Federal Register, Volume 81 Issue 151 (Friday, August 5, 2016)  
[Federal Register Volume 81, Number 151 (Friday, August 5, 2016)]
[Proposed Rules]
[Pages 51824-51828]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18210]



17 CFR Part 3

RIN 3038-AE46

Exemption From Registration for Certain Foreign Persons

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.


SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
proposing to amend one of its regulations. The proposed amendment would 
amend the conditions under which persons located outside the United 
States (``U.S.'') acting in the capacity of a futures commission 
merchant (``FCM''), an introducing broker (``IB''), commodity trading 
advisor (``CTA''), or commodity pool operator (``CPO'') in connection 
with commodity interest transactions solely on behalf of persons 
located outside the U.S., or on behalf of certain international 
financial institutions, would qualify for an exemption from 
registration with the Commission.

DATES: Comments must be received on or before September 6, 2016.

ADDRESSES: You may submit comments, identified by RIN number 3038-AE46, 
by any of the following methods:
     CFTC Web site: http://comments.cftc.gov. Follow the 
instructions for submitting comments through the Comments Online 
process on the Web site.

[[Page 51825]]

     Mail: Send to Christopher Kirkpatrick, 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.
    Please submit your comments using only one of these methods.
    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 publicly available. If you wish the Commission to consider 
information that may be exempt from disclosure under the Freedom of 
Information Act, a petition for confidential treatment of the exempt 
information may be submitted according to the procedures established in 
Sec.  145.9 of the Commission's regulations.\1\

    \1\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR Chapter I.

    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 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 

FOR FURTHER INFORMATION CONTACT: Frank Fisanich, Chief Counsel, or 
Andrew Chapin, Associate Chief Counsel, at (202) 418-5430, Division of 
Swap Dealer and Intermediary Oversight, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, 
DC 20581. Electronic mail: [email protected] or [email protected].


I. Background

Registration and Exemption From Registration of Intermediaries

    Part 3 of the Commission's regulations governs the registration of 
intermediaries engaged in the offer and sale of, and providing advice 
concerning, all commodity interest transactions, including those 
futures, options on futures, and swaps traded on U.S. trading 
facilities, including both designated contract markets (``DCMs'') and 
swap execution facilities (``SEFs''). Commission Regulation 3.10 sets 
forth the manner in which intermediaries, including FCMs, IBs, CPOs, 
and CTAs, must apply for registration with the Commission. Currently, 
Sec.  3.10(c) provides an exemption from registration, subject to 
certain conditions, for certain persons located outside the U.S. (such 
intermediaries are referred to herein as ``Foreign Intermediaries'') 
acting as intermediaries with respect to persons also located outside 
the U.S., even though such transactions may be executed bilaterally, or 
on or subject to the rules of a DCM or SEF.
    As a result of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010,\2\ swaps \3\ became subject to regulation under 
the Commodity Exchange Act (``CEA''). Accordingly, the Commission 
promulgated conforming amendments to its regulations to include swaps 
in the definition of ``commodity interest'' in Regulation 1.3(yy). 
Thus, acting as an intermediary for persons located within the U.S. in 
connection with swaps, whether executed bilaterally, or on or subject 
to the rules of a DCM or SEF, may require Foreign Intermediaries to 
register with the Commission. On the other hand, certain Foreign 
Intermediaries acting only for persons located outside the U.S. in 
connection with swaps may be exempt from registration with the 
Commission under Sec.  3.10(c).\4\

    \2\ Pub. L. 111-203, 124 Stat. 137 (2010).
    \3\ Swaps are defined in Section 1a(47) of the CEA and 
Commission Regulation Sec.  1.3(xxx).
    \4\ See Adaptation of Regulations To Incorporate Swaps, 77 FR 
66288, 66295 (Nov. 2, 2012) (discussing the modification of the 
term, ``commodity interest,'' to include swaps); Registration of 
Intermediaries, 77 FR 51898, 51899 (Aug. 28, 2012) (discussing the 
conforming amendments to Regulation 3.10(c)).

    With respect to activities involving commodity interest 
transactions (which, as explained above, includes swaps) executed 
bilaterally, or made on or subject to the rules of any DCM or SEF, 
existing Regulation 3.10(c)(3)(i) provides an exemption from 
registration as a CPO, CTA, or IB if a person \5\ and the transaction 
meet the following conditions:

    \5\ Under Section 1a(38) of the CEA and Regulation 1.3(u), the 
term ``person'' imports the plural and singular, and includes 
individuals, associations, partnerships, corporations and trusts. 7 
U.S.C. 1a(38); 17 CFR 1.3(u).

    1. The person is located outside the U.S.;
    2. The person acts only on behalf of persons located outside the 
U.S.; and
    3. The commodity interest transaction is submitted for clearing 
through a registered FCM.
    Regulation 3.10(c)(2)(i) provides a similar exemption from 
registration for any Foreign Intermediary acting as an FCM.
    In 2015 and 2016, the Commission's Division of Swap Dealer and 
Intermediary Oversight (``Division'') issued staff no-action relief 
that permitted Foreign Intermediaries to rely on the exemption from 
registration in Sec.  3.10(c)(3)(i) if their activities involve swaps 
that are not subject to a Commission clearing requirement.\6\ The 
Division noted that the CEA and Commission regulations do not require 
that all swaps be cleared and some swaps are not yet accepted for 
clearing by any Commission-registered derivatives clearing organization 
(``DCO''). Thus, the Division stated that it did not believe the 
Commission intended that Foreign Intermediaries acting only for persons 
located outside the U.S. be required to register if the intermediaries 
merely acted for such persons in connection with transactions not 
required to be cleared by the CEA or Commission regulations.

    \6\ See CFTC Letters 15-37 (June 4, 2015) and 16-08 (Feb. 12, 

    Similarly, pursuant to additional no-action relief provided in 
2015, the Division also provided relief from registration as an IB or 
CTA for intermediaries acting for International Financial Institutions 
(``IFIs'').\7\ While such institutions may have headquarters or another 
significant presence in the U.S.,\8\ the Division recognized that the 
unique attributes and multinational status of these institutions did 
not warrant treating them as domestic persons.

    \7\ IFIs are those institutions defined in the Commission's 
previous rulemakings and staff no-action letters, i.e., Int'l 
Monetary Fund, Int'l Bank for Reconstruction and Development, 
European Bank for Reconstruction and Development, Int'l Development 
Association, Int'l Finance Corp., Multilateral Investment Guarantee 
Agency, African Development Bank, African Development Fund, Asian 
Development Bank, Inter-American Development Bank, Bank for Economic 
Cooperation and Development in the Middle East and North Africa, 
Inter-American Investment Corp., Council of Europe Development Bank, 
Nordic Investment Bank, Caribbean Development Bank, European 
Investment Bank and European Investment Fund (Int'l Bank for 
Reconstruction and Development, Int'l Finance Corp. and Multilateral 
Investment Guarantee Agency are parts of the World Bank Group). See, 
e.g., Further Definition of ``Swap Dealer,'' ``Security-Based Swap 
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap 
Participant,'' and ``Eligible Contract Participant,'' 77 FR 30596, 
30692 n.1180 (May 23, 2012).
    \8\ See CFTC No-Action Letter 15-37 (June 4, 2015).


[[Page 51826]]

II. The Proposal

A. Proposal Rationale

    Given the various execution venues and clearing requirements 
applicable to swaps,\9\ the Commission now proposes to amend Sec.  
3.10(c)(2)(i) and (3)(i) in tandem to simplify the registration 
exemption that is available to Foreign Intermediaries. Specifically, 
the proposed amendments would permit a Foreign Intermediary to be 
eligible for an exemption from registration with the Commission if the 
Foreign Intermediary, in connection with a commodity interest 
transaction, only acts on behalf of (1) persons located outside the 
U.S., or (2) IFIs (as defined in the proposed rule amendments), without 
regard to whether such persons or institutions clear such commodity 
interest transaction.

    \9\ E.g., A swap may be executed bilaterally and then performed 
bilaterally between those counterparties or could be submitted for 
clearing where each counterparty would then face the clearing house 
for performance; a swap could be executed on a SEF and then 
performed bilaterally between the counterparties or could be 
cleared; a swap could be executed on a DCM and cleared. Under Part 
50 of the Commission's regulations, some swaps are required to 
cleared, but some swaps can be either performed bilaterally or 
voluntarily cleared if a clearing house accepts such swaps for 

    The Commission notes at the outset that the exemptions from 
registration in Sec.  3.10(c)(2) and (3) do not in themselves excuse 
any person (including any IFI) from compliance with any provision of 
the CEA or Commission regulations otherwise applicable to such persons, 
including, without limitation, any requirement that a resulting 
commodity interest transaction be cleared by a DCO registered or exempt 
from registration with the Commission. Commission Regulation 3.10 in 
its current form makes it a condition of the Foreign Intermediary's 
exemption that its foreign located customer's commodity interest 
transactions be cleared through a registered FCM. However, as explained 
above, not all commodity interest transactions are subject to a 
clearing requirement under the CEA or Commission regulations, and some 
are not available for clearing by any DCO registered with the 
    Thus, the Commission is proposing to amend the language of the 
exemptions by removing the clearing requirement because persons located 
outside the U.S. that are subject to any applicable clearing 
requirement for futures or swaps, or any other applicable provision of 
the CEA or Commission regulations, must comply with those requirements 
regardless of any registration exemption for a Foreign Intermediary.
    The Commission has come to the view that the focus of the exemption 
should be the activity of the Foreign Intermediary, not its customer. 
Accordingly, the Commission believes that the proposed amendments are 
consistent with its longstanding policy to focus its customer 
protection activities upon domestic firms and upon firms soliciting or 
accepting orders from domestic participants. Where a Foreign 
Intermediary's customers are located outside the U.S., the Commission 
believes the jurisdiction where the customer is located has the 
preeminent interest in protecting such customers.

B. Proposed Amended Rule Text

    Further to the foregoing, with respect to the amended rule text, 
the Commission is proposing to eliminate from Sec.  3.10(c)(2)(i) and 
(3)(i) both the clearing requirement and references to DCMs and SEFs. 
The Commission is retaining the reference to the definition of 
``foreign broker'' in paragraph (c)(2)(i) because ``foreign broker'' is 
not a Commission intermediary registration category (as are IB, CTA, 
and CPO) and the definition is necessary to make clear that a foreign 
broker is one who is ``engaged in soliciting or in accepting orders 
only from persons located outside the United States, its territories or 
possessions.'' This definitional reference also maintains symmetry with 
paragraph (c)(3)(i), which specifies that the exemption from 
registration applies to intermediary activity, as described in the IB, 
CTA, and CPO definitions, on behalf of IFIs or persons located outside 
the U.S., its territories, or possessions.
    Finally, because the Commission is proposing to codify the 
registration relief in No-Action Letter 15-37 with respect to 
intermediary activities on behalf of IFIs, the Commission proposes to 
add a new Sec.  3.10(c)(6) to define IFIs for the purposes of Sec.  
3.10 in order to provide legal clarity on the scope of the registration 
    The Commission requests comment on all aspects of this proposed 

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires Federal agencies, 
in promulgating regulations, to consider whether the rules they propose 
will have a significant economic impact on a substantial number of 
small entities and, if so, to provide a regulatory flexibility analysis 
regarding the economic impact on those entities. Each Federal agency is 
required to conduct an initial and final regulatory flexibility 
analysis for each rule of general applicability for which the agency 
issues a general notice of proposed rulemaking.\10\

    \10\ 5 U.S.C. 601 et seq.

    The rule proposed by the Commission would affect only FCMs, IBs, 
CTAs, and CPOs. The Commission has previously determined that FCMs and 
CPOs are not small entities for purposes of the RFA. Therefore, the 
requirements of the RFA do not apply to those entities.\11\ The 
Commission notes that the foreign persons affected by the proposed 
changes would be registered FCMs and CPOs if not for the exemption 
provided therein. Further, the Commission notes that the proposed rule 
would impose no new obligation, significant or otherwise, on any of the 
entities remaining entities.

    \11\ See Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, 18620 (Apr. 30, 1982) (FCMs and CPOs).

    With respect to CTAs and IBs, the Commission has found it 
appropriate to consider whether such registrants should be deemed small 
entities for purposes of the RFA on a case-by-case basis, in the 
context of the particular Commission regulation at issue.\12\ As 
certain of these registrants may be small entities for purposes of the 
RFA, the Commission considered whether this rulemaking would have a 
significant economic impact on such registrants. This proposal would 
clarify in what circumstances certain foreign persons acting in the 
capacity of a FCM or an IB, CTA, or CPO would be exempt from 
registration, in connection with commodity interest transactions solely 
on behalf of persons located outside the U.S. This proposal is not 
expected to impose any new burdens on market participants. Rather, to 
the extent that this proposal provides an exemption to the intermediary 
registration requirement, the Commission believes it is reasonable to 
infer that the exemption would be less burdensome to such participant. 
The Commission does not, therefore, expect small entities to incur any 
additional costs as a result of this proposal. Therefore, the 
Commission has determined that the proposed rule will not create a 
significant economic impact on a substantial number of small entities. 
Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the proposed rule will not 
have a

[[Page 51827]]

significant impact on a substantial number of small entities.

    \12\ See 47 FR at 18620 (CTAs); and Introducing Brokers and 
Associated Persons of Introducing Brokers, Commodity Trading 
Advisors and Commodity Pool Operators; Registration and Other 
Regulatory Requirements, 48 FR 35248, 35276 (Aug. 3, 1983) (IBs).

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined the PRA.\13\ An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number. The 
proposed rules will not impose any new recordkeeping or information 
collection requirements, or other collections of information that 
require approval of the Office of Management and Budget (``OMB'') under 
the PRA.

    \13\ 44 U.S.C. 3501 et seq.

    The Commission invites the public and other interested parties to 
comment on any aspect of the reporting burdens. Pursuant to 44 U.S.C. 
3506(c)(2)(B), the Commission generally solicits comments in order to: 
(1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have practical 
utility; (2) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information; (3) determine whether 
there are ways to enhance the quality, utility, and clarity of the 
information to be collected; and (4) mitigate 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. The Commission specifically invites public 
comment on the accuracy of its estimate that no additional information 
collection requirements or changes to existing collection requirements 
would result from the rules proposed herein.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs, by fax at (202) 395-6566 or by email 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 proposed rule for comment submission instructions to the 
Commission. A copy of the supporting statement for the collection of 
information discussed above may be obtained by visiting http://reginfo.gov/. OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this document in the Federal Register. Therefore, a comment is best 
assured of having its full effect if OMB receives it within 30 days of 

C. Cost-Benefit Analysis

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before issuing new regulations under 
the Act.\14\ By its terms, it does not require the Commission to 
quantify the costs and benefits of new rules or to determine whether 
the benefits of the proposed rules outweigh their costs; it requires 
the Commission to ``consider'' the cost and benefits of its actions. 
Section 15(A) of the CEA further specifies that the costs and benefits 
of the proposed rules shall be evaluated in light of five broad areas 
of market public concern: (1) Protection of market participants and the 
public; (2) efficiency, competitiveness and financial integrity of the 
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 of the five 
enumerated areas of concern and may, in its discretion, 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 CEA.

    \14\ 7 U.S.C. 19(a).

    The proposed regulation should foster: (1) 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.; and 
(2) greater efficiency, competitiveness and financial integrity of 
financial markets; price discovery; and sound risk management practices 
by ensuring greater depth in swaps markets accessed by U.S. persons. 
The Commission invites public comment on its cost-benefit 

List of Subjects in 17 CFR Part 3

    Definitions, Consumer protection, Foreign futures, Foreign options, 
Registration requirements.

    For the reasons set forth in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 3 as follows:


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

    Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1, 6c, 
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 
13b, 13c, 16a, 18, 19, 21, 23.

2. Amend Sec.  3.10 as follows:
a. Revise paragraphs (c)(2)(i) and (c)(3)(i); and
b. Add paragraph (c)(6).
    The revisions and addition to read as follows:

Sec.  3.10  Registration of futures commission merchants, retail 
foreign exchange dealers, introducing brokers, commodity trading 
advisors, commodity pool operators, swap dealers, major swap 
participants and leverage transaction merchants.

* * * * *
    (c) * * *
    (2)(i) A person located outside the United States, its territories, 
or possessions (a ``foreign located person'') engaged in activity that 
meets the definition of a futures commission merchant in the Act and 
Sec.  1.3(p) of this chapter is not required to register as a futures 
commission merchant if such activity is either solely that of a foreign 
broker as defined in Sec.  1.3(xx) of this chapter or solely on behalf 
of international financial institutions.
* * * * *
    (3)(i) A foreign located person engaged in activity that meets the 
definition of an introducing broker, commodity trading advisor, or 
commodity pool operator, as defined in the Act and in Sec.  1.3(mm), 
(bb), and (nn) of this chapter, respectively, is not required to 
register as an introducing broker, commodity trading advisor, or 
commodity pool operator if such activity is either solely on behalf of 
foreign located persons or international financial institutions.
* * * * *
    (6) For the purposes of this section, ``international financial 
institution'' means each of the following and any other international 
financial institution that the Commission may designate: Int'l Monetary 
Fund, Int'l Bank for Reconstruction and Development, European Bank for 
Reconstruction and Development, Int'l Development Association, Int'l 
Finance Corp., Multilateral Investment Guarantee Agency, African 
Development Bank, African Development Fund, Asian Development Bank, 
Inter-American Development Bank, Bank for Economic Cooperation and 
Development in the Middle East and North Africa, Inter-American 
Investment Corp., Council of Europe Development Bank, Nordic Investment 
Bank, Caribbean Development Bank, European

[[Page 51828]]

Investment Bank and European Investment Fund.
* * * * *

    Issued in Washington, DC, on July 27, 2016, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

Appendix to Amendment to Commission Regulation 3.10(c): Exemption From 
Registration for Certain Foreign Persons--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Bowen and 
Giancarlo voted in the affirmative. No Commissioner voted in the 

[FR Doc. 2016-18210 Filed 8-4-16; 8:45 am]