[Federal Register Volume 61, Number 53 (Monday, March 18, 1996)]
[Rules and Regulations]
[Pages 10891-10895]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6387]



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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 30


Foreign Commodity Options

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
has amended rule 30.3 to eliminate the requirement that the CFTC 
authorize the offer and sale of a particular foreign exchange-traded 
commodity option before it can be offered or sold in the United States. 
The amendment does not affect existing restrictions on transactions 
involving

[[Page 10892]]
stock index futures and foreign government debt.

EFFECTIVE DATE: March 18, 1996.

FOR FURTHER INFORMATION CONTACT:
Jane C. Kang, Esq., or Robert H. Rosenfeld, Esq., Division of Trading 
and Markets, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581; telephone (202) 
418-5435.

SUPPLEMENTARY INFORMATION:

Background

    Commission rule 30.3(a) of the Commission's Part 30 rules governing 
the offer and sale of foreign futures and option transactions makes it 
unlawful for any person to engage in the domestic offer or sale of any 
foreign commodity option contract until the Commission, by order, 
authorizes the foreign option to be offered or sold in the United 
States.1 A Commission order is not required with respect to 
foreign futures. However, an option on a foreign stock-index futures 
contract will not be approved unless, among other things, the 
Commission's Office of the General Counsel has issued a no-action 
letter authorizing the offer and sale in the United States of the 
underlying foreign stock-index futures contract. In addition, debt 
obligations of a foreign country must be designated as an exempted 
security by the SEC under its rule 3a12-8, 17 CFR 240.3a12-8, before a 
futures contract based on such debt obligation (or an option on such a 
futures contract) may be offered or sold to a U.S. person.2

    \1\ The Commission previously made clear that subject to certain 
conditions applicable to transactions involving stock indexes and 
foreign government debt, a rule 30.3 order would not be necessary 
for transactions effected by U.S. futures commission merchants (FCM) 
on behalf of foreign customers. See 57 FR 36369 (August 13, 1992).
    \2\ Consistent with section 2(a)(1)(B) of the Commodity Exchange 
Act (CEA), this proposed rulemaking would not affect existing 
restrictions applicable to transactions involving stock index 
futures or foreign government debt. Accordingly, commodity options 
based on or involving a foreign futures contract based on a foreign 
stock index may not be offered or sold to U.S. persons unless the 
foreign stock index futures contract has been the subject of a no-
action letter issued by the Commission's Office of the General 
Counsel. Further, commodity options based on a foreign government 
debt could not be offered or sold to U.S. persons unless the 
underlying debt instrument has been designated as an exempted 
security under SEC rule 3a12-8.
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    On December 5, 1995, the Commission proposed to eliminate the 
specific authorization requirement of rule 30.3 and thereby permit, 
subject to existing prohibitions with respect to stock index futures 
and options and foreign government debt futures and options products, 
the offer and sale of foreign commodity options in the same manner as 
currently applies to the offer and sale of foreign futures.3

    \3\ 60 FR 63472 (December 11, 1995).
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    The Commission's proposal to modify rule 30.3(a) was based on its 
generally positive experiences with the initial regulations imposed on 
foreign options trading. The proposal reflects the Commission's 
assessment that the continued treatment of foreign commodity options 
differently from foreign futures (which do not require a specific 
authorization order) should be reevaluated.4

    \4\ See 60 FR 63472-63474 (December 11, 1995), for a history of 
commodity option regulation by the Commission.
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Summary of Comments

    The Commission received twelve comments from six domestic and 
foreign futures exchanges (the Chicago Board of Trade (CBT), Chicago 
Mercantile Exchange (CME), the Tokyo Grain Exchange (TGE), the Tokyo 
International Financial Futures Exchange (TIFFE), Sydney Futures 
Exchange (SFE), and the Winnipeg Commodity Exchange (WCE)), the Futures 
Industry Association (FIA), the FIA Japan Chapter, National Futures 
Association (NFA), the American Bar Association's Section of Business 
Law (ABA Business Sec.), the Association of the Bar of the City of New 
York (Committee on Futures Regulation) (NY Bar), and a CFTC registered 
firm, Commodities Corporation (U.S.A.) N.V. (Commodities Corp.).
    In general, all of the commenters either affirmatively supported 
the rule change or, in the case of the CBT and the CME, did not object. 
Those commenters affirmatively supporting the rule generally agreed 
with the rationale set forth in the Commission's proposal--that the 
differential treatment of foreign commodity options as opposed to 
foreign futures was based on historical factors which no longer exist; 
the implementation of regulations governing the offer and sale of 
foreign options has increased regulatory protections; and that 
continuation of such differential treatment is no longer 
warranted.5 Many commenters also noted that the amendment would 
likely result in an increase in the number of option instruments 
available to U.S. traders thereby giving them a greater choice of risk-
shifting instruments. One commenter, Commodities Corp. (a registered 
commodity pool operator and commodity trading advisor), noted that the 
trading of foreign commodity options has significantly benefited 
clients through enhanced portfolio diversification and by enabling them 
to participate in additional market opportunities. Commodities Corp. 
urged the Commission similarly to widen access to other foreign 
products by eliminating the necessity for a Commission staff no-action 
letter before a foreign exchange-traded stock index futures contract 
can be offered or sold in the United States.6

    \5\ In this regard, the FIA noted that the Commission's generic 
risk disclosure statement does not draw any distinction between the 
risks of foreign futures and foreign commodity options.
    \6\ Commodities Corp. suggested that expedited procedures be 
considered at least with respect to ``sophisticated'' clients.
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U.S. Contract Market Concerns

     In its proposal, the Commission invited comment, in particular 
from the contract markets, to indicate any other areas in which the 
requirements for options and futures generally could be further 
harmonized.
    In general, the CBT's and CME's specific suggestions fall into two 
broad categories: (1) those which raise issues which the Commission 
believes either have been addressed or could be addressed by current 
matters before the Commission and (2) those which raise more 
complicated statutory issues surrounding the requirements imposed on 
contract markets and product authorization.7

    \7\ In this regard, the CBT stated that it viewed the proposal 
as ``confirmation that the Commission exempts foreign boards of 
trade and, in other contexts, over-the-counter markets, from many of 
the very regulations it continues to impose on domestic markets.''
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    In the first category were suggestions to:

    --Delete the requirement in rule 33.4(b) that an FCM give notice 
to its designated self-regulatory organization (DSRO) of any 
disciplinary action taken against the FCM or its associated persons 
(APs) by the Commission or another self-regulatory organization 
(SRO);
    --Consolidate the options disclosure required by rule 33.7(b) 
into rule 1.55(b); and
    --Delete the requirement in 33.4(a)(2) that FCMs collect the 
full option premium.

    In response, the Commission notes that it recently adopted a final 
rule amending rule 33.4(b) to eliminate the notice requirement referred 
to above (see 61 FR 2719 (January 29, 1996), and that the generic risk 
disclosure statement adopted by the Commission as an alternative to 
separate risk disclosure in rules 33.7 and 1.55 already reflects a 
consolidation of those disclosure statements.8 The Commission has 
not to date advanced U.S. exchanges long-standing request to delete the

[[Page 10893]]
requirement in rule 33.4(a)(2) that FCMs collect the full option 
premium.9 However, it has indicated that such a proposal could be 
entertained with respect to the section 4(c) exemption authority 
granted with the adoption of Part 36 of the Commission's regulations. 
At the same time, the Commission has permitted certain foreign 
exchange-traded commodity options to be offered with margining of the 
premium, and the Commission has not been informed of any concerns 
associated with that feature.10 In this connection, the Commission 
notes that the proposed linkage arrangement between the U.S. CBT and 
U.K. LIFFE may provide the Commission an opportunity to review the 
feasibility of implementing a program to permit the futures-style 
margining of the option premium on a U.S. contract in a limited 
context.11 In particular, the product fungibility requirements of 
the proposed linkage may necessitate that the Commission address 
permitting CBT options to trade on the same basis as LIFFE options 
(which permit margining of the premium).

    \8\ FCMs may elect whether to provide the generic statement or 
individual rules 1.55 and 33.7 statements.
    \9\ While U.S. exchanges had petitioned for the ability to 
designate option contracts having margining of the premium, a 
proposal published in 1989 was never finalized. See 51 FR 11233 
(March 17, 1989).
    \10\ See, e.g., CFTC Advisory No. 90-1 [1987-1990 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para. 24,597 (disclosure statement 
relating to the deferred payment of option premiums for certain 
foreign exchange-traded options, superseding separate disclosure 
addenda required by orders concerning the London International 
Financial Futures Exchange (LIFFE) (54 FR 37636 (September 12, 
1989)), the International Petroleum Exchange (54 FR 50356 (December 
6, 1989)), and the London Futures and Options Exchange (renamed as 
the London Commodity Exchange) (54 FR 50348 (December 6, 1989)); and 
55 FR 14238 (April 17, 1990) (Sydney Futures Exchange).
    \11\ See CBT letter dated July 28, 1995 to Jean A. Webb, 
Secretary to the Commission (rule 1.41(b) submission).
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    The second category of suggestions included the following:

    --The ability of foreign products to trade in the United States 
immediately as compared to the delay that is involved with the 
designation process for contract market products [the CBT urged the 
Commission to focus on the disparate treatment between foreign and 
domestic products];
    --The need for domestic U.S. requirements such as speculative 
position limits since foreign products may not be subject to similar 
limitations by their home regulatory scheme;
    --Differences in the quality of audit trail; and
    --A suggestion that the Commission amend rule 1.35(a-1) to 
eliminate what one exchange characterized as the ``additional and 
burdensome'' time-stamp requirement for option orders,'' a 
requirement which currently does not exist for futures orders.

    In this regard, the Commission reiterates the commitment set forth 
in the 1994 CFTC Competitiveness Study to keeping its regulatory 
programs under continuous review to assure that, consistent with its 
responsibilities for market integrity and customer protection, they 
keep pace with changes in the marketplace and do not unnecessarily 
impede domestic exchanges from evolving to remain competitive, 
especially with regard to the cost of compliance relative to non-U.S. 
exchanges.12

    \12\ A Study of the Global Competitiveness of U.S. Futures 
Markets, CFTC (April 1994) (``CFTC Competitiveness Study''), p.2.
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    The Commission recognizes, however, that its review of its 
regulations cannot proceed purely on the basis of cost equivalency. 
While differences of opinion may exist regarding the implementation of 
specific regulatory requirements, ultimately the overriding scheme 
pursuant to which U.S. contract markets operate and the level of market 
integrity that must be maintained is established by Congress in the 
CEA. Thus, speculative position limits exist because of section 4a of 
the CEA and are based on the historic concern expressed in the CEA with 
avoiding ``excessive'' speculation that could cause ``sudden or 
unreasonable fluctuations'' in commodity prices. The Commission 
believes that it has been responsive to the economic realities of 
contemporary markets and exchange competitive concerns by, for example, 
permitting U.S. exchanges to replace their speculative position limit 
rules with more flexible position accountability rules for eligible 
non-agricultural contracts. Nonetheless, the fundamental requirement to 
have such limits or their equivalent has been established by Congress.
    Similarly, the designation process and audit trail requirements are 
statutory. See section 5a of the CEA. While the basis for any 
particular Commission rule is a subject for legitimate comment and 
analysis--and the Commission believes that its record reflects a 
responsiveness to such comment--ultimately the underlying requirement 
is established by Congress. The Commission wishes to note, in this 
regard, that it continues to review the appropriateness of all of its 
programs under current circumstances.
    Finally, notwithstanding differences in regulation, the Commission 
notes that most countries with internationally active futures exchanges 
appear to share certain common regulatory concerns which result in 
comparable regulation, such as position limits and market surveillance 
programs, relative to futures trading in their respective 
jurisdictions. While the content and complexity of these regulatory 
systems differ, such differences often reflect the particular maturity 
and market experiences of the market and regulator.13

    \13\ See CFTC Competitiveness Study, pp. 31-71.
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Adequacy of Sales Practice Compliance Audits

    In its proposal, the Commission stated that prior to adopting any 
final rules it would need to be assured that arrangements exist through 
NFA or otherwise to ensure that sales practice compliance audits of 
registrants offering foreign commodity options will be undertaken, 
thereby ensuring complete sales practice compliance audit coverage of 
firms (which heretofore has been mandated on a product-specific basis 
under rule 30.3 orders). Consistent with the description of NFA sales 
practice audit procedures described in the notice of proposed 
rulemaking,14 NFA has confirmed that its audit program already 
includes steps for determining whether an NFA member FCM or introducing 
broker (IB) solicits or executes commodity option transactions on any 
foreign exchange.15 If NFA determines that the firm does engage in 
such foreign transactions, NFA includes a reasonable number of those 
transactions in its audit sample and tests those transactions for 
compliance with applicable sales practice rules. NFA has confirmed that 
the audit steps cover all authorized commodity options traded on 
foreign exchanges and will continue to do so when the authorization is 
expanded to include all foreign exchange-traded commodity 
options.16

    \14\ 60 FR 63472,63474 (December 11, 1995).
    \15\ Letter dated January 16, 1996 from Daniel A. Driscoll, 
Vice-President-Compliance, National Futures Association to Jean A. 
Webb, Secretariat of the Commission.
    \16\ Id.
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    NFA also has confirmed that it has entered into an agreement with 
certain other self-regulatory organizations (joint contractor self-
regulatory organizations (SROs)) whereby the joint contractor SROs 
audit the sales practices of joint FCM members and their guaranteed 
IBs. The audit steps used by the joint contractor SROs under the 
agreement sample and test foreign option transactions in a manner 
similar to that used by NFA.
    Similarly, as previously noted in its notice of proposed 
rulemaking, the Commission's rule 30.10 orders permitting foreign firms 
to directly solicit U.S. persons for foreign products

[[Page 10894]]
address options and futures sales practice concerns.17

    \17\ See 60 FR 63472, 63474 (December 11, 1995).
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Availability of Arbitration

    NFA also confirmed that NFA arbitration is available to U.S. 
customers who enter into foreign exchange-traded commodity option 
transactions and that NFA Member or Associate participation in claims 
filed by customers is mandatory.18 Similarly, U.S. customers 
solicited by foreign firms under rule 30.10 will, pursuant to the 
express terms of such orders, continue to have access to arbitration 
procedures both abroad and through NFA.19

    \18\ NFA noted that if a claim is brought by a customer against 
an NFA Member or Associate, NFA will hear the claim under the Code 
of Arbitration and the Member or Associate's participation in the 
arbitration process is mandatory. If a claim is brought by a 
customer against a foreign party who is not an NFA Member or 
Associate, the claim can be heard under NFA's Rules Governing 
Arbitration of Disputes Involving Foreign Parties if the parties 
agree (unless the claim arises primarily out of delivery, clearance, 
settlement or floor practices of a foreign exchange and a similar 
dispute-resolution forum is available in the foreign jurisdiction).
    \19\ See 60 FR 63472, 63475 (December 11, 1996).
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Revision Will Not Affect Existing Restrictions Related to Options 
Involving Stock Index Products and Foreign Government Debt

    The Commission reiterates that the elimination of the specific 
authorization requirement in rule 30.3(a) will not affect the existing 
product restrictions applicable to options on futures contracts based 
on stock index products (i.e., the underlying stock index futures must 
be the subject of a no-action letter issued by the CFTC's Office of the 
General Counsel) and foreign government debt (i.e., the debt product 
must be designated by the SEC as an exempted security under SEC rule 
3a12-8) contained in section 2(a)(1)(B)(v) of the CEA.20

    \20\ Among the commodity option contracts to which this relief 
would apply are option contracts on foreign currencies that are 
traded on a foreign board of trade.
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Continued Monitoring by Commission; Availability of Transaction Data 
Assumed

    The Commission notes that elimination of the specific authorization 
requirement will not affect the existing regulatory requirements 
applicable to the manner in which appropriate products may be offered 
or sold to U.S. persons, e.g., registration of intermediaries,21 
requirements related to sales practices (including appropriate 
disclosures), prohibitions on fraudulent activities and the 
availability to the Commission of books and records.

    \21\ Foreign futures and foreign commodity options may be 
offered by foreign firms operating under confirmed rule 30.10 relief 
consistent with the scope of the relevant rule 30.10 order and 
subject to existing product restrictions.
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    The Commission reiterates that FCMs which are not members of 
foreign exchanges should assure themselves that there are no statutory 
or regulatory impediments on their ability to obtain information from 
foreign exchange-member firms necessary to enable such FCMs to comply 
with the CEA and regulations thereunder relative to confirming the 
execution of foreign option transactions. In this connection, the 
Commission believes that the level of ``adequate supervision'' intended 
by rule 166.3 22 would require that firms be able to document to 
the Commission all material trade-specific data.

    \22\ Commission rule 166.3, 17 CFR 166.3, requires that:
    Each Commission registrant, except an associated person who has 
no supervisory duties, must diligently supervise the handling by its 
partners, officers, employees and agents (or persons occupying a 
similar status or performing a similar function) of all commodity 
interest accounts carried, operated, advised or introduced by the 
registrant and all other activities of its partners, officers, 
employees and agents (or other persons occupying a similar status or 
performing a similar function) relating to its business as a 
Commission registrant.
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    The Commission will continue to monitor the situation and take 
appropriate action should it determine that U.S. investors, U.S. FCMs 
or the Commission, are not able to obtain appropriate information 
related to the commodity option transactions of a specific exchange or 
are otherwise being adversely affected by the rule change.

Conclusion

    Based on the comments received and the rationale set forth in its 
proposal, the Commission concludes that the elimination of the specific 
authorization requirement for foreign exchange-traded commodity options 
23 is warranted and is amending rule 30.3 accordingly.

    \23\ Rule 30.3 addresses ``foreign futures'' and ``foreign 
options'' which are defined in rule 30.1. by reference to 
transactions that are ``made or to be made on or subject to the 
rules of any foreign board of trade.'' Thus, rule 30.3 does not 
independently authorize the offer and sale in the U.S. of futures 
and options which are not executed on or subject to the rules of a 
foreign board of trade. However, the trade option exemption of 
Commission rule 32.4(a) would continue to apply to foreign commodity 
options. See, e.g., 60 FR 30462, n.4 (June 9, 1995).
    The Commission also has previously noted that it recognizes that 
differences may exist between the practices of foreign boards of 
trade and their U.S. counterparts and that the definition should be 
interpreted as broadly as possible to effectuate the intent of 
Congress. In this connection, to the extent questions arise as to 
whether a particular transaction occurs subject to the rules of a 
foreign board of trade, the Commission encourages affected persons 
to request staff interpretations. See 52 FR 28980, 28987 (August 5, 
1987).
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Other Matters

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The Commission has previously 
determined that FCMs should be excluded from the definition of ``small 
entity'' based upon the fiduciary nature of the FCM/customer 
relationships as well as the fact that FCMs must meet minimum financial 
requirements. 47 FR 18618, 18619 (April 30, 1982). The Commission 
similarly determined that commodity pool operators (CPOs) are not small 
entities for purposes of the RFA. 47 FR 18618, 18620 (April 30, 1982). 
With respect to commodity trading advisors (CTAs) and IBs, the 
Commission has stated that it would evaluate within the context of a 
particular rule proposal whether all or some affected CTAs would be 
considered to be small entities and, if so, the economic impact on them 
of any rule. 47 FR 18618, 18620 (April 30, 1982) (CTAs); 48 FR 35248, 
35276 (August 3, 1983) (IBs).
    The amendment of rule 30.3 is intended to facilitate the ability of 
Commission registrants or exempted firms to provide customers with 
access to desired products by eliminating a current product-by-product 
authorization requirement, thus providing easier access to a greater 
number of persons.
    Accordingly, the Acting Chairman, on behalf of the Commission, 
hereby certifies, pursuant to 5 U.S.C. 605(b), that the revised rule 
will not have a significant economic impact on a substantial number of 
small entities.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1980 (Act), 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 Act. The Commission has 
determined that the amendment of rule 30.3 does not have any paperwork 
burden. Copies of the information collection submission to the Office 
of Management and Budget are available from Joe Mink, CFTC Clearance 
Officer, Three Lafayette Centre, 1155 21st Street, N.W., Washington, 
D.C. 20581; telephone (202) 418-5170.

List of Subjects in 17 CFR Part 30

    Foreign futures and options; Futures commission merchants; 
Introducing

[[Page 10895]]
brokers; Commodity trading advisors; Commodity pool operators.

    In consideration of the foregoing, and pursuant to the authority 
contained in the Commodity Exchange Act and, in particular, sections 
2(a)(1)(A), 4, 4c and 8a of the Commodity Exchange Act, 7 U.S.C. 2, 6, 
6c and 12a, the Commission hereby amends part 30 of 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: Secs. 2(a)(1)(A), 4, 4c and 8a of the Commodity 
Exchange Act, 7 U.S.C. 2, 6, 6c and 12a.

    2. Section 30.3 is amended by revising paragraph (a) to read as 
follows:


Sec. 30.3  Prohibited Transactions.

    (a) It shall be unlawful for any person to engage in the offer and 
sale of any foreign futures contract or foreign options transaction for 
or on behalf of a foreign futures or foreign options customer, except 
in accordance with the provisions of this part: Provided, that, with 
the exception of the disclosure and antifraud provisions set forth in 
Secs. 30.6 and 30.9 of this part, the provisions of this part shall not 
apply to transactions executed on a foreign board of trade, and carried 
for or on behalf of a customer at a designated contract market, subject 
to an agreement with and rules of a contract market which permit 
positions in a commodity interest which have been established on one 
market to be liquidated on another market.
* * * * *
    Issued in Washington, DC on March 12, 1996 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 96-6387 Filed 3-15-96; 8:45 am]
BILLING CODE 6351-01-P