[Federal Register Volume 62, Number 45 (Friday, March 7, 1997)]
[Rules and Regulations]
[Pages 10447-10449]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5668]


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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 Orders 
issued on May 15, 1989 (the ``Original Orders''), authorizing 
designated members of The Securities Association (``TSA'') and the 
Association of Futures Brokers and Dealers (``AFBD''),1 which 
subsequently merged to form the Securities and Futures Association 
(``SFA'') 2 to solicit and to accept orders from U.S. customers 
for otherwise permitted transactions on all non-U.S. exchanges which 
have been designated as a Designated Investment Exchange (``DIE'') by 
the United Kingdom Securities and Investments Board (``SIB'').3
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    \1\  See 54 FR 21604 (May 19, 1989) (granting rule 30.10 relief 
to firms designated by the AFBD) and 54 FR 21609 (May 19, 1989) 
(granting rule 30.10 relief to firms designated by the TSA).
    \2\  Following the April 1, 1991 merger of the AFBD and TSA to 
form the SFA, the Commission issued an Order, which, among other 
things, confirmed that the earlier Orders granting rule 30.10 relief 
to the AFBD and TSA and their respective members continued to be 
effective as to the successor SFA and its designated members. See 56 
FR 14017, 14018 (April 5, 1991) (the ``SFA Order'').
    \3\  An exchange carrying on investment business in the United 
Kingdom must be authorized by the SIB as a Recognized Investment 
Exchange (``RIE''). See United Kingdom Financial Services Act 
(``FSA'') Sections 3, 36, and 37. DIE's are certain non-U.K. 
exchanges determined by the SIB to meet adequate standards of 
investor protection. See Financial Services (Glossary and 
Interpretation) Rules and Regulations 1990. Under the terms of the 
Original Orders, an SFA member firm may only handle transactions on 
behalf of U.S. customers on an RIE or DIE. See 54 FR 21604, 21605 
and 54 FR 21609, 21610.
    The Commission also notes that although a rule 30.10 Order was 
issued to the SIB concurrently with the Original Orders (54 FR 21599 
(May 19, 1989)), there are no firms currently designated by the SIB 
for rule 30.10 relief. Under the current United Kingdom regulatory 
structure the SIB no longer has direct supervisory responsibility 
for any firm engaged in investment business involving derivatives 
under the FSA. See, e.g., Andrew Large, Financial Services 
Regulation--Making the Two Tier System Work at 21 (SIB, 1993).
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    This Supplemental Order is issued pursuant to (1) Commission rule 
30.10, which permits the Commission to grant an exemption from certain 
provisions of Part 30 of the Commission's regulations, (2) the 
Commission's Original Orders, granting relief under rule 30.10 to 
designated members of the AFBD and TSA, and (3) the Commission's SFA 
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 Securities and Futures Authority 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 United 
Kingdom Law to Conduct Futures Business for Customers.

    In Orders issued on May 15, 1989, the Commission authorized 
designated members of the TSA and AFBD to offer or sell certain futures 
and option contracts on or subject to the rules of an RIE in the United 
Kingdom, or any other non-U.S. exchange 4 which is a DIE.
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    \4\  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. 
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 CEA are 
not within the scope of the Original Orders and this Supplemental 
Order.
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    The Commission now seeks to clarify the procedures with which SFA 
members should comply in order to operate pursuant to the Original 
Orders and the SFA Order authorizing SFA member firms to engage in 
foreign futures and options transactions for U.S. customers on a DIE 
other than a U.S. exchange designated as a contract market pursuant to 
section 5 of the Commodity Exchange Act (``CEA'' or ``Act''). This 
Order clarifies that the funds of U.S. foreign futures and options 
customers must be subject to consistent protection irrespective of 
whether the SFA member firm effects trades directly on an RIE 5 or 
effects trades on a DIE directly or through the intermediation of a 
foreign exchange member.6 Accordingly, the Commission

[[Page 10448]]

has determined to clarify that the relief authorized in its Original 
Orders with respect to transactions on a DIE is applicable only if an 
SFA member firm complies with the following procedures, which are 
consistent with the requirements applicable to Commission-registered 
futures commission merchants (``FCMs'') concerning the protection of 
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customer funds under the provisions of Commission rule 30.7: 7

    \5\  With respect to transactions on an RIE, applicable U.K. 
laws and regulations and the Original Orders 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(c) and (h) of the Original Orders, 54 FR 21604, 
21606, and 54 FR 21609, 21611.
    \6\ 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).
    \7\  See Commission rule 30.7, 17 C.F.R. 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.6 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 which is a 
DIE, whether by the SFA member directly as a clearing member of such 
other exchange or through the intermediation of one or more 
intermediaries, the SFA member complies with paragraphs a, b or c 
below:
    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 SFA rules and 
United Kingdom laws may be substituted for the secured amount 
requirement as set forth in such paragraphs.9

    \9\ Any United Kingdom laws or regulations or SFA rules which 
permit an SFA 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 rule 30.10 relief already granted to the SFA also is contingent 
upon SFA and SFA members' continued compliance with the Original Orders 
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:


[[Page 10449]]


    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 Association of Futures Brokers 
and Dealers and The Securities Association 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. 97-5668 Filed 3-6-97; 8:45 am]
BILLING CODE 6351-01-P