[Federal Register: February 27, 1997 (Volume 62, Number 39)]
[Rules and Regulations]
[Page 8875-8877]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27fe97-5]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 30
Foreign Futures and Option Transactions
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is issuing a Supplemental Order authorizing members of the
Montreal Exchange (``Exchange'') designated for relief under Commission
rule 30.10 (``Exchange Member'' or ``Member'') to solicit and accept
orders from U.S. customers for otherwise permitted transactions <SUP>1
on all non-U.S. exchanges where such Members are authorized by the
regulations of the Montreal Exchange to conduct futures business for
customers.
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\1\ Relief under this Supplemental Order extends only to those
products falling within the jurisdiction of the Commodity Exchange
Act (``CEA'' or ``Act'') and remains subject to existing product
restrictions under the CEA and Commission regulations and procedures
thereunder related to stock indices and foreign government debt (see
CEA section 2(a)(1)(B)(v) and Securities and Exchange Commission
rule 3a12-8).
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This Supplemental Order is issued pursuant to Commission rule
30.10, which permits the Commission to grant an exemption from certain
provisions of Part 30 of the Commission's regulations, and the
Commission's Order dated March 14, 1989, granting relief under rule
30.10 to designated members of the Montreal Exchange.
EFFECTIVE DATE: February 27, 1997.
FOR FURTHER INFORMATION CONTACT: Jane C. Kang, Esq., or Robert H.
Rosenfeld, Esq., Division of Trading and Markets, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W.,
Washington, D.C. 20581. Telephone: (202) 418-5430.
SUPPLEMENTARY INFORMATION: The Commission has issued the following
Supplemental Order:
Supplemental Order Permitting Members of the Montreal Exchange
Designated for Relief Under Commission Rule 30.10 to Solicit and to
Accept Orders from U.S. Customers for Otherwise Permitted Transactions
on All Non-U.S. Exchanges Where Such Members Are Authorized by Exchange
Regulations to Conduct Futures Business for Customers
On March 14, 1989, the Commission issued an Order granting relief
under rule 30.10 to designated members of the Montreal Exchange, 54 FR
11179 (March 17, 1988) (``Original Order''). The Original Order limited
the scope of permissible brokerage activities undertaken by designated
Montreal Exchange members on behalf of U.S. customers to transactions
``on or subject to the rules of the Exchange.'' 54 FR at 11811
(condition (1)(c)). Subsequently, however, the Commission has issued
rule 30.10 orders which did not include this limitation.<SUP>2
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\2\ In 1989 the Commission issued a series of rule 30.10 orders
authorizing firms designated by the U.K. Securities and Investments
Board and certain U.K. ``Self-Regulating Organisations'' to conduct
brokerage activities for U.S. customers on any non-U.S. exchange
designated under U.K. law. See 54 FR 21599, 21600 (May 19, 1989)
(SIB), 54 FR 21604, 21605 (May 19, 1989) (Association of Futures
Brokers and Dealers (``AFBD'')), 54 FR 21609, 21610 (May 19, 1989)
(The Securities Association (``TSA'')), and 54 FR 21614, 21615 (May
19, 1989) (Investment Management Regulatory Organisation). The AFBD
and TSA subsequently merged to form the Securities and Futures
Association, which became the successor organization for rule 30.10
purposes. See 56 FR 14017 (April 5, 1991).
The Commission also has issued similar supplemental relief to
the Sydney Futures Exchange, see 58 FR 19209 (April 13, 1993), and
to the New Zealand Futures and Options Exchange, see 61 FR 64985
(December 10, 1996).
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By letter dated March 26, 1996, the Montreal Exchange petitioned
the Commission to revise the Original Order to permit designated
members of the Montreal Exchange to solicit or accept orders from U.S.
foreign futures and options customers for all otherwise permitted
transactions on all non-U.S. exchanges <SUP>3 where Exchange Members
are authorized by Exchange regulations to conduct futures and options
business for customers, subject to the Montreal Exchange's and Members'
continued compliance with the terms of the Original Order and such
other conditions as may be imposed by the Commission.<SUP>4 The
Exchange further represented that it would carry out its compliance,
surveillance, and rule enforcement activities with respect to
solicitations and acceptances of orders by designated Montreal Exchange
members of U.S. customers for otherwise permitted transactions on all
non-U.S. markets where such Members are authorized by Exchange
regulations to conduct futures and options business for U.S. customers.
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\3\ The term ``non-U.S. exchange'' refers to a foreign board of
trade which is defined in Commission rule 1.3(ss), 17 CFR
Sec. 1.3(ss) as: Any board of trade, exchange or market located
outside the United States, its territories or possessions, whether
incorporated or unincorporated, where foreign futures or foreign
options transactions are entered into.
Thus, contracts that are traded on a market that has been
designated as a contract market pursuant to section 5 of the CEA are
not within the scope of this Order.
\4\ Letter dated March 26, 1996, from Johanne Dupont, Legal
Counsel to the Montreal Exchange, to Ms. Jane Kang, CFTC Division of
Trading and Markets (``March 26, 1996 Request'').
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Upon due consideration and for the reasons stated in the Original
Order, the Commission has determined to issue this Supplemental Order
permitting Montreal Exchange members designated for rule 30.10 relief
to solicit and to accept orders from U.S. foreign futures and options
customers for otherwise permitted transactions in commodity futures and
commodity options (including options on futures) on or subject to the
rules of any exchange where such Montreal Exchange Members are
authorized by Exchange regulations to conduct options and futures
business for customers, other than a contract market designated as such
pursuant to section 5 of the CEA,
[[Page 8876]]
undertaken by such Members from a location in Quebec.
The expanded rule 30.10 relief provided under this Supplemental
Order, however, is contingent on the Montreal Exchange's and Exchange
Members' continued compliance with the Original Order and their
compliance with the following conditions:
(1) The Montreal Exchange will carry out its compliance,
surveillance and rule enforcement activities with respect to
solicitations and acceptance of orders by designated Exchange
Members of U.S. customers for options and futures business on all
non-U.S. exchanges listed in Article 7452 of the Exchange rules to
the same extent that it conducts such activities in regard to
Exchange business;
(2) It will cooperate with the Commission with respect to any
inquiries concerning any activity which is the subject of this
Supplemental Order, including sharing the information specified in
Appendix A to the Part 30 rules, 17 CFR Part 30, on an ``as needed''
basis on the same basis as set forth in the Original Order;
(3) Each Montreal Exchange Member firm confirmed for relief
under the Original Order seeking to engage in activities which are
the subject of this Supplemental Order must agree to provide the
books and records related to such activities required to be
maintained under the applicable Exchange regulations and laws in
effect in Quebec on the same basis as set forth in the Original
Order.<SUP>5
\5\ Montreal Exchange member firms which currently operate under
the Original Order will be deemed to have consented to condition (3)
by effecting transactions pursuant to this Supplemental Order.
Exchange members which apply for confirmation of rule 30.10 relief
subsequent to the issuance of this Supplementary Order must submit
representations to the Commission consistent with condition (3) of
this Order.
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Furthermore, the Commission seeks to ensure that the funds of U.S.
foreign futures and options customers will be subject to consistent
protection irrespective of whether the Montreal Exchange Member effects
trades directly on the Montreal Exchange (where under the terms of the
Original Order Exchange Members are required to maintain a separate
account in a manner consistent with the provisions of rule 30.7) <SUP>6
effects trades on another foreign futures and options exchange of which
the Montreal Exchange firm is a member, or trades through the
intermediation of a foreign exchange member. Accordingly, the expanded
relief permitting Montreal Exchange Member firms to engage in foreign
futures and options transactions for U.S. customers other than on the
Montreal Exchange under this Supplemental Order will be contingent upon
compliance by the Exchange Member firm with the following additional
conditions:
\6\ See paragraph (2)(f) of the Original Order.
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(4) Foreign futures and options exchanges on which the Montreal
Exchange Member firm may engage in transactions on behalf of U.S.
customers are those non-U.S. exchanges identified in Article 7452 of
the Exchange rules, provided however, that Exchange Members may not
engage in any transactions on behalf of U.S. customers on an
exchange designated as a contract market under section 5 of the CEA;
(5) The Montreal Exchange Member firm will continue to comply
with the terms of the Original Order with respect to transactions
effected for U.S. customers on the Montreal Exchange; <SUP>7
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\7\ See CFTC Advisory No. 87-4, Foreign Futures and Options:
Compliance and Operational Questions and Answers, November 18, 1987,
reprinted in Comm. Fut. L. Rep. (CCH) para. 23,975.
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(6) With respect to transactions effected on any other non-U.S.
futures and options exchange on behalf of U.S. customers, whether by
the Montreal Exchange Member directly as a clearing member of such
other exchange or through the intermediation of one or more
intermediaries, the Montreal Exchange Member complies with
paragraphs (6) 1 or 2 below:
1. a. must maintain in a separate account or accounts money,
securities and property in an amount at least sufficient to cover or
satisfy all of its current obligations to U.S. customers denominated
as the foreign futures or foreign options secured amount;
b. may not commingle such money, securities and property with
the money, securities or property of the Member, with any
proprietary account of such Member and may not use such money,
securities and property to secure or guarantee the obligations of,
or extend credit to, the Member or any proprietary account of the
Member;
c. may deposit together with the secured amount required to be
on deposit in the separate account or accounts referred to in
paragraph (6)1. a. above, money, securities or property held for or
on behalf of non-U.S. customers of the Member for the purpose of
entering into foreign futures and options transactions. In such a
case, the amount that must be deposited in such separate account or
accounts must be no less than the greater of (1) the foreign futures
and foreign options secured amount required by paragraph (6)1. a.
above, plus the amount that would be required to be on deposit if
all such customers (including non-U.S. customers) were subject to
such requirement, or (2) the foreign futures and foreign options
secured amount required by paragraph (6)1. a. above, plus the amount
required to be held in a separate account or accounts for or on
behalf of such non-U.S. customers pursuant to any applicable law,
rule, regulation or order, or any rule of any self-regulatory
organization;
d. the separate account or accounts referred to in paragraph
(6)1. a. above must be maintained under an account name that clearly
identifies them as such, with any of the following depositories:
(1) another person registered with the Commission as a futures
commission merchant (``FCM'') or a firm exempted from FCM
registration pursuant to CFTC rule 30.10;
(2) the clearing organization of any foreign board of trade;
(3) any member and/or clearing member of such foreign board of
trade; or
(4) a bank or trust company which any of the depositories
identified in (1)-(3) above may use consistent with the applicable
laws and rules of the jurisdiction in which the depository is
located; and
e. the separate account or accounts referred to in paragraph
(6)1. a. may be deemed a good secured amount depository only if the
Member obtains and retains in its files for the period required by
applicable law and Exchange regulations a written acknowledgement
from such separate account depository that:
(1) it was informed that such money, securities or property are
held for or on behalf of customers of the Member; and
(2) it will ensure that such money, securities or property will
be held and treated at all times effectively in accordance with the
provisions of this paragraph; and, provided further, that the Member
assures itself that such separate account depository will not pass
on such money, securities or property to any other depository unless
the Member has assured itself that all such other separate account
depositories will treat such funds in a manner consistent with the
procedures described in this paragraph (6)1 herein; <SUP>8 or,
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\8\ This proviso is intended to ensure that the originating
Member makes reasonable inquiries and understands prior to the
initiation of a trade the conditions under which its customers'
funds will be held at all subsequent depositories, so that it may
determine whether it may count a particular intermediary or clearing
house as a good separate account depository for purposes of this
Order or must alternatively set aside funds in the manner set forth
in paragraph (6)2. The Member initially would discuss with its
immediate intermediary broker whether funds will be transferred to
any subsequent depositories and determine the conditions under which
such funds would be treated. Compliance with this condition would be
satisfied by the Member obtaining relevant information or assurances
from appropriate sources such as, for example, the immediate
intermediary broker, exchanges or clearinghouses, exchange
regulators, banks, attorneys or regulatory references.
This requirement is intended to ensure that funds provided by
U.S. customers for foreign futures and options transactions, whether
held at a U.S. FCM under rule 30.7(c) or a firm exempted from
registration as an FCM under CFTC rule 30.10, will receive
equivalent protection at all intermediaries and exchange clearing
organizations. Thus, for example, an exchange that does not
segregate customer from firm obligations and firms which trade on
such exchanges and which do not arrange to comply otherwise with any
of the procedures described in paragraph (6) would not be deemed an
acceptable separate account. Specifically, such exchange or firms
could not provide a valid and binding acknowledgement to a rule
30.10 exempted firm.
This provision is not intended to create a duty on a rule 30.10
firm that it audit any intermediaries for continued compliance with
the undertakings it has obtained based on discussions with those
relevant intermediaries. It is intended to make clear that firms
must engage in a due diligence inquiry before customer funds are
sent to another intermediary and take appropriate action (i.e., set
aside funds) in the event that it becomes aware of facts leading it
to conclude that customer funds are not being handled consistent
with the requirements of Commission rules or relevant rule 30.10
order by any subsequent intermediary or clearing house.
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[[Page 8877]]
2. must set aside funds constituting the entire secured amount
requirement in a separate account as set forth in Commission rule
30.7, 17 C.F.R. Sec. 30.7, and treat those funds in the manner
described by that rule.
The expanded rule 30.10 relief provided by this Supplemental Order
also is contingent upon the Montreal Exchange's and Montreal Exchange
Members' continued compliance with the Original Order and the
enumerated conditions above.
This Supplemental Order is issued based on the information provided
to the Commission as set forth herein, including the letter dated March
26, 1996, from the Montreal Exchange. Any changes or material omissions
may require the Commission to reconsider the authorization granted in
this Supplemental Order.
Further, if experience demonstrates that the continued
effectiveness of this Order in general, or with respect to a particular
Member, 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 Member, or otherwise restrict the
exemptive relief granted in this Order, as appropriate, on its own
motion. If necessary, provisions will be made for servicing existing
client positions.
List of Subjects in 17 CFR Part 30
Commodity futures, Commodity options, Foreign futures.
Accordingly, 17 CFR Part 30 is amended as set forth below:
PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS
1. 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.
2. Appendix C to Part 30 is amended by adding the following
citation under the existing entry for Firms designated by the Montreal
Exchange to read as follows:
Appendix C to Part 30-Foreign Petitioners Granted Relief From the
Application of Certain of the Part 30 Rules Pursuant to Sec. 30.10
* * * * *
Firms designated by the Montreal Exchange.
* * * * *
FR date and citation: February 27, 1997, 62 FR.
* * * * *
Issued in Washington, D.C. on February 21, 1997.
Jean Webb,
Secretary of the Commission.
[FR Doc. 97-4865 Filed 2-26-97; 8:45 am]
BILLING CODE 6351-01-P
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