[Federal Register: February 9, 2006 (Volume 71, Number 27)]
[Page 6759-6761]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



Foreign Futures and Options Transactions

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.


SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is granting an exemption to firms designated by the Tokyo Commodity
Exchange (TOCOM) from the application of certain of the Commission's
foreign futures and option rules based on substituted compliance with
certain comparable regulatory and self-regulatory requirements of a
foreign regulatory authority consistent with conditions specified by
the Commission, as set forth herein. This Order is issued pursuant to
Commission Regulation 30.10, which permits persons to file a petition
with the Commission for exemption from the application of certain of
the Regulations set forth in Part 30 and authorizes the Commission to
grant such an exemption if such action would not be otherwise contrary
to the public interest or to the purposes of the provision from which
exemption is sought.

DATES: Effective Date: February 9, 2006.

Director, Susan A. Elliott, Esq., Special Counsel, Division of Clearing
and Intermediary Oversight, Commodity Futures Trading Commission, 1155
21st Street, NW., Washington, DC 20581. Telephone: (202) 418-5430.

SUPPLEMENTARY INFORMATION: The Commission has issued the following

Order Under CFTC Regulation 30.10 Exempting Firms Designated by the
Tokyo Commodity Exchange (TOCOM) From the Application of Certain of the
Foreign Futures and Option Regulations the Later of the Date of
Publication of the Order Herein in the Federal Register or After Filing
of Consents by Such Firms and TOCOM, as Appropriate, to the Terms and
Conditions of the Order Herein.

    Commission Regulations governing the offer and sale of commodity
futures and option contracts traded on or subject to the regulations of
a foreign board of trade to customers located in the U.S. are contained
in part 30 of the Commission's regulations.\1\ These regulations
include requirements for intermediaries with respect to registration,
disclosure, capital adequacy, protection of customer funds,
recordkeeping and reporting, and sales practice and compliance
procedures that are generally comparable to those applicable to
transactions on U.S. markets.

    \1\ Commission regulations referred to herein are found at 17
CFR Ch. I (2005).

    In formulating a regulatory program to govern the offer and sale of
foreign futures and option products to customers located in the U.S.,
the Commission, among other things, considered the desirability of
ameliorating the potential extraterritorial impact of such a program
and avoiding duplicative regulation of firms engaged in international
business. Based upon these considerations, the Commission determined to
permit persons located outside the U.S. and subject to a comparable
regulatory structure in the jurisdiction in which they were located to
seek an exemption from certain of the requirements under part 30 of the
Commission's regulations based upon substituted compliance with the
regulatory requirements of the foreign jurisdiction.
    Appendix A to part 30, "Interpretative Statement With Respect to
the Commission's Exemptive Authority Under 30.10 of Its Rules"
(Appendix A), generally sets forth the elements the Commission will
evaluate in determining whether a particular regulatory program may be
found to be comparable for purposes of exemptive relief pursuant to
Regulation 30.10.\2\ These elements include: (1) Registration,
authorization or other form of licensing, fitness review or
qualification of persons that solicit and

[[Page 6760]]

accept customer orders; (2) minimum financial requirements for those
persons who accept customer funds; (3) protection of customer funds
from misapplication; (4) recordkeeping and reporting requirements; (5)
sales practice standards; (6) procedures to audit for compliance with,
and to take action against those persons who violate the requirements
of the program; and (7) information sharing arrangements between the
Commission and the appropriate governmental and/or self-regulatory
organization to ensure Commission access on an "as needed" basis to
information essential to maintaining standards of customer and market
protection within the U.S.

    \2\ 52 FR 28990, 29001 (August 5, 1987).

    Moreover, the Commission specifically stated in adopting Regulation
30.10 that no exemption of a general nature would be granted unless the
persons to whom the exemption is to be applied: (1) Submit to
jurisdiction in the U.S. by designating an agent for service of process
in the U.S. with respect to transactions subject to part 30 and filing
a copy of the agency agreement with the National Futures Association
(NFA); (2) agree to provide access to their books and records in the
U.S. to Commission and Department of Justice representatives; and (3)
notify NFA of the commencement of business in the U.S.\3\

    \3\ 52 FR 28980, 28981 and 29002.

    On February 16, 2005, TOCOM petitioned the Commission on behalf of
its member firms, located and doing business in Japan, for an exemption
from the application of the Commission's part 30 Regulations to those
firms. In support of its petition, TOCOM states that granting such an
exemption with respect to such firms that it has authorized to conduct
foreign futures and option transactions on behalf of customers located
in the U.S. would not be contrary to the public interest or to the
purposes of the provisions from which the exemption is sought because
such firms are subject to a regulatory framework comparable to that
imposed by the Commodity Exchange Act (Act) and the regulations
    Based upon a review of the petition, supplementary materials filed
by TOCOM and the recommendation of the Commission's staff, the
Commission has concluded that the standards for relief set forth in
Regulation 30.10 and, in particular, Appendix A thereof, have been met
and that compliance with applicable Japanese law and TOCOM regulations
may be substituted for compliance with those sections of the Act and
regulations thereunder more particularly set forth herein.
    By this Order, the Commission hereby exempts, subject to specified
conditions, those firms identified to the Commission by TOCOM as
eligible for the relief granted herein from:

--Registration with the Commission for firms and for firm
--The requirement in Commission Regulation 30.6(a) and (d), 17 CFR
30.6(a) and (d), that firms provide customers located in the U.S. with
the risk disclosure statements in Commission Regulation 1.55(b), 17 CFR
1.55(b), and Commission Regulation 33.7, 17 CFR 33.7, or as otherwise
approved under Commission Regulation 1.55(c), 17 CFR 1.55(c);
--The separate account requirement contained in Commission Regulation
30.7, 17 CFR 30.7;
--Those sections of part 1 of the Commission's financial regulations
that apply to foreign futures and options sold in the U.S. as set forth
in part 30; and
--Those sections of part 1 of the Commission's regulations relating to
books and records which apply to transactions subject to part 30,

based upon substituted compliance by such persons with the applicable
statutes and regulations in effect in Japan.
    This determination to permit substituted compliance is based on,
among other things, the Commission's finding that the regulatory
framework governing persons in Japan who would be exempted hereunder
    (1) A system of qualification or authorization of firms who deal in
transactions subject to regulation under part 30 that includes, for
example, criteria and procedures for granting, monitoring, suspending
and revoking licenses, and provisions for requiring and obtaining
access to information about authorized firms and persons who act on
behalf of such firms;
    (2) Financial requirements for firms including, without limitation,
a requirement for a minimum level of working capital and daily mark-to-
market settlement and/or accounting procedures;
    (3) A system for the protection of customer assets that is designed
to preclude the use of customer assets to satisfy house obligations and
requires separate accounting for such assets;
    (4) Recordkeeping and reporting requirements pertaining to
financial and trade information;
    (5) Sales practice standards for authorized firms and persons
acting on their behalf that include, for example, required disclosures
to prospective customers and prohibitions on improper trading advice;
    (6) Procedures to audit for compliance with, and to redress
violations of, the customer protection and sales practice requirements
referred to above, including, without limitation, an affirmative
surveillance program designed to detect trading activities that take
advantage of customers, and the existence of broad powers of
investigation relating to sales practice abuses; and
    (7) Mechanisms for sharing of information between the Commission,
TOCOM, and the Japanese regulatory authorities on an "as needed"
basis including, without limitation, confirmation data, data necessary
to trace funds related to trading futures products subject to
regulation in Japan, position data, and data on firms' standing to do
business and financial condition.
    This finding was first made in 1993, with the issuance of
Regulation 30.10 relief to the Tokyo Grain Exchange (TGE).\4\
Commission staff have concluded, upon review of the petition of TOCOM
and accompanying exhibits that describe in detail changes to the
Japanese regulatory regime since 1993, that Japanese regulation of
futures and options exchanges continues to be comparable to that of the
U.S. in the areas specified in Appendix A of part 30, as described

    \4\ See TGE Regulation 30.10 Order, issued February 17, 1993, 58
FR 10953 (February 23, 1993).

    This Order does not provide an exemption from any provision of the
Act or regulations thereunder not specified herein, such as the
antifraud provision in Regulation 30.9. Moreover, the relief granted is
limited to brokerage activities undertaken on behalf of customers
located in the U.S. with respect to transactions on or subject to the
regulations of TOCOM for products that customers located in the U.S.
may trade.\5\ The relief does not extend to regulations relating to
trading, directly or indirectly, on U.S. exchanges. For example, a firm
trading in U.S. markets for its own account would be subject to the
Commission's large trader reporting requirements.\6\ Similarly, if such
a firm were carrying a position on a U.S. exchange on behalf of foreign
clients, it would be subject to the reporting requirements applicable
to foreign brokers.\7\ The relief herein is inapplicable where the firm
solicits or

[[Page 6761]]

accepts orders from customers located in the U.S. for transactions on
U.S. markets. In that case, the firm must comply with all applicable
U.S. laws and regulations, including the requirement to register in the
appropriate capacity.

    \5\ See, e.g., sections 2(a)(1)(C) and (D) of the Act.
    \6\ See, e.g., 17 CFR part 18 (2005).
    \7\ See, e.g., 17 CFR parts 17 and 21 (2005).

    The eligibility of any firm to seek relief under this exemptive
Order is subject to the following conditions:
    (1) The regulatory or self-regulatory organization responsible for
monitoring the compliance of such firms with the regulatory
requirements described in the Regulation 30.10 petition must represent
in writing to the CFTC \8\ that:

    \8\ As described below, these representations are to be filed
with NFA.

    (a) Each firm for which relief is sought is registered, licensed or
authorized, as appropriate, and is otherwise in good standing under the
standards in place in Japan; such firm is engaged in business with
customers in Japan as well as in the U.S.; and such firm and its
principals and employees who engage in activities subject to part 30
would not be statutorily disqualified from registration under section
8a(2) of the Act, 7 U.S.C. 12a(2);
    (b) It will monitor firms to which relief is granted for compliance
with the regulatory requirements for which substituted compliance is
accepted and will promptly notify the Commission or NFA of any change
in status of a firm that would affect its continued eligibility for the
exemption granted hereunder, including the termination of its
activities in the U.S.;
    (c) All transactions with respect to customers resident in the U.S.
will be made on or subject to the regulations of TOCOM and the
Commission will receive prompt notice of all material changes to the
relevant laws in Japan, any regulations promulgated thereunder and
TOCOM regulations;
    (d) Customers located in the U.S. will be provided no less
stringent regulatory protection than Japanese customers under all
relevant provisions of Japanese law; and
    (e) It will cooperate with the Commission with respect to any
inquiries concerning any activity subject to regulation under the part
30 Regulations, including sharing the information specified in Appendix
A on an "as needed" basis and will use its best efforts to notify the
Commission if it becomes aware of any information that in its judgment
affects the financial or operational viability of a member firm doing
business in the U.S. under the exemption granted by this Order.
    (2) Each firm seeking relief hereunder must represent in writing
that it:
    (a) Is located outside the U.S., its territories and possessions
and, where applicable, has subsidiaries or affiliates domiciled in the
U.S. with a related business (e.g., banks and broker/dealer affiliates)
along with a brief description of each subsidiary's or affiliate's
identity and principal business in the U.S.;
    (b) Consents to jurisdiction in the U.S. under the Act by filing a
valid and binding appointment of an agent in the U.S. for service of
process in accordance with the requirements set forth in Regulation
    (c) Agrees to provide access to its books and records related to
transactions under part 30 required to be maintained under the
applicable statutes and regulations in effect in Japan upon the request
of any representative of the Commission or U.S. Department of Justice
at the place in the U.S. designated by such representative, within 72
hours, or such lesser period of time as specified by that
representative as may be reasonable under the circumstances after
notice of the request;
    (d) Has no principal or employee who solicits or accepts orders
from customers located in the U.S. who would be disqualified under
section 8a(2) of the Act, 7 U.S.C. 12a(2), from doing business in the
    (e) Consents to participate in any NFA arbitration program that
offers a procedure for resolving customer disputes on the papers where
such disputes involve representations or activities with respect to
transactions under part 30, and consents to notify customers located in
the U.S. of the availability of such a program;
    (f) Undertakes to comply with the applicable provisions of Japanese
laws and TOCOM regulations that form the basis upon which this
exemption from certain provisions of the Act and Regulations thereunder
is granted; and
    (g) Maintains the greater of regulatory capital as required by
TOCOM or by Commission regulations.\9\

    \9\ See, Final Rulemaking, "Minimum Financial and Related
Reporting Requirements for Futures Commission Merchants and
Introducing Brokers," (Risk-based Capital Regulation), 69 FR 49784-
49800, August 12, 2004.

As set forth in the Commission's September 11, 1997 Order delegating to
NFA certain responsibilities, the written representations set forth in
paragraph (2) shall be filed with NFA.\10\ Each firm seeking relief
hereunder has an ongoing obligation to notify NFA should there be a
material change to any of the representations required in the firm's
application for relief.

    \10\ 62 FR 47792, 47793 (September 11, 1997). Among other
duties, the Commission authorized NFA to receive requests for
confirmation of Regulation 30.10 relief on behalf of particular
firms, to verify such firms' fitness and compliance with the
conditions of the appropriate Regulation 30.10 Order and to grant
exemptive relief from registration to qualifying firms.

    This Order will become effective as to any designated TOCOM firm
the later of the date of publication of the Order in the Federal
Register or the filing of the consents set forth in paragraphs (2)(a)-
(g). Upon filing of the notice required under paragraph (1)(b) as to
any such firm, the relief granted by this Order may be suspended
immediately as to that firm. That suspension will remain in effect
pending further notice by the Commission, or the Commission's designee,
to the firm and TOCOM.
    This Order is issued pursuant to Regulation 30.10 based on the
representations made and supporting material provided to the Commission
and the recommendation of the staff, and is made effective as to any
firm granted relief hereunder based upon the filings and
representations of such firms required hereunder. Any material changes
or omissions in the facts and circumstances pursuant to which this
Order is granted might require the Commission to reconsider its finding
that the standards for relief set forth in Regulation 30.10 and, in
particular, Appendix A, have been met. Further, if experience
demonstrates that the continued effectiveness of this Order in general,
or with respect to a particular firm, would be contrary to public
policy or the public interest, or that the systems in place for the
exchange of information or other circumstances do not warrant
continuation of the exemptive relief granted herein, the Commission may
condition, modify, suspend, terminate, withhold as to a specific firm,
or otherwise restrict the exemptive relief granted in this Order, as
appropriate, on its own motion.
    The Commission will continue to monitor the implementation of its
program to exempt firms located in jurisdictions generally deemed to
have a comparable regulatory program from the application of certain of
the foreign futures and option regulations and will make necessary
adjustments if appropriate.

    Issued in Washington, DC on February 6, 2006.
Jean A. Webb,
Secretary of the Commission.
 [FR Doc. E6-1776 Filed 2-8-06; 8:45 am]