Petition of Hard Eight Futures, LLC for Exemptive Relief, Pursuant to Section 4(c) of the Commodity Exchange Act, From Section 2(a)(1)(C)(iv) of the Commodity Exchange Act and Appendix D to Part 30 of the Rules of the Commodity Futures Trading Commission, 34429-34434 [2010-14680]
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Federal Register / Vol. 75, No. 116 / Thursday, June 17, 2010 / Notices
exercises was below the Navy’s
proposed 2009 operations.
Planned Activities for 2010
In 2010, the Navy expects to conduct
the same type and amount of training
identified in the final rules and 2009
LOAs. No modification is proposed by
the Navy for its planned 2010 activities.
Estimated Take for 2010
The estimated takes for the Navy’s
proposed 2010 training exercises are the
same as those in authorized in 2009. No
change has been made in the estimated
takes from the 2009 LOAs.
Summary of Monitoring, Reporting,
and other requirements under the 2009
LOA
Annual Exercise Reports
The Navy submitted their 2009
exercise report within the required
timeframes and it is posted on NMFS
website: https://www.nmfs.noaa.gov/pr/
permits/incidental.htm. NMFS has
reviewed the report and it contains the
information required by the 2009 LOAs.
The report lists the amount of training
exercises conducted between June 2009
and January 2010. For training exercises
conducted at the VACAPES Range
Complex, the Navy conducted 26
exercises out of the total of 176
proposed. For training exercises at the
JAX Range Complex, the Navy
conducted 4 out of 175 exercises
proposed. No training exercise was
conducted at the Cherry Point Range
Complex, though a total of 38 exercises
were proposed.
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Monitoring and Annual Monitoring
Reports
The Navy conducted the monitoring
required by the 2009 LOA and described
in the Monitoring Plan, which included
aerial and vessel surveys of training
exercises by marine mammal observers.
The Navy submitted their 2009
Monitoring Report, which is posted on
NMFS’ website (https://
www.nmfs.noaa.gov/pr/permits/
incidental.htm), within the required
timeframe. The Navy included a
summary of their 2009 monitoring effort
and results (beginning on page 3 of the
monitoring report).
Integrated Comprehensive Management
Program (ICMP) Plan
The ICMP will be used both as: (1) a
planning tool to focus Navy monitoring
priorities (pursuant to ESA/MMPA
requirements) across Navy Range
Complexes and Exercises; and (2) an
adaptive management tool, through the
consolidation and analysis of the Navy’s
monitoring and watchstander data, as
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16:13 Jun 16, 2010
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well as new information from other
Navy programs (e.g., research and
development), and other appropriate
newly published information. The Navy
finalized a 2009 ICMP Plan outlining
the program on December 22, 2009, as
required by the 2009 LOA. The ICMP
may be viewed at: https://
www.nmfs.noaa.gov/pr/permits/
incidental.htm.
The ICMP is a program that will be in
place for years and NMFS and Navy
anticipate the ICMP may need to be
updated yearly in order to keep pace
with new advances in science and
technology and the collection of new
data.. In the 2009 ICMP Plan, the Navy
outlines three areas of targeted
development for 2010, including:
• Identifying more specific
monitoring sub-goals under the major
goals that have been identified
• Characterizing Navy Range
Complexes and Study Areas within the
context of the prioritization guidelines
described here
• Continuing to Develop Data
Management, Organization and Access
Procedures
Adaptive Management and 2010
Monitoring Plan
NMFS and the Navy conducted an
adaptive management meeting in
October 2009 wherein we reviewed the
Navy monitoring results through August
1, 2009, discussed other Navy research
and development efforts, and discussed
other new information that could
potentially inform decisions regarding
Navy mitigation and monitoring.
Because this is the first year of the
regulation’s period of effectiveness, the
review only covered about 7 months of
monitoring, which limited NMFS and
the Navy’s ability to undertake a robust
review of the Navy’s exercises and their
effects on marine mammals. Based on
the implementation of the 2009
monitoring, the Navy proposed some
minor modifications to their monitoring
plan for 2010 for VACAPES and JAX
Range Complex training exercises,
which NMFS agreed were appropriate.
Beyond those changes, none of the
information discussed led NMFS to
recommend any modifications to the
existing mitigation or monitoring
measures. The final modifications to the
monitoring plan and justifications are
described in Section 7(b)(i)(A) of the
2010 LOAs for VACAPES and JAX
Range Complexes, which may be
viewed at: https://www.nmfs.noaa.gov/
pr/permits/incidental.htm. As
additional data is obtained in
subsequent years, NMFS and Navy will
be better positioned to conduct more
extensive reviews and modify existing
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34429
mitigation and monitoring measures, if
appropriate.
Authorization
The Navy complied with the
requirements of the 2009 LOAs. Based
on our review of the record, NMFS has
determined that the marine mammal
take resulting from the 2009 military
readiness training and research
activities falls within the levels
previously anticipated, analyzed, and
authorized, and was likely lower given
the fact that Navy conducted fewer
operations in 2009 than originally
planned. Further, the level of taking
authorized in 2010 for the Navy’s
training exercises at VACAPES, JAX,
and Cherry Point Range Complexes is
consistent with our previous findings
made for the total taking allowed under
these Range Complexes regulations.
Finally, the record supports NMFS’
conclusion that the total number of
marine mammals taken by the 2010
training exercises at VACAPES, JAX,
and Cherry Point Range Complexes will
have no more than a negligible impact
on the affected species or stock of
marine mammals and will not have an
unmitigable adverse impact on the
availability of these species or stocks for
taking for subsistence uses.
Accordingly, NMFS has issued three
one-year LOAs for Navy training
exercises conducted at these East Coast
Range Complexes from June 5, 2010,
through Juan 4, 2011.
Dated: June 3, 2010.
James H. Lecky,
Director, Office of Protected Resources,
National Marine Fisheries Service.
[FR Doc. 2010–14662 Filed 6–16–10; 8:45 am]
BILLING CODE 3510–22–S
COMMODITY FUTURES TRADING
COMMISSION
Petition of Hard Eight Futures, LLC for
Exemptive Relief, Pursuant to Section
4(c) of the Commodity Exchange Act,
From Section 2(a)(1)(C)(iv) of the
Commodity Exchange Act and
Appendix D to Part 30 of the Rules of
the Commodity Futures Trading
Commission
AGENCY: Commodity Futures Trading
Commission.
ACTION: Notice of petition and request
for comment.
SUMMARY: Hard Eight Futures, LLC
(‘‘HEF’’) has petitioned the Commodity
Futures Trading Commission
(‘‘Commission’’ or ‘‘CFTC’’) for
exemptive relief, pursuant to Section
4(c) of the Commodity Exchange Act
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mstockstill on DSKH9S0YB1PROD with NOTICES
(‘‘Act’’ or ‘‘CEA’’),1 to permit U.S. eligible
contract participants (‘‘ECPs’’),2 subject
to certain conditions, to trade foreign
non-narrow-based security index futures
contracts where the foreign exchange
has not obtained a staff no-action letter
with respect to the offer and sale of such
futures contracts to U.S. persons. The
conditions proposed in HEF’s petition
are: (i) Relief is only available for
futures on broad-based security indexes;
(ii) the securities comprising such an
index are principally traded on, by, or
through any exchange or market located
outside the U.S.; (iii) the Commission
must have a Memorandum of
Understanding with the foreign
exchange’s regulator with respect to
information sharing and cooperation; 3
and (iv) an ECP seeking to claim the
exemption would file notice with the
Commission, which would be effective
with respect to that person and index,
unless the Commission notifies the
person within ten (10) business days
that the claimant does not meet the
requirements of the exclusion, or that
the index does not qualify as broad
based.
The Commission seeks comment on
HEF’s petition and related questions.
Copies of the petition are available for
inspection at the Office of the
Secretariat by mail at the address listed
below, by telephoning (202) 418–5100,
or on the Commission’s Web site
(https://www.cftc.gov).
DATES: Comments must be received on
or before July 19, 2010. Comments must
be in English or, if not, accompanied by
an English translation.
ADDRESSES: Comments should be sent to
David A. Stawick, Secretary,
Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581. Comments may be sent by
facsimile transmission to (202) 418–
5521, or by e-mail to
hardeightfutures@cftc.gov. Reference
should be made to ‘‘Hard Eight Futures
Petition for Exemption from Section
2(a)(1)(C)(iv) of the Act and Appendix D
to Part 30 of the Rules of the
Commission.’’ Comments may also be
submitted by connecting to the Federal
eRulemaking Portal at https://
www.regulations.gov and following the
comment submission instructions.
17
U.S.C. 6(c).
term ‘‘eligible contract participant’’ is
defined in Section 1a(12) of the Act, 7 U.S.C. 1a(12).
3 A foreign exchange seeking to offer foreign
security index futures to the general public in the
U.S. would still need staff no-action relief, and if
it sought to do so through terminals located in the
U.S., it would still need a second ‘‘direct access noaction letter’’ from the staff.
2 The
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Comments will be published on the
Commission’s Web site.
FOR FURTHER INFORMATION CONTACT:
Julian E. Hammar, Assistant General
Counsel, Office of General Counsel,
Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581. Telephone: (202) 418–5118. Email: jhammar@cftc.gov or Edwin J.
Yoshimura, Counsel, Office of General
Counsel, Commodity Futures Trading
Commission, 525 W. Monroe Street,
Suite 1100, Chicago, IL 60661.
Telephone: (312) 596–0562. E-mail:
eyoshimura@cftc.gov.
SUPPLEMENTARY INFORMATION:
I. Background
In general, foreign exchange-traded
futures and commodity option products
may be offered or sold by properly
registered or exempt intermediaries to
persons located in the U.S., without
prior product approval.4 Special review
procedures apply, however, to the offer
or sale of futures contracts based on a
group or index of securities (‘‘security
index’’).5 Specifically, Section
2(a)(1)(C)(iv) of the CEA 6 generally
prohibits any person from offering or
selling a futures contract based on a
security index in the U.S., except as
otherwise permitted under Section
2(a)(1)(C)(ii) or Section 2(a)(1)(D).7 By
its terms, Section 2(a)(1)(C)(iv) applies
to futures contracts on security indexes
traded on both domestic and foreign
boards of trade.
Section 2(a)(1)(C)(ii) of the CEA 8 sets
forth three criteria to govern the trading
of futures contracts on a security index
to be traded on contract markets and
derivatives transaction execution
4 See Foreign Commodity Options, 61 FR 10891
(Mar. 18, 1996).
5 The CEA, as amended by the Commodity
Futures Modernization Act of 2000 (‘‘CFMA’’),
Appendix E of Public Law No. 106–554, 114 Stat.
2763 (2000), provides that the offer or sale in the
U.S. of futures contracts based on a security index,
including those contracts traded on or subject to the
rules of a foreign board of trade, is subject to the
Commission’s exclusive jurisdiction, with the
exception of security futures products, over which
the Commission shares jurisdiction with the
Securities and Exchange Commission (‘‘SEC’’). A
security future, in turn, is defined in CEA Section
1a(31) as a futures contract on a single security or
a ‘‘narrow-based security index.’’ 7 U.S.C. 1a(31).
Thus, the Commission’s jurisdiction remains
exclusive with regard to futures contracts on a
security index that is broad-based, i.e., that does not
meet the definition of a ‘‘narrow-based security
index’’ in CEA Section 1a(25), 7 U.S.C. 1a(25).
6 7 U.S.C. 2(a)(1)(C)(iv).
7 CEA Section 2(a)(1)(D), 7 U.S.C. § 2(a)(1)(D),
governs the offer and sale of security futures
products.
8 7 U.S.C. 2(a)(1)(C)(ii).
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facilities designated or registered by the
Commission:
(a) The contract must provide for cash
settlement;
(b) The contract must not be readily
susceptible to manipulation or to being
used to manipulate any underlying
security; and
(c) The security index must not
constitute a narrow-based security
index.9
The CEA does not explicitly address
the standards to be applied to a security
index futures contract traded on a
foreign board of trade. Historically,
though, Commission staff has applied
the aforementioned three criteria in
evaluating requests by foreign boards of
trade seeking to offer and sell their
foreign security index futures contracts
in the U.S. (without becoming
designated as a contract market, or
registered as a derivatives transaction
execution facility).
In reviewing such requests,
Commission staff evaluates the foreign
security index futures contract to ensure
that it complies with the three criteria
of Section 2(a)(1)(C)(ii) of the CEA. In
making its determination, the staff
considers the design and maintenance
of the index, the method of index
calculation, the nature of the component
security prices used to calculate the
index, the breadth and frequency of
index dissemination, and other relevant
factors.10 With respect to whether a
foreign futures contract based on a
foreign security index is not readily
susceptible to manipulation or being
used to manipulate any underlying
security, one preliminary consideration
is the requesting board of trade’s ability
to access information regarding the
securities underlying the index.11
9 With regard to the third criterion, the CFTC and
SEC have jointly promulgated Commission Rule
41.13 under the CEA and Rule 3a55–3 under the
Securities Exchange Act of 1934, governing security
index futures contracts traded on foreign boards of
trade. These rules provide that ‘‘[w]hen a contract
of sale for future delivery on a security index is
traded on or subject to the rules of a foreign board
of trade, such index shall not be a narrow-based
security index if it would not be a narrow-based
security index if a futures contract on such index
were traded on a designated contract market or
registered derivatives transaction execution
facility.’’ Commission Rule 41.13, 17 CFR 41.13;
SEC Rule 3a55–3, 17 CFR 240.3a55–3.
10 See generally Appendix D to Part 30 of the
Commission’s regulations.
11 In general, staff has requested that the foreign
board of trade provide a copy of the surveillance
agreements between the board of trade and the
exchange(s) on which the underlying securities are
traded; assurances that the board of trade will share
information with the Commission, directly or
indirectly; and when applicable, information
regarding foreign blocking statutes and their impact
on the ability of U.S. government agencies to obtain
information concerning the trading of futures
contracts on security indexes. The staff reviews this
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Upon determination by staff that the
subject futures contract and underlying
index comport with the criteria set forth
in Section 2(a)(1)(C)(ii) of the CEA,
Commission staff issues a no-action
letter to the foreign board of trade with
respect to the offer and sale of such
futures contract in the U.S.12 A foreign
board of trade that has received prior
no-action relief with respect to a
particular foreign security index futures
contract must file a new submission for
each foreign security index futures
contract that it seeks to offer or sell in
the U.S.
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II. HEF’s Petition
By letter dated April 21, 2008
(‘‘Petition’’), HEF, a registered
commodity trading advisor (‘‘CTA’’),
applied for exemptive relief, pursuant to
Section 4(c) of the Act, from Section
2(a)(1)(C)(iv) of the Act and Appendix D
to Part 30 of the Rules of the
Commission.13 According to the
Petition, this exemption is necessary to
promote responsible economic
innovation and fair competition.
Granting the exemption will enable U.S.
ECPs 14 to trade a foreign security index
futures contract even if the foreign
board of trade that lists the contract has
not obtained no-action relief relating to
the offer and sale of that contract to U.S.
persons.
Under the exemptive relief requested
by HEF’s Petition, U.S. ECPs could
trade, on a foreign board of trade,
futures contracts on foreign security
indexes that are not security futures
information to ensure that the requesting foreign
board of trade (and/or its regulator) has the ability
and willingness to access adequate surveillance
data necessary to detect and deter manipulation in
the futures contracts and underlying securities, as
well as share such data with the Commission.
12 A no-action letter generally is a written
statement issued by the staff of a Division or Office
of the Commission 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 by the requestor.
See Commission Rule 140.99(a)(2), 17 CFR
140.99(a)(2). A no-action letter to a foreign board of
trade does not affect or alter the application of Part
30 of the Commission’s Rules, which governs the
offer and sale by financial intermediaries of foreign
futures and foreign option contracts to persons
located in the U.S.
13 Appendix D to Part 30 sets forth the process by
which Commission staff evaluates requests for noaction relief from foreign boards of trade seeking to
offer and sell their futures contracts on non-narrowbased security indexes in the U.S., and sets forth
the information that such a foreign board of trade
should submit when seeking no-action relief. 17
CFR Part 30, Appendix D.
14 The CEA provides that the Commission may
only issue exemptive relief to ‘‘appropriate persons’’
as described in CEA Section 4(c)(3), 7 U.S.C. 6(c)(3).
For purposes of its Petition, HEF requests that the
Commission define ‘‘appropriate persons’’ as
including all ECPs.
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16:13 Jun 16, 2010
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products (i.e., the index is not a narrowbased security index) on the same basis
as they may trade any other futures
contract on a foreign board of trade.
Currently, no prior qualifying action by
the Commission or its staff is required
in order for U.S. persons to enter into
non-security-based futures contracts
traded on a foreign board of trade.
Rather, U.S. customers are permitted to
access futures products offered by a
foreign board of trade through a U.S.
registered futures commission merchant
or introducing broker, or through a
foreign firm pursuant to an exemption
under Commission Rule 30.10.15 HEF’s
Petition asks that for U.S. ECPs, the
same rules apply to foreign security
index futures contracts as well.
III. SEC Exemptive Order Regarding
Foreign Security Futures
Due to the applicability of the federal
securities laws, though, security index
futures are not the same as futures on
non-security based commodities. In this
regard, with respect to security futures
products (i.e., futures on a single
security or a narrow-based security
index) traded on foreign boards of trade,
Section 2(a)(1)(E) of the CEA and
Section 6(k) of the Securities Exchange
Act of 1934 (‘‘Exchange Act’’) provide
that: (i) The CFTC and SEC ‘‘shall jointly
issue such rules, regulations, or orders
as are necessary and appropriate to
permit the offer and sale of a security
futures product traded on or subject to
the rules of a foreign board of trade to
United States persons;’’ and (ii) such
rules, regulations or orders ‘‘shall take
into account, as appropriate, the nature
and size of the markets that the
securities underlying the security
futures product reflects.’’ 16
After HEF’s Petition was filed, the
SEC on June 30, 2009, issued an Order
(‘‘SEC Order’’) 17 exempting certain
persons from Section 6(h)(1) of the
Exchange Act, which makes it unlawful
for U.S. persons to enter into security
futures traded on foreign boards of trade
(‘‘foreign security futures’’).18 The SEC
Order, among other things, permits
certain sophisticated investors to access
foreign security futures and provides
relief for certain intermediaries in order
to effect these transactions under certain
conditions, including that the ‘‘primary
15 17
CFR 30.10.
U.S.C. 2(a)(1)(E); 15 U.S.C. 78f(k).
17 See Order Under Section 36 of the Securities
Exchange Act of 1934 Granting an Exemption From
Exchange Act Section 6(h)(1) for Certain Persons
Effecting Transactions in Foreign Security Futures
and Under Exchange Act Section 15(a)(2) and
Section 36 Granting Exemptions From Exchange
Act Section 15(a)(1) and Certain Other
Requirements, 74 FR 32200 (July 7, 2009).
18 15 U.S.C. 78f(h).
16 7
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34431
trading market’’ for the underlying
securities of foreign private issuers is
outside the U.S.19 Specifically, the
sophisticated investors to which the
SEC Order applies include qualified
institutional buyers (‘‘QIBs’’) as defined
in SEC Rule 144A under the Securities
Act of 1933.20 A QIB is generally an
entity that owns and invests on a
discretionary basis at least $100 million
in securities of unaffiliated issuers; it is,
therefore, a narrower class of investors
than the class of ECPs as defined in the
CEA.21
The relief granted by the SEC Order,
although not coterminous with the relief
requested by HEF, is relevant to HEF’s
Petition. Prior to the SEC Order, if a
foreign broad-based security index
underlying a foreign exchange-traded
futures contract became a narrow-based
security index for a certain period of
time, a U.S. person had to exit its
position in that futures contract during
a specified grace period, or be in
violation of the Exchange Act’s
prohibition on trading foreign security
futures.22 Since June 30, 2009, though,
if an ECP is eligible for and the contract
satisfies the requirements for the
exemption issued in the SEC Order, the
ECP could continue to trade such a
contract as a foreign security future
pursuant to the terms and conditions of
the SEC Order. But if an ECP is not
eligible—that is, if the ECP does not
meet the high threshold to qualify as a
QIB—or the contract is not eligible
under the SEC Order, then the ECP
would not have relief in trading such a
contract.
19 In light of questions received following the
issuance of the SEC Order, the Commission’s
Division of Clearing & Intermediary Oversight has
recently issued an ‘‘Advisory Concerning the Offer
and Sale of Foreign Security Futures Products to
Customers Located in the United States.’’
20 15 U.S.C. 77a et seq.
21 17 CFR 230.144A (a QIB is one of the
enumerated entities, ‘‘acting for its own account or
the accounts of other qualified institutional buyers,
that in the aggregate owns and invests on a
discretionary basis at least $100 million in
securities of issuers that are not affiliated with the
entity’’).
22 If an index becomes narrow-based for more
than 45 business days over three consecutive
calendar months, the CEA and the Exchange Act
provide a grace period of three months during
which the index is excluded from the definition of
a ‘‘narrow-based security index.’’ See Section
1a(25)(D) of the CEA, 7 U.S.C. 1a(25)(D) and Section
3(a)(55)(E) of the Exchange Act, 15 U.S.C.
78c(a)(55)(E). Although these provisions apply to
security index futures contracts traded on certain
U.S. exchanges, by joint regulation, the Commission
and the SEC have made these provisions applicable
to security index futures contracts traded on foreign
boards of trade. See Commission Rule 41.13, 17
CFR 41.13 and SEC Rule 3a55–3, 17 CFR 240.3a55–
3.
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Federal Register / Vol. 75, No. 116 / Thursday, June 17, 2010 / Notices
Further, this exemption would be
available only for contracts traded on
Section 4(c)(1) of the Act empowers
the Commission to ‘‘promote responsible foreign boards of trade for which the
applicable foreign regulator has entered
economic or financial innovation and
into a Memorandum of Understanding
fair competition’’ by exempting any
(‘‘MOU’’) with respect to information
transaction or class of transactions,
sharing and cooperation with the
including any person offering or
24
entering into such transaction, from any CFTC. Also, the securities comprising
the index underlying the futures
of the provisions of the CEA (subject to
contract would have to be principally
exceptions not relevant here) where the
traded on, by, or through an exchange
Commission determines that the
exemption would be consistent with the or market located outside the U.S.
The Petition does not seek an
public interest.23 The Petition requests
exemption from the requirement that a
relief from the requirement that U.S.
foreign board of trade be granted nopersons may only enter into a futures
action relief before offering and selling
contract on a foreign security index
such foreign security index futures
listed on a foreign board of trade if the
contracts to the general public. Nor does
foreign board of trade has first received
it seek an exemption from the
a letter providing no-action relief to
requirement that such contracts may be
offer and sell that futures contract to
traded through direct access from the
U.S. persons.
U.S. to a foreign board of trade’s
The proposed exemptive relief would
electronic trading system only pursuant
require that a person wishing to trade a
to a Commission staff direct access noparticular security index futures
action letter.25
contract listed on a foreign board of
More specifically, HEF is seeking an
trade that has not received no-action
exemption, pursuant to Section 4(c) of
relief notify the Commission of the
the Act, from Section 2(a)(1)(C)(iv) of
person’s intent to do so. The notice
the Act and 17 CFR Part 30 Appendix
would require the claimant to
D in the following form, with
demonstrate his or her qualification for
conditions:
the exemption (i.e., that he or she is an
(X) Exemption for Eligible Contract
ECP), and that the index is not a narrow- Participants Trading Non-narrow Based
based security index. The exemption
Stock Indexes on a Foreign Board of
would be effective with respect to that
Trade. The Commodity Futures Trading
person and index unless the
Commission, pursuant to its authority
Commission notifies the person within
under Section 4(c)(1) of the Commodity
ten (10) business days that the claimant
Exchange Act, hereby determines that
does not meet the requirements of the
notwithstanding the provisions of
exclusion, or the index does not qualify Section 2(a)(1)(C)(iv) of the Act and
under the Act as a non-narrow based
Appendix D to Part 30 of its Rules,
index (including an explanation of why nothing in the Act is intended to
it considers the person not to be
prohibit any ‘‘eligible contract
qualified or the index to be narrowparticipant,’’ as defined in Section
based, respectively).
1a(12) of the Act, located in the U.S.
from purchasing or carrying futures
23 Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1),
contracts on a securities index that is
provides that:
not a ‘‘narrow-based index’’ as defined in
In order to promote responsible economic or
Section 1a(25) of the Act, traded on or
financial innovation and fair competition, the
Commission by * * * order, after notice and
subject to the rules of a foreign board of
opportunity for hearing, may (* * * on application
trade to the same extent such person
of any person, including any board of trade
may be authorized to purchase or carry
designated or registered as a contract market * * *)
a futures contract on any other
exempt any agreement, contract, or transaction (or
class thereof) that is otherwise subject to subsection
commodity so long as the underlying
(a) of this section (including any person or class of
securities comprising such index are
persons offering, entering into, rendering advice or
principally traded on, by or through any
rendering services with respect to, the agreement,
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IV. Relief Sought by HEF
contract, or transaction), either unconditionally or
on stated terms or conditions or for stated periods
* * * from any * * * provision of this Act (except
subparagraphs (C)(ii) and (D) of section 2(a)(1),
except that the Commission and Securities and
Exchange Commission may by rule, regulation, or
order jointly exclude any agreement, contract, or
transaction from section 2(a)(1)(D)), if the
Commission determines that the exemption would
be consistent with the public interest.
While Section 4(c)(2) of the Act, 7 U.S.C. 6(c)(2),
imposes additional requirements with respect to
any exemption from the requirements of Section
4(a) of the Act, 7 U.S.C. 6(a), HEF is not seeking
such relief.
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24 This could be either a bilateral MOU between
the Commission and the applicable foreign
regulator, or a multilateral MOU such as the
‘‘Multilateral Memorandum of Understanding
Concerning Consultation and Cooperation and the
Exchange of Information’’ created by the
International Organization of Securities
Commissions (‘‘IOSCO Multilateral MOU’’).
25 See Policy Statement Regarding Boards of
Trade Located Outside of the United States and NoAction Relief From the Requirement To Become a
Designated Contract Market or Derivatives
Transaction Execution Facility, 71 FR 64443 (Nov.
2, 2006).
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Frm 00015
Fmt 4703
Sfmt 4703
exchange or market located outside the
United States, and the regulator of such
foreign board of trade has entered into
a Memorandum of Understanding with
respect to information sharing and
cooperation with the Commission.
(a) Notification: Persons wishing to
avail themselves of this exemption shall
so notify the Commission. This
notification shall be filed with the
Secretary of the Commission at its
Washington, D.C. headquarters, in
electronic form, shall be labeled as
‘‘Notification of Trading in a Nonnarrow Based Index Traded on a
Foreign Board of Trade,’’ and shall
include:
(1) The name and address of the
person and representation that the
person qualifies as an Eligible Contract
Participant, and the basis upon which
the person so qualifies;
(2) The name of the non-narrow based
index and of the foreign board of trade
on which the index is traded;
(3) A demonstration that the index is
not a ‘‘narrow-based index’’ under the
definition of Section 1a(25) of the Act;
and
(4) A representation that the regulator
of the foreign board of trade has entered
into an information-sharing agreement
with the Commission or to which the
Commission is also a signatory.
(b) Effective Date: The exemption
shall be effective ten (10) business days
after filing of the notice with the
Commission, unless the Commission
within that period notifies the person
claiming the exemption that the
exemption may not be made effective
with respect to that person and/or that
index and its reason for so finding.
According to HEF, the purpose
behind the no-action process is in
furtherance of Congress’ expressed
intent ‘‘to protect the interests of U.S.
residents against fraudulent or other
harmful practices.’’ 26 HEF maintains
that ECPs, due to their size and
sophistication, are not dependent upon
the terms and conditions imposed on
the trading of foreign security index
futures in the staff’s no-action relief for
protection from fraud. Further, HEF
notes that in the U.S., ECPs currently
are able to trade contracts, agreements,
or transactions that replicate futures
contracts on foreign security indexes in
the over-the-counter (‘‘OTC’’) markets.
HEF states that granting this exemptive
relief will enable ECPs to trade futures
contracts on a foreign board of trade that
are equivalent to contracts that ECPs are
able to trade in the OTC markets.
Because contracts on foreign security
26 H.R. Rep. No. 97–565, Part I, at p. 85 (May 17,
1982).
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17JNN1
Federal Register / Vol. 75, No. 116 / Thursday, June 17, 2010 / Notices
indexes are already traded in the OTC
markets by U.S. ECPs, HEF believes that
it is in the public interest to provide
U.S. ECPs the choice to trade foreign
security indexes in a more regulated,
transparent exchange environment on
foreign boards of trade.
mstockstill on DSKH9S0YB1PROD with NOTICES
V. Request for Comments
The Commission requests public
comment on any aspect of the Petition
that commenters believe may raise
issues under the CEA or Commission
regulations. In particular, the
Commission invites comment regarding
the following:
(1) Conditions Proposed by HEF:
Should an order granting the request for
relief include any one or more of the
conditions proposed by HEF in its
Petition?
(2) Surveillance: In granting no-action
relief to a foreign board of trade seeking
to offer and sell a futures contract on a
foreign security index to U.S. persons,
Commission staff generally rely on
surveillance sharing agreements
between the securities exchanges on
which the securities comprising the
index are traded, and the foreign board
of trade. See infra n.11. Also, before
issuing such no-action relief,
Commission staff often requests a
representation or commitment from the
foreign board of trade of its willingness
and ability to share information with the
Commission. Id. Similarly, in granting
no-action relief to a foreign board of
trade seeking to offer and sell any
futures contract to U.S. persons through
direct access to its electronic trading
system from the U.S., Commission staff
typically confirm that the market and its
regulator have the ability 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,
Commission staff generally obtains
evidence of the foreign market’s and
regulator’s willingness to share
information (e.g., through explicit
undertakings) with the Commission.
To ensure that there are similar
protections in place in the
circumstances posed by HEF’s Petition,
should an order granting the request for
relief require that the foreign board of
trade that lists the foreign security index
futures contract to be traded by the ECP
have: (i) Submitted a pending request
for no-action relief with respect to that
futures contract; (ii) received a prior noaction letter for another foreign security
index futures contract; and/or (iii)
received a foreign direct access no
action letter?
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(3) MOUs: The Commission is
concerned that the condition for an
MOU included in HEF’s Petition may
not be workable in practice, given the
wide spectrum of information sharing
agreements to which the Commission is
a party. An MOU may only mean that
the foreign regulator will share
information, not that it has access to
surveillance information to share.
Should an order granting the relief
requested in HEF’s Petition be
conditioned on the existence of an MOU
that is specifically tailored to obtain the
information that the Commission needs
to assess the efficacy of the foreign
board of trade and its regulator, and to
obtain surveillance information as it
deems necessary? Should any such
relief be limited to foreign security
index futures contracts listed in
jurisdictions that are signatories to the
IOSCO Multilateral MOU?
(4) Broad vs. Narrow-Based Security
Indexes: As discussed above, a futures
contract on a security index that moves
from broad to narrow-based thereby
becomes a security future that may no
longer be traded by U.S. persons subject
to the exclusive jurisdiction of the
CFTC. To ensure full compliance with
the requirements of the CEA and the
federal securities laws, should an order
granting the relief requested in HEF’s
Petition require an undertaking by the
ECP to: (i) Continually monitor the
underlying index to ensure that it
remains broad-based; (ii) notify the
Commission if the index becomes a
narrow-based security index; and (iii) if
the index continues to be narrow-based
for more than 45 business days during
3 consecutive calendar months, to cease
trading the futures contract and
liquidate existing positions in an
orderly manner over the next 3 calendar
months (provided, however, that if the
ECP and the futures contract are eligible
for the exemptive relief granted by the
SEC Order, the ECP may continue to
trade that contract as a foreign security
future)?
(5) Additional Conditions: Should an
order granting the relief requested in
HEF’s Petition require that there be no
solicitation of ECP orders, and/or that
ECPs be required to trade only for their
own account? 27
(6) OTC Derivatives Reform
Legislation: As discussed above, HEF’s
Petition justifies its request for relief, in
part, on the proposition that: (i) U.S.
ECPs currently are able to trade
contracts that replicate futures on
27 Granting the relief requested in HEF’s Petition
would in no way alter the requirements of Part 30
of the Commission’s regulations concerning foreign
futures and options transactions.
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Fmt 4703
Sfmt 4703
34433
foreign security indexes in the
unregulated OTC markets; and (ii) it is
in the public interest to enable them to
do so in a more regulated and
transparent exchange environment on a
foreign board of trade. Yet, legislation
currently pending before the Congress,
if eventually enacted, could change this
premise to some degree, as it would
significantly enhance the transparency
of OTC derivatives and require that
certain swaps (subject to an ‘‘end-user
exception’’) be traded on a contract
market or a ‘‘swap execution facility’’ as
provided for in that legislation. What
are the implications of the OTC
derivatives reform legislation pending
in Congress, if any, on HEF’s Petition?
(7) Foreign Securities: As discussed
above, HEF’s Petition proposes that an
order granting its request for relief be
conditioned upon all the securities in
the index underlying the foreign futures
contract being principally traded on, by,
or through an exchange or market
located outside the U.S. This
‘‘principally traded’’ formulation may be
based on the language of CEA Section
2(a)(1)(F)(ii), which addresses trading of
foreign security futures by ECPs in the
U.S.28 What are the implications, if any,
of the use of this standard in an order
granting the relief requested in HEF’s
Petition in comparison to the ‘‘primary
trading market’’ test that the SEC created
for securities of foreign private issuers
in a narrow-based security index as set
forth in paragraph (1)(a)(ii) of the SEC
Order? 29 Should an order granting the
relief requested in HEF’s Petition treat
securities in an index as being
principally traded on, by, or through an
exchange outside the United States if
they meet the criteria for securities in a
narrow-based security index contained
in paragraph (1)(a)(ii) of the SEC
Order? 30
28 7 U.S.C. 2(a)(1)(F)(ii). See text accompanying
n.31 infra for full text.
29 The SEC Order provides that for U.S. QIBs to
be able to trade foreign security futures, the
securities issued by foreign private issuers that
underlie a foreign security future must have their
‘‘primary trading market’’ outside the U.S. For
purposes of this condition, under the SEC Order a
security’s ‘‘primary trading market’’ is deemed to be
outside the U.S. if at least 55% of the worldwide
trading volume in the security took place in, on, or
through a securities market or markets located in
either: (i) A single foreign jurisdiction; or (ii) no
more than two foreign jurisdictions during the most
recently completed fiscal year. If the trading in the
foreign private issuer’s security is in two foreign
jurisdictions, the trading for the issuer’s security in
at least one of the two foreign jurisdictions must be
greater than the trading in the U.S. for the same
class of the issuer’s securities in order for such
security’s ‘‘primary trading market’’ to be considered
outside the U.S.
30 In addition to securities of foreign private
issuers whose primary trading market is outside the
E:\FR\FM\17JNN1.SGM
Continued
17JNN1
34434
Federal Register / Vol. 75, No. 116 / Thursday, June 17, 2010 / Notices
(8) ECPs vs. QIBs: CEA Section
2(a)(1)(F)(ii), cited in the preceding
paragraph, provides in full as follows:
Nothing in this Act is intended to prohibit
any eligible contract participant located in
the United States from purchasing or carrying
securities futures products traded on or
subject to the rules of a foreign board of
trade, exchange, or market to the same extent
such person may be authorized to purchase
or carry other securities traded on a foreign
board of trade, exchange, or market so long
as any underlying security for such security
futures products is traded principally on, by,
or through any exchange or market located
outside the United States.31
mstockstill on DSKH9S0YB1PROD with NOTICES
As discussed above, the SEC Order
generally limits the category of U.S.
persons that may trade foreign security
futures to QIBs (who own and invest
$100 million or more). This is a
narrower class of investors than ECPs.
The group of persons that satisfy the
ECP definition but may not be QIBs
includes registered investment
companies, commodity pools, pension
plans, corporations and high net worth
individuals. These persons may have a
real need for risk management based
upon exposures in foreign financial
markets or to economic conditions in
other countries, or they may want to
gain exposure to those markets as part
of the asset allocation in their
investment portfolio.
If the relief requested in HEF’s
Petition is granted, an ECP that is a QIB
and trades a foreign futures contract on
a foreign security index that moves from
broad to narrow-based can continue to
trade that contract as a foreign security
future, provided the contract otherwise
meets the requirements of the SEC
Order. An ECP that is not a QIB,
however, would have to exit its position
in the foreign futures contract within
the applicable grace period or be in
violation of the Exchange Act. Given
this difference in legal status, should an
order issued by the Commission
granting the relief requested in HEF’s
Petition be limited to QIBs?
U.S. underlying narrow-based security indexes,
paragraph (1)(a)(ii) of the SEC Order permits debt
securities issued or guaranteed by a foreign
government as defined in Rule 405 of the Securities
Act, 17 CFR 230.405, that are eligible to be
registered with the SEC under Schedule B of the
Securities Act, 15 U.S.C. 77aa. Further, paragraph
(1)(a)(ii) requires that at the time of the transaction,
at least 90% of the index, both in terms of the
number of underlying securities and their weight,
must meet these eligibility requirements. No more
than 10% of the securities in the index, both in
terms of their number and their weight, at the time
of the transaction, that do not meet the
requirements, must be from issuers that are required
to file reports with the SEC pursuant to Section 13
or Section 15(d) of the Exchange Act, 15 U.S.C. 78m
and 78o.
31 7 U.S.C. 2(a)(1)(F)(ii).
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Jkt 220001
With respect to access to foreign
security futures by U.S. persons, are the
conditions contained in the SEC Order
consistent with Section 2(a)(1)(F)(ii) of
the CEA? Should ECPs that are not QIBs
be permitted to trade foreign security
futures? What conditions, if any, should
be imposed on such trading by ECPs
that are QIBs, and ECPs that are not
QIBs? How should an order permitting
ECPs to trade foreign security futures
take into account, as mandated by
Section 2(a)(1)(E) of the CEA, ‘‘the
nature and size of the markets that the
securities underlying the security
futures product reflects?’’
(9) Nature of Foreign Security
Indexes: Lying at the core of the
complex interplay between HEF’s
Petition on the one hand, and the CEA
and the federal securities laws on the
other hand, is the application of the
statutory definition of a ‘‘narrow-based
security index’’ to foreign security
indexes. To the extent that a foreign
security index falls squarely on the
broad-based side of the line, distinctions
between ECPs that are QIBs and those
that are not, and the prospect of an ECP
that is relying on the relief requested by
HEF violating the securities laws, may
be of less concern.
Congress has recognized that ‘‘[t]he
detailed statutory test of a narrow-based
security index was tailored to fit the
U.S. equity markets, which are by far
the largest, deepest and most liquid
securities markets in the world.’’ 32 In
the CFMA in 2000, Congress directed
that the CFTC and the SEC, within one
year, jointly adopt rules or regulations
that set forth requirements for broadbased foreign security indexes traded on
a foreign board of trade.33 And shortly
thereafter, the CFTC and SEC promised
to consider amending the rules
regarding security index futures trading
on or subject to the rules of a foreign
board of trade.34
Should the CFTC and the SEC
establish criteria to exclude appropriate
foreign security indexes from the
definition of a ‘‘narrow-based security
index?’’ If so, on what basis? How
should it be determined whether a
foreign security index is appropriately
treated as a broad-based security index
so that foreign futures on such an index
32 H.R. Rep. No. 110–627 at 983 (2009)
(Conference Report on the CFTC Reauthorization
Act of 2008, Title XIII of the 2008 ‘‘Farm Bill,’’
Public Law No. 110–246, 122 Stat. 1651 (June 18,
2008)).
33 See 7 U.S.C. 1a(25)(B)(iv) and 1a(25)(C); 15
U.S.C. 3(a)(55)(C)(iv) and 3(a)(55)(D).
34 See Method for Determining Market
Capitalization and Dollar Value of Average Daily
Trading Volume; Application of the Definition of
Narrow-Based Security Index, 66 FR 44490, 44501–
44502 (August 23, 2001).
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Frm 00017
Fmt 4703
Sfmt 4703
would trade subject to the exclusive
jurisdiction of the CFTC, or as a narrowbased security index so that foreign
futures on such an index would trade as
foreign security futures? The
Commission encourages commenters to
submit any quantitative data and
analysis to support any proposed
distinctions between broad and narrowbased foreign security indexes.
(10) CEA Section 4(c) Requirements:
• Is the exemption requested in HEF’s
Petition consistent with the
requirements for relief set forth in
Section 4(c) of the CEA?
• Would granting the exemption
requested in HEF’s Petition be
consistent with the public interest and
purposes of the CEA?
• Would granting the relief requested
in HEF’s Petition have any material
adverse effects upon derivatives clearing
organizations, exchanges, or other
Commission registrants from a
competitive or other perspective?
(11) Other Issues: The Commission
welcomes comment on any other issues
relevant to HEF’s Petition for an
exemption.
*
*
*
*
*
Issued in Washington, DC, on June 11,
2010 by the Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.
[FR Doc. 2010–14680 Filed 6–16–10; 8:45 am]
BILLING CODE P
COMMODITY FUTURES TRADING
COMMISSION
Request To Amend an Existing Order
Under Section 4(c) of the Commodity
Exchange Act Permitting Eligible Swap
Participants To Submit for Clearing,
and ICE Clear U.S., Inc. and Futures
Commission Merchants To Clear,
Certain-Over-The-Counter Agricultural
Swaps
AGENCY: Commodity Futures Trading
Commission.
ACTION: Notice of Request for Comment
on an Amendment to an Exemption
Order.
SUMMARY: The Commodity Futures
Trading Commission (‘‘CFTC’’ or
‘‘Commission’’) is requesting comment
on whether to amend an existing order
to extend the exemption granted to ICE
Clear U.S., Inc. (‘‘ICE Clear’’) under
Section 4(c) of the Commodity Exchange
Act (‘‘Act’’) 1 to certain over-the-counter
(‘‘OTC’’) agricultural swaps for which
there is no corresponding futures
contract listed for trading on ICE
17
U.S.C. 6(c).
E:\FR\FM\17JNN1.SGM
17JNN1
]]>Agencies
[Federal Register Volume 75, Number 116 (Thursday, June 17, 2010)]
[Notices]
[Pages 34429-34434]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-14680]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Petition of Hard Eight Futures, LLC for Exemptive Relief,
Pursuant to Section 4(c) of the Commodity Exchange Act, From Section
2(a)(1)(C)(iv) of the Commodity Exchange Act and Appendix D to Part 30
of the Rules of the Commodity Futures Trading Commission
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of petition and request for comment.
-----------------------------------------------------------------------
SUMMARY: Hard Eight Futures, LLC (``HEF'') has petitioned the Commodity
Futures Trading Commission (``Commission'' or ``CFTC'') for exemptive
relief, pursuant to Section 4(c) of the Commodity Exchange Act
[[Page 34430]]
(``Act'' or ``CEA''),\1\ to permit U.S. eligible contract participants
(``ECPs''),\2\ subject to certain conditions, to trade foreign non-
narrow-based security index futures contracts where the foreign
exchange has not obtained a staff no-action letter with respect to the
offer and sale of such futures contracts to U.S. persons. The
conditions proposed in HEF's petition are: (i) Relief is only available
for futures on broad-based security indexes; (ii) the securities
comprising such an index are principally traded on, by, or through any
exchange or market located outside the U.S.; (iii) the Commission must
have a Memorandum of Understanding with the foreign exchange's
regulator with respect to information sharing and cooperation; \3\ and
(iv) an ECP seeking to claim the exemption would file notice with the
Commission, which would be effective with respect to that person and
index, unless the Commission notifies the person within ten (10)
business days that the claimant does not meet the requirements of the
exclusion, or that the index does not qualify as broad based.
---------------------------------------------------------------------------
\1\ 7 U.S.C. 6(c).
\2\ The term ``eligible contract participant'' is defined in
Section 1a(12) of the Act, 7 U.S.C. 1a(12).
\3\ A foreign exchange seeking to offer foreign security index
futures to the general public in the U.S. would still need staff no-
action relief, and if it sought to do so through terminals located
in the U.S., it would still need a second ``direct access no-action
letter'' from the staff.
---------------------------------------------------------------------------
The Commission seeks comment on HEF's petition and related
questions. Copies of the petition are available for inspection at the
Office of the Secretariat by mail at the address listed below, by
telephoning (202) 418-5100, or on the Commission's Web site (https://www.cftc.gov).
DATES: Comments must be received on or before July 19, 2010. Comments
must be in English or, if not, accompanied by an English translation.
ADDRESSES: Comments should be sent to David A. Stawick, Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581. Comments may be sent by facsimile
transmission to (202) 418-5521, or by e-mail to
hardeightfutures@cftc.gov. Reference should be made to ``Hard Eight
Futures Petition for Exemption from Section 2(a)(1)(C)(iv) of the Act
and Appendix D to Part 30 of the Rules of the Commission.'' Comments
may also be submitted by connecting to the Federal eRulemaking Portal
at https://www.regulations.gov and following the comment submission
instructions. Comments will be published on the Commission's Web site.
FOR FURTHER INFORMATION CONTACT: Julian E. Hammar, Assistant General
Counsel, Office of General Counsel, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581. Telephone: (202) 418-5118. E-mail: jhammar@cftc.gov or Edwin
J. Yoshimura, Counsel, Office of General Counsel, Commodity Futures
Trading Commission, 525 W. Monroe Street, Suite 1100, Chicago, IL
60661. Telephone: (312) 596-0562. E-mail: eyoshimura@cftc.gov.
SUPPLEMENTARY INFORMATION:
I. Background
In general, foreign exchange-traded futures and commodity option
products may be offered or sold by properly registered or exempt
intermediaries to persons located in the U.S., without prior product
approval.\4\ Special review procedures apply, however, to the offer or
sale of futures contracts based on a group or index of securities
(``security index'').\5\ Specifically, Section 2(a)(1)(C)(iv) of the
CEA \6\ generally prohibits any person from offering or selling a
futures contract based on a security index in the U.S., except as
otherwise permitted under Section 2(a)(1)(C)(ii) or Section
2(a)(1)(D).\7\ By its terms, Section 2(a)(1)(C)(iv) applies to futures
contracts on security indexes traded on both domestic and foreign
boards of trade.
---------------------------------------------------------------------------
\4\ See Foreign Commodity Options, 61 FR 10891 (Mar. 18, 1996).
\5\ The CEA, as amended by the Commodity Futures Modernization
Act of 2000 (``CFMA''), Appendix E of Public Law No. 106-554, 114
Stat. 2763 (2000), provides that the offer or sale in the U.S. of
futures contracts based on a security index, including those
contracts traded on or subject to the rules of a foreign board of
trade, is subject to the Commission's exclusive jurisdiction, with
the exception of security futures products, over which the
Commission shares jurisdiction with the Securities and Exchange
Commission (``SEC''). A security future, in turn, is defined in CEA
Section 1a(31) as a futures contract on a single security or a
``narrow-based security index.'' 7 U.S.C. 1a(31). Thus, the
Commission's jurisdiction remains exclusive with regard to futures
contracts on a security index that is broad-based, i.e., that does
not meet the definition of a ``narrow-based security index'' in CEA
Section 1a(25), 7 U.S.C. 1a(25).
\6\ 7 U.S.C. 2(a)(1)(C)(iv).
\7\ CEA Section 2(a)(1)(D), 7 U.S.C. Sec. 2(a)(1)(D), governs
the offer and sale of security futures products.
---------------------------------------------------------------------------
Section 2(a)(1)(C)(ii) of the CEA \8\ sets forth three criteria to
govern the trading of futures contracts on a security index to be
traded on contract markets and derivatives transaction execution
facilities designated or registered by the Commission:
---------------------------------------------------------------------------
\8\ 7 U.S.C. 2(a)(1)(C)(ii).
---------------------------------------------------------------------------
(a) The contract must provide for cash settlement;
(b) The contract must not be readily susceptible to manipulation or
to being used to manipulate any underlying security; and
(c) The security index must not constitute a narrow-based security
index.\9\
---------------------------------------------------------------------------
\9\ With regard to the third criterion, the CFTC and SEC have
jointly promulgated Commission Rule 41.13 under the CEA and Rule
3a55-3 under the Securities Exchange Act of 1934, governing security
index futures contracts traded on foreign boards of trade. These
rules provide that ``[w]hen a contract of sale for future delivery
on a security index is traded on or subject to the rules of a
foreign board of trade, such index shall not be a narrow-based
security index if it would not be a narrow-based security index if a
futures contract on such index were traded on a designated contract
market or registered derivatives transaction execution facility.''
Commission Rule 41.13, 17 CFR 41.13; SEC Rule 3a55-3, 17 CFR
240.3a55-3.
---------------------------------------------------------------------------
The CEA does not explicitly address the standards to be applied to
a security index futures contract traded on a foreign board of trade.
Historically, though, Commission staff has applied the aforementioned
three criteria in evaluating requests by foreign boards of trade
seeking to offer and sell their foreign security index futures
contracts in the U.S. (without becoming designated as a contract
market, or registered as a derivatives transaction execution facility).
In reviewing such requests, Commission staff evaluates the foreign
security index futures contract to ensure that it complies with the
three criteria of Section 2(a)(1)(C)(ii) of the CEA. In making its
determination, the staff considers the design and maintenance of the
index, the method of index calculation, the nature of the component
security prices used to calculate the index, the breadth and frequency
of index dissemination, and other relevant factors.\10\ With respect to
whether a foreign futures contract based on a foreign security index is
not readily susceptible to manipulation or being used to manipulate any
underlying security, one preliminary consideration is the requesting
board of trade's ability to access information regarding the securities
underlying the index.\11\
---------------------------------------------------------------------------
\10\ See generally Appendix D to Part 30 of the Commission's
regulations.
\11\ In general, staff has requested that the foreign board of
trade provide a copy of the surveillance agreements between the
board of trade and the exchange(s) on which the underlying
securities are traded; assurances that the board of trade will share
information with the Commission, directly or indirectly; and when
applicable, information regarding foreign blocking statutes and
their impact on the ability of U.S. government agencies to obtain
information concerning the trading of futures contracts on security
indexes. The staff reviews this information to ensure that the
requesting foreign board of trade (and/or its regulator) has the
ability and willingness to access adequate surveillance data
necessary to detect and deter manipulation in the futures contracts
and underlying securities, as well as share such data with the
Commission.
---------------------------------------------------------------------------
[[Page 34431]]
Upon determination by staff that the subject futures contract and
underlying index comport with the criteria set forth in Section
2(a)(1)(C)(ii) of the CEA, Commission staff issues a no-action letter
to the foreign board of trade with respect to the offer and sale of
such futures contract in the U.S.\12\ A foreign board of trade that has
received prior no-action relief with respect to a particular foreign
security index futures contract must file a new submission for each
foreign security index futures contract that it seeks to offer or sell
in the U.S.
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\12\ A no-action letter generally is a written statement issued
by the staff of a Division or Office of the Commission 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 by the
requestor. See Commission Rule 140.99(a)(2), 17 CFR 140.99(a)(2). A
no-action letter to a foreign board of trade does not affect or
alter the application of Part 30 of the Commission's Rules, which
governs the offer and sale by financial intermediaries of foreign
futures and foreign option contracts to persons located in the U.S.
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II. HEF's Petition
By letter dated April 21, 2008 (``Petition''), HEF, a registered
commodity trading advisor (``CTA''), applied for exemptive relief,
pursuant to Section 4(c) of the Act, from Section 2(a)(1)(C)(iv) of the
Act and Appendix D to Part 30 of the Rules of the Commission.\13\
According to the Petition, this exemption is necessary to promote
responsible economic innovation and fair competition. Granting the
exemption will enable U.S. ECPs \14\ to trade a foreign security index
futures contract even if the foreign board of trade that lists the
contract has not obtained no-action relief relating to the offer and
sale of that contract to U.S. persons.
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\13\ Appendix D to Part 30 sets forth the process by which
Commission staff evaluates requests for no-action relief from
foreign boards of trade seeking to offer and sell their futures
contracts on non-narrow-based security indexes in the U.S., and sets
forth the information that such a foreign board of trade should
submit when seeking no-action relief. 17 CFR Part 30, Appendix D.
\14\ The CEA provides that the Commission may only issue
exemptive relief to ``appropriate persons'' as described in CEA
Section 4(c)(3), 7 U.S.C. 6(c)(3). For purposes of its Petition, HEF
requests that the Commission define ``appropriate persons'' as
including all ECPs.
---------------------------------------------------------------------------
Under the exemptive relief requested by HEF's Petition, U.S. ECPs
could trade, on a foreign board of trade, futures contracts on foreign
security indexes that are not security futures products (i.e., the
index is not a narrow-based security index) on the same basis as they
may trade any other futures contract on a foreign board of trade.
Currently, no prior qualifying action by the Commission or its staff is
required in order for U.S. persons to enter into non-security-based
futures contracts traded on a foreign board of trade. Rather, U.S.
customers are permitted to access futures products offered by a foreign
board of trade through a U.S. registered futures commission merchant or
introducing broker, or through a foreign firm pursuant to an exemption
under Commission Rule 30.10.\15\ HEF's Petition asks that for U.S.
ECPs, the same rules apply to foreign security index futures contracts
as well.
---------------------------------------------------------------------------
\15\ 17 CFR 30.10.
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III. SEC Exemptive Order Regarding Foreign Security Futures
Due to the applicability of the federal securities laws, though,
security index futures are not the same as futures on non-security
based commodities. In this regard, with respect to security futures
products (i.e., futures on a single security or a narrow-based security
index) traded on foreign boards of trade, Section 2(a)(1)(E) of the CEA
and Section 6(k) of the Securities Exchange Act of 1934 (``Exchange
Act'') provide that: (i) The CFTC and SEC ``shall jointly issue such
rules, regulations, or orders as are necessary and appropriate to
permit the offer and sale of a security futures product traded on or
subject to the rules of a foreign board of trade to United States
persons;'' and (ii) such rules, regulations or orders ``shall take into
account, as appropriate, the nature and size of the markets that the
securities underlying the security futures product reflects.'' \16\
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\16\ 7 U.S.C. 2(a)(1)(E); 15 U.S.C. 78f(k).
---------------------------------------------------------------------------
After HEF's Petition was filed, the SEC on June 30, 2009, issued an
Order (``SEC Order'') \17\ exempting certain persons from Section
6(h)(1) of the Exchange Act, which makes it unlawful for U.S. persons
to enter into security futures traded on foreign boards of trade
(``foreign security futures'').\18\ The SEC Order, among other things,
permits certain sophisticated investors to access foreign security
futures and provides relief for certain intermediaries in order to
effect these transactions under certain conditions, including that the
``primary trading market'' for the underlying securities of foreign
private issuers is outside the U.S.\19\ Specifically, the sophisticated
investors to which the SEC Order applies include qualified
institutional buyers (``QIBs'') as defined in SEC Rule 144A under the
Securities Act of 1933.\20\ A QIB is generally an entity that owns and
invests on a discretionary basis at least $100 million in securities of
unaffiliated issuers; it is, therefore, a narrower class of investors
than the class of ECPs as defined in the CEA.\21\
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\17\ See Order Under Section 36 of the Securities Exchange Act
of 1934 Granting an Exemption From Exchange Act Section 6(h)(1) for
Certain Persons Effecting Transactions in Foreign Security Futures
and Under Exchange Act Section 15(a)(2) and Section 36 Granting
Exemptions From Exchange Act Section 15(a)(1) and Certain Other
Requirements, 74 FR 32200 (July 7, 2009).
\18\ 15 U.S.C. 78f(h).
\19\ In light of questions received following the issuance of
the SEC Order, the Commission's Division of Clearing & Intermediary
Oversight has recently issued an ``Advisory Concerning the Offer and
Sale of Foreign Security Futures Products to Customers Located in
the United States.''
\20\ 15 U.S.C. 77a et seq.
\21\ 17 CFR 230.144A (a QIB is one of the enumerated entities,
``acting for its own account or the accounts of other qualified
institutional buyers, that in the aggregate owns and invests on a
discretionary basis at least $100 million in securities of issuers
that are not affiliated with the entity'').
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The relief granted by the SEC Order, although not coterminous with
the relief requested by HEF, is relevant to HEF's Petition. Prior to
the SEC Order, if a foreign broad-based security index underlying a
foreign exchange-traded futures contract became a narrow-based security
index for a certain period of time, a U.S. person had to exit its
position in that futures contract during a specified grace period, or
be in violation of the Exchange Act's prohibition on trading foreign
security futures.\22\ Since June 30, 2009, though, if an ECP is
eligible for and the contract satisfies the requirements for the
exemption issued in the SEC Order, the ECP could continue to trade such
a contract as a foreign security future pursuant to the terms and
conditions of the SEC Order. But if an ECP is not eligible--that is, if
the ECP does not meet the high threshold to qualify as a QIB--or the
contract is not eligible under the SEC Order, then the ECP would not
have relief in trading such a contract.
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\22\ If an index becomes narrow-based for more than 45 business
days over three consecutive calendar months, the CEA and the
Exchange Act provide a grace period of three months during which the
index is excluded from the definition of a ``narrow-based security
index.'' See Section 1a(25)(D) of the CEA, 7 U.S.C. 1a(25)(D) and
Section 3(a)(55)(E) of the Exchange Act, 15 U.S.C. 78c(a)(55)(E).
Although these provisions apply to security index futures contracts
traded on certain U.S. exchanges, by joint regulation, the
Commission and the SEC have made these provisions applicable to
security index futures contracts traded on foreign boards of trade.
See Commission Rule 41.13, 17 CFR 41.13 and SEC Rule 3a55-3, 17 CFR
240.3a55-3.
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[[Page 34432]]
IV. Relief Sought by HEF
Section 4(c)(1) of the Act empowers the Commission to ``promote
responsible economic or financial innovation and fair competition'' by
exempting any transaction or class of transactions, including any
person offering or entering into such transaction, from any of the
provisions of the CEA (subject to exceptions not relevant here) where
the Commission determines that the exemption would be consistent with
the public interest.\23\ The Petition requests relief from the
requirement that U.S. persons may only enter into a futures contract on
a foreign security index listed on a foreign board of trade if the
foreign board of trade has first received a letter providing no-action
relief to offer and sell that futures contract to U.S. persons.
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\23\ Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), provides
that:
In order to promote responsible economic or financial innovation
and fair competition, the Commission by * * * order, after notice
and opportunity for hearing, may (* * * on application of any
person, including any board of trade designated or registered as a
contract market * * *) exempt any agreement, contract, or
transaction (or class thereof) that is otherwise subject to
subsection (a) of this section (including any person or class of
persons offering, entering into, rendering advice or rendering
services with respect to, the agreement, contract, or transaction),
either unconditionally or on stated terms or conditions or for
stated periods * * * from any * * * provision of this Act (except
subparagraphs (C)(ii) and (D) of section 2(a)(1), except that the
Commission and Securities and Exchange Commission may by rule,
regulation, or order jointly exclude any agreement, contract, or
transaction from section 2(a)(1)(D)), if the Commission determines
that the exemption would be consistent with the public interest.
While Section 4(c)(2) of the Act, 7 U.S.C. 6(c)(2), imposes
additional requirements with respect to any exemption from the
requirements of Section 4(a) of the Act, 7 U.S.C. 6(a), HEF is not
seeking such relief.
---------------------------------------------------------------------------
The proposed exemptive relief would require that a person wishing
to trade a particular security index futures contract listed on a
foreign board of trade that has not received no-action relief notify
the Commission of the person's intent to do so. The notice would
require the claimant to demonstrate his or her qualification for the
exemption (i.e., that he or she is an ECP), and that the index is not a
narrow-based security index. The exemption would be effective with
respect to that person and index unless the Commission notifies the
person within ten (10) business days that the claimant does not meet
the requirements of the exclusion, or the index does not qualify under
the Act as a non-narrow based index (including an explanation of why it
considers the person not to be qualified or the index to be narrow-
based, respectively).
Further, this exemption would be available only for contracts
traded on foreign boards of trade for which the applicable foreign
regulator has entered into a Memorandum of Understanding (``MOU'') with
respect to information sharing and cooperation with the CFTC.\24\ Also,
the securities comprising the index underlying the futures contract
would have to be principally traded on, by, or through an exchange or
market located outside the U.S.
---------------------------------------------------------------------------
\24\ This could be either a bilateral MOU between the Commission
and the applicable foreign regulator, or a multilateral MOU such as
the ``Multilateral Memorandum of Understanding Concerning
Consultation and Cooperation and the Exchange of Information''
created by the International Organization of Securities Commissions
(``IOSCO Multilateral MOU'').
---------------------------------------------------------------------------
The Petition does not seek an exemption from the requirement that a
foreign board of trade be granted no-action relief before offering and
selling such foreign security index futures contracts to the general
public. Nor does it seek an exemption from the requirement that such
contracts may be traded through direct access from the U.S. to a
foreign board of trade's electronic trading system only pursuant to a
Commission staff direct access no-action letter.\25\
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\25\ See Policy Statement Regarding 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, 71 FR 64443 (Nov. 2, 2006).
---------------------------------------------------------------------------
More specifically, HEF is seeking an exemption, pursuant to Section
4(c) of the Act, from Section 2(a)(1)(C)(iv) of the Act and 17 CFR Part
30 Appendix D in the following form, with conditions:
(X) Exemption for Eligible Contract Participants Trading Non-narrow
Based Stock Indexes on a Foreign Board of Trade. The Commodity Futures
Trading Commission, pursuant to its authority under Section 4(c)(1) of
the Commodity Exchange Act, hereby determines that notwithstanding the
provisions of Section 2(a)(1)(C)(iv) of the Act and Appendix D to Part
30 of its Rules, nothing in the Act is intended to prohibit any
``eligible contract participant,'' as defined in Section 1a(12) of the
Act, located in the U.S. from purchasing or carrying futures contracts
on a securities index that is not a ``narrow-based index'' as defined
in Section 1a(25) of the Act, traded on or subject to the rules of a
foreign board of trade to the same extent such person may be authorized
to purchase or carry a futures contract on any other commodity so long
as the underlying securities comprising such index are principally
traded on, by or through any exchange or market located outside the
United States, and the regulator of such foreign board of trade has
entered into a Memorandum of Understanding with respect to information
sharing and cooperation with the Commission.
(a) Notification: Persons wishing to avail themselves of this
exemption shall so notify the Commission. This notification shall be
filed with the Secretary of the Commission at its Washington, D.C.
headquarters, in electronic form, shall be labeled as ``Notification of
Trading in a Non-narrow Based Index Traded on a Foreign Board of
Trade,'' and shall include:
(1) The name and address of the person and representation that the
person qualifies as an Eligible Contract Participant, and the basis
upon which the person so qualifies;
(2) The name of the non-narrow based index and of the foreign board
of trade on which the index is traded;
(3) A demonstration that the index is not a ``narrow-based index''
under the definition of Section 1a(25) of the Act; and
(4) A representation that the regulator of the foreign board of
trade has entered into an information-sharing agreement with the
Commission or to which the Commission is also a signatory.
(b) Effective Date: The exemption shall be effective ten (10)
business days after filing of the notice with the Commission, unless
the Commission within that period notifies the person claiming the
exemption that the exemption may not be made effective with respect to
that person and/or that index and its reason for so finding.
According to HEF, the purpose behind the no-action process is in
furtherance of Congress' expressed intent ``to protect the interests of
U.S. residents against fraudulent or other harmful practices.'' \26\
HEF maintains that ECPs, due to their size and sophistication, are not
dependent upon the terms and conditions imposed on the trading of
foreign security index futures in the staff's no-action relief for
protection from fraud. Further, HEF notes that in the U.S., ECPs
currently are able to trade contracts, agreements, or transactions that
replicate futures contracts on foreign security indexes in the over-
the-counter (``OTC'') markets. HEF states that granting this exemptive
relief will enable ECPs to trade futures contracts on a foreign board
of trade that are equivalent to contracts that ECPs are able to trade
in the OTC markets. Because contracts on foreign security
[[Page 34433]]
indexes are already traded in the OTC markets by U.S. ECPs, HEF
believes that it is in the public interest to provide U.S. ECPs the
choice to trade foreign security indexes in a more regulated,
transparent exchange environment on foreign boards of trade.
---------------------------------------------------------------------------
\26\ H.R. Rep. No. 97-565, Part I, at p. 85 (May 17, 1982).
---------------------------------------------------------------------------
V. Request for Comments
The Commission requests public comment on any aspect of the
Petition that commenters believe may raise issues under the CEA or
Commission regulations. In particular, the Commission invites comment
regarding the following:
(1) Conditions Proposed by HEF: Should an order granting the
request for relief include any one or more of the conditions proposed
by HEF in its Petition?
(2) Surveillance: In granting no-action relief to a foreign board
of trade seeking to offer and sell a futures contract on a foreign
security index to U.S. persons, Commission staff generally rely on
surveillance sharing agreements between the securities exchanges on
which the securities comprising the index are traded, and the foreign
board of trade. See infra n.11. Also, before issuing such no-action
relief, Commission staff often requests a representation or commitment
from the foreign board of trade of its willingness and ability to share
information with the Commission. Id. Similarly, in granting no-action
relief to a foreign board of trade seeking to offer and sell any
futures contract to U.S. persons through direct access to its
electronic trading system from the U.S., Commission staff typically
confirm that the market and its regulator have the ability 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, Commission staff generally obtains
evidence of the foreign market's and regulator's willingness to share
information (e.g., through explicit undertakings) with the Commission.
To ensure that there are similar protections in place in the
circumstances posed by HEF's Petition, should an order granting the
request for relief require that the foreign board of trade that lists
the foreign security index futures contract to be traded by the ECP
have: (i) Submitted a pending request for no-action relief with respect
to that futures contract; (ii) received a prior no-action letter for
another foreign security index futures contract; and/or (iii) received
a foreign direct access no action letter?
(3) MOUs: The Commission is concerned that the condition for an MOU
included in HEF's Petition may not be workable in practice, given the
wide spectrum of information sharing agreements to which the Commission
is a party. An MOU may only mean that the foreign regulator will share
information, not that it has access to surveillance information to
share. Should an order granting the relief requested in HEF's Petition
be conditioned on the existence of an MOU that is specifically tailored
to obtain the information that the Commission needs to assess the
efficacy of the foreign board of trade and its regulator, and to obtain
surveillance information as it deems necessary? Should any such relief
be limited to foreign security index futures contracts listed in
jurisdictions that are signatories to the IOSCO Multilateral MOU?
(4) Broad vs. Narrow-Based Security Indexes: As discussed above, a
futures contract on a security index that moves from broad to narrow-
based thereby becomes a security future that may no longer be traded by
U.S. persons subject to the exclusive jurisdiction of the CFTC. To
ensure full compliance with the requirements of the CEA and the federal
securities laws, should an order granting the relief requested in HEF's
Petition require an undertaking by the ECP to: (i) Continually monitor
the underlying index to ensure that it remains broad-based; (ii) notify
the Commission if the index becomes a narrow-based security index; and
(iii) if the index continues to be narrow-based for more than 45
business days during 3 consecutive calendar months, to cease trading
the futures contract and liquidate existing positions in an orderly
manner over the next 3 calendar months (provided, however, that if the
ECP and the futures contract are eligible for the exemptive relief
granted by the SEC Order, the ECP may continue to trade that contract
as a foreign security future)?
(5) Additional Conditions: Should an order granting the relief
requested in HEF's Petition require that there be no solicitation of
ECP orders, and/or that ECPs be required to trade only for their own
account? \27\
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\27\ Granting the relief requested in HEF's Petition would in no
way alter the requirements of Part 30 of the Commission's
regulations concerning foreign futures and options transactions.
---------------------------------------------------------------------------
(6) OTC Derivatives Reform Legislation: As discussed above, HEF's
Petition justifies its request for relief, in part, on the proposition
that: (i) U.S. ECPs currently are able to trade contracts that
replicate futures on foreign security indexes in the unregulated OTC
markets; and (ii) it is in the public interest to enable them to do so
in a more regulated and transparent exchange environment on a foreign
board of trade. Yet, legislation currently pending before the Congress,
if eventually enacted, could change this premise to some degree, as it
would significantly enhance the transparency of OTC derivatives and
require that certain swaps (subject to an ``end-user exception'') be
traded on a contract market or a ``swap execution facility'' as
provided for in that legislation. What are the implications of the OTC
derivatives reform legislation pending in Congress, if any, on HEF's
Petition?
(7) Foreign Securities: As discussed above, HEF's Petition proposes
that an order granting its request for relief be conditioned upon all
the securities in the index underlying the foreign futures contract
being principally traded on, by, or through an exchange or market
located outside the U.S. This ``principally traded'' formulation may be
based on the language of CEA Section 2(a)(1)(F)(ii), which addresses
trading of foreign security futures by ECPs in the U.S.\28\ What are
the implications, if any, of the use of this standard in an order
granting the relief requested in HEF's Petition in comparison to the
``primary trading market'' test that the SEC created for securities of
foreign private issuers in a narrow-based security index as set forth
in paragraph (1)(a)(ii) of the SEC Order? \29\ Should an order granting
the relief requested in HEF's Petition treat securities in an index as
being principally traded on, by, or through an exchange outside the
United States if they meet the criteria for securities in a narrow-
based security index contained in paragraph (1)(a)(ii) of the SEC
Order? \30\
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\28\ 7 U.S.C. 2(a)(1)(F)(ii). See text accompanying n.31 infra
for full text.
\29\ The SEC Order provides that for U.S. QIBs to be able to
trade foreign security futures, the securities issued by foreign
private issuers that underlie a foreign security future must have
their ``primary trading market'' outside the U.S. For purposes of
this condition, under the SEC Order a security's ``primary trading
market'' is deemed to be outside the U.S. if at least 55% of the
worldwide trading volume in the security took place in, on, or
through a securities market or markets located in either: (i) A
single foreign jurisdiction; or (ii) no more than two foreign
jurisdictions during the most recently completed fiscal year. If the
trading in the foreign private issuer's security is in two foreign
jurisdictions, the trading for the issuer's security in at least one
of the two foreign jurisdictions must be greater than the trading in
the U.S. for the same class of the issuer's securities in order for
such security's ``primary trading market'' to be considered outside
the U.S.
\30\ In addition to securities of foreign private issuers whose
primary trading market is outside the U.S. underlying narrow-based
security indexes, paragraph (1)(a)(ii) of the SEC Order permits debt
securities issued or guaranteed by a foreign government as defined
in Rule 405 of the Securities Act, 17 CFR 230.405, that are eligible
to be registered with the SEC under Schedule B of the Securities
Act, 15 U.S.C. 77aa. Further, paragraph (1)(a)(ii) requires that at
the time of the transaction, at least 90% of the index, both in
terms of the number of underlying securities and their weight, must
meet these eligibility requirements. No more than 10% of the
securities in the index, both in terms of their number and their
weight, at the time of the transaction, that do not meet the
requirements, must be from issuers that are required to file reports
with the SEC pursuant to Section 13 or Section 15(d) of the Exchange
Act, 15 U.S.C. 78m and 78o.
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[[Page 34434]]
(8) ECPs vs. QIBs: CEA Section 2(a)(1)(F)(ii), cited in the
---------------------------------------------------------------------------
preceding paragraph, provides in full as follows:
Nothing in this Act is intended to prohibit any eligible
contract participant located in the United States from purchasing or
carrying securities futures products traded on or subject to the
rules of a foreign board of trade, exchange, or market to the same
extent such person may be authorized to purchase or carry other
securities traded on a foreign board of trade, exchange, or market
so long as any underlying security for such security futures
products is traded principally on, by, or through any exchange or
market located outside the United States.\31\
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\31\ 7 U.S.C. 2(a)(1)(F)(ii).
As discussed above, the SEC Order generally limits the category of U.S.
persons that may trade foreign security futures to QIBs (who own and
invest $100 million or more). This is a narrower class of investors
than ECPs. The group of persons that satisfy the ECP definition but may
not be QIBs includes registered investment companies, commodity pools,
pension plans, corporations and high net worth individuals. These
persons may have a real need for risk management based upon exposures
in foreign financial markets or to economic conditions in other
countries, or they may want to gain exposure to those markets as part
of the asset allocation in their investment portfolio.
If the relief requested in HEF's Petition is granted, an ECP that
is a QIB and trades a foreign futures contract on a foreign security
index that moves from broad to narrow-based can continue to trade that
contract as a foreign security future, provided the contract otherwise
meets the requirements of the SEC Order. An ECP that is not a QIB,
however, would have to exit its position in the foreign futures
contract within the applicable grace period or be in violation of the
Exchange Act. Given this difference in legal status, should an order
issued by the Commission granting the relief requested in HEF's
Petition be limited to QIBs?
With respect to access to foreign security futures by U.S. persons,
are the conditions contained in the SEC Order consistent with Section
2(a)(1)(F)(ii) of the CEA? Should ECPs that are not QIBs be permitted
to trade foreign security futures? What conditions, if any, should be
imposed on such trading by ECPs that are QIBs, and ECPs that are not
QIBs? How should an order permitting ECPs to trade foreign security
futures take into account, as mandated by Section 2(a)(1)(E) of the
CEA, ``the nature and size of the markets that the securities
underlying the security futures product reflects?''
(9) Nature of Foreign Security Indexes: Lying at the core of the
complex interplay between HEF's Petition on the one hand, and the CEA
and the federal securities laws on the other hand, is the application
of the statutory definition of a ``narrow-based security index'' to
foreign security indexes. To the extent that a foreign security index
falls squarely on the broad-based side of the line, distinctions
between ECPs that are QIBs and those that are not, and the prospect of
an ECP that is relying on the relief requested by HEF violating the
securities laws, may be of less concern.
Congress has recognized that ``[t]he detailed statutory test of a
narrow-based security index was tailored to fit the U.S. equity
markets, which are by far the largest, deepest and most liquid
securities markets in the world.'' \32\ In the CFMA in 2000, Congress
directed that the CFTC and the SEC, within one year, jointly adopt
rules or regulations that set forth requirements for broad-based
foreign security indexes traded on a foreign board of trade.\33\ And
shortly thereafter, the CFTC and SEC promised to consider amending the
rules regarding security index futures trading on or subject to the
rules of a foreign board of trade.\34\
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\32\ H.R. Rep. No. 110-627 at 983 (2009) (Conference Report on
the CFTC Reauthorization Act of 2008, Title XIII of the 2008 ``Farm
Bill,'' Public Law No. 110-246, 122 Stat. 1651 (June 18, 2008)).
\33\ See 7 U.S.C. 1a(25)(B)(iv) and 1a(25)(C); 15 U.S.C.
3(a)(55)(C)(iv) and 3(a)(55)(D).
\34\ See Method for Determining Market Capitalization and Dollar
Value of Average Daily Trading Volume; Application of the Definition
of Narrow-Based Security Index, 66 FR 44490, 44501-44502 (August 23,
2001).
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Should the CFTC and the SEC establish criteria to exclude
appropriate foreign security indexes from the definition of a ``narrow-
based security index?'' If so, on what basis? How should it be
determined whether a foreign security index is appropriately treated as
a broad-based security index so that foreign futures on such an index
would trade subject to the exclusive jurisdiction of the CFTC, or as a
narrow-based security index so that foreign futures on such an index
would trade as foreign security futures? The Commission encourages
commenters to submit any quantitative data and analysis to support any
proposed distinctions between broad and narrow-based foreign security
indexes.
(10) CEA Section 4(c) Requirements:
Is the exemption requested in HEF's Petition consistent
with the requirements for relief set forth in Section 4(c) of the CEA?
Would granting the exemption requested in HEF's Petition
be consistent with the public interest and purposes of the CEA?
Would granting the relief requested in HEF's Petition have
any material adverse effects upon derivatives clearing organizations,
exchanges, or other Commission registrants from a competitive or other
perspective?
(11) Other Issues: The Commission welcomes comment on any other
issues relevant to HEF's Petition for an exemption.
* * * * *
Issued in Washington, DC, on June 11, 2010 by the Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.
[FR Doc. 2010-14680 Filed 6-16-10; 8:45 am]
BILLING CODE P
