Registration of Foreign Boards of Trade, 70974-70998 [2010-29023]
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Federal Register / Vol. 75, No. 223 / Friday, November 19, 2010 / Proposed Rules
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 48
RIN 3038–AD19
Registration of Foreign Boards of
Trade
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:
The Commodity Futures
Trading Commission (Commission or
CFTC) is proposing rules to implement
new statutory provisions enacted by
Title VII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
These proposed rules establish a
registration requirement that applies to
foreign boards of trade (FBOT) that wish
to provide their identified members or
other participants located in the United
States with direct access to their
electronic trading and order matching
systems.
SUMMARY:
Comments must be received on
or before January 18, 2011. The
Commission is not inclined to grant
extensions of this comment period.
ADDRESSES: You may submit comments,
identified by RIN number 3038–AD19,
by any of the following methods:
• Agency Web site, via its Comments
Online process: https://
comments.cftc.gov. Follow the
instructions for submitting comments
through the Web site.
• Mail: David A. Stawick, Secretary of
the Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW.,
Washington, DC 20581.
• Hand Delivery/Courier: same as
mail above.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to https://
www.cftc.gov. You should submit only
information that you wish to make
available publicly. If you wish the
Commission to consider information
that is exempt from disclosure under the
Freedom of Information Act, a petition
for confidential treatment of the exempt
information may be submitted according
to the established procedures in CFTC
Regulation 145.9.1
The Commission reserves the right,
but shall have no obligation, to review,
pre-screen, filter, redact, refuse or
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DATES:
1 17
CFR 145.9.
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remove any or all of your submission
from https://www.cftc.gov that it may
deem to be inappropriate for
publication, such as obscene language.
All submissions that have been redacted
or removed that contain comments on
the merits of the rulemaking will be
retained in the public comment file and
will be considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT:
Duane C. Andresen, Senior Special
Counsel, (202) 418–5492,
dandresen@cftc.gov, or David Steinberg,
Special Counsel, (202) 418–5102,
dsteinberg@cftc.gov, Division of Market
Oversight, Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
I. Background
On July 21, 2010, President Obama
signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(the Dodd-Frank Act).2 Title VII of the
Dodd-Frank Act 3 amended the
Commodity Exchange Act (CEA or the
Act) 4 to establish a comprehensive new
regulatory framework for swaps and
security-based swaps. The legislation
was enacted to reduce risk, increase
transparency, and promote market
integrity within the financial system by,
among other things: (1) Providing for the
registration and comprehensive
regulation of swap dealers and major
swap participants; (2) imposing clearing
and trade execution requirements on
standardized derivative products;
(3) creating robust recordkeeping and
real-time reporting regimes; and
(4) enhancing the Commission’s
rulemaking and enforcement authorities
with respect to, among others, all
registered entities and intermediaries
subject to the Commission’s oversight.
Section 738 of the Dodd-Frank Act
amends Section 4(b) of the CEA to
provide that the Commission may adopt
rules and regulations requiring
registration with the Commission for an
FBOT that provides the members of the
FBOT or other participants located in
the United States with direct access to
the electronic trading and order
matching system of the FBOT, including
2 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat. 1376 (2010). The text of the Dodd-Frank Act
may be accessed at https://www.cftc.gov./
LawRegulation/OTCDERIVATIVES/index.htm.
3 Pursuant to Section 701 of the Dodd-Frank Act,
Title VII may be cited as the ‘‘Wall Street
Transparency and Accountability Act of 2010.’’
4 7 U.S.C. 1 et seq.
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rules and regulations prescribing
procedures and requirements applicable
to the registration of such FBOTs. The
Commission has determined to
promulgate rules to implement these
provisions by July 15, 2011.5
Accordingly, the Commission is
proposing to adopt a new part 48 6 to its
regulations to establish a registration
requirement and related registration
procedures and conditions that apply to
FBOTs that wish to provide their
members or other participants located in
the United States with direct access to
their electronic trading and order
matching systems. The Commission
requests comment on all aspects of the
proposed rules, as well as comment on
the specific provisions and issues
highlighted in the discussion below.
II. Relief Granted to Foreign Boards of
Trade
Since 1996, FBOT requests to provide
direct access to their electronic trading
and order matching systems (trading
systems) from within the U.S. have been
addressed by Commission staff via the
no-action process set forth in
Commission regulation 140.99.7
Specifically, an FBOT wishing to
provide its U.S.-located participants
with direct access to the FBOT’s trading
system traditionally has submitted a
request for a no-action letter to the
Division of Market Oversight (DMO).
The FBOT’s no-action request must be
accompanied by representations and
supporting documentation from the
FBOT regarding, among other things, its
organization, presence in the U.S.,
participants, the products it wishes to
list for direct access, its trading system
and the regulatory regime and
information-sharing arrangements to
which the FBOT is subject. Staff then
reviews the request and related
information and documentation and,
where appropriate, issues a ‘‘direct
access’’ (formerly known as a ‘‘foreign
terminal’’) no-action relief letter. When
reviewing no-action requests, staff looks
for a home regulatory regime that
provides oversight over the FBOT in a
manner that is comparable to the
CFTC’s oversight of DCMs. Specifically,
does the FBOT’s regulatory authority
5 See
Section 738 of the Dodd-Frank Act.
regulations referred to herein are
found at 17 CFR Ch. 1.
7 See, e.g., CFTC Letter No. 96–28 (February 29,
1996). Commission regulation 140.99 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.
6 Commission
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support and enforce ‘‘substantially
equivalent regulatory objectives’’ in its
oversight of the FBOT?
In the no-action letter, DMO staff
represents that, provided the FBOT
meets the conditions set out in the
letter, DMO will not recommend that
the Commission institute enforcement
action against the FBOT for failure to
register as a designated contract market
(DCM) or derivatives transaction
execution facility (DTEF) if the FBOT
provides direct access to its order entry
and trade matching system to FBOT
members and other participants located
in the U.S. The scope of the staff noaction relief has been restricted to
providing relief from (1) the
requirement that the FBOT obtain DCM
or DTEF registration pursuant to
Sections 5 and 5a of the CEA and
(2) regulatory requirements related to
the trading or offering of contracts on a
DCM and DTEF if the contracts
identified in the no-action letter (foreign
futures or option contracts) are made
available in the U.S. for trading in the
manner set forth in the letter.
The no-action relief also has been
limited historically to FBOTs that
provide direct access to the FBOTs’
members and other participants that:
(1) Trade in the U.S. for their
proprietary accounts; (2) are registered
with the Commission as futures
commission merchants (FCM); or (3) are
registered with the Commission as
commodity pool operators (CPO) or are
exempt from such registration and that
are submitting orders for execution on
behalf of U.S. pools they operate or
commodity trading advisors (CTA) or
are exempt from such registration and
that are submitting orders for execution
on behalf of accounts for which they
have discretionary authority. With
respect to such CPOs or CTAs, an FCM
or a firm exempt from registration as an
FCM pursuant to Commission Rule
30.10 (Rule 30.10 Firm) 8 must act as a
clearing firm and guarantees such
trades. The no-action relief typically has
been subject to numerous conditions
designed to keep staff informed
regarding the FBOT’s status and
activities from within the U.S.,
additional contracts to be made
available, and significant changes in the
information provided to the
Commission in support of the no-action
8 A Rule 30.10 order permits firms that are
members of a self-regulatory organization and
subject to regulation by the foreign regulator to
conduct business from locations outside of the U.S.
for U.S. persons on non-U.S. boards of trade
without registering under the Act, based upon the
person’s substituted compliance with a foreign
regulatory structure found comparable to that
administered by the Commission under the CEA.
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request. Significant changes in
information include changes in the
membership criteria, the location of the
management, personnel or operations
(particularly changes that may suggest
an increased nexus between the FBOT’s
activities and the U.S.); the basic
structure, nature, or operation of the
trading system or its clearing
organization; the regulatory or selfregulatory regime the FBOT is subject
to; and any change in the authorization,
licensure or registration of the FBOT.
In 2006, following a series of market
events and Commission deliberations,
the Commission endorsed the continued
use of the no-action process as a
mechanism for facilitating direct access
to an FBOT’s trading system. On
January 17, 2006, ICE Futures Europe, a
U.K. recognized investment exchange
that provided direct access to its U.S.
members pursuant to a no-action letter,9
notified the Commission that it would
list a futures contract on West Texas
Intermediate (WTI) light sweet crude oil
whose settlement price would be linked
to contracts traded on the New York
Mercantile Exchange (NYMEX).10 ICE
Futures Europe’s notification of the
proposed contract linked to a U.S.
domestic contract prompted the
Commission to undertake an evaluation
of the use of the no-action process to
permit direct access, including a reexamination of certain issues with
respect to the Commission’s statutory
obligations to maintain the integrity of
U.S. markets and to protect U.S.
customers. 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.11 The Commission also
issued a related Request for Public
9 On November 12, 1999, the Commission’s
Division of Trading and Markets (the predecessor to
the CFTC’s Division of Market Oversight) granted
no-action relief to the International Petroleum
Exchange of London (now ICE Futures Europe),
permitting it to make its electronic trading and
order matching system, known as Energy Trading
System II, available to its members in the United
States. CFTC Letter No. 99–69 (November 12, 1999).
10 On April 12, 2006, ICE Futures Europe notified
the Division of Market Oversight of its intent to
launch the ICE Futures New York Harbour Heating
Oil Futures Contract and the ICE Futures New York
Harbour Unleaded Gasoline Blendstock (RBOB)
Futures Contract each of which is cash-settled on
the price of physically-settled contracts traded on
the NYMEX.
11 The hearing was conducted on June 27, 2006,
at the Commission’s headquarters in Washington,
DC.
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Comment.12 On October 27, 2006,
following extensive debate, a review of
comments submitted pursuant to the
Commission’s request for public
comment and the Commission
Hearing,13 the Commission issued a
Policy Statement in which it endorsed
the no-action process for FBOTs that
want to provide direct access to their
trading systems to U.S.-based
participants.14
In order to address concerns raised by
the listing by ICE Futures Europe of the
linked WTI contract for trading by direct
access, Commission staff, on June 17,
2008, amended ICE Futures Europe’s
no-action relief letter by adding
additional conditions. The additional
conditions included requirements
relating to the reporting of large trader
positions, the publication of daily
trading information in the linked
contracts, and the establishment of
position limits or accountability levels
that are comparable to the position
limits or accountability levels for the
counterpart linked contracts at
NYMEX.15
12 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.
13 Comments submitted in response to the request
for comment and at the Commission’s Hearing were
generally supportive of the no-action process,
praising the process in general for its flexibility.
Many commenters suggested that the Commission
should retain in large measure the essential
contours of the no-action process. 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), available
at https://www.cftc.gov/foia/comment06/foi06002_1.htm.
14 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
64843 (Nov. 2, 2006) (Policy Statement). In the
Policy Statement, the Commission endorsed the noaction process for addressing FBOT direct access
relief requests: ‘‘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.’’ Id.
at 64846.
15 CFTC Letter No. 08–09 (June 17, 2008). The
Commission subsequently announced in the
Federal Register that these additional conditions
would apply to any FBOT that made available for
trading by direct access a linked contract. See
Notice of Additional Conditions on the No-Action
Relief When Foreign Boards of Trade That Have
Received Staff No-Action Relief To Permit Direct
Access to Their Automated Trading Systems from
Locations in the United States List for Trading from
the U.S. Linked Futures and Option Contracts and
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Federal Register / Vol. 75, No. 223 / Friday, November 19, 2010 / Proposed Rules
Commission staff subsequently
reexamined the issues raised by linked
contracts and concluded that there were
additional measures that should be
taken to further allay concerns with
respect to effective market surveillance
and maintaining the integrity of the
market. Accordingly, on June 20, 2009,
staff again amended ICE Futures
Europe’s no-action relief by adding
additional conditions with respect to
linked contracts. These conditions
included requirements that ICE Futures
Europe provide CFTC staff trade
execution and audit trail data for all
linked contracts; copies of, or
hyperlinks to, all rules, rule
amendments, circulars and other notices
published by the exchange; and copies
of all disciplinary notices involving the
linked contracts. They also provided for
CFTC on-site visits to examine ICE
Futures Europe’s ongoing compliance
with its no-action relief and, in the
event that the CFTC directs that NYMEX
take emergency action with respect to a
linked contract (e.g., to cease trading in
the contract), ICE Futures Europe,
subject to information-sharing
arrangements between the CFTC and the
United Kingdom’s Financial Services
Authority (FSA), is required to promptly
take similar action (e.g., cease trading in
the contract) with respect to the linked
contract at ICE Futures Europe.16
Since 1996, Commission staff has
issued 23 direct access no-action relief
letters to FBOTs, 20 of which remain
active (one relief letter was superseded
and two were revoked when the FBOTs
ceased operations).17 While the noaction process has served a useful
purpose, given the clear authority
provided by Congress to create a
registration program for FBOTs, the
Commission concludes that it is in the
public interest to replace the staffinitiated no-action process with a formal
Commission registration provision.
The no-action process is better suited
for discrete, unique factual
circumstances and where regulations do
not address the issue presented. In
circumstances where the same type of
relief is granted on a regular and
recurring basis, as it has been with
respect to permitting FBOTs to provide
direct access to their trading systems to
specified members and other
participants that are located in the U.S.,
the Commission concludes believes that
it is no longer appropriate to handle
a Revision of Commission Policy Regarding the
Listing of Certain New Option Contracts. 74 FR
3570 (January 21, 2009).
16 CFTC Letter No. 09–37 (August 20, 2009).
17 Currently, 14 of the FBOTs with active noaction relief report volume originating from the U.S.
via direct access.
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such matters through the no-action
process. Instead, the process should
become more transparent and
standardized through generally
applicable regulations. Among other
things, a rulemaking would provide for
a uniform application process, enhance
the visibility of the process to both
applicants and the public and assure
fair and consistent treatment to all
applicants. Further, no-action relief
letters are issued by the staff and are not
binding on the Commission and do not
provide the same legal certainty to the
FBOT recipients that a Commissionissued order would provide. The
Commission believes that a formal
registration procedure would provide
more legal certainty for registered
FBOTs and would be more consistent
with the manner in which other
countries permit U.S. DCMs to provide
direct access internationally.
Accordingly, for the reasons noted
above and pursuant to the new authority
of amended CEA Section 4(b), new Part
48 of the Commission’s regulations, as
proposed herein, would replace the
existing policy of accepting and
reviewing requests for no-action relief to
permit an FBOT to provide for direct
access to its trading system from within
the U.S. with a requirement that an
FBOT seeking to provide such access
must apply for and be granted
registration with the Commission.18
As a starting point for the proposed
registration requirements, the
Commission considered the experience
gained from the current no-action
review process. The proposed
application submission requirements
and staff review standards for FBOT
registration under the new regulations
generally are consistent with the
application requirements and review
standards that have guided the
Commission’s staff in issuing the more
recent FBOT no-action relief letters.
Under the proposed registration
requirements, for instance, the
Commission would not evaluate FBOTs
for compliance with the core principles
and/or regulatory requirements
applicable to DCMs. Rather, the
Commission would look to the FBOT’s
regulatory authority to determine that
18 The proposed rules would provide for a
‘‘limited’’ application process for FBOTs currently
operating under existing no-action relief. The
limited application would have to be submitted
within 120 days of the effective date of the
registration rules and the FBOT could continue to
operate pursuant to the no-action relief during the
120 day period and until the Commission notifies
the FBOT that the application has been approved
or denied. In the event that the Commission denies
an FBOT’s application, it would expect staff to
simultaneously withdraw the FBOT’s no-action
relief.
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the home regulatory regime provides
oversight over the FBOT in a manner
that is comparable to the CFTC’s
oversight of DCMs. Specifically, the
Commission would review the
application to determine if the FBOT’s
regulatory authority supports and
enforces substantially equivalent
regulatory objectives, such as
prevention of market manipulation and
customer protection, in its oversight of
the FBOT.
The Commission notes that the staff’s
no-action process has not remained
static since the first no-action relief
letter was issued in 1996. Instead, staff
has generally been expanding the scope
and level of its review of FBOTs to
address activities not originally foreseen
when the first no-action letter was
issued. Likewise, the number and types
of conditions imposed upon FBOTs
seeking no-action relief have gradually
expanded over time.19 Those conditions
have generally been included in the
proposed regulations, along with
proposed conditions intended to
address increasing technological
innovation, new types of products, the
impact on the market of different
trading entities listing substantially
similar or even connected products, and
the requirements of the Dodd-Frank Act.
III. The Proposed Rules
The proposed regulation is divided
into 10 sections and an appendix
(Appendix), each proposed as described
below.
A. Scope
The first section, 48.1, provides that
part 48 applies to any FBOT that is
registered or is applying to become
registered with the Commission in order
to provide its identified members or
other participants located in the U.S.20
with direct access to its electronic
trading and order matching system.
19 The first no-action relief letter required that
Deutsche Terminborse comply with eight terms and
conditions. CFTC Letter No. 96–28 (February 29,
1996). Subsequent letters generally have required
compliance with approximately 16 conditions,
although the number varies based on the manner in
which the FBOT operates. More recent additions to
the conditions address, among other things,
restriction to certain types of members, the
inclusion of CTAs and CPOs as entities eligible for
no-action relief, and a requirement that the FBOT
provide an annual certification from its regulatory
authority that the FBOT retains its authorization in
good standing as an FBOT in its home country. As
previously discussed, the staff has also added
several conditions to the ICE Futures Europe noaction letter in order to address the listing of linked
contracts.
20 For purposes of FBOT registration, the term
‘‘United States’’ or ‘‘U.S.’’ includes the United States,
its territories and possessions.
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B. Definitions
Section 48.2 includes definitions
applicable to FBOT registration. For
instance, section 48.2 defines an
‘‘FBOT’’ as any board of trade, exchange
or market located outside the U.S., its
territories or possessions, whether
incorporated or unincorporated, where
foreign agreements, contracts or
transactions are entered into. Section
48.2 also identifies certain criteria an
FBOT would have to meet in order to
register to provide direct access, such as
possessing the attributes of an
established, organized exchange;
adhering to appropriate rules
prohibiting abusive trading practices;
and enforcing appropriate rules to
maintain market and financial integrity.
Another defined term, further addressed
below, is ‘‘direct access,’’ which is
defined in the Dodd-Frank Act to refer
to ‘‘an explicit grant of authority by a
foreign board of trade to an identified
member or other participant located in
the United States to enter trades directly
into the trade matching system of the
foreign board of trade.’’ Section 48.2 also
includes definitions, for purposes of this
part, of ‘‘linked contract,’’
‘‘communications,’’ ‘‘material change,’’
‘‘clearing organization,’’ ‘‘existing noaction relief,’’ ‘‘swaps,’’ ‘‘affiliate’’ and
‘‘member or other participant.’’
C. Registration Required
Section 48.3 provides that, except as
otherwise specified in proposed new
Part 48, it shall be unlawful for an FBOT
to permit direct access to its electronic
trading and order matching system from
within the U.S. unless and until the
Commission has issued an Order of
Registration to the FBOT pursuant to the
provisions of Part 48. The proposal also
would provide that it would be
unlawful for a board of trade to make
false or misleading statements in any
application for registration or in
connection with any application for
registration.
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D. Registration Eligibility
Section 48.4 describes registration
eligibility. Generally, FBOTs that meet
the requirements of the definition in
section 48.2(b) would be eligible to be
registered. Section 48.4 also identifies
the persons to whom the registered
FBOT could grant authority to trade by
direct access. The Commission proposes
that the persons that would be
permitted by the FBOT to trade by
direct access from the U.S. pursuant to
the registration rules would be the types
of persons that are currently able to
trade by direct access pursuant to staff
issued no-action relief letters.
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Specifically, an FBOT could request
registration in order to permit direct
access from within the U.S. by
identified members and other
participants 21 that: (1) Trade in the U.S.
for their proprietary accounts; (2) are
registered with the Commission as
FCMs and submit orders to the trading
system for execution on behalf of U.S.
customers; or (3) are, subject to a
specific clearing and guarantee
requirement, registered with the
Commission as CPOs or CTAs, or are
exempt from such registration pursuant
to Commission Rules 4.13 or 4.14. The
CPOs would be permitted to submit
orders for execution on behalf of U.S.
pools they operate, and CTAs would be
permitted to do so for accounts of U.S.
customers for which they have
discretionary authority. The
Commission requests comment
concerning additional entities that
should be eligible for direct access to
the trading and order matching systems
of the FBOT from the U.S.
E. Registration Procedures
Section 48.5 describes procedures to
be followed to request and receive
registration.22 The registration
application must be submitted
electronically, must be signed by the
FBOT’s chief executive officer (or
functional equivalent), and must
include the information and
documentation set forth in the
Appendix to Part 48 and any
information and documentation
necessary, in the discretion of the
Commission, to effectively demonstrate
that the FBOT and its clearing
organization satisfy the registration
requirements set forth in section 48.7.
Section 48.5 also provides that the
Commission will review the application
for FBOT registration and may approve
or deny the application. At this time,
the proposed rule does not contain a
timeline for Commission action.23 If the
21 For purposes of FBOT registration, identified
member or other participant of the FBOT shall
include any affiliate of any registered FBOT’s
member or other participant that has been granted
direct access by the registered FBOT to the trading
system. An affiliate of a registered FBOT member
or other participant shall mean any person, as that
term is defined in section 1a(38) of the CEA, that:
(i) Owns 50% or more of the member or other
participant; (ii) is owned 50% or more by the
member or other participant; or (iii) is owned 50%
or more by a third person that also owns 50% or
more of the member or other participant.
22 Draft submissions and a request for a
preliminary review by Commission staff would be
encouraged under the proposed rule. The
Commission proposes that the final copy of an
application for registration would be published on
its Web site.
23 The Commission expects a surge of activity
shortly after the registration rule goes into effect.
Once this period has ended, the Commission
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application is approved, the
Commission will so notify the FBOT
and will issue an Order of Registration.
The Commission could, after
appropriate notice and an opportunity
for a hearing, amend, suspend,
terminate or otherwise restrict the terms
of the Order of Registration. If the
application is denied, the Commission
will issue a Notice of Action specifying
that the application was not approved
and the FBOT will not be registered and
may not provide direct access to its
trade matching engine from within the
U.S. Following a denial, the FBOT may
reapply for registration 360 days after
the date of denial.
The Commission is also proposing
that, in determining whether to grant or
deny an application for FBOT
registration, the Commission will
thoroughly review the information and
documentation submitted in the
application and, as necessary, conduct
an on-site due diligence visit at the
FBOT to determine, as mandated by the
Dodd-Frank Act, whether the FBOT and
its clearing organization are subject to
comprehensive supervision and
regulation by the appropriate
governmental authorities in their home
country that is comparable to the
comprehensive supervision and
regulation to which DCMs and
derivatives clearing organizations (DCO)
are subject in the U.S.24 In this context,
as previously noted, comparable does
not necessarily mean identical. The
comparability determination for
registration purposes will be similar to
that followed when reviewing direct
access no-action requests. The
Commission will evaluate whether the
FBOT’s home regulatory authority
supports and enforces regulatory
objectives in its oversight of the FBOT
that are substantially equivalent to the
regulatory objectives supported and
enforced by the Commission in its
oversight of DCMs.
The Commission notes that it uses a
similar ‘‘comparability’’ analysis when
evaluating foreign entities in the context
of issuing Rule 30.10 exemptions to
anticipates that a timeline would be established.
Such a timeline might require a Commission
response to a completed application for registration
within 120 days after the Commission, in its sole
discretion, determines that the application is
complete.
24 The Dodd-Frank Act also mandated that the
Commission consider any previous Commission
findings that the FBOT and its clearing organization
are subject to such comprehensive supervision and
regulation by the appropriate government
authorities in their home country. Such previous
Commission findings would include staff
conclusions drawn previously during the course of
reviewing an application for direct access no-action
relief.
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intermediaries.25 When determining
whether to issue a Rule 30.10
exemption, staff evaluates whether the
applicant is subject to a comparable
regulatory scheme in the country in
which it is located. In this evaluation,
comparable does not necessarily mean
identical: as set forth in Appendix A to
Rule 30.10 with respect to the
comparability determination, ‘‘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.’’ In
the case of FBOT registration, a
determination that the foreign
regulatory authority enforces
substantially equivalent regulatory
objectives is a determination of
comparability: The regulatory regime is
comparable, although not necessarily
identical, to that of the CFTC.
In its review, the Commission would
also consider whether the FBOT is
eligible to be registered as defined in
section 48.2(b) of this part and whether
the FBOT has adequately demonstrated
that it meets the requirements for
registration specified in section 48.7 and
any other requirements that the
Commission, in its discretion, believes
are necessary or appropriate to impose
under the facts and circumstances
presented.
F. FBOTs Providing Direct Access
Pursuant to No-action Relief
In Section 48.6, the Commission
proposes to provide for a ‘‘limited’’
application process for FBOTs currently
operating pursuant to existing no-action
relief. Such FBOTs would apply for
registration by (1) identifying the
specific requirements for registration set
forth in section 48.7 or information and
documentation required by the
Appendix to Part 48 that are satisfied by
information previously submitted in the
request for no-action relief that remain
current and true and resubmitting such
information and documentation,26 and
(2) submitting any information and
documentation required in a complete
application for registration that was not
previously provided or is no longer
current. The limited application for
registration would have to be submitted
within 120 days of the effective date of
the registration rules, during which time
25 See
supra note 8.
Commission is requesting resubmission of
original documentation, where appropriate, because
such documentation, some of which dates back as
much as fourteen years, may no longer be readily
available for review because of incomplete and or
misplaced files.
26 The
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the FBOT could continue to operate
pursuant to the no-action relief. The noaction relief would, upon notice to the
FBOT, be revoked after 120 days if a
complete limited application is not
received by the Commission by that
time. If the FBOT files an application for
registration within 120 days, the FBOT
could continue to operate pursuant to
the no-action relief until notified by the
Commission that the application has
been approved or denied. If the
Commission revokes the no-action relief
or denies the application, it will provide
for a transition period for phasing out
direct access.
G. Requirements for Registration
Section 48.7 describes the
requirements that the Commission
proposes that an FBOT would be
required to demonstrate in order to be
registered. The requirements are divided
into the same seven general categories
currently evaluated during the course of
a review of an application for no-action
relief and they would be reviewed in a
similar manner. Whether they are
successfully met would be determined
by a review of the information and
documentation submitted by the
applicant pursuant to the Appendix to
proposed Part 48, any additional
information or documentation requested
by the Commission in connection with
the application review, and, as
necessary, a Commission staff due
diligence on-site visit to the FBOT and
clearing organization.
First, with respect to FBOT and
clearing membership, the FBOT would
be required to demonstrate that FBOT
and clearing organization members and
other participants are fit and proper and
meet appropriate financial and
professional standards; that the FBOT
and clearing organization have adequate
conflict of interest provisions; and that
the FBOT and clearing organization
have and enforce rules prohibiting the
disclosure of material, non-public
information obtained as a result of a
member’s/other participant’s
performance of official duties.
Second, the FBOT’s automated
trading system would be required to
comply with the Principles for the
Oversight of Screen-Based Trading
Systems for Derivative Products
developed by the Technical Committee
of the International Organization of
Securities Commissions (IOSCO
Principles) and adopted by the
Commission on November 21, 1990.27
27 The
Commission adopted the IOSCO Principles
as a statement of regulatory policy for the oversight
of screen-based trading systems for derivative
products. Policy Statement Concerning the
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In addition, the FBOT’s trade matching
algorithm would be required to match
trades fairly and timely, the audit trail
would be required to capture all
relevant data (including changes to
orders), and audit trail data would be
required to be securely maintained and
available for an adequate time period.
Trade data would be required to be
made available to users and to the
public, the trading system would be
required to have demonstrated
reliability, and access to the trading
system would be required to be secure
and protected. Finally, adequate
provisions for emergency operations
and disaster recovery would be
required, trading data would be required
to be backed up to prevent its loss, and
only approved contracts could be made
available for trading by direct access
from the U.S.
Third, the contracts to be made
available by direct access in the U.S.
would be required to be futures, option
or swaps contracts that would be
eligible to be traded on a DCM and
would be subject to prior review by the
Commission. With respect to swaps,
Section 733 of the Dodd-Frank Act adds
section 5h to the CEA, which provides
that a person operating a facility for the
trading or processing of swaps must be
registered as a swaps execution facility
(SEF) or as a DCM. Section 733 also
adds section 5(g) to the CEA which
provides that the ‘‘Commission may
exempt, conditionally or
unconditionally, a swap execution
facility from registration under this
section if the Commission finds that the
facility is subject to comparable,
comprehensive supervision and
regulation on a consolidated basis by
the [SEC], a prudential regulator, or the
appropriate governmental authorities in
the home country of the facility.’’ The
approach for granting a SEF exemption
(namely, ‘‘subject to comparable,
comprehensive supervision and
regulation * * * in the home country of
the facility’’) is similar to that which
applies to FBOTs seeking registration.
Moreover, there is nothing in the DoddFrank Act, including Section 738 of the
Dodd-Frank Act amending Section 4(b)
of the CEA, which expressly precludes
a registered FBOT from offering swaps
through direct access.28 Accordingly,
the Commission is proposing to permit
a registered FBOT to offer and trade
swaps though direct access, subject to
the condition that the FBOT meet
Oversight of Screen-Based Trading Systems, 55 FR
48670 (Nov. 21, 1990).
28 Furthermore, under the Dodd-Frank Act, a
DCM may trade swaps without additionally
registering as a SEF.
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certain standards or requirements that
may apply to SEFs, as the Commission
deems appropriate. The Commission
requests comment with respect to
whether a registered FBOT should be
allowed to make available swaps
through direct access and if so, under
what conditions.
Contracts that are linked to a contract
listed for trading on a U.S. registered
entity would be required to be
identified, as would contracts that share
any other commonality with a contract
listed for trading on a U.S. registered
entity, i.e., both the FBOT’s and the U.S.
registered entity’s contract settle to the
price of the same third partyconstructed index. Finally, the FBOT
would be required to certify that it has
listing standards in place that require
that contracts not be readily susceptible
to manipulation.29
Fourth, with respect to settlement and
clearing, the clearing organization,
would be required to comply with the
current Recommendations for Central
Counterparties (RCCPs) that have been
issued jointly by the Committee on
Payment and Settlement Systems
(CPSS) and the Technical Committee of
the International Organization of
Securities Commissions (IOSCO), as
updated, revised or otherwise amended,
or successive standards, principles and
guidance for central counterparties or
financial market infrastructures adopted
jointly by IOSCO and CPSS, and the
clearing organization would be required
to be in good regulatory standing in its
home country jurisdiction. In the
alternative, the clearing organization
may be registered with the Commission
as a DCO.30
Fifth, the FBOT’s and the clearing
organization’s regulatory authorities
would be required to provide
comprehensive supervision and
regulation of the FBOT and the clearing
organization that is comparable to the
comprehensive supervision and
regulation to which DCMs and DCOs are
subject in the U.S., would be required
to have the power to intervene in the
29 The Commission considers that contracts that
can be found to have the following are less likely
to be susceptible to manipulation: (1) They rely for
settlement pricing on a robust and transparent
calculation, whether based on the contract’s own
trading or an externally calculated index; (2) they
are subject to measures to reduce the ability of any
party to disrupt pricing, e.g. position limits,
intraday surveillance, and pre-trade screens; and
(3) there is either ample deliverable supply or
flexibility in the contract (alternate delivery
mechanisms).
30 The Commission is including the option for the
clearing organization to be registered as a DCO
because it is aware that some foreign clearing
organizations are registered as such. These include
ICE Clear Europe Limited, LCH Clearnet Ltd. and
Natural Gas Exchange Inc.
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market and authority to share
information with the Commission, and
would be required to provide for
ongoing regulatory supervision of the
FBOT and its trading system, the
clearing organization and its clearing
system and intermediaries—with
particular attention to market integrity
and customer protection and the
manner in which the exchange enforces
its rules. In the case of FBOTs with
listed swaps, the Commission proposes
to take into consideration the regulation
of relevant market participants (e.g.,
swap dealers) regarding their exchangetrading activity when analyzing the
comparability and comprehensiveness
of the regulatory regime applicable to
exchange-listed swaps in the FBOT’s
home country.
Sixth, the FBOT and the clearing
organization would be required to have
appropriate rules and would be required
to enforce them. Among other things,
the FBOT and the clearing organization
would be required to have sufficient
compliance staff and resources to fulfill
their respective regulatory
responsibilities, including the capacity
to detect, investigate, and sanction
persons who violate their respective
rules. The FBOT would be required to
implement and enforce rules relating to
oversight of trading practices, including
appropriate trade practice surveillance,
real-time market monitoring and market
surveillance. The FBOT’s and the
clearing organization’s rules would be
required to authorize the compliance
staff to obtain, from market participants,
any information and cooperation
necessary to conduct effective rule
enforcement and investigations, and the
FBOT would be required to have and
enforce rules with respect to access to
the trading system and the means by
which the connection is accomplished.
The FBOT and the clearing organization
(or their respective regulatory
authorities) would be required to have
implemented and enforce disciplinary
procedures that empower them to
recommend and prosecute disciplinary
actions for suspected rule violations,
impose adequate sanctions for such
violations, and provide adequate
protections to charged parties pursuant
to fair and clear standards. The FBOT
would be required to have the capacity
to detect and deter market
manipulation, attempted manipulation,
price distortion, and other disruptions
of the market and would be required to
have and enforce rules designed to
maintain market and financial integrity
and prohibit other trading and market
abuses. Finally, the FBOT would be
required to have and enforce rules and
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70979
procedures that ensure a competitive,
open and efficient market and
mechanism for executing transactions.
Finally, satisfactory informationsharing arrangements among the FBOT,
the clearing organization, their
respective regulatory authorities, and
the Commission would be required to be
in place. The regulatory authorities
would be required to be signatories to
the IOSCO Multilateral Memorandum of
Understanding (IOSCO MOU) 31 or, if
not signatories to the IOSCO MOU,
would have to inform the Commission
of the reasons why the document has
not been signed, supply any additional
information requested by the
Commission, and ensure alternative
information sharing arrangements that
are satisfactory to the Commission are in
place. The regulatory authority also
would be required to be a signatory to
the Declaration on Cooperation and
Supervision of International Futures
Exchanges and Clearing Organizations
(Boca Declaration),32 or otherwise
commit to share the types of
information contemplated by the
International Information Sharing
Memorandum of Understanding and
Agreement (Exchange International
MOU) 33 with the Commission. The
FBOT would be required to have
executed, or have committed to execute,
the Exchange International MOU. In
addition, pursuant to the proposed
conditions of registration described in
section 48.8(a)(6)(iii), the FBOT would
31 Memorandum of Understanding Concerning
Consultation, Cooperation and the Exchange of
Information of the International Organization of
Securities Commissions, October 16, 2003. The
IOSCO MOU is the first worldwide multilateral
enforcement cooperation arrangement among
securities and derivatives regulators. It provides for
the exchange of essential information to investigate
cross-border securities and derivatives violations,
including the most serious offenses, such as
manipulation, insider trading and customer fraud.
The IOSCO MOU enables regulators to share critical
information, including bank, brokerage, and client
identification records and to use that information in
civil and criminal prosecutions.
32 The Boca 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 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, described below.
33 The development of the Exchange International
MOU was one of the achievements that resulted
from the Futures Industry Association-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.
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H. Conditions Upon FBOT Registration
As previously noted, Section 738 of
the Dodd-Frank Act amends Section
4(b) of the CEA to provide that the
Commission may adopt rules and
regulations requiring registration with
the Commission of an FBOT that
provides identified members of the
FBOT or other participants located in
the United States with direct access to
the electronic trading and order
matching system of the FBOT, including
rules and regulations prescribing
procedures and requirements applicable
to the registration of such FBOTs.
Proposed Section 48.8 provides for
certain procedures and requirements
applicable to maintaining the
registration of such FBOTs and
describes the specified conditions upon
FBOT registration that the Commission
believes are essential in assuring
effective market integrity and customer
protection. As previously noted, the
conditions applicable to existing noaction relief have expanded over time to
address activities not foreseen when the
earliest no-action letters were issued. In
the proposed regulations, the
Commission has added further
conditions to address increasing
technological innovation, new types of
products, the impact on the market of
different trading entities listing
substantially similar or even connected
products, and the requirements of the
Dodd-Frank Act. The specified
conditions are divided into three
categories: Specified conditions for
maintaining registration, other
continuing obligations, and additional
specified conditions for FBOTs with
linked contracts. A registered FBOT
would have an ongoing obligation to
monitor and enforce compliance with
the specified conditions of its
registration and with any additional
conditions that the Commission, in its
discretion and upon notice to the FBOT
and subsequent to an opportunity to be
heard, may impose.
(1) Specified Conditions
With respect to the regulatory regimes
under which they operate, the FBOT
and the clearing organization,
respectively, would be required to
continue to satisfy the criteria for a
regulated market and clearing
organization pursuant to their home
regulatory regimes identified in the
application for registration and would
be required to continue to be subject to
oversight by their home regulatory
authorities. In addition, the laws,
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mechanisms of the applicable regulatory
regimes would be required to continue
to require the FBOT to maintain fair and
orderly markets; prohibit fraud, abuse,
and market manipulation; and provide
that such requirements are subject to the
oversight of appropriate regulatory
authorities. With respect to
international standards, the FBOT
would be required to continue to adhere
to the IOSCO Principles, to the extent
such principles do not contravene U.S.
law. The clearing organization would be
required to continue to satisfy, as
applicable, the rules, regulations and
core principles applicable to its
registration as a DCO or the RCCPs or
successive standards, principles or
guidance that may be adopted jointly by
IOSCO and CPSS, to the extent such
recommendations, standards, principles
or guidance do not contravene U.S. law.
The FBOT would be required to
restrict direct access to the trading
system from the U.S. to identified
members or other participants and take
reasonable steps to prevent third parties
from providing such access to the
FBOT’s trading system to persons other
than the identified members or other
participants.34 All orders transmitted
through the FBOT’s trading system by
an FBOT-identified member or other
participant by direct access would be
required to be for the member’s or other
participant’s own account unless: (a)
The member or other participant is an
FCM or (b) subject to certain clearing
requirements, the member or other
participant is a CPO or CTA, or is
exempt from such registration pursuant
to Commission regulation 4.13 or 4.14.
The specified conditions also include
several documentation requirements to
assist the Commission in monitoring the
activities of a registered FBOT and the
clearing organization. Each current and
prospective member or other participant
that is granted direct access to the
FBOT’s trading system from the U.S.
and that is not registered as an FCM, a
CTA or a CPO would be required to file
with the FBOT (a) A written
representation stating that the member
or other participant agrees to and
submits to the jurisdiction of the CFTC
with respect to activities conducted
34 The Commission believes that such steps
would include specific prohibitions on sharing
access in the FBOT’s rules and membership
agreements and a review of how access is granted
by and to the identified member’s or other
participant’s infrastructure during audits of those
entities.
The Commission will continue to evaluate new
developments in technology and business
arrangements that may be used by FBOTs to
provide U.S. participants with direct access to its
trade matching system in the context of these
proposed rules.
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pursuant to the registration; (b) a valid
and binding appointment of a U.S. agent
for service of process in the U.S.; and
(c) a written representation that the
member or other participant granted
direct access pursuant to this regulation
will provide, upon the request of the
Commission, the U.S. Department of
Justice and, if appropriate, the National
Futures Association (NFA) (collectively,
the U.S. Agencies), prompt access to the
entity’s, member’s or other participant’s
original books and records or, at the
election of the requesting U.S. Agency,
a copy of specified information
containing such books and records, as
well as access to the premises where the
trading system is available in the U.S.
The FBOT and the clearing organization
also would be required to file with the
Commission a valid and binding
appointment of an agent for service of
process in the U.S. and maintain with
the FBOT written representations
concerning U.S. Agencies’ access to
original books and records or, at the
election of the requesting U.S. Agency,
a copy of specified information
containing such books and records, as
well as access to the premises where the
trading system is available in the U.S.
The FBOT would be required to
maintain all the representations
required pursuant to this regulation as
part of its books and records and make
them available upon the request of a
Commission representative.
With respect to information sharing,
the specified conditions mandate that
information-sharing arrangements
satisfactory to the Commission are in
effect among the Commission and the
regulatory authorities that oversee both
the FBOT and the clearing organization
and that the Commission is able to
obtain sufficient information regarding
the FBOT, the clearing organization and
their respective members and other
participants operating pursuant to the
FBOT’s registration. The FBOT would
be required to provide information
directly to the Commission in response
to a Commission request. In the event
that the FBOT and the clearing
organization are separate entities, the
proposed rule would require the
clearing organization to enter into a
written agreement with the FBOT in
which the clearing organization is
contractually obligated to promptly
provide any and all information and
documentation that may be required of
the clearing organization under the
regulation.
With respect to swaps contracts, if the
FBOT makes swaps contracts available
by direct access, the FBOT would be
required to report to the public, on a
real-time basis, data relating to each
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swap transaction, including price and
volume, as soon as technologically
practicable after execution of the swap
transaction. In addition, the FBOT
would be required to ensure that all
swap transaction data is timely reported
to a swap data repository that is either
registered with, or has an informationsharing arrangement with, the
Commission. The FBOT also must agree
to coordinate with the Commission with
respect to arrangements established to
address cross market oversight issues,
including surveillance, emergency
actions and the monitoring of trading. In
addition, particularly with respect to the
listing of swaps contracts, the
Commission may, in its discretion and
after notice and an opportunity to be
heard, impose additional conditions
upon the FBOT’s registration. Finally,
all futures, option and swaps contracts
must be cleared.
(2) Other Continuing Obligations
Among the proposed specified
conditions identified as other
continuing obligations are quarterly,
upon occurrence, and annual reporting
requirements that the Commission
determines are necessary to provide
ongoing visibility with respect to a
registered FBOT’s performance as it
relates to U.S. persons. First, as is the
case now with the no-action relief
recipients, the FBOT would be required
to maintain and provide to the
Commission on at least a quarterly
basis, and at any time promptly upon
request, volume data that reflects the
percentage of trading originating in the
U.S. Thus, the FBOT would be required
to provide, for each contract available to
be traded through its trading system, the
following: (a) The total trade volume
originating from electronic trading
devices providing direct access to the
trading system in the U.S., (b) the total
trade volume for such products traded
through the trading system worldwide,
and (c) the total trade volume for such
products traded on the FBOT generally.
The FBOT would also be required to
provide a listing of the names, NFA ID
numbers (if applicable), and main
business addresses in the U.S. of all
members and other participants that
have access to the trading system in the
U.S.
With respect to reporting the
occurrence of events that may have an
impact on the FBOT’s capability to meet
its registration requirements, the FBOT
would be required to promptly provide
the Commission with written notice of
the following: (a) Any material change
in the information provided in the
FBOT’s registration application or in the
FBOT’s or clearing organization’s rules
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or in the laws, rules, and regulations in
the home jurisdictions of the FBOT or
the clearing organization; (b) any matter
known to the FBOT or the clearing
organization that, in their judgment,
could affect the financial or operational
viability of the FBOT or the clearing
organization; (c) any default,
insolvency, or bankruptcy of any FBOT
trading member or other participant that
may have a material, adverse impact
upon the condition of the FBOT or upon
any U.S. customer or firm, or any
default, insolvency or bankruptcy of any
member of the FBOT’s clearing
organization; (d) any known violation
by the FBOT, its clearing organization or
any trading or clearing member or other
participant of the specified conditions
of registration or failure to satisfy the
requirements for registration; and (e)
any disciplinary action taken by the
FBOT or its clearing organization
against any FBOT trading member or
other participant or a member of the
clearing organization that involves any
market manipulation, fraud, deceit, or
conversion or that results in suspension
or expulsion that involves a contract or
contracts available for trading from
within the U.S. pursuant to registration.
Finally, the FBOT or the clearing
organization, as applicable, would be
required to provide the following to the
Commission on an annual basis: (a) A
certification from the FBOT’s regulatory
authority confirming that the FBOT
retains its authorization in good
standing as a regulated market/
exchange; (b) a certification from the
clearing organization’s regulatory
authority confirming the clearing
organization’s regulatory status (i.e., its
authorization, licensure, or registration)
and continued ‘‘good standing’’ in its
authorized jurisdiction; (c) if the
clearing organization is not a DCO,
recertification of the clearing
organization’s compliance with the
RCCPs or successive standards,
principles or guidance; (d) a description
of any material changes to any relevant
representation regarding the FBOT or
clearing organization made to the
Commission that have not been
previously disclosed; (e) a description of
any significant disciplinary or
enforcement actions that have been
instituted by or against the FBOT or the
clearing organization or the senior
officers of either in the prior year; and
(f) a written description of any material
changes to the regulatory regime to
which the FBOT or the clearing
organization are subject that have not
been previously disclosed, in writing, to
the Commission (or a certification that
no material changes have been made).
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70981
(3) Linked Contract Conditions
The proposed rule also would include
additional specified conditions for
FBOTs that make linked contracts
available for direct access. These
proposed additional specified
conditions are divided into two
categories: Statutory conditions, which
are specifically required by the DoddFrank Act, and other conditions on
linked contracts, which are additional
conditions that the Commission believes
are necessary because such linkages
create a single market for the subject
contracts and, in the absence of certain
preventive measures at the FBOT, could
compromise the Commission’s ability to
carry out its market surveillance
responsibilities. Because of the linkage,
the trading of the linked contracts on an
FBOT affects the pricing of contracts
traded on U.S.-registered entities.
(a) Statutory Conditions
The statutory conditions mandated by
Section 738 of the Dodd-Frank Act are
substantially similar to the previously
discussed additional conditions the
Commission imposed on the no-action
relief issued to ICE Futures Europe
when that exchange made available a
WTI futures contract that cash-settled
on the price of a physically-settled Light
Sweet Crude Oil futures contract traded
on the NYMEX,35 include the following:
(i) The FBOT must make public certain
daily trading information regarding the
linked contract; (ii) the FBOT (or its
regulatory authority) must (A) Adopt
position limits for the linked contract
that are comparable to the position
limits adopted by the registered entity
for the contract to which it is linked; (B)
have the authority to require or direct
market participants to limit, reduce, or
liquidate any position the FBOT (or its
regulatory authority) determines to be
necessary to prevent or reduce the threat
of price manipulation, excessive
speculation as described in section 4a of
the Act, price distortion, or disruption
of delivery or the cash settlement
process; (C) agree to promptly notify the
Commission, with regard to the linked
contract, of any changes with respect to
(i) and (ii) above and any other area of
interest expressed by the Commission to
the FBOT or its regulatory authority; (D)
provide information to the Commission
regarding large trader positions in the
linked contract that is comparable to the
large trader position information
collected by the Commission for the
contract to which it is linked; and (E)
provide the Commission such
information as is necessary to publish
35 See
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reports on aggregate trader positions for
the linked contract that are comparable
to such reports on aggregate trader
positions for the contract to which it is
linked.
One statutory condition is mandated
by Section 737 of the Dodd-Frank Act,
and would require that if the
Commission establishes speculative
position limits (including related hedge
exemption provisions) on the aggregate
number or amount of positions in a
contract traded on a U.S. registered
entity and the registered FBOT lists a
linked contract, the FBOT (or its
regulatory authority) must adopt
position limits (including related hedge
exemption provisions) for the linked
contract as determined by the
Commission.
srobinson on DSKHWCL6B1PROD with PROPOSALS2
(b) Other Conditions on Linked
Contracts
The other conditions on linked
contracts, also imposed pursuant to the
Commission’s new Section 4(b)(1)(A)
authority to adopt rules and regulations
prescribing procedures and
requirements applicable to the
registration of FBOTs, represent the
second set of additional conditions the
Commission imposed on the no-action
relief issued to ICE Futures Europe
when that exchange made available for
trading by direct access contracts linked
to the prices of contracts traded on
NYMEX.36 The conditions as proposed
would require that the FBOT, among
other things, (i) Inform the Commission
in a quarterly report of any member that
had positions in a linked contract above
the applicable FBOT position limit, (ii)
provide trade execution and audit trail
data for input to the CFTC’s Trade
Surveillance System on a trade-date
plus one basis, (iii) provide for CFTC
on-site visits for the purpose of
overseeing the FBOT’s and the clearing
organization’s ongoing compliance with
registration requirements and the
conditions of registration, (iv) provide,
at least one day prior to the effective
date, copies of, or hyperlinks to, all
rules, rule amendments, circulars and
other notices published by the FBOT
with respect to all linked contracts, (v)
provide copies of all Disciplinary
Notices involving the FBOT’s linked
contracts upon closure of the action,
and (vi) promptly take similar action
with respect to its linked contract in the
event that the CFTC, pursuant to its
emergency powers authority, directs
that the U.S. registered entity which
lists the contract to which the FBOT’s
contract is linked to take emergency
36 See
CFTC Letter No. 09–37 (August 20, 2009).
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action with respect to a linked contract
(e.g., to cease trading in the contract).
The Commission questions whether
there are additional conditions that it
could impose on registered FBOTs that
list linked contracts to promote orderly
markets and customer protection, such
as automatic safety features to protect
against errors in the entry of orders,
price-banding mechanisms, maximum
order size limitations, or trading pauses
to prevent cascading stop-loss orders.37
I. Revocation of Registration
Section 48.9 addresses certain events
which could lead the Commission to
revoke an FBOT’s registration. With
respect to failure to satisfy any of the
registration requirements or conditions
of registration, the proposed rule
provides that if the Commission
believes that a registration requirement
or condition is not being met, the
Commission may request that the
registered FBOT file a written
demonstration showing it is in
compliance with the requirement or
condition. If the Commission
determines that an FBOT (or its clearing
organization) has failed to satisfy any of
the registration requirements or
conditions, the FBOT would be given an
opportunity to bring itself into
compliance with the requirement or
condition. If the FBOT fails to make
changes necessary to comply with the
requirement or condition within 30 days
after receiving a notification that it was
not satisfying one or more requirements
or conditions, the Commission may
revoke the FBOT’s registration, after
appropriate notice and an opportunity
for a hearing. If the Commission revokes
the registration, it will provide for a
transition period for phasing out direct
access. Finally, an FBOT whose
registration has been revoked for failure
to satisfy a registration requirement or
condition could apply for re-registration
after 360 days if the deficiency causing
the revocation has been cured or
relevant facts and circumstances have
changed.
Section 48.9 of the proposed rule also
identifies four other events that, without
limitation, could result in revocation,
generally after appropriate notice and an
opportunity for a hearing. The
Commission may revoke an FBOT’s
registration (1) If the Commission
determines that a representation made
in the application for registration
37 Many of these mechanisms are discussed in the
Commission’s recent joint study with the SEC of the
market events of May 6, 2010. See Preliminary
Findings Regarding the Market Events of May 6,
2010—Report of the Staffs of the CFTC and SEC to
the Joint Advisory Committee on Emerging
Regulatory Issues (May 18, 2010), Appendix B–11.
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relevant to the Commission’s decision to
register the entity is found to have been
untrue or materially misleading; (2) if
there is a material change in the
regulatory regime applicable to the
FBOT or clearing organization; (3) in the
event of an emergency or in a
circumstance where the Commission
determines that revocation would be
necessary or appropriate in the public
interest; or (4) the FBOT or the clearing
organization is no longer authorized,
licensed or registered, as applicable, as
a regulated market and/or exchange or
clearing organization or ceases to
operate as an FBOT or clearing
organization. Revocation under these
circumstances would not necessarily
follow the procedures delineated for
revocation for failure to continue to
satisfy registration requirements or
conditions, but would be handled by the
Commission as relevant facts or
circumstances warrant.
The Commission acknowledges that
there are other actions that, if
undertaken by a registered FBOT, could
lead the Commission to exercise its
discretion and consider a full range of
corrective actions, including revocation
of the FBOT’s registration, requiring
enhanced information sharing
arrangements and surveillance
procedures, imposing trading
restrictions on U.S. persons trading on
the FBOT, imposing additional
conditions on the registration, or taking
other appropriate action. For instance,
the Commission believes that the listing
of certain products on an FBOT could
potentially have an adverse impact on
the market and the public interest.
Thus, the Commission would take
corrective action as necessary if it
become aware that a registered FBOT
permits the trading of products that
potentially could: (1) Affect adversely
the pricing of contracts traded on any
registered entity as defined in section
1a(40) of the Act, or of contracts traded
on any cash market for commodities
subject to the CEA; (2) create
unacceptable systemic risks or
disruptions in those markets or the U.S.
financial system, including capital
markets; or (3) facilitate abusive trading
practices on U.S. markets or otherwise
interfere with the ability of the
Commission to carry out its regulatory
responsibilities. The Commission
retains plenary authority to address
manipulative or abusive trading
practices that affect U.S. futures and
cash markets and market users, and
would use that enforcement authority
when necessary and appropriate.
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J. Additional Contracts
Section 48.10 would establish the
procedures for a registered FBOT to
make available futures, option and
swaps contracts that were not included
in the registration application on a
trading system to which FBOT members
and other participants in the U.S. have
been granted direct access. These
procedures are substantially similar to
the procedures established for the
listing of additional contracts under
direct access no-action relief.38
Generally, for other than security index
futures contracts, a registered FBOT
would be required to submit a written
request prior to offering the additional
futures and option and swaps contracts
from within the U.S. Such a written
request would include the terms and
conditions of the additional contracts to
be made available and a certification
that (1) the additional contracts meet the
requirements of Section 48.7(c) of this
part and (2) the FBOT and the clearing
organization continue to satisfy the
conditions of registration. The FBOT
would be permitted to make available
for trading the additional contracts ten
business days after the date of receipt by
the Commission of the written request,
unless the Commission notifies the
FBOT that additional time is needed to
complete its review of policy or other
issues pertinent to the additional
contracts.
A registered foreign board of trade
would be permitted to list for trading an
additional futures contract on a nonnarrow-based security index pursuant to
the no-action relief procedures set forth
in Appendix D to Part 30 of the
Commissions regulations. Such
procedures would require that the
registered FBOT’s request to make the
non-narrow-based security index futures
contract available for trading by direct
access be included in the FBOT’s
request that the Commission’s Office of
the General Counsel issue no-action
relief providing that the non-narrowbased security index futures contract
may be offered or sold to persons
located within the U.S. in accordance
with Section 2(a)(1)(C)(iv) of the Act.
With respect to making available for
trading by direct access an option
contract on a previously approved
futures contract, the proposed
procedures are also substantially similar
to the procedures established for the
listing such option contracts under
38 See Notice of Revision of Commission Policy
Regarding the Listing of New Futures and Option
Contracts by Foreign Boards of Trade That Have
Received Staff No-Action Relief to Provide Direct
Access to Their Automated Trading Systems from
Locations in the United States. 71 FR 19877 (April
18, 2006); corrected at 71 FR 21003 (April 24, 2006).
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direct access no-action relief.39 The
proposed procedures would provide the
following, depending on the type of
option contract. (1) If the option is on
a futures contract that is not a linked
contract, the option contract could be
made available for trading by direct
access by filing with the Commission no
later than the business day preceding
the initial listing of the contract: (i) A
copy of the terms and conditions of the
additional contract and (ii) a
certification that the FBOT continues to
satisfy the conditions of its registration.
(2) If the option is on a futures contract
that is a linked contract, the option
contract may be made available for
trading by direct access in the same
manner as (1) above except that the
certification must represent that the
FBOT continues to satisfy the
conditions of its registration, including
the conditions specifically applicable to
linked contracts set forth in Section
48.8(c). (3) If the option is on a nonnarrow-based security index futures
contract which may be offered or sold
in the U.S. pursuant to a no-action letter
issued by the Office of General Counsel,
the option contract could be listed for
direct access without further action by
either the registered FBOT or the
Commission.
K. Appendix to Part 48—Contents of
Application
The Appendix to the proposed Part 48
includes a description of what the
Commission believes should be
included in the application for
registration in order for the FBOT to
demonstrate, and for the Commission to
conclude, that the FBOT meets the
requirements for registration. The
Appendix reflects submission
requirements in eight areas, including
general information about the FBOT and
seven areas that specifically address the
registration requirements identified in
Section 48.7. The Commission requests
comments with respect to whether the
application contents requirements of the
Appendix are adequate to completely
address the registration requirements.
IV. Request for Comments Regarding
the Proposed Registration Procedures
In the proposed rule, the Commission
has included swaps in the set of
contracts that a registered FBOT may
list on a trading system to which it has
39 See Notice of Additional Conditions on the NoAction Relief When Foreign Boards of Trade That
Have Received Staff No-Action Relief To Permit
Direct Access to Their Automated Trading Systems
from Locations in the United States List for Trading
from the U.S. Linked Futures and Option Contracts
and a Revision of Commission Policy Regarding the
Listing of Certain New Option Contracts. 74 FR
3570 (January 21, 2009).
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70983
provided direct access to U.S.-located
members and other participants. As
previously stated, there is nothing in the
Dodd-Frank Act, including Section 738
of the Dodd-Frank Act amending
Section 4(b) of the CEA, which
expressly precludes a registered FBOT
from offering swaps through direct
access. Accordingly, the Commission is
proposing to permit a registered FBOT
to offer and trade swaps though direct
access, subject to the condition that the
FBOT meet certain standards or
requirements that may apply to SEFs, as
the Commission deems appropriate.40
The Commission requests comment
with respect to whether a registered
FBOT should be allowed to make
available swaps through direct access
and if so, under what conditions. FBOTs
have historically, at least in the context
of granting direct access no-action relief,
been viewed by Commission staff as
DCM-equivalent entities. The proposed
FBOT registration requirements are
based upon the premise that in
reviewing the FBOT for being subject to
comparable, comprehensive supervision
and regulation by the appropriate
governmental authorities in its home
country, the point of reference is how
DCMs operate and are regulated and
overseen by the CFTC.
Finally, the Commission requests
comment on whether, to the extent an
FBOT is permitted to list swaps on a
trading system to which the FBOT has
granted direct access to members and
other participants in the U.S., the
Commission should examine the
oversight of relevant market participants
(e.g., the functional equivalents of swap
dealers and major swap participants, as
those terms are defined by the DoddFrank Act) in the applicable home
country jurisdictions when making a
determination as to the comparability
and comprehensiveness of the
supervision and regulation of the
relevant regulatory regime. For example,
the Commission may wish to consider
whether swap dealers are permitted to
provide counterparties with the right to
segregate collateral. In the case of
swaps, certain portions of the regulatory
regime applicable to market participants
with respect to their exchange trading
activity (e.g., business conduct
standards) may be imposed by the
primary regulatory authority in the
home jurisdiction of the participant
instead of by the exchange on which
such participants conduct their
transactions. Accordingly, it may be
necessary or appropriate to review the
40 As previously noted, under the Dodd-Frank
Act, a DCM may trade swaps without additionally
registering as a SEF.
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regulations applicable to such
participants in order to ascertain
whether the foreign regulatory regime
with respect to the foreign board of
trade, in its totality, is both
comprehensive and comparable to that
in the U.S. The Commission requests
comment regarding whether such a
review is necessary or appropriate. The
Commission invites public comment
with respect to all areas described in the
proposed registration rule.
srobinson on DSKHWCL6B1PROD with PROPOSALS2
V. Related Matters
A. The Paperwork Reduction Act
The purposes of the Paperwork
Reduction Act (‘‘PRA’’) are, among other
things, to minimize the paperwork
burden to the private sector, ensure that
any collection of information by a
government agency is put to the greatest
possible uses, and minimize duplicative
information collections across
government.41 The PRA applies with
extraordinary breadth to all information,
‘‘regardless of form or format,’’ a
government agency is ‘‘obtaining,
causing to be obtained [or] soliciting’’
and includes requiring ‘‘disclosure to
third parties or the public, of facts or
opinion,’’ when the information
collection calls for ‘‘answers to identical
questions posed to, or identical
reporting or recordkeeping requirements
imposed on, ten or more people.’’ 42 This
provision has been determined to
include not only mandatory but also
voluntary information collections, and
to not only written but also oral
communications.43
To effect the purposes of the PRA,
Congress requires all agencies to
quantify and justify the burden of any
information collection it imposes.44
This includes submitting each
collection, whether or not it is
contained in a rulemaking, to the Office
of Management and Budget (‘‘OMB’’) for
review.45 The OMB submission process
includes completing a form 83–I and a
supporting statement with the agency’s
burden estimate and justification for the
collection. When the information
collection is established within a
rulemaking, the agency’s burden
estimate and justification should be
provided in the proposed rulemaking,
subjecting it to the rulemaking’s public
comment process.
The Commission will protect
proprietary information according to the
Freedom of Information Act and 17 CFR
part 145, ‘‘Commission Records and
41 44
U.S.C. 3501.
U.S.C. 3502.
43 5 CFR 1320.3(c)(1).
44 44 U.S.C. 3506.
45 44 U.S.C. 3507.
42 44
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Information.’’ In addition, section 8(a)(1)
of the Act strictly prohibits the
Commission, unless specifically
authorized by the Act, from making
public ‘‘data and information that would
separately disclose the business
transactions or market positions of any
person and trade secrets or names of
customers.’’ The Commission also is
required to protect certain information
contained in a government system of
records according to the Privacy Act of
1974, 5 U.S.C. 552a.
If the proposed rules are promulgated
in final form, they would require FBOT
registrants to collect and submit,
pursuant to part 48 of the Regulations,
information to the Commission, which
has never been required. For each
proposed requirement, set forth below
are estimates of: (i) The number of
respondents; (ii) the number of annual
responses by each respondent; (iii) the
average hours per response; and (iv) the
aggregate annual reporting burden. New
OMB control numbers will be assigned
to these proposed information collection
requirements.
1. New Collection 3038–NEW
Regulation 48.6 requires each FBOT
currently providing direct access
pursuant to no-action relief to submit a
‘‘complete limited application’’ with the
Commission to satisfy the registration
requirement, which includes
information and documentation set
forth in the Appendix to this part that
was not previously provided or is not
current.
OMB Control Number 3038–NEW.
Estimated number of respondents: 20.
Annual responses by each
respondent: 1.
Estimated average hours per response:
50.
Aggregate annual reporting burden:
1,000.
2. New Collection 3038–NEW
Regulation 48.7 provides the
information and documentation
requirements that a new FBOT must
submit to become registered with the
Commission, including FBOT
membership information, automated
trading system, terms and conditions of
contracts to be made available in the
U.S., settlement and clearing, the
regulatory regime governing the FBOT
and clearing organization, the FBOT and
clearing organization rules and
enforcement thereof, and information
sharing agreements.
OMB Control Number 3038–NEW.
Estimated number of respondents: 7.
Annual responses by each
respondent: 1.
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Estimated average hours per response:
1,000.
Aggregate annual reporting burden:
7,000.
3. New Collection 3038–NEW
Regulation 48.8(a)(8)(i) requires each
registered FBOT that makes swap
contracts available by direct access to
report to the public, on a real-time basis,
data relating to each swap transaction,
including price and volume, as soon as
technologically practicable after
execution of the swap transactions.46
OMB Control Number 3038–NEW.
Estimated number of respondents: 4.
Annual responses by each
respondent: 250.
Estimated average hours per response:
8.32.
Aggregate annual reporting burden:
8,320.
4. New Collection 3038–NEW
Regulation 48.8(a)(8)(ii) requires each
registered FBOT that makes swap
contracts available by direct access to
ensure that all swap transaction data is
timely reported to a swap data
repository.47
OMB Control Number 3038–NEW.
Estimated number of respondents: 4.
Annual responses by each
respondent: 250.
Estimated average hours per response:
8.32.
Aggregate annual reporting burden:
8,320.
5. New Collection 3038–NEW
Regulation 48.8(b)(1)(i)(A) and (B)
requires each registered FBOT to
provide the Commission with certain
trading volume information and certain
information regarding the FBOT
members and other participants in the
U.S. that have direct access to the
FBOT’s trading system on at least a
quarterly basis.
OMB Control Number 3038–NEW.
Estimated number of respondents: 27.
Annual responses by each
respondent: 4.
Estimated average hours per response:
6.
Aggregate annual reporting burden:
648.
6. New Collection 3038–NEW
Regulation 48.8(b)(1)(ii)(A)–(F)
requires each registered FBOT to
46 Because the Commission has not previously
regulated the swap market, the Commission was
unable to collect data relevant to these estimates.
Therefore, the Commission requests comment on
these estimates.
47 Because the Commission has not previously
regulated the swap market, the Commission was
unable to collect data relevant to these estimates.
Therefore, the Commission requests comment on
these estimates.
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provide the Commission on an ongoing
basis with written notice of certain
information, including any material
changes to the registration information
and documents previously submitted to
the Commission; any matter known to
the FBOT concerning the financial or
operational viability of the FBOT or its
clearing organization; and any known
violation by the FBOT, its clearing
organization, any member of the FBOT
or its clearing organization or any other
participant of the terms or conditions of
registration.
OMB Control Number 3038–NEW.
Estimated number of respondents: 27.
Annual responses by each
respondent: 1.
Estimated average hours per response:
2.
Aggregate annual reporting burden:
54.
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7. New Collection 3038–NEW
Regulation 48.8(b)(1)(iii)(A)–(F)
requires each registered FBOT to
provide the Commission on an annual
basis with certain information including
a certification from the FBOT’s
regulatory authority that the FBOT
retains its authorization in good
standing as a regulated exchange under
the licensing used in the FBOT’s home
country, a description of any significant
disciplinary or enforcement actions that
have been instituted by the FBOT in the
prior year, and a written description of
any material changes to the regulatory
regime to which the FBOT is subject to
that have not previously been disclosed
to the Commission.
OMB Control Number 3038–NEW.
Estimated number of respondents: 27.
Annual responses by each
respondent: 1.
Estimated average hours per response:
4.
Aggregate annual reporting burden:
108.
8. New Collection 3038–NEW
Regulation 48.8(c)(1)(ii)(C)(1)–(4)
requires each registered FBOT to
promptly notify the Commission, with
regard to the linked contract, of any
changes regarding information that the
FBOT will make publicly available,
enforcement of position limits, and
position reductions required to prevent
manipulation, excessive speculation as
described in section 4a of the Act, price
distortion, or disruption of delivery or
the cash settlement process, and any
other area of interest expressed by the
Commission to the FBOT or its
regulatory authority.
OMB Control Number 3038–NEW.
Estimated number of respondents: 1.
Annual responses by each
respondent: 2.
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Estimated average hours per response:
3.
Aggregate annual reporting burden: 6.
9. New Collection 3038–NEW
Regulation 48.8(c)(1)(ii)(D) requires
each registered FBOT with a linked
contract to provide the Commission
with large trader position information.
OMB Control Number 3038–NEW.
Estimated number of respondents: 1.
Annual responses by each
respondent: 250.
Estimated average hours per response:
2.
Aggregate annual reporting burden:
500.
10. New Collection 3038–NEW
Regulation 48.8(c)(1)(ii)(E) requires
each registered FBOT with a linked
contract to provide the Commission
with such information as necessary to
publish reports on aggregate trader
positions.
OMB Control Number 3038–NEW.
Estimated number of respondents: 1.
Annual responses by each
respondent: 250.
Estimated average hours per response:
2.
Aggregate annual reporting burden:
500.
11. New Collection 3038–NEW
Regulation 48.8(c)(2)(i) requires each
registered FBOT with a linked contract
to provide the Commission with a
quarterly report of any member that had
positions in a linked contract above the
FBOT position limit, whether a hedge
exemption was granted, and if not,
whether a disciplinary action was taken.
OMB Control Number 3038–NEW.
Estimated number of respondents: 1.
Annual responses by each
respondent: 4.
Estimated average hours per response:
3.
Aggregate annual reporting burden:
12.
12. New Collection 3038–NEW
Regulation 48.8(c)(2)(ii) requires each
registered FBOT with a linked contract
to provide the Commission with trade
execution and audit trail data on a
trade-date plus one basis.
OMB Control Number 3038–NEW.
Estimated number of respondents: 1.
Annual responses by each
respondent: 250.
Estimated average hours per response:
3.
Aggregate annual reporting burden:
750.
13. New Collection 3038–NEW
Regulation 48.8(c)(2)(iv) requires each
registered FBOT with a linked contract
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70985
to provide the Commission with a copy
of all rules, rule amendments, and other
notices published by the FBOT with
respect to all linked contracts.
OMB Control Number 3038–NEW.
Estimated number of respondents: 1.
Annual responses by each
respondent: 20.
Estimated average hours per response:
2.
Aggregate annual reporting burden:
40.
14. New Collection 3038–NEW
Regulation 48.8(c)(2)(v) requires each
registered FBOT with a linked contract
to provide the Commission with a copy
of all disciplinary notices involving the
FBOT’s linked contract upon closure of
the action.
OMB Control Number 3038–NEW.
Estimated number of respondents: 1.
Annual responses by each
respondent: 2.
Estimated average hours per response:
2.
Aggregate annual reporting burden: 4.
15. New Collection 3038–NEW
Regulation 48.9 requires each
registered FBOT, upon request by the
Commission, to file a written
demonstration that the FBOT is in
compliance with the conditions for
registration.
OMB Control Number 3038–NEW.
Estimated number of respondents: 26.
Annual responses by each
respondent: .25.
Estimated average hours per response:
8.
Aggregate annual reporting burden:
52.
16. New Collection 3038–NEW
Regulation 48.10 requires each
registered FBOT that wishes to list
additional futures and options contracts
for trading by direct access to request in
writing and receive approval from the
Commission prior to offering the
contracts from within the U.S.
OMB Control Number 3038–NEW.
Estimated number of respondents: 27.
Annual responses by each
respondent: 1.
Estimated average hours per response:
4.
Aggregate annual reporting burden:
108.
The Commission invites the public
and other Federal agencies to comment
on any aspect of the reporting and
recordkeeping burdens discussed above.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the
Commission solicits comments in order
to: (i) Evaluate whether the proposed
collection of information is necessary
for the proper performance of the
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functions of the Commission, including
whether the information will have
practical utility; (ii) evaluate the
accuracy of the Commission’s estimate
of the burden of the proposed collection
of information; (iii) determine whether
there are ways to enhance the quality,
utility, and clarity of the information to
be collected; and (iv) minimize the
burden of the collection of information
on those who are to respond, including
through the use of automated collection
techniques or other forms of information
technology.
Comments may be submitted directly
to the Office of Information and
Regulatory Affairs, by fax at (202) 395–
6566 or by e-mail at
OIRAsubmissions@omb.eop.gov. Please
provide the Commission with a copy of
submitted comments so that all
comments can be summarized and
addressed in the final rule preamble.
Refer to the Addresses section of this
notice of proposed rulemaking for
comment submission instructions to the
Commission. A copy of the supporting
statements for the collections of
information discussed above may be
obtained by visiting RegInfo.gov. OMB
is required to make a decision
concerning the collection of information
between 30 and 60 days after
publication of this release in the Federal
Register. Consequently, a comment to
OMB is most assured of being fully
effective if received by OMB (and the
Commission) within 30 days after
publication of this notice of proposed
rulemaking. Nothing in the foregoing
affects the deadline enumerated above
for public comment to the Commission
on the proposed rules.
B. Cost Benefit Analysis
Section 15(a) of the Act requires the
Commission to consider the costs and
benefits of its actions before issuing a
new regulation or order under the Act.48
By its terms, Section 15(a) does not
require the Commission to quantify the
costs and benefits of a new rule or to
determine whether the benefits of the
adopted rule outweigh its costs. Rather,
Section 15(a) requires the Commission
to ‘‘consider the costs and benefits’’ of a
proposed rule. Section 15(a) further
specifies the costs and benefits of
proposed rules shall be evaluated in
light of five broad areas of market and
public concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets;
(3) price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. In
48 7
U.S.C. 19(a).
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conducting its analysis, the Commission
may, in its discretion, give greater
weight to any one of the five
enumerated areas of concern and may
determine that, notwithstanding its
costs, a particular rule is necessary or
appropriate to protect the public interest
or to effectuate any of the provisions or
to accomplish any of the purposes of the
rule.49
The proposed regulations implement
the Dodd-Frank Act by establishing a
registration requirement for all FBOTs
that wish to provide their members or
other participants located in the U.S.
with direct access to the FBOT’s
electronic trading and order matching
system. Pursuant to proposed
Commission Regulation 48.5, FBOTs
wishing to provide direct access to their
trading systems to members and other
participants located in the U.S. would
be required to file an application for
registration with the Commission that
contains all of the information and
documentation set forth in the
Appendix to the Part 48 regulations and
any additional information and
documentation required to successfully
demonstrate that the FBOT satisfies the
registration requirements contained in
Rule 48.7.
Regarding FBOTs that currently do
not have no-action relief from
Commission staff, the Commission
understands that costs associated with
the submission of an application for
registration could be considerable.
However, the cost of applying for noaction relief under existing procedures
is substantial. FBOTs requesting noaction relief currently are required to
provide much of the information that
would be required under the proposed
regulation. For example, FBOTs
requesting no-action relief under
existing procedures have been required
to provide the Commission with
information including the FBOT’s
trading system, terms and conditions of
contracts made available in the U.S.,
and the regulatory regime governing the
FBOT in its home country. This same
information would be required as part of
the registration process under the
proposed regulations. The additional
cost of applying for registration rather
than applying for no-action relief is
significant, but not overly large.
FBOTs that currently have no-action
relief from the Commission would be
required to register with the
Commission and only provide a limited
application pursuant to the proposed
49 E.g., Fishermen’s Dock Co-op., Inc v. Brown, 75
F3d 164 (4th Cir. 1996); Center for Auto Safety v.
Peck, 751 F.2d 1336 (D.C. Cir. 1985) (agency has
discretion to weigh factors in undertaking costbenefit analyses).
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regulations. This should have the effect
of limiting the costs to these FBOTs
since they would be required only to
provide information that was not
previously provided or is not current.
The proposed regulations would
authorize the Commission to impose
additional conditions on FBOTs that
desire to make a linked contract
available by direct access to members of
the FBOT or other participants located
in the U.S. These conditions would be
required as part of the FBOT registration
process, and include among other
things, the imposition of speculative
position limits and the submission of
audit trail data and large trader position
information to the Commission for all
linked contracts. Any additional costs
incurred by an FBOT with existing noaction relief would be offset in part due
to the substantial overlap between the
conditions already promulgated by the
Commission as a general policy
applicable to FBOTs with linked
contracts and the conditions being
proposed by the Commission under
regulation 48.8.50
The proposed FBOT registration
regulations offer significant benefits
over the no-action process through
which requests to provide direct access
to FBOT trading systems were handled
in the past. While the no-action process
has served a useful purpose, the noaction process is designed for discrete,
unique factual circumstances where
regulations do not address the issue
presented. Where the same type of relief
is granted on a regular and recurring
basis, as it has been with respect to
direct access to FBOT trading systems,
the Commission believes that it is more
appropriate to provide the relevant
relief through a generally applicable
rulemaking. The proposed regulations
would provide a more standardized and
efficient application process, enhance
the visibility of the process to both
applicants and the public, and ensure
fair and consistent treatment to
applicants. Moreover, the Order of
Registration issued by the Commission
pursuant to this proposal would provide
greater legal certainty to FBOTs
operating pursuant to those Orders than
no-action letters, which are issued by
the staff and not binding on the
Commission.
In addition, there is substantial value
in the information and documentation
that the Commission will be able to
obtain, and the obligations that may be
imposed pursuant to the conditions
applicable to FBOT registration. For
example, an FBOT that lists for trading
a contract which settles on the price of
50 See
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substantial number of FBOTs, whether
they are large or small entities.
Moreover, the Commission does not
believe that FBOTs would be small
entities. For both reasons, the
Commission believes that a regulatory
flexibility analysis is not required for
this rulemaking.
The Commission has not previously
addressed the question whether FBOTs
are, in fact, small entities for purposes
of the RFA since FBOTs are a new
category of registrant created by the
Dodd-Frank Act. However, the term
‘‘foreign board of trade’’ has been used
in the CEA and defined in the
Commission Regulations to be a ‘‘board
of trade, exchange or market located
outside the U.S.’’ 53 The term ‘‘board of
trade,’’ in turn, is defined in the CEA as
‘‘any organized exchange or trading
facility.’’ 54 An organized exchange
includes designated or registered
exchanges, such as DCMs.55
The Commission has previously
determined that DCMs are not ‘‘small
entities’’ for purposes of the RFA.56 Key
to the Commission’s determination was
that DCMs perform a central role in the
regulatory scheme for futures trading,
requiring the DCM to employ significant
resources, including personnel, in the
performance of this statutory role. The
Commission designates a contract
market only when it meets specific
criteria including expenditure of
sufficient resources to establish and
maintain adequate self-regulatory
C. The Regulatory Flexibility Act
programs.
The Regulatory Flexibility Act
Likewise, the Commission will
51 requires that agencies
(‘‘RFA’’)
register an FBOT to provide direct
consider whether the rules they propose access only after it has met similar
will have a significant economic impact criteria. Critically, an FBOT will only be
on a substantial number of small entities registered by demonstrating that it
and, if so, provide a regulatory
possesses the attributes of an
flexibility analysis respecting the
established, organized exchange;
52 The proposed rules detailed in
impact.
adheres to appropriate rules prohibiting
this release would only affect FBOTs.
abusive trading practices; and enforces
The rules would replace the policy of
appropriate rules to maintain market
issuing staff no-action letters to permit
and financial integrity. Because FBOTs
FBOTs to provide for direct access,
and DCMs are functionally equivalent
defined in the Dodd-Frank Act to refer
entities in these regards, the
to an explicit grant of authority by an
Commission is determining that FBOTs,
FBOT to an identified member or other
like DCMs, are not small entities for
participant to enter trades directly into
purposes of the RFA. In light of the
the FBOT’s trade matching system.
As a threshold matter, because the
53 See Commission Regulation 1.33(ss).
proposed application requirements and
Additionally, the term ‘‘board of trade, exchange or
market located outside the U.S.’’ is used
standards for FBOT registration under
interchangeably in the CEA with the term ‘‘foreign
the new rules generally are consistent
board of trade.’’ For example, Section 4(a) carves out
with the application requirements and
‘‘board of trade, exchange or market located outside
review standards that have guided the
the U.S.’’ from the requirement that futures
Commission’s staff in issuing FBOT no- contracts in the U.S. must be traded on a DCM or
DTEF; new Section 4(b)(2)(C) provides that the
action relief letters, the Commission
Commission may not, except as provided in section
believes that these rules will not have a
4(b)(1) and (2), directly regulate a ‘‘foreign board of
significant economic effect on any
trade.’’
srobinson on DSKHWCL6B1PROD with PROPOSALS2
a contract traded on a Commissionregulated exchange raises serious
concerns for the Commission. The
position limit requirement and the
submission of large trader position
information and audit trail data to the
Commission, pursuant to the conditions
placed upon an FBOT that offers a
linked contract for trading via direct
access to its members or other
participants located in the U.S., will
enhance the Commission’s ability to
carry out its market surveillance
responsibilities. The proposed
regulations and related conditions also
will ensure that transactions executed
on an FBOT do not adversely affect U.S.
cash and futures markets, market
participants, and customers, as well as
the consumers affected by those
transactions. Finally, the proposed
regulations are designed to ensure that
the U.S. commodity markets operate
fairly and efficiently and are free from
fraud, manipulation and other market
abuses.
After considering the costs and
benefits, the Commission has
determined to propose the regulations
discussed above. The Commission
invites public comment on its
evaluation of the costs and benefits of
the proposed regulations. Specifically,
commenters are invited to submit data
quantifying the costs and benefits of the
proposed regulations with their
comment letters.
54 CEA
§ 1a(2).
§ 1a(27).
56 47 FR 18618, 18619 (April 30, 1982).
51 5
U.S.C. 601 et seq.
52 5 U.S.C. 601 et seq.
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foregoing, the Chairman on behalf of the
Commission hereby certifies, pursuant
to 5 U.S.C. 605(b), that the proposed
rules will not have a significant impact
on a substantial number of small
entities.
List of Subjects in 17 CFR Part 48
Foreign boards of trade, Commodity
futures, Options, Swaps, Direct access,
Linked contract, Registration, Existing
no-action relief, Conditions of
registration.
In consideration of the foregoing, and
pursuant to the authority contained in
the Act, and, in particular, sections 3, 4
and 8a of the Act, the Commission
hereby proposes to amend Chapter I of
Title 17 of the Code of Federal
Regulations by adding a new part 48 to
read as follows:
PART 48—REGISTRATION OF
FOREIGN BOARDS OF TRADE
Sec.
48.1
48.2
48.3
48.4
48.5
48.6
Scope.
Definitions.
Registration required.
Registration eligibility.
Registration procedures.
Foreign boards of trade providing
direct access pursuant to existing noaction relief.
48.7 Requirements for registration.
48.8 Conditions of registration.
48.9 Revocation of registration.
48.10 Additional contracts.
Appendix—Part 48—Contents of Application
Authority: 7 U.S.C. 5, 6 and 12a, unless
otherwise noted.
§ 48.1
Scope.
The provisions of this part apply to
any foreign board of trade that is
registered or is applying to become
registered with the Commission in order
to provide its identified members or
other participants located in the United
States with direct access to its electronic
trading and order matching system.
§ 48.2
Definitions.
(a) Foreign board of trade. For
purposes of this part, foreign board of
trade means any board of trade,
exchange or market located outside the
United States, its territories or
possessions, whether incorporated or
unincorporated, where foreign
agreements, contracts or transactions are
entered into.
(b) Foreign board of trade eligible to
be registered. A foreign board of trade
eligible to be registered means a foreign
board of trade that satisfies the
requirements for registration specified
in section 48.7 of this part and
(1) Possesses the attributes of an
established, organized exchange,
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(2) Adheres to appropriate rules
prohibiting abusive trading practices,
(3) Enforces appropriate rules to
maintain market and financial integrity,
(4) Has been authorized by a
regulatory process that examines
customer and market protections, and
(5) Is subject to continued oversight
by a regulator that has power to
intervene in the market and the
authority to share information with the
Commission.
(c) Direct access. For purposes of this
part, direct access means an explicit
grant of authority by a foreign board of
trade to an identified member or other
participant located in the United States
to enter trades directly into the trade
matching system of the foreign board of
trade.
(d) Linked contract. For purposes of
this part, a linked contract is a futures
or option or swaps contract made
available for direct access from the
United States by a registered foreign
board of trade that settles against any
price (including the daily or final
settlement price) of one or more
contracts listed for trading on a
registered entity as defined in section
1a(40) of the Act.
(e) Communications. For purposes of
this part, communications is defined to
include any summons, complaint, order,
subpoena, request for information,
notice, or any other written or electronic
documentation or correspondence
issued by or on behalf of the
Commission.
(f) Material change. For purposes of
this part, material changes in the
information provided to the
Commission in support of the
registration application would include,
without limitation, a modification of
any of the following: The membership
criteria of the foreign board of trade or
its clearing organization; the location of
the management, personnel or
operations of the foreign board of trade
or its clearing organization (particularly
changes that may suggest an increased
nexus between the foreign board of
trade’s activities and the United States);
the basic structure, nature, or operation
of the trading system or its clearing
organization; the regulatory or selfregulatory regime applicable to the
foreign board of trade, its clearing
organization, and their respective
members and other participants
(including, without limitation, the rules
applicable to or oversight thereof), any
change in the authorization, licensure or
registration of the foreign board of trade
or clearing organization, and any
information that may impact the ability
of the clearing organization to satisfy the
current Recommendations for Central
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Counterparties that have been issued
jointly by the Committee on Payment
and Settlement Systems and the
Technical Committee of the
International Organization of Securities
Commissions as updated, revised or
otherwise amended, or successive
standards, principles and guidance for
central counterparties or financial
market infrastructures adopted jointly
by the International Organization of
Securities Commissions and the
Committee on Payment and Settlement
Systems.
(g) Clearing organization. For
purposes of this part, clearing
organization means the foreign board of
trade, affiliate of the foreign board of
trade or any third party clearing house,
clearing association, clearing
corporation or similar entity, facility or
organization that, with respect to any
agreement, contract or transaction
executed on or through the foreign
board of trade, would be:
(1) Defined as a derivatives clearing
organization under section 1a(9) of the
Act;
(2) Defined as a central counterparty
by the Recommendations for Central
Counterparties that have been issued
jointly by the Committee on Payment
and Settlement Systems and the
Technical Committee of the
International Organization of Securities
Commissions, as updated, revised or
otherwise amended, or successive
standards, principles and guidance for
central counterparties adopted or
financial market infrastructures adopted
jointly by the Committee on Payment
and Settlement Systems or the
International Organization of Securities
Commissions; or
(3) Otherwise interposes itself
between the counterparties to the
agreements, contracts or transactions (or
subset thereof) executed on or through
the foreign board of trade, becoming the
buyer to every seller and the seller to
every buyer.
(h) Existing no-action relief. For
purposes of this part, existing no-action
relief means a no-action letter issued by
a division of the Commission to the
foreign board of trade in which the
division informs the foreign board of
trade that it will not recommend that
the Commission institute enforcement
action against the foreign board of trade
if the foreign board of trade does not
seek designation as either a designated
contract market pursuant to section 5 of
the Act or a derivatives transaction
execution facility pursuant to section 5a
of the Act in connection with the
provision of direct access to the foreign
board of trade’s trade matching system
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by its members and other participants
located in the United States.
(i) Swaps. For purposes of this part,
swaps is defined to mean swaps as
defined in section 1a(47) of the Act, and
any Commission regulation adopted
thereunder, and any transaction or
contract that is regulated as a swap
under the regulatory regime to which
the FBOT is subject.
(j) Affiliate. For purposes of this part,
an affiliate of a registered foreign board
of trade member or other participant
shall mean any person, as that term is
defined in section 1a(38) of the CEA,
that:
(1) Owns 50% or more of the member
or other participant;
(2) Is owned 50% or more by the
member or other participant; or
(3) Is owned 50% or more by a third
person that also owns 50% or more of
the member or other participant.
(k) Member or other participant. For
purposes this part, the terms member or
other participant of the registered
foreign board of trade shall include any
affiliate of any registered foreign board
of trade’s member or other participant
that has been granted direct access to
the trading system by the registered
foreign board of trade.
§ 48.3
Registration required.
(a) Except as specified in this part, it
shall be unlawful for a foreign board of
trade to permit direct access to its
electronic trading and order matching
system from within the United States
unless and until the Commission has
issued a valid and current Order of
Registration to the foreign board of trade
pursuant to the provisions of this part.
(b) It shall be unlawful for a board of
trade to make false or misleading
statements in any application for
registration or in connection with any
application for registration under this
part.
§ 48.4
Registration eligibility.
(a) Only foreign boards of trade
eligible to be registered, as defined in
§ 48.2(b) of this part, are eligible for
registration with the Commission
pursuant to this part.
(b) An applicant may request foreign
board of trade registration in order to
permit direct access from within the
United States to its members and other
participants that:
(1) Trade in the United States for their
proprietary accounts;
(2) Are registered with the
Commission as futures commission
merchants and submit orders for United
States customers to the trading system
for execution; or
(3) Are registered with the
Commission as a commodity pool
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operator or commodity trading advisor,
or are exempt from such registration
pursuant to section 4.13 or 4.14 of this
chapter, and that submit orders for
execution on behalf of United States
pools they operate or accounts of United
States customers for which they have
discretionary authority, respectively,
provided that a futures commission
merchant or a firm exempt from such
registration pursuant to Commission
Rule 30.10 acts as clearing firm and
guarantees, without limitation, all such
trades of the commodity pool operator
or commodity trading advisor effected
through submission of orders to the
trading system.
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§ 48.5
Registration procedures.
(a) A foreign board of trade seeking
registration with the Commission
pursuant to this part must electronically
file an application for registration,
labeled as an Application for Foreign
Board of Trade Registration pursuant to
part 48 of the Commission’s
Regulations, with the Secretary of the
Commission, at
FBOTRegistration@cftc.gov.
(b) An application for registration
must be signed by the foreign board of
trade’s chief executive officer (or
functional equivalent) and must include
the information and documentation set
forth in the Appendix to this part 48
and any information and documentation
necessary, in the discretion of the
Commission, to effectively demonstrate
that the foreign board of trade and its
clearing organization satisfy the
registration requirements set forth in
this part. The application must include
a certification by the chief executive
officer (or functional equivalent) of the
foreign board of trade and the clearing
organization that representations made
in connection with, or relevant to, the
application and the information and
documentation provided in support
thereof are true, correct and complete.
(c) A foreign board of trade
registration applicant must identify with
particularity any information in the
application that will be subject to a
request for confidential treatment and
must provide support for any request for
confidential treatment pursuant to the
procedures set forth in section 145.9 of
this chapter.
(d) The Commission will review the
application for foreign board of trade
registration and, if the Commission
finds the application to be complete,
may approve or deny the application. In
its review, the Commission will
consider, among other things:
(1) Whether the foreign board of trade
is eligible to be registered as defined in
section 48.2(b) of this part;
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(2) Whether the foreign board of trade
and its clearing organization are subject
to comprehensive supervision and
regulation by the appropriate
governmental authorities in their home
country that is comparable to the
comprehensive supervision and
regulation to which designated contract
markets and derivatives clearing
organizations are respectively subject in
the United States;
(3) Any previous Commission
findings that the foreign board of trade
and its clearing organization are subject
to comprehensive supervision and
regulation by the appropriate
government authorities in the foreign
board of trade’s home country that is
comparable to the comprehensive
supervision and regulation to which
designated contract markets and
derivatives clearing organizations are
subject in the United States; and
(4) Whether the foreign board of trade
and its clearing organization have
adequately demonstrated that they meet
the requirements for registration
specified in section 48.7 of this part.
(e) If the Commission approves the
application, the Commission will
register the foreign board of trade by
issuing an Order of Registration. If the
Commission does not approve the
application, the foreign board of trade
will not be registered and may not
provide direct access to its electronic
trading and order matching systems
from within the United States, and the
Commission will issue a Notice of
Action specifying that the application
was not approved and setting forth the
reasons therefor. The Commission may,
after appropriate notice and an
opportunity for a hearing, amend,
suspend, terminate or otherwise restrict
the terms of the Order of Registration.
(f) A foreign board of trade whose
application is not approved may reapply
for registration 360 days after the
issuance of the Notice of Action if the
foreign board of trade has addressed any
deficiencies in its original application or
facts and circumstances relevant to the
Commission’s review of the application
have changed.
§ 48.6 Foreign boards of trade providing
direct access pursuant to existing no-action
relief.
(a) A foreign board of trade operating
pursuant to existing no-action relief as
of the effective date of this Part 48 must
register with the Commission pursuant
to this Part 48 in order to continue to
provide direct access to its electronic
trading and order matching system from
the United States.
(b) Such foreign board of trade’s
application for registration must include
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all of the information and
documentation set forth in the
Appendix to this part 48. To the extent
that the foreign board of trade intends
to rely upon previously submitted
information or documentation to
demonstrate that it satisfies the
requirements of the Appendix or the
registration requirements set forth in
section 48.7 of this part, the foreign
board of trade must resubmit the
information or documentation, identify
the specific requirements for registration
set forth in section 48.7 of this part that
are satisfied by the resubmitted
information, and certify that the
information remains current and true
(limited application).
(c) Foreign boards of trade operating
pursuant to existing no-action relief
must submit a complete limited
application for registration within 120
days of the effective date of this
regulation and the no-action relief will,
upon notice to the foreign board of
trade, be revoked if a complete limited
application is not received by the
Commission within that 120 days. The
foreign board of trade may continue to
provide direct access from the United
States pursuant to the no-action relief
during the 120-day period, during the
period in which the complete limited
application is being reviewed by the
Commission, and until the Commission
notifies the foreign board of trade that
the application has been approved or
not approved or that the existing noaction relief has otherwise been
withdrawn.
§ 48.7
Requirements for registration.
An applicant for registration under
this part must include all of the
information and documentation set
forth in the Appendix to this Part 48
and any other information and
documentation necessary or appropriate
to determine that the following
requirements for registration are met.
The Commission, in its discretion, may
impose additional registration
requirements and request additional
information and documentation in
connection with an application for
registration. An applicant for
registration must provide promptly any
additional information or
documentation requested by the
Commission in connection with the
application.
(a) Foreign Board of Trade and
Clearing Membership. An applicant for
registration must demonstrate that:
(1) The members and other
participants of the foreign board of trade
and its clearing organization are fit and
proper and meet appropriate financial
and professional standards,
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(2) The foreign board of trade and its
clearing organization have and enforce
provisions to minimize and resolve
conflicts of interest, and
(3) The foreign board of trade and its
clearing organization have and enforce
rules prohibiting the disclosure of
material non-public information
obtained as a result of a member’s or
other participant’s performance of
duties as a member of their respective
governing boards and significant
committees.
(b) The Automated Trading System.
An applicant for registration must
demonstrate that:
(1) The trading system complies with
Principles for the Oversight of ScreenBased Trading Systems for Derivative
Products developed by the Technical
Committee of the International
Organization of Securities Commissions,
(2) The trade matching algorithm
matches trades fairly and timely,
(3) The audit trail captures all
relevant data, including changes to
orders, and audit trail data is securely
maintained and available for an
adequate time period,
(4) Trade data is made available to
users and the public,
(5) The trading system has
demonstrated reliability,
(6) Access to the trading system is
secure and protected,
(7) There are adequate provisions for
emergency operations and disaster
recovery,
(8) Trading data is backed up to
prevent loss of data, and
(9) Only those futures and option
contracts or swaps that have been
identified to the Commission as part of
the application or permitted to be made
available for trading by direct access
pursuant to the procedures set forth in
section 48.10 of this part are made
available for trading on connections in
the United States.
(c) Terms and Conditions of Contracts
To Be Made Available in the United
States.
(1) Contracts that may be made
available by direct access must meet the
following standards:
(i) Contracts must be futures, option
or swaps contracts—only such contracts
as would be eligible to be traded on a
designated contract market are eligible
to be traded by direct access on a
registered foreign board of trade,
(ii) Contracts must be cleared,
(iii) Contracts must not be prohibited
from being traded by United States
persons, and
(iv) Contracts must not be readily
susceptible to manipulation.
(2) Contracts that have the following
characteristics must be identified:
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(i) Contracts that are linked to a
contract listed for trading on a United
States registered entity, and
(ii) Contracts that share any other
commonality with a contract listed for
trading on a United States registered
entity, for example, if both the foreign
board of trade’s and the United States
registered entity’s contract settle to the
price of the same third partyconstructed index.
(d) Settlement and Clearing. An
applicant for registration must
demonstrate that:
(1) The clearing organization complies
with the current Recommendations for
Central Counterparties that have been
issued jointly by the Committee on
Payment and Settlement Systems and
the Technical Committee of the
International Organization of Securities
Commissions as updated, revised or
otherwise amended, or successive
standards, principles and guidance for
central counterparties and financial
market infrastructures adopted jointly
by the International Organization of
Securities Commissions and the
Committee on Payment and Settlement
Systems or is registered with the
Commission as a derivatives clearing
organization, and
(2) The clearing organization is in
good regulatory standing in its home
country jurisdiction.
(e) The Regulatory Regime Governing
the Foreign Board of Trade and the
Clearing Organization. An applicant for
registration must demonstrate that:
(1) The regulatory authorities
governing the activities of the foreign
board of trade and clearing organization
provide comprehensive supervision and
regulation of the foreign board of trade
and the clearing organization that is
comparable to the comprehensive
supervision and regulation provided by
the Commission to designated contract
markets and derivatives clearing
organizations, that is, the regulatory
authorities support and enforce
regulatory objectives in the oversight of
the foreign board of trade and clearing
organization that are substantially
equivalent to the regulatory objectives
supported and enforced by the
Commission in its oversight of
designated contract markets and
derivatives clearing organizations,
(2) The regulatory authorities
governing the activities of the foreign
board of trade, the clearing organization
and their respective members and other
participants engage in ongoing
regulatory supervision and oversight of
the foreign board of trade and its trading
system, the clearing organization and its
clearing system, the members,
intermediaries and other participants of
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the foreign board of trade and clearing
organization, with respect to, among
other things, market integrity, customer
protection, clearing and settlement and
the enforcement of exchange and
clearing organization rules,
(3) The regulatory authorities
governing the foreign board of trade and
the clearing organization have the
power to share information directly
with the Commission, upon request,
including information necessary to
evaluate the continued eligibility of the
foreign board of trade for registration
and to audit for compliance with the
terms and conditions of the registration.
(4) The regulatory authorities
governing the foreign board of trade and
the clearing organization have the
power to intervene in the market.
(f) The Rules of the Foreign Board of
Trade and Clearing Organization and
Enforcement Thereof. An applicant for
registration must demonstrate that:
(1) The foreign board of trade and its
clearing organization have implemented
and enforce rules to ensure compliance
with the requirements of registration
contained in this part,
(2) The foreign board of trade and its
clearing organization have the capacity
to detect, investigate, and sanction
persons who violate their respective
rules,
(3) The foreign board of trade and the
clearing organization (or their respective
regulatory authorities) have
implemented and enforce disciplinary
procedures that empower them to
recommend and prosecute disciplinary
actions for suspected rule violations,
impose adequate sanctions for such
violations, and provide adequate
protections to charged parties pursuant
to fair and clear standards,
(4) The foreign board of trade and its
clearing organization are authorized by
rule or by contractual agreement to
obtain, from members and other
participants, any information and
cooperation necessary to conduct
investigations, to effectively enforce
their respective rules, and to ensure
compliance with the conditions of
registration,
(5) The foreign board of trade and its
clearing organization have sufficient
compliance staff and resources,
including by delegation and/or
outsourcing to a third party, to fulfill
their respective regulatory
responsibilities, including appropriate
trade practice surveillance, real time
market monitoring, market surveillance,
financial surveillance, protection of
customer funds, enforcement of clearing
and settlement provisions and other
compliance and regulatory
responsibilities,
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(6) The foreign board of trade has
implemented and enforces rules with
respect to access to the trading system
and the means by which the connection
is accomplished,
(7) The foreign board of trade’s audit
trail captures and retains sufficient
order and trade-related data to allow its
compliance staff to detect trading and
market abuses and to reconstruct all
transactions within a reasonable period
of time,
(8) The foreign board of trade has
implemented and enforces rules relating
to prohibited trading practices (for
example wash sales or trading ahead),
(9) The foreign board of trade has the
capacity to detect and deter, and has
implemented and enforces rules relating
to, market manipulation, attempted
manipulation, price distortion, and
other disruptions of the market, and
(10) The foreign board of trade has
and enforces rules and procedures that
ensure a competitive, open and efficient
market and mechanism for executing
transactions.
(g) Information Sharing. An applicant
for registration must demonstrate that:
(1) The regulatory authorities
governing the activities of and providing
supervision and oversight of the foreign
board of trade and the clearing
organization are signatories to the
International Organization of Securities
Commissions Multilateral Memorandum
of Understanding; if the regulatory
authorities are not signatories to the
International Organization of Securities
Commissions Multilateral Memorandum
of Understanding, they must inform the
Commission of the reasons why the
document has not been signed, supply
any additional information requested by
the Commission, and ensure alternative
information sharing arrangements that
are satisfactory to the Commission are in
place.
(2) The regulatory authorities
governing the activities of and providing
supervision and oversight of the foreign
board of trade and the clearing
organization are signatories to the
Declaration on Cooperation and
Supervision of International Futures
Exchanges and Clearing Organizations
or otherwise commits to share the types
of information contemplated by the
International Information Sharing
Memorandum of Understanding and
Agreement with the Commission,
(3) The foreign board of trade has
executed, or commits to execute, the
International Information Sharing
Memorandum of Understanding and
Agreement, and
(4) Pursuant to the conditions
described in section 48.8(a)(6) of this
part, the foreign board of trade and
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clearing organization must provide
directly to the Commission information
necessary to evaluate the continued
eligibility of the foreign board of trade
clearing organization, or their respective
members or other participants for
registration, to audit for and enforce
compliance with the specified
conditions of the registration, or to
enable the Commission to carry out its
duties under the Act and Commission
regulations.
§ 48.8
Conditions of registration.
Immediately upon registration, and on
an ongoing basis thereafter, the foreign
board of trade and the clearing
organization shall comply with the
conditions of registration set forth in
this section and any additional
conditions that the Commission may
impose, in its discretion, and after
appropriate notice and opportunity for a
hearing. Such conditions could include,
but are not limited to, the conditions set
forth in section 48.8(c) of this part and,
with respect to the listing of swaps
contracts, any additional conditions that
the Commission deems necessary.
Continued registration is expressly
conditioned upon satisfaction of these
conditions.
(a) Specified Conditions for
Maintaining Registration.
(1) Registration Requirements: The
foreign board of trade and its clearing
organization shall continue to satisfy all
of the requirements for registration set
forth in section 48.7 and the conditions
for maintaining registration set forth
herein.
(2) Regulatory Regime:
(i) The foreign board of trade will
continue to satisfy the criteria for a
regulated market pursuant to the
regulatory regime described in its
application and will continue to be
subject to oversight by the regulatory
authorities described in its application
with respect to transactions effected
through the foreign board of trade’s
trading system.
(ii) The clearing organization will
continue to satisfy the criteria for a
regulated clearing organization pursuant
to the regulatory regime described in the
application for registration; the clearing
organization and its participants will
continue to be subject to comprehensive
supervision, regulation and oversight by
the regulatory authorities as described
in the application and that is
comparable to the comprehensive
supervision, regulation to which such
entities would be subject in the United
States; and the clearing organization
shall continue to be in good standing
with the relevant regulatory authority.
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(iii) The laws, systems, rules, and
compliance mechanisms of the
regulatory regime applicable to the
foreign board of trade will continue to
require the foreign board of trade to
maintain fair and orderly markets;
prohibit fraud, abuse, and market
manipulation; and provide that such
requirements are subject to the oversight
of appropriate regulatory authorities.
(3) Satisfaction of Comparable
International Standards:
(i) The foreign board of trade will
continue to adhere to the Principles for
the Oversight of Screen-Based Trading
Systems for Derivative Products
developed by the Technical Committee
of the International Organization of
Securities Commissions, as updated,
revised, or otherwise amended, to the
extent such principles do not
contravene United States law.
(ii) The clearing organization will
continue to: (A) Be registered as a
derivatives clearing organization and be
in compliance with the laws and
regulations related thereto or (B) satisfy
the Recommendations for Central
Counterparties that have been issued
jointly by the Committee on Payment
and Settlement Systems and the
Technical Committee of the
International Organization of Securities
Commissions, as updated, revised or
otherwise amended, or successive
standards, principles and guidance for
central counterparties or financial
market infrastructures adopted jointly
by the Committee on Payment and
Settlement Systems and the Technical
Committee of the International
Organization of Securities Commissions.
(4) Restrictions on Direct Access:
(i) Only the foreign board of trade’s
identified members or other participants
will have direct access to the foreign
board of trade’s trading system from the
United States and the foreign board of
trade will not provide, and will take
reasonable steps to prevent, third parties
from providing direct access to the
foreign board of trade to persons other
than the identified members or other
participants.
(ii) All orders that are transmitted
through the foreign board of trade’s
trading system by a foreign board of
trade identified member or other
participant that is operating pursuant to
the foreign board of trade’s registration
will be solely for the member’s or
trading participant’s own account
unless such member or other participant
is registered with the Commission as a
futures commission merchant or such
member or other participant is
registered with the Commission as a
commodity pool operator or commodity
trading advisor, or is exempt from such
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registration pursuant to section 4.13 or
4.14 of this chapter, provided that a
futures commission merchant or a firm
exempt from such registration pursuant
to Commission Rule 30.10 acts as
clearing firm and guarantees, without
limitation, all such trades of the
commodity pool operator or commodity
trading advisor effected through
submission of orders on the trading
system.
(5) Submission to Commission
Jurisdiction:
(i) The foreign board of trade will
require that each current and
prospective member or other participant
that is granted direct access to the
foreign board of trade’s trading system
pursuant to the foreign board of trade’s
registration and that is not registered
with the Commission as a futures
commission merchant, a commodity
trading advisor or a commodity pool
operator file with the foreign board of
trade a written representation, executed
by a person with the authority to bind
the member or other participant, stating
that as long as the member or other
participant grants direct access to the
foreign board of trade’s trading system
pursuant to the foreign board of trade
registration, the member or other
participant agrees to and submits to the
jurisdiction of the Commission with
respect to activities conducted pursuant
to the registration.
(ii) The foreign board of trade and its
clearing organization will file with the
Commission a valid and binding
appointment of an agent for service of
process in the United States pursuant to
which the agent is authorized to accept
delivery and service of communications
issued by or on behalf of the
Commission.
(iii) The foreign board of trade will
require that each current and
prospective member or other participant
of the foreign board of trade that is
granted direct access to the foreign
board of trade’s trading system pursuant
to the foreign board of trade’s
registration with the Commission and
that is not registered with the
Commission as a futures commission
merchant, a commodity trading advisor
or a commodity pool operator file with
the foreign board of trade a valid and
binding appointment of a United States
agent for service of process in the
United States pursuant to which the
agent is authorized to accept delivery
and service of communications issued
by or on behalf of the Commission.
(iv) The foreign board of trade,
clearing organization, and each current
and prospective member or other
participant of either that is granted
direct access to the foreign board of
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trade’s trading system pursuant to the
foreign board of trade’s registration and
that is not registered with the
Commission as a futures commission
merchant, a commodity trading advisor,
or a commodity pool operator will
maintain with the foreign board of trade
written representations, executed by
persons with the authority to bind the
entity making them, stating that as long
as the foreign board of trade is registered
under this regulation, the foreign board
of trade, the clearing organization or
member of either or other participant
granted direct access pursuant to this
regulation will provide, upon the
request of the Commission, the United
States Department of Justice and, if
appropriate, the National Futures
Association, prompt access to the
entity’s, member’s, or other participant’s
original books and records or, at the
election of the requesting agency (the
Commission, the United States
Department of Justice, or the National
Futures Association), a copy of specified
information containing such books and
records, as well as access to the
premises where the trading system is
available in the United States.
(v) The foreign board of trade will
maintain all representations required
pursuant to this regulation as part of its
books and records and will make them
available to the Commission upon
request.
(6) Information Sharing:
(i) Information-sharing arrangements
satisfactory to the Commission,
including but not limited to those set
forth in section 48.7(g) of the
registration requirements, are in effect
between the Commission and the
regulatory authorities that supervise
both the foreign board of trade and the
clearing organization.
(ii) The Commission is, in fact, able to
obtain sufficient information regarding
the foreign board of trade, the clearing
organization, their respective members
and participants and the activities
related to the foreign board of trade’s
registration.
(iii) The foreign board of trade, and its
clearing organization, as applicable, will
provide directly to the Commission any
information necessary to evaluate the
continued eligibility of the foreign board
of trade or its members or other
participants for registration, the
capability and determination to enforce
compliance with these specified
conditions of the registration or, in the
event that the Commission has been
unable to satisfactorily obtain necessary
information from the regulatory
authority, to enable the Commission to
carry out its duties under the Act and
Commission regulations and to provide
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adequate protection to the public or
United States registered entities.
(iv) In the event that the foreign board
of trade and the clearing organization
are separate entities, the foreign board of
trade will require the clearing
organization to enter into a written
agreement in which the clearing
organization is contractually obligated
to promptly provide any and all
information and documentation that
may be required of the clearing
organization under this regulation and
such agreement shall be made available
to the Commission, upon request.
(7) Monitoring for Compliance:
The foreign board of trade and the
clearing organization will employ
reasonable procedures for monitoring
and enforcing compliance with the
specified conditions of its registration.
(8) Conditions Applicable to Swaps
Trading:
(i) If the foreign board of trade makes
swaps contracts available by direct
access, the foreign board of trade must
report to the public, on a real-time basis,
data relating to each swap transaction,
including price and volume, as soon as
technologically practicable after
execution of the swap transaction.
(ii) If the foreign board of trade makes
swaps contracts available by direct
access, the foreign board of trade must
ensure that all swap transaction data is
timely reported to a swap data
repository that is either A. registered
with the Commission, or B. has an
information sharing arrangement with,
the Commission.
(iii) If the foreign board of trade makes
swaps contracts available by direct
access, the foreign board of trade must
agree to coordinate with the
Commission with respect to
arrangements established to address
cross market oversight issues, including
surveillance, emergency actions and the
monitoring of trading.
(b) Other Continuing Obligations.
(1) Foreign boards of trade registered
under this part and their clearing
organizations must also comply with the
following regulatory obligations on an
ongoing basis:
(i) The foreign board of trade will
maintain the following updated
information and submit such
information to the Commission on at
least a quarterly basis, not later than 30
days following the end of the quarter,
and at any time promptly upon the
request of a Commission representative,
computed based upon separating buy
sides and sell sides:
(A) For each contract available to be
traded through the foreign board of
trade’s trading system,
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(1) The total trade volume originating
from electronic trading devices
providing direct access to the trading
system in the United States,
(2) The total trade volume for such
products traded through the trading
system worldwide, and
(3) The total trade volume for such
products traded on the foreign board of
trade generally; and
(B) A listing of the names, National
Futures Association identification
numbers (if applicable), and main
business addresses in the United States
of all members and other participants
that have direct access to the trading
system in the United States.
(ii) The foreign board of trade will
promptly provide to the Commission
written notice of the following:
(A) Any material change in the
information provided in the registration
application.
(B) Any material change in the foreign
board of trade’s or clearing
organization’s rules or the laws, rules,
and regulations in the home country
jurisdictions of the foreign board of
trade or clearing organization relevant to
futures, options and swaps contracts.
(C) Any matter known to the foreign
board of trade, the clearing organization
or its representatives that, in the
judgment of the foreign board of trade
or clearing organization judgment, may
affect the financial or operational
viability of the foreign board of trade or
its clearing organization with respect to
contracts traded by direct access,
including, but not limited to, any
significant system failure or
interruption.
(D) Any default, insolvency, or
bankruptcy of any foreign board of trade
member or other participant that is or
should be known to the foreign board of
trade or its representatives or the
clearing organization or its
representatives that may have a
material, adverse impact upon the
condition of the foreign board of trade
as it relates to trading by direct access,
its clearing organization or upon any
United States customer or firm or any
default, insolvency or bankruptcy of any
member of the foreign board of trade’s
clearing organization.
(E) Any violation of the specified
conditions of the foreign board of trade’s
registration or failure to satisfy the
requirements for registration under this
part that is known or should be known
by the foreign board of trade, the
clearing organization or any of their
respective members or participants.
(F) Any disciplinary action by the
foreign board of trade or its clearing
organization with respect to any
contract available to be traded by direct
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access taken against any of their
respective members or participants that
involves any market manipulation,
fraud, deceit, or conversion or that
results in suspension or expulsion.
(iii) The foreign board of trade and the
clearing organization, as applicable,
must provide the following to the
Commission on an annual basis.
(A) A certification from the foreign
board of trade’s regulatory authority
confirming that the foreign board of
trade retains its authorization, licensure
or registration, as applicable, as a
regulated market and/or exchange under
the authorization, licensing or other
registration methodology used by the
foreign board of trade’s regulatory
authority and that the foreign board of
trade is in continued good standing.
(B) A certification from the clearing
organization’s regulatory authority
confirming that the clearing
organization retains its authorization,
licensure or registration, as applicable,
as a clearing organization under the
authorization, licensing or other
registration methodology used by the
clearing organization’s regulatory
authority and is in continued good
standing.
(C) If the clearing organization is not
a derivatives clearing organization, a
recertification of the clearing
organization’s compliance with the
Recommendations for Central
Counterparties that have been issued
jointly by the Committee on Payment
and Settlement Systems and the
Technical Committee of the
International Organization of Securities
Commissions, as updated, revised or
otherwise amended, or successive
standards, principles and guidance for
central counterparties and financial
market infrastructures adopted jointly
by the Committee on Payment and
Settlement Systems and the
International Organization of Securities
Commissions.
(D) A certification that affiliates of
members and other participants, as
defined in § 48.2(j) of this part continue
to be required to comply with
appropriate registration requirements,
conditions for registration and the rules
of the foreign board of trade and that the
members or other participants to which
they are affiliated remain responsible to
the foreign board of trade for ensuring
their affiliates’ compliance.
(E) A description of any material
changes to any relevant representation
regarding the foreign board of trade or
clearing organization made to the
Commission that have not been
previously disclosed, in writing, or a
certification that no material changes
have been made.
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70993
(F) A description of any significant
disciplinary or enforcement actions that
have been instituted by or against the
foreign board of trade or the clearing
organization or the senior officers of
either in the prior year.
(G) A written description of any
material changes to the regulatory
regime to which the foreign board of
trade or the clearing organization are
subject that have not been previously
disclosed, in writing, to the
Commission, or a certification that no
material changes have occurred.
(2) The above-referenced materials
must be signed by an officer of the
foreign board of trade or the clearing
organization who maintains the
authority to bind the foreign board of
trade or clearing organization, as
applicable, and be based on the officer’s
personal knowledge.
(c) Additional Specified Conditions
for Foreign Boards of Trade with Linked
Contacts. If a registered foreign board of
trade grants members or other
participants located in the United States
direct access and makes available to
them a linked contract, the following
additional conditions apply:
(1) Statutory Conditions.
(i) The foreign board of trade must
make public daily trading information
regarding the linked contract that is
comparable to the daily trading
information published by the registered
entity for the contract to which the
foreign board of trade’s contract is
linked, and
(ii) The foreign board of trade (or its
regulatory authority) must:
(A) Adopt position limits (including
related hedge exemption provisions)
applicable to all market participants for
the linked contract that are comparable
to the position limits (including related
hedge exemption provisions) adopted
by the registered entity for the contract
to which it is linked;
(B) Have the authority to require or
direct any market participant to limit,
reduce, or liquidate any position the
foreign board of trade (or its regulatory
authority) determines to be necessary to
prevent or reduce the threat of price
manipulation, excessive speculation as
described in section 4a of the Act, price
distortion, or disruption of delivery on
the cash settlement process;
(C) Agree to promptly notify the
Commission, with regard to the linked
contract, of any change regarding—
(1) The information that the foreign
board of trade will make publicly
available,
(2) The position limits that foreign
board of trade or its regulatory authority
will adopt and enforce,
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(3) The position reductions required
to prevent manipulation, excessive
speculation as described in section 4a of
the Act, price distortion, or disruption
of delivery or the cash settlement
process, and
(4) Any other area of interest
expressed by the Commission to the
foreign board of trade or its regulatory
authority;
(D) Provide information to the
Commission regarding large trader
positions in the linked contract that is
comparable to the large trader position
information collected by the
Commission for the contract to which it
is linked; and
(E) Provide the Commission such
information as is necessary to publish
reports on aggregate trader positions for
the linked contract that are comparable
to such reports on aggregate trader
positions for the contract to which it is
linked, and
(iii) If the Commission establishes
speculative position limits (including
related hedge exemption provisions) on
the aggregate number or amount of
positions in a contract traded on a
United States registered entity and the
registered foreign board of trade lists a
contract that is linked to the contract
listed for trading on the registered
entity, the foreign board of trade (or its
regulatory authority) must adopt
position limits (including related hedge
exemption provisions) for the linked
contract as determined by the
Commission.
(2) Other Conditions on Linked
Contracts:
(i) The foreign board of trade will
inform the Commission in a quarterly
report of any member that had positions
in a linked contract above the applicable
foreign board of trade position limit,
whether a hedge exemption was
granted, and if not, whether a
disciplinary action was taken.
(ii) The foreign board of trade will
provide Commission staff, either
directly or through its agent, with trade
execution and audit trail data for the
Commission’s Trade Surveillance
System on a trade-date plus one basis
and in a form, content and manner
acceptable to the Commission for all
linked contracts.
(iii) The foreign board of trade and the
clearing organization will permit and
cooperate with Commission on-site
visits for the purpose of overseeing the
foreign board of trade’s ongoing
compliance with registration
requirements and conditions of
registration. The Commission will
provide notice to the foreign board of
trade’s regulatory authority of any
requests for an on-site visit.
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(iv) The foreign board of trade will
provide to Commission staff, at least one
day prior to the effective date thereof,
except in the event of an emergency
market situation, copies of, or
hyperlinks to, all rules, rule
amendments, circulars and other notices
published by the foreign board of trade
with respect to all linked contracts.
(v) The foreign board of trade will
provide to Commission staff copies of
all Disciplinary Notices involving the
foreign board of trade’s linked contracts
upon closure of the action. Such Notices
should include the reason the action
was undertaken, the results of the
investigation that led to the disciplinary
action, and any sanctions imposed.
(vi) In the event that the Commission,
pursuant to its emergency powers
authority, directs that the United States
registered entity which lists the contract
to which the foreign board of trade’s
contract is linked take emergency action
with respect to a linked contract (for
example, to cease trading in the
contract), the foreign board of trade,
subject to information-sharing
arrangements between the Commission
and its regulatory authority, agrees to
promptly take similar action with
respect to its linked contract.
§ 48.9
Revocation of registration.
(a) Failure to Satisfy Registration
Requirements or Conditions: Upon
request by the Commission, a registered
foreign board of trade shall file with the
Commission a written demonstration,
containing such supporting data,
information, and documents, in such
form and manner and within such
timeframe as the Commission may
specify, that the foreign board of trade
or clearing organization is in
compliance with the registration
requirements or conditions for
registration.
(1) If the Commission determines that
a registered foreign board of trade (or
the clearing organization) has failed to
satisfy any of the registration
requirements or conditions for
registration, the Commission shall
notify the foreign board of trade of such
determination and afford the foreign
board of trade an opportunity to make
appropriate changes to bring the foreign
board of trade into compliance with the
registration requirements or conditions
for registration.
(2) If, not later than 30 days after
receiving a notification under
subsection (1) of this paragraph, the
foreign board of trade fails to make
changes that, in the opinion of the
Commission are necessary to comply
with the registration requirements or
conditions for registration, the
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Commission may revoke the foreign
board of trade’s registration, after
appropriate notice and an opportunity
for a hearing, by issuing an Order
Revoking Registration which sets forth
the reasons therefor.
(3) A foreign board of trade whose
registration has been revoked for failure
to satisfy a registration requirement or
condition of registration may apply for
re-registration 360 days after the
issuance of the Order Revoking
Registration if the deficiency causing
the revocation has been cured or
relevant facts and circumstances have
changed.
(b) Other Events that Could Result in
Revocation. Revocation under these
circumstances would not necessarily
follow the procedures delineated above,
but will be handled by the Commission
as relevant facts or circumstances
warrant.
(1) The Commission may revoke a
foreign board of trade’s registration,
after appropriate notice and an
opportunity for a hearing, if the
Commission determines that a
representation made in the application
for registration is found to be untrue or
materially misleading.
(2) The Commission may revoke a
foreign board of trade’s registration,
after appropriate notice and an
opportunity for a hearing, if there is a
material change in the regulatory regime
applicable to the foreign board of trade
or clearing organization.
(3) The Commission may revoke a
foreign board of trade’s registration in
the event of an emergency or in a
circumstance where the Commission
determines that revocation would be
necessary or appropriate in the public
interest. Following revocation, the
Commission will provide an
opportunity for a hearing.
(4) The Commission may revoke a
foreign board of trade’s registration in
the event the foreign board of trade or
the clearing organization is no longer
authorized, licensed or registered, as
applicable, as a regulated market and/or
exchange or clearing organization or
ceases to operate as a foreign board of
trade or clearing organization.
§ 48.10
Additional contracts.
(a) Generally. Registered foreign
boards of trade that wish to list
additional futures and option and swaps
contracts for trading by direct access to
the foreign board of trades’ electronic
trading and order matching systems
from the United States must submit a
written request prior to offering the
contracts from within the United States.
Such a written request must include the
terms and conditions of the additional
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futures and option and swaps contracts
that the foreign board of trade wishes to
make available and a certification that
the additional contracts meet the
requirements of section 48.7(c) of this
part and the foreign board of trade and
the clearing organization continue to
satisfy the conditions of registration.
The foreign board of trade can make
available for trading the additional
contracts ten business days after the
date of receipt by the Commission of the
written request, unless the Commission
notifies the foreign board of trade that
additional time is needed to complete
its review of policy or other issues
pertinent to the additional contracts. A
registered foreign board of trade may list
for trading an additional futures
contract on a non-narrow-based security
index pursuant to the procedures set
forth in Appendix D to part 30 of this
chapter.
(b) Option contracts on previously
approved futures contracts.
(1) If the option is on a futures
contract that is not a linked contract, the
option contract may be made available
for trading by direct access by filing
with the Commission no later than the
business day preceding the initial listing
of the contract:
(i) A copy of the terms and conditions
of the additional contract and
(ii) A certification that the foreign
board of trade and the clearing
organization continue to satisfy the
conditions of its registration.
(2) If the option is on a futures
contract that is a linked contract, the
option contract may be made available
for trading by direct access by filing
with the Commission no later than the
business day preceding the initial listing
of the contract:
(i) A copy of the terms and conditions
of the additional contract and
(ii) A certification that the foreign
board of trade and the clearing
organization continue to satisfy the
conditions of its registration, including
the conditions specifically applicable to
linked contracts set forth in section
48.8(c) of this part.
(3) If the option is on a non-narrowbased security index futures contract
which may be offered or sold in the
United States pursuant to a no-action
letter issued by the Commission’s Office
of the General Counsel, the option
contract may be listed for trading by
direct access without further action by
either the registered foreign board of
trade or the Commission.
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Appendix—Part 48—Contents of
Application
I. General Information and Documentation
(a) General Information. A description of
the following for the foreign board of trade
and clearing organization: Location; history,
size; ownership and corporate structure;
governance and committee structure; current
or anticipated presence of staff in the United
States; and anticipated volume of business
emanating from members and other
participants that will be provided direct
access to the foreign board of trade’s trading
system and the percentage of that volume
compared to the foreign board of trade’s total
volume.
(b) Initial Documentation. The following
documents for the foreign board of trade and
clearing organization:
(1) Articles of association, constitution, or
other similar organizational documents;
(2) Membership and trading participant
agreements;
(3) Clearing agreements;
(4) Terms and conditions of contracts to be
available from within the United States
pursuant to the specified conditions of
registration;
(5) The national statutes, laws and
regulations governing the activities of the
foreign board of trade and clearing
organization and their respective
participants;
(6) The current rules, regulations,
guidelines and bylaws of the foreign board of
trade or clearing organization;
(7) Evidence of the authorization, licensure
or registration of the foreign board of trade
and clearing organization pursuant to the
regulatory regime in their home country
jurisdiction and a representation by their
respective regulators that they are in good
regulatory standing in the capacity in which
they are authorized, licensed or registered;
(8) A summary of any disciplinary or
enforcement actions or proceedings that have
been brought against the foreign board of
trade and clearing organization, or the senior
officers thereof, in the past five years and the
resolution of those actions or proceedings;
(9) An undertaking by the chief compliance
officer(s) (or functional equivalent[s]) of the
foreign board of trade and the clearing
organization to notify Commission staff
promptly if any of the representations made
in connection with or related to the foreign
board of trade’s application for registration
cease to be true or correct, or become
incomplete or misleading.
II. Membership Criteria
The following for the foreign board of trade
and the clearing organization:
(a) Membership or Participant Categories
and Access.
A description of the categories of
membership and participation in the foreign
board of trade or clearing organization and
the access, trading and clearing privileges
provided by the board of trade or clearing
organization, as applicable. The description
should include any restrictions thereto for all
entities to which the foreign board of trade
intends to grant direct access to its trading
system.
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(b) Membership Criteria.
(1) A description of requirements for
membership and participation on the trading
or clearing system, as applicable, and the
manner in which members and other
participants must demonstrate their
compliance with these requirements.
(2) Professional Standards. A description of
the professional requirements, qualifications,
and/or competencies required of members or
other participants and/or their staff.
(c) Financial Integrity.
(1) A description of the manner in which
the foreign board of trade and the clearing
organization evaluate the financial resources
holdings of its members or participants,
including any financial requirements,
standards, guides, or thresholds used to
qualify members and other participants.
(2) Describe the process by which
applicants demonstrate compliance with
financial requirements for membership
participation including:
(i) Working capital and collateral
requirements,
(ii) Risk management mechanisms for
members allowing customers to place orders.
(d) Authorization, Licensure or
Registration Requirements. Describe any
regulatory and self-regulatory authorization,
licensure or registration requirements that
the foreign board of trade and the clearing
organization impose upon its members and
other participants including, but not limited
to any authorization, licensure or registration
requirements imposed by the regulatory
authorities in the home country
jurisdiction(s) of the foreign board of trade
and clearing organization. Describe the
process by which the foreign board of trade
and the clearing organization, as applicable,
confirm compliance with those requirements.
(e) Fit and Proper. Describe how the
foreign board of trade and clearing
organization ensure that potential members/
other participants meet fit and proper
standards.
(f) Qualifications for Board and/or
Committee Membership. Describe the
requirements applicable to membership on
the governing board and significant
committees of the foreign board of trade and
clearing organization, and describe how the
foreign board of trade and clearing
organization ensure that potential governing
board and committee members/other
participants meet these standards.
(g) Conflict of Interest Provisions. Describe
the provisions to minimize and resolve
conflicts of interest with respect to
membership on the governing board and
significant committees of the foreign board of
trade and the clearing organization.
(h) Disclosure of Information. Describe the
rules with respect to the disclosure of
material non-public information obtained as
a result of a member’s or other participant’s
performance on the governing board or
significant committee.
III. The Automated Trading System
(a) A description of the following:
(1) the order matching/execution system,
including a complete description of all
permitted ways in which members or other
participants (or their customers) may connect
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to the trade matching/execution system and
the related requirements (for example,
authorization agreements, technical
compliance verifications, identification of
order routing systems and/or users,
(2) the architecture of the systems,
including hardware and distribution
network, as well as any pre-trade riskmanagement controls that are made available
to system users,
(3) the security features of the systems,
(4) the length of time such systems have
been operating,
(5) any significant system failures or
interruptions,
(6) the nature of any technical review of
the order matching/execution system
performed by the home country regulator,
(7) provide a copy of any order or
certification or self-certification received and
any discrepancies between the standard of
review and the Principles for the Oversight
of Screen-Based Trading Systems for
Derivative Products developed by the
Technical Committee of the International
Organization of Securities Commissions,
(8) trading hours,
(9) types and duration of orders accepted,
(10) information that must be included on
orders,
(11) trade confirmation and trade error
procedures,
(12) anonymity of participants,
(13) trading system connectivity with
clearing system,
(14) response time,
(15) ability to determine depth of market,
(16) market continuity provisions,
(17) reporting and recordkeeping
requirements, and
(18) error trade policies.
(b) A description of the manner in which
the foreign board of trade assures the
following with respect to the trading system:
(1) Algorithm. The trade matching
algorithm matches trades fairly and timely.
(2) IOSCO Principles. The trading system’s
compliance with the Principles for the
Oversight of Screen-Based Trading Systems
for Derivative Products developed by the
Technical Committee of the International
Organization of Securities Commissions.
(3) Audit Trail.
(i) The audit trail captures all relevant data,
including changes to orders.
(ii) Audit trail data is securely maintained
and available for an adequate time period.
(4) Public Data. Trade data is available to
users and the public.
(5) Reliability. The trading system has
demonstrated reliability.
(6) Secure Access. Access to the trading
system is secure and protected.
(7) Emergency Provisions. There are
adequate provisions for emergency
operations and disaster recovery.
(8) Data Loss Prevention. Trading data is
backed up to prevent loss of data.
(9) Contracts Available. Mechanisms are
available to ensure that only those futures
and option contracts or swaps that have been
identified to the Commission as part of the
application or permitted to be made available
for trading by direct access pursuant to the
procedures set forth in section 48.10 of this
part are made available for trading on
connections in the United States.
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(10) Predominance of the Centralized
Market. Mechanisms are available that ensure
a competitive, open and efficient market and
mechanism for executing transactions.
IV. The Terms and Conditions of Contracts
Proposed To Be Made Available in the
United States
(a) Provide the terms and conditions of
futures, option and swaps contracts intended
to be made available for direct access.
(b) Demonstrate that contracts are not
prohibited from being traded by United
States persons.
(c) Demonstrate that contracts are cleared.
(d) Identify any contracts that are linked to
a contract listed for trading on a United
States-registered entity, for example, a
contract that settles against any price
(including the daily or final settlement price)
of one or more contracts listed for trading on
a United States-registered entity.
(e) Identify any contracts that share any
other commonality with a contract listed for
trading on a United States-registered entity,
for example, both the foreign board of trade’s
and the United States-registered entity’s
contract settle to the price of the same third
party-constructed index.
(f) Demonstrate that the contracts are not
readily susceptible to manipulation, as
follows:
(1) Generally. For contracts other than
broad-based stock indexes, provide the
information required in Appendix A to Part
40 (Guideline No. 1) with regard to
manipulation.
(i) For delivered contracts: a demonstration
that the terms and conditions of the contract
will result in a deliverable supply so that the
contract will not be conducive to price
manipulation or distortion and that the
deliverable supply reasonably can be
expected to be available to short traders and
salable by long traders at its market value in
normal cash marketing channels.
(ii) For cash-settled contracts: a
demonstration that cash settlement
mechanism of the contract is at a price
reflecting the underlying cash market (or the
level or index if there is no underlying cash
market), will not be readily subject to
manipulation or distortion, and is reliable,
acceptable, publicly available and timely.
(iii) To deter and detect abusive or
disruptive trading behavior that could result
in price distortions: A demonstration that the
foreign board of trade has rules and
mechanisms, for example, position limits,
restrictions on size and pricing of block
trades, restrictions on market on close or
trade at settlement orders during the daily
close and settlement, and prohibitions on,
and the capacity to detect, ‘‘marking’’ of the
trading close or important economic
announcements.
(2) Broad-Based Stock Indexes. For nonnarrow based stock index futures contracts,
provide the information required in
Appendix D to Part 30 of this chapter. A noaction letter from the Commission’s Office of
General Counsel is required to offer futures
contracts on non-narrow-based stock index
futures contracts to United States citizens.
(3) Manipulation Cases. With respect to
contracts to be listed for trading by direct
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access, describe each investigation, action,
proceeding or case involving manipulation
and involving a contract traded on the
foreign board of trade in the three years
preceding the application date, whether
initiated by the foreign board of trade, a
regulatory or self-regulatory authority or
agency or another government or
prosecutorial agency. For each such action,
proceeding or case, describe the alleged
manipulative activity and the current status
re resolution thereof.
V. Settlement and Clearing
(a) Clearing System. A description of the
clearing organization’s clearing and
settlement systems.
(b) Certification. A certification, signed by
the chief executive officer (or functional
equivalent) of the clearing organization, that
the clearing system complies with the current
Recommendations for Central Counterparties
that have been issued jointly by the
Committee on Payment and Settlement
Systems and the Technical Committee of the
International Organization of Securities
Commissions, as updated, revised or
otherwise amended, or successive standards,
principles and guidance for central
counterparties or financial market
infrastructures adopted jointly by the
Committee on Payment and Settlement
Systems or the International Organization of
Securities Commissions.
(c) RCCP Compliance. A detailed
description of the manner in which the
clearing organization complies with each of
the Recommendations for Central
Counterparties that have been issued jointly
by the Committee on Payment and
Settlement Systems and the Technical
Committee of the International Organization
of Securities Commissions, as updated,
revised or amended, (or successive standards,
principles and guidance for central
counterparties or financial infrastructures
adopted jointly by the Committee on
Payment and Settlement Systems or the
International Organization of Securities
Commissions) and documentation supporting
the representations made, including any
relevant rules or written policies or
procedures of the clearing organization.
VI. The Regulatory Regime Governing the
Foreign Board of Trade and Clearing
Organization in Their Home Countries
Provide information or documentation
necessary to demonstrate that the foreign
board of trade and its clearing organization
are subject to comprehensive supervision and
regulation by the appropriate governmental
authorities in their home countries that is
comparable to the comprehensive
supervision and regulation to which
designated contract markets, derivatives
clearing organizations and market
participants are subject in the United States.
The information and documentation
provided must be sufficient to demonstrate
that the foreign board of trade and clearing
organization are subject to an established
regulatory regime that is based upon
regulatory objectives equivalent (not
necessarily identical) to those applicable to
designated contract markets and derivatives
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clearing organizations in the United States
and that provides basic protections for
customers trading on markets and for the
integrity of the markets themselves:
(a) Regulatory Authority.
(1) Structure, function and powers.
Describe the regulatory authority’s structure,
resources, staff and scope of authority; the
regulator’s authorizing statutes, including the
source of its authority to supervise the
foreign board of trade and the clearing
organization; the rules and policy statements
issued by the regulator with respect to the
authorization and continuing oversight of
markets, electronic trading systems and
clearing organizations and the financial
protections afforded customer funds. Provide
copies of recent public reports disclosing the
regulator’s oversight and enforcement
activities which are, in the judgment of the
regulator, relevant to the FBOT’s status as a
registered FBOT.
(2) Authorization and continuing oversight
of the foreign board of trade and clearing
organization. Describe and provide copies
(with, as applicable, English translations) of
the laws, rules, regulations and policies
applicable to the authorization, licensure or
registration of the foreign board of trade and
clearing organization and the continuing
oversight thereof; the regulatory authority’s
program for the ongoing supervision and
oversight of the foreign board of trade and
clearing organization and the enforcement of
their respective trading and clearing rules;
the financial resources requirements
applicable to the authorization, licensure or
registration of the foreign board of trade and
clearing organization and the continued
operations thereof; the extent to which the
Principles for the Oversight of Screen-Based
Trading Systems for Derivative Products
developed by the Technical Committee of the
International Organization of Securities
Commissions and the current
Recommendations for Central Counterparties
that have been issued jointly by the
Committee on Payment and Settlement
Systems and the Technical Committee of the
International Organization of Securities
Commissions, as updated, revised or
amended, or successive standards, principles
and guidance for central counterparties or
financial market infrastructures adopted
jointly by the Committee on Payment and
Settlement Systems or the International
Organization of Securities Commissions are
used or applied by the regulatory authority
in its supervision and oversight of the foreign
board of trade or clearing organization or are
incorporated into its rules and regulations
and the extent to which the regulatory
authorities review the applicable trading and
clearing systems for compliance therewith;
the extent to which the regulatory authority
reviews and/or approves the trading and
clearing rules of the foreign board of trade or
clearing organization prior to their
implementation; the extent to which the
regulatory authority reviews and/or approves
exchange contracts prior to their being listed
for trading; and the regulatory authority’s
approach to the detection and deterrence of
market manipulation and other unfair trading
practices.
(3) Intermediary Oversight. Describe the
laws, rules, regulations and policies that
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govern the authorization and ongoing
supervision and oversight of market
intermediaries who may deal with United
States participants accessing the foreign
board of trade, including:
(i) Recordkeeping requirements,
(ii) The protection of customer funds, and
(iii) Procedures for dealing with the failure
of a market intermediary in order to
minimize damage and loss to investors and
to contain systemic risk.
(4) Enforcement. Describe the regulatory
authority’s inspection, investigation and
surveillance powers; and the program
pursuant to which the regulatory authority
uses those powers to inspect, investigate, and
enforce rules applicable to the foreign board
of trade and the clearing organization.
(b) Demonstration of Continuing
Regulatory ‘‘Good Standing.’’
The regulatory authorities governing the
activities of the foreign board of trade and
clearing organization must submit a report
confirming that the foreign board of trade and
clearing organization are in regulatory good
standing. The report should include:
(1) Confirmation of regulatory status
(including proper authorization, licensure
and registration) of the foreign board of trade
and clearing organization;
(2) Any recent oversight reports generated
by the regulatory authority which are, in the
judgment of the regulatory authority, relevant
to the FBOT’s status as a registered FBOT;
(3) Disclosure of any significant regulatory
concerns, inquiries or investigations by the
regulatory authority, including any concerns,
inquiries or investigations with regard to the
foreign board of trade’s arrangements to
monitor trading by members or other
participants located in the United States, the
adequacy of the risk management controls of
the trading or of the clearing system; and
(4) A description of any investigations
(formal or informal) or disciplinary actions
initiated by the regulatory authority or any
other self-regulatory, regulatory or
governmental entity against the foreign board
of trade, the clearing organization or any of
their respective senior officers during the
past year.
(c) Staff Visits with Regulatory Authorities.
The regulatory authorities governing the
activities of the foreign board of trade and the
clearing organization must agree to cooperate
with a Commission staff visit subsequent to
the application period on an ‘‘as needed
basis,’’ the objective of which will be to
familiarize Commission staff with oversight
supervisory staff of the regulatory authority;
discuss any changes to the law, rules and
regulations that formed the basis of the
application; discuss the cooperation and
coordination between the authorities,
including, without limitation, information
sharing arrangements; and discuss issues of
concern as they may develop from time to
time (for example, linked contracts, unusual
trading that may be of concern to
Commission surveillance staff).
VII. The Rules of the Foreign Board of Trade
and Its Clearing Organization and
Enforcement Thereof
With respect to the foreign board of trade
and the clearing organization, as applicable:
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(a) Describe the regulatory or compliance
department, to include size, experience level,
competencies, duties and responsibilities.
(b) Describe the foreign board of trade’s
trade practice rules. Include in the
description the following:
(1) Capacity of the foreign board of trade.
Does the foreign board of trade have the
capacity to detect, investigate, and sanction
persons who violate foreign board of trade
rules?
(2) Abusive Trading Practices Prohibited.
Does the foreign board of trade implement
and enforce rules that prohibit abusive
trading practices (for example, wash sales or
trading ahead) and other market abuses,
including the ability to detect and deter
insider trading?
(3) Trade Surveillance System. Does the
foreign board of trade maintain a trade
practice surveillance system appropriate to
the foreign board of trade capable of
detecting and investigating potential trade
practice violations?
(4) Trade Practice/Audit Trail. Does the
foreign board of trades’ audit trail capture
and retain sufficient order and trade-related
data to allow their compliance staffs to detect
trading and market abuses and to reconstruct
all transactions within a reasonable period of
time?
(5) Real-time Market Monitoring. Does the
foreign board of trade maintain appropriate
resources to conduct real-time supervision of
trading?
(6) Compliance Staff and Resources. Does
the foreign board of trade have sufficient
compliance staff and resources, including
those outsourced or delegated to third
parties, to fulfill their regulatory
responsibilities?
(7) Ability to Obtain Information. Do the
foreign board of trade’s rules authorize
compliance staff to obtain, from market
participants, any information and
cooperation necessary to conduct effective
rule enforcement and investigations?
(8) Investigations and Investigation
Reports. Does the foreign board of trade’s
compliance staff investigate suspected rule
violations and prepare reports of their
finding and recommendations?
(9) Access Requirements. Does the foreign
board of trade implement and enforce rules
relating to the persons that may trade on the
foreign board of trade, and the means by
which they connect to it?
(10) Jurisdiction. Does the foreign board of
trade require market participants to submit to
the foreign board of trade’s jurisdiction as a
condition of access to the market?
(c) Describe the foreign board of trade’s
and, if appropriate, the clearing
organization’s disciplinary rules, addressing
the following:
(1) Disciplinary Authority and Procedures.
Do the foreign board of trade and, the
clearing organization, have and enforce
disciplinary procedures that empower staff to
recommend and prosecute disciplinary
actions for suspected rule violations? Do the
procedures include the authority to fine,
suspend, or expel any market participant
pursuant to fair and clear standards?
(2) Warning Letters and Summary Actions.
Do the foreign board of trade and the clearing
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organization authorize staff to issue warning
letters and/or summary fines for specified
rule violations?
(3) Review of Investigation Reports. Do the
compliance staffs of the foreign board of
trade and the clearing organization present
their findings to a disciplinary panel or other
authority for issuance of charges, instruction
to investigate further, or finding that
insufficient basis exists to issue charges?
(4) Disciplinary Committees. Do the foreign
board of trade and the clearing organization
take disciplinary action via disciplinary
committees and formal disciplinary
processes unless the violation is subject to
foreign board of trade staff’s summary fining
authority?
(5) Disciplinary Decisions. Do the foreign
board of trade, clearing organization or their
regulatory authorities articulate the rationale
for their decisions?
(6) Adequacy of Sanctions. Are the
sanctions commensurate with the violations
committed and do they serve as effective
deterrents to future violations?
(d) Describe Market Surveillance rules,
addressing the following:
Does the foreign board of trade have a
dedicated market surveillance department or
effective delegation or outsourcing of that
function? If so, provide a general description
of the staff, the data collected on traders’
market activity, data collected to determine
whether prices are responding to supply and
demand, data on the size and ownership of
deliverable supplies, a description of the
manner in which the foreign board of trade
detects and deters market manipulation, for
cash-settled contracts, methods of monitoring
the settlement price or value, and any foreign
board of trade large-trader or other position
reporting system.
(e) Describe the Clearing Organization
rules, addressing the following:
Does the clearing organization maintain
rules that require that the clearing
organization comply with the
Recommendations for Central Counterparties
that have been issued jointly by the
Committee on Payment and Settlement
Systems and the Technical Committee of the
International Organization of Securities
Commissions (or successive standards) and,
if so, provide copies of the rules.
VerDate Mar<15>2010
17:35 Nov 18, 2010
Jkt 223001
VIII. Information Sharing Agreements
Among the Commission, the Foreign Board
of Trade, the Clearing Organization and
Relevant Regulatory Authorities
With respect to the foreign board of trade,
the clearing organization, and their
respective regulatory authorities:
(a) Describe the arrangements among the
Commission, the foreign board of trade, the
clearing organization and the relevant foreign
regulatory authorities that govern the sharing
of information regarding the transactions that
are executed pursuant to the foreign board of
trade’s registration and the clearing and
settlement of those transactions. This
discussion should include:
(1) The foreign board of trade, clearing
organization and the regulatory authorities
governing the activities of the foreign board
of trade and clearing organization commit, in
writing to provide immediately and directly
to the Commission information and
documentation requested by Commission
staff that Commission staff determines is
needed:
(i) To evaluate the continued eligibility of
the foreign board of trade for registration,
(ii) To enforce compliance with the
specified conditions of the registration,
(iii) To enable the Commission to carry out
its duties under the Act and Commission
regulations and to provide adequate
protection to the public or registered entities,
(iv) To respond to potential market abuse
associated with trading by direct access on
the registered foreign board of trade, and
(v) Where Commission staff, in its
discretion, determines that a contract traded
on a registered foreign board of trade may
affect the Commission’s ability to carry out
surveillance with respect to a United Statesregistered entity.
(2) Exchange International MOU. The
foreign board of trade must execute, or
commit to execute, the International
Information Sharing Memorandum of
Understanding and Agreement.
(b) Regulatory Authority and the IOSCO
MOU. The regulatory authorities governing
the activities of and providing supervision
and oversight of the foreign board of trade
and clearing organization must be signatories
to the International Organization of
Securities Commissions Multilateral
Memorandum of Understanding. If the
regulator is not a signatory to the
International Organization of Securities
Commissions Multilateral Memorandum of
Understanding, the regulator must inform the
PO 00000
Frm 00026
Fmt 4701
Sfmt 9990
Commission of the reasons why the
document has not been signed (for example,
in the process of applying, application is
under consideration by the International
Organization of Securities Commissions
Multilateral Memorandum of Understanding
Screening Group) and supply any additional
information requested by the Commission.
The Commission will determine, on a caseby-case basis, whether any interim
information sharing arrangement will be
acceptable.
(c) Declaration on Cooperation and
Supervision of International Futures
Exchanges and Clearing Organizations (Boca
Declaration). The regulatory authorities
governing the activities of and providing
supervision and oversight of the foreign
board of trade and clearing organization must
sign the Declaration on Cooperation and
Supervision of International Futures
Exchanges and Clearing Organizations or
otherwise commit to share the types of
information contemplated by the
International Information Sharing
Memorandum of Understanding and
Agreement with the Commission pursuant to
an existing memorandum of understanding
or other arrangement with the Commission.
Issued in Washington, DC, November 10,
2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
Statement of Chairman Gary Gensler
Notice of Proposed Rulemaking—
Registration of Foreign Boards of Trade
I support the proposed rulemaking to
implement a registration system for Foreign
Boards of Trade (FBOTs) seeking to offer
market participants in the United States
direct access to the FBOTs’ trading systems.
This registration system replaces the agency’s
current practice of issuing no-action letters to
such FBOTs. Importantly, this will bring
consistency and transparency to the
Commission’s oversight of such entities.
Today’s proposal also provides that FBOTs
subject to comparable, comprehensive
supervision and regulation in their home
country and that meet conditions outlined in
the proposal would be allowed to make
available swaps contracts through direct
access to U.S. market participants.
[FR Doc. 2010–29023 Filed 11–18–10; 8:45 am]
BILLING CODE P
E:\FR\FM\19NOP2.SGM
19NOP2
]]>Agencies
[Federal Register Volume 75, Number 223 (Friday, November 19, 2010)]
[Proposed Rules]
[Pages 70974-70998]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-29023]
[[Page 70973]]
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Part II
Commodity Futures Trading Corporation
-----------------------------------------------------------------------
17 CFR Part 48
Registration of Foreign Boards of Trade; Proposed Rule
Federal Register / Vol. 75 , No. 223 / Friday, November 19, 2010 /
Proposed Rules
[[Page 70974]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 48
RIN 3038-AD19
Registration of Foreign Boards of Trade
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing rules to implement new statutory provisions enacted by
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection
Act. These proposed rules establish a registration requirement that
applies to foreign boards of trade (FBOT) that wish to provide their
identified members or other participants located in the United States
with direct access to their electronic trading and order matching
systems.
DATES: Comments must be received on or before January 18, 2011. The
Commission is not inclined to grant extensions of this comment period.
ADDRESSES: You may submit comments, identified by RIN number 3038-AD19,
by any of the following methods:
Agency Web site, via its Comments Online process: https://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
Hand Delivery/Courier: same as mail above.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that is exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the established procedures in
CFTC Regulation 145.9.\1\
---------------------------------------------------------------------------
\1\ 17 CFR 145.9.
---------------------------------------------------------------------------
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from https://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT: Duane C. Andresen, Senior Special
Counsel, (202) 418-5492, dandresen@cftc.gov, or David Steinberg,
Special Counsel, (202) 418-5102, dsteinberg@cftc.gov, Division of
Market Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the Dodd-Frank Act).\2\ Title VII
of the Dodd-Frank Act \3\ amended the Commodity Exchange Act (CEA or
the Act) \4\ to establish a comprehensive new regulatory framework for
swaps and security-based swaps. The legislation was enacted to reduce
risk, increase transparency, and promote market integrity within the
financial system by, among other things: (1) Providing for the
registration and comprehensive regulation of swap dealers and major
swap participants; (2) imposing clearing and trade execution
requirements on standardized derivative products; (3) creating robust
recordkeeping and real-time reporting regimes; and (4) enhancing the
Commission's rulemaking and enforcement authorities with respect to,
among others, all registered entities and intermediaries subject to the
Commission's oversight.
---------------------------------------------------------------------------
\2\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at https://www.cftc.gov./
LawRegulation/OTCDERIVATIVES/index.htm.
\3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\4\ 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------
Section 738 of the Dodd-Frank Act amends Section 4(b) of the CEA to
provide that the Commission may adopt rules and regulations requiring
registration with the Commission for an FBOT that provides the members
of the FBOT or other participants located in the United States with
direct access to the electronic trading and order matching system of
the FBOT, including rules and regulations prescribing procedures and
requirements applicable to the registration of such FBOTs. The
Commission has determined to promulgate rules to implement these
provisions by July 15, 2011.\5\
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\5\ See Section 738 of the Dodd-Frank Act.
---------------------------------------------------------------------------
Accordingly, the Commission is proposing to adopt a new part 48 \6\
to its regulations to establish a registration requirement and related
registration procedures and conditions that apply to FBOTs that wish to
provide their members or other participants located in the United
States with direct access to their electronic trading and order
matching systems. The Commission requests comment on all aspects of the
proposed rules, as well as comment on the specific provisions and
issues highlighted in the discussion below.
---------------------------------------------------------------------------
\6\ Commission regulations referred to herein are found at 17
CFR Ch. 1.
---------------------------------------------------------------------------
II. Relief Granted to Foreign Boards of Trade
Since 1996, FBOT requests to provide direct access to their
electronic trading and order matching systems (trading systems) from
within the U.S. have been addressed by Commission staff via the no-
action process set forth in Commission regulation 140.99.\7\
Specifically, an FBOT wishing to provide its U.S.-located participants
with direct access to the FBOT's trading system traditionally has
submitted a request for a no-action letter to the Division of Market
Oversight (DMO). The FBOT's no-action request must be accompanied by
representations and supporting documentation from the FBOT regarding,
among other things, its organization, presence in the U.S.,
participants, the products it wishes to list for direct access, its
trading system and the regulatory regime and information-sharing
arrangements to which the FBOT is subject. Staff then reviews the
request and related information and documentation and, where
appropriate, issues a ``direct access'' (formerly known as a ``foreign
terminal'') no-action relief letter. When reviewing no-action requests,
staff looks for a home regulatory regime that provides oversight over
the FBOT in a manner that is comparable to the CFTC's oversight of
DCMs. Specifically, does the FBOT's regulatory authority
[[Page 70975]]
support and enforce ``substantially equivalent regulatory objectives''
in its oversight of the FBOT?
---------------------------------------------------------------------------
\7\ See, e.g., CFTC Letter No. 96-28 (February 29, 1996).
Commission regulation 140.99 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.
---------------------------------------------------------------------------
In the no-action letter, DMO staff represents that, provided the
FBOT meets the conditions set out in the letter, DMO will not recommend
that the Commission institute enforcement action against the FBOT for
failure to register as a designated contract market (DCM) or
derivatives transaction execution facility (DTEF) if the FBOT provides
direct access to its order entry and trade matching system to FBOT
members and other participants located in the U.S. The scope of the
staff no-action relief has been restricted to providing relief from (1)
the requirement that the FBOT obtain DCM or DTEF registration pursuant
to Sections 5 and 5a of the CEA and (2) regulatory requirements related
to the trading or offering of contracts on a DCM and DTEF if the
contracts identified in the no-action letter (foreign futures or option
contracts) are made available in the U.S. for trading in the manner set
forth in the letter.
The no-action relief also has been limited historically to FBOTs
that provide direct access to the FBOTs' members and other participants
that: (1) Trade in the U.S. for their proprietary accounts; (2) are
registered with the Commission as futures commission merchants (FCM);
or (3) are registered with the Commission as commodity pool operators
(CPO) or are exempt from such registration and that are submitting
orders for execution on behalf of U.S. pools they operate or commodity
trading advisors (CTA) or are exempt from such registration and that
are submitting orders for execution on behalf of accounts for which
they have discretionary authority. With respect to such CPOs or CTAs,
an FCM or a firm exempt from registration as an FCM pursuant to
Commission Rule 30.10 (Rule 30.10 Firm) \8\ must act as a clearing firm
and guarantees such trades. The no-action relief typically has been
subject to numerous conditions designed to keep staff informed
regarding the FBOT's status and activities from within the U.S.,
additional contracts to be made available, and significant changes in
the information provided to the Commission in support of the no-action
request. Significant changes in information include changes in the
membership criteria, the location of the management, personnel or
operations (particularly changes that may suggest an increased nexus
between the FBOT's activities and the U.S.); the basic structure,
nature, or operation of the trading system or its clearing
organization; the regulatory or self-regulatory regime the FBOT is
subject to; and any change in the authorization, licensure or
registration of the FBOT.
---------------------------------------------------------------------------
\8\ A Rule 30.10 order permits firms that are members of a self-
regulatory organization and subject to regulation by the foreign
regulator to conduct business from locations outside of the U.S. for
U.S. persons on non-U.S. boards of trade without registering under
the Act, based upon the person's substituted compliance with a
foreign regulatory structure found comparable to that administered
by the Commission under the CEA.
---------------------------------------------------------------------------
In 2006, following a series of market events and Commission
deliberations, the Commission endorsed the continued use of the no-
action process as a mechanism for facilitating direct access to an
FBOT's trading system. On January 17, 2006, ICE Futures Europe, a U.K.
recognized investment exchange that provided direct access to its U.S.
members pursuant to a no-action letter,\9\ notified the Commission that
it would list a futures contract on West Texas Intermediate (WTI) light
sweet crude oil whose settlement price would be linked to contracts
traded on the New York Mercantile Exchange (NYMEX).\10\ ICE Futures
Europe's notification of the proposed contract linked to a U.S.
domestic contract prompted the Commission to undertake an evaluation of
the use of the no-action process to permit direct access, including a
re-examination of certain issues with respect to the Commission's
statutory obligations to maintain the integrity of U.S. markets and to
protect U.S. customers. 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.\11\ The Commission also issued a related
Request for Public Comment.\12\ On October 27, 2006, following
extensive debate, a review of comments submitted pursuant to the
Commission's request for public comment and the Commission Hearing,\13\
the Commission issued a Policy Statement in which it endorsed the no-
action process for FBOTs that want to provide direct access to their
trading systems to U.S.-based participants.\14\
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\9\ On November 12, 1999, the Commission's Division of Trading
and Markets (the predecessor to the CFTC's Division of Market
Oversight) granted no-action relief to the International Petroleum
Exchange of London (now ICE Futures Europe), permitting it to make
its electronic trading and order matching system, known as Energy
Trading System II, available to its members in the United States.
CFTC Letter No. 99-69 (November 12, 1999).
\10\ On April 12, 2006, ICE Futures Europe notified the Division
of Market Oversight of its intent to launch the ICE Futures New York
Harbour Heating Oil Futures Contract and the ICE Futures New York
Harbour Unleaded Gasoline Blendstock (RBOB) Futures Contract each of
which is cash-settled on the price of physically-settled contracts
traded on the NYMEX.
\11\ The hearing was conducted on June 27, 2006, at the
Commission's headquarters in Washington, DC.
\12\ 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.
\13\ Comments submitted in response to the request for comment
and at the Commission's Hearing were generally supportive of the no-
action process, praising the process in general for its flexibility.
Many commenters suggested that the Commission should retain in large
measure the essential contours of the no-action process. 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), available at https://www.cftc.gov/foia/comment06/foi06-002_1.htm.
\14\ 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
64843 (Nov. 2, 2006) (Policy Statement). In the Policy Statement,
the Commission endorsed the no-action process for addressing FBOT
direct access relief requests: ``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.'' Id. at
64846.
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In order to address concerns raised by the listing by ICE Futures
Europe of the linked WTI contract for trading by direct access,
Commission staff, on June 17, 2008, amended ICE Futures Europe's no-
action relief letter by adding additional conditions. The additional
conditions included requirements relating to the reporting of large
trader positions, the publication of daily trading information in the
linked contracts, and the establishment of position limits or
accountability levels that are comparable to the position limits or
accountability levels for the counterpart linked contracts at
NYMEX.\15\
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\15\ CFTC Letter No. 08-09 (June 17, 2008). The Commission
subsequently announced in the Federal Register that these additional
conditions would apply to any FBOT that made available for trading
by direct access a linked contract. See Notice of Additional
Conditions on the No-Action Relief When Foreign Boards of Trade That
Have Received Staff No-Action Relief To Permit Direct Access to
Their Automated Trading Systems from Locations in the United States
List for Trading from the U.S. Linked Futures and Option Contracts
and a Revision of Commission Policy Regarding the Listing of Certain
New Option Contracts. 74 FR 3570 (January 21, 2009).
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[[Page 70976]]
Commission staff subsequently reexamined the issues raised by
linked contracts and concluded that there were additional measures that
should be taken to further allay concerns with respect to effective
market surveillance and maintaining the integrity of the market.
Accordingly, on June 20, 2009, staff again amended ICE Futures Europe's
no-action relief by adding additional conditions with respect to linked
contracts. These conditions included requirements that ICE Futures
Europe provide CFTC staff trade execution and audit trail data for all
linked contracts; copies of, or hyperlinks to, all rules, rule
amendments, circulars and other notices published by the exchange; and
copies of all disciplinary notices involving the linked contracts. They
also provided for CFTC on-site visits to examine ICE Futures Europe's
ongoing compliance with its no-action relief and, in the event that the
CFTC directs that NYMEX take emergency action with respect to a linked
contract (e.g., to cease trading in the contract), ICE Futures Europe,
subject to information-sharing arrangements between the CFTC and the
United Kingdom's Financial Services Authority (FSA), is required to
promptly take similar action (e.g., cease trading in the contract) with
respect to the linked contract at ICE Futures Europe.\16\
---------------------------------------------------------------------------
\16\ CFTC Letter No. 09-37 (August 20, 2009).
---------------------------------------------------------------------------
Since 1996, Commission staff has issued 23 direct access no-action
relief letters to FBOTs, 20 of which remain active (one relief letter
was superseded and two were revoked when the FBOTs ceased
operations).\17\ While the no-action process has served a useful
purpose, given the clear authority provided by Congress to create a
registration program for FBOTs, the Commission concludes that it is in
the public interest to replace the staff-initiated no-action process
with a formal Commission registration provision.
---------------------------------------------------------------------------
\17\ Currently, 14 of the FBOTs with active no-action relief
report volume originating from the U.S. via direct access.
---------------------------------------------------------------------------
The no-action process is better suited for discrete, unique factual
circumstances and where regulations do not address the issue presented.
In circumstances where the same type of relief is granted on a regular
and recurring basis, as it has been with respect to permitting FBOTs to
provide direct access to their trading systems to specified members and
other participants that are located in the U.S., the Commission
concludes believes that it is no longer appropriate to handle such
matters through the no-action process. Instead, the process should
become more transparent and standardized through generally applicable
regulations. Among other things, a rulemaking would provide for a
uniform application process, enhance the visibility of the process to
both applicants and the public and assure fair and consistent treatment
to all applicants. Further, no-action relief letters are issued by the
staff and are not binding on the Commission and do not provide the same
legal certainty to the FBOT recipients that a Commission-issued order
would provide. The Commission believes that a formal registration
procedure would provide more legal certainty for registered FBOTs and
would be more consistent with the manner in which other countries
permit U.S. DCMs to provide direct access internationally. Accordingly,
for the reasons noted above and pursuant to the new authority of
amended CEA Section 4(b), new Part 48 of the Commission's regulations,
as proposed herein, would replace the existing policy of accepting and
reviewing requests for no-action relief to permit an FBOT to provide
for direct access to its trading system from within the U.S. with a
requirement that an FBOT seeking to provide such access must apply for
and be granted registration with the Commission.\18\
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\18\ The proposed rules would provide for a ``limited''
application process for FBOTs currently operating under existing no-
action relief. The limited application would have to be submitted
within 120 days of the effective date of the registration rules and
the FBOT could continue to operate pursuant to the no-action relief
during the 120 day period and until the Commission notifies the FBOT
that the application has been approved or denied. In the event that
the Commission denies an FBOT's application, it would expect staff
to simultaneously withdraw the FBOT's no-action relief.
---------------------------------------------------------------------------
As a starting point for the proposed registration requirements, the
Commission considered the experience gained from the current no-action
review process. The proposed application submission requirements and
staff review standards for FBOT registration under the new regulations
generally are consistent with the application requirements and review
standards that have guided the Commission's staff in issuing the more
recent FBOT no-action relief letters. Under the proposed registration
requirements, for instance, the Commission would not evaluate FBOTs for
compliance with the core principles and/or regulatory requirements
applicable to DCMs. Rather, the Commission would look to the FBOT's
regulatory authority to determine that the home regulatory regime
provides oversight over the FBOT in a manner that is comparable to the
CFTC's oversight of DCMs. Specifically, the Commission would review the
application to determine if the FBOT's regulatory authority supports
and enforces substantially equivalent regulatory objectives, such as
prevention of market manipulation and customer protection, in its
oversight of the FBOT.
The Commission notes that the staff's no-action process has not
remained static since the first no-action relief letter was issued in
1996. Instead, staff has generally been expanding the scope and level
of its review of FBOTs to address activities not originally foreseen
when the first no-action letter was issued. Likewise, the number and
types of conditions imposed upon FBOTs seeking no-action relief have
gradually expanded over time.\19\ Those conditions have generally been
included in the proposed regulations, along with proposed conditions
intended to address increasing technological innovation, new types of
products, the impact on the market of different trading entities
listing substantially similar or even connected products, and the
requirements of the Dodd-Frank Act.
---------------------------------------------------------------------------
\19\ The first no-action relief letter required that Deutsche
Terminborse comply with eight terms and conditions. CFTC Letter No.
96-28 (February 29, 1996). Subsequent letters generally have
required compliance with approximately 16 conditions, although the
number varies based on the manner in which the FBOT operates. More
recent additions to the conditions address, among other things,
restriction to certain types of members, the inclusion of CTAs and
CPOs as entities eligible for no-action relief, and a requirement
that the FBOT provide an annual certification from its regulatory
authority that the FBOT retains its authorization in good standing
as an FBOT in its home country. As previously discussed, the staff
has also added several conditions to the ICE Futures Europe no-
action letter in order to address the listing of linked contracts.
---------------------------------------------------------------------------
III. The Proposed Rules
The proposed regulation is divided into 10 sections and an appendix
(Appendix), each proposed as described below.
A. Scope
The first section, 48.1, provides that part 48 applies to any FBOT
that is registered or is applying to become registered with the
Commission in order to provide its identified members or other
participants located in the U.S.\20\ with direct access to its
electronic trading and order matching system.
---------------------------------------------------------------------------
\20\ For purposes of FBOT registration, the term ``United
States'' or ``U.S.'' includes the United States, its territories and
possessions.
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[[Page 70977]]
B. Definitions
Section 48.2 includes definitions applicable to FBOT registration.
For instance, section 48.2 defines an ``FBOT'' as any board of trade,
exchange or market located outside the U.S., its territories or
possessions, whether incorporated or unincorporated, where foreign
agreements, contracts or transactions are entered into. Section 48.2
also identifies certain criteria an FBOT would have to meet in order to
register to provide direct access, such as possessing the attributes of
an established, organized exchange; adhering to appropriate rules
prohibiting abusive trading practices; and enforcing appropriate rules
to maintain market and financial integrity. Another defined term,
further addressed below, is ``direct access,'' which is defined in the
Dodd-Frank Act to refer to ``an explicit grant of authority by a
foreign board of trade to an identified member or other participant
located in the United States to enter trades directly into the trade
matching system of the foreign board of trade.'' Section 48.2 also
includes definitions, for purposes of this part, of ``linked
contract,'' ``communications,'' ``material change,'' ``clearing
organization,'' ``existing no-action relief,'' ``swaps,'' ``affiliate''
and ``member or other participant.''
C. Registration Required
Section 48.3 provides that, except as otherwise specified in
proposed new Part 48, it shall be unlawful for an FBOT to permit direct
access to its electronic trading and order matching system from within
the U.S. unless and until the Commission has issued an Order of
Registration to the FBOT pursuant to the provisions of Part 48. The
proposal also would provide that it would be unlawful for a board of
trade to make false or misleading statements in any application for
registration or in connection with any application for registration.
D. Registration Eligibility
Section 48.4 describes registration eligibility. Generally, FBOTs
that meet the requirements of the definition in section 48.2(b) would
be eligible to be registered. Section 48.4 also identifies the persons
to whom the registered FBOT could grant authority to trade by direct
access. The Commission proposes that the persons that would be
permitted by the FBOT to trade by direct access from the U.S. pursuant
to the registration rules would be the types of persons that are
currently able to trade by direct access pursuant to staff issued no-
action relief letters. Specifically, an FBOT could request registration
in order to permit direct access from within the U.S. by identified
members and other participants \21\ that: (1) Trade in the U.S. for
their proprietary accounts; (2) are registered with the Commission as
FCMs and submit orders to the trading system for execution on behalf of
U.S. customers; or (3) are, subject to a specific clearing and
guarantee requirement, registered with the Commission as CPOs or CTAs,
or are exempt from such registration pursuant to Commission Rules 4.13
or 4.14. The CPOs would be permitted to submit orders for execution on
behalf of U.S. pools they operate, and CTAs would be permitted to do so
for accounts of U.S. customers for which they have discretionary
authority. The Commission requests comment concerning additional
entities that should be eligible for direct access to the trading and
order matching systems of the FBOT from the U.S.
---------------------------------------------------------------------------
\21\ For purposes of FBOT registration, identified member or
other participant of the FBOT shall include any affiliate of any
registered FBOT's member or other participant that has been granted
direct access by the registered FBOT to the trading system. An
affiliate of a registered FBOT member or other participant shall
mean any person, as that term is defined in section 1a(38) of the
CEA, that: (i) Owns 50% or more of the member or other participant;
(ii) is owned 50% or more by the member or other participant; or
(iii) is owned 50% or more by a third person that also owns 50% or
more of the member or other participant.
---------------------------------------------------------------------------
E. Registration Procedures
Section 48.5 describes procedures to be followed to request and
receive registration.\22\ The registration application must be
submitted electronically, must be signed by the FBOT's chief executive
officer (or functional equivalent), and must include the information
and documentation set forth in the Appendix to Part 48 and any
information and documentation necessary, in the discretion of the
Commission, to effectively demonstrate that the FBOT and its clearing
organization satisfy the registration requirements set forth in section
48.7.
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\22\ Draft submissions and a request for a preliminary review by
Commission staff would be encouraged under the proposed rule. The
Commission proposes that the final copy of an application for
registration would be published on its Web site.
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Section 48.5 also provides that the Commission will review the
application for FBOT registration and may approve or deny the
application. At this time, the proposed rule does not contain a
timeline for Commission action.\23\ If the application is approved, the
Commission will so notify the FBOT and will issue an Order of
Registration. The Commission could, after appropriate notice and an
opportunity for a hearing, amend, suspend, terminate or otherwise
restrict the terms of the Order of Registration. If the application is
denied, the Commission will issue a Notice of Action specifying that
the application was not approved and the FBOT will not be registered
and may not provide direct access to its trade matching engine from
within the U.S. Following a denial, the FBOT may reapply for
registration 360 days after the date of denial.
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\23\ The Commission expects a surge of activity shortly after
the registration rule goes into effect. Once this period has ended,
the Commission anticipates that a timeline would be established.
Such a timeline might require a Commission response to a completed
application for registration within 120 days after the Commission,
in its sole discretion, determines that the application is complete.
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The Commission is also proposing that, in determining whether to
grant or deny an application for FBOT registration, the Commission will
thoroughly review the information and documentation submitted in the
application and, as necessary, conduct an on-site due diligence visit
at the FBOT to determine, as mandated by the Dodd-Frank Act, whether
the FBOT and its clearing organization are subject to comprehensive
supervision and regulation by the appropriate governmental authorities
in their home country that is comparable to the comprehensive
supervision and regulation to which DCMs and derivatives clearing
organizations (DCO) are subject in the U.S.\24\ In this context, as
previously noted, comparable does not necessarily mean identical. The
comparability determination for registration purposes will be similar
to that followed when reviewing direct access no-action requests. The
Commission will evaluate whether the FBOT's home regulatory authority
supports and enforces regulatory objectives in its oversight of the
FBOT that are substantially equivalent to the regulatory objectives
supported and enforced by the Commission in its oversight of DCMs.
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\24\ The Dodd-Frank Act also mandated that the Commission
consider any previous Commission findings that the FBOT and its
clearing organization are subject to such comprehensive supervision
and regulation by the appropriate government authorities in their
home country. Such previous Commission findings would include staff
conclusions drawn previously during the course of reviewing an
application for direct access no-action relief.
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The Commission notes that it uses a similar ``comparability''
analysis when evaluating foreign entities in the context of issuing
Rule 30.10 exemptions to
[[Page 70978]]
intermediaries.\25\ When determining whether to issue a Rule 30.10
exemption, staff evaluates whether the applicant is subject to a
comparable regulatory scheme in the country in which it is located. In
this evaluation, comparable does not necessarily mean identical: as set
forth in Appendix A to Rule 30.10 with respect to the comparability
determination, ``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.'' In
the case of FBOT registration, a determination that the foreign
regulatory authority enforces substantially equivalent regulatory
objectives is a determination of comparability: The regulatory regime
is comparable, although not necessarily identical, to that of the CFTC.
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\25\ See supra note 8.
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In its review, the Commission would also consider whether the FBOT
is eligible to be registered as defined in section 48.2(b) of this part
and whether the FBOT has adequately demonstrated that it meets the
requirements for registration specified in section 48.7 and any other
requirements that the Commission, in its discretion, believes are
necessary or appropriate to impose under the facts and circumstances
presented.
F. FBOTs Providing Direct Access Pursuant to No-action Relief
In Section 48.6, the Commission proposes to provide for a
``limited'' application process for FBOTs currently operating pursuant
to existing no-action relief. Such FBOTs would apply for registration
by (1) identifying the specific requirements for registration set forth
in section 48.7 or information and documentation required by the
Appendix to Part 48 that are satisfied by information previously
submitted in the request for no-action relief that remain current and
true and resubmitting such information and documentation,\26\ and (2)
submitting any information and documentation required in a complete
application for registration that was not previously provided or is no
longer current. The limited application for registration would have to
be submitted within 120 days of the effective date of the registration
rules, during which time the FBOT could continue to operate pursuant to
the no-action relief. The no-action relief would, upon notice to the
FBOT, be revoked after 120 days if a complete limited application is
not received by the Commission by that time. If the FBOT files an
application for registration within 120 days, the FBOT could continue
to operate pursuant to the no-action relief until notified by the
Commission that the application has been approved or denied. If the
Commission revokes the no-action relief or denies the application, it
will provide for a transition period for phasing out direct access.
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\26\ The Commission is requesting resubmission of original
documentation, where appropriate, because such documentation, some
of which dates back as much as fourteen years, may no longer be
readily available for review because of incomplete and or misplaced
files.
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G. Requirements for Registration
Section 48.7 describes the requirements that the Commission
proposes that an FBOT would be required to demonstrate in order to be
registered. The requirements are divided into the same seven general
categories currently evaluated during the course of a review of an
application for no-action relief and they would be reviewed in a
similar manner. Whether they are successfully met would be determined
by a review of the information and documentation submitted by the
applicant pursuant to the Appendix to proposed Part 48, any additional
information or documentation requested by the Commission in connection
with the application review, and, as necessary, a Commission staff due
diligence on-site visit to the FBOT and clearing organization.
First, with respect to FBOT and clearing membership, the FBOT would
be required to demonstrate that FBOT and clearing organization members
and other participants are fit and proper and meet appropriate
financial and professional standards; that the FBOT and clearing
organization have adequate conflict of interest provisions; and that
the FBOT and clearing organization have and enforce rules prohibiting
the disclosure of material, non-public information obtained as a result
of a member's/other participant's performance of official duties.
Second, the FBOT's automated trading system would be required to
comply with the Principles for the Oversight of Screen-Based Trading
Systems for Derivative Products developed by the Technical Committee of
the International Organization of Securities Commissions (IOSCO
Principles) and adopted by the Commission on November 21, 1990.\27\ In
addition, the FBOT's trade matching algorithm would be required to
match trades fairly and timely, the audit trail would be required to
capture all relevant data (including changes to orders), and audit
trail data would be required to be securely maintained and available
for an adequate time period. Trade data would be required to be made
available to users and to the public, the trading system would be
required to have demonstrated reliability, and access to the trading
system would be required to be secure and protected. Finally, adequate
provisions for emergency operations and disaster recovery would be
required, trading data would be required to be backed up to prevent its
loss, and only approved contracts could be made available for trading
by direct access from the U.S.
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\27\ The Commission adopted the IOSCO Principles as a statement
of regulatory policy for the oversight of screen-based trading
systems for derivative products. Policy Statement Concerning the
Oversight of Screen-Based Trading Systems, 55 FR 48670 (Nov. 21,
1990).
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Third, the contracts to be made available by direct access in the
U.S. would be required to be futures, option or swaps contracts that
would be eligible to be traded on a DCM and would be subject to prior
review by the Commission. With respect to swaps, Section 733 of the
Dodd-Frank Act adds section 5h to the CEA, which provides that a person
operating a facility for the trading or processing of swaps must be
registered as a swaps execution facility (SEF) or as a DCM. Section 733
also adds section 5(g) to the CEA which provides that the ``Commission
may exempt, conditionally or unconditionally, a swap execution facility
from registration under this section if the Commission finds that the
facility is subject to comparable, comprehensive supervision and
regulation on a consolidated basis by the [SEC], a prudential
regulator, or the appropriate governmental authorities in the home
country of the facility.'' The approach for granting a SEF exemption
(namely, ``subject to comparable, comprehensive supervision and
regulation * * * in the home country of the facility'') is similar to
that which applies to FBOTs seeking registration. Moreover, there is
nothing in the Dodd-Frank Act, including Section 738 of the Dodd-Frank
Act amending Section 4(b) of the CEA, which expressly precludes a
registered FBOT from offering swaps through direct access.\28\
Accordingly, the Commission is proposing to permit a registered FBOT to
offer and trade swaps though direct access, subject to the condition
that the FBOT meet
[[Page 70979]]
certain standards or requirements that may apply to SEFs, as the
Commission deems appropriate. The Commission requests comment with
respect to whether a registered FBOT should be allowed to make
available swaps through direct access and if so, under what conditions.
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\28\ Furthermore, under the Dodd-Frank Act, a DCM may trade
swaps without additionally registering as a SEF.
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Contracts that are linked to a contract listed for trading on a
U.S. registered entity would be required to be identified, as would
contracts that share any other commonality with a contract listed for
trading on a U.S. registered entity, i.e., both the FBOT's and the U.S.
registered entity's contract settle to the price of the same third
party-constructed index. Finally, the FBOT would be required to certify
that it has listing standards in place that require that contracts not
be readily susceptible to manipulation.\29\
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\29\ The Commission considers that contracts that can be found
to have the following are less likely to be susceptible to
manipulation: (1) They rely for settlement pricing on a robust and
transparent calculation, whether based on the contract's own trading
or an externally calculated index; (2) they are subject to measures
to reduce the ability of any party to disrupt pricing, e.g. position
limits, intraday surveillance, and pre-trade screens; and (3) there
is either ample deliverable supply or flexibility in the contract
(alternate delivery mechanisms).
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Fourth, with respect to settlement and clearing, the clearing
organization, would be required to comply with the current
Recommendations for Central Counterparties (RCCPs) that have been
issued jointly by the Committee on Payment and Settlement Systems
(CPSS) and the Technical Committee of the International Organization of
Securities Commissions (IOSCO), as updated, revised or otherwise
amended, or successive standards, principles and guidance for central
counterparties or financial market infrastructures adopted jointly by
IOSCO and CPSS, and the clearing organization would be required to be
in good regulatory standing in its home country jurisdiction. In the
alternative, the clearing organization may be registered with the
Commission as a DCO.\30\
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\30\ The Commission is including the option for the clearing
organization to be registered as a DCO because it is aware that some
foreign clearing organizations are registered as such. These include
ICE Clear Europe Limited, LCH Clearnet Ltd. and Natural Gas Exchange
Inc.
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Fifth, the FBOT's and the clearing organization's regulatory
authorities would be required to provide comprehensive supervision and
regulation of the FBOT and the clearing organization that is comparable
to the comprehensive supervision and regulation to which DCMs and DCOs
are subject in the U.S., would be required to have the power to
intervene in the market and authority to share information with the
Commission, and would be required to provide for ongoing regulatory
supervision of the FBOT and its trading system, the clearing
organization and its clearing system and intermediaries--with
particular attention to market integrity and customer protection and
the manner in which the exchange enforces its rules. In the case of
FBOTs with listed swaps, the Commission proposes to take into
consideration the regulation of relevant market participants (e.g.,
swap dealers) regarding their exchange-trading activity when analyzing
the comparability and comprehensiveness of the regulatory regime
applicable to exchange-listed swaps in the FBOT's home country.
Sixth, the FBOT and the clearing organization would be required to
have appropriate rules and would be required to enforce them. Among
other things, the FBOT and the clearing organization would be required
to have sufficient compliance staff and resources to fulfill their
respective regulatory responsibilities, including the capacity to
detect, investigate, and sanction persons who violate their respective
rules. The FBOT would be required to implement and enforce rules
relating to oversight of trading practices, including appropriate trade
practice surveillance, real-time market monitoring and market
surveillance. The FBOT's and the clearing organization's rules would be
required to authorize the compliance staff to obtain, from market
participants, any information and cooperation necessary to conduct
effective rule enforcement and investigations, and the FBOT would be
required to have and enforce rules with respect to access to the
trading system and the means by which the connection is accomplished.
The FBOT and the clearing organization (or their respective regulatory
authorities) would be required to have implemented and enforce
disciplinary procedures that empower them to recommend and prosecute
disciplinary actions for suspected rule violations, impose adequate
sanctions for such violations, and provide adequate protections to
charged parties pursuant to fair and clear standards. The FBOT would be
required to have the capacity to detect and deter market manipulation,
attempted manipulation, price distortion, and other disruptions of the
market and would be required to have and enforce rules designed to
maintain market and financial integrity and prohibit other trading and
market abuses. Finally, the FBOT would be required to have and enforce
rules and procedures that ensure a competitive, open and efficient
market and mechanism for executing transactions.
Finally, satisfactory information-sharing arrangements among the
FBOT, the clearing organization, their respective regulatory
authorities, and the Commission would be required to be in place. The
regulatory authorities would be required to be signatories to the IOSCO
Multilateral Memorandum of Understanding (IOSCO MOU) \31\ or, if not
signatories to the IOSCO MOU, would have to inform the Commission of
the reasons why the document has not been signed, supply any additional
information requested by the Commission, and ensure alternative
information sharing arrangements that are satisfactory to the
Commission are in place. The regulatory authority also would be
required to be a signatory to the Declaration on Cooperation and
Supervision of International Futures Exchanges and Clearing
Organizations (Boca Declaration),\32\ or otherwise commit to share the
types of information contemplated by the International Information
Sharing Memorandum of Understanding and Agreement (Exchange
International MOU) \33\ with the Commission. The FBOT would be required
to have executed, or have committed to execute, the Exchange
International MOU. In addition, pursuant to the proposed conditions of
registration described in section 48.8(a)(6)(iii), the FBOT would
[[Page 70980]]
be required to provide certain information directly to the Commission.
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\31\ Memorandum of Understanding Concerning Consultation,
Cooperation and the Exchange of Information of the International
Organization of Securities Commissions, October 16, 2003. The IOSCO
MOU is the first worldwide multilateral enforcement cooperation
arrangement among securities and derivatives regulators. It provides
for the exchange of essential information to investigate cross-
border securities and derivatives violations, including the most
serious offenses, such as manipulation, insider trading and customer
fraud. The IOSCO MOU enables regulators to share critical
information, including bank, brokerage, and client identification
records and to use that information in civil and criminal
prosecutions.
\32\ The Boca 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 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, described below.
\33\ The development of the Exchange International MOU was one
of the achievements that resulted from the Futures Industry
Association-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.
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H. Conditions Upon FBOT Registration
As previously noted, Section 738 of the Dodd-Frank Act amends
Section 4(b) of the CEA to provide that the Commission may adopt rules
and regulations requiring registration with the Commission of an FBOT
that provides identified members of the FBOT or other participants
located in the United States with direct access to the electronic
trading and order matching system of the FBOT, including rules and
regulations prescribing procedures and requirements applicable to the
registration of such FBOTs. Proposed Section 48.8 provides for certain
procedures and requirements applicable to maintaining the registration
of such FBOTs and describes the specified conditions upon FBOT
registration that the Commission believes are essential in assuring
effective market integrity and customer protection. As previously
noted, the conditions applicable to existing no-action relief have
expanded over time to address activities not foreseen when the earliest
no-action letters were issued. In the proposed regulations, the
Commission has added further conditions to address increasing
technological innovation, new types of products, the impact on the
market of different trading entities listing substantially similar or
even connected products, and the requirements of the Dodd-Frank Act.
The specified conditions are divided into three categories: Specified
conditions for maintaining registration, other continuing obligations,
and additional specified conditions for FBOTs with linked contracts. A
registered FBOT would have an ongoing obligation to monitor and enforce
compliance with the specified conditions of its registration and with
any additional conditions that the Commission, in its discretion and
upon notice to the FBOT and subsequent to an opportunity to be heard,
may impose.
(1) Specified Conditions
With respect to the regulatory regimes under which they operate,
the FBOT and the clearing organization, respectively, would be required
to continue to satisfy the criteria for a regulated market and clearing
organization pursuant to their home regulatory regimes identified in
the application for registration and would be required to continue to
be subject to oversight by their home regulatory authorities. In
addition, the laws, systems, rules, and compliance mechanisms of the
applicable regulatory regimes would be required to continue to require
the FBOT to maintain fair and orderly markets; prohibit fraud, abuse,
and market manipulation; and provide that such requirements are subject
to the oversight of appropriate regulatory authorities. With respect to
international standards, the FBOT would be required to continue to
adhere to the IOSCO Principles, to the extent such principles do not
contravene U.S. law. The clearing organization would be required to
continue to satisfy, as applicable, the rules, regulations and core
principles applicable to its registration as a DCO or the RCCPs or
successive standards, principles or guidance that may be adopted
jointly by IOSCO and CPSS, to the extent such recommendations,
standards, principles or guidance do not contravene U.S. law.
The FBOT would be required to restrict direct access to the trading
system from the U.S. to identified members or other participants and
take reasonable steps to prevent third parties from providing such
access to the FBOT's trading system to persons other than the
identified members or other participants.\34\ All orders transmitted
through the FBOT's trading system by an FBOT-identified member or other
participant by direct access would be required to be for the member's
or other participant's own account unless: (a) The member or other
participant is an FCM or (b) subject to certain clearing requirements,
the member or other participant is a CPO or CTA, or is exempt from such
registration pursuant to Commission regulation 4.13 or 4.14.
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\34\ The Commission believes that such steps would include
specific prohibitions on sharing access in the FBOT's rules and
membership agreements and a review of how access is granted by and
to the identified member's or other participant's infrastructure
during audits of those entities.
The Commission will continue to evaluate new developments in
technology and business arrangements that may be used by FBOTs to
provide U.S. participants with direct access to its trade matching
system in the context of these proposed rules.
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The specified conditions also include several documentation
requirements to assist the Commission in monitoring the activities of a
registered FBOT and the clearing organization. Each current and
prospective member or other participant that is granted direct access
to the FBOT's trading system from the U.S. and that is not registered
as an FCM, a CTA or a CPO would be required to file with the FBOT (a) A
written representation stating that the member or other participant
agrees to and submits to the jurisdiction of the CFTC with respect to
activities conducted pursuant to the registration; (b) a valid and
binding appointment of a U.S. agent for service of process in the U.S.;
and (c) a written representation that the member or other participant
granted direct access pursuant to this regulation will provide, upon
the request of the Commission, the U.S. Department of Justice and, if
appropriate, the National Futures Association (NFA) (collectively, the
U.S. Agencies), prompt access to the entity's, member's or other
participant's original books and records or, at the election of the
requesting U.S. Agency, a copy of specified information containing such
books and records, as well as access to the premises where the trading
system is available in the U.S. The FBOT and the clearing organization
also would be required to file with the Commission a valid and binding
appointment of an agent for service of process in the U.S. and maintain
with the FBOT written representations concerning U.S. Agencies' access
to original books and records or, at the election of the requesting
U.S. Agency, a copy of specified information containing such books and
records, as well as access to the premises where the trading system is
available in the U.S. The FBOT would be required to maintain all the
representations required pursuant to this regulation as part of its
books and records and make them available upon the request of a
Commission representative.
With respect to information sharing, the specified conditions
mandate that information-sharing arrangements satisfactory to the
Commission are in effect among the Commission and the regulatory
authorities that oversee both the FBOT and the clearing organization
and that the Commission is able to obtain sufficient information
regarding the FBOT, the clearing organization and their respective
members and other participants operating pursuant to the FBOT's
registration. The FBOT would be required to provide information
directly to the Commission in response to a Commission request. In the
event that the FBOT and the clearing organization are separate
entities, the proposed rule would require the clearing organization to
enter into a written agreement with the FBOT in which the clearing
organization is contractually obligated to promptly provide any and all
information and documentation that may be required of the clearing
organization under the regulation.
With respect to swaps contracts, if the FBOT makes swaps contracts
available by direct access, the FBOT would be required to report to the
public, on a real-time basis, data relating to each
[[Page 70981]]
swap transaction, including price and volume, as soon as
technologically practicable after execution of the swap transaction. In
addition, the FBOT would be required to ensure that all swap
transaction data is timely reported to a swap data repository that is
either registered with, or has an information-sharing arrangement with,
the Commission. The FBOT also must agree to coordinate with the
Commission with respect to arrangements established to address cross
market oversight issues, including surveillance, emergency actions and
the monitoring of trading. In addition, particularly with respect to
the listing of swaps contracts, the Commission may, in its discretion
and after notice and an opportunity to be heard, impose additional
conditions upon the FBOT's registration. Finally, all futures, option
and swaps contracts must be cleared.
(2) Other Continuing Obligations
Among the proposed specified conditions identified as other
continuing obligations are quarterly, upon occurrence, and annual
reporting requirements that the Commission determines are necessary to
provide ongoing visibility with respect to a registered FBOT's
performance as it relates to U.S. persons. First, as is the case now
with the no-action relief recipients, the FBOT would be required to
maintain and provide to the Commission on at least a quarterly basis,
and at any time promptly upon request, volume data that reflects the
percentage of trading originating in the U.S. Thus, the FBOT would be
required to provide, for each contract available to be traded through
its trading system, the following: (a) The total trade volume
originating from electronic trading devices providing direct access to
the trading system in the U.S., (b) the total trade volume for such
products traded through the trading system worldwide, and (c) the total
trade volume for such products traded on the FBOT generally. The FBOT
would also be required to provide a listing of the names, NFA ID
numbers (if applicable), and main business addresses in the U.S. of all
members and other participants that have access to the trading system
in the U.S.
With respect to reporting the occurrence of events that may have an
impact on the FBOT's capability to meet its registration requirements,
the FBOT would be required to promptly provide the Commission with
written notice of the following: (a) Any material change in the
information provided in the FBOT's registration application or in the
FBOT's or clearing organization's rules or in the laws, rules, and
regulations in the home jurisdictions of the FBOT or the clearing
organization; (b) any matter known to the FBOT or the clearing
organization that, in their judgment, could affect the financial or
operational viability of the FBOT or the clearing organization; (c) any
default, insolvency, or bankruptcy of any FBOT trading member or other
participant that may have a material, adverse impact upon the condition
of the FBOT or upon any U.S. customer or firm, or any default,
insolvency or bankruptcy of any member of the FBOT's clearing
organization; (d) any known violation by the FBOT, its clearing
organization or any trading or clearing member or other participant of
the specified conditions of registration or failure to satisfy the
requirements for registration; and (e) any disciplinary action taken by
the FBOT or its clearing organization against any FBOT trading member
or other participant or a member of the clearing organization that
involves any market manipulation, fraud, deceit, or conversion or that
results in suspension or expulsion that involves a contract or
contracts available for trading from within the U.S. pursuant to
registration.
Finally, the FBOT or the clearing organization, as applicable,
would be required to provide the following to the Commission on an
annual basis: (a) A certification from the FBOT's regulatory authority
confirming that the FBOT retains its authorization in good standing as
a regulated market/exchange; (b) a certification from the clearing
organization's regulatory authority confirming the clearing
organization's regulatory status (i.e., its authorization, licensure,
or registration) and continued ``good standing'' in its authorized
jurisdiction; (c) if the clearing organization is not a DCO,
recertification of the clearing organization's compliance with the
RCCPs or successive standards, principles or guidance; (d) a
description of any material changes to any relevant representation
regarding t
