Foreign Futures and Options Contracts on a Non-Narrow-Based Security Index; Commission Certification Procedures, 77588-77595 [2010-31014]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 75, Number 238 (Monday, December 13, 2010)]
[Proposed Rules]
[Pages 77588-77595]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-31014]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 30

RIN 3038-AC54


Foreign Futures and Options Contracts on a Non-Narrow-Based 
Security Index; Commission Certification Procedures

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: Currently, a security index futures contract traded on, or 
subject to the rules of, a foreign board of trade may be offered or 
sold to persons located within the United States pursuant to a

[[Page 77589]]

staff no-action letter confirming that the contract satisfies the 
requirements enumerated in Section 2(a)(1)(C)(ii) of the Commodity 
Exchange Act (the ``CEA'' or ``Act''). The Commodity Futures Trading 
Commission (``Commission'') is hereby proposing new requirements which 
would establish a Commission certification procedure applicable to the 
offer or sale, to persons in the U.S., of a security index futures 
contract traded on a foreign board of trade; the new certification 
procedure will replace the existing staff no-action process.
    Additionally, this proposed rule would establish a procedure for a 
foreign board of trade to request and receive a Commission 
certification on an expedited basis. Under this expedited procedure, a 
security index futures contract of qualifying foreign boards of trade 
could be offered or sold in the U.S. forty-five (45) days after 
submission of such request, absent a contrary action (or an extension 
of time) by the Commission.

DATES: Comments must be received on or before January 12, 2011.

ADDRESSES: You may submit comments, identified by RIN number, 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 you believe 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 in 
Sec.  145.9 of the Commission's regulations, 7 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: Harold L. Hardman, Deputy General 
Counsel (Regulation), (202) 418-5120, hhardman@cftc.gov; Carlene S. 
Kim, Assistant General Counsel, (202) 418-5613, ckim@cftc.gov, Office 
of the General Counsel, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

    The Commission has exclusive jurisdiction with respect to the offer 
or sale in the U.S. of futures contracts based on a certain group or 
index of securities,\1\ including those contracts traded on or subject 
to the rules of a foreign board of trade.\2\ Such offer or sale must 
comply with Section 2(a)(1)(C)(iv) of the Act,\3\ which prohibits the 
offer or sale of a security index contract, except as permitted under 
Section 2(a)(1)(C)(ii) or Section 2(a)(1)(D).\4\
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    \1\ Such a contract also is referred to herein as ``non-narrow-
based security index futures contract'' or ``broad-based security 
index futures contract.'' The proposed rule does not apply to 
foreign exchange-traded security futures products, including futures 
or futures options on narrow-based security indices, as defined in 
Section 1a(25) of the CEA.
    \2\ See 7 U.S.C. 2(a)(1)(C)(ii); 63 FR 38537 (July 17, 1998). 
However, the Commission shares jurisdiction with the Securities and 
Exchange Commission over security futures products. Securities 
futures products are defined as a security future or any put, call, 
straddle, option, or privilege on any security future. See Section 
1a(32). A security future is defined as a contract of sale for 
future delivery of a single security or of a narrow-based security 
index, including any interest therein or based on the value thereof, 
with certain exceptions. See Section 1a(31) of the CEA.
    \3\ 7 U.S.C 2(a)(1)(C)(iv). By its terms, Section 2(a)(1)(C)(iv) 
applies to security index futures contracts traded on both domestic 
and foreign boards of trade.
    \4\ 7 U.S.C. 2(a)(1)(D) (governs the offer and sale of security 
futures products). Foreign security futures contracts generally may 
not be offered or sold to customers located in the U.S. until the 
Commission and the U.S. Securities and Exchange Commission adopt 
rules governing the offer and sale of such products. See 7 U.S.C. 
2(a)(1)(E) and 2(a)(1)(F). The SEC has issued an order permitting 
certain U.S. persons, consisting primarily of qualified 
institutional buyers as defined in Rule 144A under the Securities 
Act of 1933, to purchase and sell foreign security futures 
contracts, subject to certain conditions. See 74 FR 32200 (July 7, 
2009).
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    Section 2(a)(1)(C)(ii) sets forth three criteria that govern the 
trading of a security index futures contract on a designated contract 
market (``DCM'') and a registered derivatives transaction execution 
facility (``DTEF'') under the Commission's exclusive jurisdiction. 
Specifically, Section 2(a)(1)(C)(ii) provides that no DCM or DTEF may 
trade a security index futures contract unless it demonstrates that: 
(i) The contract provides for cash settlement; (ii) the contract is not 
readily susceptible to manipulation or to being used to manipulate any 
underlying security; and (iii) the group or index of securities is not 
a ``narrow-based security index,'' as defined in the Act.\5\
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    \5\ The first two criteria under CEA Section 2(a)(1)(C)(ii) were 
unchanged by the Commodity Futures Modernization Act of 2000. With 
regard to the third criterion, an index is a ``narrow-based security 
index'' under both the CEA and the Securities Exchange Act of 1934 
(``Exchange Act''), 15 U.S.C. 78a et seq., if it has any one of the 
following four characteristics: (1) It has nine or fewer component 
securities; (2) any one of its component securities comprises more 
than 30% of its weighting; (3) the five highest weighted component 
securities in the aggregate comprise more than 60% of the index's 
weighting; or (4) the lowest weighted component securities 
comprising, in the aggregate, 25% of the index's weighting, have an 
aggregate dollar value of average daily trading volume of less than 
$50 million (or in the case of an index with 15 or more component 
securities, $30 million). See CEA Section 1a(25)(A)(i)-(iv); 
Exchange Act Section 3(a)(55)(B)(i)-(iv). Thus, an index is not a 
narrow-based security index for purposes of CEA Section 
2(a)(1)(C)(ii) unless it has one of these elements. See also CEA 
Section 1a(25)(B); Exchange Act Section 3(a)(55)(C).
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    While Section 2(a)(1)(C)(ii) provides that no security index 
futures contract may trade on a U.S. exchange unless it meets the three 
criteria noted above, it does not explicitly address the standards to 
be applied to a security index futures contract that is traded on a 
foreign board of trade. CFTC staff, however, has applied those same 
three criteria in evaluating requests by a foreign board of trade with 
regard to the offer or sale of their security index futures contract 
within the U.S. when the foreign board of trade does not seek 
designation as a contract market or registration as a DTEF to trade 
those contracts. In adopting this approach, the staff has been guided 
by the legislative history relating to Section 2(a)(1)(C)(ii) and 
Section 4(b).\6\ Of particular relevance are statements by the House 
Committee on Agriculture addressing the listing criteria of new Section 
2(a)(1)(C) and their application to a security index futures contract 
traded on a foreign board of trade.\7\
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    \6\ The Futures Trading Act of 1982 added Section 2(a)(1)(B) and 
Section 4(b) to the Act (Section 2(a)(1)(B), as amended in 2000, is 
now Section 2(a)(1)(C)). See Pub. L. 97-444, 96 Stat. 2294.
    \7\ H.R. Rep. No. 565, Part 1, 97th Cong., 2d Sess. (1982) 
(``House Report'').
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    As the House Committee explained, new Section 4(b) expressly 
empowers

[[Page 77590]]

the Commission to protect U.S. persons against fraudulent or other 
harmful practices in the offer or sale of foreign futures contracts. It 
does not, however, authorize the Commission to ``regulate the internal 
affairs of a foreign board of trade * * * or require Commission 
approval of any action of any such market * * *'' \8\ Nevertheless, 
where the Act establishes minimum requirements for a contract, the 
Committee stated that ``nothing in the provisions prevents a foreign 
board of trade from applying to the Commission that its contract 
conforms with the requirements of this Act.'' \9\ Thus, Congress 
understood that a foreign exchange might lawfully offer or sell futures 
contracts on security indexes within the United States, without having 
to become designated as a DCM or registered as a DTEF. In doing so, the 
foreign board of trade may seek assurance from the Commission that its 
futures contract meets the statutory criteria enumerated in Section 
2(a)(1)(C)(ii).\10\
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    \8\ Id.
    \9\ Id.
    \10\ Id. Specifically, the House Committee stated that a foreign 
board of trade may seek certification from the Commission that a 
futures contract offered by it that is based upon a group or index 
of American securities meets the minimum requirements specified in 
subparagraphs (a) through (c) of section 2(a)(1)(B)(ii) [now known 
as section 2(a)(1)(C)(ii)] of the Act, without seeking or obtaining 
designation by the Commission as a contract market. With regard to a 
futures contract on an index comprised of foreign securities only, 
the House Committee stated that such contract ``could be certified 
by the Commission under such criteria as the Commission may deem 
appropriate.'' Thus, the Committee made a distinction between 
contracts on indexes on U.S. securities from indexes on foreign 
securities.
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    The Commission did not adopt a certification procedure for either 
domestic- or foreign-based security index contracts offered on a 
foreign board of trade. Instead, foreign boards of trade have been 
granted confirmation with respect to their broad-based security index 
futures contracts pursuant to a no-action process, under which the 
Commission staff has applied the same criteria to evaluate a security 
index futures contract.\11\
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    \11\ A no-action letter is a written statement issued by the 
staff of a Division of the Commission or of OGC 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 or activity is 
conducted. A no-action letter binds only the issuing division or 
OGC, as applicable, not the Commission or other Commission staff. 
See 17 CFR 140.99.
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    The factors that are considered by the staff in evaluating a 
request for a no-action letter by a foreign board of trade with respect 
to its security index futures contract, and the information that the 
board should submit in its request, are set forth in Appendix D to Part 
30 of the Commission's regulations. Among other things, the staff 
considers the design and maintenance of the index, the method of index 
calculation, the nature of the component security prices used to 
calculate the index, the breadth and frequency of index dissemination, 
and other relevant factors. Another factor that the staff considers 
with respect to the issue of whether a foreign futures contract based 
on a security index is not readily susceptible to manipulation or being 
used to manipulate any underlying security, one preliminary 
consideration is the requesting board's ability to access and share 
information regarding the securities underlying the index.\12\
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    \12\ In general, OGC staff has requested that the foreign board 
of trade provide a copy of the surveillance agreements between the 
board of trade and the exchange(s) on which the underlying 
securities are traded; assurances that the board of trade will share 
information with the Commission, directly or indirectly; and when 
applicable, information regarding foreign blocking statutes and 
their impact on the ability of United States government agencies to 
obtain information regarding the trading of such contracts. The 
staff reviews this information to ensure that the requesting foreign 
board of trade (and/or its regulator) has the ability and 
willingness to access adequate surveillance data necessary to detect 
and deter manipulation in the futures contracts and underlying 
security, as well as share such data with the Commission.
    To date, OGC has issued 114 no-action letters involving 25 
foreign boards of trade. A complete list of these no-action letters 
can be found on the Commission Web site: https://services.cftc.gov/SIRT/SIRT.aspx?Topic=ForeignOrganizationProducts&implicit=true&type=DCM&status=No-Action%20Letter%20Issued&CustomColumnDisplay=TTTTTTTT.
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    The scope of the no-action relief is product-specific, is 
restricted to the subject futures contracts, is based upon the facts 
and representation thereto, and requires the foreign board of trade to 
notify OGC staff if the facts underlying the request materially 
change.\13\ Accordingly, a foreign board of trade with prior no-action 
relief with respect to a particular foreign non-narrow-based security 
index futures contract must file a new request for no-action relief for 
each new non-narrow-based security index futures contract it seeks to 
offer or sell in the United States.
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    \13\ The no-action letter does not affect or alter the 
application of Part 30 of the Commission regulations, which governs 
the offer and sale by financial intermediaries of foreign futures 
and foreign option contracts to persons located in the United 
States.
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II. Proposed Rule 30.13: Commission Certification Procedure

    The proposed Sec.  30.13 would establish a Commission certification 
process for confirming that the security index futures contract traded 
on a foreign board of trade meets the requirements of the Act and 
therefore, may lawfully be offered or sold within the U.S. In this 
respect, the new certification process would be consistent with the 
original congressional guidance on this topic. In addition, a 
Commission certification would provide a greater degree of assurance to 
foreign boards of trade seeking to make available their security index 
futures contracts offered or sold in the U.S., in comparison to a staff 
no-action letter, which only represents the views of the issuing staff.
    Specifically, Sec.  30.13 would set forth a procedure whereby a 
foreign board of trade may apply to the Commission for certification 
that a security index futures contract traded on that board conforms to 
the criteria enumerated in Section 2(a)(1)(C)(ii) of the Act. The 
Commission certification procedure would be available to futures 
contracts based on an index of foreign or U.S. securities.\14\ Under 
the proposed procedure, the foreign board of trade must file with the 
Commission a written submission requesting certification with respect 
to their security index futures contract(s). Such submission must 
include data, information, facts, and statements complying with the 
form and content requirements set forth in Appendix D to Part 30, as 
amended.\15\ Such data, information, facts, and statements will be the 
same as that specified in current Appendix D to Part 30. In addition to 
the information, statements and data specified in Appendix D,\16\ the 
foreign board of trade also would be required to provide a written 
certification that the subject

[[Page 77591]]

contract conforms to Section 2(a)(1)(C)(ii) of the Act. Finally, the 
foreign board of trade would be required to describe the manner in 
which U.S. persons legally may access these products on that board of 
trade (e.g., access through omnibus accounts, through an intermediary, 
which is registered in the U.S. and also is an authorized member of the 
foreign board of trade, or through an entity that has relief from 
registration under part 30).\17\
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    \14\ See, e.g., CFTC Staff Letter No. 06-22 [2005-2007 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) ] 30,366 (Sept. 26, 2006) (no-
action relief granted with respect to futures contracts based on the 
Hang Seng Index and the Hang Seng China Enterprises Index, both of 
which are indices comprised wholly of foreign securities); CFTC 
Staff Letter No. 02-81 [2002-2003 Transfer Binder] Comm. Fut. L. 
Rep. (CCH) ] 29,094 (June 28, 2002) (no-action relief granted with 
respect to futures contracts based on the Dow Jones Global Titan 
Index, which is an index comprised partially of U.S. securities). 
See also House Report, supra note 10.
    \15\ Appendix D to Part 30 will be amended in connection with 
the adoption of Rule 30.13. Specifically, Appendix D will be revised 
to retain only the information requirements currently set forth in 
paragraph G of Appendix D.
    \16\ Accordingly, the information required to be submitted would 
include: a copy of the contract's terms and conditions; relevant 
rules that may have an effect on trading of the contract such as 
circuit breakers or position limits or other controls on trading; 
information and data relating to the index, including the design, 
computation and maintenance thereof. In addition, the foreign board 
of trade would be required to provide a copy of the surveillance 
agreement(s) between the foreign board of trade and the exchange on 
which the underlying securities are traded and provide assurance of 
its ability and willingness to share information with the 
Commission.
    \17\ While an index product may meet the statutory standard and 
is therefore eligible to be offered or sold in the U.S., U.S. 
customers' access to such product may be restricted due to legal 
restrictions in the subject foreign jurisdiction.
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    The substantive review would remain the same under the new Sec.  
30.13 as it is under the current no-action process. Further, consistent 
with the existing staff no-action review process, the Commission's 
review of the subject contract would not be subject to any specific 
time frame, except as noted below. If a contract is determined to 
conform to the applicable requirements of the Act, the Commission will 
so notify the foreign board of trade.\18\
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    \18\ Additionally, once the Commission has certified the subject 
futures contracts, no further action is required by the Commission 
or staff in order for options on such futures contract to be offered 
and sold in the United States. See 61 FR 10891 (March 18, 1996).
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    Finally, OGC no-action letters respecting foreign non-narrow-based 
security index futures contracts issued prior to the effective date of 
new Sec.  30.13 would be grandfathered, provided that underlying 
conditions continue to be met.\19\ Accordingly, a foreign board of 
trade that has received from Commission staff such a no-action letter 
would not be required to obtain Commission relief (for the contract 
that is the subject of that letter) under this proposed rule, if 
adopted.
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    \19\ The Commission staff previously determined that such non-
narrow-based foreign index contracts conformed to Section 
2(a)(1)(C)(ii) of the Act. Given that the substance of the review 
under the proposed Commission certification process would remain 
unchanged, the Commission believes it would be appropriate to 
``grandfather'' these contracts.
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III. Expedited Review for Qualifying Foreign Boards of Trade

A. Eurex's Petition for Expedited Review
    Eurex Deutschland (``Eurex'') petitioned the Commission to 
establish a fast-track procedure for Commission review of requests by a 
foreign board of trade to offer or sell foreign security index futures 
contracts traded on that board to persons located in the United 
States.\20\ Specifically, Eurex seeks a new rule, or in the 
alternative, an amendment to Appendix D to Part 30, which would 
establish an expedited procedure for the consideration of whether a 
foreign security index futures contract that a foreign board of trade 
lists for trading, or plans to list for trading, meets the requirements 
enumerated in Section 2(a)(1)(C)(ii) of the Act. Eurex proposes that 
the expedited review be available to a foreign board of trade that has 
received either: (i) A prior OGC no-action letter with respect to the 
offer or sale of a foreign futures contract on a security index or (ii) 
a prior DMO no-action letter permitting the foreign board of trade to 
provide direct electronic access to persons in the U.S. This expedited 
procedure requested would be an alternative, or an addition, to the 
existing staff no-action procedure, which has no explicit time-frame.
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    \20\ See Letter from Paul M. Architzel, Alston & Bird, LLP, to 
David Stawick, Secretary, Commodity Futures Trading Commission 
(March 28, 2008). A copy of the petition (hereinafter referred to as 
``Eurex Petition'') is available through the Commission's Office of 
the Secretariat. To inquire with the Office of the Secretariat send 
an e-mail to secretary@cftc.gov.
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    B. Under Eurex's proposal, a foreign security index futures 
contract would be deemed to conform to Section 2(a)(1)(C)(ii) of the 
Act, and therefore may be offered or sold to persons located in the 
U.S., forty-five (45) days after filing with the Commission, unless the 
Commission determines that an additional forty-five day extension is 
necessary to address complex or novel issues. The information that a 
foreign board of trade must submit under the expedited procedure would 
be identical to the information required under the current no-action 
process as prescribed in Appendix D to Part 30.

Proposed Expedited Review

    In light of the Eurex Petition and the staff's experience with the 
process governing the offer and sale in the U.S. of foreign non-narrow 
based security index futures contracts traded on a foreign board of 
trade, the Commission is proposing to establish an expedited review 
procedure available to qualifying foreign boards of trade.\21\ As 
further described below, the proposed expedited review process 
generally conforms to the Commission's process for prior-approval 
review of contracts to be listed and traded on domestic contract 
markets. This expedited procedure would be an alternative to the 
regular review procedure described in Section II herein.
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    \21\ Under this expedited process, a FBOT would be required to 
submit information that is substantively similar to that required 
under the full, non-expedited process, including a description of 
the manner in which U.S. persons may trade the subject products on 
the board.
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    The expedited review would be available to a foreign board of trade 
that has previously been granted no-action relief by OGC, or Commission 
certification, with respect to a non-narrow-based security index 
futures contract traded on that board.\22\ In connection with the grant 
of such prior relief or certification, the staff will have worked 
closely with the foreign board of trade and its regulators, and as a 
result of having obtained prior relief or certification, both the board 
and the regulators will be familiar with the substantive and procedural 
requirements that must be met to obtain Commission certification, as 
they are the same as what is required for obtaining an OGC no-action 
letter. Moreover, in connection with prior relief or certification, the 
board of trade will have confirmed that it is willing and able to share 
with the Commission information concerning the subject contract and the 
securities underlying the index. Under these circumstances, and 
provided that the board of trade has been in compliance with the terms 
and conditions of the prior no-action letter(s), the Commission 
believes that subsequent requests for certification from such foreign 
boards of trade with regard to the offer or sale of new broad-based 
foreign security index futures contracts in the U.S. should be 
considered on an expedited basis.
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    \22\ Prospectively, following the adoption of new Rule 30.13, a 
foreign board of trade that has previously been granted Commission 
certification with respect to a foreign security index futures 
contract would also be eligible for a fast-track review.
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    The expedited review also would be available to a foreign board of 
trade that has received, and is compliant with the requirements of, 
DMO's Foreign Trading System No-Action Letter.\23\ The Commission 
believes that an expedited review is appropriate for such boards in 
light of the fact that the Commission staff will have already had 
conducted a comprehensive review of the foreign board of trade. 
Pursuant to such review, the staff will have determined that the 
foreign board of trade is a bona fide board of trade subject to a bona 
fide regulatory regime, including appropriate mechanisms for market 
oversight and customer protection, and that enabling

[[Page 77592]]

U.S. persons to have direct trading access to that board would not be 
contrary to the public interest.\24\ In connection with such relief, 
the staff also will have considered the existence of adequate 
information-sharing mechanism to ensure the Commission's ability to 
carry out its surveillance responsibilities. Under these circumstances, 
the Commission believes that such foreign board of trade will have 
demonstrated its ability to comply with the substantive and procedural 
requirements for Commission certification. Accordingly, the Commission 
believes that a foreign board of trade that is the subject of an 
existing Foreign Trading System No-Action Letter should be eligible for 
an expedited review, provided that the board of trade remains in full 
compliance with the terms and conditions of the letter. The Commission 
also notes that the recently-enacted Dodd-Frank Wall Street Reform and 
Consumer Protection Act authorizes the Commission to register foreign 
boards of trade that provide U.S, persons with ``direct access'' to 
their trading systems.\25\ The Commission anticipates that at such time 
as the Commission may promulgate such registration requirements, the 
expedited review procedure would be extended to recipients of an FBOT 
registration license.
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    \23\ Since 1996, the Commission staff has issued no-action 
letters to foreign boards of trade stating, subject to compliance 
with certain conditions, that it will not recommend that the 
Commission take enforcement action if the foreign board of trade 
provides its members or participants in the U.S. access to its 
electronic trading system without seeking designation as a DCM or 
registration as a DTEF (``Foreign Trading System No-Action 
Letters'').
    \24\ In the foreign direct access no-action context, the 
Commission staff reviews information and representations provided by 
the foreign board of trade that relate to, among other things, the 
rules and structure of the applicant (with an emphasis on the 
exchange's financial integrity, market surveillance, trade practice 
and rule enforcement regime), various system integrity protections 
that govern the foreign board of trade's electronic trading system, 
the system's related clearing and customer default protections, and 
information concerning the regulatory structure in the applicant's 
jurisdiction, with a specific emphasis on market regulation. See 71 
FR 64443 (Nov. 2, 2006) (describing the staff review in connection 
with the issuance of foreign direct access no-action letters).
    \25\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
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    Under the proposed expedited review procedure, a qualifying foreign 
board of trade may request that the Commission make its certification 
as to whether a futures contract on a security index that it lists for 
trading or plans to list for trading on that board satisfies the 
requirements enumerated in Section 2(a)(1)(C)(ii) of the Act within 45 
days after the submission of such request. As proposed, the review 
period could be extended by the Commission for an additional 45 days if 
the foreign security index futures contract raises novel or complex 
issues that require additional time for review, or if the foreign board 
of trade requests an extension of time.
    If the foreign board of trade's request to the Commission for 
expedited consideration does not comply in form or content with the 
requirements of proposed Rule 30.13, the Commission may notify the 
requesting foreign board of trade and treat the request for expedited 
review as withdrawn. However, the foreign board of trade would not be 
precluded from filing a new expedited request, provided that such 
submission satisfies the content and form requirements applicable to 
such process specified in Sec.  30.13.
    Unless the Commission notifies the foreign board of trade that the 
request has been deemed withdrawn, the subject contract will be deemed 
to be in conformance with the requirements of Section 2(a)(1)(C)(ii) 
and, therefore may be offered or sold within the U.S., at the 
expiration of the applicable review period. In contrast to the regular, 
non-expedited review, the Commission will not issue a certification 
letter to the foreign board of trade upon completion of its review.
    If the Commission will not, or is unable to, deem that the foreign 
security index futures contract or the underlying security index 
conforms to the requirements of the Act, it would so notify the foreign 
board of trade within the 45 day time period or such extended time 
frame, with a brief statement of the reasons therefore. Upon such 
notification, the foreign board of trade's request for Commission 
certification will be treated as having been withdrawn. The foreign 
board of trade, however, would not be precluded from filing a new 
submission, provided that such submission sufficiently addresses the 
deficiencies or issues identified in the Commission notification.\26\ 
The new streamlined process is intended to reduce the time frame within 
which a foreign board of trade can request, and obtain, Commission 
certification with respect to the qualification of its broad-based 
security index futures contracts prior to the offer or sale to persons 
located in the U.S. In addition, by affixing a definite timeline to the 
review process, it would provide foreign boards of trade with greater 
certainty concerning the time necessary to obtain regulatory clearance 
in order to market its broad-based security index products within the 
U.S. Further, because the substantive review would remain the same 
under the expedited procedure as is under the regular procedure, the 
new expedited review process would not curtail, or in any way 
compromise, the regulatory safeguards protecting the public and market 
users.
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    \26\ Requests for staff no-action letters respecting foreign 
security index futures contracts that are currently pending or 
submitted prior to adoption of a final rule would be considered as a 
request for Commission certification following the adoption of Sec.  
30.13. Any foreign board of trade eligible for expedited review 
under any final rule adopted by the Commission would have to submit 
a request for such treatment.
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IV. Related Matters

A. Cost Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its actions before issuing new regulations under 
the Act. Section 15(a) does not require the Commission to quantify the 
costs and benefits of new regulations or to determine whether the 
benefits of adopted regulations outweigh their costs. Rather, Section 
15(a) requires the Commission to consider the cost and benefits of the 
subject regulations. Section 15(a) further specifies that the costs and 
benefits of new regulations 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 the market for listed derivatives; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission may, in its discretion, give 
greater weight to any one of the five enumerated areas of concern and 
may, in its discretion, determine that, notwithstanding its costs, a 
particular regulation 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 Act.
    The Commission has determined that there are no apparent costs 
associated with proposed Sec.  30.13. The proposed rule would codify 
and streamline the current review process, without substantive changes 
to the review standards and information required to be filed with 
respect to a broad-based security index. Accordingly, the Commission 
believes that the proposed review procedures would not compromise 
customer protection safeguards provided by the Act or in any way be 
contrary to the public interest. Additionally, foreign boards of trade 
and U.S. market participants will benefit from proposed Sec.  30.13. 
The certification process being proposed will provide a foreign board 
of trade with greater certainty with respect to the contracts it offers 
in the U.S., which until now have only been subject to staff no-action 
relief that is not binding on the Commission. Moreover, the

[[Page 77593]]

proposed expedited review process would enhance market efficiency by 
providing foreign boards of trade with greater certainty concerning the 
time necessary to obtain regulatory clearance in order to market broad-
based security index products within the United States. Finally, 
streamlining the review process would make additional hedging 
instruments available to U.S. persons without unnecessary delay, and in 
turn, may foster price discovery in the futures market.

B. The Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires that agencies consider the impact of their regulations on 
small businesses. The Commission has previously determined that 
designated contract markets are not small entities for purposes of the 
RFA.\27\ The Commission's determination was based on considerations 
relating to the central role played by contract markets in the futures 
market, as well as the high volume of transactions conducted on such 
markets.
---------------------------------------------------------------------------

    \27\ See 47 FR 18618 (April 30, 1982).
---------------------------------------------------------------------------

    To the extent that the RFA may apply to the action proposed to be 
taken herein, the Commission does not believe that a foreign board of 
trade falls within the definition of ``small entity'' for purposes of 
the RFA. Rather, the Commission is of the view that the rationale that 
guided its finding with respect to U.S. contract markets apply equally 
to foreign boards of trade. Moreover, with regard to foreign firms, the 
RFA defines a ``small entity'' as a ``business entity organized for 
profit, with a place of business located in the United States, and 
which operates primarily within the United States or which makes a 
significant contribution to the U.S. economy through payment of taxes 
or uses American products, materials or labor.'' \28\ A foreign board 
of trade that may seek Commission certification pursuant to the 
proposed rule is not likely to meet such criteria. The Commission is 
soliciting comments on this matter.
---------------------------------------------------------------------------

    \28\ See 5 U.S.C. 601(6) (defining ``small entity'' to have the 
same term as the term ``small business'' as used under section 3 of 
the Small Business Act, 13 CFR 121.201).
---------------------------------------------------------------------------

C. Paperwork Reduction Act

    When publicizing proposed regulations, the Paperwork Reduction Act 
(``PRA'') of 1995 (44 U.S.C. 3501 et seq.) imposes certain requirements 
on Federal agencies (including the Commission) in connection with their 
conducting or sponsoring any collection of information as defined by 
the PRA. The information collection requirements associated with the 
proposed regulations are administered under Office of Management and 
Budget control numbers 3038-0022 and 3038-0054. These proposed 
amendments to parts 30 of the Commission's regulations would not impose 
any new or additional recordkeeping or information collection 
requirement that would require the approval of the Office of Management 
and Budget under 44 U.S.C. 3501, et seq. Accordingly, the PRA is 
inapplicable.

List of Subjects in 17 CFR Part 30

    Foreign board of trade, Foreign security index futures, Designated 
contract market, Derivatives transaction execution facility, 
Advertising, No-action letter, Fast-track, Non-narrow foreign security 
index future, Reporting and recordkeeping requirements.

    For the reasons set forth in the Preamble, the Commission hereby 
proposes to amend Chapter I of Title 17 of the Code of Federal 
Regulations as follows:

PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS

    1. The authority citation for part 30 continues to read as follows:

    Authority: 17 U.S.C. 1a, 2, 4, 6, 6c and 12a, unless otherwise 
noted.

    2. Section 30.13 is added to read as follows:


Sec.  30.13  Commission certification.

    With respect to foreign futures and options contracts on a non-
narrow-based security index:
    (a) Request for Certification. A foreign board of trade may request 
that the Commission certify that a futures contract on a non-narrow-
based security index that trades, or is proposed to be traded thereon, 
conforms to the requirements of Section 2(a)(1)(C)(ii) of this Act and 
therefore, that futures contract may be offered or sold to persons 
located within the United States in accordance with Section 
2(a)(1)(C)(iv) of this Act. A submission requesting such certification 
must:
    (1) Be filed electronically with the Secretary of the Commission;
    (2) Include a copy of the submission cover sheet in accordance with 
the instructions in appendix D to part 30 of this chapter;
    (3) Include the following information in English:
    (i) The terms and conditions of the contract and all other relevant 
rules of the exchange and, if applicable, of the foreign board of trade 
on which the underlying securities are traded, which have an effect on 
the over-all trading of the contract, including circuit breakers, price 
limits, position limits or other controls on trading;
    (ii) Surveillance agreements between the foreign board of trade and 
the exchange(s) on which the underlying securities are traded;
    (iii) Assurances from the foreign board of trade of its ability and 
willingness to share information with the Commission, either directly 
or indirectly;
    (iv) When applicable, information regarding foreign blocking 
statutes and their impact on the ability of United States Government 
agencies to obtain information concerning the trading of such 
contracts;
    (v) Information and data denoted in U.S. dollars where appropriate 
(and the conversion date and rate used) relating to:
    (A) The method of computation, availability, and timeliness of the 
index;
    (B) The total capitalization, number of stocks (including the 
number of unaffiliated issuers if different from the number of stocks), 
and weighting of the stocks by capitalization and, if applicable, by 
price in the index as well as the combined weighting of the five 
highest-weighted stocks in the index;
    (C) Procedures and criteria for selection of individual securities 
for inclusion in, or removal from, the index, how often the index is 
regularly reviewed, and any procedures for changes in the index between 
regularly scheduled reviews;
    (D) Method of calculation of the cash-settlement price and the 
timing of its public release;
    (E) Average daily volume of trading, measured by share turnover and 
dollar value, in each of the underlying securities for a six-month 
period of time and, separately, the dollar value of the average daily 
trading volume of the securities comprising the lowest weighted 25% of 
the index for the past six calendar months, calculated pursuant to 
Sec.  41.11 of this chapter; and
    (vi) A written statement that the contract conforms to the criteria 
enumerated in Section 2(a)(1)(c)((ii) of the Act, including:
    (A) A statement that the contract is cash-settled;
    (B) An explanation of why the contract is not readily subject to 
manipulation or to be used to manipulate the underlying security;
    (C) A statement that the index is not a narrow-based security index 
as defined in Section 1a(25) of the Act and the analysis supporting 
that statement;
    (vii) A written representation that the foreign board of trade will 
notify the

[[Page 77594]]

Commission of any material changes in any of the above information;
    (viii) When applicable, a request to make the futures contract 
available for trading in accordance with the terms and conditions of, 
and through the electronic trading devices identified in, a Commission 
staff no-action letter stating, subject to compliance with certain 
conditions, that it will not recommend that the Commission take 
enforcement action if the foreign board of trade provides its members 
or participants in the U.S. access to its electronic trading system 
without seeking designation as a designated contract market or 
registration as a derivatives transaction execution facility (``Foreign 
Trading System No-Action Letter'') and a certification from the foreign 
board of trade that it is in compliance with the terms and conditions 
of that no-action letter; and
    (xii) An explanation of the means by which U.S. persons may access 
these products on the foreign board of trade.
    (b) Termination of Review. The Commission, at any time during its 
review, may notify the requesting foreign board of trade that it is 
terminating its review under this section if it appears to the 
Commission that the submission is materially incomplete or fails in 
form or content to meet the requirements of this section.
    (1) Such termination shall not prejudice the foreign board of trade 
from resubmitting a revised version of the contract, which addresses 
the deficiencies or issues identified by the Commission.
    (2) The Commission shall also terminate review under this section 
if requested in writing to do so by the foreign board of trade.
    (c) Notice of Denial of Certification. The Commission, at any time 
during its review under paragraph (a) of this section, may notify the 
requesting foreign board of trade that it has determined that the 
security index futures contract or underlying index does not conform 
with the requirements of Section 2(a)(1)(C)(ii) of the Act.
    (1) This notification will briefly specify the nature of the issues 
raised and the specific requirement of Subsections 2(a)(1)(C)(ii)(I)-
(III) of the Act with which the security index futures contract does 
not conform or to which it appears not to conform or the conformance to 
which cannot be ascertained from the submission.
    (2) Such notification shall not prejudice the foreign board of 
trade from resubmitting a revised version of the contract, which 
addresses the deficiencies or issues identified by the Commission.
    (d) Notice of Certification. Upon review, if the Commission 
determines that the futures contract and the underlying index meet the 
requirements enumerated in Section 2(a)(1)(C)(ii), the Commission will 
issue a letter to the foreign board of trade certifying that the 
security index contract traded on that board conforms to the 
requirements of Section 2(a)(1)(C)(ii) of the Act and therefore, that 
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 and, if 
applicable, may be made available for trading in accordance with the 
terms and conditions of, and through the electronic trading devices 
identified in, the Foreign Trading System No-Action Letter.
    (e) Expedited Review. A foreign board of trade may request an 
expedited Commission review and determination of whether a futures 
contract on a security index that trades, or is proposed to be traded 
thereon, conforms to the requirements of Section 2(a)(1)(C)(ii) of the 
Act and therefore, may be offered or sold to persons in the U.S. under 
Section 2(a)(1)(C)(iv) of the Act. A submission requesting such 
expedited consideration should be filed in English with the Commission 
and should include: Information, statements and data complying with the 
form and content requirements in paragraph (a) of this section.
    (f) Eligibility for Expedited Review. In order to qualify for 
expedited review under paragraph (e) of this section, the foreign board 
of trade must either:
    (1) Have previously requested, and received, at least one no-action 
letter from the Office of General Counsel or Commission certification 
regarding a non-narrow based security index futures contract traded on 
that foreign board of trade offered and sold to persons located in the 
United States and remains fully compliant with the terms and conditions 
of such letter or certification; or
    (2) Have received a Foreign Trading System No-Action Letter from 
the Division of Market Oversight and remains fully compliant with the 
terms and conditions of such letter.
    (g) Deemed To Be in Conformance. Unless notified pursuant to 
paragraph (h) or (i) of this section, any non-narrow-based foreign 
security index futures contract submitted for expedited review under 
paragraph (e) of this section shall be deemed to be in conformance with 
the requirements of Section 2(a)(1)(C)(ii) of the Act and therefore, 
such futures contract may be offered or sold to persons located in the 
U.S. in accordance with Section 2(a)(1)(C)(iv) forty-five days after 
receipt by the Commission, or at the conclusion of such extended period 
as described under paragraph (h) of this section, provided that the 
foreign board of trade does not amend the terms or conditions of the 
contract or supplement the request for expedited consideration, except 
as requested by the Commission or for correction of typographical 
errors. Any voluntary substantive amendment by the foreign board of 
trade will be treated as a new submission under this section.
    (h) Extension of Review. The Commission may extend the forty-five 
day review period set forth in paragraph (g) of this section for:
    (1) An additional period up to forty-five days, if the request 
raises novel or complex issues that require additional time for review, 
in which case, the Commission will notify the foreign board of trade 
within the initial forty-five day review period and will briefly 
describe the nature of the specific issues for which additional time 
for review will be required; or
    (2) Such extended period as the requesting foreign board of trade 
requests of the Commission in writing.
    (i) Termination of Review. The Commission, at any time during its 
review under paragraph (e) of this section or extension thereof as 
described under paragraph (h) of this section, may notify the 
requesting foreign board of trade that it is terminating its review 
under paragraph (e) of this section if it appears to the Commission 
that the submission is materially incomplete or fails in form or 
substance to meet the requirements of this section.
    (1) Such termination shall not prejudice the foreign board of trade 
from resubmitting a revised version of the contract, which addresses 
the deficiencies or issues identified by the Commission.
    (2) The Commission shall also terminate review under this section 
if requested in writing to do so by the foreign board of trade.
    (j) Notice of Denial of Certification. The Commission, at any time 
during its review, may notify the requesting foreign board of trade 
that it has determined that the security index futures contracts or 
underlying index does not conform with the requirements of Section 
2(a)(1)(C)(ii) of the Act.
    (1) This notification will briefly specify the nature of the issues 
raised and the specific requirement of subsections 2(a)(1)(C)(ii)(I)-
(III) of the Act with which the security index futures contract does 
not conform or to which it appears not to conform or the

[[Page 77595]]

conformance to which cannot be ascertained from the submission.
    (2) Such notification shall not prejudice the foreign board of 
trade from resubmitting a revised version of the contract, which 
addresses the deficiencies or issues identified by the Commission.
    (k) Foreign Trading Systems. A foreign board of trade, who is a 
recipient of a Foreign Trading System No-Action Letter (and is 
compliant with the requirements of such letter) and is requesting 
Commission certification of its non-narrow-based security index futures 
contract, may request that such contract submitted under paragraph (e) 
of this section be made available for trading under that Letter upon 
expiration of the applicable review period provided for under either 
paragraph (g) or (h) of this section. Absent Commission notification to 
the contrary, the foreign board of trade may make that contract 
available for trading on the Foreign Trading System upon expiration of 
the review period provided under paragraph (g) or (h) of this section.
    (l) Changes in Facts and Circumstances. Any certification of a non-
narrow based security index futures contract submitted under paragraph 
(a) or (e) of this section shall be considered to be based on the facts 
and representations contained in the foreign board of trade's 
submissions to the Commission. Accordingly, the foreign board of trade 
shall promptly notify the Commission of any changes in material facts 
or representations.
    (m) Grandfathered No-Action Letters. Any non-narrow-based security 
index futures contract that is the subject of an existing no-action 
letter issued by the Office of General Counsel, as of the date of the 
adoption of Rule 30.13, shall be deemed to be in conformance with the 
criteria of Section 2(a)(1)(C)(ii) of the Act, provided that the 
contract remains fully compliant with the requirements of such letter.
* * * * *
    3. Appendix D to Part 30 is revised to read as follows:

Appendix D to Part 30--Commission Certification With Respect to Foreign 
Futures and Options Contracts on a Non-Narrow-Based Security Index

    In its analysis of a request for certification by a foreign 
board of trade relating to a security index futures contract traded 
on that foreign board of trade pursuant to Regulation 30.13, the 
Commission will evaluate the contract to ensure that it complies 
with the three criteria of Section 2(a)(1)(C)(ii) of the Act.
    (1) Because security index futures contracts are cash settled, 
the Commission also evaluates the contract terms and conditions 
relating to cash settlement. In that regard, the Commission 
examines, among other things, whether the cash price series is 
reliable, acceptable, publicly available and timely; that the cash 
settlement price is reflective of the underlying cash market; and 
that the cash settlement price is not readily susceptible to 
manipulation. In making its determination, the Commission considers 
the design and maintenance of the index, the method of index 
calculation, the nature of the component security prices used to 
calculate the index, the breadth and frequency of index 
dissemination, and any other relevant factors.
    (2) In considering the susceptibility of an index to 
manipulation, the Commission examines several factors, including the 
structure of the primary and secondary markets for the component 
equities, the liquidity of the component stocks, the method of index 
calculation, the total capitalization of stocks underlying the 
index, the number, weighting and capitalization of individual stocks 
in the index, and the existence of surveillance sharing agreements 
between the board of trade and the securities exchange(s) on which 
the underlying securities are traded.
    (3) To verify that the index is not narrow-based, the Commission 
considers the number and weighting of the component securities and 
the aggregate value of average daily trading volume of the lowest 
weighted quartile of securities. Under the Act, a security index is 
narrow-based if it meets any one of the following criteria:
    (i) The index is composed of fewer than 10 securities;
    (ii) Any single security comprises more than 30% of the total 
index weight;
    (iii) The five largest securities comprise more than 60% of the 
total index weight; or
    (iv) The lowest-weighted securities that together account for 
25% of the total weight of the index have an aggregate dollar value 
of average daily trading volume of less than US$30 million (or US$50 
million if the index includes fewer than 15 securities).

    Issued in Washington, DC, on November 30, 2010 by the 
Commission.
David A. Stawick,
Secretary of the Commission.

[FR Doc. 2010-31014 Filed 12-10-10; 8:45 am]
BILLING CODE 6351-01-P