[Federal Register Volume 64, Number 165 (Thursday, August 26, 1999)]
[Proposed Rules]
[Pages 46618-46626]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22020]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 30


Exemption from Registration for Certain Foreign FCMs and IBs

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
proposing to amend the Commission's rules and regulations on Foreign 
Futures and Foreign Options Transactions to include new Rules 30.12.\1\ 
The new rule will permit certain foreign firms acting in the capacity 
of FCMs and IBs to accept and execute foreign futures and options 
orders directly from certain U.S. customers via telephone, facsimile 
and electronic message without having to register with the Commission.

    \1\ Commission rules referred to herein are found at 17 CFR Ch. 
I (1999).
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DATES: Comments must be received by October 25, 1999.

ADDRESSES: Interested persons should submit their views and comments to 
Jean A. Webb, Secretary of the Commission, Commodity Futures Trading 
Commission, 1155 21st Street, NW, Washington, DC 20581. In addition, 
comments may be sent by facsimile transmission to facsimile number 
(202) 418-5521, or by electronic mail to [email protected]. Reference 
should be made to ``Commission Rules 30.12.''

FOR FURTHER INFORMATION CONTACT: Laurie Plessala Duperier, Special 
Counsel, or Andrew Chapin, Staff Attorney, Division of Trading and 
Markets, Commodity Futures Trading Commission, 1155 21st Street, NW, 
Washington, DC 20581. Telephone: (202) 418-5430.

SUPPLEMENTARY INFORMATION:

I. Background Information

A. Formal Rulemaking

    In 1987, the Commission adopted a new Part 30 to its regulations to 
govern the offer and sale to U.S. persons of futures and option 
contracts entered into on or subject to the rules of a foreign board of 
trade.\2\ These rules were promulgated pursuant to sections 2(a)(1)(A), 
4(b) and 4c of the Commodity Exchange Act (``Act''), which vest the 
Commission with exclusive jurisdiction over the offer and sale, in the 
United States, of options and futures contracts traded on or subject to 
the rules of a board of trade, exchange or market located outside of 
the United States.
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    \2\ 52 FR 28980 (August 5, 1987).
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    Part 30 sets forth regulations governing foreign futures \3\ and 
foreign option \4\ transactions executed on behalf of foreign futures 
or foreign options customers.\5\ For example, Rule 30.4 requires any 
person engaged in the activities of a futures commission merchant 
(``FCM''), introducing broker (``IB''), commodity pool operator 
(``CPO'') and commodity trading advisor (``CTA''), as those activities 
are defined within the rule, to register with the Commission unless 
such person claims relief from registration under Part 30. The 
transactions which are subject to regulation and require registration 
under Part 30 include the solicitation or acceptance of orders for 
trading any foreign futures or foreign option contract and acceptance 
of money, securities or property to margin, guarantee or secure any 
foreign futures or foreign option trades or contracts.\6\
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    \3\ ``Foreign futures'' as defined in Part 30 means ``any 
contract for the purchase or sale of any commodity for future 
delivery made, or to be made, on or subject to the rules of any 
foreign board of trade.'' Commission rule 30.1(a).
    \4\ ``Foreign option'' as defined in Part 30 means ``any 
transaction or agreement which is or is held out to be of the 
character of, or is commonly known to the trade as, an `option', 
`privilege', `indemnity', `bid', `offer', `put', `call', `advance 
guaranty', or `decline guaranty', made or to be made on or subject 
to the rules of any foreign board of trade,'' Commission Rule 
30.1(b).
    \5\ Pursuant to Commission Rule 30.1(c), ``Foreign futures or 
foreign options customer'' means ``any person located in the United 
States, its territories or possessions who trades in foreign futures 
or foreign options: Provided, That an owner or holder of a 
proprietary account as defined in paragraph (y) of Sec. 1.3 of this 
chapter shall not be deemed to be a foreign futures or foreign 
options customer within the meaning of Secs. 30.6 and 30.7 of this 
part.''
    \6\ See Commission rule 30.4.
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    Under Part 30, certain persons located outside the United States 
may obtain an exemption from registration and certain other 
requirements. For example, under Rule 30.10 and Appendix A thereto, the 
Commission may exempt a foreign firm that solicits or accepts orders 
(and accepts money, securities or property to margin the trades made 
thereto) from U.S. foreign futures and options customers from 
compliance with certain Commission rules, including those rules 
pertaining to registration, provided that a comparable regulatory 
system exists in the firm's home country and that certain safeguards 
are in place to protect U.S. investors, including an information-
sharing arrangement between the Commission and the firm's home country 
regulator.\7\ In addition, under

[[Page 46619]]

Rule 30.5, the Commission may exempt foreign persons acting in the 
capacity of an IB, CPO or CTA from registration, provided that the 
person complies with certain requirements.\8\
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    \7\ See Appendix A to Part 30; 62 FR 47792 (September 11, 1997) 
(``Delegation Order''). Note that persons located inside the United 
States may petition for an exemption under Rule 30.10 separate from 
the comparability relief provided for in Appendix A.
    \8\ An exemption from registration pursuant to Rule 30.5 
requires a foreign person acting in the capacity of an IB, CPO or 
CTA to file a petition for exemption with NFA and to designate an 
agent for service of process. As set forth in the most recent 
amendments to Rule 30.5, 64 FR 28910 (May 28, 1999), the Rule 30.5 
applicant must (1) provide general background information and 
information regarding the firm's fitness to conduct business with 
U.S. customers, (2) irrevocably agree to the jurisdiction of the 
commission and state and federal courts in the United States with 
respect to activities and transactions subject to Part 30, and (3) 
designate an agent for service of process. The agent for service of 
process must be a registered FCM, a registered futures association, 
or any other person located in the United States in the business of 
providing agency services. In addition, Rule 30.5 requires that only 
a U.S. FCM or a foreign broker who has received confirmation of Rule 
30.10 relief, infra note 15, may carry accounts for or on behalf of 
any foreign futures or foreign options customer.
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B. Interpretation of the Registration Requirement of Rule 30.4

    The Division of Trading and Markets (``Division'') has issued 
advisories and interpretative letters that more specifically define the 
scope of permissible activity under Part 30 and what activities by 
foreign futures and options brokers (``FFOBs'')\9\ trigger the 
Commission registration requirement under Rule 30.4(a). In 1987, the 
Division issued an interpretative letter regarding registration by an 
FFOB that carries an FCM's customer omnibus account. The Division 
indicated that certain unregistered FFOBs would not be required to 
register pursuant to Rule 30.4 if their activities on a foreign 
exchange on behalf of U.S. foreign futures and options customers were 
limited solely to carrying foreign futures and options accounts on an 
omnibus basis on behalf of an FCM and to performing the services 
incidental thereto.\10\ The Division reasoned that registration should 
not be required in that circumstance because of the presence of an 
``intervening U.S. registrant, i.e., a U.S. FCM, to whom the rules 
would be fully applicable.'' \11\ The Division, however, limited this 
relief to the members of a foreign exchange and/or the affiliates of an 
FCM.\12\
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    \9\ For this preamble and the proposed rule, ``foreign futures 
and options broker'' will mean any person located outside the United 
States or its territories that is a member of a foreign board of 
trade, as defined in Sec. 1.3(ss) of the Act, and is licensed, 
authorized or otherwise subject to regulation of a foreign 
jurisdiction. This term has not been previously defined in any of 
the Advisories. In another proposed rulemaking issued on this date, 
the term ``foreign futures and options broker'' will be similarly 
defined in proposed amendments to Rule 30.1. The Commission believes 
that a formal definition of ``foreign futures and options broker'' 
is necessary to distinguish it from the definition of ``foreign 
broker'' for purposes of Parts 15 through 21 of the Act. Commission 
Rule 15.00(a)(1) (``foreign broker'' means ``any person located 
outside the United States or its territories who carries an account 
in commodity futures or commodity options on any contract market for 
any other person'').
    \10\ CFTC Letter No. 87-7, Comm. Fut. L. Rep. (CCH) para.23,792 
(November 17, 1987).
    \11\ Id. at 34,408.
    \12\ Id. at 34,407-408. An affiliate of an FCM who is not also a 
member of the relevant foreign exchange must be licensed, authorized 
or otherwise subject to regulation in accordance with the relevant 
laws, rules or regulations of that foreign jurisdiction. In 
addition, the foreign affiliate must identify to the Commission and 
the National Futures Association the foreign clearing member through 
which the affiliate conducts business and agree to respond to 
requests for information and records concerning transactions on such 
foreign exchange. Id. at 34,408.
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    In 1993, the Division issued an advisory permitting certain foreign 
affiliates of a U.S. FCM not registered with the Commission that carry 
the customer omnibus account of the FCM to receive orders for trades 
placed directly by certain foreign futures and options customers for 
execution for or on behalf of such customers through the FCM's customer 
omnibus account.\13\ The Division reasoned that the regulatory purposes 
of the Act would not be adversely affected if direct contacts between 
certain institutional customers and certain affiliates of an FCM were 
permitted under circumstances where the FCM could adequately control 
the transactions for which its omnibus account would be obligated by 
such direct customer contacts.\14\ Accordingly, the Division 
interpreted Rule 30.4 to exempt from registration those foreign 
affiliates \15\ that have received confirmation of Rule 30.10 relief 
\16\ who receive orders directly from ``authorized customers'' \17\ for 
or on behalf of such customers through the FCM's customer omnibus 
account.\18\ This relief, however, was contingent upon the FCM's 
compliance with certain conditions. As outlined in the Advisory, an FCM 
was required to institute certain procedures with regard to its ability 
to adequately supervise the impact of such requests on its financial 
condition, confirm and supervise foreign futures and options orders 
placed through its customer omnibus account, and maintain an audit 
trail to track an order from the time it is placed to the time it is 
cleared and reported back to the foreign futures and options

[[Page 46620]]

customer.\19\ With these procedures in place, unregistered foreign 
affiliates of a U.S. FCM that had received confirmation of Rule 30.10 
relief were permitted to accept directly orders from certain 
institutional investors for trades to be placed in the FCM's customer 
omnibus account,\20\ and the Commission would have access to all the 
pertinent financial information should a problem arise.
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    \13\ CFTC Advisory No. 93-115, Comm. Fut. L. Rep. (CCH) para. 
25,932 at 41,047 (December 23, 1993).
    \14\ Id. at 41,052.
    \15\ The unregistered FFOB must either have a parent/subsidiary 
relationship with an FCM or otherwise be affiliated through common 
ownership. Id. at 41,054.
    \16\ Rule 30.10 and Appendix A thereto allows the Commission to 
exempt a foreign firm that solicits or accepts orders (and accepts 
money, securities or property to margin the trades made thereto) 
from U.S. foreign futures and options customers engaging in those 
acts described by Rule 30.4(a) 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 self-regulatory organization (``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. Once 
the Commission determines that the foreign jurisdiction's regulatory 
structure offers comparable regulatory oversight, the Commission 
issues an Order granting general relief subject to certain 
conditions. Firms seeking confirmation of relief must make certain 
representations set forth in the Rule 30.10 Order issued to the 
regulator or SRO from the firm's home country. For a more detailed 
discussion of the Commission's comparability analysis and the 
representations to be made by foreign regulators and individual 
foreign firms, see FR 47792, 47793 (September 11, 1997).
    \17\ For the purpose of CFTC Advisory No. 93-115, ``authorized 
customers'' meant:
    (i) An FCM, IB, CPO or CTA registered as such with the 
Commission;
    (ii) A broker or dealer registered pursuant to section 15 of the 
Securities Exchange Act of 1934;
    (iii) An investment company registered under the Investment 
Company Act of 1940 or a business development company defined in 
section 2(a)(48) of the Act;
    (iv) An insurance company as defined in section 2(13) of the 
Securities Act;
    (vi) A plan established by and maintained by a state, its 
political subdivisions, or any agency or instrumentality of a state 
or its political subdivisions, for the benefit of its employees, if 
such plan has total assets in excess of $5,000,000;
    (vii) An employee benefit plan within the meaning of the 
Employee Retirement Income Security Act of 1974, provided that the 
investment decision is made by a plan fiduciary, as defined in 
section 3(21) of the Act, which is a bank, savings and loan 
association, insurance company, or registered adviser, or that the 
employee benefit plan has total assets in excess of $5,000,000;
    (viii) A private business development company as defined in 
section 202(a)(22) of the Investment Advisers Act of 1940;
    (ix) An organization described in section 501(c)(3) of the 
Internal Revenue Code, with total assets in excess of $5,000,000;
    (x) A corporation, Massachusetts or similar business trust, or 
partnership, other than a pool which has total assets in excess of 
$5,000,000;
    (xi) A natural person who individually or with that person's 
spouse owns a portfolio of securities and other property with an 
aggregate market value of at least $5,000,000;
    (xii) A pool, trust, insurance company separate account or bank 
collective trust, with total assets in excess of $5,000,000;
    (xiii) A foreign person substantially equivalent to those 
persons described in paragraph (i) through (xii) above; or
    (xiv) A governmental entity (including the United States, a 
state, or foreign government) or political subdivision thereof, or a 
multinational or supranational entity or an instrumentality, agency 
or department of any of the foregoing.
    Id. at 41,052-053.
    \18\ Id. at 41,052-054.
    \19\ Id.
    \20\ The relief extended to certain unregistered FFOBs in 
Advisory No. 93-115 was limited to an FCM's institutional customer's 
ability to place orders directly with the FCM's Rule 30.10 qualified 
foreign affiliate which carried that FCM's customer omnibus account. 
If that foreign affiliate in turn had an omnibus account with yet 
another affiliated firm (or firms) with Rule 30.10 relief, the FCM's 
institutional customer was not permitted to use procedure described 
therein to place orders with other foreign affiliate of the FCM 
unless the trade processing and recordkeeping systems of the FCM and 
relevant affiliates were linked in a manner which would have 
permitted the FCM and relevant foreign affiliates to remain in 
compliance with the terms of the Advisory. Id. at 41,051.
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    In 1995, the Division issued another advisory expanding the bounds 
of permissible direct order transmittal to include contact between 
certain foreign futures and options customers and foreign affiliates of 
U.S. FCMs that were not registered and had not received confirmation of 
Rule 30.10 relief.\21\ Subject to additional terms and conditions, the 
Division determined that the regulatory purposes of the Act would not 
be undermined by allowing these unregistered affiliates of FCMs to 
accept orders directly from ``authorized customers'' for execution for 
or on behalf of such customers through the FCM's customer omnibus 
account.\22\ Similar to the terms and conditions described in Advisory 
No. 93-115, the relief in Advisory No. 95-08 was contingent upon the 
satisfaction of certain conditions by the FCM. In particular, an FCM 
was required to ensure that customers authorized to transmit orders 
directly to its foreign affiliate only deal with ``designated 
persons,'' i.e., a class of individuals working in the office of the 
foreign affiliate identified by and under the direct supervision of the 
FCM,\23\ (2) that any ``designated person'' who accepted or entered 
orders in other than a clerical capacity be registered with the 
Commission as an AP, and (3) that all ``designated persons'' at the 
foreign affiliate were subject to the supervision of an AP of the 
FCM.\24\ The FCM was also required to represent to the Commission that 
it was liable for all acts by the foreign affiliate through its 
``designated person'' whether or not the ``designated person'' is 
registered with the Commission, or any person who acts in such capacity 
whether or not designated, for or on behalf of customers of the FCM 
under the circumstances described within the Advisory.\25\ In addition, 
both the FCM, and the unregistered FFOB had to undertake to provide 
access to original books and records upon the request of the 
Commission, and represent that neither was aware of any law of the 
relevant foreign jurisdiction that would prohibit either entity from 
complying with this undertaking.\26\ Moreover, a qualified, 
unregistered FFOC was required to consent to service of process in the 
United States with respect to its activities which are the subject of 
the Advisory.\27\
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    \21\ CFTC Advisory No. 95-08, Comm. Fut. L. Rep. (CCH) para. 
26,300 at 42,489 (January 25, 1995). In Advisory No. 95-08, the 
Division did not modify the list of ``authorized customers.''
    \22\ Id. at 42,490.
    \23\ Id. at 42,490-491; see CFTC Letter No. 92-11, Comm. Fut. L. 
Rep. (CCH) para. 25,325 at 39,051 (June 25, 1992), as modified by 
CFTC Letter No. 93-83, Comm. L. Rep. (CCH) para. 25,949 at 41,089 
(August 9, 1993) (discussing procedures necessary for an FCM to 
allow a foreign affiliate to handle Globex orders placed by a 
customer after normal business hours in the United States, a.k.a., 
``passing the book'').
    \24\ Id. 42,490-491.
    \25\ Id. at 42,490.
    \26\ Id. at 42, 491.
    Shortly after it issued CFTC Letter No. 95-08, the Division 
learned that local laws in both Japan and Hong Kong prevented firms 
located in those jurisdictions from removing original books and 
records from the country without prior notice to and consent from 
the appropriate regulatory agencies. See CFTC Letter No. 95-83, 
Comm. Fut. L. Rep. (CCH) para. 26,559 at 43, 490 (September 20, 
1995). Accordingly, the Division issued a no-action position with 
regards to a U.S. FCM's Japanese and Hong Kong affiliates without 
Rule 30.10 relief, provided that the U.S. FCM making the request and 
affiliates agreed to provide authentic copies of the original books 
and records upon the request of the Commission. Id. at 43,491. 
Citing CFTC Letter No. 95-08, the Commission extended this avenue of 
relief to all U.S. FCMs with Japanese and Hong Kong affiliates. 
Delegation Order, 62 FR at 47795, n.31.
    \27\ CFTC Letter No. 95-05, para. 26,300 at 42,491.
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    In the aggregate, the interpretative letter and advisories issued 
by the Division regarding Rule 30.4 have restricted the foreign order 
transmittal process to ``authorized customers'' of U.S. FCMs contacting 
the FCM's foreign affiliates. Recently, the Futures Industry 
Association (``FIA'') has approached the Commission about a new rule 
regarding foreign order transmittal that would expand the relief from 
registration pursuant to Rule 30.4 to certain qualified, nonaffiliated 
FFOBs.\28\ The rule proposed by FIA would not only allow unregistered, 
non-Rule 30.10 FFOBs to accept orders directly from U.S. customers for 
execution for or on behalf of such customers through the FCM customer 
omnibus account carried by the FFOB, but also permit unregistered, non-
Rule 30.10 FFOBs to accept directly and execute these orders for the 
purpose of giving the trades up to another unregistered FFOB carrying 
the FCM's customer omnibus account.\29\ FIA's proposed rule 
significantly expands the relief permitted by the existing 
interpretative letter and advisories issued by the Division.
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    \28\ Letter from Ronald H. Filler, President, FIA's Law and 
Compliance Division, to the Division of Trading and Markets, dated 
February 18, 1999. The FIA proposal did not restrict FCM 
participation to those firms that met certain minimum capital 
requirements, nor did it limit the category of foreign brokers to 
those that were clearing members of foreign exchange. The Commission 
believes that these limitations are essential and as discussed 
below, has incorporated those provisions into the proposed rule.
    \29\ Id. at Appendix A, p. 4 (``Example 4. Transaction Executed 
by Executing Firm and Given-Up to Firm Carrying US FCM Customer 
Omnibus Account'').
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    FIA claims that, without such relief, there is a risk that 
sophisticated and/or institutional U.S. investors will transfer their 
foreign futures and options business offshore.\30\ According to FIA, 
sophisticated investors execute more than 90 percent of all foreign 
domestic futures and options transactions entered into by U.S. 
investors.\31\ These sophisticated investors desire direct access to 
international cash and futures markets in order to implement their 
trading strategies throughout the 24-hour trading day and do not 
require the protections afforded by the Act to less sophisticated 
investors.\32\ These customers want to have the operational and 
economic efficiencies that are the natural consequence of having all of 
their futures and options transactions carried by a well-capitalized 
U.S. FCM.\33\ In particular, these customers seek the lower costs 
associated with centralized recordkeeping, trade reconciliation, risk 
management and the margining of funds. FIA has noted that such an 
arrangement also affords the FCM a more complete picture of aggregate 
risk that the customer, and hence the FCM, is incurring.\34\
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    \30\ Id. at 4.
    \31\ Id. at 2.
    \32\ Id. at 3.
    \33\ Id.
    \34\ Id.
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    The Commission has determined to propose Rule 30.12 to address the 
concerns raised by FIA, and invites public comment on all aspects of 
the proposed rule. The Commission believes that the proposed rule would 
provide for a significant liberalization of existing rules and 
interpretative statements.

[[Page 46621]]

II. Proposed Rule 30.12

    As the Commission noted in its adoption of Part 30, ``the 
implementation of a regulatory scheme such as this is an evolving 
process, particularly as the issues are numerous and complex.'' \35\ 
The Commission believes that it is appropriate to amend provisions of 
Part 30 at this time to continue the Commission's efforts to update and 
to modernize its regulations. This effort is particularly appropriate 
now, when many futures and options exchanges are accessible 24 hours 
per day and customers, particularly sophisticated customers, want 
prompt access to exchanges globally.
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    \35\ 52 FR at 28980.
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    Specifically, the Commission proposes to allow certain foreign 
firms with sufficient capital and regulatory oversight to directly 
receive foreign futures and options orders from certain sophisticated 
U.S. customers without having to register with the Commission, 
regardless of whether such firm has received confirmation of Rule 30.10 
relief or is an affiliate of a U.S. FCM, or whether such firm carries 
the FCM's customer omnibus account.\36\ Further, a qualified customer 
of an FCM may, with the consent of the FCM,\37\ directly place a 
foreign futures and/or options order with an unregistered FFOB who 
either carries the FCM's customer omnibus account, or transfers the 
trade pursuant to a give-up arrangement to the unregistered FFOB that 
carries the FCM's customer omnibus account, without requiring either 
FFOB to register or obtain a Rule 30.10 exemption. Such a rule will 
permit qualified U.S. investors to select execution and clearing firms 
based upon their analysis of the respective services that each firm 
provides. Under the proposed rule, a qualified investor would be able 
to execute foreign futures and options trades through unregistered 
FFOBs without having to sacrifice the operational and economic 
efficiencies offered by a single U.S. global clearing firm, such as 
centralized recordkeeping, trade reconciliation, and the margining of 
funds.
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    \36\ For the purpose of this proposed rulekmaking, ``customer 
omnibus account'' means an account in which the transactions of one 
or more customers are combined and carried in the name of the 
originating FCM rather than separately.
    \37\ Since ultimate responsibility for trades executed through 
the customer omnibus account lies with the FCM, the customer must 
receive approval from the FCM before engaging in direct foreign 
order transmittal.
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    In proposing Rule 30.12, the Commission has also sought to protect 
customers and to minimize systemic risk. Both of these concerns were 
implicated in the recent failure of Griffin Trading Company 
(``Griffin''), which is instructive here. Late last year, a London 
customer of Griffin placed orders on Eurex Deutschland, a German 
electronic futures and options exchange, through an executing broker in 
London with instructions to give up the trades to the clearing firm 
with which Griffin maintained a customer omnibus account. The 
customer's orders executed by the executing broker for give-up to 
Griffin's customer omnibus account far exceeded the customer's ability 
to pay and exceeded the amount of funds on margin in the customer's 
account. While Griffin itself presumably would not have executed the 
customer's voluminous orders, the unaffiliated executing broker did. 
Since neither the customer nor Griffin was able to meet the margin 
calls issued by the broker carrying Griffin's customer omnibus account, 
Griffin defaulted and ultimately became insolvent.
    It would be impossible to fashion regulations that would adequately 
protect against every rogue customer placing trades in excess of his 
financial resources; nor can the Commission guarantee that no broker 
will ever fail. Rather, the Commission must strike a reasonable balance 
between permitting and encouraging market efficiency and growth, and 
protecting against known risks, particularly those that have systemic 
implications. Accordingly, the Commission proposes to permit direct 
order transmittal to unregistered FFOBs only if the primary 
participants in direct foreign order transmittal (e.g., the customer, 
the U.S. FCM and the FFOB) posses the sophistication and the financial 
resources to mitigate the risk that any default or failure by an 
individual customer or firm will threaten the integrity of the market 
itself or cause other customers to lose their money. Had Griffin, the 
executing broker and the London customer been required to follow the 
proposed rules, the customer could not have lawfully placed the trades 
that resulted in Griffin's collapse because all of the rule's 
eligibility requirements would not have been met.
    Under the proposed rule, an FFOB that is not registered with the 
Commission and has not received confirmation of Rule 30.10 relief will 
be permitted to receive orders directly from certain U.S. customers for 
execution on a foreign exchange only under the circumstances described 
below. The exemption from registration for qualified, unregistered 
FFOBs does not apply to the solicitation of U.S. foreign futures and 
options customers. Under the proposed rule, the qualified customer, or 
the U.S. FCM acting on its behalf, must initiate contact with the FFOB 
in an effort to establish a transactional relationship with consent of 
the U.S. FCM that carries its account. Once the transactional 
relationship is established, the FFOB may then provide services 
incidental to that relationship, including the provision of up-to-date 
market information to the customer and the confirmation of any trades 
placed by the customer directly with the FFOB. At no time may the 
qualified FFOB solicit current or prospective foreign futures and 
options customers, direct the trading in any authorized foreign futures 
and options customer account, or engage in any other activity that 
would require registration under the Act without an appropriate 
exemption.

A. Eligible Participants

(1) Authorized Customers
    The Commission proposes to limit direct foreign order transmittal 
to only the most sophisticated of U.S. investors. In the past, the 
Commission has identified particular groups of investors who do not 
require the full customer sales practice protections afforded by the 
Act.\38\ The Commission believes that the risks inherent in the 
procedures permitted by the proposed rule require a distinct, more 
narrowly-defined class

[[Page 46622]]

of sophisticated investors, called ``authorized customers'' for the 
purpose of this rule. Proposed Rule 30.12 will allow authorized 
customers to enter into transactions with parties that may or may not 
be (1) subject to the jurisdiction of the courts of the United States 
or the Commission's reparations or arbitration program, nor (2) 
supervised or controlled by a U.S. FCM. As a result, the transactions 
may implicate laws, rules, regulations, customs and/or usages that 
offer different or diminished protection from those that govern 
transactions on U.S. exchanges. Accordingly, the Commission seeks to 
identify those sophisticated investors who it reasonably believes will 
appreciate the additional risk associated with transmitting orders to 
foreign brokers not registered or supervised by the Commission and who 
are sufficiently well-capitalized to withstand the risk of such 
transactions. Note that, unlike the exemption granted to eligible swap 
participants pursuant to Part 35, proposed Rule 30.12 would focus on 
the financial sophistication of the person managing the assets and not 
the individual contributors to a commodity pool or the clients of a 
CTA.
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    \38\ For example, in part 4 of the Commission's rules, the 
Commission defined certain investors to be ``qualified eligible 
participants'' (``QEPs'') and ``qualified eligible clients'' 
(``QECs'') for the purpose of allowing CPOs and CTAs, respectively, 
to avoid certain registration, disclosure, recordkeeping and 
reporting obligations with respect to activities undertaken in 
connection with these sophisticated persons. Working with the 
definition of an ``accredited investor,'' as defined by Regulation D 
of the Securities Act, 17 C.F.R. 230.501-230.508, the Commission 
defined QEP and QEC status by means of ``objective criteria that 
such persons possess either the investment expertise and experience 
necessary to understand the risks involved, as evidenced by the 
registered status of certain investment professionals, or have an 
investment portfolio of a size sufficient to indicate that the 
participant has substantial investment experience and thus a high 
degree of sophistication with regard to investments as well as 
financial resources to withstand the risk of their investments.'' 57 
FR 3148, 3151 (January 28, 1992) (proposed Rule 4.7); 57 FR 34853, 
34854 (August 7, 1992) (final Rule 4.7).
    Similarly, the Commission adopted Parts 35 and 36 to allow 
certain sophisticated investors to engage in swaps and contract 
market transactions, respectively, in the absence of any Commission 
oversight. For the purpose of defining ``eligible swap participant'' 
for Part 35, the Commission generally used the list of ``appropriate 
persons'' set forth in new section 4(c)(3)(A) through (J) of the Act 
and utilized the authority granted by section 4(c)(3)(K) to include 
other persons. 58 FR 5587, 5589 (January 22, 1993). For the purpose 
of defining ``eligible participant'' for Part 36, the Commission 
created a class of sophisticated persons derived from the list of 
``appropriate persons'' and the definition of ``eligible swap 
participant.'' 60 FR 51323, 51328 (October 2, 1995).
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    The Commission believes that financial institutions have the 
sophistication to manage and appreciate the risk of such transactions. 
These institutions include banks, savings associations, credit unions, 
insurance companies, investment companies subject to the regulation 
under the Investment Company Act of 1940, broker-dealers subject to 
regulation under the Securities Exchange Act of 1934, and FCMs. 
Moreover, these institutions are subject to ongoing regulation 
regarding, among other things, their financial condition.
    Similarly, futures industry professionals, such as CPOs and CTAs, 
generally obtain professional licenses by passing proficiency exams 
which cover, among other things, the risks associated with commodity 
markets. However, their proficiency may not necessarily include an 
understanding of the risks of dealing in foreign futures and options. 
As a proxy for such understanding, the Commission proposes to require 
foreign brokers seeking relief under proposed Rule 30.12 to only accept 
orders from CPOs and CTAs that ``have an investment portfolio of a size 
sufficient to indicate that the participant has substantial investment 
experience and thus a high degree of sophistication with regard to 
investments as well as financial resources to withstand the risk of 
their investments.'' \39\ In a like manner, business associations 
(including, but not limited to, corporations, proprietorships and 
partnerships) may not possess the financial acumen to appreciate 
adequately the risks of direct foreign order transmittal, and 
therefore, should also be required to maintain a significant asset 
level as a proxy for their financial sophistication. However, since 
business associations are putting their own funds at risk, and not the 
funds of a third party investor, the Commission proposes to require a 
lower level of net assets to serve as a proxy for financial 
sophistication. Accordingly, the Commission proposes to define 
authorized customer to include those CPOs and CTAs with $50,000,000 in 
funds under management, and those business associations with 
$10,000,000 in net assets, as well.
---------------------------------------------------------------------------

    \39\ See, e.g., 57 FR 3148, 3151.
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    In addition, the Commission proposes not to include customer floor 
brokers\40\ and floor traders in the definition of authorized 
customers.\41\ U.S. floor brokers and floor traders may be well=versed 
in the risks of trading on U.S. futures exchanges, but are not required 
to be experts in trading foreign futures and options. For similar 
reasons, the Commission proposes not to include in the definition of 
``authorized customer'' employee benefit plans and state and local 
government entities. It is important to note that, despite their 
exclusion from the list of authorized customers, small CPOs and CTAs, 
as well as state and local government entities and employee benefit 
plans, may continue to place orders for foreign futures and options 
through a U.S. FCM or a Rule 30.10 firm, in accordance with Part 30 of 
the regulations.
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    \40\ ``Floor Broker'' means ``any person who, in or surrounding 
any pit, ring, post, or other place provided by a contract market 
for the meeting of persons similarly engaged, shall purchase or sell 
for any other person any commodity for future delivery on or subject 
to the rules of any contract market.'' Section 1a(8) of the Act.
    \41\ ``Floor Trader'' means ``any person who, in or surrounding 
any pit, ring, post, or other place provided by a contract market 
for the meeting of persons similarly engaged, purchases, or sells 
solely for such person's own account, any commodity for future 
delivery on or subject to the rules of any contract market.'' 
Section 1a(9) of the Act.
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    The Commission requests comments specifically addressed to whether 
these ``authorized customers'' eligibility requirements are appropriate 
and whether net asset, net worth or other financial criteria should be 
increased or decreased.
    The Commission's proposed eligibility requirements for ``authorized 
customers'' apply equally regardless of whether the foreign executing 
broker directly receiving the order carries the FCM's customer omnibus 
account, or gives up the trade for clearing to either the foreign 
broker carrying the FCM's omnibus account or directly to the FCM. The 
Commission believes that, in order to simplify the operational aspects 
of complying with and enforcing the rule, one uniform standard should 
define ``authorized customers.'' For example, if the minimum financial 
requirements for authorized customers differed depending on whether 
there was a give-up trade, then a customer might be permitted to 
utilize direct foreign order transmittal for orders placed only in 
those jurisdictions where the FCM maintains an omnibus account. Thus, 
the U.S. FCM would have to create and maintain separate lists of those 
investors qualified to place orders on each exchange, and implement 
internal procedures necessary to monitor and apply the bifurcated rule. 
Similarly, a rule requiring different standards for those firms 
executing orders placed directly in an FCM's customer omnibus account 
and those firms executing orders pursuant to a give up arrangement 
would unnecessarily prejudice U.S. FCMs that do not maintain numerous 
customer omnibus accounts abroad. Accordingly, the Commission proposes 
a single standard to identify which ``authorized customers'' can 
participate in direct foreign order transmittal.
(2) U.S. FCM Carrying Brokers
    The Commission also proposes to limit direct foreign order 
transmittal to authorized customers of FCMs whose adjusted net capital 
exceeds minimum requirements. In a typical FCM-customer relationship, 
the FCM limits the size of any one customer's open positions based upon 
the customer's financial condition and creditworthiness. These trading 
limits are generally correlated to the amount of assets available to 
the customer to satisfy its contractual obligations, and serve to 
protect the FCM (and derivatively, other market participants) in the 
event that a customer's aggregate position declines significantly. 
Should the customer place an order directly with an FCM that exceeds 
the customer's trading limits, the FCM may reject the order. If the FCM 
does not reject the order, and the customer cannot deposit additional 
funds to cover any subsequent loss, then the FCM will have to use its 
own capital to satisfy the margin call from a clearinghouse or clearing 
broker or it will be in default.
    Under the proposed rule, an FCM may not be able to prevent an 
authorized customer from placing orders in excess of its trading limits 
with an unaffiliated

[[Page 46623]]

FFOB.\42\ More specifically, an authorized customer may place trades 
with an FFOB in multiple international markets without the immediate 
knowledge of the FCM. Under these circumstances, an FCM may be 
responsible for the trades even though the positions exceed a 
customer's trading limits. Therefore, FCMs should possess sufficient 
capital to meet an unusually large margin call and thus mitigate 
against the increased systemic risk.\43\ Accordingly, the Commission 
proposes to require FCMs whose authorized customers use direct foreign 
order transmittal to possess either $50,000,000 in adjusted net capital 
as defined by Rule 1.17(c)(5) \44\, or three times the amount of 
adjusted net capital required by Rule 1.17(a)(1)(i)(B).\45\ The FCM's 
compliance with this requirement will be determined by reference to the 
most current Form 1-FR filed (or required to have been filed) by the 
FCM with the Commission. With either amount of capital in reserve, the 
FCM would more likely be able to satisfy the obligations of its 
authorized customers without implicating the integrity of the market as 
a whole or impacting other customers. In addition, the alternative 
minimum capital requirement will allow smaller FCMs to participate in 
the direct foreign order transmittal process, provided that they 
maintain a proportionate amount of excess capital to mitigate the risk 
associated with the activities of their authorized customers.\46\ 
Should an FCM fail to satisfy both of the minimum financial requirement 
alternatives outlined above, it may seek relief from this requirement 
by petitioning the Division for a no-action position accordance with 
Rule 140.99.
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    \42\ Financial obligations arising from a customer trading in 
excess of its limits are resolved according to privately-negotiated 
contractual arrangements entered into by the customer, the FCM and/
or the intermediating FFOBs, and/or the laws, rules and regulations 
of the exchange governing such a transaction.
    \43\ While some of these risks are present in domestic give-up 
arrangements, they are mitigated by the fact that on U.S. exchanges 
all participants to the transaction, including the floor brokers and 
traders, are either clearing members of that exchange or guaranteed 
by clearing members. Not all foreign exchanges have similar 
requirements.
    \44\ Commission Rule 1.17(c)(5).
    \45\ Commission Rule 1.17(a)(1)(i)(B). Rule 1.17(a)(1)(i) 
requires FCMs to maintain adjusted net capital equal to or in excess 
of the greatest of various statutorily defined amounts, including:
    (B) Four percent of the following amount: the customer funds 
required to be segregated pursuant to the Act and the regulations in 
this part and the foreign futures or foreign options secured amount, 
less the market value of commodity options purchased by customers on 
or subject to the rules of a contract market or a foreign board of 
trade for which the full premiums have been paid: Provided, however, 
That the deduction for each customer shall be limited to the amount 
of customer funds in such customer's account(s) and foreign futures 
and foreign options secured accounts.
    \46\ The Commission notes that as of March 31, 1999, 41 out of 
the 200 firms currently registered as FCMs would not satisfy the 
threshold financial requirements. Of those 41, only 14 (or 7% of the 
total number of FCMs) carry accounts on behalf of foreign futures 
and options customers.
---------------------------------------------------------------------------

    The Commission requests comments specifically addressed to whether 
these thresholds are appropriate in light of the increased systemic 
risk associated with direct foreign order transmittal and whether other 
financial criteria should be applied to determine the eligibility of a 
U.S. FCM to participate in the process.
    The FCM is responsible, along with the unregistered FFOB, for 
determining which of the FCM's customers qualify as authorized 
customers and for ensuring that the FCM maintains excess capital as 
required by the rule. An FCM's breach of either of these core 
obligations shall be considered a violation of the proposed rule. In 
addition, the proposed rule requires each participating FCM to also 
establish, or continue to maintain, reasonable procedures to facilitate 
compliance with the other obligations imposed by the proposed rule 
regarding its ability to supervise adequately the impact of such orders 
on its financial condition, confirm and supervise foreign futures and 
options orders placed through its customers omnibus account, and 
maintain an audit trail to track an order from the time it is placed in 
the customer omnibus account to the time it is cleared and reported 
back to the foreign futures and options customer. An FCM's breach of 
any of these obligations shall be considered a violation of the 
proposed rule. Note that nothing in the proposed rule discharges an FCM 
of its duty to comply with the requirements set forth in the Act, 
including, but not limited to, its obligation to maintain the secured 
amount set forth in Rule 30.7.
    (3) Foreign Futures and Options Brokers
    The Commission also proposes to specify which FFOBs may receive 
foreign futures and options orders via direct foreign order transmittal 
from U.S. customers without being required to register or obtain Rule 
30.10 relief. Absent registration with the Commission, the Commission 
believes that FFOBs should be, at a minimum, registered, licensed or 
otherwise subject to regulation in the jurisdiction in which they are 
located. While the Commission recognizes that such registration, 
licensing or other regulation may offer different or even diminished 
protection to U.S. investors (and carrying brokers), authorized 
customers and qualified FCMs will know that the unregistered FFOB is 
subject to the jurisdiction of a foreign regulatory authority. In 
addition, the Commission believes that an FFOB's decision to register 
abroad evidences its intent to act according to the governing statutes. 
Accordingly, the Commission proposes that FFOBs not registered with the 
Commission that accept orders pursuant to the guidelines of proposed 
Rule 30.12 be licensed, authorized or otherwise subject to regulation 
in accordance with the relevant laws, rules or regulations of the 
foreign jurisdiction in which they are located.
    The Commission also proposes to require unregistered FFOBs seeking 
to accept orders via direct order transmittal to demonstrate an ability 
to mitigate against the effect of default on the exchange on which the 
order is placed in the event that the FCM carrying the authorized 
customer's account rejects a trade or is unable to meet a margin call 
generated by one of its customers' trades. As one alternative, the 
Commission proposes to require that an unregistered FFOB that accepts 
orders from authorized persons in accordance with Rule 30.12 be a 
clearing member (or a majority-owned affiliate thereof) on the exchange 
on which the trade is executed. Although minimum capital requirements 
for FFOBs vary from jurisdiction to jurisdiction, in general, clearing 
members must maintain greater capital. In the event that the FCM 
carrying the authorized customer's account rejects a trade or is unable 
to meet a margin call generated by one of its customers' trades, the 
clearing member, or derivatively, its majority-owned affiliate, would 
be able to prevent a series of potential defaults by other 
intermediaries and/or counterparties by absorbing the loss. As a second 
alternative, the Commission proposes to allow those unregistered FFOBs 
affiliated with FCMs to accept orders from authorized persons in 
accordance with proposed Rule 30.12. As described in the existing 
advisories, the Commission believes that an FCM and its affiliates have 
a relationship that fosters the ability to exchange information as 
necessary to prevent an authorized customer from exceeding its trading 
limits without authorization and thereby putting the affiliate and the 
FCM at risk. Accordingly, the Commission proposes that unregistered 
FFOBs operating pursuant to proposed Rule 30.12 be clearing members on 
the exchange on which the order is executed, a majority-owned affiliate 
of a clearing member located in the

[[Page 46624]]

jurisdiction in which the trade is executed or be an affiliate of the 
U.S. FCM that carries the authorized customer's account.
    The Commission request comments specifically addressed to whether 
these requirements for unregistered FFOBs are appropriate in light of 
the increased risk associated with direct foreign order transmittal.

B. Procedural Safeguards

    In addition to limiting direct order transmittal to a select class 
of investors, carrying brokers, and FFOBs, the Commission proposes to 
require carrying brokers to perform certain tasks designed to apprise 
authorized customers of the risks of dealing directly with a foreign 
broker and to mitigate against the risks of customer default. Under 
both FIA's proposal and the Commission's proposed rule, the U.S. FCM 
carrying the account of an authorized customer will be required to 
furnish an additional risk disclosure document to authorized customers 
advising them of the risks of placing orders directly with an 
unregistered foreign broker before the authorized customer contacts any 
FFOB. While the Commission is sensitive to the costs imposed upon 
carrying brokers by an additional disclosure requirement, it believes 
the additional disclosure is necessary in light of the risks associated 
with direct foreign order transmittal. In addition, the U.S. FCM will 
be required to establish guidelines for direct contacts between any of 
its authorized customers and any FFOB exempt from registration under 
the proposed rule, and devise appropriate risk management procedures to 
monitor its own risk relative to its authorized customers' risk 
aggregated across all markets. The Commission believes that these 
requirements will serve to further mitigate the increased systemic risk 
associated with direct foreign order transmittal by promoting the flow 
of relevant information among the parties to the transaction.
    This proposed rule will apply to transmittal of orders to an FFOB 
by telephone, facsimile and electronic mail messages. The rule shall 
not address the transmission of orders via a screen-based direct 
trading system or automated order routing system for execution on an 
electronic foreign exchange. The relief under the proposed rule also is 
not available to any FFOB that directly carries the customer account 
for any foreign futures or options customers,\47\ unless the FFOB has 
applied for and received confirmation of Rule 30.10 relief in 
accordance with existing procedures \48\ or is registered with the 
Commission as an FCM.
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    \47\ The relief described herein will extend to those FFOBs that 
accept orders directly from an authorized customer of a U.S. FCM 
that maintains a customer omnibus account with a single foreign 
affiliate who, in turn, maintains customer omnibus accounts with 
FFOBs on various foreign exchanges, provided that the U.S. FCM 
independently satisfies the minimum capital requirements prescribed 
by the proposed rule, and the U.S. FCM, its foreign affiliate and 
the FFOB otherwise comply with the conditions outlined therein.
    \48\ Unlike an unregistered FFOB, a Rule 30.10 firm must, among 
other things, consent to jurisdiction in the United States, agree to 
provide access to its original books and records, 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 consent to 
NFA arbitration. Information regarding the registration status of 
any FFOB, including those firms with exemptions from registration 
pursuant to Rules 30.5 and 30.10, is publicly available through NFA. 
Interested parties may contact NFA or access NFA's registration 
database, BASIC, at http://www.nfa.futures.org.
---------------------------------------------------------------------------

    Note that this proposed rule would replace prior Commission 
advisories as the sole source of authorization for those unregistered 
FFOBs that directly accept orders from foreign futures and options 
customers.\49\ In addition, note that the proposed rule does not alter 
any obligation to comply with other provisions of the Act, or any 
existing regulatory obligations to the Securities and Exchange 
Commission or state securities administrators. The Commission seeks 
comments on this proposed rule at that time and invites comment 
regarding any other amendments to Part 30 that may be appropriate in 
light of these proposed rules.
---------------------------------------------------------------------------

    \49\ The following advisories will be rescinded if the proposed 
rules are adopted: CFTC Advisory No. 93-115 (permitting unregistered 
foreign affiliates of a U.S. FCM that carry the customer omnibus 
account of the FCM to receive orders for trades placed directly by 
certain foreign futures and options customers for execution for or 
on behalf of such customers through the FCM's customers omnibus 
account, provided that the affiliate had obtained confirmation of 
Rule 30.10 relief) and CFTC Advisory No. 95-08 (extending the relief 
in Advisory No. 93-115 to unregistered foreign affiliates who had 
not received confirmation of Rule 30.10 relief). The Commission 
seeks comments from any party adversely affected by the 
determination to rescind CFTC Advisories Nos. 93-115 and 95-08.
---------------------------------------------------------------------------

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611, 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The Commission has previously 
established certain definitions of ``small entities'' to be used by the 
Commission in evaluating the impact of its rules on such entities in 
accordance with the RFA.\50\ The Commission previously has determined 
that registered FCMs and CPOs are not small entities for the purpose of 
the RFA.\51\ With respect to CTAs, 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.\52\ Due to the minimum 
capital requirements for CTAs under proposed Rule 30.12, the Commission 
believes that it is unlikely that firms defined as small businesses 
could qualify as an authorized customer for the purpose of engaging in 
direct order transmittal. Further, the proposed rule would not add any 
legal, accounting, consulting or expert costs because the determination 
of whether a business qualifies as an authorized person requires 
minimal analysis of data that will be readily accessible. Therefore, 
the Chairman, on behalf of the Commission, hereby certifies, pursuant 
to 5 U.S.C. 605(b), that these proposed regulations will not have a 
significant economic impact on a substantial number of small entities. 
Nonetheless, the Commission specifically requests comment on the impact 
these proposed rules may have on small entities.
---------------------------------------------------------------------------

    \50\ 47 FR 18618-18621 (April 30, 1982).
    \51\ 47 FR 18619-18620.
    \52\ 47 FR 18618-18620.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq. 
(Supp. I 1995)) imposes certain requirements on federal agencies 
(including the Commission) in connection with their conducting or 
sponsoring any collection of information as defined by the PRA.
    While the proposed rule discussed herein has no burden, the group 
of rules (3038-0023, Rules, Regulations and Forms for Domestic and 
Foreign Futures and Options Related to Registration with the 
Commission) of which it is a part has the following burden:
    Average Burden Hours Per Response: 18.11.
    Number of Respondents: 76,750.
    Frequency of Response: Annually and On Occasion.
    The Office of Management and Budget (OMB) approved the collection 
of information associated with this group of rules on May 26, 1999. 
Copies of the OMB-approved information collection submission are 
available from the CFTC Clearance Officer, 1155 21st Street, NW, 
Washington, DC, 20581 (202) 418-5160.

[[Page 46625]]

List of Subjects in 17 CFR Part 30

    Definitions, Foreign futures, Consumer protection, Foreign options, 
Registration requirements.
    In consideration of the foregoing, and pursuant to the authority 
contained in the Commodity Exchange Act and, in particular, sections 
2(a)(1), 4(b), 4c and 8a thereof, 7 U.S.C. 2, 6(b), 6c and 12a (1982), 
and pursuant to the authority contained in 5 U.S.C. 552 and 552b 
(1982), the Commission hereby proposes to amend Chapter I of Title 17 
of the Code of Federal Regulations as follows:

PART 30--FOREIGN FUTURES AND OPTIONS TRANSACTIONS

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

    Authority: 7 U.S.C. 1a, 2, 4, 6, 6c and 12a, unless otherwise 
noted.

    2. Section 30.12 is proposed to be added to read to follows:


Sec. 30.12   Direct foreign order transmittal.

    (a) Authorized customers defined. For the purposes of this section 
an ``authorized customer'' of a futures commission merchant shall mean 
any foreign futures or foreign options customer, as defined in 
paragraph (c) of Sec. 30.1 of this chapter, that:
    (1) The futures commission merchant has authorized to place orders 
for the account of the futures commission merchant's foreign futures 
and foreign options customer omnibus account and
    (2) Is:
    (i) A bank or trust company acting on its own behalf;
    (ii) A savings association or credit union;
    (iii) An insurance company;
    (iv) An investment company subject to regulation under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); provided, 
that such investment company is not formed solely for the specific 
purpose of constituting an authorized customer;
    (v) A commodity pool operator subject to regulation under the Act, 
provided, that such commodity pool operator has funds, securities or 
property exceeding $50,000,000 under management for the purpose of 
trading in any commodity for future delivery or commodity option on or 
subject to any contract market or foreign board of trade, irrespective 
of whether the owner of the funds, securities or property under 
management independently satisfies any of the requirements set forth in 
paragraph (a) of this section;
    (vi) A corporation, partnership, proprietorship, organization, 
trust, or other entity not formed solely for the specific purpose of 
constituting an authorized customer:
    (A) Which has total assets exceeding $10,000,000, or
    (B) The obligation which under the customer agreement with the 
futures commission merchant are guaranteed or otherwise supported by a 
letter of credit or keepwell, support, or other agreement by any such 
entity referenced in paragraph (a)(2)(vi)(A) of this section or by an 
entity referred to in paragraph (a)(2) (i), (ii), (iii), (iv), (v), 
(vi) or (vii) of this section;
    (vii) Any United States governmental entity, or political 
subdivision thereof, of any multinational or supranational entity or 
any instrumentality, agency, or department of any of the foregoing;
    (viii) a broker-dealer subject to regulation under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.), acting on its own behalf, 
provided, however, that if such broker-dealer is a natural person or 
sole proprietorship, the broker-dealer must also meet the requirements 
of paragraph (a)(2)(vi) of this section;
    (ix) A futures commission merchant subject to regulation under the 
Act acting on its own behalf, provided, however, if such futures 
commission merchant is a natural person or sole proprietorship, the 
futures commission merchant must also meet the requirements of 
paragraph (a)(2)(vi) of this section;
    (x) A commodity trading advisor subject to regulation under the 
Act, including any investment adviser registered as such with the 
Securities and Exchange Commission that is exempt from regulation as 
such under the Act or Commission regulations, with total assets under 
management exceeding $50,000,000, irrespective of whether the owner of 
the assets under management independently satisfies any of the 
requirements set forth in paragraph (a) of this section.
    (b) Procedures for futures commission merchants. It shall be 
unlawful for any futures commission merchant to permit an authorized 
customer to place orders for execution in the futures commission 
merchant's foreign futures and foreign options customer omnibus account 
directly with a person exempt from registration under paragraphs (c) 
and (d) of this section, unless, such futures commission merchant:
    (1) Meets one of the following capital requirements, as determined 
by the FCM's most recent required filing of a Form 1-FR with the 
Commission:
    (i) Possesses $50,000,000 in adjusted net capital, as defined by 
Rule 1.17(c)(5); or
    (ii) Possesses three times the amount of adjusted net capital 
required by Rule 1.17(a)(1)(i)(B); and
    (2) Has established control procedures that will serve as 
guidelines for permitting direct contacts between any authorized 
customer of the futures commission merchant and any person exempt from 
registration under paragraph (c) or (d), and has in place appropriate 
risk management procedures to monitor its own risk relative to its 
authorized customers' risk aggregated across all markets, including, 
but not limited to, procedures to ensure that each authorized customer 
satisfies the participation criteria set forth in paragraph (a) of this 
section and to specify the manner in which trades may be executed 
through its customer omnibus account pursuant to this section;
    (3)(i) Furnishes a written disclosure statement to each such 
authorized customer, in a form acceptable to the Commission, advising 
the customer of the additional risks the customer may be assuming in 
placing orders directly with the foreign broker.
    (ii) The disclosure statement must read as follows:

Direct Order Transmittal Client Disclosure Statement

    This statement applies to the ability of authorized customers 
\1\ of [US FCM] to place orders for foreign futures and options 
transactions directly with non-US entities (each, an ``Executing 
Firm'') that execute transactions on behalf of [FCM's] customer 
omnibus accounts.
    Please be aware of the following should you be permitted to 
place the type of orders specified above.
     The orders you place with an Executing Firm are for 
[FCM's] customer omnibus account maintained with a foreign clearing 
firm. Consequently, [FCM] may limit or otherwise condition the 
orders you place with the Executing Firm.
     You should be aware of the relationship of the 
Executing Firm and [FCM]. [FCM] may not be responsible for the acts, 
omissions, or errors of the Executing Firm, or its representatives, 
with which you place your orders. In addition, the Executing Firm 
may not be affiliated with [FCM]. If you choose to place orders 
directly with an Executing Firm, you may be doing so at your own 
risk.
     It is your responsibility to inquire about the 
applicable laws and regulations that govern the foreign exchanges on 
which transactions will be executed on your behalf. Any orders 
placed by you for execution on that exchange will be subject to such 
rules and regulations, its customs and usages, as well as any local 
laws that may govern transactions on that exchange. These laws, 
rules, regulations, customs and usages may offer different or 
diminished protection from those that govern transactions on US 
exchanges. In particular, funds received from customers to margin 
foreign futures

[[Page 46626]]

transactions may not be provided the same protections as funds 
received to margin futures transactions on domestic exchanges. 
Before you trade, you should familiarize yourself with the foreign 
rules which will apply to your particular transaction. United States 
regulatory authorities may be unable to compel the enforcement of 
the rules of regulatory authorities or markets in non-US 
jurisdictions where transactions may be effected.
     It is your responsibility to determine whether the 
Executing Firm has consented to the jurisdiction of the courts in 
the United States. In general, neither the Executing Firm nor any 
individuals associated with the Executing Firm will be registered in 
any capacity with the Commodity Futures Trading Commission. 
Similarly, your contacts with the Executing Firm may not be 
sufficient to subject the Executing Firm to the jurisdiction of 
courts in the United States in the absence of the Executing Firm's 
consent. Accordingly, neither the courts of the United States nor 
the Commission's reparations program will be available as a forum 
for resolution of any disagreements you may have with the Executing 
Firm, and your recourse may be limited to actions outside the United 
States.
     Unless you object within five (5) days by giving notice 
as provided in your customer agreement after receipt of this 
disclosure, [FCM] will assume your consent to the aforementioned 
conditions.
    1 You should contact your account executive regarding 
your eligibility to participate in the direct order transmittal 
process.

    (c) Exemption for foreign futures and options brokers. Any person 
not located in the United States, its territories or possessions, who 
is otherwise required in accordance with this part to be registered 
with the Commission as a futures commission merchant or as an 
introducing broker will be exempt from such registration, provided, 
that such person accepts orders for foreign futures and foreign options 
transactions from authorized customer via telephone, facsimile or 
electronic message for the execution of the trades for or on behalf of 
the customer omnibus account of a registered futures commission 
merchant that meets the requirements of paragraph (b)(1) of this 
section carried by the person, but does not solicit, or accept any 
money, securities or property (or extend credit in lieu thereof) 
directly, from any U.S. foreign futures and options customer to margin, 
guarantee to secure any trades or contracts that result or may result 
therefrom; and provided further, that such person is licensed, 
authorized or otherwise subject to regulation of the foreign 
jurisdiction in which such person is located, and is either a clearing 
member of a foreign exchange on which the trade is executed, a 
majority-owned affiliate of a clearing member located in the 
jurisdiction in which the trade is executed or an affiliate of the 
futures commission merchant referred to in this section.
    (d) Exemption for foreign futures and options brokers carrying a 
customer omnibus account. Any person not located in the United States, 
its territories or possessions, who is otherwise required in accordance 
with this part to be registered with the Commission as a futures 
commission merchant will exempt from such registration, provided, that 
such person carries the customer omnibus account of a futures 
commission merchant that meets the requirements of paragraph (b)(1) of 
this section, and accepts orders for foreign futures and foreign 
options transactions from authorized customers via telephone, facsimile 
or electronic message for the execution of the trades for or on behalf 
of the customer omnibus account of a registered futures commission 
merchant either directly or pursuant to a give-up arrangement, and 
provided further, that such person is licensed, authorized or otherwise 
subject to regulation of the foreign jurisdiction in which such person 
is located, and is either a clearing member of a foreign exchange on 
which the trade is executed, a majority-owned affiliate of a clearing 
member located in the jurisdiction in which the trade is executed or an 
affiliate of the futures commission merchant referred to in this 
section.

    Dated: August 19, 1999.

    By the Commission.
Catherine D. Dixon,
Assistant Secretary of the Commission.
[FR Doc. 99-22020 Filed 8-25-99; 8:45 am]
BILLING CODE 6351-01-M