Foreign Futures and Options Transactions, 6759-6761 [E6-1776]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 71, Number 27 (Thursday, February 9, 2006)]
[Notices]
[Pages 6759-6761]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-1776]


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COMMODITY FUTURES TRADING COMMISSION


Foreign Futures and Options Transactions

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

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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.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Esq., Deputy 
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:

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.
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    \1\ Commission regulations referred to herein are found at 17 
CFR Ch. I (2005).
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    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.
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    \2\ 52 FR 28990, 29001 (August 5, 1987).
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    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\
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    \3\ 52 FR 28980, 28981 and 29002.
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    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 
thereunder.
    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 
representatives;
--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 
provides:
    (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 
above.
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    \4\ See TGE Regulation 30.10 Order, issued February 17, 1993, 58 
FR 10953 (February 23, 1993).
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    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.
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    \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).
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    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:
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    \8\ As described below, these representations are to be filed 
with NFA.
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    (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 
30.5;
    (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 
U.S.;
    (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.
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    \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.
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    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]
BILLING CODE 6351-01-P