Public Statements & Remarks

Concurring Statement of Commissioner Caroline D. Pham on Novel U.S. Location Test and FCM Registration

May 13, 2024

I respectfully concur on In re Falcon Labs Ltd.[1] because the cross-border issues raised in this matter re-open decades of settled Congressional intent and well-established Commission interpretation of the Commodity Exchange Act’s (CEA) extraterritoriality and cross-border application to foreign futures and options transactions and the futures commission merchant (FCM) registration requirement, as well as to swaps activity outside the United States. These are cross-border issues that have vast implications for the over $700 trillion notional global derivatives market and the potential to disrupt legitimate activity of multinational trading firms and the end-users that depend on derivatives markets for hedging and risk management. I believe the Commission’s unprecedented interpretation today in an administrative order constitutes a legislative rule that requires notice-and-comment rulemaking pursuant to the Administrative Procedure Act (APA) because it may impose new CFTC registration and trading requirements on scores of non-U.S. legal entities.

The Commission has chosen to ignore its comprehensive cross-border regulatory regime established under Part 1[2], Part 3[3], Part 30[4], Part 4[5], and Part 23[6] of CFTC regulations in favor of spinning up a brand-new test for extraterritorial application of the CEA without any cited statutory authority. The Commission creates a novel “U.S. location” test to “look through” non-U.S. legal entities in the latest of a series of ultra vires precedents that undermines the legitimacy of the CFTC and the integrity of global derivatives markets.[7]

If the Commission is attempting to establish a new interpretation of the extraterritorial statutory authority in CEA Section 4 and a new FCM registration regime for foreign transactions, today’s Order shockingly conflicts with the CFTC’s nearly 40-year-old comprehensive rules for foreign futures and foreign options transactions set forth in Part 1 and Part 30.[8] Any attempt to ignore the Commission’s decades of regulations and interpretations in an effort to rewrite history creates nothing more than a legal fantasy and is a breathtaking overreach to seize jurisdiction over the entire world. The reason why the Commission has never before found this kind of violation against an intermediary is because the legal argument in today’s Order is wrong.

Novel “U.S. Location” Test for Non-U.S. Legal Entities

In brief, the Commission finds that the basis for Respondent’s (a non-U.S. legal entity organized and existing under the laws of the Seychelles) alleged violation of the FCM registration requirement[9] is that Respondent had customers “located in the United States,” “such as non-U.S. incorporated entities operated and controlled by U.S.-based trading firms.”[10]

To make this finding, the Order establishes factors to “look through” a non-U.S. legal entity and thus determine whether it is “located in the United States,” including: (1) location of ultimate beneficial owners, (2) location of corporate organization, (3) principal place of business, and (4) location of personnel controlling a non-U.S. prime broker sub-account. These criteria are not set forth in the CEA’s statutory language, and the Order provides no legal authority to support these factors.

This novel “U.S. location” test could have the resulting effect of requiring any non-U.S. legal entity that transacts in futures, options, or swaps that has a U.S. parent entity or beneficial owner, or has personnel located in the U.S. that “control” (another undefined term with no cited statutory authority) a non-U.S. prime broker sub-account, to be deemed “located in the United States” even if its location of corporate organization is outside the United States and duly complies with the legal or regulatory obligations of the non-U.S. jurisdiction. In addition, at one fell swoop this test contravenes the entire body of treatment of a “proprietary account” under CFTC regulations including applicable exemptions from registration or other requirements.[11]

Let me be clear: in the past nearly 40 years since Congress amended the CEA to permit foreign transactions, the Commission has never interpreted or applied this novel “U.S. location” test. The proper legal analysis to determine the extraterritorial applicability of various sections of the CEA to a non-U.S. legal entity requires a sophisticated understanding of the CFTC cross-border regulatory regimes for, at a minimum, FCMs, CPOs, and swap dealers, as well as proprietary accounts.

Part 30 and FCMs

The Commission’s novel “U.S. location test” conflicts with the CFTC’s comprehensive regulatory regime for foreign futures and foreign options transactions, including definitions and registration requirements, set forth in Part 1 and Part 30 that was first promulgated in 1987 and the associated voluminous administrative record of the Commission’s interpretation of “located in the United States, its territories or possessions” in the many rulemakings amending Part 1, Part 30, and other associated regulations since then. Moreover, the Commission’s determination of a new look-through test for a non-U.S. legal entity that may be an FCM customer is impermissible in an administrative settlement order because it may impose new CFTC FCM registration requirements on non-U.S. brokers, which can only be promulgated through APA notice-and-comment rulemaking.

Part 4 and CPOs; Part 23 and swap dealers

Similarly, this novel “U.S. location” test would also conflict with the Commission’s comprehensive regulatory regime and voluminous administrative record of interpretations for cross-border application to commodity pool operators (CPO) and commodity trading advisors (CTA) set forth in Part 4 since 1981, and to swap dealers and major swap participants (MSP) set forth in Part 23 since 2012.

In fact, the Commission most recently established clear interpretations of the application of CFTC registration requirements to non-U.S. legal entities engaged in the activity of a CPO in its 2020 final rule, Exemption from Registration for Certain Foreign Intermediaries, including whether clearing through a registered FCM is required as a condition of the exemption.[12]

The Commission also recently established clear interpretations for swap activities outside the United States in its 2020 final rule, Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants, including an interpretation of CEA Section 2(i) and the CFTC’s extraterritorial jurisdiction, and definitions and tests for “U.S. person,” “non-U.S. person,” “United States,” and “U.S.,” all solely for purposes of Regulation 23.23, and not for any other CFTC regulations including those applicable to FCMs.[13]

I am astounded that the Commission would simply pretend these recent cross-border rulemakings did not exist.

Principal place of business for federal diversity jurisdiction

Further, the “principal place of business” prong of this novel “U.S. location” test appears to be rooted in the conflation of diversity jurisdiction in U.S. federal courts under the Federal Code of Civil Procedure, 28 U.S.C. 1332(c)(1),[14] and the Commission’s extraterritorial jurisdiction under the CEA. The case law on federal diversity jurisdiction only addresses the question of citizenship for a corporation in order to determine whether a complaint may be filed in U.S. federal court.

However, although the CFTC may sue a foreign party in U.S. federal court, that does not mean that the CFTC can apply a “principal place of business” analysis that is confined to the question of federal diversity jurisdiction, to the question whether specific provisions of the CEA apply extraterritorially to activities conducted by non-U.S. legal entities or activities conducted outside the United States. This basic conflation of foundational legal doctrines regarding federal diversity jurisdiction with the Commission’s extraterritorial jurisdiction does not make sense.

In addition, the administrative record for Part 30 and FCMs does not support a “principal place of business” analysis based on federal diversity jurisdiction case law, and is directly on point to the cross-border issues raised in today’s Order. In the preamble to the 1987 final rule on Foreign Futures and Foreign Options Transactions, the Commission noted that the then-new Part 30 to its regulations would “govern the domestic offer and sale of futures and options entered into on or subject to the rules of a foreign board of trade.”[15] The Commission then refers to “foreign futures and options transactions undertaken by U.S. domiciliaries” and notes “Congress’ intent that foreign futures and options products sold in the U.S. be subject to regulatory safeguards comparable to those applicable to domestic transactions.”[16] Taken together, it is clear that the dispositive fact is the physical location of the offer or sale of the futures transaction by a broker, evident from words such as “in” or “outside,” “domestic” or “foreign,” and, most tellingly, the phrase “sold in the U.S.” to express Congress’ legislative intent with respect to CEA Section 4’s statutory language “located in the United States, its territories or possessions.” This approach is not only the Commission’s historical and well-understood interpretation up until today’s Order, but it is also consistent with the extraterritorial application of U.S. securities laws that many of the CEA’s provisions are modeled on. And, the Commission’s reference to “U.S. domiciliaries” indicates, if anything, that the appropriate analysis for a non-U.S. legal entity would be more akin to interpretations set forth under the Internal Revenue Code and other U.S. taxation laws and regulations.

For all these reasons, the Order’s creation of a “principal place of business” extraterritorial standard based on divining the “citizenship” of a corporation [or other business organization] has no statutory authority in the CEA, and is nothing more than an attempt to re-litigate the well-settled Congressional intent and the Commission’s interpretations of its extraterritorial jurisdiction and the cross-border applicability of the CEA. Moreover, CEA Section 4 has a “clear statement of extraterritorial effect,” as do various other sections of the CEA, and the Commission has accordingly established a comprehensive regulatory regime over all its categories of registrants that interprets the CEA’s “extraterritorial effect.”[17] There is no gap to be filled.


As a final point on another threshold matter, I do not understand why the Commission unnecessarily engages in imaginative and incorrect extraterritorial application of the CEA and CFTC regulations. The Order’s alleged charge of failure to register as an FCM is supported by allegations that Respondent’s sales personnel were physically located in the United States and, therefore, were presumably engaged in the offer or sale of futures transactions (even if foreign futures transactions) physically in the United States. These allegations would also satisfy the domestic conduct requirement in Morrison v. National Australia Bank, if applicable. Because this is the appropriate and more direct basis for finding a violation of the FCM registration requirement against Respondent, I concur in this matter.

It is unwarranted to apply a novel ‘“U.S. location” test to “look through” a non-U.S. legal entity to determine that it is a U.S.-located FCM customer for purposes of the Order’s alleged charge of failure to register as an FCM. This sea change in interpretation cannot be done in an administrative settlement order, but must be carefully deliberated upon by the Commission with sufficient administrative record and rational basis to support a finding of reasoned decision-making by the Commission upon judicial review by an U.S. appellate court. The Commission must avoid establishing precedent in its administrative orders that has no cited statutory authority, conflicts with comprehensive CFTC regulations for cross-border activity, and disrupts the Commission’s well-established interpretation of its extraterritorial jurisdiction.

[1] See CFTC Issues Order Against Crypto Prime Brokerage Firm for Illegally Providing U.S. Customers Access to Digital Asset Derivatives Trading Platforms (May 13, 2024),

[2] 17 C.F.R. Part 1.

[3] 17 C.F.R. Part 3.

[4] 17 C.F.R. Part 30.

[5] 17 C.F.R. Part 4.

[6] 17 C.F.R. Part 23.

[7] I have raised these concerns consistently for the past two years, most recently calling for a GAO study and proposing reforms to the CFTC’s internal procedures. See The CFTC Needs to Get Serious: A Strategic Plan for Reform, Statement of Commissioner Caroline D. Pham Before the Open Meeting on May 10, 2024,

[8] Section 4 of the Commodity Exchange Act of 1974 (CEA), codified at 7 U.S.C. 6. CEA Section 4(a) sets forth a regulatory scheme for futures transactions “anywhere in the United States, its territories or possessions,” customarily referred to as “domestic transactions.” See, e.g., Foreign Futures and Foreign Options Transactions, 52 Fed. Reg. 28,959, 28,980 (Aug. 5, 1987) (citing S. Rep. No. 384, 97th Cong., 2d Sess. 45-46 (1982) and 51 Fed. Reg. at 12,107). CEA Section 4(b) sets forth the extraterritorial application to “the offer or sale of any [futures contract] that is made or to be made on or subject to the rules of a board of trade, exchange, or market located outside the United States, its territories or possessions,” engaged in by “any person located in the United States, its territories or possessions,” referred to as “foreign transactions.” For ease of reference, “located in the United States” as used in this statement includes U.S. territories or U.S. possessions pursuant to CEA Section 4.

[9] The Order finds a violation of CEA Section 4d(a)(1), 7 U.S.C. 6d(a)(1). In re Falcon Labs Ltd., Order Instituting Proceedings Pursuant to Section 6(c) and (d) of the Commodity Exchange Act, Making Findings, and Imposing Remedial Sanctions, CFTC No. 24-06 (May 13, 2024).

[10] Id. at 2.

[11] “Proprietary account” is defined in CFTC Regulation 1.3, 17 C.F.R. 1.3.

[12] Exemption from Registration for Certain Foreign Intermediaries, 85 Fed. Reg. 78,718 (Dec. 7, 2020).

[13] Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants, 85 Fed. Reg. 56,924 (Sept. 14, 2020).

[14] See, e.g., Hertz Corp. v. Friend, 559 U.S. 77 (2010) (establishing a uniform “nerve-center test” to determine a corporation’s principal place of business and citizenship for federal diversity jurisdiction).

[15] Supra note 8 at 28,980.

[16] Id.

[17] See, e.g., Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010). Accord supra note 8.