e8-979

[Federal Register: January 25, 2008 (Volume 73, Number 17)]

[Proposed Rules]

[Page 4499-4502]

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

[DOCID:fr25ja08-19]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 3 and 30

RIN 3038-AC26

Exemption From Registration for Certain Firms With Regulation

30.10 Relief

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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

proposing to amend the regulations regarding the registration of

certain firms located outside the U.S. that are engaged in commodity

interest activities with respect to trading on U.S. designated contract

markets (``DCMs'') and U.S. derivative transaction execution facilities

(``DTEFs'').\1\ The amended regulation would codify past actions of the

Commission's staff permitting certain foreign firms that have confirmed

relief from registration as futures commission merchants (``FCMs'') in

accordance with the regulations to introduce to registered FCMs certain

U.S. customers in connection with trading U.S. DCM and DTEF listed

futures and commodity options without having to register as an

introducing broker pursuant to section 4d of the Commodity Exchange Act

(``Act''). The Commission also is proposing to revoke the regulations

regarding quarterly reporting requirements for foreign futures and

foreign options transactions.

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

CFR Ch. I (2007). References to trading on U.S. DCMs or DTEFs shall

include trading that is subject to the rules of such entities as

well.

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DATES: Comments must be received on or before February 25, 2008.

ADDRESSES: Comments may be submitted, identified by RIN 3038-AC26, by

any of the following methods:

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

Follow the instructions for submitting comments.

E-mail: [email protected] Include ``Exemption from

Registration for Certain Firms with Regulation 30.10 Relief'' in the

subject line of the message.

Fax: 202/418-5521.

Mail or Courier: Send to David Stawick, Secretary,

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

St., NW., Washington, DC 20581.

All comments received will be posted without change to http://www.cftc.gov

, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Andrew V. Chapin, Special Counsel, at

(202) 418-5465, Division of Clearing and Intermediary Oversight,

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

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

SUPPLEMENTARY INFORMATION:

I. Background Information

A. Registration Requirements for Commodity Interest Activities on U.S.

Markets

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

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

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

including both DCMs and DTEFs. In particular, Regulation 3.10 sets

forth the manner in which FCMs, introducing brokers (``IBs''),

commodity trading advisors (``CTAs''), commodity pool operators

(``CPOs'') and leverage transaction merchants must apply for

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

exemption from registration for certain persons. For example,

Regulation 3.10(c)(1) provides an exemption from registration as an FCM

for any person trading solely for proprietary accounts, as defined in

Regulation 1.3(y).

The Commission recently adopted amendments to Regulation 3.10(c) to

codify the Commission's longstanding policy towards certain foreign

intermediaries, known as foreign brokers.\2\ New Regulation 3.10(c)(2)

provides an exemption from registration as an FCM to any foreign broker

that limits its customers to persons located outside the U.S. and

submits transactions executed on U.S. exchanges for clearing on an

omnibus basis through a registered FCM. The Commission also promulgated

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

foreign person engaged in the activity of an introducing broker,

commodity pool operator or commodity trading advisor solely on behalf

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

interest transactions are submitted for clearing to a registered

FCM.\3\

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\2\ 72 FR 63976 (November 14, 2007).

\3\ Id.

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B. Part 30 of the Commission's Regulations

In 1987, the Commission adopted a new Part 30 of its regulations to

govern the offer and sale to U.S. persons of futures and option

contracts entered into on or subject to the rules of a foreign board of

trade.\4\ These regulations were promulgated pursuant to Sections

2(a)(1)(A), 4(b) and 4c of the Act, which vest the Commission with

exclusive jurisdiction over the offer and sale, in the U.S., of futures

and commodity option contracts traded on or subject to the rules of a

board of trade, exchange or market located outside of the U.S.

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\4\ 52 FR 28980 (August 5, 1987).

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Part 30 sets forth regulations governing foreign futures and

foreign option transactions executed on behalf of customers located in

the U.S., referred to in the regulations as foreign futures or foreign

options customers.\5\ For example, Regulation 30.4 requires any person

engaged in the activities that are described in the regulation to

register with the Commission as an FCM, IB, CPO or CTA, respectively,

unless such person claims relief from registration under Part 30. The

activities described in Regulation 30.4 essentially are similar to

those of an FCM, IB, CPO or CTA defined in the Act, except that the

transactions that the person intermediates are conducted on or subject

to the rules of a foreign board of trade. The transactions that are

subject to regulation and require registration under Part 30 include

the solicitation or acceptance of orders for trading any foreign

futures or foreign option contract and acceptance of money, securities

or property to margin, guarantee or secure any foreign futures or

foreign option trades or contracts.\6\

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\5\ Regulations 30.1(a), (b) and (c), define the terms ``foreign

futures,'' ``foreign options,'' and ``foreign futures or foreign

options customer,'' respectively.

\6\ See Regulation 30.4.

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Under Part 30, certain persons located outside the U.S. may obtain

an exemption from registration and certain other requirements. For

example, under Regulation 30.10 and Appendix A thereto, the Commission

may exempt a foreign firm that solicits or accepts orders (and accepts

money, securities or property to margin the trades made thereto) from

customers located in the U.S. from compliance with certain

[[Page 4500]]

Commission rules, including those rules pertaining to registration,

provided that a comparable regulatory system exists in the firm's home

country and that certain safeguards are in place to protect U.S.

investors, including an information-sharing arrangement between the

Commission and the firm's home country regulator.\7\ Relief from

registration pursuant to Regulation 30.10 does not extend to any

activities related to acting as an intermediary with respect to

trading, directly or indirectly, on any U.S. exchanges.

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\7\ See Appendix A to Part 30; 62 FR 47792 (September 11, 1997).

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C. Interpretation of the Rule 30.10 Exemption

The Division of Clearing and Intermediary Oversight (``Division'')

has issued a series of no-action letters that permit, in limited

circumstances, a foreign firm exempt from FCM registration pursuant to

Regulation 30.10 (``Regulation 30.10 firm''), to intermediate

transactions executed on U.S. exchanges on behalf of U.S. customers.

Specifically, the Division confirmed that it would not recommend that

the Commission commence any enforcement action against certain FCMs and

affiliated Regulation 30.10 firms if such unregistered affiliates

introduced certain sophisticated U.S. customers to a registered FCM for

the purpose of trading on U.S. designated contract markets.\8\ The

relief in each no-action letter issued by the Division was predicated

upon the relevant FCM's acknowledgment that it would be jointly and

severally liable for any violations of the Act or the Commission's

regulations committed by the foreign affiliate in connection with those

activities, even if the FCM did not submit the trade for clearing. In

addition, the no-action relief required that all U.S. customers be

introduced on a fully-disclosed basis, and that any non-U.S. affiliate

would not be permitted either to solicit any U.S. customer or handle

any U.S. customer funds for trading on U.S. markets.

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\8\ See, e.g., CFTC Letter 07-23, [Current Transfer Binder]

Comm. Fut. L. Rep. (CCH) ]------ (November 23, 2007).

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In granting the above no-action relief, the Division recognized

that a U.S. institutional customer may achieve greater operational and

economic efficiencies by eliminating the need to use multiple order

entry systems to engage in transactions in both U.S. and non-U.S.

markets. In addition, the Division acknowledged that, by consolidating

orders into a single execution system, an intermediating FCM may

mitigate more effectively the increased systemic and liquidity risks

associated with such activities.

Given that the no-action relief provided by the Division applies

only to the recipients of each no-action letter, the Commission

believes that it may be appropriate to provide relief for all FCMs and

their affiliates that provide brokerage services to U.S. institutional

investors in like cirumstances. Like those FCMs addressed by the

Division's no-action relief, these FCMs also have institutional U.S.

customers that trade globally throughout the 24-hour trading day, and

who currently must use multiple order entry systems to execute

transactions both domestically and abroad. Accordingly, the Commission

has determined to propose to amend Regulation 3.10(c) to address the

issue without the need for separate no-action letters, and invites

public comment on all aspects of the proposed rule.

II. Proposed Regulations

The Commission proposes to codify the staff interpretations

described in Section I.C above. Specifically, the Commission proposes

to promulgate Regulation 3.10(c)(4) to exempt from registration as an

IB a firm located outside the U.S. that introduces certain

sophisticated U.S. customers to a registered FCM for the purpose of

trading on a DCM or DTEF. The exemption would be limited to those

foreign firms that are affiliated with an FCM and have obtained

confirmation of relief pursuant to the terms and conditions of an order

issued by the Commission pursuant to Regulation 30.10. Any account

introduced pursuant to this exemption must be introduced on a fully-

disclosed basis in accordance with Regulation 1.57 and the foreign firm

would not be permitted to solicit any U.S. customers nor handle any

U.S. customer funds for trading on U.S. markets. The Commission has

proposed to limit the exemption in Regulation 3.10(c)(4) to Regulation

30.10 firms because Regulation 30.10 relief is predicated on the

existence of a comparable regulatory program in the jurisdiction in

which the affiliate is located, and the presence of certain safeguards

to protect U.S. investors, including standards for fitness and an

information-sharing arrangement between the Commission and the

authorities in the affiliate's home country.

The Commission notes that the Division's existing no-action letters

provide exemptive relief to foreign firms acting on behalf of certain

``institutional'' and ``commercial'' entities. In search of a workable

universal standard, the Commission has proposed to structure the

exemption so as to limit the offer and sale of U.S. contracts to

institutional customers, as defined in Regulation 1.3(g). The

Commission also proposes Regulation 3.10(c)(6) that, for the purposes

of this regulation, the term ``affiliate'' means any person that: (i)

Owns 50 percent or more of the FCM; (ii) is owned 50 percent or more by

the FCM; or (iii) is owned 50 percent or more by a third person that

also owns 50 percent or more of the FCM.\9\

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\9\ See, e.g., CFTC Staff Letter 07-06, [Current Transfer

Binder], Comm. Fut. L. Rep. (CCH) ] ---------- at ----------, n.3

(May 24, 2007). CFTC Letter 07-06 is one of a series of letters

issued by the Division of Market Oversight that permits members of a

particular foreign exchange located in the U.S. to connect directly

to the foreign exchange's order and trade matching system without

the exchange having to register as a DCM or DTEF. For the purposes

of the no-action relief, the term ``members'' includes

``affiliates'' as defined consistent with this proposal. The

Commission notes that, as a condition of the no-action relief,

members connected directly to the foreign exchange are ultimately

responsible for the conduct of any affiliate.

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Consistent with the terms and conditions of relief established by

the Division in the no-action process, the Commission also proposes to

predicate the availability of the exemption upon the relevant FCM's

acknowledgment, to be filed with NFA pursuant to proposed Regulation

3.10(c)(4)(iii), that it would be jointly and severally liable for any

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

foreign affiliate in connection with those activities, even if the FCM

ultimately did not submit the trade for clearing. As such, the

Commission has proposed to limit the exemption to firms affiliated with

an FCM so that the FCM may maintain the appropriate level of oversight

to ensure that the foreign affiliate complies with the conditions for

relief as set forth in the proposed regulation.

Proposed regulation 3.10(c)(4), in keeping with the no-action

letters issued to date, prohibits the firm wishing to take advantage of

the IB registration exemption from soliciting customer orders for

trading on U.S. exchanges. This registration exemption only is intended

to be a convenience for institutional customers so that they need not

use multiple order entry processes to transact related business. For

example, an institutional customer seeking to establish a position on

the London Metal Exchange (LME) may desire to hedge that position with

contracts listed on the New York Mercantile Exchange (NYMEX). Absent

relief, a Regulation 30.10 firm executing and/or submitting for

clearing the LME transaction may not participate in the

[[Page 4501]]

acceptance of orders for any NYMEX contracts. Pursuant to the proposed

regulation, a Regulation 30.10 firm may introduce the institutional

customer to a registered FCM for the purposes of submitting the NYMEX

transaction for clearing, provided that the institutional customer

initiates the transaction.

The exemption from registration also is not intended to be used by

firms as a promotional vehicle. The proposed regulation would not

permit a Regulation 30.10 firm to solicit new customers based on its

ability to access U.S. markets. As stated above, the Commission is

proposing to create a limited-purpose exemption from IB registration so

that existing institutional customers may reduce transactional costs

associated with the use of multiple order entry processes.

The Commission also notes that the proposed amendments to

Regulation 3.10(c) are intended to provide a limited-purpose

registration exemption available only to those foreign firms engaging

in bona fide global futures brokerage activities on behalf of

institutional customers located in the U.S. Absent such relief, these

firms would be required to register with the Commission in the

appropriate capacity, because the applicable Regulation 30.10 relief

does not extend to brokerage activities undertaken, directly or

indirectly, on U.S. exchanges on behalf of any U.S. person. A foreign

firm not engaged in bona fide global futures brokerage activities on

behalf of institutional customers, e.g., a firm limiting its brokerage

activities on behalf of U.S. customers to trading solely on U.S.

exchanges, may not rely on the proposed exemptions to circumvent the IB

registration requirement. An FCM submitting the acknowledgment set

forth in proposed Regulation 3.10(c)(4)(iii) could be held liable for

any violations of a foreign affiliate in an attempt to circumvent the

Commission's registration requirements in this regard.

The Commission further notes that proposed Regulation 3.10(c)(4)

would replace prior staff letters as the sole source of authorization

for those unregistered foreign firms that introduce to an FCM U.S.

customers for the purpose of trading on U.S. markets.\10\ A firm that

fails to comply with any of the terms or conditions of the applicable

Regulation 30.10 order, including a failure to comply with any element

of the regulatory program on which relief was predicated, would make

the firm ineligible for relief set forth in proposed Regulation

3.10(c)(4).

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\10\ The following letters for no-action relief will be

superceded if the proposed rules are adopted: CFTC Letters 03-28,

04-09, 04-14, 05-06, 07-05, 07-08, 07-16, 07-17, 07-20 and 07-23.

The Commission seeks comments from any party adversely affected by

the determination to rescind these CFTC Letters.

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In each of the existing no-action letters on this subject cited in

the footnote, the Division considered the size of the FCM and its

relationship with its particular non-U.S. affiliate prior to

determining that relief would not be contrary to the public interest.

More specifically, the Division determined that the financial strength

and organizational structure of each FCM provided a reasonable basis

upon which to rely that it could honor the acknowledgement of joint and

several liability. Accordingly, the Commission solicits comments as to

whether it would be appropriate to establish minimum capital or other

standards for the affiliated FCM as a condition for exemptive

relief.\11\

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\11\ Compare Regulation 30.12, 17 CFR 30.12 (Direct Foreign

Order Transmittal). Pursuant to Regulation 30.12(b)(1)(i), an FCM

must possess, for example, $20,000,000 in adjusted net capital in

order for one of its ``authorized customers'' to engage in direct

foreign order transmittal with an unregistered foreign futures and

options broker for the purpose of trading foreign futures or options

through the FCM's customer omnibus account.

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The Commission also solicits comment as to whether the proposed

limited-purpose registration exemption should be extended to otherwise

qualified foreign persons that advise institutional customers for the

purposes of trading on U.S. markets. This relief would be available,

for example, to the foreign affiliate of an FCM that provides trading

advice tailored to the particular circumstances of U.S. customers that

meet the institutional customer standards regarding the trading of both

domestic and foreign futures as part of an overall global strategy.

The Commission also is proposing to revoke Regulation 30.8.

Regulation 30.8 requires each FCM to provide NFA with a quarterly

report containing data for the total volume of foreign futures and

options contracts effected on foreign boards of trade. From its

experience, the Commission recognizes that FCMs are engaging in both

domestic and foreign futures and options transactions on behalf of

customers located in the U.S., and therefore are subject to other

extensive reporting and recordkeeping requirements set forth in Part 1

of its regulations. As such, the Commission believes that the reporting

requirement set forth in Regulation 30.8 is overly burdensome and no

longer necessary. The Commission solicits comments as to whether

remaining reporting requirements are sufficient for FCMs engaged in

foreign futures and options transactions on behalf of customers located

in the U.S.

III. Related Matters

A. Regulatory Flexibility Act

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

requires that agencies, in proposing regulations, consider the impact

of those regulations on small businesses. The Commission has previously

established certain definitions of ``small entities'' to be used by the

Commission in evaluating the impact of its regulations on such entities

in accordance with the RFA.\12\ The Commission previously has

determined that registered FCMs are not small entities for the purpose

of the RFA because each FCM has an underlying fiduciary relationship

with its customers, regardless of the size of the FCM.\13\ The

Commission notes that the foreign persons affected by the proposed

changes to the Commission's regulations would be registered as FCMs if

not for the exemption provided therein and, as such, would maintain a

fiduciary relationship with customers similar to the relationship

maintained by each registered FCM. Therefore, the Acting Chairman, on

behalf of the Commission, hereby certifies, pursuant to 5 U.S.C.

605(b), that these proposed regulations will not have a significant

economic impact on a substantial number of small entities. Nonetheless,

the Commission specifically requests comment on the impact these

proposed rules may have on small entities.

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\12\ 47 FR 18618-18621 (April 30, 1982).

\13\ 47 FR 18619-18620.

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B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (``PRA'') (44 U.S.C. 3501 et

seq. (Supp. I 1995)) imposes certain requirements on federal agencies

(including the Commission) in connection with their conducting or

sponsoring any collection of information as defined by the PRA.

While the proposed rule discussed herein has no burden, the group

of rules (3038-0023, Rules, Regulations and Forms for Domestic and

Foreign Futures and Options Related to Registration with the

Commission) of which it is a part has the following burden:

Average Burden Hours per Response: 18.11.

Number of Respondents: 76,750.

Frequency of Response: Annually and on occasion.

The Office of Management and Budget (``OMB'') approved the

collection of information associated with this group of rules on August

17, 2004. Copies of the OMB-approved information collection submission

are available from

[[Page 4502]]

the CFTC Clearance Officer, 1155 21st Street, NW., Washington, DC

20581, (202) 418-5160.

C. Costs and Benefits of the Proposed Rules

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

costs and benefits of its actions before issuing new regulations under

the Act. By its terms, Section 15(a) does not require the Commission to

quantify the costs and benefits of new regulations or to determine

whether the benefits of the proposed regulations outweigh their costs.

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

and benefits'' of the subject regulations.

Section 15(a) further specifies that the costs and benefits of the

proposed regulations 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. The Commission

may, in its discretion, give greater weight to any one of the five

enumerated areas of concern and may, in its discretion, determine that,

notwithstanding its costs, a particular regulation 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 Act.

The proposed regulations should foster the protection of market

participants and the public by providing greater legal certainty to the

commodity interest activities of persons located outside the U.S. As

the activity set forth in the proposed regulations presently is

permitted under staff interpretation and no-action, the proposed

regulations should have no material impact from the standpoint of

imposing costs or creating benefits, on efficiency, competitiveness and

financial integrity of financial markets, price discovery, sound risk

management practices, or any other public interest considerations.

List of Subjects

17 CFR Part 3

Definitions, Foreign futures, Consumer protection, Foreign options,

Registration requirements.

17 CFR Part 30

Definitions, Foreign futures, Consumer protection, Foreign options,

Registration requirements.

In consideration of the foregoing, and pursuant to the authority

contained in the Commodity Exchange Act and, in particular, sections

2(a)(1), 4(b), 4c and 8a thereof, 7 U.S.C. 2, 6(b), 6c and 12a (1982),

and pursuant to the authority contained in 5 U.S.C. 552 and 552b

(1982), the Commission hereby proposes to amend Chapter I of Title 17

of the Code of Federal Regulations as follows:

PART 3--REGISTRATION

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

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

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

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

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

follows:

Sec. 3.10 Registration of futures commission merchants, introducing

brokers, commodity trading advisors, commodity pool operators and

leverage transaction merchants.

* * * * *

(c) Exemption from registration for certain persons.

* * * * *

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

possessions that is exempt from registration as a futures commission

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

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

the Act if:

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

registered in accordance with section 4d of the Act;

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

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

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

commission merchant for the purpose of trading on a designated contract

market or derivatives execution facility;

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

territories or possessions, that is exempt from registration as a

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

engaging in the introducing activities described in this paragraph, the

affiliated futures commission merchant has filed with the National

Futures Association (ATTN: Vice President, Compliance) an

acknowledgement that it will be jointly and severally liable for any

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

person in connection with those introducing activities, whether or not

the affiliated futures commission merchant submits for clearing any

trades resulting from those introducing activities; and

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

States, its territories or possessions for trading on a designated

contract market or derivatives transaction execution facility, nor does

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

United States, its territories or possessions for the purpose of

trading on any designated contract market or derivatives transaction

execution facility.

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

affiliated with a futures commission merchant if such a person:

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

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

or

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

percent or more of the futures commission merchant.

* * * * *

PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS

3. The authority citation for part 30 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 4, 6, 6c, and 12a, unless otherwise

noted.

Sec. 30.8 [Removed and reserved]

4. Section 30.8 is removed and reserved:

Dated: January 15, 2008.

By the Commission.

David Stawick,

Secretary of the Commission.

[FR Doc. E8-979 Filed 1-24-08; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: January 25, 2008