Boards of Trade Located Outside of the United States and No-Action Relief From the Requirement To Become a Designated Contract Market or Derivatives Transaction Execution Facility, 64443-64451 [E6-18513]
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Federal Register / Vol. 71, No. 212 / Thursday, November 2, 2006 / Rules and Regulations
inspection. The anti-rotation slot geometry
was not machined in conformance with the
design drawing during manufacture. We are
issuing this AD to prevent uncontained
engine failure, damage to the airplane, and
injury to passengers.
Compliance
(e) You are responsible for having the
actions required by this AD performed at the
next disassembly at piece-part level of the
front turbine hub after the effective date of
this AD, unless the actions have already been
done.
Onetime Visual Inspection
(f) For front turbine hubs listed by part
number and serial number in Table 1, Table
2, and Table 3 of Pratt & Whitney Service
Bulletin (SB) No. PW4G–112–72–282,
Revision 1, dated March 3, 2006, do the
following:
(1) Perform a onetime visual inspection for
extra fillet radii in the anti-rotation slots.
(2) Use paragraphs 1.A. through 1.C.(2) of
the Accomplishment Instructions of Pratt &
Whitney SB No. PW4G–112–72–282,
Revision 1, dated March 3, 2006, to do the
inspection.
(3) Remove from service any front turbine
hub that has extra fillet radii in the antirotation slots and install a serviceable front
turbine hub.
Prohibition of Front Turbine Hubs That
Have Extra Fillet Radii in the Anti-Rotation
Slots
(g) After the effective date of this AD, do
not install any front turbine hub that has
extra fillet radii in the anti-rotation slots,
onto any engine.
Previous Credit
(h) Previous credit is allowed for front
turbine hubs inspected using Pratt & Whitney
SB No. PW4G–112–72–282, dated February
27, 2006, or Revision 1, dated March 3, 2006,
before the effective date of this AD.
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Alternative Methods of Compliance
(i) The Manager, Engine Certification
Office, has the authority to approve
alternative methods of compliance for this
AD if requested using the procedures found
in 14 CFR 39.19.
Material Incorporated by Reference
(j) You must use Pratt & Whitney Service
Bulletin No. PW4G–112–72–282, Revision 1,
dated March 3, 2006, to perform the actions
required by this AD. The Director of the
Federal Register approved the incorporation
by reference of this service bulletin in
accordance with 5 U.S.C. 552(a) and 1 CFR
part 51. Contact Pratt & Whitney, 400 Main
St., East Hartford, CT 06108; telephone (860)
565–8770; fax (860) 565–4503, for a copy of
this service information. You may review
copies at the FAA, New England Region,
Office of the Regional Counsel, 12 New
England Executive Park, Burlington, MA; or
at the National Archives and Records
Administration (NARA). For information on
the availability of this material at NARA, call
202–741–6030, or go to: https://
www.archives.gov/federal-register/cfr/ibrlocations.html.
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Issued in Burlington, Massachusetts, on
October 24, 2006.
Peter A. White,
Acting Manager, Engine and Propeller
Directorate, Aircraft Certification Service.
[FR Doc. E6–18368 Filed 11–1–06; 8:45 am]
BILLING CODE 4910–13–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 140
Boards of Trade Located Outside of
the United States and No-Action Relief
From the Requirement To Become a
Designated Contract Market or
Derivatives Transaction Execution
Facility
Commodity Futures Trading
Commission.
ACTION: Policy statement.
AGENCY:
SUMMARY: The Commodity Futures
Trading Commission is issuing a
Statement of Policy that affirms the use
of the no-action process to permit
foreign boards of trade to provide direct
access to their electronic trading
systems to U.S. members or authorized
participants, and provides additional
guidance and procedural
enhancements.1
DATES: Effective Date: November 2,
2006.
FOR FURTHER INFORMATION CONTACT:
Robert Rosenfeld, Deputy Director,
Office of International Affairs, 202–418–
5423, rrosenfeld@cftc.gov; Julian
Hammar, Counsel, Office of the General
Counsel, 202–418–5118,
jhammar@cftc.gov; or Duane Andresen,
Special Counsel, Division of Market
Oversight, 202–418–5492,
dandresen@cftc.gov, Commodity
Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Background
Since 1996, staff of the Commodity
Futures Trading Commission (CFTC or
Commission) has issued no-action
letters 2 to foreign boards of trade
1 Commission Rule 140.12, 17 CFR § 140.12
Disposition of business by seriatim Commission
consideration.
2 See Commission Rule 140.99, 17 CFR 140.99
(2006), which defines the term ‘‘no-action letter’’ as
a written statement issued by the staff of a Division
of the Commission or of the Office of the General
Counsel that it will not recommend enforcement
action to the Commission for failure to comply with
a specific provision of the Act or of a Commission
rule, regulation or order if a proposed transaction
is completed or a proposed activity is conducted by
the beneficiary.
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stating, subject to compliance with
certain conditions, that it will not
recommend that the Commission take
enforcement action if the foreign board
of trade provides its members or
participants in the United States access
to its electronic trading system without
seeking designation under the
Commodity Exchange Act (CEA or Act)
as a contract market (DCM) or
registration as a derivatives transaction
execution facility (DTEF).3 In 1998 the
Commission imposed a moratorium on
the issuance of such no-action letters
pending the development of rules
governing access to automated foreign
boards of trade.4 During this period, the
Commission received extensive
comment on the proposed rulemaking,
as well as advice from the Commission’s
Global Markets Advisory Committee
and a Public Round Table. Because of
the general lack of consensus on many
of the fundamental issues surrounding
access to foreign boards of trade, the
Commission withdrew the proposed
rules in an order that also directed the
staff:
To begin immediately processing no-action
requests from foreign boards of trade seeking
to place trading terminals in the United
States, and to issue responses where
appropriate, pursuant to the general
guidelines included in the Eurex (DTB) noaction process, or other guidelines
established by the Commission, to be
reviewed and applied as appropriate on a
case-by-case basis.5
3 These letters, hereinafter referred to generally as
‘‘no-action letters’’ are published on the
Commission’s Web site at: https://www.cftc.gov/dea/
deaforeignterminaltable.htm. Reference to DTEFs in
the no-action letters was added following the
establishment of that category by the Commodity
Futures Modernization Act of 2000.
Although the letters refer to the placement of
‘‘terminals,’’ the continued use of that term does not
accurately reflect advances in technology, such as
open network systems accessible through the
Internet.
4 63 FR 39779 (July 24, 1998) (Concept Release);
64 FR 14159 (March 24, 1999) (Proposed Rules).
Under the terms of a letter dated June 3, 1998 to
Eurex Deutschland, the Division of Trading and
Markets modified the terms of the original 1996 noaction letter to the effect that Eurex members who
were not already operating U.S.-based Eurex
Terminals generally were prevented from placing
Eurex terminals in the U.S. absent written
authorization from the Division, pending adoption
of Commission rules regarding electronic access to
foreign exchanges.
5 Commission Order dated June 2, 1999, 64 FR
32829, 32830 (June 18, 1999). The Eurex-DTB noaction process referred to by the Commission in its
1999 Order lifting the moratorium was set forth in
a letter dated February 29, 1996 from Andrea
Corcoran, Director, Division of Trading and Markets
to Lawrence Hunt, Jr., pp. 12–13 (the DTB no-action
letter). CFTC Letter 96–28, indexed at https://
www.cftc.gov/opa/summaries/opanal96.htm;
[1994–1995 Transfer Binder] Comm. Fut. L. Rep.
(CCH) ¶ 26,669 at 43,795–43,802 (February 29,
1996). On June 18, 1998, the DTB changed its name
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Following the lifting of the
moratorium in 1999, the relevant
Commission operating division has
issued seventeen additional no-action
letters.6 The Commission generally has
not observed regulatory problems or
financial harm to participants who are
accessing the foreign boards of trade
pursuant to the staff no-action relief
letters. Moreover, the no-action process
has been resilient throughout a period of
increasing global competition,
technological advances, changing
ownership structures and evolving
business models.
In 2006, ICE Futures, a U.K. registered
investment exchange that provides
direct access to its U.S. members
pursuant to a CFTC staff foreign
terminal no-action letter, notified the
Commission that it would list a contract
on West Texas Intermediate light sweet
crude oil whose settlement price would
be linked to contracts traded on the New
York Mercantile Exchange (NYMEX).
ICE’s notification prompted the
Commission’s Division of Market
Oversight (DMO) to advise ICE Futures
that the ‘‘Commission will be evaluating
the use of the no-action process in light
of significant issues raised by the factual
circumstances underlying the subject
notice.’’ 7 Among other things, the
trading of such contracts made ripe the
re-examination of certain dormant
issues respecting the Commission’s
statutory obligations to maintain the
integrity of U.S. markets and to protect
U.S. customers, particularly the
Commission’s market surveillance
obligations. Accordingly, on May 3,
2006, the Commission directed its staff
to initiate a formal process to define
what constitutes a ‘‘board of trade,
exchange, or market located outside the
United States, its territories or
possessions’’ as that phrase is used in
section 4(a) of the CEA and in
furtherance of that process scheduled a
public hearing.8 The Commission also
to Eurex Deutschland, a step toward a planned
merger with the Swiss Options and Financial
Futures Exchange. See 63 FR 39779, 39781 (July 24,
1998) at fn. 12.
6 The Commission’s Division of Market Oversight
(successor to the market supervisory
responsibilities previously performed by the
Division of Trading and Markets) is responsible for
issuance of the direct access no-action letters.
7 See letter dated January 31, 2006 from Richard
A. Shilts, Director, Division of Market Oversight to
Mark Woodward, Regulation and Compliance
Policy Manager, ICE Futures. https://www.cftc.gov/
files/dea/cftclettertoicefutures.pdf.
8 See Sunshine Act Meeting Notice, 71 FR 30665
(May 30, 2006); corrected at 71 FR 32059 (June 2,
2006). The hearing was conducted on June 27, 2006,
at the Commission’s headquarters in Washington,
DC.
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issued a related Request for Public
Comment.9
Hearing and Request for Comment
Participants at the Commission’s
Hearing and comments submitted in
response to the Request for Comment
(all collectively the ‘‘commenters’’),10
were generally supportive of the noaction process, praising the process in
general for its flexibility.11 Many
commenters suggested that the
Commission should retain in large
measure the essential contours of the
no-action process.12
Commenters warned against any
mechanistic approaches to determining
whether an otherwise foreign organized
exchange that permits direct electronic
access by its U.S. members or
participants is not located ‘‘outside’’ the
United States for purposes of section
4(a) of the CEA, particularly questioned
the use of volume as a proxy for U.S.
presence (noting that its fluctuations
could result in regulatory uncertainty),
and stressed the need to avoid rigid or
‘‘bright line’’ tests.13 Some commenters
9 See 71 FR 34070 (June 13, 2006). The
Commission requested comment on the issues
related to developing an objective standard
establishing a threshold that, if crossed by a foreign
board of trade that permits direct access, would
indicate that the board of trade is no longer outside
the United States and, accordingly, may be required
to become registered under the CEA.
10 A transcript of the Commission’s Hearing on
what constitutes a board of trade located outside
the United States under the Commodity Exchange
Act section 4(a) (June 27, 2006), (‘‘Hearing Tr.’’) as
well as all comment letters (‘‘CL’’), are located in
comment file 06–002 to 17 FR 34070 (June 13,
2006). https://www.cftc.gov/foia/comment06/foi06002_1.htm.
11 For comments supporting the no-action letter
process generally, see, e.g., Comments of Nicholas
Weinreb, Euronext, Hearing Tr. at 45 (‘‘The noaction letter regime has been an extraordinarily
successful one.’’); comments of Benn Steil, Director
of International Economics, Council of Foreign
Relations, in his personal capacity, Hearing Tr. at
49 (‘‘I think it is exceptionally important to
acknowledge just how successful the Commission’s
no-action regime has been * * *’’); For favorable
hearing participant comments on the flexibility of
the no-action letter process, see, e.g., Comments of
John Foyle, Euronext Liffe, Hearing Tr. at 46;
Comments of Richard Berliand, JP Morgan
Securities, Hearing Tr. at 61; Comments of Nicholas
Weinreb, Euronext, Hearing Tr. at 174.
12 See, e.g., CL 2 (New York Board of Trade) at
3; CL 3 (Council of Foreign Relations) at 2; CL 6
(ICE Futures Exchange) at 9–10; CL 7 (Minneapolis
¨
Grain Exchange) at 2; CL 8 (Bundesanstalt fur
Finanzdienstleitungsaufsicht) at 3; CL 16 (World
Federation of Exchanges) at 1; CL 19 (Tokyo Stock
Exchange) at 2; CL 22 (Federation of European
Securities Exchanges) at 4; CL 23 (Eurex
Deutschland) at 11; CL 24 (Euronext Liffe) at 5; CL
25 (Chicago Board of Trade) at 1; CL 28 (Futures
Industry Association) at 9; and CL 45 (Committee
of European Securities Regulators) at 1.
13 See, e.g., CL 2 (New York Board of Trade) at
2–3; CL 6 (ICE Futures Exchange) at 6–7; CL 9
(Chicago Mercantile Exchange) at 6; CL 23 (Eurex
Deutschland) at 7; CL 25 (Chicago Board of Trade)
at 9–10.
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favored a totality of circumstances
approach to location,14 while others
urged the Commission to look to
indicators of physical location, such as
the main location of an exchange’s
infrastructure, its employees and
headquarters.15
Market users stressed the need to
maintain high levels of customer and
market protections, particularly where a
product might impact pricing in U.S.
markets.16 Many U.S. exchanges
requested that the Commission give
greater attention to competitive issues,
particularly when there is direct
competition between a U.S. exchange
and a foreign exchange’s products. U.S.
exchanges in particular stressed the
need for ‘‘regulatory parity.’’ 17 Some
commenters warned against taking
actions that inadvertently could result
in policies that may inhibit the ability
of U.S. exchanges and firms to operate
globally.18 Others stressed the need to
provide regulatory certainty generally
with respect to the applicability of the
no-action process and to clarify the
treatment of intermediated electronic
access.19
Need for the Policy Statement
As made clear at the Hearing and by
the written comments, the intensity of
concerns with respect to the no-action
process has been exacerbated by the
global competitive environment. In
particular, these concerns have called
into question: (1) The Commission’s
authority for the no-action process in
light of Section 4(a)’s exclusion from the
contract market designation requirement
for foreign boards of trade, (2) the
continued appropriateness of the noaction process generally, (3) whether
objective threshold standards should be
developed that would indicate that a
board of trade is no longer located
outside the United States for purposes
of section 4(a) of the CEA, (4) whether
enhancements to the no-action process
may be necessary, particularly where
trading may implicate domestic futures
and cash markets, and (5) how the noaction process relates to perceived
competitive issues.
14 See, e.g., CL 22 (Federation of European
Securities Exchanges) at 3.
15 See, e.g., CL 6 (ICE Futures) at 2; CL 9 (Chicago
Mercantile Exchange) at 6.
16 See, e.g., CL 5 (New England Fuel Institute) at
2; CL 27 (Industrial Energy Consumers of America)
at 1.
17 See, e.g., CL 7 (Minneapolis Grain Exchange) at
1; CL 25 (Chicago Board of Trade) at 5–6; and CL
43 (New York Mercantile Exchange) at 10.
18 See, e.g., CL 2 (New York Board of Trade) at
3.
19 See, e.g., CL 28 (Futures Industry Association)
at 8.
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Continued ambiguity with respect to
these fundamental issues could result in
an unacceptable degree of uncertainty
that may hinder access by U.S. users to
global products and markets, inhibit
continued innovation in technology and
products, and undermine the ability of
U.S. markets and intermediaries to
structure their business to compete
globally. Accordingly, the Commission
is issuing this Statement of Policy in
order to provide greater regulatory
certainty and transparency to issues
surrounding access to foreign boards of
trade.
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Statement of Policy Regarding the
Processing of No-Action Requests by
Foreign Boards of Trade to Provide
Direct Electronic Access to Their U.S.
Members or Authorized Participants
Since 1996, foreign boards of trade
planning to permit members or other
participants located in the United States
to enter trades directly into that foreign
board of trade’s trade matching system
(‘‘direct access’’) 20 have sought staff noaction letters.
20 For purposes of this Statement of Policy, the
term ‘‘direct access’’ refers to the explicit grant of
authority by a foreign board of trade to an identified
member or other participant of that board of trade
to enter trades directly into the board of trade’s
trade matching system.
In contrast, the staff no-action letters generally
have defined the term ‘‘automated order routing
systems’’ (AORS) as meaning any system of
computers, software or other devices that allows
entry of orders through another party (an
intermediary) who has been granted direct access
for transmission to the trading system where,
without substantial human intervention, trade
matching or execution takes place.
The Commission does not view the transmission
of intermediated orders via AORSs for execution on
a foreign board of trade to be ‘‘direct access’’ to that
board of trade for purposes of the no-action process.
In this regard, the Commission endorses the view
that mere intermediated electronic access by AORS
does not create a presence in the U.S., such that a
firm exempted from registration as a futures
commission merchant (FCM) pursuant to
Commission Regulation 30.10, which is prohibited
from establishing a U.S. presence, would be
required to register as an FCM. See, e.g., CFTC Staff
Letter No. 05–16 [Current Transfer Binder] Comm.
Fut. L. Rep. (CCH) ¶ 30,127 (Aug. 26, 2005) (‘‘For
example, Rule 30.10 Firms continue to be
prohibited from maintaining a presence in the
United States. Thus, Rule 30.10 Firms cannot
provide direct access to LIFFE CONNECT in the
United States (although they would be permitted to
accept orders overseas from customers located in
the United States that submit such orders by
telephone or through an AORS located in the
United States’’).) (Emphasis added.)
This position is consistent with the Commission’s
historical policy of addressing customer protection
concerns with regard to the offer or sale of foreign
futures to U.S. customers primarily through
regulation of the intermediary. In this regard,
nothing in the Statement of Policy is intended to
alter current Commission rules that require that any
person engaging in the offer or sale of a foreign
futures contract or foreign futures option
transaction for or on behalf of a U.S. customer must
be a registered futures commission merchant or
operating pursuant to a Rule 30.10 Order.
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This Statement of Policy provides
guidance for processing requests for noaction relief. The Commission intends
that this Statement of Policy will ensure
the consistent treatment of requests and
the application of an appropriate degree
of review, while maintaining the ability
to respond to the individual factual
circumstances raised by particular
requests.
The Commission’s Statement of
Policy takes into account the
Commission’s desire to facilitate access
to markets and products, foster
innovation and competition and
eliminate unnecessary regulatory
burdens, while maintaining customer
and market protections mandated by the
CEA. The adoption by the Commission
of such a flexible and adaptable policy
is consistent with Congressional
findings that accompanied the
enactment of the Commodity Futures
Modernization Act of 2000 (CFMA).21
excludes from the designation
requirement contracts made on or
subject to the rules of a board of trade,
exchange, or market located outside the
United States, its territories or
possessions.’’ 23
Section 4(b) of the CEA, which
authorizes the Commission to adopt
rules governing the offer and sale of
foreign futures and options contracts,
explicitly prohibits the Commission
from adopting rules pursuant to that
section that: (1) Require Commission
approval of any contract, rule,
regulation, or action of any foreign
board of trade, exchange, or market, or
clearinghouse for such board of trade,
exchange, or market, or (2) govern in
any way any rule or contract term or
action of any foreign board of trade,
exchange, or market, or clearinghouse
for such board of trade, exchange, or
market.24
I. The Commission’s Authority for the
No-Action Process
‘‘Unless exempted by the Commission pursuant
to subsection (c) of this section, it shall be unlawful
for any person to offer to enter into, to enter into,
to execute, to confirm the execution of, or to
conduct any office or business anywhere in the
United States, its territories or possessions, for the
purpose of soliciting or accepting any order for, or
otherwise dealing in, any transaction in, or in
connection with, a contract for the purchase or sale
of a commodity for future delivery (other than a
contract which is made on or subject to the rules
of a board of trade, exchange, or market located
outside the United States, its territories or
possessions) (emphasis added)’’
unless—
‘‘(1) such transaction is conducted on or subject
to the rules of a board of trade which has been
designated or registered by the Commission as a
contract market or derivatives transaction execution
facility * * *.’’
7 U.S.C. 6(b) (2000).
23 In the absence of no-action relief, a board of
trade, exchange or market that permits direct access
by U.S. persons might be subject to Commission
action for violation of, among other provisions,
section 4(a) of the CEA, if it were not found to
qualify for the exclusion from the DCM designation
or DTEF registration requirement.
24 Section 4(b) of the CEA provides:
‘‘The Commission may adopt rules and
regulations proscribing fraud and requiring
minimum financial standards, the disclosure of
risk, the filing of reports, the keeping of books and
records, the safeguarding of customers’ funds, and
registration with the Commission by any person
located in the United States, its territories or
possessions, who engages in the offer or sale of any
contract of sale of a commodity for future delivery
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. Such rules and regulations may
impose different requirements for such persons
depending upon the particular foreign board of
trade, exchange, or market involved. No rule or
regulation may be adopted by the Commission
under this subsection that (1) requires Commission
approval of any contract, rule, regulation, or action
of any foreign board of trade, exchange, or market,
or clearinghouse for such board of trade, exchange,
or market, or (2) governs in any way any rule or
contract term or action of any foreign board of trade,
exchange, or market, or clearinghouse for such
board of trade, exchange, or market.’’
A. Relevant Statutory Considerations:
The Commodity Exchange Act
Circumscribes the Commission’s
Authority Over Foreign Boards of Trade
Section 4(a) of the CEA provides that
a futures contract may be traded
lawfully in the U.S. only if, among other
things, it is traded on or subject to the
rules of a board of trade that has been
designated as a contract market or
registered as a DTEF.22 Section 4(a)
21 Section 126(a) of the CFMA, Appendix E of
Pub. L. No. 106–554, 114 Stat. 2763 (2000),
provides:
‘‘SEC. 126. INTERNATIONAL ACTIVITIES OF
THE COMMODITY FUTURES TRADING
COMMISSION.
(a) FINDINGS.—The Congress finds that—
(1) derivatives markets serving United States
industry are increasingly global in scope;
(2) developments in data processing and
communications technologies enable users of risk
management services to analyze and compare those
services on a worldwide basis;
(3) financial services regulatory policy must be
flexible to account for rapidly changing derivatives
industry business practices;
(4) regulatory impediments to the operation of
global business interests can compromise the
competitiveness of United States businesses;
(5) events that disrupt financial markets and
economies are often global in scope, require rapid
regulatory response, and coordinated regulatory
effort across international jurisdictions;
(6) through its membership in the International
Organization of Securities Commissions, the
Commodity Futures Trading Commission has
promoted beneficial communication among market
regulators and international regulatory cooperation;
and
(7) the Commodity Futures Trading Commission
and other United States financial regulators and
self-regulatory organizations should continue to
foster productive and cooperative working
relationships with their counterparts in foreign
jurisdictions.’’
22 Section 4(a) of the CEA provides in part:
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B. Section 4(a)’s Exclusion From
Contract Market Designation Applies
Only With Respect to ‘‘Bona Fide’’
Boards of Trade
The Commission interprets the
section 4(a) parenthetical exclusion
from contract market designation for
foreign boards of trade to apply only
with respect to ‘‘bona fide’’ boards of
trade. The term ‘‘bona fide’’ in this
context refers to boards of trade that,
among other things, possess the
attributes of established, organized
exchanges, adhere to appropriate rules
prohibiting abusive trading practices,
have been authorized by a regulatory
process that examines customer and
market protections and are subject to
continued oversight by a regulator that
has power to intervene in the market
and share information with the
Commission. In reaching this
conclusion, the Commission relies on
legislative history found in the Report of
the Senate Committee on Agriculture,
Nutrition, and Forestry,25 which
discusses the addition of section 4(b) to
the CEA. Specifically, the Report notes
that:
In addition, the rules and regulations
developed under this provision [section 4(b)]
are not intended to place the solicitation or
acceptance of orders in the United States for
bona fide foreign futures contracts at a
comparative disadvantage with similar
solicitation or acceptance of orders for
domestic futures contracts. For example,
rules which require the segregation of all or
part of customers’ funds in the United States
would not be consistent with the intent of
this provision when there is adequate
evidence that such funds have been
transferred to a bona fide market,
clearinghouse, or market principal and are
adequately safeguarded for the protection of
U.S. residents. [emphasis added]
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The Commission’s conclusion in this
regard is harmonious with previous
Commission interpretations of ‘‘bona
fide’’ exchange.26
A commenter had questioned the
appropriateness of applying a ‘‘bona
fide’’ limitation on the application of
section 4(a).27 However, in light of the
legislative history quoted above, which
the Commission previously has
interpreted as limiting the exclusion
from Section 4(a) to bona fide foreign
boards of trade, we believe that the
interpretation we adopt today is an
appropriate and reasonable exercise of
the Commission’s powers to interpret
and apply its governing statute,
7 U.S.C. 6(b) (2000).
25 S. Rep. 97–384, 97th Cong. 2d Sess. 46 (1982).
26 See 63 FR 39779, 39788 (July 24, 1998). See
also Compl. Count I, CFTC v. Topworth Int’l, Ltd.,
(No. 94–1256) (C.D. Cal.) (Feb. 2, 1994).
27 CL 9 (Chicago Mercantile Exchange) at 5.
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particularly when it implicates domestic
conduct and possible effects on
domestic persons and markets that the
Commission is charged with protecting.
II. The Appropriateness of the NoAction Process
A. The Commission Endorses the NoAction Process
The Commission endorses the
continued use of the no-action process
as an appropriate and flexible
mechanism that should be used
prospectively to facilitate direct access
to the electronic trading system of a
foreign board of trade by its U.S.
members or authorized participants.28
The no-action process is appropriate
because it gives staff the flexibility to
address the factual circumstances
presented in the future, and to apply a
consistent approach to reviewing
applications for no-action relief in light
of innovations in electronic trading and
technology, evolving regulatory
standards, and specific customer
protection and market integrity
concerns. This approach is consistent
with the CFMA’s goal of adopting a
flexible regulatory policy that can
account for rapidly changing derivatives
industry business practices, a theme
that also was voiced at the
Commission’s hearing and in the
written comments. Among other things,
Congress found in the CFMA that
‘‘financial services regulatory policy
must be flexible to account for rapidly
changing derivatives industry business
practices.’’ CFMA Section 126(a)(3).
Moreover, Section 126(b) of the CFMA
expresses the sense of Congress that the
Commission coordinate with foreign
regulatory authorities to encourage ‘‘the
facilitation of cross-border transactions
through the removal or lessening of any
unnecessary legal or practical
obstacles.’’
B. The Commission Endorses the Scope
of Review of the No-Action Process
The scope of review that was
established by Commission staff in the
DTB no-action letter and refined in
subsequent no-action letters 29 focuses
28 We believe the no-action process to be an
appropriate exercise of discretion committed to
Commission staff, subject to appropriate
Commission oversight. See Board of Trade of the
City of Chicago v. SEC, 883 F.2d 525, 530 (7th Cir.
1989); 17 CFR 140.99. In this connection, the
Commission is directing staff to continue to
circulate through the Secretariat for the
Commission’s review on an ‘‘absent objection’’
basis, prior to issuance, all staff foreign board of
trade no-action letters.
29 Letter dated February 29, 1996 from Andrea
Corcoran, Director, Division of Trading and
Markets, to Lawrence Hunt, Jr., pp. 12–13 (the DTB
no-action letter). CFTC Letter 96–28, indexed at
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on establishing the ‘‘bona fide’’ status of
the foreign board of trade and finding
that no public interest would be
adversely affected by persons in the U.S.
directly accessing the foreign board of
trade.30
In general, staff reviews information
and representations provided by the
applicant that relate to, among other
things, the rules and structure of the
applicant exchange (with an emphasis
on the exchange’s financial integrity,
market surveillance, trade practice and
rule enforcement regime), various
system integrity protections that govern
the foreign board of trade’s electronic
trading system (using as a template the
1990 Principles for the Oversight of
Screen-Based Trading Systems),31 the
system’s related clearing and customer
default protections, and information
concerning the regulatory structure in
the applicant’s jurisdiction, with a
specific emphasis on market
regulation.32 The staff also reviews the
https://www.cftc.gov/opa/summaries/opanal96.htm;
[1994–1995 Transfer Binder] Comm. Fut. L. Rep.
(CCH) ¶ 26,669 at 43,795–43,802 (February 29,
1996).
30 In the 1996 DTB no-action letter staff
concluded that the ‘‘the mere presence of terminals
in the United States would not cause the
Commission to deem any bona fide foreign
exchange for which products are listed through that
system to be a domestic exchange, that is, a board
of trade designated as a contract market by the
Commission pursuant to section 5 of the Act.’’
(emphasis added)
In order to conclude that the DTB was a ‘‘bona
fide’’ foreign board of trade, and therefore
appropriately subject to the parenthetical exclusion
for foreign boards of trade in section 4(a) of the
CEA, staff generally examined the DTB’s rules and
the overall regulatory environment. The text of the
DTB letter makes clear that staff recognized the
prohibitions set out in section 4(b) of the CEA, but
noted that ‘‘the relationship or interface between
DTB’s computer terminals and persons located in
the United States may raise regulatory concerns that
are unrelated to the internal operations of the DTB
or its computer terminals in the United States.’’
Accordingly, the review set forth in the DTB letter
also focused narrowly on the domestic implications
for U.S. persons using the DTB direct access
terminals (i.e., the system integrity and clearing
review).
31 The 1990 IOSCO Principles for the Oversight of
Screen-Based Trading Systems (Screen-Based
Principles) were developed by IOSCO Working
Party 7 on futures, which was chaired by the CFTC.
The IOSCO Screen-Based Principles set out in
broad terms the international consensus as to the
regulatory considerations to be addressed in
reviewing mechanisms for screen-based trading.
The Commission adopted the IOSCO Screen-Based
Principles as a statement of Commission policy. See
55 FR 48670 (November 21, 1990). In adopting the
IOSCO Screen-Based Principles, the Commission
made clear that they establish general policy goals
that will guide the Commission in resolving issues
arising from screen-based trading systems, but
would not mandate a particular substantive
response.
32 The Commission previously summarized the
scope of the staff’s foreign board of trade (FBOT)
inquiry as follows:
‘‘Currently, Commission staff generally examines
the following when reviewing an FBOT’s request
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adequacy of information sharing with
the Commission by the market and its
regulator. Based upon its review of the
documents and representations
submitted by the applicant, and subject
to compliance with various conditions
(e.g., representations governing access to
books and records and the appointment
of a U.S. agent for service of process),
staff might conclude that granting noaction relief would not be contrary to
the public interest.
Essentially, as it has evolved, the staff
review seeks to determine that the
applicant foreign board of trade is
subject to governmental authorization,
appropriate rules prohibiting abusive
trading practices, and continuing
oversight by a regulator that has powers
to intervene in the market and share
information with the Commission. This
review generally reflects the
internationally accepted approaches
used by many developed market
jurisdictions to govern access to foreign
electronic exchanges. These approaches
generally are based upon a review of,
and ongoing reliance upon, the foreign
market’s ‘‘home’’ regulatory regime, and
are designed to maintain regulatory
protections while avoiding the
imposition of duplicative regulation.33
for terminal placement no-action relief: General
information about the FBOT, as well as detailed
information about: (i) membership criteria
(including financial requirements); (ii) various
aspects of the automated trading system (including
the order-matching system, the audit trail, response
time, reliability, security, and, of particular
importance, adherence to the IOSCO principles for
screen-based trading); (iii) settlement and clearing
(including financial requirements and default
procedures); (iv) the regulatory regime governing
the FBOT in its home jurisdiction; (v) the FBOT’s
status in its home jurisdiction and its rules and
enforcement thereof (including market surveillance
and trade practice surveillance); and (vi) extant
information-sharing agreements among the
Commission, the FBOT, and the FBOT’s regulatory
authority. When issued, the terminal placement noaction letters conclude with a standard set of terms
and conditions for the granting of the relief which
include, among other things, a quarterly volume
reporting requirement.’’
See 71 FR 34070, 34071 (June 13, 2006).
33 See, e.g., United Kingdom Financial Services
Authority, Financial Services Handbook,
Recognised Overseas Investment Exchanges (ROIE)
and Recognised Overseas Clearing Houses (ROCH),
Section 6. (In comparison with full authorisation as
a domestic exchange, ROIE status ‘‘reduces the
involvement which UK authorities need to have in
the day-to-day affairs of an overseas recognised
body because they are able to rely substantially on
the supervisory and regulatory arrangements in the
country where the applicant’s head office is
situated.’’ See FSA Handbook, REC 6.1.2 https://
fsahandbook.info/FSA/html/handbook/REC/6/1.);
Australian Securities and Investments Commission
(ASIC) Policy Statement 177.8 describing
alternative licensing for overseas markets (‘‘the
alternative licensing route in s795B(2) for overseas
markets is intended to facilitate competition and
avoid regulatory duplication while maintaining
investor protection and market integrity.’’); Ontario
Securities Commission Staff Notice 21–702:
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The Commission finds that the staff
review appropriately addresses the
Commission’s concern that relief will
only be granted with respect to bona
fide foreign boards of trade.34 The
Commission also finds that the staff’s
review of foreign board of trade
representations and the related
information submitted with respect to
system integrity, clearing procedures
and default protections is appropriately
focused and respects the prohibitions of
section 4(b). Finally, the various terms
and conditions that have been imposed
in the no-action letters have been
reasonably and appropriately tailored to
the factual circumstances raised by the
applications for no-action relief.
Accordingly, the Commission
endorses the general scope of review
that was established in the DTB noaction letter, and as it has evolved in
subsequent staff letters. The
Commission also reconfirms its prior
endorsement of the use of the IOSCO
Screen-Based Trading Principles as a
general template to guide its inquiry
into the foreign board of trade’s
electronic trading system. The
Commission notes that in 2000 IOSCO
reaffirmed the continuing
appropriateness of the Screen-Based
Trading Principles, concluding that they
retained their relevancy despite the
evolution and increasing sophistication
of electronic systems ten years after
their adoption, and that they constitute
an internationally accepted framework
for the oversight of screen-based
derivatives trading systems.35
In this connection, staff’s
discretionary, selective reference to
broad regulatory objectives, such as
those contained in the CEA’s Core
Principles and in internationallyRegulatory Approach for Foreign-Based Stock
Exchanges (exemption from recognition under
section 147 of the Securities Act (Ontario); Autorite
des marches financiers (Quebec): Policy Statement
Respecting the Authorization of Foreign-Based
¨
Exchanges; the German Bundesanstalt fur
Finanzdienstleistungsaufsicht (BAFIN) authorizes
the placement of terminals in Germany under
Sections 37i et seq. of the German Securities
Trading Act.
34 See Section I supra.
35 Principles for the Oversight of Screen-Based
Trading Systems for Derivative Products—Review
and Addition, IOSCO Technical Committee (2000)
at p. 5, section III, Part 1. https://www.iosco.org/
library/index.cfm?section=pubdocs&year=2000. In
this ‘‘Review and Addition,’’ IOSCO adopted four
additional principles that encouraged regulatory
authorities to develop cooperative arrangements to
address risks that arise from cross-border
derivatives markets, to share relevant information
in an efficient and timely manner, to maintain a
transparent framework for regulatory cooperation,
and to take into account a jurisdiction’s application
of the IOSCO Objectives and Principles of Securities
Regulation.
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64447
accepted standards,36 deemed by staff in
its discretion to be reflective of a bona
fide regulatory regime,37 is an
appropriate, non-prescriptive means to
structure its review for the purposes of
determining the bona fide status of a
foreign board of trade. This observation
is not intended to suggest that the
review should require substituted
compliance with CEA market
designation or registration requirements,
apply any prescriptive approach,38 or
otherwise be expanded into a quasidesignation process.39
C. The Commission Intends To Preserve
the Flexibility and Adaptability of the
No-Action Process
The Commission’s endorsement of the
no-action process’s overall approach
and scope of review is not intended to
limit the staff’s ability to adapt or
modify its review as it deems necessary
to determine the bona fide status of a
foreign board of trade, or to address any
particular U.S. customer protection or
market integrity concerns, as identified
in Section 3(b) of the CEA, that might
be raised by a request for no-action
relief. The Commission understands
that staff potentially may need to adapt
its analysis, as well as the scope and
depth of its inquiry, to address changing
factual circumstances and any specific
regulatory concerns.40
36 See, e.g., Objectives and Principles of Securities
Regulation, International Organization of Securities
´
Commissions (IOSCO); and the Tokyo Communique
on Supervision of Commodity Futures Markets
(1997), Annex B: Guidance on Components of
Market Surveillance and Information Sharing.
´
Annex B of the Tokyo Communique establishes a
non-prescriptive framework for undertaking market
surveillance, the types of information to which
market authorities should have access and collect,
the appropriate analysis of information, the type of
powers and capacity to investigate market abuse,
the appropriate powers to intervene in the market
to address abusive practices or disorderly
conditions, the need for powers to impose
disciplinary sanctions against members of the
market as well as non-members, and the
components of effective information sharing.
37 See, e.g., CEA Core Principle 4, section 5(b) of
the CEA, for designated contract markets, which
requires the monitoring of trading to prevent
manipulation, price distortion, and disruption of
the delivery or cash settlement process. Principle 28
of the IOSCO Objectives and Principles of Securities
Regulation states that ‘‘regulation should be
designed to detect and deter manipulation and
other unfair trading practices.’’
38 In adopting the 1990 IOSCO Screen-Based
Principles, the Commission made clear that ‘‘they
establish general policy goals that will guide the
Commission in resolving issues arising from screenbased trading systems, but do not mandate a
particular substantive response.’’ 55 FR 48671,
48672 (November 21, 1990).
39 See generally, footnote 30.
40 See, e.g., CL 25 ( Chicago Board of Trade) at
1: ‘‘We do believe that the analysis preceding the
issuance of no-action letters must constantly be reevaluated and updated to reflect changes and
developments in today’s dynamic marketplace.’’
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Similarly, there should be broad
discretion under the no-action process
to determine, based on the totality of
factors, that the foreign exchange and
the applicable regulatory regime meet
relevant regulatory objectives,
notwithstanding that a particular aspect
of the foreign jurisdiction’s approach is
not identical to that of the Commission’s
regulatory program.41 In this regard, the
Commission recognizes that in an
international context, common
regulatory objectives can be attained
through different regulatory means.42
The mere fact that a foreign jurisdiction
has determined to achieve a regulatory
objective in a manner that is different
than the Commission’s approach often
is the result of varied business histories,
experiences and legislative choices. The
determinative factor in the review
should be an affirmative conclusion that
the regulatory structure in question
addresses the particular regulatory
objective deemed to be most relevant.43
III. Whether Objective Threshold
Standards Should Be Developed That
Would Indicate That a Board of Trade
Is No Longer Located Outside the
United States for Purposes of Section
4(A) of the CEA Such That the
Commission Should Require DCM
Designation or DTEF Registration
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In its release issued in advance of the
June 2006 public hearing, the
Commission requested comment on,
among other things, what level of
presence by a foreign board of trade
would be a reasonable threshold for
determining whether to require DCM/
DTEF registration and in particular
whether volume should be a
41 Compare Appendix A, Part 30 Interpretative
Statement with Respect to the Commission’s
Exemptive Authority under § 30.10 of Its Rules, 17
CFR Part 30, Appendix A: ‘‘In this connection, the
Commission would have broad discretion to
determine that the policies of any program element
generally are met, notwithstanding the fact that the
offshore program does not contain an element
identical to that of the Commission’s regulatory
program and conversely may assess how particular
elements are in fact applied by offshore
authorities.’’
42 See IOSCO Principles and Objectives of
Securities Regulation at 3: ‘‘There is often no single
correct approach to a regulatory issue. Legislation
and regulatory structures vary between jurisdictions
and reflect local market conditions and historical
development.’’
43 This can be confirmed through the applicant’s
submission of representations and relevant statutes,
rules and statements of policy, regulatory and selfregulatory oversight reports, confirmations of good
standing by the oversight regulator, and informal
staff discussions with relevant officials of the
exchange and its oversight regulator. The
Commission understands the term ‘‘regulatory
structure’’ broadly to include the regulations and
policies of the exchange, its regulator or another
self-regulatory organization, as well as relevant laws
and regulations.
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determinative factor.44 The Commission
also requested comment on whether it
would be appropriate for the
Commission to exercise jurisdiction
over foreign boards of trade that permit
direct access when they list contracts
with underlying products that are
integral to the U.S. economy.45
A. The Commission Is Not Developing
Objective Standards Establishing a
Threshold Test of U.S. Location
As noted above in the summary of
comments and hearing discussions,
most commenters rejected any
wholesale, mechanistic adoption of
threshold indicators of U.S. location. A
theme voiced by many commenters was
that the Commission should not attempt
to formalize any objective ‘‘bright line’’
test of U.S. location, particularly during
a period of rapid changes in the
technology of direct access and market
communication, as well as in global
business structures and relationships.46
Among the reasons noted by U.S.
industry commenters in particular for
not adopting objective standards
establishing a threshold test of U.S.
location at this time were: the difficulty
of developing threshold criteria that
would not be viewed as arbitrary,47 the
difficulty of determining primary
location in a period of rapid structural
change in the futures industry,48 the
possible inhibition of structural and
technological innovation,49 and the
danger that an overly-inclusive criterion
could result in duplicative regulation 50
44 71
FR 34073 (June 13, 2006).
45 Id.
46 See, e.g., CL 3 (comments of Ben Steil, Director
of International Economics, Council on Foreign
Relations) at 2.
47 See CL 2 (New York Board of Trade) at 2; and
CL 28 (Futures Industry Association) at 11.
48 See CL 25 (Chicago Board of Trade) at 9:
‘‘* * * with cross-border joint ventures and
mergers between boards of trade both existing and
proposed, it is likely to become more and more
difficult to determine the primary location of an
exchange.’’
49 See CL 2 (New York Board of Trade) at 2:
‘‘Similarly, we do not believe that defining
‘‘location’’ on the basis of management, ownership
arrangements or the location of offices and
technology of an exchange is instructive, as they are
likely to change over time and certain functions,
such as clearing and technology services, lend
themselves to outsourcing.’’ See also CL 9 (Chicago
Mercantile Exchange) at 7: ‘‘For example, a U.S.
exchange serving EU customers is likely to maintain
an EU sales office and sales representatives, an EU
technical office or outsourced technical services to
install and service networks, routers and terminals,
banking connections, delivery facilities and data
centers and/or communication hubs. In the near
future, if distributed computing makes trade
matching more effective, some part of the matching
operations may occur in the EU. It is not difficult
to imagine the adverse consequences if each of the
jurisdictions in which these operations take place
were to assert its right to regulate.’’
50 See CL 9 (Chicago Mercantile Exchange, Inc.)
at 7.
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as well as a protectionist response in
other jurisdictions that might inhibit the
ability of the U.S. futures industry to
compete effectively on a global basis.51
For the reasons noted above, the
Commission has decided not to adopt
any objective standards establishing a
threshold test of U.S. location.
Commission staff will continue to assess
the legitimacy of any particular
applicant to seek relief as a ‘‘foreign’’
board of trade by considering the
totality of factors presented by an
applicant. This flexible, case-by-case
approach will permit staff, during a
period of evolving market structure, to
consider the unique combination of
factual indicators of U.S. presence that
may be presented by an applicant for
relief.52
B. Volume Is Not a Determinative
Indicator of U.S. Location
The relevancy of U.S-originating
volume as a means to determine
whether a foreign-organized electronic
exchange is ‘‘located’’ in the United
States for purposes of CEA section 4(a)
has been a long-standing, unresolved
issue since the issuance of the DTB noaction letter.53
Notwithstanding the intuitive appeal
of using volume as a proxy for U.S.
presence, neither the Commission nor
the futures industry in its extended
consideration of this issue during the
Commission’s 1998–1999 rulemaking on
access to automated boards of trade
could reach consensus on the specific
manner in which volume could be
usefully applied to determine when a
foreign board of trade’s U.S. presence
required contract market designation.54
Comments submitted in response to
the Commission’s recent Request for
Comment, as well as statements made at
the related public hearing, reiterated the
51 See CL 2 (New York Board of Trade) at 2: ‘‘such
an approach runs the risk of creating barriers to U.S.
exchanges as they attempt to expand business
abroad;’’ CL 7 (Minneapolis Grain Exchange) at 2;
CL 25 (Chicago Board of Trade) at 7; CL 9 (Chicago
Mercantile Exchange, Inc.) at 6; CL 28 (Futures
Industry Association) at 11; CL 43 (New York
Mercantile Exchange) at 8; and NC 4 (Chicago
Mercantile Exchange Holdings Inc) at 2.
52 See CL 43 (New York Mercantile Exchange) at
6. ‘‘Accordingly, while the Commission may want
to reserve for the future the possibility to revisit this
area, we believe by far the best approach at this
point in time would be to provide guidance to
Commission staff in the continuation of the ongoing
staff no-action letter process.’’
53 The Commission had noted in its 1998 Concept
Release that ‘‘ by conditioning its letter on the DTB
providing the Division [staff] with quarterly updates
of DTB’s U.S.-originating trading volume, the
Division intended to leave open the possibility that
at some point DTB’s activities in the U.S. might rise
to a level that would necessitate greater
Commission regulation.’’ See 63 FR 39779, 39781
(July 24, 1998).
54 See 64 FR at 14170.
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various problems associated with the
use of volume, such as the regulatory
uncertainty that would result from using
a constantly fluctuating variable such as
volume, the arbitrary nature of any fixed
percentage, the difficulties in accurately
measuring U.S.-based volume, and the
possible inhibiting effect on exchanges’
global activities.55 Significantly, all of
the U.S. futures exchanges agreed, as
did foreign exchanges, that volume was
not a stable indicator of U.S. presence
for the purpose of requiring DCM
designation or DTEF registration.56
Accordingly, the Commission agrees
that volume is not determinative of U.S.
location. This conclusion does not
mean, however, that volume statistics
should no longer be required from
boards of trade operating under a staff
no-action letter, as the submission of
volume data may serve other regulatory
interests. The Commission expects that
any data collection requirement would
be tailored carefully to provide
meaningful information.
C. Nature of the Underlying Contract Is
Not Determinative of Designation
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Some commenters have suggested that
the Commission should require foreign
boards of trade that list contracts based
on a U.S.-produced or economically
important commodity to obtain contract
market designation rather than be
permitted to operate under a staff noaction letter.57 In effect, such proposals
would make the application of the
parenthetical exclusion from
designation in CEA section 4(a) for
boards of trade located outside the U.S.
dependent upon the nature of the
55 As noted at the Commission’s Hearing, it is
inevitable that as exchanges consolidate, they will
list contracts that are of great economic interest in
other jurisdictions and attract enormous
participation from other jurisdictions. See Hearing
Tr. at 100 (Ben Steil). If significant volume denoted
grounds for exchange licensing, then such an
exchange potentially would be subject to
duplicative and burdensome regulation.
56 See CL 2 (New York Board of Trade) at 2; CL
7 (Minneapolis Grain Exchange) at 1; CL 9 (Chicago
Mercantile Exchange) at 6; CL 25 (Chicago Board of
Trade) at 9–10; CL 43 (New York Mercantile
Exchange) at 7. See also CL 21 (Tokyo Financial
exchange) at 1; CL 22 (Federation of European
Securities Exchanges) at 3; and CL 23 (Eurex
Deutschland) at 7–8 for representative foreign
exchange comment. Letter available at: https://
www.cftc.gov/dea/deaforeignterminaltable.htm.
57 See CL 25 (Chicago Board of Trade) at 10–11:
The statement of Policy should exclude U.S.
Government Securities. See also letter dated
January 27, 2006 from the NYMEX to Reuben Jeffery
III: ‘‘The core regulatory policy question is, of
course, whether the WTI crude oil futures contract
is a foreign contract or whether it is a U.S. futures
contract requiring ICE Futures to become a U.S.
designated contract market. * * * NYMEX believes
that the new WTI futures contract is a U.S. product
* * * drilled and produced in the US.’’
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commodity underlying a particular
futures contract.
However, the nature of the underlying
commodity is not probative of the
‘‘location’’ of a board of trade for
purposes of CEA section 4(a). Such an
approach would lead to the anomalous
result of a board of trade being
characterized as ‘‘foreign’’ for some
contracts, but considered a ‘‘U.S.-based’’
exchange for a single contract and
therefore required to seek contract
market designation. In addition, several
U.S. contract markets list futures
contracts on commodities that are
produced or delivered in foreign
jurisdictions. Were the Commission to
endorse using such criteria to require
designation, such a policy could be
cited by foreign jurisdictions as a
rationale to subject U.S. markets to
regulation.58
IV. Enhancements to the No-Action
Process
Notwithstanding its endorsement of
the no-action process, the Commission
has identified additional enhancements
that are intended to ensure the
availability of necessary information,
and to ensure that staff will carefully
consider proposals for trading contracts
that potentially could have an adverse
effect on the ability of the Commission
to carry out its regulatory
responsibilities.
A. The Trading of Contracts That May
Adversely Affect the Commission’s
Regulatory Responsibilities Should Be
Addressed
Should staff become aware that the
trading of products listed on a foreign
board of trade that has been granted noaction relief:
• Affects adversely the pricing of contracts
traded on any registered entity as defined in
Section 1a(29) of the CEA, or of contracts
traded on any cash market for commodities
subject to the CEA;
• Creates unacceptable systemic risks or
disruptions in those markets or the U.S.
financial system, including capital markets;
or
• Facilitates abusive trading practices on
U.S. markets or otherwise interferes with the
ability of the Commission to carry out its
regulatory responsibilities, in particular
market surveillance,
staff may exercise its discretion and
consider a full range of responses, such
as imposing conditions and requiring
enhanced information sharing
arrangements and surveillance
procedures (see below), or other
appropriate action. In this regard, the
Commission retains plenary authority to
address manipulative or abusive trading
58 See
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64449
practices that affect U.S. futures and
cash markets and market users,59 and
will use that authority when necessary
and appropriate.
B. Enhanced Information Sharing
Procedures Should Be Adopted
In a global market environment,
where conduct that takes place on
markets located outside the United
States may have an impact on U.S.
futures and cash markets, as well as the
members and users of those markets, the
Commission needs to cooperate closely
with foreign market authorities in order
to ensure that the Commission can carry
out its regulatory responsibilities. The
Commission therefore endorses the
existing practice of requiring
information sharing assurances as a
condition to issuance of a no-action
letter and continued activities pursuant
to the granted relief. However, in light
of the Commission’s experiences in this
area, as well as the development of
internationally accepted information
sharing arrangements and standards, the
following enhancements are
appropriate.
1. Exchange and Its Regulator Should
Have Power, Authority and Willingness
To Share Needed Information
In negotiating information sharing
arrangements, staff should confirm that
the market and its regulator have the
power to obtain the specific types of
information that may be needed by the
Commission, as well as the authority to
share that information with the
Commission on an ‘‘as needed’’ basis.
Moreover, staff should obtain evidence
of the market’s and regulator’s
willingness to share information (e.g.,
through explicit undertakings). In this
regard, staff should note whether the
applicant’s regulator has signed the
IOSCO Multilateral Memorandum of
Understanding (MMOU), which requires
as a condition to executing the MMOU
a demonstration of power, authority and
willingness to share information. If the
applicant’s regulator is not a signatory
of the IOSCO MMOU, staff should
ascertain whether any prohibitions to
information sharing exist.
2. Applicants for No-Action Relief
Should Sign the Exchange International
MOU
When exchange member firms and
market participants trade on multiple
global exchanges, no one regulator or
market authority will have all of the
information necessary to evaluate the
risks to its markets. The Exchange
59 See, e.g., CEA Section 9(a)(2), 7 U.S.C. 13(a)(2)
and CEA section 8a(5), 7 U.S.C. 12a(5).
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Federal Register / Vol. 71, No. 212 / Thursday, November 2, 2006 / Rules and Regulations
International Information Sharing
Memorandum of Understanding and
Agreement (Exchange International
MOU) 60 and the Declaration on
Cooperation and Supervision of
International Futures Exchanges and
Clearing Organizations (Declaration),61
a companion arrangement for regulators,
were developed in 1996 as an
international response to address such
gaps in information. These
arrangements facilitate the identification
of large exposures by firms that could
have a potentially adverse effect on
multiple markets.
Applicants for staff no-action relief
should execute, or commit to execute,
the Exchange International MOU
because it demonstrates a commitment
to share information between exchanges
that is needed to ensure the integrity of
markets and to address systemic risks.
In circumstances where a foreign board
of trade is unable to share information
directly with another exchange, its
regulator should sign the Declaration (or
commit to share such information
pursuant to an existing MOU or other
arrangement with the Commission).
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3. Arrangements To Obtain and Share
Information Required To Carry Out the
Commission’s Domestic Market
Surveillance Responsibilities Should Be
a Condition to No-Action Relief
When an applicant for, or recipient of,
no-action relief trades or will trade
contracts that staff in its discretion
determines may affect the Commission’s
ability to carry out its surveillance
responsibilities (e.g., an economically
linked contract), the foreign board of
trade should be required to provide
directly to the Commission and in a
timely manner, appropriate trade and
position data as deemed necessary by
Commission staff. Alternative
arrangements may be acceptable where
60 The development of the Exchange International
MOU was one of the achievements that resulted
from the FIA sponsored Global Task Force on
Financial Integrity, which was convened to address
the cross-border issues that were identified in
connection with the failure of Barings Plc. To date,
fifty-six global derivatives exchanges have signed
the MOU.
61 The Declaration was developed through
discussions at the CFTC’s international regulators
conference, and was motivated by work
recommendations issued from the Windsor
Conference and Tokyo Conference, which were
convened by the CFTC, the U.K. FSA and Japanese
regulators (Ministry of International Trade and
Industry (MITI) and the Ministry of Agriculture,
Forestry and Fisheries (MAFF)) to respond to the
cross-border issues raised by the failure of Barings
Plc. The Declaration was developed to address
instances in which an exchange would not be able
to share information directly with another exchange
under the Exchange International MOU. Twentyeight regulators have signed the Declaration. Copy
available at: https://www.cftc.gov/oia/
oiabocadec0398.htm.
VerDate Aug<31>2005
16:15 Nov 01, 2006
Jkt 211001
local law or regulatory policies require
the interposition of the market regulator,
provided that such arrangements supply
the Commission on a timely basis with
the market information that the
Commission’s staff determines is
necessary to carry out the Commission’s
market surveillance responsibilities.
C. The Continuing Good Standing of the
Foreign Board of Trade Should Be
Verified
Although the no-action letters require
that the foreign board of trade submit to
staff and keep updated on a quarterly
basis certain material information, staff
should develop a non-burdensome and
efficient means to confirm the board of
trade’s continued ‘‘good standing’’ in its
authorizing jurisdiction. This could take
the form of an annual or biannual
confirmation by the relevant oversight
regulator of the foreign board of trade’s
authorized status and the continuing
validity of any relevant representations
that had been made by the foreign board
of trade in its initial application.
V. The No-Action Process Is Not the
Appropriate Means To Address
Competitive Issues
In their comments, U.S. futures
exchanges essentially encouraged the
Commission to review its regulations to
consider the competitive impact of
differences between its regulations and
those of other jurisdictions.62 Some
exchanges suggested that the
Commission should address perceived
regulatory disparities in connection
with the no-action process,63
particularly where the exchanges trade
similar products.64
The Commission does not believe that
it should address competitive concerns
within the context of any individual
request for a staff no-action letter.
Claims of competitive advantage or
disadvantage are exceedingly difficult to
prove. An exchange’s competitive status
reflects an array of contributing factors,
such as its overall rule structure, its
governance and business policy
determinations, its fee structure, type of
contracts offered, the method of trading,
the efficiency of its technology and
clearing systems, as well as external
factors such as statutory restrictions, tax
structure and the overall legal system.65
62 See, e.g., (Chicago Mercantile Holdings, Inc.)
Request to Appear at the Public Hearing at 2; CL
7 (Minneapolis Grain Exchange) at 1; CL 43 (New
York Mercantile Exchange) at 2, 10–12.
63 See CL 25 (Chicago Board of Trade) at 1.
64 See Hearing Tr. (NYMEX Chairman James
Newsome) at 72, 82.
65 In a 1999 report, the Commission’s Division of
Economic Analysis attributed changes in market
activity since the 1980s to the continued market
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Fmt 4700
Sfmt 4700
Rather, the appropriate focus of the noaction review should be on addressing
the bona fide status of, and domestic
regulatory concerns raised by, an
applicant for a no-action letter.
The CFMA has materially improved
the competitive status of the U.S.
futures industry.66 Nonetheless, the
Commission takes seriously the CFMA
findings, among others, that ‘‘financial
services regulatory policy must be
flexible to account for rapidly changing
derivatives industry business practices,’’
and ‘‘regulatory impediments to the
operation of global business interests
can compromise the competitiveness of
United States businesses.’’ 67 The
Commission will continue to address
these policy goals through ongoing
review of its regulatory program.
Conclusion
The U.S. futures industry is
undergoing a period of dynamic change,
marked by technological innovation,
consolidation, evolving business
relationships, and increasing global
competition. The Commission does not
presume to be able to predict the course
of ongoing industry evolution in these
areas.
The Commission’s appropriate role
during such a period of rapid change is
to construct policies that will foster
achievement of the Act’s section 3
objectives of ensuring market and
financial integrity, addressing systemic
risks, and protecting market
participants, but to do so in a flexible
manner that avoids inadvertently
inhibiting technological innovation or
the ability of the U.S. futures industry
maturation process, nonregulatory cost
considerations and technological change rather than
international regulatory differences.
‘‘In sum, neither trends in the locus of trading
activity nor regulatory developments over the last
five years suggest an erosion of U.S. futures
markets’ global competitive position. However, to
the extent that the movements toward electronic
trading systems and exchange consolidation that
were observed over the period of this study
continue into the future, the competitive structure
of global futures markets is likely to change
significantly. The Commission is committed to
continued regulatory flexibility in the face of these
trends. However, it is likely that the potential cost
savings generated by these trends, and not the
nature of the differences among the regulatory
systems of various nations, will be most important
in shaping the composition and trading interest of
the global futures industry in the twenty first
century.’’
The Global Competitiveness of U.S. Futures
Markets Revisited, the Commission’s Division of
Economic Analysis (November 1999), https://
www.cftc.gov/dea/compete/
deaglobal_competitiveness.htm.
66 See, e.g. CL 9 (Chicago Mercantile Exchange):
‘‘CFMA greatly improved the competitive
environment in the U.S. and eliminated many of the
legitimate concerns of U.S. based futures
exchanges.’’
67 CFMA Sections 126(a)(3), 126(a)(4).
E:\FR\FM\02NOR1.SGM
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Federal Register / Vol. 71, No. 212 / Thursday, November 2, 2006 / Rules and Regulations
to compete effectively in a global
environment.
This Statement of Policy has been
developed as a means for the
Commission to respond flexibly to the
challenges posed by the ongoing
evolution in electronic access to global
markets. The Commission will continue
to monitor carefully, and review the
Policy Statement as necessary in light
of, the ongoing evolution of cross-border
electronic direct access and
intermediation in order to ensure that it
does not adversely affect U.S. cash and
futures markets, market participants and
customers, as well as the consumers
affected by those foreign market
transactions.
Issued in Washington, DC, on October 27,
2006 by the Commission.
Eileen A. Donovan,
Acting Secretary of the Commission.
[FR Doc. E6–18513 Filed 11–1–06; 8:45 am]
BILLING CODE 6351–01–P
DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Food and Drug Administration
21 CFR Part 522
Implantation or Injectable Dosage
Form New Animal Drugs;
Glycopyrrolate
AGENCY:
Food and Drug Administration,
HHS.
pwalker on PRODPC60 with RULES
ACTION:
Final rule.
SUMMARY: The Food and Drug
Administration (FDA) is amending the
animal drug regulations to reflect
approval of an abbreviated new animal
drug application (ANADA) filed by IVX
Animal Health, Inc. The ANADA
provides for veterinary prescription use
of glycopyrrolate solution as an
injectable preanesthetic agent in dogs
and cats.
DATES: This rule is effective November
2, 2006.
FOR FURTHER INFORMATION CONTACT: John
K. Harshman, Center for Veterinary
Medicine (HFV 104), Food and Drug
Administration, 7500 Standish Pl.,
Rockville, MD 20855, 301–827–0169, email: john.harshman@fda.hhs.gov.
SUPPLEMENTARY INFORMATION: IVX
Animal Health, Inc., 3915 South 48th
Street Ter., St. Joseph, MO 64503, filed
ANADA 200–365 that provides for
veterinary prescription use of
Glycopyrrolate Injectable as a
preanesthetic agent in dogs and cats.
IVX Animal Health, Inc.’s
Glycopyrrolate Injectable is approved as
VerDate Aug<31>2005
16:15 Nov 01, 2006
Jkt 211001
a generic copy of Fort Dodge Animal
Health’s, Division of Wyeth’s ROBINULV (glycopyrrolate), approved under
NADA 101–777. The ANADA is
approved as of October 2, 2006, and the
regulations are amended in 21 CFR
522.1066 to reflect the approval and a
current format. The basis of approval is
discussed in the freedom of information
summary.
In accordance with the freedom of
information provisions of 21 CFR part
20 and 21 CFR 514.11(e)(2)(ii), a
summary of safety and effectiveness
data and information submitted to
support approval of this application
may be seen in the Division of Dockets
Management (HFA–305), Food and Drug
Administration, 5630 Fishers Lane, rm.
1061, Rockville, MD 20852, between 9
a.m. and 4 p.m., Monday through
Friday.
FDA has determined under 21 CFR
25.33(a)(1) that this action is of a type
that does not individually or
cumulatively have a significant effect on
the human environment. Therefore,
neither an environmental assessment
nor an environmental impact statement
is required.
This rule does not meet the definition
of ‘‘rule’’ in 5 U.S.C. 804(3)(A) because
it is a rule of ‘‘particular applicability.’’
Therefore, it is not subject to the
congressional review requirements in 5
U.S.C. 801–808.
List of Subjects in 21 CFR Part 522
Animal drugs.
I Therefore, under the Federal Food,
Drug, and Cosmetic Act and under
authority delegated to the Commissioner
of Food and Drugs and redelegated to
the Center for Veterinary Medicine, 21
CFR part 522 is amended as follows:
PART 522—IMPLANTATION OR
INJECTABLE DOSAGE FORM NEW
ANIMAL DRUGS
1. The authority citation for 21 CFR
part 522 continues to read as follows:
I
Authority: 21 U.S.C. 360b.
2. Revise § 522.1066 to read as
follows:
I
§ 522.1066
Glycopyrrolate.
(a) Specifications. Each milliliter of
solution contains 0.2 milligram
glycopyrrolate.
(b) Sponsors. See Nos. 000856 and
059130 in § 510.600(c) of this chapter.
(c) Conditions of use in dogs and
cats—(1) Amount. 5 micrograms per
pound of body weight (0.25 milliliter
per 10 pounds of body weight) by
intravenous, intramuscular, or
subcutaneous injection in dogs or by
intramuscular injection in cats.
PO 00000
Frm 00013
Fmt 4700
Sfmt 4700
64451
(2) Indications for use. As a
preanesthetic agent.
(3) Limitations. Federal law restricts
this drug to use by or on the order of
a licensed veterinarian.
Dated: October 23, 2006.
Stephen F. Sundlof,
Director, Center for Veterinary Medicine.
[FR Doc. E6–18444 Filed 11–1–06; 8:45 am]
BILLING CODE 4160–01–S
DEPARTMENT OF STATE
22 CFR Part 97
[Public Notice 5602]
RIN 1400–AC19
Intercountry Adoption—Department
Issuance of Certifications in Hague
Convention Adoption Cases
Department of State.
Final rule.
AGENCY:
ACTION:
SUMMARY: The Department of State (the
Department) is issuing a final rule to
implement the certification and
declaration provisions of the 1993
Hague Convention on Protection of
Children and Co-operation in Respect of
Intercountry Adoption (the Convention)
and the Intercountry Adoption Act of
2000 (the IAA) with respect to adoption
and custody proceedings taking place in
the United States, after review of public
comments received in response to the
Department’s June 16, 2006 issuance of
a proposed rule. This final rule governs
the application process for Hague
Adoption Certificates and Hague
Custody Declarations in cases involving
emigration of a child from the United
States. It also establishes a process for
seeking certification, for purposes of
Article 23 of the Convention, that an
adoption done in the United States
following a grant of custody in a
Convention country of origin was done
in accordance with the Convention.
DATES: This rule is effective December 4,
2006. Information about the date the
Convention will enter into force is
provided in 22 CFR 96.17.
FOR FURTHER INFORMATION CONTACT: For
further information, contact Anna Mary
Coburn at 202–736–9081. Hearing- or
speech-impaired persons may use the
Telecommunications Devices for the
Deaf (TDD) by contacting the Federal
Information Relay Service at 1–800–
877–8339.
SUPPLEMENTARY INFORMATION:
I. Background
The Convention is a multilateral
treaty that provides a framework for the
E:\FR\FM\02NOR1.SGM
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]]>Agencies
[Federal Register Volume 71, Number 212 (Thursday, November 2, 2006)]
[Rules and Regulations]
[Pages 64443-64451]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-18]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 140
Boards of Trade Located Outside of the United States and No-
Action Relief From the Requirement To Become a Designated Contract
Market or Derivatives Transaction Execution Facility
AGENCY: Commodity Futures Trading Commission.
ACTION: Policy statement.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission is issuing a
Statement of Policy that affirms the use of the no-action process to
permit foreign boards of trade to provide direct access to their
electronic trading systems to U.S. members or authorized participants,
and provides additional guidance and procedural enhancements.\1\
---------------------------------------------------------------------------
\1\ Commission Rule 140.12, 17 CFR Sec. 140.12 Disposition of
business by seriatim Commission consideration.
---------------------------------------------------------------------------
DATES: Effective Date: November 2, 2006.
FOR FURTHER INFORMATION CONTACT: Robert Rosenfeld, Deputy Director,
Office of International Affairs, 202-418-5423, rrosenfeld@cftc.gov;
Julian Hammar, Counsel, Office of the General Counsel, 202-418-5118,
jhammar@cftc.gov; or Duane Andresen, Special Counsel, Division of
Market Oversight, 202-418-5492, dandresen@cftc.gov, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Background
Since 1996, staff of the Commodity Futures Trading Commission (CFTC
or Commission) has issued no-action letters \2\ to foreign boards of
trade stating, subject to compliance with certain conditions, that it
will not recommend that the Commission take enforcement action if the
foreign board of trade provides its members or participants in the
United States access to its electronic trading system without seeking
designation under the Commodity Exchange Act (CEA or Act) as a contract
market (DCM) or registration as a derivatives transaction execution
facility (DTEF).\3\ In 1998 the Commission imposed a moratorium on the
issuance of such no-action letters pending the development of rules
governing access to automated foreign boards of trade.\4\ During this
period, the Commission received extensive comment on the proposed
rulemaking, as well as advice from the Commission's Global Markets
Advisory Committee and a Public Round Table. Because of the general
lack of consensus on many of the fundamental issues surrounding access
to foreign boards of trade, the Commission withdrew the proposed rules
in an order that also directed the staff:
---------------------------------------------------------------------------
\2\ See Commission Rule 140.99, 17 CFR 140.99 (2006), which
defines the term ``no-action letter'' as a written statement issued
by the staff of a Division of the Commission or of the Office of the
General Counsel that it will not recommend enforcement action to the
Commission for failure to comply with a specific provision of the
Act or of a Commission rule, regulation or order if a proposed
transaction is completed or a proposed activity is conducted by the
beneficiary.
\3\ These letters, hereinafter referred to generally as ``no-
action letters'' are published on the Commission's Web site at:
https://www.cftc.gov/dea/deaforeignterminaltable.htm. Reference to
DTEFs in the no-action letters was added following the establishment
of that category by the Commodity Futures Modernization Act of 2000.
Although the letters refer to the placement of ``terminals,''
the continued use of that term does not accurately reflect advances
in technology, such as open network systems accessible through the
Internet.
\4\ 63 FR 39779 (July 24, 1998) (Concept Release); 64 FR 14159
(March 24, 1999) (Proposed Rules). Under the terms of a letter dated
June 3, 1998 to Eurex Deutschland, the Division of Trading and
Markets modified the terms of the original 1996 no-action letter to
the effect that Eurex members who were not already operating U.S.-
based Eurex Terminals generally were prevented from placing Eurex
terminals in the U.S. absent written authorization from the
Division, pending adoption of Commission rules regarding electronic
access to foreign exchanges.
To begin immediately processing no-action requests from foreign
boards of trade seeking to place trading terminals in the United
States, and to issue responses where appropriate, pursuant to the
general guidelines included in the Eurex (DTB) no-action process, or
other guidelines established by the Commission, to be reviewed and
applied as appropriate on a case-by-case basis.\5\
---------------------------------------------------------------------------
\5\ Commission Order dated June 2, 1999, 64 FR 32829, 32830
(June 18, 1999). The Eurex-DTB no-action process referred to by the
Commission in its 1999 Order lifting the moratorium was set forth in
a letter dated February 29, 1996 from Andrea Corcoran, Director,
Division of Trading and Markets to Lawrence Hunt, Jr., pp. 12-13
(the DTB no-action letter). CFTC Letter 96-28, indexed at https://
www.cftc.gov/opa/summaries/opanal96.htm; [1994-1995 Transfer Binder]
Comm. Fut. L. Rep. (CCH) ] 26,669 at 43,795-43,802 (February 29,
1996). On June 18, 1998, the DTB changed its name to Eurex
Deutschland, a step toward a planned merger with the Swiss Options
and Financial Futures Exchange. See 63 FR 39779, 39781 (July 24,
1998) at fn. 12.
[[Page 64444]]
---------------------------------------------------------------------------
Following the lifting of the moratorium in 1999, the relevant
Commission operating division has issued seventeen additional no-action
letters.\6\ The Commission generally has not observed regulatory
problems or financial harm to participants who are accessing the
foreign boards of trade pursuant to the staff no-action relief letters.
Moreover, the no-action process has been resilient throughout a period
of increasing global competition, technological advances, changing
ownership structures and evolving business models.
---------------------------------------------------------------------------
\6\ The Commission's Division of Market Oversight (successor to
the market supervisory responsibilities previously performed by the
Division of Trading and Markets) is responsible for issuance of the
direct access no-action letters.
---------------------------------------------------------------------------
In 2006, ICE Futures, a U.K. registered investment exchange that
provides direct access to its U.S. members pursuant to a CFTC staff
foreign terminal no-action letter, notified the Commission that it
would list a contract on West Texas Intermediate light sweet crude oil
whose settlement price would be linked to contracts traded on the New
York Mercantile Exchange (NYMEX). ICE's notification prompted the
Commission's Division of Market Oversight (DMO) to advise ICE Futures
that the ``Commission will be evaluating the use of the no-action
process in light of significant issues raised by the factual
circumstances underlying the subject notice.'' \7\ Among other things,
the trading of such contracts made ripe the re-examination of certain
dormant issues respecting the Commission's statutory obligations to
maintain the integrity of U.S. markets and to protect U.S. customers,
particularly the Commission's market surveillance obligations.
Accordingly, on May 3, 2006, the Commission directed its staff to
initiate a formal process to define what constitutes a ``board of
trade, exchange, or market located outside the United States, its
territories or possessions'' as that phrase is used in section 4(a) of
the CEA and in furtherance of that process scheduled a public
hearing.\8\ The Commission also issued a related Request for Public
Comment.\9\
---------------------------------------------------------------------------
\7\ See letter dated January 31, 2006 from Richard A. Shilts,
Director, Division of Market Oversight to Mark Woodward, Regulation
and Compliance Policy Manager, ICE Futures. https://www.cftc.gov/
files/dea/cftclettertoicefutures.pdf.
\8\ See Sunshine Act Meeting Notice, 71 FR 30665 (May 30, 2006);
corrected at 71 FR 32059 (June 2, 2006). The hearing was conducted
on June 27, 2006, at the Commission's headquarters in Washington,
DC.
\9\ See 71 FR 34070 (June 13, 2006). The Commission requested
comment on the issues related to developing an objective standard
establishing a threshold that, if crossed by a foreign board of
trade that permits direct access, would indicate that the board of
trade is no longer outside the United States and, accordingly, may
be required to become registered under the CEA.
---------------------------------------------------------------------------
Hearing and Request for Comment
Participants at the Commission's Hearing and comments submitted in
response to the Request for Comment (all collectively the
``commenters''),\10\ were generally supportive of the no-action
process, praising the process in general for its flexibility.\11\ Many
commenters suggested that the Commission should retain in large measure
the essential contours of the no-action process.\12\
---------------------------------------------------------------------------
\10\ A transcript of the Commission's Hearing on what
constitutes a board of trade located outside the United States under
the Commodity Exchange Act section 4(a) (June 27, 2006), (``Hearing
Tr.'') as well as all comment letters (``CL''), are located in
comment file 06-002 to 17 FR 34070 (June 13, 2006). https://
www.cftc.gov/foia/comment06/foi06-002_1.htm.
\11\ For comments supporting the no-action letter process
generally, see, e.g., Comments of Nicholas Weinreb, Euronext,
Hearing Tr. at 45 (``The no-action letter regime has been an
extraordinarily successful one.''); comments of Benn Steil, Director
of International Economics, Council of Foreign Relations, in his
personal capacity, Hearing Tr. at 49 (``I think it is exceptionally
important to acknowledge just how successful the Commission's no-
action regime has been * * *''); For favorable hearing participant
comments on the flexibility of the no-action letter process, see,
e.g., Comments of John Foyle, Euronext Liffe, Hearing Tr. at 46;
Comments of Richard Berliand, JP Morgan Securities, Hearing Tr. at
61; Comments of Nicholas Weinreb, Euronext, Hearing Tr. at 174.
\12\ See, e.g., CL 2 (New York Board of Trade) at 3; CL 3
(Council of Foreign Relations) at 2; CL 6 (ICE Futures Exchange) at
9-10; CL 7 (Minneapolis Grain Exchange) at 2; CL 8 (Bundesanstalt
f[uuml]r Finanzdienstleitungsaufsicht) at 3; CL 16 (World Federation
of Exchanges) at 1; CL 19 (Tokyo Stock Exchange) at 2; CL 22
(Federation of European Securities Exchanges) at 4; CL 23 (Eurex
Deutschland) at 11; CL 24 (Euronext Liffe) at 5; CL 25 (Chicago
Board of Trade) at 1; CL 28 (Futures Industry Association) at 9; and
CL 45 (Committee of European Securities Regulators) at 1.
---------------------------------------------------------------------------
Commenters warned against any mechanistic approaches to determining
whether an otherwise foreign organized exchange that permits direct
electronic access by its U.S. members or participants is not located
``outside'' the United States for purposes of section 4(a) of the CEA,
particularly questioned the use of volume as a proxy for U.S. presence
(noting that its fluctuations could result in regulatory uncertainty),
and stressed the need to avoid rigid or ``bright line'' tests.\13\ Some
commenters favored a totality of circumstances approach to
location,\14\ while others urged the Commission to look to indicators
of physical location, such as the main location of an exchange's
infrastructure, its employees and headquarters.\15\
---------------------------------------------------------------------------
\13\ See, e.g., CL 2 (New York Board of Trade) at 2-3; CL 6 (ICE
Futures Exchange) at 6-7; CL 9 (Chicago Mercantile Exchange) at 6;
CL 23 (Eurex Deutschland) at 7; CL 25 (Chicago Board of Trade) at 9-
10.
\14\ See, e.g., CL 22 (Federation of European Securities
Exchanges) at 3.
\15\ See, e.g., CL 6 (ICE Futures) at 2; CL 9 (Chicago
Mercantile Exchange) at 6.
---------------------------------------------------------------------------
Market users stressed the need to maintain high levels of customer
and market protections, particularly where a product might impact
pricing in U.S. markets.\16\ Many U.S. exchanges requested that the
Commission give greater attention to competitive issues, particularly
when there is direct competition between a U.S. exchange and a foreign
exchange's products. U.S. exchanges in particular stressed the need for
``regulatory parity.'' \17\ Some commenters warned against taking
actions that inadvertently could result in policies that may inhibit
the ability of U.S. exchanges and firms to operate globally.\18\ Others
stressed the need to provide regulatory certainty generally with
respect to the applicability of the no-action process and to clarify
the treatment of intermediated electronic access.\19\
---------------------------------------------------------------------------
\16\ See, e.g., CL 5 (New England Fuel Institute) at 2; CL 27
(Industrial Energy Consumers of America) at 1.
\17\ See, e.g., CL 7 (Minneapolis Grain Exchange) at 1; CL 25
(Chicago Board of Trade) at 5-6; and CL 43 (New York Mercantile
Exchange) at 10.
\18\ See, e.g., CL 2 (New York Board of Trade) at 3.
\19\ See, e.g., CL 28 (Futures Industry Association) at 8.
---------------------------------------------------------------------------
Need for the Policy Statement
As made clear at the Hearing and by the written comments, the
intensity of concerns with respect to the no-action process has been
exacerbated by the global competitive environment. In particular, these
concerns have called into question: (1) The Commission's authority for
the no-action process in light of Section 4(a)'s exclusion from the
contract market designation requirement for foreign boards of trade,
(2) the continued appropriateness of the no-action process generally,
(3) whether objective threshold standards should be developed that
would indicate that a board of trade is no longer located outside the
United States for purposes of section 4(a) of the CEA, (4) whether
enhancements to the no-action process may be necessary, particularly
where trading may implicate domestic futures and cash markets, and (5)
how the no-action process relates to perceived competitive issues.
[[Page 64445]]
Continued ambiguity with respect to these fundamental issues could
result in an unacceptable degree of uncertainty that may hinder access
by U.S. users to global products and markets, inhibit continued
innovation in technology and products, and undermine the ability of
U.S. markets and intermediaries to structure their business to compete
globally. Accordingly, the Commission is issuing this Statement of
Policy in order to provide greater regulatory certainty and
transparency to issues surrounding access to foreign boards of trade.
Statement of Policy Regarding the Processing of No-Action Requests by
Foreign Boards of Trade to Provide Direct Electronic Access to Their
U.S. Members or Authorized Participants
Since 1996, foreign boards of trade planning to permit members or
other participants located in the United States to enter trades
directly into that foreign board of trade's trade matching system
(``direct access'') \20\ have sought staff no-action letters.
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\20\ For purposes of this Statement of Policy, the term ``direct
access'' refers to the explicit grant of authority by a foreign
board of trade to an identified member or other participant of that
board of trade to enter trades directly into the board of trade's
trade matching system.
In contrast, the staff no-action letters generally have defined
the term ``automated order routing systems'' (AORS) as meaning any
system of computers, software or other devices that allows entry of
orders through another party (an intermediary) who has been granted
direct access for transmission to the trading system where, without
substantial human intervention, trade matching or execution takes
place.
The Commission does not view the transmission of intermediated
orders via AORSs for execution on a foreign board of trade to be
``direct access'' to that board of trade for purposes of the no-
action process.
In this regard, the Commission endorses the view that mere
intermediated electronic access by AORS does not create a presence
in the U.S., such that a firm exempted from registration as a
futures commission merchant (FCM) pursuant to Commission Regulation
30.10, which is prohibited from establishing a U.S. presence, would
be required to register as an FCM. See, e.g., CFTC Staff Letter No.
05-16 [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 30,127
(Aug. 26, 2005) (``For example, Rule 30.10 Firms continue to be
prohibited from maintaining a presence in the United States. Thus,
Rule 30.10 Firms cannot provide direct access to LIFFE CONNECT[reg]
in the United States (although they would be permitted to accept
orders overseas from customers located in the United States that
submit such orders by telephone or through an AORS located in the
United States'').) (Emphasis added.)
This position is consistent with the Commission's historical
policy of addressing customer protection concerns with regard to the
offer or sale of foreign futures to U.S. customers primarily through
regulation of the intermediary. In this regard, nothing in the
Statement of Policy is intended to alter current Commission rules
that require that any person engaging in the offer or sale of a
foreign futures contract or foreign futures option transaction for
or on behalf of a U.S. customer must be a registered futures
commission merchant or operating pursuant to a Rule 30.10 Order.
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This Statement of Policy provides guidance for processing requests
for no-action relief. The Commission intends that this Statement of
Policy will ensure the consistent treatment of requests and the
application of an appropriate degree of review, while maintaining the
ability to respond to the individual factual circumstances raised by
particular requests.
The Commission's Statement of Policy takes into account the
Commission's desire to facilitate access to markets and products,
foster innovation and competition and eliminate unnecessary regulatory
burdens, while maintaining customer and market protections mandated by
the CEA. The adoption by the Commission of such a flexible and
adaptable policy is consistent with Congressional findings that
accompanied the enactment of the Commodity Futures Modernization Act of
2000 (CFMA).\21\
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\21\ Section 126(a) of the CFMA, Appendix E of Pub. L. No. 106-
554, 114 Stat. 2763 (2000), provides:
``SEC. 126. INTERNATIONAL ACTIVITIES OF THE COMMODITY FUTURES
TRADING COMMISSION.
(a) FINDINGS.--The Congress finds that--
(1) derivatives markets serving United States industry are
increasingly global in scope;
(2) developments in data processing and communications
technologies enable users of risk management services to analyze and
compare those services on a worldwide basis;
(3) financial services regulatory policy must be flexible to
account for rapidly changing derivatives industry business
practices;
(4) regulatory impediments to the operation of global business
interests can compromise the competitiveness of United States
businesses;
(5) events that disrupt financial markets and economies are
often global in scope, require rapid regulatory response, and
coordinated regulatory effort across international jurisdictions;
(6) through its membership in the International Organization of
Securities Commissions, the Commodity Futures Trading Commission has
promoted beneficial communication among market regulators and
international regulatory cooperation; and
(7) the Commodity Futures Trading Commission and other United
States financial regulators and self-regulatory organizations should
continue to foster productive and cooperative working relationships
with their counterparts in foreign jurisdictions.''
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I. The Commission's Authority for the No-Action Process
A. Relevant Statutory Considerations: The Commodity Exchange Act
Circumscribes the Commission's Authority Over Foreign Boards of Trade
Section 4(a) of the CEA provides that a futures contract may be
traded lawfully in the U.S. only if, among other things, it is traded
on or subject to the rules of a board of trade that has been designated
as a contract market or registered as a DTEF.\22\ Section 4(a) excludes
from the designation requirement contracts made on or subject to the
rules of a board of trade, exchange, or market located outside the
United States, its territories or possessions.'' \23\
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\22\ Section 4(a) of the CEA provides in part:
``Unless exempted by the Commission pursuant to subsection (c)
of this section, it shall be unlawful for any person to offer to
enter into, to enter into, to execute, to confirm the execution of,
or to conduct any office or business anywhere in the United States,
its territories or possessions, for the purpose of soliciting or
accepting any order for, or otherwise dealing in, any transaction
in, or in connection with, a contract for the purchase or sale of a
commodity for future delivery (other than a contract which is made
on or subject to the rules of a board of trade, exchange, or market
located outside the United States, its territories or possessions)
(emphasis added)''
unless--
``(1) such transaction is conducted on or subject to the rules
of a board of trade which has been designated or registered by the
Commission as a contract market or derivatives transaction execution
facility * * *.''
7 U.S.C. 6(b) (2000).
\23\ In the absence of no-action relief, a board of trade,
exchange or market that permits direct access by U.S. persons might
be subject to Commission action for violation of, among other
provisions, section 4(a) of the CEA, if it were not found to qualify
for the exclusion from the DCM designation or DTEF registration
requirement.
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Section 4(b) of the CEA, which authorizes the Commission to adopt
rules governing the offer and sale of foreign futures and options
contracts, explicitly prohibits the Commission from adopting rules
pursuant to that section that: (1) Require Commission approval of any
contract, rule, regulation, or action of any foreign board of trade,
exchange, or market, or clearinghouse for such board of trade,
exchange, or market, or (2) govern in any way any rule or contract term
or action of any foreign board of trade, exchange, or market, or
clearinghouse for such board of trade, exchange, or market.\24\
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\24\ Section 4(b) of the CEA provides:
``The Commission may adopt rules and regulations proscribing
fraud and requiring minimum financial standards, the disclosure of
risk, the filing of reports, the keeping of books and records, the
safeguarding of customers' funds, and registration with the
Commission by any person located in the United States, its
territories or possessions, who engages in the offer or sale of any
contract of sale of a commodity for future delivery 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. Such rules and regulations may impose different
requirements for such persons depending upon the particular foreign
board of trade, exchange, or market involved. No rule or regulation
may be adopted by the Commission under this subsection that (1)
requires Commission approval of any contract, rule, regulation, or
action of any foreign board of trade, exchange, or market, or
clearinghouse for such board of trade, exchange, or market, or (2)
governs in any way any rule or contract term or action of any
foreign board of trade, exchange, or market, or clearinghouse for
such board of trade, exchange, or market.''
7 U.S.C. 6(b) (2000).
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[[Page 64446]]
B. Section 4(a)'s Exclusion From Contract Market Designation Applies
Only With Respect to ``Bona Fide'' Boards of Trade
The Commission interprets the section 4(a) parenthetical exclusion
from contract market designation for foreign boards of trade to apply
only with respect to ``bona fide'' boards of trade. The term ``bona
fide'' in this context refers to boards of trade that, among other
things, possess the attributes of established, organized exchanges,
adhere to appropriate rules prohibiting abusive trading practices, have
been authorized by a regulatory process that examines customer and
market protections and are subject to continued oversight by a
regulator that has power to intervene in the market and share
information with the Commission. In reaching this conclusion, the
Commission relies on legislative history found in the Report of the
Senate Committee on Agriculture, Nutrition, and Forestry,\25\ which
discusses the addition of section 4(b) to the CEA. Specifically, the
Report notes that:
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\25\ S. Rep. 97-384, 97th Cong. 2d Sess. 46 (1982).
In addition, the rules and regulations developed under this
provision [section 4(b)] are not intended to place the solicitation
or acceptance of orders in the United States for bona fide foreign
futures contracts at a comparative disadvantage with similar
solicitation or acceptance of orders for domestic futures contracts.
For example, rules which require the segregation of all or part of
customers' funds in the United States would not be consistent with
the intent of this provision when there is adequate evidence that
such funds have been transferred to a bona fide market,
clearinghouse, or market principal and are adequately safeguarded
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for the protection of U.S. residents. [emphasis added]
The Commission's conclusion in this regard is harmonious with previous
Commission interpretations of ``bona fide'' exchange.\26\
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\26\ See 63 FR 39779, 39788 (July 24, 1998). See also Compl.
Count I, CFTC v. Topworth Int'l, Ltd., (No. 94-1256) (C.D. Cal.)
(Feb. 2, 1994).
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A commenter had questioned the appropriateness of applying a ``bona
fide'' limitation on the application of section 4(a).\27\ However, in
light of the legislative history quoted above, which the Commission
previously has interpreted as limiting the exclusion from Section 4(a)
to bona fide foreign boards of trade, we believe that the
interpretation we adopt today is an appropriate and reasonable exercise
of the Commission's powers to interpret and apply its governing
statute, particularly when it implicates domestic conduct and possible
effects on domestic persons and markets that the Commission is charged
with protecting.
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\27\ CL 9 (Chicago Mercantile Exchange) at 5.
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II. The Appropriateness of the No-Action Process
A. The Commission Endorses the No-Action Process
The Commission endorses the continued use of the no-action process
as an appropriate and flexible mechanism that should be used
prospectively to facilitate direct access to the electronic trading
system of a foreign board of trade by its U.S. members or authorized
participants.\28\
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\28\ We believe the no-action process to be an appropriate
exercise of discretion committed to Commission staff, subject to
appropriate Commission oversight. See Board of Trade of the City of
Chicago v. SEC, 883 F.2d 525, 530 (7th Cir. 1989); 17 CFR 140.99. In
this connection, the Commission is directing staff to continue to
circulate through the Secretariat for the Commission's review on an
``absent objection'' basis, prior to issuance, all staff foreign
board of trade no-action letters.
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The no-action process is appropriate because it gives staff the
flexibility to address the factual circumstances presented in the
future, and to apply a consistent approach to reviewing applications
for no-action relief in light of innovations in electronic trading and
technology, evolving regulatory standards, and specific customer
protection and market integrity concerns. This approach is consistent
with the CFMA's goal of adopting a flexible regulatory policy that can
account for rapidly changing derivatives industry business practices, a
theme that also was voiced at the Commission's hearing and in the
written comments. Among other things, Congress found in the CFMA that
``financial services regulatory policy must be flexible to account for
rapidly changing derivatives industry business practices.'' CFMA
Section 126(a)(3). Moreover, Section 126(b) of the CFMA expresses the
sense of Congress that the Commission coordinate with foreign
regulatory authorities to encourage ``the facilitation of cross-border
transactions through the removal or lessening of any unnecessary legal
or practical obstacles.''
B. The Commission Endorses the Scope of Review of the No-Action Process
The scope of review that was established by Commission staff in the
DTB no-action letter and refined in subsequent no-action letters \29\
focuses on establishing the ``bona fide'' status of the foreign board
of trade and finding that no public interest would be adversely
affected by persons in the U.S. directly accessing the foreign board of
trade.\30\
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\29\ Letter dated February 29, 1996 from Andrea Corcoran,
Director, Division of Trading and Markets, to Lawrence Hunt, Jr.,
pp. 12-13 (the DTB no-action letter). CFTC Letter 96-28, indexed at
https://www.cftc.gov/opa/summaries/opanal96.htm; [1994-1995 Transfer
Binder] Comm. Fut. L. Rep. (CCH) ] 26,669 at 43,795-43,802 (February
29, 1996).
\30\ In the 1996 DTB no-action letter staff concluded that the
``the mere presence of terminals in the United States would not
cause the Commission to deem any bona fide foreign exchange for
which products are listed through that system to be a domestic
exchange, that is, a board of trade designated as a contract market
by the Commission pursuant to section 5 of the Act.'' (emphasis
added)
In order to conclude that the DTB was a ``bona fide'' foreign
board of trade, and therefore appropriately subject to the
parenthetical exclusion for foreign boards of trade in section 4(a)
of the CEA, staff generally examined the DTB's rules and the overall
regulatory environment. The text of the DTB letter makes clear that
staff recognized the prohibitions set out in section 4(b) of the
CEA, but noted that ``the relationship or interface between DTB's
computer terminals and persons located in the United States may
raise regulatory concerns that are unrelated to the internal
operations of the DTB or its computer terminals in the United
States.'' Accordingly, the review set forth in the DTB letter also
focused narrowly on the domestic implications for U.S. persons using
the DTB direct access terminals (i.e., the system integrity and
clearing review).
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In general, staff reviews information and representations provided
by the applicant that relate to, among other things, the rules and
structure of the applicant exchange (with an emphasis on the exchange's
financial integrity, market surveillance, trade practice and rule
enforcement regime), various system integrity protections that govern
the foreign board of trade's electronic trading system (using as a
template the 1990 Principles for the Oversight of Screen-Based Trading
Systems),\31\ the system's related clearing and customer default
protections, and information concerning the regulatory structure in the
applicant's jurisdiction, with a specific emphasis on market
regulation.\32\ The staff also reviews the
[[Page 64447]]
adequacy of information sharing with the Commission by the market and
its regulator. Based upon its review of the documents and
representations submitted by the applicant, and subject to compliance
with various conditions (e.g., representations governing access to
books and records and the appointment of a U.S. agent for service of
process), staff might conclude that granting no-action relief would not
be contrary to the public interest.
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\31\ The 1990 IOSCO Principles for the Oversight of Screen-Based
Trading Systems (Screen-Based Principles) were developed by IOSCO
Working Party 7 on futures, which was chaired by the CFTC. The IOSCO
Screen-Based Principles set out in broad terms the international
consensus as to the regulatory considerations to be addressed in
reviewing mechanisms for screen-based trading. The Commission
adopted the IOSCO Screen-Based Principles as a statement of
Commission policy. See 55 FR 48670 (November 21, 1990). In adopting
the IOSCO Screen-Based Principles, the Commission made clear that
they establish general policy goals that will guide the Commission
in resolving issues arising from screen-based trading systems, but
would not mandate a particular substantive response.
\32\ The Commission previously summarized the scope of the
staff's foreign board of trade (FBOT) inquiry as follows:
``Currently, Commission staff generally examines the following
when reviewing an FBOT's request for terminal placement no-action
relief: General information about the FBOT, as well as detailed
information about: (i) membership criteria (including financial
requirements); (ii) various aspects of the automated trading system
(including the order-matching system, the audit trail, response
time, reliability, security, and, of particular importance,
adherence to the IOSCO principles for screen-based trading); (iii)
settlement and clearing (including financial requirements and
default procedures); (iv) the regulatory regime governing the FBOT
in its home jurisdiction; (v) the FBOT's status in its home
jurisdiction and its rules and enforcement thereof (including market
surveillance and trade practice surveillance); and (vi) extant
information-sharing agreements among the Commission, the FBOT, and
the FBOT's regulatory authority. When issued, the terminal placement
no-action letters conclude with a standard set of terms and
conditions for the granting of the relief which include, among other
things, a quarterly volume reporting requirement.''
See 71 FR 34070, 34071 (June 13, 2006).
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Essentially, as it has evolved, the staff review seeks to determine
that the applicant foreign board of trade is subject to governmental
authorization, appropriate rules prohibiting abusive trading practices,
and continuing oversight by a regulator that has powers to intervene in
the market and share information with the Commission. This review
generally reflects the internationally accepted approaches used by many
developed market jurisdictions to govern access to foreign electronic
exchanges. These approaches generally are based upon a review of, and
ongoing reliance upon, the foreign market's ``home'' regulatory regime,
and are designed to maintain regulatory protections while avoiding the
imposition of duplicative regulation.\33\
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\33\ See, e.g., United Kingdom Financial Services Authority,
Financial Services Handbook, Recognised Overseas Investment
Exchanges (ROIE) and Recognised Overseas Clearing Houses (ROCH),
Section 6. (In comparison with full authorisation as a domestic
exchange, ROIE status ``reduces the involvement which UK authorities
need to have in the day-to-day affairs of an overseas recognised
body because they are able to rely substantially on the supervisory
and regulatory arrangements in the country where the applicant's
head office is situated.'' See FSA Handbook, REC 6.1.2 https://
fsahandbook.info/FSA/html/handbook/REC/6/1.); Australian Securities
and Investments Commission (ASIC) Policy Statement 177.8 describing
alternative licensing for overseas markets (``the alternative
licensing route in s795B(2) for overseas markets is intended to
facilitate competition and avoid regulatory duplication while
maintaining investor protection and market integrity.''); Ontario
Securities Commission Staff Notice 21-702: Regulatory Approach for
Foreign-Based Stock Exchanges (exemption from recognition under
section 147 of the Securities Act (Ontario); Autorite des marches
financiers (Quebec): Policy Statement Respecting the Authorization
of Foreign-Based Exchanges; the German Bundesanstalt f[uuml]r
Finanzdienstleistungsaufsicht (BAFIN) authorizes the placement of
terminals in Germany under Sections 37i et seq. of the German
Securities Trading Act.
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The Commission finds that the staff review appropriately addresses
the Commission's concern that relief will only be granted with respect
to bona fide foreign boards of trade.\34\ The Commission also finds
that the staff's review of foreign board of trade representations and
the related information submitted with respect to system integrity,
clearing procedures and default protections is appropriately focused
and respects the prohibitions of section 4(b). Finally, the various
terms and conditions that have been imposed in the no-action letters
have been reasonably and appropriately tailored to the factual
circumstances raised by the applications for no-action relief.
---------------------------------------------------------------------------
\34\ See Section I supra.
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Accordingly, the Commission endorses the general scope of review
that was established in the DTB no-action letter, and as it has evolved
in subsequent staff letters. The Commission also reconfirms its prior
endorsement of the use of the IOSCO Screen-Based Trading Principles as
a general template to guide its inquiry into the foreign board of
trade's electronic trading system. The Commission notes that in 2000
IOSCO reaffirmed the continuing appropriateness of the Screen-Based
Trading Principles, concluding that they retained their relevancy
despite the evolution and increasing sophistication of electronic
systems ten years after their adoption, and that they constitute an
internationally accepted framework for the oversight of screen-based
derivatives trading systems.\35\
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\35\ Principles for the Oversight of Screen-Based Trading
Systems for Derivative Products--Review and Addition, IOSCO
Technical Committee (2000) at p. 5, section III, Part 1. https://
www.iosco.org/library/index.cfm?section=pubdocs&year=2000. In this
``Review and Addition,'' IOSCO adopted four additional principles
that encouraged regulatory authorities to develop cooperative
arrangements to address risks that arise from cross-border
derivatives markets, to share relevant information in an efficient
and timely manner, to maintain a transparent framework for
regulatory cooperation, and to take into account a jurisdiction's
application of the IOSCO Objectives and Principles of Securities
Regulation.
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In this connection, staff's discretionary, selective reference to
broad regulatory objectives, such as those contained in the CEA's Core
Principles and in internationally-accepted standards,\36\ deemed by
staff in its discretion to be reflective of a bona fide regulatory
regime,\37\ is an appropriate, non-prescriptive means to structure its
review for the purposes of determining the bona fide status of a
foreign board of trade. This observation is not intended to suggest
that the review should require substituted compliance with CEA market
designation or registration requirements, apply any prescriptive
approach,\38\ or otherwise be expanded into a quasi-designation
process.\39\
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\36\ See, e.g., Objectives and Principles of Securities
Regulation, International Organization of Securities Commissions
(IOSCO); and the Tokyo Communiqu[eacute] on Supervision of Commodity
Futures Markets (1997), Annex B: Guidance on Components of Market
Surveillance and Information Sharing. Annex B of the Tokyo
Communiqu[eacute] establishes a non-prescriptive framework for
undertaking market surveillance, the types of information to which
market authorities should have access and collect, the appropriate
analysis of information, the type of powers and capacity to
investigate market abuse, the appropriate powers to intervene in the
market to address abusive practices or disorderly conditions, the
need for powers to impose disciplinary sanctions against members of
the market as well as non-members, and the components of effective
information sharing.
\37\ See, e.g., CEA Core Principle 4, section 5(b) of the CEA,
for designated contract markets, which requires the monitoring of
trading to prevent manipulation, price distortion, and disruption of
the delivery or cash settlement process. Principle 28 of the IOSCO
Objectives and Principles of Securities Regulation states that
``regulation should be designed to detect and deter manipulation and
other unfair trading practices.''
\38\ In adopting the 1990 IOSCO Screen-Based Principles, the
Commission made clear that ``they establish general policy goals
that will guide the Commission in resolving issues arising from
screen-based trading systems, but do not mandate a particular
substantive response.'' 55 FR 48671, 48672 (November 21, 1990).
\39\ See generally, footnote 30.
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C. The Commission Intends To Preserve the Flexibility and Adaptability
of the No-Action Process
The Commission's endorsement of the no-action process's overall
approach and scope of review is not intended to limit the staff's
ability to adapt or modify its review as it deems necessary to
determine the bona fide status of a foreign board of trade, or to
address any particular U.S. customer protection or market integrity
concerns, as identified in Section 3(b) of the CEA, that might be
raised by a request for no-action relief. The Commission understands
that staff potentially may need to adapt its analysis, as well as the
scope and depth of its inquiry, to address changing factual
circumstances and any specific regulatory concerns.\40\
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\40\ See, e.g., CL 25 ( Chicago Board of Trade) at 1: ``We do
believe that the analysis preceding the issuance of no-action
letters must constantly be re-evaluated and updated to reflect
changes and developments in today's dynamic marketplace.''
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[[Page 64448]]
Similarly, there should be broad discretion under the no-action
process to determine, based on the totality of factors, that the
foreign exchange and the applicable regulatory regime meet relevant
regulatory objectives, notwithstanding that a particular aspect of the
foreign jurisdiction's approach is not identical to that of the
Commission's regulatory program.\41\ In this regard, the Commission
recognizes that in an international context, common regulatory
objectives can be attained through different regulatory means.\42\ The
mere fact that a foreign jurisdiction has determined to achieve a
regulatory objective in a manner that is different than the
Commission's approach often is the result of varied business histories,
experiences and legislative choices. The determinative factor in the
review should be an affirmative conclusion that the regulatory
structure in question addresses the particular regulatory objective
deemed to be most relevant.\43\
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\41\ Compare Appendix A, Part 30 Interpretative Statement with
Respect to the Commission's Exemptive Authority under Sec. 30.10 of
Its Rules, 17 CFR Part 30, Appendix A: ``In this connection, the
Commission would have broad discretion to determine that the
policies of any program element generally are met, notwithstanding
the fact that the offshore program does not contain an element
identical to that of the Commission's regulatory program and
conversely may assess how particular elements are in fact applied by
offshore authorities.''
\42\ See IOSCO Principles and Objectives of Securities
Regulation at 3: ``There is often no single correct approach to a
regulatory issue. Legislation and regulatory structures vary between
jurisdictions and reflect local market conditions and historical
development.''
\43\ This can be confirmed through the applicant's submission of
representations and relevant statutes, rules and statements of
policy, regulatory and self-regulatory oversight reports,
confirmations of good standing by the oversight regulator, and
informal staff discussions with relevant officials of the exchange
and its oversight regulator. The Commission understands the term
``regulatory structure'' broadly to include the regulations and
policies of the exchange, its regulator or another self-regulatory
organization, as well as relevant laws and regulations.
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III. Whether Objective Threshold Standards Should Be Developed That
Would Indicate That a Board of Trade Is No Longer Located Outside the
United States for Purposes of Section 4(A) of the CEA Such That the
Commission Should Require DCM Designation or DTEF Registration
In its release issued in advance of the June 2006 public hearing,
the Commission requested comment on, among other things, what level of
presence by a foreign board of trade would be a reasonable threshold
for determining whether to require DCM/DTEF registration and in
particular whether volume should be a determinative factor.\44\ The
Commission also requested comment on whether it would be appropriate
for the Commission to exercise jurisdiction over foreign boards of
trade that permit direct access when they list contracts with
underlying products that are integral to the U.S. economy.\45\
---------------------------------------------------------------------------
\44\ 71 FR 34073 (June 13, 2006).
\45\ Id.
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A. The Commission Is Not Developing Objective Standards Establishing a
Threshold Test of U.S. Location
As noted above in the summary of comments and hearing discussions,
most commenters rejected any wholesale, mechanistic adoption of
threshold indicators of U.S. location. A theme voiced by many
commenters was that the Commission should not attempt to formalize any
objective ``bright line'' test of U.S. location, particularly during a
period of rapid changes in the technology of direct access and market
communication, as well as in global business structures and
relationships.\46\ Among the reasons noted by U.S. industry commenters
in particular for not adopting objective standards establishing a
threshold test of U.S. location at this time were: the difficulty of
developing threshold criteria that would not be viewed as
arbitrary,\47\ the difficulty of determining primary location in a
period of rapid structural change in the futures industry,\48\ the
possible inhibition of structural and technological innovation,\49\ and
the danger that an overly-inclusive criterion could result in
duplicative regulation \50\ as well as a protectionist response in
other jurisdictions that might inhibit the ability of the U.S. futures
industry to compete effectively on a global basis.\51\
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\46\ See, e.g., CL 3 (comments of Ben Steil, Director of
International Economics, Council on Foreign Relations) at 2.
\47\ See CL 2 (New York Board of Trade) at 2; and CL 28 (Futures
Industry Association) at 11.
\48\ See CL 25 (Chicago Board of Trade) at 9: ``* * * with
cross-border joint ventures and mergers between boards of trade both
existing and proposed, it is likely to become more and more
difficult to determine the primary location of an exchange.''
\49\ See CL 2 (New York Board of Trade) at 2: ``Similarly, we do
not believe that defining ``location'' on the basis of management,
ownership arrangements or the location of offices and technology of
an exchange is instructive, as they are likely to change over time
and certain functions, such as clearing and technology services,
lend themselves to outsourcing.'' See also CL 9 (Chicago Mercantile
Exchange) at 7: ``For example, a U.S. exchange serving EU customers
is likely to maintain an EU sales office and sales representatives,
an EU technical office or outsourced technical services to install
and service networks, routers and terminals, banking connections,
delivery facilities and data centers and/or communication hubs. In
the near future, if distributed computing makes trade matching more
effective, some part of the matching operations may occur in the EU.
It is not difficult to imagine the adverse consequences if each of
the jurisdictions in which these operations take place were to
assert its right to regulate.''
\50\ See CL 9 (Chicago Mercantile Exchange, Inc.) at 7.
\51\ See CL 2 (New York Board of Trade) at 2: ``such an approach
runs the risk of creating barriers to U.S. exchanges as they attempt
to expand business abroad;'' CL 7 (Minneapolis Grain Exchange) at 2;
CL 25 (Chicago Board of Trade) at 7; CL 9 (Chicago Mercantile
Exchange, Inc.) at 6; CL 28 (Futures Industry Association) at 11; CL
43 (New York Mercantile Exchange) at 8; and NC 4 (Chicago Mercantile
Exchange Holdings Inc) at 2.
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For the reasons noted above, the Commission has decided not to
adopt any objective standards establishing a threshold test of U.S.
location. Commission staff will continue to assess the legitimacy of
any particular applicant to seek relief as a ``foreign'' board of trade
by considering the totality of factors presented by an applicant. This
flexible, case-by-case approach will permit staff, during a period of
evolving market structure, to consider the unique combination of
factual indicators of U.S. presence that may be presented by an
applicant for relief.\52\
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\52\ See CL 43 (New York Mercantile Exchange) at 6.
``Accordingly, while the Commission may want to reserve for the
future the possibility to revisit this area, we believe by far the
best approach at this point in time would be to provide guidance to
Commission staff in the continuation of the ongoing staff no-action
letter process.''
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B. Volume Is Not a Determinative Indicator of U.S. Location
The relevancy of U.S-originating volume as a means to determine
whether a foreign-organized electronic exchange is ``located'' in the
United States for purposes of CEA section 4(a) has been a long-
standing, unresolved issue since the issuance of the DTB no-action
letter.\53\
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\53\ The Commission had noted in its 1998 Concept Release that
`` by conditioning its letter on the DTB providing the Division
[staff] with quarterly updates of DTB's U.S.-originating trading
volume, the Division intended to leave open the possibility that at
some point DTB's activities in the U.S. might rise to a level that
would necessitate greater Commission regulation.'' See 63 FR 39779,
39781 (July 24, 1998).
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Notwithstanding the intuitive appeal of using volume as a proxy for
U.S. presence, neither the Commission nor the futures industry in its
extended consideration of this issue during the Commission's 1998-1999
rulemaking on access to automated boards of trade could reach consensus
on the specific manner in which volume could be usefully applied to
determine when a foreign board of trade's U.S. presence required
contract market designation.\54\
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\54\ See 64 FR at 14170.
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Comments submitted in response to the Commission's recent Request
for Comment, as well as statements made at the related public hearing,
reiterated the
[[Page 64449]]
various problems associated with the use of volume, such as the
regulatory uncertainty that would result from using a constantly
fluctuating variable such as volume, the arbitrary nature of any fixed
percentage, the difficulties in accurately measuring U.S.-based volume,
and the possible inhibiting effect on exchanges' global activities.\55\
Significantly, all of the U.S. futures exchanges agreed, as did foreign
exchanges, that volume was not a stable indicator of U.S. presence for
the purpose of requiring DCM designation or DTEF registration.\56\
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\55\ As noted at the Commission's Hearing, it is inevitable that
as exchanges consolidate, they will list contracts that are of great
economic interest in other jurisdictions and attract enormous
participation from other jurisdictions. See Hearing Tr. at 100 (Ben
Steil). If significant volume denoted grounds for exchange
licensing, then such an exchange potentially would be subject to
duplicative and burdensome regulation.
\56\ See CL 2 (New York Board of Trade) at 2; CL 7 (Minneapolis
Grain Exchange) at 1; CL 9 (Chicago Mercantile Exchange) at 6; CL 25
(Chicago Board of Trade) at 9-10; CL 43 (New York Mercantile
Exchange) at 7. See also CL 21 (Tokyo Financial exchange) at 1; CL
22 (Federation of European Securities Exchanges) at 3; and CL 23
(Eurex Deutschland) at 7-8 for representative foreign exchange
comment. Letter available at: https://www.cftc.gov/dea/
deaforeignterminaltable.htm.
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Accordingly, the Commission agrees that volume is not determinative
of U.S. location. This conclusion does not mean, however, that volume
statistics should no longer be required from boards of trade operating
under a staff no-action letter, as the submission of volume data may
serve other regulatory interests. The Commission expects that any data
collection requirement would be tailored carefully to provide
meaningful information.
C. Nature of the Underlying Contract Is Not Determinative of
Designation
Some commenters have suggested that the Commission should require
foreign boards of trade that list contracts based on a U.S.-produced or
economically important commodity to obtain contract market designation
rather than be permitted to operate under a staff no-action letter.\57\
In effect, such proposals would make the application of the
parenthetical exclusion from designation in CEA section 4(a) for boards
of trade located outside the U.S. dependent upon the nature of the
commodity underlying a particular futures contract.
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\57\ See CL 25 (Chicago Board of Trade) at 10-11: The statement
of Policy should exclude U.S. Government Securities. See also letter
dated January 27, 2006 from the NYMEX to Reuben Jeffery III: ``The
core regulatory policy question is, of course, whether the WTI crude
oil futures contract is a foreign contract or whether it is a U.S.
futures contract requiring ICE Futures to become a U.S. designated
contract market. * * * NYMEX believes that the new WTI futures
contract is a U.S. product * * * drilled and produced in the US.''
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However, the nature of the underlying commodity is not probative of
the ``location'' of a board of trade for purposes of CEA section 4(a).
Such an approach would lead to the anomalous result of a board of trade
being characterized as ``foreign'' for some contracts, but considered a
``U.S.-based'' exchange for a single contract and therefore required to
seek contract market designation. In addition, several U.S. contract
markets list futures contracts on commodities that are produced or
delivered in foreign jurisdictions. Were the Commission to endorse
using such criteria to require designation, such a policy could be
cited by foreign jurisdictions as a rationale to subject U.S. markets
to regulation.\58\
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\58\ See generally CL 2 (New York Board of Trade).
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IV. Enhancements to the No-Action Process
Notwithstanding its endorsement of the no-action process, the
Commission has identified additional enhancements that are intended to
ensure the availability of necessary information, and to ensure that
staff will carefully consider proposals for trading contracts that
potentially could have an adverse effect on the ability of the
Commission to carry out its regulatory responsibilities.
A. The Trading of Contracts That May Adversely Affect the Commission's
Regulatory Responsibilities Should Be Addressed
Should staff become aware that the trading of products listed on a
foreign board of trade that has been granted no-action relief:
Affects adversely the pricing of contracts traded on
any registered entity as defined in Section 1a(29) of the CEA, or of
contracts traded on any cash market for commodities subject to the
CEA;
Creates unacceptable systemic risks or disruptions in
those markets or the U.S. financial system, including capital
markets; or
Facilitates abusive trading practices on U.S. markets
or otherwise interferes with the ability of the Commission to carry
out its regulatory responsibilities, in particular market
surveillance,
staff may exercise its discretion and consider a full range of
responses, such as imposing conditions and requiring enhanced
information sharing arrangements and surveillance procedures (see
below), or other appropriate action. In this regard, the Commission
retains plenary authority to address manipulative or abusive trading
practices that affect U.S. futures and cash markets and market
users,\59\ and will use that authority when necessary and appropriate.
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\59\ See, e.g., CEA Section 9(a)(2), 7 U.S.C. 13(a)(2) and CEA
section 8a(5), 7 U.S.C. 12a(5).
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B. Enhanced Information Sharing Procedures Should Be Adopted
In a global market environment, where conduct that takes place on
markets located outside the United States may have an impact on U.S.
futures and cash markets, as well as the members and users of those
markets, the Commission needs to cooperate closely with foreign market
authorities in order to ensure that the Commission can carry out its
regulatory responsibilities. The Commission therefore endorses the
existing practice of requiring information sharing assurances as a
condition to issuance of a no-action letter and continued activities
pursuant to the granted relief. However, in light of the Commission's
experiences in this area, as well as the development of internationally
accepted information sharing arrangements and standards, the following
enhancements are appropriate.
1. Exchange and Its Regulator Should Have Power, Authority and
Willingness To Share Needed Information
In negotiating information sharing arrangements, staff should
confirm that the market and its regulator have the power to obtain the
specific types of information that may be needed by the Commission, as
well as the authority to share that information with the Commission on
an ``as needed'' basis. Moreover, staff should obtain evidence of the
market's and regulator's willingness to share information (e.g.,
through explicit undertakings). In this regard, staff should note
whether the applicant's regulator has signed the IOSCO Multilateral
Memorandum of Understanding (MMOU), which requires as a condition to
executing the MMOU a demonstration of power, authority and willingness
to share information. If the applicant's regulator is not a signatory
of the IOSCO MMOU, staff should ascertain whether any prohibitions to
information sharing exist.
2. Applicants for No-Action Relief Should Sign the Exchange
International MOU
When exchange member firms and market participants trade on
multiple global exchanges, no one regulator or market authority will
have all of the information necessary to evaluate the risks to its
markets. The Exchange
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International Information Sharing Memorandum of Understanding and
Agreement (Exchange International MOU) \60\ and the Declaration on
Cooperation and Supervision of International Futures Exchanges and
Clearing Organizations (Declaration),\61\ a companion arrangement for
regulators, were developed in 1996 as an international response to
address such gaps in information. These arrangements facilitate the
identification of large exposures by firms that could have a
potentially adverse effect on multiple markets.
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\60\ The development of the Exchange International MOU was one
of the achievements that resulted from the FIA sponsored Global Task
Force on Financial Integrity, which was convened to address the
cross-border issues that were identified in connection with the
failure of Barings Plc. To date, fifty-six global derivatives
exchange
