[Federal Register Volume 62, Number 45 (Friday, March 7, 1997)]
[Rules and Regulations]
[Pages 10445-10447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5658]


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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 30


Foreign Futures and Option Transactions

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC''), is clarifying the procedures applicable in its prior Order 
issued on April 13, 1993 (``1993 Order''), authorizing members of the 
Sydney Futures Exchange Limited (``Exchange'' or ``SFE'') to solicit 
and to accept orders from U.S. customers for otherwise permitted 
transactions on all non-U.S. exchanges where such members are 
authorized by the Australian Corporations Law (``ACL'') to conduct 
futures business for customers.
    This Supplemental Order is issued pursuant to Commission rule 
30.10, which permits the Commission to grant an exemption from certain 
provisions of Part 30 of the Commission's regulations, the Commission's 
Order dated November 7, 1988 (``Original Order''), granting relief 
under rule 30.10 to designated members of the Exchange, and the 1993 
Order.

EFFECTIVE DATE: March 7, 1997.

FOR FURTHER INFORMATION CONTACT: Jane C. Kang, Esq., or Warren Gorlick, 
Esq., Division of Trading and Markets, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, 
D.C. 20581. Telephone: (202) 418-5430.

SUPPLEMENTARY INFORMATION: The Commission has issued the following 
Supplemental Order:

Supplemental Order Clarifying Conditions Under Which Certain Members of 
the Sydney Futures Exchange Designated for Relief Under Commission Rule 
30.10 May Solicit and Accept Orders From U.S. Customers for Otherwise 
Permitted Transactions on All Non-U.S. Markets Where Such Members Are 
Authorized by Australian Law to Conduct Futures Business for Customers

    On November 1, 1988, the Commission issued the Original Order under 
rule 30.10 authorizing designated members of the SFE to offer or sell 
certain futures and option contracts traded on the Exchange to persons 
located in the United States. 53 FR 44856 (November 7, 1988). The 
Original Order limited the scope of permissible brokerage activities 
undertaken by designated SFE members on behalf of U.S. customers to 
transactions ``on or subject to the rules of the Exchange.'' 53 FR 
44856, 44857.
    By letter dated March 11, 1993, counsel to the SFE petitioned the 
Commission to revise the Original Order to include all non-U.S markets 
where SFE members are authorized by the ACL to conduct futures business 
for customers.1 As represented in that letter, section 1258 of the 
ACL prohibits futures brokers (including Exchange members confirmed for 
relief under rule 30.10) from dealing on behalf of another person 
unless the dealing is effected on an Australian futures exchange or a 
``recognized'' foreign futures exchange. The Recognized Futures 
Exchanges, as defined in section 9(b) of the ACL as well as Regulation 
8.02.02 thereunder, appear in Schedule 11 of such Regulations.
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    \1\ Letter from Philip McBride Johnson, counsel to the SFE, to 
William P. Albrecht, Acting Chairman, Commission, dated March 11, 
1993.
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    On April 13, 1993, the Commission issued its 1993 Order authorizing 
members of the SFE designated for rule 30.10 relief to solicit and 
accept orders from U.S. customers for otherwise permitted transactions 
on all non-U.S. exchanges 2 where such members are authorized by 
Australian law to conduct futures business for customers. See 58 FR 
19209 (April 13, 1993). The expanded rule 30.10 relief, however, is 
contingent on the SFE's and SFE members' compliance with the Original 
Order and their compliance with certain specified conditions.3
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    \2\ The term ``non-U.S. exchange'' refers to a foreign board of 
trade which is defined in Commission rule 1.3 (ss), 17 C.F.R. 
Sec. 1.3(ss) (1996) as:
    Any board of trade, exchange or market located outside the 
United States, its territories or possessions, whether incorporated 
or unincorporated, where foreign futures or foreign options 
transactions are entered into.
    Thus, contracts that are traded on a market that has been 
designated as a contract market pursuant to section 5 of the 
Commodity Exchange Act (``CEA'' or ``Act'') are not within the scope 
of the 1993 Order and this Supplemental Order.
    \3\ These conditions are the following:
    1. SFE will carry out its compliance, surveillance and rule 
enforcement activities with respect to solicitations and acceptance 
of orders by designated SFE members of U.S. customers for futures 
business on Recognized Futures Exchanges, as defined in section 9(b) 
of the ACL, other than a contract market designated as such pursuant 
to section 5a of the CEA, to the same extent that it conducts such 
activities in regard to SFE business;
    2. SFE will cooperate with the Commission with respect to any 
inquiries concerning any activity which is the subject of this [1993 
Order], including sharing the information specified in Appendix A to 
the Part 30 rules on an ``as needed'' basis, on the same basis as 
set forth in the Original Order; and
    3. Each SFE member firm confirmed for Sec. 30.10 relief seeking 
to engage in activities which are the subject of this [1993 Order] 
must agree to provide the books and records related to such 
transactions required to be maintained under the applicable 
statutes, regulations and Exchange rules in effect in Australia, on 
the same basis as set forth in the Original Order.

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[[Page 10446]]

    The Commission now seeks to clarify the procedures with which SFE 
members should comply in order to operate pursuant to the expanded 
relief permitting certain SFE member firms to engage in foreign futures 
and options transactions for U.S. customers other than on the SFE. This 
Order clarifies that the funds of U.S. foreign futures and options 
customers must be subject to consistent protection irrespective of 
whether the SFE member firm effects trades directly on the SFE, 4 
or effects trades on another foreign futures and options exchange 
directly or through the intermediation of a foreign exchange member. 
5
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    \4\ With respect to transactions on the SFE, applicable 
Australian laws and regulations and the Original Order require 
segregation of all money, securities and property deposited on 
behalf of U.S. customers in respect of such transactions and the 
accruals thereon. See paragraphs 2(f) and (g) of the Original Order, 
53 FR 44856, 44858.
    \5\ The Commission notes that substantially similar conditions 
were imposed in its Order authorizing members of the New Zealand 
Futures and Options Exchanges (``NZFOE'') that are designated for 
relief under Commission rule 30.10 to solicit and to accept orders 
from U.S. customers for otherwise permitted transactions on all non-
U.S. exchanges where such members are authorized by the rules of the 
NZFOE to conduct futures business for customers. See 61 FR 64985 
(December 10, 1996).
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    Accordingly, the Commission has determined to clarify that the 
relief set forth in the expanded relief authorized pursuant to the 1993 
Order is applicable only if the Exchange member firm complies with the 
following procedures, which are consistent with the requirements 
applicable to Commission registered FCMs concerning the protection of 
customer funds under the provisions of Commission rule 30.7: 6

    \6\ See Commission rule 30.7, 17 C.F.R. Sec. 30.7 (1996). To the 
extent that a depository is unable to provide the required 
acknowledgement (for example, as in the case of an intermediary firm 
which does not segregate customer from house assets), that foreign 
depository is not a good secured amount depository. To use such an 
intermediary, an FCM must establish a ``mirror'' account in the 
United States to meet its secured amount obligations. Thus, the 
procedures articulated in this Order are intended to be consistent 
with the requirements applicable to the treatment of customer funds 
under rule 30.7 by FCMs and to clarify that these same obligations 
apply to foreign firms operating under rule 30.10 orders permitting 
the execution of trades on exchanges outside of their home 
jurisdiction (see n.5 above).
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    With respect to transactions effected on behalf of U.S. 
customers on any non-U.S. futures and options exchange other than 
the NZFOE 7 and the SFE whether by the SFE member directly as a 
clearing member of such other exchange or through the intermediation 
of one or more intermediaries, the SFE member complies with 
paragraphs a, b or c below:
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    \7\ As noted above, the NZFOE received rule 30.10 relief from 
the Commission on December 10, 1996. That exchange is a wholly-owned 
subsidiary of the SFE, and the SFE Clearing House (``SFECH'') is the 
designated clearing house for all transactions effected on the 
NZFOE. The NZFOE and its members are required to segregate customer 
funds from money and property belonging to the firm and cannot use 
customer funds to satisfy the firm's obligations, both at the firm 
level and at the SFECH. See the New Zealand Futures Industry (Client 
Funds) Regulations (1990) sections 6, 14, and 20 and n.5, above. 
Consequently, taking into account the common ownership, use of the 
same clearing house, and relevant segregation requirements on both 
the SFE and NZFOE, with respect to transactions on the NZFOE on 
behalf of U.S. foreign futures and options customers, SFE members 
may comply with existing SFE and NZFOE rules in connection with this 
paragraph relating to the foreign futures and options secured 
amount.
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    a. (1) Maintains in a separate account or accounts money, 
securities and property in an amount denominated as the foreign 
futures or foreign options secured amount, at least sufficient to 
cover or satisfy all of its current obligations to U.S. customers;
    (2) Does not commingle such money, securities and property with 
the money, securities or property of the member, or with any 
proprietary account of such member and does not use such money, 
securities and property to secure or guarantee the obligations of, 
or extend credit to, the member or any proprietary account of the 
member;
    (3) Provided that it may deposit together with the secured 
amount required to be on deposit in the separate account or accounts 
referred to in paragraph a-1 above money, securities or property 
held for or on behalf of non-U.S. customers of the member for the 
purpose of entering into foreign futures and options transactions. 
In such a case, the amount that must be deposited in such separate 
account or accounts must be no less than the greater of (1) the 
foreign futures and foreign options secured amount required by 
paragraph a-1 above plus the amount that would be required to be on 
deposit if all such customers (including non-U.S. customers) were 
subject to such requirement, or (2) the foreign futures and foreign 
options secured amount required by paragraph a-1 above plus the 
amount required to be held in a separate account or accounts for or 
on behalf of such non-U.S. customers pursuant to any applicable law, 
rule, regulation or order, or any rule of any self-regulatory 
organization;
    (4) Maintains the separate account or accounts referred to in 
paragraph a-1 above under an account name that clearly identifies 
them as such, with any of the following depositories:
    (a) Another person registered with the Commission as an FCM or a 
firm exempted from FCM registration pursuant to CFTC rule 30.10;
    (b) The clearing organization of any foreign board of trade;
    (c) Any member and/or clearing member of such foreign board of 
trade; or
    (d) A bank or trust company which any of the depositories 
identified in (a)-(c) above may use consistent with the applicable 
laws and rules of the jurisdiction in which the depository is 
located; and
    (5) The separate account or accounts referred to in paragraph a-
1 may be deemed located at a good secured amount depository only if 
the member obtains and retains in its files for the period required 
by applicable law and Exchange rules a written acknowledgement from 
such separate account depository that:
    (a) It was informed that such money, securities or property are 
held for or on behalf of customers of the member; and
    (b) It will ensure that such money, securities or property will 
be held and treated at all times in accordance with the provisions 
of this paragraph; and, provided further, that the member assures 
itself that such separate account depository will not pass on such 
money, securities or property to any other depository unless the 
member has assured itself that all such other separate account 
depositories will treat such funds in a manner consistent with the 
procedures described in paragraph a hereof; 8 or
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    \8\ This proviso is intended to clarify that the originating 
member makes reasonable inquiries and understands prior to the 
initiation of a trade the conditions under which its customers' 
funds will be held at all subsequent depositories, so that it may 
determine whether a particular intermediary or clearing house is a 
good separate account depository for purposes of this Order or must 
alternatively set aside funds in the manner set forth in paragraph 
b. The member would be expected to discuss with its immediate 
intermediary broker whether funds would be transferred to any 
subsequent depositories and determine the conditions under which 
such funds would be treated. Compliance with this proviso would be 
satisfied by the member obtaining relevant information or assurances 
from appropriate sources such as, for example, the immediate 
intermediary broker, exchanges or clearinghouses, exchange 
regulators, banks, attorneys or other relevant references, including 
regulatory sources.
    This Supplemental Order is intended to clarify that funds 
provided by U.S. customers for foreign futures and options 
transactions, whether held at a U.S. FCM under rule 30.7(c) or a 
firm exempted from registration as an FCM under CFTC rule 30.10, 
will receive equivalent protection at all intermediaries and 
exchange clearing organizations. Thus, for example, an exchange that 
does not segregate customer from firm obligations and firms which 
trade on such exchanges and which do not arrange to comply otherwise 
with any of the procedures described herein would not be deemed an 
acceptable separate account. Specifically, such exchange or firms 
could not provide a valid and binding acknowledgement to a rule 
30.10 exempted firm.
    This provision is not necessarily intended to create a duty on a 
rule 30.10 firm that it audit intermediaries it uses for continued 
compliance with the undertakings it has obtained based on 
discussions with those relevant intermediaries. It is intended to 
make clear that firms seeking the benefit of the Commission's 30.10 
relief must undertake a due diligence inquiry before customer funds 
are transferred to another intermediary and must take appropriate 
action (i.e., set aside funds) in the event that such firms become 
aware of facts leading them to conclude that customer funds are not 
being handled consistent with the requirements of Commission rules 
or this Order by any subsequent intermediary or clearing house.
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    b. Sets aside funds constituting the entire secured amount 
requirement in a separate account as set forth in Commission rule 
30.7, 17 C.F.R. 30.7 (1996), and treats those funds in the manner 
described by that rule; or
    c. Complies with the terms and procedures of paragraph a or b, 
except that the amount required to be segregated under SFE rules

[[Page 10447]]

and Australian laws may be substituted for the secured amount 
requirement as set forth in such paragraphs.9

    \9\ Any Australian laws or regulations or SFE rules which permit 
an SFE member firm to obtain from its customers a waiver, 
acknowledgement or similar document in which such customer 
effectively waives the right to segregation protection would be 
inconsistent with compliance with paragraphs a, b, and c.
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    The expanded rule 30.10 relief already granted to the SFE also is 
contingent upon the SFE's and SFE members' continued compliance with 
the Original Order and the 1993 Order, and the enumerated conditions 
above.
    Further, if experience demonstrates that the continued 
effectiveness of this Order in general, or with respect to a particular 
member, would be contrary to public policy or the public interest, or 
that the systems in place for the exchange of information or other 
circumstances do not warrant continuation of the exemptive relief 
granted herein, the Commission may condition, modify, suspend, 
terminate, withhold as to a specific member, or otherwise restrict the 
exemptive relief granted in this Order, as appropriate, on its own 
motion. If necessary, provisions will be made for servicing existing 
client positions.

List of Subjects in 17 CFR Part 30

    Commodity Futures, Commodity Options, Foreign Futures.

    Accordingly, 17 CFR Part 30 is amended as set forth below:

PART 30--FOREIGN FUTURES AND 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. Appendix C to Part 30 is amended by adding the following 
citation to the existing entry for the Sydney Futures Exchange to read 
as follows:

Appendix C--Foreign Petitioners Granted Relief From the Application of 
Certain Part 30 Rules Pursuant to Rule 30.10

* * * * *
    FR date and citation, March 7, 1997, 62 FR.

    Issued in Washington, D.C. on March 3, 1997.
Jean Webb,
Secretary of the Commission.
[FR Doc. 97-5658 Filed 3-6-97; 8:45 am]
BILLING CODE 6351-01-P