[Federal Register Volume 62, Number 176 (Thursday, September 11, 1997)]
[Notices]
[Pages 47792-47797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24015]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION


Performance of Certain Functions by National Futures Association 
With Respect to Non-U.S. Firms and Non-U.S. Markets

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice and order.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission (Commission) is 
authorizing National Futures Association (NFA) to perform fitness 
checks with respect to (1) foreign firms acting in the capacity of 
futures commission merchants (FCMs) seeking relief under Rule 30.10 and 
(2) any applicant for registration or registrant having or seeking to 
add a foreign principal, subject to any limitations by individual 
offshore jurisdictions that fitness information solely be communicated 
to and among regulators. In addition, the Commission is authorizing NFA 
(1) to receive filings from foreign firms acting in the capacities of 
commodity pool operators (CPOs) and commodity trading advisors (CTAs) 
filing for exemption from registration under Rule 30.5, (2) to monitor 
compliance with Rule 30.10, Rule 30.5, and the provisions of Deutsche 
Terminborse (DTB) terminal placement relief, (3) to receive filings 
from FCMs with respect to order transmittal procedure relief for 
foreign futures and options orders, (4) to receive documentation 
pertaining to Globex and New York Mercantile Exchange (NYMEX) ACCESS 
``pass-the-book'' relief, and (5) to maintain and serve as the official 
custodian of certain Commission records.

EFFECTIVE DATE: September 11, 1997.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief 
Counsel, 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.

United States of America

Before the Commodity Futures Trading Commission Order Authorizing the 
Performance of Certain Functions With Respect to Non-U.S. Firms and 
Non-U.S. Markets

I. Authority and Background

    Section 8a(10) of the Commodity Exchange Act \1\ (Act) provides 
that the Commission may authorize any person to perform any portion of 
the registration functions under the Act, notwithstanding any other 
provision of law, in accordance with rules adopted by such person and 
submitted to the Commission for approval or, if applicable, for review 
pursuant to Section 17(j) of the Act \2\ and subject to the provisions 
of the Act applicable to registrations granted by the Commission. 
Section 17(o)(1) of the Act \3\ provides that the Commission may 
require NFA to perform Commission registration functions, in accordance 
with the Act and NFA rules. The Commission's Division of Trading and 
Markets (Division) received a letter from NFA expressing NFA's 
willingness to perform certain functions now performed by the 
Commission, to undertake to protect the confidentiality, security and 
integrity of information received and to abide by any additional use 
requirements or limitations regarding the receipt and handling of 
information from foreign jurisdictions, as discussed below.\4\
---------------------------------------------------------------------------

    \1\ 7 U.S.C. Sec. 12a(10) (1994).
    \2\ 7 U.S.C. Sec. 21(j) (1994).
    \3\ 7 U.S.C. Sec. 21(o)(1) (1994).
    \4\ The Division received the letter from NFA on August 27, 
1997.
---------------------------------------------------------------------------

    Upon consideration, the Commission has determined to authorize NFA, 
effective September 11, 1997, to perform the following functions, 
subject to any limitations by individual offshore jurisdictions that 
fitness information solely be communicated to and among governmental 
regulators: (1) For foreign firms acting in the capacity of an FCM, 
fitness checks and monitoring of compliance with Rule 30.10 \5\ relief 
granted to the firm's regulator or self-regulatory organization (SRO); 
(2) for foreign firms acting in the capacities of CPOs and CTAs, 
accepting filings that comply with Rule 30.5; (3) conducting fitness 
inquiries directed to foreign regulatory and self-regulatory bodies 
with respect to any firm applying for registration under the Act or any 
registrant having or adding a foreign principal; (4) receiving 
documentation pertaining to Globex and NYMEX ACCESS ``pass-the-book'' 
relief; (5) receiving filings from FCMs with respect to order 
transmittal procedure relief for foreign futures and options orders; 
(6) monitoring DTB terminal placement relief; and (7) maintaining and 
serving as the official custodian of records for the filings and 
acknowledgment requirements submitted by (a) exchange member firms 
seeking ``pass-the-book'' relief, (b) FCMs seeking order transmittal 
procedure relief, or (c) firms intending to operate DTB computer 
terminals in the U.S., and maintaining requests and related materials 
submitted pursuant to Rules 30.10 and 30.5 or obtained in the course of 
conducting foreign fitness inquiries. As discussed below, each of these 
functions involves the registration or exemption from registration of 
non-U.S. persons or is related to trading by U.S. persons on non-U.S. 
markets. In the future, the Commission may delegate other similar 
administrative and processing functions by letter and Commission 
Advisory.
---------------------------------------------------------------------------

    \5\ Commission rules referred to herein can be found at 17 CFR 
Ch. I (1997).
---------------------------------------------------------------------------

A. Foreign FCM Fitness and Compliance With Rule 30.10

    Rule 30.10 allows the Commission to exempt a foreign firm acting in 
the capacity of an FCM from compliance with certain Commission rules 
and regulations based upon the firm's compliance with comparable 
regulatory requirements imposed by the firm's home-country regulator. 
The Commission has established a process whereby a foreign regulator or 
SRO can petition on behalf of its regulatees or members, respectively, 
for such an exemption based upon the comparability of the regulatory 
structure in the foreign jurisdiction to that under the Act.\6\ This 
petition process requires

[[Page 47793]]

that the Commission issue an Order granting general relief subject to 
certain conditions \7\ and that individual firms then be granted 
confirmation of such relief. Firms seeking confirmation of Rule 30.10 
relief must make the required representations \8\ set forth in the Rule 
30.10 Order issued to the regulator or SRO from the firm's home 
country. The regulator or SRO forwards to the Commission the firm's 
representations along with a request for confirmation of Rule 30.10 
relief as to the particular firm. The Commission grants a particular 
firm Rule 30.10 relief after verifying the firm's fitness \9\ and 
compliance with the conditions of the appropriate Rule 30.10 Order and 
with Division of Trading and Markets Advisory 41-93, if applicable.\10\
---------------------------------------------------------------------------

    \6\ The specific elements examined in evaluating whether the 
particular foreign regulatory program provides a basis for 
permitting substituted compliance for purposes of exemptive relief 
pursuant to Commission Rule 30.10 are set forth in Appendix A to 
part 30, ``Interpretative Statement with Respect to Commission's 
Exemptive Authority Under Section 30.10 of its Rules'' and include 
the following: (1) Registration, authorization or other form of 
licensing, fitness review or qualification of persons (both 
individuals and firms) through which customer orders are solicited 
and accepted; (2) minimum financial requirements for these persons 
who accept customer funds; (3) protection of customer funds from 
misapplication; (4) minimum sales practice standards, including the 
disclosure of the risks of futures transactions; (5) recordkeeping 
and reporting requirements; (6) procedures to audit for compliance 
with, and to take action against those persons who violate, the 
requirements of the program; and (7) the existence of appropriate 
information-sharing arrangements.
    \7\ These conditions usually require the regulator or SRO 
responsible for monitoring the compliance of the firm with the 
regulatory requirements described in the Rule 30.10 petition to 
represent in writing to the Commission the following: (1) Each firm 
for which relief is sought is registered, licensed or authorized, as 
appropriate, and is otherwise in good standing under the standards 
of its place of domicile; such firm is engaged in business with 
customers located in the location of the regulator or SRO as well as 
in the U.S.; and, such firm would not statutorily disqualified from 
registration under Section 8a(2) of the Act; (2) it will monitor 
firms to which relief is granted for compliance with the regulatory 
requirements for which substituted compliance is accepted and will 
promptly notify the Commission or NFA of any change in status of a 
firm which would affect its continued eligibility for the exemption 
granted hereunder, including the termination of its activities in 
the U.S.; (3) all transactions on the exchanges under the 
jurisdiction of the regulator or SRO with respect to customers 
resident in the U.S. will be made on or subject to the rules of each 
respective exchange and the Commission will receive prompt notice of 
all material changes in such exchanges' codes and regulations; (4) 
customers resident in the U.S. will be provided no less stringent 
regulatory protection than customers in the country where the 
regulator or SRO is located under all relevant provisions of law; 
and (5) it will cooperative with the Commission with respect to any 
inquires concerning any activity subject to regulation under the 
Part 30 rules, including sharing the information specified in 
Appendix A to the Part 30 rules on an ``as needed'' basis, and 
becomes aware of any information which in its judgment affects the 
financial or operational viability of a firm doing business in the 
U.S. pursuant to an exemption granted under Rule 30.10.
    \8\ These representations generally require the firm to: (1) 
Consent to jurisdiction in the U.S. and designate an agent for 
service of process in the U.S. in accordance with the requirements 
set forth in Rule 30.5; (2) agree to make its books and records 
available upon the request of any representative of the Commission 
or the U.S. Department of Justice; (3) agree that all futures or 
regulated option transactions with respect to U.S. customers will be 
made on or subject to the rules of the applicable exchange and will 
be undertaken consistent with rules and codes under which such firm 
operates; (4) represent that no principal of the firm would be 
disqualified under Section 8a(2) of the Act from registering to do 
business in the U.S. and notify the Commission promptly of any 
change in that representation; (5) disclose the identify of each 
U.S. affiliate or subsdiary; (6) agree to be subject to NFA 
arbitration; (7) consent to the release of certain financial 
information; (8) refuse U.S. customers the option of not having 
their funds segregated from the firm's proprietary funds, even if 
that option is generally available under local law; (9) consent to 
report the value of funds required to be segregated on behalf of 
U.S. customers; and (10) undertake to comply with the provisions of 
law and rules which form the basis for granting the exemption. These 
representations may vary from order to order depending upon the 
regulatory structure of the firm's home country. To date, eleven 
orders have been issued for the following regulators and self-
regulatory organizations; Sydney Futures Exchange, 53 FR 44856 
(November 7, 1988); Singagpore International Monetary Exchange 
Limited, 54 FR 806 (January 10, 1989); Montreal Exchange, 54 FR 
11179 (March 17, 1989); United Kingdom regulators and/or SROs 
(Securities and Investments Board, Securities and Futures 
Association, and Investment Management Regulatory Organization), 54 
FR 21599, 21604, 21609, and 21614 (May 19, 1989), 56 FR 14017 (April 
5, 1991); Toronto Futures Exchange, 55 FR 10611 (March 22, 1990); 
Tokyo Grain Exchange, 58 FR 10953 (February 23, 1993); MEFF Renta 
Fija, 60 FR 30462 (June 9, 1995); New Zealand Futures and Options 
Exchange, 61 FR 64985 (December 10, 1996); and MEFF Renta Variable, 
62 FR 16687 (April 8, 1997).
    \9\ The firm's fitness is verified by checking the following 
sources for any information on the firm: (1) The Office of 
Proceedings for reparations cases; (2) the Division of Trading and 
Markets for contract market exchange actions; and (3) NFA's 
Clearinghouse of Disciplinary Information (CDI) for NFA actions.
    \10\ Division of Trading and Markets Advisory 41-93 outlines 
procedures for firms applying for confirmation of exemptive relief 
under Rule 30.10 that have affiliates or subsidiaries in the U.S. It 
is reprinted as CFTC Interpretative Letter No. 93-65, (1992-1994 
Transfer Binder) Comm. Fut. L. Rep. (CCH) para.25,784 (July 26, 
1993).
---------------------------------------------------------------------------

    The Commission believes that, once it has examined the foreign 
jurisdiction's regulatory structure and issued an Order under Rule 
30.10 granting general relief based upon the comparability of that 
structure to the structure under the Act, the steps needed to determine 
if relief is appropriate for particular firms are similar to those 
undertaken in the course of fitness checks performed by NFA with 
respect to applicants for registration under the Act. The Commission 
further believes that it is appropriate for NFA to undertake the 
performance of these steps to the extent the appropriate foreign 
regulator and/or other market authority can share information directly 
with NFA, since it has previously been authorized to perform similar 
steps for applicants. Accordingly, by this Order, NFA is authorized to 
receive requests for Rule 30.10 relief on behalf of firms which are 
acting in the capacity of an FCM for purposes of handling orders for 
foreign futures or futures options products for U.S. persons and which 
are regulatees of a foreign regulator or members of a foreign SRO to 
which the Commission has issued an order pursuant to Rule 30.10, to 
verify such firms' fitness and compliance with the conditions of the 
appropriate Rule 30.10 Order and Division of Trading and Markets 
Advisory 41-93, and to exempt qualifying firms from registration 
pursuant to Rule 30.10.

B. Foreign CPO and CTA Compliance With Rule 30.5

    Rule 30.5 provides an exemption from registration as a CPO, CTA or 
introducing broker (IB) to any qualifying non-domestic person, other 
than a person required to be registered as an FCM, who solicits U.S. 
residents to trade foreign futures or options. To qualify for the 
exemption from registration under Rule 30.5, the non-domestic person 
must enter into a written agency agreement with one of the following: 
(1) The FCM carrying the foreign futures or options account that the 
non-domestic person solicited in the U.S.; (2) any futures association 
registered under the Act; \11\ or (3) any other person located in the 
U.S. in the business of acting as an agent for service of process. The 
agreement must provide that the FCM, registered futures association or 
other designated person is authorized to serve as the agent of the non-
domestic person for purposes of accepting delivery and service of 
communications from the Commission, U.S. Department of Justice, any SRO 
or any foreign futures or foreign options customer.\12\ Qualifying 
persons who act in the capacities of IBs, CPOs and CTAs and who are 
located outside of the U.S. may be eligible to use the procedure 
provided by Rule 30.5. By this Order, NFA is authorized to accept 
filings for exemption from registration under Rule 30.5 and supporting 
agreements from qualifying persons acting as CPOs or CTAs \13\ provided 
such persons offer their products and services solely to qualified 
eligible participants (QEPs) or qualified eligible clients (QECs) as 
described in Rule 4.7.\14\ Under Rule

[[Page 47794]]

30.5(d), any person exempt from registration with the Commission in 
accordance with the provisions of Rule 30.5 must, upon the request of 
any representative of the Commission or the U.S. Department of Justice, 
provide the records such person is required to maintain under Rule 30.5 
at the place in the U.S. designated by the representative within 72 
hours after the person receives the request.
---------------------------------------------------------------------------

    \11\ NFA is currently the only futures association so regulated.
    \12\ 52 FR 28980, 28990 (August 5, 1987).
    \13\ NFA already accepts filings for exemption from registration 
under Rule 30.5 and supporting agreements from qualifying persons 
acting as IBs.
    \14\ Such persons are generally, FCMs, CPOs, CTAs, broker-
dealers, investment companies, banks, insurance companies, employee 
benefit plans, business development companies, certain business 
entities with total assets in excess of $5,000,000, natural persons 
with net worth in excess of $1,000,000 (or with individual income in 
each of the two most recent years in excess of $200,000 or joint 
income of $300,000), certain governmental entities and non-U.S. 
persons.
---------------------------------------------------------------------------

C. Foreign Fitness Inquiries of Any Applicant for CFTC Registration or 
Registrant Having a Foreign Principal

    As part of the registration process, NFA reviews the fitness of any 
foreign principal of an applicant for registration and any foreign 
principal subsequently listed with a registrant by means of a criminal 
background check through INTERPOL.\15\ In addition, in cases of a 
foreign-domiciled applicant firm with a foreign principal, NFA's 
fitness review encompasses a check with a foreign regulator or SRO. 
Under current practice, NFA must forward the request for fitness 
information to the Division, which then requests the information from 
the foreign regulator and/or SRO in the jurisdiction of the principal's 
residence. Information received from the foreign regulator and/or SRO 
by the Commission's staff is subsequently forwarded to NFA. NFA 
evaluates this information based on the standards set forth in its 
Registration Investigation Procedures Manual in making its 
determination as to whether to grant registration. These standards were 
reviewed by the Commission in February 1996.\16\ The Division has 
recommended that NFA consider expanding foreign fitness inquiries to 
include previous employment locations within the prior five years in 
addition to requesting information from authorities in the foreign 
jurisdiction where the applicant resides.\17\ The Division also 
recommended that NFA consider enhancing foreign fitness inquiries to 
include any principal with a U.S. residence who has worked abroad for a 
period of at least six months during the prior five years. By this 
Order, NFA is authorized to request fitness information directly from 
the relevant foreign regulator(s) and/or SRO(s) of any applicant for 
registration or registrant having a foreign principal to the extent the 
Commission has advised NFA such regulator is willing to transfer such 
information directly to NFA. The relevant foreign regulator(s) and/or 
SRO(s) of any applicant for registration includes foreign regulators 
and/or SROs in all employment locations of the applicant for the five 
years prior to the date of the application. NFA is further authorized 
to request fitness information on any principal who has worked outside 
of the U.S. for at least six months during the five years preceding the 
filing of Form 8-R to the same extent.\18\
---------------------------------------------------------------------------

    \15\ For these purposes, NFA considers a foreign principal to be 
any person with a current address outside of the U.S. It does not 
include a foreign national who has recently moved to the U.S. but 
would include a U.S. citizen who has moved abroad.
    \16\ Review of the Registration Fitness Program of National 
Futures Association, Commodity Futures Trading Commission, Division 
of Trading and Markets (February 1996) (hereinafter, the Review).
    \17\ Review, Recommendation No. 3b at 7-8.
    \18\ Each firm applying for registration must file a Form 8-R 
for each principal, and registrants must file a Form 8-R for each 
new principal. Rules 3.10(a)(2), 3.32.
---------------------------------------------------------------------------

D. Globex and NYMEX ACCESS ``Pass-the-Book'' Relief

    The Chicago Mercantile Exchange's (CME's) Globex trading system and 
NYMEX's ACCESS trading system permit the trading of contracts of those 
respective exchanges, and those of certain foreign exchanges, via 
electronic media outside of regular U.S. trading hours. In response to 
a request for relief on behalf of FCM member firms of the CME and the 
Chicago Board of Trade (CBT),\19\ the Division adopted a no-action 
position with respect to certain Commission registration requirements 
that would apply to the member firms and their foreign affiliates in 
France and the United Kingdom that ``pass the book'' \20\ of customer 
orders for entry into the Globex \21\ electronic trading system and to 
personnel involved in that process.\22\ The Division required the 
exchanges to notify the Commission to confirm the applicability of the 
no-action relief with respect to the placement of Globex terminals in 
other jurisdictions, and such notice has been received with respect to 
Hong Kong \23\ and Japan.\24\ The Division also granted similar relief 
to FCM member firms of the NYMEX and their foreign affiliates in the 
United Kingdom who ``pass the book'' of customer orders and engage in 
certain order acceptance activities involving the NYMEX ACCESS trading 
system.\25\ The Division also has received a notice from NYMEX as to 
the placement of Sydney Computerized Overnight Market (SYCOM) terminals 
in Australia that would permit Sydney Futures Exchange member firms to 
execute NYMEX transactions for NYMEX member firms and their foreign 
affiliates.\26\
---------------------------------------------------------------------------

    \19\ CBT was a participant in Globex from June 1992 through May 
1994.
    \20\ The term ``pass the book'' refers to the process which 
orders for exchange contracts received for or on behalf of customers 
of an exchange member firm are transferred for entry into Globex 
terminals located in a non-U.S. office of a foreign affiliate of 
that exchange member firm outside normal U.S. business hours.
    \21\ The June 20, 1988 agreement between the Chicago Mercantile 
Exchange and Reuters Holdings PLC which established certain rights 
and responsibilities of the parties related to Globex is set to 
expire in 1998. CME intends to continue to provide an electronic 
execution system that will retain the Globex name.
    \22\ CFTC Interpretative Letter No. 92-11, [1990-1992 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para. 25,325 (June 25, 1992), 
superseded in part by CFTC Interpretative Letter No. 93-83, [1992-
1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 25,849 (August 
9, 1993).
    \23\ The Division received the notice with respect to Hong Kong 
on August 15, 1993.
    \24\ The Division received the notice with respect to Japan on 
December 16, 1993.
    \25\ The Division issued the letter granting relief to NYMEX 
members that ``pass the book'' to their foreign affiliates in the 
United Kingdom utilizing NYMEX ACCESS terminals in the United 
Kingdom on October 29, 1993 and expanded it to Hong Kong on June 10, 
1997.
    \26\ The Division received the notice with respect to Australia 
on September 28, 1995.
---------------------------------------------------------------------------

    Exchange member FCMs seeking to avail themselves of the Globex and 
NYMEX no-action relief must comply with filing, acknowledgment, and 
other requirements described in CFTC Interpretative Letter No. 93-
83.\27\ Currently, the Commission receives a

[[Page 47795]]

letter from each firm intending to operate pursuant to pass-the-book 
relief setting forth these filings, acknowledgments and 
representations, and the Division verifies the completeness of the 
letter. By this Order, NFA is authorized to serve as the repository for 
the filings, acknowledgments and representations submitted by exchange 
member FCMs seeking to avail themselves of Globex and NYMEX pass-the-
book relief and is authorized to verify that the filings, 
acknowledgments and representations made by the firms are complete as 
described in CFTC Interpretative Letter No. 93-83.
---------------------------------------------------------------------------

    \27\ CFTC Interpretative Letter No. 93-83, [1992-1994 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para. 25,849 (August 9, 1993). For 
example, each exchange member FCM intending to operate pursuant to 
pass-the-book relief must, among other undertakings: (1) Identify 
itself, its foreign affiliates, and ``designated persons'' at such 
affiliates authorized to solicit, accept or enter orders from 
customers on behalf of the exchange member firm in writing to 
appropriate exchanges, NFA and the Commission; (2) carry all 
customer accounts on the books of the exchange member firm as 
customer accounts of that firm, including for purposes of computing 
net capital; (3) ensure that all written communication with 
customers is by the exchange member firm on its own stationery; (4) 
maintain all monies, securities, and property of customer accounts 
in accordance with appropriate statutory and regulatory requirements 
as segregated or secured amount funds, depending upon whether the 
transaction is effected on or subject to the rules of a contract 
market or a foreign exchange, respectively; (5) have the right to 
terminate the authority of any designated person at the foreign 
affiliate to solicit, accept, or enter orders on behalf of 
customers; and (6) be liable under the Act, the Commission's 
regulations and exchange rules for all solicitations, acceptances or 
entries of orders for exchange contracts on Globex by the foreign 
affiliate through its designated persons for or on behalf of 
customers of the exchange member firm. Generally, the filing and 
acknowledgment requirements are intended to give exchanges the 
ability to monitor and to investigate trading on Globex involving 
passing the book equivalent to their ability to do so in connection 
with orders placed directly at the exchange member firm.
---------------------------------------------------------------------------

E. FCM Order Transmittal Procedure Relief

    The Division permits certain customers\28\ of FCMs to transmit 
foreign futures and options orders directly to qualified foreign firms 
that: (1) Are affiliated with the customer's FCM through a parent/
subsidiary relationship or through common ownership; and (2) carry such 
FCM's omnibus account. When the order transmittal procedure relief was 
granted initially, the foreign firm receiving these orders must already 
have been granted relief under Rule 30.10.\29\ The Division 
subsequently expanded the order transmittal procedure relief to allow 
U.S. FCMs to implement the order transmittal procedures with their 
foreign affiliates which had not received Rule 30.10 relief, provided 
that certain additional conditions were met and representations were 
given.\30\ When a U.S. FCM and its foreign affiliate wish to operate 
pursuant to the order transmittal procedure relief, they write a letter 
to the Commission representing that they will comply with the 
conditions outlined in Letter No. 93-115 and, if applicable, with the 
conditions outlined in Letters No. 95-8 and No. 95-83.\31\ The Division 
then verifies that the U.S. FCM and its foreign affiliate have made the 
appropriate representations. By this Order, NFA is authorized to 
receive filings for order transmittal procedure relief and to verify 
the completeness of the representations contained therein.
---------------------------------------------------------------------------

    \28\ Such customers are identified in Interpretative Letter No. 
93-115 and are similar in description to persons that qualify as 
QEPs under Commission Rule 4.7. See CFTC Interpretative Letter No. 
93-115, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
25,932 (December 23, 1993).
    \29\ In order to assure that the order transmittal procedure is 
structured in a manner that facilitates an FCM's ability to 
supervise its financial condition, the Division conditioned relief 
on the following: (1) The FCM's establishment of and adherence to 
written procedures that make explicit the internal control 
procedures that apply to any direct contacts between the FCM's 
customers and the foreign affiliate, including authorization, 
identification, and supervision of orders; (2) identification by the 
FCM to the foreign affiliate of the FCM's customers authorized to 
transmit orders directly to the foreign affiliate; (3) the foreign 
affiliate's identification of the customer on the order ticket at 
the time it is created; (4) written confirmation of receipt and 
execution of the customer's order by the foreign affiliate, along 
with an audit trail and designated personnel with authority to 
reconcile certain trades; (5) the FCM's establishment of and 
adherence to procedures to monitor customer positions aggregated 
across all markets, including the ability to assess whether a 
customer is assuming too high a degree of financial risk with 
respect to these and any other positions the customer may have with 
the FCM that is greater than the FCM, in its business judgment, 
based on reasonable reviews, believes is appropriate for that 
customer; (6) a written agreement between the FCM and its affiliate 
specifying that the FCM is directly liable to the foreign affiliate 
for margin payments related to the omnibus accounts; and (7) 
documentation provided to the customer from the FCM advising 
customers that (a) orders delivered pursuant to the direct order 
transmittal procedure are for their FCM's omnibus account with the 
foreign affiliate, (b) such customers are customers of the FCM only 
and are not customers of the foreign affiliate, and (c) the customer 
has five days to object to the conditions imposed on the direct 
order transmittal procedure. CFTC Interpretative Letter No. 93-115.
    \30\ CFTC Interpretative Letter No. 95-8, [1994-1996 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para. 26,300 (January 25, 1995). In 
addition to compliance with all the terms and conditions set forth 
in Interpretative Letter No. 93-115, foreign affiliates of U.S. FCMs 
which do not have Rule 30.10 relief and the U.S. FCMs are required 
to comply with the terms and conditions summarized as follows: (1) 
The U.S. FCM must accept liability under the Act and the 
Commission's rules for all acts of the foreign affiliate undertaken 
by certain persons; (2) the designated persons of the foreign 
affiliate authorized to solicit, accept and enter orders must be 
listed and procedures must be established to ensure that customers 
deal only with such designated persons; (3) at least one designated 
person must be registered with the Commission as an associated 
person (AP) and all designated persons must be supervised by an AP; 
(4) all designated persons who accept or enter orders must be 
registered with the Commission as an AP; (5) all designated persons 
not registered as APs must acknowledge that they are subject to the 
Act and the Commission's rules, and must not be subject to statutory 
disqualification from registration under Section 8a(2) of the Act; 
(6) the Commission must be assured access to original books and 
records related to the solicitation, acceptance or entry of U.S. 
institutional customer orders on behalf of the U.S. FCM at the 
foreign affiliate; and (7) the foreign affiliate must appoint the 
U.S. FCM as its agent for service of process with respect to any 
materials arising out of its activities concerning these orders.
    \31\ As Japanese and Hong Kong laws require that original books 
and records of the U.S. FCM's foreign affiliate be maintained within 
the local jurisdiction, U.S. FCMs with foreign affiliates in Japan 
or Hong Kong may comply with the following terms and conditions in 
satisfaction of the requirement that an FCM and its foreign 
affiliate assure the Commission access to the foreign affiliate's 
original books and records: (1) The U.S. FCM and its Japanese or 
Hong Kong affiliate will provide authenticated copies of the foreign 
affiliate's original books and records upon request of a Commission 
representative; (2) the U.S. FCM and its affiliate will provide 
access to original books and records in the foreign jurisdiction; 
(3) to the U.S. FCM and its affiliate waive objection to the 
admissibility of the copies as evidence in a Commission action 
against the FCM or its affiliate; and (4) the U.S. FCM and its 
affiliate agree in the event of a proceeding to provide a witness to 
authenticate copies of books and records given to the Commission. 
CFTC Interpretative Letter 95-83, [1994-1996 Transfer Binder]) Comm. 
Fut. L. Rep. (CCH) para. 26,559 (September 29, 1995).
---------------------------------------------------------------------------

F. DTB Terminal Placement Relief

    By letter dated February 29, 1996, the Division stated that it 
would not recommend that the Commission commence an enforcement action 
against DTB\32\ in connection with the placement of DTB computer 
terminals in the U.S. in order to permit DTB members to execute 
transactions involving DTB futures and option products which are 
otherwise approved for trading by U.S. persons without the DTB being 
deemed a U.S.-based board of trade required to be designated as a 
contract market pursuant to Section 5 of the Act.\33\ Relief was 
conditioned upon, among other conditions, the filing of materials 
identifying all DTB members that intend to operate pursuant to the 
relief. The Division has also established a procedure that requires 
firms to submit an acknowledgment of jurisdiction and compliance with 
the terms of the relief as outlined in the February 29, 1996 letter 
(the Acknowledgment).
---------------------------------------------------------------------------

    \32\ The DTB, located in Frankfurt, Germany, is a fully 
automated international options and futures exchange on which all 
trades are executed and cleared electronically. Trading is conducted 
via computer terminals. The market participants' computers and 
terminals are linked to the DTB computer center by means of a wide-
ranging telecommunications network.
    \33\ CFTC Interpretative Letter No. 96-28, [Current Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para. 26,669 (February 29, 1996).
---------------------------------------------------------------------------

    By this Order, the NFA is authorized to receive and to review 
identification filings and Acknowledgments from firms intending to 
operate DTB terminals in the U.S. NFA is authorized to verify that the 
identification filings accurately identify the firms and that the 
Acknowledgments include the terms and conditions required for 
relief.\34\

[[Page 47796]]

NFA is further authorized to conduct a fitness review of the firm such 
as is performed in connection with registration with the Commission.
---------------------------------------------------------------------------

    \34\ These terms and conditions are listed in the February 29, 
1996 letter, as supplemented by a May 9, 1997 letter, from the 
Division to DTB granting relief to DTB and are as follows: (1) DTB 
terminals will be located only in U.S. offices of DTB members or on 
the floor of the CME; (2) all DTB members that intend to operate 
pursuant to the relief will be identified to the Commission and the 
NFA; (3) pursuant to the DTB's rules, DTB members must apply to the 
DTB for DTB terminal placement and identify the location and 
connection of user devices to DTB's electronic trading system and, 
upon request, DTB shall provide information received from its 
members and in its possession to the Commission regarding the 
location of all such terminals in the U.S., and shall update such 
information on a periodic basis upon reasonable request; (4) all 
orders executed pursuant to the relief will be for ``principal'' 
accounts if executed by a non-FCM DTB member firm and the Division 
will be notified promptly in the event that there is a change under 
applicable German laws or rules of the DTB concerning the definition 
of the word ``principal''; (5) participating DTB members will 
provide, upon the request of the Commission or NFA, prompt access to 
original books and records and the premises where DTB terminals are 
installed in the U.S., and will consent to Commission jurisdiction 
for purposes of ensuring compliance with the conditions of the no-
action relief; (6) DTB will continue to adhere to the ``Principles 
for Oversight of Screen Based Trading Systems for Derivative 
Products,'' a statement of regulatory policy recommended by the 
International Organization of Securities Commissions and adopted by 
the Commission on November 21, 1990; (7) DTB will submit to the 
Commission, on at least a quarterly basis, information reflecting 
the volume of trades originated from U.S.-based computer terminals 
compared to DTB's overall trading volume; and (8) DTB will undertake 
to provide the Division with prompt notice of all material changes 
to DTB rules, the German Exchange Act, the German Securities Act, 
and other German laws relevant to futures and options which may 
impact on the issuance of DTB Terminal Placement relief.
---------------------------------------------------------------------------

G. Recordkeeping Requirements

    By prior orders, the Commission has authorized NFA to maintain 
various other Commission registration records and certified NFA as the 
official custodian of such records for this agency.\35\ The Commission 
has now determined, in accordance with its authority under Section 
8a(10) of the Act, to authorize NFA to maintain and to serve as the 
official custodian of records for the filings and acknowledgment 
requirements submitted by: (1) Exchange member FCMs in connection with 
``pass-the-book'' relief; (2) FCMs and their foreign affiliates in 
connection with order transmittal procedure relief; and (3) firms 
intending to operate DTB computer terminals in the U.S. In this 
connection, NFA has undertaken to abide by any special use restrictions 
applicable to information received from a foreign market authority to 
the full extent permitted by law. The Division also has determined to 
authorize NFA to maintain requests and related materials submitted 
pursuant to Rules 30.10 and 30.5 or obtained in the course of 
conducting foreign fitness inquiries. These determinations are based 
upon NFA's representations regarding the implementation of rules and 
procedures for maintaining and safeguarding all such records, as well 
as the need to facilitate NFA's preparations for assuming 
responsibility for the above-mentioned activities.
---------------------------------------------------------------------------

    \35\ 49 FR 39593 (October 9, 1984); 50 FR 34885 (August 28, 
1985); 51 FR 25929 (July 17, 1986); 54 FR 19594 (May 8, 1989); 54 FR 
41133 (October 5, 1989); 58 FR 19657 (April 15, 1993).
---------------------------------------------------------------------------

    In maintaining the Commission's records pursuant to this Order, NFA 
shall be subject to all other requirements and obligations imposed upon 
it by the Commission in existing or future orders or regulations. In 
this regard, NFA shall also implement such additional procedures (or 
modify existing procedures) as are necessary to ensure the security and 
integrity of the records in NFA's custody and acceptable to the 
Commission; to facilitate prompt access to those records by the 
Commission and its staff, particularly as described in other Commission 
orders or rules; to facilitate disclosure of public or nonpublic 
information in those records when permitted by Commission orders or 
rules and to keep logs as required by the Commission concerning 
disclosure of nonpublic information; and otherwise to safeguard the 
confidentiality of the records.

II. Conclusion and Order

    The Commission has determined, in accordance with the provisions of 
Sections 8a(10) and 17(o)(1) of the Act and NFA's letter dated August 
27, 1997, subject to any restriction by a given jurisdiction that 
information must pass directly between regulatory authorities, to 
authorize NFA to perform the following functions:
    (1) To grant, either with or without conditions, exemptive relief 
to firms acting in the capacity of FCMs which are members of regulatory 
or self-regulatory bodies to which an order under Commission Rule 30.10 
has been issued from the registration requirements of part 30;
    (2) To maintain filings for exemption from the registration 
requirements of part 30 and supporting agreements submitted pursuant to 
the provisions of Commission Rule 30.5 by qualifying persons acting as 
CPOs or CTAs who offer their products and services solely to 
``qualified eligible participants'' or ``qualified eligible clients,'' 
as those terms are defined in Commission Rule 4.7;
    (3) To grant, either with or without conditions, the registration 
of any applicant for registration with a foreign principal and the 
addition by a registrant of a foreign principal after NFA verifies the 
fitness of the foreign principal\36\ with the relevant foreign 
regulatory authority,\37\ where NFA previously would have forwarded the 
request for fitness information to the Commission in order for the 
Commission to request the fitness information from the appropriate 
foreign regulatory body;
---------------------------------------------------------------------------

    \36\ This should include a person residing in the U.S. who has 
resided outside of the U.S. for at least six months during the five 
years immediately prior to the filing of Form 8-R.
    \37\ The relevant foreign regulatory authority can include an 
authority in any jurisdiction where the principal has worked during 
the prior five eyars as well as the authority for the principal's 
current residence.
---------------------------------------------------------------------------

    (4) To maintain the filings and acknowledgments submitted by 
exchange member FCMs in connection with Globex and NYMEX Access ``pass-
the-book'' relief;
    (5) To maintain filings of FCMs and their foreign affiliates made 
in connection with order transmittal relief where the filings contain 
the required representations for claiming such relief;
    (6) To maintain identification filings and acknowledgments from 
firms intending to operate DTB terminals in the U.S. where such 
identification filings and acknowledgments contain the required 
representations and information for claiming relief; and
    (7) To maintain filings, acknowledgments, and records pertaining to 
the functions previously delegated in this Order and to serve as the 
official custodian of those Commission records.\38\
---------------------------------------------------------------------------

    \38\ The Commission may delegate other similar administrative 
and processing functions by letter and Commission Advisory. The 
Commission also will furnish to NFA existing Commission records that 
it identifies as pertaining to the matters discussed in this Order.
---------------------------------------------------------------------------

    The Commission is in the process of preparing an update to its 
systems of records (with respect to CFTC-12 and CFTC-20) to make 
permissible under the Privacy Act of 1974 the concomitant disclosure to 
NFA of personal information on individuals that may be contained in 
these filings, acknowledgments, and records.
    NFA shall perform these functions in accordance with the standards 
established by the Act and the regulations and orders promulgated 
thereunder, particularly Rule 30.10 and Commission orders issued 
thereunder, and shall provide the Commission with such summaries and 
periodic reports as the Commission may determine are necessary for 
effective oversight of this program.
    These determinations are based upon the Congressional intent 
expressed in Sections 8a(10) and 17(o) of the Act that the Commission 
have the authority to delegate to NFA any portion of the Commission's 
registration responsibilities under the Act for purposes of carrying 
out these responsibilities in the most efficient and cost-effective 
manner and NFA's representations concerning the standards and 
procedures to be followed and the reports to be generated in 
administering these functions.

[[Page 47797]]

    This Order does not, however, authorize NFA to render ``no-action'' 
opinions or interpretations with respect to applicable registration 
requirements.
    Nothing in this Order or in Sections 8a(10) or 17(o) of the Act 
shall affect the Commission's authority to review the granting of a 
registration application by NFA in the performance of Commission 
registration functions, or to review the maintenance of registration by 
NFA.
    NFA is authorized to perform all functions specified herein until 
such time as the Commission orders otherwise. Nothing in this Order 
shall prevent the Commission from exercising the authority delegated 
herein. NFA may submit to the Commission for decision any specific 
matters that have been delegated to it and Commission staff will be 
available to discuss with NFA staff issues relating to the 
implementation of this Order. Nothing in this Order affects the 
applicability of any previous orders issued by the Commission under 
Part 30.

    Issued in Washington, D.C. on September 5, 1997 by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 97-24015 Filed 9-10-97; 8:45 am]
BILLING CODE 6351-01-P