, price distortion, or disruption of

delivery on the cash settlement process;

(C) Agree to promptly notify the Commission, with regard to the

linked contract, of any change regarding--

(1) The information that the foreign board of trade will make

publicly available,

(2) The position limits that foreign board of trade or its

regulatory authority will adopt and enforce,

[[Page 70994]]

(3) The position reductions required to prevent manipulation,

excessive speculation as described in section 4a of the Act, price

distortion, or disruption of delivery or the cash settlement process,

and

(4) Any other area of interest expressed by the Commission to the

foreign board of trade or its regulatory authority;

(D) Provide information to the Commission regarding large trader

positions in the linked contract that is comparable to the large trader

position information collected by the Commission for the contract to

which it is linked; and

(E) Provide the Commission such information as is necessary to

publish reports on aggregate trader positions for the linked contract

that are comparable to such reports on aggregate trader positions for

the contract to which it is linked, and

(iii) If the Commission establishes speculative position limits

(including related hedge exemption provisions) on the aggregate number

or amount of positions in a contract traded on a United States

registered entity and the registered foreign board of trade lists a

contract that is linked to the contract listed for trading on the

registered entity, the foreign board of trade (or its regulatory

authority) must adopt position limits (including related hedge

exemption provisions) for the linked contract as determined by the

Commission.

(2) Other Conditions on Linked Contracts:

(i) The foreign board of trade will inform the Commission in a

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

above the applicable foreign board of trade position limit, whether a

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

was taken.

(ii) The foreign board of trade will provide Commission staff,

either directly or through its agent, with trade execution and audit

trail data for the Commission's Trade Surveillance System on a trade-

date plus one basis and in a form, content and manner acceptable to the

Commission for all linked contracts.

(iii) The foreign board of trade and the clearing organization will

permit and cooperate with Commission on-site visits for the purpose of

overseeing the foreign board of trade's ongoing compliance with

registration requirements and conditions of registration. The

Commission will provide notice to the foreign board of trade's

regulatory authority of any requests for an on-site visit.

(iv) The foreign board of trade will provide to Commission staff,

at least one day prior to the effective date thereof, except in the

event of an emergency market situation, copies of, or hyperlinks to,

all rules, rule amendments, circulars and other notices published by

the foreign board of trade with respect to all linked contracts.

(v) The foreign board of trade will provide to Commission staff

copies of all Disciplinary Notices involving the foreign board of

trade's linked contracts upon closure of the action. Such Notices

should include the reason the action was undertaken, the results of the

investigation that led to the disciplinary action, and any sanctions

imposed.

(vi) In the event that the Commission, pursuant to its emergency

powers authority, directs that the United States registered entity

which lists the contract to which the foreign board of trade's contract

is linked take emergency action with respect to a linked contract (for

example, to cease trading in the contract), the foreign board of trade,

subject to information-sharing arrangements between the Commission and

its regulatory authority, agrees to promptly take similar action with

respect to its linked contract.

Sec. 48.9 Revocation of registration.

(a) Failure to Satisfy Registration Requirements or Conditions:

Upon request by the Commission, a registered foreign board of trade

shall file with the Commission a written demonstration, containing such

supporting data, information, and documents, in such form and manner

and within such timeframe as the Commission may specify, that the

foreign board of trade or clearing organization is in compliance with

the registration requirements or conditions for registration.

(1) If the Commission determines that a registered foreign board of

trade (or the clearing organization) has failed to satisfy any of the

registration requirements or conditions for registration, the

Commission shall notify the foreign board of trade of such

determination and afford the foreign board of trade an opportunity to

make appropriate changes to bring the foreign board of trade into

compliance with the registration requirements or conditions for

registration.

(2) If, not later than 30 days after receiving a notification under

subsection (1) of this paragraph, the foreign board of trade fails to

make changes that, in the opinion of the Commission are necessary to

comply with the registration requirements or conditions for

registration, the Commission may revoke the foreign board of trade's

registration, after appropriate notice and an opportunity for a

hearing, by issuing an Order Revoking Registration which sets forth the

reasons therefor.

(3) A foreign board of trade whose registration has been revoked

for failure to satisfy a registration requirement or condition of

registration may apply for re-registration 360 days after the issuance

of the Order Revoking Registration if the deficiency causing the

revocation has been cured or relevant facts and circumstances have

changed.

(b) Other Events that Could Result in Revocation. Revocation under

these circumstances would not necessarily follow the procedures

delineated above, but will be handled by the Commission as relevant

facts or circumstances warrant.

(1) The Commission may revoke a foreign board of trade's

registration, after appropriate notice and an opportunity for a

hearing, if the Commission determines that a representation made in the

application for registration is found to be untrue or materially

misleading.

(2) The Commission may revoke a foreign board of trade's

registration, after appropriate notice and an opportunity for a

hearing, if there is a material change in the regulatory regime

applicable to the foreign board of trade or clearing organization.

(3) The Commission may revoke a foreign board of trade's

registration in the event of an emergency or in a circumstance where

the Commission determines that revocation would be necessary or

appropriate in the public interest. Following revocation, the

Commission will provide an opportunity for a hearing.

(4) The Commission may revoke a foreign board of trade's

registration in the event the foreign board of trade or the clearing

organization is no longer authorized, licensed or registered, as

applicable, as a regulated market and/or exchange or clearing

organization or ceases to operate as a foreign board of trade or

clearing organization.

Sec. 48.10 Additional contracts.

(a) Generally. Registered foreign boards of trade that wish to list

additional futures and option and swaps contracts for trading by direct

access to the foreign board of trades' electronic trading and order

matching systems from the United States must submit a written request

prior to offering the contracts from within the United States. Such a

written request must include the terms and conditions of the additional

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futures and option and swaps contracts that the foreign board of trade

wishes to make available and a certification that the additional

contracts meet the requirements of section 48.7(c) of this part and the

foreign board of trade and the clearing organization continue to

satisfy the conditions of registration. The foreign board of trade can

make available for trading the additional contracts ten business days

after the date of receipt by the Commission of the written request,

unless the Commission notifies the foreign board of trade that

additional time is needed to complete its review of policy or other

issues pertinent to the additional contracts. A registered foreign

board of trade may list for trading an additional futures contract on a

non-narrow-based security index pursuant to the procedures set forth in

Appendix D to part 30 of this chapter.

(b) Option contracts on previously approved futures contracts.

(1) If the option is on a futures contract that is not a linked

contract, the option contract may be made available for trading by

direct access by filing with the Commission no later than the business

day preceding the initial listing of the contract:

(i) A copy of the terms and conditions of the additional contract

and

(ii) A certification that the foreign board of trade and the

clearing organization continue to satisfy the conditions of its

registration.

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

contract, the option contract may be made available for trading by

direct access by filing with the Commission no later than the business

day preceding the initial listing of the contract:

(i) A copy of the terms and conditions of the additional contract

and

(ii) A certification that the foreign board of trade and the

clearing organization continue to satisfy the conditions of its

registration, including the conditions specifically applicable to

linked contracts set forth in section 48.8(c) of this part.

(3) If the option is on a non-narrow-based security index futures

contract which may be offered or sold in the United States pursuant to

a no-action letter issued by the Commission's Office of the General

Counsel, the option contract may be listed for trading by direct access

without further action by either the registered foreign board of trade

or the Commission.

Appendix--Part 48--Contents of Application

I. General Information and Documentation

(a) General Information. A description of the following for the

foreign board of trade and clearing organization: Location; history,

size; ownership and corporate structure; governance and committee

structure; current or anticipated presence of staff in the United

States; and anticipated volume of business emanating from members

and other participants that will be provided direct access to the

foreign board of trade's trading system and the percentage of that

volume compared to the foreign board of trade's total volume.

(b) Initial Documentation. The following documents for the

foreign board of trade and clearing organization:

(1) Articles of association, constitution, or other similar

organizational documents;

(2) Membership and trading participant agreements;

(3) Clearing agreements;

(4) Terms and conditions of contracts to be available from

within the United States pursuant to the specified conditions of

registration;

(5) The national statutes, laws and regulations governing the

activities of the foreign board of trade and clearing organization

and their respective participants;

(6) The current rules, regulations, guidelines and bylaws of the

foreign board of trade or clearing organization;

(7) Evidence of the authorization, licensure or registration of

the foreign board of trade and clearing organization pursuant to the

regulatory regime in their home country jurisdiction and a

representation by their respective regulators that they are in good

regulatory standing in the capacity in which they are authorized,

licensed or registered;

(8) A summary of any disciplinary or enforcement actions or

proceedings that have been brought against the foreign board of

trade and clearing organization, or the senior officers thereof, in

the past five years and the resolution of those actions or

proceedings;

(9) An undertaking by the chief compliance officer(s) (or

functional equivalent[s]) of the foreign board of trade and the

clearing organization to notify Commission staff promptly if any of

the representations made in connection with or related to the

foreign board of trade's application for registration cease to be

true or correct, or become incomplete or misleading.

II. Membership Criteria

The following for the foreign board of trade and the clearing

organization:

(a) Membership or Participant Categories and Access.

A description of the categories of membership and participation

in the foreign board of trade or clearing organization and the

access, trading and clearing privileges provided by the board of

trade or clearing organization, as applicable. The description

should include any restrictions thereto for all entities to which

the foreign board of trade intends to grant direct access to its

trading system.

(b) Membership Criteria.

(1) A description of requirements for membership and

participation on the trading or clearing system, as applicable, and

the manner in which members and other participants must demonstrate

their compliance with these requirements.

(2) Professional Standards. A description of the professional

requirements, qualifications, and/or competencies required of

members or other participants and/or their staff.

(c) Financial Integrity.

(1) A description of the manner in which the foreign board of

trade and the clearing organization evaluate the financial resources

holdings of its members or participants, including any financial

requirements, standards, guides, or thresholds used to qualify

members and other participants.

(2) Describe the process by which applicants demonstrate

compliance with financial requirements for membership participation

including:

(i) Working capital and collateral requirements,

(ii) Risk management mechanisms for members allowing customers

to place orders.

(d) Authorization, Licensure or Registration Requirements.

Describe any regulatory and self-regulatory authorization, licensure

or registration requirements that the foreign board of trade and the

clearing organization impose upon its members and other participants

including, but not limited to any authorization, licensure or

registration requirements imposed by the regulatory authorities in

the home country jurisdiction(s) of the foreign board of trade and

clearing organization. Describe the process by which the foreign

board of trade and the clearing organization, as applicable, confirm

compliance with those requirements.

(e) Fit and Proper. Describe how the foreign board of trade and

clearing organization ensure that potential members/other

participants meet fit and proper standards.

(f) Qualifications for Board and/or Committee Membership.

Describe the requirements applicable to membership on the governing

board and significant committees of the foreign board of trade and

clearing organization, and describe how the foreign board of trade

and clearing organization ensure that potential governing board and

committee members/other participants meet these standards.

(g) Conflict of Interest Provisions. Describe the provisions to

minimize and resolve conflicts of interest with respect to

membership on the governing board and significant committees of the

foreign board of trade and the clearing organization.

(h) Disclosure of Information. Describe the rules with respect

to the disclosure of material non-public information obtained as a

result of a member's or other participant's performance on the

governing board or significant committee.

III. The Automated Trading System

(a) A description of the following:

(1) the order matching/execution system, including a complete

description of all permitted ways in which members or other

participants (or their customers) may connect

[[Page 70996]]

to the trade matching/execution system and the related requirements

(for example, authorization agreements, technical compliance

verifications, identification of order routing systems and/or users,

(2) the architecture of the systems, including hardware and

distribution network, as well as any pre-trade risk-management

controls that are made available to system users,

(3) the security features of the systems,

(4) the length of time such systems have been operating,

(5) any significant system failures or interruptions,

(6) the nature of any technical review of the order matching/

execution system performed by the home country regulator,

(7) provide a copy of any order or certification or self-

certification received and any discrepancies between the standard of

review and the Principles for the Oversight of Screen-Based Trading

Systems for Derivative Products developed by the Technical Committee

of the International Organization of Securities Commissions,

(8) trading hours,

(9) types and duration of orders accepted,

(10) information that must be included on orders,

(11) trade confirmation and trade error procedures,

(12) anonymity of participants,

(13) trading system connectivity with clearing system,

(14) response time,

(15) ability to determine depth of market,

(16) market continuity provisions,

(17) reporting and recordkeeping requirements, and

(18) error trade policies.

(b) A description of the manner in which the foreign board of

trade assures the following with respect to the trading system:

(1) Algorithm. The trade matching algorithm matches trades

fairly and timely.

(2) IOSCO Principles. The trading system's compliance with the

Principles for the Oversight of Screen-Based Trading Systems for

Derivative Products developed by the Technical Committee of the

International Organization of Securities Commissions.

(3) Audit Trail.

(i) The audit trail captures all relevant data, including

changes to orders.

(ii) Audit trail data is securely maintained and available for

an adequate time period.

(4) Public Data. Trade data is available to users and the

public.

(5) Reliability. The trading system has demonstrated

reliability.

(6) Secure Access. Access to the trading system is secure and

protected.

(7) Emergency Provisions. There are adequate provisions for

emergency operations and disaster recovery.

(8) Data Loss Prevention. Trading data is backed up to prevent

loss of data.

(9) Contracts Available. Mechanisms are available to ensure that

only those futures and option contracts or swaps that have been

identified to the Commission as part of the application or permitted

to be made available for trading by direct access pursuant to the

procedures set forth in section 48.10 of this part are made

available for trading on connections in the United States.

(10) Predominance of the Centralized Market. Mechanisms are

available that ensure a competitive, open and efficient market and

mechanism for executing transactions.

IV. The Terms and Conditions of Contracts Proposed To Be Made Available

in the United States

(a) Provide the terms and conditions of futures, option and

swaps contracts intended to be made available for direct access.

(b) Demonstrate that contracts are not prohibited from being

traded by United States persons.

(c) Demonstrate that contracts are cleared.

(d) Identify any contracts that are linked to a contract listed

for trading on a United States-registered entity, for example, a

contract that settles against any price (including the daily or

final settlement price) of one or more contracts listed for trading

on a United States-registered entity.

(e) Identify any contracts that share any other commonality with

a contract listed for trading on a United States-registered entity,

for example, both the foreign board of trade's and the United

States-registered entity's contract settle to the price of the same

third party-constructed index.

(f) Demonstrate that the contracts are not readily susceptible

to manipulation, as follows:

(1) Generally. For contracts other than broad-based stock

indexes, provide the information required in Appendix A to Part 40

(Guideline No. 1) with regard to manipulation.

(i) For delivered contracts: a demonstration that the terms and

conditions of the contract will result in a deliverable supply so

that the contract will not be conducive to price manipulation or

distortion and that the deliverable supply reasonably can be

expected to be available to short traders and salable by long

traders at its market value in normal cash marketing channels.

(ii) For cash-settled contracts: a demonstration that cash

settlement mechanism of the contract is at a price reflecting the

underlying cash market (or the level or index if there is no

underlying cash market), will not be readily subject to manipulation

or distortion, and is reliable, acceptable, publicly available and

timely.

(iii) To deter and detect abusive or disruptive trading behavior

that could result in price distortions: A demonstration that the

foreign board of trade has rules and mechanisms, for example,

position limits, restrictions on size and pricing of block trades,

restrictions on market on close or trade at settlement orders during

the daily close and settlement, and prohibitions on, and the

capacity to detect, ``marking'' of the trading close or important

economic announcements.

(2) Broad-Based Stock Indexes. For non-narrow based stock index

futures contracts, provide the information required in Appendix D to

Part 30 of this chapter. A no-action letter from the Commission's

Office of General Counsel is required to offer futures contracts on

non-narrow-based stock index futures contracts to United States

citizens.

(3) Manipulation Cases. With respect to contracts to be listed

for trading by direct access, describe each investigation, action,

proceeding or case involving manipulation and involving a contract

traded on the foreign board of trade in the three years preceding

the application date, whether initiated by the foreign board of

trade, a regulatory or self-regulatory authority or agency or

another government or prosecutorial agency. For each such action,

proceeding or case, describe the alleged manipulative activity and

the current status re resolution thereof.

V. Settlement and Clearing

(a) Clearing System. A description of the clearing

organization's clearing and settlement systems.

(b) Certification. A certification, signed by the chief

executive officer (or functional equivalent) of the clearing

organization, that the clearing system complies with the current

Recommendations for Central Counterparties that have been issued

jointly by the Committee on Payment and Settlement Systems and the

Technical Committee of the International Organization of Securities

Commissions, as updated, revised or otherwise amended, or successive

standards, principles and guidance for central counterparties or

financial market infrastructures adopted jointly by the Committee on

Payment and Settlement Systems or the International Organization of

Securities Commissions.

(c) RCCP Compliance. A detailed description of the manner in

which the clearing organization complies with each of the

Recommendations for Central Counterparties that have been issued

jointly by the Committee on Payment and Settlement Systems and the

Technical Committee of the International Organization of Securities

Commissions, as updated, revised or amended, (or successive

standards, principles and guidance for central counterparties or

financial infrastructures adopted jointly by the Committee on

Payment and Settlement Systems or the International Organization of

Securities Commissions) and documentation supporting the

representations made, including any relevant rules or written

policies or procedures of the clearing organization.

VI. The Regulatory Regime Governing the Foreign Board of Trade and

Clearing Organization in Their Home Countries

Provide information or documentation necessary to demonstrate

that the foreign board of trade and its clearing organization are

subject to comprehensive supervision and regulation by the

appropriate governmental authorities in their home countries that is

comparable to the comprehensive supervision and regulation to which

designated contract markets, derivatives clearing organizations and

market participants are subject in the United States. The

information and documentation provided must be sufficient to

demonstrate that the foreign board of trade and clearing

organization are subject to an established regulatory regime that is

based upon regulatory objectives equivalent (not necessarily

identical) to those applicable to designated contract markets and

derivatives

[[Page 70997]]

clearing organizations in the United States and that provides basic

protections for customers trading on markets and for the integrity

of the markets themselves:

(a) Regulatory Authority.

(1) Structure, function and powers. Describe the regulatory

authority's structure, resources, staff and scope of authority; the

regulator's authorizing statutes, including the source of its

authority to supervise the foreign board of trade and the clearing

organization; the rules and policy statements issued by the

regulator with respect to the authorization and continuing oversight

of markets, electronic trading systems and clearing organizations

and the financial protections afforded customer funds. Provide

copies of recent public reports disclosing the regulator's oversight

and enforcement activities which are, in the judgment of the

regulator, relevant to the FBOT's status as a registered FBOT.

(2) Authorization and continuing oversight of the foreign board

of trade and clearing organization. Describe and provide copies

(with, as applicable, English translations) of the laws, rules,

regulations and policies applicable to the authorization, licensure

or registration of the foreign board of trade and clearing

organization and the continuing oversight thereof; the regulatory

authority's program for the ongoing supervision and oversight of the

foreign board of trade and clearing organization and the enforcement

of their respective trading and clearing rules; the financial

resources requirements applicable to the authorization, licensure or

registration of the foreign board of trade and clearing organization

and the continued operations thereof; the extent to which the

Principles for the Oversight of Screen-Based Trading Systems for

Derivative Products developed by the Technical Committee of the

International Organization of Securities Commissions and the current

Recommendations for Central Counterparties that have been issued

jointly by the Committee on Payment and Settlement Systems and the

Technical Committee of the International Organization of Securities

Commissions, as updated, revised or amended, or successive

standards, principles and guidance for central counterparties or

financial market infrastructures adopted jointly by the Committee on

Payment and Settlement Systems or the International Organization of

Securities Commissions are used or applied by the regulatory

authority in its supervision and oversight of the foreign board of

trade or clearing organization or are incorporated into its rules

and regulations and the extent to which the regulatory authorities

review the applicable trading and clearing systems for compliance

therewith; the extent to which the regulatory authority reviews and/

or approves the trading and clearing rules of the foreign board of

trade or clearing organization prior to their implementation; the

extent to which the regulatory authority reviews and/or approves

exchange contracts prior to their being listed for trading; and the

regulatory authority's approach to the detection and deterrence of

market manipulation and other unfair trading practices.

(3) Intermediary Oversight. Describe the laws, rules,

regulations and policies that govern the authorization and ongoing

supervision and oversight of market intermediaries who may deal with

United States participants accessing the foreign board of trade,

including:

(i) Recordkeeping requirements,

(ii) The protection of customer funds, and

(iii) Procedures for dealing with the failure of a market

intermediary in order to minimize damage and loss to investors and

to contain systemic risk.

(4) Enforcement. Describe the regulatory authority's inspection,

investigation and surveillance powers; and the program pursuant to

which the regulatory authority uses those powers to inspect,

investigate, and enforce rules applicable to the foreign board of

trade and the clearing organization.

(b) Demonstration of Continuing Regulatory ``Good Standing.''

The regulatory authorities governing the activities of the

foreign board of trade and clearing organization must submit a

report confirming that the foreign board of trade and clearing

organization are in regulatory good standing. The report should

include:

(1) Confirmation of regulatory status (including proper

authorization, licensure and registration) of the foreign board of

trade and clearing organization;

(2) Any recent oversight reports generated by the regulatory

authority which are, in the judgment of the regulatory authority,

relevant to the FBOT's status as a registered FBOT;

(3) Disclosure of any significant regulatory concerns, inquiries

or investigations by the regulatory authority, including any

concerns, inquiries or investigations with regard to the foreign

board of trade's arrangements to monitor trading by members or other

participants located in the United States, the adequacy of the risk

management controls of the trading or of the clearing system; and

(4) A description of any investigations (formal or informal) or

disciplinary actions initiated by the regulatory authority or any

other self-regulatory, regulatory or governmental entity against the

foreign board of trade, the clearing organization or any of their

respective senior officers during the past year.

(c) Staff Visits with Regulatory Authorities. The regulatory

authorities governing the activities of the foreign board of trade

and the clearing organization must agree to cooperate with a

Commission staff visit subsequent to the application period on an

``as needed basis,'' the objective of which will be to familiarize

Commission staff with oversight supervisory staff of the regulatory

authority; discuss any changes to the law, rules and regulations

that formed the basis of the application; discuss the cooperation

and coordination between the authorities, including, without

limitation, information sharing arrangements; and discuss issues of

concern as they may develop from time to time (for example, linked

contracts, unusual trading that may be of concern to Commission

surveillance staff).

VII. The Rules of the Foreign Board of Trade and Its Clearing

Organization and Enforcement Thereof

With respect to the foreign board of trade and the clearing

organization, as applicable:

(a) Describe the regulatory or compliance department, to include

size, experience level, competencies, duties and responsibilities.

(b) Describe the foreign board of trade's trade practice rules.

Include in the description the following:

(1) Capacity of the foreign board of trade. Does the foreign

board of trade have the capacity to detect, investigate, and

sanction persons who violate foreign board of trade rules?

(2) Abusive Trading Practices Prohibited. Does the foreign board

of trade implement and enforce rules that prohibit abusive trading

practices (for example, wash sales or trading ahead) and other

market abuses, including the ability to detect and deter insider

trading?

(3) Trade Surveillance System. Does the foreign board of trade

maintain a trade practice surveillance system appropriate to the

foreign board of trade capable of detecting and investigating

potential trade practice violations?

(4) Trade Practice/Audit Trail. Does the foreign board of

trades' audit trail capture and retain sufficient order and trade-

related data to allow their compliance staffs to detect trading and

market abuses and to reconstruct all transactions within a

reasonable period of time?

(5) Real-time Market Monitoring. Does the foreign board of trade

maintain appropriate resources to conduct real-time supervision of

trading?

(6) Compliance Staff and Resources. Does the foreign board of

trade have sufficient compliance staff and resources, including

those outsourced or delegated to third parties, to fulfill their

regulatory responsibilities?

(7) Ability to Obtain Information. Do the foreign board of

trade's rules authorize compliance staff to obtain, from market

participants, any information and cooperation necessary to conduct

effective rule enforcement and investigations?

(8) Investigations and Investigation Reports. Does the foreign

board of trade's compliance staff investigate suspected rule

violations and prepare reports of their finding and recommendations?

(9) Access Requirements. Does the foreign board of trade

implement and enforce rules relating to the persons that may trade

on the foreign board of trade, and the means by which they connect

to it?

(10) Jurisdiction. Does the foreign board of trade require

market participants to submit to the foreign board of trade's

jurisdiction as a condition of access to the market?

(c) Describe the foreign board of trade's and, if appropriate,

the clearing organization's disciplinary rules, addressing the

following:

(1) Disciplinary Authority and Procedures. Do the foreign board

of trade and, the clearing organization, have and enforce

disciplinary procedures that empower staff to recommend and

prosecute disciplinary actions for suspected rule violations? Do the

procedures include the authority to fine, suspend, or expel any

market participant pursuant to fair and clear standards?

(2) Warning Letters and Summary Actions. Do the foreign board of

trade and the clearing

[[Page 70998]]

organization authorize staff to issue warning letters and/or summary

fines for specified rule violations?

(3) Review of Investigation Reports. Do the compliance staffs of

the foreign board of trade and the clearing organization present

their findings to a disciplinary panel or other authority for

issuance of charges, instruction to investigate further, or finding

that insufficient basis exists to issue charges?

(4) Disciplinary Committees. Do the foreign board of trade and

the clearing organization take disciplinary action via disciplinary

committees and formal disciplinary processes unless the violation is

subject to foreign board of trade staff's summary fining authority?

(5) Disciplinary Decisions. Do the foreign board of trade,

clearing organization or their regulatory authorities articulate the

rationale for their decisions?

(6) Adequacy of Sanctions. Are the sanctions commensurate with

the violations committed and do they serve as effective deterrents

to future violations?

(d) Describe Market Surveillance rules, addressing the

following:

Does the foreign board of trade have a dedicated market

surveillance department or effective delegation or outsourcing of

that function? If so, provide a general description of the staff,

the data collected on traders' market activity, data collected to

determine whether prices are responding to supply and demand, data

on the size and ownership of deliverable supplies, a description of

the manner in which the foreign board of trade detects and deters

market manipulation, for cash-settled contracts, methods of

monitoring the settlement price or value, and any foreign board of

trade large-trader or other position reporting system.

(e) Describe the Clearing Organization rules, addressing the

following:

Does the clearing organization maintain rules that require that

the clearing organization comply with the Recommendations for

Central Counterparties that have been issued jointly by the

Committee on Payment and Settlement Systems and the Technical

Committee of the International Organization of Securities

Commissions (or successive standards) and, if so, provide copies of

the rules.

VIII. Information Sharing Agreements Among the Commission, the Foreign

Board of Trade, the Clearing Organization and Relevant Regulatory

Authorities

With respect to the foreign board of trade, the clearing

organization, and their respective regulatory authorities:

(a) Describe the arrangements among the Commission, the foreign

board of trade, the clearing organization and the relevant foreign

regulatory authorities that govern the sharing of information

regarding the transactions that are executed pursuant to the foreign

board of trade's registration and the clearing and settlement of

those transactions. This discussion should include:

(1) The foreign board of trade, clearing organization and the

regulatory authorities governing the activities of the foreign board

of trade and clearing organization commit, in writing to provide

immediately and directly to the Commission information and

documentation requested by Commission staff that Commission staff

determines is needed:

(i) To evaluate the continued eligibility of the foreign board

of trade for registration,

(ii) To enforce compliance with the specified conditions of the

registration,

(iii) To enable the Commission to carry out its duties under the

Act and Commission regulations and to provide adequate protection to

the public or registered entities,

(iv) To respond to potential market abuse associated with

trading by direct access on the registered foreign board of trade,

and

(v) Where Commission staff, in its discretion, determines that a

contract traded on a registered foreign board of trade may affect

the Commission's ability to carry out surveillance with respect to a

United States-registered entity.

(2) Exchange International MOU. The foreign board of trade must

execute, or commit to execute, the International Information Sharing

Memorandum of Understanding and Agreement.

(b) Regulatory Authority and the IOSCO MOU. The regulatory

authorities governing the activities of and providing supervision

and oversight of the foreign board of trade and clearing

organization must be signatories to the International Organization

of Securities Commissions Multilateral Memorandum of Understanding.

If the regulator is not a signatory to the International

Organization of Securities Commissions Multilateral Memorandum of

Understanding, the regulator must inform the Commission of the

reasons why the document has not been signed (for example, in the

process of applying, application is under consideration by the

International Organization of Securities Commissions Multilateral

Memorandum of Understanding Screening Group) and supply any

additional information requested by the Commission. The Commission

will determine, on a case-by-case basis, whether any interim

information sharing arrangement will be acceptable.

(c) Declaration on Cooperation and Supervision of International

Futures Exchanges and Clearing Organizations (Boca Declaration). The

regulatory authorities governing the activities of and providing

supervision and oversight of the foreign board of trade and clearing

organization must sign the Declaration on Cooperation and

Supervision of International Futures Exchanges and Clearing

Organizations or otherwise commit to share the types of information

contemplated by the International Information Sharing Memorandum of

Understanding and Agreement with the Commission pursuant to an

existing memorandum of understanding or other arrangement with the

Commission.

Issued in Washington, DC, November 10, 2010, by the Commission.

David A. Stawick,

Secretary of the Commission.

Statement of Chairman Gary Gensler

Notice of Proposed Rulemaking--Registration of Foreign Boards of Trade

I support the proposed rulemaking to implement a registration

system for Foreign Boards of Trade (FBOTs) seeking to offer market

participants in the United States direct access to the FBOTs'

trading systems. This registration system replaces the agency's

current practice of issuing no-action letters to such FBOTs.

Importantly, this will bring consistency and transparency to the

Commission's oversight of such entities. Today's proposal also

provides that FBOTs subject to comparable, comprehensive supervision

and regulation in their home country and that meet conditions

outlined in the proposal would be allowed to make available swaps

contracts through direct access to U.S. market participants.

[FR Doc. 2010-29023 Filed 11-18-10; 8:45 am]

BILLING CODE P

Last Updated: November 19, 2010